Posts
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.
Wednesday, June 22, 2011
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.
Friday, May 20, 2011
Get Ready for the Election Season and the End of QE2
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.
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.
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
Thursday, March 31, 2011
We’ll Keep Printing, Will They Keep Buying?
I have been concerned about all the money being pumped into the economy and the inevitable inflation that will result. However, the symptoms of inflation (Consumer Price Indexes or CPI) have been mild (by model definition) or perhaps even disappointing to Fed Chairman Bernanke. He wants to re-inflation the economy to help turn around housing and employment/wages. Why he wants to prolong this recession by preventing prices to reach equilibrium is an open question.
We do know is that all of this money is holding up or levitating GDP. And we know that to keep GDP going, we need to keep printing money. We can do it because we are a sovereign country and can print as much money as we want (not without consequences however.) We are currently borrowing 43 cents out of every deficit dollar we spend. The problem is that the Federal Reserve is buying about 40 percent of these dollars followed by China and Japan. Will these buyers continue to buy our Treasuries?
I am not sure. One reason is that the Federal Reserve’s Quantitative Easing (QE2) policy of buying $600 billion in bonds will end in June. Who is going to pick up that 40 percent in July? I have been saying that the Fed will probably initiate QE3 because they have to keep it going. The next election is not that far off.
What does appear more certain is that we will keep spending and printing. The rumor yesterday was that Congress has reached a compromise to cut $33 billion (less than 1%) of the budget. If they (both parties) can’t cut even 1%, how are they ever going to extricate themselves from micro-managing our mixed (or Statist) economy.
We do know is that all of this money is holding up or levitating GDP. And we know that to keep GDP going, we need to keep printing money. We can do it because we are a sovereign country and can print as much money as we want (not without consequences however.) We are currently borrowing 43 cents out of every deficit dollar we spend. The problem is that the Federal Reserve is buying about 40 percent of these dollars followed by China and Japan. Will these buyers continue to buy our Treasuries?
I am not sure. One reason is that the Federal Reserve’s Quantitative Easing (QE2) policy of buying $600 billion in bonds will end in June. Who is going to pick up that 40 percent in July? I have been saying that the Fed will probably initiate QE3 because they have to keep it going. The next election is not that far off.
What does appear more certain is that we will keep spending and printing. The rumor yesterday was that Congress has reached a compromise to cut $33 billion (less than 1%) of the budget. If they (both parties) can’t cut even 1%, how are they ever going to extricate themselves from micro-managing our mixed (or Statist) economy.
Tuesday, March 15, 2011
Will The Government Continue To Pump Money Into The Economy?
I spent most of last week in Auburn, Alabama at the Austrian Scholars Conference where I listened to 40 presentations on various aspects of the economy from Austrian (or Capitalist) economists. It was excellent. I thought I would share one of my "take home" ideas on government spending (fiscal and monetary).
I think the government will continue to pump money into the economy (financial system) to keep it afloat. Most of the "growth" in GDP growth is from the government and the amount of GDP growth per dollar spent is declining. I am assuming that if the economy were really turning around based on private investment and spending, the government would stop injecting borrowed money into the system.
There is a lot of talk about the election of "Tea Party" legislators and their willingness to reduce spending and begin to get government budget under control. I don't think that will happen. The Republicans are proposing a $60 billion reduction in spending (1.6%) and the Democrats have countered with $6 billion in cuts.
Neither amount is significant and the focus is on cutting a few dollars out of the budget. However, the focus should be on the cause of overspending not just the symptoms of it. Why are we overspending? Why are we willing to borrow 43 cents of every dollar we spend? For what purpose? For whose benefit?
For example: Why are we spending $800 billion a year on "defense" which is 50% of what the world spends on defense? Why have we politicized science: one administration spends billions on programs to get us to Mars (Bush) and the next administration (Obama) shuts down those programs (wasting that money, education, etc.) and then redirects billions on satellites to monitor global warming instead? Why do we have a government (both administrations) that spends hundreds of billions to bail out banks with taxpayer money when these banks could have saved themselves? These are the kinds of questions we need answered before we are going to get serious about priorities and cost reductions.
Therefore, I expect to see one or more of the following: Quantitative Easing III (the Fed printing more money) and or the Fed keeping interest rates low for a much longer time (well into 2012) and/or more "stimulus" programs (we haven't solved our problems yet.) This of course has implications for both business and investment planning.
I think the government will continue to pump money into the economy (financial system) to keep it afloat. Most of the "growth" in GDP growth is from the government and the amount of GDP growth per dollar spent is declining. I am assuming that if the economy were really turning around based on private investment and spending, the government would stop injecting borrowed money into the system.
There is a lot of talk about the election of "Tea Party" legislators and their willingness to reduce spending and begin to get government budget under control. I don't think that will happen. The Republicans are proposing a $60 billion reduction in spending (1.6%) and the Democrats have countered with $6 billion in cuts.
Neither amount is significant and the focus is on cutting a few dollars out of the budget. However, the focus should be on the cause of overspending not just the symptoms of it. Why are we overspending? Why are we willing to borrow 43 cents of every dollar we spend? For what purpose? For whose benefit?
For example: Why are we spending $800 billion a year on "defense" which is 50% of what the world spends on defense? Why have we politicized science: one administration spends billions on programs to get us to Mars (Bush) and the next administration (Obama) shuts down those programs (wasting that money, education, etc.) and then redirects billions on satellites to monitor global warming instead? Why do we have a government (both administrations) that spends hundreds of billions to bail out banks with taxpayer money when these banks could have saved themselves? These are the kinds of questions we need answered before we are going to get serious about priorities and cost reductions.
Therefore, I expect to see one or more of the following: Quantitative Easing III (the Fed printing more money) and or the Fed keeping interest rates low for a much longer time (well into 2012) and/or more "stimulus" programs (we haven't solved our problems yet.) This of course has implications for both business and investment planning.
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