Let the Prices Decide

I’m seeing more and more construction cranes dotting skylines and even hearing commercials on the radio for financing options that make me think ‘they’re at it again’. Someone is financing these projects, and nine times out of ten it would be a bank; there aren’t too many billionaires with the liquidity and risk appetite to match to fund these many projects.

Basically, it’s this type of credit access that is needed for an economy to grow on a fundamental level when it runs on leverage. Thanks to the creative work of the Fed under Ben Bernanke, the banks are perfectly situated to service to the nascent demand for credit in the economy. This actually has potential to be the start of the next mega-macro business cycle. Which seem to run in 20 – 25 year boom-bust cycles by the way. It comes down to the economic environment that these credit transactions are going to take place in, which for the most part is swayed by Fed activity and the overall sentiment of monetary policy.

In the short term, however, economic data on housing looks to be losing upward momentum, which happens to be a key component of most inflation measures. Official unemployment numbers are creeping lower, but the length of time for which unemployment numbers have been elevated is a bit worrying. At this point there is a huge pool of people that are not being counted as unemployed, and not to mention the underemployed that have surplus labor that they cannot get sold. So that’s two for two with weak components of inflation measures.

With this template, we can expect the Yellen Fed to continue the slow withdrawal of stimulus as already in progress, and the economy to continue to hover at its current levels of growth.

If ever there was price inflation to be found, it would be in financial assets. Their proximity to the toxic amount of cash that is held between the banks and the Fed increased their relative values when compared to other key metrics of economic advancement. From here one of two things can happen; either the US macro-economy snaps up to be in equilibrium with financial assets, or financial assets snap back to be in equilibrium with the macro-economy. We’ll let the prices decide.

Long story short, the monetary stimulus never made it out of the financial ether that is the US banking system. Like the universal solvent that is water, money is fluid and will find even the most miniscule crack in the dyke that is the Federal Reserve, and flood the low lying areas of the economy with the inflation that has been suspiciously absent according to most contemporary observers.

Consumerism

Thumbing through 330s section [Dewey decimal system] I stumbled upon some interesting reading on consumerism in China. The author went on about the shifting tides of consumerism in China, and the expectations of the global business and political community that the Chinese consumer can step onto the world stage and provide demand for the import of foreign goods and services, enough so as to buoy the global economy.

Because of [and only because of] an ideological aligning with the political mechanism that is the Chinese government, the society is beginning to explore the nuances of mass consumerism.

Meanwhile, on the other end of the proverbial spectrum, the mainstay of the global consumerist economy is going through a once-in-a-generational deleveraging cycle, and the spillover effects are macro due in part to globalization, and in part to the misguided use of the work of Profs. Mundell and Fleming.

An over leveraged consumer in the United States has just seen their home and 401K go through big angulations in value. The burden of the debt generated by a deficit lifestyle became ever-present as unemployment numbers stagnated at record levels. Priorities had to be recalculated, but adjustments were [and still are being] made to ensure the US consumer cleans up a bit for their international financiers, that they can repeat another 20 – 25 year megamacro boom and bust economic cycle driven by a borrow and spend mantra.

Are the Chinese going to keep spending? It seems like the government supports it, and is showing its support by instituting certain social safety nets that cover expenses that people would otherwise have to save for themselves. The next step in the process of the full-fledged Chinese adoption of western style consumerism is a development of brand preferences. American and European firms have built empires from doing just that, and will have a new and modern market to ploy their craft.

Will the impact of such a shift be sudden and resounding? Maybe not, but it just maybe enough of an offset to the loss of the US consumer’s full ability to borrow and spend to keep the global economy on par for a period of mediocre but steady growth for next few years.

As I See It...

As I see it, Keynes is suggesting that when an economy goes into recession, government spending can offset the loss in private consumption. To show this Keynesians use multipliers that turn one dollar of government spending into more than one dollar of consumption and subsequent production. While at the same time, those that oppose the Keynesian theory have their own multipliers, showing that a deleveraging cycle that usually accompanies a recession, will negate some of the intended effects of the spending, which then filters through to consumption and subsequent production. And, furthermore adds the burden of government spending which can lead to higher taxes to fund the spending or the risk of inflation if the government borrows externally or is financed by the central bank. The effects of which are made worse when the government starts off with a budget deficit.

The monetarists suggest an alternative view of how a stalling economy can be revived. They look at production as a function of the monetary base, the rate at which money is spent or its velocity, and inflation. Their view suggests that through central bank action, changes in the monetary base can offset the slowing of the velocity of money that usually accompanies a recession. With special consideration being paid to inflation and inflation expectations of course. This approach starts to face headwinds however, when the transmission mechanism experiences disconnects between central bank intentions and real world supply-demand dynamics of money and credit. Banks have little financial incentives to lend in the way interest rates and inflation expectations, while most would-be borrowers don’t meet stricter credit standards anyway.

Seems like the one thing that might actually be working, is time. Score one for classical liaises-faire economics.

Currency Trends to End the Year With

Can the GBP/USD be in an uptrend?

Will the AUD/USD continue to push lower?

Is it time for the EUR/USD to head back to the 1.21 level?

Could USD/JPY, and USD/CAD be trending up?

Why is the USD/CHF in a downtrend?

2:1 I should be looking at long signals for the Dollar Index based on a basket of currencies I follow, but I’m not. Most of my indicators and some longer framed trend-lines are pointing to at least a short period of a US Dollar selling environment.

On the other hand, I am seeing signs of US Dollar strength against the Australian Dollar [less industrial inputs sent to China], the Euro [with exceptionally high negative correlations to the Index], the Canadian Dollar [which has to mean something to do with Oil and other commodity exports], and of course the Yen [using fiscal and monetary tools to try and solve social and demographic problems.]

Supporting the unfolding trend in the Dollar Index, both the Great British Pound [inflation after austerity, and quantitative easing], and the Swiss Franc [closely mimicking the Dollar Index], are showing signs of strength against the US Dollar.

International monetary economic theory would suggest that the expected strengthening of the US Dollar against several of its counterparts could coincide with market expectations of a scenario  playing out where the cost of US Dollar (interest rates) rises. 

So at this point the pound seems to be singling itself out from the pack. As previously suggested, the Swiss Franc closely mimics the Dollar Index, so it merely affirms any directional bias of the Index at most given points in time.

My indicators on the Pound Sterling are suggesting a buying environment for the currency. Whether you make an argument for or against fiscal austerity policies in the face of loose monetary policies, the British economy is showing signs of possibly tracking back to some sense of normalcy, which bodes well for the currency over time.