- The US Federal Reserve’s Policy of printing
money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy. - Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive, said Beijing was dismayed by the Fed’s recourse to "credit easing". "We hope there will be a change in monetary policy as soon as they have positive growth again," he said.
- "If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.
- "Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added. The comments suggest that China has become the driving force in the gold market and can be counted on to
buy whenever there is a price…
Roach: The west went on a “drunken binge of excess consumption”
by ilene - September 16th, 2009 12:18 pm
Roach: The west went on a “drunken binge of excess consumption”
Courtesy of Edward Harrison at Credit Writedowns
Stephen Roach doesn’t mince words. He calls monetary policy during the bubble years “reckless and irresponsible” and he thinks politics is thwarting any meaningful regulatory reform, a view I also hold. I think the point of Roach’s attack is that a lot of finger-pointing has been directed at Wall Street and even Main Street. But, policy makers share much of the blame. This is a point I tried to make in a post “Forget about Goldman” from this past summer.
Moreover, as Roach indicates, the concept that a central planner (which a central bank most certainly is) can allow bubbles to form and then clean up after the mess- is on it’s face absurd. But, clearly the Federal Reserve and other central banks are doing their level best to re-create the conditions which led to a near-financial collapse.
The money quote comes just about 4:45 through the eleven minute clip below:
Central bankers say trust us. We know what we’re doing. I don’t trust them one bit. They got us into this mess in the first place.
As for Asia, Roach sees a bright future. However, he warns that it has risen on the back of an unsustainable export-led macro-policy by selling things to people in the West who can’t afford them. With continued private-sector deleveraging in the west likely, this dynamic has ended.
(video embedded below)
As an aside, Roach also correctly adds that the recent protectionist tariff administered by President Obama was not the result of tire manufacturers’ lobbying. Four of five of the Chinese importers are subsidiaries of U.S. firms. Obama did this to gain credibility and support from unions, a key Democratic constituency in the health care debate and in the run-up to the mid-term elections.
I should also point out that much of the U.S. trade deficit comes from such arrangements, where a U.S. company imports goods from its own foreign subsidiary.
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10 Bubbles In The Making
by ilene - September 10th, 2009 12:43 pm
10 Bubbles In The Making
One year after America’s brush with economic catastrophe, there’s plenty of looking back at the bubbles that caused financial chaos.
But what’s next?
There are surely dangerous economic bubbles forming as we speak. As Alan Greenspan warned this week, "They [financial crises] are all different, but they have one fundamental source," he said. "That is the unquenchable capability of human beings when confronted with long periods of prosperity to presume that it will continue."
The trick, of course, is spotting them. By definition, most people don’t spot a bubble before they form and burst.
Here’s 10 for which you should be on alert →
And if history repeats, bubbles tend to share a common fate:
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UK Telegraph: China Alarmed by US Money Printing
by ilene - September 7th, 2009 5:27 pm
UK Telegraph: China Alarmed by US Money Printing
Posted by TraderMark at Fund My Mutual Fund
Considering the source - this is a quite sobering warning to America of what the Chinese are thinking. Nothing surprising as we have seen China up their stake in gold, sign bilateral currency agreements with other countries to avoid the dollar, purchasing hard assets to redeploy out of dollars, move their bond purchases to near term maturities and the like, but you can see in their words both a dismay at what we have done, and what they are slowly planning for in the long term. [Feb 13, 2009: FT.com - China to US: "We Hate You Guys"] [May 21, 2009: China Becoming More Picky About Debt]
Of course, as we have said many times - for now they are stuck with us, because any move to detach from the States or our bond market would destabilize both countries.
Also interesting to note the comments about bubbles in real estate [Aug 13, 2009: WSJ - In China, Land Prices Fan Bubble Fears] and stock market in China. [Jun 29, 2009: China Business News - $170B of Bank Loans Funneled into Stock Market] And unlike CNBC bulls, he reiterates all the world cannot rely on China to save them.
Via UK Telegraph
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The Elements of Deflation
by ilene - September 5th, 2009 12:20 pm
The Elements of Deflation
Courtesy of John Mauldin at Thoughts From The Frontline
The Elements of Deflation
The Failure of Economics
The Super Trend Puzzle
Final Demand and Income
Unemployment Was NOT a Green Shoot
As every school child knows, water is formed by the two elements of hydrogen and oxygen in a very simple formula we all know as H2O. Today we start a series that starts with the question, What are the elements that comprise deflation? Far from being simple, the "equation" for deflation is as complex as that of DNA. And sadly, while the genome project has helped us with great insights into how DNA works, economic analysis is still back in the 1950s when it comes to decoding deflation. Notwithstanding the paucity of understanding we can glean from the dismal science, in this week’s letter we will start thinking about the most fundamentally important question of the day: is inflation, or deflation, in our future?
But quickly, I want to thank the many people who wrote very kind words about last week’s letter. Many thought it was one of the better letters I have done in a long time. If you did not read it, you can read it here. And of course, you can go there and sign up to get this letter sent to you each week for free. Why not become of my 1 million (plus and growing) closest friends?
The Failure of Economics
Among the economists and writers I regularly read, there are some who, if they agree with me, I go back and check my assumptions - I must have been wrong. Paul Krugman is one of those thinkers. I admit to his brilliance, but his left-leaning philosophy does not particularly square with mine, and I find that most of the time I disagree.
That being said, I strongly encourage you to read his essay in the New York Times Magazine, which comes out this weekend. It is worth the high price of the Times to read it, if you can’t get it online. It is a very hard critique and analysis of the failure of current macro and financial economic thought, which didn’t even come close to predicting the current financial malaise. Indeed, as he points out, most schools of thought said the state we are in could not happen. You can read at the essay if you are a member, or register for free if…
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It’s not yet the end of China’s massive stimulus
by ilene - August 31st, 2009 7:41 pm
It’s not yet the end of China’s massive stimulus
Courtesy of Michael Pettis at China Financial Markets
According to a recent article on Reuters, on Saturday Lou Jiwei, the chairman of the CIC, China’s sovereign wealth fund, said at a conference on Saturday in response to a question about his expected performance: “It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose.”
In my last entry I noted that after the recent “green shoots” period, during time which it seemed hard to find anyone who was skeptical of our seeming ability to turn the corner on the crisis without actually having addressed any of the underlying imbalances, it was good to see that more and more analysts, and especially policymakers, had begun to worry again. President Hoover went down in a blaze with his “light at the end of the tunnel”, and of course one of my favorite stories of that time is his response in June 1930 to a delegation requesting a public works program to help speed the recovery: “Gentleman, you have come sixty days too late. The depression is over.”
As I see it the more policymakers worry, the better. This crisis is far from over. Until we know how the continued adjustment in US household consumption and debt will evolve, and how this adjustment will play out in China’s own changing consumption rate – most importantly whether it will complement the fiscal and credit expansion embarked upon by Beijing or, as I believe, conflict enormously with it – the crisis won’t be over. We need policymakers to resist the green-shoots nonsense and to worry about what happens when fiscal, monetary and credit tools stop working.
Although I thoroughly disagree with the “So we can’t lose” part of Mr. Lou’s statement – I have been a trader for too long to hear those words with anything but the deepest dread, and I am sure he didn’t intend the way it read – it is nonetheless interesting to me that by now skepticism is so widespread that a major investor can even propose our inability to work through the imbalances as a reasonable investment strategy.
We need skepticism. For one thing it has caused Beijing increasing worry about the risks of continuing to extend the stimulus package, to the point where they are now making…
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Stephen Roach: The case against Bernanke
by ilene - August 26th, 2009 10:38 am
Stephen Roach: The case against Bernanke
Courtesy of Edward Harrison at Credit Writedowns
While most economists have come out in favor of Barack Obama’s decision to re-appoint Ben Bernanke as Chairman of the Federal Reserve Board, Stephen Roach has penned an Op-Ed in today’s Financial Times which highlights the case against Bernanke. It is must reading.
Roach has three main points.
- Before the Lehman bankruptcy, Bernanke was an adherent of the Greenspan-professed doctrine to “clean up after bubbles.” This is what others have called “The Greenspan Put,” otherwise known as an asymmetric monetary policy response – what I would term “lax during the bubble, and loose after it.” Clearly, this doctrine was responsible for much of the carnage.
- Bernanke was also a proponent of the “Asian Savings Glut” theory which puts much of the blame for global imbalances at Asia’s doorstep and exonerates over-consumption by American citizens for a credit crisis which began in America. I have called this the Blame Asia meme. While there may be excess savings, it is disingenuous to blame Asia for problems created in the United States.
- Bernanke, like Greenspan, is an ultra-free market Libertarian who believes markets always are better informed than regulators. This takes libertarian views to an extreme which I have dubbed “Deregulation as Crony Capitalism.” I see a more nuanced belief in free markets as more appropriate.
But Roach goes on to opine that Obama, with his early decision to re-appoint Bernanke, is signalling he believes the credit crisis has ended, a calculation that Roach believes may be hasty.
Notwithstanding these mistakes, Mr Obama may be premature in giving Mr Bernanke credit for the great cure. No one knows for certain as to whether the Fed’s strategy will ultimately be successful. The worst of the US recession appears to have been arrested for now – a fairly typical, but temporary, outgrowth of the time-honored inventory cycle. But the sustainability of any post-bubble recovery is always dubious. Just ask Japan 20 years after the bursting of its bubbles.
While financial markets are giddy with hopes of economic revival – in part inspired by Mr Bernanke’s cheerleading at the Fed’s annual Jackson Hole gathering – there is still good reason to believe that the US recovery will be anaemic and fragile. US consumers are in the early stages of a multi-year retrenchment as they cut debt and rebuild retirement saving. The unusual breadth and synchronicity of the global recession will restrain US export demand from becoming…
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Fed’s Proposed Framework for Addressing “Systemic Risk” Misses the Moving Target
by ilene - August 11th, 2009 4:06 pm
Fed’s Proposed Framework for Addressing "Systemic Risk" Misses the Moving Target
Courtesy of Mish
The Federal Reserve Bank of Cleveland is proposing a three-tiered system for regulating systemically important financial institutions (SIFI)
- Tier one would include high-risk institutions, such as large, interstate banks and multi-state insurance companies.
- Tier two would include moderately complex financial institutions, such as larger regional banks.
- Tier three would include non-complex financial institutions, such as community banks.
Each would receive varying degrees of oversight and regulation. In the accompanying video, the author claims: "Really bad drawings…real simple explanations".
Drawing Board : How To Address SIFI
SIFI Framework
- Size: As a starting point for a size-based definition, a financial firm would be considered systemically important if it accounts for at least 10 percent of the activities or assets of a principal financial sector or financial market or 5 percent of total financial market activities or assets.
- Contagion: A financial institution would be considered systemically important if its failure could result in the collapse or freezing up of one or more important financial markets.
- Correlation: Correlation, as a source of systemic importance, is also known as the “too many to fail” problem.
- Concentration: Concentration has two important aspects: the size of the firm’s activities relative to the contestability of the market. That is, concentration is less likely to make a financial institution systemically important if, other things being equal, the activities of a distressed institution can easily be assumed by a new entrant into the market or by the expansion of an incumbent firm’s activities. Hence, it is logical to adjust concentration thresholds to account for contestability.
- Conditions/Context: [Pertains to the fragility of the markets at the time, for example ...] New York Fed’s reluctance to allow the failure of Long-Term Capital Management resulted largely from the fragility of financial markets at that time—due to the Southeast Asian currency crises and the Russian default.10 This might explain, in part, why LTCM was treated as systemically important and Amaranth (which was more than twice as big) was not. Another example would be intervention to prevent the bankruptcy of Bear Stearns by merging it (with assistance) into JPMorgan Chase in early 2008, whereas Drexel Burnham Lambert was allowed to enter bankruptcy in early 1990. Firms that might be made systemically important by conditions/context are probably the most difficult to identify in advance.
Preventing The Last Crisis
The video is cute and will likely be well received. However, I ask: To what extent is all of this…
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10 Pins for the Stock Market Bubble
by ilene - August 10th, 2009 5:38 pm
10 Pins for the Stock Market Bubble
Courtesy of Charles Hugh Smith, Of Two Minds
The "Recession is over" stock market rally is just another bubble awaiting a sharp pin. Here are ten such sharp little pins.
I really hate to pop anyone’s bubble, but–oh, why try to hide it, I love popping bubbles, especially stock market, credit and housing bubbles. According to the standard-issue financial pundits (SIFPs), the stock market is not only in a new Bull Market but it’s heading higher this month–S&P 500 is shooting to 1,200, guaranteed.
Before you join the euphoria, please consider these 10 sharp bubble-popping pins:
1. Structural unemployment is skyrocketing. Job Losses Moderate:
But structural unemployment worsened. The number of people who’ve been out of work longer than six months soared by a record 584,000 to 5 million, accounting for more than a third of all unemployment for the first time on record.
"Structural" is a polite way of saying there won’t be any jobs for the long-term unemployed this year, next year, or the year after that.
2. The jobless rate declined because the work force shrank. This is typical smoke-and-mirrors statistics, courtesy of your Federal government: as people lose extended unemployment benefits, they are classified as "discouraged" and are no longer counted in the "headline" unemployment number.
Unemployment fell by 267,000 to 14.5 million, while employment fell by 155,000. The labor force declined by 422,000, which means the jobless rate declined because people dropped out of the work force, not because they got jobs. The employment-participation rate fell from 65.7% to 65.5%.
3. Everyone seems to have forgotten we need to create 250,000 jobs a month just to stay even with population growth. So while "only" 250,000 jobs were lost last month–never mind a big chunk of employment was linked to the "cash for clunkers" giveaway–that means we’re still 500,000 jobs short of a return to a rising employment scenario.
4. The interest on all the debt the nation is taking on to bail out bankers and "stimulate" the dead credit-bubble model will place a drag on growth far into the future. At the end of March of 2009, Bloomberg reported that, "The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year." This amount "works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion…
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The Fed’s Low Interest Rates are Hurting Us
by ilene - July 24th, 2009 11:25 am
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The Fed’s Low Interest Rates are Hurting Us
Courtesy of Tom Burger at Applying the Lessons of Free Market Economics
I would have thought that two back to back boom/bust cycles would have our Federal Reserve governors rethinking their dogma, but that does not seem to be the case. A federal funds rate of 1% created the housing bubble which is still rendering our banking system insolvent, throwing large numbers of people onto the unemployment rolls, and generally producing the most significant economic recession since the Great Depression.
So what is the Fed’s prescription for our current ailments? Well, with this recession much more serious than the 2002 experience, the Fed has now dropped the federal funds rate to a record low of between 0% and .25%. Will these low interest rates help the economy recover from this deep recession? Will they cure our current difficulties and generate healthy new growth?
Based on my reading of economic principles, the answer is no. In fact, I believe our Federal Reserve is setting us up for more economic heartburn. Consider this quote from Marc Faber, an exceptionally astute, international economic commentator:
"This is where I have the greatest problem with US economic policy makers. I don’t think they have ever recognised that the excessive, credit-driven expansion of the US economy was unsustainable in the long run and that, sooner or later, the current crisis was inevitable. But not only that! … US economic policy makers are attempting to restore economic growth through essentially the same policies; … In fact, I would argue that the large fiscal deficits and easy monetary policies will make sustainable, healthy economic growth next to impossible."
Marc Faber, The Gloom, Boom & Doom Report, July 9, 2009
In Are Low Interest Rates Beneficial, I explained why a naturally falling interest rate is indicative of a healthy, progressing economy. Let’s now explore the nature of an artificially depressed interest rate, and why it harms us.
To Reduce Interest Rates, a Central Bank Floods the Economy with New Money
A central bank cannot just declare a lower interest rate. If our Fed, for example, could just forcibly reduce interest rates on loans to below market levels, we would find more people wanting to borrow and fewer people wanting to make loans — we would have a credit shortage. This is an inexorable economic law that not even the…
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Breaking news: Regulators are (re)discovering that maybe speculation CAN be excessive
by ilene - July 7th, 2009 7:27 pm
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Breaking news: Regulators are (re)discovering that maybe speculation CAN be excessive
Courtesy of TIME, by Justin Fox writing at the Curious Capitalist Blog
The announcement this morning (pdf!) by Commodity Futures Trading Commission chairman Gary Gensler that his agency is considering imposing limits on the size of trades by energy futures speculators may amount to something of a landmark (or turning point, or whatever portentous phrase you prefer) in Washington’s relationship to financial markets.
Gensler justified the move as part of the CFTC’s duty "to eliminate, diminish or prevent the undue burdens on interstate commerce that may result from excessive speculation." This is a big deal because, for the past 40 years, financial regulators have increasingly gravitated toward the position that speculation can never be excessive. As an official in the Clinton Treasury Department in the late 1990s, in fact, Gensler helped fight off efforts by then-CFTC chairman Brooksley Born to rein in what she felt was excessive speculation in over-the-counter derivatives markets. Yet now here he is proposing new rules to rein in oil and natural gas speculators.
The roots of the benign attitude toward speculation that prevailed in recent decades can be found (among other places I’m sure, but those places aren’t on my bookshelf) in a famous 1953 paper by Milton Friedman on "The Case for Flexible Exchange Rates" (which in turn can be found in his book Essays in Positive Economics). The basic thrust of the paper—that anything but a permanently fixed exchange rate or a free-floating one is inherently destabilizing—still holds up reasonably well. But I’m not so sure about this passage on speculation:
People who argue that speculation is generally destabilizing seldom realize that this is largely equivalent to saying that speculators lose money, since speculation can be destabilizing in general only if speculators on the average sell when the currency is low in price and buy when it is high.
Maybe it’s the "in general" that’s the problem here. On average and over time, the argument may be right. But there are surely extended periods during which price bubbles persist—as in the oil futures market last year—and speculators make lots of money by betting on further price increases, thus destabilizing markets. So Gensler is proposing rules that would limit just how much speculators can bet energy price movements, to rein in those wild price movements.
This is of a piece with…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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