brianoh

Obama's Big Win at G20: Europeans Lose Control of IMF

I love reading these lines about the brilliant Obama. What has he done other than be elected and create a massive deficit? I don't have any opinion of Obama - yet. When he has been in office for say 2 years, I may have an opinion, and it may be a good one and it may not be. As for the IMF, it is the Fed Reserve that determines the direction of the US economy, and it has been the US economy that has determined the direction of the world economy. Together with the SEC and Wall Street Banks, they have made a mighty mess. I doubt the IMF is going to fix that. Whether Obama's budget and money printing fixes things is yet to be seen.

Recent Policy Decisions and a Greater Depression

The problem as I see it is one of fundamental direction. It is rather like the question in 2001 – should I buy the Dow or is it way-overpriced? It was overpriced. If one gets the overall strategy wrong, then the medium and long-term results are going to be wrong. Needless to say that with the Dow, many traders still made money during the 2001-2008 period even though the Dow was overpriced. These people were not the long-term holders however.

The analogy is similar with the economy. The overall strategy is wrong (Keynesian), however some of the results may still be favorable on a short-term basis. Quite simply, we have the wrong people running the economy – Cheap-Credit Academics.

Greenspan is a perfect example of this. In his recent speech to the NY Economics Club he was basically saying (in part) that we need high stock prices so that we can get credit creation. This I presume explains his moves to prop-up the Dow bubble in 2001 and created the problem that brought us here. Even I can see that it is ludicrous to pump-up the Dow in order to provide the mechanism for credit. The Dow has to earn the level that it has, not be pushed there by Greenspan. We now have a Greenspan protégé as Treasury Secretary.

There are many negative consequences from this “Keynesianism God Mad”. One of the main problems is an imbalance in the economy that was caused by fictitious wealth. There are many, many businesses that need to down-size, and this will not happen overnight.

While the US has the wrong people charting the course, the long-term results will be negative. To generalize the problem – the problems caused by cheap credit cannot be solved by more of the same. The economy requires restructuring and that will not happen until the NORMAL supply-demand dynamics are allowed to play-out. Prop-ups, bailouts, mailouts, rate drops, stimulant measures, and deficit spending all create a wrong-sized economy that is unsustainable long term. In addition, the losses in the financial system that resulted from the misguided policies need to be written off, not propped-up.

It is extremely difficult to make economic decisions knowing that the policymakers are manipulating the free market at unprecedented levels. Time to let the chips lie where they fall and let industries survive or fail as a result of their own decisions.

U.S. Dollar: The Next Bubble to Pop

Your article says : "3-month Treasury yields have plummeted from 5% in July 2007 to (gasp!) 0.02% right now! The 1-month yield is 0.01% and 1-year 0.61%. This is fairly ridiculous. I fail to understand why any investor worth their salt would not just get cash (the physical paper bills, not the electronic kind) and either hold it or buy assets. "

I am surprised that you don't see why investors don't buy assets. Obviously they don't trust the value of those assets. What assets would you suggest they buy?

The US strategy for the past decade has been to inflate asset prices to absorb foreign investment and fund the US economy. The bursting of the housing bubble saw the end of that upward spiral. The policy is obviously highly flawed, because: a) it cannot continue forever, and b) it economically disenfranchises future generations.

Nevertheless, I am inclined to think in the short term that "you can't fight the Fed". Or, in other words, the Fed will destroy the US economy for short-term gain.

S&P Set for 50%+ Gains? Not So Fast, UBS

The problem that we face as we all know is inflated asset prices being restored to more normal levels. In 2001, US stocks were valued at a PE ratio of 30 (Dow). For that to be sustained, other income-earning assets had to be inflated to a similar level (ie. R/E). Greenspan caused these problems with cheap plentiful credit, and the resulting bursting of the R/E bubble followed by stocks. Historically, stocks have had PE ratios circa 15, not 30. I still hear some economic commentators talking in terms of PER 30. Obviously that does not reward investment and price risk. In a recession, the DOW deserves a price of something like 6,000 and in normal times, perhaps 7,000 to 8,000. Mister Market is simply re-pricing the inflated assets. The impact of that re-pricing is obviously impacting the inflated and cheap liquidity levels that were based on those inflated asset prices (assets prices fall and must be liquidated). Greenspan and his cronies obviously caused these problems, and that “era of largest wealth creation” is being shown for what it really was – asset-inflation. Pretty simple really. As the Fed attempts to re-inflate those asset prices it simply causes a bubble in bonds, because people have already been conned once. One of the Fed mandates is price stability and they have simply applied that selectively to consumer prices and cheap imports have sustained that. What the US needs is some proper economists to stand up and be counted. I have not seen much evidence of that. It is all prop-up, bail-out, and mail-out, and funded by the people that save money to rescue the people that have debased their cash.

Saab May Be GM's Best Hope for the Future

Very interesting that GM et al had no business plan for recovery. Trouble is, we live in changing times – “which way is the consumer heading?”. They run the risk of ditching the old model based on “yank tanks”, only to see it revived again. The structural problems are so great that it almost looks worthwhile to go chapter 7 and disappear. The old business model is unworkable in the present market – hourly rates, pensions, healthcare, products. On the other hand, the politicians will not want to see these status symbols of capitalism prove to be a failed concept. How these problems came to be is difficult to comprehend. However, the US (Treasury, Congress, Fed Reserve) appear to have abandoned conservative economic management and simply rely on the fact that the USD is the reserve currency. Productivity has been replaced by asset-inflation. Now that that has proven to have failed, they now pursue it again to attempt to prop up prices. This begs the question of: “who benefits from these policies?”

Coming Soon: The $600 Trillion Derivatives Emergency Meeting

As I see it, most of these CDS contracts are just gambles. Where there is a default of the underlying debt, the "guarantor" of the CDS is liable. This then becomes a problem where the CDS is not a gamble, and is used as insurance for a real debt. If the "guarantor" of the CDS has insufficient funds (bankrupt), the CDS contracts will be paid-out pro-rata. The main problem is where the CDS is not a gamble, but is a real debt. If this is the way it works, isn't it time the law was changed to give the holders of debt priority over all other CDS contracts? Please tell me what I am missing.

The U.S. Economy Is Still on Life Support

As I see it, the problems and causes are quite simple. The desire of the US Fed and Treasury to inflate assets and keep them that way. Obviously that is not wealth creation, it is asset-inflation. Quite simply, stocks rose too high up to 2000/2001 - circa 800% in circa 10 years. As they were about to come back to more normal PE ratios, Greenspan decided that would cause a recession and to prevent that he created the housing bubble. These Keynesian economists are destroying the US economy with phony assets that fuel consumption until the bubble bursts. Time for some real economists to start on the restructure of the US economy to create some real wealth. Trouble is, all of the people with power want short-term solutions, and that means bailouts and printing of money - socialization of the losses. Bernanke at long last recognizes this and now talks of preventing asset bubbles - talk is cheap and easy. He has the chance to prevent this one by allowing market forces to prevail.

The Great Dollar Pump of 2008: A Doomed Central Bank Intervention

Trouble is, the Fed controls the fawcet, and the Fed is run by bankers and Keynesian-economists. They rely on asset-inflation to boost the economy, and ignore the fundamental signs of the performance of the economy. If any other country was performing like the US, it's currency would be devastated. Gold was once the valve controlling the M3, and now there is no valve. It is obvious that the actions of the Fed have had major adverse consequences for the US economy. Trouble is, noone can stop them other than themselves. Forget congress, forget the Treasury, they are only interested in short-term results. Where will it all end? The housing bubble and bust is a sign that asset-inflation cannot continue. The Fed needs it to continue to support other overpriced assets such as stocks - trouble is, real US incomes have not risen in 30 years. If traditional CPI calculations were used, the story would be much worse.

Are We Being Scammed?

The asset inflation is obviously the result of the printing of massive liquidity at give-away rates (lower than inflation). The big question is when and how it will all end. It may not end. After all, all of that "wealth" created up to 2001 has to go somewhere. The fact that US stocks have had a negative return since 2001 obviously indicates that they were massively overpriced. Trouble is the Fed controls the fawcet and doesn't know a drought from a flood. The Fed-Bank partnership is little different to the concept of feudalism - the consumers being the serfs.

Google's Checkmate Was Three Moves Ago

The alternatives IMO are M$ and desktop or Goog and Chrome. M$ had their chance, now it is Googs turn. The demise of the desktop has just started. I think it is easy to see what is down the road a bit that will start to make Windows redundant. Power corrupts - true, we have seen it. Let's see if Goog can stick to their mantra. There will always be other big players with vested interests to protect offering alternatives. It is a pleasant change to download something of substance that doesn't take gigabytes. M$ at present appears like a rudderless ship - the M$-Yhoo deal was an absolute fiasco.

Bracing for Another Round of Credit Related Woes

One major point is that the Fed Rate of 2% improves bank's profitability, or at least reduces their losses. The spread between what they pay and what they receive on mortgages is very high. This means that those with cash are paying for their losses on bad loans. As for stocks, it is a question of what are reasonable PE ratios. Based on historical rates stocks are at least 30% overpriced and the Fed and Treasury are fighting like mad to keep them there - hence the housing bubble caused by Greenspan. The whole FIAT money system is at risk as a result of printing too much money and inflating asset prices.

Greenspan: Still Almost Childlike in His Idealism

As we know, the US is no longer a market economy - stocks are propped up by the Fed. First Greenspan, and now Bernanke. They brag about being students of the Great D. The fact is, markets are much worse (PER) than they were back then - thanks to the Fed. Basically it is theft - from those with cash and those of future generations. Time to abort this banking culture and get back to an efficient economy. Basic economics tells the story - trade deficit, budget deficit, inflation, unemployment, falling real-incomes, falling profits. As a result, the US is heading to become the next fallen empire.

Earnings Season: Fundamentally Flawed

It is all a giant con game orchestrated by the Fed, Treasury and the PPT. It is politically incorrect to state the truth and anyone who attempts to is branded a leper. Announcements by the Fed, Treasury and eg. FDIC are stage-managed so as to have a positive or least-negative impact. The US is no longer a free market. It is a stage-managed market. The C result was a loss, a big loss, $2.5b, but we expected worse, so it is positive news – how ludicrous as the projections show. The US economy is being ruined by bureaucrats and politicians who manipulate the economy and markets for short-term gain. The current-consumer is the insignificant and inconsequential pawn who is worth only slightly more than future consumers of future generations. A bubble in RE to pay for overpriced stocks to be paid for by current consumers and consumers of future generations who are considered mere serfs. What is the purpose? To protect those that put them where they are - the moneyed elite who think they own the earth. The US consumer is running out of steam, so their jobs have been off-shored and the emerging economies used to increase demand for multi-nationals. The strain on the limited resources of the earth creating yet another bubble. There are many, many problems with the US economy. The economy is being “run” (ruined) by bankers (Fed, Treasury), and they appear to think that more and more cheap money is the solution to everything. Trade deficit, budget deficit, USD decline, inflation, unemployment, corporate earnings, RE crash, bank failures. How many signals do these people need to tell them that they are ruining the US economy? Asset-inflation is not wealth-creation. Their answer to that is that it is up to the markets to decide asset values. When markets decide that asset-prices are overpriced, they drop rates and pump in more money. The markets don’t decide, they decide. When the markets say they are wrong, they provide the same solution that created the problem – more cheap money.

Are Subsistence Wages Killing the US?

The point I was making is that current legislation allows the 3rd world worker to replace the 1st world worker. These goods are then sold in the 1st world at 1st world prices. The jobs of creative people in the 1st world are being lost. Big companies are the only ones on this side to benefit. Only time will tell where this will lead, however based on current experiences it will lead to destruction of the US economy. The trade deficit, the budget deficit, the loss in value of the USD, the bursting of the housing bubble, the bursting of the dotcom bubble, REAL CPI-inflation over 10%. Don't all of these things spell out an economy that is ruined? The only thing that has kept it going is that all the bubbles have not burst. The Fed is fighting like mad to ensure that the last domino, Wall Street stays high. That itself was a bubble from 1990 to 2000 and was about to burst in 2001. Now Bernanke is holding it up in much the same way as Greenspan did in 2001. This time however there is no housing bubble to absorb the liquidity, there is only stocks. Bernanke has the misguided notion that lessons learnt from the 1930s will solve everything and flooding the economy with cheap liquidity will fix everything. The point he misses is that the way to stop the bursting of bubbles is to stop them forming. They do not do this because their Wall Street cronies would not like it (IMO). The US woke the Asian monsters and now they are about to beat the US at it's own game - consumption. US consumption is on the decline because real wages have declined for over 10 years. The housing bubble replaced those wages, and now that has withered. Companies like GM and Ford have the wrong products that consumers can no longer afford. So what we have is an economy that can no longer afford products manufactered by it's own companies and must import products to survive. Standards of living are declining and will continue to do so inversely to standards in China. To aid that process, the US govt sends out tax rebates for people to spend on cheap imports, further helping the foreign economies. Obviously the US has the wrong people in power and making decisions that shape the future of the US over the next century. Look at the start of this century as a guide.

Who Benefits When the Fed Floods the System with Liquidity?

"when Easy Al took interest rates down to 1% and held them there for a very long time, it did not stop the Nasdaq from falling 77%. Instead, the liquidity flowed into housing, ..."
The dotnet bubble had already burst at that point and the Nasdaq had lost 50%+. The interest rate cuts were to stop the Dow and S&P falling to realistic levels. These cuts began in 2001. The Dow had risen 10 fold (1000%) in 13 years up to its high of 12000 and was then falling. The liquidity did flow into housing of course and cause the bubble.