Curb Your Enthusiasm?

Submitted by Leo Kolivakis, publisher of Pension Pulse.

Yale economist Robert Shiller was interviewed on Tech Ticker saying that the current market boom can't be trusted:

With
the stock market up more than 50% since March and the Standard &
Poor's Case/Shiller Index on the rise for the last three months, it's a
worry, says Yale Professor Robert Shiller. "Somehow we got into this
really speculative mentality and I don't think we're out of it yet."

Given
the current economic environment, "these booms [in the housing and
stock markets] that we're seeing now can't be trusted to continue,"
Shiller tells Tech Ticker in the accompanying video, taped at last
week's Buttonwood Gathering. (Click here for part one of the interview.)

The author of Irrational Exuberance and Animal Spirits
characterizes the stock market rally as an "amazing rebound" without
much historic precedence, "you have to go back to the Great Depression
to see such a turnaround in the stock market."

According
to his cyclically adjusted P/E valuation model - stock price divided by
average 10-year earnings - stocks are overvalued today, but "not
massively overvalued."

The market's rebound isn't likely to be
derailed by valuation in the short term, Shiller says, but if one looks
to the classic bear market rally of 1933-1937 as a guide, stocks may
eventually crater as they did then.

Professor Shiller also said that the strength in the U.S. housing market is surprising but he doubts another housing bubble will develop:

"This is historic," Shiller says of the recent snapback in the Case-Shiller Index. "It's V-shaped. We've never seen it before. That makes it hard to know from statistical basis what it portends."

Shiller admits to having two conflicting instincts on how this plays out:

• No. 1. Let the good times roll (again):
  "Housing has tremendous momentum" and bubbles can occur even with bad
  underlying economic fundamentals, the professor and author says. "When
  you see [housing] suddenly turning up" - with sales and permits rising
  along with his ubiquitous index - "you kind of wonder if tenor of the
  market has just changed.
• No. 2. False Dawn: Citing the
  familiar litany of problems -- including high unemployment, rising
  foreclosures and ongoing problems in the banking system (commercial
  real estate is "a crisis in the making," he says) -- Shiller wonders
  how long the rebound can last. "This is on government life support -
  massive support," he says. "What's going to happen on the other side?"

So what is Shiller's forecast? "We're going to continue to see more up months but I kind of think it's more likely to fizzle out," he says.

In other words, more short-term gains but long-term pain for housing.

Tech Ticker also discussed about a remarkable gathering which included Soros, Roach and Geithner:

Financial
markets have been soaring and the global economy is picking up steam.
But encouraging words were seldom heard as some of the biggest names in
finance and academia descended on Pace University last week for The Economists' Buttonwood Gathering.

Here's a sample:

• Tim Geithner:
  "The first stage of recovery [is] better than expected [but] because of
  the credit bust, it's going to be slower than a typical recovery," the
  Treasury Secretary said Thursday afternoon in the event's kickoff
  session. "We're still at a point where the dominant risk is of growth
  not being strong [and] self sustaining." (A video of Geithner's
  comments is available at Economist.com.)
• Stephen Roach:
  "The market is in for a rude awakening," said the chairman of Morgan
  Stanley Asia, whose grim outlook seems to remain constant wherever he's
  domiciled. "This will be an usually weak recovery," Roach said. "The
  damage done to the system [will be] lasting - we are not even close to
  healing. It's ‘game over' for the U.S. consumer. Deleveraging is just
  beginning."
• George Soros: The global recovery is
  "bound to be flat" because China is now the world's motor and it's a
  "smaller, slower" motor than the U.S. was, said the famed financier and
  chair of Soros Fund Management. (As an aside - and it's a big one given
  his track record - Soros said weakness in the dollar has become "a bit
  overextended" and observed the short-dollar trade is "extremely
  crowed.")
• Duncan Niederauer: "Don't be misled by the Dow," said the CEO of NYSE Euronext. The rally "doesn't mean we don't have a lot of work to do."
• Dr. Jacob Frenkel:
  "The days of reckoning will come" for all the fiscal and money
  stimulus; specifically, higher long-term inflation, higher interest
  rates and lower growth, said the chairman of Group of Thirty and former
  Bank of Israel governor. "You must articulate today how the book will
  be closed" on all the extraordinary government support. (In fairness,
  Frenkel was optimistic relative to Soros and Roach, forecasting "next
  year will be significantly better" for global growth; his concerns
  focused on 2011 and beyond.)

For the record, the theme of
the conference was "fixing finance" so rather than "bull vs. bear,"
most of the debates were about how to reform Wall Street compensation
and whether or not we need to regulate derivatives. There was also
heated discussion between Harvard's Niall Ferguson and Columbia's
Jeffrey Sachs about whether Japan and China will form an economic
partnership. (Trust me, it was entertaining.)

A ‘Remarkable' Couple

Secretary
Geithner kicked off the event Thursday and Larry Summers, Director of
the National Economic Council, was Friday's featured guest. The
policymakers have distinctive personalities but spoke with notable
similarities.

We have been "remarkably effective" in putting
down a foundation of stability, Secretary Geithner said. About 24 hours
later, Summers cited the administration's "remarkable accomplishments"
in pulling the financial system back from the brink of the abyss.

But
even as they patted themselves on the back (and Ben Bernanke in
absentia), Geithner and Summers both warned against complacency - and
pushed back against those calling for a removal of stimulus.

"We
will try to avoid the classic mistake" of "withdraw[ing] support too
soon," Geithner said. "It'll be a while before we face a risk of
inflation accelerating," given the slack in the economy and rising
unemployment.

"It's "crucial to avoid premature withdrawal of expansionary measures," Summers concurred.

Given the remarkably similar comments here
from Christina Romer, chair of the President's Council of Economic
Advisers, the message from White House's top economic braintrust is
clear: Despite howls of protests from inflation hawks and Austrian
economists, the administration is not planning to head for the "exits"
anytime soon.

One administration official who isn't touting the party line is TARP monitor Elizabeth Warren, who took umbrage with Geithner's "remarkably effective" claim in our exclusive interview. Click here and here
for more clips with Warren, and stay tuned for additional interviews
from the conference with Robert Shiller, Niall Ferguson and The
Economist's economics editor, Zanny Minton Beddoes.

Yesterday on ABC's This Week, the roundtable discussed the stock market and the economy.
Paul Krugman said the economy is growing (industrial production growing
at 5% annual rate) but jobs are not growing. "There is a disconnect
between the real economy and the job market". He added "...businesses
are reluctant to hire because they don't trust the recovery."

In his latest weekly comment, John Mauldin asks Muddle Through, R.I.P? I quote on what he dubs the new muddle through economy:

This
is not a prescription for a return to normal growth. We are headed for
a New Normal that is less than what the market currently believes.
Unless the deficit comes under control at some point, we face the real
prospect of catching Japanese Disease and suffering yet another lost
decade. Can we Muddle Through? We have no choice but to do so. But it
will not be fun. It will not be long-term 2% growth and employment
going back to 6% any time soon. Can we reverse the course? With a
different attitude and leadership in Congress, maybe we can. But it
won't happen next year, and it's unlikely in 2011.

I am afraid
we will have to put my old friend Muddle Through, as I previously
defined him, back in his box for a while. But wait, if my friend at
PIMCO, Mohammed El-Erian, can tell us we are going to a "New Normal,"
then I can decide that we are going to a "New Muddle Through Economy."
Just not one as benign as I used to think.

In the end, that is
what we will do. We will figure out how to deal with the environment in
which we find ourselves. That is what free markets and entrepreneurs
do. Things will sort out, but not before we have what could be an even
more difficult crisis, which will force us to make hard choices.

As
an aside, I am not expecting that we will see the crisis I am thinking
of any time soon. We can move along with positive GDP for some time. I
am thinking of the longer term, 1-3 years out. We will become
complacent. I will get letters telling me I am too pessimistic. Just as
I did in late 2006 when I said we would be in a recession by late 2007.
But I firmly believe we will see a double-dip recession within another
18 months (at the most). Stock markets drop on average about 40% in a
recession. Adjust your portfolios accordingly.

Finally,
Fareed Zakaria GPS had an excellent discussion on Sunday with an
international panel that included Lord Skidelsky who
believes that a double round of stimulus packages is needed to counteract the real prospect of a double-dip recession. You can watch the entire interview below (fast forward to the section by dragging the cursor next to the pause button on the video).

All
I can tell you is that I believe monetary authorities are desperately
trying to reflate the real economy by flooding the financial system
with a tsunami of liquidity. Asset bubbles are being formed as we
speak. Equity and commodity prices will head much higher but it remains
to be seen whether higher asset prices will translate into higher real
prices. Stay tuned, but in the meantime you might want to curb your
enthusiasm and remain very alert as asset prices disconnect from
fundamentals.

Comments

[loup garou]

Yeah, I’m thinking about starting to scale out of some of my positions soon. It’s not that I’m worried about them; just that I don’t see the need to be greedy and hog all the profits. I mean, it’s not fair that I’m making so much money, day after day after day. Money might be the best thing, but it’s not the only thing. I think I should sell some of my shares to the little people, so they might share in the enormous prosperity we are enjoying during these glorious times. They don’t even need to thank me. That’s just the kind of guy I am. Little people need money too, you know; so sometimes I’ll even let them caddy for me. Something to brighten up their dreary, mundane existences. In fact, I might even sell them all of my shares, just so I can feel really good about myself. But of course, they’ll never get my crystal ball, which always tells me with 100% accuracy what the market is going to do at any given time…

[AN0NYM0US]

watching this video of Shiller from Oct 16 (Bloomberg)

http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/...

he seems somewhat ambivalent on housing and suggests at minute 2:25 that we may be in another housing boom

It's pretty clear to me in listening to him and others that we are in uncharted territory

[Anonymous]

Not so much uncharted territory as opaque to anyone
under 100.

http://www.jubileeprosperity.com/

[Anonymous]

Seriously Leo, you talk about how you fully buy into Leuthold's ridiculous commentary about how the S & P is going much higher on momentum and "psychology" and then now you're telling us this? Do you have your own opinion or are you going on what fill-in-the-blank is saying today?

[Leo Kolivakis]

My postition for the past six months has not changed, namely, that perfomance anxiety and massive liquidity will lead equities much higher than you think. Leuthold's comment was not ridiculous because he sees upside surprises. I keep telling you that as long as they keep buying the dips, we're heading higher. I am not feeling well today, so excuse me if I do not get into a long exchange. If you're so confident that we're due for a big correction, then short the market. But be careful, you might get your head handed to you.

[Ned Zeppelin]

Asset bubbles: symptoms of a disease which can progress to hyperinflation, as currencies are less favored than assets, owing to the feedback loop caused by printing money instead of earning it.   Contrast with a massive, deleveraging US small business and consumer, adding a counterbalancing deflationary force.  Result: asset markets buoyed not by real demand, but entirely by speculation. In hindsight, this should have been obvious in March 2009 when QE commenced. Blinded by the overwhelmingly bad fundamentals, those of us who believe fundamentals are what matter missed the biggest fundamental of all - the sheer power of sustaining the unsustainable by simply printing US Dollars, and keeping alive the TBTFs with their trading desks infused with government cash and implicit guarantees - what else would you expect them to do with all that largess? Invest in a real economy? Get a real job? No way. 

Right now, we have a massive backlog in foreclosures being held off the market, killing the value of Freddies, Fannies and private MBSs all over the place, now marked to fantasy so as to keep the embedded losses hidden from view, and thus unrealized.  Wells Fargo and its ilk are insolvent. Goldman is doing great, since its business is precisely the business you would expect to prosper in the current environment.

So, both camps are right - the fundamentalists who see an economy that is very ill, and not rebounding very well at all, and bound to rear its ugly head at some point, and the CNBC crowd, who can legitimately point to months of handsome equities and asset gains that are seemingly unstoppable and say "who's the dummy now?"

The question is, where does this lead? Who can predict what the rear view mirror will say six months from now?

[Anonymous]

No enthusiasm,as these policies are Greenspan renaissance.
Prices disconection to incomes and revenues.
Low interest rates begging for lower interest rates.
No capital investments private or corporates,banks profits outsmarting not only corporate but the economies.
Let us be graphic and see how one can boost a GDP
C+I (Gexp-taxes)+ (X-M)

consumption seems higher on Q3
http://alfred.stlouisfed.org/series?seid=PCECA&cid=110
http://alfred.stlouisfed.org/series?seid=PCNDGC96&cid=110

Not much help from private investment
http://research.stlouisfed.org/fred2/series/FPIA

or gross domestic investment
http://research.stlouisfed.org/fred2/series/GPDI

Government expenditures indeed are helpful
http://alfred.stlouisfed.org/series?seid=FGCE&cid=107
Never ever been so high
http://alfred.stlouisfed.org/series?seid=FGCEA&cid=107

[Anonymous]

http://blogs.ft.com/maverecon/2009/10/a-stronger-us-economy-requires-a-w...

This article graphically illustrates how US GDP will be boosted.

With a deleveraging consumer, and a government running out of money, the source of growth will come from a strong export sector and private investment

He argues that because domestic demand will remain weak for some time, the increase in private investment will come from strong external demand i.e. Asia. This requires a weak dollar and rebalancing of surplus Asian economies

We are seeing the former but will we see the latter?

[kevinearick]

Goliath has fallen over the cliff.

He is hoping you will either save him by pulling  back the non-performing assets, or jump off the cliff yourself, so he at least has some company, and something to cushion the fall.

I suggest you do neither, and, instead, employ the energy of the falling body as a catapult over to the other side.

As we previously discussed, as the price of oil rises above $65, they have no choice but to print more computer money for the banks. Tax receipts will continue to fall, demand for services will continue to rise, and they will print funny money for the transfer payments. The cycle continues, and accelerates as before.

Everyone was given notice not to get on that train, with more than sufficient opportunity to liquidate their position.

This is a run, and it's picking up steam in chunks.

The rip current is nasty. Only the strongest swimmers should be in the water. This is the biggest wave in History, and it's heading toward a wall. Landing is going to be quite tricky.

How are they going to implement a real excess profits tax at this point? They are way behind the curve because they did not account for the accelerating speed of disclosure in their initial calculations.

(I - C) / G. The new economy dropped old economy C & G a long time ago, and is just beginning to transform the resulting I buildup. Wealth, organic or otherwise, doesn't just disappear.

... now if he had put a seaman on those set of skis, then we would have something to work with ...

[tip e. canoe]

dear kevin, love your stuff.
please define 'new economy'.
subtle hints are welcomed.
gracias

[kevinearick]

Wow, what a question. To answer, I have to assume that you are not familiar with a few things.

Historically, old families have had asymmetric information advantage over the new families, and protected that advantage through access to effective education. The Internet you see now is highly filtered and monitored. It wasn't always that way.

At the end of the containment period (USSR), a relative handful of programmers reconfigured the the Arpanet into the Internet, to make the deficiencies of the USSR completely transparent to its people, first among its scientists, then down to the general population, eliminating the asymmetric information advantage of leadership, both shrinking the container and increasing the internal pressure, until the social bomb exploded. When the Soviet leaders saw where we were heading, the outcome became inevitable.

You are watching the same process globally now. Before they could regain control, we taught kids, globally, a few things about the physics of economics.

Now, the old families are completely dependent on computers, which they deployed in an attempt to turn all of labor into a commodity. They have absolutely no idea what is going on under the top layers of these programs, and no idea what the kids have in store for them next. The new economy is accelerating speed to disclosure faster than they can respond, and, in the meantime, the kids are building all the necessary replacement components.

The kids have advanced scientific inquiry far beyond anything taught at the political universities, or in the compliance based K-12 education system. The American Enterprise System is now subject to the same condition, increasing pressure and decreasing volume.

The new economy is a quantum jump in Democracy. The kids are now on top of the hill, looking down on the old families, virtually.

If you gave everyone access to a decent eduction across the Internet, what would happen to the existing education system? The energy grid? The nation/state physical property system? etc.

The people that see what's coming have started the run, and the ivy-league types are on the hot seat.

[tip e. canoe]

thanks for the clarity kevin.  intuition felt that's what you were referring to, but your confirmation brought to light things that have only been touched in the dark.  these times makes one even question whether even intuition is serving to pull one into the black hole as well.  as we know, the gravitational pull of a falling goliath is quite strong & has no morality.

it's refreshing to realize that the kids are processing this all and are working to build the catapault.  personally, i'm frustrated cuz all i see around me is gloom, doom & boom & i'm ready to bloom, as i have absolutely no attachments whatsoever to the old, except the energy i'm expending in the peanut gallery of the movie theater.  i have a feeling that there are many many many others that feel this way.

so please tell the kids that if they can, please provide some clues so that those who wish to play in the greener pastures with them but are lost in the jungle can find their way with some ingenuity & non-linear thought.  we do understand the necessity of speaking in tongues and have come equipped with our secret decoder rings.

cheers

[kevinearick]

As Vinny G apply provided, People are not fighting

the banks; they are fighting their own propensity

to stroll downhill, having benefited from the

climb made by previous generations, instead of

climbing the next, bigger, mountain. If you are

done climbing, build a way station to supply

the next generation.

This generation of kids is systematically choking

the empire as an example to the next empire,

so their kids have time to be kids in the next

valley, and to remind everyone that capital

without new talent becomes inert, just as a

lake without circulation dies.

As ZH provides, a computer is inhuman, and,

in economic war, those that can withstand the

most pain win.

If you want to see the next valley, follow the

kids up the mountain. There are all kinds of

little things you can do, if you think about it.

Until the seam breaks on the old system, don't

expect the kids to reveal themselves. From their

perspective, they were sold out to the banks.

[tip e. canoe]

entiendo claramente. 
muchas gracias amigo.

[kevinearick]

I am not trying to be evasive or opaque by employing analogies. You can employ calculus based physics to determine the fulcrum price for oil and its externalities, but that fills the buffer in most people's minds, leaving them disabled for the purpose of further analysis and action.

If you begin to look at the world as a fulcrum of fulcrums, all balancing each other, you don't have to do the math to see where your talents may be best applied. You see the balance, and you act at the margin when you see it will have a constructive effect.

Who/whomever is prepared to act and acts the quickest builds momentum relative to the system, and, after some investment, you find yourself above the system, instead of operating as an internal component in the sausage factory, or worse, the sausage in production.

It takes some practice, but surfing the wave is a lot more rewarding, regardless if its definition, than being chewed up by the current. The kids are building the system right in front of your eyes. 

Vaya con Dios

[tip e. canoe]

let's hope that the kids are wise enough to not take a piece of candy from the sharks:

http://kivanews.blogspot.com/2009/10/moodys-to-bring-its-credit-risk.html

in lak'ech

[kevinearick]

Now, we are into architect training:

The bigger and nastier the sharks, the better for training purposes. The problem is not the sharks; the problem is the mom and pops who breed lots and lots of little baby sharks, by following the algorithm put in their head by the medium size sharks.

I teach the kids to be self-reliant for a year, then I throw them directly into the shark tank. The ones that swim faster than the sharks become architects.

Right before we roll out a new system, we starve the big, nasty sharks, so they eat the rest of the sharks. I’m on my last apprentice now. He’s training to be a shark. From an evolutionary perspective, sharks are quite useful. If they are big enough, they grow the fulcrum by creating a center of gravity.

The young architect has good manners precisely to induce that little shark to put out that piece of candy. When the architect swims away, the little shark is quite surprised to be eaten by a larger shark waiting nearby, who is hoping to get them both. Because the kids have taken all the candy, the smaller sharks are being eaten by the larger sharks right up the line.

You have been surfing the net for some time now; I hope you are finding what you were looking for. Be patient, the really big sharks are just coming up from the deep, they are quite capable of navigating in the current of the blackhole, and they are monsters.

I spent my life on reorgs, training sharks at over 1000 organizations. If the kid takes that piece of candy, and cannot out-swim the circling sharks, he deserves to be eaten.

The better the sharks, the better the architects, and the larger the fulcrum for mom and pops in the middle. If mom and pops spoil their children as a control mechanism, then feed them to the baby sharks, that’s their mistake. The universe will create a billion rocks to get that one diamond. That’s evolution.

Put another way:

mom and pop put their money in the bank for 2%, not knowing what the bank is going to do with that money, nor do they ask. The bank lends that money to Trump to build another casino in a saturated market at the end of a bull market. Trump gets 20% short-term return, and he's deeper into the bank. How long before mom and pop's earnings are worthless, and Trump gets another bailout?

Natural selection is going to penalize mom and pop, and raise Trump, right up until mom and pop take their money out of that bank.

The run began a long time ago and is approaching a second tipping point; the banks can't get private block financing, and a mass of individuals are moving their money, ahead of a demonstration, in the face of increased structural, seasonal, and oil butterfly / currency costs.

We are on your dime Leo. I hope you found the discussion useful.

Good luck tip e.