Friday, June 08, 2007

What the &^%*?????

So equities stabilize, and NZDJPY decides that that merits a 2% rally on the day!?!?!? While there has evidently been demand from the Land of the Falling Currency, this price action is really, truly, stunning. Clearly there is more about the current climate than bonds that Macro Man doesn't fully get...


Anonymous said...

IMHO, the US economy skipped the recession and entered an expansion phase again. All economy around the world will be expanding togeter and it means, strong economic growth ahead and higher inflation risk. My bet is:

1 - PE is going to shrink again the same way we see after a recession (earnings will grow faster than price). That has to happen in order to increase the equity risk premium which is in a multiyear low (1.5% in my opinion) at the sametime we have a increase in the bod yield.

2 - Despite the economic recovery going on in the Japan, the rest of the world will grow faster and the carry is going to be more profitable. the japanease economic issue is a structural problem and they won't be able to grow more than the rest of the world their growth is constrainde by the rest of the world.

3 - This new phase will end only after the central banks around the world increases interest rates a couple of times during the next 12 months. The current tightening cycle failed to accomplish what FED expected for. We haven't seen any country default or big bankrupcy, the only financial stress we saw was of the people who was not mean to participate in the financial market so the main monetary policy transmission mechanism has failed.

4 - We will see extreme higher interest rates if China decides to cede to the US pressure...

Cassandra said...

MM - sympathies to you on trying to buy the dip for quikturn. In normal times you might have got the bounce. But with so many so large pari passu (nsync?!) in positions, in stops, and in thought processes, the moves are necessarily more vicious with attendant accumulations and distributions more elongated.

I must differ with (or at least elaborate some differences with anonymous) it is true that things are hot globally. But there is no evidence and little basis for positing that the US has somehow managed to skipped or skirt recession.

And while it may be true that FCBs continue to try to keep it all going, and so the status quo of rising global inflation amidst tepid real growth in NAm with little change in the magnitude and bias of imbalances, the result of this will be rising rates though still-negative real rates of interest, rising commodity prices, amidst rising cost and wage demands.

The status quo admittedly fine for speculators and asset owners |(to date) is the result of liquidity. But do not mistake liquidity-induced growth for productivity induced growth, for the former is decidely inflationary,sooner or later.

If there is one thing to take away from this, it is that authorities (and skeptics & bears alike) have consistently underestimated the robustness of the system to create circulate and absorb, dollar liquidity. They too similarly underestimate what it will take to tame the beast, and so underestimate both growth potential, AND inflation. But make no mistakes: more seriously inflation of the type that we embarking upon should the status quo remain in force is, and always has been, BAD for equity to the extent that authorities are attempting in any way to shadow the direction of inflation with policy response. While inadequate todate, there is no reason to doubt that monetary and political authorities will continue in this policy direction, and the result will be deleterious for equities. This is NOT a golden age for equities or real corporate earnings. Nominal earnings may grow, but they will meaningfully lag inflation as we are in fact looking at the backside of the golden period, and staring the inflation genie now fully unbottled, in the eyes, as I type this.

dryfly said...

I must differ with (or at least elaborate some differences with anonymous) it is true that things are hot globally. But there is no evidence and little basis for positing that the US has somehow managed to skipped or skirt recession.

Living out in Middle Flyover... I sure agree with that. I don't think we missed a recession - its just recession postponed.

But I don't see an 'imminent' recession... not immediately... But rather see a 'instability equilibrium' in the balance sheets of most average Americans (those well outside the shadow of Wall Street). These are the folks who still - somehow - find their way to the malls & big boxes & keep the machine running. They live pay check to paycheck with the help of ample cheap credit.

Even folks like M Madel at BW is starting to get it - there ain't no Dark Matter just like there ain't no Santa Claus. Just inaccurate numbers.

Flyover won't fall spontaneously on its own but I don't think it will take much of a kick. A hiccup from tightening lending standards & resultant 'credit squeeze' might be all it takes.

MM & Cassandra - both of your blogs are outstanding. Read them when I can.

Macro Man said...

I for one am beginning to wonder if we're finally going to get one of those "but the fundamentals are still great" EM selloffs. Alan Bollard is channelling Dee Snider ("we're not going to take it...anymore), and stranger things have happened than a NZD-inspired selloff in all things carryish and risky.

"Cassandra" said...

MM - the funny thing about bollards (to those of us who learned our 4-wheeling skills on the left) is that not all of them [bollards] are flexible plastic and that they [the concrete or forged-iron ones) can in fact inflict reasonably serious damage upon a vehicle even at moderate speed, as I learned while cutting my teeth in a friends XJ6 trying to navigate it out of the alleyways of The City, very soon after the 87 Crash.

The question in Alan Bollards case is: is he (& NZD) the flexible plastic kind that one hits with impunity on the motorway and which bounces back without damage, or the city-centre concrete kind that causes motor-pool managers no end of grief...

Macro Man said...

Yes, I suppose we'll find out tonight how tough a Bollard Alan is, and whether he can put an ugly dent in someone's shiny carry machine. Equally fascinating will be the SNB rate announcement on Thursday. After abundant moaning about the weakness of the Swissie, it's time for those guys to put up (rates by 0.50%, instead of the widely expected 0.25%) or shut up.