A Tale of Two Recoveries: Our Unfortunate Macroeconomic Reality in One Bloated Nutshell
October 22, 2009
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These are the best of times, and these are the worst of times. The distinction lies in your position on the globe.
You may have heard from any number of financial pundits that the late-2008 paralysis observed throughout the world's economies, and the depth of the commodities correction, had proven decoupling to be nothing more than an unrealized myth. They mistook panic's pause as a lasting linkage between the economies of the old and new guard, and they deemed China's economy in particular unable to sustain growth while shedding its dependence upon the Western export market. They were wrong.
East
China is on fire. That in itself increases the likelihood of a correction there as well, as a nation can only stockpile so nany natural resources. However, at the most fundamental level, China is not exposed to the same constraints to growth that America and Europe now face.
So much that was built upon leverage must still recede in the West, while the East scurries to convert its large coffers of Western currency into strategic assets of all kinds. Please don't gloss over the last point simply because I've said it many times before. That fact lies at the heart of understanding the economic world at this moment in time. Also key is comprehending the significance of China's announcement last month that Chinese state-controlled entities would be permitted to unilaterally walk away from failed derivative obligations. The moment that occurs, global credit markets freeze again, and we will see just how premature it was for economists to retire the term "systemic risk". Letus all hope that was merely some sort of diplomatic faceoff.
Those who mistook the admittedly horrendous commodities correction as the popping of a bubble ... the end of an era ... think again. The engines of industrial demand are revving up throughout the greater Australasian region, in at least three of the four BRICs, and in the emerging and frontier markets bolstered thereby. It's a tale of two response strategies and two stimulus programs. It's a tale of two positions within the broadest of economic cycles. It's a tale of two poles in the balance of economic power. It's a tale of two legendary empire-builders. Ultimately, it's a tale of two reserve currency regimes.
It's a Tale of Two Recoveries - Please read, rec, and return. :) [This piece was my original reason for posting.]
West
The outlook for Europe and the U.S., unfortunately, remains both painfully obvious and woefully contrary. This is an instance of terminal leverage. It is the end of an era, and requires a shift in economic paradigms.
This is not a global depression, but a Western Depression ... a deleveraging event that will continue to target assets in those nations whose financial institutions brought those derivative demons into existence until the demons turned on their masters. Derivatives, dear Fools, are denominated (in their enormous majority) in dollars and Euros ... the currencies of the "old guard" in the now-shifting balance of global power. They are still, many hundreds of trillions of dollars worth of them, effectively worthless because they have no liquid market in the absence of government guarantees and shady swapping mechanisms shrouded in the FED's unaudited books.
As noted by fellow blogger KDakota, Niall Ferguson understands that we are witnessing before our very eyes the decline of the American financial empire. I can't predict how it will play out, nor how long it will take, but the events of 2008 were the tipping point in a peaking phase that began some years earlier (perhaps when the dollar began losing its grip and derivatives flourished shortly after the millenium). Maybe decoupling is the wrong word ... does dethroning create a clearer image of what's happening?
Decoupling Confirmed
My evidence for declaring decoupling a defensible present reality, rather than a debunked theory, is all contained within the links embedded into my Peabody Energy article linked above (or here). I will post additional links to relevant articles below.
If you have eliminated the three 'd' s (decoupling, derivatives, and depression) from your personal economic lexicon, I urge you to reinsert them for fresh consideration. As much as I wish that I could bury those words in the past the way the financial media has ventured to do, the words are staring at us from the edge of their oblivion and wondering whether the world has simply gone illiterate.
Is there anyone left out there who thinks the broader equity rally remains sustainable? Is anyone out there still lending an ear to poor mixed-up Mr. Krugman, and thinks more stimulus is the answer? Stimulus was never the answer.
If the rally is so clearly divorced from fundamental reality, then why does it not implode?
If you adjust the rally for the deterioration of the USD that occured simultaneously, you are left with a 35% rally. Now, ask yourself, how much of that 35% rally can be directly attributed from a fundamental viewpoint to the massive interventions and guarantees to thaw the frozen capital markets? Then ask yourself, what remaining portion of this rally has been constructed atop constructed and spun expectations of a recovery that is unfortunately not in the cards with any semblance of sustainability.
I believe that this is the cold, hard truth. I understand that many will retain differing interpretations of the evidence I cite, but I challenge anyone to construct a an alternate case on the merits of countering evidence alone. In fact, as I've repeatedly said, I would like nothing more than to be wrong. This is, after all, my beloved country. At stake is the very well being of my fellow countrymen and Fools. I concede that the conclusions I have drawn sadden me. I write because I hope some will really approach the topic with an open mind and consider the evidence on the merits. I welcome reasoned debate, again, on the merits. Please, debunk me so I'll feel better about our collective financial future. I want to be wrong ... I hope I am wrong ...... Time will tell.
POSCO's Furnaces Blaze Into Recovery
Derivatives Are Daggers to the Dollar
Profit From China's Exploding Resource Blitz
Time to Crank-Start the American Industrial Machine
Systemic Risk for European shipping-related financial interests (Hamburg, London, Piraeus, etc.)
Saddle Up for the Straight Talk Express
Don't be Tempted by Illusory Steel Demand
Recovery Gets Harder to Haul
Coal Investors in a Quandry
Hidden Treasure in Leftover Clunkers
A Contrarian View on Housing
Round II of the Mortgage Meltdown is still waiting for us
Considering a New Investment Paradigm
The Untold Story Behind This Golden Breakout [Even if you eschew gold, it's critical to understand.]
Fools please understand that the stagflation we face is a currency event, and not a demand-pull consumer pricing event. Jim Sinclair has been one of several voices of reason on this front. If you take one thing away from Jim Sinclair, let it be this:
"Financial TV’s new spin is that crude is the new gold. What they have missed is that crude is your first example of how a currency has the potential of delivering hyperinflation as cost push without any meaningful demand pull."
As I stated in the Peabody piece, the tenuous condition of the dollar underlines a key currency component of the decoupling phenomenon.
Gold's Next Monster Move
Gold Overload
By the way, for anyone interested ... Here is Jim Sinclair's formula, which he offered back in 2006 as his scenario for how continued currency devaluation (which he saw as baked into the cake) would play out. I don't know about you, but I think he's nailed 10 out of 10 so far, and the other two are looking pretty likely to me.
It's the guys who have been consistently right that I still want to be paying attention to.
Final thought: The impossible reflation/releveraging strategy at the heart of the collective response to this fiscal crisis is, still, at the heart of the matter when considering our broader economic outlook.
Someone, please ... debunk me! :)
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