re: China turning Japanese; about being an agnostic, a skeptic, as an investor, needing to be convinced of investment merit; about profoundly leveraged economies being deflationary; about UK being in much better position than weak countries in Euro b/c UK has independent monetary policy
Doug Noland on Deficits and Private Sector Credit
scroll half way down to get to:
The bullish contingent is these days increasingly confident that there is much more to the recovery than a mere stimulus-induced “sugar high.” The marketplace now comfortably disregards bearish developments - and becomes further emboldened by “market resiliency”. The market this week brushed aside issues with Greece, China, Goldman and financial reform.more at the link
Complacency abounds, in true Bubble fashion. The U.S. stock market dismisses that there could be meaningful ramifications from the unfolding Greek debt crisis. Chinese authorities’ recent determination to restrict mortgage Credit barely garners a headline. And while the Goldman allegations generate great interest and discussion, few believe they will have much general market impact. Financial reform, well, it’s an afterthought when the market is open. Market participants are enamored with the notion that the securities markets and real economy are now conjoined in the initial phase of a big bull cycle.
Count me a subscriber of the “sugar high” thesis. The combination of double-digit (to GDP) deficits, protracted near-zero rates, and the Fed’s unprecedented Trillion-plus monetization has worked wonders. Government stimulus stabilized the Credit system, asset prices, system incomes and economic output. The bulls today believe that a new expansionary cycle has commenced, and fundamentals and prospects couldn’t be much more encouraging from their point of view. Surging stock prices have the optimists disregarding the possibility of a systemic addiction to massive
government spending, ultra-low rates, and overabundant marketplace liquidity.
Potential issues in the area of risk intermediation are not on the radar screen.
Yet, the sustainability of this recovery will be determined by private sector Credit - eventually. The markets assume private Credit growth will snap back after its long recuperation – as it always has in the past. But, mostly, analysts expend little energy pondering this issue. Deficits of about 10% of GDP, rapid expansion of government-backed Credit (MBS, “build America bonds,” student loans, bank deposits, etc.), and near-zero rates have created a recovery backdrop where minimal private-sector growth has sufficed. This won’t always be the case.
...
At about 70% of GDP, outstanding Treasury debt is not on the surface overly alarming. Obviously, if one throws in GSE liabilities and the massive future spending obligations related to social security, healthcare, pensions, etc., things are much worse. Yet it is conventional wisdom that the U.S. has the luxury of several years to get its fiscal house in order. And there is today great faith that economic recovery will, as it always does, lead a revival of government receipts and ensure rapidly declining deficits. Count me skeptical. The previous Bubble helped disguise underlying structural debt issues at the state, local and federal levels. Going forward it’s payback time.
WSJ's # of the Week: 103 Months to Clear Housing Inventory
re: banks have inventory of 1.1 million foreclosed homes; another 4.8 million homeowners at least 60days delinquent; HAMP modifications no panacea, as many become recidivist
I don't agree with James Grant about everything (particularly his view on prospective inflation; I take the Rosenberg side of the debate that can be found here -- be warned, huge file), but i certainly agree with him about this: The best financial reform: let the bankers fail.
excerpts:
NYT's summary of Fixes for the financial system.The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits.....
No surprise, then, the perversity of Wall Street's incentives. For rolling the dice, the payoff is potentially immense. For failure, the personal cost -- while regrettable -- is manageable.....
The substitution of collective responsibility for individual responsibility is the fatal story line of modern American finance.....
The job before Congress is to bring the fear of God back to Wall Street. Not to stifle enterprise but quite the opposite: to restore real capitalism. By all means, let the bankers savor the sweets of their success. But let them, and their stockholders, pay dearly for their failures. Fair's fair.
includes Stiglitz, Pozen, Kotlikoff, Andrew Lo
Marc Faber interview on China
re: bubbles, inevitability of its bursting, but difficulty timing that; Chinese govt wants strong economy, without unintended consequence of rampant speculation; like in US, property market has become too important for whole economy; sold Japan short in 1988, had to wait 2 years, sold tech stock short in 1998, had to wait two years --- may have to wait 6 or 12 or 18 mths, but all danger signals in place; implications for Australian market and commodity markets of China crash; housing bubbles exist also in Australia and Canada; crash impossible to time, but imminent Chinese slowdown, regardless; yuan undervalued by half, should doubled
Looking back, looking forward. John Hussman.
i recommend reading the whole she-bang, but here are key excerpts:
As of last week, our most comprehensive measure of market valuation reached a
price-to-normalized earnings multiple of 19.1, exceeding the peaks of August 1987 (18.6) and December 1973 (18.3). Outside of the valuations achieved during the late 1990's bubble and the approach to the 2007 market peak, the only other historical observation exceeding the current level of valuation was the extreme of 20.1 reached just prior to the 1929 crash....
That said, valuations have never been useful as an indicator of near-term market fluctuations - a shortcoming that has been amplified since the late 1990's. The lesson that valuations are important to long-term investment outcomes is underscored by the fact that the S&P 500 has lagged Treasury bills over the past 13 years,
including dividends. Yet the fact that these 13 years have included three successive approaches (2000, 2007, and today) to valuation peaks - at the very extremes of historical experience - is evidence that investors don't appreciate the link between valuation and subsequent returns. So they will predictably experience steep losses and mediocre returns yet again. Ironically, before they do, it also means that investors who take valuations seriously (including us) can expect temporary periods of frustration.
I've long noted that the analysis of market action can help to overcome some of this frustration, as stocks have often provided good returns despite rich valuations so long as market internals were strong, and the environment was not yet characterized by a syndrome of overvalued, overbought, overbullish, and rising yield conditions. In
hindsight, the stock market has followed this typical post-war pattern, and we clearly could have captured some portion of the market's gains over the past year had I ignored the risk of a second wave of credit strains (which I remain concerned about, primarily over the coming months).
It is important to recognize, however, that even if we had approached the recent economic environment as a typical, run-of-the-mill postwar downturn, we would now be defensive again, as a result of the current overvalued, overbought, overbullish,
rising yields syndrome. I do recognize that my credibility in sounding a cautious note would presently be stronger if I had ignored further credit risks and captured some of the past year's gains. But the awful outcome of this same set of conditions, which we also observed in 2007, should provide enough credibility.....
First, my primary concern with regard to fresh credit strains would be the period of recognition. We may very well have a multi-year period over which the full effects of deleveraging is actually felt, but the most damaging declines often occur where reality departs materially from expectations. The past year has been seen an easing of credit strains even as the volume of delinquent loans has hit new records, partially because of the abandonment of mark-to-market accounting, and partly because mortgages are long-term assets and it's possible to kick the can down the road with mortgages that aren't being serviced. It's unlikely in any event that these problems have actually been solved, because we can't reconcile the quantity of delinquent
loans with the tamer figures for foreclosures and writedowns. Still, we need
several more months of data before we can start relying on "extend and pretend"
to dispense with the problem through an extended period of chargeoffs and Fannie/Freddie bailouts. Meanwhile, I remain concerned.
The economy and the markets have enjoyed a great deal of positive effect from the enormous deficit spending of the past 18 months (if it doesn't seem that the economy has benefited, consider the dismal the profile of GDP and personal income when
stimulus spending and transfer payments are excluded). It's not at all clear that these effects are durable, and it's also not clear to what extent bank assets have been marked up, passed off to Fannie and Freddie, or otherwise obscured.....
What if the market simply moves higher? It is safe to say that at current valuations, a continued extension of overvalued, overbought, overbullish conditions, with no reprieve from interest rate pressures, would keep us in a hedged stance. The Strategic Growth Fund is not appropriate for investors who wish to speculate under that specific set of conditions, because we have no historical evidence that it is sensible to take market risk, on average, once that syndrome emerges.
Presently, the market is strenuously overvalued, faces a syndrome of overextended conditions that has historically proved hostile, and relies on the absence of further credit strains to an extent that strikes me as incredible....
As of last week, the Market Climate in stocks remained characterized by an overvalued, overbought, overbullish, rising-yields syndrome that has historically produced periods of marginal new highs, slight declines, and yet further marginal highs, followed somewhat unpredictably by nearly vertical drops. I've often accompanied the description of this syndrome with the word "excruciating," because the apparent resiliency of the market and the celebration of each fresh high, can make it difficult to maintain a defensive stance. Interestingly, the analysts at
Nautilus Capital recently noted that the most closely correlated periods in market history to this one were the advances of 1929 and 2007. While exact replication of those advances would allow for a couple more weeks of further strength, we've generally found it dangerous to expect history to do more than rhyme. These hostile syndromes have a tendency to erase weeks of upside progress in a few days.
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