The Dow Jones Industrial Average briefly traded above 11,000 last Friday and while we’ve passed that marker roughly 30 times - in both directions - since first piercing it in 1999, the move last week seemed somehow more miraculous than the first 29 times. Be honest with yourself; did you think a year ago that Dow 11k was even a remote possibility in such a short period of time? I’ve been more bullish than most over the last year and my S&P 500 target for this bull move has been 1200-1250 (roughly here) but even I’ll admit to being a bit overwhelmed with the reality that we’ve already arrived at my recovery target. Why has the market recovered so quickly? Have we really solved the problems that caused the financial crisis?
The Financial Crisis Inquiry Commission has been holding hearings into the causes of the crisis and based on the first bit of testimony one thing is obvious - no one in power really wants to know or possibly even cares what caused the crisis. That is obvious by the simple observation that the results of this inquiry are apparently irrelevant to the politicians crafting new regulations to replace the ones that just failed so miserably. The FCIC report won’t be ready until well after the elections in November and politics waits for no man or commission. What’s more important? Grandstanding and getting re-elected or drafting legislation that actually addresses the underlying issues? I think the answer to that question - according to politicians- is pretty obvious so I’d recommend not wasting another minute of your valuable time watching the parade of villains coming to testify before the commission except for one thing - the hearings are just so darn entertaining.
Just last week Alan Greenspan went before the commission and told them that he was right 70% of the time, a percentage that is in sharp contrast to my memory of his actual record as a forecaster whether in the private sector or the public one. If in fact, Mr. Greenspan was right 70% of the time one is left wondering what trivial minutia he guessed correctly since he seems to have gotten all the big stuff so drastically wrong. Maybe he was referring to the Federal Reserve NCAA basketball pool? We also got to see Robert Rubin and his cohorts from Citigroup explain how they managed to be fooled by the ratings agencies into losing $50 billion in such a short period of time and yet were smart enough to justify their pay packages.
Greenspan in particular is an almost endless source of comedic material that at times sounds like an old Abbott and Costello routine. In his most recent testimony Greenspan tried out a new twist on the old global savings glut argument by saying:
In my judgment, the origination of subprime mortgages — as opposed to the rise in global demand for securitized subprime-mortgage interests — was not a significant cause of the financial crisis.
Well, thanks for clearing that up Al; the problem was caused by excessive demand for high yielding securities. If those stupid banks had just ignored that demand and not packaged or sold those darn sub prime mortagages this whole thing could have been avoided. Is it impolite to point out to the octogenarian Greenspan that the demand for these securities was a function of the interest rate available on other, less risky securities? Or that the interest rate available on those less risky securities was a function of Federal Reserve policy, over which Greenspan had almost complete control? Is it inconvenient to mention that all these circular arguments tend to come back to the role of the Fed in fixing the price of short term credit? Does Greenspan believe he can confuse and distract us with his rhetoric as he has so many times before or is it Greenspan who is confused? Who’s on first?
The FCIC will not discover the causes of the Great Crash of 2008 by questioning the likes of Alan Greenspan. It is obvious that he is not about to admit his or the Fed’s role in creating the conditions that led to the crisis. It is easier to let Robert Rubin, Chuck Prince and the rest of Wall Street take the blame for producing products that even Greenspan admits their customers demanded. The source of the demand must apparently be ignored at all costs or blamed on the mysterious animal spirits that occasionally infect the greedy and grubby business class.
Congress will enact financial reform this year because it is good politics. No one should be fooled into believing that the reforms will prevent a future crisis. The basic source of the imbalances in our economy - in the world economy - is the manipulation of credit by the Federal Reserve and other central banks. The Fed has spent the last four decades reducing the real rate paid on savings and we wonder why people don’t save. The Fed has spent the last four decades reducing the real cost of borrowing and we wonder why the country is deep in debt.
The stock market has recovered a large portion of the losses incurred as a result of the financial crisis of 2008 because corporate profits have almost fully recovered and interest rates are low. The economy, while better than it was a year ago, still faces significant difficulties. While there are signs of recovery, unemployment is still too high, local and state governments are having considerable budget difficulties and the federal government is running huge deficits. The real estate market is still very weak, defaults are high, mortgage rates are now rising and the home buyer’s tax credit ends soon. But despite all these difficulties the economy does seem to be recovering. If anything the improvement in the economic data seems to be accelerating. Whether it lasts is something we don’t know yet, but since everyone else seems to be getting more comfortable with the idea of recovery, I think it prudent to temper my enthusiasm.
Unfortunately, we haven’t addressed the underlying problems with our economy. The debt infecting our economy has been shifted from the private sector to the public but we are still deep in debt. The Fed has manipulated interest rates to produce a recovery by pushing investors/savers to take more risks and encouraging consumption at the expense of saving - just as they did after the last recession. Corporate profits have recovered along with profit margins because companies have reduced their workforces but they aren’t using those profits to invest in their businesses - just as they didn’t after the last recession. After the last recession residential investment led the recovery but that looks like a dead end this time. Since this recession - like most of them - was caused by a fall in investment one has to wonder where the new investment (malinvestment?) will be directed that extends this recovery into a real expansion. Right now, there aren’t any obvious candidates and that is cause for considerable concern here at Alhambra.
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[...] Did We Learn Nothing? | Alhambra Investments alhambrainvestments.com/did-we-learn-nothing – view page – cached The Dow Jones Industrial Average briefly traded above 11,000 last Friday and while we’ve passed that marker roughly 30 times - in both directions - since Tweets about this link Topsy.Data.Twitter.User['wanfangabc'] = {”location”:”",”photo”:”http://a3.twimg.com/profile_images/803541703/avatarlin_normal.jpeg”,”name”:”Avatar Panda”,”url”:”http://twitter.com/wanfangabc”,”nick”:”wanfangabc”,”description”:”",”influence”:”"}; wanfangabc: “RT @JarvisSkidmore: Did We Learn Nothing? | Alhambra Investments: The Dow Jones Industrial Average briefly traded above 11000 last Fri… http://bit.ly/bbTY2d ” 30 minutes ago view tweet retweet Topsy.Data.Twitter.User['jarvisskidmore'] = {”location”:”",”photo”:”http://a1.twimg.com/profile_images/765452930/image_04_normal.jpg”,”name”:”Jarvis Skidmore”,”url”:”http://twitter.com/jarvisskidmore”,”nick”:”jarvisskidmore”,”description”:”",”influence”:”"}; jarvisskidmore: “Did We Learn Nothing? | Alhambra Investments: The Dow Jones Industrial Average briefly traded above 11000 last Fri… http://bit.ly/bbTY2d ” 33 minutes ago view tweet retweet Filter tweets [...]
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