Tuesday February 21, 2006 - 11:27:03 GMT
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Black Swan Capital - www.blackswantrading.com
â€śThe easiest way into Wall Street is by the Hall of Delusions, through which many have entered who forgot to return. That door stands wide open. No legend of warning affronts the eye. There ought to be one, and is should read: â€śNo Save Conduct Here.â€ť
Warning: We skip off a bit into the fantasy land of forecasting this morning. Hopefully we will return by tomorrow.
How do we square strong US growth expectations with an inverted yield curve (which historically points to recession)? Hereâ€™s a scenario:
Itâ€™s the triadâ€”US, China, and Japanâ€”thatâ€™s keeping the balls in the air, says Morganâ€™s Andy Xie:
â€śAnglo-Saxon consumerism, Japanâ€™s zero interest rate policy, and Chinaâ€™s surplus labor are the pillars of the current global boom, in my view. Chinaâ€™s surplus labor has kept inflation low; Japanâ€™s zero interest rates have kept interest rates low; and Anglo-Saxon consumerism has kept demand strong. Globalization has brought the three together through outsourcing and the carry trade, creating a world not too hot, not too cold but one that has allowed central banks to tolerate loose liquidity conditions.â€ť
Mr. Xie believes we have seen most of the deflationary impact on the global economy that we are going to see from China, as anyone (which is almost everyone) who wanted to manufacture in China is now there. He points to a 14% drop in foreign direct investment during the first half of 2005 to support that contention.
Thus, the Fedâ€™s explicit concern about inflationary pressures is for real. And if we are to believe what we read about Mr. Benanke (which is something we probably shouldnâ€™t do), he is not concerned about the so-called US housing bubble.
Okayâ€¦hereâ€™s why those balls being juggled by the triad start tumbling to earth:
1) The Fed feels good about taking more punch from the bowl after a strong 1st quarter GDP number. US consumers tighten up in the midst of rising rates and declining collateral values i.e. housing.
2) The Bank of Japan ends quantitative easing in April and says it hikes rates sooner rather than latter.
3) China chooses to let the yuan run higher in order to stave off US trade sanctions. The impact of slowing US demand and massive excess capacity takes a bite out of GDP.
4) China slowing at the margin leads to significant correction in global commodities markets and damages real asset collateral values everywhere for major funds and punters alike.
The dollar in this scenarioâ€¦depends on China. Pressure in Asia not met by a Chinese revaluation could lead to safe haven flow bolstering the buck. Otherwise it seems the dollar takes a hit against the Asian block. Itâ€™s all guesswork at this stageâ€¦but just maybe plausible.
Black Swan Capital
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