"New Normal" is the "New Stupid"?

macrotrader · Post by **macrotrader** » Tue Nov 17, 2009 12:32 pm

If there is a lot of supply of risk capital, shouldn't prices of risky assets go down rather than up?

On a 1/2 year basis all assets classes are flatish comparing current prices to their moving averages (relative strengh <1.1). I think in this case RS is a better measure than rate of change.

LongVol · Post by **LongVol** » Tue Nov 17, 2009 1:15 pm

An interesting point baghead.....I was browsing Euro BBB corporates just a few weeks ago and noted that the average bond yield (c.6%) is now below that of the average FCF yield........the last time this happened was 2004 which sparked a two year boom in Private Equity activity.....

Probably slight OT.

Difficult to be a bear at the moment.

SirAppleby · Post by **SirAppleby** » Tue Nov 17, 2009 5:29 pm

My .02... I think future economic historians will be critical of current policies. A combination of ZIRP/QE/government bail-outs does not reduce excesses built up during economic expansion. Any period of economic growth will produce misallocations of capital, so recessions help to rebalance capital in the economy. Central bank manipulation of short term rates is interfering with markets, but it is usually constrained by spreads versus the rest of the curve. Outright buying in the middle/back of the curve and government guaranteed corporate debt just transfers the risk from private to public finances. The new risk paradigm created by the intervention is not consistent with a stable economy.

One question: My understanding is that the Fed will soon have a $1.25 trillion MBS portfolio with current coupon mortgages and it will not be hedged. Is this the largest unhedged portfolio in history?

FDAXHunter · Post by **FDAXHunter** » Tue Nov 17, 2009 5:50 pm

And then there's the BOE, who happen to own 1/3 of UK government debt. That is probably the most concentrated position in history. They better pray this shit doesn't get downgraded or the UK can start thinking about creating the "Bank of New England".

gutenberg · Post by **gutenberg** » Tue Nov 17, 2009 6:03 pm

The S&P PE is about 100. This type of quick recovery is unprecedented. If you take average real earnings over 10 years, you get PE of 20 which is closer to the historical average. This level is reasonable if the increase is due to panicked money coming back to the markets. Any additional increase without substantail decrease in unemployment or increase in sales/ earnings of industrials I think will be sign of the massive liquidity created by the FED and will require a correction.

CMPT · Post by **CMPT** » Tue Nov 17, 2009 6:25 pm

I think US (and by extension EUR and GBP) markets should continue present trends:

With poor growth and govt finance USD should continue to trend down.

A weak currency, poor sentiment, good value (e.g. div yields, vs bonds, etc) mean USD equities should do well too.

Low growth, high real yields and size of domestic market will support
US short rates and duration.

Weak dollar and strong EM growth should continue to support commodities

Just my 2cents

Martinghoul · Post by **Martinghoul** » Tue Nov 17, 2009 6:59 pm

You could probably fund a small third world country with all the 2c we've collected here Smiley ...

KangaXX · Post by **KangaXX** » Tue Nov 17, 2009 9:38 pm

Policy makers, central bankers and other technocrats seem incapable of recognising the crux of the "new normal" which is balance sheets and whether they are important.

Recent western gdp growth largely results from government deficit spending spearheaded by Obamanomic policies. Regardless of what you think of the various (crackpot) industry subsidies the US has deployed, someone ultimately has to pay for them and total debt to gdp in the US and many other developed nations is rising. The pre-credit crunch economy shared a similar characteristic in that consumption based on consumer borrowing contributed significantly to growth. The "new normal" asks the question of whether or not growth based on balance sheet degredation is sustainable over the longer term. In the absence of the systematic repudiation of debts or monetary debasement the answer is tautological because the burden of interest and principal payments on debt is ultimately self limiting.

Stimulus spending funded through quantitative easing has increased the debt stock and if balance sheets matter then we are now further away from solving the problem of overleverage. When the current policies have run their course the total debt stock will again start to contract putting the economy on a path of deflationary anemic growth. Policy makers will be confronted with the stark choice of accepting deflation or attemping more stimulus monetised by printing presses. Ever larger stimulus will cause loss of confidence in fiat money and will send both the economy and society to the Weimar-ian wall.

If balance sheets matter then a solution is clearly long term deleveraging and austerity. The alternatives involve policy errors by misguided technocrats who think they can cause long term real economic growth with printing presses. When the BOE realises that pushing up the total debt stock through QE backed deficit spending is only increasing the problem of too much debt they may emark on "QE2" - government debt forgiveness in an attempt to trigger a "one off" inflation similar to the 1930's gold devaluation. Such an effort will kill the long term bond market, confidence in money, and will benefit the imprudent speculator who purchased real assets with other people's money while transferring wealth from pensioners and those with fixed income and cash savings. By virtue of our democracy the policy response will be designed to burn the least number of voters over a short timeframe.

I see echo's of the above macro economic picture in many places - it feels consensus - but does not act as a stay on risk. Markets may be a little overvalued given historics and very rich given macro risks, but when compared with 0% cash and confronted with the fear of policy error and hyperinflation the market will continue to bid real assets. Conversely once enough people are on board the risk train we can swing to the other side of the boat and run away from deflation all over again....and back and forth until the debate is settled (and wealth is redistributed).

Naradj · Post by **Naradj** » Tue Nov 17, 2009 10:24 pm

If you are hallucinating, we are hallucinating the same thing. When real-estate prices were out of control and oil prices were through the roof in 2006 they still weren't saying there was inflation so you can count on them NEVER saying there is any inflation.

This weak growth is the perfect argument for them to keep rates at zero for a long time. Rates were low for 10 years and we got nothing.Now we're at zero for years? And then? Add in the moral hazard, accounting fraud and the mark to fantasy and we'll never go down.

It amazes me how fragile they made the system and how obvious it is to everyone in the world that this will end in a massive collapse but there is nothing anyone can do about it.

In the end the one thing that will end this rally IMHO is the dollar accelerating its decline. Then its game over. Until then, what can stop this?

Gonzo · Post by **Gonzo** » Tue Nov 17, 2009 11:25 pm

I agree - i expect a 'currency accident' to end this period of despicable, nonsensical irresponsability from the $ powers that be