Thursday August 7, 2008 - 19:21:13 GMT
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Forex Blog - Confusing Commodity Bubble Bursting With US Growth
While I am not going to say
markets have this one wrong, I will say that large price movements like the one
down in commodities and up in US dollar have a way of creating their own
realities that often do not hold up over time.
I think we are in one of
those periods currently as two key shifts in market position unfold and drive
large shifts in asset prices and FX. Call it deleveraging or risk
reduction on the one hand and bursting of the commodity bubble on the other
hand. No matter what the financial press is reporting, financial
institutions are reducing risk â€“ unwinding exposure. Indeed I canâ€™t
recall a time when hedge funds were less engaged in trading. And as
negative data has piled up in Europe ad Japan and doubts about Chinaâ€™s growth story emerged, commodities have cratered.
And these strains have fed on each other as well as any long/short equity
manager would know who was short financial and long energy stocks.
And in the middle of the
unwind price action has led to a new consensus â€“ inflation is so yesterday and
growth is so now. More now than Paris, Brittney and Barak.
But looking at the dollar
and US Tsys in the last week one would never know that there is a global
consensus that downside risks to growth is the main danger. Today Trichet
more or less admitted growth risks were being actualized, though also not
budging on upside risks to price stability over the medium-term.
Presumably the Bank of England came to a similar conclusion and is less
inclined to hike rates (I doubt MPCâ€™s Besley voted today to hike for
So where is the
disconnect? Well if global demand is slowing and has pricked the
commodity bubble, why is the US economy getting a free pass? Is it some stupid
accounting principal applied to the business cycle of first in and first
out? My stupid accounting analogy is first in last out. No other
major economy has a balance sheet like the US (super dependent on foreign savings â€“ private and
public sectors). And growth held up in Q2 because of net exports (less
negative) and government spendingâ€¦consumption lift from the fiscal stimulus was
pretty ho hum. Yes inventories were a surprise negative and could
reverse in Q3, but I would not count on it. Wal-Mart today said its July
same-store sales already picked up a dropping off of spending from fiscal
But credit is not
staticâ€¦credit conditions are tightening. Mortgage rates are rising.
Swap spreads are widening. Credit conditions depending on how one
measures them are now about as tight if not tighter than they have been since
the Bear hunt in March.
Look at jobless claims in
the last two weeks â€“ dreadful. Okay todayâ€™s weekly number reflects the
extension of unemployment benefits (those eligible counted as new claims â€“ form
of double counting). But claims are a better snapshot of current labor
market conditions than any other series including the far more ambitious BLS
non-farm payroll survey. Anyone else notice that the July payroll data
showed no change in real estate-related employment and a gain of 2,000 in
financial services. And government jobs have been growing at an
unsustainable clip offsetting some of the decline in private payrolls.
What is happening to state and local government fiscal balances? Well
federal gvt too? They are cratering. Anyone who knows anyone in the
teaching profession from coast to coast knows about layoffs and this is at a
time when teacher shortages should be arriving with baby boomers
retiring. Gvt employment will soon be a drag on payrolls.
Markets clearly needed to
build in more weakness in Europe and Asia into expectations (even emerging market standouts
too). But to assume the US outlook goes unnoticed is well scary.
The US will be first into a serious consumer=led, and
lengthy, recession (much deeper than the one it finds itself in now).
Europe and Asia will flirt with recessions, but they suffer far fewer
imbalances and as such could be in better position to weather the perfect storm
that lies ahead for the US economyâ€¦they have positive private savings.
Another observation I have
is that markets are suffering from credit crisis fatigueâ€¦who cares about AIG
and Freddie Mac dismal balance sheets when oil is down $25 in two weeks?
And Citi set a precedent today for buying out investors sold Auction Rate
Securities as safe as gvt t-billsâ€¦get in line Street (this is a $300bln
Sadly this is a future with
a broken banking system and in need of a long rest and recuperation at a detox
center free of leverage and risk and well stocked with capital exercise
machines. At the end of the day the US gvt will have a much bigger
footprint in US economic activity from housing to banking and like any prior
major cyclical turns in politics and economics, this one was delivered by the
private sector aided and abetted by lax regulatory agencies, unjustified
confidence in derivatives and financial engineering, and Clinton and Bush administrations
hell bent of expanding home ownership â€“ something now that is clearly not part
of the Bill of Rights.
Also anyone who knows of a
vacancy as CEO at a major US financial institution let me know â€“ I have interest
in making tens of millions of dollars downsizingâ€¦this is another no downside
trade the best I can tell as most these contracts donâ€™t require execs to buy
stock of the firm they get hired by to dilute. And you get a few years to do it
meaning tens of millions over several years which could mean a hundred
million. That is one sweet deal.
PS â€“ I still hate stocks and
the dollar and love Treasuries, gold.
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