Category Archives: Canada

Mario Seccareccia on Cochrane’s paper

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Cochrane Monetary Policy with Interest on Reserves

Dear Warren,

Sorry not to respond more quickly; but I’ve been swamped with work!

However, I did a cursory reading of Cochrane’s paper which is extremely interesting. For a moment I thought that you must have been coaching him! What is amazing is that these people seem to be completely tribal and never look outside of their own clan or, if one were to be a bit more severe in one’s criticism, they are very much aware of what many of us say but they are just too afraid to cite us because that will then discredit them in the eyes of the mainstream. Hence, this is why he starts off with Friedman, Sargent & Wallace, et al. and seems to suggest that the monetary system has changed because of technological change leading to a diffusion of interest-paying electronic money and now interest on “base” money. All of this is nonsense because we could trace some of these same ideas literally to the nineteenth century within heterodox circles. Hence, to say that the gold standard was a fiscal policy commitment is hardly new and you could probably pull it out of someone as disparate as Karl Polanyi and, yet, it would seem that they are now rediscovering America!

But it is very interesting that he is saying many of the same things that we have been saying for quite some time. On the question of monetary policy, as you know, here we have been paying interest on “reserves” (or more correctly “settlement balances” in Canada, which is actually a more correct vocabulary than “reserves” … since the latter is perhaps suggestive of these “reserves” backing “inside” money, which is nonsense!) for over two decades, and this institutional change in the early 1990s was hardly because of technological change! It was to conduct more efficiently monetary policy when they realized that the control of monetary aggregates was completely futile. In much the same way, the whole issue of controlling the price level via fiscal policy is pure Abba Lerner!!

Hence, I’m really delighted to see that Cochrane is seeing the “light” and seems to understand reasonably well what he describes as the “political economy” concern of his findings. However, it is so depressing to see how “autistic” these people could be. There is not even one mention or reference to MMT or Chartalism, or Post Keynesianism, or anything of the sort! All these changes are merely a natural extension of Friedman 1969, which has been driven by changes in the monetary/technological landscape. That is just so phony and quite irritating to us who know better!

Thanks for the reference. I was unaware of the paper!

Best regards,

Mario

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Emerging Nations Save $2.9 Trillion Reserves in Rout

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Smart not to intervene and use reserves.

And even the 19% isn’t as much as Japan’s recent approx. 25% drop, so they all remain stronger vs the yen. So the US now loses ‘competitiveness’ vs a whole mob of exporters cutting ‘real’ wages vs US, Canada, UK, and the Eurozone etc. As the ongoing global race to the bottom for real wages continues…

And maybe some day they’ll figure out that cutting rates supports a currency as it cuts interest paid by govt, making the currency ‘harder to get’.

And that exports are real costs and imports real benefits.

And that real standards of living are optimized by sustaining domestic full employment with fiscal adjustments.

Emerging Nations Save $2.9 Trillion Reserves in Rout

By Jeanette Rodrigues, Ye Xie and Robert Brand

September 4 (Bloomberg) — Developing nations from Brazil to India are preserving a record $2.9 trillion of foreign reserves and opting instead to raise interest rates and restrict imports to stem the worst rout in their currencies in five years.

Foreign reserves of the 12 biggest emerging markets, excluding China and countries with pegged currencies, fell 1.6 percent this year compared with an 11 percent slump after the collapse of Lehman Brothers Holdings Inc. in 2008, data compiled by Bloomberg show. The 20 most-traded emerging-market currencies have weakened 8 percent in 2013 as the Federal Reserve’s potential paring of stimulus lures away capital.

After quadrupling reserves over the past decade, developing nations are protecting their stockpiles as trade and budget deficits heighten their vulnerability to credit-rating cuts. Brazil and Indonesia boosted key interest rates last month to buoy the real and rupiah, while India is increasing money-market rates to try to support the rupee as growth slows. Central banks should draw on stockpiles only once currencies have depreciated enough to adjust for the trade and budget gaps, according to Canadian Imperial Bank of Commerce.

“If fundamentals are going against you, it’s not credible to defend a currency level — investors would rush for the exit when they see the reserves depleting,” said Claire Dissaux, managing director of global economics and strategy at Millennium Global Investment in London. “The central banks are taking the right measures, allowing the currencies to adjust.”

‘Fragile Five’
The South African rand, real, rupee, rupiah and lira, dubbed the “fragile five” by Morgan Stanley strategists last month because of their reliance on foreign capital for financing needs, fell the most among peers this year, losing as much as 19 percent.

Foreign reserves in the 12 developing nations including Russia, Taiwan, South Korea, Brazil and India, declined to $2.9 trillion as of Aug. 28, from $2.95 trillion on Dec. 31 and an all-time high of $2.97 trillion in May, data compiled by Bloomberg show. The holdings increased from $722 billion in 2002.

The figures don’t reflect the valuation change of the securities held in the reserves. China, which holds $3.5 trillion as the world’s largest reserve holder, is excluded to limit its outsized impact.

In the three months starting September 2008, reserves dropped 11 percent as Lehman’s collapse sent the real down 29 percent and the rupee 12 percent. India’s stockpile declined 16 percent during the period, while Brazil spent more than $14 billion in reserves in six months starting October, central bank data show.

‘Contagion Potential’
“Often, on the day of the intervention or its announcement, a currency will get a small bounce upward,” Bluford Putnam, chief economist at CME Group Inc., wrote in an Aug. 28 research report. “For the longer-term, however, market participants often return to a focus on the basic issues of rising risks and contagion potential.”

Putnam said “aggressive” short-term interest rate increases that “dramatically” raise the costs of going short a currency can work to stem an exchange-rate slide.

The Turkish and Indian central banks have developed tools to fend off market volatility while keeping their benchmark rates unchanged. Turkey adjusts rates daily and Governor Erdem Basci promised more “surprise” tools to defend the lira while vowing to keep rates unchanged this year. Since July, India has curbed currency-derivatives trading, restricted cash supply, limited outflows from locals and asked foreign investors to prove they aren’t speculating on the rupee.

Records Lows
India’s steps failed to prevent its currency from touching a record low of 68.845 per dollar on Aug. 28. The lira tumbled to an unprecedented 2.0730 the same day.

The rupee plummeted 8.1 percent in August, the biggest loss since 1992 and the steepest among 78 global currencies, according to data compiled by Bloomberg. The lira plunged 5.1 percent, the rand dropped 4.1 percent, the real fell 4.6 percent and the rupiah sank 5.9 percent, the data show.

The Indian currency rose 1.1 percent 67.0025 per dollar as of 1:46 p.m. in Mumbai today, while its Indonesian counterpart gained 0.3 percent to 11,409 versus the greenback. South Africa’s rand appreciated 0.8 percent to 10.2549 per dollar, while the Turkish lira strengthened 0.4 percent to 2.0505.

Interest-rate swaps show investors expect South Africa and India’s benchmark rate will increase by at least 0.25 percentage point, or 25 basis points, by year-end, according to data compiled by HSBC Holdings Plc. In Brazil, policy makers are forecast to raise the key rate by 100 basis points to 10 percent, and Turkey will lift the benchmark one-week repurchase rate by 200 basis points to 6.5 percent, the data show.

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placebo’s doing their thing

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As previously discussed, financial placebos like QE do cause market participants to alter behavior out of either a misunderstanding of the actual fundamentals, or in anticipation of reactions by others presumed to be misinformed. And while the effects of these activities get reversed, however sometimes the effects are more lasting.

And there are also first order and second order effects. For example, a QE announcement could unleash misinformed fears about ‘money printing’ and ‘currency debasement’ and subsequent portfolio shifting that drives down the currency in the fx markets and drives up the price of gold. And the same misguided fears could cause bond yields to go higher in anticipation of a stronger/inflationary economy, even with the Fed buying bonds in an attempt to take yields lower.

So right now the QE/’monetary policy works if large enough’ placebo is at least partially driving things in both Japan and the US, and today’s announcement of the possibility of the ECB buying asset backed securities is now also at work.

And along the same lines but with a different ‘sign’ is the ideologically driven idea that cutting govt spending in the face of a large output gap- the sequester- is a plus for output and employment. Same for the year end tax hikes.

The underlying fundamental I don’t see discussed is whether private sector credit expansion can continue to sufficiently ‘overcome’ the declining govt deficit spending and satisfy the ‘savings desires’/demand leakages.

The main sources of private sector credit expansion are housing, student loans ($9 billion increase in March), and cars. Since 2009, the private sector credit expansion has managed to stay far enough ahead of the declining govt deficit, which has fallen from about 9% of GDP to about a rate of 6% of GDP by year end (mainly via the ‘automatic fiscal stabilizers’ of higher tax receipts and moderating transfer payments) resulting in about 2% real growth.

The question now is whether the private sector credit expansion can survive the 1.25% of GDP shock of the FICA tax hike and sequesters- which reduce support from the govt deficit to only maybe 4.5% of GDP- and still continue to sufficiently feed the (ever growing) demand leakages enough to generate positive GDP growth.

The stock market is often the best leading indicator of the macro economy, but it has ‘paused’ for two double dips that didn’t happen over the last few years, and it is subject to influence from placebos. Additionally, valuations change as implied discount rates change, and so in this case P/E’s shifting upwards may be discounting interest rates staying low for longer, due to an economy too weak to trigger Fed rate hikes, but strong enough to keep sales and earnings at least flat.

Placebo Surgery Shows Surprising Results

By Kate Melville

Research by Doctor Cynthia McRae of the University of Denver’s College of Education provides strong evidence for a significant mind-body connection among patients who participated in a Parkinson’s surgical trial.

Forty persons from the United States and Canada participated to determine the effectiveness of transplantation of human embryonic dopamine neurons into the brains of persons with advanced Parkinson’s disease. Twenty patients received the transplant while 20 more were randomly assigned to a sham surgery condition. Dr. McRae reports that the “placebo effect” was strong among the 30 patients who participated in the quality of life portion of the study.

“Those who thought they received the transplant at 12 months reported better quality of life than those who thought they received the sham surgery, regardless of which surgery they actually received,” says Dr. McRae. More importantly, objective ratings of neurological functioning by medical personnel showed a similar effect. In the report, appearing in the Archives of General Psychiatry, Dr. McRae writes “medical staff, who did not know which treatment each patient received, also reported more differences and changes at 12 months based on patients’ perceived treatment than on actual treatment.”

One patient reported that she had not been physically active for several years before surgery, but in the year following surgery she resumed hiking and ice skating. When the double blind was lifted, she was surprised to find that she had received the sham surgery.

Although patient perceptions influenced their test scores, when the total sample of patients was grouped by the actual operation they received, patients who had the actual transplant surgery showed improvement in movement while, on average, patients who had sham surgery did not.

Professor Dan Russell at Iowa State, the study’s co-author, says the findings have both scientific and practical implications. “This study is extremely important in regard to the placebo effect because we know of no placebo studies that have effectively maintained the double-blind for at least 12 months. The average length of placebo studies is eight weeks,” according to Russell. Dr. McRae notes that similar results related to the placebo effect have been found in other studies with patients with Parkinson’s disease. She says that there is a need for placebo controls in studies evaluating treatment for Parkinson’s as the placebo effect seems to be very strong in this disease. Dr. McRae also reports that although the sham surgery research design is somewhat controversial and has raised some ethical concerns, the results of this study show “the importance of a double-blind design to distinguish the actual and perceived values of a treatment intervention.”

Knee Surgery Proves No Better Than Placebo

By Katrina Woznicki

July 10, 2002 (UPI) — For individuals suffering from osteoarthritis in their knees, a common type of knee surgery has been found to be no more beneficial than a placebo, a new study revealed Wednesday.

Researchers at the Houston VA Medical Center and at Baylor College of Medicine came to this surprising conclusion after comparing various knee treatments to placebo surgery on 180 patients with knee pain.

The patients were randomly divided into three groups. One group underwent debridement, in which the damaged or loose cartilage is the knee is surgically removed by an arthroscope, a pencil-thin tube that allows doctors to see inside the knee. The second group received arthoscopic lavage, which flushes out the bad cartilage from the healthier tissue. A third group underwent a placebo surgery. They were sedated by medication while surgeons simulated arthroscopic surgery on their knees by making small incisions on the leg, but not removing any tissue.

During a two-year follow-up, researchers found no differences among the three groups. All patients reported improvement in their symptoms of pain and ability to use their knees. Throughout the two years, patients were unaware whether they had received the “real” or placebo surgery.

However, patients who received actual surgical treatments did not report less pain or better functioning of their knees compared to the placebo group. In fact, periodically during the follow-up, the placebo group reported a better outcome compared to the patients who underwent debridement.

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Market Watch

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Radical fixes needed to make the euro work

Commentary: Warren Mosler has a plan but no takers

By Darrell Delamaide

May 8 (MarketWatch) — If youre ever tempted to think the euro zone has turned the corner and is on the right track, go have a chat with Warren Mosler and hell set you straight.

The former hedge-fund manager and an original proponent of what has come to be known as modern monetary theory gave a talk recently at a wealth management conference in Zurich that took a pessimistic view of the euro righting itself on its current path.

The European slow-motion train wreck will continue until theres recognition that deficits need to be larger, Mosler said at the conclusion of his analysis. The continuing efforts at deficit reduction will continue to make things worse.

Mosler suggested several measures that could turn around the situation in the euro zone, though he acknowledged there is little chance they will be adopted.

The euro authorities need to accept that deficits should be allowed to go up to 8% of gross domestic product, instead of the current 3%, as the only way to create the monetary conditions for full employment and economic growth.

The European Central Bank should make a policy rate of 0% permanent. The ECB, as the source of the euro zones fiat money, should guarantee the debt of all euro countries and guarantee deposit insurance for all euro-zone banks, which would entail taking over bank supervision.

Individual countries in the euro zone, like individual states in the U.S., are trapped in a procyclical monetary and fiscal environment. Because they have no sovereign currency, they must reduce spending in a downturn.

In the U.S., the federal government can operate countercyclically, by running a sufficiently large deficit to provide net savings to the private sector. The ECB is the only institution in the euro zone that does not have revenue constraints and could play a countercyclical role.

Because money is a public monopoly, when the monopolist restricts supply by not running a sufficient deficit, it creates excess capacity in the economy, as evidenced by high unemployment.

Mosler says the deficit can result from lower taxes or increased government spending, whatever your politics prefers. But policies aimed at reducing the deficit are doomed to keep an economy depressed.

And theres more. All successful currency unions include fiscal transfers, Mosler said. In Canada, this is written into the constitution and in the U.S. it is achieved through the federal budget.

In Europe, this would mean that some authority like an empowered European Parliament would direct government spending to the areas with the highest unemployment.

Clearly all of this is well beyond what Europe is currently capable of doing, and the leaders in power have implicitly or explicitly rejected all of these potential fixes.

The reality is, Mosler noted, that there is no political support for higher deficits, no political support for leaving the euro, and beyond reducing deficits the only remaining fixes are taxes on depositors and bondholders like those seen in Cyprus and Greece.

Mosler, who currently manages offshore funds and produces sports cars on the side, says his views, which have been taken up and elaborated by a post-Keynesian school of economics, are based on his experience as a money manager.

And, he adds, he has a substantial following of asset managers for his ideas because these are people who are paid to get it right.

The current stopgap measures proposed by the ECB notably the putative outright monetary transactions to bail out a country under certain conditions, which has yet to be used have a dubious legal basis and are so much smoke and mirrors, Mosler said.

In this Zurich talk, Mosler did not draw any further conclusions regarding his pessimistic view of the euros current course, but a website devoted to Mosler Economics in Italy, where MMT has a considerable following, spells out what it could mean in a post called 10 reasons to return to the lira.

These reasons include the ability to lower taxes, allow the government to pay off debts to the private sector and implement a works program to provide employment and improve the public infrastructure. Read the post (in Italian).

Lest this all seem like so much pie in the sky, keep in mind that the forces that gave the protest movement of Beppe Grillo a quarter of the vote in Italys recent election will only grow as continued austerity deepens Europes recession.

So remain optimistic if you like, but youve been warned.

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Reinhart-Rogoff data errors found!

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If true, this is very bad:

Researchers Finally Replicated Reinhart-Rogoff, and There Are Serious Problems.

By Mike Konczal

April 16 (Bloomberg) — In 2010, economists Carmen Reinhart and Kenneth Rogoff released a paper, “Growth in a Time of Debt.” Their “main result is that…median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower.” Countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate, in fact.

This has been one of the most cited stats in the public debate during the Great Recession. Paul Ryan’s Path to Prosperity budget states their study “found conclusive empirical evidence that [debt] exceeding 90 percent of the economy has a significant negative effect on economic growth.” The Washington Post editorial board takes it as an economic consensus view, stating that “debt-to-GDP could keep rising and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.”

Is it conclusive? One response has been to argue that the causation is backwards, or that slower growth leads to higher debt-to-GDP ratios. Josh Bivens and John Irons made this case at the Economic Policy Institute. But this assumes that the data is correct. From the beginning there have been complaints that Reinhart and Rogoff weren’t releasing the data for their results (e.g. Dean Baker). I knew of several people trying to replicate the results who were bumping into walls left and right – it couldn’t be done.

In a new paper, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst successfully replicate the results. After trying to replicate the Reinhart-Rogoff results and failing, they reached out to Reinhart and Rogoff and they were willing to share their data spreadsheet. This allowed Herndon et al. to see how how Reinhart and Rogoff’s data was constructed.

They find that three main issues stand out. First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don’t get their controversial result. Let’s investigate further:

Selective Exclusions. Reinhart-Rogoff use 1946-2009 as their period, with the main difference among countries being their starting year. In their data set, there are 110 years of data available for countries that have a debt/GDP over 90 percent, but they only use 96 of those years. The paper didn’t disclose which years they excluded or why.

Herndon-Ash-Pollin find that they exclude Australia (1946-1950), New Zealand (1946-1949), and Canada (1946-1950). This has consequences, as these countries have high-debt and solid growth. Canada had debt-to-GDP over 90 percent during this period and 3 percent growth. New Zealand had a debt/GDP over 90 percent from 1946-1951. If you use the average growth rate across all those years it is 2.58 percent. If you only use the last year, as Reinhart-Rogoff does, it has a growth rate of -7.6 percent. That’s a big difference, especially considering how they weigh the countries.

Unconventional Weighting. Reinhart-Rogoff divides country years into debt-to-GDP buckets. They then take the average real growth for each country within the buckets. So the growth rate of the 19 years that England is above 90 percent debt-to-GDP are averaged into one number. These country numbers are then averaged, equally by country, to calculate the average real GDP growth weight.

In case that didn’t make sense let’s look at an example. England has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally. Even though there are 19 times as many data points for England.

Now maybe you don’t want to give equal weighting to years (technical aside: Herndon-Ash-Pollin bring up serial correlation as a possibility). Perhaps you want to take episodes. But this weighting significantly reduces the average; if you weight by the number of years you find a higher growth rate above 90 percent. Reinhart-Rogoff don’t discuss this methodology, either the fact that they are weighing this way or the justification for it, in their paper.

Coding Error. As Herndon-Ash-Pollin puts it: “A coding error in the RR working spreadsheet entirely excludes five countries, Australia, Austria, Belgium, Canada, and Denmark, from the analysis. [Reinhart-Rogoff] averaged cells in lines 30 to 44 instead of lines 30 to 49…This spreadsheet error…is responsible for a -0.3 percentage-point error in RR’s published average real GDP growth in the highest public debt/GDP category.” Belgium, in particular, has 26 years with debt-to-GDP above 90 percent, with an average growth rate of 2.6 percent (though this is only counted as one total point due to the weighting above).

Being a bit of a doubting Thomas on this coding error, I wouldn’t believe unless I touched the digital Excel wound myself. One of the authors was able to show me that, and here it is. You can see the Excel blue-box for formulas missing some data:



This error is needed to get the results they published, and it would go a long way to explaining why it has been impossible for others to replicate these results. If this error turns out to be an actual mistake Reinhart-Rogoff made, well, all I can hope is that future historians note that one of the core empirical points providing the intellectual foundation for the global move to austerity in the early 2010s was based on someone accidentally not updating a row formula in Excel.

So what do Herndon-Ash-Pollin conclude? They find “the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as [Reinhart-Rogoff claim].” Going further into the data, they are unable to find a breakpoint where growth falls quickly and significantly.

This is also good evidence for why you should release your data online, so it can be probably vetted. But beyond that, looking through the data and how much it can collapse because of this or that assumption, it becomes quite clear that there’s no magic number out there. The debt needs to be thought of as a response to the contigent circumstances we find ourselves in, with mass unemployment, a Federal Reserve desperately trying to gain traction at the zero lower bound, and a gap between what we could be producing and what we are. The past guides us, but so far it has failed to provide an emergency cliff. In fact, it tells us that a larger deficit right now would help us greatly.

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Achuthan – ECRI – Bloomberg today

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He’s been calling recession for a while.

The ‘stall speed’ thing is the pro cyclical nature of the private sector I recently discussed.

Achuthan on how he defines stall speed:

“That is a concept we do not use that often. The Fed uses it because they are using models. We do not use models. We use leading indicators. The Federal Reserve board in 2011 came out with a study examining the idea of stall speed, you look at GDP and gross domestic income, the counterpart, which should statistically be actually the exact same thing. When they looked at all the different measures, they found that the two quarter annualized GDI growth rates going below 2% was a signal of an economy slipping into recession. When you look at that measure now, what you see is that in the second quarter of 2012 it fell below 2%. It went to 1.5% and then in the third quarter, it fell further to 0.4%. By last fall, when the unemployment rate was plunging and people did not believe it was plunging and then the Fed came out and said, hey, we will give you q-ternity… It kind of makes sense in the context of their own recessionary stall speed.”

On whether the U.S. is in a recession now:

“I think that a recession began around the middle of last year. The reason I think that is because number one, the stall speed and GDI last year, and also when you look at the weakness in the indicators that define a recession — output and income and sales — initial jobless claims are not used to define recession. You actually use overall employment payroll or household employment, and there, if you simply look at year-over-year growth rates, what you see is they are falling. Right now on the Bloomberg I think the consensus is 160-170 for tomorrow. Even if that is true, you are going to see year-over-year payroll jobs growth go to a 16-month low. It’s going the wrong direction. The headlines say jobs are improving but they are actually going down.”

On what it would take to admit that he is wrong about the U.S. being in a recession:

“I think some facts, right? I am pointing out that the GDP number that you have from Q4 is recessionary. Central banks are now going to be targeting nominal GDP fairly soon, right, because in theory, they could impact the cash economy. You see nominal GDP growth by Q4 year-over-year at 3.5%, even with your marginally higher revision. Any time in the 65-year history of GDP growth it has been below 3.7, you have been inside a recession… The other thing is, you are not in a 2% economy. Everybody keeps saying it, but just because you are saying it does not mean it is true. You’re in weaker than a 2% economy.”

On whether a recession can exist with 0.5% GDP growth:

“Economies do not hang out at 0.5% or 1%. They do not get this low growth steady state muddle through recession-free kind of growth at 1%, which everybody seems to think might be possible. It is not possible. Free markets have economic cycles. they accelerate and they decelerate. if you are doing it at a very low growth rate, the odds of a slowdown going into recession are very high.”

On whether he’s going to move to London:

“No, I’m not, but the entire West is in the yo-yo years. They have all been having growth stair stepping down. It is very weak growth with higher cycle volatility which will give you more frequent recessions. Did anyone notice that in q4, it’s the G6, Canada did not report. They all contracted? This is after $11 trillion worth of stimulus.”

On how to explain the housing recovery:

“How do we explain it? We called it. We called it back April 2012. We said there was a home price upturn. But that does not preclude a recession. In 2001 you had a home price upturn and we actually had a recession.”

On whether his critics are wrong to strictly associate him with recession:

“I think, no. Look, when we call a recession we will be associated with recession. That is fine. That is what we do. We don’t call the market. We call the business cycle. I think people forget it is not easy to recognize it recession when it is happening.”

On equities going to record highs right now:

“Here’s the thing. In 80% of the last 15 recessions you have had an associated bear market. That is why if you hear the word recession, you say, oh my gosh, we have to run to the hills in the equity market. But in three out of those 15 recessions, we had stock prices rise through the recession. You did not have an associated bear market. That is 1980, a pretty short recession, 1945, coming out of World War II, and 1926-27, which was smack dab in the middle of the Roaring 20s. Avery different economy, a very different market, but to say that stock prices cannot rise during a recession is actually not true.”

On what his weekly indicators say that most indicate the vectors toward recession:

“All the growth rates are coming down in our broad indicators. Look, let’s be clear — the Fed told you they are targeting financial assets as part of their monetary policy. They have specifically called out people’s 401k’s as something that they are looking to target. So, I submit perhaps some of the market prices, as they pertain to economic fundamentals, may be a little wacky, which is why when we look at leading indicators, we do not have all eggs in one basket.”

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Clinton says budget deal critical to U.S. global role, security

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In case you thought Hillary had a clue:

Clinton says budget deal critical to U.S. global role, security

By David Brunnstrom

November 17 (Reuters) — U.S. Secretary of State Hillary Clinton said on Saturday that reaching a deal to resolve America’s budget crisis is critical to its global leadership and national security and would bolster efforts to project U.S. economic power around the world.

Speaking in Singapore during a tour of Asia and Australia, Clinton said that when she was in Asia last year during the height of debate about the U.S. debt ceiling, leaders from across the region asked her if the U.S. Congress would actually allow the United States to default on its debt.

“Let’s be clear,” she said. “The full faith and credit of the United States should never be in question.”

However, Clinton, who spoke at Singapore Management University, said that with Washington gearing up for another round of budget negotiations, she was “again hearing concerns about the global implications of America’s economic choices”.

She said that despite all the differences between the U.S. political parties, “we are united in our commitment to protect American leadership and bolster our national security”.

“Reaching a meaningful budget deal is a critical to both,” she said. “It would shore up our ability to project economic power around the globe, strengthen our position in the competition of ideas shaping the global marketplace, and remind all nations that we remain a steady and dependable partner.

“For us, this is a moment to once again prove the resilience of our economic system and reaffirm America’s leadership in the world,” Clinton said, stressing that U.S. leadership depended on its economic strength.

“Global leadership is not a birthright for the United States or any nation. It must be constantly tended and earned anew.”

U.S. President Barack Obama and his Republican rivals are in talks aimed at avoiding what has been dubbed a “fiscal cliff” at the year-end, which experts say could push the U.S. economy back into recession.

If Congress cannot agree to less extreme steps, from Jan. 2, about $600 billion worth of tax increases and spending reductions, including $109 billion in cuts to domestic and defense programs, will begin to kick in.

Both sides are eager to reassure the public that Washington will not see a repeat of the white-knuckle budget standoff that spooked consumers and investors last year, and Republican and Democratic congressional leaders emerged from a meeting with Obama on Friday pledging to find common ground to avert the fiscal cliff.

“HISTORY BEING WRITTEN”

Clinton said responding to threats would remain central to U.S. foreign policy, but could not be Washington’s only foreign policy.

Maintaining U.S. strength would require following through on a policy of intensified engagement with the Asia-Pacific region and elevating the role of economics in foreign relations.

Clinton said the visit of Obama to Asia from Sunday – within days of his Nov. 6 reelection – showed the importance of the region in U.S. eyes. Obama will visit Thailand, Cambodia to attend an East Asian summit, and Myanmar.

“Why is the American president spending all this time in Asia so soon after winning reelection?” Clinton asked. “Because so much of the history of the 21st century is being written here.”

Clinton said the United States was making progress in talks with countries on both sides of the Pacific towards finalizing a Trans-Pacific Partnership trade pact, which would lower barriers and raise regulatory standards in a region accounting for 40 percent of world trade.

“We will continue to work with Japan and we are offering to assist with capacity building so that every country in ASEAN can eventually join,” she said, referring to the 10-member Association of Southeast Asian Nations.

Clinton said the United States would welcome the interest of any country willing to meet the standards of the TPP – including China, where some view the pact with suspicion and as a U.S. attempt to contain China’s rapid growth, something U.S. officials deny.

The United States, Australia, New Zealand, Chile, Peru, Singapore, Vietnam, Malaysia and Brunei agreed this year to let Mexico and Canada into the negotiations, which could reach a conclusion next year. Japan’s prime minister said this month he wants to enshrine backing for the pact in his party’s election platform.

Clinton said that with the U.S. government working to bring down trade barriers and create a level playing field for U.S. firms, it was also up to them to raise their game abroad.

“Too many are sitting on the sidelines,” she said. “I hear it over and over when I travel: ‘Where are the American businesses?’ At a time when America’s domestic growth depends more than ever on our ability to compete internationally, this has to change.”

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June Employment Data (U.S. and Canada)

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Good for stocks and bonds,

Not so good for people, apart from the lower gasoline prices.


Karim writes:

June Employment Data (U.S. and Canada)
U.S.

  • Headline payroll growth of 80k in line with other Q2 employment readings and a clear loss of momentum in job gains from Q1.
  • The report was a positive from a personal income standpoint, however, as the components of the income equation, Hourly Earnings (+0.3%) and Aggregate Hours (0.4%) were both strong.
  • The hours data in particular suggests demand was running at reasonable levels but forward uncertainty may have restrained hiring.
  • Weather related sectors did bounce back: Net change in construction of +33k in particular. There may have been some seasonal issues in education as that sector had a net change of -55k.
  • Other key metrics were generally stable: The unemployment rate was unchanged at 8.2%, the labor force participation rate was unchanged, the median duration of unemployment fell from 20.1 weeks to 19.8 weeks, and the Diffusion Index dropped from 59.8 to 57.9
  • This is the last payroll number before the next Fed meeting. In what should be a close call, Twist 2 will likely be maintained.

Canada

  • Very modest growth in employment in June (7.3k). Equivalent to about 75k in the U.S., population-adjusted.
  • Y/Y growth in Canadian employment is exactly 1%. Combined with modest productivity growth, current GDP trends appear similar to the U.S., about 1.5-2.0%.

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Canada Tightens Mortgage Rules: Equivalent to 100bp Rate Hike

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too many new homes being built?
;)


Karim writes:

Canada Tightens Mortgage Rules: Equivalent to 100bp Rate Hike

  • Long expected but well overdue, Canadian FM Minister Flaherty announced yesterday a series of rule changes yesterday that tighten rules for home mortgages in Canada
  • The most significant is shortening the longest amortization period from 30yrs to 25yrs. In terms of monthly payments, this has the same impact as a 100bp rise in mortgage rates. About half of all mortgages have 30yr terms.
  • They also lowered LTV from 85% to 80% and tightened standards even more on mortgage loans in excess of $1mm.
  • This should definitely be viewed a form of tightening that will delay BoC rate hikes, and may even allow the Bank greater leeway to ease rates if they want to.
  • Standard behavior in the past is for borrowers to lock in terms before new rules go into effect. But with the broader message here that household debt levels are dangerously high, and more measures may be forthcoming to cool down the housing market, it wouldn’t be surprising if new mortgage activity isn’t as great as in years past.
  • The most basic market impact is for lower short-term rates and a weaker C$ based on likely narrower rate differentials to the U.S. going forward.

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Saudi’s Naimi says determined to bring down oil prices

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He could start by lowering his posted prices…

Saudi’s Naimi says determined to bring down oil prices

By Meeyoung Cho

April 13 (Reuters) — Top oil exporter Saudi Arabia is determined to bring down high oil prices and is working with fellow OPEC members to accomplish that, Oil Minister Ali al-Naimi said on Friday.

Brent crude has risen about 13 percent this year, trading above $120 a barrel on Friday, threatening a nascent recovery of the global economy. Oil has traded above $100 for all but a couple of days in the past year.

“We are seeing a prolonged period of high oil prices,” Naimi said in a statement during a visit to Seoul. “We are not happy about it. (The Kingdom of Saudi Arabia) is determined to see a lower price and is working towards that goal.”

The influential Saudi oil minister earlier this year identified $100 a barrel as an ideal price for producers and consumers earlier this year.

Concern of a supply shortage due to production problems in some producing countries and as U.S. and European sanctions target exports from OPEC’s second-largest producer Iran have helped keep Brent crude well above that mark.

Naimi reiterated that there were no supply shortages in the global oil market and the kingdom stood ready to use its spare production capacity if necessary.

Saudi Arabia is pumping 10 million barrels per day, he said. Output at that level would be the highest since November, when the kingdom produced more oil than it had done for decades. Naimi reiterated that production capacity stands at 12.5 million bpd.

“The story is one of plenty,” he said. “Supply is not the problem.”

Fellow OPEC producers Libya, Iraq and Angola have increased output, Naimi said. Non-OPEC members including Canada, the United States and Russia had also boosted supplies, he added.

Saudi stockpiles at home and abroad were full, he added. Inventories in industrialized countries were also filling up, he said.

“Fundamentally the market remains balanced — there is no lack of supply,” he said.

The International Energy Agency said on Thursday that the oil market had broken a two-year cycle of tightening supply conditions as demand growth weakens and top exporter Saudi Arabia increases output.

The agency, which advises industrialized nations on their energy policies, said increased supply and slowing demand growth might already point to a significant rise in global oil stocks.

Stubbornly high oil prices could be expected to ease when markets woke up to the shift in trend, it added.

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