Wednesday, May 5, 2010

Bernanke Bubble

I agree with you on the Bernanke Bubble. The politicians are putting pressure on the fed to cause another inflationary boom so that the Democrats and Obama can get re-elected. The problem is they hurt the economy so bad that it is taking too long to recover so they may get booted out of office.

> I agree with you about the bond market. I believe the Fed is behind the
> curve again and stocks are surging into dangerous waters. The P/E ratios are
> ridiculously out of whack, and you are right, institutions are diving into
> stocks big time because the bond market is destined to fall out of bed. I am
> at a loss as to why the Fed does not let the free market determine bond
> rates and to readjust their portfolio holdings.

I think the answer is politics and the inherent inflationary bias of third world banana republics and mobocracy in general. Theoretically the Federal Reserve is supposed to be above politics, like the Supreme Court, and act in the best interests of the economy. But in practice the Fed will succumb to politics, especially now that financial institutions are being called in to testify before congress and heavily critisized.

On a positive note, industrial production is recovering sharply, and business profits are improving after they have fired many employees and the worst businesses went bankrupt. Now these unemployed can find work in leaner and meaner firms in parts of the economy that need to grow.

> I see where they have
> decided not to relinquish mortgage packages, low rated bonds, and other
> holdings as Bernanke testified before Congress. I believe that he is under
> political pressure to hold rates where they are for Treasury to float more
> debt.

Yes, I expect this pressure to continue and eventually cause inflation. Most of the economy is still too weak to raise prices -- people don't have enough money to buy very much. But as the recovery continues this will change and people will spend more freely and the result of massive liquidity will materialize into price increases.

> The institutions see this and are getting out of the bond market
> recognizing hidden bond retractions and going into stocks.

Yes, it looks like the smart money has already left and the dumb money is suffering losses on their bond portfolios. I expect to see this in the stock market later this year. Many think the stock market has gotten ahead of itself and are moving money elsewhere. The problem is where? Maybe overseas. I just had the idea to move to Mumbai India which is the English-speaking business capital on the west coast with weather similar to Hawaii (which lacks business.) China is more booming but the language is too difficult.

> Somewhere this
> has got to give way, and interest rates will have to go up. Looks like the
> Fed is screwing up again.

Yes, this is the third Fed induced bubble we have had in the last 15 years! When will it end? How much can the economy take?

Glass-Steagall was good

As I expected, with politicians ripping up the bankers, those bankers now wish they had not engaged in risky activities and are calling for re-regulation to curb risky activities.

I was appalled when they got rid of Glass-Steagall. Financial institutions need firewalls between them to help contain crises. This would also help prevent banks from getting too big to fail. More smaller banks would also provide more competition at the margin as banks fight over businesses on the periphery where their businesses overlap.

Many now agree with me:
http://www.bloomberg.com/apps/news?pid=20601087&sid=auWJO2Uj5tKw&pos=4