Emini Trading Update – Wednesday 18 May 2011 (2:14)
One shot, one kill. Done for today.
Link of the day …
This is a must-read PDF – the best summary of where we are and the dilemma we face.
I have a love-hate relationship with Richard Koo.
Yes, he has been a thought leader all the way. He explained the current Balance Sheet Recession and how it is different from normal recessions. And I love him for that.
However, he believes we need continued Government spending to pull us out. That’s where we differ and that’s where the “hate” bit comes in.
I think Government should not “manage” an economy but simply ensure we have the ground rules in place for each of us to lead productive lives. Richard Koo uses the example of Japan to illustrate how we should debt spend ourselves out of the crisis.
Might I remind you, gentle reader, that Japan is not out of the weeds. Their Government has spent so much that their debt-to-GDP is 200%. So the Japanese “experiment” is still in play and the end result is not yet clear.
Anyway, I digress. In his latest piece he explains what Ben B. was up to with QE2 and what the impact has been. On page 6 he says this:
“Viewed objectively, the central banks are trying to push up asset prices using quantitative easing and the portfolio rebalancing effect. The resultant rise in asset prices based on this effect represented a potential bubble – or at least a liquidity-driven event – from the start.
“The question is whether the real economy can keep pace with asset prices formed in those liquidity-driven markets. If it cannot, higher asset prices will be considered a bubble and will collapse at some point. The resulting situation could be much more severe than if quantitative easing had never been implemented to begin with.
“In other words, if stock and commodity prices are in fact in a bubble and if those bubbles were to collapse, the balance sheets of the financial institutions and hedge funds making investments with the expectation of higher asset prices could suffer heavy damage, exacerbating the balance sheet recession in the broader economy.
“When the situation is viewed in this light, we come to the realization that Mr. Bernanke’s QE2 was in fact a major gamble. It was a gamble in the sense that the Fed tried to raise share prices with QE2. If the wealth effect resulting from those higher prices led to improvements in the economy, the higher asset prices would ultimately be supported by higher real demand, thereby demonstrating that prices were not in a bubble.
“However, I cannot help but feel that the portfolio rebalancing argument was putting the cart before the horse, in the sense that it is ordinarily a stronger real economy that leads to higher asset prices, and not the other way around.”
Well that’s an understatement – it’s always the fundamentals that get reflected in price; economic growth that gets reflected in a rising share market. You can’t manufacture a recovery by gaming share prices higher – that should be obvious. But maybe not to an ivory tower, Princeton University professor.
I’ve got that oh so smug Jurassic Park professor image in my head again.
Go read the PDF – and turn off your email and phone. It deservers your full attention. You can find it on Zero Hedge here:
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