GDP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 12

[DrSpike]

Originally posted by HershOstropoler
Based on my assumptions the recession is not a masochistic choice, but like the question of going to the dentist or labouring with the toothache.

A very bad analogy. Since you haven't listened to me in the past on "good recessions", read this piece (again if you have read it) by Krugman (who we both respect) on why "good recessions" do not occur. Be warned your darling Hayek (quite fairly) gets a bit of a pasting.

http://www.pkarchive.org/cranks/hangover.html

[DrSpike]

It's in the cranks section, just noticed that; how appropriate.

[HershOstropoler]

I know that piece by Krugman. To a smaller extent I disagree with him, but mostly he is attacking a pretty misconstrued opposing view.

If you can get rid of the imbalances without a recession, excellent. But in this case that the price for avoiding it has been to build up more imbalances.

[TCO]

Originally posted by HershOstropoler


If you can answer a question for a change: Are you denying that a central bank, by forcing interest rates below their natural market level, can create a self-reinforcing consumption and invest boom ? Yes or no.

Although I am not a macro-weenie, I beleive that the central bank can influence immediate consumption but not create an immediate stock market jump. The reason being that stocks are valued based on the estimate of long-term cash flows. Easing the money supply for a year or so does not impact the long term prospects for a company. The boom was an internet fable. It was the New Economy booshwa. But people believed it. If I discover oil/seawater transmuation, the market will be justified in jumping. As that will mean cracking of the OPEC cartel. Even if the market THINKS I've discovered it, they are justified in jumping. Let them move around. Just keep CPI under control and don't do much else. That will make me happy.

[TCO]

Originally posted by GP


Although I am not a macro-weenie, I beleive that the central bank can influence immediate consumption but not create an immediate stock market jump. The reason being that stocks are valued based on the estimate of long-term cash flows. Easing the money supply for a year or so does not impact the long term prospects for a company. The boom was an internet fable. It was the New Economy booshwa. But people believed it. If I discover oil/seawater transmuation, the market will be justified in jumping. As that will mean cracking of the OPEC cartel. Even if the market THINKS I've discovered it, they are justified in jumping. Let them move around. Just keep CPI under control and don't do much else. That will make me happy.

I think that there are several examples of markets moving opposite to the way that one would expect from easing/constraining money supply. This is easy to understand with the emphasis on long term results. Also, you can look at the crash of 87 and see that it was not a result of monetary policy.

[Ted Striker]

Just wanted to say a quick hi to HershOstropoler-Rechtsberater and Manly Non-Macro Weenie GP.

I still have that drinking problem. *belch*

[el freako]

Just to put my oar in....

Well according to the OECD there has already been a sharp slowdown in the US's trend rate of growth.

According to the (admitted guesstimate) of the D-P functions, trend growth in the US was 3.6% in during the boom years of 1997-2000 but it's forecasting that this year it will only be 2.9%.

With the US's capital stock growing by only 1.5% a year - a rate that cannot be raised without a very large rise in investment - the US would have to put in fantastic captial productivity figures (I think it's capital productivity, i'm talking about capital stock/gdp here) of around 1.5% to 2% a year.
I don't think that's possible (during 1929-2001 capital productivity averaged 0.5% a year and never averaged more than 1% a year for a decade).

Sorry, but a mild slowdown followed by a recovery that also sees a sharp fall in the potential growth rate (leading to a much worse recession later in the decade) sounds very Japan-like to me.


On the subject of whether the Fed's policy since 2000 is correct the only thing I have to say is that the best description for the situation in 2000 is "don't start from here".

[Ted Striker]

There's alot of cash on the sidelines though.

[HershOstropoler]

GP:

A CB can't create an immediate stock market jump. It can however create an economic boom and invite them to the easy money table, that's the bait for speculators. Whether they bite or not is another question - this time they did.

"If I discover oil/seawater transmuation, the market will be justified in jumping."

Depends on what your wateroil will cost....


ElF:

"With the US's capital stock growing by only 1.5% a year"

Is that for 2001/2002 ?

"(I think it's capital productivity, i'm talking about capital stock/gdp here)"

gdp/capital stock. Agree that that one won't give much mileage.

[TCO]

Originally posted by HershOstropoler
GP:

A CB can't create an immediate stock market jump. It can however create an economic boom and invite them to the easy money table, that's the bait for speculators. Whether they bite or not is another question - this time they did.

Yes, but if markets beleive the boom is destructive over the long term, they will not rise overall. They have no incentive to do so. Plus they are quite capable of being stupid and of oscillating wildly on their own and independent of CB actions. See the studies on volatility, random walk patterns and the like. First chapter of Brealey and Myers is a good start and has references to the academic literaure. I assume that as an academic you either have all those journals on campus or have interlibrary loan. I did as a scummy chem grad student and used it to get journal articles in all fields. Almost always at no cost.

"If I discover oil/seawater transmuation, the market will be justified in jumping."

Depends on what your wateroil will cost....

Of course. I discussed that when I gave the example before.

[HershOstropoler]

"Yes, but if markets beleive the boom is destructive over the long term, they will not rise overall."

Which makes the Fed's cheerleading even more bizarre.

"Plus they are quite capable of being stupid and of oscillating wildly on their own and independent of CB actions."

Sure. But with the support of a CB, they can be even more stupid and oscillate more wildly.

[TCO]

Originally posted by HershOstropoler
"Yes, but if markets beleive the boom is destructive over the long term, they will not rise overall."

Which makes the Fed's cheerleading even more bizarre.

I have no problem with criticims of the cheerleading. I disagreed with the Internet hype and I also disliked the last administration.

Sure. But with the support of a CB, they can be even more stupid and oscillate more wildly.

But my point is that the markets take a long term view. A volatile long term view, but a long term one. They won't nescesarily dance to a current CB action. Also, what did the CB do that was so extreme? CPI didn't really go crazy as I remember. I know you had a bunch of comments about 2% versus 3% inflation. But I really don't remember any huge CPI craziness like from the 70's.

[HershOstropoler]

"But my point is that the markets take a long term view."

How long term ?

"what did the CB do that was so extreme."

The Fed created a consumption and investment boom.

The Greenspan Fed repeatedly reacted to (simetimes just possible) symptoms of financial stress with generous liquidity, be it the 1987 crash, the early 90s reliquification, LTCM, Y2K.... that pushed the boom further, and it created an impression of reduced risk in financial markets (whether you call it the "Greenspan put" or not).

As for CPI, Japan didn't have a real CPI inflation problem either during its bubble.

[el freako]

Originally posted by HershOstropoler
ElF:

"With the US's capital stock growing by only 1.5% a year"

The data is here (on the second sheet).

As you can see after growing by 2.9% in 1981-2000 and 2.7% in 2001 US capital stock growth slows to 1.3% in 2002 0.9% in 2003 and 1.3% in 2004, 1.5% would be the long-term rate from 2005 - that would translate into potential growth of around 2% to 2.5% a year, way below current estimates.

[TCO]

Originally posted by HershOstropoler
"But my point is that the markets take a long term view."

How long term ?

Do a DCF and look at the how much value come in different years. More than 80% of a typical stocks value is more than 5 years out. (This is textbook type stuff. Just do the DCF. It's math...not really arguable.) Now of course the market uses current events to predict what it thinks will happen a few years out. But if a CB injects money that will not drive prices up. The market has to think that the rise in value is sustainable. Otherwise there is no incentive for value to rise.

"what did the CB do that was so extreme."

The Fed created a consumption and investment boom.

What speciafically? I've already heard you blame the CB broadly. What ACTION?

The Greenspan Fed repeatedly reacted to (simetimes just possible) symptoms of financial stress with generous liquidity, be it the 1987 crash, the early 90s reliquification, LTCM, Y2K.... that pushed the boom further, and it created an impression of reduced risk in financial markets (whether you call it the "Greenspan put" or not).

Ok. Maybe. I think that the moral hazard issue with currency devaluations (specific bailouts....not Fed money levers) is the bigger concern. Also, even if the Fed juices the money supply when there is trouble, the markets still have to beleive that the policy is sustainable.

As for CPI, Japan didn't have a real CPI inflation problem either during its bubble.

Investors are capable of bidding up stocks without one bit of extra money supply. Just by believing the stocks are worth more. For instance because of false expectaions of future earnings.