Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

QE2 and the Art of Economic War

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Obama_Hu_dinner

Quantitative easing is unpopular with bears for its artificial market support and distortion of trading patterns. It is great sport to poke fun at the Secretary of the Treasury and the Chairman of the Federal Reserve for their seemingly idiotic, irresponsible money printing, bond-buying polices. But Turbo-Tax Timmy and Helicopter Ben are not dummies. It is worth considering whether the current QE policies are aimed at state interests far beyond the stated goals of: To provide further support for the economic recovery while maintaining price stability.

The U.S. is currently involved in several wars, but the conflict with the biggest stakes is only starting to be recognized. This is the economic war between the United States and the Peoples’ Republic of China. The U.S., as the world’s superpower, has much to lose to an ascendant China. Chinese economic strength supports its political, ideological and military power. Unlike the U.S. eclipse of the British Empire in the 20th Century, China’s new hegemony will not be a win-win handoff of the superpower baton. What is good for China is not likely to be good for the U.S.  This conflict is a new Cold War, with potential for escalation into military operations. The fight between China and the U.S. will define the structure of world power for the remainder of the 21st Century.

China is employing radical mercantilist policies at an extreme, state-orchestrated level. China provides state support for all facets of its export economy, with no concerns for fairness, balance of trade, intellectual property or other sentimental western constructs.  China’s beggar-thy-neighbor economic policies are eroding the workforce, capital, manufacturing base and research and development capabilities of competitor nations. It is worth noting that similar collateral damage from the world wars of the 20th century helped to establish U.S. as the superpower of today.

If you were fighting this economic war as the President of the United States, what would you do?  What would most inhibit China’s rise as an industrial, economic and military power? As war has been a Chinese pastime for millennia, cribbing ideas from the enemy might be a good place to start:

So in war, the way is to avoid what is strong   and to strike at what is weak.
 -
Sun Tzu, On The Art of War

OK, POTUS, let’s consider Chinese weakness. China has a large peasant population with middle-class aspirations. Internal political turmoil, potentially even revolution, will result if the people of the PRC do not share in the country’s economic success. To meet these expectations, China must maintain high economic growth rates, driving its industrial revolution at a blistering pace, putting upward pressure on prices of raw materials, food and energy. To keep its exports affordable to American Wal-Martians, China pegs its currency to the $USD and has been only very reluctantly raising interest rates. China has purchased great quantities of U.S. Treasury bonds, to support its debtor consumer market.

To exploit these weaknesses and attack China, it would be hard to develop a more potent weapon than Quantitative Easing. U.S. money printing increases inflationary pressures, making commodities needed to fuel China’s growth more expensive, particularly as long as China keeps its peg to the weakening dollar. With inflation in necessities such as food and housing, the Chinese people will begin to experiencing a declining standard of living, sowing the seeds of social unrest. QE bond purchases dilute the value of Chinese UST holdings and with that, the Chinese leverage on U.S. financial policy.  As China tightens its economic policy to fight inflation, their currency strengthens, their exports become less competitive and their economy and world influence, declines. So maybe there is a bit more to QE2 than first meets the eye.

Be sure to include your ideas for a caption for the above photo in the comments section.

Another Superpower

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This is dumb, but I wanted to share a quick anecdote.

Like anyone else, I have strengths and weaknesses. Being an overly-visual person, I'm really, really good with faces, but I'm lousy with names. I can be introduced to someone five times, and I still won't remember their name the sixth time I meet them. I never forget a face, however.

This ability to identify someone visually goes to extremes. I can spot someone at a great distance just based on how they move. And – weirdly – I can identify people just by the backs of their heads, even if they are not someone I've met before (e.g. celebrities, minor or otherwise). For instance, I was walking in the New York Hilton lobby once, and from 200 feet I could tell the person walking away was George Stephanapolous. I mean……….what's wrong with me? What kind of superpower is that?

I was reminded of this just a few minutes ago. I was driving toward the Stanford campus, and I saw a couple of guys walking down the sidewalk about a block away. They were walking away from me, and there was nothing outwardly unusual about them. However, I instantly knew one of them was Mark Zuckerberg, the founder of Facebook. I told this to my young son who was with me, and as we passed the two guys by, sure enough, the shorter one was Zuck.

This, coupled with my vibrating eyeballs, surely gives me the right to wear a cape or something. Added to which………..it is so cool to live in Palo Alto if you're a tech fan-boy like me.

Stay Focused (by Ultra Trading)

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If you are a longer term trader and not a day trader then it is very important to stay focused on the issues facing the global economy.   The issues are very real and have yet to be confronted in a serious manner, one that will achieve true resolution.  In the day to day noise of ES futures or pundits that are all in and refuse to question their long trade it is very easy to get distracted and drawn into the power of group think.  As investors we need to understand the environment in which we risk capital to determine how the risk and reward coexist.  Sometimes this means missing powerful moves up as I personally have. Other times it means realizing that early to a trade is the same as being wrong, again as I personally have learned. 

I continue to sit on hands until the following items are priced into this market for I feel these issues are very real and skew the risk reward equation far to the risk side. 

EU Debt 

Portugal 10 year yields are at 7.3% as of February 8 (7% is the threshold for the need for ECB / IMF support).  Ireland has asked for an additional 40% in funding to support banks that are faced with an acceleration in deposit runs and reduction in credit quality.  Italy is facing a leadership change as Berlusconi is now very likely to face charges for his sexual escapades.  Recent reports have raised the question that Greece should default as their ability to repay their debt is growing impossible. 

Global Unrest

Yesterday, Egypt saw its largest protest to date.  Just when it appeared Egyptians were tiring, they were rejuvenated by the release and subsequent statement by a Google executive.  Protests have spread to Saudi Arabia, Yemen, Syria, Jordan, Algeria and more.  This movement is just getting started in my opinion. 

QE 

Bernanke is coming under greater pressure to cease QE2 in June and not commence QE3 thereafter. From rising bond yields, inflation concerns to growing internal dissent the case for QE3 is becoming more difficult.

China 

This is a big question mark that should not be ignored.  China has grown more hawkish in their monetary policy yet US markets have ignored this completely.  China is trying to slow its real estate growth as its economy grows from one that is export driven to consumer driven.

Currency

China, India, Russia and many others are increasing their precious metal reserves as they realize the day of the USD reserve status is diminishing and are now trading with non USD currencies.  Charts of the USD look simply horrid and other than a two day bounce cannot reverse trend.  Meanwhile with all the problems facing the EUR it has shown greater strength.  So in the race to the bottom, the USD appears to be winning.

Asset Prices

Residential and commercial real estate have not bottomed as many pundits will lead us to believe.  The levels of residential mortgage underwater are growing that will lead to further strategic defaults, thus higher levels of shadow inventory further pressuring home prices. A recent report from Fitch said that over 30% of commercial real estate that needs to be rolled in 2011 do not meet their standards.  We have far more real estate than this economy and job market can support. 

Unemployment 

The job market is horrid.  Regardless of the weather pattern behind a specific report the bottom line is the US has yet to create the minimum of 160,000 jobs needed each month to simply keep up with population growth.  We have a structural problem in this country and it will not be solved by QE.  20% of income is in the form of a government transfer payment yet only 49% pay taxes.  Meanwhile 1 in 7 Americans are on food stamps and this trend shows no sign of reversing.

I can go on with this list and more detail for each subject but the message is tiring.  This market can stay elevated for another hour, another week, another few years.  No one knows.  Many have learned not to stand in front of this market but as investors its important to understand the issues that surround us aside from the noise.  We must be ready to act when the market begins to price in the above items.  It is human nature to ignore problems we are faced with.  That is exactly what is occurring right now among our leaders.  That will not cause them to go away but only grow.

Submitted by Ultra Trading.  If you would like to read more, please visit - Ultra Trading