This is Economic Recovery?

[Ken H.]

Ever read something three times and you still can’t believe what you think it says?

 

From a recent edition of Time magazine, “$88.9 billion – The record profits the U.S. Federal Reserve gave the Treasury Department in 2012, mostly from interest payments on U.S. debt it purchased.”

 

There’s so many things wrong with this it’s hard to know where to start. And this is the path to recovery!?!

 

Beyond belief.

 

[Dave McReynolds]

If the reason that the Fed bought US debt back was because the US was spending less and therefore didn't need to borrow as much money, then I would agree that their action saved the US Treasury a net of $88.9 billion in interest payments. However, as we all know, the US continues to run record deficits, so I would assume that any repurchases of debt by the Fed was more than offset by debt refinanced or new debt issued. It is possible that the debt refinanced or new debt issued was at a lower interest rate than the debt re-purchased (like when you refinance your home mortgage at a lower rate). Do you think that could be what they mean?

[John Ranalletta]

The Fed (owned by private banks) benefits banks with QE by buying or using crap debt from banks as collateral.

 

This "profit" helps the government avoid the debt ceiling cap; so, it's a payment with a political purpose.

 

This has nothing to do with the economy but only with the banks and the treasury playing with each other.

 

BTW, anyone have an interest in knowing the extent to which the Fed is bailing out foreign banks. Any foreign bank with a branch in NYC is eligible for QE. http://bit.ly/UZKk0y

 

[philbytx]

Ken,

 

For an illuminating read, try :

 

 

The Creature from Jekyll Island

By G Edward Griffin

 

 

 

 

 

[Peter Parts]

Ken,

 

For an illuminating read, try :

 

 

The Creature from Jekyll Island

By G Edward Griffin

 

 

 

 

PhilbyTX -

 

Can you tell us if that's the book where this former child actor* explains that Laertril CURES cancer, that there really was a Noah's arc (not just a meaningful Bible parable)**, or where he presents a screwball conspiracy theory that a secret banker's cabal took place on an island named Jekyll to plot the downfall of the civilized universe as we know it?

 

In case anybody thinks I am making this up, see the Wikipedia entry:

 

You won't believe what a screwball this Griffin is...

 

Ben

 

*Isn't it is fair to refer to all child actors who became adults as "former" without implying failure?

 

**I am not taking any position on this matter for or against or evaluating, only stating his point of view.

[Quinn]

I really don't understand our economic model. It seems to me that a portion of our population works or provides services to get money. Then our government takes some of that money to give to other people so they can buy the goods and services of the first group. You can throw in a few other money loops if you want; like the government taxing it's own workers,or the workers and servers buying from each other but that's basically it for me. Now, entropy would have ground down the system to a halt a long time ago except exporting infuses new money into the loop and maybe inflation and the national debt help keep it spinning also.

 

It just seems to me that the National Debt is like pumping up a tire with a leak in it instead of fixing the leak.

 

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[John Ranalletta]

a more illuminating read consists of two graphs: one showing the purchasing power of the dollar since the creation of the Fed. The other is the price of gold.

[Patallaire]

Really Apples and Oranges. Gold is an International commodity that expands and contracts based on a supply and demand curve for different reasons at different times for different reasons. You could run the same Fed comparison and tie it to the invention of computer speed or technological advancement in the free world or the birth of babies in Japan or divorces in the United States. It is a leap to make the connection.

[John Ranalletta]

If I were selling stocks for a living, I'd probably write the same thing. Gold vs. dollar = fiat money vs. real money. What happens to stock prices and other financial assets when QE ends?

 

[philbytx]

Ben,

 

There is little illumination about the Jekyll Island "Duck Hunt", mostly 12v low wattage. Fed Reserve historians and/or conspiracy theorists were/are avid readers of ANY available documentation. Unfortunately, there is a dearth of same....funny that !

 

If you aren't one of either, then I wouldn't bother.

 

 

 

 

 

[kmac]

 

It just seems to me that the National Debt is like pumping up a tire with a leak in it instead of fixing the leak.

 

Pumping up a tire with a leak in has gotten me home MANY times.

Not saying that is a financial fix, but there is a time and a place.

 

As to the value of gold, if there were ever some apocalyptical event I do not see how gold would help anyone. I would rather have steel in an apocalypes...much stronger and easier to weld than gold.

 

The point I am making is that nothing has any REAL value other than relationships and physical skills {IE, bulding and fabrication skills, hunting. farming}. Stocks, bonds, paper money, gold and gems...all just stuff.

 

If the financial problems are just economic problems then whatever, that is just pushing paper OR gold around to me. I work, I eat, I am fine. I think the biggest problem is that most places no longer BUILD anything. We just buy and push paper around to do that. American {and many other places} are just outsourcing our own demise.

 

Too many bean counters and litigators.

[Patallaire]

Estinto:

"If I were selling stocks for a living I would write the same thing." Really. I do not sell stocks for a living, I am far removed from that, but economics is economics, that is what I wrote about. By the way Stocks are investments in corporations. So, if you believe that corporations are going to collapse as a result of QE ending then your opinion about how the world works will suggest moving your wealth to the pillow case. When QE ends, as when any other program or event happens some corporations will benefit, some will lose value. It is not a static world. Bonds may be impacted, mutual funds may be impacted, but not all of these vechicles will collapse ,nor will all of them either lose or gain value. What you are suggesting is a little confusing. If the investment world were as simple as suggested, creating wealth would be quite simple. Everyone would know and they would be always in the right investments and we would all be reading the tea leaves in the same way. Many investors can make as much money on down markets as up markets. So, if you understand risk as you relate to it, and you truely understand your own tolerance for it, than the noise of the press on which way the the world is going will only create opportunities, not fatalism.

[UberXY]

DJIA Feb 13, 2009 = 7850.41

DJIA Feb 13, 2013 = 13982.91

 

78% gain indicates a reasonable recovery to me, as an investor.

[Peter Parts]

Maybe people who post in these kinds of discussions should indicate if their careers are "old economy" or "new economy."

 

If your skills and education are top-notch, you may not be having a bad time as much as other people. But if you work in a buggy whip factory, ooops.

 

Or age or gender (recovery for women lags men by quite a bit - for no reason anybody understands).

 

Or whether you are a "bear" or a "bull" about life in general.

 

Ben

[John Ranalletta]

Stock market averages are certainly not a function of recovery today. They're a function of the fed keeping interest rates at near-zero levels forcing investors to chase returns and yields in the stock market. Stock prices today have nothing whatsoever to do with company performance. Is AAPL worth $700 or $500. Performance hasn't changed, but the stock price sure did.

 

Stock investing is dead along with its victims. Trading is still viable, but trading isn't investing.

[Bob Palin]

I really don't understand our economic model.

 

The economic model is based on continuous growth, the exploitation of natural resources continuously creating wealth. Unfortunately the US has moved beyond that into a 'service' economy which is as you go on to describe. Both models are unsustainable but the former is the only real hope for a continuation of our standard of living. The important thing is to be intelligent about what our resources are, they cannot be raw land and material any more, they must be related to brain power and innovation. A low (true) cost source of energy would create enormous wealth, that's where I think we should be looking. Reducing wasted energy in the mean time would contribute nicely and there is enormous opportunity to do that.

[John Ranalletta]

Many investors can make as much money on down markets as up markets.

I agree. "Investing" is dead. Trading is alive. With 80%+ stock activity coming from unmanned computers churning prices up and down in search of 1/16 cent profit, I'll step aside.

 

Anyway, one gets rich making money, not saving it.

[Bob Palin]

Of course there is a source of effectively unlimited raw materials to increase global wealth

 

http://www.businessinsider.com/deep-space-industry-asteroid-mining-plan-2013-2

[tallman]

Maybe people who post in these kinds of discussions should indicate if their careers are "old economy" or "new economy."

 

If your skills and education are top-notch, you may not be having a bad time as much as other people. But if you work in a buggy whip factory, ooops.

 

Or age or gender (recovery for women lags men by quite a bit - for no reason anybody understands).

 

Or whether you are a "bear" or a "bull" about life in general.

 

Ben

 

[Patallaire]

I really don't know where you get your entertaining material from about markets etc.. If you believe as many economists do, that markets are efficient, therefore they price everything where it should be, then the price of Apple is priced on what the market believes it is worth based on it's fundamentals. Since they want to sit on Billions of cash and no additional return for the shareholders in the form of Dividends it is worth what the markets ssid it was worth, there are also some profit pressures as well as management uncertainty in the markets about that stock, so it is trading efficiently now. When I referred to down market profits I wasn't referring to automated trading at all, you extrapolated that from someplace in your comedic material. It appears to me that you should sit out all markets, your grasp of this could be dangerous to your wealth.

It is of course possible to get wealthy by working, in fact that is a great strategy. By combining your manual sweat labor with putting your money to work for you, it is more than possible to gain wealth. It need not be people at work, or money at work, it is more than possible to have both working on your behalf. If you believe that your ability to do labor is your key to wealth, and since I suggest that your grasp of financial instrumnets is rudementary at best, then your path to wealth is through labor. Whatever works and whatever you are most comfortable with, I suggest that you do. You will be happier and the world may be a better place.

[John Ranalletta]

If you believe as many economists do, that markets are efficient, therefore they price everything where it should be, then the price of Apple is priced on what the market believes it is worth based on it's fundamentals.

If markets are efficient and markets price in all, was the market wrong on aapl at 700 or wrong on it now at 467? After all, what did the market "price in" to wipe out billions in investors' net worth; or was it a buy and hold sucker bet all along?

 

 

I've had significant gains y/o/y for years w/o being in the stock market while friends still nurse a wounded portfolio.

 

Was the market right at NYSE 70 or 50% lower at 35? After all, the market is efficient and the market knows.

 

What it knows is how make most investors' money evaporate very efficiently.

 

 

[Dave McReynolds]

It seems to me that there is truth in what both Pat and Estinto have written. Estinto has written that the price of stocks has been artificially increased by efforts to keep interest rates low. Pat writes that stock prices are based on fundamentals.

 

Certainly, in my own particular case, I have moved a lot of money that I would otherwise have invested in CD's into mutual funds of various kinds, since I get virtually no return off the CD's. Obviously, I have been quite pleased with this strategy so far, but I could be equally (or more) displeased if the bottom fell out of the market. I would assume I'm not the only one to have moved my money from CD's to stocks, and it seems logical to me that having a huge amount of money in the stock market that would otherwise not be there would drive the prices of stocks up, under the basic law of supply and demand.

 

Clearly, this is not a pro-rata across the board increase, and some stocks' prices will have increased more than others, based on the perceived fundamentals. I would further assume that if the excess money were removed from the market, e.g., if CD rates increased enough that people were motivated to move their money back to CD's, then it seems logical that the prices of stocks would fall by more than the fundamentals would suggest they should.

 

Does this make sense? And if it does, how does one use this information to make intelligent investment decisions? If we knew that controls would be lifted within the near term, causing interest rates to float on up to whatever they should be, then I would assume that we should cash out of all of our stocks and put our money in short-term CD's until the interest rate stabilizes. OTOH, if interest rates are kept down, then we could lose money by moving it to CD's that have essentially no return.

 

Granted, the fundamentals will always determine how the price of Apple rises or falls compared with other stocks, and the growth (or lack thereof) of the economy in general will effect stock prices in general, but it seems to me that the supply of money flowing into or away from stocks also has to have a material effect on stock prices. Just how material I don't know, nor do I know what is the best thing to do about it.

[John Ranalletta]

Does this make sense? And if it does, how does one use this information to make intelligent investment decisions?

David, one might suggest that buying when everybody else is selling and selling when everyone else is buying could work.

 

It seems unwise to me for someone to expose the bulk of their wealth or a big portion of it to the markets for a relative small gain. If one thought the markets were to rise, why not take a small portion of the portfolio and buy calls? At least one's downside would be limited; whereas, all-in means one could lose it all in a downdraft.

[Patallaire]

The markets in your charts demonstrate my point exactly. Markets are efficient. I am not sure where you have invested to have YOY increases without either being in a commodity, a stock, bond, or real estate. In which case that would be a different discussion. Markets move, they have since 1926, a snapshot of 5 years when compared with the history of the markets looks irrevelant. All stock did not lose over that period of time. We had portfolios constructed that were never down during those times. So, was Apple over priced by speculation? Was the market overheated against the fundamantal measurements in 2008? Clearly yes to both. Markets don't make people lose money, poor investment decisions and fear lose money.

If you believe that markets make money evorporate, don't be in them. if you are not in them you have no dog in the fight only opinions!

[John Ranalletta]

I've invested in myself and my ability to generate revenues far in excess of my needs. I don't rely upon others to produce revenues for me except that I deploy others and take a portion of their earnings.

 

To be dependent on a market I can't touch and can't control for my future financial welfare gives me the creeps.

 

In fact, it would make more sense for someone with excess earning to "invest" in the market than someone less able to replace those investments when they are decimated.

[Patallaire]

I agree! It does make sense!

[DiggerJim]

But if you work in a buggy whip factory, ooops.

Now for something a bit off topic (well where this topic has gone...I love "efficient market theorists" who try to explain why all the information has been reflected in the price of a stock but then suggest that speculation is responsible for run ups or down as if the former could be true and yet people would be nuts enough to disregard that and try to find some other value in a stock...or ask them to explain why Berkshire Hathaway can consistently outperform all the wizards who have studied efficient markets theory)...

 

So, back to my initial reaction to this post - I was giving this very subject some thought a month or so ago. We like using the buggy whip example as a dead industry that left its clinger-ons in the dustbin of financial history. Yet there are buggy whip makers today. There's still demand for them - harness racing, horse drawn carriages, etc. The cost of these whips has gone up substantially and the makers now rest in a nice little niche industry.

 

I got to wondering how many industries have actually been completely wiped out? There are still people making vinyl record albums. Still folks who handcraft vacuum tubes for audiophiles who believe they provide warmer sound than "cold" silicon chips. People make spinning wheels, fixed gear bicycles, dope & fabric bi-planes, etc. etc.

 

Seems like a lot of people can make a good living if they find a "dead" industry and apply their skills to crafting what most people think are just buggy whips.

 

Couldn't really come up with something that has been completely eliminated from human commerce & production.

 

Might make interesting career advice to a young person to look not into working in a cubicle farm competing with all the other hamsters but finding that niche and becoming an expert pipe organ maker or something.

 

Just pondering...

[taters]

Amazing that so many experts say Obama is doing the right thing overspending by 5 trillion in the last 4 years and so many experts say he is not and we are heading for disaster. So who does one believe? I'm hoping the CEO of my master card believes in the former and raises my credit limit. I'll even promise I won't default.

[Peter Parts]

Digger Jim -

 

Instead of buggy whips, how about working in a factory that makes fax machines? On average, bad place to work. Self-employment a slightly different matter. Most fax jobs will be kaput.

 

Checking your examples, I wonder if there is a place for artisnal fax machines (BTW, fax machines are still in half the homes in Japan)? Maybe.

 

Buffett's main strength is buying whole companies although B-H also do all kinds of other un-Buffett-like business. He owns great chunks of companies that own a lot of their niche and that niche is stuff people use every day.

 

My favorite Buffett comment: I buy companies that could be run by an idiot because someday they will be.

 

Perfect of not, the stock market does OK. It is just hard to beat it consistently or by much.... without insider trading.

 

Ben

[Quinn]

Amazing that so many experts say Obama is doing the right thing overspending by 5 trillion in the last 4 years and so many experts say he is not and we are heading for disaster. So who does one believe? I'm hoping the CEO of my master card believes in the former and raises my credit limit. I'll even promise I won't default.

 

Well, if the national debt doesn't really matter, why doesn't the government just send everybody a check for $35K every few months so we can all be rich? Now there's a plan I could vote for.

 

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[John Ranalletta]

Amazing that so many experts say Obama is doing the right thing overspending by 5 trillion in the last 4 years and so many experts say he is not and we are heading for disaster. So who does one believe? I'm hoping the CEO of my master card believes in the former and raises my credit limit. I'll even promise I won't default.

 

Well, if the national debt doesn't really matter, why doesn't the government just send everybody a check for $35K every few months so we can all be rich? Now there's a plan I could vote for.

 

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I agree with Tim Geitner, the guy who couldn't do his own tax returns. http://huff.to/Q02Sds

 

Only bankers get free money which is why Lew, formerly a manager of one of AIG's losing divisions, will be the new sec/treas. Don't expect anything to change.

[John Ranalletta]

http://www.contraryinvestor.com/mo.htm

 

What this historical relationship implies is that for the “wealth effect” to be a positive economic force that spurs consumption, households must have something other than stocks or real estate assets to liquidate and use for consumption, exactly as they did from 1980-2006. They either need to spend their savings or borrow to consume. The key issue of the moment is that at least in the US, savings have not been rebuilt post the Great Recession. As of now, there are no increased savings to spend down while the Fed attempts to make households feel better via their efforts to levitate residential real estate and equity prices. The household savings rate today stands just shy of where it stood in January 2008. I’d again ask the question “spend what?” In the post Great Recession environment, the largest growth in consumer credit has been in student loans, not in revolving or non-revolving credit balances. Households hurt by heavy debt balances, largely related to real estate investments from the prior cycle, have not embarked on a new borrowing cycle. From my vantage point, QE will not positively affect the “wealth effect” and translate into accelerating consumption and domestic GDP growth directly because of the lack of domestic savings, and households remaining gun shy about leverage.

 

So where does this leave us? It still leaves us with global central bankers committed to unlimited and indefinite money printing, but also a persistent ongoing disconnect between the printing of money and actually getting that money into the real economies globally, as has been the case since 2009. The money they “create” still needs to find a home. And now that we’ve moved into unlimited money printing mode, that means one big home. As a rule, central bankers can create additional liquidity, but they cannot control where or how that money will be put to use. Ideally, they would like to see banks increase lending with this unprecedented liquidity and theoretically get that money into the real economy, but bank lending has been very slow.

 

Almost as default, that leaves the global financial and commodity markets as a potential repository for historic global central banker largesse. Over the past four years we have heard more than a number of commentators tell us that “the stock market is doing well so the economy must be doing well”.

 

Unfortunately this has not proven to be the case as we continue with one of the most anemic economic recoveries on record.

 

Although we are certainly not there yet, the danger is that this current round of extraordinary excess central banker liquidity creates further asset bubbles, very much as happened with the late 1990’s tech stock bubble and the clear bubble in mortgage lending in the middle of the last decade. By the Fed’s own admission, they missed “seeing” the last two asset bubbles they had a hand in creating. Now that we have moved into the endgame of global central bank monetary expansion, let’s hope central bankers everywhere have had their annual optometrist check-up.