Where Will the Growth Come From?

Roubini: Dollar Will Not Weaken Much From Now On, Where Will the Growth Come From? It Won't

* The question is whether China will have a soft landing or a hard landing. There were two episodes of China tighteninglatelty, in 2004, when there was a soft landing, and in 2007, when there was a hard landing. He thinks this time it will be like 2007.
* The reported 5% GDP growth was due to inventories
* US growth will slow down in 2nd half of the year as stimulus dies down
* Dollar will not weaken much, where is the growth coming from?

The dollar, utilities, health care and technology stocks make up "the safety trade."

by Howard Penney, Managing Director, www.researchedgellc.com

It's a cruel world out there and in this business you need to be critical to survive, stand up for what you believe and be factually correct. Most importantly, people want you to "make a call."

I agree that Ben Bernanke is completely compromised and Tim Geithner is out of his league and should never have been appointed to Treasury. At the same time they are the two people in Washington that have "inside information."

During this past week Ben had already said the U.S. economy faces "formidable headwinds" and then yesterday, we learned that the Treasury Secretary notified Congress that he is extending the Troubled Asset Relief Program through Oct. 3, 2010. Why? What do they know that I don’t? A lot, because they have "inside information!"

I don't have inside information, but I have the Research Edge Macro Models and this is what I do know…

(1) The U.S. dollar is establishing a new level of support with the trend line at 76.41--the buck is bottoming and is still a safe haven.

(2) The Semis are rallying--up 11 of the past 12 days.

(3) Oil is falling--it's currently trading at a two-month low--the reality of supply and demand.

(4) Gold has fallen just over $100 (9%) in a week--just a bubble?

(5) Copper has fallen for six straight days (the longest losing streak in a year)--the reality of supply and demand!

(6) Financials have underperformed the S&P 500 by 660 basis points over the past three months--this could be trouble!

Seeing the financials dramatically underperform is unnerving and could be a leading indicator of things to come. Whether or not Ben and Tim know something that I don't about the health of our financial system, Mr. Market is trying to tell us something. The banks are not lending and the FDIC continues to close more doors, while the "son of subprime" is going to hit with another wave of defaults in 2010. Ben can't raise rates and the Treasury Secretary is going to need TARP in 2010! We are in a very bad situation.

Have the financials truly absorbed all of the asset deflation in the system and are the current capital ratios real?

I believe technology, utilities and health care are part of the new "safety trade." Utilities have yield and growth and are a stealth play on green technology. Health care is safe from the perils of Washington and selected technology names are beneficiaries of deflation.

Paul Krugman: The Chinese Disconnect

Senior monetary officials usually talk in code. So when Ben Bernanke ... spoke recently about Asia, international imbalances and the financial crisis, he didn’t specifically criticize China’s outrageous currency policy.

But he didn’t have to: everyone got the subtext. China’s bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world — and, in particular, the United States — will do about it.

Some background: The value of China’s currency, unlike, say, the value of the British pound, isn’t determined by supply and demand. Instead, Chinese authorities enforced that target by buying or selling their currency in the foreign exchange market — a policy made possible by restrictions on the ability of private investors to move their money either into or out of the country.

There’s nothing necessarily wrong with such a policy, especially in a still poor country whose financial system might all too easily be destabilized by volatile flows of hot money. ... The crucial question, however, is whether the target value of the yuan is reasonable. ...

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.

So what are we going to do?

U.S. officials have been extremely cautious about confronting the China problem, to such an extent that last week the Treasury Department, while expressing “concerns,” certified in a required report to Congress that China is not — repeat not — manipulating its currency. They’re kidding, right?

The thing is, right now this caution makes little sense. Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard. Under current conditions, this would actually help the U.S. economy by making our exports more competitive.

In fact, some countries, most notably Switzerland, have been trying to support their economies by selling their own currencies on the foreign exchange market. The United States, mainly for diplomatic reasons, can’t do this; but if the Chinese decide to do it on our behalf, we should send them a thank-you note.

The point is that with the world economy still in a precarious state, beggar-thy-neighbor policies by major players can’t be tolerated. Something must be done about China’s currency.

(from NY Times, October 22, 2009)

George Soros 2008 Investment Year

In an article in FT on January 28, 2009, George Soros outlined how his 2008 investment year went.

***Problems facing Obama are even greater than FDR. Total credit outstanding was 160% of GDP in 1929 going to 260% in 1932. We entered the crash in 2008 at 365%, which he thinks will go to 500%

***Although he was positioned reasonably well going in 2008, his thesis of decoupling between developed and developing markets cost him dearly

***Indian and Chinese stocks were hit even harder than U.S. and Europe. He lost more in India than he made the year before. His Chinese manager did relatively better through good stock selection, but he was also helped by the renminbi appreciation

***He had to push himself very hard to make up for the India and China losses from external managers in his macro-account. This had the draw-back that he over-traded as his positions were too large for the increasingly volatile markets

***He could not go against the market in a big way due to his size, so he had to try to catch minor moves

***It also made it difficult for him maintain his short positions. Although he has a lot of experience, he got caught several times and largely missed the crashes in October and November

***On the long side he stuck to his guns and lost an enormous amount of money. Example is Petrobras

***He was able to get out of CVRD, a Brazilian iron ore producer, in time for the end of commodity bubble, but he didn’t short the commodities directly because of his previous difficult experience trading them

***He was slow to recognize the reversal of the dollar and gave back a big chunk of his profits

***His new CIO did well in the UK where he bet against the sterling vs. euro and that short-term interest rates would decline. He also made money going long credit after the collapse

***Eventually he understood the dollar’s rise was a flight to quality during the financial system disruption, not a fundamental move. This insight enabled him to bet against the dollar at the end of 2008 and make money

***He ended the year almost making his 10% minimal return goal after spending most of the year in negative territory