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El-Erian on the Strategic Vacuum

http://www.foreignpolicy.com/articles/2012/04/25/the_strategic_vacuum?page=0,1

Today, advanced economies no longer live in an overwhelmingly cyclical world. They are navigating major structural and secular changes. They require comprehensive policy responses to overcome the twin problems of too little growth and too much debt; and they must adapt to the rapid developments of emerging economies and their consequences for the functioning of the global system. Until this materializes properly, the private sector's engagement will prove insufficient to provide the powerful creation of jobs that is so desperately needed.

Conditions on the ground call for a rapid pivot from tactical to strategic. Realistically and unfortunately, this may well require the sense of another impending crisis before leaders in advanced countries truly grasp the urgency and importance of this transition. But in one sense, we may already be creating the conditions for just that eventuality -- because, in the meantime, what appears tactically smart today may well end up tomorrow looking strategically shortsighted.

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El-Erian on the Strategic Vacuum

Realistically and unfortunately, this may well require the sense of another impending crisis before leaders in advanced countries truly grasp the urgency and importance of this transition.

Ah, the crisis round the corner!

The next one's the big one, will force various parties to 'get real'.

I don't think so!

The next crisis will shake stuff up and almost certainly accelerate the path to genuine re-balancing but I despair about these people who think that eventually there will be some co-ordinated rational 'policy' worldwide that will 'restore sanity'.

That alleged prior sanity (when was that again?) was an illusion.

All will progress towards the chaos inherent in a dynamic equilibrium. Stuff will change faster than "sane policy makers" can react to.

Ultimately the system will find its own sane balance based on the technological, cultural and energetic constraints that exist. And the eventual solution will have bugger all to do with policy, which at its best, can only remove temporary impediments to where the system, that complex adaptive thing, intends to go.

[Edit: and after that, various snakes will come out from under various stones and try and claim credit for the new normal]

Edited by scepticus

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Ah, the crisis round the corner!

The next one's the big one, will force various parties to 'get real'.

I don't think so!

The next crisis will shake stuff up and almost certainly accelerate the path to genuine re-balancing but I despair about these people who think that eventually there will be some co-ordinated rational 'policy' worldwide that will 'restore sanity'.

That alleged prior sanity (when was that again?) was an illusion.

All will progress towards the chaos inherent in a dynamic equilibrium. Stuff will change faster than "sane policy makers" can react to.

Ultimately the system will find its own sane balance based on the technological, cultural and energetic constraints that exist. And the eventual solution will have bugger all to do with policy, which at its best, can only remove temporary impediments to where the system, that complex adaptive thing, intends to go.

[Edit: and after that, various snakes will come out from under various stones and try and claim credit for the new normal]

Exactly. There is still a hell of a lot of debate and supposition about what stopped the last Great Depression.

And when he says the good old economic cycles don't really exist in developed economies anymore - I would argue that is primarily because the technocratic moneyists have tinkered with the system and are having to be more and more brave to stop it all blowing up in their faces. A little knowledge is a very dangerous thing when you're trying to 'fix' a complex machine. They have real time experiments with no control sample. And all too often policy is compartmentalised and subject to orthodoxy, despite the fact that they impact on each other. Such as the thrust towards unfettered trade and capital flows without consideration of other factors or even the simple game of wanting to be in surplus or the race to the botttom in taxes or regulation. All too narrow by far.

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Exactly. There is still a hell of a lot of debate and supposition about what stopped the last Great Depression.

yup,, its all hindsight, and little of that is applicable today.

- I would argue that is primarily because the technocratic moneyists have tinkered with the system and are having to be more and more brave to stop it all blowing up in their faces.

Maybe. My view is that what they have done is accelerate what would have happened anyway. That can be seen as good or bad.

I think as long as they continue to help the system dynamic on its way its unlikely to blow up in their faces.

If they oppose it it will destroy them. But then, when the system has got where it wants to go they will be redundant anyway.

There will be new technocrats, but not the same as the old ones. Smaller fiefdoms, more unstable.

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yup,, its all hindsight, and little of that is applicable today.

Maybe. My view is that what they have done is accelerate what would have happened anyway. That can be seen as good or bad.

I think as long as they continue to help the system dynamic on its way its unlikely to blow up in their faces.

If they oppose it it will destroy them. But then, when the system has got where it wants to go they will be redundant anyway.

There will be new technocrats, but not the same as the old ones. Smaller fiefdoms, more unstable.

I don't agree with destroying capitalism. Money being in sufficiently short supply and commanding a rate has helped guide where real world resources should be placed in its wake. What they need to do is implement a deliberate shortage of tokens but better rules for balance.

The liquidity won't stop flowing just because there is no yield anymore. Indeed, the flow of liquidity to hitch rides on rising (or falling) tides will become ever more frenetic as more people give up on yield entirely.

Unless you see 'heat death' as also entailing the freezing of all prices for evermore too?I'm afraid real world events would do for that theory.

Edited by hotairmail

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Exactly. There is still a hell of a lot of debate and supposition about what stopped the last Great Depression.

And when he says the good old economic cycles don't really exist in developed economies anymore - I would argue that is primarily because the technocratic moneyists have tinkered with the system and are having to be more and more brave to stop it all blowing up in their faces. A little knowledge is a very dangerous thing when you're trying to 'fix' a complex machine. They have real time experiments with no control sample. And all too often policy is compartmentalised and subject to orthodoxy, despite the fact that they impact on each other. Such as the thrust towards unfettered trade and capital flows without consideration of other factors or even the simple game of wanting to be in surplus or the race to the botttom in taxes or regulation. All too narrow by far.

They've chucked a couple of billion potential workers into a pre-existing system, removed all the controls and let it rip.

It ought not be a surprise that the pre-existing 'controls' won't apply. I think he's spot on. Domestic cyclical no longer obtains. QE now seems to have more impact on Asian inflation than US jobs for instance. UK housing prices were influenced by US capital rather than domestic capital, RBS b'sheet was stuffed full of non-UK assets supported by UK taxpayers. Isn't that the point he's making? Seems entirely valid. You only have to listen to Osborne for two minutes to realise he's fighting some sort of weird Thatcherite battle where the labour's in China!

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I don't agree with destroying capitalism. Money being in sufficiently short supply and commanding a rate has helped guide where real world resources should be placed in its wake. What they need to do is implement a deliberate shortage of tokens but better rules for balance.

Its my view that the rate commanded arises endogenously from the dynamic of the economy. That is, the rate arises from how resources have been allocated- to what projects and to what sectors of society - existing technology and population and energy dynamics. The distinction is important, because if this view is correct, rates cannot be set or controlled and the best hope for raising rates would be to proceed with a resource allocation that would be condusive to a higher rate. That may not be possible of course, but that would be the direction of causality.

The liquidity won't stop flowing just because there is no yield anymore. Indeed, the flow of liquidity to hitch rides on rising (or falling) tides will become ever more frenetic as more people give up on yield entirely.

Agreed.

Unless you see 'heat death' as also entailing the freezing of all prices for evermore too?I'm afraid real world events would do for that theory.

No not at all. The notion of heat death is closer to that of a perfectly efficient market. By efficiency I mean removing yield down to a minimum. Prices have little to do with allocation and more to do with yield differential. Yes it would be chaotic day to day along the lines of what you wrote above. But "patterns" of a TA type would be harder to discern and more transitory. WHen some yield or arb did appear it would get instantly swamped by liquidity, leaving nice profits for the original holder.

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Its my view that the rate commanded arises endogenously from the dynamic of the economy. That is, the rate arises from how resources have been allocated- to what projects and to what sectors of society - existing technology and population and energy dynamics. The distinction is important, because if this view is correct, rates cannot be set or controlled and the best hope for raising rates would be to proceed with a resource allocation that would be condusive to a higher rate. That may not be possible of course, but that would be the direction of causality.

Agreed.

No not at all. The notion of heat death is closer to that of a perfectly efficient market. By efficiency I mean removing yield down to a minimum. Prices have little to do with allocation and more to do with yield differential. Yes it would be chaotic day to day along the lines of what you wrote above. But "patterns" of a TA type would be harder to discern and more transitory. WHen some yield or arb did appear it would get instantly swamped by liquidity, leaving nice profits for the original holder.

Actually heat death is a poor term for the above behaviour. Dynamic equilibrium is a better term.

The 'heat death' term really applies to the heat death of a cultural dynamic based on the motivating pressure of money, credit and rising asset prices, all of which arose (along with the positive rate/yield) from the very lopsided distributions (e.g. age structure, ability for money to move, cheap energy) of the wider economy.

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Actually heat death is a poor term for the above behaviour. Dynamic equilibrium is a better term.

The 'heat death' term really applies to the heat death of a cultural dynamic based on the motivating pressure of money, credit and rising asset prices, all of which arose (along with the positive rate/yield) from the very lopsided distributions (e.g. age structure, ability for money to move, cheap energy) of the wider economy.

The distinction is important, because if this view is correct, rates cannot be set or controlled and the best hope for raising rates would be to proceed with a resource allocation that would be condusive to a higher rate

Sounds like 'strategic' co-ordination rather than 'tactical' (monetary/QE) to me!

#justsaying

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Interim low now in? Or early August '11 fake out?

Eussro banks appear to have found support too.

Another month end quandry..........

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Interim low now in? Or early August '11 fake out?

Eussro banks appear to have found support too.

Another month end quandry..........

Isn't it just. FWIW I favour a rally further well into the 1400s before we get another correction:

- I agree with Tiho (as posted earlier by HAM) that long USD is a crowded trade

- IMO the recent "shale oil = strong dollar" story is designed to get this trade even more crowded before it breaks, fuelling risk-on trades

- We had the "sell in May" equity trade in 2010 and 2011 - on the surface it is appearing now too, which is a perfect opportunity to burn shorters

So I think we'll run up higher. A QE3 rally would help Obama; to get QE3 by autumn would mean equity weakness during the summer, so let's say a June correction would be just perfect.

Or we could get a little pre-election panic-inspired banking blackmail like 2008. :ph34r:

EDIT: I remembered that Adam Hamilton wrote on this in Feb (this may be a re-post):

http://zealllc.com/2012/spx2012.htm

So what is likely to happen? A couple weeks ago I wrote an essay on the state of the SPX’s current cyclical bull market and the latest upleg within it. For a variety of technical reasons on several time scales, today’s rally is likely to persist until late spring at least. Summer is even a possibility, depending on how high the SPX gets relative to its secular-bear resistance of 1500 before that. Soon after 1500, we are due for either a major correction or possibly a new cyclical bear market.

If this upleg crests too early, so the correction is over by late summer and the SPX can rally into autumn, the Democrats have a better chance of winning. But if this upleg crests later, or the SPX lingers near highs during the summer before correcting like it did last year, the subsequent selloff (correction or new bear) should hit in autumn. And that would give the Republicans a much better chance of winning.

In pure market terms, politics aside, this second scenario looks more likely based on my research. The flagship S&P 500 only has to rally another 10% or so from here to hit its decade-old secular-bear resistance of 1500. And that would make for an easy and gradual ascent into late spring, no sharp surges sparking upleg-killing excessive greed, before the stock markets’ usual May seasonal peak.

Well 2 months later we were only 10-20 pts higher on SPX so it looks like the second scenario is working out.

Edited by Crash Buyer

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Odds shorten on Mancunian to replace Merv............

http://ftalphaville....e-governor-job/

As one of the great Glowballists, I wouldn't expect any special favours from him.

Anyway, some sage advice from a forthright Yorkshireman:

http://video.ft.com/v/1589389910001/3M-s-George-Buckley-on-boosting-growth

EDIT: I don't entirely agree with him however. There are areas where we lack ambition and take an extremely small share of the value chain for superior knowledge and skills. A great example would be ARM. If ARM was run by Jobs, he would have been looking to see how he could cut out other people and use his technology to take the lion's share. Would you rather be ARM or Apple? It is just that they are happy with their blue sky research and working environment, decent wages...but they don't have the drive to take over the world. Nor do they have the social cohesiveness at their core where the middle classes provide work for those lower down the food chain - happier to keep their hands clean and see it done elsewhere.

Edited by hotairmail

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As one of the great Glowballists, I wouldn't expect any special favours from him.

Anyway, some sage advice from a forthright Yorkshireman:

http://video.ft.com/v/1589389910001/3M-s-George-Buckley-on-boosting-growth

EDIT: I don't entirely agree with him however. There are areas where we lack ambition and take an extremely small share of the value chain for superior knowledge and skills. A great example would be ARM. If ARM was run by Jobs, he would have been looking to see how he could cut out other people and use his technology to take the lion's share. Would you rather be ARM or Apple? It is just that they are happy with their blue sky research and working environment, decent wages...but they don't have the drive to take over the world. Nor do they have the social cohesiveness at their core where the middle classes provide work for those lower down the food chain - happier to keep their hands clean and see it done elsewhere.

i like ARM, if for arguments sake those were the differing philosophies at work id much rather ARMs philosophy but that might be my natural sloth shining through

Edited by Georgia O'Keeffe

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EDIT: I don't entirely agree with him however. There are areas where we lack ambition and take an extremely small share of the value chain for superior knowledge and skills. A great example would be ARM. If ARM was run by Jobs, he would have been looking to see how he could cut out other people and use his technology to take the lion's share. Would you rather be ARM or Apple? It is just that they are happy with their blue sky research and working environment, decent wages...but they don't have the drive to take over the world. Nor do they have the social cohesiveness at their core where the middle classes provide work for those lower down the food chain - happier to keep their hands clean and see it done elsewhere.

The difference between ARM and apple is IMO not one of philosophy, they simply operate at different levels of the market. Apple sells finished products to end consumer (an OEM) and ARM sells semiconductor intellectual property to chipmakers who make the chips that go in Apple products.

FYI, ARM is dominating the world. ARM cores are in every mobile phone, vast quanities of embedded systems and now compete with Intel in servers. While Samsung looks set to begin dominating Apple, ARM has its cores in both Apple and Samsung phones.

To totally 'take over thw world' ARM would need to make their own chips, but if they did that then the buyers could only get ARM powered chips froma single source and would therefore immediately seek alternatives.

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