Skeptical Investment: August 29

Sunday, August 29, 2010

August 29

Don't aim at success. The more you aim at it and make it a target, the more you will miss it. For success, like happiness, can not be pursued; and it only does so as the unintended side-effect of one's dedication to a cause greater than oneself or as the by-product of one's surrender to a person other than oneself. Happiness must happen and the same holds for success: you have to let it happen by not caring about it. I want you to listen to what your conscience commands you to do and go on to carry it out to the best of your knowledge. Then you will live to see -- in the long run, I say! -- success will follow you precisely because you had forgotten to think of it.
Viktor Frankl

What was the most important news on Friday?
That the downward revision in Q2's GDP growth wasn't as bad as expected (which, it seemed, prompted stocks to rally and bond's to sell off)?
Or the fact that Intel cut its forecasts?
Or that Ben revealed he's running low on bullets and isn't sure they're not "blanks"

The economic outlook and monetary policy. Ben.
growth has been less vigorous than expected; but economy will expand modestly in H2; and growth will pick-up next year; based on that, further stimulus should not be necessary; in fact, the Fed has not agreed on any specific triggers for further action; there are costs/risks associated with new policy tools; but if deflation risks increased, the the benefit-cost tradeoffs of new policy tools would become significantly more favourable; if necessary, first step would be to expand Fed's holdings of long-term securities; other steps could include changing the extended period language and reducing interest paid on reserves; the idea for communicating a higher inflation target has no support on the FOMC

Bernanke's speech: a big tease. David Beckworth.

What Bernanke doesn't understand about deflation. Steve Keen.
Keen finds it more than curious that Ben's speech "didn’t contain one reference to the key force driving the American economy right now: private sector deleveraging"
This is a must-read post; it goes into much more detail, including how B.B. still doesn't really understand Irving Fisher's debt-deflation dynamics, but here's how it starts:

The reason the US economy is not recovering from this crisis is because all sectors of American society took on too much debt during the false boom of the last two decades, and they are now busily getting themselves out of debt any way they can.

Debt reduction is now the real story of the American economy, just as real story behind the apparent free lunch of the last two decades was rising debt

"I was wrong again!" What Ben Bernanke meant to say. Andrew Leonard, Salon.

Why the U.S. economy is weak. Ed Harrison.

With this macro background, where does that leave us today?
1.With still weak job and income growth. (Consumer Spending -Income impact)
2.With a 12-month supply of existing homes and still elevated home price to income
ratios. (Consumer Spending – wealth impact)
3.With still indebted consumers still near peak debt service to income ratios. (Consumer Spending – debt impact)
4.With a large and politically unsustainable budget deficit and a declining addition from stimulus already in the pipeline. (Fiscal Policy)
5.With a Fed chastened by its foray into fiscal policy and near zero interest rates that leave no way to stimulate via rate cuts. (Monetary Policy)

i.e. all that leaves is trade and business investment, neither of which look too hot, either

Inside the BEA's latest numbers. Consumer Metrics Institute, via Pragmatic Capitalist.

Barring some sudden reversal in consumer attitudes and habits, the 2010 economic slowdown will be longer and at least as painful as the one experienced in 2008. Furthermore, the shape of this contraction event indicates that it is probably not an independent “double dip”, but simply a continuation of the “Great Recession” of 2008 after a few quarters of now lapsed consumer stimulation.

(chart from Doug Short)

The bubble that isn't. Daniel Gross, Slate.

220 years of 10-yr bond yields:

This is not a recovery. Paul Krugman, NYT.

Will the economy actually enter a double dip, with G.D.P. shrinking? Who cares? If unemployment rises for the rest of this year, which seems likely, it won’t matter whether the G.D.P. numbers are slightly positive or slightly negative. All of this is obvious. Yet policy makers are in denial.

okay, so most people can agree that's the problem; problem is, what's the solution??

Krugman has a number of ideas, none of which he's sure will work, but all of which he's sure are worth trying in case they might work

but, as per the following, most of P.K.'s suggestions are infeasible or have huge risks:

Krugman's solution -- NITRO. Bruce Krasting.

Procrastination on foreclosures now blatant, may backfire. American Banker.

Widespread fear freezes housing markets. Joe Nocera, NYT.

2 charts: all you need to know about Canada's housing bubble. VREAA.