We mentioned yesterday that the hopes of the world were resting upon the actions this week of the central banks and policy makers. A day later we have had the results in from the BOE, the ECB and Obama's job package with only the G7 to come.
ECB - TMM's take was that JCT spent the first 15 mins trawling through the usual numbers associated to CPI and other price stability measures to justify their "no move" stance. Meanwhile the market was starting to mumble "errr.. and? Does the guy really not get it?" The growing "does he not get it" then manifested itself in the more and more pointed questioning along the lines of "do you not get it?" to which he more and more violently expressed the view that it wasn't his job to "get it" as the only stupid piddling target he had been given to play with was "price stability" - Which TMM think he felt is like being told you are in charge of the cup holder in the Millennium Falcon as you take on the Empire's Deathstar. Mind you, he did put a very convincing case for what a wonderful job he had done with the cup holder and how he was amazed that no one had called him into the Federation's Galactic headquarters to give him a medal. Unfortunately TMM didn't quite see it that way and think his reading from the start of his forthcoming memoires has instead just highlighted the rift between the ECB and the politicians at a time when unity of response is needed. Lagarde, even this morning, is saying that monetary policy needs to be more accommodative but until they change the ECB's mandate TMM think it will probably take until December before the rear-view mirror of the ECB 12 yr old quants picks up enough historic data to trigger an inevitable rate cut. -1 Point.
BoE - Think they must have had McKinsey Consultants in to advise on their policy announcement having obviously been told just to photocopy the last one and send it out again. Nil Points
Obama - Better advised (probably by Simon Cowell) having already teed up the market for a $300bil plus from an earlier $250bil, he went for $447bn (why not $450bn?!). TMM didn't actually hear the announcement but would not have been surprised if it had been accompanied by the "sentimental rising success of underdog to winner" music, so overused in X-Factor style shows, after brief background interviews with his friends and family all saying how much he REALLY REALLY wants this to work, it's his dream, how it will change his life should he win and how he really hopes the Republicans will give him their votes. TMM think that him holding out the olive branch of $245bn of tax cuts mean the bulk of the stimulus should be enacted. Not the viewers' favourite, but having Simon Cowell behind him means through to the next round. +2 points.
The net effect of the above has been to make Eur/usd the litmus paper of Austerity vs Stimulus policies and it's now trading on a 1.38 handle.
As a quick aside on another function that TMM is being told to sell Eur/usd on - There has been plenty of muttering out there about a possible announcement of HIA2, a sort of super HIA where repatriated funds are conditional upon "good" investment. TMM however think the likelihood of such an announcement in the short term is neither likely nor advisable because all it does is encourage corporates to keep cash abroad for the future, on the expectation that there will be another future tax holiday with result being that corporation tax receipts fall structurally. Bad idea.
We now await G7 - Whereas the results of the other announcements appear to be parochial, the response to this one should be global. Interesting that we had the first glimmer of agenda with Geithner's piece yesterday in the FT. Not exactly earth shattering in its novelty but if they actually get any of this done then it will be seen as a seismic shift relieving some of the stresses in the plate tectonics of imbalances. TMM's reading of punters is that little is expected ."What can they do?", which means they start a point up. TMM would like to see something a little more punchy and wonder what the chances of the following happening are:
1) G7 propose global bank stress test administered by the IMF, and commit to forcibly recapitalise banks either directly (for those governments that can afford it) or via EFSF (for those that can't).
2) G7 and China state they are ready to support the Eurozone by explicit purchases of government debt from Exchange Stabilisation Funds.
3) G7 agree to extend the scope and attractiveness of central bank swap facilities and explicitly encourage their use by banks.
4) G7 reiterate commitment to "No More Lehmans".
5) G7 reintroduce bank liability guarantee schemes (e.g. TLGP).
6) G7 announce a new round of gold sales in order to recapitalise banks.
7) G7 central banks agree to purchase bank bonds
And finally, this has been out for a bit but considering the Lagarde comments and those she made at Jackson Hole and pre-G7, TMM wonder if this paper first pubished in March could form the basis for a new Marseille Accord creating a new system for Global Capital Markets and FX?
--------------
Stop Press
TMM have over the past year experienced first hand the absurdities of Greek economics and now hold up as exhibit A this latest piece of data.
"Data released by the Hellenic Statistical Authority (ELSTAT) suggested that Greece imported 1.5 million euros worth of olive oil -- once a staple of its agricultural production -- from Germany in 2010"
ECB - TMM's take was that JCT spent the first 15 mins trawling through the usual numbers associated to CPI and other price stability measures to justify their "no move" stance. Meanwhile the market was starting to mumble "errr.. and? Does the guy really not get it?" The growing "does he not get it" then manifested itself in the more and more pointed questioning along the lines of "do you not get it?" to which he more and more violently expressed the view that it wasn't his job to "get it" as the only stupid piddling target he had been given to play with was "price stability" - Which TMM think he felt is like being told you are in charge of the cup holder in the Millennium Falcon as you take on the Empire's Deathstar. Mind you, he did put a very convincing case for what a wonderful job he had done with the cup holder and how he was amazed that no one had called him into the Federation's Galactic headquarters to give him a medal. Unfortunately TMM didn't quite see it that way and think his reading from the start of his forthcoming memoires has instead just highlighted the rift between the ECB and the politicians at a time when unity of response is needed. Lagarde, even this morning, is saying that monetary policy needs to be more accommodative but until they change the ECB's mandate TMM think it will probably take until December before the rear-view mirror of the ECB 12 yr old quants picks up enough historic data to trigger an inevitable rate cut. -1 Point.
BoE - Think they must have had McKinsey Consultants in to advise on their policy announcement having obviously been told just to photocopy the last one and send it out again. Nil Points
Obama - Better advised (probably by Simon Cowell) having already teed up the market for a $300bil plus from an earlier $250bil, he went for $447bn (why not $450bn?!). TMM didn't actually hear the announcement but would not have been surprised if it had been accompanied by the "sentimental rising success of underdog to winner" music, so overused in X-Factor style shows, after brief background interviews with his friends and family all saying how much he REALLY REALLY wants this to work, it's his dream, how it will change his life should he win and how he really hopes the Republicans will give him their votes. TMM think that him holding out the olive branch of $245bn of tax cuts mean the bulk of the stimulus should be enacted. Not the viewers' favourite, but having Simon Cowell behind him means through to the next round. +2 points.
The net effect of the above has been to make Eur/usd the litmus paper of Austerity vs Stimulus policies and it's now trading on a 1.38 handle.
As a quick aside on another function that TMM is being told to sell Eur/usd on - There has been plenty of muttering out there about a possible announcement of HIA2, a sort of super HIA where repatriated funds are conditional upon "good" investment. TMM however think the likelihood of such an announcement in the short term is neither likely nor advisable because all it does is encourage corporates to keep cash abroad for the future, on the expectation that there will be another future tax holiday with result being that corporation tax receipts fall structurally. Bad idea.
We now await G7 - Whereas the results of the other announcements appear to be parochial, the response to this one should be global. Interesting that we had the first glimmer of agenda with Geithner's piece yesterday in the FT. Not exactly earth shattering in its novelty but if they actually get any of this done then it will be seen as a seismic shift relieving some of the stresses in the plate tectonics of imbalances. TMM's reading of punters is that little is expected ."What can they do?", which means they start a point up. TMM would like to see something a little more punchy and wonder what the chances of the following happening are:
1) G7 propose global bank stress test administered by the IMF, and commit to forcibly recapitalise banks either directly (for those governments that can afford it) or via EFSF (for those that can't).
2) G7 and China state they are ready to support the Eurozone by explicit purchases of government debt from Exchange Stabilisation Funds.
3) G7 agree to extend the scope and attractiveness of central bank swap facilities and explicitly encourage their use by banks.
4) G7 reiterate commitment to "No More Lehmans".
5) G7 reintroduce bank liability guarantee schemes (e.g. TLGP).
6) G7 announce a new round of gold sales in order to recapitalise banks.
7) G7 central banks agree to purchase bank bonds
And finally, this has been out for a bit but considering the Lagarde comments and those she made at Jackson Hole and pre-G7, TMM wonder if this paper first pubished in March could form the basis for a new Marseille Accord creating a new system for Global Capital Markets and FX?
--------------
Stop Press
TMM have over the past year experienced first hand the absurdities of Greek economics and now hold up as exhibit A this latest piece of data.
"Data released by the Hellenic Statistical Authority (ELSTAT) suggested that Greece imported 1.5 million euros worth of olive oil -- once a staple of its agricultural production -- from Germany in 2010"
47 comments
Click here for commentsTMM, the Paper link doesnt seem to work. Thanks for a great post as usual
ReplyHi anon.. sry about that. Fixed it.
ReplyThanks! You guys rock
ReplyIn the end, don't your recommendations lead to a nationalizing of large parts of the banking system?
ReplyWell they weren't so much our recommendations as more our thoughts of what they may do. Nationalising the banks is not what we imagine they wan't. That would mean govn would be responsible for their success or failure. Better to completely neuter them, regularly hitting them with law cases or taxes to drain off "excessive" profits yet leave shareholders to feel any pain as they felt the shareholders got too good a deal out of bank bailout part one... would imagine it's also very useful to have an independent banking system to politically blame for any future problems too.
Replyexcellent post MM... your thoughts about negative vs positive posts are clearly true...
Replyif its not negative, no one responds!
EUR/USD looks fugly, as $dollar strength against most major pairs. I feel that cant be a harbinger of risk on. Though with so many HF reversing their USD positions in the past few weeks, who knows
looking forward to reading the paper
Of course gentlemen if governments end up owning 40% of a banks balance sheet , post recapitalisation , then that is the best of both worlds . Evil bankers can continue to take the blame while day to day control over operations moves to the Elysee, #10, or the Hague.
ReplyFar fetched ? Those of us with long memories remember dear old Crispin with Rail Track and dear old Phillip with Northern Rock .
Whatever happened to Greek farmers? Everyone on extended paid vacations or retired?
ReplyFrom where I stand, in order of most to least probable:
Reply4), 3), 5), 1) (without the forced recap), 6), 2), 7)
To me, it seems like policy makers (at least those who are not on the continent) are not seeing this as 08 redux; growth is seen as the panacea here, and I don't think the banking system is the mechanism they intend to rely on.
Also, you can count on heated discussions re: currency intervention behind closed doors. Probably generic statements outlining commitments to flexible exchange rates (once conditions normalize).
'C fom C' says'
ReplyLooking at the dollar and what that means for the sell the dollar buy anything tangible heretheto it appears we may have reached that point in time where relative ugliness has reached it's zenith with dollar taking it more historical role of ultimate big liquidity safe haven. If that runs then risk is off.
I don't think one should confuse 2 seperate functions here. Real USD buying (not on normal safehaven flow) and the euroblx. As for this current dump. I sympathise with the usd move but not the rest if it. Doesn't feel deep enough. Just hope on monday we aren't writing a "Chamberlain" piece... "I have in my hand a piece of paper..."
Reply'C from C' says'
ReplyI am not sure what you mean by the "rest of it".
It appears to me we have two potential issues.
The first is global growth biught via inflationary policy and the channel for that the weak dollar.Do we have some acceptance that the way ahead does not appear to be Orange..I mean Golden ;)
The second issue is safe haven flow from Euro uncertainty when the channels that have become so popular appear with the Swissie to be getting slammed shut.
Appears to me some combination of both factors could be at play right now.
Brilliant stuff, Greece really defies analysis.... but it's a very unique situation. The EU would have been better off admitting Albania to the currency union, at least they still grow stuff and work there. Greece is an example of what happens when an untaxed kleptocracy and bloated government bureaucracy are allowed to join forces to take complete control of an entire country, resulting in a hollowed out economy. US, take note.
ReplySo perhaps markets are pricing in a "Greek outcome" for all the other countries, where they all sit around in cafes smoking and complaining, while importing all their products from Germany, where they are produced by Gastarbeiter from Turkey and Africa? But look, this is crazy, Spain and Italy have problems but they are still functional economies and some regions are thriving. Greece is unique, for the time being.
I liked the G7 checklist, especially 4) no more Lehmans and 6) gold sales. Both of those would do wonders for confidence. I would add 8) encourage the BoJ to go Swiss, and go big - they desperately need to attract productive investment in Japan itself. It's important to flush several safe havens all at the same time if we are to get things moving globally and avoid malinvestment and long-term parking of capital at these financial airport parking lots (that's car parks, to you, TMM).
The DAX post was very useful, and I think the DAX is a great tell for the time being, we would continue to buy DAX and SPX, as long as we have higher lows. The DAX post pointed out the extreme oversold conditions, and a recent visit to Europe suggests that we are not seeing a Soup Kitchen economy anywhere, as recent market action might suggest. Gastarbeiter everywhere, prices as steep as ever.
C in C is right, if Bucky runs and the Euro crashes hard, it will be risk off big time, but we don't see that happening here.
Nobody wants to see Neville, it's time for Winston.
Leftback,
ReplyI think the definition of malinvest is actually investing into production capacity when there is no demand for it(China is a great example of how bizarre it can become with over 50% of GDP coming from fixed investment). Safe havens are so well bid because there are not that many good investments that make sense in a low growth environment plagued by over-capacity. Investments can be value destructive you know.
'C from C 'says'
ReplyBucky is running now not just against the Euro and this is my point..it is running against AUD and CAN albeit pars have yet to be taken out there,but collectively this is a turnaround that I would simply not ignore. The strange thing is taht it happens when the US appears ready to to take yet another step to buy growth which makes them virtually isolated in that other majors are not taking such steps.Moreover the G7 as we know mmet. It may be the case that is a general sideline move in the sell the dollar circle until at least after the G7 and BB have come to play.
Anon, I have tolerated all kinds of rubbish from a variety of anons, but I have had enough of this shit. Your comment is inane and massively toolish, if I may say so. There are an absolute host of excellent investments to be made all over the world at this time without having to build empty cities in China.
ReplyJapan is in dire need of regional reconstruction. The Disunited States fancies itself a bit but in reality has descended to such an extent that the infrastructure would shame a decent third world country, with some awfully nice trains from about the 1950s and crumbling roads, bridges, and infrastructure everywhere you look. it is a disaster.
Europe is more of a problem - it has hordes of unemployed youth and university graduates with nothing much to do except sit around and complain about Gastarbeiter while the latter wait their tables and clean the toilets for Jeremy and Jemima the estate agents. But I see no shortage of (dirty, dull, unglamorous) jobs for people who are willing to do the work.
If ever there was a time for investment in our own people and our own neck of the woods, it is now. There are millions of great projects that need doing in the US, I am sure this is true elsewhere too.
This is no time to sit in your house 1930s-style on a pile of Treasuries, gold or bunds, bemoaning a lack of aggregate demand and lazy indigent workers, we need some real collective action to break out of this state of ennui in the developed world.
A Stark reminder of ECB disunity.
ReplyStark Resigns
Germany really needs to think outside the box here. An EU unwind isn't going to do much for German exports. Hard to believe that even our Bayerische friends in Lederhosen are that stupid (in fact, we don't think they are at all).
Deal with Greece now, dump them, they deserve nothing more, and the market has priced it in. But then circle the wagons around the remainder of the EU and let's get back to functioning markets.
Today's market action (especially European bank stocks) is telling us that a Greek default is coming, and that it is now likely to be imminent. All that remains is to hear about the length of the resulting haircuts. The media noise about ECB plans for recapitalizing banks is telling you that they will not allow another Lehman moment here.
ReplyIf US markets can hold critical support levels by the end of the day, as I believe they can, this will be a bullish sign for the weeks and months ahead of us.
'C from C' says'
ReplyYes I caught the Stark resignation. There are times when frankly I feel like giving up on my fellowman because his stupidty appears to know no bounds. Stark is an educated man ,but IF he truly had any principles and used that 'education' he would have weighed up whther this was the appropriate time at which to spit out his dummy and are I say he would made his desire known quietly ,but held off for the moment acting upon it.
Whoever kept the Uk out of this shambles even to this degree needs a medal for foresight. Not that we will escape the fallout IF they proceed with this playground dispute.
The timing is suspect. Somebody is making big coin today. Quite possibly, Stark chose this opportune moment because he has trading friends at DB or on some other desk who were short, and this gives them time to make a profit and then cover ahead of the G7. We don't need to have much faith in the integrity of individuals, especially when they are bankers.
ReplyA new low on the 10y today, do you fancy it here, C in C? LB has to say Treasuries are the ultimate Venus fly trap here... fly to safety at your peril, you may be slowly digested before the bonds mature.
PP - gads! I read the whole paper. The only certainty I could derive was that any solution that does not directly involve China is probably prone to collapse. But admitting China on the terms that it can more or less dictate means the official end of the entire post-war structure. There is a lot more than banks and nations being saved here.
Replyre, Greek olive oil. A little hard to believe that it came from Germany unless by some related Italian company paperwork trick used to move non-EU oil inside Europe. It's not the first time I've heard rumours of Greek buying on intl markets. The amount calculates out, btw, to be about 750 tonnes v domestic production of typically 150,000.
LB has had a chat with the ref - and as a result LB apologizes unreservedly to Anon @ 4.05 for donning the steel toe caps on his Doc Martens up there.
ReplySorry, guv'nor, there have just been a lot of Anons (gold bugs and their ilk) who have been trashing the comments space in general and LB in particular, and "we just snapped, m'lud. It won't 'appen again".
Honest, guv...
Leftback,
ReplyI agree that some investments can be good and infrastructure in US is an excellent example. But the amounts there are not as massive as the money that lies idle just at the Federal Reserve in excess reserves for example (1 trillion, 2 trillion?)and these projects are not shovel ready. And I am not going even to start about the US political circus that means that only cosmetic mis-directed stimulus is taken. And how exactly will this constructive spending be funded - with more debt until you hit the compound trap like Greece and soon Italy?
Its not the flushing of the safe havens that is needed to start this up though - it's agressive bank resolution Swedish style, defaults and debt writedowns/cramdowns. Then people can stop worrying about counterparty risk, defaulted assets will find more effective owners and everybody gets on with it by taking a haircut on unsustainable standard of living, even the unemployed students in Europe.
At the risk of being even more naive, I dare to say that nothing will come out of G7 because there is really nothing they can do except jaw-boning. Gold sales are a non-starter - no CB will be stupid enough to sell its only insurance. Japan interventions - how many have there been, coordinated and not? The JPY will only fall once the current account surplus deteriorates significantly, 2008 style. An explicit FX target will generate inflation in Japan very quickly and destroy their ability to fund at 1% rates and then you have the next Greece, only much larger.
"This is no time to sit in your house 1930s-style on a pile of Treasuries, gold or bunds, bemoaning a lack of aggregate demand and lazy indigent workers, we need some real collective action to break out of this state of ennui in the developed world."
ReplyThe republicans believe it is a superb time to sit on a pile of treasuries gold and bunds, and bemoan any and all attempt to create aggregate demand, other than giving lots and lots of money to those people who are overflowing with treasuries, gold and bunds, and taxing the aggregate demanders who have nothing to spend but ennui.
And they will get everything they want. (There will be a Republican President, Senate and House in Jan 2013, and they will eliminate the filibuster).
"If ever there was a time for investment in our own people and our own neck of the woods, it is now. There are millions of great projects that need doing in the US, I am sure this is true elsewhere too."
In the USA the received wisdom is that of course the efficient market would have already made those investments if they were worth doing, so obviously there are no good investments, and that won't change until we give the people with surplus capital even more, and stop doing anything which looks like something suggested in the previous paragraph.
'C from C' says'
ReplyI see much to agree with in Anon 6.02 as I did with your earlier post.
I do however see something very ironical in your comments.You see what you are suggesting as a tactic for low growth ,that is waiting it out in 'safe haven' is from apragmatic point of view not really any different to what people did when they loaded into property over two decades.You see that was what they thought was a 'safe haven' against long run inflation and it's effect on the life's accumulation of capital.In part,a large part that was also a mistake because anything that is inanimate and not working productively simply diverts moneyflow and contributes to economic contraction eventually.
So the point I am making is this most of the 'safe havens' are no different to property in that they 'store wealth' and in doing so encourage the very low growth they presume to exist.
Tell me what would growth be if the vast amount of moneyflow lying idle was put to work ?
It's all idle speculation anyway because anyway ,because in truth a great dela of that money is owned by people with marshmallow balls. A large scale concerted global offensive on growth would flush it into play faster than we could blink. Not many will sit and watch growth actually start to get underway meaningfully while cuddling a basketful of comfort blanket treasuries. I know human nature and I do know that about it.
G7 ..big whip right out of the Swiss playbook would put this to the test.
YES, WE CAN!
Reply...AND WE WILL!
http://www.youtube.com/watch?v=iu49gV-fefE&feature=related
Marshmallow balls...
ReplyThat my friend is a MM classic. Well done, sir!
Well, LB stirred it up a bit out there today. LB is a bit like the Joey Barton of MM, some days classy, skillful and inspirational, other days just looking to clatter people and start up fights all over the field. We're Scouse..!
"Yields fall to 60-year lows on Europe worries"
ReplyNo chance that this might be a sentiment extreme?
None at all, I suppose....
LB,
ReplyGood to see you back on the forum.
While I agree that Greece needs to be allowed to default, I am skeptical that such a move would be bullish for markets in weeks and months to come. I agree that removing the uncertainty surrounding Greece would be a plus, but I see some negatives as well.
A Greek default would mean the ECB needs to be recapitalized (again). What would that do to (German) policy makers' appetite for continued ECB propping up of the BTP market? What is the impact of a Greek default on the marginal buyer/seller of Italian/Spanish government debt? It strikes me that a pretty good portion of the real money no longer considers Italy to be money good and I don't see a Greek default helping that situation.
All that being said, S&P is holding support (so far). Today's close may be quite indicative.
'C from C' says,
ReplyThe stark move gave the sellers a free shot coming as it did on a friday with an upweek behind it. Technically the market come Friday wth money in the pot is raedy to go to the bank with some anyway so when you load up Stark on top you've just tilted the balance of selling urgency relative to thin buyers.Other than that today could have been pretty much a non event for equity outside of mainland Europe which actually si where most of the concern is actually focussed.
Folks, I'm actually out and about so having to script on a phone, so no long messages. Just a thanks for the impressive contributions in these comments.
ReplyThanks and good weekends I hope for all .
Keep it clean..
Pol..
'C from C' is not out and about and is determined to get that post count up so says'
ReplyTell me this 'safe havens'...
Did Japan get low growth and very low yields on it's public debt because the worlds was actually in low growth mode of was it actually because their domestic towards growth was so very very bad that it actually engenered it?
I know where I lean and that is low growth was not some predetermined 'must be' awaiting debt deleverage to the nth degree at all. The low growth came because the govt and it's policies squeezed out the opportunities for growth and Mrs watanbe had no reason to go looking for growth risk when the govt had already shaped her behaviour towards pottering along the strret to the Post Office to deposit her capital in an account that yielded something commensurate with it's risk. My argument is there is no reason tat the world needs to replicate Japan ,but it will if it imitates it's policies and i do hope the Germans are really not that stupid albeit they appear to be making a good start at it !!
'C from C 'says'
ReplyWhat if for example your debt level is rising more slowly than the yield cost on servicing the debt is dropping...LOL in that case 'safe haven' is actually paying the US etc etc to undertake some very low cost debt issuance to fund all the job creation it wishes. The irony of that appeals to me ..growth paid for by 'safe haven' fear ;)
Now if only we can get politicians to stop looking at nominal debt levels and start looking at real cost of debt levels.
@ C from C,
ReplyI would be careful with that line of argument. The "rising debt levels with falling cost of carry" situation perfectly describes Greece until, well...
The problem with those damned bond vigilantes is that they generally aren't a problem until it is too late. Assuming that the US got forewarning and yields started creeping up, they would have to achieve a primary surplus in very short order. Given that they are running a 10% deficit, I cannot agree with you that the US should be borrowing based solely upon their current cost of issuance (especially given the sloppiness of their major stimuli packages - see below)
That being said, a properly executed stimulus in a country like Germany (which is in a much better deficit situation) probably makes sense. By "properly executed" I mean spending on projects (which may be pulled relatively rapidly, and also contribute to future efficiency) rather than programs (which are politically very difficult to cut back on).
Food for thought. Now it's my turn to get out and about.
C from C,
ReplyI think you should look somewhat differently at the Japan situation and important lessons from it. What happened was exactly the result of attempts to avoid proper banking system restructuring and asset clearing - sound familiar? You are absolutely right that the government squeezed out opportunities and prevented effective allocation of capital. But all the interventions you ask from G7 will achieve the same results - distort incentives. Gold is rising as a direct result of government intervention in markets. Isn't the reason everybody is buying US treasuries with negative expected return is Fed intervention and expectations of additional Fed intervention? The so called safe haven assets are unintended consequences of misguided and useless government policy attempts at controlling business cycles for the last 20 years. You need to destroy fake paper wealth including sovereign debt holdings through debt restructuring and defaults and achieve market clearing prices that actually make sense to take risk. You cannot make people take risk if reward is negative by default. Also, overall slower economic growth now is a function of high base, demographic changes and resources limitations, especially energy constraints - and it's not possible even at lower levels without writing down the massive unproductive financial overhead. So I am all for productive investments but capital protection is not a useless concept right now, especially if the governments are intent on confiscating private savings to shore up banks and overpriced assets = low growth or no growth for many years.
Yep well before I turn in, thanks to you Teamsters for takin' the time to up jump the boogie.
ReplyI noticed today in his address to the Eastern Economic Association (How We Failed, NYTimes) that Krugman appears not only to have thrown in the towel but also to have thrown down the gauntlet in the direction of a safer pair of sociologist's hands.
So ... have we reached The Tipping Point?
It seems the "purge the rot from the system" meme is still going on strong after 80+ years...
ReplyAggregate demand and unemployment are what matter here. Treasury yields are high and trending lower because the markets expect the growth to be shit.
http://www.youtube.com/watch?v=jDhLVyYsC_A
ReplyHave a good weekend all!
G7 pre-communique already released. A translation:
Reply"We will squirt a torrent of liquidity from all orifices if there is any indication that Mr Shorty is going to instigate a Black Monday. So don't even think about it."
A lot of people comment on the debt situation in US and Japan saying that a disaster from rising interest rates that will lead to default, hyperinflation etc. is imminent. This couldn't be further from the truth. Please learn how the modern monetary system works and the difference between currency issuers (like the US and Japan) and currency users (like Greece, Italy etc, as well as the US in the old gold standard). In today's world there is ZERO probability of Japan defaulting in its JPY debt. The worst it can happen is currency weakening (like in the UK) resulting in moderate imported inflation (like in the UK again), but NOT hyperinflation, not with the tax capacity intact, laws working, and people in debt denominated in that currency up to their eyeballs. So, if you feel like trying your luck playing bond vigilante for the n-th time in Japan, go ahead, you will end up bankrupt like so many others before.
ReplyAlso, let me say that I'm with Leftback on the spending/investing part. The world and especially the western world has huge wasted spare productive capacity. As capital decides to stay idle (i.e. parked in treasuries, cash or hoarded commodities) there's a growing number of unemployed people that slowly turn to unemployable, and this is a true waste from a global point of view (i.e. viewing the world as a whole). Nowhere is this more evident than in the continental Europe and especially in the south. Unfortunately, language and cultural barriers prevent even the educated youth of Greece, Spain, Italy, etc. to move to Germany or wherever else there's still demand for their work. There's a lost generation there and it's a pity that the shortsighted Eurocrats allow this to happen.
ReplyC f C' says'
ReplyTheta,indeed.
This is simple ,but seems not to be appreciated by many.
If you are a sole issuer of currency of major major league size then the market punishes you for issuing non asset backed money via your currency and not by trying to do a david and Goliath on your bond debt which is likely to be huge.
IF you are a minor in the legaue table,OR IF you are not a sole currency the market can punish you via both your currency and via your debt costs.
Hence ,for example the behaviour of recent times of the US$ so at odds with the performance of it's debt yields.
By comparison the PIIGS have been secured from currency punishment because of Germany (and I suspect China) so the punishemnt has been taken via cost of debt. Note that has changed as sentiment now also appears to have decided that the state of affairs between these relative trading partners now favours a better outcome from US policy than from Eurozone policy.
Hence,the US now get's the best of both worlds . Global fear has delivered very low borrowing costs recycling Fed profits to the treasury and discounting/locking in future low borrowing costs on each issuance.
Meanwhile the attraction of the dollar will push down inflationary costs even further for them and tend to narrow their trade deficit through the energy bill albeit offset by export growth being capped.
However those inflationary costs and locking in of future rates will provide consumers with an effective increase in disposable income as .
On top of this this context gives the US a 'free' shot at fiscal stimulus recycling beefits back to consumers through the tax regime.
In other words it does everything that stupid EU policy of fiscla austerity fails to do with the one exception that their currency falling will over time assist export growth and that would be nice IF only outside Germany they had many export oriented Industry. The problem for the EU even with a falling currency will be that so much of their trade that should benefit will not because they are a trading zone transacting first and foremost with each other with the biggest exception being Germany of course.
US equity of course being so global in the majors now has a further problem with eanrings IF the dollar rally proceeds which it looks likely to do. Market will probably factor that in first beofre stopping to consider whether a payroll tax holiday if passed may offset it.
Still just looking at the economies rather the markets for the moment the US looks most likely to outperform going forward when compared to the EU and I'd be surprised if this did not get reflected in the performance of the market Indices.
'C from C' says'
ReplyActually Theta you're mssing something probably I suspect because you might not be a Brit.
That spare capacity you are talking about has been stadily making it's way to the UK !
We are open to them and the language barrier does not tend to exist as many speak enough English to work here.
Note to idiots this is why the 'aging poulation' argument and doom and gloom for future growth does not work for the UK at all. We are adding numbers and those numbers tend to be of the young age group. What are we going to do with them? As a sole issuer of currency we should just ssue and let the market do what it wants with our currency ,because it will not be able to get to grips with our debt if we enact fiscal growth polices. This is also why I would not be a buyer of UK or even US debt BECAUSE both countries have the ability and dare I say it likelihood of going for growth. I know Osbourn talks a lot about the debt,but before too long we will see something else form him because he wants to get re elected eventually and he won't have time to dawdle if he wants to make that happen..does anybody seriously think a party get's re elected via austerity ..jezus get some education in psychology...no chance
Great stuff, this morning, especially Theta's skewering of hyperinflationistas, and C from C's astute comments on the UK, which has escaped the worst of the Euro mess by virtue of retaining its monetary sovereignty and the joint actions of Swerve and El Gordo to produce a rapid and enormous devaluation of the pound during the GFC, resulting in the moderate inflation we see today in the UK but avoiding a huge collapse.
ReplyWell done, chaps. Carry on.
Nice job from Jeremy and Jemima too, loading up on short duration debt rather than the 30Y stuff Joe Q Public is being stuffed with. Makes the Swerve's job even easier.
ReplyAlso, am I missing something here or is short EURCHF still the obvious trade here, especially through options. Going back to theta's point about currency users vs currency issuers, I find the notion that SNB is going to be able to 'pull a China' very very unlikely to happen on say, a 1YR horizon
Reply'C f C' says'
Replyit's fairly clear that sentiment trumps models at this time although there are some interesting relative stories occurring in equity.