Tag: news

Submitted by mickeyman via The World Complex blog,

Interpretation of scaling laws for US income

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/yRQgOT6Jawc/story01.htm Tyler Durden

 

The primary theme driving US stock markets, is that of whether the Fed will taper or not.

The mere fact that this is the single most important theme for the markets goes a long way towards explaining how busted our financial system has become. Before 2007, the talk concerned whether the Fed would change interest rates. Today we talk about whether scaling back from $85 billion in asset purchases per month represents tightening.”

 

At the end of the day, the fact is that the Fed can never exit its strategies. I realize there are a lot of smart people with smart explanations for why the Fed can exit, but they are missing a critical component: human nature.

 

We saw this in real-time back in May 2013 when the Fed first floated the idea of tapering its QE programs. The Fed had hoped it could float this idea and let the markets get used to it, instead interest rates spiked with rates on the 10-year moving up from 1.5% to nearly 3% in a matter of weeks.

 

 

At the time, the financial media began to write articles about the market’s “taper tantrum” as though metaphorically aligning the capital markets with s spoiled brat explained the reaction.

 

The Fed then did a 180 despite all but promising it would taper QE. Bernanke even went so far as to negate the call for a taper in his July Q&A.

 

Why did he do this? It’s simple. He like the rest of the Fed saw in simple terms that there is no such thing as a smooth exit. The market rebelled at the mere hint of tapering at a time when the Fed is buying $85 billion per month. If the Fed were to actually go ahead and taper what would rates do?

 

Moreover, with the financial system now even more leveraged than it was going into 2007… what would happen if interest rates moved back to their historical averages of 4% on the ten year Treasury?

 

Ka-Boom.

 

So now, there is talk of the Fed tapering in December. Maybe it will, maybe it won’t. I have no idea. No one does. If we were going to try to analyze the Fed’s moves via logic or economic fundamentals, we would have tapered months if not years ago.

 

Instead we’ll get more of the same: talk of taper to talk the markets down, then a surprise decision to not taper so market take off again. The Fed is now managing expectations more than anything. The Fed has acted in 90+% of the months since the Crisis began. This tells us precisely what the game plan is going forward.

 

At some point, and I cannot say when, this whole mess will come unhinged. When it does 2008 will look like a joke.

 

If you have not taken steps to prepare for a market collapse, we have a FREE Special Report that outlines how to prepare your portfolio. To pick up a copy, swing by:

http://phoenixcapitalmarketing.com/special-reports.html

 

 

Best Regards

 

Phoenix Capital Research

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/9tBBOMMZk1E/story01.htm Phoenix Capital Research

An Iran deal that is kinda sorta a deal but really is not a deal is all we need in the new normal to justify adding another few fractions onto the equity multiple valuation tree of hope. The S&P is up 9 points, Dow up 70 points, and WTI Crude is down around 1% on the news. Interestingly, stocks have no support from the almost ubiquitous carry traders as this appears more like a rip through the stop order stack more than another greater fool adding to their position.

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/40OdFTkF1TI/story01.htm Tyler Durden

“Fixed…?”

 

 

 

(h/t Sunday Funnies at The Burning Platform blog)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ek2Xn32mhl4/story01.htm Tyler Durden

“Fixed…?”

 

 

 

(h/t Sunday Funnies at The Burning Platform blog)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ek2Xn32mhl4/story01.htm Tyler Durden

Submitted by Tomas Salamanca via the Ludwig von Mises Institute of Canada,

Until recently, Alan Greenspan’s main argument to exonerate himself of responsibility for the 2007-2009 financial crisis has consisted in the claim that strong Asian demand for US treasury bonds kept interest rates on mortgages unusually low. Though he has not given up on this defense,  he is now emphasizing a different tack, as manifest in an article published in the current issue of Foreign Affairs. The article captures key themes elaborated in his latest book on the problem of forecasting, The Map and the Territory. His new tack is no better than the old tack.

Reprising what has lately become a very common refrain in financial commentary, Greenspan points the finger at the emotional side of human nature. This is the side where behavioral economics has recently made a name for itself in formulating its accounts of investor behaviour. Actually, this approach has a much older provenance, most famously conveyed in Keynes’ invocation of “animal spirits” in the General Theory of Employment, Interest, and Money.  On the Keynesian view that behavioral economics adopts, investors do not buy and sell securities by rationally processing all available information and calculating expected returns. Rather, their decision making is distorted by cognitive biases and swayed by the oscillating passions of fear and hope.

In Greenspan’s rendering of the “animal spirits”, investors swing between phases of risk loving and aversion. Greenspan also maintains that “animal spirits” show themselves in herd behaviour. Inasmuch as investors take their cues from others, they tend to be either risk loving, or risk averse, all at the same time.  You know where all this is going with respect to the financial crisis. According to Greenspan, the herd on Wall Street bought up mortgage backed securities while underestimating their risks, and then as soon as those risks became all too clear, everyone headed to the exits simultaneously.

No doubt, an understanding of human psychology is helpful in making sense of economic phenomena. But we have to be precise in distinguishing the role of psychology in economics. As Mises argued, economics is a deductive science. All its conclusions ultimately proceed from the axiom that human beings act by choosing between alternative means to realize their subjective ends. All the psychology that economics needs is the rather obvious proposition that an overriding goal of human beings is the quest to attain a more favorable state of affairs in their lives. Only when the attempt is made to illustrate the operation of economic principles in the real world, as happens when one is engaged in the writing of economic history,  does psychology become illuminating. A psychological analysis might, for example, tell us what goals a particular individual or group are pursuing as well as the degree to which they prioritize considerations of the present over those of the future. Psychology can help economists tell richer stories; it cannot help them derive better economic theories.

Still, this is not the most significant of Greenspan’s errors. Yes, very few people are truly independent thinkers. Not being confident in any opinion unless it is socially confirmed somehow, people are inclined to think as others around them do.  And so, yes, this means human beings are subject to herding behaviour. Yet in order for a herd to develop in favor of some opinion, such as that sub-prime mortgage securities are a great investment, that opinion must initially gain traction. This is what Greenspan’s account is missing. He seems to think that investor herds come out of nowhere, mysteriously emerging more often than would be expected from a bell curve distribution of asset price changes. How, in other words, did sub-prime mortgage trend higher in the first place so as to generate all the enthusiasm it subsequently attracted?

The answer, of course, involves the loose monetary policy that Greenspan himself ran in the 2000′s as chairman of the Federal Reserve. By injecting so much money into the financial system, he supplied market participants with the means of raising the demand for financial assets. By greatly reducing the yields on low risk government bonds, Greenspan shifted that demand towards higher risk mortgage securities offering more appealing rates of return. Yield spreads narrowed between private sector and government bonds. Concomitantly, there was a steady upward movement in the prices of mortgage bonds, which the “animal spirits” then exacerbated through investor herding.

So if Greenspan hadn’t run an easy money policy in the first place, there would have been nothing in the mortgage arena for the “animal spirits” to have latched onto. This is always the case with financial asset bubbles. Excess hope only comes into play after the central bank has set the boom in motion. Excess fear is the inevitable follow-up once the bubble is popped.

Ironically enough, we can appeal to psychology to explain why Greenspan is unable to recognize this point. Human beings are strongly inclined to maintain their self-esteem. Admitting your own complicity in one of history’s greatest financial crises goes against that fundamental drive. Greenspan would be well advised to apply psychology not just to others, but to himself.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/7ihLeqqQiD4/story01.htm Tyler Durden