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http://www.tradingfloor.com/posts/steen-jakobsen/steens-chronicle-whos-going-to-pick-up-the-tab-3512
29 April 2011
America is a country that doesn't know where it's going but is determined to set the speed record getting there - Laurence J. Peter
Last night I had the pleasure of speaking at a Saxo EBANK seminar in Copenhagen with the world famous blogger Mike "Mish" Shedlock -he of the Mish's Global Economic Trend Analysis blog.
First, I must note that it was a novel experience for me in my twelve years of speaking engagements to be out-gunned on the negative side on my investment outlook. In the past, so many have asked me after my presentations: 'Steen, you are always selling everything – what are we supposed to BUY? Clearly, I need to bring Mish along on more of these speaking gigs and play off his gloom to make my views appear a bit more cheery.
Mish raised several critical themes and issues in the current financial environment, but the most interesting was the often forgotten focus on leverage in the US – which we all know is high, but do we really understand exactly how high?
Financial leverage in the United States
Fed Balance Assets – white line, MZM – broad money – Yellow, Public Debt – Green and finally Credit Market Debt - Red line
Source: Bloomberg
The US Fed has more than tripled its balance sheet since 2008, and US public debt has followed suit. Meanwhile, the broader money measure, as a benchmark for baseline money in the economy, has remained stable. The point here is not rehash the well publicized fact that the Fed has printed money, but more to point out that when you have this kind of leverage, even small policy errors can have major implications.
I will never forget how in the pre-Financial crisis day, I listened in on a Lehman CFO analyst call in which she boasted that they had brought down their balance sheet leverage from 40 times to less than 30! In retrospect, it's so easy to point out that this means it only takes a 3.34% move in the wrong direction in underlying assets to wipe you out rather than a 2.5% move – not a huge difference.
My piece yesterday on the possibility of an upcoming US dollar crisis drew some attention, but I must say the more I think about the main issue: How the Fed and to some extent the ECB continue to write off any material changes in the economic reality as "noise" or "transitory effects", the more I believe that all economists, a.k.a. dismalists need to own up to the fact that all models in economics are flawed – They are all fair-weather models that work when we have a tailwind and clear visibility, but as soon as things start going down the drain, the model continues to see clear skies ahead instead of a thunderstorm of uncertainty.
Here's what you get when you compound the erroneous assumption that these economic models work with the scary cherry of financial leverage on top: Main Street suffering, Wall Street celebrating, a lack of real traction in the economy, whether investment or job creation, spiking inflation expectations, US dollar weakness, and a flight to tangible assets and other seemingly tangible assets like stock. This paradigm can gain and has gained incredible inertia over a certain period of time – but we are now entering the part of the party where someone needs to go to the bar and cough up some cash to pay for the drinks. I fail to see anyone at the party willing or even able to do so. The two or three giants: Asia (China+ India), the Middle East, and to some extent Germany have domestic issues that are too pressing for them to continue to bail-out everyone. And while on the one hand the political establishment does know it needs to strike a deal, on the other hand, a wait-and-see mentality seems to have no downside risk in the meantime and hence we will continue to see plenty of non-solutions and decision-making delays on offer. Meanwhile, silver, gold, and stocks continue their upward spiral and the US dollar keeps dropping.
The current market environment seems relaxed about it probably being too easy and therefore very dangerous. Please realise that high leverage always means high risk and if nothing else that is probably the best advice I can give anyone, not that anyone asked for it. This was also the bottom line of Mish's presentation yesterday. Yes, it is appealing to join the crowd, but sometimes it is also better risk-reward to say like Groucho Marx: " I don't care to belong to any club that will have me as a member".
29 April 2011
Steen's Chronicle: Who's going to pick up the tab?
Steen Jakobsen, Chief EconomistAmerica is a country that doesn't know where it's going but is determined to set the speed record getting there - Laurence J. Peter
Last night I had the pleasure of speaking at a Saxo EBANK seminar in Copenhagen with the world famous blogger Mike "Mish" Shedlock -he of the Mish's Global Economic Trend Analysis blog.
First, I must note that it was a novel experience for me in my twelve years of speaking engagements to be out-gunned on the negative side on my investment outlook. In the past, so many have asked me after my presentations: 'Steen, you are always selling everything – what are we supposed to BUY? Clearly, I need to bring Mish along on more of these speaking gigs and play off his gloom to make my views appear a bit more cheery.
Mish raised several critical themes and issues in the current financial environment, but the most interesting was the often forgotten focus on leverage in the US – which we all know is high, but do we really understand exactly how high?
Financial leverage in the United States
Fed Balance Assets – white line, MZM – broad money – Yellow, Public Debt – Green and finally Credit Market Debt - Red line
Source: Bloomberg
The US Fed has more than tripled its balance sheet since 2008, and US public debt has followed suit. Meanwhile, the broader money measure, as a benchmark for baseline money in the economy, has remained stable. The point here is not rehash the well publicized fact that the Fed has printed money, but more to point out that when you have this kind of leverage, even small policy errors can have major implications.
I will never forget how in the pre-Financial crisis day, I listened in on a Lehman CFO analyst call in which she boasted that they had brought down their balance sheet leverage from 40 times to less than 30! In retrospect, it's so easy to point out that this means it only takes a 3.34% move in the wrong direction in underlying assets to wipe you out rather than a 2.5% move – not a huge difference.
My piece yesterday on the possibility of an upcoming US dollar crisis drew some attention, but I must say the more I think about the main issue: How the Fed and to some extent the ECB continue to write off any material changes in the economic reality as "noise" or "transitory effects", the more I believe that all economists, a.k.a. dismalists need to own up to the fact that all models in economics are flawed – They are all fair-weather models that work when we have a tailwind and clear visibility, but as soon as things start going down the drain, the model continues to see clear skies ahead instead of a thunderstorm of uncertainty.
Here's what you get when you compound the erroneous assumption that these economic models work with the scary cherry of financial leverage on top: Main Street suffering, Wall Street celebrating, a lack of real traction in the economy, whether investment or job creation, spiking inflation expectations, US dollar weakness, and a flight to tangible assets and other seemingly tangible assets like stock. This paradigm can gain and has gained incredible inertia over a certain period of time – but we are now entering the part of the party where someone needs to go to the bar and cough up some cash to pay for the drinks. I fail to see anyone at the party willing or even able to do so. The two or three giants: Asia (China+ India), the Middle East, and to some extent Germany have domestic issues that are too pressing for them to continue to bail-out everyone. And while on the one hand the political establishment does know it needs to strike a deal, on the other hand, a wait-and-see mentality seems to have no downside risk in the meantime and hence we will continue to see plenty of non-solutions and decision-making delays on offer. Meanwhile, silver, gold, and stocks continue their upward spiral and the US dollar keeps dropping.
The current market environment seems relaxed about it probably being too easy and therefore very dangerous. Please realise that high leverage always means high risk and if nothing else that is probably the best advice I can give anyone, not that anyone asked for it. This was also the bottom line of Mish's presentation yesterday. Yes, it is appealing to join the crowd, but sometimes it is also better risk-reward to say like Groucho Marx: " I don't care to belong to any club that will have me as a member".
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