Well, I Was Wrong
I have been a stock market bear for some months now. I don't really think the US economy is going to double dip on its own, but I felt like Europe and Asia would bring us down. Well, I simply underestimated both the Fed's and the ECB's willingness to goose financial assets. If the Fed and ECB are going to inflate our way out of, uh, whatever it is we are in, then I certainly don't want to be holding bonds, particularly at these absurdly low interest rates. Stocks are not as good of an inflation hedge as some hard assets, but they are a hell of a lot better than most bonds. I'm certainly not going to buy back in the current euphoric highs, but I am giving up on trying to predict that market based on fundamentals. It seems that fundamentals are a suckers game, and you better not be timing the market unless you have an inside line to government policy, because that seems to be what drives the train.
PS- I wish Milton Friedman were still around. QE was as much his idea as anyone else's. I wonder what he would have thought of the results, or of this particular implementation.
ThalesOfCo:
Crap fundamentals improve most when deflation (bankruptcy) risks are removed
September 14, 2012, 11:55 amtjic:
My stock holdings are $0 (and have been for a few years).
My cash holdings are about $50.
I'm taking every spare dollar I have and paying off debt.
Hopefully my house will be entirely free and clear by my mid-late 40s. Business debt will take a bit longer, perhaps.
Because of the economy (and being overly enthusiastic with starting a second business just as the Great Recession was ramping up) my retirement savings are $0.
I'm hoping that
a) entrepreneurialism is still a decent strategy in America, and brand #3, or #4 or whatever will work
b) working till I'm 70 or so will pay off
c) after the house is paid off in a few years I can turn the fire hose into savings just before the Lost Decade (or, rather, more typically Lost 15 years) ends.
I don't know. It's a bit of a new world, and I'm feeling my way forward.
September 14, 2012, 12:17 pmmesaeconoguy:
Gold/metals was the right way to play this distortion.
September 14, 2012, 12:49 pmRuss:
Perhaps I misunderstand Friedman, but I would think that QE would be anathema to him. Didn't he once say something like the monetary supply could be better managed by a computer? Maybe he would be against using loose monetary policy to counterbalance pathetic fiscal policy?
September 14, 2012, 1:32 pmFormerCreative:
I think you've got a validation error at Line 18: attribute "crossed" should have a value of "true."
Probably should be a solo tag, too; unless you're considering that as a block-level element. ;)
September 14, 2012, 1:53 pmVal:
Goosing the markets and actually goosing the economy are not the same thing. In fact, one could say that the markets (in this case the equity markets since that is what everyone means) are now effectively decoupled from the economy. However, to quote a phrase: Something that can't go on forever, won't.
September 14, 2012, 7:20 pmMark:
Yes, Friedman would not propose QE. He believed in stable, consistent monetary growth.
September 15, 2012, 1:18 amThe reason for the market surge based on QE is what we learned from the 2008 financial crisis. The big investors rely on leverage. When rates are zero, they can play all of their hedge trading strategies and make bundles of money. The only problem is when the interest rates shift their trades go down the toilet.
James:
If you bought them 10 years ago. Also, don't forget that sometimes the government decides that it doesn't want individuals to own gold and forces you to liquidate.
September 15, 2012, 11:01 amMondak:
The tough thing is that your math is right but you underestimate (can't estimate) people's emotion. When the math is this out of balance, you just need a catalyst to set things in motion. Not sure what that will be, big or small. It might be another terrorist thing, it might be another major default in Europe (just a matter of time) or whatever else I can't predict. But shortly afterwards, everyone will have seen this coming just like you can't seem to find anyone who now claims to have been surprised by the mortgage thing / dot com bubble etc. At that point, things will go downhill faster than anyone, myself included could really predict.
September 15, 2012, 12:25 pmmesaeconoguy:
No, I bot them 9 months ago. Silver was up 4% following the announcement Thurs.
Pay attention.
I don't care if the government says I have to start shitting in the forest, ain't gonna happen. They want their geld, they'll have to come get it. With guns.
September 15, 2012, 4:30 pmmesaeconoguy:
Agreed, Warren, no Friedman I’ve read (which is nearly all
of him) suggests he would endorse anything like QE.
In fact, if I recall, in Money Mischief, he warns against
such monetary horseshittery…
I believe Friedman advocated letting a computer run monetary
September 15, 2012, 4:34 pmpolicy, setting monetary expansion at about 3% per year, roughly equal to
average GDP growth (presumably to maintain price stability, the mandate the Fed
has now officially abandoned).
JA:
I wish Ludwig Erhard was here running the show.
He was a politician (and an economist) who implemented the economic policies that led to Germany's post WWII "economic miracle." He is probably the only economist of the 20th century (and so far, of the 21st century) who actually implemented an economic program that produced the results desired; (though the long time British PM of Hong Kong also produced astonishingly good results too.).
Erhard realized that if people are simply left alone and the shackles of govt. are removed, and the free market allowed to work, production and investment will follow as day follows night. Erhard defied the diktats of the Harvard and Cambridge economists - whose economic nostrums maintained W.Germany in a crippled, dysfunctional state. No surprise that one of the "celebrated" economists whose policies were crippling Germany was the arrogant J.K. Galbraith (one of the water-carriers , ideologically speaking, for Keynes).
Friedman, Keynes, Samuelson, Bernanke, Goolsbee, etc., though all having differing views on how govt. should implement policies to improve an economy, all believe(d) they had/have the knowledge and smarts to ascertain which policies should be implemented to aid an economy. Sorry folks; nobody, no agency, no organization, no gaggle of MIT/Harvard/Columbia/NYU/Wharton/Cambridge/Berkeley/Oxford/Chicago PhD economists have the ability to do this, though I realize that these supremely arrogant souls believe they do.
The real-world evidence of all the unfortunate economic dislocations since 1929-to- present, apparently does not dissuade the economists from maintaining their arrogance and conceit. Further, the economic storms since 1930 are AS FREQUENT AND LAST LONGER, on average, than those that occurred from about 1800 to 1915; a period when there was no FED and no academic economists to provide "advice" to screw up things worse than they were already, and oh, by the way, almost ZERO inflation.
An economy, like the weather, is a chaotic, non-linear, dynamical system and cannot be described nor predicted using any sort of deterministic analyses; yet this is what all these economists do. Benoit Mandelbrot - of fractal geometry fame- proved this in his book "THE MISBEHAVIOR OF THE MARKETS." Of course, his book and his views were totally ignored because, basically, he showed that economist are literally barking up the wrong tree, if not just wasting their time (and worse, suggesting policies that make things much worse). So, like the proverbial ostrich, mainstream economists still have their heads, necks, torsos and their asses deep in the ground where they can all talk to each other and award themselves prizes in economic "science." They arise from their narrow tunnels to dispense deadly advice to the guinea-pig populace, and quickly return to their well-paid, secure, tenured academic positions while those at the receiving end of their economic policies - policies that never seem to work at all - lose their jobs, homes and livelihoods.
Somehow, economists are never held accountable for the suffering their implemented polices inflict on the citizenry; no matter how wrong they are or how often, they still keep their jobs. Talks about a make-believe fantasy world in which they are cocooned!!
"THE PANIC OF 1907," (Bruner and Carr) traced the UNPREDICTABLE series of cascading events which led to that disaster; this is not unlike an airplane disaster in which one problem leads to another which leads to another, etc.; and it is/was all UNPREDICTABLE. This book, though not intentionally written so, confirms Mandelbrot's thesis.
Erhard realized that the billions of daily actions of millions or people cannot be modeled or directed. He just let them do their thing.
September 15, 2012, 5:55 pmNehemiah:
You are absolutely correct, but remember the goal isn't to get the economy going, but to create a little near term euphoria to get Obama reelected. To the extent that there is an economic component to this strategy it would be that some of the paper wealth created by inflating portfolios might translate to increased consumer spending. .
September 17, 2012, 11:39 amTed Rado:
I am not an economist, but common sense suggests that what we are doing, such as QE, the ECB purchase of worthless bonds, etc., is total nonsense. The first law of thermodynamics says (to paraphrase) that you can't make something out of nothing. The economists and financial "experts" seem to believe otherwise. By some clever rearranging of deck chairs, the Titanic will not sink.
September 17, 2012, 7:46 pmThe problem is that we (individuals and governments both) have been living on credit cards. Short of cash? No problem, get anothr credit card.
We do not seem to have the will to tighten our belts and face reality. Example: Social security will have a 30% shortfall in a few decades. This could be accomodated by putting a freeze on SS colas for ten years or so, extending the age of retirement, or some combination of the two. Sure, it would be politically unpopular, but that's what strong leadership is: explaining to people that strong medicine in needed.
Ronald Reagan put the country into a serious recession to stop the inflation of the Carter years. Yes, it was painful and his popularity cratered, but it was the right thing to do. Some leader with guts to make painful decisions is what is needed, not more credit cards Bernanke and Obama style, and kicking the can down the road for the next guy to worry about. What a gutless bunch of pansies we are!