Showing posts with label stimulus. Show all posts
Showing posts with label stimulus. Show all posts

Monday, April 7, 2014

The Lions in the Grass, Revisited

By John Mauldin


“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

“Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”

– From an 1850 essay by Frédéric Bastiat, “That Which Is Seen and That Which Is Unseen”

I’ve come to South Africa a little bit ahead of my speaking tour next week to spend a few days “on safari.” Which is another way to say that I am comfortably ensconced in a game lodge next to Kruger Park, relaxing and trying to get some time to think. We’ve been reasonably lucky on the game runs: besides the usual lions, rhinoceri, water buffalo, etc., we’ve seen both cheetah and leopard, two animals that avoided my vicinity on every other trip to Africa. I’m here at the end of the rainy season, so everything is lush and green, and you have to get a little lucky to find the animals in the dense bush.

In several moments here, I was reminded of an essay I wrote two years ago called “The Lion in the Grass.” So I went back and read it and decided to update it fairly extensively in order to talk about the hidden lions we don’t see today that could catch us unawares tomorrow. Just like the African bush I am surveying at this moment, the economic landscape out there could harbor some serious but still unseen problems.

I have been captivated by the concept of the seen and the unseen in economics since I was first introduced to the idea. It is a seminal part of my understanding of economics, at least the small part I do grasp. It was introduced by Frédéric Bastiat, a French classical liberal theorist, political economist, and member of the French assembly. He was notable for developing the important economic concept of opportunity cost. He was a strong influence on von Mises, Murray Rothbard, Henry Hazlitt, and even my friend Ron Paul. (I will have to ask Rand about his familiarity with the Frenchman the next time I see him.) Bastiat was a strong proponent of limited government and free trade, but he also advocated that subsidies (read stimulus?) should be available for those in need. “[F]or urgent cases, the State should set aside some resources to assist certain unfortunate people, to help them adjust to changing conditions.”

Today we explore a few things we can see and then try to foresee a few things that are not quite so obvious. The simple premise is that it is not the lions we can see lounging in plain view that are the most insidious threat, but rather that in trying to avoid those we may stumble upon lions hidden in the grass.

But first, I really want to urge you to consider joining me in San Diego May 13-16 for my Strategic Investment Conference. We are continuing to fill out the strongest list of speakers we’ve ever had in our 11 years at this. My good friends George Gilder, Stephen Moore of the Wall Street Journal, and Neil Howe (who wrote The Fourth Turning) have all agreed to come and join Niall Ferguson, Newt Gingrich, Kyle Bass, David Rosenberg, and a dozen other A-list speakers from around the world. You can see who else will be there by clicking on the link above or here.

And I’m especially honored and pleased to announce that Vice Admiral Robert S. Harward, Jr., has agreed to join us on Wednesday night as a special keynote speaker. The three-star admiral (just recently retired) is a Navy SEAL and former Deputy Commander of the United States Central Command. In addition to his numerous other positions and awards, he also held the title of “Bull Frog” from 2011 until 2013 (longest-serving SEAL on active duty).

This is simply the finest economic and investment conference anywhere in the country. Don’t procrastinate; make your plans to come and register now.

The Lion in the Grass

When I was discussing this concept with Rob Arnott (of Research Affiliates and the creator of Fundamental Indexes) in Tuscany a few years ago, he mentioned the following photo, which he took on the savannah in Tanzania. I think it’s a perfect way to start out our discussion of the lions in the grass.



Going back to Bastiat, let’s look at that first sentence:

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

It is natural to focus on the apparent dangers in front of us. That is part of our evolutionary heritage from the time when humans were first dodging lions and chasing antelopes on the very African savannah in Rob’s picture. But we soon learned that, if we were to survive, it wasn’t enough to dodge the lions we could see. It is the hidden lions that may spring upon us suddenly and take an arm or a leg.

Below I have once again reproduced Rob’s picture. Even when I knew there was a hidden lion, I couldn’t find it. But after it was pointed out to me, it is now the first thing I see. And there is a direct analogy there, to both economics and investing.

So, before you go to the next page, I suggest you go back and look one more time to see if you can spot the hidden lion. Just for fun, you know.

I showed this to a friend of mine who is a hunter, and he found it almost immediately. But then he has taught himself over the years to look for hidden game. And as Bastiat noted, it is the skilled economist who looks for the effects that are hidden, the surprises that are unseen. It should be a habit to look at the potential second- and third-order consequences of what we can see happening before our eyes. That way, we not only avoid the hidden lions, we also turn what would hunt us and do us harm into the hunted. Sometimes, the dangers themselves can be turned into a very nice trophy indeed – if you can act in time.

As I noted, that previously invisible lion is now the first thing I see. And that is the way with economic lions in the grass. Once someone points one out, it’s obvious, so obvious that we soon convince ourselves that we would have seen the lion without help. How many people told you they “knew” all along that subprime debt was going to end in tears? Or that the housing market was a bubble? Or that we would be plunged into the Great Recession?

I remember that in the fall of 2006 I was beginning to talk about the probability of a recession, in this letter, in speeches, and in numerous media interviews. (There is one such episode still up on YouTube.)  I was told I was ignoring what the market was telling us, and indeed the market proceeded to go up for another six months or so. Being early is lonely. Me and Nouriel. J

Today there are a lot of people who tell us they knew there was a recession coming all along. In fact, the farther we get from 2006, the greater the number of people who remember making that call. It now seems I had no reason to feel so lonely out there on that limb, scanning the tall grass of the savannah. In retrospect, it seems that limb was rather crowded.

So, with that in mind, let me show you where the other lion is. Then go back and look at the first picture. After a few times you will see the hidden lion almost before you see the obvious ones.



Black Swan or Hidden Lion?

I should note that a lion in the grass is different from a black swan. A black swan is a random event, something which takes us all by surprise. Economic black swans are actually quite rare – 9/11 was a true black swan. Other than Nostradamus some 500 years ago, who saw it coming?

The last recession and the credit crisis were not true black swans. There were those who saw it all coming, but few paid attention. They were dancing right along with Chuck Prince to the rousing music of a bull market and swelling profits.

As we know now, a few people saw the subprime crisis coming and made huge fortunes. Sadly, pulling that off generally required one to risk a small fortune to play in that game. So while I talk about the lions hidden in the grass, remember that if you can figure out how to play it, there can be large profits betting on that which is unseen by the markets.

Now, let’s look at a few obvious lions and then see if we can spot a few hidden lions lurking nearby.

The Lions in Europe

By some miracle, Mario Draghi and his team at the European Central Bank (ECB) continue to get from their communication tools what most central banks have to take by force. Widespread complacency has washed over the region in the months and quarters since July 2012, when Mr. Draghi introduced the Outright Monetary Transactions (OMT) facility and adamantly promised to do “whatever it takes” to preserve the euro system.

As a result, government borrowing costs are converging back to pre-crisis levels even as falling inflation brings the next debt crisis forward … and markets are clearly still responding to the ECB’s increasingly hollow commitments.

Without changing the ECB’s main policy rate at this week’s monetary policy meeting, Mr. Draghi once again attempted to talk his way to a policy outcome by suggesting that he has the broad based support to authorize quantitative easing, if and when it is needed. It will be needed – and maybe soon.

As I wrote late last year, European banks are in terrible shape compared to U.S. banks. We think of German banks as the epitome of sobriety, but they have been on a lending binge to creditors who now appear to be in financial trouble; and with 30- or 40-1 leverage, they could easily see their capital fall below zero. Despite modest bank deleveraging across the Eurozone since early 2012…



… public and non-bank private debt burdens have not improved:



Low inflation is also seriously disrupting government debt trajectories. The analysis below from Bank of America Merrill Lynch shows how low inflation, near 0.5%, raises debt trajectories in France and Italy that would be a lot lower under a normal, 2%, inflation scenario. As the charts show, persistent “lowflation” for several years could add another 10% to 15% to the public debt to GDP ratio in each country … even if rates stay where they are today.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

 


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Friday, June 8, 2012

Bloomberg: Crude Oil Heads for Longest Weekly Losing Streak Since 1998

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Crude oil fell, heading for the longest run of weekly losses in more than 13 years, on concern that an economic slowdown in the U.S. and Europe will worsen and curb fuel demand.

Crude dropped as much as 3.3 percent after German exports decreased for the first time this year as Europe’s debt crisis and weaker global growth reduced consumption. Federal Reserve officials need to assess the risk from Europe and U.S. budget cuts before deciding on stimulus measures, Federal Reserve Chairman Ben S. Bernanke said yesterday.

“Germany is the lynchpin of the whole euro zone, and if they are slowing, that’s going to add more negative news to the markets,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago. “It’s basically a letdown after Bernanke’s comments yesterday. There is no growth right now, no oil demand”.....Read the entire Bloomberg article.

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Thursday, June 7, 2012

Bernanke Speaks....and they all fall down!

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The U.S. stock indexes closed mixed today. The bulls were disappointed with Federal Reserve Chairman Ben Bernanke's speech to the Joint Economic Committee of the U.S. Congress. Bernanke said the U.S. is facing economic headwinds, especially due to the European Union debt crisis, but offered up no specifics on any fresh monetary stimulus package to promote more economic growth. The restrained tone of Bernanke's speech disappointed bulls who wanted immediate gratification on economic stimulus.

However, Bernanke at this time holding his cards close to his vest on the matter did not surprise most market watchers, many of whom still reckon the Fed will at some point down the road provide fresh monetary policy easing. The “Bernanke bust” overshadowed several significant market place developments that occurred earlier Thursday, led by news China has cuts its interest rate by 0.25% in an effort to stimulate its economy.

Crude oil closed down $0.85 a barrel at $84.17 today. Prices closed near the session low today. The crude bears have the solid overall near term technical advantage. There are still no early technical clues to suggest a market bottom is close at hand.

Natural gas closed down 14.6 cents at $2.275 today. Prices closed near the session low and hit a fresh six week low today. Bears have the solid overall near term technical advantage and gained more downside momentum today.

Gold futures closed down $44.10 an ounce at $1,590.10 today. Prices closed nearer the session low today and were pressured by the failure of Fed chief Bernanke to offer fresh monetary stimulus at today's testimony to Congress. The gold market bulls quickly lost their technical momentum today. Bears regained the slight near term technical advantage in gold.

The U.S. dollar index closed down 14 points at 82.63 today. Prices closed near mid range today and saw more profit taking. No chart damage has occurred this week but the bulls are fading a bit and a bearish weekly low close on Friday would begin to hint that a market top is in place. Bulls do still have the overall near term technical advantage.

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Thursday, April 26, 2012

Crude Oil Trades Near Highs of the Week as Fed Says it's Ready to Protect Growth

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Crude oil traded near the highest level in more than a week after Federal Reserve Chairman Ben S. Bernanke said that while further stimulus is unlikely, central banks “remain prepared to do more” to protect the economy.

Futures were little changed, paring an earlier gain after more Americans than forecast filed applications for unemployment benefits last week. Economic growth is expected to “remain moderate over coming quarters and then to pick up gradually,” the Federal Open Market Committee said in a statement. U.S. crude supplies gained more than estimated last week, and Iran’s envoy in Moscow said his country may halt the expansion of its atomic program to avert new Western sanctions.

“Bernanke will do something if things don’t get better,” said Hakan Kocayusufpasaoglu, chief investment officer at Archbridge Capital in Zug, Switzerland. “And when Bernanke says he’ll do whatever it takes to get the economic growth rate improving, that means the economic trajectory rises and oil demand increases over time. And his methods for doing something increase money supply, causing the dollar to depreciate and that lifts all commodities”

Read the entire Bloomberg article

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Friday, February 19, 2010

Don’t Discount the Impact of the Discount Rate Increase


Don’t discount the impact of the discount rate increase. The longest journey from the removal of extraordinary stimulus starts with the first step and that step has now been taken.

As the US stock market closed, the Federal Reserve raised the discount rate charged to banks for direct loans to 0.75 percent from 0.50 percent. The Fed wants to wean banks away from taking loans from them and push their lender back into the real world when they have to borrow money for their short term liquidly needs. Oh sure, the Fed is trying to say not read too much into this and that these changes are only intended as a further normalization of the Federal Reserve’s lending facilities but come on. Who are they trying to kid? Let’s face it, the normalization of the Fed's lending facilities is a big change and perhaps a red stick pin in the chart of the history of the greatest financial crisis since the Great Depression.

Or sure the Fed says that these so called modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, yet at the same time in the Fed Minutes the Fed said that the outlook for the economy was brighter and this would be the most likely next move towards getting us back to normal. You remember normal, now don’t you?

Of course the Fed had other inspirations like losing control of the long end of the yield curve where the spread between the long and short end of the curve widened further than the Snake River canyon. Long end yields hit the highest level since last summer. And on top of that, we are seeing hot inflation data as evidenced in the Producer Price Index that rose by a much hotter than expected 1.4%. The truth is that no matter what the Fed is telling us it is clear that the market and the economic data is starting to force the Fed hands. If the long end of the yield curve does not come in after this move, it is more likely that the Fed will have to start on its next move.

Now the Fed agreed that the first move would be a an increase in the discount rate which has happened but now do we go to systems repos or do we go to just go to all out rate increases? Do we drain that excess cash the Fed has gone in to overtime printing? Or do we shock the traders out of the long end with end of the curve with a quarter point downer increase in the Fed Funds rate? Or maybe does the Fed Just change the language try to fake out the so called “bond vigilantes” into believing that the Fed is ready to move. Does the Fed drop the range on the Fed Funds rate or do we as Kansas City Fed President Thomas M. Hoenig suggested change the language to because as the Fed minutes said, “he believed it was no longer advisable to indicate that economic and financial conditions were likely to "warrant exceptionally low levels of the federal funds rate for an extended period." In recent months, economic and financial conditions improved steadily and Mr. Hoenig was concerned that, under these improving conditions, maintaining short term interest rates near zero for an extended period of time would lay the groundwork for future financial imbalances and risk an increase in inflation expectations.

Mr. Hoenig believed that it would be more appropriate for the Committee to express an expectation that the federal funds rate would be low for some time, rather than exceptionally low for an extended period. Such a change in communication would provide the Committee flexibility to begin raising rates modestly. He further believed that moving to a modestly higher federal funds rate soon would lower the risks of longer-run imbalances and an increase in long-run inflation expectations, while continuing to provide needed support to the economic recovery.

In other word the increase in rates could help inspire an economic recovery. An increase in rates may be a signal to home buyers and businesses that the days of easy money are coming to an end. That it may be time to start making some commitments before we start talking about the good old days when you could get a mortgage for 4.93%.

For oil bears the timing of this move could not have come at a better time. The oil market was strong yesterday for a lot of reasons. Some of them technical as oil had an air bubble after it close above 7550 which should have given us a run towards $80 which happened, but there were a lot of things that drove us to that point. Obviously the oil inventories were a key factor but there was also strength in the dollar. The dollar versus the euro and the euro versus the Swiss played a massive role in some of the crazy moves that we saw but also the fact that the UN’s International Atomic Energy Agency finally woke up to the fact that Iran was working towards getting a nuclear war head. Wow! We are all shocked! Are we not?

Then next thing we find out was that there was gambling at Rick’s. But even before that stunning announcement the dollar and oil swung on reports of a central bank intervention by the Swiss National bank. Bloomberg News reported after a big rise in the Euro, reversing its losses against the dollar, there was speculation the Swiss National Bank sold the Swiss franc in an effort to cap the currency’s gains. Bloomberg said at that point that the dollar earlier rose toward a nine-month high against the common currency amid speculation the Federal Reserve will be one of the first major central banks to remove stimulus measures.

They were right on that speculation as it does indeed appear the US will lead the world out of the economic crisis. Well that’s only right because we did lead the world into it. Of course they were all willing participants in the easy money and mortgage yourself to the hilt false prosperity game. Oh sure, there are those who would argue that China is leading the world out of the global meltdown it but from my view point China’s expanding bubble is the next great threat to the global economy. The lack of concern by many over the way China’s economy has exploded and the crazy out of control lending by Chinese banks means that many have not learned from history. Sure there can be massive profits made riding the China bubble and it has been one incredible ride but you don’t want to be there when the bubble ends.

Now remember this is coming from one of the early China bulls as I was bullish on China long before being bullish on China was cool. Like 10 years ago. (Oh, my gosh, has it really been 10 years? It seems like yesterday). Obviously it is hard to predict when it will end but we are getting closer and if we have learned anything we know that China needs to be even more aggressive in trying to slow things down or we could see the next global economic shock faster than many complacent bubble intoxicated China bulls might think.

Oil bulls liked what they saw in the weekly oil inventory that was much more bullish on distillates than the API would have you believe. The EIA reported that distillate fuel inventories fell by 2.9 million barrels in the latest week that was more in line with the bulls more fidget dream forecast. Of course do not remind them that supplies are still 6.1 percent above year ago levels as that might make them a bit cranky. The EIA said that crude was up 3.1 million barrels which should have been bears if it were not foe the distillate drawdown. Gasoline increased by 1.7 million barrels which was bullish as well as many felt that with all the snow should have seen a larger increase.

Refinery runs improved to 79.8% if you want to call that an improvement. And demand, based off total products supplied over the last four week period, has averaged 19.0 million barrels per day, up by 0.2 percent compared to the similar period last year. Over the last four weeks, motor gasoline demand has averaged 8.6 million barrels per day, down by 1.3 percent from the same period last year. Distillate fuel demand has averaged 3.7 million barrels per day over the last four weeks, down by 7.4 percent from the same period last year. Jet fuel demand is 1.4 percent higher over the last four weeks compared to the same four week period last year.

Oil did hit a 5 week high but failed to take out 80. With the Fed move and with expiration of the March futures on Monday, it is unlikely that they will. As I said yesterday, the recent move does nothing to change our long term bearish outlook and this could present an opportunity. Unless oil closes above $85 we are headed to the $40 handle in my humble opinion. We expect a test of this area and short term traders and day traders can take advantage of the wider swing moves within the range. We have seen oil fall from the eighties to the sixty handle and have swung wildly in the seventies.

You can contact guest blogger Phil Flynn at pflynn@pfgbst.com



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Tuesday, July 21, 2009

Crude Oil, Gasoline Rise as Earnings Signal Recession Is Easing


Crude oil rose and gasoline climbed a sixth day, the longest stretch since January, as better than expected earnings at Caterpillar Inc. signaled the recession may be easing in the world’s biggest fuel consuming country. Oil increased as stimulus programs and improved credit markets bolstered profits at the biggest maker of earth moving equipment. Per share earnings beat projections by an average of 14 percent for the 70 companies in the S&P 500 that reported quarterly results since July 8. U.S. crude oil supplies probably fell last week.....Complete Story

Friday, February 13, 2009

IEA Projects Higher Oil Prices On Projected OPEC Cuts


"New OPEC Cut Would Push Oil Prices Higher-IEA"
If OPEC decides to cut oil production levels again at its March meeting, that would further tighten global petroleum supplies and put upward pressure on oil prices, the head of the International Energy Agency said on Friday. "Our current projection suggests that (world oil supplies are) tightening, and a further (OPEC) cut.....Complete Story

"Crude Oil Surges on Speculation Plunge Earlier This Week Was Unjustified"
Crude oil rose the most in three weeks on speculation that a 9.6 percent drop in prices this week was larger than justified as governments implement stimulus programs....Complete Story

"Norwegian Oil Firm Goes to Energy's Last Frontier"
A Norwegian oil company has gone to the ends of the earth to get at some of the world's last untapped energy resources....Complete Story

"OPEC Members Carry Out 65% of Production Cuts So Far"
Members of OPEC have implemented nearly two-thirds of the production cuts of 4.2 million barrels per day that they agreed to last September, an OPEC report showed Friday....Complete Story
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