Yellen said at least one thing of importance last week, but not in a good way. She confessed to the frightening truth that the FOMC formulates its policies and actions based on forecasts of future economic developments.
My point is not simply that our monetary politburo couldn’t forecast its way out of a paper bag; that much they have proved in spades during their last few years of madcap money printing.
Notwithstanding the most aggressive monetary stimulus in recorded history—-84 months of ZIRP and $3.5 trillion of bond purchases—–average real GDP growth has barely amounted to 50% of the Fed’s preceding year forecast; and even that shortfall is understated owing to the BEA’s systemic suppression of the GDP deflator.
What I am getting at is that it’s inherently impossible to forecast the economic future, but that is especially true when the forecasting model is an obsolete Keynesian relic which essentially assumes a closed US economy and that balance sheets don’t matter.
Actually, balance sheets now matter more than anything else. The $225 trillion of debt weighing on the world economy——up an astonishing 5.5X in the last two decades—– imposes a stiff barrier to growth that our Keynesian monetary suzerains ignore entirely.
Likewise, the economy is now seamlessly global, meaning that everything which counts such as labor supply and wage trends, capacity utilization and investment rates and the pace of business activity and inventory stocks is planetary in nature. Continue reading
Submitted by James Howard Kunstler – www.kunstler.com
Theory du jour: the new Star Wars movie is sucking in whatever meager disposable lucre remains among the economically-flayed mid-to-lower orders of America. In fact, I propose a new index showing an inverse relationship between Star Wars box office receipts and soundness of the financial commonweal. In other words, Star Wars is all that remains of the US economy outside of the obscure workings of Wall Street — and that heretofore magical realm is not looking too rosy either in this season of the Great Rate Hike after puking up 623 points of the DJIA last Thursday and Friday.
Here I confess: for thirty years I have hated those stupid space movies, as much for their badly-written scripts (all mumbo-jumbo exposition of nonsensical story-lines between explosions) as for the degenerate techno-narcissism they promote in a society literally dying from the diminishing returns and unintended consequences of technology.
It adds up to an ominous Yuletide. Turns out that the vehicle the Federal Reserve’s Open Market Committee was driving in its game of “chicken” with oncoming reality was a hearse. The occupants are ghosts, but don’t know it. A lot of commentators around the web think that the Fed “pulled the trigger” on interest rates to save its credibility. Uh, wrong. They had already lost their credibility. What remains is for these ghosts to helplessly watch over the awesome workout, which has obviously been underway for quite a while in the crash of commodity prices (and whole national economies — e.g. Brazil, Canada, Australia), the janky regions of the bond markets, the related death of the shale oil industry, and the imploding hedge fund scene.
As it were, all credit these days looks shopworn and threadbare, as if the capital markets had by stealth turned into a swap meet of previously-owned optimism. Who believes in anything these days besides the allure of fraud? Capital is supposedly plentiful these days — look how much has rushed into the dollar from the nervous former go-go nations with their wobbling ziggurats of bad loans and surfeit of production capacity — but what actually constitutes that capital? Answer: the dwindling faith anyone will pay you back next Tuesday for a hamburger today. Continue reading
The Fed’s industrial production series also includes estimates on total motor vehicle assemblies. Auto sales in general have been one of the only bright spots in the economy, especially since the 2012 slowdown (even though it has been boosted artificially via credit far, far more than income gains). Given that trend, it is still difficult to assess whether activity in recent months is meaningful. After surging in July, auto activity in terms of industrial production has slumped – now pushed into a fourth month.
Auto production is quite volatile, even where the Fed has attempted to “smooth out” that tendency via its seasonal adjustment factors, so more analysis is needed to establish some confidence about interpretation. Still, at the very least, it raises concerns expressed in the growing (surging) inventory of autos counted in manufacturer’s numbers but stuffed (unsold to end users) on dealer lots and in wholesale limbo.
Furthering those concerns, economic reports out of Canada today showed not just broad-based wholesale sales declines but also a four-month slide also in auto sales at that wholesale level. Canada being a primary exporter of autos to the US, the coincidence of further weakening is not likely to be random and yet another negative commentary on the state of US “demand.”
The agency also released October data for wholesale trade, which fell 0.6 per cent to $54.7 billion — its fourth-straight monthly drop.
It said lower trade figures were recorded in four areas that, when combined, represent 64 per cent of all sales.
Sales fell by three per cent to $10.5 billion in the food, beverage and tobacco category — its third decrease in four months. The category of motor vehicle and parts registered a 2.1 per cent drop to $9.5 billion, its fourth-straight tumble. [emphasis added]
Taken together with the rather steep drop in US industrial production, the risks of a full-blown and perhaps severe recession have undoubtedly grown. Unlike what the FOMC is trying to project via the federal funds rate, a rate that isn’t being fully complemented, either, at this point, visible economic risk is not just rising it is exploding. Nowhere is that more evident than in junk bonds and high yield. The collapse in those markets and tiers has been produced not through actual defaults, which, though slightly rising, remain historically low, but rather through greatly shifting perceptions of defaults that increasingly look likely and in bulk. Continue reading
Submitted by William Bonner, Chairman – Bonner & Partners
PARIS – The Fed did as expected. It announced it would raise its key rate by a quarter of a percentage point to 0.5% and gradually raise it up over the next three years.
Reports the Financial Times: “Historic gamble for Yellen, as Fed makes quarter-point rise.” If all goes well, we’ll be back to “normal” in 2019 – 10 years after the long emergency began!
Esmeralda, one of the many forecasters known to be superior to the Fed (a lot cheaper too).
Photo via pinterest.com
U.S. stocks rose on the news, with the Dow up 224 points – or about 1.3%. Those who predicted panic were wrong. (Surprises rarely come when they are expected.) But wait …
The daily effective federal funds rate, a volume-weighted average of trades arranged by major brokers. It is now at its highest point since late 2008, ending seven years of “ZIRP” – click to enlarge.
How does the Fed know what a normal rate will be in 2019? Won’t conditions change? Besides, there are sidewalk astrologers and mall palm readers with a better record of market forecasting than the Fed.
To borrow a phrase from George Soros, our mission at the Diary is to “find the trend whose premise is false and bet against it.” Is it true that the Fed is really going to follow through with its promise to return interest rates back to normal?
Is it true that terrorists are out to get us? Is it true that Donald Trump is a fool? Of course, we are all fools… but some more than others. The wise man is the one who knows he is a fool. For our part, we deny it. And we resent readers who remind us. Continue reading
Claudio Grass interviews Professor Antal E. Fekete
GLOBAL GOLD: “Prof. Fekete, it is a pleasure to have this opportunity to talk to you. You are a fierce critic of the current monetary system and a strong proponent of the gold standard, particularly the variety that combines with the Real Bills Doctrine (RBD) of Adam Smith which we shall get into later. We are very much interested to learn how this interest of yours started in the first place and what led you to believe in gold and Austrian Economics in general.”
Professor Antal E. Fekete (see further below for biographical details)
Photo credit: verlagjohannesmuller
AF: “I have been a lifelong student of gold money which led me to Austrian economics. However, I find that the writings by Austrian authors such as Hayek and Mises on gold somehow deviated from Carl Menger’s basic idea of marketability of goods in favor of the Quantity Theory of Money. For this reason, I find they did not address the nexus between gold and interest. I take pride in pioneering a new departure to develop a theory of interest based on the idea of marketability of goods (also known as hoardability) that puts this nexus right into the center. My own view is that gold and silver are the only monetary metals for reasons having to do with the fact that they are the most hoardable substances in existence. I also believe that if Menger had lived longer, he himself would have developed his theory of interest along the lines of indirect exchange of income and wealth that are an improved version of hoarding and dishoarding (direct exchange). As a matter of fact, here we are talking about the dual theory of the evolution of direct exchange (barter) into indirect exchange of goods and services (monetary economy). Essentially what we see is the direct conversion of income into wealth (and vice versa) evolving into indirect conversion. More specifically, direct conversion of income into wealth (hoarding) and wealth into income (dishoarding) is evolving into indirect conversion of income into wealth (selling bonds) and wealth into income (buying bonds).” Continue reading