One of the problems with the news cycle is that perennial issues — problems and solutions both — tend to get ignored in favor of things which have changed in the last few hours or days or weeks. As a result, when it comes to the global economic crisis — the thing which came to the world’s attention in 2008 and which no amount of Panglossian dreaming of V-shaped recoveries can wish away — one of the key potential solutions has been left all but ignored from the outset of the crisis through the present day.
Everybody knows that correlations go to 1 during a crisis. But markets and crises move at many speeds. Rodrigo Campos quotes one technical analyst today as saying that during the latest bout of market volatility, “We were moving over a three and a half day period like we were during the flash crash, just more orderly. It was totally irrational.”
Peter Rudegeair, who has the memory of an elephant, thought of me when he saw David Swensen’s op-ed in last Sunday’s NYT. Back in March 2009, he recalled, I posted a short blog entry entitled “The Dangers of Listening to David Swensen”. In light of the new piece, Peter asked, what do I think now?
Allan Sloan says that today is “scarier than 2008-09″ — and looking at the markets, he doesn’t seem far off. Yes, stocks are still much higher than they were at the height of the crisis, but relative to earnings the improvement isn’t all that impressive. Meanwhile the 10-year Treasury hit a new all-time low yield of 1.97% today, inflation figures notwithstanding, and gold too is hitting new highs above $1,825 per ounce.
Matt Taibbi’s 5,000-word exposé of the SEC’s document-shredding is a magnificent piece of journalism, and is the first and last place that you should look to understand what’s going on here. After the piece came out, Senator Chuck Grassley — who’s quoted in the article — made growling noises in the general direction of the SEC, which is now very much on the back foot. But all the news and background that you need can and should be found in Taibbi’s article, rather than Grassley’s 325-word press release.
The much larger than expected 0.5% inflation figure today is certainly worrying, even if I wouldn’t go as far as Joe Weisenthal, who says that it “screams stagflation”. For one thing, we had negative inflation in June, of -0.2%, so there might be an element of mean-reversion here. But if you look at the 12-month inflation figures, they’re all pretty high, with a headline number of 3.6% — significantly higher than anybody at the Fed would normally feel comfortable with.