Shift in Global Markets?

Submitted by Leo Kolivakis, publisher of Pension Pulse.

I wanted to follow-up an an earlier post on curbing your enthusiasm. But first, let me go back and retrace my thoughts as briefly as possible.

Some have accused me of being a "perma-bull". However, if you go back to my comments in June 2008 and July 2008
when I started my blog, you would have labeled me a "perma-bear". I saw
deflation, an imploding securitization/hedge fund/ private equity/
commercial real estate bubble. I also saw the end of the great pension
con job in alternative investments.

Then came August 2008,
where I predicted that AIG's disastrous results spelled trouble for
pension funds and that the global Ponzi scheme in alternative
investments was unraveling fast. Sure enough, when September 20o8
rolled along, we all thought the end of the world had arrived.
Operation "AIG" swung into full force, capitalists of this world
united, and we narrowly escaped "the Apocalypse".

In January 2009,
I started talking about post-deleveraging blues and made the right call
on many stocks except I totally missed the big rally in financial
stocks. What a fool I was! How could I have not seen that all that TARP
and BARF money was feeding the banksters on Wall Street? Not only did
they get billions in bailout funds (thanks to Hank "the Tank" Paulson),
but they got to borrow at zero interests rates (thanks to "Helicopter"
Ben Bernanke).

What did the banksters do with all that free
money? Did they lend to small businesses that were in desperate need of
funds? Hell no! They did what they know best, they traded away in the
world's biggest Casino buying all sorts of risky assets from high yield
bonds, to emerging markets bonds and stocks, to commodities and
commodity currencies.

As unemployment kept soaring, the
banksters knew they had a free call option. As long as unemployment kept
climbing, the Fed wouldn't dare raise rates. So you move up the yield
curve, get more yield and buy as much risk from all around the world as
you can.

In May 2009,
I saw that massive liquidity injections were drowning out the meaning
of inflation and that the "W" recovery would be postponed. I wrote
about why small is beautiful in this new Wild West of investing.

In June 2009,
I wrote about how the sharp rally from March lows was causing some
serious performance anxiety among big institutions. Massive liquidity
and performance anxiety were driving equities higher. Every dip was
being bought and I knew we were going much higher.

We are now in
October and barring some unforeseen event (terrorism, war with Iran?),
I don't see why things have changed much since June. In other words,
there is still plenty of liquidity and lots of performance anxiety
going into year-end that will drive risk assets to higher levels.

Now, let me offer you some other thoughts on where we are heading. On October 16th, E.S. Browning of the WSJ reported Dow at 10000 as Crisis Ebbs. The article noted the following from Ned Davis Research, one of my favorite independent research firms:

Ned
Davis Research has been comparing the current bull market to the one
that ran from late 1974 through 1976, when the Dow rose 76%. Like the
current rally, that one came in the midst of a troubled period for
stocks. If this rally is similar, it would have longer to run, but most
of the gains already would be made.

The median stock in the
Standard & Poor's 500-stock index trades at about 20 times the
company's profit for the past year, Ned Davis Research calculates,
above the average of 17 since 1972. But that is below the level of 22
which has been a ceiling for stocks in recent years, the firm says. It
calculates that the S&P 500, which rose 1.75% on Wednesday to
1092.02, could hit 1200 before it starts to look pricey. "We think the
rally still has legs," says Ed Clissold, senior global analyst at Ned
Davis. Like many research firms, the company is expecting some kind of
temporary pullback given stocks' gain since March.

One oddity is
that, historically, the levels of 10000, 1000 and 100 all have been
stumbling blocks for the Dow, which has tended to stall around those
levels. It first touched 1000 in intraday trading in the 1960s, but
then spent well over a decade floundering. It didn't lastingly move
past 1000 until 1982.

But be careful with
historical comparisons. With the amount of liquidity sloshing around
the world, this will be the Mother of All bear market rallies as asset
prices totally detach from fundamentals.

By the way, the
fundamentals aren't as bad as the pessimists claim. On Thursday, the
Conference Board said that its index of leading economic indicators for
the U.S. rose in September:

A
private forecast of economic activity rose for the sixth straight month
in September, a sign the economy will keep growing next year.

The
Conference Board said Thursday that its index of leading economic
indicators rose 1 percent last month after a 0.4 percent gain in
August. Wall Street economists expected an increase of 0.8 percent last
month, according to a survey by Thomson Reuters.

Economists
expect the economy grew about 3 percent in the third quarter after
falling for a record four straight quarters. But many wonder if that
pace can continue in the current quarter and next year as unemployment
rises and consumers remain hesitant to spend.

The
Conference Board said the indicators' 5.7 growth rate in the six months
through September was the strongest since 1983, but joblessness was
weighing on the rebound.

"These numbers strongly suggest that a
recovery is developing. However, the intensity of that recovery will
depend on how much, and how soon, demand picks up," said Conference
Board economist Ken Goldstein.

A sustained
pick-up in demand can only come from employment gains. We'll see if
U.S. job growth finally shows up in the upcoming reports and whether
companies are finally hiring (I think they'll slowly start
hiring).

Outside the U.S., things are looking better, especially in China where the growth rate accelerated to an 8.9 percent pace in the third quarter:

Lavish
government spending and bank lending helped China's growth rate
accelerate to an 8.9 percent pace in the third quarter, far
outstripping expansions elsewhere around the globe and raising
questions about whether the rapid rebound can be sustained.

China
also announced Thursday that industrial production and investment
spending are growing at a faster pace. That seemingly good news
unsettled local stock investors, however, on fears Beijing may need to
rein in its stimulus policies to avoid asset bubbles and inflation.

Companies,
central bankers and political leaders around the world are increasingly
counting on growing demand from Chinese producers and consumers to
offset sluggish home markets. Corporations from Coke to Caterpillar are
seeing their strongest sales in Asia, particularly China. So far, the
growth is coming mostly from government-backed spending on construction
and other projects, but demand from China's traditionally frugal, still
relatively poor consumers is also rising.

The world's
third-largest economy began to falter in late 2008 as exports plunged
and thousands of factories shut down, throwing millions out of jobs.
China fought back with a 4 trillion yuan ($586 billion) stimulus plan
involving massive spending and bank lending for construction of
infrastructure such as railways and roads to pump up the domestic
economy.

Growth fell to a low of 6.1 percent in the first
quarter, but rebounded to 7.9 percent in the second quarter, hitting
8.9 percent in the third quarter compared with a year earlier. That
puts the economy on track to at least meet the official target of an 8
percent expansion for 2009.

With China in the forefront, "Asia
appears to be leading the global recovery," Federal Reserve chairman
Ben Bernanke said earlier this week. "Recent data from the region
suggest that a strong rebound is, in fact, under way."

Yet
sustaining the upswing beyond a few quarters hinges on stronger demand
for exports from important markets such as the U.S., Europe and Japan
which are emerging only slowly from the worst global recession since
World War II.

"We'll see strong growth
from China for the next six months, possibly another year," said
Standard Chartered Bank economist Stephen Green. "The problem is what
happens after another year and a half. What will be the growth driver
then?" he said.

Signaling another set of concerns, China's top
leaders said Wednesday that policies will increasingly focus on
countering inflation — a problem that had seemed below the horizon with
consumer prices down 1.1 percent so far this year. They also resolved
to clamp down on waste, industrial overcapacity and other imbalances
brought on by the rapid resurgence in growth.

Still, the
announcement that growth continued to accelerate in the third quarter
contained a hint of jubilation over Beijing's progress in mending
damage from the global economic crisis.

"We can say we have made
obvious and remarkable achievements in our economic growth," National
Statistics Bureau spokesman Li Xiaochao told reporters in Beijing.

"We
have quickly reversed the economic slowdown. The momentum of the
recovery is solid and overall, our economic performance is showing
signs of improvement," Li said.

Industrial output rose 8.7
percent in the first three quarters of the year, and 12.4 percent in
July-September — signaling accelerating demand for steel and other
industrial goods.

While China's imports still fall far short of
its exports, its recovery is playing a stabilizing role for other,
harder-hit economies, said David Cohen, director of Asian economic
forecasting for the consultancy Action Economics in Singapore.

"The Chinese are the biggest customers for many countries around the world," he said.

"They matter like never before."

Surging purchases of coal, iron ore and other minerals have aided global miners BHP Billiton and Rio Tinto.

Automakers
such as Ford Motor Co. and General Motors Co. are increasingly reliant
on China with its auto market surging ahead of the U.S. to become the
world's biggest this year.

Caterpillar Inc., which makes heavy
equipment, raised its earnings forecast for the year because of
performance in Asia, its best-performing region. Deliveries of its
products in China were higher than they had ever been for the third
quarter. Coca-Cola Co. plans a $2 billion investment along with its
bottlers in China in the next three years to meet the growing
popularity of fizzy drinks.

Even as China's rapid recovery sees
it loom ever larger for companies in the West, it is grappling with
problems that could undermine that progress.

Heavy reliance on
spending on public works and other investments has raised worries that
wasteful and redundant outlays on new factories and unneeded
construction will worsen gluts, while inviting financial problems as
projects fail to pay off.

Record bank
lending has also helped spur potentially unhealthy run-ups in property
and share prices. On Wednesday, top bank regulator Liu Mingkang ordered
banks to show more caution in lending in coming months.

The
government this week also outlined fresh curbs on investments in
steelmaking and other industries plagued by massive overcapacity.

China's
planners are seeking to widen the sources of growth beyond exports and
investment in state-dominated industries by channeling spending to
areas of the economy expected to spur more consumer spending and
improve productivity.

While China's domestic consumption remains
low compared with other major economies, it is rising. Retail sales
grew 15.1 percent in the first three quarters, the statistics bureau
said. Housing sales have been rising and new housing starts are also
picking up.

"I never trusted what the economists were saying on
TV about the recovery until our orders doubled last month. Now I'm
convinced," said Zhang Yizheng, general manager of Shanghai Rising, a
trading company that deals in plastic pipes used mainly in vehicles.

"Our
orders from car makers, electric equipment makers and construction
companies tell me that their business is returning to normal, too."

China
is not immune to boom bust cycles. A bust in China can spell trouble
down the road because it will mean another wave of goods deflation at a
time when the developed countries will be struggling with debt deflation.

But
the remarkable growth in China is leading the global recovery. And it's
adding to global liquidity in financial markets. The Chinese Investment
Corporation (CIC) has billions to invest and they're allocating
aggressively to stocks, hedge funds, private equity and real estate.

Speaking of private equity, it seems the golden age is behind us. On Thursday, TPG announced it will return $20 million in fund fees:

Private
equity firm TPG has told investors that it plans to return $20 million
in fees paid on its $19 billion buyout fund, a source familiar with the
situation said on Wednesday.

The
firm told investors about its plans, reported earlier by the Wall
Street Journal, at its annual conference this week, the source said.

"We
took this proactive step in order to share the economic cost of a deal
market that has been slower than anyone anticipated," the WSJ quoted
James Coulter, co-founder of TPG, saying.

TPG could not be immediately reached for comment by Reuters.

Private
equity firms have had a tough time finding new investments since the
credit crisis shut off the availability of easy financing.

They
have also struggled to keep investments healthy as the economy
suffered. Fundraising for new funds has also become very difficult, as
investors have been hard hit by the slump in global equity markets.

Investors
originally committed about $20 billion to the TPG VI fund, but TPG
later allowed them to reduce their commitments, a source told Reuters
in December, which brought the size down to about $19 billion. TPG,
formerly Texas Pacific Group, is one of the largest private equity
firms in the world.

Its founding
partner, David Bonderman, is considered one of the most influential
figures in the U.S. private equity industry.

Mr.
Bonderman and Mr. Coulter are not returning fund fees because they see
tons of opportunities in private equity. They're obviously managing
expectations downward and to their credit, they're not charging fees
for assets they're not using.

On another note, PE Hub revealed that Grant Thornton to Release "Blockbuster" Study:

Grant
Thornton confirmed that the study will be rolled out at a press
conference on November 9th. It’s been in the works for two years.

One
VC who’s aware of it, Pascal Levensohn, said he was “shocked” when he
learned what’s in it. “It has really scary statistics about the secular
decline in marketshare, globally, that all listed markets in the U.S.
have been experiencing since 1997,” he said. “This proves that (the IPO
drought) has nothing to do with Sarbanes Oxley and the tech bubble. The
reality is that America peaked in 1997 as a capital markets force in
equities, and since then it’s gone straight down and every other market
has gone up.”

The study is co-authored by David Weild, a former
vice chairman of NASDAQ who also co-authored the last eye-opening study
by Grant Thornton– “Market Structure Is Causing The IPO Crisis,” which
was released earlier this month.

Weild told me he became
concerned about the fundamental health of U.S. markets after watching
the “massive volatility” created by bubbles, specifically the dot-com
bubble, while he was working at NASDAQ.

“I was sitting in an
executive committee meeting — I was there from 2001 to 2004 — and I was
in charge of all listed companies, and we were delisting companies like
mad,” he said. “I had to change the rules not to delist so many. I felt
like I was running on a tread mill. I said, ‘We’ve created this
incredible delisting machine and companies can’t get out of their way.
There’s something wrong about this.’”

The dot-com bubble was not
a listings bubble, Weild said — “it was a valuation bubble in a narrow
industry group that left out the rest of the economy. It was highly
destructive, maybe even more so because bona-fied, decent businesses
couldn’t get capital. The capital allocation function was failing.”

Weild
started collecting data to understand what had gone wrong, and he ended
up tracing the problem to what he calls well-intentioned but misguided
regulations — the SEC’s Manning and Order Handling Rules implemented in
1997, and decimalization, implemented in 2001.

The effect, he
said, was to take away many of the economic incentives that support
small-cap public companies. One proof point to him is Omeros, the
biotech company that went public October 8 at $10 a share and is now
trading at just under $7. Its product speeds recovery after surgery.
Weild is not an investor in Omeros.

“They invested $113 million
in this business, had over 100 patents already issued and over 100
pending, and raised $62 million, so that’s $175 million,” he said. “If
you multiply their trading price by the number of shares outstanding,
they’re trading at a discount to total money invested plus new money
raised.

“There’s nothing in this business to represent the years and years of work and human equity that’s gone into it.”

Here’s
an interview that Weild did two weeks ago with Bloomberg TV on the
Grant Thornton IPO paper that explains more of his thinking (watch video by clicking here).
He wants a new market for small-cap companies that would protect price
spreads, so brokers would get higher commissions and commit to paying
for research, trading and sales to support small-cap stocks.

Finally, Pan Pylas of the AP reports there are worries about the dollar slide_ but what to do?:

Concerns
worldwide about the dollar's slide have escalated to the point where
currency markets are beginning to wonder when governments might try to
do something about it.

For now, any attempt to put a floor under
the dollar's exchange rate is expected to remain rhetorical, with
actual market interventions by central banks unlikely — especially if
China won't change its currency policy.

But with the dollar
sagging against the euro, the yen and a host of other peers,
policymakers around the world are voicing worries a weak dollar will
dampen their still-shaky economic recoveries. A falling dollar hits
exporting countries because they find it more difficult to sell their
products to the U.S.

A weak dollar also raises the cost of commodities such as oil, which are priced in the U.S. currency.

So
far, currency traders have largely ignored escalating rhetoric from
government officials. They pushed the euro above $1.50 on Wednesday for
the first time in 14 months and it has hovered round that level all day
Thursday.

And the dollar could get
weaker yet, if the stock market rally has further legs. That's because
dollar investments were used as a refuge as markets tanked. Now that
markets are rising, that money is flowing back out of the dollar safe
haven into stocks or emerging-market currencies.

And so far, the
third-quarter U.S. corporate results season has been strong — around 75
percent of companies that have reported so far have beaten
expectations. Larger U.S. budget deficits weigh on the dollar, as do
Federal Reserve efforts to spur the economy, such as low interest rates
and efforts to expand the supply of money.

At
some point, governments could consider intervention — buying dollars to
drive up its exchange rate. Or they could start hinting more strongly
to markets they might consider such a step, which could have much the
same effect.

"Assuming that the euro closes above $1.50 this week
it technically has plenty of open ground on the run up to the record
high of $1.6040 hit in July 2008, but there will also be plenty of
official resistance to limit its appreciation," said Mitul Kotecha,
head of global foreign exchange strategy at Calyon Credit Agricole.

"Such
resistance may currently be limited to rhetoric, but it will not be
long before markets begin discussing the prospects of actual
intervention," he added.

The dollar's current slide has recalled
memories of the coordinated intervention of September, 2000. Then, the
U.S. Federal Reserve, European Central Bank, Bank of England and Bank
of Canada intervened to stop an alarming drop in the euro that
threatened competitiveness of U.S. companies. The central banks bought
billions of euros for dollars and yen. The risky move helped halt the
euro's slide.

Today, however, analysts think any successful
intervention to stem the dollar's fall would require not just support
of the U.S. authorities, including the Federal Reserve. It would have
to also involve the Chinese, who have have kept their currency
artificially low against the dollar. That helps them boost their
exports to the United States — and China has been cool to suggestions
it ease its currency practices.

But
that could change if the Chinese start to fret about inflation. Premier
Wen Jiabao told a Cabinet meeting Wednesday that policy will focus on
balancing economic growth while managing inflation. Analysts said it
that could mean that the Chinese authorities might even allow their
currency to rise against the dollar. That would reduce the costs of
imports and help keep inflation down.

In turn, that would ease
some of the upward pressure on the euro, which has been bearing the
brunt of the dollar's adjustment — a move that by itself could lessen
any need for Western central banks to intervene.

And it would
also help cut China's massive trade surplus with the United States, a
key objective of the Group of 20 rich and developing countries.

The
arena for any coordinated action could be the G-20 finance ministers
meeting at St. Andrews, Scotland early next month. "The topic of
China's exchange rate can be expected to get increased attention in the
approach to the next G-20," said Jane Foley, research director at Forex.com.

Some
finance ministers in attendance may have reached their dollar pain
thresholds. Already this week, Canada's Jim Flaherty expressed worries
the U.S. dollar could derail his country's recovery, while Brazil's
Guido Mantega has announced a 2 percent financial transaction tax on
foreign investment flows. That was intended partly to curb the rise in
the value of the Brazilian real against the dollar.

Europeans
have started expressing concern. European Central Bank president
Jean-Claude Trichet has for weeks been warning that "excessive
volatility" in exchange rates could damage economic and financial
stability.

For the U.S. to agree to intervene, however, the
current dollar decline will have to turn into a rout. President Barack
Obama's administration says it wants a strong dollar — but the fact is,
a weaker dollar helps exports and the U.S. recovery.

"Unless the
dollar collapses, the U.S. is unlikely to feel compelled to adjust its
policy levers," said Bank of New York Mellon currency strategist Neil
Mellor.

As you can see, there are many things
going on in the world and I am just trying to connect all the dots as
best as I possibly can, focusing on the major trends that will shape
our future.

Comments

[The_Euro_Sucks]

I truely don't understand the reasons for a strong Euro. It is as corrupt as the Dollar. It seems many investors don't want to see the bubble. This weekend the outcome of debt renegotian with Latvia is expected. If the Latvians (?) win it will be bad news for German banks (cooking their books already) and Swedish bank (cooking as well). One thing is for sure, once banks in Spain are forced to recognise their losses all hell breaks loose. Their housing bubble is in Euro terms about as big as the entire US. For my country (Holland) it's known that the central bank officially understates the morgagebubble by a huge percentage (40 ish). They state that securitised morgages dont count. If you do count them in the morgagedebt to GDP is 168%. I can go on and on but let me summarise the Euro sucks. 

[kevinearick]

dominoes

[Yossarian]

Right, the ECB borrow from The Fed and lends to their insolvent banks.  They also monetize- see the NAMA situation where ECB is essentially stealth monetizing (or quantitatively easing if they ever actually sell the assets on the mkt) crap assets of Irish banks. What they haven't done, as far as I can tell, is act as aggressively w/respect to "stimulus," although the US is merely moving towards their level of debt.  

[The_Euro_Sucks]

Read that the ECB stealth monetised 4-6 trillion Euro. You have more info on that? I just wonder what happens if the outcome with Latvia is the same as with Iceland. European banks are already dead in the water. Then other governments like Hungary, Romania etc can take example and kill some Euro to big to fail banks in smaller countries wich are not allowed to be saved.... Because of the language (26) barrier here info is not that widespread especially since free media is as dead as in the states. Some governments, like Italy, are officially over the 100% debt to GDP. We are also moving the debt level forward on a aging population. Truely guaranteed succes.

[Gunther]

Leo,
the comparison of the current market to '74 seems questionable to me.
Differences:
'74 was a double bottom, gold topped with the second bottom and (un-doctored) inflation started to fall from around 12%. Ten year bonds were yielding some 7.5%.
Oil did not go up during 1975. 
That left stocks as only investment.

Today the Stock market made a V, without re-testing the bottom except for tech.
The US$ is weak, interest rates are low, gold in US$ broke out of resistance, and the volume is low on advances and picks up on declines. The market shows typical signs of a bear-market rally.
 The rally gets extended with all tricks, adding liquidity, cancelling stock-loans for short-selling, claiming better earnings then expected and so on.

Fundamentally nothing got fixed with the banks; Reggie Middleton has quite a bit of research to back that up.   Moreover, stocks are expensive here as several P/E discussions pointed out. If stocks are pieced in either Euro or gold the rally does not look impressive any more.
Even if I disagree with the comparison to 1974 I agree with the conclusion: This is the mother of all bear market rallies.

[Anonymous]

O/T: a skeptical look at US gov't revenue
http://www.bizzyblog.com/2009/10/23/year-end-deficit-report-part-2-aps-c...

More on people getting off the merry-go-round (US-centric)
http://www.forbes.com/forbes/2009/1005/taxes-financial-aid-college-rough...

[Anonymous]

GEAB N°38 is available! Global Systemic Crisis – The European Union at a crossroads in 2010: an accomplice or a victim of the collapse of the dollar?

As early as the second quarter of 2009, central banks from all over the world undertook to stop accumulating US dollars (dollars accounted for 37 percent only of their currency purchases while they account for 63 percent of their reserves) (8). As early as July 2009, close to USD 100 billion worth of net capital fled the US (9), at the precise moment when the US was claiming to be able to attract more than USD 100 billion a month to help finance the federal deficit (not to mention the other deficits).

In this situation, a fundamental question must be asked: who is really buying these USD 100 billion worth in Treasuries each month? Certainly not US citizens, indebted beyond any reason and left without savings or credit. Certainly not foreign private investors, more and more concerned about the economic health of the US. Certainly not the Chinese, Russian or Japanese central banks, more concerned about curbing their purchases of long-term bonds, and even starting to sell their Treasuries or exchange their long-term bonds against short-term ones. Strangely enough, the Bank of England alone seems to still have this appetite (10). Therefore, we are left we the “usual suspects’, i.e. the Fed and its network of « primary dealers ». “Money printing” is taking place on a far greater scale than acknowledged by the Fed under its official policy of « quantitative easing ».

Unlike last year, no panic will come to the rescue of the dollar. This time, the US currency is seen more as a sham than as a safe haven. Indeed decoupling of the rest of the world (Asia, South America and Europe in particular) is underway (14) and it is precisely the reason why 2010 is such a crucial year for the Europeans. If they don’t do anything about it, the Euro will become a safe-haven currency and it will rise until it suffocates the European economy. The Eurozone must therefore become more aggressive and discuss with the other big economic and financial players how to avoid the Euro soaring against the Yuan, the Yen and all the other currencies of its trade partners.

On this aspect, the EU doesn’t have a choice: it cannot be lasting policy to purchase billions of USD every day that lose value every day as a result of the increasing pace at which they are printed (15). Moreover, the EU is in the strongest position to negotiate with the IMF for the suppression of the US right of veto and for sharing power with the « re-emerging » powers (16).

As usual, external events will push the Europeans to act in a united and proactive manner. In the present case, according to LEAP/E2020, the issue of the Dollar will be a powerful stimulus for European action in 2010. History, whose only “sense” is the sense of irony as often recalled by our team, is apparently ready to give the Europeans the role everyone thought would be played by the Chinese…

http://flq.us/CE

[kevinearick]

where exactly did the fed send that money, and how did it get washed before coming back?

Black is right. They are increasingly blinding the the few remaining participants with misdirection as the oncoming train gets closer and closer.

To Vinny G, I add, if these guys don't stop playing chicken with the laws of physics soon, and I don't think they will, this is going to be the largest train wreck in History. Get a telescope, a folding chair, and climb a mountain a safe distance away to watch the show.

[Anonymous]

Its been said before but at what point do the chineese quit worrying about exports to the U.S.?

Letting the Yuan rise would allow them to afford their own products, no?

[chinaguy]

"On Thursday, the Conference Board said that its index of leading economic indicators for the U.S"

Whoop-dee-doo

M2 is 35% of the weighting in the LEI. M2 bloats LEI rises.

[Bruce Krasting]

Leo, Talk of Fed intervention will have a VERY short term impact. Look at the history of that. Talk will not work for long. If intervention is required it will be a long term effort. Not a single day or week. Once it starts it will last for months. This can only be a defensive action. They can only slow the decline. The reason is that confidence in the dollar is not there. It will not be there until well after the POMO activity stops.

The benefit of intervention is that the Fed will be forced to borrow under it's swap lines to fund the dollar purchases. The fed will buy Treasuries with the $'s raised by intervention. This is back end POMO.

But after the 20% adjustment that is coming happens (June, 2010??) there will be a great sucking noise. How will we raise the money we need to borrow at a cost we can afford??

[Leo Kolivakis]

Bruce,

I agree with you, intervention in F/X markets needs to be coordinated and last a long time for it to be effective. What odds are you placing on a 20% decline in the USD by mid 2010? What is the implied vol telling us about what the market expects? Thanks.

[Margin Call]

Here is another article of note on the Chinese stimulus package in the New York Times:

http://tinyurl.com/ylh8bvv

What a vapid puff piece! Is it just me, or has the NY Times here taken on shades of Xinhua? I get worried whenever I hear people praising the "efficiency" of authoritarianism. China was already an orgy of over-investment 5 years ago, I can only imagine how bad the infrastructure white elephant count is these days. It amazes me that people who are so quick to rip the American economic system apart somehow manage to gloss over the glaring excesses of the Chinese one.

Any country whose goverment can build infinite bridges to nowhere with impunity will look good on paper.

[kevinearick]

"Any country whose goverment can build infinite bridges to nowhere with impunity will look good on paper."

are you talking about the U.S of yesterday, or China today? The characters in this show move to China, roll out the same system, in the face of accelerating disclosure, and expect a different outcome?

crazyman ...

[curbyourrisk]

Pennies and open book got me out of trading back in 2002.  All it did was further the manipulations of the specialists. 

[Leo Kolivakis]

tip e. canoe,

I was talking with a buddy of mine who trades currencies. He told me that central banks that target inflation (ECB) can either 1) raise rates or 2) let their currencies appreciate. The ECB won't dare raise rates. The appreciation of the euro is a better option because it reduces import prices and energy prices (oil is in U.S. dollars). But above 160, Europe gets into trouble, and we're close to that level. So far, the rapid rise in the Canadian dollar hasn't hampered growth, but we'll see what happens once parity (or beyond) is reached. My buddy doesn't think China will allow their currency to appreciate just yet and risk a hit in exports.

I happen to think that monetary authorities want inflation because it is the lesser of two evils. That is why the U.S. is flooding the financial markets with liquidity and why China won't revalue its currency. Inflation will also help reduce the structural deficits in global pensions.

One problem: we are not out of the woods yet on deflation and the debt burden will be a noose around our neck for a very long time. Add to that a major shift in demographics, and you can easily see a protracted period of sub-par growth.

[Enkidu]

Leo - what's exactly wrong with deflation? If prices go down we can afford 'stuff'. Inflation only suits spivs and speculators and capitalists. Ordinary people want lower prices.

[Leo Kolivakis]

Debt deflation is bad for everyone, including "ordinary people" because they keep putting off purchases expecting prices to fall. the economy doesn't grow, jobs aren't created and if deflation is really nasty, the finacial system is bogged down for years as zombie banks stop lending altogether. The best is to have low to moderate inflation.

[Yossarian]

http://mises.org/story/3767

It's best not to have the inflation in the first place but, once you have it, the adjustment pain must be born by someone, the only question regards who takes the pain and what will the duration be?  Let the nasty debt deflation occur, as Asia did in the late 1990's, while insuring deposits, insurance payments (like people who have policies at AIG), etc. but NOT making senior creditors money good (instead debt->equity) and not bailing out profligate subprime borrowers who have been living over their heads.    

[kevinearick]

bad for everyone; I don't think so. all deflation is accompanied by inflation. as the current actors are deflated, "ordinary people" are inflated. ordinary people do not need the banks, nor do they need the trinkets the economy is currently producing.

I can see where deflation is bad for a pension industry that has built-in dependency on large compounding returns, sucked out of "ordinary people", through the misdirection of of a self-reinforcing political cycle.

The fat lady is singing, and they go la-la-la-la-la-la-la-....

The pension industry would be much better off reorganizing now, to re-enable long-term NPV on lower earnings, with a much higher capitalization rate, than continuing down the same road, increasingly blinding itself to the future. That fuzzy light at the end of the tunnel is not green shoots; it's an oncoming train.

[tip e. canoe]

nice post Leo.

"decimalization, implemented in 2001.  The effect, he said, was to take away many of the economic incentives that support small-cap public companies."

radical idea, but maybe it's time to bring back the fractions?

also, your post got me thinking whether one of the main intentions of the FED in filling the pool with dollars is to help China hit that 8% target (the Chimerica thesis) and boost their export market everywhere else except the US (Europe, Canada, Australia, etc).

also interesting article in Forbes that dissects the China #'s:
http://bit.ly/1ny6tr