Bubbles

from the November 3 FOMC Minutes:

"Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations. While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks."


from the book Meltdown, p8, by Thomas E. Woods, Jr.:

"The Fed's policy of intervening in the economy to push interest rates lower than the market would have set them was the single greatest contributor to the crisis that continues to unfold before us. Making cheap credit available for the asking does encourage excessive leverage, speculation, and indebtedness."

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As one can see from the above two quotes, there is a considerable difference in philosophies regarding the probability of prolonged low interest rates in creating asset bubbles. The top quote is from the November 3 Federal Open Market Committee Minutes, while the quote below it from Tom Woods Jr. and seems to offer a concise view of the Austrian philosophy on the low interest rate matter.

The issue of whether the ultra-low interest rate environment that has been put in place has fomented asset bubbles is a critical one. For background on this matter, the November 30 BusinessWeek had a story titled "Is the Fed Creating New Bubbles?" and can be found at this link:

http://www.businessweek.com/magazine/content/09_48/b4157022781639.htm

My opinion on the matter is that there are currently multiple bubbles that have formed across various asset classes. They are of various sizes and "vintages." Asset bubbles that burst can of course cause tremendous economic damage. Perhaps the best example of this is "bursting" of the housing bubble.

Some bubbles are harder to spot than others. Bubbles, almost by definition, include irrational behavior, and therefore can be hard to predict both in their formation as well as their ultimate size. There are many factors that can come into play in order to cause bubbles.

I have addressed my thoughts as to whether Gold is in a bubble in a November 20 post. Another question, that is critical to both investors and the economy, is whether U.S. Treasury securities, especially the 10 Year, is in a bubble. I believe the answer to this is "yes." The reasoning for my opinion is rather lengthy and complex; however, the previous post (from November 30) represents some of my thought on the issue.


SPX at 1112.28 as this post is written

Ron Paul On The U.S. Dollar

One of the facts that Ron Paul frequently quotes is that since the Federal Reserve's inception (it was created in 1913) the U.S. Dollar has lost more than 95% of its purchasing power.

I wonder how many people are actually concerned by this occurrence? I hardly ever hear this discussed among people or by the media.

They should be very concerned, however...



SPX at 1105.61 as this post is written

A Notable Quote From Ron Paul

On Wednesday The Wall Street Journal ran a story titled "Anti-Fed Activists Fuel Push for Audit":

http://online.wsj.com/article/SB125305951231914071.html

One quote from Ron Paul really caught my attention:

"The Fed will self-destruct," Mr. Paul said in an interview. "This economy is going to get worse and this dollar is going to get a lot worse."

I found "The Fed will self-destruct" phrase to be most interesting. I'm not sure what he means by this - perhaps he elaborates on this in his book "End the Fed" - but I think the phrase is worthy of contemplation. Its connotations are massive, should Ron Paul prove correct...

SPX at 1066.04 as this post is written

Economic Forecast From The Federal Reserve

The recently released minutes of the June 23-24 FOMC meeting, found here:

http://www.federalreserve.gov/monetarypolicy/fomcminutes20090624.htm

stated the following: "The staff projected that real GDP would decline at a substantially slower rate in the second quarter than it had in the first quarter and then increase in the second half of 2009, though less rapidly than potential output. The staff also revised up its projection for the increase in real GDP in 2010, to a pace above the growth rate of potential GDP. As a consequence, the staff projected that the unemployment rate would rise further in 2009 but would edge down in 2010." Additionally, GDP for 2009 was forecast (using their term "Central Tendency") as -1.5% to -1.0%, and for 2010 as 2.1% to 3.3%. For 2011, 3.8% to 4.6% and "Longer Run" 2.5% to 2.7%. The Unemployment Rate is seen forecast as 9.8% to 10.1% in 2009, 9.5% to 9.8% in 2010, and 8.4% to 8.8% in 2011; with the "Longer Run" as 4.8 to 5.0%.

On another note, Nouriel Roubini is quoted at this link:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6qhJ4aCIlD0

it says "The U.S. recession will last six more months and be followed by a “shallow” recovery, Nouriel Roubini said."

Additionally, "This is a great recession that could have ended up in a near depression,” Roubini, the New York University economist who predicted the credit crisis, said on Bloomberg Radio’s “Surveillance.” “We’re not out of the woods.”
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I find Nouriel Roubini's comments, seen above, to be interesting as he has been seen as perhaps the "gloomiest" among the professional economists. Now, his (as well as RGE Monitor's) views don't seem too far from the consensus, albeit still below them.

The Federal Reserve forecast above, as well as Roubini's comments, seem to further confirm that there is a very widely held, tight (meaning there is little variance) consensus among public and private economists.

As stated previously on this blog, at this link here:

http://economicgreenfield.blogspot.com/2009/06/misc-note.html

from a fundamental perspective, I don't think (based upon my analysis) that the economist consensus that the "worst is behind us" is correct, unfortunately. During periods of economic decline, it is relatively common to have periods of "relief" from decline - then a resumption of further decline. This is what I believe we are experiencing now, both in the economy as well as the stock market rally (which I have previously referred to as a "bear market rally.")

Furthermore, from a purely statistical standpoint, I stated this in a July 1 blog post (seen in italics below):

"This conclusion, that "the worst may soon be over" and that recovery will quickly follow, seems to be extremely widely held among forecasters, as documented elsewhere (such as the June 19 post) on this blog.

I find this "widely held" facet to be fascinating in and among itself. Economic forecasts since 2007 have proven very inaccurate, and now we have an overwhelming consensus among public and private forecasters of recovery and slow growth going forward. From a purely statistical standpoint, what are the odds of such an overwhelming consensus proving accurate going forward, given that forecasts of 2007 - early 2009 proved so inaccurate?

Another issue is why is there such a consensus? Are all the forecasters using the same models, or is there such uncertainty that a "safety in numbers" mentality has taken hold?


SPX at 939.54 as this post is written



Copyright 2009 by Ted Kavadas