"The world"

"The world," is often the answer I proffer when my wife asks me of the cause of my scowl. It's an all encompassing answer, and one which she offers reciprocally to my questions of concern.

I know it's important to keep one's cool, to lift the mind above the details of uptick rules, carbon emission standards, toxic assets, and national burn-on-burn politics (Grassley with the cross-over, Frank with the pump fake). Yet, from an altitude of perspective, things really do not look all that good. A few years ago, I could rise up and see a flattening of world sorrows from here to the horizon. This too shall pass away with time.

Now, though, all I can see is the churn. The world is changing, like it or not. The last great change like this began with the Great Depression and ran through the Korean War, with aftershocks in Czechoslovakia, Vietnam, the Cultural Revolution, and the political troubles in Central America.

Demographically speaking, the pillars that kept the world aloft during the past eighty years are in a state of peril. Russia is shrinking. Europe's whites are grey, and the young are brown. America's immigration iteration takes us farther and farther away from Jefferson's plantation. People think of China as the next great power, but that is incorrect. Their population will age and decline dramatically in the next quarter century; the young are too male. China is hemmed in by nuclear powers -- it's army and national police will have no local imperial outlet. The threat or promise of a great Chinese power is overstated at best. Woe to be a Chinese peasant, though, at the mercy of a police state powered by a fiat economy.

Even without pillars, the world will stand. But it will be an ad hoc structure resembling bazaars in India or Brazil. Chaotic, inefficient places that somehow produce results.

Yet I fear for a world increasingly beholden to the third law of thermodynamics. I fear it because it's unknown and unfamiliar. I fear it because I have a child. As the churn grows and foments popular yearning for change, visions of calamity begin to take shape. To build a better world, which is what billions are now demanding, requires uprooting the weeds that threaten to choke off water and light. Those in power now will not relinquish their standing so easily. As the energies of billions coalesce, the vehicles of differences amongst the innumerable world tribes will crash against each other. I fear that inevitable friction -- and its sparks -- more than I fear whatever perfect world might result after the churn flattens down again.

QE

The Fed announced plans to buy up $300B in Treasury bonds. Now to be clear, the Fed is not buying up existing holdings of Treasuries, but is instead planning to be a buyer in imminent debt issuances by the U.S. Government. This means that the Fed still has one arrow left in its quiver.

I am grappling with the timing of the Fed's move. The stock market sustained a rally until the news of the Fed's plans hit the net. Investors were starting to feel the bottom. Now, the uncertainty that has dogged the market for over three quarters is back.

Why now? A strong dollar in the short run is still a good thing. It keeps energy prices low and provides a stable backbone to the world economy. A strong dollar maintains the sense of safety inherent in Treasury bills and supports confidence in the U.S. as a government and as an economy.

According to form, QE is implemented when a zero interest rate regime fails to stimulate economic activity. The central bank then needs to scare people out of currency and into assets, and the best way to do that is to weaken the currency. So, if the market is rallying, which signifies a return to risk-taking, then there is no need to scare people into buying assets. Contrariwise, a rational investor (are there any rational investors left?) would interpret QE in the midst of a rally as a signal that the economy is still too dangerous for play.

Furthermore, for the stimulus to be effective, stuff needs to be purchased. With a weaker currency, the stimulus money will buy less. And who believes that the difference will be made up by increased exports?

"Hello, my name is liquidity trap."

Unless investors perceive the Fed's move as immaterial, or a signal that the worst is behind us (meaning that the economy is leveled out and we can move on to inflating our debt away), then the market rally should continue. If the Fed's move is interpreted as a move to correct even greater underlying problems (e.g., a fear that there won't be enough buyers of U.S. debt; i.e., China; cf. Italy), then investors will return to the sidelines, content to lose a little against inflation instead of losing a lot against a still-retreating market. Where does that leave us? With tiptoes tickling the iron jaws of a liquidity trap.

Smick on WaPo

If you are familiar at all with Smick's thinking, he is suspicious of populism/protectionism. He might be right here.

Smick lives in the land of geniuses, and doesn't seem comfortable integrating the sources of populism and protectionism. Namely: voters/constituents. It's hard to fault Americans who want to see financial institutions held accountable for their misdeeds. I would qualify Smick's article by adding that Obama needs time to build the case that either a) the banks are solvent; or b) the banks are insolvent. The former needs time to see if markets will rebound in the face of continued uncertainty. The latter requires investigation into the counterparty risk and maximum toxic exposure of the big banks. If the banks are truly insolvent, and Obama has to get all Swedish on 'em, there can't be allegations that he's a commie. Hence the plans to report all findings on the Treasury's website. If the banks are broken beyond repair, and taxpayers are going to take a bath, there must be nearly unanimous support for the necessary actions to place the banks into receivership and pay out all their obligations to bond holders (on top of whatever amount FDIC has to cough up for depositors).

So, please, take your time, Mr. President. Keep it all transparent.

Oops, No New China Stimulus

Something is not right here:

China targets 8% growth despite crisis: (courtesy of FT) Apparently China will not increase its deficit spending. Wen says that China will meet its 8% growth target based on the previous stimulus initiatives. Plus, the Chinese are sending peaceful overtures to Taiwan, while significantly increasing military spending.

What am I not seeing? I know the world leaders have been waiting on Obama to save the American economy, remembering the countless times the American industrial/financial machine has buoyed the world economy. Yet, at the same time, how could anyone see the Recovery Act as a sign of improvement? Plus, Geithner and Bernanke are warning of further catastrophe, even though the banking industry has shown increased signs of stability.

I think back to Spring 2007 when the housing market began its collapse, and the regulators and financial industry leaders thought everything would be contained. Contagion spread as the derivatives house of cards collapsed, and now the economy is in a mild depression. Worldwide, the problems are more severe as half of Europe faces national defaults. Russia is not even a country any more (well, maybe that's a little harsh, but it is certainly teetering on the brink of dissolution). China increasingly relies on its military army and its army of police to tamp down unrest. Et cetera.

I guess I just don't understand how the leaders of China, Canada, France, and Germany are failing to see the urgency to take action rather than wait for America to get straightened out. Maybe I'm wrong and Rome isn't burning. Yet, somehow, it would not surprise me at all to learn that the world is led by a coterie of Neros.

Back to China. Much of their allocated spending will be directed internally. Building schools and supporting local industry. In my estimation, this is exactly what China should be doing right now. It corrects global imbalances while putting inland Chinese to work. But is it enough? Maybe the question, and the answer, is whether China can do more.

Cramer versus Obama

I tend to agree with Cramer here. The Recovery Act is full of junk and lacks vision. Obama let others craft a plan portrayed as a strategy to stimulate the economy, but which is instead a debt creation initiative to be paid down by future generations. Of course, a worse (and more likely) scenario is that future generations will see today's balance inflated away.

Obama is capable of something more. The country is changing; the whole world is changing. By letting Congress choose the direction of federal outlays, Obama deferred to the status quo, which we all know is broken.

As I predicted, China would gauge the winds before deploying their own stimulus. They have done so, and the initial reaction by the investor class is positive. I'm going to look at some of the details before lending my own opinion, but I would suspect that people who are long on oil will find something to smile about. Of course, a China stimulus repairs the status quo, it does not project the world economy into the future.

Sadly, there will be more breakage in the economy before things will get set right. Obama missed his chance to be the architect of the future economy. Rather, he sowed the seeds for the inevitable breakup of the Union of Fifty States. More on that subject some other time.

The Bottom

I'll be laughed at, probably, but the bottom of the market is here. We will still see a lot of volatility, and an upward trend won't be discernible for another 9 months at least. But, now would be a good time to go in for a low cost, domestic index fund. I'd do it myself except that my liabilities (college debt) grow at a greater rate than any asset would appreciate. So, like the banks, I'm still deleveraging.

The TALF will freeze toxic asset prices as institutions swap CDOs and other junk for Fed money. This should jump start the securitization market beyond what Freddie and Fannie have been ordered to do.

But there's still systemic problems requiring a lot of time and anguish (and legislation) to resolve. Beware anything remotely resembling a bubble: energy, biotech, green stuff, discount retail, etc.