Outlook 2010: Black Swans or Black Sloths?

Leo Kolivakis's picture

Submitted by Leo Kolivakis, publisher of Pension Pulse.

At the end of every year, Martin Barnes of BCA Research
puts together the outlook for the following year. This is an excellent
publication and I advise all institutional clients to read it
thoroughly. You can obtain a copy of BCA's Outlook 2010, The Debt Supercycle Goes Global, by clicking here.

my Outlook 2010, I decided to follow the BCA style this year, except I
do not have a client called Mr. X, but will rather have someone called
Mr. Y who asks me, the editor, a bunch of questions on the global
economy and the markets. I will provide hyperlinks to the numerous
articles cited, and will focus on the major themes. Hope you enjoy
reading this comment.

Mr. Y: You are up vey early this Saturday morning.

Yes, couldn't sleep properly because I have severe upper back pain. So
I decided to get up and start writing my Outlook 2010, which is the one
post I dread to write every year.

Mr. Y: Why so? I thought you liked writing it.

I love researching it; writing it not so much. It takes a lot of
reading, a lot of thought, and to be honest, a lot of energy. But it's
important so let's not waste any more time and get right to it. Please
fire away.

Mr. Y: Fine, let's begin with the global economy. Cody Willard wrote a comment for MarketWatch, Economic Outlook 2010: First, bet on the OECD being wrong again,
where he basically ridicules OECD projections and concludes by stating:
"Expect price inflation but not asset appreciation. There’s a
difference, even if the OECD’s economists don’t see it." Do you agree
with Mr. Willard?

Not entirely. First of all, it wasn't just the OECD that totally missed
forecasting the last financial crisis. I know of many venerable
institutional funds that got their heads handed to them. Second, given
the unprecedented liquidity in the financial system, I expect more bubble trouble
in 2010. There is considerable slack in the global economy, so I am not
convinced that inflation will come roaring back any time soon. You will
likely see a cyclical backup in yields as the US economy recovers, but
not the runaway inflation we had in the 1970s.

Mr. Y: Let's come back to the issue of asset prices a little later and focus on the economy right now. In August 2008, you wrote about Galton's Fallacy and the Myth of Decoupling where you cited Desmond Lachman of the American Enterprise Institute. Do you still hold the view that the US is the engine of global economic growth?

Absolutely. While there is no question that a secular shift is going on
in the BRIC economies and that China and India will play an
increasingly more important role in the world over the next decades,
the US remains the strongest economy in the world and without a US
recovery, it's silly to discuss the prospects of a sustainable global

Mr. Y: On the issue of China, Gavekal’s Arthur Kroeber, recently wrote that there is no doubt the Chinese economy is overheating and policymakers remain behind the curve. What do you think? Can China halt its building bubbles?

I am not convinced of these "China is overheating" arguments. In early
December, I had lunch with Keith Porter who used to manage the Emerging
Markets portfolio at the Caisse. I wrote about it in my post on the rally of a lifetime.
Anyways, Keith made a very intelligent argument, stating that what we
Westerners perceive as "overinvestment", might be totally false when it
comes to China.

Importantly, Keith thinks that all this talk of
excess capacity in China is missing the bigger picture. He told me that
China is planning and preparing for the future so they have every
reason to overinvest now and build up their infrastructure and
stockpile the resources. It makes perfect sense when you think about
it. They saw all the mistakes the Western world made and decided it's
best to be better prepared for the future.

Moreover, I agree with Jeff Nielson who made a comment on Seeking Alpha in early November, There's No Bubble in China. Mr. Nielson wrote the following:

dealt with definition of terms, let's look at the facts of the Chinese
economy. First, there are vast levels of savings in the Chinese
economy. It was because of the vast amount of savings in the Japanese
economy that an economic downturn of well over a decade resulted in
relatively few bankruptcies and defaults – despite the fact that all
the other ingredients of a huge asset-bubble were present.


economy is growing much more rapidly than other economies. A growing
economy generates real increases in wealth. Rising wealth supports
higher asset prices, thus a rapidly growing economy can sustain a much
more rapid rate of asset-appreciation.


However, the
China-bashers still insist that there is one ingredient of a “bubble”
in China: too much leveraged debt, they claim. Given that these same
“experts” were totally incapable of spotting excessive leveraged debt
in the U.S. economy, it should be of little surprise that once again
the experts are totally wrong.


China's four largest banks, which account for nearly half of new loans originated in China this year, have seen their total deposits quadruple
while lending has only tripled. It should be obvious even to the inept,
China-bashers that if China's biggest banks are taking in $4 of
deposits for every $3 dollars that they lend, that they have been
getting steadily less-leveraged all year. This is in contrast to the
behavior of U.S. banks during the housing bubble (and Wall Street
Ponzi-scheme) – where U.S. banks were lending out $30 of debt for every
$1 they took in, in deposits. Can you spot a slight difference here in
the degree of leverage?


To provide even further assistance in
educating the experts, let me introduce them to a real “bubble”: the
U.S. bond market. At a time when the U.S. is dumping more supply onto
the market than at any time in history, bond prices remain near
all-time highs. It is straight out of Economics 101 (presumably the
experts managed to pass that course) that when you increase the supply
of any good that you depress the price. An extreme increase in supply
should result in an extreme decline in price. Thus, the first condition
for a bubble is satisfied: a grossly over-valued market.


It is
even easier to point out the excessive leverage, because it exists in
so many ways. To begin with, the U.S. debt-to-GDP ratio is increasing
exponentially – a sure sign of excessive leverage of the U.S.
government, by itself. However, there is an even more obvious indicator
of excessive leverage: the need for the U.S. government to “buy” much
of its own bonds to prop-up the prices. Without any possible doubt,
this is the most blatant example of an over-leveraged market on the
planet – yet it remains “invisible” to most of the experts (and all the


As a further note, we are seeing very similar
behavior in U.S. equity markets, where the Plunge Protection Team
permanently pumps-up valuations of U.S. equities through buying-up
shares, and in the U.S. housing market – where U.S. banks have also
artificially (and radically) reduced supply, through simply holding
millions of foreclosed U.S. properties off of the market (see “Fantasy Housing Numbers a Prelude to NEXT U.S. Crash”).


don't suppose the same group of experts who already totally over-looked
one, enormous U.S. asset-bubble could fail to see several more, do you?

Mr. Y: I am glad you mentioned the bond market. Right before Christmas, you wrote that a number of top hedge funds are betting on a big rise in yields. But you're not convinced that yields will explode up. Do you still hold the view that there is no bubble in bonds?

I repeat what I stated earlier, without a sustainable US recovery, you
can't have a meaningful global recovery. While I agree with Mr.
Nielson's views on China, I am not worried about a US bond bubble. The
Chinese and other investors will continue to purchase US bonds because
they will not bite off the hand that feeds them.

What's a bit
trickier in the bond market is that investors are underestimating the
strength of the nascent US recovery. I think the next few US employment
reports will readjust market expectations to the upside. You'll see
significant gains in payrolls and substantial upward revisions to
previous employment figures.

Mr. Y: How so? Are you being overly optimistic on the employment front?

Editor: There is no doubt in my mind the US economy is recovering. If you look at November ISM New Orders surging above 60, profits increasing to $132 billion in the third quarter,
compared with an increase of $43 billion in the second quarter, a
pick-up in business investment, this all means that firms are ready to
hire again. As conditions improve, you'll see more hiring.

let's be clear on something. More hiring from depressed levels won't
make a huge impact on overall consumption as there is still way too
much slack in the economy. We know that the real US unemployment rate is closer to 18%, so there are still far too many people that are left behind in this economy.

will be interesting to see in the first half of 2010 is how the bond
market reacts to the increasingly positive jobs reports. Will we get a
slight or significant backup in yields? Will the Fed remove excess
liquidity slowly or quickly and start raising rates sooner than what
the market currently anticipates? If growth starts dissipating in the
second half of the year, how will the bond market react to a possible
second round of stimulus? Will there be a run on the US dollar as some
of the doomsayers are predicting?

Mr. Y: Back in October, you wrote a comment on the death-defying dollar. Given the structural problems, isn't a run on the US dollar a real possibility? Why are you so bullish on the greenback?

Currency calls are always about relative growth expectations. At this
point and time, I see the US economy growing stronger than Japan which
just unveiled an ambitious economic growth strategy, or than Europe where Spain just took over EU presidency and vowed to focus on the economy.

At this time, I agree with GaveKal Research that short US dollar positions are increasingly risky
as an improvement in economic outlook could unleash a violent reversal
of the carry trade, forcing foreign producers to scramble for US
dollars as they attempt to meet working capital needs.

Mr. Y: And what about China's currency peg? Won't they have to readjust their peg in light of all this?

Not necessarily. As the US dollar appreciates, so does the Chinese yuan. In late October, I wrote about the Chinese disconnect
and agreed with the views of Zachary Karabell and Jason Dean over
Krugman's simplistic view that "something must be done about the
Chinese currency".

Importantly, there is no more China and
America, but Chimerica. The relationship between large US
multinationals and China is crucial to understanding the underpinnings
of the global economy. It's quite silly to talk about these two
economic superpowers separately.

Mr. Y: Let's move on to commodities. According to the IMF, commodity prices were surprisingly buoyant in 2009, and are expected to increase further in 2010 as world activity expands after the global crisis. Do you agree with this view?

Editor: Yes, 2009 was the year of commodities
and I think we will see further price gains in 2010. But not all
commodities will rise in 2010. Given my views on the US economy and the
greenback, I am less bullish on gold and more bullish on oil, copper,
natural gas, and wheat.

Mr. Y: How
can oil rise along with the US dollar? Also, aren't you worried that a
rise in crude prices will hamper the global economic recovery?

Yes, given the abundant liquidity in the financial system, there is a
threat that speculative activity will pick up in energy markets, but I
don't agree with those that assume oil above $100 will threaten the recovery.
It all depends on how fast we get there and whether or not prices
significantly diverge from the underlying fundamentals of the economy.

far as oil prices rising along with the US dollar, we have seen this in
the past. It's all part of the normal cyclical recovery story. I would
add that the same goes for stocks. Bears automatically assume that a
rise in the US dollar and oil prices will kill the rally in stocks. But
they ignore the dynamics underlying the recovery.

Mr. Y: Please explain this because stocks and commodities came off one of their best years ever. In 2009, you talked about liquidity drowning the meaning of inflation, big money suffering performance anxiety, and the recovery mirroring the decline. Surely you are not suggesting the same spectacular gains for 2010?

Of course not. Risk assets performed exceedingly well in 2009 because
last year this time, investors were suffering from irrational
pessimism and post-deleveraging blues.

me go further and tell you that 2009 was all about beta. Any monkey
could have made money being long corporate bonds, stocks, commodities
and commodity currencies. That's why I am not impressed when large
pension funds like CPPIB come out to boast about their performance,
because it really all boils down to the beta boost.

might add that the same goes for most hedge funds. The ones that
survived the crisis and the calls for redemptions did very well in 2009
because most of them also benefited from the beta boost. Going forward,
alpha will be the key to making money in these markets. And very few
hedge funds or pension funds know how to deliver true alpha, ie.
returns above a proper beta benchmark.

Mr. Y: You
just mentioned the "B" word, the one that makes senior pension fund
managers cringe every time they read your comments. Are you dead set
against private equity, real estate, infrastructure commodities and
hedge funds as far as proper diversification of pension assets?

Editor: Absolutely not! What troubles me is when I see senior public pension fund managers act stupid, gaming these benchmarks or not even bothering disclosing them!

if stakeholders are going to dole out millions in bonus, they
better make sure the board of directors at these public pension funds
are doing their jobs properly, approving performance benchmarks for all
asset classes, especially private markets and internal and external
hedge fund activities, that accurately reflect the risks of the
underlying investments.

Mr. Y: I can see this is one of your pet peeves. You become visibly angry and have been writing on bogus benchmarks in alternative investments ever since you started Pension Pulse.

Look, if you're paying hedge fund managers or pension fund managers for
alpha, then you'd better make sure they're delivering alpha, not beta.
It's quite disconcerting to see the glaring gaps in pension governance
when it comes to compensation based on bogus benchmarks that do not
reflect the risks of the underlying investments.

While the
largest abuses are in private markets (private equity, real estate, and
infrastructure), there are abuses too in public markets (external hedge
funds or internal absolute return strategies). Stakeholders need to
wake up and conduct proper oversight of these funds without
micro-managing them.

Please go back to read Kip McDaniel's article on Canadian pension funds in the winter issue of ai5000,
paying close attention to Leo de Bever's comments. He gets it but where
I disagree with him is that pension fund managers are not paid anywhere
near what hedge fund managers are being paid in performance bonuses.
Unlike hedge fund managers, pension fund managers do not have skin in
the game or high water marks, so they shouldn't be paid like hedge fund
or private equity fund managers. Also, they are pension funds, not
hedge funds or private equity funds, which is something managers and
board of directors tend to forget.

Mr. Y: Let's shift gears and go back to the stock market. In last year's outlook 2009, you totally missed the boat on financials. Why is that and what do you see for financials going forward?

I will admit that I made money on my other calls but steered clear of
financial stocks. What did I miss? For one, the big banks had a license
to print money because they were borrowing for free and trading away in
all sorts of risk assets.

The one thing banks didn't do is lend
money, especially to small businesses. The 2008 crisis was essentially
a liquidity crisis and banks are still reluctant to lend past three
year terms. They prefer trading in capital markets, making a killing in
the process.

A lot of the TARP funds that were paid back
recently were paid back because bankers do not want governments to interfere
with compensation practices, which are grossly out of whack. Soros was
dead right about alignment of interests.
The wimps at investment banks want to make the same bonuses as hedge
fund managers but they got no skin in the game, and often take
recklesss risks to deliver the big performance figures.

Going forward, I think it will be a lot tougher for the financial sector as the Fed might surprise with a shift:

balance-sheet expansion, the profit outlook for banks and financials is
iffy, which is reflected in the sector's recent underperformance in the
stock market. Moreover, the likelihood of the bond market beginning to
price in an eventual Fed tightening will lead to a flattening of the
yield curve, according to BCA Research's Daily Insights.


have enjoyed a "free lunch" in a record steep yield curve, the research
service continues. With the short end of debt market anchored at near
zero by the Fed's fed-funds target, yields escalate sharply with
progressively longer maturities.


That provides a built-in wide
profit margin for banks that borrow short for practically nothing and
reap yields of 2% or 3% from intermediate-term Treasury notes. Leverage
that many times over and banks reap lush profit margins -- so long as
their short-term borrowing costs remain low.


Were the yield
curve to flatten substantially, banks would have to depend on a revival
of residential real estate to power their earnings growth, BCA contends.


the outlook remains very shaky. House prices face a difficult 2010,
with a new wave of foreclosures expected as mortgage resets accelerate
and government mortgage and foreclosure programs eventually end.


a longer-term perspective, there are even more troubling signs for
banks," BCA continues. Banks had been able to expand their assets
faster than the economy from the mid-1990s until last year. That's no
longer the case and banks' balance sheets are likely to lag the
economy's growth, it adds.


"Bottom line: The financial sector in
general, and banks in particular, have entered a period where lagging
profitability is likely to trigger underperformance, especially if
perceptions of future monetary policy slowly begin to shift and the
deleveraging cycle plays out similarly to past periods (i.e. the early
1990s)," when banks' real-estate loan losses also crimped lending, BCA


If the Fed signals, however obliquely, that it is
moving away from its near-zero-rate policy, banks and financials will
lead the stock market lower, perhaps severely so.

think BCA is right, a shift in monetary policy will deal a blow to
banks as their capital markets operations, where most of the profits are
coming from, will not be as profitable. However, one senior bank
economist told me that higher rates also mean fatter margins for banks
on existing lines of credit that expanded during the last year. This
will cushion the blow.

Mr. Y: So are you neutral on banks? What about the rest of the stock market?

Editor: I am neutral on big US banks, less so on big European banks where I see more balance sheet problems weighing them down.

the broader stock market, you have to pick your spots well, and stock
selection will be the key going forward. Forget the big beta moves that
you saw in 2009, 2010 will be all about picking your sweet spots. There
won't be any free lunches in the next 12 months.

Keep in mind that some very respected strategists and analysts think the stock market could be jolted in 2010 if economy stumbles:

Ned Davis analyst Lance Stonecypher said it's too early to make a
shift, but as stocks continue to rise next year, they will become
pricey, and a move to more defensive stocks like consumer staples,
telecommunications, utility stocks and health care -- sectors that sell
things people need regardless of economic strength -- will be
warranted. Kostin agrees and notes that investors will also prefer
dividend-paying stocks in the second half.

I happen to believe the liquidity-driven rally has legs to run and that investors should continue to buy the dips.

Mr. Y: Please discuss this further and relate it back to your thoughts on the liquidity driven rally...

Editor: Sure
thing. In response to the credit crisis, we had unprecedented monetary
and fiscal stimulus. We also had massive quantitative easing in the US
and around the world, which added to the liquidity tsunami.

tend to think of liquidity in broad terms. Money is flowing from
investment banks, pension funds, insurance funds, endowment funds,
sovereign wealth funds, hedge funds and private equity funds. All that
liquidity has to flow somewhere and in 2009, it flowed primarily in
risk assets.

In 2009 you had a massive liquidity-driven
rally. In 2010, there will more of a fundamentally-driven rally, but
there will be plenty of speculative activity, especially in new sectors
like renewable energy. Don't be surprised if we see a new bubble
shaping up in this sector.

Mr. Y: Stop right there. You've been pumping solar stocks for some time now, especially Chinese solar stocks.
I can accuse you of talking up your book, just like you accuse Bill
Gross and others of talking up their book. Any comments on this?

Yes, let me comment. First, unlike Bill Gross, I do not manage
billions. Second, I have repeatedly warned readers that solar stocks
are volatile and if you can't stomach gut-wrenching volatility, don't
even think of buying them. Hedgies love to manipulate these stocks,
bringing them down so they can scoop up some more at attractive levels.

Third, and most importantly, I will invite readers to go back and read my post on why small beautiful.
I like to pay attention to what the top hedge funds are buying and
selling, not what analysts are touting. Hedge fund managers have skin
in the game, so I know when they are buying or selling, they do so with
conviction, at least most of the time. The data is lagged, but it gives
me enough insight as to what sectors I should be focusing on.

Mr. Y: And what other sectors do you like for the new year?

Lots of other sectors, including semiconductors, software, networking
equipment, storage (tech in general will continue to do well so I am
bullish on QQQQs), nat gas, medical device companies, etc. I am not
going to get into specific names right away, but will update this post
with some as I do more research.

Mr. Y: Ok, let's have some concluding thoughts. Why did you ask "Black Swans or Black Sloths?" in your title?

Editor: Because I feel that those folks who are focused solely on Black Swan events are missing the bigger picture, namely, the slow motion Black Sloth events taking place across the world.

the global pension crisis will not disappear overnight. It is a
long-term structural issue that will plague governments for years. In
fact, part of me thinks that the Fed and other central bankers will try
to engineer inflation to partly offset future pension liabilities.

Mr. Y: And will they succeed in these attempts?

My worst fear is that they will fail miserably, creating another
generation of paupers. I hope I am wrong, but this remains my worst
fear for the next few years. I do hope monetary authorities and
governments take the pension crisis more seriously.

Mr. Y: Thank you and Happy New Year.

Editor: Happy and Healthy New Year to you and to all my readers.

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Anonymous's picture

A very good and well written blog.

Anonymous's picture

Actually, this proposal for 'suspended redemption' is akin to those daily price limits which many exchanges already impose on various products. So in truth, its function is to maintain some semblance of order during extreme markets; nothing doomsday about it.

Nonetheless that huge train of comments accompanying said article is really quite a hilarious read. Don't let the absurdity of it all get to your head though.

(Sorry for off-topic comment)

Anonymous's picture

Oh crap, I think I may be starting to understand some of this. Or maybe not.

If there is an "unexpected" jump in interest rates, then the value of short term Treasuries would drop dramatically. Since most money market mutual funds are invested in short term Treasuries, this could potentially create another scenario where one or many MMMFs break the buck, thereby creating a run on MMMF.

Hence the need for MMMFs to have the ability to "suspend redemptions" to prevent such runs.

I may start my run tomorrow.

Comrade de Chaos's picture

Actually, it would effect long term maturities to a higher degree, especially a low yield , "high grade" corporate bubble gum or new issue miniature yield asset/mortgage backed funk.

Whether money market funds will break a back is hard to predict, unless management of those is not following their IPS/prospectus/obligations.

Comrade de Chaos's picture

Leo, are you expecting an "unexpected" jump in the interest rates by the end of this year or not? If so, will it be as devastating as 1994 for the investments in fixed income?

Leo Kolivakis's picture

Comrade de Chaos,

Funny you should ask me that because I had the 94-95 backup in yields in mind. There is a possibility that stronger than anticipated growth in the US will cause yields to overshoot to the upside, but the difference is how the Fed handles this situation. We shall see in the second half of 2010.

Comrade de Chaos's picture

I think that a trade war (even Mr Krugman got on board) and a debt celling (hopefully will become an issue in mid elections) will force the FED to quit it's insane free money monetary policy. I also expect higher political pressure that will favor Keynesian rather than Chicago school approach to battle a stagnant unemployment so as the result rates might climb much higher than expected. 

I fear "we" will do what the Japanese did, jump from one set on insane economic policies onto another extreme set that will turn to be as bad or worse.

However given the uncertainty due to the hidden deflationary pressure those rates increases might be delayed well into the next year. The crazy thing, the more FED & Gov interfere the more random possible scenarios become. 


Grand Supercycle's picture


I use technical analysis and more analysts should study share price trends in my opinion.

Technical analysis can assist us as to the direction of the economy as it is a leading indicator.

In early 2007 I warned of an impending stockmarket crash.

I confirmed a bottom by April 2009.

In mid 2009 I warned of an impending USD rally.

The uptrend since March 2009 has been a bear market rally contained within a much larger bear cycle that started in 2000.


Chopshop's picture

fantastic piece from a true analyst. thanks very much, Leo.

love damn near everything about BCA but two things: little mention of hamilton bolton's "side-pursuits"; and their short-term technical trading advice, which is woeful.

Leo Kolivakis's picture

Thanks Chopshop, enjoyed reading your post too.


Leo Kolivakis's picture

The Zero Hedgies are back in full froce, criticizing my views. Let's have some good exchanges.

Leo Kolivakis's picture

Sorry Daedal, I wasn't going back and forth and I was trying to relax a little this weekend...lol!

Ok, you wrote "Free market punishes failure and rewards success -- Keynesians have managed to do the opposite." I agree with this but the problem is that whether or not you have Keynesians, Monetarists, Lucasians, or Austrians at the helm, you're not going to have any punishment whatsoever, but more corporate welfare. I just don't believe in pure free markets. This is all bullshit, as economies have always been mixed to one extent or another. Even under the Reagan and Thatcher era, which is undeniably one of the most free market eras of our time.

And by the way, I'm not a neo-Keynesian but I do think Keynes was a genius, one of the most important people ever in the history of mankind. But another favorite economist of mine is Joseph Schumpeter, a well known Austrian economist.

Now, let's get back to focusing on Outlook 2010. I just edited some typos of mine. My apologies.

Daedal's picture

“The best way to destroy the capitalist system is to debauch the currency.”

Vladimir Lenin

the problem is that whether or not you have Keynesians, Monetarists, Lucasians, or Austrians at the helm, you're not going to have any punishment whatsoever, but more corporate welfare.

You keep on touching the point, but missing the big picture. And that is; people, regardless of persuasion or level of intelligence, cannot effectively implement central planning. If you cannot get past that point, diving into more detail would be futile.

Austrianism is based on market participants dealing with each other and resolving their own issuse. Government power to arbitrarily interfere with this dealings would be stripped. The only power it has left is to protect people and their property from each other (put robbers, killers, Madoffs in jail) and enforce contracts (ie, make sure senior debters are senior debters, GS isn't front running its clients, etc). 

I'm quite certain our country was founded on those principals.


Anonymous's picture

I have an issue with coal-burning power plants three states over fucking up my atmosphere. Show me the contract I can enforce to get them to stop. If you can't, explain (with links) how you propose I resolve this issue without government action.

Leo Kolivakis's picture


Ancient Greeks say "Pan,metrion, ariston". Too much of anything is not good. Think about these wise words very carefully before you too fall victim to any ideology or theology.:)

Daedal's picture

Ancient Greeks say "Pan,metrion, ariston". Too much of anything is not good.

I would say the word 'anything' in inclusive of things like 'moderation'. The Greeks should've proofread their own work, for that statement is a paradox.

Greek Saying Translated: Everything in moderation, including moderation.

Leo Kolivakis's picture

Yes, thank you for correcting my lazy translation. Moderation is the key in life, especially in one's own personal political and economic views. It's nice to dream of a Utopian economy governed by fundamental Austrian school teachings, but this will never happen (Thank God!).

Daedal's picture

Austrian economics is not utopian at all, nor does it claim to be (unlike Keynesianism which claims to eliminated the very recession we're in). Austrians view recessions as cures, like an unpleasant, but necessary, fever one is likely to experience to overcome an illness.

Perhaps I should have stated the following before I stated anything else, that being, in order to establish an effective economic system, one must first understand human behavior.

The reason free markets (austrian) work is because humans first look out for their own interests (starting with self preservation) before I they look out for the interests of others. When transactions happen in the marketplace, let's say you sell me The Wealth of Nations on Amazon, it occurs when both parties feel as though they have benefited. I value the book more than $15, and you subsequently value the $15 more than the book. 

That's it. An economy, as perverted as the definition has become in the eyes of politicians, is nothing more than a mutual exchange of goods and services amongst able and willing participants. The idea of supply and demand stems from that basic premise. Government need not apply.

Recessions don't materialize randomly; there's a reason they materialize and the long term effects of them are actually good because what we expereince as a recession is actually a rebalancing.

When the government starts manipulating money and/or creating rules for transactions which favor certain parties over others, or break prior contracts, the whole idea behind a mutual exchange between market participants goes out the window.

What would have been the result if our society, instead of housing, extended credit and built business around Type Writers? Let's say everyone was investing in companies that make type writers, people were hiring type writer manufactuers, etc. Then Steve Jobs comes a long and invents a computer. Type Writer company values plumment, mass layoffs occurr -- a huge economic recession experience by many in the business. We know it as structural unemployment, but should the government then buy out all type writer companies, guarentee all debtors of type writer companies, etc?? I think not. And the negative consequences of tieing up all that capital in typewriters means that the economy will take longer to correct. And the opportunity lost in uninvested capital may be even worse.

Anonymous's picture

1: Schumpeter was Austrian, but not Austrian School.

2: I defy you to show me any mainline Austrian School economist who has proposed, or who would propose, even the slightest bit of corporate welfare.

AN0NYM0US's picture

Leo says (above)

Moreover, I agree with Jeff Nielson who made a comment on Seeking Alpha in early November, There's No Bubble in China.


Fan Gang, member of the central bank's monetary policy committee says:

The rising inflow of speculative capital, or "hot money", into China could lead to "asset bubbles"


Anonymous's picture

I guess when you're managing billions of other people's dollars and they're all "widow and orphan" pensioners, you have to say things like "There is no doubt in my mind the US economy is recovering... But let's be clear on something..." [it really isn't].

Leo Kolivakis's picture

I added this comment:

Keep in mind that some very respected strategists and analysts think the stock market could be jolted in 2010 if economy stumbles:

Ned Davis analyst Lance Stonecypher said it's too early to make a shift, but as stocks continue to rise next year, they will become pricey, and a move to more defensive stocks like consumer staples, telecommunications, utility stocks and health care -- sectors that sell things people need regardless of economic strength -- will be warranted. Kostin agrees and notes that investors will also prefer dividend-paying stocks in the second half.

El Hosel's picture

"the stock market could be jolted in 2010 if economy stumbles".

 If it stumbles? Stocks are totally disconnected from the stumbling economy.

john_connor's picture

Looks like the Fed surrogates are busy buying futures again. 

Plus nearly $80 oil!  When will the O team realize that high gas prices are bad for the popularity rating?

Anonymous's picture

Comments on China=It's different this time.

It's never different.