Wednesday, July 15, 2009

Andy Kessler Gets It (Sort Of)

Best selling author and former money manager Andy Kessler knows what works to juice the economy. He writes in today's WSJ:

At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market...In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster...

One problem with Kessler's analysis is that he is looking at monetary base, rather than M2 nsa. While looking at the monetary base is better than nothing, it is not money out in the system. The two, monetary base and M2 nsa, generally march in lockstep but not always. For example, he mentions a blip up in the monetary base in July. There is no such blip up M2 nsa. At this point that means the clears trend for the economy, stock market and commodities is down---that is, until Bernanke decides to step on the money accelerator again.

Kessler in his piece is also good on what hasn't caused the recent rebound in the economy:

Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth

All this said, the one place Kessler misses the point seems to be when it comes to business cycle theory. While he gets that an increase in money helps the stock market, he clearly doesn't get that this occurs because the new money distorts the capital structure of the economy by providing more funds to the capital goods sector (including the stock market). He somehow thinks that this Bernanke distortion is a good thing.

Further, this is real money entering the economy through the capital goods sector. Remarkably, Kessler manages to believe this is just stock market opinion rather than real money entering the system and causing the up move. He writes:

The stock market will ignore [Bernanke's] dollars if it doesn't believe they'll
turn into real profits.

Nobody ignores Fed money printing. If the money that's printed ended up in your wallet, you would notice. Kessler's right that it is wacky for money to be thrown at "green jobs and government health-care clerks...", but this is real money going into these sectors. It is not good for the economy overall, but it is great if you are Boone Pickens with a bunch of windmills headed to your garage and not enough room to store them all.

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