Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Coronavirus Pandemic Vaccines Indicator Current State - 3rd Mar 21
AI Tech Stocks Investing 2021 Buy Ratings, Levels and Valuations Explained - 3rd Mar 21
Stock Market Bull Trend in Jeopardy - 3rd Mar 21
New Global Reserve Currency? - 3rd Mar 21
Gold To Monetary Base Ratio Says No Hyperinflation - 3rd Mar 21
US Fed Grilled about Its Unsound Currency, Digital Currency Schemes - 3rd Mar 21
The Case Against Inflation - 3rd Mar 21
How to Start Crypto Mining Bitcoins, Ethereum with Your Desktop PC, Laptop with NiceHash - 3rd Mar 21
AI Tech Stocks Investing Portfolio Buying Levels and Valuations 2021 Explained - 2nd Mar 21
There’s A “Chip” Shortage: And TSMC Holds All The Cards - 2nd Mar 21
Why now might be a good time to buy gold and gold juniors - 2nd Mar 21
Silver Is Close To Something Big - 2nd Mar 21
Bitcoin: Let's Put 2 Heart-Pounding Price Drops into Perspective - 2nd Mar 21
Gold Stocks Spring Rally 2021 - 2nd Mar 21
US Housing Market Trend Forecast 2021 - 2nd Mar 21
Covid-19 Vaccinations US House Prices Trend Indicator 2021 - 2nd Mar 21
How blockchain technology will change the online casino - 2nd Mar 21
How Much PC RAM Memory is Good in 2021, 16gb, 32gb or 64gb? - 2nd Mar 21
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Stock Market Party on Wall Street Like Its 1929

Stock-Markets / Stock Markets 2010 Aug 14, 2010 - 06:42 AM GMT

By: Mike_Whitney

Stock-Markets

Best Financial Markets Analysis ArticleOn Tuesday, the Fed announced that it will reinvest the proceeds from maturing mortgage-backed securities (MBS) into US Treasuries. The process is called Quantitative Easing. In theory, Q.E. increases inflation expectations so that consumers spend more and rev up the economy. That's the theory.  But adding to bank reserves when the banks are already loaded to the gills, achieves nothing.  It doesn't put money in the hands of people who will spend it, generate more economic activity or increase growth. It's a big zero. Oddly enough, the Fed even admits this. According to an article in Bloomberg News, "The Central Bank posted a paper co-written by Seth Carpenter, associate director of the Fed’s monetary-affairs division, finding that the “quantity of reserve balances itself is not likely to trigger a rapid increase in lending.” No "increase in lending" means no credit expansion and no rebound. Thus, QE will have no real impact.


   From the FOMC Statement:

   "Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.....

   The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability."

  There's not a glimmer of light in the Fed's statement, and yet, "the Committee anticipates a gradual return to higher levels of resource utilization". But how? And on what is the Fed basing its prediction? Certainly not the data. Maybe tea leaves? The truth is the economy is in very bad shape and getting worse. This is from Wednesday's New York Times:

   "The government’s preliminary estimate for economic growth in the second quarter is likely to be revised substantially lower...."Combining the bigger-than-expected trade deficit with other weak data suggests that Q2 growth was only 1.2 percent rather than the 2.4 percent originally estimated, placing the economy on even shakier ground than it seemed,” wrote Nigel Gault, chief United States economist at IHS Global Insight." (New York Times)

   The Fed has dramatically revised its growth forecast downward since its last meeting. The fiscal stimulus is petering out and inventory restocking is nearly over. Now the economy will have to stand on its own without the support of fiscal and monetary aid. But is it strong enough? Households are still patching their balance sheets, credit is tight, and businesses have no incentive to invest due to flagging demand. So where's the growth going to come from? If the government does not provide more stimulus, asset prices will tumble, unemployment will rise, and the economy will contract.

   This is from Wednesday's Wall Street Journal:

  "A Wall Street Journal survey found that by a two-to-one margin Wall Street economists see deflation as a bigger threat to the U.S. economy over the next three years than inflation.

  “Deflation is dangerously close,” said David Resler of Nomura Securities, one of 53 economists surveyed by the Wall Street Journal. Among economists who answered the question, nearly two-thirds said that deflation poses the bigger risk to the economy over the next three years; the remainder said inflation is the bigger threat. That compares to an April survey, when the economists were split 50/50 over whether inflation or disinflation posed the bigger risk over the next year." ("WSJ Survey: Risks of Deflation on the Rise, Fed on Hold Longer", Phil Izzo, Wall Street Journal) 

   The looming risk of deflation is what makes the future so "unusually uncertain". (Bernanke words)  But investors don't like uncertainty, which is why they pulling their money out of equities and moving it into bonds.  That's also why the flight to safety has continued for more than 2 years since the crisis began. No one knows what the policy is or what the rules are. It's catch-as-catch-can. At the same time, falling bond yields are a referendum on Bernanke's performance. Historic low yields on Treasuries indicate that the Fed has been unable to restore confidence or allay investor fears.  Recent surveys of small business owners (National Federation of Independent Business) and CEO's show that confidence continues to plunge. Consumer confidence is in the dumps, too. Bottom line: No one has faith in the Fed's approach.

   Bernanke hoped that restarting his bond purchasing program would convince Wall Street that he was prepared to provide as much liquidity as needed. But traders saw through the ruse. The bond market cast its ballot immediately, driving yields into the ground. Investor pessimism pushed the 10-year below 3% while  2 year Treasuries slumped to historic lows.  Investors are betting that the economy is headed into another vicious cycle of debt-liquidation and depression. They don't believe the Fed can stop the freefall, so they are shifting into risk-free liquid assets.

   It took the stock market a bit longer to grasp what was going on, but 24 hours later, the rout on Wall Street began.  Shares plunged throughout the session pushing down the Dow Jones 265 points by the end of the day. The other indexes were battered as well. The dollar strengthened on fears of deflation while bond yields on short-term notes fell sharply. Bernanke thinks the economy can muddle through on its own, but Wall Street isn't buying it. They want more monetary stimulus, and they want it now.


PARTY LIKE ITS 1929

   This is from David Rosenberg's "Breakfast with Dave":

  "I know this sounds a bit dire, but little has changed from where we were a year ago......we had a huge bounce off the lows, but we had a similar bounce off the lows in 1930. The equity market was up something like 50% in the opening months of 1930, and while I am sure there was euphoria at the time that the worst of the recession and the contraction in credit was over, it’s interesting to see today that nobody talks about the great run-up of 1930 even though it must have hurt not to have participated in that wonderful rally. Instead, when we talk about 1930 today, the images that are conjured up are hardly very joyous. I’m not saying that we are into something that is entirely like the 1930s. But at the same time, we’re not in Kansas any more." ("Not in Kansas Anymore", David Rosenberg, Gluskin Schef)

   The economy is on the rocks and another round of quantitative easing won't help. The Obama administration will have to toughen up and push through another fiscal stimulus program. It's the only way. QE, low interest loans, zero rates, consumer subsidies, tax cuts or more bank reserves will not do the trick. Private sector deleveraging is beginning to accelerate, which means that economic contraction is unavoidable unless government spending increases substantially for an extended period of time. The budget deficits are going to balloon. Get used to it. That's what it will take to get back on track.  Obama's stimulus was never big enough. Experts like Paul Krugman, Joseph Stiglitz and Obama's-own Christiana Romer figured it would take roughly $1.4 trillion to suck up the excess capacity in the system and really put a dent in unemployment.   $787 billion is a pittance compared to the $6 trillion in home equity and $4 trillion in retirement funds that were lost in the housing bubble flameout.  When that much money vanishes from the system, it takes time to regroup. It blows a hole in personal balance sheets and forces people to cut back on spending. That's why the personal savings rate has skyrocketed to 6.4% in a matter of months. People are strapped and trying to pull themselves of the red. It's government's job to give them a hand.

  Here's an excerpt from a report by Goldman Sachs:

  "The economic landscape has changed significantly during the last two months. The macroeconomic data that seemed to indicate improvement in April and May deteriorated sharply in June and early July. Cutting our 2011 EPS estimate to $89 represents a reversal for us and reflects the more challenging economic environment we now face compared with the backdrop just a few months ago."

   Bernanke maintains the recovery is on track and that the economy is slowly improving, but as economist Dean Baker points out, demand has been weak throughout the crisis and is showing no signs of a rebound. Here's Baker:
 
   "Growth has been boosted over the last 4 quarters by an inventory cycle as firms went from depleting to building their inventories. This cycle has now ended. Inventory growth is unlikely to accelerate further in the quarters ahead. This means that GDP growth will be close to final demand growth. Final demand growth has averaged 1.2 percent in the last four quarters and was 1.3 percent in the most recent quarter. There is no obvious reason to expect that the rate will increase in the near future." (Dean Baker, CEPR)

   Bernanke's no-jobs, no-growth recovery has run aground. Now we need a real solution, a fiscal solution; a solution that will lower unemployment, put the country back to work and restore public confidence in government.  And there's not much time to act either. As pessimism spreads and economic atrophy sets in,  the prospect of a general fall in the price level becomes more likely. That will lead to more layoffs, more excess capacity, more plummeting asset prices, more debt-liquidation, more defaults and more bankruptcies. It's up to Obama and Co. to get this thing right and change course fast. Otherwise, we'll be back in the soup.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2010 Copyright Mike Whitney - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Mike Whitney Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules