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Interesting to read the comments of new German finance minister Wolfgang Schäuble and to compare them with the statement earlier in the week by Ben Bernanke. While the latter had said that it was very hard to say what the fundamental price of an asset should be and therefore it was difficult to say that it was overvalued (this, btw, was a sentence before he said that assets were not currently overvalued -- leading one to ask "given his previous sentence, how can he know?") Schäuble said in Frankfurt yesterday that
Mr Liu last weekend attacked the Fed for keeping interest rates low and thus fuelling the dollar carry-trade. Yesterday Schäuble warned that
I think that much, possibly all, of the dollar's recent general weakness is because of carry-trades. The one exception is its exchange rate with commodity currencies (e.g. Norway, Australia, Canada) where those currencies are naturally benefiting from another arm of the asset bubble (commodities), as well as the carry trade. Note also that the UK, which also has very low interest rates, has not benefited against the dollar to the extent of the euro or more "speculative" exchange currencies.
All of this forex stuff is really a bit by-the-by. Governments scream and shout about exchange rates, but history has shown that the benefits and handicaps of stronger or weaker rates have a significant self-balancing effect -- not least to the extent that a stronger exchange rate holds down inflation and forces producers to up their efficiency, while a weaker exchange rate allows companies to say that "oh, the currency movements are increasing our profits anyway".
Of more interest (well, to me, at least) is the claim by Schäuble that a new asset bubble is being created (i.e., we aren't getting out of the previous problem, we are just shifting it somewhere else) and that we don't really know what is going to happen when disaster strikes -- merely that disaster will inevitably strike somewhere and that, when it does, in the manner of disasters, it will be very unpleasant.
It is this undeniable truth that Brown, Darling, Bernanke and Geithner seem determined not to see. And even Schäuble's motives are far from pure. This is really a German being pissed off at the Americans for keeping interest rates low, thus "harming" the eurozone, rather than an objective observer warning that the entire macro-economic policy is fucked. Trust me, if Germany were benefiting from the US "solution", he would be far less vociferous on the matter.
But at least Schäuble has come to the right conclusion, if for the wrong reasons. As I've been saying for ages, my feeling is that the solutions put forward by the US and the UK in the past year have just shifted the problem into (future) inflation. But Schäuble's comments gave me pause. Because all that I had really thought was that the US and UK solution obviously wasn't any more of a real answer than was Bush's response to the dotcom collapse of the early 2000s. And the only way that I could see this disaster unfolding (i.e., genuinely solving itself) was much higher inflation. However, there are other possibilities that I discounted, ignored, or perhaps wasn't even aware of (see "Black Swan") and perhaps I should allow for the chance that the bubble will burst in a very unpleasant way, but not in the way I had confidently predicted. Perhaps, after all, it will be the debtors that suffer rather than the savers.
In other words, I still think that inflation will be the net result of current government lunacy, but I should start looking around for alternative scenarios.
I've already been hedging my bets in a way by paying down my mortgage, but really this is more of a "I can't think of anything else that I want to do with my money" than a positive take on future inflation. I've got quite as much as I want allocated to equities, and my pension is now all in index-linked. Property is still fully/over valued (despite Bernanke's line that it's hard to say whether this is the case or not), so it's hard to see where else to go with cash that you want to "invest". As Mikey observed, with all that helicopter money floating around, some of which seems to have found its way into my pocket, the choice is either put it under the mattress or put it into assety-like things. Quite a few banks have been putting it under the mattress (although in the banking world this is known as reserve-strengthening) but enough investment managers have been putting it into assety-like things.
One thing seems very likely now -- the UK and US governments are going to keep interest rates very low for far longer than is prudent.
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BTW, am now in middle of worst downswing ever (in real terms) at minus $3k since high point. In comparative terms, it's the worst since October/November 2006. All getting a bit depressing... As usual, a run of v bad luck eventually leads to affecting the quality of your play. This isn't "tilt" (not in my sense of the word). It's just what separates us from the machines. And it's here that being good at your "C" game is so important. You know that you aren't playing at your best, but your third-best has to be better than other people's third-best, because they will go through the same shit eventually as well. But, jeez it can hurt.
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"more likely today is a scenario in which excess liquidity globally creates a new asset market bubble".So, Bernanke and US/UK policy on one side, Germany, France and, more interestingly, China's banking regulator Liu Ming-Kang, on the other.
Mr Liu last weekend attacked the Fed for keeping interest rates low and thus fuelling the dollar carry-trade. Yesterday Schäuble warned that
"if there is a sudden reversal in this business, markets would be threatened with enormous turbulence".
I think that much, possibly all, of the dollar's recent general weakness is because of carry-trades. The one exception is its exchange rate with commodity currencies (e.g. Norway, Australia, Canada) where those currencies are naturally benefiting from another arm of the asset bubble (commodities), as well as the carry trade. Note also that the UK, which also has very low interest rates, has not benefited against the dollar to the extent of the euro or more "speculative" exchange currencies.
All of this forex stuff is really a bit by-the-by. Governments scream and shout about exchange rates, but history has shown that the benefits and handicaps of stronger or weaker rates have a significant self-balancing effect -- not least to the extent that a stronger exchange rate holds down inflation and forces producers to up their efficiency, while a weaker exchange rate allows companies to say that "oh, the currency movements are increasing our profits anyway".
Of more interest (well, to me, at least) is the claim by Schäuble that a new asset bubble is being created (i.e., we aren't getting out of the previous problem, we are just shifting it somewhere else) and that we don't really know what is going to happen when disaster strikes -- merely that disaster will inevitably strike somewhere and that, when it does, in the manner of disasters, it will be very unpleasant.
It is this undeniable truth that Brown, Darling, Bernanke and Geithner seem determined not to see. And even Schäuble's motives are far from pure. This is really a German being pissed off at the Americans for keeping interest rates low, thus "harming" the eurozone, rather than an objective observer warning that the entire macro-economic policy is fucked. Trust me, if Germany were benefiting from the US "solution", he would be far less vociferous on the matter.
But at least Schäuble has come to the right conclusion, if for the wrong reasons. As I've been saying for ages, my feeling is that the solutions put forward by the US and the UK in the past year have just shifted the problem into (future) inflation. But Schäuble's comments gave me pause. Because all that I had really thought was that the US and UK solution obviously wasn't any more of a real answer than was Bush's response to the dotcom collapse of the early 2000s. And the only way that I could see this disaster unfolding (i.e., genuinely solving itself) was much higher inflation. However, there are other possibilities that I discounted, ignored, or perhaps wasn't even aware of (see "Black Swan") and perhaps I should allow for the chance that the bubble will burst in a very unpleasant way, but not in the way I had confidently predicted. Perhaps, after all, it will be the debtors that suffer rather than the savers.
In other words, I still think that inflation will be the net result of current government lunacy, but I should start looking around for alternative scenarios.
I've already been hedging my bets in a way by paying down my mortgage, but really this is more of a "I can't think of anything else that I want to do with my money" than a positive take on future inflation. I've got quite as much as I want allocated to equities, and my pension is now all in index-linked. Property is still fully/over valued (despite Bernanke's line that it's hard to say whether this is the case or not), so it's hard to see where else to go with cash that you want to "invest". As Mikey observed, with all that helicopter money floating around, some of which seems to have found its way into my pocket, the choice is either put it under the mattress or put it into assety-like things. Quite a few banks have been putting it under the mattress (although in the banking world this is known as reserve-strengthening) but enough investment managers have been putting it into assety-like things.
One thing seems very likely now -- the UK and US governments are going to keep interest rates very low for far longer than is prudent.
____________
BTW, am now in middle of worst downswing ever (in real terms) at minus $3k since high point. In comparative terms, it's the worst since October/November 2006. All getting a bit depressing... As usual, a run of v bad luck eventually leads to affecting the quality of your play. This isn't "tilt" (not in my sense of the word). It's just what separates us from the machines. And it's here that being good at your "C" game is so important. You know that you aren't playing at your best, but your third-best has to be better than other people's third-best, because they will go through the same shit eventually as well. But, jeez it can hurt.
_____________
