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Five Things You Need to Know: United States of "Chimerica"?, Chinese Monetary Policy Gone Awry?, Carry Trade: Stop Making Sense?, Rent (Out Of) Control?, A Proposition for You?


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. United States of "Chimerica"

"Excess liquidity." You've probably read the phrase a thousand times and have perhaps used it yourself, but what does it really mean? This morning a commentary piece in the Wall Street Journal takes a closer look at the phrase.

  • First, what is "excess liquidity" other than a catch-all phrase to mean "an unusually correlated rise in all asset valuations"?
  • A November 2006 European Central Bank working paper has formulated an answer to what exactly defines "excess liquidity." Turns out measuring it is no simple matter.
  • In modern financial systems in which central bank-created (i.e. "outside"), high-powered money often represents only a tiny fraction of monetary and credit aggregates which are normally considered relevant for explaining aggregate demand, measuring excess liquidity is no simple matter, the authors of the paper noted.
  • In econo-geek-speak, the concept of excess liquidity is "the ratio of a monetary aggregate to nominal GDP," also known by the daunting term - Marshallian K, which is equivalent to the inverse of the velocity of money.
  • So, fast forwarding to the commentary piece in the Journal today by Niall Ferguson and Moritz Schularick, there are a couple of theories floating around about excess liquidity.
  • The first is that "excess liquidity" is due to economic policy before and after the dotcom bubble.
  • Is that correct? The authors say that if that is correct, then using the Marshallian k measure (ratio of a monetary aggregate to nominal GDP), "the supply of money in major economies (e.g., M3) should be outstripping the demand for money (as measured by nominal GDP) by a significant amount. In the U.S., however, the ratio of M3 to GDP has been stable at around 80% since 2002."
  • The second popular theory, the authors say, is that we don't have excess liquidity so much as a shortage of assets created by, among other things, private-equity deals and record corporate buybacks. "In our view, the rapid increase of stock buy-backs and leveraged buyouts is a symptom, not a cause, of something more fundamental," they say.
  • And what might that "something more fundamental" be?
  • "The defining feature of the current world economy is not an excess of liquidity or a shortage of assets, but the gap between company profits and the level of real interest rates," the authors write.
  • "This wedge between the return on capital and the cost of capital is in large measure attributable to the spectacular rise of what we call "Chimerica": the sum of China, the world's most rapidly growing emerging market, and America, the world's most financially advanced developed economy."
  • According to the authors, the threat to this so-called "Chimerica bargain" is one, American protectionism, and two, Chinese monetary policy gone awry... which leads us to today's Number Two...

2. Chinese Monetary Policy Gone Awry?

The People's Bank of China will adopt more measures to curb excess liquidity, XFN-Asia reported this morning.

  • The People's Bank of China will adopt more measures to curb excess liquidity, assistant central bank governor Yi Gang said, according to XFN-Asia news, but (and this is one big important "but") he also told a financial seminar that the rise in liquidity is not as bad as some people suggest.
  • 'Additional measures (to curb liquidity) will be adopted,' Yi said without elaborating.
  • He added, however that "Liquidity is excessive but not as severe as some people say."
  • What was that in Number One again about Chinese monetary policy possibly going awry?
  • Oh yeah, the possibility that the People's Bank of China could lose its grip on monetary policy and allow inflationary pressures to spill over into consumer prices.

3. Carry Trade: Stop Making Sense?

We came across an interesting take on the carry trade from this weekend's Financial Times' Lex column.

  • According to Lex, the number of times the phrase "carry trade" appeared in the media hit record levels this past week, so should investors be fearful?
  • After all, couldn't an unwinding of the carry trade spark a bout of selling similar to last May's sudden downturn in equities?
  • The verdict according to the FT is that the environment remains generally supportive of carry trades:
    - Interest rates, though on the rise globally, remain at historically low levels.
    - Emerging market fundamentals appear to be improving, rather than declining.
    - Despite the loud protests of politicians (see, for example, the upcoming G7 summit), the reality is that currency volatility is also quite low.
  • The FT notes that on the Chicago Merc the net short yet positions represent only 38% of open interest.
  • Moreover, 93% of Japanese household wealth is yen-denominated.
  • The estimate trotted out by the FT is that interest rates in Japan would need to rise by more than two percentage points before the carry trade stops making sense.

4. Rent (Out Of) Control?

A research report based on investor surveys by real estate brokerage company Marcus & Millichap, finds apartment rents are expected to rise for a third-straight year in 2007, while commercial real estate, led by apartments, remains the top choice for future investment growth.

  • While areas with an overbuilt condo market, such as Miami, Las Vegas and parts of California, are expected to show only modest increases in rental prices, the average projection for rent increases nationwide is expected to be 5%, the report said.
  • This would mark the third consecutive year for rent increases.
  • The results are from a survey of more than 1,000 private and institutional investors.
  • More than half of respondents said they were currently invested in apartments, the most frequently cited property type, the survey said.
  • Apartment rental rates were either flat or declining between 2001 and 2005, with the average rental rate climbing just $22 during that period, the report said.
  • Meanwhile, more than half the survey respondents said they believe single-family housing is experiencing a housing bubble, up from 45% in the survey a year ago.
  • Those who believe single-family housing is in a bubble expect a continuing pricing correction of between 10% to 20%.
  • When viewed alongside the overall economy and wage growth - expected to be about 4% this year - the prospects of rising rents coming in at least a full percentage point above that level this year represents a significant takeaway from discretionary income.

5. A Proposition for You?

Last night the Colts easily covered the spread in Super Bowl, but that's hardly where the real gambling action was. The real action was in the proposition bets.

  • Sports-book managers say proposition bets accounted for nearly 40 percent of the more than $600 million wagered on the Super Bowl at Las Vegas and online sports books, according to Bloomberg.
  • Proposition bets are far more complicated than whether the Colts were able to beat the Bears by 7 points.
  • According to Bloomberg, prop bets were sparked by a single wager tied to the Chicago Bears Super Bowl in 1986.
  • That wager was whether Bears lineman William "The Refrigerator'' Perry would score a touchdown.
  • The odds against Perry scoring were 50-1, resulting in a $1,000 return on a $20 bet, Bloomberg said.
  • Last night, proposition bets were available on everything from how long it would take Billy Joel to sing the national anthem to whether Prince would fall off the stage while performing during the halftime show.
  • We bet $2,500 last night that the game's first touchdown would be scored by the kicker. Dang.
No positions in stocks mentioned.

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