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Financial Skeptic Bulletin, June 2013

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Retirement at risk: Who's falling short By Jeanne Sahadi

Blast from the past. Just before market collapsed...
July 31, 2007 | CNNMoney.com
How would you feel about doubling or tripling your 401(k) contributions? For some people, that may be the only solution if they want to maintain their current lifestyle in retirement. The Center for Retirement Research (CRR) estimates that 36 percent of high-income households - those with a median income of $117,000 - won't be able to live as well in retirement as they do today.

Among middle-income households, 40 percent are at risk of having to downsize, while 53 percent of low-income households are likely to fall short.

That hasn't always been the case. "We're at the tail end of the golden era of retirement," said CRR Director Alicia H. Munnell.

In a report released Tuesday, CRR notes that only 20 percent of those who were between ages 51 and 61 in 1992 were at risk of falling short of money in retirement. Today, 32 percent are.

Why the increase? Munnell points to the shift from traditional pension plans to 401(k)s. Plus, she notes, people are living longer, and Medicare and taxes will take a bigger slice out of Social Security checks.

"Minsky moment" has come. The crash of bond bubble is under way.

"Minsky moment" -- a sudden fall in asset values bloated by credit.

Blackhalo

Cinco-X wrote:

Telegraphing your punches is almost always a bad idea.

The market is now the Fed's adversary? I think Ben's practice of giving the market at least 6 months notice, is one of the smarter things he does.

"Is the explanation as to why markets fell - a drop of 2% or worse is something that has happened literally 1000s of times previously - accurate? Was the 675th worst one day (2.34%) Dow selloff in history all about the Fed's taper of their bond purchases?"

On Jun 24, 2013 Treasury yields hit 2011 highs in choppy trade

Treasurys pared some losses on Monday after Federal Reserve officials sought to refine the central bank's monetary policy message, but yields still rose to multi-year highs.

The 10-year note -0.08% yield, which moves inversely to price, rose 3.5 basis points on the day to 2.572%, its highest close since August 2011. The benchmark note climbed as high as 2.661% in morning trading after

Bill Gross All Assets Are Risky, But I'm Buying Treasuries

"Never have investors reached so high for so little return [and] stooped so low for so much risk."

Jun 11, 2013

When PIMCO's Bill Gross declared last month that "the secular 30-year bull market in bonds likely ended" on April 29, it was the shot heard around the fixed-income world.

But many people wrongly assumed that dramatic declaration meant Gross was turning outright bearish on bonds. As the manager of the $293 billion Total Return Bond Fund explains in the accompanying video, that isn't necessarily the case.

"Investors should look at the yield on at 10-year…and see whether that legitimately in this environment provides some type of return," Gross tells me. "Six weeks ago at 1.6% [the 10-year yield] was more than skinny. Where we are now, [over] 50 basis points higher, is a much better situation than where we were then."

In other words, price matters, and the recent drop on Treasury prices – which move in opposition to yields – has made Gross a buyer again, at least in recent weeks as the yield moved above 2% to this morning's 14-month high of 2.27%.

This is a "decent environment to earn your carry," Gross says. "The Total Return Fund...is not as vulnerable as investors believe it to be as witnessed in May," he said, a time when the fund fell 1.9%, its biggest monthly loss since September 2008, and its first month of outflows since 2011.

Related: QE "Quicksand" Puts Bernanke in a Corner, Says PIMCO's Gross

By the same token, Gross isn't wildly bullish either, reiterating PIMCO's house view that we've entered a 'new normal' of sluggish economic growth and low returns.

"Investors are going to have to know [yields are] being repressed and what they're getting for their money is not what they should be getting," he says. "But it doesn't mean they should go home and put it in a mattress."

Related: Fed Will Taper Later This Year, But Not For Obvious Reasons: Bill Gross

And with "safe carry," Gross seeks to draw a distinction between PIMCO's Total Return Fund and other speculators, whom he says are in danger.

"The whole world…the credit space, high-yield space, equity space, currency space – is enamored and hooked on carry, in fact levered carry," he says. "Some of this and the funding of it is vulnerable based on the yen carry trade. It looked good for a while but when the yen goes up in price vs. down and JGB yields go up as opposed to down then funding of this fabulous carry trade presents a risk for levered trades...there's more risk now in all assets than there was before."

Repeating something he's written (and Tweeted), Gross declares: "Never have investors reached so high for so little return [and] stooped so low for so much risk."

rising 39 basis points last week in its worst week since 2009.


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NEWS CONTENTS

Old News ;-)

Five years are enough for most people to forget lessons of previous financial crisis ;-)

2014 2013 2012 2011 2010 2009 2008 2007 2006

"The US economy desperately needs less of our bloated, unproductive and increasingly parasitic banking system … The banking system has become an agent of destruction for the gross domestic product and of impoverishment for the middle class."

David Stockman,
Ronald Reagan's former director
of the Office of Management and Budget.
FT Alphaville

Government by organized money is just as dangerous as Government by organized mob.

FDR, 1936

"The trouble with capitalism is capitalists; they're too damn greedy."

Herbert Hoover

[Jun 30, 2013] 'What to Do with the Hypertrophied Financial Sector'

June 28, 2013 | Economist's View

Brad DeLong:

... Over the past year and a half, in the wake of Thomas Philippon and Ariel Resheff's estimate that 2% of U.S. GDP was wasted in the pointless hypertrophy of the financial sector, evidence that our modern financial system is less a device for efficiently sharing risk and more a device for separating rich people from their money--a Las Vegas without the glitz--has mounted. Bruce Bartlett points to Greenwood and Scharfstein, to Cechetti and Kharoubi's suggestion that financial deepening is only useful in early stages of economic development, to Orhangazi's evidence on a negative correlation between financial deepening and real investment, and to Lord Adair Turner's doubts that the flowering of sophisticated finance over the past generation has aided either growth or stability.

Four years ago I was largely frozen with respect to financial sophistication. It seemed to me then that 2008-9 had demonstrated that our modern sophisticated financial systems had created enormous macroeconomic risks, but it also seemed to me then that in a world short of risk-bearing capacity with an outsized equity premium virtually anything that induced people to commit their money to long-term risky investments by creating either the reality or the illusion that finance could, in John Maynard Keynes's words, "defeat the dark forces of time and ignorance which envelop our future". ...

But the events and economic research of the past years have demonstrated ... I should ... have read a little further in Keynes, to

"when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done".

And it is time for creative and original thinking--to construct other channels and canals by which funding can reach business and bypass modern finance with its large negative alpha.

Anthony Juan Bautista said...

Financial innovation is a risk factor as regards outsized boom/bust business cycles? Sure. But central banks are the greatest financial innovators in the history of humankind! Central banks make the Goldman guys look like amateurs.

Darryl FKA Ron said in reply to Anthony Juan Bautista...

The economy is a fabric. Arbitrage and speculation eat away at that fabric.

The central banks just comes in to stitch up the holes. No one wants to stop the arbitrage and speculation, because that is where the big money candy store has been built.

Eventually the central bank will run out of thread.

Peter K. said in reply to Anthony Juan Bautista...

Nonsense. Per usual. Where's your evidence? You have none.

Conservatives bribe their way into a deregulated system. What happens? Epic bubble and epic downturn after the bubble pops. And so they blame the Fed without evidence. Or they blame Fannie/Freddie.

The economics are well know. Limit leverage. More regulations. Financial transactions taxes. Domesticate the banking sector to the way it was during the post-War years.

The Fed needs help supporting growth via fiscal and currency/trade policies.

Anthony Juan Bautista said in reply to Peter K....

My evidence is written in the annals of a century of Fed-facilitated boom/bust economic cycles.

And do you really think deregulation caused this latest cycle? Jack Lew disagrees with you:

http://www.motherjones.com/mojo/2013/01/jack-lew-treasury-secretary-deregulation-financial-crisis

Darryl FKA Ron said in reply to Anthony Juan Bautista...

...Here's a crucial piece of information about Lew: He has said he doesn't believe financial deregulation was a major cause of the financial crisis. In 2010, Lew testified before Congress that the deregulation of Wall Street in the Clinton era-the repeal of Glass-Steagall, say, or the ending of real regulation of complex derivatives-wasn't a critical factor.

"The problems in the financial industry preceded deregulation," Lew told members of the Senate budget committee in September 2010. He added that he didn't "personally know the extent to which deregulation drove it, but I don't believe that deregulation was the proximate cause."...

[Jack Lew is certainly somewhat correct here. Securitization, the global savings glut, limits to growth, wealth distribution, Triffin's Dilemma, and the rating agencies compensation plans all preceded deregulation and were entirely sufficient to create the bubble itself. The deregulation of derivatives, notably CDS, and repeal of Glass Steagal introduced institutional agency problems into the investment banking sphere.

The agency problem at AIG had to do with an executive framework trained for managing large derivative contracts and other hedging techniques carefully planned for merger and other large discrete activities and transposing that into a high volume commodity market. It lead to a massive error of assumptions that eventually trapped the firm into making up their losses with volume until they became insolvent. Leaman and Bear Stearns may have been similar, but I don't have the time to research them. AIG was the subject of a very revealing book. The smarter players shorted their own risk errors with CDS bets, many covered by AIG which had to get bailed out to keep Goldman and Citi from suffering big losses.]

Mark A. Sadowski said in reply to Anthony Juan Bautista...

Financial innovation generally refers to the creating and marketing of new types of securities, something which, arguably, central banks have absolutely nothing to do with.

On the other hand there have supposedly been a number of monetary policy "innovations" by central banks in response to the Global Financial Crisis. (And even even this is debatable, as QE, for example, is really just a fancy acronym for enlarging the monetary base, something which central banks have been doing since Johan Palmstruch first invented central banking over 350 years ago.) But these "innovations" came in response to the bust and consequently can hardly be considered a causal factor in the current bust.

Darryl FKA Ron said in reply to Mark A. Sadowski...

[Tony posted this on the Karicature thread. It is not a bad paper up until the actual analysis and recommendation:]

http://www.cultureofdoubt.net/download/docs_cod/global%20crisis%20causes%20and%20cures.pdf

II. Monetary anchors for ever rising asset prices

Monetary policy in the United States was accommodating throughout the 1990s and became aggressively expansionary in the 2000s: nominal interest rates fell below levels indicated by the Taylor rule and in 2003-04 also below inflation (IMF 2007, Taylor 2009, Visco 2009). The Bank for International Settlements has long maintained that this provides the main explanation for the speculative bubbles (Borio and Lowe 2002, Borio and Shim 2007). In their view central banks should use their policy and regulatory tools to 'lean against' accelerating credit and asset prices (cf. also De Grauwe and Gros 2009, ECB 2005, IMF 2000, Mussa 2003).

The Federal Reserve has consistently opposed this view on the grounds that bubbles cannot be identified ex ante since an objective definition of 'fundamental' asset values cannot be readily obtained (Bernanke 2002 and Bernanke and Gertler 2001). Moreover, since a stable empirical relation between monetary policy and asset prices does not exist, any attempt to halt specific asset price increases could destabilize the economy as a whole. As a consequence, monetary policy would need 'to focus on policies to mitigate the fallout when it occurs and, hopefully, ease the transition to the next expansion' (Greenspan 2002).

[Bottom line is whoever we blame for the financial crisis, it was just the problem too big to brush under a rug. We got lots of problems, which lead too much money into the search for yield on AAA rated MBS junk bonds. So, now we have various little ponies that we wish for, none of which actually address the current account imbalance, consolidation of wealth and power in too few hands, or a littany of other economic disfunctions. Well I want a pony too. I want a pony with legs long and strong enough to win the big race. But it don't matter. Tony ain't gonna get his pony. Peter K ain't gonna get his pony. And I ain't gonna get my pony either.]

Jeffrey678 said...

Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway. --Warren Buffett

Peter K. said in reply to anne...

He's referring to this part:

"evidence that our modern financial system is less a device for efficiently sharing risk and more a device for separating rich people from their money -- a Las Vegas without the glitz -- has mounted."

Except when the government doesn't respond correctly to the post-crisis downturn, everyone suffers with slow growth and millions unemployed.

Steve Bannister said...

What will happen, sooner or later, is a good dose of atrophy. Probably cheaper now than later.

cm said in reply to Steve Bannister...

As in drug-assisted out of control body building, "benign" atrophy is not usually what happens, but that the rest of the organism that supports or has supported the artificial growth fails.

mrrunangun said...

The banks bought relief from Glass-Steagall from Clinton and Gingrich. Couldna happened without both. Both rich now.

Bankers proceeded to lever up and gamble with guarantee from government. Humongous bankster bonuses as along as the bets on rising home prices paid off.

Bonuses generously shared with political leaders. When the bets go bad, political leaders pull out all the stops to save the banks and recapitalize them via direct subsidies, ZIRP, QE, etc. adverse consequences to the banksters were zero. Adverse consequences to the citizenry have been immense. Neither Bush nor Obama made any effort to either punish Wall Street wrongdoers or to protect the public from them.

In Illinois we have had the Combine, made up of Dem and GOP leaders who have been fleecing the taxpayers for decades, working together against the citizenry. Now we have the same thing in the national government with both parties working against the general public to the benefit of their "contributors".

Sandwichman said in reply to anne...

Financialization is only a symptom. Perhaps if Brad had read even a bit further in Keynes, he might have come across "The Long-Term Problem of Full Employment":

"4. After the war there are likely to ensure [sic] three phases-

"(i) when the inducement to invest is likely to lead, if unchecked, to a volume of investment greater than the indicated level of savings in the absence of rationing and other controls;

"(ii) when the urgently necessary investment is no longer greater than the indicated level of savings in conditions of freedom, but it still capable of being adjusted to the indicated level by deliberately encouraging or expediting less urgent, but nevertheless useful, investment;

"(iii) when investment demand is so far saturated that it cannot be brought up to the indicated level of savings without embarking upon wasteful and unnecessary enterprises."

Keynes's ultimate cure for the third phase?

"It becomes necessary to encourage wise consumption and discourage saving,-- and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours."

http://ecologicalheadstand.blogspot.com/p/long-term-problem-of-full-employment.html

anne said in reply to Sandwichman...

Really interesting but too, too radical for Brad DeLong I realize in reading on. Keynes can be scary in that way, all those socialist tendencies.

Sandwichman said in reply to anne...

What looks like "socialism!" in Keynes is actually genuine conservatism (as opposed to the reactionary faux-faux "conservatism!" of the American right).

DrDick :

Surgical excision at least. The financial sector produces nothing and is all about rent seeking. At minimal size and heavily regulated, it can(but does not automatically) serve a limited set of useful functions, but it is always a drain on the economy as it is simply a rent extraction machine.

Charlie Baker said in reply to Sandwichman...

I'm with you. How about dial Big Finance rules back to say 1960, plus maybe ATMs? The rest is just like Dr. Dick says, a rent extraction machine.

The growth of Big Finance has had no direct relationship to true business investment, which has been largely internally financed for quite a while now. It's mostly a way to make money by squeezing people. What new societal good has been produced by Wall Street since the repeal of Glass-Steagal?

SUTM said...

Well, isn't the 'left' calling for masses of monetary stimulus? Isn't this why the financial sector thrives because so there are so many bits of paper floating about?

Monetary policy just is snake oil for the traders. Fiscal policy would have helped real labour with real jobs in real factories making real things.

Sandwichman said in reply to SUTM...

There is no "left" in this spectrum, SUTM. It's saltwater crackpot realism vs. freshwater crackpot realism. Like the mainstream "doves" vs. "hawks" of the Vietnam War era, they differ on tactics but not fundamentally on objectives.

[Jun 30, 2013] How the Fed lost control of short term interest rates by Gavyn Davies

June 28, 2013 |

The declines in the prices of bonds and many risk assets since the Fed's policy announcements last week have followed a sharp rise in the market's expected path for US short rates in 2014 and 2015. This seems to have come as surprise to some Fed officials, who thought that their decision to taper the speed of balance sheet expansion in the next 12 months, subject to certain economic conditions, would be seen as entirely separate from their thinking on the path for short rates. Events in the past week have shown that this separation between the balance sheet and short rates has not yet been accepted by the markets.

The FOMC under Chairman Bernanke has worked very hard on its forward policy guidance, so there is probably some frustration that the markets have "misunderstood" the Fed's intentions. Richard Fisher, the President of the Dallas Fed, said that "big money does organise itself somewhat like feral hogs", suggesting that markets were deliberately trying to "break the Fed" by creating enough market turbulence to force the FOMC to continue its asset purchases.

This is dubious logic. Investors who dumped bonds after the FOMC meeting would make money if bond prices fell further. They therefore presumably want the Fed to tighten policy, which is the opposite of what Mr Fisher indicates. Nor is it right to suggest that big money "organises itself" at all; investors act in competition with each other, not in collusion.

Nevertheless, it is possible for market prices to become misaligned with the Fed's intentions on monetary policy, and that may well have happened in the past few days. The key questions are why has it happened, and what can the Fed do about it?

The extent to which short rate expectations have changed is illustrated in the first graph, which shows the path for the federal funds rate built into the futures market, before and after the recent Fed statements.

The graph shows that the Fed's warnings about likely tapering have had the effect of increasing the expected short rate in mid 2016 by about 100 basis points. This implies a fairly dramatic change in the implied probability that the Fed will tighten as early as next year. My colleague Juan Antolin Diaz has built a calculator which allows us to enter various probabilities of Fed tightening by certain dates, and it then produces a probability-weighted path for the short rate over the next few years. You can put in your own probabilities here:

In order to replicate the path which is currently built into the futures market, we need to ascribe a probability of around 30 per cent that the initial Fed tightening will happen in June 2014, and a probability of 35 per cent that it will happen in December 2014. That means that the market is probably pricing in a two-thirds probability that the Fed will tighten before the end of next year. After that, the blue line in the graph assumes that the Fed will tighten by 1.25 percentage points a year, until it reaches a "normal" short rate of 4 per cent in 2019.

These probabilities of early Fed tightening are much higher than they were before Mr Bernanke's recent interventions. The second graph shows the probabilities of initial tightening which are needed to generate the futures path today, and compares them with those collected by the New York Fed in its primary dealer opinion survey in April. The increase in the probability that tightening will start in 2014 is very apparent.

This is what has damaged asset prices, and also alarmed some Fed officials who do not think it is justified by the Fed's forward guidance. So why has it happened?

One possibility is that the shock caused by the policy change has led to deleveraging by investors in panic selling of futures contracts. If so, the impact should reverse itself as the market calms down. But another possibility is that the markets have rationally taken the Fed statements on tapering as a signal that their thinking on monetary policy is changing. This signal of Fed intentions may be more powerful than the other forms of forward guidance they have given about their intentions.

There is evidence that this signalling effect of Fed balance sheet changes might be very powerful. If the Fed is not willing to "put its money where its mouth is" by buying bonds, then the market might take its promises to hold short rates at zero less seriously than before. According to this recent research by the San Francisco Fed, it is possible that a sizeable proportion of the total effect of QE on bond yields came from these signalling effects rather than the portfolio balance effects which have usually been emphasised by the central banks.

The same could now be happening in the opposite direction. This would imply that the Fed will now need to work harder with other forms of signalling to reverse the rise in forward short rates, and get the markets to calm down. We are likely to see this in a series of speeches by dovish FOMC members, but at some point during the year-long process of tapering, the Fed might need to offer different economic thresholds to impact market thinking.

Narayana Kocherlakota, President of the Minneapolis Fed, has made some concrete suggestions this week on economic thresholds. In the present context, his most important suggestion is that the Fed should say that it will not increase the federal funds rate until the unemployment rate has fallen below 5.5 per cent, which would represent a full one percentage point reduction compared to the present 6.5 per cent threshold. This would be subject to the medium term outlook for inflation remaining below 2.5 per cent.

It is not clear that all members of the FOMC, several of whom have clearly become very worried about the reach for yield in the financial system, would be willing to go that far. But if the Fed really does want to get short rate expectations back under control, they may need to think very seriously about Mr Kocherlakota's thresholds.

[Jun 30, 2013] PIMCO Investment Outlook - The Tipping Point by Bill Gross

Zero Hedge

...Immediate analysis of the past 6 weeks' market action would argue that in late April, both the Fed and PIMCO observed that bond markets were approaching a tipping point. Yields were too low, prices too high, both for investors' and the economy's own good. The Fed's Jeremy Stein had written a research paper outlining the risk. I, in fact, had written a March Investment Outlook outlining Governor Stein's paper, and to be fair, PIMCO had been warning of high seas for what seems like an eternity. "Never," I tweeted, "have investors reached so high for so little return. Never have investors stooped so low for so much risk." True enough, history will likely record.

It will also record however, that the risk was not only in narrow credit spreads and emerging market debt/equity markets but at the heart of the credit system itself: U.S. Treasuries. What supposedly old salts like yours truly didn't suspect was that all bonds, and yes, equities too were at risk of heeling over based upon a rather perfect storm, one that forecasters everywhere found difficult to fathom.

The forecast for bad weather as I've mentioned was becoming more rational with every increase in asset prices. If all markets were being artificially supported as PIMCO claimed and the Fed confirmed, then someday, someday that support via quantitative easing would have to be withdrawn. But the dark clouds seemed to be far off on the horizon. Investors worldwide piled on the leverage – not just in high yield or equity space – but in Treasuries as well. If the Fed (and BOJ) were going to keep writing checks at one trillion per year, then these two central banks alone might be buying 70-80% of all developed market future supply. The fear was that there might not be enough for others, not that there was too much leverage.

1) The Fed's forecast of the economy which prompted tapering panic is far too optimistic. If 7% unemployment is tapering's final port of call, we simply think that we're much further away than the Fed's compass would suggest. We argue for structural headwinds – demographic, globalization, and technology influences – that have had and will continue to have dampening effects on domestic and global growth. The Fed, we would argue, is too cyclically oriented, focusing substantially on housing prices and car sales. And speaking of housing, since mortgage rates have risen by 1½% in the last six months and the average monthly check for a new home buyer is up by 20–25% as well, then as I tweeted several weeks ago, "Mr. Chairman are you serious?" Growth will be negatively influenced.

2) Inflation, according to the Fed's own statistics is running close to a 1% pace. The Fed has told us that they "target," " target" 2% and for the next 1–2 years are willing to accept even 2½% until they reverse engines. Fed Governor Bullard of the St. Louis Fed was in our opinion correct where he dissented from the majority decision several weeks ago, citing the distant shores of 2%+ inflation and the seeming inability to even move in that direction.

3) Yields have adjusted by too much. While T.V. and the press focus on 10-year Treasuries at 2.55% as their guiding star, subjective stabs by yours truly or anyone else are difficult day to day. The technicals, as Mohamed has written, can dominate while the fundamentals are flushed to second page priorities. When analyzing the fundamentals though, I like to point to a "North Star" that is as permanent as possible within the context of current market instability. Tapering aside, if the Fed has consistently informed the market that its policy rate – Fed Funds at 25 basis points – will stay there for a substantial period of time even after the end of QE, then to my eye, Fed Funds will not increase until at least mid-2015 and even then subject to a consistently strong economy that produces 2%+ inflation. I wonder if we can get there in this decade to tell you the truth. But the beauty of this North Star Fed Funds sextant is that it can be rather directly observed in futures markets, either for Fed Funds or for Eurodollars, which are a close companion. Right now, Fed Funds futures markets are predicting a 75 basis point yield in 2015, and Eurodollars validating a similar conclusion. That would suggest a mispricing, despite the obvious caveat of professional observers that some of the 75 is a surcharge for potential volatility. In any case, if frontend curves are up to 50 basis points cheap, then intermediate curves – the 10-year Treasury – may be as much as 35 basis points too cheap. They belong in our opinion at 2.20% instead of 2.55%.

... ... ...

Tipping Point Speed Read

1) Yields and risk spreads were far too low two months ago.

2) Global markets were too levered and now they are derisking.

3) The bond market ship is not sinking. Expect low but positive returns in future years.

4) Don't panic. Yell at someone!

[Jun 26, 2013] SP 500 and NDX Futures Daily Charts

Jesse's Cafι Amιricain
Stocks put in a rally today despite a sharply lower adjustment to 1Q GDP to 1.8% from 2.4%.

That is twenty five percent lower!

The Fed will not be ending QE anytime soon. They may call it something else. They may change what they are buying and how they are buying it. But the Fed is going to remain 'accommodative' for the time being.

The problem they face is that their money creation is going right into the banking system where it is being channeled into financial assets. They may seek to change that.

Without serious cooperation from the dysfunctional Congress and the crony captured White House, it is hard to see how they can.

[Jun 26, 2013] How Will the Fed Respond to the Downward Revision to Q1 GDP?

Economist's View

When will the Fed make it's move? The revision to first quarter GDP growth from 2.4% to 1.8% announced today suggests it will be later rather than sooner:

Q1 GDP Revised down to 1.8% Annualized Real Growth Rate, by Bill McBride: GDP was revised down from a 2.4% annualized real growth rate to 1.8% in Q1. From the BEA:

Real gross domestic product ... increased at an annual rate of 1.8 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "third" estimate released by the Bureau of Economic Analysis. ... The downward revision to the percent change in real GDP primarily reflected downward revisions to personal consumption expenditures, to exports, and to nonresidential fixed investment that were partly offset by a downward revision to imports.

Personal consumption expenditure growth was revised down from a 3.4% annualized rate in the 2nd estimate to 2.6% in the 3rd estimate of GDP. ...

The current FOMC forecast is for GDP to increase between 2.3% and 2.6% from Q4 2012 to Q4 2013. The first quarter was below the FOMC projections..., and it appears the second quarter will also be below the FOMC forecast - if so, then GDP will have to pickup in the 2nd half of 2013 for the Fed to start tapering QE3 purchases in December.

The Fed does not seem to be able to learn its lesson about being overly optimistic (e.g., me in 2009 on the Fed, Green Shoots, Real or Imagined?).

[Jun 26, 2013] Q1 GDP Revised down to 1.8% Annualized Real Growth Rate

Hoocoodanode

Cinco-X wrote on Wed, 6/26/2013 - 6:24 am (in reply to...)

Rob Dawg wrote:

US population growth 1.0%. Inflation 1.6%. GDP growth 1.8%. One of these things is not keeping pace with the other two. In other words GDP per capita in real terms contracted in the first quarter.

Try root-mean-square addition...Wink

arthur_dent

Rob Dawg wrote:

Looks like the markets are giving QE 3.1 rev C a thumbs up.

my interpretation is that the markets know top line revenue growth is not possible (the pie is not growing). Profit margins can only be sustained by financial repression (QE).

Sebastian

This downward revision is still in-line with my overall economic view. IMO, the growth-rate peak coming out of the recession, +2.8% year-over-year, represents the top of the range for this expansion. The low so far in this expansion is +1.55% in Q3 2011.

IMO, that's the range we should see for the balance of the recession. When GDP growth breaks below this range, accompanied by other data confirming the weakness, that's when the next recession will be imminent.

Sebastian:

curious wrote:

IMO, that's the range we should see for the balance of the recession.

Sorry, that should be "balance of the expansion." For some reason HCN won't allow me to do an edit.

Comrade Scott

Sebastian wrote:

Slow-but-steady growth continues.

Heh...inching sideways mostly...but yes, and what growth is there is probably "real" and not bubble driven. I wonder what the growth rate looks like ex-finance though...

ResistanceIsFeudal

Sebastian wrote:

Slow-but-steady growth continues.

The "muddle-through" economy, as Maudlin once called it

Blackhalo

km4 wrote:

Mortgage Applications Collapse To Lowest In 19 Months | Zero Hedge

their real purchasing power (given a limited budget as opposed to free money-based finance) has plunged by 16% (for now).

Finally someone did the math, that I'm too lazy to do.

That second chart is gravy.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/06-2/20130624_loan1.jpg

black dog

disposable personal income ... quarter over quarter change SAAR

vtcodger

Somewhere between a fifth to a third of the million students graduating out of India's engineering colleges run the risk of being unemployed.

Forget about bird flu, Snowden's exposure of US secrets, the Keystone pipeline. Does anyone have any idea of the potential damage to civilization that might be wreaked by hundreds of thousands of unemployed engineers? See Short Story - Superiority - by Arthur C. Clarke

sum luk:

black dog wrote:

disposable personal income ... quarter over quarter change SAAR

The Bonddad Blog: No, real wages are not falling

[Jun 26, 2013] Treasury yields hit 2011 highs in choppy trade By Ben Eisen

June 24, 2013 | MarketWatch

Treasurys pared some losses on Monday after Federal Reserve officials sought to refine the central bank's monetary policy message, but yields still rose to multi-year highs.

The 10-year note -0.08% yield, which moves inversely to price, rose 3.5 basis points on the day to 2.572%, its highest close since August 2011. The benchmark note climbed as high as 2.661% in morning trading after rising 39 basis points last week in its worst week since 2009.

The 30-year bond -0.98% yield fell 1.5 basis points to 3.572%, and the 5-year note +1.11% yield rose 4.5 basis points to 1.479%.

... ... ...

But some buyers reentered the market Monday after a trio of Fed officials sought to calm jitters about an end to easy money policy. Dallas Fed President Richard Fisher compared financial markets to "feral hogs", noting that investors like to sniff out and exploit weakness.

"I think the intent of the message contained there is that accommodation is likely to remain in place for a considerable period of time," said Christopher Sullivan, chief investment officer at the United Nations Federal Credit Union.

New York Fed President William Dudley also said Monday the Fed isn't accommodative enough, given that it hasn't yet achieved its goals of raising inflation and lowering unemployment.

And Minneapolis Fed President Narayana Kocherlakota said Monday that the central bank should provide more guidance on how it will set the Fed funds rate after it has fully stopped its bond-purchase program. Those two policy tools have often been linked by markets, which have viewed the end of monetary easing as a sign that the Fed's short-term interest rates will go up, though Bernanke has sought to decouple those decisions.

The rise in yields had been aided by technical trading, said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott.

"A lot of it is a technically-driven move. A lot of fast-money investors like hedge funds are unwinding in the shape of the yield curve," he said.

But retail investors are also pulling their investments out of mutual funds and exchange-traded funds, forcing those funds to sell assets into a down market.

[Jun 26, 2013] Reconciling Competing Narratives by Mohamed El-Erian

Jun 24. 2013 | FT Alphaville

Mohamed El-Erian, chief executive and co-chief investment officer at PIMCO, submits this guest post to FT Alphaville.

During major market shocks, including the current one, it is important to listen to what is broadly viewed as conventional wisdom. Interestingly, while price correlations have gone up sharply among asset classes in the last few weeks, and specifically with virtually every financial security selling off, the accompanying narratives are still quite distinct depending on the individual market segment.

The most-widely followed narrative in fixed income speaks to a large and violent re-pricing triggered by a change in the notion of the "central bank put."

The resulting assault on carry has been forcing disorderly technical unwinds in every segment, whether its U.S. and German government bonds, European peripherals, corporate credit or emerging market local, external and corporate instruments. Moreover, the more liquidity-challenged the market segment (e.g., emerging markets., TIPs, etc.), the bigger the price fall and the related technical damage.

Generally speaking, economic growth and inflation issues do not feature prominently in this narrative other than for those looking well beyond the current phase of technical dislocations – i.e., when the process either exhausts itself, healthy balance sheets re-engage and/or central banks credibly walk back from their latest policy signals ( assuming that this is still theoretically and practically possible).

Not so for equities. Here growth plays a much more important role in the most commonly-heard narrative. Indeed, many equity analysts point with comfort to Fed anticipation of a sustained pickup in growth. They cite this as the principal reason why the asset class can and will outperform during (and after) this market storm.

In today's inter-dependent world, including sources of corporate profits, the optimistic growth view needs to encompass not just the U.S. but also the global picture. Specifically, the postulated pickup needs to be strong enough to compensate not only for Fed tapering and fiscal contraction, but also for slowing in other parts of the world.

To make things even more interesting, the equity segments most highly levered to global growth – emerging markets – has suffered the greatest damage so far in this downturn. While part of this is explained by technical factors, there are emerging concerns in some circles about the cyclical and secular growth outlook for this part of the world.

With technical and liquidity dislocations continuing to act as marginal price setters, the co-existence of several competing narratives can persist for a while. But, ultimately, they will need to be reconciled.

So, if the Fed is right about its more optimistic economic outlook, higher growth will ultimately end up by dominating price setting dynamics. This would spare U.S. equities from the violent price corrections already felt by other asset classes since the beginning of the year.

If, however, the Fed again proves too optimistic about real and nominal growth, then equities would face greater downside from here.

Doug Beattie

I always the fed would wait till the inflation genie was truly out of the bottle before tightening since cooling an economy is easier than heating one up. Looks like they fired their ammo 12-18 months too soon.

Eoghan

If you were correct then high-yield 'safe' 'high-quality' stocks would have fallen more than 'growth' or 'commodity' type stocks. But they haven't..... In other words, the current price action (wrong or right) is consistent with a 'market view' that faster normalisation of monetary policy will lead to slower growth than the market was previously discounting.

Rando Randy

@ Doug

I agree, but the more I think about the current pace of QE, the more I'm coming to the conclusion that the Fed thinks there are real operational difficulties in unwinding their balance sheet. If you think about it, if they waited another 12-18 months before slowing down asset purchases they would grow the balance sheet by another $1 trillion.

Now I agree that a lot of this come down to confidence in the central bank, but I think there are some risks to unwinding $4 trillion+ when rates do go up. Granted, I know the Fed can't go bust, but it does set some dangerous precedents to have a insolvent central bank with a balance sheet half the size of the US economy.

On a side note a great post by Mr. El-Arian. Him and Bill Gross have had some excellent articles in the past few weeks.

Terra_Desolata

Also, I would agree with the assertion that the primary trigger for this sell-off has been a change in the view of the "central bank put". The most commonly held view is that it was the suggestion of a future "taper" which prompted the selling. I think that is close, but not quite the case; rather, I see the primary trigger being the unstated assumption by Federal Reserve officials that there will not be a future expansion of easing programs.

The markets had come to believe that the Federal Reserve's aggressive programs would not have the desired effect of stimulating the economy, and that each round of asset purchases would therefore have to be followed by another round of even larger asset purchases (hence the "bad news is good news" effect noted in the market). That led directly to the most consistently profitable trade of the last five years: front-running the Fed on its next round of asset purchases. And if the Fed was set to eventually include the entire market in the range of assets being purchased, why, any asset would do.

The trigger for the change in views came when it was realized that the Federal Reserve's discussion had switched from future expansion of quantitative easing, to future rollback of the same. If the Fed was not set to eventually move into corporate bonds, municipal bonds, and equities, that reduced the attractiveness of those asset classes, and heavy selling was the result. Treasurys have been hit, of course, but the heaviest of the selling has been in the areas furthest from the frontier of Fed open market operations.

Derek K

I think the markets today are reacting to the realization that the monetary base is going to be growing at a much slower rate going forward. There are three factors that are pushing this: 1) lower mortgage volumes because of the end of the Refi boom means fewer Agency MBS for the Fed to monetize through QE or the discount window; 2) narrowing fiscal deficit is producing fewer Treasuries for the Fed to monetize through QE or the discount window; and 3) tapering QE means the Fed will no longer be buying long-term assets at above market prices, which will mean fewer dollars in the system. For the past four years dollar denominated credit instruments have grown at a pace that vastly exceeds the growth in operational cash flows, which means that the market has assumed that this debt would be repaid by continued monetary expansion. That dream can no longer be supported by reality and we are beginning to realize that there is no where near enough quality collateral to cover all these shorts. This realization is starting a rush for cash to cover these dollar shorts. We are seeing this first as a run on EM, but we should watch to see if it moves to USD risk assets. If there are any strains in HY credit, as in if any of these record issuance start running into trouble, then the I think the market will really come undone.

Sherwood | June 24 10:33pm | Permalink

The Fed statements still feel like a bluff, designed to quell enthusiasm and leverage. "We'll pull back at 7% unemployment" - when does anyone think that will happen? We're at the mid-sevens right now, but keep in mind there's a lot of dark inventory out there, in the form of non-working, non-looking people.

Recently we saw a blip up from 7.5 to 7.6, as people came out if hiding to give the job hunt another shot. There are millions hidden in that pool, and as the economy grows (if?) they will prop-up that figure, keeping the Fed's wallet wide open.

[Jun 24, 2013] The Danger Lurking in Your Next Brokerage Statement (MUB, NLY, PCY, PTTRX, VBTLX)

Bond prices move in the opposite direction as yields. As a result, as you're opening your brokerage statements in early July, you can expect to see troubling results like these:

In addition, even stocks geared at generating income haven't been immune. Mortgage-REIT Annaly Capital (NYSE: NLY ) , once the go-to place for high-dividend yields and strong total returns, has plunged 20% since the beginning of April. A steepening yield curve might help mortgage REITs in the long run, but for now, the Fed's continuing purchases of mortgage-backed bonds hamper Annaly's ability to maximize its profits. More broadly, rising interest rates hurt a wide range of rate-sensitive stocks, and so you'll see many dividend-paying stocks having suffered somewhat deeper declines than the broader market.

[Jun 24, 2013] The BIS Loses Its Mind, Advocates Kicking Citizens and the Bond Markets Even Harder

naked capitalism

If anyone doubted that Ben Benanke's "we're convinced the economy is getting better, so take your lumps" press conference after the FOMC statement last week was awfully reminiscent of 1937, the newly-released Bank of International Settlements annual report is tantamount to a kick to the groin. And to change metaphors, if the Fed's sudden hawkish posture is playing Russian roulette with the real economy, the BIS just voted loudly for putting a couple more bullets in the cylinder.

Investors took the news badly, with 10 year Treasury yields rising from 2.18% before the FOMC statement to 2.53% at the end of Friday. And the selloff continues, with the 10-year yield as up to 2.62% as of this writing.

Some commentators thought the Fed talk was misread, pointing to the various thresholds and triggers the central bank set for for commencing its QE exit and they actually weren't so terrible. Others refused to believe Bernanke was serious, with Marc Faber saying that bonds, stocks, and equities were "very oversold" and arguing, "We are going to go with the Fed to QE99."

Unfortunately, the worry warts are looking to have the more accurate reading. Tim Duy zeroed in on a key bit of information, namely, St. Louis Fed James Bullard's speech on Friday, on his dissent from the FOMC's vote (Bullard thinks low and falling inflation means the economy is weaker than his colleagues believe). This was Duy's takeaway:

Why would the Fed lay out a plan to withdraw accommodation – which in and of itself is a withdrawal of accommodation – at a meeting when forecasts were downgraded? Because, as a group, policymakers are no longer comfortable with asset purchases and want to draw the program to a close as soon as possible. And that means downplaying soft data and hanging policy on whatever good data comes in the door. In this case, that means the improvement in the unemployment rate forecast. Just for good measure, let's add on a new policy trigger, a 7% unemployment rate. In my opinion, it is not a coincidence that they picked a trigger variable where their forecasts have been most accurate or even too pessimistic. They loaded the dice in their favor….

I think market participants clearly heard Bernanke. After weeks of being soothed by analysts saying that the data was key, that low inflation would stay the Fed's hand, Bernanke laid out clear as day a plan for ending quantitative easing by the middle of next year. Market participants then concluded exactly what Bullard concluded: It's the date, not the data.

That's been my reading as well. Something is driving a new-found eagerness to get QE over. Could it be the mid-term elections, that they believe their own PR (that the economy really really is gonna lift off once that little sequester bump is over) and they want any market adjustment (which they also view as temporary) to be over before the fall election?

[Jun 24, 2013] Is Bernanke pulling a Trichet

Calculated Risk

Former ECB President Jean Claude Trichet has been widely criticized for pushing to raise rates near the end of his term, even though the euro zone was headed for another recession (an obvious blunder). Clearly Trichet had a bias towards tightening, even though the data suggested otherwise.

From Tim Duy: It's About The Calendar

Key words: "calendar objectives." Bullard clearly felt the mood in the room was something to the effect of "We know the data is soft, but we want out of this program by the middle of next year, so we are going to lay out a program to do just that."

In light of Bullard's dissent, the market's reaction should be perfectly clear. I have seen some twitter chatter to the effect of market participants didn't understand what Federal Reserve Chairman Ben Bernanke was saying, that his message was really dovish, that interest rates would be nailed to the zero bound in 2015, that the policy was data dependent, etc. Market participants obviously didn't have that interpretation. ... The Fed changed the game this week. Bernanke made clear the Fed wants out of quantitative easing. While everything is data dependent, the weight has shifted. The objective of ending quantitative now carries as much if not more weight than the data. Market participants need to adjust the prices of risk assets accordingly.

Bottom Line: I think the question is not how good the data needs to be to convince the Fed to taper. The question is how bad it needs to be to convince them not to taper. And I think it needs to be pretty bad.

[June 24, 2013] Ben Bernanke Banks, bonds and a big breakdown

June 24, 2013 | RT Op-Edge

Right now all the Fed is threatening to do is, maybe, MAYBE, buy less financial bric-a-brac come the fall. Even then they will still be buying multi-billions of assorted IOUs until summer 2014. The widespread terror in financial markets this week suggests this is tantamount to the Mayan apocalypse.

Incidentally nobody has yet actually suggested the Fed will endeavour to sell the trillions of 'pick & mix' quality/questionable IOUs it has accrued in years of binge buying...that really would provoke a meltdown.

So the Fed-fuelled Bond bubble is about to pop sparking global repercussions. When the Fed gave its charges de facto 'money for nothing' traders scoured the world for enhanced yields, with a lot of cash inflating mini-bubbles in Asian assets. The Fed whisperings have provoked an emerging markets exodus which will be exacerbated by the Chinese simultaneously reining in their credit bubble. This Sino-US credit contraction pincer movement hurts financial assets. More acutely, lack of credit can severely impact the real economy as lending further dries up. The US may be able to muddle through the storm but Europe is already deep in crisis and Asia is further threatened by the China slowdown. With the Fed cash flood eventually tapering to a few isolated drops, interest rates are likely to head upwards.

The actual rise in interest rates is not the only worrying issue: the competence of traders is a worry here too. A generation of financial markets professionals with anywhere up to 15 years' experience have never encountered an environment of rising interest rates. That's why this word "tapering" has led so many traders to suffer a belief-system meltdown as they realized the security of the quantitative easing fairy was just a childish myth.

Meanwhile taxpayers have been left holding a multi-trillion dollar baby (plus ca change...!). The greatest concern is that these trillions of dollars may only have prolonged the economic agony and an inevitable bond market meltdown awaits. Once the punch bowl is finally taken away, markets could be left with a hangover of epic proportions, creating shock waves for global growth. Of course Ben Bernanke will be retired by then earning a crust on the lecture circuit...

Revisions in Expected Interest Rate Paths

June 18, 2013

There's been a lot of discussion of upward movements in long term interest rates. I thought it useful to consider the revisions in expectations, over time, and in context.


expintyield.png
Figure 1: Ten year constant maturity Treasury yields (black), and expected ten year yields by vintage. Source: WSJ, June 2013 survey, St. Louis Fed FRED, NBER.

Two observations:

Posted by Menzie Chinn at June 18, 2013 02:15 PM

westslope

Great chart. Hints at the prowess of the Bernanke Fed. It brought down the entire yield curve but didn't leave 10-year yields stagnating below 2%.

Higher yields will drive increased US federal debt maintenance costs and that is worrying some market participants.

Edward Lambert

Inflation will stay low, below 2.5% for a long time, many many years as long as labor income stays so low. Low labor income in Europe is really bad. The mechanism I see is that labor has constrained liquidity, which lowers their natural rate of interest and with it inflation. The question I have is whether labor income will go so low that it pulls inflation into negative territory. Every low paid worker becomes a straw on the back of inflation until it breaks and falls into deflation.
A stubbornly high unemployment rate also lowers the natural rate of interest. And if it turns out as some of us say that the natural rate of unemployment has risen to at least 7%, then the natural rate of interest has shifted down even more. That shift won't become apparent to interest rates until the end of the business cycle comes near, and then we will feel another drop in the interest rates.
Inflation goes as the natural rate of interest of labor goes.

Steven Kopits

Latest from Sivak. Recommended.

http://deepblue.lib.umich.edu/bitstream/handle/2027.42/98098/102947.pdf

Ricardo

It is instructive to look at the 10 year Treasury rates during previous periods of growth and previous periods of economic stagnation.

The low interest rates of today are unprecedented. The theory is that low interest rates stimulate the economy but what we observe is that since interest rates have been so low our economy has been in stagnation.

But it is also instructive to look at high interest rates such as those during the 1970s and early 1980s. This was also a period of economic stagnation.

What this seems to prove is that Knut Wicksell was essentially correct. When interest rates are held either higher than or lower than the natural rate (for prosperous periods the natural rate appears to be between 3.5% and 4.0%) there is economic dislocation.

That being the case, we see that the FED has pushed us between a rock and a hard place. Higher interest rates will be devastating to our national budget as interest payments would absorb a significant amount of the budget, probably in excess of defense spending, but keeping interest rates at the lower rate continues to create economic stagnation. There just is no good way out this mess that the command economy bureaucrats have put us in.

Spencer

US treasury yields were under 4% from 1924 to 1965.

Yes, this included the depression, but overall it was an era of above trend real GDP growth.

If you want to look at history, maybe you should go a little further back.

Our views are shaped by the 1970s-1980s era, but in the long term this was a historic anomalie.

Edward Lamber

reply to Spencer & Ricardo... IMO, Rates lower than the natural rate lower the cost for creative investment. At higher rates people are not as likely to invest in creative ventures. Higher rates make for a more conservative economy. The US economy is much more conservative in this regard since the 80's. So there is relatively little grass roots innovation going on now. Corporations command. Low rates don't lead to much widespread grass roots ventures. All that kind of investment is happening in emerging countries. Low rates now lead to bubbles. Where is the bubble now? It appears to be in emerging countries. Here is a link to a chart comparing the Fed rate to NGDP in relation to bubbles. http://www.businessinsider.com/analyst-now-that-the-cheap-money-is-coming-to-an-end-we-can-see-where-the-bubbles-are-2013-6

westslope

Comment: US employment rates are high because the structural unemployment is high. A recovering global economy and a return of interest in venture capital markets will offset that structural unemployment to some extent by a US dollar whose value declines as investment capital flows out of the USA pick up.

Question: when will Americans stop viewing Federal Reserve policy through lenses shaped by culture of 'celebrity narcissism'?

Given the mandate of the federal reserve, the Bernanke has done a great job. It is nothing short of miraculous in terms of what this US Fed has accomplished.

Ricardo

I hope I don't ruin your reputation here but I agree with you concerning the lowering of US entrepreneurial activity. I saw an article just yesterday that revealed that innovation in new business in the emerging economies has passed the US.

But I see the next bubble as stock prices. PEs are too high and taxes and regulations are sucking the life out of profits. The stock market can't sustain itself without profits no matter how much money the FED pumps into the economy.

Bruce Carman

Edward: "Inflation goes as the natural rate of interest of labor goes."

Edward is correct:

https://www.box.com/s/655bfqdsxbcgfn0d8m0r

https://www.box.com/s/bqduja958olt3fs9x0m8

https://www.box.com/s/szg9200y60guiogn92bs

The trend rates of nominal after-tax and real wages imply that rates will remain at secular lows, which is consistent with a Long Wave Trough regime.

Wages simply cannot accelerate given public and private debt service, high payroll taxes, offshoring of production and employment, competition from billions of workers in the developing world, and accelerating automation of domestic labor, including increasingly in the services sector hereafter.

Steven, WRT "peak motoring", see the following link for US auto sales and goods-producing employment per capita:

http://research.stlouisfed.org/fredgraph.png?g=jzp

Total vehicle sales per capita:

http://research.stlouisfed.org/fredgraph.png?g=jzy

Autos and light trucks per capita and nonfarm payrolls per capita:

http://research.stlouisfed.org/fredgraph.png?g=jzA

Private employment per capita (back to the level when auto sales per capita peaked and goods-producing employment commenced its secular decline coincident with deindustrialization):

http://research.stlouisfed.org/fredgraph.png?g=jzC

Not coincidentally, US auto sales per capita peaked with the secondary peak for US crude production at the price of oil at $10-$12 and the peak of valued-added goods-producing employment and the onset of deindustrialization and financialization of the economy.

2slugbaits

Ricardo says: taxes and regulations are sucking the life out of profits. The stock market can't sustain itself without profits

The FRED data says:

Corporate After Tax Profits

2008: $643.7B

2009: $1354.9B

2010: $1467.6B

2011: $1566.1B

2012: $1773.7B

But OMG...corporate profits dipped a whopping 1.9% last month and Ricardo flips out. All is lost! And it's all the fault of that commie/pinko/socialist in the White House.

Give us a break.

Menzie Chinn

westslope: I would welcome citation of any econometric analyses which back up your assertion that structural unemployment is high.

Edward Lambert

Bruce: Good charts with the CPI and wage & salary disbursements. I calculate the natural interest rate of labor with the equations of effective demand. http://effectivedemand.typepad.com/ed/2013/06/exchange-rate-between-capital-labor-a-wild-idea.html

I noticed that inflation was following the natural rate for labor and it made sense. Your charts show it too. and your reasoning shows that wages and consequently inflation will stay low. I would also add to your list that there is culture of paying low wages in business now. They have been trained to cut wages as much as possible. Fallacy of composition.

Steven Kopits

What the hell's going on in China?

http://www.zerohedge.com/news/2013-06-19/chinas-red-flags

Steven Kopits

China Panic: Overnight Rate Hits 25% Gordon Chang in Forbes

The overnight repo rate in China has just hit 25%, an indication the credit market is now frozen.

This month, liquidity tightened considerably. Two government bill auctions failed, and several banks defaulted on their interbank obligations. Overnight rates in the last few weeks surged to about 15% but had fallen back, settling in at just north of 7%. The 25% rate indicates credit is becoming unavailable.

Nothing is going right for China at the moment. In the last few hours, the HSBC Flash PMI for June came in at 48.3, down considerably from the 49.2 final reading for May. The country's problems are now starting to feed on themselves.

What the People's Bank of China , the central bank, does in the next few hours could be critical. One wrong move and defaults could roll through the country's banking system and take down struggling enterprises and debt-laden local governments.

Posted by: at June 20, 2013 07:26 AM

Bruce Carman

Steven: "What the hell's going on in China?"

See charts at the following folder:

https://www.box.com/s/mcnwyaoy4h51vn3idenq

Trillions of dollars of US and Japanese FDI since the '90s has resulted in the largest credit and fixed investment bubble in world history in China, far surpassing that of the US during the 1920s, '90s, and '00s, and Japan in the '80s.

https://www.box.com/s/ttohuy8477q04uuqicir

China's GDP in current Yuan terms has been growing at a DOUBLING TIME OF 4-5 YEARS and an implied domestic deflator rate of 8-9%.

https://www.box.com/s/9xsawsd8lg7xpae1y0xu

https://www.box.com/s/0qg903xl96e6b0yw1juc

China has grown in less than one-third the time it took the US to get to $7,000 GDP per capita from a similar starting point as the US. China has reached the "middle-income trap".

The US and Japan built out their industrial economies to $7,000 GDP per capita on the basis of oil priced at $10-$20 (constant dollar), whereas China has attempted to industrialize with oil at 3-10 times this price while growing GDP in Yuan terms at a compounding doubling time of 4-5 years.

China's runaway credit and fixed investment bubble is unprecedented in the history of the world, increasingly dependent upon FDI at 3-4% of GDP with oil imports now exceeding 50% of consumption. China is a runaway credit train heading for a sharp curve at the edge of a debt-deflationary cliff.

A decline in FDI by the US and Japan of as little as 1-1.5% equivalent of GDP in China risks a reverse multiplier effect to investment, production, and exports akin to a Great Depression-like contraction in China's GDP in a relatively short period.

What will be most remarkable is not that China crashes, which is a mathematical certainty, but that it did not occur years sooner. Demographics will exacerbate the deflationary crash in China into the '20s.

Once US supranational firms begin the process of attempting to repatriate US$'s from China's banks via the Fed's book entry custodial swaps of US Treasuries with the PBOC, and by way of the back door through Hong Kong and Singapore banks, the "giant sucking sound" of capital flight from China will be heard around the globe.

As is the historical precedent going back more than two centuries to the late 18th century, I fully expect the Chinese leadership to institute even stricter capital controls on its citizens and foreigners, seize foreigners' assets, and restrict bank withdrawals when bank runs commence.

China will not continue her post-'90s super-exponential growth rate and become a western-like mass-consumer economy with increasing imports of energy, food, and materials. China will crash and grow old before growing rich.

China is a four-letter word, "sell", but it is getting very late in the process to get one's money out, if not already too late.

dilbert dogbert

Ricardo Wrote: "There just is no good way out this mess that the command economy bureaucrats have put us in."

Did Ricardo note the mess that the Financial Industrial Complex put us in? The command economy bureaucrats are commanded by the FIC.

Ricardo

Slug,

Your aggregate analysis lumps FED monetary expansion into your numbers. Real businesses are hurting and no amount of statistical or econometric manipulation will change that. Let's just see what is ahead.

sherparick

I consider that Ricardo is communicating to us from an alternate universe, one without any links to back up his factual assertions.

The U.S. economy has no particular internal reasons to go into a recession right now, although Fiscal drag has made it very vulnerable to external shocks. It now appears about to get one from China and other members of the BRICS, as well as from the economies that rode the commodity bubble up with China (Australia, New Zealand, South Africa, and Canada come to mind). This has been the source of world economic growth since 2009. With it ending, what economic investment led demand will take its place? U.S. Housing? Rising interest rates will nip that in the bud pretty fast.

Troy

I think interest rates will rise in the second half of this year, which means that will be when stocks start to fall.

Bruce Carman

Troy: "I think interest rates will rise in the second half of this year, which means that will be when stocks start to fall."

https://www.box.com/s/lm412emuxx4tpzg9edt5

https://www.box.com/s/ks7i9g4lzj2ezyhvy68h

https://www.box.com/s/qpvvhcy08gd8gv604qwd

https://www.box.com/s/q4538hkpx6np1wrlil83

https://www.box.com/s/b8woajnhu9lql8fucptw

https://www.box.com/s/eoo9gzi7v2ndi6zfm3mf

It's very late in the cycle, margin leverage is excessive, and secular valuations remain at extremes of overvaluation against trend earnings.

We know how this ends . . .

westslope

Menzie: I can't help with an 'econometric analysis' showing higher structural unemployment.

Perhaps you can point out how econometric analysis of structural unemployment has vastly improved over the years. I recall a good number of macroeconomists suggesting that mistaken full employment targets consistently sabotaged attempts at counter-cyclical management during the 1970s and 1980s.

The failures were rather spectacular I thought (though they were excellent, wonderful opportunities for the financially literate to make gobs of money in a rather sorry zero-sum game). The failures inspired Prescott and Kydland's work on time inconsistency and ultimately inspired a number of rich OECD countries to adopt single-mandate monetary policy starting with New Zealand.

Otherwise, I conclude that structural unemployment has increased by the persistence of high unemployment rates since the 2008 mega-financial crisis, increased income disparities among American workers, persistent and what appear to be growing significant educational and skill differences between ethnic groups, on-going efforts to profit-shift/subsidize industry by American states with poor productivity, the long-term trend of market share loss by US auto manufacturers, etc.

The information technology-driven economy seems to having positive benefits for some worker groups and, at least in the near-term, disastrous consequences for other worker groups.

[Jun 24, 2013] Rowboats for Retirement

NYTimes.com

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

It feels so good to row your own boat. You're the captain. You can set your own course and speed. According to the boat advertisements, you are almost sure to reach your destination as long as you pay for good advice, rebalance and row hard. Sure, there may be big waves, but you can ride them out, and storms always subside.

A lot of people used to think of 401(k) retirement accounts this way. But in the last six years, most Americans have gained a new appreciation of financial bad weather and the threat of a perfect storm. Stock market volatility, low interest rates and a sagging bond market have discouraged retirement savings.

Persistent unemployment and stagnant wages have left many workers treading water, struggling so hard to stay afloat that they couldn't open a retirement account even if they wanted to.

A new report from the National Institute on Retirement Security, based on analysis of the 2010 Survey of Consumer Finances, shows that about 45 percent of all working-age households don't hold any retirement account assets, whether in an employer-sponsored 401(k) type plan or an individual retirement account.

Among those 55 to 64 years old, two-thirds of working households with at least one earner have retirement savings less than one year's income, far below what they will need to maintain their standard of living in retirement. By a variety of measures, most households, even those with defined benefit pensions, are falling far short of the savings they will need.

The report lends weight to longstanding criticisms of the increased reliance on individual savings in the United States retirement system, including Jacob Hacker's "The Great Risk Shift: The Assault on American Jobs, Families, Health Care and Retirement and How You Can Fight Back" and Teresa Ghilarducci's "When I'm 64: The Plot Against Pensions and the Plan to Save Them."

Current efforts to encourage 401(k) and I.R.A. accounts primarily benefit those who already have substantial savings. The National Institute on Retirement Security report shows that households with retirement accounts have five to six times the non-retirement wealth of non-owning households in the same age group. Recent research on tax incentives in Denmark shows that they encourage shifts from conventional accounts to retirement accounts, rather than increasing overall savings.

Households in the top fifth of the income distribution reap 70 percent of the tax subsidies. Money in retirement accounts (unlike pension benefits) can be bequeathed to heirs, perpetuating wealth inequality.

Employers have little incentive to expand benefits. Some 401(k) fans contend that automatic enrollment (requiring employees to opt out of a regular contribution, rather than opting in) could increase participation. But evidence suggests that employers who use automatic enrollment offer a lower match to employee contributions in order to control their costs.

Many families who manage to accumulate retirement savings are forced to dip into them when they experience unemployment or other unexpected economic stress. The 10 percent withdrawal penalty makes this a particularly costly way of paying bills.

An increasing percentage of workers are being forced to stay on the job longer than they had planned. The percentage of workers expecting to retire after age 65 increased to 33 percent in 2010 from 11 percent in 1991 and 19 percent in 2000. That's a hardship not just for the older generation but for the younger generation waiting for jobs to open up.

That younger generation may also find that their older family members, unable to meet their medical expenses or long-term care needs, will need significant financial assistance.

The National Institute for Retirement Security reports that more than 90 percent of Americans they surveyed would favor a new pension plan that is available to everyone, is portable from job to job and provides contributors with a monthly check throughout retirement.

This sounds a lot like the guaranteed retirement accounts that Professor Ghilarducci has proposed, which would require all workers and employers to contribute to a retirement fund but guarantee a minimum rate of return. This more centralized approach would both lower administrative costs and pool risks.

Legislation proposed by Senator Tom Harkin, Democrat of Iowa, has similar features, offering the advantages of a traditional pension without forcing individual employers to bear all the risks.

It would put all Americans in the same retirement boat.

No boat is unsinkable. But for long-distance trips to old age, an ocean liner would be a lot more secure – and comfortable – than a rowboat. It would probably also be safer than the brass-and-mahogany cabin cruisers in which the affluent hope to make their crossing.

[Jun 23, 2013] Bond Losses of $1 Trillion if Yields Spike, BIS Says

10_yr_long_historical_jun_13.png

Bondholders in the United States alone would lose more than $1 trillion if yields leap, showing how urgent it is for governments to put their finances in order, the Bank for International Settlements said on Sunday.

"As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care," the BIS said.

"Clear central bank communication well in advance of any moves to tighten will be critical in this regard."

Underlining the BIS's warning, U.S. bond prices slumped after Fed Chairman Ben Bernanke said on Wednesday that the U.S. central bank expected to reduce its pace of bond buying, now $85 billion a month, and cease purchases completely by mid-2014 if the economy continues to improve.

Filling Bernanke's Shoes The Sooner, The Better

"Nothing is more difficult, and therefore more precious, than to be able to decide," Napoleon Bonaparte once said. While the French emperor and general is known for many things, indecisiveness is not one of them, and his words serve as a reminder that when the time comes to make a decision, putting it off will not make it any easier.

With this in mind, it seems that many in the world of finance are anxiously awaiting the decision by our own leaders as to who will succeed Ben Bernanke as chairman of the Federal Reserve. It's an issue that was brought to the fore this week when President Obama remarked that the Fed chief has probably stayed in his role longer than he should have.

"Clarity. We need clarity, especially in the pits behind me," says Jeff Kilburg, founder and CEO of KKM Financial, in the attached video. As much as he and many other economists and observers feel that Fed vice chair Janet Yellen will ultimately be tipped for the top job, he thinks the time of the transition will make it extra tricky.

"It is pretty amazing that Bernanke is going to pass the baton during this time because the next six months are critical," Kilburg says from his perch at the Chicago Mercantile Exchange.

When addressing the Fed successor debate, some commentators - including billionaire Home Depot financier Ken Langone, who has gone as far as calling Bernanke "the ultimate lame duck" - are asking "why wait?"

For his part, Bernanke tried to downplay the matter during his quarterly press conference on Wednesday, saying that despite the President's remarks, he didn't have anything to say about his "personal plans."

Zero Hedge On a long enough timeline the survival rate for everyone drops to zero

"If you believe that [Bernanke] means what he says," explains Gloom, Boom, and Doom's Marc Faber to a spell-bound Trish Regan on Bloomberg TV, "then you believe in Father Christmas."

Simply out, Faber adds, "we are going to see QE99," and while he notes that equities, bonds, and gold are "very oversold," he would "rather buy bonds and gold than equities." From his views on Laszlo Birinyi to inflation, the 'taper', US housing, and China, Faber calmly warns that "the S&P could drop 20-30% from the recent highs - easily."

"The only thing that I know is that I want to own some physical gold because I don't want all of my assets in financial assets."

"I am not a prophet, I don't know exactly where the price will be on a month by month basis, but I want to have some wealth, some of my assets in physical gold. I can see a lot of problems coming into the world including expropriation through taxation or through regulation or even through revolution and social strife."

[Jun 23, 2013] The sermon from Basel I'm a central banker, get me out of here

Jun 23, 2013 | The Economist

CENTRAL banks are unable to repair banks' broken balance sheets, to put public finances back on a sustainable footing, to raise potential output through structural reform. What they can do is to buy time for those painful actions to be taken. But that time, provided through unprecedented programmes of monetary stimulus since the financial crisis of 2008, has been misspent. Neither the public nor the private sector has done enough to reduce debt and to press ahead with urgent reforms. Yet only a forceful programme of repair and reform will allow economies to return to strong and sustainable growth.

That is the message from the Bank for International Settlements (BIS), the closest that central bankers have to a clearing-house for their views. Based in Basel, the BIS can point to prescience before the financial crisis, when William White, then its chief economist, worried that excessive credit growth was generating bubbles that could burst in a messy fashion. So how far should the warning in its annual report released today be heeded?

MrRFox

Getting out of QE was something that should have been planned, and the implications of it fully understood, before ever getting into QE - sort of like with laying down Presidential 'red lines'. Pretty clear now that wasn't done by the Fed-Boys either. Oh, they did give us some smug assurances that they were '100%-confident' in their ability to execute a smooth, trouble-free exit. Doesn't seem to be working out that way, does it?

Gotta wonder if they still have 100%-confidence in themselves. Bullard doesn't - and he's not afraid to publicly challenge Bernanke's stated intention to wean from QE. Meanwhile, Basel and Lacker and Fischer are challenging Bernanke from the opposite direction - get out, and sooner not later. We're in uncharted territory - nobody actually knows what's right.

Uncertainty about what to do; open dissension at the highest ranks of financial policy-making - hardly an ideal circumstance for inspired decision-making, is it? This could get twitchy, fast. At least we're blessed to be witness to history being made, however (badly) it turns out.

Only thing I'm 100%-certain of is that 100%-happy I'm 100% in US$-cash, even if I got there a bit too soon.

[Jun 23, 2013] Fed Watch Hilsenstory

Economist's View

Federal Reserve Chairman Ben Bernanke reiterated the Fed's belief that the stock of asset held is the key variable. Felix Salmon, however, has the oppostie view:

At his press conference yesterday, Ben Bernanke reiterated his view that the way QE works is through simple supply and demand: since the Fed is buying up fixed-income assets, that means fewer such assets to go round for everybody else, and therefore higher prices on those assets and lower yields generally. In reality, however, the flow always mattered more than the stock: when the Fed is in the market every day, buying up assets, that supports prices more than the fact that they're sitting on a large balance sheet. And even more important is the bigger message sent by those purchases: that we're in a world of highly heterodox monetary policy, where the world's central banks can help send asset prices, especially in the fixed-income world, to levels they would never be able to reach unaided.

I tend to think that market participants generally favor this view. And why shouldn't they? The pace of the flow says something about the expected future stock of the assets. One way to interpret this week's events is that market participants now see that the stock of assets held by the Fed is reaching its peak, and while the Fed may not sell those assets, they will let them mature off the balance sheet.

The second point, which I don't think should be under-emphasized, is that only one person who was in the room Tuesday and Wednesday has spoken about the meeting - St. Louis Federal Reserve President James Bullard. And I think he gave a pretty clear message:

Policy actions should be undertaken to meet policy objectives, not calendar objectives.

The Fed shifted toward calendar objectives this week. It is the only way to reconcile Bernanke's plan for ending QE with the data flow.

More directly to the point, however, is Bullard's response in this interview with Neil Irwin and Ylan Mui:

N.I.: Is that correct? Is this a more hawkish Fed today than it was a week ago or a month ago?

J.B.: Based on Wednesday's action, I would say it is.

Bullard was in the room and concluded the same thing markets concluded: The Fed shifted in a hawkish direction this week. Bernanke might have tried to cushion the blow, but you can't avoid the reality that he laid out a plan to end QE - and that plan involves a shift toward a calendar component.

Mike_In_FL:

Let's cut to the chase here. Global QE has helped inflate the biggest bond market bubble in history ... in order to mop up the damage from the biggest housing bubble in history ... which in turn was inflated by cheap money as part of a Fed plan to mop up the damage of the biggest tech stock bubble in history. Now, even the slightest mention of a possible future tapering of some unspecified amount has finally pricked this latest, greatest Fed-inflated bubble. That just underscores how it was NEVER sustainable in the first place. Now we all get to deal with the fallout. Fasten your seatbelts.

kievite

With ZIRP Fed are against the wall unless the economy picks up. But chances are that the global growth, earnings, incomes and fundamentals remain very subdued. Moreover the situation can easily deteriorate. In this case ZIRP becoming a mousetrap from which there is no escape without hurting the US economy, may be more then ZIRP helped.

Now Fed faces a huge bond bubble which, in a way, replaced real estate bubble. In this environment even feeble uttering about ending of QE creates an outsize reaction. I wonder what will be the reaction on 0.25% bump up in interest rates. I think they are trying to defuse the bond bubble and in the calamity that results the 401K investors bones will be crushed.

MetLife released a study that showed that 52% of people with more than $200,000 in investable assets are parking their money in bank savings accounts. In other words, the game the US government plays with retirees is really cruel. First they offloaded all investment risk, then inflation risk and now interest risk. If we assume that stock market is now at least partially controlled by HFT crooks the situation for retirees and pre-retirees outside, say, top 20% of population is really dismal.

I think when Putin called Bernanke a "monetary hooligan" he has a point if we think about effects of his policy on seniors. This is a 100% neoliberalism. And there is no sizable countervailing forces for redistribution of the wealth up.

[Jun 22, 2013] Is That The Sound Of Asset Bubbles Bursting

Zero Hedge

Bernanke is focused on his legacy

Why is Bernanke choosing to act now to reduce stimulus then? Before getting to that, let's take a quick look at what he actually said at his press conference post the FOMC meeting. Bernanke suggested that QE cutbacks could begin later this year if growth picks up as the Fed projects, unemployment comes down and inflation comes closer to the central bank's 2% target. If those expectations bear out, the Fed could stop QE altogether by the middle of next year, when it forecasts unemployment to drop to 7%.

In short, Bernanke thinks the economy is improving to the point that it will be able to stand on its own without the assistance of stimulus. And this line has been parroted by the vast majority of the investment community.

But there appears to be more than a few holes in this argument:

  1. U.S. economic growth is mediocre at best, particularly when considering that it's coming out of such a deep downturn.
  2. The majority of recent data points on the economy has disappointed, indicating a slowing growth rate in the short term.
  3. If economic growth remains at current levels, or falls, Bernanke's unemployment targets won't be reached.
  4. The biggest issue of all is one that I have alluded to many occasions and only recently have other commentators started to pick up on: U.S. inflation is slowing and deflation remains the primary risk right now.

Under these circumstances, QE tapering would likely undo what remains a fragile economy.

If that's the case, why would Bernanke be pushing ahead with this tapering? We suspect that politics may have something to do with it. In a recent TV interview, President Obama all but said that Bernanke won't serve a third term as Fed Chairman from January next year.

This means that Bernanke, like any good politician (central bankers are as much politicians as they are economists), has one eye on his current job and the other eye on how he'll be remembered in the history books. He won't want to become another Alan Greenspan, who left office shortly before the 2008 financial crisis that he arguably contributed too.

Put bluntly, QE tapering - even a small reduction thereof - offers the chance for Bernanke to be remembered as the responsible central banker rather than the one who re-created asset bubbles that led to a further financial crisis.

[Jun 21, 2013] Are Bond-Market Fears Greatly Exaggerated?

Bonds definitely were in a bubble territory... This relatively small correction just restored sanity, but it does not change the fact that growth in minimal or absent, unemployment is high, large enterprise profits are due to cost-cutting and situation is not improving
Jun 20, 2013 | Barron's

John Fallavollita wrote:

I tend to agree with Schilling on this one. With inflation dead in the water, there is no need to panic about the Fed's move on interest rates for at least a year. This past month may turn out to be a head-fake on bonds.

But, and here's where I start to sweat, if we are heading for the same fate as Japan - deflation - then we will be playing this story over and over like in Groundhog Day. One day we hit 2.5% then the next month we are back down to 1.6%, and the cycle repeats until we drop. There is nothing in the good book of economics that says we get out of this mess with inflation.

Kenneth Cusick wrote:

The bottom line here is that no one knows what the market value of bonds would be without the Fed's QE program. It seems very unlikely it will be lower but given economic reality of low growth it seems unlikely interest rates should be double or even 50% higher then they are currently.

The only economic force that could do that is inflation. A lot of people have been running scared of hyperinflation in the last few years (see price of gold last year) but the gold market is saying that fear is dead. And no one has seen even a wisp of inflation anywhere.

[Jun 21, 2013] Impact of Higher Rates on Banks, Home Prices Video - Bloomberg

Stagnation will be a natural result of higher rates in the current environment. Fed put themselves in the corner from which there is no escape.

[Jun 21, 2013] Bernanke Is Right to Slow Asset Purchases Ross Video - Bloomberg

[Jun 21, 2013] Gross Bernanke's Message Was Pro-Growth Video

An interesting interview, where Gross defended his buying of long term Treasures... He also sharply criticized Bernanke suggesting that his is driving in the fog. To a curtain extent Bernanke is driving in a fog, taking structuring issues of high unemployment and inflation for cyclical issue. Job growth is a very difficult target in a current environment for the next 12-16 months.
Jun 19, 2013 | Bloomberg

June 19 (Bloomberg) -- Pimco Co-Chief Investment Officer Bill Gross reacts to Ben Bernanke's news conference and Fed statement on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Gross thing the market missing influence on inflation. Inflection has to go up to 2% target. Those who sell treasures in anticipation of FED tapering might be disappointed if inflation remains low.

Higher inflation target 2% was specifically delineated. So the main fear is deflation and this what Chairman is afraid of.

So tapering start is conditioned by two events: unemployment lowing to 7% and inflation rising to 2% (which is a target).

Chairmen is afraid of deflation. Now inflation is around 1% and I doubtful that during Bernanke time left, higher inflation target of 2% can be achieved. And it is a target.

To a curtain extent Bernanke is driving in a fog, taking structuring issues of high unemployment and inflation for cyclical issue. Job growth is a very difficult target in a current environment for the next 12-16 months. Globalization in a sense of dampening wages, with lowest due to third world competition, demographic (aging of society, lower birth rate), that put cap on consumption, race against machine when technology is eliminating jobs instead of providing them.

All of those are structural issue that will keep unemployment high and lowing it to 7% is tall order.

[Jun 21, 2013] Are Bond-Market Fears Greatly Exaggerated?

Bonds definitely were in a bubble territory... This relatively small correction just restored sanity, but it does not change the fact that growth in minimal or absent, unemployment is high, large enterprise profits are due to cost-cutting and situation is not improving
Jun 20, 2013 | Barron's

John Fallavollita wrote:

I tend to agree with Schilling on this one. With inflation dead in the water, there is no need to panic about the Fed's move on interest rates for at least a year. This past month may turn out to be a head-fake on bonds.

But, and here's where I start to sweat, if we are heading for the same fate as Japan - deflation - then we will be playing this story over and over like in Groundhog Day. One day we hit 2.5% then the next month we are back down to 1.6%, and the cycle repeats until we drop. There is nothing in the good book of economics that says we get out of this mess with inflation.

Kenneth Cusick wrote:

The bottom line here is that no one knows what the market value of bonds would be without the Fed's QE program. It seems very unlikely it will be lower but given economic reality of low growth it seems unlikely interest rates should be double or even 50% higher then they are currently. The only economic force that could do that is inflation. A lot of people have been running scared of hyperinflation in the last few years (see price of gold last year) but the gold market is saying that fear is dead. And no one has seen even a wisp of inflation anywhere.

Jim Willie: Bankrupt Western Banks, Alternative SWIFT System & The Ongoing Gold War!

Blast from the past from a gold bug ;-)
11 May 2012 | Socio-Economics History Blog

This is an interesting interview by Turd Ferguson (www.tfmetalsreport.com) of Jim Willie (www.goldenjackass.com). Topics:
-
– JP Morgan, Jaime Dimon is lying, their loss is not US$2B but closer to US$18B.
– Deutsch Bank is insolvent and may not survive.
– Major western banks suffering insolvency and now illiquidity!
– JP Morgan is the operating arm for the US FedRes.
– The FedRes tried to prevent a collapsing situation.
– 82% of the derivatives book of JP Morgan is tied up in interest rates derivatives! US$800T derivatives book??.
– The interest rate swaps (derivatives) have been used heavily to keep interest rates down. JP Morgan suffering huge loss due to this.
– The US is stuck at ZIRP 'forever' until debt default.
– The liquidity problem of European banks is because the LTRO didn't work.
– The big Europeans banks are facing giant margin calls from various instruments: bonds, currencies … exposure.
– They are selling gold to meet these margin calls. And the East (ie. Asia, China) is taking advantage to buy up their physical gold.
– The East is taking on the bullion cartel to drain all their physical gold and keeping the price of gold low.
– What we are seeing is a 'death process of JP Morgan'!
– The falling gold price is accelerated drainage of physical gold of the gold cartel to the East.
– It will lead to the end of the manipulation by the gold cartel and will result in rocketing gold price.
– All the French banks are in trouble.
– An alternative to the SWIFT is being built by Eastern nations. A gold backed system? An alternative trade settlement mechanism not using the USD. Eastern group includes: Japan, Korea, India, Iran, China … Russia.
– The US cannot get out of the ZIRP.
– Russia has 10-30X more gold than they report.
– A new Euro minus the PIIGS, minus southern Europe?
– A gold backed new Euro-Mark?
– Gold backed Russian ruble, Chinese Yuan, Middle East Dinar, Euro-Mark ?
– The United States will become a 3rd world nation when the dollar collapse.
– Hyperinflation in United States after dollar collapse.
– Preparations are being made to an alternative to SWIFT, non USD international trade settlement. Barter system coming too.
– The Arab and OPEC nations to abandon petrodollar. They are waiting for the west to collapse. Russia and China to provide the military protection for ME oil powers?
– The new financial and monetary system will not be USD centric.
– Warren Buffet is a liar about gold.
– ETF GLD is getting drained of physical gold in 'hyper-drive'!
- and many other issues…

[Jun 20, 2013] Calculated Risk Two more articles on QE3

Those two pre-conditions: "provided momentum continues in the labor market." and "inflation make steady progress toward its 2% target" are a tough call...

From Merrill Lynch:

Fed Chairman Bernanke expects to start tapering before year-end, provided momentum continues in the labor market. Bernanke has clarified his reaction function and, as a result, we are changing our Fed call: we now expect the Fed to announce tapering in December with the first rate hike to begin in summer 2015. Soft inflation in the near-term will not dissuade the Fed from tapering, but we think the Fed will want to see inflation make steady progress toward its 2% target to begin rate hikes.

From Neil Irwin at the WaPo: This is why global markets are freaking out

.... .... ....

In effect, with the Fed starting to think about an exit from an era of easy money, it will be a great test of just how resilient this economic recovery really is. If the whole thing - the rises in stock prices, in corporate earnings, in the housing market, even in job growth - is driven solely by the flood of money, or whether five years of zero-interest rates and trillions of dollars in bond purchases have succeeded at getting a more resilient economic engine for the United States up and running.

JP :

This isn't a crisis like the ones that struck the United States starting in 2008 or Europe in 2010. Rather, it is a byproduct of the world's central banks, having intervened on vast scale to deal with the economic travails of the last several years

... because they failed to deal with the problem back in 2005-8.

Finance_Fan:

merchants of fear wrote: But the damage wasn't just in stocks. Bond prices fell, and the yield on the benchmark 10-year note rose to 2.42 percent, its highest level since August 2011, although still low by historical standards. Oil and gold also slid.

of course, all assets are inflated and need to come down. big deal!

"People are worried about higher interest rates," said Robert Pavlik, chief market strategist at Banyan Partners. "Higher rates have the ability to cut across all sectors of the economy."

this is just hilarious. is the mkt freaks out because the 10-year yield is "high" while under 3%... what will it do when it goes up to a reasonable level? Armageddon?

let's face it, if there's panic at this level, the patient is in comma and is not gonna wake up.

[Jun 20, 2013] Market plunge of FED statement

Making a statement about starting to taper has the same effect as if he started to taper immediately. If he has plans to taper, he should have just done it. Sometimes too much information is worse than not enough. Talk with no action is just pure manipulation. Should be a crime to manipulate people like this, imo. It might be that market is pricing in reality without Fed support. Artificial Fed support. It's called price discovery, and long run is better for all.

It's been awhile since we experienced a market swoon like today. But that doesn't worry Barry Ritholtz, author of The Big Picture blog and CEO of Fusion IQ. He tells The Daily Ticker that he's not panicking, he says as the market sells off, it's important to remember that there are buyers on the other side of the trade. Watch the video above to see more insight on the market plunge from Ritholtz, Aaron Task and Yahoo! Finance senior columnist Rick Newman.

Also reacting to the drop, Wells Capital Management chief investment strategist James Paulsen told Bloomberg News, "The buyers are saying 'I'm going to wait and see.' They're not running to the exits but they're also not willing to catch a falling knife."

Bernanke Kills Fed Credibility and the Confidence Fairy in One Shot

Probably the Fed became nervous about the helium balloon it had attached to the stock market and decided it needed deflating with some talk of ending QE. The problem for the Fed is that investors might interpret Bernanke announcement as bad news about the Fed's reliability. The recent rise in bond yields coincided with unexciting jobs data and very low inflation - inconsistent with the "stronger economy" story.

naked capitalism

How many markets are in upheaval right now? The ten year Treasury has gone from 2.18% to 2.44% in less than a day. Gold is down to $1288. ...S&P future are down over 16 points, or roughly 1%.

Frankly, the real issue seems to be that the Fed has gotten itchy about ending QE. Who knows why. It may be 1937 redux, that they've gotten impatient with the length of time they've been engaged in extraordinary measures. It may be that they can't face up to the fact that they might have gotten into a Japan-style QE forever (I believe Japan is now on QE 8). They might also worry about political backlash if the Fed balance sheet keeps growing, or that savers and investors are suffering in a low yield environment (more likely they are concerned about depriving banks of easy profits, like real earnings on float or easy yield curve profits).

John Plender suggested in the Financial Times that Bernanke may be following the view of a recent Frederic Miskin paper, in which Miskin took the view that the Fed window for a QE exit was closing.

I've been musing that the impact of QE might well be asymmetrical, that it did less to goose the economy than the Fed wanted. Its main impact has been to lift asset prices. Some studies have confirmed Richard Koo's take on a balance sheet recession, that consumers prioritize paying down debt over spending, and so the rise in the stock market and recovery in home prices hasn't led to as much increase in spending as you'd expect. But as I speculated, while lowering interest rates doesn't do much to stimulate demand in the real economy, raising rates will slow growth in normal times. And it could do more to choke off the nascent recovery than the Fed has anticipated.

The big problems are the Fed has no idea how to exit and this problem results from the flawed design of QE, of targeting quantities rather than rates. So the one thing Bernanke sort of made clear yesterday is the Fed will make up its mind as the data comes in. That's not exactly the sort of guidance Mr. Market was looking for. He also raised the growth target and suggested the taper might start as early as September. Freakout! Even though Bernanke had made noises about an exit last month, and the the bond market took badly to that, the failure of Fed minions to offer any reassurance in the meantime was a warning of sorts that not enough people heeded.

Susan the other says:

Action is evidence of intent. And in this case probably high level collusion. It isn't just the Fed; it's the Fed and Congress. Bernanke might be afraid of deflation but he's flat-out terrified of inflation.

And he's got the perfect foil. Unemployment. His dual mandate is as convenient as a shell game. Bernanke and Congress are not fighting deflation – deflation is the goal. If unemployment is kept high (true unemployment at 17%, propaganda at 7.5%) then the Fed can manipulate its true anti-inflation agenda without interference. Keep the banks and the stock market growing with zirp; save the banks' fraudulent balance sheet by buying up all the MBS; and impose a stealth austerity on the rest of the nation; even on the rest of the world because we're not a nation of consumers anymore.

washunate says:

Well said. Bernanke has been quite consistent, going back to when he was a Bush appointee, that he's willing to do the emergency lending corporate welfare financial bailouts thingy, but that Congress is responsible for evaluating and implementing support for non-financial companies.

If that double standard is a problem, well gee, I wonder what Congress and the President could have done about it. I can't quite put my finger on it.

Richard Kline says:

To me, the Fed is using the headline unemployment rate as tawdry window-dressing on that the Fedheads want to do anyway. This is Uncle Ben reading the riot act to the FinSys and shadow player speculators, and all of the bets unwinding; at an orderly pace so far given their scale and correlation.

Everyone dives for bonds and out of their risk-on bets in gold, emerging markets, the Nikkei, and shadow flows into China. Spec bucks on swap from the Fed were already out of commodities and Euro shorts at the moment, which is why there isn't much movement there. Ben's turned out the lights before the drunks break the furniture. And for the record, I don't think Ben Bernanke gives a rat's tokhus for unemployment, everyone starting with him knows the number's bogus.

It's just an excuse for managing macro moves as he tries to Ozma the Great on the financial system, which is the only _real_ charge of the Fed for a generation. The financial system doesn't care about unemployment, they only care about how much money the Fed will make available, and at what price, and that is all the Fed has come to care about. Period. The rest are optics for politicians and other rubes.

slothrop says:

Because of QE the monetary base has tripled. But loans to private businesses have actually gone down since 2008. Given this, why does Yves Smith assume that QE boosts employment, when clearly the relationship must be in the other direction?

NotTimothyGeithner says:

Its prevented firms from collapsing or facing liquidity crises, but at the same time, its kept the same parasites and cruel structure in place. Its death by a 1000 paper cuts.

Tomorrow QE boosts employment, but in the long term, it hampers real business formation and devalues the assets of people who don't have access to the discount window destroying customers. Minimum wage hasn't risen with QE, and small businesses don't have access to QE the same way large companies do. My guess is the life/financial insurance companies are projecting problems from low interest rates for their business models which is what is driving this taper talk. A major insurer going under will have the same result as a major bank going under.

Malmo says:

"Personally I don't think a rise in interest rates will necessarily be a macroeconomic negative. No one wants debt now, so a rise is unlikely to have a major impact on lending to the real economy. In addition higher rates will increase private sector income which might actually spur a little more spending."

I'll eagerly take the other side of that bet.

Yves Smith says:

Please go back and read the post.

I said I have been speculating that QE is asymmetrical. I very clearly said it didn't do much to help the real economy but withdrawing it could hurt.

Also looking at business loans tells you very little. Bank lending is only 15% of non-farm, non-financial credit. Bonds are a much bigger deal in business funding. Research by Amar Bhide shows new businesses are funded via savings, friends and family borrowings, and credit cards. Credit cards are turned into bonds. None of that is business loans. Some might have borrowed against HELOCs, again that would not show up as business loans but a mortgage loan.

The very small % that are VC funded ALSO would not show up as business loans.

If QE has had any effect on the real economy, it's mainly through related Fed cheerleading and confidence fairy, the financial media cheerleading the rise in the stock market as meaning the economy is recovering + the rise in housing prices in the last year (which as we know is significantly the result of private equity and other investor buying and some of those are debt financed via warehouse lines but they are counted as "all cash" buyers because they don't use a mortgage).

Malmo says:

"I said I have been speculating that QE is asymmetrical. I very clearly said it didn't do much to help the real economy but withdrawing it could hurt."

Really, that's all I'm saying too: the withdrawing could hurt.

I admit I'm being somewhat selfish here. Still, if withdrawing helps a significant amount of others on the margins then I can stomach the move. I'm just not convinced it will.

MyLessThanPrimeBeef says:

The recovery is fragile because it's a fake recovery.

In a real recovery, there will be many more workers (here, not abroad) working more hours making a lot more money, instead of relying on borrowing to make up of stagnant wages.

Ben Johannson says:

Mosler is correct, of course. Lending cannot stimulate aggregate demand unless credit expansion is accelerating faster than the contractionary effect of repaying the loans. Furthermore QE is a tax reducing private sector income flows as the Fed acquires securities paying 1-3% and replacing them with largely useless reserves paying 0.25%. Every penny the Fed "returns" to the Treasury is a penny that would have gone to the non-government sector.

Alejandro says:

From a birds-eye, it has seemed that QE's have been blows looking for a bubble.

Walter Map says:

Except that it's not 'free money'. It's a wealth transfer to the rich from the general population. The 99.9% are paying for it through the nose and will end up paying for it with everything else they've got.

Fed policy has exactly one goal: enrich the wealthy. Since the U.S. economy is shrinking ( http://www.shadowstats.com/alternate_data/gross-domestic-product-charts ) this must be accomplished by screwing everybody else. And it must be accomplished. And screw they have.

As is often noted, Fed policy has done nothing for the economy or unemployment. It's not supposed to. It should be obvious to even the casual observer that the Fed's supposed mandate with respect to unemployment is just a cheap con. Unemployment is controlled with propaganda, not economic policy.

Wealth and power, like water, seek their own level. Unlike water, wealth and power flow uphill, not downhill, and unless the flow is controlled and wealth impounded and diverted by the levees and dams and canals of taxation and worker empowerment it will all run to the top. Which is precisely what it is doing. It's global economic policy because that's the policy the obscenely wealthy want.

The U.S. national debt is pushing $17 trillion. Where do you suppose all that money went? The rich like to blame the poor and the teachers and the firefighters and other union workers, but they obviously don't have it. So who does?

Massinissa says:

Its sort of like Ross Perot's 'Giant Sucking Sound', but this time instead of from Mexico to the USA, its from the Middle Class and the Working Class to the Rentier class…

Strange that they're sucking so hard but noone in the mainstream can hear it. Americans are such boiling frogs these days.

RSDallas says:

This is all about the banking, insurance and pension industries. The insurance and pension business is a legal Ponzi scheme and they have to be close to insolvency, especially if we have another financial melt down, which is coming. It's already tearing through Japan and it looks like China is joining the party.

... ... ...

Wells Fargo Must Die says:

The Fed became nervous about the helium balloon it had attached to the stock market and decided it needed deflating with some talk of ending QE. No doubt it would like to begin withdrawing. However, it would have to give up its peg for the market.

It is relearning a lesson it will have to relearn over and over. It cannot peg and withdraw at the same time. The peg is more important so the end of QE will be abandoned. But it has at least talked down the market a little. When we drop below the 1600 peg, a new bit of propaganda will be forthcoming.

profoundlogic says:

Quelle Surprise! Mr. "100 Percent" certain is looking more and more human every day.

We should not be surprised that the Fed is wrong; they are consistently wrong. The transcripts leading up to the initial crisis demonstrate just how clueless they are in terms of the real economy, and how callous they are toward the general population. They live in an intellectual vacuum, where the rarified air only echoes the crying voices of the wealthy establishment.

Behold! The emperor has no clothes!

b2020 says:

I believe Hussman is arguing that while the Fed might stop QE, that will not be enough to also raise interest rates, and that the Fed cannot raise interest rates without reverting QE purchases first, or it would wipe out its own balance sheet.

So the Fed can cease backing itself even further into the corner, but it cannot do anything to get out of it. In other words, the problem with ZIRP was that the Fed had become irrelevant, and QE was a desperate attempt [to pretend] to do something, anything – hence no surprise QE did nothing to solve the problem, and the Fed is still irrelevant.

http://www.hussmanfunds.com/wmc/wmc130617a.gif

Kokuanani says:

Yves, more info please.

Could you please do an article on what exactly happens to all those "toxic assets" [or however else they're referred to] once they're removed from the banks' books via QE? Are they securitized and rolled out to ignorant investors? Are they resold, with a new set of servicers to go after borrowers? Are they hanging on to properties to keep them off the market, but continuing the many evils of this route?

Why couldn't the Fed do everyone a favor and refinance this trash, including a substantial bit of cram-down?

QE is about as transparent as Obama's other policies.

washunate says:

This is where definitions get a little tricky because everything is so opaque and complex, but the issue now isn't so much existing 'toxic assets' (where the public policy problem was that the government paid above market prices -"toxic prices" – and lent money at below market rates to the 'banks' themselves). Rather, QE now is the Fed being forced to buy some of the NEW issuance of mortgage-backed securities and treasury securities. (because private actors aren't stupid enough to continue buying all the GSE and USFG debt at such low interest rates, and USFG isn't interested in ending the bailouts/corporate welfare of FIRE, national security, healthcare, and tax cuts for the wealthy)

I highly encourage poking around the Fed balance sheet numbers to explore this some more. It is truly staggering how quickly the balance sheet is expanding. The PDF links look better, but all the data is there in the html, too, if bandwidth is an issue. $3.2 trillion in outright holdings of securities. That's an increase of $579 billion in one year (22%!). $247 billion increase in treasuries and $344 billion in MBS (and a decrease of $21 billion of other federal agency debt).

http://www.federalreserve.gov/monetarypolicy/bsd-overview-201305.htm http://www.federalreserve.gov/releases/h41/current/

[Jun 19, 2013] Bond Bull Market Isn't Dead Yet, Longtime Bond Bull Says

Yahoo! Finance/Daily Ticker

But, to cite Mark Twain, reports of the death of the bond bull market have been "greatly exaggerated," according to Gary Shilling, president of A. Gary Shilling & Co., and author of The Age of Deleveraging.

"A lot of people over the years have declared this bond rally of a lifetime over [and] it's repeatedly not proved to be the case," Shilling tells The Daily Ticker. "I don't think it's over."

Shilling, a longtime bond bull, compares the current bond bull market – which began in 1981 – to the secular bull market in stocks in the 1980s and 1990s. "That was a time when you basically wanted to buy and hold [and] I think bonds are still in a secular bull market," he says.

Of course, given Treasury yields have fallen so dramatically since the early 1980s, Shilling concedes the bond bull market is closer to the end vs. the beginning and is wary about staying at the party too long.

Still, he remains convinced the bond bull isn't dead yet for the following reasons:

Harry

This old man ought to be smart enough to know what a ponzi scheme looks like. Reply .

michael m

Don't Fight the Fed & Don't fight the tape.

Economist's View

In light of Bullard's dissent, the market's reaction should be perfectly clear. I have seen some twitter chatter to the effect of market participants didn't understand what Federal Reserve Chairman Ben Bernanke was saying, that his message was really dovish, that interest rates would be nailed to the zero bound in 2015, that the policy was data dependent, etc. Market participants obviously didn't have that interpretation.

Indeed, I think market participants clearly heard Bernanke. After weeks of being soothed by analysts saying that the data was key, that low inflation would stay the Fed's hand, Bernanke laid out clear as day a plan for ending quantitative easing by the middle of next year. Market participants then concluded exactly what Bullard concluded: It's the date, not the data.

With that information in hand, market participants did exactly what they should have been expected. I think Felix Salmon has it right:

What we really saw today was not a move out of stocks, or bonds, or gold, but rather a repricing within each asset class.

The Fed changed the game this week. Bernanke made clear the Fed wants out of quantitative easing. While everything is data dependent, the weight has shifted. The objective of ending quantitative now carries as much if not more weight than the data. Market participants need to adjust the prices of risk assets accordingly.

Bottom Line: I think the question is not how good the data needs to be to convince the Fed to taper. The question is how bad it needs to be to convince them not to taper. And I think it needs to be pretty bad.

More Similarities To The Market Peak In 1973

Jun 22 2013 | Seeking Alpha

In last week's column, I showed charts of how the market has alternated between significant bull and bear markets since the top in 2000, and how Warren Buffett has been right so far in his prediction in November, 1999 that, "Over the next 17 years equities will not perform anything like - anything like - they've performed over the last 17 years."

I noted how the market since 2000 has been in a sideways 'secular' bear market that is very similar so far to the last 17-year long secular bear market of 1965-82. The current 'cyclical' bull market that began in 2009 has carried the market back up to its previous peaks of 2000 and 2007, and this time exceeded those peaks. That has it looking ominously similar to 1973, when the Dow also returned to its previous two peaks and broke out to a new high.

That had investors in 1973 excited, bullish, and convinced that secular bear was over. But instead, the next cyclical bear market was even worse than the previous two.

I've received a lot of messages since asking if conditions might not be quite different now than at that peak in 1973, given the improving economy, ongoing stimulus efforts by global central banks, assurances coming out of Wall Street that the bull market still has years to run, and so on.

So it has been interesting to take another look back at that period.

There are indeed differences between now and 1973, most notable that the 1970's were a period of extremely high inflation and interest rates, while inflation and interest rates have been extremely low in recent years.

But there were fascinating similarities, not only in the return of bear markets each time the stock market returned to its previous highs, but in the way the political drama played out.

For instance, it's said that probably more new regulations were imposed on the economy in Nixon's first term, which ended in 1972, than in any presidency since the New Deal, particularly related to healthcare and environmental issues. New bills and regulations included the creation of the Occupational Safety and Health Administration (OSHA), the Environmental Protection Agency (EPA), the National Oceanic and Atmospheric Administration (NOAA), the 1972 Noise Control Act, the 1972 Marine Mammal Protection Act, the 1973 Endangered Species Act, and the Supplemental Security Income (SSI) Act, providing a guaranteed income for elderly and disabled citizens. The Nixon years also brought large increases in Social Security, Medicare, and Medicaid benefits.

Nixon actually proposed more programs than he was able to get enacted, including a National Health Insurance Partnership Program, expansion of the Food Stamp program, and a Family Assistance Program.

It was also interesting that the economy had stumbled early in Nixon's first term, but an economic recovery began in 1971 and lasted into the 1972 campaign season, helping Nixon win re-election by a wide margin in 1972.

The stock market rally that accompanied that economic recovery had the Dow 6% above its previous two bull market peaks by 1973. But the economy began to stumble again.

And here's where we don't know if the similarities will continue. The stock market topped out in 1973, plunging into another serious bear market, even though the government had introduced expansive fiscal and monetary policies in an effort to re-stimulate the economy.

Then there are the military similarities. As the U.S. currently struggles to extricate itself from the record-long and costly wars in Iraq and Afghanistan, it recalls the similar ongoing struggle in 1972 and 1973 to wind down the then record long and costly Vietnam War.

Even the optimism on Wall Street and in the media was similar, including the reasons for the optimism. Time magazine, January 8, 1973 (two days before the market tumbled into the serious 1973-74 bear market):

"Most Wall Street analysts are convinced the market will continue to climb smartly in 1973. Wall Street sees signs that small investors are beginning to overcome fears instilled by the stock market decline of 1970 and are returning to the market."

So there are dissimilarities, particularly in area of inflation and interest rates, but the similarities are fascinating.

[Jun 19, 2013] Crash this year or next by Martin Hutchinson

There is a huge amount of "water" in valuations
Jun 4, 2013 | Asia Times Online

At some point, this gigantic ziggurat of global malinvestment must collapse. The stock markets of the world spiral up to infinity with only an occasional hiccup and the US housing market is well into bubble mode again, pumped up by cheap money. Only gold and silver languish, hard assets that have gone out of fashion because of the lack of inflation.

At some time this bubble must burst, bringing devastation to global financial markets. The crucial question to investors seeking to maximize gains and protect their few remaining assets is: will the burst come this year, or is it more likely to be delayed into 2014 or even 2015.

Make no mistake, there will be a crash. Interest rates have been negative in real terms for five years. That has made it attractive to leverage and has caused asset prices to spiral towards infinity. It has also disguised the extent of stock market overvaluation by inflating reported earnings, as the cost of balance sheet debt diminishes below zero in real terms.

To use the Austrian economic term, the malinvestment of 2003-07, caused by the previous bout of ultra-low interest rates, has not really been washed out. In housing, all kinds of schemes have been used to prevent the expected foreclosures, while innumerable funds have bought up the inventory of foreclosed housing, intending to use it to satisfy a rental demand that has not been proved to be there (much of the overstock being in outer suburbs, while rental demand is strongest in inner suburbs and gentrifying inner cities).

More important, the wave of leveraged buyouts carried out in 2006-07, which were expected to present a huge economic obstacle in 2011-12 as five-year debt required refinancing, have simply been rolled over. There is thus a huge amount of "water" in valuations, both from good assets whose prices have been chased too far and, more important, from bad assets that have minimal value in a free market but have been propped up by funny money.

Trees don't grow to the sky, straight lines do not continue to infinity and bubbles do not inflate indefinitely. At some point, this gigantic ziggurat of global malinvestment must collapse. The question is: when and how?

Since the beginning of this year I have held the view that we were due for a major market breakdown in 2014, probably in the second half of 2014. Monetary policy seemed likely to remain ultra-easy until the end of this year, the "Abenomics" experiment in Japan would take at least 12-18 months to work through, we were a long way from the top of the business cycle, and while stock markets were already close to all-time highs it seemed to me they had a lot further to go.

Then there was gold; I found it difficult to believe that the cycle could end without a major spike in gold prices, and the experience of 1978-80 suggested pretty strongly such a spike should take at least 12-18 months.

There are now a number of signs that the bubble may burst sooner than this. For a start, many economic commentators from the right of the political spectrum, who in 2012 were duly forthright about replacing Ben Bernanke at the earliest possible opportunity, have now reversed themselves and embraced Bernankeism, claiming that quantitative easing is the only thing keeping the economy going.

The Current U.S. Economy Text and Subtext by Jared Bernstein

We are stuck in a sloggy, backward-leaning L-shaped recovery. Current growth rates are not fast enough to put much downward pressure on the unemployment rate. Stock market valuations are way up. 80% percent of the value of the market is held by the richest 10% of households.
June 17, 2013 | NYTimes.com

The International Monetary Fund just published its most recent assessment of the United States economy. Its summary, below, is clear and incisive. Yet, there's another layer to all of this so I've added annotations - the numbers in brackets - intended to peel back the economic onion a bit, as it were.

The United States recovery has remained tepid over the last year [1], but underlying fundamentals have been gradually improving [2]. The modest growth rate of 2.2 percent in 2012 [3] reflected legacy effects from the financial crisis, fiscal deficit reduction [4], a weak external environment [5], and temporary effects of extreme weather-related events. These headwinds notwithstanding, the nature of the recovery appears to be changing. In particular, house prices and construction activity have rebounded, household balance sheets have strengthened, labor market conditions have improved, and corporate profitability and balance sheets remain strong, especially for large firms [6].

With the sizable output gap and well-anchored inflation [7] expectations keeping inflation subdued, the Fed appropriately continued to add monetary policy accommodation over the past year by increasing its asset purchases and linking the path of short-term rates to quantitative measures of economic performance, thus helping to maintain long-term rates at exceptionally low levels [8]. Overall financial conditions have eased, as risk spreads narrowed, stock market valuations surpassed their pre-crisis peak [9], and bank credit conditions gradually eased.

[1] We are stuck in a sloggy, backward-leaning L-shaped recovery: The United States economy, with considerable prodding from fiscal, financial (the bailouts), and monetary help, exited a historically deep recession in the second half of 2009, but has been growing relatively slowly since then. In other words, there was no "bounce-back," no V-shaped pattern, where we fall hard but quickly make up our losses. So, why did those policy interventions help break the recession but not move growth from an L to a V? Because they ended too soon.

[2] Whose fundamentals you talkin' about? At times like this, there's a risk that the economy's doing well, except for most of the people in it. To understand how the recovery is playing out in different people's lives, you've got to ask: just whose fundamentals are improving?

[3] Current growth rates are not fast enough to put much downward pressure on the unemployment rate. When the economy grows at around 2 percent, the unemployment rate tends to stay about where it is as that's just fast enough growth to balance the flows of people coming into the job market and cycling out of unemployment into work. But it's not fast enough to really make a big dent in the stock of about 20 million who are un- and underemployed. Moreover, the I.M.F. predicts slower growth (1.9 percent) this year.

[4] Wait a minute - they said things are improving … so why slower growth!? Because of too much "fiscal deficit reduction." Our policy makers may not be the austerions that are whacking away at European economies right now, but we too have reduced government spending too quickly, far more so, as the Fed governor Janet Yellen points out, than in past recoveries. Basically, the public sector handed the growth baton to the private sector before it was ready to run with it.

[5] The "weak external environment" refers to slower growth in some of our export markets, like Europe, which absorbs about 20 percent of our exports. But the problem runs deeper: our persistent trade deficits have essentially exported demand and jobs for years, often to countries that manage their currencies to maintain a price advantage over us. Policy makers who want to reverse that need to address this currency issue if we are to make serious progress on increasing net exports.

[6] All true, and all helpful developments, especially the housing part, but there's a large imbalance between improving labor market conditions and corporate profitability. When the lightly unionized American job market is too slack, as it's been for years now, low- and middle-wage workers have too little bargaining power to claim much of the growth they're helping to create. It's a very different story for large multinationals who can trot the globe seeking profits (and tax shelters). In fact, the compensation share of national income is at a 48-year low, the profit share at an all-time high.

[7] "Well-anchored inflation?" Inflation is running at around a measly 1 percent, in no small part because of the growth slog and absence of labor market pressures. True [8], this should keep the Fed in the easing game for a while, and that in turn could perhaps calm excessively skittish equity markets (they're worried the Fed will begin to "taper" its bond buying program). But faster inflation right now is less a function of expectations and more of weak demand and stagnating wages. A bit faster price growth would thus be a welcome sign.

[9] Stock market valuations way up. Though a rising stock market benefits some in the broad middle class, mostly through retirement and pension savings, the vast majority of its gains go to the wealthiest (80 percent of the value of the market is held by the richest 10 percent of households). It's actually very simple to describe what's wrong here: since the recovery began, adjusted for inflation the Standard & Poor's 500-stock index is up 57 percent while median household income is down 5 percent.

The picture painted in broad strokes by the I.M.F. is correct and not at all without hope. As they say, things are improving, albeit too slowly. But in every case, we could be doing better were it not for policy mistakes, ones that are having profound and lasting impacts on the living standards of working families. In this regard, it's important to peel back the economic onion, even if it makes you tear up.

R. Law, Texas

The ' recovery ' has left so many people behind (indeed feeding on those left behind since their incomes have gone down) that the perpetuation of a two-economy America is gaining steam instead of being reversed.

It is dangerous for the country, for democracy, if this is not reversed through progressive tax policy.

The democracy depends on less income inequality - fewer people in Richistan, and fewer people in the plutonomy identified by Citigroup for its private wealth clients in 2005:

http://www.dailykos.com/story/2009/10/04/789523/-Citigroup-s-Shocking-Plutonomy-Reports-h-t-Michael-Moore

which ran off a cliff 3 years later, having to be rescued by hoi polloi and the big bad central socialized government.

Yet even after the rescue (because they were bailed out?) the plutonomy still believes in ' makers ', ' takers ' and ' nails ladies ':

http://krugman.blogs.nytimes.com/2012/07/12/nails-ladies/

and the Romney-Ryan world view.

This has to be stopped in its tracks with progressive taxation.

workerbee, Florida

"But faster inflation right now is less a function of expectations and more of weak demand and stagnating wages. A bit faster price growth would thus be a welcome sign."

Faster price growth would be a positive sign because it would mean that wages would be growing in a healthy way again. But wage growth is stagnant, mainly because profits are accruing to corporate upper management and shareholders rather than to labor, and policymakers aren't going to do anything that would change that in favor of the workers.

So demand will remain weak for a long time and, consequently, rates will hover near zero for a long and indeterminate period of time.

[Jun 18, 2013] Bonds Versus Stocks - Just Ask Japan

"Weak economic growth, an aging demographic, rising governmental debt burdens and continued deflationary pressures can keep interest rates suppressed for a very long time."
06/17/2013

The impact of substantially higher interest rates are not good for the economy or the financial markets going forward. In the short term consumers, and the financial markets, can withstand small incremental shifts higher in interest rates. There is clear evidence historically to suggest the same.

However, sustained higher, and rising, interest rates are another matter entirely. Before we get too excited, it is important to keep in perspective the recent "surge" in interest rates that has gotten the market's attention as of late. In reality, this is nothing more than a bounce in a very sustained downtrend. While there is not a tremendous amount of downside left for interest rates to go currently - it also doesn't mean that they are going to substantially rise anytime soon. Weak economic growth, an aging demographic, rising governmental debt burdens and continued deflationary pressures can keep interest rates suppressed for a very long time. Just ask Japan.

[Jun 18, 2013] PIMCO's Bill Gross "Which Way For Bonds?"

While we are not likely to see a repeat of that type of bull market any time soon, we also do not believe we are at the beginning of a bear market for bonds. Rather, what we're seeing is the continuation – and acceleration of the de-levering process ... We don't see the Fed raising rates in a meaningful way for at least the next few years.
06/14/2013

While we are not likely to see a repeat of that type of bull market any time soon, we also do not believe we are at the beginning of a bear market for bonds. Rather, what we're seeing is the continuation – and acceleration, in some respects – of the de-levering process, a key distinction that may be getting lost in some of the noise over the past few weeks. The Fed, the Bank of England, and now the Bank of Japan have all committed to holding their easing stance until growth targets are hit. We don't see the Fed raising rates in a meaningful way for at least the next few years.

"We are concerned by the growing downside of zero-based money and QE policies – among them a worrisome distortion in asset pricing, the misallocation of capital and ultimately a dis-incentivizing of risk taking by corporations and investors."

"We believe caution is warranted not just for fixed income investors, but for investors in all risk assets; avoiding long durations, reducing credit risk away from economically vulnerable companies and sectors"

Q: How are you positioning Total Return to navigate this environment?

Gross: While it's natural to want to reach for higher returns, an investment strategy's success depends on carefully weighing potential rewards against the long-term costs, using the insights you've gathered on the ground and on a macro level through rigorous analysis. Today, given the economic uncertainty and rich market valuations, we think that the fortitude to wait for more attractive opportunities is a valuable attribute. Our goal for the Total Return strategy is to enhance our dry powder, seek prudent alpha and reduce risk – not dramatically, but to average or slightly below-average levels. Fortunately, PIMCO has a wide array of tools at our disposal to accomplish that. So, among other things, we're avoiding long durations, reducing credit risk away from economically vulnerable companies and sectors, managing volatility and increasing exposure to countries with higher-quality balance sheets such as the U.S., Brazil, Mexico and Australia. And we are seeking out and taking advantage of opportunities in the market. For example, we believe intermediate Treasuries are currently attractively priced at around 2%.

...
Q: With bond markets so uncertain, what steps can investors take to ensure they're prudently pursuing their financial goals?

Gross: It's important for investors to remember the reasons they own bonds in the first place – namely for the potential for the preservation of capital, income and growth, relative steadiness and typically low to negative correlations with equities. These needs – which will only become more urgent as millions of baby boomers head to retirement over the next decade and a half – are long term, regardless of what markets are doing today. So fixed income should always have a place in a portfolio. Still, there are ways to navigate challenging markets without feeling stuck. One is to expand your investment universe by going global.

Bob Janjuah Markets Are Tepper'd Out So Don't Get Sucked In

Bob Janjuah: "There can be no doubt in my view that the global growth, earnings, incomes and fundamental story remains very subdued. But at the same time financial markets, hooked on central bank 'heroin', have created an enormous and – in the long run – untenable gap between themselves and the real economy's fundamentals."
Fed now de facto has a new duel mandate based on (the trade-off between) what I'd call Nominal GDP (or macro-economic stability), and Financial Sector Stability (or what I'd simply label as system-wide 'leverage' levels).
Zero Hedge

Here is what I think matters:

1 – There can be no doubt in my view that the global growth, earnings, incomes and fundamental story remains very subdued. But at the same time financial markets, hooked on central bank 'heroin', have created an enormous and – in the long run – untenable gap between themselves and the real economy's fundamentals. This gap is getting to dangerous levels, with positioning, sentiment, speculation, margin and leverage running at levels unseen since 2006/2007.

2 – The Fed knows all this. The Fed also knows that it was held at least partially responsible for creating and blowing up the bubble that burst spectacularly upon us all in 2007/2008. But very importantly, the Fed now has explicit and pretty much full responsibility for regulation of the banking and financial sector.

3 – As such, and as discussed by Jeremy Stein in February (remember, Mr. Stein is a Member of the Board of Governors of the Fed), the Fed now de facto has a new duel mandate based on (the trade-off between) what I'd call Nominal GDP (or macro-economic stability), and Financial Sector Stability (or what I'd simply label as system-wide 'leverage' levels).

4 – This means first and foremost that while growth, inflation and unemployment all matter a great deal, the Fed cannot now either allow, or be perceived to allow, the creation of any kind of excessive leverage driven speculative (asset) bubbles which, if they collapse, go on to threaten the financial stability of the US. Imagine if this Fed were to allow a major asset bubble to blow up and then burst anytime soon (say within the next two or three years). This time round Congress and the people of the US would be able to place the entire blame on the Fed – probably with some justification – and, if the fallout approached anything like that seen in 2008, then it would mean, in my view, the end of the Fed as we currently know it.

5 – Turkey's do not vote for Christmas, nor is Chairman Bernanke or any other member of the Fed willing, in my view, to take such a risk. Back in Greenspan's day he could always blame asset bubbles on someone else – even though leverage either in and/or facilitated by the banking/finance sector is always at the heart of every asset bubble. But this get-out has now explicitly been removed from the list of options open to the Fed going forward.

6 – So for me, 'tapering' is going to happen. It will be gentle, it will be well telegraphed, and the key will be to avoid a major shock to the real economy. But the Fed is NOT going to taper because the economy is too strong or because we have sustained core (wage) inflation, or because we have full employment - none of these conditions will be seen for some years to come. Rather, I feel that the Fed is going to taper because it is getting very fearful that it is creating a number of significant and dangerous leverage driven speculative bubbles that could threaten the financial stability of the US. In central bank speak, the Fed has likely come to the point where it feels the costs now outweigh the benefits of more policy.

7 - As part of this, the lack of sustainable growth in the US (much above the weak trend growth of 1% to 2% pa in real GDP which has been the case for some years now) is very telling. And, while I can't be 100% certain, at least some members of the Fed and other central bankers must be looking with concern at recent developments in Japan whereby the BoJ's independence has, for all practical purposes, been consigned to history, and which has a two decade head start with respect to QE. At least some members of the Fed may be worrying about the future of the Fed and the US if they persist with treating emergency and highly experimental policy settings as the new normal.

8 – The Fed will hope that markets heed its message and that we gradually, through the normalization of yields (in the belly of the curve) and rates volatility (higher!), move aggressively over optimistic financial market asset valuations somewhat closer to what is justified by rational and sustainable real economic fundamental metrics. Rather than being based on some circular and self-serving 'risk premium' delusion, which is almost completely predicated on the bogus time-inconsistent assumption of a continuous and never to be removed Fed/central bank put on yields and rates volatility.

9 – The sad likelihood is that markets – which are suffering from an acute form of Stockholm Syndrome - will listen and react too little too late. This could give us the large 25% to 50% bear market I expect to see beginning in late 2013 or early 2014, rather than a more gradual correction. In part, this is because markets will not believe – until it is too late – that the Fed is actually taking away its goodies. Further, it's because positioning and sentiment among investors just always seems to go to extremes, way beyond most rational expectations, before they correct in spectacular style. Think Chuck Prince and his dancing shoes.

10 - Crucially I suspect that the Fed will be so conflicted/whip-sawed by, and suitably vague in its response to data that it ends up watering down its tapering message a little too often and a little too much, thus encouraging one or two more rounds of 'buying the dip'. This would reflect the new dual FED mandate and because we are living through an enormous and never seen before global policy 'experiment'. Furthermore, we are probably going to see Bernanke be replaced come January 2014. I don't actually think it matters who will replace him – anyone different is a risk and a new uncertainty for the market. In the unlikely event that Bernanke signs up for another term, I don't think that the coming shifts and changes will be reversed, but I tend to feel that the transition phase would be a little less fraught with risk and volatility, as Chairman Bernanke has credibility and the confidence of the market.

11 – So, going back to C & D above, we can certainly see a dip or two between now and the final top/the final turn. But it may take until 2014 (Q1?) before we get the true onset of a major -25% to -50% bear market in stocks. We also need to be cognizant of the Abe/BoJ developments. Along with the Fed, 'Japan' is one of the two major global risk reward drivers. The ECB response to (core) deflation and the German elections, and weakening Chinese & EM growth and the indebtedness of China & EM, will also matter a great deal.

As of today, my best guess is at least one major dip around Q2/Q3 (we may be in the middle of it now) as we seek more clarity around all of these drivers. My initial line in the sand for this dip is around S&P at 1530 and my major line is at S&P at 1450. A weekly close below 1450 S&P, in particular, would be extremely bearish. But I expect at least one more major buying of the dip come (late) Q3/Q4.I would not be surprised if we saw the S&P not just back up in the high 1600s, but perhaps even a 100 points higher (close to 1800!) before the next major bear market begins. It depends on who says what, and on the levels of extreme speculation and leverage. In other words, did we collectively learn our lesson from the events leading up to and including the global 07/08 crash? My 25+ years in financial markets lead me to believe, sadly, that the answer is almost certainly NO.

What I do know is that the longer we wait and the longer we put our faith in a set of time-inconsistent policies the greater the fallout will be from the forced unwind of the resulting speculative leverage extreme. This would come once the cost and availability of capital (i.e., rates volatility) 'normalizes'. It would follow current policies that seek to force a mis-allocation of capital by mis-pricing the cost and availability of capital. I am confident that view is a correct read of the current state of affairs . And I think the Fed is telling us that they know this too. Ignoring this seemingly transparent signal from the Fed – by, for example, believing that the Fed will not have the courage to taper, or that the BoJ and/or ECB can replace or even out do the Fed over the next year or so - could prove to be extremely dangerous for investors.

We are (I think) in a new volatility paradigm now. Cash will increasingly become King over the next year, even if I do still expect another round or two of dips that get bought during this period. Not getting too sucked in and/or too long illiquidity and/or overly invested in high-beta risks should all be avoided. Nimble tactical trading of risk should be the rule. An increasing focus on de-risking core balance sheet/portfolio should, over the next 12/18 months, hopefully set one up to take advantage of what I think will be another savage bear market in global risk assets over most of 2014.

If cash is too safe, then safety should be sought in the strongest balance sheets, whether one is investing in bonds, in credit, in currencies and/or in stocks. And, as a rule of thumb, (and excluding real house prices in the US) those things that have 'gone up the most' over the past few years are likely to be the things that 'go down' the most – so as well as equities, EM investors also need to be very careful.

[Jun 13, 2013] If There Is A Housing Recovery Then This Chart Can't Be Right

"Home affordability is overstated today when compared to the last cycle." -- Doug Kass

Zero Hedge

Let's start with the oldest economics joke in the book: "assume there is a housing recovery."

Ok, let's assume that.

So, applying logic, wouldn't consumers be actively buying furniture for their brand new homes, instead of furniture sales not only declining for the past year but posting the first negative print since January 2011, and the Great Financial Crisis before that?

... Because we are confused.

And here are some additional thoughts on the issue of the housing recovery via Doug Kass:

I expect last week's "rally" in applications will be short lived relative to history.

Here is why:

Home affordability is overstated today when compared to the last cycle.

The bubble from 2003-2007 was all about "leverage-in-finance", I.e.: popular, exotic loan products of each period, terms, allowable DTI, documentation type, start/qualifying interest rates etc. For example, from 2003 to '05 a 5/1 interest only loan allowed 50% DTI qualifying at interest only payments. From 2006 to '07 Pay Option ARMs allowed 55% DTI at a 1.25% start rate.

This made the "cost" of buying a house HALF of what it is today.

Then when the leverage-in-finance all went away during a short period of time from late-2007 to mid-2008 house prices quickly "reset" to what people could afford to pay on a fundamental basis...30-year fixed mortgages, fully documented, 45% DTI, at a 6% interest rate.

Because 70%+ of homebuyers use mortgage loans -- and the monthly payment trumps the "purchase price" of the house with respect to purchase ability and decisioning -- then it stands to reason that the monthly payment rate of popular loan types of each period relative to house prices would determine whether or not house prices are once again bubbly.

Bottom Line: the popular loan programs during the bubble years -- which allowed for rapid and large house price appreciation -- were not 30-year fixed loans like today. Rather, exotic interest only loans, negative amortizing Pay Option ARMs and high CLTV HELOCs. Thus, comparing the "affordability" of houses using today's 30-year rates and program guidelines vs 30-year rates and guidelines from 2003 to 2007 is apples to oranges.

Based on "cost of ownership" for the 70% who need a mortgage loan to buy, CA houses are more expensive today than from 2003 to 2007. This is why first-timer buyer volume has plunged to 4-year lows recently. And if not for the incremental buyer & price pusher -- the institutional "buy and rent or flip "investor" that routinely pays 10% to 20% over the purchase price / appraised value treating a house like a high-yield bond -- present house prices cannot be supported.

On this basis, back in 2006 a $555k house "cost" as much as a $325k house does today.

[Jun 13, 2013] Bernanke Will Wait to Taper QE, BofA's Meyer Says

Economy remain sluggish. 1% for Q2. Bernanke will wait to taper. Clearly we see that markets are moving just by speculation of what FED will do. There is a lot of active players who will go out for the summers. Market is driven by short time traders. It is just reaction to expectation not by the actions by FED. China is an uncertainty now. Production data, manufacturing data are soft. That is about hedge funds getting out. A lot of dislocation in market as a result. That might be the worst year as for fiscal cuts.
June 13 | Bloomberg Video

Michelle Meyer, senior U.S. economist at Bank of America, and Robert Sinche, global strategist at Pierpont Securities Holdings LLC, talk about the outlook for the U.S. economy, markets and Federal Reserve policy. They speak with Scarlet Fu, Tom Keene and Alix Steel on Bloomberg Television's "Surveillance."

[Jun 13, 2013] Fischer Says U.S. Housing May Be Due for Decline Video

Current drop might be a test run. Bonds will return in Q3. FED want to do it very slowly. By slowing the rate of purchaces (tapering). They want to do it very slowly starting in 2014. We see massive swings, especially in emerging markets. Nobody knows what will happen but FED does not want to increase amplitude of those moves. FED managed to rally the market despite absence of growth. There obviously will be adjustment in bonds as interest rate might change.
June 13 | Bloomberg Video

Bank of Israel Governor Stanley Fischer discusses the U.S. economy, Federal Reserve and Bank of Japan monetary policy, and the shekel.

He talks with Francine Lacqua and Elliott Gotkine on Bloomberg Television's "The Pulse." (Source: Bloomberg)

[Jun 13, 2013] What Bill Gross Is Buying

Bonds are mispriced... You buy bond for 2% upside, but risk is losing capital. People are ignoring default risk.
June 12 | Bloomberg

MD Sass Associates Chairman and CEO Martin Sass discusses bonds with Adam Johnson on Bloomberg Television's "Lunch Money." (Source: Bloomberg)

[Jun 13, 2013] U.S. Treasury Yields `Going Lower,' Shilling Says Video

Yield for 30 bond will remain low as economy remains weak. People were living in a dream work. They went for yield. They will be world. If people look at the reality they will see disconnect. Emerging market and junk might disappoint. People are ignoring default risk.
June 12 | Bloomberg

Gary Shilling, president of A. Gary Shilling & Co. and a Bloomberg View columnist, talks about Federal Reserve policy, the U.S. economy and bond market. He talks with Tom Keene and Sara Eisen on Bloomberg Television's "Surveillance." (Shilling is a Bloomberg View columnist. The opinions expressed are his own. Source: Bloomberg)

Yield for 30 bond will remain low as economy remains weak. People were living in a dream work. They went for yield. They will be world. If people look at the reality they will see disconnect. Emerging market and junk might disappoint.

[Jun 13, 2013] The Age of Deleveraging

Shilling believes that we have a decade or more of continued deleveraging in front of us, and with it a period of lower than expected growth and deflation. "you have to adopt a tactical approach to investing. Take advantage of rallies when you see them, but be prepared to take profits. In a period of deleveraging, you win by not losing."
Amazon.com

Charles Lewis Sizemore, CFA

Shilling is a true contrarian, June 10, 2011

Given the strong rebound in the equity markets since March 2009, "most investors believe that 2008 was simply a bad dream from which they've now awoken," starts Gary Shilling in his newly-released tome on deflation, The Age of Deleveraging. "But the optimists don't seem to realize that the good life and rapid growth that started in the early 1980s was fueled by massive financial leveraging and excessive debt, first in the global financial sector, starting in the 1970s, and later among U.S. consumers. That leverage propelled the dot-come stock bubble in the late 1990s and then the housing bubble."

Dr. Shilling has had a long and wildly successful career as an economic forecaster. Shilling was one of the few voices of reason that foresaw the busting of the Japanese bubble of the late 1980s, and he also correctly forecasted the bursting of the 1990s Internet bubble and the mid-2000s housing and financial sector bubble. I am delighted to find him on "our" side of the inflation/deflation debate.

It can be a bit lonely here in the deflation camp. Despite the fact that official CPI inflation has been tepid at best for the past three years and that retailers still have practically no pricing power, there is widespread belief that high or even hyper inflation is just around the corner due to the Federal Reserve's aggressive quantitative easing.

Essentially, the inflationist camp is making the mistake of believing that the pre-WWII Weimar German Republic is an accurate representation of our own conditions today. Why? Because it is example that is often cited in popular economics books and it is thus fresh on their minds. But a better understanding of history would tell you that 1990s Japan is a far better representation than 1920s Germany. Japan, like America, had a massive real estate and consumer spending bubble fueled by easy credit. Weimar Germany's inflationary spiral was a result of unplayable war reparations. Which would seem a closer parallel to you?

Similarly, the inflationists see confirmation that inflation is "everywhere" when they see prices for fuel and agricultural commodities rising--yet they ignore the fact that food prices have risen primarily due to supply-shock factors (i.e. exceptionally bad harvests in Russia and elsewhere due to extreme weather) and that energy prices are manipulated by both speculators and the OPEC cartel.

They simultaneously ignore the fact that retail prices of services and manufactured goods continue to fall, as do housing prices. Furthermore, the bursting of asset bubbles is virtually always followed by a long period of deflation. Gary Shilling understands this.

Shilling believes that as a result, we have a decade or more of continued deleveraging in front of us, and with it a period of lower than expected growth and deflation.

All About Deflation

On the federal deficit and its implications, Shilling writes,

"With the prospect of huge federal deficits for the next several years, why won't significant inflation follow? After all, excessive government spending is the root of inflation. Still, it's excessive only if the economy is already fully employed, as in wartime. And that's not the case now, nor is it likely in the slow economic growth years ahead. The continuing $1 trillion deficits result from a sluggish economy, which retards revenues and hypes government spending."

Ditto, Gary. Dr. Shilling, though not a demographic expert by any stretch, does understand what demographic trends imply. On the Boomers he writes,

"A saving spree in the next decade will also be encouraged by [Baby Boomer] saving. Those 79 million born between 1946 and 1964 haven't saved much, like most other Americans, and they accounted for about half the total U.S. consumer spending in the 1990s. But they need to save as they look retirement in the teeth... Postwar babies need to save not only to finance retirement but to repay debt.

The Fed's 2007 Survey of Consumer Finance found that 55 percent of households with members aged 55-64 had mortgages on their abodes and 45 percent carried credit card balances."

Yet while he sees the importance of demographics, he also misunderstands them. Shilling falls into the trap that so many others--Dr. Jeremy Siegel and Fed Chairman Ben Bernanke among them--fall into. There is this persistent belief that the retirement of the Boomers will cause a labor shortage that will lead to severe inflation. As Shilling writes,

While this argument might make intuitive sense at first, it is fundamentally flawed. Outside of medical care and select few other industries, spending falls on virtually all other consumer items in retirement. Yes, the elderly still have to eat. But they buy little else that contributes meaningfully to inflation.

This is not purely an academic argument. Japan has been struggling with an aging and even declining population for years now. And Japan would love to have an inflation problem. Instead, deflation persists.

You see, supply is not the problem. In the post-industrial information and high-tech economy, supply takes care of itself. Is it expensive to hire a housekeeper? No problem, buy an iRobot Rhoomba to vacuum the carpet while you're at work. Is your tax accountant expensive? No problem, fire him and buy TurboTax.

In the modern economy, automation and technology can make a good deal of human labor obsolete. We bring in migrant labor to harvest crops because migrant labor is cheap. But if the price of migrant labor got high enough, rest assured that California farmers would use robots to pick strawberries. This is not idle conjecture; their counterparts in Japan already do.

Demand will determine if we have inflation or deflation, not supply.

Concluding Remarks

BloombergBloomberg

In The Age of Deleveraging, Dr. Shilling has published a very good and very convincing body of work. A world economy dominated by deleveraging is a very different animal than a world economy dominated by an accumulation of debts.

As investors, you have to position your portfolios accordingly and -- I want to be firm on this point -- you have to adopt a tactical approach to investing. Take advantage of rallies when you see them, but be prepared to take profits. In a period of deleveraging, you win by not losing.

Paul N.

Interesting but not a slam dunk argument, December 21, 2010

I have mixed feelings about this book. I suspect that you will either love it or hate it if you have strong predictions of deflation or inflation, respectively. For the rest of us who aren't sure and are reading around, this is a good read but isn't entirely convincing.

Let me just start by saying that Shilling points out in a number of places in the book that he is a top-down economist, predicting first the macroeconomic environment with interest rates, and then moving down to their effects on individual sectors. My trouble with this approach is that top-down theories are interesting to read about, as they lay out a framework for thinking about the economy and "what-if" scenarios... but they're known to be unreliable at predicting what will happen. This is probably why Shilling spends so much time at the beginning of the book tooting his own horn about his past predictions. Nonetheless, I hear that he has made a number of gravely inaccurate predictions as well - see for example his book on deflation from the late 90s, I believe. Anyway, past performance, even if perfect, is no guarantee of future results. (As an aside, the top-down, as opposed to the fundamental bottom-up, approach introduces many data points that can significantly skew the end result by compounding small errors along the way.

Consider that many good investors - people who actually intend to make money, as opposed to economists and academics -, like the Buffet clan, continually reiterate that no one can predict the markets, even with perfect economic information.)

Which brings me to my point: it seems to me that the case Shilling lays out isn't as strong as it may seem, even if there is a lot of supporting "evidence. ..." I feel much of this evidence is circumstantial; it's all good in isolation, but taken together it doesn't really give strong proof that the world is in a deflationary mode. Here's how he lays out the book. In general, he devotes much of the book to a history of the market and various economic environments. Now I admit it's a truly fascinating read for economic history buffs. He then launches into a very good conversation about P/E ratio compression.

He makes the common argument, which I entirely buy, that bear markets are often bear because P/Es continually compress more than earnings can grow, putting pressure on the market. Fair enough. He incorporates various comments about interest rate regimes, the earnings yield on bonds vs stocks over the last 30 yrs, and a broad conversation about what that means. He also talks about foreign countries and their economic policies, notably China and the Chinese growth myth. His conclusion, then, due to compressing P/Es and various macroeconomic factors, including low interest rates, is that deflation will rein supreme over the next 10 yrs. He then makes some investment recommendations.

All this data and analysis makes for very interesting reading, but the sum does not necessarily add up to deflation. Possibly, it adds up to a bunch of stagflation, maybe some low growth, and some p/e compression. But he somehow continually ends up with a number of 2-3% deflation per annum over 10 years that seems unjustifed by the large amount of "evidence." Along these lines, he is obsessed with the long bond and is predicting much further appreciation in bonds, stating for example that the 3.x% yield can still go down to 2.x%, for an almost 20% appreciation. However, just recently, and shortly after publication of the book, the yields on the long bond rose substantially after QE2, and there is great argument in the community about what this rise means. He ends the book by issuing some investment recommendations that seem very reasonable given his deflation hypothesis.

As someone who is on the fence and looking for more info with an open mind, this book did not convince me about the future of deflation - not even whether deflation exists now or not. I think I would have liked to have seen some more specific analysis of how QE is working (or not working) and why it's doing what it's doing compared to other inflationary or deflationary periods. But providing me with general scenarios of history and a jump to a conclusion of deflation is, while highly interesting from an academic perspective, not good enough for me to put money on, which is ultimately the point of the book.

All in all, this was an interesting read, a good history, and good theory; but an amalgam of lots of data does not necessarily end in a cogent, well-constructed argument, and it left me questioning his argument.

All this data and analysis makes for very interesting reading, but the sum does not necessarily add up to deflation. Possibly, it adds up to a bunch of stagflation, maybe some low growth, and some p/e compression. But he somehow continually ends up with a number of 2-3% deflation per annum over 10 years that seems unjustified by the large amount of "evidence." Along these lines, he is obsessed with the long bond and is predicting much further appreciation in bonds, stating for example that the 3.x% yield can still go down to 2.x%, for an almost 20% appreciation. However, just recently, and shortly after publication of the book, the yields on the long bond rose substantially after QE2, and there is great argument in the community about what this rise means. He ends the book by issuing some investment recommendations that seem very reasonable given his deflation hypothesis.

As someone who is on the fence and looking for more info with an open mind, this book did not convince me about the future of deflation - not even whether deflation exists now or not. I think I would have liked to have seen some more specific analysis of how QE is working (or not working) and why it's doing what it's doing compared to other inflationary or deflationary periods. But providing me with general scenarios of history and a jump to a conclusion of deflation is, while highly interesting from an academic perspective, not good enough for me to put money on, which is ultimately the point of the book.

All in all, this was an interesting read, a good history, and good theory; but an amalgam of lots of data does not necessarily end in a cogent, well-constructed argument, and it left me questioning his argument.

Jackal

Specific long term recommendations for 2011 given, December 15, 2010

I am not familiar with Schilling but he manages money and writes a newsletter from a quick perusal of his website. However, the book states that he does not yet manage money (but he is already a bit old). The book is really in three parts:

  1. The first third of the books deals with recommendations the author made to his clients roughly from 1988 to 2008. Clearly the author is a bit full of himself here. That is allowed because he seems to have made some good calls. I suppose the author needs to establish his track record somehow. However, most people wouldn't find this section terribly interesting. At least the author has made a decent job editing the text, which presumably originates from his newsletter. However, the section might be interesting for life-long students that want to understand the author's thought process in more detail. For those a key problem is that he only discusses his successful predictions. Maybe he has loads of predictions that didn't pan out. So while there is value in history, this section is problematic.
  2. The second third deals with themes that currently preoccupies the author. We are not going to see anything like the bull market which lasted from 1982 to 2000. Instead we'll get deflation. This discussion is quite interesting. However, this is a contrarian viewpoint so I would really have liked more depth and crispness in the arguments. He should also address the contents of his 1998 book called "Deflation", because if he has called "deflation" for over a decade her will lose credibility.
  3. The final third deals with investment recommendations for the next decade. I'm not terribly impressed by this section. Some of these recommendations are a bit naive, like don't buy antiques because they're illiquid.... Other ideas are clearly more serious, like buy consumer staples stocks. The nagging question is that I don't know if the author still keeps his best ideas exclusive to his newsletter subscribers. I would have liked the author to raise this issue himself.

The language is not very technical at all. I think most people who end up reading my review can easily read the book. Personally I find the book very verbose. He is kind of writing to a not-so-knowledgeable wealthy person. If you have some basic economics courses under your belt, some of the book will feel quite tedious.

Judging the quality of non-fiction is different from judging a novel. I really don't like the verbose style of writing, so style is equivalent to two stars. However, it is really the insights and quality of recommendations that is the important. For problems listed above that is three or four stars. So in conclusion three stars (i.e. useful if you read many books, but certainly not your first choice on the topic).

Oregonian

Old wine in new bottle August 19, 2011

Gary Shilling has been predicting deflation for the better part of two DECADES now. In the 1990s he wrote books predicting that deflation was just round the corner. A dozen inflationary years later, he is still singing the same tune. As they say, even a stopped clock will be right twice a day. He lists out his great calls over the decades. How about listing the not-so-great calls also?

Gary is most likely wrong on his recommendation for investing in Treasurys and bonds, because with interest rates at historic lows, bond prices have nowhere to go but down in the next 10 years. And he is most likely wrong on the US dollar also. Except for short-lived bear-market rallies, the US Treasurys and US Dollar will remain on a long term down trend, as will US stocks until the end of this decade.

That being said, there is some great information in the book, and some great numbers. I do agree with his recommendation to invest in rental properties. Below I quote some of his statements from the "Rent versus Buy" section in Chapter 12.

Over time, houses have sold for about 15 times (annual) rental costs. But that was in the post-World War II years when owners of rental properties expected inflation to enhance their 6.7% return - before the cost of income tax-deductible maintenance and property taxes. When house price appreciation was not expected in the aftermath of the 1930s, the norm for (annual) rentals was 10% of the house's value. In the coming deflationary years, houses and apartments may sell for closer to 10 times (annual) rentals than the 15 times norm, much less than the 20 times in the housing boom days.

Gary's analysis has shown that even with tax deductibility of mortgage interest, renting a single-family house or apartment is cheaper than home ownership, absent price appreciation. One can only imagine how things will be if the mortgage interest deduction is removed (seriously being advocated by politicians in Washington DC).

Here are some of the investments he suggests to avoid in this decade: - Commodities. - Big ticket consumer purchases. - Banks and similar financial institutions. - Credit card and other consumer lenders. - Conventional home builders and suppliers. - Commercial real estate. - Developing country stocks and bonds. - Japan.

Here are some of the investments he suggests to buy in this decade: - Treasurys and other high-quality bonds. - US dollar. - North American energy. - Health care. - Rental apartments. - Income producing securities.

12 of 12 people found the following review helpful 5.0 out of 5 stars Thought-provoking look at where the economy is likely heading April 14, 2011 By SCJ Format:Hardcover|Amazon Verified PurchaseDr. Shilling quotes Mark Twain in Chapter 1: "History doesn't repeat itself, but it does rhyme." He explains that he believes human nature changes slowly, if at all, over time which leads him to be able to make great economic calls. (Some reviewers have been troubled by his description, "great calls." I viewed them as I would a hallway of accolades leading me to a conversation with a wise economic thinker). As Sir John Templeton noted, "The four most dangerous words in investing are, "this time it's different."

So while the majority believe that an increase in the money supply will lend itself to an inflationary challenge, Dr. Shilling believes that money velocity will continue to be muted and the supply of goods, not money, will dictate the direction of prices. He espoused this belief in two of his previous books in the nineties and believes that the global recession of 2007/2008 is the tipping point. To those who disagree, he presents a strong case.

His research indicates that, in general, war is a precursor for inflation because it saps up the excess productive capacity. When the nation(s) are at peace, deflation reigns. While acknowledging that the United States has been in a war of sorts, the War on Terror, he believes that it may wind down before reaching Cold War proportions. If that happens and no other wars rise up in its place, he is confident that capacity will dictate our economic path. Too much of a good thing with too few buyers putting them (the buyers) in command.

And these buyers are not buying like they once were. The savings rate in the US is climbing again for the first time since it began its steady decline in the early eighties. He believes that over the next decade we will again see the savings rate reach double digits here.... That implies a steady increase in the savings rate of about 1 percent per year (it had fallen to 1 percent from 12 percent before it began to reverse course). Incidentally, he notes that we have a long way to go to get back to the debt to after-tax income ratio we had in the early 1980s. We were at 122 percent in 2010 -- almost double where it was back then!

In addition to foretelling a significant rise in the savings rate, he also notes that credit will be much tighter in the years ahead. His logic for this is that the bankers of yesterday's excess will become the bankers of tomorrow's thoughtfulness. There will be no more "no-doc" (liar) loans. Only the best credit risks will be extended the courtesy of borrowing and they will graciously decline since they are reeling from setbacks in the values of their homes and the uncertainty surrounding their investment portfolios. We will become a nation of risk managers!

How important will this turnabout of the American buyer of first and last resort be for the rest of the world? Dr. Shilling points out that just a 1 percent decline in US consumer spending whacks nearly three times that much off of our imports, their exports. With US moms and pops a full one-sixth of global GDP, the rest of the world will feel the change in thinking and spending.

So with exports from around the globe adversely affected, will that open an opportunity for the US to ride the back of a weak dollar and become a stronger exporter? Not according to the good doctor. He actually sees a strong dollar (the best of a bad lot and still no other option for a global reserve currency) and a very limited link between the value of the buck and real imports/exports. On the other hand, his statistical evidence points to a very strong correlation between GDP and imports/exports.

For those that believe deflation is impossible in a fiat currency system, he points to Japan as an outstanding example. Their economic output has been among the top two or three for decades and yet they have experienced a domestic demand problem tied to the deleveraging that began there in 1989. So while we fret about the threat of rising prices, Dr. Shilling believes that we will start to see falling prices in the years ahead. Little by little, the reality of deflation will set in and people will start to expect to pay less in the future and not view today's purchase as a store of value. He points to the likes of Wal-Mart lowering the prices on thousands of items in April 2010 as a US example and Ireland, Spain, and Portugal price declines in 2009 as an international one.

So while the monetarists under the spell of Milton Friedman continue to wax poetically on the dangers of a pumped up money supply, Dr. Shilling continues to croon his tune of money in the vaults doesn't matter. Show me the M2 to reserves (was 70 to 1 in early 2007 but less than 1 to 1 for the $1 trillion in new reserves as of March 2010) and I'll show you a picture of a bunch of fat-cat bankers sitting around the table smoking their stogies and counting their Bennies (Franklins, that is). There's no business like show business as bankers have learned the hard way. Their exotic Italian and British cars have been replaced with Volvos and SUVs as they have gotten back to the business of banking. They now actually read the crash tests before they buy (or loan) now. The next wreck they get into may find Uncle Sam's body shop closed. That's a chance they would rather not take -- especially since Uncle Sam bought into the businesses and will now be lending a hand in deciding what cars little Johnnie and Susie should be driving on the dangerous highways and by-ways of an international economy teetering on the brink of failure.

So with the US consumer pulling back, the banks pulling back, and Uncle Sam pulling back, how are prices going to push ahead? Dr. Shilling concludes that they won't. After reading his book carefully you may not agree but I wouldn't bet on it. Read more › Comment | Was this review helpful to you?Yes No 11 of 11 people found the following review helpful 4.0 out of 5 stars Has a really interesting chapter on the elements of deflation / inflation August 20, 2012 By Gwendally Format:PaperbackI heard Gary Shilling speak at a conference last month and his discussion of demographics was interesting and insightful so I sought out his most recent book: "The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation". This book was 500 pages long. Five hundred. I told B. I felt like I was taking a graduate level course in economic forecasting. I'm not even sure how to integrate this book into my body of knowledge, but here's my attempt.

The first 125 pages or so are on the subject of why we should listen to him. Each chapter is about triumphs in prognostication he had over the years, his "Seven Great Calls" when he predicted major economic changes. I found the history to be occasionally interesting and skimmed the chapters looking for what he considered the markers of change. The main thing he appears to do is to really dive down into the STORY that the economic indicators are telling. Look at the big picture: where are the demographics? What is the existing inventory level? What makes SENSE to happen next? I found his methods to be plausible and in line with the way I look at the world, too. Each of the many threads emerges into a tapestry if you stand back and look at the big picture. This is why I read so many threads and go for long walks to let it gel. I'm not Gary Shilling, but I don't have to be if I can listen to people who see the big picture.

The central premise of this book is that Gary Shilling sees slow growth ahead. Period. He stands with Mish Shedlock in the deflation camp (although he never mentioned Mish Shedlock.) Instead, he takes on more esteemed heroes of mine. He pooh poohs Peak Oil (we'll switch to natural gas, he says, and doesn't sound cornucopian when HE says it....) He dismisses Milton Friedman's definition of inflation "as always and everywhere a result of [excess money.]" What is money, asks Shilling? If you have a $10,000 credit line on a credit card - whether you use it or not - isn't that money? American Express cards have no limits on them... what does THAT mean to the money supply? Instead he talks about there being seven varieties of inflation/deflation:

1. Commodity 2. Wage-price 3. Financial asset 4. Tangible asset 5. Currency 6. Inflation by fiat 7. Goods and services.

I have to admit, I really liked having seven dimensions to this issue. It is far more satisfying that Friedman/Martenson/Austrian versions. It fits reality better. It's hard to hold them all in my head at once, and they often move in tandem, but they actually are NOT identical and our current world situation has allowed the effects of different parts to be teased out better. If I ever re-read this book it'll be for Chapter 8: "Chronic Worldwide Deflation". This is where he makes the case that he isn't just some cranky old man moaning about how things were better when he was young (and get off my lawn, kid!)

Chapter 9 talks a bit about what help we can expect from the Fed, IMF and Congress. It's a short chapter. (Synopsis: none.)

Chapter 10 is about the outlook for stocks. The short version there is that he expects very low earnings going forward. He pretty much stayed away from the question of whether to buy index funds or managed portfolios in a confusing way, by saying managed portfolios will do better, except most of the time they don't. He is not a fan of long-term buy and hold and hates asset reallocation strategies, too, thinking it's foolish to sell your winners to buy your losers. Far better to just buy winners low and sell them high. (D'oh, why didn't *I* think of that?) So, all in all, this chapter was pretty worthless to me. (Because every book that says, "first, start by buying a high quality stock cheap right before it goes up" is similarly worthless, although is certainly fine advice.)

Chapter 11 was his explanation of twelve investments to sell or avoid. This is worth elaborating on:

1. Big Ticket consumer purchases (because people will be more austere and expect prices to fall so they'll wait to buy.) 2. Consumer lenders (who are about to find out that "deleveraging" means that they don't get paid back) 3. Conventional home builders (demographics suck) 4. Collectibles (there's a distinct shortage of greater fools) 5. Banks (see #2) 6. Junk securities (did you notice how the lenders fared in #2 and #5) 7. Flailing companies (uh, when WERE those a good idea?) 8. Low tech equipment producers (becoming obsolete and fungible at the same time) 9. Commercial real estate (low growth = high vacancies) 10. Commodities (they're being played by speculators) 11. Chinese and other developing country stock and bonds and 12. Japanese securities.

Japanese securities were because Japan is a stagnant aging population with a serious debt problem whose heroes all die in kabuki plays (or something like that.) But the Chinese and other developing country stocks and bonds was because of currency risk and because the economy is still too dependent on exports to the First World. Until a country develops a sizable middle class that can purchase its own GDP the economy is too tied to ours, he claims, and so you just end up with the currency risk that will eat up any growth. He also thinks that China has been stimulating itself into creating too much capacity that they aren't yet using. In other words, he's expecting deflation there, too.

Instead, he suggests you buy:

  1. Treasuries and other high-quality bonds. (This guy loves him some long bonds. He had a unique voice on that subject and I should probably reread this section because I find myself really confused how the Long Bond could be a good investment in a 0% world. He appears to be expecting the interest rate to go still lower!)
  2. Income-producing securities (sort of the opposite to #7 above, I mean, duh.)
  3. Food and other consumer staples (because they won't be subject to people putting off buying them.)
  4. Small luxuries (fluffy toilet paper? Watches? Cosmetics?)
  5. The U.S. dollar (he made the case that no one else has anything better.)
  6. Investment advisers and financial planners (Wuhoo! He makes a case that we're worth our keep.)
  7. Factory-built housing and rental apartments (so, buy those REITS but make sure they aren't commercial, merely residential housing. Uh, good luck with that.)
  8. Health care. (Demographics, government unicorn funding, the thing people want above all else) 9. Productivity enhancers (because everyone wants to run their business without actual people)
  9. North American energy (because we're massive hogs who care not one whit about climate change and want our air conditioning RIGHT THIS MINUTE without having to negotiate with Iran for oil. Sounds like a solid bet to me.)

The pieces I find myself thinking about in new ways are 30 year treasury bonds (it comes as a surprise to me that someone LIKES those) and that emerging country growth won't be as solid a play as I was thinking. He also gave me some instruction on how to think about the Big Picture, and my brain may be ready for more on that subject after I rest up from reading this book. It was tough going at times, and he occasionally veered into stories about his days meeting with captains of industry or highly placed officials. I guess he's allowed. He's pretty proud of the job he did replumbing the house he bought in 1968 and still lives in. I found myself liking the man, much the way I like Jack Bogle and Bud Hebeler. Overall, recommended, but be prepared to skim some parts.

Gary Shilling is one of the bears December 12, 2010 By Y JIN Format:HardcoverGary Shilling called the 2008 bear market. Like most other bears he just kept calling it, in 2001, 2002, 2003, 2004, 2005, 2006, 2007, and 2008. Boom! They got it. All bears declared victory. But all bears missed the big run up. Now they all missed it again. Reading this book will not make anyone a penny.

[Jun 13, 2013] Bonds Burned By Ugly, Tailing 30 Year Auction

06/13/2013

Following the 3 and 10 year auctions in the last two days, today's 30 Year $13 billion reopening completed the trifecta of ugliness, pricing at a surprisingly wide 3.355%, or three whole basis points above the When Issued, which traded at 3.324% at 1pm - the biggest tail in a long time. It was also the highest yield for a 30 Year since March 2012.

The internals were not pretty either - the Bid To Cover coming at 2.47, well below the TTM average of 2.59 but hardly the massive BTC collapse that we saw in yesterday's 10 Year.

And just like yesterday, the Directs ran for the hills taking down just 8.5%, compared to 15.2% in the past year average, Indirects taking 40.2% and 51.3% or so left for the Dealers who will be happy to stock up on some more collateral.

Wounded Heart by Bill Gross

In the process of reaching and stooping, prices on financial assets have soared and central banks have temporarily averted a debt deflation reminiscent of the Great Depression. Their near-zero-based interest rates and QEs that have lowered carry and risk premiums have stabilized real economies, but not returned them to old normal growth rates. History will likely record that these policies were necessary oxygen generators. But the misunderstood after effects of this chemotherapy may also one day find their way into economic annals or even accepted economic theory.

Central banks – including today's superquant, Kuroda, leading the Bank of Japan – seem to believe that higher and higher asset prices produced necessarily by more and more QE check writing will inevitably stimulate real economic growth via the spillover wealth effect into consumption and real investment. That theory requires challenge if only because it doesn't seem to be working very well.

...Granted, some investors may switch from fixed income assets to higher "yielding" stocks, or from domestic to global alternatives, but much of the investment universe is segmented by accounting, demographic or personal risk preferences and only marginal amounts of money appear to shift into what seem to most are slam dunk comparisons, such as Apple stock with a 3% dividend vs. Apple bonds at 1-2% yield levels.

Because of historical and demographic asset market segmentation, then, the Fed and other central banks operative model is highly inefficient. Blood is being transfused into the system, but it lacks necessary oxygen.

In addition, there are several other important coagulants that seem to block the financial system's arteries at zero-bound interest rates and unacceptably narrow "carry" spreads:

  1. Zero-bound yields deprive savers of their ability to generate income which in turn limits consumption and economic growth.
  2. Reduced carry via duration extension or spread actually destroys business models and real economic growth. If banks, insurance and investment management companies can no longer generate sufficient "carry" to support employment infrastructures, then personnel layoffs quickly follow. With banks, net interest margins (NIM) are lowered because of "carry" compression, and then nationwide retail branches previously serving as depository magnets are closed one by one. In the U.K. for instance, Britain's four biggest banks will have eliminated 189,000 jobs by the end of this year compared to peak staffing levels, reports Bloomberg News. Investment banking, insurance, indeed the entire financial industry is now similarly threatened, which is leading to layoffs and the obsolescence of real estate office structures as well which housed a surfeit of employees.
  3. Zombie corporations are allowed to survive. Reminiscent of the zero-bound carry-less Japanese economy over the past few decades, low interest rates, compressed risk spreads, historically low volatility and ultra-liquidity allow marginal corporations to keep on living. Schumpeter would be shocked at this perversion of capitalism, which is allowing profits to be more than "temporary" at zombie institutions. Real growth is stunted in the process.
  4. When ROIs or carry in the real economy are too low, corporations resort to financial engineering as opposed to R&D and productive investment. This idea is far too complicated for an Investment Outlook footnote – it deserves expansion in future editions – but in the meantime, look at it this way: Apple has hundreds of billions of cash that is not being invested in future production, but returned via dividends and stock buybacks. Apple is not unique as shown in Chart 1. Western corporations seem focused more on returning capital as opposed to investing it. Low ROIs fostered by central bank policies in financial markets seem to have increasingly negative influences on investment and real growth.
  5. Credit expansion in the private economy is restricted by an expanding Fed balance sheet and the limits on Treasury "repo." Again, too complicated for a sidebar Investment Outlook discussion, but the ability of private credit markets to deliver oxygen to the real economy is being hampered because most new Treasuries wind up in the dungeon of the Fed's balance sheet where they cannot be expanded, lent out and rehypothecated to foster private credit growth. I have previously suggested that the Fed (and other central banks) are where bad bonds go to die. Low yielding Treasuries fit that description and once there, they expire, being no longer available for credit expansion in the private economy.

Well, there is my still incomplete thesis which when summed up would be this: Low yields, low carry, future low expected returns have increasingly negative effects on the real economy. Granted, Chairman Bernanke has frequently admitted as much but cites the hopeful conclusion that once real growth has been restored to "old normal", then the financial markets can return to those historical levels of yields, carry, volatility and liquidity premiums that investors yearn for. Sacrifice now, he lectures investors, in order to prosper later.

Well it's been five years Mr. Chairman and the real economy has not once over a 12-month period of time grown faster than 2.5%. Perhaps, in addition to a fiscally confused Washington, it's your policies that may be now part of the problem rather than the solution. Perhaps the beating heart is pumping anemic, even destructively leukemic blood through the system. Perhaps zero-bound interest rates and quantitative easing programs are becoming as much of the problem as the solution. Perhaps when yields, carry and expected returns on financial and real assets become so low, then risk-taking investors turn inward and more conservative as opposed to outward and more risk seeking. Perhaps financial markets and real economic growth are more at risk than your calm demeanor would convey.

Wounded heart you cannot save … you from yourself. More and more debt cannot cure a debt crisis unless it generates real growth. Your beating heart is now arrhythmic and pumping deoxygenated blood. Investors should look for a pacemaker to follow a less risky, lower returning, but more life sustaining path.

The Wounded Heart Speed Read

  1. Financial markets require "carry" to pump oxygen to the real economy.
  2. Carry is compressed – yields, spreads and volatility are near or at historical lows.
  3. The Fed's QE plan assumes higher asset prices will revigorate growth.
  4. It doesn't seem to be working.
  5. Reduce risk/carry related assets.

Bill Gross All Assets Are Risky, But I'm Buying Treasuries

Jun 11, 2013

When PIMCO's Bill Gross declared last month that "the secular 30-year bull market in bonds likely ended" on April 29, it was the shot heard around the fixed-income world.

But many people wrongly assumed that dramatic declaration meant Gross was turning outright bearish on bonds. As the manager of the $293 billion Total Return Bond Fund explains in the accompanying video, that isn't necessarily the case.

"Investors should look at the yield on at 10-year…and see whether that legitimately in this environment provides some type of return," Gross tells me. "Six weeks ago at 1.6% [the 10-year yield] was more than skinny. Where we are now, [over] 50 basis points higher, is a much better situation than where we were then."

In other words, price matters, and the recent drop on Treasury prices – which move in opposition to yields – has made Gross a buyer again, at least in recent weeks as the yield moved above 2% to this morning's 14-month high of 2.27%.

This is a "decent environment to earn your carry," Gross says. "The Total Return Fund...is not as vulnerable as investors believe it to be as witnessed in May," he said, a time when the fund fell 1.9%, its biggest monthly loss since September 2008, and its first month of outflows since 2011.

Related: QE "Quicksand" Puts Bernanke in a Corner, Says PIMCO's Gross

By the same token, Gross isn't wildly bullish either, reiterating PIMCO's house view that we've entered a 'new normal' of sluggish economic growth and low returns.

"Investors are going to have to know [yields are] being repressed and what they're getting for their money is not what they should be getting," he says. "But it doesn't mean they should go home and put it in a mattress."

Related: Fed Will Taper Later This Year, But Not For Obvious Reasons: Bill Gross

And with "safe carry," Gross seeks to draw a distinction between PIMCO's Total Return Fund and other speculators, whom he says are in danger.

"The whole world…the credit space, high-yield space, equity space, currency space – is enamored and hooked on carry, in fact levered carry," he says. "Some of this and the funding of it is vulnerable based on the yen carry trade. It looked good for a while but when the yen goes up in price vs. down and JGB yields go up as opposed to down then funding of this fabulous carry trade presents a risk for levered trades...there's more risk now in all assets than there was before."

Repeating something he's written (and Tweeted), Gross declares: "Never have investors reached so high for so little return [and] stooped so low for so much risk."

Related: Equity Prices Are Artificially High - It's Time to Take Profits: PIMCO's El-Erian

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo! Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com

[Jun 11, 2013] Goldman Sees Bull Run Over as Returns Trail Stocks Commodities

Bloomberg

Commodities are trailing equities for the longest stretch in almost 15 years as Goldman Sachs Group Inc. and Citigroup Inc. predict the end of the decade-long bull market even as the global economy expands.

The Standard & Poor's GSCI Spot Index of 24 commodities lagged behind the MSCI All-Country World Index for six months, the longest stretch since 1998. Hedge funds cut combined bullish bets across 18 U.S. raw-material futures by 51 percent from a 16-month high in September and are bearish on six of them. Commodities will return 1.6 percent in a year as losses in agriculture and precious metals diminish gains from energy and industrial metals, Goldman said last month.

Enlarge image Goldman Sees Bull Run Over as Returns Trail Stocks Goldman Sees Bull Run Over as Returns Trail Stocks Goldman Sees Bull Run Over as Returns Trail Stocks Daniel Acker/Bloomberg Corn grows in a field in Tiskilwa, Illinois.

Corn grows in a field in Tiskilwa, Illinois. Photographer: Daniel Acker/Bloomberg Blankfein Most Afraid of `Deflationary Period' 22:26 May 2 (Bloomberg) -- Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., talks about the U.S. economy, Federal Reserve monetary policy and the European financial crisis. He speaks with Investment Company Institute's Paul Schott Stevens in Washington. (Excerpt. Source: Bloomberg) Sponsored Links Planning for Retirement? $500,000 portfolio? Download the guide by Forbes Colu... www.FisherInvestments.com iShares ETFs for Your Po... Get Information on Tax Efficient, Low Cost ETFs to He... www.ishares.com Whitewater cloud storage... Improve DR readiness, eliminate tape and streamline I... www.Riverbed.com/White... Buy a link Investors pulled a record $23.3 billion from commodity funds this year as global equities attracted $182 billion, according to EPFR Global, which tracks money flows. Prices that more than doubled in 10 years spurred expansions at mines, farms and oil fields. Gluts are emerging as the International Monetary Fund predicts global growth of 3.3 percent this year, from 3.2 percent in 2012. The group cut last week its estimates for China, the top consumer of metals, grains and energy.

"There are times when you probably should be avoiding commodities, and I think this is one of them," said John Stephenson, who helps oversee about C$2.7 billion ($2.61 billion) at First Asset Investment Management Inc. in Toronto. "Anytime you have a whole lot of inventory and visible supply, prices are going to be under pressure. The real issue for commodities is the source of demand, China, is weak."

[Jun 11, 2013] What Investors Should Really Fear - and What They Shouldn't By Michael Santoli

Michael Santoli

A first step in treating post-traumatic stress disorder is to compile a "hierarchy of fears" to be surmounted, from the least scary to most terrifying. Investors have undergone their share of financial trauma over the past five years, and remain twitchy with flashbacks. In the past month, especially, alternating and confusingly contradictory worries have come as world stock and bond markets struggle to assess potential threats.

There are two principal Big Fears, which have waxed and waned in various combinations this year.

First, that global economic growth – already negative in Europe, slowing in China and sagging in most emerging economies – will weaken further. The second is the worry that the Federal Reserve will soon curtail its volume of "quantitative easing" asset purchases, diminishing one force – both perceived and actual – compressing interest rates and supporting financial markets.

Here, in order from least to most scary, is how the various investor fear pairings stack up, along with a word about what exactly investors should be most afraid of:

Too much of a good thing. Not so scary at all. Until markets get bubbly and pop, this is the heads-I-win-tails-you-lose scenario in which the U.S. economy is seen to be accelerating at the same time the Fed is firmly committed to continuing its extreme easing efforts. This is largely what prevailed in the earlier months of this year, when stocks were levitating, Treasury bond yields were compressed and corporate-junk bond rates sank to record lows.

One way of looking at this condition is that the Fed's medication for a convalescing economy – $85 billion of bond buying a month – was not thought to be needed as badly, and the drugs were increasingly being used recreationally.

Fed officials did not want overconfident financial markets to continue barreling higher and under-pricing risk, so they began sending signals that their intentions for QE were unclear. The Fed dreads a situation in which bubbly stock and bond markets demand a major tightening move to fight excessive speculation before the real economy is "ready" and on a sturdy trend of job growth.

In a calculated February speech, Fed governor Jeremy Stein pointedly noted "a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit," a coded warning that investors should not get too comfortable in thinking markets could only strengthen.

That overconfidence has been clipped back. Economic numbers have softened – especially in the rest of the world – and the Fed's eventual cutback on QE has investors' attention.

Stronger economy, Fed "tapering." This is probably most professional investors' baseline expectation, justified to some degree by Fed rhetoric. The decent-to-good job numbers the past two months, and firmer housing and auto markets appear to put the domestic economy on the expected pace of improvement, leaving Wall Street to handicap the ballyhooed "tapering" of QE, perhaps later this year.

While it seems frightening to the extent one believes the markets have largely (or to some, entirely) been lifted by central-bank policy, after a nervous adjustment period it would probably be among the better outcomes. Less Fed help for the "right" reasons, accompanied by moderately higher interest rates, should be palatable if the economy holds together.

Economic downturn, steady Fed. Obviously, this is the opposite of the above scenario. It's probably a bit underappreciated as a risk, but could be treacherous even with a still-generous Fed. Profit margins are elevated, stocks are not demonstrably cheap, and an unexpected "growth scare" would leave the market vulnerable to at least a nasty correction.

The prospect of another downward wiggle in the economy is exactly why the Fed will not be pre-emptive in "tapering." Fed officials are fixated on the "fiscal drag" of lower federal spending and are also agonizing over how to stage-manage any reduced QE so markets don't instantly extrapolate "less" all the way to "zero." Of course, Bill Gross of Pimco brings up another wrinkle, suggesting on Yahoo! Finance's Daily Ticker that Fed tapering might become necessary simply because lower deficits will mean a shortage of Treasuries.

Some sort of "financial accident." The combination of plentiful cheap money, crowded macro trades, leverage, an emerging-market bust and policy confusion is combustible. These things can't be predicted easily, but the increasingly worrisome action in emerging economies and jumpy world markets – with their familiar rhythms and correlations disrupted – fed the sharp, brief financial panics of the late 1990s.

Alarmism helps no one, and the U.S. stock market has served as something of a global safe haven as these threats have mounted. But such a scenario seems more worth the worry than the chance of a well-telegraphed dialing-down of the money flow from a still-generous Fed that sees things getting better.

Central banks ultimately prove impotent. This is a daunting possibility, one that at least has been hinted at in the way markets have reacted to signs that policy makers can't, or won't, stoke more growth and pacify markets.

Tuesday's messy selloff in Japanese stocks and bonds after the Bank of Japan took no specific action to damp volatility in the government-debt market there suggests an acute sensitivity to signals about central bankers' commitment and ability to implement stimulus in an orderly way.

Mary Catherine Sinclair of Strategas Research asks in a new report whether easier monetary policy is "being 'crowded out' by the sheer prevalence of it globally. It is just one tool at policymakers' disposal and much of the power from it might already be gone." Some 21 central banks globally have eased this year, after 28 did last year to stem disinflation and recharge growth.

While it's not yet possible to declare this is going on for sure, perhaps the ultimate terrifying prospect would come if the Fed effectively says, "We've done what we can," reduces QE despite limp inflationary pressure and leaves the economy on its own before it's clear it can sustain a decent expansion.

This is far from the likeliest narrative, at least not for this year. Yet if it were to appear more probable, it would prompt cold night-sweats among the investor class. A Fed backing away in resignation – or so as not to seem entirely powerless to accelerate growth – and essentially reloading ammunition for a future downturn would not be friendly to risky assets.

[Jun 04, 2013] Analysts Are Not Paid to Make Stock Recommendations

The Big Picture

News flash: Analysts exist to generate investment banking business and trading commissions; they are not here to assist you in making stock buys or sells.

That is the conclusion of a recent study, but let's be blunt: If you have been paying attention, you probably already knew this.

At this point in the evolution of Wall Street, analyst conflicts and priorities should not come as any surprise to investors. Most learned this from getting burned by various frauds of the late 90s and early 2000s.

Following the many analyst scandals that have plagued investing, from the dotcom underwriting to corrupted analyst coverage to outright hostility to shortsellers who uncovered many of the accounting frauds, it was apparent that something was rotten in the state of Denmark. Now we have statistical proof from academia to prove what you suspected all along.

Here are John Reeves and Ilan Moscovitz:

"Countless studies have shown that the forecasts and stock recommendations of sell-side analysts are of questionable value to investors. As it turns out, Wall Street sell-side analysts aren't primarily interested in making accurate stock picks and earnings forecasts. Despite the attention lavished on their forecasts and recommendations, predictive accuracy just isn't their main job."

The ongoing rise of indexing - Vanguard was the only firm that garnered fresh assets during most of the past few years - suggests that Mom & Pop won't be so quick to follow analysts again.

Time has a way of making people forget, but I suspect perhaps their memories might be better this time.

[Jul 31, 2007] Retirement at risk: Who's falling short By Jeanne Sahadi

July 31, 2007 | CNNMoney.com

How would you feel about doubling or tripling your 401(k) contributions? For some people, that may be the only solution if they want to maintain their current lifestyle in retirement. The Center for Retirement Research (CRR) estimates that 36 percent of high-income households - those with a median income of $117,000 - won't be able to live as well in retirement as they do today.

Among middle-income households, 40 percent are at risk of having to downsize, while 53 percent of low-income households are likely to fall short.

That hasn't always been the case. "We're at the tail end of the golden era of retirement," said CRR Director Alicia H. Munnell.

In a report released Tuesday, CRR notes that only 20 percent of those who were between ages 51 and 61 in 1992 were at risk of falling short of money in retirement. Today, 32 percent are.

Why the increase? Munnell points to the shift from traditional pension plans to 401(k)s. Plus, she notes, people are living longer, and Medicare and taxes will take a bigger slice out of Social Security checks.



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Last modified: March, 12, 2019