The Most Bullish Article I've Read This Cycle

I ultimately agree with your conclusion. I like to think of the old Keyne's quote and I'm paraphrasing here, "the market can stay irrational longer than you can stay liquid". One could argue that we've always been in this mode in one way or another. What fascinates me most is how people are so focused on money supply and the gold standard and blah blah blah, but they seem to forget that all that really matters at the end of the day is how many goods and services we produce for one another. Everything boils down to confidence and obviously a strong currency plays into that, but considering how emotional people are (and I find it truly amazing how irrational most are) any sign of a collapse would spark full blown out panic. It seems as though you can never go wrong being a contrarian to the popular waves flowing through the crowds of janitors, truck drivers and gas station attendants. The truth is that the dynamics of this global economy are just so wildly different than anything we've ever seen in the past and the idea that people can try to pinpoint outcomes based on one or two metrics is just so totally wrong it amazes me. It baffles me to see people who should know better try to make such wild macro calls based on just one or two misplaced variables. Anyways, Stockman is a total crackpot and he seems to waddle back and forth as a conservative and liberal. My gut tells me we may see a slight pull back, but I don't envision a 2009 scenario again.

I think this is what's confusing a lot of economists right now, and I really like your post. Yes, the FED is pumping huge amounts of money into the economy and the one thing that's doing well right now is corporate America so the net result is rising stock prices. The question is whether or not prices crash after this period of time.

In the gloom and doom camp, there's a lot of general cynicism but also some really good points. Chief among these is "when the gov't stops subsidizing the whole economy by printing money, it will crash". On the other side of this, where I'm looking at, there's an increased amount of liquidity and the primary place it's flowing to is actually producing something, so we're subsidizing the one sustainable portion of the economy to the point of jumpstarting longer term investments when they get a handle of the lay of the land for the forseeable future. Unlike the dot com and housing booms, these companies are actually growing and actually producing tangible goods+services, so why would they bust? Currently, no one knows exactly what the shape of things to come is, but companies and some states have started to really address their debt issues (or at least realize them) and this is a big deal in light of longer term planning: if they get their books in order now, they are better positioned to take advantage of when the recovery picks up enough steam to move past inching along.

But I think there's more to it, and I think we're seeing the basis of larger systemic changes. Before we continue, I'd like to point out that I'm not an economist and I really have a poor grasp of the formal terminology, so try and hang on to the general gist of what I'm getting at.

Realistically, I have no doubt that a shakeout is coming (my mind tells me end of summer-ish), and a correction of at least a few points later on when the fed winds down the money machine. There's more than this that interests me though. By increasing the overall money supply, the ultimate loser in this environment is the debt market and a very specific one: government debt. And more specifically....holders of US debt. "Investors" are currently taking a 2%+/- loss, adjusted for inflation, for the privelage of holding certain US debt, and there's no shortage of buyers. Why? Because there's so much uncertainty on the entire earth right now that parking liquid assets for what amounts to a small fee seems like a good move. This is a good holding move if equity purchases aren't palatable, for whatever reason. As interest rates rise, and they will eventually have to, stock growth slowing down to real world rates combined with capital flows to the debt market basically put us back to normal. The opportunity for us is during that transition. As soon as stocks dip, people tend to dump shares pushing prices down further, and buying at that bottom is where we want to have our money.

On a side note, this offsets the trade imbalance with a country like China in a weird way. China pegs its currency to ours for what amounts to a net subsidy, and they get economic growth in return. Think about it: it's not like the average Chinese citizen is walking around with cheap cars, fuzzy dice, and an iPhone...we are. On the other hand, we are running up national debt so that we can get cheap stuff on an indivual and corporate level: the arrangement between the US and China amounts to the gov't subsidizing our spending habits. There are two ways out of this.

option 1) a trade war, complete with embargos, rising prices, lowered economic activity, and basically the whole doomsday scenario possibly including vicious proxy wars. Because let's face it, no one wins if China and the US go nuclear, it's an act of lunacy to even consider it a real course of action. The US has already set up a security perimeter along the Pacific Rim and Australia, but who are we kidding...

option 2) What we're seeing now: Chinese holdings of US debt begin to devalue in real terms forcing currency changes, the trade between us slows to the point where we both start consuming more of our own production, a rebalancing of the overall financial relationship, all that and a bag of chips. If wages go up a bit at that point, there should be minimized pain as people can afford the good their economy produces...and they definitely have to in China as the middle class argues for a larger percent of the wealth that they actually create (notwithstanding the fact that the people organizing it are of course still entitled to the lion's share). The net result is more developed homegrown economies that are more sustainable and profitable in the long run. Because let's face it, we can outsource more of our work but if America doesn't produce something then it becomes a disaster in the long run. The net result is less interconnectivity but increased net value at those points, and stronger local economies that are ultimately more sustainable. By growing the strong points of regional economies, as opposed to merely chasing cheap labor, wages and productivity will got up. Outsourcing will of course continue, but not every job is outsourced, and we're increasingly weeding out what jobs are better off kept in house (can you say call center?) It's one thing to look for incremental gains in relocating production sites, it's another to just run out of options and pony up the extra few dollars for a job done right...and there are plenty of jobs coming back to the US. There's something in this for libertarians as well: as productivity, hiring and wages go up on their own due to the need to pay people enough to do a job well, then unions have less support simply because they're not needed. Remember that unions were turned to in desperation in America and if quality of life issues weren't out of control it's unlikely they ever would have had much of a leg to stand on. Culturally, I'm thinking Americans in general would prefer to be able to EARN more as opposed to begging/demanding more, so it's a win. We're seeing the "unMorganization" of the economy in some respects, and that can only mean one thing: increased competition. As for China's social contract, I'm pretty sure the "people's party" might actually be forced to start looking out for them.

Or hey, maybe I just had too much time to chase this line of thought today. I dunno. You tell me.

I suppose this will betray my Austrian bias, but

tt1254:

But is the free market always right? Or more specifically, are market determined prices best for long term economic growth in say gdp per capital or total GDP? But more importantly, the Fed is distorting the market, but since when has there been a market with no distortions?

while I agree with the point you're making here, you seem to be contradicting yourself by going on to say

I can go on with the later paragraphs (and can do so if there is interest), but what I think Stockman is saying is that the great "Keynesian" experiment failed - i.e. government meddling in free markets does far more harm than good. Never mind national defense, infrastructure as public goods for which the free market has shown not to be good at.

True it makes little sense to preach gloom and doom because the market is distorted now when it has been in a state of perpetual distortion since before any of us were born. But a corollary to that conclusion is that you can't use the same example as evidence of free markets' supposed inability to efficiently provide public goods. It isn't and hasn't been a free market, so unless you're relying on other examples of actual free markets I don't see how arguments can be made on either side.

An analogy:

Free Market Protagonist: This bicycle tire is leaking from where this nail is has punctured it and embedded itself. To fix it, the nail should be removed and the hole plugged.

Free Market Antagonist: No, that's too extreme, too much air is going to escape between nail removal and hole plugging, and we don't even know if it works. Let's test your hypothesis by pulling the nail out a little bit.

(Later)

Free Market Antagonist: We pulled the nail out a little bit and the leak worsened. Thank goodness we didn't fully commit because Nail removal is obviously not a viable theory.

Note that the Protagonist has not been proven correct, but neither has he been proven incorrect.

subrosa/ufoinsider: agreed - can't make an easy analogy between the usa of now and econ of before, but still ultimately support the fed's policy here vs. alternatives. The alternative of course europe with the least money printing of all. I mean really, europe wins at austerity - they have govt and world-mandated austerity at both fiscal and monetary level and how are they doing? (not so well: http://www.zerohedge.com/news/europes-scariest-chart).

Fed's policy is no doubt disruptive and will have unintended consequences, but view it more as reflating the econ vs. bubble-making (for now). There will be a bubble, and there will be a crash, of course - that is the nature of markets.

My point for all of this is, for markets to rally there must be fresh buyers, and right now there are plenty of sellers and others on sidelines for the reasons above. Those reasons, I believe, are too weak/general and may already be priced in (we are at same point as 10+ yrs ago with much higher s&p earnings...)

*To be fair, my post came right before sell-off today, so clearly I'm a contrary signal :).

zeropower: does this mean you would buy when there's no problem in sight for the economy/fundamentals? Say when us govt had surplus, usa-made products/technologies are growing exponentially? ... say 2000? :). My point is mkt != current econ.

As for buyers cycling, think that is the case for stock market in general. you don't get the cash flows by buying the stock other than divs.. Right now, even the dividends and are earnings yield of s&p is ~16-17 ttm earnings i think = ~6% earnings yield. Not that cheap, but not exactly bubble territory.

thaimint: public goods? let's do a thought experiment in the austrian style (i believe?). I build a coal plant next to your house, you get face-full of smog each morning. I make $x/shipment of coal, while you get to go to lung doctor. Is this what we want as a society? Air is therefore a public good (http://www.epa.gov/airtrends/aqtrends.html).

What if, instead, coal companies have to pay to pollute? Less coal would be produced, but some of the societal cost of dirty air goes there. You or I can't pay an entire plant to move, but as a society we could (http://en.wikipedia.org/wiki/Air_pollution_in_the_United_States)

I do take issue with perpetual use of "free market." Does this mean no govt at all? I can just take your goods by force?

Now, this doesn't mean govnt (people as a group) is always better/correct either. That is why i'd prefer to go policy by policy rather than just using the same general reason to reject policies, etc.