Someone sent out the hounds, using fear of a weakening dollar as propaganda against the administration's policies. Yet as I have mentioned before, problems persist in the global economy (especially the European part of it). All major currencies will have to devalue themselves in the coming months. As the business cycle continues its downward trajectory, wise big money investors will continue to see the dollar as a safe haven.
Scorecard: America still leading by a nose. Chinese horse soon to be disqualified for steroids. European entry suffering from anemia. Latin American horses unsure whether the race track runs clockwise or counterclockwise. Indian steed making gains. Vitamin-rich Canadian and Australians making promising strides. Poor, limping Japanese mount -- why can't it catch a break?
Thursday, May 21, 2009
Wednesday, May 20, 2009
Note for the Medievalists, aka Gold Standard Dummies
Hello Ron Paul moonies, I would just like to point out that a gold standard can be manipulated in exactly the same ways as a fiat currency. Market forces have no more impact on a gold-based currency than a fiat currency.
Those who favor a return to the gold standard (you know, the good ol' days before 1933) are in the same position as certain French or Japanese nobles were during the 16th century, arguing in favor of heavy infantry in a gunpowder age. The French adapted and became a world power for several centuries. The Japanese closed their borders and became a backwater until reality hit them in the face.
Like it or not, we live in a world where central banks wield enormous power. The policies of these central banks are transnational in effect. Coordination amongst these banks (undemocratic actions indeed) are necessary to prevent systemic collapses.
What we have learned in this crisis should reify the role of the central bank in international conflict resolution. Watch in the coming months as China gets pressured into the modern world as the coordinated quantitative easing by the Fed, the ECB, and the various national European central banks forces the renmimbi up in value.
Those who favor a return to the gold standard (you know, the good ol' days before 1933) are in the same position as certain French or Japanese nobles were during the 16th century, arguing in favor of heavy infantry in a gunpowder age. The French adapted and became a world power for several centuries. The Japanese closed their borders and became a backwater until reality hit them in the face.
Like it or not, we live in a world where central banks wield enormous power. The policies of these central banks are transnational in effect. Coordination amongst these banks (undemocratic actions indeed) are necessary to prevent systemic collapses.
What we have learned in this crisis should reify the role of the central bank in international conflict resolution. Watch in the coming months as China gets pressured into the modern world as the coordinated quantitative easing by the Fed, the ECB, and the various national European central banks forces the renmimbi up in value.
Monday, May 18, 2009
Jobs, and a Call for Revolution
Bridgewater and John Mauldin are spreading the word. As I have mentioned before, the only priority right now should be job creation and establishing a backstop for the unemployed. This is all that matters right now. Forget North Korea and Iran. Let the DoJ handle the torture issue. Let FDIC raise funds for the eventual disintegration of one or more of the big banks.
Jobs.
Without them, we'll plunge into a depression that will destroy the Union of 50 States. Without them, the world economy will step back thirty years.
Here's what a Bridgewater analyst says:
In short, fixing finance won't fix the economy. This is a very important point to digest. Wall Street and the markets attract the big media buzz, and the Fed/Treas/SEC/FDIC are dedicated to the repair and growth of Dow Jones. They will all fail if Obama does not zero in on the jobs issue.
All unemployment benefits need to be extended indefinitely. This will be the only way to allow the country to delever and devalue still-bubbled assets. Companies that came in above expectations for Q1 did so on the cost-cutting power of layoffs. Sad, but true. There needs to be more of it. A lot more of it.
Is this contrary thinking to my shrill cry for more jobs? No. We need a backstop for job loss. We need to let companies regain their footing in a world where everything's being re-priced.
At the same time, we need to give the recently unemployed the opportunity for new ventures. Health care costs and business startup costs must be made reasonable. The recently unemployed have skills and experience that should not be put to waste. Untold innovation and improvement is being kicked to the curb.
I am calling for revolution. A small business revolution.
Jobs.
Without them, we'll plunge into a depression that will destroy the Union of 50 States. Without them, the world economy will step back thirty years.
Here's what a Bridgewater analyst says:
“Normally, labor markets lag the economy because incremental spending
transactions are financed via debt, stimulated by interest rate cuts. But as
long as credit remains frozen, spending will require income, and income comes
from jobs. And debt service payments are made out of income. Therefore, in a
deleveraging environment job growth becomes an important leading, causal
indicator of demand and other economic conditions."
In short, fixing finance won't fix the economy. This is a very important point to digest. Wall Street and the markets attract the big media buzz, and the Fed/Treas/SEC/FDIC are dedicated to the repair and growth of Dow Jones. They will all fail if Obama does not zero in on the jobs issue.
All unemployment benefits need to be extended indefinitely. This will be the only way to allow the country to delever and devalue still-bubbled assets. Companies that came in above expectations for Q1 did so on the cost-cutting power of layoffs. Sad, but true. There needs to be more of it. A lot more of it.
Is this contrary thinking to my shrill cry for more jobs? No. We need a backstop for job loss. We need to let companies regain their footing in a world where everything's being re-priced.
At the same time, we need to give the recently unemployed the opportunity for new ventures. Health care costs and business startup costs must be made reasonable. The recently unemployed have skills and experience that should not be put to waste. Untold innovation and improvement is being kicked to the curb.
I am calling for revolution. A small business revolution.
Friday, May 15, 2009
Obama Reading Roubini?
I guess the President was reading Roubini's NYTimes Op-Ed.
Thankfully, he doesn't make the mistake of saying the sky is falling on the dollar and instead places the emphasis on the fiscal component -- too much borrowing.
I sometimes wonder if it would make more sense for the US to default now rather than try to pay back all the obligations. Chapter 11, national style. If we had the national will to accept a lower standard of living and become an exporter nation, defaulting would be feasible. As it is, though, it would just be chaos.
So, everyone, rally around a reduction in spending. Or a sizeable increase in taxes. It comes down to a simple couple of questions: do you want less, or do you want to pay for what you're getting?
President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.
“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”
Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”
Thankfully, he doesn't make the mistake of saying the sky is falling on the dollar and instead places the emphasis on the fiscal component -- too much borrowing.
I sometimes wonder if it would make more sense for the US to default now rather than try to pay back all the obligations. Chapter 11, national style. If we had the national will to accept a lower standard of living and become an exporter nation, defaulting would be feasible. As it is, though, it would just be chaos.
So, everyone, rally around a reduction in spending. Or a sizeable increase in taxes. It comes down to a simple couple of questions: do you want less, or do you want to pay for what you're getting?
Thursday, May 14, 2009
Roubini in Forbes
Nuriel Roubini (Someone buy this man a pink or yellow suit! Too much gloom dampens the intellect, Professor) captured the worldwide state of the economy in Forbes. Not a bad article, and I found myself nodding while reading it. Typically, his articles make my face scrunch up. Plus, having doublechecked his math, I tend to treat his proclamations with great skepticism.
Of course, economics is a very complicated subject, and it's easy to get caught up in contradictions. Roubini is no exception.
His piece in the NYTimes described the coming collapse of the dollar. Yet, he forgets the simplest concept in foreign exchange: currencies are measured against each other. Consider all the debt issuance already done by the Fed/Treas. Why hasn't the dollar already collapsed? Two reasons: measured against other currencies, the dollar stays strong because of two factors: 1) The USA's GDP is shrinking less than its major competitors (and you have to consider that China's numbers are fanciful at best), and 2) other central banks are also printing money in their respective local currencies (increased supply on both sides of the value comparison). Roubini's Forbes piece captures these two phenomena quite succinctly.
As time goes by, the American financial sector will recover. When it does, the Fed will pull back the excess liquidity to take some of the steam out of inflation. At the same time, other countries will have to do the same thing (decoupling is a myth not unlike the Montauk Monster), and probably with steeper interest rate targets. Inflationary pressures will be much stronger in Europe and China than in the US. This fact alone will keep the dollar atop the list of favorite currencies. Yes, the US will see inflation, but it will be a result of competition with Brazilian, Indian, Korean, Japanese, and some other -- yet unknown (rubles, anyone?) -- currencies. Those countries will export stuff we like -- or perform services we think are useful. Their national balance sheets will be stabilizing. Plus, cost of production and transporation (OIL!) will drive up prices at the wholesale and consumer levels.
Net result: dollar still reigns, despite inflation. But, there will be greater parity.
Of course, economics is a very complicated subject, and it's easy to get caught up in contradictions. Roubini is no exception.
His piece in the NYTimes described the coming collapse of the dollar. Yet, he forgets the simplest concept in foreign exchange: currencies are measured against each other. Consider all the debt issuance already done by the Fed/Treas. Why hasn't the dollar already collapsed? Two reasons: measured against other currencies, the dollar stays strong because of two factors: 1) The USA's GDP is shrinking less than its major competitors (and you have to consider that China's numbers are fanciful at best), and 2) other central banks are also printing money in their respective local currencies (increased supply on both sides of the value comparison). Roubini's Forbes piece captures these two phenomena quite succinctly.
As time goes by, the American financial sector will recover. When it does, the Fed will pull back the excess liquidity to take some of the steam out of inflation. At the same time, other countries will have to do the same thing (decoupling is a myth not unlike the Montauk Monster), and probably with steeper interest rate targets. Inflationary pressures will be much stronger in Europe and China than in the US. This fact alone will keep the dollar atop the list of favorite currencies. Yes, the US will see inflation, but it will be a result of competition with Brazilian, Indian, Korean, Japanese, and some other -- yet unknown (rubles, anyone?) -- currencies. Those countries will export stuff we like -- or perform services we think are useful. Their national balance sheets will be stabilizing. Plus, cost of production and transporation (OIL!) will drive up prices at the wholesale and consumer levels.
Net result: dollar still reigns, despite inflation. But, there will be greater parity.
Small Business Gandhi
The markets fear Obama too much. Like Foch, they're fighting the last war. Obama is not FDR or LBJ.
His vision of wealth redistribution is retrospective and idealized, but not in a Marxist way. Think of him as small business Gandhi.
Gandhi believed, perhaps accurately, that the cultural soul of India was found in the villages and rural farming communities across the country. Likewise, Obama sees America's vitality coming from small businesses and entrepreneurs. If banks won't lend to small businesses, then the SBA will compete directly with the banks. He targets Wall Street, not as an enemy of labor unions, but as an enemy to the commonsense managers and proprietors of businesses on Main Street. In the Obama model, innovation is created by the Jerry Yangs of the world rather than the Vikram Pandits.
Is he right? Only if the necessary conditions for supporting an entrepreneurial model are in place. There are enormous barriers to entry caused by the confusing tax code and health care costs. One should not need to pay a lawyer and an accountant just to do business. It should be possible for a sole proprietor to keep her own books without losing competitive advantage to those who can afford to hire sophisticated accountants and lawyers. Right now, you need to have money to make money. Adding financing opportunities without addressing the tax code just places entrepreneurs into a deeper leveraged position than is warranted.
The cost of maintaining a small business is compounded by escalating health care costs. I don't know the solution, but this has to be addressed. Furthermore, many enterprising people are deterred from quitting their jobs and starting a new business because they don't want to lose their health benefits, which are too burdensome to afford on their own. Nationalizing health care would be the best thing ever for small businesses and innovation.
Gandhi's vision scared the modernists of his country. That's why he got shot. I fear that Obama's vision, should it continue to be qualified as "socialist" or "fascist" (make up your mind, people!), will pose a threat to the entire country. I do hope that the message gets out that he's targetting an entrenched class of million- and billionaires, not business as a whole. Obama is not riding with Stalin and the Bolsheviks, gunning for managers. Let's be real here. Without a better attempt at selling his vision of the new capitalism, however, his initiatives will be as effective at reforming the economy as Gandhi's white dhoti was at preventing the Kashmiri wind from chilling his skin.
His vision of wealth redistribution is retrospective and idealized, but not in a Marxist way. Think of him as small business Gandhi.
Gandhi believed, perhaps accurately, that the cultural soul of India was found in the villages and rural farming communities across the country. Likewise, Obama sees America's vitality coming from small businesses and entrepreneurs. If banks won't lend to small businesses, then the SBA will compete directly with the banks. He targets Wall Street, not as an enemy of labor unions, but as an enemy to the commonsense managers and proprietors of businesses on Main Street. In the Obama model, innovation is created by the Jerry Yangs of the world rather than the Vikram Pandits.
Is he right? Only if the necessary conditions for supporting an entrepreneurial model are in place. There are enormous barriers to entry caused by the confusing tax code and health care costs. One should not need to pay a lawyer and an accountant just to do business. It should be possible for a sole proprietor to keep her own books without losing competitive advantage to those who can afford to hire sophisticated accountants and lawyers. Right now, you need to have money to make money. Adding financing opportunities without addressing the tax code just places entrepreneurs into a deeper leveraged position than is warranted.
The cost of maintaining a small business is compounded by escalating health care costs. I don't know the solution, but this has to be addressed. Furthermore, many enterprising people are deterred from quitting their jobs and starting a new business because they don't want to lose their health benefits, which are too burdensome to afford on their own. Nationalizing health care would be the best thing ever for small businesses and innovation.
Gandhi's vision scared the modernists of his country. That's why he got shot. I fear that Obama's vision, should it continue to be qualified as "socialist" or "fascist" (make up your mind, people!), will pose a threat to the entire country. I do hope that the message gets out that he's targetting an entrenched class of million- and billionaires, not business as a whole. Obama is not riding with Stalin and the Bolsheviks, gunning for managers. Let's be real here. Without a better attempt at selling his vision of the new capitalism, however, his initiatives will be as effective at reforming the economy as Gandhi's white dhoti was at preventing the Kashmiri wind from chilling his skin.
What Now?
If the chatter is correct, and the big money behind the recent rally was mostly composed of short covers, then we're in for a pullback. Day traders got confused by the rally and ran up the prices on financials and oil. Both are under-valued, but both are suspect for quality. I still believe that oil prices will skyrocket again in the future, but the short run prospects are hard to gauge. I think I would get excited if a barrel of crude came back down to about $45.
Financials, though. Why not go to Vegas? Well, there's a reason financials are better than gambling: the gov't is backing them. Part of me thinks that a basket of about 19 financials corresponding to the big TARP institutions would stand to grow about 500% over the next fifteen years. But that's a big risk. No one knows what will become of the industry -- will consolidation wash out the weaker players? Will regulation kill the risk, and therefore the profit potential? I, for one, wouldn't touch the financials unless I had money to burn.
I still stand my statement that the market bottomed in March. The economy, meanwhile, is still losing. My intuitive take is that we will not see a full recovery for about a decade. Interestingly, this corresponds with the (now former) head economist of Merrill Lynch's analysis. Rosenberg thinks we're at the halfway point of an 18 year bull market. Good times all around.
Financials, though. Why not go to Vegas? Well, there's a reason financials are better than gambling: the gov't is backing them. Part of me thinks that a basket of about 19 financials corresponding to the big TARP institutions would stand to grow about 500% over the next fifteen years. But that's a big risk. No one knows what will become of the industry -- will consolidation wash out the weaker players? Will regulation kill the risk, and therefore the profit potential? I, for one, wouldn't touch the financials unless I had money to burn.
I still stand my statement that the market bottomed in March. The economy, meanwhile, is still losing. My intuitive take is that we will not see a full recovery for about a decade. Interestingly, this corresponds with the (now former) head economist of Merrill Lynch's analysis. Rosenberg thinks we're at the halfway point of an 18 year bull market. Good times all around.
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