Equity storm over for a bit
Posted by WARREN MOSLER on August 9th, 2011
From Goldman:
Published August 8, 2011
* Following Friday’s downward revisions, we now expect real GDP to increase just 2%-2½% (annualized) through the end of 2012 and the unemployment rate to rise slightly to 9¼% during this period.
This is still higher than the first half, so presumably corporations will have a better second half as well, and they did just fine in the first half.
And with lower gasoline prices, consumers get a nice break there which should firm their spending on other things as well.
The tighter fiscal won’t matter for this year, and markets won’t discount what may happen in November until it’s closer to actually happening.
So still looks to me like the recent sell off in stocks was mainly technical, as the initial knee jerk sell off from the debt ceiling and downgrade uncertainties triggered further selling by those with short options positions, much like the crash of 1987.
And, like then, and unlike early 2008, the current federal deficit seems more than large to me to keep things chugging along at muddle through levels of modest growth, continued too high unemployment, and decent corporate profits and investment.
Yes, risks remain. Europe is a continuous risk, but the ECB, once again, stepped in and wrote the check. China looks to be slipping but the lower commodity prices will help US consumers maybe about as much as they hurt the earnings of some corps.
So for now, with the options related stock selling over, it looks like we’re back to calmer waters for a while.
And Congress goes back to trying to cut the deficit to put people back to work.
Someone needs to tell them they haven’t run out of dollars, they aren’t dependent on China, and they can’t become the next Greece, and so yes, the deficit is too small given the current output gap.
But until then, we keep working to become the next Japan.
August 9th, 2011 at 2:20 pm
Why is the price of oil dropping so quickly? Is it a sell off in anticipation of weak demand due to the relatively bad news about the world economy still?
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WARREN MOSLER Reply:
August 9th, 2011 at 5:31 pm
yes, or any number of things we don’t find out about until well after the fact
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August 9th, 2011 at 2:44 pm
Also warren, i was just curious….
You say operational level folks at the fed and tsy understand mmt. Or well, a lot of them do. How come more arent open proponents of mmt? They seem like good allies to have out there
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Unforgiven Reply:
August 9th, 2011 at 3:32 pm
@tom,
Politics. Ignorance. Academia.
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WARREN MOSLER Reply:
August 9th, 2011 at 6:27 pm
not their personalities to do that. in fact, they hide the fact they’ve read my book
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Mario Reply:
August 9th, 2011 at 6:57 pm
@tom,
they want to keep their jobs. Nothing gets you on the bad side of your boss quicker than by showing everyone how freaking stupid he is (let alone the fact these guys seem to be hell-bent on NOT telling anyone these “secrets” for whatever reason).
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August 9th, 2011 at 3:32 pm
I agree. I did some buying yesterday.
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WARREN MOSLER Reply:
August 9th, 2011 at 6:28 pm
good move!
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August 10th, 2011 at 4:52 am
Warren – what do you think about the thesis that GDP in 2H11 will be inflated by companies bringing investment forward (driven by tax incentives which expire on 12/31), such that the economy will tank in 1H12@?
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WARREN MOSLER Reply:
August 10th, 2011 at 3:53 pm
not impossible if it’s a large enough number
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August 10th, 2011 at 9:41 am
“…the recent sell off in stocks … triggered further selling by those with short options positions, much like the crash of 1987.”
Warren, what kind of data are you looking at to conclude this?
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F. Reply:
August 10th, 2011 at 10:59 am
@Curious,
Short gamma positions have to be hedged by selling with downturns.
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WARREN MOSLER Reply:
August 10th, 2011 at 3:59 pm
none. just how it looks to me having been through both
and i just saw a recap of tail risk funds and their performance which seems supportive of my guess
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August 11th, 2011 at 9:08 am
I did some buying at yesterday’s close. Longer term horizon for me but still very nervous. Hope you are right Warren (& Mike)!
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WARREN MOSLER Reply:
August 11th, 2011 at 3:58 pm
Well done!
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