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The Last Boomer

The Last Boomer
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  • Zulauf: Fed won't hike this year [View news story]
    Of course the savings rate can decrease regardless of how low it already is. In 2005 it was 1.9% while today is 4.6. China has a savings rate of something like 40%.
    Jan 24, 2015. 10:36 PM | Likes Like |Link to Comment
  • Zulauf: Fed won't hike this year [View news story]
    "How is it bad for your average American to experience an ever increasing dollar?"
    In the long run it is bad for the average American. Stronger dollar makes all imports cheaper. Americans will have more disposable income in the short run and consumption will increase. Unfortunately, there is a dark side to the strong dollar. It will make imports cheaper and American goods will be less competitive internationally as well as domestically. Therefore, total domestic production will increase less than total domestic consumption. As a result the savings rate will decline since savings are the difference between production and consumption. The American savings rate is already low and the strong dollar will only make things worse. As imports increase faster than exports, the trade deficit will increase too. This means that more American demand will be exported to China and other surplus countries. The trade deficit has to be financed with foreign debt so the total American debt problem will worsen as if it is not already bad. Weak domestic production and investment means weak economy, higher unemployment, higher debt.
    Jan 24, 2015. 03:33 PM | 1 Like Like |Link to Comment
  • The Meaning Of Negative Bond Yields [View article]
    Global savings glut. Despite all its valiant efforts, China has managed to once again achieve a world record in low share of consumption in GDP: 34% in 2013 according to the World Bank. Thus it continues to supply the world with savings that nobody wants and needs. Increasing inequality in the developed countries is another source of excess savings. A savings glut must be accompanied by a balancing adjustment – either by an increase in investment or by a reduction in savings in another part of the economy – and this adjustment must occur simultaneously. The interesting part is how this adjustment may happen:
    1) will productive investment absorb the excess savings? Large infrastructure programs in countries that need them may do the job but the country with the biggest need (USA) is unlikely to do so.
    2) Will excess savings fuel another bubble(s)? Was $100 oil actually a bubble that just burst? Bond bubble anyone?
    3) Will it result in another debt driven consumption splurge?
    4) If none of the above happens, the only solution is decline in total demand.
    Jan 20, 2015. 09:13 PM | 1 Like Like |Link to Comment
  • The Real Value Of The US Money Supply [View instapost]
    Jason, thanks. Very helpful. Please keep writing. I have read almost all your comments in the last 3-4 years and have learned a lot. One lesson I think I'll remember forever is that nobody will be fat and happy until the bankers are fat and happy.
    Jan 16, 2015. 10:06 PM | 4 Likes Like |Link to Comment
  • The Energy Sector - Risk Or Opportunity? The S&P 500 2015: Part 2 [View article]
    Oil price in 2004 was around $40 and total world consumption was around 80 million barrels a day, and production closely followed. 10 years later the consumption (and production) increased by about 12% but price (until the recent decline) increased 150%. If an increase in production of 12% requires a 150% increase in costs to extract oil, this just comes to show how unsustainable is to satisfy the world hunger for energy with more oil extraction. Most likely though the increase in the oil price that outpaced so much the increase in production/consumption and the general inflation is due not to increased average costs of oil extraction but by other factors.
    Jan 16, 2015. 10:28 AM | 3 Likes Like |Link to Comment
  • The Real Value Of The US Money Supply [View instapost]
    Jason, I am working my way through your writing. I am not an economist so I apologize if I ask dumb questions.
    It looks like the Fed can print real wealth into existence in only very special circumstances like the ones in the fall of 2008. Do you think that we have completely overcome this special situation? Most other economists I read (Krugman, DeLong, Summers, Pettis, etc.) think that we are still in a very precarious situation that requires further accommodative policies by the Fed and the government.
    Do we need another QE? Paradoxically, after the end of the first two rounds of QE interest rates went down, not up. Same thing is happening now: QE is over and rates are plummeting. QE supposedly kept high the public inflation expectations and thus, the component of interest rates that relates to inflation expectations. If the goal is to keep inflation from plummeting and turning into deflation, isn't it better to implement policies other than QE, policies that for example will grow wages (such as minimum wage increase)?
    Jan 16, 2015. 08:26 AM | Likes Like |Link to Comment
  • The Energy Sector - Risk Or Opportunity? The S&P 500 2015: Part 2 [View article]
    Bill McBride at Calculated Risk had a similar article a few days ago showing that the price of oil has grown twice as fast as the CPI over a fairly long period of time. The recent drop of the oil price just brings it in line with the overall inflation of the last 10-20 years.
    Jan 15, 2015. 04:39 PM | 4 Likes Like |Link to Comment
  • Why I Am Buying AK Steel [View article]
    Well, I came back here one more time to sum up my AKS experience. I bought first around $3.50 in July 2013, sold in early January 14 at $8, bought back at around $6 and sold at $11. Overall, this was a great ride with gains of several hundred percent over a period of about one year. In the last two days AKS has cratered by 14% and 10% and is now around $4. I don't know what happened but that was a wild ride from $3 to $11 and back down to $4 in 18 months. I don't think the underlying (or intrinsic) value has really changed that much in 18 months. Morningstar maintained a fairly stable valuation that ranged from $6.50 to $8 during this period. How can the market be anything close to rational and change its mind so drastically over such a short period? I don't think that valuation had anything to do with these changes. The stock price was pushed up and then down by the demand for the stock. For a while steel stocks were hot and then they were not. I know this is neither rational nor predictable but it seems to be the way the market works.
    Jan 13, 2015. 09:35 PM | Likes Like |Link to Comment
  • Jeff Miller Positions For 2015: Still Plenty Of Life In The 'Aging Bull' [View article]
    Jeff asks: "Housing is still dragging. What if it finally shows significant improvement?"
    I own housing stocks (NVR, XHB) but I am perplexed by the slow recovery in housing. The long-term trend was to build new houses at the rate of 1.2M/ year. After the bubble we have constructed about .5M/ year thus creating a discrepancy of about 4m single family houses compared to the pre-bubble trends. Based on this my expectation has been that anytime now residential construction should increase sharply but it has not happened. I wonder if this has been a result of the way the bubble hangover was dealt with: through foreclosures waves that eliminated a lot of families from the housing market for years to come. Housing lending has not recovered and until this happens housing construction will lag.
    Jan 10, 2015. 11:46 AM | Likes Like |Link to Comment
  • Jeff Miller Positions For 2015: Still Plenty Of Life In The 'Aging Bull' [View article]
    Jeff Miller offered a lot of good food for thought. A couple of questions though.
    1) It is tempting but somewhat simplistic to say that interest rates are already too low and it is unlikely they'll go even lower. Jeff asks: "Would you lend money to the US government for ten years at 2%?". Well, how about lending to the Japanese government at 1% or lower; investors have done this for years. Or how about this: lending to the Spanish and Italian governments at rates lower than the rates paid by the US government? Portugal, I repeat, PORTUGAL, is not far behind the US with rate of 2.61%. There is something going on here.
    2) Long term Europe is a basket case and will unravel but short term the steep decline of the euro and the drop in oil prices should provide a nice shot in the arm of the moribund European economies. European stock indexes have been kind of flattish for the last year. It looks like an opportunity to me, especially if Syriza manages to scare the markets and create a nice drop in the stock prices.
    3) Greece can lead Europe in dismantling the Eurozone and provide a model for economic growth if they muster the courage to get out of the euro. Short-term there will be a lot of commotion but this would be the best time to pick up Greek assets. If they do it right, within two years this may provide huge returns.
    Jan 10, 2015. 10:56 AM | 3 Likes Like |Link to Comment
  • Russian Roulette: Taxpayers Could Be On The Hook For Trillions In Oil Derivatives [View article]
    Here's how this may happen. In 2007 the total US mortgage securities stood as $7T but the credit default swaps market derived from them stood at $62T. Wallstreet innovation at work here.
    Jan 6, 2015. 10:48 PM | 2 Likes Like |Link to Comment
  • Marc Chandler Positions For 2015: It's Not The Things We Know That Get Us Into Trouble [View article]
    This is my explanation too: everybody and their mother are buying US financial assets. Stocks, treasuries, everything goes. To buy US assets the foreigners need dollars, therefore the dollar goes up. At one point though this trade will get really crowded. Other assets will start looking really cheap and the herd will run the other way. But not yet; so I am invested in US assets. As Citi's Chuck Prince famously said in 2007, since the music is still playing, we need to get up and dance. And so we dance.
    Dec 29, 2014. 09:13 PM | 2 Likes Like |Link to Comment
  • It's Baaack: Looming Greek Elections Threaten To Re-Ignite The Euro Crisis [View article]
    Ok. Alexander and quancoyte. Let's try to get to the bottom of this. In the 90s Germany faced a problem of high unemployment after the reunification. It put in place a set of policies to deal with this aimed at constraining wages and increasing competitiveness. These policies would not have had such a negative impact on Europe without the introduction of the Euro. The common currency introduced a relatively tight monetary policy in Germany given the German growth rate but these policies were loose for Southern Europe given the faster growth there. These policies resulted in an increasingly undervalued Euro for Germany relative to the rest of Europe, low wages compared to its productivity, high consumption and income taxes. As a result German GDP grew faster than the household income and consumption. When production grows faster than consumption, this results in higher savings rate since this is simply an accounting identity (National production = national consumption - national savings). This is the source of the high German savings rate, not some mythical German virtue. The high national savings rate has nothing to do with cultural preferences or individual choices. It is a consequence of economic policies implemented in a certain political and economic context. As I said in my previous post, savings don't just sit on the sidelines. They got exported to Southern Europe which effectively imported demand from these countries into Germany, further supporting German growth and employment while the exact opposite happened in Southern Europe. If these countries had their own currencies, by devaluing them they could regain competitiveness. Since this is not possible with the single currency, the choices are either Germany to accept higher inflation, decrease of their trade surpluses, and slower growth in order to give the peripheral Europe chance to restore balance and thus save the union or the whole thing will go to hell. My bets are on the latter.
    Dec 12, 2014. 08:22 PM | 2 Likes Like |Link to Comment
  • It's Baaack: Looming Greek Elections Threaten To Re-Ignite The Euro Crisis [View article]
    Very good article. Thanks. Europe is sliding towards political radicalization as a result of botched economic policies primarily by the Germans. David at Imperial Beach gets it absolutely right. To Alexander Alekhine I highly recommend The Great Rebalancing by Michael Pettis. Germany has been implementing for more than a decade now a string of policies that suppress internal consumption and increase the German national savings rate. Savings don't rest peacefully in silence like the gold bricks at Fort Knox. They are more like when you put the wrong kind of soap in your dishwasher: it immediately gets out and takes over the kitchen (I have first-hand experience with this). By exporting their savings abroad, the German essentially import demand and under the right circumstances this translates into trade imbalances and high unemployment rates in the deficit trading partners. The Euro created these right circumstances that led predictably to the current disaster. Unfortunately the German policymakers are too shortsighted to see the log in their own eye while they are quick to point at the speck in their neighbors' eyes. (Luke 6:41 for reference). Given the German intransigence, a disorderly but peaceful dissolution of the Eurozone is the best possible outcome. As for the worst one: we saw its prequel in Europe and worldwide about 75 years ago.
    Dec 12, 2014. 03:50 PM | 2 Likes Like |Link to Comment
  • Wolfgang Münchau: Germany's Weak Point Is Its Reliance On Exports [View article]
    User 13913602,
    your recommendation makes perfect sense if Germany really wants to save the European project. But it involves initial slowdown in German growth and rise in German debt. In the long term it is the smart thing to do because prosperous Europe will benefit Germany. In the short term it is unlikely that the German politicians will change their narrative and policy.
    Nov 15, 2014. 10:08 AM | Likes Like |Link to Comment