Foot Bone Connnected to the Ankle Bone, the Ankle Bone Connected to the Shin Bone, Etc.
In this global economy, a sniffle in Venezuela can cause a sneeze in Brazil, and the flu in credit markets…and high yield bonds and notes in NY money center banks from their loans to oil producers in North Dakota, and an hospitalization for high yield bond holders of packaged loans backed by oil through out the USA. All is connected. Like drugs, newly developed by biotech firms, a change in enzymatic activity by the new drug can have a huge effect on the entire system by a misbalance of normal activity throughout the body. An SSRI can cause no relief from depression, but its opposite and suicide as more and more is learned about the biochemistry of the brain and serotonin, and the newly found anti-serotonin that causes depression naturally is boosted in the brain, while the majority of serotonin used as a neurotransmitter in the gastrointestinal track can also have effects on nutrients that can be absorbed. So too the economy works and is not understood by any means in full any more than brain biochemistry is by medicine. So the drop in oil, the fluctuation in currencies (see last blog) can have an enormous effect on the economy in other parts of the world than one would think. Also low rates in the EU and Japan and others can cause the Fed to become ineffective if arbitrage from global trading continues to cause buying of US Treasuries that overwhelms Fed action. It seems that there is much going on now that has a given the future a highly uncertain future all relative to where the dominos begin to fall and the connections globally. From Russia to Greece to Venezuela to emerging markets, much is going on that is destabilizing to the third largest economy (based on GDP) on the globe …namely the US. Last night, Chinese equities fell the largest amount since 2009. This is rather frightening as we have had rumors indicating credit problems in China for some time, and the reason for the fall was the Chinese government ruled that debt issues (notes and bonds) of less than stellar credit ratings could be used as margin for purchasing Chinese stocks as collateral or margin. Why? We don’t know. As China (the world second largest GDP after the Eurozone, has no transparency at all. We know they lowered rates some time ago (not exactly a sign of confidence in their economic growth) but aside from that what is happening in China and their banking system vs their shadow banking system (giving loans to low quality credit) is very unclear. We know they are highly involved in Africa, but send no help to aid ebola and try to cure the issue. As a matter of fact, they get involved in no global matters for help in solving issues. They only kill more elephants for their tusks than anyone we know. It reminds me of a poker game, say 5 card draw, with the Eurozone, the US, Japan and others dealt all cards face up. China, however, with their policy of disallowing the Yuan to float, and with an income (GDP) larger than all others at the table but the Eurozone, holds their cards unseen, close to their “vest” so to speak and then we all play. It is not a level playing field in this game. But last nights collapse in their equity markets can not be taken lightly nor can the reason. This will have ripple effects as if the debt issues they have now disallowed as collateral for accounts to buy or short stocks is actually in danger of default, this credit crunch will have ripple effects around the world. And especially in China. Again, my best argument for eliminating currency fluctuation and manipulation as an additional problem. There is enough uncertainty from commodity price changes, the odd surge in gold (especially in terms of currencies dropping vs the dollar) while iron and other metals used in economic growth have fallen to new lows is odd. Especially while oil drops as well. There is something shaking in the reasons behind this, and if uncertainty in forex could be removed, then relative values placed on each country could be held to only GDP related matters. And I am sure, few countries would like to do this, although it would be in their best interest as they gain more control over their own country’s economy….no longer having to concern themselves with the US Fed changing the entire global system by changes in the value of the reserve currency, the dollar and its effect on all. While all this is going on toward the end of the year for most money managers, I would still expect a return to the mean in nearly all US centric investments, the selling of losing trades, and all piling into winning trades by the end of the year to “paint” the picture that they had invested well over the year. But as of Jan 2015, beware of huge changes in all markets as we get past this “window dressing” and see the effects of all global connections moving markets in different directions. And hope for a change (Brenton Woods style) and hopefully visionaries of stability change the reserve currency, or the world will have problems that will eventually end up back home here as the world should finally object to the third largest economy in the world (as GDP) controlling prices by using the dollar as reserve. And this could cause dollars and treasuries to be sold globally forcing the US into a corner where not even the Fed can help but to monetize the debt sold and find that while the money supply changes little, its location and geography changes a great deal and all is back here. And Brazilians use reals to buy and sell agricultural products for export, The Russians use rubles, the Canadians and Mexico want to use their currencies, Japan wishes to use yen, and the dollar no longer hold love and affection on the planet as it is forcing other countries to lose their purchasing power for essentials like all commodities, and destroying their economies should the US actually raise rates. The idea of raising rates here, looking at the markets in fed funds and Eurodollar CDs in the futures markets is still not expecting higher rates until December 2016 or later of any importance. But that is assuming the dollar remains the reserve currency as we fall to a more distant third place in GDP as 2015 continues. I don’t expect much until the end of the year, until then oil should drop with occasional profit taking but reentry into short positions into year end, buying of winning equities that have looked good all year, and selling of losing equities on the year a tax losses. Grains have become peculiar, and have rallied back a great deal (in dollars and more in other currencies) in the last few months as gold has. But next year beware of the interconnectedness of all in the globe become more important. And again, remember that oil production in the USA has become larger, and in prior years accounted for 10 to 12% of GDP, so loss of income from this area along will decrease our economic size within the world. Already there is must angst over US high yield debt connected to oil production, and BP laying off workers (and rumored to be thinking of merging with Shell, and no new wells being drilled, and layoffs and mergers widely expected for survival in oil production here….and concerns of defaults). Meanwhile, Russia and so many others (Venezuela) etc must continue to drill and pump even more to survive. The degree to which this will be a problem will only begin to be understood until next year.
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Foot Bone Connnected to the Ankle Bone, the Ankle Bone Connected to the Shin Bone, Etc.
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