Jim Bianco: Stop Interfering With Free Markets

Bianco of Bianco research gives his outlook on the markets. I like his point on the crowded aspects of the dollar devaluation trade.

Remember the old TV show MASH? When the choppers and buses would bring in scores of wounded soldiers all at once, completely overwhelming the medical staff, who were scrambling to provide care? The first thing they would do would be to assess the scope of the damage, then stabilize the injured and prioritize which patients got tended to first. To borrow the words of Jim Grant, it was “fast and ugly” in action.

The other side of that type of urgent triage would be “slow and ugly,” a euphemism often used to describe the current course of action the Federal Reserve and Treasury have embarked upon to restore the economy. But now that we’re more than three years into it, critics such as Jim Bianco of Bianco research say it’s high time we started moving forward.

“Quantitative easing is all about trying to prevent pain in the marketplace,” he says. ” But in doing so, it prevents adjustments, and that’s why markets like housing can’t move forward.”

Given the latest housing statistics, few would argue that point.

“The problem with housing is that we’re at the wrong price, so prices have to come down” Bianco says. “But we don’t want prices to come down, so we invent like 58 programs and QE to prevent them from coming down, and then we complain that prices aren’t going up. Going up?! They still need to come down.”

But as much as Bianco would like to see the Fed’s money-printing experiment ended with QE2, he admits that the chance of QE3 goes up with each weak data point that comes out. And lately there have been many of them, including the private payroll flop from ADP and a big slump in ISM Manufacturing on Wednesday alone.

“I cant imagine the Fed would do two trillion of quantitative easing…and saying ‘Look guys, we tried, you’re on your own,'” Bianco says. ” No, there will be QE3 and 4 and 5.”

“At some point, if you believe in free markets and the capitalist system, you have to let markets adjust” or risk an outcome like Japan, which Bianco says has been “muddling along” for 22 years. “Never really a catastrophe, but never really gets better either.”

In place of “slow and ugly,” Bianco would prefer a “very modified version” of what was done in 1974 and 1932 that “would be bad over the very short term but then it’s over and things start getting better…we hit bottom and can see things moving forward as opposed to this perpetual waiting and waiting and waiting like Japan.”

Probably the nicest thing Bianco will say about the country’s post-crisis playbook is that things have definitely stabilized since 2007 and that the weak dollar has resulted in a few short-term benefits. However, he adds, “I think the all-time crowded trade right now is the weak dollar” and that world history is full of examples that support the notion that “you can’t devalue your way to prosperity.”

And maybe he’s right. Had we gone “fast and ugly” from the outset, we might be in an entirely different position right now.