Archive for the 'Economics' Category

Market Bounce is Another Opportunity for Bears

Published
by
Doug
on March 11, 2008
in Economics, Federal Reserve, Markets and Money
. 0 Comments

Today, the U.S. Federal Reserve and four other central banks teamed up to get hundreds of billions of dollars in fresh funds to the credit markets. The Fed allowed financial firms to use securities backed by home mortgages as collateral for these central bank loans. The markets were up sharply as a result: e.g., the Dow climbed 416.66 for its biggest gain in over 5 years.

A Bounce or a Rally?

So, will this bounce turn into a meaningful rally? I seriously doubt it. There is a still a lot of bad news out there; some of it lurking out in the open, temporarily forgotten, and I bet there is still a lot more bad news people are keeping to themselves, hoping they won’t have to make any announcements, betting they can ride this storm out, but this storm has yet to shake out all the bad apples from the tree. The arrogant and unprincipled will fall while the modest and prudent will rise to take their place in the end.

Bad News is Still Out There

Let me give you a sample of some of the bad news still out there. For starters, Standard & Poor’s and Moody’s Investors Service have not cut ratings on any of the AAA securities that track subprime bonds; this despite downgrading over 10,000 of the lesser-rated subprime-mortgage bonds. When one of these ratings agencies decides it has to cut a rating on of their AAAs, I think the market will react adversely, and I don’t think it will be much longer before this happens. The Fed is running out of ammunition to correct the markets and I don’t think it can keep dropping the money bombs ad infinitum.

Also, all the highly-leveraged hedge funds are reeling from this credit crunch, some unable to meet margin calls, as lenders are asking for more collateral and Bloomberg is reporting that the Fed has lost control of inflation when you look at the negative yields for the TIPS. I could probably go on, but I just don’t have the time.

With all this in mind, I think the traders and financial institutions were very grateful for this slight reprieve from all their troubles, but I feel that this will be a small bounce, leading to yet another great opportunity for going short.

An Interesting Theory

One last thing I want to mention is Market Ticker’s analysis of what he thinks really happened today. Here is a large excerpt from his post:

We were almost certainly on the verge of the collapse of one or more of the primary dealers AND international banks FOR THE SECOND TIME IN JUST A FEW DAYS!

Remember, The Fed just took an “extraordinary” action in expanding the TAF!

Their only defense the primary dealers had to being forced to buy back those treasuries at a huge loss is to borrow even more of them from The Fed.

BUT THEY WERE OUT OF COLLATERAL TO POST OTHER THAN THESE MORTGAGE AND OTHER “AAA” BONDS!

What’s worse, this short squeeze was being fed by people who did NOT want agency paper at any price; they were generating it by dumping the agencies and buying Ts. They have figured out that its contaminated (see below) and are freaking out about the potential for serious shortfalls or outright defaults.

Remember - “AAA” means “as safe as the US Government.”

Except that lately, we’ve learned that its not - that the claim is a lie.

So The Fed decides that they’re going to put in place a “swap” and let the primaries exchange Treasuries (of which they have several hundred billion) for “Agency and other AAA” paper - mortgages. The intent is to “pair” the two, thereby halting the spread widening and thus stopping the short squeeze.

The action today was nothing more or less than an attempt to stabilize Agency spreads which were blowing wide in a historic short squeeze that was threatening to collapse major financial institutions!

Yet if you listen to CNBS, including Fast Money, you hear these guys saying that “The Fed Injected 200 billion in money.”

NO THEY DID NOT! IN FACT, THEY EXPLICITLY INJECTED EXACTLY ZERO DOLLARS INTO THE SYSTEM; A SWAP OF ONE SECURITY FOR ANOTHER OF IDENTICAL SIZE AND FACE IS A BIG FAT NET ZERO IN TERMS OF BALANCE SHEET AND MONEY SUPPLY IMPACT.

I find this analysis simply amazing. It is something you would never see reported by the mainstream media. This to me seems like an extremely plausible explanation for today’s events. And even if this analysis is wrong, I still just wanted to highlight it as a shining example of the great thinking powers some people possess.

Economists Can “Prove” Anything

Published
by
Doug
on March 5, 2008
in Asides, Economics and Iraq
. 0 Comments

Amity Schlaes argues that Nobel Prize winner J. Stiglitz gets the math wrong in his book The Three Trillion Dollar War. I see this as more proof that economists can “prove” anything.

Who Will Challenge Conventional Wisdom?

Published
by
Doug
on February 28, 2008
in Asides, Economics and Money
. 0 Comments

Who will challenge the conventional wisdom that we, as a nation, can borrow and spend our way to prosperity and expect that prosperity to endure?

Both Candidates Insult Allies During Tuesday Debate

Published
by
Doug
on February 28, 2008
in Economics, Elections, Free Trade and Politics
. 0 Comments

During the Tuesday night debate between Democrat candidates Hillary Clinton and Barack Obama, one of the topics of debate was NAFTA. Tim Russert was the questioner and he did a good job of trying to force both of them to choose a side: are you for NAFTA or against it? Both tried to have it both ways. Even the New York Times is not afraid to point out that both candidates haven’t always been free-trade foes.

But most distressing to me is the fact that both spoke in ways that were highly insulting to Mexico and Canada. As this editorial on IBD states, “Sure, they’re pandering for Rust Belt votes. But do they ever consider the impact of their statements on our allies?”

Both candidates threaten to leave NAFTA unless its “labor and environmental standards” are strictly “enforced.” Enforcement? Hammer? What kind of criminals are these would-be G-men talking about? Evil ruffians out there committing . . . trade.

This not only insults our allies and trading partners, it signals to everyone else that America’s capricious, chest-thumping protectionist ally, Mexico, a third-world nation that is trying hard to transform itself into a first, bears the brunt of this coded jingoism.

That’s because trade pacts these days are about more than just trade — they represent long-term strategic partnerships. But after this talk, who’ll want to sign a permanent trade deal knowing they’ll be threatened by ambitious politicians every election season?

Mexico is not on the same level as the United States and it is probably much harder and more cost prohibitive for them to enforce labor and environmental standards. These candidates are ignoring reality if they think they can force Mexico to meet our higher standards.

Durable Goods Orders Decreased

Published
by
Doug
on February 28, 2008
in China, Economics, Energy, Foreign Policy, Politics and Recession
. 0 Comments

Yesterday I read a long post from Market Ticker detailing some of the recent, distressing economic and business news. Here are some things that stuck out for me.

First, durable goods orders decreased 5.3% on the month and inventories are rising. Market Ticker says this is always a sign a recession is on the way (or at least evidence that people are cutting back on spending), which makes sense to me. People used to be buying lots of crap, manufacturers ramped up production bit by bit to meet demand. Now that the demand is no longer there because people are limiting their spending, inventories will naturally rise and products will not get shipped.

Second, he berates the short-sighted politicians for setting America up for an energy crisis. The fools have prohibited any nuclear energy development for the past 30 years. We’ve turned our food into energy and we have refused to drill for oil off our coasts, oil which we know is there.

Also, and a most interesting and scary prediction that there will be a war between China and Russia in the future:

Let’s talk geopolitical risk - what’s really driving metals prices. Its not talked about, but it should be. China has north of 1.2 billion people. Russia, which shares a border with China, has 140 million, or about 1/10th of China.

Russia has a net surplus of both oil and natural gas, and in addition has a surplus of land per-capita. China has a dearth of all three. So long as China can pay for what they need, this is not a serious problem.

But as we flush, to believe that China can turn to internal consumption and pick up the slack, with a per-capita income of under $2,000, where ours is more than 10 times as high, is pure fantasy.

I wouldn’t take that bet at any odds.

What I expect to happen is that China will eventually run out of ability to subsidize, and will turn to what nations have always historically turned to when faced with severe internal pressures and a resource-rich nation sharing a border with them.

Quite distressing news overall, but good news if you happen to be a bear.

Dollar-Carry Trades?

Published
by
Doug
on February 27, 2008
in Asides, Economics, Markets and Money
. 0 Comments

An increase of dollar-carry trades is certainly a confirmation of how far our currency has fallen, but I wonder if it is also a sign of impending recession.

Scarcity Is the Basis of Fun

Published
by
Doug
on February 21, 2008
in Asides, Economics and Games
. 0 Comments

Scarcity is the basis of fun in games. I’d go further and say scarcity underlies every aspect of life itself.

High Commodity Metal Prices Are Here to Stay

Published
by
Doug
on February 7, 2008
in Commodities, Economics, Markets and Trends
. 1 Comment

Ernst & Young has released a report that addresses the cyclical nature of commodities, the abilities of analysts to forecast commodities prices, and what these two factors mean for the future of this sector.

Ernst & Young says metals analysts’ prediction of metal prices “have consistently and significantly lagged behind the actual spot market,” and that mining and metals equities have been undervalued. They also say, “It is our view that current metal prices are actually a return to sustainable price levels following an extended period of artificially depressed prices, rather than the conventional wisdom that the industry is near the top of a cycle.”

It will be interesting to see how this plays out if a recession takes place in the U.S. Will a recession in the U.S. affect the growth of BRIC countries and thereby the demand of raw materials?

Hat tip to Sufiy for the link.

Problem With the Concensus Views About China

Published
by
Doug
on February 3, 2008
in China, Economics and Money
. 0 Comments

I just watched a very interesting presentation (and relatively short at about 27 minutes) by Dr. H. “Woody” Brock, President of Strategic Economic Decisions, about the threat of  China and the 5 general misconceptions of concensus views.

Here are the 5 questions Brock poses regarding the concensus views of China:

  • Is it true that a higher yuan would not improve the US trade deficit?
  • Do those who celebrate the virtues of “cheap Chinese imports now” not understand there is no free lunch?
  • Who says the very low US savings rate is in fact the principal reason for the vast US trade deficit?
  • Is it true that the Chinese will retaliate by “pulling out their money” and/or by reducing their ongoing purchases of US treasuries?
  • On what grounds is the yuan “only” undervalued by 15%-25%?

Brock addresses each of his questions in language that is easy to understand. Non-economists should be able to wrap their minds around the concepts which Brock discusses. 

In conclusion, Brock attempts to answer what should be done about China using the paradigm of game theory. There are three factors that influences the outcome of bargaining between China and the U.S.: (1) the relative risk aversion of the bargaining nation, (2) the relative threat power, and (3) the relative coalitional muscle. Brock essentially says that although the U.S. in theory has the upper hand on two of these three factors, he is worried that the U.S. is incapable of capitalizing on its strengths in order to bargain successfully with China. Brock is worried about the future of the U.S. in relation to China and Asia.

Though I think everyone has heard of “the Chinese threat” or some such variation on that phrase, most don’t really understand the nature of the threat, which is largely economic in nature, though there is a growing military threat. This presentation does a good job providing some simplified concensus views of China and also his arguments that the concensus views are wrong. Watching this will help you understand better the nature of the threat from China.

“Scary” Federal Reserve Charts

Published
by
Doug
on January 30, 2008
in Charts, Economics and Federal Reserve
. 0 Comments

The Financial Ninja has some “scary” Federal Reserve Charts that help explain why the Fed will be cutting rates furiously. The charts are:

  • Total Borrowings From Fed
  • Non-Borrowed Reserves
  • Net Free Borrowed Reserves
  • Board of Governors Monetary Base

You don’t have to be an economics major to see that something is amiss in the charts. You see some pretty large slopes and spikes on the charts.

Now as to whether I would describe these charts as scary, I don’t think I have the background experience to say whether the charts are scary or not. All I can go on is my feeling that we’ll be able to work things out in the end and that what worked in the past won’t necessarily work in the present or the future.