Anatole kaletsky: investors shifted from being policy obsessed to focusing on fundamentals which aren't that bad #eurohedge
15 minutes ago
Category Archive: Finance & Markets
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More on Defense Spending
In my last post on the 08Q3 GDP release, I noted the remarkable contribution of defense spending. Here is a little more detail on the growth rates of defense spending on goods and services on a NIPA basis.
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Just How Bad Was October 2008?
Not too shabby a week — plus 11% across the major indices, with some areas even stronger. Of course, that comes from deeply oversold levels, with stocks peak trough down 27% within October. The key question going forward is whether or not this past week’s snapback rally has legs. But rather than guess about that, let’s look at some of the more intriguing data points from October 2008.
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Reverse carry trade borrowing is deadly
By now, you are familiar with the carry trade, where one borrows in one’s own currency in to invest in higher yielding foreign assets, often times with significant leverage. The Japonese were famous for making this trade in Australian Dollars, US Dollars, you name it.
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CDS Pricing in Increasing Treasury Default Risk
We have noted that Treasuries (and the dollar) are the remaining bubbles, although some doubts are starting to surface on the Treasury front. Paul Amery at Prudent Bear gives a good recap:
The tectonic plates underlying the whole superstructure of debt have started to shift.
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A look at the next phase of the financial crisis
Summary
The global financial situation is complex and wreathed in fog, but at least two things are clear.
- The financial crisis consists of fore-shocks before the main event.
- A new geopolitical order will mark the solution of this crisis; it lies far in the distance.
This post examines the grim details of item #1. Click on number two for that post. There will be a long series of posts with good news on this site, but that time has not yet come. But it will.
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Some Additional Observations on the 2008Q3 Advance GDP Release
If you went no further than noticing that the q/q annualized growth rate of -0.3% was faster than the -0.5 in the Bloomberg consensus, you might have taken this as good news. I’m not going to say it wasn’t good news (relatively speaking), although negative growth makes the case for recession pretty good according to Jeff Frankel (who is on the NBER BCDC); see also RealTime Economics. However, there are some pretty interesting things that merit additional discussion.
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The GDP deflator
This post is a guide to understanding the GDP deflator, which the government use to arrive at the economic growth numbers we all hear on TV or read about in the newspaper. This post is the product of a lot of background research and some good confirmatory side conversations on the topic with Jake at EconomPic Data.
In essence, the GDP deflator is an inflation statistic. And it has wide-ranging consequences in terms of how ‘real’ the real GDP numbers actually are. However, because it is not a ‘true’ measure of inflation, the GDP deflator can create an inaccurate picture of the economy. Recently, we saw just such an inaccuracy because of the last two quarters’ oil prices.
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A call for a European Financial Stability Fund
The euro is plunging and EU banks are coming under renewed pressure. There is a strong demand for ‘European’ bonds as well as a need for massive government capital infusions to prevent the crisis from getting worse in the banking sector and the European periphery. This is why the EU should set up a massive European Financial Stability Fund. -
Byways and Tribal Capitalism
I have been indulging in leisure again. For nine days I backpacked along the ancient Ridgeway, the superhighway of Neolithic Britain and a trade route into the modern era. Starting about 6,000 years ago, (roughly the time Sarah Palin imagines Adam and Eve holding hands in a newly wrought Eden) the Britons occupying the plains either side of the Ridgeway were settling the river valleys to raise crops and herd animals. As the crops and herds increased, and the Iron Age and Bronze Age opened trading opportunities in new technologies, these Britons took strides that set them and their heirs on the road to market capitalism.
The road they followed is the road I walked – the Ridgeway Trail.
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The Stimulus Plan We Need Now
Further legislation to deal with the economic crisis should not wait until the new president takes office. Fortunately, the president-elect will be a senator and can propose legislation without waiting to be sworn in as president. Immediately after Nov. 4, the winner could, and should, take the lead in the legislative process.
The economy faces two separate problems: the downward spiral of home prices, which hangs over the financial markets, and the decline in aggregate spending, which could cause a deep and prolonged recession.
