Doubting Economics

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

The Federal Reserve Bank of San Francisco, Janet Yellen’s old institution, has made a habit of breaking with orthodox trends and actually citing and disclosing deficiencies in economic study. In its latest effort, the bank channels a bit of Stanley Fischer and states the obvious, or what everyone else has known for a long time:

Over the past seven years, many growth forecasts, including the SEP’s [Summary of Economic Projections] central tendency midpoint, have been too optimistic. In particular, the SEP midpoint forecast (1) did not anticipate the Great Recession that started in December 2007, (2) underestimated the severity of the downturn once it began, and (3) consistently overpredicted the speed of the recovery that started in June 2009.

The timing of such a statement is almost too perfect, as if there were some turf war being waged within the bowels of the academic apparatus supporting the FOMC’s policymaking efforts. As you may have heard, the FOMC and its SEP has made another set of very rosy projections upon which they want the whole world to believe they will be adjusting policy. It seems at least a bit odd for FRBSF to release a study right now detailing how the Fed’s economists have been too overly and consistently sanguine going back to at least 2007.

Further, the main emphasis about the implications of all this relate to monetary policy itself. Perhaps this is, like Bernanke’s final year, an attempt to get Congress and the fiscal side to “do something” as monetary policy just isn’t effective, or at least as much as the models have been projecting.

According to the SEP, “each participant’s projections are based on his or her assessment of appropriate monetary policy.” A possible explanation for the SEP’s prediction of a rapid catch-up to potential GDP after 2009 is that participants overestimated the efficacy of monetary policy in the aftermath of a so-called balance-sheet recession…The SEP’s overprediction of the speed of the recovery could also be linked to other factors. These include possibly underestimating the damage to the economy’s supply side, as evidenced by the downward revisions to potential GDP, or perhaps expecting larger effects from stimulative federal fiscal policy.

The mention of the “damage to the supply side” is extremely important, because it relates directly to actual economic potential; as opposed to the orthodox approach of using some “updated” Phillips Curve methodology of some calculation of full employment consistent with the inflation mandate. This is a process that has led to statistical revisions in the “potential” of the US economy, especially as modeled by the CBO.

ABOOK Feb 2015 Overestimation SF Fed

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Here We Go Again: The Robo Machines Are Raging

Here we go again. The robo machines have been raging for the past two days, and by mid-afternoon we were hovering around 2045 on the S&P 500. Since that’s only 2.3% below the all-time high reached at the end of December, bubblevision’s amen chorus was back out in force, pronouncing that all is well, the momentary headwinds are fading and, yes, the bottom’s in.

Not exactly. The robo machines are actually drunk. The S&P 500 first shot through 2045 back on about November 13th, and was then on its way to 2070 by early December. It then reversed course and plunged through 2045 from above on December 10, reaching a low of 1989 a few days later. Shortly thereafter the market erupted back over 2045 on December 18th—-as it soared along an upward path to its year-end and all-time peak of 2090.

As is evident in the chart below, the zigzagging has only gotten more intense and frequent since the turn of the year. By January 2, the S&P 500 plunged back below the 2045 mark, but five days later was back above it; then it was down again on January 9, back up on January 21, and back down on January 26. So here we are on February 3 back above 2045——virtually the same spot as early November.


^SPX data by YCharts

The market is cycling, but the economic facts on the ground are not. Everywhere the trends are getting worse, and not by trivial or debatable increments. Were the stock market an actual discounting device engaged in price discovery, it would be heading south— not in circles.

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Was This American Hero Actually a Soviet Spy?

Submitted by Marin Katusa  –  Casey Research

Fact: He was rich, controversial, and his father was a communist.

Fact: He also built one of America’s leading oil companies.

Moreover, he was a major shareholder and director of a company whose main product—an orange box of baking soda—was a staple in every American fridge, and whose name mirrored his own.

The man I’m referring to is Armand Hammer. He had no immediate connection to the company, Arm & Hammer; it was in fact created 30 years before one of America’s greatest oil tycoons was even born. But Armand was as un-American as could be.

Though he later claimed he’d been christened after a character in an Alexandre Dumas novel, Armand Hammer was actually named for the hammer-and-sickle symbol of the USSR and the Socialist Labor Party of America, in which his father had a leadership role.

Armand Hammer sought to buy the company only because he was so often asked if he owned it. He’s quoted as saying: “I offered to buy it so I could say yes. But the owners didn’t want to sell.”

Booze, Drugs, and Wheat

Armand Hammer was born in New York in 1898 to Ukrainian-Jewish parents who emigrated from Odessa (then still a part of the Russian Empire) in 1875. They settled in the Bronx to run drugstores and a general medical practice.

Armand attended Columbia University Medical School and graduated in 1918 with the intent of helping out with the family business, Good Drug Co. His first foray into a business of his own was a highly profitable one: producing and selling an alcoholic solution of ginger, which was extremely popular during the Prohibition era due to its ability to act as a highball ingredient. By his graduation in 1921, the booze business had made Armand a millionaire several times over, and he would revisit it again several decades later, with the same success. Continue reading

There Are No ‘Tailwinds’

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

With the Chinese manufacturing indications “unexpectedly” disappointing over the weekend it was absolutely no surprise that US estimates of income and especially spending would as well. These overall, broader figures align closely with other indications of a dangerously weak household sector, very much explaining why the rest of the world is screaming about impending contraction.

For all that intuitive sense and logical consistency, the media and their appointed credentialed economists are talking about a totally different world. While there was acknowledgement of a “less-than-stellar” December, somehow there remains a preponderance of “tailwinds” in all commentary.

Despite ending 2014 on a weak note, lower gasoline prices and a firming labor market are expected to provide a huge tailwind to consumer spending in the first quarter.
Households have so far used much of the extra income from cheap gasoline to pay down debt and boost savings, according to economists. Gasoline prices have plunged 43 percent since June, according to U.S. government data.

The second paragraph quoted above directly contradicts the first’s blatant cheerleading, as lower gas prices have not been used for spending yet so it is completely unclear (aside from ideology) as to why that would suddenly and sharply change. As it is, any increase in spending is due in no small part to healthcare, which is clearly crowding out other more efficient activity. The major revisions to the savings rate demonstrated this zero sum existence, and now in December does no favors to those looking for a gas price “boost.”

ABOOK Feb 2015 PCEDPI Savings Rate

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Want to Sleep Better at Night? Here’s How

Submitted by William Bonner, Chairman – Bonner & Partners

Up and Down 

The Dow lost 251 points, or 1.5%, on Friday. Gold was flat. What’s ahead? Up? Down? Our best guess is we’ll have more up and more down in the months ahead. Pressure on both sides is increasing.

Downward pressure is coming from the collapse of oil, the $4.6 trillion parked in bonds yielding negative interest rates and the slowest rate of growth of world trade in 35 years.

On the upside, Fannie Mae is offering mortgages with 3% down, and the Bank of Draghi is pumping more credit into the world economy at the rate of €60 billion ($68 billion) a month.

Actually, we don’t know which of these things should be on the downside and which should be on the upside. The economy has been turned on its head so often, we no longer can tell down from up.


The art of sleeping well …

Image credit: Robinsons Bed Shop

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The VIX and the Stock Market

Submitted by Pater Tenebrarum  –  The Acting Man Blog

A Disturbance in the Farce?

We usually like to keep an eye on indicators that are not getting a lot of attention, in an attempt to circumvent the “what everybody knows isn’t worth knowing” problem. Recently, several noteworthy things have happened with the $VIX, or rather, the derivatives traded on the VIX. The VIX is a measure of implied volatility, referring to front month options on the S&P 500 Index (it used to be the S&P 100 back when OEX options were still the most liquid index options – the OEX version is these days called VXO). While the first OEX version used only at-the-money options expiring 30 days hence, the calculation has been expanded over time. Now it is a blend of front and second-month at-the-money and out-of-the-money options. Those interested in the precise calculation procedure can take a look at it here: CBOE VIX White Paper (PDF). The aim is to calculate the expected 30-day volatility of the SPX at a 68% probability (one std. deviation) as expressed by the options market.


Image credit: James Steidl / Thinkstock)

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No escape

Submitted by Dmitry Orlov  –  The ClubOrlov Blog

Quite a few of those currently inhabiting the belly of the decrepit and senile beast of western industrial civilization are experiencing an extreme sense of unease about what the future is likely to bring. But living with such a sensation is less than pleasant. In some other, perhaps less civilized language, the resolution to this crisis may be expressed as a special way of being, but in the language of civilization, the only possible work-out is through taking action. We must DO SOMETHING!

After all, who would want to not care about things that aren’t important at the moment, not think about objects that are not immediately and tangibly present, not treat depictions or representations as real or valid—but rely exclusively on their own perceptions, and perhaps those they share with those few people who are close to them? A decidedly uncivilized person, by most people’s standards. But we must remain civilized, and to be civilized means to always be driving towards some destination, even if it is an imaginary one. “Stop the world, I want to get off!” some of them exclaim in exasperation. But they are willing prisoners of this metaphor of the world as purposeful action, and their talk of escape is a mental loop (an escapist one) within another mental loop (from which there is no escape).

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Say Goodbye to the “Strong Dollar Policy”

Submitted by Michael Pento – Pento Portfolio Strategies

dollar bombIt is absurd to believe that the inhabitants of the Eccles building in D.C. promote a strong dollar policy. Printing $3.8 trillion dollars and keeping interest rates at zero percent for going on the seventh year can hardly be confused with a hard-currency regime. Merely pretending to cheer the dollar higher appears to be the Fed’s method of operation.

But since World War II every administration likes to pledge their support for a “strong dollar policy”. However, the truth is this policy has only truly been practiced in the United States on very rare occasions. The courageous Fed Head, Paul Volcker, raised interest rates to the dizzying level of 20% in order to squeeze inflation out of the economy in the early 1980’s. During his tenure the intrinsic value of the dollar increased and the economy thrived. This is because, contrary to what the Keynesians who currently run our economy believe, a strong dollar is great for America; while a weaker dollar is most efficient at destroying the purchasing power of savers.

A weak currency doesn’t boost GDP or balance a trade deficit—a philosophy that governments and central banks now embrace with alacrity. Take Japan, which still has a 660 billion yen trade deficit two years after Shinzo Abe unleashed his all-out assault on the yen, which is down a staggering 40% against the dollar since January 2013. This, after a 50-year average trade surplus of 382 billion yen prior to his reign. And, in its 25th month of massive currency depreciation, Japan still finds itself in an official recession. Continue reading

New Gold Fix To Be Run By Western and Chinese Banks – Still Not Transpare

Submitted by Mark O’Byrne  –  GoldCore

  • Replacement for the near-century-old London gold fix will start in March
  • London gold fix to Shanghai gold fix – still not transparent
  • Stealth run on the London bullion market continuing?
  • Oil surges 11%; deflation deepening
  • Increasing signs of a slowdown of the U.S. economy is supporting gold

The overhaul of the gold fixing benchmark formally known as the London Gold Fix is due to begin in March. Participants are hoping that there is less disorder than was seen for the messy launch of the London Silver Price (LSP) last August.

The Queen inspecting gold reserves in the Bank of England

Although the new system is set to go into operation at the start of next month, theLondon Bullion Market Association (LBMA) has complained to Britain’s financial regulator, the FCA, that it still has not received guidelines as to how the new system will be regulated. Continue reading

Greece FinMin: “No U-Turn” In Our Position; “Write-Off Can Occur In Several Methods” Spokesman Adds

Submitted by Tyler Durden  –  ZeroHedge

Yesterday, when we reported on the FT’s take of the supposed Greek flip-flop, we said that contrary to the official interpretation of Greece ending its demands for a hard debt write-down and replacing it with a proposal for a debt exchange, we stated that “the Greeks themselves realize that this proposal is nothing but a debt haircut under a different name, but hope that Europe will pull an Obamacare and bet on the “stupidity of their own taxpayers” to let it slide without anyone noticing. To wit: “[Varoufakis] said his proposal for a debt swap would be a form of “smart debt engineering” that would avoid the need to use a term such as a debt “haircut”, politically unacceptable in Germany and other creditor countries because it sounds to taxpayers like an outright loss.”

For the benefit of the knee jerk algos we even highlighted the key section, noting that all Varoufakis had done, was engage in semantics for the “benefit” of German taxpayers:

And not only was the Greet gambit merely a verbal paliation, the proposed alternative was in itself a non-starter, “when one considers what we explained a long time ago: namely that a distressed debt exchange, such as what Greece is proposing, is what the rating agencies have always deemed an Event of Default, and thus something which the ECB will never agree with as it once again impairs an ECB-held security” as well as is seen as ECB monetary financing of a sovereign state (the ECB does that with QE as well, but we’ll let that slide for the time being). Continue reading

History In the Balance: Why Greece Must Repudiate Its “Banker Bailout” Debts And Exit The Euro

Now and again history reaches an inflection point. Statesman and mere politicians, as the case may be, find themselves confronted with fraught circumstances and stark choices. February 2015 is one such moment.

For its part, Greece stands at a fork in the road. Syriza can move aggressively to recover Greece’s democratic sovereignty or it can desperately cling to the faltering currency and financial machinery of the Euro zone. But it can’t do both.

So by the time the current onerous bailout agreement expires at month end, Greece must have repudiated its “bailout debt” and be on the off-ramp from the euro. Otherwise, it will have no hope of economic recovery or restoration of self-governance, and Syriza will have betrayed its mandate.

Moreover, the stakes extend far beyond its own borders. If the Greeks do not take a stand for their own dignity and independence at what amounts to a financial Thermopylae, neither will the rest of Europe ever escape from the dysfunctional, autocratic, impoverishing superstate regime that has metastasized in Brussels and Frankfurt under cover of the “European Project”.

Indeed, the crony capitalist corruption and craven appeasement of the banks and financial markets that have become the modus operandi there are inexorably destroying the EU and single currency. By fleeing the euro and ECB with all deliberate speed, therefore, the Greeks will give-up nothing except the opportunity to be lashed to the greatest monetary train wreak ever recorded. Continue reading

Limits To PBOC Reform?

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

On January 20, the Chinese National Bureau of Statistics released its full-year report on Chinese GDP. The introduction makes no mistake about what the Chinese government wishes to see out of the Chinese economy:

In 2014, faced with the complicated and volatile international environment and the heavy tasks to maintain the domestic development, reform and stability, the Central Party Committee and the State Council have adhered to the general tone of “moving forward while maintaining stability”, seized the momentum of development, fully deepened the reform and opening up, focused on the innovation of macro control, tapped into the vitality of the market and fostered the driving force of innovation. As a result, the national economy has been running steadily under the new normal, showing good momentum of stable growth, optimized structure, enhanced quality and improved people’s livelihood. [emphasis added]

If you think about it, such a statement would not be out of place in an FOMC press release, as there are a lot of similarities between the communists “talking” the economy to a certain level and the Federal Reserve doing it. However, despite the intentions of a command economy, from both, complexity has intruded.

The latest PMI data (FWIW, I have a dim view of them but they seem to extract severe reactions in both directions) from China are not good. Last autumn’s hopes for a sustained rebound have been all but given up by now and thoughts are increasingly (“unexpectedly”) turning beyond probability to severity.

China’s final HSBC Purchasing Managers’ Index (PMI) fell to 49.7, a touch below its 49.8 flash reading, and after dipping to 49.6 in December. A reading below 50 indicates contraction. The data comes a day after the government’s official PMI for January also dipped into contractionary territory for the first time in two and the half years, coming in at 49.8 and surprising market watchers who were expecting expansion.

It has been increasingly evident that the total collapse in commodity prices, including but certainly not limited to crude oil, is actually demand-driven and, worse, is a net negative instead of the tremendous boost that has been incessantly proclaimed.

Ordinarily, cheaper energy prices would be good for China, one of the world’s most intensive energy consumers, but most economists believe the phenomenon is a net negative for Chinese firms because of its impact on ultimate demand.
“Lower commodity prices mean that China’s own energy, mining and metals-processing firms are suffering. And when this big group of firms cuts back on capital spending, demand for machinery and industrial products weakens,” wrote Thomas Gatley of Gavekal Dragonomics in a recent research note.

It is unsurprising, then, to see that the Chinese “dollar” problem has returned, including continued talk about collateral chains in commodity deals.

ABOOK Feb 2015 China Yuan

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