As the USD falls it impacts China in various ways, one is it makes its exports cheaper and China’s exports are its national priority. A falling USD causes oil prices to rise, which is slightly inflationary to the Chinese economy, probably not a entirely bad thing. The falling USD hurts other big export countries like Japan and Germany, which may feel forced to print currency, and run fiscal deficits. The falling USD in the US domestic economy could spur some inflation, could boost the stock market, provide some support for housing, and maybe boosting consumer spending.
To pay for the US debt issuances what is really is needed is a trade deficit with China to prompt the Chinese to buy the all coming U.S. government debt.
Wednesday, October 21, 2009
Lets Look at the big Game - A Top Down Look at Stocks
There is a lot going on and things can go a lot of different ways. Parts of the economy are going into slack demand and higher prices, I think that is called inflation or maybe currency devaluation, but that is what we see in commodities, basic materials, and gold.
International markets may demand that interest rates go up, and if the Federal Government cannot afford to buy so many mortgages in the RMS market then that could cause mortgage rates to go up, and this could hurt housing prices, then impact the economy. I think that with gold and commodities surging then one should be wary of real estate, home builders, home improvement retail. There are real risks and real pressures which could exert negative impacts on these sectors.
Its really strange to see commodity and basic material stocks rising at the beginning of a economic cycle, usually these stocks are late cycle stocks. The China growth story is still in effect that was the driver for these stocks before the crisis and it may still be intact. The other reason could be the massive liquidity injected into the market trying to find a home.
Its something to ponder and in away it is a form of inflation. To much money in the hands of people leads to CPI inflation, to much money in the hands of banks may just lead to inflation in certain stocks.
So in normal recessions, banks are doing good, due to the spread on money because the Fed has dropped interest rates very low, and banks are making money on the steep interest rate curve.
Well, at this point home builders are usually a good buy; does that look like a sector that will rally in 2010? Not really. How about in Brazil? Gafisa is homebuilder I have kept my eye on for years. I understand that condo prices in Hong Kong are the most expensive in the world, so maybe Chinese homebuilders, or realty developers would be a good place to invest. Auto stocks have been a good place to invest in the early part of recoveries. I have noticed the rising shares of Honda and Toyota, although these are levered to the U.S. market, once again a pure auto builder in China may be a good place to look at.
Lets look at U.S. debt and interest rates. The short end is nearly zero and the long end is low and falling. There are few potential signals that are being telegraphed. Investors are supposedly buying the short term paper to avoid being bite by inflation. Investors are supposedly buying the long dated (10-year treasuries) in anticipation of worsening economic conditions, such as a full onset of deflation or a worse business contraction due to the increasing unemployment rate. This doesn’t square at all with the stock market rocketing up for the supposed reason of seeing a sharp V-shaped recovery somewhere.
Something Gotta Give
It appears the market has something for everyone these days, the doom and gloomers can point to the interest in buying long dated U.S. debt bodes ill, but the stock market is anticipating a sharp recovery with positive signs being scene everywhere.
Tying It Together
I have seen some speak about an inflationary depression, and I have noted there are clearly sectors experiencing inflation, Oil, without the growth boom of a few years ago and there are a lot of sectors still contracting. The world maybe in the state of a depression with a general flight from currencies giving the false growth signal of inflation in energy, basic materials sectors.
So if we assume that market forces were to resume, and the dollar sell-off prompts the Fed to raise short term interest rates. Now the steep curve doesn’t look so steep and banks are immediately impacted. Supposedly banks are collecting savings and paying out very little with the nearly zero interest rates and then are buying treasuries at 3.8%. This is a nice riskless spread. So now banks loose a revenue stream, do they stop buying 10 year treasuries and lend, pumping credit, dollars and ultimately inflation into the system? The yield on the 10-year could then rise rapidly. The USD has traded as a function of liquidity, not as a function of the yield on treasuries versus other higher paying currencies. So maybe the USD weakens even in spite of rising interest rates, that is a negative feedback loop and we could see interest rates quickly spike higher then we would expect.
International markets may demand that interest rates go up, and if the Federal Government cannot afford to buy so many mortgages in the RMS market then that could cause mortgage rates to go up, and this could hurt housing prices, then impact the economy. I think that with gold and commodities surging then one should be wary of real estate, home builders, home improvement retail. There are real risks and real pressures which could exert negative impacts on these sectors.
Its really strange to see commodity and basic material stocks rising at the beginning of a economic cycle, usually these stocks are late cycle stocks. The China growth story is still in effect that was the driver for these stocks before the crisis and it may still be intact. The other reason could be the massive liquidity injected into the market trying to find a home.
Its something to ponder and in away it is a form of inflation. To much money in the hands of people leads to CPI inflation, to much money in the hands of banks may just lead to inflation in certain stocks.
So in normal recessions, banks are doing good, due to the spread on money because the Fed has dropped interest rates very low, and banks are making money on the steep interest rate curve.
Well, at this point home builders are usually a good buy; does that look like a sector that will rally in 2010? Not really. How about in Brazil? Gafisa is homebuilder I have kept my eye on for years. I understand that condo prices in Hong Kong are the most expensive in the world, so maybe Chinese homebuilders, or realty developers would be a good place to invest. Auto stocks have been a good place to invest in the early part of recoveries. I have noticed the rising shares of Honda and Toyota, although these are levered to the U.S. market, once again a pure auto builder in China may be a good place to look at.
Lets look at U.S. debt and interest rates. The short end is nearly zero and the long end is low and falling. There are few potential signals that are being telegraphed. Investors are supposedly buying the short term paper to avoid being bite by inflation. Investors are supposedly buying the long dated (10-year treasuries) in anticipation of worsening economic conditions, such as a full onset of deflation or a worse business contraction due to the increasing unemployment rate. This doesn’t square at all with the stock market rocketing up for the supposed reason of seeing a sharp V-shaped recovery somewhere.
Something Gotta Give
It appears the market has something for everyone these days, the doom and gloomers can point to the interest in buying long dated U.S. debt bodes ill, but the stock market is anticipating a sharp recovery with positive signs being scene everywhere.
Tying It Together
I have seen some speak about an inflationary depression, and I have noted there are clearly sectors experiencing inflation, Oil, without the growth boom of a few years ago and there are a lot of sectors still contracting. The world maybe in the state of a depression with a general flight from currencies giving the false growth signal of inflation in energy, basic materials sectors.
So if we assume that market forces were to resume, and the dollar sell-off prompts the Fed to raise short term interest rates. Now the steep curve doesn’t look so steep and banks are immediately impacted. Supposedly banks are collecting savings and paying out very little with the nearly zero interest rates and then are buying treasuries at 3.8%. This is a nice riskless spread. So now banks loose a revenue stream, do they stop buying 10 year treasuries and lend, pumping credit, dollars and ultimately inflation into the system? The yield on the 10-year could then rise rapidly. The USD has traded as a function of liquidity, not as a function of the yield on treasuries versus other higher paying currencies. So maybe the USD weakens even in spite of rising interest rates, that is a negative feedback loop and we could see interest rates quickly spike higher then we would expect.
Wednesday, October 14, 2009
The US is a Giant ARM
I understand that the U.S. is issuing mostly 2-year T-Bills, since it cannot find buyers for longer term debt. So unless the U.S. intends on paying off all this paper the U.S. if forced into basically rolling and re-issuing massive amounts of debt. If interest rates were to rise it would quickly become a huge burden on the budget.
So rising interest rates must not be allowed to happen at all costs. If they do then the debt must be monetized and/or the USD devalued. Not great choices but the only choices.
So rising interest rates must not be allowed to happen at all costs. If they do then the debt must be monetized and/or the USD devalued. Not great choices but the only choices.
It Is Time to Plan for a Managed U.S. Default
Practically every country has defaulted on its sovereign debt, why, because that is preferable then driving it’s economy into the ground. trying to service a unbearable debt load.
Most of the U.S. debt is held by Asian Central Banks who basically bought this debt to maintain high levels of foreign reserves (to fend off potential currency attacks) and to balance current account surpluses, which allowed their domestic export market to thrive. Now the U.S. needs some help. The other major holder of U.S. Treasures is pensions; they should not be forced into taking such a severe haircut.
A lot of blogs have looked at the current debt levels, and the future obligations and come to the conclusion, in a cash flow model, that the U.S. will never be able to service its debts in 5, 10, or 20 years without massive tax hikes or massive benefit cuts. I agree it looks doubtful, so the alternative is a massive default, currency crisis, and collapse, maybe not.
There have been many sovereign defaults in the past century and the world survived. Since the U.S. is huge it will take a concerted effort of many countries to do several things, refinance debt or re-structure loans, and impose what is politically impossible, benefit cuts and tax hikes or direct spending to service bond holders first.
Only a default crisis will allow critical mass to do what is politically impossible. It won’t be the end of the world, it will restore the basically out of control fiscal imbalance of the U.S.
Most of the U.S. debt is held by Asian Central Banks who basically bought this debt to maintain high levels of foreign reserves (to fend off potential currency attacks) and to balance current account surpluses, which allowed their domestic export market to thrive. Now the U.S. needs some help. The other major holder of U.S. Treasures is pensions; they should not be forced into taking such a severe haircut.
A lot of blogs have looked at the current debt levels, and the future obligations and come to the conclusion, in a cash flow model, that the U.S. will never be able to service its debts in 5, 10, or 20 years without massive tax hikes or massive benefit cuts. I agree it looks doubtful, so the alternative is a massive default, currency crisis, and collapse, maybe not.
There have been many sovereign defaults in the past century and the world survived. Since the U.S. is huge it will take a concerted effort of many countries to do several things, refinance debt or re-structure loans, and impose what is politically impossible, benefit cuts and tax hikes or direct spending to service bond holders first.
Only a default crisis will allow critical mass to do what is politically impossible. It won’t be the end of the world, it will restore the basically out of control fiscal imbalance of the U.S.
Saturday, October 3, 2009
Some More Misconceptions
Misconceptions In Central Banking
That the petro producing countries and the Asian export countries will continue to buy all the Federal debt being issued till normalcy resumes.
That hyper-inflation of some sort won’t breakout in the next few years.
That China is of the same mindset as the U.S. that we are all on the same page. What if China has a different agenda?
In central banking it seems that they assume that they can make everything better.
Misconception - Gold is a Great Investment
The central banks of the world hate gold and openly coordinate to keep the prices down. Remember the old wall street saw, “Don’t fight the Fed”? I like gold, I have been accumulating gold, but I know that deflation can take gold down. I also know that various central banks have selling gold and silver, causing massive price drops over the past year. At first, I didn’t believe the reports in various “gold bug” blogs, but its true. Has anyone read or believe why the executive board of the IMF decided on September 18, 2009 to sell 403 metric tons of gold (1/5th of its totally holdings)? Look it up.
I think this is another misconception, that if gold prices are suppressed, then there is no hyperinflation now or on the horizon. Its not a bad idea to maintain control. I can hear pundits saying, the market is looking ahead and by the drop in gold prices, it clearly is not expecting inflation, or hyper-inflation, or a currency crisis, and I would agree, if that is all I knew. Well, the money making opportunity is simple buy gold the dips (central bank engineered) and sell the peaks, and wait for some other central bank to come in and shoot down gold. They have the power to sell gold and crater the price. Now eventually they may not be able to contain the price. Also, gold miners may remain wall flowers and never get their big run they are expecting.
That the petro producing countries and the Asian export countries will continue to buy all the Federal debt being issued till normalcy resumes.
That hyper-inflation of some sort won’t breakout in the next few years.
That China is of the same mindset as the U.S. that we are all on the same page. What if China has a different agenda?
In central banking it seems that they assume that they can make everything better.
Misconception - Gold is a Great Investment
The central banks of the world hate gold and openly coordinate to keep the prices down. Remember the old wall street saw, “Don’t fight the Fed”? I like gold, I have been accumulating gold, but I know that deflation can take gold down. I also know that various central banks have selling gold and silver, causing massive price drops over the past year. At first, I didn’t believe the reports in various “gold bug” blogs, but its true. Has anyone read or believe why the executive board of the IMF decided on September 18, 2009 to sell 403 metric tons of gold (1/5th of its totally holdings)? Look it up.
I think this is another misconception, that if gold prices are suppressed, then there is no hyperinflation now or on the horizon. Its not a bad idea to maintain control. I can hear pundits saying, the market is looking ahead and by the drop in gold prices, it clearly is not expecting inflation, or hyper-inflation, or a currency crisis, and I would agree, if that is all I knew. Well, the money making opportunity is simple buy gold the dips (central bank engineered) and sell the peaks, and wait for some other central bank to come in and shoot down gold. They have the power to sell gold and crater the price. Now eventually they may not be able to contain the price. Also, gold miners may remain wall flowers and never get their big run they are expecting.
Misconceptions
The oil industry assumed that oil production was dead in the U.S. and sold off those assets, wrong move, the independents who bought those assets made money.
The oil industry thought that the age of importing expensive LNG had dawned. It was a great concept and it had some great opportunities for investing massive amounts of capital in attractive locations such as Africa and Middle East. Investment ran the gamut from developing large fields, piping, liquefaction plants, transportation ships and finally the re-gasification plants in America. The oil industry was wrong about the amount of natural gas supply in the U.S. Now what will happen with the expensive LNG facilities in the U.S.? Now the money making opportunity was that this was clearly a mis-allocation of capital and investment, but will the impacts show on the big oil equities? The short opportunity for Cheniere Energy, Inc. (LNG) was there. It was fraud, although I believed it had all the signed agreements as it stated it did. How about the fabricators or the LNG levered shipping companies.
What will happen with the facilities in the Africa, Australia, and the middle east? Has big oil mis-directed massive amounts of capital?
Now there are complications LNG is not wholly consumed in the U.S, so there are opportunities for these assets to return handsome profits for years to come.
Another misconception is big oil is dependent on importing foreign oil, a known fact. Let us assume that if Iran was to become too bothersome in the middle east then the U.S. would engage in war to resume the “friendly” atmosphere in the middle east which allows oil to flow to the U.S. via big oil firms. What happens if Obama does not engage Iran and allows Iran to militarize and cause a nuclear arms race in the Middle East and further deteriorate conditions there and interfere with the oil production industry. What if the Obama Administration will not or cannot maintain control in the Middle East and that causes a large war to breakout between Iran and Israel? Big oil will be unable to conduct business and will have a large part of its assets and energy delivery chain in or effected by a war zone. The burden of supplying energy in the U.S. would fall on other sources such as renewables, or not big oil. This scenario has not been planned for, nor is the U.S. in any position to be cut off from foreign oil.
Money making angles, well there is a lot of considerations, so I will return to this.
If war in the gulf was to come to pass, then the U.S. will have to rely on Canadian oil sources, buy Canadian oil companies. I believe Frontier Oil, is a refiner that is specifically tied to the crude from Canda. I need to check that again.
I think natural gas will be come a huge transportation source for the U.S. and I would like to become involved in aspect of business myself.
Big oil assumes that the republicans will regain political power and the changes initiated by Obama will not come to pass, energy efficiency, increased renewable energy production, etc… will fail.
Big oil is assuming that the capital markets will continue to support their needs for CAPEX by purchases of stocks, bonds, etc…this may be not true in an unstable monetary environment.
The oil industry thought that the age of importing expensive LNG had dawned. It was a great concept and it had some great opportunities for investing massive amounts of capital in attractive locations such as Africa and Middle East. Investment ran the gamut from developing large fields, piping, liquefaction plants, transportation ships and finally the re-gasification plants in America. The oil industry was wrong about the amount of natural gas supply in the U.S. Now what will happen with the expensive LNG facilities in the U.S.? Now the money making opportunity was that this was clearly a mis-allocation of capital and investment, but will the impacts show on the big oil equities? The short opportunity for Cheniere Energy, Inc. (LNG) was there. It was fraud, although I believed it had all the signed agreements as it stated it did. How about the fabricators or the LNG levered shipping companies.
What will happen with the facilities in the Africa, Australia, and the middle east? Has big oil mis-directed massive amounts of capital?
Now there are complications LNG is not wholly consumed in the U.S, so there are opportunities for these assets to return handsome profits for years to come.
Another misconception is big oil is dependent on importing foreign oil, a known fact. Let us assume that if Iran was to become too bothersome in the middle east then the U.S. would engage in war to resume the “friendly” atmosphere in the middle east which allows oil to flow to the U.S. via big oil firms. What happens if Obama does not engage Iran and allows Iran to militarize and cause a nuclear arms race in the Middle East and further deteriorate conditions there and interfere with the oil production industry. What if the Obama Administration will not or cannot maintain control in the Middle East and that causes a large war to breakout between Iran and Israel? Big oil will be unable to conduct business and will have a large part of its assets and energy delivery chain in or effected by a war zone. The burden of supplying energy in the U.S. would fall on other sources such as renewables, or not big oil. This scenario has not been planned for, nor is the U.S. in any position to be cut off from foreign oil.
Money making angles, well there is a lot of considerations, so I will return to this.
If war in the gulf was to come to pass, then the U.S. will have to rely on Canadian oil sources, buy Canadian oil companies. I believe Frontier Oil, is a refiner that is specifically tied to the crude from Canda. I need to check that again.
I think natural gas will be come a huge transportation source for the U.S. and I would like to become involved in aspect of business myself.
Big oil assumes that the republicans will regain political power and the changes initiated by Obama will not come to pass, energy efficiency, increased renewable energy production, etc… will fail.
Big oil is assuming that the capital markets will continue to support their needs for CAPEX by purchases of stocks, bonds, etc…this may be not true in an unstable monetary environment.
Wednesday, September 23, 2009
Invitation For Absurd Scenarios
People we have seen a huge bubble in credit, we have developing countries supporting the spending of developed countries, we have governments buying toxic assets, we have ZIRP, we have QE, we have governments spending more they raise in tax receipts, etc…
Yet, the debate is on when inflation is going to get here. Lets hear from some other ideas, I mean, we have embarked on a new path, this isn’t a run of the mill recession, I keep hearing, but the path forward is just inflationary?
Even my macro view is somewhat boring, I see deflation for a year or so then inflation. Somehow, I just feel we will see a lot of surprises.
What about you?
Yet, the debate is on when inflation is going to get here. Lets hear from some other ideas, I mean, we have embarked on a new path, this isn’t a run of the mill recession, I keep hearing, but the path forward is just inflationary?
Even my macro view is somewhat boring, I see deflation for a year or so then inflation. Somehow, I just feel we will see a lot of surprises.
What about you?
Alternatives will never be able to replace fossil fuels -
Big oil is not worried about alternatives, oil prices are lower, and consumers will again go into a slumber from worrying about high energy prices, old habits will rein supreme again. But is it different this time? Aren’t solar companies producing solar panels which are really becoming cost competitive? Will China turn into a mass producer of solar panels that will drive the cost to the floor?
Even if the oil industry believed that solar or wind was an economical choice, what could they do with 100 years of investment in fossil fuels? How does Exxon quietly exit fossil fuels? For awhile a few energy companies had jingle that went like, we are not a fossil fuel company, but an energy company, meaning we can sell any energy. It sounds logical, but is even remotely possible that fossil fuel based company will adopt alternative energy? On the flip side no way will alternative energy companies be able to provide the vast amounts of energy the world consumes in a day. Sounds like a messy dislocation is coming.
Think of the impacts of solar or wind energy on profits from fossil fuel. Imagine thate the marginal energy user now switches to solar or wind, that reduces the demand at the margin, and that lowers the price of energy across the entire market. At least that is what I learned in economics. Maybe 10% renewable based energy would set the market price or reduce the profit for what will still be big oil.
Now in the 80s and 90s, I always heard that Saudi Arabia sets the price of world oil. How? The Saudis only controlled 8-12% of the market. But it was common knowledge that Saudi Arabia had control of enough market share to set the price.
Now if renewables were to get to some level, say producing 10-15% of the energy, wouldn’t they have the ability to do the same? You can’t be selective about market pricing impacts, if Saudi Arabia could and in fact did set the price during the 80s and 90s, then it must be true that another country which approaches that production size or another source would, could, and will do the same. When I state this that renewable could impact the price of energy in a few years, maybe 10 years, this is roundly met with laughs.
But if the price of fossil fuels is impacted by renewables we have an interesting intersection of events.
Oil will continue to become more expensive to produce over the next 10 years, I think there is wide agreement on that.
Renewables such as solar are continuing to come down in price, weather or not China becomes a mass producer or not, simply look at the price per kilowatt over the past couple of years, it has dropped.
So we have two trends that we should have wide agreement on, oil prices swing widely but, the base price to produce oil is rising, and due to technology and production advances solar energy is dropping in price. Oil based energy is cheaper then solar currently.
When the two price curves intersect, then the price of power will be capped, why buy expensive oil produced electricity, when you can get cheaper solar produced electricity. Now in reality you will have to, because solar will only be able to produce so much electricity. At that point, producing oil will become progressively more expensive, and these increased costs will not be easily passed onto consumers. The impact on profits at oil companies will be dramatic and felt long before renewables become a major producer of energy. I would guess that the stock market will realize this and it will reflect in the price of oil company stocks.
The consensus right now is with increasing demand, oil companies can be almost limitlessly profitable. In fact that is not true, at some level maybe $150/bbl, the world will go into a recession, maybe at $100/bbl as we have seen. But oil is widely seen as a great place to invest and will be profitable for years to come, any disruption of that outlook will have impacts on investing.
Making Money
It seems so simple buy solar companies and short big oil, especially the high cost producers. But when will this theory come true? Today? No, Next year, in 5 years time?
Now you can pass legislation all day encouraging energy conservation, but when energy prices soar, a landslide of energy conservation is unleashed. The lesson is that free market capitalism is more effective then government and it can turn on a dime.
Even if the oil industry believed that solar or wind was an economical choice, what could they do with 100 years of investment in fossil fuels? How does Exxon quietly exit fossil fuels? For awhile a few energy companies had jingle that went like, we are not a fossil fuel company, but an energy company, meaning we can sell any energy. It sounds logical, but is even remotely possible that fossil fuel based company will adopt alternative energy? On the flip side no way will alternative energy companies be able to provide the vast amounts of energy the world consumes in a day. Sounds like a messy dislocation is coming.
Think of the impacts of solar or wind energy on profits from fossil fuel. Imagine thate the marginal energy user now switches to solar or wind, that reduces the demand at the margin, and that lowers the price of energy across the entire market. At least that is what I learned in economics. Maybe 10% renewable based energy would set the market price or reduce the profit for what will still be big oil.
Now in the 80s and 90s, I always heard that Saudi Arabia sets the price of world oil. How? The Saudis only controlled 8-12% of the market. But it was common knowledge that Saudi Arabia had control of enough market share to set the price.
Now if renewables were to get to some level, say producing 10-15% of the energy, wouldn’t they have the ability to do the same? You can’t be selective about market pricing impacts, if Saudi Arabia could and in fact did set the price during the 80s and 90s, then it must be true that another country which approaches that production size or another source would, could, and will do the same. When I state this that renewable could impact the price of energy in a few years, maybe 10 years, this is roundly met with laughs.
But if the price of fossil fuels is impacted by renewables we have an interesting intersection of events.
Oil will continue to become more expensive to produce over the next 10 years, I think there is wide agreement on that.
Renewables such as solar are continuing to come down in price, weather or not China becomes a mass producer or not, simply look at the price per kilowatt over the past couple of years, it has dropped.
So we have two trends that we should have wide agreement on, oil prices swing widely but, the base price to produce oil is rising, and due to technology and production advances solar energy is dropping in price. Oil based energy is cheaper then solar currently.
When the two price curves intersect, then the price of power will be capped, why buy expensive oil produced electricity, when you can get cheaper solar produced electricity. Now in reality you will have to, because solar will only be able to produce so much electricity. At that point, producing oil will become progressively more expensive, and these increased costs will not be easily passed onto consumers. The impact on profits at oil companies will be dramatic and felt long before renewables become a major producer of energy. I would guess that the stock market will realize this and it will reflect in the price of oil company stocks.
The consensus right now is with increasing demand, oil companies can be almost limitlessly profitable. In fact that is not true, at some level maybe $150/bbl, the world will go into a recession, maybe at $100/bbl as we have seen. But oil is widely seen as a great place to invest and will be profitable for years to come, any disruption of that outlook will have impacts on investing.
Making Money
It seems so simple buy solar companies and short big oil, especially the high cost producers. But when will this theory come true? Today? No, Next year, in 5 years time?
Now you can pass legislation all day encouraging energy conservation, but when energy prices soar, a landslide of energy conservation is unleashed. The lesson is that free market capitalism is more effective then government and it can turn on a dime.
Tuesday, September 22, 2009
Are we Taking the Best Medicine?
If you look back on recent economic history, you see it is filled with a lot of countries which spent more then they could tax and experienced debt crisises. Lets see how they dealt with them.
The Washington Consensus
Over the past few decades, the best recipe for recovery when a government is embroiled in a debt crisis is to follow the following sets of guidelines issued by the IMF and the World Bank called the Washington Consensus, they are as follows:
Impose fiscal discipline
Reform taxation
Liberalize interest rates
Raise spending on health and education
Secure property rights
Privatize state run industries
Deregulate markets
Adopt a competitive exchange rate
Remove barriers to trade
Remove barriers to foreign direct investment
I would guess that if that is the best advice given from the IMF and the worlds best economists, over and over again, paired with a record of success, that the U.S. would surely want to take a dose of the best medicine.
But are we?
Impose Fiscal Discipline
Not even close, we have chosen to reflate via ZIRP on the monetary side and deficit spend on the fiscal side. In fact, Mark Thoma, Reagan/Bush advisor has come out and said, it is politically impossible to cut spending. The only way is to cut taxes and hope that reduction results in increased economic growth to shrink the debt to GDP ratio. So the number 1 recommendation is not possible in the U.S., it is impossible to administer such bitter medicine to ourselves.
Reform Taxation
This usually means to lower tax rates and promote growth, in spite of what the right claims I don’t think we can reduce tax receipts without risking a serious problem with the government flooding the market with government debt.
Liberalize Interest Rates
Market set not artificially set by the government. Well that means they go up and that squelches the economy and the U.S. is aiming for recovery, full employment, so it is ZIRP all the way.
Raise spending on health and education
The U.S. does spending a lot on these at least in gross dollar terms, we probably don’t get the benefits from these expenditures.
Secure Property Rights
Clearly other countries would nationalize foreign assets instead of servicing debts, in the U.S., when push comes to shove property rights are being skirted by various means.
Privatize State Run Industries
Well, this complicated, the financial industry had to be nationalized or supported by the U.S. government or it would have collapsed. This wasn’t done in any thought out manner it was carte blanche and inevitable included a lot of wasted tax payer dollars.
Deregulate Markets
The U.S. has gone a long way down this road. Many claim that government regulations are strangling businesses at all levels, it appears poor management of businesses has caused more harm to businesses then any regulation.
Adopt a Competitive Exchange Rate
The U.S. but China pegs to the USD and that surely needs to be changed.
Remove Barriers to Trade
I think this really applies to countries which were very protective of their industries. The massive amount of aid provided from the Fed and Treasury to the financial industry was basically a form of protectionism. Hundreds if not thousands of these institutions showed themselves to be poorly managed and would have gone bankrupt if we let the market choose the winners and losers. At this point in the cycle the field would be wide open for better suited firms to grab market share. Unfortunately, we have the same bad players in business.
Remove barriers to foreign direct investment
This would really apply to allowing foreign countries to exchange their holding of U.S. Government debt for other assets, such as whole companies. No wanted China to buy Unocal, so no one will want to see any other investments by China or petro dollars. This is a problem.
So, there are alot of angles to this, are we following the best medicine?
The Washington Consensus
Over the past few decades, the best recipe for recovery when a government is embroiled in a debt crisis is to follow the following sets of guidelines issued by the IMF and the World Bank called the Washington Consensus, they are as follows:
Impose fiscal discipline
Reform taxation
Liberalize interest rates
Raise spending on health and education
Secure property rights
Privatize state run industries
Deregulate markets
Adopt a competitive exchange rate
Remove barriers to trade
Remove barriers to foreign direct investment
I would guess that if that is the best advice given from the IMF and the worlds best economists, over and over again, paired with a record of success, that the U.S. would surely want to take a dose of the best medicine.
But are we?
Impose Fiscal Discipline
Not even close, we have chosen to reflate via ZIRP on the monetary side and deficit spend on the fiscal side. In fact, Mark Thoma, Reagan/Bush advisor has come out and said, it is politically impossible to cut spending. The only way is to cut taxes and hope that reduction results in increased economic growth to shrink the debt to GDP ratio. So the number 1 recommendation is not possible in the U.S., it is impossible to administer such bitter medicine to ourselves.
Reform Taxation
This usually means to lower tax rates and promote growth, in spite of what the right claims I don’t think we can reduce tax receipts without risking a serious problem with the government flooding the market with government debt.
Liberalize Interest Rates
Market set not artificially set by the government. Well that means they go up and that squelches the economy and the U.S. is aiming for recovery, full employment, so it is ZIRP all the way.
Raise spending on health and education
The U.S. does spending a lot on these at least in gross dollar terms, we probably don’t get the benefits from these expenditures.
Secure Property Rights
Clearly other countries would nationalize foreign assets instead of servicing debts, in the U.S., when push comes to shove property rights are being skirted by various means.
Privatize State Run Industries
Well, this complicated, the financial industry had to be nationalized or supported by the U.S. government or it would have collapsed. This wasn’t done in any thought out manner it was carte blanche and inevitable included a lot of wasted tax payer dollars.
Deregulate Markets
The U.S. has gone a long way down this road. Many claim that government regulations are strangling businesses at all levels, it appears poor management of businesses has caused more harm to businesses then any regulation.
Adopt a Competitive Exchange Rate
The U.S. but China pegs to the USD and that surely needs to be changed.
Remove Barriers to Trade
I think this really applies to countries which were very protective of their industries. The massive amount of aid provided from the Fed and Treasury to the financial industry was basically a form of protectionism. Hundreds if not thousands of these institutions showed themselves to be poorly managed and would have gone bankrupt if we let the market choose the winners and losers. At this point in the cycle the field would be wide open for better suited firms to grab market share. Unfortunately, we have the same bad players in business.
Remove barriers to foreign direct investment
This would really apply to allowing foreign countries to exchange their holding of U.S. Government debt for other assets, such as whole companies. No wanted China to buy Unocal, so no one will want to see any other investments by China or petro dollars. This is a problem.
So, there are alot of angles to this, are we following the best medicine?
Monday, September 14, 2009
Good Summary of Events
I think the chalkboard is a good summary of events that have occurred over the last 10 if not 20 years.
It is a bit scary, we seem to be embarked on a grand experiment. I saw a post regarding the biggest story not being reported right now, well, its more big picture then recent event. Does the public realize where we are?
We are ZIRP, we are QE, we are turning bad private debt to public debt, we are beyond the reaches of monetary and fiscal stimulus. One could just state these facts as ominious facts that indicate a great fall is in the offing, however, events write their own history.
We may be in for something new and probably unexpected, but you have to look at the chalkboard to see the steps to what lies ahead.
I case can be made for inflation or a currency crisis, a case can be made for deflation, but it is not 1970, alot has changed so to the coming events will reflect the changes to the globe.
It is a bit scary, we seem to be embarked on a grand experiment. I saw a post regarding the biggest story not being reported right now, well, its more big picture then recent event. Does the public realize where we are?
We are ZIRP, we are QE, we are turning bad private debt to public debt, we are beyond the reaches of monetary and fiscal stimulus. One could just state these facts as ominious facts that indicate a great fall is in the offing, however, events write their own history.
We may be in for something new and probably unexpected, but you have to look at the chalkboard to see the steps to what lies ahead.
I case can be made for inflation or a currency crisis, a case can be made for deflation, but it is not 1970, alot has changed so to the coming events will reflect the changes to the globe.
Saturday, September 12, 2009
Thoughts on What happened and What it Means?
To view what happened from a political view like what we see taking place on talk radio, such as blaming the democrats in Congress for requiring banks to lend money to low income earners for home purchases is probably not going to yield an accurate view of what forces caused the financial panic of 2008.
I am not sure why but the conservatives seem to be determined to blame everything on the Democrats, Unions, and socialized thinking. Their thoughts boil down to “If only the free market was allowed to work then everything would have been fine”.
Similarly, the Democrats see the same events and blame tax cuts, the Reagan and Bush Administration’s lax regulatory or de-regulatory actions as what allowed or even encouraged a financial community to engage in a credit boom and nearly worldwide bust.
From looking at what happened, and many things happened, I am not sure you can really logically trace it back to the Democrats. That’s unfortunate because it be a readily implementable solution – vote Republican. We are not so lucky.
In fact viewing the financial collapse through any political view is probably a hindering move and it doesn’t seem to get you to any cogent explanation of what happened.
How To View the Modern World
This is a grand or super Macro vision of the state of the globe. We have the West an area of financial innovation, of democratic institutions that may not be working so well.
Into the mix we have probably peak global oil output, however with a shrinking world GDP we can put the effects of that aside for a few years.
We have China, a mercantile driven economy. The Chinese decided to engage in massive industrialization and have found they like being the dominant manufacturer in the world. They like the vast sums of money that they made and for awhile the global corporate CEOs also liked the fact that they could boost profits, off of cheap Chinese labor and a pro business environment.
The Chinese embarked on a calculated path of vendor financing with the U.S., they understood if goods only flow out of the country then their currency would strengthen and it would hurt their manufactured goods, so they bought US agency debt, treasury bills, and the USD directly as currency reserves. This balanced everything for many years it made everyone happy, what is wrong with that? Sure there were loosers in this, like the environment, the US manufacturing workforce, but on balance it was a happy world.
The US Fed the situation with every lower interest rates to get they system kick started whenever it fell into recession.
However there were grotesque distortions taking place, many I was never aware of.
OK, we now know that low interest rates to spur the economy distorted the housing industry. We know that the calculated buying of US Debt on the surface distorted the trade imbalance between the US and China. We know that ultra low interest rates buoyed the U.S. but over stimulated the Chinese economy due to currency pegs, we know that these imbalances were balanced by Chinese Central Bank purchases of U.S. debt. We know that this may be coming apart and we suspect these artificially stoked economies consumed more than they should have, mainly in the West.
So what comes next, the U.S. consumer is tapped out, so what will the Chinese do? Do they continue to find a way to allow the U.S. consumer to buy goods? I don’t the answer to this.
The U.S. needs some way to fund the coming debt issuances, how will this be accomplished. Since it is a known problem, I suspect that is a problem that someone is trying to solve.
Distortions Then and Now
In the early 2000s the low interest rates led to distortions in the market, it helped spur growth which Greenspan wanted but it led to abnormally low returns on capital, so investment banks went for leverage, well we know how it ended, aren’t we back at it again?
What are the distortions of Zero Interest Rate Policy (ZIRP), there must be some, likely many? I hear the USD may be the new carry trade, gold prices continue to surge, what else?
Now all the problems that eventually came to characterize the financial crisis were not known in the years before the crisis, I think we all heard from Roubini stating housing, commercial real estate, credit in general were all in bubble territory, but I do not recall anyone saying that the investment banks and banks like Citi were leverage 100:1, I never heard about CDS or that AIG had basically become a concentrated risk counterparty for a lot of this bad debt to be.
We knew about the carry trade from Japan and heard about speculators buying the Swedish Krona a higher yielding currency, but nothing about how the ARS market or money markets or the function of SIVs and how huge these had become.
So while we knew some stuff, we didn’t know a lot of what was to come. Are we not basically there again.
I am not sure why but the conservatives seem to be determined to blame everything on the Democrats, Unions, and socialized thinking. Their thoughts boil down to “If only the free market was allowed to work then everything would have been fine”.
Similarly, the Democrats see the same events and blame tax cuts, the Reagan and Bush Administration’s lax regulatory or de-regulatory actions as what allowed or even encouraged a financial community to engage in a credit boom and nearly worldwide bust.
From looking at what happened, and many things happened, I am not sure you can really logically trace it back to the Democrats. That’s unfortunate because it be a readily implementable solution – vote Republican. We are not so lucky.
In fact viewing the financial collapse through any political view is probably a hindering move and it doesn’t seem to get you to any cogent explanation of what happened.
How To View the Modern World
This is a grand or super Macro vision of the state of the globe. We have the West an area of financial innovation, of democratic institutions that may not be working so well.
Into the mix we have probably peak global oil output, however with a shrinking world GDP we can put the effects of that aside for a few years.
We have China, a mercantile driven economy. The Chinese decided to engage in massive industrialization and have found they like being the dominant manufacturer in the world. They like the vast sums of money that they made and for awhile the global corporate CEOs also liked the fact that they could boost profits, off of cheap Chinese labor and a pro business environment.
The Chinese embarked on a calculated path of vendor financing with the U.S., they understood if goods only flow out of the country then their currency would strengthen and it would hurt their manufactured goods, so they bought US agency debt, treasury bills, and the USD directly as currency reserves. This balanced everything for many years it made everyone happy, what is wrong with that? Sure there were loosers in this, like the environment, the US manufacturing workforce, but on balance it was a happy world.
The US Fed the situation with every lower interest rates to get they system kick started whenever it fell into recession.
However there were grotesque distortions taking place, many I was never aware of.
OK, we now know that low interest rates to spur the economy distorted the housing industry. We know that the calculated buying of US Debt on the surface distorted the trade imbalance between the US and China. We know that ultra low interest rates buoyed the U.S. but over stimulated the Chinese economy due to currency pegs, we know that these imbalances were balanced by Chinese Central Bank purchases of U.S. debt. We know that this may be coming apart and we suspect these artificially stoked economies consumed more than they should have, mainly in the West.
So what comes next, the U.S. consumer is tapped out, so what will the Chinese do? Do they continue to find a way to allow the U.S. consumer to buy goods? I don’t the answer to this.
The U.S. needs some way to fund the coming debt issuances, how will this be accomplished. Since it is a known problem, I suspect that is a problem that someone is trying to solve.
Distortions Then and Now
In the early 2000s the low interest rates led to distortions in the market, it helped spur growth which Greenspan wanted but it led to abnormally low returns on capital, so investment banks went for leverage, well we know how it ended, aren’t we back at it again?
What are the distortions of Zero Interest Rate Policy (ZIRP), there must be some, likely many? I hear the USD may be the new carry trade, gold prices continue to surge, what else?
Now all the problems that eventually came to characterize the financial crisis were not known in the years before the crisis, I think we all heard from Roubini stating housing, commercial real estate, credit in general were all in bubble territory, but I do not recall anyone saying that the investment banks and banks like Citi were leverage 100:1, I never heard about CDS or that AIG had basically become a concentrated risk counterparty for a lot of this bad debt to be.
We knew about the carry trade from Japan and heard about speculators buying the Swedish Krona a higher yielding currency, but nothing about how the ARS market or money markets or the function of SIVs and how huge these had become.
So while we knew some stuff, we didn’t know a lot of what was to come. Are we not basically there again.
Saturday, August 29, 2009
Lets Talk Some Stocks
The way I look for stocks is somewhat of a three step process as I outlined below:
1. Get a Macro view of the economy in general
2. Find a sector which will logically or reasonably do well in the future economic picture
3. Follow and research several stocks buy or watch to see if they rally or if anyone else begins to talk about these stocks
So lets talk about where we are.
The markets have been in rally mode, the effect of massive government spending and the impact of the general realization that we are not courting financial collapse. The question is will the recovery take hold or will the spending run out and the problems that caused this recession re-emerge and send the world economy back into recession.
With cheap money and massive liquidity injections, not surprisingly, some sectors are doing well. Banking, atleast the depository portion is reaping large profits with fed rates so low. The spread between what they pay for money versus what they pay in interest to depositors is several hundred basis points. I have heard a few commenters mention this as a reason to buy
Bank of America or Citi.
OK, lets go back in time to see what happened. The last time this occurred was 2001, however it was a different world, at that time mortgages and housing boomed, not so this time. So scratch buying those stocks.
The last time the world was flooded with cheap money, apparently unaware to central bankers such as Greenspan, there was the build up of the shadow banking community, the securitization of debts, SIVs and the rest.
I don't really see any good reasons to buy financials, I know that some like Goldman Sacks is making money, I am not sure how. I know that financials are likely at generational lows, but it is hard to pick winners in this environment.
A thought, the last time interest rates where lowered in the 2000/2001 timeframe things became distorted, like housing.
What is being distorted this time by the presence of easy money?
The last time money was cheap, it was cheap and available to the consumer - not so in this cycle. Back then cheap money supported consumer durables such as autos or even airplane purchases. While that is not occurring in this market at this time, auto makers or manufactures in general may find themselves a stronger competitor due to reduced input costs and more market share due to the bankruptcy of competitors.
I believe that is a important theme to remember and to look for that in a variety of industries.
The last time we saw a bottom of the cycle we saw energy drop, spare capacity in electric demand, wipe out IPPs and some subsequent recovery in that market. The last cycle saw a slow build in energy prices due to emergence BRIC demand. Its hard to remember but that kinda of came out of the blue. Even when it was apparent other commodities didn’t rally till a year or two after oil prices began to rise.
Oil prices have risen, but the world is now on the hunt for renewables and energy effiency.
Input costs are now less for users of iron ore, costs are less for miners and manufacturers however so are the prices of their goods. However gold mining is in the sweet spot, mining costs are down, gold prices are up. Maybe we have found something that deserves more investigation. Over the last decade many have watched the rise of gold prices and in the past we would have seen the same rise in the rise of the stock price of gold miners, but we didn't. People who anticipated the rise in gold prices and bought the big gold miners didn't catch the wave. I believe this was due to the the gold ETFs now available.
But now gold miners may get the respect they deserve.
Tech never saw the recovery of the last cycle tech giants, but the emergence of something entirely new - Google.
Healthcare such as one of my favorites PFE has been a perennial wallflower, will the collapse of the Obamacare, bring on a rally in healthcare? Well see.
1. Get a Macro view of the economy in general
2. Find a sector which will logically or reasonably do well in the future economic picture
3. Follow and research several stocks buy or watch to see if they rally or if anyone else begins to talk about these stocks
So lets talk about where we are.
The markets have been in rally mode, the effect of massive government spending and the impact of the general realization that we are not courting financial collapse. The question is will the recovery take hold or will the spending run out and the problems that caused this recession re-emerge and send the world economy back into recession.
With cheap money and massive liquidity injections, not surprisingly, some sectors are doing well. Banking, atleast the depository portion is reaping large profits with fed rates so low. The spread between what they pay for money versus what they pay in interest to depositors is several hundred basis points. I have heard a few commenters mention this as a reason to buy
Bank of America or Citi.
OK, lets go back in time to see what happened. The last time this occurred was 2001, however it was a different world, at that time mortgages and housing boomed, not so this time. So scratch buying those stocks.
The last time the world was flooded with cheap money, apparently unaware to central bankers such as Greenspan, there was the build up of the shadow banking community, the securitization of debts, SIVs and the rest.
I don't really see any good reasons to buy financials, I know that some like Goldman Sacks is making money, I am not sure how. I know that financials are likely at generational lows, but it is hard to pick winners in this environment.
A thought, the last time interest rates where lowered in the 2000/2001 timeframe things became distorted, like housing.
What is being distorted this time by the presence of easy money?
The last time money was cheap, it was cheap and available to the consumer - not so in this cycle. Back then cheap money supported consumer durables such as autos or even airplane purchases. While that is not occurring in this market at this time, auto makers or manufactures in general may find themselves a stronger competitor due to reduced input costs and more market share due to the bankruptcy of competitors.
I believe that is a important theme to remember and to look for that in a variety of industries.
The last time we saw a bottom of the cycle we saw energy drop, spare capacity in electric demand, wipe out IPPs and some subsequent recovery in that market. The last cycle saw a slow build in energy prices due to emergence BRIC demand. Its hard to remember but that kinda of came out of the blue. Even when it was apparent other commodities didn’t rally till a year or two after oil prices began to rise.
Oil prices have risen, but the world is now on the hunt for renewables and energy effiency.
Input costs are now less for users of iron ore, costs are less for miners and manufacturers however so are the prices of their goods. However gold mining is in the sweet spot, mining costs are down, gold prices are up. Maybe we have found something that deserves more investigation. Over the last decade many have watched the rise of gold prices and in the past we would have seen the same rise in the rise of the stock price of gold miners, but we didn't. People who anticipated the rise in gold prices and bought the big gold miners didn't catch the wave. I believe this was due to the the gold ETFs now available.
But now gold miners may get the respect they deserve.
Tech never saw the recovery of the last cycle tech giants, but the emergence of something entirely new - Google.
Healthcare such as one of my favorites PFE has been a perennial wallflower, will the collapse of the Obamacare, bring on a rally in healthcare? Well see.
First Deflation Then Inflation
I guess I thought I would add my thoughts in the inflation/deflation debate. While I see the looming problem of printing to much money will lead to inflation, I believe that currently what is a driving force currently is a massive output gap.
There is overcapacity in auto manufacturing, steel mills, retail space, the list goes on and on. This is clearly a deflationary force. Nothing governments have done which is mostly financial manuvering (except Cash for Clunkers) has increased industrial production to reduce the overcapacity. So I see deflation now and likely inflation later.
There is overcapacity in auto manufacturing, steel mills, retail space, the list goes on and on. This is clearly a deflationary force. Nothing governments have done which is mostly financial manuvering (except Cash for Clunkers) has increased industrial production to reduce the overcapacity. So I see deflation now and likely inflation later.
Whats Wrong With Natural Gas
From my trolling the internet, it appears these are the likely suspects driving down the price of natural gas:
1. oversupply
2. distortion of the futures market from the effects of the UNG ETF "negative roll" in the spot price due to the contango market
3. No hurricannes
4. Storage is now approaching full on a nationwide basis
5. Industrial production is down 12%
6. Going into a "shoulder" period of the year
7. Natural gas is locally produced and locally consumed, oil is a global commodity, so while China maybe rebounding and spurring industrial production, that is not true in the U.S., nor it will be in the future
I have read reports where there have been cases that producers give natural gas away free to avoid shutting in
Whatelse could be impacting the natural gas market and what is the major driver, more importantly how long will this last?
Could wind and alternative energy be impacting the energy industry? I have read a report put out recently where in Texas wind is now impacting the pricing of the electricity market as a whole. Wind in Texas is actually displacing natural gas as a fuel, it does not displace the baseload generation producers such as nuclear or coal, could this be a sign of things to come?
I have looking at this market and have a few thoughts, if you look back at the last decade we have seen a great energy boom. The boom consisted of a huge investment, based on the response by industry to the rising prices. This occurred in both the oil and natural gas sectors, as we would expect we would see, the fruits of free market capitalism working and therefore bringing more product to market.
If you look at graphs of reserves, you see a huge increase in supply in natural gas, but not in the oil market, one reason why I believe in peak oil. Looking at these curves over 10 years does not lie.
The natural gas industry needs to find more customers other than power plants. The natural gas industry has done nothing to encourage the use of CNG vehicles. To me this would be a natural investment to encourage natural gas usage.
Value Stock Thoughts
1. oversupply
2. distortion of the futures market from the effects of the UNG ETF "negative roll" in the spot price due to the contango market
3. No hurricannes
4. Storage is now approaching full on a nationwide basis
5. Industrial production is down 12%
6. Going into a "shoulder" period of the year
7. Natural gas is locally produced and locally consumed, oil is a global commodity, so while China maybe rebounding and spurring industrial production, that is not true in the U.S., nor it will be in the future
I have read reports where there have been cases that producers give natural gas away free to avoid shutting in
Whatelse could be impacting the natural gas market and what is the major driver, more importantly how long will this last?
Could wind and alternative energy be impacting the energy industry? I have read a report put out recently where in Texas wind is now impacting the pricing of the electricity market as a whole. Wind in Texas is actually displacing natural gas as a fuel, it does not displace the baseload generation producers such as nuclear or coal, could this be a sign of things to come?
I have looking at this market and have a few thoughts, if you look back at the last decade we have seen a great energy boom. The boom consisted of a huge investment, based on the response by industry to the rising prices. This occurred in both the oil and natural gas sectors, as we would expect we would see, the fruits of free market capitalism working and therefore bringing more product to market.
If you look at graphs of reserves, you see a huge increase in supply in natural gas, but not in the oil market, one reason why I believe in peak oil. Looking at these curves over 10 years does not lie.
The natural gas industry needs to find more customers other than power plants. The natural gas industry has done nothing to encourage the use of CNG vehicles. To me this would be a natural investment to encourage natural gas usage.
Value Stock Thoughts
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