Perhaps it’s the time of year, when participants are on vacation, that nothing noteworthy is taking place in any of the major markets.
– The Eurozone crisis has dissipated more rapidly than it emerged. All it took was some bromides and the promise of guarantees from ‘Authorities’ while the most authoritative of the lot – the Germans – ramped up the deflation.
Consequence: the euro @ $1.30.
The appearance and disappearance of the (same ol‘) crises in different places (remember Dubai?) leads to the conclusion that the underlying issues have not been addressed, much less fixed. It also concludes the ‘Bond Vigilantes’ are toothless, not willing to bring their trades to the logical conclusion and rip the bottom out of the credit system.
This means for the time being, Treasuries (particularly middle- maturities 2- 5yr) will find whatever support they need. This is true of Japan bonds as well. When demographics require Japan to enter the international credit markets with its debt/GDP ratio of 200% it will find eager buyers for its bonds. Why not? The Japanese have a current account surplus and their demographic ‘handicap’ of elderly masses … will soon die of old age! Dead people don’t need services.
As the elderly decease, the shrinking remainder will have more wealth to share. Individuals will have larger claims on the whole, why not lend to them?
What evaporated the euro crisis? One reason was the Fed reopening dollar swap lines. This action was so obscure nobody paid any attention – except for Greek bond buyers who were only holding out for a big- brother guarantee. The other reason was China buying Greek and Spanish bonds (with the Fed guarantee) which is like China buying Fannie Mae mortgage bonds. Once the (rich) Chinese appeared on the euro- stage the crisis was a dead duck.
“for now …” he said, dryly as he returned the automatic to his pocket …
Smooth talk and the promise of a ‘big brother’ helping out saved the day in Dubai as well as in Europe. (Deflation is still raging in Eastern Europe, by the way but who cares, right? It’s just the ‘little people. ) This iteration of jawboning will work because the participants know the limits. In the early 1990’s the vigilantes could count on increasing real output productivity to keep any crisis from beheading the economy but now …? A run out of commercial bonds or Treasuries (or euro paper) would lead to a waterfall collapse that nobody wants or needs.
The tactic is to hold out for higher yields and short maturities. The traders are getting that. Why rock the boat?
On the stock market … the concept of ‘overvalued’ and ‘not supported by fundamentals’ isn’t congruent with the amounts of cash that the market leaders are carrying. Stocks at the current level are probably fairly valued as dollar trades. Although this makes little sense – why not simply hold dollars instead – all that cash means the likelihood of a stock ‘crash’ is remote.
Keep in mind as well that the reason the companies are holding all this cash is because they have fired large parts of their workforces. The reduction in labor expense means profits even if revenue and top- line earnings are declining.
The upshot is that companies are moving away from productive enterprise toward dollar speculation. The same thing is taking place in China where finance earns more than manufacturing in an uncertain final- demand environment. How long can this go on?
Markets can remain irrational longer than you can remain solvent.-John Maynard Keynes
Stoneleigh has written another version of her deflation argument which calls for a breakdown in the debt markets. I think Stoneleigh has been predicting this for several years now …
Waiting for that train, you know what I mean?
Stoneleigh: Extend and pretend cannot persist forever. There’ll come a time when that proverbial kid will holler: “He has no clothes on!”. At some point we will see investors trying to sell distressed assets, and then we will realize what they are actually worth (i.e. what someone will actually pay for them). When we see that they are worth pennies on the dollar, and that whole asset classes need to be repriced overnight, we will see the reality of deflation. That, almost at a stroke, will mark the destruction of the virtual wealth created during the long expansion years.
Maybe yes, maybe no! Deflation yes, depression is different. Japan has experienced deflation for 20 years without a depression. Why? Because the lenders to Japan and its industries are not willing to call their loans, knowing that doing so would precipitate the cataclysm that the lending seeks to put off. As for the ‘no clothes’; all that we do is illusory! What is ‘wealth’, ‘success’, ‘power’ or ‘fame’? Pundits have been pointing out the current establishment’s nakedness since Ronald Reagan/Margaret Thatcher. Nothing has come of it because of the ongoing investment in the ‘belief’ in Reagan and Thatcher.
If you believed yesterday, why not tomorrow? The day after will take care of itself …
Some other cataclysm must start the chain reaction, peak oil and its attendant shortages, perhaps. Peak oil and the hardening dollar which undermines rather than obliterates. Today, another business failed and another …
Who will fail tomorrow?