Clive Corcoran

On Financial and Economic Velocity

As you point out there was a highly unusual spike in, to use your terminology, financial velocity in 2007. It's plain to see on many charts and, in my opinion, much of the impetus to it can be attributed to the flourishing shadow banking system of that period and its usage of the carry trade and massive leverage to squeeze every last nickel from structured products.
Reviewing charts from July 2007 it is possible to see where the great carry trade unwind began and by the latter part of the year the broad equity market indices were all exhibiting really negative divergences.

In my humble estimation the "velocity of money" is just a different way of talking about the degree of leverage in the real and shadow banking system

Half of Americans Have Stopped Investing

The irony is that whether they realize it or not all Americans are investors in the US economy via the implicit guarantee that has been made to Too Big to Fail institutions.

Chart of the Day: Dollar/Equities Correlation

One of the most stunning correlations that I have encountered is a positive correlation between the AUD/JPY cross rate and the MSCI Emerging Markets Index - recently shows a correlation coefficient of about 0.8

Classic Market Bubble

John,

From a completely different perspective (and not necessarily one that I would endorse) there are a lot of wave theorists who maintain that 2000 marked a major super-cycle top (perhaps an EWT specialist could sketch out the precise diagnosis).

Other work that I have been doing suggests that the attempt to avoid the recession from the Nasdaq bubble bursting has only extended the bubble to even more exaggerated proportions which now include limitless claims against the public purse.

Seen from afar in the fullness of time it just may be that 2000 was the culmination and finale of the great American century

U.K. and U.S. Show Most Currency Debasement Over Last Five Years

Dave,

The "crisis" is just as big a problem for the UK as it is for the US with debt to GDP ratios at very similar level and both approaching 100% soon. The UK government is stalling any real attempts to deal with the massive problems facing the public finances because it is trying to get re-elected next May.

In itself the price of gold is not critical to the UK but if one wants to create a reasonable reference point for assessing the declining value of each currency - independently than their exchange rate with US dollars per se - gold is a good proxy for several other key items that countries do have to purchase, for example, in global commodity markets

How Liquid Risk Strategies Are Highly Correlated

Walter,

This is very useful analysis. There is also a low R2 reading for EUR/USD suggesting that this is not a carry trade pair

One of my preferred cross rates is AUD/CHF which, like AUD/JPY shows a longer history of carry trade characteristics

Are U.S Treasuries and Gold in Conflict?

The chart for the ratio of the 10 year to gold looks virtually the same as the chart for gold expressed in US dollars which also witnessed a breakout earlier this week.

The message that I am taking from this is that global investors are sending a clear message to the US administration, that they are nervous about their role as custodian of the reserve currency.
While it may be (depending on your viewpoint) understandable that US monetary policy is aimed principally at solving US domestic problems, for the wider world - and holders of large amounts of dollars as their primary reserve currency - that agenda is causing widespread consternation.

There is a lot of rumbling about a new basis for a global reserve currency or a more diversified one, but while that debate will undoubtedly take a long time (unless we get another more vicious systemic crisis which would really speed up the theorizing), the default safety blanket, that many in the market appear to be looking to cover themselves with, is to buy gold and commodities.

The Time for Diversification Away from the Dollar Is Upon Us

The comments raised are, in some cases, more apocalyptic than was the intention of the article. We may be heading for a dollar crisis but only if the powers that be are not smart enough to harness the possibilities for a transition to a better framework for international settlements for both trade and capital movements rather than relying effectively on a dollar standard

Mitul,

The point I was really making was echoed by another contributor in a piece today by John Browne also reprinted at Seeking Alpha

"Although a nation whose currency enjoys reserve status is given a great many advantages, the privilege does come with responsibility."

Below is a comment to that sentence with which I am in total agreement:

It is the sense that the US has abdicated its responsibility with respect to being the custodian of the reserve currency, in order to look after its internal agenda, which is driving the move towards another - more diversified - model for international settlements

The Time for Diversification Away from the Dollar Is Upon Us

Moon

I agree entirely with your conclusion i.e. "the only real solution is to demand that the Federal Reserve ceases or stops it's persistent campaign at currency devaluation and that the US government ceases to run deficits when there is no recession or depression"

The trouble is that the Fed, and the other powers that be, don't listen to demands - they only pay attention when matters become super-critical

Employment in Crisis

These perspectives are very useful and should be given much more attention in the mainstream media
Incredible shrinking labor force = incredible shrinking tax base.

The Problems with Brad DeLong's Keynesian Stimulus Proposals

Bringing Keynesianism into this discussion (i.e. what he did or did not say) is actually not very helpful and avoids the underlying issue which the article raises.

Just supplying further stimulus without dealing with the broad based structural problems of the US economy (or the UK economy for that matter) will not create a sustainable basis for broad income growth and job creation which is the only way to halt the growing crisis in the public finances.

What Mr Bernanke and other central bankers are hoping is that if they allow impaired assets like real estate to recover in an extended period of cosy convalescence (with public sector guarantees holding the system together), eventually a new property based bubble will emerge. This will provide the framework to allow consumption economy punters to feel sufficiently "rich" again to go on another borrowing binge creating further prosperity for the emerging market, production based, economies.

Bailouts Through the Back Door

The quote cited from the book by Robert Pozen makes the sterilization of the Lehman debacle sound deceivingly simple.

PWC has about 250 people working full time on disentangling the Lehman mess and many hundreds of others (including ex Lehman staff) will be gainfully employed for a considerable period - with very considerable fees -sorting out the complex labyrinth of counter-parties to their trades. AIG's labyrinth went right to the "heart" of the financial system.

As John L suggests at the end of the day it came down to a "gut" level decision by Mr Paulson about who most needed to be protected.

Dow Jones Industrials: A Different Risk Perspective

John

Interestingly your comment regarding back-testing is exactly the context in which this piece emerged, as this has been a current focus of mine.
I certainly do not hold out (nor do you imply) that there is any forecasting ability from such tools as the index examined.
My main complaint against the Sharpe Ratio is that it suffers from the limitations of the standard deviation as discussed.
Another useful metric for assessing the performance of asset managers, which also uses the concept of draw-downs over specific periods, is the Calmar ratio.

Dollar Shorts Should Look Out

I think you are right to essentially equate the huge liquidity in the market for dollar denominated assets with a safe haven argument.
The only problem would be how policy makers would respond to another major liquidity crisis.
Since they have effectively "under-written" the entire financial system already - what do they for an encore if required?

Consumer Deleveraging

John,

You have spotlighted why these times are so different from a common or garden recession. The changes in consumer behavior are the real fall-out from the events of last year's financial crisis and many analysts have forgotten to tweak the variables about propensity to borrow into their growth models.

Just as it was assumed in credit risk modeling that real estate was bound to keep rising, the notion that consumers will continue to keep piling on credit has been built into economic forecasting especially with regard to GDP growth.

The forthcoming lack of final demand - which you highlight - is in danger of blowing up many of the forecasting models upon which recent rosy scenarios have been constructed.