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Notes to myself, possibly of interest to others.
-- Bill Northlich

Friday, February 5, 2016

Grantham: Economy Will Beat Consensus View

Fund manager Jeremy Grantham thinks cheap oil will give bigger boost to global output than many think.

By
JEREMY GRANTHAM
February 4, 2016

Here is summary of this piece.

• The positive effects of low resource prices are underestimated. The U.S. and global economies are likely to do significantly better this year than recent opinions predict. The U.S. has plenty of spare capacity to grow above its longer-term limits. The biggest risk would be China’s GDP becoming much more disappointing.

• The U.S. and global markets do not look like they are in bubble territory. They can always suffer a regular bear market (and are almost in one now). But I still believe we will have to wait longer for the BIG ONE and that global equity markets will regroup once more.

• Currently ultra-low resource prices are not sustainable, particularly those of grains and oil. Oil producers need $65/barrel and rising to finance new oil exploration. Resource prices will inevitably rise and as they do they will reduce once again the growth rates of the global economy.

A quick look at 2015 and 2016

2015

Looking back to last year we could simplify it by saying that the big positive was, as usual, support from the Federal Reserve and its allies, as they continued to maintain lower than market rates. You know my view: These lower rates have surprisingly little effect on the economy but a big effect on pushing up asset prices. Historically – well for 25 years anyway – the lack of reasonable values has often not impeded the Fed’s ability to push equity prices higher. Indeed, by any traditional measure we have spent over 80% of the last 25 years overpriced. The big negative in 2015, of course, was China slowing down, especially in areas requiring raw materials. This helped to broadly lower global GDP growth. Loosely speaking, the closer investments were to China – say, miners, countries supplying raw materials, and emerging markets with heavy Chinese trade – then the relatively worse they did. And the closer to the Fed, as the U.S. is, the less badly they did.



More From Jeremy Grantham

Jeremy Grantham: Watch Out for Wall St. Optimists

Jeremy Grantham: The 10 Topics That Really Matter

Jeremy Grantham: U.S. Stocks Still Have Legs

The global bear market bias of 2015 was also helped along everywhere by the plunging oil price, which caused layoffs, reductions in capital spending, and, probably more importantly for equities, increased global uncertainties both at the company financial level and the country political level.

Right behind that as a negative, particularly in the U.S., was a decline in profit margins. Finally! But the drop was from levels so far above the old trend that even after recent declines they remain handsome.

Looking at the U.S. equity market I think we might agree on how powerful the Fed is in the market equation. It approximately offset these three very large negatives: China, oil, and declining margins, which together caused disappointing global growth. But in addition, it had to neutralize the justifiable nervousness caused by increased terrorism, immigrant problems, Russia’s sharp elbows, and an apparently disheveled Europe. Not bad!

2016

Looking to 2016, we can agree that uncertainties are above average. But I think the global economy and the U.S. in particular will do better than the bears believe it will because they appear to underestimate the slow-burning but huge positive of much-reduced resource prices in the U.S. and the availability of capacity both in labor and machinery. So even though I believe our trend line growth capability is only 1.5%, our spare capacity and lower input prices make 2.5% quite attainable for this year. And growth at this level would make a major market break unlikely. As discussed elsewhere, this situation feels at worst like an ordinary bear market lasting a few months and not like a major collapse. That, I think, will come later after the final ingredients of a major bubble fall into place.

As always, though, prudent investors should ignore historical niceties like these and invest according to GMO’s rather depressing 7-year forecast. The U.S. equity market, although not in bubble territory, is very overpriced (+50% to 60%) and the outlook for fixed income is dismal. At current asset prices no pension fund requirements can be met. Thus, we should welcome a major market break that will leave us with more reasonable investment growth potential for the longer term, but I suspect that we will have to wait patiently for such a major decline. The ability of the market to hurt eager bears some more is probably not exhausted. I still believe that, with the help of the Fed and its allies, the U.S. market will rally once again to become a fully-fledged bubble before it breaks. That is, after all, the logical outcome of a Fed policy that stimulates and overestimates some more until, finally, some strut in the complicated economic structure snaps. Good luck in 2016.

U.S. equity bubble update

On the evaluation front, the market is not quite expensive enough to deserve the bubble title. We at GMO have defined a bubble as a 2-standard-deviation event (2-sigma). We believe that all great investment bubbles reached that level and market events that fell short of 2-sigma did not feel like the real thing. (In our view, 2008 was preceded by an unprecedented U.S. housing bubble – a 3-sigma event.)

Today a 2-sigma U.S. equity market would be at or around 2300 on the S&P, requiring a rally of over 20%; even from the previous record daily high it would have required an 8% rally. The impressive bubble peaks of 1929 and 2008 also featured broad international overpricing of equities, measured at over 1-sigma, and this, too, was completely lacking this time. Emerging market equities were just ordinarily overpriced last year and full of investor concerns totally unlike normal bubble conditions. Europe and other developed markets were more overpriced but nowhere near bubble levels, and were also characterized by extreme nervousness.

On the more touchy-feely level of psychological and technical measures, the U.S. market came closer to bubble status but, still, I think, no cigar. I had pointed out two years ago that nearly all major bubbles are immediately preceded by a period when the safer blue chips outperform the riskier, higher-beta stocks on the upside. At other times this would be considered very unusual. Two years ago there was not a hint of that, but last year was a classically narrow market – i.e., led by a handful of the very largest and, on average, higher-quality companies. So the bears can claim this one, although I think with an asterisk because the market was not really going up last year and outperformance of bigger stocks in a flat market is not particularly remarkable. Also mitigating the bear argument is that this market effect was not caused by defensive buying of blue chips but, I would say, offensive buying into the spectacularly superior earnings of this small group. So, not convincing. I had also written that I did not see much chance that this market would end before records would be set for corporate deals done, encouraged by the extremely low rates and reluctance to invest in new plants and equipment. This test, I must admit, was passed with flying colors, for all deal records were broken in the second half of last year. Much more convincing.

A third less elegant but historically effective test further improves the odds of a bear market this year: the infamous January rule. Applied GMO-style, it goes that the first five trading days predict the balance of the year, especially if the average number is negative. (As does the whole month with about the same – and quite significant – statistical weight.) When the two signals oppose each other, on the other hand, we have had very normal years. Needless to say, the first five days and January were both record-ugly this year. Since 1925, a down five-day and down January have more than doubled the probability of a down market for the remaining 11 months.

So I must admit to feeling nervous for this year’s equity outlook in the U.S. But I am not entirely convinced. Sure, we can have a regular bear market. That is always the case. But the BIG ONE? I doubt it. And here is my admittedly reduced case.

The most important missing ingredient is a fully-fledged blow-off. This should come complete with crazy speculative anecdotes for your grandchildren, massive enthusiasm from individual investors, an overwrought, overcapacity economy, and, at minimum, a 2-sigma S&P 500 at 2300. Lacking all of this, I still believe it is “likely” that we will reach Election Day more or less intact. I will, though, admit to my definition of “likely” being beaten down by the negative factors listed earlier to something just over 50%. The wild card, as usual these days, is China. The market is discounting lower growth. (I believe 4% a year for the next 10 years would be a reasonable target.) But a deep entry into negative GDP numbers might ruin my relatively positive case for global growth.

To rub in how ordinary our present market negatives are compared to the impending doom bubble of 2007 when a crash seemed inevitable – like “watching a slow motion train wreck”2 – let’s compare today with 2007.

Back then the banks looked very vulnerable. Indeed, I predicted in July 2007, “at least one major bank… will fail.” This time oil debt may hurt, but our moderately strengthened banks will surely withstand this much smaller hit easily. In 2007, resource prices, historically a terrible drag on economies, were at cosmic highs – oil alone was over $150/barrel. Today they are at cosmic and unsustainable lows. So a major, major negative is this time a major positive. The U.S. housing market back then was at a 3-sigma high (never before approached) and represented a potential and realized $6 trillion writedown of perceived wealth. This time the U.S. housing market is merely moderately overpriced. Last time the economy was cranking out 1.25 million extra houses and the whole economy was running flat out. This time we are building at least 300,000 houses below normal levels and there is spare capacity in the broader economy. See our Quarterly Letters during 2007. Clearly, this current situation has no material similarity to that which impressed us as so irresistibly negative in 2007. In short, the economic outlook for the immediate future is less bad than recent commentaries would have you believe. Especially in the U.S.

Yet more on oil

So, this is the situation: The world’s most important resource, oil, which we need for practically everything but especially to drive our cars, is getting really cheap. And this is helping to drag other commodities down with it. Everything is getting cheap. It is like a tax cut for individuals that is being financed by the profits of oil companies and Saudi Arabia. Now, what’s not to like about that? Yet this is a big part of what is spreading terror in the markets. Why?

I have described before the situation that although in the long run there is an apparent balance between winners and losers, the problem is that oil companies and their suppliers take their hits up front as they reduce their exploration and development efforts projecting deep into the future. Oil-dominated countries do the same, in addition to cutting their national budgets and their foreign buying. Under this shock, economic expectations can take a hit.

The shock, I suppose, is how completely Saudi Arabia and OPEC were willing to give up any and all attempts to control price. Through 90% of oil history, if oil producers wanted to outproduce demand they could have. And it would always have buried oil prices. But mostly they restrained their competitive market share instincts in the interest of a more stable price. And very sensibly so. To summarize my previous case, I consider that Saudi Arabia, if it has been driven by commercial as opposed to political reasons, has made perhaps the biggest economic error in the history of oil. If their main motive is political, on the other hand, it better be an extremely important one for they themselves are quite likely to pay a very high political as well as financial price. An oil price change of this magnitude and speed is very destabilizing to economies, politics, and social cohesion. It makes for dangerous times and the market does not like it. The psychological response is understandable.

But excluding some major political upheaval, what are the likely economic consequences from here? The largest hits from the major oil company responses are behind us, although at $30/barrel (and maybe less) there will be some further retrenchment. And now comes the matching response from us, the consumers. Everything we buy has cheaper input costs. The major item of gasoline purchases is a steady jolt of encouragement. Heating bills are also much lower. Could there be a better financial input than this to the group that has been hurting for 30 years – the median wage earner? Not easily. Some of us argued that the impact of high resource prices in 2008 had an underappreciated major negative impact on the economy, and there certainly is a strong statistical relationship between previous upward jots in oil prices and ensuing recessions. (Actually, the number is 100%. Every major previous increase in the price of oil was followed by an economic setback. And why would this not be the case?) We argued that mainstream economists were so obsessed with bank and credit problems that they had no time to worry about resource prices. Typically they almost never do. Market opinion now, though, impressed with the early negatives that it should have expected and because the offsetting stimulus effect is delayed and weakened initially by some understandable increases in savings, is doing the opposite. It is underrating what will very likely become an important economic tailwind for the next several quarters. Reflecting current opinion (January 25), Luke Kawa, a writer for Bloomberg reviewing the oil situation claims, “One of the biggest surprises in economics has been how the world responded to a period of lower energy prices.” Well, the economic world is easily surprised.

A lot of people who worry about resources had felt that several years of much higher resource prices (from 2006 to 2014) were acting to weaken our global economy, slowly but surely, and I was one of them. I feel that this period now is a reprieve, if only temporary, from that pressure. It gives an opportunity for the global economy to regroup and start to grow a bit faster again, at least for a while.

The U.S. economy in particular, with its available labor, tucked away in the current ultra-low labor participation rate, and a moderately low industrial capacity ratio (76.5% – 3.5 points below its 1972- 2014 average), appears to be well-positioned to benefit. And, we are still an important wheel in the global machinery.

Grantham is founder of GMO, a Boston-based asset management firm.

Copyright 2014 Dow Jones & Company, Inc. All Rights Reserved

Jeff Saut 2.5.16


"As many times as we've repeated this over the years, we feel compelled to yet again remind everyone that the stock market and the economy are not the same. Financial media personalities and pundits compete to outdo one another with doomsday prognostications for higher ratings by feeding the anxiety of already frightened investors to become captive frightened listeners. Don't give in to it."

. . . Steven Gluckstein, Seaview Global Advisors

I received Steven Gluckstein's sage words yesterday from one of our financial advisors with the tag line, "Hey Jeff, Steve is a guy I have a LOT of respect for. He seems to be echoing many of the things you have mentioned." Steve's insightful missive goes:

"The stock market's abysmal start in the new year is not a harbinger of imminent economic disaster. As we stated last month, markets will be plagued by increased volatility with fragile sentiment making the market vulnerable to multiple corrections. Certainly near-term caution is warranted after the sharp drop in oil, stocks and the ongoing investor angst over the Fed's initial rate hike. Strategist calls to 'sell any rally' or even 'sell everything' have become the new mantra. These are classic signs of a bottoming along with hordes of analysts capitulating on their covered stocks as they abandon long-held views. The typical decline of between 5% and 10% for the major stock averages this year actually understates the pain for most investors since the average listed stock is already in its own bear market with a decline of 20% or more from its 52-week high. Nonetheless, we still expect that the major averages will finish the year higher - as confidence in better forward earnings guidance resurfaces later in the year along with improved political clarity."

Indeed, that sounds a lot like me! In fact, it is VERY reminiscent of another gentleman I quoted a few weeks ago named Howard Marks, of Oaktree Capital fame, who titled his report "What Does the Market Know?" One quip from said article reads:

"Especially during downdrafts, many investors impute intelligence to the market and look to it to tell them what's going on and what to do about it. This is one of the biggest mistakes you can make. As Ben Graham pointed out, the day-to-day market isn't a fundamental analyst; it's a barometer of investor sentiment. . . . You just can't take it too seriously. Market participants have limited insight into what's really happening in terms of fundamentals, and any intelligence that could be behind their buys and sells is obscured by their emotional swings. It would be wrong to interpret the recent worldwide drop as meaning the market 'knows' tough times lay ahead. . . . It's important to understand for this purpose that there really isn't such a thing as 'the market.' There's just a bunch of people who participate in a market. The market isn't more than the sum of the participants, and it doesn't 'know' any more than their collective knowledge."

Accordingly, I am sticking with my "call" that the selling stampede ended last Thursday ﴾1-28-16﴿ at session 21 in the envisioned 17-25 day "selling stampede" timeframe until proven wrong.

Wednesday, December 30, 2015

Note to self. Sorry...

Rose Bowl Parking.

5 N to 2 N to 134 E.  ~1.5 mi to Figueroa.  
Exit - looping around to Fig.; left on Fig.; 
left on Colorado Blvd.  .25 to .5 mi on Col. then left on Patrician Way.  
Wind around Annandale Golf Course.  Keep to right.  
Rt on Glen Oaks Blvd.  @ San Rafel there is a road triangle.  Stay on left on Glen Oaks.  
Wind to bottom of hill.  Left on Linda Glen; go up hill.  Park.  
Walk down Linda Glen to Linda Vista.  Take Seco St. over to Rose Bowl area.  Map says ~1.5 mi.

To leave walk back up to car (!).  Back track on Linda Glen and Glen Oaks to San Rafel.  Left on San Rafel down to 134 freeway.

Tuesday, December 29, 2015

Always ask "Does it add value?"

In the spirit of offering guides to navigating life's challenges, here is a version of the heretofore very closely-held "Bill's Corollary*":
Always ask "Does it add value?"
This can be asked of anything - a company, a business plan, an individual's job, a person's life.
For example, what value do health insurance companies add? (Anyone?...)
Or, in your job, if you can't clearly see that you are adding value, you should maybe keep your eye out for another job, since your boss will at some point wonder why (s)he is paying you.
The creative destruction of capitalism is just nature asking of every endeavor - what value is being added/created here?
One could opine that many of Jesus' teachings are meditations on the Corollary. One could, but I won't.
There. You are welcome.
*What is Bill's Corollary a corollary of? Everything!

Wednesday, September 30, 2015

Stocks: Patient Bullishness

The volatility in markets these days is a big story.















What's all the to-ing and fro-ing about?  CNBC needs something to do.

Seriously, the case for a sour market outlook comes not from the ranting punditsphere, eg, the likes of Carl Ichan warning about a looming market catastrophe.  Watching CNBC is not good for one's health or wealth.

However there is one solid brief to be filed in support of a bearish view:  We are possibly entering, or in, a period of global deflation.  Reality setting in at China HQ is a contributing factor.
























This chart is probably the reason the Fed did not tighten, and may not for a while.

Wait - we are worried about low inflation?  Many of us lived through '80's where inflation was the worst thing in the world.  But it's important to remember what inflations is:
Inflation is not just rising prices.  Inflation is a rising wage-price spiral.  Prices can't rise very far without a concomitant rise in wages.  Period.
Well, as a business, you can raise prices all you want.  Soon, without rising wages, nobody can buy your stuff.

Point is, deflation is bad and very hard to get out of.  It's much harder to escape deflation than to reduce inflation.

---

So.  I mentioned bullishness above.  Despite the latter I remain, not screamingly, but patiently bullish on the markets, for the following reasons.
  • The amount of cash on companies' books is vastly larger now than in my lifetime.  That tends to put a floor under the amount of damage that can be done by broad economic trends.


  • We don't have rising interest rates. We don't have an inverted yield curve.  We don't have an economy in recession.  More here on the latter points by David Kotok, a guy I find very clear and enlightening.  (Ok, a pundit.  Sorry).
  • Finally, the US is the safe haven of the world in times of economic stress - for both equities and fixed income.

Friday, September 18, 2015

My comment on Josh Barro's article on Carly Fiorina at the NYT.

bill n

 lafayette, ca 
Ok, have scanned most but not all the comments. It's clear none of you, esp Barro, know what you are talking about. HP was dead in the fall of 2001. Dead. It would have ceased to exist if not for the merger. Would that make it better for all the people Carley "fired"? Walter Hewett wanted to turn HP into a printer company. Ok - Save 1000 jobs at best. The merger was driven by Tom Perkins, who basically hired Carley. Here's a link to an article by Perkins on what happened. http://is.gd/jDXSFN Ok, it's Breitbart. But the article is correct. It won't kill you to visit the link - you have my word. HP wasn't growing revenue quickly enough? How about no revenue? Better? I'm not a Republican and I think it's sad that Carly has to bow and scrape, and try to be the new Sara Palin, mouthing attendant blithering idiot statements about war, the economy, "entitlements", etc, but the current popular anti-Carly narrative is nonsense at best.

Tuesday, July 14, 2015

Jihadists are us

Krugman asks in a recent NYT op-ed:
"Why is there so much animus against the unemployed, such a strong conviction that they’re getting away with something, at a time when they’re actually being treated with unprecedented harshness?"
K has been discussing this and related issues - why the "right" has such an animus toward, and fear of the great unwashed, for a long time - in op-ed's, interviews, and blog posts. In the article he asks if the reason is stupidity, ie, that republicans don't know that there's not much welfare going on rt now, that republicans basically have no idea in the world how the other half lives, or maybe it's just basic right-wing meanness that somehow spreads like a virus in Republican get-togethers, etc. He settles on confirmation bias - that rt. wingers live in a closed universe, getting their "information" exclusively from Cato, AEI, Limbag, and Fox.

Many other "left" wing pundits weigh in on this issue. Perhaps at some point I'll supply a list of example links to informed commentary on the question Krugman asks, from DeLong, Thoma, Chinn, Konczal, Chait, etc.

I don't presume to provide information as informed as the latter list does as a matter of course. However, in my naïveté, I (as my twitter page notes) am a recovering republican, so I believe I am 100% qualified to reliably divulge unto you the answer to why the "right" is so relentlessly set in it's, un-civil, counterproductive, and anti-american ways.

The answer, my friends, is that Republicans are Jihadists. What is Jihad? My associate, Mr. Wikipedia, says it is many things, including that for Muslims, it is a struggle against those who do not believe in the Islamic God; the struggle is religious duty imbued in them by the Koran. Jihad is often translated as "Holy War". Replace "Muslims" with "Republicans." Replace "Islamic God" with "imaginary free market". Etc. Ok, not philosophically consistent, but still.

Certainly I'm not the first to point out the similarity between fanatical Islam and our fanatical climate change-denying, misogynistic, super-religious, racist right. There is more than happenstance in the similarity.

All forms of human society have religion as a central part of societal grouping - mostly, and unpleasantly, super-religion. Western liberal democracy, before it became what we experience today, had a thousand years - and more - of rule-by-men-in-pajamas. Unfortunately there are frequent statements these days by US rightists that there is no notion of separation of church and state in our founding documents which of course is just one of the very many reality-challenged memes which circulate in the right's Fantasy Land.  It's the fantasy land of Arcs and Parting Seas.  It's nothing more, or less, than religion:  The refuge of people possessed of no tools to understand the word other than ancient superstition.  The Us vs. Them of the jungle.

Today we are far from being a Jihadist state. But not that far.

An Exchange, sortof, about Greece. Economic Nazism. The Totalitarian-Nazi Roundelay

Friend:
Poorer than Greece: the EU countries that reject a new Athens bailout | World news | The Guardian

The Slovenes and Latvians have a point. Having visited Slovenia, Latvia and Greece no comparison between the work ethic of the Slovenes and Latvians compared to the Greeks. Latvia and Slovenia are more like Ohio and Greece like Florida. Could it be the climate-F. Scott Fitzgerald thought so...
Me:
Not sure the article makes sense.
Latvia GDP: $31B
Greece GDP: $242B
Friend:
Essential question for other Euro zone members-do we bail out a spendthrift?
Me:
Spendthrift - not so much.

But the essential question really is - why does Germany want to kick Greece out? BC this is what they are doing. They keep moving the goalposts, plus, as it is, Greece can never do what is being asked of them. More austerity will depress the economy; they will need to borrow more, pay more, depress the economy more, etc etc. And what does Germany get when they do get rid of Greece? Probably a failed state on the bottom of Europe, with Jihad of some kind and all the rest.

IMO, the Germans are not dumb - they know this. So what do they think will happen? They think maybe Greece will be able to fend for itself, but if not the USA will come over and "contain" whatever mess is left BC it's very much in our national interest not to have Europe totally implode. Germany's national interest, short term, is to not spend money on international stuff, but rather hunker down and sell BMW's. It's actually a plan that should work pretty well in the short-medium term.

Should Germany be stepping up to help solve international/European issues? Of course - from our view, but they are saying they are too small to be Europe's police force or bankers, so fuck international stability, fuck "Europe", we're going our own way. Real-politic. As I said, probably a workable plan short/medium term.

As I further said - IMO.
 --- A day later, 7/14/15
I was right! :-)

At least about Germany trying to kick Greece out of the euro. They failed for now, only because they miscalculated how low people will bow, scrape, and crawl under existential threats. Next time, double the sanctions!

However, I feel I could be wrong about the Greece failed state thing. With articles like the above, more people will see and understand the horror of the economic Naziism being wielded by Germany in this situation - maybe coalitions will indeed form to support the likes of Greece. Maybe instead of Germany kicking Greece out, everyone else will kick Germany out. Ok... Getting too carried away by liberal idealism here. But I agree with the article in that Germany is now fully revealed as the bloodthirsty pricks that they are.

I have a new theory - Russia and Germany ally against NATO. Totalitarians and Nazis together at last! Bliss!

Monday, June 1, 2015

Google Wins Derp Of The Week

Mr/Ms Google:  It's nice to be able to finally set a signature in your Inbox app. It would be even nicer to have the app attach the signature to outgoing messages.
---
Update 6.3:  Am not the world's best Google operator I guess.  But finally discovered that the Inbox signature feature only works if the email address sent from is an xxx@gmail.com address.

Gmail has "aliases" for sending.  I use several.  One is billn@vituscapital.com.  Vituscapital.com is a valid domain.  But I use my gmail account to send the mail; it is a convenient feature - no need for eleventy-seven email accounts.  And, especially useful in a professional context of course.

Google's Gmail apps for Android and IOS work "correctly" - they send signatures with any aliased address one might choose to use.  Inbox does not.

I mean... Seriously.

Friday, May 29, 2015

Delong: Western Governments are Missing a Once-In-A-Lifetime Opportunity to Fix Their Finances

Brad DeLong:
Why is the US economy still depressed?
[G]overnments are not responding to market signals: financial markets are telling them that they have a once-in-a-lifetime opportunity to advantageously pull spending forward from the future into the present and push taxes back from the present into the future. But, because of the ideology of austerity, they are not taking advantage of this opportunity.
Also, just now
We’re running the most contractionary fiscal policy in the postwar era, and probably for longer, at a time when the case for an expansionary one could not be stronger...

Thursday, May 28, 2015

Mike Konczal - TPP a bad deal; Elisabeth Warren is right. WTF Obama?

Mike Konczal (@rortybomb) has a great post on the TPP, providing some actual details and examples. EG:
Let’s dig into an example. In 2011, Australia passed the Tobacco Plain Packaging Act 2011,designed “to discourage the use of tobacco products” by, among other things, requiring cigarette packages to have larger warnings, ugly colors, and no logos or advertisements. This act is clearly a “predatory intervention” against tobacco companies, designed explicitly to reduce their business in Australia by lowering smoking rates. As a result, Philip Morris Asia, a part of the American company Philip Morris International, is using an investor-state dispute settlement to stop enforcement and demand compensation, claiming this is a discriminatory “expropriation.” Instead of just the bureaucrats at the Australian government creating and administering rules for the selling of cigarettes, there’s an additional layer of international bureaucrats—positions created by trade agreements—who can overrule them.
There are more examples.  It ends with:
The goal for believers in democracy is to ground the bureaucracies governing international trade in democratic principles and accountability as much as possible. The secret, privatized bureaucracies hidden within free trade agreements like the TPP deploy the power of the state in corporate, rather than public, interests. They do not facilitate the distribution of goods, but the abrogation of democracy in choosing what is good for all.
This is the first place I've seen any reasonable discussion with examples of why TPP is not such a good idea.  Dean Baker provides a lot of politics, but not as clear an explanation of the basic facts as Konczal.

OTOH, as I've tweeted, no one is saying why this is a good idea except a few air-head editorials in the WSJ.

C'mon, Obama - Show us something!

Tuesday, May 26, 2015

Sunday, January 25, 2015

@mileskimball: Which party do you think has better proposals?

I had a Twitter exchange with Miles Kimball, Professor of Economics, University of Michigan:



















Of course I said "D's".

But then...  Dr. Kimball is not dumb - he is no doubt asking in good faith, or something there akin unto.  I decided to write a few things down and send this blog post to him.  Maybe I'll learn something!  Maybe he'll ignore me.
---
What policies of the D's are better than those of the R's?  For example:
  • R's have no national healthcare policy other than to do away with the D's one, the ACA.  I think maintaining and strengthening the ACA is better policy than killing ACA.
  • R's policy on money center banking is to repeal Dodd-Frank.  D's policy is to continue to develop and enforce Dodd-Frank, keeping in mind how out-of-control the banking sector got in 2006-2010.  I think that the US banking sector should be viewed as always by it's nature on the brink causing international financial turmoil*.
  • R's policy on taxation at a national level is to implement the most regressive tax possible, from Steve Forbes' Flat Tax to the Ryan-Romney plan of a 20% tax cut across the board.  These plans will be paid for by unspecified mechanisms. The D's tax plan is, briefly, to increase the capital gains tax from 20 to 28 percent, and use the money to help pay for a range of benefits for low and middle income people, such as moderate tax credits for education and child-care.  I am against policies which specifically are non-specific about how they pay for themselves; I am for policies which further the well-being of Americans at reasonable costs.
  • Et Cetera dept.:  Climate, education, science, infrastructure, ...
A final example I'd give for now is higher education.  America's Research University is the envy of the world, but has been under attack from Republicans for decades.  I, myself, started my journey from republican to democrat because of Reagan's attempt, when he was governor,  to cut the budget of UC Berkeley by 10% unilaterally.  A good discussion of the Research University issue is here.  Dr. Kimball should know about this situation, being a tenured professor at a prestigious university.  If he does not, or if he finds some sophistic way of explaining away what is clear on it's face, then he should be ashamed of himself at least.

In general, there is no act or policy of Republicans which has been stated or proposed since Nixon expanded Social Security and Medicare in 1969, which is not directly, purposefully, and defiantly positioned in a veritable elysian field of a US Tragedy of the Commons.  Four of the original states in the United States call themselves Commonwealths.  So far we have come.

* I don't have time here to give a history of US banking.  This blog has many examples of the failure in the 2000's of US Banking to be congruent with any concept of social relevance.

Thursday, January 22, 2015

Monday, May 12, 2014

DeLong Posts Definitive Geithner Day Disquisition

AND DAN DAVIES DELIVERS TIM GEITHNER'S SOLILOQUY AS THE EARL OF KENT IN "KING BARACK": MONDAY REAL-TIME SMACKDOWN WATCH

  1. Why was the "Rubin Question" not asked? Why didn't every meeting end with: "What do we need to do today in order to create room to maneuver in case our assessment of the economy is wrong?"? Why was there no contingency plan for what to do if the administration's view of the economy turned out to be wrong, and if the recession was either not relatively shallow nor followed by a strong, rapid recovery? Good question, totally agree.
  2. Why did the Treasury's loans to banks via the TARP come with neither bankruptcy-control rights (i.e., the ability to throw the organization into the courts if the government was displeased) nor shareholder-control rights (i.e., the ability to replace the boards of directors and the top management if the government was displeased)? He who pays the piper should call the tune, right? It was early in the game and everyone (except you and Paul Krugman) was scared of THE DREADED STATE OWNERSHIP. But Geithner ought to be made to say this out loud.
  3. Why was the Treasury's first priority in January 2009 not filling the post of Director of the FHFA with somebody smart who understood the depths of the housing finance crisis, the housing finance crisis's role in causing and maintaining the catastrophe, and the potential macroeconomic benefits to be gained from resolving the housing finance crisis? Nearly all such people wouldn't have gone near the job because of the reputational risk.
  4. Why was the Treasury's second priority in January 2009 not filling the Federal Reserve with Keynesian macroeconomists to balance the austerity-minded regional reserve bank governors, and not thus giving Ben Bernanke and his successor room to maneuver to pursue technocratic dual-mandate policies? An excess of Very Seriousness. I realise this is basically a rhetorical question though, along the lines of "why did this more or less economically illiterate, non-Keynesian administration, consistently fail to appoint Keynesians who knew what they were doing?"
  5. Why was the Treasury's third priority in January 2009 not setting-up the game table to make enacting a second round of fiscal stimulus easy, should the Recovery Act turn out (as it did, and is Christina Romer warned at the time) to be less than half as large as it should have been? See above...
  6. Why did the spring 2009 PPiP program never go much of anywhere? It seemed to me at the time to be a very wise way--albeit a very risky way--to utilize TARP money. Too tricksy and think-tank-wonky. Too many bells and whistles. In a crisis, everyone's mental bandwidth is maxed out and so clever-clever solutions never work.
  7. The Treasury senior-executive team that was assembled seemed to me to be relatively light on all of (a) Wall Street trading and management experience to actually interface with the financial firms to which the TARP money had been committed, (b) Fed-watching experience, (c) macroeconomic policy expertise, and (d) health-care finance expertise. Given that running the TARP, attempting to bring the Federal Reserve's FOMC to a state of understanding of the economy, spurring a strong and rapid recovery, and implementing health-care reform were the administration's top priorities, why were the Treasury's senior executives--excellent people, all--who they were? Don't know. Suspect that the depth of bench in Treasury is not what it was when you worked there.
  8. Former Obama OMB Director Peter Orszag has said if he had properly understood and internalized the lessons of work like Rinehart-Rogoff on the likelihood of slow recovery after financial crises he would have taken a significantly different position in the Obama administration NEC's policy debates in 2009-10--a position closer to Romer-Summers than to Geithner. How many of what clearly were, in retrospect, unforced macroeconomic policy errors by the Obama administration due to this failure to understand the likelihood of a prolonged, slow "jobless recovery"? Lots of them, although Orzag's sincerity can't be taken for granted.
  9. What were the three biggest unforced macroeconomic policy errors of the Obama administration, and why were they made? Inadequate stimulus, three times. Made first time round because Summers thought he was dealing with 1998-replay, and then second and third times round out of timidity with respect to Congress.
  10. The Obama administration began with two among the most-senior policymakers--Lawrence Summers and Christina Romer--having deep understanding of the macroeconomics of full employment and inflation and of the two episodes, the Great Depression and Japan's "lost decades", thought to be relevant to the U.S. situation at the end of the 00 decades. When they left in 2010 that expertise was not replaced at the most senior level. Why not? Why no Blinders or Tysons? Might have given advice that the Obama/Geithner/VSP community didn't want to be given.
  11. What was the thinking behind the decision that Ben Bernanke should--after 2007-9--be offered a second term as Federal Reserve chair? In retrospect, is that thinking still defensible? If not, why was that thinking convincing at the time? TBH, Bernanke didn't do a bad job in the face of total lack of help from the fiscal side. I don't think there's a question to be answered here.
  12. I understand that Neil Barofsky at SIGTARP was regarded by the Treasury as somewhat of a loose cannon, but why was that relationship handled so badly? Because twenty years' worth of regulatory capture isn't undone in a fortnight, even in conditions like 2008-9.
  13. I understand why the Treasury might think that Michael Barr was a better choice to run the CFPB than Elizabeth Warren, but why was that relationship handled so badly? Same answer as 12, with possible additional hints of sexism. OTOH, having run her out of the CFPB, the banking industry then ended up getting Prof. Warren to deal with on the Senate Banking Committee, so heckuva job lobbyists.
  14. Why did the Obama administration in 2011 think that the way to strengthen the economy was to pursue a long run "grand bargain" rather than to pursue short-run expansionary exchange rate, bank regulation, housing finance, and monetary policies? Because he's the management consultancy boss from hell who will always avoid taking a difficult decision if he isn't personally committed to it.
  15. Why was the Obama administration so certain in 2011 that Boehner wanted to come up with a reasonable long-run entitlement reform and tax increase deal, and that its key negotiating strategy should be to make anticipatory concessions in order to make sure the deal was sweet enough for Boehner to be able to convince his troops to take it?Literally no idea, but this is also surely a rhetorical question; if Geithner was capable of giving a sensible answer to it, he would surely not have made the mistake in the first place.
  16. Why was there never any explanation of what would happen in the event of a potential breach of the debt ceiling other than "default is unthinkable"? That line put Obama in a very poor bargaining position. The Republican leaders in the House could then pass what they wanted and adjourn--leaving the Senate with no option but to endorse it or to breach the debt ceiling. Obama would then have no option but to sign the House bill or breach the debt ceiling. Can anybody explain to me this throwing-away of the administration's power to threaten not to sign whatever was on the president's desk when the click ticked down to zero? Good question, agree.
  17. I understand that there was no macroeconomic policy between July 2009 and April 2010 because health-care reform soaked up all the oxygen. But why was there no macroeconomic policy in the Obama administration between April 2010 and November 2010? The facts from 2010 ought to make you consider whether the excuse was valid in 2009 either.
  18. I remember a phone conversation with Tim Geithner about Obama's decisive turn to and endorsement of "austerity"--the passage in Obama's 2010 State of the Union address that went: "Families across the country are tightening their belts and making tough decisions. The federal government should do the same. So tonight, I'm proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year.Starting in 2011, we are prepared to freeze government spending for three years..." Geithner told me: "I know that [senior administration official X] and [senior administration official Y] really think that I was an [expletive] for not strongly opposing that, but I did not support it." If the Treasury Secretary did not support it, how did it get approved by the NEC? If it did not get approved by the NEC, how did it get into the State of the Union text? Who did support it? Why did they support it? Very good question, although the possible explanation "Geithner wasn't being wholly candid with you on the phone" comes to mind.
  19. I remember a phone conversation with Tim Geithner in which Geithner said that entrenched and incumbent FHFA head Ed DeMarco would "push the limits of the reasonable envelope" with actions to accelerate and encourage the refinancing of underwater mortgages. Why did Ed DeMarco not do so? Why did Tim Geithner think he would?Institutional impossibility of getting anyone to get anything done in the god damn mortgage industry, IMO.
  20. Why was it not the first priority in deciding on the Federal Reserve chair to pick somebody who had had a substantially-correct understanding in 2007-9 of what was happening to the economy? All such people might have given advice that they didn't want to receive.

Thursday, May 1, 2014

A, uh, new post about, of course, Piketty. QOTD - Mike Konczal.

In the mode of YAPP (Yet Another Piketty Post), we'd like to quote Mike Konczal reviewing Piketty:  
"In an especially revealing passage on French rentiers at the turn of the last century, Piketty writes that “universal suffrage and the end of property qualifications for voting…ended the legal domination of politics by the wealthy. But it did not abolish the economic forces capable of producing a society of rentiers.”
This is a remarkable provocation for liberals. Piketty is, in a way, saying: go ahead and make whatever reforms you want. Break up the banks. Pass the campaign finance package of your dreams. Reach deep into the bag and pass all the non-reformist reforms that you can think of. All your reforms can’t guarantee that you are safe from the logic of r > g. Reforms won’t change the nature of capital: to accumulate, eat up a larger share of the economy, and let the past dominate the future. What then?"

Thursday, April 10, 2014

DeLong Week @ Vitus

Larry Summers:  An agenda for the IMF: "In the face of inadequate demand, the world’s primary strategy is easy money..
All this is better than the kind of tight money that in the 1930s made the Depression great. But it is highly problematic as a dominant growth strategy.We do not have a strong basis for supposing that reductions in interest rates from very low levels have a large impact on spending decisions. We do know that they strongly encourage leverage.... We cannot confidently predict the ultimate impacts of the unwinding of massive central bank balance sheets on markets or on the confidence of investors. Finally, a strategy of indefinitely sustained easy money leaves central banks dangerously short of response capacity when and if the next recession comes. A proper growth strategy would recognize that an era of low real interest rates presents opportunities as well as risks and would focus on the promotion of high-return investments... infrastructure spending... promote private investment, including authorizing oil and natural gas exports, bringing clarity to the future of corporate taxes... moving forward on international trade agreements.... Europe has moved back from the brink... But no strategy for durable growth is yet in place and the slide toward deflation continues.... A global growth strategy framed to resist secular stagnation rather than simply to muddle through with the palliative of easy money should be this week’s agenda." 
---DeLong

Wednesday, April 9, 2014

Breaking! Conservative Derp





WRM is a commentator with a lot of cred.  Vitus Read his book Power, Terror, Peace, and War. Which was largely good.  V. Recently decided to follow him on the T.  Above is the first tweet I see.  The article referenced is here.

Well, I read the NYT's article on Medicare overcharging this AM: "Sliver of Medicare Doctors Get Big Share of Payouts".  The equivalent of "US health care system incentivizes bad behavior", above, is, in the NYT article,
There’s a lot of potential for whistle-blowers and justified worry for fraudsters,” said Steven F. Grover, a lawyer who represents whistle-blowers who sue doctors and hospitals who they claim have committed fraud against the Medicare program. “There’s going to be a lot of litigation over this,” he said.
One should read both articles; the Mead one is short.

The previous couple of posts in this blog, below, talk about the new American fascists (as opposed to, um, Obama...).  Vice President Wallace's 1944 screed says of the American Fascists of the time "Their newspapers and propaganda carefully cultivate every fissure of disunity...Their final objective toward which all their deceit is directed is to capture political power so that, using the power of the state and the power of the market simultaneously, they may keep the common man in eternal subjection"

The NYT article manages - somehow (maybe by using a technique knows as "reporting") - to avoid garnering evidence form it's sources that "US health care system incentivizes bad behavior".

Clearly Mead is crafting his piece to further pry open the fissure of American disunity which is the controversy over healthcare, and to add to the world yet another Randian call for ridding the world of evil government.

There are many ways to skin a cat - and also to write about a complex event.  It's hard enough to present the facts.  It's easy, lazy, disingenuous, and deceitful to craft the description of an event solely to deceive and propagandize, and to proselytize one's politics.

Koch's: The New Nazi's

Vice President Henry A. Wallace, April 9, 1944: The American fascists are most easily recognized by their deliberate perversion of truth and fact. Their newspapers and propaganda carefully cultivate every fissure of disunity, every crack in the common front against fascism. They use every opportunity to impugn democracy. They use isolationism as a slogan to conceal their own selfish imperialism. They cultivate hate and distrust of both Britain and Russia. They claim to be super-patriots, but they would destroy every liberty guaranteed by the Constitution. They demand free enterprise, but are the spokesmen for monopoly and vested interest. Their final objective toward which all their deceit is directed is to capture political power so that, using the power of the state and the power of the market simultaneously, they may keep the common man in eternal subjection.
---HT DeLong

Paul Ryan - Healthcare Under the New Fascisism

DeLong:  It is unclear whether Paul Ryan understands what he is doing or not. But if he does, he is laying it all out there--that the Republican health-care endgame is as follows:
  • If you are already sick, have the wrong genetic markers, or are poor, the plan is for you to beg at your church for money to pay your health care bills.
  • Health insurance is to be reserved only for those from the middle class who lack adverse genetic markers and who have no preexisting conditions.

Thursday, March 13, 2014

Bullish on war

http://www.nytimes.com/2014/03/14/world/europe/ukraine.html?_r=0

Bush said "bring it on".

Wednesday, January 29, 2014

Rosenberg - Medium Term Investment Themes









David Rosenberg: No Bear Market Now; Green Light for One-Two Years

Rosenberg, 1/24:

The historical record is crystal clear: Go back to what happens at the peak of every bull market and you will see a yield Curve that is either flat or inverted...lofty multiples are not the metrics that bring on the bear market when it comes. What causes that to happen, with near certainty based on past experience, is the Fed tightening the liquidity spigots to such an extent that short-term rates rise above the level of long-term rates.

NAVIGATING THE MACRO AND MARKET OUTLOOK - IS THE TRAFFIC LIGHT FLASHING RED, AMBER OR GREEN?

Answer: Amber on a one-to-three-month horizon as valuation and sentiment extremes hopefully recede and open up a better buying opportunity at more attractive re-entry price point. Green on a one-to-two year basis as everything from the Leading Indicators index to the yield curve to the gap between nominal growth and long-term interest rates to the ISM are signaling a constructive fundamental backdrop which will transcend the near-term hurdles associated with market positioning, P/E multiples and technicals. In other words, stay the course until one or more of the fundamental factors illustrated below begin to Change!

One is the Conference Board's Leading Economic index, and not just the level, but the rate of change. The LEI rose 01% in December to 99.4 - the highest since February 2008. This was the ninth consecutive increase, so we have more information here about the durability of the expansion. Not just that, but the key YoY trend for the LEI improved notably to 5.41% in December from 1.95% a year ago. This is a critical momentum indicator and in and of itself contains some interesting forward-looking properties...

On average, how many months before a recession are we typically with the YoY trend where it is now? Historically. the YoY trend stands between 5.0% and 5.5% (currently it is 5.4%) 28 months before a recession (min: 15 months and max: 58 months)­ That is comforting because it means that recession risks for 2014 should be close to nil...

Another critical barometer is the yield curve. Only once in the past 60 years did it invert without foreshadowing a recession (back in the mid1960's). But every recession did indeed follow a period of curve inversion, including the last one, and the reason why Alan Greenspan developed the reputation as being a Maestro was because he flattened the yield curve in 1994 but did not invert it, and as such we experienced a ‘soft landing’ the following year that helped extend the Cycle at the time for another half-decade. And while corrections will come and go (October 1987 was a severe correction but not a bear market, August 1998 was a correction but nota bear market, the summer of 2011 was a correction but nota bear market), the reason they were not bear markets. which one measures in time, not just in magnitude. is because there was no recession.

Monday, January 20, 2014

On First Looking Into Chapman's Homer Gorton's Misunderstanding Financial Crises

Very clear and readable.   It's a wonderful book which lays out directly and in detail the problems embedded "Conservatism"'s relilgiostic pursuit of FINO marketism (Free In Name Only).

"Conservatives" invent magic, fantastical worlds of invisible hands racing around fixing things, invisibly of course - so that so-called Conservatives may abjure responsibility for contributing to the societal commonwealth to which they belong, and from which they withdraw so much.

Vitus Fils comments on chapter one:
We begin to see the “right versus everyone else” ideology coming to light in Groton’s work.  For one, the elimination of ‘note brokers’ and note brokering as a whole as a result of federal regulation (i.e. nationalization) is in direct conflict with the Glenn-Beckian/Mitt Romnian/Republican ideas of “free” market, or “guiding hand” or “freedom” in pursuing one’s livelihood (i.e. creating or developing a product or service that may or may not service society as a whole).  That there were substantial problems in “Free Banking” resulting in money not being traded at par precisely because of the rise of note brokers as a result of “Free Banking” directly illustrates the need for some federal regulation where it is required.  Of course, the likes of Bill O’Reilly will take this idea of ‘federal regulation’ and blow it up to a point where regular average Americans believe that a Marxist/Leninist conspiracy (a la our black president, which as we all know is the real problem) is taking over the U.S. 

Friday, January 17, 2014

David Brooks Says Republicans Deeply Concerned about the Poor. Um...

Yglesias:
In a curious column today, David Brooks asserted that Republican Party politicians are deeply concerned about the welfare of poor Americans, and that if liberals would just stop being mean to rich people the country could come together and help the poor:
"There is a growing consensus that government should be doing more to help increase social mobility for the less affluent. Even conservative Republicans are signing on to this. The income inequality language introduces a class conflict element to this discussion."
...at least on its face, it doesn't seem to me that there is a consensus on helping the poor that's being disrupted by a controversy about the rich. It is true that Republicans think one major problem in America today is that the highest-earning Americans don't have enough take-home pay. And it is true that the GOP view on this is impelling them to propose a budget that reduces spending on middle class entitlement programs. But it's also true that Republicans want to cut spending on low-income people much more drastically than they want to cut spending on middle class people. We saw that with Paul Ryan's budget, we saw it with the House GOP proposal to cut food stamps, and we saw it in Mitt Romney's campaign proposals.

Vitus:  For the Pro version of the daily Brooks takedown, see Dean Baker. Baker points out that Brooks starts with
"If you have a primitive zero-sum mentality then you assume growing affluence for the rich must somehow be causing the immobility of the poor, but, in reality, the two sets of problems are different, and it does no good to lump them together and call them 'inequality."
Baker money quote: "Fans of arithmetic everywhere know that if the rich get more, and the economy is not growing faster, then everyone else gets less."

Jeff Saut: Buy the dips in the coming months

From Minyanville:
 [I]f we get [my] prescribed rally into month's end, or into early February 2014, it should be accompanied by excessive optimism leading to the typical 5% - 7% pullback over the next three months, and something like a 10% - 12% decline over sometime in the next 12 months. Said anticipated declines should be BOUGHT on the expectance we are now in a new secular (multi-year) bull market. To reiterate, such declines are for BUYING because my sense is that we are in a secular bull market that has years left to run! Yesterday, however, was yet another stutter-step session in this week's manic-depression sequence whereby the equity markets cannot decide between "light and dark." Verily, is the glass half full, or half empty? I think that the glass is half full, which implies, as stated, "Pullbacks are for buying, NOT selling." That said, I think we are involved in the final stages of a short-term upside "blow-off" for equity prices in the very short term. In the ending stages of the 2007 "Tech Bubble," the NASDAQ rallied nearly 40% (like now), energy stocks surged nearly 50% (like now), and housing prices went exponential (like now). If we are about to see another such upside price "blow-off," it should happen between now and mid-February; and, I am a buyer during any such decline. Yesterday, after two days of advances this week, the SPX declined, but the downside conviction of that move was lacking given the accompanying volume characteristics. Accordingly, this morning the pre-opening futures are higher, driven by stronger economic data out of Europe and some decent earnings reports.

Monday, January 13, 2014

Everyone a CEO! Elysian Fields of Conservative Political Economy

Steve M (HT DeLong):
...right-wing arrogance [led] Michelle Malkin, back in 2012, to say with a sneer, "Romney types, of course, are the ones who sign the front of the paycheck, and the Obama types are the one who have spent their entire lives signing the back of them": the right simply believes that it's disgraceful to be an ordinary worker in the job market, subject to its ups and downs. If you're not a capitalist, you're scum.

Vitus:  Once, on a lark, V. went to a Ponzi-scheme prezzo at a hotel near SFO, put on by a person named Glen W. Turner from (of course) somewhere in the south.  There were easily 1000 people there.  The product being sold was the purest form of Ponzi - you were supposed to buy a franchise in a thing called "Dare To Be Great".  You would become "Great" by selling franchises of "Dare To Be Great".  We could only take about 20 min. of this stuff ourself, but clearly a lot of people there were desperate to believe in something which might give them a way out of their Mitty-esq lives.

This, it occurs to us, is a biggish part of the appeal of Tea-partydom.  I'm signing the backs of paychecks for now but...

It's of course all make-believe to think that "free" markets are self-regulating; that "I" am above needing help from the government; and that, as Romney said, we should (and could!) all borrow money from our parents and start businesses.  The right-wing "arrogance", above, is in fact religiostic phantasy.  All CEO's; no workers.  Sounds like a plan.

Saturday, January 11, 2014

The Un-Commonwealth of 'Murca

"we’re becoming a nation that doesn’t offer enough economic opportunity to the bottom half, or maybe even the bottom 80 percent, of its citizens."
---Krugtron

Friday, January 10, 2014

The Fed Sucks! Abolish the Fed and Base Our Currency on Gold! Wait...

David Andolfatto, ht Noah Smith

Q. Why doesn't the U.S. return to the gold standard so that the Fed can't "create money out of thin air"?
A.The phrase "create money out of thin air" refers to the Fed's ability to create money at virtually zero resource cost. It is frequently asserted that such an ability necessarily leads to "too much" price inflation. Under a gold standard, the temptation to overinflate is allegedly absent, that is, gold cannot be "created out of thin air." It would follow that a return to a gold standard would be the only way to guarantee price-level stability.
Unfortunately, a gold standard is not a guarantee of price stability. It is simply a promise made "out of thin air" to keep the supply of money anchored to the supply of gold. To consider how tenuous such a promise can be, consider the following example. On April 5, 1933, President Franklin D. Roosevelt ordered all gold coins and certificates of denominations in excess of $100 turned in for other money by May 1 at a set price of $20.67 per ounce. Two months later, a joint resolution of Congress abrogated the gold clauses in many public and private obligations that required the debtor to repay the creditor in gold dollars of the same weight and fineness as those borrowed. In 1934, the government price of gold was increased to $35 per ounce, effectively increasing the dollar value of gold on the Federal Reserve's balance sheet by almost 70 percent. This action allowed the Federal Reserve to increase the money supply by a corresponding amount and, subsequently, led to significant price inflation.
This historical example demonstrates that the gold standard is no guarantee of price stability. Moreover, the fact that price inflation in the U.S. has remained low and stable over the past 30 years demonstrates that the gold standard is not necessary for price stability. Price stability evidently depends less on whether money is "created out of thin air" and more on the credibility of the monetary authority to manage the economy's money supply in a responsible manner.

Tuesday, November 19, 2013

Jeremy Grantham - Bull Market for 1-2 years, then a bust

My personal view is that the Greenspan-Bernanke regime of excessive stimulus, now administered by Yellen, will proceed as usual, and that the path of least resistance for the market will be up. I believe that it would take a severe economic shock to outweigh the effect of the Fed’s relentless pushing of the market...My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up. And then we will have the third in the series of serious market busts since 1999...

In the meantime investors should be aware that the U.S. market is already badly overpriced – indeed, we believe it is priced to deliver negative real returns over seven years – and that most foreign markets having moved up rapidly this summer are also overpriced but less so. In our view, prudent investors should already be reducing their equity bets and their risk level in general. One of the more painful lessons in investing is that the prudent investor (or “value investor” if you prefer) almost invariably must forego plenty of fun at the top end of markets.
---GMO Quarterly letter (login rqd)

Kotok - Tutorial on QE

Very important and clear note on how QE works/is working.  Unusually for Vitus, presented in entirety (HT Ritholtz)
Tapering or Tightening?
David R. Kotok
Cumberland Advisors, November 17, 2013 
Janet Yellen did well in her Senate hearing. Markets have settled on the notion that Federal Reserve policy is not going to lurch abruptly in a new and surprising direction. The results are to (1) shrink risk premia, (2) add to the perception of some Fed policy predictability, and (3) marginalize the behavior of extreme senators like Rand Paul who would slow down the process.
Readers know we were critical of Senator Paul when he threatened to put a senatorial “hold” on Janet Yellen’s nomination. Yahoo-Finance’s Daily Ticker issued an invitation to me to debate with David Stockman on the Rand Paul response. Here is the link to an excerpt from that debate: http://ph.news.yahoo.com/video/rand-paul-absurd-hold-yellens-152616134.html.
A second part of that debate had to do with stock markets and bubbles. My argument is that we are not yet in a stock market bubble, a housing bubble, or any other sort of bubble. We may get there, but we are not there yet. We are in a period of rising prices. David Stockman countered with the opposing argument and called for immediate action because of bubble conditions. (Here is the link to that section of the debate).
My colleague and Cumberland’s Chief Monetary Economist, Robert Eisenbeis, has written about the evolution of Fed monetary policy and tapering and what it means in the short and long run. Bob and I and others in our firm discuss this issue frequently.
In the national arena, there are those who wring their hands about quantitative easing (QE), offering gloomy predictions. For five years now, we have heard that monetary policy will result in a huge inflation. Look around. The inflation rate in goods and services is somewhere between 1% and 2% and is falling. Rampant inflation as the result of money printing, predicted by so many, has not happened yet. It is not likely to happen for a while. Falling inflation is likely to be intensified if commodity and energy prices also decline.
Others have debated whether or not the Fed’s tapering constitutes a tightening. The Fed and Janet Yellen maintain that tapering is not tightening, but that view is controversial. Let’s consider this metaphor:
A car is moving at 80 miles per hour with the driver’s foot on the accelerator. The driver’s foot is then lifted from the accelerator to slow the car to 60 miles per hour. During the car’s deceleration from 80 mph to 60 mph, the engine is not providing any power. At some point the car reaches 60 mph, still slowing; the driver then puts a foot back on the accelerator to maintain speed at 60 mph. The engine is now providing the power again (think of this as monetary stimulus) to maintain that new speed. At all times, the car is moving forward. The rate of movement changed, but the direction did not.
Does the metaphor apply to monetary policy? That is much harder because the question cannot be answered in a vacuum, without other influences. Such influences might include foreign currency exchange rates or foreign central bank activities and how they interact with the US dollar and economy. What happens when the structure of the credit markets changes? Does that have an impact on the tapering versus tightening debate?
We think the answer to that question is yes. Before Lehman-AIG and at the onset of extraordinary monetary stimulus, the weighted duration of the Fed’s assets was 2. The size of the balance sheet was approximately $900 billion. Today, the Fed’s balance sheet is $4 trillion in size, and the weighted duration is 6. These durations are computed as estimates of a weighted duration and derived from an examination of the construction of the various Fed assets. We have gone from $900 billion with duration of 2, to $4 trillion with duration of 6. That is a massive change in market impact. The November, 2013, McKinsey discussion paper estimates that the Fed’s special programs “have reduced ten-year Treasury yields by about 65 to 100 basis points.”
That is in addition to taking short-term interest rates to near zero. The longer-term rates were reduced because the Fed extracted the weighted duration from the market and put it on the central bank’s balance sheet. The central bank funded that transaction by creating excess reserves in the banking system. Those excess reserves are presently costing the Fed a payment rate of 0.25% per year. The Fed takes the differential between that cost of 25 basis points and what it receives on the long duration it holds on its balance sheet and then hands the difference back to the US Treasury. Those remittances now take place on a regular and systematic basis. They approximate $100 billion per year. The Treasury takes the $100 billion and uses it to reduce the budget deficit. That is the circularity of the transaction as it exists today.
What happens if the federal deficit shrinks? The US Treasury creates fewer new federal securities relative to the number created before this process started. A shrinking deficit means not originating as many new Treasury notes, bonds, and bills as were previously created. This is happening today. As Stan Collender wrote, “Deficit numbers, especially good ones, are just not that interesting.” So we didn’t hear much about it. Fact: the deficit is now under 4% of GDP and falling.
If the Fed holds its quantitative easing policy stable at $85 billion per month and the US Treasury creates less duration than it did previously because of the shrinking deficit, the Fed’s extraction of new duration relative to GDP is going up. The Fed is presently absorbing roughly the entire new duration created by the US government in the issuance of Treasury securities. There is a similar and parallel activity going on in federal mortgage-backed securities.
What does this mean when the Fed begins to taper? We cannot be sure. If tapering means buying fewer than $85 billion per month in federally backed securities and it happens at the same time the federal government is producing fewer such securities, it is quite possible that tapering will not be tightening. Both the Fed’s purchases and the creation of new Treasury securities are two sides of a shrinking deficit. Both can be reduced in a fashion where stability and neutrality can be maintained.
In our view, it is uncertain as to whether tapering results in any type of tightening. At the moment, we do not know the process for tapering, and we do not know the rate at which tapering will occur. We expect it to commence early next year and to be consistent with the criteria outlined in Janet Yellen’s and Ben Bernanke’s testimony and speeches.
All of this means that asset prices in almost all categories – stocks, commodities that reflect monetary activity, art in auctions, real estate, and a host of other items – reflect an upward bias. The reason behind that upward bias is that the interest rate is maintained at a very low level. When interest rates are maintained at a very low level, the discounting mechanism to value assets works to raise the prices of those assets. That trend will continue worldwide in the major economies for several more years as all of them go through this process of central bank stimulus, plateauing, subsequent tapering, reaching a neutrality level, and then confronting in the out years how to permit the assets of the central bank to roll off and mature over time without shocking those economies.
The last item will take place years from now. We remain fully invested.