Macro
Reiterating Two of the Main Risks to the Global Recovery
In yesterday’s comment I made only two points:
- I ridiculed Bernanke trying to justify 15 years of excessively accommodative monetary policy and implying that the Fed’s “free money” had nothing to do with the housing bubble. I expect this feeble defense to get the backlash it deserves, opening a new proverbial can of worms on the uncharacteristically vocally defensive chairman. Why were inflation expectations so low? How are you defining inflation and how were you measuring it? If a (modified) Taylor’s rule is so biblically prophetic remind us why we need you, dear Chairman?
- The rising protectionism around the Globe, in particular against China.
Right on cue, in a piece published minutes after mine (Double-Dip Risk Seen in Stall-Speed Economy), looking at the two biggest risk factors to the global recovery Roach makes the following two points:
1. The Fed’s propensity to keep policy too accommodative (asymmetrical, Bernanke Put, Greenspan Put – call it what you will).
Two potential shocks would play right into that vulnerability, the first being a failed exit strategy from the Great Stimulus. Policy makers are not lacking in tools or tactics to withdraw the extraordinary fiscal and monetary stimulus that has been put in place to save the world.
Unfortunately, they are lacking in political will. The odds are high that America’s Federal Reserve will once again embrace an “asymmetrical” exit strategy — quick to slash the federal funds after the onset of a crisis but slow to normalize policy settings in recovery.
This would be a replay of the delayed normalization of 2002-2006, which played a key role in fueling new bubbles and imbalances, setting the stage for the Great Crisis.
2. Rising protectionism – in particular China-bashing.
A second possible shock would be heightened trade frictions and protectionism, especially a Washington-led outbreak of China bashing. With the U.S. unemployment rate likely to remain higher than 9.5 percent heading into the mid-term congressional election of 2010, the Chinese currency issue has once again become a bi-partisan lightning rod.
If Washington imposes trade sanctions, the Chinese would undoubtedly reduce their appetite for dollar-denominated assets, with severe implications for the dollar and probably real long- term interest rates in the U.S.
On the note of protectionism, does anybody even take Paul Krugman seriously anymore? From his childish spat with Ferguson, which degenerated into something which would not have looked out of place on a toddlers playground, to his calls for mind-blowing magnitudes of Keynesian “stimulus” (read the comments), Krugman is making even the Obama Administration blush with embarrassment (and that takes some doing). Now, like a careering, loose cannon… aboard a rudderless ship… in a storm… with an inebriated captain at the helm… it’s a miracle that he is even able to light his own fuse. That the consequence of his efforts are the pulverization of his own ship’s hull and mast should come as little surprise to less hysterical debate participants.
Today, he randomly fires a shot which this time land in China’s waters – specifically at China’s monetary policy here and here (again, read the comments – they’re much more interesting and probably more informative). The unfortunate Professor Krugman is beginning to look like another comical political caricature of The Administration with a Nobel Laureate badge pinned to his forehead.
Like a man in a speed-dating chat-room with exceptionally pungent halitosis, his credibility seems to evaporate each time he opens his mouth.
Macro Data to Watch:
- ISM Non-Manufacturing in the US.
Markets
It is ironic that only 6 months ago, many pundits were extremely cautious about the outlook for the economy. Yet here we are, with the S&P 30% higher and loftier valuations globally and it seems the bulls are back in force. Don’t stock-pickers make money by buying low and selling high? But it’s a powerful thing, momentum. Once a rally is entrenched into the first week it could extend to the whole month, which could set the precedent for the entire first half of the year. So goes January…
But the function of the stock market is not to make us rich or clever or to endorse the opinions of CNBC cheerleaders. Instead the role of the markets is to collectively make as much of a fool of as many people simultaneously as it possibly can – be they bulls or bears. I imagine 2010 will be no exception in that respect.
That said, some huge moves yesterday in prominent household names: PetroChina up 6%, RBS up 10%, Ford hit a new high in style, up 6.6% on rising sales, Las Vegas Sands up 10% (Vegas is small-fry, that business is all about Macau).
One of the most interesting moves yesterday was in the Korean Won – as the one year chart shows and as I alluded to yesterday with respect to the Taiwanese Dollar.
Some of the Asian currencies are starting to feel the pressure from a Weak Dollar Policy and are strengthening as a consequence. On Monday it was the Taiwanese Dollar hitting new highs, on Tuesday it was the Korean Won – as a result the stock price in Korean Car exporter, Hyundai, got smashed. It’s worth keeping an eye on Asian Currencies including the Yen and of course any rhetoric on the Chinese Renminbi.
Global Stocks to Watch:
- In the wake of recent currency moves, ALL Asian exporters.
- Earnings:
- Bed, Bath and Beyond kick off the earnings season.
- Keeping half an eye on the Cadbury situation (out of morbid curiousity)
- Autos – all up strong in the US and Europe (Audi, Ford) but down in Asia (Toyota, Hyundai) – will this continue?
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