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Wednesday, November 18, 2009

Treasury Yields

Treasury yields. Look at 'em. Scream. Pass out.

Wake up. Get off floor. Stagger weakly to toilet. Vomit.

CF Economics. Zero Hedge.

I have come to have such scorn for Geithner and the rest of them that I can't even write about this stuff. I don't watch TV. All I read are articles about statistics and so forth, plus buys and sells. An awful lot of what's out there is the economic equivalent of Fantasia.

We are now Japan, only without the favorable trade balance. :(
When foreigners demand interest rates that protect their dollar exposure anybody stuck in Ts is going to get whacked on NPV and double whacked by inflation.

I'll say this slowly: THere is no such thing as an orderly currency crisis.
John - trade balance should be US policy concern one - and as the only way to get there is to replace foreign crude imports, it's drill, baby, drill.

Rob - Yep, money's busted and all bets are off. The economic signaling apparatus is broken, and everyone's careening through the intersections as best they can.
MEAD - Mutual Economic Assured Destruction

US - 150 million people demand jobs. Devalue currency to the point China will give up. Only then can we fix our trade deficit and put people back to work.

China - 1 billion people demand jobs. We fear ours more than you fear yours. We will never give up.

Europe: Stop that! You are BOTH killing us!

I'm deflationary right now, but I think I can be back to stagflation after Christmas. Could be wrong of course.
Fantasia is not about societal suicide. At least, not until some PostModernist starts spinning his gangrenous, festering theories about it. Speaking of which, can it possibly be coincidence that the very people who are driving civilization toward suicide are campaigning for individual suicide?
Wow!! You guys are really scaring me. I am not a financial person and read MOM hoping that some knowledge will slowly rub off. The problem is that I am not a liberal and cannot just put my fingers in my ears close my eyes and sing "Lalalalala..." to drown out reality. On the other hand, maybe I can brace for what is coming. Sounds like things are going to get truely rough in the near future.

This Administration is evil. Poetic justice will be when all the liberals finally start saying that they actually miss W. I sure do. Hell, I miss Clinton. We are buying a shotgun this weekend and are taking stock of our gold and other assets. And, we are praying.

-- Army Mom
Army Mom - praise the Lord and pass the ammunition! I think you want to stock up on some cash too.
NJCommuter - No, the stuff I am reading really is some form of Walt Disneyish economic stuff. Stuff like because stocks are up, everyone's going to be spending again, etc. Just bizarre. Not that stock prices are that good, either. And they are going to be heading lower. But still that is some of the stuff the big boys doing it for pay are coming up with.

October plus November WIET (that's fiscal year to date) tax receipts are now down over 10% YoY. I was thinking this was going to start leveling out, due to much easier prior year comparisons.

So with incomes being down - stock prices are supposed to fuel a spending boom? Wasn't that the position when we entered this recession?

"So with incomes being down - stock prices are supposed to fuel a spending boom? Wasn't that the position when we entered this recession?"

I just heard on TV (don't ask me why I watch!) that retirees are desperate for yield. Apparently that's supposed to be a reason to buy stocks.

Perhaps things are looking better than I thought. There are certainly plenty of desperate people these days and we're easily adding 200k a month right now.
I think I see people headed for the door.
Okay--please tolerate my ignorance, but if I read you (and your links) right:

1. The feds are inflating. They are letting the dollar slide.

2. Taxes will make the situation worse.

3. Fuel will be more expensive.

4. It's time to start hoarding. Cash, guns, food, but what about gold?
Gordon - I am just not a gold bug, and currently prices of gold are high. I think in terms of stuff that is usable.

For instance, today I went and got four new tires put on my car. The cost might be considerably higher next year.

But it's worth noting that both Indian and Chinese currencies are floating with the dollar. I think what is most probable in the near term is that fuel costs will place the same sorts of pressures upon global trade.

India has considerable internal demand, and is probably in a better position to weather this than China. China is faced with an ugly situation.
And Gordon, the changes in the dollar and the yen do seem to show another flight to safety; what Treasury yields are unambiguously projecting appears to be another retraction of capital to higher ground and another downturn in trade, most likely quite widespread although patchily so.

In particular, the movements in ag chem worry me, as in potash. It appears to be a very clear signal that agriculture is pulling back, and that world hunger is doomed to rise again. The concern for persons in growing countries is that more and more of their incomes will be diverted to food, and that they will not be able to replace declining real demand in the developed western economies with aging populations.

Part of the Treasury moves are probably the need to bolster reserves for the end of the year. The 1/3 month ratios in Treasuries are related to accounting, as in audits and SOX.

But the moves in the 1, 2 & 3 yr show another economic contraction in the works.

The reason why I am so concerned is that the Fed is apparently playing a suicidal game of chicken with Asia. The US desperately needs world growth to sustain our growth. It's not going to do us any good to have a cheap dollar if manufacturers are deporting jobs and production facilities and if Asian growth is severely hit.

The implication of all this is sort of what Ronald has mentioned several times in comments here. Damage to trade supply lines as a result of the 2008 collapse. Asian ocean freight never did really pull back to profitability; it now appears we are in another consumption squeeze, and this time more severe damage may occur.

If it does, the effect on world trade is likely to be increasing disaggregation of longer chains of supply and demand. You could see a series of stochastic collapses in local industries, and a retraction or substitution of goods in local economies with less currency fluctuations.

Should that happen, the economic ties that bind countries to each other will worsen, and wars are likely to erupt.
So, MOM, there's some stuff I'm not understanding here.

I'm looking at basic materials, and it looks to me like they're getting the beginnings of a leg up here. What I'm not understanding is the eventual effect of an (orderly) collapse of the dollar on materials prices in a deflationary environment. Let's leave aside Weimar-style hyperinflation, for the moment at least. Or am I too optimistic?

The effect on finished goods is obvious, I think--anything imported from a non-dollar-linked economic zone will get more expensive.

But for the foreseeable future, the U.S. is still a ridiculous percentage of consumer demand for goods. If our economy can't stand up to increasing costs of basic materials, won't that drive prices down?

My thought experiment always ends with very weird effects in the actual marketplace. Spot shortages of key goods, but massive overstock of (and huge sales on) consumer electronics. Higher prices on luxury foods, but low prices on basics (and farmers going bankrupt). Some hard assets will drastically increase in price, others will collapse.

It's all so unstable, I don't know quite how to predict anything well enough to prepare. And so much depends on how long the Chinese maintain that dollar link...
Here's anecdotal evidence about retail sales.

There are a lot more college students right now. Enrollment is WAY up. Even my girlfriend is back in college in hopes of starting a career that has at least some stability.

Here's something most aren't thinking about though. She was REQUIRED to buy a laptop.

Normally we think of laptops as discretionary items. I would claim that at the beginning of the school year (a few months ago) many of them were actually staple purchases.

Those who looked at PC sales probably thought they were seeing a signs of a vastly improving consumer. I don't think that's necessarily true.

Intel was just downgraded. College students won't be needing computers at Christmas and I think somebody just figured that out.

If true, watch out below. It will create a huge hole in spending that was assumed to be there.

Just opinions.
Neil - no, I would say that is a very accurate picture of the outcomes and the uncertainties. It is the weirdness factor that is so disruptive.

It is not hard to understand the money signals when you look at this from a production point of view. (Which is why I never take a purely monetary point of view.)

The need to build reserves and cushion against being caught out in a situation in which production costs are high and selling prices and rates are uncertain indicates a net retraction of money from the economy and a dire need to hedge.

Some farmers didn't plant last year if weather was highly uncertain, especially if they still had unsold goods from prior crops. The cost of the inputs was too high. Others planted but restricted inputs, which of course will affect yields.

The huge asset bubble in China is just another symptom of the same disease. Farmers have been hit hard by inflation in China; they buy metals as a way to hedge against similar in the future.

Throwing large amounts of money into a system in which the smooth circulation of money is impaired creates these odd price discrepancies.

During the mid 1930s, the costs of basics actually rose compared to the costs of everything else. That is a very simple and logical effect; as the ability to get credit is impaired, everyone tries to build their own reserves, and new investment in production is impaired, and producers may at times stop selling.

Just looking at these two items on potash
few years through beg of 2009

collapse of potash in Saskatchewan

shows how stochastic it can become. As uncertainty rises, the need for monetary/exchange reserves builds, and effectively the supply of money circulating within the industrial and agricultural infrastructure collapses.

This is why I was so sure that the Fed HAD to raise interest rates this year. They didn't have to go up that much, but it would have curbed speculation greatly and evened out some of the price swings.

Basically the price signalling system has become psychotic; the prices for oil are wildly discrepant with the prices for other inputs, especially those used for agriculture. But ag trading too is distorted; as the price of inputs is collapsing on consumption, the logical implication is that there will be a future shortage and foodstock prices should rise. However if foodstock prices rise, world consumer spending on discretionary products should fall quite sharply, which would indicate that the price of oil and other energy should fall hard.

To me, this looks like the second phase of the GD, in which the world production system entered thrash mode due to inability to forecast prices and therefore an inability to allocate working capital effectively. Needless to say lending was also impaired.

What I am claiming is that the world response to the 2008 collapse has been to try to stabilize the price of financial assets, but the world has done so at the cost of destabilizing production capital. This is not a recipe for a recovery.
Basically the price signalling system has become psychotic; the prices for oil are wildly discrepant with the prices for other inputs, especially those used for agriculture....as the price of inputs is collapsing on consumption, the logical implication is that there will be a future shortage and foodstock prices should rise....

I'm thinking that ag is actually a special case, at least in the U.S. It may not be so psychotic as it seems.

Two of the biggest inputs to ag prices are anhydrous, for fertilizer, and propane, for drying. Natural gas is the feedstock for anhydrous, and propane prices are linked to natural gas, being substitutable for each other. In addition to that, the major feedstock for other chemical inputs is process heat, which these days is also more and more derived from natural gas cogeneration plants.

I think there's been a hard limit put on natural gas prices; turns out we're basically floating on recoverable reserves of the stuff, given the latest fracking technologies, and the equipment is all produced domestically. So natural gas is not going to be a good inflation hedge, and is thus relatively speculation-free.

Which is all a roundabout way of saying that I'm not sure how sensitive ag prices really are to inflation right here.
Of course, that leads me to wonder what will make a good inflation hedge--I'm with you MOM, I suspect gold has gotten ahead of itself.

Maybe silver? Platinum? Heck, I dunno, titanium?
Neil - in the US, maybe. Nonetheless the pattern over the last two years has been a bit troubling. We won't really know where we are until the planting reports come in 2010.

But internationally, I see a growing problem, which is going to come around and hit world trade.
The one thing you overlook is that there is still no credible alternative to US assets. Hence the world will at least in the coming five years continue to buy US debt. Yields will come lower and lower until they reach Japanese levels. Or maybe even lower. The budget deficit will not kill anyone, least of all the United Stated. It will only become cheaper and cheaper to service its debt.
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