Asset Reflation Does Not Signal Recovery for U.S.'s Collapsed Economy 51 comments
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If all the highly informed people who’ve been waging a war the past six months against rising stock prices would just step back for a moment, they would perhaps understand better that their macro views are supported, not negated, by asset reflation. For it’s this asset reflation that hints at the singular and doomed strategy of our monetary policy, and its overlay on our collapsed economy.
Just so that I’m clear: there is no macroeconomic recovery occurring in the United States. What’s unfolding currently is snap-back from last year’s crash, which led us to the bottom of a spider-hole. The positive bits of macro data, dribbling out here and there, are really just about getting us back to zero. A kind of steady-state, expected to carry on for some time to come. And that’s a best-case scenario.
You can think of the US economy as a kind of defunct amusement park, over which the FED has poured trillions of dollars of syrupy goo. The caramel candy is there for tasting, but it doesn’t turn the machines back on. The ferris wheel is silent. Since WW2, Washington has always been able to call upon Housing and Autos as the two areas to stimulate, to pull the country out of recessions. Of course, we just did that in super-sized fashion 6-7 years ago, to extract ourselves from the last recession. So, it’s kind of sad to see policy makers trying this again. Failed thinkers promote failed playbooks.
Our society’s hierarchy rests in part upon the following assumption: that the intellectual capacity of the chairman of the Federal Reserve, with his PhD and his white papers, is superior to that of a mortgage broker from Orange County, California. I think we need an adjustment to this type of assumption. Because the spread I see opening up everywhere in the US economy is what I call the Prestige-Performance gap, whereby the assertions of our elite no longer comport with observable reality. If the chairman of the Federal Reserve will not allow that the greatest credit bubble ever has now burst, or that it ever existed, then this partially explains why he would think stuffing the banking system with fresh capital would revive the economy.
Asset reflation therefore, in equities and especially in gold, should be seen not as exuberance but merely as part of the same chaos in pricing unleashed by The Federal Reserve, starting earlier this decade. As so clearly outlined in the recent data on employment, credit demand, consumer spending, and our (in)ability to save there is little to no prospect for a sustained economic recovery for one simple reason: Americans are now trapped by their debt.
For those who recognize a rising stock market as evidence of disarray, what we should anticipate now is the recognition phase where the wider public finally comes to understand the nature of our inflationary depression. My marker has been 100 dollar oil and 15% unemployment in California. That should finally get the message across. But other combinations will do: 1300 dollar gold, 1300 on the SPX, and more problems with Commercial Real Estate will also suffice. Like the prestige-performance gap, the divergence between the economy and asset prices apparently has to become even more grotesque before people will understand.
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This article has 51 comments:
However, I wish you could "connect the dots" a bit more as to why this "disarray" produces such a strong upward trend in stock prices. Are investors so easily tricked by official sleight-of-hand? Or, more odiously, are prices being artificially pumped by certain privileged Wall Street firms in a conspiracy to defraud innocent investors even further?
Higher financial/commodity asset prices disproportionately benefit the tiny governing elites and those who monetize their connectivity with the WashDc-Wall ST Regime. It matters little in practice whether asset inflation is the result of intrinsic wealth creation or a change in the exchange rate between favored asset classes and the rapidly debasing dollar. Certainly, it is much easier and far quicker to debase the currency than increase the wealth and therefore income and job creating capacity of the US .
High and higher/unemployment is a direct and inevitable consequence of the resource mal-allocation, income transfer, risk shifting and reward appropriation policies of the Regime. The Bosses are fully aware that the true unemployment/underempl... rate already far exceeds 15% in California(and most large states) but care nothing. The lower class can be bribed with money illusion , drugged with digital addictions and diverted by the propaganda of class warfare; the disorganized and demoralized middle class can be ignored or coerced and punished if there is any revolt.
The Regime cares as little for the personal and property rights, material quality of life and physical security of ordinary Americans as do its fellow-traveling Regimes in Russia, Iran or Venezuela(the 3 Nations before whom the Regime grovels the most).
How big of a shock the investing or general public requires to knock back some reality into the market is unclear. But I`d hope that time of recognition comes sooner rather than later because the further out this can is kicked, the bigger the eventual kickback will be.
For more analysis, check out my blog: youngandinvested.com
I'm predicting the US's Argentina moment will take place in 2011 but not before one final "fool's rally" in Treasuries and the dollar:
hubpages.com/hub/Peak-...
We are in a classic liquidity trap, aggravated by exhausted savings; both banks, who are contracting lending, and consumers want to rebuild their respective balance sheets and have a strong preference for cash and savings. This is immutable.
As Volcker noted, the banks are generally avoiding traditional financial intermediation activities but are more than happy to engage in their preferred hobby/business of casino activities, short-term trading of securities, currencies and derivatives. I emphasize short term because the banks understand better than anyone else the true state of their spurious balance sheets and only want to engage in activities where they can readily convert "investments" into cash. Their keeping a tight leash on cash.
That this is so is seen in the simultaneous rise in prices of equities, debt, gold; all are going up and all are correlated. Each player in the casino has his own view of the world; some think there will a recovery; some think there will be deflation; some think there will be inflation. But what they have in common is a willingness to use the house's credit line to engage in their favorite pastime, seen in the value of the house's chips(dollars) falling in value.
Unfortunately, rather than increasing consumption, folks have poured this liquidity back into assets.
Hence we have asset inflation in parallel with higher unemployment.
Sorry Fed, your scheme didn't work.
Thanks, Gregor for your informative article.
>
> However, I wish you could "connect the dots" a bit more as to why this "disarray" produces such a strong upward trend in stock prices. Are investors so easily tricked by official sleight-of-hand? Or, more odiously, are prices being artificially pumped by certain privileged Wall Street firms in a conspiracy to defraud innocent investors even further? >
--
I know your question was directed to our talented author, but hopefully you won't mind me throwing out a theory as well.
It seems to me that the money they are throwing back into the economy is pushing up prices for at least a few reasons. It is probably giving confidence to some investors who are expecting a strong rebound. Others are worried about inflation or even hyper inflation. People are pushed out of holding cash if the dollar is likely to continue devaluing. It is not only earning near zero interest, but is becoming worth less and less the longer it sits there. Stocks, as a share in the ownership of companies with fixed assets and hopefully earning power that will eventually go up along with the inflation rate are considered by many to be a hedge against that loss in value. Other investment options, such as real estate would normally be a good risk, but some of the REITS etc have already gone up in price and there is risk there as well given the large number of foreclosures, capacity overhang and interest rate resets coming up.
Someone posted a chart on here a couple of days or so ago showing the stock market prices adjusted for the value of the dollar vs a market basket of currencies. Because of the significant drop in the dollar already, the "true" market prices had gone up a little bit, but not that much from the March bottoms, certainly far less than it has gone up in nominal terms. It would be interested to see that chart in terms of pricing vs gold, though the gold prices have their own supply demand curves and haven't necessarily been steady either.
"Our society’s hierarchy rests in part upon the following assumption: that the intellectual capacity of the chairman of the Federal Reserve, with his PhD and his white papers, is superior to that of a mortgage broker from Orange County, California. I think we need an adjustment to this type of assumption."
How about: The leadership abilities and economic acumen of a former community organizer who doesn't have a PhD is superior to everyone in the country? I think we need an adjustment to that type of assumption or we are destined to be ruled by Tsars.
The rest of the world has figured it out, time for us to "take off the rose colored shades". The heart can't bleed much longer and universities can only brainwash intellectuals to a certain point in which logic takes precedent.
Are we finally coming around to reality? Not in the markets! Those buying in to all of this...are bound to get burned.
www.lewrockwell.com/or...#
On Oct 06 03:38 AM Alan Young wrote:
> Brilliant concept, and "defunct amusement park" a delightful metaphor.
>
> However, I wish you could "connect the dots" a bit more as to why
> this "disarray" produces such a strong upward trend in stock prices.
> Are investors so easily tricked by official sleight-of-hand? Or,
> more odiously, are prices being artificially pumped by certain privileged
> Wall Street firms in a conspiracy to defraud innocent investors even
> further?
Perhaps now more than ever, the new money is being funneled towards only the most creditworthy of borrowers (which make up an ever smaller segment of the population).
The typical creditworthy borrower today is interested not in adding to his houseful of stuff, but rather in rebuilding his battered nest egg. As such, the new money is bidding up risk assets -- equities, bonds, commodities, etc.
"Shovel-ready" concepts are great if we were still in the 1930s but skill sets have evolved and the segments that were hardest hit were white-collar technology, finance and engineering jobs which were outsourced and/or replaced by H1Bs in the last 7-8 years.
What would have been more effective would be targeting "keyboard-ready" or "network-ready" jobs to get many highly skilled people back on the merry-go-round and out of underemployment (which is not tracked but is a more highly accurate barometer of the consumer economy than unemployment).
Using your analogy, at best we will be on a merry-go-round economy where some will think we are moving forward but really we are stagnant and just going around in circles. Others will just be able to watch the merry-go-round, wishing they were at least part of it.
One of the cornerstones of American capitalism was the separation of banking from commerce. This principle is of utmost importance in any free market economy which has a central bank and a banking cartel. This separation was broken with the Citi Corp - Travelers merger and has been further eroded with the conversion of Goldman and Morgan into bank holding companies and the mergers of BofA and Merrill. The banking cartel is now being run by investment bankers, who are really commercial entities tied loosely to the financial system. This perversion of our capitalist system and the new status of the investment bankers who by their nature are gamblers and advisors rather than bankers, as systemically important and above the rules applied to all other capitalist entities has caused an acceleration of the distortion caused by Fed interference. A Fed owned by the bankers is a necessary evil, a Fed owned by Wall St. is a quick path to utter systemic failure.
The privileged, whether politically, or financially through being at the top in a business that cannot be allowed to fail, do not care too much, because whatever happens they will have more than enough. For example, at the CEO level, pay is determined AFTER taxes, so whatever they become, the pay before tax will be adjusted to allow for it.
The ordinary straight honest hard-working majority will be shafted as always by those proclaiming how good they are in looking out for the people in a great democratic society like the US, GB, Europe or wherever. The truth is less noble: they look after number one first and foremost, and if anyone else gets a piece, then it's because their greedy hands couldn't lift it with all that was already in them.
These competitor nations outwitted the supposed 'great' Western deal-makers, especially the USA. They are not beyond competitors and revealing themselves for what they always were. Russia and China stated such things clearly in 1993, our leadership wasn't listening.
Nice summary Mr. MacDonald. I increasingly enjoy your insights and calling a spade a spade. Here are my insights on Russo-Chinese alliance posted here on SA for many months seekingalpha.com/user/... . Now my fellow investors. I have an operational solutions plan to educate the public, build consensus, solve problem and influence elections. In 2008 I formed a think tank. Many would recognize the names here from SA. Most of you have now seen the beta of a distributed social network, that site is theburningplatform.com . We solved the technology barriers of entry for writers and activists.
If you want to actually do something about these problems instead of waiting for the tidal wave to come crashing over your heads in the next few years, feel free to email me. We can all either be a part of history and how we shape the end of this era and start of a new one or bite our nails off from the cheap seats.
On Oct 06 08:04 AM jimboy wrote:
> Good, well-written fare from you as always. Solid recoveries can
> only follow recessions that actually correct the problems of the
> previous boom. To use a gross medical analogy: it's the difference
> between cleaning and disinfecting a wound and just sticking on the
> bandage and taking a couple of painkillers. We've had two boom/bust
> cycles in succession where the Advil's come out but no one has cleaned
> out the puss and it's getting messy.
> I'm predicting the US's Argentina moment will take place in 2011
> but not before one final "fool's rally" in Treasuries and the dollar:
>
> hubpages.com/hub/Peak-...
The WORST thing that could happen to the U.S. is for the Dow to hit 20,000 - because since there is no way for REAL valuations to increase in this dying economy that it would simply indicate that hyperinflation has taken hold.
It is IMPERATIVE for anyone with holdings in USD's to find a RELIABLE source for U.S. inflation data (most people choose John Williams' shadowstats.com). Without reliable inflation data, the NOMINAL prices in U.S. equity markets are totally meaningless.
P.S. If I recall correctly, I believe that Williams is now pegging current U.S. inflation above 7%.
On Oct 06 03:38 AM Alan Young wrote:
> Brilliant concept, and "defunct amusement park" a delightful metaphor.
>
> However, I wish you could "connect the dots" a bit more as to why
> this "disarray" produces such a strong upward trend in stock prices.
> Are investors so easily tricked by official sleight-of-hand? Or,
> more odiously, are prices being artificially pumped by certain privileged
> Wall Street firms in a conspiracy to defraud innocent investors even
> further?
On Oct 06 10:56 AM Philip Gvinter wrote:
> I agree with all of the point made above but would like to add one
> important aspect of the current events which seems to have been overlooked.
>
>
> One of the cornerstones of American capitalism was the separation
> of banking from commerce. This principle is of utmost importance
> in any free market economy which has a central bank and a banking
> cartel. This separation was broken with the Citi Corp - Travelers
> merger and has been further eroded with the conversion of Goldman
> and Morgan into bank holding companies and the mergers of BofA and
> Merrill. The banking cartel is now being run by investment bankers,
> who are really commercial entities tied loosely to the financial
> system. This perversion of our capitalist system and the new status
> of the investment bankers who by their nature are gamblers and advisors
> rather than bankers, as systemically important and above the rules
> applied to all other capitalist entities has caused an acceleration
> of the distortion caused by Fed interference. A Fed owned by the
> bankers is a necessary evil, a Fed owned by Wall St. is a quick
> path to utter systemic failure.
You're at the park and hungry, you want a good meal that will sustain you throughout your long visit. However, the establishment has insisted you eat lots of cheap and subsidized cotton candy because it will "get you up and going faster". This results in an immediate pleasure with the taste, fast energy, and perception of "recovery from hunger". However, you soon discover that "quick fix recovery" has a nasty and aggressively fast downside to it...the sugar "crash". It's just not sustainable.
"When in the course of human events it becomes necessary...it is their right...it is their duty...."
I don't think that it was the "folks" that poured their money back into assets. A huge pile of money, for those few folds that still have any, remains on the sidelines as we've heard said over and over. The stimulus package went to the banks and they aren't lending their hoard of stimulus dollars out to anyone. If anything, the liquidity that is supporting the baseless increase in the stock market is coming from the banks through their hedge funds and derivatives in an attempt to recapture as much profit as possible to cover their toxic mortgage losses. Stealing from Peter to pay Paul, I'd say, and a pox on their houses, I pray.
Thanks for bringing into the comments one of the most important aspects of our current and past economic problems. Until we can break the connection between politicians and the financial institutions we will continue to have disasters as we are now experiencing. Eliminate the corporate contributions; break up the banks to manageable "fail-able" sizes; and anchor the dollar to a standard, either to an international currency basket or back to a gold standard.
What white swan could arise from the ashes? That's what we as investors should be looking for. You'll miss these opportunities if you are constantly expecting the world to end.
Our Central Bank does not control our economy. Because of politics they can only try to respond to an environment created by extremists in both political parties. If you want to see an economy run by economists look at Singapore or Beijing. Economics is not brain surgery.
When a bubble develops Central Banks usually spot it, but are unwilling to take drastic action because of the political backlash. They take narrow money to zero and wait for the train to come into the station. When markets begin to fall, if it is orderly, they sit. If it becomes a panic they react. Bernanke bypassing the banking system was a brilliant move.
I need to get to the golf course and do something useful. Rising narrow money combined with single digit normalized p/e ratios will overcome the momentum factor in a financial panic. A rising stock market is a "real" economic event. It creates new wealth and credit on a massive scale. This is why it is so difficult for central banks to control bubbles. The rising market creates new credit faster than the central bank can tighten interest rates.
You are in a multi year bull market coming out of a 1973-1974 recessionary environment. Fighting this is going to be a disaster for your retirement accounts. Even socialist economies have bull markets. Leave the politics alone. It doesnt help.
The point he brings up is the point all the deflationists miss. With the Fed flooding the financial system with money, it is leading to the worst type of inflation - asset inflation!
Asset inflation only leads to bubbles (like US stocks and Treasuries right now) and then busts which end up hurting not the elite, but the average American.
new party eh?
well in 1980 (some people didn't like either jim c's failed administration or ronny's kowtowing to the millionaire class) we had mr. anderson's american party getting 5% of the vote but it doesn't seem to have gone anywhere since.
time for another try?
> jack
I've been asking the question of why because the markets rallying just seems like insanity.
The really crazy part is that the people who should be running for cover are going out and buying a new car.
I'm seeing lots of phoney baloney infomercials for debt rescue, along with reverse mortgage and yes...even home equity loan adverts.
The FED and banksters seem to be gearing up to throw some more debt on the fire to pump up the market over the holidays.
Your perspective makes sense and I've said it in other ways.
Get money off the sidelines to make the banks and funds solvent to rob the average investor once again before reality REALLY catches up with perception.
"Our society’s hierarchy rests in part upon the following assumption: that the intellectual capacity of the chairman of the Federal Reserve, with his PhD and his white papers, is superior to that of a mortgage broker from Orange County, California. I think we need an adjustment to this type of assumption."
He is of superior intelligence backed up with groups of Think Tankers that engineer societies through fiscal and political policies. Do you really think this is just a business cycle? Or maybe it's still the sub-prime mortgages. These social architect's map out strategies 5,10,20,30,50 years ahead. They play out every scenario possible with quantum fluidity. For every action they have a thousand possible reactions.
Gregor Macdonald.... jumpin' Jesis, you're not a Scot are ya'? Now I know something you and William Wallace have in common.
Great job dude!
> I can't believe there has not been one reader willing to critically
> evaluate this nonsense.<
Why don't you consider the possibility that it's not nonsense. You won't feel so bitter once you've seen the light.
On Oct 06 09:32 AM Barbarous Relic wrote:
> When newly printed money enters the economy, it is not received by
> all participants simultaneously -- the lucky early recipients gain
> the benefit at the expense of everyone else. It is the buying preferences
> of the early recipient which determines where higher prices will
> be seen.
>
> Perhaps now more than ever, the new money is being funneled towards
> only the most creditworthy of borrowers (which make up an ever smaller
> segment of the population).
>
> The typical creditworthy borrower today is interested not in adding
> to his houseful of stuff, but rather in rebuilding his battered nest
> egg. As such, the new money is bidding up risk assets -- equities,
> bonds, commodities, etc.
the typical earnings projection on the S&P 500 for 2011 is between $90 and $105..Gee..put a 16x multiple on that and it beats making 2% at Ally bank (ex GMAC).
There was a major study completed recently and available on the net regarding over 100 previous financial crisis..the summary, those countries that did little paid the biggest long term costs..they are following the research..the FRB is probably targeting inflation for 2-3% and then hoping to be able to control it at that point..drop inflation data and stock prices into excel from st. louis fed..the stock market does not respond until inflation starts..its not something we as investors need to deal with at this moment..
good luck..
Additionally, you wrote, "A rising stock market is a "real" economic event. It creates new wealth and credit on a massive scale." OK, then the real question is...who's getting the "new wealth" when 16 to 18% of consumers are out of jobs and losing their homes? 10 to 1 that the banks' hedge funds and derivatives are soaking up the huge majority of the new wealth to add to their bonuses.
On Oct 06 11:02 PM The Recusant wrote:
> Additionally, you wrote, "A rising stock market is a "real" economic
> event. It creates new wealth and credit on a massive scale." OK,
> then the real question is...who's getting the "new wealth" when 16
> to 18% of consumers are out of jobs and losing their homes? 10 to
> 1 that the banks' hedge funds and derivatives are soaking up the
> huge majority of the new wealth to add to their bonuses.
Mr. Macdonald takes too narrow a view of the measures taken to stabilize the banks, credit markets and the economy since July of last year. With all the attendant flaws, the triggering of a controlled crisis in July of 2008 and the monetary and fiscal stimulus that followed across the G8 have stabilized banking, credit availability and the global economy (albeit artificially) giving the governments, central banks, financial markets and the private sector a reasonable opportunity to execute a recovery and the foundation of a more healthy economy than the one that exist now or that existed in 2005 before the crisis began to unfold. In short, the first stage was to trigger a controlled crisis; the second stage was to stabilize matters to establish a foundation from which further stages can be executed.
Mr. Macdonald would be correct if the stimulus measures were seen as the sole response to the crisis as the inflationary depression to which he refers (a replay with passion of the stagflation of the 1970s) would likely then ensue. He is also right that such a inflationary depression may result in any case if the difficult task of maintaining sufficient stimulus for a sufficient time and then to transition to appropriate later stages towards the goal of a sustained recovery are not conceived and executed adequately. The better view, however, is that the steps taken to date at least allow for the possibility that the necessary long and many staged recovery can be achieved. At least our attention now can focus on achieving the profound restructuring over an extended period that is needed rather that the alternative (thrashing about in hyperinflation or in a deflationary collapse) that otherwise faced us in short order.
Clearly the huge secularized debt and derivative bubble must be resolved over time. This will undoubtedly entail transferring it in part to governments to be monetizing or made part of national debts. In part this bubble must continue to be carried by the banks, hedge funds and near banks that hold it or be defaulted by them. The key is that all this be done in an orderly fashion over time and, to that end, the reflation to which Mr. Macdonald refers can be useful in moderation. Like stimulus, reflation is a limited tool and not the solution to our problems in and of itself.
On Oct 06 10:10 PM Zell wrote:
> From the article:
>
> "Our society’s hierarchy rests in part upon the following assumption:
> that the intellectual capacity of the chairman of the Federal Reserve,
> with his PhD and his white papers, is superior to that of a mortgage
> broker from Orange County, California. I think we need an adjustment
> to this type of assumption."
>
> He is of superior intelligence backed up with groups of Think Tankers
> that engineer societies through fiscal and political policies. Do
> you really think this is just a business cycle? Or maybe it's still
> the sub-prime mortgages. These social architect's map out strategies
> 5,10,20,30,50 years ahead. They play out every scenario possible
> with quantum fluidity. For every action they have a thousand possible
> reactions.
You have put it much more clearly and succinctly than I have been able to.
Thank you very much.
D
On Oct 06 09:32 AM Barbarous Relic wrote:
> When newly printed money enters the economy, it is not received by
> all participants simultaneously -- the lucky early recipients gain
> the benefit at the expense of everyone else. It is the buying preferences
> of the early recipient which determines where higher prices will
> be seen.
>
> Perhaps now more than ever, the new money is being funneled towards
> only the most creditworthy of borrowers (which make up an ever smaller
> segment of the population).
>
> The typical creditworthy borrower today is interested not in adding
> to his houseful of stuff, but rather in rebuilding his battered nest
> egg. As such, the new money is bidding up risk assets -- equities,
> bonds, commodities, etc.
i would highly recommend readers of seeking alpha to read the research papers published by the FRB and the other Central Banks. The topics of these papers are assigned by policy makers on issues that they are confronting..Yes, the research can be wrong..But, in the last 20 years the amount of accurate raw data that has been accumulated allows for a reasonable guess at what the dynamic factors are..this is why China and Singapore have been able to achieve their development goals..It helps if you dont have to worry about vested interests.
You are totally right in seeing that "who gets the initial wealth" is an important piece of the puzzle..The top 20% of families control almost 40% of consumer disposable income..they are the shareholders..their wealth increases by 50-100% in a year they start to fully spend their current incomes..this kick starts the business recovery..
why not buy a bigger house when your net worth has just increased dramatically..real estate and all asset classes are subject to arbitrage..when one increases money starts to leak into investment vehicles that have not participated in the reflation of asset prices..
Do socialist regimes offer a better long term outlook for their citizens..the current evidence is not..
On Oct 06 11:02 PM The Recusant wrote:
> PompanoFrog -- Greenspan admitted years ago that they manipulate
> the gold price in order to alleviate pressure on the dollar. And
> are we so naive as to believe that the central banks, Fed, Bank for
> International Settlements, and IMF do not control as much as they
> can when billions of dollars are at stake every day? If not, then
> why are many of their meetings held behind closed doors and secret?
>
>
> Additionally, you wrote, "A rising stock market is a "real" economic
> event. It creates new wealth and credit on a massive scale." OK,
> then the real question is...who's getting the "new wealth" when 16
> to 18% of consumers are out of jobs and losing their homes? 10 to
> 1 that the banks' hedge funds and derivatives are soaking up the
> huge majority of the new wealth to add to their bonuses.
I've taken a few shots this year on my blog, describing how the US got itself to such an awful place. People might want to read my March 24 post The Seigniorage Curse
gregor.us/oil/the-seig.../
Best,
Gregor