JS Global Macro Notes

Weekend Comment: The Von Mises Prophecy Explained

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Despite very long interims, reality (and gravity) tends to eventually reassert itself. This is why the Austrian school will always have relevance.

In that respect, there is something I think of as "the Von Mises prophecy," which is a sort of one paragraph summation of Austrian thought -- anchored to a prediction -- as put forth by Ludwig Von Mises himself:

"There is no means of avoiding the final collapse of a boom expansion brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

The Von Mises prophecy can further be understood in the context of "exploding debt dynamics" (a highly useful term coined by an IMF staffer).

To wit, your debt dynamics become explosive when debt service costs overtake your ability to arrange new financing. "A rolling loan gathers no loss," as the Wall Street wags say, but once that loan stops rolling? Game over man...

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Global Macro Notes: China's Biggest Export -- Deflation

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Quick, off the top of your head: What is China's biggest export?

Gym socks? iPods? Wal-Mart knick-knacks? Neo-colonial African infrastructure (e.g. bridges and ports in Congo)?

We'll hypothesize here that China's biggest export is deflation.

Consider -- during the boom-boom Bretton Woods II years, everyone talked about "the China price." As in, "if you can't beat the China price" for some manufactured good, you didn't really have a chance of competing.

China's low-wage army and all-encompassing state-run utilization of resources exported the "China price" all over the world, lowering not just the cost of finished goods but the wages of Western world workers to boot...

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Weekend Comment: The Trouble With Modern Monetary Theory (MMT)

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It's time to put the smackdown on Modern Monetary Theory (or MMT for short).

To be blunt, MMT is fatally flawed, and someone needs to address those flaws head on. (That is the conclusion of yours truly after investigating in recent months.)

If you aren't familiar with Modern Monetary Theory, the quotes in the blue sidebar may disturb you a bit. They highlight some rather bizarre assertions made by MMT proponents.

In some ways the MMTers are neo-channelers of Dick "deficits don't matter" Cheney. (Full quote: "Reagan taught us that deficits don’t matter.")

In reality, what Reagan taught us is that deficits don't have to matter for extended periods of time. But then, all of sudden, they can start mattering a great deal.

But we'll get to that... point being, MMTers think deficit concerns are bunk. In fact, they don't see much reason to worry at all! Dead wrong, as we shall see...

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Weekend Comment: Stores of Value, Feedback Loops, and Gresham's Law

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In between family, presents, and the eating of Christmas cookies, the holidays gave time to revisit a book or two.

One such book was Paper Money by Adam Smith (aka George Goodman). Paper Money is a timely chronicle of 1970s economic conditions -- housing bubble, energy crisis, runaway inflation and so on -- published in 1981.

In thinking about the conditions that exist today (or could soon exist in future), this passage from Paper Money stood out:

The binge of the Second Oil Crisis, you will now see, is very relevant to this discussion of paper money. Remember Sir Thomas Gresham, whose law said bad money drives out good, meaning bad money drives good money out of circulation and into savings. The bad money is spent. In the Second Oil Crisis what was saved was oil, and what was spent was money. The store of value had become oil. The yen, the marks, the dollars, the francs, were spent; the oil was saved...

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Global Macro Notes: Twelve Major Risks for 2011

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In the December issue of the Absolute Return Letter, Niels Jensen reveals his "dirty dozen" -- twelve major risks for the year 2011. Many of these overlap with themes we have already highlighted or discussed.

With more explanation to follow, here are Jensen's 12 risks in brief:

1. High yields priced for perfection?
2. The risk of double dipping
3. The sinking ship of Japan
4. Beggar thy neighbor mentality
5. Capital flows too hot to handle
6. Chinese inflation out of control?
7. Food inflation induces civil unrest
8. India an accident waiting to happen?
9. European contagion and solvency risk
10. Massive refinancing program
11. Premature withdrawal of monetary suppport
12. Israel launching a pre-emptive strike on Iran

Against a backdrop of extreme bullish complacency, with many professional prognosticators seeing little to no risk at all through their rose-colored glasses, a discussion of "gray swans" -- not so hidden risks of low probability but potential high impact -- feels appropriate here...

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Happy New Year ET...

2011 is gonna be bigger and better than ever. :cool:

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Weekend Comment: On the Importance of Themes (and Getting Around)

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...the market is not just bulls versus bears, or investors versus traders. These are artificial distinctions, sometimes useful and sometimes not.

On a deeper level, the market regularly expresses itself in themes -- collective opinions as to what the future will hold, often keying off some scenario or basic logic chain, expressible in a standard format.

"Because of X, such and such industry group will do Y... in light of A, stocks will do B," and so on.

We prefer to think thematically -- to think in themes -- because these ideas and belief sets are like powerful ocean waves, pushing sectors, industry groups, or even whole asset classes up and down.

Sometimes these themes are logical and sensible. At other times they are downright loony. (Remember how 'eyeballs' were the measure du jour of dot com stocks?)

And there can be dozens of themes running through markets at the same time -- some loud and dominant, others barely a whisper.

Some themes directly conflict with one another. Others dovetail and mutually reinforce each other. And of course, the market can (and often does) drop one theme in favor of another with surprising speed.

Sound messy? Welcome to markets. It's the swirling, bounded chaos of tens of thousands of market professionals (and countless non-professionals) all trying to make sense of things in real time...

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Hey, DH great to have you back. I always considered you one of the all time great posters here on ET. And I'm not the only one. Your name always comes up when great posters are mentioned. We missed you. :) I'm just starting to post again myself. You know how that is. :) Somehow I missed this thread and just discovered it by clicking on your name in my buddy list. I was expecting to see you hadn't posted in years. What a pleasant surprise. Was just starting to check out your website too. Looks good. Got to run, but I'm looking forward to following this thread and reading it all as I have time and looking into your website more too. :)

Oh, wait! I think I have you confused with someone else!............................................................. kidding. :) Welcome back!
 
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