So stuffed.......

Wow what a great Thanksgiving dinner today! The whole family was present including the extended fam - and there was plenty of pecan pie - my favorite. I also took a break today from work and studying and had the chance to watch the new Harry Potter move (thumbs up) and read a few interesting economics/finance related articles that I just hadn't had time to look at yet.

I read a few articles from Marc Faber which were quite enlightening / stimulating. They gave a different view/analysis of the basically the entire US (and world for that matter) financial system. I guess the most facinating idea was the way that we consider and measure inflation in the United States from a values perspectiver. The government places a lot of emphasis on consumption related inflation, but tend to ignore asset inflation (re: bonds, stocks, and real estate). Most Americans consider asset inflation as a "good thing," - e.g. - so and so got rich in the stock market or in "real estate." I guess the basic idea being that so long as our asset prices are appreciating we are all experiencing greater "wealth" and can use that asset based wealth to fund future purchases and consumption (re: STUFF) which thanks to the low consumption type inflation over the past 10 years is still CHEAP.

The articles examined the structural assumptions that this type of system is based on - principally cheap financing / low real interest rates. Taking these thoughts a step further I believe when we evaluate the performance of our Central Bank and its chairmen we actually heap a ton of praise on these "managers" of our monetary system precisely because they have enabled a system (through accomodative monetary policy over a long period of time) that encourages the inflation of and demand for financial assets.

This thought is also particularly striking to me re: the performance of both the stock market and the real estate market over the past 25 years. We had the stock market "bubble" and now the real estate "bubble," but overall the population considers both of these developments as quite positive. The stock market bubble was considered largely a testament to our entrepreneurship and business success, while the real estate market has a variety of great and tangible micro type factors that are considered (e.g. scarcity of land, growing population, beauty (re: coastal, etc.), utility). Much emphasis is placed on the observable facts - i.e. that property prices are up around 200% over the past five years in Coastal California and many other areas of the country. But little discussion at least in the mainstream press re: the probable causes and genesis of these developments (most notably an intense interest rate cutting strategy from the Central Bank taking the fed funds rate from 6% to 1% between 2001 and 2003.)

Before this turns into a real estate based rant, I want to bring this to a close and just restate the basic idea - that is - maybe we should be just as concerned about asset price inflation in our economy as we are about consumer price inflation. That is - if we as country begin to consider and respect as the best examples of wealth creation - 1) real estate speculation and 2) continued increases in stock and bond prices. This would seem to be quite a shift in sentiment as our country traditionally considered the creation of real wealth through the production and development of new technologies and goods, or perhaps a more efficient way to provide services as the most impressive type of entrepreneurship - not the ability to leverage yourself 10-1 in 2003 and then resell the asset of your choice (real estate, stock, or bonds) for 1000%+ profits.

Even if you consider the basic premise of this blog a huge amount of emphasis is placed on speculation instead of investment. By my own design of course - but these thoughts really provoked me and I am excited to share them with all readers. I do not plan to change the emphasis of the blog but I do find myself asking - am I just another cog in the wheel speculating based on historical trends that are unsustainable? - or am I hopefully beginning to catch glimpses of the broader framework that defines the financial markets and may provide a useful fundamentals based design in the years ahead? As I said - "hopefully' the latter - but more likely the former!

Best Regards and Happy Thanksgiving!

-BG