Category: News and Views

Yoga with Brad and Larry

In a timely and somewhat interesting paper, economists Brad DeLong and Larry Summers argue that fiscal policy has an important role to play when monetary policy is constrained by the zero bound on interest rates. From the abstract:

“This paper examines logic and evidence bearing on the efficacy of fiscal policy in severely depressed economies. In normal times central banks offset the effects of fiscal policy. This keeps the policy-relevant multiplier near zero. It leaves no space for expansionary fiscal policy as a stabilization policy tool. But when interest rates are constrained by the zero nominal lower bound, discretionary fiscal policy can be highly efficacious as a stabilization policy tool. Indeed, under what we defend as plausible assumptions of temporary expansionary fiscal policies may well reduce long-run debt-financing burdens. These conclusions derive from even modest assumptions about impact multiplier, hysteresis effects, the negative impact of expansionary fiscal policy on real interest rates, and from recognition of the impact of interest rates below growth rates on the evolution of debt-GDP ratios. While our analysis underscores the importance of governments pursuing sustainable long run fiscal policies, it suggests the need for considerable caution regarding the pace of fiscal consolidation in depressed economies where interest rates are constrained by a zero lower bound.”

Of course, it’s too large of a paradigm shift for them to admit, for example, that (1) fiscal and monetary approaches are largely interchangeable insofar as additions to and subtractions from the stock of net financial assets go, or (2) that Clinton-era Rubinomics “succeeded” thanks to ongoing and demographically supported credit expansion in the private sector (and was an utter disaster for U.S. dollar-dependent entities such as Argentina, Mexico, Russia, and Asian Flu countries).

Their paper extends earlier work done by sympathetic economists on fiscal policy in low interest-rate environments. While it offers the right policy prescription, it’s also an effort to preserve and protect some prevailing but defective macro models.

One particular point of interest is that DeLong and Summers cite MMT stalwart Randy Wray on page three, however briefly. Fortunately, fellow MMT economist Bill Mitchell posted a critique of the zero-bound or ‘liquidity trap’ argument just yesterday, concluding:

The reason the mainstream promoted monetary policy to the fore was because they were really advocating smaller government and more free market space. Hence they had to undermine the case for fiscal policy. In doing so, they have created three or more decades of persistent underutilisation of labour resources in most nations; virtually zero growth in per capita incomes in the poorest nations; and set the World up for the current crisis.

By continuing to see quantitative easing as the solution, the more progressive mainstream economists have also caused the current crisis to be extended.

Fiscal policy expansion is always indicated when there is a spending gap. It is a direct policy tool ($s enter the economy immediately) and can be calibrated and targetted with more certain time lags. Liquidity trap or not, fiscal policy is the best counter-stabilisation tool available to any government.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. SCM is not affiliated with or related to Symmetry Partners, LLC. 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. All views and positions are subject to change without notice.

Like Diet & Exercise for Pneumonia

An important post at FT Alphaville from Izabella Kaminski regarding looming capital tightening at European banks this summer (bold passages are Kaminski quoting economist Richard Koo):

As a practical matter, the only way banks can satisfy the new capital requirements if raising capital is difficult is by reducing the denominator in the capital ratio: total assets. If all banks try to do that at the same time, the result will be a destructive credit crunch.

So, no new capital = need to sell-off assets = brand new credit crunch.

Hardly constructive.

And that, Koo says, is exactly what happened when stricter capital rules from the BIS were introduced in 1997 in Japan:

Although Japan’s bubble burst in 1990, it was not until October 1997 that the economy experienced a serious credit contraction. The decision by the Ministry of Finance’s Banking Bureau to unveil the details of new BIS-based capital rules on 1 October that year—a time when most Japanese banks were struggling under the weight of bad debts—triggered a destructive credit crunch. Discussions about the new BIS standards had been ongoing for a number of years, but it was the announcement of the specifics on new rules in October 1997, when the bubble’s collapse had left Japanese banks in an extremely weakened state, that prompted a major credit contraction.

It’s perhaps no coincidence then that the first mention of the [stricter capital rules for European banks] coincided with a marked deterioration of the crisis in the summer of 2011. Also, coincidentally, the moment when Italy became fully ensconced in the quagmire too.

It’s surprising in that context, says Koo, that no-one has yet called for a revision of the rule and/or government-led capital injections into the banking system ahead of the June 2012 deadline to discourage further asset sell-offs.

…not scrapping the [stricter capital rules], says Koo, could be the equivalent of telling a patient with pneumonia to do some exercise and to go on a diet.

While it’s possible that Europe can limp through the twin shoals of tighter capital requirements and the risk of private-sector haircuts on much greater swaths of troubled government debt, both of which will lead to renewed financial crisis and contagion, it seems just as possible that it will threaten to smash itself between the two.

As a result, we decided today to take off clients’ long positions in European equity funds for the time being, booking very small gains in the European Equity Fund (EEA) and the SPDR Euro STOXX 50 ETF (FEZ) since late January. While it may be premature, Europe still looks to us like a classic case of risk  outweighing potential reward.

Investors must also keep in mind that the European Central Bank’s Long-Term Refinancing Operation (LTRO) offered loans to eligible banks for no longer than three years. The LTRO, largely a life-support measure for bank and government balance sheets, will need to be extended, probably more than once, for European financial markets and economies to remain stable.

If the ECB issued sufficient net financial assets, and/or national governments were permitted to run large enough deficits, financial stability and economic growth would both be possible. But the current situation in Europe (as well as the United Kingdom) is eerily reminiscent of the lead-up to the Great Depression, when a nominal gold price target that was probably half of what is should have been—or said another way, a chronic and substantial shortage of net financial assets—forced national economies and their central banks into a game of musical chairs that eventually came unhinged.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. SCM is not affiliated with or related to Symmetry Partners, LLC. 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. All views and positions are subject to change without notice. Both EEA and FEZ positions were liquidated today in the accounts of clients holding them. Neither the firm nor its principals currently own EEA or FEZ.

A Disturbance in the Force

A Jerry-Maguire like shot emanated from Goldman Sachs yesterday. Greg Smith, an executive director and longtime employee of the firm, published a stinging resignation letter in the New York Times:

I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it. To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.

The rest of the letter is heavy on drama, but also passion and emotion—Smith clearly cares about the firm and its direction. We can only assume that during his successful decade-plus stint at Goldman, he has put away a large enough financial cushion (and/or has a big enough book deal in the works!) to absorb both the resulting legal fees and the possibility that he just committed career seppuku.

Far more important to the rest of the galaxy was this eerily similar and closely timed resignation: http://www.thedailymash.co.uk/news/society/why-i-am-leaving-the-empire%252c-by-darth-vader-201203145007/

Neither the firm nor its clients (in accounts that the firm manages) presently hold or intend to hold positions related to Goldman Sachs.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. SCM is not affiliated with or related to Symmetry Partners, LLC. 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. All views and positions are subject to change without notice.

The UK Has Run Out of Money

File under preposterous utterances—UK Chancellor of the Exchequer, George Osborne, believes his government, the monopoly producer of Great British Pounds, which are essentially created out of thin air, has somehow managed to run out of them (hat tip to Warren Mosler). According to UK newspaper The Telegraph (emphasis added, bold):

The Government ‘has run out of money’ and cannot afford debt-fuelled tax cuts or extra spending, George Osborne has admitted.

In a stark warning ahead of next month’s Budget, the Chancellor said there was little the Coalition could do to stimulate the economy.

Mr Osborne made it clear that due to the parlous state of the public finances the best hope for economic growth was to encourage businesses to flourish and hire more workers.

“The British Government has run out of money because all the money was spent in the good years,” the Chancellor said. “The money and the investment and the jobs need to come from the private sector.”

This statement is so astoundingly wrong that a well-informed and daring-enough media outlet should be able to quickly rip it to shreds, along with Osborne’s credibility. Unfortunately, most of the media is just as ill-informed on the subject as he is, as evidenced by the use of ”admitted” in the quote above, as well as the following poll question which excluded any choice that reflects the actual realities of Britain’s fiscal and monetary operations (e.g., ”The UK government cannot run out of the money that is is the monopoly and near-zero cost supplier of”).

What should George Osborne do to provide a tax cut?

Tax the rich more to allow the income tax rate to be lifted to £10,000

Borrow more and worry about reducing national debt in future years

We can’t afford any tax cuts 

Meanwhile, the latest economic data out of the UK have been welcomed with subtitles like:

“Least downbeat outlook since April 2010″ for household finances, even though the Index has remained stuck between the low 30’s and low 40’s since the global recession ended (a positive outlook has a value of more than 50).

Business Expectations Index recorded single biggest monthly rise in survey history,” while the level remains rangebound about 10% below its level of the prior decade.

Meanwhile, the UK labor market continues to look stagnant despite a slight improvement in January, remaining at the lower end of a decline that began around the same time as the passage of concerted austerity measures (fortunately, at least one UK media outlet has been able to discern that connection).

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. SCM is not affiliated with or related to Symmetry Partners, LLC. 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. All views and positions are subject to change without notice.

Huebscher: Misreading Reinhart & Rogoff

Bravo, Bob Huebscher of AdvisorPerspectives.com!

Bob has provided a sober and sorely-needed critique of the popular misapplication of economists Carmen Reinhart and Kenneth Rogoff’s (R&R) recent empirical studies on government debt.  

If the rallying cry for deficit reduction rests on an intellectual framework, it would be the work of Carmen Reinhart and Ken Rogoff, whose book, This Time is Different, has been hailed for its exhaustive historical study of financial crises.  A key finding of those scholars – that economic growth slows once the ratio of debt-to-GDP exceeds 90% – has been widely cited by those calling for decreased government spending. 

But those calling for deficit reduction have largely ignored a number of caveats that Reinhart and Rogoff gave with respect to their 90% threshold, and as a result many warn that the US faces the imminent danger of a Greek-like sovereign-debt crisis.

He also makes the critical point that people should not infer causation—i.e., high government debt leads to slower economic growth—from R&R’s work. In fact, the association between high government-debt levels and slow GDP growth could run the other way, or they could both be driven by other variables that R&R didn’t look at. (As we’ve pointed out many times, the role of population age structure has been largely overlooked in macroeconomic analysis.)

These kinds of critiques of R&R and popular interpretations of their work are long overdue, but still very relevant. (Martin Wolf took a nice stab at it, registration required, in September 2011.) We would add a few additional criticisms:

  • R&R did not distinguish between sovereign (debt issued in domestic, inconvertible currency) and non-sovereign (debt issued in, or pegged to, external or other forms of hard currency) governments.
  • Prevailing macroeconomic models still do not account explicitly for the fact that under a soft currency system, government deficit spending and debt constitute private sector saving and net financial assets.
  • Finally, although Bob obtained much of his ammunition from an interview with Rogoff, R&R haven’t been completely innocent of letting the “90%” and similarly bad memes spin out of control.

You can read our prior R&R critiques and related posts here:

http://symmetrycapital.net/index.php/blog/2011/09/a-cechetti-craptacular/

http://symmetrycapital.net/index.php/blog/2011/08/sp-called-on-the-carpet/

http://symmetrycapital.net/index.php/blog/2011/01/what-pimcos-angle/

http://symmetrycapital.net/index.php/blog/2011/08/el-erian-policy-dithering-will-fuel-crisis/

http://symmetrycapital.net/index.php/blog/2011/06/help-help-im-being-repressed/

http://symmetrycapital.net/index.php/blog/2010/07/when-smart-people-are-wrong/

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. All views and positions are subject to change without notice.

EU Agreement: Bad for Germany, Bad for the World

Summary version—full article available at Seeking Alpha: http://seekingalpha.com/article/312904-eurozone-agreement-bad-for-germany-bad-for-the-world

At this week’s European Union summit, the 17 nations of the euro currency bloc, along with a few hopeful entrants, agreed to Germany’s condition of tighter, integrated fiscal oversight of national budgets.

The problem with the planned arrangement is that, like all previous attempts to resolve the eurozone’s government debt crisis (sovereign debt is is a misnomer for eurozone), it is doomed to fail.

The German government has become a riskier credit as a result of this week’s agreements. And that indicates that while Germany got what it wanted, what Germany wants is wrong for Germany, wrong for Europe, and wrong for the world.

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. All views and positions are subject to change without notice.

Treasury Debt Ceiling Looming Large

According to the Treasury’s daily statement for the last day of November, total public debt subject to the Congressional debt limit of $15.194 trillion is now $15.067 trillion—only $127 billion (less than 1%) away. At the current monthly run rate of around $90 billion, the ceiling is likely to be reached early in 2012.

The debt agreement from August of this year empowers President Obama to raise the limit by another $1.2 trillion. However, that only buys about an additional 13 months, depending upon how economic and financial variables shake out in the quarters ahead, and the sequestration feature of the law is designed to offset every dollar of that increase beginning in 2013.

In other words, unless federal politicians can do some slick backstepping in the next 13 months—which the prospect of an election year makes all the more challenging, I think—then the enlarged federal deficits that have made our economy the envy of the austerity-smitten world of late will rapidly contract, with severe financial and economic consequences to follow, including even higher debt-to-GDP levels (unless, of course, the private sector makes an unexpectedly swift return to health and takes the credit baton in hand once again—an outcome we don’t advise holding one’s breath for).

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. All views and positions are subject to change without notice.

Is There A “Face Ripper” Equity Rally Brewing?

Cullen Roche, picking up on a thread recently spun by Warren Mosler, observes that Europe appears to be moving toward a more functional union. Germany’s approach is very conservative on its face, demanding more centralized control over member nations’ budgets and fiscal affairs. However, this may well be the concession it demands for agreeing to a more complete monetary role for the ECB (under soft currency regimes, the distinctions between monetary and fiscal policy tend to become irrelevant, and bifurcating them can create problems as the EMU is learning).

From Cullen:

Reuters and the WSJ are reporting similar rumors about further integration (see here and here).   The timeline here is for the December 9th summit so it wouldn’t be shocking to see a face ripper rally in equities in the coming weeks leading up to that meeting.  There are A LOT of investors caught flat footed right now betting on the end of the world scenario.

He may be on to something, judging by stock market futures and the Sunday performance of bourses like Tel Aviv. European market futures are moderately positive (tellingly, U.K. stock market futures are in the red, and it’s worrisome that Hong Kong is too), while the Tel Aviv market indices are up by more than a percent.

As far as a fiscally and monetarily integrated Europe goes, there’s still plenty of distance between here and there. But assuming the EMU and EU can make substantial progress on the necessary measures, what might the implications be beyond a short-term risk rally?

  1. It would lower the risk of a systemic financial crisis dramatically (as long as the ECB is empowered to backstop government credits).
  2. If austerity remains the primary fiscal objective within the EMU, it will not take a recession off the table.
  3. The impact on China, which is the other current wildcard in the global economy, is likely to be marginal (though positive).

So while we agree with Cullen and Mosler that Europe appears to be groping its way toward a more perfect monetary union, and that notable progress in that regard would probably ignite a rally in risk assets, it will not undo some of the other bearish developments we see in the global economy.

From an investment standpoint, there will still be room for some negative betting. But perhaps the most obvious implication is that if an EMU bazooka is indeed in the works, it would be time to go bottom-fishing in European equities. 2008 suddenly turns into 2009?

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. All views and positions are subject to change without notice.

Randy Wray: A World Of Imbalances

Just happened across an amazing essay by economist Randy Wray on global imbalances—no, not more of the ‘twin deficit’ silliness that most macroeconomists like to torture people with, but rather some really timeless stuff. Insights for nothing, wisdom for free—the only cost is your time and effort: http://www.economonitor.com/lrwray/2011/11/02/imbalances-what-imbalances-a-dissenting-view/

Balance is nice; it’s intuitively appealing. In truth, it was not invented by physics. All cultures view it as natural. It is the universal condition—both in nature and in human society. It reflects an inner yearning for fairness…

There is a right way to do things. Failure to follow tradition upsets the balance. Who knows what wrath imbalance might invoke among the gods.

Gabriel, the Angel of records, keeps God’s ledger book—to be produced in the Last Judgment. Too much imbalance in your life and you go to hell.

And, as we know, Lucifer records the debts—of the souls he will collect. He’ll sell you a good time now, but your soul lies in the balance. You buy now, you pay forever. Sort of like Student Loans in America…

Time, Measurement. Balance. Everything you need for money and accounting…

So from time immemorial debts would be periodically canceled—the Year of Jubilee. With every change of ruler…or every 7 years or 30 years depending on sinfulness, all debts were canceled.

Babylonia chose 30 as the likely reign of a ruler; the Bible chose 7—the lucky number, a 7 year ever-normal granary would get you through a drought. Debt cancellation.

Why? These were no bleeding heart liberals. No, debt cancellation was to restore balance. If all your subjects are in hock to creditors, you cannot rule them…

Now why do we need periodic debt cancellation? The Sotty principle. Compound interest trumps compound growth…

It was our first imbalance—our first violation of natural law.

It would inevitably lead to concentration of wealth—like the game of Monopoly, the last player standing would take all. So from Babylonia to Rome, balance was restored by canceling debts.

Time was circular: time and accounts would reset at zero when the slate was wiped clean.

Time and debt are inherently related. Time compounds the debts at the rate of interest. In Heaven there are no debts and no time; in Hell all debts are compounded forever.

Redemption allows time and debt to start over from balance. But with Roman Law we abolished circular time.

Henceforth it moved in one direction only—from a largely known past to what Paul Davidson would call a fundamentally uncertain future. No more debt cancellations. Just debtor’s prisons—where the debtor would be held until family could redeem him. Later we used prisons and execution simply for retribution—an eye for an eye, a life for a life, so that the scales would balance.

But debtor’s prisons destroyed the balance between creditors and sovereign—just as debt bondage had several thousand years earlier. With the family head in prison, it was impossible to repay. Again, bankruptcy was invented not out of compassion but to restore the balance between the rights of rulers and of creditors.

Yet bankruptcy only allowed a partial reset. It was a poor substitute for Jubilee and Hallelujah. And the Creditors ran the show. They liked inequality; they liked imbalance.

As Kenneth Boulding used to say, surveys of the rich consistently show that you cannot imagine how incredibly greedy they are, and how monumentally stupid they are, too. They will gleefully roast the goose that lays the golden egg.

If you do not believe that, you have not been watching Wall Street over the past decade. Or what Germany is doing to Greece and Ireland. When creditors have too much power, they destroy the balance.

There’s a lot more, including how this all ties in to the intersectoral balances approach to economic policy. Highly recommended!

That Cat Looks Dead After All

There was plenty of debate at the beginning of this month over October’s outrageous stock market rally, and whether it marked the reinvigoration of the cyclical bull market of 2009-2011 or was, in classical Wall Street parlance, merely a “dead cat bounce” following the August-September debacle in risk assets.

After shaking off the whiplash from watching stock markets post steep monthly losses followed by a double digit monthly gain, we came down on the side of the dead cat. Although the U.S. economy has shown some pleasantly surprising strength of late, credit markets have clearly been signalling that:

  1. Europe is in serious trouble and poses severe risks to both the global financial system and the world economy.
  2. China may be in serious trouble, which poses risks to its trading partners (especially net exporters to China), industrial commodity prices, and the world economy.
  3. Longer-term expectations for the U.S. (its economy and stock markets) have gotten well ahead of themselves.

We’re now half way through the month of November, and from most appearances, it’s looking as though October’s spectacular arc may indeed have been traced out by a lifeless feline, as shown in the following chart of the Dow Jones World Stock Index:

Though history only rhymes, the pattern is somewhat reminiscent of 2008 to 2009’s ‘cat falling down the stairs’ pattern in the S&P500:

It’s not my intention to tell scary campfire stories, and an intensifying bear market in risk assets is far from assured. However, with the current policy and macroeconomic backdrop, the risk-reward tradeoff in risky assets lo0ks rather thin to us, and credit markets and other indicators continue to signal that risky assets could be available at even steeper discounts in the months or quarters ahead.

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 nor its principals nor its clients hold positions in any securities mentioned herein. All views and positions are subject to change without notice.