Stock Market thoughts (continued - no politics please!)

[Luigi]

And Dow futures currently up for tomorrow...like ABR about 7.9% dividend

 

[Velocity173]

I should’ve bought! I should’ve bought!

 

[PaulS]

Largest single day point gain in history.

(To return to the actual thread topic...)

Winning!

 

[tspear]

Two questions:
1. How does the monetary policy keep the economy moving when the economy stops due to demand? That is the fear with COVID-19 right? People stop traveling, no public gatherings, no going out to dinner.... That is all demand side. How does monetary policy help there?
2. What changed between last week and today? Besides the 100 new cases in the USA plus a few deaths.

Tim

 

[denverpilot]

2. What changed between last week and today? Besides the 100 new cases in the USA plus a few deaths.

Three days to analyze actual risk vs internet BS... and time for institutional investors to short against the panicky non-institutional ones ... and take their money?

 

[Velocity173]

Two questions:
1. How does the monetary policy keep the economy moving when the economy stops due to demand? That is the fear with COVID-19 right? People stop traveling, no public gatherings, no going out to dinner.... That is all demand side. How does monetary policy help there?
2. What changed between last week and today? Besides the 100 new cases in the USA plus a few deaths.

Tim

Well, China has just reported a reduction in the trend of cases reported and are now discharging more COVID-19 patients than admitting.

 

[Half Fast]

Well, its comforting to know that those most at risk of dying are the elderly.

Oh, wait...

Relax, Eddie - 80 is the new 40, remember?

 

[tspear]

Three days to analyze actual risk vs internet BS... and time for institutional investors to short against the panicky non-institutional ones ... and take their money?

Ah, so investors think that the supply lines, international travel, and the consumer will all snap back to where they were in December tomorrow? Because, the news does not match that. Shipping is still down, and getting worse. Oil prices are still headed down with demand falling fast. Airlines are extending flight cuts, and canceling more. Just check the news from BA today.

Well, China has just reported a reduction in the trend of cases reported and are now discharging more COVID-19 patients than admitting.

So the Hubei province has basically be shutdown economically for over a month. This one province represents about 4.5% of the China GDP; let alone the ripple effect to the rest of the country. When will China stop the quarantine and open the province for business? Two or three weeks after no new cases? How long will it take the province, let alone the country to rebuild supply lines? How many small firms will have gone bankrupt, or be operating under massive debt loads?
The economic effects are just starting to ripple into supply lines around the world; auto plants in Europe and Asia are starting to shutdown due to lack of parts. Tech companies are starting to shutdown plants due to lack of chips, boards and other critical components.

Tim

 

[TCABM]

Two questions:
1. How does the monetary policy keep the economy moving when the economy stops due to demand? That is the fear with COVID-19 right? People stop traveling, no public gatherings, no going out to dinner.... That is all demand side. How does monetary policy help there?
2. What changed between last week and today? Besides the 100 new cases in the USA plus a few deaths.

Tim

1. It doesn’t. But a lot of those things aren’t happening in the US at the scale it is in China, where monetary policy doesn’t matter. But people can’t live without food, so delivery is needed and the delivery people and drop off locations are closely monitored and controlled to limit exposure.

2. Already discussed.

 

[Velocity173]

Ah, so investors think that the supply lines, international travel, and the consumer will all snap back to where they were in December tomorrow? Because, the news does not match that. Shipping is still down, and getting worse. Oil prices are still headed down with demand falling fast. Airlines are extending flight cuts, and canceling more. Just check the news from BA today.



So the Hubei province has basically be shutdown economically for over a month. This one province represents about 4.5% of the China GDP; let alone the ripple effect to the rest of the country. When will China stop the quarantine and open the province for business? Two or three weeks after no new cases? How long will it take the province, let alone the country to rebuild supply lines? How many small firms will have gone bankrupt, or be operating under massive debt loads?
The economic effects are just starting to ripple into supply lines around the world; auto plants in Europe and Asia are starting to shutdown due to lack of parts. Tech companies are starting to shutdown plants due to lack of chips, boards and other critical components.

Tim

Just answering question two man. Don’t shoot the messenger. In my opinion, the markets shouldn’t have dropped in the first place. In the same amount of time COVID-19 killed 2,900 people China, air pollution there killed over 250,000. Yet that has no effect on the market.

 

[PaulS]

Companies that are heavily reliant on China are going to be in deep doo doo. I know someone whose company is in this position, the manufacturer they use typically expect about 50% of the workforce not to return after Chinese New Year. This year less than 5% returned. It will take a month or two before this becomes an issue in the US for the companies that use manufacturers like this. On top of that, the professional staff is staying home, worried about this virus.

 

[denverpilot]

Companies that are heavily reliant on China are going to be in deep doo doo.

Yup. There will definitely be specific winners and losers.

The giant market leap wasn’t rational.

Now the shorts will pick apart the value of the specific companies exposed. Won’t be pretty for them.

Many places make big deals about having Business Continuity plans for various events, but forgot to plan for their manufacturing location to essentially be closed down overseas.

But they have a nice three ring binder detailing how to handle flooding at the corporate office.

 

[PaulS]

Yup. There will definitely be specific winners and losers.

The giant market leap wasn’t rational.

Now the shorts will pick apart the value of the specific companies exposed. Won’t be pretty for them.

Many places make big deals about having Business Continuity plans for various events, but forgot to plan for their manufacturing location to essentially be closed down overseas.

But they have a nice three ring binder detailing how to handle flooding at the corporate office.

That's part of the problem with contract manufacturing, you cede control of your manufacturing to others, then relentlessly beat them to lower costs. In the interim you are helpless if for some reason that manufacturer suddenly goes TU.

 

[SoonerAviator]

That's part of the problem with contract manufacturing, you cede control of your manufacturing to others, then relentlessly beat them to lower costs. In the interim you are helpless if for some reason that manufacturer suddenly goes TU.

Or you diversify your suppliers so that not all are in the same location . . .

 

[jspilot]

The fed lowering rates to 0 will eventually have huge consequences down the road. When money becomes free to borrow think of all the speculative prospects people will begin to engage in and think of how quickly that will all fall apart. The biggest issue now though for the market is their is absolutely a “fed put” being established meaning their is a mindset developing in the investing world that whenever the stock market takes a dive the Federal Reaerve will come in and save the day. That’s not the intention of the Federal Reserve and nor should it be. The Federal Reserve is not supposed to act as a supporter of the stock market and this notion that it will rescue by lowering rates and increasing its balance sheet is just plain and simple financial engineering on epic levels and infringes on the very edicts the fed has— maintain a stable currency by maintaining stable prices on items and maximize employment. The stock market needs to remain a free market or else it’s not an authentic and real investment instrument.

At least everyone is getting rich right now who is invested in the market and if you are not in the game you can’t win the game but I’m so concerned about the way the game is being played.

 

[FastEddieB]

The fed lowering rates to 0 will eventually have huge consequences down the road. When money becomes free to borrow think of all the speculative prospects people will begin to engage in and think of how quickly that will all fall apart.

This is where advocating for negative interest rates is absurd.

If we had a negative interest rate of 1%, let’s say, I’d go right out and borrow $1,000,000. Right off the bat, I’d earn $10,000/yr in negative interest. Then, I’d invest the whole wad in a dividend income fund, where a 2% to 3% yield should be easy to manage. Violá! An extra $30,000/yr coming in with very minimal risk.

The fly in the ointment is what happens if everyone does that? Beyond my pay grade to calculate all the ramifications, but they’d be substantial.

 

[jspilot]

This is where advocating for negative interest rates is absurd.

If we had a negative interest rate of 1%, let’s say, I’d go right out and borrow $1,000,000. Right off the bat, I’d earn $10,000/yr in negative interest. Then, I’d invest the whole wad in a dividend income fund, where a 2% to 3% yield should be easy to manage. Violá! An extra $30,000/yr coming in with very minimal risk.

The fly in the ointment is what happens if everyone does that? Beyond my pay grade to calculate all the ramifications, but they’d be substantial.

Right this is exactly why this whole financial situation is just plain absurd. If every single person went out an bought free yielding money by using loans to do it it would be just fake wealth on the backs of the government. Eventually the debt to the government becomes too much and the country implodes.

 

[Chip Sylverne]

Negative rates have been in place in several countries for a long while, most noticeably Japan, without much success. It's a way to punish banks for hoarding money, and a substitute for government spending. But free money won't do jack for a supply recession. Putting money in the theater goers hands won't save the theater if there's no one there to sell the tickets.

 

[tspear]

Negative rates have been in place in several countries for a long while, most noticeably Japan, without much success. It's a way to punish banks for hoarding money, and a substitute for government spending. But free money won't do jack for a supply recession. Putting money in the theater goers hands won't save the theater if there's no one there to sell the tickets.

Actually free money helps when there is a supply deficit.
It is a drop in demand where interest rates do not matter.
Japan, Europe, have for years been fighting a lack of demand.
The question I have is will COVID-19 hurt USA domestic consumer spending (demand) beyond a transient hit. China's chief economist (I think, someone high up) expects the economic hit to be shaped like a V. Rapid down, then rapid back up when quarantines end. But so far no one has the answer if COVID-19 will be more than a transient hit, or will the hit be severe enough to have a material impact which prevents the race back up to full economic growth or cause a change in behavior that has lasting effect.

Tim

 

[Chip Sylverne]

Actually free money helps when there is a supply deficit.
It is a drop in demand where interest rates do not matter.
Japan, Europe, have for years been fighting a lack of demand.
The question I have is will COVID-19 hurt USA domestic consumer spending (demand) beyond a transient hit. China's chief economist (I think, someone high up) expects the economic hit to be shaped like a V. Rapid down, then rapid back up when quarantines end. But so far no one has the answer if COVID-19 will be more than a transient hit, or will the hit be severe enough to have a material impact which prevents the race back up to full economic growth or cause a change in behavior that has lasting effect.

Tim

Beg to differ, Tim, but the central tenets of both Keynesian and monetarist theory hold that increasing the money supply, either through lower interest rates or fiscal stimulus, are means of boosting demand. Says Law, the theory that supply creates it's own demand, has long since been discredited. The idea is that by putting money in the hands of the people, they will spend it on goods and services, thus increasing economic activity. The rub is, there has to be goods and services available.

 

[jspilot]

Beg to differ, Tim, but the central tenets of both Keynesian and monetarist theory hold that increasing the money supply, either through lower interest rates or fiscal stimulus, are means of boosting demand. Says Law, the theory that supply creates it's own demand, has long since been discredited. The idea is that by putting money in the hands of the people, they will spend it on goods and services, thus increasing economic activity. The rub is, there has to be goods and services available.

Well said but another basic economic principle is supply is much easier to impact quicker than demand. The idea being that companies can simple produce more goods to meet the supply issue but to increase demand it almost always takes additional spending( i.e advertising, improving the product, R&D) so in many ways demand moves slower than supply because people either want your product or they need to be convinced they want the product by lowering the price or new features or new advertising etc...

 

[Checkout_my_Six]

So...riddle me this....how does fed funds fix a disease problem and get people buying and businesses making money?

 

[denverpilot]

Beg to differ, Tim, but the central tenets of both Keynesian and monetarist theory hold that increasing the money supply, either through lower interest rates or fiscal stimulus, are means of boosting demand. Says Law, the theory that supply creates it's own demand, has long since been discredited. The idea is that by putting money in the hands of the people, they will spend it on goods and services, thus increasing economic activity. The rub is, there has to be goods and services available.

Also ignores what cheap loans do to prices of those goods. See housing or college tuition rates for examples. Especially when risk is removed from the lender by guarantees. Similarly unsecured credit card debt.

Adding money without allowing risk to stay in place for the lender temporarily increases demand but that also drives prices up in an infinite loop. So instead of long term demand, you find up with a market better for sellers than buyers.

It turns out it just drives never ending inflation if continued for longer terms. The market always figures out that bad loans just devalue the underlying currency.

Which leads to the reality that if you’re not getting a 3% pay raise EVERY year, you’re losing purchasing power... or effectively, taking a pay cut.

Keynes has assumptions about risk that aren’t accurate for today. There wasn’t anything “too big to fail” in his time.

 

[Chip Sylverne]

Also ignores what cheap loans do to prices of those goods. See housing or college tuition rates for examples. Especially when risk is removed from the lender by guarantees. Similarly unsecured credit card debt.

Adding money without allowing risk to stay in place for the lender temporarily increases demand but that also drives prices up in an infinite loop. So instead of long term demand, you find up with a market better for sellers than buyers.

It turns out it just drives never ending inflation if continued for longer terms. The market always figures out that bad loans just devalue the underlying currency.

Which leads to the reality that if you’re not getting a 3% pay raise EVERY year, you’re losing purchasing power... or effectively, taking a pay cut.

Keynes has assumptions about risk that aren’t accurate for today. There wasn’t anything “too big to fail” in his time.

Your point about inflation is a good one. Also, in this economy, there's far too much cash chasing far too few opportunities for return. Free cash flow isn't being invested on means of production, but in stocks. More low cost cash will only fuel that. A lower dollar could help with some exports...if anybody's buying.

 

[PPC1052]

Two questions:
1. How does the monetary policy keep the economy moving when the economy stops due to demand? That is the fear with COVID-19 right? People stop traveling, no public gatherings, no going out to dinner.... That is all demand side. How does monetary policy help there?
2. What changed between last week and today? Besides the 100 new cases in the USA plus a few deaths.

Tim

To answer your first question, by easing the monetary supply (putting more money out there into circulation, either through printing or loaning it out cheaply) folks have more money to buy things with, so that increases the demand for stuff. The problem here though is your assumption that COVID-19 causes a demand problem only. It causes a supply problem, too. Factories are closing for extended periods. So goods, such as parts, and finished goods, etc., are not being produced. So, that's a restriction on the supply side that monetary policy can't fix.

 

[Chip Sylverne]

It'll be interesting to see what happens to the market when the Fed tries to take back the "emergency" rate cut when the immediate "crisis" passes.

 

[Checkout_my_Six]

It'll be interesting to see what happens to the market when the Fed tries to take back the "emergency" rate cut when the immediate "crisis" passes.

Well....they just need to do it during the v-eee bottom reversal.....lol

 

[Chip Sylverne]

Well....they just need to do it during the v-eee bottom reversal.....lol

Yep, simple as taking drugs from a heroin addict.

 

[tspear]

Beg to differ, Tim, but the central tenets of both Keynesian and monetarist theory hold that increasing the money supply, either through lower interest rates or fiscal stimulus, are means of boosting demand. Says Law, the theory that supply creates it's own demand, has long since been discredited. The idea is that by putting money in the hands of the people, they will spend it on goods and services, thus increasing economic activity. The rub is, there has to be goods and services available.

Chip,

I am going on memory; but I believe if you dig into the original Keynesian theory, and the academic material which came after. Monetary supply is used to constrain demand and/or supply. Not increase either one. Fiscal policy is the primary method to increase demand. In this case, monetary supply is like a rubber band. It does not push very well; but it is great to restrain or hold back an economy. Every example I have seen where the money supply was increased and demand/supply increased are better examples where monetary policy had been previously constraining the economy and the controls were relaxed.

Tim

 

[Chip Sylverne]

Chip,

I am going on memory; but I believe if you dig into the original Keynesian theory, and the academic material which came after. Monetary supply is used to constrain demand and/or supply. Not increase either one. Fiscal policy is the primary method to increase demand. In this case, monetary supply is like a rubber band. It does not push very well; but it is great to restrain or hold back an economy. Every example I have seen where the money supply was increased and demand/supply increased are better examples where monetary policy had been previously constraining the economy and the controls were relaxed.

Tim

Tim,
Monetary policy does both. I don't know if you're old enough to recall the 70-'s interest and "Whip Inflation Now" rates in the teens, but Volker did that to suppress runaway prices and slow the economy by making money harder to get. Greenspan did too, in his words, "take away the punch bowl" to slow the housing market. Conversely, Bernanke lowered rates to nearly the zero lower bound in order to get the economy moving again after the crash in 2008. We could have a discussion about whether either did enough or too much, but that's not the issue here. Interest rates are a tool to accelerate or decelerate economic activity. The goal of monetarism is price stability, with a measured inflation goal of 2-3%.

The big advantage to using monetary policy as a macroeconomic tool is that there's comparatively little lag between taking the action of raising or lowering rates and seeing the impact on activity. Fiscal policy, or Keynesian economics, is almost exclusively a tool for increasing demand through Gov't spending. The problem with it is that by the time any stimulative effect takes place, lowering interest rates has already done the job. Further Gov't stimulus tends to be too late, and is potentially inflationary.

The thing neither has real effect on is a runaway deflation, or a supply shock recession.

 

[jspilot]

Your point about inflation is a good one. Also, in this economy, there's far too much cash chasing far too few opportunities for return. Free cash flow isn't being invested on means of production, but in stocks. More low cost cash will only fuel that. A lower dollar could help with some exports...if anybody's buying.

And this is the biggest fear that I have about the next systemic collapse! We can see how people have pounded the ETF’s filling them with 100’s of millions of dollars that are just basically essentially grouped assets. The idea now is there are fewer and fewer real assets left that are of any bargains as we’ve witnessed a rising tide raises all boats type market here. Stocks have increased because they are grouped with other stocks in ETF’s and some have artificially high stock prices because ETF managers have to invest the money in one way or another. What’s left after all this are purely speculative instruments or high risk atocks(it’s happening right now with Virgin Galactic and already happened with companies like Tilray whose stock went up over 100 bucks per share in a few days and is now below 20.) Anyone remember the crypto craze from about a year ago?!? These are all examples of how once the quality assets are bought up and stocks with real value become to overbought and stock prices are too high speculative investments are all that’s left. Any historian of major market crashes knows that each and every collapse was predicated by a wave of major and rampant speculation( really except the flash crash of 87 which was really caused by an investment portfolio insurance mess). You just need to pay attention to what’s going on around you to see we are heading right for a similar pattern. I believe today’s Fed cut reflects how they realize they have propped up the market for as long as they can and now they are running out of ways to help. That’s disasterous if true.

 

[Chip Sylverne]

And this is the biggest fear that I have about the next systemic collapse! We can see how people have pounded the ETF’s filling them with 100’s of millions of dollars that are just basically essentially grouped assets. The idea now is there are fewer and fewer real assets left that are of any bargains as we’ve witnessed a rising tide raises all boats type market here. Stocks have increased because they are grouped with other stocks in ETF’s and some have artificially high stock prices because ETF managers have to invest the money in one way or another. What’s left after all this are purely speculative instruments or high risk atocks(it’s happening right now with Virgin Galactic and already happened with companies like Tilray whose stock went up over 100 bucks per share in a few days and is now below 20.) Anyone remember the crypto craze from about a year ago?!? These are all examples of how once the quality assets are bought up and stocks with real value become to overbought and stock prices are too high speculative investments are all that’s left. Any historian of major market crashes knows that each and every collapse was predicated by a wave of major and rampant speculation( really except the flash crash of 87 which was really caused by an investment portfolio insurance mess). You just need to pay attention to what’s going on around you to see we are heading right for a similar pattern. I believe today’s Fed cut reflects how they realize they have propped up the market for as long as they can and now they are running out of ways to help. That’s disasterous if true.

And it sure doesn't give me the warm fuzzies, since it's all on the cuff...

 

[Chip Sylverne]

The yield on the 10 year, which is set totally by the market, dropped to 1% at the close. That means people are willing to tie up cash for 10 years at below the rate of inflation, just to be certain of getting their capital returned. That is not good, folks.

 

[jspilot]

And it sure doesn't give me the warm fuzzies, since it's all on the cuff...

Yes exactly. I think then when this is studied in history today will be the day when economists and historians alike point to the end of the Federal Reserve as being an honest instrument sworn to uphold the only two mandates it has— maximize employment and price stability. There is no way the Fed can make an arguement that it was acting with those two mandates in mind when slicing rates for a world event largely fueled by fear mongering by the news media and a President screaming for lower rates. The Fed is not supposed to be a wing of the President’s policy nor is it supposed to be acting as an artificial supporter of the stock market. It’s job is to remain an independent piece of the United States’ larger controlling force and can’t become tied directly to any “best way forward for the stock market” safety net. Powell killed his perception today and killed the Feds ability to appear like a data driven decision making entity. What he did was make the Fed entirely unpredictable and appear entirely reactionary. The market was acting the way it should have until the Fed got involved and now there is nothing left in terms of next actions. Devastating day for the Fed and disasteouous day for the future of real investing in the stock market.( might be a bit of hyperbole but I’m willing to be accused of that.)

Investing involves risk and that’s what makes a market. No one can create a market where everyone wins and by trying to do just that, too many important decision makers are forgetting that it’s ok for people to lose— it makes the winning that much better!

 

[wsuffa]

The yield on the 10 year, which is set totally by the market, dropped to 1% at the close. That means people are willing to tie up cash for 10 years at below the rate of inflation, just to be certain of getting their capital returned. That is not good, folks.

Some of that is panic. They'll move to higher yield when things turn around.

As for the rate cut: stimulating demand doesn't help when supply is being constricted (which is the case here). Some is panic buying, some is the shutdowns in China (I saw a report that arrivals at the Port of Long Beach were down 25% last week).

 

[denverpilot]

The yield on the 10 year, which is set totally by the market, dropped to 1% at the close. That means people are willing to tie up cash for 10 years at below the rate of inflation, just to be certain of getting their capital returned. That is not good, folks.

Not sure that’s a sign of anything but what we already know... Boomers are retiring and want zero risk. They’re going to continue to shove the market around for another decade or more. It’s just numbers.

Same core reasons for the “pilot shortage”.

But not unexpected by any means to see big old money moving away from risk.

As far as monetary policy goes, Greenspan and Bernanke both are on record saying they screwed up. Political or real, who knows, but neither believes what they tried actually worked. Definitely Greenspan.

The concept that the Fed makes a change and demand/activity increases “quickly” — is that real people or just standard institutional investing and computers doing what they always do now?

I’ve never seen the Fed change rates and myself or anyone I know suddenly have more cash to make major purchases ... definitely not within the supposedly short timeframe of when the magic money makers suddenly proclaim the economy picked instantly up.

I’m going with “What’s the big lie about what we accomplished... for $1000, Alex.”

I’ve seen *retirement* investments rise nearly instantly, but that’s untouchable fake money being managed by a computer. And nobody is going to touch it or move it to less risk than stock based mutual funds unless they’re retiring very soon. They need the returns to beat the inflation.

So, it’s just a number that goes up and down at the whims of the Fed and world events for most folk who are invested ... and aren’t over 55 and actively taking risk off... if even then...

And just to be clear the use of the Boomer term isn’t intended as sarcasm or “Ok Boomer”, just as a label for an age group, above.

Gen X has been pretty sure that older group wouldn’t give up leadership positions or mentor anybody for them until they’re about 90.

No real surprise there.

But it has a well defined and predicted impact on where investment money will be flowing for at least another decade... and why that pool continues to move out of risk, and money supplies keep having to be loosened for those younger.

Which drives price inflation and generally makes everyone poorer in real purchasing power.

Snake eating its tail.

Let’s not even discuss what junk companies my generation and older are investing in...

They’re not much for real returns and more about personality and carefully crafted PR spin about the CEOs... and that’s not going to pan out well...

 

[Chip Sylverne]

The place that the FOMC rates has the greatest impact is the mortgage market. You can see how the rate fluctuation of short rates affects the market pricing of longer- term paper. The increase in mortgages is a good proxy for future economic activity. People who buy houses have to furnish them, , etc. Construction jobs also positively correlate.

I don't predict market moves...I just observe irrational behavior. Even if you're retiring and want capital preservation, zero-risk as you say, buying g a 10yr at 1% isn't going to do it. If Bill is correct and rates normalize fairly quickly, you're going to suffer a capital loss on the bond unless you hold to maturity. If you hold to maturity, you're going to lose the rate of inflation. It's a sucker bet. Might as well put it into t-bills, commercial paper or other short term instrument. Might not pay much, but you can be liquid again in the short- term.

I like to follow the FRED charts. The M2 money supply is way, way up. Lots and lots of cash out there. But the velocity of money, the rate at which it changes hands, is at the lowest point since the 1960's. Says to me Arthur Laffer is full of crap.

 

[tspear]

Tim,
Monetary policy does both. I don't know if you're old enough to recall the 70-'s interest and "Whip Inflation Now" rates in the teens, but Volker did that to suppress runaway prices and slow the economy by making money harder to get. Greenspan did too, in his words, "take away the punch bowl" to slow the housing market. Conversely, Bernanke lowered rates to nearly the zero lower bound in order to get the economy moving again after the crash in 2008. We could have a discussion about whether either did enough or too much, but that's not the issue here. Interest rates are a tool to accelerate or decelerate economic activity. The goal of monetarism is price stability, with a measured inflation goal of 2-3%.

The big advantage to using monetary policy as a macroeconomic tool is that there's comparatively little lag between taking the action of raising or lowering rates and seeing the impact on activity. Fiscal policy, or Keynesian economics, is almost exclusively a tool for increasing demand through Gov't spending. The problem with it is that by the time any stimulative effect takes place, lowering interest rates has already done the job. Further Gov't stimulus tends to be too late, and is potentially inflationary.

The thing neither has real effect on is a runaway deflation, or a supply shock recession.

I was a kid in the 70s, finishing college early 90s. I took a fair number of econ classes, so I am very out of date
Keynesian actually covers both monetary and fiscal aspects. Which is often overlooked.
Bernanke had a different problem. The financial system came to a grinding halt, money was not moving. Bernanke had to pull out all the stops to try and keep the machine going.

Tim

 

[Checkout_my_Six]

The place that the FOMC rates has the greatest impact is the mortgage market. You can see how the rate fluctuation of short rates affects the market pricing of longer- term paper. The increase in mortgages is a good proxy for future economic activity. People who buy houses have to furnish them, , etc. Construction jobs also positively correlate.

I don't predict market moves...I just observe irrational behavior. Even if you're retiring and want capital preservation, zero-risk as you say, buying g a 10yr at 1% isn't going to do it. If Bill is correct and rates normalize fairly quickly, you're going to suffer a capital loss on the bond unless you hold to maturity. If you hold to maturity, you're going to lose the rate of inflation. It's a sucker bet. Might as well put it into t-bills, commercial paper or other short term instrument. Might not pay much, but you can be liquid again in the short- term.

I like to follow the FRED charts. The M2 money supply is way, way up. Lots and lots of cash out there. But the velocity of money, the rate at which it changes hands, is at the lowest point since the 1960's. Says to me Arthur Laffer is full of crap.

so....you're not a fan of Art? and his curves?

 

[jspilot]

The place that the FOMC rates has the greatest impact is the mortgage market. You can see how the rate fluctuation of short rates affects the market pricing of longer- term paper. The increase in mortgages is a good proxy for future economic activity. People who buy houses have to furnish them, , etc. Construction jobs also positively correlate.

I don't predict market moves...I just observe irrational behavior. Even if you're retiring and want capital preservation, zero-risk as you say, buying g a 10yr at 1% isn't going to do it. If Bill is correct and rates normalize fairly quickly, you're going to suffer a capital loss on the bond unless you hold to maturity. If you hold to maturity, you're going to lose the rate of inflation. It's a sucker bet. Might as well put it into t-bills, commercial paper or other short term instrument. Might not pay much, but you can be liquid again in the short- term.

I like to follow the FRED charts. The M2 money supply is way, way up. Lots and lots of cash out there. But the velocity of money, the rate at which it changes hands, is at the lowest point since the 1960's. Says to me Arthur Laffer is full of crap.

The Laffer curve has long been debunked as outdated and largely irrelevant at this point in history. I teach economics in High School and I barely even mention it anymore because it’s really becoming less and less relavant to anything.

What’s lost in this entire debate is the stagnation of wages in this country since the 70’s and the relative lowering of purchasing power of the average middle class American. What has become a normal practice for most middle class Americans is to live with mountains of debt because they want to maintain at least the life style they grew up in. When you are making the same equivalent wage as your dad but prices have gone up sometimes 10x you have to borrow money to afford anything. What the Fed hides from us but is not hard to see is they know very well that with real interest rates, or higher rates more in line with historical norms, the entire middle class except for the highest earners in the middle class become wiped out. They won’t be able to repay car loans, mortgages, small business loans etc... the entire situation goes away but they just don’t have enough money. I would love to right a book one day called the 0 principle which the premise would be that we all start out with essentially 0 dollars when we are born and basically life is accumulating money to reach certain finish lines( major purchases.) The issue becomes if you can’t accumulate money fast enough and the finish lines keep getting further and further away, you won’t reach them unless you try and change how far away the finish line is( borrow money) or you accelerate your speed( invest in speculative instruments or obtain a better job which involves going to college and paying huge loans— essentially like running a race with a 10 pound weight on your legs.)

Now the real reason people should feel totally confident investing in the stock market is the Fed will completely continue this easing policy until they can’t do it any longer. That’s why yesterday’s panic rate cut was potentially catostophic because once they reach 0 they are pretty done- I listened to a CNBC interview last night with a former Fed govener who was asked what other tools might be more effective and she had basically no answer.

To me, the house of cards fall real quick and has huge ramifications if this propping of be middle class goes away.