Macro
Let’s get off to an easy start this Monday.
Firstly, to summarize Friday in the US – it was all about the jobs numbers. Nonfarm Payrolls came in much better than expected at -11k (vs -125k expected). This meant US unemployment actually improved from 10.2% to 10%. Pretty surprising number for everyone, I think – even the bulls!
Now on my weekend reading I stumbled across this rather contrarian article in ZeroHedge: Albert Edwards on a potential Yuan Devaluation. That’s right… not an appreciation revaluation of the Yuan, but a devaluation! Read on, this is an interesting piece if only because it helps to see a new perspective on the value of the Yuan.
Finally, in a NY Times piece, James Surowiecki talks about The Debt Economy. He takes a different tack to me, implying that it was political legislation and attitudes towards subtle tweaks on taxation policies which have helped to gently coax a culture of debt (as opposed to inflation mismanagement). The truth is it’s probably a bit of both.
There are a couple of peculiar things about these tax breaks—which have been around as long as the federal income tax. The first is that they’re unnecessary. Few people, after all, can save enough to buy a home with cash, so home buyers naturally gravitate toward mortgages. And businesses like debt because it offers them tremendous leverage, making it possible to put down a little money and potentially reap a huge gain. Even in the absence of the deductions, then, there would be plenty of borrowing. The second thing about these breaks is that their social benefits are pretty much nonexistent. Advocates of the mortgage-interest deduction, for instance, claim that it increases homeownership rates. But it doesn’t: in countries where mortgage deductions have been eliminated, homeownership rates haven’t dropped. Instead, the deduction simply inflates house prices. The business-interest deduction, meanwhile, may lower an individual company’s taxes, but it also means that the over-all corporate tax rate is higher, so its real impact is to give companies with lots of debt an unjustified advantage.
If the benefits are illusory, the costs are all too real. Economies work best, generally speaking, when people are making decisions based on economic fundamentals, not on tax considerations. So, as much as possible, the tax system should be neutral between debt and equity, and between housing and other investments. It’s not, and, worse still, as we’ve seen in the past couple of years, debt magnifies risk: if companies or individuals rely on large amounts of leverage, it’s much easier for bad decisions to lead to insolvency, with significant ripple effects in the wider economy. A debt-ridden economy is inherently more fragile and more volatile. This doesn’t mean that the tax system caused the financial crisis; after all, the tax breaks have been around for a long time, and the crisis is new. But, as a recent I.M.F. study found, tax distortions likely made the total amount of debt that people and companies took on much bigger. And that made the bursting of the housing bubble especially damaging. So encouraging people to take on debt qualifies as a genuinely bad idea.
It reminds us that debt is like speed when driving a car. It simply magnifies risk in both directions – to the upside and the downside. Also, while reading this article I thought about the so-called Wealth Effect. The effect of rising asset prices and how this “perceived” increase in wealth, in turn, influences consumer confidence and thus the modern economy as a whole, in a sort of backward loop of causality. The Wealth Effect, of course, is a symptom of a debt-dependent society, debt magnifies the effect of asset price inflation and deflation (and thus the aversion to deflation and thus the importance of pursuing accommodative policy at the Fed – which causes yet more debt). Thus in a society less pre-occupied with debt, the inflation of an asset, say, the price of one’s house, is barely influential on consumption patterns. However, where that house has been financed with huge amounts of debt, from a macroeconomic perspective, the perceived return (and loss) on capital is outsized. The psychological effect is magnified, hence the Wealth Effect.
Macro Data to Watch:
- Taiwan CPI and export numbers
Markets
The S&P got off to a flier due to the jobs numbers, although there was a bit of a sell off in the middle of the day.
You see Gold? What a sell off. But we had a sell-off like this at the end of the week before and the precious metal still hit a new high the following week. Let’s see if the same thing happens this week.
Of course, the Dollar rallied hard on Friday. I’ve been a little wary of being short the Dollar lately. As I’ve said before: too many people on one side of a trade is always recipe for some pain down the road!
Global Stocks to Watch:
- Obviously the gold stocks names like Goldcorp, Harmony Gold and Barrick Gold (one of the biggest movers on Friday – down 9%).
- Banks again – it’s not always about the price. Have a look at my chart of the day for Bank of America. Forget the price, look at the graph below for volume!
No comments:
Post a Comment