Wall Street Journal: Why Letting the Dollar Fall Could Be a Good Thing

In this video, the economics editor of the WSJ explain the reasons why the falling of the US dollar affects the equilibrium in the international trade, particularly with the developing world and why Bernanke did not make this strategy public.

Krugman and the bond bubble

In this post, Krugman explains why the bond bubble have it roots in the low CPI and the high unemployment rate. Enjoy.

"The Taylor rule and the 'bond bubble'. Wonkish"

TLT is showing some keys

In the big picture, TLT looks like it is developing wave 4, until 96.72 (we know what this means for the S & P the US treasury bonds downtrending, at least in the short term). This is supported also by the reversal pattern (hammer followed by a red candlestick). The target is 96.72. In addition, the last news are showing a change in the mood of the market (jobs report, FED speech, etc.). We can add to this, the behavior of the VIX during the last week (weak and without a clear trend in the weekly chart). I am thinking on possible objectives for wave 5. Still I do not know the target of that wave. 

TLT daily chart:

China: covering shorts on US treasury bonds?

China: Rumors of the Central Bank Chief's Defection | STRATFOR 

I just read this news and is worth to notice that, even if this is not true, it is perfect to explain the last rally in US treasury bonds. Last months we were trying to find something that explains why the yields tanked again. I did not saw panic in the market (only in the fat finger day). In addition, I think this last movement on yields does not looks like a "flight to quality" and the yields were relatively low (compared to other investments) to justify a big buy on them. The last explanation to this big buy is china covering big shorts....I am still in research on this matter.

The economy, or the market?

I just read this, which makes me think about all the time spent reading and and trying to predict the future of the economy...may be is better to use our time and brain to study and analyse business and companies instead of the economy...because in the market, we are the ones that takes the decisions (we decide in which side of the trade stay). On the other hand, In the economy, the decisions are taken by everybody, except us.


"Forecasting stock prices based on a forecast of the economy has almost always led to disappointment. 
Rather, the stock market should be seen generally as a good predictor of the economy—although not always."

Euro: back in time

When in 1987, Britain became a member of the European Exchange Rate Mechanism (ERM), investors believed that sterling, then linked to the Deutsche Mark, was as good as the mark. 

Citing Mark Tier in the book "The winning investment habits of Warren Buffet and George Soros":

"As British interest rates were higher, money poured into sterling. In a reflexive, self-full-filling prophecy, this increase in demand for sterling helped keep it stable against the mark...and set the scene for its subsequent fall.

Then the Berlin Wall was torn down, the Soviet Union collapsed, Germany was reunified, and the system, said Soros, 'was thrown into a state of dynamic disequilibrum.'"

I think that history tends to repeat, so let's see what happened thereafter.

The chancellor Helmut Kohl, and the Bundesbank, started a discussion over the rate at which East Germany's currency (the Ostmark), should be exchanged for Deutsche Marks. Kohl wanted a higher rate, looking for his party's popularity in the coming election. But, on the other hand, the Bundesbank stated that a high rate of exchange was very negative for the anemic european economy. A higher rate would become very difficult to persuade private investors to make businesses there, it would cause a massive increase in government deficit, high unemployment and inflation. Finally, the Ostmarks were exchanged at .... 1:1 rate for the first 4.000, and 2:1 rate the rest. 

According to Soros ("Soros on Soros: staying ahead of the curve", 1995), that set the scene for the collapse of the ERM:

"There was a latent flaw in the ERM as well, but it became blatant only as a consequence of reunification. The flaw was that the Bundesbank played a dual role in the system: It was both the anchor of the ERM and the constitutional protector of the stability of the German currency. During the near-equilibrum period, the Bundesbank could fill both roles without problems, but with the reunification of Gemany, which caused the exchange of the East German currency for the Deutschemark at a very high, excessive rate, created a conflict between the two roles of the Bundesbank: its constitutional role and its role as an anchor of the ERM....

The tremendous injection of capital from West Germany into East Germany set up strong inflationary pressures within the German economy."


At that time, by constitution, the Bundesbank should push up interest rates in order to control inflation pressures. But this was inappropriate for Europe and in particular Britain, since they were in recession. In Soros words: "That throw the ERM, which had been operating near-equilibrium, into dynamic disequilibrium". To avoid this kind of conflict of interest in the Bundesbank, Kohl proposed to Mitterrand (French president) a reform in the european institutions. This (adding other things) was the initial impulse to create the Euro and the European Central Bank.


So, in conclusion, the Bundesbank was advocating a different monetary policy than the one that chancellor Kohl needed and Germany was adopting a monetary policy (tight) inappropriate for the rest of Europe. This tension would not last too much. Sterling collapsed on Black Wednesday, September 16, 1992. And other weak European currencies depreciate too. 

Nowadays, we have some similarities with that scenario. First, Germany, given it's productivity and fiscal situation, would need a different monetary policy than the rest of Europe, since it has the best qualities to beat the recession . Notice that both Germany and France are between the most efficient countries (Source: OECDE.org, statistics at 2007):

With this undervalued euro and productivity, (good combination for growth) a tight monetary policy would be appropriate in case the first shoots of inflation appears in Germany. But this is no the case in the rest of the countries. Second, there is a tension between the monetary policy of the BCE and the fiscal and economic situation in countries like Greece, Italy, Spain, Hungary and Portugal (among other countries). The BCE advocates for tight policies (I mean tight in relationship with the ideal suitable policies for recession) in this countries, something difficult to manage in countries with negative growth. If they were not members of the euro, they would depreciate their currencies and there would not be such tension. But this tension could not last for ever. Something should happen.


Here the comparisons between these economies, estimates at 2009 (data source: CIA world factbook):


GDP (purchase power parity, in millions)

Inflation:

Unemployment:

Current account balance as % of GDP:

Real GDP growth:

Notice that Germany is a country which would need a different monetary policy than the rest, if it had not had a negative real GDP growth. Then, with a depreciated euro, if the Germany machine starts rolling, the tension between the different economies will growth and the weakest countries would find very difficult to stimulate their economies, adding pressure to their membership of the common European currency.

Answers

Two weeks later, the market clear all the doubts and apparent contradictions in the gold, treasury and stock market. This are the answers:

France index in USD (weekly chart & fibonacci's):

FTSE in USD (weekly chart & fibonacci's):

IBEX 35 in USD (weekly chart & fibonacci's):

Greece debt problems.... and USA?

Today I read an interesting article, in which Nouriel Roubini was giving his opinion on the Greece crisis. He compare this crisis with the crisis of Argentina 2001, explaining that given the Greece numbers (worse than the Argentina figures previous to the default),  we need a miracle in Greece. The figures in the chart are the ones described by Roubini for Greece and Argentina. I calculated the figures for U.S.A and compare them with Greece and Argentina.

The output is staggering:

Preparing for this week

I will post periodically some doubts and apparent incoherences in the market.

The S & P 500 has reached the maximum levels since September 2008, before Lehman's collapse. The Nasdaq is at the May 2008 levels.
Like always happen, we have opposite signals. Regarding the bond market, the situation has not change since it is anticipating no inflation, as we can see in the spread between the TIPS and treasury. I have read something interesting in bloomberg:

Demand for U.S. government bonds is increasing. On average, the Treasury received $3.21 in bids for each dollar sold at 10- year auctions this year, compared with $2.63 in 2009 and $2.41 from 2004 through 2008, according to data compiled by Bloomberg.

But, when I look at the gold market (considered like a hedge against inflation), we see that the cost of this hedge goes up.

Why investors are buying treasurys and why they are buying Gold at the same time? Why this apparent contradiction?. I think we are talking about different investors. I have read that Soros is buying GLD. Is he buying treasurys too?  I do not know, but I do not think so. The Greece debt crisis could be the reason, as investor are hedging against money emission in the Greece bail-out and also making a little fly to quality? I have to make more research on this matter.

The TNX is moving within a channel and the trend is moderately UP, although the astronomic numbers of the debt in relationship to GDP (looking at the debt clock, you can see the debt growing 1.000.000 while in the same term the GDP grows only 85.000). Despite this situation (how long can the government keep this level of debt growth?),  I would go long at the current levels.

Regarding economic information of this week, these are the most important announcements:

- Tuesday:  Consumer confidence
- Wednesday: FOMC interest rate announcement
- Friday: GDP / University of Michigan concumer sentiment

One sector to keep an eye on is the energy sector (XLE), which have made new maxs. Sector rotation could choose this sector to keep the bull rally in the market, since this one of the sector lagging the market (the other is healthcare) and the balance sheets of the most important companies (XOM, CVX) are better than most of the other sectors.

Finally, most important earnings announcements:

Tuesday: MMM, F
Wednesday: DOW, V
Thursday: BMY, XOM

GDP chart analysis

Let's take a look at the evolution of the GDP. In these charts we show the % change from preceding period in Real Gross Domestic Product, seasonally adjusted at annual rates. There are some interesting things to notice,like the "Services" component, in which the principal trend starts falling in the 2nd quarter of 2007 and then recovers in the 4th quarter of 2008 (coinciding with the market trend at that time)

GDP: Personal Consumption expenditures:

Gross private domestic investments:

Exports:

Imports:

Government expenditures:

For additional information: click here