Alan Greenspan's Modest Proposal: Fix Broken Economic Models By... Modeling Irrational "Animal Spirits"Submitted by Tyler Durden on 01/02/2014 14:26 -0500
We leave it to everyone's supreme amusement to enjoy the Maestro's full non-mea culpa essay, but we will highlight Greenspan's two most amusing incosistencies contained in the span of a few hundred words. On one hand the former Chairman admits that "The financial crisis [...] represented an existential crisis for economic forecasting. The conventional method of predicting macroeconomic developments -- econometric modeling, the roots of which lie in the work of John Maynard Keynes -- had failed when it was needed most, much to the chagrin of economists." On the other, his solution is to do... more of the same: "if economists better integrate animal spirits into our models, we can improve our forecasting accuracy. Economic models should, when possible, measure and forecast systematic human behavior and the tendencies of corporate culture.... Forecasters may never approach the fantasy success of the Oracle of Delphi or Nostradamus, but we can surely improve on the discouraging performance of the past." So, Greenspan's solution to the failure of linear models is to... model animal spirits, or said otherwise human irrationality. Brilliant.
As 2013 comes to a close, efforts to revive growth in the world’s most influential economies – with the exception of the eurozone – are having a beneficial effect worldwide. However, All of the looming problems for the global economy are political in character; and there are some eerie resemblances with the financial conditions that prevailed in the US in the years preceding the crash of 2008.
The world has depended on Chinese and American stimulus for years, and, as Caixin's Andy Xie notes, one implication of their tightening is a slowing global economy in 2014.
In a vacuum, the U.S. is enjoying strengthening economic growth buttressed by a positive feedback loop due in large part to improving household debt dynamics and job creation. Asia seems to be adequately managing economic growth as well; investors remain sanguine on China and the general region’s long-term outlook. While Europe struggles to grow, due to continued austerity, the situation has improved. Taken together, RCS Investments' Rodrigo Serrano notes that these 3 regions illustrate an ongoing global recovery that remains on weak foundations, susceptible to influence by both positive and negative factors. Below are the most important trends investors need to keep an eye out for over the coming year.
The world economy has experienced another year of subdued growth, having failed to meet even the most modest projections for 2013. Most developed economies continued trudging along toward recovery, struggling to identify and implement the right policies. Meanwhile, many emerging economies encountered new internal and external headwinds, impeding their ability to sustain previous years’ economic performance. Nonetheless, some positive developments in the latter part of the year are expected to gain momentum through the coming year. But the global economy is still subject to significant downside risks. In short, while the global economic outlook for 2014 has improved, policymakers worldwide must remain vigilant about downside risks and strengthen international cooperation. Developments in 2013 provide strong incentive for policymakers to do so.
Propaganda, phony fixes and more debt can only cover the widening gap between fiscal reality and official fantasy for so long. So what else besides the potential for another global financial meltdown bears watching in 2014? Here are a few worthy prospects... as we doubt the same illusions and tricks will get the global economy through 2014-2015 unscathed.
December 23rd, 1913 is a date which will live in infamy. That was the day when the Federal Reserve Act was pushed through Congress. Many members of Congress were absent that day, and the general public was distracted with holiday preparations. Now we have reached the 100th anniversary of the Federal Reserve, and most Americans still don't know what it actually is or how it functions. But understanding the Federal Reserve is absolutely critical, because the Fed is at the very heart of our economic problems. Since the Federal Reserve was created, there have been 18 recessions or depressions, the value of the U.S. dollar has declined by 98 percent, and the U.S. national debt has gotten more than 5000 times larger. This insidious debt-based financial system has literally made debt slaves out of all of us, and it is systematically destroying the bright future that our children and our grandchildren were supposed to have. The truth is that we do not have to have a Federal Reserve. The greatest period of economic growth in U.S. history was when we did not have a central bank. If we are ever going to turn this nation around economically, we are going to have to get rid of this debt-based financial system that is centered around the Federal Reserve. On the path that we are on now, there is no hope.
I wonder who will prevail in the end?
Each quarter the Fed releases their assessment of the economy along with their forward looking projections for three years into the future. The reality is, however, is that the Federal Reserve simply cannot verbally state what they really see during each highly publicized meeting as it would roil the markets. Instead, they use their communications to guide the markets expectations toward reality in the hopes of reducing the risks of market dislocations. The most recent release of the Fed's economic projections on the economy, inflation and unemployment continue to follow the same previous trends of weaker growth, lower inflation and a complete misunderstanding of the real labor market. Reminiscent of the choices of Goldilocks - the reality is that the Fed's estimates for economic growth in 2013 was too hot, employment was too cold and inflation estimates were just about right. The real unspoken concern should be the continued threat of deflation and what actions will be available when the next recession eventually comes.
Among other things, the month of November was memorable because for the first time, Caterpillar - that bellwether of the old industrial economy in which "stuff" was actually made, dug out of the ground, erected, or otherwise processed instead of merely hosted ad impressions - posted declining retail sales in every region around the globe. This was the first time of uniform declining retail sales since February 2010. To say that this data conflicts massively with all the rumors, fairytales and lies about a global recovery, is an understatement which is why it has not been mentioned anywhere, in hopes the subsequent month would demonstrate some improvement and perhaps an upward inflection point. That did not happen. Moments ago CAT released its November dealer retail sales: for the second time in a row CAT posted negative retail sales across the world, with total retail sales down a whopping 12%.
The Federal Reserve's balance sheet is set to exceed a whopping $4 trillion today, prompting warnings its ultra loose monetary policies are inflating asset price bubbles and will lead to a devaluation of the dollar and signifigant inflation in the coming years.
"The Fed will never end QE for good..." blasts Marc Faber, "they may do some cosmetic adjustments, but within a few years, [Fed] asset purchases will be substantially higher than they are today." There will be another weakening in the US economy, Faber warns, and "the Fed will argue it hasn't done enough and will do more... they have been irresponsible for 20 years." Use rallies to reduce exposure, he warns, "we will go up until it is over; and when it is over the drop will be larger than 20%," and the best opportunity, Faber notes, is in the most-depressed asset-class he looks at: gold and gold stocks.
2013 was a stellar year for stocks, but how will the markets evolve in 2014? Here is our sneak preview...
"Twas the Friday before the Friday before Christmas..." and as the year end rapidly approaches the mainstream consensus is that 2014 will be another bouyant year for the stock market despite the impact of a potential Federal Reserve tapering. The optimistic view is an easy one. While it isn't popular, or fun, to look at the non-bullish view it is nonetheless important to consider the risks that could potentially lead to a larger than expected loss of investment capital. There is one simple truth about financial markets and investing: what goes up must come down. It is the downside risk that is most damaging to long term investment returns. Therefore, this week's "Things To Ponder" is a sampling of views and thoughts on what to watch out for as we enter the new year.
We present the first half of Goldman's 100 best charts for 2013.