Gaming The Fed
The basis of the much of today’s unbridled speculation in stocks, bonds, commodities, real estate, etc., fundamentally lies in an unqualified conviction the government can and will, "by any means necessary" to quote Governor Bernanke's seminal November 2002 speech, drive the economy, corporate profits, and asset prices higher. As global strategist Marc Faber notes in a recent Financial Times piece, “[O]ver the last 18 months U.S. monetary policies have boosted all asset classes. This is most unusual since it ought to be obvious that in the long run commodities inflation and real estate inflation are incompatible with a bond bull market.” While this conviction was sorely tested last summer by the Fed’s apparent withdrawal of the “Bernanke Put”, it appears that such earlier expressed diffidence has been laid aside and with it, banishment of bearishness to the sidelines…at least, until recently.
As Faber observes, a multiplicity of bubbles has been created over the last year in virtually every asset class: stocks, bonds, commodities, real estate. With constant reassurance by the Fed, professional investors essentially have been gaming the likelihood that, confronted with catastrophic losses, policy makers would effectively socialize the risk, and thereby thwart the disciplines of the free market. In the event that such calculations went awry, many professional investors reasoned they would have gone out of business anyway, so virtually nothing was lost in betting the ranch (at least with other people's money) on a deeper policy response. If it worked, you got to play again another day; if it failed, at least one failed in a conventional fashion (to paraphrase Keynes's famous quip). ...Link
Wednesday, March 31, 2004
Gaming The Fed - Auerback
Well, a lot of people think the markets are doing just fine. Let's see who turns out to be right, as I for one agree with Marshall's position. There's $874trillion of derivatives transactions out there adding considerable aggregate cost to capitalism's very survival. There's also all the extra interest cost, arbitrage costs, hedging, and other speculative aggregate system costs. This is a lot of extra weight for capitalism to viably carry. What do you think?