As the world begins recovering from the worst financial crisis in 70 years, an odd couple of winners have emerged: stocks and gold. So far this year, the Dow Jones Industrial Average, a bet on economic recovery, is up 14%. Gold futures, a bet on calamity, are up 19%. The reason: Low interest rates and heavy government stimulus have poured cheap money into financial markets, helping both the economy and stocks. But the creation of all that money, together with the Federal Reserve’s maintenance of near-zero benchmark interest rates and the prospect of heavy government borrowing to fund deficits, threatens to weaken the dollar and fuel inflation and economic volatility later.
Dangerous Side Effects of Ultra-Easy Money (pinecarr)
In order to engineer a 180-degree turnaround in trader psychology, from the chronic fear of meltdowns last year, to the opposite side of the spectrum – the euphoric illusions of V-shaped recoveries, the “Group-of-20” have committed $12-trillion of taxpayer money, equivalent to a fifth of the entire globe’s annual economic output. The G-20’s largesse has been used to fund capital
Tuesday, May 8, 2012
Sunday, May 6, 2012
Financial leverage
Despite the rally today, up well over 100 Dow points as I write this, caution is in order as discussed in this link from Paul Kedrosky to Bill Gross.
Bill Gross: One of Our U.S. GDPs Has Gone Missing
[The last fifty years] produced a persistent increase in asset prices vs. nominal GDP that led to an average overall 50-year appreciation advantage of 1.3% annually. That’s another way of saying you would have been far better off investing in paper than factories or machinery or the requisite components of an educated workforce. We, in effect, were hollowing out our productive future at the expense of worthless paper such as subprimes, dotcoms, or in part, blue chip stocks and investment grade/government bonds. Putting a compounding computer to this 1.3% annual outperformance for 50 years, produces a double, and leads to the conclusion that the return from all assets was 100% (or 15 trillion – one year’s GDP) higher than what it theoretically should have been. Financial leverage, in other words, drove the prices of stocks, bonds, homes, and shopping malls to extraordinary valuation levels – at least compared to 1956 – and there could be payback ahead as the leveraging turns into delevering and nominal GDP growth regains the winner’s platform. …Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets – while still continuously supported by Fed and Treasury policymakers – is likely at its pinnacle. Out, out, brief candle.
Bill Gross: One of Our U.S. GDPs Has Gone Missing
[The last fifty years] produced a persistent increase in asset prices vs. nominal GDP that led to an average overall 50-year appreciation advantage of 1.3% annually. That’s another way of saying you would have been far better off investing in paper than factories or machinery or the requisite components of an educated workforce. We, in effect, were hollowing out our productive future at the expense of worthless paper such as subprimes, dotcoms, or in part, blue chip stocks and investment grade/government bonds. Putting a compounding computer to this 1.3% annual outperformance for 50 years, produces a double, and leads to the conclusion that the return from all assets was 100% (or 15 trillion – one year’s GDP) higher than what it theoretically should have been. Financial leverage, in other words, drove the prices of stocks, bonds, homes, and shopping malls to extraordinary valuation levels – at least compared to 1956 – and there could be payback ahead as the leveraging turns into delevering and nominal GDP growth regains the winner’s platform. …Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets – while still continuously supported by Fed and Treasury policymakers – is likely at its pinnacle. Out, out, brief candle.
Saturday, May 5, 2012
Power and money from the citizens
The piece below by Peter Boettke summarizes what I think about current economics. The Keynesian model or paradigm is wrong and always has been. Two primary reasons it was adopted were 1) the crisis of the 1930s was misunderstood but demanded “action” of some kind and 2) it gave the politicians a license to steal power and money from the citizens. If economics were a physical science where data could refute false hypotheses, it is doubtful that the paradigm would still exist today. Because it isn’t, reason number two became paramount. Most economists initially objected to the theory, gradually agreeing with it over time. After all, it also provided lucrative rewards for them in terms of higher paying jobs in government and eventually a route to tenure after it dominated university economics departments.
The books referenced below in the fifth paragraph are excellent reads for anyone interested in the flaws and inconsistencies in the so-called General Theory. “The Critics of Keynesian Economics” book is especially insightful because it is a collection of great economists (authors include Jacob
The books referenced below in the fifth paragraph are excellent reads for anyone interested in the flaws and inconsistencies in the so-called General Theory. “The Critics of Keynesian Economics” book is especially insightful because it is a collection of great economists (authors include Jacob
Thursday, May 3, 2012
Private negotiations with the banks
Whether you approve of his style or not, Karl Denninger cuts through the BS and says it like it is. The corruption and self-dealing in these bailouts is disgraceful. One must wonder whether there is any integrity left in government or our financial system. You and I and all other taxpayers are bailing these crooks out instead of sending them to jail.
More Arrogation Of Power?
Bloomberg has an interesting story up on the AIG derivative “payoff” mess I’ve repeatedly written about:
Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps — insurance-like contracts that backed soured collateralized-debt obligations.
….
More Arrogation Of Power?
Bloomberg has an interesting story up on the AIG derivative “payoff” mess I’ve repeatedly written about:
Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps — insurance-like contracts that backed soured collateralized-debt obligations.
….
Wednesday, May 2, 2012
Best financial analyst
Some commentary by David Rosenberg, probably the best financial analyst posting on a regular basis.
• Oh yes — this is surely a sign that the credit crunch is behind us. Regulators closed seven more regional banks last Friday, bringing the tally for the year to 106. There have been more bank failures this year than in the past 15 years combined, and the only reason why the big boys never followed suit was because the government guaranteed all their debt and then allowed them to hide their losses by switching to mark-to-model accounting from mark-to-market. Believe us when we tell you that even the most renowned experts could not tell you what is really sitting on the balance sheets of these large U.S. banks — but there is limited downside risk because Uncle Sam has deemed them all to be ‘too big to fail’. Those who were investors in American United Bank, well, we are sorry to have to tell you that you were involved in an institution that was small enough to close down.
• We realize that this did not make it anywhere in the weekend press (outside of a microscopic piece in the IBD) but the ECRI leading economic indicator actually fell (by 0.2 of a point) for the second week in a row (and the smoothed annualized growth rate declined 1.6% —- now what is that all about?).
• Oh yes — this is surely a sign that the credit crunch is behind us. Regulators closed seven more regional banks last Friday, bringing the tally for the year to 106. There have been more bank failures this year than in the past 15 years combined, and the only reason why the big boys never followed suit was because the government guaranteed all their debt and then allowed them to hide their losses by switching to mark-to-model accounting from mark-to-market. Believe us when we tell you that even the most renowned experts could not tell you what is really sitting on the balance sheets of these large U.S. banks — but there is limited downside risk because Uncle Sam has deemed them all to be ‘too big to fail’. Those who were investors in American United Bank, well, we are sorry to have to tell you that you were involved in an institution that was small enough to close down.
• We realize that this did not make it anywhere in the weekend press (outside of a microscopic piece in the IBD) but the ECRI leading economic indicator actually fell (by 0.2 of a point) for the second week in a row (and the smoothed annualized growth rate declined 1.6% —- now what is that all about?).
Tuesday, May 1, 2012
The stock market goes up
Peter Schiff adamantly recommends getting out of the dollar. His presentation, if correct, will be devastating for this country and wipe out the wealth of the middle class. All of what he says is correct, although his timing may be off. Furthermore, there is the possibility that our government might change course, although I, like Schiff, feel that unlikely. His recommendation to own “real stuff” is correct. If the stock market goes up, I doubt whether it will keep pace with inflation. The best performing stock market in the world in recent years has been Zimbabwe, but it did not keep pace with their inflation.
So, what to do? If as some believe that the dollar will decline by 50% from here over the next 10 years, then having your funds outside the dollar (in other currencies) would presumably produce a 7% average return per year. Investing in foreign stocks would provide that 7% plus the returns (or losses) obtained in foreign stock markets. Precious metals, as money substitutes, should do well. So should natural resources and other hard assets like land. Foreign resource stocks might do especially well.
None of this is meant to be investment advice. If what Schiff (and I) fear comes true, some of the above might be reasonable investments/hedges. On the other hand, all of the above comments would be 180 degrees wrong if we were to end up in deflation instead of inflation.
Schiff was very emotional, practically begging people to get out of the dollar. I suspect the economy and markets over the next year or two will justify his emotion. Whether his scenario results or not, is the more difficult issue.
So, what to do? If as some believe that the dollar will decline by 50% from here over the next 10 years, then having your funds outside the dollar (in other currencies) would presumably produce a 7% average return per year. Investing in foreign stocks would provide that 7% plus the returns (or losses) obtained in foreign stock markets. Precious metals, as money substitutes, should do well. So should natural resources and other hard assets like land. Foreign resource stocks might do especially well.
None of this is meant to be investment advice. If what Schiff (and I) fear comes true, some of the above might be reasonable investments/hedges. On the other hand, all of the above comments would be 180 degrees wrong if we were to end up in deflation instead of inflation.
Schiff was very emotional, practically begging people to get out of the dollar. I suspect the economy and markets over the next year or two will justify his emotion. Whether his scenario results or not, is the more difficult issue.
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