Faith

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My Perspective Has Broadened

One of the considerations that comes up in the debate about fiscal stimulus is whether the government crowds out private market actors through its diverting of resources and capital towards its particular projects. And most of the time, when I hear that conversation play out, it is framed in the context of interest rates -- i.e., there is only a finite amount of savings upon which to draw the needed capital to implement any particular project, and so the act of government drawing from that base serves to prevent someone else from doing the same, driving up the cost of capital.

But, then I caught the following comment over at Scott Sumner's blog, which I think expands the definition of "crowding out" in a useful way that I hadn't really contemplated (even though it should be rather intuitive). Given that I think government policy is imprecise at best, the notion that it could target only idle resources is simply naive. Inevitably, it will capture some portion of the resource base that is already being utilized, to the detriment of other actors. And, so, it is not simply about a competition for savings (that will cause interest rates to spike), but also a competition for any components of the production process (which might not manifest itself through interest rates).

Trying to Explain the Unexplainable

I'm a day late in picking this up, but Jonathan Finegold Catalan poses some interesting questions about stock market action and gold.

Starting in reverse, as you may recall, some time back there was a blog exchange between Paul Krugman and Bob Murphy about why the price of gold was going up. Krugman tried to boil it down to one explanation, consistent with his model and view of the world. But, as Catalan notices, he is incomplete -- Krugman identifies the desire of gold owners to hold rather than sell (with negative interest rates contributing), but fails to identify any catalyst, generally, for why gold should move higher prospectively. While Catalan does not necessarily explore those reasons, I think it's worth a moment to ponder.

It starts with the fact that US economists (think Krugman, DeLong, Roubini) employ a very US-centric view into their analysis, treating gold as some sort of absurdity that gets too much attention from the fringe element. And, in being so dismissive, they end up paying short shrift to gold's historical role as a monetary asset -- that a lot of people in places like India and China (you know, real small countries) continue to take very seriously. Therefore, as everyone knows that money-printing is the order of the day, these non-Western folks are happy to hold gold because they seem to understand currency debasement. More fiat but the same amount of capital and resources -- what could that possibly be a recipe for? So, while a gold standard may not be an inevitable outcome, the end of the dollar standard is. And gold should do just fine along the way.

As to why the stock market moves the way it does, I still believe that most of it is just noise. Sentiment captured by moves up, down and sideways (this being the best reason to use technical analysis). If you believe in Keynes, it is the "animal spirits" of it. Or Higgs, the notion of uncertainty impacting behavior. So, while in the "micro" timeframe things can seem out of whack, if you wait for the "macro" timeframe to play itself out, you mostly end up where you think you should.

Land of the Rising Sun

As I've mentioned it as an interesting opportunity to come (perhaps even this year), I am going to check in regularly on the performance of the Japanese Yen, using FXY as a proxy. (For those interested in how the ETF price correlates to the dollar exchange rate, it is roughly 1/exchange rate * 10,000.) While the reason to get short the Yen is purely about fundamentals, the chart can still be used to keep track of changing sentiment.

Currently, the FXY is dancing around 128, which has provided mild resistance to the upside. But the level I am focused on is 126, having served as resistance, and then support, since last March. A break below is not catastrophic, but it might signal the start of a more bearish trend.

Anyway, enough for now.

Mr. Softee

I am a big fan of Bill Fleckenstein -- he of daily Market Rap fame. In today's piece, he passed a quick comment that it looks like Microsoft has at long last started to perform commensurate with the fundamentals underlying the company. As you might recall, I made a wrong turn with the company about a year and half ago, when the stock was in the lows 30s, buying a decent sized position of Jan 2012 $30 calls. Needless to say, I took a pretty loss when I finally sold it off in early 2011. Still, I own some of the stock outright and think it stands to perform well over time. But, the question is whether anything that has happened lately would give anyone reason to think that the stock is finally ready to move. So, despite the TA skeptic that I am, below is a 1-year daily chart.



In my estimation, it still looks to be range bound, and stopped right at the level that you would expect it to (note: the lines you see were drawn a long time ago, so there was no tinkering with the chart today to tell the story I want to tell). Clearly, there are plenty of people who are looking at the chart and using it to guide their thought process. Which is not to say that it can't finally get going, simply that I would hold off on getting too excited yet.

Daily Peeves

Here goes:

-For the second time in recent memory, I am without MSG and Knicks game as a customer of Time Warner.

-The little newsstand in the lobby of my office building has closed. I will now be forced to pay an extra dollar for my daily 1.5 liter bottle of Poland Spring.

-I am totally disengaged from the hullabaloo that is the 2012 race. And not without reason. Which means I inevitably face at least another 4 years of a President and government that will leave me wanting.

-We have officially reached the point in each New York winter where it simply becomes too painful to be outside for any extended period.

Harumph!

Definition of Insanity

I found the following quote from a 1991 paper by Harvard professor Greg Mankiw interesting:

"At any point in time, policymakers with discretion are tempted to inflate in order to reduce unemployment. Economic actors, however, come to understand this temptation and adjust their expectations of inflation accordingly. Higher expected inflation in turn causes the short-run tradeoff between inflation and unemployment to deteriorate. In the end, discretionary policy yields higher inflation without lower unemployment."

The counterargument is that the economy is now stuck in some sort of liquidity trap with rates at zero. Thus, the calculus changes.

Still, it did get me thinking. Look, I know correlation is not causation. But, in the literature that I have endeavoured to read recently, there is a recurring theme where you see easy money precipitate large expansions of credit and a boom. The boom proves itself unsustainable (for whatever reason, but you might guess) and then comes the bust. So, without delving into any discussion of where interest rates will go and when, isn't it at least worth a conversation about whether the most popular solutions discussed today, that seem to incorporate both the worst of the quote above and the sequence I briefly touched on, could put us on a path to repeating ourselves. In a bad way.