It’s 10 days old and continues to receive attention, so now it’s my turn.
Mr. Krugman is at it again, commenting on a recent presentation by Larry Summers at the IMF Research Conference. Summer’s attention-grabbing and provocative conclusion is that the U.S. has basically been in a secular stagnation since the 1980s. The source of stagnation could be demographics, a decline in innovation or something else – but the key point is that bubbles have become necessary in order for the economy to grow.
Krugman, as usual, is careful to talk with caveats and in measured language, but it’s clear that he finds much merit in the position, ultimately concluding “What Larry did at the IMF wasn’t just give an interesting speech. He laid down what amounts to a very radical manifesto. And I very much fear that he may be right.”
But let’s dig in to some of the commentary before we get there. For starters, Krugman the Statist implies that government spending is better than private spending. Specifically, he notes that the Keynes' hypothetical of burying currency in holes for the private sector to dig up, or Krugman’s notion of preparing for a fake alien invasion, are both the types of massive government spending that the economy needs right now – because spending is the priority and “unproductive spending is still better than nothing”. And the same logic applies to the private sector as well, at least sort of: ”Private spending that is wholly or partially wasteful is also a good thing, unless it somehow stores up trouble for the future. That last bit is an important qualification.” Huh? Is he really suggesting that the risk only lies with the private sector when the mandate is just to spend? I don't really think the facts support that, but it sure does tell us a lot about the mindset behind the Krugman schtick, and why he often supports programs that take control away from individuals and centralizes it in Washington.
Another area where his position just glosses over the facts is in arguing that with all the bubbles since the S&L crisis, there really has been no inflation. And to agree you basically have to ignore financial assets and the size of government or the persistent instability in the face of a “Great Moderation”. CPI doesn’t capture any of those things, of course – and it also ignores food and energy prices as well. But, by all means, continue with your hedonics and substitution, forget about wage stagnation, and pretend that people can afford just as much, and you still end up with a CPI (bogus as it may be) that is more than 2.5 times higher than it was in the late 80s.
Krugman also says the problem is not loose money and low rates. If anything, if Summers is right, the economy has been trying to get into a liquidity trap for a long time, and but-for high household spending and increasing debt, things would probably look much worse. I find it a bit misleading then to ignore the shift from a gold standard to an unbacked currency, and the resulting spike in debt levels since then, with an attending decrease in the bang that you get from each incremental dollar of debt, and still to conclude that monetary policy is not related here.
Anyway, to wrap this up, Krugman offers some ideas for how to handle this new reality. Like paying negative interest rates on deposits, pushing inflation much higher, and worrying less about financial regulation since we really need to encourage bubbles. Some of which we’ve heard before, maybe once or twice. And which I’m sure will all turn out wonderfully. After all, Nassim Nicholas Taleb is banking on it.
Tuesday, November 26, 2013
Monday, November 25, 2013
More Links
In this week’s note from Doug Noland, I think he does a good job of explaining how QE leads to speculation in financial assets – in this instance, U.S. equities:
“As an illustration, follow the trail of outflows from a somewhat less popular “Total Return Bond Fund” (TRBF). To fund outflows, TRBF sells Treasuries to the Federal Reserve. TRBF then transfers Fed liquidity to exiting investors that then use this “money” for investment in the now extremely popular “Total Stock Market Index Fund”. This fund then takes this “money” that originated with the Fed and bids up stock prices.
Or, how about an example where a hedge fund moves to exit an underperforming emerging bond market. Here the fund is unwinding a leveraged “carry trade” that involves selling the EM bond and liquidating the EM currency position. With the EM bonds and currency under intense (“hot money” outflow) pressure, the local EM central bank intervenes with currency purchases (sells dollars to buy the local currency). To fund these purchases, the EM central bank sells Treasuries to the Federal Reserve. The central bank then uses Fed liquidity for purchasing currency from the hedge fund, and the hedge fund then has “money” to rotate into 2013’s speculative vehicle of choice - US equities.”
Then in the latest Hussman piece, he covers a lot of interesting ground related to this overvalued stock market. For example, part of the problem is that many look at the market and think that there is nothing remarkable from a multiples perspective – until one considers that corporate profit margins are 70% above historical norms. All of which means, one, expect some mean reversion, and two, it is not practical to extrapolate from the present on what the discounted value for stocks should be prospectively. That’s why the Schiller P/E is a better multiple to focus on since it measures price to 10-year historical, inflation-adjusted earnings. And it currently stands at a robust 25x.
The other noteworthy point is more of a rebuttal to anyone who tries to tie employment and inflation – essentially the logic behind the Phillips Curve. Here’s Mr. Hussman: “This isn’t to say that A.W. Phillips was incorrect. Rather, his “Phillips Curve” was actually a relationship between the unemployment rate and wage inflation, in a century of British data when Britain was on the gold standard and general prices were stable. What Phillips said, in effect, is that unemployment is inversely related to real wage inflation. That proposition holds true in U.S. data as it does internationally. But it is hardly the basis for any strong belief that we can buy a few more jobs by targeting a higher inflation rate in the general price level.”
“As an illustration, follow the trail of outflows from a somewhat less popular “Total Return Bond Fund” (TRBF). To fund outflows, TRBF sells Treasuries to the Federal Reserve. TRBF then transfers Fed liquidity to exiting investors that then use this “money” for investment in the now extremely popular “Total Stock Market Index Fund”. This fund then takes this “money” that originated with the Fed and bids up stock prices.
Or, how about an example where a hedge fund moves to exit an underperforming emerging bond market. Here the fund is unwinding a leveraged “carry trade” that involves selling the EM bond and liquidating the EM currency position. With the EM bonds and currency under intense (“hot money” outflow) pressure, the local EM central bank intervenes with currency purchases (sells dollars to buy the local currency). To fund these purchases, the EM central bank sells Treasuries to the Federal Reserve. The central bank then uses Fed liquidity for purchasing currency from the hedge fund, and the hedge fund then has “money” to rotate into 2013’s speculative vehicle of choice - US equities.”
Then in the latest Hussman piece, he covers a lot of interesting ground related to this overvalued stock market. For example, part of the problem is that many look at the market and think that there is nothing remarkable from a multiples perspective – until one considers that corporate profit margins are 70% above historical norms. All of which means, one, expect some mean reversion, and two, it is not practical to extrapolate from the present on what the discounted value for stocks should be prospectively. That’s why the Schiller P/E is a better multiple to focus on since it measures price to 10-year historical, inflation-adjusted earnings. And it currently stands at a robust 25x.
The other noteworthy point is more of a rebuttal to anyone who tries to tie employment and inflation – essentially the logic behind the Phillips Curve. Here’s Mr. Hussman: “This isn’t to say that A.W. Phillips was incorrect. Rather, his “Phillips Curve” was actually a relationship between the unemployment rate and wage inflation, in a century of British data when Britain was on the gold standard and general prices were stable. What Phillips said, in effect, is that unemployment is inversely related to real wage inflation. That proposition holds true in U.S. data as it does internationally. But it is hardly the basis for any strong belief that we can buy a few more jobs by targeting a higher inflation rate in the general price level.”
Tuesday, November 19, 2013
Notable Comments
A recent addition to my regular reads is the weekly note from Ben Hunt at Epsilon Theory. In this week’s issue, he tackles how politics have corrupted economic theory. And in getting there, he has a couple of observations worth repeating:
“Suffice it to say that it’s not a coincidence that Social Security is a child of the Great Depression in the same way that both QE and Obamacare are children of the Great Recession. The institutionalization and expansion of centralized economic policy is what always happens after an economic crisis, but the scale and scope of QE and Obamacare, particularly when considered together as two sides of the same illiberal coin, are unprecedented in US history.”
and…
“In exactly the same way that French kings in the 13th century used ecclesiastical arguments and Papal bulls to justify their conquest of what we now know as southern France in the Albigensian Crusades, so do American Presidents in the 21st century use macroeconomic arguments and Nobel prize winner op-eds to justify their expansionist aims. Economists play the same role in the court of George W. Bush or Barack Obama as clerics played in the court of Louis VIII or Louis IX. They intentionally write and speak in a “higher” language that lay people do not understand, they are assigned to senior positions in every bureaucratic institution of importance, and they are treated as the conduits of a received Truth that is – at least in terms of its relationship to politics – purely a social construction.”
Another new member to the roster is Michael Pettis, who writes a blog about China from a financial perspective. In a piece from last month, he addresses the interesting topic of the PBoC’s huge foreign reserves and why they are not really a safeguard in the event that Chinese banks need to recapitalize. To wit:
“A much more important objection is the idea that reserves can be used to clean up the banks (or anything else, for that matter) is based on a misunderstanding about how the reserves were accumulated in the first place. There seems to be a still-widespread perception that PBoC reserves represent a hoard of unencumbered savings that the PBoC has somehow managed to collect.
But of course they are not. The PBoC has been forced to buy the reserves as a function of its intervention to manage the value of the RMB. And as they were forced to buy the reserves, the PBoC had to fund the purchases, which it did by borrowing RMB in the domestic market.
This means that the foreign currency reserves are simply the asset side of a balance sheet against which there are liabilities. What is more, remember that the RMB has appreciated by more than 30% since July, 2005, so that the value of the assets has dropped in RMB terms even as the value of the liabilities has remained the same, and this has been exacerbated by the lower interest rate the PBoC currently earns on its assets than the interest rate it pays on much of its liabilities.
In fact there have been rumors for years that the PBoC would be insolvent if its assets and liabilities were correctly marked, but whether or not this is true, any transfer of foreign currency reserves to bail out Chinese banks would simply represent a reduction of PBoC assets with no corresponding reduction in liabilities. The net liabilities of the PBoC, in other words, would rise by exactly the amount of the transfer. Because the liabilities of the PBoC are presumed to be the liabilities of the central government, the net effect of using the reserves to recapitalize the banks is identical to having the central government borrow money to recapitalize the banks.”
Mr. Pettis has another recent post about Abenomics in Japan and why if it succeeds, it still might fail. Here’s the punchline:
“Japan’s enormous debt burden was manageable as long as GDP growth rates were close to zero because this allowed both for the country to rebalance its economy and for Tokyo to make the negligible debt servicing payments even as it was effectively capitalizing part of its debt servicing cost. If Japan starts to grow, however, it can no longer do so. Unless it is willing to privatize assets and pay down the debt, or to impose very heavy taxes of the business sector, one way or the other it will either face serious debt constraints or it will begin to rebalance the economy once again away from consumption.
As this happens Japan’s saving rate will inexorably creep up, and unless investment can grow just as consistently, Japan will require ever larger current account surpluses in order to resolve the excess of its production over its domestic demand. If it has trouble running large current account surpluses, as I expect in a world struggling with too much capacity and too little demand, Abenomics is likely to fail in the medium term.
Perhaps all I am saying with this analysis is that debt matters, even if it is possible to pretend for many years that it doesn’t (and this pretense was made possible by the implicit capitalization of debt-servicing costs). Japan never really wrote down all or even most of its investment misallocation of the 1980s and simply rolled it forward in the form of rising government debt. For a long time it was able to service this growing debt burden by keeping interest rates very low as a response to very slow growth and by effectively capitalizing interest payments, but if Abenomics is “successful”, ironically, it will no longer be able to play this game. Unless Japan moves quickly to pay down debt, perhaps by privatizing government assets, Abenomics, in that case, will be derailed by its own success.”
Courtesy of Stratfor, I found this feature of Chilean governance to be incredibly interesting:
“Economically, Chile has an institutionalized monetary and fiscal policy, which means that politicians are limited in their ability to tamper with macroeconomic fundamentals. Of particular note is the countercyclical fiscal rule, which essentially dictates that politicians are required by law to save copper proceeds in sovereign wealth funds during booms but are allowed to use deficit spending during downturns.”
And, finally, here is the Zero Hedge article that examines the recent revelation of manipulation of the jobs reports by the Census Bureau, including the one just before Obama got re-elected in 2012 when the unemployment rate dropped meaningfully under 8.0%.
“Suffice it to say that it’s not a coincidence that Social Security is a child of the Great Depression in the same way that both QE and Obamacare are children of the Great Recession. The institutionalization and expansion of centralized economic policy is what always happens after an economic crisis, but the scale and scope of QE and Obamacare, particularly when considered together as two sides of the same illiberal coin, are unprecedented in US history.”
and…
“In exactly the same way that French kings in the 13th century used ecclesiastical arguments and Papal bulls to justify their conquest of what we now know as southern France in the Albigensian Crusades, so do American Presidents in the 21st century use macroeconomic arguments and Nobel prize winner op-eds to justify their expansionist aims. Economists play the same role in the court of George W. Bush or Barack Obama as clerics played in the court of Louis VIII or Louis IX. They intentionally write and speak in a “higher” language that lay people do not understand, they are assigned to senior positions in every bureaucratic institution of importance, and they are treated as the conduits of a received Truth that is – at least in terms of its relationship to politics – purely a social construction.”
Another new member to the roster is Michael Pettis, who writes a blog about China from a financial perspective. In a piece from last month, he addresses the interesting topic of the PBoC’s huge foreign reserves and why they are not really a safeguard in the event that Chinese banks need to recapitalize. To wit:
“A much more important objection is the idea that reserves can be used to clean up the banks (or anything else, for that matter) is based on a misunderstanding about how the reserves were accumulated in the first place. There seems to be a still-widespread perception that PBoC reserves represent a hoard of unencumbered savings that the PBoC has somehow managed to collect.
But of course they are not. The PBoC has been forced to buy the reserves as a function of its intervention to manage the value of the RMB. And as they were forced to buy the reserves, the PBoC had to fund the purchases, which it did by borrowing RMB in the domestic market.
This means that the foreign currency reserves are simply the asset side of a balance sheet against which there are liabilities. What is more, remember that the RMB has appreciated by more than 30% since July, 2005, so that the value of the assets has dropped in RMB terms even as the value of the liabilities has remained the same, and this has been exacerbated by the lower interest rate the PBoC currently earns on its assets than the interest rate it pays on much of its liabilities.
In fact there have been rumors for years that the PBoC would be insolvent if its assets and liabilities were correctly marked, but whether or not this is true, any transfer of foreign currency reserves to bail out Chinese banks would simply represent a reduction of PBoC assets with no corresponding reduction in liabilities. The net liabilities of the PBoC, in other words, would rise by exactly the amount of the transfer. Because the liabilities of the PBoC are presumed to be the liabilities of the central government, the net effect of using the reserves to recapitalize the banks is identical to having the central government borrow money to recapitalize the banks.”
Mr. Pettis has another recent post about Abenomics in Japan and why if it succeeds, it still might fail. Here’s the punchline:
“Japan’s enormous debt burden was manageable as long as GDP growth rates were close to zero because this allowed both for the country to rebalance its economy and for Tokyo to make the negligible debt servicing payments even as it was effectively capitalizing part of its debt servicing cost. If Japan starts to grow, however, it can no longer do so. Unless it is willing to privatize assets and pay down the debt, or to impose very heavy taxes of the business sector, one way or the other it will either face serious debt constraints or it will begin to rebalance the economy once again away from consumption.
As this happens Japan’s saving rate will inexorably creep up, and unless investment can grow just as consistently, Japan will require ever larger current account surpluses in order to resolve the excess of its production over its domestic demand. If it has trouble running large current account surpluses, as I expect in a world struggling with too much capacity and too little demand, Abenomics is likely to fail in the medium term.
Perhaps all I am saying with this analysis is that debt matters, even if it is possible to pretend for many years that it doesn’t (and this pretense was made possible by the implicit capitalization of debt-servicing costs). Japan never really wrote down all or even most of its investment misallocation of the 1980s and simply rolled it forward in the form of rising government debt. For a long time it was able to service this growing debt burden by keeping interest rates very low as a response to very slow growth and by effectively capitalizing interest payments, but if Abenomics is “successful”, ironically, it will no longer be able to play this game. Unless Japan moves quickly to pay down debt, perhaps by privatizing government assets, Abenomics, in that case, will be derailed by its own success.”
Courtesy of Stratfor, I found this feature of Chilean governance to be incredibly interesting:
“Economically, Chile has an institutionalized monetary and fiscal policy, which means that politicians are limited in their ability to tamper with macroeconomic fundamentals. Of particular note is the countercyclical fiscal rule, which essentially dictates that politicians are required by law to save copper proceeds in sovereign wealth funds during booms but are allowed to use deficit spending during downturns.”
And, finally, here is the Zero Hedge article that examines the recent revelation of manipulation of the jobs reports by the Census Bureau, including the one just before Obama got re-elected in 2012 when the unemployment rate dropped meaningfully under 8.0%.
Monday, November 18, 2013
And the band plays on...
I think Doug Noland’s (almost) weekly piece is a must-read. This time through he touches on Janet Yellen’s recent confirmation hearings before the Senate, picking up on a very interesting exchange with Senator Bob Corker…
Senator Robert Corker: “We talked a little bit about the Fed in the early summer began to talk about moderating the pace at which it was going to be making purchases. And the market had a pretty stringent reaction. It was like… the Federal Reserve appeared as if it had touched a hot stove and that this policy was going to greatly affect, if you will, the wealth effect that you were trying to create… And so the Fed jumped back. And it seemed to me - and I think you discussed this a little bit in the office - that the Fed had become a prisoner to its own policy. That to really try to step away from QE3 was really going to shatter possibly the markets and therefore take away from the wealth effect. And I wonder if you could talk a little bit about some of the discussions that were taking place during that time.”
Yellen: “Well, Senator, I don’t think that the Fed ever can be or should be a prisoner of the markets…”
Senator Robert Corker: “But to a degree in this case, it did affect the Fed, did it not?”
Yellen: “Well, we do have to take account of what is happening in the markets, what impact market conditions are likely to have on spending and the economic outlook. So it is the case, and we highlighted this in our statement, when we saw a big jump in rates - a jump that was greater than we would have anticipated from the statements that we made in May and June - and particularly saw mortgage interest rates rise in the space of a few months by over a hundred basis points, we had to ask ourselves whether or not that tightening of conditions in a sector where we were seeing a recovery and a recovery that could really - recovery in housing that could drive a broader recovery in the economy - we did have to ask ourselves whether or not that could potentially threaten what we were trying to achieve. But overall, we are not a prisoner of the markets. I continue to feel that we’re seeing an improvement in the labor market, which was the goal of the program. And we will continue to evaluate incoming data and to make decisions on the program in that light going forward.”
Yellen acknowledges that the move up in rates, after hints of a taper, took the Fed by surprise. In other words, they started to lose control and the response was to immediately back off any kind of hawkish stance. And that supports two ideas: (1) that the move in rates was not about an improving economy as the goldilocks crowd tried to suggest; and (2) the Fed’s machinations can never stop unless they are prepared for rates to march much higher.
Senator Robert Corker: “We talked a little bit about the Fed in the early summer began to talk about moderating the pace at which it was going to be making purchases. And the market had a pretty stringent reaction. It was like… the Federal Reserve appeared as if it had touched a hot stove and that this policy was going to greatly affect, if you will, the wealth effect that you were trying to create… And so the Fed jumped back. And it seemed to me - and I think you discussed this a little bit in the office - that the Fed had become a prisoner to its own policy. That to really try to step away from QE3 was really going to shatter possibly the markets and therefore take away from the wealth effect. And I wonder if you could talk a little bit about some of the discussions that were taking place during that time.”
Yellen: “Well, Senator, I don’t think that the Fed ever can be or should be a prisoner of the markets…”
Senator Robert Corker: “But to a degree in this case, it did affect the Fed, did it not?”
Yellen: “Well, we do have to take account of what is happening in the markets, what impact market conditions are likely to have on spending and the economic outlook. So it is the case, and we highlighted this in our statement, when we saw a big jump in rates - a jump that was greater than we would have anticipated from the statements that we made in May and June - and particularly saw mortgage interest rates rise in the space of a few months by over a hundred basis points, we had to ask ourselves whether or not that tightening of conditions in a sector where we were seeing a recovery and a recovery that could really - recovery in housing that could drive a broader recovery in the economy - we did have to ask ourselves whether or not that could potentially threaten what we were trying to achieve. But overall, we are not a prisoner of the markets. I continue to feel that we’re seeing an improvement in the labor market, which was the goal of the program. And we will continue to evaluate incoming data and to make decisions on the program in that light going forward.”
Yellen acknowledges that the move up in rates, after hints of a taper, took the Fed by surprise. In other words, they started to lose control and the response was to immediately back off any kind of hawkish stance. And that supports two ideas: (1) that the move in rates was not about an improving economy as the goldilocks crowd tried to suggest; and (2) the Fed’s machinations can never stop unless they are prepared for rates to march much higher.
Friday, November 15, 2013
More advice from economists
An interesting read over at Stratfor (behind the paywall) about the investigation launched into Germany’s trade surplus. A common refrain in looking at the problems of the Southern European countries is that a Germany which increases domestic demand and endures a bit of inflation will help the EU to survive. But, a few data points to consider:
-Since 2007, the German surplus has mainly been a function of increased exports to non-EU countries. So, while it may be true that the Germans have benefitted from the common currency and access to the EU and Eurozone markets, the sustainability of that surplus is not solely dependent on those factors.
-The other suggestion is that the Germans need to raise wages in order to encourage domestic demand, thereby helping the export sectors of other EU states. But, German wages are already 32% higher than the EU average (even though they have not grown as fast over the past 10 years) and a weaker currency probably only helps those countries from which Germany already has a high level of imports – and they are not really the countries that need the additional help right now (save for France).
All of which means, the only obvious manner to grow wages (as per some economic theory) is through more government spending. Which means the German taxpayer has to bail out the EU. Maybe the benefits outweigh the costs, but remember that the Germans have a deep understanding of what fiscal recklessness can lead to.
-Since 2007, the German surplus has mainly been a function of increased exports to non-EU countries. So, while it may be true that the Germans have benefitted from the common currency and access to the EU and Eurozone markets, the sustainability of that surplus is not solely dependent on those factors.
-The other suggestion is that the Germans need to raise wages in order to encourage domestic demand, thereby helping the export sectors of other EU states. But, German wages are already 32% higher than the EU average (even though they have not grown as fast over the past 10 years) and a weaker currency probably only helps those countries from which Germany already has a high level of imports – and they are not really the countries that need the additional help right now (save for France).
All of which means, the only obvious manner to grow wages (as per some economic theory) is through more government spending. Which means the German taxpayer has to bail out the EU. Maybe the benefits outweigh the costs, but remember that the Germans have a deep understanding of what fiscal recklessness can lead to.
Thursday, November 14, 2013
Small Bites
A few things that I noticed around the internet…
-I liked this article by Bob Murphy that examines the economic problems with Obamacare and why we are headed for a single payer and medical rationing down the road.
-Here’s a piece where Scott Sumner responds to the WSJ op-ed by Andrew Huszar from earlier this week. As you’ll recall, Sumner is a fan of NGDP targeting and supports the large-scale QE programs. But when he writes the following…
“Huszar doesn’t seem to realize that financial-market reactions are the best indication of how these programs are working, indeed the only reliable indication. Everything else (such as borrowing costs) is meaningless without a counterfactual.”
…does anyone else see some inconsistencies in logic? I mean, if it’s really about aggregate demand and GDP growth, why have both metrics continued to stall even as the QE programs have gotten larger? In fact, the financial markets have shown little to no correlation with economic realities.
-Moving on to Japan, this Bloomberg article examines how the BOJ has basically overwhelmed the JGB market and that pricing signals have essentially disappeared. For which there are definite consequences:
“’The JGB market is dead with only the BOJ driving bond prices,” said Tetsuya Miura, the chief bond strategist at Tokyo-based Mizuho, one of the 23 primary dealers obliged to bid at government auctions. “These low yields are responsible for the lack of fiscal reform in the face of Japan’s worsening finances. Policy makers think they can keep borrowing without problems.’”
-I liked this article by Bob Murphy that examines the economic problems with Obamacare and why we are headed for a single payer and medical rationing down the road.
-Here’s a piece where Scott Sumner responds to the WSJ op-ed by Andrew Huszar from earlier this week. As you’ll recall, Sumner is a fan of NGDP targeting and supports the large-scale QE programs. But when he writes the following…
“Huszar doesn’t seem to realize that financial-market reactions are the best indication of how these programs are working, indeed the only reliable indication. Everything else (such as borrowing costs) is meaningless without a counterfactual.”
…does anyone else see some inconsistencies in logic? I mean, if it’s really about aggregate demand and GDP growth, why have both metrics continued to stall even as the QE programs have gotten larger? In fact, the financial markets have shown little to no correlation with economic realities.
-Moving on to Japan, this Bloomberg article examines how the BOJ has basically overwhelmed the JGB market and that pricing signals have essentially disappeared. For which there are definite consequences:
“’The JGB market is dead with only the BOJ driving bond prices,” said Tetsuya Miura, the chief bond strategist at Tokyo-based Mizuho, one of the 23 primary dealers obliged to bid at government auctions. “These low yields are responsible for the lack of fiscal reform in the face of Japan’s worsening finances. Policy makers think they can keep borrowing without problems.’”
Tuesday, November 12, 2013
Interesting Reads
-A peak into how Spanish banks have managed to avoid NPLs even as the economy is in the shitter. The secret…refinance loans that will never get repaid at lower rates.
-The second piece excerpts from Ray Dalio at Bridgewater Associates. Basically, he thinks the Fed has created another bubble in financial assets and QE is losing steam in terms of its effect.
-Next is a piece that looks at how Blackstone and Goldman (among others) are looking to buy single family homes in Spain. Their strategy resembles what they did in the U.S., where they became the market and caused prices to rise. But, at a certain point, that strategy runs out of steam and the market stops going up when they stop buying.
-The final installment is John Hussman’s weekly note. He points out the same things that he always does – this market is overvalued, overbought and overbullish. And while it may stay that way for a while longer, it would be foolish to think that it can go on forever.
-The second piece excerpts from Ray Dalio at Bridgewater Associates. Basically, he thinks the Fed has created another bubble in financial assets and QE is losing steam in terms of its effect.
-Next is a piece that looks at how Blackstone and Goldman (among others) are looking to buy single family homes in Spain. Their strategy resembles what they did in the U.S., where they became the market and caused prices to rise. But, at a certain point, that strategy runs out of steam and the market stops going up when they stop buying.
-The final installment is John Hussman’s weekly note. He points out the same things that he always does – this market is overvalued, overbought and overbullish. And while it may stay that way for a while longer, it would be foolish to think that it can go on forever.
Friday, November 8, 2013
October Jobs
The BLS report came out with 204,000 new jobs for the month, nearly double the consensus estimate.
However…
-The household survey showed a drop of 623,000 full-time workers and 127,000 part-time workers – so much for trying to extrapolate the September numbers that showed an unexpected (and apparently one-time) surge in full-time workers
-No shock, but nearly half the headline number consisted of low-wage jobs (retail, hotel, temps)
-The participation rate dropped to 62.8%, reflecting a loss of 932,000 people from the labor force and the lowest rate since 1978
But, by all means, let’s get very excited about a robust recovery.
However…
-The household survey showed a drop of 623,000 full-time workers and 127,000 part-time workers – so much for trying to extrapolate the September numbers that showed an unexpected (and apparently one-time) surge in full-time workers
-No shock, but nearly half the headline number consisted of low-wage jobs (retail, hotel, temps)
-The participation rate dropped to 62.8%, reflecting a loss of 932,000 people from the labor force and the lowest rate since 1978
But, by all means, let’s get very excited about a robust recovery.
Monday, November 4, 2013
P.S.
As a nice follow-up to my post on Friday, Doug Noland’s weekly piece came out and it is, as usual, a good read. He specifically touches on the subject of monetary velocity and the lack of inflation as measured by CPI. An excerpt:
“The conventional view holds that massive QE has not caused inflation because the Fed’s monetary fuel has remained unused as “reserves” on bank balance sheets. From this viewpoint, inflation risks lurk somewhere out in the future: when the banks eventually lend these “reserves” and the monetary fuel finally makes its way into the real economy. Moreover, the optimistic view holds that the Fed has the tools to adeptly manage any future inflation issue.
I take a much different view. QE is anything but benign. The Fed’s monetary fuel certainly doesn’t just sit inertly on bank balance sheets. Indeed, this monetary inflation is immediately unleashed upon the financial markets, with the newly created “money” setting off a chain-reaction of transactions, flows and market impacts. Over time, this dynamic foments huge distortions in marketplace liquidity, risk perceptions, speculative financial flows, asset prices and market stability. And, somehow, when Fed officials discuss QE they avoid any mention of what have become conspicuous inflationary effects on securities prices.
Fundamentally, the repeated injection of Fed liquidity over time – and especially at key junctures - into the financial markets has created Bubbles increasingly vulnerable to even subtle changes in market perceptions and/or changes to the risk-taking and speculative leveraging backdrop. This is the essence of the so-called “addiction” induced by the Fed’s historic monetary inflation.”
Also, Jack Crooks over at Currency Currents notes the following since the 2008 crisis started:
-Government debt has increased $30 trillion
-Central Bank balance sheets have grown $10 trillion
-Private debt has grown $22 trillion
-Stock market capitalizations have risen by $26 trillion
And with all of that, global GDP has grown $8 trillion. In other words, financial assets have increased 11 times relative to underlying real assets upon which those financial assets are supposed to be a claim. Unsustainable. Even if you just focus on central bank balance sheets, you still don't see any one-for-one correlation. Not good.
“The conventional view holds that massive QE has not caused inflation because the Fed’s monetary fuel has remained unused as “reserves” on bank balance sheets. From this viewpoint, inflation risks lurk somewhere out in the future: when the banks eventually lend these “reserves” and the monetary fuel finally makes its way into the real economy. Moreover, the optimistic view holds that the Fed has the tools to adeptly manage any future inflation issue.
I take a much different view. QE is anything but benign. The Fed’s monetary fuel certainly doesn’t just sit inertly on bank balance sheets. Indeed, this monetary inflation is immediately unleashed upon the financial markets, with the newly created “money” setting off a chain-reaction of transactions, flows and market impacts. Over time, this dynamic foments huge distortions in marketplace liquidity, risk perceptions, speculative financial flows, asset prices and market stability. And, somehow, when Fed officials discuss QE they avoid any mention of what have become conspicuous inflationary effects on securities prices.
Fundamentally, the repeated injection of Fed liquidity over time – and especially at key junctures - into the financial markets has created Bubbles increasingly vulnerable to even subtle changes in market perceptions and/or changes to the risk-taking and speculative leveraging backdrop. This is the essence of the so-called “addiction” induced by the Fed’s historic monetary inflation.”
Also, Jack Crooks over at Currency Currents notes the following since the 2008 crisis started:
-Government debt has increased $30 trillion
-Central Bank balance sheets have grown $10 trillion
-Private debt has grown $22 trillion
-Stock market capitalizations have risen by $26 trillion
And with all of that, global GDP has grown $8 trillion. In other words, financial assets have increased 11 times relative to underlying real assets upon which those financial assets are supposed to be a claim. Unsustainable. Even if you just focus on central bank balance sheets, you still don't see any one-for-one correlation. Not good.
Friday, November 1, 2013
Around the Web
-I read Scott Sumner’s blog today and he has a new post about reforms to the healthcare system that marry well with the good ideas in David Goldhill’s book. Specifically, the main reform should be to provide everyone with a health savings account and then insurance (perhaps even a single payer) for catastrophic events. It brings in market concepts (as individuals have to be thoughtful about spending for the non-existential stuff) and yet still satisfies those who endorse state intervention and an end to private insurance.
-Speaking of Sumner, he gets credit for pointing out that fiscal stimulus is not a game-changer in the way that some would like us to believe. Specifically, the Fed is always in a position to temper the fiscal side through its conduct of monetary policy and manipulation of rates. In other words, the Fed is much more important. Which then got me thinking about the counter-argument, which is that while the Fed can print money, it ultimately has no control over its velocity. In other words, they can only play defense. Both sides agree, though, that expectations are very important.
So, what do I think? I continue to read a lot of people who believe in a deflationary threat. But, in that battle between inflation and deflation, the Fed always gets another turn at bat. So, if it’s inflation they want, it’s inflation they’ll get. But, how do you work through the issue of velocity?
And here’s where the ephemeral “expectations” piece matters. As we continue to struggle through a low growth, weak employment world, two things should eventually happen: (1) people will realize that the Fed does not have a handle on things and is trapped in the current policy stance; and (2) as the desired results continue to be elusive, the Fed will amp up (rather than taper) its efforts. Between those two realities, dynamics will change as well as the expectations for inflation. And the Fed won’t be able to do a thing about it, unless they are finally prepared to enable the recession/depression that they have tried so hard to prevent.
-Speaking of Sumner, he gets credit for pointing out that fiscal stimulus is not a game-changer in the way that some would like us to believe. Specifically, the Fed is always in a position to temper the fiscal side through its conduct of monetary policy and manipulation of rates. In other words, the Fed is much more important. Which then got me thinking about the counter-argument, which is that while the Fed can print money, it ultimately has no control over its velocity. In other words, they can only play defense. Both sides agree, though, that expectations are very important.
So, what do I think? I continue to read a lot of people who believe in a deflationary threat. But, in that battle between inflation and deflation, the Fed always gets another turn at bat. So, if it’s inflation they want, it’s inflation they’ll get. But, how do you work through the issue of velocity?
And here’s where the ephemeral “expectations” piece matters. As we continue to struggle through a low growth, weak employment world, two things should eventually happen: (1) people will realize that the Fed does not have a handle on things and is trapped in the current policy stance; and (2) as the desired results continue to be elusive, the Fed will amp up (rather than taper) its efforts. Between those two realities, dynamics will change as well as the expectations for inflation. And the Fed won’t be able to do a thing about it, unless they are finally prepared to enable the recession/depression that they have tried so hard to prevent.
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