gabe borenstein

Why Does the Fed Feel Powerless to Identify Bubbles in Real Time?

In fact the FED did recognize the market "bubble" on the way in 1999,but the error was to address the issue via radically restrictive policy which had lead to dramatic market implosion.Untill mid of 2007 ,the FED once again had attempted to address the the issue of the market and the real estate bubble(they had called it inflation) by raising the FF to 5.5% from 1%.Unprecedented decompression was the result.Let's not forget Mr.Volcer under whose reign the FED had raised the FF to 20% . Major recession was the result . History shows that the FED in fact anticipates the "bubbles" but the applied monetary policy is invariably too aggressive.Evidently ,the FED in applying monetary brakes tends to forget the "monetary" lag and continues with restrictive policy for too long .
As for myself ,I had came to a conclusion that based on the past history ,when the FED is concerned about the "bubble" it will address the issue by derailing economy.
In 1999 I have met with portfolio manager for the Vatican ,Dr.Menginni .I have warned him about the market implosion ahead.
In September of 2007 ,in an interview with Brian Sullivan (Bloomberg TV) ,I had issued a warning about decompression ahead.
As of now ,I am impressed with the more dynamic approach that the FED has adopted ,although I do believe in the notion of too big to fail because of the psychological impact on the investment community.

Policy Lessons from the Great Depression

If the FED truly had learned the relevant lessons from the Great Depression,It would have never raised the FF level to 5.5% by July of 2007,thus creating a financial hardship on the home owner with adjustable mortgage rates. For the record ,in 2006 ,20% of all of the homes sold were financed by AMRs. Dramatic hike in FF had contributed to painfull spike in AMRs ,contributing to the housing sector implosion leading to a major economic imbalance in 2008.
In this cyclical stabilization/recovery ,the FED had finally adopted (it seems) a more cautious outlook on aggressive monetary policy.
Another lesson we all should have learned from the Great Depression is that the major decompression will implode the price of the gold.

Equities Update: Averages Tumble as Traders Fret over Economy

Both traders and the investors had never allowed for the2008 economic implosion. As late as March of 2009 ,the market consensus indicated follow up on the cyclical decompression and another market low .One major financial news program staffed with reporters who delude themselves to be economists or worse yet strategists continually spewed economic non stop bearish nonsense.
The truth is simpler than most had allowed so far..
The key economic structural weakness had been addressed. The monetary and fiscal stimuli will contribute to a non inflationary cyclical growth for at least the next five years .The dollar weakness (intentionally allowed ) will enhance the economic expansion in the period ahead (J-curve). I believe that the dollar is actually building a base for a major rally which will enhance the relative value of the dollar denominated assets to foreign investors .In the meantime the weaker dollar provides an incentive to invest in the cheap U.S assets(foreign investors0>
The gurus who spurn the investments in the U.S markets ,encourage investments in emerging markets where the structural unemployment is at least double the U.S current unemployment rate and where(Emerging Markets) per capita income is negligible.
The U.S continues to be the global, relative value locomotive.
Major market rally lies ahead. Please note that the unemployment is a lagging indicator and is reflective of the U.S economic status quo of some 12 months ago.

Grantham on the Markets: '860 Is Fair Value for S&P'

As late as mid 2007 ,most of the experts and investors could not accept the notion of potential economic implosion.
In March of 2007 consensus was for a bearish correction.
The market rallied .
Now we are told that the market is over priced by the experts who have missed some key market adjustments
There is no way to quantify the relative value of the market at this stage of the business cycle.
The stock market is a leading economic indicator and as such it reflects an above average expansion in the period ahead.
As such barometer it confirms what is obvious -the catalytic measures in place will create above average business conditions.
All of the bearish nonsense about the U.S economy we have heard long enough.
For myself I can say the following : I was bearish early enough and I certainly was bullish in March.
My opinions were reflected in various interviews with the Bloomberg reporters.

Equities Update: After 2 Down Days, A Rally

Investors are trying to pick a top in the stock market . In reality the market is consolidating for the next move up.
For all of the sophistication , most participants are forgetting that the stock market is a leading economic indicator not a knee jerk reaction to individual data.
The economic momentum will accelerate into 2010 ,the market rally will intensify .
To surprise of most,the dollar will rally sharply -a reflection of a dramatic shift in the fundamentals .

Robert Prechter's 'Conquer the Crash': A Forecast That's Still Coming True

This is nonsense.As an investor I want to know about the crash before it occurs .I have predicted the crash in an interview with Mark Gilbert (Bloomberg) on June 3,2005 and again on September18 ,2007 in an interview with Brian Sullivan( Bloomberg TV).
At this point in time to imply possibility of another crash is a reflection of an economic ignorance as that implosion would lead to a global economic/financial anarchy that would make Armageddon look like Nirvana.
Governments and the Central Bank finally comprehend the risks and have deflected them.
Fannie and Freddie have been rescued by the U.S government finally confirming that the implicit guarantee of the agencies in fact is direct and explicit guarantee.
To imply that the U.S will now allow these agencies to fail ,is to argue that the U.S will fail and cease to exist as a viable economic /financial system.
For all of the nonsense being disseminated again,the U.S economy will continue to stabilize and expand without the risk of inflation.
We will see the stock market at the record levels in the period ahead .GDP will attain 5%(non inflationary) growth by the second half of 2010.

Regarding Osinski, Toxic Assets, and Felix Salmon

The toxic assets topic would have been a beneficial topic prior to the market implosion. have certainly issued enough warnings .
If investor believes in the economic recovery and a major economic/market rebound ,than "toxicity" of the toxic assets is less of an issue.The complexity of the product is just a garbage that was utilized to induce investors to buy these assets.
I still remember the bearish stock market /economic prognosis by one of the names mentioned.

Dow and Then: 1999 vs. 2009

The 1999 rally was reflection of insane evaluations and expectations of the high tech sector. When the reality caught on ,the markets have imploded. The preceding monetary tightening only exacerbated the issue .The current rally is a reflection of unprecedented commitment by the FED ,the Congress and the Administrations(both) to deflect a major economic decompression in any sector. The combination of the global "market" bears which have failed to read the danger signs which were visible as early as 2005,continue to spew the bearish nonsense which does not address the current programs(bullish) in place. The U.S recovery is in the early cyclical stages and will continue to gain momentum in the period ahead.
The price of gold is a reflection of the medieval perceptions by some of the market gurus who will be proven wrong in the period ahead.

Crude Oil and Gasoline Prices: Like Déjà Vu All Over Again

Last year at this time Global economies were heading for a major decompression.It was logical to assume that the final demand for crude will collapse and it did .This time around U.S economy is heading for a major but noninflationary expansion.The oil prices will likely have some marginal propensity to move down but that is because oil speculators who have contributed to the financial/economic disarray by forcing the crude prices above $140 per barrel,have learned their lesson. Given the current real relative slack in demand,it is difficult to see the crude moving up more than $ 10 dollars per barrel.Relative stability is likely the scenario irrespective of the economic accelerating economic momentum ahead.

Hawkishness Prevails in Government Policy

On June 3,2005 in an interview with Mark Gilbert (Bloomberg, London),I have predicted major decompression in the period ahead. In the same interview ,I have predicted that the yield on the 10 yr treasuries will decline to 2.5 % at the end of that decompression cycle.
The Fed policy which had again focused on inflation(wrongfully so),driving the FF to 5.5% by the August of 2007 had led me to concluded that economic Armageddon lies ahead.
When 2006 data had revealed that more than 20% of the new homes sold were financed by the subprime mortgages,there was no doubt in my mind that a major economic decompression was inevitable in the period ahead I had reiterated that conclusion during the Brian Sullivan interview September18,2007(Bloom... TV).
As the panic spread through the U.S economy I thought that what is about to happen to U.S ,would make Great Depression look like an economic Nirvana.
For the first time in my professional , life the FED surprised me as it unleashed massive monetary easing in coordination with the Treasury and the Congress(fiscal stimulus).
I knew then ,that the unprecedented economic Armageddon was averted . I have expressed that opinion in March of 2009 in another Bloomberg interview.
There is no doubt in my mind that mislead focus on inflation ,which lead to historically relevant spike in rates ,was a major catalyst for 2008 decompression.
Misled convictions had forced Lehman liquidation only to geometrically increase investors fear (globally). Rest is a history.
TARP ,TARF and aggressive easing had averted unquantifiable global disaster..
Further liquidity injection into key (needy) economic sectors with above in place ,were the necessary catalytic force necessary to achieve the current status quo.
In 2008 the consumers liquidity and assets (globally ) were decimated.
This reality will neutralize the excessive demand pull forces in the current cyclical recovery that in the previous cycles had lead to significant inflation.
The topic of reducing liquidity should be eliminated from the FED's agenda for now .Yes, there is too big to fail(psychology)
With the current status quo in place (both fiscal and the monetary),the U.S economy will experience the longest non -inflationary cyclical recovery recorded to date.

The Market Finally Questions Justifiability of High Stock Prices

The stock market is a leading economic indicator.As such it reflects an economic status quo in the period ahead.
The correction in the past two weeks is a constructive phenomenon and reflection of a market consolidation.
Recent data was misinterpreted but not negative.
True ,the unemployment continues ti rise but it is a lagging indicator reflective of the economic past.
Auto sales have declined but not as severly as the inititial expectations reflected by the auto industry in August.
Under the pressure from some who continue to focus on gold and commodities in general, preaching inflation;the Congress and the FED reflected much too early about neutralizing some of the stimulus- a mistake.
Then again the timing of that action was not specified.
On the other hand the fiscal and the monetary policies in place will continue to assist economic expansion.
Decimation of savings and decline in the asset values in 2008 ,eliminates the risks of excess demand(in this cyclical recovery) which normally would lead to inflationary pressures.
Only in March of this year some form of an economic implosion was a consensus.
We came a long way .Unprecedented cyclical ,non inflationary expansion will continue.
What happened to all the bears at the end of 2007 when the real risks had emerged? .I had issued several warnings then.
Another decompression ? a wishful death wish that will not happen .

Today in Commodities: Inflation or Deflation?

Inflation is the least of the threats to the economies . The spike in some commodity prices especially gold ,is predicated on the past cyclical economic/commodity prices behavior. Until the current cycle ,every recovery was accompanied by excessive demand pull "forces" which had led to a cost push inflation.
The global implosion of 2008 has decimated global and consumer liquidity . Global focus at every level will and should be to restore this catalytic component of stability(liquidity).
In the U.S carefully applied "jolts" both monetary and fiscal will contribute to impressive and non inflationary economic expansion.
Gold?- is reflective of a global leveraged speculation based on the old notions.Other commodity prices will not go very far.
Inflation is not in the cards in the current cycle.

Base Metal Companies' Gold Exposure

The key word is the " gold mania".On the one hand investors are being told that the market is ahead of the economy ,on the other hand we are being told that economy will expand and the injected liquidity will contribute to inflation.
It sounds to me as if these opinions are reflective of existing major positions and are not reflective of the fundamentals .
The injected liquidity had stabilized key economic sectors including the financial sectors .
At this time it appears that the "middle"class America is the primary beneficiary of various "economic stability" programs.
It should be noted that this working class had sustained a record liquidity/assets decimation.
As the economic momentum accelerates in the period ahead contributing to a dynamic employment expansion by 2010, the Americans will be spending predominantly on the necessities and will be attempting to restore a degree of liquidity.
The global slack on the supply side is almost at the record.
The potential for inflation as indicated by the gold prices,is not a reality..
The economic notions will have to be updated in this particular economic cycle .

Speculative Trading Indicates Rally Losing Steam

Only few months ago ,the consensus had indicated that we are heading for a major decompression.
This major rally appears to have been missed by most of the market gurus.
I have reiterated my bullish convictions quite frequently in various interviews with the Bloomberg's reporters.
One thing for sure ,the current rally is difficult to classify as speculative in nature .The rally may be a logical response to the
the fundamentals which point to above average ,non inflationary expansion in the period ahead and certainly negate the original assumptions of the economic implosion.
Finally , financials have rallied ? Why not .
The provided liquidity via fiscal and monetary policies has stabilized the financial sector that includes AIG ,FRE ,FNM and others.
Until the debacle of 2008 (which I have correctly predicted as early as June of 2005 in an interview with Mark Gilbert),the U.S guarantee of the agencies was implicit only.
I think after giving an access to required liquidity to the FRE and FNM ,that guarantee appears to be no longer implicit perhaps adding relative value to the U.S agencies' equities and bonds.
The rally in the AIG ?Not a big deal so far as allowing for the reverse split ,the stock trades at 2.50 dollars.
I would argue that the current rally is a function of a massive ,speculative short covering .
The real rally lies in the period ahead when the impact of the implemented measures becomes explicitly clear.

Preview from Europe: Mid-Day Sell-Off

U.S economy is consolidating for a major rebound in the period ahead.
The structural vulnerability in the key sectors has been addressed.
The fiscal and the monetary policies are aggressive and will lead to a GDP growth of 4% plus in the 4th qtr. I expect GDP expansion in 2010 to exceed 4%.
I expect the rebound to be non inflationary as it is fueled by carefully balanced monetary and fiscal policies.
Demand pull (inflationary catalyst ) is not an issue in this cyclical expansion ,something that most investors had failed to recognize.
A 100% margin on the Comex listed futures ,such as gold may bring some sense of reality into a massive speculation based on the obsolete theories .
In the meantime the stock market rally will continue as the market is undervalued and behind the curve.
Only several months ago ,Depression was a consensus.
In the meantime we are heading for a rebound of unprecedented durability.
Unemployment will decine sharply by the end of the 4th qtr.
It will decline to 3%by mid 2010.
The projected deficits will evaporate as the tax revenue increases geometrically and the U.S Treasury(Government) realizes record profits on the liquidity investments(injections).