Category Archives: Economics

Unsentimental

The Atlanta Fed GDPNow forecast for Q1 GDP now stands at 1.2% annualized growth. This despite outrageously bullish sentiment everywhere you look.

1937, anyone?

Pension Tsunami Sighted

NY Teamsters Pension Fund becomes first to run out of money.

Oh, and after the close the API announced that crude and product inventories continue to set new records. Not to worry, speculative buying continues. GLWT.

 

Socialism Is Good For You

If you need to lose weight, that is. Due to lack of food supply, Venezuelans have lost an average of 19lbs. over the last year. This despite having the largest proven oil reserves in the world.

Greece Again

Greece is back in the news. As a pretty much unbiased observer, a few points:

  • The IMF is right. Greece cannot pay its debts. Debt repayments come from surplus, profits in a sense. They’re not there, and they’re not coming.
  • Greece is a zombie. It needs a fresh start desperately, for humanitarian reasons if nothing else.
  • Apparently, there is no provision in the rules for a Eurozone member to go bankrupt. Therefore, the Eurozone rules need to be changed. It is foolish to believe that bad things don’t happen.
  • Germany has profited hugely from the Eurozone – on paper – but a lot of those profits are yet to be collected because they are in the form of unpaid debts.
  • Germany is, understandably, reluctant to write off any of those debts for fear that the whole racket will come apart, so it insists on the “nuclear option” of Grexit. As the French would say “Pour encourager les autres.”
  • Draghi is unwilling to take a leadership role in resolving the situation, because he knows that if Greece is given a less painful solution, then Italy is next in line. And Germany will be on the short end of the stick.
  • It is likely that nothing good will happen until Merkel and Schäuble are gone. The good news is that, because of the immigrant crisis, their departure from the scene is no longer unthinkable.

Welcome to 2017

Happy New Year. Well, probably not for a lot of people. Today is the first employment report of the year, and the bottom line is that the most optimistic view one could take from it is stagflation. The weakening employment trend does not support the bullish growth meme, especially as the “not in labor force” reaches a record 95.1 million. Adding back the “unemployed,” there are 102.6 million people not working – 0.675 for each employed person. Think about it.

Anyhow, the bubble lives on. US property prices are back to the previous bubble peak, and of course there are many other property bubbles around the world. The US stock market is by many measures the most over-valued in history. I could go on, but what’s the point. It will pop when it pops.

As previously explained in this blog, we are witnessing the death throes of liberal socialism. President-elect Trump is merely a symptom, as are the other “populist” political figures around the world. The liberal establishment that has benefited from the largesse is fighting back with every available weapon, but it is fated to be a losing battle. Que sera, sera.

Going Out On A Limb

I think the end of this bubble is beginning, as yields spike and the dollar soars:

“Our revels now are ended. These our actors,
As I foretold you, were all spirits and
Are melted into air, into thin air:
And, like the baseless fabric of this vision,
The cloud-capp’d towers, the gorgeous palaces,
The solemn temples, the great globe itself,
Yea, all which it inherit, shall dissolve
And, like this insubstantial pageant faded,
Leave not a rack behind. We are such stuff
As dreams are made on, and our little life
Is rounded with a sleep.”

― William Shakespeare, The Tempest

The economy is not strong. There are 100+ million adults not working (“not in the labor force”) out of a total population of 325 million, to say nothing of the myriad of government employees who are employed, but not contributing any value to the economy.

Consumption is being sustained by debt, both private borrowing and government money-printing. By January 2009, the United States had accumulated $10.6 trillion in debt. The gross national debt – just federal government debt – stands at $19.7 trillion as of the end of FY2016. Spending is on a pace to add another $2.4 trillion this fiscal year (2017), surpassing $21 trillion by next September. Krugman applauds, and of course this is Obama, not Trump. Yet.

Debt-funded consumption in excess of income has crowded out savings and therefore investment. As investment has declined, so, logically enough, productivity growth has fallen (see previous post). Simultaneously, government has been growing, making a lethal cocktail for real household disposable incomes, which have been declining for years. Pensioners who think they are in good shape are not noticing that defined-benefit pension funds are already starting to cut benefits and many, especially state and local government funds, are woefully under-funded. Social Security is in negative cash flow, and drawing on the general tax revenue pot to make up the difference. The stock market is ludicrously over-valued and promises zero or negative returns to pension funds for years to come. As Margaret Thatcher notably said “Socialist governments traditionally do make a financial mess. They always run out of other people’s money. It’s quite a characteristic of them.”

Powerful deflationary forces are being unleashed. The world is awash in oil and efforts to keep the price up will eventually fail. OPEC in aggregate will not cut supply because its governments (as well as the non-OPEC ones) depend on the flow of oil money to stay in power. I expect oil to reach the lower $20s if not below. Most of the world is engaged in a race to the bottom, cutting interest rates to devalue their currencies and boost exports. They are therefore exporting deflation to the US. I expect to see CAD in the 0.60s and the EUR in the 0.80s. Consumer price inflation in the US appears comparatively strong due to the inclusion of OER¹ in the CPI, which is not done elsewhere, and due to the uncontrolled rise in healthcare and education prices, funded by government subsidies and debt. These prices end up being a form of taxation by the 0.01%, who are on the receiving end. The protest vote in the US election should be no surprise.

OER, a completely fictional number to start with, is high as a result of low interest rates financing housing bubbles. These will end as badly as the previous lot. I choose not to be a homeowner, largely because I don’t want to face a huge capital loss.

In short, the economy is a Potemkin village. Things are not as they are made out to be. Even a fractional increase in rates may trigger a deflationary crisis, especially considering the shortage of dollar liquidity outside the US.

¹ OER, Owner’s Equivalent Rent, is weighted about 25% of the CPI basket. It is estimated by a telephone survey of selected homeowners, asking them how much they think it would cost to rent their a property like theirs.It has nothing to do with what it actually costs them to own and live in their properties.  I am not kidding. Now do you think CPI means anything?

Trumpeting Inflation?

The bond market is, at least superficially, reacting to the election of Mr Trump as if he was going to succeed in creating inflation where all others had failed.

Not very likely. It has been tried. The program of printing money to spend on infrastructure has resulted in nearly every flat surface in Japan being covered in concrete or asphalt, to say nothing of enormous bridges to nowhere and other follies. But no inflation.

The smart money knows this. My personal suspicion is this is a ruse to drive retail investors out of bond funds into the stock market, while the boyz take the other side of the trade. This supposition is supported by the trading in cheap stocks, particularly in the Russell 2000, an index with an undefined P/E.

Oil, the second most important price (labor is #1) in the real economy is tanking (literally). The dollar is soaring as the yuan (-0.9% to a record low today) and euro (-1.1%) fall, obviously also deflationary. This will not end well.

Political Economics

The field now called economics used to be called political economics, until a group decided that they could get better pay, like the physicists, if they promoted their field as a science. So they dropped the “political” part, which of course is completely wrong. Economies are political, period.

If there was any doubt, it should by now be crystal clear that there is only one party in Washington. That party, that some refer to as the neo-liberal deep state and others simply call “the establishment”, has served its masters, the financial and political elite, very well. It has established an oligarchic rule while preserving at least the illusion of popular participation, even though “studies have shown” that such participation is non-existent. It is now being attacked by a genuine outsider, Mr Trump. Since it knows very well that its actions have served the average voter very poorly, it has resorted to vicious ad hominem attacks in order to divert attention from its policy failings. Or from its point of view, its policy successes as it has made the oligarchy wealthy beyond belief at the expense of the lives and fortunes of οἱ πολλοί.

Unfortunately for the party, its chosen candidate, Ms Clinton, has her own personal skeletons in the cupboard, which have blunted her attacks on Mr Trump. The party has grown increasingly desperate as these attacks have failed to stop Mr Trump’s campaign, even to the point of having prominent Republicans reveal their true allegiance by publicly supporting Ms Clinton.

If Britons can grasp the nettle and throw off the yoke of the Eurocrats, surely Americans can do the same?

Nec illegitimi carborundum (or “don’t let the bastards grind you down”).

The Black Hole

Here is a prime example of the kind of nonsense that passes for economic wisdom at the Jackson Hole meeting.

In a lunch address by Princeton University economist Christopher Sims, policymakers were told that it may take a massive program, large enough even to shock taxpayers into a different, inflationary view of the future.

“Fiscal expansion can replace ineffective monetary policy at the zero lower bound,” Sims said. “It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as financed by future inflation, not future taxes or spending cuts.”

Ever hear of Abenomics, Mr Sims? Oh I know, not large enough. Please.

I think it is obvious that you can’t finance anything with inflation. Latin America has been trying that for years, with disaster after disaster ensuing. Right now I am looking at a framed Zimbabwean hundred trillion dollar bill. This obsession with creating inflation, obviously intended to devalue the enormous pile of debt that Keynesian policies have created, is possibly the most dangerous and ludicrous aspect of the madness that has seized mainstream economists.

It is a perpetual search for the magic bullet that will resolve the economic failure of liberal socialism, which is playing out around the world. Economists seem to believe that just because the Keynesian free lunch has failed to materialize doesn’t mean that it can’t be teased out by some manipulative action. Sorry folks, it is just a mirage. It will always be out of reach because it does not exist.

Information is lost in both Jackson Holes and black holes.

Jackson Hole

Janet Yellen’s speech today provided no new information, although there was a kneejerk spike in financial markets, now largely reversed.

It continues to be obvious that Ms Yellen has no connection with the real world and that lack of connection pretty much guarantees a new financial crisis that will devastate the world.

Markets may not yield perfect outcomes, but the outcomes are the result of the combined intelligence and knowledge of the participants. The “expert” system is hopelessly vulnerable to error resulting from the shared misapprehensions, prejudices and blindnesses of one or a few individuals.

For a little humor, here is the 70% confidence interval of Fed’s interest rate projections.
ff forecast

And, BTW, I’ll take the under.