Tuesday, December 20, 2011

Fear subsides, prices rise

As this chart shows, the Vix index has dropped to a new post-Greece-is-likely-to-default, and the-end-of-the-world-as-we-know-it-is-nigh low. Ostensibly, today's good news on housing starts is the trigger for the S&P 500's 3% advance. But the good news has been accumulating for awhile now (e.g., jobs growth, car sales, exports, inventories, bank lending, retail sales, capex, corporate profits), even as the stress in the Eurozone financial system approaches the extremes of late 2008.

Call it panic exhaustion: it's tough to continue to worry about the end of the world being right around the corner when the fundamentals continue to show improvement. And it's tough to worry that a Eurozone default will be a surprise or catch anyone off guard now that the world has had 20 months to prepare for it and markets have already marked down $1 trillion worth of sovereign debt. It's tough even to worry that a major sovereign default will bring down the global economy, since defaults are a zero-sum game that don't destroy demand. The bad thing about defaults is what led up to the defaults: all that deficit-financed spending that was squandered on transfer payments and faux-stimulus policies.

What's pushing the market up is the growing realization that despite all the concerns out there, the global economy is not hanging by a thread. On the margin, fears are declining. In part, that's because billions of people continue to go to work every day, and corporations continue to rake in record profits. It's also the case that, despite their best efforts to muck things up with "stimulus" policies that only work to restrain growth and increase uncertainty, governments and central banks are rapidly approaching the point where they can do no more harm. Keynesian stimulus policies have been almost completely discredited. Monetary policies have reached the "zero bound." Quantitative easing has been so massive already that adding a few more hundreds of billions to bank reserves can't possibly make any difference, except to further weaken currencies and boost destructive speculation. Meanwhile, the fundamentals that lead to real growth—the private sector's dynamism and willingness to work and invest—have been slowly and quietly improving behind the scenes, despite all the headwinds and roadblocks that governments have thrown in their way.


Benjamin Cole said...

Actually, I think there is plenty more the Fed could do, such as establishing targets for nominal GDP growth, and using interest rates, QE and no interest on reserves until we get there.

The market monetarism school is growing and persuasive, drawing upon the best ideas of Milton Friedman.

In economic terms, federal outlays are squandered whether on military outlays or USDA subsidies or transfer payments. Plenty of room to cut back on federal outlays.

If you wish income tax reductions, please note that transfer payments are largely financed by payroll taxes, while it is federal agency spending---primarily Defense, Homeland Security and the VA--that eat up income taxes.

Please cut at will, and bring an axe.

Benjamin Cole said...

"California may see record spending by visitors in 2011
Domestic and international visitors to California are expected to have spent $104.4 billion by year's end, a 10% increase over last year, according to a consulting firm's forecast."---LAT

Don't know if the above is true, but the lower exchange rate for the dollar is helping the domestic tourism industry for sure....

John said...

Call it "make dough on volatility."
The Congressional standoff is sure to prompt another sell-off, and soon. That will be another good time to buy. Tomorrow's a good time to sell.

Benjamin Cole said...

BTW, commodities failed in their last peak (May) to reach the peak of 2008. They are declining again.

It may be that supply has ramped up in commodities (there have been many years of strong demand and price action, and speculation), and old peaks cannot be reached again. The worst is over for a decade or so.

George Gilder advocated letting commodities prices do what they will; higher prices would bring on new supplies. If commodities demand is always cut off by monetary authorities, then new supply is crimped. Gilder was pro-growth, a position I much adhere to.


Hans said...

Ben Jamin, SS taxes as well as medicare taxes enter the the general federal funds and are spent accordingly..

This is the sole reason, con gress does not want to end this much blighted program..

Hans said...

So, this is all we "get", just a thud in the road, after decades of governmental mismanagement?

Government units being the largest bondholders in the world bond market; does somebody not find that fact as disturbing?

This may indeed save the day for the Keynesians and their allies and their working theories..

"Don't know if the above is true, but the lower exchange rate for the dollar is helping the domestic tourism industry for sure."


Hans said...

Not pleasant food for thought..


Squire said...

The money saved in cutting the military will just get squandered in transfer payments elsewhere and put military people on unemployment. Which would you rather have?

Hans said...

Investors fears may have subsided, but the banks have liquidity issues to a tune of 1/2 trillion Euro, which the BenEuro Bank has fulfilled...

I have been told by sources, that QVC will be selling Greek bonds shortly...Available with flex-pay as well...