Seeking Alpha has the article The Stock Market Doesn’t Have A Clue About Monetary Policy by  Christopher Mahoney .

The lead steers are laboring under the misconception that growth and stock prices have been artificially stimulated by “massive monetary stimulus” since 2008. Where did they get such an idea? Can’t they google FRED? The last time that we had sustained double-digit money growth was exactly thirty years ago, in 1983, following the Volcker Shock.

I’m going to repeat this until it finally sinks in: money growth since the crash has been quite low. M2 has grown at about 5%, while the broader aggregates have grown by much less. There has been no monetary stimulus; Fed policy has not been “extraordinarily accommodative” no matter how many times Bernanke uses those words. The linkage between the Fed’s balance sheet and the money supply is simply nonexistent. QE has been pushing on a string, resulting in a massive buildup of sterile excess reserves that have no impact on the money supply.

I have also been under the mis-conception that the stock price growth have been artificially stimulated by the fed.  I am trying to reconcile the view of this author with the view of Investment Quality Trends that says that the market is overvalued on the basis of historical dividend yields.

Perhaps the Fed stimulus did not increase the money supply, but it did lower bond interest.  The low bond interest did artificially drive investors toward the stock market instead of the bond market.  So the Fed stimulus may be responsible for overvalued stock prices, but not quite for the reasons some people assumed.

To put a finer point on the IQT analysis, I tell myself that the stock market dividend yield may not mean that the stock market is overvalued for the current level of interest rates.  However, in terms of what the interest rates will be when they revert to historical norms, then it is overvalued.  Other things  may change by the time that interest rates return to normal, so it is hard to predict stock market price trends based on them being overvalued now, in some sense.  For instance, dividends might grow faster than the rise of interest rates, so that the market price of stocks does not have to fall to get them out of being overvalued.  Or the dividends might not rise fast enough and prices will decline.  I just try not to believe in crystal balls when it comes to predicting the stock market.

The Russian Duo appeared on NPR in Cleveland on the show Around Noon.

I just love to hear this music.

When I read The New York Times headline For Retirees, a Million-Dollar Illusion, I knew this article would have the usual amount of baloney in it.

But then stock market risk comes into play. Over the long term, stocks tend to outperform bonds, but typically fluctuate much more wildly. There’s a good chance that at some point, stock investments will produce major losses that many people simply can’t tolerate.

“We find that people tend to think of losses in their portfolios based on the peak value they’ve ever had,” Mr. Masters said. So Bernstein calculates the probability of what it calls a “peak-to-trough loss” of at least 20 percent in its sample portfolios.

For those with an 80/20 mix of stocks and bonds, it found a 60 percent probability of such a loss over the investors’ lifetime. And, of course, some market declines far exceed 20 percent.

“Large losses may not be something that people are willing to live with, even if they are associated with higher returns over the long term,” Mr. Masters said. “Which is why we’d recommend holding some stocks, but not as much as 80 percent, for most people.”

What is missing from a featured place in this article is the role of stock dividends in a portfolio.  If you have a reliable stream of dividends coming to you from quality stocks, then a peak to trough decline of 20% in market value of your stocks is something you can ignore.

At the current low interest rates, it would be foolish to be invested in any large proportion of bonds.  You know their value will decline and the stream of interest payments is insufficient already.

With Social Security and a tiny pension, I find that a nest egg of the size being discussed here is totally adequate.  With most of my nest egg in tax deferred accounts my annual income tax liability is a tiny fraction of what it was when I was working.  And I also do not have to save for retirement.

I can live quite well on substantially less income than I needed when I was working.

Maybe The New York Times needs to get some people who have retired successfully to be writing these articles instead of working “experts” who do not seem to understand what retired living is all about.

Thanks to RogerG for posting the NPR article Our Surveillance Society: What Orwell And Kafka Might Say on his Facebook page.

And, even in the tradition of prophetic literature that warns of the dangers of bureaucratic power run amok, there is an awareness that the protection of the state, while intrusive, is necessary.

This gives me an opportunity to comment on this latest brouhaha.

I just do not understand what the hoopla about PRISM is all about.  Suddenly the people have been awakened to the technology that is there for the big guys to use.  The fact that Google, Amazon, Facebook, Verizon, AT&T, Walmart, etc, have all this data and use it to their advantage every day is what we should be addressing.  They use it to concentrate market power in the hands of fewer and fewer organizations to the disadvantage of those that do not have the information.  Collection of this data is not something we can stop.  So we need to carefully consider how it ought to be regulated.

Do not let big media and big politics divert your attention from the real issue.  We have to wonder whose advantage is being served by bringing this issue to light in just this way at just this time.

This NPR article serves the public interest better by bringing up the all the real issues for calmer consideration.

In my previous post, Fixing The Problem We Have At This Time, I mentioned that government stimulus spending is the right thing to do at this phase of the economic cycle.  I hope I also made it clear that in a different phase of the cycle, where the economy is booming so much that it may be overheating,  we would need a little (or a lot) of restraint in government spending.

Investing in our infrastructure, which includes the education of our citizens, is something that we always ought to do.  In the last three or more decades, we have been under investing.  We need to boost that investing so that the long term trend line meets the needs of an economy and society that wants to remain relevant in a global context.

So how do we reconcile the need for a long term growth trend in infrastructure spending and the cyclical nature of the economy?

Some infrastructure investing, like the interstate highway system of the Eisenhower administration, is a long term project that lasts through many economic cycles.  The legislation that authorizes the investment ought to allow for a structure that sets the end goals and spending limits, but not the micro details of timing.  The general plan for the entire project will be written at the beginning, but each phase of the project can either be sped up or delayed based on what is right for the economy at any given time.

Even successful business people who eventually migrate to congress had flexible spending plans for their businesses.  There was a time to spend vigorously and a time to pull back.  Since business and government have very different roles in our economy and society, the time to spend and the times to pull back for business and government should be out of phase compared to each other.  The reasons should be so obvious, I won’t state them here.

The net effect of adding together two cycles that are out of phase with each other is to have economic cycles that are smoother than would otherwise be the case.

The concepts described here are so obvious, that I wonder why it took me so long to think of them all together.  Do you suppose the “business oriented” people in Congress will ever figure this out?

Should we ever elect a business person to Congress who has not figured this out yet?  I think electing such immature business people is a very real danger to our economy, especially when they think of themselves as economic experts.  They have no humility and no clue as to what it is that they do not know about economics.

In the recent senatorial debate, candidate Gabriel Gomez chided Rep. Ed Markey for not promoting more forceful action against the Syrian government.  Gomez said something to the effect that “all you have to do is find the right rebel group in Syria and back them.”  Since John McCain was recently in town to support Gomez, he might have been referring to McCain’s efforts to find the right rebels.

Here is an email that I just received from VoteVets.org.

Dear Steven –

It’s been two weeks since the Senate Foreign Relations Committee voted to give President Obama the authority to arm and train the Syrian rebels in their nation’s civil war.

Since then, the fighting has intensified along with Senator McCain’s insatiable appetite for intervention.

Ironically, the Senator’s relentless pursuit of more war crystalizes the case against our involvement better than anything else has so far.

By now you’ve probably heard the story about his secret trip to Syria to meet with rebel leaders and the picture he took with members of a known terrorist group during his short stay. His staff says he didn’t know who they were, and no one doubts that.

But that’s the point: if a U.S. Senator can unwittingly pose for pictures with terrorists in Syria, how can we guarantee the arms he supports sending won’t end up in the same place he did — with terrorists?

Will you use our “Contact Congress” tool to write a letter to your Senator telling them you oppose intervention in Syria at this time?

http://action.votevets.org/senate-intervention

No doubt, there’s an unquestionable humanitarian crisis unfolding in this conflict, but the truth is there are no good guys in this fight.

The government of Bashar al-Assad has the support of a number of groups who targeted and killed many Americans in Iraq. At the same time, many of the rebel fighters have also killed American and Iraqi troops, and they still seek to bring down Nouri al-Maliki’s government.

At some point we must learn that we will never, ever successfully maneuver the millennia-old fight between Sunni and Shia and the best move for our own security is to stay out. Write a letter to your Senators today.

http://action.votevets.org/senate-intervention

Thanks for taking action. We’ll keep you updated as things heat up on this issue.

All the best,

Jon Soltz
@jonsoltz
Iraq War Veteran and Chairman
VoteVets.org

As I would have said to Gabriel Gomez had I been there, ‘All you have to do’ is easy for you to say, but how are you going to do it? For somebody who thinks the government in Washington is incompetent, you put a lot of faith in them to pick the ‘right’ rebels

I favor Ed Markey’s approach to military intervention. On top of his requirements for using military intervention, I would include the caveat that you have to be pretty sure that the intervention will help our interests and not hurt them.

At this time in the economic cycle, we have a problem of high unemployment and low real economic growth.  The Republicans in Congress won’t allow us to use the tools that the government has to fix the problem we have  at this time  because they are worried about a problem that we do not have  at this time.

The tool that the Republicans won’t let us use is called fiscal stimulus.  Government fiscal stimulus means that government spends money to buy goods and services in order to replace the demand in the economy that individuals and individual corporations cannot  create.  This is different from the tool that the Federal Reserve has which is called monetary stimulus.  Monetary stimulus means that the Fed pumps liquidity (money) into the economy in the hope that individuals and individual corporations will spend the money to create the economic demand that is missing. What excess monetary stimulus produces at this time is a bubble in the stock market. This is not real economic growth, as much as I personally benefit from it.

At this time, monetary stimulus is not the most effective tool to use.  With high unemployment and lack of demand and the corporations swimming in excess cash, there are no demand stimulating investments for corporations to make.  People who fear unemployment and whose asset values (homes) have declined, are not in a position to spend enough money buying goods to lower unemployment.  The only sensible thing for individuals to do is to hunker down, save money, and cut personal debt.  If enough people do this at this time and there is no countervailing force from government, the economy will nose dive. Remember that the student and former student loan debt is a very strong component of the problem that Elizabeth Warren proposes to fix at this time.

There is a very important reason why I have emphasized the phrase at this time.  The Republicans accuse Democrats of always wanting to spend.  This is not the case as can clearly be seen with Bill Clinton’s massive deficit reductions at his time. The prescription to fix what ails the economy at another time will be different from the prescription to fix what ails us at this time.

Republican business people who want to get into government claim that they know how to create jobs to lower unemployment because of their business experience.  The trouble with this claim is that the tools that a business uses to create jobs in an individual corporation are nothing like the fiscal policy tool that the government has at its disposal.  Business people who do not recognize this difference pose an immediate threat to our economy at this time.  These people also ought to understand that the major goal of a corporation is quite different from the major goal of the federal government.  The major goal of a corporation, and rightly so, is to make a profit for its investors.  The major goal of the government is to see that we have a smoothly running society where just about everyone can live a reasonably comfortable life style.

If there is one thing to remember from this post is that in economic policy timing is everything.  Don’t be fooled by so-called experts who have only one prescription for all economic ailments at all times.

I just participated in a Web event where Elizabeth Warren talked about her Bank on Student Loans Fairness Act that she has introduced in Congress.  There were over 10,000 people participating in this event.

Elizabeth Warren promised that keeping the interest rate low on government Stafford Student Loans is just a first step in solving the crisis of student debt.  When we are talking about student debt, we are not just talking about 20-something-year-olds.  Many people are carrying student debt into their 50s and beyond.

Here are Senator Warren’s remarks when she introduced her bill to the Senate.

When I started my career in 1967, it was a policy of all companies to pay for the advanced degrees of their employees.  My Master of Science in Electrical Engineering was paid for  by Texas Instruments, RCA, and Digital Equipment Corporation.

In today’s world of high unemployment and international competition for jobs, companies have discovered that they don’t have to pay for their employees’ educations.  They can always find somebody who has already earned their advanced degree.  The corporations are saving huge amounts of money by not having to pay for this expense.

The same set of circumstances that has let the companies off the hook for this expense is causing governments to cut back on their support for higher education.  High unemployment stresses government budgets at all levels of government.

It is probably true that we never should have depended on corporations to shoulder the burden that government should have borne.  Now that there are no corporations willing to take on this burden, who should take up the slack?

Now the private citizens must individually bear the burden.  This is an untenable situation.  Bearing this burden puts people into a lifetime of debt.  They cannot buy houses while they owe the cost of a house for their education.  They cannot save for retirement.  They will not be able to help their children pay for college.  They cannot buy the goods and services that provide the demand stimulus to keep our economy out of depression.  They will not be able to support their parents when their parents, you and me, become too old to take care of themselves.

What about this big picture is too big for our citizens to comprehend?

You can sign a petition at BankOnStudents.org to let your Congress people know how upset you are about their failure to act for the best interests of the country.

Another place to keep track of this issue is StudentDebtCrisis.org.

We must raise our voices in support of Elizabeth Warren’s efforts because she cannot accomplish our goals by herself.

Kelley Wright at Investment Quality Trends kelley@iqtrends.com has written an interesting commentary in this issue of the newsletter.  Here are some quotes to give you a taste:

Another intent of QE was to increase employment. To that end the policy has not been as effective as unemployment has remained fairly elevated. It is curious when one considers the intellectual horsepower at the Federal Reserve, why serious studies by well-regarded academics and economists that provide empirical evidence that although monetary policy can improve general economic conditions, it cannot induce employers to hire additional labor, have largely been ignored. Apparently the primary reason employers hire additional labor is to fulfill consumer demand for their products/services. I can’t put my finger on it but I seem to remember that consumer demand is somehow tied to income, which, if I remember correctly, is somehow connected to wages.
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Due to massive deficit spending, record low interest rates and cutting costs to the bone, corporations are more lean and mean than almost any previous period and their balance sheets are absolutely pristine. Choosing not to make any large scale capital expenditures, corporations are generating so much cash it is sloshing around as in a bucket. The end result is that dividends, which are mother’s milk to us, have risen significantly, as have share repurchases.

I use the investing strategy laid out in this newsletter, but I have sent quite a few emails to Kelley Wright lambasting his comments about macro-economics.  Perhaps he has actually gotten something from my emails.

The point about QE and the employment situation is right on the mark except for his disparagement of the Fed.  The tools that “well-regarded academics and economists” say should be used to boost employment are not available for the Fed to use.  You cannot fault them for not using the tools that they do not legally have.  Fiscal stimulus is in the province of the Congress and the President.  The blame for not using the effective tools lies with the Congress and to a lesser extent with the President.

Kelley Wright may say “Apparently the primary reason employers hire additional labor is to fulfill consumer demand for their products/services.”  The way I put the lack of the unemployment level going down is usually elegantly stated as “What part of no freaking customers do you not understand?”  I’d like to have a chance to put this to one of our current Senatorial candidates, Gabriel Gomez running on the Republican ticket.

I’d also like to ask Gabriel Gomez if he thinks that giving tax breaks to  “corporations [that] are generating so much cash it is sloshing around as in a bucket” would induce them to hire more people?

Is the title of job creator appropriate for  corporations that gives jobs to 100 people so that those people can manipulate markets and raid other companies to destroy millions of jobs?  Perhaps, as a business man, Gabriel Gomez does actually know what it takes to create jobs, but I bet he didn’t make his fortune putting those ideas into practice.  What he tells us he would do in Congress doesn’t give you a lot of confidence that he actually does know.

PC Magazine has the article Chinese Cyber Espionage: Don’t Believe the Hype.  The article touched on some scary headlines about cyber espionage reputed to be coming from the Chinese government.

These headlines are scary, and they are certainly indicative of how nations will interact in the digital age: countries will hack one another, secrets will be stolen (and likely sold). Retired Lieutenant General Harry Raduege said as much at the RSA conference this year, when he described a kind of cyber “warm war” with a few major hacks hitting the front page of newspapers from time to time. The scariest thing from all these reports is that the U.S. seems to still be coming to terms with that.

But it’s also important to take this news with some big grains of salt. The Department of Defense is facing the possibility of huge cuts while the nation wrings its hands about the deficit. In an age of sequestration, it’s a good idea to have a reason to spend billions and trillions on new and better defense programs. And with the war in Iraq over while operations in Afghanistan coming to a close, the search is on not just for future threats but also the justification for future spending.

I don’t claim  that this article is the definitive word on the subject.  Even this article says that our government is not treating the threat seriously enough.  What we have to guard against is being stampeded into taking irrational actions either on poorly thought out Defense Department/CIA/NSA spending or on punitive actions we take against countries like China on scant evidence put forth by people and groups with an ulterior motive.