Thursday, February 26, 2009

My Comments and views censored by Dr. Brad Setser (the latest set)

Following is a set of comments I posted on the blog page of Dr. Brad Setser. They have been deleted and now I'm pasting them here so anybody who's interested can read them here.

Here's Brad' Setser's advocacy on financing US Treasuries from a small private cartel instead of the PBoC

Brad Setser:That implies, if the Pandey/Setser estimates for official purchases are right, that private investors snapped up more Treasuries than the world’s central banks…My guess is that the Treasury market will be driven by developments in the US – not developments in China – in 2009.
Me:What will any reasonably smart, thinking person, think when they read this?
When we discussed how China’s purchase of Treasuries affects the $11 trillion home mortgage boom, we reasoned how flows matter. Mostly, the $11 trillion boom was fueled by flows from China’s Treasury purchases.Now we’re looking at the impact of China’s Treasury purchases on the market for Treasuries itself - and we aren’t seeing much of an impact there.
Most of those smart people who’re thinking this will also type in that you’ve made a great, wonderful analysis, and never raise this point. Some of them might actually even cheerlead your post here.

Let’s hope private market participants don’t bet on high Treasury Bond prices now. Jansen’s post suggests the classic rupture of Government Bond prices. Central Bank demand for Treasuries remained high on the day he reports on, yet prices crashed and yields rose. This is very good news for equity markets and home prices.People are clearly demanding higher yields now.

Here are some comments I made in response to comments from other blog participants:
@ KT Cat - can you consider not interpreting things as “horrible”,”dreadful”, and “shrinking” without more reasoning than you present above?
Banks are trying to dispose of a large set of foreclosed homes together, say, in a block worth around $30 million, to small groups of private investors. Sales volumes are a bit down because these negotiations take more time than a fire sale.Banks are also disposing of foreclosed properties in some areas individually; that typically goes faster.
Lower demand for Treasuries at higher Treasury prices is again very good news for the US economy.
I don’t understand what you mean by“Japan’s economy is getting killed”.
I explained yesterday that Japan’s exports and imports are down more than China’s because of lesser credit growth in the Japan economy than China, but Brad deleted my post.Once the credit problems are solved things will be much better for Japan.

jim:…they invest on fundamental strengths that are dominating the market place …
Me: Fundamental analysis based on earnings, etc in my opinion is like a relative grading system. You can put a buy,hold or sell recommendation on a particular equities by comparing them with others. The underlying assumption is that your analysis is largely to allocate a certain fixed amount of capital amongst different equities. You can also account for the differential impact of macroeconomic or other ‘market risk’ events on different equities.But in terms of determining the overall direction of indices, that part of fundamental analysis isn’t particularly useful. It’s not easy to discount future cash flows, arrive at a fixed number for the ‘present value’ of the stock and use that as a basis to be a successful investor. Your ‘present value’ rarely ties in with the market’s, especially with wide fluctuations in multiples. It’s best to recognize that, even by the conceptualization of capital market theory, market risk can at best be diversified away to reduce its impact,not eliminated. Successful investment therefore requires understanding the full spectrum of fundamental analysis, macroeconomic analysis and most importantly, the geopolitical underpinnings of international finance.Earnings are definitely weak in US equities and will probably grow slowly for some time. But the reason to go long is a market bottom, a shift in the debate to when things will get better, from how much worse things will get before they get better.Of course my actual strategy is long in the Nifty, and not the Dow, and the two things are quite different.Nomura Holdings recently hired 50 team leads with long expertise in US equities and they’re rapidly setting up a sizeably large US equities unit. If they don’t have plans to invest in US equities, or advise clients to do so, these hiring decisions wouldn’t be rational.

@DOR: Residential investment in the US was at levels of $600+ billion, out of a $14 trillion economy, even at inflated prices.The direct output effect of a collapse in residential investment is small. The US was perhaps just as much of a Hollywood Economy, rather than a Home Building Economy during the boom.That would be consistent with a 43% share of services in GDP.Home Equity Withdrawals financed 3-4% of PCE. Annual increases in o/s consumer credit were 1% of GDP.US consumption wasn’t mainly driven by using homes as ATMs,though that conceptualization is attractive.35% of US homes were owned outright in 2007. 5% of the remaining 65% homes had mortgages that were both ARMs and subprime. The mythical American risky borrowers were therefore few.The recent collapse can be explained by the non availability of normal credit. For instance, even qualifying home buyers may not get a mortgage loan. People with a good income and finances may not get approved for a car loan. Similarly, difficulties in segments like student loans, corporate working capital loans, export credit, letters of credit, etc have disrupted the US economy.A certain level of credit is neither good or bad by itself, but only in comparison with income and overall balane of assets and liabilities. Once normal credit flows are re started, things will be much better for the US economy.But growth will be slow because the destruction of personal net worth due to fall in home prices needs to be worked off by US consumers.

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