Well, today, I stand before you, humbled. For I am wrong and GAVEKAL is right. For the moment. For in my zeal to look ahead, I have been in denial over the simple basic fact of the-here-and-now that nothing nothing nothing could be better for non-fixed income assets (ex-Japan) in general and particularly for most equities (ex-Japan) than soaring inflation coupled with stable interest rates, tame wage-price inflation, and most importantly stable to rising currency values versus the largest surplus nations. My love of independent film and a well-written screenplay seemingly blinded me to the true and utter perfection of this saccharine Hollywood production.
Some in the media have mis-named it Goldilocks. But this is way off the real mark. For it's not a question of "too hot", or "too cold". We know its too hot (just look at "stuff" - gold, art etc., or Chinese and Hong Kong stocks in comparison to forward earnings estimates!). No. It more resembles the Kudlow-Economy as in "A place where it couldn't be better so long one doesn't think about tomorrow." It's a Kudlovian's utopian ideal where we needn't tax our minds (or conscience) with details like how and why we've got here. This is Global Financial Pleasantville , where Stepford Economics, prevail, and are the upside laws by which markets apparently abide.
Nonetheless, we are there (or is it here?!?). And ruminators are frustratingly helpless since, in this world, when one tries to yell or in any other way articulate that it's founded upon unsustainable policies all-around, no sound emerges. Or worse: one thinks that one is speaking English, yet everyone around else hears Gaelic, and everyone knows that not a soul comprehends it anymore.
And so the dollar continues weak against the currencies it perhaps no longer should, and gathers strength against those that it head-scratchingly shouldn't. Yet, the sense of crisis possibility still hasn't quite arrived in Washington, nor in Tokyo or Beijing for that matter. There is no talk of conservation, no urgency to ponder what might happen with a spike to $200 oil, or a gold-spiking loss of confidence. No contemplation of tax increases to begin to pay for the present war, nor of aligning our interests with Europeans to preserve the vestiges of an international monetary system predicated upon market forces in exchange and interest rates to discipline governments that push the envelope of fiscal and/or monetary sensibility, or of the destructive trade wars set to ensue when the system buckles under the neglect. Why does eveything still appear in the reversed contrast of an old, silver-halide negative? When will leadership emerge and scream: "Halt, engines full reverse or else we'll run aground?"
In the meantime, I am SO SO wrong and should fight it no longer. I must for sanity's and financial sake, embrace it, for I am a Capitalist and THIS world of THIS MOMENT is fantastic for capital and asset owners, large. Imagine: Inflationary pricing power yet falling interest rates, with little of the attendant cost-push (ohhh thank you denizens of $2-a-day-workers, and willing buyers of USDs - please may nothing happen to you or your munifidence!). The perfection of this moment just makes me want to break out in song, like Donaldson & Kahn's late 1920s ditty ...
Wishing is good time wasted,
Still it's a habit they say;
Wishing for sweets I've tasted,
That's all I do all day.
Maybe there's nothing in wishing,
But speaking of wishing I'll say:
Nothing could be finer than to be in Carolina in the morning,
No one could be sweeter than my sweetie when I meet her in the morning.
Where the morning glories
Twine around the door,
Whispering pretty stories
I long to hear once more.
Strolling with my girlie where the dew is pearly early in the morning,
Butterflies all flutter up and kiss each little buttercup at dawning,
If I had Aladdin's lamp for only a day,
I'd make a wish and here's what I'd say:
Nothing could be finer than to be in Carolina in the morning.
Dreaming was meant for nighttime,
I live in dreams all the day;
I know it's not the right time,
But still I dream away.
What could be sweeter than dreaming,
Just dreaming and drifting away.
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12 comments:
C, I believe you are experiencing the sensation that young Anakin Skywalker must have experienced when he gave in to his inner demons and embraced the Dark Side.
The current environment is what one might term a 'Lake Woebegone market", wherein all (non-dollar denominated, naturally) risk assets offer above-average returns.
While I (and Rawdon, no doubt) could well take the title of this missive literally, in today's market one might as well substitute 'Shanghai' for 'Carolina', at least if one's utility is driven primarily by investment returns rather than air quality.
As far endgames and the resumption of your mantle as investment Cassandra? The great China Crash of 2008 is probably not a bad event to fixate on as a driver for asset market normalization.
Do you have any idea how painful it is to STILL listen to R-W pundits chiming: carbon tax? energy tax? Why do we need that? The MARKET is taxing us, and all will be as it should..." It's just such a dumb-ass thing to say in light of what we know about economics, human behaviour, resource availability, global finance, and the relative length of time it takes to an aircraft carrier to do a penaltly turn in a Navy regatta. Surely, macroeconomics is no different. It's OBVIOUS (and has been since Japan & the NICs whom the Cold War forgave) to all observers what the pernicious and insidious long-term structural effects of huge imbalances and a sabotaging of the mechanism(s) of adjustment will have upon the country. I keep hoping and wishing and thinking that folks far smarter, more articulate, and motivated by an american ingenuity and a can-do attitude will emerge and do the right thing, but instead I look out and THEY are precisely the one's cutting taxes, increasing spending, lowering interest rates, shorting the dollar, creating so-called AAA paper by assembling the turds of other asset-backed paper and building new factories in China.
What's the point of arbitrage when the leveraged DOTW push your FX carry basket with such apprent ease, or the HSI can in the realm of possibility move 50% in a month? When the tails can (and more frequently do) that with such alacrity, there is little point for a dinosaur like me, looking for 10bp-a-day 70% of the time, to even getting up in the morning.
In sympathy with your lament a certain Nietzschean admonition comes to mind: "Madness is rare in individuals - but in groups, parties, nations, and ages it is the rule." The denouement of our permanently high plateau will have its day in the sun, though, alas, perhaps not in a Keynesian time frame. The worst part of it all, day to day, is the necessity of fearless punting, Bushmills clutched to one's chest to wash away the cognitive dissonance, when in fact one should be hunkered down in an epicurean bunker with a horde of tea and biscuits waiting for the fireworks.
Advocatus Diaboli
Thanks for that....BTW: what is a conventional Keynesian timeframe?? This might be useful in recalibrating my own market-clock
Actually MM, what I am experiencing is the same thing as this, where like the B-9 Robot I am yelling "Danger Will Robinson, Danger Will Robinson", all the while, being doubly-insulted, first because no one except Will EVER believed Robot as Cassandra, and secondly because feel like I am getting whacked by the likes self-interested fools and imbeciles such as Doctor Smith. Not as highbrow an analogy as Nietzsche, but rather apt all the same...
Not wishing to speak for A.D, but I'd hazard a guess that a Keynesian timeframe has something to do with the length of time that one can remain solvent....
The perverse aspect of the market and our fiscal managers is that it is unclear what is a low risk posture, and all the popular future scenarios seem to be fully discounted. I think there greater risk in being in all cash USD than a mix of stocks and cash. My old default to cash is now not riskless due to US governance issues. The powers that be have 15 months to go, and they haven't ever seemed constrained by concerns for fiscal and diplomatic prudence. It they shit the carpet now, they know that someone else will get the job of cleaning it up. That doesn't encourage discretion.
A crazy but profitable manager who was my boss ~30 years ago quit the business, and was quoted in the papers a few years later about how he felt all the Hamptons houses owned by former competitors was a sign of a top.
Bottom line, sometimes it is more obvious that you don't know squat, and neither does anyone else. It's just one of those times to be broadly diversified as protection.
Remember to buy a condo in Florida or whereever when they're cheap, and chill for now.
Cassandra,
You sound frustrated that for now the bulls are right.
I had similar feelings while reading the news of the debt implosion and watching the markets doing almost nothing. This does not make sense to me but smells desperate intervention from someone with a printing press.
In a strange way the economy looks similar to the communist GDR economy shortly before the breakdown of 1989. All statistics looked good but the reality was more than sad. Anybody predicting a collapse even months before it happened would not have been taken seriously. That is a striking parallel to today and probably frustrating for everybody who tries to be realistic.
Anyway, keep up your good blog.
Gunther
Exasperated an disappointed are the more precise words.
Of course I do not really care a hoot about whether Gavekal is right or wrong for it's really not a bull or bear thing, and in anny event I run an anally hedged book that is eeking pathetically small gains - a dispiriting comparison to, for example, HSI's 50% vault.
To me, its a right and wrong policy thing. There are so many old saws: "Good money after bad"; "Money down the drain"; "Doubling Down", all which reflect that China & Japan are in the midst of pursuing the largest Martingale EVER, while the US - through neglect, corrruption and parochial greed and some triumphalist meglomania - has gone "ALL-IN" on a weak-hand, and appears to soon face that shattering moment when the realization occurs that you are toasted, smoked, washed-out, and broke. Followed by shock, horror, denial, and eventually acceptance.
Now, just in case Chinese and Japanese readers start with the schaudenfraude, lets remember that as enablers and mondo creditors (not to mention suppliers extraordinaire), you are f*cked too, and that your irresponsibility in vying for sustainability makes you equally as culpable, though I will grant that China's aspirational motives are admittedly more noble than Japan's preservationalist ones.
I agree Gunther with your basic point however, that America's perception of reality, and the reality itself in the USA are reasonably far departed and due for some rude convergence.
The rudest Aesopian "ant & grasshopper" moment where Americans curse four successive Administrations eschewing energy policy and especially Cheney, will occur should as Matt SImmons sugggests, the Saudi's come clean about reserves. Ohhhh as Col Kurz said, "the horror...."
(3rd from last paragraph should of course say "....NOT vying for sustainability..."
Cassandra,
Im firmly convinced that majority of people have no idea what ithey gotten themselves into playing the global asset inflation game and policy makers are either clueless or so scared they can barely sleep at night. Time and time again these periods end in complete disaster. The US has created its entire economy around credit creation and the resulting inflation that goes withit. The whole system is going to go into convulsions at some point and simply stop functioning. If credit markets crashed which by all accounts they did in August then stock markets wont be far behind. All these idiot fund managers who keep claiming that PE's are cheap are wrong if credit was in a massive bubble.
C
im close to throwing in the towel too, but my charts show that
there might be another week or two and then there ought to be a big turn in the markets.
but then again the Keynesian framework... when I say a week or two, im not even sure how I will get through the Fed decision today.
(note: I miss the Bundesbank. they were boring but thats how a central bank is supposed to be)
Jeremiah
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