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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Tommaso who wrote (1953)	3/13/2004 5:07:42 PM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 116555

as with individuals, a country's credit-worthiness and hence its currency depends on it ability and willingness to pay bills and debts. while this sounds logical, i think a look at the evidence of the last thirty-odd years shows a different picture when it comes to certain countries, namely the US and Japan. Japan runs a large C/A surplus as a matter of policy. therefore, the US must run a corresponding large C/A deficit. this we have done. and Japan's commitment to this regime cannot be questioned, given that they have already bought another $100 billion of USTs this year, taking their total to over half a trillion. they do not care about notions of creditworthiness. they have a net foreign investment position of more than $3 trillion thanks to years of surpluses. there's no way they could repatriate these funds without crashing the global economy, not that they're intending to. in fact, they have really stepped up their support for USD as JPY pressured domestic makers too much. as long as the Japanese are around, USD will not go gently into that good night. and who knows, maybe now the ECB, along with RBA et al, will find themselves turning Japanese a bit as they contemplate excess deflation pouring onto their shores due to currency appreciation. this is not meant to be sanguine, mind you! the current regime may not be sustainable indefinitely, but it is not easy to predict when it will end. i think the only thing that can be said is that the entire global economy will fall apart. however, the global economy is imo going to fall apart in a couple decades anyway, due to the peaking of oil, so it may or may not be difficult to distinguish a dollar meltdown as THE proximate cause of the collapse of the global economic order. just for the privilege of keeping their money in Swiss Francs, somewhat as people are willing to buy the closed-end gold fund, CEF, at a high premium now. i think paying a high premium for CEF is ludicrous--imo it represents more of a bubble than anything else. why don't people just buy coins or bars if they want to hold bullion? obviously, there are enough reasons in the market (liquidity, tradeability, etc.) to effect a substantial NAV premium in the case of CEF. but this is precisely the reason why some very intelligent people buy trashy stocks or anything else at a premium to NAV--because they think they can sell them to others for a greater premium. That is, I think inflation is a lot worse than govnernment figures show it to be. Those figures include rent but not house prices. Grant had a piece on this recently. i think it is wrong, because houses have become like stocks that we live in in America. obviously, MOST people in this country do not consider housing-price inflation as inflation per se, but as an increase in their wealth--since for most, it is their only form of significant wealth. of course it makes it difficult for newcomers to the market, but in any given year, most people already have a house, so the 10% or 20% rise is experienced as an increase in real wealth. you can call it delusional, but you've got to admit, that is the perception people have, and they behave accordingly. that is to say, they extract housing wealth, through the innumerable means made available by structured finance. thus even though real income growth has been pathetic in this recovery, when supplemented by bubble-induced housing "wealth" extraction (or "savings"), people can perceive a rise in net income. all these are reasons i think the housing bubble can't be considered inflation. among other things, i think it's going to unwind (probably badly). but there's no doubting that it affects other prices--rents included. perhaps rental inflation is understated relative to long-term trend, since rent markets are depressed by excessive housing purchases (homeownership has rocketed upward). but OTOH, material inputs to housing are probably overstated relative to trend since many houses shouldn't be built but are. For a stable USD, short term interest rates should be nominally at about 6% right now. last year, USD short rates were about 400bp less than AUD short rates. but AUD appreciated 35% against USD (and more the year before). so AUD appreciation captured around 9 years worth of short-rate differential between USD and AUD. this can't be expected to happen every year. already, AUD/USD has declined some 10% from its highs as too many speculators crowded the trade. this points to another thing--CBs and economies generally don't like their currency to be overly strong these days. so if it gets too strong, there will be a lot of pressure, esp. from mfg sector, to reduce rates. now we even have tiny New Zealand CB contemplating intervention. not good for the NZD, which like AUD is some 10% off its highs vs. USD.