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Wednesday, December 7, 2016
Walls of worry update
Here's an update of one of my favorite charts. I show it in honor of another decisive market move to new all-time highs that has been accompanied, not surprisingly, by a significant decline in the market's level of fear and a meaningful rise in interest rates, which in turn reflects a more confident growth outlook.
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12 comments:
Yeah the market is on "fire" well financials are at least. With forward earnings of 20x, market is pricing 30% increase in earnings. Seems a bit optimistic to me! Trump si getting the "bump" but then what.
On a side note things in China are looking difficult, the BoC is clamping down on capital flight, its not entirely clear if capital is afraid or simply looking for better returns elsewhere. But one figure is amazing between June 2014 and today, the Chinese's holding of US Treasury has dropped from $ 4 trillion to $1 trillion.
That's a massive outflow!
Re China: The latest release of China's forex holdings (as of Nov. 30) shows total holdings of $3.05 trillion. That's down about $1 trillion from the high of $3.99 trillion (June '14). You may have your numbers scrambled.
In any event, China is indeed experiencing capital flight, and that explains why the yuan has been falling. It looks like the central bank is not allowing the capital flight to shrink the money supply, and that is somewhat disturbing. In effect, they have been selling dollar-based holdings and buying domestic securities to replace them. So the quality of the yuan has been deteriorating. And without allowing the supply of yuan to decline as money leaves the country, there remains a surplus of yuan which is depressing the yuan's value.
China still has an amazing $3 trillion of reserves, however, so the situation is far from critical. But it bears watching
Any sensible person might have reservations about Donald Trump.
But I am heartened to see an American president speak mostly about business, and not entanglements in foreign crapholes.
If Trump puts American businesses on a pedestal...well, we have seen worse and recently too....
Hi Scott, thanks for your comments. Re. China, it would be great to have your thoughts. As far as I understand, a country has basically 3 economic tools (interest rates, capital controls and exchange rate) and you can only control 2 of them. On the other hand, historically it has been very hard for countries to acoid a hard landing when reserves drop by 30% in a row and China is approaching that level. Again, it would be great to have your thoughts.
Hi Scott, I just watched a presentation by Mark Levin on LevinTV about America's $200 trillion total national and federal debt (and liabilities). I know you have commented on this before but can you just state again, in capsule form, why you don't think this kind of debt will eventually sink the US ? (Not a rhetorical question, I am genuinely keen to hear your view). Many thanks.
George Washington's Farewell Address, 1796: "... avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertion in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear."
Re our national debt: The direct federal debt that cannot be avoided is roughly $14.5 trillion, or about 75% of GDP. That's a lot, but it's not lethal, and for now it's not growing much relative to GDP. (Think of a family with four kids and parents in prime working age: if their total debt, including mortgage, were 75% of their annual income they wouldn't have a care in the world.) The other stuff (which may reach as much as $200 trillion, depending on your assumptions) is the present value of the unfunded liabilities of social security, medicare, etc. That is not contractual, and the total is very sensitive to assumptions about growth, inflation, demographics, and rules (e.g., whether the future retirement age for social security is raised from 65 to 68 or 70, whether future payouts are linked to the growth of wages or just to the CPI, etc.). It's a safe bet that if we get to the point where social security expenses loom intolerably large, then a future Congress will find a way to change the rules. In other words, if something can't go on forever, it won't. Meanwhile, for the foreseeable future we are not staring into the abyss. And if Trump manages to get GDP growth up to 4% or more, then a lot of dire projections will fade away. In the end, economic growth, or the lack thereof, is of primary importance to our future indebtedness.
As usual Scott you have provided an excellent (and succinct) counterpoint to the doom and gloom predictions, many thanks.
If my predictions deflation in stocks, bonds, real estate, and commodities are true (and I pray that I am wrong), then China will soon be buying up America for pennies on the dollar. For those who say such things as the size of the national debt does not matter, consider the totality of everything else that is happening right before our eyes: $20 trillion debt; municipal bankruptcies; underfunded public pensions; persistent negative trade balances; persistent deficit spending; flattening tax revenues; persistent oil glut; dollar index rising; potential trade wars; immigration chaos; racial strife. Each of these challenges are intractable at a national scale. I sure hope that all of these challenges abate, but I know better. My motto is hope for the best, but plan for the worst. I'm stacking cash until I see some real progress on multiple fronts.
PS. Scott, you said "The direct federal debt that cannot be avoided is roughly $14.5 trillion" .. Since most people talk about the headline figure of c. $20 trillion, how risky do you then regard the remaining $5.5 trillion ? Thanks.
The $20 trillion figure that people love to toss around is completely misleading. It in includes $4.5 trillion of "intragovernmental debt." That is mostly money that has been "borrowed" from the social security system. It is simply double-counting. Taken as a whole, the federal government owes only $14.5 trillion. Within the federal government's accounts is an accounting entry for the social security surplus (the "lockbox") that has been loaned to the rest of the government. That is money that theoretically exists in the form of IOUs that one branch of the federal government promises to pay to another in the future. In practice, the social security surplus was dumped into the general fund and spent. The "asset" that the social security system has it its lockbox is exactly offset by the liability that the rest of the government owes the social security system. On net, the two cancel out, and all that is left is debt owed to the public, which is $14.5 trillion. You can see the figures on a daily basis here:
https://treasurydirect.gov/NP/debt/current
Excellent, thanks again !
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