This week in Outside the Box, Louis-Vincent Gave, Charles Gave, Anatole Kaletsky, and company of GaveKal Research delve into the underlying misconceptions that presumes money velocity is and will remain constant, in the equation that says MV = PQ (Money*Velocity = Prices*Quantity) when M is increased. GaveKal Research strive to show that in application this relationship does not hold, and that investors ought to look to velocity to rebound to gauge market recovery or further deterioration. This is an important concept and holds major implications for the inflation debate.
GaveKal venture on to address the Banking crisis in England, how Mervin King & Co. at the BoE responded to the Northern Rock debacle, and why the appropriate response was hindered by political malaise than by BoE incompetence, though mind you there was some to speak of. Furthermore, the Fed 50bps reduction is taken to light on account of the uncertainty of whether such (and potentially further) reductions will prevent the economy from falling into recession.
GaveKal further discusses how the dollar breaching record lows, will affect the inflationary pressures in China, and how the dollar is affecting the oil markets, which happen to be denominated in dollars. I have attached below graphs of the Euro/Dollar conversion rate, and the current (WTI) cost of oil.
Finally, my publisher is running an advertisement for my friends at International Living. I normally don't think abut the ads, but this one is interesting in that it is two years for the normal one year price for a publication that I enjoy. If you travel or think about living somewhere else, this is a good place for information, or to just dream. Enjoy your week.
My friends have at GaveKal have been whale watching for some time. But not for Blue whales or in an ocean. There theory is that Central banks keep throwing dynamite (in terms of liquidity) into the ocean during credit problems, watching little fish die and don't stop until a whale floats to the surface, thereby giving a signal that the credit crisis is close to being over. They think they have spotted that whale.
This week in a very interesting and decidedly different Outside the Box, Charles Gave writes about the current liquidity crisis and the problems surfacing in England. Remember, it was problems in Asia and then Russia that created the problems in 1998. We should all pay attention to what is going on. Are there more whales getting ready to float to the top?
This week is we look at two short articles on different topics from some of my favorite writers. The first is by Anatole Kaltsky of GaveKal Research and looks at some of the recent political and economic problems in Europe and what must be done to help turn the EU around. Germany recently had state elections (big upsets), the French vote on the EU constitution was this weekend (expected to be a rejection). These and other issues will have interesting long term implications for Europe and the European economy. (I am writing this week's OTB a little head of time to take a holiday on Monday, so I am not sure of the French vote.)
The second article is by Paul Kasriel of Northern Trust and discusses the leading economic indicators (LEI) and why economists seem to ignore what it is telling them. Paul finds a strong correlation between the LEI and recessions. Can you guess what it might be telling us now?
These two articles were both short, but had some interesting things to say so that is why they were both picked for this week's Outside the Box.
This week's research comes once again from the GaveKal Ad Hoc Comment publication, however this piece was done by Anatole Kaletsky, a different analyst than the previous reports we have highlighted. This group is located in Hong Kong and I always find their comments on Asia very insightful.
The report takes a look at some of the structural players in the U.S. bond market and why their actions may be causing the longer term bond rates to stay low. The largest catalyst surprisingly is Japanese private purchasers of US bonds. The reasons are not the subject of work I have read elsewhere and they will continue to buy until conditions improve in Japan's investment markets. This is a different look at the issue than you see from most economists and why I chose it for this week's Outside the Box.