Kudrna's Stock Market Talk

Quote of the Day:

Blessed are the young, for they shall inherit the national debt.

Herbert Hoover

Macro Overview

The Debt-Pimp

• As the debt ceiling rears its head again I think it’s worth revisiting the subject of excessive debt and its origins. You’ve met the whores of economic policy, but who was the original pimp behind the street slaves of today?
• Let’s start with who we are; we are the customers, the catchment, the market – otherwise known as economic fodder, the potential debt-junkies. Relative to historic precedent, we don’t know what it means to live a “normal life” under “normal economic conditions”. Life feels tough today. My advice: get used to it. To every other generation it is normal to have to struggle to meet living costs, to have to struggle to pay debts and mortgages, to have to struggle to invest savings safely. We’ve been through a reversion… welcome to the mean.
• In a general sense, any person under the age of 50 has been spoiled with a charmed life. Their financial senses have been honed under an unsustainable, protected life, padded out with the soft, gay candyfloss economy of the last few decades. An economy which ratified the glories of modern monetary theory and its most powerful splinter group – the modern central banker. In this modern era volatility was low, growth was consistently high, inflation was consistently benign and world peace thrived. So, naturally, it sickens us to admit that we are but an economically ignorant generation of an emotional, instinctive species influenced by comically arrogant leaders… but we are.
• We, the children of a debt-addicted revolution, got lucky… for a while. Despite what any arrogant authority may claim, we did not engineer this economic utopia and it certainly was not the brainchild of any single economic mastermind or group of divine leaders. Rather, I believe, it was the fortunate confluence of a number of criteria far beyond the control of any single central think-tank, government or organization. As I wrote about in my piece (Bernanke and the Butterfly), 4 years ago, well before the sub prime crisis hit the headlines, there were three main macro influences which started decades ago but came to surface in the mid-eighties. These set the tone for the economic utopia we have come to expect today.

1. Perestroika and The End of the Cold War… I wrote:

During the three decades after the 1989 collapse of The Iron Curtain, the global economy has experienced unprecedented growth and remarkably benign inflation – albeit with a few hiccups along the way. But let us get one thing straight: while Greenspan deserves enormous credit for his management of the economy during the late 80’s, he did not bring down The Iron Curtain – the timing of the end of the Cold War was coincidental to the beginning of his tenure!

While much of the symbolism was occurring in Berlin, the economic effects were not only felt in Germany (or the US or USSR for that matter), indeed, there were far-reaching implications all over the World. The Barriers came down almost overnight, and so, with it, came the reversal of all the economic potential which had been held back in restraint during decades of political stalemates and frictional, trade-less stand-offs. The fall of The Iron Curtain opened the proverbial floodgate for free trade and it was here that the seeds of Globalization were sown.

2. The Rise of Emerging Asia (China)… I wrote:

a new era of optimism and healthy growth gave way to a feeding frenzy among consumers and a spiral of euphoric optimism among the financial think tanks, business leaders and media pundits. Not only that, we all co-habit what is commonly regarded as “The Global Village”, synergies could be worked within the system. Cue: the massive Labor Arbitrage between the consumers (The Western Economies) and the producers (the then Emerging Market Economies – especially Asia).

3. A game-changer – The Birth of the Information Age (aka The Internet)… I wrote:

Throw in the greatest gleaming innovation of this era a little something called, The Internet, and mix it with the backdrop of post Cold War optimism and you have globalization on steroids. And in many senses the stock market rally we experienced in the first half of the 90’s was entirely justified. There was genuine reason to believe we were in a new era, “this time it was different”.

• There were other factors, but these were the BIG THREE in my opinion. While these factors are man-made “developments”, they were not the collective policies of any programmed action by any party. We just got lucky – these historic, one-off events occurred concurrently, uninhibited and continuously feeding back in a self-reinforcing manner, beginning at exactly the same time… around the mid-to-late eighties. It also happened to coincide, almost exactly, with the appointment of a new Federal Reserve Chairman… his name was Alan Greenspan. A mere mortal upon whom much credit was bestowed for the then blissful “New Normal” of low volatility, expansive growth, benign inflation and even world peace. The opaque, laissez-faire central banker may have become economic deity to the media-fed masses, but to a select group of dissidents Greenspan represented the “Original Sinner”.  Prostituting infectious societal debt like economic HIV, he deserved little of the credit for what would turn out to be a simpler, less arrogant explanation for the boom: the fortuitous inheritance of an inevitably optimistic global economic backdrop for any central banker in that circumstance. I wrote…

The tidal wave of products, services, materials, opportunities flowing out of Asia was, not only contributing greatly to global growth, it too enhanced the tailwind of disinflation that Globalization was already providing. Not only were these (now three) phenomena a gigantic influence on the supply side of the equation, the surge of optimism and the spawn of an easy monetary policy style (“The Greenspan Put”, as it had come to be known), stoked confidence in The West to hysteric consumption patterns. By the turn of the century, we had grown intoxicated on our own potent cocktail of inflation-risk-free growth to the point that Greenspan himself (now, widely dubbed by the growing band of investment groupies and media junkies as “The Maestro”) called for an end to the “irrational exuberance” of asset price inflation. Alas, that was the last we ever saw of Greenspan’s attempts to diffuse bubbles and asset prices.

Credit Only Where it is Due

Greenspan deserves only a fraction of the credit he gets for keeping inflation under control and stimulating growth for the past twenty years. It is quite likely that low inflation, globalization and higher growth would have presided irrespective of who was at the helm of the Central Bank for the last quarter of a century. In fact, by over-use of the Greenspan Put, our “Maestro” encouraged confidence to give way to complacency.

•  … and the rest, of course, is history, dear reader … to be continued…

Market Overview

Good Bond Auctions Buoy The Market

• Despite the mass S&P downgrade blood did not run on the streets of Europe. In fact the European markets looked quite good by the end of the day and the French bond auction went well. It’s true, like we thought, much of the downgrade was already priced into the market. But why are things so different from December? Did Father Christmas really cheer everybody up?
• Well some of it has to be put down to what I call the January effect – plenty of funds embark on strategies to allocate cash reserves from the previous year. But also there were huge redemptions in Europe which put cash into the pockets of fixed income investors – this cash had to be reinvested in the fixed income market so there has not been a lack of sovereign debt investors, generally. But we have to admit, some of it must also be due to a change in sentiment. The LTRO has done its job to and extent, even if the EFSF falls flat on its face (which it probably will).

Markets Still Looking For Direction

• You’d think all this (relatively) good news in Europe would lead to a rally in the Euro, but the Euro has languished around the 1.26 level vs the US Dollar. Partly I think because the market recognizes the printing effect of the ECB’s policy shift under Draghi. Will be interesting to see how other larger economies react to this new, subsidized Euro level. Chart of the Day – 6 month graph of Euro/Dollar.
• Keep an eye on Earnings coming out this quarter … the earnings season basically starts now – with Citi and Rio Tinto being the big names reporting tomorrow. But I think numbers out over the next few days will set the early tone to direction of the equity markets. Equities are hungry for some conviction to either direction.

Chart of the Day

Events

Macro Events:

Update:

• Japan Machine Orders were good!

Alerts:

• Brazilian Inflation

Corporate Events:

Results:

• Citi [C], Rio Tinto [RIO AU/LN]

Dividends:

• Nothing Significant

Reading, Links:

Nothing Significant

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Tags: Alan Greenspan, Bernanke, Bond Markets, China, Citigroup (C), Cold War, Credit Markets, Debt, ECB, Economy, EFSF, Euro, Europe, Fed, France, Germany, Globalization, Greenspan, Growth, Inflation, Internet, Investment, Japan, Keynesian Economics, LTRO, Modern Monetary Theory, Monetary Policy, pundits, Rio Tinto (RIO), S&P, TIPSTER

This entry was posted on Tuesday, January 17th, 2012 at 11:42 AM and is filed under Economy/Macro/Politics. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.