Peter Johnson

Salsman on “The quiddity on liquidity”

25 posts in this topic

The National Post (Toronto) published yet another opinion piece today by THE FORUM expert Richard Salsman.

(Salsman explains in the piece that the word "quiddity" in the title "The quiddity on liquidity" means essence.)

One of the things I had been wondering over the last few days was whether the central banks' recent creations of money would be inflationary. I had tentatively thought no: because the operations were being done as repurchase agreements with a short term, the commercial banks would have to buy back the securities from the central banks within a few days, thus quickly removing the money from circulation. Salsman says their actions are not that simple.

Another thing he mentioned, which I had not previously heard, is that the Fed had announced that the only securities it would purchase were "mortgage-backed securities": the exact obligations that the market is trying to re-price lower to reflect their higher risk. (I had thought the Fed was limited to trading only government issues.)

Salsman leads me to think that what is being represented in the media as a liquidity crunch limited to the short-term money market will indeed spread to the economy and capital markets. (Capital markets pertain to longer-term tradable securities, such as equity or debt maturing in more than 1 year, including investment-grade corporate bonds and junk bonds; money markets pertain to tradable debt that matures in a year or less, such as government treasury bills, bankers' acceptances, or "commercial paper", which is issued by private, non-bank companies.)

Thankfully, the Bank of Canada (BoC) trades only in government securities not mortgage-backed securities; however, this morning the BoC announced that it was prepared to deal not only in debt of the Canadian government but also provincial-government debt. (Financial players in Canada regard provincial-government debt as being just as secure as federal-government debt because they believe that the federal government [taxpayers] would cover a provincial-government default.)

The more I read, the more I see the credit crunch of the past week as not being a short-term phenomenon that will quickly be cleared up by the prospect of future economic growth.

Share this post


Link to post
Share on other sites

Thanks for the link. I'm not sure I agree with Mr. Salsman this time: the basic problem is that the yield curve is inverted, and the way to undo the inversion is to lower short-term interest rates--and the way to achieve that is precisely by lending more money via repurchase agreements. (A repurchase agreement is really just a badly misnamed loan of money collateralized by some security.) And note that the Fed always does such lending when the federal funds rate is above target--because that is precisely how it seeks to achieve the target. If the target rate were actually cut--which is necessary to finally bring back the yield curve to normal--then the Fed would have to do even more repurchase agreements in order to achieve that lower target rate.

Share this post


Link to post
Share on other sites
the basic problem is that the yield curve is inverted.......

The inverted yield curve is a symptom, and the basic problem is much more basic than that:

As Greenspan was quoted as saying in CUI, the problem is the "penny has been in the fusebox" for far too long. As a result, tremendous amounts of credit have been created by governments, investment banks, and assorted non-bank institutions, and extended to people and corporations who had no realistic capacity to generate the income to pay it back. We now have an economy based largely on speculation through debt -- a house of cards and an impending credit disaster that may eventually rival the final chapters of Atlas Shrugged as it implodes.

This bound-to-fail speculation was encouraged by government backing (FDIC, FNMA, GNMA, etc) but also by reckless Wall Streeters who "passed the trash" around the world through collateralized debt instruments that also violated traditional sound economic principles.

Having insulated themselves from traditional economic free market discipline with the penny in the interest rate fusebox (and in many other ways hidden the fraudulent nature of the entire system), ALL of the significant parties to these transactions share the blame for what has been created. The world DOES have a price to pay for failing to heed the warnings Ayn Rand gave years ago.

In my view this simmering issue is developing into the biggest thing since 1929. It will quickly progress to the biggest political issue of the day: "How were so many "innocent" people led to financial disaster under a Republican Congress (until recently) and presidency?" George Bush has just about hit bottom already, but my bet is he'll eventually be looked at as the second coming of Herbert Hoover. It's pretty much a foregone conclusion that he'll NEVER get his arms around the fundamental philosophical issues that brought all this about, so there's no telling what God-awfully stupid comments he'll make about the fundamental soundness of the economy while the markets burn around him.

Bush and the Republicans can be counted on to bungle the job of explaining the problem to the public. In my view it's time for the Ayn Rand Institute and fans of Ayn Rand in general to gear up to explain that it was NOT free market principles that caused this disaster, but the abandonment of them, and, more fundamentally, the failure to understand the lessons explained by Ayn Rand.

The implosion of real estate, followed quickly by the overall credit implosion and stock prices in general, will provide a huge challenge and opportunity to prove our commitment to the views of Ayn Rand. There will be many truly innocent (children, for example) who will be hurt by this disaster, so we need to be ready with our diagnosis. And a major part of that diagnosis will include differentiating the James Taggarts (virtually all of Wall Street and most leaders of corporate America) from the Dagny Taggarts (I wish I could name some examples...)

That's my two cents, anyway.....

Sorry, I don't mean to be apocalyptic. The nation came through 1929 (albeit through the Red Decade thereafter) and we'll live through the Credit Collapse of 2007. I'm short-term VERY concerned but long-term confident, because we have the immense advantage no one had in the 1930's -- the mature life work and wisdom of Ayn Rand. Wall Street is probably toast, and real estate values will collapse and stay there for years as did Florida in the 20's. But as individuals, with the nation still substantially free, we can ride through this storm if we keep our heads and remember what we've learned.

Share this post


Link to post
Share on other sites
...And a major part of that diagnosis will include differentiating the James Taggarts (virtually all of Wall Street and most leaders of corporate America) from the Dagny Taggarts (I wish I could name some examples...)

...

Wait a minute - how do you get the idea that "most leaders of corporate America" are like James Taggart? There are many companies today that are doing a good job producing values and making money at it; how can it be that their leaders are evil men? That's quite an accusation you've made. Please prove it!

Please provide some examples to justify this malevolent view of American businessmen today. I want names of companies and their CEOs who you think are as evil as James Taggart. If your accusation is true, that should be easy to provide. Consider, say, the 30 companies that make up the Dow Jones Industrial Average. Since you say "most" of them are James Taggarts, how many of these men do you consider to be that evil?

In my life I've encountered people who predicted a coming economic collapse in many years past, but I can't recall any of them expressing such a negative value judgment as this.

Share this post


Link to post
Share on other sites

Jay:

As that aspect of the post was not the central point I was trying to address, I will defer to your point and agree. As individuals most Wall Streeters and corporate leaders are of mixed premises and it is not productive to overgeneralize about individuals as I did in the section you quoted.

It might be interesting to catalog the business leaders who embrace tariffs to defeat foreign competition, or advocate direct government bailouts for companies "too big to fail," or those who seek socialized medicine or socialization of pension funds, or those who are now calling for federal bailouts of the homebuilding / home loan industry, but that's beyond the scope of what I intended to address. Certainly there are many fine philosophic people who are true to Objectivist principles on Wall Street and even in banking/corporate leadership (John Allison for one).

As for the problems inherent in a credit collapse, I would like to think they will not be severe but I think not. Obviously this is an area that hasn't attracted the attention of the Objectivist intellectual leadership, so I hope I'm wrong. But I don't think so, and I'd like to see this issue addressed so I don't have to go back to the early 1960's to look for topical quotes from Objectivists on credit implosions and depressions.

So you think this episode is going to blow over with minimal problems? (not a rhetorical question -- I'm interested in your viewpoint).

Share this post


Link to post
Share on other sites
Jay:

As that aspect of the post was not the central point I was trying to address, I will defer to your point and agree. As individuals most Wall Streeters and corporate leaders are of mixed premises and it is not productive to overgeneralize about individuals as I did in the section you quoted.

OK, but you were doing more than overgeneralizing. James Taggart is one of the most evil characters that Ayn Rand created; to equate somebody with him is a very serious charge; even more serious is the statement that most American business leaders are James Taggarts. In fact, I can't think of even one prominent American businessman, just now, who is that evil - and of course, completely incompetent too. Can anybody here? (I'm not talking about cowardly people like the characters of Mr. Mowen or Paul Larkin; James Taggart was much worse.)

It might be interesting to catalog the business leaders who embrace tariffs to defeat foreign competition, or advocate direct government bailouts for companies "too big to fail," or those who seek socialized medicine or socialization of pension funds, or those who are now calling for federal bailouts of the homebuilding / home loan industry, but that's beyond the scope of what I intended to address. Certainly there are many fine philosophic people who are true to Objectivist principles on Wall Street and even in banking/corporate leadership (John Allison for one).

As for the problems inherent in a credit collapse, I would like to think they will not be severe but I think not. Obviously this is an area that hasn't attracted the attention of the Objectivist intellectual leadership, so I hope I'm wrong. But I don't think so, and I'd like to see this issue addressed so I don't have to go back to the early 1960's to look for topical quotes from Objectivists on credit implosions and depressions.

So you think this episode is going to blow over with minimal problems? (not a rhetorical question -- I'm interested in your viewpoint).

I do not claim to have any ability to predict the future of financial markets, much less to be able to predict that there is going to be some kind of a credit collapse or depression in any particular year. And given my past observations, I'm very doubtful of anybody who comes along and claims that some apocalyptic financial event is going to occur.

What I mean by my past observations is that I've been hearing, since at least the late 1960's, self-styled experts predict that a major depression is just around the corner. There were books with titles like "How to Profit from the Coming Collapse", "How to Prosper During the Coming Bad Years", "You Can Profit from a Monetary Crisis", "The Crash of 1990"; tape sets with titles like "How to Beat the Depression, which is Surely Coming", newsletters that advised people to sell everything, buy gold, and head for a sparsely-populated area; predictions of a down stock market during the 1980's.

I also knew people who had, in the 1950's, urged friends and relatives to not buy real estate in California because house prices were bound to collapse as soon as the coming depression hit. Another example of predictions of apocalypse that did not come true: who can forget all of the people who were sure Western Civilization was going to collapse on January 1, 2000?

Now, many of these prophets-of-doom were conservative and advocates of generally sound economic principles, such as a gold standard, and rightly loathed socialism and the increasing statism in the US in the 20th century. (They also, in many cases, would seem to have had quite a strong sense of a very malevolent universe.) But they made predictions that were so far off the mark that it's pathetic (because the last 50 years have been very good ones to be alive in the US; marked by prosperity and increased wealth). Anybody who followed the advice of these self-styled experts would have truly missed out on life, while sitting somewhere waiting for a collapse that didn't come. How sad that would be!

Does all of this mean that anybody who makes a negative prediction is automatically wrong? Of course not, but anybody who makes such predictions deserves to be asked some hard questions, about just why it is he knows that a collapse is coming this year (or whenever he says it's going to). Why now and not ten years ago?

It's true that there are deep-rooted philosophical problems in our culture today; I don't think any Objectivist is going to deny that. But these problems have been with us for a long time, and there have been many serious government depredations on the economy beginning with Hoover as president. These cause bad effects, but it's by no means obvious to me that the result has to be another 1930's-style depression, let alone a depression that is always right around the corner. Again, I ask: why now, and not ten or twenty years ago, or ten or twenty years in the future?

There are good forces in our culture and bad ones. Some are fast-acting and some are slow to take effect. And people have free will - all 300,000,000 of us. There are so many variables that I don't know how to predict what the end-result (and its timing) of all this will be, except in terms that are so general they'd be useless in making financial predictions, because the time-range would be so broad.

Share this post


Link to post
Share on other sites
Jay:

Again, I ask: why now, and not ten or twenty years ago, or ten or twenty years in the future?

Yes indeed, that's a question that needs to be asked.

Why did the Florida real estate bubble crash in 1925 rather than 1924 or 1923? Could the bubble have been prevented? Could the crash have been prevented?

Why did the stock market crash in October of 1929 rather than 1928 or 1927 or 1926? Could the bubble have been prevented? Could the crash have been prevented?

Timing is an extremely difficult thing to predict, but it's an exercise that has to be undertaken. Events like 1929 (or 1987) do happen, and if you don't think independently then you end up only being able to react to events after they occur.

My larger point here is that we already have Chuck Schumer and Hillary Clinton calling for a huge bailout for the residential housing sector, and the usual suspects will get louder and louder as this problem grows. Thousands of people in the mortgage industry have already lost their jobs, foreclosures are spiking up most everywhere, and the pain is spreading.

We need to be ready in response with the Objectivist diagnosis. In my view, 1929 didn't happen because the Federal Reserve failed to inject more money into the economy as Milton Friedman argued, but because of Federal Reserve / governmental manipulation of the system as Greenspan / Branden / Rand argued in Capitalism the Unknown Ideal.

The distinction is huge. Bernanke, most politicians, and most business media pundits are now arguing for Milton Friedman prescription (Fed bailout). Who and where are the advocates of the CUI position?

Share this post


Link to post
Share on other sites
Jay:

Again, I ask: why now, and not ten or twenty years ago, or ten or twenty years in the future?

Yes indeed, that's a question that needs to be asked.

...

The reasons I was suggesting that one ask these questions of a pundit who's predicting financial apocalypse are:

1) Look at his track record and see if he has been predicting the same thing in the past. One can then avoid listening to somebody who's been calling for a depression for the last 30 years.

2) Find out what it is about today's conditions that are supposed to mean we get a depression this time around, whereas we avoided one in the past 30 years. In other words, what's so special about this year?

These aren't questions I think most people should spend much time pondering; I'm only suggesting that one ask them of a prophet-of-doom that one is thinking of taking seriously.

...

Politicians such as Mrs. Clinton will of course use the fact of some financial turmoil as an excuse to increase federal spending, which is what this kind of person has always done.

Share this post


Link to post
Share on other sites
a house of cards and an impending credit disaster that may eventually rival the final chapters of Atlas Shrugged as it implodes.

Let me guess: you're an adherent of Austrian economics, right? :ph34r:

Share this post


Link to post
Share on other sites
a house of cards and an impending credit disaster that may eventually rival the final chapters of Atlas Shrugged as it implodes.

Let me guess: you're an adherent of Austrian economics, right? :ph34r:

Isn't everyone? :o

Share this post


Link to post
Share on other sites

From the CDROM; "Letters of Ayn Rand - The later Years"

"No, the "Austrian approach" has not "helped to mold" my philosophy. It is one of the many approaches to capitalism which I oppose, though I do agree with many of its purely economic ideas." [emphasis added]

I am presuming that the "approach to capitalism" she was referring to was the lack of proper moral foundation and justification. I am also presuming that her agreement with "many of its purely economic ideas" include their views on the causes of depressions and credit implosions, which I interpret to be incorporated in the economics views stated in Capitalism the Unknown Ideal.

Please correct me if I'm wrong. And I say that without the least intent of sarcasm or irony, as I appreciate the fact that you or those others who read the economics threads are interested enough to comment (and thanks to Peter Johnson for starting the thread). As stated above I think this is developing into a huge issue and if I'm the one that's wrong, I'd rather correct my course sooner than later!

Share this post


Link to post
Share on other sites

One more relevant quote from the same source: "Letters of Ayn Rand - The later Years"

"There are flaws in classical economics, to be sure, and even in its best modern heir, the Austrian school as represented by Ludwig von Mises."

[emphasis added]

Several of the seminal passages from CUI: - "Common Fallacies About Capitalism: Depressions":

"Throughout most of the 1920's, the government compelled banks to keep interest rates artificially and uneconomically low. As a consequence, money was poured into every sort of speculative venture. By 1928, the warning signals of danger were clearly apparent: unjustified investment was rampant and stocks were increasingly overvalued. The government chose to ignore these warning signals."

"The boom and wild speculation -- which had preceeded every major depression -- were allowed to rise unchecked, involving, in a widening network of malinvestments and miscalculations, the entire economic structure of the nation. People were investing in virtually everything and making fortunes overnight -- on paper. Profits were calculated on hysterically exaggerated appraisals of the future earnings of companies. Credit was extended with promiscuous abandon, on the premise that somehow the goods would be there to back it up."

Of course the entire chapter is worth quoting but I don't have the typing stamina to do it right now.... It all sounds pretty descriptive of the last number of years to me.

Share this post


Link to post
Share on other sites

Last cite until and unless somebody else weighs in:

From Mises in HUMAN ACTION:

"The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." [emphasis added]

So to submit a proposed conclusion for your consideration:

The proper Objectivist position is that the Fed should NOT lower interest rates below what the market deems appropriate, the Fed should NOT take steps to enhance the availability of credit (even if called by the sophism-of-the-day "liquidity"), and the Fed should NOT bail out the banks or anyone else, even (especially) if their problems arise from indulgence in speculative debt instruments. (Of course there shouldn't be a Fed in the first place but that's not the immediate question.)

Share this post


Link to post
Share on other sites
So to submit a proposed conclusion for your consideration:

The proper Objectivist position is that the Fed should NOT [...]

exist. :ph34r:

Share this post


Link to post
Share on other sites

Let me guess: you're an adherent of Austrian economics, right? :ph34r:

Isn't everyone? :o

I, for one, am definitely not! Nor is Mr. Salsman. Austrian economists got more things right than perhaps all other mainstream schools put together, but they lack the proper philosophical foundation just as badly as the other schools do, and they retain many of their fallacies--the idea of a "credit expansion" being one of them.

I highly recommend reading Mr. Salsman's series of articles in The Intellectual Activist entitled The Cause and Consequences of the Great Depression (June 2004, July 2004, August 2004, July 2005). See also his article Fed has hobbled another bull from about a year ago, when the Fed began to invert the yield curve.

Share this post


Link to post
Share on other sites

I don't have access to the Intellectual Activist articles. Does Mr. Salsman explicitly disagree with the speculative credit sections of Branden/Greenspan/(and implicitly Rand) in Capitalism the Unknown Ideal?

I am not an economist or an expert on banking but it seems to me that boom/bust in residential mortgage financing is pretty evident and beyond dispute. The contributions of the government toward that (Fannie, Freddie, mortgage interest deduction from taxes, etc., not to mention the Fed's reduction of interest rates since 9/11/01) also seem pretty clear.

As I indicated above, Miss Rand seems pretty clear that it was only the moral /philosophical justification aspect of Mises/Human Action/Austrian school with which she disagreed. I don't have it at hand to quote from but Robert Mayhew's introduction to her Marginalia on Human Action makes the same point. Nowhere have I seen Miss Rand make comments critical of the credit expansion problem, which I gather is a major point of Austrian theory and I contend much of the root of the current market turmoil. So I would think it is fair to say that "Objectivist Economics" is substantially similar to "Austrian Economics" only with a sound moral / philosophical basis -- and that has nothing to do with the credit expansion problem.

Darn, these are important issues -- I sure would like to see some heavy firepower attention paid to them! (And that's not meant to slight Mr. Salsman or present company in this thread.)

I'll grant the truth of the observation that in POLITICS it isn't time for an Objectivist party, but applied ECONOMICS is another question, and ought to be more ripe for Objectivist debate and initiatives.

I wonder where John Allison stands on this.....(?)

Share this post


Link to post
Share on other sites
...

As I indicated above, Miss Rand seems pretty clear that it was only the moral /philosophical justification aspect of Mises/Human Action/Austrian school with which she disagreed. I don't have it at hand to quote from but Robert Mayhew's introduction to her Marginalia on Human Action makes the same point. Nowhere have I seen Miss Rand make comments critical of the credit expansion problem, which I gather is a major point of Austrian theory and I contend much of the root of the current market turmoil. So I would think it is fair to say that "Objectivist Economics" is substantially similar to "Austrian Economics" only with a sound moral / philosophical basis -- and that has nothing to do with the credit expansion problem.

...

The printed material of Miss Rand were specific to Human Action, and I do not know of any of her criticisms, verbal or written, regarding what I think is the far more important work, Menger's Principles of Economics, that would indicate Objectivist economics are substantially similar to the Austrian school. I don't think silence can be taken to mean general agreement. Could you define what you mean by "Objectivist Economics"?

Most private foundations and institutes that support the Austrian school are mainly interested in the promotion of particular economic policies, but not economic theory. Even those who are interested in the subjective theory of value create their 'ideal' economic interactions under the conditions of an anarchy-based, pure market economy with imaginary (more like nightmare) constructs with no private property rights and replace them with common property resources, including copying of products without the "bridle" of private property rights to delimit investment incentives. Private foundations are also not inclined to explore the cases of so-called "market failure" (a misnomer) because their 'robot' actors and 'human actors' are not applicable to the real, rational world. Mises is a name invoked by left-liberals and neocons for all manner of altruistic policies and ways of thinking; it is not "only" in philosophy that Rand differed from the Austrian school when it is their respective philosophies that is the life's blood of each tree.

I cannot consider for these reasons that Miss Rand's thoughts intersect with the Austrian school that one might call the two "substantially similar".

By the way, does anyone know/recall which edition of Human Action Miss Rand reviewed?

Share this post


Link to post
Share on other sites
I don't have access to the Intellectual Activist articles. Does Mr. Salsman explicitly disagree with the speculative credit sections of Branden/Greenspan/(and implicitly Rand) in Capitalism the Unknown Ideal?

Not explicitly, at least not in the articles in question, but I would say that a disagreement with your citations is definitely implicit in them. See also the thread on The Business Cycle.

Share this post


Link to post
Share on other sites

CF:

I just heard about this post from George Reisman's blog. I have not had a chance to digest it yet but it sure looks to me like he's not far off from the alarm-bell position:

"In the aftermath of credit expansion, today no less than in the past, the economic system is primed for a veritable implosion of credit, money, and spending. The mass of capital funds put into the economic system by credit expansion quickly begins evaporating (the hedge funds of Bear Stearns are an excellent recent example), with the potential to wipe out further vast amounts of capital funds."

"It probably is the case that at this point the only thing that can prevent the emergence of a full-blown major depression is the creation of yet still more money. But that new and additional money does not necessarily have to be in the form of paper and checkbook money. An alternative would be to declare gold and silver coin and bullion legal tender for the payment of debts denominated in paper dollars. There is no limit to the amount of debt-paying power in terms of paper dollars that gold and silver can have. It depends only on the number of dollars per ounce."

I know Mr. Reisman's not necessarily on the ARI approved list but I gather his economic views are respected among Objectivists (??)

Share this post


Link to post
Share on other sites
I just heard about this post from George Reisman's blog. I have not had a chance to digest it yet but it sure looks to me like he's not far off from the alarm-bell position:

Reisman has been on the alarm bell and predicting imminent economic collapse and depression non-stop for the past forty years.

I know Mr. Reisman's not necessarily on the ARI approved list but I gather his economic views are respected among Objectivists (??)

Richard Salsman, who is a fan of Menger but not of the later Austrians (see his lectures on Austrian Economics here), has often disagreed with Reisman's constant pessimism and there have been Reisman partisans and Salsman partisans among Objectivists when these disagreements arose. So far, Salsman's predictions have proven more correct than Reisman's.

Share this post


Link to post
Share on other sites
So far, Salsman's predictions have proven more correct than Reisman's.

In the latter 1980s, I listened to one of Reisman's lectures on tape. I believe he recorded it in the latter 1970s, and it was about reconverting to the gold standard. His lecture had the profound effect of convincing me the gold standard is completely untenable. At least his proposal was. :ph34r:

Share this post


Link to post
Share on other sites
So far, Salsman's predictions have proven more correct than Reisman's.

I'm curious, which predictions has Salsman made that have fared better than Reisman's? Has Reisman made specific incorrect predictions, or do you mean he is just generally over-pessimistic in tone? I have just finished reading the first half of Reisman's Capitalism: A Treatise on Economics and in my judgement what he has to say seems quite reasonable and insightful. (I have yet to read anything by Salsman save a few short articles)

Share this post


Link to post
Share on other sites
I'm curious, which predictions has Salsman made that have fared better than Reisman's? Has Reisman made specific incorrect predictions, or do you mean he is just generally over-pessimistic in tone?

Reisman has always been pessimistic. The main difference, however, is that Reisman is an economic theorist while Salsman is a professional market forecaster (click here) whose financial success depends on being right.

Here is Salsman's track record for 2006. It might be interesting to compare this to Reisman's predictions for the same period of time if they are still available on his blog or elsewhere.

Share this post


Link to post
Share on other sites
Here is Salsman's track record for 2006. It might be interesting to compare this to Reisman's predictions for the same period of time if they are still available on his blog or elsewhere.

It would indeed be interesting. And, given the number of Objectivists working in economics and finance, I'd like to see those people making predictions for a year ahead, and then when the time comes, check their predictions against reality. Maybe there'd be a prize for the winner.

Share this post


Link to post
Share on other sites

A Yen ETF for current market conditions, small size, see what happens, I don't own any but I thought about it a few weeks ago, if I were an investor as opposed to an active trader and intensely scared that's what I'd do -- we're only starting to see articles regarding speculation about carry trades unwinding (which I don't think the actual carry trades will) so these ETFs should move up in theory.

Recently I have been studying why house prices double, and particularly over the last cycle almost on queue house prices have moved up as soon as interest rate hikes begin, and level or decrease their rate of price growth at the plateau or interest rate pause (a plateau you'd notice gold has drawn a line around, moving between $600 to $700 for quite some time since the middle of 2006 whilst making some pretty cool technical continuation patterns whilst it crawls around under $700 [there were actually 3 government interventions selling gold as gold crept to $696 awhile back).

Information is the greatest commodity in the financial markets, market prices efficiently respond to news over time, will you be one of the first to get in?

For you traders out there don't just listen to Bernanke when he's on TV, find every one of his speeches and works in academia from the past and especially WHEN THEY COME OUT. LISTEN, learn, anticipate...

Quotes like these from Alan Greenspan in September 2005 ought to be Postits hanging off your multimonitor trading systems.

“signs of froth have clearly emerged in some local markets where home prices seem to have risen to unsustainable levels”.
-- Alan Greenspan
“the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices”.
-- Alan Greenspan

I added some emphasis in italics (as this isn't just false in theory but false at the time and today [hence why you're seeing the Fed today jumping in and buying mortgage backed securities])

“The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other, more-exotic forms of adjustable-rate mortgages, are developments that bear close scrutiny“
-- Alan Greenspan

What's this guy implying in September 2005?

That he as the Fed chairman is going to squeeze out the so called 'irrational' 'speculative' elements of the housing market.. (as prices rise all around him as of September 2005, hmm.. I wonder why? Maybe heaps of rate hikes very fast?).. yes that's what the Fed chairman was implying back in September 2005.

Back in 2005 he was saying for people to take piggy back rates on their mortgages, as he was disturbed at speculators buying houses for a quick pop, interest only loans had SURGED.

Investors who bought interest only loans (i.e. instead of paying over 30 years for the house + interest, or $600 a month you pay $250 a month on the interest for 5 to 10 years out of the 30 year loan, and after that period begin to pay for the actual house as opposed to just the X% interest on the debt, this is better for investment as you as a speculator become more liquid to go ahead and buy more houses.. with debt..).

In an economy where speculators are buying IO loans whilst house prices bloom around them, aren't people going to follow in their footsteps? Isn't the demand only going to continue? Aren't such investors going to extract equity out of existing homes of which they only own 5% and buy more homes?

Over 4/5ths of mortgage debt was equity extracted from homes.

Construction follows as demand increases.

Greenspan believed that the home owners in the housing economy had large equity cushions to absorb any price downfalls. I completely disagree with this and you've seen it in front of your eyes, this is why we're in this mess.

The price downfalls don't have to take place on the home, all that's necessary is a drop in economic confidence for a sustained period because of subprime as well as repricing of debt instruments.

Personally, I think we're going to see positive GDP growth with no recession as well as a normalized yield curve for a few years with massive pressure on the 3 month T-bill yields to the downside as the demand for cash increases for the long term (people don't buy long term bonds for the long term, they buy short term bonds for the long term so every 3 months they can buy another).

Demand for the US dollar ought to increase as gradually as you've seen it recently, interest rates fall, less inflation, the stock market moves sideways for awhile while we see some turning points in the energy markets.

I think bernanke is right about lower energy prices, his voice can even make it self-fulfilling prophecy.

Share this post


Link to post
Share on other sites