odin

Window Dressing for the Markets

My take is that not everyone can take advantage of the fed rate -- the spreads that banks charge on your cash essentially can make the fed rate negative.

Trading the 'Theme du Jour'

While fashions du jour change rapidly, it seems to me the short dollar crowd is touching the elephant trunk and calling it a snake. My big question to the $-fall over the medium term is: against what? MM has answered it in the short-run: against everything else but it makes little sense over the long run.

We talk of Fed $-printing. Arent the Chinese doing the same thing at a much more accelerated and an even more unsustainable pace?

Against gold because of inflation? But are wages going up? Unemployment going down? (i actually believe employing will be a a leading rather than a lagging indicator in this cycle) Re-leveraging into asset speculation is no inflation. That is the only recovery I see and likely to end up the same way as the earlier experience -- in tears.

The Chinese have NO choice but to buy dollars if they wish to keep employment levels remotely close to where they are. Even small economies dont turn on a dime, let alone the worlds 2nd largest suddenly turning its export-focus and promoting domestic consumption in a short time-frame. Repatriating physical gold, jawboning about dollar worries are just that -- noise.

I would not be surprised if DXY ended the year in the mid-80s. If ever the world gets back to full productive capacity and near-full employment levels AND the central banks all over the world keep easy money policies that result is more than just asset bubbles (especially widespread shortages in food and energy), then and only then will I worry about high inflation (and invest not in gold but in those commodities and the equities of companies that produce/service them).

However, I cant put weight scales in the voting booth and am content to stay on the sidelines through these rallies.

Struggling with Divergences

Not sure about Fannie and Freddie but I have heard a variant of that explanation in China. Several retail punters claimed that lower priced equities were "cheaper" and thus a better value than higher-priced equities.

Unemployment: Historical Chart Sends Scary Message

To chap08's point about long-term structural employment -- there is also a expectations' adjustment over the years (willingness to be employed, not just ability). Unemployment insurance is indeed a good thing if it gives people the cushion they need and prevents people from being underemployed (taking the first job they are offered). However, I fear, there is a sense of entitlement thats creeping in that translates these safety-net benefits into a belief that its a right (without corresponding responbilities.)

Furthermore, with youth unemployment figures much higher, I bet that a lot of young people are headed back to graduate education and are not counted in this figure.

(Anecdotally, to support both statements above:I had a conversation with a young lady recently who was lamenting the fact that she could not get unemployment benefits when she quit her job to go to post-graduate school. Far be it from me to tell her that she is technically not "unemployed" or the irrationality of expecting to be "bailed out" for something she was doing to further her own career).

What Does the Lack of Volatility Mean for Markets?

For the record: I do not believe that the US and China will start a war over any issue in the foreseeable future.

But I do believe that if the status quo in China were to be threatened, an external conflict is one of the key levers that the government and the army can push to drum up nationalist fervor. Still, the US will hardly be the first target.

Japan, given its economic and demographic trajectory and the historical context between the two nations, lies square in those cross-hairs. (It is no coincidence that at no point in the long history of these two ancient civilizations have they _shared_ power at the top in Asia. One or the other has dominated).

It is hard to imagine wars starting openly between nation states in the future. However, there is a lot of potential for small conflicts to get out of hand and the pain thresholds to be heightened. (Austria-Hungary/Germany did not attack Britain and France to start WW I)

On Jul 10 05:17 PM LilBob wrote:

> Regarding the Raytheon and Lockheed comment. The US economy is so
> dependent on China right now, we could never go to war with them.
> We even get the majority of our pharmaceuticals and enormous quantities
> of pharmaceuticals from Japan. The US wouldn't even be able to keep
> our own Hospitals running without cheap Chinese medical supplies.
> With the way that this country has grown so incompetent at controlling
> costs in health-care, JUST a cast for a broken arm would cost $15,000
> without China supplying us. (Currently an arm cast in this country
> only runs around $5000, honestly couldn't believe that when I saw
> the bill a cousin of mine received.)

What Does the Lack of Volatility Mean for Markets?

Dangerous game being played in China: They dont want a weaker dollar, yet dont want to concentrate further in the dollar (increase risk). What they want is a third stronger currency, so that they can both diversify away from the dollar and still keep the yuan weak (and continue to export capacity and build up surpluses against this third currency). Of all things, they would like another superpower that can assert itself economically and militarily against the US. This is not a stable situation.

You cant continue to buy up assets (mining or real estate or whatever) if you continue to build up an unstable world. In spite of the fiscal and monetary stimulus in China, the benefits are not accruing to the rank-and-file. The money is being used for speculation by the noveau rich in China. (Auto sales are up? Hallelujah! But how is unemployment doing? Food prices? Wages? Exports? Are the factory workers buying up these autos? What about new and newly unemployed grads?)

Inevitably, as global appetite for all things Chinese falls (falling trade, falling credit and inability to accomodate a weak yuan subsidy), some of the speculative projects will fail. Bets on rising commodities based on "green shoots" of Chinese demand will fail. Bets placed with renewed enthusiasm in real estate markets will fail. In the foreseeable future of an aging, tapped out consumer, the world will not grow fast enough to accomodate such foolish investments.

(Idle speculation alert)
This is a recipe for great unrest in the future as unemployment rises. And this will not be a Tiannenmen Square composed of disgruntled students or elites. Any bets on what the powers that be in China will do then? Watch out Japan. Its not so much gold, but Raytheon and Lockheed that are in for bumper times.

The Market Giveth, And the Market Taketh Away

As pessimistic as I am on the near-term prospects, I am a little wary to short financials.

Yes, mortgage resets, commercial loans, credit card receivables are all on the horizon. But we have a secular turn towards higher savings and nothing fills a banks coffers as a steep yield curve and people willing to hand over their cash savings for paltry rates. (Granted the financials will be trying to make money by making do with only 10x leverage).

Global Growth Likely to Stagnate Through Summer

My take is that the its a subsidy that has gone horribly wrong. I'm not sure that driving up commodity prices was the intention. The party wants high employment (to prevent unrest and threaten their own existence). Their solution has been to support the export industry. In characteristic fashion, they pushed for increased lending. However, if the SOE managers do not see the demand to support worthwhile projects, they are doing the only thing that makes sense when money is cheap: speculate for quick returns. Caijing recently claimed that these firms are directly or indirectly (by lending at higher rates to smaller businesses who dont have direct access to these funds) played the commodities markets by buying up inputs (thus easier to disguise this speculation). While initially it may have been a smart bet on a narrowing contango, it has rapidly turned into a long commodities play.

I have my ears perks for news of unemployment, unrest, bad loans (though it will be many quarters before the last piece is clear) in China, which would validate this theory. This is a key black swan event in my book (as much as the student unrest failed 10 years ago, a workers unrest has great potential to destabilize this extremely relevant country and thus impact the rest of the world).

Quarterly Fed Flow of Funds Report: Good News for the Markets?

Scary. Headline today about G8 ministers already talking about exit strategies on the stimulus. I dont believe fiscal stimulus works this fast for me to give it full credit for the pickup (sentiment, short-covering etc. are my top candidates for reasons behind the rally) but I wonder about the basis of such about-faces. Do we not look at data anymore? (I guess sun is shining in Latvia again....)

To echo MM's sentiment -- treasuries are very much underrepresented in the household portfolio and there are very few markets that will accomodate these savings. A risk-averse, yield-hungry (aging) investor will inevitably find that there is no market like the IG+ bond market...esp. in a slow-growth environment.

If the feared inflation doesnt materialize broadly (not just high oil prices but higher wages, higher real estate, fuel & food and other large components of the consumer basket), the real rates on treasuries will suddenly seem mouth-wateringly good. If by some chance, we do enter choppy inflation waters, real corporate profits will not be immune for long either.

Inflation by Shortage

Mr Ingram --

The conclusion that will have higher (nominal) profitability at the expense of the consumer comes with an assumption -- that they are able to pass on higher input costs (assuming inflation) to consumers.

I think this is the point that MHFT is making. There is an output gap. The pricing power of firms is eroding. I do get one point in your article: that the supply curve itself is shifting left as producers shut down production capacity but thats coupled with the reality that demand is falling as consumers deleverage and repair their b/s) . This is true especially in the energy sector (shutting down of nat gas wells for e.g.)...however, it remains to be seen whether the economy/demand recovers enough to cause a shortages.

As far as using leverage in real estate to play inflation goes -- real estate prices are sensitive to expectations of real appreciation. If inflation and rising rates affect affordability, what would be the impact on house prices? (Hint: the 1980s)

U.S. Hyperinflation: Is Faber's Prediction Realistic?

While it is politically difficult to rein in the monetary supply accomodations (esp. when a recovery is nascent), at least in theory, central bankers are supposed to be indepedent. Just as they have many tools of money creation, they have equally enough and potent tools to destroy fiat money.

It will be politically much more difficult to rein in public spending and the size of the government (fiscal policy), a distinction not made in the article above. However, the impact of that policy on inflation is a lot more indirect.

There is record amounts of overcapacity in the global economy. Unemployment rates are still rising. Commercial real estate and credit card default hits are yet to hit the bank's bottom lines (and further impact their ability to lend). The money multiplier has completely broken down. For several years, just as with private individuals, balance sheet repair will the primary goal of these banks and they will use the steep yield curve to rebuild the equity side of their balance sheets and deleverage...not lend the excess. The consumer cut off from credit, employment will be kept on life-support with government transfers but will save more rather than go on another spending binge. Against this backdrop, inflation-mongering doesnt make sense.

Education and Healthcare seem impervious to any deflation worries...and there might very well be inflation, even hyperinflation in our future. (and it depends of many 'ifs' and inflation expectations especially can rapidly materialize), however, when you've been starving for two weeks, it seems hardly prudent to keep worrying about the fat content on your next meal (i.e. being too early on a call is no different than being wrong).