Smooth transition in markets

Below is today’s press release from the Fed. I have emboldened a couple of key statements.
“With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.” While this statement may be true (probably less so than we are led to believe) at the moment, ignore it. It is a “CYA” statement that provides cover for the Fed to continue pumping the economy. This statement or its equivalent will probably be in the Fed’s statement until a month or two before rampant inflation is obvious to everyone.
“The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.” This statement is inconsistent with the prior statement. It is either untrue or a diversion. There is no “smooth transition in markets” possible. While it might be possible that the Fed does actually honor this statement in a strict sense, they will merely shift their pumping to a different vehicle. To stop pumping now would mean a collapse of the mortgage market and the economy that will result in a Great Depression.
It is difficult to discern whether the Fed is merely being duplicitous or just plain wrong in their reading of the economy. After all, they have a pretty good track record for both.
If you believe what is in the statement, then I would get out of the stock market immediately. If not, then it is possible that the financial market fantasy can continue for awhile. Regardless of which you believe, be very careful. For me, I want no part in long positions in traditional stocks or bonds. This Ponzi scheme cannot go on much longer.

The differences in the absolute amount of total obligations

For some who closely follow the economic situation, it is obvious that we are headed for a disaster. There can be no happy ending. It will be a tragedy! Only the timing and shape are unknown. However, most disagree, believing this crisis is merely another recession like so many before. How can there be such a discrepancy in beliefs? Is the former group merely populated by a type of loose wingnut, spouting their own form of Armageddon Economics?
I don’t consider myself a wingnut (of course it is likely that no wingnut does), yet I do fall into the first camp. About four months ago I undertook the task of teaching a course entitled “Surviving the Crisis” at the University of North Carolina in Asheville. The class was a group of talented and eager middle- to upper-age students, mostly retirees with highly diverse backgrounds. The course was dominated by “non-wingnuts,” members that believed that, yes things were bad but no worse than other downturns in their lifetime. Fortunately for me, I did not have to present my case in 1 – 2 hours,  but was able to lay it out over six weeks and 12 hours of class time plus much internet

Forecast such things

Paulson, Bernanke and Geithner have horrible forecasting records. Anyone forecasting, leaves himself open for a certain amount of embarrassment. Yet these people persist in pretending that they are capable of managing the economic condition of the country. That is truly scary!
Now we have the latest bit of evidence of  their prowess. Look at this statement (one of many in a detailed report) made by Frederick Mishkin when he was on the Federal Reserve Board: “… they clearly illustrate that Iceland is a well run, advanced Nordic country that has little in common with emerging market countries, a fact important to recognize when we start discussing financial stability in the next section.” Shortly thereafter, Iceland inconveniently and totally collapsed into financial rubble.
Perhaps it isn’t Bernanke; perhaps it is his aides that are so wrong. Actually it is neither. No one can accurately forecast such things. That they are wrong is not surprising; that they have the hubris to pretend to know these things is what is amazing. Frederick Hayek’s Nobel acceptance speech entitled The Pretence of Knowledge has much to say both about the problem and professional hubris. Perhaps this speech should be required reading by all Washington economic and other policy dunderheads.

The current economic crisis

A rosy assessment by Bloomberg. Their assessment of growth is reasonable; the statement that “… government stimulus helped bring an end to the worst recession since the 1930s…” is highly unlikely. It appears to be both an early and foolish call. During normal recessions, it is typical to have an intervening quarter or two of growth and then return to negative numbers.
This is no ordinary recession. There can be no recovery until the private sector (more properly called the productive sector) starts growing again. The public sector (better called the non-productive sector) produces virtually nothing, although it can appear to “cause” growth because of the manner in which GDP is defined. The government has no money of its own. It gets money either by taking it from the productive sector or by printing it. To get money from the productive center, it either coercively takes it in the form of taxes or sells bonds. Either way, the productive center has less funds to use. The government cannot produce growth in this fashion because of the dollar for dollar trade-off. Their spending makes us poorer in the sense that they do not spend the way we would. Simply stated, as a consumer would you rather have $100 bill or have your neighbor spend the $100 for you and show up with gifts or groceries that he assumed you would like?
The third method the government can use to obtain funds is printing money. But this is inflation.

The return to risky behavior is already underway

Hope and Change in the Banking System seems to be “hope” that the system can get through this economic cycle while “change” is non-existent. “Too big to fail” creates incentives for risk-taking that would not occur in a true free market. Taxpayers underwriting risk and backstopping failure ensure that firms will take on more, rather than less, risk.
Legislated rules need to be imposed to contain excessive risk-taking based upon taxpayer guarantees. While a truly free market could handle this better than legislation, there appears to be zero hope for that occurring. Thus, a reinstatement of Glass-Steagall or its equivalent is necessary. Without some type of legislation, we are merely waiting for the next crisis to occur. With it, crises will still occur, but they should be more manageable.
The return to risky behavior is already underway.

You might as well label JP Morgan the new Lehman Brothers because they are operating like an investment bank.  So much for those bailouts helping the average American.  The media really needs to scrutinize how these companies make their earnings.  They are simply using hot and easy money to double down in the Wall Street casino on the taxpayer dime.  No reform has happened since the collapse of Wall Street because these banks own our politicians.

This threat looms ever larger with the passage of time

Julian Robertson, legendary investor, expressed what I believe to be the critical immediate problem facing the US (and the rest of the world). With my emphasis added, he said the following:

I prefer to run scared through here. I think that if the Chinese stop buying our debt, it is virtually the end of the financial world as we know it. The conventional thinking is that they will continue buying. But I don‟t think it’s logical to assume somebody will continue to buy our paper which declines in value. Our dollar is declining in value, and it’s been pretty shocking over the last four or five months. The politicians who are so tough on businessmen and so critical – they and the Federal Reserve caused us to be in this predicament. What really caused me to predict the problems we had in 2007 and 2008 was that we were spending so much and no one was balancing the budget. No family can keep doing that forever, no corporation can keep doing that forever and no nation can continue doing that forever. We did it on all three fronts – and it blew up in our face.

Robertson speaks of what happens if/when the US can no longer depend on the “kindness of strangers” to fund our deficits. If/when our benefactors stop lending us money, both Treasury bonds and the US currency will collapse. As he alludes , bonds and currency are merely symptoms of underlying problems. While many believe that Blanche du Bois (the United States) will be able to bypass what Robertson fears because strangers will continue to support us, I do not. Furthermore, unless and until we remedy the underlying problems (government spending that cannot be supported by taxes, weakness in the private sector, etc.), this threat looms ever larger with the passage of time. At this point, there are no signs of the US even addressing these problems. Government projections (probably highly optimistic) for the remainder of this decade show deficits 2-3 times larger than any prior to last year.
Our kind strangers are not altruists, have their own needs for funds and their own political/national objectives. The frightening part of this entire situation is that we literally have no control over the short-term outcome. We have lost most of our economic clout, are viewed as profligate and probably have lost much of our political clout. We appear to be following the path of Britain when it lost its world leadership. Whether we fall to what arguably approached third-world nation status for Britain before recovering to a much smaller role in the world or not is moot. Our role as economic leader appears to be quickly slipping away. Even so, geopolitically we will remain relevant so long as we are in possession of ICBMs, sort of like Russia today but without the natural resources.

It invites anarchy

This swamp is too big and too far gone to be drained by electing “the other guys.” There are no other guys; they are all the same. I’m not sure what the answer is, but the wise words of Justice Brandies should have served as a warning and ultimately may become prophetic:
“In a government of laws, the existence of the government will be imperiled if it fails to observe the law scrupulously. Our government is the potent, the omnipotent teacher. For good or ill, it teaches the whole people by its example. If government becomes a lawbreaker it breeds contempt for law: it invites every man to become a law unto himself. It invites anarchy.”
Scary times with even more thrills ahead I am afraid.