retired aviator

Reality Is at Odds with Policymakers' Optimism

There are a couple of unfair generalizations is this article:

<<Obviously, markets were completely blind-sided by the biggest recession since the Great Depression.>>

The markets are no single 'read' on where the economy is going. You have to consider the makeup of the market participants being different at different times. One simple dichotomy is that the stock market is made up of both "dumb money" and "smart money". Smart money began to have an inkling of the debt meltdown long before the peak in 2007, but foolish money being piled into stock funds drove the markets higher anyway. The question is, who thinks the S&P500 is a buy now at 1000 -- the smart or dumb? -- I say lots of buyers today are of the smart variety. They know of the recession that "This too shall pass." There still are hurdles, such as many option ARM resets to come, but I think it is smart money that is betting now that the US economy will not wither and die.

<<if the U.S. economy really were improving, the dollar would be strengthening – not weakening.>>

It's definitely not that simple. A currency can 'decouple' from its underlying economy without correlation. Case in point: Japan. The yen has been strong for years, yet at same time the Japanese economy has been in the doldrums.

S&P P/E Ratio Is Low, But Has Been Lower

Seems to me that what matters to anyone looking at P/E and considering a long position now is 'normalized' future earnings in years to come. Earnings during the current massive writedown and contraction stage will be meaningless after the writedowns are done and falling demand has ultimately leveled off.

The question is in picking the equities that will weather the storm and have intact businesses in the aftermath, and guessing what their earnings and earnings growth will be. I say 'guessing' because this great debt unwinding is uncharted waters and estimates a few years out are a complete grope in the dark.

The market is in deepest despair so stocks will likely fall more, but ultimately will undershoot intrinsic value at some point and the S&P will be a strong buy. Those who say 'buy and hold is dead' are dead wrong. The conditions for 'buy and hold' will be recreated. It could be several years off or just months. The plummeting market will create an excellent buying opportunity at some point. The question of course is how low does it go.

In the meantime S&P earnings are likely to keep falling and P/E not so useful a tool.

Is the U.S. Solvent?

I'd like to see a defense of this author's bold statement:


" For those of you who don't know, when everything is shaken out, money supply growth exactly equals price inflation."

I know of no empirical or conceptual proof of money supply growth quantitatively predicting inflation, even roughly, let alone "exactly".

What Exactly Is the Money Supply?

Is Anyone Else Bothered by the Fed's definition of M1 Money Supply?



The Fed's most basic component of the money supply (M1) is defined by the Fed as "Currency outside the U.S. Treasury, Federal Reserve Banks and the vaults of depository institutions", plus checkable deposits.

Currency outside the Fed and Treasury is reasonable, but I have misgivings about excluding ALL the currency in vaults of banks. Apparently they view private banks as essentially extensions of the government currency distribution system. That makes sense, but only to the extent that currency in the vaults is counterbalanced by a liability to the Fed.
In other words, if the Fed sends a bank $10 million in fresh new bills, and so the bank's account at the Fed is debited for the $10 million, the new vault assets are completely offset by a debt to the Fed. At this point it is reasonable to say the money is not yet "in the economy" (M1) since the bank has zero equity in the $10 million - it is 100% owed to the Fed.

But what about bank's vault holdings beyond its debt to the Fed? Surely that should count as money supply in M1, since the bank owns it free and clear. Or suppose an business has a large need for cash, so its local bank has learned to keep lots of extra currency on hand for this customer, in the vault. On pure technicality, this currency would be excluded from the definition of the money supply, though it belonged to, and was being used in the economy by a customer.

Anatomy of the Government Bailout

Mr. Hummel,

I enjoy reading your work posted on your website, and following your commentary. You should know that you have at least one fan!

I am actually working on writing a book dispelling the hyperinflation hue and cry, and wonder if you would mind your work being quoted a bit in the book?

There is a bit of a problem with the above bailout scenario, though. There is an error. When national income rises to 10,025, tax receipts at 20% are not the 2025, but rather 2005 bn.

Still demonstrates the point that the bailouts are not as expensive as they seem. I think the Treasury will actually do pretty well over time.

Lending at historically low interest rates, and with the dollar likely to sink against foreign currency and inflation rise, they should be able to gradually buy the bonds back well below par or service the debt with inflated dollars. With a likely falling dollar they can do especially well over time with Treasuries now sold to foreigners.

If it takes a while to do buy the national debt down after recovery, the interest payments are historically low. Rising GDP over time, even just nominally pacing inflation and no real growth, might even be roughly enough to increase tax receipts enough to service the debt. I think we'll survive this massive stimulus debt alright.

Thanks for your articles!

Rich M

Buffett Serving Free Lunch? (Part II)

Those puts Berkshire sold are big news now because of being such a large bet and just a few months old, while deep underwater. Truth is, by 2019, the major indices will be far above the strike prices and these worthless puts long-forgotten. The market is so cheap now in comparison with LONG TERM corporate earnings that by 2020 the market will long since have woken up and the Dow should be in the 20,000+ range and still at a reasonable P/E multiple.

Bear markets always forget that economic growth is a GEOMETRIC mathematical function, with profits being leveraged to grow faster than GDP. Every single bear market in US history would have made an excellent buy-in point. This one is no different.

Critics of this like to point out that someone buying the Dow in 1929 would not have broken even for some 25 years (dividends notwithstanding). But 1929 was no bear market; quite the opposite.

We are 45% down from the peak, so this does not resemble buying in 1929. Also, the dividend yield in the 30's and 40's was excellent due to depressed equity prices and worth owning even without share appreciation. So is the dividend yield now. 3% yield of the indices might not seem like a lot, but given that fact that dividend payers tend to grow their dividends, that 3% can be an annual yield of easily 15+% on original principal a dozen years hence.

How many over Buffet's long and stellar career have critiized positions he had when they were underwater? Where are they now and where is he?