Archive for the ‘Bubbles (Asset)’ Category

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Mishkin’s Previous Comments On Bubbles

Sunday, April 25th, 2010

On April 8 I commented upon William C. Dudley’s “Asset Bubbles” speech.

In that speech, he refers to Frederic Mishkin’s speech of May 15, 2008.  It should also be noted that Mishkin offered similar thoughts in a Financial Times op-ed of November 9, 2009.

There is much I can comment about in each of Mishkin’s commentaries about bubbles.  For now, I will limit myself to the following:

Here is a passage from the aforementioned 2008 speech which I found most interesting:

“…monetary policy should not try to prick possible asset price bubbles, even when they are of the variety that can contribute to financial instability. Just as doctors take the Hippocratic oath to do no harm, central banks should recognize that trying to prick asset price bubbles using monetary policy is likely to do more harm than good. Instead, monetary policy should react to asset price bubbles by looking to the effects of asset prices on employment and inflation, then adjusting policy as required to achieve maximum sustainable employment and price stability. This monetary policy response should prove sufficient to prevent adverse macroeconomic effects of some types of asset price bubbles.”

I interpret this (and other points in his speech) as (in effect) saying that monetary policy shouldn’t be used to prevent bubbles, but it should be used to “clean up the mess” should they “pop.”

This “mindset” seems to be prevalent now among policy makers.

I believe this overall “treatment” of bubbles is frightfully perilous, has already created immense damage, and will end very badly.

It appears as if not only are we (as a nation) downplaying the risks of bubbles, but also are continually unable to identify their existence.

As I wrote on March 29: “I strongly disagree with those who think that bursting bubbles are not something to be unduly concerned about….While it may be pleasant to ignore the existence of bubbles, and downplay the potential significance of their bursting, I believe that the existence and prevalence of bubbles in today’s worldwide economy is perhaps the largest threat to achieving Sustainable Prosperity.”

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Asset Bubble Speech By William C. Dudley

Thursday, April 8th, 2010

Yesterday William C. Dudley, President and CEO of The Federal Reserve Bank of New York, gave a speech titled “Asset Bubbles and the Implications for Central Bank Policy.”

Although there are many parts of this speech with which I disagree, I found this speech noteworthy and interesting.

I could make exhaustive comments about many parts of this speech.  However, for now, I will comment on two aspects:

This speech continues the trend of other Federal Reserve (as well as a general widespread perception) statements that imply that there is an institutional belief at The Federal Reserve that there are no asset price bubbles in existence now, or at least not in the United States.  Dudley does say that “I am going to be a bit of a heretic and argue that there is little doubt that asset bubbles exist and that they occur fairly frequently.”  However, he does not name any that are currently in existence – he just talks of those in the past.

Our societal inability to spot and prevent asset bubbles is problematical.  As I have stated before, there are many bubbles in existence now, and they represent a grave danger to our economic system.

Another interesting statement that Dudley makes is the following, which is very noteworthy not only to investors but to others (including policy makers) as well:

“…a bias toward optimism may also play an important role. Studies have found that most people believe that they are above average in terms of their acumen, be it as investors, car drivers or in other activities.5 This overconfidence may cause some people to keep investing in the asset, even when they are skeptical about its valuation because they are overly confident that they will anticipate the end of the bubble and be able to get out in time.”

Dudley’s speech also references a 2008 speech by Frederic Mishkin of which I may comment upon later.

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Greenspan’s Most Notable Phrase

Monday, March 29th, 2010

Alan Greenspan recently gave a lengthy video interview on Bloomberg.  A short summary is found at this link; the actual video is the first listed near the bottom of the article.

I found the video to be most interesting.  Greenspan elaborates upon his recent “The Crisis” paper, which I mentioned here.  As well, he discusses many other issues.

While there is much I can comment upon in this interview, I want to focus on a key phrase he mentions with regard to what is now happening:

“You can see the whole blossoming of finance.”

I believe this to be the most notable of all of Greenspan’s famous phrases.

I think we are seeing a blossoming – not of “finance”, but instead of (hyper)bubbles.  I think there are many bubbles of severe magnitude throughout the worldwide economy.  I have previously written of these bubbles in a variety of posts.

I strongly disagree with those who think that bursting bubbles are not something to be unduly concerned about.  In fact, Greenspan says in the interview, “Remember that the bursting of the bubble by itself is not a big catastrophe. We had a dot-com bubble, it burst, and the economy barely moved.”

While it may be pleasant to ignore the existence of bubbles, and downplay the potential significance of their bursting, I believe that the existence and prevalence of bubbles in today’s worldwide economy is perhaps the largest threat to achieving Sustainable Prosperity.

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Article On Asset Bubbles

Tuesday, March 9th, 2010

On January 25 Fortune had an article on asset bubbles titled “Beware the 4 new asset bubbles.”

The four purported bubbles mentioned in the article are Gold, oil, the stock market, and Treasuries.  I have discussed each of these markets, with the exception of oil, in previous posts.

I found the logic and discussion in the article interesting, although I did not agree with various aspects of the article.  I especially disagree with the logic about housing, for reasons I have recently written about.

It is very important for investors to understand whether the markets they are investing in are indeed experiencing bubbles.   My previously written posts are found under the “Bubbles” Category.

Of course, the existence and prevalence of bubbles also has massive ramifications for the economy, especially when viewed from the standpoint of Sustainable Prosperity.

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Roubini Interview Concerning Bubbles

Wednesday, January 27th, 2010

Here is a link to an interview today with Nouriel Roubini in which he discusses bubbles:

http://www.cnbc.com/id/35078010

I would argue against those who believe that bubbles could start to form or that they are just beginning to form.  I strongly believe that there are many bubbles in existence right now, and the implications of such are massive.

Over the last few months I have written quite a few posts on bubbles, and those posts can be found on in the “Bubbles” category listed on the right-hand side of the home page.

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Characteristics Of The Housing Bubble

Friday, January 8th, 2010

Given the incredibly outsized intervention efforts in the residential real estate market, I think it is important to examine some dynamics of the real estate bubble.

Here is a chart from the 12/15/09 Contrary Investor commentary that I believe is interesting, as it depicts some underlying residential real estate fundamentals.  It shows the equity and mortgage debt situation.  The underlying data is from the Federal Reserve Flow of Funds:

http://www.contraryinvestor.com/

As far as real estate prices are concerned, I would like to show two charts, both from the CalculatedRisk blog:

http://www.calculatedriskblog.com/

The first chart was posted on 12/21/09 and is the LoanPerformance Price Index from 1976:

Next, a chart posted on 12/29/09 showing the LoanPerformance Index as well as Case-Shiller, from January 2000:

As others have commented, it appears as if the overall intervention efforts are aimed at reflating (or to re-inflate) the housing bubble.  Conventional (investment) wisdom has held that reflating a burst bubble is impossible.

However, I think given the tremendously outsized intervention efforts in housing, we are truly in a unique situation.  I don’t believe there has ever been such a large intervention effort in our country, at least in the last 150 years.  Depending upon how one would measure such intervention efforts, it might even be among the largest interventions in world economic history.

A casual observer might assume that such an outsized effort would be destined to be successful.  However, (economic) life is not that simple.

From an ”all things considered” standpoint, I don’t believe the residential real estate bubble has actually burst.  It appears to me that it has somewhat deflated.  I base this view on a variety of fundamental and technical factors. 

Assuming this view is correct – that the residential real estate hasn’t popped – the implications are immense.   I think it is likely that one of two possibilities will occur from here, and each could happen in a relatively rapid fashion.  The first possibility is a “successful” reflation of the residential real estate market, with accompanying economic activity.  The second possibility is a collapse of the residential real estate market with accompanying economic repercussions.  As to the path real estate will travel from here - my previous writings on interventions, bubbles and real estate indicate my thoughts on the subject.

If a “successful” relation occurs, one is led to wonder as to the characteristics of such a “successful” reflation of the real estate bubble.  Among other critical questions is how long would such a reflation last?

I think it very important to note the quality and durability of the economic activity that occurred in the first phase of the bubble, which peaked in 2006.  Can one hope for any better outcome during a subsequent reflation?

These issues are critical to the concept of Sustainable Prosperity, of which I have previously frequently commented.

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Ben Bernanke’s January 3rd Speech

Wednesday, January 6th, 2010

I would like to make a couple of comments regarding the speech Ben Bernanke gave on January 3.  It was titled “Monetary Policy and The Housing Bubble.” (pdf)

I could make a significant amount of comments regarding this speech, as I partly or fully disagree with many of the points presented.

I will, however, briefly comment on a couple aspects of the speech.  First, from page 21:

“Although the house price bubble appears obvious in retrospect–all bubbles appear obvious in retrospect–in its earlier stages, economists differed considerably about whether the increase in house prices was sustainable; or, if it was a bubble, whether the bubble was national or confined to a few local markets.”

I agree with the general premise that bubbles aren’t always obvious.  As I said in my December 2 post, “Some bubbles are harder to spot than others.”  As far as the housing bubble was concerned, in my opinion it was a relatively easy bubble to identify as it occurred, based upon a variety of characteristics.

Second, from page 22:

“That said, having experienced the damage that asset price bubbles can cause, we must be especially vigilant in ensuring that the recent experiences are not repeated. All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs.”

I think it can be strongly inferred from this excerpt, as well as other statements that he has recently made, that he doesn’t believe there are asset bubbles currently in existence.  My analysis indicates otherwise, as I discussed in my December 2 & December 16 posts.

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Larry Summers On Bubbles – March 13 2009 Speech

Wednesday, December 23rd, 2009

As I, as well as others, have been frequently mentioning bubbles, I thought it would be interesting to post a few comments (excerpts) that Larry Summers made concerning their effects during his March 13, 2009 speech.  I found these comments to be very interesting, especially in light of our current economic condition and prospects for Sustainable Prosperity.

Here is a link to that speech, which was made to The Brookings Institution:

http://www.brookings.edu/events/2009/0313_summers.aspx

 

“Our single most important priority is bringing about economic recovery and ensuring that the next economic expansion, unlike it’s predecessors, is fundamentally sound and not driven by financial excess.
This is essential. Without robust and sustained economic expansion, we will not achieve any other national goal. We will not be able to project strength globally or reduce poverty locally. We will not be able to expand access to higher education or affordable health care. We will not be able to raise incomes for middle class families or create opportunities for new small businesses to thrive.”
later:
“We have seen housing prices reach unsustainably high levels and credit spreads reach unsustainably low levels in the middle of this decade. And we saw bubbles in technology in the late 1990s.
Bubble driven economic growth is problematic because of disruption and dislocation – affecting those who took part in the bubble’s excesses and those who did not. And, it is not entirely healthy even while it lasts.” 
later:
“If growth in the coming years is not to be driven by asset price inflation-induced consumption, other engines of growth must be identified. These forms of growth should be sustainable and shared by the majority of American households.” 
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Article On Asset Price Bubbles

Wednesday, December 16th, 2009

In my opinion, the existence of asset price bubbles is of paramount importance.

I have recently written a few posts on the subject.  I would now like to comment on a Wall Street Journal article from Monday titled “Economists Warn of Asset-Price Bubbles.”  Here is the link:

http://online.wsj.com/article/SB126074172673289729.html

First, I would like to reiterate that I believe there are many bubbles in existence right now.  This is in contrast to the commonly held theory that bubbles may form in the future if low interest rates and other stimulative measures are maintained.

Second, from the article, I completely disagree with the following excerpt with regards to “don’t appear to be taking any chances”: 

“Although global growth and financial markets are rebounding more quickly than was expected last summer, the Fed and the European Central Bank don’t appear to be taking any chances.”

I base my disagreement on several factors.  In my previous writings I have extensively written about the potential perilousness of interventions, moral hazard issues, asset bubbles, etc.

Third, I strongly disagree with this excerpt:

“The usual warning sign of new bubbles, rising inflation…”

Assuming that “inflation” refers to inflation as measured by CPI, I disagree that rising inflation is definitely one, if not the key, warning signs of new bubbles.  Without writing extensively about this, I would point out that two of the largest bubbles of the recent past (as well as from a long-term historical context) were created in periods of low (CPI) inflation: the housing bubble and the surrealisticly absurd internet stock “hyperbubble.”

I will be commenting further upon bubbles as time progresses…

 

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When Might I Become “Bullish”?

Thursday, December 3rd, 2009

In this post I would like to respond to a question that was raised in response to the final post (November 6) of my “Danger In The Markets?” series.

The question raised was “What would have to occur before you considered moving bullish?”

I will answer this question in the context of the general stock market (S&P500).  As readers of this blog know, I have repeatedly expressed doubts as to the sustainability of this stock market rally.  I continue to view it as a bear market rally, albeit a strong one.  If this indeed proves to be a bear market rally, by definition it will go below the 666 March low.  There are a variety of technical, fundamental, general economic, and “behavioral” characteristics of this stock market rally that cause me to draw such conclusions. 

Additionally, as I have previously stated there are a lot of factors and conditions in various other markets (outside the stock market) that cause me to be very concerned.  Posts explaining these concerns can be found under the “Investor” category on the right-hand side of the home page.

Another concern that I have is that, as stated in yesterday’s post, I view many asset classes as being in bubbles now.  This is a very serious condition.   Investing in bubbles can be extremely profitable on the way up; however, for the “long” investor they can produce huge losses if one doesn’t time the exit appropriately.  While I view some bubbles as being bigger than others, if the markets enter a “general liquidation” phase like they did in 2008 and most asset classes prove to be tightly correlated, as they were in 2008′s decline, there would be widespread severe losses throughout most asset classes.

A few years ago I ran across a quote that I found most valuable.  In essence, it said that the last place you want to invest is in an asset class whose bubble has popped.

To conclude, before I would change my overall stock market stance to “bullish,” I would want to see an overall market environment considerably different than that currently existent.   While I can’t exactly specify the parameters of this change, because so many factors are involved, I think a change to “bullishness” will be plain to see, if not explicitly stated, in the blog posts. 

One other thought…bear markets can last for years and can make many turns.  Assuming we are in a bear market, the ultimate low could be years away.

 

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