Friday, January 22, 2016

Your Weekly Update AND Times Like These (the return of the gloom gang)... Plus, a bonus section on free trade...

WARNING! The China section (after the first two paragraphs) gets a bit wonky. If you're not in the mood, skip to "The Fed" and continue. I think you'll find the "What else?" section interesting. And please keep an open mind when you get to the bonus section---this is the season (occurs every 4 years) where our minds tend to fixate, which makes it easy to lose sight of the big picture...

The all-too-usual suspects for this weekend's commentary would be: The presently tight correlation between oil and stocks, China's "predicament(s)", and the Fed (I'll insert corporate earnings next week). Being that these subjects are indeed "all-too-usual" (these days), I'll keep the following as concise as possible:

The oil/stock trade:

I'll continue to hammer this one into submission during my daily commentaries. I.e., nothing to add for now.


If you've been reading this blog, you know all-too-well my view on the China economic rebalancing story. I'll add that while I do not share the view that China is on the verge of a debt-induced collapse, I am now of the opinion that we very well could see the Yuan trend notably lower going forward. This trend, by the way, will have no relation to the manipulative rants of at least two of the fascinating characters currently eyeing the seat of the leader of the "free world" (amazingly, the two I'm referring to seemingly sit on opposite extremes of the political spectrum, yet they trumpet the same utterly-destructive protectionist rhetoric*)---They would have you believe that China has been aggressively "cheating" us Americans by devaluing its currency so as to deliver us more affordable China-made goods (Oh I wish it were true!)---a claim they, as well as past candidates, have been making for years.

Here's a 10-year chart that unequivocally dispels that myth:     (And, folks, the notion that any rung on the U.S. economic ladder would be somehow enriched by limiting the global reach of U.S. businesses and the freedoms of U.S. consumers [to transact anywhere on earth they choose under the most favorable terms], is utter pernicious garbage. It's a playing on age-old fears that politicians have been exploiting for centuries. Please send me a message if you need convincing and I'll do my darndest [I'll include a primer at the end below]. Or simply ask yourself this American [Great American!] question: Will the proposed policy expand or limit my personal freedoms? Also [although that last question ought to be enough], understand that when it comes to commerce, any policy that would limit your access to imported goods under anything but the terms you and the supplier agree on, or that would limit a U.S. business from exploiting any and all global opportunities to achieve the greatest efficiencies, not only flies in the face of true American values [liberty, for example], it is---as virtually every non-political economist agrees---utterly destructive from a macroeconomic perspective!---As I attempt to illustrate in the video at the bottom...)

click to enlarge

Remnimbi in USD terms

As you can see, the Yuan rose steadily for years against the dollar. As for the plunge in mid-2015, while some were screaming "unfair devaluation" (or, "unfairly" offering U.S. consumers a price break on China-made goods [how dare they try and save us money!]), the fact of the matter is that China aimed (and succeeded) for its currency to be accepted in the IMF's SDR (Strategic Drawing Rights) basket of world currencies (along with the U.S. dollar, the Japanese Yen, the Euro and the GB pound). To gain acceptance they had to allow the Yuan more float (i.e., a more market-determined value). Plus, as China's economy slows (per the rebalancing), capital has been looking for the exits. Maintaining the old peg to the dollar (the rate the Chinese central bank held) has become ever more expensive.  Dropping the "daily fix" by 2 percent better accommodated present market forces, plus the new practice of adjusting it (the daily fix) to account for the previous day's close is yet more evidence that they're serious about allowing the market more say in the pricing of the Yuan.

As for why I see the Yuan possibly falling further: The extent to which the central bank has had to prop up the currency (a practice that is the complete opposite of what those candidates claim), even after last year's "devaluation", clearly signals that capital is fleeing the country. That propping depleted reserves by over $half a trillion last year. The chart below illustrates the decline, plus the fact that while $3.3 trillion (green line) remains a huge war chest (the world's largest, in fact), it only amounts to 16% of China's total M2 money supply (yellow line). I.e., I see China allowing for further careful depreciation, assuming capital continues to leave the country, as opposed to greatly depleting a reserve base that is sufficient to pay off their short-term dollar debt, times 5, as well as purchase all of their imports for the next two years running, according to Nomura Holdings Inc.     click to enlarge

China FX Reserves to M2 Ratio

This is the perfect segue for my present view on the Fed:

Recent global market turmoil, plus the prospects for the dollar to appreciate even further (to the perceived detriment of the export side of the U.S. economy)---potentially exacerbated by potentially higher rates and the China story I just told (all of which flies firmly in the face of the Fed's inflation objective), makes the odds of the Fed achieving its goal of 4 rate hikes in 2016 highly unlikely. A scenario I suspect the equity market will heartily welcome.

What else?

Well, in times like these, the gloom gang always shows up in full force. Prognosticators claiming uncanny predictive prowess seem to come out of nowhere with their auguries of Armageddon. Of course market crashes do occur from time to time, and, my!, how incredible you'd be (or seem) if you could accurately predict one.

So, if you aim to be viewed as credibly incredible, why not give it a shot. And then keep shooting, because ultimately the market will have a "crash" and you can tout your incredible self as an all-seer whose books should be bought, newsletter should be subscribed to, and whose counsel should garner top-dollar.

Here's the link to  Michael Johnston's A Visual History of Market Crash Predictions.

A few snippets:
In that interview, Nenner predicted challenging days ahead:

It is going to be very difficult few years to make some money. … I don’t expect the economy to pick up until 2020.

For anyone who listened to him, making money was indeed difficult. Those who held the market came out fine though; the Dow has added almost 8,000 points since that prediction.

In late 2011, Dent made headlines by predicting that the Dow was eventually heading to 3,000. (CNBC has mercifully misplaced the image titled “chart_scary.jpg,” perhaps after renaming as “chart_neverhappened_758.”)

Dent is selling a number of different products, including The Great Crash Ahead (published 6,700 Dow points ago) and The Demographic Cliff: How to Survive and Prosper During the Great Deflation of 2014-2019 (published 1,600 Dow points ago). 

Dent’s company also offers a number of newsletters; a lifetime subscription comes at the bargain basement price of $7,500.

Farrell, a former investment banker, has authored nine books. One of those, Think Astrology & Grow Rich, seems to recommend making investing decisions based on the positions of the stars. This is, unfortunately, not a joke; they guy splashing “stock crash” headlines across one of the most widely-read financial sites in the world wrote a book with this advice:

When Uranus and Neptune go into Aquarius, I look toward information and technology.

Fast forward 11 months to June 2015, and two things have changed: the stock photo of a bear (now much less menacing), and the price of the Dow (up about 1,500 points). Everything else is about the same; Cook is calling for markets to drop by about 25 percent, using some back-of-the-envelope math from 1987.

In addition to the book he co-authored with Michael Sincere, Cook sells trading seminars designed to “maximize your trading personality with an approach tailor made to you.”

Robert Prechter was described at the time of his 2010 call for Dow 1,000 as a “market forecaster and social theorist.” Echoing the words of George R.R. Martin, he made a dire prediction that the rally from the market bottom was setting investors up for more heartache:

I’m saying: ‘Winter is coming. Buy a coat.’ Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.

Following Prechter’s advice was anything but benign; the Dow had added almost 2,000 points before the end of the year.

Additional advice from Prechter is available in many forms, including a “Financial Forecast Service” ($59 per month) and the “Elliott Wave Trader’s Classroom” ($49 per month).

Mark Hulbert, a journalist who monitors and reports on the performance of investment newsletters, has at times found it tempting to make a few predictions of his own. In late 2013 — about a year after a similar prediction — he warned that another 1987-like crash was “inevitable.”

 subscription to Hulbert’s newsletter costs $59 for the first year.

David White, a financial planner in Michigan, predicted in early 2012 that the Dow would fall by nearly half to 7,000 by the summer. The Dow finished the year above 13,000.

In August 2011, longtime market bear Bill Strazzullo appeared on CNBC and advised “investors” to wait until the Dow hit 9,000 to buy and then sell around 11,500. The Dow never even dipped below 10,000, but has continued to run far higher than his sell point.

David Stockman was Ronald Reagan’s budget director and a former Michigan congressman. In March 2013, shortly after publishing The Great Deformation, he penned an op-ed in the New York Times warning of a coming economic meltdown and advising investors “to get out of the markets and hide out in cash.”

Marc Faber is a Swiss investment advisor and author of the Gloom, Boom & Doom Report ($300 per year). He’s made a number of bearish calls over the years, including a prediction of a market crash in 2014.

In early 2011 Brady Willett encouraged subscribers to Fall Street ($180 annual subscription) to sell stocks, based on the premise that Warren Buffett had begun a “hibernation process” that involved moving to cash. Buffett has, of course, continued to do deals and has maintained exposure to U.S. stocks. Since this article was published, Berkshire Hathaway (BRKB) has gained about 65 percent.

Be back soon...

*P.s. Here's a little something I wrote and illustrated back in the fall of 2011 (BONUS SECTION ON FREE TRADE):
Where Left and Right Merge

Plain and simply, the imposition of what the consumer will be fooled to believe are punitive (U.S. job saving) tariffs on foreign imports - per the coming proposal from a bipartisan (left and right merge on this one) band of manipulators (lead by Democrat Shumer and Republican Graham), at the behest of Presidential-wannabes Mit Romney and Michele Bachman - would, if passed, only serve to hurt Americans employed by American exporters, Americans who work for American businesses that benefit from our discretionary spending - and virtually every other American consumer through higher prices of everyday items. I.e., the net result of protectionism is forever the taking of money from the consumer-at-large and the handing it to a select (politically powerful) few.

Thus, the mere suggestion that this politically-inspired proposal, were it to pass, would do anything other than severely hurt our already limping economy, is an utter insult to our intelligence. Shumer, Graham and the candidates are either profoundly ignorant or assume so of us.

Of course non-competitive U.S. industries lose jobs to trade, but other (competitive) industries benefit mightily. Here's my rendition of a story Don Boudreaux tells in his book Globalization (a great read!):

Imagine there are only two countries in the world, China and the U.S... And China wants absolutely nothing from the U.S.. Therefore, being that U.S. dollars offer them no value, the Chinese refuse to sell U.S. citizens a single item. That's a bummer, because we really want their tires. However, when a third country, Australia, enters the story, opportunity presents itself. Australians desire U.S. software, while China wants Australian wool. So then:

1. China sells tires to the U.S....
2. China now has U.S. dollars to buy wool from Australia..
3. Australia now has U.S. dollars to buy software from the U.S....

Now I'll add the manipulation: The United Steelworkers Union cries foul (actually happened in '09 by the way), buys favor with a U.S. President (Obama) - who points to the trade deficit with the surely-cheating China - and VoilĂ ! we tariff Tianjin Tires. And, alleluia, we save American (tire manufacturing) jobs. And, alas, we destroy American (tech industry, etc.) jobs.

Here's me illustrating the above:

1 comment:

  1. […] Americans, alas, would prefer to dismiss (but they shouldn’t). If you suffered through all of last week’s update, you caught my little lecture on free trade. And you’ll recall my view that when Americans […]