...to a contemporary equating the U.S. economic situation with Greece and his related opinion that investment in...CHINA...is a good idea.
We shall see. For the purposes of this discussion, I categorically deny that the U.S., as sovereign currency issuer of its debt denominated in same, is the same UNIVERSE as Greece, which must "get" Euros to satisfy its Euro-denominated obligations.
Your comments assume the economy and global security are uncorrelated variables...they are not. The dollar as reserve currency is going no-where IMNSHO, especially given the current and forthcoming economic malaise the developing world is experiencing. Thus if your prediction of WW III comes to fruition where are global assets likely to flow? A jurisdiction with unparalleled military capability or...anywhere else?
For the record as well, China is one of the largest bubbles I have ever seen. Invest at your peril.
As always, your comments are appreciated and I only reply thusly in the hopes that my contributions will augment our mutual understanding of the most complex problems facing our world.
Sunday, June 05, 2011
Saturday, June 04, 2011
Treasuries.
With little statesmen, philosophers and divines all banding together saying that Treasuries will be decimated for this or that reason (China/U.S. Debt/Dollar weakness/etc.), I smile when the above chart is presented.
They have all made the simple mistake of thinking that monetary policy does the same thing no matter what contextual landscape it resides in. It does not. I have written about this multiple times on this blog coupled with my opinion regarding Treasuries.
Certainty...
...is the enemy of flexibility.
"A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines"
-Ralph Waldo Emerson
One of my readers has rightly excoriated me for my certainty regarding upcoming events. I take this criticism with deadly seriousness, as being "fox-like" (as Tetlock would say) is best when attempting to comprehend the likely outcomes in something SO complex as the world economy. Myopically phase-locking into one mode of thinking, or failing to at least entertain the dark matter of "unknown unknowns", is a recipe for disaster.
I say this because I pay special attention to CERTAINTY and HUBRIS in the popular memorandum from investment advisors, "little statesmen", philosophers, and divines when attempting to identify financial bubbles.
Its not anywhere near an exact science, but to paraphrase Justice Potter Stewart I often "know it when I see it".
Principal protection...
...is not always protected. When purchasing any security, its a good idea to understand the counter-party implications and any bankruptcy priority issues that surface in case of calamity. Typically, these risks are NEVER priced in, resulting in an expensive mechanism that is, for all intents and purposes, pure Beta.
(snippet from an article in my inbox)
Worried about the increasing number of retail investors jumping into complex financial products, securities regulators Thursday warned that structured notes with principal protection are not risk-free.
The Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. warned that such an investment may come with confusing terms that actually guarantee as little as 10% of the investment and limit the amount investors gain on the upside. It also can tie up those funds for a decade.
Structured notes with principal protection combine a zero coupon bond— that is, one that pays no interest until it matures — and an option whose payoff is linked to an underlying asset, index or benchmark (such as currencies, commodities, the Russell 2000) or a basket of benchmarks. The payoff can vary, based on the performance of the linked index, but the bonds offer the prospect of a greater return than money-market instruments, which makes them appealing.
“The current low-interest-rate environment might make the potentially higher yields offered by structured notes with principal protection enticing to investors,” said John Gannon, Finra's senior vice president for investor education.
Investors typically are interested in such products because they believe they are gaining possible market upside while protecting their principal.
What investors believe and what's true are not necessarily the same thing. The SEC says principal-protected notes vary wildly by issuer, and investors tend to ignore — or don't understand — what's spelled out in prospectuses.
The obvious problem with principal-protected notes: Often, the principal isn't protected. Some sellers of the notes do indeed guarantee 100% of principal. That's fine, unless the issuer of
the note goes bankrupt, in which case the investor will likely lose all or most of the principal.
(snippet from an article in my inbox)
Worried about the increasing number of retail investors jumping into complex financial products, securities regulators Thursday warned that structured notes with principal protection are not risk-free.
The Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. warned that such an investment may come with confusing terms that actually guarantee as little as 10% of the investment and limit the amount investors gain on the upside. It also can tie up those funds for a decade.
Structured notes with principal protection combine a zero coupon bond— that is, one that pays no interest until it matures — and an option whose payoff is linked to an underlying asset, index or benchmark (such as currencies, commodities, the Russell 2000) or a basket of benchmarks. The payoff can vary, based on the performance of the linked index, but the bonds offer the prospect of a greater return than money-market instruments, which makes them appealing.
“The current low-interest-rate environment might make the potentially higher yields offered by structured notes with principal protection enticing to investors,” said John Gannon, Finra's senior vice president for investor education.
Investors typically are interested in such products because they believe they are gaining possible market upside while protecting their principal.
What investors believe and what's true are not necessarily the same thing. The SEC says principal-protected notes vary wildly by issuer, and investors tend to ignore — or don't understand — what's spelled out in prospectuses.
The obvious problem with principal-protected notes: Often, the principal isn't protected. Some sellers of the notes do indeed guarantee 100% of principal. That's fine, unless the issuer of
the note goes bankrupt, in which case the investor will likely lose all or most of the principal.
Wednesday, June 01, 2011
Volatility.
I have said on this blog that June and July represent inflection points for market volatility and the current economic figures do nothing to disuade me from that opinion. This ramains a contest between the Bond markets and the Fed.
ISM
Economic data coming in as I expected. Realpolitik in Europe and the U.S. continues its role as investment banker for the world. Today's ISM report confirms this with some dismal numbers for new orders and manufacturing.
All of this in light of round after round of QE and "accomadative" monetary policy. Once again, the levers are broke, it is time to re-route the engine.
All of this in light of round after round of QE and "accomadative" monetary policy. Once again, the levers are broke, it is time to re-route the engine.
The Great Repatriation
Given the current and forthcoming economic weakness, political pressures will manifest themselves into various measures to strengthen domestic demand and combat the (now obvious) deflationary pressures that, if left unchecked, threaten to launch the world's most dynamic economy into a Western Hemisphere version of Japan's "lost decade".
Since monetary policy has been an utter disaster (in the sense that it has failed to do what our leaders thought could be done), more imaginative fiscal policies will be brought forth in an effort to combat deflation.
Chief among these policy options will be a reform of tax policy on foreign earnings. This will consist of two prongs. The first is explicit tax breaks on foreign earnings repatriated back to the United states coupled with an implicit efforts "suggesting" that U.S. multinationals recycle these foreign earnings into domestic investment.
These measures, together with foreign demand for U.S. financial assets (based on my convictions that things in the developed world will continue to erode, the U.S. being the only safe port in the proverbial storm) will successfully combat deflation. The U.S. will not devolve into the Japanese experience.
But risks remain. Policymakers could be convinced of the debt hysteria surrounding economic debate and choose not to follow the above measures, but in my view tax refunds/breaks/rebates on foreign earnings is a wonderful way to stop deflation in its tracks, and something the Fed should consider lobbying congress to explore this option.
Since monetary policy has been an utter disaster (in the sense that it has failed to do what our leaders thought could be done), more imaginative fiscal policies will be brought forth in an effort to combat deflation.
Chief among these policy options will be a reform of tax policy on foreign earnings. This will consist of two prongs. The first is explicit tax breaks on foreign earnings repatriated back to the United states coupled with an implicit efforts "suggesting" that U.S. multinationals recycle these foreign earnings into domestic investment.
These measures, together with foreign demand for U.S. financial assets (based on my convictions that things in the developed world will continue to erode, the U.S. being the only safe port in the proverbial storm) will successfully combat deflation. The U.S. will not devolve into the Japanese experience.
But risks remain. Policymakers could be convinced of the debt hysteria surrounding economic debate and choose not to follow the above measures, but in my view tax refunds/breaks/rebates on foreign earnings is a wonderful way to stop deflation in its tracks, and something the Fed should consider lobbying congress to explore this option.
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