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Most economists believe that no serious disruption to the economy (or markets) will occur when the Federal Reserve ends QE2 (the printing of $600 billion) in June. They also believe the economy is on a sustainable growth path (but below trend growth levels) and that the economy will continue to improve over time.
Sure, there are some who think the government needs to print even more money to encourage employment growth and wage increases (besides, debt is not a problem and interest rates are low.) And there are a few who think the Fed should raise interest rates now to deter inflation and reduce taxes to incentivize employment (besides, spending is not the problem; debt and low interest rates are the problem.)
Since this view (borrow and spend) is what got us into this problem and is currenty keeping the economy levitated; it does not make sense that the government can simply stop increasing the money supply and we all go merrily on our way or we would have stopped printing money long ago.
Unless savings increase enough to fill the gap left by the Fed (unlikely), GDP will decline (maybe after some lag time) and politicians will panic (elections are coming! elections are coming!) We will be subjected to a news cycle of endless attack speeches, ads, vetoes, etc. about the debt ceiling, budgets, etc. Not exactly tranquility.
Also, with GDP declining, banks will be less inclined to lend (so neither savings or loans will make up for reduced government spending.)
Now, add in a slower-volume summer market and you have the ingredients for a very volatile market full of surprises (and counter surprises.) One must be nimble short-term. Longer-term, any time there is a dip in GDP or a stock market dip, I believe the government will do the only thing it knows how to do, borrow and spend.
Friday, May 20, 2011
Commodities and the Evil Speculators
When commodity prices rise to the point that constituents start calling their congressperson, something has to be done; and that something is to:
1. Blame someone other than politicians for the problem,
2. Attack the "symptom" (rising prices) rather than the cause and
3. Focus on and talk about the benefits (winners) and ignore the negative consequences (losers.)
That is exactly what the government did last week when they raised margin requirements on silver five times in five days increasing the total margin requirements by 84%; and then raised the margin requirements on oil.
The net result of their "margin increase" policy will be to disrupt the market for a short period of time (creating some winners and some losers,) BUT that short-sighted policy does not change the long-term trend of rising commodity prices because it does not attack the "real cause" of rising commodity prices.
In addition to supply and demand issues, the government and the Federal Reserve are addicted to borrowing and printing money as a way to stay in office. Increasing the money supply (demand) without increasing supply devalues the dollar. This means commodities prices raise to compensate for the devalued dollar. It's pretty simple.
If you are an investor, this correlation is an opportunity to "speculate." But, if the government stopped printing money or contracted the money supply, commodity prices would fall. However, if you think speculation is bad now, wait until people recognize that higher commodity prices are not "transitory." Then, commodity speculation will consume almost everyone like it did housing ("You don't flip") a few years ago.
May 12, 2011
1. Blame someone other than politicians for the problem,
2. Attack the "symptom" (rising prices) rather than the cause and
3. Focus on and talk about the benefits (winners) and ignore the negative consequences (losers.)
That is exactly what the government did last week when they raised margin requirements on silver five times in five days increasing the total margin requirements by 84%; and then raised the margin requirements on oil.
The net result of their "margin increase" policy will be to disrupt the market for a short period of time (creating some winners and some losers,) BUT that short-sighted policy does not change the long-term trend of rising commodity prices because it does not attack the "real cause" of rising commodity prices.
In addition to supply and demand issues, the government and the Federal Reserve are addicted to borrowing and printing money as a way to stay in office. Increasing the money supply (demand) without increasing supply devalues the dollar. This means commodities prices raise to compensate for the devalued dollar. It's pretty simple.
If you are an investor, this correlation is an opportunity to "speculate." But, if the government stopped printing money or contracted the money supply, commodity prices would fall. However, if you think speculation is bad now, wait until people recognize that higher commodity prices are not "transitory." Then, commodity speculation will consume almost everyone like it did housing ("You don't flip") a few years ago.
May 12, 2011
Is The Run In Commodities Over?
No. However, in the past couple of months, commodities rose "too quickly" approaching all time highs. Silver alone, was up almost 30 percent in the past month. Profit taking was in order. Then, commodities will be on the rise again.
Why? Nothing has changed. The government is borrowing and spending money the country does not have to keep the economy afloat. It's not working:
1. GDP growth was 1.8% last quarter (and 1.7% for the past 10 years. We have been levitating the economy for a long time),
2. Housing is beginning to take a double dip (falling prices and huge inventories and 25% of people with mortgages under water),
3. Employment, wages, and hours worked are not improving,
4. Inflation is climbing (it is not transitory as Bernanke stated. He also thought subprime mortgages were small and containable, that the financial crisis was containable and transitory, etc. etc.)
In fact borrowing and printing is making matters worse. It is not only prolonging the recession, our debt is so high that it is likely to restrict economic growth in the future and we refuse to do anything about it. Austerity looks like its going to be 0 for 3. Nothing of consequence happened with the 2011 budget. It looks like nothing of consequence will happen with the debt ceiling problem and nothing of consequence will happen with the 2012 budget. But maybe we can cut 1-2% of a rising budget after the 2012 elections.
Therefore, nothing has changed. We will continue to borrow and spend to levitate the economy, reduce the value of the dollar and cause commodity prices to rise.
May 6, 2011
Why? Nothing has changed. The government is borrowing and spending money the country does not have to keep the economy afloat. It's not working:
1. GDP growth was 1.8% last quarter (and 1.7% for the past 10 years. We have been levitating the economy for a long time),
2. Housing is beginning to take a double dip (falling prices and huge inventories and 25% of people with mortgages under water),
3. Employment, wages, and hours worked are not improving,
4. Inflation is climbing (it is not transitory as Bernanke stated. He also thought subprime mortgages were small and containable, that the financial crisis was containable and transitory, etc. etc.)
In fact borrowing and printing is making matters worse. It is not only prolonging the recession, our debt is so high that it is likely to restrict economic growth in the future and we refuse to do anything about it. Austerity looks like its going to be 0 for 3. Nothing of consequence happened with the 2011 budget. It looks like nothing of consequence will happen with the debt ceiling problem and nothing of consequence will happen with the 2012 budget. But maybe we can cut 1-2% of a rising budget after the 2012 elections.
Therefore, nothing has changed. We will continue to borrow and spend to levitate the economy, reduce the value of the dollar and cause commodity prices to rise.
May 6, 2011
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