Category Archives: USA

Thaler’s Corner 04-22-2013 2013: And now?

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Again, very well stated!

Thaler’s Corner

I must admit that I am at a loss for words these days. The analytical items at our disposal describe a situation so complex, given a myriad of contradictory influences, that I find it impossible to develop any sort of reasonable scenario.


I have spent a lot of time in recent weeks exchanging ideas and perceptions with academics, political officials and others in an effort to develop a coherent explanation of the events unfolding before us (Cyprus, wealth tax, etc.), but the conclusions are anything but conclusive!

Changes in financial securities will no longer be determined by purely economic factors but more and more by political decisions, such as whether or not to establish a real European banking union with all that implies in terms of cross-border budget transfer risks.

Whatever, lets take a look at the state of the real economy in the United Sates and Europe, given that it is still a bit early to draw any sort of conclusions about a third economic motor, Japan.

By the way, I strongly recommend that people check out the links in todays Macro Geeks Corner toward the end of the newsletter. It is interesting to see how two fairly divergent schools of thinking (the two first texts) end up with rather similar conclusions.

United States

In the United States, the economy is (logically) slowing as the effects of the Sequester slowly make themselves felt. Only the (increasingly discredited) partisans of Reinhold & Rogoffs constructive austerity thought it would not affect household consumption.

We had to wait for the hike in payroll taxes for the effect to be seen in retail sales figures, down 0.4% in March. Similarly, all the latest leading economic (PMI) and confidence indicators came in below expectations, which augurs for a soft patch in the US.

Moreover, the yens decline can only have a negative impact on America trade balance with Japan as it puts US exporters at a disadvantage, in particular, as they compete with their Japanese rivals on Asian markets. And the pitiful state of the European economy is not going to help this sector of the US economy either.

But there remains one bright spot, namely the residential real estate market, which should remain a powerful support in the quarters ahead. Check out one of my favorite graphs real animal rates.

Real animal rates in the US:


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These rates are calculated using a proprietary equation I developed, which includes, in addition to terms like mortgage interest rates, recent home price trends, the difference between the reported unemployment rate and that during periods of full employment, and the difference between the average length of unemployment and that existing in times of full employment.

With the Animal Spirits so dear to Keynes and behavioral science in mind, the goal was to factor in items more subjective than simple economic criteria (nominal borrowing rates) in the home purchase decision-making process of a household.

If experience has taught us anything, it is that the factors which most influence a potential homebuyers decision is his degree of job security and the feeling that prices can only rise.

The first point is that the only time these real animal rates dipped into negative territory (in the upper part of graph, transcribed in inverted scale) corresponds perfectly with the great real estate bubble of 1998 to 2006.

This big trend reversal occurred in 2006 when rates resurfaced above zero and thus below the graphs red line.

The only other time real animal rates became negative was in 1989, but that was abruptly reversed by the sharp hike in nominal interest rates.

In the current context, nominal interest rates are unlikely to undergo any such sharp hike in the quarters ahead, and this dip of real animal rates into negative territory should enable the real estate market to continue to recover. This all the more true, given that the yens decline will only strengthen disinflationary trends in North America, which ensure accommodative monetary policies for some time to come!

All you need to do is look at the steep decline in inflationary expectations, as expressed by the TIPS market in the US, to understand that investors seem to have finally realized that QE policies have nothing to do with the so-called dollar printing press. Notwithstanding the ZeroHedge paranoids!

That said, existing home sales in the US, out just a few minutes ago, came in weak, at -0.6% m-o-m (vs expected +0.4%, i.e. 4.92M vs 5M), which explains this afternoon shiver on stockmarket indices.

Now, as the IMF has said in recent days, the main brake on a worldwide recovery is the Eurozone, which remains paralyzed by the obsession of its northern member states on austerity and by the ECBs total and unforgivable incapacity to comply with its own mandate! In todays Macro Geeks Corner, you will find two instructive links on this matter.

Eurozone

Instead of harping on the endless stream of errors made by our beloved European monetary and governmental leaders, I prefer to comment on some far more instructive graphs.

Lets start with our graph on aggregate 2-year Eurozone government bond rates, which have proven to be so useful in recent years for evaluating the ECBs reaction function.

This rate, currently at a record low 0.55%, is now well below the 0.75% set for the refi. This stems from two factors.

First, in view of the state of the economy and the latest comments by certain ECB board members, investors expect that the refi rate will very soon (May or June) be cut to 0.50%.

Second, certainty that short-term interest rates, like the Eonia, which have been stuck between 5 bps and 12 bps for the past 9 months, are not going to rise anytime soon is pushing investors to seek yields wherever they can still find them, like in Spain and Italy where 2-year bonds still fetch between 1.95% and 1.25%, now that they are assured that, henceforth, in case of insolvency, bank depositors will be forced to pay the bill without pushing sovereign issuers into default, as happened in Greece!

Aggregated Eurozone government 2-year rate:

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However, we have reason to be concerned that the ECB, if it does lower the refi to 0.50%, will be satisfied with what it already deems a low rate and highly accommodative monetary policy. Such is far from being the case, even if we go by the ECBs own obsolete aggregates, like M3, as money velocity continues to skid to a halt, following Cyprus.

And all this has an impact on the real economy, as you can see in the following graphs.

Eurozone Industrial Production

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The least we can say is that this graph is particularly distressing. Of course, it does not account for the economys industrial aspect, which some call the old economy. But it provides a whole lot of jobs and no economic area can afford to neglect it.

And the impact of Mr Sarkozys renowned Walk of Canossa, following his summons by Ms Merkel in July 2011 to Berlin where the unfortunate decision to create the first sovereign default of a developed country was endorsed (Greek PSI), is very clear on this graph. Together with a hardening of austerity policies and the nefarious consequences of the ECBs hikes of benchmark interest rates in the spring of 2011, this decision torpedoed already distressed economies, with the consequences we all know today.


But if there is one depressing economic indicator, which reflects even more cruelly how austerity affected the Eurozone, it is surely the unemployment curve.

Eurozone Unemployment

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Here again, no comment is needed. I included earlier in this newsletter the graph comparing the US and Eurozone curves, but even that is no longer all that relevant. If people are happy to underperform the United States, who cares? If the Eurozone wants to try liquidationist economic policies to help drive home the morality message, it has every right to do so, just as its citizens merit the leadership they elect.

But to go from there to creating a situation of hysteria, leading to an increasingly large segment of the active population being ejected from the labor market, is a big step that must never be taken.

In some countries, the figures are just horrifying, with nearly 30% general unemployment and over 50% for those under 25 years of age. It is incredible that some continue to boast the merits of such policies for countries like Ireland while ignoring the daily siphoning of the population due to massive immigration to seek jobs elsewhere!!

I wonder if those responsible for such policies have forgotten the consequences of such an approach in Europe and the breakdown in the social fabric during the Great Depression, especially now, with so many leaders spicing their speeches with anti-German references?

This pathetic situation, reflecting month after month of economic policies based on no worthwhile or credible foundations, be it on a theoretical or empirical basis, explains why I am having a hard time re-establishing a decent pace of publication.

This is especially so in that the conflict between this depressive macro situation and the strong efforts undertaken by the Fed and the BoJ (among others) to reignite economic activity leave no space for laying out clear asset allocation biases.

We continue to enable our clients to take advantage of opportunities on option markets which make it possible during these troubled times to make bets on the cheap but without any real conviction.

Has our asset allocation strategy, dating from 2007 (a bit early, I know), of favoring government debt came to maturity with German 10-year rates at 1.23%, i.e. more than 30 bps below those of the United States?

Will European stock markets continue to suffer from our big fear, the Japanese syndrome? Or will popular pressure push the ECB and the Austrian School proponents to realize that they have a modern currency at their disposal and that reversing their entire intellectual edifice is possible?


Despite all my efforts, studies, reading and discussion, I am totally incapable of responding to these questions, which a great lesson in humility. Sorry for the consequences in terms of this newsletters clarity and frequency of publication, but if anyone has any ideas, I am all ears!

The Macro Geeks Corner:

Dear Northern Europeans Monetary easing is not a bailout

A factual rebuttal of remarks of ECB chief Jrg Asmussen, made at the Bank of America/Merrill Lynch Investor conference

Breaking bad inflation expectations

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U.S. Warns Japan on Yen

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So does the US have a strong dollar policy, a weak dollar policy, or an ‘unchanged’ dollar policy?

In any case, President Obama and Congress still fail to recognize that imports are real benefits and exports real costs. And that net imports mean taxes can be lower and/or spending higher to sustain full employment levels of demand.

So what would you rather have?
1. A strong dollar, rising net imports, and lower taxes, or
2. A weak dollar, falling net imports, and higher taxes?

How hard is this???

As for Japan, the BOJ hasn’t actually done anything to weaken the yen. Nor has fiscal policy, at least yet, though if the announced deficit hike goes through it could be a modestly weakening influence. The trade flows going into deficit from surplus have hurt the yen, as gas and oil replaced the nukes that were shut down, though they are in the process of relighting them. And portfolio shifting has probably weakened the yen the most, with life insurance companies, pensions, etc. reportedly adding risk to their portfolios by shifting from yen assets to dollar and euro assets. Yes, this is a ‘one time’ adjustment, but it can be sizable and take years, or it could have already run its course. I personally have no way of knowing, but no doubt ‘insiders’ are fully aware of how this will play out.

Furthermore, the US is going the other way with tax hikes and spending cuts a firming influence on the dollar, which is at least part of the yen/dollar weakness.

Too many cross currents for me to bet on one way or another. If you have to trade it go by the charts and don’t watch the news…

U.S. Warns Japan on Yen

By Thomas Catan and Ian Talley

April 12 (WSJ) — The Obama administration used new and pointed language to warn Japan not to hold down the value of its currency to gain a competitive advantage in world markets, as the new government in Tokyo pursues aggressive policies aimed at recharging growth.

In its semiannual report on global exchange rates, the U.S. Treasury on Friday also criticized China for resuming “large-scale” market interventions to hold down the value of its currency, calling it a troubling development. The U.S. stopped short of naming China a currency manipulator, avoiding a designation that could disrupt relations between the world powers.

The Chinese Embassy didn’t immediately respond to a request for comment. A Japanese government official reached early Saturday in Tokyo declined to comment directly on the Treasury report, but said, “We will continue to abide by” recent commitments by global financial policy makers to avoid intentional currency devaluation”as we have done until now.”

The Treasury report appears to be part of a broader strategy by the Obama administration in response to a sharp shift in economic policy in Japan under new Prime Minister Shinzo Abe.

Hours before the currency warning, the White House said it had accepted Mr. Abe’s request to join negotiations to create an ambitious pan-Pacific free trade zone, despite objections from the American auto industry and other domestic sectors worried about new competition from Japan. The U.S. government is welcoming economic reforms in Japan while trying to discourage Tokyo from reverting to prior tactics of trade manipulation.

The Bank of Japan kicked off the latest drop in the yen by shocking markets last week by announcing plans for a massive increase in money supply, pledging a sharp increase in purchases of government bonds and other assets. The dollar has risen nearly 7% against the yen since then, and is up 15% since Mr. Abe came into power on Dec. 26.

Policy makers in Japan sensitive to currency complaints and warnings have repeatedly insisted in recent days that the yen’s sharp fall has merely been a byproduct of its stimulus policies, not a goal.

“We have no intention to conduct monetary policy targeting the exchange rate,” Haruhiko Kuroda, the new Bank of Japan governor whose policies have helped push down the yen, said in a Tokyo speech Friday. The BOJ’s policies, he added, were aimed at pulling Japan out of its long slump and that “achieving this goal will eventually provide the global economy with favorable effects.”

Amid sluggish global growth, governments face the temptation to lower the value of their currencies to juice exports. Those pressures are aggravated as central banks in the U.S., Europe and Japan seek to spur their economies by pushing cash into the systempolicies that have the effect of weakening their currencies. Seeking higher returns, investors are putting their money into emerging markets, putting upward pressure on those countries’ currencies and making their exports more expensive abroad.

The U.S. said it would “closely monitor” Japan’s economic policies to ensure they are aimed at boosting growth, not weakening the value of the currency. The yen is now hovering near a four-year low against the dollar, in response to Mr. Abe’s policies.

“We will continue to press Japanto refrain from competitive devaluation and targeting its exchange rate for competitive purposes,” the Treasury report said.

The yen quickly strengthened following the report, pulling the dollar to as low as 98.08, its lowest level this week, in a thin Friday afternoon market. The yen later gave back some of those gains, as investors came to see the comments less as criticism than as a statement of fact.

American officials have been walking a tightrope in recent months. While worried about a deliberate currency devaluation, they have also tried to encourage Japan’s attempts to jump-start growth, after years of frustration in Washington that Tokyo wasn’t doing enough to fix its economy.

“The wording does make it clear that the U.S. Treasury is watching extremely closely” to ensure that Japan lives up to promises not to purposely weaken its currency, said Alan Ruskin, a currency strategist at Deutsche Bank in New York. But, he added, “the report does not infer that Japan is breaking any agreement.”

The Treasury report, required by Congress and closely followed by markets, highlighted the need for more exchange-rate flexibility in many Asian countries, most notably China.

The Treasury used tougher-than-usual language on China, saying Beijing’s “recent resumption of intervention on a large scale is troubling.” While it noted that China had allowed the yuan to appreciate by about 10% against the dollar since June 2010or 16% including inflationthe report said the Chinese currency remained significantly undervalued and “further appreciation” was warranted.

The Treasury in recent years under both Republican and Democratic administrations has declined to formally label China as a currency manipulator, with officials suggesting publicly and privately that such a step would hurt efforts to encourage Beijing to let the yuan rise.

Still, the question of China’s currency has become shorthand in Washington for the broader debate over the economic relationship between the two countries. It was a frequent topic on the campaign trail for both President Barack Obama and GOP challenger Mitt Romney last year, as Mr. Romney pledged that if elected, he would label China a currency manipulator.

On Friday, some U.S. manufacturers criticized the Obama administration for its reluctance to call China a currency manipulator. “The Treasury Department’s latest refusal to label China a currency manipulator once again demonstrates President Obama’s deep-seated indifference to a major, ongoing threat to American manufacturing’s competitiveness, and to the U.S. economy’s return to genuine health,” said the U.S. Business and Industry Council, an industry lobby group.

The Treasury report also took South Korea to task for seeking to keep a lid on the won as foreign investors flood the economy with cash. “Korean authorities should limit foreign-exchange intervention to the exceptional circumstances of disorderly market conditions,” and capital controls should only be used to prevent financial instability, not reduce upward pressure on the exchange rate, Treasury said.

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Global growth and US oil and product imports

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A while back I’d written about how the global economy had become leveraged to net exports to the US, which has turned out to be the case. And now with US imports of crude and products falling, another leg of this process seems to be underway, and in a world where no one runs high enough deficits to sustain domestic demand at reasonable levels.

A rough guess is 15x leverage? A US trade deficit of $500 billion is sustaining about $7.5 trillion in global ‘equity value’? More?

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My story of the Thatcher era

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Here’s how I remember it all.
I didn’t look anything up, with the idea that memories matter.

The ‘golden age’ from WWII was said to have ended around 1973. Inflation and employment was remembered as relatively low, productivity high, the American middle class thriving.

Why? Keynes was sort of followed. The Kennedy tax cuts come to mind. But also of consequence and ignored was the fact that the US had excess crude production capacity, with the Texas Railroad Commission setting quotas, etc. to support prices at maybe the $2.50-$3.00 price range. And stable crude prices, though maybe a bit higher than they ‘needed’ to be, meant reasonable price stability, as much was priced on a cost plus basis, and the price of oil was a cost of most everything, directly or indirectly.

But in the early 1970’s demand for crude exceeded the US’s capacity to produce it, and Saudi Arabia became the swing producer, replacing the Texas Railroad commission as price setter. And, of course, price stability wasn’t their prime objective, as they hiked price first to about $10 by maybe 1975, which caused a near panic globally, then after a too brief pause they hiked to $20, and finally $40 by maybe 1980.

With oil part of the cost structure, the consumer price index, aka ‘inflation’, soared to double digits by the late 70’s. Headline Keynesian proposals were largely the likes of price and wage controls, which Nixon actually tried for a while. But it turned out the voters preferred inflation to their government telling them what they could earn (wage controls on organized labor and others) and what they could charge. Arthur Burns had the Fed funds rate up to maybe 6%. Miller took over and quickly fell out of favor, followed by tall Paul in maybe 1979 who put on what might be the largest display of gross ignorance of monetary operations with his borrowed reserve targeting policy. However, a year or so after the price of oil broke as did inflation giving tall Paul the spin of being the man who courageously broke inflation. Overlooked was that Jimmy Carter had allowed the deregulation of natural gas in 1978, triggering a massive increase in supply, with our electric utilities shifting from oil to nat gas, and OPEC desperately cutting production by maybe 15 million barrels/day in what turned out to be an unsuccessful effort to hold price above $30, as the supply shock was too large for them and they drowned in the flood of no longer needed oil, with prices falling to maybe the $10 range where they stayed for almost 20 years, until climbing demand again put the Saudis in the catbird seat. Meanwhile, Greenspan got credit for that goldilocks period that again was the product of stable oil prices, not the Fed (at least in my story.)

So back to the 70’s, and continuous oil price hikes by a foreign monopolist. All nations experienced pretty much the same inflation. And it all ended at about the same time as well when the price of crude fell. The ‘heroes’ were coincidental. In fact, my take is they actually made it worse than it needed to be, but it did ‘get better’ and they of course were in the right place at the right time to get credit for that.

So back to the 70’s. With the price of oil being hiked by a foreign monopolist, I see two choices. The first is to try to let there be a relative value shift (as the Fed tries to do today) and not let those price hikes spill into the rest of the price level, which means wages, for the most part. This is another name for a decline in real terms of trade. It would have meant the Saudis would get more real goods and services for the oil. The other choice is to let all other price adjust upward to keep relative value the same, and try to keep real terms of trade from deteriorating. Interestingly, I never heard this argument then and I still don’t hear it now. But that’s how it is none the less. And, ultimately, the answer fell somewhere in between. Some price adjustment and some real terms of trade deterioration. But it all got very ugly along the way.

It was decided the inflation was caused by unions trying to keep up or stay ahead of things for their members, for example. It was forgotten that the power of unions was a derivative of price power of their companies, and as companies lost pricing power to foreign competition, unions lost bargaining power just as fast. And somehow a recession and high unemployment/lost output was the medicine needed for a foreign monopolist to stop hiking prices??? And there was Ford’s ‘whip inflation now’ buttons for his inflation fighting proposal, and Carter with his hostage thing adding to the feeling of vulnerability. And the nat gas dereg of 1978, the thing that actually did break the inflation two years later, hardly got a notice, before or after, and to this day.

As today, the problem back then was no one of political consequence understood the monetary system, including the mainstream Keynesians who had been the intellectual leadership for a long time. The monetarists came into vogue for real only after the failure of the Keynesians, who never did recover, and to this day I’ve heard those still alive push for price and wage controls, fixed exchange rates, etc. etc. in the name of price stability.

So in this context the rise of Thatcher types, including Reagan, makes perfect sense. And even today, those critical of Thatcher type policies have yet to propose any kind of comprehensive proposals that make any sense to me. They now all agree we have a long term deficit problem, and so put forth proposals accordingly, etc. as they are all destroying our civilization with their abject ignorance of the monetary system. Or, for some unknown reason, they are just plain subversive.

Thatcher?
It was the blind leading the blind then and it’s the same now.
And that’s how I remember it/her.
And i care a whole lot more about what happens next than about what happened then.

:(

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Contrasting Eur/U.S. Data/Forecasts

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Karim writes:

The single most important economic indicator in Europe was released today, the Composite PMI.

For March, it was expected to increase to 48.2 from 47.5; it fell to 46.5, the lowest level since November.

In the U.S.:

  • 4-week average of initial claims fell to a 5yr low
  • Existing single family home sales up 8.9% y/y and multi-family units up 22% y/y
  • FHFA new home prices up 6.5% y/y and NAR measure up 11.5% y/y
  • Philly Fed bounced 14 points in March and the Flash PMI (national measure) rose from 54.3 to 54.9 in March.

So, latest NowCasting forecasts:

Europe: Q1 -0.8% and Q2 revised from +0.1% to -1.05% after todays data
U.S.: Q1 +2.6% and Q2 revised from 2.8% to 3.4% over the past week (they will not account for sequester hit as forecast simply based on incoming data flow).

Euro PMI (white) vs U.S. ISM Mfg (orange) and Services (yellow): link

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Raising tax rates is “unacceptable” to House Speaker John Boehner

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I hear you.
I’m starting to get worried the ‘caveats’ are winning

:(

in any case the charts are still saying ‘sell’ even though,
ex caveats, the fundamentals are ok.

So in any case timing isn’t right yet for a long position, seems

On Fri, Nov 9, 2012 at 7:25 AM, Michael Norman wrote:
You’re pretty sanguine on being able to avoid the fiscal cliff, however, I just don’t see it.

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Posted in USA

MMT on the immediate restoration of the US’s AAA rating

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Not that it matters, of course, but all’s that’s needed is for the Fed to guarantee that all US obligations mature at 100. The Fed is fully authorized to buy US tsy securities and can certainly buy them at maturity value on their maturity date, simply by crediting the appropriate accounts. And the ratings agencies fully recognize that authority.

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