Central Banks, Solvency, Liquidity, & Budget Deficits
Guest post by Peter Tchir.
Once again, the fate of the world or at least the markets rests on the shoulder of two men. Ben and Mario hold center stage over the next few days.
I believe Ben will disappoint and rather than highlighting what can be done, will take this opportunity to preach on fiscal policy and to talk about what can’t be done with monetary policy. It won’t do much damage to the markets, but isn’t going to support the rally in the short term. I will be on Bloomberg TV today at 5 to discuss my reaction to what he actually says and does.
Draghi, on the hand, I think will come through. It will be tricky as the market has decided it wants certain things (ESM banking license, full support along the entire curve, etc.) that are outside of his “mandate” to deliver. So there may some initial disappointment, but I think he will be able to push the market along.
The immediate response of many is that he cannot do anything meaningful. That Spain and Italy are in solvency modes with deteriorating budgets, so what can monetary policy do?
Merkel – Same same but different?
Merkel, the Iron lady has been showing more softness over the past weeks. Has the Eurozone crisis made her mor humble, or is this just another political trick? Spiegel reports,
On the outside, the new Angela Merkel looks like the old one. She still wears her usual blazer — a camel-colored one on this particular Wednesday. Her striking amber necklace has resurfaced. Her hair? Always the same. Still, something has changed since the German chancellor returned from her summer vacation. And it was apparent on Wednesday, as she stood together with Italian Prime Minister Mario Monti on the first floor of the Chancellery in Berlin.
The Last Thing We Need To Worry About?
Guest post by Azizonomics.
But really, truly, the last thing we need to worry about is whether the Chinese love our bonds.
— ShitKrugmanSays (@ShitKrugmanSays) August 31, 2012
Krugman claims the US private sector is financing the deficit, not China:
So who’s actually financing the US budget deficit? The US private sector. We don’t need Chinese bond purchases, and if anything we’re the ones with the power, since we don’t need their money and they have a lot to lose. In fact, we don’t want them to buy our bonds; better to have a weaker dollar (a point that the Japanese actually get.)
Lots of people keep getting this wrong, even after all these years. But really, truly, the last thing we need to worry about is whether the Chinese love our bonds.
He cites as evidence that the current account deficit as a percentage of GDP is way down since before 2008:
US Govt Ignoring Rule of Law & Harming Economy Further
There are numerous examples of the federal government suspending or ignoring settled rules of law in order to quickly and effectively respond to particular problems created by the broader financial crisis starting in 2008. UPenn Law Professor, David Skeel, says that the federal government’s inability to revert to the long established principles associated with rule of law in the United States is beginning to have a profoundly negative impact on the national economy. He talks with Bloomberg Law’s Lee Pacchia.
Video below.
Float Shrink Outperforms Dividends
Biderman on ETFs, dividends and float shrinks.
So far this year investors have poured billions into high dividend strategy ETFs. Yet almost all the big dividend ETFs have underperformed the market, even after including reinvested dividends. On the other hand only millions have gone into ETFs whose strategy is based upon float shrink. Companies that have been shrinking the trading float of shares the most using free cash flow have not only significantly outperformed the high dividend ETFs, but the overall market as well.
Those of you who took finance 101 might have learned that there are two ways to distribute profits to shareholders. But before a company can distribute anything, the company first has to generate a cash profit, after taxes and after all capital expenditures. What is left is free cash flow that can either be added to the balance sheet or distributed to shareholders via dividends or float shrink.
Full video below.
Twitter Trading
Whether you believe it or not, people use technical analysis. The latest “indicator” is measuring sentiment by tracking Twitter feeds on individual stocks. Via Downside Hedge.
With the advent of social media sites such as Twitter, investors now have the ability to get real time sentiment information on individual stocks and stock market indexes. The Twitter stream can be read by a computer program that scores each tweet and aggregates the scores into a daily value for each individual stock. The resulting values can be used as a technical analysis indicator in stock charts similar to a Relative Strength Index (RSI) or a Moving Average Convergence/Divergence (MACD).
Downside Hedge currently computes a Twitter Sentiment Indicator for a variety of stocks, ETFs, and indexes on a daily basis. In the chart below we compare our daily sentiment indicator of the S&P 500 Index to the AAII weekly sentiment survey. Full reading here.
Mitt Romney Charts
With the US elections up next, let’s review who is where. From Gallup.
Soon-to-be-Republican presidential nominee Mitt Romney is about as well-liked as he has been during the presidential campaign, with 48% of Americans holding a favorable view of him and 46% an unfavorable view. His image was only slightly more positive in May — about the time he clinched the Republican nomination. As recently as mid-July, significantly more Americans viewed him unfavorably than favorably.
Currency Competition
Guest post by Azizonomics.
Monopolies contribute to many problems — the record of evidence illustrates the potential inefficiency, waste and price fixing.
Yet the greatest trouble with monopolies is what they take away — competition. Competition is a beautiful mechanism; in exercising their purchasing power and demand preferences, individuals run the economy — it is their spending that allocates, labour, capital, resources and brainpower. It’s their spending that transmits the information that determines what gets made, what doesn’t, which businesses succeed and which don’t. Individuals exercise a far greater political and economic power in a free economy when they spend, and when they work than when they vote. So without competition, the power of choice suffers, and businesses, markets and societies can become economically stagnant and rampantly corrupt; look at North Korea and the myriad other examples of once-prosperous societies impoverished by a lack of economic competition.
Bulls vs Bears in Trench Warfare
A few market observations by Peter Tchir.
Looking at the market of the past few weeks, it reminds me of trench warfare. A lot of boredom, followed by brief outbursts of carnage, and in the end, nothing changes.
Since August 3rd, the S&P has been stuck between 1391 and 1418. In the meantime, volumes have eroded. Since July 31st and the Knight fiasco, S&P mini volumes have dropped significantly and seem set to have one of the slowest full days of the year.
Maybe it is because it is August, but that excuse just doesn’t seem right. We have had busy Augusts in the past. Heck, just last year we had great volatility in the month. So it isn’t just that.
There is no shortage of news. We have had summits in the past, and Fed meetings, but typically we get volatility leading up to them. Markets have moved on every single utterance by any European politician or central banker. Now Merkel could stand up naked on the Parthenon shouting that Greece should go, and the markets might sell off a couple of points. Draghi wheeling around a printer might cause a bigger reaction, but even then, I’m not sure.
That may be an exaggeration, but what has happened?
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