Relative Performance - JPY K Revenge of the Low Yielders Source: Bloomberg
Volatility Has Surged K Source: Bloomberg
PPP - CPI K Source: Bloomberg
What happened? B
ZIRP The Path Towards Global ZIRP B Source: GFT
ZIRP Why? B Because price levels are collapsing.
Oil vs. CPI B Source: GFT What are the Drivers?
CPI Case-Shiller Used Instead of Owners Equivalent Rent source http://globaleconomicanalysis.blogspot.com/ B Source: GFT What are the Drivers?
What are the Drivers? Yield No Longer Matters B The only question for FX: who will rebound first?
Recession vs. Depression Recession: When your neighbor loses his job Depression: When you lose your job B
Recession vs. Depression B
Great Depression of 1929
Unemployment at 25% (now 7.5%)
GDP at $7.5 trillion (now $13T)
Deflation - CPI at -10% (now +0.1%)
House prices dropped 25% (now -10%)
World trade declined 65%
Stocks dropped 40% from Sept to Oct and down 90% by 1932
(down 43% since 2007)
Recession vs. Depression B
Defined as when GDP growth slows, businesses stop expanding, unemployment rises and house prices decline.
Managed contraction in GDP.
Brought on by tight interest rates, ends when CB eases
Lower rates help boost liquidity
Defined as a downturn that lasts several years
Unmanaged economic contraction where monetary policy ceases to work as rates hit zero
Further rate cuts impossible
Prices drop as demand falls
Deflationary expectations set in
Cannot self-correct since they are structural problems
How long do recessions last? B
Protectionism Buy American Bill: Allows companies to buy only US-manufactured steel and iron Source: berklube.com US Economy
Can we spend our way out of a recession?
$900B Stimulus Package - Keynesian Economics
Focused on energy, education and health care
How will we pay for it? > Raise taxes and/or print money
Raise Taxes – Robbing Peter to pay Paul
Print Money – Rob Paul to Pay Paul back with devalued $
What we need is INNOVATION
US Economy Can we spend our way out of a recession? Source: Bianco Research / East Coast Economics
Consequences of branding China as a currency manipulator
China has $1.94 Trillion in FX Reserves - $900 B estimated to be in US Treasuries
Agencies Have Government Backing Source: Brad Setser China
Q4 growth was 6.8%,
2008 growth was 9% (7-year low)
Can China make its 8% growth target?
Minimum that China needs to create enough jobs
Source: National Bureau of Statistics of China
Ramifications for the US Dollar
In past recessions, $ tends to fall in first six months, rises in next six months
No pattern beyond 12 months
Euro Stress Is Trichet too slow? Source: DealBook
Euro Stress Part of dollar’s strength is due to the fact that Euro is losing viability. Can a currency without a country survive a steep economic downturn?
UK Mess The hedge fund economy blows up… Source: Bloomberg
UK Mess … but maybe it’s hit bottom. Source: Bloomberg
UK Mess Has EUR/GBP topped? Source: Dealbook
No Yen For Japan
No Yen For Japan Industrial Production Falls at Fastest Pace Since Great Depression Source: Bloomberg
No Yen For Japan Toxic combination of strong Yen and collapsing global demand. Will BOJ Intervene? Will it Work?
No Yen For Japan Source: Dealbook
Carry Trades Is Mrs. Watanabe turning short? Source: Tokyo Financial Exchange
Key question: Who will bounce back first?
Outlook for the Majors
EUR/USD Up-Down? UP DOWN EZ economy stabilizes as North/South nations create a coordinated plan of action and faith in the currency is restored. US economy responds to stimulus, first to rebound from global recession. US Treasury Auction fails as investors refuse to absorb any more US Sovereign debt capital flight ensues. EZ union nears collapse as economic stress creates political backlash, member sovereign credits come under assault. Global capita markets rally, risk assumption returns as doomsday fears dissipate. Dollar remains repository of safe haven funds as global economy remains mired in a protracted recession.
GBP/USD Up-Down? UP DOWN UK economy stabilizes – PMI’s a clue? Quick monetary and fiscal response, lower pound yield positive results. UK economy remains stuck at very low production rates as demand is curbed due to persistently high jobless rate and growing debt burdens. Global capital markets stage a rally. London resumes its role as the financial intermediary to the world. Global capital markets remain bearish – BOTH equities and fixed income continue to fall. Capital leaves the dollar on US financial concerns. High leverage of UK consumers and massive issuance of sovereign debt trigger capital flight.
USD/JPY Up-Down? UP DOWN US economy bounces, Dow rises, US 2-year rates increase to 3.5% reviving demand for carry and yield. Risk Aversion reigns supreme, Dow dives to 6000 or lower. Japanese economy recovers slightly prompting return of risk appetite. US economic fortunes do not improve, credit contraction creates massive deflation of US assets. BOJ intervenes as strong yen hurts exporters. Repatriation of Japanese funds continues unabated as world sits at ZIRP.
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