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January 26th Overnight Market Movers

Posted by Larry Doyle on January 26th, 2010 7:27 AM |

While many eyes here in America are distracted by the ongoing political noise emanating from Washington, there are significant market moving developments with long-term implications happening overseas.

Let’s first look east to China and Japan. There are two major stories in this region:

1. Chinese banks are putting restrictions on new lending. This effective tightening of credit is a result of concerns that excessive speculative lending has created an asset bubble. The major Chinese stock index sunk to a three month low on this news. This development out of China has supported the greenback in a flight to safety.

2. Japan’s sovereign credit rating may be cut by S&P, as the rating agency believes that the ‘Land of the Rising Sun’ has limited flexibility to deal with its massive government debt load.

Moving westward, news out of the United Kingdom is good  . . . or is it? (more…)

Deflation

Posted by Larry Doyle on December 27th, 2009 7:52 AM |

Although the American consumer is much more accustomed to inflation and the threat of inflation, I am increasingly convinced that the threat of deflation remains the greater challenge. This battle between macroeconomic deflationary forces versus governmental supported inflationary programs is THE ultimate issue facing our economy in 2010 and beyond.

We hear very little about deflation from Bernanke, Geithner, or other central bankers here in the United States. Why not? If they were to even bring attention to it, I think they would cause a stir and legitimize the underlying deflationary forces at work in our economy.  What do we hear? Continuous platitudes about how inflation is under control. Remember that the primary mandate of the Federal Reserve is to work to achieve stable prices. How is it going about that currently? Massive federal programs including ballooning the Fed’s balance sheet to prop the economy and prices from the weight of deflationary forces. How and why have these deflationary forces developed? Excessive debt throughout large sectors of our economy. (more…)

The Message of the 2yr Treasury, Deflation, and Japan

Posted by Larry Doyle on November 20th, 2009 2:20 PM |

Most eyes are fixated on the rise in equities and commodities and, in turn, point to those markets as indicators of an incipient economic recovery. In doing so, we neglect the movements within the bond market, specifically the U.S. Treasury market, at our peril. What is the Treasury market saying? A lot. Let’s look and listen.

The 2yr Treasury note specifically yields a paltry-like .71%. Why so little? I thought investors were more inclined to invest in risk-based assets? Why are they buying a 2yr Treasury note at such a miniscule return?

In my opinion, the front end of the Treasury curve, typically referenced by the yield on the 2yr note, is telling us the Fed will be on hold for a protracted period. This point we already knew. Tell me something I don’t know, LD. The 2yr Treasury note is indicating that inflation expectations are currently constrained. You probably knew that, also. Two strikes LD, you get one more pitch. The 2yr Treasury specifically and bonds in general are telling me that deflationary pressures in our economy are growing. What do you think? While most economists and analysts talk about inflation and inflation expectations, we have not heard much about deflation lately. Welcome to Sense on Cents. (more…)

United States and Japanese ‘Forests’ Appear as Mirror Images

Posted by Larry Doyle on August 31st, 2009 8:57 AM |

Japan’s election results yesterday, in which the Japanese LDP party was routed, is a clear case of resoundingly ‘throwing the bums out’ in an attempt to ‘clean house’ and set the nation on a new track. What direction is that track headed? East, as in measures of increased protectionism within Japan itself and a closer relationship with the BRIC nations, primarily China.

Sense on Cents provided a hint of this on July 13th in writing, “Will Japan Take a Samurai to the U.S. Dollar?”:

Is the economic influence of the BRIC nations (Brazil, Russia, India, and China) gaining momentum and a huge ally in the assault on the U.S. dollar? It would appear so. What country is also questioning the validity of the greenback as the international reserve currency? Our second largest creditor, that being Japan.

Japan remains mired in a longstanding run of economic stagnation. This stagnation not only encompassed The Lost Decade of the 1990s, but to a large extent continues today. Japan, much like China, has largely been an export based economy dependent on American consumers. With the American consumer now pulling in his purse strings, what does the future hold for Japan? Let’s review the platform of the victorious Democratic Party of Japan (DPJ). The Wall Street Journal provides insightful analysis this morning, The Audacity of Yuai, in detailing the DPJ’s premise and platform, which includes the following:

> Yesterday’s election represents only the second time that the LDP has lost office in 54 years, and Mr. Hatoyama succeeded brilliantly by campaigning on the audacity of ambiguous “change.”

Interesting . . . “change,” sound familiar?

> Like the LDP, the DPJ wants to protect the politically powerful agricultural lobby, reshuffle public handouts, raise taxes in the name of environmentalism, and protect workers and small- and medium-sized businesses from competition. On the campaign trial, Mr. Hatoyama sold these old ideas as a new vision of government focused on yuai, or friendship and love.

Could we categorize these components as ‘the more things change, the more they stay the same?’ Are we experiencing much of this in Washington as well?

> Japan’s public-debt-to-GDP is about 180% and the fiscal deficit is projected to approach 8% by year end. Mr. Hatoyama promises to trim the budget to pay for his 16.8 trillion yen ($177 billion) in spending promises. But that ignores the gaping debt hole that must be serviced eventually.

What other country has a massive debt problem and is going into deeper debt to dig its way out?

> He suggests that China’s rise to economic dominance in Asia is inevitable and that Japan should do more to redistribute the wealth it currently has.

Redistribute? Sound familiar?

> On foreign affairs, Mr. Hatoyama wants the U.S. to remain the main guarantor of Japan’s security, but with fewer troops and bases in Japan. He is strong on human rights but supports international institutions like the United Nations that coddle rogue regimes.

How gracious of them. We get to protect them with a lessened physical presence. Might he also dare to negotiate with certain ‘rogue regimes?’

The simple fact is the Japanese public is fed up with economic stagnation. However, the Japanese may care to review the foundations of that stagnation. Within that foundation is a culture which has never been willing to recognize losses within its banking institutions. That unwillingness to acknowledge losses has left an overhang of bad debt on its economy.

If you see many similarities in the platform of the newly elected DPJ, look beyond the trees and I think you may see a forest in the United States which, in many respects, is the mirror image of that in Japan.

LD






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