A must see chart

Treasury bears and yield curve prediction model proponents should pay close attention to this chart, posted way back in 2008 by M&G Investments in the U.K.:

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (“SCM”) is a state registered investment adviser in the Commonwealth of Pennsylvania. The views expressed by the author are as of the publication date, and are subject to change based on market and other conditions. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy or a solicitation to sell any security, or to engage in any investment strategy. Investors should not use this information as a basis for any investment decisions without first consulting their own financial adviser. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

URLs:

http://www.bondvigilantes.co.uk/blog/2008/11/19/1227105540000.html

Austerity as political fashion trend

Exquisite foolishness from the recent G20 summit in Korea:

The G20’s final communiqué introduced a surprise change of tone from the document produced by G20 finance ministers just six weeks ago — a shift for which Britain’s new Chancellor of the Exchequer, George Osborne, was keen to claim credit as he made his debut on the international summit circuit.

The April 23 G20 communiqué supported the idea that governments should continue to support growth with stimulus until the recovery is driven by the private sector. Today’s document, though, backed the sort of immediate fiscal consolidation being planned by Mr Osborne.

From the sounds of things, fiscal austerity is little more than an intellectual fashion trend to which ascendant politicians are eager to give their imprimatur.  Wow…what better grounds could there be for pushing millions into relative poverty???

Apparently Tim Geithner, on behalf of the U.S., was a lonely voice of “reason”:

The weekend’s meeting of G20 finance ministers and central bankers saw heated exchanges between US and European representatives, with division centering on the speed at which government budget deficits should be reduced.

US treasury secretary Timothy Geithner argued the case for fiscal consolidation over the “medium term,” while Europeans, rattled by the region’s ongoing debt crisis, called for faster cutbacks.

URLs:

http://business.timesonline.co.uk/tol/business/economics/article7144663.ece

http://euobserver.com/?aid=30220

Obama leadership fumble [and recovery]

We’ve opined frequently on the overly hawkish direction of Obama’s leadership on fiscal policy, but haven’t seen an opportunities to criticize his leadership style until this weekend.  In an interview with CNN about the damage done to the Gulf ecology and economy by BP and oil service companies, Obama stated:

I would love to just spend a lot of my time venting and yelling at people. 

‘But that’s not the job I was hired to do.  My job is to solve this problem and ultimately this isn’t about me and how angry I am.

We think the president fumbled this one a bit.  One aspect of his leadership style is to hold people accountable in a laid back fashion.  But when a person or an organization screws up as monumentally as BP has, and has caused such severe external damages to so many, one of the most important things a leader can do is to give voice to his or her constituents’ emotions.  In other words, “venting and yelling” is not about him in this situation.  It’s about using his position to give a voice to those who need to feel like they’re being heard.

Ideally, it would be done in a constructive manner, but just as importantly, it must provide relief for constituents struggling with intense fear, anger, and anxiety, who have no way of expressing those emotions directly to the people and organizations who have caused them.  In this kind of situation, leaders must give a public voice to people’s suffering and anger by emoting — express their anger facially, pound the podium and strike an intimidating posture on their behalves, etc (we recommend stopping short of kicking over teleprompters, throwing things, and breaking stuff). 

The only aspect that’s about ‘me the leader’ is the style of voice used to convey people’s anger. There’s more than one way to convey anger vocally — the important thing is that there be no mistake about the emotions behind the words.  

A good leader will also follow up on their commitment to ensure a fair measure of justice, and on that count, we don’t doubt Obama’s sincerity.  But emotive leadership can act as an important safety valve in a situation that’s as socially destructive as this one.  And that’s something that BP execs should appreciate more than anyone, despite any bunker/siege mentality they might be feeling at the moment.

And to be fair, Obama did say he was angry in the interview:

King asked ‘Are you angry at BP?’, Mr Obama responded: ‘You know, I am furious at this entire situation because this is an example where somebody didn’t think through the consequences of their actions. 

‘It’s imperilling not just a handful of people.  This is imperilling an entire way of life and an entire region for potentially years. 

Again, we just think he fumbled the question. It was not, and is not, about his anger. It’s about his followers’ anger, and his capacity to give them a meaningful voice.

UPDATE 6/8/2010 – Perhaps driven by some of the flack over his comments to Larry King, Obama apparently took a sharp rhetorical turn yesterday in an interview that will be aired by NBC today: “The president defended his talks with Gulf fishermen and oil spill experts, saying their purpose was not academic – rather, they were an exercise in asserting where the presidential boot should be administered, ’so I know whose ass to kick’.” 

URLs:

http://www.dailymail.co.uk/news/worldnews/article-1283959/Furious-Barack-Obama-BP-felt-anger-Gulf-Mexico-oil-disaster.html

http://www.guardian.co.uk/world/2010/jun/08/barack-obama-kick-ass-gulf

“Money we don’t have”

Good NYT article on deficit hysteria, with an especially illustrative quote from Rep. Cooper (D, TN):

“We have to stop spending money we don’t have,” said Representative Jim Cooper, a Tennessee Democrat who voted against the bill. “I hope deficit reduction fever is catching.”

The U.S. is in the midst of a balance sheet recession, with demographic ratios shifting an an unfavorable economic direction for several more years.  Under those conditions, deficit reduction fever will lead directly to the dreaded Japanese Disease —  another decade of stagnation, underemployment, and opportunity costs, all of which will impose greater burdens on future generations than expanded federal deficits would.

And policymakers — not to mention most members of the electorate, including analysts and the media — continue to commit two fundamental errors regarding fiscal policy:

1. They believe that all deficit spending must be financed with interest bearing debt, thus competing with the private sector for scarce financial resources.  However, judging by current Treasury rates, there’s still plenty of room for expanded federal borrowing.  And there’s a symbiosis between federal deficits and repair of balance sheets in the financial sector, as evidenced by the perfect quarters turned in by several major investment banks recently.  Politically, that relationship is almost nauseating, as it’s doing very little to relieve distressed households — but it nevertheless makes apparent the  dynamic between public sector fiscal deficits and private sector balance sheet relief.
2. They also believe implicitly that the U.S. is on a gold or similar standard, where fiscal and monetary policies are constrained by the supply of some exogenous factor, and governments can thus literally “run out of money.”  Governments can’t run out of money, as it is ’created’ by nothing more than digital ledger entries.  In other words, government (today, via operations of the quasi-private Fed) is the sole creator and supplier of high powered money.  Thus, the only constraint on money creation is inflation and a loss of confidence in the currency, and at the moment, those forces are emphatically not in play.  This too is symptomatic of Japanese Disease.

The fears of incumbent politicians like Cooper are certainly understandable.  But they’re borne of either ignorance about how these things work, or self-preservation.  Either way, it smacks of lousy political leadership. 

And given that Republicans are likely to benefit in November, we’d expect the trend towards fiscal conservatism to intensify.  Even President Obama, in a speech yesterday, promised the following:

• A three year freeze on all non-discretionary federal spending beginning in 2011
• Expiration of tax cuts via sunset provisions
• Elimination of 120 federal programs
• Reinstatement of PAYGO
• Higher fees on banks that are expected to lower federal deficits by $90B over ten years

He promised all of this as a way to force the public sector to budget in the same way that families and businesses do.  Again, this is wrong, and is borne of either ignorance or pandering.  And as with Congress, it smacks of crummy political leadership either way. 

The administration’s jawboning is also reminiscent of budget austerity measures touted by the Carter administration in the 1970s in reaction to the “tax revolt” — austerity measures that contributed to its eventual demise, even though they may have been more appropriate to the conditions prevailing at the time (e.g., baby boomers entering adulthood, global trade and financial integration, etc).   Today, austerity is far less appropriate, but even more vigorously pursued.  That almost certainly spells trouble for Obama in 2012 – assuming the GOP can field a worthy candidate and avoid blowing all of its political capital in the intervening years. 

You also have to wonder, were he to experience a change of heart, whether there’s any credible way for him to backtrack from his neo-liberal rhetoric.  The DLC, Brookings, Peterson, and all the other usual suspects have painted the guy into one hell of a corner.

In the meantime, assuming that reality will align with rhetoric, the political climate continues to be favorable to the USD and Treasuries, and rather risky to gold.  A contrarian call? You bet.  But it’s based on what we think is a well-grounded and – just as importantly – non-ideological assessment of the facts. 

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (“SCM”) is a state registered investment adviser in the Commonwealth of Pennsylvania. The views expressed by the author are as of the publication date, and are subject to change based on market and other conditions. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy or a solicitation to sell any security, or to engage in any investment strategy. Investors should not use this information as a basis for any investment decisions without first consulting their own financial adviser. SCM is an Amazon.com associate, and earns a commission on sales generated through links from our website. Some clients of the firm are long GLL and/or long TLT.  At the time of writing, neither the firm nor its principals owned any securities mentioned. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

URLs:

http://www.nytimes.com/2010/05/29/us/politics/29deficit.html

http://www.japanreview.net/review_bsr.htm

http://www.miraeasset.com/ourmarket/outlookView.do?board_id=1125&group_id=1&pageNo=2

http://www.investmentnews.com/article/20100602/FREE/100609973

http://seekingalpha.com/article/208174-how-deficit-hawks-will-keep-cutting-spending-until-we-re-all-on-food-stamps

Greece et al are not sovereign

The FT ran an op-ed by “Dr. Doom” Nouriel Roubini on sovereign crises — excerpts and our quibbles follow:

…governments everywhere are releveraging to socialise private losses and jump-start private demand. But public debt is ultimately a private burden: governments subsist by taxing private income and wealth, or through the ultimate capital levy of inflation or outright default. Eventually governments must deleverage too, or else public debt will explode, precipitating further, deeper public and private-sector crises.

Roubini, like so many other experts, is steeped in a gold standard era concept of public sector debt, and thus he misses the concept of “disdeflation” entirely.  If demand is low enough to allow deflationary pressures to unfold, then the public sector can spend in significant measure before the “ultimate capital levy of inflation” ever takes root.  And it can do so via the creation of money rather than mere resource shifting between the public and private sectors.  This is not a difficult concept, but unfortunately, deflations are so rare historically that people don’t spend a lot of time thinking about how to deal with them.

Roubini continues:

This is already happening in the front-line of the crisis, eurozone sovereign debt.

“Eurozone sovereign debt” is a misnomer.  No eurozone government is a sovereign issuer of the non-interest bearing debt used to service its interest bearing debt.  They’re more like state and local governments in the U.S., who are decidedly not sovereign.

The eurozone offers an object lesson in how not to respond to a systemic crisis. Member states started going it alone when they carved up pan-European banks along national lines in 2008. After much dithering and denial over Greece, leaders orchestrated an overwhelming show of force; a €750bn bail-out bolstered confidence for one day. But the rules went out of the window. Sovereign rescues are legitimised by an escape clause from the “no bail-out” rule intended for acts of God, not man-made debt. The European Central Bank began buying government bonds days after insisting it would not. Tensions in the Franco-German axis are palpable.

In the first sentence, Roubini is spot on, but the rest of it is backwards.  Debt deflation is in the wind, and no amount of fully sterilized repos by the ECB will stop it.  Stern fiscal rules work great until they don’t.  And under debt deflationary conditions — private or public sector – they don’t.  Instead, they are decidedly pro-cyclical.

To stem the current crisis, the ECB must allow eurozone treasuries to stimulate demand.  Until they do, financial markets — and people — will suffer.  That’s what the message from funding and equity markets is.  It doesn’t have a damn thing to do with any rules going out the window.

Among his policy prescriptions:

…creditors need to take a hit, and debtors adjust. This is a solvency problem, demanding a grand work-out. Greece is the tip of the iceberg; banks in Spain and elsewhere in Europe stand knee-deep in bad debt, while problems persist in US residential and global commercial property.

Creditors do need to take haircuts.  In the U.S., that process appears to be happening solely in bankruptcy courts — and the backlog must be immense.  This is one reason why fiscal expansion via the creation of money can play such a powerful role.  Technically, as deflation takes hold, creditors become wealthier — as the value of the currency increases, the cash flows they expect in the future are worth more in real terms.  To the extent that new money stops that process, it gives creditors a haircut on gains that their debt contracts should not permit them to realize (Ludwig Mises argued long ago that private debt contracts could be structured in ways that allowed for inflationary and deflationary adjustments – but today, they’re not). 

Monetized fiscal expansion also supports nominal activity (as long as it’s done well and reasonably fairly), which helps to prevent the financial and economic strains that would arise from unchecked deflation.

Roubini also offers a reflexive call for fiscal sustainability (not so good), radical financial reforms (good), and global economic rebalancing:

The quid pro quo for fiscal and financial reform in deficit countries must be deregulation of product, service and labour markets to boost incomes in surplus countries.

At least he believes in sharing the pain.

Negative GDP in 2H10?

Interesting chart from Consumer Metrics Institute implying that a contraction in U.S. GDP — the dreaded “double dip” — could occur this year. (TOH Larry Doyle).

We don’t know enough about the CMI index to make a well grounded assessment of it.  But if the past four years of data are any indication, it’s done a pretty nice job of predicting GDP growth — albeit with a notable lead/lag of four to eight months since around the time of Lehman and AIG’s failures (related to uncertainty and/or risk aversion?).

If we were to assume it’s a robust model, and that the lag effects will continue, then it looks as though GDP could deliver a negative surprise in 3Q or 4Q 2010 — perhaps even 2Q.  That’s quite a bit earlier than we predicted towards the end of 2009, but makes sense in light of the global policy hawkishness we’ve observed since the beginning of 2010.

Does anyone else find it interesting that both curves appear to correspond with the waxing and waning of federal stimulus measures?

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (“SCM”) is a state registered investment adviser in the Commonwealth of Pennsylvania. The views expressed by the author are as of the publication date, and are subject to change based on market and other conditions. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy or a solicitation to sell any security, or to engage in any investment strategy. Investors should not use this information as a basis for any investment decisions without first consulting their own financial adviser. SCM is an Amazon.com associate, and earns a commission on sales generated through links from our website. At the time of writing, the firm, its principals, and its clients did not own any securities mentioned, or any securities issued by entities mentioned. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

URLs:

http://www.consumerindexes.com/index.html

http://seekingalpha.com/instablog/443845-larry-doyle/74356-consumer-metrics-institute-projects-3rd-quarter-gdp-of-2-thats-right-2

http://www.fiscalsustainability.org/taxonomy/term/145

Europe, Rage, and Democrats

Mike Darda of MKM Partners emphatically comes around to our view on the ECB’s sterilization promises in his latest piece (.pdf):

Sovereign debt spreads in Spain and Italy — the largest countries in the PIIGS periphery — have hit new crisis highs, exceeding levels seen in late 2008 and early 2009. At the same time, interbank lending rates have been edging higher, European financial CDS spreads are nearly back to their May highs, and European corporate bond spreads have moved higher. In short, the markets are giving the EU/IMF/ECB $1 trillion rescue package a vote of no confidence. With European inflation expectations collapsing, broad money growth in reverse gear, and credit spreads widening, the ECB will need to become much more aggressive in order to offset a decline in the velocity of money and thus a relapse into a negative nominal GDP growth environment. The ECB’s balance sheet has begun to expand rapidly again, which is a step in the right direction. Oddly, ECB officials continue to claim that they will “sterilize” bond purchases, meaning their effect on eurosystem liquidity will be nil. If this is the case, it is unlikely that the rescue program will succeed, in our view. Unfortunately, the amount of damage to recovery prospects required for the ECB to come to this conclusion — and we believe they will — remains unclear.

As we noted on May 19th:

There’s only one thing capable of turning things around before downside momentum takes us back to, e.g., the 800-900 neighborhood on the S&P 500, and that’s a change of heart at the ECB and in the eurozone, as in swapping a sufficient amount of distressed interest bearing sovereign debt for newly minted euros. That’s it.

And quoted Ambrose Evans-Pritchard on May 9th:

…Stephen Lewis from Monument Securities says Europe’s leaders have forgotten the lesson of the “Gold Bloc” in the second phase of the Great Depression, when a reactionary and over-proud Continent ground itself into slump by clinging to deflationary totemism long after the circumstances had rendered this policy suicidal. We all know how it ended. 

Conditions in Europe are getting shaky enough for us to loop in a new meme from Simon Schama that was carried in the FT recently — a ‘new age of rage’. Schama wrote:

Far be it for me to make a dicey situation dicier but you can’t smell the sulphur in the air right now and not think we might be on the threshold of an age of rage… Historians will tell you there is often a time-lag between the onset of economic disaster and the accumulation of social fury. In act one, the shock of a crisis initially triggers fearful disorientation; the rush for political saviours; instinctive responses of self-protection, but not the organised mobilisation of outrage. Whether in 1789 or now, an incoming regime riding the storm gets a fleeting moment to try to contain calamity. If it is seen to be straining every muscle to put things right it can, for a while, generate provisional legitimacy.

Act two is trickier. Objectively, economic conditions might be improving, but perceptions are everything and a breathing space gives room for a dangerously alienated public to take stock of the brutal interruption of their rising expectations…Should governments fail to reassert the integrity of public stewardship, suspicions will emerge that, for all the talk of new beginnings, the perps and new regime are cut from common cloth. Both risk being shredded by popular ire or outbid by more dangerous tribunes of indignation.

At the very least, the survival of a crisis demands ensuring that the fiscal pain is equitably distributed…in 2010 a pragmatic steward of the nation’s economy needs to beware relying unduly on regressive indirect taxes, especially if levied to impress a bond market with which regular folk feel little connection. At the very least, any emergency budget needs to take stock of this raw sense of popular victimisation and deliver a convincing story about the sharing of burdens. To do otherwise is to guarantee that a bad situation gets very ugly, very fast.

So we face a tinderbox moment: a test of the strength of democratic institutions in a time of extreme fiscal stress. On the one hand, we should be glad that the mobilisation of public energy in elections can channel mass unhappiness into change. That is what we must believe could yet happen in Britain. Elsewhere the outlook is more forbidding. In the sinkhole that is the Eurozone, animus is directed at unelected bodies – the European Central Bank and International Monetary Fund – and is bound to build on itself. Those on the receiving end of punitive corrections – in public sector wages or retrenched social institutions – will lash out at their remote masters. Those in the richer north obliged to subsidise what they take to be the fecklessness of the Latins, will come to see not just the single currency, but the European project as an historic error and will pine for the mark or franc. Chauvinist movements will be reborn, directed at immigrants and Brussels dictats, with more destructive fury than we have seen since the war.

In the U.S., it looks increasingly as though the “provisional legitimacy” of Democrats’ blanket majority will be extinguished in November (TOH Marshall Auerback):

For omens of the midterm congressional election results, watch the amount of money going into people’s pockets. In the language of economists, that’s real disposable personal income per capita — and the numbers aren’t encouraging for Democrats.

Measured by disposable income, the U.S. standard of living has been stagnant since Obama took office in January 2009, giving Democrats control of the executive and congressional branches of government. Adjusted for inflation, per capita income went unchanged in 2009.

The only calendar years with declines in income during the past two decades were 2008, when former President George W. Bush was finishing his second term, and in 1991, the year before then-President George H.W. Bush lost re-election…

Heading into the elections, real disposable income per capita will only be up “a very anemic” 0.4 percent from a year earlier, forecasts Moody’s Economy.com chief economist Mark Zandi. “That suggests for many households after-tax income is still declining,” Zandi said.

Income growth has been the best economic predictor of U.S. presidential election results since 1952, said Douglas Hibbs, a former government professor at Harvard University in Cambridge, Massachusetts, and economics professor at Sweden’s Gothenburg University…

“It’s the broadest measure of economic well-being,” said Hibbs of disposal income growth. “It has a very, very powerful effect.”

…Ray Fair, an economics professor at Yale University in New Haven, Connecticut, who has developed a computer model to forecast congressional elections based on the performance of gross domestic product and inflation, believes Democrats face significant losses this fall. Fair predicts the Democrats’ share of the two-party vote for House candidates will fall to 50.43 percent from 53.4 percent in 2008.

Even that projection depends on an optimistic forecast that Fair uses for GDP growth. Using the median forecast of economists surveyed by Bloomberg, the model’s prediction for the Democratic vote share would drop lower, to 49.22 percent, increasing the risk that the party will lose control of the House.

What’s remarkable about this is that presumed Republican policies — primarily concerted deficit reduction, tax code status quo (or perhaps even a move towards a VAT or consumption tax) — are likely to keep real per capita GDP stagnant under current conditions (yes, we realize that this brings us into opposition with David Ricardo and Milton Friedman among others, but that’s OK — under current conditions, they’re wrong).  We would also point out that backpeddling on financial regulation would increase the likely frequency of future systemic financial crises. 

If they are given a drubbing in November, Democrats can thank the DLC and other usual suspects whose dogmatic views of ’crowding out‘ and ‘governments running out of money’ have prevented them from pursuing the kinds of measures (.doc) that would have more forcefully mitigated against economic stagnation.

UPDATE 6/2/10 – President Obama is giving a speech on rolling back tax breaks for oil companies, in which he is touting the economic effects of many of his administration’s policies, claiming that the economy is “getting stronger by the day.”  Rolling back tax breaks on oil companies might or might not make sense — I don’t know enough about them to say.  But in the stagnation that follows balance sheet recessions, having the public sector take with one hand and give back nothing with the other (e.g., a long payroll tax holiday) is a bad idea.  November’s promise of a rude surprise for the President and his party remains intact.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (“SCM”) is a state registered investment adviser in the Commonwealth of Pennsylvania. The views expressed by the author are as of the publication date, and are subject to change based on market and other conditions. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy or a solicitation to sell any security, or to engage in any investment strategy. Investors should not use this information as a basis for any investment decisions without first consulting their own financial adviser. SCM is an Amazon.com associate, and earns a commission on sales generated through links from our website. At the time of writing, the firm, its principals, and its clients did not own any securities mentioned, or any securities issued by entities mentioned. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

URLs:

http://www.capmarkets.com/10954/MKM_Darda_060210.pdf

http://symmetrycapital.net/index.php/blog/2010/05/fiscal-austerity-collateral-requirements/

http://symmetrycapital.net/index.php/blog/2010/05/europes-absolute-general-mobilization/

http://www.ft.com/cms/s/0/45796f88-653a-11df-b648-00144feab49a.html

http://www.businessweek.com/news/2010-06-01/roman-dmytriv-needs-more-money-to-make-ends-meet-with-obama.html

http://symmetrycapital.net/index.php/blog/2010/01/a-strong-dollar-call/

http://greatergreaterwashington.org/post.cgi?id=1620

http://www.rasmussenreports.com/public_content/business/federal_bailout/february_2009/66_are_worried_government_will_run_out_of_money

http://www.ritholtz.com/blog/wp-content/uploads/2009/02/timeforanewnewdealrvutip561.doc

Egghead Smackdown!

One night only!!! Hedge Fund Hendry versus Shock Therapy Sachs, in a clash of econo-nerds!!!

I never imagined we’d post an interview play-by-play, but this one is as relevant as it is entertaining.  In an interview, guest Gillian Tett of the FT claims that the eurozone needs to talk openly about restructuring Greek debt, to “bite the bullet now and face reality”.

Hedgie Hugh Hendry then offers a brash and entertaining riff, first on banks, then on politicians and academics like Sachs, in short order:

…Don’t pay [the banks]…don’t reward folly. The banking sector is responsible for gross folly. When you bring on a professor, and when you bring on a politician, they are unaccountable.  If Jeffrey [Sachs] is wrong…he’ll survive in tenure.  If I’m wrong, I’ll go bankrupt.  Who do you want to bet with?

Then into a strange channelling of Andrew Mellon:

I say let’s purge the system of its rotteness.  Let’s take on a recession.  It’s gonna be tough.  People are going to lose their jobs, they’re gonna lose their jobs anyway.  We can spread this over twenty years, or we can get rid of it in three years.  

Sachs then accuses Hendry of draconian sensationalism (does anyone else sense the irony there, given Sachs’ horrifically tragic “shock therapy” advice for Russia’s economic transition?) and launches into a neoliberal cheer for worldwide austerity programs, a/k/a ‘economic adjustment’, a/k/a, ‘responsible policy’, as Greece is currently embarked on.  The two get into it a bit more, it’s good fun. 

Tett then asks Sachs if he thinks there’s a chance that Greece can “repay its debt,” to which Sachs replies that “there’s a reasonable chance….absolutely, there’s a reasonable chance” that Greece will be able to service its debt and remain a normal debt market participant. 

To which we would reply that, under the types of ’responsible policy induced economic adjustments’ being pushed by folks like Sachs — much less Hendry or Tett – in the words of the great Miracle Max, “It would take a miracle!” 

We still think that Greece and other PIIGS nations will prosper in the coming decade, thanks in large part to favorable shifts in demographic composition – we just think that it’s having to give up a whole lot more than the entities who enabled its errors, and that it (and many other parts of the world) stand to suffer needlessly from misguided fears of hyperinflation and from slippery notions of ‘responsibility’ and ‘adjustment’ pushed by folks who don’t have a whole lot of skin in the game. 

One good point that both Hendry and Sachs agreed upon was the need for stricter leverage limits / capital ratios.  Of course, those are procyclical measures when you’re coming out of a financial panic and in the midst of a balance sheet recession…

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (“SCM”) is a state registered investment adviser in the Commonwealth of Pennsylvania. The views expressed by the author are as of the publication date, and are subject to change based on market and other conditions. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy or a solicitation to sell any security, or to engage in any investment strategy. Investors should not use this information as a basis for any investment decisions without first consulting their own financial adviser. SCM is an Amazon.com associate, and earns a commission on sales generated through links from our website. At the time of writing, the firm, its principals, and its clients did not own any securities mentioned, or any securities issued by entities mentioned. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

URLs:

http://www.creditwritedowns.com/2010/05/hugh-hendry-i-would-recommend-you-panic.html

http://en.wikipedia.org/wiki/Andrew_W._Mellon

http://en.wikipedia.org/wiki/Shock_therapy_(economics)

http://www.youtube.com/watch?v=D9tAKLTktY0

Faber on lots of stuff

If you’re a fan of Marc Faber, you’ll enjoy this video of a talk he gave to the Mises Institute (they love anyone who refers to an increase in base money supply as “inflation”).  He always has some interesting things to say, e.g.:

• Asian countries (notably China) have a tougher road to energy security than the U.S., due to our countries’ relative geographic positions and military strength (China has to source almost all of its oil from the Middle East).  He predicts military conflict between the U.S. and both China and Russia.
• Unlike the past 5,000 years of military conflict, relative safety will be found in rural areas instead of urban areas, due to bombing, quanrantines, and attacks on the electrical grid and water supply (in other words, some degree of self-sufficiency is required).  Except for the war part, we like this from a contrarian standpoint, as urban land values appear to have outpaced rural land values in recent decades.  But we’d like to see some data regarding the relative safety of cities in warfare over the past 5,000 years before accepting this assertion at face value.
• In calling for higher interest rates, rising commodity prices, and weaker currencies, he points to periods in which demographic composition and global trade and financial integration were moving in opposite directions to today’s.  If Japan is a closer parallel to today, then sovereign bonds and currencies could do better than he’s predicting, at least for part or all of the coming decade. 
• Faber decries neochartalism or modern monetary theory without calling them by name (“printing money” is his preferred moniker).  There’s little

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (“SCM”) is a state registered investment adviser in the Commonwealth of Pennsylvania. The views expressed by the author are as of the publication date, and are subject to change based on market and other conditions. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy or a solicitation to sell any security, or to engage in any investment strategy. Investors should not use this information as a basis for any investment decisions without first consulting their own financial adviser. SCM is an Amazon.com associate, and earns a commission on sales generated through links from our website. At the time of writing, the firm, its principals, and its clients did not own any securities mentioned, or any securities issued by entities mentioned. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

URLs:

http://www.creditwritedowns.com/2010/05/marc-faber-mirror-mirror-on-the-wall-when-is-the-next-aig-to-fall.html

Disdeflation revisited

Recent cross currents on debt, financial crisis, policy responses, and money / inflation / deflation:

• A short UniCredit piece on the inflation-disinflation-deflation debate that (1) overlooks “disdeflation” and (2) finds little likelihood of either inflation or deflation
• An interview with Felix Zulauf in which he predicts eventual debt monetization that will cause a global currency crisis (TOH Ed Harrison)
• A David Rosenberg interview in which he argues that gold could eventually reach $3,000
• Emerging controversy over the ‘natural’ or ‘non-accelerating inflation rate of unemployment’ (NAIRU)

The UniCredit piece does a nice job parsing current and expected data, arguing that short term disinflation will be followed by (very) mildly accelerating core inflation in 2011.  While we view that as a possibility, we still believe that prevailing global policy hawkishness — against a historically fragile background in terms of debt, deleveraging, stagnant incomes, and demographic ‘internals’ (.pdf) — means that deflation continues to be a serious threat, at least until the end of this decade.

On that point, we are in some agreement with Felix Zulauf.  Where we disagree with him — and his interviewer — and many analysts and pundits — is that central bank monetization of debt is always and everywhere inherently inflationary (listen to his interviewer’s breathing patterns when Zulauf outlines that scenario).  In what we think of as ‘normal’ conditions, it certainly tends to be.  But in deflationary conditions, it may simply modulate those conditions to some extent (“disdeflation“).  Where we do agree with Zulauf — and it’s disconcerting to us — is that said monetization won’t occur until powerful deflationary conditions have taken hold and financial crises have unfolded, at which time confidence in fiat currencies will be severely shaken.  Thus his advice to own things like gold and farmland.  We don’t place a high probability on this, but it is possible, and we think that a general currency crisis is most likely to happen if policymakers carry out monetization  measures in a panicky and haphazard manner with poor communication. 

We’ll stick our necks out though, and predict that political processes are likely to push policymakers towards some less deflationary outcome, and thus avoid the worst case laid out by Zulauf.  In some of those outcomes, it is not at all unreasonable to expect fiat currencies to strengthen against other assets (including stocks, gold, and farms…), much as the Japanese Yen has done since around 1990.  But if policymakers err — or fiddle — too much in rectifying a multi-decade process of over-leveraging, then Zulauf could prove right, and that would not be a pretty outcome.  And if his prediction that global currency reforms would follow such a crisis proves false — and recent events in the eurozone provide little comfort — then even global military conflict could enter the realm of possibilities. 

On a side note, Zulauf mentions Switzerland as a low sovereign debt nation whose currency might prove attractive, but don’t be so sure.  Some economists see severe trouble ahead for Swiss banks due to unfolding depressions in eastern European economies (TOH Ed Harrison).  If enough of those loans go bad — and given continental banks’ love affair with high leverage, “enough” isn’t many — then the Swiss public sector may have to take large amounts of private sector debt and other financial assets onto its ledgers.  This should sound familiar to anyone who’s lived in the U.S., the U.K., or Europe since 2008. 

David Rosenberg sounds some important cautionary notes on the economy and stock markets, and then predicts that gold will top out somewhere around $3,000.  We’ve argued against this call recently, but admit to having some misgivings.  If Zulauf is right, and deflation is en route, then it is entirely irrational to chase gold — unless you believe, like most of the world does, that something like “disdeflation” does not exist.  We’re well aware that history is replete with episodes of fairly persistent irrational asset pricing — gold might thus have a ways to go.  And if central bankers and other policymakers lose their heads in the fashion that Zulauf fears, then higher gold prices might turn out to be rational in hindsight.  Thus, we continue to watch gold prices closely.  Some of our clients continue to hold shares of GLL, but if gold prices take out their November 2009 highs, we will close them out and look for a better entry point. 

Finally, Nobel economist Ned Phelps and a couple of Wall Street analysts are arguing that the natural or non-inflationary rate of unemployment in the U.S. may be higher, which would mean that the Federal Reserve has less of a margin of safety to avoid fostering inflation via low interest rates.  However, given the hawkish stance and signals of fiscal policymakers the world over (and montary policymakers in a handful of countries), it’s highly unlikely that U.S. unemployment will converge to its ‘natural’ level any time soon, even at a high current NAIRU estimate of 7.5%. 

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC is a state registered investment advisor. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy nor a solicitation to sell any security, or to engage in any investment strategy. Some clients of the firm hold long positions in ProShares UltraShort Gold (GLL). 

URLs:

http://www.fxstreet.com/fundamental/analysis-reports/friday-notes/2010-05-28.html

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/5/28_Felix_Zulauf.html

http://www.creditwritedowns.com/2009/02/switzerland-threatened-with-bankruptcy.html

http://seekingalpha.com/article/207629-no-rosie-outlook-more-downside-for-stocks-3-000-gold-ahead

http://symmetrycapital.net/index.php/blog/2010/05/holiday-reading-viewing-and-reflections/

http://preview.bloomberg.com/news/2010-05-31/why-7-unemployment-is-turning-point-for-inflation-fed-doesn-t-want-to-say.html