tag:blogger.com,1999:blog-34323687.post6241413891289364050..comments2024-03-29T09:24:42.731+00:00Comments on Macro Man: Ten Things I Think I ThinkMacro Manhttp://www.blogger.com/profile/12324967552369915949noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-34323687.post-13496733499062500922007-10-03T21:47:00.000+01:002007-10-03T21:47:00.000+01:00I appreciate the chalkboard, MM, Brad.It is kind o...I appreciate the chalkboard, MM, Brad.<BR/>It is kind of you to share.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-27918871494039880482007-10-03T19:51:00.000+01:002007-10-03T19:51:00.000+01:00t, it might be useful to clarify terminology. Cur...t, it might be useful to clarify terminology. Current account surplus countries will export capital (run capital account deficits) because of the identity of international accounts. <BR/><BR/>These days, the rate at which the capital account clears is the primary determinant of exchange rates.<BR/><BR/>One term in that equation is the attractiveness of borrowing in a curency to fund purchases in another currency. That decision may be made on the basis of very low interest rates (e.g. the yen) or of expected depreciation (e.g. the dollar.) Note that the current account does not play a role in that decision. However, because it represents the offset to the capital account, currencies like the yen tend to have a buffer that currencies like the dollar do not.<BR/><BR/>It's also important to remember that that current accounts represent a marginal savings <I>rate</I>, not the <I>stock</I> of savings. If the US repatriates some of its stock of foreign savings, it can fund its own current account deficit in the absence of foreigners. To a degree, that is what happened in 2001.<BR/><BR/>So...I guess the rule is that there are no permanent rules.<BR/><BR/>Anonymous, you are right about the GBP/USD rate....though its subsequent decline says a lot more about pre-Thatcher Britain than it does about the post-Kennedy USA.<BR/><BR/>And of course, investors' time horizons must be finite at the end of the day, for in the long run we are all dead!Macro Manhttps://www.blogger.com/profile/12324967552369915949noreply@blogger.comtag:blogger.com,1999:blog-34323687.post-70311606392707043652007-10-03T19:24:00.000+01:002007-10-03T19:24:00.000+01:00for all the hand-wringing about the $ , I remeber ...<B> for all the hand-wringing about the $ , I remeber when there were 4$'s to the Pound during the 60's ....... time frames can make all arguments valid</B>Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-6965964966310798952007-10-03T17:38:00.000+01:002007-10-03T17:38:00.000+01:00...and yet the powers that be go out of their way ......and yet the powers that be go out of their way to ensure that this type of credit creation from a small borrowing base continues, because they are scared ****less about the deflationary implications if it doesn't continue. Almost like a broker too scared to give its biggest client a margin call, lowering margin requirements when the client's trades are losing.<BR/><BR/>So as far as I can see, all means necessary will continue to be deployed to continue the NR borrow short lend long model. As a result the inverted pyramid of credit will continue to grow until people are unable to borrow any more.<BR/><BR/>I understand this implies inflation (<I>de facto</I> devaluation vs. assets).<BR/><BR/>As for savings being necessary to become a funding currency, I bow to your superior knowledge (inferior ignorance?) Brad. It would seem to predict, though, prolonged weakness in currencies that have current account surpluses, which seems perverse. I will spend more time trying to understand this.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-46552334379236860332007-10-03T16:06:00.000+01:002007-10-03T16:06:00.000+01:00..or think of it on a micro level. Northern Rock'.....or think of it on a micro level. Northern Rock's business model involved heavy doses of credit creation layered on top of relatively little savings (its small deposit base), with the shortfall made up by the kindness of strangers (the interbank lending market.) It works great when it works. But when the strangers exhibit less kindness, it can all go horribly wrong rather quickly...Macro Manhttps://www.blogger.com/profile/12324967552369915949noreply@blogger.comtag:blogger.com,1999:blog-34323687.post-297607258567730772007-10-03T15:59:00.000+01:002007-10-03T15:59:00.000+01:00why the old fashioned requirement for savings -- w...why the old fashioned requirement for savings -- well, that probably takes more than a comment to address. But i think the general argument would be that this credit creation, absent savings to lend you, implies inflation ...<BR/><BR/>on a global basis, the account identities indicate that you have to save more than you invest (not create more credit with new fangled instruments) to finance the rest of the world. the big funding currencies now (JPY, CHF) both have current account surpluses. the US not so much -- it relies on inflows to cover a domestic savings shortage. i don't think that changes with new instruments.<BR/><BR/>the more interesting question is whether derivatives can let you take effectively leveraged positions with very small flows -- i think the answer is yes, but it going short the $ via a derivative requires someone that is willing to take the opposite side ... <BR/><BR/>bsetserAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-21196261788338019432007-10-03T14:39:00.000+01:002007-10-03T14:39:00.000+01:00"the uS doesn't have a current account surplus for..."the uS doesn't have a current account surplus for its housewives (or hedge funds) to lend out to the world;"<BR/><BR/>Credit can be created at the stroke of a pen; in the face of a slowing economy borrowing will be made easier, reserve requirements can be eased (though not exactly onerous now); can not credit expand up to the capacity to borrow?<BR/>Why then the old-fashioned requirement of savings?<BR/><BR/>Please correct my likely misunderstanding.<BR/><BR/>re. Andover - how about Portsmouth, now there is no navy presence.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-74516180796917258722007-10-03T14:33:00.000+01:002007-10-03T14:33:00.000+01:00C, ironically enough I think the US equity underpe...C, ironically enough I think the US equity underperformance, in dollar terms, is the strongest of the points when looked at from a longer term perspective. Us nominal GDP growth will be well below that of the world nominal GDP growth, which should bear some relation to relative domestically-generated profits. And while the biggest US companies are multinationals, I'd expect that an outcome of protectionism to be a more adverse operating environment for those firms in the fullness of time (i.e, over 10-20 years.)<BR/><BR/>I, too, struggle with the roundabouts, which are used instead of stop signs.<BR/><BR/>In my experience, the goods arb is hampered by customs, which I am sure charge more than just VAT on imported goods.<BR/><BR/>Brad, I thought I had linked to you...but I see now that it was in a comment on another post. You're linked up now!Macro Manhttps://www.blogger.com/profile/12324967552369915949noreply@blogger.comtag:blogger.com,1999:blog-34323687.post-80001246140145931352007-10-03T13:36:00.000+01:002007-10-03T13:36:00.000+01:00macroman --nice post, very "macro" --I half expect...macroman --<BR/><BR/>nice post, very "macro" --<BR/><BR/>I half expected a link to my blog when you wrote "that books could have been written" about reserve accumulation; there is a new ECB paper out as well that seems to make similar points.<BR/><BR/>t -- one problem with the dollar as a funding currency in some global macro sense is that the uS doesn't have a current account surplus for its housewives (or hedge funds) to lend out to the world; any dollar borrowed from the US to lend to the rest of the world is a dollar the US itself is borrowing from the rest of the world. I think that ultimately makes it a central bank demand for $ arbritrage kind of play ... <BR/><BR/>and for non-market things I think:<BR/><BR/>Is the city really going to grow fast enough to occupy all the new construction visible from the south bank of the thames? The cranes of Dubai and Shanghai seem to have a bit of competition ... there is a lot more construction going on in London than New York from the look of things. I probably should have known that, but somehow didn't.<BR/><BR/>bsetserAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-33104544859581177522007-10-03T13:02:00.000+01:002007-10-03T13:02:00.000+01:00You're flying macro high for someone who's trades ...You're flying macro high for someone who's trades are often more tactical in nature. I generally agree with most of your sentiments, but let me add a few:<BR/><BR/>Liquidity remains ample, but the will to lend amongst dedicated systemic lenders at previously prevailing spreads and terms HAS waned dramatically. Liquidity is the sum of what's out there already, and the possible multipliers thereof. What's out there already in private and official hands will perhaps put a floor on asset prices, other things the same, BUT once prudential religion is burnished upon lenders in a Jimmy Stewart kind of "Financial Ghosts of Xmas Past", authorities may find it hard to rekindle the speculative animal spirits of bank lenders and leveraged buyers of securitised yield plays. <BR/><BR/>2. Protectionism. The threat is significantlyt under-estimated. The least systemically disrupting answer to this threat is for the US to harmonise its energy and consumption taxes to OECD norms. This allows BWII to breathe for another day. The CA deficit would at a minimum halve in very short order, and though some would complain, the system would live to fight another day, and the US and EU would again be fighting on the same the neo-mercantilist battle. <BR/><BR/>3. US Equity underperformance. I am not an equity bull, but this is the weakest of your 10 points. And you haven't said in what terms US equities underperform...local ccy or USD? Here, you need to examine what US equities (you mentioned cap in yests post, where the USD will be, and what the actual global linkages will be vs. the Economists rosey version of "The World Can Withstand A Stonking US Recession". Within the OEX Top 100 representing the lions share of US market capitalisation, the avg non-US sales % is roughly half. These are global enterprises. Moreover, most foreign non-EMs bear similar if not greater overseas proprtions. So who's exposed and under what scenarios? Weakening USD and mild softening, but continued robust growth outside the US combined with no protectionism might allow USS midcaps and small caps to underperrform until the J-curve effects upon trade kick in. But is this likely? Large caps however will outperform small , and likely keep pace with global non-US large caps, each suffering from US softness, offset by non-US robustness. In local CCY terms its a wash then, but in USD terms, non-US might outperform, but if it reduces to this, you needn't express a short-dollar view so cumbersomely. <BR/><BR/>Finally, as to the non-market things I think, <BR/><BR/>- Will the gazillion sq feet of retail being built out at White City be another Canary Wharf, being a visionary idea right in the long run, but getting deep-sixed and changing owners several times before the vision is proved a success?<BR/><BR/>- Why do the English eat baked beans for breakfast? Is there perhaps some connection between this and their banking troubles? <BR/> <BR/>- Why are there not more physical goods arbs in the UK between the US? Shipping is cheap, and while there is VAT to contend with the spread are large? Are all the specs preoccupied with front-running Russians in South Kensington and St. Chelskyberg real estate? <BR/><BR/>- What demons possessed highway engineers in the UK to pursue the round-a-bout, and put them seemingly everywhere thhey are not needed? It's very name gives a clue as to the directness of the round-a-bout as an answer to traffic problems.<BR/><BR/>- IS there any city or town south of Watford that is as maddeningly inaccessible, ugly or irrelevant as Andover? Also, in my long resiidency in the UK, why did no one every tell me that Canterbury is amongst the grimmest of places? <BR/><BR/>- The OFT should investigate or someone should be told of the most obvious price-fixing arrangement betweeen Costa[lot]'s Coffee and Starbucks. No wonder England is a land Tea drinkers!"Cassandra"https://www.blogger.com/profile/17412381249313151515noreply@blogger.comtag:blogger.com,1999:blog-34323687.post-46490762623941804872007-10-03T13:01:00.000+01:002007-10-03T13:01:00.000+01:00agreed, which makes short dollar a no-brainer base...agreed, which makes short dollar a no-brainer based on principal depreciation.<BR/><BR/>To take the point further, I suppose I mean that the dollar will also become a funding currency <I>par excellance</I> in the same way as then yen, but even bigger, as dollar borrowings are subsidised.<BR/><BR/>In which case the risky asset boom / inflation / liquidity / dollar anti-bubble is going to get to (even more) ridiculous proportions.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-21496350821858939182007-10-03T12:53:00.000+01:002007-10-03T12:53:00.000+01:00t, I think we're already seeing it...which is why ...t, I think we're already seeing it...which is why the US current account deficit has been funded pretty much exclusively <A HREF="http://www.rgemonitor.com/blog/setser/217776/" REL="nofollow">via the CBs these days</A>.Macro Manhttps://www.blogger.com/profile/12324967552369915949noreply@blogger.comtag:blogger.com,1999:blog-34323687.post-17453073128830916382007-10-03T12:22:00.000+01:002007-10-03T12:22:00.000+01:00All of which, pretty much, are $ -ve.Perhaps we ca...All of which, pretty much, are $ -ve.<BR/>Perhaps we can foresee a similar slo-mo capital flight out of the US as we have in Japan.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-34323687.post-79104920160906966532007-10-03T12:15:00.000+01:002007-10-03T12:15:00.000+01:00I for one would like to see if non US equities can...I for one would like to see if non US equities can rally after everyone drops there dollar pegs. Growth as is it right now is as much about inflation as anything else. 200 nations all doing there best zimbabwe impressionJameshttps://www.blogger.com/profile/12183085827525696523noreply@blogger.com