Forex Blog - Been Down So Long Looks Like Up From Here.
January 02, 2009
Been Down So
Long Looks Like Up From Here.
flawed species characteristics, humans tend to see the start of each calendar
year in terms of anewbeginning...control
alt delete on 2008.
Yes it is
simplistic but it is also part of the species survivalâ€¦putting the past
behindâ€¦especially dreadful past.
And so many are
looking at 2009 as an improvement (variations on degrees of improvement) over
2008. We are an optimistic lot to begin with and why not dip into the
well of optimism as the New Year gets underway?
So out of the
gates, most (contrarians may use this to fade and I note that contrarians are
not always right) are looking at 2009 from record low bond yields, a massive US
dollar rally from July and the largest declines in global equity prices since
the Great Depression, and concluding in a sort of primal way
that asset prices have to improve in the next 12 monthsâ€¦its been down so long
it looks like up to me.
And there is
some reasonable logic to being optimisticâ€¦Washington may get it more right on
the policy front in 2009 than it did in 2007 and 2008 and actually keep the
economy from falling into the black hole of deflation. President-elect
Obama, with an electoral mandate, is planning the largest fiscal stimulus in a
generation aimed at kick starting the economy and more accurately filling the
gap the private sector is leaving as households and firms pull back in the face
of a serious recession. With theTARP
balance at $350bln and purported plans from Obama to add another $700-800bln in
new spending and or tax cuts, there is serious firepower aimed at the
economy. And look for much of the early money bombardment to hit the
housing market on the notion that this is where the financialcrisis and then economic crisis started and where they must
And the Fed will
begin expanding its balance sheet by directly buying securities from the market
rather than simply lending cash for collateralâ€¦this is the equivalent of printing
money. The Fed (and US Treasury) will work
to support credit expansion outside the banking system (buying ABS in credit
card, small business loans and student loans).
policy response is global â€“ every major economy is throwing fiscal and monetary
accommodation at this problem â€“ and will up the odds of the response working.
And since much
of the current malaise in asset prices and the real economy is rooted in
confidence or lack thereof, there are real and some imagined reasons to view
the incoming administration as well up the food chain of competence compared
with what President Bush brought to Washington where cronyism and incompetence
were rife and where government was considered the root of all evil â€“ forced
many of the long-term competent civil servants to leave government. I
think there is a degree of competence in Washington come January 20 that there
is not now and has not been there for the better part of the last 8 years and
this gives rise to theoptimism the Obama administration getting
it right (task is tall and risks great and only time will tell).
So I am of the
belief that riskier assets and currencies should outperform at least through Q1
and possible Q2 â€“ equities, corporate debt, munis, commodities and ABS (buy
what c bankers are buying). And risk free government bonds, from stupidly
high levels, have some ground to give up (not predicting a reflation run on
Treasuries and dollar). I think 2009 is mainly an equity and bond
opportunity and less a currency opportunity. However, this (my view) also
means the USD has more ground to give up versus commodity currencies, emerging
market currencies and European currencies excluding the British pound.
No doubt there
are risks to the Obama optimism trade â€“ Republican Congressional leadership is
beginning to stir and questioning the scale of the stimulus Obamaâ€™s transition
team has been batting around and could prove obstructionist (recall resistance
to TARP and the auto bailout bill). Even Congressional Democrats fear
that the lack of detail in the Obama fiscal stimulus proposal makes any early
passage (for January 20, 21 presidential signing) of fiscal stimulus less
likely. Furthermore, there is no reason to assume that foreign investors
will feel comfortable committing more savings to the US public and private
sector to pay for a qualitative change in US government debt issuance (good
news is US public will save more ahead and will buy less foreign goods and
services and compensate for some decline in foreign capital inflow).
And then there
are the longer term trades and trends â€“ like the 2H 2009 when we will be able
to assess the effectiveness of Obamanomics and Fed monetization. Rising
unemployment and falling home prices may be more than even massive monetary and
fiscal policy accommodation can offset. And I have little faith that the
banking system will be up and runningat anytime in
2009â€¦more like major new writedowns in PE leveraged bank loans, home equity
lines of credit, credit cards, business loans (unsecured credit lines or
revolvers), student loans and hedge funds (banks sometimes own them and in most
cases invest in them). The problem for Fed and Treasury is there is not a
great alternative to the major banks in creating credit and transmitting easier
monetary policy â€“ likes of credit card issuers, auto financing companies,
regional banks not hobbled by subprime and ABS toxic waste and other non-bank
consumer lending agents (like student loan firms) may not be sufficiently
adequate as credit creation machine and transmission mechanism to compensate
for the busted major banking system. If I had to guess, the Obama
honeymoon ends in late Q2 and sets the stage for new lows in equities in 2H
2009 and a rebound in risk free assets.
view I would bet against is that the Fed and government succeed this year in
reflating the economy and monetary and fiscal policy accommodation give root to
an inflation problem. The next 12 months will be about firms and
households surviving, not returning to old bad habits of indebtedness for
current consumption/investment. No amount of possible fiscal and monetary
easing can fully account for the deleveraging ahead for banks (ongoing),
households and many firms.
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