Friday, March 13, 2009

Friday The 13th

So for the second month in a row, we are confronted by the prospect of a Friday the 13th. It was exactly four weeks ago today that Macro Man took his tumble on the ski slope, so he can testify that bad things do happen on the famously inauspicious date.

Today, of course, the world somehow feels a bit warmer than last month. True, the SPX is 10% lower than it was a month ago, buy hey! It's more than 10% higher than it was a week ago!

Meanwhile, this weekend sees the G20 meeting here in the UK, where the world's major finance ministers and central bankers will join Gordon Brown in saving the world economy. Or perhaps not. There seems to be little consensus on a unified approach to fiscal stimulus or the financial system, and while the grandees might agree to increase the IMF's war chest, there's always going to be the uncomfortable question of who, exactly, is going to sign the cheques.

Meanwhile, the FT is full of nonsense about "currency wars" following the SNB's action to intervene in EUR/CHF yesterday. Switzerland intervening to weaken its currency is one thing; Japan or another large, closed economy (China?) doign so is something else. After all, Switzerland doesn't face much competition for its cuckoo clock exports. Moreover, given the huge stock of CHF liabilities in Eastern Europe, one could argue that the SNB has now done more for Mrs. Gabor and Mr. Bukowski than the European Union ever has. CHF/HUF is now down 10% from its recent highs, which should take a bit of the sting out6 of the next mortgage payment.Focus is now shifting to who the next currency-weakeneing candidates may be. Obviously everyone cannot do it....but the small, open Asian export machines (Taiwan and Singapore) are coming into focus, re-kindling a theme that Macro Man's been preaching for some time.

Elsewhere, the Fed released the quarterly flow-of-funds report yesterday, and it made for grimmer viewing than a hacker movie like...err...Friday the 13th.

Part 1: Jason suffers a record decline in his household equity last quarter
Part 2: That, combineed with equity market weakness, sent the y/y change in his net worth down to off-the-chart lows.
Part 3: Jason sees his net worth as a multiple of consumption collapse to early 90's levels, despite being considerably older. He resolves to cut back on spending.
Not pretty viewing, is it? Let's hope we have to wait longer than 29 years before they decide to do a re-make of this movie.


Anonymous said...

MM, it is better to use Mrs. Kovacs for a tipical Hungarian name instead of Mrs. Gabor; Gabor is generally a male first name. Your posts are brilliant anyway.

Macro Man said...

Ah....I thought Gabor was a common surname; must have been thrown off by Eva and Zsa Zsa!

Blackadder said...

Cuckoo clocks are typical for Germany, not Switzerland. Banana exports would have been a better example :-)

Sargon TM said...

Being thrown off by The Third Man is a matter for pride, not shame.

Adrem said...

It is worth noting that Treasury yields in the US are rising which could, of course, reflect expectations of higher inflation down the road. Hard to believe it reflects belief in a bounce in the economy. But look at the Bollinger bands. When the band narrows it time and again heralds a sudden move one way or another, up or down. It narrowed last Oct/Nov and yields collapsed. Now perhaps it foretells a jump in the 30-yr to to the 4%-5% rang. That will be a big help won't it.

By the by, why not have a break in a sunny clime somewhere to get some sun on that old knee of yours. Hop about in the sea. Get some rest. Might help.

Yossarian said...

MacroMan, I need your help. I keep reading how overleveraged the US consumer is and in certain large demographics that is true; but in aggregate (q3'08) American consumers were not severely over-levered. Mortgage debt was $10.5T and Credit debt was $3.5T versus $71T in assets ($21.5 RE, $45 Financial, $7.5 Deposits). From this I conclude that the asset bubble was not caused by consumer leverage but by other leverage or simply irrational valuations.

I know there is a lot more debt in the financial system that may have to be unwound but I was wondering if you can shed some light on this aspect of credit. The way I see it, if I lend you $100 @3% and you lend to Blackadder at 4% and the he lends to Sargon at 5% then there is now $300 in both assets and liabilities but really no increase in money (except a transfer from Sargon down to Me via interest payments). With our personal incomes (GDPs) constant the Debt to GDP ratio looks daunting but, if Sargo defaults, $300 in assets AND debt are wiped out. I guess the problem is that all of those assets from me to you to Blackadder etc. have been used as collateral for more leverage via financial institutions. Thx.

Thomas said...

Not sure that Singapore would want to devalue:

It pretty much imports everything it consumes, so any devaluation would push up cost of living.

With public discontent anyway rising due to Temasek/GIC's evaporating investment portfolio, it's probably not a politically smart thing to do.

And financially, they can afford to keep the currency where it is: Even though the current account surplus is disappearing at record speed, it's unlikely to go deeply into the red, and their reserves are plentiful.

So my take is the SG$ will possibly go down a bit, but nothing massive.

Macro Man said...

Yossarian, while it is true that household liabilities pale in comparison to their assets, it is also the case that the assets and liabilities are not perfectly matched. And as the ratio of assets to liabilities falls (it is less than half of what it was 50 years ago, and down 14% from Dec 2007), more and more households get caught with negative net worth, and thus default on their liabilities.

That's problematic in and of itself. What has got us where we are today is that one man's liability is another bank's asset. And unlike households, banks are INCREDIBLY levered relative to their net worth. So it only takes a small increase in household defaults on liabilities to reduce the value of those bank assets...which then gives them a negative net worth, which is where we are today.

Say hi to Col. Cathcart for me.

Thomas, I am not suggesting that the SGD will evaporate. However, for better or for worse, the MAS has adopted the exchange rate as their instrument of monetary policy, AFAIK they are the only CB in the world not to ease yet. A prior, raising the cost of living sounds like a bad idea, but when the economy is sustaining a major deflationary impulse, as is the case today, then to meet inflation objectives a modest depreciaition of the exchange rate is warranted.

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