Nice Industrial Production Bounce

The Fed reported yesterday that July U.S. industrial production was up nicely.

Industrial production advanced 0.9 percent in July. Although the index was revised down in April, primarily as a result of a downward revision to the output of utilities, stronger manufacturing output led to upward revisions to production in both May and June. Manufacturing output rose 0.6 percent in July, as the index for motor vehicles and parts jumped 5.2 percent and production elsewhere moved up 0.3 percent. The output of mines advanced 1.1 percent, and the output of utilities increased 2.8 percent, as the extreme heat during the month boosted air conditioning usage. At 94.2 percent of its 2007 average, total industrial production for July was 3.7 percentage points above its year-earlier level. The capacity utilization rate for total industry climbed to 77.5 percent, a rate 2.2 percentage points above the rate from a year earlier but 2.9 percentage points below its long-run (1972–2010) average.

We are clearly enjoying a bit of a tailwind as Japan’s supply chains are repaired. How long it lasts remains to be seen. This could be a matter of pulling demand “backwards” (i.e., prior demand that didn’t materialize due to disaster-related production constraints is pulled into the present), which could mask weakening trends temporarily.

I hope I’m wrong.

UPDATE 2011.08.17 – Prieur de Plessis observes that the “manufacturing sectors in only four out of 20 countries are showing faster growth, while nine countries are now contracting and growth in four have slowed significantly. The current situation looks extremely grim when compared to February this year.” Note that there’s not a single country with both a positive trend and expanding manufacturing. Looks like the global economy is teetering on a knife’s edge. And with Europe proposing a financial transactions tax to deal with its fiscal chasm, China in a somewhat similar position to Japan in the early 1990s, and the U.S. facing the threat of large deficit reductions, there are no major tailwinds capable of improving the picture. Look out below?

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  SCM, its principals, and its clients may hold positions in any securities mentioned.

One Word: Japan

We closed a recent post with the warning, “One word…Japan.” Here’s more evidence that we’re filing under Affirmation Bias.

First, a chart from Bloomberg U.K. (hat tip to Mike Darda at MKM Partners, image hosted by Barry Ritholtz):

Second, a similar chart maintained by an Angry Bear contributor:

Finally, a scary piece of technical analysis that actually lines up pretty well (although it forecasts a 50% drop from 1200 versus our model’s predicted drop of roughly 25%) with the worst case prediction of our New York Stock Exchange margin model for the S&P 500:

Don Luskin posted an interesting chart awhile back that overlaid the Dow Jones Industrial Average (DJIA) since 2009 on the DJIA from 1936-1938. The fit was somewhat disconcerting to say the least, until October of 2010, when the graphs diverged emphatically.

It’s my suspicion that we were able to break with the earlier pattern because of the fall 2010 fiscal agreement. Some would argue that it was QE2, which makes for a fun but intractable debate. It’s likely that both played a roll, but whether QE2 played had an actual beneficial impact on the real economy or just played on market beliefs is open to question in my view.

The break occurred as expectations of (1) an agreement over the Bush tax rates and payroll taxes and (2) and QE2 began to be impounded in market expectations and valuations.

An incipient recoupling trend with the 1936-38 graph may be underway as (1) QE2 has ended and the Fed has begun unwinding its Maiden Lane portfolio (the former may only have psychological effects, but the latter is definitely a form of tightening) and (2) with recent passage of the debt ceiling agreement.

As Richard Bernstein has pointed out—it’s basic economics.  

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  SCM, its principals, and its clients may hold positions in any securities mentioned.

Bernstein: Basic Economics

From Richard Bernstein, one of Wall Street’s sharper strategists:

Europe and the emerging markets already had anti-growth policies in place.  It should be no surprise, therefore, that the markets are correcting as the sole “stimulator” of the world, the US, moves as well toward anti-growth policies.  It’s just basic economics.

Effects of Falling Margin Debt?

Bloomberg’s running a story today entitled “Margin Calls Push Leverage Down Most in a Year.”

Investor credit at Wall Street brokerages is falling by the most in a year as the Standard & Poor’s 500 Index suffers its biggest losses since the bull market began.

Borrowed money in accounts at 61 New York Stock Exchange firms has fallen 4.6 percent, the biggest drop since June 2010, according to a July 22 statement from New York-based NYSE Euronext. The decline at NYSE firms followed a 36 percent increase to $320.7 billion in eight months, the biggest expansion since 2007. Leverage slipped to the lowest level of 2011 last week, according to Morgan Stanley’s prime brokerage.

Lenders have been calling in loans since April, when the benchmark gauge for American equities began a plunge that has wiped out more than $2 trillion in value. While withdrawals preceded bear markets in the past and may worsen losses by leaving investors with less money to spend, they foreshadowed a return to the market by hedge funds and other speculators after the European credit crisis receded in August 2010.

On this and other important news items, Bloomberg has been somewhat behind the ball and making questionable assertions of late. But it’s still a timely topic, and this is an indicator that we watch closely.

As shown in the first chart, changes in the level of the S&P 500 correlate closely with changes in the level of margin (margin is the collateral used to finance the purchase or sale of financial assets; the higher margin levels are, the more financial leverage investors are using). Please note that there appears to be an error in the NYSE’s margin data, as 1993 and 1994 are identical.

A simple, unfitted regression model based on historic data shows that the S&P 500 may have been undervalued by 16% or so at end-of-June levels:

However, the trend in margin balances is decidedly flat-to-lower, and a simple polynomial regression forecasts that it could drop by roughly 30% over the next twelve months. This would obviously be a negative indicator for the stock market.

And if we apply a bit of technical analysis to margin levels, we see the same scary chart pattern that’s at work in a long term chart of the S&P 500:

Applying several different polynomial regression forecasts, and weighting them by how well they fit the data, we end up with a decline in NYSE margin balances of 18% from June’s levels, and a twelve-month forecast for the S&P 500 of 1,312, or 11% above last week’s close. In other words, the expected contraction in leverage may already be priced in to the S&P 500 and then some.

However, if we look only at the last two peak-to-trough slides in margin levels (which may be appropriate given structural shifts in age structure and financial deregulation), we forecast a 78% drop in NYSE margin levels over two years, bottoming some time in mid-2013. That gives us an implied level of around 890 on the S&P 500, or a 26% decline from last week’s closing value. At a level of 900 or lower, we would be backing up the truck on behalf of our clients, as long as there’s no chance of a balanced budget amendment to the U.S. Constitution being ratified.

If we take a more subjective approach that incorporates human judgment (yikes!?), and assume that leverage levels settle around 30-40% lower than their June 2011 levels, then the predicted value of the S&P 500 implies somewhere between a loss of 6% and a gain of 2%.  Add in an expected dividend yield of around 2%, and that’s an expected net change of -4% to +4%.

As with most of our indicators, the market stands at a fork in the road between muddling through and falling even further. However, the risk-reward balance appears to be somewhat bearish, with this particular series of models indicating a one-year change, including expected dividends, of between -24% and +13%.

There are a few of things to keep in mind. First, until the NYSE corrects the 1993-1994 data, this model should be assumed to be somewhat defective. Second, leverage may not be as extensively employed as it was before the last two downturns, so its decline might not be nearly as steep this time around. And third, margin levels rebounded pretty quickly following last year’s sharp but short-lived downturn. We’ll need to see a couple more months of data before knowing whether the near-term future will echo 2008 or 2010.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  SCM, its principals, and its clients may hold positions in any securities mentioned.

Revisiting Gold

Back in 2010, we wrote that we viewed gold as overpriced, but were unwilling to lie down in front of what appeared to be an early- or mid-stage bubble. Good thing we didn’t, as spot gold is up about 40% since. It mght be time to revisit the trade though.

In May of this year, Michael Darda of MKM Partners observed that the commodities rally was getting a bit long in the tooth when compared to earlier bubbles like U.S. housing and the Nasdaq.

In late July of this year, Doug Short provided an eye-catching overlay of the recent gold price run-up on the bubble and bear markets seen in the Shanghai Composite of recent years, the Nasdaq circa 2000, the Nikkei circa 1990, and the Dow circa 1929-1932:

And today, we noticed an Associated Press story on the elevated pace of gold sales on eBay:

For gold sellers on eBay, the recent stock market turmoil has been a boon for business.Gold and silver sales on eBay had already been rising steadily over the past several years — so much so that eBay Inc. created a special area in May to make it easier for buyers to find sellers.

Now, activity on that part of the site, the Bullion Center, is intensifying as consumers unnerved by the economic uncertainty flock to gold in hopes it will be a stable investment.

“When people are coming down to the question, `Do they want to have cash in the bank or gold in their hands?’ the answer is they’d rather have gold or silver,” said Jacob Chandler, CEO of Great Southern Coins, the largest seller of precious metals on eBay.

Of course, a question that the investing public might want to ask is, what do owners of the companies selling precious metals want in THEIR hands?

It all begs the question that investors started asking around 2005—is gold in a bubble, or have fundamentals shifted it to a new equilibrium that is still north of here, as many market participants still seem to believe? Smart people can be found on both sides of the argument.

It motivated me to dust off an old model based on the relationship between foreign official reserves on the Fed’s balance sheet and the price of gold. Although the historic sample is limited to quarterly data since 1975 (with no clear relationship appearing until around 1982, perhaps as markets became confident that a ‘correct’ price had been found for gold following the turmoil of the 1960s and 70s), the logic is compelling. As U.S. dollars go outside our borders, they tend to support gold demand and thus gold prices.

The relationship held up well until 2007, when gold began its parabolic ascent to its current levels. As shown in the first two charts below, a very simple linear regression model based on the relationship between historic foreign official reserves and gold prices implies that gold has between 70-80% downside from here. That seems a bit extreme.

Eyeballing the historic relationship, obviously an even cruder method than simple regression, one might expect to see a gold price closer to $650, as shown in the third chart, implying about a 60% drop from current levels. Of course, that assumes that there has been no change in fundamentals.

If we refer back to Doug Short’s chart, we can trace out approximate changes in value over the entire pre- and post-bubble periods he’s documented. By my estimates, the median annualized change in the Shanghai, Nikkei, Nasdaq and Dow is somewhere around 6.5% from start to finish (though the Shanghai hasn’t technically finished, as it is still short of 1,500 days from its peak).

Using a 6.5% annualized rate of return, and taking June 2007 as a starting point with a gold price of around $650, we would expect the price of gold to eventually settle at approximately $1100, which seems more reasonable. The decline from current levels would be in the neighborhood of 35%, as shown by the yellow line in the fourth chart.

Of course, while that final back-of-the-envelope estimate sounds more reasonable, it ignores both the commodity and monetary features of gold, which could (frustratingly!) be used to argue for both higher and lower prices.

Wherever the price of gold ends up, and whatever path it takes in getting there, is entirely unknown, of course. But for clients in our active mandate, we are considering putting on a position or positions that would be expected to benefit from a decline in the price of gold. 

[2011/08/15 - Another factor that argues for a bid under gold, at least in the minds of most traders and investors, is foreign exchange intervention, which is not going away any time soon judging by recent remarks from Japan's Finance Minister and the Swiss National Bank. Another widely-held thesis (David Rosenberg, for example) is that gold's nominal value should have some relationship to the supply of high-powered money, such as bank reserves and currency (Rosenberg has used this as the basis for a $3,000 upper price forecast if memory serves). However, I think this is a shaky framework as it doesn't adjust for velocity, i.e., the fact that most high-powered money is just sitting in reserve accounts at central banks (a fact that implies that the money multiplier is a myth or at least broken at the moment). The level of foreign official reserves shown in the charts above would seem to support the low-velocity argument. So again, either the fundamentals of gold have changed, or it's in a bubble, or both are true to some extent.]

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  We are considering adding positions in the next 72 hours that would benefit from a decline in the price of gold.

El-Erian: Policy Dithering Will Fuel Crisis

In a welcome reprieve from Bill Gross and Neel Kashkari’s theatrical hand-wringing over Carmen Reinhart’s cynical warnings of “financial repression“, PIMCO’s Mohammed El-Erian warns that policy errors are a major risk facing the economy and financial markets. That risk is a cornerstone of our investment philosophy, but we agree that it’s especially acute at the moment. As he puts it (emphasis added):

The world economy is now in the grips of a damaging feedback loop involving deteriorating fundamentals, lagging policy responses and destabilised financial markets. If policymakers do not act boldly, and do so in a globally-coordinated fashion, the world risks tipping into a prolonged recession with worrisome institutional, political and social consequences.

It’s interesting to see that the continuing stresses of the global financial crisis may be undermining El-Erian’s faith in certain cornerstones of the macroeconomic catechism:

…the European Central Bank – a “Germanic” institution – became even more of a fiscal agency last Sunday by agreeing to buy Italian and Spanish government bonds…

In fact, under current institutional arrangements, monetary and fiscal operations are two sides of the same “vertical” coin, as the European Monetary Union is finally learning the hard way (and rather slowly).

El-Erian continues:

In America, the Federal Reserve overcame on Tuesday three public dissensions to signal that its policy rate will probably remain floored at [zero] per cent for two more years. Yet the ability of such dramatic actions (particularly those by central banks, which were deemed unthinkable just a few weeks ago) to act as durable circuit breakers is questionable. Indeed, recent developments confirm a worrisome trend that has been evident for two years now – policy outcomes have consistently fallen short not only of what is needed but also of policymakers’ own expectations.

This should lead him to call into question prevailing beliefs about what effective economic policies look like. It doesn’t. Instead, he argues that structural conditions have made policy measures less potent:

If policymakers were to step back, they would quickly recognise that policy transmission mechanisms are severely undermined by structural weaknesses. Like clogged pipes, the output of actions is only weakly related to the input.

In America, this takes the form of persistently-malfunctioning housing and labour markets, uneven banking activity, poor infrastructure and medium-term fiscal rigidities. In Europe, the list also includes immediate debt solvency problems, fiscal governance issues and more severe competitiveness difficulties.

There are structural problems, as he notes, and I believe most policymakers are aware of this. But like them, he overlooks shifts in population age structure, which appear to have an especially powerful impact on economies and policy effectiveness. Under this and the conditions he outlines (save “fiscal rigidities,” which the U.S. does not face operationally, and which are being utterly refuted [I so badly want to write "refutiated"--it's such a great word!] by bond market behavior, as they’ve been during Japan’s ‘black widow trade’ decades), policies probably have to be more forceful than we’ve become used to in the eras of post-WW2 rebuilding and the passage of Baby Boomer generations through adulthood in many developed countries.

Unfortunately, El-Erian continues to struggle under the delusion that monetary policy is the most effective weapon in policymakers’ toolkits. Worse, he believes that central bank purchases of sovereign debt amount to “monetization.”

To get out of such an impasse, central bank crisis management remains critical; and it will probably involve further balance sheet operations and monetisation of debt. As critical as this is, it is unlikely to prove sufficient unless it is quickly accompanied by better policy framing at both the national and global level.

For a government whose debt is denominated solely in its own currency, this is a myth (and a stubbornly persistent one).

Unless the central bank pays for government debt without actually taking it onto its books, or pays significantly more than its market value, there is no monetization occurring. It’s merely a swap of one government liability for another, analogous to transferring money between your checking and savings accounts.

One can make the argument that a central bank’s interest rate target is set at a level that will prove inflationary, in which case its open market sales and purchases of government debt will have inflationary consequences. But that’s a far cry from what most macroeconomists think of as debt monetization.

Finally, El-Erian channels his inner Thomas Friedman in a strange paean to China’s policymaking practices:

In this specific area, the world should learn from one aspect of China’s economic policy approach. If it does, it would do three things differently. First, it would get buy-in from broad segments of society for medium-term policy objectives (in this case, high growth, greater employment creation and financial soundness). Second, it would link the objectives to specific structural reforms that are implemented simultaneously and – equally importantly – owned, closely-followed and coordinated at the highest political level. Thirdly, it would build institutional flexibility that facilitates timely midcourse corrections if needed.

These are mandarinate strategic objectives that are highly unlikely to succeed in or among western democracies short of war or depression. They are not bold and globally coordinated policy recommendations.

PIMCO’s big three continue to shoot blanks on sound economic policy. Congratulations again, Paul (and hang in there, Tony).

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  Clients and/or principals of SCM may own shares of any securities mentioned.

When Smart People Are Distracted

We’ve noticed a peculiar thread at an advisory shop (Cumberland Advisors) with roots in our neck of the woods on the Federal Reserve’s capital ratios and solvency (pdf). I’ve met some of the folks there, and they’re smart people. But this particular area of analysis that they’ve carved out is of…well, highly questionable value. And they’re not the only ones thinking and writing about it.

As a 2003 paper from the Bank of International Settlements (BIS) observed, “the main objective of central banks is not to maximise profits but to accomplish social goals such as low inflation and a stable financial sector.” The author further noted that certain central bank operations would ideally be consolidated into the government’s fiscal accounts.

The BIS paper could have gone even further. For a central bank with the ability to create reserves out of thin air, it’s questionable why it would need any capital at all. The authors at both Cumberland and BIS acknowledge this reality, at least implicitly, but they don’t dare ask the question.

Consider an analogy from gold standard days. Then, mine output taken to mints was the primary source of new money, or said another way, of net additions to the existing stock of financial assets. As long as the mine had additional gold reserves that it could dig out of the ground, it wouldn’t hold on to gold it had already produced as a capital cushion (unless the real price of gold was currently above its nominal parity, but that’s an arbitrage issue and entirely unrelated).

The Federal Reserve is in a similar position, except that it has 100% certainty that it will be able to produce new reserves in the future. So why is there any need at all to look at capital ratios of the Fed, or concern ourselves with its solvency, when insolvency risk does not exist?

The only risk is inflation. If that becomes a problem, then contraction of the Fed’s balance sheet (ignoring offsetting effects of interest-income channels) may be in order. Cutting federal spending and/or raising federal taxes (i.e., a smaller federal budget deficit) might be a more effective approach (though I’ll now be forced to turn in my Robert Mundell fan club membership card, as I’ve essentially traded myself to the James Tobin club by writing such a heretical thing…few will get this, but Go Illineks!).

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  Clients and/or principals of SCM may own shares of any securities mentioned.

The Corner We Now Find Ourselves In

I’ve previously made the argument that, due to Larry Summers’ (alleged) major strategic bungle with Romer’s stimulus proposals, and the leadership errors by President Obama that made it possible, policymakers have now painted themselves (and the rest of us) into a corner. And the ascendance of well-meaning but misinformed Tea Partiers to Congress ensures that things will have to get pretty ugly before we change course.

Australian economist Bill Mitchell made the same case rather forcefully this morning for the global economy (emphasis added), and does a nice job assessing the media memes that are currently in vogue:

The problem now is that the neo-liberal paradigm was not killed off in 2008 and in re-asserting itself (at the wrong time) – we have the worst of all worlds. Growth is slowing because spending growth is inadequate because the conservatives have declared fiscal policy a failure – “see, it had its chance” – and monetary policy “had its chance but cannot move any further” and so – according to the mantra – the only thing that we can do now is swallow the bitter pill.

A problem with this is that the ones who are telling us all this will not be the ones who swallow the bitter pill. The tenured academics and those on sinecures from the likes of Peter G. Peterson who are making the most noise will not lose a bean and will probably swoop on the reduced real estate bargains that will emerge if the economy further contracts.

At this point, it doesn’t matter whether the proponents of an austerity push are deluded but well-intentioned patriots or opportunists with horrific ethical and moral codes. It’s critically important that the U.S. electorate prevents recessionary or depression-inducing measures from being pursued.

If we insist on giving them a try, it will likely change people’s minds in short order, as in 1937-38. But we should start having a conversation now about whether proponents will be exposed to civil liabilities for the damages they end up causing. If they know ahead of time that they will be, they might at least reconsider their (1) macroeconomic foundations and/or (2) personal pecuniary interests. As we told our clients earlier in the month:

…the lack of hiring does not have a damn thing to do with the employers’ or markets’ concerns over the U.S. government ‘getting its fiscal house in order’. That’s a tired, threadbare meme, an utter fantasy, and completely irrelevant to solving the problems at hand. It also ensures that our children and grandchildren will be worse off than they would otherwise be, exactly opposite to the plaintive assertions of deficit-phobes (there’s not enough space here to fully explain this, beyond pointing out that every Treasury security is typically purchased with a dollar that the government has already spent into existence; but the upshot is that there is no federal “debt” for our children and grandchildren to “pay off”; it sounds logical, but operationally, it’s utter nonsense). And yet Robert Rubin, who in my opinion ought to be locked up in the Tower of London or banished to the Antarctic until GDP reaches at least 4%, was repeating this nonsense ad nauseum to Charlie Rose[3] as recently as this Tuesday. It made me wonder why economists aren’t more exposed to professional liability and malpractice claims. Almost every other profession is, and for good reason. If you hold yourself out as knowing what is good for people—in the case of [Rubin] and his peers, for millions and even billions of people—then you ought to be held responsible when your errors, however well-intentioned, cause harm. I suspect that the damages caused by the economics profession would be absolutely staggering if you were to add them all up. 

The cumulative damages will be even worse the longer we go with inaction, or worse, severe austerity via the debt ceiling agreement. And of course, there’s almost no way that policymakers, the economists advising them, or the people and institutions underwriting them are going to be exposed to any liability whatsoever. Quite the contrary—if history is any guide, they’ll all make a damn good living at it. But lest they forget, this kind of stuff is the raw fuel for unrest, riots, and insurrections when it goes unchecked for long enough. To riff on a line from the Tea Party’s spiritual founder, “Washington, are you listening?!?”

There does seem to be an incipient change of tone in D.C. But the Republicans have some significant strategic opportunities in front of them in 2012, and tactically, it makes sense for them to try to put the economy through the ringer in the coming year. Whether the American people can last that long without losing faith in the GOP remains to be seen.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  Clients and/or principals of SCM may own shares of any securities mentioned.

Strong Yuan to Support the Global Economy?

Curious headline from Bloomberg: “Surging Yuan May Signal Boost For Global Recovery”

The yuan’s strongest gain in more than three years may herald a new stimulus for a flagging global recovery as Chinese importers get more firepower to buy up goods from slowing economies in the U.S. and Europe.

On its surface, that sounds intuitive. But it’s followed by this curious note (emphasis added): 

The currency climbed 0.8 percent this week, more than any weekly increase since December 2007, breaking through 6.4 per dollar for the first time in 17 years.

December 2007 is when the last recession started in the U.S.

And when you consider what a strengthening Yen has done for Japan’s struggling economy since the early 1990s, it calls the whole hypothesis into question. It seems more reasonable to infer that China’s export-driven model has run its course vis-a-vis the United States, at least for now. Will they follow in Japan’s footsteps and start building factories abroad? Can they, given that their domestic standard of living still has a fair amount of converging to do?

As economists have pointed out since at least nine decades ago, a higher foreign exchange value is not necessarily a net benefit for a domestic or the global economy.

And in China’s case, it seems more likely to presage intensified currency battles with the U.S. and elsewhere than to buoy the global economy.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  Clients and/or principals of SCM may own shares of any securities mentioned.

Renewed Stress in the Financial Sector

The KBW Bank Sector Index recently experienced volatility not seen since the 2008-2009 crisis.

There was some market intrigue around Bank of America last Monday, one of the largest holdings in the index, which caused it to close down about 15%. But most of the top holdings were down by well over 5% by the end of trading on August 8th.  

The sudden turbulence raises the question: Is this a replay of 2010? Or 2008?

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  Neither the firm, its principals, or its clients own shares of Bank of America or any securities based upon the KBW Bank Sector Index.