Signing Off For a While
As some may know, I am moving to LA and start a new job shortly, including a whole new coverage universe (small/mid tech and materials). Add a new baby, I am not likely to have a lot of time to keep up on the board for a while. However, I have had extra time recently and wanted to leave a post containing some of the thoughts occupying my mind recently. Note, I write as if what I am saying is fact when it is probably better characterized as informed opinion. Sorry for the length of the post - at least it is original thought though. Enjoy.
1) Greenspan is taking a disproportionate blame for the housing bubble. Among other things, bubbles not only require liquidity but also a disregard for risk. The disregard for risk was apparent during the tech bubble when the metrics were widely published but people seem to have forgotten the consideration when evaluating the housing bubble.
I don’t know how many people I talked to during the 2000-2006 years who said real estate is the best investment possible and it never drops in value. The same reckless disregard was applied by the lenders because nobody was being held accountable. Not the brokers, not the banks and not the investors. Cheap money does not raise credit ratings or increase people’s incomes.
The Greenspan haters like to cite his speech in 2003 when he talked about the virtues of ARM’s. I doubt Joe Blow decided to buy a house or refi based on those comments. Greenspan is simply an easy target relative to the anonymous bankers, brokers and purchasers.
2) The bursting of asset bubbles are inherently disinflationary. The collapse typically destroys excess wealth and reins in the appetite for risk to more moderate levels. Given this, cuts in interest rates is warranted. In contrast, in 1929 and in 1989 central banks failed to cut rates adequately in the face of the collapse of asset prices the result was long deflationary spirals.
3) On a general level, I would prefer an environment conducive to bubbles than not. Several of the bubbles over the last 200 years – autos, railroads, and technology – have lead to meaningful improvements in life. I read somewhere we are likely to see a major bubble emerge in alternative energy. I say great. Imagine how the world could change for the better if a few hundred billion went into the development of new sources of energy. Some will get rich, some will lose their shirts but the world will be better. Unless the bubble is in tulips or beanie babies, bubbles are not necessarily a bad thing.
4) Despite my comments, I do believe the economy overreacts in both directions via feedback loops. As such, I believe government intervention, designed to limit the damage, is appropriate even given the government’s typical incompetence. While certain posters’ comments about the value of allowing the market/economy to sort it out have tremendous merit, I think they underestimate the potential for irrational follow up.
The phenomenon of bank runs is a perfect example of what I am thinking. Bank runs occur when people’s faith in the bank lapses. While the bank may have the resources to survive the economic issues testing the depositors’ faith, the act of the bank run undermines it. On an individual basis, a run on a bank is not a major issue but when it spreads you have major problems, which is exactly what happened in 1930. The willingness of the Fed and the government to intervene is a major reason why bank runs are so infrequent in the United States. Prior comments made by me about a housing bailout were made with this in mind.
5) In my opinion, the key question with regards to whether we are looking at stagflation is whether the rise in commodity prices is a supply or demand driven. If it is demand driven, the prices will ease when the economy slows. In this case, China is the primary factor affecting demand and when their central bank raises rates in response to inflationary pressures or lets the Yuan rise, their economic growth should decelerate, easing commodity prices.
In contrast, if it is a supply issue, then we are more likely looking at stagflation. OPEC’s actions, government intervention in Venezuela and Russia, and the lack of significant new production from the integrateds make that a real possibility with oil. Other commodities have their own issues with supply that might also be superceding demand issues.
The reality is it is probably a mixture of both incremental demand and an inadequate supply response. To the extent that one dominates the other provides you with the outcome. I have sided with the demand side, believing Chinese economic growth is not sustainable at 11% and will fall below 10%. I still think that and still believe it will cause a meaningful pullback in commodity prices, at least in the short run. However, the floor on prices is probably higher than I once believed.
6) I read a quote, I cant recall who said it, that capitalism is inherently deflationary while socialism is inherently inflationary. I think there is something to this and it is why I have generally been less concerned about inflation than many others. On a relative basis, we are much less socialist than we were 30 years ago. That said, the trend might be changing with the socialist/centrally planned economies impacting commodities overseas and the potential election of the Democrats in the US – Bill Clinton had economic policies more Republican in nature than what Obama and Hillary have suggested.
7) Although there are a lot of reasons to continue to be bearish, a major reason to reconsider is the “Bush is Gone” thesis. Even if the Dems roll back the tax cuts, the overall perception of the country both by Americans and foreigners might inspire more investment in public equities. Off hand, I guess that psychology is probably worth a couple of multiple points by itself.
8) I have heard more than a few times people make the comment that gold not only does well in inflationary periods but also deflationary periods. This is a dangerous statement. Gold is a form of currency; in a deflationary period currency holds its value relative to goods. Why then would gold increase in value relative to a currency in this environment?
During the great depression gold did increase in value despite the deflationary environment. There are a couple of key things to consider. First, the 1930’s saw an absurd number of countries default on their debt. If the deflationary spiral is so great that governments fail on making there debt payments, then yes, gold will increase in value. I don’t see that as a huge risk right now unless mushroom clouds start showing up over major Western cities – or something less dramatic but equally impactful. Second, Roosevelt outlawed the possession of gold in the 1930’s. I don’t fully know the extent of the restriction but I am going to guess this artificially boosted the value of gold. Point being, the exceptional circumstances of the 1930’s do not disprove the relationship between gold and inflation but rather reemphasize it is a form of currency thats value is based on the governments’ ability to repay its debt in current terms.
9) The United States has a necessary role in global affairs that warrants military bases oversees, membership in the UN and other engagements overseas. First, the era of the neocons is over. Even if McCain is elected, the necons have been discredited. Given that, think of our role in absence of Bush’s follies.
American intervention in Turkey, Greece, and Western Europe stabilized these countries after WWII. Same goes in Asia with South Korea, Taiwan, the Phillipines, and Japan. The ability to project power disincentives smaller countries to act aggressively toward their neighbors. North Korea and Iraq invaded because they were under the misperception that the US would not intervene – State Department screw ups. Iraq and Vietnam were disasters because we acted incompetently both in deciding to enter and in determining how to proceed.
America is at the forefront because, until the last 8 years, we have been the only country that has had the moral credibility to act in this role. Bush undermined this credibility but it can be recovered. Russia, Western Europe, and China all lack this credibility. Other countries would never allow most of these countries on their soil unless it was under the UN flag. Before you question this assumption, ask yourself why Eastern Europe is scrambling to get admitted into NATO. Its not because of the French.
No other country has the resources to intervene overseas. It requires tremendous air and naval resources to move troops around the world. China might have the capability in 10 or 20 years but not yet. Russia never had it. Europeans are wimps; they wont even intervene in their own back yard – the Balkans.
Regardless of what you think of Iran or North Korea, at some point a legitimate threat will emerge that requires us to act. Iraq in 1990 is a perfect example. Had Hussein kept Kuwait and continued on to Saudi Arabia he would have emerged as a regional power threatening American interests politically, economically, and eventually, militarily via nukes. Someone new will emerge and we will have to deal with them.
Overseas military bases are essential because they allow for the quick transportation of people and materials. In 1990, the first Marines were on the ground in Saudi Arabia in a week or two. The only way that is possible is if weapons and supplies are pre-positioned nearby – Turkey, Italy, and Germany are huge improvements over stocks held in the US. In 1986, the US bombed Libya in retaliation for it support of terrorists in Europe. The bombers flew from bases in England. Bombers attacking Serbia in 1999 came from Italy. Carriers are powerful but not all encompassing. It is also a lot more expensive to keep a carrier active in hostile seas than bombers on land.
If we abandoned Japan and South Korea, they would be forced to add nuclear forces to their military to counteract China. China has had a fairly stable nuclear policy over the years. This would be undermined almost immediately if we pulled out and these two countries developed their own arsenals.
Taking our forces home would destabilize regions around the world to no one’s benefit except opportunistic despots. The indirect economic cost, although difficult if not impossible to measure, would far supercede the direct costs of maintaining these bases. The fact that Bush has acted incompetently does not change this presuming the next administration shows even the slightest bit of intelligence in foreign affairs.
1) Greenspan is taking a disproportionate blame for the housing bubble. Among other things, bubbles not only require liquidity but also a disregard for risk. The disregard for risk was apparent during the tech bubble when the metrics were widely published but people seem to have forgotten the consideration when evaluating the housing bubble.
I don’t know how many people I talked to during the 2000-2006 years who said real estate is the best investment possible and it never drops in value. The same reckless disregard was applied by the lenders because nobody was being held accountable. Not the brokers, not the banks and not the investors. Cheap money does not raise credit ratings or increase people’s incomes.
The Greenspan haters like to cite his speech in 2003 when he talked about the virtues of ARM’s. I doubt Joe Blow decided to buy a house or refi based on those comments. Greenspan is simply an easy target relative to the anonymous bankers, brokers and purchasers.
2) The bursting of asset bubbles are inherently disinflationary. The collapse typically destroys excess wealth and reins in the appetite for risk to more moderate levels. Given this, cuts in interest rates is warranted. In contrast, in 1929 and in 1989 central banks failed to cut rates adequately in the face of the collapse of asset prices the result was long deflationary spirals.
3) On a general level, I would prefer an environment conducive to bubbles than not. Several of the bubbles over the last 200 years – autos, railroads, and technology – have lead to meaningful improvements in life. I read somewhere we are likely to see a major bubble emerge in alternative energy. I say great. Imagine how the world could change for the better if a few hundred billion went into the development of new sources of energy. Some will get rich, some will lose their shirts but the world will be better. Unless the bubble is in tulips or beanie babies, bubbles are not necessarily a bad thing.
4) Despite my comments, I do believe the economy overreacts in both directions via feedback loops. As such, I believe government intervention, designed to limit the damage, is appropriate even given the government’s typical incompetence. While certain posters’ comments about the value of allowing the market/economy to sort it out have tremendous merit, I think they underestimate the potential for irrational follow up.
The phenomenon of bank runs is a perfect example of what I am thinking. Bank runs occur when people’s faith in the bank lapses. While the bank may have the resources to survive the economic issues testing the depositors’ faith, the act of the bank run undermines it. On an individual basis, a run on a bank is not a major issue but when it spreads you have major problems, which is exactly what happened in 1930. The willingness of the Fed and the government to intervene is a major reason why bank runs are so infrequent in the United States. Prior comments made by me about a housing bailout were made with this in mind.
5) In my opinion, the key question with regards to whether we are looking at stagflation is whether the rise in commodity prices is a supply or demand driven. If it is demand driven, the prices will ease when the economy slows. In this case, China is the primary factor affecting demand and when their central bank raises rates in response to inflationary pressures or lets the Yuan rise, their economic growth should decelerate, easing commodity prices.
In contrast, if it is a supply issue, then we are more likely looking at stagflation. OPEC’s actions, government intervention in Venezuela and Russia, and the lack of significant new production from the integrateds make that a real possibility with oil. Other commodities have their own issues with supply that might also be superceding demand issues.
The reality is it is probably a mixture of both incremental demand and an inadequate supply response. To the extent that one dominates the other provides you with the outcome. I have sided with the demand side, believing Chinese economic growth is not sustainable at 11% and will fall below 10%. I still think that and still believe it will cause a meaningful pullback in commodity prices, at least in the short run. However, the floor on prices is probably higher than I once believed.
6) I read a quote, I cant recall who said it, that capitalism is inherently deflationary while socialism is inherently inflationary. I think there is something to this and it is why I have generally been less concerned about inflation than many others. On a relative basis, we are much less socialist than we were 30 years ago. That said, the trend might be changing with the socialist/centrally planned economies impacting commodities overseas and the potential election of the Democrats in the US – Bill Clinton had economic policies more Republican in nature than what Obama and Hillary have suggested.
7) Although there are a lot of reasons to continue to be bearish, a major reason to reconsider is the “Bush is Gone” thesis. Even if the Dems roll back the tax cuts, the overall perception of the country both by Americans and foreigners might inspire more investment in public equities. Off hand, I guess that psychology is probably worth a couple of multiple points by itself.
8) I have heard more than a few times people make the comment that gold not only does well in inflationary periods but also deflationary periods. This is a dangerous statement. Gold is a form of currency; in a deflationary period currency holds its value relative to goods. Why then would gold increase in value relative to a currency in this environment?
During the great depression gold did increase in value despite the deflationary environment. There are a couple of key things to consider. First, the 1930’s saw an absurd number of countries default on their debt. If the deflationary spiral is so great that governments fail on making there debt payments, then yes, gold will increase in value. I don’t see that as a huge risk right now unless mushroom clouds start showing up over major Western cities – or something less dramatic but equally impactful. Second, Roosevelt outlawed the possession of gold in the 1930’s. I don’t fully know the extent of the restriction but I am going to guess this artificially boosted the value of gold. Point being, the exceptional circumstances of the 1930’s do not disprove the relationship between gold and inflation but rather reemphasize it is a form of currency thats value is based on the governments’ ability to repay its debt in current terms.
9) The United States has a necessary role in global affairs that warrants military bases oversees, membership in the UN and other engagements overseas. First, the era of the neocons is over. Even if McCain is elected, the necons have been discredited. Given that, think of our role in absence of Bush’s follies.
American intervention in Turkey, Greece, and Western Europe stabilized these countries after WWII. Same goes in Asia with South Korea, Taiwan, the Phillipines, and Japan. The ability to project power disincentives smaller countries to act aggressively toward their neighbors. North Korea and Iraq invaded because they were under the misperception that the US would not intervene – State Department screw ups. Iraq and Vietnam were disasters because we acted incompetently both in deciding to enter and in determining how to proceed.
America is at the forefront because, until the last 8 years, we have been the only country that has had the moral credibility to act in this role. Bush undermined this credibility but it can be recovered. Russia, Western Europe, and China all lack this credibility. Other countries would never allow most of these countries on their soil unless it was under the UN flag. Before you question this assumption, ask yourself why Eastern Europe is scrambling to get admitted into NATO. Its not because of the French.
No other country has the resources to intervene overseas. It requires tremendous air and naval resources to move troops around the world. China might have the capability in 10 or 20 years but not yet. Russia never had it. Europeans are wimps; they wont even intervene in their own back yard – the Balkans.
Regardless of what you think of Iran or North Korea, at some point a legitimate threat will emerge that requires us to act. Iraq in 1990 is a perfect example. Had Hussein kept Kuwait and continued on to Saudi Arabia he would have emerged as a regional power threatening American interests politically, economically, and eventually, militarily via nukes. Someone new will emerge and we will have to deal with them.
Overseas military bases are essential because they allow for the quick transportation of people and materials. In 1990, the first Marines were on the ground in Saudi Arabia in a week or two. The only way that is possible is if weapons and supplies are pre-positioned nearby – Turkey, Italy, and Germany are huge improvements over stocks held in the US. In 1986, the US bombed Libya in retaliation for it support of terrorists in Europe. The bombers flew from bases in England. Bombers attacking Serbia in 1999 came from Italy. Carriers are powerful but not all encompassing. It is also a lot more expensive to keep a carrier active in hostile seas than bombers on land.
If we abandoned Japan and South Korea, they would be forced to add nuclear forces to their military to counteract China. China has had a fairly stable nuclear policy over the years. This would be undermined almost immediately if we pulled out and these two countries developed their own arsenals.
Taking our forces home would destabilize regions around the world to no one’s benefit except opportunistic despots. The indirect economic cost, although difficult if not impossible to measure, would far supercede the direct costs of maintaining these bases. The fact that Bush has acted incompetently does not change this presuming the next administration shows even the slightest bit of intelligence in foreign affairs.
posted by Odoacer at
3:03 PM
4 Comments:
you are beyond help.
Good luck.
I deleted my full commentary as you are a lost cause.
i agree, i disagree with almost everything you wrote. i can suggest a reading list for you as i think you need to completely change the way you think. the united states is a short, it won't be long until interest rates bottom out - it looks like mtg rates have bottomed already - and then we move into a 13 - 18 yr downturn. There is so much wrong with this country and people who think like you do that it is going to require such an ugly contraction to change the way people think and behave - which btw is the final result of the historical 72 year economic cycles.
Good luck with your new job; and as final farewell i would say that Greenspan is the worst guy in the history of the united states. He is worse than the four all time worst presidents - woodrow wilson, franklin delanore roosevelt, ronald reagan, and george w bush...you pick the order but my order is sequential. Greenspan's fraud is a good book to start with on how terrible this douchebag is and how single handedly ruined this country.
Silverado, why don't you like RR?
Statement number 11:
I just make up bullshit to fit my world view.
Ronald Regan increased the national debt more than any president in the history of the nation on a percentage basis. He is an Empire builder and a major reason for our current failure as a nation. His lesbian wife also made possible the war on drugs, which is basically an excuse to increase our jails so that we have a larger percentage of our people in jail than any other country in the world.
Give me liberty or give me death.
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