January 2010 - outlook on leading indicators

at a snail's pace... a catalyst for sustained leveraging is much needed. i believe equity prices have quite a ways to go on the upside. speculation will heat up. there is synchronized global stimulus efforts to blow up the next bubble. can it play the role that sub-prime mortgages played in the us?

a.) corporations are sitting on mountains of cash. watch for stock buybacks to push equity prices.
the glut of dollars continues to grow. these dollars ultimately must be revalued downward. stocks will rise than fall from the wave of dollars seeking something above 0% interest.


b.) manufacturing output increasing:

philadelphia, new york indexes improve 5th month in a row

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a revised reading of 22.5 in December to 15.2 this month. The index has now remained positive for five consecutive months (see Chart). Indicators for new orders and shipments suggest continued growth this month, but they also declined somewhat from their December readings. The current new orders index, which has remained positive for six consecutive months, decreased 5 points. The current shipments index fell 4 points. The current inventory index, although still negative, increased 4 points, to its highest reading in 26 months. Indicators for unfilled orders and delivery times edged higher and are both positive, suggesting stronger economic conditions.

Labor market conditions have been stabilizing in recent months, and for the second consecutive month, the percentage of firms reporting an increase in employment was higher than the percentage reporting declines. The current employment index increased 2 points, to its highest reading since February 2008.

c.) exports increasing.

china's growth at 10.7% for Q4. banks ordered to slow loan rates.

d.) deleveraging proceeding

e.) unemployment trending lower but way too slowly

f.) war spending stimulus: continues to expand

g.) housing: prices stabilizing, but foreclosures continuing and threatening to rise.

h.) commercial paper: half the size of August 2007

an upside surprise?

we have a rather unique confluence of economic determinants, which include slow but rising manufacturing profits (in large part due to a restructuring to lower debt), a weak dollar and ultra-low interest rates. low interest rates are not furthering corporate borrowings but can leak out into the usual leveraging channels for interest sensitive investments. it is widely expected that when the fed ends its purchase program of mortgage back securities that long-term interest rates will rise. but there just might be a compensating market for the leveraged products from the massive yield hunting market. none of it will get very far without some significant employment gains and continue debt deleveraging of household debt.

Brenner on the 2002 recovery through asset targeted Keynsian policies:

What actually created the foundation for the new cyclical upturn turned out to be an historic decline in the cost of long term borrowing. From 1995, the yield on ten year Treasury bonds fell more or less steadily and, to the surprise of many, it continued to do so through most of the ensuing expansion, until 2005—declining in this interval from 7.09 per cent to 4.29 per cent in nominal terms and 4.49 per cent to 0.89 per cent in real terms (adjusted by the consumer price index). How is this extraordinary, indeed epoch making, drop-off to be explained?


The economy was rescued, in effect, by its own debility. Between 1973 and the
later 1990s, part and parcel of the long term system wide deceleration, the rate of
investment on a global scale (investment/GDP) steadily declined. With their capital
accumulation slowing, businesses’ call for credit slowed correspondingly, reducing the pressure on long term interest rates. The world crises of 1997-1998 and 2000-2002
sharply accentuated this trend by bringing about a further slackening in the growth of plant, equipment, and software and of employment on a global scale, which further
undermined the demand for loans, and the ensuing business cycle of the years 2001-2007 witnessed the slowest increase of investment, and of growth more generally, within the advanced economies, including the East Asian NICs and Little Tigers, since 1945.

During the same interval, as the US federal budget once again skyrocketed and the
current account deficit set new records year after year, East Asian governments made
ever-greater purchases of dollar-denominated assets for the purpose of holding down the exchange rate of their currencies and reducing the cost of borrowing in the US so as to sustain competitiveness and subsidize demand for their exports. As a consequence, the supply of credit continued to ascend, further easing the cost of borrow0ing. Federal Reserve Board chairmen Alan Greenspan and Ben Bernanke deemed the unexpected failure of long term interest rates to increase a “conundrum” and evolved the convenient theory of a “world savings glut”, originating mainly in East Asia, to explain it. They thereby rationalized record US borrowing and consumption in terms of a distinctive, if not implicitly irrational, East Asian failure to consume—which US policymakers just happened to desperately require to keep American interest rates down and enable the reflation of the enfeebled American economy on track. “The East Asians made us do it.”
Nevertheless, the supposed conundrum and its resolution are both redundant. There was
no global trend toward increasing saving, only a decreased tendency to invest almost
everywhere in the world outside of China.16 It was, in effect, the worsening of the
secular economic slowdown in the advanced capitalist countries plus the drive by East
Asian states to sustain the region’s investment-driven, export-dependent form of
economic development that made for the continuous reduction of the real long term
borrowing right through 2005-2006 that proved the saving grace for the US and global
recovery.

Periphery reflating - PrudentBear Dec 31, 2009

To an extent never before imagined, economies around the globe could partake in aggressive fiscal and monetary stimulus, rapidly expand Credit, reflate markets and economies – and have little worry about currency vulnerability or an outflow of speculative finance (a far cry from the ‘90s). The world had changed, and global asset prices were revalued based on a backdrop of expected ongoing dollar devaluation and newfound resiliencies in Credit system and financial flows to (“undollar”) “Periphery” economies and non-dollar asset classes.


i will suggest that 2009 marked a historic inflection point in global finance. I have argued that years of policy mismanagement led to the breakdown in the dollar reserve “system” - that for more than 60 years worked (with varying success) in restraining global Credit expansion. This year saw key inflationary/reflationary biases move decidedly from the “Core” (U.S.) to the “Periphery” (notably China, Asia, Brazil, India and the “emerging” markets). Importantly, a discredited dollar and the prospect of ongoing U.S. policy-induced currency devaluation created a backdrop of extraordinary market accommodation for “Periphery” Credit systems.