Posts Tagged ‘Credibility’
Thursday, April 26th, 2012
by Jeff Miller, Dash of Insight
If you are reaching an important investment decision, I have a suggestion for you:
Insist on data — accept nothing less!
Investors should monitor diverse sources of investment information to avoid confirmation bias. If you want to succeed, you still need to engage in critical thinking. Some are in complete denial about progress. There is a simple solution if you do not like the reality of strong corporate earnings:
Talk about “normalized earnings.”
This has a wonderful scientific feel to it, lending an air of credibility to those who have not studied the subject. After all, don’t we want our estimates to be “normal?”
If the current strong earnings reports do not fit your forecast, you can just say that you want to “normalize” earnings without offering any clue about your method or how it has worked in the past.
When the recession hit, there were many observers who felt that even the finest companies would be crushed by the economic collapse. They expected that revenues would fall, expenses would increase, and profit margins would collapse.
Some of us thought that the best companies — not all — would learn to get “lean and mean” and would increase earnings rapidly during the rebound. We were right, and we have profited from this investment.
The increased earnings had a downside, since it often came at the expense of workforce reductions, with remaining workers asked to do more.
During the recovery period, the companies with enhanced productivity have blossomed — better earnings and better cash flows. There is a clear lesson:
Profit margins went higher as pricing power and employment went lower.
I disagree with some observers (sometimes accused of being perma-bulls) who think that profit margins have achieved a permanently higher level. My own conclusions are more nuanced. I fully expect profit margins to decline, and I am interested in two questions:
- How far?
We should all be open-minded about the eventual profit margin level, which is a function of (primarily) new competitive entrants. When it comes to a topic like — for example — unemployment — the bearish pundits are eager to embrace the idea that there have been structural changes. OK — and what about the many companies that are protecting their profit margins?
More importantly, I agree with the general concept that profit margins will decline. At the same time this “mean reversion” occurs I expect all of the things we associate with a strong recovery: Better employment, better pricing power, and more aggressive competition from new companies.
There is nothing surprising about any of this, since it reflects a typical business cycle.
Time to call “FOUL!”
There is a group that I’ll call Pundits in Denial. They engage in static analysis, expecting profit margins to decline while nothing else changes. As a result of this misguided analysis they help to scare the daylights out of the average investor by stating that if earnings were “normalized” —what a wonderful word!! — then the market is massively overvalued.
How to Normalize
When I am analyzing a stock with cyclical properties, I definitely consider the earnings at peaks and troughs of the business cycle. This is one of the key elements of my edge, so most people have no idea about how to do this. If you are at a business cycle trough, you must be willing to buy cyclical stocks at a high P/E multiple — and vice versa.
To do this correctly you need to have a good theory of the business cycle and where we are right now.
You cannot just take a meat cleaver to earnings, saying that you reject the data because of profit margins.
If you want to gain an investment edge you have to find something that most people are doing wrong. Investing in cyclical stocks combines common errors on profit margins, economic strength, and where we are in the business cycle.
I have a current emphasis on this theme, but today presents an outstanding candidate in Caterpillar (CAT). I had several stocks in mind for this article, but CAT is the most timely. I am choosing it as the worst-performing (and therefore the best opportunity) of stock fitting this theme, since the stock sold off today despite a good report. Here is the long-term earnings picture (from the excellent fastgraphs source) before today’s report:
Any investor who looks at this chart for a minute or so will be far ahead of most of the people they see in TV! You can see for yourself the worst case of earnings during recessions, the general growth rate, the ability of the company to deal with recessions, and the current potential.
Nothing in today’s report upset this story, so you get a chance to buy a terrific stock at a discount.
Once again, I abbreviated this story to cite the stock with the best current opportunity. Another candidate to feature in this story was Apple, but that would have been a layup! I hope readers understand that there are many, many stocks like this.
To repeat the main point — “normalizing” profits is not as obvious as it first seems…..
More to come.
Copyright © Dash of Insight
Tags: Bulls, Clue, Conclusions, Confirmation Bias, Corporate Earnings, Credibility, Critical Thinking, Denial, Downside, Earnings Reports, Economic Collapse, Investment Decision, Jeff Miller, Observers, Profit Margins, Rebound, Recession, Recovery Period, Simple Solution, Workforce Reductions
Posted in Markets | Comments Off
Thursday, October 20th, 2011
From Peter Tchir of TF Market Advisors
Prudence versus Reckless Abandon
As much as the current round of negotiations are being framed as “France vs Germany” there is more to the story than that. The battle is forming up along the lines of those who are trying to show some restraint and prudence and are willing to deal with the consequences of that decision against those who want to do everything possible, giving the highest chance of “success” with absolutely no downside protection.
The prudent camp seems to realize that all these new plans do is shift the power to the debtor nations as the good countries are taking on obligations that could bring them down. They realize lenders who made bad decisions in regards to Greece need to pay the price. Not only so that Greece can achieve sustainable debt levels, but to reduce the moral hazard that the banks believe they will always be protected for every bad decision. The prudent camp seems to realize that no matter what they do in terms of EFSF or other plans, there is a risk it fails to stop defaults, because it doesn’t address the problems, and they want some ammunition in reserve for this. So far Germany and Finland have come out in support of the prudent camp.
The ECB continues to do some reckless things (more secondary market purchases to no apparent affect with no obvious direct benefit to the country whose debt is being bought), but does seem to realize that providing massive leverage to EFSF is not a good idea. It is either with recourse and margin which risks collapsing the EFSF, or it is non-recourse which risks the ECB. Again, if the plan was 100% certain to work, the ECB wouldn’t worry, but they at least seem to be getting scared of the large numbers and are aware of the downsides of the plan, and seem to be lining up in the prudent camp and saying that enough is enough and we need some credibility and resources if this doesn’t work.
Portugal, Ireland, and Greece, with a combined €54 billion of EFSF guarantees, are unlikely to participate (they are “stepping out” countries) but in any case have lost any voice in the debates. They can default if they want, that is in their control, but they cannot shape the EFSF or any further part of the rescue plan.
Slovakia, Luxembourg, Slovenia, Cyprus, Estonia, and Malta, will contribute a whopping €18 billion of EFSF guarantees. In the end, they are irrelevant. Although there is still some pretense about this being a Eurozone decision, what these countries want is meaningless. A deal will power ahead with or without them. The most likely scenario is that the EFSF will provide them funding equal to or greater than their own guarantees to ensure that on the surface the EFSF has full support, but the reality will be the countries are neutralized on their commitments so it would be all for show. Of these countries, only Luxembourg, with €2 billion is AAA rated.
Italy and Spain are “interesting” to say the least. They have promised to guarantee a total of €232 billion. So even the most optimistic, rose colored glasses wearing analyst would have to admit the headline number of €780 billion needs to be cut to €726 billion to account for the “stepping out” countries. If these two countries, expected to receive a big chunk of the protection step out, the headline number drops to €494 billion. That number is not nearly as impressive, so they won’t step out, but realistically how much value does their guarantee have? If the EFSF was buying some uncorrelated risky assets, the Italian and Spanish guarantees would be useful, but since the EFSF intends to buy Italian and Spanish debt, their guarantees are not particularly useful. In any case, as big potential beneficiaries of the EFSF, they will likely go along with any plan, it will only be whether they are ecstatic with the plan or merely happy that is at stake.
The reckless abandon camp is led by France, with Belgium an eager follower (they have no choice after bailing out Dexia). These two countries represent €186 billion of the EFSF commitments. Belgians contribution is relatively small and given the trajectory of their own credit they may well soon be a beneficiary of the EFSF. The Belgium 10 year bond was yielding as low as 2.2% in September 2010 and is now at 3.8% which is the highest yield over that period. Not yet PIIG-like, but concerning. And they have about €330 billion of debt and are running at about 100% of Debt to GDP, so their motives are clear.
France’s headlong rush down the reckless abandon policy is more confusing. If anything, it seems that this has become way too personal for Sarkozy and has gone to the point of being something more than policy and has become a crusade. If he was a trader, he would have been stopped out long ago. His decisions have not been working, and rather than cutting back, and pausing to think about a new strategy, he just keeps rolling forward. He, more than any other leader except Papandreou, continues to focus on speculators and CDS as the core of the problem. That is pure nonsense, but he in particular seems to see the world in that way. Maybe sipping wine with other exquisitely dressed rich bankers in a smoke filled room with the occasional dismissive wave of the hand and comments of “if only ze speculators were crushed, all would be tres bien” has influenced him. In any case his focus seems directed in the wrong direction. The fact that the country with the biggest problems at the bank level is the biggest proponent of turning the EFSF into a bank is also somewhat ironic, if not ludicrous. Maybe he has some friends at the big banks looking for a less stressful, but high profile and high paying job, and what better way than creating a bank? Imagine the field day someone as witty and smart as Sarkozy would have if someone he was up against was caught proposing such wild plans. In the end, he seems to believe that Europe can do something, anything, and everything that can “solve” the problem with 100% certainty. That is the problem with his stance, nothing is 100% certain, except debt and taxes (except in Greece where taxes at least, are optional). He is going down a path that leaves no plan B, and that is scary. The fact that most of his plans fall flat when discussed amongst people who would be buying the bonds of all the whacky entities and structures has totally fallen on deaf ears.
Austria and Netherlands have not taken a stand so far. They remain strangely quiet. With €66 billion of commitments they are not trivial. The fact that their commitments are rated AAA makes them even more important. I suspect they remain quiet because they are in the “prudent” camp. The “reckless abandon” camp has the benefit of any good crusade – the ability to say that they are saving the Eurozone. I would bet they are in the prudent camp and are hoping that, Germany who has the most to lose in the reckless abandon plan, and Finland which has already demonstrated a willingness to fight for themselves with collateral demands, win and they don’t get blamed for the near term problems that result.
In the meantime, Italian, Spanish, German, and French yields are all higher again today (not good) and Spanish and Italian spreads are wider as well, doublenotgood.
The market feels positioned extremely long. I think there are a lot of closet longs. It is cool to say negative things about the possibility of Europe resolving anything, but people are long or have cut hedges dramatically, just in case, but aren’t willing to admit it. That is away from the crowd the believes Europe “gets it” and is long on the back of that. Without a doubt, there is a willingness to try and figure it out, but it seems that they waited way too long to look at any actual details, and things are so dire, that no plan has a high probability of success, and many have extreme downside risks.
Tags: Ammunition, Bad Decision, Bad Decisions, Bonds, Consequences, Credibility, Debt Levels, Debtor Nations, Downside Protection, ECB, Efsf, Large Numbers, Lenders, Leverage, Moral Hazard, Negotiations, Non Recourse, Prudence, Reckless Abandon, Sustainable Debt, Tf
Posted in Bonds, Brazil, Markets | Comments Off
Friday, July 29th, 2011
by Lupin Rahman, PIMCO
- We forecast emerging economies will expand at a faster pace than advanced economies over the secular horizon.
- The challenge for emerging market central bankers is to remain ahead of inflation expectations and retain credibility on inflation targeting. We feel they are well positioned for this.
- We believe global investors remain significantly underweight emerging market assets. We expect this underallocation to decrease, providing multiyear support for the asset class.
Emerging markets are increasingly important drivers of growth for the global economy, though they face challenges to reaching parity with, or even surpassing, today’s developed nations.
In the final of a series of Q&A articles accompanying the recent release of PIMCO’s Secular Outlook, portfolio manager Lupin Rahman discusses growth dynamics, inflation and structural change in emerging markets (EM) as well as what all of this means for the global economy.
Q. Could you discuss growth dynamics in emerging markets and their share of the global economy?
Rahman: We forecast emerging markets to outperform advanced economies over the secular horizon (next three to five years) with growth averaging 6% vs. 2% in advanced economies. Significant transitions already underway in the global economy underpin this trend. Essentially we are seeing a shift from a unipolar world anchored by advanced economies toward a multipolar world with large emerging economies playing an increasingly larger role in the global economy.
Within EM we expect to see differentiation across economies. In Latin America and emerging Asia we forecast growth in the 6% to 7% range to be anchored by low leverage, strong structural demand for commodities and a soft landing in China. Meanwhile, countries in emerging Europe, and in particular those economies with high levels of leverage, are likely to experience a period of modest growth in the 4% range.
The relevance of this increasing importance of EM for investors lies in the remarkable divergence between current investor positioning and the economic realities of the postcrisis world. Specifically, we believe global investors remain significantly underweight emerging market assets in relation to both their current and future share of the world economy, as well as in relation to the trends in their relative credit fundamentals. We believe that as markets reorient to our New Normal view of the world this underallocation to EM will decrease, providing multiyear support for the asset class.
Q. How does the middle class in emerging markets compare to the developed world? And what are
current and anticipated domestic consumption patterns in EM?
Rahman: The growth of the emerging middle class is an important aspect of the EM growth story, particularly in the context of a deleveraging consumer base in advanced economies. If we take the World Bank’s definition, the global middle class is forecast to triple from 400 million in 2000 to 1.2 billion in 2030, with China and India accounting for most of this expansion, according to a December 2006 report. To put this into perspective, this means that by 2030 a significant majority of the global middle class will be from EM.
In addition to important strides in po verty reduction, this shift represents tremendous opportunities in new global consumer markets as EM consumption expands beyond food and shelter and towards consumer durables and services. In fact we are already seeing this trend with spending on automobiles, refrigerators and entertainment showing robust growth. We expect this to continue in the next decade and be underpinned by gains in real EM consumption growth which we estimate will increase by 50% in real terms.
Q. Shifting gears, could inflation cloud the outlook for emerging markets?
Rahman: There have been two important shifts in EM inflation dynamics over the past decade underpinned by more independent central banks, a reduction of fiscal dominance and a reduction in wage indexation. First, the levels of inflation in emerging markets have dropped from double-digit increases being the norm to headline inflation decreasing to the mid-single digits. Second, inflation volatility has decreased as a result of more anchored inflation expectations.
Looking ahead, the current 2 to 3 percentage point differential between emerging market and advanced
economy inflation will likely persist given our forecast of robust EM growth and debt deleveraging in advanced
economies. But importantly, we do not see a sharp secular increase in this differential. Of course there are risks to this baseline view from potential spikes in commodity prices and asset-market bubbles, but the fundamental shifts in inflation expectations mentioned before provide EM policymakers room to maneuver in tackling these shocks.
Q. What are central bankers in those countries doing to contain inflation, and what are the implications of
Tags: asset class, Brazil, Commodities, Credibility, Differentiation, Emerging Asia, Emerging Economies, Emerging Europe, Emerging Market, Emerging Markets, Global Economy, Global Investors, Growth Dynamics, India, Inflation Expectations, Latin America, Leverage, Market Assets, Multipolar World, Parity, Portfolio Manager, Unipolar World
Posted in Brazil, Commodities, India, Markets | Comments Off
Preposterous Statements – Jim Rogers: “No Food at Any Price”; Barton Biggs: ” U.S. Needs Massive Infrastructure Program”
Thursday, July 7th, 2011
It does not help your case when you make absurd statements to support your views. All it does is damage your credibility. Here are a couple of completely unrelated viewpoints that will show what I mean.
“No Food at Any Price”
Speaking on food shortages, Jim Rogers says Global Agriculture Supply Worsening May Spur Food Shortages
The global agriculture supply situation has worsened and a failure to boost food production fast enough to meet demand may lead to shortages, said investor Jim Rogers, chairman of Rogers Holdings.
“We’ve got to do something or we’re going to have no food at any price at times in the next few years,” Rogers said in a Bloomberg Television interview with Rishaad Salamat today in Singapore. “I still own agriculture. If I found something to buy, I would buy it.”
Rogers likes agriculture. Maybe he’s right, and maybe not. However, the notion “We’ve got to do something or we’re going to have no food at any price at times in the next few years” is one of the more blatantly absurd things regarding food shortages that I have ever heard.
US has record grain forecasts. Even if you do not believe those forecasts, the US is going to have a good crop. How does that translate to “no food”? The short answer is “it doesn’t”.
Many reported shortages are weather-related. Some “alleged” shortages are not shortages at all, but unavailability because of government price controls. The rest of the “shortage” problem is higher prices caused by speculation and/or rampant inflation in China and India.
The idea there will be no food at any price is absurd. There may not be food available at government mandated prices, but that is certainly not what Rogers said.
“U.S. Needs a Massive Public Works Program”
Barton Biggs Says U.S. Needs a Massive Public Works Program
Don’t expect the economy to perk up any time soon.
The U.S. and Europe are set to grow at an anemic pace for the foreseeable future unless the government can step in with an enormous fiscal stimulus, according to a veteran investor.
Speaking exclusively with The Wall Street Journal, Barton Biggs, managing partner at multibillion dollar hedge fund Traxis Partners, painted a bleak outlook for the developed world with only huge government intervention likely to improve things.
On the final day of the Federal Reserve’s bond-buying program, Mr. Biggs dismissed a further round of the so-called quantitative easing as a possible solution. It was meant to lower borrowing costs and simulate investment.
Instead, Mr. Biggs, former chief global strategist for U.S. investment banking powerhouse Morgan Stanley, demanded the U.S. government temporarily return to ideas used in the Great Depression as a way to get the country back to higher growth.
“What the U.S. really needs is a massive infrastructure program … similar to the WPA back in the 1930s,” he says.
He suggested financing such building through the sale of U.S. Treasuries.
Failure of Japan
It amazes me that apparently bright people can neither think nor see. Biggs is proposing the same medicine Japan tried. Where did it leave Japan? After 20 years of infrastructure projects, Japan has government debt to the tune of 200% of GDP and is still mired in deflation.
Looking Down the Road
Demographics and debt levels now are both far more precarious than they were in the 30′s and 40′s. Worse yet, Davis-Bacon and prevailing wage laws guarantee government will overpay for what it gets.
What if we tried the idea anyway? What if we fixed everything in 5 years?
The economy would boom for 5 years, then what? How would the US pay back that debt? What would happen to jobs the moment the projects finished? How would our children and grandchildren pay back that debt?
No Painless Solution, No Free Lunch
The very last thing the US needs is a massive infrastructure program paid for via the printing presses. Instead, we need to cut military spending, scrap Davis-Bacon, scrap prevailing wage laws, get rid of government workers, reduce public worker pensions, and get the budget in shape before the US becomes the next Greece.
Will that cause pain? Of course it will. However, Biggs wants a free lunch. If printing money solved problems, Zimbabwe would be the wealthiest nation on the planet.
Biggs Cannot See, Hear, Think
It would help if Biggs could look at Greece, or Spain, or Portugal, or Ireland. Those countries show what happens when debt gets excessive and the bond market takes matters into its own hands.
The logical conclusion is Biggs is cannot see, hear, or think.
Perhaps Biggs is simply talking his short-term book with complete disregard to what his proposal would do to our children and grandchildren, so that he could have one last party.
Mike “Mish” Shedlock
Tags: Ane, Barton Biggs, Bloomberg Television, Credibility, Food Production, Food Shortages, Global Agriculture, Government Price, India, Inflation In China, Infrastructure, Infrastructure Program, Jim Rogers, Rampant Inflation, Reported Shortages, Short Answer, Speculation, Supply Situation, Television Interview, Unavailability, Viewpoints, Weather
Posted in India, Infrastructure, Markets | Comments Off
Tuesday, July 5th, 2011
Erste Group Bank’s new report on gold, written by analyst Ronald-Peter Stoeferle, has just been published. It is very comprehensive in nature and makes for insightful reading.
GATA (the Gold Anti-Trust Action Committee) summarizes the major conclusions as follows.
- Negative real interest rates are the main driver of the gold price and will continue to be powerfully supportive.
- The arguments supporting a return to some form of gold standard are strengthening.
- Government debt burdens could be substantially eased by a higher gold price.
- There is no “bubble” in gold, as the public is hardly invested in it and has little interest in it.
- Increasing dependence on government transfer payments for the public’s income works against restoring solvency to government.
- Many paper pledges of gold cannot be fulfilled by real metal.
The report concludes, in part:
“Given that the majority of debt has neither been written off nor paid off but simply transferred, the problem of excessive debt is still waiting to be resolved. There has been no deleveraging, only an adjustment of booking entries from the private to the public sector. The quantitative easing has left monetary stability short on credibility, and it will be very difficult to remedy this situation. In this fragile environment gold will continue to thrive.”
Please click here for the full report.
Stoeferle also discusses the Erste Group report and the outlook for the gold price on Bloomberg Television, speaking from Vienna.
Source: Bloomberg, July 4, 2011.
Tags: Action Committee, Bloomberg Television, Credibility, Debt Burdens, Dependence, Erste Bank, Excessive Debt, Fragile Environment, Gold Price, Gold Standard, Government Debt, Government Transfer, Group Report, July 4, Monetary Stability, Pledges, Public Sector, Quantitative Easing, Solvency, Transfer Payments
Posted in Markets | Comments Off
Thursday, June 17th, 2010
Double-click on video for full screen
BBC: On this question of the euro, no one else seems to want the euro at the moment, but you are thinking of buying it, have already bought it,
Rogers: When no one wants something, that should be a signal to you to think about buying it. If everybody sold it, the chances are its time to buy it now, at least for a rally, so yes I bought some recently.
BBC: So, are you buying them for the rally, or do you think the European government have got their act together and doing the right thing on Greece?
Jim Rogers: Let me get the rally first, and if I get the rally first, then I’ll answer the rest of the question. We’ll see. No, the European governments are not getting their acts together, not at all. But the euro can still go up if for nothing else but a rebound rally, and maybe because its less flawed than many other currencies.
The problem is these days, everything is flawed. All paper money is flawed, nearly every currency in the world.
BBC: But you have said with the situation with Greece, the best thing that could happen is for Greece to go bankrupt, and all the European countries are doing everything to prevent that.
Rogers on European credibility: “If Greece went bankrupt it would send the signal to the world, and to the rest of Europe – ok, we’re not going to let people lie about their finance anymore, we are not going to let them spend money they don’t have, we are going to run a tight ship. That means the euro would be an extremely sound currency, it would the old Deutsche Mark.”
On Keynesianism: “You can’t keep spending money you don’t have because eventually the whole thing collapse in a house of cards.”
On the transition to reality: “I am not suggesting it is going to be a good time, don’t get me wrong. But if you wait 5 years from now, 10 years from now, when there is nothing you can do, and the whole system collapses, then you have real chaos in the streets, then you have Greece never recovering. In the US we have had states go bankrupt, cities go bankrupt, counties go bankrupt. It didn’t end the US, it didn’t end the US dollar.” And on the flaws of our political system, which are just as applicable to our own president: “Greece is just trying to get through the next election, I am trying to figure out what’s good for country, what’s good for the world, what’s good for Europe, what’s good for the financial system.”
Tags: Advertisement, Chaos, China, Collapse, Commodities, Credibility, Currency, Deutsche Mark, Doing The Right Thing, Double Click, Euro, Europe, European Countries, European Government, European Governments, Finance, Financial Guru, Fortune, George Soros, Good Time, Greece, Hedge Fund, House Of Cards, James Rogers, Jim Rogers, Keynesianism, Marketer, Maverick, Paper Money, Rally, Rebound, Sarah Montague, Spending Money, Tight Ship, Time Don, Transition
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Wednesday, August 5th, 2009
I published the first four chapters of Richard Karn’s e-book, Credit and Credibility, in posts over the past few weeks. In this fascinating book, Karn, author of the Emerging Trends Report, gives his assessment of today’s financial turmoil and what he considers to be the five most pressing issues the global economy will face in the years ahead.
Chapter 5, “Passing laws, just because” is now available and offers Karn’s assessment of the anthropogenic global warming debate, pending greenhouse gas legislation, and the effects thereof on the US and OECD economies.
The remaining chapters will also be posted on this site as they become available.
Tags: Ahead, Anthropogenic Global Warming, Chapter 3, Chapters, Credibility, E Book, Financial Turmoil, Gas Legislation, Global Economy, Greenhouse Effects, Greenhouse Gas, Oecd Economies, oil, Richard Karn, Trends Report
Posted in Markets | Comments Off
Thursday, July 30th, 2009
I published the first three chapters of Richard Karn’s e-book, Credit and Credibility, in a post a few days ago. In this fascinating book, Karn, author of the Emerging Trends Report, gives his assessment of today’s financial turmoil and what he considers to be the five most pressing issues the global economy will face in the years ahead.
Chapter 4, “The report of my death was an exaggeration“, is now available and details Karn’s contention the world has had its fill of US “financial innovation”, and the only way the US economy will recover will be through its traditional strengths in agriculture, manufacturing, invention, and hard work.
The remaining chapters will also be posted on this site as they become available.
Source: Emerging Trends Report
Tags: Agriculture, Ahead, Chapters, Contention, Credibility, E Book, Exaggeration, Few Days, Financial Innovation, Financial Turmoil, Global Economy, Invention, oil, Richard Karn, Traditional Strengths, Trends Report
Posted in Markets | Comments Off
Wednesday, July 22nd, 2009
I published the first two chapters of Richard Karn’s e-book, Credit and Credibility, in a post a few days ago. In this fascinating e-book, Karn, author of the Emerging Trends Report, gives his assessment of today’s financial turmoil and what he considers to be the five most pressing issues the global economy will face in the years ahead.
Chapter 3, “May you live in interesting times”, is now available and explores the extent to which emerging markets can decouple from “consumer” economies, the increasing incidence of nationalism and mercantilism, and the role of China as the litmus test for the thesis.
The remaining chapters will also be posted on this site as they become available.
Source: Emerging Trends Report
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Tags: Cape Town, Chapter 3, Chapters, China, Credibility, E Book, Emerging Markets, Extent, Few Days, Financial Turmoil, Global Economy, Litmus Test, May You Live In Interesting Times, Mercantilism, Nationalism, oil, Postcards, Richard Karn, Target, Thesis, Trends Report
Posted in Emerging Markets, Markets | Comments Off
Friday, April 24th, 2009
Econompic Data looks at the possible direction for 10-Year Treasurys. On one hand you have the supply issue; on the other hand you have deflation and further deterioration, combined with the Fed’s impetus to purchase lond-dated treasurys which could drive yields down further:
Higher –> Supply: Across the Curve
Treasury bonds are taking a severe drubbing and the yield on the benchmark 10 year note is approximately at the level which prevailed on the day when the Federal Reserve announced quantitative ease (2.96 percent currently).
One participant noted that the 200 day moving average on the Long Bond was 3.798 percent and the market penetrated that level this morning as a sharp knife would melting butter.
The yield curve has steepened sharply and participants are deeming the belly of the curve particularly odious. The 2year/10 year is once again close to 200 basis points and the 2year/5year/30 year butterfly has returned to 93 basis points after a foray into the low 100s.
Dealers report rate lock selling and fear of very heavy Treasury supply next week. As I have mentioned too often the Treasury will announce around $ 100 billion of new supply tomorrow. It will consist of 2year,5 year and 7 year notes.
Lower –> Quantitative Easing / Continued Economic Deterioration: Zero Hedge
n light of next week’s scheduled meeting of the Fed, we thought we would look at the potential for further announced quantitative easing. Last month, the Fed rocked most major markets with the announcement of a major purchase of long rates to push down yields. Since then, many have dismissed the purchases as a one-time event that are not likely to repeat. However we have to question that thinking as it is very much in line with the pre-crisis mentality that quantitative easing is the equivalent of a nuclear bomb in a central bank’s arsenal and the unpredictability of any resulting inflation would destroy all credibility that a central bank may have to price stability.
There has been a lot of criticism of Big Ben (us included) but one thing that has come out is he is not afraid to take relatively risky moves to combat whatever he perceives as the biggest threat. As we have noted before, he has clearly revealed his playbook in the past and we see little indication that he will stray from it going forward. On the balance between inflation and deflation, much has been made of the Chinese response if we try to print our way out of this situation but the much larger problem has always been deflation. Combining what we know about the available policy options and the effectiveness of the last round of QE, we have to believe that more purchases of long rates are on the table as a serious consideration.
We are not saying that the Fed is deaf to the concerns of price stability; indeed, the specific concern is addressed in last month’s minutes.
Also, some participants were concerned that Federal Reserve purchases of longer-term Treasury securities might be seen as an indication that the Federal Reserve was responding to a fiscal objective rather than its statutory mandate, thus reducing the Federal Reserve’s credibility regarding long-run price stability. Most participants, however, saw this risk as low so long as the Federal Reserve was clear about the importance of its long-term price stability objective and demonstrated a commitment to take the necessary steps in the future to achieve its objectives.
However, consumer spreads continue to stay at high levels.
Additionally, long rates have given back much of the gains made from the time of the previous announcement.
In light of the minimal impact of the announced $300B bond purchase last month, we have to think that the Fed will give it at least one more go. The Fed can really only directly control the benchmark – if the Treasury figures out a way to strong arm banks into flowing credit again, that may put a stop to further QE but that isn’t a likely scenario in the short-term.
At this point the issue of deflationary pressure does seem to be the 800-pound gorilla in the room.
Tags: 10 Year Treasury, Basis Points, Credibility, Crisis Mentality, Drubbing, Economic Deterioration, Federal Reserve, Foray, Impetus, Lond, Moving Average, Nuclear Bomb, Price Stability, Sharp Knife, Time Event, Treasury Bonds, Treasury Yields, Treasurys, Unpredictability, Yield Curve
Posted in Bonds, Credit Markets, Economy, Markets | Comments Off