Friday, December 15, 2006

Groundhog Day

Markets have a way wearying even the most enthusiastic and energetic observers. There is a wonderful scene in the Bill Murray film, Groundhog Day where the cynical Murray re-lives the same day over and over as the weatherman who has traveled to the middle of nowehere to present a fluff piece on "Punxatawney Phil", the Pennsylvania rodent whose legendary shadow is renown for predicting whether winter will be short or long. And like Euro/Yen's relentless percolation against all reason and internationalo monetary responsibility, Murray, having delivered the same intro, on the same morning, with the same people, in the same town for the umpteenth time, has lost his will, become, bored, lethargic and even hostile at the absurdity and futility of living the same day over and over and over....

What will break the cycle of this Euro vs. Yen "Groundhog Day"? Asset prices all over continue to roar (excepting perhaps Russian joint-ventures coveted by Russian partners, central government, of friends of Mr Putin), Zimbabwean farmland or Venezuelan Pasture. And Japanese Japanese asset are no exception. Tankan was upbeat, Xmas Bonuses were the highest on record, and shares on the bourse have resumed their ascent. And while the ECB prudently expresses concern (even though most know that it is essentially "hot air"), MoF and BoJ officials continue to stoke concerns about deflation, of Nippon slipping back into recession, with not a public whisper about the Yen carry trade and its role in financing everything from US deficits, renovations to SW3 townhomes, to HF managers' record bids for trophy art.

Martin Wolf presciently foresaw this tenous divergent policy in early 2004 in describing the Fed's necessity to tolerate trade and fiscal deficits with complimentary loose policy as the price for keeping the balls in the air. He accurately predicted the roaring business environment, the growing imbalances, and mercantilist surplusses alongside the temporarily-benign purgatory. However he pointed out that it would, eventually, be threated by ballooning asset prices or growing trade-frictions and protectionism.

We've undoubtedly got the first. Liquidity is so abundant listed US companies are falling prey to LEVERAGED private market buyers at the rate of several per day. Real estate is gallopping again in overbought, overheated and unaffordable markets like UK, Australia and Spain despite tepid retail sales, stagnant employment and real wage growth. A spade must be called a spade, and this phenomenon is a pure monetary phenom. We have now proceeded deep into unprecedented territory, though we are protected from the most vbicious of beasts by Central Banks willingness to hold the dollars. But it is frightening to hear talk of independant Chinese agencies to "manage the assets", or wonder what might become of them should trade frictions rise as they are certainly bound to do.

(Sod's Law: Yen/Euro moves -1% as I finished typing this post)


-pi said...

Don't worry, be happy. Now say that ten times. I can't live and trade like apocalypse is right around the corner. That's right. Call me complacent but not ignorant. The point is to have a hedge and a plan when the inevitable happens. Now only if Goldman can spread the wealth ...

Cassandra said...

The Groundhog day phenom is late-move angst to one who desires to fade, or has already faded, a trend long-in-the-tooth, that becomes still longer-in-the-tooth. Nothing that a good vigorous run or game of squash won't diminish. Of course the only thing that really and truly eliminates "it" is to still be levered-long of the move. But that, Pi-my-friend, takes a peculiarly iron constitution, the kind that comes from a slug of hubris, a dash of arrogance, a certain behavioural predisposition, and finally, never having been severely and near-mortally spanked by the unexpected of the market.

Don't worry, be happy...DOn't worry be happy

-pi said...

As clueless as I am, I will consider an honor to be called your friend.
The first thing on any serious trader's mind has to be "to live to fight another day". But then there are those who behave in the delirious kamikaze pilot mode of "to die in blazing glory" or at least die trying. Although I don't condone the latter way of trading, human nature being what it is, it's too tempting not to trade this way looking for the big score. Furthermore, I do recall a study where the best traders were the ones who couldn't feel any emotions and turned out to be sociopaths or psychopaths. Such are the contradictions of trading.

Anonymous said...

As Say said, in 1803:

"The encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.”

(Fascinatingly enough this quote comes c/o the Dallas Fed, an institution not historically known for its propensity to discourage consumption - but which has apparently been infiltrated by creeping Austrians. Let's give it up for Gramsci.)

So let's say you are a government of the latter type and you wish to encourage consumption. One way is for your wise officials to fly to China and politely request that the wise officials of that fine nation encourage their fine citizens to save less and consume more.

But if that doesn't work - perhaps because the Dallas Fed hasn't yet annoyed the Golden Shield - you could always create some more money.

So the phenomenon you're chronicling, in your usual inimitable style, is increasing political dependence on monetary creation. By feeding price inflation in residential real estate, the Fed found a way to shoot consumption straight into its jugular. Its present attempts to shift the inflating asset class back to the dainty mirror-sniffing ways of Wall Street, 1999 style, strike me as about as likely to succeed as Vlad the Impaler.

As for the latest run of statistics, I think John Mauldin has it right. A soaring Dow, microscopic credit spreads, and the apotheosis of Goldman might be great for yacht sales in Montauk, but their effect on Wal-Mart America is limited at best. And Montauk is not where the votes is.

Responsible leadership would give us austerity, ASAP. A good hard recession, with bankruptcies galore, would go quite a way toward restabilizing the global financial system. Perhaps Barack Obama could sell it.

Unfortunately, St. Obama aside, investing on the expectation of responsible leadership has not been a winner for some time now. So, consumption which does not consume commodities being something of an oxymoron, these simple and timeless assets may continue to be the saver's friend. Their immunity to the Fed's game of move-the-bubble is increasingly clear. (Though perhaps the same, as per your thoughts, could be said of commercial real estate.)

And of course the one commodity in which arbitrary price appreciation due to an influx of savers is indefinitely sustainable is - well, you know...


"Cassandra" said...

Yes thats CAD (not credit default swaps). Thanks (fixed now in original post).

Moldy - By the way that was a highly entertaining exchange with GCS over the weekend. I have enormous respect for him. He has first-class economic mind that distills the essence of complex arguments coupled with the best of intentions. There are no "winners" in such a joust, except for me perhaps who was highly entertained by the pixels and bytes for some time, (much to my spouses chagrin).