Mish's Global Economic Trend Analysis |
- Governor Christie to Test Teachers in Reading and Math
- QE Engine Revs, Car Goes Nowhere
- Sure Thing?!
| Governor Christie to Test Teachers in Reading and Math Posted: 28 Sep 2010 08:30 PM PDT If you can't read, write, or do basic math, you sure can't teach it. That is the logic behind Governor Chris Christie's reform package that will require teachers in kindergarten through fifth grade pass tests in reading and math in order to be certified. Everyone but the teachers' unions and incompetent teachers should be happy with Sweeping N.J. Education Reform Christie is turning his take-no-prisoner's style to the classroom, demanding a top to bottom overhaul of how New Jersey students learn and teachers teach. And that means undoing tenure, seniority and other union work rules.Fancy that, teachers have to be able to read and write. The only thing that puzzles me is why only kindergarten through fifth grade teachers need certification tests. Bear in mind this is hardly an ideal approach. In a free market there would not be teachers' unions in the first place and schools would easily get rid of incompetent teachers at will. However, pragmatically speaking, it is extremely difficult to get to where we need to go in a single step. Changing seniority and tenure rules is a welcome step in the right direction. Moreover, unless you are a union member, you have to adore Christie's willingness to play hardball. We need Christie in the Whitehouse, not a state capitol. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| QE Engine Revs, Car Goes Nowhere Posted: 28 Sep 2010 12:24 PM PDT The economy is stuck in neutral so stepping on the QE gas pedal is highly unlikely to accomplish much except increase the noise level. Yet, the philosophy at the Fed seems to be, if gas doesn't work, give the engine more gas. So the engine continues to rev louder and louder, and treasury yields drop, but that does not and will not put Americans back to work. 5-Year Treasury Yields at All-Time Low Curve Watcher's Anonymous notes Treasury Five-Year Yields Near Lowest Since 2008 Before Auction Treasuries rose, pushing five-year note yields to the lowest level in almost two years before today's auction, as a drop in consumer confidence spurred bets that the Federal Reserve will increase debt purchases.Yield Curve Weekly Close  Providing unneeded liquidity may or may not help asset prices (please see Sure Thing?! for a discussion) but if quantitative easing helped the real economy, at some point yields would stop falling. Clearly the Fed has no clue as to what to do, but it wants to "do something". The only thing the Fed can think of doing (or is willing to do) is have another round of quantitative easing, so the Fed eases whether it makes any sense or not. The amazing thing here is talk of "Sure Things" regarding equities, with treasuries universally despised. Of course it is no "Sure Thing" for treasury yields to drop either, but arguably it is more likely given the economic engine is stuck in neutral. The simple fact of the matter is increased borrowing power or lower interest will not cause business businesses to expand. I have discussed this point at length in
Here are a few charts from NFIB Small Business Trends for September. Prices Received  Actual Price Changes  Single Most Important Problem  The single most important problem is lack of customers. Access to credit is not even on the list. Small businesses don't want loans because they don't have any customers and prices they receive are falling like a rock. This is deflation in action, and it is crucifying small businesses. Floods Everywhere The response from the Fed is to provide more liquidity. Hell, water is everywhere already. The action in corporate bonds alone proves it. Some think that liquidity will continue to flow into equities. However, with junk bonds already at parity, it seems to me that gold and treasuries are a better bet. Regardless, please note how Bernanke's policies have robbed those living on fixed income, now earning 0% on their savings. Bernanke to those on Fixed Income  The above cartoon is actually in reference to Amazing Arrogance, Gall, Chutzpa, and Unmitigated Effrontery from Berkshire Hathaway but the same can be said about the policies of Bernanke that destroy the middle class and those living on fixed income. Yet, here we go again, with another round of QE, another round that cannot possibly do anything positive for the real economy, but try we must because Bernanke does not want to appear like the powerless charlatan that he is. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| Posted: 28 Sep 2010 04:27 AM PDT Last week, David Tepper, a billionaire hedge fund titan and president of Appaloosa Management remarked on CNBC ... Two things are happening. It's that easy sometimes. Either the economy is going to get better by itself, in the next 3 months and what assets are going to do well? You can guess what assets will do well - stocks are going to do well, bonds won't do so well, gold won't do as well. OR The economy is not going to pick up in the next three months and the Fed is going to come in with QE. Right? Then what's going to do well? Everything! In the near term - Everything! Video Earnings vs. Share Prices One might not be able to argue with Tepper's past performance, but one sure can argue with his current logic. Stocks do not necessarily go up because earnings go up. Stocks rise or fall primarily based on sentiment. Right now, sentiment is so bullish and earnings estimates so lofty there is room for hefty earnings expansion that falls short or estimates. Buying stocks that miss wildly optimistic earnings estimates is not likely to work out well. Furthermore, even if earnings do come in on target, there is no historic guarantee that stock prices follow. For example, on March 31, 1973 the S& P was at 111.52 with trailing earnings of $6.80. Seven years later, on March 31, 1980 the S&P was at 102.09 with trailing earnings of $15.27. Thus, over a span of seven years, earning rose 125% while stock prices fell 8.5%! What happened? The PE ratio on the S&P fell from 16.40 to 6.68, that's what. Moreover, those were real earnings then. Now, corporations hide garbage in SIVs with the blessing of the Fed and analysts cite pro-forma earnings that throw out "one-time" charges that occur with increasing regularity. Thus, anyone who says stock prices will go up because earnings go up, does not understand history. This does not make Tepper wrong, but it does make his argument fallacious. What About Quantitative Easing? Tepper also argues that everything will be good if the Fed falls back on quantitative easing. Really? The Cleveland Fed has a series of nice charts on Japan's Quantitative Easing Policy Japan's Quantitative Easing vs. Price InflationNikkei Monthly Chart  For the Japanese Nikkei Index it has been two lost decades going on three. Japan started QE on March 19, 2001. The stock market fell for two more years before staging a magnificent rally that collapsed to a new all time low in the great recession. No Lesson Learned Amazingly, the Cleveland Fed article concludes "The Japanese experience suggests that when inflation and short–term interest rates approach zero, central banks should act aggressively, giving greater than normal weight to downside risks. Moreover, they should commit to an inflation target and clearly explain their actions in terms of that target." That nonsense was written in 2008. It is still nonsense today. Yet it seems to be the nonsense the Fed is about to try. Amazingly, nearly everyone believes it will work. If quantitative easing worked, we sure would not need another round of it. Would we? However, here were are with unemployment close to 10% (and I believe new all time highs are coming). Here we are with treasury yields in the gutter and with mortgage rates at all time lows, yet home sales are at record lows. To top it off, and in spite of trillions of dollars of Keynesian stimulus from Congress, on top of trillions of quantitative easing from the Fed, and GDP is likely to go negative this quarter or next! Indeed, quantitative easing was so much of a success that Bernanke needs to do it again. The Greatest Head-Fake of All-Time? Todd Harrison, founder of Minyanville is pondering the question The Greatest Market Head-Fake of All-Time? One of the first adages I learned on Wall Street was that nobody is bigger than the market. That theory is being put to the test.Could We Be Missing Something? Last week, right after this Tepper story appeared, I was asked by a fund manager I highly respect "Could we be missing something?" This was my answer..... Sure.Reflections on Confidence Please consider the Zero Hedge article Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame [The following snip is from Bank of America's Jeffrey Rosenberg, who analyzes the costs of QE2]Uncharted Territory with Risks to the Downside Tepper seems to have more confidence in Bernanke than Bernanke has in Bernanke. Even Bernanke seems to understand we are in uncharted territory with uncharted risks. One such risk is that confidence could severely erode in financial assets (such as equities) denominated in dollars and unsupported by Fed buying. That risk is both significant and heavily skewed to the downside. After all, equities are subject to earnings shock and PE compression, as noted earlier. Also note that the lift in equities in 2009 was a directly related to the lift in corporate bonds. Arguably, Bernanke's one success was unlocking the corporate bond market. Companies priced for bankruptcy on expectation they would not be able to roll over their debt got a new lease on life. Now junk bonds are back at par. So where to from here? At best, QE2 can maintain that liquidity. At worst, confidence collapses in spite of, or perhaps because of QE2. Conversely, commodities, especially gold, may be beneficiaries of a loss of confidence in equities, junk bonds, or the dollar. Thus, from a risk/reward perspective, stocks are quite far down on the list of places to be, hoping for QE2. A month ago everyone was focused on a "Hindenburg Omen". Now everyone is focused on a "sure thing" by the Fed. That is how quickly sentiment can change, and sentiment can just as easily turn again. Caution, not "sure things" seems like a better bet to me. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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