August 10

Economic outlook: slip-sliding away. Anthony Hall, UPI.

It is open to question what the Fed might do about a recovery that is slipping away, but the first task at hand is to name the problem. Is deflation an imminent threat? Some on the Fed's Open Market Committee say it is, including Boston Fed President Eric Rosengren and St. Louis bank President James Bullard, who recently warned a potential "Japanese-style deflationary trend" could be developing.... Entrenched in its "first, do no harm" mentality, the Fed has not whispered any official consensus on deflation.

What will happen if the Fed stops paying interest on reserves? Andy Harless.
lots of things; but at the end of the day, says Harless,

All in all, we get a mild economic stimulus at the price of some substantial disruptions to the financial system.

More from Harless:
Inflation targeting when the natural interest rate is negative.

When the natural interest rate is negative, since it’s impossible to cut nominal interest rates much below zero, the only way to get back to normal is to create an expectation of inflation. If the nominal interest rate is zero and the inflation rate is positive, then the real interest rate is negative; thus it is possible, with a sufficient amount of expected inflation, to set the real interest rate down to the negative natural rate. But how can that inflation be achieved? Wicksell argues that prices rise when the actual interest rate falls below the natural rate, but in order for that to happen, prices must already be expected to rise. Can a central bank pull itself up by its own bootstraps?

The answer is almost certainly yes, since nearly everyone agrees that a sufficiently reckless central bank will always be able to produce a high inflation rate. (Imagine the Fed buying up the entire national debt, along with all the private sector’s offerings of commercial paper, mortgages, corporate bonds, and so on. Eventually, there will be inflation.) The problem is that it is hard to estimate in advance how aggressive monetary policy needs to be in order to produce the needed expectation of inflation. Not only doesn’t the central bank know what actions would produce a given “happy medium” target between too-low and too-high inflation expectations; it never really even knows what the natural interest rate is, so it doesn’t know how much inflation would be enough to get the real rate down to the natural rate.

If the central bank estimates wrong and overshoots, it risks a period of very high, and unnecessarily high, inflation. If (as seems infinitely more likely to me) it estimates wrong and undershoots, it risks reducing its credibility, so that it becomes more difficult, subsequently, to achieve the necessary inflation rate. (Note BTW that if you take the Mankiw Rule as an estimate of the natural interest rate, then the Fed’s current 2% inflation target is not high enough: the Fed is on a course to fail and thereby reduce its subsequent credibility.)

Economic pessimists gain cachet. NYT.
Not a lot of meat on this bond, but a few snippets:
Albert Edwards of SocGen forecasts a "bloody, deep recession", stocks down at least 60%, then money printing leading to very high inflation; Edwards says that even he gets depressed reading stuff from Bob Janjuah, soon to be at Nomura after leaving RBoS; Raoul Pal is betting that "the United States economy is not just about to enter a double-dip recession but that it will be far worse than anything experienced in the lifetime of anyone younger than 70."

For more meat, at least from Edwards, see:
Albert Edwards Explains How The Leading Indicator Is Already Back Into Recession Territory And Why The Japan "Ice Age" Is Coming. ZeroHedge.

T2 Partners Monthly Letter. Whitney Tilson.

In general, we believe that in the aftermath of the bursting of the biggest asset bubble in history, we are in uncharted waters and there is a very wide range of possible outcomes over the next 2-7 years. Broadly speaking, they fall into three scenarios:

1) A V-shaped economic recovery with strong GDP growth (3-5%), a falling unemployment rate, and reduced government deficits. Under this scenario, the stock market would likely compound at 7-10%.

2) A “muddle-through” economy with weak GDP growth (1-2%), unemployment remaining high (7-9%), and continued government deficits. Under this scenario, the stock market would likely compound at 2-5%.

3) A double- (and triple-, and quadruple-) dip recession where periods of growth are followed by periods of contraction, with no overall GDP growth, unemployment around 10% (with the actual level higher due to people giving up looking for work), and large deficits as the government tries to stimulate the economy (but with little impact). Under this scenario, which looks like what Japan has gone through for more than two decades, the stock market would be flat to down.

Both as investors and as Americans, we’re of course hoping for 1), but fear that this is the least likely of these scenarios. A few months ago, we would have guessed (and it’s no more than an educated guess) that the odds were 25%, 50% and 25%, respectively, but in light of recent weak economic indicators, the odds have shifted unfavorably. Hence, we are positioning our portfolio more conservatively

a couple of points: he doesn't give revised probabilities, other than to say (1) is now least likely; well, duh; question is, what's more likely? 2 or 3? I believe 3; and the odds I'd give are 65-35. But I do not buy his version of 3. In the 3 I envision, the stock market would have no chance of just being flat.

Four defamations of the apocalypse. David Stockman (was a director of the OMB under Reagan), NYT.

QE take II: uncharted territory. Mish.

The Known
1. Structural problems (tide of debt, demographics, etc) are numerous.
2. Stocks are not cheap if you factor in quality of earnings, dividends, historical PEs, etc. Stocks only "appear" cheap if you believe forward earnings estimates in the face of those structural problems.
3. Buying stocks in the face of such structural issues, at a time when they are not cheap is highly likely to yield poor results.
4. It is difficult if not impossible to time the effect (if any) of quantitative easing. In fact, we may have already seen it in advance.
5. Gold is in a long-term bull market with its monthly trendlines intact. Other than treasuries, not much if anything else is.

Stoneleigh takes on John Williams: deflation it is. Automatic Earth.
very good summary of the deflation argument, one I concur with wholeheartedly

China visit: economic report. Simon Hunt, via Credit Writedowns.

In all likelihood, China has entered the most critical and taxing period since the country was reopened to the outside world in the 1970s. Domestically, there are a slew of issues, any one of which could create instability. These issues include:

Home affordability
Leadership instability
A potential if not actual housing bubble
The rising income and wealth differential between those who have made it and those who have not
The country’s continued dependence on exports as its principal driver of growth
Cheap credit, which punishes savings and encourages investment/speculation
The misallocation of capital that springs from the previous factor
Local/provincial government indebtedness
A new assertiveness and arrogance at all levels
Policy making that focuses on short-termism without addressing structural and longer-term issues, etc.
Impact of rising wages
Energy intensity
Role of foreign companies
Resource dependability – water, raw materials, etc.

The list could go on, but these issues are evolving at a time when the global environment is fraught with difficulties and uncertainty, making policy making within China that much more complex.

The mother of all bubbles. Bud Conrad, Casey Research.

Fear empty flats in China's property bubble. Andy Xie, Caixin Online.

on the other hand, Clay Fisher takes exception to some of Xie's assumptions in:
Behind Andy Xie's China Housing Numbers.


I havent't done a BP link in a while, because BP's coverup policy has been successfully fooling the mainstream media recently, but in case you thought all was well now, read this:

BP's Insidious Coverup and Propaganda Campaign: Out of Sight, Out of Mind. Dahr Jamail, Global Research.ca

In late April, after the Deepwater Horizon rig exploded and sank into the depths and the Macondo well began gushing oil, BP and the complicit Coast Guard announced no oil was being released. The Gulf Restoration Network flew out to the scene and saw massive amounts of oil and sounded the alarm, which forced BP and the US government to admit there was, indeed, oil. Such has the trend of BP/US Government lying, countered by (sometimes) forced accountability, then to more lying, been set.

Thus has the BP spill been handled in a P.R. sense no different than the Soviets handled Chernobyl.

When the disaster at Chernobyl occurred, it was only after radiation levels triggered alarms at the Forsmark Nuclear Power Plant in Sweden that the Soviet Union admitted an accident had even occurred. Even then, government authorities immediately began to attempt to conceal the scale of the disaster. Sound familiar?

for instance, carcasses of whales and other sea creatures are being sent to secret locations for disposal:

the numbers of birds, fish, turtles, and mammals killed by the use of Corexit will never be known as the evidence strongly suggests that BP worked with the Coast Guard, the Department of Homeland Security, the FAA, private security contractors, and local law enforcement, all of which cooperated to conceal the operations disposing of the animals from the media and the public

also, though BP claims/insists that it is doing all it can to clean up the oil; problem is, cleaning the mess is a lot harder and more expensive than hiding it, so when they do hear of oil slicks, rather than sending in the clean-up operations "BP is using night flights to drop dispersant on oiled bays"

much more at Washington's Blog

also at Mother Jones, in The BP Cover-Up. Julia Whitty.

Deepwater Horizon is different from any other spill in human history. The extreme technology used to drill at unprecedented depths lacks the extreme safety equipment and protocols needed to stave off disaster. BP, gambling at the border of controllable engineering, has lost spectacularly in its bid to be the deepest and cheapest driller of them all....

BP and its partners have transformed themselves into modern-day pirates, operating beyond law or conscience. Their reckless quest has endangered and perhaps condemned not just the Gulf Coast, but the largest, richest, most pristine, most biologically important, and last completely unprotected ecosystem left on Earth: the deep ocean.... The relatively small amounts of oil washing ashore, and the relief felt when the surface oil began to dissipate, hardly account for the devastation being wrought in the dark world beyond our sight.

Sadly, one of the other most vocal truth-telling critics of BP, Matt Simmons, passed away recently.


and here's a more positive energy-related one:
It can be done, and quickly. Sudden Debt.


other fare:
Why socialism? Albert Einstein.
interesting how something written so long ago can strike such a chord today