My Crotchets and My Conundrums

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Though their voices were a little more muted when China’s thirst for raw materials was being leveraged up by every trend-chasing, hedge fund hotshot in the West, the Reverse Malthusians among us have begun to crow a little more loudly again now that things have cooled a little in the resource sector.

These overproduction/underconsumption doom-mongers constantly fret that the prodigies of Asian industrialization will permanently suppress finished goods prices (and thus their businesses will also ultimately collapse into idleness), while we Sybarites in the developed world will, one day soon, either max out on our credit cards, or else we will succumb to a bout of real estate revulsion, and so compound the woes of the world, in a dark spiral of recession — even depression.

What the pessimists miss in all this is that — where not temporarily suspended by government interference and funny money — Say’s Law still holds good and so the Asian suppliers can always buy in proportion to what they sell and thus bring about their own demand; a demand they can always exercise personally if their debt-ridden customers are eventually forced to take a breather.

In this context, we’ve already twitted the bond gurus at PIMCO for their contention that “it’s different this time”, but now we find that perennial Cassandra, Steven Roach of Morgan Stanley, has also fallen back on this most insubstantial of mental crutches.

We say this, for Roach — who is at least a thoughtful Keynesian — actually stooped to citing the fabled powers of the cyber-revolution as a factor in his reluctant endorsement of the instant orthodoxy of a bond bullish view.

Throwing in the towel on his call for higher Treasury yields, in his latest circular, he reasoned that:

"Nor do I view [my] concerns as purely cyclical. The ever-powerful IT-enabled forces of globalization — now spreading from tradables to once-sacrosanct non-tradables — seem to be imposing new limits on pricing leverage that our traditional inflation models are simply not equipped to handle." [Emphasis added]

But, faulty logic aside, Roach is not alone in his rush to clamber aboard the bond-market bandwagon.

Indeed, so many commentators have recently found a pretext to issue encomiums for the lowest real yields since the Great Inflation stole every widows’ mite in the 70′s, that you could almost start to get suspicious about just how spontaneous this chorus of approval really is.

Be that as it may, the biscuit was surely taken by the latest comments of Dallas Fed President Richard Fisher — a gentleman who seems to have surpassed even his egregious predecessor, Bob McTeer, for farcical pronouncements on economics.

Giving an interview to (whom else?) CNBC, this worthy added a little “coup de whiskey” to the bond market rally by opining that:

“We’re clearly in the eighth inning of a tightening cycle — we have the ninth inning coming up at the end of June… There is room to tighten a little bit further. Then we will see how we are standing against inflation.”

(Answer: even compared to the Fed’s own “haute con job” figures, still at or below zero, for what will soon be a foolhardy fourth year running!)

So how did Mr Fisher view the bond market’s current euphoria? As barely worth the trouble of explanation.

The 10-year Treasury note yield, he vouched, was “less of a conundrum” but was simply “an expression of confidence in the way the FOMC has conducted its policy.”

Moving on from this laughable display of misplaced conceit, Mr. Fisher next expressed incredulity at the thought that the best use for one’s hard-earned “savings” might not be to place it at the tender mercies of those wise and disinterested philosopher-kings in Washington.

“What we have in this country is a $12 trillion economy growing at between 3 and 4 per cent,” he said. “We have constitutional unity [A snide dig at Europe?]. Where [else] are people going to put their money?”

As if this was not fatuous enough, Mr. Fisher went on to show that he is another member of the school [possibly the only one he's ever attended] which holds that Western overindulgence is the height of philanthropy and that if we spendthrifts — we latter day Bertrand de Mandevilles — are to be criticized for anything, it is that we are still not doing enough to devour the “global glut of savings.”

“Where would the world be,” Fisher smugly, if rhetorically, asked, “if Americans did not live out their proclivity to consume everything that looks good, feels good, tastes good?”

With a man like this voting on how rapidly your money should be depreciated, are you really wise to lend it to an incontinent, irresponsible and unanswerable government for twentysome-odd years at a measly 4½%, before tax and price rises?

Sean Corrigan [send him mail] is an investment analyst in Switzerland.

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