Thursday, September 10, 2009

Krugman Article:

Nobel prize winning economist Paul Krugman published a much ballyhooed article last weekend in the New York Times Magazine. The article is called, "How did economists get it so wrong? He steps on a lot of toes and thrashes many of the major Chicago School economists including John Cochrane and Robert Lucas. The article questions the current mathmatical models in modern economics and suggests that the only solution to our present economic crisis is direct government stimulus via the Keynesian model. The article indirectly speaks volumes about our current political system. Krugman is an individual cog of the Financial Elite and is definitely a barometer of future economic policy. This is my take:

  • The Financial Elite are laser focused on our country's Income Statement as they continually ignore our Balance Sheet. Policy will always trend toward increasing the country's GDP at all costs. Even if we incur crippling debt in the long run. The thinking is that any debt will be paid with future gains in GDP. This policy was started during the Reagan Era when interest rates on 10 year treasuries were at 15%. The policy has worked for 25 years because of the tailwinds from the Interest Rate Mega Bubble but presently is incurring diminishing returns. According to Ned Davis Research it took $1.50 of debt to generate $1 of GDP in the 1960s, $1.70 to generate $1 of GDP in the ’70s, $2.90 in the ’80s, $3.20 in the ’90s, and an unbelievable $5.40 of debt to generate $1 of GDP in the latest decade. The trend of using debt to replace growth and savings is unsustainable.

  • The Financial Elite always look to the past to solve our present problems. There is almost never any discussion of the future. Even though Krugman admits that past economic policy is not working in this economic environment he is adamant that Keynesian Policy is the only solution. I guess when all you have is a hammer, you treat everything like it is a nail.

  • Going one step further, The Financial Elite rarely reconcile past events with current policy. Our current situation is much like Japan of 20 years ago when Japan started their "lost decade". Our present policy is almost exactly the same but we expect a different outcome? It just does not reconcile. Keynesian economics has never been proven as a solution. The Financial Elite say that the Great Depression is the example. I suggest that the Great Depression lasted 10 years. The depression after WWI was massive and received no fiscal or monetary stimulus. It only lasted one year and the economy came out of it on a dead run. This fact is never mentioned by Krugman or any of the Financial Elite. Also, the Austrian School of economics and behavioral economics are ignored in Krugman's article and by the Financial Elite even though both were about the only schools of economics that predicted our current crisis.

  • Policy is always focused on what is less painful to the "winners" chosen by our policymakers. The "Greenspan put" of the last 20 years has rewarded speculation in Wall Street with a guarantee of easy money and bailouts if investments go bad. I am very surprised that Paul Krugman, the self professed "conscience of a liberal" has not raised questions about rewarding corporate and financial executives with windfall profits in stock options driven by the bailouts from our government. He has also never suggested that the government claw back the obscene amount of money the financial sector made as they brought our financial system to it's knees. He has stated repeatedly that we need a bigger stimulus even though most of the stimulus is rewarding bad behavior and creating winners and losers.

I have no real problem with Paul Krugman's views or his article in the New York Times. He is a small cog in a very large problem that will correct in the future, either slowly or quickly. The speed will depend on the amount of debt created by our government and The Financial Elite. My only lament is that we can't use this period to fix all of the problems with our society. In our country's past, recessions were a financial Winter that purged speculators from the system, eliminated debt, repriced assets to fair value and sent forth a functional system for our children to enjoy. Presently we are rewarding speculators, increasing overall debt in the system, artificially propping up asset values and passing these problems to our children. I would suggest that we are one of the most selfish generations that this country has ever known.


Presently I have gone to stock market neutral in my investments. I am up 54% with this run of the S and P and could definitely lose ground against my target index if people perceive that the economy is improving. But the easy money has been made and if The Herd wants to speculate, more power to them. I see no green shoots. Of course I am keeping all of my stock holdings but I am hedging with leveraged ETF's. Part of my stock hedge is a growing position in the US dollar and a short on oil. Two of the reasons for the stock run up are the weak dollar and the price of oil hence my contrarian position. I am equally long in natural gas as a hedge against my short oil position. I am short on the 10 year treasury as a hedge on my US dollar position. It's a traders market now, the gains are going to be in the volatility of the markets.

Saturday, September 5, 2009

Moving toward market neutral position

I have been slowly moving my stock position to "market neutral". The events in the economy today reinforced my "market neutral" decision as the dismal jobs report sent the S & P index up 1.3%. The Herd is feasting off the greed created by the 50% rally in the stock market. I will take this opportunity to hedge my position and move away from the The Herd once again. Today I only took 40% of the 1.3% move upward in the S & P index. Friday I purchased more inverse EFTs and will probably only take 15% of any S and P profits on Tuesday if the market heads North.

I still am not able to see any green shoots in the economy. The unemployment numbers on Friday were dismal. It would have been much worse except that many of the unemployed are starting their own businesses. This helps the unemployment numbers but I would suggest that most of these businesses will not be profitable for at least a few years and many will fail. Also, the part time work force is increasing and except for minimum wage jobs, hourly salaries are going down. Many private employers are still planning layoffs in the near future. The only sector where salaries are increasing is the government sector. Presently 20% of household income is generated by our government.

Because of the trillions of dollars of stimulus by our government we will come out of the recession in the next few months. This will be only temporary. I can not see any situation where we will not go into recession again in a year or two. We have endured 2 years of financial pain and have not made headway on the cause of the financial crisis. Our society is deeply, deeply in debt. We presently have more debt in relation to GDP than any time in our country's history, this includes the time during the Great Depression. In 2008 our country's households were in horrible debt and I suggested that because our society has such a repugnance to saving that a recession would be the only cure for our debt obsession. Well I never would have guessed but after the biggest recession since the Great Depression our households are in more debt than in 2008 in relation to net worth. What's worse is that our government is pushing households to increase their debt even more. For the last 20 years our country has become a debt junky and our government has become our dealer and our enabler. The debt is not the desease. The debt is a symptom. The cancer that has infected our economy is speculation. I use the term speculation as the antithesis of saving. The tragedy is that our financial elite are absolutely clueless as to the symptom or the desease. No one saw any problem with the system in 2007 during the biggest asset and credit bubble in history. I was so upset by this denile, "by everyone", that I decided to become a renter for the first time in my adult life and took out a large short in the stock market to protect my two biggest assets.

I had hope in 2007 that in a couple of years, after a clensing recession that things would look better. Unfortunately they are worse. Until someone in the financial elite suggests that our country stop borrowing, stop bailing out speculators and start saving we are in for a bumpy road.