Hi J.D,Insider Selling: There's been a massive wave of insider selling. We have to take that as a bearish longer term view from executives. They get to see the economy from the 50 yard line from the front row while the rest of us are up in the bleachers. If I keep it simple, I don't think they see revenue growth or a growing economy or any real improvement on the Main Street economy. And that might be their best outlook.
I have two questions for you that maybe you would like to address in your blog.
Q. Week after week I read about corporate insider selling greatly out numbering insider buying. I am also well aware that the Federal Reserve is probably going to target higher inflation with the next round of quantitative easing. Do you think this means that corporate insiders do not expect asset inflation as a result of QE2 or is there some other explanation?
Q. Do you think it is possible that the Federal Reserve could/would buy state or municipal bonds as part of QE2? If so, what effects do you see?
QE2 or not, successful or not, their selling should be a longer term warning about the economic outlook. Can you imagine that many insider sellers being wrong in the long run? I can't. In this question, I'm more focused on insider selling than QE2. However, if they really thought QE of any kind was going to work, I'm quite confident they would be massive buyers of stock.
Federal Res. Buying Muni Bonds: I love this question. Let's look at the biggest issue in state deficits. The Bubble State (California) has a deficit of $19 billion, which does not include all of the local municipalities that have deficits in CA that also have muni bonds to payoff, separate of the State's bonds.
There's no way, absolutely no way the State of California and local cities and counties work out of their budget crises without defaulting on their bonds, or by getting aid from the US Gov't. There are a number of reasons the US Gov't will attempt to buy state bonds.
First: In my 8 risks for deflation, California is one of those risks of aiding to a deflationary cycle. It's simply too big of an economy with too many people to not impact the rest of the US if it implodes in a bubble melt down. From that perspective, it would seem logical for the US Gov't to try to step into the mix to help CA on the basis of too big to fail.
Second, we have too many people in this country that do not pay taxes, so they have no equity in how the country is operated financially. So why should they care if the government is wasting tax payer money on this or that, or bailing out GM, Banks, or eventually the State of California. Our citizenry has become ignorant to the negatives of our government's monetary and fiscal policies because they do not pay taxes so why should they care if tax dollars are pissed away. The idea of buying muni bonds might not get any push back from voters, especially if it's a multiple state purchase where a concentration of the population lives (New York and CA, etc).
Lastly, we've created a trend of the US government being the everything of last resort. That's simply for political power. They're the lender of last resort, the world's cop, the health care provider of last resort, the retirement fund of last resort, and the economic stimulus of last resort. So why shouldn't we expect them to back stop the states in a last resort. A lot of people expect the government to step in when there's an issue of any kind.
It just seems to fit based on the way our government works. Oh sure, at first they will tell you it will never happen, but we've already seen them float ideas of bailing out cities or floating more money for teachers etc. We aren't that far away, are we?
Personally, I think they will try smaller ways to help states in a hope the economy bounces back and bails out all the flawed financial decisions by government at all levels. As this fails, they might get pot committed holding 7-2 off suit and do something crazy by going all in buying muni bonds.
Impact: If we get to the point of buying muni bonds on the US balance sheet my first thought was a collapse in the US dollar, but by the time we get to buying muni bonds the dollar might already have sold off. So, I think the outcome will be a collapse in global confidence in the US government and maybe our bonds. We might see foreign governments lose interest in holding US paper and this might be part of a greater movement in the bust of the bond bubble. But frankly, I'm just spit balling what might be an outcome, I think it's very difficult to gauge currently.
Caveat: If there's a reason it does not happen it's this one: As social unrest permeates this country in a deflationary cycle, we should see a massive back lash against the wealthy. We witnessed it first in bonus pay for AIG employees and trying to control bank executive pay.
As social unrest settles into the US the number of angry broke voters could overwhelm politicians. The voter might view muni bond holders as the wealthy and want them to pay for state deficits via a bond default. Politicians might have to ignore the wealthy to save their seat. One of the things they can do to save state budgets is to support the default of bonds or some version of state bankruptcy.
It's an odd thought, especially when we consider there are too many Americans who don't understand the damaging effects of monetary and fiscal policies and believe that it's the governments job to restore the economy, not a free market without government.
The public is going to have to go through a serious change in mind set before we get that angry mass voter block. If it happens, it happens at the bottom of deflation when the public is completely washed out and finally understands they've been hosed.
Hope all is well.
J.D. Rosendahl, Rosey