The Mess That Greenspan Made

Slack, Too Much of It

It will surely be interesting to look back in a few years or so (i.e., after the next financial crisis) at the whole idea of too much “slack” in the economy as being sufficient justification for central banks to have taken such unprecedented actions, money-printing-wise.

Here, economist Paul Krugman talks to Bloomberg’s Tom Keene on the subject.

It’s easy to sympathize with the unemployed as the global labor market has clearly fallen on tough times in recent years, but, the idea that all you have to do is stimulate the same levels of demand that we saw before the last financial crisis and everything will be hunky-dory still strikes some of us as loony.

Of course, it’s entirely possible that this is exactly what we’ll see as policy makers seem to be working under the tacit assumption that all we have left are bubbles and that we need to create more and bigger ones to regain our lost prosperity.

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Janet Yellen and the “B-Word”

John Cassidy writes in the New Yorker that Federal Reserve Chair Janet Yellen didn’t see fit to once mention asset bubbles in her speech at the Economic Club of New York the other day and that, in itself, is a bit disconcerting.

But what was most striking to me about Yellen’s remarks was that she didn’t even discuss the financial markets and the overriding need to avoid another damaging speculative bubble, like the ones that the American economy experienced in the late nineteen-nineties and mid-two-thousands. Indeed, Yellen didn’t use the B-word at all. Given that her immediate predecessors, Alan Greenspan and Ben Bernanke, will be remembered for, among other things, their roles in inflating the bubbles in the stock market and the housing market, that was a pretty remarkable omission.

Recent history can’t be avoided, and neither can the task of maintaining financial stability and avoiding boom-bust cycles, particularly in the credit markets. Together with maintaining an adequate level of over-all demand in the economy, which is necessary for investment and job creation to proceed, it is the key challenge that all central banks face. But Yellen didn’t even mention it. Instead, she couched her remarks in terms of the old-fashioned inflation-unemployment trade-off, which is precisely the conceptual framework that encouraged Greenspan and Bernanke to shrug off what was happening in the financial and housing markets.

It’s hard to believe that Yellen will be any different than her predecessors in spotting a looming crisis be it of the bursting asset bubble variety or something different.

Moreover, when considering that history rarely repeats, but often rhymes as Mark Twain purportedly quipped, the Fed will probably be more attuned to spotting something they’ve already seen (e.g., stock bubble, housing bubble, etc.) rather than the more likely case of something completely different (e.g., currency crisis, sovereign debt crisis, etc.)

The Diverging U.S. Stock Market

This CNN/Money story about how a peak in the number of new highs for individual stocks (as shown below) consistently spells trouble for broad equity market indexes almost a year later is probably of little concern to those who bid share prices higher in recent days as all major U.S. stock indexes turned in big gains this week after last week’s tumble.

Ned Davis Research looked at 15 stock market highs since 1962 and says the peak in new highs for individual stocks precedes the peak in the overall markets by 9 to 11 months.

If that holds true this time around, we’re about done with the bull run.

We’re 11 months past the May 2013 peak of new highs in individual stocks.

I recall reading about this in the wake of the early-2000s internet stock crash where some investors were able to avoid the carnage by taking note of this development before share prices reversed course.

They say what’s different this time is that stock market leaders are the first to fall (e.g., tech and biotech shares in recent weeks), however, this may well be another case where we’re in such uncharted territory (i.e., due to the mis-pricing of assets after unprecedented central bank intervention) that historical comparisons are all but meaningless.

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Good Friday Morning Links

If Russia invades Ukraine, this is how it will happen – Vox
Ukraine Talks End With Accord on De-Escalate Conflict – Bloomberg
Jerry Brown’s Next Budget-Saving Step for California – Reuters
The reverse world of retirement investing – USA Today
Are We Headed for a Credit Market Crash? – House of Debt
Morgan Stanley, Goldman Adjust to New Banking Climate – NY Times
Whither The Bottom 90 Percent, Thomas Piketty? – Forbes
Crackdown on Flash Trading Gathers Momentum – Fiscal Times
Wealth’ Effect Without Wealth – Alhambra Partners
Yuan Depreciation Is Deeper Than You Think – WSJ
The Divergent trend: Bad for stocks – CNN/Money
The Case Against Stocks – Barron’s

To find out what Tim thinks of today’s news, subscribe to Iacono Research

Traders frustrated by false breakouts – MarketWatch
Hedge funds get clobbered by fall in tech stocks – CNBC
Week Ahead: Spring fever brings hope for U.S. earnings – Reuters
Fed’s Low-Rate Pledge Keeps Wind At Stock Market’s Back – Short Takes
IPO market is casualty of stock market pullback – USA Today
If The Smart Money Is Selling, Who’s Buying? – Zero Hedge
Treasuries Fall as Ukraine Talks End in Accord – Bloomberg
Gold flat below $1,300/oz, heading for weekly fall – Reuters
Several Factors Suggest A Big Move Is Coming For Gold – IRD
U.S., Chinese Economic Data Hold Keys For Gold Next Week – Kitco
Geneva Talks Pressure Gold – Trader Dan

(Mis)leading Indicators – Foreign Affairs
Has US household deleveraging ended? – voxeu
Got a minute? 3 little words that kill productivity – Fortune
QE has boosted UK growth by 3pc, says Martin Weale – Telegraph
Sina Weibo shares jump 19% in US debut – Channel News Asia
China March New Home Price Increases Ease on Tighter Credit – Bloomberg
Will the Housing Market Stay in the Tank? A Look at Homebuilders – The Street
Mortgage Reform Is Worth the Small Extra Cost to Borrowers – NY Times
Thoughts On US Inflation in Light of Yellen’s Comments – XE
Big banks lend to corporations over consumers – Fortune
What Janet Yellen Didn’t Say: The B-Word – New Yorker

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