Thursday, September 17, 2009

Economic musings:

There are all sorts of opinions out there, bullish and bearish, so you pretty much pick the scenario that matches your prejudices. That said, here are some excerpts from posts at the Big Picture that seem on the mark.

From Lehman’s Legacy Still Being Written: (Mon, Sep 14)
After small stutter steps on Friday and this morning, U.S. stocks marched ahead today for the sixth time in the last seven trading sessions.

By one measure alone — the willingness of investors to speculate — the mindset that helped foster bubbles in both stocks (until 2000) and in residential real estate (until 2006) is proving hard to kill. Generational seismic events, whether along tectonic plates or in financial behavior, tend to be followed by long periods of relative inactivity. Earthquakes in and around the San Francisco Bay area were few and far between in the decades following the “big one” in 1906, for example, and stock speculation after the twin Greats (Crash of ‘29 and Depression during the ’30’s) didn’t really rear its ugly head again until the go-go years of the late ’60’s and early ’70’s.

Not so here in 2009, though, as any quick glance at the New Highs tables will reveal. Lower quality stocks have led the move higher off the March lows, and the rises in the shares of financial entities that are really wards of the State in drag have been downright perplexing. AIG, just to cite one of this summer’s hottest names, recently quintupled, even though current shareholders have the most distant of claims on the company’s assets. ... If what happened to the capital markets in the wake of Lehman’s 2008 failure were really the “Big One”, then how could risk appetites in so many asset classes be so healthy so soon?

The short answer is money printing, and the long answer deals with the side effects that go with zero-bound short term interest rates and quantitative easing. ... Deathly afraid of making the type of mistakes that might lead to a 1930’s-style depression, today’s policy makers are united in their desire to make mistakes of their very own during this credit down cycle. One symptom of this pedal-to-the-metal approach to monetary policy (and perhaps a harbinger of unwindings to come) is the sudden appearance of the dollar carry trade. Risk appetites are sparked by many variables, but speculation also needs fuel. Borrowing at a rate approaching nothing, in a currency that tends to head south for winter and summer both, is just the stuff with which to fan the speculative embers.
From Who is Feeling Smart These Days?: (Wed, Sep 16)
U.S. stocks rose once again on Wednesday, extending what has become a rather remarkable equity rally.

“Never confuse brains with a bull market” is one of Wall Street’s oldest pieces of advice for investors. It teaches us to not feel too smug or smart about the levitation in one’s portfolio when the major averages, too, are rising. If what has been transpiring at the corner of Wall and Broad streets since March is indeed a bull market, then the usual celebratory cockiness is missing. Of the seeming lack of joy over this latest rally, one of my readers relayed the following impression of her recent trip to New York : “Even the ones who are making money aren’t happy”, she said.

Mr. Bernanke will see to it that money printing will be with us until the bond market grounds his fleet of helicopters. Until that day comes, stocks could continue to be kited higher on the winds of easy money.
From A Tale of Two Cities: Wall Street vs. Main Street; the stock market vs. the real economy: (Wed, Sep 16)
Long-time readers know that for years we have inveighed that there is a huge, historic disconnect between the stock market and the economy due to funny money. Easy Al and now Benito have transformed the stock market and other markets from gauges of the economy to generators of economic activity via their deployment as asset bubbles.

Ergo one must now be a technician to not only navigate and profit in the markets but to insure against a career-ending misadventure, either on the downside or upside.

Yesterday Bernanke said the recession has probably ended. If the recession has ended shouldn’t the Fed at its meeting next week at least stop QE and the massive monetization of mortgages?

If QE, which is due to expire, is renewed, stocks should rally but commodities, gold and inflation plays should rally far more. The dollar should tank. China should go apoplectic. Benito will look foolish for saying “the recession is likely over”. Bonds might rally initially but then look out below.

If QE is not renewed, stocks and commodities should tank; the dollar should soar and bonds after initially declining should rally. China will be appeased.
Bottom line is that the stock market rally, by now at least, has exceeded "bear rally" dynamics and is being seen by some as a direct result of the Fed's QE and other easy money policies. That may explain the peculiar non-euphoric feelings of those who have gained in the last six months (and massive angst by those who are losing, or losing out).

ALSO: Check out Can You Name These 14 Bubbles?


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