david roche's the new monetarism
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4 of 4 people found the following review helpful:
Old Tricks on a Larger Stage, December 21, 2007
By Charles de Trenck
This a great, quick read. Many topics can be misleadingly easy to read but difficult to piece together at a deeper level. David Roche is so familiar with his topic that many of the discussions have been distilled many times over. So it may be best to re-read parts.
The recurring theme of new monetarism is seen through a pyramid of liquidity where central bank power money has shrunk in importance while securitized and derivative money has led to a new top heavy relationship where the top part of the pyramid represents a bigger chunk of liquidity than in the past. But at the same time there is no new paradigm in global growth. Only more liquidity from the top of the pyramid, which is reflected in recent bubbles from capital priced too low. Paraphrasing makes the arguments seem more in line with many recent realizations in the market on excess liquidity, and now turning toward busts (or at least severe haircuts). But reading the arguments and connecting the dots produces a powerful, non-traditional interpretation of what's happened in recent years. In some ways, the arguments presented are the anti-thesis of Gavekal's Brave New World. Yet both books are just as stimulating given the mental work out they set off as one tries delve deeper into key arguments.
A few extrapolations from the book.
Monetary policy: If power money + broad money were 13.6% the size of securitized debt + derivatives in 1990, then in 2006 this had shrunk to about 7.1%, based on the pyramid breakdowns on p. 17. This supports the view that monetary policy has shifted to the issuers of liquidity as financial institutions and away from central banks. Ironically, with the recent blow ups in asset backed paper, many of the recent providers of liquidity have had to go back to the central banks and government agencies for help, which also tends to blur the differences between the different segments in this pyramid of new monetarism, which then brings on a discussion on gold, other assets/stores of value and their differentiation with monetary tools of liquidity. (Too many more questions come to mind...)
The Yen carry trade: The world has exhibited a propensity to leverage up on Yen borrowings to lower the cost of capital and enhance returns on investment (at least until a few months ago). That the Yen makes up less of global FX reserves (4%) than global GDP (10%) as shown on p.31 while also making up more of power money (18%) than of derivatives (13%) in terms of global liquidity as seen on p.33 connects to lower velocity of usage and the concept of low risk (lower growth).
The reversal of perceptions on risk, which happens to have happened with a rise in the VIX index and equity market volatility, makes sense when you think out of the box as David Roche and Bob McKee do. One just needs to recognize that what people thought was low risk was in fact high risk (sometimes low risk may be defensive strategies yet other times low risk may be taking the reverse position from consensus). Put another way, exchanging the low return Yen for higher risks and returns pushed the relationship to its limit -- and more -- until it has now reversed back on itself, which is saying that the low risk trade was turned into a high risk trade.
Popping the Greenspan-Bernanke bubble: Bernanke's theory on the global (Asia) savings glut relative to US overconsumption is dragged out for a flogging. An interpretation by Bernanke that the US has done the world a favor by over-consuming what Asia and China produce and that it is the Asia surpluses from US trade deficits that keep interest rates low through the recycling process is ridiculed by the authors by showing that the recycling accounted for only about 15% of the decline in interest rates. Most of the decline comes from disinflation and a shrinking supply of longer maturities paper. The point is perhaps better explained when the authors point out that Asia excess corporate savings are only about 40% the size of those from US corporates.
But perhaps as well, an added point is that with higher cash generation (at margins above mean, etc..) comes less demand for borrowing in the first place. If high power money makes up a smaller portion of the liquidity pyramid then obviously the capital has been coming from new sources -- which then leads us back to understanding the pricing from the new sources. In a sense, so much more could be written here. For example, when finance books tell us the cost of equity is higher than the cost of debt (and yet also corporates often act as if equity is cheaper during good times).
In the end doesn't the cost of issuing money through securitizations and derivates also end up being more expensive (yes, we know that), even if it looked cheap at one point. But, again as we are finding out now with SIVs, we need know how much more expensive and the change in the cost over different time frames. When the current bubble deflation is better understood, we will see that the cost of capital from the top of the pyramid is far more than was believed. The authors of course tell us capital has been priced too low. But so much more could be written on this.
This book is great to get you thinking.
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New Monetarism 1435700880 David Roche Lulu Enterprises, UK Ltd New Monetarism Books Old Tricks on a Larger Stage This a great, quick read. Many topics can be misleadingly easy to read but difficult to piece together at a deeper level. David Roche is so familiar with his topic that many of the discussions have been distilled many times over. So it may be best to re-read parts.
The recurring theme of new monetarism is seen through a pyramid of liquidity where central bank power money has shrunk in importance while securitized and derivative money has led to a new top heavy relationship where the top part of the pyramid represents a bigger chunk of liquidity than in the past. But at the same time there is no new paradigm in global growth. Only more liquidity from the top of the pyramid, which is reflected in recent bubbles from capital priced too low. Paraphrasing makes the arguments seem more in line with many recent realizations in the market on excess liquidity, and now turning toward busts (or at least severe haircuts). But reading the arguments and connecting the dots produces a powerful, non-traditional interpretation of what's happened in recent years. In some ways, the arguments presented are the anti-thesis of Gavekal's Brave New World. Yet both books are just as stimulating given the mental work out they set off as one tries delve deeper into key arguments.
A few extrapolations from the book.
Monetary policy: If power money + broad money were 13.6% the size of securitized debt + derivatives in 1990, then in 2006 this had shrunk to about 7.1%, based on the pyramid breakdowns on p. 17. This supports the view that monetary policy has shifted to the issuers of liquidity as financial institutions and away from central banks. Ironically, with the recent blow ups in asset backed paper, many of the recent providers of liquidity have had to go back to the central banks and government agencies for help, which also tends to blur the differences between the different segments in this pyramid of new monetarism, which then brings on a discussion on gold, other assets/stores of value and their differentiation with monetary tools of liquidity. (Too many more questions come to mind...)
The Yen carry trade: The world has exhibited a propensity to leverage up on Yen borrowings to lower the cost of capital and enhance returns on investment (at least until a few months ago). That the Yen makes up less of global FX reserves (4%) than global GDP (10%) as shown on p.31 while also making up more of power money (18%) than of derivatives (13%) in terms of global liquidity as seen on p.33 connects to lower velocity of usage and the concept of low risk (lower growth).
The reversal of perceptions on risk, which happens to have happened with a rise in the VIX index and equity market volatility, makes sense when you think out of the box as David Roche and Bob McKee do. One just needs to recognize that what people thought was low risk was in fact high risk (sometimes low risk may be defensive strategies yet other times low risk may be taking the reverse position from consensus). Put another way, exchanging the low return Yen for higher risks and returns pushed the relationship to its limit -- and more -- until it has now reversed back on itself, which is saying that the low risk trade was turned into a high risk trade.
Popping the Greenspan-Bernanke bubble: Bernanke's theory on the global (Asia) savings glut relative to US overconsumption is dragged out for a flogging. An interpretation by Bernanke that the US has done the world a favor by over-consuming what Asia and China produce and that it is the Asia surpluses from US trade deficits that keep interest rates low through the recycling process is ridiculed by the authors by showing that the recycling accounted for only about 15% of the decline in interest rates. Most of the decline comes from disinflation and a shrinking supply of longer maturities paper. The point is perhaps better explained when the authors point out that Asia excess corporate savings are only about 40% the size of those from US corporates.
But perhaps as well, an added point is that with higher cash generation (at margins above mean, etc..) comes less demand for borrowing in the first place. If high power money makes up a smaller portion of the liquidity pyramid then obviously the capital has been coming from new sources -- which then leads us back to understanding the pricing from the new sources. In a sense, so much more could be written here. For example, when finance books tell us the cost of equity is higher than the cost of debt (and yet also corporates often act as if equity is cheaper during good times).
In the end doesn't the cost of issuing money through securitizations and derivates also end up being more expensive (yes, we know that), even if it looked cheap at one point. But, again as we are finding out now with SIVs, we need know how much more expensive and the change in the cost over different time frames. When the current bubble deflation is better understood, we will see that the cost of capital from the top of the pyramid is far more than was believed. The authors of course tell us capital has been priced too low. But so much more could be written on this.
This book is great to get you thinking.
Charles de Trenck December 21, 2007
Overall: 5
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Charles de Trenck
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