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  • Stocks Cannot Levitate On Twist Alone [View article]
    I definitely think stocks are the play. The other factor I would put in to the discussion is the high unemployment. Supply and demand yet again. The difficulty of brining a competitive business online, means the demand for labor stays low, thus pressure on wage expense is alleviated. A central bank tends to be a subsidy for existing wealth. It is designed to subsidize financial assets. That's what QE does and why it has an impact on equities.

    I think one of the things to monitor right now is the size of the Fed's balance sheet. The other thing to monitor will be if we see a massive new wave of taxation via regulations or just outright expropriation tax increases (especially capital gains).

    To me this would signal a pullback, but here's the kicker...good news for equities will be good news and bad news for equities will be good news, because bad news means more monetary stimulus via the Fed for equities. As long as the stimulus doesn't get really crazy (say 5 trillion QEs), and as long as fiscal policy don't get really crazy, say a new regulatory agency to help Apple to make better ipads, the natural growth of the economy will accomodate the wealth transfer to the equities markets.

    If you could get really good at this you could time the increase or decrease in subsidy shocks, get out at the top of equities, move into bonds at higher yields, then wait for the flight to safety, sell the bonds for gains, and then buy equities at the bottom in anticipation of the cycle starting all over again.
    Apr 25, 2012. 09:33 AM | 1 Like Like |Link to Comment
  • Stocks Cannot Levitate On Twist Alone [View article]
    "the Fed decides to buy the stock of publicly traded companies in order to lift stock prices."

    Or what if there are 4 people, 2 of whom buy equities and 2 of whom buy bonds. They make their purchases with FR notes. Then one day the Fed becomes a bond buyer. Yields are now lower for bonds because the bonds don't need yield to attract the two buyers. The bond buyers are no longer attracted to bonds, and buy equities instead. Equity prices are now higher because of the two new buyers, and the cost for the companies to finance is now cheaper thus causing a rise in earnings. Even though sales haven't increased, earnings are up, thus the new prices for equities seemed to be justified. The buyers of the bonds won't go back to bonds because of the low yields, and they aren't that afraid of equities because they price of the equities now seem justified.

    Yes, the question is how long can this go on? The Fed has definitely monkeyed with supply and demand, thus their is a malinvestment somewhere. As long as there isn't something to mess with the subsidy bubble (new regulations or expropriation taxes that hurt earnings), this could probably go on for years.

    QE and CBs clearly have an impact on markets. If they didn't then why have them? It is basically just another form of subsidy, which means it is a wealth transfer. The trick to managing it, is to monitor the subsidies and figure out where the wealth is going to be transferred to, and be there when it gets there.
    Apr 25, 2012. 06:36 AM | 3 Likes Like |Link to Comment
  • John Hussman: Run, Don't Walk [View article]
    Apr 24, 2012. 04:07 PM | Likes Like |Link to Comment
  • Don't Expect QE3 From The Fed This Week [View article]
    Its about funding a bank balance sheet.

    Move the date back to 2007 to see its growth.

    It is a sort of back door way for a gov to issue the noninterest bearing notes it would have preferred to issue in the first place. The argument is made that it doesn't affect the economy because these noninterest notes sit in reserves. This would make sense if a bank wasn't part of the economy, so these notes do affect the economy. It affects the economy with respect to the fact that the bank's liquidity needs are satisfied and as such it doesn't need to compete for deposits.
    Apr 24, 2012. 01:54 PM | 1 Like Like |Link to Comment
  • Don't Expect QE3 From The Fed This Week [View article]
    OT ends in June. So if a third round of buying is launched are we talking the Fed buying the whole curve, to do QE and OT at the same time?

    Or will the next round of "QE" just be OT under another name, like Sterilization? So it isn't really QE in the sense the Fed's balance sheet gets bigger, but that they just continue OT through a different set of mechanics (buy long and repo short).
    Apr 24, 2012. 01:50 PM | Likes Like |Link to Comment
  • John Hussman: Run, Don't Walk [View article]
    Equity prices dont have to reflect the economy. Both fiscal and monetary policy can prop up equity prices. Follow theses for signals of when to buy and sell.
    Apr 24, 2012. 01:03 PM | 2 Likes Like |Link to Comment
  • Do Low Interest Rates Make Stock PEs Cheap? [View article]
    "That is an accelerant to growth"

    Only if the low rates occur becuase the supply of capital for investment is increasing. When interest rates are lowered by a CB, this comes at the cost of someone else because the CB can't magically create capital from thin air to add to supply. So what winds up happening is $10 is taken from one person, and that $10 is used to prop up equities markets by adding a bid that wasn't there before. Now the company whose equity price has just been subsidized, now needs to sell a $10 product to create earnings to justify that equity price, which of course the potential customer no longer has becuase the $10 was just used to purchase the stock instead of the product.

    In other words it winds up being a wash, and the result is equity prices that don't come down, profit margins that remain high but don't go higher because sales don't really change, and high unemployment that stays high because their isn't an increase in sales/production that doesn't require any more people being hired.

    All that has happened is wealth has been transferred, instead of any net new wealth being created. The subsidies for the equities can continue for quite some time. It is a bubble. You have to look for policies changes that could burst that bubble (ie more regulations, higher expropriation taxes, decreases in the size of the Fed's balance sheet, increases in FF rate, etc).
    Apr 24, 2012. 12:28 PM | 6 Likes Like |Link to Comment
  • John Hussman: Run, Don't Walk [View article]
    The little jabs at tyranny are often the best ones, and those that are taken the most seriously can be the most dangerous.
    Apr 24, 2012. 12:06 PM | 4 Likes Like |Link to Comment
  • John Hussman: Run, Don't Walk [View article]
    "But even Obama will have to address the deficits in his (eventual) second term."

    Maybe not. In fact without the concerns of re-election (that is, assuming there will still be elections), why worry about them. The biggest fear will be from regulatory or expropriation tax increases that could damage the subsidies for the equities markets that the deficits are affording. Obama is just a nonprofit board guy. He doesn't understand the forces he is dealing with. In his zeal to practice his arrogance and attack business and productivity because he has been indoctrinated to think these things are evil, he may just wind up killing the subsidies that are propping up the equities markets.

    So yes, keep an eye out for policy changes, especially on the fiscal side. Obama will probably win, but he is a looter. The problem with looters is that they just don't loot producers, but they loot other looters. Fiscal policies that pop the subsidies will act just like monetary policies that pop the subsidies. Obama, in his zeal to act on unelightened philosophies could wind up doing the fiscal equivalent of cutting the Fed's balance sheet in half.

    If I were in Obama's shoes, I would just talk like a looter, but leave regulations and expropriation taxes where they are. Then I would continue to propose spending that transferred wealth to my political supporters, so just in case I couldn't engineer being in office for the rest of my life, I would have engaged in spending that profited my political supporters thus making them extremely wealthy(wealthier) as a result of my looting. Then when I was out of office, they would be in a position to make me just as rich as Romney is. In this case, then yes the equities markets would stay strong.

    Romney on the other hand, won't do anything substantive. He will talk about killing deficits, but they will just grow larger. There are just too many forces arrayed against him in this regard. As such, he would then unwittingly carry out the strategy that will keep the markets doing well that Obama probably should do but probably won't do.

    Either way, with regards to the market, what you need to watch for are policies that will kill the subsidies for the markets, whether they come from Romney or Obama. At this point, the most likely candidate to kill the subsidies will be Obama.
    Apr 24, 2012. 09:16 AM | 7 Likes Like |Link to Comment
  • U.S. Borrows 53.7 Cents Of Every Dollar Spent In March [View article]
    "free to leave anytime"

    While you still can.

    What is interesting was that in 1893 Richter (a German) predicted that one day Germany would be socialist, and people would be shot for trying to escape (Berlin Wall). It would seem the real test of slavery is not the conditions in which you live, but the option you have to leave in order to escape the conditions in which you live.

    It also interesting to note that high tax, high reg states often have the highest levels of emmigration. The Fed income tax required an amendment, because the orginal purpose of the Fed gov was really to deal with issues between states. Thus, there wasn't a presumed need for a direct tax. The Fed gov would have a few limited powers that was intended to deal with issues between states, not really with issues between individuals and the Fed gov. Once you get an income tax and a central bank that crosses over all the states, where do you go to escape bad policy once the price blind Feds, get it wrong?

    I guess the future will be not teaching you children to work, but teach them that their neighbors owe them a living in the name of the common good, and if they don't provide it, then you start burning things down until they do.
    Apr 23, 2012. 03:54 PM | 2 Likes Like |Link to Comment
  • U.S. Borrows 53.7 Cents Of Every Dollar Spent In March [View article]
    "government borrows 100% of what it spends"

    This is another way of saying a gov is a wholly owned sub of the populace. The sub is like a holding company that charges mgmt fees to the operating sub. The tax revenue of the gov is the tax expense of the populace. When you consolidate the two the rev and exp eliminate, and what is left is the aggregate financial statements of all the people in the populace, including the financial statements of the people in the gov and the assets held in the gov's name that can really be apportioned to the populace.

    The mgmt company also houses the finance or treasury function that issues stock, and everyone in the company uses the stock for exchange of goods and services. Imagine if the company made everything these people wanted. Now, also imagine if the mgmt company could use guns to enforce its policies. If the operating divisions failed to pay their fees, the mgmt division could start shooting people. What sort of mgmt decisions would come down the pike? Would these decisions tend to favor mgmt over everyone else? Would the mgmt team really need to reward producers and punish slackers?

    Over time the producers slow their work and have less stock (fees) to surrender to the mgmt company. Why work, when the fruit of your labor can just be taken on a whim by those wielding the guns? Now the mgmt co has less goods to purchase with the current volume of stock in existence, and as such they can't buy as much with the stock that they used to. But mgmt can do something the op divisions can't. It can print stock. So now mgmt can purchase things from the op divisions, but because of the disincentives to produce there is less and less to buy. At the same time stock is being created, there is less and less products being created. What do you think this does to the value of that stock?

    Mgmt prints even more stock, but now, since you don't have to innovate to attract stock for your goods, and since mgmt doesn't produce anything, recipricoal trade begins to disappear. After all, the stock is easy to come by, thus the ability of your labor to produce something that can be exchanged for other real assets or services disappears and all you receive in return are pieces of paper.

    So, just because a gov can fill your acct with gov notes, does not mean it can fill your acct with notes that will maintain or improve your standard of living. In fact the power to print an infinite amount of money mediums via the option of force, makes the creation of those notes price blind and thus the destruction of their value (a claim on labor) is destroyed because the incentives to engage in labor erode away.

    This is why a private company can be centrally planned, but a general populace with a gov that has access to force cannot. The mgmt of a private company must be sensitive to prices, because they can't shoot employees for noncompliance. They must rely on voluntary cooperation. An employee is free to leave at anytime.

    A gov can and does shoot people for noncompliance, thus people in gov become price blind. Thus, they will fill your account with gov notes, but those notes will have lost value, because the claim on labor they represent will have been diminished. This is why the slave South (with its own sovereign currency) could not beat the North. People will not work for the sake of another in the pursuit of wealth creation with the same zeal they will work for themselves in the pursuit of wealth creation. The presence of force makes all the difference. Force makes you blind to prices, which is just a signalling mechanism for what is efficient wealth creation and what is not.
    Apr 23, 2012. 03:37 PM | 3 Likes Like |Link to Comment
  • Gold: The Fate That Awaits Once Fed Stimulus Ends [View article]
    Well, CB notes aren't money either. Both gold and CB notes are money mediums. CB notes just happen to be the legal medium at the moment because govs have monopolized what is typically a private product. Money is the contract that the mediums represent, like a stock certificate is not ownership, but rather a symbol of the ownership. The ownership is an abstract because it is an idea. So too is money. It is a contract for the exchange of capital, and capital is yet another abstract that is represented by assets. So a money contract is a contract for the exchange of assets.

    So, to the extent you have creation of capital and thereby assets you have the potential for money creation. What you can't have is the creation of money mediums that magically create assets. What you can have is money medium creation faster than asset creation, which dilutes the mediums, which devalues the mediums as seen by price increases for the assets.

    What is needed is medium creation at the same ratio as asset creation. This requires a pricing mechanism. Gov access to force makes it blind to prices (this is why thieves use guns, they don't care about the labor someone engaged in to create an asset and the gun makes them able not to care). As such, since govs are trying to manage a price sensitive process with their price blindness, they will always get it wrong. The result is wealth transfer (stealing) via gov's force, and once you recognize that, then you can begin to find ways to protect yourself.
    Apr 23, 2012. 07:33 AM | 5 Likes Like |Link to Comment
  • Can the Fed Control Core Inflation? [View article]
    That's what I was getting at. We can certainly reduce the mission of the military to just defense, and pull in some serious waste. No need to defend nations that have enough wealth to do it themselves. Its basically military welfare and it creates the same dependence and lack of productivity that social welfare creates. The other suggestions are productivity disincentives, and without productivity the claim on labor that our notes represent becomes diminished and devalues those notes.

    Deficits aren't a problem as long as your productivity is growing faster than the deficits.
    Apr 22, 2012. 04:46 PM | Likes Like |Link to Comment
  • Gold: The Fate That Awaits Once Fed Stimulus Ends [View article]
    Govs would always prefer to issue noninterest bearing notes. The reason they are forced into issuing interest bearing notes, is people catch on that the noninterest bearing notes bear a reverse interest, devaluation. To avoid this, a gov creates a CB. So the CB buys the notes with interest in exchange for its noninterest notes, and presto, the public has just been issued the noninterest bearing notes via the CB and the banking system. The banks that normally need to compete for deposits of CB notes with rate and service, suddenly find themselves stuffed CB notes.

    So they no longer need to compete with rate (what's a 1 yr CD paying now?), and the deposits that people choose to keep at a bank for safety or liquidity give them less purchasing power (a tax that funds gov via spending it engages in, in exchange for notes it issues). The CB notes they would place at a bank goes somewhere else looking for yield. Perhaps equities and thus creates "inflation" in equities.

    Either way, the goal of the gov to issue noninterest bearing notes is accomplished via a CB via the banking system. People wind up buying gov debt via their bank deposits that give hardly nothing in interest combined with a little bit of inflation and presto, the gov just issued the noninterest bearing notes it wanted to in the first place.

    Pretty slick, huh?
    Apr 22, 2012. 03:26 PM | 10 Likes Like |Link to Comment
  • Can the Fed Control Core Inflation? [View article]
    With the exception of the military spending, the rest of it would create a huge debt via a massive collapse in asset prices. It is basically the same thing as raising the FF rate to 9%.
    Apr 22, 2012. 03:06 PM | 3 Likes Like |Link to Comment