What a week in the market. I have all but given up on predicting direction. I remain short, but it really hurt me this past week. Still, I think this is a bear market rally & the S&P will break through its lows by the end of March.
Why? Because the primary driver of GDP growth over the last 15 years or so has been consumption. Conspicuous consumption is dead. (for now) See GDP (otherwise known as Gross Domestic Product) = C + G + I, where C =consumption G=government spending and I= investment. This is a very basic explanation. If you want more detail read:
http://en.wikipedia.org/wiki/Gross_domestic_product
When an economy is growing, GDP is increasing. When an economy is contracting, it is decreasing. "Keynesian" economics is a school of economic thought says that the government can and should intervene in economies to "smooth" the business cycle. This can be temporarily effective. It can slow economies when they grow too quickly. It can "stimulate" economies when they are contracting.
GDP is contracting right now, and has been since December 2007 because consumers are dramatically reducing their spending. Keynesian policies that have worked to stimulate demand are not working anymore. In other words, the "C" in GDP is falling off a cliff... no matter what the Government does. In the Fortune Encyclopedia of Economics, 1993 edition, I found the following in the section on GDP:
"GDP measures production, not exchange. If economists, policymakers, and news commentators kept this simple truth in mind, much confusion over the interpretation of economic statistics might be avoided. Many proposals to cut taxes, for example, are aimed at 'stimulating consumer spending', which is expected to cause an increase in GDP. But consumer spending is a use of GDP, not production. A rise in consumer demand could simply crowd out investment, not raise GDP." The writing goes on to explain that in the short run, Keynesian emphasis on demand is, "relevant and alluring". But, government reliance in "demand management" can "distort market prices, generate major inefficiencies, and destroy production incentives." Sound familiar? Is it possible that we are currently experiencing the effects of years of government binging on Keynesian policies to artificially prop up demand (consumer spending)? I not only think it is possible, I think it is true.
Now that propping up consumption is no longer working, the government is going to drastically increase the "G" in the formula above. We already see this beginning with all the bailouts and no doubt we will see it in Obama's New, New Deal.
These policies will lead us into a socialist state. I am sad to say this is where we are headed. I can only hope there are enough people out there who will grasp what is happening and try to save our country.
Luckily, the market, like the"force" in Star Wars has a way of letting us know when things are out of whack. They are very out of whack right now. If we try to fight gravity by "propping up demand" we only continue dependence on the same policies that created this mess in the first place.
Check out how much America has been consuming:
http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/leadingtraders.html
Look where government spending is headed:
http://www.gao.gov/cghome/hccrisis/img6.html
Try to get a good night's sleep, anyway.
Saturday, December 6, 2008
Guest Blogger
My beautiful daughter is my guest blogger tonight. I had to work late and she is still awake. So I asked her if she wanted to help with my blog. Here is what she has to say:
"I am proud of my mom for making her own blog site. I like that she came up with the title econ mom. My day was good. Today we rehearsed songs on the stages in the cafeteria. We sang "Happy Talk", "Under The Sea", and another song that I can't remember the name of. I cannot sleep because yesterday I went to sleep late and tonight I think I am going to fall asleep at the same time I did yesterday. I already read a book called "Fantastic Mr. Fox" by Roald Dahl. I think it is really cool. I understand I am talking about random topics, but I don't care.
WHAT IS THE PROBLEM WITH ADULTS?: They are old and grumpy. I know that I should listen to my parents or other adults but sometimes they get annoying. No offense.
MY BROTHER: He likes guns, swords, a game called Command & Conquer, & he likes to flick me. I do not like when he flicks me. I have to say that I am not always nice to my brother. I still love my brother even though sometimes he can be a pain in the neck.
SCHOOL: I think fourth grade is a little more challenging than third grade and under. But I am very glad that I have a boy teacher because he is very nice and I've always had girl teachers.
HOW TO ACHIEVE WORLD PEACE: People being nice. Recycling. And I don't know much more about that.
WHAT I LIKE: I only like to read good books. I like science. I like Webkinz. I like lemon tea.
WHAT I HATE: I hate it when my hair gets all full of static in winter. I also hate onions. I hate a boy in my class. I hate hate homework.
GROWN UPS SHOULD: Listen to kids more. Sometimes let their kids, if they have any, be wild. Let them stay up a little later on weekends, but, I have to say sorry to my mom because she is letting me stay up late right now That is all I have to say. Bye "
"I am proud of my mom for making her own blog site. I like that she came up with the title econ mom. My day was good. Today we rehearsed songs on the stages in the cafeteria. We sang "Happy Talk", "Under The Sea", and another song that I can't remember the name of. I cannot sleep because yesterday I went to sleep late and tonight I think I am going to fall asleep at the same time I did yesterday. I already read a book called "Fantastic Mr. Fox" by Roald Dahl. I think it is really cool. I understand I am talking about random topics, but I don't care.
WHAT IS THE PROBLEM WITH ADULTS?: They are old and grumpy. I know that I should listen to my parents or other adults but sometimes they get annoying. No offense.
MY BROTHER: He likes guns, swords, a game called Command & Conquer, & he likes to flick me. I do not like when he flicks me. I have to say that I am not always nice to my brother. I still love my brother even though sometimes he can be a pain in the neck.
SCHOOL: I think fourth grade is a little more challenging than third grade and under. But I am very glad that I have a boy teacher because he is very nice and I've always had girl teachers.
HOW TO ACHIEVE WORLD PEACE: People being nice. Recycling. And I don't know much more about that.
WHAT I LIKE: I only like to read good books. I like science. I like Webkinz. I like lemon tea.
WHAT I HATE: I hate it when my hair gets all full of static in winter. I also hate onions. I hate a boy in my class. I hate hate homework.
GROWN UPS SHOULD: Listen to kids more. Sometimes let their kids, if they have any, be wild. Let them stay up a little later on weekends, but, I have to say sorry to my mom because she is letting me stay up late right now That is all I have to say. Bye "
Wednesday, December 3, 2008
What Children Need
Children need time, attention (conscious attention), love, & food and water. Therefore, I will not be blogging tonight. My kids need me.
Have a good night!
Have a good night!
Monday, December 1, 2008
Bernanke Amazes Me
I was watching the "fally" fall apart today on CNBC. They panned to a speech Bernanke was giving at an economic conference. I tuned in just in time for the question and answer period. I could not believe my ears but I thought I heard Bernanke, a self-proclaimed "expert" on the Great Depression say that, "there is no comparison" between the situation we are now facing and the Great Depression he has so avidly studied. Now, I want to know, what exactly has he been studying? No, seriously, I am not being sarcastic. I know I am nowhere near as smart as Bernanke. But, I have been fascinated with the Great Depression for years, and I have read at least three academic books, two of them were very dry and technical, but full of good information nonetheless. The third, I am still reading. It is by far the best of the three. ('The Forgotten Man' by Amity Shlaes) I would recommend it for everyone.
Now, I know I am no Bernanke. I am, however, smart enough to realize that THIS PERIOD IS VERY SIMILAR TO THE GREAT DEPRESSION ERA in more ways than one. We are facing:
1) The unwinding of a very large asset bubble. (Housing was the trigger in this case.)
2) A period of steep deflation in the value of many hard assets.
3) A global recession.
4) A dramatic decline in stock prices.
(part of the asset deflation)
5) Government intervention on a massive scale. (New Deal type policies on the horizon)
6) Massive failures in the financial services sector. (Leman, AIG, Citi, Etc.)
So, what exactly does Bernanke mean when he says the era's are not comparable? I might just be cynical enough to think he is trying to prevent being replaced by OBAMA.
Bernanke says we will be better off this time because the FRB is going to hold interest rates very low and the government won't be protectionist. He also says the economy is so much bigger now that the consequences of a global slowdown won't be as severe as they were back then.
What am I missing here? Am I to read in to his comments that he intends to inflate the money supply to such a degree that a depression is impossible? Is he just so brilliant that he an his board of governors can stop a very large interconnected global economy from faltering? Can he single-handedly create a new asset bubble to replace the old one? Are federal reserve governors just inherently SMARTER now because of evolution than they were in the 1930's? Oh, that's probably true. What an arrogant.......OK, I'll stop now. I think you get the picture.
Needless to say I would love it if someone out there, economist or not, could give me some hard evidence as to why the downturn we are facing is different than the Great Depression. I mean it, I really want to be wrong on this one.
Please read:
http://www.forbes.com/afxnewslimited/feeds/afx/2008/10/15/afx5559042.html
and
http://www.forbes.com/reuters/feeds/reuters/2008/12/01/2008-12-01T194048Z_01_WBT010190_RTRIDST_0_USA-FED-BERNANKE-DEPRESSION-URGENT.html
Now, I know I am no Bernanke. I am, however, smart enough to realize that THIS PERIOD IS VERY SIMILAR TO THE GREAT DEPRESSION ERA in more ways than one. We are facing:
1) The unwinding of a very large asset bubble. (Housing was the trigger in this case.)
2) A period of steep deflation in the value of many hard assets.
3) A global recession.
4) A dramatic decline in stock prices.
(part of the asset deflation)
5) Government intervention on a massive scale. (New Deal type policies on the horizon)
6) Massive failures in the financial services sector. (Leman, AIG, Citi, Etc.)
So, what exactly does Bernanke mean when he says the era's are not comparable? I might just be cynical enough to think he is trying to prevent being replaced by OBAMA.
Bernanke says we will be better off this time because the FRB is going to hold interest rates very low and the government won't be protectionist. He also says the economy is so much bigger now that the consequences of a global slowdown won't be as severe as they were back then.
What am I missing here? Am I to read in to his comments that he intends to inflate the money supply to such a degree that a depression is impossible? Is he just so brilliant that he an his board of governors can stop a very large interconnected global economy from faltering? Can he single-handedly create a new asset bubble to replace the old one? Are federal reserve governors just inherently SMARTER now because of evolution than they were in the 1930's? Oh, that's probably true. What an arrogant.......OK, I'll stop now. I think you get the picture.
Needless to say I would love it if someone out there, economist or not, could give me some hard evidence as to why the downturn we are facing is different than the Great Depression. I mean it, I really want to be wrong on this one.
Please read:
http://www.forbes.com/afxnewslimited/feeds/afx/2008/10/15/afx5559042.html
and
http://www.forbes.com/reuters/feeds/reuters/2008/12/01/2008-12-01T194048Z_01_WBT010190_RTRIDST_0_USA-FED-BERNANKE-DEPRESSION-URGENT.html
Sunday, November 30, 2008
What Is Real Value?
A question has been floating around in my mind today. I was thinking about prices. I was having a discussion with my husband about what the price of something should be. His point was that everything has different value to different people.
True. I have friends that enjoy scrapbooking. I however, do not. These women seem to really enjoy their hobby. I have to admit, I wish I liked it. I somehow feel I am lacking in femininity because I can't stand to scrapbook. I like looking at the wonderful books these people put together. Perhaps my children will wish they had one someday. Alas, they will only have CD Rom's and boxes full of pictures of themselves. I guess I am OK with that. But the real point is this: to me, scrapbooking supplies have little or no value, therefore, I wouldn't spend much if anything on them. But to many women (let's face it, it is almost only women who do this activity), they are extremely valuable. They literally are willing to spend hundreds, if not thousands of dollars on pretty paper. The person who receives the higher utility from a certain product, is willing to pay more for it. Without this there would be no markets, no arbitrage, no speculation. This is all fine and good. But it ultimately means that value is subjective.
I am having trouble with this idea. I really want value to be objective. But it isn't. It just isn't. The marketplace is what it is; and isn't it cool? If value were objective, I couldn't make money trading stocks. If value were objective, everyone would be willing to pay the same amount for scrapbooking supplies. Pehaps the best markets can do is get the prices of goods as close to their true value as possible through trading.
My old economics professors would probably laugh at me, "DUH". But it still fascinates me.
If you can think of a good or a commodity that has objective value please comment & explain your thoughts. I would love to hear them.
True. I have friends that enjoy scrapbooking. I however, do not. These women seem to really enjoy their hobby. I have to admit, I wish I liked it. I somehow feel I am lacking in femininity because I can't stand to scrapbook. I like looking at the wonderful books these people put together. Perhaps my children will wish they had one someday. Alas, they will only have CD Rom's and boxes full of pictures of themselves. I guess I am OK with that. But the real point is this: to me, scrapbooking supplies have little or no value, therefore, I wouldn't spend much if anything on them. But to many women (let's face it, it is almost only women who do this activity), they are extremely valuable. They literally are willing to spend hundreds, if not thousands of dollars on pretty paper. The person who receives the higher utility from a certain product, is willing to pay more for it. Without this there would be no markets, no arbitrage, no speculation. This is all fine and good. But it ultimately means that value is subjective.
I am having trouble with this idea. I really want value to be objective. But it isn't. It just isn't. The marketplace is what it is; and isn't it cool? If value were objective, I couldn't make money trading stocks. If value were objective, everyone would be willing to pay the same amount for scrapbooking supplies. Pehaps the best markets can do is get the prices of goods as close to their true value as possible through trading.
My old economics professors would probably laugh at me, "DUH". But it still fascinates me.
If you can think of a good or a commodity that has objective value please comment & explain your thoughts. I would love to hear them.
Subscribe to:
Posts (Atom)
Posts
