Posts filed under “Think Tank”
Boom and burst: Don’t be fooled by false signs of economic recovery. It’s just the lull before the storm
Andy Xie is a former Morgan Stanley economist now living in China; The following is from the South China Morning Post:
The A-share market is collapsing again, like many times before. It takes numerous government policies and “expert” opinions to entice ignorant retail investors into the market but just a few days to send them packing. As greed has the upper hand in Chinese society, the same story repeats itself time and again.
A stock market bubble is a negative-sum game. It leads to distortion in resource allocation and, hence, net losses. The redistribution of the remainder, moreover, isn’t entirely random. The government, of course, always wins. It pockets stamp duty revenue and the proceeds of initial public offerings of state-owned enterprises in cash. And, the listed companies seldom pay dividends.
The truly random part for the redistribution among speculators is probably 50 cents on the dollar. The odds are quite similar to that from playing the lottery. Every stock market cycle makes Chinese people poorer. The system takes advantage of their opportunism and credulity to collect money for the government and to enrich the few.
I am not sure this bubble that began six months ago is truly over. The trigger for the current selling was the tightening of lending policy. Bank lending grew marginally in July. On the ground, loan sharks are again thriving, indicating that the banks are indeed tightening. Like before, government officials will speak to boost market sentiment. They might influence government-related funds to buy. “Experts” will offer opinions to fool the people again. Their actions might revive the market temporarily next month, but the rebound won’t reclaim the high of August 4.
This bubble will truly burst in the fourth quarter when the economy shows signs of slowing again. Land prices will start to decline, which is of more concern than the collapse of the stock market, as local governments depend on land sales for revenue. The present economic “recovery” began in February as inventories were restocked and was pushed up by the spillover from the asset market revival. These two factors cannot be sustained beyond the third quarter. When the market sees the second dip looming, panic will be more intense and thorough.
The US will enter this second dip in the first quarter of next year. Its economic recovery in the second half of this year is being driven by inventory restocking and fiscal stimulus.
However, US households have lost their love for borrow-and-spend for good. American household demand won’t pick up when the temporary growth factors run out of steam. By the middle of the second quarter next year, most of the world will have entered the second dip. But, by then, financial markets will have collapsed.
China’s A-share market leads all the other markets in this cycle. Even though central banks around the world have kept interest rates low, the financial crisis has kept most banks from lending. Only Chinese banks have lent massively. That liquidity inflated the mainland stock market first, then commodity markets and property market last. Stock markets around the world are now following the A-share market down.
By next spring, another stimulus story, involving even bigger sums, will surface. “Experts” will offer opinions again on its potency. After a month or two, people will be at it again. Such market movements are bear-market bounces. Every bounce will peak lower than the previous one. The reason that such bear-market bounces repeat is the US Federal Reserve’s low interest rate.
The final crash will come when the Fed raises the interest rate to 5 per cent or more. Most think that when the Fed does this, the global economy will be strong and, hence, exports would do well and bring in money to keep up asset markets. Unfortunately, this is not how our story will end this time. The growth model of the past two decades – Americans borrow and spend; Chinese lend and export – is broken for good. Policymakers have been busy stimulating, rather than reforming, in desperate attempts to bring growth back. The massive increase in money supplies around the world will spur inflation through commodity-market speculation and inflation expectations in wage setting. We are not in the midst of a new boom. We are at the last stage of the Greenspan bubble. It ends with stagflation.
Hong Kong’s asset markets are most sensitive to the Fed’s policy due to the currency peg to the US dollar. But, in every cycle, stories abound about mysterious mainlanders arriving with bags of cash. Today, Hong Kong’s property agents are known to spirit mainland-looking men, with small leather bags tucked under their arms, to West Kowloon to view flats. Such stories in the past of mainlanders paying ridiculous prices for Hong Kong flats usually involved buyers from the northeast. In this round, Hunan people have surfaced as the highest bidders. The reason is, I think, that Hunan people sound even more mysterious. But, despite all this talk, the driving force for Hong Kong’s property market is the Fed’s interest rate policy.
Punters in Hong Kong view the short-term interest rate as the cost of capital. It is currently close to zero. When the cost of capital is zero, asset prices are infinite in theory. At least in this environment, asset prices are about story-telling. This is why, even though Hong Kong’s economy has contracted substantially, its property prices have surged. Of course, the short-term interest rate isn’t the cost of capital; the long-term interest rate is. Its absence turns Hong Kong into a futile ground for speculation, where asset prices increase more on the way up and decrease more on the way down.
When the Fed raises the interest rate, probably next year, Hong Kong’s property market will collapse. When the Fed’s policy rate reaches 5 per cent, probably in 2011, Hong Kong’s property prices will be 50 per cent lower.
Andy Xie is an independent economist
Boom and burst
Don’t be fooled by false signs of economic recovery. It’s just the lull before the storm
South China Morning Post Aug 24, 2009
Category: Think Tank
David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from…Read More
Category: Think Tank
After starting the week with a broad-based sell-off, stock markets resumed their five-month uptrend as investors’ confidence in the recovery prospects of the global economy gained traction. With risky assets back in favor, a number of bourses and crude oil closed at fresh highs for the year, showing resilience in the face of a sharp correction in China on Monday (-5.8%) and Wednesday (-4.3%). Safe-haven assets such as government bonds and the US dollar received a cold shoulder.
Source: Walt Handelsman, August 20, 2009.
Referring to the nascent economic recovery, Paul Kasriel and Asha Bangalore (Northern Trust) said: “There is concern being voiced that after the fiscal stimulus wears off, the economy will lapse back into a recession. Anything is possible, but that does not necessarily make it highly probable. In the post-WII era, once the US economy has gained forward motion, it has maintained that forward motion until the Federal Reserve has intervened to halt it.
“We believe that the earliest the Fed will begin to take action to brake the pace of nominal economic activity will be late-June of 2010. And if it begins to take action then, it will do so only tentatively. If, in fact, economic activity is flagging from a lack of additional fiscal stimulus, then the Fed is unlikely to commence tightening or would reverse course. We believe that the next recession, whenever it occurs, will be precipitated by the lagged effects of Fed tightening, not by the economy ‘running out of gas’ on its own.”
A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.
The MSCI World Index (+1.6%) and MSCI Emerging Markets Index (-0.8%) followed separate paths last week as China and a number of emerging markets came under pressure during the first few trading days. Emerging markets have now underperformed developed markets for three weeks running.
Category: Think Tank
Here is something I never expected to be linking to on a Saturday afternoon, via the St. Louis Fed’s David C. Wheelock: How Not to Reduce Excess Reserves: The Federal Reserve’s actions to support financial markets and the broader economy have resulted in a large increase in bank reserves—both total reserves and reserves held in…Read More
The Statistical Recovery, Part Three
Capacity Utilization Set to Rise
A Real Estate Green Shoot?
The Deleveraging Society
Some Thoughts on Secular Bear Markets
Weddings and Ten Years of Thoughts From the Frontline
This week we further explore why this recovery will be a Statistical Recovery, or one that, as someone said, is a recovery only a statistician could love. We look at capacity utilization, more on housing, some thoughts on debt and deflation, and some intriguing charts on volatility in the last secular bear-market cycle. This letter will print a little longer, but there are lots of charts. I have written this during the week, and I finish it here in Tulsa, where Amanda gets married tomorrow. (There is no deflation in weddings costs!)
Thanks to so many of you for your enthusiastic feedback about my latest Accredited Investor Newsletter, in which I undertook to examine the impact of last year’s dramatic increase in volatility on the performance of hedge funds and to ascertain those elements that led to success in the industry, such as select Global Macro and Managed Futures strategies, as well as the challenges. If you are an accredited investor (basically anywhere in the world, as I have partners in Europe, Canada, Africa, and Latin America) and haven’t yet read my analysis, I invite you to sign up here: www.accreditedinvestor.ws
For those of you who seek to take advantage of these themes and the developments I write about each week, let me again mention my good friend Jon Sundt at Altegris Investments, who is my US partner. Jon and his team have recently added some of the more successful names in the industry to their dedicated platform of alternative investments, including commodity pools, hedge funds, and managed futures accounts. Certain products that Altegris makes available on its platform access award-winning managers, and are designed to facilitate access for qualified and suitable readers at sometimes lower investment minimums than is normally required (though the net-worth requirements are still the same).
If you haven’t spoken with them in a while, it’s worth checking out their new lineup of world-class managers. Jon also tells me they just added yet more brilliant minds to their research team, making it, in my opinion, one of the foremost teams in the industry, focused solely on alternative investments. I invite you to have a conversation with one of their professional and seasoned advisors. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.) Now, let’s jump into the Statistical Recovery.
Capacity Utilization Set to Rise
Capacity utilization is a concept in economics that refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between actual output that is produced with the installed equipment and the potential output that could be produced with it, if capacity was fully used.
The chart below shows that capacity utilization in the US is at an all-time low, around 68%. That means that with the equipment we already have in place we could produce almost 50% more goods than we are now producing. However, most analysts think that 80% capacity utilization is a very good number.
If you look very closely at the bottom right-hand detail, you can see that there is a small uptick in last month’s data. Whether or not this is the “bottom” remains to be seen. But if it is not the bottom, it is close. You can only shut down so much production before inventories fall to levels that require restocking. And we are getting close to that level in many industries.
Before we wander too far away from the graph, I want you to notice that past dips (circa the recessions of 1968, ’74, and ’80-’82) had V-shaped recoveries in capacity utilization. But in the 1990-91 recession it took longer than it did in past recessions, and in the most recent recession (2000-02) the recovery took longer and we did not actually “recover” for four years.
Category: Think Tank
July Existing Home Sales, 85% of the housing market and a measure of actual closings, totaled 5.24mm annualized, 240k more than expected and the highest since Aug ’07. The inventory to sales ratio though remained unchanged at 9.4 months because the improvement in single family homes to 8.6 from 8.9 was offset by a spike…Read More
Today’s chart illustrates how the recent plunge in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From…Read More
> Is Bernanke purposely aiding & abetting the usual market manipulation that occurs during expiration week? In July, Ben poured $80.2B into the system, mostly by monetizing MBS, during expiration week, igniting a huge rally. The Fed balance sheet contracted for most of June and July before Ben’s gambit. For the week ended Wednesday, Ben…Read More
“Memories, like the corners of my mind. Misty water colored memories, of the Way We Were,” sang Barbra Streisand and I’ll be humming the song as Bernanke gives a speech today titled “Reflections on a Year of Crisis” at 10am from Jackson Hole. Unfortunately the trip down memory lane won’t begin in mid ’03 when…Read More
J.D. Power and Associates today is quantifying in their estimation the impact on auto sales this year due to the clunker program and the extent that it steals sales from 2010. They said that based on data seen thus far, August will see the first 1mm+ unit sales (includes fleet sales) month since last year….Read More