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?
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