Tuesday October 11, 2005 - 11:21:20 GMT
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Black Swan Capital - www.blackswantrading.com
•Japanese machinery orders rose more than expected in August as companies equipped new factories. (Bloomberg)
•South Korea's central bank has raised interest rates for the first time in more than three years. (BBC)
•Key reports due today (Global-View.com):
23:00 GMT- UK- Sep BRC Retail Sales
05:00 GMT- JPN- Aug Core Machinery Orders
JPN- BOJ Monetary Policy meeting - - Day 1
06:45 GMT- FRA- Aug Foreign Trade
08:30 GMT- UK- Aug Foreign Trade
12:15 GMT/8:15 EST- CDA- Sep Housing Starts
12:30 GMT/8:30 EST- CDA- Aug New House Prices Starts
18:00 GMT/2:00 EST- US- FOMC Minutes
“The purpose of markets is to test the limits of ideas, and sometimes take them to absurd extremes."
Many macro oracles are finding their crystal balls cloudy. Some see inflation, some deflation, and others glimpse stagflation when conjuring up economic images.
Writes Philip Coggan in this morning’s Financial Times about growing financial market volatility:
“Investors are clearly finding it difficult to decide whether strong economic data represent good news (because of the boost to corporate profits) or bad news (because it will keep the Fed raising interest rates).
“It is possible that other factors may be underlying this volatility shift. David Bowers, the Merrill Lynch strategist, points to a slowdown in global liquidity growth. The year on year percentage growth rate of global dollar liquidity, defined as the US money base plus foreign central bank holdings of US Treasuries held at the Federal Reserve, has fallen into single digits for the first time in two years. Liquidity was rising by more than 20 per cent last year.” [Our emphasis]
Given the 24/7 central bank pumping campaign we’ve witnessed in the recent past, isn’t it about time we saw some of this liquidity reined in—or pumped out at a slower rate? What’s wrong with that? Well…
“There is one condition under which deflation is a disaster and this is when total credit market debt is high as a percentage of the economy. When debts are as large as there are now, deflating prices and especially deflating asset prices would wreck havoc in the economic system and lead to massive defaults and bankruptcies,” writes Boom-Bust guru Mark Faber.
In short, Mr. Faber believes the Fed will blink and once again man the printing presses. (Ben’s favorite job, and he can’t wait to get started we hear.) And if the Fed blinks, in an attempt to bolster the wealth driven bubble economy, the whiff of inflation will become palpable.
I once had a crusty old accounting professor who used to say, “Sooner or later it all comes out in the wash.” At the time, I wasn’t quite sure what that meant. Now I understand how wise he was.
The point: This game of asset inflation through loose money to drive wealth creation can’t continue without some real wage growth to support rising debt loads. In a world where the US government seems it must indemnify every hazard, the invisible hand of market cleansing is handicapped, at best. It’s why we are leaning toward the stagflation scenario as we peer into the fog.
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