Claus Vistesen

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    • Mon Oct 6th 17:19 PM | Rating: 0 0
      Commented on:
      The Global Economy: Is Deflation the Next Macro Story?
      Hi Guys,

      Thanks for the comments, not nearly as harsh as I had expected :) since this was after all a bumper piece and I know that SA readers don't take too kindly to these kind of things. I am glad that you took your time to read through it (or some of it, or just the conclusion). Anyway ...

      "The deflation scenario has been in track for some time and given the size of the world housing markets it is the prime mover."

      This is true Whidbey, but what I try to draw attention to is the fact that some economies may simply get stuck due to the particular severity of this downturn.

      "For The Big Freeze is the path"

      Quite and I would then submit that some countries may simply never thaw!

      @ Ihunt

      Excellent points ... I guess we can agree that we agree then.

      "As well as the 1st to come back will be emerging mkts."

      I do think this is one of the main points in the sense that whatever recovery we will see it is going to be assymmetric. Little by little I would also expect money to flow steadily back towards the yield offered by high growth markets. In fact, this would be the biggest threat to the US if we imagined that the Fed would have to raise rates to defend the USD. However, if the the ultimate push from this is deflationary it may not come to that.

      "On the other hand, I think the US $ will fall. We just keep printing dollars. Europe will be Forced to do some similar package or watch Rome burn, as well as the Euro. The Real Blood is just now showing up on the Real Streets. As this happens, Asia, South America, Central America, Middle East, will be shoved up against the wall or kill the System. Much like the Ugliest Global Financial Crisis has played out very quickly, it is possible to go hyperinflation just as quickly. Then, full on deflation as consumers can not pay for anything on the cash adjusted basis."

      A scary scenario, but it may be likely. The feedback effects from whatever policy (inflationist or calvinist) can definitely turn out to be quite volatile.

      @Real Broker

      Very interesting comment. There is definitely a sense of re-coupling in action here. At least, I personally find it quite amusing that people were speaking of the Euro as the new global powertrain only one year ago as Bernanke started to cut rates. Now of course, we are all a lot smarter as it is clear that Europe will now have to clean up its own mess.

      "You can only monetize debt for so long until it becomes mathematically and even theorectically impossible to make good on your promises."

      True, very true and I would not downplay the US situation for one minute. This is not small chips (or whatever) and the US economy will not command the same position in the global economy after this.

      @ YR Dog

      "An interesting question is that if deflation is coming, what will happen to gold. It's hard to look to the Depression for answers there when the countries were abandoning the gold standard and US citizens were forbidden to own gold from 1933. Will gold be a safe haven independent from deflation or will its value fall like everything else? "

      I think many people are asking themselves this question. Clearly, many Austrian punters would just love to see the fall of the global fiat reign and the return to a solid tangible standard. However, that would also imply, I think, a kind of coordination that just is not possible at this point.

      "The interesting thing to watch is will foreigners continue to buy Treasuries at 0.0% ??? They seem to be a hard sell right now. A rate increase any time soon would really seize up markets. "

      Ah yes, this small point. Well, I do think it is quite obvious that the foreign purchases of agencies and treasuries are not necessarily for the real yield they offer. So there must another reason ... now, collectively we would label this system Bretton Woods II although I am unsure that this is still the right thing to call it. Ultimately however, the fact that foreigners have been so eager to finance the US is also a counterproduct of their endogenous growth path and strategy.


      Claus
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    • Fri Aug 22nd 03:39 AM | Rating: 0 0
      Commented on:
      Testing Hank Paulson's Resolve on the GSEs
      @ 348

      Really?

      I think myself that this is one of my better pieces in terms of argument structure :).

      Claus
      View article »
    • Fri Aug 22nd 03:32 AM | Rating: 0 0
      Commented on:
      What's Next for Brazil's Economy?
      Hi Guys,

      Thanks for your comments.

      @ User247325

      "I agree with the points above, but the biggest issue that Brazil has today is corruption at

      all levels."

      Point taken! I certainly do not want to come off as someone who seems complacent towards

      this issue. Honestly, I also have to admit that it is a topic of which my knowledge is very

      limited. However, if I take your points at face value they would obviously constitute an

      important obstacle for whatever Brazil sets out to "become".

      Ultimately though beauty, as always, is in the eye of the beholder and I would be surprised

      to see if Brazil's development endeavors shored up at the sluggishness by which the state

      apparatus conformed to modern "western standards". This does not mean of course that

      something should not be done and that the issues should not be treated.

      I guess that I am seconding Egan's points here since what is "corruption" really in this

      context. Clearly, if you are placed with operations in Venezuela et al. the threat of

      trigger happy govvy soldiers marching in and taking your property is a BIG issue, but I

      would argue that Brazil is another level up from these kinds of adverse business

      environments.

      @ Brahm

      Thanks for this elaborate comment. I do have to concur that this piece was not one of my

      most succinct.

      It is of course interesting to note that those four economies you mention constitute that

      almost infamous BRIC economy group coined by Goldman Sachs almost a decade ago (I think).

      My main argument here is consequently first and foremost that Brazil together with other

      rapidly developing emerging markets WILL see their share of world GDP grow. I think that

      this is the big global development story of the 21st century and it really should not be

      lamented. I would also expect that their increasing clout of their economies as a share of

      world GDP be especially pronounced in DOLLAR terms. In this way, the world already HAS de-

      coupled from the US economy so to speak, but it is a much longer term process than what we

      are immediately seeing.

      Within this frame of reference I am fundamentally bullish on Brazil (and India btw)

      especially compared to China and Russia where I think we will NEVER see a them becoming a

      net absorbers of global capacity (i.e. sustainable external deficit economies). Of course,

      Russia may experience an external balance at some point but Gazprohm inc will fight long and

      hard before that happens.

      You see, what Brazil has is a relatively favorable demographic structure and one which at

      this very point in time is almost at its "optimal" level if we look at age structure. This

      is really the gist of my argument (I guess that I should have been clearer here).

      So, I would simply put up the simple hypothesis that Brazil CANNOT be expected to crash

      completely due to internal momentum. Obviously, as you say yourself; both India and Brazil

      are hard at work to try to halt the spike in inflation and to prevent the money from coming

      in too fast. So, they WILL definitely slow, but 1997 style crises should not occur in these

      two countries I think.

      "Brazil is an interesting case. My take here is that commodity prices will have some effect

      on the export revenues. However, I do not expect severe decrease as commodity prices will

      moderate probably by only 10-15% overall. Don't expect massive decrease in revenue because a

      disproportionate fraction of exports of commodities is to emerging economies. These

      economies will not have much decrease in infrastructure investment, and hence the need for

      commodity imports will remain significant as most of the economies do not serious balance of

      payment problems."

      I could not agree more really. I think this is an excellent point. Sure, commodity prices

      are falling and can fall further if the investor community starts to worry about deflation

      and recessionary risks in OECD, but once countries as Brazil, India, Turkey etc start

      accelerating again (my guess is end 2009), then commodities will once again begin their

      structurally bound upward march.

      @ Whidley

      Thanks for your points and also those of educative nature. SA readers and commenters are a

      demanding bunch, but I do appreciate that you (they) take their time to massage the more

      argumentative side of my pieces.

      "I did not see much on internal consumption in the economy in your analysis: why?"

      A fair point, and while the Brazilian consumer is sure to wind down in the coming slow down my main argument is that she will not fold completely. Moreover, I am arguing that the relative "gusto" of Brazilian domestic demand is high compared to other (especially OECD) economies which should flatter the the economy in terms of inflows for investments and portfolio purposes.

      "The structure of the demand side of the economy is weak and seriously underdeveloped for want of educational and training policies that foster the middle classes and a stable lower class and lack of economic opportunity and mobility."

      Definitely, and nothing comes for free. More specifically, I would say that Brazil now has a golden opportunity to lock in a growth and optimal growth path for the next 20 something years. One of the challenges/pre-requisi... here will certainly be investment in human capital (i.e. on the quality side that is).

      best wishes everybody

      Claus
      View article »
    • Mon Aug 11th 16:00 PM | Rating: 0 0
      Commented on:
      Japan: Recession All but Certain
      oops ...

      copy/edit; "will not BE punished (...)"
      View article »
    • Mon Aug 11th 15:59 PM | Rating: 0 0
      Commented on:
      Japan: Recession All but Certain
      I sure hope so Kunst ... of course, if my readers are not willing to reciprocate I can only hope that my crime will not punished too severly.

      Claus
      View article »
    • Thu Aug 7th 07:27 AM | Rating: 0 0
      Commented on:
      CEE and Baltic Currencies: Where Now?
      Hi Paul,

      Thanks for your comments and best wishes.

      I am sorry that you don't think my piece is self contained. I really do not have any excuse here other than the fact that it was ultimately meant as a follow-up to one of my previous notes on Baltic and CEE currencies;

      clausvistesen.squaresp...

      I realize that this may not square well with the majority of SA readers who only read my stuff on occasion and out of
      context.

      First of all, on this.

      "I hold dual Citizenship, do you? I was in Lithuania less than a month ago, but reside in the US. Have you visited the
      countries you are making such broad statements about."

      No, unfortunately I do not and I am yet to visit any of the Baltic countries. I welcome anybody on the ground to prove me wrong with respect to my analysis. You should not think otherwise for a moment. I am arguing on the basis of statistics and second-hand reports, but who isn't these days? If I held myself to the standard of primary, "on the ground", research before I could say anything, I would not be saying much at all. But then again, some would perhaps prefer it that way ;).

      This however brings me neatly to this.

      "Lithuania has something the rest of the ECB lacks, Farmland, lots of it. Currently 50% is being used for Bio diesel, the
      other 50% is enough to sustain the food requirements for the rest of the country."

      I think this is an excellent and important point. I would indeed say that this argument could be generalized to many CEE
      economies in the sense that they too have spare farmland. In a world where the agricultural sector may be about the flip-flop the
      value chain these parcels are definitely a huge asset; not least in the context of potentially correcting the external imbalance.

      However, I think you are forgetting one thing because who, prey tell, is going to work all that land across the CEE edifice?
      You see, demographics DOES matter and while I agree that Malthus is staging somewhat of a comeback I believe that this is
      built on a fallacy. Consequently, it is not about population size per se, but population structure. It is here exactly that the Baltic and CEE growth model (with their subsequent dear nominal currencies) do not work.

      The point here would simply be that they are trying to enjoy emerging market style catch-up growth saddled with structurally
      broken population pyramids. Now, this "break" in the population pyramids primarily stems from two decades worth of lowest-low
      fertility as well as a steady outward trickle of the most productive cohorts.

      Basically, I hold the view that many CEE economies (especially the Baltics) simply have been growing way beyond their capacity limits and that this is why we are where we are today. In this way, I would take an issue with this statement:


      "Current inflationary costs stem from the previous 12 months"


      I think that this is too simplistic. It is true that the credit turmoil inspired energy shock is a recent phenomenon and it remains to be seen how elastic headline inflation is on the downside. However, I think it is crucial to note that the propensity for CEE and Baltic economies to stoke inflation is very high due to their recent high growth levels and subsequent low, and declining, level of capacity.

      You are obviously right that devaluation/depreciati... would equal an increase in inflation (de-facto) but isn't the alternative inflationary too? I mean, as long as the currencies stay dear, the incentive to tap foreign credit remains, as well as the external imbalance becomes almost impossible to correct. Also, a high relative currency also implies that the economy can actually muster the inflows which will follow.

      Ultimately, many CEE economies are likely to face wage and, by consequence, consumer price deflation in order to correct the
      imbalances. I hold this to be highly probable almost regardless of what happens to the currencies. In this sense, it DOES
      seem quite improbable that the Baltic pegs will fall at this point from a kind of Soros like attack. I think it is much more likely that the peg be abandoned to shift the credit loss onto the financing side of the CA deficit (i.e. foreign credit
      institutions).


      "The next Nobel Prize winner will be an Economist who will be able to provide a concise formula on why the Fed did what it did in 2007 going forwards, and why it was precisely the wrong thing to do. "

      I am not so certain about this, but we will see in the fullness of time I guess.

      Oh and this...

      "Well spoken Claus. I emphasize "spoken".&qu...

      Yes, I know that SA readers demand, and rightly so, high standards when it comes to the written deployment of Shakespeare's tongue. Or perhaps I got this one wrong. In any case, rest assured that I will strive to prevent the bar from lowering too much.

      "Good luck in your endeavors."

      Thanks a lot and to you too

      best regards

      Claus
      View article »
    • Tue Jul 29th 06:35 AM | Rating: 0 0
      Commented on:
      Yen Cross Basics
      Nice bout of currency wonkery here, Joseph. I will need more than a few minutes to digest what the points might mean for my funny money p/l :).

      Just a minor copy/edit note ... the ECB is running 4.25% and not 5.25%. I know; we are in the region of pedantry here but I still thought that I would point it out. I guess it would also affect the 4.75 yield advantage the Euro has over the Yen (i.e. it is 3.75% no?).

      In any case ... a neat piece about the inner workings of the FX trading universe.

      Can one of the nice SA editors please edit these small numbers?

      Claus
      View article »
    • Sat Jul 26th 04:13 AM | Rating: 0 0
      Commented on:
      Is the Eurozone Heading Off a Cliff?
      Thanks for comments guys ... also the ones on my english language skills; and yep, English is my second language (I really mean this). I appreciate JoeG's comments since all I can do is move forward and learn with each piece that I write. At the end of the day, I don't want my sentences to be difficultly read. Oh and to bbzz24 ... thanks for your related comment too; it assures me that I am not completely off the chart.

      Anyways ... on to the business at hand.

      First of all there is the comment made by Junky about the potential demise of the Euro. I don't see it like this at all. I think it is quite far fetched to speak of a Eurozone break-up at this point since the costs would be too great (after all). That does not mean however that there won't be challenges. For me, Italy is the biggest "if" since at some point in the future they will possibly have to default on their debt. I am not sure what the ECB would/could do in such a situation? One could also imagine some kind of knee jerk Italian ultimatum with respect to the Euro system; especially in light of the fact that Berlusconi is at the rudder.

      Another point would be if e.g. Spain, or perhaps the aforementioned Italy falls into a very severe deflationary recession on the back of the current mess. It would be very difficult for the ECB to accomodate such a scenario I think. Of course, some kind of EU transfer in kind might be a possibility here. But where does this leave us with the whole convergence and one-size-fits all monetary policy hypothesis? Ultimately, the ECB may be facing a credibility backlash as a result of the current myopic focus on inflation.

      @Bbzz24

      I completely agree with the main thrust of your argument. It makes little sense to invoke this US v. Europe football match since these are two different regions/economic structures. However, in this light specifically it also worries me to hear Trichet speaking, at one of the press conferences, about how the ECB is like the Fed, in that it presides over one homogenous economy. This is BS (!) and acting accordingly will only bring tears I think.

      "Consider this: budget deficit spending is 2x the annual GDP growth for quite some time!!! How is this possible? Well, the Chinese and Japanese are willing, so far, to fund the U.S. growth in exchange for future claims against the government and the U.S. taxpayer."

      Quite, this system is obviously unsustainable in its current form and with the velocity it is growing. However, my guess is that this is structural in the sense that e.g. Japan cannot
      do anything else than hope to live off of claims on more "vibrant" (read: young) economies. Yet, this does not mean that emerging market mercantilism and the subsequent US overconsumption won't come to an end. My guess is that the system is crumbling as I type since the US is well under way to transform into a different economy. I won't be easy and it won't be painless but it will happen ... gasoline tax anybody :)?

      Cheers

      Claus
      View article »
    • Sun Jul 13th 04:29 AM | Rating: 0 0
      Commented on:
      Tremors in Danish Banking
      Hi,

      "i thought scandanavia for the most part would escape this mess."

      Not by a long shot I am afraid. Basically, my feeling is that Denmark may only have seen the initial shot across the bov here and that a considerable mess is about to unfold.

      The main point would be that the housing sector is in for a long and painful contraction all at the same time as the demand is simply not there to support a floor for the deflation.

      In Sweden of course they have the link with the Baltics and how this may drag down Hansabank/Swedbank or at least send significant jitters through the system.

      So, it may yet get worse but then again it might not but the risk and key components are there.

      Claus
      View article »
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