Overleveraged America has no Plan B

WASHINGTON – Is America once again at the edge of some catastrophic event that will cause economic misery? Not by a long shot, most would argue. The economy, although a bit slower in the second quarter of 2019, is till chugging along, with a respectable 2.1 GDP growth. Unemployment at 3.7% is still at its historic lows, while jobs creation (about 165,000 a month this year) is quite substantial. So, where is the problem? The problem is too much debt.

Too much debt

It is well known that credit is the fuel of capitalism. And this is why a modern, well functioning financial sector is so critical for growth. Savvy bankers and venture capitalist most of the time will allocate capital to deserving established or new enterprises. This properly targeted new credit (or investments) will foster the growth of healthy companies or new ventures, often creating more innovation, new jobs, and eventually broader prosperity.

Corporate debt

And yet, if we look at the $ 9 trillion of US corporate debt, much of this massive burden is not about new investments. Some of it at least is about cheap capital used to buy back stocks, in order to prop their value. Which is to say that at least some of the impressive stock market buoyancy is an optic illusion. It is made possible by historically low interest rates that allow corporation to obtain cheap credit used not for investment in technology and expansion, but for financial manipulation.

Consumers are overleveraged

And what about US consumers? Their financial health and optimism about their economic and financial circumstances are absolutely critical, since private consumption in America, at 70% of GDP, is by far the most significant factor affecting economic growth.  

Well, here
is another mixed bag. As noted above, the economy is growing, new jobs keep
being added, and unemployment is extremely low. Still, things are not great for
the American middle class. Millions of relatively young people carry an
extraordinarily high student debt load. Combined with car loans, other consumer
debt and child care expenses for those who have children we have a picture of
individuals or families that can barely survive, even on relatively good income
(above $ 100,000 or more for a couple).

Millions of new young professionals simply cannot afford to buy a house because the existing debt they have to pay off prevents them from saving enough for a down payment, let alone adding monthly mortgage payments to the long list of existing obligations.

More federal debt

The Federal Government is playing a negative role in all this. Democrats and Republicans who these days agree on almost nothing, very quietly just passed a new spending bill that increases defense and other discretionary spending, without even a word on the need to seriously consider reforming the major entitlement programs (Social Security, Medicare and Medicaid are the big ones) that slowly but surely increase –every year—federal spending. The net result of this political accord is more federal spending, higher deficits and more debt, at a faster clip than forecasted even a year ago.

Debt, debt everywhere

So, here is
the picture. Corporations are high into debt. The American consumers,
especially the younger workers, even those with above average income, carry an
enormous debt burden that is made tolerable only by extremely low interest
rates. The Federal Government, both parties having forgotten any concerns about
fiscal responsibility, is piling up new debt at a fast clip –while a growing economy
is at full employment.

To top it
all off, the US Federal Reserve just cut interest rates, this way signaling that
the happy era of ultra-cheap credit will continue, who knows for how long.

All is well?

At the
moment, none of this concerns anybody. If asked, policy-makers will tell you
that things have rarely been so good for the US economy. On the surface this is
true. But we have to pray that nothing will happen.

If for some
reason we have a re-ignition of inflation that may force the Federal Reserve to
raise interest rates and therefore increase the cost of borrowing throughout
the economy, this whole thing may collapse.

Cascading effects

consumers can no longer pay existing debts and buy new things at the same time,
there will be a contraction in spending that will immediately reverberate
throughout the economy. Lower demand means lowers sales, and therefore job cuts.

Think of
the millions who can barely make it today, while having a good or at least
decent job. Imagine their predicament if they lose that job! They will default
on all their loans. Their cars will be repossessed. As a consequence, much of
their consumer loans and credit card debt will have to be written off, with
considerable losses for the banks that extended it. And this means a major

Doomsday scenario

Look, may be none of this will ever happen, and this doomsday scenario will remain fiction. Still, I am truly concerned when America –the largest economy on earth– has essentially no margin, no cushion. All the key players: corporations, consumers, the Federal Government and the Federal Reserve are overextended.

when a recession hits, the Federal Government increases spending in an attempt
to inject liquidity and stabilize the jobs market.

But today
Washington is about to go back to $ 1 trillion deficits, justifiable only when
America was trying to emerge from the devastating financial crisis of 2008. It
will be hard to increase federal spending when deficits are already so high.

Again, let’s
pray that nothing bad will happen. But prayer is hardly the most sophisticated
contingency plan for a $ 20 trillion plus overleveraged economy.

How The US Fed Damaged The American Economy

WASHINGTON – I indicated a while back that whoever would be elected President of the United States on November 8 –Clinton or Trump– it was unlikely that she or he would have the fortitude and the political backing enabling her/him to seriously focus on the real, yet silent systemic crisis affecting the U.S. economy: artificially depressed interest rates. I still hold this opinion.

Financial and economic distortions 

Let’s look at the issue. We are now dealing with the consequences of several years of Fed-mandated zero interest rates policies, or ZIRP. These policies have created enormous distortions affecting now the entire fabric of the American economy, its economic policy making process, and financial markets. What started as extraordinary monetary easing in order to mitigate the risks of a post-2008 financial meltdown, morphed into a real monster.

Unprecedented predicament  

No, we are not necessarily on the proverbial edge of the abyss. The world is not coming to an end. At least not today. Nonetheless, a sad combination of wild (and prolonged) experimentation on the part of the Federal Reserve –way beyond the limits of reason– and a mixture of political cowardice, ideological infighting, and intellectual void on the part of the Congress and the Obama White House created this truly unprecedented hazard.

Fed policies now drive markets 

After years of zero interest rate policies, the US Federal Reserve managed to accomplish something quite unique. Its policies on interest rates –and not economic fundamentals– now determine in large measure investment decisions, and therefore assets valuations.

Disconnect between the economy and markets 

Put it differently, prices of major assets, stocks first and foremost, no longer depend  mainly on how the U.S. economy and the world economy are actually performing. They are largely dictated by Fed’s policies and its perceived future moves on interest rates. Which is to say that Fed moves now determine asset prices. And so we have had and are still having today an almost total disconnect between the actual conditions of the economy and the valuations of basic economic assets. Investors follow Fed mandated interest rates. They base their investment decisions on Fed moves, and not on corporate performance. This is most unhealthy. 

This obvious divorce between market valuations and underlying economic realities this time is not about market speculators. This is not yet another bubble created by crazy investors. This is a Fed-engineered disconnect between the real economy and financial markets. The Fed did this. yes, the Fed, the once revered custodian of national financial integrity.

Markets follow the Fed 

Simply stated, several years of interest rates repression induced (forced?) most investors seeking a return on their capital to migrate to stocks, whose valuations are now inflated, because that’s what everybody is buying, since there are no other realistic investment choices.

As a result of this unprecedented distortion, stock prices now are not affected –as they should be– by expectations on future corporate performance and sector strength. No, they are affected mostly by speculations on what the Fed may do next. It is now accepted as a “normal” phenomenon that US stocks respond with sudden swings to any hint of significant changes in interest rates policy by the Fed.

In other words, these days stock valuations respond mostly to developments that have nothing to do with the real economy.

How did all this begin? 

Well, and why did the U.S. Fed get into this crazy game? At the beginning, in the immediate aftermath of the Great Recession of 2008, it was all done with good intentions. Fed officials were hoping that by pushing interest rates down to zero, and keeping them at zero for a while, both corporations and individuals would gain confidence and have an extra incentive to borrow more and therefore kick-start into higher gear the wounded US economy struggling to come back after the horrible 2008 financial debacle.

Strong medicine 

It was hoped that this strong monetary medicine would help, giving time to the slow-moving US Government to concoct market-friendly reforms, (such as lower corporate taxes, streamlined regulations), aimed at creating a more pro-investment, pro-growth policy environment.

And here is where everything went wrong. The U.S. Government, torn apart by bitter partisan politics, has done practically nothing. Since the end of the Great Recession nothing, absolutely nothing, has been done to reform federal spending, this way “bending’ the curve. Likewise, nothing to reform and simplify the horrendously complicated U.S. tax code, with the goal of making it more business friendly. Nothing to improve the fundamentals of the U.S. “economic eco-system” in order to encourage new enterprise creation. 

Sure enough, after massive stimulus ordered by Washington financed mostly by issuing bonds, (read: more debt creation), the U.S. economy rebounded. But it has been a feeble recovery, with unimpressive growth.

Weak economy, strong markets 

And yet, despite all this, the stock market shot up. While this year Wall Street growth has been modest, it is clear to most observers that current valuations are not justified by the performance of the real economy.

While consumer spending is relatively healthy, the fundamentals of the U.S. economy are not good. There is very little new investment, while increased amounts of regulations affecting practically every economic sector suffocate existing small businesses, at the same time creating disincentives to new business formation.

Here is the monster 

And so, here is the monster. America has at best a mediocre “doing business” environment. Our public finances are in a dreadful state, with more debt added to already historically high debt. There is little new investment, while more small businesses close down than new ones are established. In other words, the real economy is either stagnating or slowly declining, (at least in some sectors). And yet, the stock market has done great, mostly because of Fed policies.

What we got, after years of ZIRP, is a horrible distortion, whose ramifications we do not even begin to appreciate.

Gradual adjustment? 

The rosy scenario is that the Fed finally would see the danger of the effects of its policies. Therefore it will slowly jack up interest rates, this way allowing time for investors to devise and implement a gradual and orderly reallocation of capital. While this readjustment takes places, the stock market will experience some corrections. But nothing terrible will happen, as investors will have time to make the appropriate portfolio diversification.

But what if it all happens in a sudden big burst? What if the hoped for incremental correction turns into a stampede? What if trillions of dollars now invested in obviously inflated stocks are vaporized in a matter of hours?

“Rewired markets” 

So, here is the thing. Just like a sorcerer apprentice, after 2008 the Fed went into uncharted territory, hoping that zero interests would work like the magic trick that would revive the moribund U.S. economy. Worse yet, even though the magic did not happen, The Fed kept on this ZIRP course for many years. This prolonged intervention “rewired markets”. It created new, and truly unhealthy, incentives for financial markets. They now respond mostly to Fed signals, as opposed to economic fundamentals.

And there is more. Corporations now respond to short term financial incentives. Many of them do not make long term investments. Indeed, it is a lot easier to support your market valuations through stock buy backs funded by money borrowed at practically zero interest than to plan growth strategies that require real capital investments.

How do we get out of this? 

And now, to make a bad situation really treacherous, the Fed does not know how to extricate itself from the trap it created for itself and the entire U.S. financial system. Leaving interest rates near zero for much longer is a really bad idea. However, the danger now is that any action that may be read by the market as a quick return to historic interest rates may give the signal to a chaotic exit from artificially priced shares. 

No help from policy-makers 

As for getting any real help from policy-makers, forget about it. On November 8 we had the end one of the most acrimonious and divisive presidential campaigns in recent American history. President-elect Donald Trump, the uncontested winner, should realize that almost half the country is still against him.

This is not an auspicious beginning for a new President who should instead have the political flexibility deriving from a strong mandate. Trump needs to engage both the Nation and the Congress in order to put in place, as soon as possible, a new fiscal, economic and tax policy environment finally conducive to real investments and real growth.

What is the end game? 

While few policy-makers will say this in public, it is clear that the U.S. economy looks reasonably healthy mostly because it is on Fed-administered monetary drugs. The current high stock market valuations are illusions. At some point this whole thing will fall apart. How fast and how dramatically, is anybody’s guess.

Sinking Japan Keeps Adding To The National Debt

WASHINGTON – As we Americans watch with growing concern our crazy presidential elections politics, other crazy things are happening around the world, without anybody paying any attention. Western governments (US included) keep piling up more and more debt, while Central Bankers do all they can to keep interests rates at zero, or close to it, this way allowing the insane perception that getting deeper into debt is painless, and therefore fundamentally OK.

Japan’s enormous public debt 

David Stockman illustrates this point very well in a recent piece in his www.davidstockmanscontracorner.com that focuses on Japan:

“The government of what can only be described as an old age colony sinking into certain bankruptcy sold 30-year bonds at an all-time low of 47 basis points. Let me clear here that we are talking about a record low not just for Japan but for the history of mankind. [Emphasis added]

To be sure, loaning any government 30-year money at 47 basis points is inherently a foolhardy proposition, but it’s just plain bonkers when it comes to Japan.

Here is its 30-year fiscal record in nutshell. Notwithstanding years of chronic red ink and its recent 2014 consumption tax increase from 5% to 8%, Japan is still heading straight for fiscal oblivion. Last year (2015) it spent just under 100 trillion yen, but took in hardly 50 trillion yen of revenue, stacking the difference on its already debilitating mountain of public debt, which has now reached 240% of GDP.”

“That’s right. A government which is borrowing nearly 50 cents on every dollar of outlays should be paying a huge risk premium to even access the bond market. But a government with a 240% debt-to-GDP ratio peering into a demographic sinkhole would be hard pressed to borrow at any price at all on an honest free market.

[This is] what lies 30 years down its demographic sinkhole. To wit, Japan’s population will have declined by 30% to 90 million, while its working age population will have plummeted from 78 million to about 52 million or by 33%. Moreover, its labor force participation rate has been declining for years, but even if it were to stabilize at the current 60% level, it would still mean just 31 million workers.”

A horrible picture 

Yes, these are the facts. Japan’s revenue covers at best 50% of its spending. The remaining 50% is financed by issuing bonds. As a result, the national debt is now equivalent to 240% of GDP. And yes, as Stockman points out, going forward this horrible picture gets a lot worse. Given Japan’s rapid demographic decline, the number of active workers and therefore tax payers is rapidly decreasing, while the number of retirees receiving pensions, health care services and other benefits is increasing relative to the overall population. This means that going forward there will be even more spending for seniors, while less revenue will be coming in.

No trouble selling bonds 

And in all this, notwithstanding this brewing fiscal catastrophe, the Japanese government has no trouble selling 30 year bonds at a nominal interest rate. How is that possible? In a sane world, no government in this fiscal predicament would be able to sell any bonds, let alone at these rates!

Yes, as Stockman points out, there is a fix. Bond traders “know” that the Bank of Japan, BOJ, eventually will buy these bonds. So, they are not concerned that these will turn out to be like Argentina’s bonds right before bankruptcy. There will always be a reliable buyer.

But here is the question. The BOJ will keep buying worthless paper, paying real money for it, for ever?

Everybody is doing it

As absurd as this sounds, at the moment this seems the consensus. What makes things worse is that this insanity linking fiscal profligacy and Central Bankers’ madness is now the official orthodoxy. Indeed, what Japan is doing is pretty much in line with what other Central Bankers in Europe and America are doing. The difference is only one of degree.

Getting into debt is good 

So, here is the picture. Formerly rich Western countries keep spending way beyond their means, this way accumulating more and more debt. However, thanks to their Central Banks, the cost of borrowing is way below what it should be. And this of course encourages more fiscal irresponsibility. Indeed, at least in the short term, there is essentially no heavy price to pay for profligacy. Japan is an extreme case, but all the others, the US included, are quickly catching up.

More red ink with Trump 

And, by the way, if we take a quick detour back to US politics, most estimates indicate that Donald Trump’s proposed public policies would add another $ 10 trillion in 10 years to the US national debt. This staggering figure would be on top of the $ 19 trillion the US already owes.

And, of course, Trump is leading in the polls. Amassing more public debt seems to be a good way to “Make America Great Again”.

Maersk Warning About Global Slow Down – Recession In the US?

WASHINGTON – Maersk, (based in Denmark) is the largest shipping conglomerate in the world. Their business is to transport every day tens of thousands of containers from exporters to importers around the world. The company just announced losses for 2015. Just a temporary setback? Well, apparently not. Maersk ascribes this setback to shrinking global trade volumes. Their profits are way down because a much weaker world economy generates much less shipping of goods.

The worst since 2008 

Maersk’s CEO is quoted by the WSJ saying that the conglomerate is facing a “massive deterioration”, adding that this is the worst they have seen since the onset of the Great Recession of 2008. Got that? We are back to a 2008-like scenario. I suggest that this is really bad.

And Maersk believes that this weak trade flows trend will continue in 2016. We should pay close attention to what Maersk managers say. Global shipping volumes are a very good proxy for world economic health. 95% of all manufactured goods are transported via containers that get to destination thanks to global shipping companies like Maersk.

Less activity in ports world-wide

Maersk is not alone in predicting bad times. DP World, a very large Dubai based port facilities management company, with operations in 70 terminals in practically every continent, chimed in, indicating that their business (handling the containers moved by Maersk and other shipping companies) is down, significantly. And the IMF confirms this pessimism about a global economy that run out of steam. They have lowered their forecasts for both growth and international trade flows.

So, here we go. The big companies that handle global trade are hurting. Their business is down because the world economy is slowing down, at a rapid pace. They are worried.

Weak economies 

And why is that? Because the day of reckoning is finally getting close. The jig is up. For several years we have lived in a fools’ paradise created by easy money created by central banks that caused asset price inflation in developed countries, and too much easy credit in emerging markets. Underlying economic conditions all over were rather weak, but everything looked good because of the artificial froth created by monetary easing.   `

Central banks to the rescue 

Until recently, when stock market worldwide showed signs of weakness, investors simply waited for central banks in the US, the EU, UK, and Japan to come to the rescue. And they were never disappointed. Trying to boost sagging economies, central bankers would launch, or relaunch, monetary easing, and zero per cent interest.

They would ladle quantitative easing, or QE. If it wasn’t enough, they would ladle some more. When that did not do the trick, they went further. Some of them (Japan’s Central Bank just joined the group) stopped paying interest to commercial banks parking their funds with them.

More of everything

And when even that proved to be insufficient, some of them started charging interest on deposits as a way to force banks to lend more in order to induce more growth. (Even Janet Yellen, the Chairwoman of the US Fed, just declared during a congressional testimony that negative interest rates could be looked at here in the US as a policy option, in some scenarios).

All these gimmicks produced some results. But nothing stellar. With all this gigantic monetary stimulus, the US has been growing at a modest 2%. Europe, at roughly 1%, has done much worse. Still, notwithstanding meager results, the international financial community seemed to be comfortable.

As long as the central banks seemed to be in control, busy doing one thing or another to  prop up markets and keep stock markets reasonably buoyant, (regardless of the weak underlying economic fundamentals), it all looked promising.

Artificial valuations 

Except that everybody, unless totally insane, must have known that nothing was right. Here is the thing. The extravagantly long season of monetary easing did not do much to grow the economies. But zero interest rates pushed cash from savings into stocks, therefore artificially boosting stock prices.

This cannot go on for ever.

Therefore, investors paying high prices for inflated assets must know that these high valuations were and are artificial. What happens when the central banks cannot provide any more monetary easing?

Governments have done nothing 

It is true that central banks intervened so heavily mostly because governments did practically nothing. Sadly, in most western countries there has been no serious attempt to launch new pro-market, pro-growth, pro-investments policies. And it is obvious that, without a business friendly policy environment, there will be fewer investments, less innovation, less enterprise, fewer new companies, and fewer new jobs. And this means no growth, or lackluster growth.

But policy-makers, paralyzed by their ideological blinders that privilege spending on social issues as opposed of investments in future growth, sat on their hands.

It is true that central bankers, at least in the US and in the EU, pleaded with governments. They wanted action, real reforms that would free up resources, favor enterprise and therefore new growth. They did say that they could not manage the economies all on their own. But nobody listened, and almost nothing happened.

No reforms in the US 

In the US nothing has been done about reforming entitlement spending (Social Security, Medicare and Medicaid) and a horrendously complicated, burdensome federal tax system that discourages business creation. On the contrary, instead of reducing regulations, the US government keeps adding more, this way suffocating enterprises with unnecessary mandates.

In Europe, if anything, it is even worse. In Japan, Prime Minister Shinzo Abe back in December 2010 announced “Abenomics” a major reform plan consisting of “three arrows”: fiscal stimulus, monetary easing and structural reforms. Well, thanks to a subservient Bank of Japan, he got the monetary easing. But the rest –especially the structural reforms– did not happen. Abe simply could not deliver. Japan continues to stagnate.

Central banks keep easing 

So, confronted with systemically weak economies, and no help from policy-makers, the central banks tried to provide more oxygen via monetary stimulus. And it worked; but only a little. However, in so doing, the central banks created unprecedented asset price distortions and misdirected the allocation of capital. Trying to buy some time, they created a gigantic mess.

Nervous investors 

And now investors are very uneasy. They are on the lookout for any signs that may indicate the imminent collapse of this house of cards. They know that China, the most astonishing example of fake growth almost entirely financed (since the 2008 Great Recession) by unprecedented levels of new debt, is doing poorly. How poorly? Well, we do not know, because we cannot trust Chinese economic statistics. But global investors know that something really bad is brewing there. There is massive industrial over capacity, and no new demand. There is capital flight. For how long can the Chinese Government keep so many virtually bankrupt companies open? Not for ever.

And the same investors know and fear the cascading effects of the China retreat, some of them already unfolding, (and captured by Maersk’s warning on world trade flows deterioration). Indeed, South Korea, Thailand, Japan, Indonesia, Australia and others are closely tied to the Chinese economy. Many of their companies are part of China’s supply chains. So, as China goes down, they follow. This means a broader contraction.

Commodities down 

And then you have all the commodities producing countries, also hurt badly by China’s slow down. This would be bad enough as it is. But it is made a lot worse by the fact that the rapid growth of many sectors (not just commodities) in emerging markets was debt-financed. Now that business is down, and profits have disappeared, where is the money to pay back the loans? These companies are going down, while their fall causes losses in the financial sector. This means more negative ripple effects.

So, here is the picture. Stock markets are over valued. Commodities producing countries are in bad shape because of lack of demand from China and over supply. There is too much bad debt.

Too much debt

Now, is this another September 2008 in the making? Who knows really. It is clear that no major economy is in high gear. On top of that, at least some highly indebted companies will be unable to make it. There are nasty rumors of troubled European banks with too many non performing loans on their books. Now they are abandoned by investors who fear the worst.

In China, at least for now, the losses are disguised through heavy-handed interventions by the state. But what about elsewhere? In the US, for instance, many of the companies that participated in the now defunct shale oil boom borrowed heavily to finance their operations. Because of the oil price collapse, now many of them will go under. This already hurt producers, contractors, suppliers and vendors, not to mention tens of thousands of high paying jobs lost. And you have to add the banks that financed the energy boom to the list. More broadly, the global financial system is exposed to a lot of non recoverable loans in emerging markets.

Bad news 

So, there you have it. The global economic slow down is here to stay, according to Maersk and others. I would trust them. It is their core business to properly understand trends in trade flows.

Commodities prices are not going to rebound. Mining multinationals from Glencore to BHP Billiton to Vale are in bad shape. China got a massive indigestion and stopped buying. Brazil is in a recession. Russia is doing poorly because of low oil prices. Europe is fragile. And there is a lot of bad debt in distressed emerging countries.

US cannot insulate itself 

It is true that in this rather gloomy context the US is not doing so badly. We have some growth, (a bit more than 2%), and unemployment is way down, (4.9%). The point is that the US is not strong enough to be able to insulate itself from these global currents. While the American economy is less dependent on foreign trade, many large US companies are tied to world markets. (Think about Caterpillar, or General Electric). If they suffer because of lost foreign sales, there will be ripple effects. At some point America as a whole will also feel the pain.

And if this happens while investors lose confidence in the Fed’s ability to keep propping up markets with some more tricks, then all bets are off. At that point expect a mad rush for the exit.

Right now a US recession seems a very distant possibility. But may be it is a lot closer than we think.


Fed Unclear On Future Rate Increases

WASHINGTON – At last, the US Federal Reserve decided to put an end to the abnormally long period of zero interest rates, or ZIRP. On December 16 Fed Chairman Yellen announced a 1/4 percentage point increase.

More rate increases ahead 

In addition, the Fed indicated its intent to continue to “gradually” increase interest rates in 2016 and 2017. In so doing, the Fed signals its intention to bring monetary policy back to “normal”. The emergency mode that goes back to the 2008 recession is officially over.

The argument supporting a rate hike is that the US economy is growing at a steady pace, while unemployment at 5% is back to a physiological level.

Do they really mean it? 

However, after reading the modulated Fed statement and after listening to the careful words of Fed Chair Yellen during her press conference, we can also get a very different impression. The Fed did something now. But it is not at all clear that it will carry on with additional rate hikes at a steady pace next year, even though it says it wants to.

In fact, it may very well do nothing next year.

We want inflation 

Here is the thing. The Fed declared that additional rate hikes that will bring monetary policies back to “normal” are in large part contingent on the rate of inflation going back to 2%. Right now it is much lower, at 0.4%. Which is to say that if inflation fails to climb to the desired 2% level, the Fed may have to reconsider the pace and the extent of any additional interest rate hikes.

That said, it is quite plain that in a deflationary global economy, with collapsing commodities and energy prices, the chances of higher inflation in the US in 2016 are very slim. Therefore we can conclude that the Fed, while declaring a policy objective, also created an easy way out.

This is what we will do, or may be not 

In simple terms, the Fed announcement can be read this way: “Yes, it was about time for all of us in the Federal Open Market Committee, FOMC, to stop this ZIRP insanity. And so we did. We raised rates, even if just a little bit, to prove that we are serious about this. And, of course we would like to raise rates some more in 2016 and  2017. However, we really need inflation at or close to 2% to do this. If this does not happen next year we may have to reconsider any rates hike timetable”.

Got that? Let me say it again, just in case: “We would like to raise rates, but we may not, after all. It all depends on the rate of inflation. If inflation is too low we may pause or raise rates even more slowly than we announced today. Is our intent clear?”

The markets can choose to interpret this statement of intentions this way:

We have raised rates today. But this is only for show. And we have created a nice way out of additional interest rate hikes. Off the record, we all know that there is no way that inflation will go back to 2% in 2016. And we just told you that low inflation will give us an excuse to dilute or postpone any future action on rates”

Markets are fine with this 

Theoretically, any Fed policy move signaling a return to higher interest rates should have spooked the stock market. It is an open secret on Wall Street that stocks are overvalued because ZIRP, the zero per cent interest policy pursued by the Fed for so many years, made stock investing a lot more attractive. Bank deposits and other traditional forms of prudent investment yield nothing.

But the stock market reacted calmly. In fact, right after the Fed announcement, the Dow Jones moved higher.

How so? In my opinion, the markets concluded that the Fed does not intend to seriously tighten any time soon. May be later, but not in the immediate future.

Translation: the Wall Street party goes on.

A different signal would have elicited different market reactions

It would have been a completely different story had Yellen declared that this 0.25% increase is just the opening salvo, the first in a long series of staggered rate hikes that will take place —no matter what. This would have signaled a real policy shift.

Right now there is half a signal. “We would like to, but we are not sure that we will, because low inflation may not allow us to go forward”.

End ZIRP just as the economy peaked 

Well, why this muddled message? Very simple. The Fed is in a bind. At some point it had to end this ZIRP anomaly. But the Fed also knows that the US economy, while expanding at a modest 2% annual rate, is not doing so great. Capital expenditures are down. Movement of goods in and out of US ports is down. Major US exporters like Caterpillar are doing poorly because of lack of demand.

A global slow down 

Besides, the global economy is very anemic. Europe is not growing much. Japan is in bad shape. China is slowing down. Major commodities exporters, from Brazil to Chile and Australia, are in real trouble. All commodity prices have collapsed. Besides, oil is now at less than $ 40 a barrel, with negative consequences on a large part of the US economy that supports the energy sector.

And finally, all other major central banks, from the European Central Bank to the Bank of Japan, are moving exactly in the opposite direction. While the US begins tightening, they keep on relaxing their own monetary policies, this way devaluing their currencies. Higher rates in America will translate into an even higher US dollar. And this will hurt all US exporters.

This is not a scenario that indicates higher growth ahead for America, therefore providing the rationale to go back to “normal” monetary policies. In fact the global slowdown may even cause a recession in the US in 2016.

Given all this, why did the Fed decide to act now on rates?

A political rate hike

The December 16 rate hike is mostly symbolic. It is about  institutional credibility, and therefore mostly about politics, and not about setting a new monetary policy.

The fact is that a Fed rate increase has been openly discussed, anticipated, hinted and almost announced so many times that the FOMC decided that it had to do “something” before the end of 2015. But it did so in a clever way, leaving for itself plenty of wiggle room regarding future moves.

However, because of this deliberate ambiguity, it is hard to read any precise guidance regarding future monetary policies.

Will the stock market bubble continue? 

Eternal Wall Street bulls and plenty of speculators will probably conclude that the Fed moved today only for public relations reasons.

Most probably, it will increase rates in 2016 only a little bit, and may be not at all. Therefore investing in vastly overvalued stocks is still relatively safe. The small 0.25% rate hike, by itself, changes nothing.

In other words, to the extent that investors believe that the stock market is alive and well, even after today’s hike and announcements of likely future tightening, we are a long way from getting back to normal.

And this is bad news. At some point, with or without decisive Fed action on rates, the Wall Street party will end. When that happens, speculators and unsuspecting retail investors will be burnt very badly.

A word of advice: Pull out now, before the whole thing collapses.

Will The Fed Raise Interest Rates? May Be Not

WASHINGTON – Until a couple of days ago, most economists bet that the US Federal Reserve would finally begin to raise interest rates at its December 2015 meeting, this way ending the anomaly of the longest era of zero interest in modern history.

Promising picture

The general picture looked propitious for such a move. The US economy just added 271,000 jobs in October, many more than expected. Wages are going up a bit. Unemployment is down. Overall, it seemed that the new data indicated that a strong economy would fuel more inflation. And this new trend would justify raising interest rates.

What will happen to stocks? 

And what about the consequences? Well, here it gets tricky. This Fed move on interests would signal to stock investors that the ground may begin to shift. Higher rates mean that in a short while, (depending on how fast the Fed moves to bring interest rates from zero back to a historic norm of about 4%), other investment instruments like savings accounts or bonds will become once again more attractive.

In short, if it is indeed true that this unprecedented era of zero interest created a stock market bubble because it forced people to move away from other forms of investments, then we can expect that its end may bring about a stock market decline, or worse.

Right now, people have an extra incentive to invest in stocks because –thanks to zero interest rates decreed by the Fed– it is the only game in town. You cannot make any money by placing your funds in savings accounts. When interest rates go up again, people will have choices.

Fed watching 

Because of all this, these days markets move up or down mostly on the basis of what analysts believe the Fed will or will not do, and how soon. This happens because stocks are sensitive to interest rates moves, and also because there is no action on any other economic policy front that may trigger market reactions.

Paralysis in Washington 

Washington is paralyzed by political dissent. Therefore, no chance of anything happening there that would influence economic policies and therefore economic and investment decisions. No serious public spending reform plan on the agenda, no changes to major entitlements, and no tax reforms that would modify economic incentives.

In other words, nothing is coming from Washington that would signal markets that soon it will be easier to go into business, create new companies, invest in them and profit from them.

Will the Fed move?

So, we are left with Fed watching. As noted above, looking at the positive signs from the US economy that were streaming in in the last few days, it looked as if the Fed would finally have the margin to move.

Indeed, on the surface, the US is doing fine. The stock market is buoyant. Lots of new jobs added in October. More Americans are employed. Higher interest rates, phased in a little bit at a time, would not smother this fairly solid economy.

Outlook not so good anymore 

Well, this was only a few days ago. But now things do not look so good anymore. For example, let’s take a look at commodities. By any measure the sector, a close proxy of industrial activities, looks awful. The Bloomberg Commodity Index is now down to its lowest level since the 2008 financial crisis. The price of copper, widely used in all sorts of industries, is now down to a six-year low. Most commodity prices are back to where they were before China engaged in its gigantic domestic investment program that drove up the cost of everything. As a minimum, this serious decline means that most industrial economies, and not just China, are slowing down.

Commodities down, world trade down 

And it gets worse. Because of sharply lower demand for their products, many emerging markets that produce and export commodities are either in a recession or close to it, (think of Brazil and South Africa). Besides, despite the official statistics pointing to lower but still significant growth, China is exporting and importing less of everything. This affects all its trading partners, from Australia to South Korea.

And there are more bad signs. Maersk, the Denmark based leading maritime shipping company, recently announced that it canceled several orders for new vessels. In other words, a giant player that manages a large chunk of world trade does not believe that current and projected global traffic volumes justify buying more container ships. (Incidentally, recent data about the movement of goods in and out of major US ports also indicate a sustained decline).

More Americans are working, but few good jobs

Back in the US, while more people have jobs, most of the recent additions are in leisure and hospitality, health care, and other services. Most of these jobs are low paying. In many cases they are not full-time. In other words, there are no new jobs in critical wealth creating sectors such as oil and gas, mining and manufacturing.

Sure, more American are employed, and this is good news. But their jobs depend on government spending (health care), and on the spending of other Americans employed in wealth producing sectors.

So, here is the thing. While we have more bartenders and waiters, we have had zero growth or declines in manufacturing, oil and gas, and mining. This is not a sign of a robust economy, going forward.

If the global economy slows down significantly, many US exporters will be hurt. Some, like Caterpillar, are already doing poorly. And this is because fewer foreign customers are engaged in new construction projects. Hence no need to buy more earth moving equipment from Caterpillar.

Other Central Banks not about to raise rates 

Last but least, you have to consider what the other monetary authorities are doing. The Bank of England just decided not to raise rates. The European Central Bank is engaged in Quantitative Easing and plans to have more of it, largely on account of disappointing growth within the Eurozone, (only 0.3% in the last quarter). The Japanese economy is (once again) sputtering.  Finally, China is trying to stimulate its economy by easing credit and lowering the amount of reserves banks need to keep. Therefore you can expect more, not less, monetary easing in the rest of the world.

So, here is the global picture. The US may be doing almost OK –for now. But the rest of the developed and developing world is slowing down. For this reason all other central banks will keep interest rates at zero or close to zero.

If the US acts on its own 

In this context, if the US will raise rates all by itself, as a minimum we can expect a massive flood of foreign capital seeking higher rewards into America. This would drive the US dollar further up, significantly hurting US exporters, including all major manufacturing companies. And remember that the newly added US jobs in leisure and hospitality largely depend on other gainfully employed people having the discretionary income to spend on restaurants and holidays.

Stampede out of stocks? 

And it gets worse. Everybody agrees that the US stock market is overvalued on account of zero interest rates that drove people away from other forms of investments. What we do not know is how overvalued.

Assuming even a modest Fed move on interest rates in December, we cannot expect rational, measured reactions. Foreign investors, fearing that the Fed might get aggressive, may flee from higher risk countries. The dollar shoots up. US exporters are hurt, badly. Their stocks sink, dragging down their vendors and suppliers. Other vulnerable stocks follow. Can this become a rout that drags down “everything”? Yes, this can happen.

Is the US economy rather weak, after all? 

Therefore, the odds are now against the Fed raising rates. But, wait a minute. If the Fed does not raise rates, then it signals to Wall Street that the US economy, contrary to its earlier analyses, is not that strong. If even a modest Fed move on interest rates might upset the whole thing, this means that the economy has no strong foundations.

For this reasons, some investors are likely to sell stocks anyway, finally realizing that they are holding stuff of dubious, most likely artificially inflated value.

Preserve your capital, stay out of over valued assets 

Either way, we lose. If investors were wise, they would give up the notion of making any money in stocks, given this weird environment characterized by a slow-moving US, a weak global economy, and expensive assets.

US stock are over valued. Therefore it is not smart to keep buying them. Of course, if you go into cash, you make no money, we know that. Still, better to make zero profit than losing your capital. As I said, if investors were wise…

Thanks To The Central Banks, The Equity Bubble Is Getting Bigger

WASHINGTON – Imagine this. There are lots of chronically sick patients in the hospital. Many of them are deteriorating rapidly. The right therapies cannot be administered because of absurd delays caused by infighting within the Ministry of Health. 

Give them morphine 

The physicians in charge of the hospital know what is needed to take care of the patients. But they have no resources. The only thing they have got is morphine, lots of it.

Well, since we cannot cure the patients, at least let’s alleviate their severe pain. “Morphine for everybody!” orders the Director of the hospital. “But sir, this is no cure”, argues a young doctor. “What do we do when the effect of morphine wears off?”, he asks. “Well, we will give them some more. We have ample supply”, replies the Director.

Quantitative Easing is morphine

This may be a far-fetched analogy, but here it is. The patients are the sick economies in Europe, Japan, the US and now –in a major way– China. The Ministry of Health are the Governments incapable of tackling the structural issues of lack of productive investments, labor market rigidity and high public spending. The hospital Director are the Central Bankers. And the morphine is an ample supply is Quantitative Easing, (QE).

Central Bank left alone to manage the economies

The Western economies are really sick. There is too much leverage, low productivity, too much private debt and out of control public spending. But Governments do essentially nothing about any of this. They are paralyzed by ideological disputes and bogus arguments about austerity and income redistribution. The only institutions that can do “something” are the Central Banks. They have no real “cure” for any of this. But they can provide temporary relief by keeping interest rates close to zero, (here is the morphine, in the form of QE), thereby giving everybody the illusion that the situation, while difficult, is manageable. The patients are still very sick. But (thanks to ample doses of QE-morphine) they feel no pain; and so they are led to believe that they have been cured.

More QE, it is still party time!

This is totally absurd. But this is exactly what is happening. The European Central Bank, after having launched its own QE a while ago, just declared that the Eurozone economies need some more monetary easing. The Central Bank in China just announced some more easy money measures, in a country, mind you, that accumulated a monstrous amount of debt (much of it bad debt) in just a few years.

Watching all this unfold, Wall Street correctly concluded that in this environment where everybody is injecting even more liquidity there is no way that the US Federal Reserve will go against this powerful current and raise interest rates in 2015. With US rates still near zero, it still makes sense to put money in equities, since everything else will give you no financial reward.

Investors got the message. “It is still party time!” And so, Wall Street shot up on Thursday. The Dow Jones added 300 points. There was further growth on Friday. Has this optimism about equities got anything to do with the real economy? Not really.

Perverse incentives 

This is yet another Fed-induced rally. (By indirectly signalling that it will not raise rates in 2015, the Fed gave the green light). Needless to say, this is madness. Equity prices in developed economies now are largely disconnected from the fundamentals.

Even worse, thanks to QE governments in highly indebted countries, from Europe to the US, are under no pressure to reform their public finances, because they can keep borrowing at very low interest, this way creating and sustaining the insane delusion that more and more debt is a good way to finance chronic over spending.

Commodities took a dive 

In the meantime, though, emerging countries whose commodities fueled the crazy debt-driven Chinese construction investments binge are feeling the pain. As China could not sustain its own truly over sized madness, it stop buying stuff.

Therefore, commodity prices collapsed. As a result, Brazil, Australia, South Africa, Chile, Argentina, Zambia, and many others are suffering, in a major way. They built their budgets with the unwarranted assumption that commodity prices would stay in the stratosphere for ever. Now they have to go back to the drawing board.

In the meantime, their semi-impoverished people have no extra cash to buy new things, while their currencies are worth a lot less. This penury will further depress exports from industrial countries, this way further reinforcing the global downward spiral.

No incentives to engage in serious reforms 

So, here is the picture. The global economy is doing poorly, in large part because of minimal growth in the debt-burdened West where Governments still spend money on unaffordable entitlements instead of creating a business friendly environment that will encourage private investments in wealth-creating innovation.

Most emerging markets are in recession or close to it.

But at least in Europe, Japan, the US (and now China) the real extent of the problem is disguised. Developed countries enjoy a drug-induced financial markets buoyancy (QE is morphine) because the Central Banks keep pumping in liquidity, this way allowing the stock market bubbles to continue.

Another big bubble 

This is a gimmick. A dangerous gimmick. At some point it will have to stop. I am not sure when. But it cannot go on for ever. I do not even want to think about what will happen when this gigantic bubble will explode.

David Stockman: We Are Losing Manufacturing Jobs

WASHINGTON – In his Contra Corner blog David Stockman (Budget Director under Ronald Reagan) has been warning us that we live in Fed-induced economic fantasy, possibly a hallucination, in which soft numbers pass for indications of solid growth.

Back to where we were

The ugly truth is that, notwithstanding the unprecedented length of the Fed-mandated zero per cent interest policy, America is barely back to where it was  before the 2008 recession. As for jobs growth, it is real. However, we should carefully look at the economic reality behind these numbers. What kind of jobs are we creating?

Jobs losses in manufacturing, gains in health care

Indeed, the just released August figures provide a warning. The mildly good headline is that we have added new jobs, (+ 173,000). However, this is a bit less than what was expected, and this is a bit disappointing.

If we break this number down, the real story is that the smaller than expected jobs growth is due to a net decline in the sectors that actually have an impact on the real economy: manufacturing and mining, (-17,000 jobs). This has been compensated by significant employment growth in services, such as health care.


Which is to say that America is stagnating where it matters: in the true wealth-creating sectors of the economy, while we add jobs in (low pay) services sectors that depend largely on public financing, notably health care. The fact is that nursing assistants, while valuable, do not generate any new wealth, factory workers do. The soft August jobs numbers do not fully reveal this disturbing reality.

Now, the loss of some manufacturing jobs is not so terrible. Because of technological progress and automation, (robots), factories can keep their output while employing fewer people. But, below a certain level, these losses spell decline.

The end game

And if we combine the two trends –loss of jobs in industry and employment gains in low added value services– we begin to see the end game: a feeble economy that no longer generates any real wealth.

How Stockman sees it

This is how Stockman himself presents the issue in his Contra Corner blog. The figures and the graph below, copied from his recent entry, are truly alarming.

“Putting this all together, since the start of the Second Great Depression, the US economy has lost 1.4 million manufacturing workers, but has more than made up for this with the addition of 1.5 million waiters and bartenders”.

Capitalism In Peril?

WASHINGTON – In a well crafted WSJ op-piece (The World-Wide Undermining of Free Markets, August 11, 2015), financial adviser Romain Hatchuel points out some worrisome truths. Western policy-makers, monetary authorities in the lead, have pursued policies that have undermined the foundations of capitalism.

Years of ZIRP 

This is what central bankers have done. Many years of zero per cent interest rates, (ZIRP, for Zero Interest Rate Policy), plus massive asset purchases and quantitative easing have created a dangerous new environment. As a result of easy money, the price of many assets has been inflated. Current high stock market valuations are false, in as much as they are largely the outcome of stimulative policies that made cheap money available to investors, while traditional savings vehicles are out, because of the prolonged zero per cent interest policies pursued by all major central banks.

China manipulates markets 

At one extreme, you have China. Obviously China is not a capitalist market economy. But, according to its apologists and many admirers it is well on its way to become one. Really?

Most recently the Chinese authorities prevented a stock market meltdown by suspending trades, distributing essentially free cash to stock brokers so that they would buy shares and forcing share holders to hold on to their stocks. All this, of course, with the noble objective of preventing major losses for millions of improvident investors.

Still, be that as it may, all of the above indicates that China does not have –and has no immediate plans to create– real capital markets in which buyers and sellers freely determine share prices. It is all manipulated.

Inflated stock prices 

But what about the rest of the world? We used to have real capital markets. Well, we do not have Chinese extremes, but we are getting there. Fed mandated ZIRP has created a bubble. So much so that every time a credible rumor of any type of Federal Reserve rate hike comes out, investors reflexively sell stocks.

Why is that?

Very simple. Because most of them know that they are holding stock portfolios whose value is artificially inflated by the Fed’s zero per cent interest policy that has been kept in place for 6 years, that is well after the end of the 2008 Financial Crisis. Therefore, it makes sense to believe that if and when rates go back to normal stock prices will go down because the artificial incentives to buy expensive stocks will vanish.

So, Wall Street may be not the Shanghai Stock Market, but in both of them transactions are heavily affected by non market factors that support or inflate share prices.

Unaffordable entitlements 

At a different level, what about large and growing fiscal imbalances? It is amazing to notice that by and large there is almost total indifference vis-a-vis large fiscal deficits that over time caused the additional growth of an already immense national debt in Japan, Europe and the US.

Large fiscal deficits are largely caused by unsustainable entitlement programs designed in a different era, with different cost structures and different demographic trends.

No reform 

To put it simply, these programs now cost too much. But instead of dealing squarely with the issues and devising sensible ways to reform the programs, this way making them sustainable, elected leaders prefer to side step the politically thorny decision to reduce benefits. They decided to finance the same, essentially unchanged, programs through more and more debt.

Japan’s debt 

Japan is leading the way. This once energetic economy now has a national debt equal to 240% of GDP. This is astonishing. What this means is that, even with a Japanese version of ZIRP currently in place, almost half the country’s total revenue has to be devoted to debt service. This means that Japan has to divert scarce capital from investments to paying interest on this monumental debt.

And yet, all seems normal in Tokyo. Nobody talks about this absurd level of debt as an emergency that requires drastic action.

Issue ignored in Washington 

Well, move to Washington and, while the numbers are less frightening, we have the same complacency. It is implicitly understood by almost all candidates for national office, (we have a presidential campaign underway), that even talking about entitlement reform is political suicide.

Social Security, Medicare and Medicaid (these are the big entitlements) are essentially untouchable. And this is folly. The costs of these entitlements will inevitably go up. The baby boomers are retiring. The active population that pays into the system is shrinking. This is like watching a train wreck in slow motion. We know exactly what is going to happen.

Much more can be said about the damage caused to business creation by heavy corporate taxes and absurd regulations. Taken altogether, the outcome of the policy mix is highly toxic. We have fake money that causes inflated asset prices. Unstoppable entitlement spending that is destroying public finances, and excessive regulations that are choking enterprise.

Messy capitalism 

Here is my conclusion. Markets are hardly perfect. Capitalism is a messy and often wasteful system. The 2008 Great Recession is illustrative of what can happen when investments turn into crazy speculation, while people keep buying over inflated assets (and fake securitized mortgages) with the certainty that prices will never go down.

Bad remedies

Yes, 2008 and its aftermath was a horrible show of human folly. And yet the cure may be even worse. Public policy has created a new false semi-prosperity, in the context of sluggish economic growth. Asset prices are once again inflated. Millions of people keep get unaffordable benefits financed through soon to be unsustainable debt.

And politicians keep offering more free goodies. There is a little bit for every one. Higher minimum wage. A policy that in practice amounts to debt forgiveness for student loans. More categories of workers entitled to over time compensation. More food stamps for low-income people. And subsidized heath services for millions through Obamacare. In all this, the Democrats propose redistributive tax measures so that more wealth will be transferred to the poor and to the lower middle class.

Drifting away from capitalism 

I fully concur with what Hatchuel wrote in his WSJ op-ed piece about America slowly drifting away from its capitalistic roots. Indeed, current policies largely focused on support and subsidies, while they  ignore the need to promote economic growth, have slowly eroded the fundamentals of free market capitalism.

The way it used to be 

It used to be the case that you would get ahead in America mostly because you were part of the productive, money-making sectors of the economy. You got rich because you produced wealth, and not because you were part of a protected class.

As I said, the capitalistic system is most imperfect. It is prone to excess and speculative frenzy, while even seasoned players make gigantic errors. But I have yet to see a better alternative.

The idea that savvy policy-makers can successfully manage markets, and grow the economy, so that we can all prosper within a fine-tuned system is a complete absurdity. Many failed experiments –from Fascism to Communism to Social-Democracy– amply demonstrate this assertion.

US Stocks Rise Because Of Bad Economic News?

WASHINGTON – Here is a clear economic news non sequitur, now considered “normal”, as financial markets lost any connection with the real economy. This is from a recent Reuters (May 18, 2015) news story: “U.S. stocks edged higher, with both the Dow Jones industrial average and the S&P 500 hitting records, as weak economic data suggested the Federal Reserve will hold back on raising rates any time soon”.

Bad economy, stocks go higher

Yes, this exactly it. US stocks edge higher on weak economic data. But, wait a minute. Shouldn’t it be the opposite? Shouldn’t it be that stocks are valued less when we have indications that the economy is not doing so well?

Well, not any more. And here is the perfectly logical and rational reason. Right now investing in stocks is practically the only way to put money to work. And this is because the zero interest rates policy, (ZIRP), inaugurated many years ago by the Fed in order to counter the Great Recession, has made any other form of investment unprofitable, and therefore unattractive.

Stocks are over valued

That said, everybody knows that because of this market distortion created by the Fed (in order to encourage more investments) stocks are over valued. If and when the Fed will end this incredibly long ZIRP stretch, interest rates will go higher and investors will have once again viable alternatives to buying stocks.

At that point stock valuations will be deflated, because stocks will no longer benefit from the “subsidy” provided by zero interest rates. And this is why all observers anxiously watch the Fed, trying to divine when and what speed the Federal Open Market Committee (FOMC) will take steps to go back to “normal” interest rates.

The absurd is now rational

But here is where all this becomes absurd. The conventional wisdom is that the Fed will continue to keep interest rates at zero, as long as the US economy remains  relatively weak and fragile. The moment we start gaining real velocity, (an indication that we are finally getting our act together), the Fed will start ratcheting up interest rates, this way ending the longest Wall Street party.

And this explains the non sequitur in the Reuters story quoted above: mediocre economy, higher stock prices. Please note all this. On account of Fed policies, these days “bad news” is good for investors. “Good news” causes stock prices to fall.

In my own words, the markets are extremely happy to see lackluster economic data, because this means that the Fed will have to delay any action on interest rates even further. Having taken note of this, as a fitting celebration, investor rush to buy more stocks.

Again, think about it. We keep buying stocks, not because there is true value in owning a piece of a successful company, but because the economy is weak, and so (thanks to Fed policies) there is an inherent advantage in owning over valued assets.

Fed-induced misalllocation of resources

So, there you have it. “Weak economy, Wall Street celebrates”. This is what the Fed has done. If the economy is good, then it is time to sell way over valued stocks. If the economy is bad or so-so, then we buy stocks, because we know that they will continue to be overvalued a little while longer.

All this is crazy. Our top monetary authority has created distortions that encourage a gigantic misallocation of financial resources. And nobody says anything.