All economics, all the time

At least in this post…this is a lightening round of some of the issues in the news:

S&P PE

  1. Yes the markets are getting whipsawed, even with today’s big move back up.  Not surprising; valuations using conventional metrics (such as the market price to earnings multiple) have been extremely high compared to history.  One can make the claim that we are still in bubble territory with the S&P 500 at an average PE of over 25.  But we’ve also had historically low volatility; markets need some volatility to bleed off excessive exuberance.  Bull markets climb a wall of worry, but there has been precious little worry until the last few days.  Finally, the concern is inflation, because central banks may finally be forced to scale back on global liquidity (which is what I maintain has been the fuel of the incredible stock market rise).  As we normalize monetary policy, it has always been known that the unwinding might be painful.
  2. Yesterday we got a report of a 9 year high in the trade deficit; according to Mr. Trump we must be losing.  I want to tell Mr. Trump, no this does not mean you’re a loser.  In fact it means you are a winner.  Domestic economic growth and increased confidence in your policies are encouraging consumers to spend on imports and for foreigners to want to invest in the US (a current account deficit must be offset by a capital account surplus, i.e., foreigners investing in US).  Keep on winning Mr. Trump!  Don’t mess it up by trying to fight a non-problem.
  3. Poor Venezuela is now in the throws of hyperinflation.  For some reason the collapse of oil prices has only ruined one country–Venezuela.  And even as oil prices are creeping slightly back up, Venezuela’s implosion continues.  Hmmm…I wonder why this happened there?
  4. Finally, bitcoin is coming back to earth.  So regulators are clamoring that they need to protect the public from digital currencies.  While I remain a fan of the potential implications of block chain technology, I’ve always maintained that the government would never allow bitcoin as a dollar competitor.  The U.S. will not allow a competitor to its monopoly money.

What’s the common denominator in these?  Each issue is due to the intersection of politics and economics.  We live in a mixed economy, whether we like it or not.   This is a far cry from the Biblical role of “bearer of the sword” for the government.

14 thoughts on “All economics, all the time”

  1. How far down do you think that the Fed will allow markets to drop before it backs off on interest rate increases and attempts to dd more liquidity to the market? Are there other causes outside of excessive liquidity that have contributed to the bubble status that the stock market has right now?

    1. There was a nice article in the WSJ today about that very topic, and the good news is that it seems that the Fed wants to hold off on responding to corrections such as this one, even if the bottom continues to drop for a while. The bad news is that they do seem to be ready to jump in if they feel the economy is slipping. Part of the problem with the bubble is that easy money means easy misallocation, so with the volatility returning to the economy, we’ll start finding out who bit off more than they could chew. That will undeniably suck for some people, but it’s healthy in the long run to have a normally functioning economy.

  2. It has not been established that the market is in a “bubble stage.”

    First, many confuse “bubble” for any appreciation of the market. People were talking bubble back in March 2009, when the market was at its low. Some Austrian economists are always talking bubble. They are just about always wrong.

    Those who speak of bubbles are often permabears who are really good at sounding intelligent, but for not making money. They often appear as “experts” on CNBC or on its ugly twin, Fox Business, pontificating about the market. They are entertainers, not traders.

    For all of the talk over the last few days, the market is about where it started in 2018, which began only five weeks ago. The S&P futures went about 90 points over the January 1-15 range, and now went down around 90 points below that range. The difference is that it went up in a matter of weeks, and went down in a matter of days.

    The market will likely be making new highs by May. That said, it would be nice if price went back down during real time where it was last night in the overnight session (S&P 2530 area).

  3. What would you say characterizes a ‘mixed economy’ and do you think it is necessarily a departure from a proper role of government?

  4. The market was bound to do this so I don’t understand why so many people are freaking out. The steady and smooth way that the stock market has been for a while is what was so unusual. I also wonder how long is is going to take for the Fed to give up and lower interest rates again. I wonder if Trump will ever realize that this is a win not a loss. There is no way that the government will let bitcoin ever take over. I really liked all of your explanations on these topics.

  5. On the topic of bitcoin, I personally think block chain technology is here to stay and could be the future one world currency. Cryptocurrency is both decentralized and the speed at which it can be traded and transferred across the globe makes it a unique alternative currency option. Your argument seems to be that the government will regulate and crack down on bitcoin because of the threat it poses to national currencies. What ways do you think the government even has control over bitcoin in the first place? In China the ban didn’t seem to work with all the loopholes and inconsistencies which makes me think that governments will have a harder time than they think in their quest to suppress the new wave of digital currencies.

    1. Well, they can’t completely control the black market uses, but most commerce is not black market–easily enough to make it illegal or subject to enough regulation that it is no longer competitive.

  6. If one is hesitant to trade Bitcoin itself, one can trade Bitcoin futures now on the Chicago Mercantile Exchange’s electronic platform. Kind of like when the casino manager, played by Robert DeNiro, put sports betting inside the Tangiers in the 1995 movie “Casino.”

  7. Good points. Hopefully Mr. Trump will see the way that current international trade works and accept its benefits for the American consumers. Also, Venezuela has a presidential election coming up, and the Venezuelan people would vote out Maduro in a heartbeat if many opposition leaders weren’t already jailed or exiled.

  8. I find it interesting how the common denominator always seems to be government intervention, yet there are still cries for more and more intervention, which is why I never thought Bitcoin would fully take off. There was simply no way that Bitcoin would become super popular without the government trying to step in, which defeats the main purpose of Bitcoin in the first place.

  9. Interesting point in #2 that the trade deficit actually means we are winning, but what is the chance that Trump will let this be? I would also like to know what steps the government should take in these situations in order to more accurately fit the biblical role of government. What are we doing right and what should be stopped?

  10. Nothing seems so obviously solvable as #2. It still baffles me how Trump, in one sector of the economy will call for less government interaction, and then completely contradict that philosophy when it comes to foreign trade. Unfortunately, I don’t believe he’ll change his mind soon, and much of the good work he’s accomplished will be undone.

  11. I think it is very interesting that the government does have a hand in each of those issues, and I would agree with you on the fact that we are living in a mixed economy with the Fed having immense control of the economy. Do you ever see us shifting back toward a free economy? Or with the way things are going, do you think our economy will just be more controlled by the government?

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