7 thoughts on “FriendFeed: Presenting The Liquidity …”
trooperbari
Sooooo … panic?
Casey
This is a silly scare chart based on bad economics.
The linked authors pose this chart as a “liquidity discounted valuation” of the S&P, thus debunking the recovery. But the chart is created by dividing the S&P by the Fed balance sheet, more or less. How is that ratio a valid valuation measure? Why do we care how many times the S&P can cover the Fed’s balance sheet?
What the authors should have done for this analysis is to divide the S&P by the CPI or something like that. That gives a measure of the “real” value of the S&P.
To understand why the above chart is a fraud, think what would happen if you used it as a valuation measure. The chart tells you that $800 of S&P in 2003 is worth $2,000+ of S&P in 2009. Since the S&P is dollar denominated, it also says that $800 in 2003 is worth $2,000+ in 2009. That’s nonsense.
If you find that reasonable, I’d be happy to give you $800 today if you can guarantee to return $2,000+ in 2015.
The people on the linked site are screaming that the sky is falling because Bernanke is pumping liquidity into the system. But he’s pumping it because the system can absorb it. That’s why the sky hasn’t fallen as a result of Bernanke’s actions.
Casey
Did I write that peevishly enough? I’m trying to get back into proper academic form.
Casey
To clarify my valuation point:
The chart falls by more than 50% from 2003-now
The S&P is up about 20% over that same time period
Chart says S&P now is worth 0.5 S&P 2003
Actual S&P now is worth 1.2 S&P 2003
1.2/0.5 = 2.4, soo 2009 S&P worth 2.4*2003 S&P. $800 * 2.4 = $1920. And since the denominator is really less than .5, I guess $2,000+.
Brendan Loy
Thanks for the comment, Casey. I appreciate having someone who knows much more than me about this stuff, telling me NOT to panic. 🙂
As for this post… you obviously don’t think the chart tells us what the author claims it tells us. But do you think it tells us anything at all? Or is it just random noise? It seems, to my layman’s brain, non-coincidental that Bubble #1 caused this numerical index to go up, whereas Bubble #2 didn’t do so, and the current rally isn’t doing so. But maybe it actually is purely coincidental. Or maybe it just means something meaningless. (Is it possible to mean something meaningless? Heh. I think that’s a question for a philosopher, not a finance guy…)
Joe Mama
I’m glad someone thinks that chart doesn’t mean what it was supposed to mean.
Casey
As for the last financial post, and the state of the economy in general — it’s hard to say. I’m bearish and expecting a long Japanese-style sluggish period (corresponding with a double-dip). The situation is very complex, and it’s hard to cite one factor to drive the double dip. So I go by economic history, in which bigger credit bubbles lead to longer recessions.
We all know what the S&P is, and if you consider the denominator series for the chart separately from the S&P, it is also very important. It just doesn’t make sense as a scaling factor for the S&P.
Any measure of liquidity or money supply will show unprecedented upticks in recent years. The “saturated with adrenaline” metaphor is a pretty apt way of describing the situation.
Monteary laxity from 2003-2007 was really sort of kicking the can down the road, using excess liquidity to induce excess economic activity and keep the economy churning. Now instead of postponing disaster, monetary laxity is the only thing keeping the economy alive. Without it we’d be facing global economic meltdown.
On the plus side, even though the Fed is just pumping money into the system, banks are being more reluctant to loan it out. So the distortions that excess liquidity can cause in the real economy are actually diminishing; the liquidity is mainly serving to shore up a broken banking system.
The net of all that — the economy sucks and will for some time. The Fed’s actions are scary, but beneficial and probably necessary.
Now our political system — that is totally screwed and is our most severe national liability going forward, bigger than the debt or healthcare or national security or anything else. It created all the crises we face now, and will create even more going forward, so long as it depends on monied corporate factions. We can’t function as a nation with the system we have.
I would offer to serve as emperor, but I’ve got a lot else on my plate just now. Maybe later.
Sooooo … panic?
This is a silly scare chart based on bad economics.
The linked authors pose this chart as a “liquidity discounted valuation” of the S&P, thus debunking the recovery. But the chart is created by dividing the S&P by the Fed balance sheet, more or less. How is that ratio a valid valuation measure? Why do we care how many times the S&P can cover the Fed’s balance sheet?
What the authors should have done for this analysis is to divide the S&P by the CPI or something like that. That gives a measure of the “real” value of the S&P.
To understand why the above chart is a fraud, think what would happen if you used it as a valuation measure. The chart tells you that $800 of S&P in 2003 is worth $2,000+ of S&P in 2009. Since the S&P is dollar denominated, it also says that $800 in 2003 is worth $2,000+ in 2009. That’s nonsense.
If you find that reasonable, I’d be happy to give you $800 today if you can guarantee to return $2,000+ in 2015.
The people on the linked site are screaming that the sky is falling because Bernanke is pumping liquidity into the system. But he’s pumping it because the system can absorb it. That’s why the sky hasn’t fallen as a result of Bernanke’s actions.
Did I write that peevishly enough? I’m trying to get back into proper academic form.
To clarify my valuation point:
The chart falls by more than 50% from 2003-now
The S&P is up about 20% over that same time period
Chart says S&P now is worth 0.5 S&P 2003
Actual S&P now is worth 1.2 S&P 2003
1.2/0.5 = 2.4, soo 2009 S&P worth 2.4*2003 S&P. $800 * 2.4 = $1920. And since the denominator is really less than .5, I guess $2,000+.
Thanks for the comment, Casey. I appreciate having someone who knows much more than me about this stuff, telling me NOT to panic. 🙂
Speaking of which, do you have any thoughts on my last financial post?
As for this post… you obviously don’t think the chart tells us what the author claims it tells us. But do you think it tells us anything at all? Or is it just random noise? It seems, to my layman’s brain, non-coincidental that Bubble #1 caused this numerical index to go up, whereas Bubble #2 didn’t do so, and the current rally isn’t doing so. But maybe it actually is purely coincidental. Or maybe it just means something meaningless. (Is it possible to mean something meaningless? Heh. I think that’s a question for a philosopher, not a finance guy…)
I’m glad someone thinks that chart doesn’t mean what it was supposed to mean.
As for the last financial post, and the state of the economy in general — it’s hard to say. I’m bearish and expecting a long Japanese-style sluggish period (corresponding with a double-dip). The situation is very complex, and it’s hard to cite one factor to drive the double dip. So I go by economic history, in which bigger credit bubbles lead to longer recessions.
We all know what the S&P is, and if you consider the denominator series for the chart separately from the S&P, it is also very important. It just doesn’t make sense as a scaling factor for the S&P.
Any measure of liquidity or money supply will show unprecedented upticks in recent years. The “saturated with adrenaline” metaphor is a pretty apt way of describing the situation.
Monteary laxity from 2003-2007 was really sort of kicking the can down the road, using excess liquidity to induce excess economic activity and keep the economy churning. Now instead of postponing disaster, monetary laxity is the only thing keeping the economy alive. Without it we’d be facing global economic meltdown.
On the plus side, even though the Fed is just pumping money into the system, banks are being more reluctant to loan it out. So the distortions that excess liquidity can cause in the real economy are actually diminishing; the liquidity is mainly serving to shore up a broken banking system.
The net of all that — the economy sucks and will for some time. The Fed’s actions are scary, but beneficial and probably necessary.
Now our political system — that is totally screwed and is our most severe national liability going forward, bigger than the debt or healthcare or national security or anything else. It created all the crises we face now, and will create even more going forward, so long as it depends on monied corporate factions. We can’t function as a nation with the system we have.
I would offer to serve as emperor, but I’ve got a lot else on my plate just now. Maybe later.