The Balcony Box

Verbatim:

Obese People Have ‘Severe Brain Degeneration’

About two-thirds of U.S. adults are overweight or obese

This show just gets better.

Scary article.  Not much to add, except that the situation looks even worse if you account for off-balance-sheet liabilities at Fannie and Freddie.  Buffet quotes Keynes:

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

With deflationary pressure from elevated unemployment and massive deleveraging, I think Buffet is right that the effects of greenback emissions could “remain latent for a long time”, but it’s hard to imagine that Washington will have enough spine to make the tough choices required to protect the dollar.  If they did, we wouldn’t be in this mess to begin with!  Julius, how much time do you think we have?  Two years? Five?

One of the most frustrating aspects of the current mania gripping the capital markets is the belief that numbers can be made to shape reality.  In particular, the recent euphoria over positive global GDP prints and cherry-picked confidence and sales numbers has most commentators and lay-people in a foamy-mouthed lather.

Yesterday, I had a conversation with a reasonably representative portfolio manager, which is to say overconfident of the current financial landscape.  (This is hardly a character flaw: to be in financial services is to place at least some faith in the current economic arrangements.)  And I quote, “I have seen no evidence that deleveraging is going on.”  When asked to elaborate, he pointed to the fact that since asset values are down and debt has barely been paid down in aggregate, leverage has increased–technically.  His conclusion: “Why can’t the credit cycle continue forever?” 

I love math.  But it seems my love is at all times 180 degrees out-of-phase with current economic thinking.  When (mathematically unsustainable) economic overconfidence was ascendant–that is, during the start of the blow-off phase of the worldwide credit bubble circa 2003–those with a voice pointed to “strong fundamentals” underpinning the worldwide expansion.  Now that technicals–the fundamentals–are firmly constraining the global economy (it’s the debt, stupid), everybody laments the lack of “confidence” and “animal spirits”. 

I, too, wish the fundamentals were different.  They’re not.  And whatever “give” the math had for animal spirits simply isn’t there today, notwithstanding the excitement over a few random numbers.

As observers debate whether extremely loose monetary policy will lead to runaway inflation, Julius and I have had our own long-running discussion on the topic.  My experiences in Japan have lead me to expect a sustained period of deflation, though I’m not at all confident in this view.  There may be another possibility: yet another round of asset bubbles.  It had seemed unlikely to me that the game could be restarted, but perhaps the combined efforts of the world’s central banks can do the job.  The Telegraph raises the possibility in a recent article “Excess liquidity thesis gains traction as financial markets soar“.  From the article:

in their anti-deflationary fervour, central banks may be creating more money than depressed economies require. The surplus creates “excess liquidity” – which may be feeding a new series of stock, commodity, property and bond bubbles.

Interestingly, the Telegraph suggests that the depressed state of the real economy may encourage money to flow into financial assets:

But the very decline in GDP may be causing the excess money problem. Economic activity has contracted sharply and consumer prices are deflating, so a constant stock of money buys more, in real terms, than it did a year ago. This deflationary money adjustment may be generating excess liquidity – and feeding buoyant markets.

Though I’m not a macro economist, this seems plausible: if individuals are cutting consumption to rebuild their balance sheets and corporations are cutting investment in the face of slack demand, then the money forced into the system by the central banks has few places to go.  Of course, the article also notes that China is expanding the money supply so rapidly that new bubbles seem a virtual certainty.  As usual, Michael Pettis has the details.

The Shanghai stock market is booming again (it has nearly doubled since last November), and a securities brokerage called Everbright recently went public in an offering that raised $1.6B, was more than 100 times oversubscribed, and valued the company at 59 times 2008 earnings.  Enough said.