Dow up over 400 points today, news flow all about how great the Central Bank actions are for the economy.
So what’s the truth?
Hard to know, that’s what the truth is…
First up, China.
The China News
The Chinese Central Bank eased reserve requirements for their banks. This is seen as good, since China had been trying to dampen the excessive growth rates in China (to reduce inflation risks). So having that problem abating is good, right? Central Banks saying “Things are looking good on inflation and we don’t need to be so tight, we’ve succeeded.” is a good story, right?
Well, it depends on ‘why’, and for China where even basic data are often unavailable or highly suspect, figuring out what the real ‘why’ might be is at best massive guesswork. This means a reminder is in order:
“Why? Don’t ask why. Down that path lies insanity and ruin. -E.M.Smith”.
As usual, we will now explore “Why?” ;-)
China has moved to dominate manufacturing globally. In many ways and many industries, they have succeeded beyond the wildest dreams of avarice. Try, just try, to find things like socks, hand tools, light bulbs, electronics gadgets and similar small shippable items that are NOT made in China. Yes, Europe and the USA still have manufacturing, but it is far less than before, highly automated (i.e. not many jobs) and largely in things that simply don’t ship well or are highly specialized. Major earth moving equipment, for example. It takes much longer to make the giant machine tools needed to make 50 foot tall motors or tires the size of small buildings. Give China time and it will enter those industries too. Some things, like specialized oil drilling equipment, is often custom fabricated. That’s best done near the well site. When BP had the oil rig blowout in The Gulf, local companies did custom fabrication. So China has not ‘won’ yet, it’s only the middle of the game..
The problem with this is that manufacturing, and especially ‘consumer durables’ manufacturing, is highly cyclical. China has a cyclical industrial based economy. That means that once they stop growing via cannibalizing the rest of the global manufacturing base, they will enter a highly boom and bust cyclical mode. In this pause, we are likely seeing the first of those turns from ‘rabid growth’ to ‘stagnant’. The next cycle will have a ‘down’ component. The question is: Are we already to the point where “Up Big – Flat – Up Big – Flat” turns into “Up – down – up – down”? IMHO, we’re pretty darned close. China is not geared to handle down cycles…
The bottom line, though, is that most of the Chinese economy has been export lead based on manufactured goods, with internal construction of facilities (plant and equipment, real estate) being a supporting boom industry, infrastructure construction supporting it, and then the real estate boom as all those folks started making money and sinking it into homes. Sometimes 2nd and 3rd homes. All well and good. But don’t lose sight of the fact that it all is built on top of an export lead economy.
Recent news has included the data that Europe has slowed their purchase of Chinese goods. Not all that surprising when you have a Euro Zone crisis and the Euro has dropped from near $1.50 to near $1.33 (so if you spend all your Euro, you get less Chinese stuff…) and Austerity has been “in the wind” for much of the PIIGS area (fewer Chinese Trinkets to be bought in the future in those areas).
But also in the news have been 2 great sales reports. “Black Friday” when Americans go compulsively shopping just after Thanksgiving Day, had record numbers. IMHO, a lot of this is from the opening time being moved from 6 am to 00:01 am and having more total hours. A secondary effect was adding a lot of heavily discounted prices on ‘loss leaders’ to get folks in the door and buying. Then there was “Ciber Monday” where folks go back to work and instead of working, shop on line for Christmas gifts. Again, good numbers reported. Up 22% year over year if I caught the ‘crawler’ correctly. All good, right? The American Consumer is out, in force, and buying. Buying a lot of stuff made in China too…
What I think this misses is pretty simple. First off, folks are looking for ‘deals’. So retailers have managed to get total spending focused into ever more narrow slices of time with ever more discounts. We’ve just measured a ‘pulse’ in that shift, not a net increase in spending. The total can only be known on December 25th… The more subtle thing I think it misses is that those shirts, socks, radios, dishes, etc. being bought to put under the tree are largely made in China. (Yes, a little of it is from Thailand and Indonesia. Some high end cameras are still made in Japan, but ever more of them are made in China under Japanese supervision). Exactly how much will it ‘stimulate’ the US Economy if I buy a pair of Chinese shoes at Target? We’re not putting GE Jet Engines or Joy Global earth movers under the Christmas tree…
Yes, it’s good for China. But even that is only a very limited thing. If goods were not already on the container ships some time ago, they will NOT be here for Christmas. This is ‘sell through’ of existing inventory. This is not buys of new inventory. So what will happen when January comes? Will we, collectively, have a lot more jobs and a lot more money (not just inflated fiat currency – real purchasing power) and be able to have a consumer lead economic recovery?
Recent jobs data were up nicely. (In the area of 200,000 vs a 30,000 expectation on some ‘flash number’ that also was on the crawler so I’m not sure exactly who’s data it was.) That is ALMOST enough to suck up the new graduates this semester… Unemployment rates are still high, and staying there. That level of hire does not ‘fix it’. It’s also the case that the early numbers from this time of year are often revised down as they ‘adjust out’ the seasonal hires. Watch for a January drop as all the Christmas sales and shipping jobs evaporate…
So net, what do those things mean, when integrated, for production and economic growth in the USA and China?
IMHO, it means that China is slowing, probably by a lot. It means that China will be coping with a ‘housing bubble’ of its own and with the oscillation of ‘income from trade’ working its way through the supporting industries and into real estate. The present ‘easing’ says more about that issue than it does about economic growth, IMHO. So China is not in great shape. The ‘good sales’ in America are not going to fix the drop in Chinese exports. Europe will continue to be a big issue there, but ongoing unemployment in the USA will not help. Only significant job growth in the USA and European stability (WITH personal disposable income…) will help China sales.
Neither is ‘on the cards’ for the foreseeable future. USA is at best ‘neutral’ ( I don’t see us going down much from here for a while) while Europe is NOT going back to “business as usual”. It will either be a Euro Breakup (so less money leaving the PIIGS for China as they will have inflating currencies that buy less ‘stuff’) or it will be German Austerity in an integrated banking system. In that case, we have significant decreases in spending by all those folks in the PIIGS areas who will be looking a new, lower, checks for The Dole, their pensions, government spending, etc. EVENTUALLY, it might lead to increases in employment, productivity, and eventual sales; but we’re talking years to potentially decade scale times. (New factories are not built over night).
None of this means China has to tumble, either. We could have a ‘soft landing’ and things in China stabilize about where they are now. Growth slows and the property bubble cleans out some investors savings, but the overall economy doesn’t collapse. Basically, China could join the “stagflation” of the west.
So I’m not seeing ‘good times are here again’ for China in any of this short term data. That the banks are being allowed to lighten their reserves just means they can speculate more and be more risky. This is good how? OK, watch for some speculation in commodities and folks rushing to buy more copper, platinum, palladium, coal, etc. Betting on Chinese banks gambling in commodities does not sound real stable to me and not very safe, either. The trade depends on the “risk on” mentality and the expectation that an economic rush is starting now, so better buy that steel maker while it’s cheap. But that depends on the projected future demand growth materializing. Will it? We don’t know. But I’m not seeing who is going to be buying those exports in March of 2012…
Central banks lowered the interest rate European banks will pay to borrow $US from The Fed.
Basically, Europeans banks were nervous about each other, so when they needed to borrow $US from each other, they were not willing to do it. The ECB European Central Bank was having issues coming up with enough $US to lend to the various banks (as they can not make currency out of thin air like our Fed can.) So the agreement is that the ECB can borrow from The Fed cheaper. They can do a “swap” and ship a boat load of Euro to The Fed in exchange for The Fed printing up a load of $US out of thin air. The ECB can then hand those $US over the the various national banks for much lower interest rates.
In essence, it puts The Fed ability to create $US at the disposal of the ECB ‘on the cheap’. That lets more Euro / $US ‘swapping’ happen faster and easier and it lets the various European banks that were having trouble borrowing $US from each other ‘get over it’.
Why do they need $US in EuroLand? Well, say you need to settle a contract for a few $Million of Saudi Oil at $100/bbl. That contract is settled in $US. If you have a load of Euros, that’s a tiny issue. You need to find someone who wants to go ‘long Euro’ in exchange for $US, and that’s not a lot of folks right now…
This lets the Central Banks more easily manage the Euro exchange rate vs the $US and against the folks wanting to put on a “short Euro / long $US” trade; while also letting international trades that settle in $US “go” more easily.
Yes, its a good thing. It improves liquidity and reduces a foreign exchange pressure.
But does it do anything for solvency of the PIIGS or the Eurozone in general? Nope. Not a bit. Not even a tiny bit.
It does make The Fed flexible balance sheet more available to the Eurozone banks and helps get around the ECB being stuck. As The Fed is up to their eyeballs in a way over leveraged balance sheet, having it take on a load of Euro Swaps doesn’t look like all that good an idea to me… But I’d watch for any tick up in $US interest rates as an indication that folks are not keen on it either and starting to vote with their wallets.
Oh, and there was some change in rules vs the IMF and loans to it from countries, but I’ve not had time to chase that one down. For now I’m just expecting it to be in the same mold. Easier loans between all these fiat bankers to let them share each others balance sheets and liquidities in different currencies. Still not fixing any real economic activity problems nor any real fix for debt overloads.
That S&P thinks the US Banks are suited for a downgrade is, IMHO, a much more important reality. After all the bailouts, all the easy money, all the TARP taking bad loans off their books, all the ‘Fed Funded Refinance’ for folks threatened with foreclosure, and all the ‘stress tests’ and even all the forced mergers and general mucking about with laws: The banks are getting a downgrade.
So does any of all this bank news make me think things are getting better? Nope.
We’re just continuing to play the same game and the same hand. More flushing of fiat currency into a system in an attempt to prevent the collapse of over inflated prices and to keep over borrowing from coming home to roost. It has not worked so far (or, more accurately, it only works for a short time then the ‘fix’ wears off and you need more… sound familiar?) It’s the usual thing of “the solution to pollution is dilution” that only works as long as the pollution is much much smaller than the ocean. At this point the size of the problems (housing globally and many countries being way over their heads in debt) are NOT smaller than the ocean of The Fed balance sheet… so the Central Bankers are trying to make the ocean larger as fast as they can…
The hope is that if we just smear the shit over enough players, eventually folks won’t notice the stink. IMHO, they ought never to have made the poo pile in the first place via over ‘inducement’ to home loans over the last 30 years (nor letting the PIIGS borrow to 100%+ of GDP); but now we’re stuck with the cesspool anyway. Next up in preference would have been to take strong bleach to the most concentrated puddles of it, not spread it around. If BofA had not been married to a couple of lousy banks (per their executives, at the ‘request’ of the Fed and / or government players) they would not be near junk stock price levels today. (BAC briefly went under $5 earlier this month, now bouncing up on euphoria…) S&P is recognizing this with their downgrade.
I’m of the opinion that this is neither a particularly good thing, nor a particularly bad thing, overall. Mostly I just see it as more “same old same old”.
There is a theoretical argument that Keynesian Writ Globally might work “this time for sure!”. It all depends on when The Fed runs out of balance sheet inflation and if the ECB gets a Rubber Balance Sheet too… and when they collectively would be seen as just another bubble, though an obscure and technical one. IF the economy can get moving before that point, Keynesian Intervention gets a win in their column. If not, The Austrian School gets a win.
IMHO, the reality is likely between the two and most of the Central Bank moves are more pointless than material. Tactical not strategic. The real issue, IMHO, is the level of government vs private spending. Governments make bad investments most of the time based on political, not physical or economic, considerations. Private money likes to grow and likes to invent new technologies and create new wealth. To the extent we have more government spending, we will fail to have ‘recovery’. To the extent we have more private money, we get economic recovery and progress. How The Fed arranges the deck chairs does not mater nearly as much as who is driving the ship and which direction…
Even worse; when governments DO make good investment decisions, it tends to be when the economies are primitive and need major investment in well understood industries. Russia and the investments in lots of steel and infrastructure early in the USSR period, for example. This works when most of the population is so poor that the aggregate “propensity to invest” is nearly zero. Having the government as The Big Rich Guy choosing to invest, frankly invest in nearly anything, is better than the alternative. But that is not where we are now.
Around the world, the ‘troubles’ are in places that are already substantially developed. We don’t need ‘investment in anything, even primitive things’. Even China (that benefited from that same effect as they moved to industrialize) needs more tuned and focused investment. In that context, private capital makes much better selective choices. At that point, central ‘planning’ and central banking starts to run out of juice as a control system. Things become political gifts to friends rather than growth of net wealth. As the west has embraced more regulation and central planing, we’ve ossified. More of the money goes to “Friends of Bill” and “Friends of George” and “Friends of Obama” and less goes to “hard work and new products”. So what is the proposed solution? More central bank dancing and more government lead “stimulus” and “bail outs” and “picking winners” (thus creating losers…). Just exactly the wrong thing. It works in young and primitive economies, it does not work in large mature ones. Those just become “Rome in decline” under those conditions.
In the end, this just means that we don’t know what is likely to happen (as we don’t know when The Fed and ECB reach the end of the Balance Sheet Bubble) but it isn’t promising.
The big run up in the market today has managed to get the market all the way back up to where it was at the start of the month. If you are not working at the ‘week or less’ time scale on trading, you would either have been whipsawed (at the couple of week scale) or be flat (at the over a month scale). I see no reason to celebrate being flat for November just because the last week or two has been good. It is just more of the news flow driven roller coaster at this point.
The market volume today was not high. This run up was on not much volume. Some significant part of it will be the ‘end of the month 401k’ automatic buying. That evaporates when the month ends. (Look on charts, there is often a ‘few days run’ higher at the end of the month. The traders who buy mid month run the prices up knowing that the ‘forced buys’ are coming… You can make a decent day trade strategy out of that…) That even with good news AND the 401k buys we only had modest volume says most folks are just not buying it. This is NOT a new bull market. It’s just a news driven swing on a short time scale. In a couple of weeks we’ll have even more EuroZone bad news. IFF things hold up then, and volume picks up, THEN we’ve got some reason to embrace this market. For now it’s still ‘trade it on short swings’ not invest in it.
FWIW, I’m still largely hedged just because it IS a news driven market and you can’t know which way the news will flow on any one day. My cash largely matches my mortgage, so any inflation that reduces my cash also reduces my debt. Net zero change. I’ve got some core holdings for decade scale investing (like BRKA) that are themselves managed as ‘value funds’ by good managers and I’ve got a bit of high dividend selected positions like some oil funds (a hedge against my fuel used. What OPEC takes from my gas tank they put in my oil trust…) Not exactly a ‘risk on’ positioning.
So for now, with the European Indicators headed down, China easing as sales falter, and the USA ‘hanging on’ but not great (and The Fed lending their balance sheet to the EuroZone) I’m still, net, uninterested in ‘risk on’ for anything other than swing trades and day trades. As things unfold, I’d expect gold and silver to rise on inflation impacts and US Treasuries to fall in market value when interest rates start to rise (so TBT would win then); but both of those need watching charts day to day to trade them properly. Gold moves fast and is volatile but has tradable ripple in it. TBT will need the eventual realization of inflation in the $US and as long as the Euro is sick, $US will be supported by flight from the Euro, so ‘watch and wait’ on that trade too.
Update: Adding some charts
The most common currencies to watch:
FXS the Swedish Krona (not on the chart), is down in the lower batch along with the FXA – Aussie and the FXB – British Pound. It’s pretty easy to see that the cluster is mostly flat against each other and the relative motion is from the $USD going up in comparison. BZF – Brazilian Real – is the lowest line. That rise in the BZF from a while ago has evaporated as the Emerging Markets falter during times of worry.
What’s rising? GLD – Gold. UUP – a ‘note’ that is a basket shorted against the dollar (dominated by the Euro), EUO a “leveraged note” that shorts the Euro with more vigor. FXY – the Japanese Yen has been up, but flat for the last 4 months as the BOJ intervention keeps it from rising against the $US. FXF – Swiss Franc show how a dramatic rise can be squashed by the Swiss Central Bank if they so desire it… That Pop and Plunge is why I use the FXF, but always exit it when it’s run up too much and talk of intervention is in the air.
Of particular interest to me is that GLD and EUO often move in opposition. Folks running from one to the other cyclically? A good trade to watch… It also says that “long gold / short euro” has a hedge value to it. Plot a line 1/2 between those two and you get a much more steady rise with fewer wobbles. Nice… So at this point it looks like a 3 way spread of $US, EUO, and GLD makes for a nice package.
The indicators are generally for “be short Euro and long $US and Gold” though you can see the ‘drop’ today on bank news. It will likely be a good time to enter a Euro Short in just a few days as the euphoria of Fed and ECB action wears off. Gold needs it’s own chart that I’ll do next, but it does look on first blush like ‘long metals’ has value…
This is an interesting chart. Gold and Short Euro make a nice set, industrial and semi-precious metals another.
So the “paranoid risk off” set is winning and the “industrial boom” set is losing… But that’s a static as of now, not a ‘what is next’. The GLD Simple Moving Average line is flat. Not a lot of momentum right now. The base and semi-precious metals look like a ‘double bottom’ with the latest ‘dip’ about as low as the prior one, and no lower. I can see a case for a “EUO / GLD” set as a hedged play, or as an oscillating trade. I can also see a case for picking up some platinum, silver, and copper as ‘likely near a bottom’ and “scaling in” until a new recovery trend develops (or it resolves to the downside and you exit a busted trade).
If the economy is in fact starting to ‘pick up’, go for the base metals and semi-precious metals / catalysts. If disaster is near, especially a Euro Disaster, the GLD / EUO set looks good. Until you know which way things are going, both have been ‘flat rollers’ the last 2 months. Right now, the ‘base and catalyst’ set looks like it is at an entry on a rolling swing trade basis. The recent positive news being the driver.
The indicators for SLV and PALL Palladium are both ‘almost’ at a cross over / entry. JJC – Copper is at an entry point:
MACD ‘blue on top’ as is DMI. RSI is rising out of a ‘near 20’. Price is above the 50 day SMA line.
OK, my take on it is that there is a ‘trade’ on right now in the industrial and catalyst group and in a couple of weeks there will likely be a nice entry into the GLD / EUO set. At that entry, if it shows, you decide to hold the base metals longer term, or exit a swing trade if things falter… Along the way, holding metals and some gold are likely to be a decent thing to do, along with $US.
OK, we’ve got a ‘flat weave’ on the SMA lines. Possible a ‘bottom weave’. We’ve got something of a reordering to price over fastest over slowest SMA lines. We’ve got RSI rising off a bottom with higher higher lows. We’re headed for ‘blue over red’ on the MACD (though it is still a tiny bit below the zero line, so still technically in a bear trend, but close to neutral. DMI is ‘blue on top’ so also saying ‘be in’. Looks to me like at a minimum we’re looking at a swing trade off a fairly stable base. The three ‘lows’ on price are at about the same level, with the latest a bit higher.
All that says to me that we likely have a “Christmas Rally” in our future. US markets are beating the rest of world markets with EWO – Austria – on the bottom. (That EuroZone thing…). Emerging markets (EEM for a basket, EWZ for Brazil and FXI for China) are under performing the USA (but when a rise happens, it often happens faster in emerging markets).
OK, looks like a ‘trade long’ stocks, USA and a small position in EEM, would likely also work here for a little while. I’ll need to do a more complete “around the world” comparison and I need to do a RUT vs QQQQ vs DIA vs SPY vs… USA separator, but SPY will do “for now”.
In general, it looks like “going down” has reached a limit case (at least in this local time frame) and the downside risk is less than the upside possible. It would be best to to buy in on exactly the right moment, but this looks ‘good enough’. Worth a ‘trade in’ but then be very careful to not overstay it if the trend reverses instead of resolving to the upside longer term. Most probably we’ve got “rolling on the bottom” but it could easily resolve to more upside (as we’ve pretty much explored it to a limit case via shorts pushing it and getting the same bottom point). There is also the fact that Obama and the Dems need some stability going into the 2012 elections, so it’s likely they will try to get a ‘we are getting better now’ story going and pull out all the stops to get it. So I could easily see a bottom roller with a general uptrend over the next year. Then it will hang on the election. Republicans win, rocket ride. Democrats win, they will bring back the economy killing Central Planning hand and watch for a roll over. That will be my ‘base case’ scenario from here on out, so I’ll be watching for ‘confirm’ or ‘fail’ on that scenario as the future unfolds.
In general, I think the metals are more interesting, but it would be reasonable to add some stocks as a way to diversify and hedge.
OK, for now it’s a “risk on” world… but watch your back…