November 29

Taking von Mises to pieces. Buttonwood, The Economist.

policymakers seem to show a lot less interest in the economic ideas of the "Austrian school” led by Ludwig von Mises and Friedrich Hayek, who once battled Keynes for intellectual supremacy. Yet the more you think about recent events, the odder that neglect seems. A one-paragraph explanation of the Austrian theory of business cycles would run as follows. Interest rates are held at too low a level, creating a credit boom. Low financing costs persuade entrepreneurs to fund too many projects. Capital is misallocated into wasteful areas. When the bust comes the economy is stuck with the burden of excess capacity, which then takes years to clear up.

other fare:
The next great crash will be ecological - and nature doesn't do bailouts. Johann Hari.

Margaret Atwood interview. Guardian.

November 25

Hamping Europe's periphery. Paul Krugman.

European defaults and Chinese inflation. Michael Pettis.


other fare:
Nassim Taleb looks at what will break, and what won't. The Economist.

Most traffic-congested cities in North America. Paul Kedrosky.

November 23

Zombie bears. Barry Ritholtz.

Failure to consider constraints. Mish.
skim thru the first part about his predictions, but the rest of the post is good review

Shadow over Asia. Interview of Vitaliy Katsenelson by David Galland.

I am a big believer that in the boxing match between a visible and an invisible hand, though the invisible hand may lose a few rounds, it will win the match every time....
There are no shortcuts to greatness. As long as they keep building new bridges [to nowhere], the economic numbers will register that there is growth, but at some point the piper will have to be paid, and these projects have a negative return on capital....
The problem with China is pretty much the same as with any bubble. Though it may have had a solid foundation under it, it is simply a good thing taken too far.... the actions taken by the Chinese government, especially after the recent global recession, have basically supersized the bubble that was already forming.... The government can drive this bubble further than a rational observer would expect....
In the case of Japan, their government basically ran out of chips. I think the Chinese government still has enough chips to keep the bubble going awhile longer. These bubbles usually last longer than the reputation of the person who predicts their demise.

November 22

CoreLogic: Shadow Housing Inventory pushes total unsold inventory to 6.3 million units. Calculated Risk.

Banks face another mortgage crisis. Barron's.
But Chris Whalen of IRA thinks the exposure of the banks is much greater than Barron's says.

Fannie Mae, Freddie Mac and the Coming Wave of Foreclosure Buybacks. RealtyTrac.

There will be blood. Paul Krugman.

Call Their Bluff, Mr. President. David Cay Johnston.



sorta related fare:
Obama the house negro --- pity the man who walks on his knees (and the nation he leads from that position). Evert Cilliers aka Adam Ash, 3QD.

However, this was but a screwup in a teacup compared to what the Dems did, which was wreck their chances for making any more “reforms” for the next two years or more. And a silent fart in a huge cathedral compared to what our President has wrought, which was wreck his chances for re-election. Just like the Republicans have successfully obstructed anything that can do the country any good over the last two years so they can blame everything wrong on the Democrats, they are now going to make damn sure nothing good happens at all so they can blame everything wrong on the president, and replace him with Mitt Romney (maybe even Sarah Palin). Simple election strategy, and amazingly effective.

totally other fare, especially for basketball lovers:
When David beats Goliath: When underdogs break the rules. Malcolm Gladwell, The New Yorker.

Some thoughts, with references

I share the views of the world of:

Richard Koo, Paul Krugman, Mark Thoma, etc., w.r.t.:
the unique, persistent nature of balance sheet recessions, as distinct from normal cyclical recessions; the need for more government intervention to get unemployment down; the liquidity trap, which causes normal transmission channels of monetary easing, which normally induce housing-led recoveries, to be no better than pushing on a string; and, therefore, the primacy of fiscal policy to fill the gap in aggregate demand in order to achieve the objectives of reducing unemployment and increasing inflation; but, in the absence of sufficient fiscal policy, the necessity for further monetary policy easing, however non-traditional and (in-)effective that may be;

Irving Fisher, Steve Keen, Gary Shilling, Van Hoisington and Lacy Hunt, David Rosenberg, Felix Zulauf, Ray Dalio, Albert Edwards, etc., w.r.t.:
the huge excess of unsustainable debt growth built up over two decades, and the concomitant excessive spending, represented enormous pulling-forward of aggregate demand, which ultimately must be paid for with future savings from income and therefore lower future demand in the same scale as past excess consumption; that that process of debt accumulation appeared to be sustainable not due to income growth but due to the chimera of wealth enhancement due to elusive/temporary asset-price appreciation in the housing market; the credit expansion created excess claims to underlying real wealth; once the asset-price bubble burst, i.e. the Minksy moment, the resultant debt-deflation dynamics, including the paradox of thrift, deleveraging, declining money multipliers and monetary velocity, deflation of broadest measures of effective money supply, which, contrary to the views of many traditional economists, critically includes credit (which dwarves traditional measures of money supply, like M2) (i.e. deflation is a decrease in money and credit relative to available goods and services); and resultant disinflation of wage and price levels; in this deleveraging, disinflationary, low-growth environment, there's no evidence that the secular bull market in bonds has expired, as the phenomenon of lower yields for the last 25 years has been consistent with declining rates of nominal GDP growth, which persists --- i.e. yields have yet to see their lows

Kenneth Rogoff and Carmen Reinhart, et al, w.r.t.:
the costliness of economic recessions that are coupled with financial crises, both in terms of share of GDP and recovery time, particularly given the hits to the consumer due to the debt burden mentioned above and the housing recession; that recovery is extended until the debt overhang is absolved or resolved

Chris Whalen, Josh Rosner, Janet Tavakoli, William Black, John Hussman, etc., w.r.t:
the disastrous policy of rescuing the banks rather than rescuing the banking system, i.e. following the failed Japanese model rather than the successful Nordic model of responding to a financial crisis; that fundamentally nothing that caused the credit crisis has gone away or improved (and in fact have gotten worse when it comes to commercial real estate), only that the inherent problems on bank balance sheets have been glossed over or hidden from public view but remain there (e.g. all of the nation's banks jointly earned $22billion in Q2, thanks largely to reducing reserves against losses by $27billion compared to a year earlier), making the banks into zombie banks and effectively nationalizing the whole mortgage market, but without having done anything to help homeowners with mortgages, the root of the problem; and that without proper debt restructuring (haircuts, debt-for-equity swaps, etc.), the problem will persist and fester; the government's notion that re-capitalizing the banks would result in a multiplier effect (each dollar of capital injected into banks by the government would result in $8 of new lending to families!) proclaimed by Obama was either naive idiocy or duplicitous crony capitalism; that extend-and-pretend merely postpones the necessary adjustments and extends the adjustment period

Joseph Stiglitz, Paul Krugman, Simon Johnson, Paul Volcker, Robert Reich, Mervyn King, William Black, Dean Baker, etc etc etc, w.r.t:
the TBTF banks are not TBTF; until they are broken up and until the paper-ponzi-pushing egomaniac CEOs of those TBTFs lose their sway over policy via their lapdogs, policy-makers will stick with their failed strategies, to the detriment of the economy; the financial sector of the economy is a tax on the productive sectors of the economy

Meredith Whitney and Chris Whalen w.r.t:
the likelihood of states and municipalities defaulting on their debt

Gary Shilling w.r.t.:
the housing recession is not over; house prices remain too high based on price-to-income and price-to-rent metrics, and will fall further thanks to high vacancy rates, tight credit, nonexistent income growth, high unemployment, poor supply-demand dynamics, fraud-closure problems, shadow inventory; reduced housing construction has not yet compensated for too-long a period of over-building, etc.

Warren Mosler, Marshall Auerback and Randall Wray w.r.t.:
on the fiscal side, that, operationally, government spending is not constrained by revenues, there is no solvency problem for the federal government, or any government that issues its own currency; on the monetary side, that QE is not money printing, it is an asset swap (though the monetary base will increase, and, in this very limited sense QE could be construed as money printing, the monetary base does not constitute a full measure of money, which in aggregate will be unaffected); QE is thus not inflationary; it is functionally equivalent to the government issuing T-bills rather than long bonds; excess reserves do not get lent out; expansion of the monetary base is a result of increased lending, not a cause of increased lending; unintended consequences of monetary ease include that ZIRP reduces income for savers, and QE pulls yet more interest income out of the private sector of the economy, neither of which helps the situation; therefore, as per above, I disagree vehemently with the likes of Alan Meltzer who complain that the "enormous increase in bank reserves [caused by QE] will surely bring on severe inflation if allowed to remain" --- though I also disagree with the Fed's notion that it is the paying of interest on reserves that "breaks the link between the quantity of reserves and banks' willingness to lend"

Michael Pettis, w.r.t.:
China's huge trade surplus means that although it accounts for a significant share of global growth, it does not actually contribute significantly to global growth; i.e. its trade surplus means that it absorbs much more demand than it supplies; in fact, China's policy of perpetuating both existing global imbalances and also internal imbalances will make the inevitable adjustment processes that much more difficult and painful; China has been able to maintain high rates of growth by mercantilist export-led growth strategies, which parasitically rely on consumption growth in OECD countries, thereby making the trading partners that China relies on that much weaker (i.e. by appropriating other countries’ demand), and also by continually investing in excess productive capacity (65% of GDP accounted for by fixed-asset investment), which is already well out of line with global demand (akin to the significant over-building in U.S. residential and non-residential construction); massive overinvestment and misallocation of capital seldom ends well; that China is fundamentally not all that dissimilar in nature to Japan circa-1980s (when Japan was considered a miraculous economic success story, and keiretsu were all the rage, as was Japanese innovation and work ethic and MITI-central planning, etc., and when its share of global GDP went from 7% in 1970 to 18% in 1990 --- but has subsequently fallen back to 8%); Chinese consumption growth has been far short of its GDP growth, such that consumption has fallen to just 36% of GDP in 2009, from an already low 46% in 2000, an unhealthily small share of GDP, and is reflective of household income growth, which, while robust by developed country standards, has trailed GDP growth; this internal imbalance will require a period of difficult re-balancing, which, though not necessarily imminent, is inevitable; the question is whether income and consumption growth can exceed GDP growth with that latter being sustained in the prevailing range of 8-10%, which would be inconsistent with historical precedents, or the rebalancing would require GDP growth to fall below household income and consumption growth

Jim Chanos, w.r.t.:
China = Dubai times 1000; China = Enron; China's lending bubble, real estate bubble, stock market bubble, aura bubble

Chanos, Dylan Grice and Peter Gibson, w.r.t.:
every single financial crisis in the last 150 years has been preceded by rampant credit growth; there is a Chinese financial crisis in the making

Marshall Auerback and Albert Edwards w.r.t.:
that beggar-thy-neighbour geopolitics has become the norm, and portend the a potential nasty trade war, particularly given domestic U.S. political considerations and also given China's consistent policy of always doing what's in its own best mercantilist interest; that "Chimerica" has been a chimera; the Fed's attempt to trash the dollar may be motivated by a desire to force the Chinese, who have no wish to revisit the inflation-induced social unrest of 1989, to revalue the yuan sooner rather than later if QE causes commodity and food-price inflation to get out of hand (its unlikely that the Chinese are unaware that food price inflation was a primary contributor to social unrest at the start of the Iranian, Russian and French Revolutions)

Ambrose Evans-Pritchard, w.r.t.:
Europe's "gamble of launching a premature and dysfunctional currency without a central treasury, or debt union, or economic government to back it up, and before the economies, legal systems, wage bargaining practices, productivity growth and interest rate sensitivity, of [the Teutonic] north and [Club Med] south Europe had come anywhere near sustainable convergence, may now backfire horribly" due to its one-size-fits-none arrangements; problems in Ireland and Greece and Portugal cannot be ring-fenced, because Spain will be next in line and it is big enough to bring the whole house of cards down

Dean Baker, Jeremy Grantham, etc., w.r.t.:
the precariousness of the housing market in Canada; that it is naive to believe that "conservative" Canadians could not have bid house prices up much too high just because subprime lending is not endemic here as it was in the U.S., or because mortgages are non non-recourse and mortgage interest payments are not tax-deductible; none of these things changes the fact that most people now own too much home, evidenced by price-to-income, price-to-rent and debt-to-income ratios well above historic norms

John Hussman, etc., w.r.t.:
the over-valued, over-bought, over-bullish stock market, which is discounting far better results than the economy can produce; that market participants were apparently making the assumption in early 2010 that the economy would return to normal as per typical post-war recoveries, implying that profits would return to 2007-"normal" and earnings growth would continue at 1990-2006 rates, allowing for aggressive valuation metrics; that their expectations were quite validly shaken by the Euro debt crisis in the spring and the economic evidence that this recovery would not follow the path of typical recoveries; that the recent bounce back is a sugar-high, under-pinned only by psychology and not fundamentals; and, given prevailing economic and market conditions, is susceptible to a steep drop with little warning



without reference, in my own view:

contrary to popular opinion, stocks do NOT generally earn 10% over the long-run; the historical average has been half that

Earnings growth is typically lower than nominal GDP growth; earnings are currently elevated relative to economic growth; analysts are extrapolating historically high profit margins indefinitely into the future

Modest nominal GDP growth prospects (IMHO) portend modest prospective earnings growth

Stock-holders do not ultimately get paid with “operating” earnings, they get paid with total (reported) earnings; the recent convention of focusing on operating earnings is a perversion of proper valuation analysis; furthermore, forward earnings estimates are unreliable indicators of even future operating earnings, much less reported earnings

Forward P/Es are therefore irrelevant; stocks always look cheap on forward P/E basis, and do nothing to forecast returns on a trailing P/E basis, stocks are moderately expensive (P/E of 16.5 vs long-term median of 14.3), but this assumes the last year’s earnings are representative, and it too has been a very unreliable indicator of future returns On a normalized P/E basis, stocks are 40% overvalued (P/E of 23.7 vs historical median of 16.9) Historically, when normalized P/E ratios were as rich as they are currently, 10-year forward price returns have been not much above zero, with significant volatility in the interim


Other thoughts:

the U.S. economy has received the biggest peacetime stimulus it has received in 75 years but it has resulted in nothing more than lacklustre growth; with final sales so weak, even without a further drop in the cyclical sectors of housing or consumer durables, even a modest dip in inventories could be sufficient to send the economy into a double dip; the usual catalysts for self-sustaining growth have been absent in this recovery; debt deleveraging, with no end in sight, has offset fiscal and monetary stimulus, the former of which does have an end in sight, and the latter of which is pushing on a string, while inventory-led growth, which surprised me by persisting in Q3, is nonetheless not sustainable;

C + I + G + X - M
absent income growth or credit growth, consumption growth will be absent;absent signs of demand growth, and with prevailing excess capacity, investment growth will be absent;the waning of fiscal stimulus by itself detracts from growth, and, with political gridlock, the prospect of further stimulus, with the exception of the likely extension of the Bush tax cuts, which are unlikely to have much impact on aggregate demand, is remote;net exports, particularly if the greenback's depreciation persists, is the one component of GDP that seemingly offers much prospect for growth, though to some degree will be provided by lacklustre import growth, which, though a mathematical contributor to growth, would be reflective of weak growth of the first three components (C, I and G); meanwhile, if the European situation worsens, not only will the weaken, but the impact on risk appetites generally would likely cause general US$ appreciation, and, in any case, there’s not much prospect of significant revaluation of the yuan, implying that the largest component of the U.S. trade deficit will be relatively immune to currency impacts

though both the ECRI WLI and Consumer Metrics Institute gauge are not as negative as they were two months ago, they both herald a double dip

ISM new orders minus inventories foreshadows a decline in ISM to well below 50

inflation expectations have historically been highly correlated with the ISM, so when the ISM falls to 45, that would be consistent with inflation expectations falling from 2% to 1%, which would be positive for bond prices

Ben B does not heed own advice -- says Fed does NOT seek inflation above 2%; didn’t he tell Japan to target high inflation in order to convince the public the BoJ really meant to reflate?

Ben Bernanke said to Milton Friedman "you're right, we did it; we won't let it happen again"; but, ironically, it could very well be that QE is the destabilizing force that causes the next crash; if QE-induced commodity and food price inflation force China's hand, prompting it to break its unbridled expansion of credit, which could cause, given that the market's broad-based resurgence of confidence is seemingly predicated on the emerging markets and commodity prices themes, a re-evaluation of global risk appetite, and if higher food and oil and gas prices in the U.S. impose a tax on the consumer that further slows discretionary spending

Fed needs negative real interest rates to reflate --- but with Fed funds constant and inflation falling (particularly the type of inflation that matters from a debt deleveraging perspective, wage inflation), real interest rates are getting less negative over time

state and local governments will continue to act like 50 little Hoovers; is California (or Illinois or New Jersey) any different than Ireland?

inordinately high corporate cash balances exemplify the type of cash hoarding that goes on when monetary velocity declines

to stimulate the economy, the government could increase aid to the unemployed, reduce employers' payroll taxes, allow expensing of investment costs, provide further state aid, invest in infrastructure, or offer income tax cuts; this list of options is in descending order of effectiveness according to the CBO; and yet the first option has already been kaiboshed, and the only option that is politically feasible in the near future, the extension of the Bush tax cuts, will be least effective option

there are falling pressures on each component of M*V = P*Q

the credit crisis was not an issue of liquidity, but one of solvency; liquidity issues have been temporarily "solved" by glossing over the solvency issues, which have not been alleviated (debtors have too much debt relative to the means to repay it; creditors at risk);

the Fed estimates that the shadow banking system was $20 trillion in size at the start of the crisis, relative to the $11 trillion size of the traditional banking system, and has now fallen to $16 trillion, still in excess of the now $13 trillion size of traditional banking



US = Japan2

November 20

QE2 is equivalent to issuing T-bills. Randall Wray.

QE dynamics one more time: its about price, not quantity. Warren Mosler.

Debt, deleveraging and the liquidyt trap: A Fisher-Minsky-Koo approach. Paul Krugman.

Debt: there is no jubilee. Hinde Capital.

What happens if Chinese growth slows. Michael Pettis.


other fare:
Peak oil: why the Pentago is pessimistic. Le Monde.

November 17

The inimitable John Hussman, as always, provides great insights (and is always able to come up with new ones) and has a wonderful way with words. Read his whole commentary, The Cliff; but I couldn't resist excerpting this:

From my perspective, an "economic recovery" that requires a tripling in the Fed's balance sheet, continues to average 450,000 new unemployment claims weekly, and relies on fiscal stimulus to counter utterly stagnant personal income, is ipso facto (by the fact itself) not a "standard" economic recovery. We have swept an enormous volume of bad debt under rugs, behind dams, and in back of curtains (not to mention in off-balance sheet vehicles such as Maiden Lane that were created by the Federal Reserve). But it is all effectively still there, festering. Meanwhile, our policy makers are trying to reignite financial bubbles in order to create an illusory "wealth effect" to propagate spending patterns that were inappropriate in the first place.
It is a bizarre notion that a credit crisis can be solved by bailing out lenders while doing nothing about the obligations on the borrower side. Think about it - what we have said to lenders is, here you have these homeowners who can't pay for their houses. Foreclose on them, sell the homes at half the price, and the public will make
you whole (largely through Treasury bailouts to Fannie and Freddie, made necessary by Federal Reserve purchases of these securities).
Heck, if the public is going to be on the hook anyway, at least notice that at equivalent cost to the public, the mortgage could simply be written down to half its value, with the homeowner now able to pay the balance off and the lender getting the public handout to make up the difference. But of course, that would reward the homeowner. So instead, we simply make the lenders whole while people lose their homes and foreclosure investors flip the homes at a profit in return for providing liquidity at the auction. That way, the same amount of public funds can be spent through the back door without Congress even getting involved.
Memo to Ben Bernanke - throwing money out of helicopters isn't monetary policy. It's fiscal policy. How is this not clear?
The proper way to deal with a major debt crisis - indeed, the only way nations have ever successfully dealt with major debt crises - is through debt-equity swaps, restructuring and writedowns. There are numerous ways to achieve this with mortgages. My preference would be swaps of principal for pooled property appreciation rights (administered, but not subsidized by the Treasury). In any event, until our policy makers wake up to the need to restructure debt, so that the obligation is modified for both the debtor and the creditor, our financial system will
increasingly tend toward a giant Ponzi scheme. We are racing toward the financial equivalent of a mathematical singularity, where the quantities become so large and outcomes become so sensitive to small changes that the whole system becomes unstable.

November 15

A PIGS 5-fer:
Europe stumbles blindly towards its 1931 moment. Ambrose Evans-Pritchard.
love this quote:

“This is a breath-taking mixture of suicidal irresponsibility and farcical incoherence”

which for some reason reminds me of Martin Luther King, Jr.'s quote:

"Nothing in all the world is more dangerous than a sincere ignorance and conscientious stupidity."

Sovereign default system makes sense. John Dizard, FT.

Within a month or so, the seize-up in the peripheral bond markets will lead to serious and immediate operating issues for the financial system. So the political leadership has no choice but to clarify how Europe will deal with sovereign default, and banking system insolvency.

Europe’s Monetary Cordon Sanitaire. Simon Johnson and Peter Boone, Project Syndicate.

Given the vulnerability of so many eurozone countries, it appears that Merkel does not understand the immediate implications of her plan. The Germans and other Europeans insist that they will provide new official financing to insolvent countries, thus keeping current bondholders whole, while simultaneously creating a new regime after 2013 under which all this debt could be easily restructured. But, as European Central Bank President Jean-Claude Trichet likes to point out, market participants are good at thinking backwards: if they can see where a Ponzi-type scheme ends, everything unravels.

Portuguese hint at euro exit as cost of debt soars and Greek debt crisis 'worse than ever'. both from the Independent.


Wow -- Check Out How Blatantly Our Government Misled Us With The October Jobs Numbers! Henry Blodget. NFP surprised to the upside because BLS changed its seasonal adjustment factor

Open letter to Ben Bernanke. WSJ. the authors of this letter lost all credibility once they included Malpass as a signatory! and (Dow 36,000) Kevin Hassett! And Michael Boskin (who blamed Obama in late 2009 for the stock market crash)!

other fare:
Obama to switch party. Michael Collins.

QE outlook

The early evidence: QE does more harm than good. TPC.


I do not believe that QE will have any positive impact on the broader economy, and, as per last, and as with past examples of unintended consequences of ill-advised government policy, will likely cause more damage than benefit; to wit:

- QE has had a psychological impact on asset prices, including equities and commodities, but has not changed fundamentals in any way
- if QE does not help the economy, then the boost to stock prices will have been ill-founded and subject to downward revision
- the dollar-debasement-fear impact on commodity prices will help commodity producers, but will impair margins for commodity-user-companies and will effectively impose a tax on consumers
- companies will therefore be less inclined to expand their workforce and consumers will be less inclined to expand their discretionary spending
- aggregate demand will continue to be lacklustre and hence below aggregate supply
- upside commodity price shocks have historically caused economic slowdowns; the last commodity price shock preceded the recession; this time around, the economy is much more vulnerable, given that core CPI is already below 1% and U6 is already near 10%
- propping up asset prices to revive the economy was the failed strategy of the 2000s (housing); the definition of insanity is doing the same thing over and over again and expecting different results
- excess reserves do not in any way motivate bank lending; deleveraging will persist, driven by both reluctant lenders and reluctant borrowers
- theoretical wealth effects from stock prices have been disputed (Shiller), and, in any case, to the extent that household wealth remains below the past peak, even with recent stock price gains, it is quite likely that homeowners are still perceiving a negative wealth effect (though the hole might not be quite as deep now that stocks are up 10%, they're still in the hole)
- meanwhile, aging baby boomers are a few years closer to their hoped-for retirement age, are twice-bitten, thrice shy of stocks (ICI reports that as of Nov 10 there were 27 straight weeks of outflows from domestic equity mutual funds), and need to continue to save to replenish their coffers
- interes rates are very low, so interest income has been degraded, implying that even more has to be socked away
- misguided concerns that QE is money-printing means dollar debasement could provide a near-term boost to export growth as U.S. export-products become more attractively priced in foreign currencies, but (a) yuan is not budging much, so will not help trade deficit with China, (b) euro has appreciated, but outlook for euro area is not promising and implies risk of currency turnaround, and, most importantly, (c) geopolitical tensions about QE could cause real trade frictions and protectionist backlash
- to the extent that easy monetary policy gets exported to emerging market nations, principally w.r.t. asset prices, those emerging market nations may be forced to impose domestic monetary restraint which will at the margin impair global growth, offsetting *any* "expansionary benefits" of unconventional Fed easy money policies


all in all, though the Fed likely does WISH to reflate the economy, there is little evidence to support the assumption that they have the CAPACITY TO DO SO --- not until the unsustainable debt burden built up over the last decade has been whittled down to levels that are manageable given prevailing income levels and given the demographic outlook; if this viewpoint is reasonable, then this is not likely to be a 2-5 year process but one that lasts rather longer


what if I'm wrong? what should we look for as signs of successful reflation?
- broad-based increase in cap-ex
- sustained increase in lending
- consistent increases in hiring (evidenced in both the household and institutional surveys) in excess of population growth

November 11

must read explanation of QE:
Just what is Bernanke up to? L. Randall Wray.

With QE2, the Fed proposes to buy longer-term treasuries. Since these are not toxic, it will not help the banks. It is like transferring funds from CDs they hold at the Fed to their checking accounts, thereby reducing their interest earnings. I suppose the idea is that the Fed is going to reduce bank income, impoverishing banks to the point that they will finally throw caution to the wind and begin to make loans to struggling firms and households. It is simultaneously a strange view of banking and also a scary remedy to a financial crisis that was created by excessive bank lending to those who could not afford the loans. It’s sort of like sending a covey of nymphomaniacs to the hospital bed of a nonagenarian suffering from myocardial infarction initiated by an age-inappropriate tryst.

Fasten your seatbelt. John Taylor.

On the day after the Fed’s move, [Bernanke] wrote in a Washington Post editorial piece that QE2 would push up the equity market, bonds, and other risky securities thereby stimulating consumption and economic activity. Even Greenspan did not publicly proclaim his “put,” but now Bernanke has made it the centerpiece of US strategy. Equities are already overpriced, with profit margins at all-time highs and PE ratios far above average. Speculation is now more American than apple pie – but this is a very risky time to practice it.

It’s Going to Be Another Long, Hard Winter in Housing. Zillow Real Estate Research.

Annual State of the Residential Mortgage Market in Canada. CAAMP.



other fare:
Robert Reich makes some excellent points about why Obama should take a stand, but Reich is naive if he thinks Obama will do so --- he's clearly gonna cave in.

Oh, look at that, it might as well be official --- the Huffington Post says White House gives in on Bush tax cuts.

November 10

Steve Keen And Chris Martenson Explain Why "It's All About The Debt". zerohedge.

IEA acknowledges peak oil. Early Warning.

November 9

Bernanke: Chumps! Bruce Krasting.

I got a laugh out of the $600b number. The dealers were polled on their expectations last week. The response was an even half trillion. So with that as a bogie the Fed does 600 large. They wanted to do just a bit more than was actually expected. So they added on an extra 100b. They gave the market what it wanted and a little bit of extra cream on the top.

Understanding the mechanics of a QE transaction. Pragmatic Capitalism.

Recent Decisions of the Federal Open Market Committee: A Bridge to Fiscal Sanity? Richard Fisher, FRB of Dallas.

I agree that we are indeed in what is referred to in economic parlance as a liquidity trap. Yet, I think it worth noting that we already have low interest rates, and spreads against risk-free instruments are historically narrow. Despite their theoretical promise, reductions in interest rates to Lilliputian levels have not done much thus far to spark loan demand. Loans are desirable when business see an opportunity for tapping credit markets to earn a return on investment that significantly outpaces the cost of credit and other risk factors. Even with the low rates that already prevail, businesses lack confidence that they will earn a superior ROI by investing so as to expand their domestic workforce, in comparison to what they might earn from alternative investments abroad or by buying in their stock or cleaning up their balance sheets. For their part, consumers will borrow when they believe it makes sense to shift consumption forward. But after the sobering experience of the past
three years, they are restrained by a lack of confidence that their future income streams will be sufficient to cover their payment obligations.
On the supply side, we know that businesses are floating on a sea of liquidity. Banks already hold over $1 trillion in excess reserves; holdings of government securities as a percentage of total assets on bank balance sheets are growing; loans as a percentage of assets are declining.
If we had a level of bank reserves or liquidity in the marketplace that was binding or inhibiting loan growth, I could understand the impulse to relieve that stricture. Further quantitative easing through additional asset purchases will surely increase the level of bank reserves, lower rates marginally and add more liquidity to markets while weakening the dollar. The more germane question is whether this works to the benefit of job creation and wards off financial excess....
The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed. I could not state with conviction that purchasing another several hundred billion dollars of Treasuries—on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities—would lead to job creation and final-demand-spurring behavior. But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed.

Bubble, Crash, Bubble, Crash, Bubble... John Hussman.

The Japan syndrome goes global. Stephen Roach, Morgan Stanley.

Warning: retirement disaster ahead. Brett Arends, WSJ.

Bank of America edges closer to tipping point. Jonathan Weil.