Things Not Obvious to San Francisco Fed Chief
Marketwatch reports that San Francisco Fed president John Williams (a noted dove if memory serves) doesn't see the stock market as particularly overvalued at present, even though it sports a CAPE (cyclically adjusted P/E) or “Shiller P/E” of approximately 24, which is in the upper decile of all historical observations – we refer you to a recent article by Doug Short on market valuation in this context.
John Williams is correct insofar as we have not quite yet reached the crazy CAPE valuations of the 1929 peak or the tech mania peak. Of course those are not his yardsticks. With regard to valuations he says:
“With respect to stocks being near-record highs and the Fed’s hand in that, Williams said the media talks more about stock prices than the Fed does. Williams said policy makers take economic data, household wealth and money in the stock market into account, but they are not drivers of monetary policy.
“If you look at the valuation of stocks today compared to earnings and dividends and relative to historical averages, it’s not obvious that the stock market is overvalued. In fact a lot of models will tell you that it’s undervalued given how strong profits have been.”
Which 'models' might he be referring to? We hope not the so-called 'Fed model', a favorite tool of bubble spin doctors, which has been thoroughly debunked by John Hussman on several occasions (see e.g. here for an excellent overview).
When it comes to the S&P's dividend yield, one doesn't really need a 'model' to judge where we stand. A functioning pair of eyes will do just fine:
SPX dividend yield since 1926. Note that the level of administered interest rates and t-note yields has for the better part of market history proved irrelevant for dividend yields. Thus the 'Fed model' must not only be viewed skeptically with respect to price/earnings ratios, but also with respect to dividend yields. Since the beginning of the late 90s bubble, yields have remained at paltry levels – click to enlarge.
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Theory of Interest and Prices in Paper Currency Part IV (Rising Cycle)
In Part I , we looked at the concepts of nonlinearity, dynamics, multivariate, state, and contiguity. We showed that whatever the relationship may be between prices and the money supply in irredeemable paper currency, it is not a simple matter of rising money supply à rising prices.
In Part II, we discussed the mechanics of the formation of the bid price and ask price, the concepts of stocks and flows, and the central concept of arbitrage. We showed how arbitrage is the key to the money supply in the gold standard; miners add to the aboveground stocks of gold when the cost of producing an ounce of gold is less than the value of one ounce.
In Part III, we looked at how credit comes into existencevia arbitrage with legitimate entrepreneur borrowers. We also looked at the counterfeit credit of the central banks, which is not arbitrage. We introduced the concept of speculation in markets for government promises, compared to legitimate trading of commodities. We also discussed the prerequisite concepts ofMarginal time preference and marginal productivity, and resonance.
Part III ended with a question: “What happens if the central bank pushes the rate of interest below the marginal time preference?”
A Faible for Socialism
We have often remarked on the soft spot the New York Times has for socialism. It is after all the ideology that is most popular among the self-proclaimed intelligentsia, as can be easily ascertained by observing the unbroken support it enjoys in academe – in spite of the fact that the communist system has collapsed in what was the biggest bankruptcy in human history. Apparently they just failed to 'implement Marxism correctly'. It is easily forgotten today that Western intellectuals were cheering for the Soviet Union throughout its seven decade history, from the Lenin era until its ignominious demise.
Richard Duncan on Capitalism
Richard Duncan is a well-known author of popular books on economic topics, such as 'The Dollar Crisis: Causes, Consequences, Cures'. He has just written a new book, again with an apocalyptic theme as the title suggests: “The New Depression: The Breakdown of the Paper Money Economy.”
In order to promote his new book, he is currently touring the financial media to give interviews and familiarize people with what the book is actually about.
Let us first take a look at Duncan's analytical claims. We have highlighted the salient points in an excerpt from the Marketwatch article below (we are leaving aside his recommendations for now):
„Recognizing that the world operates on a different set of rules from the laissez-faire capitalism of the 19th century is among the key arguments in Duncan’s 2012 book, “The New Depression: The Breakdown of the Paper Money Economy.”
While it might seem like an arcane economic question, Duncan said that, in fact, the stakes are huge.
Global policy makers are running out of time to take advantage of opportunities offered up by the new system to help resolve the crisis, or otherwise face sliding into a corrosive period of economic contraction and rising geopolitical tensions, he said.
“The danger is that this new economic paradigm will collapse through debt deflation,” Duncan said.
Duncan sees the global economy as having undergone a fundamental transformation during the past 43 years. Since changes in 1968 that freed the Federal Reserve from holding physical gold in reserve against dollars in circulation, total global credit has expanded 50 times, or from about $1 trillion to $50 trillion in 2007.
Over that period, credit creation and consumption, or what Duncan calls “creditism,” took hold as the growth dynamic behind the global economy, displacing capitalism, which he says relied upon sound money, hard work and capital accumulation.
Duncan believes that true capitalism died in 1914, when nations across Europe abandoned gold-backed currencies, running up huge deficits in preparation for what would come to be known as the Great War“
A Crisis of Capitalism?
Ever since the 2008 financial crisis we have frequently remarked in these pages how ludicrous the assertions are – which keep being repeated ad nauseam in the mainstream media – that the financial and economic crisis was a result of 'laissez faire' allegedly gone too far. Not a week has passed since then without someone coming out and blaming the non-existent free market for the calamity.
First of all, it should be perfectly clear that the Western regulatory democracies do not represent free unhampered market economies. They have a socialistic, centrally planned monetary system and free enterprise and production are restricted by a mountain of licensing laws and administrative legislation that is unsurpassed in the history of mankind. At the center of the financial crisis we found in fact one of the most regulated sectors of the economy.
Operation 'Perfect Hedge' – the Criminalization of 'Greed'
As most of our readers are probably aware, the ongoing FBI investigations into insider trading at prominent hedge and mutual funds has just yielded another batch of arrests and indictments. This seems to be still the same investigation that ensnared the founder of Galleon, Raj Rajaratnam, a little while ago. Apparently the investigation has been going on for four years running.
Revisiting the Squid
Back when we wrote a brief critique of Matt Taibbi's latest populist jeremiad against 'God's workers', a.k.a. Goldman Sachs, we were of course aware that the topic would be controversial. Quite a few people seem to have misread that piece as an apologia for Goldman Sachs (judging from some comments on the Seeking Alpha reproduction of the post and e-mails we received), so perhaps we didn't express our point clearly enough. Yesterday, another writer dared to speak up in Goldman's defense, specifically with regards to the questions surrounding its trades and Taibbi's allegation that GS executives are guilty of perjury. Just as we suspected, the case is not as clear-cut as Taibbi makes it out to be – not by a long shot.
Marx and Engels and the Theory of Dialectic Materialism
„A socialist advocates socialism because he is fully convinced that the supreme dictator of the socialist commonwealth will be reasonable from his–the individual socialist's–point of view, that he will aim at those ends of which he–the individual socialist–fully approves, and that he will try to attain these ends by choosing means which he–the individual socialist–would also choose. Every socialist calls only that system a genuinely socialist system in which these conditions are completely fulfilled; all other brands claiming the name of socialism are counterfeit systems entirely different from true socialism. Every socialist is a disguised dictator. Woe to all dissenters! They have forfeited their right to live and must be "liquidated."
The market economy makes peaceful cooperation among people possible in spite of the fact that they disagree with regard to their value judgments. In the plans of the socialists there is no room left for dissenting views. Their principle is Gleichschaltung, perfect uniformity enforced by the police.“
Ludwig von Mises, Human Action, Ch. XXV., The Imaginary Construction Of A Socialist Society
A Theory of Capital
Time, savings and economic progress
The economics of Keynes and the Chicago monetarist school are historical outgrowths of a school of economic thought that has remained curiously untouched by the revolution of subjectivist economics that began with the publication of 'Grundsätze der Volkwirtschaftslehre' ('Carl Menger in 1871.') by
The money multiplier
The practice of creating new bank deposits from thin air has large economic effects. It is important to recognize that from a practical standpoint, deposit money in demand deposits at banks is part of the money supply. It matters not if money circulates in the form of banknotes and coins or is deposited in demand deposits – demand deposits are a perfect money substitute, which is to say, they are money. We have previously commented on measures of the money supply and provided links to the various methodologies attempting to measure it in 'Monetary conditions in the US', but for this article it is enough to state, money is the medium of exchange, and every form of money or money substitute that performs this function from the viewpoint of the individual actors in the economy is ipso facto money.
Part One: Legal and Ethical Questions – the debate over fractional reserves
We recently came across an article by Robert Murphy, 'The Fractional Reserve Banking Question', in which he briefly comments on a controversy within the Austrian School, between what could be termed the 'neo-Currency' and 'neo-Banking' schools, a terminology introduced by Joseph Salerno, harkening back to the 'currency' and 'banking' school debate of the early 19th century.
So the demand uttered in a recent article on Slate. The author Daniel Gross refers to the many things the Federal Reserve is responsible for according to its mandate. Plaintively Gross asks:
|“Fed Chairman Bernanke does not seem to care about high unemployment. Why?”|
A crisis for the Establishment – the One Party State comes under attack
We have speculated for a long time that the day was probably drawing near when the US political establishment would be seriously challenged. Our pet idea has always been that this challenge could take the shape of the eventual formation of a viable third political party, or alternatively an independent political movement. You might of course just as well say 'a second political party'.
Ruminations on the effects of monetary policy in the context of short term and secular cycles
Money supply growth, asset prices and capital over different time frames
Once the growth momentum of money supply wanes, asset prices – specifically stock prices - that have been buoyed by an excess of free liquidity tend to either come under pressure or see their rallies stall out. Normally an economy emerging from a cyclical recession experiences an increase in private sector credit demand. In the early stages of recovery, the Fed's easy money policy tends to egg this credit demand and credit growth on. Investments in higher order production stages appears more profitable, as low interest rates suggest low time preferences and an abundance of available savings.