Category Archives: Equities

Debt ceiling dynamics

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Here’s my take:

A. They get a few trillion in long term cuts and maybe a few that kick in reasonably soon and extend the debt ceiling

This would help ensure aggregate demand stays low for long, which is bond friendly, and stocks muddle through in a range with slowing earnings growth but just enough top line growth to stay positive.

B. They don’t extend the debt ceiling

This would immediately and directly reduce aggregate demand, which is very bond friendly and very bad for stocks, as many top lines go negative until federal spending is restored.

And either way the economy remains vulnerable to looming external shocks, including a China slowdown, euro zone default and/or slowdown, UK slowdown, and a strong dollar.

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CH News

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China is traditionally a first half/second half story, with h2 notably slower than h1 as fiscal and lending initiatives have generally been front loaded.

So watch for a very weak h2:

China Stocks Drop for 6th Day on Slowing Growth, Tighter Credit

May 26 (Bloomberg) — China’s stocks slid for a sixth day, driving the benchmark index to the longest stretch of losses in 11 months, on concern tightening measures are slowing the economy and making it harder for small companies to borrow money.

Huaxin Cement Co., an affiliate of Holcim Ltd., dropped 2.9 percent after Shanghai Securities News reported China’s industrial output may slow. A gauge of small-capitalization stocks fell to the lowest close in four months as Citigroup Inc. said smaller companies are being squeezed by tighter credit. Kangmei Pharmaceutical Co. led declines for drugmakers on speculation the government will further lower drug prices.

“Sentiment is weak and we haven’t seen anything positive that can support stocks,” said Dai Ming, fund manager at Shanghai Kingsun Investment Management & Consulting Co. “Slowing growth, high inflation and tight lending will continue to weigh on the market in the near future.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, fell 5.23 points, or 0.2 percent, to 2,736.53 at the 3 p.m. close, erasing a gain in the last half hour of trading. The six-day decline is the longest since July 1. The CSI 300 Index lost 0.4 percent to 2,978.38, while the CSI Smallcap 500 Index retreated 1 percent.

The Shanghai gauge has slumped 2.5 percent this year as the central bank raised the reserve-requirement ratio for banks 11 times and boosted interest rates four times since the start of 2010 to cool inflation, which exceeded the government target each month this year. China’s preliminary manufacturing index
fell to its lowest level in 10 months, according to a report from HSBC Holdings Plc and Markit Economics this week.

Huaxin Cement slid 2.9 percent to 22.19 yuan. Offshore Oil Engineering Co. lost 4.9 percent to 6.42 yuan, the lowest close since Aug. 27. SAIC Motor Corp., China’s largest carmaker, fell 1.4 percent to 15.96 yuan.

Slowing Industrial Output

China’s industrial output growth is expected to slow in coming months as companies continue to destock and power shortages restrain production, Xu Ce, a researcher with the State Information Center, wrote in a commentary published in Shanghai Securities News. Government efforts to cut capacity in some industries will also restrain output growth, Xu wrote.

Sanan Optoelectronics Co., China’s biggest producer of light-emitting diode chips, led declines for smaller companies, slumping 3.7 percent to 16.71 yuan. Haining China Leather Market Co. plunged 5.6 percent to 21.53 yuan.

China’s small- and medium-sized companies are being squeezed by credit rationing and rising costs, Minggao Shen, an analyst at Citigroup, said in a report after meeting clients.

Bank Funding

The seven-day repurchase rate, which measures funding availability between banks, has averaged 3.48 percent so far this month, compared with 2.83 percent in April and 2.39 percent in March. The seven-day repo rate was at 5.08 percent as of 11:31 a.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. It touched 5.50 percent yesterday, the highest level since Feb. 23.

Kangmei fell 8.5 percent to 11.90 yuan, the biggest decline in almost 21 months. Nanjing Pharmaceutical Co. slid 6.9 percent to 12.44 yuan. Northeast Pharmaceutical Group Co. lost 6.3 percent to 16.37 yuan.

“Institutions are selling drugmaker shares because there’s still a lot of uncertainty about the next round of drug price cuts by the government,” said Li Ying, analyst at Capital Securities Corp.

Chinese stocks are “getting close to the market bottom” after recent declines and may gain as much as 20 percent this year, according to Steven Sun, Hong Kong-based head of China equity strategy at HSBC Holdings Plc.

The nation’s equities may rally in the second half of 2011, as easing inflation from June onward allows the central bank to hold off on its policy tightening campaign, Sun said in an interview with Bloomberg Television yesterday.

“We are getting close to the market bottom,” he said. “We are talking about a 15 to 20 percent upside by the end of this year.”

China Steel Reduces Prices as Industrial Output Slows

May 25 (Bloomberg) — China Steel Corp., Taiwan’s largest producer, will cut prices for domestic customers after the island’s industrial output slowed.

Prices will fall by an average 4.2 percent for July and August contracts, the Kaohsiung-based company said in an e-mailed statement today. Hot-rolled coil, a benchmark product, will fall by an average NT$1,754 ($61) a metric ton, while cold- rolled steel will be cut by an average NT$1,419 a ton.

Steel demand may decline after industrial production increased at the slowest pace in 19 months in April. Vehicle and auto part output fell 0.35 percent last month from a year earlier, the Ministry of Economic Affairs said May 23.

China Steel dropped 0.4 percent to close at NT$34.25 in Taipei before the announcement. The stock has climbed 2.2 percent this year, compared with the 2 percent decline in the benchmark Taiex index.

Electro-galvanized sheet prices will be cut by NT$1,500 a ton, electrical sheets by NT$2,600, and hot-dipped zinc-galvanized sheets by NT$1,613, China Steel said. Prices of plates, bars and wire rods will be left unchanged, the steelmaker said, without giving specific percentage changes for the products.

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Commodities, China and 2012

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From Art Patten, Symmetry Capital Management, LLC

A brief overview of our current thinking on the financial market and economic outlook—please see important disclosures at the bottom of this email:


Yesterday’s rally provided a reprieve from strong selling pressures, but was low-conviction judging by trading volumes and bond market behavior. I suspect it will prove temporary and that the current trend will remain negative. Normally we could ascribe that to seasonal dynamics—for example, the old “sell in May and go away” adage—but there are some really strange forces at work, and almost all of them are bearish. They may not cause much damage in the coming quarters, but at some point they will. Our current guess is 2012, but it could start earlier.

  • Recent commodity market volatility indicates to us that the trade is highly levered on the bullish side, and thus increasingly fragile. As long as there’s real demand, the investment (speculative!?) demand from developed world investors can do OK (and then some, in recent quarters). But there are now rumors of commodity supplies being used in China in much the same way that houses were used in some western countries 2005-2007, tech stocks 1998-2000, and so on here), and monetary and credit indicators from China do not bode well for commodity prices right now.
  • There are similarly fragile dynamics in Europe, where continental banks levered up on the debt of countries that now can’t pay their bills, as they surrendered monetary autonomy to join a union with no fiscal authority (and a real anti-fiscal fetish, as embodied in the Maastricht Treaty). Money and credit indicators out of Europe look absolutely horrific at the moment.
  • Either of those fragile equilibria could break hard in 2011, with the usual contagion to financial markets and asset prices. If they are not managed proactively (a serious possibility given (1) the zero-bound on central banks’ interest rate targets and (2) the prevailing deficit and debt phobias around the world) it will spread to the global economy yet again, against a backdrop of already-high unemployment and painful relative price shocks from food and fuel.
  • On a relative basis, the U.S. looks attractive. However, in 2011-2012, the proportion of young adults in the U.S. economy turns negative here), something that is strongly associated with recessions.
  • Fiscal austerity will only worsen things. In fact, we’re not surprised by the softness in U.S. leading indicators, given announcements that federal tax receipts were better than expected. Remember—today, the federal budget deficit is what gold mines were in the 19th century. In an over-levered economy slowly recovering from recession, it would have been very hard to produce too much new gold (money) back then, and the last thing you would have done is re-bury whatever gold was produced. But ‘fiscal discipline’ today amounts to the very same thing! Granted, it’s rational to worry that larger deficits will mean higher tax rates, as few politicians—and far too few economists!—grasp the reality of our monetary system and how it interacts with fiscal policy.
  • The current trajectory of the debt ceiling negotiations is depressing. The GOP believes that government spending crowds out private investment, as though money comes from somewhere ‘out there’ or is still dug out of the ground. The Dems can’t get over their beloved ‘Clinton surpluses,’ ignoring the fact that they, like every other significant federal budget surplus, were followed by a recession. For the last few weeks, a few members of the GOP have been pointing out (correctly) that the U.S. will not default. It will direct revenues to Treasury debt holders first, and be forced to make severe spending cuts elsewhere. This will further undermine an already anemic level of overall demand. In fact, fiscal authorities in most parts of the world are doing all they can to undermine global aggregate demand. The U.S. Congress is just now joining the party.
  • U.S. equity markets aren’t indicating an imminent recession, but keep in mind that they were more of a coincident than a leading indicator when the last one started in December 2007. I expect a similar dynamic this time around, with a sideways trend eventually giving way to one or more financial shocks and the eventual realization that we’ve driven ourselves into the ditch yet again.
  • Longer-term, we’re heading into an environment in which the relative impotence of monetary policy will become a new meme, a 180-degree turn from the last four or five decades. And it will probably take at least a decade for macro policy to adjust (Japan’s policymakers still haven’t, over 20 years later). More lost decades ahead? We’re starting to think it’s a wise bet.
  • The only factors that look benign at the moment are in U.S. credit markets. They imply that the employment picture should continue to improve and that the U.S. economy is not nearing recession. If we had to guess, we’d predict one or two financial market shocks ahead, but depending on their timing, there could be something of an equity market rally after the usual summer doldrums. But it might involve significant sector rotation, and our outlook for 2012 is rather pessimistic at the moment.

Finally, here’s a chart that the NYT ran in January that makes a compelling case that a 1970s-style inflation is off the table. If time allows, I’ll pen an Idle Speculator piece this summer on why that is. In the meantime:

Symmetry Capital Management, LLC (SCM) is a Pennsylvania-registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, nor is it a recommendation to engage in any investment strategy. This material does not take into account your personal investment objectives, financial situation and needs, or personal tolerance for risk. Thus, any investment strategies or securities discussed herein may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment activity, and it is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any investment strategy or security. SCM does not guarantee any specific outcome from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.

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Altman Sees Dealmaking Recovery Surpassing $4 Trillion Record

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As previously discussed on this website, the stock market continues to be stacked against investors.

Management is too often incented to sell shareholders down the river in securing it’s own fortunes.

For example, management thinks nothing of issuing highly dilutive preferred’s and convertible’s, etc.

This means the shares are worth more if you own enough for control, which bypasses ‘anti shareholder’ incentives.

In other words, market forces are continuing to work to keep most stocks at prices where they are take over targets

Altman Sees Dealmaking Recovery Surpassing $4 Trillion Record

By Serena Saitto

May 6 (Bloomberg) — Dealmaking is at the beginning of a recovery whose peak will exceed the record $4 trillion of takeovers clinched at the height of the merger boom in 2007, according to Evercore Partners Inc.’s Roger Altman.

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The Wall of Shame (cont.)

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Today is year and in Japan,
which means the last few days could be mainly quarter end and year end maneuvers,
with a high probability of ‘buy the rumor sell the news’ types of unwinds coming up.

This would include the anticipation of another 200,000 new private sector jobs to be reported tomorrow am.
And the euro strength we’ve seen in front of the announced ECB rate hike next week.

There have been lots of promotional reasons to rush to get stocks on your books for year and/quarter end reporting,
as well as a bit of gold, silver, foods, and other commodities.

But fundamentally I see what’s going on below- a world heck bent on removing aggregate demand.

More noises from Japan on how they will pay for the rebuild, which looks to be a very modest appropriation tempered by fears of being at a fiscal tipping point.

UK austerity ratchets up April 1.

China still fighting inflation with further reduced spending and lending.

The euro zone demanding and getting austerity in return for funding, with signs in some members of austerity no longer bringing down deficits as revenues fall off from economic weakness. And no fiscal safety net if it does all go bad as markets have shown extreme reluctance to fund countercyclical deficits.

And food and fuel from monopoly pricing both eating into consumer demand and driving large segments of the world population into desperation.

Talk of Q1 US GDP down to maybe only +2%, housing still bumping along the bottom, and Q2 threatened by supply shortages due to the earthquake in Japan.

And the US debt ceiling showdown now possibly happing late next week as the deficit terrorists seal their congressional victory with the promised down payment on net spending cuts that won’t end there.

In fact, their army of support is now all but universal.

Everyone in DC and the mainstream media and economics profession agrees on the problem.

The only discussion is where the cuts should be, and who should pay more.

March 31, 2011
President Barack Obama
The White House
1600 Pennsylvania Avenue, NW
Washington, DC 20500
The Honorable John Boehner
Speaker of the House
1101 Longworth House Office Building
Washington, DC 20515
The Honorable Nancy Pelosi
House Minority Leader
235 Cannon House Office Building
Washington, DC 20515
The Honorable Harry Reid
Senate Majority Leader
522 Hart Senate Office Building
Washington, DC 20510
The Honorable Mitch McConnell
Senate Minority Leader
361-A Russell Senate Office Building
Washington, DC 20510

Dear President Obama, Speaker Boehner, Minority Leader Pelosi, Majority Leader Reid, and Minority Leader McConnell:


As you continue to work on our current budget situation, we are writing to let you know that we join with the 64 Senators who recently wrote that comprehensive deficit reduction measures are imperative, and to urge you to work together in support of a broad approach to solving the nation’s fiscal problems. As they said in their letter to President Obama:

“As you know, a bipartisan group of Senators has been working to craft a comprehensive deficit reduction package based upon the recommendations of the Fiscal Commission. While we may not agree with every aspect of the Commission’s recommendations, we believe that its work represents an important foundation to achieve meaningful progress on our debt. The Commission’s work also underscored the scope and breadth of our nation’s long-term fiscal challenges.

Beyond FY2011 funding decisions, we urge you to engage in a broader discussion about a comprehensive deficit reduction package. Specifically, we hope that the discussion will include discretionary spending cuts, entitlement changes and tax reform.

By approaching these negotiations comprehensively, with a strong signal of support from you, we believe that we can achieve consensus on these important fiscal issues. This would send a powerful message to Americans that Washington can work together to tackle this critical issue. Thank you for your attention to this matter.”

We agree with this letter and hope that you will work together to agree on a comprehensive, multi-year debt stabilization package.

Sincerely,
The Honorable Roger C. Altman
Former Assistant Secretary of the U.S.
Department of the Treasury; Founder
and Chairman, Evercore Partners

Barry Anderson
Former Acting Director, Congressional
Budget Office

Joseph Antos
Wilson H. Taylor Scholar in Health Care
and Retirement Policy, American
Enterprise Institute

The Honorable Martin Baily
Former Chairman, Council of Economic
Advisers

Robert Bixby
Executive Director, Concord Coalition

Charles Blahous
Research Fellow, Hoover Institute

Erskine Bowles
Former Co-Chair, National Commission
on Fiscal Responsibility and Reform

The Honorable Charles Bowsher
Former Comptroller General of the
United States

The Honorable John E. Chapoton
Former Assistant Secretary for Tax
Policy, U.S. Department of the Treasury

David Cote
Former Member, National Commission
on Fiscal Responsibility and Reform;
Chairman and CEO, Honeywell
International

Pete Davis
President, Davis Capital Investment
Ideas

John Endean
President, American Business
Conference

The Honorable Vic Fazio
Former Member of Congress

The Honorable Martin Feldstein
Former Chairman, Council of Economic
Advisers

The Honorable William Frenzel
Former Ranking Member, House
Budget Committee; Co-Chair,
Committee for a Responsible Federal
Budget

Ann Fudge
Former Member, National Commission
on Fiscal Responsibility and Reform;
Former CEO, Young & Rubicam Brands

William G. Gale
Senior Fellow, Brookings Institution William A. Galston
Senior Fellow and Ezra K. Zilkha Chair,
Brookings Institution

The Honorable Bill Gradison
Former Ranking Member, House
Budget Committee

The Honorable Judd Gregg
Former Chairman, Senate Budget
Committee

Ron Haskins
Senior Fellow, Brookings Institution

Kevin Hassett
Senior Fellow and Director of Economic
Policy Studies, American Enterprise
Institute

G. William Hoagland
Former Staff Director, Senate Budget
Committee

The Honorable Glenn Hubbard
Former Chairman, Council of Economic
Advisers; Dean, Columbia Business
School

David B. Kendall
Senior Fellow for Health and Fiscal
Policy, Third Way

The Honorable Bob Kerrey
Former Member of Congress

Donald F. Kettl
Dean, School of Public Policy,
University of Maryland

The Honorable Charles E.M. Kolb
President, Committee for Economic
Development

The Honorable Jim Kolbe
Former Member of Congress

Lawrence B. Lindsey
President and CEO, The Lindsey Group;
Former Director, National Economic
Council

Maya MacGuineas
President, Committee for a Responsible
Federal Budget

The Honorable N. Gregory Mankiw
Former Chairman, Council of Economic
Advisers

The Honorable Donald Marron
Director, Urban-Brookings Tax Policy
Center; Former Acting Director,
Congressional Budget Office

William Marshall
President, Progressive Policy Institute

The Honorable James T. McIntyre, Jr.
Former Director, Office of Management
and Budget

Olivia S. Mitchell
Economist

The Honorable William A. Niskanen
Chairman Emeritus and Distinguished
Senior Economist, Cato Institute; Former
Acting Chairman, Council of Economic
Advisers

The Honorable Jim Nussle
Former Director, Office of Management
and Budget; Former Chairman, House
Budget Committee; Co-Chair,
Committee for a Responsible Federal
Budget Michael E. O’Hanlon
Senior Fellow and Sydney Stein Jr.
Chair, Brookings Institution

The Honorable Paul O’Neill
Former Secretary of the U.S.
Department of the Treasury

Marne Obernauer, Jr.
Chairman, Beverage Distributors
Company

Rudolph G. Penner
Former Director, Congressional Budget
Office

The Honorable Timothy Penny
Former Member of Congress; Co-Chair,
Committee for a Responsible Federal
Budget

The Honorable Alice Rivlin
Former Director, Congressional Budget
Office; Former Director, Office of
Management and Budget; Former
Member, National Commission on
Fiscal Responsibility and Reform

The Honorable Charles Robb
Former Member of Congress

Diane Lim Rogers
Chief Economist, Concord Coalition

The Honorable Christina Romer
Former Chairwoman, Council of
Economic Advisers

The Honorable Robert E. Rubin
Former Secretary of the U.S.
Department of the Treasury

The Honorable Martin Sabo
Former Chairman, House Budget
Committee

Isabel V. Sawhill
Senior Fellow, Brookings Institution

Allen Schick
Distinguished University Professor,
University of Maryland

Sylvester J. Schieber
Former Chairman, Social Security
Advisory Board

Daniel N. Shaviro
Wayne Perry Professor of Taxation,
New York University School of Law

The Honorable George P. Shultz
Former Secretary of the U.S.
Department of the Treasury; Former
Secretary of the U.S. Department of
State; Former Secretary of the U.S.
Department of Labor

The Honorable Alan K. Simpson
Former Member of Congress; Co-Chair,
National Commission on Fiscal
Responsibility and Reform

C. Eugene Steuerle
Institute Fellow and Richard B. Fisher
Chair, Urban Institute

The Honorable Charlie Stenholm
Former Member of Congress; Co-Chair,
Committee for a Responsible Federal
Budget The Honorable Phillip Swagel
Former Assistant Secretary for
Economic Policy, U.S. Department of the
Treasury

The Honorable John Tanner
Former Member of Congress

John B. Taylor
Mary and Robert Raymond Professor of
Economics, Stanford University; George
P. Shultz Senior Fellow in Economics,
Hoover Institution
The Honorable Laura D. Tyson
Former Chairwoman, Council of
Economic Advisers; Former Director,
National Economic Council
The Honorable George Voinovich
Former Member of Congress

The Honorable Paul Volcker
Former Chairman, Federal Reserve
System

Carol Cox Wait
Former President, Committee for a
Responsible Federal Budget

The Honorable David M. Walker
Former Comptroller General of the
United States


The Honorable Murray L.
Weidenbaum
Former Chairman, Council of Economic
Advisers

The Honorable Joseph R. Wright, Jr.
Former Director, Office of Management
and Budget
Mark Zandi
Chief Economist, Moody’s Analytics

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Welcome to the 7th US depression, Mr. bond market

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Looks to me like the lack of noises out of Japan means there won’t be a sufficient fiscal response to restore demand.

If anything, the talk is about how to pay for the rebuilding, with a consumption tax at the top of the list.

That means they aren’t going to inflate.
More likely they are going to further deflate.
Yes, the yen will go down by what looks like a lot, maybe even helped by the MOF, but I doubt it will be enough to inflate.

In fact, all the evidence indicates that Japan doesn’t don’t know how to inflate, nor does anyone else.

Worse, what they all think inflates, more likely actually deflates.

0 rate policies mean deficits can be that much higher without causing ‘inflation’ due to income channels and supply side effects.
There is no such thing as a debt trap springing to life.
Debt monetization is a meaningless expression with non convertible currency and floating fx.
QE mainly serves to further remove precious income from an already income starved economy.

Only excess deficit spending can directly support prices, output, and employment from the demand side, as it directly adds to incomes, spending, and net savings of financial assets.

The international fear mongering surrounding deficits and debt issues is entirely a chicken little story that’s keeping us in this depression (unemployment over 10% the way it was measured when the term was defined) that’s now taking a turn for the worse.

The euro zone is methodically weakening it’s ‘engines of growth’- its own (weaker) members being subjected to austerity measures that are reducing their deficit spending that paid for their imports from Germany. And now China, Japan, the US and others will be cutting imports as well.

UK fiscal austerity measures are accelerating on schedule.

The US is also working to tighten fiscal policy, particularly now that both sides agree that deficit reduction is in order, beaming as they make progress towards agreeing on the cuts.

The US had 6 depressions while on the gold standard, which followed the only 6 periods of budget surpluses.
And now, even with a floating fx policy and non convertible currency that allows for immediate and unlimited fiscal adjustments,
we have allowed the deflationary forces unleashed by the Clinton budget surpluses to result in this 7th depression.

We were muddling through with modest real growth and a far too high output gap and may have continued to do so all else equal.

But all else isn’t equal.

Collective, self inflicted proactive austerity has been working against growth, including China’s ‘fight against inflation.’

And now Japan’s massive disaster will be deflationary shock that, in the absence of a proactive fiscal adjustment, is highly likely to further reduce world demand.

Hopefully, the Saudis capitulate and follow the price of crude lower, easing the burden somewhat on the world’s struggling populations.
If so, watch for a strong dollar as well.

And watch for a lot more global civil unrest as no answers emerge to the mass unemployment that will likely get even worse. Not to mention food prices that may come down some, but will remain very high at the consumer level as we continue to burn up our food supply for motor fuel.

And it’s all only likely to get worse until the world figures out how its monetary system actually works.

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Libya Libya Libya

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Here’s my take.

As before, all the world actually cares about is the price of oil.

And the internal struggle will wind down with someone controlling the oil.

And whoever gets control of the oil wants the oil for only one reason- to sell it.

In a land of haves and have nots (at all levels), and no understanding of fiscal balance, it’s all about having the oil to sell.

So that means prices go back to where the Saudis want them to be.

My guess, and all anyone can do is guess, is Brent at maybe 100 which puts WTI maybe just under 90 until the glut issues are sorted out.

If this happens, seems-

The long oil long trades reverse.
Food prices back off some.
The view of the economy goes from half empty to half full.
The dollar gets a lot stronger.
Energy related stocks lose, others win.
But a stronger dollar may dampen prospects for US stocks.
Bonds move with stocks.
Attention shifts back to China, Europe, UK, and US fiscal policies, which are all in tightening mode.

And happy birthday to my brother Seth who turns 60 today! He just posted some old family pictures on facebook.

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March 30 2009 post

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Here’s what I said back a couple of years ago.

Unfortunately, not much has changed (including my suggestion at the time in an earlier post that it was all a pretty good environment for stocks which could easily double).

Review of the recession and how to end it

March 30th, 2009

  1. The problem is suboptimal output and employment which is evidence of a lack of aggregate demand.
     

  2. Less important what caused the drop in aggregate demand

    • The end of the subprime expansion in 2006 reduced the demand for housing
       
    • The wind down of the one time Q2 2008 fiscal adjustment (Q2 2008 GDP was up 2.8%)
       
    • The Mike Masters inventory liquidation that began in July 2008 added supply from inventories, reducing output and employment
       
    • A shift in the propensity to spend due to the pro cyclical nature of credit worthiness

     

  3. My proposals for restoring aggregate demand:

    • A full payroll tax holiday – This tax is taking $1 trillion per year from workers and businesses struggling to make ends meet $1,000 per capita in revenue sharing for the States (approx. $300 billion total).
       
    • Federal funding for a $8 per hour full time job for anyone willing and able to work that includes federal health care.
       
    • Caveat – Unless our demand for motor fuel is cut in half, restoring aggregate demand will also empower the Saudis to set ever higher prices for crude oil which will cause our real terms of trade and standard of living to deteriorate.
       
    • Political options for reducing imported fuel consumption:
       

      • Regressive – utilizing allocation by price (Carbon tax, fuel taxes)
         
      • Closer to neutral – mandating higher fuel economy requirements for new vehicles, offering incentives to trade up to more fuel efficient vehicles
         
      • Progressive – substantially reducing speed limits to discourage driving and advantage public transportation

     

  4. Redirect banking to serve public purpose

    • Ban banks from all secondary markets.
       
    • Allow bank lending only to serve public purpose.
       
    • Do not use the liability side of banking for market discipline.

     

  5. Analysis of current situation

    • Our leaders believe they must first ‘get credit flowing again’ to restore output and employment.
       
    • Unfortunately the reverse is the case; restoration of output and employment will restore the flow of credit.
       
    • Government is removing about $1 trillion per year in payroll taxes from employees and employers who can’t meet their mortgage payments and wondering what is causing the financial crisis.
       
    • All moves to date by the Treasury and Federal Reserve have only served to shift financial assets between the public and private sectors. Nothing has directly added to aggregate demand.
       
    • Therefore the economy has continued to deteriorate, with only the ‘automatic stabilizers’ slowly adding financial assets and income to the private sector, as the counter-cyclical deficit rises.
       
    • The rate of federal deficit spending (not counting TARP and other shifting of financial assets that does not directly alter demand, as above) now exceeds 5% of GDP and seems to have begun moving the economy sideways.
       
    • The new fiscal package starts taking effect in April. While modest in size, it isn’t ‘nothing’ and will further support GDP.
       
    • Employment will not grow until real output of goods and services exceeds productivity growth.
       
    • Fuel prices are already moving higher.

     

  6. Conclusion

    • Leadership that doesn’t understand how the monetary system works has needlessly prolonged the recession and delayed the recovery.
       
    • They have put a premium on ‘confidence’ as the President spends countless hours in front of the TV cameras, when in fact loss of ‘confidence’ means only that federal taxes can be lower for a given level of federal spending:

      lower confidence = less private sector spending = less aggregate demand = lower taxes or higher federal spending to sustain output and employment

    • The headline USD trillions they have directed towards the financial sector has accomplished little or nothing beyond burning up expensive political capital and credibility.
       
    • They are in this way over their heads, and it’s costing us dearly.
       
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John Taylor (Mr Hedge Fubd FX — not Mr. Hoover Institute Economist :))

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The highlighted part is what I was getting at previously.
The idea that QE does nothing is now reasonably well distributed.
Those holding positions include a lot of managers who highly suspect QE does nothing.
But they believe others who do believe QE is ‘inflationary money printing’ will keep driving prices.

Same with austerity. The idea that it makes things worse is taking hold, but those who believe it is a good thing- that govt borrowing takes away money from the private sector and all that nonsense- still have the upper hand.

But ‘reality’ is working against those out of paradigm, as the dollar is firming and the rest showing signs of coming apart as well.

As for Europe, it all holds as long as the ECB keeps buying bonds in the secondary market in sufficient size to keep shorter term yields reasonable. And comes apart when they don’t.

The problem is politically it isn’t ‘fair’ to spend euro resources on targeted nations, which carries with it the notion that all the others are ultimately paying for it, though they don’t know exactly how that will play out. So you see the core addressing that with loud noises of restructuring, etc. which may or may not happen. But the real possibility is there.

My proposal of the ECB making per capita distributions to all the member nations of, say 10% of GDP in the first round, would not carry that notion of ‘unfairness’

And as long as member nation spending was appropriately constrained politically there would be no inflation or monetary ramifications, apart from better credit ratings and the ability to fund existing deficits at lower risk premiums.

But it’s still not even a consideration, best I can tell.

Fasten Your Seatbelt
November 11, 2010
By John R. Taylor, Jr.
Chief Investment Officer, FX Concepts

‘… Although the world believes that QE2 is there to push the dollar sharply lower, Bernanke argued that his goal was something else. On the day after the Fed’s move, he wrote in a Washington Post editorial piece that QE2 would push up the equity market, bonds, and other risky securities thereby stimulating consumption and economic activity. Even Greenspan did not publicly proclaim his “put,” but now Bernanke has made it the centerpiece of US strategy. Equities are already overpriced, with profit margins at all-time highs and PE ratios far above average. Speculation is now more American than apple pie – but this is a very risky time to practice it. As one highly respected analyst noted about Bernanke’s article, “these are undoubtedly among the most ignorant remarks ever made by a central banker.” As we and many others have noted that QE has shown little or no positive impact on actual economic activity, so the Fed has taken a big gamble, and if it fails as we expect it will have nowhere else to go. With the Republican victory tainted by the Tea Party “starve the beast” mentality, austerity has come to Washington. This next year will be a terrible one for the world’s biggest economy, so we would go against Bernanke on the equity side, but buy government bonds along with him…’

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