iTulip is back?

[jk]

Re: iTulip is back?

in 1994, at a fed meeting, greenspan made reference to the stock market bubble and whether they could effectively "prick" it. in 1996 he quoted robert shiller's phrase, "irrational exuberance," but then got scared when equities sold off. after that he brought out the pom poms for the "New Economy." he knew, but it became socially, politically and financially inconvenient to admit he knew.

[dcarrigg]

Re: iTulip is back?

I agree. I think they all knew. At least the smarter leaders of the group. But it was far more profitable for them to package and sell an obvious lie as truth. And there's a certain type of young and gullible that will just buy into it. Hell, that's why all they teach in Econ 101 is general equilibrium models with perfectly efficient markets. The whole point is to begin with the lie.

The idea of turning economics into a true empirical science, where core theories can be rejected, is a BIG, revolutionary idea.

[EJ]

Re: iTulip is back?

in 1994, at a fed meeting, greenspan made reference to the stock market bubble and whether they could effectively "prick" it. in 1996 he quoted robert shiller's phrase, "irrational exuberance," but then got scared when equities sold off. after that he brought out the pom poms for the "New Economy." he knew, but it became socially, politically and financially inconvenient to admit he knew.

Greenspan had a deal with Clinton early in Clinton's first term. In exchange for Clinton undertaking the politically unpopular task of cutting the Federal deficit, Greenspan agreed to keep interest rates lower for longer than economic conditions warranted. That much is public knowledge. I think having Greenspan ignore the tech bubble was the second term deal to continue deficit cuts. The resulting boom made Clinton look like a genius. All Greenspan had to do is come up with clever excuses. My favorite at the time was his description of tech stocks as akin to lottery tickets. His argument: We don't try to keep citizens from buying lottery tickets so why discourage them from buying over-priced tech stocks? Pretty lame.

The driver of that bubble was rapid recycling of IPO cash back into new start-ups. To halt the bubble the suggestion that I made at the time was a regulatory requirement for a 3-month to 6-month post-IPO stock holding period. Those regulations were in fact put in place but not until after the crash, to prevent a recurrence. They've been effective.

I didn't see anything particularly anti free-market about common-sense regulations like that that eliminate the underlying mechanism of an asset bubble. Seemed more like common sense to me. But then politics almost always trumps common sense.

One of the very first iTulip posts in 1998 featured this image.

[jk]

Re: iTulip is back?

my favorite greenspan whopper was his testimony supporting the w. bush tax cuts: he was worried that the u.s. would run overly large surpluses.

[EJ]

Re: iTulip is back?

I take personal umbrage to what he and his did to my young mind. Not just the early high school Rand assignments. I didn't get what they were at the time. But the writing was uninspiring enough I didn't become some acolyte. But I more or less did start falling for the efficient market dogma and self esteem and their market concepts of human value and self worth. It's truly mind-warping stuff, especially for boys. After you internalize it, it takes some time or education to realize that there's a reason your dog don't leave you for a stronger, richer, or prettier fella on the walking route. Probably the same reason that your father or wife don't abandon you either. Some never pick up on the fact their minds have been poisoned and head down a lonely destructive path. I had learned about the old Dutch Tulip bubble and been complaining to folks about how homes had become totally unaffordable when I found this place. I didn't discover Minsky until some time later, although he just put a theory to a phenomenon known since at least the advent of stock markets themselves, but which neoclassical dogma could give no schrift to without violating the sanctity of markets. It's still a place with a variety of views mixed in. EJ himself has a tendency to quote some dusty old far right Austrian nobleman, then in the next sentence throw out a concept that would make him spin in his grave. There's a certain agnostic pragmatism to it that I still find attractive. There's something...quite American about it. In a way the market dogma that lots of American economists have succumb to never really felt American. I suppose it's the drive to make returns without being anybody's fool. Kind of sharpens the senses, if you're not crooked. Janet Yellen got it. But even in getting it, she had to couch it behind stating that a lot of people don't believe in it, and even many of those who do think the fed should do nothing about it. We can't even agree that what we see with our own two eyes is real, and even half who can think there's nothing we ought to do about it. Dark times.

An iTulip article starts with a blank piece of paper and a question. Answers lead to other questions. I never go into it trying to make a particular argument. I go where the data lead me. You can find yourself stuck for days trying to answer a particular question, the answer to which when you find it contradicts the thread of logic that led you there, and you have to throw it away and continue on from a new place. It's a laborious and sometimes frustrating process.

I make no conscious effort to avoid any school of economics. My thinking has evolved over the years to include parts from all schools in a way that fits together to meet the requirement that an argument not contradict the data.

For example, it's hard to look at this graph and not conclude that the Fed has been a boon to the US economy. Before the Fed the economy spent about as much time shrinking as growing. Much of the technological advances we've seen in our lifetimes could not be possible if investors faced short expansion periods in which to realize profit on investment, interrupted by long recessions when many firms go under.



Yellen is a smart cookie. In my short conversation with her in 2012 she struck me as a straight forward person. I don't think she could be persuaded to do anything she didn't think was right. In other words, not a team player, thus the single term.

[DSpencer]

Re: iTulip is back?

I have another related question, which is simply, "How many members of the fed believe in asset bubbles?"

My sense is, especially among the econ community, there are a lot of true believers who think markets are everywhere and at all times efficient, and the problem is not in us but in our stars--that is, the bubbles are not bubbles, they are perfectly efficient market outcomes, like all market outcomes, we simply see them as bubbles because we lack the tools to divine the will of the market correctly, and had we prevented the bubble in the first place, we would have gone against the will of the market, and things would be even worse.

I can't understand the attempt to paint the members of the Fed as some kind of free market purists. The entire purpose of the Fed is to control levers which supersede market forces. Maintaining artificially low interest rates is analogous to price controls on wages, rents, etc.

The free market purist view is not that asset bubbles don't exist; it's that bubbles are often created by Fed intervention in the same way that subsidizing corn production leads to excessive corn production.

I get the Greenspan connection, but that's like saying if a priest sexually abuses a child it's now part of the Christian faith and dogma.

[dcarrigg]

Re: iTulip is back?

I can't understand the attempt to paint the members of the Fed as some kind of free market purists. The entire purpose of the Fed is to control levers which supersede market forces. Maintaining artificially low interest rates is analogous to price controls on wages, rents, etc.

The free market purist view is not that asset bubbles don't exist; it's that bubbles are often created by Fed intervention in the same way that subsidizing corn production leads to excessive corn production.

I get the Greenspan connection, but that's like saying if a priest sexually abuses a child it's now part of the Christian faith and dogma.

It's not so much about painting anyone anything as it is about a number of people who have unquestioning faith in the efficient market hypothesis regardless of evidence to the contrary. And they apply that faith across asset classes.

[touchring]

Re: iTulip is back?

I don't think the stock market bubble can sustain until 2020.

Regardless of Fed policies, if I were Trump, I'd rather it collapse now and then recover just in time for Nov 2020.

With Trump, you'd never know...

[santafe2]

Re: iTulip is back?

I don't think the stock market bubble can sustain until 2020.

A paraphrase; the market will be irrational longer than anyone who bets against the trend can remain solvent. Or more straightforward, the trend is your friend, (until the end). GE, AT&T, TSLA and many others are doomed, but not that soon. The world is awash in cash. Oil has gotten a lot cheaper. Housing is moderating in the Case-Shiller 20 but it's not tanking. We have full employment by modern measurements, (we've covered that here for 10 years).

The leading market indicators were kicking in almost a year ago and the lagging market indicators are turning red now. All of the usual suspects will be wringing hands over the next few months / year but as GRG said a while ago, watch for an oil spike, (or some other serious existential threat). Nothing big is happening soon.

Some markets that regular folks don't watch are great indicators; rare automobiles, 20th Century art and mega yachts. Watch the pricing and buzz at Monterey, Sotheby's and Monte Carlo to understand when the rich are worried. These are very volatile markets because the participants can afford to pay way to much and can afford to lose on the way out the door. Hint: For now, everything looks fine.

[Thailandnotes]

Re: iTulip is back?

The entire purpose of the Fed is to control levers which supersede market forces..

Interesting article...

"For half a century, presidents have refrained from criticizing the “independent” Federal Reserve. But that was before Donald Trump...It is possible that six of the seven Board members will be put in place by Trump."

https://www.truthdig.com/articles/ti...in-in-the-fed/

[DSpencer]

Re: iTulip is back?

It's not so much about painting anyone anything as it is about a number of people who have unquestioning faith in the efficient market hypothesis regardless of evidence to the contrary. And they apply that faith across asset classes.

I'm really trying to look past what I see as the obvious contradiction in your viewpoint. Help me understand: If a person has unquestioning faith in the efficient market hypothesis, what does that person think is the appropriate monetary policy?

[Woodsman]

Re: iTulip is back?

Interesting article...

I'm sure any chance Trump has of putting "his people" on the Fed's board is pretty close to zero. The slate of candidates for the Fed's board will be selected by the boards of the member banks and the President will choose from whomever they offer him.

...Nixon’s plan for national finance, along with his plan for health care and a guaranteed income, alarmed the Wall Street/Federal Reserve power bloc, which was about to be challenged like never before. He writes:

The “Watergate” saga was obviously just Senatorial theater. … The Wall Street Great Merchants as owners of the Senate … were making certain that the money dreams of “Tricky Dick” and his vision for the Republic protected with a network of converted Savings and Loan associations was doomed. …

Only John Kennedy, Abraham Lincoln and two other assassinated presidents, James Garfield and William McKinley, prior to Nixon had actively contemplated changes of such magnitude in the U.S. financial system.

[DSpencer]

Re: iTulip is back?

Interesting article...

"For half a century, presidents have refrained from criticizing the “independent” Federal Reserve. But that was before Donald Trump...It is possible that six of the seven Board members will be put in place by Trump."

https://www.truthdig.com/articles/ti...in-in-the-fed/

The veil of independence is so thin. The board members are appointed by the President and, unlike the Supreme Court, they have a max term limit. Even that seems to be mostly irrelevant because they tend to just move on after a few years.

I'm curious when someone like Trump would ever believe that interest rates should be higher.

[touchring]

Re: iTulip is back?

A paraphrase; the market will be irrational longer than anyone who bets against the trend can remain solvent. Or more straightforward, the trend is your friend, (until the end). GE, AT&T, TSLA and many others are doomed, but not that soon. The world is awash in cash. Oil has gotten a lot cheaper. Housing is moderating in the Case-Shiller 20 but it's not tanking. We have full employment by modern measurements, (we've covered that here for 10 years).

The leading market indicators were kicking in almost a year ago and the lagging market indicators are turning red now. All of the usual suspects will be wringing hands over the next few months / year but as GRG said a while ago, watch for an oil spike, (or some other serious existential threat). Nothing big is happening soon.

Some markets that regular folks don't watch are great indicators; rare automobiles, 20th Century art and mega yachts. Watch the pricing and buzz at Monterey, Sotheby's and Monte Carlo to understand when the rich are worried. These are very volatile markets because the participants can afford to pay way to much and can afford to lose on the way out the door. Hint: For now, everything looks fine.

Yes, this is true, there's nothing on the horizon that says the stock market bubble will unravel. Even Ray Dalios says that the US stock bubble has another 2 years to go.

Trump knows this also. He also knows that based on trend, the bubble will burst at the right time - October 2020, just in time for him to lose his re-election.

This is the worst timing not for him, but also for the US because you want the bubble to unravel while the economy is still strong so that the real economy (manufacturing/services/energy sector) can help absorb some of the fallout (FANGS/California RE).

[dcarrigg]

Re: iTulip is back?

Yes, this is true, there's nothing on the horizon that says the stock market bubble will unravel. Even Ray Dalios says that the US stock bubble has another 2 years to go.

Trump knows this also. He also knows that based on trend, the bubble will burst at the right time - October 2020, just in time for him to lose his re-election.

This is the worst timing not for him, but also for the US because you want the bubble to unravel while the economy is still strong so that the real economy (manufacturing/services/energy sector) can help absorb some of the fallout (FANGS/California RE).

Historically, the timing is much more slow motion than that. The Oct. 1929 crash sunk Hoover in 1932, not the Republicans in Nov. 1930 midterms. The Great Recession peak was Oct. 2007. By summer, Nasdaq crashed below 2k. Was still some crash to go through and past election day. Didn't hit rock bottom until spring 2009. McCain was ahead in the polls as late as early Sept. 2008. He got a bounce off the convention, and off naming Palin on the 10th. Lehman went bankrupt 5 days later. Palin's terrible Katie Couric interview was in between. TARP wasn't passed and signed by W. Bush until Oct. 2nd. By then, the political damage was done, and Obama pulled clearly ahead.

Anyways, my point is just that if stocks crashed today, it could take until next year for a lot of the employment and bankruptcy headlines to really crank up.