Three Unorthodox Views

Marc To Market's picture

In separate pieces we have sketched three views that are outside the consensus. We thought it would be helpful to pull them together in one note.

1. Resilience of the US economy: Many fear that the end of the payrolls savings tax holiday and the sequester will undermine the US economy and possibly back into a recession, after a pitiful 0.1% expansion in Q4 12 before the spending cuts and tax increases were implemented.

We demur. The recent ISM suggests an under-appreciated resilience of the world's largest economy. Auto sales have remained strong and steel output is at its highest level since last September. The wealth effect of rising stocks and home prices is not being lost on US consumer confidence.

What we are suggesting is not unprecedented. Just like the tax hikes in Reagan's second term and tax hikes in Clinton's first term were "supposed" to derail the economy, it did not then either. The underlying strength of the US economy is illustrated by two numbers. First, in 2012 US exports exceeded China's, according to the respective government's data. Second, the US oil production exceeded Saudi Arabia last November, the most recent comparative data.

2. Skepticism about the prospects of Abenomics: We argue that the yen's weakness was not only a function of the change in regimes in Japan, but actions of the ECB last summer to ensure the survival of the EMU project reduced the need for safe havens in general and this was clearly a force much larger than the yen, but impacted other safe havens and risk asset more broadly. Of course, signals of aggressive fiscal and monetary stimulus further encouraged the yen's weakness.

However, barring a remaining window to shock and awe at the April BOJ meeting, we think the major parts of Abenomics is in place and that the government turns its attention to its political agenda ahead of the summer upper house elections.

Our concern is two-fold. First, that as the LDP seemed to have demonstrated previously, monetary and fiscal stimulus in the absence of structural reforms is not effective under present conditions in Japan. Second, while foreign interest in Japanese equities remains keen, and many international fund managers remain underweight Japanese shares, Japanese investors are keeping more of the investment at home. It seems as if the realization that their yen can buy few foreign assets has caused a bit of a sticker shock and have been selling foreign assets. The inability to recycle the current account and portfolio capital inflows may exert upward pressure on the yen.

3. Currency Wars: Although the media continues to press this line and many commentators refer to it, the recent G7 and G20 meetings agree with our assessment that current behavior--the pursuit of monetary and fiscal policies for domestic objectives is not tantamount of war. Japanese officials have moved back within compliance by not citing specific bilateral exchange targets.

In addition, over the past couple of weeks, Japanese officials have placed down the need to buy foreign bonds (which is too close to fx intervention), and showed less urgency to change the BOJ's charter, Abe appears to have picked the official to head up the BOJ that has the highest international gravitas, and Japan seemed to be more likely to join the trans-Pacific free-trade agreement. The existence of circuit breakers and conflict resolution mechanisms, like the World Trade Organization reduce the chances of currency tension spilling into trade.

One of the dangers of exaggerating currency wars is that it distracts our attention from the real systemic fissures. Unlike the 1920s and 1930s, the critical fissure is not between countries (as was the case in the aftermath of the end of WWI--see The Economic Consequences of Peace by Keynes), but within countries. Rather than confront the political and economic elites in other countries to soften the blow at the end of the credit cycle, the domestic elites have turned on their own people.

Capital accumulation and profits are largely being preserved at the cost of further erosion of the social contract and the increased concentration of income and wealth domestically. This assessment suggests the international order may be more robust than many have argued. This in turn underscores our belief that the role of the dollar in the international economy as a reserve asset, a store of value and a means of exchange has not and will not be significantly altered by the financial crisis.

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whoknoz's picture

the was submitted by MDB, right?....

Vooter's picture

"This in turn underscores our belief that the role of the dollar in the international economy as a reserve asset, a store of value and a means of exchange has not and will not be significantly altered by the financial crisis."

The author left out "desperate" between "our" and "belief"...

the grateful unemployed's picture

1 yes, but whose economic recovery is it? see number 3. number 2, japan is no longer the carry trade dummy partner (code money laundering for the global fiat printing appartus, and expediter of seignory[sp?] or the cost of money as far as you and i are concerned [see 1 and 3] maybe China will take that roll, maybe the HFTs for Goldman are going to pick up the slack, but someone has to be consiglore [sp again] to the money printing mob bosses [code central bankers]. why is it the mafia never was interested in counterfeiting? well they probably made enough money laundering the stuff for the USG.

and while i worry that America is at a disadvantage in participatory democracy, being a Bush like Republic, even under Marxist non-citizen POTUS Obama, this continues for some time to come. [and being under Economic Marxist rule by Polituburo Central Bank] the situation  empowers states and makes the domestic beatdown a tough sell, though i might expect that POLS in the beltway will try to starve some of these states out, those especially in the poor south, represented by noisy anti social GOP luddhites who would reinvent slavery just to restore the Constitution.

but in the end corporate AMERIKA, and WalMart, being the canary in the consumers coal mine, is spiraling downward. as corporate AMERIKA goes so goes the status quo, and we should look back at this 20yearsfromnow, with disgust and loathing for the political class that tried to sell its people down the same river WASHINGTON crossed in order to end this sort of thing. goodbye lobbyists, goodbye cronies, goodbye dictator POTUS pretenders. 

rfwashere's picture


The author of this very weak article references a book by Keynes entitled "The Economic Consequences of Peace" and he expects me to take him seriously?


Keynesian 'economics' is at the center of the black hole that is sucking the life out of this country and destroying everything that made America great.  Central planners and progressives just LOVE Keynes.  His number one butt buddy is good ole' Ben with Timmy bringing up the rear...

I don't think so.

Marc To Market's picture

rfwashere, I don't get it.  You obviously have never read Keynes or even really understand what Keynesian economics are.  Yet it does not stop you from insulting me.  Keynesian economics is, you say destroying everything that made America great.  You will find, if you care to, that for most of American history, the country has been in debt.  That is to say, American was probably in debt during the period that you do not specify that you think made America great.   It was the conservative Republican President Nixon that declared we were all Keynesians.   That is to also say that it is not just central planners and progressives that like Keynes, but as someone pointed out in the comment section of another post, so did the Fascists and totalitarians.  But they also liked Capitalism. 

And I know you think it is cool to talk about butt buddys, but if you are having a gender identification problem, why insist on projecting it on others? 

rfwashere's picture

M2M, I stand by my disdain for Keynes and I must point out that the "butt buddy" comment was clearly NOT directed at you and was solely directed at Keynes, Bernanke and Geitner.  I apologize if you misunderstood my comment and took offense as that was not my intent.

As for Keynes, I am familiar with his work and I happen to disagree with him. After publishing a Treatise on Money, Keynes himself later said "I no longer believe in that" in response to criticism penned by Freidrich Hayek the author of "The Road to Serfdom". 

Keynes believed in a mixed economic system - part capitalism, part socialism, part fascism.  While I appreciate your admiration for Keynes, I do not share in that admiration.

When Bernanke called gold a "Barbarous Relic", did you know that he was quoting Keynes?  Is gold a barbarous relic?  Perhaps to some, but I don't think so.

There is no one thing that made America great, just like there is no one thing that is tearing this great country apart.  Of course Keynesian economics is not solely to blame but Keynes was a genius/progressive that believed in collectivism (not communism though - go figure) and disdained individuality. 

If Keynes were alive today, he would likely abhor the current state of affairs in this country and might view his contributions with disdain - who knows.

Presented for your enjoyment: Fredreich Hayek on Keynes

From 1978:

From 1980's:


moneybots's picture

1. Resilience of the US economy:


The economy is so resilient it crashed in 2008.  It is so resilient that Zero Hedge posted that homelessness in NYC is now worst since the Great Depression.


With only 25% unemployment, rather than 50% unemployment, Spain is very resilient.   Greece is very resilient.  North Korea is resilient.  Despite the number of people who have died of starvation, there are a lot of people left.

Marc To Market's picture

The US eocnomy is one of the few high income countries in which GDP is above the pre-crisis peak.  And GDP in Q1 13, depsite the fiscal cliff and sequester--ie tax increases and spending cuts, is likely to be greater than Q4--prior to the fiscal measures.  So yes, I think the US economy is demonstrated a resilience.  No I am not talking aout 5 years ago, but now. 

Edward Fiatski's picture

It is resilient in regards to Europe, UK & Japan.

tired_of_manipulation's picture

I'll one up number 1.  A stronger than expected economy will not correlate with stock market gains.  Any significant reduction in unemployment is going to lead to inflation driven by rising wages.  Corporate margins and earnings multiples will both go down simultaneously.  This weak recovery with high unemployment is a goldilocks scenario for the market.  Any significant shift towards a stronger recovery or recession will be the top.

Orly's picture

"...the domestic elites have turned on their own people."

Don't drone me, bro.


The resilience of the upper crust is only valid inasfar as they can stick together themselves.  When things start to sour on the "domestic" help and there is violence, there will be plenty of blame to be passed around and pass it around they will.  Finger-pointing and back-stabbing will only last so long because you can only beat up on your little brother so long before there are real consequences.

When they turn on themselves, it will start to get real.


Mrmojorisin515's picture

society is a pyramid, the upper crust relies on the lower section to help keep the base in line.  When the middle section loses its "privilege" you'll begin to see change happen.


the quickining!

BlueCheeseBandit's picture

Dollar is strengthening because big money doesn't have better ideas. The dollar won't survive the decade as is.

TBT or not TBT's picture

The euro has to die first, pretty much axiomatically.   The political union behind it is a joke, and the currency union is a great example of how the former overreached.

Ghordius's picture

I note your wish, but I fail to see how. by break-up? which members? why are they in, at all, if they could cuddle in the embrace of the dollarzone or being buffeted around by the great waves of speculation?

the "political union"? the EZ does not need the EU, in the same way as the previous monetary grids did not need something like that. note that Switzerland is a guest of the eurozone without being even a member of the EU

meanwhile Poland is preparing to join the EUR - why?

Orly's picture

The dollar is strengthening because the Pound Sterling is in the tank and the Euro wants badly to dip below 1.3.

Both situations won't last until the end of the decade, I am certain.


orez65's picture

I suggest that the resilience you see is the result of people moving their dollar savings into hard assets.

How can any currency survive when you have the Fed print the equivalent on an Apple company every six months?

suteibu's picture

"Japanese investors are keeping more of the investment at home."

0 interest on deposits, sticker shock (as you say) on foreign investments, and urban real estate (nobody seems to want to own rural land) that is artificially propped up by the BoJ buying REITS.  What the hell else can they do with their money?  Like in the US, propping up the markets because there is nowhere else to go is a feature for the ruling class, not a bug.

And you are a typical Westerner to assume that the TPP will do anything to improve Japan's economy or society.  Most of the provisions (that have been leaked from the secret negotiations), 24 of the 26, have nothing to do with trade, but force countries to adopt legislation favorable to global (read: Western) corporations.  Japan's future lies with Asia.

Marc To Market's picture

I am not sure what a typically Westerner means.  I did not make a single normative claikm about TPP.  I said the Japan is more likely to join it.  Period.  The basis for your claim that I am assuming it will improve Japan is not in my note.  I can take any crticism of my views, but please don't attribute views to me.

Sustained yen weakness requires Japanese investors to buy foreign assets.  My work, which has been posted in this space, shows Japanese investors are SELLING foreign assets at the fastest pace in several years (over the past four weeks). 


suteibu's picture

"The existence of circuit breakers and conflict resolution mechanisms, like the World Trade Organization reduce the chances of currency tension spilling into trade."

Capital controls restrictions are part of the TPP as is the investor-state dispute mechanism which gives companies the right to sue taxpayers in a foreign (regional) body for loss of profit or unfair advantage for domestic companies because of local legislation.  The Phillip-Morris/Australia case is an example.  The only thing it will do is restrict Japan from fighting the effects of the Fed under threat of bureaucratic punishment or lawsuits.  Granted that you are making short-term analysis, but show some depth.

Sustained yen weakness means nothing when the US market is at an all-time high.  The last time the markets were this high, the JPY/USD was ~120.  The Yen has a long way to go before the US market is attractive.  As for selling the US market, according to Zero Hedge, insiders in the US are also selling.  Given these things, what's the big surprise.

Winston Churchill's picture

Because the League of Nations worked so well in the 1930's in

averting consequences.

Orly's picture

Hence, the "recycling" of yen that you mentioned the other day. I understand now.

That's sort of like a Catch-22 then, isn't it?  There must be an equilibrium level in the relative value of a currency that makes either an inflationary or a deflationary scenario feed on itself.

The Japanese are probably selling their foreign assets because now they can get the best price.  I thought it was Kyle Bass that mentioned the Japanese were actually buying foreign assets, including taking large stakes in American companies (the Sprint deal that failed comes to mind...) at end of last year.  He also mentioned that it was a sign that we were nearing the end of relative yen strength.

The question becomes what happens when the Japanese run out of foreign assets to sell?  Do they dip into their US Treasury portfolio and start unloading or do they take a different tack?


suteibu's picture

They will buy Nikkei up to 13,000 as Amari promised and then they will start stuffing their money in their mattresses.

disabledvet's picture

That number three is so spot on (obviously not the popular view...when is monied interests ever popular?) wish I had the time to expand on it. The future of course is always a guessing game but what I look for is what I deem as "news worthy" and proceed from there. Unlike trends "what is news" requires the "added value of Saliency" and his this besides being a uniquely human endeavor at a certain level "totally unknowable." while it has not been my goal to actually BE the news it is true "one cannot separate the human from the human interest story." hence "I think the dollar will be your financial NEWS story of the year" (tomorrows news today/I'll look as the year end approaches to see if it was empirically true and then assess the coverage/lack of coverage.) know you know unlike most here how truly unimportant the economy is to the market participants on Wall Street et al. Still the term "recession proof banking" still sticks in my craw oh these woeful years. As with the media I have achieved a true binary relationship with banking (on/off with simultaneity) since 2008. On the one hand they serve the State...on the other hand they serve the market. And neither can be true at the same time..."so we get Twinkie Management" and no bank? Just some idling thoughts on this day of course...

Orly's picture

So you use Schroedinger's Bank?