Prieur’s readings (November 10, 2009)

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• Nelson Schwartz ( Inside the global gold frenzy, November 8, 2009.
Long considered the ultimate refuge for nervous investors, gold has climbed as the dollar has steadily weakened, budget deficits have expanded in the United States and Europe, and central banks have continued to pump trillions of dollars into weak economies, creating fears of another asset bubble that will ultimately pop. “It’s not that gold has changed, but gold buyers have changed,” said Suki Cooper, a precious-metals strategist for Barclays Capital. “It’s a structural shift we’re seeing on the investing side, from Asian central banks right down to individual investors buying ingots and coins.”

• William Rees-Mogg (Times Online): Which will come out on top: paper or gold? November 9, 2009.
Printing presses have been pumping out dollars and pounds. Little wonder many are seeking a more trusty store of value.

• Paul Krugman (The New York Times): TIPS and inflation expectations, November 9, 2009.
Treasury inflation-protected securities – bonds whose payouts are indexed to consumer prices – are really useful for economic analysis: they give an objective, market-based measure of expected inflation. But you have to be a bit careful about using them to interpret recent events, because the same financial disruptions that wreaked havoc with many assets also did some funny stuff to TIPS.

• William Pesek (Bloomberg): Roubini versus Rogers is right debate for 2010, November 9, 2009.
Investor Jim Rogers thinks gold will double to at least $2,000 an ounce. Economist Nouriel Roubini says that’s “utter nonsense.” As these well-known market personalities duke it out, they’re doing us a favor by highlighting a critical debate: Which is the bigger threat – inflation or deflation?

• Paul McCulley (PIMCO): The uncomfortable dance between V’ers and U’ers, November 2009.
Around the world, in investment committee meetings and on trading floors (and at the Fed!), one question dominates discussion and debate:  How can it be that risk assets, notably common stocks, have been roaring ahead, presumably discounting a robust V-shaped economic recovery, while Treasury bonds are holding their own with a bull flattening bias, presumably rejecting the V-shaped hypothesis, instead discounting a U-shaped recovery as the base case, with a W-shaped outcome the dominant risk case? Simply put, big-V’ers should be wary of what they wish for. U’ers, meanwhile, must be mindful of just how bubbly risk asset valuations can get, as long as non-big-V data unfold, keeping the Fed friendly. But that’s no reason, in our view, to chase risk assets from currently lofty valuations. To the contrary, the time has come to begin paring exposure to risk assets, and if their prices continue to rise, paring at an accelerated pace.

• Ed Harrison (Credit Writedowns): Consumer credit down, but does it show deleveraging? November 7, 2009.
I have just taken a look at the consumer credit figures for September, released just yesterday by the Federal Reserve. The data do show some modest deleveraging, especially when looking at the recent increase in nominal GDP. However, it is still not clear to me that the scale of deleveraging is great enough to induce a recessionary relapse.

• Mark Thoma (Economist’s View): “Why do central banks have assets?”, November 8, 2009.
If you look at the balance sheet of a central bank, you will see it has liabilities (mostly currency) and assets (normally mostly government bonds/bills). Why do central banks have assets? Do they need them?

• Cesar Bacani (Time): Why some countries are stopping their stimulus, November 9, 2009.
The global crisis and the stimulatory monetary and fiscal policies that were brought to bear against it have overturned all the verities about long-term investing. Exiting from those policies is not likely to reinstate them. How will equities, bonds, commodities, oil, gold, currencies and other investment vehicles fare in the post-crisis, post-stimulus-spending world?

• Frederic Mishkin (Financial Times): Not all bubbles present a risk to the economy, November 9, 2009.
If bubbles are possible now, are they of the dangerous, credit boom variety? In the US and Europe, the answer is no. Tightening monetary policy would not yet make sense.

• Edmund Conway (Telegraph): Bank of England says financiers are fuelling an economic “doom loop”, November 6, 2009.
The banking sector must be overhauled as profoundly as in the wake of the Great Depression or financiers will “game the state” over and over again, the head of the Bank of England’s financial stability arm has warned.

• Kevin Drawbaugh (Reuters): Big bank “break-up” idea gains ground in Congress, November 6, 2009.
An independent U.S. senator on Friday introduced a bill that would give the government the power to identify and break up financial firms that are “too big to fail,” an idea that is catching on. “If an institution is too big to fail, it is too big to exist,” said Senator Bernie Sanders in a statement. We should break them up so they are no longer in a position to bring down the entire economy,” he said.

• Louis Uchitelle (The New York Times): Economists seek to fix a defect in data that overstates the nation’s vigor, November 8, 2009.
A widening gap between data and reality is distorting the government’s picture of the country’s economic health, overstating growth and productivity in ways that could affect the political debate on issues like trade, wages and job creation. The shortcomings of the data-gathering system came through loud and clear here Friday and Saturday at a first-of-its-kind gathering of economists from academia and government determined to come up with a more accurate statistical picture.

Anoop Singh (iMFdirect): Asia’s corporate saving mystery, October 8, 2009.
As Asia starts down the path to recovery, it is going to have to tackle two issues which are constraining its long-term growth potential: firms that save but do not invest and wealthy households that are reluctant to consume.

• Michael Pettis (China Financial Markets): What rebalancing of Chinese and American consumption? November 2, 2009.
So if the overvalued dollar cannot adjust except against the euro, and if the already overvalued euro has to bear the brunt of any further adjustment, will American and European politicians be forced into the “second-best” option of trade protection?  No prizes for guessing what I think.

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