Steve Keen's Debtdeflation.com has a post that contains a remarkable history of predictions of the housing bubble-induced economic crisis. Reading it makes it clear that the permabulls made no sense. It was in the run-up to the crisis that Dr. Keen registered the URL "debtdeflation.com". Even as a non-economist, it was obvious to me by summer 2007 that housing was in a depression, autos were in a severe recession, and therefore the domestic economy was in or going into at least a mild recession already, with only exports keeping things afloat. Given how high stocks were, it was an easy decision to sell all I could.
After being long stocks since August 1982 on, the first exit I made was throughout 2000. It was back in but only halfway in spring 2003.
Where now?
The averages: no.
Individual issues in selected asset classes: yes.
The economy will grow until it does not, but stock prices in the aggregate are too high for one year of improved earnings to affect their fundamental overvaluation. Right now, technical and sentiment factors argue for a "correction". Will "they" squeeze some remaining shorts and goose things higher?
Could be. But the S&P 500 could be halved to merely bring its dividend yield equal to the level of the 10-year Treasury. It was only about15 months ago that this equivalence occurred (briefly). The prior time was about 1960.
I anticipate this equivalence to return, but when and at what yield levels are unknowable. Right now one can find stocks with a 6-7% free cash flow "yield" that would be available for dividend payouts. DLTR, ROST, WPI, TEVA and CB are among many issues with that "value" characteristic. In overvalued times, Graham and Dodd just don't work anymore. One day their much more stringent criteria may be useful. For now, free cash flow yield or discount to tangible book value for profitable companies are the best the market offers.
Copyright (C) Long Lake LLC 2010
Showing posts with label Steve Keen. Show all posts
Showing posts with label Steve Keen. Show all posts
Saturday, April 3, 2010
Monday, January 25, 2010
Shalom Also Means Goodbye
Dr. Steve Keen of Australia, one of the few economists who predicted the financial crisis, has a concise post out titled The Economic Case Against Bernanke. Mish has also posted on this. Please read this, as it is not lengthy. The focus is debt levels; Dr. Keen correlates the 1920s and Great Depression to the recent past and current situation.
In my very humble opinion, there has to be a reason why the current downturn has lasted so long and why in December, 24 months after the first official recession month, the better part of one million people are reported to have left the job force.
They did not leave because they had successfully played the stock market rally in 2009!
Large companies, which often have 90%+ gross margins on their products, can show rising profits without sales gains simply by cutting a variety of costs, but it is the continued decline in the labor force that argues that the downturn is not truly over. And this is occurring as government has taken on more debt than the private sector has shed.
It would appear that either governments at all levels of this country need to suddenly find very productive uses of their debt spending, or we are simply going to have to get serious about canceling a number of the debts.
Also, it is time that all financial institutions perform accurate accounting of their assets. If the companies have no equity with proper accounting, their stocks should go to or near zero and the bondholders need to engage in a debt-for-equity swap. If the companies are solvent, then the Fed can cease trying to create inflation by penalizing savers.
One of the relatively subtle Big Lies extant is that the steep yield curve is bullish. Actually, a zero short-term interest rate is bizarre. A 10-year Treasury yield of about 3.7% is hardly predictive of a booming economy.
It is this sort of financial situation along with a rising stock market that has played the dominant role in the economic models such as the Index of Leading Economic Indicators and ECRI's analysis.
At very high and very low temperatures, matter acts strangely. The same is true at extremes of interest rates.
Meanwhile, of course the same Establishment that let TARP pass only after the Senate got to lard it up with a large spending bill that was languishing there, that changed the focus at the last minute when it got back to the House, that predicted a Depression if TARP did not pass and has not explained why the economy promptly imploded, and that hid the final large AIG payout to counterparties at 100 cents on the dollar by the distraction of some relatively small bonuses to the remaining staff at AIGFP has rallied the troops and appears poised to push the second coming of the Maestro to a second term as chairman of the Fed, no matter how abysmal his performance has been as Sir Alan's lieutenant and then as chief enabler of the reckless boom.
I see no reason why gold and low-end retailers will not continue to thrive, given that the same people can be reasonably expected to follow the same policies that brought them to the power to which they tenaciously cling.
Ben Shalom Bernanke should in good conscience say thanks but no thanks and let someone with clean hands guide the Fed.
Copyright (C) Long Lake LLC 2010
In my very humble opinion, there has to be a reason why the current downturn has lasted so long and why in December, 24 months after the first official recession month, the better part of one million people are reported to have left the job force.
They did not leave because they had successfully played the stock market rally in 2009!
Large companies, which often have 90%+ gross margins on their products, can show rising profits without sales gains simply by cutting a variety of costs, but it is the continued decline in the labor force that argues that the downturn is not truly over. And this is occurring as government has taken on more debt than the private sector has shed.
It would appear that either governments at all levels of this country need to suddenly find very productive uses of their debt spending, or we are simply going to have to get serious about canceling a number of the debts.
Also, it is time that all financial institutions perform accurate accounting of their assets. If the companies have no equity with proper accounting, their stocks should go to or near zero and the bondholders need to engage in a debt-for-equity swap. If the companies are solvent, then the Fed can cease trying to create inflation by penalizing savers.
One of the relatively subtle Big Lies extant is that the steep yield curve is bullish. Actually, a zero short-term interest rate is bizarre. A 10-year Treasury yield of about 3.7% is hardly predictive of a booming economy.
It is this sort of financial situation along with a rising stock market that has played the dominant role in the economic models such as the Index of Leading Economic Indicators and ECRI's analysis.
At very high and very low temperatures, matter acts strangely. The same is true at extremes of interest rates.
Meanwhile, of course the same Establishment that let TARP pass only after the Senate got to lard it up with a large spending bill that was languishing there, that changed the focus at the last minute when it got back to the House, that predicted a Depression if TARP did not pass and has not explained why the economy promptly imploded, and that hid the final large AIG payout to counterparties at 100 cents on the dollar by the distraction of some relatively small bonuses to the remaining staff at AIGFP has rallied the troops and appears poised to push the second coming of the Maestro to a second term as chairman of the Fed, no matter how abysmal his performance has been as Sir Alan's lieutenant and then as chief enabler of the reckless boom.
I see no reason why gold and low-end retailers will not continue to thrive, given that the same people can be reasonably expected to follow the same policies that brought them to the power to which they tenaciously cling.
Ben Shalom Bernanke should in good conscience say thanks but no thanks and let someone with clean hands guide the Fed.
Copyright (C) Long Lake LLC 2010
Sunday, September 20, 2009
It's Not Easy Being Steve Keen
A must read for a non-MSM view of the economy is Steve Keen's latest in a series. This one is titled It's Hard Being a Bear (Part Five): Rescued?
Here's the conclusion, but please consider reading the entire piece, as it is written for intelligent non-economists:
. . . the bad news is that this model only considers an economy undergoing a “credit crunch”, and not also one suffering from a serious debt overhang that only a direct reduction in debt can tackle. That is our actual problem, and while a stimulus will work for a while, the drag from debt-deleveraging is still present. The economy will therefore lapse back into recession soon after the stimulus is removed.
The Keen analysis is not inconsistent either with ECRI's bullishness or with the longer-term bearishness of many who believe the U. S. stock market is in a "secular" bear market no matter what their guess for stock prices is for the next year.
Copyright (C) Long Lake LLC 2009
Here's the conclusion, but please consider reading the entire piece, as it is written for intelligent non-economists:
. . . the bad news is that this model only considers an economy undergoing a “credit crunch”, and not also one suffering from a serious debt overhang that only a direct reduction in debt can tackle. That is our actual problem, and while a stimulus will work for a while, the drag from debt-deleveraging is still present. The economy will therefore lapse back into recession soon after the stimulus is removed.
The Keen analysis is not inconsistent either with ECRI's bullishness or with the longer-term bearishness of many who believe the U. S. stock market is in a "secular" bear market no matter what their guess for stock prices is for the next year.
Copyright (C) Long Lake LLC 2009
Tuesday, September 15, 2009
Statistics and Theory Regarding the Economic Depression
The Commerce Dept. has released July's Manufacturing and Trade Inventories and Sales.
Seasonally adjusted, total business sales were down 17.8%; manufacturers sales were down 22.2%, retailers' sales were down9.5%; and merchant wholesalers' sales were down 19.8%.
The ratio of total business inventories to sales remained higher in 2009 than in 2008, at 1.36 vs. 1.27.
These numbers are unadjusted for price changes, so given that core inflation was up year on year by over 1%, perhaps the real numbers are slightly worse than the above.
This comparison is of course to a month that occurred in the 3rd quarter of recession.
On this anniversary day of the fall of Lehman Brothers, there remains a school of thought that the above depressionary (or "Great Recession"-ary) numbers are not the worst of matters. A minority of economists believe that the public has been fooled into thinking that things are better than they are and will not get as good as they have been led to believe, because of the hair of the dog strategy to bail out leveraged debtors and encourage more debt. Here
is a current post from the Australian economist Steve Keen, one of the dozen named economists (including Nouriel Roubini) to have "called" the Great (or Global) Financial Crisis in advance. Herewith, Dr. Keen's It's Hard Being a Bear (Part Four): Good Economic Theory:
Steve Keen’s Debtwatch
Published in September 15th, 2009
I delayed publishing this on the blog because I thought it was worth submitting it to a newspaper for first publication on the anniversary of the Lehman Brothers collapse. That has occurred: a slightly edited version of this post (for reasons only of length, I hasten to add!) is in today’s Sydney Morning Herald (page 4 of the print version), WA Today, and probably several other newspapers in the Fairfax chain.
You have just come from your annual medical checkup, where your doctor assures you that you are in robust health.
Walking jauntily down the street, you bump into a practitioner of alternative medicine. He takes one look at you and declares “You have a serious tumour! It must be removed or you will die”.
You ignore him as you always have, and continue your merry way down the street. One day later, a stabbing pain suddenly cripples you, and you collapse to the pavement.
In agony, your call your doctor, who initially refuses to send an ambulance because he knows you are well.
When you lapse into a coma and stop talking mid-sentence, your doctor concludes that perhaps something is wrong, and sends an ambulance to take you to hospital.
Initially the doctor waits for you to revive spontaneously, because he still knows there’s nothing really wrong with you. But as your pulse starts to weaken, he reluctantly calls a retired doctor who had experience of a similar inexplicable malady in the distant past.
She prescribes massive doses of tranquilisers, painkillers, vitamins, and oxygen—all substances that had been removed from the medical panoply due to recent advances in medical theory. Reluctantly, your doctor follows his retired colleague’s advice—and miraculously, you start to revive.
After a year of expensive medical treatment, you return to the same robust health you displayed before your inexplicable illness. Triumphant, if somewhat puzzled, your doctor declares you well once more, and releases you from intensive care.
As you stride confidently away from the hospital, you have the misfortune to once again bump into the practitioner of alternative medicine.
“But they haven’t removed the tumour!”, he declares.
…
One shouldn’t have to spell out the details of such an analogy, but in times of widespread denial, one has to:
You are the economy;
The tumour is a massive accumulation of private debt;
Your doctor is Neoclassical Economics, and the retired colleague is a so-called “Keynesian” Economist — who doesn’t know it, since her medical textbooks were poorly written, but he’s actually following another economist called Paul Samuelson, not Keynes (and your doctor’s textbooks are so bad they don’t warrant discussion);
The alternative medicine practitioner follows Hyman Minsky’s “Financial Instability Hypothesis” (which is based on what Keynes actually did say—as well as the wisdom of Joseph Schumpeter and, in whispers, Karl Marx);
The moment you hit the pavement is the beginning of the Subprime Crisis; The collapse of Lehman Brothers is the moment when you slip into a coma; and
The day the doctor takes you off life support and declares all is well … is next month.
The final reason for me being a bear is that I am that practitioner of alternative medicine. Minsky’s “Financial Instability Hypothesis” has been ignored by conventional economists for reasons that are both ideological and delusional. A small band of “Post-Keynesian” economists, of whom I am one, have kept this theory alive.
According to Minsky’s theory:
Capitalist economies can and do periodically experience financial crises (something that believers in the dominant “Neoclassical” approach to economics vehemently denied until reality—in the form of the Global Financial Crisis—slapped them in the face last year);
These financial crises are caused by debt-financed speculation on asset prices, which leads to bubbles in asset prices;
These bubbles must eventually burst, because they add nothing to the economy’s productive capacity while simultaneously increasing the debt-servicing burden the economy faces;
When they burst, asset prices collapse but the debt remains;
The attempts by both borrowers and lenders to reduce leverage reduces aggregate demand, causing a recession;
If the economy survives such a crisis, it can go through the same process again, with another boom driving debt up even higher, followed by yet another crash; but
Ultimately this process has to lead to a level of debt that is so great that another revival becomes impossible since no-one is willing to take on any more debt. Then a Depression ensues.
That is where we were … in 1987. The great tragedy of today is that naïve Neoclassical economists like Alan Greenspan and Ben Bernanke allowed this process to continue for another three or more cycles than would have occurred without their rescues.
In 2008, they did it again—only with methods they would have disparaged a mere year earlier (“Rational Expectations Macroeconomics”, a modern neoclassical fad, preaches that government intervention can’t influence the level of economic activity at all—yet another belief that reality has recently crucified). This time, while the rescue has worked, the recovery they expect afterwards can’t happen—because there’s almost no-one left who will willingly take on any more debt.
This time, there’s no re-leveraging way out. The tumour of debt has to be removed.
Obviously, there are people who are taking on debt in America, and governmental debt addition is exceeding the aggregate of private and business debt reduction. So, I'm much less sure than Dr. Keen of his conclusion, though obviously I agree with his final recommendation; I believe that we are in fact releveraging and that this could well lead to another "recovery". But in that case, it strikes me that recent trends of outperformance of gold and, over a cycle, outperformance of safe debt such as Treasuries is likely to continue until and unless stocks or cash provide greater current income.
Copyright (C) Long Lake LLC 2009
Seasonally adjusted, total business sales were down 17.8%; manufacturers sales were down 22.2%, retailers' sales were down9.5%; and merchant wholesalers' sales were down 19.8%.
The ratio of total business inventories to sales remained higher in 2009 than in 2008, at 1.36 vs. 1.27.
These numbers are unadjusted for price changes, so given that core inflation was up year on year by over 1%, perhaps the real numbers are slightly worse than the above.
This comparison is of course to a month that occurred in the 3rd quarter of recession.
On this anniversary day of the fall of Lehman Brothers, there remains a school of thought that the above depressionary (or "Great Recession"-ary) numbers are not the worst of matters. A minority of economists believe that the public has been fooled into thinking that things are better than they are and will not get as good as they have been led to believe, because of the hair of the dog strategy to bail out leveraged debtors and encourage more debt. Here
is a current post from the Australian economist Steve Keen, one of the dozen named economists (including Nouriel Roubini) to have "called" the Great (or Global) Financial Crisis in advance. Herewith, Dr. Keen's It's Hard Being a Bear (Part Four): Good Economic Theory:
Steve Keen’s Debtwatch
Published in September 15th, 2009
I delayed publishing this on the blog because I thought it was worth submitting it to a newspaper for first publication on the anniversary of the Lehman Brothers collapse. That has occurred: a slightly edited version of this post (for reasons only of length, I hasten to add!) is in today’s Sydney Morning Herald (page 4 of the print version), WA Today, and probably several other newspapers in the Fairfax chain.
You have just come from your annual medical checkup, where your doctor assures you that you are in robust health.
Walking jauntily down the street, you bump into a practitioner of alternative medicine. He takes one look at you and declares “You have a serious tumour! It must be removed or you will die”.
You ignore him as you always have, and continue your merry way down the street. One day later, a stabbing pain suddenly cripples you, and you collapse to the pavement.
In agony, your call your doctor, who initially refuses to send an ambulance because he knows you are well.
When you lapse into a coma and stop talking mid-sentence, your doctor concludes that perhaps something is wrong, and sends an ambulance to take you to hospital.
Initially the doctor waits for you to revive spontaneously, because he still knows there’s nothing really wrong with you. But as your pulse starts to weaken, he reluctantly calls a retired doctor who had experience of a similar inexplicable malady in the distant past.
She prescribes massive doses of tranquilisers, painkillers, vitamins, and oxygen—all substances that had been removed from the medical panoply due to recent advances in medical theory. Reluctantly, your doctor follows his retired colleague’s advice—and miraculously, you start to revive.
After a year of expensive medical treatment, you return to the same robust health you displayed before your inexplicable illness. Triumphant, if somewhat puzzled, your doctor declares you well once more, and releases you from intensive care.
As you stride confidently away from the hospital, you have the misfortune to once again bump into the practitioner of alternative medicine.
“But they haven’t removed the tumour!”, he declares.
…
One shouldn’t have to spell out the details of such an analogy, but in times of widespread denial, one has to:
You are the economy;
The tumour is a massive accumulation of private debt;
Your doctor is Neoclassical Economics, and the retired colleague is a so-called “Keynesian” Economist — who doesn’t know it, since her medical textbooks were poorly written, but he’s actually following another economist called Paul Samuelson, not Keynes (and your doctor’s textbooks are so bad they don’t warrant discussion);
The alternative medicine practitioner follows Hyman Minsky’s “Financial Instability Hypothesis” (which is based on what Keynes actually did say—as well as the wisdom of Joseph Schumpeter and, in whispers, Karl Marx);
The moment you hit the pavement is the beginning of the Subprime Crisis; The collapse of Lehman Brothers is the moment when you slip into a coma; and
The day the doctor takes you off life support and declares all is well … is next month.
The final reason for me being a bear is that I am that practitioner of alternative medicine. Minsky’s “Financial Instability Hypothesis” has been ignored by conventional economists for reasons that are both ideological and delusional. A small band of “Post-Keynesian” economists, of whom I am one, have kept this theory alive.
According to Minsky’s theory:
Capitalist economies can and do periodically experience financial crises (something that believers in the dominant “Neoclassical” approach to economics vehemently denied until reality—in the form of the Global Financial Crisis—slapped them in the face last year);
These financial crises are caused by debt-financed speculation on asset prices, which leads to bubbles in asset prices;
These bubbles must eventually burst, because they add nothing to the economy’s productive capacity while simultaneously increasing the debt-servicing burden the economy faces;
When they burst, asset prices collapse but the debt remains;
The attempts by both borrowers and lenders to reduce leverage reduces aggregate demand, causing a recession;
If the economy survives such a crisis, it can go through the same process again, with another boom driving debt up even higher, followed by yet another crash; but
Ultimately this process has to lead to a level of debt that is so great that another revival becomes impossible since no-one is willing to take on any more debt. Then a Depression ensues.
That is where we were … in 1987. The great tragedy of today is that naïve Neoclassical economists like Alan Greenspan and Ben Bernanke allowed this process to continue for another three or more cycles than would have occurred without their rescues.
In 2008, they did it again—only with methods they would have disparaged a mere year earlier (“Rational Expectations Macroeconomics”, a modern neoclassical fad, preaches that government intervention can’t influence the level of economic activity at all—yet another belief that reality has recently crucified). This time, while the rescue has worked, the recovery they expect afterwards can’t happen—because there’s almost no-one left who will willingly take on any more debt.
This time, there’s no re-leveraging way out. The tumour of debt has to be removed.
Obviously, there are people who are taking on debt in America, and governmental debt addition is exceeding the aggregate of private and business debt reduction. So, I'm much less sure than Dr. Keen of his conclusion, though obviously I agree with his final recommendation; I believe that we are in fact releveraging and that this could well lead to another "recovery". But in that case, it strikes me that recent trends of outperformance of gold and, over a cycle, outperformance of safe debt such as Treasuries is likely to continue until and unless stocks or cash provide greater current income.
Copyright (C) Long Lake LLC 2009
Monday, August 24, 2009
Seeing It Coming
In "No-one saw this coming?" Balderdash!, the maverick Australian economist Steve Keen reviews the common thread amongst the few prominent economists who predicted the Great Financial Crisis of 2007-9, referring to research performed by the Dutch economist Dirk Bezemer.
Aside from Dr. Keen there are 11 economists, including Nouriel Roubini and Robert Shiller. While there is much more, the conclusion is easy reading.
Firstly, unlike a tsunami, this crisis was predictable by economists who take what Bezemer characterized as a “Flow-of-fund or accounting” approach. Secondly, a tsunami is actually caused by a huge shift in the planet’s tectonic plates, and the shift itself relieves the tension that caused the tsunami in the first place: in a sense, the tsunami resets the system to a tranquil state.
This financial tsunami was caused by the bursting of asset price bubbles driven by excessive levels of debt, but the bursting of those asset bubbles hasn’t eliminated the debt—far from it. Instead, economic performance for the next decade or more will be driven by the private sector’s attempts to reduce its debt levels, and this will depress economic activity for years. Unlike a tsunami, a debt crisis is a wave of destruction that keeps on rolling unless the debt is deliberately eliminated.
Everything that is being done by policy makers around the world is instead trying to restart private borrowing. A better analogy is therefore not a tsunami but a drug overdose—and our “neoclassical” economic doctors are attempting to bring the patient back to health by administering more of the same drug.
Econblog Review has several times referred to the strategy of the Fed and the Feds as an alcoholic's strategy of feeding more of the addicting substance to the addict. It did not work in Japan and is unlikely to work here.
One detail of the above post is incorrect. It is clearly not true that "everything" that policy makers in the U. S. are doing is directed to private borrowing. Actually, in true statist fashion, the Obama administration's "stimulus" program is heavy on Government borrowing and Government-directed investment into paving roads and high-speed rail projects. This strategy has a name: central planning.
Copyright (C) Long Lake LLC 2009
Aside from Dr. Keen there are 11 economists, including Nouriel Roubini and Robert Shiller. While there is much more, the conclusion is easy reading.
Firstly, unlike a tsunami, this crisis was predictable by economists who take what Bezemer characterized as a “Flow-of-fund or accounting” approach. Secondly, a tsunami is actually caused by a huge shift in the planet’s tectonic plates, and the shift itself relieves the tension that caused the tsunami in the first place: in a sense, the tsunami resets the system to a tranquil state.
This financial tsunami was caused by the bursting of asset price bubbles driven by excessive levels of debt, but the bursting of those asset bubbles hasn’t eliminated the debt—far from it. Instead, economic performance for the next decade or more will be driven by the private sector’s attempts to reduce its debt levels, and this will depress economic activity for years. Unlike a tsunami, a debt crisis is a wave of destruction that keeps on rolling unless the debt is deliberately eliminated.
Everything that is being done by policy makers around the world is instead trying to restart private borrowing. A better analogy is therefore not a tsunami but a drug overdose—and our “neoclassical” economic doctors are attempting to bring the patient back to health by administering more of the same drug.
Econblog Review has several times referred to the strategy of the Fed and the Feds as an alcoholic's strategy of feeding more of the addicting substance to the addict. It did not work in Japan and is unlikely to work here.
One detail of the above post is incorrect. It is clearly not true that "everything" that policy makers in the U. S. are doing is directed to private borrowing. Actually, in true statist fashion, the Obama administration's "stimulus" program is heavy on Government borrowing and Government-directed investment into paving roads and high-speed rail projects. This strategy has a name: central planning.
Copyright (C) Long Lake LLC 2009
Sunday, February 8, 2009
Weekend Wrap-up
This post, like Gaul, is divided into three parts: commentary, economics and markets:
COMMENTARY
The biggest news this weekend could be the delay in Treasury propounding its plan for repairing the financial system. It announced late last week that Mr. Geithner would talk Monday morning. Now it is to be Tuesday. The reason/excuse provided that he will be busy on Capitol Hill dealing with Congress does not persuade me.
Mr. Geithner could give his talk at 8 AM, answer questions if he wanted, and then hie himself to the Hill.
This is the burning issue of our time. The "stimulus" package will assuredly pass and will work over months and years, or not work. It is not an hour-to-hour emergency. So the talk really should occur when scheduled. Thus the suspicion is arising at this blog that our president has not made up his mind what to do. What a momentous decision for anyone to make! We all sympathize and wish him more than well. Yet, this crisis is not new; and, when the Government announces a talk that the whole world is planning to pay very close attention to, Mr. Obama should direct that come hell or high water, the talk must go on. Messrs. Obama, Geithner and Summers have to do more than walk and chew gum at the same time. Dealing with this crisis and their expansive response to it requires something more like running and playing the guitar at the same time: this is the big leagues (to mix a metaphor).
So far as the day-to-day thinking and mood of the markets, an influential British columnist has a cheery article (not!) - Bond market calls Fed's bluff as global economy falls apart: global bond markets are calling the bluff of the US Federal Reserve (Ambrose Evans-Pritchard). Here's his conclusion: My own view, sadly, is that there is no hope at all of stabilizing the world economy on current policies.
Here's some of his evidence:
The bank (of Japan) is already targeting equities on the Tokyo bourse. That is not enough for restive politicians. One bloc led by Senator Koutaro Tamura wants to create $330bn in scrip currency for an industrial blitz. "We are facing hyper-deflation, so we need a policy to create hyper-inflation," he said.
This has echoes of 1932, when the US Congress took charge of monetary policy. We are moving to a stage of this crisis where democracies start to speak – especially in Europe.
The European Central Bank's refusal to follow the lead of the US, Japan, Britain, Canada, Switzerland and Sweden in slashing rates shows how destructive Europe's monetary union has become. German orders fells 25pc year-on-year in December. French house prices collapsed 9.9pc in the fourth quarter, the steepest since data began in 1936. "We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe," said Julian Callow, Europe economist at Barclays Capital.
Spain's unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data. The labour minister said yesterday that Spain's economy could not "tolerate" immigrants any longer after suffering "hurricane devastation". You can see where this is going.
Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3m in the US. As the budget deficit surges to 12pc of GDP, Dublin is cutting wages, disguised as a pension levy. It has announced "Rooseveltian measures" to rescue the foundering companies.
ECONOMICS
There are some wonkish and lengthy but important economic posts this weekend. Compliments of Infectious Greed is Coming Up To Date On The Great Depression by Dr. Edward Hugh, who refers favorably to comments of Dr. Paul Krugman. I couldn't read it all, but the basic message is increasing evidence that the U.S. is indeed following the Japanese experience into deflation, with what is called a liquidity trap. I do recommend that you click onto the article on peruse the two graphs showing money supply growth in Japan 1997-2004 and Japan Money Supply and different amounts borrowed by different sectors. These graphs demonstrate that rapid money supply growth can be associated with deflation.
The Japan-U.S. similarity was stated clearly here on January 6, 2009 in Land of the Setting Sun, which began: "We are Japan".
Another more controversial economics article is printed in toto in Naked Capitalism. It is titled Steve Keen: "The Roving Cavaliers of Credit (or Why Ben's Helicopter Will Fail). The intellectual gist is that credit creation precedes and dominates money supply growth. It therefore supports the empirical evidence out of Japan and out of the ongoing U.S. crisis that a real credit collapse can cause deflation despite surging money supply measures. I cannot begin to give this writeup a fair explanation. It is more revolutionary that the prior one, but it is fascinating to see intellectual support for the deflationary debt collapse hypothesis emerging. Interested parties can get the gist of the argument quickly, though the article is very long.
MARKETS
The Econblog Review proprietary Bloomberg video indicator is suggesting that it may be near time to buy intermediate Treasuries: it is reassuring that the video title: "Crescenzi Says Bear Market May Develop for Treasuries" has been present perhaps all weekend. Technically, the yield back-up has been sharp and severe: from about 2% to about 3% in less than 2 months, and the yield is approaching the prior recession's low of about 3.1%, which could represent resistance. There is deflation; the price of gold is churning; my daughter reports that a normally bustling mall in a prosperous area was empty; and "everyone knows" that other than short Treasuries, yields have nowhere to go but up.
Re stocks, our proprietary Big Mac indicator showed nonconfirmation of last week's Dow rally, as MCD barely budged. When market leaders with continued strong fundamentals and reasonable valuations can't even keep up with the market on a strong up week, one should worry that the rally is more short-covering than real.
Gold remains the beneficiary of the global anxiety. The trader in me remains wary of it for now.
Copyright (C) Long Lake LLC 2009
COMMENTARY
The biggest news this weekend could be the delay in Treasury propounding its plan for repairing the financial system. It announced late last week that Mr. Geithner would talk Monday morning. Now it is to be Tuesday. The reason/excuse provided that he will be busy on Capitol Hill dealing with Congress does not persuade me.
Mr. Geithner could give his talk at 8 AM, answer questions if he wanted, and then hie himself to the Hill.
This is the burning issue of our time. The "stimulus" package will assuredly pass and will work over months and years, or not work. It is not an hour-to-hour emergency. So the talk really should occur when scheduled. Thus the suspicion is arising at this blog that our president has not made up his mind what to do. What a momentous decision for anyone to make! We all sympathize and wish him more than well. Yet, this crisis is not new; and, when the Government announces a talk that the whole world is planning to pay very close attention to, Mr. Obama should direct that come hell or high water, the talk must go on. Messrs. Obama, Geithner and Summers have to do more than walk and chew gum at the same time. Dealing with this crisis and their expansive response to it requires something more like running and playing the guitar at the same time: this is the big leagues (to mix a metaphor).
So far as the day-to-day thinking and mood of the markets, an influential British columnist has a cheery article (not!) - Bond market calls Fed's bluff as global economy falls apart: global bond markets are calling the bluff of the US Federal Reserve (Ambrose Evans-Pritchard). Here's his conclusion: My own view, sadly, is that there is no hope at all of stabilizing the world economy on current policies.
Here's some of his evidence:
The bank (of Japan) is already targeting equities on the Tokyo bourse. That is not enough for restive politicians. One bloc led by Senator Koutaro Tamura wants to create $330bn in scrip currency for an industrial blitz. "We are facing hyper-deflation, so we need a policy to create hyper-inflation," he said.
This has echoes of 1932, when the US Congress took charge of monetary policy. We are moving to a stage of this crisis where democracies start to speak – especially in Europe.
The European Central Bank's refusal to follow the lead of the US, Japan, Britain, Canada, Switzerland and Sweden in slashing rates shows how destructive Europe's monetary union has become. German orders fells 25pc year-on-year in December. French house prices collapsed 9.9pc in the fourth quarter, the steepest since data began in 1936. "We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe," said Julian Callow, Europe economist at Barclays Capital.
Spain's unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data. The labour minister said yesterday that Spain's economy could not "tolerate" immigrants any longer after suffering "hurricane devastation". You can see where this is going.
Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3m in the US. As the budget deficit surges to 12pc of GDP, Dublin is cutting wages, disguised as a pension levy. It has announced "Rooseveltian measures" to rescue the foundering companies.
ECONOMICS
There are some wonkish and lengthy but important economic posts this weekend. Compliments of Infectious Greed is Coming Up To Date On The Great Depression by Dr. Edward Hugh, who refers favorably to comments of Dr. Paul Krugman. I couldn't read it all, but the basic message is increasing evidence that the U.S. is indeed following the Japanese experience into deflation, with what is called a liquidity trap. I do recommend that you click onto the article on peruse the two graphs showing money supply growth in Japan 1997-2004 and Japan Money Supply and different amounts borrowed by different sectors. These graphs demonstrate that rapid money supply growth can be associated with deflation.
The Japan-U.S. similarity was stated clearly here on January 6, 2009 in Land of the Setting Sun, which began: "We are Japan".
Another more controversial economics article is printed in toto in Naked Capitalism. It is titled Steve Keen: "The Roving Cavaliers of Credit (or Why Ben's Helicopter Will Fail). The intellectual gist is that credit creation precedes and dominates money supply growth. It therefore supports the empirical evidence out of Japan and out of the ongoing U.S. crisis that a real credit collapse can cause deflation despite surging money supply measures. I cannot begin to give this writeup a fair explanation. It is more revolutionary that the prior one, but it is fascinating to see intellectual support for the deflationary debt collapse hypothesis emerging. Interested parties can get the gist of the argument quickly, though the article is very long.
MARKETS
The Econblog Review proprietary Bloomberg video indicator is suggesting that it may be near time to buy intermediate Treasuries: it is reassuring that the video title: "Crescenzi Says Bear Market May Develop for Treasuries" has been present perhaps all weekend. Technically, the yield back-up has been sharp and severe: from about 2% to about 3% in less than 2 months, and the yield is approaching the prior recession's low of about 3.1%, which could represent resistance. There is deflation; the price of gold is churning; my daughter reports that a normally bustling mall in a prosperous area was empty; and "everyone knows" that other than short Treasuries, yields have nowhere to go but up.
Re stocks, our proprietary Big Mac indicator showed nonconfirmation of last week's Dow rally, as MCD barely budged. When market leaders with continued strong fundamentals and reasonable valuations can't even keep up with the market on a strong up week, one should worry that the rally is more short-covering than real.
Gold remains the beneficiary of the global anxiety. The trader in me remains wary of it for now.
Copyright (C) Long Lake LLC 2009
Subscribe to:
Posts (Atom)