Tuesday Thoughts: Bill Gross Gives Us 90 Seconds [View article]
Well, that was a far reaching article with many interesting implications. For the matter immediately relevant to us here, how to position our portfolios, there is not much new, but as it touches on macro themes in political economy, may I strain your patience while sharing a few thoughts that have imposed themselves over recent years? If not, please ignore this post.
It has been readily apparent to many of us that the great macro trend of the post cold war era is globalisation and a process of global leveling of living standards. Whether this is a bad or good thing is a value judgement that we can put aside for the moment. My thought is that the world may be able to provide a standard of living seen in modern "western democracies" for a portion of its population, but not for everyone.
What is changing, and I believe will continue to change, is the distribution. Thus, we are moving to a world where virtually the entire populations of the US, western Europe, etc live in relative affluence, while virtually the entire populations of India, China, etc live in relative poverty, to a world in which there are relatively affluent classes and relatively impoverished classes on a global basis. Geography and political jurisdiction will become increasingly irrelevant.
In the new era, bankers and software engineers in the US, Brazil, China, and Poland will have more in common with each other than any of them will have in common with undereducated and underemployed persons living in their own cities. Presently, numerous governments are fighting losing rearguard actions to maintain living standards for populations, parts of which are being left behind in the global leveling process, and incurring potentially ruinous public debts. The rebellion against this is plainly evident in Germans who are outraged at the prospect of propping up other European states, and Americans who don't wish to provide health insurance for the uninsured/uninsurable.
We have a mismatch between geographical and national sovereignty and the global economy, an arrangement which no longer serves us well and will likely become increasingly dysfunctional over time. New thinking and new solutions are called for but it is difficult to see how they will come about in an orderly fashion. Historically, these things seem to happen in messy and, for some, very unfortunate ways. There will be winners and losers, and for the less visionary and noble of us, the best we can hope to do is to make the right choices for ourselves and our families.
25 Reasons We Will Not Have a Depression [View article]
Thank you Mr. Corson,
This posting is a salutary antidote to the excessive pessimism often on display here. The challenges are daunting, but as you say, there is much to be done, and it's time to get on with it.
Understanding the Rise and Fall of Urban Economies [View article]
As a reply to Mr. Taylor, actually relatively low skill assembly and production jobs do exist in the US - and my firm employs dozens of them. We found that the most competitive approach to some production in our industry is to buy foreign sourced components and subassemblies, and complete them in our domestic plants around the country.
The reason this is competitive is that unit shipping costs for "knockdown" product in overseas trade are so much less than they are for large finished goods (a lot more product fits into an overseas container) that the domestic assembly costs are covered. Where we have a difficult time competing is in full raw material to finished goods production. In this area we produce far less than we did years ago.
We are committed to maintaining as high a level of production and distribution employment as we can, because we live and raise our families in these communities, and we understand that if there is no good paying work to be had for large parts of the population, it will eventually impact quality of life for everyone. Our philosophical preference would be to produce everything locally, but if we did that, our competitors who do import would drive us out of business, and we could not employ anyone. I am not an American by birth, but I have lived in the US and worked in manufacturing for a long time, and understand that if we can't produce anything of value in this country, it will be difficult to maintain a decent standard of living for more than a privileged few. That would not be the USA I have come to call my home.
Great Depression Not Imminent, But Inevitable [View article]
Inevitability of a great depression is a non sequitur, given the analysis in the article. The evidence is troubling, indeed, but inevitability is a extraordinary claim which should not be made lightly.
Well, that seems a rather pessimistic forecast, even for the prophets of doom who have overrun Seeking Alpha. Somehow I tend to think that we will find a more civilized way through this mess. If Hitler and Stalin failed to drive us back to barbarism, how likely is it that this lot will do it?
Well said, Mr. Summers. A good dose of moral outrage is a welcome antidote to much of what passes for analysis of the crisis. In London, Lord Turner has raised the question, to the applause of many and the ridicule of others. But what about the targets of our outrage? "They" are us. Quite simply, they are. Our politicians, our bankers, our corporate managers, our doctors, the whole thieving lot of them. They are us. An old, now retired vice president in my employer firm often would say in meetings, "silence is consent" (albeit in a very different context).
So long as times were good and accounts were flush, we were silent. Now it's all gone to the dogs, and some of us would round up the scoundrels and "put a cap in them" gangster style. No, my friends, we all got here together. Revenge is a satisfaction that wears off quickly. No use for that. We have A LOT of work to do from here to make things right again. WE do. You and I and all the rest of us.
It doesn't matter what China wants to do, who their largest trading partner is, even to some extent how fiscally profligate the US is. What matters is the bilateral balance of trade between the US and China. So long as China runs a trade surplus vs. the US - which it is bent on doing as a matter of policy - it has to do something with all those Dollars. It can buy all manner of goods or assets denominated in US Dollars...or just bury it in coffee cans in the back yard.
Let's assume the latter is not an option. When you're moving around that kind of money you still can't beat Treasuries for liquidity and safety. Of course, they could buy a few trillion dollars of US listed stocks, corporate bonds, or prime US real estate (remember Japan in the 1980s?), or pump it into commodities. Just imagine what that would do to those markets, and the uproar that would ensue.
The funny thing is people assume the US government is just borrowing money recklessly, and going to China for loans. The US government isn't buying all those MP3 players and food processors and knock-off Fender Stratocasters. US businesses and consumers are buying them, and the Chinese are just recycling the proceeds through the Treasury market, generating huge demand and driving yields down. In a perverse way, the same Americans who are kvetching about the budget deficit are contributing to the problem every time they drive the Suburban down to Costco and load it up with those lovely cheap wares.
Try having that discussion at your next Tea Party rally.
Canadian Banks' Equity: Third Worst in the World [View article]
Calling a bank risky on leverage ratio alone doesn't tell us much. Asset quality is the other side of the story. A bank levered 20x on high quality assets may be less risky than a bank levered 10x on junk.
Is the Bond Market Screaming Inflation? [View article]
Hmm...primary moving averages in a number of the commodities rolling over, truck freight volumes slipping, UPS laying off 300 pilots. These data points do not suggest typical demand driven inflation. That leaves supply-input inflation as the remaining possible source, but where is the evidence? The bond market may be skittish, but the inflationary scenario is not compelling here. I suspect the bond market may be discounting downgrade/default risk, not inflation (loss of buying power) risk, or as Mr. Hass noted above, it could be a simple case of indigestion.
Bond Investors Beware - Don't Underestimate Current (Escalating) Risks [View article]
Well said, I agree completely.
I also suggest investors avoid most bonds denominated in US dollars - treasury and investment grade credit because the yields have fallen too far, and junk because the current yields don't compensate adequately for default risk. My outlook on most REITS is also underweight to avoid.
Suggestions for income portfolios: selected dividend paying common equities (with a large portion of non US issuers), in particular utilities and telecoms. Also Canroys and energy MLPs; TIPS; international bonds; covered call strategies. I also suggest some allocation to commodities even for the income portfolio, as this generally provides a nice hedge against principal devaluation in a rising rate environment.
Short term market moves are better analyzed on technical indicators, and they pointed to a rally. Yes, the underlying economic fundamentals are still weak, and that should cause investors to be cautious over the longer term, but significant interim moves present profitable opportunities for nimble traders. As so many have noted, it's not a market that favors the buy and hold approach.
Understanding the Rise and Fall of Urban Economies [View article]
As a side note to this very broad and wide ranging discussion, Detroit represents to me a fascinating case study in US social history. There are plenty of anecdotal and armchair remarks, but one simply has to spend some time there and have a feel for the place to get a sense of what is going on in parts of the county. Similar situations exist in other cities but Detroit best exemplifies a not insignificant part of the American zeitgeist.
For those unable or unwilling to spend any time there, following the discussions at detroityes.com will convey some sense of the amazing devastation that has taken place in a mere forty years time. The photographic tour on the website is a real eye opener, I imagine in particular for those Americans who live in sunbelt areas.
Jeff Gundlach: The U.S. Will Default [View article]
Quick note on "The government cannot be in surplus at the same time the private sector is in surplus."
This is, strictly speaking, incorrect. Both sectors can be in surplus, but only if net external money flows (trade & investment) are positive by more than the sum of the surpluses. A feat, by the way, that seems to be what nearly every nation on the planet seems to think they can pull off - all of them simultaneously. Which is, of course, utterly impossible. Hence the absurdity of globally un-coordinated fiscal policy in a global economy. The nonsense going on in Europe presently is the same thing in microcosm.
Japan does face challenges, but this is a faulty analysis. For some balance, consult the Financial Times article "Japan's Debt" published 2/22/2010.
"Three factors account for the significant difference between Japan’s gross and net debt levels. First, the country’s large reserves of foreign currency should be deducted. Second, public institutions account for a significant proportion of domestic lending, so their financial assets must be taken into consideration (albeit with a generous estimate for bad loans). Third is a quirk of government financial reporting: transfers between different accounts create a new debt and liability which cancel each other out, but gross debt calculations capture only the liabilities.
Japan is no fiscal poster-boy, but it’s no Greece yet, either."
I wouldn't necessarily advocate for going long Japanese assets, but neither are they short candidates. There are better opportunities in the markets.
A good deal of noise and speculation based on who knows what data. What is the market saying? 50 day MA on the S&P 500 has rolled over and is flat to down; Friday closed right there in the vicinity, short term appears overbought, but bulls and bears are fighting it out right here, right now.
FXI and most EM ETFs showing choppy and not very constructive price action. This is not a market for heroic positioning in either direction; be patient and let the trend show itself, don't try to catch the top or bottom. Once a trend does get underway, be decisive.
Tuesday Thoughts: Bill Gross Gives Us 90 Seconds [View article]
It has been readily apparent to many of us that the great macro trend of the post cold war era is globalisation and a process of global leveling of living standards. Whether this is a bad or good thing is a value judgement that we can put aside for the moment. My thought is that the world may be able to provide a standard of living seen in modern "western democracies" for a portion of its population, but not for everyone.
What is changing, and I believe will continue to change, is the distribution. Thus, we are moving to a world where virtually the entire populations of the US, western Europe, etc live in relative affluence, while virtually the entire populations of India, China, etc live in relative poverty, to a world in which there are relatively affluent classes and relatively impoverished classes on a global basis. Geography and political jurisdiction will become increasingly irrelevant.
In the new era, bankers and software engineers in the US, Brazil, China, and Poland will have more in common with each other than any of them will have in common with undereducated and underemployed persons living in their own cities. Presently, numerous governments are fighting losing rearguard actions to maintain living standards for populations, parts of which are being left behind in the global leveling process, and incurring potentially ruinous public debts. The rebellion against this is plainly evident in Germans who are outraged at the prospect of propping up other European states, and Americans who don't wish to provide health insurance for the uninsured/uninsurable.
We have a mismatch between geographical and national sovereignty and the global economy, an arrangement which no longer serves us well and will likely become increasingly dysfunctional over time. New thinking and new solutions are called for but it is difficult to see how they will come about in an orderly fashion. Historically, these things seem to happen in messy and, for some, very unfortunate ways. There will be winners and losers, and for the less visionary and noble of us, the best we can hope to do is to make the right choices for ourselves and our families.
25 Reasons We Will Not Have a Depression [View article]
This posting is a salutary antidote to the excessive pessimism often on display here. The challenges are daunting, but as you say, there is much to be done, and it's time to get on with it.
Understanding the Rise and Fall of Urban Economies [View article]
The reason this is competitive is that unit shipping costs for "knockdown" product in overseas trade are so much less than they are for large finished goods (a lot more product fits into an overseas container) that the domestic assembly costs are covered. Where we have a difficult time competing is in full raw material to finished goods production. In this area we produce far less than we did years ago.
We are committed to maintaining as high a level of production and distribution employment as we can, because we live and raise our families in these communities, and we understand that if there is no good paying work to be had for large parts of the population, it will eventually impact quality of life for everyone. Our philosophical preference would be to produce everything locally, but if we did that, our competitors who do import would drive us out of business, and we could not employ anyone. I am not an American by birth, but I have lived in the US and worked in manufacturing for a long time, and understand that if we can't produce anything of value in this country, it will be difficult to maintain a decent standard of living for more than a privileged few. That would not be the USA I have come to call my home.
Great Depression Not Imminent, But Inevitable [View article]
The Consequences of M3 [View article]
Sure It’s Legal … But Is It Right? [View article]
So long as times were good and accounts were flush, we were silent. Now it's all gone to the dogs, and some of us would round up the scoundrels and "put a cap in them" gangster style. No, my friends, we all got here together. Revenge is a satisfaction that wears off quickly. No use for that. We have A LOT of work to do from here to make things right again. WE do. You and I and all the rest of us.
Can China Really Dump the Dollar? [View article]
Let's assume the latter is not an option. When you're moving around that kind of money you still can't beat Treasuries for liquidity and safety. Of course, they could buy a few trillion dollars of US listed stocks, corporate bonds, or prime US real estate (remember Japan in the 1980s?), or pump it into commodities. Just imagine what that would do to those markets, and the uproar that would ensue.
The funny thing is people assume the US government is just borrowing money recklessly, and going to China for loans. The US government isn't buying all those MP3 players and food processors and knock-off Fender Stratocasters. US businesses and consumers are buying them, and the Chinese are just recycling the proceeds through the Treasury market, generating huge demand and driving yields down. In a perverse way, the same Americans who are kvetching about the budget deficit are contributing to the problem every time they drive the Suburban down to Costco and load it up with those lovely cheap wares.
Try having that discussion at your next Tea Party rally.
Canadian Banks' Equity: Third Worst in the World [View article]
Is the Bond Market Screaming Inflation? [View article]
Bond Investors Beware - Don't Underestimate Current (Escalating) Risks [View article]
I also suggest investors avoid most bonds denominated in US dollars - treasury and investment grade credit because the yields have fallen too far, and junk because the current yields don't compensate adequately for default risk. My outlook on most REITS is also underweight to avoid.
Suggestions for income portfolios: selected dividend paying common equities (with a large portion of non US issuers), in particular utilities and telecoms. Also Canroys and energy MLPs; TIPS; international bonds; covered call strategies. I also suggest some allocation to commodities even for the income portfolio, as this generally provides a nice hedge against principal devaluation in a rising rate environment.
Sucker's Rally Approaching an End [View article]
Understanding the Rise and Fall of Urban Economies [View article]
For those unable or unwilling to spend any time there, following the discussions at detroityes.com will convey some sense of the amazing devastation that has taken place in a mere forty years time. The photographic tour on the website is a real eye opener, I imagine in particular for those Americans who live in sunbelt areas.
Jeff Gundlach: The U.S. Will Default [View article]
This is, strictly speaking, incorrect. Both sectors can be in surplus, but only if net external money flows (trade & investment) are positive by more than the sum of the surpluses. A feat, by the way, that seems to be what nearly every nation on the planet seems to think they can pull off - all of them simultaneously. Which is, of course, utterly impossible. Hence the absurdity of globally un-coordinated fiscal policy in a global economy. The nonsense going on in Europe presently is the same thing in microcosm.
Japan Is the Next Greece [View article]
"Three factors account for the significant difference between Japan’s gross and net debt levels. First, the country’s large reserves of foreign currency should be deducted. Second, public institutions account for a significant proportion of domestic lending, so their financial assets must be taken into consideration (albeit with a generous estimate for bad loans). Third is a quirk of government financial reporting: transfers between different accounts create a new debt and liability which cancel each other out, but gross debt calculations capture only the liabilities.
Japan is no fiscal poster-boy, but it’s no Greece yet, either."
I wouldn't necessarily advocate for going long Japanese assets, but neither are they short candidates. There are better opportunities in the markets.
Faber: Don't Buy the Rally [View article]
FXI and most EM ETFs showing choppy and not very constructive price action. This is not a market for heroic positioning in either direction; be patient and let the trend show itself, don't try to catch the top or bottom. Once a trend does get underway, be decisive.