help

[jk]

i'm having trouble understanding the following passage from an interview with jim paulsen in this week's barrons:

In the next 25 years we are going to have slow but steady improvement in our trade deficit, and that is going to be the dividend payback for the long period of investment we made in these other countries. In the past several years, let's say, our domestic demand has been growing 5% each year while we lost about 1% abroad. So our real GDP is growing at 4%. Let's say next year the trade deficit improves by a percent and our domestic demand is still growing at 5%; well, then GDP grows at 6%. We can go from 4% to 6% without any change in domestic spending trends. You can imagine what that does to wage demands and interest rates.

i don't follow these numbers. can someone enlighten me? where does he get "we lost about 1% abroad"? the 2005 trade deficit was 5.8% of u.s. gdp. but this is a nominal figure. he specifies real gdp. also wouldn't it require going to a 1% surplus for to get to 6% gdp by his reasoning? and isn't that a huge and impossibly fast turnaround? and even if we somehow turn this into a -1 becoming a +1, isn't that a +2 change? what am i missing? i would appreciate it if someone could clarify this passage for me.

[bart]

Re: request for help

i'm having trouble understanding the following passage from an interview with jim paulsen in this week's barrons:
...

I agree with your sentiments, the quote makes little sense. The only thing I got is that he has some vague idea that the trade deficit will drop, and that it will cause something to happen to wages and interest rates.

[blazespinnaker]

Re: help

Well, some people think that the trade deficit is a caused by a global savings gut (too much investing in the US) and not really a trade deficit at all.

[WDCRob]

Re: help

Is he saying...

US-based GDP is growing at 5%, but declining enough outside the US to create a net 1% drop. So the net rate of GDP growth is 4%.

And if US-based GDP continues to grow at 5%, but other countries stop saving so much by investing in the US, and instead begin consuming more the foreign-based GDP portion of overall GDP will grow and ADD to the domestic GDP of 5% -- creating net GDP growth above 5%.

That's how I read it anyhow.

[Finster]

Re: request for help

i'm having trouble understanding the following passage from an interview with jim paulsen in this week's barrons:

In the next 25 years we are going to have slow but steady improvement in our trade deficit, and that is going to be the dividend payback for the long period of investment we made in these other countries. In the past several years, let's say, our domestic demand has been growing 5% each year while we lost about 1% abroad. So our real GDP is growing at 4%. Let's say next year the trade deficit improves by a percent and our domestic demand is still growing at 5%; well, then GDP grows at 6%. We can go from 4% to 6% without any change in domestic spending trends. You can imagine what that does to wage demands and interest rates.

i don't follow these numbers. can someone enlighten me? where does he get "we lost about 1% abroad"? the 2005 trade deficit was 5.8% of u.s. gdp. but this is a nominal figure. he specifies real gdp. also wouldn't it require going to a 1% surplus for to get to 6% gdp by his reasoning? and isn't that a huge and impossibly fast turnaround? and even if we somehow turn this into a -1 becoming a +1, isn't that a +2 change? what am i missing? i would appreciate it if someone could clarify this passage for me.

I couldn't understand it, so I read the whole article in Barron's in the hope of finding some glimmer of coherence. My search was rewarded. I found a glimmer of coherence.

Good thing I wasn't expecting more.

Actually Paulsen expresses a number of perceptive insights in that article. His comments on the trade deficit not included. For some reason, an otherwise intelligent mind seems to turn scrambled when he tries to justify the debt plight of America.

It just doesn't wash. The trade deficit does NOT represent an inflow of capital into America. Exactly the opposite. Capital - the means of production - is being traded away for stuff that we promptly burn up and wear out.

This may well be wonderful for the countries on the receiving end. How it is good for the party whose seed corn is being squandered on trinkets and crude is beyond me.

Paulsen further falls victim to one of the most common errors of fuzzy thinking extant in the economic community inhabiting the Wall Street - Washington axis of evil. Consumption somehow equals wealth. Ridiculous side-swiping cracks like the "...US consumer has been the sole locomotive of world economic growth..." just roll out without the slightest attempt at critical examination. There ought to a malpractice law for economic malfeasance.

It is production and the capacity to produce that makes a nation wealthy. Not its proclivity to absorb the fruits of production and turn them into landfill fodder and smog.

Imagine a farmer who owns forty acres of land. Each year, he raises enough food to feed his family and sell some into the market to buy other things the family needs. Then one day he thinks it would be nice to enjoy some extra, and in addition to the crops and livestock he raises, he sells off an acre of his land, using the extra proceeds for a new SUV and flat-panel TV.

Since it seemed to work out so well, he does it again the next year. And the next. After ten years, however, he finds that he must sell off an acre of land just to live as well as he did before he started. Thirty acres just don't produce as much as forty. So to maintain his lifestyle, he now must sell two acres.

Now by the lights of Paulsen and his fuzzy-minded contemporaries, our farmer is "investing in the future". Finster says he's getting poorer.

Which do you think?

[jk]

Re: request for help

I couldn't understand it, so I read the whole article in Barron's in the hope of finding some glimmer of coherence. My search was rewarded. I found a glimmer of coherence.

Good thing I wasn't expecting more.

Actually Paulsen expresses a number of perceptive insights in that article. His comments on the trade deficit not included. For some reason, an otherwise intelligent mind seems to turn scrambled when he tries to justify the debt plight of America.

It just doesn't wash. The trade deficit does NOT represent an inflow of capital into America. Exactly the opposite. Capital - the means of production - is being traded away for stuff that we promptly burn up and wear out.

This may well be wonderful for the countries on the receiving end. How it is good for the party whose seed corn is being squandered on trinkets and crude is beyond me.

the analogy to the marshall plan is key. paulsen is saying that we're building up a world of developed trading partners. of course when we did the actual marshall plan the u.s. was the factory to the world. we built up, among other things, customers. i guess this time around we'll get to sell the indonesians and thais and chinese option arms for their new housing.

Paulsen further falls victim to one of the most common errors of fuzzy thinking extant in the economic community inhabiting the Wall Street - Washington axis of evil. Consumption somehow equals wealth. Ridiculous side-swiping cracks like the "...US consumer has been the sole locomotive of world economic growth..." just roll out without the slightest attempt at critical examination. There ought to a malpractice law for economic malfeasance.

It is production and the capacity to produce that makes a nation wealthy. Not its proclivity to absorb the fruits of production and turn them into landfill fodder and smog.

i agree that nominal values don't make for wealth. but someone does have to consume what is produced. otherwise there is no market for what is produced, and it is worthless. the american people have unselfishly volunteered for this task.

Imagine a farmer who owns forty acres of land. Each year, he raises enough food to feed his family and sell some into the market to buy other things the family needs. Then one day he thinks it would be nice to enjoy some extra, and in addition to the crops and livestock he raises, he sells off an acre of his land, using the extra proceeds for a new SUV and flat-panel TV.

Since it seemed to work out so well, he does it again the next year. And the next. After ten years, however, he finds that he must sell off an acre of land just to live as well as he did before he started. Thirty acres just don't produce as much as forty. So to maintain his lifestyle, he now must sell two acres.

Now by the lights of Paulsen and his fuzzy-minded contemporaries, our farmer is "investing in the future". Finster says he's getting poorer.

Which do you think?

depends on how long the future is. i figure the farmer has fewer acres to work, so he's getting less exercise. this also gives him more time to enjoy the flat panel tv, watching football and drinking beer. if the guy has a heart attack before he runs out of land to sell, he's had a high old time.

[Finster]

Re: request for help

the analogy to the marshall plan is key. paulsen is saying that we're building up a world of developed trading partners. of course when we did the actual marshall plan the u.s. was the factory to the world. we built up, among other things, customers. i guess this time around we'll get to sell the indonesians and thais and chinese option arms for their new housing.

This Marshall Plan crap is key to Door Number 3, behind which lies vague and indefinite irrelevance. This is the player’s booby prize. Where is the hard data? The facts? Was the US a debtor nation? Was the US consuming 7% more than it produced?

No! The US was a creditor nation until sometime in the late 1980s. Then the "temporary" deficits we were running somehow became not so temporary.

The bottom line is you are either trading seed corn for trinkets or you are not. What good does it do to have a world full of trading partners if the trade all boils down to that? Is that what he’s claiming happened during the Marshall Plan?

i agree that nominal values don't make for wealth. but someone does have to consume what is produced. otherwise there is no market for what is produced, and it is worthless. the american people have unselfishly volunteered for this task.

If there were no market for what is produced, then what is produced is worthless and should not have been produced in the first place. Only in a dysfunctional, centrally planned, artificially stimulated and inflated economy do you get such malinvestment and misallocation of resources.

Say’s Law: Production creates its own demand. Of course, that applies in real terms, not nominal ones. In the past few years, US demand came not from its "productivity" but from printing money and distributing it to homeowners. The homeowers produced nothing new for the fresh fiat cash, but the Chinese did, so they wound up with the cash. Then they used that cash to compete with the (now devalued) cash left in the US, causing the prices of oil and other goods to skyrocket, right along with the house prices.

This "demand" borne of the printing press - not production - is phony demand and only serves to drive up prices. But don’t expect Keynesians like Paulsen to get it. They can’t tell the difference between growth and inflation.

Inflation is not wealth!

depends on how long the future is. i figure the farmer has fewer acres to work, so he's getting less exercise. this also gives him more time to enjoy the flat panel tv, watching football and drinking beer. if the guy has a heart attack before he runs out of land to sell, he's had a high old time.

May be, but he sure as heck not investing for a very long one! And his kids, like ours, will be poorer, not richer, for it!

[jk]

Re: request for help

This Marshall Plan crap is key to Door Number 3, behind which lies vague and indefinite irrelevance. This is the player’s booby prize. Where is the hard data? The facts? Was the US a debtor nation? Was the US consuming 7% more than it produced?

No! The US was a creditor nation until sometime in the late 1980s. Then the "temporary" deficits we were running somehow became not so temporary.

The bottom line is you are either trading seed corn for trinkets or you are not. What good does it do to have a world full of trading partners if the trade all boils down to that? Is that what he’s claiming happened during the Marshall Plan?

finster, you obviously have not cottoned to the fact that the u.s.' competitive advantage is in its highly developed financial markets and rule of law. we'll be hedge fund manager to the world! [and we all know how much those guys make.]

[Finster]

Re: request for help

finster, you obviously have not cottoned to the fact that the u.s.' competitive advantage is in its highly developed financial markets and rule of law. we'll be hedge fund manager to the world! [and we all know how much those guys make.]

But seriously, probably the main reason the problem persists is because those financial markets are making a killing grabbing bits and pieces of the torrent of capital flowing out of the US.

Enough to finance a lot of political campaigns at least...

[jk]

Re: request for help

But seriously, probably the main reason the problem persists is because those financial markets are making a killing grabbing bits and pieces of the torrent of capital flowing out of the US.

Enough to finance a lot of political campaigns at least...

it's really not clear to me whether the "torrent of capital" originates here, or is made in japan, given the revival of the yen carry trade after a little scare a few months ago. do you have any info or opinions on that, and its implications?

[Finster]

Re: request for help

it's really not clear to me whether the "torrent of capital" originates here, or is made in japan, given the revival of the yen carry trade after a little scare a few months ago. do you have any info or opinions on that, and its implications?

The capital is basically the accumulated wealth of the United States of America. Its productive capacity, its assets.

It's flowing out for two reasons. One is money printing by the Fed. The "free" money means consuming power without the burden of production. It flows to homeowners who did nothing to earn it, and from then to the Chinese, who did. The Chinese in turn lend it back to Americans and buy their property. Through this circuitous route the Chinese get claim to American assets in exchange for trinkets.

The other reason is a badly out-of-whack tax system. It burdens production (income taxes) but not consumption. Therefore, there is a financial incentive to consumer goods of foreign origin, which are not so taxed. This merely adds insult to the injury cited above.

[jk]

Re: request for help

The capital is basically the accumulated wealth of the United States of America. Its productive capacity, its assets.

It's flowing out for two reasons. One is money printing by the Fed. The "free" money means consuming power without the burden of production. It flows to homeowners who did nothing to earn it, and from then to the Chinese, who did. The Chinese in turn lend it back to Americans and buy their property. Through this circuitous route the Chinese get claim to American assets in exchange for trinkets.

of course you're right. i focused on the liquidity instead of the true capital. but then the same question arises re the money printing: is it the fed or the boj? it's easy to say both, but i remember seeing some graphs from gavekal a while ago showing that it was the japanese money supply that was powering all the markets via the carry trade.

[Finster]

Re: request for help

of course you're right. i focused on the liquidity instead of the true capital. but then the same question arises re the money printing: is it the fed or the boj? it's easy to say both, but i remember seeing some graphs from gavekal a while ago showing that it was the japanese money supply that was powering all the markets via the carry trade.

I don't buy the yen carry trade explanation. The problem there is the failure to distinguish between different types of liquidity, encouraged by the use of a broad and fuzzy term like "liquidity".

Not that there isn't a lot of liquidity or that there isn't a yen carry trade. It's just that it's impossible to explain surging prices in USD in terms of up-to-the-gills yen liquidity. Only a world swimming in dollars can cause the value of dollars to fall and the price of things in dollars to rise.

If that sounds implausible, consider the Wiemar experience. The German government was printing Reichsmarks by the billions and trillions but that did not cause prices in dollars or pounds to rise.

[jk]

Re: request for help

I don't buy the yen carry trade explanation. The problem there is the failure to distinguish between different types of liquidity, encouraged by the use of a broad and fuzzy term like "liquidity".

Not that there isn't a lot of liquidity or that there isn't a yen carry trade. It's just that it's impossible to explain surging prices in USD in terms of up-to-the-gills yen liquidity. Only a world swimming in dollars can cause the value of dollars to fall and the price of things in dollars to rise.

the ability to borrow yen at near zero rates, and turn around to buy higher yielding instruments in other currencies, pulls down rates all around the world, and so promotes the creation of new loans, producing- in the case of the u.s.- that very very flood of dollars.

If that sounds implausible, consider the Wiemar experience. The German government was printing Reichsmarks by the billions and trillions but that did not cause prices in dollars or pounds to rise.

what were weimar interest rates like? was there a reichsmark carry trade?

[jk]

yen carry trade

http://www.minyanville.com/articles/index.php?a=11492

Break out the paper hats and start gettin’ jiggy with it cuz’ (in case you hadn’t noticed), the fourth quarter party is underway. In what has become a seasonal spectacle, investors are cutting themselves a big fat slice of risk from the global market cake and shoveling it in without the least regard for how piggish they look. Even in these early days, the roundup of market performance for the quarter has the sugar-stained fingerprints of risk-seeking investors smeared all over it.

Hard asset protection has been dutifully dispensed in favor of paper with commodities lagging behind their Emerging Market cousins, precious metals underperforming base metals and spec bets being slashed (see addenda). Indeed, according to the CFTC, gold longs have been cut in half and oil longs have been completely unwound. Meanwhile, on the paper front, the rapacious appetite for risk has found stocks outperforming bonds and high-yield bonds trouncing high-quality. In fact, since the quarter began, Junk yields have actually declined -30bp while Investment grade bond yields have risen +13bp!!



The last time investors went on a risk binge of this magnitude was back in April. That’s right, the month right before May. And we all remember what it felt like coming off that sugar-high!! Watching the current feeding frenzy, it’s hard not to worry about a repeat of that unpleasant circumstance today. The question is whether the indigestion that will inevitably follow will arise as a reaction to the cake itself (the ‘risk’ assets being purchased) or the icing (the leverage).

In May, leverage was the culprit. Rumblings from the Bank of Japan that it was ready to end its Quantitative Easing campaign and, in time, move to tighten, were sufficient to shake specs from their carry-trade roosts. With their cheap yen financing now threatened, they rushed to unwind their various positions, sucking money from all corners of the globe.

After a brief but ferocious liquidation, these positions were rebuilt…and then some. In the months since, short positions in the Yen have pushed deeper and deeper into record territory. Glancing at the increased wagers in the last two weeks, depicted in the chart below, one can almost envision the drool welling up in the corner of investors’ mouths in Pavlovian response to the 4th quarter alarm bell. After all, what better way to add a little oomph to your year-end performance than lever-up --- borrowing at 25bp in a currency that is all but guaranteed to remain weak??



If these trader commitments are any indication, the yen-carry trade is now more than twice as large as it was in May! Thus any modest shift in the fundamentals underlying the dollar/yen could cause a Liquidity Event that makes May’s dyspepsia seem like a muffled burp. (Check out yen and the VIX).



Of course, with the Fed busy huffing and puffing about inflation, such a shift in dollar/yen dynamics is the last thing on investors’ minds. But that’s precisely the point. Everyone is lined-up on one side of this bet. And if the housing bubble’s deflation has half the impact we suspect it will (on consumer spending…and financial institutions), the Fed will be shifting gears sooner and more aggressively than the markets presently expect. Tomorrow’s Existing Home Sales report will be interesting in this regard. Should it fail to endorse the popular view that ‘the worst is behind us’… this big trade might begin to unravel.

In the meantime, those looking for anecdotal signs of a ‘peak’ in the yen carry trade it last week. No, I don’t mean Russia’s announcement that it would apportion more of its reserves to Yen (although that is important). I am referring to Iceland’s first-ever Samurai (yen-denominated) bond issue.

Talk about the ultimate expression of the yen carry trade! Iceland, one of the worlds highest-yielding currencies, is borrowing in yen to finance investment at home. It took a while, but apparently the guys at Iceland’s largest bank, Kaupthing, finally figured out that there was substantial Krona to be saved by borrowing at 0.25% in Japan instead of 14% at home!!

Could this be the ‘icing’ on the leverage layer-cake? With Iceland elbowing its way in for a slice of the carry-trade cake, this speculative bash is starting to lose its elite feel. Pretty soon, the other party-goers will be nudging each other: Hey, who invited those guys??? And, as they put their forks down and grab their coats, the long-delayed liquidity exodus will begin.