Back on August 1, 2010, Alan Greenspan - who is once again making the media rounds in a desperate attempt to peddle his ridiculous book about forecasting (in which he explains it wasn't the Fed's models that were wrong; it was reality, and all those who inhabit it, that had a glitch) and is arguably the man who created the single biggest credit expansion in the Pre-New Normal era who no longer has access to the money printer so needs to sell books, and soon enough he may devolve to pitching newsletters - issued one of his most memorable post-Lehman bloopers. To wit: "if the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here." We decided to investigate his claim...
Alan Greenspan is out pitching his news book. We explained the miracle of revisionist history and questioned the sanity of anyone buying this 'guide to economic forecasting' earlier in the week, but in his appearance this morning on CNBC, the "maestro" did a great job explaining just how flawed his own logic was (without our help). He explains (sadly reflective of the current clairvoyance of Jim Bullard) that, speaking for himself and his FOMC colleagues, "all of us knew there was a bubble," though failing to admit to being the progenitor, "but we badly missed the timing." But, perhaps summing up the mantra of his ilk better than any other sentence, Greenspan concludes, "a bubble in and of itself does not give you a crisis..." adding, during a later Bloomberg TV clip, "I missed certain forecasts, you don’t apologize for that... We are not omniscient. I am a human being."
Charts Show that U.S. Policy Has Increased Terror Attacks
The Chinese yuan has reached 20-year highs versus the U.S. dollar. It's a significant development with potentially huge ramifications for China and the world.
As markets twiddle their thumbs waiting on Washington to come up with a political solution to the Federal Debt Limit/budget debate, ConvergEx's Nick Colas decided it would be a good time to review the academic literature on how markets discount expectations in the first place. Behavioral finance posits that human nature skews perceptions of risk and return, causing everything from irrational risk aversion to asset price bubbles. Against this current backdrop of theoretical uncertainty, measures like the VIX are currently somnambulant. So, using the modern vernacular, WTF? The bottom line, Colas explains, is that Wall Street thinks it has the current "Crisis" all figured out: a last minute deal with no Treasury default. And just as we haven’t sold off materially during this drama, don’t expect a huge (+5%) lift afterwards.
Stunning Facts that Your History, Economics and Business Teachers Never Learned ...
After reading the coverage of Janet Yellen’s Fed Chair nomination yesterday, it feels as though it’s 2006 all over again. Confidence in our central bankers seems to be approaching all-time highs, little more than five years after it collapsed alongside the financial sector. The overwhelmingly positive response to Yellen’s nomination is worrisome because, well, it’s overwhelming positive. As Galbraith once astutely observed: “In economics, the majority is always wrong.”
Unlike her predecessors, Janet Yellen has never had a youthful dalliance with hawkish monetary ideas. Before taking charge of the Fed both Alan Greenspan, and to a lesser extent Ben Bernanke, had advocated for the benefits of a strong currency and low inflation and had warned of the dangers of overly accommodative policy and unnecessary stimulus. (Both largely abandoned these ideals once they took the reins of power, but their urge to stimulate may have been restrained by a vestigial bias against the excesses of Keynesianism). Janet Yellen, who has been on the liberal/dovish end of the monetary spectrum for her entire professional career, has no such baggage. As a result, we can expect her to never waver in her belief that stimulus is the answer to every economic question.
David Stockman, author of The Great Deformation, summarizes the last quarter century thus: What has been growing is the wealth of the rich, the remit of the state, the girth of Wall Street, the debt burden of the people, the prosperity of the beltway and the sway of the three great branches of government - that is, the warfare state, the welfare state and the central bank...
What is flailing is the vast expanse of the Main Street economy where the great majority have experienced stagnant living standards, rising job insecurity, failure to accumulate material savings, rapidly approach old age and the certainty of a Hobbesian future where, inexorably, taxes will rise and social benefits will be cut...
He calls this condition "Sundown in America".
This is at a time when we have real economic growth barely above 2% and nominal growth of just over 3% (abysmal by any standards) after six years of monetary easing and 5 years of QE1; QE 2; Operation twist; QE “infinity” and huge fiscal deficits. After last week Citi notes it is not clear that this set of policies is going to end anytime soon. It seems far more likely that these policies will be continued as far as the eye can see and even if there are “anecdotal” signs of inflation this Fed (Or the next one) is not a Volcker fed. This Fed does not see inflation as the evil but rather the solution. Gold should also do well as it did from 1977-1980 (while the Fed stays deliberately behind the curve). Unfortunately Citi fears that the backdrop will more closely resemble the late 1970’s/early 1980’s than the “Golden period” of 1995-2000 and that we will have a quite difficult backdrop to manage over the next 2-3 years.
Financial volatility since Federal Reserve Chairman Ben Bernanke’s announcement in May that the Fed would “taper” its monthly purchases of long-term assets has raised a global cry: “Please, Mr. Bernanke, consider conditions in our (non-US) economies when you determine when to end your quantitative-easing policy.” That is not going to happen. The Fed will decide on monetary policy for the United States based primarily on US conditions. Economic policymakers elsewhere should understand this and get ready. All of this is just hard reality. The best way to prepare is to limit the use of credit in boom times, prevent individuals and companies from borrowing too much, and set high capital requirements for all banks and other financial institutions. The Fed surprised markets last week by deciding to maintain its quantitative-easing policy. But that underscores a larger point for non-US economies: You never know when the Fed will tighten. Get ready.
When it comes to discombobulated people, IceCap's Keith Dicker notes the financial World has a bunch of them. Leading the pack during the roaring 1990s was the King of Confusion himself – Alan Greenspan. His money reign at the US Federal Reserve was highlighted by bailing out Wall Street’s biggest hedge fund, which planted the seed for the dot-com bubble. Unfortunately for the market, only the combination of retirement and hindsight allowed Mr. Greenspan to become less confused when he admitted he had found a “flaw” in his economic philosophy. Next up on the baffle scale has to be the Eurozone. The decision in 1995 to create a common currency was actually brilliant. The final watered down product - not so much. For now, as markets roll into the fall, investors, politicians, and central bankers remain just as discombobulated as ever... And if you think you are confused... Try being Ben Bernanke for a day.
The Federal Reserve decision to refrain from and put off indefinitely a QE taper is very bullish.
The Fed is struggling to keep interest rates low for as long as possible in a desperate attempt to prolong a very fragile U.S. recovery or non recovery in our opinion.
Money printing and debt monetisation on this scale has led to higher gold prices throughout history and will do so again.
The Federal Reserve is effectively insolvent and investors and savers should prepare for falls in the U.S. dollar, a dollar crisis and an international monetary crisis.
Until six days before Lehman Brothers collapsed five years ago, the ratings agency Standard & Poor’s maintained the firm’s investment-grade rating of “A.” Moody’s waited even longer, downgrading Lehman one business day before it collapsed. How could reputable ratings agencies – and investment banks – misjudge things so badly? Regulators, bankers, and ratings agencies bear much of the blame for the crisis. But the near-meltdown was not so much a failure of capitalism as it was a failure of contemporary economic models’ understanding of the role and functioning of financial markets – and, more broadly, instability – in capitalist economies. Yet the mainstream of the economics profession insists that such mechanistic models retain validity.