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portefeuille (99.60)

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July 24, 2009 – Comments (14)

Hi, I just re-read a blog post that is about 47 days old and that was very well received "recommendationwise" (I don't usually re-read old post, google led me there because I just read this

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The reports underscore the prevailing theme of earnings season thus far: Companies have been able to report better-than-expected earnings in large part because of aggressive cost-cutting measures, not stronger sales.

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here and that reminded me of my response to point 2 of those 12 points.)

So here is that old blog post followed by my old response (I did not get the point of some points).

 

 

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This is a follow up to my Blog about being a bear found here-I've only had a couple, officer, really I'm fine.  It seemed so harmless at first; watching the S&P slip lower at the close.  But then I couldn't wait till the close and wanted it in the afternoon and then in the morning.  I would say"after all its 5pm somewhere in the world".  The first step is admitting you have a problem so yes-

Left to my own vices I would drink Tonic and DOW Drops in the morning, I would do Nasdaq Bubble Bongs at noon, and then sip Russle 2K slips at night.  Here is my 12 step plan for recovery. 

1.  Ignore PE ratios.  The non-existent S&P profits mean nothing.

2.  Don’t look at un-employment numbers.  More people out of work each month is healthy for the economy.

3.  Ignore the V-shape “recovery”.  This time will be different than any other 50% or greater correction in history and be V shaped.

4.  Ignore the fact that we are less than 2 years into this recession.  This time will be different than any other 50% or greater correction in history and last a little over a year.

5.  Ignore Treasury yields.  The government will buy them and interest rates won’t continue to climb.

6.  Ignore the slow down in Mortgage applications because of rising interest rates.  Uncle Sam will fix that too.

7.  Ignore the fact that the fed is buying treasuries.  It’s healthy just like using your Visa to pay your MasterCard.

8.  Ignore the deficit.  Everyone knows that the more you owe the more credit worthy you are.

9.  Ignore the un-funded obligations of Medicare and Social Security.  Those people are a burden anyways.

10.  Ignore the Banks crashing around you.  The FDIC will never run out of money and neither will the banks with government connections.

11.  Ignore the credit crises.  Money just gets in the way of running a good business.

12.  Ignore the worthless mortgage backed securities held by the banks.  We all know our houses will double in price next year to get us back to even.

 And so it is that simple to stay on the wagon.  I'm starting to sweat just a little and my hands are shaking.  Maybe just a little hair of the dog to steady my nerves......Now where are those historical charts....ah here we are 1929..1932..ahh what fine vintage.....

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#5) On June 07, 2009 at 1:24 PM, portefeuille (99.98) wrote:

1.  Ignore PE ratios.  The non-existent S&P profits mean nothing.

know what they mean.

2.  Don’t look at un-employment numbers.  More people out of work each month is healthy for the economy.

cost cutting is a feature not a bug.

3.  Ignore the V-shape “recovery”.  This time will be different than any other 50% or greater correction in history and be V shaped.

look at the chart. 1

4.  Ignore the fact that we are less than 2 years into this recession.  This time will be different than any other 50% or greater correction in history and last a little over a year.

at the March 2009 low the S&P 500 index calculated in real EUR was down ca. 75% from its March 2000 high. it has gained ca. 27% in around 3 months since then. 2

5.  Ignore Treasury yields.  The government will buy them and interest rates won’t continue to climb.

3

6.  Ignore the slow down in Mortgage applications because of rising interest rates.  Uncle Sam will fix that too.

don't give too much importance to daily news flow.

7.  Ignore the fact that the fed is buying treasuries.  It’s healthy just like using your Visa to pay your MasterCard.

4

8.  Ignore the deficit.  Everyone knows that the more you owe the more credit worthy you are.

4

9.  Ignore the un-funded obligations of Medicare and Social Security.  Those people are a burden anyways.

?

10.  Ignore the Banks crashing around you.  The FDIC will never run out of money and neither will the banks with government connections.

banks are recapitalised (raising money + QE).

11.  Ignore the credit crises.  Money just gets in the way of running a good business.

?

12.  Ignore the worthless mortgage backed securities held by the banks.  We all know our houses will double in price next year to get us back to even.

they have to some extent been written down.

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I could elaborate and be more balanced, but I just wanted to state some points.

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I am not sure I would give very different answers today and the issues mentioned in those 12 points still make the headlines today even though the focus may have shifted in the meantime ...

Feel free to post a new response to those 12 points or re-post your old response!

 

14 Comments – Post Your Own

#1) On July 24, 2009 at 11:45 AM, portefeuille (99.60) wrote:

S&P 500 index



enlarge

 

10y yield



enlarge

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#2) On July 24, 2009 at 12:28 PM, kaskoosek (70.07) wrote:

Porte is the ultimate bull.

 

I am starting to discredit what you write. I still do not understand how government deficits will be resolved.

 

Maybe I am stupid, but Krugman has not offered me any enlightment. Without significant dollar devaluation the issue can nor be resolved.

 

 

 On Wednesday last week, yields on 10-year US Treasuries – generally seen as the benchmark for long-term interest rates – rose above 3.73 per cent. Once upon a time that would have been considered rather low. But the financial crisis has changed all that: at the end of last year, the yield on the 10-year fell to 2.06 per cent. In other words, long-term rates have risen by 167 basis points in the space of five months. In relative terms, that represents an 81 per cent jump.

Most commentators were unnerved by this development, coinciding as it did with warnings about the fiscal health of the US. For me, however, it was good news. For it settled a rather public argument between me and the Princeton economist Paul Krugman.

It is a brave or foolhardy man who picks a fight with Mr Krugman, the most recent recipient of the Nobel Prize for Economics. Yet a cat may look at a king, and sometimes a historian can challenge an economist.

Keep reading >

Synopsis:

Ferguson argues that rates are rising because the US is planning to borrow at least $10 trillion over the next 10 years (which we can't afford to do).  Krugman says rates won't rise no matter how much we spend because there's a "global savings glut."

For now, it seems, Ferguson is right.  And it's hard to see how those who have scrimped and saved their way to a global glut will want to vaporize the savings by investing them in collapsing dollars.

Even Krugman seems to concede this.  Ferguson again:

But the stimulus package only accounts for a part of the massive deficit the US federal government is projected to run this year. Borrowing is forecast to be $1,840bn – equivalent to around half of all federal outlays and 13 per cent of GDP. A deficit this size has not been seen in the US since the second world war. A further $10,000bn will need to be borrowed in the decade ahead, according to the Congressional Budget Office. Even if the White House’s over-optimistic growth forecasts are correct, that will still take the gross federal debt above 100 per cent of GDP by 2017. And this ignores the vast off-balance-sheet liabilities of the Medicare and Social Security systems.

It is hardly surprising, then, that the bond market is quailing. For only on Planet Econ-101 (the standard macroeconomics course drummed into every US undergraduate) could such a tidal wave of debt issuance exert “no upward pressure on interest rates”.

Of course, Mr Krugman knew what I meant. “The only thing that might drive up interest rates,” he acknowledged during our debate, “is that people may grow dubious about the financial solvency of governments.” Might? May? The fact is that people – not least the Chinese government – are already distinctly dubious. They understand that US fiscal policy implies big purchases of government bonds by the Fed this year, since neither foreign nor private domestic purchases will suffice to fund the deficit. This policy is known as printing money and it is what many governments tried in the 1970s, with inflationary consequences you do not need to be a historian to recall...

 

 

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#3) On July 24, 2009 at 12:57 PM, portefeuille (99.60) wrote:

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 On Wednesday last week, yields on 10-year US Treasuries – generally seen as the benchmark for long-term interest rates – rose above 3.73 per cent. Once upon a time that would have been considered rather low. But the financial crisis has changed all that: at the end of last year, the yield on the 10-year fell to 2.06 per cent. In other words, long-term rates have risen by 167 basis points in the space of five months. In relative terms, that represents an 81 per cent jump.

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Yes, that is what the second chart shows. Comparisons always yield "big numbers" if you pick the proper highs and lows. If my posting of that chart had a point (apart from showing what the 10y yield was on June 7) it was to show that we are "back at the levels of September/October 2008". I just noticed that I misplaced the arrows and circles in the 2 charts above. They should highlight the June7 data but they highlight the June 24 data (I mixed the day of today with the month of that old post, sorry!).

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#4) On July 24, 2009 at 1:02 PM, portefeuille (99.60) wrote:

Now I see that that was not written by you so forget about the "Yes, that is what the second chart shows." part ...

Could you post that FT article here?

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#5) On July 24, 2009 at 1:06 PM, portefeuille (99.60) wrote:

Of course, Mr Krugman knew what I meant. 

What exactly was your part in the "Krugman discussion"? Do I have to take a look at the FT article? Did you comment on that article? I am not an FT subscriber ...

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#6) On July 24, 2009 at 1:06 PM, kaskoosek (70.07) wrote:

History lesson for economists in thrall to Keynes

By Niall Ferguson

Published: May 29 2009 19:23 | Last updated: May 29 2009 19:23

On Wednesday last week, yields on 10-year US Treasuries – generally seen as the benchmark for long-term interest rates – rose above 3.73 per cent. Once upon a time that would have been considered rather low. But the financial crisis has changed all that: at the end of last year, the yield on the 10-year fell to 2.06 per cent. In other words, long-term rates have risen by 167 basis points in the space of five months. In relative terms, that represents an 81 per cent jump.

Most commentators were unnerved by this development, coinciding as it did with warnings about the fiscal health of the US. For me, however, it was good news. For it settled a rather public argument between me and the Princeton economist Paul Krugman.

It is a brave or foolhardy man who picks a fight with Mr Krugman, the most recent recipient of the Nobel Prize for Economics. Yet a cat may look at a king, and sometimes a historian can challenge an economist.

A month ago Mr Krugman and I sat on a panel convened in New York to discuss the financial crisis. I made the point that “the running of massive fiscal deficits in excess of 12 per cent of gross domestic product this year, and the issuance therefore of vast quantities of freshly-minted bonds” was likely to push long-term interest rates up, at a time when the Federal Reserve aims at keeping them down. I predicted a “painful tug-of-war between our monetary policy and our fiscal policy, as the markets realise just what a vast quantity of bonds are going to have to be absorbed by the financial system this year”.

De haut en bas came the patronising response: I belonged to a “Dark Age” of economics. It was “really sad” that my knowledge of the dismal science had not even got up to 1937 (the year after Keynes’s General Theory was published), much less its zenith in 2005 (the year Mr Krugman’s macro-economics textbook appeared). Did I not grasp that the key to the crisis was “a vast excess of desired savings over willing investment”? “We have a global savings glut,” explained Mr Krugman, “which is why there is, in fact, no upward pressure on interest rates.”

Now, I do not need lessons about the General Theory . But I think perhaps Mr Krugman would benefit from a refresher course about that work’s historical context. Having reissued his book The Return of Depression Economics, he clearly has an interest in representing the current crisis as a repeat of the 1930s. But it is not. US real GDP is forecast by the International Monetary Fund to fall by 2.8 per cent this year and to stagnate next year. This is a far cry from the early 1930s, when real output collapsed by 30 per cent. So far this is a big recession, comparable in scale with 1973-1975. Nor has globalisation collapsed the way it did in the 1930s.

Credit for averting a second Great Depression should principally go to Fed chairman Ben Bernanke, whose knowledge of the early 1930s banking crisis is second to none, and whose double dose of near-zero short-term rates and quantitative easing – a doubling of the Fed’s balance sheet since September – has averted a pandemic of bank failures. No doubt, too, the $787bn stimulus package is also boosting US GDP this quarter.

But the stimulus package only accounts for a part of the massive deficit the US federal government is projected to run this year. Borrowing is forecast to be $1,840bn – equivalent to around half of all federal outlays and 13 per cent of GDP. A deficit this size has not been seen in the US since the second world war. A further $10,000bn will need to be borrowed in the decade ahead, according to the Congressional Budget Office. Even if the White House’s over-optimistic growth forecasts are correct, that will still take the gross federal debt above 100 per cent of GDP by 2017. And this ignores the vast off-balance-sheet liabilities of the Medicare and Social Security systems.

It is hardly surprising, then, that the bond market is quailing. For only on Planet Econ-101 (the standard macroeconomics course drummed into every US undergraduate) could such a tidal wave of debt issuance exert “no upward pressure on interest rates”.

Of course, Mr Krugman knew what I meant. “The only thing that might drive up interest rates,” he acknowledged during our debate, “is that people may grow dubious about the financial solvency of governments.” Might? May? The fact is that people – not least the Chinese government – are already distinctly dubious. They understand that US fiscal policy implies big purchases of government bonds by the Fed this year, since neither foreign nor private domestic purchases will suffice to fund the deficit. This policy is known as printing money and it is what many governments tried in the 1970s, with inflationary consequences you do not need to be a historian to recall.

No doubt there are powerful deflationary headwinds blowing in the other direction today. There is surplus capacity in world manufacturing. But the price of key commodities has surged since February. Monetary expansion in the US, where M2 is growing at an annual rate of 9 per cent, well above its post-1960 average, seems likely to lead to inflation if not this year, then next. In the words of the Chinese central bank’s latest quarterly report: “A policy mistake ... may bring inflation risks to the whole world.”

The policy mistake has already been made – to adopt the fiscal policy of a world war to fight a recession. In the absence of credible commitments to end the chronic US structural deficit, there will be further upward pressure on interest rates, despite the glut of global savings. It was Keynes who noted that “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist”. Today the long-dead economist is Keynes, and it is professors of economics, not practical men, who are in thrall to his ideas.

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#7) On July 24, 2009 at 1:35 PM, portefeuille (99.60) wrote:

I really thought that maybe YOU had a rather public argument with Krugman ...

Thank you for posting it!

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#8) On July 24, 2009 at 1:45 PM, kaskoosek (70.07) wrote:

portefeuille

Only guy I've seen in real life is Taleb. Taht's about it.

 

:D 

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#9) On July 24, 2009 at 4:55 PM, rofgile (99.29) wrote:

The response from Ferguson was really nice.  Though, one one hand he seems to argue that the deficit running was really great because it prevented the banking meltdown, while on the other hand, he says that this was only a recession and the policy of increasing government debt by purchasing its own bonds is a terribly wrong policy.

Could we have saved the banks without the spending of money and increasing of debt, requiring the US to buy more debt?  

It seems like Ferguson liked the solution (stimulus + bank bailout), but didn't like the effects (increasing debt)?

------>

 I think the US government needs to call the US people to action, as they did in the World War II.  There needs to be a call to buy US bonds by US citizens to keep the country running.  That's how we managed debt in WWII.

 -Rof 

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#10) On July 24, 2009 at 11:12 PM, portefeuille (99.60) wrote:

Ifo Business Climate Germany (pdf)

 

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#11) On July 25, 2009 at 9:49 AM, portefeuille (99.60) wrote:

For those wondering. Yes, the "business climate index" is just "business expectations index" plus "assessment of business situation index" divided by 2, so red = orange + blue / 2 in the figure above and the business expectations index (orange) is currently acting the way it is supposed to, i.e. as a leading indicator, i.e. indicating the future business situation.

 

(and yes, this ifo stuff has very little to do with the topic of this blog post ...)

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#12) On July 25, 2009 at 10:16 AM, portefeuille (99.60) wrote:

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a guide to my blog posts can be found in the comment section to this post

(should be or should be close to the last comment)                                                                

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#13) On July 25, 2009 at 2:56 PM, portefeuille (99.60) wrote:

Goldman may join CIT rescue effort

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#14) On July 26, 2009 at 12:44 PM, Mark910 (< 20) wrote:

Since i wrote this I have had to trade on the bullish side to make any money.  I still think for the reasons listed we will have to retest the lows.  Is the point of the German business graph 'good bye nasty recession' or just noise like the same graph shows back in 2001-02?

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