JS Global Macro Notes

Gov is biggest player in fix income securities. And fix income is the biggest game by far.. they are speculators just like us

 

Except modern day central banks can't go bankrupt and technically never have to run out of ammunition. It is only politics that restricts their room to maneuver. And thus their speculations are political - a rather different ballgame.

 

No, dude, China is not "okay"

All in all, China is most definitely not ok, and those who argue otherwise for the sake of pleasing whatever clients or masters they have in Beijing and Shanghai are simply making spectacles of themselves...

Read more: http://www.mercenarytrader.com/2012/08/no-dude-china-is-not-okay/

 

Central Banks may never run out of ammunition literally, but figuratively their ammunition is thought to eventually bounce off their targets, as oft stated by others including FED members. Here is Bill Gross's take:

Arguably the BOND GURU and co-CEO of Pimco, the world's largest bond fund: Bill Gross

HEADLINE:

"Monetary Policy Has Reached a Dead End: Gross"


EXCERPTS from short report relating to what Gross said Friday:

"While more QE3 is a near certainty, it is increasingly impotent, Gross tweeted."

and

“Monetary policy has reached a dead end,” Gross said. “Once you get down to zero percent on interest rates, there’s not much left to stimulate.”

and

“Don’t fight the Fed, but be afraid of the consequences, or lack of consequences, going forward,” Gross added.


http://www.cnbc.com/id/48860383

 

Agree, which explains how we could yet see, among other possibilities, a very nasty deflationary outcome. Putting together some thoughts on this.

 

FWIW, I posted on this forum or another, the respected and highly traveled John Mauldin stated within the last two months that his most FAQ is "which will we have, inflation or deflation ?" To which he claims he has no intention on being flippant, but his answer is "YES !" His explanation is we will have BOTH, but has no way to know which will come first.

When I read that, it made me reflect on the many bright minds on the subject who have had that question forced on them within the last 18 months or so and none of them have been definitive. The best they can do is stage scenarios that are classic which when the moving parts line up, you will get one.

My read on Mauldin is we will get a one-two punch--one right after the other. His other point he slides in there with this conversation is not unique to him: the longer we kick the can down the road, the worse it will be. The tough, tough, tough act for a president who knows what he is doing and doing it perfectly is probably to let what little air is in the tire out quickly enough to make a difference to what MUST be done, but not to tip us into an Armageddon while doing it. So somewhere on the scale between here and Armageddon is the sweet spot, but it ain't gonna feel sweet. Which becomes a lay-up for his opponent not to allow him to become re-elected; which makes the cake he started not even half baked. Which means we never get it right. Which means sliding quality of life in perpetuity.

These are my thoughts, not Mauldin's. I did read his END GAME in December. I recall there are four prescriptions to getting out of a fix like ours, either of which can do it. However, I recall thinking at the time, all (but maybe one) are very slim to none for putting in play. The exception, was Rx #1: Grow our way out. But along the way, if not attempting to additionally put in play some degree of at least one of the other modalities to the fix (like for instance, austerity), it will be generations to come to extricate ourselves. (Extricate means allowing for something better than staying even, like meaningfully whittling down the debt.) My point for saying we will never get it fixed, is because voting citizens will not be compliant with the prescriptions. This is the same voting public that knows nothing about history, economics, or current events, but rather elects leaders that whisper sweet things in its ears. The cake will fall flat.

 

In my opinion, part of the reason we have a "Schrodinger's cat" outlook for inflation / deflation (not knowing which will materialize) is because no one has advance access to future policy decisions. In response to the next mini-crisis, or series of mini-crises, we do not know what the CBs and politicians will do, and different aggregate response scenarios can lead to very different outlooks. In addition to the above, we do not know how investors, businesses and savers will respond to the responses; there are too many human feedback loops to speak with any certainty about intermediate term outcomes.

 

Aug 28 published:

Michael Pond , co- head of interest-rate strategy in New York at Barclays, said in a radio interview on Bloomberg Surveillance with Tom Keene and Ken Prewitt:

“The market is pricing in modest inflation five years out,” Pond said. “This tells you the Fed is going to” ease policy further “regardless of the inflation outlook or where inflation is as long as they are concerned about growth. If they are worried about growth they think inflation is heading down from their perspective.”

http://www.bloomberg.com/news/2012-...lds-lower-barclays-s-pond-says-tom-keene.html


If Pond is correct about the FED, sounds like a real Japanese-ish 20 year funk attitude. What is your take ?

 

It is wholly plausible, though obviously not a certainty, that long-term bond yields could be just as low ten years from now as they are today.

 

It is wholly plausible, though obviously not a certainty, that growth can return.

I think it would have to move to a flourish and evolve over time into a steady robustness. Leadership where there is supposed to be leaders and an inspired public, uniquely educated, understanding the need to put sacrifices with growth, can sustain it. Slowly rising interest rates and stronger currency can make a cameo appearance, like it, and stay a while.

It is now or never.

I am reminded of a brave man, David Walker who I understood was widely listened to and agreed with (but off the record by many leaders) about the brink America was headed to. That was over a dozen years ago. However, when leaders’ actions were motivated by something other than statesmanship and belied probably their true belief in what they had been lectured to by Walker, the man left a cushy and impressive job to educate citizens. I give him credit for educating me.

"Walker served as Comptroller General of the United States and head of the Government Accountability Office (GAO) from 1998 to 2008. Appointed by President Bill Clinton, his tenure as the federal government's chief auditor spanned both Democratic and Republican administrations. While at the GAO, Walker embarked on a Fiscal Wake-up Tour, partnering with the Brookings Institution, the Concord Coalition, and the Heritage Foundation to alert Americans to wasteful government spending. Walker left the GAO to head the Peterson Foundation on March 12, 2008.

"In 2008, Walker was personally recruited by Peter G. Peterson, co-founder of the Blackstone Group, and former Secretary of Commerce under Richard Nixon, to lead his new foundation. The Foundation distributed the documentary film, I.O.U.S.A., which follows Walker and Robert Bixby, director of the Concord Coalition, around the nation, as they engage Americans in town-hall style meetings, along with luminaries such as Warren Buffett, Alan Greenspan, Paul Volcker and Robert Rubin.

"Walker has compared the present-day United States to the Roman Empire in its decline, saying the U.S. government is on a "burning platform" of unsustainable policies and practices with fiscal deficits, expensive over-commitments to government provided health care, swelling Medicare and Social Security costs, the enormous expense of a prospective universal health care system, and overseas military commitments threatening a crisis if action is not taken soon.

"Walker has also taken the position that there will be no technological change that will mitigate health care and social security problems into 2050 despite ongoing discoveries.
In the national press, Walker has been a vocal critic of profligate spending at the federal level. In Fortune magazine, he recently warned that "from Washington, we'll need leadership rather than laggardship."; in another op-ed in the Financial Times, he argued that the credit crunch could portend a far greater fiscal crisis; and on CNN, he said that the United States is "underwater to the tune of $50 trillion" in long-term obligations.

"He favorably compares the thrift of Revolutionary-era Americans, who, if excessively in debt, would "merit time in debtors' prison", with modern times, where "we now have something closer to debtors' pardons, and that's not good."

(Excerpts from Wikipedia.org ...."David Walker")

It is now or never.