Posted on 11/02/2009 3:15:35 PM PST by blam
Posted Nov 02, 2009 11:00am EST
By Aaron Task in Investing
Stocks rose sharply early Monday, quelling concerns (for now at least) about another rout after Friday's big decline.
As Wells Capital's Jim Paulsen might say, the very fact so many people were worried about a possible crash Monday is a sign of the prevailing bearish sentiment. The market will continue to climb this proverbial "wall of worry," say bulls like Paulsen.
That may well prove true but the past few weeks have reintroduced a level of volatility largely absent since the July lows. Clearly, the tenor of the market has changed from "one-way bet" to one in which people are questioning the rally's staying power, for a variety of reasons:
[snip]
(Excerpt) Read more at finance.yahoo.com ...
Posted Nov 02, 2009 07:30am EST
By Aaron Task in Investing, Newsmakers
Despite a "persistent array" of better-than-expected news on the economy, earnings and the healing of the financial markets, the "wall of worry" remains remarkably high, says James Paulsen, who oversees $375 billion as chief investment officer of Wells Capital Management. That's very bullish from a contrarian standpoint, and Paulsen believes we are "very early" in the recovery for both the economy and the stock market.
"There will come a time when the recovery gets more mature and you're going to convert bears to bulls and we'll get buyers that will take this market still higher," he says.
How much higher?
It won't be a straight line and won't happen overnight, but Paulsen predicts both corporate profits and blue-chip averages will revisit all-time high levels before this cycle ends.
[snip]
PMI: Heh, An Actual Good Number!
The Market Ticker
Monday, November 2. 2009
Posted by Karl Denninger in Macro Economics at 10:58
PMI: Heh, An Actual Good Number!
This isn't a bad report! (Headline 55.7%)
On balance, quite strong. Warning signs in new orders (slowing in advance, although still growing) and prices (increasing.)
No change in backlogs; production up, employment went positive, and this is significant.
Inventories are still contracting, but at a slower pace, and customer inventories are below critical levels.
This last point is a potential trouble spot and could lead to some really ugly price dislocations if the economy actually improves.
[snip]
This is all free Fed money (0% interest rate) and a carry trade - borrowing at zero and buying stocks.
This is not wall of worry. It is not driven by earnings at all but free money. Eventually that free money punch bowl will go away on a global basis.
For how long? Actually, it ended the day on kind of a precarious note, not a big rise.
http://stockcharts.com/h-sc/ui?s=QQQQ&p=D&yr=0&mn=4&dy=0&id=p24903662436
Mother of all carry trades faces an inevitable bust
Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply , while government bond yields have gently increased but stayed low and stable.
This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.
But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.
So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.
Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.
People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.
Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.
So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.
While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.
The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.
But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.
Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.
This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
http://www.ft.com/cms/s/0/9a5b3216-c70b-11de-bb6f-00144feab49a.html?nclick_check=1
I see the problem of :
Why do anything productive when I can make more money at the race track?
parsy, who says the market is taking money from Main Street
How exactly? The people on Main St who are gambling in the market send it there voluntarily. The Fed which is creating the market bubble is not taking money from Main St, but they are going screw Main St in the long run. Being precise about the problem is essential, otherwise we will get the solution you seem to be asking for (govt regulations and takeover).
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.