Posted: Tue May 03, 2005 3:13 pm Post subject: Economic madness
I've been following the markets for quite a few years. I thought that I understood quite a bit of what is going on. However lately it seems that I can throw all my knowledge out of the window.
Quote:
DETROIT (Reuters) - The world's largest automakers Tuesday reported mixed sales for April, with General Motors and Ford reporting declines but DaimlerChrysler posting a 9 percent rise.
Shares of GM (up $0.51 to $27.67, Research) and Ford (up $0.23 to $9.45, Research) each rallied in afternoon trading while Daimler (down $0.12 to $39.23, Research) shares edged lower on the New York Stock Exchange.
If you have a choice between two companies, one posting growth and one posting slumping sales, where would you put your money? Well apparently that is not what the market is thinking. It is typical for the things that have been going on for the past months. Companies get rewarded for bad performance and punished for good performance.
Then you have the markets reaction to the oil price. Last week the Dow rallied because the oil price fell. The reason for the fall in oil prices was not the weekly petroleum status report but the GDP report. Traders are expecting a slowdown in the economic growth and thus a slowdown in oil demand. So when you look at it sec. the stock market rallied because of an expected slowdown in the economy. This of course is madness.
Another thing is the bond market. Despite 8 consecutive rises in fed rates, and strong signs of increasing inflation, the bonds are rising and the rates are dropping. At the moment the 5 year bonds are at such a low rate that anyone who owns them makes a loss on the bonds due to inflation. Would you buy something which would reward you with a guaranteed loss?
Even Alan Greenspan told that he couldn't understand why the rates were dropping.
Quote:
Greenspan's 'Conundrum'
The Fed is increasing short-term interest rates, so rates on bonds and home mortgages should also rise. Right? Well, they haven't
Quote:
NEW YORK (CNN/Money) - Federal Reserve chairman Alan Greenspan called it a "conundrum." Chicago Fed president Michael Moskow deemed it a "puzzle."
So it probably won't be long before another Fed member trots out the Winston Churchill quote about Russia and says that relatively low long-term rates are "a riddle wrapped in a mystery inside of an enigma."
Well you can think a lot of Greenspan, but after 60 years of economic education he should know a thing or two about the markets. The fact that he says that he hasn't got a clue on what these bond markets are up to implies that strange things are happening indeed.
Perhaps I'm not crazy after all.
I get the feeling that the markets finally have become completely detached from the reality. I don't think that the traders realize that they are dealing in parts of real companies, instead of putting chips on a giant crap table.
Joined: Sep 25, 2004 Posts: 4428 Location: Boston, MA
Posted: Tue May 03, 2005 3:30 pm Post subject:
Quote:
Another thing is the bond market. Despite 8 consecutive rises in fed rates, and strong signs of increasing inflation, the bonds are rising and the rates are dropping. At the moment the 5 year bonds are at such a low rate that anyone who owns them makes a loss on the bonds due to inflation. Would you buy something which would reward you with a guaranteed loss?
We know why they are doing this. The Asian Central banks (and the US Treasury Department ) are buying these bonds in order to keep the US dollar from crashing. If America had to finance its own budget deficit, it would have to raise taxes by 25%. This would crush the economy and force the USA into a major recession. Now imagine trying to finance its own trade deficit. The dollar would have to drop by a very large amount in order for foreigners to buy US products.
So China, Korea, Japan, (and the US Treasury Department ) are forced to buy US debt even if they are actually losing money on the deal. They can't allow the US Economy to fall apart and so even if 10-year bond rates drop below 0% (they actually have to pay to borrow money ) and inflation hits 10%, they are still forces to buy US debt. The alternative is so much worse for them that they rarely even mention it... _________________ "www.peakoil.com is the Myspace of the Apocalypse."
I'm so fortunate--I'm as poor&ignorant as dirt. _________________ "By the time individuals discover that remaining resources will not be adequate for the next generation, the next generation has already been born. " David Price
We know why they are doing this. The Asian Central banks (and the US Treasury Department ) are buying these bonds in order to keep the US dollar from crashing.
According to the official statistics the top four foreign holders of US Treasury bills as at February 2005 were Japan $702 billion, China $196.5 billion . UK $171 billion and the Carribean Banking Centres $103.6 billion. Korea actually trails in fifth with a mere $67.1 billion dollars. This seems to indicate that some of the conventional wisdom about China bankrolling the US deficit is wrong. Japan is much, much more important. The figures from the UK and the Carribean are quite interesting. This might be a back door route for the US government to purchase its own bills. Alternatively, it could just be all that drug money seeking a secure home. Of course, some conspiracists might wonder whether the CIA, with all its links to the narcotics trade, is also helping to prop up the US economy.
Joined: Sep 25, 2004 Posts: 4428 Location: Boston, MA
Posted: Tue May 03, 2005 6:51 pm Post subject:
Quote:
Carribean Banking Centres $103.6 billion
We have absolutely no idea who these people are! I think a large chunk of that money is US government money. We are buying our own debt in order to keep interest rates down and the dollar up.
Quote:
According to the official statistics the top four foreign holders of US Treasury bills as at February 2005 were Japan $702 billion, China $196.5 billion.
That's the key word here, holders. That does not mean the people who are currently buying, just the people who previously bought. China has a large and growing economy. Japan also has a large economy, but their economy is not growing. China's currency is pegged to the dollar. Japan does not peg its currency to the dollar. This forces China to buy lots of US debt in order to keep their currency's value level with the dollar.
I'm not 100% sure about this, but I believe that China buys more US debt than Japan does at the monthly auctions. The American trade deficit with China is larger than the American trade deficit with Japan. This gives China more $$$ to buy T-bills with than Japan. Either way, Japan and China own a big chunk of our country and it can't possibly be healthy for one nation to be so darned indebted to its trade partners. _________________ "www.peakoil.com is the Myspace of the Apocalypse."
If you buy into the efficient markets hypothesis, then the reason why the price of GM went up despite their loss is because investors probably expected worse results, then adjusted their expectations up when the numbers came out.
US T-bills are below inflation right now because of foreign central banks attempting to sterilize purchases of US dollars made to keep their currency pegged. Normally to peg the currency you must create some of your own money and trade it in for US dollars, however this imports USD inflation into your country. An alternate strategy is to buy a US T-bill and sell a domestic bond in exchange, which doesn't create inflation but puts you at risk in case of a sudden devaluation of the USD.
Joined: Dec 07, 2004 Posts: 463 Location: Cheshire, England
Posted: Wed May 04, 2005 1:44 am Post subject:
jaws wrote:
... the reason why the price of GM went up despite their loss is because investors probably expected worse results...
Yes. That's why you hear words like 'forecast' and terms like 'better than expected' all the time.
Shares dont rise on good results and fall on bad ones; they rise on better than expected results and fall on worse than expected ones. Market expectation is the pivot point.
Joined: Apr 04, 2005 Posts: 472 Location: Seattle, WA
Posted: Wed May 04, 2005 1:59 am Post subject:
Quote:
I get the feeling that the markets finally have become completely detached from the reality. I don't think that the traders realize that they are dealing in parts of real companies, instead of putting chips on a giant crap table.
Alan Greenspan: "Heh Kid, what number should I put it on?"
Me: "Huh? Uh, I dunno know. How about Red 17."
Alan: "Good bet. I'll put $50 billion down there and then I'll double down $200 billion on black just in case."
Me: "Uh, aren't you in risk of losing $250 billion if you get a naught or non black?"
Alan: "Who Cares? That Chinese guy right behind me has got another $200 billion ready for me to play with. I'm going out in style!"
Craps table operator with hand extended over table: "No more bets, no more bets..."
The ball whirls....click, clack, click, clack.
Craps table operator: "Red 13"
Alan: "Damn it, you just caused 3 million Americans to lose their jobs."
Me: "Say what? I told you I don't know."
Alan: "I don't know either. I just make it up at every Congressional Hearing I go to. Through in a word from my econ book here and another there and they call me a god!"
Alan: "Yeh Xi Yaun, give me some more of you money..."
Posted: Thu May 05, 2005 6:38 pm Post subject: Re: Economic madness
smiley wrote:
I've been following the markets for quite a few years. I thought that I understood quite a bit of what is going on. However lately it seems that I can throw all my knowledge out of the window.....Perhaps I'm not crazy after all. I get the feeling that the markets finally have become completely detached from the reality.
You have a couple of possibilities:
1) The Markets were never rational and you just now noticed.
2) The Markets are being affected by an invisible hand all right, but its not the hand Adam Smith wrote of. (insert whatever 'conspiracy theory' you want to.)
Good luck on betting VS whatever rules the house are now using.
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) are buying these bonds in order to keep the US dollar from crashing. If America had to finance its own budget deficit, it would have to raise taxes by 25%. This would crush the economy and force the USA into a major recession. Now imagine trying to finance its own trade deficit. The dollar would have to drop by a very large amount in order for foreigners to buy US products.
) and inflation hits 10%, they are still forces to buy US debt. The alternative is so much worse for them that they rarely even mention it...
