Friday, March 13, 2009

Cancel the Crisis, Part ll

First the President tells us that the crisis is "not as bad as we think."

Now, Obama's top economic adviser Larry Summers says the nation's economic crisis has led to an "excess of fear" among Americans that must be broken to reverse the downturn.

"Fear begets fear," said Summers. "It is this transition from an excess of greed to an excess of fear that President Roosevelt had in mind when he famously observed that the only thing we had to fear was fear itself. It is this transition that has happened in the United States today."

Polls on the President's fear mongering must have been very bad. The administration has completely flipped on their message.

For newcomers, here's a recap of what is really going on.

The Federal Reserve is printing money (M2 nsa) at double digit rates. For the most part since late September it's been around 15% annualized. There has been a slight dip over recent weeks to the 10% annualized growth level, which is still very aggressive money printing.

This new money entering the system will eventually turn the economy around in a distorted fashion. The data will look good, and the stock market will soar, but an economy with such huge money printing is being set up for a huge price inflation down the road. At that point, Bernanke has two choices. He can stop the money printing which will crash the economy, since the boom was all based on the Fed money pumping. Or, he can continue printing which will feed the fires of price inflation.

In short, the current crisis has not been canceled. It will comeback uglier than ever. There's no easy way out.

1 comment:

  1. Cancel that crisis?

    The liberal / progressive meme was that Bush "was out of touch". A fair criticism. That was then, this is now.

    Just how "in touch" is Obama anyway? Does he understand what's going on? Is he off on some kind of Bushian la la land 'ideology creates it's own reality' trip? Admittedly this time smoking a different kind of loco weed? A good indicator may be whether or not Obama even understands what is happening in the marketplace.

    Here is an extract from Brookes News, an Australian based Austrian oriented economics commentary.

    "It's true the market was heading down before Obama was elected. It is also true that the downward trend steepened once it became odds on that he would be the next president, proving once again that markets have fare greater foresight than political pundits and media cheer leaders.

    So how low, for example, can the Dow go? On 6 March it closed at 6,626.94. It was 13,000 last May, a drop of 49.02 per cent. Share prices fall in a recessions because earnings fall. Because markets are forward-looking they factor anticipated earnings (discounted) into current share prices. It follows that the lower future earning will be the lower will be share prices and the same goes for the price-earnings ratio. Moreover, the longer markets expect a recession to last the longer it will take share prices to recover. When we consider that the Obama stimulus package is really an anti-recovery policy I think it is quite possible that the Dow will fall to 4,000 or even lower and remain there for sometime. Obama's response to this dismal picture was to tell Americans:

    "Profits and earning ratios are starting to get to the point where buying stocks is a potentially good idea."

    Markets do not require investment advice from a man who thinks a firm's profits equal the price of one of its shares. Even if he understood the P-E concept it would not justify his rosy recommendations. At the moment I believe the average P-E is about 12 as against the historical of average of 14. Given the market trend and Obama's assault on profits and investment, the 12 figure strongly suggests that the P-E still has a long way to fall. Perhaps this why the markets chose to ignore President Obama's investment advice? "