Sunday, August 14, 2011

Stormy weather?

I've reverted to a "stormy" Calafia Beach photo in the banner in recognition of the recent extreme volatility in the markets, and because the looming debt and banking crisis in Europe is not likely to fade away soon. I'm not sure how this will all play out in the near term, but there is one thing the encourages me: the recent problems all revolve around the fact that quite a few sovereign governments (including ours) have exceeded rational limits of spending, intervention, and market manipulation. We are living through the initial stages of that wonderful maxim: if a trend is unsustainable, it won't continue. Greece is going to have to cure its profligacy, because the market is already demanding an impossibly high price if it doesn't: 35% interest rates on 2-yr money. Italy, the U.K., and even the U.S. are being forced to reevaluate the role of government, and it seems quite likely at this point that government will emerge smaller, rather than larger, once the dust settles. That is fine by me, but the statists will not give up easily. Battles will be fought, and nerves will be rattled, and markets consequently will be volatile. Waiting in the wings is a dynamic private sector that is just waiting to pounce once the public sector begins to weaken, and that moment is approaching.

Note: I'm not saying that the outlook is negative, only that the recent volatility is likely to continue. Things could bounce around a lot before good news has a chance to solidify the uptrend in equity prices.

20 comments:

W.E. Heasley said...

Mr. Grannis:

Are you not describing, to a degree, the crosscurrents described by A.V. Dicey in the book Lectures on the Relation between Law and Public Opinion in the Nineteenth Century?

That is, the dominate view of big government, fostered 1880 - 1930, put into practice over the last eight decades, has finally been balanced against the view that big government is the problem. Hence when the counter view comes into balance with the prior dominate view, this becomes the point where fundamental change is possible.

Friedman, Hayek and other likely lead the counter view beginning in earnest in the 1950‘s, the view became more mainstream in the 1980’s, and likely the trend has finally become balanced with the prior dominate view of big government.

The odd item being that big government, the prior dominate view, revealed itself as fallacy through an observation put forth by Friedman, in that, the intentions of big government in fact produced big government miserable results.

“One of the great mistakes is to judge policies and programs by their intentions rather than their results“. - Milton Friedman

John said...

"Waiting in the wings is a dynamic private sector that is just waiting to pounce once the public sector begins to weaken..."

Keep telling yourself that, fellas. Procurements float your boat.

Frozen in the North said...

University of Michigan consumer sentiment survey this morning makes for grim reading, as does the Empire manufacturing. Yet, my guess it that for the next few weeks all the action will take place in Europe. The end game seems to be afoot. Merkel with all here "skills" seems to be between a rock and a hard place!

Watch the Euro from hereon. MY guess is that the USD will take on strength as the Euro area drops rates (pressure is building on ECB). Impact on U.S. companies of stronger USD will be fall off in earnings (weakness of USD has often been to benefit earnings of US Cos). September should be facinationg!

William said...

Gentlemen, be careful.

You may just be rationalizing your emotions. The stock market is a barometer, not a thermometer.

I should think that all the bad news was priced into the market last week. Now we look forward.

Benjamin said...
This comment has been removed by the author.
Benjamin said...

Jeez, for once I am more optimistic than Grannis!

Sometimes, it helps to take a longer view.

It was only yesterday that the top tax rate was 90 percent in the USA, and the finance, transportation and telecom industries were heavily regged.

If you can remember "Regulation Q" and TV shows where someone would win a million dollars and owe $900,000 to the IRS, then you remember the pre-Reagan era.

Today the top rate is 34 percent, and maybe it should be lower. The minimum wage is lower today than in the 1960s, adjusted for inflation. The aforementioned industries are less regulated (stock trading commissions, anyone? Remember?).

We have less structural impediments in our economy than 30 years ago--and information, which was once a inadvertent private-sector structural impediment, has just about been flattened. You can learn more on the Web in a day than what used to take a week.

I think the worst of over, and that the right-wing will soon stop obsessing over minute rates of inflation, and get back to promoting growth. Maybe when Obama leaves.

The Fed may take yet further steps to stimulate, and I hope they do.

Good luck everybody, and remember, compared to the Depression, WWII, or the urban crime wave of the 1970s-1980s, what we are facing today is a walk in the park.

mmanagedaccounts said...

I heard Roger Altman, former Under Secretary of the Treasury under President Clinton, say that the Obama admin. should set out a comprehensive plan for tackling the slow growth economy that should include massive fiscal stimulus over the next couple of years, followed by massive increases in revenue after two years.

Altman was not recommending this approach, but saying that given Obama's progressive premise, he should be extremely bold.

As a supply-sider I am extremely thankful we have conservative Republicans in the House with an unwillingness to raise taxes. I worry that, like FDR in his time, this president will be able to sell voters on his vision which will include saving Social Security, Medicare and Medicaid and protecting the down trodden, and making "those who have benefited most during the Bush years to give back something and pay a fair share."

Sadly, the president isn't interested in expanding the pie, only in changing its distribution, and doing that by expanding our debt obligations. Spending is the answer.

I think you should keep your storm clouds covering the horizon over Calafia Beach until a growth policy is implemented by our federal government.

mmanagedaccounts said...

Sometime in the mid 1990s I had a telephone covversation with Robert Goodman, at the time senior economist for Putnam Investments in Boston. I asked him how long the growth would last. His response was that it would last until the American public became more concerned with the distribution of the benefits of that growth, than the growth itself.

I sense we reached that point in the last presidential election. Here's hoping the past 3-4 years have convinced us we must return to a growth policy.

I do not think this administration sees it that way.

The Roller said...

As I suggested in last week's comment section that mergers and acquisitions would continue as the Fed announced rates will be held low for the next two years,

today, Google buys Motorola Media for 12.5 billion in cash money, homies.

Stock are cheap. There will be more takeovers to come!

dyarchy said...

from Walter Russell Mead's Blog today:

Tip Toe Towards Transfer Union?

News reports from Germany this morning suggest that faced with the stark alternatives of a breakdown in the eurozone and the flotation of “eurobonds”, euro-denominated bonds that would be jointly backed by all of the members of the zone, Angela Merkel’s Christian Democrats are slowly and reluctantly edging toward some form of “transfer union” in which Germany would become responsible for the debts of weaker countries like Italy and Greece. Her Free Democrat coalition partners aren’t so sure; the idea of a transfer union is about as popular in Germany as a US guarantee of Mexican and Argentine debt would be here.

Nobody knows how this will end up; Europe is on the verge of the biggest decisions since the original Treaty of Rome established what grew into the European Union back in 1957.

The French have played this very cleverly. The euro is what German chancellor Helmut Kohl promised France as a kind of compensation when German unification wrecked decades of French policy aimed at ensuring French leadership in Europe. The common currency would bind Germany into a European framework and limit united Germany’s power in Europe. France hopes to use this crisis to commit Germany more fully and decisively to the euro and harness the German ox to the European cart.

France’s clear short term goal is to commit Germany to underwrite debts from weak EU states. That not only staves off a crisis that threatens to engulf France; by putting Germany on as a co-signer for Greek, Italian and Spanish loans, France will ensure that Germany’s credit rating will not be better than France’s.

The French will accept almost any German rules to limit the ability of countries like Greece to run up new debts. It is in France’s interest to have the weak EU countries on a fiscal leash — and better still to do it in such a way that the Greeks and others will blame Germany for the austerity. Once the new system is in place, France will subtly and continuously work to loosen and politicize the rules, heading a “soft money” group within the bloc. Over time, they believe (probably correctly) that they can soften the economic rules, pushing the Germans to offer more and more generous terms and make the system more “political” and less rule-driven.

It is a very elegant and very typical French trap. Having trapped President Obama into supporting French neo-colonialism in North Africa under the guise of a humanitarian war in Libya, the French are on a roll. What makes the euro trap so clever is that in fact Germany’s best choice may be to go along with French plans.

Keep your eyes on Europe. One way or another, history is being made there this year.

Benjamin said...

Inflation?

From Dataquik--

JULY HOME SALES (% change from July 2010)
Los Angeles 6,193 -4.9%
Orange 2,455 -2.8%
Riverside 3,288 -6.8%
San Bernardino 2,378 -7.0%
Ventura 735 -1.9%

JULY MEDIAN PRICE (% change from July 2010)
Los Angeles $320,000 -5.6%
Orange $437,500 -2.8%
Riverside $190,000 -5.0%
San Bernardino $151,000 -2.6%
Ventura $360,000 -2.7%

This shows prices and sales down from last July.

So we have inflation, except for in real estate, manufactured goods, and unit labor costs.

This is an odd sort of inflation.

Dr William J McKibbin said...

"This is your Captain speaking from the cockpit -- due to severe economic turbulance and other problems we are having here at the controls, we are aborting normal soft landing procedures -- all passengers and crew should prepare now for crash landing..."

John said...

Not a "pounce," nor a "crash landing," but five more years of very slow growth, I say.

Benjamin said...

Let's hope that Scott Grannis, with his gloomy weather photos, has called the bottom (like BusinessWeek in 1979).
Nice rally today, deals a-happening, credit is cheap, and the WSJ says stocks are trading at 10 times earnings.
Sure, we have federalk problem, but don't forget, the US private labor force is almost entirely de-unionized, the minimum wage is down 30 percent from 1960s levels (adjusted for inflation), and the finance, transportation and telecom industries are largely deregged compared to the 1970s.

Top tax rate has fallen from 90 percent to 34 percent in same time frame.

You would think it is worse than ever, and our monetary policy is nearly suffocating us. But on many levels, things are better than ever.

The Roller said...

Mr Grannis,

Though you live at the beach, it is quite clear that you do not surf.

This fact aside, of all people, if anyone knows it is you. One cannot get perfect surf without a bit of stormy weather.

For those who do not surf, you cannot get good weather without bad weather first.

Scott Grannis said...

Roller: excellent observation. In all the years I have watched the surf it has never occurred to me to use that analogy. I would add that the biggest surf comes from storms in the vicinity of New Zealand, as Calafia beach faces southwest. The storm sending ugly waves to the US financial market is coming all the way from Europe. Big things happening overseas.

William said...

CalculatedRisk Blog

"Industrial production advanced 0.9 percent in July. The capacity utilization rate for total industry climbed to 77.5 percent, a rate 2.2 percentage points above the rate from a year earlier but 2.9 percentage points below its long-run (1972--2010) average."

http://www.calculatedriskblog.com/

Benjamin said...

Perry Says Fed Spending Before Election Almost ’Treasonous’
August 16, 2011, 10:49 AM EDT
MORE FROM BUSINESSWEEK

By John McCormick

Aug. 16 (Bloomberg) -- Texas Governor Rick Perry, finishing his first full day of campaigning for the U.S. Republican presidential nomination in Iowa, said it would be “almost treacherous -- or treasonous” for Federal Reserve Chairman Ben S. Bernanke to increase stimulus spending before the 2012 election.

“If this guy prints more money between now and the election, I don’t know what you would do with him,” Perry said at a backyard appearance in Cedar Rapids, Iowa. “We would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous -- or treasonous in my opinion.”

Of course, printing money after the election, with the GOP in charge presumably--now that would not be treasonous.

Treason is now defined as what is against the interests of the GOP.

William said...

Oh, please Benjamin. Could we leave quoting politicians to some other blog? There will be glut of political remarks between now and the 2012 elections. I hope not to have to wade through them on this Blog. Geeez!

TradingStrategyLetter - Weekly Summary said...

It's astonishing when a guy like Perry spreaks the 'unvarished truth'about real concerns. Debt undermines EVERYTHING! It seems like everyone has bought into the Keynes fairy tale hook line and sinker. What good has all this spending brought other than short term satisfaction and long term misery with loads of 'unpayable' debt? Did $1 of all that QE I & II charade do any good at all other than fatten bankers balance sheets? We are on the precipise of epic upheaval and all I hear is that it would be 'irresponsible' NOT to borrow more good money and throw it after bad! What a spoiled and dilusional generation. When the final wipeout arrives it will make '29 look like a walk in the park!