Stanley, I am not sure I trust High Economic Circles as a group. Early on in my career, I worked with Dr. Campbell at Brown Brothers. He was a great down to earth man. For example, he taught me that the 1972 food inflation, before the oil shock, was created by the depletion of anchovies off the coast of Peru, due to El Nino. This is why I try to stay simplistic, and weary of philosophical debates - and, while an optimist, I am quite a pundit, most of the time.
I happen to believe that there are many tools in the tool box, which can be Keynesians or Monetarists. I also believe that expectations play a great role in economic agents behavior, which is now called Behavioral Finance. And then I believe action speaks louder than words. So, targeting, I have no clue - to me it's a moving "target" which depends on many variables, external as well as internal (demographics is a big one). By my book, and this too is quite controversial, I think Bernanke is the best chairman we've ever had. Not only does he effectively deals with what he knows, but as you point out, he uses his judgment to address what he does not know. Part of the unknown stems from the derivatives market, to include the infamous Credit Default Swaps. First issued by JPMorgan in 1997, they were exempted from regulation under the Commodity Futures Modernization Act of 2000 - signed by President Clinton on December 21, and sponsored by Phil Gramm, whose wife Wendy, previous Chair of the CFTC was on the Enron Board at the time... Even Greenspan had this to say about these in 2005: "The new instruments of risk dispersal have enabled the longest and most sophisticated banks, in their credit granting role, to divest themselves of much credit risk by passing it to institutions with far less leverage. Insurance companies, especially those in reinsurance, pension funds, and hedge funds, continue to be willing, at a price, to supply credit protection" - I did not make it up to answer your question, see page 110 of my book.
So, be assured of the fact that I am not oblivious to risk and tales. However, my job is to make money. The only way I know how to is when there is risk - I do not believe in Efficient market Theory. To be clear, I am quite uneasy, short term, for a number of reasons - either observable or not. Longer term, however, I firmly believe we are back in the historical 14 to 26 P/E range, and that equities will outperform bonds by a mile.
Actually, skiman, the Fed will withdraw much of the Excess Reserves IF the Multiplier revives - which I think it will. Remember, this is not a magic number in itself, or even a tool. It's a residual number, i.e. GDP divided by M1 in my case. It's different than the maximum theoretical Multiplier, which is the inverse of the Reserve Requirement currently at 10% (for deposits above $25Mn). Under this maximum Multiplier, $1.6Trillion in Excess Reserves, if used by the Banking system to make loans, would equate into a $16 Trillion GDP... While the real Multiplier had gone down over time, before the crash it was around 1.7: for some $800Bn in reserves, GDP was around $14Bn - round numbers. And Excess Reserves were around $11Bn (not a typo). Another way to look at it is through the concept of Money Velocity, which deals with the growth of GDP relative to the growth of Money. The point is: there is a reason why the Bazooka. Lots of potential enemies out there. Once they all come out of the bushes and the dust settles, the banks will know how much they really need, you will see the Multiplier pick up, and yes, the Fed will mop up the excess. But what comes first is normalization, which the market is anticipating as we progress. Now, there maybe a headline impact which could justifiably lead to a correction, but I would welcome it as a buying opportunity.
skiman, the question always is: what are the odds? Remember that the Fed has a dual mandate, contrary to the ECB: inflation they share, but the Fed watches over job creation as well.
Stanley, honored by your comment. But the multiplier has been dead ever since SP 666. I believe at some point it will revive, when banks have restored their balance sheet. With the "free" 3% to 5% net interest margin they are currently generating, it may take a couple of years, but it will happen. Actually, one thing I did not mention was the debt-to-net worth ratio in my table above. Note that it is at 20.3%, lower than at any time since the early 2000, and down from the Faberesque 28% peak in 2008. The time it will take is the reason why I think we will get to 2000, and then some because the Fed will lag, not lead. BTW, this table is one that the Fed often refers to.
Chris, thanks for chipping in - I got a little worried about my overexposure to Housing Stocks when I felt a consensus forming. That's what we are going to have to deal with - I want the Wall of Worry back.
S&P 500 Target 2000: Going Once, Going Twice ... Part II [View article]
S&P 500 Target 2000: Going Once, Going Twice... [View article]
S&P 500 Target 2000: Going Once, Going Twice... [View article]
I happen to believe that there are many tools in the tool box, which can be Keynesians or Monetarists. I also believe that expectations play a great role in economic agents behavior, which is now called Behavioral Finance. And then I believe action speaks louder than words. So, targeting, I have no clue - to me it's a moving "target" which depends on many variables, external as well as internal (demographics is a big one). By my book, and this too is quite controversial, I think Bernanke is the best chairman we've ever had. Not only does he effectively deals with what he knows, but as you point out, he uses his judgment to address what he does not know. Part of the unknown stems from the derivatives market, to include the infamous Credit Default Swaps. First issued by JPMorgan in 1997, they were exempted from regulation under the Commodity Futures Modernization Act of 2000 - signed by President Clinton on December 21, and sponsored by Phil Gramm, whose wife Wendy, previous Chair of the CFTC was on the Enron Board at the time... Even Greenspan had this to say about these in 2005: "The new instruments of risk dispersal have enabled the longest and most sophisticated banks, in their credit granting role, to divest themselves of much credit risk by passing it to institutions with far less leverage. Insurance companies, especially those in reinsurance, pension funds, and hedge funds, continue to be willing, at a price, to supply credit protection" - I did not make it up to answer your question, see page 110 of my book.
So, be assured of the fact that I am not oblivious to risk and tales. However, my job is to make money. The only way I know how to is when there is risk - I do not believe in Efficient market Theory. To be clear, I am quite uneasy, short term, for a number of reasons - either observable or not. Longer term, however, I firmly believe we are back in the historical 14 to 26 P/E range, and that equities will outperform bonds by a mile.
S&P 500 Target 2000: Going Once, Going Twice... [View article]
S&P 500 Target 2000: Going Once, Going Twice... [View article]
S&P 500 Target 2000: Going Once, Going Twice... [View article]
S&P 500 Target 2000: Going Once, Going Twice... [View article]
S&P 500 Target 2000: Going Once, Going Twice... [View article]
S&P 500 Target 2000: Going Once, Going Twice... [View article]
S&P 500 Target 2000: Going Once, Going Twice... [View article]
S&P Target 1600: Buy 'Em When They're Sleepin' And Don't Wake Me Up Until We Get There [View article]
S&P Target 1600: Buy 'Em When They're Sleepin' And Don't Wake Me Up Until We Get There [View article]
S&P Target 1600: Buy 'Em When They're Sleepin' And Don't Wake Me Up Until We Get There [View article]
It's 3:55 Thursday 8/2 - I Am Covering Shorts @ SnP 1365 And DJII 12880 [View instapost]
S&P Target 1600: Buy 'Em When They're Sleepin' And Don't Wake Me Up Until We Get There [View article]