Oil, commodities, asset boom, then bust

[C.W.]

I found an article about last year's energy market and the author's expectations for 2010.

I is interesting in that he recognizes the role of made-up money on asset prices, and thinks (that is, he believes what he has been told) that it was all for the good. Then he sees a dive in prices after the flow of made-up money disappears, which will be then supported by real demand. Isn't that a lovely story!! He then sees higher prices than we see now, in about a year.

So, the question, for our assembled reality-oriented thinkers, is: can this happen? Even if Bernanke and his minions manages to sop up the excess member bank reserves in a timely manner, can the economy actually find its footing and grow?

The Austrians, of which I consider myself in a small way, would say that the liquidation of misallocated assets has not been allowed to occur. Nor have prices been allowed to drop to real levels. Misallocations have, in fact, continued. The stock market price growth is mostly inflation, too. We are continuing to buy imports with made-up money. The money supply has grown dramatically. I don't see much to suggest that real growth is going to happen. Cleaning up the mess has just been put off.

[agrippa1]

If you look at stock prices since the end of the gold period (1971), you notice that prices diverged from book value at that point and started tracking to earnings. More specifically, the earnings to price ratio (inverse of P/E) tracks very well with interest rates over the past 40 years. It's as if we started considering stocks as interest bearing securities rather than investment in companies. If interest rates drop, people transition to stocks to try to improve their returns, until the E/P is driven down in line with interest rates.

Interest rates are very low right now, and everyone agrees that at some point inflation will force the Fed to increase those rates. If interest rates pop up, the market will crash.

So stock prices are being kept up because of deflation, not inflation!

The scary thing is that the gov't is keeping interest rates low right now by lending billions to banks at near 0% and having them take advantage of the carry-trade, bidding Treasury yields down, and in the process making risk-free profits (with which to pay back their TARP funds!!), and depressing overall interest rates.

It's one gigantic shell game - and that's not even counting the $3B per day the gov't is spending on MBS's. It can't go on for long, and when they finally run out of blind alleys, the whole thing collapses. And the longer it does go on, the worse it will be when it finally does blow up.

If you think they have a plan to unroll everything for a soft landing, just watch the fireworks that are already starting in White House discussions on the economy and banks. Giethner is in revolt over the new bank policies, and Bernanke is close to getting the boot. Who do you think Obama will nominate in his place? Paul Krugman, maybe?

[C.W.]

If you think they have a plan to unroll everything for a soft landing, just watch the fireworks that are already starting in White House discussions on the economy and banks. Giethner is in revolt over the new bank policies, and Bernanke is close to getting the boot. Who do you think Obama will nominate in his place? Paul Krugman, maybe?

Some suggested Reicht (sp?). Whoever BO comes up with, he will be bad, worse than what we have, which is already pretty bad.

I agree that the "unwinding" is going to be anything but soft, not even the make-believe god could effect a soft landing. The question is what is going to happen afterwards. We need to be ready, because the people in office are going to again blame capitalism and we could have a even stronger government in place in no time.

[agrippa1]

Some suggested Reicht (sp?).

Robert Reich. Yeah, a genius. I heard Reich defend the minimum wage once on the grounds that higher wages would get higher performing workers and would make businesses work more efficiently. He is of the same ilk as Krugman, equally on par with Rand's worst villains in AS. This mentality, that a one-size solution from an intellectual* can better serve all businesses than individual solutions for each business devised by its owner, is typical of the Leftist, elitist mindset. Well-intentioned, arrogant idiocy at best; disingenuous, cynical tyranny at worst. I lean towards the latter explanation.

*Pseudo-intellectual actually. An pseudo-intellectual is a man who confuses sophistication - knowing something no one else knows - with the false sophistication of believing something no one else would believe.

(edit: typo)

Edited January 25, 2010 by agrippa1