Thursday, October 4, 2012

Market Wants Obama To Win

Market Wants Obama To WinSince March, the performance of the S&P has been correlating extremely well (76%) with Obama's reelection chances on InTrade. In fact, the correlation is so good that even a short-term plummet in reelection chances saw the S&P plummet as well. We'll see what Obama's chances are after all the dust is settled from the first debate, but it appears that the market wants Obama to win. And why might it want him to win? Could it be because Obama, unlike Romney, has made of no mention of nominating a new Fed chairman next year? Lest we forget that stocks would likely be 50% lower if it weren't for Bernanke's liquidity pumping.

Market Wants Obama To Win - chart

Clinton's Prosperity Was A Greenspan Bubble, Mr. Obama

Clinton's Prosperity Was The Tech Bubble, Mr. Obama
Early in this evening's presidential debate, Obama twice brought up the economic success of Bill Clinton's presidency. Let it be known that Clinton's 2nd term, the term to which people refer when they talk about "Bill Clinton's economy", took place during the period of time in which the "beneficial" effects of Alan Greenspan's first great liquidity pumping came to fruition. (Books have been written about this. I suggest Greenspan's Bubbles: The Age Of Ignorance At The Federal Reserve). While Democrat politicians love to point to Bill Clinton's economic record, the truth is that the prosperity we saw during Clinton's 2nd term can be largely attributed to Greenspan's Fed.

A nutshell economics lesson: Following the 1991 recession, Greenspan's Fed pushed down the Fed Funds Rate (the rate at which the Fed loans to banks) to near-historic lows and kept them there for the better part of the decade. The FFR had been lower before (as you can see in the following chart prior to 1965); however, Greenspan's Fed pumped fiat currency (more likely to pool in speculative markets) whereas Fed presidents prior to 1965 lent gold-backed currency (less likely to pool in speculative markets). As you can see from the red trendline on the chart, Greenspan's Fed Funds Rate was far below where the FFR had been for the majority of time after August 15, 1971, the date on which the dollar was decoupled from gold. The FFR during the 1990's wasn't as low as it was during the 2000's (those low rates helped lead us to this economic depression), but it was low enough to help inflate a then-historic speculative bubble (dot-coms and technology in general) and juice the economy, which highly benefited the legacy of one William Jefferson Clinton.

Another way of looking at Greenspan's first great liquidity pumping is to look at the sudden drop in the personal savings rate during the late 1990's. Nearly a decade of record-low post-gold-decoupling Fed Funds Rates lead to abnormally low savings rates, which enticed people to spend more money, much of it on the technology (and technology stocks) created by the speculative-driven tech market. The wealth effect of major market bubbles intensified this spending trend, which made the economy--and Bill Clinton--look good.

Clinton's Prosperity Was A Greenspan Bubble, Mr. Obama - charts 1 and 2

And how much did the tech speculation benefit the economy? During Clinton's 2nd term, the NASDAQ alone "created" nearly $2 trillion in new wealth and made tens of thousands of Americans instant millionaires. The trickle-down effect was immense, and millions of Americans were lifted out of poverty. (Clinton's 2nd term is a testament to the benefits of trickle-down economics.) Bill Clinton wasn't responsible for all that wealth creation. People throwing piles of fiat dollars at technology was.

Clinton's Prosperity Was A Greenspan Bubble, Mr. Obama - charts 3

Wednesday, October 3, 2012

Fed Econ Models Predict "Explosive Inflation"

Fed Econ Models Predict "Explosive Inflation"In a staff report published today by the New York Fed (.pdf), economists Mark Del Negro, Marc Giannoni, and Christina Patterson came to the shocking conclusion that key Fed economic models must be wrong...because they predict severe consequences (extremely high inflation 2 years from now) as a result of manipulating the monetary system. From the report, discussing the challenge of predicting economic performance 8 quarters out:
Given that policymakers seldom if ever experimented with forward guidance this far in the future, there is little data to guide them. The problem, however, is that these DSGE models appear to deliver unreasonably large responses of key macroeconomic variables to central bank announcements about future interest rates.

Carlstrom et al. show that the Smets and Wouters model would predict an explosive inflation and output if the short-term interest rate were pegged at the ZLB (Zero Lower Bound) between eight and nine quarters. This is an unsettling finding given that the current horizon of forward guidance by the FOMC is of at least eight quarters.
In English, the report is saying the Fed's models must be wrong because they predict "explosive inflation" 2 years out. Interesting that Philly Fed president Charles Plosser recently came to the same conclusion.

Intelligence Effort Targeted Innocent Citizens

Intelligence Effort Targeted Innocent Citizens
Yesterday, the AP reported that a Senate study on homeland security spending has concluded that so-called federal "fusion centers", a multi-billion dollar information-sharing network used by law enforcement agencies of all levels, have improperly collected information about innocent Americans. From the AP:
What began as an attempt to put local, state and federal officials in the same room analyzing the same intelligence has instead cost huge amounts of money for data-mining software... The report underscores a reality of post-9/11 Washington: National security programs tend to grow, never shrink, even when their money and manpower far surpass the actual subject of terrorism.

Tuesday, October 2, 2012

Tax System More Progressive, Rigged

Tax System More Progressive, Rigged
Maybe it's just a function of the rich getting richer and the poor getting poorer (but getting more handouts), but, according to taxfoundation.org, the federal tax system has been getting more progressive over the past 3 decades. In fact...

Tax System More Progressive, Rigged - chart 1

...today, the system is progressive (and rigged well) even after credits and deductions. A few things about this next chart: The jump between the $100,000-250,000 and $250,000-1,000,000 brackets is disproportionally large (stick it to the successful small businessman or senior-level corporate employee!), and the jump between the $250,000-1,000,000 and $1,000,000+ brackets is disproportionally small (the wealthy can afford top-dollar accounting and legal services). Also, the fall between the $15,000-30,000 and $1-15,000 brackets is below trendline, reflecting the impacts of the EITC and the welfare state. Clearly, the tax system has evolved to become more progressive and to benefit the wealthy (only an increase in effective tax rate of 1% between $999,999 and $999,999,999), and the poor, who pay progressive negative effective tax rates.

Tax System More Progressive, Rigged - chart 2