Our Next Economic Plague: Japan Disease
by ilene - March 15th, 2010 2:35 pm
Our Next Economic Plague: Japan Disease
By Andy Xie, courtesy of Clusterstock
From Caixin:
Japan’s nominal GDP fell 6 percent to 475 trillion yen last year, while its real GDP declined 5 percent. Meanwhile, nominal GDP in the United States decreased 1.3 percent to US $14.2 trillion and real GDP fell 2.4 percent.
If you travel across Japan and the United States, you get the impression that America is in much worse shape: Americans cannot stop screaming about their woes, while the Japanese face economic sufferings quietly. Maybe this is due to cultural differences. Regardless, Japan is in dire shape. Its nominal GDP is now lower than it was in 1992 when the nation’s property prices first began to decline.
Read the rest at Caixin –>
(What's this?)
(market folly, 2/25/10)
(The Mess That Greenspan Made, 3/17/10)
(naked capitalism, 3/8/10)
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The Implications of Velocity
by ilene - March 13th, 2010 3:09 pm
The Implications of Velocity
Courtesy of John Mauldin at Thoughts from the Frontline
The Velocity of Money
Our Little Island World
GDP = (P) x (T)
P=MV
A Slowdown in Velocity
Dallas and Thoughts on the Economy
This week we do some review on a very important topic, the velocity of money. If we don’t understand the basics, it is hard to make sense of the hash that our world economy is in, much less understand where we are headed.
But before we jump into that, I want to let my Conversations subscribers know that we have posted a recent conversation with two hedge-fund managers, Kyle Bass of Hayman Advisors [and his staff] here in Dallas and Hugh Hendry of the Eclectica Fund in London. Our discussions centered on what we all think has the potential to be the next Greece, but on a far more serious level. It was a fascinating time.
Then next Wednesday we will post a Conversation I had with George Friedman of Stratfor fame, and then the following Wednesday a Conversation that I just completed with Dr. Ken Rogoff and Dr. Carmen Reinhart, the authors of This Time Is Different.
For new readers, Conversations with John Mauldin is my one subscription service. While this letter will always be free, we have created a way for you to "listen in" on my conversations with some of my friends, many of whom you will recognize and some whom you will want to know after you hear our conversations. Basically, I will call one or two friends each month and, just as we do at dinner or at meetings, we will talk about the issues of the day, with back and forth, give and take, and friendly debate. I think you will find it very enlightening and thought-provoking and a real contribution to your education as an investor.
And as you can see, I can get some rather interesting people to come to the table. Current subscribers can renew for a deeply discounted $129, and we will extend that price to new subscribers as well. To learn more, go to http://www.johnmauldin.com/newsletters2.html. Click on the Subscribe button, and join me and my friends for some very interesting Conversations.
The Velocity of Money
The Federal Reserve and central banks in general are running a grand experiment on the economic body, without the benefit of anesthesia. They are testing the theories of Irving Fisher (representing the classical economists), John Keynes (the Keynesian school) Ludwig von Mises…
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Which Way Wednesday - The Beige Book Boogie
by Phil - March 3rd, 2010 8:15 am
The last Beige Book report was on January 13th.
At the time the futures were flying and we were bullish but Dow was looking toppy and I thought we were going too far, too fast and called for caution - despite our "Meatball Market" at the time. Just like yesterday, I was not happy with the fundamentals to the point where I felt it necessary to keep pointing them out while the parade of analysts at CNBC et al told everyone to BUYBUYBUY at the 10,750 top. I don’t like to be Chicken Little but sometimes the sky is actually falling! The January book had very little "good" news to report (see my analysis for Members that day) and we took our money and ran on the long side. Although it wasn’t until the next Tuesday that we actually went down - it was a doozy and we fell over 500 points in 3 days, all the way to 10,165 (our 5% rule) and we continued weakly through 2/8, when we bottomed out at 9,900.
Whoever said this charting stuff was complicated? Just follow the 5% rule, draw some lines and PRESTO - we know what’s going to happen! Well, at least we hope we know what’s going to happen because I’ve spent a good portion of my week so far telling Members NOT to trust the rally we’ve been having and to expect a downturn with today’s Beige book a possible catalyst for a correction. From experience, we know there is not generally an immediate reaction to what is essentially a collection of anecdotal evidence about the state of the economy but it does give us an overview of the nation and I haven’t seen much news in the 6 weeks since the last report to make me think this one will be showing any great improvements.
It’s a tough call at the moment because there is clearly a determined effort to get the markets to move up but we are loaded up with bullish plays from our visit to 9,900 so it pays to be a bit more bearish with our short-term plays as we test the top of our MAYBE range. We have had some good news this morning with MBA Mortgage Applications up 14.6% as rates fell back under the magic 5% mark and, of course, that’s a rebound off of last week’s TERRIBLE showing, probably weather related.
69% of the activity was refinancing, which is nice but it doesn’t move homes or employ any construction…
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Weekly Wrap-Up - Buffett’s Daring Derivative Deal Does Well
by Phil - February 28th, 2010 9:30 am
I was going to talk about Buffett’s annual letter to investors.
Fortunately, I procrastinated and other people did some detailed reporting like Ravi Nagarajan, Andy Fry, Scott Patterson and Joe Del Bruno - who does a great job of pointing out that Berkshire’s 4th quarter results were propped up by Buffett’s $1.05Bn gains in derivatives betting (something Buffett himself once called "weapons of mass financial destruction" but, as we well know - if you can’t beat them…), which accounted for 1/3 of Berkshire’s $3.06Bn profits.
Buffett’s biggest bet was selling a put against the S&P 500 back in March - a move I said at the time was BRILLIANT and Buffett himself now says about his own options trading: "We are delighted that we hold the derivatives contracts that we do. To date, we have significantly profited from the float they provide. We expect also to earn further investment income over the life of our contracts."
What did Buffett do? Exactly what we teach you to do here at PSW - he took advantage of an irrational move in the markets and SOLD INTO THE EXCITEMENT, getting a fat premium from some sucker that bet the S&P would not hold 666 5 years from now. Buffett effectively sold $5Bn worth of puts that expires worthless at S&P 700 between 2019 and 2027, putting $5Bn in his pocket and holding aside $1Bn in margin, which is how much he’s already ahead on the bet. Like a good options trader, he has a plan and he’s trading his plan, making sure his investment is on track and patiently letting time do it’s work as it eats away at the put-holder’s premium.
What about the risk? Well I can’t speak for Buffett’s stop-loss technique but we’re talking about a company that has (had) $40Bn in cash using their excess margin to make a $5Bn bet that the S&P would not stay below 700 for 10 years. Buffett and I both tell people - NEVER buy a stock (or sell a put against one) that you are not willing to own for 10 years. The S&P was 5% below at the time and would have had to drop, perhaps, 20% more to cost him $1Bn so let’s call the stop 550 on the S&P where Buffett risked 2.5% of his cash against a posible 400% gain on his $1Bn risk allocation over 10+ years. While it is true that if the S&P dropped 50% in one day Buffett would be in deep trouble - sometimes you do have to play the odds…
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Thank GDP It’s Friday!
by Phil - February 26th, 2010 8:27 am
Wow, a 6% GDP!
I’m guessing as it’s only 7:30 but WOW! What an amazing economy this must be in the fantasy-land where they concoct these numbers. Let’s see, we have 138M working people so we must have added 8.6M jobs, right? NO??? Well, then the people who are working must be putting in a lot of overtime, right? No? I know, everybody must be making 6% more money than last year! No? Well, then it must be coming through in benefits, right? No? Hmm, this is a hard game isn’t it? I KNOW!!! Housing prices - with China-like GDP growth our housing market must be red hot and surely our homes are up 6% in value! No? Damn, I feel like I’m playing deal or no deal and I picked the case with the penny…
Just like our discussion about what total BS the CPI was - GDP is no different. GDP is the sum of Consumption, Investment, Government Spending and Net Exports which means a combination of inflation and government spending can boost our GDP even as real consumption falls and the rising dollar papers over export losses. In other words - I buy $100Bn worth of Toyotas (5M at $20,000 each) from Japan with the dollar at 85 Yen. Now the dollar rises to 93 Yen and I’m "only" buying $90Bn worth of Toyotas (5M at $18,000 each) and our GDP for that segment is up 10%. Wow - FANTASTIC!
Are we happy? Are more Americans working? Is there more shipping? Are there more sales at the Toyota dealership? No. Is Japan happy? Not at all, they are getting less money for the same cars. Another group that hasn’t been happy are the oil exporters, who shipped us an average of 10.5 Million barrels a day at an average price of $60 last year ($630M) and are now shipping us just 8.5Mbd at $80 last week ($680M). Sure they are still getting their $680M a day by choking off production and creating false supply shortages, but they miss the days when they were able to charge us $100 for 11Mbd.
Don’t worry my OPEC pals, JPM and the other oil manipulators are working very hard to make sure you once again have Billions of more American dollars that you can funnel to terrorists and this Democratic Congress turns the same blind eye to the shenanigans as the previous administration did so happy days will soon be here again as our leaders have the unmitigated gall to get up…
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China’s High-Growth Ghost Towns
by ilene - February 19th, 2010 2:48 pm
China’s High-Growth Ghost Towns
Visiting the eerily vacant epicenter of unsustainable progress, far out in the grasslands of Inner Mongolia.
BY APRIL RABKIN at Foreign Policy
In the gritty Inner Mongolian wind, I stood at the pinnacle of the global economy, at least in terms of GDP growth: the main drag of one of the fastest growing cities in the fastest-growing region in all of China, the world’s supposed new economic powerhouse.
Built in a breakneck five years, Kangbashi is a state-of-the-art city full of architectural marvels and sculpture gardens. There’s just one thing missing: people. The city, built by the government and funded with coal money, its chief industries energy and carmaking, has been mostly vacant for as long as it has been complete, except for the massive municipal headquarters. It’s a grand canyon of empty monoliths. In a paradox only possible in today’s economic system, Kangbashi manages to be both a boom town and a ghost town at the same time.
Kangbashi represents a particularly destructive economic force at work in China today: an obsession with GDP that ignores all other metrics of progress or human capital. GDP as calculated in China — or the rest of the world, for that matter — doesn’t make any distinction between quantity and quality, or between creative and destructive expenditures.
Due to the industrial pollution billowing out of the country’s GDP-enhancing factories and mines, cancer is the leading cause of death in China. A recent government survey showed that 30 percent of children in Yunnan province suffer from lead poisoning. Perhaps the biggest and most destructive GDP boost came from construction of the Three Gorges Dam, for which 1.24 million people were evicted. Even some of the newly rich, however, shower in tainted brown tap water.
(What's this?)
(naked capitalism, 2/18/10)
(Dividend Growth Investor, 3/10/10)
(Investment U, 3/3/10)
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Will We Hold It Wednesday?
by Phil - February 17th, 2010 8:27 am
We’re back!
On Monday, Jan 25th I set our 5% Rule bounce levels at: Dow 10,300, S&P 1,105, Nasdaq 2,225, NYSE 7,100 and Russell 625 and watching those levels kept us out of trouble as we stayed bearish on the first bounce in early February. Now it’s the 16th of February and we are so close, but yet so far, from finally getting back over the line which indicates a resumption of the bullish trend. Of course, we called the bottom at the 10% line (also noted in that post) as some of our 8% bounces held and did some aggressive bottom fishing but NOW it’s decision time. Do we take our quick profits and cut and run or do we get set for a bigger rally?
Fallondpicks shows us in the chart on the right that we have clearly broken out of our downtrending channel and happy days are here again as we forget all about Greece and those other STUPID countries as well as the fact that no one bought our T-Bills last week or inflation in Europe or the 5%, single-day pop in commodity prices here or our debt or the collapse of the EU - that was all so last week, I feel embarrassed to even bring it up but it’s a slow news day and we need some filler…
As I said in yesterday’s post, I’m done with Greece and I’m done with worrying about the GDP. Like the Chinese, we need to embrace the New Year and look forward, not backwards. Sure those concerns are still with us and still unresolved but that doesn’t mean we can’t go back to ignoring them. Isn’t it funny how, as soon as GS is implicated in manipulating the Greek crisis - the crisis eases off and we have a huge rally that takes everyone’s mind off it? Just a coincidence I’m sure. After all, GS doesn’t control the markets… Remember - they said that the program they use to manipulate the markets was stolen in July - so it can’t be them!
Of course much of this rally is being fueled by a sharp 1% pullback in the dollar at the top of a 5% run - after all, who could have possibly expected that? Perhaps boss-man Ben may have missed the signs but KC Governor Hoenig just put out a paper called "Knocking on the Central Bank’s Door" for the Commission on Budget Reform Policy in which he…
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China - The Mother of All Black Swans
by Phil - February 17th, 2010 1:50 am
Courtesy of Vitaliy N. Katsenelson:
Have I mentioned I like TBT lately? I also like Vitaliy, who sends me tons of good stuff so I’m making up for not posting him more often by catching up a little:
- Vitaliy was also recently interviewed on Yahoo’s tech ticker here.
- Yesterday he was on CNBC with Maria mispronouncing his name - discussing our range-bound outlook.
- Here’s Yahoo giving him more time on the same subject.
- Welcome to Another Lost Decade
- Q&A on Range-Bound Market with the FT
(What's this?)
(naked capitalism, 2/18/10)
(Dividend Growth Investor, 3/10/10)
(Investment U, 3/3/10)
Investing in China,
Yahoo!,
ProShares UltraShort 20+ Year Treasury
at Wikinvest
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Fifty Basis Point Friday - China Puts First Pin in the Bubble
by Phil - February 12th, 2010 8:19 am
Thank you China!
I had put out a post last night detailing how we ended up short at yesterday’s close and at 3:21, when I published it as I was checking the Asian markets (don’t ask, I keep strange hours) it looked like I had called it wrong as the Hang Seng went into lunch up over half a point and commodities were still hanging tough after yesterday’s ridiculous run up. In fact, at 12:07, in Member Chat, I just so happened to say: "Copper $3.13 - ridiculous… Very annoying movement, not very playable like this as it can all crash back down again very fast."
Fortunately, we let our levels be our guide and cashed out our long DIA day trades in my 1:41 Alert to Members as we hit our Dow 10,165 target from the morning post. We flipped bearish to the DIA $100 puts at .62, which should have a nice open this morning. We had an FCX short play with the $70 puts that I couldn’t bring myself to let go of, even after they broke over our $72.50 stop line and my 1:50 comment on that position was: "I’m in a 4x position at avg. $1.16, now .71 so not good but I think copper run was BS so I’m willing to stick it out but very happy just to get even now. I think a big squeeze was put on commodity bears today with no energy reports to point out the demand destruction. Copper up from $2.93 yesterday to $3.13 today after taking two weeks to fall that far on the way down - that is nonsense! If I were not full I would roll up or DD but, as I said, I’ll just be happy to get back out and, if not by tomorrow, I’ll sell some other sucker my puts and roll to March."
Needless to say, despite having a rolling plan to turn the trade into a spread, I was not a happy camper as things held up into the close and then, through lunch in Asia and into Europe’s open. My closing comment to Members at 3:44 had been: "I’m still generally suspicious that we’ve had such a strong day on very low volume (Dow 136M at 3:40) when there was a storm. An amazing coincidence if nothing else…. The fact that it was led by BS commodity sector making a radical move up on NO news at all (in…
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TIM BOND: EQUITY INVESTORS ARE DANCING ON THE EDGE OF THE VOLCANO
by ilene - February 10th, 2010 12:21 pm
TIM BOND: EQUITY INVESTORS ARE DANCING ON THE EDGE OF THE VOLCANO
Courtesy of The Pragmatic Capitalist
Tim
“Never has a bull market climbed a steeper wall of worry. Despite a proliferation of positive economic indicators, the consensus remains resolutely gloomy. Bullish economists are still rarer than hens’ teeth. The average forecast for Q3 US GDP growth is an anaemic 0.8% increase, which would be by far the slowest first quarter of any recovery on record.”
He couldn’t have been much more accurate. The economic landscape is quickly changing, however, and Bond’s outlook is turning decidedly less optimistic. Bond now believes the problem of debt is becoming contagious in Europe and that higher bond yields will accompany the process:
“Fiscal dynamics point towards higher government bond yields in many economies, including the UK and US. History is unequivocal in linking fiscal deterioration to higher yields. This point is clearly becoming recognized by investors. As a result, a contagious process has started, during which risk premia in bonds, equities and currencies adjust higher to reflect the fiscal situation. This process is unlikely to remain confined to southern Europe, but will eventually embrace all those economies with sizeable budget deficits.”
Bond has argued for much of the last year that low rates and de-leveraging were actually very bullish for equities. As monetary policy begins to shift and fiscal policy remains imprudent the landscape is shifting. Like Teun Draaisma, Bond is concerned about the impending higher rate environment that will accompany global rate increases and continuing risks associated with an indebted global economy. Bond argues the long-term situation remains unfavorable for 3 primary reasons:
- 1) The majority of the G20 is a fiscal mess
- 2) Demographic trends of the G20 are highly negative
- 3) Containing the long-term government debt problem will be painful
Most alarming to Bond, however, is the close relationship between high debt levels and rising rates. In studying 6 developed nations over the last 20-30 years, Bond found that a 1% change in deficit/GDP caused a 32 bps increase in 10 year rates. Based on this, Bond says we are due for…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(