brianoh

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.

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.

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.

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.