JS Global Macro Notes

Discussion in 'Economics' started by darkhorse, Aug 1, 2010.

  1. Judging by the overview of funding, there's still some joy left:

    http://www.recovery.gov/Pages/home.aspx

    In my perhaps parochial view, what is coming home to roost is the upshot of previous tax cuts that didn't, and couldn't, pay for themselves, virtually no financial regulation to speak of, fostering an "anything goes" environment, and a Fed that "eased" at the slightest dips over the years rather than allowing small and periodic corrections along the way to play themselves out. The Fed's actions over the past several years have been about as far-minded as putting out every single forest fire until there is so much accumulated deadwood that the inevitable blaze that will follow may be next to unstoppable. Meanwhile, the Fed is low on water.
     
    #31     Aug 15, 2010
  2. Right, except some would say look back a good deal farther.

    I agree with the view that says we are at the tail end of a 25 year leverage and debt supercycle, having kicked off in the early 80s as a result of Volcker "breaking the back of inflation."

    After the extraordinary pain wrought on the U.S. economy by the Volcker fed to kill off inflation -- read Greider's excellent "Secrets of the Temple" for much more on this -- the country started on a long protracted "leveraging up" path beginning with the Reagan administration. (Dick Cheney: "Reagan taught us that deficits don't matter." Well, they do now, Dick.)

    At the same time that the government started leveraging up in the 80s, the early underpinnings of the "shadow banking system" were created -- the means by which Wall Street took the reins of unconventional credit creation.

    And then, of course, "the Maestro," Alan Greenspan, showed up just in time to be imprinted like a duck after successfully saving the country from the aftermath of the '87 crash. Greenspan learned precisely one lesson after that -- when ever anything goes wrong, PRINT -- and gave up his last vestiges of a spine when his "irrational exuberance" speech went over like a lead balloon in Washington, embracing his role as head cheerleader / soothsayer / money printer ever after. It was Greenie's insistence on taking interest rates down to 1% and leaving them there for over a year post dotcom / telecom crash that was a major driver for the larger and even more destructive housing bubble, which in turn fueled the China / Middle East treasury buying cycle via pumped up consumers loading up on "stuff" and sending their housing equity dollars abroad, which came back home to be parked in USTs and keep long rates low (and mortgage rates low) in a classic Soros style reflexive feedback loop.

    Then, too, there is the multi-decade decline in consumer savings rates -- as fueled by a steady increase in leverage, natch -- traveling from somewhere in double digits (above 10%) in the early 80s all the way down, down, down to below zero for the first time (consumers spending more than a dollar for every dollar earned) in 2005.

    So, yeah, the Fed of the last few years has really screwed the pooch, but basically Bernanke took the baton from Greenspan and the whole country has been doubling down on its borrow and spend bets, martingale style, for a couple decades now. That's why we're not in Kansas anymore... there is a major unwind and recalibration underway the likes of which few have ever seen.
     
    #32     Aug 15, 2010
  3. +1 and eloquently written, to boot...
     
    #33     Aug 15, 2010
  4. piezoe

    piezoe

    Isn't that "the common wisdom"?

    ________

    "The Common Wisdom is almost always wrong."
    -- Gore Vidal
     
    #34     Aug 15, 2010
  5. Darkhorse, I think your last post should be set to music.

    And as a reminder, please don't forget about the descriptive process metaphor you were going to provide in response to my earlier question.
     
    #35     Aug 15, 2010


  6. "Do not choose to be wrong for the sake of being different."
    - Lord Samuel

    It is often tricky to know what the common or generally received wisdom is. With the $USD and USTs, for example, there is a very wide contingent of belief that both are 100% doomed and should only be sold, e.g. Nassim Taleb: "Every human should be short treasuries."

    Also, before the most recent $USD surge, there was a very loud drumbeat as to how the greenback was destined to head much lower, for ex., WSJ and NYT cited here. The FT most definitely had its hand in there too... all were playing "catchup" in trying to explain the euro's surprise reversal rather than making any truly forward-thinking observations on the markets.

    Someone (I forget who) said that patriotism is the last refuge of a scoundrel. Similarly, my feeling is that playing the "contrarian" card is the hallmark of a lazy or otherwise not very well researched argument. All too often the sample size referenced as conventional is off base or nonexistent... the assertion that a view is conventional should be backed up with empirical evidence appropriate to the relevant swathe of market participants.

    Now if you had evidence that forex traders were all convinced the $USD could only rise, for example, that would be something interesting. What matters is when the relevant group shares a very obvious view. When the euro broke $1.20 back in June, the conventional wisdom among actual forex market participants -- bank desks, hedgies, brokers etc -- was indeed that it could only fall much lower on its way straight to par, and look what happened.
     
    #36     Aug 15, 2010
  7. piezoe

    piezoe

    Thank you. I think, for answering my question. :D

    Vidal did, after all, hedge by saying "almost always".
     
    #37     Aug 16, 2010

  8. Yep, true.

    As a general rule, it's good to remember too that the crowd is not always wrong... the crowd is only wrong at major turning points, which by definition are less than frequent. Being contrarian at the wrong time is akin to arguing with a herd of cattle.

    Trading (in my humble opinion) thus becomes a curious mix of going with the flow, but also knowing when to selectively fade the flow.
     
    #38     Aug 16, 2010
  9. schizo

    schizo

    That, my friend, only happens when the Fed is caught with their pants down. Until then, they're ALWAYS one step behind the curve. They don't raise the dame rate when the economy is heating up; only when EVERYBODY knows do they react. By the same token, they don't cut the damn rate when the market is seriously tanking. Witness 2007 and you'll see both examples in clear daylight.

    This idiotic saga started long before Bernanke (remember Greenie?), although Bernie made it ever more poignant.
     
    #39     Aug 16, 2010

  10. Ask and you shall receive: Integrated Macro Analysis, Part I

    p.s. the metaphor (and price action details) will be in part II
     
    #40     Aug 17, 2010