Friday, December 17, 2010

Dec 16 Chat

09:03:03  ME : yo
09:03:50  FRIEND 3 : you're bloody right! mkt pricing us turning the corner, hope it's not into a blind ally!

09:06:26  ME : imagine, if i were prop trading at {}, your bonus pool would be bigger!!

09:07:11  FRIEND 3 : i'd like that

09:09:43  ME : i believe we will eventually have another bond rally, but in the near term you underestimate the power of the propaganda systems to perpetuate the 'recovery' meme

09:09:59  FRIEND 3 : i do

09:10:28  ME : the market psychology game has been an important factor
remember 'green shoots'?
that was a coordinated campaign
including he white house/fiscal apparatus

09:11:19  FRIEND 3 : green shoots shrivelled!

09:11:46  ME : how can you possibly view tax cuts/spending increase as anything other than Fiscal Stimulus Act 2.0 (or 3.0 or whatever number you want to put on it)
because the economic structure is broken
its like transfusing blood into a body whose main arteries have been lacerated
the blood is indeed in the body for some period of time
it is pouring out onto the sidewalk

09:12:59  FRIEND 3 : that's why i feel like 2011 will be a repeat of 2010

09:13:10  ME : i thought you'd like that metaphor
well, 09-10
green shoots was spring-summer 09
alot of talk about 'second derivatives' from the zombie teleprompter readers on cnbc
: like they ever took a math class in their lives!!
in the short term, you'll get all the economic weathermen on the street to update their forecasts and talk about gdp growth
blah blah
09which has already happened
some very motivated folks will even talk about sustainable recovery
without going too far into the weeds on that one!
but job growth will not materialize
deleveraging will continue
of course, both are devastating to housing and commercial real estate
ultimately pressuring the banks
i believe the japan corollary will hold
because the dollar is not in significant threat as reserve currency
lots of brinksmanship
but ultimately smoke and no fire
or light but no heat
or whatever the phraseology is
the economists will miss the withering shoots yet again, because they overlook the structural bankruptcy of the country and therefore miss the psychological need to save rather than spend, and then when we turn, it's too late
and as your boy conceded monday night - that group is blinded by incentive systems and groupthink
so, very important to know what the groupthink is
and not get too far in front of it
its way too early after the whole 'rah rah, gdp will go up' from the tax cut/fiscal stim to buy bonds

09:21:23  FRIEND 3 : ‘my boy’ get's the delvering thingy....he and i spoken at great length about this, but he says it's very hard to forecast what impact it will have, and how he uses it is to temper growth forecasts due to perceptions of further extensive delivering

09:21:46  ME : ultimately anyone looking at the situation as a recession from a baseline of 2005-2006 has absolutely zero understanding of the economy
meaning most wishful thinking politicians and sell side strategists/economists/ media shills

09:22:24  FRIEND 3 : what you mean?

09:22:40  ME : this is (at least) a 30yr story playing out
robbing from the future to 'juice' the present WHILE THE PRESENT FUNDAMENTALS ARE DETERIORATING
has been happening for at least 30 years
we live in an industrial / post industrial world
wealth comes from additional understanding of already complexly understood technologies etc

09:24:01  FRIEND 3 : we are about to live in a post consumer world...that is my greateest fear. at least i know how to skin a goat!

09:24:06  ME : but look at the education league tables of the last 30 years
and graph the u.s. position
look at the florida guy
that's what social unrest looks like in the u.s. i fear

09:25:22  FRIEND 3 : if you were a real estate developer in florida, what would you be doing? which florida guy you referring to btw?

09:25:28  ME : guy railed against the 'financial terrorists and corrupted government' and then went to shoot his local school board
09:25:39  FRIEND 3 : oh that guy, right

09:25:54  ME : i mean, his critique is pretty accurate
for an addled dude
strategy for change flawed
but probably will see more of that
people just snapping
if i were a real estate developer in florida, i already would have leveraged up as much as possible , cashed out as much equity as possible, diversified into metals, bonds, interest rate and currency vol

09:28:15  FRIEND 3 : it never ceases to amaze me how a little be of good news can cause us to take our eye of the real problem...even for most long as we can meet service payments we seem to ignore structural problems until it's too late...have you read any of the stuff on greece. it's shocking. the scale of insolvency is brutal

09:28:36  ME : dude, its worse here right now than it is in greece
looking at just u.s. government debt WITHOUT fannie and freddie is DUBIOUS
with fannie and freddie its already worse

09:29:16  FRIEND 3 : that's why greece is so scary...cause it could be us too...and what you are saying is that it is

09:29:26  ME : it absolutely is
except the dollar is the reserve currency
and the fed is printing money

09:29:59  FRIEND 3 : i read recently that the public bus system has 8 drivers for every bus!!
the service it provides is not transport, it's jobs

09:29:59  ME : in effect, monetizing the chinese's inability to ultimately float the currency
china is not dumb
i mean, they're fascist
but not dumb
if they float the yuan
manufacturing picks up and moves to bangladesh/rural vietnam]
and large social movements are more recent in chinese history than the u.s.
meaning gov't existential risk

09:31:27  FRIEND 3 : we all operate on the lesser evil least we are not as bad as so and so....but we are worse!

09:31:30  ME : meaning actual life existential riosk for the establishment folk
its a slicker machine here, for sure

let me ask you a framing fundamental question
can china float the yuan?
no, of course not

09:46:28  FRIEND 3 : let me answer!

09:46:28  ME : so, what wil they have to do with their dollar surplus?
ok, take a shot at it

09:48:04  FRIEND 3 : no, if they do they end up with a bubble greater than the one the have...akin to japan 1985-1999 after the plaza accord...taht destryied they know in reality their reserves are worthless, but nonethe less and important part of domestic chinese economic policy. they can afford to do nothing with them
09:48:23  ME : exactly
09:48:34  FRIEND 3 : phew...i was half expecting and WRONG!

09:48:34  ME : although i don;t think they will have a b ubble
your conclusion is right
but they would not have a greater bubble, they would have systemic collapse
 (though perhaps they would attempt to flight that off by printing money like all good banana republics)

09:50:02  FRIEND 3 : they are extremely afraid of that...the foxcomm thing frightened the cr@p out of beijing....beijing survives simply becuase of job creation and improvements in stds of lving

09:50:33  ME : i mean, has to be that way
interesting angle on this is the gamesmanship between the creditor nations
do they take their dollar surpluses and sell the USD to buy their competitors currency?
that's a smart strategy
for instance, if you wer echina, shouldn;t you be buying KRW?
but then the koreans would need to defned their own currency and in turn 1) spend their non dollar reserves on usd
and/or 2) print krw
like insect repellent
i'm completely brainstorming right now
but like where this is going
we need some anecdotal data on what is happening
ther ehas to be some short term brinksmanship here
between the creditor/producer nations
inside of the larger longer term framework of needing to preserve the usd
you can’t tip the dollar over
they all have that interest
until enough demand is created in the rest of the world oto offset the u.s. market
 (really, the western markets)
IF these guys are actually interested in that (a big IF, in my mind)
then they absolutely should be pursuing middle class building policies
secure the raw materials access
which at the very least china has been doing
build the productive capacity
and build the end demand
i am sceptical about the end part
because they need to share the gains from trade with the workers
and China's Gini coefficient is one of the highest in the world
think Foxconn
so, i think we can conclude this is a pretty long game
we're not near the end
meaning the dollar will be the reserve currency
the complicating piece in the near term is the rollover of the  massive expiring debts in the developed world
you've got to think the Fed is a little bit crafty, right?
this is the stuff they think about
all the time
even from a sinister  'preserve the establishment' agenda
so if they are crafty
they let the economy hit another soft patch
which is inevitable even now
after the dose of stimulus wears off
 (mortgage rates up 100bps)
that is where they can credibly come in and say, 'we need to fight deflation'

10:01:49  FRIEND 3 : you are on a roll dude

10:02:00  ME : so, better economic numbers in the short term
leads fed to say 'we're done after qe2'
which probably hurts gold
more than anything else
because you lose the 'structural collapse alternative currency probability'
as well as the 'runaway money printing'
i think you could see a flattening of the curve
as the market takes the economic improvement and prices in a rate hike
which keeps the bond vigilantes quiet
stocks are still constrained by a lack of revenue growth
after the stimulus effects passs through the system and more soft data is realized, then the fed can come back in and print
if they want to actually look smart
which  is the hard thing to discount
don’t know how much brainpower they have there
or how much they care about looking smart
even if they are thinking this
but all of that makes a heck of a lot of sense to me

the reality is the ultilmate problem is not monetary policy
 (although monetary policy is compounding the original problems and has historically prevented working on the real problems)
at this point, continuing to do that can be rationalized as 'buying us some time'
but no one is talking about really addressing the fundamental issues in that time
given the corrupted political apparatus
which is why i am ultimately bearish
only the most nebulous 'we must make education a priority'
which is true
but i think that’s a circularity without systemic collapse
the people may need a systemic collapse to shake them out of their slumber
hard to say
given anecdotes like florida dude
tea party
general anti-incumbency
and consumer deleveraging
voluntary AND involuntary
complicating factor you could shed light on - what's the likely europe stochastic?
ECB prints money?
EFSF gets funding from the fiscal authorites of member states large enough to bail out all the periphery for 3-5 years?
Ireland style workout?
where pension system assets are pledged against new loans?
 (to me, this is criminal)
but isn’t that what just happened in ireland?

10:13:59  FRIEND 3 : that's how you tackle the pension problem...force it to buy bad assets!
10:18:28  ME :  K
things that need to be incorporated:  europe scenarios and u.s. state/municipal default scenarios
let me ask you another question -
if the fed came out tomorrow and said, we will not do any more QE because the fiscal authorities are stepping up stimulus
what would the bond market do?

10:25:14  FRIEND 3 : ask me one on cricket
honestly without QE i think bonds would rally and stocks would PUUUUuuuuke

10:27:58  ME : agreed
if the stated goal of QE2 was to reduce long term interest rates
shouldn;t they do this then?

10:28:42  FRIEND 3 : it did puzzle me why the fed would use their last available tool without things being totally helpless

10:28:45  ME :
well, it did appear as though there was no way the fiscal authorities would get anything done
given the tea party republican momentum
and the data was turning down
at the time they were thinking about it (probably july)
definitely by early august
it appeared to be the only option
now i think they’re thinking, lets go double barreled and try to avoid japanese outcome
even using richard koo's ‘balance sheet recession’ terminology
but don’t they look at the underlying economic structure???

10:31:24  FRIEND 3 : the last time things got so global destabilized....didnt we have a world...dont mention the war!

anything you have on europe and the u.s. states would be awesome

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