There are very scary stories out there: 1) a European debt crisis; 2) Incredibly slow economic growth in Western countries; 3) A potential for Asian economic growth to top out. Does this mean stocks cannot do well?
Surely "the market" knows what we know. How much worse news is yet to come?
Greece will default. Has the market fully factored that in? While the initial shock of a Greek default would likely cause stocks markets to skid, the reality is that a Greek default could be the harbinger of good news to come. The sooner that defaults and workouts become the order of the day in Europe, the sooner Europe can begin to heal its economic woes.
Why are defaults and workouts therapeutic for Europe? The reason is that politicians will never be able to reverse the spending and entitlement train. They just won't be able to do it. Instead, a default will let the market itself force the necessary reforms on Europe. It won't be possible for Europe to access debt markets in the future unless Europe begins to tackle its unaffordable spending and entitlement programs. Market discipline will solve a problem that politicians have no hope of solving. This is good. So, defaults are good news not bad news and defaults are coming soon.
What about the US? It is unlikely that the US is headed for a recession. Try as it might to strangle the economy, Obama and his allies will not be completely successful in their efforts to destroy the American economic engine. Besides, unless Obama shifts ground and does it quickly, he will be a one-termer and his successor is likely to to do a complete about face on the Obama agenda. This is good news as well, whichever way it shakes out. The hide tide of government intrusion and regulation in the economy may be just over the horizon. In any event, a downturn in GDP isn't likely. Slow growth, not negative growth, is probably our future for the next year or two until the cavalry arrives.
All of this suggests that stocks are probably a good buy for the long term investor. For the short term investor, who knows? But, for the long term investor, this is probably a historic opportunity to own equities.
Sabtu, 27 Agustus 2011
Kamis, 25 Agustus 2011
All Eyes on Bernanke...Why?
Whatever Ben Bernanke has to say on Friday is irrelevant to the grand picture. The American economy is stuck in a quagmire that Ben Bernanke cannot do anything about. He can make things worse, indeed he has already. But, can Bernanke do anything that can help? What can Bernanke can do that will convince a business to shoot itself in the foot by hiring someone in a world of massive regulation, litigation and mandates? Not much.
But, I guess the press has to talk about something. So, the Bernanke sideshow continues.
But, I guess the press has to talk about something. So, the Bernanke sideshow continues.
Rabu, 24 Agustus 2011
Europe and US Face Similar Problem
The "Greek Problem" is really no different than what might be called the "California Problem" in the US. The 50 states of the US are in a common currency, yet each state has its own "fiscal policy." This is essentially the same as the situation in Europe wherein European countries (excepting Switzerland) are banded together in a common currency -- the Euro. Each country has its own fiscal policy.
Greece (and California) are eventually going to be unable to continue financing their outstanding debt. There is no scenario possible that would permit either Greece or California to fund their outstanding debt over any significant future time period. The only way to postpone a default in either place is for someone to step in and bail them out and let them continue to expand their indebtedness.
That's why politicians will soon be clamoring for the US government to bail out California, just as many are pushing the concept of Eurobonds in Europe to bail out Greece (and Spain and Italy and on and on).
These bailouts permit profligate countries to expand their indebtedness and postpone making the decisions that would be required to put their financial house in order. This only makes the impact of the ultimate default (which will come in any event) that much worse. Meanwhile, along the way, to entice the bailer to do the bailout, Greece and eventually California, will be asked to enact "austerity" measures that their populations will not support. Greeks will eventually reject the austerity measures and proceed to a default "workout" on their own. Three is no way that Greeks will, voluntarily, agree to the kind of austerity that the bailout folks will want to impose on them. Ditto for California.
In the US, there is a growing list of states that will join California in the rush to get a federal bailout. Essentially, the idea is to have states like Texas and Alaska, who haven't behaved stupidly with their spending, provide the money to bail out the delinquents like California, Illinois, New York, etc. This is the same idea as having Greece saved by the frugal German taxpayer.
All of this, as it takes place, rewards those who made bad decisions and punishes those who made good decisions. Ultimately, it won't work anyway as the bailer and the bailee will all be forced to some kind of debt default. Pity the poor bondholders who fall for all of this. They will be big losers.
But, there are other losers as well. The citizens of Greece and California and other profligate places will face economic paralysis as they put on the austerity straight jacket, which the bailers will insist upon. There will be a global economic paralysis brought on by the foolish idea that those who made good decisions should pick up the tab for those who made decisions. Foolish economic policy by the Eurozone and US politicians will cause a lengthy period of economic pain which will end with massive defaults through the Western economic structure.
It is possible that the citizens of Europe and the US might wake up before this situation develops too far along the bailout road. We shall see. The optimistic scenario is bolstered by the rise of the tea party and the focus of current debate upon the problems of sovereign debt. So, maybe, just maybe, the Western world will stop the bailout process before it goes too far and is irreversible.
Greece (and California) are eventually going to be unable to continue financing their outstanding debt. There is no scenario possible that would permit either Greece or California to fund their outstanding debt over any significant future time period. The only way to postpone a default in either place is for someone to step in and bail them out and let them continue to expand their indebtedness.
That's why politicians will soon be clamoring for the US government to bail out California, just as many are pushing the concept of Eurobonds in Europe to bail out Greece (and Spain and Italy and on and on).
These bailouts permit profligate countries to expand their indebtedness and postpone making the decisions that would be required to put their financial house in order. This only makes the impact of the ultimate default (which will come in any event) that much worse. Meanwhile, along the way, to entice the bailer to do the bailout, Greece and eventually California, will be asked to enact "austerity" measures that their populations will not support. Greeks will eventually reject the austerity measures and proceed to a default "workout" on their own. Three is no way that Greeks will, voluntarily, agree to the kind of austerity that the bailout folks will want to impose on them. Ditto for California.
In the US, there is a growing list of states that will join California in the rush to get a federal bailout. Essentially, the idea is to have states like Texas and Alaska, who haven't behaved stupidly with their spending, provide the money to bail out the delinquents like California, Illinois, New York, etc. This is the same idea as having Greece saved by the frugal German taxpayer.
All of this, as it takes place, rewards those who made bad decisions and punishes those who made good decisions. Ultimately, it won't work anyway as the bailer and the bailee will all be forced to some kind of debt default. Pity the poor bondholders who fall for all of this. They will be big losers.
But, there are other losers as well. The citizens of Greece and California and other profligate places will face economic paralysis as they put on the austerity straight jacket, which the bailers will insist upon. There will be a global economic paralysis brought on by the foolish idea that those who made good decisions should pick up the tab for those who made decisions. Foolish economic policy by the Eurozone and US politicians will cause a lengthy period of economic pain which will end with massive defaults through the Western economic structure.
It is possible that the citizens of Europe and the US might wake up before this situation develops too far along the bailout road. We shall see. The optimistic scenario is bolstered by the rise of the tea party and the focus of current debate upon the problems of sovereign debt. So, maybe, just maybe, the Western world will stop the bailout process before it goes too far and is irreversible.
Senin, 22 Agustus 2011
A Bad Idea Can Do Some Real Damage
What we are experiencing now are the fruits of the "too big to fail" mentality. In the US, the crisis of the Fall of 2008 began with the government orchestrating a purchase by JP Morgan of Bear Stearns with a $ 29 billion guarantee by the US government. That was the beginning. Before they were done the politicians had bailed out half the financial system, even those who did not wish to be bailed out.
Now the European politicians are doing the same thing. Greece was too big to fail. Now, Spain and Italy are too big to fail. Germany and France are, no doubt, to big to fail too, but there is no one left big enough to bail them out.
This is all ridiculous. No one is too big to fail. The world would not have come to an end if the various financial institutions that were liquidity starved had been permitted to fail in 2008 (or provided some orderly form of Chapter 11 bankruptcy). There was absolutely no reason to protect bondholders from the risks that they had assumed. They should have suffered not the taxpayer. Ditto today for Greece, Ireland, Italy, Spain, and Portugal and, if it gets that far, Germany and France.
Bondholders take risks too. Why shouldn't they pay the price, if they have taken a foolish risk.
By not letting the chips fall where they may, the Western economies now face austerity programs, zombie institutions, and economic stagnation for generations. Is this price worth paying just to protect a few bondholders?
The problem is that politicians love this. It makes folks like Tim Geithner feel really powerful to wander around distributing taxpayer funds to those in need. But, it is very bad economic policy and we are paying a horrendous price for such bad policy.
Now the European politicians are doing the same thing. Greece was too big to fail. Now, Spain and Italy are too big to fail. Germany and France are, no doubt, to big to fail too, but there is no one left big enough to bail them out.
This is all ridiculous. No one is too big to fail. The world would not have come to an end if the various financial institutions that were liquidity starved had been permitted to fail in 2008 (or provided some orderly form of Chapter 11 bankruptcy). There was absolutely no reason to protect bondholders from the risks that they had assumed. They should have suffered not the taxpayer. Ditto today for Greece, Ireland, Italy, Spain, and Portugal and, if it gets that far, Germany and France.
Bondholders take risks too. Why shouldn't they pay the price, if they have taken a foolish risk.
By not letting the chips fall where they may, the Western economies now face austerity programs, zombie institutions, and economic stagnation for generations. Is this price worth paying just to protect a few bondholders?
The problem is that politicians love this. It makes folks like Tim Geithner feel really powerful to wander around distributing taxpayer funds to those in need. But, it is very bad economic policy and we are paying a horrendous price for such bad policy.
Minggu, 21 Agustus 2011
Reasons for Optimism
Reading this blog and following the markets can get one down after a while. So, what is there to feel good about. Several things.
First and most important, the world is now fully cognizant of the profligate ways of the Western economies. This is a plus.
Second, the Asian economies and some scattered others are motoring along quite nicely and they are not enacting the kind of poison pill social policies that destroyed the Western economies. At least not yet.
Third, government bureaucrats have not yet caught up with technology, though they are trying to. It is still possible to come up with a new technological idea and put it out there without drowning in red tape (which is what happens to you in the bricks and mortar economy).
Fourth, the global warming folks are losing their audience, though they still have President Obama dutifully in attention.
Fifth, left-leaning Americans are mad at Obama.
Sixth, Paul Ryan might run for President
So, rejoice, buy stocks.....all is not lost
First and most important, the world is now fully cognizant of the profligate ways of the Western economies. This is a plus.
Second, the Asian economies and some scattered others are motoring along quite nicely and they are not enacting the kind of poison pill social policies that destroyed the Western economies. At least not yet.
Third, government bureaucrats have not yet caught up with technology, though they are trying to. It is still possible to come up with a new technological idea and put it out there without drowning in red tape (which is what happens to you in the bricks and mortar economy).
Fourth, the global warming folks are losing their audience, though they still have President Obama dutifully in attention.
Fifth, left-leaning Americans are mad at Obama.
Sixth, Paul Ryan might run for President
So, rejoice, buy stocks.....all is not lost
Martha's Vineyard
There is no reason why the President should not have a vacation and enjoy it without the press (and Maxine Waters) villifying him for taking time off to be with his family. The focus on the President's trip to Martha's Vineyard shows the bankruptcy of the modern media.
The problem is not that the President is taking a vacation. He doesn't need to hurry back, call Congress back into session, and then inflict more damage on the US economy. Better that he enjoy himself at Martha's Vineyard and leave us alone. Would that his EPA and his NLRB would do the same.
Our problem is not too little attention from the President, but too much attention. The Credit Card "Reform" Act, Obamacare, Dodd-Frank as well as various direct administrative acts by government agencies have all but guaranteed that the US economy will remain mired in stagnation for a generation. This is what happens when Obama takes an interest in our welfare. Lets hope he forgets all about us. We will have a better chance for an economic recovery if he stays away. Perhaps he can take Harry Reid and Nancy Pelosi with him to Martha's Vineyard.
The problem is not that the President is taking a vacation. He doesn't need to hurry back, call Congress back into session, and then inflict more damage on the US economy. Better that he enjoy himself at Martha's Vineyard and leave us alone. Would that his EPA and his NLRB would do the same.
Our problem is not too little attention from the President, but too much attention. The Credit Card "Reform" Act, Obamacare, Dodd-Frank as well as various direct administrative acts by government agencies have all but guaranteed that the US economy will remain mired in stagnation for a generation. This is what happens when Obama takes an interest in our welfare. Lets hope he forgets all about us. We will have a better chance for an economic recovery if he stays away. Perhaps he can take Harry Reid and Nancy Pelosi with him to Martha's Vineyard.
Sabtu, 20 Agustus 2011
The Focus on Jackson Hole
Once again all eyes are pointed in the wrong direction. The Federal Reserve's annual conclave is this coming week in Jackson Hole, Wyoming. Nothing of any significance can possibly emerge from this gathering.
But for the media, this is the big event. The media can pretend that somehow, someway it matters what happens and what gets said in Jackson Hole. This is complete nonsense.
The American economy's problems cannot be fixed by applying any strategies from the Federal Reserve. The Fed has done enormous damage to the American economy in the last three years, in part because it was handmaiden to an Administration and a Congress intent upon destroying the private sector economy. Ben Bernanke has only one goal -- getting himself reappointed by Obama as Fed chairman. Nothing else really matters to Bernanke at this point. Greenspan behaved in a similar fashion when Clinton was President. There is nothing new about a Fed Chairman playing the politics of survival.
But fixing the economy is an entirely different matter, unrelated to anything that might transpire in Jackson Hole. What the economy needs is breathing space. It won't get that breathing space. What it will get is more regulation, more litigation, more taxes and more demonizing rhetoric about millionaires, billionaires, special interests, etc. This Administration is all about finding the enemy and exposing the enemy to its political base. This Administration has little or no interest in economic recovery. Economic recovery shows the triumph of capitalism, not an outcome that this President shows much interest in.
So, forget the politics. Take a course on microeconomics. Learn why business hire employees. Ponder why raising the minimum wage does not create jobs. (If you think raising minimum wages is a good thing, why not raise it to a $ 1,000 per hour. That ought to make everyone wealthy!). Ponder why Obamacare and its mandates make business lose interest in having US employees and even US facilities. Ponder why litigation to protect the rights of virtually every group one can find a definition for saps the energy of businesses who might otherwise wish to grow and expand. Ponder why Sarbanes-Oxley and Dodd-Frank are destroying the American financial institutions so that they can be replaced by their equivalents in Asia. If you wanted to destroy the American economic engine, you could not dream up a better set of government policies than these. And, they are working. Capitalism is being annhilated in the US economy and is being replaced by government bureaucracy. We are switching places with China in every respect.
Outsourcing and replacing labor with capital is the sensible business policy when faced with the politics of big government interference in free markets. This is the future.
It is worth repeating that stocks can do fine in this environment. The main impact of Obama policies is to dramatically increase the inequality of opportunity, the inequality of income and the inequality of wealth. Buffett should like that.
But for the media, this is the big event. The media can pretend that somehow, someway it matters what happens and what gets said in Jackson Hole. This is complete nonsense.
The American economy's problems cannot be fixed by applying any strategies from the Federal Reserve. The Fed has done enormous damage to the American economy in the last three years, in part because it was handmaiden to an Administration and a Congress intent upon destroying the private sector economy. Ben Bernanke has only one goal -- getting himself reappointed by Obama as Fed chairman. Nothing else really matters to Bernanke at this point. Greenspan behaved in a similar fashion when Clinton was President. There is nothing new about a Fed Chairman playing the politics of survival.
But fixing the economy is an entirely different matter, unrelated to anything that might transpire in Jackson Hole. What the economy needs is breathing space. It won't get that breathing space. What it will get is more regulation, more litigation, more taxes and more demonizing rhetoric about millionaires, billionaires, special interests, etc. This Administration is all about finding the enemy and exposing the enemy to its political base. This Administration has little or no interest in economic recovery. Economic recovery shows the triumph of capitalism, not an outcome that this President shows much interest in.
So, forget the politics. Take a course on microeconomics. Learn why business hire employees. Ponder why raising the minimum wage does not create jobs. (If you think raising minimum wages is a good thing, why not raise it to a $ 1,000 per hour. That ought to make everyone wealthy!). Ponder why Obamacare and its mandates make business lose interest in having US employees and even US facilities. Ponder why litigation to protect the rights of virtually every group one can find a definition for saps the energy of businesses who might otherwise wish to grow and expand. Ponder why Sarbanes-Oxley and Dodd-Frank are destroying the American financial institutions so that they can be replaced by their equivalents in Asia. If you wanted to destroy the American economic engine, you could not dream up a better set of government policies than these. And, they are working. Capitalism is being annhilated in the US economy and is being replaced by government bureaucracy. We are switching places with China in every respect.
Outsourcing and replacing labor with capital is the sensible business policy when faced with the politics of big government interference in free markets. This is the future.
It is worth repeating that stocks can do fine in this environment. The main impact of Obama policies is to dramatically increase the inequality of opportunity, the inequality of income and the inequality of wealth. Buffett should like that.
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