Attached is a copy of a presentation that Warren delivered yesterday in Montreal.
We were extremely well received and Warren was a huge hit, mixing a concoction of high dose monetary economic realities with real life experiences and anecdotes from his long and lustrous career as a market wizard. The presentation was scheduled for 45 minutes but turned into 1hr20 minutes including Q&A.
Presentation link here.
So imagine the corn crop report comes out and it surprises on the upside at up 30%
What happens? The price of corn probably starts to fall. Commercial buyers back off, farmers rush to hedge, and, overall, players of all ilks try to reduce positions, get short, etc.
A few weeks later it’s further confirmed that the farmers are producing a massive bumper crop.
What happens? The same adjustments continue.
But what if that crop report was wrong? What if, in actual fact, there had been a crop failure? And market participants never do get that information?
What happens? Prices go down for a while as described above, but at some point they reverse, as sellers dry up, and as consumption overtakes actual supply price work their way higher, and then accelerate higher, even if no one ever actually figures out there was a crop failure.
QE is, in fact, a ‘crop failure’ for the dollar. The Fed’s shifting of securities out of the economy and replacing them with clearing balances removes interest income. And the lower rates from Fed policy also reduces interest paid to the economy by the US Treasury, which is a net payer of interest.
But the global markets mistakenly believed QE was producing a bumper crop for the dollar. They all believed, and some to the of panic, that the Fed was ‘printing money’ and flooding the world with dollars.
So what happened? The tripped overthemselves to rid them selves of dollars in every possible manner. Buying gold, silver, and the other commodities, buying stocks, selling dollars for most every other currency, selling tsy securities, etc. etc. etc. in what was, in most ways, all the same trade.
This went on for months, continually reinforced by the pervasive rhetoric that QE was ‘money printing’, and that the Fed was playing with fire and risking hyperinflation, with the US on the verge of suddenly/instantly becoming the next Greece and getting its funding cut off.
Not to mention Congress with it’s deficit reduction phobia.
So what’s happening now? While everyone still believes QE is a bumper crop phenomena, QE (and 0 rate policy in general) is none the less an ongoing crop failure, continuously removing $US net financial assets from the economy.
And so now that the speculators and portfolio shifters have run up prices of all they tripped over each other to buy, the anticipated growth in spending power-underlying aggregate demand growth needed to support those prices- isn’t there. And, to throw more water on the fire, the higher prices triggered supply side repsonse that have increased net supply along with a bit of ‘demand destruction’ as well.
Last week I suggested that higher crude prices were the last thing holding down the dollar, and that as crude started to fall I suggested its was all starting to reverse.
It’s now looking like it’s underway in earnest.
It may indeed serve public purpose to sell federal property.
In fact, the burden of proof of public purpose is with the federal government as to why it would own any specific property in the first place.
However, selling property does remove net financial assets from the economy, make the dollar ‘harder to get’, and is thereby a contractionary/deflationary bias that reduces aggregate demand/output and employment.
The continuing problem is that deficit reduction doesn’t currently serve any public purpose that I can discern, but it’s actively being pursued by both sides, now trying to out do each other in what’s shaping up to be a death race to the bottom.
The good news is that at least so far the Saudis seem to be following/allowing crude oil prices to decline. Possible reasons range from the demand destruction or looming supply increases due to the higher prices, to the possibility they got short in their personal accounts. There’s no telling why they do what they do, and as a simple point of logic they remain swing producer/price setter.
Falling crude prices serve to directly make US dollars ‘harder to get’ as the US bill for imported crude and products falls, and thereby offers substantial and ongoing fundamental support to a US dollar that has to be one of the most oversold items of all time.
The only negative for the US dollar I can see is the chart, which has been telling me there continuous portfolio shifting away from the US dollar, which, when assisted by the rising crude prices, combined to keep the US dollar in decline. Without the support of the rising crude prices the tide could be turning.
The White House Blog: Saving Money by Selling Excess Property
By Jeffrey Zients
May 4 — As we look at our fiscal situation, the President understands that the Federal Government must do what American families are doing all across the country: find ways to live within our means and invest in the future. That means cracking down on waste and getting the most from taxpayer dollars.
Since President Obama took office, we’ve made unprecedented progress in reforming the way Washington works – saving billions of taxpayer dollars through IT reform, cut contracting spending, and eliminated duplicative and ineffective programs.
In his State of the Union address, the President discussed another area that is ripe for savings and reform — the real estate footprint of the Federal government. For too long, the American people’s hard-earned tax dollars have gone to waste, funding empty buildings and holding on to valuable properties the government no longer needs. That is something that shouldn’t be tolerated at any time, but especially with this challenging fiscal environment, it’s unacceptable.
Today, we’re sending legislation to the Hill that will cut through red tape and politics to rid the government of the burden of excess property and save taxpayers at least $15 billion. We look forward to working with members of Congress to pass this legislation, the Civilian Property Realignment Act.
Interesting how portfolio managers and speculators- the herd in general- clings to long dispelled theories.
Note the large shift away from the dollar and into commodities on QE2, which in fact did nothing of consequence apart from turning psychology.
And the idea that rate hikes support a currency has been long dispelled by extensive research, including decades of central bank research.
Euro Approaches 18-Month High Versus Dollar Before ECB Decision
By Lucy Meakin
May 4 (Bloomberg) — The euro rose against the dollar, approaching its strongest in 18 months, on speculation that European Central Bank PresidentJean-Claude Trichet will signal further rate increases after policy makers meet tomorrow.
Long gold, stocks, and other currencies is all the same trade, and all the specs and trend followers are in big, proving once again that the crowd isn’t always wrong.
Lack of understanding of what QE actually is seems to have scared everyone from portfolio managers and the man on the street to Putin to take action.
And Chairman Bernanke’s recent remarks, though fundamentally sound, gave them no comfort whatsoever, and only encourage this latest round of dollar selling and related trades.
No telling how long it will keep going.
But underneath it all the dollar’s fundamentals aren’t all that bad relative to the other currencies, apart from rising crude prices keeping the US import bill higher than otherwise, though partially offset by higher export prices, including food.
At last look trade gaps look to be ‘deteriorating’ in the eurozone, the UK, Japan, Canada, and Australia, as their currencies continue to climb, indicating they may have gotten past the humps in their J curves and trade flows have turned against them?
So looks to me like with the entire dollar move predominately driven by ‘hot money’ in the broad sense, there is nothing fundamental to get in the way of the reversal scenario suggested at the end of this article.
Best way to play it? Stay out of the way.
Cheap Dollar Fuels One-Way Bets in Everything Else
By Reuters
April 28 (Bloomberg) — Americans’ cheap money spigot remains open and the flow is as fast as ever, meaning the world had better brace for even higher oil, metals and food prices and a weaker dollar.
The clear message from Federal Reserve Chairman Ben Bernanke on Wednesday was that the U.S. central bank intends to keep interest rates exceptionally low and monetary policy very easy as it continues to try to inflate the U.S. economy back to health.
For investors, he offered further encouragement to keep borrowing in dollars, paying virtually nothing and then swapping those dollars into higher-yielding currencies or using them to buy oil, metals and food futures and options.
This so-called “carry trade” has become the trade du jour, particularly with the dollar’s precipitous drop of around 10 percent from its peak in January.
By comparison, U.S. crude futures are up 23 percent so far this year and the Thomson Reuters-Jefferies CRB index, a global index of commodities, is up 10 percent.
“The biggest risk right now is that Bernanke’s looseness creates the unintended consequence of boom-goes-bust, where easy-money-driven asset bubbles implode and confidence is consequently sucked out of the economy,” said JR Crooks, chief of research at investment advisory firm Black Swan Capital in Palm City, Florida.
“It’s one thing to have a currency on the decline; it’s another thing to have GDP on the decline.”
The “carry” trading tack is akin to the still popular yen-carry trade, which involves borrowing yen at Japan’s near-zero interest rates to purchase other higher-yielding securities such as Treasuries. Investors are borrowing in currencies like the dollar to fund purchases in markets with higher yields or currencies with potentially higher returns.
The Barclays’ G10 carry excess return index shows that borrowing in low-yielding currencies such as the greenback and buying those with high interest rates like the Australian dollar has generated returns of about 37 percent so far since the end of the financial crisis in early 2009.
“The Fed seems to be in no rush to tighten monetary policy. So if rates remain low, why shouldn’t the dollar be the preferred funding currency?” said Thomas Stolper, chief currency strategist at Goldman Sachs in London.
“And as you know in foreign exchange, it’s all about differentials between countries and in that respect, that differential is negative for the dollar,” Stolper added.
The yield differential continues to weigh against the dollar, particularly against the euro , the Australian dollar, and some emerging market currencies, whose central banks have started to raise interest rates.
Record low U.S. rates of zero to 0.25 percent, an enormous supply of liquidity under the Fed’s purchases of more than $2 trillion of Treasury and mortgage bonds, and improving economic prospects in emerging markets have prompted investors to borrow the lower-yielding dollar in carry trades over the last 18 months.
A rough estimate from investment advisory firm Pi Economics in Stamford, Connecticut, showed that the Fed’s easing may have fueled dollar carry trades in excess of $1 trillion, based on U.S. financial institutions’ net foreign assets positions.
On Wednesday, the dollar skidded to a three-year low of 73.284 as measured by the Intercontinental Exchange’s dollar index, down around 10 percent from its peak in January. Many traders expect the index to fall through the all-time low, hit in July 2008, of 70.698.
Feasible Alternative
For some investors, using the dollar in carry trades remains the only feasible alternative to other low-yielding currencies such as the yen and Swiss franc .
While the yen yields an interest rate of zero, like the dollar, the Japanese currency could strengthen if the economy goes into recession. Since Japan has huge overseas investments, a recession would prompt a repatriation of domestic investors’ funds to bolster savings, boosting the yen.
The Swiss economy is in much better shape than the United States and a rise in inflation there could well prompt the Swiss National Bank to raise interest rates, much like the European Central Bank did early this month.
That leaves the U.S. dollar as the only other option left to finance investors’ penchant for risk-taking.
“No one really thinks the Fed will hike rates significantly … They would want to keep rates low since the recovery is not that strong,” said Pablo Frei, a portfolio manager and senior analyst at Quaesta Capital, a Zurich-based fund of funds focused on currency managers, with assets under management of about $3.5 billion.
Frei said that although the dollar is a big short among hedge funds, “people have become more cautious of the risk of the dollar carry,” given how crowded this trade has become.
He added that the fund managers he tracks have reduced their short position on the dollar, although the lower-dollar bet remains their largest exposure.
As in any crowded trade, there is always the risk of a squeeze once things get sour, which could lead to a massive unwinding of carry trades and the potential for huge losses for those slow to get out. When global stocks drop, or when the risk barometer shoots up, investors tend to repatriate funds, close out losing carry trades and buy back currencies they had shorted.
This happened in 2008 during the global financial crisis and could well happen again.
With crude oil back up, the dollar has resumed it’s slide vs the other currencies. And odds are West Texas crude converges to Brent, which remains over $10 per barrel higher at about $124/barrel when/as the Cushing supply issues clear up.
However, with food and energy, at least for now, remaining a relative value story, this could largely be the other currencies deflating rather than the dollar inflating.
The US is a large importer of finished products and with relatively weak aggregate demand here this means downward price pressures on those who export to the US to sustain their export volumes and market share.
And with US unit labor costs not rising, US companies can price aggressively overseas and keep foreign margins under pressure as well.
So looks to me like the world shortage of aggregate demand/dangerously high unemployment will continue for a considerable period of time, now exacerbated by rising food and energy costs which takes purchasing power from high propensity to consume individuals and transfers it to low propensity to consume states, corporations, investment funds, etc.
While at the same time this (at least for the near future) relative value story gets treated like an inflation story by most of the world’s governments, who are consequently prone to take measures to further reduce aggregate demand.
No nation wins in this process, just some losing less than others.
I spoke with Senator Blumenthal for several hours on MMT just over a year ago, before he was elected Senator.
He read my book and asked the right questions.
He knows imports are real benefits, exports real costs.
He knows the trade deficit is a good thing for America.
He knows that his proposals would reduce our real terms of trade and lower our standard of living.
And he knows taxes function to regulate aggregate demand,
and that we can readily sustain full employment by keeping taxes at the right level for a given size of government.
He remarked that it was how he had learned it at Harvard in the 1960’s.
And he called me several times to discuss specific issues in detail.
With this letter he has turned subversive for presumed political gain.
I see it as a clear case of politics over patriotism.
I likewise discussed this with Senator Carl Levin, but maybe 15 years ago, who also seems to have decided to place politics over patriotism.
If I had the authority, I would prosecute for treason.
April 14, 2011
The Honorable Timothy J. Geithner
Secretary of the Treasury
1500 Pennsylvania Ave. NW
Washington, DC 20220
Dear Mr. Secretary,
We write to urge you to make fundamental currency misalignment a central issue at the G-20 meeting in Washington, DC this week. For too long, this issue has festered, harming not only American companies and workers, but also the economy of every country that meets its International Monetary Fund (IMF) commitments to allow the level of its currency to be determined by markets.
The consistent interference of a few countries in currency markets creates an uneven global playing field, perversely encouraging other countries to intervene as well. The resulting currency misalignments distort global markets, creating instability at a time when the world can ill afford it.
While multiple countries are guilty of currency manipulation, China unfortunately stands out from the rest. Its mercantilist policies occur on a grand scale. In the fourth quarter of 2010, China intervened in currency markets by purchasing $2 billion worth of foreign currency a day, adding $199 billion to its foreign currency reserves. Not surprisingly, in its recent 2011 Global Economic Outlook, the IMF calls the RMB “substantially weaker than warranted” and finds a “key motivation for the acquisition of foreign exchange reserves seems to be to prevent nominal exchange rate appreciation and preserve competitiveness.”
China’s policies work as intended: The RMB has had almost no appreciation against the dollar since May 2008. China’s illegal practices make Chinese-produced goods cheaper than similar products made in America, driving up our trade deficit with China and putting Americans out of work. The United States’ trade deficit with China reached a staggering $273 billion last year, costing our country thousands of jobs.
The IMF cites the accumulation of official foreign exchange reserves as “an important obstacle to global demand rebalancing.” Removing this obstacle should be a key U.S. priority. Ironically, China’s refusal to allow the RMB to appreciate in a meaningful way is contrary to its own best interest. Economists agree that China needs to rebalance its economy to rely more on domestic consumption than on export-led growth. This necessary rebalancing would ultimately tame Chinese inflation, improve global economic growth, and remove a key barrier to a more fruitful U.S.-China relationship.
The United States does no one a favor by downplaying this crucial issue. We urge you to work together with all countries harmed by currency manipulation to press China to allow the level of the RMB to be determined by markets, not government interventions. When everyone plays by the same rules, our entrepreneurs and workers can compete and win in the global economy.
Sincerely,
Sen. Debbie Stabenow
Sen. Sherrod Brown
Sen. Olympia Snowe
Sen. Carl Levin
Sen. Sheldon Whitehouse
Sen. Bob Casey
Sen. Ben Cardin
Sen. Kirsten Gillibrand
Sen. Jack Reed
Sen. Richard Blumenthal
So with the entire world completely wrong,
but nonetheless in charge,
seems a reasonable bet to assume weak demand and a too wide output gap/too high unemployment will continue indefinitely?
That is, fear of looming national solvency crisis (becoming the next Greece)
is causing the world to go, at best, the way of Japan, as the real risk remains deflation.
Not that there won’t be relative value shifts, particularly where there is pricing/monopoly power.
With crude oil the main concern.
The ignorance remains overwhelming, on monetary operation and trade policy, as well as fiscal policy, as highlighted below:
World Finance Chiefs Chastise US on Budget Gap
April 17 (Reuters) — World finance leaders Saturday chastised the United States for not doing enough to shrink its massive overspending and warned that budget strains in rich nations threaten the global recovery.
Finance ministers in Washington for semi-annual talks took sharper aim than in previous years at the United States’ $14 trillion debt.
While most of the criticism came from emerging market economies, some advanced nations joined the chorus.
Dutch Finance Minister Jan Kees de Jager warned that if the United States and other advanced nations move too slowly it could undermine confidence in the global economy.
“Insufficient budgetary consolidation may spark off further escalation of debt sustainability issues, with repercussions on confidence and the still fragile financial sector,” de Jager told the International Monetary Fund’s steering committee.“Debt dynamics in other advanced economies, including the United States, are of concern.”
The IMF this week said the U.S. budget deficit was on course to hit 10.8 percent of nation’s economic output this year, tying with Ireland for the highest deficit-to-GDP ratio among advanced economies. It urged Washington to move quickly to put a credible plan in place to tighten its belt.
Brazil’s finance minister, Guido Mantega, offered sharp words in a thinly veiled attack on the United States. “Ironically, some of the countries that are responsible for the deepest crisis since the Great Depression, and have yet to solve their own problems, are eager to prescribe codes of conduct to the rest of the world,” he said.
The Group of 20 countries agreed on Friday to a plan that could put more pressure on the United States to fix its deficits as well as push other leading economies to address
their own shortcomings.
The IMF’s advisory panel on Saturday said issues of financial stability and sovereign debt stability must be addressed, saying in a communique that “credible actions are needed to accelerate progress.” It emphasized the need for fiscal consolidation in advanced economies while avoiding overheating in emerging economies.
The Obama administration and the U.S. Congress are locked in battle over how best to fix the deficit. Republicans are pushing for deep spending cuts as part of the argument over raising the nation’s $14.3 trillion debt limit, something which is needed to avoid an unprecedented U.S. debt default.
The Republican-led House on Friday approved a plan to slash spending by nearly $6 trillion over a decade and cut benefits for the elderly and poor.
President Barack Obama, who has offered a competing vision to curb deficits by $4 trillion over 12 years, said Thursday the Republican plan would create “a nation of potholes.” The White House is wary about cutting spending sharply while the economic recovery remains fragile.
Treasury Secretary Timothy Geithner told fellow finance ministers on Saturday caution was needed. “We are committed to fiscal reforms that will restrain spending and reduce deficits while not threatening the economic recovery,” he said.
Geithner was quick to say others whose policies contribute to global imbalances must change too, “especially those whose fundamentals call for greater exchange rate flexibility…”
The United States has repeatedly called for China to relax its limits on the yuan currency.
Yi Gang, a deputy governor of China’s central bank, called for “more rigorous” efforts by advanced economies to tighten budgets and said the IMF needs to strengthen its monitoring of these rich nations.
Russian Finance Minister Alexei Kudrin, taking aim at the U.S. Federal Reserve, said central banks that buy government debt to keep interest rates low were abetting fiscal profligacy.
The Fed is on course to complete the purchase of $600 billion in U.S. government debt by the end of June, which would take its total purchases of mortgage-related and government debt since December 2008 to nearly $2.3 trillion.
Echoing Republican lawmakers and even some Fed officials, Kudrin said those purchases blurred the line between monetary and fiscal policy in a way that could jeopardize a central
bank’s independence.
“We observe this process with some wonderment, since it amounts to the monetization of those countries’ budget deficits,” Kudrin said.
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> (email exchange)
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> Hi Warren,
>
> Do you have any thoughts on Stiglitz calling for a new reserve currency?
> Is this something you see as a problem or is Stiglitz getting it wrong?
>
Yes, my advice for Joe is to stop talking about these things entirely.
He’s in it all way over his head.
Stiglitz Calls for New Global Reserve Currency to Prevent Trade Imbalances
By John Detrixhe and Sara Eisen
April 10 (Bloomberg) — The world economy needs a new global reserve currency to help prevent trade imbalances that are reflected in the national debt of the U.S., said Nobel-prize winning economist Joseph Stiglitz.
He doesn’t seem to grasp the notion that imports are real benefits and exports real costs, nor that the national debt is nothing more than dollar balances in Fed securities accounts that are ‘paid back’ by debiting the securities accounts and crediting reserve accounts, also at the Fed. No grandchildren writing checks involved.
A “global system” is needed to replace the dollar as a reserve currency and help avoid a weakening of U.S. credit quality, said Stiglitz, a professor at Columbia University in New York.
There is no such thing as weakening the ability of the US to make US dollar payments. All that’s involved is crediting reserve accounts at the fed.
The dollar fell to an almost 15-month low against the euro last week, and the U.S. trade deficitwidened more than forecast in January to the highest level in seven months.
“By taking off the burden of any single country, we don’t have to have trade deficits,” Stiglitz said in an interview in Bretton Woods, New Hampshire.
He just assumes there’s some problem with a nation running trade deficits, not realizing it’s a sign of success- improved real terms of trade- and not failure.
“Things would be much worse if it were not the case that Europe was having even more of a problem, but winning a negative beauty pageant is not the way to create a strong economy.”
The benchmark 10-year Treasury note yield was at 3.58 percent on April 8, below the average of 7 percent since 1980.
Deficits per se obviously don’t drive up interest rates.
“Reserves are IOU’s,” Stiglitz said. “When IOU’s get big enough, people start saying maybe you’re not a good credit risk. Or at least, they would change in their sentiment about credit risk.”
Doesn’t matter with a currency issuer like the US, Japan and UK.
Japan’s ‘debt’ is nearly 3x ours, has had multiple downgrades, and their 10 year rate just ‘skyrocketed’ to about 1.3%, for example.
The existing monetary system means “there’s a very good risk of an extended period of low growth, inflationary bias, instability,” Stiglitz said.
Agreed, because nations don’t realize that their taxes function to regulate their aggregate demand, and not to raise revenue per se. And seems Stiglitz doesn’t get it either.
It’s “a system that’s fundamentally unfair because it means that poor countries are lending to the U.S. at close to zero interest rates.”
It’s unfair for a lot of reasons, except that one.
