Monday, September 14, 2009

Your Turn

Well, well, well. The long-awaited protectionist chickens are coming home to roost. Amongst all the over-the-top furore over the president's birth certificate, Macro Man wonders if the conspiracists shouldn't actually be checking to see if his birth name wasn't "Steve Carlton"?

In any event, the brouhaha over tires (and chicken and cars) has predictably set risk assets onto the back foot today, after Friday's late session sag following the tariff announcement. How long it lasts remains to be seen.

Macro Man is trying something different today. After spinning his wheels for the last couple of weeks, he wants to take a step back and get a sense of where consensus lies in a few key markets. So it's your turn to write the post today, by answering the four poll questions below.


Results for the SPX, gold, and yen polls.


Macro Man said...

It seems to be impossible to ind a free polling app that doesn't suck and screws up what you are trying to do. Apologies this mornign to people who see answer changing and disappearing...I might have to start from scratch.

Crisis Management said...

Heh, no idea really where all those different markets will go. Fortunately one doesn't have to, easier to hop on a wave and ride it for a while.

USDJPY going south seems like the one-way bet for now. DJ: "it's matter of time" before USD drops below Y90, says Nomura Securities senior dealer Hiroshi Maeba.

I'm with ol' Hiroshi. Prospective FinMin Fujii was on the wires a few minutes ago, seemed to be putting the kibosh on intervention. Even said strong yen is "desirable longer term."

Stefan said...

What a bunch of bears here...
Y is eying lower in short term, looks really resilient.

Nemo Incognito said...

Ah the joys of the protectionist trade. Eking out 5% moves in single names seems to be the only thing that consistently makes sense here. more sense than trying to short AUD for example.

Anonymous said...

Its the little bearish news that keeps bringing in the profit taking and shorting, only to be reversed by the fact that earnings are stable and up, tech is looking good for a few quarters and reflation is working...seriously, trillions!!! I think there are a lot of traders getting killed trying to short everything like its fall of 2008 again. Long USD. Short crude. Everything like its going to be the same exact thing. Come on!

My bet is the next big banking crisis doesn't hit until 2H next year.


Crisis Management said...

Anonymous @ 10:11 AM, a trillion sounds like a lot, but the total OTC derivatives outstanding are north of 500 trillion according to BIS.

Anonymous said...

The only logical trade is to sell US treasuries - surely a trade war with the mkt's biggest investors cant bode well, regardless of safe-haven flows etc.

Nemo Incognito said...

I think selling big exporting industries in China or that export from the US to China makes a lot more sense. Maybe I'm missing the big picture but these trade war things are more of a micro trade than anything else. Treasury yields are not entirely obvious: if you do see a lot of jobs repatriated to the US then wage costs go up and inflation expectations should too but I don't think that's the proximate event here.

Anonymous said...

Shorting treasuries seems a bit strange.

What inflation? I just don't see it apart from in a few tradeable financial assets at the moment.

Nemo Incognito said...

Ditto. I'm getting a bit short again (wearing a cup this time) and tooling around on my micro/industry RV trades.

Its ironic in that the onset of deflationary expectations AND a set of crappy numbers indicating deleveraging could force Barry to throw a sop to unions and get protectionist, in turn creating the setup for inflationary pressures to come through in wages.

When you look through all this it isn't easy to feel some pity for elected officials, they've got almost no agency.

But What do I Know? said...

The last one is the easiest--the Fed will *never* hike rates in a meaningful way (>1%), the national debt is simply too large to do so.

Gregor Samsa said...

MM, your audience so far is remarkably undecided. Can't seem to find a take-home message yet in your polls.

Manc Trader said...

Long dollar like anon 10:11 no position in crude though.

Anonymous said...

" in turn creating the setup for inflationary pressures to come through in wages"

67% Cap Ut., 17% U-6 does not set the way for wage inflation, that's years away.

MM- Obama couldn't tie Lefty's shoes

Nemo Incognito said...

Manc Trader I agree - the point is that DGDF (terms of trade driven pressure related to commods) and protectionism driving up employment and wages are the only way in hell any of this inflation is going to happen.

Which makes it all the more baffling that everyone is talking about inflation. Velocity still sucks and credit creation is negative. China - different story of course.

Anonymous said...

US unemployment claims north of 500k and NFP still in the 200k, where is the inflation going to come from? Sure, we have injected "trillions" as some have pointed out, but the amount of debt and slack in the global economy, particularly in the US, is beyond imagination. Add the demographic issue that the US now faces due to the retirement of baby boomers that are underwater after two severe financial bubbles and the odds of inflation are just as high as Gisele Bundchen dumping Tom Brady for you.

Anonymous said...

With the US debt and deficit at such high levels and carrying charges at such low levels, creating asset inflation, inflation or dollar debasement is nearly impossible. Interest rates will rise as fast if not faster than inflation rate. 10-15% inflation with 10-15% interest rates doesn't help, it hurts.

Donlast said...

Well from your poll everything is as clear as mud.

Anonymous said...

If country A has $100 of consumption, $90 of income and therefore needs to finance $10, but there's only $7 surplus available worldwide to finance your consumption, then the only way to close the gap is to artificially increase the $7 worldwide surplus to $10 by devaluing country A's currency. The other way you get there is to raise rates (which Bernanke is known for?) to tilt the savings/investment identity toward savings.

There is no way we are going to lower the value of our bonds. This is going to happen with the dollar first. In fact, its already happening!!! The dollar is going down, and everyone is buying ipods and Windows 7, regardless of how much their house is worth.

Steve said...

Polls look like a trading market still, tilted towards the bears but on balance tilting towards neutral. In other polls the results are neutral to bullish, from what I can see.

But they no longer paint a uber-bear picture, so I think it's much safer to short now.

leftback said...

Anon at 10:43, I have Gisele on line 5 for you...

Is today "The Turn", MM?

Macro Man said...

Re: was a jab at the nickname, rather than the quality...

Re: Brady/ that she's got a bun in the oven, it's about time for him to dump her, n'est-ce pas?

wcw said...

I dunno; I'm no Obamagirl, but his strikes me as the most purely competent executive the US has had since Ford. And if you don't think that's a compliment, do some reading. For simple competence you have to reach back to Ike otherwise.

In re derivatives, please keep in mind that the total amount of derivatives outstanding is always $0. They are derivatives. For every dollar you are long some mildly exotic double-touch barrier option, someone else is short. They always net to zero. I am surprised I have to explain this to you.

I don't want to be bearish, though I did sell out my beta exposure into the Geithner Week rally (which looked like a fine play until mid-July). Thing is, the last bullish trade I touched (short long-dated Treasuries) burned, ouch. Right now none of the trades saving my P/L bacon are strictly long beta, though a few (long CA munis) tend to like recovery up to a point.

On inflation, the other day I was on a conference call with subadvisers. One of them started nattering about inflation pressures. The one old bond hand in the room and I looked at one another and quietly rolled our eyes. Yes, the economic data look better lately, but better is not positive, and weak-but-stable economies do not generate inflation pressures. I was short long bonds as a trade into supply and economic releases, not structurally.

Anonymous said...

48% vol in dec wti : a 60/85 dec strangle seems a reasonable short if you believe oil remains range bound, which is the Opec policy!

Crisis Management said...

>> please keep in mind that the total amount of derivatives outstanding is always $0.

This is really quite a surreal statement. If I sell Macro Man a bunch of OTC options, then I file for Chapter 11, well then MM will be lucky to get pennies on the dollar in court.

That doesn't "net out" to zero. In the real world there is counter party risk.

Anonymous said...

and there is such thing as Open Interest, which can be either net long or net short (or neutral/nil)so always a 'net zero' it is not.

Anonymous said...

@Anon 4:19

What a pile of utter nonsense

Nemo Incognito said...

Nickel, iron and coal all getting utterly f*&ked what on earth is the AUD doing? Please, someone enlighten me. Are we really that excited by carry these days?

k1 said...

Looking for some insight regarding the possibility of the USD taking over from the yen as the funding currency, particularly in terms of negative effects on the US economy.

Thinking over the matter, it seems like there are a number of benefits to the US from a weaker currency, with the main negatives being increased cost of imported economic inputs (e.g. oil).

However, even that increased cost of importing seems to have longer term benefits in convincing US businesses to conserve, substitute, or figure out how to produce more internally.

Can somebody please outline the economic costs of taking over from Japan in the carry trade?

leftback said...

"Looking for some insight regarding the possibility of the USD taking over from the yen as the funding currency"

Um.. I think that already happened and explains a large part of the second half of the rally since March...

EUR:JPY, AUD:USD and EUR:USD all correlate well with spx and $wtic, especially from June/July onwards.

k1 said...

Leftback- understood about the correlations, I was trying to ask a different question (and failed, obviously).

There are some clear benefits to having a "cheap" currency. Are there commensurate problems/challenges beyond the obvious increase in relative cost of inputs?

Crisis Management said...

>> Are there commensurate problems/challenges beyond the obvious increase in relative cost of inputs?

The 2008 unwind of Yen carry trade for example seems to have resulted in "disorderly" movements in the FX markets.

This in turn can wreak havoc with exporters who aren't properly hedged for these violent currency moves.

Of course the bigger problem is what is the hot carry money used to buy? Carry trade is almost an erroneous term, in the case of the oil bubble last year, there was no actual carry involved, pure speculation.

And we all know how that one turned out...

Gary said...

I have a challenge for all the pro-deflation readers of the blog... how does the largest debtor the world has ever known (USA) survive if there is long term deflation?

Japan is still a net creditor, so it is a bad comparison.

Quotes of CPI are meaningless. The BLS says CPI is not an inflation index and never was. Consumer bills (energy, property taxes, education and ahem! health care) are growing 6-10% annually even in recession.

The US government has a very simple way to create inflation (prevent deflation) whenever they want -- the notable difference from history is that USD can be created at the speed of a computer now; no need to waste time with a printing press.

They could (thinking outside the box here) lend infinite amounts of money at zero percent to primary dealers to monetize all the garbage debt in the system

The deflation story never made any sense to me; and the fact that is main proponents are insolvent banks propped up by crony and corrupt politicians hardly helps

Not sure I buy Marc Faber's hyper-inflation argument either; but 5-7 years of stagflation (with say 6% inflation) seems quite in keeping with history

leftback said...

Gary - it's going to be a process - a gradual bouncing down the steps process, a few months of deflation, then some more QE, then more deflation, etc.. until we have achieved some deleveraging. This level of debt is unsustainable.

You have to remember the progressive political problems that are associated with many debt-free taxpayers repeatedly paying up to offset other people's losses, not to mention the limits on US Govt borrowing and the resulting inflation and unrest if it gets away from them.

We would be safer deflating slowly over time and easing from time to time when the economy becomes too weak to maintain employment levels. In other words, Japan. Get used to it, gaijin, and forget about the Myth of American Exceptionalism.

Gary said...

leftback -- other than the housing and stock bubbles deflating, I have yet to see any indication of this deflation that Wall Street analysts claim to see.

My local electric utility just raised rates 7%. My water company raised rates 15% two months ago. Property taxes increased 7% (and the state / local governments still have a huge deficit next year, before even considering a massive unfunded municipal pension system). Food costs are flat overall (some up, some down).

Other energy costs (gasoline, heating oil) are flat to slightly up from last year.

Not that we need any evidence of Wall Street ineptitude, but oil prices last year were not $147 (except for a very brief moment). Full year average WTI oil prices for last year were more like $85, with other grades of oil much cheaper ... that more accurately reflects prices actually paid.

This year, WTI crude is closer to $71; however is was lower earlier in the year. Also, the spread to other grades of crude is much less (if not negative). Brent crude now trades at a premium to WTI.

There is no deflation. It is simply not happening in real life. Deflation is another modeling error from the people who told us CDOs deserved to be AAA rated, home prices could never go down, 105% LTV ratios in mbs bonds was OK, and 40-1 leverage ratios was "sound" bank practice

The cost of living in the US is clearly going up 5-6% annually (maybe more?). A dollar buys less of "real stuff". In the forex market, the USD is worth less and less (even if it is oversold at the moment, the yen clearly won't fall to 150 where it was a decade or so ago.

Sell side analysts are paid to sell whatever is in their firm's inventory (mostly overpriced bonds at the moment) -- and they fabricate whatever bull they need to make the sale.

This is hardly a revelation; but it amazes me how many people still blindly accept the sales nonsense even in the face of overwhelming evidence to the contrary.

There is no deflation; there is a need for insolvent banks to sell overpriced bonds to hapless customers

Gary said...

I must have messed up my editing of oil prices on the last post...

Average WTI prices this year are slightly down from last year, but other grades of crude are much higher -- meaning the raw cost of crude mix to make gasoline (petrol for Europeans) or heating oil isn't much different from last year.

The crack spread (the refining margin) is generally higher than last year's average -- hence the reason why refiners continue to produce gasoline / distillates even in the face of existing above average inventories

Actual oil energy prices paid are essentially unchanged from last year (up or down a very small amount). Wall Street's claim of oil prices going from $147 to $70 is the stuff of very weak analytical minds

And we all know what happened the last time we listened to these "experts"...

Macro Man said...

I for one have seen plenty of lower prices across some portions of my consumption basket. My mortgage service costs have gone down a lot over the past twelve months. The entire reason I took a holiday to the US this year was because I could get business class tickets at an absurdly low price. I bought a half-decent golf shirt for a fiver recently (after spilling coffee all over my regular shirt.) Hell, even a couple of pizzas from Domino's is £5 cheaper than it was a few months ago.

Now, with curtailed supply for discretionary goods, it may be the case that the bulk of the deflation in, say, autos has run its course. But I find it hard to see a scenario where the price of most consumer goods and shelter will rise dramatically any time soon if my views on final demand prove to be correct. Whether that makes for deflation, especially with energy inflation, is a question that I don;t know the answer to, and I am not sure it would be helpful even if I did.

What I do believe is that inflation will not emerge as a corrosive force until the "zillions of dollars" are actually spent, rather that socked away as bank reserves with various CBs. Put another way, inflation won;t really emerge until the velocity of money turns around. That could take some time indeed. When it does....look out.

Anonymous said...

Gary - voice of reason.

Crisis Management - Sounds like retail.

Gary said...

MM: I recall the 1970s, when consumer demand was less than dull, GDP growth was anemic, stocks went sideways, and someone decided polyester pants were fashionable.

We had significant inflation anyways.

As for your airplane tickets et al...

This is another example where well meaning MBAs extrapolate academic theories to absurdity. You are making an assumption that economic demand for goods has a normal distribution -- the same fallacy that made CDOs work until they didn't.

There is excess capacity world wide in auto manufacture (duh!), many textiles, and airlines. Rather than allowing bad airlines / auto companies to go out of business (and reduce capacity) -- governments prop up failed companies indefinitely.

That is not deflation -- that is failed government policy. GM, Range Rover, British Airways and American Airlines have been in and out of defacto bankruptcy / government support dozens of times.

That is not deflation (currency becoming more valuable). That is excess supply that the government will not allow to clear.

While many industries have global excess capacity, others have shortages. Good software developers (who can re-engineer business processes, not just automate existing processes), petroleum engineers, miners, etc are all in shortage.

And world-wide, the farming industry clearly does not have enough capacity to feed growing emerging economies. There aren't enough farmers; there isn't enough real estate / fields; there isn't enough potable water for irrigation.

And one other point: much of the costs I talked about (utilities, education, taxes, health care) are government programs. That is a fancy way of saying they are price indifferent; the demand curve is vertical and always shifting outwards. Whatever your thoughts on the economy, they are irrelevant to a "buyer" who is not economically motivated.

And that buyer is taxing the rest of us (directly and indirectly) to pay for its spending.

Inflation in the 1970s came from excessive government spending in the 1960s -- and it will happen again now

Gary said...

There is excess capacity in things you want, but don't need ... airplane rides and yet another new car to replace the one you already have that still works.

There is a shortage of capacity in things you NEED and can't avoid buying ... energy & food production, education, etc.

You can eliminate all airplane flights if your situation merits. Try convincing Mrs Macro you don't need heat this winter

leftback said...

Gary - you should at least take some time to read a few deflationists (Mish, Gary Shilling) before wading into the muck. Ray Dalia of Bridgewater wrote a particularly good piece about how slow this is all going to be, so if you do have the attention span of a gnat this is going to be very trying for you.

It all depends on definitions, but even if your own definition of inflation is based on "prices that Gazza sees in Gazza's very own immediate area" you must admit that the chances of prices going screamingly higher are slim based on the fact that consumer credit has plummeted, M3 velocity is declining and that there is NO possibility of wage inflation along the lines of the 1970s.

A lot of people who live in NY and DC are now worried about inflation, and think we are in a humming recovery. Those people need to get out more, US has 5-6 states in severe recession conditions and the foreclosure machine is still out there cranking out supply and loan write-downs.

Oregon Guy said...

If Obama is as neurotic as Carlton we're all in trouble. Hell of a slider though.

S&P fair value is around 850 on dividend yield - Grantham says 880 based on his metrics - but how often is S&P at or below fair value? Greedscam/Helicopter Ben won't tolerate it.

Macro Man said...

Gary..the obvious difference between today and the 1970's is, of course, that wages in the 70's exploded higher (despite high unemployment rates)..the minimum y/y avg hourly earnings growth was 5.5%...that level hasn;t been seen since 1982, and obviously there's little upward wage pressure for the foreseeable future.

A lot of what we are seeing is a relative, rather than absolute, price shift; certainly the price of crappy pieces of paper has experienced extreme deflation over the past two years, as has the price of most housing. The price of energy, clearly not...though here in the UK rail prices have come down this year, so not all undersupplied, price inelastic g&s have experienced inflation.

I find the almost religious fervour of the deflationist/inflationist duality to be slightly perplexing, to be honest; personally, I think we get some of one, and then some of the other. As is almost always the case, I find it easier (and more profitable) to keep a relatively open mind...

Gary said...

Lefty -- I have read Mish and Gary Shilling ( I don't get Ray Dalio's stuff at the moment -- please forward a link)

Mish babbles on endlessly about various academic "formulas" (which more accurately are estimating models). His favorite thing is to "explain" his college professor's model of prices vs velocity vs demand. He fails to understand that this is nothing but a model, it is not an absolute truth, no matter how many times your professor repeated it.

Academia has assured us that the universe revolves around the Earth, which is flat.

Black Scholes is a great model, but if you were paying attention it relies on many assumptions that we all know are simply not true.

Another popular myth, accepted as "fact" for awhile was that Coca Cola causes illness. "Scientists" showed irrefutable evidence of a 1.0 correlation rate. After cooler minds prevailed, it was found that hot weather caused the illness and also caused people to be thirsty.

Correlation does not prove causality.

Rising wages are often correlated with inflation, but they do not cause it. The central bank printing dollars to pay for Vietnam and the Great Society causes the dollar to decline, and causes workers (with a delay) to demand higher nominal wages to keep up with their expenses.

Today, we are paying for Iraq/Afghanistan, all sorts of entitlement spending (England too), crony capitalism, and stealth bank recapitalization. Government spending in the UK and US is pushing 50% of GDP.

All that spending must be paid for with higher taxes, higher inflation, or some combination thereof. You can't tax a shrinking economy enough to pay for 10% government spending growth -- so the difference will come from increased inflation.

Debt only postpones the increases (with interest) -- debt doesn't avoid anything unless you believe those "risk free" bonds your professor babbled about are going to default.

Inflation is how every spendthrift government throughout history has postponed its demise. I see no evidence that this time will be different

Anonymous said...

I live in Michigan, the state with the highest unemployment in the union. Benefits have been extended to everyone that needs them. Food stamps are easily available and cover a ridiculous amount, if not all of a family's food expenditures. Housing is affordable, and rents are down. Basically, things feel pretty good right now. If you don't have a job, you're being taken care of. Everything we need is in high demand...its just our wants where prices are depressed.

BTW, almost everyone I know under 45 doesn't own a lick of gold or silver. I can see that just starting to change. I think that's where the next bubble is going to be.

leftback said...

"Basically, things feel pretty good right now. If you don't have a job, you're being taken care of."

Is that a sign of a healthy economy?

Agreed with MM on avoiding the religious fervor, but as soon as DGDF is over we are due for another round of asset deflation, and will probably see some price deflation in the grocery store as a result. Oil is the key as it feeds into so many other prices.

Gary said...

MM -- I agree about keeping an open mind in pursuit of profits. I think you can make an argument for Trsy bond prices being high because of fear (flight to safety) and/or because of the near term dominance non-economic buyers (SAFE, the Fed, etc).

The inabilty of anyone to guess S&P earnings (as you wrote about a month or so ago) makes equities less appealing, and bonds might be the one eyed man in the village of the blind.. There are logical reasons for bonds to be "over priced" in the short term (even if you don't agree with all of them)

But the deflation argument makes no sense, and sounds too much like the "reasoning" that made the banks insolvent. A huge net debtor cannot survive long term deflation, and it is simply too easy to crank up the electronic printing press. Bernanke could deposit from thin air $10MM or $10 billion in every bank account at the click of a mouse -- no helicopter needed, no need to buy paper/ink.

I don't want to follow the banks over the cliff -- I want to understand the actual macro environment so I can profit.

Endless sky is falling / deflation nonsense just makes that task more difficult.

I think the markets will start to "heal" when we all restore a sense of meritocracy.

Exactly how insolvent do banks and sell side firms need to get before we question the merits of their "analysis"?

Explorer said...

I recently visited several countries in Africa. The economies were (at best) flat, many were shrinking. Unemployment was rampant. Those that had wages (mostly government bureaucrats) hadn't seen in increase in years, and "supplemented" their income by extorting bribes.

None the less, inflation is rampant.

So much so, that most trade is done via barter, not via the official currency.

High duties on official transactions further encourage barter instead of currency use. The only money exchanged for goods is black market for non local currency.

Clearly, a growing economy and rising wages are not a prerequisite for rampant inflation

Ian said...

How many quarters of "better than expected" GDP growth and upside surprises will it take before the deflationists throw in the towel? Note the recent spate of upwardly revised GDP forecasts. 3Q GDP might hit five percent. Imagine that continues next year. Will Mish et al simply continue to move the second part of the W from 2010 to 2011 to 2012? At current bond prices you had better be right if that is the scenario you are betting on.

leftback said...

Ian, the GDP may be positive 3, 5 or 10% for Q3 but it is all done with pumped in money on the back of a devaluation in the US and UK, see Stiglitz for a discussion of whether GDP is a meaningful measure of growth, especially when it is achieved by currency debasement.

Bond yields are telling you that GDP of 5% is totally impossible next year. Credit markets tend to be wiser than equity markets. Remember the Govt can really only inflate one market at a time and the equity market is fundamentally less important than the debt market so if they had to crash it to save the Treasury market they will do so in a heartbeat.

The W is already baked in the cake unless there were another round of bailouts and stimuli pre-emptively right now. Politically, they can't do it.

I used to think the deflationists were nuts but they got everything more or less right last year. Keeping an open mind, but we are still looking at EPS that may be "BTE" but in reality are still NFG.

Gregor Samsa said...

Gary & others, I think that the fate of the USD will not be determined by the question if there is inflation or deflation short term in the US or not. It is the perceptions and expectations abroad that matter, and the USD can go a long way down even in a deflationary environment.

Gary said...

Leftback - "Bond yields are telling you that GDP of 5% is totally impossible next year"

???? Bond yields don't tell you anything about GDP, up or down. Low Treasury yields tell you there are more buyers than sellers. Any other messages you think you are seeing are Rorschach blots.

SAFE is buying Treasuries to keep the Yuan stable to promote exports -- their buying says nothing about GDP.

Many bond traders are playing with Fed money. Heads they collect a huge bonus and tell everyone how smart they are. Tails they stick the taxpayer with the loss.

Those of us who are not primary dealers are making a very different bet if we buy Treasuries.

The deflationistas got everything right last year? Bond yields dropped, but there were loads of non deflation reasons for that to happen. Core CPI (which is not inflation, but people like to site it anyways) is still up yoy. The USD is down, cost of living is up. How do you figure the deflationistas got everything right?

Stock prices of dot-coms skyrocketing did not prove a viable business model anymore than skyrocketing home prices "proved" CDOs to be good investments.

I can throw a dart at the stock pages in Barrons and buy whatever it hits. If I did that in late March, I would be sitting on some serious gains now. Does that "prove" my stock picking technique is superior?

Skyrocketing bond prices proves the Fed and SAFE are buying heavily. It proves the insolvent banks are afraid to make loans, and they are buying Treasuries instead. To a lesser extent, those that want to sell short are unable to borrow the bonds to short.

We really need to raise the bar on the quality of "thinking" that happens on Wall Street. Disagree with me if you like (I hope many people will, I learn from intelligent disagreement) -- but try coming up with some sound logic to support your view.

Anonymous said...

thanks MM for the inspiring post. i simply don't see anything out there that is going to cause a sell off in equities in near term. i can see a) shallow corrections getting bought b) extreme pricing on 80% vs 100% puts that would point to a lot of short futures delta hedging and a market that is well hedged c) an earnings yield for 2010 that is very high relative to risk free yields d) companies commenting on further cost cutting and some starting to whisper about some revenue improvement. If people are looking for a catalyst on the downside to cause the 10% correction represented in the sample what is it? a move higher in treasuries yields, china, credit markets, inflation etc all the bear points seem very well discussed every day and we just march higher. please enlighten me as I like MM try and assess everything with the most open mind!!

leftback said...

Gary, you really are not paying attention in class, old chap, now LB is going to have to SCHOOL you. As a matter of fact, the deflationists got everything right LAST YEAR unlike the DECOUPLERS like, say, Peter Schiff when they were long Tsys and short equities and long the dollar. Result, ka-ching.

At the end of 2008, then they mainly advised selling Tsys and bought IG corporates into the summer as spreads narrowed for a LAY-UP trade, before reversing the call this summer when the 10-yr hit 4%. More ka-ching.

Look this is a Macro and FX blog, generally, so you have to realize from MM's posts that currencies are the key to this. You do understand that govts other than US can f*** up their currencies as well, don't you? If the Euro area economy becomes very weak due to the strong Euro, what do you think the ECB will do? Watch EUR:USD go to 2.00 and oil streak towards $200? No, they will start QE or get on the phone and make BB or TG jawbone the dollar up.

Competitive devaluation or beggar thy neighbor is what is happening but it is all probably in a co-ordinated pre-arranged "after you, Jean-Claude", "no, after you Ben, and you, Mervyn" sort of way.

Just wish they would publish the devaluation schedule ahead of time like the train timetable...

Macro Man said...

LB, as a Brit you should know that a railway-style timetable will only tell you when you can sure that the event in question will not arrive....

Gary said...


Gary is not the same name as Peter Schiff ... I don't see how you got us confused. I also don't see why you erroneously believe that Schiff speaks for decouplers or anyone other than himself.

There are plenty of reasons for yields to rally besides deflation. The deflationistas might be right for all I know...

but you aren't giving any supporting evidence either way. You are only reinforcing my belief that Wall Street's collapse was caused by a total lack of ability in critical thinking.

Anonymous said...

I had the privilege of learning under great mentors, but one in particular provided me with the greatest lesson. "Those that speak too much or under a great degree of certainty are likely to lack knowledge and meaningful things to say. However, always pay attention to those that speak little and display great humility."

Guess under which category you fall?

Gary said...

Anon 10:57 (probably leftback in drag?)-- it doesn't matter which category I fall into, this is just a bunch of fools babbling on a blog.

The more important question to the industry is: which of your categories do Wall Street analysts fall under?

There are whole newspapers and TV channels filled with people who are absolutely certain that x% Treasury yields "means" y% GDP.

MM talked about a pretty wide range of S&P eps scenarios, followed by a pretty wide range of P/E multiple scenarios. That is why I read his blog and seek his views.

Goldman Sachs gets on TV and tells us the S&P is going to 1250 -- no caveats, no range or margin of error. And Goldman is hardly alone in this.

I don't care how upset my comments got you-- I am tired of trying to defend my profession at every cocktail party and public forum. I am tired of bailing out these losers. I am tired of hearing how another broker cost one of my friends thousands of pounds/ dollars because he merely parroted his firm strategist's recommendations without any thought.

I want to encourage more analysis like what MM does. I don't want to make any effort to defend the poor thinking skills that seem to dominate the sell side today and IMHO led to its collapse.

kihei said...

I know I'm late to this but I'd like to address Gary's deflation argument. I would argue we've been in deflation since late 2006. If Gary wants to use the cost of living for inflation/deflation I'm fine with that.

The largest monthly expenses (house, car, food) have been falling or flat the last 3 years. You might say that YOUR mortgage/rent hasn't changed but I would say that's due to YOUR decision. Housing prices and rents have been falling in aggregate across the country. Gas is where it was three years ago. The $CRB is where it was three years ago.

Now taxes might have risen, but that's not inflation, that's the government taking more of your money. CA had a large tax increase May 1st (income, sales, fees), and it sucks, but it's not inflation.

It doesn't matter that Ben says he can dump as much money as needed to stop deflation, he hasn't done it yet so it's only theoretical. At one point he also claimed that subprime was contained. The FED will save the biggest banks by issuing more debt, but that doesn't guarantee rising asset prices (inflation) over the next several years.

I will simply state my argument: without wage inflation there can be no price inflation without the debt ponzi scheme that's occurred the last decade. And all ponzi schemes end.

Nemo Incognito said...

Viz natural gas folks, does anyone have any idea how much uncontracted gas is coming online over the next few years out of Qatar, or how much capacity is being built in Asia Pac? This curve looks way too steep.

The Gubernator said...

kihei: home prices have fallen for me too the last couple years, but before that they were climbing 15-20% per year.

So that means inflation drastically under-reported from 1997-2007 (rough date range)? That means central banks in Europe and the US (and much of the world) should have put their lending rates near 15%?

I have to disagree with your theory about taxes. Taxes (especially in the US) are not some edict handed down from a devine power -- they are the cost of government services. We went to the government "dealership" and we chose to purchase 1000 units of government (its actually called voting). The cost of our government goods is increasing at an alarming rate -- far faster than our ability to pay for it, much like our spending habits in many other categories.

Especially in a democracy, government services (and their cost) are not some externality that is outside our control.

We may regret our decision to buy that additional designer shirt or that extra government agency -- but we made the decision ourselves.

We got into this mess in large part by deluding ourselves into believing that this SIV is off balance sheet, this social program doesn't count, this government agency is off-budget.

We learned the hard way that it is all on budget, on balance sheet. If we have to pay it, it counts

We have to pay taxes for the government services that we voted for. They count

Don Ho II said...

@kihei -- the makeup of CRB changed several years ago (I think 2006?); it is not the same index. The old index was a broad commodity index; the new one is very heavily weighted toward energy.

If you look at the CRB CCI (continuous commodity index), it is up markedly from three years ago.

Don Ho II said...

@kihei - look at the post from Explorer a ways back... I don't know which African countries he is talking about, but most of what I heard from Africa and the old Latin American banana republics has the same story.

They definitely had no wage inflation -- sometimes they had no wages.

But they had very high levels of inflation just the same.

How do you explain that?

Igor said...

The CRB CCI index was around 330 three years ago. It closed 14-Sept at 419.50

That works out to about 8.3% annual increase

kihei said...

Notice how this can be a pointless task unless you have a strict definition of what inflation/deflation is (thanks Gary). The premise was made that because of the Fed we will not have deflation. And I made the claim that since 2006 we are in deflation. That the cost of living on a monthly basis is the same or cheaper for the largest components (house, auto, food). And I will still say if your costs are not $hundreds less per month than it's a personal choice and not due to Fed-induced inflation forces.

I have never seen anyone try to wrap increased taxes, fees, and fines into the definition of inflation.

We will revisit this in another year and see if the cost of goods increases even with the expansion of the Fed's balance sheet - I'll bet housing/rents are at least 5% lower next year. How much more do you think you'll be paying next year?

Don Ho II said...

@kihei: of course taxes count toward inflation!

Do you mean to suggest that inflation is not possible in a socialist country? Everything is owned / operated by the government, so everything "doesn't count".

Anyone from the former Soviet Union want to chime in on the validity of that theory?

If it was true, inflation could always and everywhere be eliminated by simply declaring an absolute dictatorship

The US and the UK in the 1970s both had very high marginal tax rates (75%+ for the highest bracket?) ...

The US had very high inflation.

The UK economy was so bad, the UK government needed an IMF bailout

Igor said...

The Soviet Union had very high inflation. Taxes definitely need to be counted, even if western economists didn't count them in the past.

I would not consider auto prices (or airline tickets) to be a valid barometer of inflation / deflation. Autos from GM/Range Rover are sold at a loss for political reasons (preserving jobs). Ditto for airlines.

Food is hard to judge -- the raw prices in the CRB CCI are clearly way up.

The food prices at the supermarket are set by government price controls (milk prices are actually set where I live, while other prices factor in large subsidies)

There is no real price discovery happening in any of these products -- so no inference about inflation / deflation can be drawn

kihei said...

Count your basic monthly expenses in October, and then count them a year from now. We know the Fed plans to massively print, if you're expecting 7% or greater inflation by all means leverage up and buy all the real estate you can. If we get flat to lower prices we'll have another year of deflation.

kihei said...

And if higher taxes are inflationary, then after a big tax increase would a private company have more or less discretion to increase the price of their product? Would people have more or less money to pay for a mortgage?

Anonymous said...

#second attempt

Interesting discussion (in peculiar point in time)

Have a few observations

- the market/s is/are increasingly replaced by intervention and is/are thus reflecting more and more (the interaction of different) political decisions than any kind of useful »information«
- as for forex and index game playing – does the drop of one currency (relative to x other n) in your view reflect all information about commodities, given the correlation between the reserve currency towards real resources and state of affairs in derivative markets? More precisely, where do changes in movement of n1-n10 (given that x is/was »reserve«) towards hard assets show?
- the one thing that lacks in every such discussion is the topic of real categories (vs nominal ones). Real interest rates, real wages and real price of a given commodity and/or PM. There is complete lack of knowledge about movement in real categories as I suspect is quite normal in a gamed over and based/built on appearances »world« that has been overkilled many times over. My 2 deflating cents (after seeing the results of the vote) go towards rising real price of bullion, regardless of whether this means falling nominal one or not.
- If I earned my living through trading it would be prudent of me to dedicate some time at least towards generating my thoughts on expected effects of pegged to reserve currency (call it n11) inflation, that is currently being “forced” by x`s »monetary policy as well as “embraced” by N11s, « that I d both call »necessity«. I don t (know how to).

Though I try to be humble, I will stop now anyways, for fear of not being labeled (another) one who speaks too much. As I do not know the answers I d be happy tho if anyone takes the above-mentioned points and adds his 4 cents on top.

Anonymous said...

"I dunno; I'm no Obamagirl, but his strikes me as the most purely competent executive the US has had since Ford. And if you don't think that's a compliment, do some reading. For simple competence you have to reach back to Ike otherwise."

I could not disagree more. Ignoring policies (which people will always disagree about), GWB was awful as far as letting Congress run all over him. But Obama is (incredibly) even worse. No leadership or even direction (other than "send me something, and I will sign it"). Compare Obama to LBJ (who certainly had his flaws). LBJ knew how to get what HE wanted out of Congress, not necessarily what Congress wanted. Even Reagan got his 1986 tax reform (which pundits said at the time would "never" happen), and he had a opposition Congress at the time.

Nemo Incognito said...

I would just like to say that this deflation/inflation debate got so surreal I could swear someone put LSD in the NBER water cooler. WTF.

Bob said...

Usually the comments on this blog are 100% dominated by Nemo Incognito and a very few others...

I am happy others have had a chance to comment (even though I don't agree with everything they said).

It is very surreal for Nemo to have to share "his" blog!

Steve said...

On the inflation/deflation debate nearly half of the CPI is rent or rent equivalent. I live in NYC and I can tell you, rents are plunging. It's a wonder we're not printing negative numbers.

Since most of the activity in residential real estate is in foreclosures, it's a safe bet that most of these will show up on the rental market. You buy a house at 40 cents on the dollar and rent it out at 20% below "market"--and voila, the market gaps down.

This hyperinflation stuff is just silly. We just lost $15 trillion in wealth, and that's just the US. All the king's horses and men have thrown at most $5 trillion at the problem, and most of that is loans.

Nassim Taleb, whose books I do enjoy, is touting hyperinflation. But the fact is, he has been wrong most of his career, it is now, post-crisis, that he is making it to the airwaves. I take that as one of many counter-indicators.

Bob said...

No one ever thinks rising rents / home prices should count -- those are investments.

But the next year, the same people claim falling home prices / rent should count as evidence of inflation?

Either you think home prices / rent counts -- in which case you are implicitly saying inflation was 15% per year from the mid 90s to the mid 2000s (10-12 years)... I do not remember anyone making that claim, not even the crazy outlier forecasts from people trying to get attention

Otherwise, you can't argue that these prices falling is evidence of deflation. Since no one -- not even the attention mongers-- made a claim for 15% inflation yester-year, it makes no sense that they now argue deflation

The joke around my NYC based firm (from both inflation hawks and doves) was that CPI included "all prices", but it excluded the ones that were going up... unfortunately, there was too much truth for the joke to be funny.