This page has been archived and commenting is disabled.
Did The Fed Blow It?
Kristina Peterson of Dow Jones Newswires reports in the WSJ, US Small-Cap Stocks Plunge As Investors' Economic Anxiety Climb:
U.S.
small-capitalization stocks plunged Wednesday in their biggest two-day
drop since early June, highlighting the anxiety that flooded the
market over worries of a global economic slowdown.
The
Federal Reserve's more cautious assessment of the economic recovery
and data showing slower growth in China sent the broad market into a
tailspin Wednesday. Small-caps, thought to sink further in times of
economic weakness, fell most steeply as investors fled from riskier
assets.
The Russell 2000 index of small-capitalization
stocks tumbled 25.97 points, or 4.02%, to 620.39, its third largest
point drop of the year.
The Standard & Poor's SmallCap 600
index skidded 13.13, or 3.80%, to 332.16, its fourth biggest point and
percentage drop of 2010.
Both indexes wiped out their
year-to-date gains on Wednesday. The Russell 2000 is now down 0.80%
year-to-date, while the S&P 600 is off 0.14% since the year's start.
"Small caps had a nice start to the year as they tend to
outperform coming into an economic recovery, but that recovery is now
much more doubtful," said David Carter, chief investment officer at
Lenox Advisors. Investors interpreted the Fed's statement as an
"about-face," reversing its earlier more optimistic view of the
recovery, he said.
Cyclical
sectors led the broad decline in small caps as worries mounted over
whether the economy could enter a second slump. Materials weakened as
investors fretted that the slowing growth in China could cut into
demand.
"If China can't pull along the global economy,
who can?" asked Carter. Agricultural products company American Vanguard
plummeted 88 cents, or 11%, to 7.38, on the New York Stock Exchange.
Century Aluminum fell 88 cents, or 8.1%, to 10.01.
Energy
stocks took the steepest tumble Wednesday. Investors avoided
commodities as the dollar surged, sending the price of oil down 2.8% to
settle just above $78 a barrel. Oil-well-services provider Basic
Energy Services (NYSE) fell 99 cents, or 11%, to 8.34.
Offshore-drilling company Seahawk Drilling shed 93 cents, or 10%, to
8.08.
Safe-haven consumer staples slid, but posted the
most modest drop. Gainers included tobacco company Alliance One
International (NYSE), up 4 cents, or 1.2%, to 3.35, and snack-foods
maker Lance, which rose 4 cents, or 0.2%, to 22.04.
The drop in energy and commodity stocks slammed Canada's main stock index as it fell to its lowest level in nearly three weeks. The Canadian dollar lost more than a penny as stocks took a beating.
After the close on Wednesday, tech giant Cisco Systems was down nearly 8% as its CEO warned that a return to normal economic conditions would take longer than previously expected.
It's pretty much all doom & gloom again, prompting some market observers to ask whether the Fed's move against deflation will end up backfiring:
If
you weren't worried about deflation, you may be now—thanks to the
Federal Reserve's latest move to jumpstart the languid economy.
In
fact, some economists think the central bank's implicit concern about
falling prices could help bring about the very situation the Fed is
trying to avoid.
"This gets to
be a gamesmanship situation," says economist A. Gary Schilling. "On the
surface, the Fed is reacting to the threat of deflation and a weak
economy. Does it have deflationary implications? I think it does
because it says the Fed is concerned. They're obviously preparing more
and more for it. People say, 'Maybe I ought to prepare for it?'"
With
both Wall Street and Washington looking to the central bank to do
something else to revive what many see as a flagging growth, the Fed's monetary policy committee Tuesday said
it would "help support the economic recovery in the context of price
stability" by buying longer-term Treasury securities, while downplaying
inflation.
"The
Fed didn't use the D word in its statement but that's certainly
implicit in its thinking," says Scott Anderson, senior economist at
Wells Fargo.
After
the statement's release, stock prices cut losses and more importantly
Treasury prices rallied further. But investors woke up Wednesday and
essentially asked, "What just happened?"
In a double-take Wednesday morning, almost every asset class, from gold to oil to stocks, fell ... except Treasurys—the prime beneficiary of the Fed's move—whose monster is inflation.
Few
economists see actual deflation in the wings. But given the the
economy's slow growth, marked by weak demand, and a spate of recent
reports showing falling prices for goods and services, they say
deflationary expectations are real and growing.
Economists
admit that though the price of many durable goods has been falling, if
you take food, housing and oil out of the consumer price index, prices
are decidedly higher. What's more, wages—a key ingredient in the
deflationary equation—are not falling.
"It isn't deflation per se that bothers the Fed, it's deflationary expectations," explains Schilling.
Economists
say Fed boss Ben Bernanke and the FOMC members may have wanted to seem
assertive and reassuring in its policy initiative, but at this point
the move appears to have backfired.
"It's
almost as if their statement now is contributing to deflationary
expectations," says Chris Rupkey, chief economist at Bank of
Tokyo-Mitsubishi, who otherwise does not subscribe to the deflation
argument.
Economists
and money managers say the Fed clearly intends to push intermediate
and long term rates lower, much as it has with short term rates, to
encourage demand and risk, whether it's lending and borrowing or
production and consumption, all of which supports price appreciation,
not depreciation.
"They're hoping it
creates a positive economic impact to avoid that [deflation]," says Jim
Awad, managing director at Zephyr Management.
Much like with the recent rally in Treasurys, analysts and investors are rightly asking just how low the Fed can go.
A relentless push has its hazards. One is a perpetual flight to quality and the safe haven of Treasurys.
Schilling,
for instance, says he's still buying 30-year bonds, now yielding about
four percent and headed to three percent. That's probably a safer bet
than stocks yielding a big return anytime soon, he says.
"It's
OK if they can jawbone long-term rates lower," says Rupkey. "It's not
the Fed pushing rates lower today. it's the Dow falling 200 points
that brings rates down. If it's also hurting the stock market, the
impact of wealth loss is going to overwhelm the lower prices and
potential consumption."
Another
risk is that cheaper and cheaper money becomes another reason for
consumers and businesses to wait to do anything, defying the normal
inflationary cause and effect.
"They're
pumping up money as much as they can, which is supposed to be
inflationary," says Ken Goldstein of the Conference Board. "But in the
short term you do have kind of a deflationary pressure to it. It's
about timing."
Meaning , if the strategy works, it reinflates the economy, before deflation sinks it.
Alright,
let me give you my take on Wednesday's action. The media will spin it
as "pure panic", but this is just another day for Wall Street crooks
to make a killing. After the Fed's announcement, they brought the
market up, a classic head fake before they cut risk across the board on
Wednesday.
Don't be fooled. This market
is so corrupt, so manipulated, that it's no wonder the big banks and
their elite hedge fund clients are the only ones that can navigate
through it properly, making a killing in the process. Multi-million
dollar computers performing high-frequency trading (HFT) provide the
illusion of an "imminent catastrophe".
Total
rubbish. I really wonder which institutional investor was dumb enough
to sell stocks after the Fed's announcement. I bet you elite hedge
funds and big banks' prop desks are loading up on risk
assets, using this as another opportunity to make enormous profits.
All
this gloom & doom is way overdone. I don't know if the bounce will
happen this week or next week, but it will bounce back and global equity
markets will rally sharply. In fact, all risk assets will bounce back
because asset classes are highly correlated.
Cheap
money may not benefit consumers and businesses in the near term, but it
means more cheap financing for Wall Street's financial elite to
continue borrowing at zero and investing in risk assets all around the
world. They'll continue trading, not lending.
And what about pension funds? On Wednesday, the Canada Pension Plan Investment Board announced its Q1 fiscal 2011 results:
The
CPP Fund ended the first quarter of fiscal 2011 on June 30, 2010 at
$129.7 billion compared to $127.6 billion at the end of fiscal 2010, on
March 31, 2010.The $2.1 billion increase in assets after
operating expenses this quarter was the result of contributions, which
totaled $3.8 billion in the first quarter, offset by an investment
return of negative 1.3%, or negative $1.7 billion. The investment
result was primarily due to the decline in public equity markets, and
this was reflected in CPPIB’s public markets investment portfolio.As
global financial stimulus efforts tapered off and concern about
economic conditions in Europe increased, many public equity market
indices dropped significantly in the three-month period ended June 30,
2010. For example, the S&P 500 fell by 11.9%, and the TSX was down
6.2%.“This was a challenging
quarter for public equity markets around the world, many of which
experienced double-digit declines,” said David Denison, President and
CEO, CPP Investment Board. “This was also a quarter where the CPP Fund
benefited from diversification into private equity, real estate,
infrastructure and private debt holdings.”For the
five-year period ended June 30, 2010, the CPP Fund has generated an
annualized investment rate of return of 3%, or $13.8 billion of
investment income. For the 10-year period ended June 30, 2010, the Fund
has generated $36.6 billion in investment income, reflecting an
annualized rate of return of 5.1%.
Investment Portfolio Update
CPPIB investment teams were active on a broad range of
transactions during the first quarter. Completed investments included
the acquisition of ownership stakes in 1221 Avenue of the Americas and
600 Lexington Avenue in New York City, a U.S. shopping centre
acquisition joint venture with Kimco Realty Corp., a property
development joint venture in Australia with Goodman Group, and the
acquisition of a 17.5% stake in oil sands developer Laricina Energy.Transaction
activity has continued since the end of the first quarter. In July,
CPPIB submitted a conditional proposal to acquire Australian toll road
operator Intoll Group, whose assets include a 30% interest in the 407
ETR in the Greater Toronto Area, and through an entity jointly owned by
CPPIB and Onex, reached an agreement with Tomkins plc to acquire all
of the issued and to be issued share capital of Tomkins, a global
engineering and manufacturing group. CPPIB also recently entered into a
joint venture with U.K. property manager and developer Hammerson plc
to acquire an office building at 10 Gresham Street in the City of
London.“We continue to focus on
putting to work our comparative advantages including scale,
predictable cash flows, and the long investment horizon of the CPP Fund
to diversify our global portfolio,” said Mr. Denison. “We now have in
place the resources and expertise to execute private asset transactions
such as these most recent ones around the world.”“Looking
ahead, while we see a modest global recovery underway, we also see a
number of challenges, particularly in international credit markets.
Since access to credit markets remains a critical element in our
ability to complete private asset transactions, we expect that they
will continue to be difficult to execute throughout the balance of
fiscal 2011. Notwithstanding these difficulties, this environment
affords us opportunities to earn attractive risk adjusted returns,
especially in the area of private debt. As a global organization, we
also have the benefit of being able to invest in geographies that offer
the best forward looking return characteristics on a risk adjusted
basis and, as a result, we are continuing to pursue expansion of our
investment activities into emerging markets,” Mr. Denison said.At the end of June 2010, approximately 25% of the CPP Fund, or $33 billion was invested in private assets.
Given CPPIB's asset mix, these results shouldn't surprise anyone:
Equities represented 53.9% of the investment portfolio or $69.9 billion. That amount consisted of 40.8% public equities valued at $52.9 billion and 13.1% private equities valued at $17.0 billion.
Fixed
income, which includes bonds, money market securities, other debt and
debt financing liabilities, represented 32.0% or $41.5 billion.Inflation-sensitive assets represented 14.1% or $18.3 billion. Of those assets,
- 6.1% consisted of real estate valued at $7.9 billion
- 4.7% was infrastructure assets valued at $6.1 billion
- 3.3% was inflation-linked bonds valued at $4.3 billion.
Keep
in mind that CPPIB only reports results on its private markets once a
year, when their annual report comes out, so the quarterly results
pretty much follow what is happening in global stock and bond markets
(ie. beta).
A key question to consider is how are most pension
funds going to react to the Fed's announcement? How are they going to
deliver 8% actuarial return in this environment dominated by high-frequency trading and outright manipulation of the markets? You can bet
that senior pension officers around the world are holding asset
allocation meetings following the Fed's announcement.
Finally, I
leave you with a clip where John Ryding, of RDQ Economics, and Brian
Fabbri, of BNP Paribas, discuss whether the Fed's made a mistake. As I
stated in my last comment,
there is no choice but to continue reflation policies, and while
markets are selling off, I still think this dip will be bought hard. But
they will first scare all the weak hands away, much like they did in
late October 2009 when everyone feared another Black Monday.
»
- advertisements -
pitz:
we all share your frustation and anger but you're way over the top, dude. CHILL IT!!
no springtimes's for hitler on this web site...........................
It's all rigged, run, run for your lives.
Raging Bear
Well, I have to say that Leo was right about yesterday's move following the Fed announcement, head fake.
It really feels that the move yesterday was to shake out the shorts and today's move has been to shake out the longs.
I'm prepared to believe Leo here.
The market is schizophrenic.
DavidC
"As I stated in my last comment, there is no choice but to continue reflation policies"
In other words:
There is so much debt in the system the entire economy will collapse unless we hyperinflate our currency.
You heard it here first. Leo's now a bear. I seem to remember Leo stating not very long ago that there was already plenty of liquidity in the system. Fool.
The choice is between continuing reflation policies and maintaining the illusion for as long as we can and then collapse, or collapse now.
What do you think most people would choose?
Keynesians have no conscience.
Keynesians have no brains.
Keynesians just want to keep their jobs by any means possible...
As Keynesians know it's a really shitty job market out there...
But Keynesians have the biggest BALLS you've ever seen!
Whether or not the Fed messed it up, Ben is pissed right now.
He doesnt understand the numbers he's seeing, so they got together and chose the middle-of the-road, steady decision, OK lets not spook anyone while we figure out what this is... and what happens? The USD spikes, SPX down 3%, bond yields collapse even further and the media keep talking about deflation.
Thats gotta hurt, poor guy.
Oh, and Leo, when you see the market gradually melt all day like today, thats real money, real accounts selling. They don't trust the banks so they say "get me VWAP". Of course the banks can control VWAP, duh, so the whole thing is manipulated slowly lower before the big closing auction on decent volume at the end at the low of the day. I dont know what you call manipulation, but institutions get fucked getting in and getting out. It used to be in the bid/offer, now the spreads are miniscule but the algos take the same cut.
I don't know, something about this one is alot different. As we all know, the fed has been buying back it's own debt for months now. Then they come out and say that they will start to do just that. I think they knew that an bigger and bigger increase in the fed secretly buying their debt (direct bidders) would have eventually been a market buster, so they come out and say that they will do it and make it seem that it's normal (without explaining that they are essentially monetizing the debt and have been for months).
What is happening to our economy is a chimera of Stagflation, Inflation and Deflation all in one. Our govt. and our banks have made a situation where parts of each is being done to our economy, but the cure has never been made for a situation like this. The demographic shift is happening where the baby boomers will be tapping their benefits (SS, Medicare, Medicad and pensions public and private), not enough new workers to put money into the liabilities even if you tax 100% of their income, unemployment high and jobs being lost, so much hot money that is in the market but being held eventually it has to hit the street and when it does Inflation on everything (the have been hiding inflation in food by making smaller containers but the same price, still inflation).
This will be one for the history books, thats for sure. When this Depression happens, it will make the first one seem like a friday morning market correction.
'What is happening to our economy is a chimera of Stagflation, Inflation and Deflation all in one.'
This is my school of thought.. What if in 2 years, the price of some assets; Commercial and Residential Real Estate way down, machinery down, luxuries down. But, we have a huge increase in things like food and energy.
I think rather than looking at the actual price of things we should quantify our economic situation by the change in percentage of income -relative to now- we need for our expenditures.
As painful as it will be, domestic deflation combined with FX weakness is NECESSARY to enable balanced trade. The US MUST become price competitive again. Our 30 year deficit shows that we haven't been for along time.
Somebody the other day called it 'biflation' - inflation in the things you need; deflation in the things you own.
On the way back from my wholly non-secure job, I had to put $2.69 per deflationary gallon in my tank tonight and buy $63 in groceries and supplies for the next 4 days, then drive to my home , which has lost about 27% of its value (though I don't give a shit because it's been paid for since 2002). I stopped at my mailbox to learn that my insurance had paid for a $72,000 piece of surgery that would've bankrupted me if I'd been unemployed.
Max:
"This is my school of thought.. What if in 2 years, the price of some assets; Commercial and Residential Real Estate way down, machinery down, luxuries down. But, we have a huge increase in things like food and energy."
What you have just described is an abridged compendium of the the 'virtual economy'.
Something is alway going up and something is always going down. In the virtual economy the escalator market effect is the economic equivalent of politcal 'wedge issues' that divide and conquer.
What is important is that the perception of growth, momentum and personal gain remain intact for those so inclined regardless of how marginal the real rewards actually are.
All of us here at Hal 9000 are dedicated to making sure that your virtual economy is always no more than a key stroke away and that lucrative cyber based profit centers for entreprenurial risk takers remain a vital constant that continue to proliferate.
What you have just described is an abridged compendium of the the 'virtual economy'.
I had no idea I was that smart.. :) And here I though I was just applying a little common sense..
Max:
I had no idea I was that smart.. :) And here I though I was just applying a little common sense..
your virtual diploma, along with your virtual tuition refund check is in the mail............
I sense the same thing. I don't think there's a word for it yet.
The cost of living is rising, but assets are declining. The things we need and use in the short term are getting more expensive, but the things we need and hold for the long term aren't holding their value. I guess this is what a declining nation looks like... the immediate is dear, the future discounted.
Shortages of affordable energy are real and looming, and are the harbinger of resultant food shortages due to the leverage afforded by oil being lost.
However, this is not inflationary BY DEFINITION which is an increase in the money supply (of which 95% or more is credit). If prices are rising during a debt deflation it is indicative of real prices going thru the roof, as excess claims are extinguished leaving behind a dominant cash/barter economy in the deflationary wake.
See M3
You kill me Leo. You write on a daily basis what a wonderful thing QE2 is and how much we really, really need it. So we get it and the market pukes and you are left wondering why.
I tell you again and again.QE will destroy everything that you hold valuable. It is the worst possible choice. Multiples will go down not up, Stocks will go down not up. Confidence will fall not rise. The economy will fall not recover.
Put 20 people in a room and ask them if QE is good or bad. 18 will tell you it is bad. You and some other Kenysian from another era will clap.
The Fed move was a loser. They teed up QE2 with a $200b buy of Treasuries over 12 months. That is not a plan. That is a cry for help. That will do a nothing for the economy. All it does is drive the fear factor higher because it is a stupid destabilizing policy.
We will see at the end of the year. We now have a chance for a market that is 25% lower. Just because of QE. It is the worst thing that could be done.
Bruce,
"I tell you again and again.QE will destroy everything that you hold valuable."
It's not QE that will destroy everything you hold valuable, it's the astronomical mountain of private debt accumulated over the last 30 years. QE is just a temporary plaster that maintains the illusion for a little while longer and gives time to those who can afford it to get on their lifeboats. With or without QE, the outcome will be the same, lots and lots of pain. It's just a question of timing and of who gets a lifeboat.
Mountain of private debt with trillions in CDS's bet on it. No way out.
Dead on Bruce.
The debt does not go into some worm hole called the Fed and disappear...it is transferred to ALL of us.
It is the definition of socialized losses and privatized gains...and it's all losses now.
Not entirely true. The only reason the Fed gives a damn about QE is because it props up assets (real esate) that fund public sector employment.
In that sense, property taxes are a socialized gain.
Provided one believe's the size and drag on the real economy of the public sector can be afforded.
"Bell City Manager Robert Rizzo resigned after a Times investigation showed he received an annual salary of nearly $800,000."
http://www.huffingtonpost.com/2010/08/04/bell-salaries-calpers-kne_n_670...
I believe the median income of a taxpayer of Bell California is 40k a year.
Socialized gains indeed...more like a feudal system.
It's wagon circling, vote buying, trickle down economics (haven't you heard?! everyone feels the benefit of public sector employment... eventually) and power politics rolled into one neat package.
Bruce,
You might be a great currency trader, but in equities, one day doesn't mean squat. All the weak hands will sell, and they will bring her right back up. Watch, you'll see. And for those of you who are convinced we are heading towards a Japanese style protracted deflationary slump, you might be right, but before we get there, there will be hundreds of sharp rallies and selloffs in stocks. Nobody really knows whether inflation or deflation will prevail.
"one day doesn't mean squat"
Yes, how about the past 10 YEARS. Stocks nowhere for 10 years. INTC off by say 60%? GE? BAC?
Can you explain ANY of the eco data lately? GDP at 1%? NFP where it was, even after all of the goosing?
I keep reading your articles hoping for some good explanation of the bull case for stocks. All I get is "the market's manipulated - they will take it up". The same group that has done such a good job so far managing the economy for everyone but themselves? They took the market to 666 - how about again? 10 years of ZERO NOMINAL returns.
Please, please, please come up with something a little bit better, and then let me know to come and read one of your pieces again.
"but in equities, one day doesn't mean squat"
Leo,
The SPY is right were it was in 1998, adjust for inflation and its a joke.
In equities it means NO ROI for 12 Years.
SPY is not all equities
Index funds are a joke, 401K's investing on indexes is a joke
But not all equities are worthless
If you had invested in Mcdonald's, Coca cola you'd been 4 times better off
If you were in anything else with better returns[other than gold with zero cash flow], let me know!
Maddy,
The SPY is the benchmark / poster child for the US markets, it reflects equities in general... In general they have lost value the past 12 years when adjusted for inflation.
If you are a great trader or stock picker good for you.
And for those of you who are convinced we are heading towards a Japanese style protracted deflationary slump, you might be right, but before we get there, there will be hundreds of sharp rallies and selloffs in stocks.
A depression with volatility is not exactly a bullish outlook.
Just like the statements from the Fed, Leo has introduced his new "hedge" language. Previously, he argued that there was a 0% probability of deflation or a long, slow downward spiral like Japan (just keep buying the dips, keep buying solar stocks). Now, he is pontificating about the opportunities from the "hundreds of sharp rallies an selloffs in stocks".
Why anyone who has an investment portfolio over $100 would listen to a charlatan like Leo is beyond me.
Well, I do think it's nice to have someone try and make the opposite case such as it is. No sense in having it get too echo chamber-y around here.
Merc:
"Well, I do think it's nice to have someone try and make the opposite case such as it is. No sense in having it get too echo chamber-y around here."
i'm going to agree with you. back in the day when we actually had a market that worked you had to have both both buyers and sellers or the markets didn't function.
that's how price discovery actually took place. now ,of course, such mundane fundamentals as supply and demand are irrelevant. but the concept deserves to be respected none the less.
leo, darling, i'm so glad you're there to buy my *#%#@* chinese solars.............
I don't get what you are saying Leo: "And for those of you who are convinced we are heading towards a Japanese style protracted deflationary slump, you might be right, but before we get there, there will be hundreds of sharp rallies and selloffs in stocks..." Are you agreeing that in the long run stock prices will decline??? The why are you suggesting buying into the stock market? Are you encouraging people to speculate? What are you recommending????
As Rosenberg often points out there were hundreds of thousands of rally points in Japanes stocks over the past twenty years. But the market is still 70% lower. Think of that. Twenty years and you have 30 cents on the dollar.
Think about Japan's property bubble which preceded its deflation episode, think about its demographics, think about key differences in the timing and aggressivenes of policy responses...too easy and way too early to conclude the US is another Japan in the making.
Leo, you do realize the market was at this level back in 1999, right?? That the US has already had a lost decade, right?
Have you at least pondered the thought for even a second that you might be delusional?
Delusional. One of my favorite words.
Mass Delusion. Quickly becoming my favorite concept.
-Japan had property bubble prior to economic drop and Deflation - US, Check
-Japan proceeded to hide the banks losses through changes in law, regulation and QE - US, Check
-Japan has a low birth-rate and a greying population, that is now on the verge of liquidating savings to pay for retirement - US, yes to retirement but what savings?
-Japan has funded it's QE domestically primarily to it's trade surplus, but that is now beginning to shift a the productive workers retire - US, not so much, we have no savings only debt
Overall the US will be LUCKY to have the Japanese trajectory. We are in a much weaker position starting off on our credit bubble collapse journey. Maybe attempting to hide the true losses through QE is EXACTLY THE WRONG CHOICE?Why is stimulating production in a economy that is under-producing a good idea? It clearly hasn't worked in Japan , and they have excess production. Maybe we should be suppressing demand and stimulation consumption to balance the economy. The persistent trade deficit results in the $ bleeding out of the US economy, and THAT IS CAUSING DEFLATON.
Wrong.
Next watch for massive public works projects the likes of which did not work in Japan and they won't work here either.
The masses are done with stocks. Boomers are 10 years closer to retirement than they were in the 90's. 401k was the proverbial "set up like a bowling pin, knocked down it gets to wearin' thin" plot. An engineered fucking of the middle class to create a slave society.
How about that jobs report!
Leo,
If you are too blind or too stupid to have already realized that the actions the US is and continues to take are not putting them directly in place of Japan then I have no freakin clue how you have ever gotten this far. Working for a major Japanese firm myself it is all management talks about here and they are truly scared for us. They know what it is like and are very fortunate to be here in the US working the parent back home. If we continue the path we are laying out, we are as screwed if not more screwed than Japan STILL is after 18 years. Atleast their people had some money when it started.....our's don't.
As for inflation....and the FED keeping thier reflating ways..... THE ONLY WAY WE ARE GOING TO GET OUT OF THIS FUNK IS INCREASED WAGES. Without rising wages, there is no reflating anythign. The Government cannot spend while the American people borrow our way out of this.
++ only way to increase wages at this point is to allow deflation to run its course.
Well we had a property bubble. We have deflation.We have bad policy being implemented and we have a demographic problem. To me all the pieces are the same. Just a few decades apart.
I dont' think economies grow very well when debt levels approach 100%. We are there today Leo. And you think things look different? You are alone in that.
No, the pieces aren't the same. Japan could afford its policies thanks to current account surpluses accumulated from exports to a rapidly growing world economy and could postpone collapse by transfering private debts of 100% of GDP to the sovereign during 15 years.
Today the OECD doesn't have this luxury. We won't be able to postpone collapse for another 15 years.
Leo,
"too easy and way too early to conclude the US is another Japan in the making"
Correct. The Japanese scenario is the best case. Worst case is a lot more painful.
To achieve the Japanese scenario we have to assume that countries of the OECD will be allowed to increase their sovereign debts by another 100% of GDP to compensate private deleveraging of the same magnitude, ie maintain the total leverage of the OECD at a more or less constant level and avoid a collapse of the bond markets during the next decade.
Seeing that financial markets are already nervous with the weakest dominoes (Greece, Spain) today, I honestly doubt that this kind of policy can continue unabatted for the comming ten years. What's more likely is that way before that decade is over a cascading currency crisis engulfes the OECD and results in a far more painful outcome than what Japan went through during the last 15 years.
The most likely scenario is that the successive attempts from governments and central banks at reflating the economy via stimuluses and money printing result in another 3 to 4 years of Japanese style "noflation" (constant leverage and no growth) with increasing volatility and an acceleration of the business cycle, followed by a cascading sovereign debt and currency crisis.
What's certain though is that during the period of noflation equities and real estate will continue to underperform vs bonds and gold. That period will end when bonds will reach their peak and then collapse within a few months as investors finally understand that there is no safe haven in cash and cash equivallents try to sell en masse in a panic attempt to convert their holdings in more useful stuff for the future... During that last phase, some equities (eg companies with a large share of their books in useful tangible assets) and some real estate (eg agricultural land) will certainly outperform bonds and there will be no market left for gold as it will be either confiscated by governments or hoarded by those who have managed to hide some early enough.
japan still has industry, we dont. Buy the dip, Dip
Leo, You miss a key difference between Japanes & US residential and commercial RE !! In Japan you just cant walk away hence moving away from mark-to-market has worked ad infinitum (say 20 years). But in the US folks just walk away and banks have to WRITE THOSE LOSSES DOWN !!
USA is not Japan and will never be. But we will heal quicker than them too inspite of all the Fed's tricks.