Ahha interprets finance and the market.
Free market capitalism is terribly fair. Few can see this especially not rich people, academics, FED. They all think human intellect can engineer a better outcome.
FED, the apotheosis of the better way, engineered the current disaster by running a negative real cost of funds for 3 years. They did this to achieve the fair goal of eternal prosperity. The result was cheap money found its way out the back door, around town, and ended up enabling the bidding up of no risk RE prices. Almost everyone considered this outcome eminently fair since most of them owned houses. Now it is looked upon as eminently unfair.
If a free market in money had been operating instead of FED's fixed price pretense, cheap money would never have been available to fuel the excesses. No one wants that kind of fairness because each thinks it stops an individual from getting ahead by subjecting everyone to financial discipline.
Funny thing about financial discipline that comes from the terribleness of free markets. You don't make money but you get wealthier over time. Contrast that with what I see around my upper middle class neighborhood. Everyone has lots of money but they're all poor, and they don't want free market capitalism. They'd prefer to continue to pay the protection money, the protection that keeps things unfair, so that they can get ahead.
When FED started selling Permament, it has the effect of draining reserves in the banking system. Normally this tightens credit. In our current environment that's what we need to break the tangible rational expectations for inflation. Breaking that, breaking the MECHANISM, is more important than bailing out the banking system from RE related illiquid states. For, if FED fails to break rational expectations for inflation, they'll lose control, and then the entire banking system will implode. FED has to preclude that, not because of some altruistic dedication to Dual Mandate, but to save themselves. They won't be able to do good, no more.
In our current situation there's too much liquidity in some sectors, and not enough in others. The TAF, TSF, are addressing the dearths associated with RE loans. What's dealing with the excesses? FED Permanent sales. It's permanent. FED is going to bust the MECHANISM into pieces to bring back or restore confidence that they can address the other side, the important side, of Dual Mandate, the low inflation side. You eliminate inflation by making money scarce and that makes it dear.
Why is that bullish? The stock market has been dropping not because of RE loan disposition, but because if loan disposition causes FED to pump up inflation, no one has any business holding stocks. It does not matter if it is true or not. (Rich Evans Doctrine). I and all other financial pros including the main fund managers believe that inflation is total anathema, so we must sell in anticipation of it. When FED starts draining liquidity which historically is bad for stocks it kills the will to inflate. The US has almost zero propensity to inflate, if we are talking about wage driven inflation, the only true dynamic kind, but if we are talking about monetary inflation, say put in place by FED by running a negative real fed funds rate on a sustained basis, or pumping for superficialities like y2k, or Asian Crisis, or S&L Crisis, et al, the US has extremely high propensity to inflate. The stock market has plunged concurrently with FED bail out. You've heard me wail that they needed to raise fed fund rate. Equivalently, they can drain reserves. I didn't suggest that because they haven't done a drain in eons. It means they mean business about busting the MECHANISM, and that means integrity will be restored to money and the system. In light of this the stock market is way undervalued. |
