Posts
March 21, 2012
Simple question but difficult to answer. Here is the long answer.
I still think that we are getting near a tipping point with both the economy and the markets. The “economy continues to improve” groups are basing their argument on headline numbers. For example,
1. Auto sales are up slightly but inventories are even higher;
2. or an average 200,000 jobs have been created over x months but that is not enough and half the jobs are part-time and for lower wages;
3. Or manufacturing and service indexes are over 50 and therefore show “modest growth,” but are higher inventories good for the economy or just GDP index.
4. Corporate profits are high (decades high levels) and going higher (implies margins will continue to expand), but many indications that margins will contract (rising costs, gasoline hurting consumers, increasing housing foreclosures mean people have to move and pay rent rather than spending their mortgage payment on restaurants and cars, etc.)
5. The warm whether is also a factor being ignored by the Fed’s models.
At the same time, the money the Federal Reserve and deficit spending have pumped into the economy is going into the markets as Bernanke wants to get them animal spirits going; and he is being helped by the media: consumer sentiment is improving and the VIX (volatility or risk measure) is now extremely low (what risk can there be?)
“Darth Vader” on the other hand is looking at the fact that the pace of money supply(the key driver of GDP) has started to contract and that means decline for the GDP by June/July unless there is a new stimulus program or QE3+.
I think the Fed is looking for an “excuse” to print more money but it can’t look like a political move so he needs some economic data to point to in order to pull the trigger. This could be some bad economic numbers or a market correction along with a correction in gold and silver. Or it could be done through stimulus as we prepare for to engage in another war.
Net/Net: The economy remains in recession and looks to stay there for some time because we have not addressed any of the issues that brought us into this recession or are keeping us there (spending, debt, central planning, printing money, government interference in the economy and markets, etc. etc.
But, the $8 trillion dollars pumped into the economy has helped GDP’s and increased assets. This is what politicians (including Fed Reserve politicians) do. It seems to be the only thing they know how to do. Therefore, I expect another round of stimulus or money printing in time to help the elections and before the new debate on the debt limit ceiling which will likely be reached by October.
Investments must be flexible (risk on, risk off) because the exact shape and timing of the markets are unknown; and tradable (for protection and opportunities) until the longer trend becomes known.
Net/Net: The short answer is that the market is at the top of its range and can only be held there by more action from the government.
Friday, March 30, 2012
Friday, March 9, 2012
Is It Decision Time for the 2012 Economy?
The media has been reporting for some time, based on "expert" opinions, that we are in a recovery and that the economy is slowly getting better. There are some data points that are getting better. Afterall, we should get some nominal improvement after the government spent about $10 trillion in the last three years (40% of it borrowed) and the Federal Reserve printed another $3 trillion over the past four years. But, the problem is that it's only temporary. The improvement only lasts as long as the printing presses are running. The net is that the market is being held up by printing money but the economy itself is not improving much.
Now however, we are running out of previously printed money. Quantitative Easing (QE1 and QE2) and the Feds "Twist Program" are winding down. So going forward, we can't get an increase in nominal GDP growth. Therefore, GDP will now start to decline. For example, Goldman Sachs revised its estimate of GDP in the first quarter down twice lat Friday and Bank of America is now at 1.8% for the first quarter. We must print more money to get an increase in GDP.
Yes, both political parties know this and the Federal Reserve knows this as well. But, with current debt at close to $16 trillion, some people are saying no to more debt. Therefore, the government needs to "prove" we need more money printing. After all, elections will be here soon. So, the Federal Reserve needs some bad numbers now to justify printing more money. I wonder about Friday's jobs number. Maybe if gold and silver dropped in value, it would show that debasing the dollar by printing money wasn't the reason for its rise in value. Or maybe a quick hit to the stock market would generate enough fear to do the trick. And, oil needs to come down in price because you can't start a war with oil over $100 per barrel. Or?
The net is this; we could be at a tipping point. Either we side back into recession or we print more money and "jump start" the economy, again.
Now however, we are running out of previously printed money. Quantitative Easing (QE1 and QE2) and the Feds "Twist Program" are winding down. So going forward, we can't get an increase in nominal GDP growth. Therefore, GDP will now start to decline. For example, Goldman Sachs revised its estimate of GDP in the first quarter down twice lat Friday and Bank of America is now at 1.8% for the first quarter. We must print more money to get an increase in GDP.
Yes, both political parties know this and the Federal Reserve knows this as well. But, with current debt at close to $16 trillion, some people are saying no to more debt. Therefore, the government needs to "prove" we need more money printing. After all, elections will be here soon. So, the Federal Reserve needs some bad numbers now to justify printing more money. I wonder about Friday's jobs number. Maybe if gold and silver dropped in value, it would show that debasing the dollar by printing money wasn't the reason for its rise in value. Or maybe a quick hit to the stock market would generate enough fear to do the trick. And, oil needs to come down in price because you can't start a war with oil over $100 per barrel. Or?
The net is this; we could be at a tipping point. Either we side back into recession or we print more money and "jump start" the economy, again.
Sovereign Bond Risks to Increase Significantly
February 21, 2012
If you remember, we were frightened when the U.S. Government threw out two hundred years of settled law when they arbitrarily threw out the superior claims of General Motors' bondholders in favor of the subordinated claims of the shareholders and unions. But, we have since dismissed this incident as being just against one company; and besides it was politically expedient.
However, we did the exact opposite in the financial crisis when we saved the bondholders with public funds. Again, it was politically expedient.
Saturday, the European Central Bank (ECB) did something they may regret later. They exchanged their existing Greek bonds for "New Greek" bonds that are not subject to the "collective action clause" (which allows a supermajority of bondholders to agree to a debt restructuring.) Now, under the new terms, the ECB has first claim to Greek assets over all other bondholders. They did this without the other bondholders consent and without objection from other European nations.
In other words, the ECB can now retroactively change the terms of any bond contract. For example, who has the superior claims against assets, the interest rates, the maturities, etc. at any time it's to their advantage and without bondholder acceptance. No rule of law. No judicial appeal.
Bond buyers will now have to reassess the current value of European bonds for this new risk and then evaluated them against U.S. Treasuries where we have had the rule of law. This increased risk should have an impact on Europe and on our markets.
If you remember, we were frightened when the U.S. Government threw out two hundred years of settled law when they arbitrarily threw out the superior claims of General Motors' bondholders in favor of the subordinated claims of the shareholders and unions. But, we have since dismissed this incident as being just against one company; and besides it was politically expedient.
However, we did the exact opposite in the financial crisis when we saved the bondholders with public funds. Again, it was politically expedient.
Saturday, the European Central Bank (ECB) did something they may regret later. They exchanged their existing Greek bonds for "New Greek" bonds that are not subject to the "collective action clause" (which allows a supermajority of bondholders to agree to a debt restructuring.) Now, under the new terms, the ECB has first claim to Greek assets over all other bondholders. They did this without the other bondholders consent and without objection from other European nations.
In other words, the ECB can now retroactively change the terms of any bond contract. For example, who has the superior claims against assets, the interest rates, the maturities, etc. at any time it's to their advantage and without bondholder acceptance. No rule of law. No judicial appeal.
Bond buyers will now have to reassess the current value of European bonds for this new risk and then evaluated them against U.S. Treasuries where we have had the rule of law. This increased risk should have an impact on Europe and on our markets.
The Drums Of War
February 20, 20012
Everyday there are additional stories about the dangers in the Middle-East and the threats posed by Iran. The next day, an even louder response. Then, came the sanctions on Iran and now the U.S. and NATO have began to tighten those sanctions. From an economic point of view, Iran gets 60% of its income from the sale of oil. These sanctions now include restrictions on who can buy Iran's oil in an effort to reduce their revenues and at the same time, the U.S. has put a hold on Iran's sovereign bank accounts. Logic tells you that if the sanctions work and Iran sees the "situation" as hopeless, they have nothing left to do but surrender or strike out. We know they have recently threatened to close the Strait of Hormuz.
We also know there is a rule of thumb that says currency wars (which are going on world wide now) lead to trade wars (more and more talk about tariffs, etc.) and trade wars eventually lead to real wars.
Therefore, if sanctions against Iran become crippling and they close the straits of hormuz for even five days, the price of oil would significantly increase and if something more severe would happen like the disruption of oil for 30 days, oil could jump to $200 or so. Who knows how high it could go.
Everyday there are additional stories about the dangers in the Middle-East and the threats posed by Iran. The next day, an even louder response. Then, came the sanctions on Iran and now the U.S. and NATO have began to tighten those sanctions. From an economic point of view, Iran gets 60% of its income from the sale of oil. These sanctions now include restrictions on who can buy Iran's oil in an effort to reduce their revenues and at the same time, the U.S. has put a hold on Iran's sovereign bank accounts. Logic tells you that if the sanctions work and Iran sees the "situation" as hopeless, they have nothing left to do but surrender or strike out. We know they have recently threatened to close the Strait of Hormuz.
We also know there is a rule of thumb that says currency wars (which are going on world wide now) lead to trade wars (more and more talk about tariffs, etc.) and trade wars eventually lead to real wars.
Therefore, if sanctions against Iran become crippling and they close the straits of hormuz for even five days, the price of oil would significantly increase and if something more severe would happen like the disruption of oil for 30 days, oil could jump to $200 or so. Who knows how high it could go.
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