One thing about a recurring nightmare is that when sleep ends all
the tossing and turning was for naughtâ€¦the shark did not eat me after
But this is no dream.
The global economy is melting faster than the washed up witch in the Wizard of
Oz. And everywhere. This tide change has seen the ebb leave
everyone without swimming trunksâ€¦it looks like a nudist colony.
The labor market is bleeding
jobs from every corner except government and with massive budget deficits at
the state and local level pending this too will be a source of blood flow
shortly. Something very bad happened to the global economy last fallâ€¦US employment has fallen 1.75mln in the last three
months. And this is the start of the freefall. What started as
housing and banking problems has turned into a tech, retail, small business,
advertizing, publishing, media, insurance, pharmaceuticals, and education
What is equally disturbing
is that asset prices have become increasingly unhinged from reason
(fundamentals) and are being driven by unstable market psychology. I
understand markets positioning in front of data like BLS jobs report, but
please in the face of the worst employment numbers to date and bonds sell off
and stocks rally? Maybe I am irrationalâ€¦labor lags the business cycle right?
Indeed. This is why I think the downturn is far from bottoming and pace
of decline far from slowingâ€¦in other words monthly payrolls should reach
800,000 a month by March. And the unemployment rate at the currency pace
will be pressing 10% by the fall (and if you think the national numbers look
bad look at the nation state called California).
I simply donâ€™t think there
is much reason in pricing in reflation today when we are in a vortex of
unprecedented decline. Pricing in hyperinflation as the global economy
slides into a deflationary spiral (okay not there yet but ever closer every
day) is not rational. If global deflation takes hold there will not be an
easy exit for years. Why price in a Zimbabwe policy outcome today when the risks are heavily
favoring the Greatest Depression?
Traders say the worse the US economic data the greater the chance Washington will do the right thing â€“ deliver the shock nâ€™ awe
response on spending (and tax cuts â€“ I think latter impact in this economy is
< 1) and credit. Is anyone reading the papers about the theater in the
Congress over the fiscal stimulus? And this is the most popular president
since Reagan and with a near bullet proof majority in Congress. My bet on
Washington getting something done soon is high, but getting
something good enough to meet shock nâ€™ awe standard is nearly
unattainable. Where is Rahmbo? And as I outlined this week in
another email, the scope for a truly shock nâ€™ awe bank rescue plan is quite
small as Paulson poisoned the well and makes going back to Congress for real
money to restore a functioning banking system nearly impossible. Shock nâ€™
awe on the cheap is schlock nâ€™ awe. The only shock nâ€™ awe for markets
next week will likely be what happens to asset pricesâ€¦and not talking higher
for risk assets which is the goal of policymakers at the end of the day.
Unhinged asset markets are
not a good environment for coping with a global depression. We have
debated to death the role of government in the banking system and aggregate demand.
My sense is that the 2009 debate will be about the role of government in asset
markets. BOJ is already there buying shares from Japanese banks (not
clear at what price, but I would bet at levels Paulson was willing to subsidize
banks for preferred shares at the very least). Fed is buying assets â€“ MBS
mainly. Look for Treasuries to be added to the list in due course.
Currency intervention I believe is soon to emerge on the scene â€“ SNB, BOJ and
BOE may be drawn out first.
As long as policymakers have
a working assumption that capital markets are working or will work soon with a
little nudging, and asset prices are some undistorted picture of PDV of future earnings, interest rate or price level, then we will see a
deflation cycle shortly. Capital markets need to be rebuilt before
confidence has a chance of returning and private capital flowing. Until
they are rebuilt, for better or worse, it is all governmentâ€¦get over it.
Ding ding ding ding dingâ€¦my
alarm clock? I did not see 598,000 jobs lost in January and a jump in the
unemployment rate to 7.6% from 7.2% in December. Nope, it happened.
Baltic dry goods index and
copper have gone asymptotic on the upsideâ€¦oh there is hope after all.
Capital markets are working and prices are clean signal of future outcomes.
Like the Monkeyâ€™s songâ€¦Iâ€™m a daydream believer.
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