Market Outlook: More From The Fed

[EJ]

Re: Market Outlook: More From The Fed

the question of whether or to what degree other economies are uncoupling from the u.s. is profound and important. schiff puts forth a scenario of [relatively] painless [for the non-u.s. world] uncoupling. it's hard for me swallow. nonetheless, at least he tries to deal with the issue. ka-poom theory and ej's writings in general are terrific, but don't shed much light [in my reading] on what might happen in europe and asia. i would welcome an extended discussion of this issue, and am especially curious about ej's thoughts on the matter.

The Poom dollar denominated asset repatriation phase of the process is predicated on a degree of repudiation of US economic and monetary policy by Europe and Asia afforded by a degree, if not independence, then of at least the precedence of domestic political and economic needs over US interests. Rather than cooperating to support the US economy and dollar after the next crash, EU and Asia instead focus economic reconstruction efforts on improving economic and trade ties with each other.

Since I proposed this idea back in 1999, I have always considered the greatest threat to the theory that yet another instantiation of US-centric systems we have seen since WWII will happen after the next post crash "jump ball" because EU/Asia and intra-Asian economic development failed to happen much. Since then, economic inter-dependence between Europe and Asia, and intra-dependence within Asia, have grown so strong that they have recently earned the term "de-coupling," and I'm starting to think that the next major recession for the US will have a relatively minor impact on Europe and Asia even during the event, creating weak motivations for supporting of the US economy to support the dollar and maintain export income during the recovery phase.

It's important to understand the political issues here. The way the dollar's depreciation was managed since 2002 was via sales of mortgage-backed securities and other creative paper to Europe and Asia. That's how the dollars were sold, in order to create a leveling of currency depreciation. Turns out that US ratings agencies were as corrupt as the big US consulting firms that said that Enron's and a lot of other bogus companies' books were good so that EU and Asian pension funds would buy them back in the 1990s.

Their financial markets are also better protected. After hosing them twice in ten years, what's the US going to sell them this time to support the dollar?

Who the US's friends are...

[friendly_jacek]

Re: Market Outlook: More From The Fed

global markets correlation...

http://online.wsj.com/public/resourc...ilydrop07.html

Ya, I saw that map. Curiously enough China is up big time. Yes, I call it decoupling.

[jk]

Re: Market Outlook: More From The Fed

...what's the US going to sell them this time to support the dollar?

if they won't buy junk equity [e.g. enron] or junk debt [e.g. "AAA" cdo's stuffed with subprime junk] we might have to sell something of value. that's likely one reason the dow has been outperforming other averages - big, multinational companies are worth something even when/if the u.s. economy isn't doing too well. luxury property - hamptons, nantucket, jackson hole, aspen, high end properties in nyc and san francisco and so on - are also likely to be worth something to foreign purchasers. [in general: we'll have to sell the crown jewels. of course we sold the japanese rockefeller center and pebble beach and look where it got them. but that was when japan was at the top of its own bubble.]

relatively painless decoupling still seems unlikely to me in spite of increased eu/asian and intra-asian trade. i think one weak link is likely china, which is experiencing breakneck and unbalanced growth even while still maintaining a large unproductive and uncompetitive state operated enterprise sector. dare we say that china's growth is a bubble? lots of intra-asian trade represents intermediate products and raw materials for goods ultimately headed for the export market, much of those exports headed to the u.s.

and european growth is also quite unbalanced - germany is doing well because of its export sector, but most of those exports are to other eu countries. and you, ej, have pointed to spain's r.e. bubble, while i've made mention of italian economic distortions that threaten the cohesiveness of the euro-zone.

so is it really plausible that the u.s. could go into recession and the rest of the world merely catch cold instead of coming down with pneumonia?

the underlying issue, i think, is this: if uncoupling isn't real, then ka will be a real bone-crusher, and poom - sluggish growth with significant inflation - will be global. if uncoupling is real, ka will merely be very, very painful, and poom will mostly be made in america, while the rest of the world experiences somewhat healthier growth.

[EJ]

Re: Market Outlook: More From The Fed

the underlying issue, i think, is this: if uncoupling isn't real, then ka will be a real bone-crusher, and poom - sluggish growth with significant inflation - will be global. if uncoupling is real, ka will merely be very, very painful, and poom will mostly be made in america, while the rest of the world experiences somewhat healthier growth.

I believe this is the case. But there are so many wild cards, and they are all political.

For example, never could I have imagined in 1999 when developing Ka-Poom theory that the US would start a war, and a new cold war is evolving.

There can be little doubt that the asset and debt deflation is underway that so many have expected. But I don't think anyone expected it to take the course it has taken so far, and I bet no one knows where it's going from here.

I talked to one fund manager who described the experience of the shock spread widening mid July as like piloting a jet on a sleepy cross country red-eye, reaching for your coffee and watching the coffee suddenly pour onto your face as the plane turns upside down, three of four engines out and one still sputtering, and complete blackout. He went on to describe what the passengers (his team... analysts, ops, quants, etc.) were doing in the back but that's a bit graphic for iTulip.

He says he's still hurdling through the air in darkness and losing altitude. I bet he's not alone.

[jk]

a few more thoughts on and from decoupling

if the u.s. is [will be] in recession, with consumers' money being eaten up by rising food and energy costs along with the pressure of trying to pay their reset mortgages, we will be buying fewer flat screen tv's, [lead painted] toys, furniture and so on. the u.s. balance of trade will improve rapidly because u.s. imports will drop sharply. this produces less dollar income for exporters like china to recycle, and simultaneously less incentive for them to worry about maintaining access to a shrunken u.s. market. so there will be severe pressures in the direction of selling to other, non-u.s., markets like the e.u., and to develop their own domestic markets. but the e.u. is already concerned about asian producers selling into their market, and the switch to encouraging domestic asian consumption will not be easily accomplished. i think the pressures will push in that direction but the risk is a major global recession/depression triggered by a u.s. recession.

i guess that brings us back to the deflation-scare that will be ka, and the consequent pumping that will be poom. the u.s is already exporting capital - mutual fund flows have been to international and emerging market funds for some time, for example, and u.s. domiciled companies are doing their capital investments abroad.

when the fed next drops the funds rate, and drops again, can we foresee a u.s. dollar carry trade, as a progressively weakening dollar and low u.s. rates lead to a process paralleling the current yen carry trade? [i must keep reminding myself that this can only happen 2 steps away, after the ka process leads to a stronger dollar in the near to intermediate term.] but poom incorporates the notion of dollars coming home, even as domestic dollar holders try to escape the currency.

i find myself drawn back to the central question of poom - will the fed be able to successfully reflate out of the [presumably] approaching recession. no one i'm aware of [not even ej] predicted that the rate drops from the tech bust would ignite a housing bubble. but we are now saying that future rate drops will be able to reflate something, enough to get the economy limping along at least. we just haven't quite figured out what that something might be. alt energy and infrastructure are our main nominees. and infrastructure, broadly defined to include rebuilding every bridge, tunnel, sewer line, water pipe and electrical transmission line in the country, is certainly big enough to accommodate endless dollars. in fact, it's the one thing that could be bigger than housing.

so there's another answer to the question i addressed in the previous post: what are we going to sell foreigners next? answer: infrastructure bonds supported by tax payments, and more to the point infrastructure bonds and equity participation supported by fees tied to infrastructure utilization - highway and tunnel tolls, energy transmission fees, water and sewer charges, electricity transmission fees disaggregated from electricity generation charges.

so this might help support the dollar: foreign buying of u.s. infrastructure investments, and a renewed stock bubble centered on u.s multinationals and u.s. infrastructure plays including basic industries like steel, heavy contruction companies, equipment and materials, trucks and railroads, electrical equipment and so on. the next bull market.

so maybe asia needn't uncouple. we can import their dollar-denominated capital to pay for all this, and a re-invigorated american economy centered on the theme of "rebuilding america" will support some renewed imports of flat screen tv's after all.

sorry for rambling on here, but i'm trying to think this out and keep going around in circles. but i've focused in the past of the risks in poom to the downside. now i'm wondering if in fact there's a more optimistic outcome possible, an inflationary poom with healthier growth than i've previously believed possible, at least for a while until that process, too, is overdone and overexploited, distorted, leveraged and re-repackaged and it, too, has to crash.

none of thiese outcomes is obvious and i guess the one utility of this exercise is open my mind to the multiplicity of possibilities.

[jk]

ps

re the war, the renewed cold war with russia, the emerging cold war with china: let's not forget the "defense" industry as a place to spend endless dollars. this could be tied in with a "rebuild america's aerospace, electronics/avionics, i.t. and spy-t, and general tech industry" theme, with an echo of the post-sputnik surge in science education now that it's harder to get visas for foreign science grads. [and foreign science grads are more attracted to staying in or returning to their home countries.]

[EJ]

Re: a few more thoughts on and from decoupling

no one i'm aware of [not even ej] predicted that the rate drops from the tech bust would ignite a housing bubble.

We said when we restarted iTulip March 2006:

Our thinking was that in the past the Fed has been very quick to stop speculation in real estate, much more quickly than stock market speculation. Why? Real estate involves the banking system much more than the stock market bubble did and looking after the banking system is Job One for the Fed. Letting millions of homeowners buy real estate they can't afford with mortgages they can never pay back is a surefire road to mass defaults that can cripple the banking system. When a little housing bubble declined in the early 1990s, the U.S. banking system seized up. That response to the downside of that minor real estate cycle was a gran mal seizure compared to the massive stoke that the banking system is likely to suffer on the back end of this wild real estate freak show. More importantly, the political aftermath of a real estate bubble is economic devastation of the host country's economy. Lots of unemployment and negative wealth effects that keep consumers home sulking and saving, not out at the mall buying goods from Asia that keep Asian central banks inspired to lend, and the virtuous circle of lending, borrowing, importing and exporting going. Not good for recessionary, inflationary and other re-election sensitive economic matters. So why take the chance? Because it looked better, at the time, than the obvious alternative: a big recession and unemployment before the 2004 elections. Never good for anyone's re-election bid.

If we'd been listening more carefully, we would have heard Greenspan noting in public hearings in 1999, when one senator wondered aloud if Big Al was worried about the inevitable collapse of the stock market bubble, and he replied that only a small percentage of U.S. households own stocks whereas 70% of household wealth is tied up in real estate. Don't worry about it. We got a plan.

Alas, we at iTulip.com missed the cue. What we didn't understand was that the Fed convinced themselves at the time, and may still believe today, that by the magic of securitization, the risk of defaults on all those mortgage loans that can never be repaid with current dollars is spread so far and wide around the planet that the aftermath of a housing bubble won't be anything the Fed can't deal with. Not so, and we'll explain over the next several months just how and why, and what that's going to mean to you.

iTulip.com About

And Oct. 2006:

Once the credit markets roll over, many of the credit bubble driven mega-deals you read about in the paper for the past couple of years, now reaching a crescendo of greed, will go the way of the AOL-Time Warner merger that closed in January 10, 2000, near the top of the equity bubble. Instead of dysfunction in equity based financing as we experienced after the tech stock bubble, we will see dysfunction in credit based financing, the heart of capitalism.

jk says:

what are we going to sell foreigners next? answer: infrastructure bonds supported by tax payments, and more to the point infrastructure bonds and equity participation supported by fees tied to infrastructure utilization - highway and tunnel tolls, energy transmission fees, water and sewer charges, electricity transmission fees disaggregated from electricity generation charges.

That's our thesis. One major contingency: coordinated reflation requires cooperation among central banks. If things get divisive enough, the cooperation won't happen, or not in a way that's will be as favorable to the US as in the past.

[bill]

Re: a few more thoughts on and from decoupling

or not in a way that's will be as favorable to the US as in the past.

The US economy cycle could be more severe this time. In the past it has been less difficult to contract -expand via domestic and international investor’s confidence keeping the flow coming. Now that we mismanaged and lost our needed investor confidence it will be harder to convince investors to purchase our illusionary investment packaging as in the past. The U.S. assets to be used in poom going forward will have to be real value with transparency not an illusionary promise. With fraud charges looming http://www.iht.com/articles/2007/08/17/business/sec.php it will only get more difficult to attract investors to the U.S in the future.

[jk]

Re: Market Outlook: More From The Fed

get enough liquidity and you'll get a new bubble with phony valuations of something-or-other. the tech bubble grew on "new era" and "new economy" fantasies, and people created new metrics for valuing stocks. they weren't valued on earnings, they were valued on eyeballs. the mortgage market started with gov't sponsored entities guaranteeing mortgages underwritten responsibly. the gnma market, for example, has been around a long time. the ratings agencies were lured [or perhaps "corrupted"] into using tenuous models of new-fangled financial contraptions that kept extending further and further from prior real-life experience into a neverland of mathematical assumptions based on prior subprime experience in a very different historical context. [rather like milken created a new junk bond market falsely valued on the historical experience of a very different kind of junk bond.] what starts with real value will evolve, given loose enough credit conditions, into bullshit.

[bill]

Re: Market Outlook: More From The Fed

The only thing which poses a severe risk to killing developing world growth is the oil question - and that is a huge risk.

Major Development China secures oil !!!!!!!

I guess this meeting http://news.xinhuanet.com/english/20...nt_6561418.htm did produce results for China

http://www.bloomberg.com/apps/news?p...Iz8&refer=home

China, Kazakhstan to Build Pipelines From Caspian Sea (Update1)

By Henry Meyer
Aug. 18 (Bloomberg) -- The leaders of China and Kazakhstan agreed to finance and build a network of pipelines to supply the world's fastest-growing major economy with oil and gas from the Caspian Sea region.
``The Caspian will be linked to western China,'' Kazakh President Nursultan Nazarbayev told reporters in the capital Astana today after meeting with his Chinese counterpart Hu Jintao. ``These are major projects and today we reached agreement on these issues.''
Kazakhstan's Atasu-Alashankou oil route will be extended and a gas link from Turkmenistan to China through Kazakhstan will be built, Nazarbayev said. The gas link will bypass Afghanistan, Tajikistan and Kyrgyzstan, landlocked countries between Turkmenistan's Caspian shore and China.
China, the world's second-largest energy user, is scouring the globe in search of energy supplies for its economy, which is expanding at an annual rate of 11.9 percent, the fastest pace in more than a dozen years. Kazakhstan and Turkmenistan are the biggest energy suppliers in the former Soviet Union after Russia. The Caspian region they share with Azerbaijan, Iran and Russia holds about 4 percent of the world's proven oil and gas reserves.
The gas pipeline will be able to move 30 billion cubic meters of fuel a year and cost as much as $4 billion to build, Energy Minister Baktykozha Izmukhambetov said in November.
Chinese Investment
The 750-kilometer (1,200-mile) extension of the Atasu- Alashankou oil pipeline will connect China with two oil fields, Kenkiyak and Kumkol, owned and operated by Kazakh units of state- run China National Petroleum Corp. The pipeline will have a capacity of 400,000 barrels a day, or about 5 percent of China's consumption.
China National Petroleum Corp., the biggest Chinese oil producer, said yesterday it will expand oil and gas co-operation with Kazakhstan after spending more than $6.5 billion so far on oil exploration, refining and pipelines in the country.
Nazarbayev, 67, met the Chinese leader as Kazakhstan held parliamentary elections that are expected to cement his 18-year rule. Hu praised Nazarbayev for his ``democratization'' of the former Soviet republic.
To contact the reporter on this story: Henry Meyer in Astana, through the Moscow newsroom at hmeyer4@bloomberg.net ;
Last Updated: August 18, 2007 10:20 EDT

More details:http://www.gulf-times.com/site/topic...8&parent_id=28

[c1ue]

Re: Market Outlook: More From The Fed

China is not the only one that could buy:

Mitsubishi UFJ Financial Group, Japan's largest bank, would consider
buying a commercial bank in the United States or Europe to expand its
international operations, a senior executive said on Thursday.

Go to Article from Reuters:
http://www.reuters.com/article/innovationNews/idUST19321120070816

[c1ue]

Re: Market Outlook: More From The Fed

get enough liquidity and you'll get a new bubble with phony valuations of something-or-other. the tech bubble grew on "new era" and "new economy" fantasies, and people created new metrics for valuing stocks. they weren't valued on earnings, they were valued on eyeballs. the mortgage market started with gov't sponsored entities guaranteeing mortgages underwritten responsibly. the gnma market, for example, has been around a long time. the ratings agencies were lured [or perhaps "corrupted"] into using tenuous models of new-fangled financial contraptions that kept extending further and further from prior real-life experience into a neverland of mathematical assumptions based on prior subprime experience in a very different historical context. [rather like milken created a new junk bond market falsely valued on the historical experience of a very different kind of junk bond.] what starts with real value will evolve, given loose enough credit conditions, into bullshit.

Quite true - the need for something of initial value is important.

However, I'm still not convinced that infrastructure is the answer.

Yes, investment is absolutely needed.

However, monetization of infrastructure is very difficult outside of toll roads and bridges.

Unless the interstates get converted to toll, plus old dams retrofitted for hydro, I'm just not seeing a lot of income to convert into a bond-type asset.

Besides the absolute cost, this is why much of infrastructure is government built.

I think the defense thesis is more realistic; Aircraft carrier groups for rent!

[bill]

Re: Market Outlook: More From The Fed

I think the defense thesis is more realistic; Aircraft carrier groups for rent!

With China and Russia and Kazakhstan in the middle grouping together without the U.S. to secure oil you can count on conflict.

http://www.financialsense.com/series3/part2.html

[bill]

Re: Market Outlook: More From The Fed

Major Development China secures oil !!!!!!!

I guess this meeting http://news.xinhuanet.com/english/20...nt_6561418.htm did produce results for China

http://www.bloomberg.com/apps/news?p...Iz8&refer=home



More details:http://www.gulf-times.com/site/topic...8&parent_id=28

Kazakhstan implements new policy on existing oil deal. As Kazakhstan ramps up oil production with its new partner China and is in a position of strength they will apply pressure to change the structure and terms of existing production agreements more to their liking.
http://www.bloomberg.com/apps/news?p...gos&refer=home

Kazakhstan May Halt Work on Eni's Kashagan Oil Field (Update1)

By Nariman Gizitdinov
Aug. 21 (Bloomberg) -- Kazakhstan may suspend work at Eni SpA's Kashagan oil project because of ecological damage as the Caspian Sea state seeks more profit from its biggest oilfield.
``Taking into account the failure to meet the previous obligation by the company, we must withdraw the permit as the company's work brings irreparable ecological damage,'' Environment Minister Nurlan Iskakov said today at a government meeting in Astana. ``We will send the necessary materials to the energy ministry to decide on the halting of work at Kashagan.''
Kazakhstan, the second-largest oil producer in the former Soviet Union, is following Venezuela and Russia in seeking better terms from international oil companies after crude prices rose to records. The Kazakh government demanded 40 percent of profit from the project last week after it claimed costs had more than doubled.
``The energy ministry must take the measures in accordance with legislation today,'' Kazakh Prime Minister Karim Masimov said, according to the statement.
Kazakhstan said on July 30 that costs at the Kashagan project had more than doubled to $136 billion, prompting the government to consider revising the Italian company's contract. Kazakhstan, the second-largest oil producer in the former Soviet Union after Russia, needs to tap the field to meet its goal of almost tripling production by 2015.
Planned Audit
``We are doing a planned audit and have the basis to believe that the Kashagan operator doesn't meet ecological legislation,'' Iskakov said, according to the statement posted on the government Web site today. ``We notified the general prosecutor's office about that.''
Last year, Russia threatened to halt parts of a $20 billion oil and gas project on Sakhalin Island on environmental grounds before the foreign oil companies running the venture, led by Shell, agreed to sell a majority holding to OAO Gazprom, Russia's state-run gas company.
The Kazakh government said on July 30 it wants 40 percent of profits from Kashagan, compared with an original 10 percent. The cost of developing the field, which won't start pumping oil until 2010, was previously estimated at $57 billion, according to the energy ministry.
A spokesman at Rome-based Eni wasn't able to comment today and a spokesman for the Astana-based Kazakh energy ministry wasn't available for comment.
Exxon Mobil Corp., a partner in Kashagan, said on Aug. 1 that it had sent engineers to Kazakhstan to advise Eni on the project. Eni, Exxon, Total SA and Royal Dutch Shell Plc all hold 18.52 percent stakes in Kashagan, while ConocoPhillips has 9.26 percent. KazMunaiGaz National Co. and Japan's Inpex Corp. each own 8.33 percent.
To contact the reporter on this story: Nariman Gizitdinov in Almaty, through the Moscow newsroom at +7-
Last Updated: August 21, 2007 09:27 EDT

[jk]

Re: Market Outlook: More From The Fed

kazakhstan is following in russia's footsteps.