It’s days like today that I regret giving up blogging. What’s bad for my 401k, and bad for America, and bad for Europe, and bad for Asia, is great news for my blog. I could have done the following sort of post:
1. Well it least it’s all out in the open now
About a year ago Krugman dismissed the notion that fiscal stimulus might fail because of being offset by monetary policy. He said something to the effect that Bernanke would never do such a thing. I have been arguing for many months that the Fed is doing exactly that. That all this talk about exit strategies and refusal to offset past deflation with higher inflation, is equivalent to a tight money policy. As Woodford and Eggertsson keep saying, what matters for today’s AD is expectations of future monetary policy. But for some reason my arguments fell of deaf ears. For some strange reason most economists insist on viewing the nominal short term rate as the indicator of monetary policy. The Fed wasn’t “doing anything,” so how could they be tightening policy?
Well at least it is all out in the open now. The Fed raised the discount rate and within minutes the S&P futures plunged 9 points. Here’s the reaction last night in Asia:
LONDON (AP) — World markets fell Friday after the U.S. Federal Reserve unexpectedly raised interest rates for emergency bank loans, triggering fears that regular borrowing costs could also move higher soon, slowing the recovery in the world’s largest economy.
. . .
Earlier in Asia, Hong Kong’s Hang Seng stock index led decliners, diving 528.13, or 2.6 percent, to 19,894.02 while Japan’s Nikkei 225 stock average dropped 212.11, or 2.1 percent, to 10,123.58.
“As the dollar strengthens, we see less appetite for riskier assets such as Asian stocks.” said Jit Soon Lim, head of equity research for Southeast Asia for Nomura in Singapore. “We’re bullish on the region’s economic growth, but bearish on risk.”
“As the dollar strengthens” Why that must be wonderful news for Europe! After all, the zero-sum game economists keep telling us that we would be helped by a stronger yuan, so why shouldn’t Europe be helped by a stronger dollar (and yuan by implication)? Odd that the European markets didn’t rise on the news.
When I arm wrestle with my 10-year old daughter I start out with a fairly limp wrist, and then gradually increase the pressure as I feel her pushing harder. Our two hands remain motionless over the table, my pressure exactly calibrated to offset hers. She gets frustrated, and I can’t blame her. And I can’t blame Obama if he is feeling frustrated right now. The Fed has a nominal target in mind, and dog-gone-it they are going to do whatever it takes to prevent the economy from overshooting that nominal target. The harder Obama and Congress push, the harder they’ll push back.
Anyone still think that a second stimulus bill would help?
Update: I forget to mention the last time the Fed raised the discount rate after 24 months of steady job loses—October 1931. Bernanke is an expert on that event, it might be nice for someone to dig up what he had to say about it.
2. The invincible markets hypothesis
Then there is talk (here and here) of a new type of inefficient markets hypothesis; Rajiv Sethi calls it the invincible market hypothesis. I don’t buy it, nor do I think the more famous anti-EMH types would either. The claim is that markets are efficient, but they are also so irrational that there is no way for investors to take advantage of that fact. This implies that the gap between actual price and fundamental value doesn’t tend to close over time, but rather follows a sort of random walk, drifting off toward infinity.
As far as anti-EMH theories go, I prefer the views of people like Shiller. He argues that markets are somewhat inefficient, but also partly efficient. Thus if fundamentals suggest the P/E should be 15, when it falls below 10 you should allocate more of your portfolio to stocks, and if it is above 25 you should put more into bonds. After all, stocks always tend to drift back toward the average P/E in the long run. So Shiller claims his theory does allow you to do better than buy and hold. I don’t think Shiller’s right about the EMH, but I do agree with him that if the anti-EMH position is correct, it must have investment implications. If not, then the anti-EMH model would be worthless, and should be ignored. BTW, Sethi argues Shiller might be right in the long run, but may be wrong in the short run. I don’t buy that distinction. If Shiller’s right then the anti-EMH position has useful investment implications, even for short term investors, and markets aren’t “invincible.”
Here’s part three of my chapter on the first year of the Depression, looking at the three big shocks of 1930:
4.f The June 1930 Stock Market Crash
We have already seen that the 1929 tariff debate may have had an adverse impact on stock prices. In 1930 the tariff debate re-emerged with even greater intensity, and this time the impact on stock and commodity markets was unmistakable. By mid-1930 fears of political paralysis in Washington were replaced with worries about the international repercussions of the enactment of a higher tariff. And now there was evidence that investors were concerned about not just the potential impact of Smoot-Hawley on trade, but also on the prospects for monetary cooperation.
Den ganzen Beitrag lesen…
