Q&A….
The week really flew by this time. Sorry for the lack of posting this week. I’ve been dealing with a lot of mundane things lately. I’ll get back in the flow next week. For now, let’s hit up some Q&A. What’s on your mind? Anything goes….
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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31 Comments
how was rail traffic this week? appreciate all your posts
Cullen,
Thoughts on the idea that current corporate profit margins are unsustainable … is this really true? Manufacturing efficiency is at an all time high. Worker productivity is at an all time high. We are producing more goods than ever before. The following blog has 2 good graphs:
http://mjperry.blogspot.com/2012/04/phenomenal-gains-in-manufacturing.html
It shows efficiency and output increasing at an enormous pace. Perhaps we shouldnt be too quick to dismiss the sustainability of these high profit margins?
Thanks.
-tyler
Hi Cullen,
Just wondering what your 5-year forecast for the S&P 500 or any asset class is. Since I’m asking you, I might as well give mine. My target is about 2,250 with a low of 2,000 and high of 2,500 (I’m forever the optimist). I get there assuming about 6% growth (which is about 1 std deviation below long term growth according our research group) and P/E expansion to 16. Thanks
In my opinion in the long run the ultimate cause for mankind’s ruin will be population growth (scarce resources will become even scarcer). Do you think we should control population growth globally? Perhaps a license to give birth? Mandatory sterilization? Some kind of a more humane way? Obviously it would be a massive violation of liberal rights but something has to be done, I guess.
I’ve had the same thought, and consider additions to the population ‘future claims on resources’. I think its a good question to consider. ‘Controlling population growth’ is gonna bring a lot of crazies out of the wood work but I personally think we’re going to have to limit future growth of the population somehow (insert crazies calling me Hitler here).
I think we’re at the point where we can have an intelligent conversation about what size population makes sense over the long run before mother nature is forced to make that decision for us. I also think it’s right to have some concerns about how we’re going to have a sustainable planet as we’re pulling the developing world up to our level of wealth and consumption. The population of the western world is stabilizing, but we’ve got to find a way to live rich without dumping carbon in the air, nitrogen in our rivers and bays, and depleting the oceans.
I think that economic development is already taking care of that… except for the USA every developed country isn’t growthing if you net out immigration. Even many developing countries like South Korea for example have very low birth rates. Too expensive to have kids these days and more money means more money to spend on contraception!
Exactly. And until a few decades ago, people relied on their offspring to support them in old age. So that was another motivation to breed a large clan. But the advanced societies have in effect, turned that role over to their governments, so that’s another factor in the equation.
And before we start imposing birth limits (which has already been done in China, BTW), I think we should wait a few decades and see how this decline in birth rates plays out. Europe, Japan, and even China are facing potential demographic shifts where they potentially won’t have enough productive workers to support their large elderly populations. That might be a bigger issue to solve than lack of resources.
If you had to deploy cash today, what strikes you as an attractive asset class on a risk/reward basis? Unattractive?
Cullen,
As a student, like you’ve said before, our institutions do not really teach the fundamental reality of how our monetary system works. Do you see any academic work on MMR happening? What schools understand what is actually going on? It seems to me the academics should be trying to work out the optimal level of spending (and where to spend it) given specific economic conditions, but instead make simplified models that don’t reflect how our system actually works and then try to apply them. Your website has been extremely informative and I think this is one of the most misunderstood concepts of our time. Hopefully the next generation of policy makers and leaders can get it right.
Cheers.
+1: An academic base is badly needed, but it also needs grounding in ‘real-world’ experience It seems no accident that Black and the UMKC MMT group are not based at one of the ‘elite’ academic institutions (whose interests are so closely bound to the status quo). And, while I sympathized politically with the academic MMT’ers, it seemed clear they would benefit from more of that grounding (partly why Mosler – and Auerback as well – carry credibility).
Ir would be great if the MMR approach could find ways to bridge those worlds.
Cullen,
Why does QE help stock prices?
I hear it all the time from pundits and charts that show a connection/correlation but I don’t understand the transmission mechanism for QE to stocks. Apparently Bernanke believes there is one as well.
Thanks.
+1.
The main objective of QE is to lower bond yields. The lower the yield, the higher the P/E on stocks, all else equal.
Same goes for real estate or any other asset that is valued based discounting future cash flows.
QE that buys Treasuries is done to lower bond yields (QE2, OP Twist), since Treasuries have no credit risk. QE1 bought mortgage backed securities for full face value at a time when the market valued them much less. It was done to bail out the banks by taking those securities off their balance sheets.
Any career advice for the younger generation in the financial industry? Should I pack my bags and travel around the world while I am young with few obligations? Is it going to be impossible for me to get a job along the coast in this economy?
1. Why do I have a hard time reconciling that the Fed can control the entire yield curve with the theory of market suppy/demand forces setting rates. The evidence does suggest that the Fed has strong control of rates but are there not some tail risks.
2. I’m confused on reserves (and QE so a few questions)
a. Do reserves from fractional banking differ from reserves from base money?
b. Related to the above, what is the limit of QE in terms of reserves. That is, if the Fed implemented QE to the maximum, would the magnitude of QE undertaken be equal the reserves of the base money in economy or equal to the reserves of base money + reserves from fractional system?
c. And is there any difference in inflation if QE is applied base money or to reserve of fractional banking.
3. Why are currency swaps needed with the ECB (and the Euro banks)? That is, why do these Euro based banks need US dollar loan funding. And why can’t the ECB provide liquidity in Euro instead of swapping with the US. If these Euro banks needs US dollars, then they could with the Euro liquidity provided by ECB find dollars in the open market. And finally what would happen if Fed no longer provided currency swaps but left it to the ECB on its own as I describe?
Sorry for the many question but these swaps are confusing.
With regards to reserves for base money I’m referring to that part of base money that is not issued as (paper money or coins) that the government deficit spends into existence.
Also is paper money or coins “reserves” in themselves?
Investing/trading-wise how do you approach elections? (Esp. this year with France+some PIIGS – next year with Germany; this year Presidential.)
In your opinion, are we in a secular bear market or are the conditions ripe for a secular bull to continue assuming it began in March 2009? I realize you avoid market valuation calls, but I think you could answer from a macro standpoint….
I get the jist of why the Federal government needs to keep spending money during this balance sheet recession, but do you have some opinions as to how Uncle Sam might spend the money more efficiently, or make better choices on how the money should be spent? Also, some areas of consumer spending, at least for certain products and services, have been quite strong. Are you suggesting that without the significant deficit spending by Uncle Sam that those strong consumers wouldn’t have spent so much? It’s hard for me to make the direct connection, unless it’s a government employee buying an iPhone.
Cullen, love your work. Aside from your Web site, what do you consider to be the “must read” list of books and articles for someone who wants to learn about MMR and MMT? Thanks.
Hi Cullen,
During the Supervisory Capital Assessment Program of 2009 (“Bank Stress Test”),
banks were evaluated on their levels of “Tier 1″ capital or core capital, which includes common stock, and disclosed reserves (retained earnings).
As we know banks are not reserve constrained, but are only capital constrained in their lending. One thing I’m not sure of is how a bank would call upon its common stock to cover loan losses…the “stock” belongs to the shareholders not the bank. The only thing I can think of is the regulators might look at the capitaliztion of the bank relative to it’s current share price, and determine whether or not the market would absorb newly issued stock, if the bank needed to raise funds this way….obviously, if your shares are $2/ share like BAC, or $0.33 like Citigroup was…you really don’t have much leeway to issue new common stock (hence Citigroup’s reverse 1:10 split).
Am I right about this…? Or am I looking at this wrong ?
Cullen,
You always talk about how during recessions that the Congress can large deficits to offset slowing aggregate demand and/or household desired savings. And then when aggregate demand picks up and/or households desire to save less, then the government can reduce the deficits to control any possible inflationary pressures. And while in theory this is correct, it would seem to me that practically speaking that this would never happend because deficits are “sticky” because politicians never want to make cuts given that people get used to the spending being directed their way as well as the politicians always desire to increase their electability. As such, why should we feel comfortable implementing this kind of deficit increase given how we know it will turn out in the long run? Thanks.
Bob Barker
Cullen, this question was asked by me and another once before, about the ability of ECB or anyone else to create new euros. You linked to another website which was great at explaining how the eurozone handled settling of debts and money flow, but I could find nothing on creation of new net euros.
Question: Does the eurozone have ANY means of vertically creating new euros or was the net amount of euros currently circulating set in 1999 at the time of old currency conversions?
thanks for all your postings..
rhp
Does the US need the rest of the world to save its future…………..?
Cullen, what is your economic growth model forecasting for 2nd half 2012 growth based on sectoral balance data and the other data which you use? Thanks
How do you think ECB policy will change, assuming that Francois Hollande is elected President of France on Sunday? In his campaign pledges he has promised to tear up the fiscal austerity pact, and promised to force the ECB to monetize EU State debt across the entire EU and hold interest rates down in every EU State. If he carries out those promises, will the EU recession end quickly?
Cullen
I’m curious on what you think of Hugh Hendry’s latest investment letter, specifically, his notion that China cannot escape an economic crisis that will affect global growth. If he’s right, how can one position to at least avoid the worst of a china led economic crisis.
Thanks, Sam
1) Why does there seem to be a general resentment towards establishments, esp govts these days? What do you think?
2) IMHO, the Job Guarantee is just an idea that stems from what is possible if the monetary system is viewed from the MMT/R view. In fact, you could have a “re-skilling program” for all citizens/residents to upgrade their education, skillsets and what not to increase productivity, one of the many key things to keeping a country and it’s citizens strong. Another idea on the welfare side is of course, better healthcare and health insurance programs. if we need more people/technology to defeat ppl like hitler, then we spend more on military.
It just seems like we’re stuck in this “big vs small” govt argument all the time rather than focusing on what would work best and how to get there. it’s just a colossal waste of time and resources. interest rates, monetary policy, fiscal policy and all that are just distractions from the key issues; all that won’t work if there’s nothing to ‘regulate’.
Will the “Floating Treasury” be of any concern for folks to consider?
http://www.reuters.com/article/2012/05/02/usa-treasury-refunding-idUSL1E8G25JC20120502