Robert Martorana

The Dodd Bill: Generally Very Good

Felix,

This bill does a good job on regulating large hedge funds, holding brokers to a fiduciary standard, and regulating derivatives (by penalizing trades placed off of an exchange).

Unfortunately the biggest risk remains unchecked: Bailouts. With the exception of Lehman, large firms learned during the financial crisis that the government will bail them out. Bailouts create a culture of excessive risk taking, and the costs are eventually borne by the taxpayer.
Rob

Dollar Hurting Exporters? Not So Much

Paul:

You note that exporters are flourishing since the liquidity boom began in March. This implies that other countries have better growth prospects than the U.S., and that exporters are benefiting from lower costs (denominated in U.S. dollars). Alternatively, perhaps stocks in exporters were depressed in March relative to purely domestic companies (but I doubt that).


Rob

Is Unemployment Only 9.5%?

Felix,


Thanks--this was news to me.

If seasonal adjustment factors boosted the U-3 unemployment rate from 9.5% to 10.2%, this should be front-page news. Strangely, I haven't seen this reported in the media or on SeekingAlpha.

It makes sense to me: An improvement in the employment outlook is consistent with massive liquidity and global reflation. Loose monetary and fiscal policy WILL eventually boost economic growth, though at the cost of inflation.

Lest I be misunderstood, I'm just observing the reflation, and NOT justifying government intervention (lest I be savagely beaten by a roving band of Austrian economists).

Rob

Why Oil ETFs Are Lagging Oil Prices

Tom,
Great call. Contango is a directly observable event, and implies exactly what you recommend.
If we slip into backwardation, however, the USL would suffer vs. the USO. So investors should evaluate the shape of the futures curve before diving in.
For now, however, the upward slope in oil prices remains a headwind for USO holders every time that the front end month rolls over to a new, higher-priced month.
Rob

Top Line Numbers Not Bad

BIG:

Do the positive revenue surprises reflect growth overseas? The S&P 500 is tilted towarnds non-U.S. sources, and this may influence the numbers. Alternatively, maybe revenue growth simply reflects a global reflation rally (nominal growth rises during a liquidity boom, as at present).

Nevertheless, revenue surprises are a very valuable signal. If you have geographic data, that would be great.
Rob

The Unsustainable Lie of Inflation

Michael Clark:

Good response to Tetrapod above seekingalpha.com/artic...

We have seen runaway inflation devastate the working class over the last three decades, and the response is two-career families.
Rob

Changes in the Dollar's Value Reflect Changes in Money Velocity

Calafia:

I agree that velocity is recovering as the "flight to safety trades unwind," the economy recovers from "shell shock," and people spend money that "had been stuffed under mattresses." So I agree that these factors are helping monetary velocity to recovery.
These are natural and healthy developments, and occur in every business cycle recovery.
Unfortunately, I also see two headwinds to a full recovery in velocity during THIS economic cycle.
First, I believe that the drop in velocity since 2008 reflects the deleveraging of the American economy.We got drunk on debt, the Fed has given us another drink while we sober up. Private deleveraging by consumers and financial institutions is a long, slow process, and a stiff headwind for the economy.

In addition, part of the recovery in velocity is government induced, via loose monetary and fiscal policy. This boost to velocity is enormous, completely artificial, and does not reflect fundamental improvement in the economy. Unfortunately, quant easing must eventually come to an end.
Therefore, I continue to believe that we are in a reflationary bubble.

The best case outcome is a painfully slow recovery followed by a long period of stubbornly high inflation. This is better than depression, but I think we must acknowledge that the U.S. economy has deeply rooted problems that are undermining confidence in our currency.

Nevertheless, I always respect the other side of the trade. You may be right, and our country will be better off.

Thanks,
Rob

Stock Market Returns Lost in Translation

Bespoke Inv Group:

Your thesis is correct, and it provides good food for thought.

Graham Summers wrote about this in depth in his article "Dollar's Decline Has Contributed to Market's Recent 'Rise'" seekingalpha.com/artic...

The reflation rally is the mother of all liquidity bubbles, and reflects quantitative easing and record budget deficits. As you noted, however, this has NOT translated into strong returns for foreign investors. They are recognizing that the U.S. is now at risk of default on its debts or continued devaluation of its currency.

I predict that this liquidity bubble will collapse when:
1) Quant easing ends
2) Foreign capital flows reverse (because of higher potential returns in other assets or geographies)

Once QE fades and/or foreign capital dries up, we will see a run-up in interest rates. The 3.6% yield on 10-year U.S. government bonds is temporary, and higher rates will be needed to attract capital in light of inflationary risks and the potential for default. Higher yields will cause capital to flow out of the equity market and into the debt market, which will appear more attractive by comparison. Higher rates will also slow the economy, which is now sustained only by unrealistically low rates.

For now, quant easing and foreign capital flows are the key events to watch. Until then, the market rally is likely to continue, as global reflation boosts NOMINAL returns for all risk asset classes.

Thanks for the article! It is good food for thought.
Rob

US Unemployment (U3) Will Peak At 13%

Andrew,
The government response is infuriating: Money for banks, but not for jobs. America has even more debt, and no improvement in the employment outlook or economic fundamentals.
As you noted, it is lunacy. Pure lunacy.
Thanks
Rob

Market Volatility Returning to Familiar Patterns

Bill,
Excellent thinking and writing.

"...each investor has their own personal half-life for how long availability bias and disaster imprinting will cast a shadow on their view of the investment landscape."

I concede that availability bias is fed by frequent media impressions, and this continues to make investors very worried about the future. But what if the key lesson from 2008 is that we are in a sustained period of higher volatility and potential volatility?

If the structural imbalances in the U.S. economy are finally coming home to roost, then I believe we ARE in a period of structurally higher volatility. The U.S. dollar is at risk, and a loss of confidence could trigger a catastrophic chain of events: Higher interest rates on our national debt, which worsens the outlook for the economy and the U.S. dollar, which causes a loss of confidence. The snowball grows as it rolls downhill. This is classic reflexivity, a la Soros.

In a nutshell, I believe that volatility signals need to be interpreted within a macroeconomic context. Beyond that, I defer to your expertise in reading the VIX tea leaves.

Rob

Are Reports of the Dollar's Death Premature?

Babak:

Thanks for examining the U.S. dollar under both parties.

The lesson from the last 25 years is that BOTH PARTIES have helped inflate the deficit, and undermine the solvency of our country. What makes the dollar weakness so frightening are the long-term reasons for pessimism: America has debts it cannot pay, and foreign investors know it. They are buying gold and Euros since it's clear that the math doesn't work anymore for the debt-addicted U.S. economy.

You are right to say that Obama inherited a mess. And both parties have been profligate: Republicans took us into a war we cannot afford, and Democrats want to expand our health care obligations when we cannot afford our current social entitlements (Medicare and Social Security will begin to bankrupt the country when they become cash expenses in three years). The Federal Budget is fiction, since it grossly understates our military and social obligations.

I try to be cynical, but it's hard to keep up. (Lily Tomlin).

Fortunately, Goldman Sachs is still printing money, and Google is set to dominate the Internet and what's left of the free world. Today's college grads can aspire to work there, or to polish their shoes, trim their lawns, and tend to their pets.

Rob

Those Lucrative Interest-Rate Hedges

Felix,

As FatPanda noted above, the other side of Goldman's trade is the U.S. taxpayer. Goldman is profiting from our zero-interest rate policy with abandon.

Unfortunately, it is putting America further from financial solvency. You don't cure a drunk with another drink, and you don't cure a credit bubble with more debt. That's why the U.S. dollar is collapsing: America has debts it cannot pay and a currency it cannot support.

Investors need to be defensive: Gold and commodities are the best bet to preserve wealth.

Rob

Food Stamp Participation on the Rise in August 2009

Your charts highlight the disconnect between corporate prosperity and the plight of the American workers (aka "those about to be outsourced or laid off"). I described this disconnect in "The Deflation of the American Dream" seekingalpha.com/artic...

Food stamps are a scary new illustration of how low we've sunk.

Rob

Dollar's Decline Has Contributed to Market's Recent 'Rise'

Graham:

Nice work!

You do an excellent job of documenting the fruit of quantitative easing: A weak dollar, and illusionary "gains" in U.S. financial assets.

The illusion works for now, since Americans do not realize that we have sold our future for a McMansion and a 46" TV. The investment implications of your work are bullish for gold and commodities, and EXTREMELY BEARISH for U.S. government bonds.

Why? America has debts it cannot pay, and a currency it cannot support. As Medicare and Social Security become cash expenses in the next three years, we face default on our debts or a devaluation in our currency. The math simply doesn't work anymore, and foreign investors know it.

Thank you very much for your excellent work in documenting this alarming development. Well done.

Rob

Lessons from Recession

Roger,

America has debts it cannot pay and a currency it cannot support.

Unfortunately, this creates a "Debt Snowball", where loss of confidence feeds rising rates, and this makes our national debt ever harder to service. We face either devaluation or default within five years, and it makes sense for investors to focus on their living expenses, as you suggest.

This is the "New Normal": Be defensive, focus on what you can control, and adapt downward.

Thanks Roger!
Rob