Financial bubbles are very similar to other manias like those involving witches, the Crusades, etc, well-documented in the 1852 classic, 'Extraordinary Popular Delusions and the Madness of Crowds' . We, humans, are prone to all kinds of manias, plus, I think America has been especially prone to manias like with celebrities, the dot.com bubble, Harry Potter Books, Ipods, holiday shopping sales where crowds run over other shoppers, excessive debt, etc, etc. I found it particularly interesting that the book went into a mania involving fortune tellers.
So, Sharon Begley's recent article in Newsweek made me think that guys like Nouriel Roubini, Peter Schiff, etc - were nothing more than a current form of 'fortune tellers' and how a mania-predisposed society, like ours, especially during times of extreme uncertainty, just comes up with another mania - looking to people who are certain about what lies ahead - a current incarnation of fortune tellers - just because they might have made one great prediction is certainly no indication that they might make another - but it is their 'certainty' about the future which is the really dangerous thing about them and which mania-predisposed people are most likely to exhalt.
Bertrand Russell once wrote something like 'the problem with the world is that fools are certain and the intelligent are full of doubt'.
So, I think it wise to be extra wary of financial pundits who are so certain about what will happen with this financial mess. It would be safer to place a heavier weight on analysts who have more nuanced expectations, maybe even ones who suggest percentages about various things which might happen - like 15% chance of Depression, 50% chance of severe recession, and ranges like unemployment peaking between 15%-20% lasting 2-3 years, for example. Plus, a good analyst would be likely to also mention the positive things happening, especially since some positive things are indeed happening now, which would caution against relying too much on pundits with only worst-case scenarios.
Tuesday, March 31, 2009
Thursday, March 19, 2009
Comment on the Economy - "The Fed's Bold Move"
Yesterday, the Fed made a pretty big move. It announced an additional $1.15 trillion of stimulus, saying it would buy up to $300 billion of longer-dated Treasury securities, and $850 billion more of mortgage agency debt and mortgage-backed securities than previously planned.
The way I sum it up is:
1. The Fed was basically doing an "end-around" to the obstructionists in Congress who caused the government's stimulus package to be watered down so as to not have enough spending to reduce unemployment fast enough, specifically in the area which was the worst hit - housing. The Fed wants to speed up bank lending - both by buying mortgage-backed assets and hoping to lower interest rates.
The Fed wants to take a deflationary depression off the table.
2. However, in the process, the Fed significantly risks inflation, a weakening dollar, rising commodity costs and long-term interest rates rising significantly.
3. Let's take a worst case scenario resulting from this move, with #2 spiking significantly. In that case, the Fed could back off from the program and return to having the government issuing debt rather than the Fed monetizing debt, and raising interest rates slightly to choke off any building inflation. This would mark the Fed's move a failure and while some damage would have been caused, but likely the damage could still be mitigated.
4. Now, for the potential good. As long as #2's risks were just moderate for a reasonable length of time, that could really help things. a) Some inflation is actually good b) a moderately weakened dollar is also good - both to spur exports and help other economies around the world b) rising commodity costs will certainly help many of the emerging and developing nations' economies where many are resource-based. This mess is global and we need other nations to also recover, in order to help us.
5. Since this is such a bold move, we need to wait awhile before being too quick to judge the move, at least a week - maybe up to a month, to see how the financial markets react. So, I'll wait awhile.
6. A few comments - a) The Fed is basically creating disincentives to saving - with a lot of incentives for people to spend and borrow. b) As for stocks, it has been said "not to fight the Fed", and the Fed is basically saying buy stocks. So, buying some stocks is reasonable, especially ones which pay dividends higher than CD or Treasury rates, while also keeping some money in reserve in case the market goes lower. Also, having some gold and inflation-protected Treasuries (TIPs) is reasonable.
7. Again, a bold move, and really too soon to judge it.
The way I sum it up is:
1. The Fed was basically doing an "end-around" to the obstructionists in Congress who caused the government's stimulus package to be watered down so as to not have enough spending to reduce unemployment fast enough, specifically in the area which was the worst hit - housing. The Fed wants to speed up bank lending - both by buying mortgage-backed assets and hoping to lower interest rates.
The Fed wants to take a deflationary depression off the table.
2. However, in the process, the Fed significantly risks inflation, a weakening dollar, rising commodity costs and long-term interest rates rising significantly.
3. Let's take a worst case scenario resulting from this move, with #2 spiking significantly. In that case, the Fed could back off from the program and return to having the government issuing debt rather than the Fed monetizing debt, and raising interest rates slightly to choke off any building inflation. This would mark the Fed's move a failure and while some damage would have been caused, but likely the damage could still be mitigated.
4. Now, for the potential good. As long as #2's risks were just moderate for a reasonable length of time, that could really help things. a) Some inflation is actually good b) a moderately weakened dollar is also good - both to spur exports and help other economies around the world b) rising commodity costs will certainly help many of the emerging and developing nations' economies where many are resource-based. This mess is global and we need other nations to also recover, in order to help us.
5. Since this is such a bold move, we need to wait awhile before being too quick to judge the move, at least a week - maybe up to a month, to see how the financial markets react. So, I'll wait awhile.
6. A few comments - a) The Fed is basically creating disincentives to saving - with a lot of incentives for people to spend and borrow. b) As for stocks, it has been said "not to fight the Fed", and the Fed is basically saying buy stocks. So, buying some stocks is reasonable, especially ones which pay dividends higher than CD or Treasury rates, while also keeping some money in reserve in case the market goes lower. Also, having some gold and inflation-protected Treasuries (TIPs) is reasonable.
7. Again, a bold move, and really too soon to judge it.
Tuesday, March 10, 2009
Comment on the Economy - "The Follow-Through"
First, the "Window" opened up (commodity prices collapsing and mass asset destruction which essentially removed tons of potential money which meant inflation was not an immediate threat and there was a worldwide demand for US Treasury debt) - evident 1/19.
Second, "Some Interesting Things" happened (bottoms forming in the first economic areas to turn down - US housing - most importantly in San Diego where the boom/bust first started, the US stock market, and commodities) - evident 3/4.
Third, now we have the "Follow-Through", with the stock market further confirming some sort of bottom actually happening in concert with some solid economic indicators. Some of the indicators are 1) Citicorp actually showing some reason for hope in the financial sector even if Citicorp isn't safe yet as they still will have large writeoffs in about a month. But, it does show that Fed actions and TARP have had some positive effects - a favorable yield curve plus LIBOR rates now reasonable - so well-run banks will surely be doing pretty well. Plus, recent buyouts of Wyeth by Pfizer, Schering-Plough by Merck and a pending completion of the Roche takeover of Genentech - indicate several things -money is available, investment banking has awakened, plus as our healthcare system begins to change, healthcare companies are beginning their adjustment by eliminating costly duplications, building synergies, etc.
Sure, this mess will still get worse as unemployment is still rising, commercial RE has much further to fall, same with credit card debt, likely some Eastern European nation will collapse and some Latin American country - maybe Mexico, plus some major geopolitcal event(s) will likely happen. But, the important thing is there are some positive indicators where this mess first hit. Sure, likely this is just a bounce in the stock market and further lows could be hit, but some stabilizing is happening for some fundamental reasons.
Second, "Some Interesting Things" happened (bottoms forming in the first economic areas to turn down - US housing - most importantly in San Diego where the boom/bust first started, the US stock market, and commodities) - evident 3/4.
Third, now we have the "Follow-Through", with the stock market further confirming some sort of bottom actually happening in concert with some solid economic indicators. Some of the indicators are 1) Citicorp actually showing some reason for hope in the financial sector even if Citicorp isn't safe yet as they still will have large writeoffs in about a month. But, it does show that Fed actions and TARP have had some positive effects - a favorable yield curve plus LIBOR rates now reasonable - so well-run banks will surely be doing pretty well. Plus, recent buyouts of Wyeth by Pfizer, Schering-Plough by Merck and a pending completion of the Roche takeover of Genentech - indicate several things -money is available, investment banking has awakened, plus as our healthcare system begins to change, healthcare companies are beginning their adjustment by eliminating costly duplications, building synergies, etc.
Sure, this mess will still get worse as unemployment is still rising, commercial RE has much further to fall, same with credit card debt, likely some Eastern European nation will collapse and some Latin American country - maybe Mexico, plus some major geopolitcal event(s) will likely happen. But, the important thing is there are some positive indicators where this mess first hit. Sure, likely this is just a bounce in the stock market and further lows could be hit, but some stabilizing is happening for some fundamental reasons.
Wednesday, March 04, 2009
Comment on the Economy - "Some Interesting Things"
Though this mess has further to go on the down side, some very interesting positive things are happening.
In any economic downturn it is wise to look at the areas which were first to collapse, and watch for indicators of bottoming there. Plus, with all of the government stimulus, flooding markets with capital, there is bound to eventually be some general upturn, its duration all dependent on how long this "window" remains open where there is a global need for US government debt and how solid such a recovery turns out to be - actually putting people back to work, spending and returning tax revenues to the government, etc - a combination of short term and long term measures reinforcing each other - and inflation doesn't get too bad - some is OK, even healthy.
Since the US was the first nation to begin this collapse, since housing was the first section of the US economy to collapse, and since San Diego was perhaps the first US housing market to top out and begin the collapse, it is wise to look at these areas closely, bottom up.
So, I notice San Diego median housing seems to be bouncing around, up a little one week, down a little another, looking for a bottom.Plus, when I look at other US housing markets (I watch HousingTracker.net) and I see many cities up during the last month or so. Probably foreclosures are tempting a lot of buyers, so some kind of bottom is opening. Plus, anecdotally, I see around the LA area, many Chinese investors are coming in to buy homes because they are so reasonable for them. Plus, I see in San Francisco, median home prices are up about 7% in the last month. I see San Francisco being a beneficiary of the administration's goals in restructuring the economy, rewarding science, new technology, education (many good to excellent colleges and universities which will benefit, there, etc).
Plus, commodities have been bottoming. Stocks are at a critical point, but it is too soon to say they aren't looking for a bottom rather than making a further sharp spike down - which is still possible.
I don't want to say the coast is clear, plus some major unforseen event(s) could happen, geopolitically or whatever. Heck, we just had a close call from some asteroid plowing almost head on to the planet.
Plus, the world is looking to the US for leadership and this new administration does have a solid popularity during its first two months, along with a vision, all taken together seems to be supported by most Americans and most world leaders and populations. Sentiment is important at turning points in financial markets. Simply, that is the way they work, on human emotion - at critical points.
In any economic downturn it is wise to look at the areas which were first to collapse, and watch for indicators of bottoming there. Plus, with all of the government stimulus, flooding markets with capital, there is bound to eventually be some general upturn, its duration all dependent on how long this "window" remains open where there is a global need for US government debt and how solid such a recovery turns out to be - actually putting people back to work, spending and returning tax revenues to the government, etc - a combination of short term and long term measures reinforcing each other - and inflation doesn't get too bad - some is OK, even healthy.
Since the US was the first nation to begin this collapse, since housing was the first section of the US economy to collapse, and since San Diego was perhaps the first US housing market to top out and begin the collapse, it is wise to look at these areas closely, bottom up.
So, I notice San Diego median housing seems to be bouncing around, up a little one week, down a little another, looking for a bottom.Plus, when I look at other US housing markets (I watch HousingTracker.net) and I see many cities up during the last month or so. Probably foreclosures are tempting a lot of buyers, so some kind of bottom is opening. Plus, anecdotally, I see around the LA area, many Chinese investors are coming in to buy homes because they are so reasonable for them. Plus, I see in San Francisco, median home prices are up about 7% in the last month. I see San Francisco being a beneficiary of the administration's goals in restructuring the economy, rewarding science, new technology, education (many good to excellent colleges and universities which will benefit, there, etc).
Plus, commodities have been bottoming. Stocks are at a critical point, but it is too soon to say they aren't looking for a bottom rather than making a further sharp spike down - which is still possible.
I don't want to say the coast is clear, plus some major unforseen event(s) could happen, geopolitically or whatever. Heck, we just had a close call from some asteroid plowing almost head on to the planet.
Plus, the world is looking to the US for leadership and this new administration does have a solid popularity during its first two months, along with a vision, all taken together seems to be supported by most Americans and most world leaders and populations. Sentiment is important at turning points in financial markets. Simply, that is the way they work, on human emotion - at critical points.
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