Links, June 29

World debt charts. The Economist.


other fare:

is Iran soon going to be a page 1 story?
As per Stratfor, 2 of the U.S.'s 3 Atlantic carrier groups are now in the area.
for some colour on what's going on, Noah Chomsky writes about the Iranian threat

“They are gearing up totally for the destruction of Iran,” according to Dan Plesch, director of the Centre for International Studies and Diplomacy at the University of London. “US bombers and long range missiles are ready today to destroy 10,000 targets in Iran in a few hours,” he said....

the Iranian threat is not military.... US invasion and military occupation of Iran’s neighbors is “stabilization.” Iran’s efforts to extend its influence in neighboring countries is “destabilization,” hence plainly illegitimate.

Lightning strikes 3 towers in Chicago at same time. 3QD.

Links, June 28

Was Joe Biden supposed to say that "there's no possibility to restore 8 million jobs lost in the Great Recession"?? Just wondering.

The third depression. Paul Krugman, NYT.

Ben Bernanke needs fresh monetary blitz as US recovery falters. Ambrose Evans-Pritchard. Telegraph.
this is interesting excerpt:

Mr Bernanke is so worried about the chemistry of the Fed's voting body – the Federal Open Market Committee (FOMC) – that he has persuaded vice-chairman Don Kohn to delay retirement until Janet Yellen has been confirmed by the Senate to take over his post.

though I agree with Plosser and the hawks that the Fed's QE has made monetary policy cross into the realm of fiscal policy --- and that Congress should be the party responsible for fiscal policy --- I agree with the doves that conventional monetary policy is not sufficiently stimulative (pushing on a string).

another from Evans-Pritchard:
RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve

Andrew Roberts, credit chief at RBS: "we cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable"

so RBS is thinking the same as Albert Edwards at SocGen

What might history tell us about the Greek crisis? China Financial Markets.

Michael Pettis makes 5 predictions:

1. The euro will not survive in its current form

Ernest Hemingway once described the process of going broke as “Slowly. Then all at once.”

That is not a very precise description, I know, but I would guess that support for the euro will erode very slowly until suddenly it seems inevitable and then the process will happen breathtakingly quickly.

2. This is the big one

In my opinion the current set of crises, beginning with the sub-prime crisis in the US and spreading throughout the world, is not a short-term liquidity crisis like LTCM, the Asian Crisis, or the Mexican crisis of 1994. I think this is likely to be one of those big events, one that represents a major re-adjustment in the world during which time the massive imbalances that had been built up during the long globalization cycle that started around the late 1980s and early 1990s are finally worked out.

Not only will Greece, in other words, get worse, but it is by no means the end of the crisis. A lot more countries in Southern Europe, Latin America and Asia are going to be caught up in this before it ends.

3. The European crisis will be accompanied by a trade shock.

The deficit countries of Europe, whose combined trade deficits are nearly two-thirds the size of the US trade deficit, will also be forced into a rapid contraction in their trade deficits for the very same reasons – they are going to find it hard enough simply to refinance themselves, let alone receive net capital inflows. Without a capital account surplus, however, they simply cannot run current account deficits. This contraction must, one way or another, be absorbed by the very unwilling rest of the world.

4. The economic recovery in the countries hit by crisis will not begin until they are recognized as insolvent and receive debt forgiveness from their creditors.

Historical precedence makes it clear that as long as the sovereign borrower is forced to struggle with an unrepayable debt burden, it will not grow. Eventually, as has happened in nearly every previous case, creditors and borrowers will acknowledge reality and will work out a debt forgiveness plan that will allow the economy to return to growth. Until then, expect weak growth, high unemployment, and constant battles over debt.

5. Greece’s insolvency will not be recognized for many years.

[European sovereign debt is] heavily concentrated within the banking system, and the banks cannot recognize the losses without themselves collapsing into insolvency. That cannot be allowed to happen....

The banks will need first to rebuild their capital bases before they can admit the obvious, and this could take several years. So we are condemned to spend much of the next decade postponing a resolution of the crisis while banks rebuild their capital base. Until they do, we will all pretend that Greece isn’t insolvent and that other European countries will not face a crisis. Meanwhile none of these countries will be able to grow.

and, of course, its not just a Greek thing:

Spain's Debt Maturity Wave Hits Next Month And It's Already Obvious They Don't Have Enough Cash. businessinsider.

As 1.3 Million Americans Are About To Lose Their Jobless Benefits This Week, The Unemployment Rate Will Surge To 10.5%. zerohedge.

Presenting The Key H2 Milestones To Observe As The Economy Begins Its Next Pre-Stimulus Contraction Cycle. Goldman's Andrew Tilton, via zerohedge.

The First Great Depression: Blow By Blow, From The BIS, And How It Mirrors Our Ongoing Second Great Depression. BIS, via zerohedge.

courtesy of the recent release of the BIS's full annual reports, history buffs can now replay, year by year, the events in world capital markets from 1931 onward

Income Gaps Between Very Rich and Everyone Else More Than Tripled In Last Three Decades, New Data Show. Center on Budget and Policy Priorities.

Fed economist: bloggers are stupid. Bruce Krasting.

other fare:

all the attention on this report is how bad the U.S. ranks, but that's not surprising; what IS surprising is how bad Canada ranks:

Mirror, Mirror on the Wall: How the Performance of the U.S. Health Care System Compares Internationally, 2010 Update. The Commonwealth Fund.

BP link of the day:
BP Alaska a ticking time bomb. CNN.

so the next potential oil spill disaster could be in the Beaufort Sea, just 250 km along the coastline from the Yukon ---- wonderful!

Links, June 24

Albert Edwards Goes All Out: Sees New Recession By End Of Year, Market Collapsing "Like Pack Of Cards". zerohedge.

What's Ben gonna do? Bruce Krasting.

Japan's post-bubble rallies. Doug Short.


if you weren't PO'd enough already:
BP May Be Burning Sea Turtles Alive. bigthink.

think the BP spill is bad? just wait:
The Coming Era of Energy Disaster. Michael Klare, TomDispatch.com.

How global warming and capitalism are deeply intertwined. AlterNet.

Human race 'will be extinct within 100 years', claims leading scientist. DailyMail.

Q2 Forecast

US unemployment is high (near 10%) and core inflation is low (near 1%) so Fed needs to remain very accomodative; in fact, a Taylor Rule prescription suggests FOMC s/b at -5% or so right now, so, relative to where they should be, the Fed is as TIGHT as it ever has been in the AG/BB era

---> Fed on hold through 2012, likely longer, as per Japan


BoC caught between rock and hard place: doesn't want frothy domestic housing and household debt markets to turn into dangerous bubbles, so would like to be more restrictive, but knows external demand will highly influence economy, and risks there growing significantly

---> BoC will hike in July and likely again in September, getting to 1%, by which time the U.S. and global economic outlooks will have deteriorated sufficiently to keep BoC on hold indefinitely


U.S. economic outlook is gloomy for a number of reasons (with or without the European problem); paraphrasing from Andy Harless:

1. quantitative easing, which was temporarily buttressing demand, is over (for now) imparting a downward bias to growth in the coming quarters (before QE gets revived again)

2. fiscal stimulus has been largely exhausted (see recent post) so that its impact will be declining in the coming quarters, imparting a downward bias to growth; even if additional stimulus funds are come up with, they are likely to be modest given the political climate and the paranoia about fiscal deficits (legitimate concern for Mediterranean countries in Euro, but for US, like Japan before it, not yet a legitimate concern), such that any future stimulus will be less than past stimulus, so will have declining impact on GDP growth regardless


3. pent-up demand from consumers (many of whom were worried about the losing their jobs last year but no longer are) has been largely exhausted, and its impact will likely decline over time, imparting a downward bias to growth in the coming quarters.

4. inventory adjustment process has run its course (manufacturing inventories are actually quite elevated relative to shipments/sales); significant increases in production are no longer necessary to maintain inventories, so while inventories added significantly to Q4/09 and Q1/10 growth, may detract, and certainly not add, to H2 growth.

5. recent dollar strength and weak external demand (particularly Europe, but anticipate slowing elsewhere as well, including BRICs) mean export growth will not drive robust recovery.

6. normally, the surge in productivity at the beginning of a recovery is followed by a surge in employment, with a lag of about two quarters; there has been no employment increase following last year’s surge in productivity (exempting census jobs, which, added in spring, will be lost by autumn); meanwhile, productivity growth has settled back into the normal range, which dampens hope for a future surge in employment.

7. Bush tax cuts expire at the end of 2010, which will be drag on income growth and thus on economic growth starting six months out

8. a housing double dip is soon arriving, as government stimulus for housing market, which temporarily supported house sales data, has been lost, and banks will need to increase the pace of foreclosure activity, and there is substantial shadow inventory already; and prices, though they have fallen substantially, remain above their long-term norms in terms of price-to-income and price-to-rent ratios, and can be expected to revert below their means given supply overhang, high unemployment, flat income growth, etc. (see T2 Partners' presentation)

9. the next wave of the credit crisis is ramping up right now; the first wave was subprime, whereas this wave is option ARM
10. consumer balance sheets remain extremely stretched; the process of deleveraging has just begun, and will take many many years to be complete

11. state and local government budgets are severely impaired; these governments, some of which are already in crisis mode, will act like 50 little Hoovers going forward; state and local government spending is 50% larger than federal government spending; has acted as drag on growth in recent quarters, at an escalating pace, and given that fiscal year ends are June 30 and new budgets need to be pared back, the pace of contraction will escalate further

x. there is no evidence of any positive stimulus to growth that would offset all these negatives; in fact, the Consumer Metrics and ECRI leading indicators are already flagging potential of double-dip, and those indicators have been steadily deteriorating over recent weeks/months, with no signs of turning around; even the Conference Board's LEI, once you extract stock prices, yield curve and money supply growth, were negative in 2 of last 3 months





xi. as per Hussman, when you have had credit spreads widening over 6 months, in conjuction with stock prices down over 6 months, in conjunction with a moderate or flat yield curve, in conjunction with an ISM of 54 or below and moderate or declining employment growth, a current or imminent recession has been flagged without error in every instance (i.e. each those criteria is not particularly notable by itself, but in conjunction they are very notable); all the conditions are met with the exception of the ISM


---> U.S. double-dip


Canada is the tail that gets wagged by the U.S. dog; as goes their economy, so goes ours, although with more volatility; for more on Canada, see past post.


as per the Edward Chancellor piece (or brief summary here), I believe China is a bubble waiting to pop, a la Japan 1989 or US 1999; its growth has not just been supported by government stimulus, which, arguably, could continue indefinitely, but also by extraordinary and unhealthy credit growth, by a housing bubble, and by over-investing in yet more excess capacity (malinvestment), none of which are sustainable; its just a matter of (indeterminate) time before they pop and cause major headaches


I have long anticipated, and continue to anticipate the Japan scenario, or one much like it, to play out in the U.S.: i.e. once the BoJ was under 1%, it stayed there; and 10-year bond yields have been at or under 2% for over a decade; there has been deflation for 15 years; the Nikkei is at a quarter the level of its peak, and half the level it was at 10 years ago; money multiplier and velocity contraction have more than offset any money supply growth; real estate prices have been trending down persistently since the peak; consumption has been flat for over a decade; nominal GDP is at the same level it was at 18 years ago



even in the absence of a double-dip in the U.S. (which i DO expect), unemployment resolutely above its normal rate (NAIRU) is disinflationary, and we already have core CPI at 1%, which, i believe, posits strongly for deflation; even if one took the Fed's central tendency forecasts of unemployment and inflation for 2010/11/12, as per the SF Fed, the Fed should be on hold into 2012 (taking account of QE) or through 2012 (assuming no QE)
none of this is good for stocks; all is good for bonds (and gold!)

stocks remain overvalued; forward P/E ratios are worse than useless; on a forward P/E basis, stocks are fairly valued, at just under 15 ---- but fwd P/E has been between 14 and 15 non-stop for the last 5 years!!!

forward earnings estimates are pricing in huge advances in E, not at all consistent with a modest GDP growth environment, much less a double-dip or Japan scenario

longer-term measures of valuation more clearly show how overvalued the stock market is; the Q-ratio, relative to its long term average, shows the S&P about 35% overvalues; the cyclically-adjusted P/E ratio (using 10-year average earnings) shows similarly (CAPE is north of 20, relative to long-term average of 16ish)

based on E of 60 and P/E of 15, fair value of S&P is 900ish

given that I predict another downleg for the economy, I anticipate that analysts will again overreact on the downside (as they did when S&P hit 666), and S&P will trade in 800s again in next 9 months

S&P/TSX will trade in kind

GoC 10years will trade south of 3% and long bonds will approach 3% (while US 10s will once again approach 2%)




p.s. bonus forecast item: Netherlands wins World Cup -- go Orange!

Links, June 21

So, the Chinese announced that they'll enhance their exchange rate flexibility.

And the markets liked the news, at least at first. The yuan apparently hit a 2-year high, some inane MSM journalists were reporting --- nevermind that the currency has been FIXED for the last two years and all it moved was from 6.83 to 6.80!

Perhaps the market's sell-off as the day progressed was due to the realization that flexibility is a 2-way street. Yuan appreciation may be assumed, but it is not a given. This gives the Chinese the latitude to depreciate if they want/need to. And, given how the greenback strength can't have helped them (they do export to Europe too!), maybe they DO want to.

Born on 3rd base. John Hussman (last week).

Wall Street seems to have no concept at all that every bit of growth we've observed over the past year can be traced to government deficit spending, with zero private sector expansion when those deficits are factored out. As I noted last week, if one removes the impact of deficit spending, "the economy has recovered to the point where the year-over-year growth rate since early 2009 now matches the worst performance of any of the 50 years preceding the recent downturn." In effect, Wall Street's is seeing "legs" where the economy is in fact walking on nothing but crutches...

The following is our refined set of "Aunt Minnie" criteria for identifying oncoming recessions. In every instance we've observed these conditions, the U.S. economy has either already been in a recession, or has been within a few weeks of what turned out in hindsight to be the official beginning of a recession. There have been no false signals.

1: Widening credit spreads: ...This criterion is currently in place.

2: Moderate or flat yield curve: ...virtually any decline in the 10-year yield from here will put this criterion in place.

3: Falling stock prices: ...This criterion is currently in place.

4: Moderating ISM and employment growth: Manufacturing PMI (at or) below 54, coupled with either total nonfarm employment growth below 1.3% over the preceding year , or an unemployment rate up 0.4% or more from its 12-month low. At present, both of the employment measures are in place. Last month, the ISM PMI dropped from 60.4 to 59.7.

For all intents and purposes, unless the credit spreads, the S&P 500, or the yield curve reverse, a further decline in the Purchasing Managers Index to 54 or below would be sufficient to confirm a "double-dip recession."

Cliffhanger. Hussman (today).

my greatest concern remains that we may be nearing a point that mathematicians call a "discontinuity." With respect to the stock market, valuations remain uncomfortably rich, and market action is tenuous.... a deterioration in market action would likely trigger a substantial amount of liquidation by speculators, into a market where fundamentally-oriented investors would require large price adjustments in order to absorb it... When an overvalued market loses support from market internals, it frequently produces discontinuous outcomes ranging from brief "air pockets" to "panics" to "crashes." Emphatically, I am not forecasting or predicting a discontinuity as the only possible outcome, but it is important to recognize that the risk is elevated

Consumer Metric Institute's Growth Index. Doug Short.
includes this chart, among others:

Housing double-dip to slow economic recovery: Whitney. on CNBC.

Summer's storms and norms. Don Coxe, Basic Points, via zerohedge.

We believe that Gold’s recent rise began when investors sought a classic inflation hedge, but its real run came when deflation risks were far more obvious than any evidence of inflation.

As we have written in these pages, gold is the classic store of value. It should retain its value under both inflationary and deflationary conditions.

That means a great time to buy gold to make capital gains is when inflation is rising.

It also means a great time to buy gold to conserve existing wealth is when (1) prospective risk-adjusted returns on bonds and stocks look unattractive because the economic outlook is for slow growth with (2) a risk of a renewed downturn that would hammer the value of stocks—particularly financial stocks—and real estate anew, and (3) bond yields are too low given the endogenous risks in the currencies in which they are issued and (4) the range of future fiscal deficit forecasts is from grim to ghastly.

BP link of the day:

BP Hires Mercs to Block Oily Beaches. Wired.

something different:

Skeletal anatomy of cartoon characters. Why Evolution Is True.

U.S. Fiscal Stimulus

U.S. real GDP through Q1 was +2.5% YoY, up from the trough of -3.8% after Q2/2009, following 5.6% and 3.1% annualized growth in Q4/09 and Q1/10, respectively.

But, as you can see from the following chart (click to enlarge), GDP growth in those quarters was driven substantially by changes in inventories.
Absent those inventory changes, real GDP would have grown only on the order of about 1.8% and 1.5%, respectively --- hardly a vibrant bounceback of domestic demand from the sharpest recession since WWII, particularly given the degree of stimulus injected into the economy.

I'll ignore monetary stimulus for now, focusing on fiscal stimulus.

The contribution of the federal government's spending to GDP growth shown in the chart above gives an incomplete assessment of the goverment's true impact on GDP, as the other components are impacted by transfer payments, tax changes and the like. A much better measure is given by accounting for changes in the federal deficit.

The federal deficit grew nearly $1 trillion from 2008 to 2009, and is projected to grow a further $143 billion in 2010.

So GDP shrunk 1.3% in 2009 despite $954 billion of extra spending by the Obama administration in 2009 relative to 2008 (a deficit of 10% of GDP, up from 3.2% in 2008).

The deficit is projected by the government to grow further in 2010, accounting for almost 40% of the projected growth in nominal GDP. The deficit is then anticipated to fall in the succeeding 3 years.

Meanwhile, the government projects 2.6% growth in nominal GDP this year, followed by 4.6% growth next year, and 6% growth in each of the following 2 years.

These growth projections are made despite the fiscal retrenchment of 19% (of the previous year's deficit) in 2011, 35% in 2012 and 12% in 2013 (equivalent to 2.0%, 2.9% and 0.6%, respectively, of GDP).

Meanwhile, the impact of the American Recovery and Reinvestment Act of 2009 is waning.

The total stimulus included in the ARRA is $787 billion:

Also shown as (from recovery.gov):

Solid data on the timing of fiscal stimulus due to the ARRA is hard to come by. The best guide I could find that projects into the future was provided by Mark Zandi of Moody's Economy.com.

As the following chart shows, the projections he made (in spring 2009) have substantial stimulus throughout 2010, but the stimulus will have peaked in the first quarter.

According to the government, $410 billion, or 52% of the allocated stimulus of $787 billion, has been spent so far ($163 billion of the $288 billion allocated for tax benefits; $115 billion of the $275 billion allocated for contracts, grants and loans; and $132 billion of the $224 billion allocated for entitlements.)

Through the first quarter, $373 billion had been spent, as shown here:

So $110 billion was spent in the first quarter, up from $84 billion in the previous quarter --- but GDP growth decelerated from 5.6% to 3.1%, and absent inventories from 1.8% to just 1.5%.

As Zandi projected, the positive contributions to real GDP growth are just about done, and will turn negative in H2.

So, though, as per above, the White House is projecting a bigger deficit in 2010 than 2009, which adds to GDP growth YoY, that will be front-loaded, with H2 relying on private demand for growth.

And there will have to be enough growth to offset the continued declines to be expected from state and local governments. State and local government spending is about 50% bigger than federal government spending ($1.5 trillion vs. $1.05 trillion).

And state and local governments have already been detracting from GDP growth --- negative growth in 5 of the last 6 quarters, including the last 3, down 0.6%, 2.2% and 3.9% QoQ annualized, subtracting 0.1%, 0.3% and 0.5% from total GDP growth.

Double-dip? I think so.

Links, June 18

Correlating the S&P. Bruce Krasting.

No, the "Maestro" has not yet gone away:
U.S. Debt and the Greece Analogy. Alan Greenspan, WSJ.

An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon.

If Al says it, then I'll take the other side; as does Krugman.

That '30s Feeling. Paul Krugman, NYT.

Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.

Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession.

Seems Obama is more on Krugman's wavelength than on Greenspan's:

Letter from the President to G-20 Leaders. White House.
with typos from the original included, here's an excerpt:

Our highest priority in Toronto must be to safeguard a)ld strengthen the recovery. We worked exceptionally hard to restore growth; we cannot let it falter or lose strength now. This meansthat we should reaffirm our unity of purpose to provide the policy support necessary to keep economic growth strong. It is essential that we have a self-sustaining recovery that creates the good jobs that our people need. In fact, should confidence in the strength of our recoveries diminish, we should be prepared to respond again as quickly and as forcefully as needed to aveli a slowdown in economic activity.

This does not look good. David Beckworth.

Today's BP link:
Five crucial moves by BP: Did they lead to Gulf oil spill disaster? Christian Science Monitor.

BP made five crucial decisions in the name of saving money that may have contributed to the catastrophic Deepwater Horizon oil spill

Assholes!

something different:
The Ten Most Disturbing Scientific Discoveries. Smithsonian.

Links, June 17

Wow, now THAT's bearish! Elliot Wave predicts triple-digit Dow in 2016. MarketWatch.

Stock market bulls and most economists think that a new bull market and economic recovery are underway. Most bears are looking for either a long sideways bear market à la 1966-1982, or a hyperinflationary run to infinity. Our Elliott Wave outlook opposes both of these scenarios. The most likely profile is a stock market crash of historic proportions.

DOW under 1000? Yeah, that would be historic, to say the least!

Fannie-Freddie Fix at $160 Billion With $1 Trillion Worst Case. Bloomberg.

Links, June 13

Robert Reich discusses Why the Main Street economy isn't getting any better:

The common wisdom is that excessive debt-financed spending was one of the causes of the recent recession, so the news that household debt is dropping is being celebrated by business cheerleaders as reason to believe we’re on the mend.

Baloney. The reason so many Americans went into such deep debt was because their wages didn’t keep up. The median wage (adjusted for inflation) dropped between 2001 and 2007, the last so-called economic expansion. So the only way typical Americans could keep spending at the rate necessary to keep themselves — and the economy — going was to borrow, especially against the value of their homes. But that borrowing ended when the housing bubble burst.

So now Americans have no choice but to pare back their debt. That’s bad news because consumer spending is 70 percent of the economy. It helps explain why we so few jobs are being created, and why we can’t escape the gravitational pull of the Great Recession without far more government spending.

It’s also a bad omen for the future. The cheerleaders are saying that for too long American consumers lived beyond their means, so the retrenchment in consumer spending is good for the long-term health of the economy. Wrong again. The problem wasn’t that consumers lived beyond their means. It was that their means didn’t keep up with what the growing economy was capable of producing at or near full-employment. A larger and larger share of total income went to people at the top.

So in the longer term, it’s hard to see where the buying power will come from unless America’s vast middle class has more take-home pay. Yet the economy is moving in exactly the opposite direction: Businesses continue to slash payrolls. And the hourly wage of the typical American with a job continues to drop, adjusted for inflation.

and Why we are moving toward a recessionary era, and why Keynes is being exhumed:

... demand always seems on the verge of trailing the nation’s productive capacity. The biggest ongoing threats are chronic recession or even deflation, because consumers don’t have enough money to what the economy is capable of selling at full or near-full employment. Despite gains in productivity, little has trickled down to America’s middle class. John Maynard Keynes is being exhumed because his Depression-era worry about inadequate demand is once again the nation’s central economic problem.

Paul Krugman discusses some economists' Strange arguments for higher rates.

My take on the current economic situation is quite simple, and I would have thought corresponds to standard economics. Right now, we clearly don’t have enough demand to make full use of the economy’s productive capacity. This means that the real interest rate is too high. And so the “natural” thing is for the real rate to fall. Yes, that would mean a negative real rate....

Surely... we want to get rates as close to their appropriate level as possible — which means a zero nominal rate. There’s nothing “unnatural” about it. On the contrary, the “natural rate of interest”, as Wicksell defined it, is clearly negative right now.

Andy Harless itemizes 7 reasons to be concerned about double-dip, and 6 (less compelling) items that make the case against a double dip, in Second Dip? and then concludes:

What worries me particularly is that, even if the case for a second dip is completely wrong, the employment picture going forward is still dismal, and there is still a case for deflation.

Am I wrong in understanding that this is standard textbook macroeconomics? There is a non-accelerating inflation rate of unemployment (NAIRU). When the actual unemployment rate is above the NAIRU, the inflation rate declines. The further the unemployment rate is above the NAIRU, the more quickly the inflation rate declines. The unemployment rate is currently 9.7% and is not expected to fall rapidly, even under optimistic scenarios. Recent estimates put the NAIRU at about 5%. The current core CPI inflation rate is about 1%. You do the math.

Links: June 11

The chances of a double-dip recession are virtually nil. Macroeconomic Advisers.
So they say; we shall see. I suspect though their model might work well in typical inventory-led recessions, it likely works less well with these balance-sheet recession, debt-deflation thingies.

The Mankiw Rule with QE: Why is the Fed so tight? Andy Harless.

I tried to come up with a simple measure of monetary policy stance that incorporates both the federal funds rate and quantitative easing..... The one conclusion that is robust to reasonable changes in specification is that the composite measure is now moving close to zero again, even as the Mankiw Rule interest rate remains well below negative 3 percent. (It will likely rise slightly above negative 4 percent based on the May data, but I’m waiting for the CPI report before I update.) Quantitative easing is over, but the economic conditions that justified it are still with us – at least if we measure retrospectively..... Once we recognize that QE is an option – and one that is no longer being pursued – we can draw the conclusion that the Fed is much tighter today than what the Mankiw Rule would suggest. Indeed, relative to the Mankiw Rule, the Fed is much tighter than at any time during the Greenspan-Bernanke years.

Here’s one way to think about the situation. Fed policy typically affects output and employment with a lag of less than a year. Over the past year, the Fed has tightened dramatically. The super-duper-easy aggressive quantitative easing policy of 2009 (especially early 2009) has given the US economy enough monetary fuel to get it almost to an employment growth rate (exclusive of the Census) that could stabilize, but not significantly reduce, the unemployment rate. That policy is gone. In order to believe that the economy is going to strengthen from here, you have to believe either (1) that the lag associated with monetary policy is longer than usual or (2) that the underlying strength of the economy, holding monetary policy constant, has improved dramatically. Maybe one (or both) of those things is true. Or maybe not.

Oy, Canada! Paul Krugman, NYT.

Albert Edwards, of SocGen, in recent report:

“It went almost unnoticed this week that core CPI inflation rates in the US and eurozone continue to slip-slide their way down towards zero. Although this is seen as buoying bond prices at the margin, it is a pernicious development that investors will focus on when this cycle starts to fail. Regular readers will know that I believe that in a post-bubble world, recession follows recession with surprising rapidity.

We are now only one cyclical failure away from Japanese-style outright deflation in the US and the eurozone at a time when de-leveraging still has years to run (falling prices bring the risk of a classic debt deflation trap). Impending cyclical failure and a deflation scare will trigger new lows in equities as the valuation bear market finally plays itself out with the S&P falling below 500. We therefore maintain our long-standing target of sub-2% US 10y bond yields – and that is the point when QE will really begin to get serious.”

Flow of Funds report updated, so Q-ratio can be too:
the Q-ratio and market valuation. dshort.com


Other fare:
The importance of unbelief. comedian Stephen Fry
&
Ways to become happier. Tal Ben-Shahar, both at the BigThink.


World Cup calendar. Too cool!

and, also too cool:
Nike Football - write the future. YouTube. I love the part with Rooney.


Another BP spill. BigThink.

Okay, more seriously:
The Gulf Coast oil spill's Dr. Doom. Fortune.

Experts forecast an active hurricane season this year. We know it could disrupt efforts to stop the spill, but how else do you think storms could impact the Gulf Coast?

We've got to stop the gusher first. Then we have to deal with the other issues. There's a lake at the bottom of the Gulf of Mexico that's over 100 miles wide and at least 400 to 500 feet deep of black oil. It's just staying there. And only the lightest of that is what we're seeing hitting the shores so far. If a hurricane comes and blows this to shore, it could paint the Gulf Coast black. We should have been pumping this oil out onto other tankers weeks ago.

How do you think the U.S. government should handle this disaster?

I think the government should ask BP to leave the United States and turn its operation over to the military. Put the U.S. Navy in charge. Have all the contractors report to the Navy -- the cleanup efforts, the whole nine yards. Because as long as it's in BP's hands, they're going to spin the information as long as they can.

What do you think is in store for the future of BP?

They have about a month before they declare Chapter 11. They're going to run out of cash from lawsuits, cleanup and other expenses. One really smart thing that Obama did was about three weeks ago he forced BP CEO Tony Hayward to put in writing that BP would pay for every dollar of the cleanup. But there isn't enough money in the world to clean up the Gulf of Mexico. Once BP realizes the extent of this my guess is that they'll panic and go into Chapter 11.

Speaking of the spill, this decision in May sure looks good in hindsight, doesn't it?
U.S. not accepting foreign help on oil spill. Foreign Policy.
Lets not accept help, lets just let BP do it. Great.

Should this be the last generation? Peter Singer, NYT.

Once upon a time...

I was Mr. Potato Head.

Yup, I was a climate skeptic.

Actually, that's not quite right.

I certainly did not dispute global warming

But, like the book title says --- unstoppable global warming.... every 1500 years
(aside: haven't read the book yet, and I suspect that it, like Bjorn Lomborg's Cool It, has been widely taken to task --- i.e. we should be skeptical about the skeptics)

In any case, I didn’t deny the planet was getting warmer

But I DID think that it wasn’t all b/c of man-made activity, there were other causative factors involved as well (though, undeniably, human activity is certainly making the problem worse, perhaps an order of magnitude worse --- or perhaps just somewhat worse? A little worse? no counterfactual, so hard to know for sure, but can't deny that historically globe has warmed up in the past (millions of year) as much as it has this century, and without the carbonization of our atmosphere from human activity; but perhaps future warming will be outside of historical precedent?)

And I thought that it was hubris to believe that we'd be able to figure it out enough to fix it (i.e. that any "fixes" we attempted might open a Pandoras Box of unintended consequences)

And I had doubts about how well we could model expected changes in global temperatures 50 or 100 years forward, given the complexities and unknown unknowns involved with intertwined dynamic systems --- and given how meterologists can't even get the weekend forecast right

And I thought that economic development of underdeveloped countries was necessary for an improved standard of living for billions of people and couldn’t be accomplished without contributing further to human-activity-contributions to global warming


But, of course, I'm very deeply concerned about the potential for my kids to inherit a very rough future


But, more than anything, more than just agreeing with Maher about the substance of what he wrote, I like the WAY he wrote it.

So see this:

New Rule: Al Gore must come out with a sequel to his movie about climate change and call it, An Inconvenient Truth 2: What the Fuck Is Wrong with You People? Bill Maher

read the whole thing, but here's how it starts:

A bunch of depressing new surveys reveal that people in droves are starting to believe that global warming is a hoax -- and this time, it's not just us.

People are always accusing me of hating America and calling it stupid, so tonight I'd like to take a few moments to hate England and call it stupid. Because now English people don't believe in global warming either. I thought the English were smarter than that. The home of Newton and Darwin. I can't believe we let these people build our exploding oil platforms.

Even scarier is why people have stopped thinking global warming is real. One major reason pollsters say is we had a very cold, snowy winter. Which is like saying the sun might not be real because last night it got dark. And my car's not real because I can't find my keys.

That's the problem with our obsession with always seeing two sides of every issue equally -- especially when one side has a lot of money. It means we have to pretend there are always two truths, and the side that doesn't know anything has something to say. On this side of the debate: Every scientist in the world. On the other: Mr. Potato Head.

Okay, so being Mr. Potato Head ain't taking the right side of the debate.

But I still have a hard time not agreeing with at least part of what Czech Rep President Vaclav Klaus said 2 years ago:

The basic questions of the current climate change debate are sufficiently known and well structured:
1- Do we live in an era of a statistically significant, nonaccidental and noncyclical climate change?
2- If so, is it dominantly man-made?
3- If so, should such a moderate temperature increase bother us more than many other pressing problems we face and should it receive our extraordinary attention?
4- If we want to change the climate, can it be done? Are current attempts to do so the best allocation of our scare resources?

My answer to all these questions is NO, but with a difference in emphasis. I don't aspire to measure the global temperature, nor to estimate the importance of factors which make it. This is not the area of my comparative advantages. But to argue, as it's done by many contemporary environmentalists, that these questions have already been answered with a consensual "yes" and that there is an unchallenged scientific consensus about this is unjustified. It is also morally and intellectually deceptive.

I think that probably summarizes what I thought then (i.e. a few years ago?). Now, I'd have to answer YES, unequivocally, to 1 and 2, a Maybe to 3 (there are more pressing problems NOW, like clean water and adequate nutrition for billions of people, but its the FUTURE we're concerned about when it comes to climate, and the fat tail risk of not today's warming, but of brutal climate change), and, most crucially, still, I think, a NO for #4.

That is, I agreed then and think I still do now with what Roger Revelle said in 1991 (R.R. was the Harvard prof who inspired Al Gore, and who in the 50s and 60s was researching CO2 in the atmosphere and attributing it to fossil fuel burning, then in the 80s warned of possibility of increased global warming, and thus became first to discuss greenhouse effect) ---- anyway, in '91 R.R. said

"Drastic, precipitous, and especially, unilateral steps to delay the putative greenhouse impacts can cost jobs and prosperity and increase the human costs of
global poverty, without being effective."

Has anything really changed?

Just asking.



Anyways, while on the subject, check out this:

Obama And The World: Should America Have A Foreign Policy? Does The World Need It? 3quarksdaily.

Let's start with a smattering of metaphors. The world needs the US like a fish needs a bicycle. Or rather: like a virgin needs a rapist. There was a time, a century ago, when Turkey was known as the sick man of Europe. Today America might be called the psychopath of the planet. We happen to be the dark id of nations, yet we imagine we're the shiny superego. We happen to drop more bombs on people than anyone, yet we believe we're crop-spraying the manna of freedom. We happen to be Darth Vader, but we think we're Luke Skywalker.

thus begins a long but amusingly-written diatribe against U.S. foreign policy.

The section on climate change is, of course, the key section as far as the topic of this post goes, but the whole thing is a good read (for those of you who are jaded souls, like me)


And, for those of you who aren't climate change skeptics and want to make a difference --- best thing you can do: cut your meat consumption back, big-time.

Ten studies on meat and global warming. GreenMuze.

Turning Japanese

the future of the U.S., in pictures (click on each for larger version):

1) Japan's nominal GDP in 2010 at 1992 levels
2) 15 years of Japanese deflation

3) 13yrs of flat consumption and downward real estate prices

4) positive money supply growth offset by declining multiplier and velocity

5) lots of volatility in equities, but long bear market; BoJ, once under 1%, stays under 1%; 10yr yield under 2% for a decade

Worthwhile Reading on NFP day

Okay, I know, I know, the B/D #s are applied on NSA basis, so can't be subtracted directly from SA #s, but, nonetheless, +215k in B/D when NFIB Small Business Optimism is stuck at 90 (which is lower than it had been at any point from 1980 to 2008), and small businesses still reluctant to hire, is stretching the bounds of credulity:

Non Farm Payrolls Come At -226K After Census (411K), Temporary (31K), And Birth-Death Adjustment (215K). zerohedge.

Fannie Mae's chief economist, Douglas Duncan, via Bloomberg:
"Temporary tax credits change behavior temporarily; it’s simply shifted demand forward. It actually created some price appreciation that’s not supportable long term,” Duncan said of the tax credit.

Why its not a normal recovery. Comstock Partners.

The data cited here cover the major indicators of economic activity, and they paint a picture of an economy that has moved up, but only from extremely depressed numbers to a point where they are less depressed. And keep in mind that this is the result of the most massive monetary and fiscal stimulus ever applied to a major economy. In our view the ability of the economy to undergo a sustained recovery without continued massive help is still questionable, and the data discussed in this comment doesn't even include the fiscal problems of the states, the deteriorating federal fiscal outlook, sovereign debt problems subject to potential global contagion, the Chinese housing bubble and the increased threat of beggar-thy-neighbor nationalistic economic policies. At current levels the stock market is substantially
overvalued and subject to severe downside risk.

Richard Russell as of June 3, 2010 on phases of a bear market:

1) The first phase is the one where the bear market wipes out the optimism and excitement which existed at the preceding bull market’s top. I believe we are in the first phase of the bear market now.

2) The second phase of a bear market is usually the longest phase. This is the phase where it gradually dawns on stock holders that business is deteriorating and that we are moving into hard times. I believe we are now close to the second phase.

3) The third phase of a bear market is the “throw ‘em in” phase where stocks are sold for no other reason than that the sellers need to raise cash.

During the latter part of the third phase, blue-chip stocks will sell “below known value,” and dividend yields on top-quality blue-chip stocks will climb above 6% or more.

Investors will turn black-bearish, and we will hear opinions such as “This is the end of capitalism,” and “The nation may not survive.” As a pure guess, I think that if or when the Dow breaks below its March 9, 2009 low of 6547.05 (and I think it will) that will mark the end of the second phase of the bear market and the start of the third phase.

U.S. Monetary Policy in the 2010s. Andy Harless.


Also, we keep getting video feeds of the oil being spilled from the bottom of the Gulf, and over the last few weeks we've repeatedly seen updated maps showing the slick in the Gulf, but only recently have we been seeing much visual press coverage of the true horror of how wildlife is being devastated.

Gulf Oil Spill Photos: Animals in Peril. Huffington Post.

A Potentially Dangerous Energy Future. Big Think.

EIA: Hard Core Peak Oil Forecast. Econbrowser.

Green stimulus is not sufficient for a global green recovery. Edward Barbier, voxeu.

Fossil fuel subsidies and other market distortions, as well as the lack of effective environmental pricing policies and regulations, will diminish the impacts of G20 green stimulus investments on long-term investment and job creation in green sectors. Without correcting existing market and policy distortions that underprice the use of natural resources, contribute to environmental degradation and worsen carbon dependency, public investments to stimulate clean energy and other green sectors in the economy will be short lived. The failure to implement and coordinate green stimulus measures across all G20 economies also limits their effectiveness in "greening" the global economy.

Finally, the G20 has devoted less effort to assisting developing economies that have faced worsening poverty and environmental degradation as a result of the global recession. Nor has the G20 taken a leadership role in facilitating negotiations towards a new global climate change agreement to replace the Kyoto Treaty that will expire in 2012.

Urgent: A global green New Deal

A Bearish John Taylor Asks If Too Much Fear Is Priced In. zerohedge.

Although our analysis argues that the global economy should be slowing down and starting a longdecline, the tremors that went through the markets in May have halted the Central Banks’ tightening drift, which should allow financial markets to rally again....

Our analysis of the long-term cycles points to a peak in the second half of July or August which would be followed by a long and increasingly dramatic decline that would continue into the middle of 2011 at the minimum. It is very likely that the global Central Banks will lower rates further, where they can, and will resort to increased amounts of quantitative easing. As much of the economic distress will be centered in Europe, the dollar will gain against the euro, but when the Fed eventually shifts into high gear -- as it always does -- the Asian currencies and maybe even the euro will outperform the dollar.

Into the Abyss: The Coming Cycle of Debt Deflation. Ron Hera via the business insider.

Warren Buffett going the way of Alan Greenspan --- from demi-god / guru to, well, you fill in the blank:

Warren Buffett's Shameful Performance. capitalgainsandgames.

Oh my God. I never thought i would ever say this, but Warren Buffett has turned into an evasive, disingenuous, bumbling buffoon...

This is the same Warren Buffett who has been all but canonized as a saint for his adherence to long-term value investing, his folksy candor, his opposition to Wall Street gimmickry and not the least for his memorable description of financial derivatives as "weapons of mass financial destruction."

Where have you gone, Joe DiMaggio?

To the bank, apparently.

And, a couple of things totally different:


A Plague Upon The World: The USA is a “Failed State”. Dr. Paul Craig Roberts interview, via the progressive mind.

Science and Religion are Not Compatible. Sean Carroll, Discover Magazine.

Worthwhile Reading, June 2

from the department of No shit, Sherlock!
Equity analysts: Still too bullish. McKinsey.
put at least they have a couple cool charts, including:

Time for industry to end its war on regulation. Steven Pearlstein, Washington Post.

these comments don't apply just to regulation:

The biggest oil spill ever. The biggest financial crisis since the Great Depression. The deadliest mine disaster in 25 years. One recall after another of toys from China, of vehicles from Toyota, of hamburgers from roach-infested processing plants. The whole Vioxx fiasco. And let's not forget the biggest climate threat since the Ice Age.

Even if you're not into conspiracy theories, it's hard to ignore the common thread running through these recent crises: the glaring failure of government regulators to protect the public.

The big flaw in the business critique of regulation is not so much that it overstates the costs, but that it understates its benefits -- in particular, the benefits of avoiding low-probability events with disastrous consequences.

this applies just as well to investing --- people are always too enthused about capturing all potential upside in stocks, to the neglect of considering the potential downside, when capital preservation should be investors' primary concern

Eclectica Fund Manager Commentary, May 2010. Hugh Hendry.

a view from China:

West moving toward deeper financial abyss. China Daily.

A year and half after the first shock waves of the global financial tsunami, Western economies - including the US and the European Union (EU) but excluding Australia and Canada, which are big natural resources exporters - are marching toward economic failure. I base this assertion on just one thing: Their governments are afraid to do the right thing.

With the full knowledge of what their fatal policies will lead to, their politicians do not seem to have the political courage to rally the support of the people to accept the necessary pain and make the sacrifices as preached by the Washington Consensus....
The Western economies, having spent well beyond their means for years, should spend less for some time to pay off the debts, and should take this opportunity to change their lifestyle and consumption habits drastically. Their governments should punish the financial fat cats and protect the small guys from desperation.

Tactical Update: 2008 will seem like the good old days. Bob Janjuah via zero hedge.

like him, I don't have a lot of conviction tactically for the month of June, but once H2 rolls around, expect bear trades to pan out nicely

p.s. I've got shorts (SKF, SKK, EEV, QID, HSD, HXD) on to hedge my long risk asset positions --- mostly gold, some stocks in Group retirement fund and Sprott fund, plus a bit of clean energy (PBD) and agriculture (DBA) --- and my fixed income positions are long D; I will get net short if S&P gets in 1200 neighbourhood again, and/or as we get closer to Labour Day

Worthwhile Reading, June 1

Fiscal Monitor. IMF.

May's Big Sell-Off Could Be Just the Beginning. WSJ.

Too many people have simply assumed that the last 14 months have been the start of the next boom. But it may have been a typical "bear-market rally" doomed to fall flat on its face.

That's what stock-market historian Russell Napier says. He thinks we're in a giant, generational slide that began in 2000 and has several years still to run.

We forget that the stock market moves in long, decadal swings. Slumps like those in the 1930s or the 1970s, or in Japan after 1990, weren't simple, straight-down affairs. They were punctuated by huge "sucker" rallies that eventually faded away. But, over all, the market bounced along sideways, or down, for a decade or two.

The slide that began in 1969 didn't end until 1982. The slump after 1929 didn't give way until the late 1940s. Japan's gloom is still with us.

In general, the bigger the bull-market boom, the bigger and nastier the bear market that follows. The bull market of the '80s and '90s was the biggest on record. So expect the bear that follows to be ugly and tenacious.

Mr. Napier has studied the big stock-market grizzlies of the past. Generally speaking, they took a long time to die, and didn't do so until shares got really, really cheap. March 2009? Not even close. He fears Wall Street could fall by half, or worse, over the next four years before this bear is finally slain.

Oil and Red Ink. John Hussman.

But that was evidently not a sufficient lesson. As soon as the surface appearance of the problem was covered up by an expensive and opaque band-aid of government bailouts and suspension of accounting transparency by the FASB, investors went right back to using those unconditional probability estimates. Indeed, until the spike in credit spreads that began a few weeks ago, the amount of additional yield investors demanded for taking credit risk had fallen back to the lows of 2007. We've had a major credit crisis, we have failed to restructure the debt underlying that crisis, and yet investors are approaching the market as if the debt has simply been made whole and we can continue along the former path.

Knowing that the cash flows from mortgage payments cannot possibly be adequate to service the original debt, that delinquencies continue to hit new records, and that there is an enormous overhang of nonperforming debt and unforeclosed homes - it seems utterly naive to assume that the problems we saw over a year ago have been adequately addressed.....

Of course, investors hope to ignore the solvency problem to some extent, since the FASB has obscured accounting rules to allow Madoff-like disclosure. Even if the latest proposal by the FASB to restore mark-to-market survives the outcry of the banking industry, it would not be implemented until 2013. Why should we care if banks actually are solvent as long as they tell us they are solvent? This is an open question, but only if one can be certain there is a greater fool available. We prefer not to make that assumption....

In my estimation, there is still close to an 80% probability (Bayes' Rule) that a second market plunge and economic downturn will unfold during the coming year. This is not certainty, but the evidence that we've observed in the equity market, labor market, and credit markets to-date is simply much more consistent with the recent advance being a component of a more drawn-out and painful deleveraging cycle....

As of last week, the Market Climate for stocks was characterized by unfavorable valuations, and unfavorable market action, with a leadership reversal coming just off of an overvalued, overbought, overbullish syndrome, and accompanied with heavy downside breadth. This type of event has produced fairly benign outcomes about 20% of the time. The remaining instances have been hostile, on average, and in the majority of cases were observed at the beginning of steep market declines. It is difficult to review that record with equanimity about what may occur in the present instance, but again, about 20% of those outcomes were fairly benign.

Bank profit mirage III: From FASB with Love? Annaly Salvos.

more accounting fun and games

the banks have been serially under-reserving for losses in order to show headline profits, despite non-performing assets (NPAs) that continue to rise. We expected a similar story in the current quarter, and indeed we are told that provisions fell in the first quarter in the face of increasing NPAs. In fact, for the first time since 2005, provisions didn’t even cover charge-offs for the period.

Later in the year.... is now! Christopher Pavese, View from the Blue Ridge.

China property risk is worse than in US, says member of the Chinese central bank’s monetary policy committee. FT.

The Great Depression and the Revolution of 2017. Randall Wray, via naked capitalism.

“Look, President Obama as well as his successors followed the advice of economists — who continually called for more fiscal austerity, much like the misguided physicians used to bleed patients to death. They were, and still are, clueless. I promise you that I will ban all economists from my administration. I will not seek, nor will I follow, advice from economists.”

BP's behaviour in the Gulf is appalling. But our thirst for oil is the real issue. The Guardian

Whatever the courts may find about BP's culpability the real cause is our demand for oil and our refusal to pay its true price. Right now, everyone in America wants to do something to fight the spill. However, if you suggest that perhaps we should double the price of fuel and use the revenue to rebuild our transportation network, the general response is suspicious silence.

Dmitri Orlov says that Deepwater is America's Chernobyl.

Why the H-E-double hockey sticks is BP still in charge of containment?!? Why hasn't it been taken over?! (As Robert Reich says, if the US can take over AIG and GM, it can take over BP!) Does Obama think that making BP fix it makes it just BP's problem? That the U.S. and his administration have no responsibility? Does he think, even after the last 6 weeks of BP-bumbling and lying, that BP is best suited to dealing with this crisis?! FxCK!

Oil Spill Cartoon Video. Mark Fiore.