Carry Trade, Inflation and Market Forces

Dear Readers,

So we have this news - US Fed chairman Bernake 'softened' his tone and 'vowed' exceptionally low interest rates for extended period owing particularly to the situation in Europe. This is quite opposite to what I thought some time back when several Fed members opened their mouth against low interest regime. I thought that was the start of changed stance by 'Fed Group' and would lead to unwinding of carry trade world over. So, do I change my views? NO. Bernake said what he was compelled to say and markets somehow do understand that this 'renewed dovish stance' is just a camouflage and interest rates are poised to go up sooner than later. Let me make myself clear hear - Fed DOES NOT DECIDE RATES, IT JUST DOES WHAT IT IS FORCED TO DO BY MARKETS. Fed guys are also helpless when facing actual market forces. However, I guess Bernake is right in his thinking that it is deflation that is going to be near term threat than inflation.

When it comes to investing and markets, small guys look toward news and policy decisions by govt. My neighbor told me yesterday why Indian markets will go up now. He said it was inflation and esp food price inflation that was worrying govt. According to him, this coming year India is going to have one of the best agriculture production thanks to good monsoon and that will drive down food prices which will eventually result in high stock prices. He was so convinced about this that he refused to hear anything against this 'sound' logic. I asked him anyway - what will happen to the rural people who are directly dependent on agriculture? Won't they be in a better state and have more disposable income? Won't they buy a lot more goods and services with the extra income they would have as a result of good harvest? This is where common people stop thinking. A good monsoon is good for Indian economy and then it actually drives up inflation. RBI (Indian Central Bank) is uncomfortable and governor Subbarao has already expressed his feelings. I guess a good monsoon is going to create more troubles for Indian govt as well as RBI.

Milton Friedman said inflation is always and everywhere a monetary phenomenon and I agree partially. Inflation is indeed a monetary phenomenon but not always. We can see it today - even zero interest rates and 'monetizing debt' haven't been able to lift Japan's inflation and the same is happening in US as well. Bernake can't stop market forces, he can only do what he is told by market forces to do. And, despite deflation being the actual threat, interest rates will have to rise in coming days. In India its a little different - monetary inflation and its threat will force RBI to raise interest rates which will eventually result in deflation.

Funny - The Mainstream Media

Dear Readers,

When it comes to investing and markets, there are so many available media - electronic media, financial newspapers, websites, newsletters and blogs to name a few. The most popular of these are electronic media, websites and newspapers. Almost all of us who have interest in stock markets and access to internet are well aware of Yahoo Finance, Bloomberg etc and look at these websites for market quotes as well as what's happening around. The question is not how good or bad the content there is, it is how funny one portal is than others are.

Usually there are quotes of most important of US Indexes - Dow Jones, Nasdaq and S&P 500 and also that of Crude Oil, Gold and 10 Year Bond Yield (Yahoo Finance example). Then, there are news items led by 'headline news'. I almost always find these 'news' funny - not because there is some inherent humorous content, but because the 'explanation' along with these 'news' items. For example, a headline or listed news looks like this - "Stocks jump as investors are cheered with *xyz* data". Notice there are two important clauses in that sentence, the 'news' clause ("Stocks jump" in this example) and then 'cause behind it' clause usually following "as". It is this judgement of cause that makes them funny. Now look at this screenshot :

Look at the indexes - Dow and S&P are about a third of a percent down and Nasdaq is slightly up in green. Now, read the "TOP STORIES" and particularly the 'headline' - "Stocks pare losses as consumer sentiment jumps most in 2.5 years - AP". So this means AP reports WHY stocks 'pare' losses after an initial drop after opening. That reason happens to be a 'jump in consumer confidence'. Then we go ahead and read first listed news below the headline - "retail sales drop by most in 8 months". So, this is what that caused that initial 'drop' and if you had looked at this portal just two hours back, then indeed it was the headline, not as 'news', but as the CAUSE of that 'drop'!

Now whats happening here! First there is this 'drop in retail sales' and then there is a 'jump in consumer sentiment' ! How come these two things coexist at the same time? If retail sales are dropping then it can't be 'high consumer sentiment'.

Well, dear readers, I did not attempt to criticize either the portal or the news providers, I simply put forward the funny thing that emerges out and confuses common readers. I guess the associated reporters feel compelled to associate 'causes' behind market movements, but, mostly what that ends up doing is make us laugh. Let me be clear here, this is not exclusive to websites, this is actually a norm and electronic media (particularly CNBC) is way ahead sometimes on the 'fun meter'.

UPDATE AFTER ABOUT 30 MINUTES
I found it most interesting to post the changed screenshot just after about half an hour. Dear readers, look at it, read it and then compare to above post and find out even funnier one.

Bell Rings For Carry Trade Unwinding

Dear Readers,

The carry trade currency used to be Japanese Yen just two years back but now its been replaced by USD, thanks to US Fed Reserve. Mr. Bernake and Co. lowered interest rates to near zero last year and the effect was clearly visible on all assets all over the world. So far every Fed statement was more about keeping interest rates low ostensibly to support 'weak' economy and now they are 'hawkish' despite continuing high unemployment rate.

In my post on 23 March, I warned that 'the beginning' of new era of deflation has started and one of my reasons was fear of higher interest rates. Although we have been getting hints of 'voices' demanding an end to near zero interest rates, today there is this news from Reuters and I guess this is going to be the beginning of unwinding of US Dollar based carry trade. If my fears prove right then there may be a bigger crisis kind of situation for all assets including precious metals and 'resilient' emerging markets. US Dollar should get stronger as well, continuing its rally against most currencies as speculators unwind their 'carry trades'.