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Minyan Mailbag: The Desire for Risk


...even when you take the foot off the accelerator a bit you risk a crash.


Prof. Reamer,

I have not embarked on the exercise but why not prove that all assets are exhibiting commodity like behavior (more so than ever) by simply overlaying any asset index on top of any trustworthy broad money supply indicator. If I understand your work, you see liquidity waning in here. I have no idea how that is possible but I will take your word for it. My GUESS is that crude and stocks (and whatever) overlay almost perfectly on top of M3. Just a guess if you deem it relevant. Since monetary levers took over in 2002, all assets are little more than a proxy for the (over) availability of credit. That we have people moaning about a tight fed when the funds rate lags even the government's trumped up inflation numbers is comical. What is more comical, however, is that I have failed to embrace the obvious and it has cost me great hardship.

Keep up the good work

Minyan Steve


Actually, M3 has no correlation whatsoever to stocks, GDP, corporate earnings, or anything else for that matter. Incredible as that may seem, this is one of the reasons the Fed is abandoning it (well, one of the stated reasons anyway): it's uselessness in providing real economic (or financial market) insight.

Your statement that "Since monetary levers took over in 2002, all assets are little more than a proxy for the (over) availability of credit" is one of the most important insights an investor can have. [I would quibble a bit with it by saying that the institutional means of credit expansion (the Fed) must be accompanied by the desire for credit (i.e. demand for risk) but that is a minor point.] My entire point since the great reflation of 2001 has started (and let's not forget this is part of a reflation going back to 1987 at minimum) is that the desire for risk - risk seeking behavior - accompanied by the institutional mechanisms in place to reflate the money supply is THE cause of the asset speculative frenzy in EVERY asset class: stocks, corp. bonds, commodities (yes, gold and silver included), currencies, treasuries, derivatives, etc. Credit booms are booms: they affect everything that is denominated in dollars to a greater or lesser extent. Folk are moaning precisely b/c even when you take the foot off the accelerator a bit you risk a crash: you might still be going 60 mph but the relative decline in speed is what is important b/c it is the RELATIVE decrease in liquidity that affects the marginal economic activity/speculation. And our work suggests that an enormous amount of the economic activity/speculation has been marginal. Thus it is at serious risk for even the smallest decrease in liquidity...even if they are still pumping in absolute terms.

If by embracing the obvious you mean engaging in the same risk taking behavior as those long, say, Gold or stocks with sentiment at 80%+ bulls, be glad you ignored it. I have a new angle on an old saying: "no good crowd ever goes unpunished."

Be glad you aren't part of the crowd.

Prof. Reamer

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