December 11, 2009
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11/30 – Australia raises rates again
The Reserve Bank of Australia raised its overnight interest rate by .25% on Tuesday morning to 3.75% and is the third increase in the last three months. They obviously believe their economy is on an upswing and wants to prevent an uptick in inflation. Raising rates is usually bullish for the home currency but the Aussie dollar is unchanged tonight as the market was fully expecting the news from the Australian central bank.
A couple of stories from down under that are worth reading especially since they are about the booming real estate market. The first quotes a Reserve Bank governor that told a Sydney audience house prices are not overpriced despite the fact they are at historic levels after 18 consecutive years of economic growth. Didn’t we hear the same thing from a National Association of Realtors economist a couple of years ago just before the price peak?
The second article is about an Australian survey that found more than 33% of Australians plan on buying a property in the next two year despite concerns over higher living costs and rising interest rates. It’s amazing how rising prices bring in home buyers especially when a central bank governor is encouraging more purchases.
12/1 – The second “back up the truck”
It is very rare we have two “active” trades but today’s Nikkei advance into our preferred sell area allowed readers to accumulate a ¾ short position in the EWJ (ETF). A move above 10.00 will gives us the last ¼ and complete the position. In Wednesday’s Asian trading the Nikkei is unchanged despite today’s 1%+ advance in US stocks. I will set a stop loss point once the lat ¼ position is completed but even with last night’s BOJ announcement of semi quantitative easing it is doubtful the effect on the economy will be positive unless the exchange rate begins to weaken.
The Japanese yen is nearing levels not seen 1995 and tonight’s chart shows the yen on a monthly basis back to 1974 when it traded at 300 to the US dollar. If the Bank of Japan is serious about fighting deflation and the new administration wishes to bolster its export driven economy we will see a significant increase in the supply of yen created by the BOJ. The problem is that interest rates are already so low in Japan that I’m not sure what effect it can have and it might be difficult for the BOJ to find sellers of bonds for its newly created currency. The ultimate answer will be the same route almost all countries use to fight deflation: DEPRECIATE your currency and my target for the yen remains 120 to the US dollar in 2010.
A Bank of Japan board member (Suda) said tonight the bank “is open to taking more steps to support the economy.” I agree with his statement but unless it is accompanied by support from the federal government it will be like trying to push a ball under water and then watching it constantly bounce back up.
12/2
It’s important to understand why gold is rising and it is NOT because of rising inflation expectations. Last night I wrote about a massive devaluation of the currency in North Korea which drives citizens to hide their assets in gold. The Bank of Japan announcement on Tuesday of another quantitative easing program will have a negative effect on the yen and will send Japanese investors to gold. The rise is all about a coordinated depreciation of world currencies and central banks are leading the parade into gold. Can gold go to $2000? $3000? Yes but buying into parabolic moves instead of waiting for the inevitable pullback is almost always a guaranteed way to create losses.
12/3 – The Fed and interest rates
I watch and tape every Fed speech and pay close attention to question and answer sessions for clues to upcoming changes to monetary policy. It’s very time consuming but much like a football coach that spends hours reviewing film of his opponent’s games one or two tidbits can make a big difference in planning for the future. This morning’s Q&A session was aimed at the Fed’s past mistakes but a couple of Senators asked what the Fed is doing to increase small business lending. The Fed Chairman’s answers are revealing because he kept his answers to the supply side of lending stating credit is available to anyone in need of funds. He stated the Fed has urged banks to make loans BUT make sure they are not bad loans. In today’s environment banks are afraid of making most loans because they can’t be sure the value of the collateral will not decline. He also offered the fact that low interest rates usually stimulate lending but haven& rsquo;t yet because of bank’s desire to invest money in Treasuries instead of loans. He never touched on the most important part of lending – demand from borrowers. It takes two sides to complete a loan and if there are few borrowers of assets there will be very little demand for credit. The only assets rising in value this year have been gold, commodities and stocks and those are not the loans the Fed wants to see increase because those loans don’t end up creating new jobs.
The most interesting answer Mr. Bernanke gave today was missed by the press and traders and it concerns long term interest rates. When Ben was asked if the Fed was worried about future inflation pressures he answered:” We can handle rising inflation expectations (through higher nominal short term rates) but WE ARE WORRIED ABOUT RISNG REAL RATES.” Why would the Fed Chairman be worried about real interest rates which represent the expected growth rate of the US economy and are currently trading at 1.17% for the 10 year? Wouldn’t the Fed like to see real rates higher because it would a result of a growing economy? Yes, BUT what if real interest rates rose because investors became worried about the ability of the US to make timely interest payments and/or have the funds to pay bond holders at maturity. What would cause this panic that would drive real rates higher? What is the real worry of the Fed Chairman? It has to be the performance of the dollar which is being used a desperate way to stimulate the economy through lower prices to foreigners. The problem is that every other country (China, etc.) is using the same instrument AND as I have written many times I know of no country in history that has devalued its currency and arrived at prosperity. The Fed Chairman knows the country is trying to stimulate foreign demand for US goods without an increase in inflationary expectations while fighting a deflationary domestic war that is accelerating because credit is contracting every week as borrowers and lenders hide because of fear that asset prices haven’t hit a solid bottom.
The recently popped bubble in real estate and assets was built on an unsustainable increase in credit and now we want banks to extend more credit again but to only those who they are sure can repay the loans. Who are they kidding? It’s not going to happen and can’t happen for years and not until debt levels are reduced by both consumers and investors. This is a very big problem and one of the main reasons I believe we won’t hit bottom until 2013 and begin a sustainable economic rally in 2019. Get comfortable the world is NOT what you want or need and won’t be for a very long time.
12/6
Gold, jobs, interest rates, the yen, stocks, where do we begin? Avery busy Friday for all markets but the end of the day may have given us the best clue to the future despite the fact the financial press gave it no coverage. The Fed’s weekly h.8 report showed a continuation of the credit contraction that began last year. Bank credit fell $8.8 billion but general fear appears to have taken over as banks cut back holdings of treasuries by $12.9 billion and mortgage securities by $20.5 billion. Where are the banks placing their $$? Cash assets rose by a stunning $146.5 billion and our now $764 billion higher than a year ago. Friday President Obama spent the day in Allentown, Pennsylvania and held a meeting with small business owners who expressed frustration during the question and answer session about the lack of available credit from banks. The President assured them he was just as angry at the banks and would be using every means available to push them into issuing loans. Unless the government wants to guarantee the banks against losses it will be very difficult to make these lenders go back and do something that caused the problems we now have in the credit markets. This is a very important point and one of the main reasons I believe the economy won’t bottom until 2013. It’s clear to everyone that excess credit creation and poor underwriting standards created the current mess and much like a cat that sits on a hot stove it will take time before the banks go back to what got them in trouble. The President and Congress wish memories were shorter but banks have no reason to take risks when they perceive the value of the collateral for loans remains unstable and the ability of borrowers to pay interest and principal is not certain. The economy has slowed its rate of decline but sustainable growth without an increase in credit is impossible as the country’s savings rate remains near zero. The government can print money but can’t force consumers to spend and banks to lend without guarantees or tax incentives.
12/7 – Is there a Hall of Fame for bad investments?
2008 proved to be a disastrous year for most investors in equity land but the UAE (United Arab Emirates) sovereign wealth fund might have set a record for the worst equity purchase made by a fund with its investment in Citigroup. Two years ago the Abu Dhabi group sent $7.5 billion to the New York banks when it was in desperate need of capital and demanded an 11% dividend that was guaranteed for two years. BUT Citi convinced the fund to include a mandatory conversion of the money into Citi stock on March 31, 2010 at a price of $31.83. With Citi’s tock currently trading at $4.03 it converts a winning investment into a sure loser of more than 50%. What was the UAE thinking when they made the investment? We see the world as we need it to be NOT as it is with the reassurance that if we lose it will be in company which is easier than winning alone.
12/9
States with no income tax are finding it difficult to raise needed revenue and Texas announced Wednesday a 85% increase in the annual unemployment tax from $89.10 to $164.70 per worker. The immediate effect will be a revenue increase but shortly thereafter they will learn what Michigan did a few years ago and that the end result is a huge increase in the unemployment rate as employers find it too expensive to hire the marginal workers.
