Saturday, April 30, 2005
HOUSING BUBBLE?
Charting the economy .com EXCELLENT source of charts and explanation of our current situation. Best I have seen next to contraryinvestor.com
**One point bore out here, and I have been aware of is that the CASH OUTS were NOT used for DEBT consolidation
Duratek
**One point bore out here, and I have been aware of is that the CASH OUTS were NOT used for DEBT consolidation
Duratek
SPX/VIX RATIO REVISITED
10 yr chart As the market rallied into end of 2004 I had posted this many times. I thought it correlated well with 2000, and had mentioned it had gone to new highs of excess.
One thing to keep in mind, an indicator reaching new highs or lows in and of itself is not enough (as bears found out with LOW VIX) but it is when the indicator TURNS DIRECTION bottoms or tops out we SHOULD take notice.
That is exactly what the SPX/VIX ratio has done, and it is a ways from any kind of serious bottom.
The 52 week looks ready to begin a downtrend, the 2o wekk already has.
It certainly looks like the UPTREND in this relationship has topped. BAD for stocks.
FED PUMPED IN OVER $50 B last week reported! BEYOND CRISIS LEVELS of liquidity. NO kidding? this surrounds a move to 10K???
Or that this occurs BEFORE the next FED meeting on rates?
"we're done for now, no rate increase" a PANIC? what things aren't peachy keen?
"another blah blah 25 basis point rise, measured blah blah" STOCKS DO NOT DO WELL in rising interest rate environment, YET has it held off the housing industry.
Hey, here's your starter home or fixer upper....800 SQ FT $300K !
The market is SICK, it moves from news blurp to data release..leadership is sunk
D
One thing to keep in mind, an indicator reaching new highs or lows in and of itself is not enough (as bears found out with LOW VIX) but it is when the indicator TURNS DIRECTION bottoms or tops out we SHOULD take notice.
That is exactly what the SPX/VIX ratio has done, and it is a ways from any kind of serious bottom.
The 52 week looks ready to begin a downtrend, the 2o wekk already has.
It certainly looks like the UPTREND in this relationship has topped. BAD for stocks.
FED PUMPED IN OVER $50 B last week reported! BEYOND CRISIS LEVELS of liquidity. NO kidding? this surrounds a move to 10K???
Or that this occurs BEFORE the next FED meeting on rates?
"we're done for now, no rate increase" a PANIC? what things aren't peachy keen?
"another blah blah 25 basis point rise, measured blah blah" STOCKS DO NOT DO WELL in rising interest rate environment, YET has it held off the housing industry.
Hey, here's your starter home or fixer upper....800 SQ FT $300K !
The market is SICK, it moves from news blurp to data release..leadership is sunk
D
"DEATH ZONE" 55 DAY RULE
http://www.forbes.com/2004/04/29/cz_lm_0429adviser.html
I was recently informed of this phenom, and found this article on the subject.
D
I was recently informed of this phenom, and found this article on the subject.
D
HOME HOME where the overpaid roam
In our paper there was land near my home. (MD)
2 acre lots, $299K to $399K
Finished 5 bedroom 5 bath colonial $1.1 M F ME its crazy!
Now me puts on my thunkin hat. ARE we better off if our house value rises, we sell and move replacing old with a stepper upper? We got more, but we paid more, end result is MORE DEBT.
OR
Our house stagnated in value rising a little here, a little here, we SELL, we break even, we buy another house that also has stayed relative in value.
Difference? NO CASH OUTS to PULL value out of the home for….CONSUMPTION and INCREASE of DEBT! That is how we got to 305% total debt as % of GDP!
FED steped on gas again last week. Retailers WEAK WEAK WEAK, game being played with DOW. and could WEAK OIL be weak demand which equals weak economy which was born out with weak GDP and weak durable goods?
D
2 acre lots, $299K to $399K
Finished 5 bedroom 5 bath colonial $1.1 M F ME its crazy!
Now me puts on my thunkin hat. ARE we better off if our house value rises, we sell and move replacing old with a stepper upper? We got more, but we paid more, end result is MORE DEBT.
OR
Our house stagnated in value rising a little here, a little here, we SELL, we break even, we buy another house that also has stayed relative in value.
Difference? NO CASH OUTS to PULL value out of the home for….CONSUMPTION and INCREASE of DEBT! That is how we got to 305% total debt as % of GDP!
FED steped on gas again last week. Retailers WEAK WEAK WEAK, game being played with DOW. and could WEAK OIL be weak demand which equals weak economy which was born out with weak GDP and weak durable goods?
D
Friday, April 29, 2005
SHIPPING
5 YR BALTIC DRY INDEX
BALTIC DRY COMPARISONS
Background INFO
BALTIC DRY SCALES NEW HEIGHTS
Sunday, 28 November 2004
The runaway dry cargo market broke all records last Thursday when the Baltic Dry Index, an average of its handysize, panamax and capesize indices, achieved at an all-time high and on Friday it increased a further 136 points, ending the week at 5,870. The previous high, back in early February had been 5,681.
Asked what was behind the exceptionally bullish market a Baltic Exchange insider said just one word, ‘China’.
BALTIC DRY COMPARISONS
Background INFO
BALTIC DRY SCALES NEW HEIGHTS
Sunday, 28 November 2004
The runaway dry cargo market broke all records last Thursday when the Baltic Dry Index, an average of its handysize, panamax and capesize indices, achieved at an all-time high and on Friday it increased a further 136 points, ending the week at 5,870. The previous high, back in early February had been 5,681.
Asked what was behind the exceptionally bullish market a Baltic Exchange insider said just one word, ‘China’.
WHAT WAS, NOW IS NOT
NASDAQ 10 YR
Let the day to week to month do its thing, but this chart is telling, something longer term may be afoot.
D
Let the day to week to month do its thing, but this chart is telling, something longer term may be afoot.
D
SPIN BS NONSENSE
from YHOO
Stocks Mixed As Technology Sector WeakensFri 11:18AM ET - APWeakness in the technology sector kept stocks mixed Friday despite strong earnings from Microsoft Corp. and a pair of economic reports that eased Wall Street's inflation fears.
@@*%^^ WHat was it that "eased inflation fears?" If earnings were strong from MSFT or that meant a damn, themarket WOULD respect it.
Wise guys are on guard and still we see weakness, 10K goes 9800 quickly IMHO and THEN might 10K be resistance! IF so BEAR should be considered BACK and act accordingly......I hope my readers have.
My hope is that I can help us identify the SAFE periods to be long, with the help of the wisdom of many GREAT market mavens, I read.....
A nation with NO savings is a poor nation, a nation at risk.
D
Stocks Mixed As Technology Sector WeakensFri 11:18AM ET - APWeakness in the technology sector kept stocks mixed Friday despite strong earnings from Microsoft Corp. and a pair of economic reports that eased Wall Street's inflation fears.
@@*%^^ WHat was it that "eased inflation fears?" If earnings were strong from MSFT or that meant a damn, themarket WOULD respect it.
Wise guys are on guard and still we see weakness, 10K goes 9800 quickly IMHO and THEN might 10K be resistance! IF so BEAR should be considered BACK and act accordingly......I hope my readers have.
My hope is that I can help us identify the SAFE periods to be long, with the help of the wisdom of many GREAT market mavens, I read.....
A nation with NO savings is a poor nation, a nation at risk.
D
CONFIDENCE
Final Mich numbers were BELOW expectations at 87.7
In perspective, in 2000 the reading was near 150 ! HOW important is any reading? It is more the DIRECTION the trend is going than the reading itself.
ENERGY prices, and the NON INFLATIONARY pressure we keep hearing are NOT HERE, eating into spendable income, as WAGES stagnate.
hey, I found a pay stub from 2000, I own my company, I've had NO raise in 5 years.
I need additional employees, nor can I afford them.
D
In perspective, in 2000 the reading was near 150 ! HOW important is any reading? It is more the DIRECTION the trend is going than the reading itself.
ENERGY prices, and the NON INFLATIONARY pressure we keep hearing are NOT HERE, eating into spendable income, as WAGES stagnate.
hey, I found a pay stub from 2000, I own my company, I've had NO raise in 5 years.
I need additional employees, nor can I afford them.
D
DEVIL IN DETAILS
http://briefing.com/Silver/Calendars/EconomicReleases/eci.htm
COSTS ARE RISING, Wages falling, spending outpacing any wage increase, savings FLAT LINING.SO....futures rise on "good inflation data" what a crocK! 10K PTT
Usually when they froth the futures like this it flag poles up and STAYS up. Market action is NOT healthy IMHO BUSH last night was extra lame.
D
COSTS ARE RISING, Wages falling, spending outpacing any wage increase, savings FLAT LINING.SO....futures rise on "good inflation data" what a crocK! 10K PTT
Usually when they froth the futures like this it flag poles up and STAYS up. Market action is NOT healthy IMHO BUSH last night was extra lame.
D
Thursday, April 28, 2005
7 D'S Developing Disaster
*(Do you find my blog helpful? send me an email to Duratek@yahoo.com also if you have any specific interests or questions you want addressed, let me know)
The Seven "D's" of the Developing Disaster
By: Alf Field
“The objective of investing is to increase the purchasing power of capital.”
- From the Foreword to “The Art of Asset Allocation” by David M Darst. (Published in 2003 by McGraw-Hill).
David Darst is Managing Director and Chief Investment Strategist for the individual investor business of Morgan Stanley. “The Art of Asset Allocation” is possibly the definitive work on the principles of asset allocation in investment portfolios.
David’s book deserves a plug firstly because it is good, but also because David has generously donated the entire royalties from this book through the Morgan Stanley Foundation to the families of the 13 Morgan Stanley employees who died in the World Trade Center on Sept 11, 2001.
It was David who planted the seeds of the idea for this article when he suggested that most of the major problems facing the USA (and thus the world) commenced with the letter “D”. I have refined his idea to produce the following list:
DEFICITS (US CURRENT ACCOUNT AND BUDGET)
DOLLAR (US)
DEVALUATIONS (COMPETITIVE)
DEBT
DEMOGRAPHICS
DERIVATIVES
DEVOLUTION
Most readers will be familiar with the first 6 but will be puzzled by the last one, DEVOLUTION. It is included because the first 6 problems, combined with the likely Government responses, will probably lead to a situation where one single investment criterion will become so important that it will transcend all other factors in investment decisions. That situation will lead to DEVOLUTION. We will return to this later.
The first 6 problems have received a great deal of coverage elsewhere and there is no need to regurgitate them in detail here. These problems generally involve huge mind-numbing, incomprehensible numbers of dollars. Those numbers continue to grow so rapidly that they tend to be out of date shortly after they are published. The following brief notes on the first 6 “D’s” deliberately ignore these gigantic numbers.
The US Current account and Federal Government DEFICITS have grown to chronic levels where each deficit now exceeds 6% of the country’s GDP. How will these continuing deficits be financed? The answer, by creating increasing quantities of electronic US Dollar credits.
The US DOLLAR will be under downward pressure while these deficits continue. The lower the US Dollar declines, the greater the pressure on those countries that export to the USA. These countries will protect their markets by invoking competitive DEVALUATIONS. This cannot happen in a freely floating exchange rate system, but is effectively done by foreign countries creating massive quantities of their own currencies. These new foreign currency electronic credits are then dumped on the foreign exchange markets, thus weakening their currencies. In this way the American problem is exported to the rest of the world.
DEBT of all kinds in the USA has been reaching record high levels for decades and continues to do so. This is the way the economy is stimulated in a fractional reserve banking system. DEBT must continue to grow. A contraction in DEBT will lead to those other unmentionable “D” words, DEFLATION and DEPRESSION. This will not be allowed to happen. New electronic US Dollar credits will be created to whatever quantity is required to avoid this outcome.
DEMOGRAPHICS refers to the imminent retirement of the Baby Boomers generation and the huge unfunded liabilities that exist in Social Security, Medicare, Pension Funds and other US programs that need to be funded. Several books have been written on this subject. One of which is “Running on Empty” by Peter Petersen. Those unfunded liabilities will be funded, probably once again by the creation of new electronic US Dollar credits to the extent necessary to meet the unfunded liabilities.
DERIVATIVES have been the fastest growing area in US finance over the past 15 years. The numbers involved are truly mind boggling. About 25% of the Derivative instruments in existence are Exchange traded items such as futures and options. The other 75% are Over-the-Counter instruments, privately created and traded between major financial institutions. These tend to be extremely complicated transactions that are often difficult to value. They rely heavily on their counter parties in these transactions actually meeting their obligations when they fall due.
There is a grave risk of counter party failure in the Over-the-Counter derivative area. If one major counter party goes bankrupt and fails to meet its commitments, it could trigger a domino like collapse of major institutions in the financial markets. The numbers involved are so vast that there is potential to bring down the entire financial system in the event of a major counter party default.
If this risk is readily discernible to outsiders, then bankers and others involved in the OTC derivatives must be acutely aware of the problem. Bankers are not stupid. They are extremely clever, cautious people. So how could they allow the OTC derivative situation to grow to such a massive extent with all the concomitant risks involved?
One suspects that they know something we don’t. Do the major players in the market have some assurance that there will be no counter party failure? Without that assurance, the gigantic build up of OTC derivatives over the past decade would surely have been unthinkable. Alternatively, they must have deliberately built up the derivative market without considering the size or risks involved on the assumption that, as with past similar cases, the Federal Reserve and Federal Government would combine and to come to the rescue of a failed major counter party.
The OTC derivative market looks like an accident waiting to happen. Already some lesser players are showing signs of strain. How do the authorities rescue a problem situation when it occurs? Again by creating electronic US Dollar credits to the extent necessary to prevent a catastrophe.
The common thread that runs through this brief summary is that when problems emerge in the US financial system, the authorities will solve them by throwing money at the problem, by creating new electronic US Dollar credits whenever necessary and to whatever extent necessary. This is not just a personal opinion. We have been told by no lesser personage than Dr Ben S Bernanke, who is a member of the Board of Governors of the Federal Reserve Board, that the authorities now have a new tool, the electronic printing press, which will be utilised when disasters threaten.
When the supply of something is increased sharply relative to demand, the value of that commodity will decline. If the supply continues to increase rapidly and indefinitely, then that item will become worth less and less, with the potential to finally become nearly worthless. This is the Developing Disaster facing the US Dollar and the world. This is the factor that could become the single most important criterion in investment allocation decisions and possibly even for individual financial survival.
When that point is reached, the headline to this article: “The objective of investing is to increase the purchasing power of capital,” will become ever more pertinent.
We can now return to the final factor, the 7th “D”, which is DEVOLUTION. Dictionary definitions of the word DEVOLUTION include the following:
A passing down or descent through successive stages of time or a process.
Transference, as of rights or qualities, to a successor.
Delegation of authority or duties to a subordinate or substitute.
A transfer of powers from a central government to local units.
It is the first definition that is applicable here. Imagine an inverted pyramid of various investment type assets where the least secure (and most prolific assets) are in the very wide top layers. The inverted pyramid then narrows down through layers of increasingly more secure asset classes to the small point at the base which consists of the most secure (and least prolific) assets. This is an idea propagated years ago by John Exter.
The theory is that in times of financial crisis investors will cause their investments to devolve downwards (hence DEVOLUTION) through the different asset class layers in the inverted pyramid as they search for greater security. DEVOLUTION is thus a movement by investors out of riskier, speculative asset classes into more secure ones. This is what can be expected in the months and years ahead as the creation of electronic US Dollar credits gathers momentum and faith is lost in the US Dollar.
The assets in the most secure category at the tip of the inverted pyramid are gold and silver bullion, assets that have performed the function of protecting wealth throughout the ages. In the layer above the precious metals lie the companies that mine and hold large deposits of gold and silver. The least secure assets in the envisioned environment, which form the broad layers at the top of the inverted investment pyramid, will be the electronic US Dollar credits and assets or loans that are repayable in US dollars.
The DEVOLUTION of assets into more secure investments is not just an esoteric theory. It is already happening and can be observed in the actions of thinking investors such as Warren Buffett, possibly the greatest investor of the past century. Buffett has been gradually moving the assets of his investment company, Berkshire Hathaway, into increasingly more secure asset classes. He made headlines last year when he moved over $20 billion out of US Dollar cash assets into foreign currencies.
Buffett already has a stash of silver bullion, so is clearly aware of the protective power of precious metals. It is only one short further step for Buffett to move out of foreign currencies (which will eventually follow the path of the US Dollar) into gold bullion and precious metal mining company shares, a move that seems logical and inevitable in the circumstances envisioned above.
A move into precious metals and their associated mining companies by a person like Buffett would instantly change the public perception of this asset class. If it is not Buffett, it will be someone else, as the logic of doing this will become increasingly apparent to investors. Then the devolution of investments down through the asset classes of the inverted pyramid will truly gather momentum. The quantity of precious metals and their associated mining company shares is very limited while the quantity of electronic US Dollar credits is infinite. It will be a question of “first come, first served”.
The Seven "D's" of the Developing Disaster
By: Alf Field
“The objective of investing is to increase the purchasing power of capital.”
- From the Foreword to “The Art of Asset Allocation” by David M Darst. (Published in 2003 by McGraw-Hill).
David Darst is Managing Director and Chief Investment Strategist for the individual investor business of Morgan Stanley. “The Art of Asset Allocation” is possibly the definitive work on the principles of asset allocation in investment portfolios.
David’s book deserves a plug firstly because it is good, but also because David has generously donated the entire royalties from this book through the Morgan Stanley Foundation to the families of the 13 Morgan Stanley employees who died in the World Trade Center on Sept 11, 2001.
It was David who planted the seeds of the idea for this article when he suggested that most of the major problems facing the USA (and thus the world) commenced with the letter “D”. I have refined his idea to produce the following list:
DEFICITS (US CURRENT ACCOUNT AND BUDGET)
DOLLAR (US)
DEVALUATIONS (COMPETITIVE)
DEBT
DEMOGRAPHICS
DERIVATIVES
DEVOLUTION
Most readers will be familiar with the first 6 but will be puzzled by the last one, DEVOLUTION. It is included because the first 6 problems, combined with the likely Government responses, will probably lead to a situation where one single investment criterion will become so important that it will transcend all other factors in investment decisions. That situation will lead to DEVOLUTION. We will return to this later.
The first 6 problems have received a great deal of coverage elsewhere and there is no need to regurgitate them in detail here. These problems generally involve huge mind-numbing, incomprehensible numbers of dollars. Those numbers continue to grow so rapidly that they tend to be out of date shortly after they are published. The following brief notes on the first 6 “D’s” deliberately ignore these gigantic numbers.
The US Current account and Federal Government DEFICITS have grown to chronic levels where each deficit now exceeds 6% of the country’s GDP. How will these continuing deficits be financed? The answer, by creating increasing quantities of electronic US Dollar credits.
The US DOLLAR will be under downward pressure while these deficits continue. The lower the US Dollar declines, the greater the pressure on those countries that export to the USA. These countries will protect their markets by invoking competitive DEVALUATIONS. This cannot happen in a freely floating exchange rate system, but is effectively done by foreign countries creating massive quantities of their own currencies. These new foreign currency electronic credits are then dumped on the foreign exchange markets, thus weakening their currencies. In this way the American problem is exported to the rest of the world.
DEBT of all kinds in the USA has been reaching record high levels for decades and continues to do so. This is the way the economy is stimulated in a fractional reserve banking system. DEBT must continue to grow. A contraction in DEBT will lead to those other unmentionable “D” words, DEFLATION and DEPRESSION. This will not be allowed to happen. New electronic US Dollar credits will be created to whatever quantity is required to avoid this outcome.
DEMOGRAPHICS refers to the imminent retirement of the Baby Boomers generation and the huge unfunded liabilities that exist in Social Security, Medicare, Pension Funds and other US programs that need to be funded. Several books have been written on this subject. One of which is “Running on Empty” by Peter Petersen. Those unfunded liabilities will be funded, probably once again by the creation of new electronic US Dollar credits to the extent necessary to meet the unfunded liabilities.
DERIVATIVES have been the fastest growing area in US finance over the past 15 years. The numbers involved are truly mind boggling. About 25% of the Derivative instruments in existence are Exchange traded items such as futures and options. The other 75% are Over-the-Counter instruments, privately created and traded between major financial institutions. These tend to be extremely complicated transactions that are often difficult to value. They rely heavily on their counter parties in these transactions actually meeting their obligations when they fall due.
There is a grave risk of counter party failure in the Over-the-Counter derivative area. If one major counter party goes bankrupt and fails to meet its commitments, it could trigger a domino like collapse of major institutions in the financial markets. The numbers involved are so vast that there is potential to bring down the entire financial system in the event of a major counter party default.
If this risk is readily discernible to outsiders, then bankers and others involved in the OTC derivatives must be acutely aware of the problem. Bankers are not stupid. They are extremely clever, cautious people. So how could they allow the OTC derivative situation to grow to such a massive extent with all the concomitant risks involved?
One suspects that they know something we don’t. Do the major players in the market have some assurance that there will be no counter party failure? Without that assurance, the gigantic build up of OTC derivatives over the past decade would surely have been unthinkable. Alternatively, they must have deliberately built up the derivative market without considering the size or risks involved on the assumption that, as with past similar cases, the Federal Reserve and Federal Government would combine and to come to the rescue of a failed major counter party.
The OTC derivative market looks like an accident waiting to happen. Already some lesser players are showing signs of strain. How do the authorities rescue a problem situation when it occurs? Again by creating electronic US Dollar credits to the extent necessary to prevent a catastrophe.
The common thread that runs through this brief summary is that when problems emerge in the US financial system, the authorities will solve them by throwing money at the problem, by creating new electronic US Dollar credits whenever necessary and to whatever extent necessary. This is not just a personal opinion. We have been told by no lesser personage than Dr Ben S Bernanke, who is a member of the Board of Governors of the Federal Reserve Board, that the authorities now have a new tool, the electronic printing press, which will be utilised when disasters threaten.
When the supply of something is increased sharply relative to demand, the value of that commodity will decline. If the supply continues to increase rapidly and indefinitely, then that item will become worth less and less, with the potential to finally become nearly worthless. This is the Developing Disaster facing the US Dollar and the world. This is the factor that could become the single most important criterion in investment allocation decisions and possibly even for individual financial survival.
When that point is reached, the headline to this article: “The objective of investing is to increase the purchasing power of capital,” will become ever more pertinent.
We can now return to the final factor, the 7th “D”, which is DEVOLUTION. Dictionary definitions of the word DEVOLUTION include the following:
A passing down or descent through successive stages of time or a process.
Transference, as of rights or qualities, to a successor.
Delegation of authority or duties to a subordinate or substitute.
A transfer of powers from a central government to local units.
It is the first definition that is applicable here. Imagine an inverted pyramid of various investment type assets where the least secure (and most prolific assets) are in the very wide top layers. The inverted pyramid then narrows down through layers of increasingly more secure asset classes to the small point at the base which consists of the most secure (and least prolific) assets. This is an idea propagated years ago by John Exter.
The theory is that in times of financial crisis investors will cause their investments to devolve downwards (hence DEVOLUTION) through the different asset class layers in the inverted pyramid as they search for greater security. DEVOLUTION is thus a movement by investors out of riskier, speculative asset classes into more secure ones. This is what can be expected in the months and years ahead as the creation of electronic US Dollar credits gathers momentum and faith is lost in the US Dollar.
The assets in the most secure category at the tip of the inverted pyramid are gold and silver bullion, assets that have performed the function of protecting wealth throughout the ages. In the layer above the precious metals lie the companies that mine and hold large deposits of gold and silver. The least secure assets in the envisioned environment, which form the broad layers at the top of the inverted investment pyramid, will be the electronic US Dollar credits and assets or loans that are repayable in US dollars.
The DEVOLUTION of assets into more secure investments is not just an esoteric theory. It is already happening and can be observed in the actions of thinking investors such as Warren Buffett, possibly the greatest investor of the past century. Buffett has been gradually moving the assets of his investment company, Berkshire Hathaway, into increasingly more secure asset classes. He made headlines last year when he moved over $20 billion out of US Dollar cash assets into foreign currencies.
Buffett already has a stash of silver bullion, so is clearly aware of the protective power of precious metals. It is only one short further step for Buffett to move out of foreign currencies (which will eventually follow the path of the US Dollar) into gold bullion and precious metal mining company shares, a move that seems logical and inevitable in the circumstances envisioned above.
A move into precious metals and their associated mining companies by a person like Buffett would instantly change the public perception of this asset class. If it is not Buffett, it will be someone else, as the logic of doing this will become increasingly apparent to investors. Then the devolution of investments down through the asset classes of the inverted pyramid will truly gather momentum. The quantity of precious metals and their associated mining company shares is very limited while the quantity of electronic US Dollar credits is infinite. It will be a question of “first come, first served”.
NEWS FLASH
Help Wantes index declined from 41 back to 39, WEAK
Yet with INFLATIONARY PRESSURES, can the FED stop rasing? meeting next week
D
Yet with INFLATIONARY PRESSURES, can the FED stop rasing? meeting next week
D
Wednesday, April 27, 2005
Bearish...REALLY?
DIA SHORT INTEREST
Same for Q's, declining short interest, not enough to cover even 2 full days of trading.
D
Same for Q's, declining short interest, not enough to cover even 2 full days of trading.
D
TODAYS MARKET ACTION
QUICK sand INvesting
The action in the markets should be of concern to anyone with one eye open.The market seemingly on the move from ONE NEWS story to then next..... NOW we are to believe that "falling oil" is the catalyst for improving prices......let us NOT be concerned with a SLUMP in durable goods and because maybe the FED won't keep raising...how wonderful.
Are we to think do not worry about inflation? When the VERY GOV report that states it is falsified? with BS from renters equivalent data?And the job market who can tell between people who begin looking again to those who have given up? and those taken away or ADDED by the net birth/death MODEL?
SOLID footing is nowhere to be found.Bonds soar as flight to safety even as gov need for debt becomes insatiable? when the rate is FAR below the inflation rate, even though we know a normalizing must occur.
We are in a time where a very aggresive DEFENSIVE posture should be had.....and maybe none taken, IMHO LOOK at prices vascilate around today, damn, almost every day forlast week....schizo market, and it needs prozac.
I understand ING is offering a 7% guranteed ANUUITY with a 5% BONUS, as IUnderstand IF you invest the money and the 7% is what is better to get it, you MUST annuitize it after 10 years, then you get the 7% and it is paid out to you over an equal but specifiied period, you no longer have access to the LUMO SUM, but it is rather safe!
I have 2 accounts with MANULIFE called GRIP doing the same thing for 6%,this is what I WANTED SAFE at the BOTTOM of my investment pyramid.
D
The action in the markets should be of concern to anyone with one eye open.The market seemingly on the move from ONE NEWS story to then next..... NOW we are to believe that "falling oil" is the catalyst for improving prices......let us NOT be concerned with a SLUMP in durable goods and because maybe the FED won't keep raising...how wonderful.
Are we to think do not worry about inflation? When the VERY GOV report that states it is falsified? with BS from renters equivalent data?And the job market who can tell between people who begin looking again to those who have given up? and those taken away or ADDED by the net birth/death MODEL?
SOLID footing is nowhere to be found.Bonds soar as flight to safety even as gov need for debt becomes insatiable? when the rate is FAR below the inflation rate, even though we know a normalizing must occur.
We are in a time where a very aggresive DEFENSIVE posture should be had.....and maybe none taken, IMHO LOOK at prices vascilate around today, damn, almost every day forlast week....schizo market, and it needs prozac.
I understand ING is offering a 7% guranteed ANUUITY with a 5% BONUS, as IUnderstand IF you invest the money and the 7% is what is better to get it, you MUST annuitize it after 10 years, then you get the 7% and it is paid out to you over an equal but specifiied period, you no longer have access to the LUMO SUM, but it is rather safe!
I have 2 accounts with MANULIFE called GRIP doing the same thing for 6%,this is what I WANTED SAFE at the BOTTOM of my investment pyramid.
D
Stephen Roach FINANCIAL DILEMA
Stephen Roach (Tokyo)
In all my years in this business, never before have I seen a central bank attempt to spin the debate as America's Federal Reserve has over the past six or seven years. From the New Paradigm mantra of the late 1990s to today's new theories of the current-account adjustment, the US central bank has led the charge in attempting to rewrite conventional macroeconomics and in making an effort to convince market participants of the wisdom of its revisionist theories. The problem is that this recasting of macro is very self-serving. It is a concentrated effort on the part of the Fed to exonerate itself from the Original Sin of failing to address asset bubbles. The result is an ever-deepening moral hazard dilemma that poses grave threats to financial markets.
I am not a believer in conspiracy theories. But the Fed's behavior since the late 1990s is starting to change my mind. It all began with Alan Greenspan's worries over "irrational exuberance" on December 5, 1996, when a surging Dow Jones Industrial Average closed at 6437. The subsequent Fed tightening in March 1997 was aimed not only at the asset bubble itself, but at the impacts such excessive appreciation in equity markets were having on the real economy -- consumers and businesses alike. It was a classic example of the Fed playing the role of the tough guy -- the central bank that, to paraphrase the words of former Chairman William McChesney Martin, "takes away the punchbowl just when the party is getting good." Unfortunately, the tough guys weren't so tough after all. Predictably, there was a huge outcry on Capitol Hill as the Fed took aim on the US stock market. But rather than stay the course as an independent central bank should, the Fed ran for cover in the face of political criticism. Not only were its initial bubble-containment efforts put aside, but Alan Greenspan went on to champion the notion of a sea-change in the macro climate -- a once-in-a-century productivity miracle that would justify the stock market's exuberance as rational. That was the Original Sin that has since been compounded in the years that have followed.
Out of that pivotal moment in the late 1990s, a New Economy actually did come into being. But it was not the new economy of ever-accelerating productivity growth that infatuated the New Paradigm Crowd and legions of equity-market speculators. Instead, it was the Asset Economy that enabled consumers and businesses to draw on the pixie dust of a new source of purchasing power -- asset appreciation -- as a means to augment what has since turned into a stunning shortfall of organic domestic income generation.
Unfortunately, the asset-based spending model has given rise to many of the distortions and imbalances evident in the US today. That's especially true of low saving rates, the housing bubble, high debt loads, and a runaway current account deficit. When the equity bubble burst, asset-dependent American consumers barely skipped a beat. Courtesy of an extraordinary shift to monetary accommodation, the pendulum of asset depreciation quickly swung into property markets; US house-price inflation has since surged to a 25-year high. To the extent that equity extraction from ever-rising property appreciation was viewed as a substitute for organic sources of labor income generation, hard-pressed consumers went deeply into debt to monetize the windfall. As a result, household sector indebtedness surged to nearly 90% of US GDP -- an all-time record and up over 20 percentage points from levels in the mid-1990s when the Asset Economy was born. Secure in the asset-driven spending posture that resulted, consumers saw no need to save the old-fashioned way out of earned labor income. That's why the personal saving rate has collapsed and currently stands near zero. Asset-based consumption is also at the core of America's current-account problem. In an income-based accounting framework, the "missing saving" has to come from somewhere. In this case, that "somewhere" is the foreign saver -- giving rise to the current-account and trade deficits required to attract the foreign capital. As a result, the US current-account gap probably exceeded 6.5% of GDP in the first quarter of 2005 -- easily another record and well in excess of the 4% deficit prevailing in the mid-1990s.
This whole story, in my view, remains balanced on the head of a pin of absurdly low real interest rates. And the Fed has certainly been pivotal in nurturing this low-interest-rate regime. In an extraordinary display of policy accommodation, the real federal funds rate is only now moving above the zero threshold after having spent three years in negative territory. Of course, a central bank has little choice to do otherwise if it has made a conscious decision to underwrite the Asset Economy. After all, it takes low interest rates to provide valuation support to most financial assets -- initially stocks, then bonds, and now property. Furthermore, it takes low rates to make refi debt -- and the equity extraction it sponsors -- look attractive from a carrying cost perspective. Low rates also discourage income-based saving by underscoring the paltry returns available to savers in traditional asset classes. A migration to riskier assets -- such as property and "spread" products (i.e., high-yield and emerging market debt) -- is encouraged as a result. And low real rates make it easier to finance an ever-widening current-account deficit -- especially if the incremental flows come from foreign central banks, where there is reason to tolerate subpar returns in exchange for currency competitiveness. In short, without low real interest rates, the Asset Economy -- and all of its inherent imbalances and excesses -- is nothing.
The Fed is not only hard at work in the engine room in keeping the magic alive with a super-accommodative monetary policy but is has also become the intellectual architect of the New Macro. Time and again, since Alan Greenspan rolled out his New Paradigm theory in the late 1990s, senior Federal Reserve policy makers have taken the lead role as proselytizers of a new macro spin that condones the saving, debt, property bubble, and current-account excesses of the Asset Economy. The examples are far too numerous to mention, but consider the following highlights:
* Chairman Greenspan has made light of traditional measures of household indebtedness -- even going so far as to urge consumers to move from fixed to floating rate obligations (see his February 23, 2004, speech, Understanding Household Debt Obligations. Note: All references are to speeches available on the Fed's website at www.federalreserve.gov).
* Fed governors have also borrowed a page from the Roaring 1990s in denying the possibility of a housing bubble (see Chairman Greenspan's October 19, 2004, speech, The Mortgage Market and Consumer Debt, and Governor Kohn's April 1, 2004, speech, Monetary Policy and Imbalances).
* More recently, an army of senior Fed officials -- namely, Chairman Greenspan, Vice Chairman Ferguson, and Governors Bernanke and Kohn -- have unleashed a veritable broadside against the time-honored notion of the current-account adjustment (see their various 2005 speeches, especially Governor Kohn's April 22 speech, Imbalances and the US Economy, Vice Chairman Ferguson's April 20 speech, U.S. Current Account Deficit: Causes and Consequences, and Chairman Greenspan's February 4 speech, Current Account).
* Governor Bernanke has also led the charge in coming up with a new theory of national saving -- that the United States is actually doing the world a favor by absorbing a so-called glut of global saving (see his April 14, 2005, speech, The Global Saving Glut and the U.S. Current Account Deficit); Vice Chairman Ferguson has been on a similar wavelength in dismissing concerns over subpar personal saving (see his October 6, 2004, speech, Questions and Reflections on the Personal Saving Rate).
Is this is an appropriate role for a central bank? In my view, absolutely not. The problem with an activist central bank is that decision makers in the real economy -- consumers and businesspeople alike -- mistake the Fed's point of view for strategic advice. And so do financial market participants. After hearing the Fed pound the table, consumers feel left out if they don't spend their housing equity. Business managers felt equally deprived in the late 1990s if their companies didn't achieve the dotcom-type valuations in the stock market that Chairman Greenspan insisted in the late 1990s and even early 2000 were well grounded in a once-in-a-century productivity miracle. The resulting overhang of excess IT spending was a direct outgrowth of this perceived deprivation. Needless to say, when investors and financial speculators saw the equity train leave the station and the Fed condone the high growth of a productivity-led economy by leaving interest rates low, they saw no reason to believe that a bubble was about to burst. When consumers hear from a Fed chairman that it makes little sense to take on fixed rate debt, they rush to floating rate instruments; not by coincidence, the adjustable rate portion of newly originated mortgage debt shot up in the immediate aftermath of Chairman Greenspan's comments on consumer indebtedness. And should asset-dependent, saving-short, overly indebted American consumers feel at risk if the Fed assures them that there is no housing bubble -- that the asset-based underpinnings of their decision making are well grounded? A record consumption share in the US economy -- 71% of GDP since 2002 versus a 67% norm over the 1975 to 2000 period -- speaks for itself.
The rhetorical flourishes of America's central bankers have dug the US economy -- and by definition, a US-centric global economy -- into a deep hole. To this very day, the Fed has never confessed to the Original Sin of condoning the equity bubble. On the contrary, Greenspan & Company have been on the defensive ever since by dismissing the increasingly dangerous repercussions of the original post-bubble shakeout. Far from playing the role of the tough guy that is required of independent central bankers, the Fed has become an advocate of the easy money of a powerful liquidity cycle. One bubble has since begotten another -- from equities to bonds to fixed income spread products (i.e., emerging market and high-yield debt) to property. And financial markets have gone along for the ride -- not just in the US but also around the world as global investors and foreign central banks have rushed with reckless abandon to finance America's record current-account deficit.
The day is close at hand when US monetary policy must get real. At a minimum, that will require a normalization of real interest rates. Given the excesses that now exist, it may even require a federal funds rate that needs to move into the restrictive zone -- possibly as high as 5.5%. Yes, this would cause an outcry -- perhaps similar to that which occurred in the spring of 1997 on the occasion of the Original Sin. But in the end, there may be no other choice. Fedspeak has taken us into the greatest moral hazard dilemma of all -- how to wean an asset-dependent system from unsustainably low real interest rates without bringing the entire House of Cards down. The longer the Fed waits, the more perilous the exit strategy.
In all my years in this business, never before have I seen a central bank attempt to spin the debate as America's Federal Reserve has over the past six or seven years. From the New Paradigm mantra of the late 1990s to today's new theories of the current-account adjustment, the US central bank has led the charge in attempting to rewrite conventional macroeconomics and in making an effort to convince market participants of the wisdom of its revisionist theories. The problem is that this recasting of macro is very self-serving. It is a concentrated effort on the part of the Fed to exonerate itself from the Original Sin of failing to address asset bubbles. The result is an ever-deepening moral hazard dilemma that poses grave threats to financial markets.
I am not a believer in conspiracy theories. But the Fed's behavior since the late 1990s is starting to change my mind. It all began with Alan Greenspan's worries over "irrational exuberance" on December 5, 1996, when a surging Dow Jones Industrial Average closed at 6437. The subsequent Fed tightening in March 1997 was aimed not only at the asset bubble itself, but at the impacts such excessive appreciation in equity markets were having on the real economy -- consumers and businesses alike. It was a classic example of the Fed playing the role of the tough guy -- the central bank that, to paraphrase the words of former Chairman William McChesney Martin, "takes away the punchbowl just when the party is getting good." Unfortunately, the tough guys weren't so tough after all. Predictably, there was a huge outcry on Capitol Hill as the Fed took aim on the US stock market. But rather than stay the course as an independent central bank should, the Fed ran for cover in the face of political criticism. Not only were its initial bubble-containment efforts put aside, but Alan Greenspan went on to champion the notion of a sea-change in the macro climate -- a once-in-a-century productivity miracle that would justify the stock market's exuberance as rational. That was the Original Sin that has since been compounded in the years that have followed.
Out of that pivotal moment in the late 1990s, a New Economy actually did come into being. But it was not the new economy of ever-accelerating productivity growth that infatuated the New Paradigm Crowd and legions of equity-market speculators. Instead, it was the Asset Economy that enabled consumers and businesses to draw on the pixie dust of a new source of purchasing power -- asset appreciation -- as a means to augment what has since turned into a stunning shortfall of organic domestic income generation.
Unfortunately, the asset-based spending model has given rise to many of the distortions and imbalances evident in the US today. That's especially true of low saving rates, the housing bubble, high debt loads, and a runaway current account deficit. When the equity bubble burst, asset-dependent American consumers barely skipped a beat. Courtesy of an extraordinary shift to monetary accommodation, the pendulum of asset depreciation quickly swung into property markets; US house-price inflation has since surged to a 25-year high. To the extent that equity extraction from ever-rising property appreciation was viewed as a substitute for organic sources of labor income generation, hard-pressed consumers went deeply into debt to monetize the windfall. As a result, household sector indebtedness surged to nearly 90% of US GDP -- an all-time record and up over 20 percentage points from levels in the mid-1990s when the Asset Economy was born. Secure in the asset-driven spending posture that resulted, consumers saw no need to save the old-fashioned way out of earned labor income. That's why the personal saving rate has collapsed and currently stands near zero. Asset-based consumption is also at the core of America's current-account problem. In an income-based accounting framework, the "missing saving" has to come from somewhere. In this case, that "somewhere" is the foreign saver -- giving rise to the current-account and trade deficits required to attract the foreign capital. As a result, the US current-account gap probably exceeded 6.5% of GDP in the first quarter of 2005 -- easily another record and well in excess of the 4% deficit prevailing in the mid-1990s.
This whole story, in my view, remains balanced on the head of a pin of absurdly low real interest rates. And the Fed has certainly been pivotal in nurturing this low-interest-rate regime. In an extraordinary display of policy accommodation, the real federal funds rate is only now moving above the zero threshold after having spent three years in negative territory. Of course, a central bank has little choice to do otherwise if it has made a conscious decision to underwrite the Asset Economy. After all, it takes low interest rates to provide valuation support to most financial assets -- initially stocks, then bonds, and now property. Furthermore, it takes low rates to make refi debt -- and the equity extraction it sponsors -- look attractive from a carrying cost perspective. Low rates also discourage income-based saving by underscoring the paltry returns available to savers in traditional asset classes. A migration to riskier assets -- such as property and "spread" products (i.e., high-yield and emerging market debt) -- is encouraged as a result. And low real rates make it easier to finance an ever-widening current-account deficit -- especially if the incremental flows come from foreign central banks, where there is reason to tolerate subpar returns in exchange for currency competitiveness. In short, without low real interest rates, the Asset Economy -- and all of its inherent imbalances and excesses -- is nothing.
The Fed is not only hard at work in the engine room in keeping the magic alive with a super-accommodative monetary policy but is has also become the intellectual architect of the New Macro. Time and again, since Alan Greenspan rolled out his New Paradigm theory in the late 1990s, senior Federal Reserve policy makers have taken the lead role as proselytizers of a new macro spin that condones the saving, debt, property bubble, and current-account excesses of the Asset Economy. The examples are far too numerous to mention, but consider the following highlights:
* Chairman Greenspan has made light of traditional measures of household indebtedness -- even going so far as to urge consumers to move from fixed to floating rate obligations (see his February 23, 2004, speech, Understanding Household Debt Obligations. Note: All references are to speeches available on the Fed's website at www.federalreserve.gov).
* Fed governors have also borrowed a page from the Roaring 1990s in denying the possibility of a housing bubble (see Chairman Greenspan's October 19, 2004, speech, The Mortgage Market and Consumer Debt, and Governor Kohn's April 1, 2004, speech, Monetary Policy and Imbalances).
* More recently, an army of senior Fed officials -- namely, Chairman Greenspan, Vice Chairman Ferguson, and Governors Bernanke and Kohn -- have unleashed a veritable broadside against the time-honored notion of the current-account adjustment (see their various 2005 speeches, especially Governor Kohn's April 22 speech, Imbalances and the US Economy, Vice Chairman Ferguson's April 20 speech, U.S. Current Account Deficit: Causes and Consequences, and Chairman Greenspan's February 4 speech, Current Account).
* Governor Bernanke has also led the charge in coming up with a new theory of national saving -- that the United States is actually doing the world a favor by absorbing a so-called glut of global saving (see his April 14, 2005, speech, The Global Saving Glut and the U.S. Current Account Deficit); Vice Chairman Ferguson has been on a similar wavelength in dismissing concerns over subpar personal saving (see his October 6, 2004, speech, Questions and Reflections on the Personal Saving Rate).
Is this is an appropriate role for a central bank? In my view, absolutely not. The problem with an activist central bank is that decision makers in the real economy -- consumers and businesspeople alike -- mistake the Fed's point of view for strategic advice. And so do financial market participants. After hearing the Fed pound the table, consumers feel left out if they don't spend their housing equity. Business managers felt equally deprived in the late 1990s if their companies didn't achieve the dotcom-type valuations in the stock market that Chairman Greenspan insisted in the late 1990s and even early 2000 were well grounded in a once-in-a-century productivity miracle. The resulting overhang of excess IT spending was a direct outgrowth of this perceived deprivation. Needless to say, when investors and financial speculators saw the equity train leave the station and the Fed condone the high growth of a productivity-led economy by leaving interest rates low, they saw no reason to believe that a bubble was about to burst. When consumers hear from a Fed chairman that it makes little sense to take on fixed rate debt, they rush to floating rate instruments; not by coincidence, the adjustable rate portion of newly originated mortgage debt shot up in the immediate aftermath of Chairman Greenspan's comments on consumer indebtedness. And should asset-dependent, saving-short, overly indebted American consumers feel at risk if the Fed assures them that there is no housing bubble -- that the asset-based underpinnings of their decision making are well grounded? A record consumption share in the US economy -- 71% of GDP since 2002 versus a 67% norm over the 1975 to 2000 period -- speaks for itself.
The rhetorical flourishes of America's central bankers have dug the US economy -- and by definition, a US-centric global economy -- into a deep hole. To this very day, the Fed has never confessed to the Original Sin of condoning the equity bubble. On the contrary, Greenspan & Company have been on the defensive ever since by dismissing the increasingly dangerous repercussions of the original post-bubble shakeout. Far from playing the role of the tough guy that is required of independent central bankers, the Fed has become an advocate of the easy money of a powerful liquidity cycle. One bubble has since begotten another -- from equities to bonds to fixed income spread products (i.e., emerging market and high-yield debt) to property. And financial markets have gone along for the ride -- not just in the US but also around the world as global investors and foreign central banks have rushed with reckless abandon to finance America's record current-account deficit.
The day is close at hand when US monetary policy must get real. At a minimum, that will require a normalization of real interest rates. Given the excesses that now exist, it may even require a federal funds rate that needs to move into the restrictive zone -- possibly as high as 5.5%. Yes, this would cause an outcry -- perhaps similar to that which occurred in the spring of 1997 on the occasion of the Original Sin. But in the end, there may be no other choice. Fedspeak has taken us into the greatest moral hazard dilemma of all -- how to wean an asset-dependent system from unsustainably low real interest rates without bringing the entire House of Cards down. The longer the Fed waits, the more perilous the exit strategy.
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