Thought Bubbles from the Deep

[qldfrog]

we are in a deflation right now: I agree with Valued,
but deflation or hyperinflation are both sign of a sick economy; state of mind is the difference, as soon as the psyche starts wondering the "real" value of the dollar/peso/euro, we switch to an hyperinflation move;And I do believe this is what government are actually looking for: only way to get rid of the debt without defaulting whether you are in the US/Europe/Japan
my 2c but the first one: deflation does not eliminate the possibility of the second: high inflation following.

 

[Valued]

I was talking about the US though and my point was that it was not in deflation.

If we are talking about Australia, then it is doing poorly compared to the US. You should look at NZ though. I don't think they realise how bad their economy is right now. NZ is falling apart while their stocks make new highs. Not sure what is going on in that strange little country.

 

[qldfrog]

I was talking about the US though and my point was that it was not in deflation.

If we are talking about Australia, then it is doing poorly compared to the US. You should look at NZ though. I don't think they realise how bad their economy is right now. NZ is falling apart while their stocks make new highs. Not sure what is going on in that strange little country.

Thanks Valued, not really aware of NZ, an opportunity to short there in your opinion?

 

[Valued]

Thanks Valued, not really aware of NZ, an opportunity to short there in your opinion?

Not for a while. Their central bank will continue to prop up their markets with interest rate cuts I think.

 

[sinner]

I was talking about the US though and my point was that it was not in deflation.

Both the velocity of money and money multiplier for the US continue to decline, the credit economy is deflating, at least when measured relative to productivity or the monetary base. Examination of the evidence shows both private corporate and domestic households have crash their living standard while the public sector has attempted to take up the slack. So, once again, not really sure what your evidence is.

As for central banks supporting markets with rate cuts, not really sure why people keep bringing this up as if it was an evidence based fact that everyone knows. In reality, markets tanked in 2008 as rates went to all time lows and the Nikkei has been crap for decades despite essentially 0% rates from the BoJ.

 

[Valued]

Both the velocity of money and money multiplier for the US continue to decline, the credit economy is deflating, at least when measured relative to productivity or the monetary base. Examination of the evidence shows both private corporate and domestic households have crash their living standard while the public sector has attempted to take up the slack. So, once again, not really sure what your evidence is.

As for central banks supporting markets with rate cuts, not really sure why people keep bringing this up as if it was an evidence based fact that everyone knows. In reality, markets tanked in 2008 as rates went to all time lows and the Nikkei has been crap for decades despite essentially 0% rates from the BoJ.

You are correct on the velocity of money and credit. Living standards are lower but sometimes the economy can do well even if the poor are living in slums, unfortunately a fact of life for the US. If you look at things like retail sales, production, jobs growth and housing, they are doing pretty well (housing isn't as good as what it could be, but it's ok).

Interest rates aren't always effective as a monetary policy tool. They can be in some cases and not in others. Sometimes it's more to do with market reaction to a cut rather than the actual long term fundamentals. I don't think you can point at 2008 and have that as a fair example. Japan is an unusual case too. Interest rate reductions can work if it leads to an expansion of credit (putting aside the problems that will occur from that possibly years later), but it will not work if people are too scared to go get loans despite the fact that they are cheap. It may still prop up the stock market not necessarily on the basis that the fundamentals support it, but more on that companies start paying less interest and that this allows more cash to go towards dividends and share buy backs, which is great if interest rates are low because it offers a substantially better yield.

 

[sinner]

You are correct on the velocity of money and credit. Living standards are lower but sometimes the economy can do well even if the poor are living in slums, unfortunately a fact of life for the US.

When I say "crash standard of living" I don't mean in reference to any wealth gap, I am referring to the portion of total consumption undertaken by private corporate and domestic sector.

If you look at things like retail sales, production, jobs growth and housing, they are doing pretty well (housing isn't as good as what it could be, but it's ok).

Lagging macro indicators, the utility they provide to discovering the state of the economy is limited at best. Employment and housing, especially, are at the far end of the lagging scale.

Retail sales have been growing at a slower pace every year since 2009, not sure how that comes up as "doing pretty well", I'd call it a worrying divergence. PMI is barely holding 50.



Meanwhile leading indicators:
* Treasury yields lower
* Credit spreads wider
* Breadth narrowing
* Industrial commodities carted out
* New orders (ex defense) negative YoY
* Inverted backlogs, negative YoY
* Inventories/Sales ratios back to 2001/2008 highs

Anyway. I didn't mean to get into a point-for-point over the US economy, was just looking for some evidence for the claim

The strength of its inflation is being underestimated significantly too, at least by retail traders.

since I really don't see

* strength in inflation
* underestimation of strength of inflation

anywhere at all...still don't. You claimed the point was "they're not in deflation" but the metrics used to track indicate that the credit economy is deflating. Next you say the economy is doing "good", well on a relative (i.e. ignoring pre GFC data) and lagging (i.e. looking at employment and housing) basis I guess so, but none of the metrics which have led economic contraction in the past seem to concur. Please provide some evidence to support your claims.

 

[Valued]

The difference is just how we judge the state of the economy. I judge the state of the US economy relative to other major economies and I judge it on lagging indicators relative to previous short term performance over a year . I don't consider the indicators relative to pre GFC, I think you need to judge trends in the economy using lagging indicators relative to recent performance. I only consider month on month performance to establish trends rather than year on year performance. The reason is I don't plan to buy and hold for years. I plan to trade anywhere from a few days up to a few months.

The main reason I don't judge the economy up against the pre-GFC economy is so I am not comparing an economy that has been recovering from a large financial crisis to the height of the boom prior to the collapse. I think by that metric you would never be happy with the economy until we are at the height of the next boom.

 

[sinner]

The difference is just how we judge the state of the economy. I judge the state of the US economy relative to other major economies and I judge it on lagging indicators relative to previous short term performance over a year . I don't consider the indicators relative to pre GFC, I think you need to judge trends in the economy using lagging indicators relative to recent performance. I only consider month on month performance to establish trends rather than year on year performance. The reason is I don't plan to buy and hold for years. I plan to trade anywhere from a few days up to a few months.

Fair enough I guess, not really sure about the prospective returns of such a strategy but it's your money

The main reason I don't judge the economy up against the pre-GFC economy is so I am not comparing an economy that has been recovering from a large financial crisis to the height of the boom prior to the collapse. I think by that metric you would never be happy with the economy until we are at the height of the next boom.

One would be "happy" merely to see metrics which match the post 1971 non-recession average, let's start there.

 

[DeepState]

NZ is falling apart while their stocks make new highs. Not sure what is going on in that strange little country.

I was surprised to learn that New Zealand's average wealth per adult is the second highest in the world, behind Switzerland. Based on household assets. According to Credit Suisse's Global Wealth Report 2015. Australia came in third. The US came in fourth.

 

[Valued]

I was surprised to learn that New Zealand's average wealth per adult is the second highest in the world, behind Switzerland. Based on household assets. According to Credit Suisse's Global Wealth Report 2015. Australia came in third. The US came in fourth.

That sounds about right. For some reason, and I only read this recently, it's a big cultural thing in NZ to buy property. They love investing in property, so much so they have a housing shortage right now and housing prices are very high (I haven't confirmed the prices, I just read that they were high). Hopefully it doesn't go bust and destroy them, like it did in the US. If that's the case though, it could explain the very high wealth. They also have a lot of natural resources and not a large population.

 

[DeepState]

One would be "happy" merely to see metrics which match the post 1971 non-recession average, let's start there.

US potential growth is now around 2%. It is growing faster than that and is expected to continue to do so for the next couple of years. If growth matched the post 1971 non-recession average, the brakes would probably have to be pulled pretty hard.

 

[DeepState]

US unemployment is higher than the 5% that is being reported. However, they are doing very well compared to everyone else.

The participation rate has declined since the GFC commenced. Part of that is due to demographics. Part of it is due to some sort of cyclical reason. Around 1% of the participation rate is not satisfactorily explained. By adding this 1% of the civilian labour force, headline unemployment would move from 5% to 6%. The Fed is aware that this may be the case and is watching indicators like wages and hours more closely and anecdotal stuff coming out of the Beige Book.

The nature of the US demographic is such that it would take a growth of just 77k jobs per month to hold reported headline unemployment steady.

 

[DeepState]

I think the possibility of a fed rate hike is even higher than the market thinks it is right now. Unless the China data is bad (and it's not out yet), in my opinion it's practically guaranteed they would raise rates. Something bad needs to happen at this point for them not to do it.

When you have:
+ official unemployment at 5% and dropping fast;
+ core inflation excluding volatile items doing alright considering commodity inputs are impacting the prices of final goods sold, and where services inflation is right in the zone (see below for goods inflation vs key commodity prices)
+ the price of liquid assets unreasonably tight
+ GDP growing at or in excess of potential growth rates
+ Credit readily available to credit worthy borrowers
+ ...

....it is ridiculous to have a real cash rate of around -2%.



Even if we accept Dalio's argument that we are about to enter into a period of deleverage, something akin to a zero real rate would not tax savers in real terms and allow deleverage to occur as the economy continues to grow. If we find that productivity growth is lacking as the economy reflates, then rates would likely not reach anything like what the Fed thinks as normal for many years to come. Still, zero is far too stimulatory for the present circumstances. To put that into context, the US is kind of running a short end of the curve that would put the ECB at a -2% cash rate without the means to take your money out of the bank and stow it.

 

[qldfrog]

So Oz dollar down by the end of this calendar year Deep State?

 

[DeepState]

So Oz dollar down by the end of this calendar year Deep State?

Presumably you mean vs USD. I have no signal on that call.

 

[qldfrog]

Presumably you mean vs USD. I have no signal on that call.

yes I did mean vs USD..i understand you believe the fed will rise its rate in dec so I would assume the aud will fall against the USD, and any hint of panic in emerging countries could reinforce the feeling
(yes I know assumption and past history not indicative of future)
I will probably keep my high exposure to usd till february if the fed starts raising, unsure about gold;
Gold in AUD is a strange beast in that context.
My main focus lately is return of capital not return from capital but that is the reflection of my pessimistic nature

 

[DeepState]

yes I did mean vs USD..i understand you believe the fed will rise its rate in dec so I would assume the aud will fall against the USD, and any hint of panic in emerging countries could reinforce the feeling
(yes I know assumption and past history not indicative of future)
I will probably keep my high exposure to usd till february if the fed starts raising, unsure about gold;
Gold in AUD is a strange beast in that context.
My main focus lately is return of capital not return from capital but that is the reflection of my pessimistic nature

Did I say that I, personally as opposed to market pricing, was expecting a Dec lift-off somewhere? I don't think I have expressed that view one way or another.

 

[qldfrog]

Did I say that I, personally as opposed to market pricing, was expecting a Dec lift-off somewhere? I don't think I have expressed that view one way or another.

no you did not, but you stated yesterday evening all the reason why "it is ridiculous to have a real cash rate of around -2%." Your points are solids and I just think the fed could raise even if i believe it missed the point a long time ago and may go in reverse early next year .
Note I have never expected you or anyone else to have a crystal ball into the future or give advices
Anyway i shut up and will just keep reading this thread passively

 

[DeepState]

Anyone out there familiar with the current policies for alt energy and all things carbon in Australia? If you are prepared to share some of your knowledge, it would be great. Could even organise a conference call if others are interested and/or you are interested in such a thing. I don't know enough/anything about this ahead of the Paris soire. Come on ASF....