This will be the last entry on this blog.
I have decided that blogging has not been good for my mental health.
I have been off work now since May 13 on a leave of absence for mental health reasons, having been suffering from anxiety attacks and other symptoms of depression since January.
If you read my very first post from December, its clear that I was already suffering some (more muted) form of depression.
I had thought that having an outlet for my thoughts would -- as in a process of venting -- help me --- both when I started the blog while I was still working, and more recently while absent from work. I had also thought that keeping apprised of what's going on in the world, and contributing my own particular viewpoint, whether through original posts of my own, or, more commonly, via collections of what I viewed as worthwhile reading of other people's material that I thought was particularly germane or insightful, would be useful earlier on, and would continue to be useful by helping alleviate my guilt for not being at work as it would provide an avenue to continue contributing to my colleagues' investment research.
I'd taken breaks from posting in the past (February, and parts of June), when things were particularly bad for me. But, frankly, short breaks then resuming blogging is not the answer. I need to shut it down.
I hope to blog again in the future --- but it won't be at this site. This site is just too affiliated to my recent problems. I probably won't wait until I can give the sunny-side up story, because I remain less than confident that the sunny-side up/green shoots/recovery story will prevail in the near-term; but that's just me.
In any case, I'll at least wait until I, if not the economy, have recovered from my depression.
I don't know when I'll be back at work. I hope sooner rather than later ---- but I had sincerely hoped I'd be back by/before now.
The meds I started on in February have been helping, but not doing the full job. So I needed a 2nd med. And the second meds I started in March, and ramped up in April, ended up causing much more harm than good. So I then had to be weaned off them and started onto something new. That transition was fun --- not! In any case, the worst of the bad stuff that was going on in May has mostly gone away (extreme headaches and suicidal thoughts) but I'm otherwise not yet actually any better. Still an emotional wreck; still have episodes triggered by auditory signals (volume/pitch); still have a limited resevoir of energy, emotional and otherwise, to get me through each day; still have headaches all the time (though not the vise-like ones); still am tired all the time, typically having meltdowns in early evening (despite sleeping in to 8:30 or 9:30), and, if I don't get 10 hours sleep, am a wreck the next day.
Anyways, enough personal babbling.
This blog is over.
Thanks for reading.
Best to all.
Cheers,
M
p.s. though there will be no new posts, I will leave the blog active so that my old posts are still accessible and, more importantly, so that my sidebar links remain accessible. I don't know how long I can go without posting new posts before Blogger shuts it down.
Friday, July 3, 2009
Tuesday, June 30, 2009
Worthwhile Reading - anytime
"What can I do?" Robert Reich. (not sure letters from Canadians will help, but couldn't hurt)
Betraying the planet. Paul Krugman, NYT.
Temperature trends; and Scary picture. Krugman's blog.
Betraying the planet. Paul Krugman, NYT.
Temperature trends; and Scary picture. Krugman's blog.
Thursday, June 18, 2009
Worthwhile Reading - June 13 to 18
Where are we now? Five point summary. Simon Johnson, The Baseline Scenario.
Do you see what I see? James Hamilton, Econbrowser.
SocGen: Expect new equity lows in H2; China is the global Achilles heel. Zero Hedge.
Where are profits going? Sudden Debt.
Bankers are scared. Are you? Gary North.
Do you see what I see? James Hamilton, Econbrowser.
SocGen: Expect new equity lows in H2; China is the global Achilles heel. Zero Hedge.
Where are profits going? Sudden Debt.
Bankers are scared. Are you? Gary North.
Friday, June 12, 2009
Worthwhile Reading - June 12
Just who bought all the Treasuries issued in late 2008 and early 2009? Brad Setser.
those of us who compare the U.S. now to Japan in the '90s often get shot down by critics who point to the fact that Japan had a huge pool of domestic savings, whereas the U.S. relies on foreign creditors; therefore, although the economic dynamics may be similar (aging demographics, crashed housing bubble and stock market bubble, messed up banking system, similar monetary and fiscal policy attempts (albeit with different timing), sub-potential economic growth, disinflationary if not deflationary predilections due to excess capacity, deleveraging, etc.), the interest rate outcome can't be the same; my counterpoint, influenced largely by Rosie, has been that U.S. household balance sheets have historically (VERY) low levels of bond holdings, and that the impetus to save (pay down debt and re-build retirement portfolios) left plenty of scope for domestic financing of incremental government debt; so, although the U.S. was starting from a low level of savings, that was immaterial (its not the stock the matters, its the flows) and on a prospective basis, that level of U.S. savings was bound to pick up significantly; and even if households themselves do not hold Treasuries outright in their own names, by paying down debt to financial institutions, those institutions could also be the new marginal buyers of Treasuries (what? they're going to lend out that extra cash to other households who are also trying to save? they're going to lend out that extra cash to businesses that are retrenching?).
As per Setser, the expert in the field of tracking fund flows,
Central bank custodial holdings continue to rise — just look at the last week’s custodial data. But the world’s central banks are no longer buying up all the debt the Treasury issuing. And Americans are now saving, creating a new pool of funds that needs to be lent out. Moreover, the financial sector isn’t borrowing — it actually is scaling back — which means that the household sector is lending less to financial firms, freeing up funds to flow into the Treasury market. Obviously, the price that pulls US investors into Treasuries matters greatly. But the basic sources of demand for the huge amount of Treasuries the US is now issuing aren’t really a mystery.... [W]e aggregated Treasuries held by mutual funds with Treasuries held directly by households. At the end of 2008 mutual funds were the main buyers of Treasuries. In q1 2009, though, households themselves were the main buyers of Treasuries.
Price stability and the monetary base. David Altig, of the Atlanta Fed, at his macroblog.
why anyone worries about what Art Laffer is saying, like worrying about what Ben Stein is saying, seems to me a waste of time and energy; one could just accept at face value that they live in their own little worlds and there should be little expectation of them always making sense (but guys like Felix Salmon picked up the "Ben Stein Watch" thing once Brad deLong got tired of it)
in any case, Altig felt it worthwhile to combat Laffer's assertions about what the increase in the monetary base means and whether or not the Fed is up to the task of taking away the stimulus when the time is right, most importantly pointing out that the reason to be concerned that monetary base expansion would be inflationary is if there was expansion in loan growth; but, as Altig says,
but in my opinion it is a bit of a stretch—so far, at least—to correlate monetary base growth with bank loan growth: [see his chart]... Let's call that more than a bit of a stretch.
The fiscal black hole in the U.S. and a follow-up, Limits to inflating away debt, and political commitments to future public spending. William Buiter, Maverecon.
Rebalancing the U.S.-China economic relationship. Kenneth Rogoff, Project Syndicate.
main point, just as Pettis, Roach and others have argued: if everyone is just trying to get things back to normal --- the same normal that relied on global imbalances --- then short-run stability might be achieved, but only at the expense of another (greater) financial crisis down the road
As global slump is set to continue, poor countries need more help. World Bank.
The world economy is set to contract this year by more than previously estimated, and poor countries will continue to be hit hard by multiple waves of economic stress, said World Bank Group President Robert B. Zoellick today. Even with the stabilization of financial markets in many developed economies, unemployment and under-utilization of capacity continue to rise, putting downward pressure on the global economy. According to the latest Bank estimates, the global economy will decline this year by close to 3 percent, a significant revision from a previous estimate of 1.7 percent.
Is Eastern Europe on the brink of an Asia-style crisis? Nouriel Roubini, Forbes.
China's case of the missing cars. Stuart Burns, MetalMiner.
more games being played with China's data:
There are some apparently contradictory numbers coming out of China at the moment. Take those car sales as an example. Our man on the ground tells us BYD, a noted Chinese car maker, reported 30,000 car sales of one model by end of last year, but the number plate agency recorded only 10,000 new cars of that model registered for use on the road. What happened to the other 20,000 are they running around without number plates? In a police state, I don’t think so. Our understanding is auto sales are recorded in China when they leave the factory, not when they are registered on the road, so dealers can build up inventory while car “sales” are rising.
Coming back to Mr. Setser in a fine analysis on the impact of a fall in China’s exports he explores the apparent dichotomy of falling electricity consumption, falling industrial production and yet rising GDP. Even Mr. Setser wasn’t able to conclusively get to the bottom of that one although his overall conclusion was that the economy was growing and it must largely be on the back of domestic consumption as exports and employment remain depressed.
These disconnects call into question our tendency to take official proclamations at face value, and we should also be careful about taking one or two months data and extrapolating that to a longer term trend. In a market so heavily influenced by state controls, a short term trend can be the distorted result of government actions rather than the more reliable measure of a sum of company actions taken over an unfettered economy. Growing China certainly is a trend, but how comprehensively across the economy and how sustainably remains to be seen.
Recent average CDS auction recovery rate? 10%. Tylder Durden, Zero Hedge.
so much for that 40% assumption
Thinking the unthinkable: the Treasury black swan, and the LIBOR-UST inversion. Zero Hedge again.
food for thought; as Durden says, "now that we have gotten to a point where 6 sigma events are a daily ocurrence, it might be prudent to consider all the alternatives"
Where does the public sector end and the private sector begin? Ian Lienert, IMF Working Paper.
haven't read this yet, but got to do so to see if it furthers the point made earlier (let it be resolved, there is no credit market)
*** The household driven deflation? Tylder Durden again, with some Rosenberg included.
True or false: economic stats lie? SmartMoney.
mostly about John Williams and his ShadowStats.
those of us who compare the U.S. now to Japan in the '90s often get shot down by critics who point to the fact that Japan had a huge pool of domestic savings, whereas the U.S. relies on foreign creditors; therefore, although the economic dynamics may be similar (aging demographics, crashed housing bubble and stock market bubble, messed up banking system, similar monetary and fiscal policy attempts (albeit with different timing), sub-potential economic growth, disinflationary if not deflationary predilections due to excess capacity, deleveraging, etc.), the interest rate outcome can't be the same; my counterpoint, influenced largely by Rosie, has been that U.S. household balance sheets have historically (VERY) low levels of bond holdings, and that the impetus to save (pay down debt and re-build retirement portfolios) left plenty of scope for domestic financing of incremental government debt; so, although the U.S. was starting from a low level of savings, that was immaterial (its not the stock the matters, its the flows) and on a prospective basis, that level of U.S. savings was bound to pick up significantly; and even if households themselves do not hold Treasuries outright in their own names, by paying down debt to financial institutions, those institutions could also be the new marginal buyers of Treasuries (what? they're going to lend out that extra cash to other households who are also trying to save? they're going to lend out that extra cash to businesses that are retrenching?).
As per Setser, the expert in the field of tracking fund flows,
Central bank custodial holdings continue to rise — just look at the last week’s custodial data. But the world’s central banks are no longer buying up all the debt the Treasury issuing. And Americans are now saving, creating a new pool of funds that needs to be lent out. Moreover, the financial sector isn’t borrowing — it actually is scaling back — which means that the household sector is lending less to financial firms, freeing up funds to flow into the Treasury market. Obviously, the price that pulls US investors into Treasuries matters greatly. But the basic sources of demand for the huge amount of Treasuries the US is now issuing aren’t really a mystery.... [W]e aggregated Treasuries held by mutual funds with Treasuries held directly by households. At the end of 2008 mutual funds were the main buyers of Treasuries. In q1 2009, though, households themselves were the main buyers of Treasuries.
Price stability and the monetary base. David Altig, of the Atlanta Fed, at his macroblog.
why anyone worries about what Art Laffer is saying, like worrying about what Ben Stein is saying, seems to me a waste of time and energy; one could just accept at face value that they live in their own little worlds and there should be little expectation of them always making sense (but guys like Felix Salmon picked up the "Ben Stein Watch" thing once Brad deLong got tired of it)
in any case, Altig felt it worthwhile to combat Laffer's assertions about what the increase in the monetary base means and whether or not the Fed is up to the task of taking away the stimulus when the time is right, most importantly pointing out that the reason to be concerned that monetary base expansion would be inflationary is if there was expansion in loan growth; but, as Altig says,
but in my opinion it is a bit of a stretch—so far, at least—to correlate monetary base growth with bank loan growth: [see his chart]... Let's call that more than a bit of a stretch.
The fiscal black hole in the U.S. and a follow-up, Limits to inflating away debt, and political commitments to future public spending. William Buiter, Maverecon.
Rebalancing the U.S.-China economic relationship. Kenneth Rogoff, Project Syndicate.
main point, just as Pettis, Roach and others have argued: if everyone is just trying to get things back to normal --- the same normal that relied on global imbalances --- then short-run stability might be achieved, but only at the expense of another (greater) financial crisis down the road
As global slump is set to continue, poor countries need more help. World Bank.
The world economy is set to contract this year by more than previously estimated, and poor countries will continue to be hit hard by multiple waves of economic stress, said World Bank Group President Robert B. Zoellick today. Even with the stabilization of financial markets in many developed economies, unemployment and under-utilization of capacity continue to rise, putting downward pressure on the global economy. According to the latest Bank estimates, the global economy will decline this year by close to 3 percent, a significant revision from a previous estimate of 1.7 percent.
Is Eastern Europe on the brink of an Asia-style crisis? Nouriel Roubini, Forbes.
China's case of the missing cars. Stuart Burns, MetalMiner.
more games being played with China's data:
There are some apparently contradictory numbers coming out of China at the moment. Take those car sales as an example. Our man on the ground tells us BYD, a noted Chinese car maker, reported 30,000 car sales of one model by end of last year, but the number plate agency recorded only 10,000 new cars of that model registered for use on the road. What happened to the other 20,000 are they running around without number plates? In a police state, I don’t think so. Our understanding is auto sales are recorded in China when they leave the factory, not when they are registered on the road, so dealers can build up inventory while car “sales” are rising.
Coming back to Mr. Setser in a fine analysis on the impact of a fall in China’s exports he explores the apparent dichotomy of falling electricity consumption, falling industrial production and yet rising GDP. Even Mr. Setser wasn’t able to conclusively get to the bottom of that one although his overall conclusion was that the economy was growing and it must largely be on the back of domestic consumption as exports and employment remain depressed.
These disconnects call into question our tendency to take official proclamations at face value, and we should also be careful about taking one or two months data and extrapolating that to a longer term trend. In a market so heavily influenced by state controls, a short term trend can be the distorted result of government actions rather than the more reliable measure of a sum of company actions taken over an unfettered economy. Growing China certainly is a trend, but how comprehensively across the economy and how sustainably remains to be seen.
Recent average CDS auction recovery rate? 10%. Tylder Durden, Zero Hedge.
so much for that 40% assumption
Thinking the unthinkable: the Treasury black swan, and the LIBOR-UST inversion. Zero Hedge again.
food for thought; as Durden says, "now that we have gotten to a point where 6 sigma events are a daily ocurrence, it might be prudent to consider all the alternatives"
Where does the public sector end and the private sector begin? Ian Lienert, IMF Working Paper.
haven't read this yet, but got to do so to see if it furthers the point made earlier (let it be resolved, there is no credit market)
*** The household driven deflation? Tylder Durden again, with some Rosenberg included.
True or false: economic stats lie? SmartMoney.
mostly about John Williams and his ShadowStats.
Tuesday, June 9, 2009
Worthwhile Reading - June 6 to 11
The depression quietly deepens. Ambrose Evans-Pritchard, Telegraph.
intro:
Those of us who still question whether the world has purged its toxins are reduced to the same tiny band of moaning Druids from early 2007, when we shook our heads in disbelief as the carry trade swept Iceland to fresh madness and bankers laughed off sub-prime rot at Bear Stearns.
key excerpt:
Yes, the Baltic Dry Index for bulk shipping of resources has quadrupled since January, but this reflects China's bid to stockpile metals while prices are low.
Stephen Roach, Morgan Stanley's Far East chief, fears an "Asian Relapse", saying the region is prisoner to its fatal dependency on exports to the West. The export share of GDP has risen from 36pc to 47pc across developing Asia over the last decade.
"China's incipient rebound relies on a time-worn stimulus formula: upping the ante on infrastructure spending in anticipation of an eventual rebound of global demand," he said. The strategy cannot work this time because Americans have exhausted their credit, and their desire to borrow. Consumption will fall from its peak of 72pc of GDP to the "pre-bubble norm" of 67pc, if not more.
David Rosenberg from Gluskins Sheff expects Americans to retrench ferociously as 78m baby boomers face the looming threat of penury in old age. "The big story is that the personal savings rate hit a 15-year high of 5.7pc in April. I believe it could test the post-War peak of 15pc. Too many pundits are still living in the old paradigm of Americans shopping till they drop," he said.
If he is right, this will shatter the surplus economies of China, Japan, and Germany, unless they adjust fast to the new world order.
Europe swings right as depression deepens. Evans-Pritchard again.
excerpts:
The savings rate is rocketing in the deficit states of the US, UK, Spain, et al, as the "sinners" belatedly tighten their belts, but their fall in consumption is not being matched by an offsetting rise among the surplus "saints" states, China, Japan, Germany-Netherlands, which all points to an implosion in world demand. Yes, the West is printing money. But that is a harder to trick to pull off than Friedman and Bernanke ever realized....
So, we may lose three or four governments in Europe in coming days or weeks -- or even worse, they may survive. The drama is unfolding as I feared. Half way through the depression, we are facing the exactly the sort of political disintegration that occurs in times of profound economic rupture. Remember, the dangerous phase in the Great Depression was Stage II, after the collapse of Austria's Credit-Anstalt in mid-1931 set off a disastrous chain-reaction that Autumn (until then, most people thought they faced no more than a bad recession, like today).
The green shoots crowd liked the NFP labour market data, but looking at the jobs data detail (including that the B/D model has "added" 220k more jobs yet again; and there were 790k more unemployed), its hard to see why; for starters, Menzie Chinn shows some charts which certainly make the prevailing wisdow questionable, in:
James Pethokoukis: "An improving job market"[?] at Econbrowser.
and a member of the NBER Business Cycle Dating Comittee had this to say:
The labour market has NOT yet signaled a turning point. Jeffrey Frankels blog.
excerpt:
all of us [on the NBER business cycle dating comittee] agree, on the one hand, that a decline in economic activity is a decline in economic activity, and therefore still a state of recession, even if the rate of decline has moderated a lot. But I believe that we also agree, on the other hand, that employment is usually a lagging indicator of economic activity. [emphasis on "usually" is mine (see below)]...
Unfortunately, as reported by Forbes, pursuing this logic leads to second thoughts about whether the most recent BLS announcement was really good news after all. The length of the average work week fell to its lowest since 1964!
and then there's this:
Jobless recovery redux? Federal Reserve Bank of San Fran.
the study compares labour market data to that in past recessions and the conclusions are pessimistic on the prospects of a labour market recovery ---- agreed on that front, but I just don't see how in a balance-sheet recession you get any "recovery" without jobs/income growth.
meanwhile, amidst lousy labour market, with the employment-population ratio under 60% for the first time since the early 1980s (when there was a structurally/demographically different labour market profile) there's this...
Why home prices may keep falling. Robert Shiller, NYT.
Home prices in the United States have been falling for nearly three years, and the decline may well continue for some time.
and this...
Consumer credit declines at 7% annual rate in April. Calculated Risk.
and this...
Mortgage market remains solidly frozen. Michael Shedlock.
and this...
Flow of Funds Accounts of the United States, First Quarter 2009. Federal Reserve.
household net worth down again, down to $50T, and both business debt and household debt contracted in the first quarter
and this...
The still over-leveraged consumer. Barry Ritholtz.
and, as per Rosie above, there's little reason to think this trend of increased savings is over.
i.e. aggregate income falling + consumers saving up = consumption falling faster than income => AD < as =""> output gap increasing => no incentive for biz investment -------- govt trying to fill the gap, but seems like a vicious circle to me
which is why...
The economy is still at the brink. Sandy Lewis and William Cohan, NYT.
though there is:
An easing pace of deterioration in some major economies. OECD Composite LEI.
but...
Japan, China and German green shoots looking doubtful. Yves Smith.
and Smith also points out that "China is not playing nice in the sandbox":
Chinese steel export rebate to fuel trade war?
while Ritholtz points out lack of green shoots in this U.S. data:
The American Trucking Association tonnage index. Big Picture.
Where's the money coming from? Paul Krugman.
Krugman also gave a few lectures for which he's posted his slides:
Lecture 1: The sum of all fears
Lecture 2: The eschatology of lost decades.
Lecture 3:
amazing timing: in my last post, I noted that Simon Johnson was asking "what would Gorbachev say?"; well, now we know:
We had our perestroika. It's high time for yours. Mikhail Gorbachev, Washington Post.
Can the Fed execute a perfect landing? Ritholtz.
The return of the great debt scare. Robert Reich and Mark Thoma, Economist's View.
What deleveraging? Rolfe Winkler.
The future of retirement; its time to prepare. HSBC.
more reason why Rosie's savings rate prognosis may not be at all absurd.
Be it resolved: there is no credit market. John Carney via Paul Kedrosky.
should've seen this one coming; if bank debt is guaranteed, either explicitly or implicitly, spreads should be minimal, and spread compression need not come just from the top-down, but also from the bottom-up
*** Which way forward? Rob Parenteau, Richebacher Letter, via nakedcapitalism.
intro:
Those of us who still question whether the world has purged its toxins are reduced to the same tiny band of moaning Druids from early 2007, when we shook our heads in disbelief as the carry trade swept Iceland to fresh madness and bankers laughed off sub-prime rot at Bear Stearns.
key excerpt:
Yes, the Baltic Dry Index for bulk shipping of resources has quadrupled since January, but this reflects China's bid to stockpile metals while prices are low.
Stephen Roach, Morgan Stanley's Far East chief, fears an "Asian Relapse", saying the region is prisoner to its fatal dependency on exports to the West. The export share of GDP has risen from 36pc to 47pc across developing Asia over the last decade.
"China's incipient rebound relies on a time-worn stimulus formula: upping the ante on infrastructure spending in anticipation of an eventual rebound of global demand," he said. The strategy cannot work this time because Americans have exhausted their credit, and their desire to borrow. Consumption will fall from its peak of 72pc of GDP to the "pre-bubble norm" of 67pc, if not more.
David Rosenberg from Gluskins Sheff expects Americans to retrench ferociously as 78m baby boomers face the looming threat of penury in old age. "The big story is that the personal savings rate hit a 15-year high of 5.7pc in April. I believe it could test the post-War peak of 15pc. Too many pundits are still living in the old paradigm of Americans shopping till they drop," he said.
If he is right, this will shatter the surplus economies of China, Japan, and Germany, unless they adjust fast to the new world order.
Europe swings right as depression deepens. Evans-Pritchard again.
excerpts:
The savings rate is rocketing in the deficit states of the US, UK, Spain, et al, as the "sinners" belatedly tighten their belts, but their fall in consumption is not being matched by an offsetting rise among the surplus "saints" states, China, Japan, Germany-Netherlands, which all points to an implosion in world demand. Yes, the West is printing money. But that is a harder to trick to pull off than Friedman and Bernanke ever realized....
So, we may lose three or four governments in Europe in coming days or weeks -- or even worse, they may survive. The drama is unfolding as I feared. Half way through the depression, we are facing the exactly the sort of political disintegration that occurs in times of profound economic rupture. Remember, the dangerous phase in the Great Depression was Stage II, after the collapse of Austria's Credit-Anstalt in mid-1931 set off a disastrous chain-reaction that Autumn (until then, most people thought they faced no more than a bad recession, like today).
The green shoots crowd liked the NFP labour market data, but looking at the jobs data detail (including that the B/D model has "added" 220k more jobs yet again; and there were 790k more unemployed), its hard to see why; for starters, Menzie Chinn shows some charts which certainly make the prevailing wisdow questionable, in:
James Pethokoukis: "An improving job market"[?] at Econbrowser.
and a member of the NBER Business Cycle Dating Comittee had this to say:
The labour market has NOT yet signaled a turning point. Jeffrey Frankels blog.
excerpt:
all of us [on the NBER business cycle dating comittee] agree, on the one hand, that a decline in economic activity is a decline in economic activity, and therefore still a state of recession, even if the rate of decline has moderated a lot. But I believe that we also agree, on the other hand, that employment is usually a lagging indicator of economic activity. [emphasis on "usually" is mine (see below)]...
Unfortunately, as reported by Forbes, pursuing this logic leads to second thoughts about whether the most recent BLS announcement was really good news after all. The length of the average work week fell to its lowest since 1964!
and then there's this:
Jobless recovery redux? Federal Reserve Bank of San Fran.
the study compares labour market data to that in past recessions and the conclusions are pessimistic on the prospects of a labour market recovery ---- agreed on that front, but I just don't see how in a balance-sheet recession you get any "recovery" without jobs/income growth.
meanwhile, amidst lousy labour market, with the employment-population ratio under 60% for the first time since the early 1980s (when there was a structurally/demographically different labour market profile) there's this...
Why home prices may keep falling. Robert Shiller, NYT.
Home prices in the United States have been falling for nearly three years, and the decline may well continue for some time.
and this...
Consumer credit declines at 7% annual rate in April. Calculated Risk.
and this...
Mortgage market remains solidly frozen. Michael Shedlock.
and this...
Flow of Funds Accounts of the United States, First Quarter 2009. Federal Reserve.
household net worth down again, down to $50T, and both business debt and household debt contracted in the first quarter
and this...
The still over-leveraged consumer. Barry Ritholtz.
and, as per Rosie above, there's little reason to think this trend of increased savings is over.
i.e. aggregate income falling + consumers saving up = consumption falling faster than income => AD < as =""> output gap increasing => no incentive for biz investment -------- govt trying to fill the gap, but seems like a vicious circle to me
which is why...
The economy is still at the brink. Sandy Lewis and William Cohan, NYT.
though there is:
An easing pace of deterioration in some major economies. OECD Composite LEI.
but...
Japan, China and German green shoots looking doubtful. Yves Smith.
and Smith also points out that "China is not playing nice in the sandbox":
Chinese steel export rebate to fuel trade war?
while Ritholtz points out lack of green shoots in this U.S. data:
The American Trucking Association tonnage index. Big Picture.
Where's the money coming from? Paul Krugman.
Krugman also gave a few lectures for which he's posted his slides:
Lecture 1: The sum of all fears
Lecture 2: The eschatology of lost decades.
Lecture 3:
amazing timing: in my last post, I noted that Simon Johnson was asking "what would Gorbachev say?"; well, now we know:
We had our perestroika. It's high time for yours. Mikhail Gorbachev, Washington Post.
Can the Fed execute a perfect landing? Ritholtz.
The return of the great debt scare. Robert Reich and Mark Thoma, Economist's View.
What deleveraging? Rolfe Winkler.
The future of retirement; its time to prepare. HSBC.
more reason why Rosie's savings rate prognosis may not be at all absurd.
Be it resolved: there is no credit market. John Carney via Paul Kedrosky.
should've seen this one coming; if bank debt is guaranteed, either explicitly or implicitly, spreads should be minimal, and spread compression need not come just from the top-down, but also from the bottom-up
*** Which way forward? Rob Parenteau, Richebacher Letter, via nakedcapitalism.
Friday, June 5, 2009
Worthwhile Reading - June 2 to 5
Non-farm payrolls trend mismatch. Jesse's Cafe Americain.
yet more B/D B.S.
From the subprime to the terrigenous: recession begins at home. Gavin Putland, Land Values Research Group.
as if we haven't been talking about this for 3 years now, from UCLA's Ed Leamer's warnings and those of Calculated Risk to the more recent research reports of Rogoff and Reinhart, but this is a good research paper that provides yet more evidence that a downturn in the domestic property market is a leading indicator of recessions; has housing bubble and recession data for 32 countries.
*** Treasury market: Gonk! and Smackdown Week: Now consumers are all but extinct. Accrued Interest.
What makes this all tough for the serious analyst is that you have to balance holding firm to your viewpoint while admitting you could be wrong. Its another way of saying that the toughest thing in investing is a sell discipline. I'm long Treasuries now (only avoided a real shellacking based on some good technical analysis). I believe in my deflation thesis, but I know I could be wrong. The inflation camp isn't stupid. There is a valid argument for much higher interest rates. The smart trader puts his ego aside and admits when he's wrong.
Bond market close: June 4. John Jansen, Across the Curve.
no need to read the full article; I just thought this point worthwhile:
I hesitate too say this and it is probably the death knell for the bear market in bonds but it is difficult to envision any scenario tomorrow in which the market can rally. One has consistently been paid this year to short the supply and cover back later. There has been no reward for buying early. I think that we will see higher yields into the refunding next week and surely a steeper yield curve. We are in a new age and that new era is governed by supply. There is no refuge from it. It just keeps coming and until there is some sign that the fiscal situation in the US is a road to rehabilitation, the treasury market will remain a cold lonely venue.
The bond war. Daniel Gross, Slate.
more on the Krugman vs. Ferguson debate on inflation/deflation and higher/lower rates.
Fall in LIBOR fails to paint a true picture. FT.
analysts and bankers warn that Libor rates may not be telling the full story.
That is because there are wide differences between the rates at which individual banks can borrow. The biggest institutions are able to fund themselves at around Libor levels while smaller institutions have to pay, in some cases, more than 100 basis points above Libor. This is explained by continuing counterparty risk in what remains an uncertain economic environment. That contrasts with the situation before the credit crisis when institutions paid similar rates to borrow. Meyrick Chapman, fixed income strategist at UBS, says: “We should not build up our hopes that the fall in Libor is such a positive sign for the markets. We have a very tiered market, where many smaller banks are still having to pay relatively high rates to borrow.”
the article does go on to admit that even 100bps back of LIBOR is still low on a historical basis, but the main point is that LIBOR isn't as generally reflective of funding costs as it once was, particularly beyond 3 months.
More on bank lending data. James Hamilton, Econbrowser.
short post, and worthwhile issue to be aware of
Q1 2009 Bank Ratings Update: Zombie dance party just heating up. Chris Whalen of Institutional Risk Analyst, via The Big Picture.
Households saving the fiscal stimulus; possible deleveraging while consumption stabilizes. Rebecca Wilder, News N Economics.
and
What personal consumption data means for the stock market. Ed Harrison, naked capitalism.
of the previous two articles, I favour Harrison's viewpoint, in no small part because of the following:
Retail chain store sales plummet. Tyler Durden, Zero Hedge.
and this:
Personal consumption declining for durables and non-durables, and Durable goods. Jake, EconompicData.
and this:
From powerhouse to funhouse. Sudden Debt.
Trade - it's not just the currency. Michael Pettis, China Financial Markets.
long article, worth just skimming, but the main point, one that Pettis has been arguing for quite some time, is this:
What the world needs from China is not an increase in total consumption but rather an increase in net consumption – i.e. the excess of new consumption over new production – that is roughly in line with the decline in US net consumption. If consumption grows, but production grows just as fast, or even faster (and we can tell by looking at the trade balance corrected for various pricing effects and one-off purchases or sales), then the world imbalance is getting worse and the overcapacity problem will not have been addressed.
i.e. we're not going to solve our global economic problems without significantly reducing global imbalances, so any green shoots we're seeing right now that just exacerbate the current structural imbalances will not be long-lasting green shoots -- they'll lead to further problems down the road
Change, or more of the same? Brad Setser, Follow the Money.
Sure, the US fiscal deficit is up, something China’s state media now likes to highlight.*** And the Fed has cut policy rates in the midst of a severe downturn. But that is only half the picture. Household savings are up. Household borrowing is down. The private sector’s financial deficit is way down. The trade deficit is down too. Foreign inflows finance a trade deficit not the fiscal deficit and, in my book, financing a 6% of GDP trade deficit is more risky than financing a 3% of GDP trade deficit. What has changed is China’s own perception of the risks.
meanwhile, as Geithner's China visit made clear, he believes:
the goal of both US and Chinese policy should be to move away from the current unbalanced relationship
but how, pray tell, are they working towards that goal??
as per Pettis' article, China is trying to get out of the slump by stimulating its export and investment sectors, while the U.S. is trying to get out of the slump by rescuing the banks so as to sustain lending, while also also offering tax cuts, both so as to pump up consumption (albeit with a modest mix of infrastructure spending and auto bailouts which should boost domestic production more than consumption); talk is cheap (particularly from Tim G.)
and yet,
Global crisis inevitable unless U.S. starts saving, Yu says. Bloomberg.
is that what the mercantilist, export-dependent countries of Asia want, for the U.S. to start consuming less than they produce, and have trade surpluses? oh, wait, a deficit is okay, as long as its smaller.
the Chinese could have worse things to worry about; at least the U.S. is not Peru:
Sovereign debt repayment in shit. Paul Kedrosky, Infectious Greed.
meanwhile, as if the situation with the federal deficit were our only concern, there is that issue of what's going on at the state and local level, and it is NOT good:
The fiscal survey of states. National Association of State Budget Officers.
its not just a California problem:
The 50 states are facing one of the worst fiscal periods in decades. Fiscal conditions deteriorated for nearly every state during fiscal year 2009, and weak fiscal conditions are expected to continue in fiscal 2010 and possibly into fiscal years 2011 and 2012....
Expenditure pressures continue as demand for additional funding of programs such as Medicaid increase during tough economic periods and states deal with looming long-term issues such as funding pensions, demographic shifts, and maintenance and repair of infrastructure. Unfortunately, when revenue growth declines as a result of a weakened economy, spending pressures for social programs and health care increase. While the American Recovery and Reinvestment Act of 2009 has helped states avoid draconian levels of cuts, it will not end the need for states to cut spending as exhibited by the 2.5 percent decline in governors’ recommended budgets for fiscal 2010.
Reflections and outrage. Robert Rodriguez, First Pacific Advisors.
Bill Gross: "Staying rich in the new normal." Ed Harrison, naked capitalism.
The view from the top. James Kwak, The Baseline Scenario.
quotes Colin Negrych:
“What constituency is there for pessimism? People believe optimism is necessary, an American right. The presumption of optimism is the problem. That’s what creates the debt we have now.”
Debt and money. David Altig, macroblog.
on the question of whether the Fed is monetizing the Treasury's debt; see charts, but here's conclusion:
And, as I see it, so far allegations that extraordinary steps are being taken specifically to accommodate fiscal deficits are properly characterized as risk rather than fact.
Bernanke: current economic and financial conditions and the federal deficit. Mark Thoma, Economist's View.
a condensation of Bernanke's recent speech, in the form of a simulated interview.
Obama's Gorbachev moment. Peter Boone and Simon Johnson, NYT.
suggests that Geithner's promise to the Chinese that their holdings are money good; and that Bernanke's speech which pointed out that Geithner was less-than-convincing but offered no credible policy changes himself other than platitudes, are insufficient ----- actions, not words, are required, i.e. structural reform
for more, see:
What would Gorbachev say? On the U.S. China and Saudi Arabia. Simon Johnson, The Baseline Scenario.
A tale of two depressions. Barry Eichegreen and Kevin O'Rourke, voxeu.
an update to their April post; they still make the same points: today's recession is at least as bad as the Great Depression was at this point, although the policy response is more favourable; the outstanding questions are whether or not the better policy response will ultimately be sufficient, and whether or not those better policy responses get un-done by optimistic green-shoot thinking or political or other considerations.
Why the present depression will be deeper than the great crash of 1929. Charles Hugh Smith, of two minds.
The fate of nations (graphs to contemplate). The Animal Spirits page.
The stock market in context with the Great Crash of 1929 - 1932. Jesse's Cafe Americain.
in particular, take a look at the last chart which shows what Treasury bond yields did in the 1930s:
It is also easy to forget that in 1931 the business community and the leading economists were convinced that the worst was over and that a recovery was underway. Their concerns shifted to inflation, and dealing with the then unprecedented expansion of narrow money in the adjusted monetary base to ease short term credit problems.
Benefit spending hits $2 trillion, highest percent since 1929; one dollar out of every 6 from vouchers. Michael Shedlock.
1 in 9 Americans now on food stamps.
CFO Survey, June 2009. Duke.
RECESSION TO DRAG ON FOR REST OF 2009, CREDIT CONDITIONS DETERIORATE FOR MANY FIRMS, CAPITAL SPENDING AND EMPLOYMENT TO BE SLASHED
What we're watching to identify the economic recovery. Richard Yamarone, Argus, via Scribd.
Speculative bets against the dollar highest since July 15 2008. Mish again.
Kostorhyz:
Next time you run across one of these Dollar Cassandras, please ask them to tell you the names of the currencies that the Dollar going to decline against, and to please speak to you in detail about the relative fundamentals of these nations. Ask them about sovereign debt ratios. Ask them about external debt ratios. Ask them about bank capitalization ratios. My experience has been that when you pose this question to the perma-bears, it usually elicits a long pause and empty stare.
Mish:
Short-term, I do not know where the dollar goes, nor does anyone else. What I do know is anti-dollar sentiment is quite extreme and that signals caution on anti-dollar bets.
Not so loonie. Martin Hutchinson, Breaking Views.
I agree that if China is worried about diversifying its foreign holdings and wants to reduce its purchases of Treasuries, Canadian bonds should be a natural alternative, as should the real assets that Canada possesses. this has been part of my thinking related to why Canadian bonds should outperform Treasuries; and, ultimately, I think it should be one relatively supportive factor of the C$ vs the greenback, but there are other "legs of the stool" that aren't as supportive, including the fact that we're a small open economy very susceptible to global economic weakness, and, in particular, very dependent on exports to the U.S. So, all in all, hard to know what constitutes a fair value level on the C$. But, like Carney, I suspect that a 90 cent C$ doesn't help Canada nearly as much as an 80 cent C$!
[Oil] Demand is in the toilet. FT Alphaville.
and
Oil: supply up, demand down. Jake, EconompicData.
More sausage hiding: banks. Karl Denninger, the Market Ticker.
don't bother reading this, unless you really care about reactionary regulation; I just love the title:
Hubris, nemesis and catharsis. Con Keating, voxeu.
Understanding Taleb. Felix Salmon, Reuters.
the Black Swan Protection Protocol-Inflation, is not really a bet on hyperinflation, as the WSJ would have it. Rather, Taleb describes it as a bet that the error rate in global fiscal and monetary policy is being systematically underestimated. “Forecasting errors can compound either way”, he says, and if you have an incompetent pilot flying a plane, then inevitably there’s going to be some kind of crash, whether it flies into a mountain or into the sea. Essentially, the fund is going long volatility in macroeconomic variables, on the pretty reasonable grounds that policymakers are likely to get things wrong, one way or another.
I don't understand this at all:
Fed's Hoenig calls for rate hikes. Calculated Risk.
Basically, Hoenig says, the consumer is going to be weak for a long time, so the economic recovery is going to be very weak; but the bond market is selling off, so that must mean they're worried about inflation, so we'd better start normalizing the Fed funds rate sooner rather than later.
Is that really the kind of thinking that goes on in some of those Fed meetings??!!
Let's say the market is selling off b/c of supply concerns (which could ultimately prove inflationary) --- how does higher short-term rates do anything to reduce thos supply concerns?! --- if anything, it aggravates them (less monetary stimulus implies need for more fiscal stimulus implies even more issuance; plus, if Treasury is paying higher interest on its debt due to Fed hikes, that means more issuance)
Absurd!
this is too funny:
Sign-o-the-times: Geithner rents home out. Barry Ritholtz, The Big Picture.
yet more B/D B.S.
From the subprime to the terrigenous: recession begins at home. Gavin Putland, Land Values Research Group.
as if we haven't been talking about this for 3 years now, from UCLA's Ed Leamer's warnings and those of Calculated Risk to the more recent research reports of Rogoff and Reinhart, but this is a good research paper that provides yet more evidence that a downturn in the domestic property market is a leading indicator of recessions; has housing bubble and recession data for 32 countries.
*** Treasury market: Gonk! and Smackdown Week: Now consumers are all but extinct. Accrued Interest.
What makes this all tough for the serious analyst is that you have to balance holding firm to your viewpoint while admitting you could be wrong. Its another way of saying that the toughest thing in investing is a sell discipline. I'm long Treasuries now (only avoided a real shellacking based on some good technical analysis). I believe in my deflation thesis, but I know I could be wrong. The inflation camp isn't stupid. There is a valid argument for much higher interest rates. The smart trader puts his ego aside and admits when he's wrong.
Bond market close: June 4. John Jansen, Across the Curve.
no need to read the full article; I just thought this point worthwhile:
I hesitate too say this and it is probably the death knell for the bear market in bonds but it is difficult to envision any scenario tomorrow in which the market can rally. One has consistently been paid this year to short the supply and cover back later. There has been no reward for buying early. I think that we will see higher yields into the refunding next week and surely a steeper yield curve. We are in a new age and that new era is governed by supply. There is no refuge from it. It just keeps coming and until there is some sign that the fiscal situation in the US is a road to rehabilitation, the treasury market will remain a cold lonely venue.
The bond war. Daniel Gross, Slate.
more on the Krugman vs. Ferguson debate on inflation/deflation and higher/lower rates.
Fall in LIBOR fails to paint a true picture. FT.
analysts and bankers warn that Libor rates may not be telling the full story.
That is because there are wide differences between the rates at which individual banks can borrow. The biggest institutions are able to fund themselves at around Libor levels while smaller institutions have to pay, in some cases, more than 100 basis points above Libor. This is explained by continuing counterparty risk in what remains an uncertain economic environment. That contrasts with the situation before the credit crisis when institutions paid similar rates to borrow. Meyrick Chapman, fixed income strategist at UBS, says: “We should not build up our hopes that the fall in Libor is such a positive sign for the markets. We have a very tiered market, where many smaller banks are still having to pay relatively high rates to borrow.”
the article does go on to admit that even 100bps back of LIBOR is still low on a historical basis, but the main point is that LIBOR isn't as generally reflective of funding costs as it once was, particularly beyond 3 months.
More on bank lending data. James Hamilton, Econbrowser.
short post, and worthwhile issue to be aware of
Q1 2009 Bank Ratings Update: Zombie dance party just heating up. Chris Whalen of Institutional Risk Analyst, via The Big Picture.
Households saving the fiscal stimulus; possible deleveraging while consumption stabilizes. Rebecca Wilder, News N Economics.
and
What personal consumption data means for the stock market. Ed Harrison, naked capitalism.
of the previous two articles, I favour Harrison's viewpoint, in no small part because of the following:
Retail chain store sales plummet. Tyler Durden, Zero Hedge.
and this:
Personal consumption declining for durables and non-durables, and Durable goods. Jake, EconompicData.
and this:
From powerhouse to funhouse. Sudden Debt.
Trade - it's not just the currency. Michael Pettis, China Financial Markets.
long article, worth just skimming, but the main point, one that Pettis has been arguing for quite some time, is this:
What the world needs from China is not an increase in total consumption but rather an increase in net consumption – i.e. the excess of new consumption over new production – that is roughly in line with the decline in US net consumption. If consumption grows, but production grows just as fast, or even faster (and we can tell by looking at the trade balance corrected for various pricing effects and one-off purchases or sales), then the world imbalance is getting worse and the overcapacity problem will not have been addressed.
i.e. we're not going to solve our global economic problems without significantly reducing global imbalances, so any green shoots we're seeing right now that just exacerbate the current structural imbalances will not be long-lasting green shoots -- they'll lead to further problems down the road
Change, or more of the same? Brad Setser, Follow the Money.
Sure, the US fiscal deficit is up, something China’s state media now likes to highlight.*** And the Fed has cut policy rates in the midst of a severe downturn. But that is only half the picture. Household savings are up. Household borrowing is down. The private sector’s financial deficit is way down. The trade deficit is down too. Foreign inflows finance a trade deficit not the fiscal deficit and, in my book, financing a 6% of GDP trade deficit is more risky than financing a 3% of GDP trade deficit. What has changed is China’s own perception of the risks.
meanwhile, as Geithner's China visit made clear, he believes:
the goal of both US and Chinese policy should be to move away from the current unbalanced relationship
but how, pray tell, are they working towards that goal??
as per Pettis' article, China is trying to get out of the slump by stimulating its export and investment sectors, while the U.S. is trying to get out of the slump by rescuing the banks so as to sustain lending, while also also offering tax cuts, both so as to pump up consumption (albeit with a modest mix of infrastructure spending and auto bailouts which should boost domestic production more than consumption); talk is cheap (particularly from Tim G.)
and yet,
Global crisis inevitable unless U.S. starts saving, Yu says. Bloomberg.
is that what the mercantilist, export-dependent countries of Asia want, for the U.S. to start consuming less than they produce, and have trade surpluses? oh, wait, a deficit is okay, as long as its smaller.
the Chinese could have worse things to worry about; at least the U.S. is not Peru:
Sovereign debt repayment in shit. Paul Kedrosky, Infectious Greed.
meanwhile, as if the situation with the federal deficit were our only concern, there is that issue of what's going on at the state and local level, and it is NOT good:
The fiscal survey of states. National Association of State Budget Officers.
its not just a California problem:
The 50 states are facing one of the worst fiscal periods in decades. Fiscal conditions deteriorated for nearly every state during fiscal year 2009, and weak fiscal conditions are expected to continue in fiscal 2010 and possibly into fiscal years 2011 and 2012....
Expenditure pressures continue as demand for additional funding of programs such as Medicaid increase during tough economic periods and states deal with looming long-term issues such as funding pensions, demographic shifts, and maintenance and repair of infrastructure. Unfortunately, when revenue growth declines as a result of a weakened economy, spending pressures for social programs and health care increase. While the American Recovery and Reinvestment Act of 2009 has helped states avoid draconian levels of cuts, it will not end the need for states to cut spending as exhibited by the 2.5 percent decline in governors’ recommended budgets for fiscal 2010.
Reflections and outrage. Robert Rodriguez, First Pacific Advisors.
Bill Gross: "Staying rich in the new normal." Ed Harrison, naked capitalism.
The view from the top. James Kwak, The Baseline Scenario.
quotes Colin Negrych:
“What constituency is there for pessimism? People believe optimism is necessary, an American right. The presumption of optimism is the problem. That’s what creates the debt we have now.”
Debt and money. David Altig, macroblog.
on the question of whether the Fed is monetizing the Treasury's debt; see charts, but here's conclusion:
And, as I see it, so far allegations that extraordinary steps are being taken specifically to accommodate fiscal deficits are properly characterized as risk rather than fact.
Bernanke: current economic and financial conditions and the federal deficit. Mark Thoma, Economist's View.
a condensation of Bernanke's recent speech, in the form of a simulated interview.
Obama's Gorbachev moment. Peter Boone and Simon Johnson, NYT.
suggests that Geithner's promise to the Chinese that their holdings are money good; and that Bernanke's speech which pointed out that Geithner was less-than-convincing but offered no credible policy changes himself other than platitudes, are insufficient ----- actions, not words, are required, i.e. structural reform
for more, see:
What would Gorbachev say? On the U.S. China and Saudi Arabia. Simon Johnson, The Baseline Scenario.
A tale of two depressions. Barry Eichegreen and Kevin O'Rourke, voxeu.
an update to their April post; they still make the same points: today's recession is at least as bad as the Great Depression was at this point, although the policy response is more favourable; the outstanding questions are whether or not the better policy response will ultimately be sufficient, and whether or not those better policy responses get un-done by optimistic green-shoot thinking or political or other considerations.
Why the present depression will be deeper than the great crash of 1929. Charles Hugh Smith, of two minds.
The fate of nations (graphs to contemplate). The Animal Spirits page.
The stock market in context with the Great Crash of 1929 - 1932. Jesse's Cafe Americain.
in particular, take a look at the last chart which shows what Treasury bond yields did in the 1930s:
It is also easy to forget that in 1931 the business community and the leading economists were convinced that the worst was over and that a recovery was underway. Their concerns shifted to inflation, and dealing with the then unprecedented expansion of narrow money in the adjusted monetary base to ease short term credit problems.
Benefit spending hits $2 trillion, highest percent since 1929; one dollar out of every 6 from vouchers. Michael Shedlock.
1 in 9 Americans now on food stamps.
CFO Survey, June 2009. Duke.
RECESSION TO DRAG ON FOR REST OF 2009, CREDIT CONDITIONS DETERIORATE FOR MANY FIRMS, CAPITAL SPENDING AND EMPLOYMENT TO BE SLASHED
What we're watching to identify the economic recovery. Richard Yamarone, Argus, via Scribd.
Speculative bets against the dollar highest since July 15 2008. Mish again.
Kostorhyz:
Next time you run across one of these Dollar Cassandras, please ask them to tell you the names of the currencies that the Dollar going to decline against, and to please speak to you in detail about the relative fundamentals of these nations. Ask them about sovereign debt ratios. Ask them about external debt ratios. Ask them about bank capitalization ratios. My experience has been that when you pose this question to the perma-bears, it usually elicits a long pause and empty stare.
Mish:
Short-term, I do not know where the dollar goes, nor does anyone else. What I do know is anti-dollar sentiment is quite extreme and that signals caution on anti-dollar bets.
Not so loonie. Martin Hutchinson, Breaking Views.
I agree that if China is worried about diversifying its foreign holdings and wants to reduce its purchases of Treasuries, Canadian bonds should be a natural alternative, as should the real assets that Canada possesses. this has been part of my thinking related to why Canadian bonds should outperform Treasuries; and, ultimately, I think it should be one relatively supportive factor of the C$ vs the greenback, but there are other "legs of the stool" that aren't as supportive, including the fact that we're a small open economy very susceptible to global economic weakness, and, in particular, very dependent on exports to the U.S. So, all in all, hard to know what constitutes a fair value level on the C$. But, like Carney, I suspect that a 90 cent C$ doesn't help Canada nearly as much as an 80 cent C$!
[Oil] Demand is in the toilet. FT Alphaville.
and
Oil: supply up, demand down. Jake, EconompicData.
More sausage hiding: banks. Karl Denninger, the Market Ticker.
don't bother reading this, unless you really care about reactionary regulation; I just love the title:
Hubris, nemesis and catharsis. Con Keating, voxeu.
Understanding Taleb. Felix Salmon, Reuters.
the Black Swan Protection Protocol-Inflation, is not really a bet on hyperinflation, as the WSJ would have it. Rather, Taleb describes it as a bet that the error rate in global fiscal and monetary policy is being systematically underestimated. “Forecasting errors can compound either way”, he says, and if you have an incompetent pilot flying a plane, then inevitably there’s going to be some kind of crash, whether it flies into a mountain or into the sea. Essentially, the fund is going long volatility in macroeconomic variables, on the pretty reasonable grounds that policymakers are likely to get things wrong, one way or another.
I don't understand this at all:
Fed's Hoenig calls for rate hikes. Calculated Risk.
Basically, Hoenig says, the consumer is going to be weak for a long time, so the economic recovery is going to be very weak; but the bond market is selling off, so that must mean they're worried about inflation, so we'd better start normalizing the Fed funds rate sooner rather than later.
Is that really the kind of thinking that goes on in some of those Fed meetings??!!
Let's say the market is selling off b/c of supply concerns (which could ultimately prove inflationary) --- how does higher short-term rates do anything to reduce thos supply concerns?! --- if anything, it aggravates them (less monetary stimulus implies need for more fiscal stimulus implies even more issuance; plus, if Treasury is paying higher interest on its debt due to Fed hikes, that means more issuance)
Absurd!
this is too funny:
Sign-o-the-times: Geithner rents home out. Barry Ritholtz, The Big Picture.
Monday, June 1, 2009
Worthwhile Reading - June 1
Making sausages, data in China. WSJ.
The focus these days is on the mismatch between China’s electricity consumption and a key measure of industrial output.
For most of the past decade, China’s industrial value-added growth (IVA) –industry output less input costs – has moved broadly in step with movements in electricity consumption. But the relationship’s broken down recently: electricity use is still seeing negative growth, while IVA is growing at a decent positive rate again.
Some China analysts are crying foul: If IVA growth figures are being cooked, surely that means China’s recent GDP data have been overstated too. China’s statisticians use IVA output to estimate what accounts for nearly half of China’s GDP.
China’s association of electricity generators has a solution: it’s stopped publishing consumption data.
Record demand, record angst; and More government borrowing doesn't necessarily mean more total borrowing. Brad Setser, Follow the Money.
if central banks believe that the only acceptable, safe alternative to long-term Treasury notes is short-term Treasury bills, they will end up lending to the US at incredibly low rates so long as the Fed keeps rates low. Key countries end up piling up short-term Treasury bills at a rate that has to make everyone nervous. US policy makers have to worry about the weak foreign bid for long-term bonds, and the risk that the rise in mortgage rates will choke off the recovery. And at some point, foreign central banks will have to worry about the lack of interest income of their (now once again growing) foreign portfolio.
Treasury myths. Models & Agents.
Anything but academic. John Hussman.
agrees with John Taylor, not Paul Krugman, about the likelihood of significant inflation over the next decade; also says:
There is very little chance, in my view, that the current downturn is over. We have enjoyed a nice reprieve – if over a trillion dollars in redistribution could not accomplish even a reprieve, it would be a surprise. It's clear that investors are hopeful that we can simply return to rich valuations, debt-financed economic expansion, and abnormal profit margins based on excessive leverage. From my perspective, this hope is as thin as those that we observed at the peak of the internet bubble, the housing bubble, and the profit margin peak of 2007.
Place your wagers. Contrary Investor.
We continue to believe the financial markets are trying their best to discount a typical consumer and/or corporate demand led economic recovery of the type seen over the past half century. Yet when we look at things like the credit markets, personal income circumstances and the complexion of household balance sheets crying out for deleveraging, current conditions are quite different than any recession of the prior half-century, with the government acting as Atlas holding up the world of "demand", per se, for now. Just what type of a valuation multiple do we put on a financial market under these character circumstances? We believe this is a very important question the financial markets will be facing head on during the second half of this year and early next. For now, the key recovery fingerprints of every single economic recovery of the last half century are missing from the current puzzle (housing demand, auto demand and reacceleration in consumer credit growth). Standing in for these classic drivers is the US government. For how long will this be the case and what should investors be paying for this stand in role?
*** Why there is more pain to come. T2 Partners.
see comments on slides 24/25, 30, 63/64 & 71 in particular
Zoellick warns stimulus 'sugar high' won't stem unemployment. Bloomberg.
Let's do the time warp again. Steve Keen.
basically debunks any forecasts (and specifically that of the Australian Treasury) produced by economists who (a) didn't foresee the credit crunch, (b) continue to use models that don't take account of the credit crunch, and (c) assumes that the credit crunch is just a short-term one-off event that shocks the economy below equilibrium, but from which point the economy will revert back to its long-run equilibrium growth path (as if nothing fundamental ever happened in the interim) which actually requires an above-average growth rate in the mid-term to make up for the short-term growth lapse; Keen then uses his own dynamic economic model, derived from Minsky's Financial Instability Hypothesis, which, unlike traditional static and DSGE economic models, accounts for asset markets and the level of debt, to make his own forecasts:
But what if the crisis is one of solvency instead? What if the real cause of the crisis is not merely a sudden drop in confidence resulting in lower rates of creation and circulation of credit, but too much debt altogether?
That possibility is captured in my Minsky model, in which a series of booms and busts leads to one final bust where the accumulated debt is so great that the economy can no longer service it. Output and employment collapse, and the only way out is to deliberately reduce the debt....
The Ponzi Finance system however is inherently unstable: the growth of unproductive debt during a boom–when people borrow money to speculate on rising asset prices–adds so much to debt that the amount accumulated in the previous boom is never completely repaid before the next boom takes off. The debt to GDP ratio therefore ratchets up over time, until ultimately, so much debt is taken on that the economy experiences not merely a recession but a Depression.
The focus these days is on the mismatch between China’s electricity consumption and a key measure of industrial output.
For most of the past decade, China’s industrial value-added growth (IVA) –industry output less input costs – has moved broadly in step with movements in electricity consumption. But the relationship’s broken down recently: electricity use is still seeing negative growth, while IVA is growing at a decent positive rate again.
Some China analysts are crying foul: If IVA growth figures are being cooked, surely that means China’s recent GDP data have been overstated too. China’s statisticians use IVA output to estimate what accounts for nearly half of China’s GDP.
China’s association of electricity generators has a solution: it’s stopped publishing consumption data.
Record demand, record angst; and More government borrowing doesn't necessarily mean more total borrowing. Brad Setser, Follow the Money.
if central banks believe that the only acceptable, safe alternative to long-term Treasury notes is short-term Treasury bills, they will end up lending to the US at incredibly low rates so long as the Fed keeps rates low. Key countries end up piling up short-term Treasury bills at a rate that has to make everyone nervous. US policy makers have to worry about the weak foreign bid for long-term bonds, and the risk that the rise in mortgage rates will choke off the recovery. And at some point, foreign central banks will have to worry about the lack of interest income of their (now once again growing) foreign portfolio.
Treasury myths. Models & Agents.
Anything but academic. John Hussman.
agrees with John Taylor, not Paul Krugman, about the likelihood of significant inflation over the next decade; also says:
There is very little chance, in my view, that the current downturn is over. We have enjoyed a nice reprieve – if over a trillion dollars in redistribution could not accomplish even a reprieve, it would be a surprise. It's clear that investors are hopeful that we can simply return to rich valuations, debt-financed economic expansion, and abnormal profit margins based on excessive leverage. From my perspective, this hope is as thin as those that we observed at the peak of the internet bubble, the housing bubble, and the profit margin peak of 2007.
Place your wagers. Contrary Investor.
We continue to believe the financial markets are trying their best to discount a typical consumer and/or corporate demand led economic recovery of the type seen over the past half century. Yet when we look at things like the credit markets, personal income circumstances and the complexion of household balance sheets crying out for deleveraging, current conditions are quite different than any recession of the prior half-century, with the government acting as Atlas holding up the world of "demand", per se, for now. Just what type of a valuation multiple do we put on a financial market under these character circumstances? We believe this is a very important question the financial markets will be facing head on during the second half of this year and early next. For now, the key recovery fingerprints of every single economic recovery of the last half century are missing from the current puzzle (housing demand, auto demand and reacceleration in consumer credit growth). Standing in for these classic drivers is the US government. For how long will this be the case and what should investors be paying for this stand in role?
*** Why there is more pain to come. T2 Partners.
see comments on slides 24/25, 30, 63/64 & 71 in particular
Zoellick warns stimulus 'sugar high' won't stem unemployment. Bloomberg.
Let's do the time warp again. Steve Keen.
basically debunks any forecasts (and specifically that of the Australian Treasury) produced by economists who (a) didn't foresee the credit crunch, (b) continue to use models that don't take account of the credit crunch, and (c) assumes that the credit crunch is just a short-term one-off event that shocks the economy below equilibrium, but from which point the economy will revert back to its long-run equilibrium growth path (as if nothing fundamental ever happened in the interim) which actually requires an above-average growth rate in the mid-term to make up for the short-term growth lapse; Keen then uses his own dynamic economic model, derived from Minsky's Financial Instability Hypothesis, which, unlike traditional static and DSGE economic models, accounts for asset markets and the level of debt, to make his own forecasts:
But what if the crisis is one of solvency instead? What if the real cause of the crisis is not merely a sudden drop in confidence resulting in lower rates of creation and circulation of credit, but too much debt altogether?
That possibility is captured in my Minsky model, in which a series of booms and busts leads to one final bust where the accumulated debt is so great that the economy can no longer service it. Output and employment collapse, and the only way out is to deliberately reduce the debt....
The Ponzi Finance system however is inherently unstable: the growth of unproductive debt during a boom–when people borrow money to speculate on rising asset prices–adds so much to debt that the amount accumulated in the previous boom is never completely repaid before the next boom takes off. The debt to GDP ratio therefore ratchets up over time, until ultimately, so much debt is taken on that the economy experiences not merely a recession but a Depression.
Saturday, May 30, 2009
Worthwhile Reading - May 30
The big inflation scare. Paul Krugman, NYT.
read it all, but key excerpt:
First things first. It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.
So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.
The first story is just wrong. The second could be right, but isn’t.
Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.
But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.
Mortgage markets lock up. Mish.
Understanding inflation-indexed bond markets. John Campbell, Robert Shiller, Luis Viceira; NBER.
A return to a nasty external dynamic. Tim Duy.
Troubled bank loans hit a record high. Floyd Norris, NYT.
First-ever global housing-led recession. Dr. Housing Bubble.
subtitle: One out of Eight American Mortgage Holders either Late or in Foreclosure on their Mortgage: 66 Percent of Mortgages Prime but what does that mean if Prime is now Defaulting at High Rates?
May economic summary in graphs. Calculated Risk.
*** The shadow banking system and Hyman Minsky's economic journey. Paul McCulley, PIMCO.
note: very good overview of Minskian theory as it played out in real-time; but, taking it a little easy on the Fed and now-colleague big Al, aren't you, Paul? no criticism of low rates for too long, or of Al's refusing to heed his own colleague's advice about mortgage lending standards, although a bit of veiled criticism, couched more as regret, that regulators drank the same Kool-Aid as did the investors and the rating agencies
Even Bloomberg openly ridiculing Tim Geithner now. and Bloomberg's vendetta with Geithner/TALF continues. Zero Hedge.
gotta check out the Bloomberg panels!
Taking responsibility. Gregory Knox, via The Big Picture.
note: I never worked in the auto industry, but I did work in a couple unionized environments; what Knox says about electricians acting all high-and-mighty, and about guys working slow during the week so as to get into weekend double-pay overtime hours, and about telling the newbies to slow down so they don't show up the old farts all ring very true for me in my past experiences working both in a pulp-and-paper mill and in a municipal hydro line crew.
read it all, but key excerpt:
First things first. It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.
So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.
The first story is just wrong. The second could be right, but isn’t.
Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.
But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.
Mortgage markets lock up. Mish.
Understanding inflation-indexed bond markets. John Campbell, Robert Shiller, Luis Viceira; NBER.
A return to a nasty external dynamic. Tim Duy.
Troubled bank loans hit a record high. Floyd Norris, NYT.
First-ever global housing-led recession. Dr. Housing Bubble.
subtitle: One out of Eight American Mortgage Holders either Late or in Foreclosure on their Mortgage: 66 Percent of Mortgages Prime but what does that mean if Prime is now Defaulting at High Rates?
May economic summary in graphs. Calculated Risk.
*** The shadow banking system and Hyman Minsky's economic journey. Paul McCulley, PIMCO.
note: very good overview of Minskian theory as it played out in real-time; but, taking it a little easy on the Fed and now-colleague big Al, aren't you, Paul? no criticism of low rates for too long, or of Al's refusing to heed his own colleague's advice about mortgage lending standards, although a bit of veiled criticism, couched more as regret, that regulators drank the same Kool-Aid as did the investors and the rating agencies
Even Bloomberg openly ridiculing Tim Geithner now. and Bloomberg's vendetta with Geithner/TALF continues. Zero Hedge.
gotta check out the Bloomberg panels!
Taking responsibility. Gregory Knox, via The Big Picture.
note: I never worked in the auto industry, but I did work in a couple unionized environments; what Knox says about electricians acting all high-and-mighty, and about guys working slow during the week so as to get into weekend double-pay overtime hours, and about telling the newbies to slow down so they don't show up the old farts all ring very true for me in my past experiences working both in a pulp-and-paper mill and in a municipal hydro line crew.
Thursday, May 28, 2009
Worthwhile Reading - May 28
How long will this glut continue? Signals suggest a while. Rebecca Wilder.
Bond carnage, muddled inflation thinking, and Fed options. Yves Smith, naked capitalism.
Treasury matrix. Zero Hedge.
Shadow market may undercut housing rebound. CS Monitor.
Only 30 percent of foreclosed homes are currently on the market nationwide. Could the backlog of hundreds of thousands of empty or rented homes swamp recovery?
Quarterly Banking Profile. FDIC.
summary:
Net Income of $7.6 Billion Is Less than Half Year-Earlier Level
Noninterest Income Registers Strong Rebound at Large Banks
Aggressive Reserve Building Trails Growth in Troubled Loans
Industry Assets Contract by $302 Billion
Total Equity Capital Increases by $82.1 Billion
excerpts:
The high level of charge-offs did not stem the growth in noncurrent loans in the first quarter.... Despite the rise in the level of reserves relative to total loans, the industry’s ratio of reserves to noncurrent loans fell for a 12th consecutive quarter, from 74.8 percent to 66.5 percent, the lowest level in 17 years.... Total assets declined by $301.7 billion (2.2 percent) during the quarter, as a few large banks reduced their loan portfolios and trading accounts.... The decline in industry assets and the increase in equity capital meant a reduced need for funding during the quarter.
Bond carnage, muddled inflation thinking, and Fed options. Yves Smith, naked capitalism.
Treasury matrix. Zero Hedge.
Shadow market may undercut housing rebound. CS Monitor.
Only 30 percent of foreclosed homes are currently on the market nationwide. Could the backlog of hundreds of thousands of empty or rented homes swamp recovery?
Quarterly Banking Profile. FDIC.
summary:
Net Income of $7.6 Billion Is Less than Half Year-Earlier Level
Noninterest Income Registers Strong Rebound at Large Banks
Aggressive Reserve Building Trails Growth in Troubled Loans
Industry Assets Contract by $302 Billion
Total Equity Capital Increases by $82.1 Billion
excerpts:
The high level of charge-offs did not stem the growth in noncurrent loans in the first quarter.... Despite the rise in the level of reserves relative to total loans, the industry’s ratio of reserves to noncurrent loans fell for a 12th consecutive quarter, from 74.8 percent to 66.5 percent, the lowest level in 17 years.... Total assets declined by $301.7 billion (2.2 percent) during the quarter, as a few large banks reduced their loan portfolios and trading accounts.... The decline in industry assets and the increase in equity capital meant a reduced need for funding during the quarter.
Wednesday, May 27, 2009
Worthwhile Reading - May 22 - 27
Where has the money gone: the state of Canadian household debt in a stumbling economy. The Certified General Accountants Association of Canada.
*** Liquidity drowning the meaning of inflation? Leo Kolivakis, Pension Pulse, with plenty of excerpts from other sources. must read.
We cannot inflate our way out of this crisis. Wolfgang Munchau, FT.
Government Motors is born. Karl Denninger, The Market Ticker. reflections on what the government's handling of the priority of auto-makers' creditors may imply for govt debt.
Consumer confidence, or consumer hope? MarketWatch.
David Rosenberg: "600-840 on the S&P". Tyler Durden, ZeroHedge.
Has the U.S. recovery begun? Martin Feldstein, Project Syndicate.
conclusion:
The positive effect of the stimulus package is simply not large enough to offset the negative impact of dramatically lower household wealth, declines in residential construction, a dysfunctional banking system that does not increase credit creation, and the downward spiral of house prices. The Obama administration has developed policies to counter these negative effects, but, in my judgment, they are not adequate to turn the economy around and produce a sustained recovery. Having said that, these policies are still works in progress. If they are strengthened in the months ahead – to increase demand, fix the banking system, and stop the fall in house prices – we can hope to see a sustained recovery start in 2010. If not, we will just have to keep waiting and hoping.
A recovery without credit: possible, but... Stijn Claessens, M. Ayhan Kose, Marco E. Terrones, voxeu.
update: the authors look at past recessions in OECD countries that are associated with either a credit crunch, house price bust or equity price bust and conclude that a recession can end before the credit crunch; frankly, while i find this topic/issue interesting to think about, I find this kind of analysis to be a good example of crappy economics; in particular, what the authors fail to even note, much less study, is (a) what happens in recessions associated not with any one of the three other phenomenon, but with all three at once, (b) what happens when the recession is not isolated (in a single country or region) but is global, or (c) the level of debt at the time of recession, which could be crucial given their assessment that consumption growth is usually the key driver of recoveries, and therefore, (d) what are the drivers of consumption growth in recoveries (if not credit growth, presumably income growth? but where is that coming from?)
The new global balance: financial de-globalization, savings drain, and the U.S. dollar. Christian Broda, Piero Ghezzi, Eduardo Levy-Yeyati, voxeu.
update: the authors of this post note that cross-border flows have dwindled; they then focus soley on the implications of the declining flows from foreigners into the U.S. (i.e. less foreign buying of U.S. assets means, in their view, a weaker dollar and higher interest rates); but they do not discuss the implications of the fact that American investors have also recently shown a home-bias, or of the change in composition of those American investors' portfolios, particularly in a period of increased savings (if foreigners are buying less U.S. bonds, isn't it because Americans are buying less foreign goods?)
*** The crisis and how to deal with it. Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros, Robin Wells et al, The New York Review of Books.
update: essential reading; read the Ferguson section, which is a great summary of what the consensus wisdom is right now (i.e. the combination of fiscal and monetary policy is terrible for bonds and terrible for the $); then read the Krugman rebuttal, which is a fantastic exposition of why I think domestic (U.S.) savings in excess of profitable investment opportunities implies a domestic savings glut, which should do now what Bernanke said the foreign savings glut did a few years ago (i.e. bond conundrum of low long-term yields even as the Fed was hiking); Roubini, Soros and Wells all follow up with great points too, mostly concurring with Krugman; mind you, its hard to disagree with Ferguson's last points; its a shame this debate ended prematurely
Global imbalanceds and future crises. Barry Eichengreen, via Mark Thoma's Economist's View.
China stuck in 'dollar trap'. FT.
similarly,
Asia will author its own destruction if it triggers a crisis over U.S. bonds. Ambrose Evans-Pritchard, Telegraph.
The dollar crisis. Sahm Adrangi, via Clusterstock.
Do be wary of green shoots. Randall Forsyth, Up and Down Wall Street, Barron's. see esp. pg. 2 with stock market parallels from Louise Yamada to 1938 and discussion of earnings as key to stock prices.
Electrical consumption sees first outage since WWII. Paul Kedrosky, Infectious Greed.
Here comes the OptionARM mortgage explosion. Joe Weisenthal, Clusterstock.
And a personal reminder from Doug Kass, via Kedrosky:
The perma-bear cult in markets.
The perma-bear cult, of which I have often been accused of being a member, is an especially strange clique that often sees the clandestine plunge protection teams saving the U.S. stock market at critical points. They have never met a government statistic they like but instead see the U.S. government as "massaging" and revising employment, inflation and many other economic statistics in order to paint a positive picture. They express contempt for second derivative economic improvement and never or rarely ever see prosperity. They view seeds of recovery as Superman saw Kryptonite and extrapolate economic/stock market weakness to the extreme.
And they never ever or rarely make money.
Can we inflate our way out of this mess? Jake, EconompicData.
The greatest swindle ever sold. Andy Kroll, The Nation. worth reading if just for the numbered bullet points.
Why Britain has to curb finance. Martin Wolf, FT.
two old ones:
Why the U.S. has really gone broke. Chalmers Johnson, via Jesse's Cafe Americain, and
The incontrovertible truth about debt, deleveraging, devaluation and recovery. Jesse.
As always, Willem Buiter calling it as he sees it:
Obushma-Biney in the home of the frightened. Willem Buiter, Maverecon.
*** Liquidity drowning the meaning of inflation? Leo Kolivakis, Pension Pulse, with plenty of excerpts from other sources. must read.
We cannot inflate our way out of this crisis. Wolfgang Munchau, FT.
Government Motors is born. Karl Denninger, The Market Ticker. reflections on what the government's handling of the priority of auto-makers' creditors may imply for govt debt.
Consumer confidence, or consumer hope? MarketWatch.
David Rosenberg: "600-840 on the S&P". Tyler Durden, ZeroHedge.
Has the U.S. recovery begun? Martin Feldstein, Project Syndicate.
conclusion:
The positive effect of the stimulus package is simply not large enough to offset the negative impact of dramatically lower household wealth, declines in residential construction, a dysfunctional banking system that does not increase credit creation, and the downward spiral of house prices. The Obama administration has developed policies to counter these negative effects, but, in my judgment, they are not adequate to turn the economy around and produce a sustained recovery. Having said that, these policies are still works in progress. If they are strengthened in the months ahead – to increase demand, fix the banking system, and stop the fall in house prices – we can hope to see a sustained recovery start in 2010. If not, we will just have to keep waiting and hoping.
A recovery without credit: possible, but... Stijn Claessens, M. Ayhan Kose, Marco E. Terrones, voxeu.
update: the authors look at past recessions in OECD countries that are associated with either a credit crunch, house price bust or equity price bust and conclude that a recession can end before the credit crunch; frankly, while i find this topic/issue interesting to think about, I find this kind of analysis to be a good example of crappy economics; in particular, what the authors fail to even note, much less study, is (a) what happens in recessions associated not with any one of the three other phenomenon, but with all three at once, (b) what happens when the recession is not isolated (in a single country or region) but is global, or (c) the level of debt at the time of recession, which could be crucial given their assessment that consumption growth is usually the key driver of recoveries, and therefore, (d) what are the drivers of consumption growth in recoveries (if not credit growth, presumably income growth? but where is that coming from?)
The new global balance: financial de-globalization, savings drain, and the U.S. dollar. Christian Broda, Piero Ghezzi, Eduardo Levy-Yeyati, voxeu.
update: the authors of this post note that cross-border flows have dwindled; they then focus soley on the implications of the declining flows from foreigners into the U.S. (i.e. less foreign buying of U.S. assets means, in their view, a weaker dollar and higher interest rates); but they do not discuss the implications of the fact that American investors have also recently shown a home-bias, or of the change in composition of those American investors' portfolios, particularly in a period of increased savings (if foreigners are buying less U.S. bonds, isn't it because Americans are buying less foreign goods?)
*** The crisis and how to deal with it. Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros, Robin Wells et al, The New York Review of Books.
update: essential reading; read the Ferguson section, which is a great summary of what the consensus wisdom is right now (i.e. the combination of fiscal and monetary policy is terrible for bonds and terrible for the $); then read the Krugman rebuttal, which is a fantastic exposition of why I think domestic (U.S.) savings in excess of profitable investment opportunities implies a domestic savings glut, which should do now what Bernanke said the foreign savings glut did a few years ago (i.e. bond conundrum of low long-term yields even as the Fed was hiking); Roubini, Soros and Wells all follow up with great points too, mostly concurring with Krugman; mind you, its hard to disagree with Ferguson's last points; its a shame this debate ended prematurely
Global imbalanceds and future crises. Barry Eichengreen, via Mark Thoma's Economist's View.
China stuck in 'dollar trap'. FT.
similarly,
Asia will author its own destruction if it triggers a crisis over U.S. bonds. Ambrose Evans-Pritchard, Telegraph.
The dollar crisis. Sahm Adrangi, via Clusterstock.
Do be wary of green shoots. Randall Forsyth, Up and Down Wall Street, Barron's. see esp. pg. 2 with stock market parallels from Louise Yamada to 1938 and discussion of earnings as key to stock prices.
Electrical consumption sees first outage since WWII. Paul Kedrosky, Infectious Greed.
Here comes the OptionARM mortgage explosion. Joe Weisenthal, Clusterstock.
And a personal reminder from Doug Kass, via Kedrosky:
The perma-bear cult in markets.
The perma-bear cult, of which I have often been accused of being a member, is an especially strange clique that often sees the clandestine plunge protection teams saving the U.S. stock market at critical points. They have never met a government statistic they like but instead see the U.S. government as "massaging" and revising employment, inflation and many other economic statistics in order to paint a positive picture. They express contempt for second derivative economic improvement and never or rarely ever see prosperity. They view seeds of recovery as Superman saw Kryptonite and extrapolate economic/stock market weakness to the extreme.
And they never ever or rarely make money.
Can we inflate our way out of this mess? Jake, EconompicData.
The greatest swindle ever sold. Andy Kroll, The Nation. worth reading if just for the numbered bullet points.
Why Britain has to curb finance. Martin Wolf, FT.
two old ones:
Why the U.S. has really gone broke. Chalmers Johnson, via Jesse's Cafe Americain, and
The incontrovertible truth about debt, deleveraging, devaluation and recovery. Jesse.
As always, Willem Buiter calling it as he sees it:
Obushma-Biney in the home of the frightened. Willem Buiter, Maverecon.
Saturday, May 23, 2009
Reality vs. Perception
subtitle: have i f'd up?
or, alternatively: my convictions wavering?
Back in December, when the US 10 yr flirted with 2%, I figured that I'd been right to predict/worry that the housing depression, the blowing up of the debt bubble, the stock market collapse, the dismal economy, and the consequent imminent risk of deflation implied a period of structural lower government bond yields, a la Japan.
How fleeting that feeling was!
With the exception of a brief rally in late March after Ben announced implementation of Q.E., rates have been steadily trending higher almost all YTD, with the 10-yr now back to 3.45.
What's changed? Not the economic reality. The economy has contracted at a fast rate over the last two quarters (having fallen faster to a lower level now than anyone in mid-December must have been thinking likely), and though its contracting at a slower rate now (+ve 2nd derivative), the contraction is not yet over (still -ve 1st derivative).
The housing market has shown blips, but its done that off-and-on for two years. So the housing recession is also not yet over, for reasons I've cited before: home prices still too high relative to incomes or rents; still too much excess supply and shadow inventory; credit is constrained, particularly at lower end, which prevents the whole process of sellers at the lower end moving up to be buyers at the higher end. The debt bubble has burst, and a new credit cycle has not been restarted; it will take a long time yet to digest the excessive (private) debt already in the system, an unhealthy portion of which is bad. Particularly given that unemployment keeps rising and incomes are stagnating (at best). Similarly, the consumer retrenchment, as hard as it is psychologically for Americans to give up their spendthrift ways, also won't be over with just a few months of paring back. In a deleveraging world, and one in which repaying debt is prevalent because asset prices are no longer rising, then spending will be constrained to something less than incomes, which themselves are contracting. Corporate profits have tanked, margins are constricted, cost cutting is the order of the day, capacity utilization is awfully low, etc. There don't seem to be many areas in which there is pricing power.
So, for all those reasons, the deflationary forces are as pertinent today as they were in December, if not more so.
But what HAS changed is the market's perception of government's approach to dealing with all this. As Karl Denninger says in U.S. credit rating under fire:
Inflation fears in this regard are somewhat misplaced, because there is a black hole of defaulting credit into which one is attempting to issue, but it is perceptions that counts in a fiat currency world, and the perception in the market is that the US Government has lost control of its deficit and budget process, and The Fed has lost control of the money supply.
Perhaps the bond vigilantes really ARE back!
Denninger believes foreign central banks are selling into Ben's bid, and, if that's so, the game is up --- there will be a bond market implosion and an economic collapse. (Denninger's been warning of this for over a year, of course, which means he was warning of it with yields north of 4%, well over where they are now. I don't believe he foresaw them dropping as low as they did at the end of last year, so the sell-off we've experienced recently still doesn't get us back to levels at which he was saying bonds were doomed. That said, maybe his concerns back then took some time to become widely perceived, but, now that they are, this sell-off, which is already nearing 150bps, could go a long ways yet if Denninger is right. And, needless to say, its views of his type that test my convictions.)
My impression has always been that Denninger's concerns are totally valid, but the question is one of timing. I saw David Walker's Fiscal Wake-Up Tour material while he was still Comptroller General at the GAO (before leaving to work on the same crusade at the Peterson Institute), so I know Denninger is right: the U.S. simply cannot afford to pay off its debts, not while also maintaing the commitments it has made through all its non-funded liabilities, particularly healthcare. At least, it can't do so with dollars that are worth something! The burden is just too big: as Walker's GAO material pointed out, it added up to $170,000 PER PERSON, or $440,000 per household --- and that was as of the end of 2006!! As per the Peterson Foundation, the burden is now $184,000 per person and growing.
But, in the meantime, deleveraging and debt contraction and deflation and the historically very low proportion that bond holdings represent of the U.S. household sector's balance sheets and the relative near-term safety of government debt relative to riskier assets which have taken a drubbing, all meant that there was plenty of room for incremental new internal domestic bond demand to take up the incremental new supply (as Rosenberg argued repeatedly). And even low nominal yields look okay in a disinflationary or deflationary period --- this is one of those rare times that real yields are actually higher than nominal yields.
Meanwhile, though foreign central banks certainly realize the risk to their appreciable U.S. holdings, they're stuck between a rock and a hard place. They may not want to throw good money after bad, but if they stop buying U.S. debt now, not only do they guarantee a loss on their existing positions, but their currencies, which they've been holding down relative to the US$ with those past purchases, would go the other way, killing their own export-dependent economies. And, to the extent that they have trade surpluses with the U.S., they need to do something with the dollars they receive. Would they rather exchange those greenbacks for Euros? Pounds? Yen? Swiss Francs? Lats? Lira? Roubles?
Besides, I'm really not sure Denninger is correct that foreign C.B.s are indeed cutting back on their purchases. Brad Setser is the expert in this field, and he says that central banks still (heart) dollar reserves. Now, it is true that the U.S. trade deficit has declined, in part because oil prices have fallen, and in part because personal consumption has fallen, so imports have fallen faster than exports. And to the extent that the trade deficit is smaller, that implies a smaller net outflow from the U.S. of dollars to the world (to pay for imports relative to received for exports). So less currency recycling is necessary just as the government is ramping up issuance.
But, according to Setser, central banks have actually increased their Treasury holdings at the Fed by almost twice as much as required to finance the trade deficit. However, they are indeed shortening the maturities of the U.S. debt they purchase. So maybe they don't (heart) long bonds. But Setser believes that as the yield curve has steepened significantly, we'll soon get to a point where those foreign buyers will once again look at the paltry yields they're getting on their bills and notes and opt again for the higher yields on bonds.
All told, my convictions have been sorely tested, but, perhaps naively, I don't think I've f'd up too badly. Just like last year when the markets were all gung-ho about commodity-driven inflation, the markets this year are now gung-ho about money-printing-driven inflation. And, just like last year when government bonds rallied in the second half, I remain convinced, like the Van Hoisingtons and Gary Shillings of the world, that we'll have another significant rally coming.
Where my conviction has been most sorely tested, and maybe even lost, (which isn't much help for tactical trading), is how high yields might get in the meantime. But, as I suggested in my May 4 notes about 1998 Japan (In Japan in 1998, long-bond yields declined fairly steadily from 2.70 in January to 1.16 in October, then spiked back to 2.97 by year-end and 3.53 in February. They then fell back below 2 by May.) I think these so-called "green-shoots" type periods will hurt bonds, but, ultimatley, all the bond-friendly factors will prevail, albeit with remarkable volatility in the interim.
or, alternatively: my convictions wavering?
Back in December, when the US 10 yr flirted with 2%, I figured that I'd been right to predict/worry that the housing depression, the blowing up of the debt bubble, the stock market collapse, the dismal economy, and the consequent imminent risk of deflation implied a period of structural lower government bond yields, a la Japan.
How fleeting that feeling was!
With the exception of a brief rally in late March after Ben announced implementation of Q.E., rates have been steadily trending higher almost all YTD, with the 10-yr now back to 3.45.
What's changed? Not the economic reality. The economy has contracted at a fast rate over the last two quarters (having fallen faster to a lower level now than anyone in mid-December must have been thinking likely), and though its contracting at a slower rate now (+ve 2nd derivative), the contraction is not yet over (still -ve 1st derivative).
The housing market has shown blips, but its done that off-and-on for two years. So the housing recession is also not yet over, for reasons I've cited before: home prices still too high relative to incomes or rents; still too much excess supply and shadow inventory; credit is constrained, particularly at lower end, which prevents the whole process of sellers at the lower end moving up to be buyers at the higher end. The debt bubble has burst, and a new credit cycle has not been restarted; it will take a long time yet to digest the excessive (private) debt already in the system, an unhealthy portion of which is bad. Particularly given that unemployment keeps rising and incomes are stagnating (at best). Similarly, the consumer retrenchment, as hard as it is psychologically for Americans to give up their spendthrift ways, also won't be over with just a few months of paring back. In a deleveraging world, and one in which repaying debt is prevalent because asset prices are no longer rising, then spending will be constrained to something less than incomes, which themselves are contracting. Corporate profits have tanked, margins are constricted, cost cutting is the order of the day, capacity utilization is awfully low, etc. There don't seem to be many areas in which there is pricing power.
So, for all those reasons, the deflationary forces are as pertinent today as they were in December, if not more so.
But what HAS changed is the market's perception of government's approach to dealing with all this. As Karl Denninger says in U.S. credit rating under fire:
Inflation fears in this regard are somewhat misplaced, because there is a black hole of defaulting credit into which one is attempting to issue, but it is perceptions that counts in a fiat currency world, and the perception in the market is that the US Government has lost control of its deficit and budget process, and The Fed has lost control of the money supply.
Perhaps the bond vigilantes really ARE back!
Denninger believes foreign central banks are selling into Ben's bid, and, if that's so, the game is up --- there will be a bond market implosion and an economic collapse. (Denninger's been warning of this for over a year, of course, which means he was warning of it with yields north of 4%, well over where they are now. I don't believe he foresaw them dropping as low as they did at the end of last year, so the sell-off we've experienced recently still doesn't get us back to levels at which he was saying bonds were doomed. That said, maybe his concerns back then took some time to become widely perceived, but, now that they are, this sell-off, which is already nearing 150bps, could go a long ways yet if Denninger is right. And, needless to say, its views of his type that test my convictions.)
My impression has always been that Denninger's concerns are totally valid, but the question is one of timing. I saw David Walker's Fiscal Wake-Up Tour material while he was still Comptroller General at the GAO (before leaving to work on the same crusade at the Peterson Institute), so I know Denninger is right: the U.S. simply cannot afford to pay off its debts, not while also maintaing the commitments it has made through all its non-funded liabilities, particularly healthcare. At least, it can't do so with dollars that are worth something! The burden is just too big: as Walker's GAO material pointed out, it added up to $170,000 PER PERSON, or $440,000 per household --- and that was as of the end of 2006!! As per the Peterson Foundation, the burden is now $184,000 per person and growing.
But, in the meantime, deleveraging and debt contraction and deflation and the historically very low proportion that bond holdings represent of the U.S. household sector's balance sheets and the relative near-term safety of government debt relative to riskier assets which have taken a drubbing, all meant that there was plenty of room for incremental new internal domestic bond demand to take up the incremental new supply (as Rosenberg argued repeatedly). And even low nominal yields look okay in a disinflationary or deflationary period --- this is one of those rare times that real yields are actually higher than nominal yields.
Meanwhile, though foreign central banks certainly realize the risk to their appreciable U.S. holdings, they're stuck between a rock and a hard place. They may not want to throw good money after bad, but if they stop buying U.S. debt now, not only do they guarantee a loss on their existing positions, but their currencies, which they've been holding down relative to the US$ with those past purchases, would go the other way, killing their own export-dependent economies. And, to the extent that they have trade surpluses with the U.S., they need to do something with the dollars they receive. Would they rather exchange those greenbacks for Euros? Pounds? Yen? Swiss Francs? Lats? Lira? Roubles?
Besides, I'm really not sure Denninger is correct that foreign C.B.s are indeed cutting back on their purchases. Brad Setser is the expert in this field, and he says that central banks still (heart) dollar reserves. Now, it is true that the U.S. trade deficit has declined, in part because oil prices have fallen, and in part because personal consumption has fallen, so imports have fallen faster than exports. And to the extent that the trade deficit is smaller, that implies a smaller net outflow from the U.S. of dollars to the world (to pay for imports relative to received for exports). So less currency recycling is necessary just as the government is ramping up issuance.
But, according to Setser, central banks have actually increased their Treasury holdings at the Fed by almost twice as much as required to finance the trade deficit. However, they are indeed shortening the maturities of the U.S. debt they purchase. So maybe they don't (heart) long bonds. But Setser believes that as the yield curve has steepened significantly, we'll soon get to a point where those foreign buyers will once again look at the paltry yields they're getting on their bills and notes and opt again for the higher yields on bonds.
All told, my convictions have been sorely tested, but, perhaps naively, I don't think I've f'd up too badly. Just like last year when the markets were all gung-ho about commodity-driven inflation, the markets this year are now gung-ho about money-printing-driven inflation. And, just like last year when government bonds rallied in the second half, I remain convinced, like the Van Hoisingtons and Gary Shillings of the world, that we'll have another significant rally coming.
Where my conviction has been most sorely tested, and maybe even lost, (which isn't much help for tactical trading), is how high yields might get in the meantime. But, as I suggested in my May 4 notes about 1998 Japan (In Japan in 1998, long-bond yields declined fairly steadily from 2.70 in January to 1.16 in October, then spiked back to 2.97 by year-end and 3.53 in February. They then fell back below 2 by May.) I think these so-called "green-shoots" type periods will hurt bonds, but, ultimatley, all the bond-friendly factors will prevail, albeit with remarkable volatility in the interim.
Thursday, May 21, 2009
Is it always a lagging indicator?
There are some themes or ideas that are just accepted as common wisdom, and, as such, ordained as truisms.
For a time, one of those ideas was that the U.S. consumer was resilient; for a long-time this remained true ---- until it wasn't. Another such theme was that of global decoupling; for a while, it too looked like it might turn out true --- until it didn't. A third was that subprime would be contained --- which, likewise, wasn't based on facts or evidence or even well thought-out analysis, but was just an optimistic assumption, or, better yet, presumption, that ultimately got disproved.
The problem with ideas such as these is that the reason for the platitude is hardly ever examined; its truism-ity is usually just assumed on a prospective basis, often because it has been generally true retrospectively.
I worry that the notion that labour is a lagging indicator is just such a notion.
Undoubtedly, in most recessions, labour has been a lagging indicator. But most recessions that we are familiar with have been inventory-cycle recessions, or have been recessions caused by the Fed hiking rates until something breaks, after which time they drop rates again and re-start the economic cycle, principally by way of the credit cycle.
In an inventory-led recession, such as the dot-com bust, companies project the good times too far out into the future, they build to over-capacity, find out they have too much inventory, cut back on hiring, do some firing, work down their inventories, and its only after a while of those inventories being worked off, whether or not sales have picked up, that they need to resume the labour cycle, once their inventories are lean again. Therefore, labour indicators lag in such a cycle.
In other Fed-hiking-induced recessions, the Fed fears the inflationary effects of an overheating economy, so it hikes til the economy breaks/brakes; then once it has decided that it has slowed the economy enough that inflation will remain contained, it reduces interest rates, which spurs lending, as both consumers can incur new debt more cheaply to finance their spending (mostly through housing) and businesses can likewise finance more projects because their cost of financing has fallen, which makes more projects profitable. As such, the economy gets going again, and as consumers spend and as businesses ramp up, more labour is required, and hiring picks up, but in lagged fashion.
These are the typical types of recessions we are familiar with; and these are the types of economic cycles from which we evolved the common wisdom that labour is a lagging indicator.
But is that equally true today? Needless to say, I have my (serious) doubts.
Back on April 9 I published a post called U.S. Employment Data, at the conclusion of which I noted:
"Labour data is considered a lagging indicator. While that surely remains true (i.e. the economy will show other signs of rebounding before labour does), labour trends impart their own impact on the economy, particularly in a recession that is being consumer-led, unlike some past inventory-cycle recessions. In this case, the consumer retrenchment can't help but be re-inforced by the employment trends, as overly-indebted consumers are now also increasingly income-constrained consumers."
Normally, when the Fed tries to rescue the economy by cutting interest rates, that works its magic by restarting the credit cycle --- borrowing escalates, which finances economic activity, which spurs labour creation. Today, the Fed has dropped rates to as low as they can go, but its magic has lost its magic. Banks are not expanding the credit on offer. And even if they were inclined to, consumers are in no shape (or mood) to incrementally add to their monstrous debt burdens.
Furthermore, the primary channel through which Fed-engineered interest rate changes has historically had its impact is through housing: low Fed rates tend to lead to lower mortgage rates tends to lead to more housing activity, including all the various multiplier effects therefrom. But in this cycle, because of the still large overhang of excess homes, that's simply not happening. Sure, homeowners will refi as much as they can to take advantage of lower interest payments on outstanding mortgage burdens, and this will help ease their pain and suffering, and, at the margin, will mean they have more money in their pockets to spend on gas and groceries, and it will also allow their debt repayments to work more on reducing the principal rather than just paying mostly interest, but it does NOT mean they will take on more debt.
Households are deleveraging. They have taken a huge hit to their wealth, there is no more MEW available, they are closer to retirement than they were a decade ago, during which time they've had very little savings (relying instead on asset price appreciation that has quickly since dissolved), and, even for those who had pension plans, those too have taken a serious hit, so they now realize they need to save. They need to repay their outstanding debts, and also to re-build their nest eggs (can't just retire off the proceeds of a future house sale), which means that consumption must be constrained to something less than their incomes. Which, in the meantime, is falling (not just from lost jobs, but from lost hours for those still working, and from neglible wage gains).
Similarly, businesses haven't much motivation to leverage off of low interest rates to increase their activity. They have huge levels of unutilized capacity, so, as low as (government-backed) interest rates are, they have little incentive to take that money to invest in new productive capacity or in the creation of new widgets. And, not all businesses have access to government-guaranteed debt, so funding costs for the broader business community, due to still-wide spreads, are not that incentivizing in any case.
Therefore, if the Fed can't re-start the credit cycle, then it can't restart the economic business cycle, and thus it can't do much to promote job growth.
Banks don't want to expand lending (they have enough NPLs and bad debts to worry about already, and why extend more credit into an already debt-heavy economy that is in recession and to debt-burdened consumers who have poor job prospects and declining collateral values). Consumers don't want to take on more lending (for all the same reasons the banks don't want to extend it --- both groups are properly motivated to see debt levels in aggregate fall). And businesses might be in a position to borrow money, but the question for them is what to do with it (Microsoft, for instance, did a very opportunistic (first ever, I believe?) debt issue to lock in some nice borrowing rates (just 100 back of Treasuries), but it was already sitting on a ton of cash, and its not as if issuing a bunch of bonds has any implication for its order book.)
So, without labour growth, where will expanding economic activity come from? For now, there is some that is coming from the government purse, and that increase in federal expenditures (above and beyond the decrease in state and local outlays) will likely be sufficient to impact growth in the near-term, but does little to address the structural problems in the economy (i.e. excessive debt) that do not bode well for the mid- to long-term.
At the end of the day, what promotes economic growth is spending growth, and what promotes spending growth is income growth, and what promotes income growth is job growth. And we ain't got none of that right now.
As long as deleveraging persists (and it will for quite some time given that total economy-wide debt loads have continued to increase relative to the size of the economy or personal disposable income, which have fallen faster than debt has been paid off, and given that the mirage that it was sustainable on the back of housing values has been discredited, and given that housing prices still remain stretched relative to historical norms), it is my belief that job growth will be a leading, not lagging, indicator of demand, and, therefore, of economic activity.
And, most unfortunately, we are stuck in a vicious circle. Businesses' profit margins have been crushed, so pressure remains on them to cut costs (i.e. cut labour). As labour conditions continue to deteriorate, aggregate demand will continue to be stifled. And so it goes and so it goes.
At some point, conditions will have reached a point that sustainable growth will become inevitable. But a decade-long debt-drinking binge will not be cured with a 10-month hangover --- not until all that bad booze has been purged from the system and the drunks are over the memory of how bad that hangover felt.
For a time, one of those ideas was that the U.S. consumer was resilient; for a long-time this remained true ---- until it wasn't. Another such theme was that of global decoupling; for a while, it too looked like it might turn out true --- until it didn't. A third was that subprime would be contained --- which, likewise, wasn't based on facts or evidence or even well thought-out analysis, but was just an optimistic assumption, or, better yet, presumption, that ultimately got disproved.
The problem with ideas such as these is that the reason for the platitude is hardly ever examined; its truism-ity is usually just assumed on a prospective basis, often because it has been generally true retrospectively.
I worry that the notion that labour is a lagging indicator is just such a notion.
Undoubtedly, in most recessions, labour has been a lagging indicator. But most recessions that we are familiar with have been inventory-cycle recessions, or have been recessions caused by the Fed hiking rates until something breaks, after which time they drop rates again and re-start the economic cycle, principally by way of the credit cycle.
In an inventory-led recession, such as the dot-com bust, companies project the good times too far out into the future, they build to over-capacity, find out they have too much inventory, cut back on hiring, do some firing, work down their inventories, and its only after a while of those inventories being worked off, whether or not sales have picked up, that they need to resume the labour cycle, once their inventories are lean again. Therefore, labour indicators lag in such a cycle.
In other Fed-hiking-induced recessions, the Fed fears the inflationary effects of an overheating economy, so it hikes til the economy breaks/brakes; then once it has decided that it has slowed the economy enough that inflation will remain contained, it reduces interest rates, which spurs lending, as both consumers can incur new debt more cheaply to finance their spending (mostly through housing) and businesses can likewise finance more projects because their cost of financing has fallen, which makes more projects profitable. As such, the economy gets going again, and as consumers spend and as businesses ramp up, more labour is required, and hiring picks up, but in lagged fashion.
These are the typical types of recessions we are familiar with; and these are the types of economic cycles from which we evolved the common wisdom that labour is a lagging indicator.
But is that equally true today? Needless to say, I have my (serious) doubts.
Back on April 9 I published a post called U.S. Employment Data, at the conclusion of which I noted:
"Labour data is considered a lagging indicator. While that surely remains true (i.e. the economy will show other signs of rebounding before labour does), labour trends impart their own impact on the economy, particularly in a recession that is being consumer-led, unlike some past inventory-cycle recessions. In this case, the consumer retrenchment can't help but be re-inforced by the employment trends, as overly-indebted consumers are now also increasingly income-constrained consumers."
Normally, when the Fed tries to rescue the economy by cutting interest rates, that works its magic by restarting the credit cycle --- borrowing escalates, which finances economic activity, which spurs labour creation. Today, the Fed has dropped rates to as low as they can go, but its magic has lost its magic. Banks are not expanding the credit on offer. And even if they were inclined to, consumers are in no shape (or mood) to incrementally add to their monstrous debt burdens.
Furthermore, the primary channel through which Fed-engineered interest rate changes has historically had its impact is through housing: low Fed rates tend to lead to lower mortgage rates tends to lead to more housing activity, including all the various multiplier effects therefrom. But in this cycle, because of the still large overhang of excess homes, that's simply not happening. Sure, homeowners will refi as much as they can to take advantage of lower interest payments on outstanding mortgage burdens, and this will help ease their pain and suffering, and, at the margin, will mean they have more money in their pockets to spend on gas and groceries, and it will also allow their debt repayments to work more on reducing the principal rather than just paying mostly interest, but it does NOT mean they will take on more debt.
Households are deleveraging. They have taken a huge hit to their wealth, there is no more MEW available, they are closer to retirement than they were a decade ago, during which time they've had very little savings (relying instead on asset price appreciation that has quickly since dissolved), and, even for those who had pension plans, those too have taken a serious hit, so they now realize they need to save. They need to repay their outstanding debts, and also to re-build their nest eggs (can't just retire off the proceeds of a future house sale), which means that consumption must be constrained to something less than their incomes. Which, in the meantime, is falling (not just from lost jobs, but from lost hours for those still working, and from neglible wage gains).
Similarly, businesses haven't much motivation to leverage off of low interest rates to increase their activity. They have huge levels of unutilized capacity, so, as low as (government-backed) interest rates are, they have little incentive to take that money to invest in new productive capacity or in the creation of new widgets. And, not all businesses have access to government-guaranteed debt, so funding costs for the broader business community, due to still-wide spreads, are not that incentivizing in any case.
Therefore, if the Fed can't re-start the credit cycle, then it can't restart the economic business cycle, and thus it can't do much to promote job growth.
Banks don't want to expand lending (they have enough NPLs and bad debts to worry about already, and why extend more credit into an already debt-heavy economy that is in recession and to debt-burdened consumers who have poor job prospects and declining collateral values). Consumers don't want to take on more lending (for all the same reasons the banks don't want to extend it --- both groups are properly motivated to see debt levels in aggregate fall). And businesses might be in a position to borrow money, but the question for them is what to do with it (Microsoft, for instance, did a very opportunistic (first ever, I believe?) debt issue to lock in some nice borrowing rates (just 100 back of Treasuries), but it was already sitting on a ton of cash, and its not as if issuing a bunch of bonds has any implication for its order book.)
So, without labour growth, where will expanding economic activity come from? For now, there is some that is coming from the government purse, and that increase in federal expenditures (above and beyond the decrease in state and local outlays) will likely be sufficient to impact growth in the near-term, but does little to address the structural problems in the economy (i.e. excessive debt) that do not bode well for the mid- to long-term.
At the end of the day, what promotes economic growth is spending growth, and what promotes spending growth is income growth, and what promotes income growth is job growth. And we ain't got none of that right now.
As long as deleveraging persists (and it will for quite some time given that total economy-wide debt loads have continued to increase relative to the size of the economy or personal disposable income, which have fallen faster than debt has been paid off, and given that the mirage that it was sustainable on the back of housing values has been discredited, and given that housing prices still remain stretched relative to historical norms), it is my belief that job growth will be a leading, not lagging, indicator of demand, and, therefore, of economic activity.
And, most unfortunately, we are stuck in a vicious circle. Businesses' profit margins have been crushed, so pressure remains on them to cut costs (i.e. cut labour). As labour conditions continue to deteriorate, aggregate demand will continue to be stifled. And so it goes and so it goes.
At some point, conditions will have reached a point that sustainable growth will become inevitable. But a decade-long debt-drinking binge will not be cured with a 10-month hangover --- not until all that bad booze has been purged from the system and the drunks are over the memory of how bad that hangover felt.
Tuesday, May 19, 2009
Worthwhile Reading - May 9 - 21
Kabuki on the Potomac: Reforming CDS and OTC derivatives. Chris Whalen, The Institutional Risk Analyst, via Barry Ritholthz's The Big Picture.
Normalizing earnings during profit freefalls. Barry Ritholtz.
Novelty chart of the day. Zero Hedge, with chart from NDR.
Perfect revelation. Cassandra Does Tokyo (on origins, and bastardization, of QE).
Credit crisis watch: thawing -- noteworthy progress. Prieur du Plessis, via The Big Picture.
HOWEVER...
The world in recession. Carnegie Endowment. includes presentations from Olivier Blanchard, Director of the Research Department of the IMF, among others.
U.S. banking crisis may last until 2013: S&P. Reuters.
Secular Outlook: A new normal. Mohamed El Erian, PIMCO.
The "new normal" for growth. Kenneth Rogoff, Project Syndicate.
Damage assessment: how much will the financial crisis hurt America's economic potential. The Economist.
*** The end-game draws nigh: the future evolution of the debt-to-GDP ratio. Dr. Woody Brock, of Strategic Economic Decisions, via John Mauldin's Outside the Box.
The exuberance glut, or the dollar-euro short squeeze race. Tyler Durden, Zero Hedge.
Deep thoughts from Bob Janjuah. Zero Hedge.
*** Banks pass stress test; regulators fail ethics test. John Hussman.
read it all, but here's one excerpt on the markets:
"Even if we have observed the ultimate lows of this downturn (which I would not take as given), it does not follow that the decline we've observed over the past 18 months will be progressively recovered without a great deal of intervening difficulty. The S&P 500 has retraced just over 25% of its bear market loss. The 904 level on the S&P 500 was a 25% retracement, and 977 would be a 1/3 retracement, which is not unreasonable. Aside from such retracements, the idea of a “V-shaped” recovery in the market is strongly odds with “post-crash” market behavior, which generally features a long and drawn-out flat period for years afterward. Given the enormous overhang of Alt-A and option-ARM resets scheduled to begin later this year, extending into 2012, such a profile would not be surprising in the present case."
and another on the stress tests:
"Now, just think of this for a minute. Even if you assume that the “risk-weighted assets” of the banks are about two-thirds of their total assets (as the stress-test does), we're still looking at $7.8 trillion in total assets at risk in these banks, and despite being on the edge of insolvency only weeks ago, we are asked to believe that they will need less than 1% of this amount – $74.6 billion – of additional capital even in a worst case scenario."
The destructive implications of the bailout -- understanding equilibrium. Hussman again.
excerpt:
"One of the features that has enabled the bureaucratic abuse of the public during the past year has been the frantic, if temporary, flight-to-safety by investors. The Treasury has issued an enormous volume of debt into the frightened hands of investors seeking default-free securities. This has allowed the Treasury to finance a massive and largely needless transfer of wealth to bank bondholders so easily over the short-term that the longer-term cost has been almost completely obscured. But by transferring wealth from those who did not finance reckless loans to those who did – providing monetary compensation without economic production – the bureaucrats at the Treasury and Federal Reserve have crowded out more than a trillion dollars of gross investment that would have otherwise have been made by responsible people in the coming years, shifted assets to the control of those who have proven themselves to be irresponsible destroyers of capital, and have planted the seeds of inflation that will cut short any emerging recovery."
a bunch on banks:
Inside Citi's stress test: more like an F than a B+. Time.
and
How the bailouts screw smaller banks. Barry Ritholtz.
and
I would not own banks stocks: Meredith Whitney. CNBC.
and
The race: future earnings vs. writedowns. CR, with reference to Roubini and Hatzius.
and
Mark Patterson: "It's a sham; the banks are insolvent." Zero Hedge.
and
Breathing easier after bank stress tests? You shouldn't. McClatchy.
and
Red pill or blue pill? Jesse's Cafe Americain.
and a bunch on housing and mortgages:
Housing bubbles around the world: looks pretty bad. Rebecca Wilder, News N Economics.
and
On "rock bottom" housing prices. Zero Hedge.
and
A portrait of the ax, not falling. Rolfe Winkler, Option Armageddon.
and
April foreclosure and servicer tracker report. Mark Hanson, Mr. Mortgage.
excerpt:
"Bottom Line — after seeing these latest figures I am more convinced than ever that the next step is wide-spread principal balance reductions that will reduce the massive negative equity burden in America and be a first-step to solving the mortgage and housing crisis once and for all."
and
Loan reset threat looms until 2012. Mathew Padilla, Mortgage Insider, with charts from Credit Suisse.
and
Loan reset / recast schedule. Calculated Risk.
and
Zillow: higher percentage of homeowners waiting for a market turnaround. Calculated Risk.
and
Foreclosure activity remains at record levels in April. RealtyTrac.
excerpt:
"This suggests that many lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria. It's likely that we'll see a corresponding spike in REOs as these loans move through the foreclosure process over the next few months."
and
Freddie reports $9.9 billion quarterly loss. MarketWatch.
excerpt:
"This delinquency data suggests that continuing home price declines and growing unemployment are significantly affecting behavior by a broader segment of mortgage borrowers. Additionally, as the slump in the U.S. housing market has persisted for more than a year, increasing numbers of borrowers that began with significant equity are now “underwater,” or owing more on their mortgage loans than their homes are currently worth. Our loan loss severities, or the average amount of recognized losses per loan, also continued to increase"
so, house prices are still too high, shadow inventory is building, more foreclosures are coming, and plenty more mortgage resets will be coming down the pike, more homeowners are underwater and it sounds like from Freddie that walking away is becoming more common (even in prime, not just subprime), all at time when mortgage rates are lower but lending standards are MUCH tighter.
Options for Fannie, Freddie may include "wind-down" [:OMB]. Bloomberg. (after hundreds of billions sunk)
meanwhile...
Commercial property prices. Mark Thoma, Economist's View, with info from MIT.
MEW, consumption, and personal savings rate. Calculated Risk again.
Update on inventory correction. CR. (yes, there was a big inventory correction in recent quarters, but inventory decumulation not keeping pace with decline in sales, so inventory-to-sales ratios remain higher than they've been since 01-02 recession -- and with retail sales still declining in April, that doesn't bode well for the inventory correction being done)
The anorexia of earnings and the government's junk diet. Tyler Durden, Zero Hedge.
Krugman fears lost decade for U.S. due to half-steps. Reuters.
Turning which corner? and Not so green Wednesday. Tim Duy's FedWatch.
Financial policy: looking forward. Susan Woodward and Robert Hall, Financial Crisis and Recession.
The worst is yet to come. Jesse's Cafe Americain, channeling Howard Davidowitz.
[update: Mish gives his take on this here]
The collapse of the neoliberal model: Where Russia went wrong. Michael Hudson, counterpunch.
excerpt:
"The problem is how to restructure the financial system to make it serve the objectives of industrial growth rather than merely facilitating capital flight. Throughout the world financial interests have taken control of government and used neoliberal policies to promote their own gain-seeking – financial gains without industrialization or agricultural self-sufficiency. Betting against one’s own currency is more remunerative than making the effort to invest in capital equipment and develop markets for new output. So unemployment and domestic budget deficits are soaring. The neoliberal failure to distinguish between productive and merely extractive or speculative forms of gain seeking has created a travesty of the kind of wealth creation that Adam Smith described in The Wealth of Nations. The financialization of economies has been decoupled from tangible capital investment to expand employment and productive powers."
Apocalypse when? Investors' Business Daily. (on social security and medicare)
The 81% tax increase. Bruce Bartlett, Forbes.
Fed: delinquency rates surged in Q1 2009. Calculated Risk.
and
Credit card defaults reach record highs in April. CNBC.
Asia needs to dump its growth model. Michael Pettis, FT.
China cuts lending amid asset bubble fears. FT.
Chinese power generation. Jake, Econompic Data.
China and the liquidity trap. Paul Krugman.
Not putting your money where your mouth is. Brad Setser, Follow the Money.
The wonderful world of negative nominal interest rates, again. Willem Buiter, Maverecon.
Inflection points and turning points - since you asked. Buiter again.
Credit growth in the aftermath of a crisis. Michael Pomerleano, FT.
(so, with no income growth, and no credit growth, where is PCE spending growth supposed to come from?)
Consumer credit contracts. Jake, EconompicData.
for more on that point, we have:
U.S. household deleveraging and future consumption growth. FRBSF Economic Letter.
excerpt:
"In the long-run, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes. For many U.S. households, current debt levels appear too high, as evidenced by the sharp rise in delinquencies and foreclosures in recent years. To achieve a sustainable level of debt relative to income, households may need to undergo a prolonged period of deleveraging, whereby debt is reduced and saving is increased. This Economic Letter discusses how a deleveraging of the U.S. household sector might affect the growth rate of consumption going forward.....
... More than 20 years ago, economist Hyman Minsky (1986) proposed a "financial instability hypothesis." He argued that prosperous times can often induce borrowers to accumulate debt beyond their ability to repay out of current income, thus leading to financial crises and severe economic contractions....
... could result in a substantial and prolonged slowdown in consumer spending"
[update: Mish has his own commentary here on this FRBSF report]
a bunch from Hellasious:
How steep is my valley. (does the shape of the yield curve mean now what it would normally mean?)
and
It's a copycat - deadcat bounce. (from risk revulsion to risk appetite.... on what?)
and, to answer that question:
Bailouts, inventories and jobs.
and why things are likely getting ahead of themselves:
The great reset results in traps. and The Lazarus market. and The real economy in pictures. and
*** Low wages + high consumption = massive debt. and GDP on debt steroids.
all from Sudden Debt.
One thought could change your life. Michael Matovcik, via Zero Hedge.
lotsa little quotes/ideas, my favourite of which is:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” Ludwig Von Mises
FRBSF Economic Outlook. Mark Thoma, Economist's View.
Economists stuck in 1930s need a decade update. Caroline Baum, Bloomberg. (partly about leading indicators, partly about Alan Blinder's opinion not to take the foot off the gas too soon, partly C.B.'s opinion that following A.B.'s advice to avoid the 1930s might lead to reprise of 1970s)
Involuntary part-time workers and the deficiencies of the unemployment rate. Federal Reserve Bank of Cleveland.
Government payroll warping overall data? Jake, Econompic Data. (published figure: -539, take off downward revisions to past months of -66 and one-time census hiring -66, and you get -671 (and that's ignoring the huge assumed positive contribution (241k) of the Birth/Death adjustment)
Bad collateral. Jim Kunstler.
excerpt:
"... All this is to say why it is so dispiriting to see Mr. Obama's White House mount a campaign to sustain the unsustainable in the economic realm. Everything they've done for four months involving money management and enterprise policy -- from backstopping hopeless banks, to gaming the bankruptcies of the big car companies, to the bungled efforts to prop up artificially-high house prices -- amounts to a gigantic exercise in futility. Worse, it gives off odors of dishonesty or stupidity, since the ominous tendings of our system are so starkly self-evident. Not least of the problems entailed in all this are the scary political consequences. ... The Obama White House has very quickly painted itself into a corner on these things. The so-called bank "stress test" couldn't have backfired more completely. Rather than bolster confidence in our money system and the people who run it, it only made the system appear more obviously corrupt. It made the Treasury Department (and the White House by extension) look idiotic for concocting it. Worse, the game of allowing the banks to audit themselves, and cook their books under newly jiggered accounting rules, only made them look less sound and trustworthy, and their executives more venal and mendacious. The stress test scam also virtually guaranteed that the banks will not get another dime out of congress -- even while it is common knowledge that they will desperately need quadrillions more dimes in the months ahead. Who knows what the point of this ludicrous exercise was?"
Another 'I told you so': pensions. Karl Denninger. (the PBGC's deficit has tripled in the last six months to $33.5B, and that's before it has to account for Chrysler or GM)
Let's assume we have a can opener. Steve Keen's Debtwatch. (applies to Australia's budget forecasts, but same line of thinking applies to Obama's and even the BoC's rosy forward-looking return to trend-growth forecasts.)
first, in praise of gold:
Financial Psalm 16. Cassandra.
Monetizing the debt: explanation for non-economists and laymen. The Prudent Investor.
a little bball debate:
Kobe vs. LeBron. excerpts from TrueHoop debate.
and some cool art:
WOW! 3D pavement art. must see. Edgar Mueller.
Normalizing earnings during profit freefalls. Barry Ritholtz.
Novelty chart of the day. Zero Hedge, with chart from NDR.
Perfect revelation. Cassandra Does Tokyo (on origins, and bastardization, of QE).
Chasing the shadow of money. Tyler Durden, via nakedcapitalism.
Why I'm freaking out. Gonzalo Lira, via nakedcapitalism.
The simplest explanation. Distressed Lookout, via Zero Hedge.
*** The last hurrah and seven lean years. Jeremy Grantham, GMO Quarterly Letter, via Option Amageddon
excerpt: "Probably the single biggest drag on the economy over the next several years will be the massive write-down in perceived wealth that I described briefly last quarter. In the U.S., the total market value of housing, commercial real estate, and stocks was about $50 trillion at the peak and fell below $30 trillion at the low. This loss of $20-$23 trillion of perceived wealth in the U.S. alone (although it is not a drop in real wealth, which is comprised of a stock of educated workers and modern plants, etc.) is still enough to deliver a life-changing shock for hundreds of millions of people. No longer as rich as we thought – under-saved, under-pensioned, and realizing it – we will enter a less indulgent world, if a more realistic one, in which life is to be lived more frugally. Collectively, we will save more, spend less, and waste less. It may not even be a less pleasant world when we get used to it, but for several years it will cause a lot of readjustment problems."
Enjoy the rally while it lasts -- but expect to take a sucker punch. Ambrose-Evans Pritchard, Telegraph. (quoting James Montier and Albert Edwards from SocGen and Teun Draaisma from Morgan Stanley)
Was it a sucker's rally? Andy Kessler, WSJ.
Liquidity crisis? Check. James Kwak, The Baseline Scenario.
with stocks having rallied as much as they have since March 9, its good to note that its not been just an equity-mope phenomenon, as credit indications have improved also; green shoots theories helping all risk assets:Credit crisis watch: thawing -- noteworthy progress. Prieur du Plessis, via The Big Picture.
HOWEVER...
The world in recession. Carnegie Endowment. includes presentations from Olivier Blanchard, Director of the Research Department of the IMF, among others.
U.S. banking crisis may last until 2013: S&P. Reuters.
Secular Outlook: A new normal. Mohamed El Erian, PIMCO.
The "new normal" for growth. Kenneth Rogoff, Project Syndicate.
Damage assessment: how much will the financial crisis hurt America's economic potential. The Economist.
It's that "vision" thing: why the bailouts aren't working, and why a new financial system is needed. Jan Kregel, Levy Institute.
*** The $33,000,000,000,000 question. Niels Jensen, via John Mauldin's Outside the Box.
Faith-based economics. John Mauldin, Thoughts from the Frontline.*** The end-game draws nigh: the future evolution of the debt-to-GDP ratio. Dr. Woody Brock, of Strategic Economic Decisions, via John Mauldin's Outside the Box.
The exuberance glut, or the dollar-euro short squeeze race. Tyler Durden, Zero Hedge.
Deep thoughts from Bob Janjuah. Zero Hedge.
*** Banks pass stress test; regulators fail ethics test. John Hussman.
read it all, but here's one excerpt on the markets:
"Even if we have observed the ultimate lows of this downturn (which I would not take as given), it does not follow that the decline we've observed over the past 18 months will be progressively recovered without a great deal of intervening difficulty. The S&P 500 has retraced just over 25% of its bear market loss. The 904 level on the S&P 500 was a 25% retracement, and 977 would be a 1/3 retracement, which is not unreasonable. Aside from such retracements, the idea of a “V-shaped” recovery in the market is strongly odds with “post-crash” market behavior, which generally features a long and drawn-out flat period for years afterward. Given the enormous overhang of Alt-A and option-ARM resets scheduled to begin later this year, extending into 2012, such a profile would not be surprising in the present case."
and another on the stress tests:
"Now, just think of this for a minute. Even if you assume that the “risk-weighted assets” of the banks are about two-thirds of their total assets (as the stress-test does), we're still looking at $7.8 trillion in total assets at risk in these banks, and despite being on the edge of insolvency only weeks ago, we are asked to believe that they will need less than 1% of this amount – $74.6 billion – of additional capital even in a worst case scenario."
The destructive implications of the bailout -- understanding equilibrium. Hussman again.
excerpt:
"One of the features that has enabled the bureaucratic abuse of the public during the past year has been the frantic, if temporary, flight-to-safety by investors. The Treasury has issued an enormous volume of debt into the frightened hands of investors seeking default-free securities. This has allowed the Treasury to finance a massive and largely needless transfer of wealth to bank bondholders so easily over the short-term that the longer-term cost has been almost completely obscured. But by transferring wealth from those who did not finance reckless loans to those who did – providing monetary compensation without economic production – the bureaucrats at the Treasury and Federal Reserve have crowded out more than a trillion dollars of gross investment that would have otherwise have been made by responsible people in the coming years, shifted assets to the control of those who have proven themselves to be irresponsible destroyers of capital, and have planted the seeds of inflation that will cut short any emerging recovery."
a bunch on banks:
Inside Citi's stress test: more like an F than a B+. Time.
and
How the bailouts screw smaller banks. Barry Ritholtz.
and
I would not own banks stocks: Meredith Whitney. CNBC.
and
The race: future earnings vs. writedowns. CR, with reference to Roubini and Hatzius.
and
Mark Patterson: "It's a sham; the banks are insolvent." Zero Hedge.
and
Breathing easier after bank stress tests? You shouldn't. McClatchy.
and
Red pill or blue pill? Jesse's Cafe Americain.
and a bunch on housing and mortgages:
Housing bubbles around the world: looks pretty bad. Rebecca Wilder, News N Economics.
and
On "rock bottom" housing prices. Zero Hedge.
and
A portrait of the ax, not falling. Rolfe Winkler, Option Armageddon.
and
April foreclosure and servicer tracker report. Mark Hanson, Mr. Mortgage.
excerpt:
"Bottom Line — after seeing these latest figures I am more convinced than ever that the next step is wide-spread principal balance reductions that will reduce the massive negative equity burden in America and be a first-step to solving the mortgage and housing crisis once and for all."
and
Loan reset threat looms until 2012. Mathew Padilla, Mortgage Insider, with charts from Credit Suisse.
and
Loan reset / recast schedule. Calculated Risk.
and
Zillow: higher percentage of homeowners waiting for a market turnaround. Calculated Risk.
and
Foreclosure activity remains at record levels in April. RealtyTrac.
excerpt:
"This suggests that many lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria. It's likely that we'll see a corresponding spike in REOs as these loans move through the foreclosure process over the next few months."
and
Freddie reports $9.9 billion quarterly loss. MarketWatch.
excerpt:
"This delinquency data suggests that continuing home price declines and growing unemployment are significantly affecting behavior by a broader segment of mortgage borrowers. Additionally, as the slump in the U.S. housing market has persisted for more than a year, increasing numbers of borrowers that began with significant equity are now “underwater,” or owing more on their mortgage loans than their homes are currently worth. Our loan loss severities, or the average amount of recognized losses per loan, also continued to increase"
so, house prices are still too high, shadow inventory is building, more foreclosures are coming, and plenty more mortgage resets will be coming down the pike, more homeowners are underwater and it sounds like from Freddie that walking away is becoming more common (even in prime, not just subprime), all at time when mortgage rates are lower but lending standards are MUCH tighter.
Options for Fannie, Freddie may include "wind-down" [:OMB]. Bloomberg. (after hundreds of billions sunk)
meanwhile...
Commercial property prices. Mark Thoma, Economist's View, with info from MIT.
MEW, consumption, and personal savings rate. Calculated Risk again.
Update on inventory correction. CR. (yes, there was a big inventory correction in recent quarters, but inventory decumulation not keeping pace with decline in sales, so inventory-to-sales ratios remain higher than they've been since 01-02 recession -- and with retail sales still declining in April, that doesn't bode well for the inventory correction being done)
The anorexia of earnings and the government's junk diet. Tyler Durden, Zero Hedge.
Krugman fears lost decade for U.S. due to half-steps. Reuters.
Turning which corner? and Not so green Wednesday. Tim Duy's FedWatch.
Financial policy: looking forward. Susan Woodward and Robert Hall, Financial Crisis and Recession.
The worst is yet to come. Jesse's Cafe Americain, channeling Howard Davidowitz.
[update: Mish gives his take on this here]
The collapse of the neoliberal model: Where Russia went wrong. Michael Hudson, counterpunch.
excerpt:
"The problem is how to restructure the financial system to make it serve the objectives of industrial growth rather than merely facilitating capital flight. Throughout the world financial interests have taken control of government and used neoliberal policies to promote their own gain-seeking – financial gains without industrialization or agricultural self-sufficiency. Betting against one’s own currency is more remunerative than making the effort to invest in capital equipment and develop markets for new output. So unemployment and domestic budget deficits are soaring. The neoliberal failure to distinguish between productive and merely extractive or speculative forms of gain seeking has created a travesty of the kind of wealth creation that Adam Smith described in The Wealth of Nations. The financialization of economies has been decoupled from tangible capital investment to expand employment and productive powers."
Apocalypse when? Investors' Business Daily. (on social security and medicare)
Unintended consequences....again! Karl Denninger, The Market Ticker.
re: Obama's treatment of GM and Chrysler debt-holders:
"Without capital formation and private investment, our capital markets and ultimately our business environment will wither and die. This is not conjecture, it is mathematical certainty.
The Rule of Law is what has separated us from a banana republic for over 200 years. That has now been relegated to the dustbin of history"
The 81% tax increase. Bruce Bartlett, Forbes.
Fed: delinquency rates surged in Q1 2009. Calculated Risk.
and
Credit card defaults reach record highs in April. CNBC.
Asia needs to dump its growth model. Michael Pettis, FT.
China cuts lending amid asset bubble fears. FT.
Chinese power generation. Jake, Econompic Data.
China and the liquidity trap. Paul Krugman.
Not putting your money where your mouth is. Brad Setser, Follow the Money.
The wonderful world of negative nominal interest rates, again. Willem Buiter, Maverecon.
Inflection points and turning points - since you asked. Buiter again.
Credit growth in the aftermath of a crisis. Michael Pomerleano, FT.
(so, with no income growth, and no credit growth, where is PCE spending growth supposed to come from?)
Consumer credit contracts. Jake, EconompicData.
for more on that point, we have:
U.S. household deleveraging and future consumption growth. FRBSF Economic Letter.
excerpt:
"In the long-run, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes. For many U.S. households, current debt levels appear too high, as evidenced by the sharp rise in delinquencies and foreclosures in recent years. To achieve a sustainable level of debt relative to income, households may need to undergo a prolonged period of deleveraging, whereby debt is reduced and saving is increased. This Economic Letter discusses how a deleveraging of the U.S. household sector might affect the growth rate of consumption going forward.....
... More than 20 years ago, economist Hyman Minsky (1986) proposed a "financial instability hypothesis." He argued that prosperous times can often induce borrowers to accumulate debt beyond their ability to repay out of current income, thus leading to financial crises and severe economic contractions....
... could result in a substantial and prolonged slowdown in consumer spending"
[update: Mish has his own commentary here on this FRBSF report]
a bunch from Hellasious:
How steep is my valley. (does the shape of the yield curve mean now what it would normally mean?)
and
It's a copycat - deadcat bounce. (from risk revulsion to risk appetite.... on what?)
and, to answer that question:
Bailouts, inventories and jobs.
and why things are likely getting ahead of themselves:
The great reset results in traps. and The Lazarus market. and The real economy in pictures. and
*** Low wages + high consumption = massive debt. and GDP on debt steroids.
all from Sudden Debt.
One thought could change your life. Michael Matovcik, via Zero Hedge.
lotsa little quotes/ideas, my favourite of which is:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” Ludwig Von Mises
FRBSF Economic Outlook. Mark Thoma, Economist's View.
Economists stuck in 1930s need a decade update. Caroline Baum, Bloomberg. (partly about leading indicators, partly about Alan Blinder's opinion not to take the foot off the gas too soon, partly C.B.'s opinion that following A.B.'s advice to avoid the 1930s might lead to reprise of 1970s)
Involuntary part-time workers and the deficiencies of the unemployment rate. Federal Reserve Bank of Cleveland.
Government payroll warping overall data? Jake, Econompic Data. (published figure: -539, take off downward revisions to past months of -66 and one-time census hiring -66, and you get -671 (and that's ignoring the huge assumed positive contribution (241k) of the Birth/Death adjustment)
Bad collateral. Jim Kunstler.
excerpt:
"... All this is to say why it is so dispiriting to see Mr. Obama's White House mount a campaign to sustain the unsustainable in the economic realm. Everything they've done for four months involving money management and enterprise policy -- from backstopping hopeless banks, to gaming the bankruptcies of the big car companies, to the bungled efforts to prop up artificially-high house prices -- amounts to a gigantic exercise in futility. Worse, it gives off odors of dishonesty or stupidity, since the ominous tendings of our system are so starkly self-evident. Not least of the problems entailed in all this are the scary political consequences. ... The Obama White House has very quickly painted itself into a corner on these things. The so-called bank "stress test" couldn't have backfired more completely. Rather than bolster confidence in our money system and the people who run it, it only made the system appear more obviously corrupt. It made the Treasury Department (and the White House by extension) look idiotic for concocting it. Worse, the game of allowing the banks to audit themselves, and cook their books under newly jiggered accounting rules, only made them look less sound and trustworthy, and their executives more venal and mendacious. The stress test scam also virtually guaranteed that the banks will not get another dime out of congress -- even while it is common knowledge that they will desperately need quadrillions more dimes in the months ahead. Who knows what the point of this ludicrous exercise was?"
Another 'I told you so': pensions. Karl Denninger. (the PBGC's deficit has tripled in the last six months to $33.5B, and that's before it has to account for Chrysler or GM)
Let's assume we have a can opener. Steve Keen's Debtwatch. (applies to Australia's budget forecasts, but same line of thinking applies to Obama's and even the BoC's rosy forward-looking return to trend-growth forecasts.)
Wholesale prices post largest 12-month decline since 1950 [finished goods PPI down 3.7% YoY, but intermediate goods down 10.5% and crude goods down 40%!]
and Non-existent "pre-recovery" in manufacturing suggests U.S. Treasuries a buy. both by Michael Shedlock.The dynamically-hedged economy II. Doug Noland, Prudent Bear (skip to the last section); excerpt:
"The more bearish analysts argue that current economic underpinnings do not support surging stock and debt prices. Of course they don’t, but that’s not really the key issue. Rather, the question is whether the return of liquidity and securities market inflation will stoke sufficient confidence (from both spenders and lenders) to spur sustainable economic recovery. Here I must lean heavily on my analytical framework. In the short-run, I have to presume that major financial sector and market developments will work to stimulate the real economy (as they have repeatedly in the past). At the same time, it’s my view that the economy today is unusually susceptible to an artificial and fleeting recovery. The unwind of bearish hedges will at some point have run its course, concluding a period of major artificial liquidity generation. Moreover, I question the sustainability of the Government Finance Bubble (fiscal and monetary) overall. The markets are setting themselves up for disappointment."
The economic crisis and its implications for the science of economics. The Perimeter Institute Recorded Seminar Archive. (includes Roubini, Taleb, Andrew Lo, Bill Janeway)
'I think people are still in denial'. Brian Milner interviews David Rosenberg, G&M.
and, great news, at least for a limited time:
Sign up for economic reports featuring David Rosenberg. Gluskin Sheff.
and, a few on the light-hearted side:first, in praise of gold:
Financial Psalm 16. Cassandra.
Monetizing the debt: explanation for non-economists and laymen. The Prudent Investor.
a little bball debate:
Kobe vs. LeBron. excerpts from TrueHoop debate.
and some cool art:
WOW! 3D pavement art. must see. Edgar Mueller.
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