Archive for the ‘Intervention’ Category

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S&P500 Vs. Consumer Confidence

Sunday, October 31st, 2010

The following commentary and chart is excerpted from the October 14, 2010 ContraryInvestor.com commentary.  I find it interesting in a variety of different ways, and it raises a lot of questions with regard to the stock market, consumer confidence, QE1, and QE2…

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“We have not touched on consumer confidence for a good while, but now is the time.  It’s time because of the certainty of QE ahead.  Again, absolutely key question being, will QE2 positively influence the real economy?  QE I was a strike out.  And what of QE2?  We believe a key indicator to watch as to whether QE2 will transmit to the real economy is the present conditions component of the headline consumer confidence index.  Clearly the aim of QE2 is to inflate asset prices even further, let’s not beat around the bush about it.  QE I inflated financial and commodity prices, but left real world prices of leveraged residential real estate and commercial real estate untouched.  Moreover, QE I did not help headline consumer confidence recover.  We’ll spare you the chart, but headline consumer confidence continues to rest at levels historically consistent with recession.  Very quickly, the headline consumer confidence report is driven by two subcomponents that are present conditions and future expectations.  Historically, the present conditions component of the headline number has been highly directionally correlated with the equity market over time.  You can see exactly this in the chart below.  Of course without the Fed overtly telling us this as a driver of their QE2 decision making, they are implicitly hoping higher stock prices (the assumed wealth effect) will engender accelerating consumer confidence, thereby motivating consumers to borrow and spend (or at worst just spend).  This likewise had to be a key rationale of QE I as the Fed is surely aware of this prior cycle linkage between stock prices and confidence in present conditions.

But what stands out like a sore thumb in the chart above is that the present conditions component of the confidence report never recovered at all even as equities experienced one of the greatest 13 month rallies in history under QE I (exactly as we marked in the chart) from March of 2009 through April of this year.  Moreover, and as is also clear, even as heavy Fed POMO was kicked off in August and September that lifted stocks to their greatest September gain in over seven decades, the present conditions component of the consumer confidence survey continued to deteriorate up through the most recent numbers.  Message being?  At least for now consumer confidence is not being bolstered by financial asset price inflation.  A complete anomaly relative to historical experience.  QE2 is clearly a bet this anomaly will fall back in rhythm with historical experience.  So, we need to intently watch the present conditions component of the consumer confidence report ahead for clues as to whether QE2 will positively impact the real economy through bolstering consumer confidence, or otherwise.”

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A Special Note concerning our economic situation is found here

SPX at 1183.26 as this post is written


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Additional Quantitative Easing – Comments

Friday, August 13th, 2010

Monday’s (August 9) Barron’s had an article titled “Time to Print, Print, Print.”

The article provides an overview of the concept of Quantitative Easing (QE) in the context of our current economic situation.

I don’t agree with many of its conclusions and insinuations, however.  In particular, the article seems overly positive on the idea of Quantitative Easing and its supposed positive effects, without providing significant discussion of its risks.

Quantitative Easing is an especially important concept now as I believe additional large-scale QE will continue to occur.  There are an array of risks embedded in such QE efforts.  Perhaps chief among these risks is the risk that excess “money-printing” poses to the currency.  The Barron’s article does acknowledge this by saying “Promiscuous growth in the money supply, of course, can both fan inflation and debase the currency.”  Although there has been virtually no commentary on the vulnerability of the US Dollar to substantial declines, I believe that such vulnerability does exist, as I discussed in the July 30 post.

Another large risk to QE efforts is that should QE prove successful in driving down interest rates, such a policy foments asset bubbles.  This is especially notable as many believe the housing bubble is but one example of an asset bubble that was caused by ultra-low interest rate policies.  My numerous posts concerning asset bubbles can be found under the “Bubbles (Asset)” category.  Asset Bubbles, and their future resolution, are an epic problem.

Most people fail to acknowledge the current existence of asset bubbles.  The Barron’s article seems to imply that no bubbles exist when it says “Damn the risks of triggering a bit of inflation and some modest investment bubbles.”

I will likely comment more upon the idea of QE once it is further implemented.

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SPX at 1083.61 as this post is written

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Blinder And Zandi Paper – My Comments

Sunday, August 1st, 2010

Alan Blinder and Mark Zandi released a paper dated July 27 titled “How The Great Recession Was Brought To An End.” (pdf)

From the report, page 1: “In this paper, we use the Moody’s Analytics model of the U.S. economy—adjusted to accommodate some recent financial-market policies—to simulate the macroeconomic effects of the government’s total policy response. We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government’s response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.”

my comments: Needless to say, I don’t agree with many aspects of the report’s conclusions, focus and methodologies.

Much of my thoughts on intervention efforts, which includes stimulus, can be found under the “Intervention” category.

The main reason I highlight this report is for reference purposes.

I think the report will prove highly memorable, an iconic piece of the period.

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SPX at 1101.60 as this post is written

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Multipliers Used In Stimulus Plans

Tuesday, June 1st, 2010

John Taylor’s May 21 blog post discusses the stimulus multiplier used for the ARRA and new research from the IMF with regard to actual stimulus multipliers.

The chart shown has immense significance on a variety of fronts, assuming that the IMF research is representative of the effectiveness of stimulus spending.

We, as a nation, do ourselves no benefit by continually overestimating the (gross) benefits to be derived by stimulus actions.

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As I’ve previously commented, I don’t believe the concept of stimulus spending is well understood.  My previous writings on stimulus can be found here.  Stimulus spending is of particular noteworthiness as I believe that we will continue to enact stimulus spending in significant amounts.

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SPX at 1089.41 as this post is written

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Milton Friedman On Monetary And Fiscal Policy

Sunday, May 16th, 2010

I found this passage from Milton Friedman in 1958, as seen on John B. Taylor’s blog, to be notable, especially given the immense monetary and fiscal policy actions taken to “improve” our economic situation:

“The available evidence…casts grave doubt on the possibility of producing any fine adjustments in economic activity by fine adjustments in monetary policy….and much danger that such a policy may make matters worse rather than better…The basic difficulties and limitations of monetary policy apply with equal force to fiscal policy.

Political pressures to ‘do something’ …are clearly very strong indeed in the existing state of public attitudes.

The main moral to be had from these two preceding points is that yielding to these pressures may frequently do more harm than good. There is a saying that the best is often the enemy of the good, which seems highly relevant. The attempt to do more than we can will itself be a disturbance that may increase rather than reduce instability.”

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SPX at 1135.68 as this post is written

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Impact Of Government Stimulus On GDP

Thursday, May 13th, 2010

John B. Taylor had a blog post on May 1, 2010 that discussed the impact of government stimulus on GDP.  The post is titled “Latest Data Continue to Show Little Impact of Government Stimulus on GDP.”

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One of the reasons that I write extensively about interventions, which includes stimulus programs,  is that I believe we, as a nation, will continue to do them.  This is highly problematical for a number of reasons.  I’ve previously written of this issue in the article “My Overall Thoughts On The Bailouts, Stimulus Measures and Interventions”.

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SPX at 1171.67 as this post is written


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BusinessWeek Article: “The Case For More Stimulus”

Tuesday, April 13th, 2010

The April 19 BusinessWeek has a story titled “The Case for More Stimulus,” along with this interesting accompanying chart (pdf), “Stimulus That Makes a Difference.”

Of course, those familiar with this blog know that I tend to disagree with this type of article on various fronts.

One question (among many) that supporters of further stimulus should be asking is if stimulus is working (and there is solid evidence it is not, as seen in many of my blog posts), then why is further stimulus necessary?

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SPX at 1195.05 as this post is written

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The Latest Housing Intervention

Monday, March 29th, 2010

Saturday’s Wall Street Journal chronicles the latest housing intervention plan in a story titled “Mortgage Plan Remodeled Again.”

I have written extensively about the residential real estate problems and dynamics thereof.

It strongly appears as if we, as a nation, have come to a place where there is hardly a real estate intervention that we don’t like.

I think this situation is one filled with peril, as I strongly believe (and have written extensively of) the unintended consequences and hidden risks of interventions.

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SPX at 1166.59 as this post is written

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Comments On The HIRE Act

Sunday, March 21st, 2010

On Thursday President Obama signed the HIRE Act, a jobs stimulus.  The summary of the signing can be found here.

There is also a transcript of his remarks found here.

I could make many comments about this jobs stimulus.  However, as an intervention measure, it has many of the same characteristics of other interventions.  As such, my previous extensive comments about interventions are highly relevant.  Those posts can be found listed under the “Intervention” Category.

However, I will make two comments specific to this legislation:

First, the ARRA was supposed to be a “jobs creation” legislation.  On various levels it has not performed as intended with regard to job creation.  As I’ve pointed out before, we should be very cognizant of how previous stimulus bills have fared before enacting new ones.

Second, in President Obama’s comments he said, “I’m signing it mindful that, as I’ve said before, the solution to our economic problems will not come from government alone.  Government can’t create all the jobs we need or can it repair all the damage that’s been done by this recession.”  This entire idea of “creating” jobs or “stimulating” job creation needs to be intensely scrutinized.  Should government be attempting to “create” jobs – as seems to be the current widely accepted theory – or should job creation and job growth be an inherent feature of a strong economy?

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Here is a link to a blog series I have previously written titled “Why Aren’t Companies Hiring?” :

http://www.economicgreenfield.com/2009/07/24/why-arent-companies-hiring/

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SPX at 1159.90 as this post is written

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Keynesian Theory – A Few Comments

Thursday, February 25th, 2010

Up to this point, I have yet to mention “Keynes” or any derivative thereof.  The reason for this is simple – I don’t believe that the efforts taken to stimulate the economy are reflective of the theories that Keynes espoused.  Instead, they are a type of “bastardized” Keynesian Theory – used by various parties in an attempt to “legitimize” the tremendous amounts of money spent on various stimulus plans.

I’ve been meaning to write a blog post about this and other related topics.  I still intend to write a fuller post.  However, what prompted me to write about this now is a very interesting article I ran across in Fortune Magazine.  It is a February 5 interview with Allan Meltzer and can be found at this link.

As Meltzer indicates in the interview, Keynesian Theory is not aligned with the stimulus actions we, as a nation, have undertaken.

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SPX at 1105.24 as this post is written

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