We have lived through
an era of revolutionary change. Everything is different now than it
used to be. Examples are too obvious and plentiful to mention, but
how about these future headlines: “US a net exporter of oil”,
“Chinese property investments sound”, “US housing market
recovers”, “Euro soars past Greek default”, “social media
transforms markets”, and “inflation
is not a threat”.
First, we can't have
all this good news without making the last headline a lie. But it's
this headline which ultimately is a the rallying cry for all market
bulls; we hear everyone say that, “inflation is not a threat” and
monetary policy confirms that, at the very least, inflation is not
the number one concern (even China is easing again – while everyone
thought they were tightening in an attempt to control a monstrous
property bubble). Decreasing reliance by the US on foreign oil
supplies will be held to support the low inflation argument, but the
other headlines surely imply an inflow of funds into markets, the
accounts of companies, and pockets of consumers, so, inflation is
coming – watch out!
Not so fast, let's have
a look at the likelihood of these headlines, and current assumptions
and misconceptions. Is the US really going to be a net exporter of
oil? The quick answer is no, in the last few years the US has
decreased its oil consumption while increasing both gas and oil
production. It's largely “new” cheap gas which has helped
control the price of WTI, created banner years for the pipeline
partnerships, and, combined with a weak economy, lowered the demand
for oil. But, gassification is far from cheap, and a moderate
rebound in the US economy will show everyone that the US is still
very much addicted to oil, and confirm that the US is not going to be
a net exporter.
Apparently, the Chinese
government has decided to act with reckless abandon and puff up the
property bubble even more. The official rationale presented for
lowering bank margins goes along the lines that, since the bubble has
not burst for a couple of years, there was no bubble to begin with.
This rationale is pretty simple to follow, and, remember, we are
living in an era of revolutionary change, and it's almost impossible
to think of anything more revolutionary than the rapid rise of
Chinese economic power combined with a rapidly liberalizing domestic
market. While it's tempting to accept this argument and conclude
that there's no property bubble, there's another way to look at the
lowering of margin requirements in China – what if the Chinese
banks are under pressure because their loan portfolios aren't
performing? As property developers and buyers default, the banks
only have two options, either carry the properties or sell them. The
Chinese government is still facing the Herculean task of controlling
the bubble, and decreasing margins will make it possible for the
banks to not burst the bubble by flooding the market.
As we conclude that the
Chinese property market is being doctored to prevent an implosion,
perhaps it's natural to have a look at how the US market has fared
after “operation twist”. Bernanke is used to being charged with
being ineffectual when it comes to fixing the US housing market, but
now there are signs of life in the US housing sector – could this
be due to the Fed skewing the yield curve in favor of mortgage
borrowers? While it's not possible to pass a final verdict, the fact
is that current long term yields are the same as right before the
“twist”. Lately, market participants have linked the yield curve
more to European issues than Fed policies. As to the US housing
market, some high profile hedge funds that have been investing for
the past couple of years are now coming out “talking their own
positions” - which tells us that they've filled up with all the
cheap housing they can afford and now are looking for the rest of us
to give them a profit. When you're a star fund manager this usually
works, at least in the short run, and it sure looks like there's a
causative relationship between some of these announcements/publicity
and recent signs of life in housing market. Analyzing the situation
on a different level, it seems there are added incentives for banks
to allow “short sales” , this will lead to additional supply, but
also additional demand, but on balance this is good for the housing
market. Balancing this recent positive spin and increased liquidity,
Ginnie, Fannie and Freddie are continuing to bundle foreclosed
properties and attempting to sell them. In the end, these auctions
combined with increasing short sales are all going to show up on the
US tax payers' bills, but in the short run, yes, the housing market
looks set to head up.
Talking about fixating
on short term solutions and kicking the can down the road, Greece
surrendered its sovereignty and was rewarded by another bailout. To
talk about “'default” at this stage is very passe and best left
for mainstream media – who in their right mind compares a 70% or
more write-off to a “haircut” – imagine yourself 70% shorter
than you are today, even sporting a 1970's afro wouldn't save your
life! Anyhow, will the financial markets experience any more
convulsions resulting from this Greek tragedy, and, specifically,
will the Euro retain its valuation? Yes, there will be more
convulsions, and, no, the Euro won't retain its valuation. The bond
offerings by the rest of the PIIGS will now be even less attractive,
leading to increased demands on the ECB which will directly result in
Germany, and whichever other Euro area countries economists imagine
might be fundamentally creditworthy, to provide more funds and bigger
guarantees. The events unfolding are leading to a federal Europe,
and Greece's surrender of sovereignty will prove the model. The EU
is on its way to a unified tax code (pleasing the single market/level
playing field adherents) – in the end, as the PIIGS agree to
centralization and oversight, German rejection of the “European
bond” will seem unfounded, after all, German demands are being met
and these countries are no longer in control of their own economies.
Anyone thinking that this may be a pyrrhic victory, as the
creditworthiness of Germany et al is diluted, may be partially
correct, but Germany would be much worse off with low interest rates,
a strong Euro and crippled neighbors. Kicking the can down the road
has been very costly, but considering the price paid by Greece, and
everyone else in the Euro area, there's little chance that the can
won't one day end up scoring a goal for the federalists.
Our last headline, will
social media save the world? Without offering an argument for or
against, here's our nominated indicator, NASDAQ:GSVC at $16 and
change, after spiking above $20 after Facebook announced its IPO
filing. Also, the company has done another secondary at $15 –
which is roughly the same price as its IPO last April. Conclusion:
institutional investors are hopeful, but, in a weak market, are able
to drive a bargain. When it comes to social media, it's easy to
agree that “hope” is nice but not a good guide.
Since the February 6
post calling for market consolidation, the Dow has added about a
hundred points, the Footsie a little less, and the All Ordinaries are
flat, while the Nikkei is up 600 points and the Hang Seng is up an
impressive 800 points. Along the way there have been consolidations
and the outlook is for a bullish continuation as fund managers buy
the dips in an attempt to catch up to the markets, all the while
shouting for all to hear that inflation is not a threat.
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