THREE THINGS I THINK I THINK
17 November 2009 by Cullen Roche
16 Comments
- There is a powerful underlying bid in this market. Are investors chasing performance as they reallocate from low risk to high risk assets into year-end or is there something more nefarious going on here?
- Are we going to follow the 2003 script into year-end? The S&P rallied almost 5% in the final month of the year after a steady climb throughout 2003.
- The rally at this point appears to be entirely dependent on a weaker dollar. So let me get this straight: investors want to sell dollars because they are certain that the U.S. government will maintain a fiscally irresponsible policy approach for years to come and yet these same investors believe it is prudent to purchase equities with some portion of this dollar funded trade? That sounds oddly similar to what investors in Japan did in the early 90′s. How did that end? This falling dollar, rising stocks trend is not a sustainable trade or growth strategy.
TPC,
You forget about foreign investors in analyzing the link between the stock market and the US dollar. As the US dollar falls, US stocks become cheaper for foreign investors, and they are willing to bid them up, so effectively, the stock market mostly moves sideway from their perspective.
One of the various triggers that could prompt political pressure for a defense of the dollar, is that Bernanke is painting a big target sign on the back of US companies. Remember Conoco, the Dubai ports deals, etc. And foreign investors licking their chops at a chance to buy up US infrastructure, like toll roads, on the cheap. That is where Bernanke’s policies lead.
I think the main point is that this dollar carry trade won’t end well. This low interest rate policy has not proven to be an effective remedy to slow economic growth.
Peter Thiel -although he lost some credibility in the last 12 months- says the Usd is hugely undervalued (accordingly to PPP) vs. most currencies except the Chinese RMB, and the Usd carry trade should be close to the end… How close is hard to tell
While I would agree with you, I would also say that it is foolish to fight the monetary forces that are in motion here. Buying dollars right now is simply not prudent.
Right. In less than 24 hours Bernanke, Khon and Yellen said there are no bubbles.
I think they all meant to say “yet”.
I don’t know much about what happened / is happening in Japan other than the Richard Koo work that’s been linked to here.
Question: In the face of Japan’s extremely loose monetary and fiscal policies, the yen has always held up quite well relative to other currencies?
The US dollar has not in the face of this govt’s loose monetary and fiscal policies.
And so comparisons to Japan are flawed?
Also, Richard Koo’s thesis is that the Japanese govt. had to spend (fiscal policy) because loose monetary policy was not enough — as companies and individuals were focused on paying down debt even in the face of zero percent interest rates (and I have heard from guests of financial media that most Japanese do not participate in the stock market). In other words, Japanese companies were being responsible at the micro level; the problem was they did it all at once which is terrible at the macro level.
However, in the US, companies and individuals seem to be spending. Perhaps not in the real economy, but speculating in the stock market, emerging markets, commodities, etc. There is not the micro-level responsibility of Japan; companies are engaging in the same risky behavior again.
So just how valid are these comparisons to Japan?
The Yen cratered after its 1990 peak. It then moved sideways to down for 15 years as investors poured into the carry trade. The Yen has only been strong since 2007 when the Yen carry trade was unwound. In other words, investors are doing the EXACT same thing here.
I vehemently disagree with Koo’s theory that you can print your way out of a debt crisis. Japan was different in that their debts were not consumer based. They were banking and corporate based. But they aren’t a consumer driven economy as we are. Therefore, you have to ask yourself if our situation is in fact worse than theirs?
Consumers can continue to spend and be irresponsible. They can take advantage of cash for clunkers, homebuying tax credits and other policies that lead to more irresponsibility, but that doesn’t mean it is prudent. The debt collectors ALWAYS come. They will come for the U.S. consumer eventually just as they knocked on the doors of the corporations in Japan.
You can’t spend your way out of a debt crisis. You can only pay down the debt or come to an agreement with your creditors. We are doing neither.
The comparison, though imperfect, are very valid. Eerily so….
Thanks TPC,
I need to sit down and figure out what Japan can tell us taking into account the various US/Japan simlarities and differences.
The yen declined; the Nikkei declined. The inverse has been true of the USD and US markets.
It seems our debt problems are everywhere – business, consumer and govt., but the world continues to lend to us.
Your starting assumption needs modification – the Nikkei did not go down a straight line, it had many surges each time when the government announces a new stimulus or each time BoJ cut. That is rather consistent with what is happening now to the USD and the US stock indices. You should also not assume the world continues to lend you, because officially, the Fed monetizes about 50% of the US’s debt, after presumably a quick turn through the primary dealers for a handsome profit to the same, further enriching your favourite bank stocks bailed out with future taxes we all would be paying (unless of course you are planning to stay unemployed or refuses to pay sales taxes forever); but don’t take my world for it, read Mish Shedlock or even Denninger once a while.
Buying the dips has become a no brainer. That makes me think the people doing it must have no brains. This market isn’t just due for a correction, it’s due for a -20% reality check.
My feeling is that the reality check will start from the emerging mkts, I don’t have any evidence but I think there are huge positions there Usd funded
There is an incredible bid under this market. You just can’t keep it down no matter what.
There is a double dip ( correction if you want to call it that) coming. Like Karl Denninger always says, the math is always right. In this case we owe so much money in so many sectors that we have to deleverage or go to bankruptcy. The real question is which markets bubble will burst first, the US, Europe or China. Regardless of who is on first, it is going to cause the avalanche that brings down everyone.
What is odd is that retail flows shows investors allocating to bonds. Anyone seen any stats for pension funds? If not could all this be due to short covering and some massive hedging of MTM derivatives (? maybe all the insurance companies that sold guaranteed products, hedged, and now with the market going up are selling their hedges?
Smart step taken in by the US investors…it is surely going to get then lots of profit as soon the stock market will get a hike.