Thursday, 26 March 2009

Pictures and Expectations

Fascinating how politicians, commentators, and the markets alike are in constant search for the turnaround. It seems that even after almost two years of slide, it is still difficult to take in the magnitude, depth, and length of the crisis.

Amidst all the talk of optimism and rebounding markets, consider this picture of the Japanese export dynamics from today's FT. Remember those times a year - year and a half ago when we were still debating whether the East Asian region will 'decouple'?

Of course, one could argue that Japan is different, the ultimate trump card in any macro conversation. If so, what about the German business confidence? Spooky how the two are almost identical.



  1. Both graphs show signs of slowing at the bottom. That is what people talk about. It is not the recovery that economists are predicting but the end of the slide. Your two pictures are not going against that.

  2. dragon tamer: these graphs changes, not levels. Even if there were some signs of these slowing, all that would mean that the speed of the slide would slow. However, at the extraordinary levels these are at, all such observations would fall under the category of 'technical analysis', a.k.a. imaginary, dreams.

  3. But wouldn't the Geithner plan (i.e. decreased risk of further big bank failures / total havoc) and the revival of global bond markets justify a general upswing in valuations?

  4. The Geithner plan may do that by increasing the transparency and thus moving items from the 'unknown unknowns' to the 'known unknowns' category. However, this would-be systemic impact - so far at least - is only wished for, rather than guaranteed.

    As for the global bond markets: this would be the real Munhausen move. This kind of self-fulfilling valuation improvements tend work in the upswing; I am not sure if there is a lot of evidence for it to do the miracle job in the midst of crisis, though. Especially if the latter is of credibility of policy - the key factor behind the bond market.

  5. ??? No, the Geithner plan does that by taking those securities off banks' balance sheets and thus freeing them from related further mark-to-market write-downs.

    Bond-markets: don't get your argument here (either). If money starts flowing again, than the hitherto viscious circles get replaced by virtuous ones. The way up is equally self-fulfilling as the way down.

    But here's a question for you: when you say the current rally is fake, is that because a) you expect further GDP declines OR b) second / third round effects of the GDP declines we had yet?

  6. re Geithner plan: I am not sure if I follow your argument. (which it seems, is mutual...) The effect on banks is one thing, the effect on the system is an other. It is very clear that the transparency of the assets will increase, both on the banks' level, and on the system level. However, where will the actual risk go? I am not sure if you are suggesting that by pushing through the Geithner machine, suddenly risk will vanish in the air?

    Re bond market: I presume 'vicious circle' refers to the liquidity dynamics of the market. (If not, please explain.) And thus the debate here would be whether the ills of the bond market are liquidity originated or not. My view is that it is not (and could not have been for this long): the money crunch is merely a symptom of valuation problems. (Which, in my view, are due to the lack of adequate models about the effective economy at hand: our national level macro framework is too constrained, and we do not have a functional global one. But this is beyond this debate.)

    Re the GDP-fake rally question: (a) AND (b). But that is not only why I think this rally is going to be temporary. It 'feels' wrong. People propose all sorts of explanations why there should be an upturn now -- these mostly come across as wishful thinking. At the same time, the numbers that come out are either neutral (a few) or bad (quite a few) or very bad (a lot).

    What do you think?

  7. Geithner: it pretty much seems this is the situation where the effect on banks is the effect on the system (at least as long as the financial sector remains the bottleneck.)

    Maybe I'm being too simple here but it seems quite straightforward that if banks can lend again, then economic recovery arrives quicker, thus inter alia increasing the value of those securities. Curious to see your arguments in favour of "nothing happens" if toxic assets change ownership.

    Re fake rally: I guess if total meltdown is priced in then any news that is not total meltdown is good news. Numbers seem to show that at least the pace of decline is decreasing, and this, while admittedly meagre, IS positive news.

  8. There you have it: turnarounf in US & UK housing markets. Seems we've missed the bottom.

  9. The only way a turnaround is possible now is via a wealth affect coming from a new capital market bubble. All global macro indicators are pointing further down. For such a bubble to work (the Munthausen move...) you'd need it to be large (is there a mass optimism around?) and detached from the macro reality. Consider this, for instance, for the likelihood of the latter. Just as in the good old boom times you were suspect if you had a negative outlook for an asset class, now, the opposite is true. The previous bubble was very much the child of carelessness in both assessment by analysts, and the assessment of assessment by fund managers. It is not very likely to be repeated this soon...

  10. Interesting how much our views differ. To me it seems the Great Scare is over and will not return. Bottom prices were determined by liquidity shortage/fire sales rather than genuine value considerations. Now that liquidity is back valuation counts again.

    Macro freefall IS over, with the ground below taking shape. (Landing COULD be hard but at least there's a runway in sight)

    You rightly point out that there is no mass optimism around. Precisely that is why we're ahead of a major increase on stock markets as people on a mass scale will start beliveing the Bear is dead.

    Additionally, there's so much more room for better-than-expected news than the opposite. A terrible Q1 earnings season is priced in, and - again - anything that is NOT terrible will further improve sentiment.

  11. Yes, we interpret the tea leaves completely differently. I do not see the "genuine value considerations" returning. Or them having been there recently. Or even the possibility of having them - as pointed out earlier, for this we would need a workable global theory, some form global economics, which is just not there. The framework of international economics (here is a recent exposition) has not been particularly useful apart from predicting short term dynamics in smooth times.

    Re global macro freefall: our opinion differs again. I can see a halt to the fall, but no idea where the landing strip is. All the stimulus that is out there is short term, with the future increment being more and more difficult. (However, I will give in terms of clearing up as opposed to stimulus.) And there is much more bad news coming towards us.

    In any case, if the meltdown was really priced in, you'd have much-much lower levels. Of course, this will lead back to what we think the meltdown really means...

  12. I will have to agree with Anonymous. The sentiment in global finance is clearly turning. The end is in sight. Too many not-so-bad news recently to justify keeping with the bad mood.

    If you want the obvious, look at China. The Chinese economy is not even at the bottom any more. It is coming out with a rally. If you can't see it, you are blind.

  13. Dragon_tamer: The Chinese turnaround is debated by many, including some very good China experts. If only blind people can't see the coming recovery, then there are a lot of us around without eyesight.

    What are your arguments, anyway?

  14. peter, my words exactly: dragon_tamer, you did it again...

    however i would like to point out that this post touches upon the early Chinese recovery debate