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Global: Worldthink, Disequilibrium, and the Dollar
Stephen Roach (New York)
The big moves in financial markets always seem to be driven by the unwinding of fundamental imbalances. The disequilibria can be economic, geopolitical, or purely financial. Recent examples include the great disinflation from 1982 to 2002, the end of the Cold War, and the popping of the NASDAQ bubble. And now the unwinding of a new disequilibrium is at hand -- the rebalancing of a US-centric world. I continue to believe that this will be a mega macro play for years to come that could have profound implications for world financial markets.
I have been stressing several aspects of this rebalancing theme over the past year -- especially the unsustainability of ever-widening disparities in the world’s external accounts. As the United States squanders its already depleted national saving, its massive current-account deficit can only widen further. And as the rest of the world remains on a subpar consumption path, its large current account surpluses can only keep expanding. The International Monetary Fund has noted that the disparities between the world’s external imbalances have never been greater than they are today -- with both deficits and surpluses now approaching 1.5% of world GDP. This is a fundamental disequilibrium of the highest order.
But there’s another twist to this story that has also been troubling me -- the geopolitical imbalances of an increasingly unipolar world. These concerns were very much in evidence in the debate at this year’s World Economic Forum in Davos (see my 27 January essay, “The Asymmetries of Globalization”). But for me they crystallized when I read a provocative little book by a leading “neo-con,” Robert Kagan (see Of Paradise and Power: America and Europe in the New World Order, Alfred A. Knopf, 2003). Last week, I had the opportunity to spend some time with Kagan at a Morgan Stanley conference in Italy. While I can’t say we’re cut from the cloth of the same political persuasion, I found his arguments elegant in their simplicity and most provocative in their implications.
At the risk of over-simplifying, Kagan’s argument can be summarized as follows: He stresses two strains of deeply rooted historical forces that have come together to create an extraordinary gap between the United States and Europe -- the only two rivals for global power. One element is structural -- the huge disparity between the military capabilities of the two regions. The other is more ideological -- reflecting entirely different perceptions of the concept of power; America, in Kagan’s view, has opted for power projection by military means whereas Europe has moved beyond conventional power -- relying more on the negotiated laws and conventions of transnational integration. For a Europe that has long been torn apart by one devastating war after another, the thought of intra-regional conflict is now inconceivable. In Robert Kagan’s parlance, that is Europe’s true paradise.
Through Kagan’s lens, American hegemony can only increase. It’s not just Europe’s conscious abdication of conventional power. The demise of the Soviet Union was also critical. The post-Cold War absence of a second super-power has left the world without another force to counter-balance the strength of the United States. Kagan suspects that the war in Iraq was a turning point in this new world order and that more US expansion may be coming. America’s military might hints in that direction. Its history, he notes, points to a similar conclusion. The so-called Axis of Evil is but one blueprint of what might lie ahead, in his opinion. Yet Kagan is far from troubled by this turn of events in world history. He believes strongly that US democracy contains its own built-in restraints on the exercise of power -- sheer military limits, economic considerations, and, most importantly, the self-restraint of the American moral conscience.
These are big thoughts. But what do we do with them? As macro practitioners, we tend to focus on the “narrow” considerations of economics and financial markets. But reality is never so neatly compartmentalized. It ultimately reflects the interplay between our narrow perception of economic fundamentals, social considerations, and equally important political forces -- both domestic and geopolitical. A more holistic approach is needed, especially at times like this.
Kagan’s view of the geopolitics of the world fit together all too well with my depiction of an unbalanced, US-centric global economy. A synthesis, if I may be so bold, depicts a condition of profound asymmetries in this unipolar world. And that’s what takes us back to financial markets and economics. In my view, the big adjustments in asset prices are almost always driven by a resolution of asymmetries. Look no further than the post-bubble adjustments now paying out -- not just the round trip of NASDAQ and other major equity markets but the unwinding of related excesses in the real economy.
But this saga is not about the bubble. It is about the unwinding of a more profound asymmetry in the global economy -- the rebalancing of a US-centric world. History tells us that such asymmetries are not sustainable at current asset prices. And that same history tells me that the resolution of this disequilibrium will ultimately hinge on a realignment of relative prices -- namely the prices of dollar-denominated assets compared to those of non-dollar-denominated assets. Ironically, America’s post-bubble shakeout has had limited consequences for such relative prices. US financial assets -- stocks as well as bonds -- have held up much better than their counterparts overseas. And, up until recently, the most important relative price of them all -- the US dollar -- has remained Teflon-like in its invincibility.
Yet the tensions continue to build for a world seeking a new equilibrium. That’s certainly the message from America’s gaping and ever-widening current-account deficit. It’s also the message from a potential backlash to the Kagan hypothesis of America’s unfettered geopolitical dominance. While I hardly claim any expertise as an historian, I well remember a thesis of Yale’s Paul Kennedy that had as much notoriety in the late 1980s as Kagan’s arguments do today. In The Rise and Fall of the Great Powers (Random House, 1986), Kennedy documented repeated examples of global empires that extended their military reach beyond their economic base. This ultimately resulted in the demise of the great powers -- from China’s Ming dynasty of the 15th century to Europe’s Spanish, Napoleonic, and British empires that followed. Needless to say, this interpretation of history poses a critical question for today’s unipolar world: Can a saving-short US economy continue to finance an ever-widening expansion of its military superiority?
My answer is a resounding “no.” The confluence of history, geopolitics, and economics leaves me more convinced than ever that a US-centric world is on an unsustainable path. Balance of payments disparities tell us that, as does America’s ever-widening military superiority. These are the asymmetries that must eventually be resolved one way or another. Financial markets have always played a critical role in providing the means by which such disequilibria are vented. And I don’t think it will be any different this time. In my view, a sharp decline in the value of the US dollar will be central to the global rebalancing that must now unfold. While the dollar has been quite weak of late, the risk is it is not weak enough. On a broad trade-weighted basis, the dollar surged by some 47% from May 1995 through early 2002; to date, it has fallen only 9% from that peak.
As I see it, the dollar’s recent decline is still far too modest to trigger the wholesale rebalancing that a US-centric global economy so desperately needs. The model of the current-account adjustment is pretty clear on what to expect. Based on the experience of some 25 current-account adjustments that occurred among industrialized countries over the 1980-97 period, a Fed study points to the likelihood of four developments -- a 20% drop in real exchange rates and nearly double that in nominal terms, higher real interest rates, reduced growth in domestic demand, and faster growth overseas (see Caroline L. Freund, “Current Account Adjustment in Industrialized Countries,” Board of Governors of the Federal Reserve System International Finance Discussion paper #692, December 2000). In other words, to the extent that the past is prologue, there is a good chance that the dollar’s recent decline barley scratches the surface in terms of the ultimate impacts of America’s increasingly urgent current-account adjustment.
I continue to believe that a sharp depreciation in the value of the dollar is the single most important force that might foster a long overdue rebalancing of a US-centric world economy. The impacts of higher real interest rates should show up first in the form of weakening US domestic demand -- a key outcome if America is ever to rebuild its aggregate saving rate back to historical norms. Initially, the impacts should also entail potentially severe consequences for Europe and Japan, with euro and yen strengthening likely to crimp external demand in both regions -- thereby unmasking a near stagnant pace of domestic demand. Global rebalancing works only if Europe and Japan then respond to this currency realignment by taking actions on structural reforms that have the potential to unlock pent-up domestic demand. Conversely, global rebalancing fails if Europe and Japan resist dollar weakness and engage in policies of competitive currency devaluation and protectionism.
The world is not functioning as a global economy. It is in fundamental disequilibrium -- in economic and geopolitical terms. Financial markets don’t always have the final say in how the asymmetries are vented. But in this instance, I suspect they won’t be faulted for lack of trying. For a lopsided global economy, a weaker dollar may well be the only way out.
(Stephen Roach is still the only economist I follow...the boldfaced question is precisely the one I have been focusing on for some time)
great post about Taleb's work...this issue of randomness and its impact on individual trading results is very vexing imo with no clear statistical resolution...and the issue of the ever-present large risk in any type of assets...
very long term equity index buy and hold makes sense due to continued economic expansion over time...same for real estate where demographics also provides the upward push...
but short-term trading is a different story...is the success here due to one's ability to analyze market moves using math/stat?...or is it due to one's ability to "read" the minds of other investors better than most a bit like in poker?...maybe it's a non-quantifiable psychological insight that's responsible...assuming of course that it's not simply the fact that statistically one in a thousand coin tossers will get ten coin heads in a row...
nevertheless, t/a should be at least good enough to get above-market-average results...but is it good enough to get 100% a year on average for 30 years of short-term trading?...also, are derivatives (options) useful in enhancing one's results?...and does additional leverage (margin or futures) allow for higher returns?...
i really don't know...and i suspect that no one else does either...
george
wld, i am not at all clear on random boy assumptions...i'd like to see more detailed explanations with an example...also, can a new trade be opened every day and if so what % of portfolio is each trade? ...tia
i fully agree
Sornette is applying new math-based approaches to analyze stock markets longer-term...imo the effort is interesting almost regardless of the results as there is currently no valid approach for this long-term type of market analysis...
Very interesting post:
http://www.investorshub.com/boards/read_msg.asp?message_id=984026
especially this part:
"Prof. Sornette's forecast is calling for one more very large down wave to sweep through and fully cleanse the market of all remaining bullishness, after an extended benign period that could last into the middle of this year."
http://physics.iop.org/IOP/Press/PR8802.html
http://www.ess.ucla.edu/faculty/sornette/pub_finance.asp
Nice chart by LG:
http://www.investorshub.com/boards/read_msg.asp?message_id=976037
hi Lisa!
Marc, You've got mail! (PMs)
Paul, are you saying I can't do math? gggg
just kiddin' ya...
so, you expect about 1100 on SPX to match:
http://stockcharts.com/def/servlet/SC.web?c=$SPX,uu[r,a]wacaynay[d20020102,20030502][pf]&pref...
FORTUNE magazine says: since no one can beat the market long term the only option is to buy and hold...did they post this article in the Japanese edition too? ..gggggg
Is the Market Rational?
No, say the experts. But neither are you--so don't go thinking you can outsmart it.
FORTUNE
Tuesday, December 3, 2002
By Justin Fox
Meanwhile a few finance scholars of a more diplomatic bent than Cootner began spreading their ideas of risk and return in the real world. Princeton economist Burton Malkiel's A Random Walk Down Wall Street, published in 1973, probably played the biggest role in bringing efficient-markets thinking to the retail investing masses. But on Wall Street itself, the most important messenger was William Sharpe.
Sharpe, now 68, grew up in Southern California and learned his economics at UCLA. He was of the efficient-markets school, but his work (for which he won the economics Nobel in 1990) appealed even to those who still hoped to beat the market. In an efficient market the only way to outperform the market is to take on more risk. Sharpe devised a simple measure of risk based on past volatility, called "beta," that could be used to build balanced portfolios--and to measure whether active money managers were actually beating the market or just taking on extra risk.
Sharpe wasn't content to make his point merely in academic journals. He wrote textbooks on investments and finance and did so much consulting for Wall Street firms and pension funds that he gave up full-time teaching at Stanford in the mid-1980s. In 1996 he even launched a dot-com, Financial Engines, to make his advice available to small investors. So while Sharpe believes in efficient markets, he has also spent much of his career helping investors make choices. That, it turns out, makes him a big fan of behavioral finance. "As a practical matter, I still think it's prudent to assume that the market is pretty close to efficient in terms of pricing and risk and return and all that," Sharpe says. "On the other hand, we've certainly learned from cognitive psychology that ordinary human beings need to have alternatives framed in ways that can help them make right decisions rather than wrong decisions."
Most of the wrong decisions investors make, behavioral research has shown, stem from overconfidence. That is, we think we know more than we do. We trade too much, we don't diversify enough, and we extrapolate from the recent past to make assumptions about what will happen next.
As a result, much of what the behavioralists have to offer in terms of advice has to do with protecting retail investors from themselves. That's why Thaler spends a lot of his time thinking about how best to design 401(k) plans. It's why Sharpe incorporates behavioralist research into the advice Financial Engines doles out. And it's almost certainly why Daniel Kahneman, when asked by a CNBC anchorman the day after his Nobel was announced in October what investment tips he had for viewers, responded, "Buy and hold."
When I recount Kahneman's words a few weeks later to Fama, he reacts with glee. "That means I won!" he shouts. It is, on one level, an absurd claim. The behavioralists are now clearly the dominant stream in academic finance, having made the leap from outsider status during the 1990s as a new generation of professors rose to positions of prominence. But the real-world phenomenon that cemented the behavioralists' victory also illustrates why, when it comes to actual investing advice, they sound so much like Fama and Sharpe.
That real-world phenomenon was the stock market bubble of the late 1990s. According to strict efficient-markets thinking, there must be a rational explanation for what happened. Fama describes those sky-high Internet stock valuations as a risky but not crazy bet that one or two of those money-losing Net companies would end up as big as Microsoft. But he's almost all alone on this one. "We have just lived through the biggest bubble of all time," says Malkiel, who now calls himself a "random walker with a crutch." Fama's favorite collaborator, Dartmouth's French, is on the verge of using the b-word as well when he stops himself. "I work very closely with Gene," he says. "He would be very upset if I used that word in print."
Yale economist Robert Shiller has no such compunctions about ticking off Gene Fama. In 1984 he declared that the logical leap from observing that stock price movements were unpredictable to concluding that the prices are in fact right "represents one of the most remarkable errors in the history of economic thought." That was Shiller's first brush with fame. He got more popular attention after the 1987 stock market crash, which the efficient-markets professors had trouble explaining. ("It's weird," Sharpe told a reporter at the time. Later his mother called to berate him: "Fifteen years of education, three advanced degrees, and all you can say is, 'It's weird'?")
Shiller is 56 and did his economics training under Samuelson at MIT. He and Thaler have long been allies, but Shiller seems less interested than many of the other behavioralists in assembling the cognitive-psychology building blocks of a market bubble (which would involve that persistent flaw of extrapolating from the recent past to make assumptions about what will happen next). Instead he's perfectly willing to accept at face value the conventional wisdom that markets are sometimes taken over by fads and mass hysterias. By the mid-1990s Shiller had become convinced that we were entering into one of those mass hysterias. His evidence was straightforward: Price/earn-ings ratios were really high. He began sounding the alarm wherever he could, including the offices of the Federal Reserve Board. Then he wrote Irrational Exuberance, which hit bookstores in March 2000, just as the market peaked.
The book's perfect timing was dumb luck, Shiller himself says. And while he took most of his own money out of the stock market in the 1990s, his advice to investors now is to "diversify completely" and not try to beat the market. This happens to be what Sharpe would tell you. Or Fama. Or Thaler. The dirty little secret of the behavioralists is that, for all their work on investor irrationality and market anomalies, they still believe that markets work pretty well and that trying to outguess the collective wisdom of millions of investors is usually futile. In answer to Fama's question of how they plan to calculate the cost of capital in a world where prices are incorrect, the behavioralists say that for the purposes of such calculations, they'll just assume that prices are right.
But efficient-markets theory has a dirty little secret, too, which is that for the market to remain efficient, there have to be lots of rational investors who believe enough in the market's inefficiency to spend their careers trying to beat it. Behavioralist theory, of course, has no problem accommodating the belief that some investors can beat the market. In fact, several behavioralist professors, Thaler included, have money-management firms that try to take advantage of the anomalies they discover in their research.
But there's a limit to the riches that can be dredged from market anomalies. That's because "markets can remain irrational longer than you can remain solvent."
This aphorism is usually attributed to economist and speculator John Maynard Keynes, and there are those who contend that the whole of the behavioralist case is contained in chapter 12 of Keynes's 1936 General Theory, with its wonderful depiction of investing as a game of musical chairs. But the argument of modern behavioralists includes a crucial observation that wasn't in Keynes--that professional investors are now under so much pressure from their customers that they cannot make the kind of long-term bets that might beat the market. If they do, as was the case with a lot of value-oriented mutual funds in the late 1990s, they can soon find themselves without any customers' money to invest.
That gets us to a world in which an investor with enough staying power and contrarian gumption can beat the market, but the vast majority of mutual funds and hedge funds don't. In other words, the behavioralists have reconciled the success of a Warren Buffett (which efficient-markets purists have absurdly termed dumb luck) with the overwhelmingly empirical evidence that most professional money managers fail to beat the market.
This is, we posit, a major intellectual accomplishment. What does it mean for you? That's easy: Buy and hold. Diversify. Put your money in index funds. Pay attention to the one thing you can control--costs--and keep them as low as possible.
Marc, i just posted ajtj's chart and extended NYSE new lows chart for 1991-2003 in this post:
http://www.investorshub.com/boards/read_msg.asp?message_id=972934
as you can see, single digit NYSE new lows were common during the bull market of 1991-1998...so a new bull market would have those often as well...however, extreme readings of fewer than 5 NYSE new lows marked (local) tops during 1991-1998, so likely we are within days of a major (local) top here...
Marc, is your NDX 1300-1350 target based on resistance from Feb 02 bottom at 1330?
http://stockcharts.com/def/servlet/SC.web?c=$NDX,uu[r,a]wacaynay[d20020102,20030502][pf]&pref...
nice chart:
http://www.dailyduediligence.com/Midday/nylow.html
last time we had fewer than 3 NYSE new lows was in...1991-92:
http://stockcharts.com/def/servlet/SC.web?c=$NYLOW,uu[g,a]daclynay[d19910102,20030502][pf]&pr...
and these extreme # of new lows (under 5) coincided with local SPX tops:
http://stockcharts.com/def/servlet/SC.web?c=$SPX,uu[g,a]daclynay[d19910102,20030502][pf]<i&pr....
wld, i believe that few, if any, traders have ever been able to trade options successfully over a long period of time with annual gains at 100%+ level...it may be because of time decay of premiums or efficient real-time pricing using black-scholes...
otoh, futures are simply a leveraged version of index equities so in that sense they are somewhat like margined qqq or even profunds/rydex but with higher leverage and round-the-clock trading...the problem is clearly that higher leverage requires smaller positions and tighter stop losses...so the question is: is there any advantage to trading futures vs just trading margined qqq...
i am a bit skeptical here as far beating returns obtainable from trading qqq on margin...still, if anyone at all can trade futures successfully with high returns my bet would be on you given your systematic and creative approach to trading...
so we shall see how you compare with my four top qqq/profunds traders (and a trader named Trade Hard who also trades futures very successfully using someone else's system)...
good luck!
george
WAHZ, qqq hit 28.20...now what? tia
hi wld, larry is sure persistent but that's actually very helpful to all of us..looking forward to your posts...
yes
i typed "[ pre]" above table and "[ /pre]" below table (without quotes and without spaces after "[" )
WAHZ, i think you are the very best...your track record so far seems to be defying statistical odds...you have even succeeded in undermining my bearish bias so that i am open to bullish developments in the future (i am not quite convinced yet given that May-Sept period is normally not kind to stock markets)...
you had this prediction of qqq top at 28.20:
http://www.investorshub.com/boards/read_msg.asp?message_id=901468
do you still feel we will top out at qqq 28.20 before the 10% drop?
tia, your friend
george
this post says that investing in the DOW JONES during the Oct 1 - May 31 period every year captures practically all the profits while the May 31 - Oct 1 period provides no profits:
http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=18891041
this chart verifies this assertion for the 1990-2003 period:
http://stockcharts.com/def/servlet/SC.web?c=$indu,uu[a,a]maclynay[d19900101,20030428][pf]<i[J1199....
yes...here are the top 4 traders i currently follow for competitive purposes:
(1) KT...trades QQQ...300% gain in the past 12 months (or over 10% a month compounded) with no leverage/margin
http://www.geocities.com/k_tieff/e/KT-QQQ-e.htm
(2) PAUL FAKLER...trades QQQ...15% gain in the past 1 month with no leverage/margin
http://www.investorshub.com/boards/board.asp?board_id=1628
(3) POSITIONTRADER (MARC)...trades UOPIX (2x NDX long fund) and USPIX (-2x NDX short fund)...200% gain in the past 6 months (or 20% a month compounded) with 100% leverage by investing 100% of portfolio in the 2x NDX funds
http://www.investorshub.com/boards/read_msg.asp?message_id=948189
(4) WAHZ...trades QQQ...40% gain in the past 3 months (or over 10% per month compounded) with average position size of approx 125% of the account (1st position 75% of acct and 2nd position 75% of acct...2nd position open about 2/3 of the time)
http://www.investorshub.com/boards/board.asp?board_id=1566
also of interest is this board due to claims it makes regarding annual 5-fold to 10-fold compounded returns:
http://www.investorshub.com/boards/board.asp?board_id=1616
individuals (1)-(4) are the only QQQ/NDX traders i have discovered so far with returns of at least 10% a month with no leverage/margin or 15% a month with leverage/margin...
i hope that more top traders will provide a public record verifying their returns at similar levels
George
Stephen Roach (New York)
http://www.morganstanley.com/GEFdata/digests/20030425-fri.html
It’s hard to argue against the logic of tax reform -- the “apple pie” of fiscal policy. Who wouldn’t want a more efficient tax system? But like all good things, such efforts have their time and place. Sadly, today’s saving-short US economy simply can’t afford to indulge in the luxury of tax reform. While a counter-cyclical fiscal stimulus may be in order in a soft economic climate, multi-year deficit spending is not. To the extent that Bush administration policy proposals lead to ever-mounting federal budget deficits, serious new risks might afflict the US economy -- namely, an exploding balance-of-payments gap, a plunging dollar, and rising interest rates. These aftershocks would swamp any hopes for a windfall of economic growth and job creation.
The macroeconomic impacts of fiscal initiatives are best seen in the context of a national saving framework -- the means by which investment, the sustenance of longer-term economic growth, is funded. The government sector plays an important role in the determination of national saving. When the federal government runs a budget surplus, it is making a positive contribution to the pool of national saving. Conversely, when the government budget goes into deficit, the public sector is then “dissaving” -- in essence, offsetting the private saving generated by households and businesses. If the private sector has an ample reservoir of saving, the economy can afford large government budget deficits. However, if private saving rates are low, fiscal profligacy becomes unaffordable.
The latter set of circumstances depicts the perils of today’s saving-short US economy to a tee. America’s net private saving rate -- by net, I mean the saving left over after allowing for the depreciation and/or replacement of worn-out capital stock -- stood at just 4.1% of GDP in the fourth quarter of 2002. While that’s up from the 2.4% low hit in the spring of 2001, it remains less than half the 8.8% average prevailing over the 40-year interval, 1960 to 1999. Unfortunately, the modest increase in private sector saving that has occurred over the past year and a half does not represent a new American penchant for national saving. Instead, courtesy of the first round of Bush administration tax cuts, it merely reflects a transfer of saving from the government to the private sector. The government sector’s net saving rate -- federal plus state and local units, combined -- went from a surplus of 1.1% of GDP in the second quarter of 2001 to a deficit of 2.8% in the final period of 2002.
The result is that America’s net national saving rate -- the aggregation of saving by households, businesses, and the government sector -- plunged to a record low of 1.3% of GDP in the second half of 2002. By way of comparison, this rate has now fallen to only one-fourth the 4.8% average of the 1990s and even further below the longer-term 40-year average of 7.6% recorded over the 1960 to 1999 interval. Undoubtedly, some of the recent decline in national saving reflects the temporary impacts of a deteriorating business cycle climate. After all, due to the impacts of built-in “automatic stabilizers,” government budget deficits always widen in recessions. But in late 2002, the net national saving rate fell to half its prior low of 2.5% hit in mid-1992. America’s plunging national saving rate is now plumbing new depths. And the risk is it is about to go even lower.
A sharply deteriorating federal budget position, in conjunction with Bush administration policy proposals that are now on the table, can only make matters worse as seen through the lens of America’s national saving framework. The non-partisan Congressional Budget Office estimates that the President’s proposals will add about $800 billion of deficit spending over the five year time frame, 2004-08. The ten-year estimate is an astonishing $2.7 trillion. In both cases, these totals are roughly double the estimated impacts of the first tax cut enacted in 1991. At the same time, budget analysts are scrambling to update their assessment of the current state of the US fiscal balance. In its March 2003 review, the CBO estimated the Bush Administration budget would produce deficits averaging about $310 billion during fiscal 2003-04 -- even after allowing for the so-called dynamic-scoring feedback effects that have long captivated supply-siders. Morgan Stanley’s latest estimates are closer to $375 billion for both years, and other analysts are even less sanguine, with numbers topping $400 billion.
Federal budget deficits of this magnitude would equal about 3.5% of GDP over the 2003-04 period -- fully 1.2 percentage points larger that the shortfall hit in late 2002. Consequently, barring a spontaneous revival in private sector saving -- highly unlikely in times of economic distress -- ever-widening federal budget deficits could well be sufficient in and of themselves to all but erase the thin margin of net national saving in the United States. The likelihood of a “zero” net national saving rate -- or even a negative saving rate -- now looks to be a real possibility if Washington opts for another fiscal gambit.
Alas, the story doesn’t stop there. It is an economic tautology that saving must always equal investment. But that doesn’t necessarily mean a saving-short economy can’t grow. Lacking in domestically generated saving, America has turned to foreign savers for help in funding economic growth. That requires massive inflows of foreign capital and equally large current-account deficits to attract that capital. It’s not by coincidence that a saving-short US economy now has a serious balance-of-payments problem. It is the only option America has left to keep the growth magic alive.
The US current-account litany is every bit as worrisome as the saving saga. In the fourth quarter of 2002, the current-account deficit hit an annualized $548 billion, a record 5.2% of GDP. That surpassed the previous record of 4.5% hit in late 2000 and was well in excess of the 3.4% external gap recorded in 1987 -- the last time America was faced with a serious international financing problem. Here’s where the budgetary arithmetic of saving-short US economy becomes so daunting. If, in fact, the net national saving rate now heads toward zero, the current-account deficit will have to widen sharply further, moving toward the 6.5% to 7.0% zone as a share of GDP over the next couple of years. In that case, capital inflows would have to total around $3 billion per business day. Neither the United States nor the world has ever faced an external financing burden of that magnitude.
History is clear on what to expect next. A classic current-account adjustment appears inevitable. America is on an unstable and perilous path that simply cannot be sustained. At a minimum, foreign investors will begin to exact concessions on the terms under which they provide financing for America. A weaker dollar and higher yields on Treasury securities are likely. Or the arbitrage could occur in equity or property markets. But whatever the outcome -- and I tend to favor the dollar-interest-rate correction -- there can be no mistaking the endgame. America’s runaway budget deficit only compounds the external financing requirements of a saving-short US economy. It pushes both the national saving rate and the current account deficit into unprecedented zones of distress. And it leaves America plunging headlong down a most reckless path.
Fiscal profligacy, and the current-account funding crisis it might trigger, could wreak havoc on world financial markets. Most worrisome would be the distinct possibility of a sharp back-up in long-term interest rates. Even as the US now flirts with outright deflation, such a possibility can not be ruled out -- it may well be the premium that foreign investors require in order to purchase ever larger volumes of dollar-denominated assets. That could spell serious trouble for overly indebted US consumers and businesses. Historically low interest rates have been the only means by which rising debt burdens have not crushed highly levered private sector borrowers. Low interest rates have also fueled the home-mortgage refinancing bonanza -- the last line of defense for otherwise beleaguered American consumers. As the current-account adjustment takes hold, those days could be over.
It is in this context that Washington must come to its senses on the budget debate. The argument is not over the merits of tax reform, in general, or even the specific proposal on the table for the elimination of the double taxation of dividends. Notwithstanding the obvious politics of such initiatives -- especially the class warfare implications of dividend tax relief that pit the Left against the Right -- the economics scream out for a very different focus. In a saving-short and weakened US economy, a fiscal stimulus must instead be focused on getting the maximum bang for the buck in a short a period of time. It should not provide breaks over a long period of time -- especially ones that may or may not stimulate aggregate demand. Short-term payroll tax reductions that put high-octane fuel in the hands of spenders are far more effective than multi-year tax reform initiatives in getting the economy moving again. The latter approach is at best a very circuitous means to stimulate a weak economy.
In the end, there’s something more basic at risk, here -- the paradigm of a US-centric global economy. America’s record and ever-widening current-account deficit is symptomatic of unprecedented imbalances in the US and the broader world economy. The US has consumed to excess and the rest of the world has done precisely the opposite -- perfectly content to sustain its growth by selling things to Americans. The bill for these excesses can go unpaid for only so long. Yet Washington is now upping the ante -- asking for the world to foot an even larger portion of the bill. Outsize budget deficits that spark a current-account crisis could well the tipping point that finally brings this house of cards tumbling down. It would be a policy blunder of monumental proportions.
[what's he talking about? this ain't japan here...ggg...
and sp500 ain't nikkei either............yet:
http://www.decisionpoint.com/chartspotlitefiles/030418_nikkei.html
done
imo every trader needs a set of rules (a system) regardless of the time frame...supposedly 90% of all day traders fail (likely before they develop a viable system)...a system does not have to be fully mechanical...your point about one's trading approach being compatible with one's personality is a very good one...
http://www.investorshub.com/boards/read_person.asp?membernum=12839&nummsgs=2
more excerpts:
"...traders who temper their emotions and stick with trading plans fare better than their more emotional and impulsive peers..."
"...a disproportionate number of the successful traders-about half-reported utilizing mechanical trading systems. Of the unsuccessful traders, none were mechanical traders..."
"...the successful traders, it turned out that even the ones that were not systems traders were basing their trades on patterns that they had carefully researched. Conversely, almost to a person, the unsuccessful traders lacked such grounding in patterns and research..."
"...A major reason they were successful, I believe, is that they used trading rules both to guide their trading and to maintain a positive mindframe..."
"...By reducing trading to a set of rules, traders lessen their ambiguity so that they can function in a relatively automatic mode...."
(all this only confirms what i have personally observed and recently conceptualized...which can be boiled down to two key principles:
(1) AVOID EMOTIONS and (2) FOLLOW THE SYSTEM...
what's really interesting that these two principles seem to be synergistic and co-dependent...both of these articles are among the most important things i have ever read on trading...)
amazing, superb articles which explain so much:
http://www.investorshub.com/boards/read_person.asp?membernum=12839&nummsgs=2
"Staying grounded in solid trading rules and plans is one of the most powerful ways of maintaining a positive trading psychology. When we are rule-governed, we are in a mental state that promotes efficient perception, problem solving, and action."
(imo this means a trader needs to develop and follow a SYSTEM)
i realize that zeev is bearish and wahz is bullish...so, let's see how this compq chart develops next week:
http://stockcharts.com/def/servlet/SC.web?c=$COMPQ,uu[r,a]daclynay[dc][pd20,2!f][J11050778,Y]&...
the triangle suggests compq over 1430 next week...the question is: will it top at a lower high below 1467?
similarly, for ndx:
http://stockcharts.com/def/servlet/SC.web?c=$ndx,uu[r,a]daclynay[d20020917,20030417][pd20,2!f][J1...
will 1099 and then 1104 be taken out?
this trader joins KT and wahz on my list of top qqq traders:
http://www.investorshub.com/boards/board.asp?board_id=1628
well, i don't agree with briefing.com every day...here is an exception:
http://www.briefing.com/scripts/sub/stocks/PowerAnchor.asp?varArticleID=SB20030415084414rvgreen
"However, if the signs continue to indicate that technology markets have matured, it spells continued serious trouble for tech stock investors, because most tech stocks are still priced as if they were growth stock companies."
vxn a bit oversold?...nah, peace & prosperity just broke out..gg
http://stockcharts.com/def/servlet/SC.web?c=$VXN,uu[g,a]waclynay[d19950101,20030415][pd20,2!f][iUb14...
Hi Chris, thanks...
if it's a new bull market VXN will CRASH below 40:
http://stockcharts.com/def/servlet/SC.web?c=$vxn,uu[g,a]maclynay[d19950111,20030411][pd20,2!f][J1...
...and if not...NDX will CRASH below 1000:
http://stockcharts.com/def/servlet/SC.web?c=$ndx,uu[g,a]maclynay[d19950111,20030411][pd20,2!f][J1...
...so let's flip a coin...<ggg>
time to cover qqv shorts coming soon? (as suggested by Justa):
http://stockcharts.com/def/servlet/SC.web?c=$QQV,uu[g,a]waclynay[de][pd20,2!f][iUb5][J9678668,Y]&...
well, if we follow the bell curve scenario, the 4-month indecision in the right blue box should be symmetrical to the 4-month indecision in the left blue box...that is, we should move steadily down for several years mirroring the up move from 95 to 98:
http://stockcharts.com/def/servlet/SC.web?c=$ndx,uu[r,a]macaynay[d19950101,20030409][pd20,2][j910...
yet, because there are attempts to "manage" the US markets, the Nikkei scenario may be more likely, that is a long-term decline punctuated by periods of rising ("bull") markets:
http://stockcharts.com/def/servlet/SC.web?c=$NIKK,uu[r,a]macaynay[d19900101,20030409][pd20,2]&...
hi wahz, you are trading very very well imo...i was simply gently chiding your ebullient, effusive, emotional, energized, enthusiastic, euphoric, exaggerated, and exuberant commentary today...<ggg>