Today, the DJIA (Dow Jones Industrial Average) leaped back to life. It was up 11.1% So is the recession over? Don't forget to get the t-shirts CNN is selling:
Also see: Shirt Archive
Sometimes, people say that the DJIA isn't really an indicator of the health of the economy. I couldn't agree more. What we saw today was a direct result of Friday's CDS (credit default swap) settlement. The industry now has a better idea of what these instruments are worth, so as result, there has been sunshine shed on the market. The market likes sunshine and it usually reacts favorably to it.
In addition to being very volatile, there is also a very odd condition in the market right now. This odd condition is that both the DJIA and commodities are going up at the same time. Usually they go in opposite directions. For example, when the DJIA goes up, oil and gold prices come down. Instead, they're doing weird things.
It also remains to be seen if this settlement's sunshine will last. I believe a much more reliable indicator for the current turmoil is the TED Spread indicator. For the current season of turmoil, if that indicator keeps going up, we will continue to see problems. I believe the TED Spread, not the DJIA, is the richter scale for our economy at the moment.
Another possibility is that the problem has been largely patched and now we'll go along on our merry way again just like before. So banks will start lending again and another huge bubble will form, bringing us back to this point, only worse.
Those of the Austrian School of Economics believe the problem is bank credit expansion, which can be visualized as follows:
Source: Arkansas IMC
There's nothing inherently wrong with investing in the financial sector. The problem is how this is being financed. It is being financed with easy money through bank credit expansion, thus resulting in an increased money supply and inflation. The above chart shows how much the financial sector has overtaken manufacturing. By delaying the difficult recession, we have delayed recovery and made the present crisis more difficult as well.
Also see: Shirt Archive
Sometimes, people say that the DJIA isn't really an indicator of the health of the economy. I couldn't agree more. What we saw today was a direct result of Friday's CDS (credit default swap) settlement. The industry now has a better idea of what these instruments are worth, so as result, there has been sunshine shed on the market. The market likes sunshine and it usually reacts favorably to it.
In addition to being very volatile, there is also a very odd condition in the market right now. This odd condition is that both the DJIA and commodities are going up at the same time. Usually they go in opposite directions. For example, when the DJIA goes up, oil and gold prices come down. Instead, they're doing weird things.
It also remains to be seen if this settlement's sunshine will last. I believe a much more reliable indicator for the current turmoil is the TED Spread indicator. For the current season of turmoil, if that indicator keeps going up, we will continue to see problems. I believe the TED Spread, not the DJIA, is the richter scale for our economy at the moment.
Another possibility is that the problem has been largely patched and now we'll go along on our merry way again just like before. So banks will start lending again and another huge bubble will form, bringing us back to this point, only worse.
Those of the Austrian School of Economics believe the problem is bank credit expansion, which can be visualized as follows:
Source: Arkansas IMC
There's nothing inherently wrong with investing in the financial sector. The problem is how this is being financed. It is being financed with easy money through bank credit expansion, thus resulting in an increased money supply and inflation. The above chart shows how much the financial sector has overtaken manufacturing. By delaying the difficult recession, we have delayed recovery and made the present crisis more difficult as well.
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