Comments on: Neomercantilism and Sloppy Central Bankers

By: DaveinHackensack

DaveinHackensack — Thu, 23 Oct 2008 23:28:12 +0000

There should be a lot of opportunities here for cash-rich companies that aren’t dependent on external financing. I spoke with the CEO of one such (small) company last week, and he mentioned that he was looking to take advantage of the opportunity to buy assets from eager sellers.

By: Estragon

Estragon — Thu, 23 Oct 2008 18:45:41 +0000

Matt,

The flip side of a declining CA deficit is lower US consumption and a rising savings rate. To at least some extent (and possibly at the cost of higher rates), these savings will end up funding the treasury issuance.

By: matt

matt — Wed, 22 Oct 2008 21:58:11 +0000

Sheesh! I’m not a fixed income guy, but when someone tells me that pepsi’s issue is at T+400, I want to buy.

Mr. Merkel:

You mentioned the neomercantilists recycling their dollars back into U.S. assets to control their currencies. The U.S. current account deficit is likely to contract at a time when the Treasury is issuing in record amounts. Given that the Treasury is largely financed externally by dollars that boomerang back from surplus countries, and that a contracting CA deficit is likely to diminish the number of dollars available to boomerang, does that mean that the bailouts are likely to be monetized?

In other words, with a contracting CA deficit, the neomercantilists will have to reinvest a smaller surplus to control their currencies. The increasingly large treasury issues seem to depend on large external financing, which seems unlikely to come in as strongly as when the CA deficit was huge.

Am I missing something big here?

By: PlanMaestro

PlanMaestro — Wed, 22 Oct 2008 16:54:15 +0000

Thanks Steve, liked very much the shorter tail part and no CAT exposure. Will take a look at it.

Given your expertise in P&C, would it be possible a summary of your perspective in the sector?

The companies I know were badly burned at the beginning of the decade and learned their lessons (no CDOs, shorter tail, well reserved) but is difficult to do a comparison of valuations.

By: David Merkel

David Merkel — Wed, 22 Oct 2008 16:40:42 +0000

David, they are both important, and it is hard to untangle the two effects. We don’t have enough data.

By: David Beckworth

David Beckworth — Wed, 22 Oct 2008 15:49:20 +0000

David,

I commented on a paper here
that empirically assess the importance of neomercantilism versus sloppy central bankers.

By: David Merkel

David Merkel — Wed, 22 Oct 2008 15:37:31 +0000

Steve, I commented over at AI on that same phenomenon, they may as well buy long Treasury zeroes to gain duration at those rates.

PlanMaestro, I’ve always liked Assurant — they are very well run and diversified. ACE — I tend to worry about what I don’t know there. Are reserves set properly — much longer-tail in nature. I would rather own PRE, it is more conservative — they don’t discount their reserves, and disciplined about risk taking. True book value is near $90.

By: PlanMaestro

PlanMaestro — Wed, 22 Oct 2008 15:08:44 +0000

David,
why Assurant? would not your prefer Ace at a cheaper M/B valuation, better profitability and low CAT exposure? P&C looks cheap in general though

By: Steven Milos

Steven Milos — Wed, 22 Oct 2008 12:52:29 +0000

David,

Another weird credit market anecdote: Tom Graff reports on Realmoney that 30 year swaps yesterday traded at a 0.5 bps spread. This is obviously nuts, and due to unwinding of positions by leveraged players. If you have the opportunity, probably a great opportunity to pay fixed, and hedge with long Treasuries.

For Halloween this year, somebody ought to dress up as the credit market, it’s much scarier than any fictional vampire or ghost LOL.

Steve