Still no conviction in the stock market...

So how is it that the Dow can top 15,000 while the place---the bond market---that captured the money of the folks who brought it to its knees (back in 2008) remains more flush than ever? If you had told me, say a year ago, that stocks would be at these levels, I would have told you that bonds would be getting trounced. I mean it makes perfect sense, right?

If back in October 2007 stocks were priced at X (all-time high), and bonds were priced at Y, and by March 2009 stocks were priced at Y (multi-year low), and bonds at X, for stocks to once again be priced at X, bonds---to provide the liquidity to push stocks back to X---would have had to sell off back to Y (or, at a minimum, somewhat lower than X), right? Well, as I stated above, no...

There are two factors at play that circumvent this seeming commonsense: One being the Fed, which, with its quantitative easing ("printing" money and buying bonds), has effectively put a lid on bond yields (or a floor under bond prices) to this point. The other being a general lack of conviction: This, as many a pundit has declared of late, has been the most hated rally in history. Meaning there's been no storming of the market's gates. Stocks have eclipsed old highs with no battering ram-wielding buyers pounding liquidity into equities (and out of bonds).

The latter essentially means volume (the number of shares actually changing hands) has been somewhat light. Which means the holders of stocks have been, for whatever reasons---perhaps exceptional corporate earnings, lots of sideline cash earning nothing, record low bond yields and a slightly better-trending economy---reluctant to unload their shares at yesterday's lower prices. But if those reasons are indeed legitimate, why aren't buyers coming in in droves? Well, perhaps it's uncertainty over tax and regulatory policies going forward, or post traumatic stress resulting from the 2008 bear market, or the fact that, while better-trending, this recovery has been the slowest on record, or any number of other reasons I can't think of at the moment.

The good news (maybe) if you're bullish on stocks is that with such little participation from the retail investor (think, for example, 401k accounts), a skeptical tone from many an institutional investor (the ones who missed the rally that is), and a bulging bond market, there's more than ample liquidity to make Warren Buffet (on CNBC yesterday) look like he knows what he's talking about.

As for me, I'm not that interested in where the market goes in the short-run (which keeps me sane since it makes no sense to take great interest in something that, at times, makes no sense). I guess if I had a short-term want, I'd want stock prices to as accurately reflect the real world of earnings as possible. And based on present price-to-earnings ratios, and other valuation metrics, stocks---my indifference (and the political environment) notwithstanding---make short-term sense to me. As for my long-term (what counts) want, I want to own stocks: because I believe I'll be typing future essays with better technology, that (politics notwithstanding) I'll be finding abundant global opportunities---and for all those other reasons I mentioned in Why You Eat Bugs and Own Stocks...

Planning like there's no tomorrow...

This piece by Don Boudreaux puts central election-cycle planning into perspective as well as anything I've read thus far. Here's a snippet:

Who cares about tomorrow? Who cares about the counterfactual that is prevented from coming into existence? It will always be a mere counterfactual. We have no time for economic policies that allow market forces to play out over time – to play out in all of their rockiness, with their failure-to-keep-everyone-optimally satisfied-at-every-moment. We have no time to worry ourselves about the microeconomic structure of production, the pattern of relative prices. Changes for the better in those things take time. Better that we simply treat with greater government spending the symptom – a symptom, sometimes, of real problems and, at other times, merely of beneficial on-going economic changes – than to be patient and let market processes work their way out over time.

If you only have time today, this week, this month, or this year to read one blog post, read this one!

Ideology is like Superglue...

Just listened to four highly-credentialed economists (two to a side) debate the ultimate effects, social and economic, of the minimum wage. Each side made reference to studies that they claimed conclusively proved their case. One side argued so well the (what I believe to be) commonsense points I've expressed and linked to numerously over the years. Only to be shamed by the other for suggesting---commonsense (or empirical evidence) notwithstanding---that raising the cost of labor would somehow compromise the market for labor. Understanding that this was a publicized debate---the sides picked based on their advertised positions on the issue---and that, under no circumstance, would the discussion remotely sway a panelist from his or her conviction, I nonetheless found myself thinking wow, ideology is like Superglue. The resistance, through years of mining bias-confirming data, can become so great that to pry loose would mean to relinquish to the other side some psychic material that composes who we believe ourselves to be.

So I began to pen an essay on the subject then remembered that we already went there last fall. Give this one another read...

The Thing About Coffee - Or - Firm in His Addition - Or - Empirical Evidence is in the Eye of the Beholder

“The question we should ask”, says Paul Krugman in Friday’s NY Times, “is what policies would offer the best prospects for healing the damage?” The administration “would have tried to accelerate recovery by sustaining public spending and putting money in the hands of people likely to use it. Republicans, on the other hand, insist that the path to prosperity involves sharp cuts in government spending. And Republicans are dead wrong.” He goes on to cite the just-released IMF World Economic Outlook, a report that, he says, combines “short-term prediction with insightful economic analysis”. A “grim and disturbing document, telling us that the world economy is doing significantly worse than expected, with rising risks of global recession. But the report isn’t just downbeat; it contains a careful analysis of the reasons things are going so badly. And what this analysis concludes is that a disproportionate share of the bad news is coming from countries pursuing the kind of austerity policies Republicans want to impose on America”. He then confesses; “O.K., it doesn’t say that in so many words. What the report actually says is: “Activity over the past few years has disappointed more in economies with more aggressive fiscal consolidation plans.”"

Fascinating that a man of Krugman’s intellect, and tenure as a political commentator, would suggest that today’s Republican politician—campaign pledges notwithstanding—is somehow less predisposed to spending than his predecessors. I see little, at this juncture, to support that assertion (look no further than their voting records).

The thing about coffee—for the infrequent user—is that the occasional cup will deliver that generally desirable kick. But when one finds oneself partaking on a daily basis, for an extended period of time, it, oddly, can deliver the opposite effect—sluggishness. Should the heavy user find himself in need of a boost (an approaching deadline perhaps)—if caffeine is to remain his stimulant of choice—he’ll have to step it up; go high-octane and maybe throw in a Red Bull or two. Knowing full-well he’ll be suffering the ultimate consequence—a major crash—once the deadline is met. But if he is to keep from destroying his health, crash he must.

From what I understand about alcohol (boring me doesn’t drink), the casual user gets by just fine on the occasional beer, glass of wine, etc. He enjoys the short-term effect, and his life is all about facing the everyday challenges that come with the typical modern human experience. The functioning alcoholic, on the other hand, feels miserable when that cup of coffee on his desk isn’t spiked with whatever it is he spikes that cup of coffee with. “Functioning alcoholic” is a term used for addicts who can hold down a job while simultaneously holding down their liquor. The term, however, is not to be confused with a “functioning liver”—and therein lies the problem. On the surface things may appear just great, while, inside, the abuser eventually drowns his organs and, alas, shortens his modern human experience.

Today’s politician (central planner) is, at best, the chronic caffeine addict. At worst, he’s the functioning alcoholic. He is forever haunted by his constituents’ query; “are we better off today than we were four years ago?” The notion of coming down off of years of over-spending, and suffering the healthy, market-clearing (and economy-saving) pain of recession—on his watch—doesn’t warrant the remotest consideration. And, sadly, as any user can attest, the greater the [stimulant-induced] sluggishness, the greater will be the cry for continued (and heightened) stimulus—particularly when the inevitable “crisis” (or garden-variety recession) occurs. And just like the in-denial addict who believes he can drink his way to success, the planner—whose mantra, a la J.M. Keynes, would be “in the long run we’re all dead”—assures us he’s got everything under control.

I find it utterly baffling how, in the face of the developed world’s record sluggishness and runaway deficits, Krugman remains firm in his conviction. Or is it that he’s firm stuck in his addiction? That would make sense—for addictions make blunderers out of otherwise bright individuals.

Now to be fair, he’s hardly the only hard-core addict Keynesian among us. They are aplenty, and they do indeed have their arguments, as market-advocates (like yours truly) have theirs. Each side offers up its empirical evidence—which the opposition refutes. The ardent Keynesian proffers a compelling—to the layman—exposé of how free-market-fanaticism put us in this pickle. His opponents, he accuses, are addicted to an out-dated ideology—and he has all the “empirical” evidence to prove it.

Thus, with both sides stuck as they are, when we step outside the spin—when we look at the world objectively—we conclude that ideology is indeed (I here confess) addicting, that the Keynesian vs Laissez-faire argument is eternal, and that empirical evidence is forever in the eye of the beholder.

May the following wisdom of Nassim Taleb inspire you to keep your wits about you. As for me, alas, I’m too far gone…

“Our ideas are sticky. And we tend to stick to our theories. Good idea then to delay ones theories, for once they’re made they’re very difficult to let go of.”

“Once your mind is inhabited with a certain view of the world, you’ll tend to only consider instances proving you to be right. Paradoxically, the more information you have, the more justified you’ll feel in your views.”

Jobs and austerity, subsidies, trade and deregulation...

In yesterday's New York Times Jared Bernstein shares his concerns, and offers advice, with regard to our present employment woes. To fully appreciate the following you'll need to read his article first. It'll take you just a couple of minutes.

Okay, now that you get where he's coming from, here again are his suggestions, followed by (what I believe to be) better sense:

What would it take to reverse these trends? For one thing, in the near term, do no harm. Austerity, including sequestration, is the economic version of medieval leeching. The Federal Reserve continues to apply high doses of monetary stimulus, and that’s supporting low interest rates, which in turn are linked to the improving housing market. But it can’t do it alone, and Congress is counteracting such tailwinds with fiscal headwinds.

Austerity, including sequestration, is the economic version of getting yourself in shape after suffering an obesity-caused myocardial infarction. Although the kind of "austerity" we've imposed here in the U.S. is the economic version of reducing an obese caloric intake of 6000/day by a mere 150 calories (literally).

We also need a significant, permanent program to absorb excess labor (an explicit part of the Humphrey-Hawkins law). We should consider restarting and rescaling a subsidized jobs program from the 2009 Recovery Act that, though relatively small, made jobs possible for hundreds of thousands of workers.

Subsidized, by definition, is the process of extracting resources from one group and distributing to another. With the politician being the extractor and distributor. To presume that such an exercise would yield some net economic gain is to presume that the politician can better allocate income than can those who worked their tails off to earn it.

And we have to reassess our manufacturing policy, including reducing the trade deficit. That means both reshaping our dollar policy — going after competitors who suppress their currencies’ value to get an edge on net exports — and public investments in areas where clean energy intersects with production.

Man I wish we had a trade deficit. How awesome would it be for us if China, for example, would give us stuff without taking anything in return? Jobs wouldn't be an issue, we'd have everything we need without having to produce a thing.

The fact of the matter is that the "trade deficit" is an outright myth --- seriously, it's an utter impossibility. Think about it; who would trade something for nothing? The reality is that the Chinese, for example, make stuff super-cheap for us, not because they love us, but because they love stuff that we produce (assets included) that they need U.S. dollars to buy/invest in. E.g., we buy some cell phone covers from them, they buy some pistachios from us. If they're willing to sell us more dollars worth of cell phone covers than they need to buy pistachios, it's absolutely because they want to invest in businesses, treasury bonds, real estate, etc.

Going after competitors who allegedly suppress their currencies' value to give us a break in cost, would be the economic equivalent of shooting ourselves in the proverbial foot, big time! Oh, and the U.S. "going after" currency suppressors is the economic equivalent of the pot calling the kettle black.

As for public investments (subsidies) in clean energy, let's just say our record-to-date speaks for itself.

Finally, financial deregulation has become the enemy of full employment: it funnels capital to unproductive parts of the economy, and plays a key role in the “shampoo cycle” of bubble, bust, repeat. Less volatile capital markets mean fewer shocks to the job market.

Jared misses a critical step in the "shampoo cycle" of bubble, bust, repeat. The problem is not deregulation as much as it is the cycle of bubble, bust, bailout, repeat. Knowing you can't lose allows for the most egregious mismanagement.

Sadly, Jared's proposals, if adopted, would not only not help, they'd in all likelihood exacerbate the issue...

Austerity is not a strategy...

In his New York Times article The Ignoramus Strategy Paul Krugman states "what's really going on in the economy" as follows. Each followed by my take: 

1. The economy isn’t like an individual family that earns a certain amount and spends some other amount, with no relationship between the two. My spending is your income and your spending is my income. If we both slash spending, both of our incomes fall.

The economy is a tad bit more than your spending and my spending. Oh, and by the way, you and me have been spending aplenty while the recovery proceeds at a snail's pace. The economy is, in fact, like an individual family that earns a certain amount---by producing something---then spends that income. If the family doesn't spend it all---that is, if it acts responsibly---and invests the difference, it provides capital for the production of new and improved goods and services, creating jobs in the process.

2. We are now in a situation in which many people have cut spending, either because they chose to or because their creditors forced them to, while relatively few people are willing to spend more. The result is depressed incomes and a depressed economy, with millions of willing workers unable to find jobs.

Nope; consumer spending has held up just fine. Business investment, on the other hand, hasn't of late. 

3. Things aren’t always this way, but when they are, the government is not in competition with the private sector. Government purchases don’t use resources that would otherwise be producing private goods, they put unemployed resources to work. Government borrowing doesn’t crowd out private borrowing, it puts idle funds to work. As a result, now is a time when the government should be spending more, not less. If we ignore this insight and cut government spending instead, the economy will shrink and unemployment will rise. In fact, even private spending will shrink, because of falling incomes.

Government purchases must be paid for. And if government is to borrow, lenders must be willingly to supply it with, yes, their idle funds --- in return for a presently very low interest payment. Investors haven't always been so willing to lend money for such a measly return --- in fact they've never been so willing (rates are at record lows). Of course, one investor, the Fed, has never before committed to purchasing so much government-issued debt. Oh, and those funds from the Fed weren't previously idle, they're brand spanking new. As for government borrowing, well, the private sector will ultimately have to curtail productive activities in order to pay back the debt incurred to finance current "investments".

Now Krugman's response to that last sentence---after calling me an idiot (or an ignoramus)---would be that the private sector will be paying itself back ("we owe it to ourselves"), and that somehow makes it a-okay. I think, in fact, the number---that we've bought of our nation's debt---is somewhere around 66%. So simple math alone suggests that Krugman's own argument should be sliced by about a third. That is, we (our kids/grand kids that is) will be paying two-thirds to "ourselves" and the remaining third to other individuals/entities with whom we share this planet --- who just happen to live on the other side of lines drawn on maps. But, frankly, that's not the least bit the issue --- the domicile of the lender is of little consequence. The basic issue should be intuitive: if I borrow from my brother and spend (God forbid like a government), I'll be paying him back (with funds I borrow from someone else, if I'm like a government). It's in the family, but I'm still out the money. (Please read this open letter to Paul Krugman for a more in depth view of why his argument---which, by the way isn't his, it's a centuries-old fallacy---is the definition of nonsensical)  And if I spend (or "invest" if you prefer) like a government, the odds that I'll be doing more than wasting scarce resources that would have been better utilized by the profit-seeking private sector ("crowding out"  by definition), are very slim indeed. I.e., I will not have produced, or preserved, enough with the borrowed money to pay my brother back. You see there's a reason I (like the government) keep having to hit up the family.

4. This view of our problems has made correct predictions over the past four years, while alternative views have gotten it all wrong. Budget deficits haven’t led to soaring interest rates (and the Fed’s “money-printing” hasn’t led to inflation); austerity policies have greatly deepened economic slumps almost everywhere they have been tried.

Correct; the past four years of budget deficits haven't led to soaring interest rates (not yet anyway), not while the Fed stands "prints" in support. And the Fed's "money-printing" hasn't led to inflation, not while the "printed money" sits idle in banks' excess reserve accounts left on deposit (earning .25%) at the Fed. Austerity policies, by definition, inflict the kind of pain a debt-ridden country (just like a debt-ridden individual family) must ultimately endure while it gets its act together. Austerity is not a growth strategy, it's not something you try, it's a necessity anytime expenditures exceed revenues and there's no credible moment on the horizon when previous investments will yield enough to offset the deficit.

5. Yes, the government must pay its bills in the long run. But spending cuts and/or tax increases should wait until the economy is no longer depressed, and the private sector is willing to spend enough to produce full employment.

Oh sure, spending cuts can wait until future politicians are in a position to cut the federal budget --- that is, to disappoint their supporters. Never happens!! As for tax increases, I concede, it would be a very bad idea to suck more from the private sector to fund yet more government spending, weak economy or not.

Here's his last paragraph (earlier in the article he referred to Ken Langone as an ignorant simpleton):

Is this impossibly complicated? I don’t think so. Now, I suppose that someone like Langone will just respond that it’s all gibberish he can’t understand. But unless he really is stupid, which as I said I doubt, that’s only because he doesn’t want to understand.

Are my followups to his 5 points impossibly complicated? Or do they possibly offer a more sensible, yet more in depth, view of the world? Now, I suppose that someone like Krugman will just respond with name-calling and more of the same one-side-of-the-coin analyses. But unless he really is stupid, which I doubt, that's only because he is, pardon my stooping to name-calling, the absolute worst of partisan hacks.

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