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Same Old Summer Malaise Fears

June 2, 2011 Leave a comment

I’m always stunned by the market punditry’s myopia:

Global Economy Loses Strength as Oil Costs, Debt Woes Take Toll — Simon Kennedy

This “new” fear of a global economic malaise (a couple weeks ago it was slowing EM growth as the chief worry, last week it was sovereign debt and oil, this week it’s US housing, and I’m sure they’ll think of something else for next week) is the same old re-run of last summer’s worries over the so-called faltering recovery.

The simple reality—and this has always been true—is growth doesn’t happen in a straight line, and not in parallel across regions. A couple months’ worth of data doesn’t tell you squat. More, because the globe has already “recovered,” we’re talking about new growth these days—global GDP is at new highs. Which is why headlines like the below exist today, where most didn’t think it was possible just a few years back:

G-8 Says Pickup in Global Growth to Spur Faster Debt Cuts — James G. Neuger

 Monetary policy will tighten some from historic accommodation, some economies will accelerate, others will slow. But the global economic outlook remains benign today.

Get Ready For the Grand QE2 Finale! (Or Not)

April 15, 2011 Leave a comment

Much has been made in the last few weeks on the notion of a “critical pivot point” in global monetary policy. With the ECB raising rates, the BOE pretty sure to follow soon, many developing nations that already started tightening, and, of course, the prospect of the Fed’s QE2 ending this quarter—seems like the era of ultra-easy money is going to give way to…still pretty accommodative.

In my view, the need to act on “critical” moments for just about anything in capital markets is fairly rare. Most stuff moves pretty glacially. Of course there are exceptions (Fall 2008, for instance), but when it comes to macro policy stuff—don’t expect the world to shift under your feet radically in a day.

For some of 2011 monetary policies globally might look divergent, but my guess is by this time next year basically all of them will be on the same track of tightening in some form or another, and only the degree will vary.

Will all that trigger a reversal of the dollar’s weakness? A shift in asset flows? It will certainly play a role, whatever happens. But in the meantime, there’s no need to get panicky and move on a dime. The QE2 finale will probably be quieter than many expect this summer. 

Fisher Investments Analyst’s Book Review: End the Fed by Ron Paul

January 28, 2011 Leave a comment

Congressman Ron Paul is now chair of the Monetary Policy subcommittee, which means he’s effectively chief antagonist to Ben Bernanke. Paul is a pure-form libertarian (read: pure-form tea partier), an ardent student of Austrian economics (read: laissez faire, free market capitalism), and has staunchly voiced his opposition to the very existence of the Federal Reserve every chance he gets.

With the new Congress fully installed, now seems the right time to have a look at Paul’s short but well-executed 2009 book, End the Fed. Of course, this is a political document, and on that basis it’s easy to see why Paul’s been around so long and did better than most expected in his 2008 presidential run—he’s a gifted communicator, able to exude down-to-earth everydayness, good humor, prudence, and practicality, but coupled with that eagle-eyed vision, intellect, and steadfastness that are the rhetorical hallmarks of most great public executives (be they CEO or president). Everything he writes sounds sensible, trustworthy, wonderful. You’d so like to have a drink with this gentleman.

This means, to really get value out of End the Fed, you have to work hard to be constantly vigilant of this layer of political rhetoric, especially when he relates stories about how he learned about money and saving as a kid from his father, as well as his encounters with economist Ludwig Von Mises and curmudgeonly philosopher Ayn Rand.

Past that, it turns out End the Fed is a great primer on how money, money creation, and central banking works. On some level, it’s refreshing to read a high-profile legislator write in such learned fashion on the issues he must, you know, legislate on.

Paul operates from the basic philosophical position that principles are more important than practicality. This is the crux of pure libertarianism. That is, panic of 2008 be darned, the Fed/Treasury/Congress had no business bailing out beleaguered banks—to a libertarian such intervention is morally wrong. In fact, in Paul’s view, liberty and freedom are antithetical to the way markets and banking are set up today. Because of moral hazard and the now-inextricable relationship between banks and the government, there really isn’t much true capitalism anymore. Instead, he describes today’s banking as a kind of public-private entity. Financial markets are really largely beholden to central planning of the government (he says), and the government has been manipulating the economy for many decades—from inflation to savings rates and basically all in between. He’d rather see the world do away with central banking altogether and return to the gold standard. (But he’s not really a “gold bug” per se. Paul says very clearly he doesn’t care if it’s gold or something else money is directly tied to—he just doesn’t want the government to control money supply.)

Mostly, Paul says the recent recession and most other banking crises are not the fault of capitalism but of the government—Fannie and Freddie, artificially low interest rates from Alan Greenspan, and so on. This all seems very compelling. But hidden in the sensible rhetoric is a classic mistake pure free marketers and socialists alike consistently make: Economic cycles can’t be “solved,” yet they prescribe and proselytize as if they can. We had depressions, bank runs and panics long before the Fed existed, and we’ve had them long after too—and will again. Fact is, we are in a more highly regulated world than ever before, but there’s still quite a lot of capitalism out there too. And as such, we’re not going to do away with economic cycles—ever. They’re part and parcel of markets. If you mitigate the downturns, you mitigate the economic growth. Efficient allocation of capital is of course beholden to short-term psychology, and corrections can be swift and devastating. But any good economist knows economic readjustment is usually better done with relative alacrity than drawn out for years, letting uncertainty fester. One can argue central banks exacerbated the recession/panic unduly; but maybe sometimes they helped avoid ruin too. But their existence won’t change the basic mechanics of capitalism, which is by nature destructive, cyclical, and ultimately wealth-creating for society. Cycles are here to stay.

This loops us back to Paul’s hard-line position that practicality must always be trumped by principles—his world is a kind of “no relativism zone.” That’s a fine and noble political view and an easy place from whence to evoke the Founding Fathers and other pious mantras. But investors steadfastly hold to principles at their peril. Bull and bear markets happen in both Elephant- and Donkey-led eras; in socially dominant and “deregulated” eras. William James’ Pragmatism is a much better worldview for an investor. (Of course, the communists didn’t do so well with their capital allocation.) In investing, it’s the pragmatic who evolve and see the world with clear enough eyes to navigate the many market situations encountered over a lifetime.

The bottom line, though, is this book is darn near essential reading if you want to understand an important contemporary undercurrent in US politics and central banking today. This is not a work of inflammatory flim-flam; it’s thought-provoking, well argued, and a fine contribution to the conversation.

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