In my previous blog item, I argued that 2005 is likely to be the YOTGBMR (Year Of The Great Bond Market Rout)…As strongly argued by the bond market guru Bill Gross, in 2005 Cash will be Prince and King too…and I would argue Cash will be Emperor too as the Treasury Emperor has no clothes at all (and little foreign assets or reserves left) and is digging to himself an even bigger multi-trillion funeral hole (or immolation funerary pire?) with its wretched Social Security privatization plan…
Biggest Bond Manager in the world recommends to avoid US long bonds in 2005 as if they were pestilence: Cash is Prince…and Emperor too…
As Brad Setser and I have been repeatedly warning about the risks of a bond market rout in 2005 (more details in our forthcoming papers but your can read our preliminary views here and here and here and here), it is refreshing to read that the bond guru Bill Gross, Managing Director at Pimco, the one of largest bond (fixed income) asset management firms in the world (over $400 billion assets under management), is recommending to stay away from US long term bond in 2005 and keep as much as possible in cash. Having the Managing Director of an institution specialized in selling to investors the widest variety of bonds and bond funds telling you to avoid bonds and hold cash is quite an irony: as if the largest world food multinational company were to start a global ad campaign to warn you to avoid its products as if they were poisonous or pestilence-inducing. Of course, the menu offered by these most respected bond managers includes a variety of poison-avoiding foods (inflation indexed bonds, foreign bonds that will gain from the dollar weakness, very short-duration bonds and, best of all, zero interest rate short-term bonds, i.e. Cash). As he Gross rightly and honesty puts it: in 2005 Cash will be King or Prince… This is indeed the most authoritative indirect endorsement of the view that the US government is on its way to bankruptcy. And you gotta give great credit and respect to the intellectual honesty of the biggest bond salesman around warning you about his wares with the loudest Caveat Emptor of all! Kudos to Gross for his honesty: truth above narrow self-interest!
As reported yesterday by the Washington Post, the Bush administration will put tax reform on the back burner for a year – and consider a more modest attempt to reform the tax system rather than radically change it – to concentrate on social security privatization and “spending” controls. To figure out the administration’s new tax reform plans:
“tax policy analysts and business lobbyists have been looking for clues in a 2002 study done by the Treasury Department. Its author, former assistant Treasury secretary for tax policy Pamela F. Olson, said she has been fielding a steady stream of calls about the report, especially about its fifth, most incremental tax option.”
Liquidity/Rollover Risk on US Assets? A Nightmare Hard Landing Scenario for the US $ and the US Bond Market..
One of the most typical and common features of currency and financial crises in emerging market economies is “liquidity” or “rollover” risk. If a country has a large amount of short term debt that is coming to maturity and investors are unwilling to roll over (refinance) such debt, then a liquidity or debt rollover crisis may occur. The debt coming to maturity is usually the foreign currency (or foreign currency-linked) debt of the government (as the infamous Mexican Tesobonos in 1994) or the short-term foreign currency liabilities of the banking system (as the $20 billion plus of short-term cross-border inter-bank lines in Korea in 1997). Similar liquidity or rollover crises (also referred to as roll-off crises as investors roll off rather than roll over their claims) have been observed in every emerging market economy crisis in the last decade (see Chapter two of my new book with Brad Setser).
On selling your reserves, babies and other Banana Republic schemes…a follow-up on my Swiftian “Modest Proposal”…
Somehow, based on email feedback from many, the sarcasm and ironic nature of my recent blog’s “Modest Proposal” for the US Treasury to sell US reserves and government foreign assets as a way to finance our budget deficit – given the shrinking willingness of the world to do that – was missed by many, even otherwise sophisticated, observers; all this in spite of the obvious Swiftian allusions of my blog’s item title.
Many took seriously what I thought was obvious irony and asked me: “But we do not have so many reserves, right?” or “For how long could we play this treasures’ fire sale game?” or “The whole problem is attributable to a loss of confidence in the dollar. The only possible solution is to restore that confidence.That would not happen if the US starts selling its foreign assets. On the contrary, such acts could further undermine the dollar.”
As they say, imitation is the sincerest form of flattery….
A senior economist sent me this morning the following email:”Hope you enjoyed reading your blog (on Social Security) as an editorial in the FT today!”
I then opened my very favorite paper – the Financial Times – and I indeed found a brilliant and thoughful editorial on why social security privatization is a bad idea that followed all the arguments of my recent blog on Social Security privatization. But more likely, rather than imitation as my colleague was suggesting, one can assume that “great minds” think alike…And I happen to find the FT as the most thoughful daily newspaper on international macroceconomic, geopolitical and global issues (together with the weekly Economist), many notches above the Wall Street Journal that excels in business information but is totally inadequate when it comes to economic analysis (and is arch-partisan in its editorial board).
In another example of the economic brilliance of our MBA President (who taught him economics and when?) and of his economic team, Dubya just found out today the Holy Grail that will eliminate in an instant our trade deficits.
Bush told reporters that the trade deficit was “easy to resolve. People can buy more United States products if they’re worried about the trade deficit.”
Very deep and profound concept and idea…and altogether wrong on all matters of economic substance. As any freshman in Economics knows, the current account deficit is, by definition,equal the excess of the country’s expenditure relative to its income; so if a country spends more than its income, it will have a current account deficit, regardless of its preferences for domestic or foreign goods. If we spend more than we earn, if we have lower savings (because of the huge budget defitics) than our real investment, the current account will be and remain in a large deficit. Also, the demand for imports depends mostly on relative growth rates across countries and relative prices of foreign goods relative to foreign goods (i.e. exchange rates). So, assuming the trade deficit will disappear will not change it by a iota. And too bad that the masses of red state evangelicals on their way to join the social and economic lumpenproletariat crave and can only afford the good and cheap Chinese goods that made the fortune of Wal Mart.
Trade deficit is up; foreigners willingness to finance it is down! A “Modest Proposal” for the US Treasury to follow its own brilliant advice….
As yesterday’s figures on the trade deficit showed, the October trade deficit was sharply up, to $55.5 billion (and not only because of oil). While today’s TIC report on Foreign purchases of US assets suggests that the foreigners willingness to finance our trade and current account deficit is down as International investors bought in October a net $48.1 billion of Treasury notes, corporate bonds, stocks and other financial assets, well below the $67.5 billion level in September. For a FAQs on TIC see this Morgan Stanley report today.
As widely reported by the press, a partial privatization of Social Security via the creation of private accounts is one of the top policy priorities of the Bush II administration.
But when you carefully look at the facts, it becomes clear that the proposed partial Social Security privatization is literally a Con Man Smoke-and-Mirrors Shell Game that – in the form it has been proposed – will not lead to any of the alleged benefits argued by its supporters. It is amazing the amount of misinformation that one reads about social security privatization; apologists argue that:- The current pay-as-you-go (PAYGO) Social Security system is bankrupt.
Tim Geithner – NY Fed President and formerly Under Secretary for International Affairs at the US Treasury and head of the IMF’s PDR department – has warned again this week about hedge funds and systemic risk. As his first speech as NY Fed Prez last March was on systemic risk, this is the third time since March that he has spoken on the subject (see also his October speech on systemic risk). Would that be a veiled suggestion that he, the NY Fed and the Fed Board are concerned about the issue? One may infer – from the frequency with which he has publicly spoken about the subject – that the issue of systemic risk may be on his mind. As he was at Treasury when LTCM blew up and as he is a leading expert – and crisis manager – of financial crises in emerging markets, his concerns are well justified.