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Further to my recent comments about the weak US dollar being the funding currency for risk-taking around the globe the past 8 months, today we see the flip-side of this trade as risk aversion roars back amid reports that Dubai World may be defaulting on its debt. The natural product of risk aversion today is U$ dollar up, risk assets down:
Meanwhile chronic over-production continues to be a huge problem for China and the rest of the world. The massive government stimulus this year has only exacerbated the problem by insisting on greater and greater production and investment, despite much diminished demand. It will take a long time for stock-piles to work down both of raw goods and finished products. These issues were re-emphasized today in a study released by the European Union Chamber of Commerce in China:
"The crisis has throttled demand for exports from China at a time when even more investment, in the form of the Chinese government's massive stimulus package, is being pumped into building new plants and adding unnecessary capacity.
"As a result, the problem is actually getting worse in many industries," the report said.
The State Council acknowledged in August that overcapacity was blighting many industries and that local governments were expanding capacity "blindly".
The cabinet subsequently singled out iron and steel, cement, electrolytic aluminum, glass, coal chemical, polysilicon and wind power equipment as the worst offenders and announced steps to rein in their expansion."
The Baltic Dry Index (BDI) collapsed in 2008 and into the summer of 2009, then rallied sharply the past 2 months. This has encouraged some to conclude that global shipping is now in recovery. The problem is that as a leading indicator the BDI has become distorted recently to more of China stimulus indicator than a global trade indicator. Less than 10% of bulk imports have been coming to America, with about 50% going to China for stimulus driven stock-piling and re-stocking. In addition an unusually large surge in new ships coming on stream this year and next is likely to drive shipping prices down again over the coming months as many vessels bid to carry below-trend global trade volumes.
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The most common consensus today is that the U$ will continue to relentlessly fall and that China is an economic saviour for the world. Colour me skeptic: I can't buy either view.
China is a communist country that still arrests its citizens for protesting its government. It is a place where the one child policy has rendered a population horribly deficient in women, birth rates and young people. It is a country with so little social safety net that its citizens save 40% of their incomes to fund their own health care and personal security. A place where so many struggle to meet their basic needs that civil unrest boils close to the surface at all times. In the interests of retaining control and civil obedience the Chinese government insists on growth. But as Enron executives learned the hard way, insisting on perpetual growth rates above organic demand is a game plan doomed to eventual failure. It’s only a matter of time before reality will reveal truth. In the meantime those trying to bank on the reported economic data coming out of China are undoubtedly doing so at great risk. "Demand" in China is not always what it seems. For a sample of this point, watch:
Over the past 9 months markets have rallied from the sublime to the ridiculous in the risk-asset melt-up since March. Just one of the many areas where prices have gone delusional once more is commodities. The Canadian stock market with our rocks and trees concentration has been a major recipient of melt-up euphoria, leading some familiar culprits back to the “decoupling” banter of 2007-2008: “Commodity bubble? What bubble?” they say, wide-eyed and hopeful.
The flow of the US carry trade into our Canadian stock market speaks for itself in this picture of the falling U$ and it’s near perfect negative correlation with the Canadian TSX year to date:
On October 16 my partner and Technical Analyst Cory Venable sent me the following long-term chart of the US dollar index suggesting key support at $75.
Yesterday the U$ Index did hold $75 and is bouncing today. The importance of the dollar trade since March cannot be over-stated. As the U$ dollar has fallen the past 8 months, most other assets have soared into bubble Dom. Who knows what staying power this dollar bounce may have, but while it holds, a long-overdue correction in other risk assets (including gold) is likely to follow.
The supply demand picture for gold continues to be bearish: increasing supply from producers spurred by soaring prices is overwhelming weak consumption demand. The World Gold Council today announced that Q3 2009 saw a 30% year over year drop in jewellery demand. Investment demand which includes gold ETFs, bars and coins was down 46% from Q3 2008, and even retail investment demand for bars and coins remains 31% below the third quarter of 2008. We note that despite the weakness in demand numbers, the World Council entitled their report “Gold demand remains robust.” On the other hand, they do admit that “World Council’s mission is to stimulate and sustain the demand for gold and to create enduring value for its stakeholders.” At least they openly admit their bias!
Meanwhile gold mania has gone mainstream see ABC video: Gold Fever. I received a media call Tuesday asking if I could be “the gold bear" on Fox Business. You know bulls are raging, when Fox has trouble finding a gold bear in all of North America... more»
I am bored rigid with the ongoing debate about whether humans have any role in the warming of the planet. The way I see it, arguing this topic is a bit like arguing your views on whether or not there is a God: you either believe or you don't; best to move on to productive discussion.
That said whether you believe it necessary or not, the quest for sustainable energy gives innovative companies incredible inspiration. And this new area offers truly exciting solutions for consumers, producers and governments who can stop fighting and start embracing the inevitable wave of change.
In the four short years since GM was collecting and crushing its EV1 prototypes (idiots), plug-in cars have raced miles ahead.
A recent example (of many) is Shelby’s new Electric Super Car. Zero emission? That's the least of this story:
-zero to 60 in 2.5 seconds
-200 miles on a charge
-recharge fully on 10 min plug in
-little maintenance, much less wear and tear
-can run it in your garage without poisoning yourself
What thinking consumer wouldn't want this technology?
Artificially low interest rates born of government stimulus have juiced prices across all risk assets the past 8 months. From housing, to stocks, to commodities to high yield debt few sectors have been left behind. Growing distrust of paper currencies which are increasingly levered has spurred bubbling speculation in gold and precious metals. As the US carry trade builds, those borrowing U$ at near zero rates sell the U$ loan proceeds and buy all manner of everything else. So far this widespread speculation has become the self-fulfilling and relentless cycle of US dollar down, other currencies and risk assets up.
These are not the days of wine and roses that soaring markets might suggest. Posing as an economic recovery, global speculation has now driven capital markets once again to a dangerous precipice: what if their galloping appreciation fails to translate into a lasting economic recovery? An excellent article in The UK Independent yesterday offers insight:
"Sometimes, however, economies end up in a different place, based on the physics of bungee jumping. The economy falls off a cliff. Activity drops a long way. Then there's a rebound. For a while, the rebound looks very good and it's easy enough for economists to stick to their straight-line thinking. But the economy never returns to normal; instead it is left dangling by a thread. The straight line simply doesn't apply...
In a world of bungee economics, it's just as likely that the current hopes of a "Great Recovery" will prove overly-optimistic. Rising asset prices may say something about the success of unconventional policies, but they could just as easily be part of the regular volatility of financial markets and, in fact, say hardly anything about longer-term growth prospects.
Throughout the 1990s, economists following Japan had to cope with similar problems. Every so often, the economic data would show modest signs of improvement. In their haste to declare recovery, investors would pile into Japanese equities, triggering a stock-market rally. The rally gave economists the confidence to revise up their forecasts for future economic growth. These upward revisions led to an even bigger rally. Then came the shocking discovery. The Japanese economy wasn't really recovering at all: it was the ultimate bungee economy, with occasional signs of rebound followed, as night follows day, by yet another setback. The mistake was to assume that financial markets provided an accurate forecast of future economic developments. As it turned out, the best they could do was to offer an occasional bout of wishful thinking..."
Good stuff, I think the bungee economy is a perfect analogy right now. Read the whole piece by Stephen King here :more»
The New Yorker's James Surowiecki spoke with Elizabeth Warren, professor at Harvard Law School and the chair of the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP), about the importance of transparency in consumer financing, the future of the regulatory system, and what’s good about capitalism. They met in Washington, D.C., on November 5th.
Meredith Whitney on CNBC this morning says "stocks are overvalued across the board with no fundamental root in reality...residential housing still a big problem... recession will return":
I met Gary Shilling a couple of weeks ago when we were both speaking at The Moneyshow in Toronto. A long time market vet, he has remained steadfastly bearish on the prospects for a consumer-led "V" recovery. Today he sat down with Aaron Task and Henry Blodget to explain why soaring stock markets have so far not changed his thinking on the kind of recovery we are likely to see in 2010-11.
Robert Prechter of Elliott Wave International sat down on November 11 with Kevin Depew of Minyanville. I am not an Elliott Waver but I respect Prechter's discipline, longevity and careful study of human behaviour and market cycles. He thinks that the market is topping out now in the bear market rally since March. He may be right. We have thought that prices have been topping out since June and so far the bulls have kept running. They could push prices further yet.
But in the end, getting the big picture primary cycle correct is "the'' most important aspect of lasting gains and avoiding market down drafts. Those looking for perfect timing have to avoid the stock market altogether; those looking to survive and thrive through all the stages of each market cycle must adopt a pragmatic, humble approach. Its not what markets make, but rather what we keep that matters most.
So far US dollar down, markets up again today: if only we were witnessing a true demand driven recovery story, market action would be so much more encouraging!
A few stories and clips of note today, see:
“Of the world’s six largest economies, three currently have budget and public debt positions that if allowed to fester will push those nations into bankruptcy…so which major country, the United States, Japan or Britain will default first on its foreign debt?”
“China has huge amounts of hidden debt in its banking system, which could well collapse, but its direct public debt is small, as is its budget deficit, so it is unlikely to enter formal default.”
“We have not experienced a debt default by a major economy since the 1930’s. That three such defaults are currently conceivable indicates both the severity of the current downturn and the wrong-headedness of the policies taken to address it.”... more»
Jon Nadler, Metals Market Analyst at Kitco, was one of my co-speakers in Montreal last weekend. I have known Jon for a few years now. In the midst of the emotionally charged commodities space, I have come to respect Jon's commitment to fact-based analysis. His recent interview on gold is worth a read:
"What we really see is a momentum- and index-fund-driven speculative move that started almost on cue on Sept. 1. They've been piling in, hand over fist, with margin positions and futures positions that have now mushroomed to a level that's unreal—historic highs, on the order of 750 tons of long positions. They outnumbered the shorts 9:1 as of the week before last; it has since narrowed to 7:1 [as of Tuesday, Oct. 27]. Still, that's way distorted.
But I have to say from the get-go, I'm not a gold bear. I know that anybody who doesn't say "$2,000 gold!" is automatically a bear, but I'm just a realist who looks at supply and demand."
The Center for Strategic International Studies hosted Richard C. Koo, the world renowned chief economist of Nomura Research Institute, for a speech titled “Great Recessions- Lessons Learned from Japan.”
This is one of the most insightful discussions I have heard in a while. Listen to the Audio here. As I have mentioned previously, Japan is different from the US in that they have maintained a restrictive immigration policy and low birth rate throughout their crisis which has amplified their stagnate growth.
However there are a few key points that stand out as potentially similar:... more»
The stock market is up, but people on Main Street are still reeling from last year’s economic collapse. With North America still facing rising unemployment, foreclosures, and declining property values, Bill Moyers discusses with renowned economist James Galbraith, professor of economics at the University of Texas, whether we have averted the crisis and how to get help for the middle class. Watch the October 30, 2009 interview in three parts below:
Yesterday the Financial Times ran an article from Economist Nouriel Roubini warning of global asset bubbles that have been simultaneously re-inflated courtesy of the falling US dollar since March. As the U dollar fell against most of the world's currencies, traders have borrowed U dollars at negative rates to buy pretty much any and every other asset in the world. The more reckless the risk taking, the more genius one has looked over the past few months.
The US dollar may weaken further over the longer term, but in the interim the risk of an oversold U dollar bounce now looms:
"Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.
This unravelling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall."
After last week's big sell off in equities, and big bounce in the VIX(volatility index), a few rebound days would be the norm this week. But our technical work on the U dollar suggests an interim dollar rebound is increasingly probable. Investors should beware of the price risk the dollar carry trade has brought back into world markets. more»
Josh Rosner is one of the more knowledgeable people about the US banking system and this interview cuts straight to the point: the Obama admin is doing nothing so far to reign in the Fed or the banking rules that caused the disaster of 2005-2009 and beyond. So far Obama's leadership is a huge disappointment in this crucial area. So much for the audacity of hope; very frustrating to watch as so many regular citizens are still unaware of the breach of trust and abuse of power here.
Joshua Rosner, managing director at Graham Fisher & Co., talks with Bloomberg's Matt Miller and Carol Massar about proposed U.S. financial stability legislation.
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