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A lot has happened over the past week or so. I just want to cover the Federal Reserve meeting today. Fed Chairman Bernanke stated after the meeting that we are basically in a recession (my interpretation) that will last for some time; and that he will hold interest rates down until at least mid-2013. This is the normal Keynesian and Keynesian-Lite reaction to a “consumer spending gap” (a reduction in consumer spending.). Fiscal and monetary policy has been doing this (low rates and printing money) for several years now and it is not working very well.
We know that increasing the money supply increases the GDP, but maybe low interest rates and printing money are not our problem and in fact, may be prolonging our problem. However, I think the Fed believes we are still stuck in a “liquidity trap” (over simplified: I (individual, bank, company) have some money and I could borrow more, but I don’t want to spend it or buy on time or invest it because I don’t know what the future holds and if I will be able to pay it back in this uncertain economy.)
The Fed believes, to get out of this liquidity trap, they need to continue to keep rates low and flood the economy with new money which will encourage people to spend and invest. Many think this might be difficult to do now considering the recent debt debate. But this is all the Fed and the government know how to do. They can’t create jobs or fix the housing foreclosure problem or expand free trade agreements, etc. Besides, that’s what a lot of people (like Paul Krugman, et. al.) are demanding. They want the government to do something”.
Now we have a second quarter revision to GDP on August 26th. I think GDP will be revised down from 1.3% to under 1% and maybe down to as little as 0.5%. Since we are obsessed with GDP that is a problem. Two quarters under 1% growth when we need 3% growth to effect jobs growth and unemployment.
Then we have another Fed meeting on August 29th. I expect Chairman Bernanke to announce that additional help (accommodation) will be coming soon. Then throw in the fact t that Congress gets back to “work” after Labor Day and the Presidential Election season is underway.
Therefore, my assumption of Scenario One (Print Until You Drop) is that the economy may not turn up but GDP (the arithmetic model we call the economy) will turn up on new fiscal and monetary initiatives. This will then “lead” the market higher.
There are a lot of implications to this scenario on the upside and the downside for both equities and income securities. Start now to position yourself for what is coming.
Friday, August 12, 2011
Monday, August 1, 2011
We Again Kicked the Can, But the Road is Now Going Down Hill
The “Debt Deal” will likely pass the House and Senate today. It does not reduce the budget or spending very much. Here’s why. The base line or assumption is that the budget will grow about 7% every year (that means a 7% increase is priced in.) So, if the 2011 budget is 3.6 trillion, next year the budget will start out at $3.6 plus $250 billion or $3.85 trillion (assuming no more wars, etc.)
Therefore, in 2013 when the debt ceiling is reached again, the deficit will be $16.6 trillion rather than the $14.2 we have today; and the budget for 2014 will start at $4.1 trillion. Unless we have a national discussion about why we are spending this much money and reach a national consensus, we will continue to let politicians keep spending and monetizing our debt. If you create enough inflation to make previous debts meaningless, is that a default?
At the same time, the global economy, at a minimum, is contracting or slowing down. Therefore, the euphoria that passing the debt ceiling brings will be very short lived. We will have to immediately focus on the economy again and jobs. And there seems to be only one thing the government knows how to do, spend money and pass regulations. Also, it is only 15 months until election so stimulus and QE3 will have to be set up and implemented quickly.
Unfortunately, what we really need is for the government to get out of the way.
Therefore, in 2013 when the debt ceiling is reached again, the deficit will be $16.6 trillion rather than the $14.2 we have today; and the budget for 2014 will start at $4.1 trillion. Unless we have a national discussion about why we are spending this much money and reach a national consensus, we will continue to let politicians keep spending and monetizing our debt. If you create enough inflation to make previous debts meaningless, is that a default?
At the same time, the global economy, at a minimum, is contracting or slowing down. Therefore, the euphoria that passing the debt ceiling brings will be very short lived. We will have to immediately focus on the economy again and jobs. And there seems to be only one thing the government knows how to do, spend money and pass regulations. Also, it is only 15 months until election so stimulus and QE3 will have to be set up and implemented quickly.
Unfortunately, what we really need is for the government to get out of the way.
Monday, July 18, 2011
Moody's Has It Absolutely Wrong
July 18, 2011
There will be a market reaction to passing or not passing the debt limit. But it is time to start thinking about this problem as adults rather than as political party advocates. Moody’s comments the past few days are a prime example.
Moody’s, the credit agency has stated they are likely to downgrade America’s AAA credit rating if the debt limit is not raised.
Today, Moody’s stated that America should get rid of the debt limit ceiling altogether because it gives them a reason to downgrade our credit rating. This is not only illogical; it’s symptomatic of the way politicians, economists and pundits think. They almost always attack the symptom rather than the cause.
What Moody’s should be saying is that the Congress needs to pass a law that forces politicians to reduce the debit ceiling by some percent every year until our budget is balanced. Our problem is not the current debt ceiling. Our problem is that our budget is not balanced and on an unsustainable path upward.
There are two major reasons we spend too much.
One, the party out of office attacks the party in office for spending too much and the party in power defends the spending. When election results change, so do the positions of the parties. Congress has raised the debt ceiling 140 times since it was enacted in 1917.
By the way, the debt ceiling was created by President Wilson in order to pacify the opposition that he would not spend too much on WWI.
Two, we refuse to debate the cause of our problems. We only debate the amount of money we will spend on the symptom. For example:
1.Why does America with 5% of the world’s population spend about as much as the rest of the world does on defense? Is America responsible for most of the world? If it’s to protect democracy, why doesn’t Switzerland spend more?
2.Why hasn’t poverty been eliminated after trillions have been spent on the poor? Is poverty simply a percent of the population? Are the government and the population an enabler? Is our education system failing us? Etc. etc.
3.Why do we worry about the consumer price index (CPI)? It is only a symptom. Inflation is not a manipulated, mathematical index; it’s the increase in money supply. Should we be increasing the money supply?
I could give you a thousand examples but I think you got the idea. We need to change the way we think. Once we identify the real cause of the problem, we should be able to get consensus on how much to spend solving the problem.
By the way, America has defaulted on our debt five times starting in 1776. Also, the Federal Reserve can buy bonds to fund the government forever and never have to default on the “Public” debt (public debt is what we are talking about.)
There will be a market reaction to passing or not passing the debt limit. But it is time to start thinking about this problem as adults rather than as political party advocates. Moody’s comments the past few days are a prime example.
Moody’s, the credit agency has stated they are likely to downgrade America’s AAA credit rating if the debt limit is not raised.
Today, Moody’s stated that America should get rid of the debt limit ceiling altogether because it gives them a reason to downgrade our credit rating. This is not only illogical; it’s symptomatic of the way politicians, economists and pundits think. They almost always attack the symptom rather than the cause.
What Moody’s should be saying is that the Congress needs to pass a law that forces politicians to reduce the debit ceiling by some percent every year until our budget is balanced. Our problem is not the current debt ceiling. Our problem is that our budget is not balanced and on an unsustainable path upward.
There are two major reasons we spend too much.
One, the party out of office attacks the party in office for spending too much and the party in power defends the spending. When election results change, so do the positions of the parties. Congress has raised the debt ceiling 140 times since it was enacted in 1917.
By the way, the debt ceiling was created by President Wilson in order to pacify the opposition that he would not spend too much on WWI.
Two, we refuse to debate the cause of our problems. We only debate the amount of money we will spend on the symptom. For example:
1.Why does America with 5% of the world’s population spend about as much as the rest of the world does on defense? Is America responsible for most of the world? If it’s to protect democracy, why doesn’t Switzerland spend more?
2.Why hasn’t poverty been eliminated after trillions have been spent on the poor? Is poverty simply a percent of the population? Are the government and the population an enabler? Is our education system failing us? Etc. etc.
3.Why do we worry about the consumer price index (CPI)? It is only a symptom. Inflation is not a manipulated, mathematical index; it’s the increase in money supply. Should we be increasing the money supply?
I could give you a thousand examples but I think you got the idea. We need to change the way we think. Once we identify the real cause of the problem, we should be able to get consensus on how much to spend solving the problem.
By the way, America has defaulted on our debt five times starting in 1776. Also, the Federal Reserve can buy bonds to fund the government forever and never have to default on the “Public” debt (public debt is what we are talking about.)
Update on Scenario One
July 8, 2011
Scenario One still remains the most probable of my four scenarios. However, if the government or the Central Bank deviates from the “expected” course (from a capitalist point of view) other scenarios might become more probable.
Also, here are some assumptions to consider:
1. The following chart uses the S&P500 index to illustrate this scenario because it is easy to visualize.
2. My assumption is that money supply drives the economy or GDP (and there is a lag time involved here.) Increasing GDP drives business revenues and profits which then drive stock prices.
3. Money supply will slow up beginning in June but will expand when re-election fears really kick in and new “government help” adds stimulus (money creation weather it’s spending or tax reductions unless paid for) to drive up GDP in time to help with re-elections.
4. Serious spending cuts will be postponed until after the election.
Following is a brief description of each point on the chart.
Point 1. Housing bubble bursts and banks become insolvent. The government decides to save the banks by using taxpayer money to “keep them solvent” rather than demanding that the banks try to convert their bonds into equity. Recession is underway.
Point 2. March 2010. The massive increase in money supply which artificially and temporarily increases GDP begins, but results in malinvestments or bubbles. For example:
a. Interest rates reduced to zero and held there
b. Stimulus Programs begin (over $800 billion in stimulus spending and unpaid for tax cuts) plus $1.5 trillion in deficit spending,
c. Mark-to –Market accounting rules revised (allowing banks to increase the ”value” of their mortgage bonds to boost their equity and reserve requirements,
d. Central Bank buys “toxic bonds” from the banks (QE1) increasing ”excess reserves” at banks to $1.1 trillion from $4 billion,
e. November 2010, QE2 begins ($600 billion more pumped into banks but most of it ends up in foreign banks)
f. Money supply increases at double digit rates for 28 of last 29 months (see assumption 2 above.)
Point 3. May 2011. There is a “short-term” stock market top and correction due to anticipated contraction of the pace of money supply and other headwinds including slowing global growth and debt problems. For example:
a. Stimulus ending in June
b. QE2 ending in June (a and b both will contract money supply which will reduce GDP)
c. Debt ceiling “argument” (raise limit by $2-3 trillion and get more fiscal stimulus or austerity) deadline by August 2
d. Reductions in U.S. GDP (Central Bank reduces growth rate in June) and Global GDP rates
e. Increasing inflation rates (headline and core)
f. Housing still a big problem
g. Unemployment slowly getting worse
h. Earnings (Qr 2) in July should be at or near expectations but analysts are already cutting earnings for second half of 2011. It will be a negative for the markets if companies do not confirm current growth rates for second half.
Economy and markets will become more volatile and trend lower until the government “solves” the problems with more money creation, which is what I expect. Or some kind of austerity program including reduced spending is put in place, which I do not expect. However, if austerity happens, my Scenario Two (continued decrease in economy and markets) would come into play.
Point 4. Labor Day or possibly sooner (for example by the August debt ceiling limit) depending on our central planners (government and the Central Bank) the money supply will again increase raising GDP (with a lag) and then revenues, profits and markets. This up turn will last longer (with corrections along the way.)
a. My guess, debt limit increased with promise to cut spending starting in 2013 (after next elections)
b. As economy drifts lower, the pressure will be on government to “do something.” Therefore, I expect a new stimulus program (significant tax cuts because Republicans will have to vote for them and Democrats will get their stimulus because we will borrow the money displaced by the tax cuts)
c. New QE3 program (large) so central bank can continue to buy bonds and keep interest rates low (for housing, employment, etc.) This may be called something else so it can be framed differently for public consumption.
d. Timing of new stimulus for 2012 elections will become important to allow for lag time and momentum prior to elections.
Point 5. Top of Bubble (Sept-Dec 2012 +/-) caused by the huge increase in money supply added over the years and the malinvestments that have occurred as a result of this increased money supply. This bust will cause a very deep recession illustrated by the S&P500 going back down to 600-650 area.
Point 6.January 2015. Long period of stagflation with low, real GDP growth rates of 1-2% and high interest rates due to inflation.
Wednesday, June 22, 2011
Update On Scenario One
This remains the most probable scenario at this time (of my four total scenarios.) However, other scenarios are possible depending on what the government and central banks do (more money creation or money contraction) and what banks do (possible trillions in credit to consumers which is money creation) and how individuals react (credit defaults, savings, leverage, etc.)
1. March 2010 (massive increases in money supply which artificially and temporarily increases GDP but results in malinvestments or bubbles)
a. Interest rate reduction
b. Stimulus Programs
c. Mark-to –Market rules revised (allowing banks to increase value of mortgage bonds)
d. Central Bank buys “toxic bonds” from banks (QE1) increasing ”excess reserves” at banks to $1.1 trillion from $4 billion.
e. November 2010, QE2 begins ($600 billion more pumped into banks but most of it goes into European banks)
f. Money supply increases at double digit rates for 28 of last 29 months
2. May 2011
a. Stimulus ending in June
b. QE2 ending in June (both a and b will contract money supply which will reduce GDP)
c. Debt ceiling “argument” (raise limit by $2-3 trillion or austerity) deadline by August 2
3. Labor Day (+/-) or possibly sooner depending on our central planners (government and the Central Bank
a. My guess, debt limit increased with promise to cut spending starting in 2013 (after next elections) Raising the debt limit is priced into the markets now.
b. As economy drifts lower, pressure for government to “do something.” Therefore, I expect a new stimulus program (significant tax cuts because Republicans will have to vote for them and Democrats will get their stimulus because we will borrow the money displaced by the tax cuts)
c.New QE3 program (large) so central bank can continue to buy bonds and keep interest rates low (for housing, employment, etc.) This may be called something else so it can be framed differently for public consumption.
d.Timing of new stimulus for 2012 elections will become important to allow for lag time and momentum prior to elections.
4. Top of Bubble (then significant recession)
5. S&P500 down to about 650-600
The Next Three Months
June 10, 2011
The economy, meaning the GDP or consumption model, is struggling to say the least. The government has been pouring money into the economy trying to keep it from adjusting to its natural (equilibrium) level after the artificial high encored during the buildup of the bubble.
Now, the flow of money is scheduled to stop (stimulus money by the end of June, the Fed printing money by June 30), and reaching the debt limit ($14.2 trillion) for the 140th time. Now what’s going to happen: more money or austerity? It seems everyday the market flips back and forth.
On Monday, it appears that austerity is on the way which will reduce GDP (and revenues and profits) but the Fed will keep interest rates low “for an extended period of time.” Therefore, the markets react by buying the dollar and chasing high interest rates and selling stocks and commodities. The price swings are big but the intensity of buys and sells is not there.
On Tuesday, the mood swings and traders are convinced that the “government will do something” (more stimulus, additional tax reductions, more printing of money by the Fed, etc.) Therefore, the markets react by pushing up the stocks and commodities, selling off the dollar and high interest rate securities. Again, big price swings but not much intensity.
This may go on for the next three months or until it become clear what the government will do. Therefore, for the next three months you may be limited to very short trades or waiting for the printing presses to start rolling again. Based on how the political class has acted since 1913, I am not going to hold my breath for a balanced budget.
The economy, meaning the GDP or consumption model, is struggling to say the least. The government has been pouring money into the economy trying to keep it from adjusting to its natural (equilibrium) level after the artificial high encored during the buildup of the bubble.
Now, the flow of money is scheduled to stop (stimulus money by the end of June, the Fed printing money by June 30), and reaching the debt limit ($14.2 trillion) for the 140th time. Now what’s going to happen: more money or austerity? It seems everyday the market flips back and forth.
On Monday, it appears that austerity is on the way which will reduce GDP (and revenues and profits) but the Fed will keep interest rates low “for an extended period of time.” Therefore, the markets react by buying the dollar and chasing high interest rates and selling stocks and commodities. The price swings are big but the intensity of buys and sells is not there.
On Tuesday, the mood swings and traders are convinced that the “government will do something” (more stimulus, additional tax reductions, more printing of money by the Fed, etc.) Therefore, the markets react by pushing up the stocks and commodities, selling off the dollar and high interest rate securities. Again, big price swings but not much intensity.
This may go on for the next three months or until it become clear what the government will do. Therefore, for the next three months you may be limited to very short trades or waiting for the printing presses to start rolling again. Based on how the political class has acted since 1913, I am not going to hold my breath for a balanced budget.
Monday, June 6, 2011
What Slow Patch? Aren’t We Still In A Recession?
With the bad economic numbers we have been getting lately (employment, housing, manufacturing, etc.), the economy appears to be turning down again.
Consensus among mainstream economists is that the “recovery” is only entering a “slow patch” as we transition from a government funded recovery back to a private sector funded economy. The reason for this “slow patch” is that stimulus programs are running out of money and the Fed’s QE2 program is ending in June. Therefore, we have to be patient as the “real” economy continues to grow.
The real question is “Aren’t we still in a recession? We have spent trillions of dollars and all we have to show for it is debt. Now, we are going to have to go through a “slow down?”
Let’s face reality. Either the government gets out of the way and lets the economy reach equilibrium, as painful as that would be; or we borrow and spend more money to keep our economy growing at 1% (stagflation level). My guess is that the government will spend more without cutting or saying they will start to cut in 2014 (when they are all retired.)
Hit reply and tell me what you think:
Will they cut spending?
Will they spend even more?
There is one other thing they could try. They could stop looking short-term (definition: days to next election) or they could look at the cause of the recession (government intervention, spending on the flavor of the month, the tax code, trillions of unnecessary regulations, manipulation of interest rates, etc., etc.) That is what caused the bubble in the first place. Now, we are in the process of doing it over again. It’s time to re-think our priorities first, then budget levels.
Consensus among mainstream economists is that the “recovery” is only entering a “slow patch” as we transition from a government funded recovery back to a private sector funded economy. The reason for this “slow patch” is that stimulus programs are running out of money and the Fed’s QE2 program is ending in June. Therefore, we have to be patient as the “real” economy continues to grow.
The real question is “Aren’t we still in a recession? We have spent trillions of dollars and all we have to show for it is debt. Now, we are going to have to go through a “slow down?”
Let’s face reality. Either the government gets out of the way and lets the economy reach equilibrium, as painful as that would be; or we borrow and spend more money to keep our economy growing at 1% (stagflation level). My guess is that the government will spend more without cutting or saying they will start to cut in 2014 (when they are all retired.)
Hit reply and tell me what you think:
Will they cut spending?
Will they spend even more?
There is one other thing they could try. They could stop looking short-term (definition: days to next election) or they could look at the cause of the recession (government intervention, spending on the flavor of the month, the tax code, trillions of unnecessary regulations, manipulation of interest rates, etc., etc.) That is what caused the bubble in the first place. Now, we are in the process of doing it over again. It’s time to re-think our priorities first, then budget levels.
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