China and India bubble ready to pop
China and India share a dubious honour as the global crisis wanes: they are home to two of the world’s most obvious stock bubbles.
Well, there you have it. He's done a great job navigating us through these treacherous economic times. I've quoted his words of wisdom many times on this blog. Ignore his current warning at your own peril.
Happy hour is lasting a bit too long for comfort. If stocks are rallying because of economic fundamentals, then so be it. If they are rallying because of easy-money policies, then Asia’s stability is more fiction than fact. It’s time for monetary bartenders to start declaring closing time.
You certainly know where I stand. It must frustrate the heck out of the Fed right now to know that deflation is still the imminent threat but people keep asking them about exit strategies.
A blast from the past...
Rarely have monetary-policy makers faced a more daunting assortment of things that could go awry. They include a global credit crunch, swooning stock markets, out-of-whack currencies, hedge-fund blowups and whether to fret more about inflation or recession -- or both. - William Pesek, September 7, 2007
Stag,
ReplyDeletehttp://newsfrom1930.blogspot.com/2009/10/favorites-of-week-oct-13-oct-18-1930.html
From the above link:
Editorial: Gov. Black of the Atlanta Fed. takes a defeatist attitude in saying that the US must accept a lower standard of living and that the “load of debt around our necks” is the root of the problem. Contrast this with President Hoover's optimism: “Any retreat from our American philosophy of constantly increasing standards of living becomes a retreat into perpetual unemployment and the acceptance of a cesspool of poverty for some large part of our people.” Can Gov. Black really say going into debt has been a net negative for the American people? “Has there been any greater blessing than the building and loan associations which have lent billions of dollars to millions who would never otherwise have had the means to build.” Homeownership has stimulated people's desire for the other comforts of life, resulting in activity and progress; the fact that some excesses have taken place doesn't negate our whole course. “Governor Black says that what is needed in American business today is not confidence but courage. But surely courage lies in going forward, not backward. The American emblem is an eagle not a crab.”
"If they are rallying because of easy-money policies, then Asia’s stability is more fiction than fact. It’s time for monetary bartenders to start declaring closing time."
ReplyDeleteWelcome to the US economic development plan asian tigers! We never thought you would arrive!
Mark,
ReplyDeleteToilet paper squirrels make sense, but what about paper towels? I am LONG bounty:
http://tinyurl.com/yjr5wpb
mab,
ReplyDelete"The American emblem is an eagle not a crab."
No crab could have done the following. Damn we're good.
Where Eagles Dare
http://www.youtube.com/watch?v=pRHqtbt3ORc
Please don't tell me it's just a movie. I'm trying to be all patriotic and stuff.
GYSC,
ReplyDeleteI am VERY long paper towels. :)
Stag,
ReplyDelete"The American emblem is an eagle not a crab."
Actually, here's the new American emblem:
http://www.natureserve.org/images/logos/goldman_sachs_logo_0411.jpg
The new emblem is Top Secret for the time being so try and keep the intel on the down low.
http://www.youtube.com/watch?v=y-YHw1sqjL8
It all sounds like some bad movie.
Nightmare on Main St.
Completely unrelated thought:
The requirement of exponential debt growth and the authority to CONjure money into existence are powerful forces that should not be taken lightly.
It's a good thing our banker are patriotic and stuff. I'd hate to see what would happen if bankers put their own self interests above the interests of the country. Seriously, it would be like financial terrorism.
mab,
ReplyDelete"I'd hate to see what would happen if bankers put their own self interests above the interests of the country. Seriously, it would be like financial terrorism."
It would probably lead to excessive sarcasm in the blogger community! ;)
mab,
ReplyDeleteMy girlfriend and I were watching the financial news and the CEO of Coach was on. I heckled of course and I bring it up because you have heckled Coach in the past as well.
She then described how her friends think nothing of buying $200+ purses. Meanwhile, her purse cost less than $10 on sale.
Purses and wallets are much like diamonds I guess. Most of their value is based on what people think other people think they are worth.
I've been using the same cheap black leather swiss army wallet for MANY years. No designer name. No massive marketing campaign. It is functional and well built. There is absolutely nothing I would change about it. It meets my needs exactly.
Out of curiosity, I looked at the Coach website and found its closest tri-fold match. It cost roughly 5x what I paid and actually lacks a feature that mine has (my driver's license is behind a thin mesh therefore making it visible without removing it). On the other hand, mine isn't made from "Water buffalo calfskin". I must be really missing out. Perhaps the hide of water buffalo offers vastly superior protection against water damage and I'm simply too ignorant to know better, lol.
Water buffalo? People are nuts. We knew that though. Right?
http://www.newworldencyclopedia.org/entry/Buffalo
"Water buffalo leather is very thick and strong and is used to make, among other things, shoes and motorcycle helmets (Olson 2006)."
The LAST thing I am looking for in a wallet is "very thick". Call me silly. Other than the price, that's my biggest complaint when I see "designer" wallets. More is not better. More is actually a pain in the... well, you know. Literally!
Stag,
ReplyDeleteShe then described how her friends think nothing of buying $200+ purses.
The money consumers blow on vanity is unbelievable. I thought it was stupid crazy 10 years ago. But the housing bubble period took the stupidity to a level beyond my comprehension.
Investors are beyond my comprehension too. It's mind numbing to think that in 2007, Coach had an equity market cap of almost $20 billion. Even today, Coach has a market cap of ~ $11 billion. And Coach isn't an isolated case either. Scores of these multi-billion dollar vanity companies exist.
This kind of idiocy could only exist in a fake eCONomy. Take banks for instance. A year ago, they were broke. Today, banks are posting record profits and paying record bonuses. All against a backdrop of soaring unemployment, stagnant wages, record deficits, negative net national savings, collapsing sales (S&P 500 sales are down $1.52 trillion over the past 12 months), collapsing house prices, drastically underfunded corporate pension, etc. The list goes on and on. But the list is meaningless against an unbounded credit system.
Object permanence doesn't exist in the financial community. Put losses under a big TARP and they magically disappear. Change an accounting rule or two while you're at it.
http://en.wikipedia.org/wiki/Object_permanence
Object permanence is the understanding that objects continue to exist even when they cannot be seen, heard, or touched. Jean Piaget argued that object permanence is one of an infant's most important accomplishments, as without this concept, objects would have no separate, permanent existence.
Apparently, TPTB see no point in limiting banks and banker bonuses based on infantile CONcepts such as impaired assets.
Productive work is for suckers. I'm serious. Credit expansion shams are where the money is.
mab,
ReplyDelete"This kind of idiocy could only exist in a fake eCONomy."
Oil is getting the heck stimulated out of it again. Oh joy.
Stag,
ReplyDeleteHow many investors and mutual fund bagholders are thinking that if the markets can only get back to 2007 levels they will be able to cash out?
Back in 2000, it was "one more double and I'm retired and comfortable forever". Now, I believe it's 'just get me back to where I was in 2007".
No way can so many get out at once. So many of our "assets" are wealth traps imo.
mab,
ReplyDelete"No way can so many get out at once."
Fool me once (2000 stock bubble), shame on me.
Fool me twice (2007 stock bubble), shame on me twice.
Fool me three times (2009 stock bubble), shame on me three times.
At what point does survivalist instinct kick in?
I'm not quite believing in the "what doesn't kill us makes us stronger" theory right now.
http://www.youtube.com/watch?v=HE3Wbd5_o9U
Rocky was a work of fiction. You cannot actually use your face as a shield when boxing, lol.
Mark,
ReplyDeleteGlad you liked the link!
Bernanke was just asked (on TV) if he was aware that investors aren't being told what safe is! The questioner pointed out that investors nearing retirement aren't told about TIPS and I-Bonds and are instead told to buy stocks, lol.
ReplyDeleteYou go quy! Hahaha!
Not only did Bernanke agree with his point but he then went on about basic financial literacy in general. He even went so far as to mention payday loans and people living paycheck to paycheck. Go figure.
Stag,
ReplyDeleteI've been trying to figure out the details of how the Fed's stealth bank re-capitalization works (assuming that is actually what is taking place).
http://en.wikipedia.org/wiki/Capital_adequacy_ratio
http://en.wikipedia.org/wiki/Capital_requirement
We know that the Fed is exchanging mountains of cash for mortgage paper. If nothing else, that action will increase bank capital adequacy ratios by increasing cash and likely government securities (zero risk weight) and decreasing mortgage assets (50% risk weight). The denominator of the formula is decreasing due to the fed's actions. The Fed is also increasing the numerator as they are clearly paying more for the morgage assets than the private market would. Hooray, the banks are saved.
The entire CONcept of the CAR is dubious in my view. The most important component, Tier 1 capital, is primarily paid in capital and retained earnings. But since the retained earnings are driven by asset value increases, the CAR formula seems to naturally encourage asset inflation and a ponzi eCONomy. In other words, the CAR ratio improves as long as asset values increase the numerator more than the denominator (risk weights). Bubble asset values and monster bonuses are a killer though because after asset valuations revert, the ratio is decimated.
The CAR really encourages securitization too. Securitization creates churn which increases prices and frees up cash for yet more churn. Is it any wonder we have bubbles? Also, falling interest rates are a giant freebie for banks as asset values increase immediately. But even lower rates can't increase bubble asset valuations.
The above aside, I don't see how any of this stealth recapitalization has much if anything to do with the real economy. Our economy still has way to much debt per output imo. Moreover, I don't see any way our economy can withstand higher interest rates. Asset valuations and capital ratios would go into reverse.
The CAR ratio came out of the 1988 Basel Accord. It was implemented around the globe by the early 1990s. The securitization and ledger games the Basel Accord spawned have never been exposed to a rising interest rate environment. In short, I believe out debt saturated environment can't handle higher rates for any extended period. So lower rates it shall be (I have no idea how the Asians eel about that).
We've traded a portion of future growth to pay for present day banking idiocy.
Any comments or thoughts would be appreciated.
mab,
ReplyDeleteYou know more than I do about all of this. I can tell you what my gut thinks about what you have to say though.
"We know that the Fed is exchanging mountains of cash for mortgage paper." Gut agrees.
"Also, falling interest rates are a giant freebie for banks as asset values increase immediately. But even lower rates can't increase bubble asset valuations." Gut agrees.
"The above aside, I don't see how any of this stealth recapitalization has much if anything to do with the real economy." Gut agrees.
"Our economy still has way to much debt per output imo." Gut agrees.
"Moreover, I don't see any way our economy can withstand higher interest rates. Asset valuations and capital ratios would go into reverse." Gut agrees.
"We've traded a portion of future growth to pay for present day banking idiocy." Gut agrees.
Stag,
ReplyDeleteAlmost everyone agrees that central planning does not lead to the best economic outcomes. The thing is, we have big time central planning - around banks, banker bonuses and asset values. *sigh*
CAR = (T1+T2)/a, where a = risk weigthed assets. Falling asset values are a killer. Same with banker bonuses which come directly out of T1.
The CAR formula could easily stifle Bernanke's fractional reserve money multiplier theory. But Bernanke and Geithner know this. They were not very forthright with CONgress during the TARP testimony when they said that new cash in banks would lead to multiples of new loans. That would only be true if asset values were raised enough. Also, CAR helps explain why, in aggregate, banks create credit first and then central banks create reserves after the fact. Banks are not so much constrained by reserves, but rather by asset values. Those asset values would get crushed with higher interest rates imo.
My gut tells me that if mark to market accounting changes won't do the trick, we'll get another rule change. Exponential growth MUST CONtinue.
It all seems to add up. The early 1990s (when CAR was implemented) is when asset values seemed to become detached from norms. It also explains why piling up reserves had little effect in Japan and so far has had little effect here. I'm sure over-indebtedness has something to do with it too. Bernanke can inflate Wall St. assets all he wants. But if private credit demand remains negative he's pushing on a string.
One more thought. The interest on $1.5 trillion in mortgage paper will now be flowing to the fed, and not banks and investors.
mab,
ReplyDelete"My gut tells me that if mark to market accounting changes won't do the trick, we'll get another rule change."
You'd think removing mark to market would be enough! It's basically an old economics joke.
CEO: What's this thing worth?
Chief Economist: What would you like it to be worth?
It's a good thing then, that stock market bubbles have no impact at all on long-term Chinese economic growth, which is driven by basic economic fundamentals when you move from a subsistance to a modern market economy.
ReplyDelete