WEBVTT NOTE Current Market Conditions: 22 Oct. 2008 1 00:00:00.000 --> 00:00:13.960 Frank, it's good of you to call and give us a market update. You saw what was happening 2 00:00:13.960 --> 00:00:17.320 in the markets today. Is it too depressing to talk about? 3 00:00:17.320 --> 00:00:27.840 I think that it's too depressing. It really is. But the interesting thing is that the 4 00:00:27.840 --> 00:00:42.840 In this case, policies don't work. Now it's trying to support the money market mutual funds, money market funds. It tries to expand it everywhere now, the money pumping, and it's not working. 5 00:00:42.840 --> 00:00:53.840 It is a little bit of a problem when the markets fall purely on questions of corporate profitability or whatever the press is citing today. What can the Fed do about corporate profitability? 6 00:00:53.840 --> 00:01:05.040 It's just an indication that the economy is falling, obviously one would expect profitability 7 00:01:05.040 --> 00:01:11.360 to fall also and what the Fed is doing is just counterproductive, not only counterproductive 8 00:01:11.360 --> 00:01:23.160 it's damaging, Bernanke is really doing a demolishing job right now, destroying the 9 00:01:23.160 --> 00:01:29.880 So the official theory is that by injecting more money and loosening up credit markets 10 00:01:29.880 --> 00:01:39.680 then corporations start to borrow, production expands and the economy goes back into recovery. 11 00:01:39.680 --> 00:01:40.680 What's wrong with that scenario? 12 00:01:40.680 --> 00:01:49.560 Well, you know, this is the typical Keynesian scenario, in other words, they're paying attention 13 00:01:49.560 --> 00:01:54.760 to boosting demand. They believe that there is the multiplier that will boost the consumption. 14 00:01:54.760 --> 00:02:00.120 Through the Keynesian Multiplot, things will just amplify and everything will be okay. 15 00:02:00.120 --> 00:02:07.400 The problem is that we are confronted with a real issue, a real issue that real savings 16 00:02:07.400 --> 00:02:13.800 have been destroyed over many decades now. There's probably very little left of the real 17 00:02:13.800 --> 00:02:37.040 Well, how does market psychology play into this? Why is it that just good feelings all 18 00:02:37.040 --> 00:02:39.880 around don't repair the damage? 19 00:02:39.880 --> 00:02:49.880 How the market psychology enters? I personally believe that psychology is just a result. 20 00:02:49.880 --> 00:02:55.880 If things are good, then psychology is good. But if things are bad, then psychology is going to be bad. 21 00:02:55.880 --> 00:02:59.880 But it's not an independent entity by itself. I wish it would have been. 22 00:02:59.880 --> 00:03:05.880 Then the solution would have been to employ psychologists or psychiatrists and talk to people and say, 23 00:03:05.880 --> 00:03:24.880 It seems like we need a psychiatrist employed to find out why it is that Cain seems to have made such a big comeback these days. I've seen him cited as providing the answer to all the problems. 24 00:03:24.880 --> 00:03:54.880 This is a misguided view, but it derives credibility, because after the Second World War supposedly things started to move strongly, and everybody said, well, Keynes was vindicated, but we know that in the 70s the whole thing collapsed, like we had stagflation and all those things, and so Keynes in economics has been discredited for several decades now, 25 00:03:54.880 --> 00:04:05.880 Yeah, for absence of an alternative. And also, I guess, Keynes provides a rationale for the state to do what it wants to do anyway. I think that's what Murray Rothbard used to write. 26 00:04:05.880 --> 00:04:20.880 Absolutely right. Keynes provided the endorsement, the rationale, the legitimacy for politicians to do what they love to do, to spend and show that they can really control the economy. 27 00:04:20.880 --> 00:04:26.880 Economy, and what we see right now that actually it's all bankrupt. 28 00:04:26.880 --> 00:04:31.560 Bernanke has been pumping now money since September last year, I mean he was doing all 29 00:04:31.560 --> 00:04:36.600 those things lowering interest rates and pushing money and doing all sorts of crazy things 30 00:04:36.600 --> 00:04:39.080 and so far there's no results. 31 00:04:39.080 --> 00:04:44.400 I mean even if you want to last for a certain time lags, whatever, you know, but it starts 32 00:04:44.400 --> 00:04:47.400 not working. 33 00:04:47.400 --> 00:04:52.720 How, after this whole crisis is over and presumably we'll go through a recessionary period, what 34 00:04:52.720 --> 00:04:58.480 is going to be the effect on the willingness of institutions to borrow and lend in the 35 00:04:58.480 --> 00:05:03.480 future? Do you think that a certain lesson has been learned here? 36 00:05:03.480 --> 00:05:10.960 Well, I basically think that, I mean, at the moment we will have some certain conservatives 37 00:05:10.960 --> 00:05:16.160 and that people for some period of time will be very cautious, banks will be cautious, 38 00:05:16.160 --> 00:05:21.160 Everybody will get more cautious because they burned their fingers badly right now with 39 00:05:21.160 --> 00:05:29.800 all the excesses, all the crazy type of lending they were pursuing and buying long-term assets 40 00:05:29.800 --> 00:05:34.200 with very short-term money and all the mismatched policies. 41 00:05:34.200 --> 00:05:40.640 This probably will stop for a while, but once things will go back to normal, normal and 42 00:05:40.640 --> 00:05:45.840 valid commerce and central banks will start pushing yen money the way in the past, I'm 43 00:05:45.840 --> 00:05:56.240 You like to make predictions both short-term and long-term, and I know your long-term prediction 44 00:05:56.240 --> 00:06:02.200 concerns the rise of inflation as a result of all the injection of new reserves into 45 00:06:02.200 --> 00:06:03.200 the banking system. 46 00:06:03.200 --> 00:06:04.200 But what about short-term? 47 00:06:04.200 --> 00:06:09.200 Do you expect days like today to continue? 48 00:06:09.200 --> 00:06:18.200 Well, I basically see that the way the stock market works, the way I see it, for example, 49 00:06:18.200 --> 00:06:27.200 that it responds to what happens on the company's levels. And the companies, corporates today, 50 00:06:27.200 --> 00:06:36.200 they're misallocated in a big way, so now they're trying to adjust themselves. And we don't know exactly how much they have to adjust. 51 00:06:36.200 --> 00:06:54.200 And that's really why the stock market is still sort of a completely uncertain. Once we'll reach a certain level of adjustment, then we'll know that we hit the bottom, and then because we've got so much money being pumped, this will just move the market strongly. 52 00:06:54.200 --> 00:07:05.200 My view is that if we have already reached the level of good adjustment, then maybe the turnaround is not far from now. 53 00:07:05.200 --> 00:07:12.200 But I'm a bit cautious on this because I don't believe the companies have made the adjustment because 54 00:07:12.200 --> 00:07:18.200 the Fed didn't allow it and all the pumping of money prevents the proper adjustment to take place. 55 00:07:18.200 --> 00:07:29.200 There is also the hope, probably on the part of some other big institutions, that more bailouts are still forthcoming, which would prevent the adjustment. 56 00:07:29.200 --> 00:07:39.200 That's right, exactly right. Large institutions seem to be protected. They don't adjust anything. They keep all the structures intact. 57 00:07:39.200 --> 00:07:44.200 And that's going to be a serious problem, like in Japan, like previously we discussed, 58 00:07:44.200 --> 00:07:49.200 they have left all the inefficiency there and that's why they couldn't recover. 59 00:07:49.200 --> 00:07:56.200 What's happening to the dollar on international exchange and what do you expect to happen? 60 00:07:56.200 --> 00:08:05.200 Well, at present, I believe that the American dollar is strengthening on account of its previous 61 00:08:05.200 --> 00:08:20.200 The delayed effect, if you want, from the past money rate of increase, I would say, coupled with other factors, of course, that the American economy seemed to be slightly better than the European economy, let's say. 62 00:08:20.200 --> 00:08:34.200 But on balance, I suspect that, you know, maybe in six months' time or whatever, things may reverse and could be in favor of Euro again. It's quite possible. 63 00:08:34.200 --> 00:08:43.200 A lot of it depends on the willingness of the European Central Bank to inflate at the same level as the third, right? 64 00:08:43.200 --> 00:08:54.200 That's right. I mean, the rumors now in the market that the European Central Bank is probably going to lower interest rates very soon. 65 00:08:54.200 --> 00:09:04.440 Until a few months ago, Mr. Trichet, the chairman of the European Central Bank, was resisting the idea of lowering rates. 66 00:09:04.440 --> 00:09:07.400 Now it looks like he's under pressure to do it. 67 00:09:07.400 --> 00:09:12.760 And we know that the Fed is also going to aggressively lower interest rates at the end of this month now. 68 00:09:12.760 --> 00:09:17.400 The rumor is now in the market about half a percent at least. 69 00:09:17.400 --> 00:09:44.400 So, we will end up in a situation that we had in 2001 when we had a 1% interest rate again in the United States and we know what this 1% has created after the dot-com crash, you know, the Greenspan got very nervous and lowered the rates, now we got the same repetition with Benanke. 70 00:09:44.400 --> 00:09:55.400 So on one hand they complain about the effects of loose credit, and on the other hand they can see no way out other than more loose credit. 71 00:09:55.400 --> 00:10:04.400 That's right. The only remedy they have got is pumping money, whether they need it or not, that's what they're doing. 72 00:10:04.400 --> 00:10:09.400 If in doubt, print money. That's their formula, it looks like to me. 73 00:10:09.400 --> 00:10:20.400 It's unbelievable. And they're covering it up with insurance. They say, we're buying insurance, buying insurance. It's crazy. 74 00:10:20.400 --> 00:10:28.400 But in the process, they're creating all sorts of side effects. And then they're complaining about those side effects. 75 00:10:28.400 --> 00:10:38.400 In 2001, they laid foundation for CDOs and all the financial engineering. So now they'll lay foundation for something else. 76 00:10:38.400 --> 00:10:44.080 Yeah, and it's just purely for a lack of other options or at least unwillingness to pursue 77 00:10:44.080 --> 00:10:49.200 the option that they have to pursue, which is to tolerate the losses and tolerate the 78 00:10:49.200 --> 00:10:50.200 correction. 79 00:10:50.200 --> 00:10:51.200 Absolutely right. 80 00:10:51.200 --> 00:10:57.480 Even the interesting thing that Anna Schwartz, right, which, you know, like, of all people 81 00:10:57.480 --> 00:11:02.160 who probably wouldn't call her an Austrian, right, she basically agreed with us. 82 00:11:02.160 --> 00:11:10.160 She says, well, the experience shows that if you do very little, if you don't touch the market, the results are the best. 83 00:11:10.160 --> 00:11:14.160 That's what she said in the last interview on Wall Street Journal. 84 00:11:14.160 --> 00:11:19.160 And she basically criticized, in a subtle way, Mr. Bernanke. 85 00:11:19.160 --> 00:11:26.160 She said, Mr. Bernanke fights the previous wars, not today's war. 86 00:11:26.160 --> 00:11:35.160 That's what you said. That's significant because Bernanke is always citing the Schwartz Friedman book as a justification for his current policy. 87 00:11:35.160 --> 00:11:47.160 Exactly. I mean, he basically said that, in fact, you know, you remember in this, Friedman's birthday, 90th anniversary, 90th party, he basically said, 88 00:11:47.160 --> 00:11:53.600 I apologize on behalf of the Fed. He said, we're sorry for what we did in 1930s, but 89 00:11:53.600 --> 00:11:58.240 we're not going to repeat this error again, because we learned it from you. We know now 90 00:11:58.240 --> 00:12:04.600 you showed us what to do, and we'll never do it again. And now Anna Schwartz says, hey, 91 00:12:04.600 --> 00:12:12.400 you didn't read it properly. You made a mistake. Yeah, that's what she said to me. She was 92 00:12:12.400 --> 00:12:19.520 I was saying that then she said banks were collapsing because there was a run on banks. 93 00:12:19.520 --> 00:12:24.800 So she said the Fed was standing and doing nothing, so therefore we recommended to push 94 00:12:24.800 --> 00:12:25.800 money. 95 00:12:25.800 --> 00:12:29.080 But then she said today it's not the case, today she said the balance sheets are not 96 00:12:29.080 --> 00:12:33.280 right, therefore the Fed shouldn't really pump money just like that, but must look at 97 00:12:33.280 --> 00:12:36.440 the balance sheets and perhaps buy assets. 98 00:12:36.440 --> 00:12:42.240 The initial plan of Paulson was correct she said, obviously we don't agree with it, but 99 00:12:42.240 --> 00:12:47.240 At least she's critical of Bernanke's indiscriminate money printing. 100 00:12:47.240 --> 00:12:53.240 Well Frank, despite all the market trends, it's still good to hear you laugh and making jokes. 101 00:12:53.240 --> 00:13:04.240 No, I mean it is, but Mr. Bernanke, sooner or later, if things won't work, he will have to give up and say, 102 00:13:04.240 --> 00:13:15.240 If we have the guts to say, look, my theories are wrong, let's concede our defeat to Mr. Mises and let's start reading Human Action. Maybe people will say it. 103 00:13:15.240 --> 00:13:22.240 That's a good idea. So we take just a year off to do nothing but read Human Action and let the markets go their own way. 104 00:13:22.240 --> 00:13:29.240 Yeah, well, let them start. Maybe Mises Institute will sponsor and send them a copy of Human Action to read. 105 00:13:29.240 --> 00:13:38.240 We'll see if we can raise money for that. Maybe he'll pay some money to pay for it. Thank you so much Frank. 106 00:13:38.240 --> 00:13:40.240 Okay, no problem. Bye.