August 31

Beware those who think the worst is past. Carmen and Vincent Reinhart, FT.

Credit is also a problem. It expands rapidly before crises, but post-crash the ratio of credit to GDP declines by an amount comparable to the pre-crisis surge. However, this deleveraging is often delayed and protracted.... if we continue as others have before, the need to deleverage will dampen employment and growth for some time to come.... In such circumstances slow growth often becomes a self-fulfilling prophecy produced by timid authorities, who neither supported spending nor dealt with the capital-adequacy problems at large banks.... Financial supervisors want to believe that troubled banks are temporarily illiquid, not permanently insolvent.... the bigger worry remains the assumption that dust has begun to settle; that the shock from the crisis is temporary, when it is likely to be deep and persistent

from ICI via Moody's via Paul Kedrosky:

Bond bubble - a sterile debate on semantics. James Montier.

bond valuation based on 3 components: the real yield, expected inflation and an inflation risk premium; with the first at about 1% right now (via TIPs), the second at 1.5% (via nominals - TIPs), and the last at 0.25-0.5%; fair value under normal inflation would be 4%

unless you believe that Japan is correct template for the US (i.e. inflation will be zero for the next decade), government bonds don’t offer an attractive return as a buy and hold proposition.

he goes on to say that the market must be implying about a 70% chance of the U.S. turning Japanese (20% or normal, 10% of high inflation); then says

It is possible to build a speculative case for bond investment (i.e. riding the deflationary news flow down), however, as ever, this leaves participants with the conundrum of Cinderella’s ball as described by Warren Buffett “The giddy participants all plan to leave just seconds before midnight. There is a problem though: They are dancing in a room in which the clocks have no hands!” Personally I prefer to stick to investment rather than speculation.

as highlighted by Mish, remember when Rosie said:

"Guess how many homes prices above $750k managed to sell in July. Answer — zero, nada, rien; and for the second month in a row."

well, he shoulda been suspicious of that; turns out, according to the Census Bureau (hat tip: Mish), which quotes its data in thousands of homes and using round numbers (so, the total for all price levels was 25k, but we're not sure where in between 24,501 or 25,499 that was), the (Z) they put in for the price level of $750,000 and over means that there were less than 500 units

Home prices: a look at underlying supply and demand forces. charts and quotes from BoA, as posted on zerohedge.

I hadn't yet found solid data on U.S. household formation, to compare with the inventory of homes on the market; BoA/ML spares me the need (as posted on zero hedge), as they've calculated it; and its rather shocking: household formation was strongly positive in 2001-2006 (1.2 million annually), but was more than cut in half during the period from 2007-2009 (0.5 mil, a drop of 0.7mil); of course, I knew it had fallen, given that the homeownership rate had fallen, but wouldn't have expected that much

so, homebuilders have dramatically slashed their new construction; but, meanwhile, foreclosures have put new supply on the market, so, net-net, supply has not normalized and still exceeds housing demand; BoA calculates an excess of 1.87mil vacant homes (given that homeowner vacancy rates and rental vacancy rates are much higher than normal)

BoA concludes:

Unlike in prior recoveries, it is clear that housing will lag rather than lead the recovery. The monetary policy transmission typically has a very strong impact in the housing market – low rates encourage home sales and greater residential investment. In turn, job creation picks up in the construction sector, further supporting consumer spending and home sales, and creating a virtuous cycle. This feedback loop is currently broken. Mortgage rates have plunged to record lows, and yet have done little to stimulate home purchases because credit conditions are still incredibly tight and consumer confidence is depressed. That said, we believe the direct drag from housing, through construction, is nearly over. Our forecasts for housing starts imply that residential investment will subtract from growth in 3Q, but then consistently add to output going forward. Still, the contribution to growth will be feeble relative to prior cycles, where housing was decidedly the force of growth...

Our baseline view is that national home prices will edge lower over the rest of the year and then bounce around the bottom for some time. The downside risk is that foreclosures flood the market at a rapid pace, depressing home prices greatly, which could tip the overall economy back into recession.

other than Meredith Whitney, Mike Mayo is the only other financials analyst that I'm aware of being very vocal about his/her skeptical view on financials and being very blunt and even confrontational with management:

Mike Mayo Tells Clients Numbers Out Of Citi Can Not Be Trusted. via zerohedge.

The trap we're in. Paul Krugman, NYT.

The Taylor Rule says that, given where inflation is now, interest rates should be negative; but, of course, they can't be (see his graph)

The crucial thing to understand about this position is that it’s not self-correcting. On the contrary, as inflation falls over time and possibly goes to actual deflation, we sink deeper into the trap.

more background from PK here

data today:
Canadian GDP for June, came in at expectattions of 0.2%, but for Q2 came in at 2.0%, vs. expectations of 2.5%, and Q1 was revised down to 5.8% from 6.1%

in the U.S., S&P/Case-Shiller Composite-20 up 4.2% YoY through June, vs +3.5% YoY expected (down 28% from the peak), and the national index was up 3.6% YoY through the 2nd quarter, up from 2.3% at the end of Q1 (note that this data is 2 months old --- its a 3mth rolling average of April, May and June) and was relevant for the period before the tax credit ended; as per Calculated Risk, prices are probably falling right now (starting in July), but this will not show up in the Case-Shiller index for a few months since this is an average of three months)

Chicago Purchasing Managers was a bit below expectations, at 56.7, down from 62.3; and ditto for NAPM Milwaukee, down to 59 from 66; but consumer confidence beat expectations, at 53.5

if you want to quickly check out state of European sovereign yields, check out Bloomberg's interactive charts
the code for
Germany is GDBR10:IND
Greece is GGGB10YR:IND
Ireland is GIGB10YR:IND
Portugal is GSPT10YR:IND
Spain is GSPG10YR:IND

other fare:

this is hilarious --- The truth about Somali pirates. Broyhill Asset Mgmt, The View from the Blue Ridge.

this too is amusing --- We didn't see it coming.

this is in no way amusing --- Lawsuit challenges Obama's power to kill citizens without due process. Glenn Greenwald, Salon --- how can the U.S. be a country in which assassination of citizens without due process is even contemplated, much less allowed?!

and this is interesting --- the author of Cool It!, Bjorn Lomborg, recants

August 30 - with late addition

"If you can't control the wind, adjust your sails."

S&P earnings: can we expect what they're expecting?
in 2008, 12mth operating earnings were 49.51, while reported earnings were 14.88
in 2009, they were 56.86 and 50.97, gains of 15% and 243%
analysts are estimating 2010 will come in at 83.04 and 70.36, which would be gains of 46% and 38%
and for 2011, estimates are for 94.31 and 80.20, which are gains of 14% for each

those are pretty robust E-gains compared with sales: sales per share were $232.38 in Q1, up 5% from the trough of $221.80 in Q1 of 2009, but still 17% below the level in the 2nd quarter of 2008; on a trailing 12-mth basis, sales through Q1 of $919 remain 15% below the peak level through Sept 2008 of $1080

so, given the underlying economic dynamics, can we expect sales growth to pick up enough to support those earnings growth estimates; or will companies have to squeeze even more blood from stones? how much more E-growth can be attained with tepid sales growth?

( chart from Doug Short)

and, why is sales growth tepid? consumer deleveraging and no income growth (see yesterday's chart)

late addition: why else should earnings growth be suspect? how about the chart Mish posted:

what this chart shows is the ratio of loan loss provisions to non-performing loans for all banks across the entire banking system; either banks think those non-performing loans are not a problem (so they haven't felt the need to provision for them and don't think that will come back to haunt them), or they were not provisioning for losses that are coming down the pipe because they wanted to boost earnings (any provisions would be a charge against earnings, so if you don't want to hurt E, you don't take provisions; easy, right? typical extend and pretend; Mish resumed the discussion here)

Monetarists follow Milton Friedman to the grave. Caroline Baum, Bloomberg.

Bernanke has gone out of his way to explain the Fed’s purchases of $1.4 trillion of agency mortgage- backed and debt securities as credit easing, not quantitative easing. Credit easing is by definition quantitative. It doesn’t matter what the Fed buys: Treasuries, Toyotas, toilets or Tootsie Rolls. It’s the act of buying something that creates money.

I like that line about Toyotas and tootsie rolls; but I disagree with the notion that the expansion of the Fed's balance sheet creates money; as discusses in earlier posts, its an asset swap; as van Hoisingon and Lacy Hunt so professorially explains, QE expands the monetary base, but the monetary base does not constitute money; and as Mish insists, "given that we have a fiat-based credit system, it is... silly to discuss inflation/deflation without paying attention to credit... I define inflation as a net expansion of money supply and credit, with credit marked-to-market. Deflation is a net contraction of money supply and credit, with credit marked-to-market."; so no matter what the monetary base is doing, as long as credit, which dwarves M2, keeps contraction, there's deflation in terms of the amount of "money" availabe and being used for spending

Warning: why cheaper money won't mean more jobs. Robert Reich.
individuals aren't taking on more debt; small business isn't; big business is; these corporations, however, aren't investing in the productive capacity of the domestic economy, they're either sitting on cash, or, worse, using their cash to expand productive capacity in cheaper abodes abroad, or they'll do M&A, which will lead to further contraction of productive capacity domestically

Chris Whalen is an expert on the U.S. financial sector and always worth listening to; he believes that the Bernanke Fed drives deflation with zero rate policy, via zerohedge

low rates are killing the U.S. economy and have created an interest rates trap for financial institutions and other fixed-income investors... Over the next year, banks, retirees and other interest rates sensitive investors are going to see their cash flow fall further as zero interest rate policy drains the NIM [net interest margin] from the dollar financial system. Not surprisingly, these same individuals and organizations are cutting expenditures to reflect falling cash flow on their investments.... By keeping interest rates at zero, the Fed is forcing individuals and corporations to save more.

On the other hand, and why I don't buy the notion that low interest rates lead to delfation, consider all the arguments by various authors that Mark Thoma links to in his post, The correspondence principle:

The proposition that a commitment by the Fed to maintain a low nominal interest rate indefinitely must lead to deflation (rather than accelerating inflation) defies common sense, economic intuition, and the monetarist models of an earlier generation.

This was was pointed out forcefully and in short order by Andy Harless, Nick Rowe, Robert Waldmann, Scott Sumner, Mark Thoma, Ryan Avent, Brad DeLong, Karl Smith, Paul Krugman and many other notables.

Germany's rebound is no cause for cheer. Wolfgang Munchau, FT.

on Germany's begger-thy-neighbour policies, and on its export-reliance being dependent on global growth; his conclusion?

Germany’s economic strength is likely to be persistent, toxic and quite possibly self-defeating in the long-run.

Letter to shareholders. John Hussman.

Given that GDP growth over the past year has amounted to $563 billion, while Federal government debt has increased by $1.6 trillion, there appears to be little evidence that the positive economic growth of recent quarters was driven by much else but the deficit spending of government and to a lesser extent, the aggressive purchase of mortgage securities by the Federal Reserve. Private sector demand, income less government transfer payments, employment growth, housing activity and other measures of "intrinsic" economic activity remain remarkably weak. With the impact of stimulus spending trailing off, and little evidence that debt has been restructured in proportion to the cash flows available to service that debt, expectations for economic expansion appear to be based more on hope than on a careful reading of economic history.

A report by Credit Suisse came out earlier this month which purported to "correct the understatement of income" in official statistics in China. The study argues that household income is about 30% higher than official stats say.

Michael Pettis discusses why one should not receive this as positive news, in Have we underestimated Chinese consumption?

even if income (hidden/gray/illegal) and consumption are truly higher than officially reported, underconsumption is an undeniable problem:

How do we know that China has an under-consumption problem? To answer that question it is unnecessary even to look at the consumption statistics. All you need to know is that China has a very high investment rate (perhaps the highest in the world) and a huge trade surplus.... The only way a country can run an extraordinarily high investment rate and an extraordinarily high trade surplus is if consumption is extraordinarily low.

also, the study implies that underconsumption is an even bigger problem than official stats suggest; rather than the (official) consumption rate of (an extraordinarily low) 36%, the # may be as low as 31%, because

So while Chinese household income might be significantly higher than we thought, most of that additional income goes to the high-savings rich. The Chinese savings rate, consequently, is also much higher and the Chinese consumption rate much lower than the official numbers suggest.

So, was that Credit Suisse study really good news, as some believed?

data:

ECRI WLI came out on Friday at -9.9; but, as usual, the previous week was revised down, to -10.1 from -10; also on Friday, UofM confidence fell to 68.9

today, personal income (up 0.2% in July), personal spending (up 0.4%), PCE deflator (1.5% YoY)and PCE core (up 1.4% YoY) showed no real surprises; and Dallas Fed manufacturing activity came in below expectations, at -13.5 (NAPM Milwaukee and Chicago purchasing manager tomorrow, ISM on Wed; 52.8 expected, down from 55.5)

other fare:
One lump or two? Kunstler.

Why Mr. Obama has turned out to be such a weenie remains a mystery... He certainly appears to be hostage of the more malign forces in society these days -- the medical insurance racket, the too-big-to-fail banks, the multi-national corporations. But I don't believe it's because he wants to suck up to them, or join their country clubs when his current job ends.

My own guess is that he's been informed that the system is so fragile that if he dares to disturb even one teensy-weensy part of it -- for instance, by throwing some executives from Goldman Sachs, Merrill Lynch, et cetera, into federal prison -- that said system will fly to pieces in a fortnight. So Obama's main task for a year and a half has been to desperately apply baling wire and duct tape to the banking system while telling fibs to the public about a wished-for recovery to a prior state.

August 29

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

Viktor Frankl

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

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

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

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

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

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

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

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

With this macro background, where does that leave us today?

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

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

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

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

(chart from Doug Short)

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

220 years of 10-yr bond yields:

This is not a recovery. Paul Krugman, NYT.

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

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

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

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

Krugman's solution -- NITRO. Bruce Krasting.

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

Widespread fear freezes housing markets. Joe Nocera, NYT.

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

China will collapse. George Friedman, Stratfor, interviewed on CNBC Asia.
makes comparison of China now to Japan 20 years ago

Armageddon-watch:

WWIII ahead: Warfare defining human life by 2020. Paul Farrell, MarketWatch.

other fare:
Were you born on the wrong continent? America's misguided culture of overwork. A book review. Salon.

Live tiger found in check-in baggage. Traffic.

Our planet is close to climate tipping points. climatologist James Hansen.

income up? only the top 1%!!

Everybody knows. Leonard Cohen, via Jesse's Cafe Americain.

August 26

[post revised on Sept 1 to correct attribution and to insert missing hyperlink to external source]

yesterday's $36 billion U.S. 5-year Treasury auction closed at 1.374%, as low as the 5-yr yield has been since the early '60s, with the exception of December 2006 at 1.358%; today's 7-year auction also drew a record-low yield, of 1.989%

data today:

initial jobless claims better, down to 473k, from upwardly-revised 504k; 4-wk M.A. at 487k

14.4% of mortgages are delinquent or in foreclosure in Q2, down from 14.7% in Q1

and we had one more regional Fed survey come out today: the KC Fed manuf survey was at 0 for August, down from 14 in July;

these regional manufacturing surveys give us a good idea of what to expect for the ISM next week; the Empire was the first to come out, on Aug 16th, and it was up slightly from 5 in July to 7 in August; Richmond Fed fell to 11 from 16; Philly Fed fell to -7.7 from 5; KC fell today; Dallas Fed will be on Monday and Chicage Fed manufacturing index on Tuesday, then the ISM will come out on Wed.; as per Bill at Calculated Risk, based on the #s that have come out, we can expect the ISM to have slipped again, but to remain above 50

tomorrow we get Q2 GDP; consensus forecast is for +1.4%, down from the advance estimate of 2.4%; the CBO says fiscal stimuls added somewhere between 1.7% and 4.5% to GDP growth; so, absent that stimulus, if the consensus estimate is in the right ballpark, Q2 GDP could have been anywhere from -3.1 to -0.3%; and, as per Jan Hatzius (see here), fiscal policy will go from being a contributor to growth in the last 5 quarters, to a detractor from growth starting in Q3 and forward; so even if underlying domestic demand stays at the Q2 level, which doesn't seem likely given recent deterioration in most indicators, Q3 GDP is set to go negative

also tomorrow, start of Jackson Hole; Ben will give his outlook; do you think he will refer to inflation expecations as well-anchored? despite, via TIPs, evidence to the contrary?

I've been saying for awhile that those who say the U.S. today is not like Japan was are right; the similarities are similar (huge burst asset bubble, too much debt, zombie banks, ineffective policy efforts), but the differences actually make the U.S. worse, not better, off (no savings, so U.S. savings rates having to go up, unlike down in Japan, which cushioned the blow to aggregate demand; unemployment twice what it was in Japan)

Albert Edwards agrees: the U.S. is "much, much worse than Japan a decade ago"

also:

There is still too much hope about. Until the mantra changes from "equities for the long term" to "Bonds at any price", we will not have completed our Ice Age journey.... the Japanese template of supposedly "expensive" bonds outperforming supposedly "cheap" equities; this will feel nothing like a flesh wound…

as per a posting at zerohedge, BofA Merrill Lynch asks is the U.S. becoming Japan:
Ethan Harris says there is just a 35% chance of QE2 and 20% chance of sustained deflation, largely because the Fed reacted so much faster than the BoJ did (policy paralysis in Japan)

but also because, apparently, there are no zombie banks in the U.S. (disputable) and that there is no "acceptance of zero growth" in the U.S. as there was in Japan (perhaps the Japanese only "accepted" it once they realized they couldn't do anything more to engineer stronger growth --- and, as Richard Koo says, Japan was fortunate to do as much as they did which prevented an outcome far worse)

not sure whether Michael Hartnett's contrast of much higher unemployment in the U.S. relative to Japan is a positive contrast, or negative one; otherwise, the similarities he presents vis-a-vis Japan: (interest rates low but not working; asset price performance is deflationary; debt, deleveraging, deflation), like those of Harris (popping of massive asset bubble; impaired banking system; near-zero inflation; large external shock; premature fiscal tightening), seem more compelling (negative) than the (positive) contrasts (Hartnett: non-financial debt-to-GDP did not grow as much in U.S. as in Japan; policy responses (QE & capital injections) were quicker; creative destruction, i.e. high unemployment; Harris: cultural adversion to radical steps, along with the distinctions mentioned above, response time, zombie banks and acceptance of zero growth in Japan)

so how Harris comes up with those odds is beyond me

meanwhile, BoA's Jeffrey Rosenberg says "the backdrop of both cash on balance sheet and credit market availability means that unlike in Japan, the ability to finance growth on corporate balance sheets does not stand as an impediment to any recovery" --- okay, but (a) perhaps that cash is defensive in nature as companies get funding not because they need to or have plans to invest it in productive capacity, but while they can; and (b) though the corporate sector has lots of cash, its a result of lots of debt issuance, and while that is good in the sense that corporates having extended maturities of its debt leaves it less vulnerable to a seize-up in the credit markets --- it means they also has lots of debt, and remain highly leveraged; and (c) even if they do have cash to deploy, with excess capacity and stagnant demand, why should they put it to work in risky projects (and M&A does not stimulate sustainable economic growth)

what BoA/ML fails to mention, but David Rosenberg does not, is that Japan had a high savings rate at the start of the crisis, in contrast to the U.S., cushioning the blow as the savings rate fell over time (whereas in the U.S. it is going up); Japan's lost decade was cushioned by a global economic boom which supported its export sector; and the U.S. has a much larger output gap to deal with

okay, credit where credit is due:

an analyst/strategist, who has made some very good calls in the past, advocating getting into stocks in early 2009 and advocating raising some cash in April of this year, was out yesterday with a bold call: to go max equities, min bonds, anticipating the S&P to be up about 50% over the next 2 years; will he continue his good run?

his forecast is predicated on a soft landing, accompanied by P/E multiple expansion

he cites 5 "good" reasons to believe in the soft landing thesis (with my comments in parentheses): a positively-sloped yield curve (with the Fed at 0, the yield curve can't be anything but positively-sloped, so to suggest that every time the Fed is at 0 is bullish for the economy avoids the reasons WHY the Fed still remains at 0); increasing M&A activity is indicative of corporate and bank confidence (the fact that corporations are using their cash for M&A rather than for investment in productive capacity in the economy doesn't strike me as indicative of confidence in the economy or in a rebound in aggregate demand); dividends are being hiked, which would not be the case if corporations feared a hard landing (as per last point, corporations have leveraged up, opportunistically taking on debt while the getting's good, and are sitting on a lot of cash with, apparently, little productive purpose, so paying out more in dividends is a shareholder-friendly way of doing something with cash that would otherwise sit idle); firings and thus jobless claims have been increasing just modestly (perhaps firings aren't rising more now because firings were so high in the depths of the crisis that companies have cut to the bone already; the fact that there's no more fat to slice off seems small consolation to me when unemployment is already just under 10%); his fifth point is his prediction of a decline in the savings rate, which would be supportive of consumer spending (if true; it hasn't happened yet, as consumer credit has been in a steady decline since July 2008; and personal savings, which averaged $250 billion from 1994 through 2006, are at their highest level in a year, and have been trending up for each of the last 3 years; as they say, show me the money)

quite frankly, given the success of his earlier calls, I was hoping for some more robust analysis that that; for example, I'd rather pin my economic expectations on what yield changes tell me (T10 down 150bp since April), rather than the fact that the curve (necessarily) remains positive; and I'd rather premise my forecast on what the Philly Fed A-D-S, ECRI WLI, Consumer Metrics Institute Growth Index, jobless claims and the housing markets are telling me as leading indicators (or, on what John Husman looks at: widening credit spreads, combined with moderate yield curve, combined with falling stock prices, combined with ISM PMI below 54), rather than on his five indicators

He also notes that stocks are trading at 11.5 x forward earnings --- which sure DOES sound cheap --- but analyst earnings estimates are notoriously REactive to the trends in the economy, as opposed to being predictive so I take no solace whatsoever from low forward P/Es (note previous article which noted that based on forward P/E's stocks ALWAYs look cheap!)

as per the following chart from Doug Short, either the bond market has accurately foreshadowed a wobbly autumn stock market; or, if stocks don't sell off, then bonds have come too far and will sell-off; some are betting on the latter; and, yes, the bond market may have come too far too fast and give some back; but nothing I've heard comes close to trumping the things I've been looking at, so I continue to bet on the former

in fact, if anyone expects the S&P to hit 1575 (up 50% from today's 1050) in the next two years, I'd be game to bet on which happens first in the next two years, S&P at 1575 or S&P below 800

So, how about market sentiment? Where are we now?

As per the Financial Philosopher:

The Hope of early 2009 was followed a few months later by Relief that extended and even touched on some Optimism into early 2010. Now that monetary policy and fiscal stimulus appear to be running out of steam, it seems we have stepped backward in sentiment: Optimism and Relief appear to be dissipating, which brings us back to Hope. Hope is not a prudent plan

The elusive Canadian housing bubble. Alexandre Pestov, via zerohedge.

other fare:

The Coming Famine. book excerpt by Julian Cribb in the NYT.

Lo que separa la civilización de la anarquía son solo siete comidas.

(Civilization and anarchy are only seven meals apart.)—Spanish proverb

Inflation or Deflation?

Some say the world will end in fire,
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
But if I had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.
—Robert Frost, Fire and Ice, 1920.

August 25

data yesterday:
Canadian retail sales were weak, but driven by price effects, as volumes were fine; US existing home sales were atrocious, dropping 27% in July from a downward-revised level in June, to a new historical low of 3.83 million, increasing the months' supply to 12.5; the Richmond Fed Manuf index dropped, but not as much as expected

today's data:
mortgage purchase applications remained very low (back to 1996 levels); durable goods missed expectations, big-time, and were particularly weak ex-transportation, and capital goods orders non-defense ex-aircraft were down 8%; new home sales followed suit with existing home sales, falling to the lowest level its been in the history of the data series (1963), and months' supply up to 9.1 (despite the inventory of new homes being as low as its been since I was born);

claims tomorrow and U.S. GDP on Friday


with recent data, most notably claims and housing, you can see that, though papered over with stimulus for awhile, the underlying problems in the economy are re-emerging. And:

More negative news flow coming. Calculated Risk.

regarding my point yesterday that Hilsenrath's column in the WSJ did not bode well for the answer to Evans-Pritchard 's question of whether or not the Fed has the will to do QE2 yet, Goldman's Jan Hatzius says not til Nov. 3, via zerohedge.

Japan and the ancient art of shrugging. Norihiro Kato, NYT. (hat tip, Rosenberg)

a rather long but VERY worthwhile read, with plenty of links to other background articles: Contained Depression. Michael Shedlock.

China's looming real-estate bubble. Shikha Dalmia and Anthony Randazzowsj, WSJ.

there is mounting evidence that Beijing has misallocated vast amounts of capital, touching off a real-estate crisis that could yet drag the world's second-largest economy down to earth....So many middle-class Chinese are being priced out of the market that their travails became the subject of a popular TV series called "Dwelling Narrowness." Beijing banned the show, fearing it would cause unrest.

for more discussion/debate on whether or not China's economy is a bubble:
Stephen Roach, Morgan Stanley, Jim Rickards, Omnis Gourp, and John Rutledge, Chinese Academy of the Sciences on CNBC.

The limits of stimulus. Patrick Chovanec.

nice little take-down of Bill Gross, by Yves Smith, naked capitalism.

"Boy, when you think you’ve seen the worst in utterly shameless, self serving tripe, someone manages to outdo it."

I'm late to this, because I only just started reading his blog, but this is worth highlighting:
"Extend & pretend": Where are we after one (and a half) years of the suspension of the FASB rules? Gonzalo Lira.

ever since April 2, 2009, when the FASB rules were suspended, the American banking system has been floating on nothing by air. By suspending rule 157, none of the banks have had to admit that they’re insolvent. With the suspension of mark-to-market, accounting rules are now basically mark-to-make-believe....

Has it worked? Prima facie, it would seem so. The banks seem to be stable, and have been raking in the big bucks ever since the rule was suspended....

everything is wonderful! Nothing hurts! However, the basic problems in the banking system remain: The banks are still broke, because of the same reason—the toxic assets on their books. The banks have taken “extend and pretend” to heart—they have lobbied to extend the suspension of FASB, while they have pretended to repair their balance sheets, when in fact, they have not.

In fact, compared to the write-off mania of ’08, the banks have not written off any of these non-performing assets. They sit like dead weight on the balance sheets of the banks—we still do not have a clear grasp of even how much of this garbage is still lurking out there, like turds in the Venice canals, because of the obfuscation of the basic accounting rules—an obfuscation which the banks insist on perpetuating. The banks still have the holes in their balance sheets which caused the crisis in 2008.

BP link of the day:

Slow violence and the BP coverups. Anne McClintock, counterpunch.

“Let me tell you something. Today we saw three sharks washed up dead on the beach. The insides of their noses were black with oil. The membranes of their mouths were black with oil. Their eyes were black with oil.” Steve is a war veteran who has seen a great deal of horror, but he seems to find this memory inordinately upsetting. “I am telling you this for the sake of our grandchildren,” he said. “We have an apocalypse going on and no one is paying enough attention.”

and

BP could well stand, not for Beyond Petroleum, but for Beyond Principle. In a particularly nefarious act of cost-cutting and labor control, BP has hired prison inmates to do the clean-up, refusing to let them wear respirators, as this makes it visible that conditions are hazardous. Nor can they carry cell-phones lest they document the damage. Forced labor: slavery déjà vu. And there’s an extra perk for BP. Private companies like BP who use people on work-release get tax rebates of $2,400 for every worker they employ.

other fare:

on the multiple energy miracles that we need; talking energy with Bill Gates.

Can Exercise Make You Feel More Full? Scientific American.

Digital devices deprive brain of needed downtime. NYT.

August 24

Two consumer contractions. Consumer Metrics Institue via dshort.

I am Superman: The Federal Reserve Board and the Neverending Crisis. Chris Whalen.
for the to-read list

In a recent column, Ambrose Evans-Pritchard says:

This time yields may stay low for longer. Fiscal and interest rate ammo has been exhausted, though not QE. I have little doubt that central banks can lift the West out of debt-deflation if needed with genuine QE – not Ben Bernanke's Black Box "creditism", or Japan's fringe dabbling. Whether they have the nerve or the ideological willingness to do so is another matter.

as I have said before QE is not a helicopter drop if the expansion of the monetary base sits in excess reserves, which is what Evans-Pritchard is referring to re "genuine QE"; as he said at the end of June,

The Fed has since made a hash of quantitative easing, largely due to Bernanke’s ideological infatuation with “creditism”. QE has been large enough to horrify everybody (especially the Chinese) by its sheer size – lifting the balance sheet to $2.4 trillion – but it has been carried out in such a way that it does not gain full traction. This is the worst of both worlds. So much geo-political capital wasted to such modest and distorting effect.

The error was for the Fed to buy the bonds from the banking system (and we all hate the banks, don’t we) rather than going straight to the non-bank private sector. How about purchasing a herd of Texas Longhorn cattle? That would do it. The inevitable result of this is a collapse of money velocity as banks allow their useless reserves to swell.

on the question of "ideological willingness to do so", it doesn't look good, as per John Hilsenrath in Fed split on move to bolster sluggish economy (WSJ); though the formal vote was 9-1 in favour of QE-lite (not allowing balance sheet to shrink), 7 of the 17 Fed officials at the Aug. 10 meeting spoke against QE or at least had reservations.

Officials were clustered in two camps. In one camp, Mr. Dudley, and the presidents of the Boston and San Francisco Fed banks, Eric Rosengren and Janet Yellen, were distressed that the Fed was far from its objectives of low unemployment and stable inflation.... The other camp was skeptical.

The monetary base and bank lending: you can lead a horse to water.... FRB of St. Louis.

Why was the increase in the money stock so small when the increase in the monetary base was so large? The answer centers on the willingness of depository institutions (banks) to lend and the perceived creditworthiness of potential borrowers. A deposit is created when a bank makes a loan. Ordinarily, bank loans—and hence deposits—increase when the Fed adds reserves to the banking system. However, despite an increase in reserves of over $1 trillion, total commercial bank loans were some $200 billion lower in May 2010 than in September 2008.... banks were reluctant to make new loans. Partly this reflected weak loan demand, but it also indicated a diminished appetite for risk on the part of bankers.

Jan Hatzius thinks there are only 25%-30% odds of a double-dip, but that forecasters need to cut their GDP and earnings forecasts much further. via BondSquawk.

How hyperinflation will happen. Gonzalo Lira.

Right now, we are in the middle of deflation. The Global Depression we are experiencing has squeezed both aggregate demand levels and aggregate asset prices as never before. Since the credit crunch of September 2008, the U.S. and world economies have been slowly circling the deflationary drain.... Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative)—in short, everything screams “deflation”. Therefore, the notion of talking about hyperinflation now, in this current macro-economic environment, would seem . . . well . . . crazy. Right? Wrong: I would argue that the next step down in this world-historical Global Depression which we are experiencing will be hyperinflation.

why?

hyperinflation is not an extension or amplification of inflation... Inflation is when the economy overheats... Hyperinflation is the loss of faith in the currency

I didn't know there was an "Oracle of the North"

other fare:

Vancouver housing prices: “If you want Winnipeg-level house prices here, all you have to do is tear down the mountains and fill in the ocean.” Tsur Somerville of UBC Centre for Urban Economics and Real Estate.

All-out geoengineering still would not stop sea level rise. Scientific American.

China Traffic Jam Could Last Weeks. WSJ.

I too am a fan of Chimay.

Predictions (in prep for next forecast meeting)

"Low-probability" events that I currently predict:

- U.S. is experiencing a balance sheet recession, much like the Japanese did, which leads to very different outcomes than do typical inventory-led recessions, meaning that this will be a bump-along, virtually no-growth era, albeit with lots of volatility

- the wide output gap will persist; economic slack will continue to be disinflationary

- U.S. housing STILL has not bottomed; houses remain overvalued and with the excess supply of homes, even ignoring shadow inventory, (months supply of existing homes now at 12.5 months), pressure on prices will resume

- the U.S. household balance sheet continues to have very much more debt than can be serviced given incomes and nonexistent income growth (median household income adjusted for inflation has not grown since 1997); there will be many more write-offs, loan loss provisions need to increase, which will hit earnings, and deleveraging will persist for a LONG time

- as households delever, deflation picks up (deflation is the contraction of money and credit; though prices as calculated in the CPI are not yet falling, M3 IS, thus deflation)

- with excess capacity and no demand growth, there's no impetus for production growth (other than very short-term inventory cycles), so there is no impetus for employment growth

- waning of inventory rebound and of federal fiscal stimulus will not just no longer add to growth, but will detract from growth, as will the state & local budget cut-backs

- if the U.S. does not double-dip, it will only be because the NBER decides the recession starting December 2007 hasn't actually ended yet (a mid-recession bounce off the lows that does not reclaim the old peak before the down-trend resumes may not justify an end-of-recession call)

- Canada will not decouple from the U.S. going forward any more than it did in 2008/09

- Canada has its own internal imbalances (consumer credit, household debt, housing activity & prices) which makes it not just vulnerable via external shocks, but vulnerable too to unsustainable domestic demand

- China does not just contribute to global imbalances, but has its own severe internal imbalances, which are unsustainable and thus won't be sustained, and China will suffer the same fate as Japan in the 1990s and the U.S. now in the aftermath of the crash of an asset bubble (though many believe the Chinese government has plenty of ability to fine-tune the economy and keep growth near double-digit range, there is not much precedent for successful central planning economies)

- stocks remain in a secular bear market, despite the cyclical swings; stocks will fall below 800 as current very rich valuations (based on cyclically-adjusted P/E ratio and Q-ratio, as opposed to forward P/E) are predicated on robust earnings growth due to robust economic growth, neither of which will materialize; in fact, if fair value is 850ish, and given that stock markets always over-react in each direction, a revisiting of the 600s is not out of the question

- investors will shun stocks and continue to restock the fixed income holdings on their balance sheets, which, for households, remain very low, particulary given the aging baby boomer demographic situation

- Fed will be on hold at least until 2014, likely longer

- BoC will get its overnight rate no higher than 1% while Fed remains at 0%, and I believe it will cut rates again once the shxt hxts the fan again (i.e. once the fact that there's no recovery to speak of becomes obvious)

- the secular bull market in bonds that began in the 1980s has not been broken yet and will not be in the next few years; bond yields will break through the 2009 lows, getting closer to Japanese levels in 2011; US10s will get below 2%, Canada 10s under 2.5% and long bonds to 3%







Context: "Low probability" events that I have previously predicted:

- in late 2006, anticipated not just U.S. housing stalling, but crashing; a recession in 2007; an S&L-type financial crisis

- in Q1/2007, I thought the economy would be in recession in Q2, if it was not already (wrong; but it was by the end of the year)

- in Q2/2007, I predicted a Minsky moment, that the debt bubble would burst (and though I sold most of my non-bank ABCP, I foolishly rationalized not selling my one last piece as it was just a 2-month maturity)

- and that the S&P would fall below 1000 (I was the only in-house predictor of negative stock returns in 2008; however, I was also the only predictor of negative stock returns for the rest of 2007, which was incorrect; early again, like with the recession)

- it was in Q3/2007 that I first started predicting that the U.S. would likely, due to a cratering asset bubble and large private sector debt burden, have an outlook similar to Japan in the 1990s
- in late 2007/early 2008, I predicted that the Fed would drop rates to the old low of 1%

- and, at that time, I believed it was too early to be buying credit (but I did not advocate for selling credit, and I certainly did not foresee spreads widening anywhere near as much as they ultimately did)

- in early 2008 I noted that economic growth since the 1980s had been driven by debt growth, with more and more debt required over time to buy each unit of GDP growth, and therefore that in the absence of debt growth there would be no economic growth; and that though the government could fill the void for awhile and offset private sector deleveraging for a time, it could not do so indefinitely, so economy-wide deleveraging would happen

- in 2008 I agreed that subprime was contained --- to planet Earth

- and I predicted, when losses so far were under $400 billion, that credit writedowns would easily exceed $1 trillion

- I also suggested in mid-2008 that the Fed was in a liquidity trap and that monetary policy, though easy, would not be effective (pushing on a string)

- in Sept 2008, when the S&P was at 1200, I expected stocks to go down a further 14% in 2008 and be down 8% in 2009 (down to 800 then up to 1000) (wrong -- they went lower than I anticipated (to 666), then recovered much more than I anticipated (to 1150))

- in late 2008 I predicted that global decoupling was an optimistic myth, that the global economy relied on the U.S. consumer and would be dragged down by it

- in 2008 and 2009 (and still in 2010) I believed that U.S. housing was not yet in a sustainable recovery

- in early 2009 I predicted that unemployment, then at 8.1%, would exceed 10%; I predicted that the Fed would be on hold for quite some time as, though an overnight rate of 0% seemed very accomodative, relative to a Taylor Rule approximation, it wasn't easy enough, and, because it NEEDED to be very easy, it would STAY very easy; I remained in the deflationary camp; that Fed's so-called printing of money through QE was ineffective as it wasn't a helicopter drop into the hands of consumers, but was instead sitting in banks' excess reserves (effectively just an asset swap), so though the Fed could expand the monetary base, as the money multiplier and velocity fell, monetary base expansion would have no effect on P*Q

- in spring 2009, I removed my hedges, assuming stocks would get back to 900 (at which point I started hedging part of my equity exposure again) or 1000 (at which point I became fully hedged); I did not expect the S&P to get above 1000, and did actually expect much lower stock prices in H2/2009 (below the March low --- wrong) (so I became net short equities as stocks got to 1100 and further at 1200)

- in Sept 2009 I predicted that the Universe bond index would return over 6% and the long index around 10% in 2010

- in late 2009, I predicted that bond yields would head higher in the first half of 2010, along with stock prices, as investors assumed the recovery was underway and entrenched, but that yields and stocks would fall in the second half of 2010 as it became obvious that the stimulus-induced and inventory-led recovery was temporary and not sustainable and that underlying demand remained anaemic and the recovery was really no recovery at all


in other words, just b/c a type of event in a normal economic environment might be of "low probability", in a different type of environment, all bets are off, and probabilities need to be significantly re-appraised

Taylor Rule, Fed and 10-year Treasury

This post is motivated by Krugman. (And this post was revised the morning after first being posted.)

The Taylor Rule formulation, which can be viewed as either a description of historical monetary policy or as a prescription of how monetary policy ought to be conducted, is a linear function of an inflation rate and a measure of economic slack.

There are lots of versions out there, as different measures of inflation or slack can be used, and different coefficients can be applied to each variable. One of the simplest, and that results in a pretty good fit to actual historical Fed policy, and therefore the one I've been using, is the Mankiw Rule, which uses core CPI inflation along with the unemployment rate and applies the same coefficient to both.

So, first, a little history. Here is what core CPI and the U3 unemployment rate have looked like since the start of the Greenspan era.

Based on that data, the purple line in the chart below shows what the Taylor Rule would've prescribed, while the red line shows actual Fed policy. (stating-the-obvious note: the former can suggest a negative rate "should" be set, though the latter can't actually go negative, so Fed policy can be "tight" relative to where it ought to be even when the Fed funds rate can't go lower)

Enough history; now how about going forward?

Well, to decide what the Taylor Rule would prescribe for the Fed funds rate, one must have estimates of what the two underlying variables will be. Fortunately, we can use what the Fed itself is predicting. Its central tendency projections are charted below.

Note that the Fed expects unemployment to stay above 7% through 2012, before falling to average just above 5% in the longer-run. Because it doesn't seem likely that unemployment will fall from 7.3% at the start of 2013 to 5% immediately, I applied some assumptions to have it fall steadily over time until it got back to near the 2000 and 2006 lows, falling to 6.3% at the end of 2013, 5.3% at the end of 2014, 4.75% in 2015 and 4.25% in 2016, which averages 5.15% over those 4 years.

And the Fed expects core PCE (rather than core CPI) to not rise to a range of 1.0-1.5% until the end of 2012. So I did similarly for core CPI in the longer term as I did for unemployment, pencilling in a rise from the 2012 projection of 1.25% (the mid-point of the Fed's 1.0-1.5 range) to 1.4% in 2013, 1.55% in 2014, 1.75% in 2015 and 1.9% in 2016.

Based on those projections, the Taylor Rule formulation is shown below (along with where the Fed would be when the Taylor Rule suggests a negative rate is appropriate).

This suggests that even based on the Fed's very own projections for economic slack and inflation, it should keep rates at zero for the next 3 years. The economy would gradually return to normal, and therefore monetary policy could return to normal, gradually thereafter, principally in 2015/2016.

So lets say that's true. What does that suggest for the 10-year Treasury?

Historically, the yield on the 10-year has been less than 150bp above the Fed funds rate. This is very variable over time, depending on the environment. Note that when the Fed funds rate is being lowered, the T10-Fed spread has tended to widen, as the Fed funds rate falls faster than does the 10-year yield. Note also, however, that when Fed policy is roughly static, the T10-Fed spread generally grinds in. That is, once the Fed stops easing, the 10-year typically continues to shift towards the Fed funds rate, narrowing the T10-Fed spread. In recent history, this has been even more noticeable when the Fed has stopped hiking.

So, in any case, while it is a VERY imperfect guide, let's say that the 10-year yield should be about 150bps, not above the current Fed funds rate, but above what the Taylor Rule says the Fed funds rate should be (which allows us to project forward, not just look backwards); if so, you get this:


Obviously the reasonably strong correlation historically can't be as applicable when the Taylor Rule says Fed funds should be negative --- but it does seem to suggest that given the macroeconomic environment, the 10-year yield is actually pretty high, not too low.

Another way of looking at this would be to use the Taylor Rule projection, assume the Fed funds rate will be as prescribed, and calculate what interest rate one would have to earn on a 10-year bond today to match what you would earn by investing at the Fed funds rate as it evolves over time (i.e. a breakeven analysis). I calculate 2.7%. Which is pretty much where the 10-year Treasury is today.

And, if the market starts to view the Fed's projections as too optimistic, there would be room for the Taylor Rule to push interest rate hikes out even further, and thus to lower the yield that a 10-year bond would have to earn to match Fed policy.

In fact, there's very good reason to take the Fed's central tendency projections with a rather large grain of salt: they don't have a good track record. For instance, official projections for unemployment never foresaw a rate anywhere near 10%. In fact, for a laugh, go back to Fed central tendency projections in spring 2008 (after the recession had started) and you can see that the Fed never anticipated core PCE ever getting below 1.7%, nor of unemployment ever getting above 5.7%! Similarly, in January 2009, the Fed thought unemployment would get no higher than 8.8% in 2009, declining in 2010 and falling futher in 2011 to a range of 6.7 to 7.5% (which, needless to say, is in no way consistent with what it is currently pencilling in for either 2010 or 2011).

So, if the Fed is wrong, what if, for instance, one were to expect the disinflationary trend to persist, with core inflation steadily trending down, and if one were to expect unemployment to remain stubbornly high, both of which as I do?

I honestly believe that the unemployment rate could go well into the double-digits; but, for the sake of argument, let's say it simply stays in the 10% neighbourhood (slightly above where it is now) for awhile, not falling until it starts dropping regularly in 2014 and thereafter (this is not really what I expect; I'm pencilling in a more benign view than my own; if the U3 rate doesn't go higher than 10% and if it starts falling regularly in 2014, I would hazard a guess it has as much to do with how the U3 rate is calculated (if you fall off the unemployment rolls, you're no longer unemployed!) as with underlying strong economic growth; I anticipate the broader U6 measure to exceed 20% soon and stay there for quite some time; in any case, for argument's sake...)


So, what if that came to pass? How should monetary policy evolve? A Taylor Rule would suggest the Fed stay at 0 until 2018.

And if the Fed stays at 0 for the next 8 years, then the current spread of 250bp of US 10-years over Fed funds looks very attractive relative to the historical average of 143bp.

And, if you did that same breakeven analysis I did earlier, now using Taylor Rule projections based on MY CPI and U3 forecasts rather than those of the Fed, rather than 2.7 as a breakeven for the 10-year, you'd get 0.3%.

August 23

Are corporate earnings sustainable? EconompicData.

The last chance to avoid a global trade war. Michael Pettis, FT.

Euro crisis has not gone away, it is merely masked by other troubles. Roger Bootle of Capital Economics, Telegraph.

If the world economy is heading for a slowdown, and I think that it is, then on past form the eurozone will join in.... A marked slowdown will bring to the fore all the problems which caused such anxiety earlier in the year. It is the weakest members who have most to fear. As the eurozone economy softens, worries about the future of the euro will soon resurface.

Making it up. Paul Krugman, NYT.

The Taylor Rue and the "bond bubble". Krugman again.

my sense is that a lot of people just can’t bring themselves to face the reality that we’re likely to be in a zero-interest world for a long time. They just keep assuming that the Fed is going to raise rates soon, even though there is absolutely nothing about the macro situation that would justify such a rate increase. But once again: if you take standard economic forecasts seriously, they point to near-zero short-term rates for a very long time, which in turn justifies low longer-term rates.

Now that's rich. also Krugman.
according to Republicans and conservative Democrats, the deficit and debt need to be addressed, so no further fiscal stimulus for the economy can be afforded; but

politicians are eager to cut checks averaging $3 million each to the richest 120,000 people in the country. What — you haven’t heard about this proposal? ... I’m talking about demands that we make all of the Bush tax cuts, not just those for the middle class, permanent. ... The Obama administration wants to preserve those parts of the original tax cuts that mainly benefit the middle class — which is an expensive proposition in its own right — but to let those provisions benefiting only people with very high incomes expire on schedule. Republicans, with support from some conservative Democrats, want to keep the whole thing.... According to the non-partisan Tax Policy Center, making all of the Bush tax cuts permanent, as opposed to following the Obama proposal, would cost the federal government $680 billion ... over the next 10 years. For the sake of comparison, it took months of hard negotiations to get Congressional approval for a mere $26 billion in desperately needed aid to state and local governments.

Housing in ten words. James Kwak, Baseline Scenario; and Housing: no longer a surefire wealth builder. Barry Ritholtz, The Big Picture.

Mea culpa from Jim Caron, Global Head of Interest Rate Strategy at MorganStanley, and new forward-looking view, including how to front-run the Fed, in August 19 Interest Rate Strategist.

I like long bonds, but even I wouldn't buy a 100-year bond!

data today:
Chicago Fed NAI rebounds in July to 0 from downward revised -0.7 in June;
the boost in July was due to the 1% boost in industrial production, which itself was accentuated by an 8.8% boost in the auto products component --- but there were some issues with the seasonality factor applied to autos in July, so the 1% IP gain was overstated (the expectation of a 0.5% gain was probably more accurate) and there will likely be some future give-back

tomorrow: Canadian retail sales and U.S. existing home sales and Richmond Fed
Wednesday: US durable goods and new home sales
Thursday: US claims, as usual, plus mortgage delinquencies and foreclosures
Friday: US Q2 GDP (1.4% now expected)
Aug 26-28: Fed's annual pow-wow at Jackson Hole


other fare:
We've gone into the ecological red. Andrew Simms, Guardian.


p.s. a note on Links

I may link to articles by authors who I don't necessarily agree with

obviously, I have a clear bias to link to the views I find most informative to developing my own view, and, as such, tend to be (at this particular moment in time) more negative on economic prospects --- this is largely because I often don't agree with the views of the economic bulls, typically finding their analysis less than robust; therefore you'll almost never see links to articles authored by Malpass or Kudlow or Brian Wesbury, etc. --- unless I'm doing so in an obviously sarcastic way

but I will link to comments/interviews/op-eds/articles of authors if the topic matter of that piece is thought-provoking, even if I don't agree with it --- or, more typically, is a specific view I think worthy of consideration and may agree with, even if I don't agree in general with the author's views

for example, I think guys like Roubini and Taleb and Krugman are worth listening to even if I think they're wrong on something; they may be right, I may be wrong, and if they are analysts whom I know are serious, are not politically or otherwise conflicted, have a good track record, study objective reality rather than pander subjective B.S. because they have some kind of agenda, etc., then I ought to be willing to analyze their analysis to determine whether or not I've missed something and ought to revise my own analytical process; John Hussman would also fall into this category; I don't think there's anyone who I respect more, who I almost always agree with, and who I believe I have learned a lot from (in the same category as James Montier and Barry Ritholtz) --- and yet I disagree with the view he published today that QE will result "in an abrupt collapse" of the dollar (speaking of Ritholtz, for an excellent piece sort of along these lines, see Seeking the truth -- or obscuring it?, which is well worth a read)

I may also link to articles by authors who I haven't actually heard of

what most often matters to me is not WHO is saying something, but WHAT that person is saying; and if the specific WHAT I'm linking to is informative, reasonable, insightful, etc., or is simply highlighting an event or fact that I think is worthy of acknowledging, then it doesn't necessarily matter to me if the author's other views (past and present) are ones I agree with; bona fides don't interest me as much as facts, ideas and analysis

for example, I was much more familiar with the reputation of BCA than I was with either Lombard Street Research or Capital Economics when I started reading them, but it was the latter two shop's research than I found more compelling than that of the former, so reputation was to me less important than analysis

as another example, I recently linked to a piece by John Rubino; at the time, I knew nothing about him --- other than that he was highlighting the VIEW that, with a dearth of reasonably-yielding investment options, investors' reaching for yield is likely responsible for the FACT that junk bonds are getting issued and bought at a record pace, such that high yield issuance YTD is already very close to breaking the 2009 record for issuance

neither the fact that Rubino wrote a book in 2003 about how to profit from the coming real estate bust, nor the fact that he is currently predicting a collape of the dollar (and, as a corollary, I presume he believes bonds are a bubble waiting to crash at the same time that inflation causes the dollar to crash) impacts my belief that the point about junk bond-issuance is worth thinking about

so, to sum up, the view of an article I link to is not necessarily one I agree with, but is simply one I believe should be acknowledged and/or incorporated into my big picture view, and though the author's reputation, if I know anything about the author at all, may affect the # of grains of salt, if any, I attach to a view, that's much less important to me than the analysis or views themselves

August 22

With his black swan metaphor, Nassim Nicholas Taleb has been warning people for years that high impact events are not always low probability ones; that anything is possible, and that unpredictable, unforeseen, surprising major events SHOULD be expected, and have become almost commonplace.

As such, it seems to me that this veiw should caution investors to be humble, to accept (and plan for) the fact that one can't possibly know everything that's going to happen that will affect the markets (my favourite definition of risk is that more things CAN happen than WILL happen).

I certainly respect Taleb's research, insights and opinion. Which is why I found it somewhat curious and, admittedly, disappointing that he was SO SURE of himself to say in February that "every single human being" should bet Treasuries would decline; that it was "a no-brainer" to sell short Treasuries.

That trade hasn't worked so well in the last six months, but Taleb is sticking to his guns, saying that the Treasury bond market is a bubble waiting to collapse, via Bloomberg.

Meanwhile Randall Forsyth says

THERE'S A REAL BUBBLE TAKING PLACE in the markets and you can scarcely miss it, so blatant and omnipresent has it become. It is, of course, the bubble in talk about a bond bubble.

in Barrons.

the German economy may be expanding strongly on the back of export growth, up 2.2% quarter-over-quarter in Q2, and up 3.7% since the 2nd quarter of 2009, but when ECB hawk Axel Weber says the ECB should retain stimulus at least til the 1st quarter of next year, the yield on the German 30-year bond fell to a record low 2.89% (meanwhile, "bond vigilantes" are demanding 5.38% yield on Irish 10-year bonds

Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar. John Hussman.

My impression is that Ben Bernanke has little sense of the damage he is about to provoke. A central banker who talks about throwing money from helicopters is not only arrogant but foolish. Nearly a century ago, the great economist Ludwig von Mises observed that massive central bank easing is invariably a form of cowardice that attempts to avoid the need to restructure debt or correct fiscal deficits, avoiding wiser but more difficult choices by instead destroying the value of the currency....

Good policy is not rocket science. It begins with the refusal to make people pay for mistakes that are not their own. This economy continues to struggle with a fundamental problem, which is that debt obligations exceed the ability to service them. While policy makers have done everything to preserve the patterns of spending and consumption that created the problem in the first place, we have done nothing to restructure those obligations

China real estate watch: crash-in-waiting, from Bloomberg.

The Overconfidence Problem in Forecasting. Richard Thaler, NYT.
quotes Mark Twain:

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain't so.”

Great dangers attend the rise and fall of great powers. John Plender, FT.

Armageddon watch: the always-entertaining Gerald Celente, interviewed on techticker.

We went from a country of merchants, craftspeople, manufacturers to one of clerks and cashiers;... once you're off the unemployment roles, you're no longer unemployed!... the type of rioting you're seeing in Greece, you'll see it all over the world... when people lose everything and they have nothing left to lose, they lose it

I knew after the Jackson Hole conference in 2007, when he said that mortgage equity withdrawal didn't impact consumer spending and that the Fed shouldn't be in the business of predicting/calling/or doing anything about asset bubbles, that Mishkin was a yahoo; here's further proof, via zerohedge. How can you write a paper titled "Financial Stability in Iceland" (and get paid to write it but not disclose that little fact!) then go back later and change the title to "Financial INstability in Iceland". We should sue him!

other fare:
Liberty lovers meet their match. National Post.

and today was national go-topless day in the U.S.