Jan 19, 2005

Morning Already?

I recommend reading Nouriel Roubini's article on the housing bubble. He addresses the arguments on both sides of the issue and ultimately views the presence or absence of a bubble as a matter of faith. My faith says it is not the best time to be buying houses.

He also has a good summary of how the world economy got us to where we are.

So, the missed chance by the Fed to tighten early on to prevent the stock market bubble (and its further Fed Funds easing in 1998) was an important factor in allowing the bubble go on and eventually burst. Then, the bursting in early 2000 - only partly driven by the 175bps reversal btw mid 1999 and mid 2000 - was the main factor behind the 2001 recession (dot.com and Nasdaq crash leading to a real investment crash after the real investment bubble that had been itself fed by easy liquidity for too long). And the attempt to avoid the real consequences of the dot.com (and of all stock markets) crash then triggered another massive Fed easing - from 6.5% to 1% - that created the great bubble of 2003-2004 with all risky assets - equities, emerging market debt, housing, high yield corporates, commodities and even long-treasuries - surging in value and becoming overvalued and feeding even further the US households' leverage build-up and savings contraction. So, as Ken Rogoff once put it, massive Fed easing (6.5% to 1%), massive and reckless fiscal easing (from 2.5% of GDP surplus to 4% deficit) and sharp dollar fall (15% trade weighted so far and still going) gave us the best recovery that money can buy; but it also gave us the most drugged and artificial recovery that money can but leaving the US imbalances worse than before: twin deficit, short-term financing of these deficits with increasing rollover risk, sloshing liquidity, housing and risky assets bubbles, low savings and high leverage in households and among highly-leveraged agents, carry-trades and chasing for yield.
This summary in my mind is what explains why the Fed seems worried about inflation while the bond market remains calm. The Fed is not seeing a current problem so much as seeing an abundance of liquidity being provided through the corporate bond market. Today's CPI number while reassuring bond investors (and maybe stock investors), will not really relieve the current worries at the Federal reserve.

None of this really matters today. For, today I think JPM picked the wrong day to miss earnings.

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