Financial topics

[Higgenbotham]

I think Noland and Hussman are a couple of very smart guys with a good understanding of what is going on.

I haven't read them since QE3 was announced but all of this seems accurate. I think Noland is right that this is now similar to 1929, though I think the crash will be much worse.

[OLD1953]

Note:This post probably sounds a bit irrational. Unfortunately, when discussing an irrational action, you must discuss it irrationally, otherwise you aren't dealing with reality.

As I said in a post on the daily news, there are two economies in the USA that are intertwined, but not the same. One manages alterations in the physical world and is rewarded for those alterations. This is the source of all physical goods and services, if you can see it, listen to it, eat it, wear it or otherwise use it directly, it's part of this economy. The other economy deals solely in the manipulation of symbols deriving their value from these alterations in the physical world, or the organizations or individuals that perform such alterations, including the past, present or future value of such alterations (assumed under a set of assumptions that may or may not be accurate and may or may not be revealed to those outside the inner circle). This is the world of banks, brokers, futures markets, etc.

Just incidentally, this is why Bernake's efforts have come to so little. He can only manipulate the second economy, and if the second economy isn't effective in boosting the first economy, then he can't do anything at all. Graphs of stimulus dollars vs economic growth show that he's simply SOL.

Bernake has been greatly concerned about the first economy, but all his actions have resulted in bumping the valuations of the second economy. Given that derivative values ARE derivative of alterations in the real world, he's effectively driven up the future valuation of the first economy to rather olympian heights.

There is no logical reason for him to continue on this course. It's unpopular with the public, it's unpopular with most of Washington, it's unpopular with almost everyone but a few thousand people at the top of the second economy who directly benefit from it, but otherwise it's a wash. Therefore, we have to look at illogical reasons for him continuing on this course.

The usual reasons for taking illogical (unsane) actions are emotional. Looked at from that angle, his actions do have a possible explanation, or so I tend to think. I think he's trying to keep the value of 401K's bumped up, because the FED and several Presidents he respects, especially Ronald Reagan are tightly attached to the entire 401K idea. If 401K's are discredited, then the entire Reagan legacy is heavily tarnished and the FED with it, and that began to happen after the first crash. If he can do anything to force the markets upwards, he will, because otherwise 401K's aren't looking good, and if they don't look good, the FED looks bad and so does everything he cares about.

If you've got a better reason, lets hear it. I can't see that this constant stimulus will do anything but make matters worse in the end. (BTW, when the government quit trying to fix the second economy and concentrated on the first economy, the Depression started to relax.

[John]

> If you've got a better reason, lets hear it. I can't see that
> this constant stimulus will do anything but make matters worse in
> the end. (BTW, when the government quit trying to fix the second
> economy and concentrated on the first economy, the Depression
> started to relax.

Your discussion of the two economies makes a lot of sense, and it
helps explain why the Fed's expansive monetary policies are not
resulting in hyperinflation. The money is going into what you call
the second economy, resulting in "hyperinflation" in the stock and
bond markets. But it's not going into the first economy, which is
where real-world inflation is measured.

However, I do believe there's a more credible reason to explain the
behavior of Bernanke and other officials. It's not that they're
psychotic, or political, or protecting their own 401Ks. It's because
they're absolutely desperate. They see what's coming, and they're
doing anything the can to "kick the can down the road," to delay the
inevitable crisis, and to hope against hope that the economy will
start growing again as it did in the bubble days. But as
you say, they're only making things worse.

John

[Higgenbotham]

However, I do believe there's a more credible reason to explain the
behavior of Bernanke and other officials. It's not that they're
psychotic, or political, or protecting their own 401Ks. It's because
they're absolutely desperate.
John

At this point in time, I would buy into this reasoning. They are in a state of panic is the phrase I would use. The only thing we can't be sure of is why they are in a state of panic.

[gerald]

Many things are out of whack, such as computer trading in the stock market. Earlier I suggested some solutions for fixing the stock market such as having to hold stock for a fixed period of time. Guess, I am not the only one thinking of such things. Of course having these changes occur now are slim, too many powerful people are making too much money to allow this. But times change. From zero hedge http://www.zerohedge.com/news/guest-pos ... ock-market

Here are some common-sense rules for such a "new market":

Every offer and bid will be left up for 15 minutes and cannot be withdrawn until 15 minutes has passed.
Every security--stock or option--must be held for a minimum of one hour.
Every trade must be placed by a human being.
No equivalent of the ES/E-Mini contract--the futures contract for the S&P 500--will be allowed. The E-Mini contract is the favorite tool of the Federal Reserve's proxies, the Plunge Protection Team and other offically sanctioned manipulators, as a relatively modest sum of money can buy a boatload of contracts that ramp up the market.
All bids, offers and trades will be transparently displayed in a form and media freely available to all traders with a standard PC and Internet connection.
Any violation of #3 will cause the trader and the firm he/she works for to be banned from trading on the exchange for life--one strike, you're out.

[John]

But wouldn't that just encourage off-market trades, such as the
existing "dark pools," by people who want to avoid the new rules?

[OLD1953]

It's not that they are protecting 401K's per se or the value of 401K's, they are protecting the idea of the 401K. If you believe the second economy offers a real benefit to the average American (who usually works in the first economy) then there has to be such a benefit. That benefit was established with the creation of the 401K. If the idea of the second economy being of benefit to the middle class falls into disfavor, then there is no reason not to tear up all the rules and customs that advantage the second economy and start over. The idea of the 401K is essentially a bulwark of protection for the second economy, if this idea fails, then we will see the bankers burning in effigy, or perhaps even an older tradition would be revitalized and they'd be tarred and feathered and ridden out of town on a rail.

What I'm saying is that Bernake is so bound up in the idea that the second economy should be considered the primary focus of all policy and given every advantage, that he'll do anything to protect it and I believe in his mind that equates to protecting the value of the 401K.

[Higgenbotham]

It's not that they are protecting 401K's per se or the value of 401K's, they are protecting the idea of the 401K.

I think the idea that Bernake is protecting is "the idea of Ben Bernake". He is operating solely out of self interest in his own stated ideas.

I like calling him "Bernake" too, so I've started using that. And if the Fed's contractors are doing word searches they have to search harder.

In this particular instance, Bernake will be buying mortgages and I read somewhere it amounts to about 35% of the monthly mortgage issuance. This means that banks can go back to issuing crappy mortgages and there can be another mortgage bubble which can lead to another housing bubble, so the idea in this instance is to give a boost to housing prices. One of Bernake's oft repeated ideas (or lies for those so inclined) was that housing prices simply could not collapse and that subprime was contained. This program will give a harder boost to housing prices (in theory) than it will to stock prices. Also (in theory) it will give a temporary boost to stock prices (just in time for the election for those inclined). To see evidence that the market is buying into the idea that Bernake's new program is targeting housing, the homebuilder stocks have soared in the past 2 days.

[John]

New NBC show "Revolution" begins Monday evening at 10 pm ET

"Revolution" has the high-concept premise of a potential
blockbuster. Among the most costly new shows, with an estimated
per-episode price tag of approximately $3 million, it revolves around
a far-fetched setup: 15 years after a mysterious blackout, America has
been transformed into an overgrown, feudal Middle-Earth where good but
mostly powerless people struggle against evil warlords. It's a
cautionary tale for technology-obsessed 21st century Americans
addicted to everything from smartphones to, well, appliance-generated
ice.

"Everyone knows how frustrating it is to be in a blackout," Eric
Kripke, the show's creator and a writer-producer best known for CW's
"Supernatural," said in a recent interview. "I think everyone senses
somewhere deep in their animal instinct that we're overextended. We're
precariously balanced. ... None of us knows how to find food and water
if we need to."

...

Kripke originally pitched Abrams the idea of a swashbuckling fantasy
in a post-apocalyptic America. "I was picturing two guys having a
full-on, 'Lord of the Rings' sword fight," Kripke recalled. "But
instead of some ancient English Stonehenge-like structure, they were
having it in front of a vine-covered Starbucks."

Abrams liked the idea but wanted to tweak the apocalyptic element by
adding a notion first dreamed up by his producing partner, Bryan
Burk. That story, never fully sketched out, involved everyone's
electrical and battery power suddenly disappearing. No more artificial
lights, no more cars, no more smartphones.

The pilot ultimately written by Kripke starts 15 years after the
mysterious blackout. Charlie Matheson (Tracy Spiridakos) — a
precocious young woman armed with a crossbow, apropos of this year's
film smash "The Hunger Games" — treks to Chicago to find her uncle,
Miles (Billy Burke), dodging villains on horseback and trying to
re-establish the U.S.

http://www.detroitnews.com/article/2012 ... evolution-

[Reality Check]

...
there are two economies in the USA that are intertwined, but not the same. One manages alterations in the physical world and is rewarded for those alterations. This is the source of all physical goods and services, if you can see it, listen to it, eat it, wear it or otherwise use it directly, it's part of this economy. The other economy deals solely in the manipulation of symbols deriving their value from these alterations in the physical world, or the organizations or individuals that perform such alterations, including the past, present or future value of such alterations (assumed under a set of assumptions that may or may not be accurate and may or may not be revealed to those outside the inner circle). This is the world of banks, brokers, futures markets, etc.

Just incidentally, this is why Bernake's efforts have come to so little. He can only manipulate the second economy, and if the second economy isn't effective in boosting the first economy, then he can't do anything at all. Graphs of stimulus dollars vs economic growth show that he's simply SOL.

Bernake has been greatly concerned about the first economy, but all his actions have resulted in bumping the valuations of the second economy. Given that derivative values ARE derivative of alterations in the real world, he's effectively driven up the future valuation of the first economy to rather olympian heights.

There is no logical reason for him to continue on this course. It's unpopular with the public, it's unpopular with most of Washington, it's unpopular with almost everyone but a few thousand people at the top of the second economy who directly benefit from it, but otherwise it's a wash. Therefore, we have to look at illogical reasons for him continuing on this course.

The usual reasons for taking illogical (unsane) actions are emotional. Looked at from that angle, his actions do have a possible explanation, or so I tend to think. I think he's trying to keep the value of 401K's bumped up, because the FED and several Presidents he respects, especially Ronald Reagan are tightly attached to the entire 401K idea. If 401K's are discredited, then the entire Reagan legacy is heavily tarnished and the FED with it, and that began to happen after the first crash. If he can do anything to force the markets upwards, he will, because otherwise 401K's aren't looking good, and if they don't look good, the FED looks bad and so does everything he cares about
...

Your discussion of the two economies makes a lot of sense, and it
helps explain why the Fed's expansive monetary policies are not
resulting in hyperinflation. The money is going into what you call
the second economy, resulting in "hyperinflation" in the stock and
bond markets. But it's not going into the first economy, which is
where real-world inflation is measured.

However, I do believe there's a more credible reason to explain the
behavior of Bernanke and other officials. It's not that they're
psychotic, or political, or protecting their own 401Ks. It's because
they're absolutely desperate. They see what's coming, and they're
doing anything the can to "kick the can down the road," to delay the
inevitable crisis,
...

John

I think the idea that Bernake is protecting is "the idea of Ben Bernake". He is operating solely out of self interest in his own stated ideas.
In this particular instance, Bernake will be buying mortgages and I read somewhere it amounts to about 35% of the monthly mortgage issuance.
This means that banks can go back to issuing crappy mortgages and there can be another mortgage bubble which can lead to another housing bubble, so the idea in this instance is to give a boost to housing prices.

The concept of two economies, one real, and the second derivative is useful.

But there are rules for both worlds and Bernake does not control all in the second world, and few, if any, in the first world.

For example, Bernake may not control some of the mortgage issuance rules that would need to change to go back to making crap mortgage loans.

But there were two other questions raised recently that are more interesting.