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Richmond Fed: "Bubble? What Bubble?"
The latest out of the Richmond Fed is a joke of a paper that while analyzing the possibility that the entire stock market and dollar carry trade is one zero cost of capital-funded bubble, skips over this possibility and instead goes on to analyze the "factors that could contribute to a fundamentals-based explanation for the recent rally in certain risky asset markets." Spoiler alert: No bubble - it's all based in sound reality.
In what is likely a first, the Fed quotes Nouriel Roubini:
The near zero nominal interest rate in the United States, jointly with the expansion of the Fed’s balance sheet, have created resources available to be lent. Some investors have taken advantage of those resources by borrowing in dollars at very low rates and investing in foreign assets, especially in emerging economies and commodities. The expected profits from this investment strategy have been magnified by the expectation of a weaker dollar: Once it comes time to pay off the dollar-denominated loans, the investors can repay them using dollars that are worth relatively less. In turn, this trading strategy – referred to as “shorting” the dollar – has itself contributed to the decline in the value of the dollar since investors must exchange dollars to purchase foreign-denominated assets.
In explaining what Roubini means to his intellectually subprime colleagues, Richmond Fed analyst Renne Courtois provides this enlightening narrative:
The argument of Roubini and others is that this represents a bubble because the emerging markets and commodities rallies are fueled by easy money and the carry trade, rather than economic fundamentals. Under this view, several likely factors could cause this asset bubble to burst. After appreciating during the height of the financial crisis, the dollar steadily declined for most of 2009 but eventually will likely stabilize at some point. Stabilization of the dollar would reduce returns for investors with short dollar positions. Additionally, economic recovery in the United States will raise expectations of an interest rate increase. This would cause the dollar to appreciate (since higher interest rates raise the expected return of dollar-denominated assets, all else equal), and thus cause significant losses for investors short on the dollar.
The Richmond Fed goes as far as refuting Bernanke's recent claim that low interest rates have never, NEVER, been responsible for this arcane concept known as a bubble: "Research has shown how a bubble fueled by low interest rates can exist under certain conditions." But then it promptly moves on to quash any lingering doubts that there is any validity to justifying that asset prices are grounded not in reality, but in the Fed's flawed monetary policy:
It may be the case that investors have been learning that the crisis did not generate major structural problems in emerging economies. Such economies were resilient to the world’s financial problems at first, but eventually they experienced contractions at the end of 2008 and the beginning of 2009. In part, the contractions were explained by declines in commodity prices and the reversal of capital inflows. A 2009 International Monetary Fund study mentions that the historically low current account and fiscal deficits and the high reserve levels in emerging market countries offered some protection against financial stress in advanced economies and limited the impact on the “real economy” (for example, reserves can be used to buffer the effects from a drop in capital inflows or to pay back sovereign debt and avoid a default). It has been mentioned that reforms in the financial system in East Asian countries have also helped to reduce financial vulnerabilities. This apparent resilience of emerging market economies could explain the reversal in capital outflows and the fast recovery in equity values compared to what has been observed in developed countries.
Nothing like quoting the IMF to prove your point. And as for regulatory reform in East Asia - well, that surely accomplished some miracles.
Yet Courtois' conclusion is the stuff that Coco would have field day, or night, as the case may be, with, were he not the savage victim of NBC's lack of programming and ad revenue foresight:
There is intense debate within the economics profession about whether it is typically possible to know in real time, outside of lucky guesses, when asset prices have outstripped fundamentals. The argument against the ability to identify bubbles in real time is that if any information existed on which to gauge that the asset price run-up is not justified, markets would quickly uncover the information and it would, in fact, temper the asset’s price. This does not mean that asset prices cannot become overvalued – simply that it will be quite hard to judge when a bubble has emerged and how large it is.
So there you have it: all those who called the housing peak and warned against a market crash were nothing but coin-flippers and just lucked out. Since as the Fed says it is "quite hard to judge when a bubble has emerged" we must all accept this logic and move on. And lest the Fed is wrong, the consequences of their faulty conclusions would merely be "an important area of economic research" which would result in yet more totally worthless papers such as this one, funded by taxpayers' dollars.
All in all, the Fed once again irrefutably proves that any arguments that promote its existence based on its deep economic insights are just as flawed as arguments that the Fed could possibly be responsible for asset bubbles. And while Richmond Fed et al crank out yet more such gibberish, the bubble, so fortuitously spotted by ever more people, will continue expanding, until such time as even the authors of this paper have to acknowledge that a 36,000 Dow coupled with 20% unemployment may not be quite the logical observations as was previously thought.
Full total waste of time paper below.
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The same crappy Fed analysis that got into this mess in the first place. And the reason the Fed should be abolished!!! They are incompetent, and completely stupid. I said that before as someone who used to set on a Fed Regional bank beige book committee and I quite sure I haven't changed my mind.
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"The same crappy Fed analysis that got into this mess in the first place"
Wouldn't it have also been 'crappy private industry' analysis?
To put ALL of the blame on the Fed is naive at best and incredibly disingenuous at worst.
A classic case of adjusting the reasons and explanation to fit the myth. Remember, they aren't trying to convince the sane or skeptical that they're correct in their assessment or projections. They're simply telling the deluded or those in denial what they wish to hear.
This is the purpose of the official lie, permission to believe the lie. Like a small child clinging to his or her mother's breast during a crashing thunder and lightening storm, all s/he wants to hear is that everything will be OK. The truth is immaterial and only important if the truth could deliver emotional relief. In this case, the lie is what they want to hear and the only thing they will hear if it's officially spoken.
"Say it ain't so, Joe, say it ain't so."
http://www.kudzumonthly.com/kudzu/jul01/sayitaintsojoe.html
LOL, when I scrolled down and saw the title of the document, at first glance I thought it said "Economic Belief", not "Economic Brief".
This reminds me of a similar childhood experience I had. Perhaps it should first be noted that I am an immigrant, and my grandparents lived through WW2, so food was not something that was EVER wasted.
In any case, when I was a kid, you were forced to eat until your parents and/or grandparents told you that you were full. Later in life, I was told that during one of my meals (probably when I was feeling full), I turned to my parents and asked, "Am I full?"
It was hilarious - still is. But that example applies directly to the manner the general public treats its government (asking for permission to believe or not believe in something), and it is frightening to say the least.
Thank you for your very revealing life experience.
I called my adult son the other day and I apologized. He was confused and asked me why I was apologizing since I had done nothing to him. I explained this way.
While he was growing up, I tried hard to teach him critical thinking skills, to ask questions, to challenge himself and others, to be independent and confident. But there were so many times while he was growing up when I grew tired of fighting the influence of his peers, teachers, extended family, the "system", the government, the world we know as consensus reality and I would roll over and let him become engulfed.
And now that the years have passed I realize that those periods of time, when the going was toughest for me and him, were exactly when my influence on him was needed most, when I was least willing to help because I was thinking of myself and not him. While I most certainly did a good job with my son, I could have done much better if I had exhibited more patience and courage and persistence. After all, that's my job as the parent, to prepare my child to not just exist in the world but to live fully and proactively. I should not have blindly passed on some of the things I was taught simply because I was taught them. That's the lazy way, the softer easier way. How can I expect my child to meet a high standard when I wasn't willing to do so?
He understood what I was saying and he thanked me in return. And this led into a long and involved discussion about how we spend most of our lives on automatic pilot, not really thinking or living but just existing, just hanging around.
Your story brought to my mind many of the things I taught my son that he must now unlearn before he can continue to learn. Sort of what we as a nation must do if we are going to shake off the consensus reality. We must unlearn the lies before the truth can take hold and change our lives.
Elizabeth Warren explains the financial crisis to Jon Stewart in language even the American Idol crowd could understand. Thankfully, the AI crowd has no interest in knowing.
http://www.fundmymutualfund.com/2010/02/elizabeth-warren-explains-part-of.html
Wait till they can not afford the new gadgets!
A high percentage of the youth is unemployable anyway.
Moms and dads can no longer afford these.
the shock will be severe when the wake up from the fantasy land.
This is a ridiculous interview. She doesn't even get to the root of the problem which is control of money supply. Instead she attempts to turn this into an ethical issue.
The problem is that government thinks they can regulate every unintended consequence for every regulation they put in place. If congress did nothing but try to regulate in this way, they would never accomplish anything else, nor the goal they set out with in the first place. The trick, in my opinion, is to create an atmosphere in which self-regulation can prosper. Unfortunately, that is an impossibility in the eyes of congresspeople.
TraderMark,
Ms Warren has her heart in the right place, but she misses the boat regarding both the cause and solution to the crisis. The primary cause of the 30+ credit bubble is and was easy money, CREDIT.
A FED unwilling to reign in liquidity funding asset bubbles assures busts. The larger the party, the larger the bust.
Responsible monetary policy, allowing businesses to fail, and limiting government intervention in the market are the only ways to clean up what we have. More regulations will only entrench the Goliaths and make it more difficult to get any meaningful competition.
Afixis thnixis
sharpen the Guilotines
Yo Tyler
The Chinese, unlike Americans, actually can see bubbles and sometimes even make attempts to puncture them.
Home Sales crashed 50-70% in January in major Chinese cities - you know what that means right? Buy stocks.
http://www.fundmymutualfund.com/2010/02/chinese-existing-home-sales-plunge.html
This type of disconnect is exactly why we are destined for an epic meltdown.
My new favorite phrase: "intellectually subprime"
It seems to me that the only bubbles the Richmond Fed is knowledgeable of are the ones they make while sitting in the bathtub.
Thats the way I see it John Connor,so why doesn't the market?
We all have got to write our senators and get that regulatory bank reform bill through , then there will be no more "screw the people,then bail us out and make them pay if it fails" game plan.
Heres your senators email addresses. To avoid confusion just write: "vote against big banks", they will get it.
http://www.senate.gov/general/contact_information/senators_cfm.cfm
It is because you, my friend, are truly smarter than the 'market'.
You are privvy to the intelligence that is generally reserved to only the most enlightened of souls.
The rest of American sheeple, when they aren't watching American Idol or being spoonfed their information by 'the MSM', are being hoodwinked.
Keep spreading the truth and THIS time we mean it!
"We probably will see widespread civil disorder in the 1980's, as a direct result of our faltering economic system."
- Ron Paul, 1981
Wow...these guys really belong on the short bus.
This Stockholm syndrome when it comes to Wall Street’s power-grab is junk economics. Wall Street is not “the economy.” It is a superstructure of credit and money management privileges positioned to extract as much as it can, while threatening to close down the economy if it does not get its way. High finance holds the economy hostage not only economically but also intellectually at least to the extent of having captured Obama’s brain – and also the federal budget, as money paid to Wall Street has crowded out spending on economic recovery. It has re-defined “reform” to mean putting Wall Street even more in power by making the Fed the sole regulator of Wall Street. Under these conditions, saving “the system” means saving a mess. It means saving a debt dynamic that must grow exponentially at the economy’s expense, absorbing more and more federal bailout funds and hence crowding out the spending needed to revive the economy.
It seems to be merely an incidental by-product of saving taxpayers and labor that Wall Street ended up with the hundreds of billions of dollars of gains (and losses avoided) – at a $13 trillion expense by government, of about four million jobs in the overall economy whose employment is shrinking, and of about four million home foreclosures in 2009-10. The cover story is that matters would have been worse otherwise. This was the price for “saving the system.” But “the system” turns out to be the Bubble Economy, in which the Obama administration has put as much faith as Bush did. This is why the same managers have been kept in place.
http://www.counterpunch.org/hudson02012010.html
The Bank of Canada can see bubbles ahead of time. Whats with the Fed?
"The place where optimism flourishes most is the insane asylum". (Ellis)
Good god Renne, what a dope you are.
Sarcasm on:
Thank God, for a minute I was worried about everything. Good to hear that everything is A-OK.
Sarcasm off
what a piece of trash.
all hail the econ grad students populating regional fed offices nationwide. you know, the powers that be. man i bet whoever wrote this piece of garbage totally has, like, the coolest resume ever
If only these atheist priests knew what kind of a bubble bath we splash around in:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1019013
Having a Federal Reserve Bank in Richmond (home of Big Tobacco and Massive Resistance) is an aberration. The article merely confirms it.
This bullshit is really getting old.
Better get some stamina No More Bubbles
The Fed is blowing the mother of all bubbles and has been for the last fifty years. It's the Government Jobs Bubble. All the jobs in the Federal agencies, the military industrial complex, and all the latest job programs are going to go poof when the Fed losses control of interest rates and the value of the dollar. It's only a matter of time, the enemy of all bubbles.
You can't tell the Banksters without a program. Ms. Duke on the Fed Board of Govs also helped shape Fannie Mae and this propaganda from the Richmond Fed.
All of Wallistons articles including " The True Origins of This Financial Crisis" http://www.aei.org/issue/100001Elizabeth A. Duke took office on August 5, 2008, to fill an unexpired term ending January 31, 2012.
Prior to her appointment to the Board, Ms. Duke was Senior Executive Vice President and Chief Operating Officer of TowneBank, a Virginia-based community bank. Prior to this, she was an Executive Vice President at Wachovia Bank, and an Executive Vice President at SouthTrust Bank. Earlier in her career, Ms. Duke was President and Chief Executive Officer of Bank of Tidewater, based in Virginia Beach, Virginia.
Ms. Duke served on the Board of Directors of the American Bankers Association from 1999 to 2006, and served as its Chairman from 2004 to 2005. She also served on the Board of Directors and as President of the Virginia Bankers Association. From 1998 to 2000, Ms. Duke served on the Board of Directors of the Federal Reserve Bank of Richmond. She has also served as a member of the Fannie Mae National Advisory Council.
Aside from her work in the banking industry, Ms. Duke has held many civic positions, including service on the boards of directors of the Virginia Council on Economic Education, the Hampton Roads Partnership, the Old Dominion University Foundation, and the Economics Club of Hampton Roads. She also served on the Virginia Legislative Subcommittee to Study Capital Access and Business Financing and served on the Board of Commissioners of the Norfolk Airport Authority.
Ms. Duke, a Virginia native, was born in July 1952. She received her bachelor’s degree from the University of North Carolina at Chapel Hill and her M.B.A. from Old Dominion University. She is also a graduate of the Stonier Graduate School of Banking and the Virginia Bankers School of Bank Management.
If you can'r abolish the Fed then at least move it to Kansas City so the Georgetown Cocktail Circuit can't shape monetary policy.
I usually reserve this label for male politicians such as Dodd and Frank. In Ms. Duke's case, I shall make an exception...
What Douche-Baggery.
You certainly think and write like one of the "boys," sister. I am also relieved to know you learned something during your time as Exec VP at Wachovia....
FYI, ZH, quick adjustment to your "facts" on this one:
http://www.jrdeputyaccountant.com/2010/02/richmond-feds-precious-bubble-...
But the bubble part? 100% dead on :)
There is a spread bet advert on Bloomberg, which I won't name, but says 'get thinking' so you can trade the market.....hmmm, they want a band of losers if that is the case, because only those who act like insane buyers who will load up on any old junk regardless of fundamentals wins in this market right now.
'Get thinking' and you wouldn't touch the junk, cos you know that banks are broke and so are the governments who print money regardless and steal from people to pay the banksters
Dow 36,000!
They just never told us that it would only take 1 gram of gold to buy the Dow at 36,000...