The View From 1776

Wall Street Continues Celebrating

The Fed’s recent “tapering” policy does nothing to control or deflate the stock market bubble.  While latest quantitative easing policy will reduce monthly purchases of longer-term Treasuries and mortgage securities from $85 billion per month to $75 billion, the Fed vows to keep short term rates near zero throughout 2014, and possibly longer.

It’s the availability of essentially unlimited amounts of short-term funding for the stock market carry trade that fuels the bull market in stocks, in the face of the highest ratio on record of negative earnings outlooks issued by corporations.  Carry trade, as you may know, means the ability to borrow short-term at very low interest rates and to invest long-term in assets such as stocks listed on the exchanges.  The Fed’s continued “Greenspan Put” emboldens hedge funds and other speculators secure in the knowledge that the Fed won’t pull the punch bowl away and leave them squeezed by higher costs of borrowed funds.

Posted by .(JavaScript must be enabled to view this email address) on 12/22 at 01:53 AM
  1. Johan Norberg, in his updated edition of "Finacial Fiasco," points out that "This is no longer a financial crisis, or even a debt crisis. This is now a political crisis, a crisis of governments."

    His book documents how the various government executives and agencies created the recent financial meltdown and exacerbated its devastating consequences. He points out the start of it all under Clinton and the incremental steps taken by government under the Bush and Obama administrations. He concludes, ominously, that politicians and agencies are today assuming even more power to deal with the problems that they have created.

    This process of expanding interference seems to be part of the inexorable growth of our government: It starts by small interferences in the market place which cumatively become major roadblocks in whatever segment of the economy affected. Then they propose added programs and solutions to "fix' those problems but the end result is the opposite of what was intended. As Reagan quipped, government is not the solution; it's the problem!

    Norberg also makes clear that this is not about regulation vs deregulation: it is about the corrupt and/or ideological battles that allow the actors in crony capitalism to cater to the special interests that feed the top richest .001%, the new elites that call the shots. Financial Regulation of the banks, like gun control, has been fine tuned to burden the innocent public, while allowing the criminals to go unrestricted, uncontrolled, and laughing all the way ro the bank.

    The "tapering," the egregious bailouts, and the Feds entire policy is dictated by the bankers running the Treasury Department, The FRB, and the Justice Department. The revolving door between Wall Street bankers and Washington's highest offices should make this clear, as should the growing financial inequality in America, and the stagnation of middle class incomes. The hypocisy of the Obama administration is there for all to see.
    Posted by bill greene  on  12/22  at  10:19 PM
  2. Bill,

    This idea that the government is growing inexorably is fiction. The number of federal and state government employees has declined over the last several years.

    Thomas,

    Your comments about the Fed have an ominous tone suggesting that something dire is about to happen, but you don't actually come out and state your prediction. What terrible event is it that you think we are on the brink of? What catastrophe is about to occur?
    Posted by .(JavaScript must be enabled to view this email address)  on  12/23  at  02:12 PM
  3. Mr. Jay, financial publications such as The Wall Street Journal, Barron's, and Forbes oscillate between pronouncing today's conditions as a stock market bubble about to burst, on the one hand, and declaring all's well, so keep the orgy going, on the other hand.

    More frequently now, even analysts who see the stock market as not overvalued are urging caution.

    Two occurrences suggest that the stock market is in bubble territory. First, last May when Bernanke mused about tapering the Fed's monetary policy, the market dropped precipitously, making it clear that, without the Fed's loose money the market couldn't hold its high level. Second, when the Fed finally announced a slight taper, all at the long-term end, continuing to flood the short-term end with money to keep rates near zero, the market popped with renewed exuberance.

    I'm not predicting anything, but meanwhile I'm allowing cash from bond maturities and bond calls to stay as cash in my portfolio. If nothing else, long-term interest rates should continue upward. When they reach historical levels I expect to deploy the cash into fixed-income securities yielding a good margin over inflation.
    Posted by .(JavaScript must be enabled to view this email address)  on  12/23  at  03:36 PM
  4. Mr. Jay, I should have added that the Keynesian thesis that drive's the Fed's loose money policy, as Bernanke has stated, is the belief that higher stock market prices create a "wealth effect" that both sparks businessmen's "animal spirits," and tricks consumers into believing that they are rich again and should take on more debt to expand consumption expenditures.

    Neither has happened to the extent of recoveries in past recessions. The housing upswing has already petered out, and consumer expenditures have disappointed hopes.

    Moreover, if the Fed's tapering should lead to significantly higher medium to long-term interest rates, that will put a damper on the already very low level of investment in production goods, the source of new jobs.
    Posted by .(JavaScript must be enabled to view this email address)  on  12/23  at  04:08 PM
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