Backdoor Bank Bailout? Fannie And Freddie May be “Losing Money as a Matter of Policy”
Yahoo Tech Ticker May 12, 2010
Andy Xie is a former Morgan Stanley analyst now living in China
Major economies reported strong growth for the first quarter. In the United States, for example, GDP grew 3.2 percent from the fourth-quarter level. Year-on-year growth rates were not far behind.
East Asian export-oriented countries reported even stronger data than those in the West. As a group, they probably grew twice as fast as the United States. And their second-quarter reports are likely to reflect similar strength. Meanwhile, the International Monetary Fund has upgraded its global, 2010 GDP growth forecast to 4 percent.
All these positive statistics raise an important question: Are we in the midst of a V-shaped recovery following the economic collapse that began in the second half 2008?
The answer is no. I think the current recovery is merely based on government stimulus and low-base effect. And given the amount of stimulus spending, this is not a strong recovery. More importantly, structural problems exposed by the financial crisis were merely covered up, not resolved, by stimulus spending. This is why the recovery is not sustainable.
Since stimulus will eventually lead to inflation, interest rates will have to be raised. That will lead to another dip in the global economy. I expect this second dip in 2012, which means we are en route to a W-shaped economic phenomenon, not a V-shaped recovery.
When so many people are bullish about an economic outlook – and offer lots of data to support their optimism – it is easy for little people like you and I to be persuaded. But one should always question the consensus. You don’t have to poke too deep to find holes in the latest recovery story. One year ago, the consensus was that the financial crisis was the most serious in 60 years. Now, the doomsayers have changed their tune. How can things change so dramatically in just a year?
In early 2009, I predicted the people who were panicking at that time would declare everything fine by the end of the year. I also thought that, in the middle of the crisis, policymakers around the world had decided to err on the side of too much stimulus rather than too little. These predictions have come true. So the latest growth rates should be analyzed in that context.
Here’s what’s really happening: Major economies such as the United States and Britain are running fiscal budget deficits exceeding 10 percent GDP. Deficits in Europe and Japan are half that amount. Interest rates around the world are close to zero. When viewed in this context, 4 percent global growth is not impressive. Actually, we should be asking why the global economy isn’t growing faster.
But can individuals like you and I make sense of what’s happening in our huge global economy, with its roughly US$ 60 trillion in gross output and more than 6 billion people? More importantly, can we identify unsustainable trends and make the right decisions to avoid collective or personal losses?
In fact, it’s impossible for an individual to gather and analyze all the data needed to reach meaningful conclusions. We have to rely instead on government agencies. But bureaucrats are slow, and they’re usually too late in delivering data and analyses. In addition, some agencies massage data to achieve desired financial market reactions. As a result, a lot of little people have been force-fed misinformation. They’ve been left to search for answers in the dark before being led to the slaughterhouse.
Look at Prices
Yet we can improve our odds of success while navigating the vast global economy and avoid being fooled by consensus views. This is possible if we always remember that the economy is guided by a price system. Multinational companies have arbitraged away production cost differences over the past two decades, so price information about a company or a product can shed light on macroeconomic trends.
Let’s look at China’s auto industry to prove the point. Everyone says the industry is booming. Meanwhile, automakers are depressed everywhere else around the world. How should we read the difference? What facts are true and sustainable, true but not sustainable, or false?
It’s true that auto demand is booming in China. This is line with the global industry’s trend. Whenever a country’s per capita income rises above US$ 6,000, auto demand tends to take off. And that income level has been surpassed in many Chinese cities.
But is this growth rate sustainable? It is not. China’s auto market is new, which means many consumers are buying their first car, creating a spike in demand. Demand for replacement vehicles will be the market’s next development, and that will be a long time coming.
On the supply side, which includes auto dealers and manufacturers, China’s auto sector seems highly profitable. One can be easily enticed to think this profitability is due to strong demand. But it is not. Autos are a globally traded product, so supply and demand sides in any single country don’t have to reflect each other. China-based auto producers and distributors are profitable due to trade barriers that keep global competition out. The telltale sign is that prices are higher in China than elsewhere.
What’s the significance of this story? From an investment perspective, one should be cautious about China’s auto sector. Most analysts pushing auto stocks cite strong demand growth and high profitability. But this profitability is due to trade barriers.
Category: Think Tank
The 10 yr note auction was decent as the yield was right in line with expectations with the when issued of 3.54-3.55% at 1pm but below the level of about 12:45pm. The bid to cover of 2.96 is slightly above the 12 month average of 2.91 but below the prior two which were well above…Read More
John Melloy points us to Lon Juricic, who crunches the numbers, and discovers that the 998 point whoosh was actually closer to 1250 points. How? The Dow actually fell closer to 1,250 points — if you calculate the average using low prices for stocks that traded away from the NYSE. Off exchange trades that were…Read More
I keep hearing from people that this is not the typical economic recovery. But I don’t see that at all — at least in terms of Consumer behavior.
We had 25 months of economic contraction with horrific headlines the whole time. Spending decreased, savings increased, unemployment spiked. This led the government and central bankers to throw lots of money at the problem — not so much fixing it, as papering it over.
Certainly, the cause of the recession was not the usual run of the mill factors. Nor was depth or duration. However, it appears — at least according to the charts I see — that this recovery is following a fairly normal script.
Then, a recovery began.
Many people doubted it, recent painful memories being so fresh.
But have a look a the charts below — when I look at year over year changes in areas such as spending, income, jobs — this looks like a typical recovery in hiring, etc.
Isn’t that is typical recession/recovery behavior?
-People hunkered down, and slowed spending.
-Market discounted the recession partially.
-Consumers get nervous, spend less, save more during the contraction.
-Markets discounted the recovery.
-Employment picks up
-As signs of improvement become visible, consumers started spending again.
The consumer response to economic stress was — pardon the word — typical. 1973, 1982, and 1991 saw similar hunkering down, then a return towards normalcy.
UPDATE: May 12, 2010 5:54pm
In the 4 charts I referenced, I was looking at factors impacting and reflecting consumer behavior.
This came up in a discussion with a hedgie friend as a follow up to the Mortgage Defaulters are driving retail sales. I wanted to see if this was in anyway an out of the ordinary consumer recovery. The charts imply that it is pretty typical.
Now, all of the surrounding factors — the credit bubble, market crash, bank collapse, TARP, the RE boom & bust, ZIRP, etc. were highly unusual.
But the human response to the end of the recession seems rather ordinary . . .
Charts after the jump
Comparing them to “a friend who lends an umbrella on a sunny day” Ritholtz says high frequency traders only add liquidity “when the market’s going up.”
It’s all symptomatic of a financial industry that’s become increasingly focused on trading and less so on creating societal benefits. “Wall Street is supposed to exist for businesses and entrepreneurs to meet capital and fund economic growth,” says Ritholtz. “It’s not just supposed to be a place where you’re playing Nintendo or Wii for money.”
Getting to the Bottom of the “Flash Crash”: Barry Ritholtz Blames the Machines
May 11, 2010 04:12pm
The March US Trade Deficit was about in line with expectations at $40.4b and is up $1b from the revised level in Feb. The rise was led by an increase in the $ amount of petro imports. Both overall Exports and Imports are back to levels last seen in Oct ’08 but the rise in…Read More
David R. Kotok, Cumberland Advisors May 12, 2010 There is plenty of historical evidence to suggest that the period from May through October is the weakest half of the year for stock-market investors. Studies of markets worldwide have confirmed that phenomenon: November through April has often outperformed the May through October period by a large…Read More
Category: Think Tank