US news is abuzz with Q2 2010 earnings season. The asset bubble has been re-inflated. The policy makers Faustian deal needed to achieve the re-inflation has 2 critical levers:
1. The Savings Tax – Drop interest rates to near zero. Given a horrible choice - consume despite your fears or find some way of saving for tomorrow at ~0%, individuals have chosen to invest in risky assets. Find an asset, any asset – stocks, junk bonds, gold, commodities - and buy.
2. The Greater Fool – And the confidence to buy was provided by ensuring a greater fool was available. The history of bubbles shows rational individuals continuing to trade in the belief that a greater fool will pay a higher price. In 2009-2010 that greater fool was the US taxpayer (and some others around the world). The Fed bought MBS > $1 Trillion, recently released AIG documents show other assets purchases at 50-1000% inflated prices, etc.
But, two significant events happened last week. First, March 31 was the official end of the Fed’s trash (MBS) buy back policy. Second, Germany and the rest of the Europeans are hesitating on whether to fully support the greater fool charade – at least as far as Greek debt is concerned. They will likely cave-in, but the unwavering solidarity of the global bankers is now in question.
So how do we get to a next jump up in asset prices?
From here forward, for all intensive purposes, we are back to looking for other fools to propel asset prices higher. Higher earnings are already priced in (Firing 5% of the country - and US government stimulus growing corporate revenue by 5+% of GDP - has to show up somewhere in profits!). Accounting mark-to-fantasy and other rules (Repo 105 is fascinating) will continue to let us sweep debt problems under the rug – but we don’t have any new accounting rules to count on.
My candidate: China. The US Treasury Secretary has taken the confidence game to China this week, pushing for currency devaluation. The real question is whether the Chinese use their savings to buy up US (and other) assets -- as the Japanese did a couple decades ago--, since their economy is already over-heating. Will it be wisdom or folly?
Since the answer to the question you have posed about wisdom and folly will depend on future price trends in respect of different asset classes, disaggregated trend analysis and projections of these across at least some of the leading economies,could ensure that none of your followers end up donning the fool's mantle . Wondering whether you could peer into the magical Palantir , and safeguard your followers from an ignoniminious future appellation, by providing what it needs to avert the possible crisis !
ReplyDeleteTo continue to comment, if that not be still greater folly, "folly" is perhaps the answer to the question you have posed,given the illusion of it all .....For is that not the ultimate truth, the greater wisdom ? Reflecting till the light shines ....
ReplyDeleteContinuing to reflect-- While one has understood that Palantir is emphasizing the mirage which gullible and hapless "fools" seem to be chasing, am just wondering whether the surfeit of liquidity chasing the glitter, can somehow be put to alternative , productive uses , which lead to altering fundamentals , in a world which needs it now, more than ever before.And if so, how ? Looking forward to enlightenment , while continuing to think as well.
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