Steve Major of HSBC We highly recommend

Negativity among the punditry seems to have risen dramatically over the last couple of weeks. While we're certainly not raging bulls, and we think that public policymakers need to do more to start pulling their weight, the stories we've come across in the past few days are completely over the top.

First is the foreboding sounding 'Hindenburg Omen' noted by some technical analysts recently, which prompted TPC to ask whether equity markets are in for a "savage downturn" in the months ahead. If I understand correctly, we still need to see a "confirming Hindenburg Omen" or two (or three, or four). Not to say that a panic selloff or crash is an impossibility, but good grief...

Second is an absolutely over-the-top piece from Matterhorn Asset Management that was making the rounds in a highly sensitized blogosphere:

there will be no double dip. It will be a lot worse. The world economy will soon go into an accelerated and precipitous decline which will make the 2007 to early 2009 downturn seem like a walk in the park. The world financial system has temporarily been on life support by trillions of printed dollars that governments call money. But the effect of this massive money printing is ephemeral since it is not possible to save a world economy built on worthless paper by creating more of the same. Nevertheless, governments will continue to print since this is the only remedy they know. Therefore, we are soon likely to enter a phase of money printing of a magnitude that the world has never experienced. But this will not save the Western World which is likely to go in to a decline lasting at least 20 years but most probably a lot longer.

Again, good grief. Putting on the hip waders, one need only look around and ask themself:

•"Are assets in the real economy -- be they physical capital like machines or structures, intangibles like brands, human capital embodied in every individual with even a whit of (potential) talent and motivation, or anything else that is capable of producing value to human beings -- somehow negated by the existence of what the author deems 'worthless paper'"?
•Is there anything about the U.S. or other developed economies that indicates an under supply problem, such that additional money would be chasing too few goods, services, assets, and labor and thus lead to inflation? Or is the fundamental challenge facing developed economies today one of aggregate demand falling short of aggregate supply?
•Are paper monies really worthless? If so, then the debt that so many households are struggling under should not be much of a burden, and the real value of the deficits and accumulating public debt of sovereign governments would be much smaller than they look. And yet households continue to struggle with deleveraging, electorates and policymakers continue to gnash their teeth over deficits and debt, and deflation fears are rising as inflation expectations recede. So much for "worthless paper".
•If governments were to directly monetize assets, is that inevitably going to spark inflation? Or do the realities of a widespread household balance sheet recession and massive shifts in age structure mean that direct monetization, be it of assets or of public budget deficits, would only prevent deflation? As we've argued, inflation and deflation lie along a continuum. The acceptance of "disinflation" should logically lead one to accept the possibility of "disdeflation".
If you want to get academic, dig into the actual data on public deficits, public and private sector debt ratios, and inflation and deflation. You should find that they do not support the assertions in the Matterhorn paper or the many other missives like it that are circulating. Moreover, those assertions -- especially the idea that simply 'printing money' is always and everywhere inflationary and thus detrimental to savers -- rest on a woefully incomplete theoretical footing. If any Austerian doubts this, they need only read the chapter on 'Indirect Exchange' in Mises' Human Action. The grand old man of Austrian economics understood that the relative value of money, like any other good or service, is a function of supply and demand (to assess the demand side of the money equation, refer back to the third question above).

Anecdotally, the pessimism embodied in the Matterhorn piece and elsewhere seems to have people thinking about stocking their bunkers. For example, we noted from a networking site that a friend is reading The Modern Survival Manual: Surviving the Economic Collapse, a book on surviving the Argentinian credit collapse by Fernando Ferfal Aguirre. I enjoy reading survival manuals, as they're an interesting (and potentially useful) real life analogue to financial risk management. And Ferfal seems to be a pretty sharp and level headed guy with some clever advice for surviving crisis situations in modern settings.

However, in terms of the risk of economic collapse, the U.S. and Argentina are very, very different, as Steve Major of HSBC explained in today's FT. We highly recommend both his column and a recent op-ed by Alan Beattie as good innoculations against the viral gloom and doom of the moment. Beattie outlined quite well how overconfidence in monetary policy, along with hysterics over public sector deficits, are likely to be counter productive in the long run (emphasis added):

It would help greatly if fiscal policy were pulling in the same direction as monetary, signalling that the central bank and the government will act to stimulate if growth weakens. Sadly, this is not forthcoming. Super-low bond yields show fiscal policy has more room for manoeuvre, but far too many people – congressional Republicans, Harvard historians moonlighting as economists [take that, Niall Ferguson!], cable television pundits – seem to believe with almost no evidence that a debt crisis and possibly high inflation are just around the corner. According to this view, an anaemic economy shovelling extremely cheap money at the Treasury is somehow signalling it wants the government to stop borrowing.

This is a problem. We have been here before – during Japan’s long struggle with deflation in the 1990s and 2000s. Some of today’s debt crisis brigade have drawn the lesson that large-scale fiscal infusions do not work. In reality, as shown by Adam Posen of the Bank of England’s monetary policy committee, Japan became airborne in the early 2000s after the twin engines of fiscal and monetary policy were finally run together. [Posen's book is highly recommended; it helped change our thinking on Japan's policy experience.]

Before then, Japanese policy was disjointed and half-hearted. Serial-killing fiscal and monetary authorities repeatedly choked off growth whenever the economy flirted with recovery, and sometimes undid each other’s work..

There is no such obvious disagreement between government and central bank in the US. But divisions elsewhere are destroying the coherence of fiscal policy. A stimulus-phobic Congress is blocking the White House. And with the recent departures of senior officials Peter Orszag and Christy Romer, there are signs of division and exhaustion within the administration’s economics team.

Stasis and wrongheadedness in fiscal policy makes the Fed’s job harder [as we've argued previously, fiscal policy errors worsen the zero bound "trap"; conversely, smart fiscal expansion would make the Fed's job easier]. The FOMC is not just trying to operate in highly uncertain circumstances with highly uncertain instruments but also has too much of the burden. Central bankers are no more omnipotent than they are omniscient. Investors, the public and the Congress may be forced painfully to find that out.

Again, we're not raging bulls, and we think the coming decade will be a tough one for both stock markets and economies. But we're not stocking the backyard bunker either.

Disclosure: No positions

所有跟帖： 

• private sector borrowing has been contracting at a faster rate t -marketreflections- ♂ (5669 bytes) () 08/31/2010 postreply 11:56:06

• disposable personal income (DPI)+wealth effect: driving consumpt -marketreflections- ♂ (2452 bytes) () 08/31/2010 postreply 12:38:15

• Steven Hansen must read -marketreflections- ♂ (157 bytes) () 08/31/2010 postreply 12:53:37