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Of The G20, Quantiative Easing And Other Shenaningans
From Nic Lenoir
While it will have no bearing on your trading today or probably tomorrow, the following story will drive the economic future for years. I have been warning for a while about currency wars, trade wars, and civil or outright good old fashion wars... in fact since 2008. 2 out of 3 so far: not bad, and the 3rd one is just about as likely to come as winter follows autumn.
The current world economy is like a system governed by the laws of physics: it cannot stay in a transitional state for too long. An equilibrium is formed, then somehow fundamentals change until they are so far off from supporting the current equilibrium that the economy embarks on a transition towards a new state of equilibrium. We don't know what the next equilibrium will be like, which is part of the problem, and so for now the Fed and other governments/central banks (independence of central banks ha ha ha) are trying to maintain us in a transitional state. Maintaining a system in a transitional state requires energy, and the same goes for the economy. It takes debt to maintain the economy in a transitional state. Think of the Western world as a lake perched at high altitude, and the mercantilist Asian countries as the ocean. If you open a path from the lake to the ocean, the water will flow until there is none left in the lake or the water level in the ocean reaches that of the lake. Two things can happen assuming it doesn't rain (think of the rain as flows of immigration, demographic growth, or credit growth, all of which happen naturally). You either create a dam or you start pouring water into the lake. Given that natural sources (rain) here cannot outpace the flow of water, the Fed needs to man the hose. The problem is: how big is the tank the hose is pumping from? Because obviously, that system will stay in a transitional state until the tank goes empty, and then what? Back to building a dam...
This is a bit of a simplistic image, but really are things that complicated? I suppose the Fed would argue that a change in temperature makes the water expand and hence the level of water can rise despite the leak. Water temperature is money velocity. If you look at papers by Fed/ECB/BOE/BOJ/BOC officials you will realize that the only thing they focus on theoretically is the temperature of the water, or velocity. Now as we all know if you have a huge lake it takes many gallons of water to raise the temperature even a little, and the volume of water needed is somewhat huge compared to the gain in expansion of the total volume from temperature elevation (this last point in nature is in fact null but nevermind, let's assume it works, velocity = energy creation). The trick with velocity is that it is a theoretical variable invented to represent whatever it is we don't understand in the economic/inflation transmission process. So really targeting a velocity increase to refill the lake is like screaming at gravity to make it disappear. Central banks probably hope that if they poor water in the lake, other people will join them to help in the private sector. But the private sector knows there is a leak leading the water from the lake to the ocean, so would rather poor the water directly in the ocean. That's why there is a huge influx of hot money (water?) in emerging markets.
Really could it be that simple? But of course: let's build a goddamn dam! I am not suggesting replacing Bernanke by a beaver though it would make FOMC more entertaining for sure. This is precisely why I have been utterly convinced we would have currency and trade wars, because there is just so much water you can pour in the lake before the tank is empty or the water bill gets out of control (a lot of countries charge for drinkable water, America is about to discover just that). One solution would be to lower the altitude level of the Lake. That's called devaluation. Problem is for the US economy it would mean severe inflation and shrinking demand of man-made goods as the price of energy and commodities in general would rise for Amercians and Europeans as they are put on the same level playing field as the rest of the world when it comes to buying natural resources. (when the lake and the water really communicate you get salt in your fresh water). China has been anticipating this for years by the way, vying for any natural resources it can via mine concessions and acquisitions. Need more examples? Two words for you: rare earth.
Currency war means China is trying to lower the level of the sea as we lower that of the lake. Pretty simple and it's already happening. Trade wars is when you start building a dam, also already happening though so far politicians are not really convincing beavers. Arguing against free trade is like being politically incorrect. For the pat 30 years all we hear is free trade. Well guess what: no dam, no lake. Free trade comes with a price. And since China controls its currency, the Western world can't even go hog-wild long china currency and equities to prop them artificially up to our level faster so we stop leaking. By the way I say China here but it is true of every exporting country which is controlling its currency. China just happen to be over a billion people and have such a low level of living standard that it can play the cheap labor card at will so it attracts more attention.
Brazil is trying to build a dam, and because the US is pouring too much water in the system their dam is being over-run so they are pretty upset and won't show at the G20 (or least they threaten too). Same thing with Japan, which has apparently been told flat out to stop building a dam. But if you don't keep pouring water in the highest lake or build a dam to guard it, the other lakes are going to keep getting filled up by more water they can absorb.
This simple metaphor is getting its fair share of use and I should probably stop here, but the conclusion is as simple as the metaphor. French or Greek protesters can burn all they want, Western central banks can print as much as Keynes would have dreamt of, and still they won't solve our structural problems. The G20 is just a group of guys who are about to start going helmet-to-helmet but pose on the picture like they are the brady bunch.
Good luck trading,
Nic
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But the Brady Bunch demonstrated ethics, morals, and responsibility. Poor analogy.
Water is very nearly incompressible. There is no measurable change in volume with temperature.
On the flip side, it does expand a lot when frozen
Water expands when heated, hence the expansion tank on any hydronic system.
Wrong. The thermal coeficient of expansion for water is significantly higher than other materials such as aluminum or steel. This expansion is the theory behind rising seas due to global warming. Yes melting of ice caps contributes, but the volumetric expansion of water due to temp change is significant. Ever have your radiator overflow?
Water is not compressible. That means no change in volume with pressure. Temperature is an entirely different matter. Water expands with increasing temperature and also expands when it phase changes to a solid (ice). This last fact is very important to life on earth since ice floats and melts in summer.
Phase Equilibria on ZH.....What a beautiful thing.
I'm thirsty.
im wet
The problem with thinking (or arguing) in analogies is you can lose sight of where the analogy breaks.
The problem isn't free trade. The problem is that today, there is little freedom anywhere. You can produce whatever you want--if you get permission, pay protection to the labor movement, don't get sued, don't get blocked by the enviros, set prices that are not "too" high, "too" low, or "too colluding", obey millions of contradictory and incomprehensible rules, and accept irredeemable fiat currency in payment.
So freedom and free trade get the bum rap that ought to go to government working together with business, i.e. fascism.
Loose analogies about lakes, rivers, oceans, rain, tanks, hoses, pumps, and gravity notwithstanding.
Still using analogies, Nic? Come on, didn't you know it is all digital, now?
http://www.youtube.com/watch?v=LC9dx6Ns_K8&feature=related
Free trade will lead to a form of fascism every time. What Nic is describing is a complex economic system that has evolved a large level of emergent fragility. Although the individual actors in a free trade system may not be corrupt, the aggregate economic activity of such system inevitably leads to concentration of wealth and corruption. Nic makes the excellent point that we can't expect to have complete freedom AND high levels of continuous economic growth without the natural energy processes to back that up. Stability inherently breeds instability and we must recognize that no amount of regulation, fiscal/monetary policy or foreign trade/military policy is going to change that fact.
Now I may not agree that China is sitting on an ocean of wealth, but they certainly have a huge advantage in this global dynamic. The Western world has grown for the longest amount of time and become the most corrupt, so they will bare the brunt of collapse in the short term.
From the water metaphor to the "fascism every time" line, I find the use of abstractions overdone, and the concrete facts much glossed-over: The US and Europe foolishly decided (in competition with each other) to bless the PRC as a worthy trade partner. While I was in I Corp and over Laos fighting Chinese-fed and armed soldiers, and while China was leading it's Cultural Revolution (killing and starving millions more of its own people) Kissinger got the brilliant idea (he thought of the Laos invasion) to "open China." So we end up allowing1.4 billion Chinese laborers into the labor market of the world, while they were (and are) living with no political freedom under a Communist Dictatorship, one also notoriously corrupt at all levels. And people are talking about water metaphors and free trade? This issue is how did we let the big corporations (Walmart, Boeing, Wilson, et al) talk us into allowing Chinese goods into the US at all, let alone sans high tariffs? Ah, the civil servants and retail clerks loved the cheap necessities? The country went mad. Insane. Slavish in mentality. What the Chinese don't get the Medical Machine has taken, by Guild power on the tax-payer's dime, with laws rigged to limit physician supply. Skip the fancy metaphors and politique nouveau. The facts are simple and obscene. Trade with a aggressive dictatorship was never opened for question by the US voters. We were tied in knots by politicians, battling over abortion, affirmative action, and taxes while China was affirmatively grabbing our jobs, and aborting our future, and our debt from living on the cuff made our future tax bill certain to double. Who are the fools in this picture?
It would be an insult to the beaver's intelligence to put him on a level with Bernanke. But the beaver could do a better job by far.
How many Benjamins would a Benjamin print, if a Benjamin could print Benjamins.
And beavers probably don't stink as bad as that rat bastard Bernanke.
NutFlux hits it out of the park again.
Up $14 after hours.
Another "cult" stock I refused to buy.
Another lost opportunity.
thing is, it didn't hit it out of the park....and it is still ballooning. you have to wonder now if anything, how many trillion is it going to take to satisfy the market now?
major disappointment is heading towards us like a dirty tornado.
Q3 free cash flow drops to $7.8m down from $34M Q210 and $25m in Q309
BTW LNN treating ag equip longs right. Plus $8 or 17pc on earnings
Wow.
Definitely not a gold stock.
LOL....
Talk about coming back from the grave! You see a 10 year on this? wow... the farmland trade is alive and well.
I'll make you feel wonderful, I bought it at $17.00, and sold it at $21.00........
Now, do do you feel better?.
I passed on Google, and laughed at them at $200.00 and change.....
Now, lets talk about lost opportunity.
Nic Lenoir, you are writing and commenting sometimes bullsh1t and commenting on "good old fashion wars" is disgusting !
Hey Tyler, she-who-must-be-obeyed didn't think much of your post with regards to the title cos indemnity:
Yes, I know about the warranty deal. Sadowski is a knucklehead – the stories I could tell. These articles look like they are written by children. The parenthetical about “which makes one wonder just what exactly FNF’s function is” is just lame. FNF gets the indemnity from the bank. FNF is still primarily responsible to the owner but has recourse for recovery from the lender under an express indemnity. The indemnity does make sense but it makes me laugh because it reminds me of A*** H***** wanting to get banks to indemnify us in the event of forgery by a third party. Now THAT would make you wonder what FNF’s role was.
If we cared about said commentary we would post a childish retort. As for the "laughability", the CEO of FNF was just downgraded to EVP. And, yes, she knew that too.
I will since I don't mind being adolescent on occasion. Hell, with another Varuca running the conned show it helps to recall what happens when folks get wrapped up in image and acting .. or page view stats...
- JAFO
http://www.youtube.com/watch?v=nqchRpH_eDM
Inland bodies of water do in fact flow to the sea in reality. The difference is that other natural forces keep the flow almost perpetual. ie. weather systems over the sea collect energy and water from the sea and deposit it back on the land to replenish the lakes, etc, etc... Economically, this regenerative process has not happened, and here we are with an empty lake.
The federal reserve has no choice. US can't pay back the debt but we can't do a hard default. Therefore, we devalue the currency to achieve the same effect. A soft default. That is why gold is sky high. Long term dollar only going lower.
Nations don't default anymore, unless everyone involved really desire it. A default is pretty much the same as walking away from your house (which is bad form indeed).
No nation will ever pay back its national debt, nor will any creditor expect it. The future and the past don't really matter, only the credibility to meet interest payments right now matters. Interest payments in turn obviously depend on a nations ability to sell debt, which in turn depends on a nations ability to project power in the world.
The US is overextending its ability to sell debt relative to its power. Paying back debt is totally irrelevant. Only interest payments can become a problem.
Mach777 living in last decade, now you default on house and stay put.
perhaps it is THE problem. Insecurity breads fear.
Oh well, it's just water over the damn.
Welcome to another heapin' helpin' of certain uncertainty that no amount of Tabasco can assuage Nic.
Wonder how many bots are going to be buying this nipple bottom?
Robo ~ I liked the video from 1987 crash speaking with goldman ect.... The bond market is yelling ruuuuuuun....
http://www.youtube.com/watch?v=XFn1G2goDQw
wouldn't touch it with a 10 meter cattle prod. Of course, my average holding period is longer than fractional seconds... :)
The FED says the economy is expanding "modestly" and consumer spending is up slightly, which should be considered as great news considering. Why do they want to goose it and risk future disruption.
On another note, the NY FED suing BofA seems like legal justification for more QE/liquidity injections. If rational fails tweak the law.
Madness.
March 28,2007
Federal Reserve Chairman Ben Bernanke told Congress on Wednesday that growing troubles in the market for risky mortgages thus far doesn't appear to be spreading to the overall economy ....
"At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained," Bernanke said in prepared testimony to Congress' Joint Economic Committee"...
Paradigm shift. Looks like rain and here I wet myself. This ain't your grandma's Smoot-Halley. We'll see.
Smoot-Halley...I like it. One of these times that comet is going to impact...
Nic lost me somewhere near halfway - now if he used a different metaphor - such as a wine lake I may have been more concerned as any leakage would have been catastrophic for a Irishman.
Water shortages are not much of a problem here although they now want to tax it in Ireland !!!!
But seriously the scale of this shit storm is becoming hard for me to comprehend - local geographical features may be inadequate to convey two econimic galaxies colliding.
Some Xtranormal videos....
Some hot Newport Beach chick asking for a HAMP modification...
Here's one I made, an argument in the office between Bob Pisani and Erin Burnett.
Free trade, NAFTA, Plaza, globalisation are the CANCER of our world. Only fascist corporation make profit and the thugs without any skills except stealing.
Stop globlisation and get to work!
It's the US which made China what it is: a greedy dragoon!
a truly outstanding post!
We're all global macro now!
I have had the dubious pleasure of setting up joint ventures in China when it was bloody hard, so I am loathe to defend the Chinese, but really, I am totally sick of all the crap and thinly veiled bigotry that leaps and bounces all over the net.
If China is greedy, then what the fuck are you? Is the pursuit of raising a billion people out of POVERTY greedy? Their ethos is pragmatism, their morals bound tightly to the notion of acting for the greatest need. In Trekkie terms, the needs of the many outweigh the needs of the few. That's how they operate, and ANYONE who has ever done business there can walk away with vast profits in imports whilst the Chinese happily manufacture goods for you at an average of 2-3% net profit. That's the reality and the crap I hear about China's greed makes me wince with embarrassment that people could be that ignorant and twisted.
Currency manipulation is another tricky matter because we do it every single day. China is the largest commodities importer in the world, so raising the value of their currency would be highly advantageous for them. Why don't they just raise the Yuan value, get their raw materials cheaper, make our exports more cheaper in return, and everybody wins? Duh. The disparity between city/countryside wages, living conditions, infrastructure, education, and the rest is such that the sudden shock of floating their currency will split their country apart along a divide differentiated by wealth-v-poverty. And when I say wealth, it's relatively meagre in our terms, but vast in theirs. You can't just raise everyone's wages before all the things we take for granted: good roads, communication, health, & access to education are in place. But then, I think a lot of the monsters in our midst in the West would be very happy to cause massive human suffering on a biblical scale just to feel superior for a day or two.
It's this mischief-causing incitement, "Do as we say and not as we do", misdirection, and blaming other people for things that we do as a matter of course that I find both curious and disgusting.
Fair share. Fair Trade. Free Market. These words do not mean a thing if your actions say, "Lie, cheat and kill to secure natural resources", "Exploit the 3rd world", and "Might is right". - the three guiding principles of the USA for as long as I have been alive.
Good post though. :)
Wow, a very rare spark of insight and cross-border/culture understanding. All hope is not lost, I hope.
Bigotry and ignorance exist everywhere. But quite a few otherwise intelligent, sensible, and well-informed people have shown shocking bigotry and ignorance on China issues, always so but increasingly so as of late. This is depressing and worrisome. It's a combination of ignorance (probably due to inconvenience more than anything else), brainwash, laziness of the mind, and the need to blame someone else in times of difficulty.
Thank you, sir! That was one of the best and heart-felt comments I've read in a while here.
I been watching yall the last few days, you retards aint figured out QE never stopped yet?
These self flagellating TeaTards(TM) are retarded.
Thanks, Nic. Are we at SPX 800 yet? Or is that years away too now? Let's keep kicking the "end game scenario" down the road until it works out someday and you can say, "See, I told you."
-100 Wagner, if you think any of this rally has been about improving, REAL demand in the economy you are out of your mind. The only thing that contributed to your AAPL profits was Fed funded PD robots. If you believe this can go on indefinitely you're certainly out of your mind.
20 bottles of beer on the wall, 20 bottles of beer.
Take Brazil down and pass it around, 19 bottles of beer on the wall.
19 bottles of beer on the wall, 19 bottles of beer.
Take Japan down and pass it around, 18 bottles of beer on the wall...
Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic.
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