Given the busy circumstances posed by the last two bond issues from the government, we haven’t been able to present our economic reports as often as usual. In order to correct this, going forward, we will publish a short weekly or biweekly report with a minimum of three sections initially: THE MATRIX, analyzing the US economic scene; LOCALLY GROWN, reviewing local economic developments and PARALLEL UNIVERSE, surveying local FX tendencies. Yet, as we did in the past, every so often we will publish long reports providing historical context to help you understand present events. Without further ado, here is our first report under the new format:
THE MATRIX
The Friday Dow Jones record doesn’t bode well for our original call in November 2006 to stay away from equities. But, hang on! Take a look at the chart below. In it, Paul L. Kasriel, our favorite economist, shows why the LEI (Leading Economic Indicators Ratio) is already signaling a US economic recession, note how it (red line) has already gone below the level attained in the 2001 recession.
Thus, what you are looking at today in the Dow, S&P and NASDAQ must be the typical “Suckers’ Rally” so many times announced by Nouriel Roubini in his broken but incredibly accurate English dissertations. As claimed by Roubini, since the appearance of soft-hearted central bankers (the Greenspan era), every time the Fed is about to cut the Fed Funds rate (because of a slowing economy), equity markets go wild as they envision consumer consumption doubling or tripling as rates recede. Instead, by the time the Fed eases, things are so bad that equity markets have usually dived into a whirlwind funk they cannot recover from until the economy finally improves (two to three years later).
So if you are short, all we can say is: Short people got more reason to live!
LOCALLY GROWN
In reference to our economy, please keep in mind that if US equities plunge, so will oil prices and commodity prices in general (yes, including gold!). Yet, this time around, we are in even worst shape than usual. For the fist time in history, we have indebted our nation by $74 Billion (see table below), while sinking our reserves to less than half that amount ($30 billion going on to $25 billion when PDVSA settles). If oil prices do drop in the next 3 to 6 months, as we envisioned they will, our economy will be the most vulnerable it has ever been since 1958, when we became oil-rent dependant and started drifting towards an increasingly unviable economic model.
PDVSA
Fortunately for some, Emerging Market bonds move in tandem with the US equity markets, so for now your PDVSA bonds are enjoying a good ride as the Dow reaches another historical record. Technically, that could improve even further as we get closer to the 45-day quarantine (last week of May). However, if before that time, US equities suddenly start discounting the coming recession, not only will the Dow and all other indices plunge savagely, but all emerging market bonds will follow them down, just as viciously. Thus, keep an eye out!
PARALLEL UNIVERSE
Finally, with respect to the FX scene, we can’t seem to get across the following historical observation: The parallel rate GOES UP after each and every government dollar-bond placement, no exceptions. Whether you call them Global bonds, “Unidades de Inversión”, “Bono Sur” or PDVSA bonds, there has never been one instance so far, when the parallel rate went down AFTER the final placement of the bonds. Thus, rather than asking the question one more time, please sit down and watch the rate soar, as always!
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