Bloodless Coup

One more for you:

One of these years somebody's going to "discover" that the US inflation rate has actually been much higher than the government has let on, which will have charming consequences for all those with "low cost" floating-rate mortgages. As one of the smartest guys in the money management business (Seth Klarman) wrote last year:

[W]e increasingly suspect the true rate of inflation to be significantly understated. One factor is the government’s use of “hedonic price adjustments” that attempt to measure the value of “quality improvements” in many goods. In addition, the way the U.S. government measures the cost of many items, such as housing, is based on an odd construct that, not coincidentally, shows the result the government wishes for rather than the one we all can observe in plain sight. Housing costs, in the government’s calculation, are based on imputed rents, which have not been rising even as housing prices have surged in recent years. When we consider the expenses in peoples’ lives, computers and home electronics are surely becoming cheaper, but almost everything else – food, gasoline, heating oil and natural gas, healthcare, tuition, tickets to theatre, concerts and sporting events, and services from haircuts to lawn care to legal advice are soaring. If the markets wake up, interest rates will surge, housing will deteriorate even more rapidly, and equities will face heady competition from government bond yields.

Yeah, that too. I don't know if you read the Dark Wraith, but his analysis is quite sobering (understatement of the year?).

I don't read the Wraith. But in my world, when people like Klarman and Warren Buffett are concerned enough to say so publicly, it's high time to pay careful attention.

Actually, it's worth calling this out too. Here's the key part of the Buffett piece linked above, a letter to BRK shareholders issued this past Thursday (March 1):

The slowdown in residential real estate activity stems in part from the weakened lending practices of recent years. The "optional" contracts and "teaser" rates that have been popular have allowed borrowers to make payments in the early years of their mortgages that fall far short of covering normal interest costs. Naturally, there are few defaults when virtually nothing is required of a borrower. As a cynic has said, "A rolling loan gathers no loss." But payments not made add to principal, and borrowers who can't afford normal monthly payments early on are hit later with above-normal monthly obligations. This is the Scarlett O'Hara scenario: "I'll think about that tomorrow." For many home owners, "tomorrow" has now arrived.

Buffett's letters tend to put things on the Wall St media's front burner -- expect a lot of articles on this topic (among others) over the next several days.

Ask and you shall receive.

That "analysis" is either idiotic or deliberately deceptive. Picking 1/22/01 as the start date without offering any context around what the market had been doing for the preceding 6 months (beginning the dot-com crash) or what it continued to do for the 18-24 months following (completing the dot-com crash and sort of grinding around aimlessly) is -- well, let's just say he's counting on a pretty serious lack of financial sophistication on the part of his audience. Of COURSE returns look sucky if you start your timeline on the first downward leg of a nasty bear market. And bear markets happen, no matter who is president. That one happened because valuations got completely out of whack between 1996 and 2000 and the US markets got run way up beyond reason, which was the fault of the Wall St hype machine, not Bush.

Go here and scroll it back to mid-2000 (the last peak was at the end of August), and you'll see what I mean.

For now, I won't even touch the idiocy of blaming stock market performance on a president. I'm not impressed, to say the least.

So then you count into 2001 as Clinton presidency?

What do you think Clinton has to do with this? The point is that this guy picked the date of Bush's inauguration and argued that the stock market performance from that day onward was somehow Bush's "fault" while completely ignoring the reality of what was happening in the market at that point, which had NOTHING to do with Bush and very very little to do with Clinton.

He's a fucktard.

If you really insist on looking at the market as a presidential performance referendum, let's consider:

On March 20, 2003 (the day the Iraq attacks started), the S&P 500 closed at 875.67. On Friday, it closed at 1387.17, a rise of about 58% in three years. Do you think that huge leap represents:

A) The market's opinion on the war;

B) A referendum on Bush's performance over the period; or

C) A recovery -- supported by fairly strong economic fundamentals -- from a bear market that started with the dot-com collapse and was exacerbated by the 9/11/01 attacks?

The answer should be obvious.

The reality is this: Wall St doesn't much care who is president. If interest rates are low, economic growth reasonably strong, valuations not too overoptimistic, the international situation reasonably stable, and the regulators not too pernicious, the market will, on balance, go up (with bumps from time to time.) If the markets think any of those things are going out of whack, the ride gets bumpier.

For an informed adult look at the recent market situation as it stands this morning, check this out.

So, then, you're saying, that any presidential administration has nothing to do with the market's response? No relationship to the Fed and its announcements with market effects? Then in that case, why have macroeconomic policy at all? Toss out foreign economic policy too? We could also disregard the effect of an administration's other policy initiatives on the market as well. It's not like "war economy" actually means anything?

The chart you linked to shows the beginning of a downward turn. So then, any administration faced with such a start would be powerless to do anything but ride it down?

I am not arguing that Bush or any administration should be blamed for everything that happens in the market. However, I don't see how looking at market performance from the start date of an administration is a huge no-no, given that actions taken by that administration influence investment climate, debt, etc. all things that provide a general economic environment and investment climate. Politics affect economics, deliberately or not.

No.

As I said, "If interest rates are low, economic growth reasonably strong, valuations not too overoptimistic, the international situation reasonably stable, and the regulators not too pernicious, the market will, on balance, go up (with bumps from time to time.)".

To the extent that presidents, their policies, and the people they appoint have an effect on those factors, presidents contribute to the overall direction of the market. But blaming Bush for both the dot-com collapse (which a) was inevitable and b) started before the 2000 election) and 9/11, which is in essence what this "analysis" does, makes even less sense than crediting him for the subsequent market recovery and new highs that were reached earlier this year, which to the extent that he gets any credit at all were due to his general failure to rock the economic boat too hard.

The market is clearly linked to politics, which is clearly linked to Presidential actions. Which means, to me, that the President can influence some factors which in turn influence the markets. Does this mean that the market is a constant poll of Presidential approval - no. But it does mean that the market makes short-term ups/downs based on political actions (as you note, if the country goes to war the market reacts).

Thus, keeping an eye on the market during presidential terms is somewhat useful in terms of assessing presidential economic performance. It isn't the sole indicator, but is a part of the report card.

As for your link to an up-to-date report on the market, I'll note that the author is very bullish (fundamentals are good). I've never seen a financial analyist who wasn't bullish, which makes me somewhat suspicious of them.

Wow. I totally did not blame Bush for the dot com bust. ???

Baltar: with very few exceptions, the entire machinery of Wall St is bullish both by inclination and by (SEC etc) rule. The equity market is actually rigged, by law, to go up, albeit in relatively small ways. Doesn't mean he's wrong, but one learns to apply a natural filter.

FWIW, I am not as bullish as he is by a long shot, but his explanation of the mechanisms of recent activity is not unreasonable.

I maintain that the Wraith is a moron, and I don't see how anyone with a reasonable understanding of the markets could conclude otherwise. To borrow an analogy, if George Bush had happened to have been sitting on the roof of a train when it derailed and crashed, the Wraith would have us believe that the crash was Bush's fault. If Bush is responsible for the downward slide of the market from the day he took office until it troughed in 2002, then he is also responsible, not only for the 9/11 attacks, but for the absence of sanity around valuations that created the dot-com boom (and the broader market run-up) from 1997 to 2000.

For a somewhat more bearish view, try this The implications of the "carriage trades" (borrowing money in a country with very low interest rates and lending it or investing it in higher-yielding locales) and their unwinding have been widely, and worriedly, discussed in various high-net-worth corners of the globe for the last few days.

Here's one more on hedge funds and the yen carriage/carry trades. One other implication not discussed in this piece: many hedge funds are "fully invested", meaning they try not to have tons of cash sitting around. Unwinding these carriage trades involves buying yen. They'll have to sell other stuff to buy yen, in some cases (thanks to the leverage they employed on the currency trades) lots of other stuff. That other stuff is generally US stocks. Hello, US market correction.

Wow. I totally did not blame Bush for the dot com bust. ???

You didn't. But the Wraith did, implicitly -- if, as the Wraith contends, Bush is responsible for stock market movements starting from the date of his inauguration, then he must be responsible for the bear market that was well underway at the moment he took office, which was the falloff from the dot-com boom.