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Joseph Calhoun  

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  • A New Secular Bull Market? [View article]
    I don't see secular bull markets as merely or even especially in technical terms. A secular bull is built on cheap valuations and improving fundamentals. The US does not qualify on the first and fundamentals are not improving at a rate that inspires much confidence.
    Feb 24, 2015. 09:31 AM | 1 Like Like |Link to Comment
  • Less Than Zero [View article]
    Well we'll see. If QE works through the portfolio balance channel as Bernanke believed then we might be seeing a positive response to it already. The WSJ is reporting today that inflows to European high yield funds was over 1 billion Euros last week. The European high yield market is not that big though and I don't know if it is enough to turn things around. The question is of course whether the money lent through that channel will be well spent. I would argue that it wasn't in the US with way too much going to fracking companies. But I guess from the typical central banker standpoint, growth is growth whether it is sustainable or not.

    I don't deny that QE "worked" in the US to the extent that it provided funding for low rated companies at the margin that wouldn't have been funded without it. The question is whether it is sustainable or whether it is merely more investment that will end up being wasted as was the case with housing. (Or I guess you could say that it was investment brought forward from the future but either way it wasn't sustainable.) What I want - and I think everyone wants - is growth that is sustainable, not just growth for the sake of growth. And QE isn't getting us there. I've said it many times and I'll say it again: we won't get better monetary policy until we get better fiscal and regulatory policy. And that doesn't look likely in the short term.
    Feb 2, 2015. 03:59 PM | 3 Likes Like |Link to Comment
  • Less Than Zero [View article]

    Are there really no alternatives to QE? You ask "would reducing the size of the money stock, the ECB balance sheet, currency and bank reserves produce more inflation or contribute to deflation?" Well if Europe is like the US where the excess reserves just sit at the Fed, what difference would reducing them make? And yes, I know there is an expectation that negative rates on reserves will push the banks to lend but I don't think we've seen that yet and I bet we won't. What incentive to banks have to make risk loans right now?

    Here's something to consider: Central banks have taken the view that they can manage the business cycle by lowering short term interest rates when the economy slows. But is it the reduced cost of short term money that stimulates the economy or the shape of the yield curve, which steepens as the central bank is easing (short rates fall faster than long rates)? If it is the latter then we've got a problem right now because the yield curve is flattening and short rates can't go down. The only way to make the curve steeper right now is to force up long rates which would require the Fed to do something to raise nominal growth (inflation) expectations. Or they could just sell their longer maturity bonds. Would that be stimulative? Maybe. It would certainly give banks a bigger incentive to lend long term by increasing net interest margins.

    I do not claim to have the answer to our problems (which I don't think are really monetary and won't be solved by any amount of experimental monetary tinkering) but it doesn't appear to me that what we are doing is working. If we want to experiment with monetary policy maybe we ought to move on from this one and try something else.

    I know you'll disagree with what I've written but just consider that a lot of economics is counterintuitive and that maybe QE isn't the only and best alternative. Maybe there are better ways to conduct monetary policy than trying to force feed debt onto a system that has enough thank you very much. My personal choice would be to target a value for the dollar and stick to it come hell or high water. We can argue later about what that value might be.
    Feb 2, 2015. 02:39 PM | 4 Likes Like |Link to Comment
  • The Deflation Threat [View article]
    "The use of quantity of money as a target has not been a success. I'm not sure I would as of today push it as hard as I once did." Milton Friedman, June 7, 2003 in the FT.

    Milton Friedman was a great man for a lot of reasons but he wasn't perfect. Like all prices the value of money is determined by supply AND demand. And as such it isn't just a monetary phenomenon. To the degree that fiscal and regulatory policy affect the demand for money it will affect the value of money and therefore inflation/deflation. The Fed may be able to offset lower demand for money created by lousy fiscal and regulatory policy but that doesn't mean it should. Monetary policy is a blunt tool and it shouldn't be used for micro managing the business cycle.

    I know the arguments for mild inflation but small amount is hard to define and often elusive. I'd say that mild deflation is actually more desirable since over time it raises real purchasing power but why not just aim for a stable currency? That's what this argument is really all about anyway. If you have a stable currency and lousy growth the problem isn't monetary policy. It's something else and using monetary policy to fix it will just cause other problems - as we've found out. I am at least partially agreeable to some of the market monetarist arguments such as NGDP targeting but only because I suspect it would produce a stable currency. That should be the goal and yes I know we'd have to argue about how to define that but that's an argument we should be having.

    Good conversation....
    Jan 26, 2015. 07:07 PM | 2 Likes Like |Link to Comment
  • The Deflation Threat [View article]
    I guess technically you are correct that the US didn't go off a metal standard during the War of 1812 but, as I'm sure you know, the 1st Bank of the US was not rechartered in 1811 and there was a more than doubling of the number of state chartered banks from then to about 1817. It was those state banks the US borrowed from to fund the war and they issued notes well in excess of their metal (specie) reserves. There was even a suspension of specie payments (convertibility). That continued after the war and primarily funded land speculation. It was the establishment of the 2nd Bank of the US - under a bill written and introduced by my ancestor John C. Calhoun - that stopped the inflation when the state banks were reined in. The deflation that followed was a return to sound money. So, yes, technically the US did not go off the metal standard but we did have inflation and a bubble. And yes, you will get deflation when you pop a bubble.

    As for the rest of your response, well, let's just say that we have very different ideas about what causes inflation. As for the Japanese, I'd just ask if you've been there recently. If deflation causes the misery you imply, it is damn hard to find in Tokyo. It is also damn hard to find in their unemployment rate which is lower than ours. Considering their demographic issues, Japanese GDP/capita growth hasn't been that bad during their "lost decades".

    The current state of the oil industry in the US may be an example of deflation but wasn't the fracking industry only viable because of the previous inflation? Oil rose because the dollar fell (that is inflation) persistently from 2003 to 2008. Those high oil prices were the only reason fracking was viable. So is the problem that we ran an inflationary economic policy before and created a bubble or that the bubble is deflating now? You seem to be saying that the bubble is the norm and we should just ignore its causes. I guess the lesson is that if you run an inflationary monetary policy and create bubbles you better never stop.

    Look, I agree that a rapid deflation is not something to be desired. But a gradual deflation is probably not something we should fight. We are an advanced society that can surely find better things to do with our capital than punch holes in the ground. If the fracking industry goes under I'll feel sorry for the folks who bought into that money illusion but we can't run monetary policy for the benefit of the small percentage of our population that toils in the energy industry.
    Jan 26, 2015. 05:26 PM | 1 Like Like |Link to Comment
  • The Deflation Threat [View article]
    I am well aware of the history and also well aware of the literature on deflation, i.e. sticky wages, etc. I don't need to resort to googling.

    You are right that the 19th century saw several deflationary periods. Most of them were due to deviations from the gold standard (war of 1812 and civil war obviously). The deflation occurred when we repegged the dollar back to gold at the previous rate (a mistake in my opinion and the same one the Brits made after WWI).

    But deflation and inflation were not defined the same back then. To my knowledge, general price indexes such as the CPI did not exist back then although commodity price indexes did. To the extent that inflation and deflation were discussed it was in terms of gold (remember the cross of gold speech by William Jennings Bryan). The definition of inflation and deflation as being the movement of a general price index is a 20th century invention. And it is certainly true that most economists (maybe 99% of them) define inflation and deflation today in terms of the general price level.

    As for the effects of deflation on the economy, I am constantly amazed that people who label themselves as capitalists believe that once deflation takes hold that the economy would never reach a new equilibrium. Does a deflationary spiral take prices to zero? Or is there some point where supply and demand would balance once again? I'd say the latter. What we are really discussing when we talk about deflation is where that balance would be achieved. The consensus is that with downward wage rigidities, getting there would create more unemployment than our society could handle or tolerate. I happen to agree with that. But there is a big difference between a large and quick deflation and a gradual deflation. My concern is the former and right now it is a major concern. And I don't think Euro QE will allay the problem; if anything it will make it worse. The latter, a gradual deflation, I think we would adjust to over time.

    Anyway, this wasn't meant to be a whitepaper and it wasn't written for economists. The main point I wanted to make is that inflation and deflation are about the value of money, something I think most people don't understand. If they did, I think it would make for a more informed conversation.
    Jan 26, 2015. 02:53 PM | 3 Likes Like |Link to Comment
  • Monetary Death By Proxy [View article]
    You may not know this fliper but Zero Hedge steals material. I know, I was shocked too but they publish articles all the time without asking permission. This is just one example.
    Jan 10, 2015. 10:20 AM | Likes Like |Link to Comment
  • Questions For 2015 [View article]

    I write every Sunday afternoon. Jeff Snider writes during the week while I have another blog where I write daily. In the new year, I'll get Snider set up on a different feed for SA and start including my other blog feed. Thanks for reading.
    Dec 23, 2014. 09:02 AM | Likes Like |Link to Comment
  • Questions For 2015 [View article]
    Thanks fliper and thanks to you for commenting. The shale call was pretty easy with a rising dollar. But the shale story isn't over yet. I suspect the dollar is in for a reversal sometime in the next year and it will be interesting to see how that affects oil prices and other commodities. It probably depends on why it reverses. All I know for sure is that everyone thinks the dollar is a one way trade and extreme consensus is rarely right (see bonds).
    Dec 23, 2014. 09:01 AM | 1 Like Like |Link to Comment
  • Bubble Behavior? [View article]
    Jeff needs an editor desperately but I just don't have the time. He's as smart as they come though and knows more about the global financial plumbing than anyone I've ever met.
    Nov 18, 2014. 10:16 AM | 1 Like Like |Link to Comment
  • Who You Gonna Believe? [View article]
    We are all guilty of bias but at least if we are aware of it we can try to overcome it. Jeff and I do the best we can. Thanks for your kind words.
    Sep 10, 2014. 03:20 PM | Likes Like |Link to Comment
  • Who You Gonna Believe? [View article]
    Predict a crash? I have problems predicting the past much less the future. I just take things as they come and try to figure out what Mr. Market is whispering. Right now I've got a bond market talking about weak growth and a stock market that sees everything coming up roses. Commodities, as someone pointed out above, aren't exactly perky. And the dollar is winning the tallest midget contest. Generally, I think of bond, currency and commodity markets as smarter money and stock markets as more an emotional barometer where the wisdom of crowds isn't very wise. I have no idea if or when some market might crash.
    Sep 10, 2014. 03:19 PM | Likes Like |Link to Comment
  • It's A Big World Out There [View article]
    I'd have to agree with that fliper. The dollar has been fairly stable the last couple of years despite the folks who said QE was inflationary. It hasn't worked out that way...yet.
    Jul 7, 2014. 08:07 PM | Likes Like |Link to Comment
  • It's A Big World Out There [View article]
    I thought that too....
    Jul 7, 2014. 08:05 PM | Likes Like |Link to Comment
  • Rational Exuberance [View article]

    You are right that the recovery we've had since 2008 would have been a much limper affair had the investment in fracking not happened. My doubts concern the sustainability of the investment. Commodities are inherently volatile and the high cost of extraction using fracking makes these investments only profitable as long as prices remain high. Natural gas prices have fallen due to the supply released from fracking but now companies have shifted their attention to crude oil because fracking gas at these prices is unprofitable (and as I noted above, we've seen a lot of writedowns on those natural gas "investments"). Will the cheap gas stay cheap? If not, those LNG export terminals might end up being very large white elephants. In commodity markets the cure for low prices is low prices and vice versa. We can't have our cake and eat it too. The more successful we are at extracting oil via fracking the more likely it is that the price of crude drops and makes it unprofitable. I think we'd be better off with a stronger dollar and cheaper oil while spending our capex on more productive investments.

    We've had oil busts before - ask any Texan about the 80s - and we'll have them again. When we do, all this investment based on high energy prices will have been wasted.
    Jun 23, 2014. 02:25 PM | 1 Like Like |Link to Comment