Sunday, December 13, 2009

Abu Dhabi bails out Dubai

In a sign that the risk trade has been restarted, Abu Dhabi announced that it will provide $10b to Dubai World, the sovereign wealth fund that was over-leveraged on risky assets. With this move, we should see stock markets power past their recent resistance points. In this market full of government cash and support, and little recourse for poor decision making, we should be mindful of investing in good balance sheets, and building our personal balance sheets for the next crisis to come. It will only be a matter of months before we start seeing an inflation crisis that will pull the weakest personal balance sheets to insolvency.

Tuesday, September 22, 2009

New Zealand steps out from the Recession

New Zealand became the latest country to statistically step out of the shadow of the recession, sparking an increased appetite for the carry trade, and thereby bringing the USD under pressure again overnight. Ironically, the country's growth was partially a result of dairy sales, which have caused such grief in Europe.

What's the Fed to do?

Tomorrow will be a significant day for the markets. It may mark the first day we hear the Fed's plans to exit the quantitative easing program initiated during the midst of the crisis. This could cause significant pain to the market short-term, but may provide a catalyst for the markets to move higher. As the Fed moves out of the mortgage business (effectively ending its purchases of 10 and 30-year treasuries), the market will need to soak up all the Treasury's liquidity without the U.S. government's assistance. I'm not sure where the heavy lifting will come from, and this may prompt higher yields in longer term treasuries. While this will reduce confidence in the U.S. dollar, it will do wonders for the competitiveness for U.S. exports, and bringing some inflation into the market. Depending on the velocity of the Fed's tightening of the money supply (through reduced treasury purchases), we will see this inflation bring higher commodity and equity prices, as future earnings prospects will accelerate.

On another note, it will be some time before we see the Fed increase the fed funds increase, as the Fed will need to first remove the layers of support that have been thrown over the faltering economy, including the quantitative easing, TARP and TALF programs. Thus, I see a steeper yield curve, a lower U.S. currency (vs. commodities at the very least), and better future prospects for the equities market. Only time will tell - the initial reaction is not necessarily the right one in the market.

Monday, September 21, 2009

Permabears turning bullish...Many bulls remain frozen in the headlights...

James Grant, a famous bear who had been harping about the housing and credit bubble for years, has turned remarkably bullish, in spite of his fears about the long-term implications of shoveling money into the economy. Grant evidences that in each major recession in the past, the economy has rebounded very quickly, and the harder we fall, the faster we rise.

With the economic meltdown as severe as it was in 2007-2009, it is clear that the next bull market will be much steeper than many predict, and it's great to have a permabear trade in his claws for some horns and hooves.

While Grant has become bullish, many economists and institutional managers alike remain bearish. This in itself is a bullish sign, and I am in the camp that we have entered a secular bull market, that many will only conclude is such a market when we make new highs on the S&P and Dow, which may still be years away. While we may have corrections (even at the current levels), my personal opinion (to be taken with a grain of salt) is that any correction will be fast and furious, to flush out the weakest of hands and the gambling speculators.

Tuesday, August 25, 2009

Thesis on the Market Recovery

It's been a few weeks since Warren Buffett's op-ed piece, "The Greenback Effect". Obviously the concerns being portrayed are one of a depreciating US currency. I personally see this as being only half the story.

I personally believe that most of the developed world is building a Ponzi scheme of debt, financing each others' ambitious infrastructure plans that will save capitalism from collapse. I don't doubt that this will have been the best approach given the circumstances in the marketplace at the time (frozen credit markets and a catatonic consumer base).

I theorize that the US currency may not fall versus most currencies worldwide, but most currencies will depreciate against hard assets and useable commodities, like oil, copper, etc. With the flood of cash, and some evidence that the credit markets are thawing (see the 750,000 cash for clunker deals that have taken place - at least some of those had to be financed), I expect that the velocity of cash will accelerate quickly through the economy, increasing demands for credit, in order to "get ahead of the curve". As companies will start showing increasing profits and revenues through this "cheap cash", the cash will continue to produce increasing cash through the marketplace (courtesy of the economic multiplier). This cash won't generate jobs as quickly as people anticipate - the market is not quick to bring jobs back into the forray, but productivity gains will continue to increase. The middle class is squeezed by the fact that jobs don't return as quickly as the economy does, and the price of goods increases by worldwide demands. Therefore, middle class individuals lose on two counts: less job stability and inability to increase compensation at the rate of inflation. Until we reach full employment, middle class employees are squeezed, and their wealth is reduced in real rather than nominal terms.

Wednesday, August 19, 2009

Buffett's latest take - an Op-Ed in the New York Times

This is an important report about the implications of opening the coffers of debt to save the U.S. economic system from collapse. More to follow.

Saturday, August 8, 2009

Hurricane Season - the Ace in the Hole for the Market?

While hurricanes pose huge risks for cities and individual safety, they may provide another reason for commodities to rise, and inflation to arrive sooner than most analysts think. The Atlantic basin, while quiet, is warming up, and looks like it will bring its share of storms in the coming months. With the Gulf of Mexico already in the 80s (Fahrenheit), it will become a concern (as it does every late summer) to funnel major hurricanes into the major refineries and the major U.S. oilpatch. This year, this will almost certainly bring with it $80 oil, increasing prices for many commodities, and potentially, another reason for the market to move up.

Sunday, August 2, 2009

U.S. GDP - A Primer for the Second Half

Last week, second quarter GDP numbers came in with a contraction of 1.0%, better than the expected decline of 1.5%. While nothing to cheer at, the pace of contraction has now been pared, and we finally appear to be stepping out of a technical recession, although increasing unemployment will make the recession feel a lot longer.

The topic on most economists' minds is whether the recession is officially over. I think that we are likely to see a very steep recovery in GDP, contrary to most economists. The reason I say this is from the interesting news stories we have seen in the last week or so.

For one thing, inventories in most sectors are already at very low numbers, and big-ticket items like houses and cars are now being purchased hand over fist thanks to the current and prior U.S. administrations' willingness to burn cash like a California wildfire. In four days, the entire $1b "Cash for Clunkers" budget was used. Given the average car costs about $28,000 and the program provided $4,500 in cashback for trade-ins, this means about $6.2b in vehicles were sold (about 222k cars) - in four days! Last year, the US sold just over 16m cars and trucks, without any government sponsorship. The auto manufacturers have already reduced their inventories significantly, temporarily and permanently shutting down plants across North America.

When inventory is sold at such extremely high rates, especially when the forecast is for government programs to last 12 weeks, it makes me feel that the American consumer is again willing to spend money more quickly than Wall Street thinks. The pent-up demand will push inventories to ridiculously low levels in these big-ticket items, meaning higher prices, and a push back to inventory builds, and higher employment in the near-term (6-9 months, rather than 18-24 months). While the US household has been beaten and bruised, it is a resiliant entity, prepared to buy, buy and buy some more.

Unlike the recovery of 1982 (when we had "V" like recovery - like I anticipate this time around), we have Fed sponsorship in the recovery, with trillions of dollars sloshing through the economy, and we are likely seeing the first signs of acceleration of this moneyflow through the market place (with the highest credit worthy consumers snatching up vehicles and homes). This makes me a believer that we will see massive worldwide growth, a return to increasing commodity prices, and a more permanence to the inflationary conditions plaguing North America in the 2005-2008 period. Commodity capital projects have been halted or delayed and developing countries are showing signs of growth and demand, making me convinced that we will see demand overtake production very quickly, and we will need to wait for capital projects to end before the inflationary pressures reduce to more normalized levels.

Sunday, January 18, 2009

Thoughts on the state of the World Economy

I have said that my appetite for purchasing equities has increased in recent months, and I continue to look for opportunities to do so. That said, I have had some interesting thoughts about the world markets that I'd like to share.

The United States vs. China

I am deeply worried about how the overall world economy can grow in the future without some decoupling of the Chinese currency from the U.S. currency. Only a year ago, the U.S. government was begging the Chinese to remove their peg of the U.S. dollar (by selling the dollars/Treasuries they currently own - in the trillions of dollars) - and allow the RMB (yuan) to inflate from its artificially low USD peg. Twelve months later, I'm sure the Chinese are wondering why they didn't move to further de-peg their RMB. The USD has been rapidly strengthening against virtually all major currencies, save for the yen, and it has caused quite a Catch-22 for the US and China. Should the Chinese sell those treasuries and dollars to the open market, surely the appetite for US dollars will appreciably fall, and the dollar could collapse under the weight of the US's very own printing press. This could have one of two effects, one desirable and one undesirable.

If this were to occur, we may worldwide be lucky enough to see a decline in the USD - and the return of inflation, the growth engine of the world. A stronger RMB is in the cards in the next 5-10 years anyways. The Chinese will become a consuming nation of finished goods rather than a supplier of them, and will need to offload its peg to be able to consume more using a higher valued currency. Why not now?

Well, the flip side of the question is the answer to that question. The Chinese economy could potentially trade places with the U.S. by selling its treasuries. By strengthening the RMB at this time, it loses its global position of cheapest mass producer, which is the engine it has now. If it doesn't sell the USD and treasuries, it is already losing that position with other global players like the EU.

The European Union - is the model sustainable

The EU continues to lower its interest rate, to stave off huge problems for behemoths like Spain (the housing bubble) and Germany (which has seen its share of problems with the likes of VW). This brings me back to my old question - will the Euro survive? By creating the Euro, Germany and other large European countries placed their confidence in the hands of emerging economies like Slovakia and Slovenia. The dynamics in each country can conflict with each other, and result in movements by the European Central Bank that may run contrary to the needs of individual member states that have adopted the Euro. In late-2008 Germany was already handing hundreds of billions of Euros to its banks in an effort to shore up its banks, while the ECB was still being implored by the world to lower its rates. The ECB seems to be very much behind the curve now, and is desperately trying to catch up with lower rates that the US has already applied. I feel that the EU is showing tremendous cracks under the pressure of its model. While free trade is always an ideal, countries giving so much control of their economic viability to a central bank certainly is not. How this affects trade with China and the U.S. is still emerging.

This is the primary reason I love macro-economics - there are millions of issues at play (with a few Black Swans that will emerge along the way), and it takes market makers months to digest a slice of that information to make decisions. We are participants of the most exciting film (I just hope most of us can leave the theater with our shirts) the world has seen in some time. This is the essence of globalization: we will see more volatility, more Black Swans and more currency blowups.