EUCOM Economic Analysis - Part I

[Firn]

Let's get real about the stock market puts all the recent records in perspective. For non-economists the 'real' is a play on the important adjustment for inflation.



He also uses the Graham/Shiller P/E to put the price in context of the (past) long-term earnings. It is one of relative few metrics I value for a few reasons I have outlined in the past. For obious reasons he will tend in the long run to hover above the current P/E...



Buffett pretty much said the same thing last week underlining especially the part about the retained earnings. So should you invest now in stocks? Just like pretty much everbody else I have no idea. I will continue to sell bonds and have not bought a new one in the last 3 years or so. Too much risk IMHO as someday you will have higher yields and thus in the long run bond prices will come down. Hopefully we won't all be dead...

I enjoyed this post about why old hedge fund managers hate Ben Bernanke. Luckily I did change my views on inflation within a liquidity trap, after having faced the facts. I would be quite a bit poorer today and have much less faith in ordinary macro textbooks...

Hedge funds are doing badly in this rising-tide-lifts-all-boats market, and they feel that they would be outperforming if the Fed just let things collapse, and they could swoop in when prices "clear."

The inflation and hyperinflation fantasies are another important aspect here. A lot of these guys cut their teeth during the 80s, when inflation was the enemy, and Volcker was a hero for fighting it. Thus being anti-inflation is kind of a nostalgia trip for them. Also in general, the older people are, the more worried they are about inflation. Also the older people are, the more they are inclined to invest in bonds and risk-free assets, so low rates aren't fun.

[Firn]

Time travel in Euroland

Unfortunately, this is not news by now, but the president of the Euro group, Jeroen Dijsselbloem in an interview with CNBC yesterday dismissed the role that fiscal policy and monetary policy can have to address the economic crisis (emphasis is mine):

"Monetary policy can really not help us out of the crisis. It can take away the pressure, it can accommodate new growth, but what we really need in all countries is structural reforms in the first place. I'd just like to stress the point that in the policy mix of fiscal policy, monetary policy and structural reforms — I'd like the order to be exactly the other way around. Structural reforms in the first place, fiscal policy and viable targets in the mid-term for all regions in second place — and monetary policy can only accommodate domestic economic problems in the short-term."

The bloggers respond:

It is not exactly clear what to make out of his statement but it seems that long-term solutions should come first before we implement those that will help us in the short term. It is surprising that even today there is such a great confusion about long-term versus cyclical problems.

This confusion comes from a basic belief that some hold that there is nothing inherently different in the dynamics of an economy when one looks at the short run and the long run. This is part of a never-ending academic debate but when it comes to policy makers and politicians it seems to be more a matter of beliefs.

What it is not always understood is that we are dealing with two separate problems and therefore we need two different set of tools or solutions to deal with them.

I fully agree with their point of view. Right now the ECB is in life-saving mode and tries to keep the patient afloat. The governments should act quickly and pump into him the needed medicaments and other proper treatments including expensive surgery. There is now little sense to force him to undergo and even light training to get into good shape and to shed some weight. The latter is an excellent approach for the long term but in the short run it might lead to an exitus.

Of course some political actors seem to fear that good fiscal treatment will ease the way for dolce vita and not harsh austerity, with an adios to structural reforms.