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  • The U.S. Economy Is Producing Too Many Jobs [View article]
    Bernanke is more aware of the underlying economic weakness than many give him credit for. But he does serve as an academic front man for a Fed dominated by Wall Street and Washington interests.

    Bernanke spins plausible-sounding but wrong theories about the Depression and Japan to rationalize bad policies. His dogmatic blindness is evidenced by the fact that he's been pushing these theories in the US since 2002, when there was no sign whatever of a general deflation (only a hangover in stocks). Bad theories led to bad policies, then led to the housing bubble, which led to the housing and stock crash, and additional, gratuitous asset deflation -- but still no sign of general deflation. We're not Japan. Pretty soon, even Japan will not be Japan, as the yen drops, and inflation and interest rates rise -- the end of the JGB bubble is in sight.

    The NYFed board is the center of an open conspiracy of primary dealers and investment banks to keep the cheap liquidity tap open forever. They lend to the hedge funds and are currently overbuying stocks from a wave of insider sellers. We, the retail investors, as well as institutional buyers, are supposed to be good muppets and line up and buy from the hedge funds, investment banks, and primary dealers.

    Meanwhile, the Washington end of this cabal is dominated by the overwhelming need to keep government interest costs low.

    2012 will be the last year of the US bond bubble. With no more price appreciation in bonds, people will start to look hard at those tiny interest rates and creeping inflation, and slowly back away. The effects won't be visible until late in 2013 -- but, I suspect, all hell will then break loose. 1993-94 might look like a tea party in comparison.

    Before that happens here, we'll see a preview in Japan.
    Apr 4, 2012. 01:45 PM | 3 Likes Like |Link to Comment
  • Is The U.S. Healthcare System An Economic Bubble? [View article]
    Yes, though the education bubble is more directly a financial bubble, because of the high level of personal debt it involves. Health care is fueling debt also, but on the governmental level mainly. This debt fuels a demand bubble for expensive and unnecessary medical intervention. Americans use doctors and hospitals more than almost any other country.

    Health care in the US is a complicated topic, as the US is a large and heterogeneous place. The best health care in the US is better than almost any other country. But in general, health care is spread unevenly and varies widely in cost in the US.

    People are always commenting on the apparent "paradox" of expensive health care, BUT around 30 million uninsured. Actually, there's no paradox: we have about 10% uninsured BECAUSE US health care is so expensive. This is why the cost issue has to be dealt with first. Talking about universal coverage, or lack thereof, first is putting the cart before the horse.

    I'm not sure Americans will like the solutions. Governments subsidize health care in every developed and some developing countries. But in most countries, the more expensive treatments are not subsidized. This keeps demand for such services in check and concentrates the subsidies on less expensive medicine. Most developed countries have moved to a mixed system, where basic insurance is subsidized but competitive markets are allowed in supplemental private insurance.

    The US suffers from the worst of all worlds, a mixed private-public system that is decades out of date. (I mean the system of financing, not the medicine.) It indiscriminately subsidizes just about everything for the elderly and spends phenomenal amounts on marginally effective or ineffective treatments, or on the terminally ill. But it lacks a competitive national market in health insurance, which would provide greater choice and lower costs.
    Apr 4, 2012. 01:31 PM | Likes Like |Link to Comment
  • The U.S. Economy Is Producing Too Many Jobs [View article]
    Yes, this is one of the many distortions in the savings-capital system that has upset many of the stable relationships that held from the 1950s until recently. It's more the like the "financial repression" policies of the 1930s and 40s, when Okun's Law also didn't work.
    Apr 1, 2012. 02:43 PM | 1 Like Like |Link to Comment
  • The U.S. Economy Is Producing Too Many Jobs [View article]
    It's the GDP numbers that are closer to correct, as confirmed by most other economic data. The labor market reporting is what's out of whack.

    The current jobs trend we've seen in the last four months is simply an illusion created by the BLS seasonal adjustment. The same happened in 2009-10 and 2010-11. It will fade in the spring and summer, as it has for the last two years. The effect is due to the BLS misguided birth-death model and the large seasonal distortions induced by the layoff wave in the late 2008-early 2009 data. The distortion will be with us for years to come, unless the BLS goes back the older, coincident approach to estimating unemployment, or at least something better.

    A simple confirmation is provided by the BLS raw data, with no seasonal adjustment. The moving average of job creation since the end of the recession in summer 2009 is 110-140K jobs a month. Nothing has happened to change this, as a look at the raw January and February data will show. The problem is that the seasonal adjustment creates a statistical artifact: jobs creation is shifted out of the spring and summer months into the late fall and winter. The seasonal adjustments are large, one+ to two+ million jobs, on top of a real signal of 100-200K -- an error-prone situation and sensitive to small changes in inputs. There are similar, albeit less severe, distortions in the GDP, inflation, and housing data.

    Bernanke is quite aware of this seasonal distortion. He's also aware of the sharply declining labor force participation rate, which is the longer-term secular trend. It peaked in 2000, reached a lower peak in 2007, and has been declining since. Even as the economy recovered, LFPR fell off a cliff in 2010 and 2011. In 12 years, it's gone from high 60s to low 60s, a rapid change. Actually working population is has gone from high 60s to high 50s in the same period. And it's not due to retirement either, as the normal LF definition doesn't count people over 65 or under 16.

    It's also probable that Okun's law is in need of modification for the current recovery. It's an empirical rule of thumb, not a law of physics, and was developed in the 50s, 60s, and 70s, when the US economy was a lot less levered than it is now. There's no postwar recession that produced such job losses, followed by such sluggish growth.* You need to consider the absolute level of GDP and jobs, not just the deltas. We're now producing a little more GDP than at the peak in late 2007-early 2008, with about five million fewer jobs. That's never happened before. In the Great Depression, there was a large decline in GDP, with a comparable decline in employment. By that absolute measure, we're certainly not suffering from too many jobs.

    The New Normal is real -- this is it.

    *The two previous sluggish recoveries (1991-4 and 2002-3) were not preceded by such large losses; and the severe 1981-82 recession was followed by a sharp V-shaped recovery.
    Apr 1, 2012. 11:49 AM | 7 Likes Like |Link to Comment
  • 10 Reasons Why The Dollar's Reign As The World Reserve Currency Is About To End [View article]
    I'm sure China is not happy with it.

    But the BRICs have no unity of interests or purpose either. It's just a label Jim O'Neill of GS slapped on them, because they're outsized EM countries that have to be considered in a class by themselves by virtue of their size.
    Mar 29, 2012. 12:39 PM | Likes Like |Link to Comment
  • 10 Reasons Why The Dollar's Reign As The World Reserve Currency Is About To End [View article]
    Good reads: Barry Eichengreen, James Rickards
    Mar 28, 2012. 01:29 PM | Likes Like |Link to Comment
  • Commodity ETF Dangers [View article]
    One-word answer: USCI
    Mar 28, 2012. 01:27 PM | Likes Like |Link to Comment
  • Yup, It's Your Father's Recession, And Your Grandpa's Too [View article]
    The Fed has existed since 1914.

    The Fed didn't contract the money supply in the early 30s. It allowed it to contract while pursuing other goals.

    The essential problem in the early 30s was the dollar was overvalued relative to gold, as were all major currencies, which needed to be devalued. The demand for dollar conversion to gold caused the deflationary shock, which ended when the dollar was devalued from $20.67 to $35 per ounce. In every country that did this, the contraction ended virtually the same day as the currency-gold peg was suspended or changed. That's a big hint that the problem was monetary in nature.

    What the Fed also did, in the 1920s, was to allow the new-fangled "soft" money supply of credit and other quasi-money instruments balloon far faster than had ever been allowed in the past. This is what caused the giant investment speculative party in the late 20s. The Fed did it for what seemed to be good reasons; e.g., helping out an exhausted, bankrupt Europe trade with the US.

    Crashes must never be viewed asymmetrically, just obsessing about the contraction. This is the mistake of the Keynesians. The entire cycle of bubble and bust must be taken as a unit. The severity of the bust is a direct result of the size of the preceding bubble.
    Mar 26, 2012. 06:25 PM | 2 Likes Like |Link to Comment
  • The Age Of The Dollar Is About To End [View article]
    Darrell -- Definitely, you should read Rickards' book on currency wars.

    The decision to make the dollar the one universal anchor currency for everyone else was taken at the 1944 Bretton Woods conference, before the Cold War started. The free world participated in this system (non-dollars anchored to the dollar, the dollar anchored to gold at $35/oz.) until August 1971, when Nixon took us off the gold standard. Currencies have been freely floating and unanchored ever since. In the 90s, after the end of the Cold War, the dollar gained further prominence as the "master currency."

    What has determined currency values ever since is a mix of short-term and long-term factors. The short-term factor is monetary policy (interest rates, inflation). The long-term factor is the "backing economy" -- it's the productive capacity of the economy that now backs the currency and, in particular, its ability to pay off or roll over outstanding debts and other obligations. Clearly, all major developed economies are or will soon be in serious trouble with regard to the latter.

    The next currency to go will be, not the dollar, but the yen. Because Japan owns so many US Treasuries, a yen crash could create serious problems in the UST market if the Japanese decide to sell USTs. Much of the developed world's new debt issuance is being bought up by central banks -- a kind of drunks-leaning-on-each... picture. A country in the trouble Japan is starting to enter has to sell assets.

    Contrary to today's Keynesians and others, Keynes (who played a major role at Bretton Woods) was - late in his life - in favor of a commodity standard for all currencies, although not gold alone. (Keynes died in 1946.) His idea was that all currencies would be linked to a common commodity index administered by the IMF, which in those days was a clearinghouse for Western countries. Keynes strongly resisted the US attempt to make the dollar the official standard, as he believed (correctly) that a country with such a currency status could abuse it and use such a position to live beyond its means.

    To put it another way, the dollar serves two roles, as the US currency, and as a global reserve and trading currency. Yet another way: the Federal Reserve is central bank to the US and to the world. It was inevitable that a conflict between these national and global roles would arise. Since the 2001 recession and stock crash, the Fed has relentlessly abused the dollar's status to pursue an credit expansion policy here at the expense of everyone else. (Something similar happened with excess money printing in the 1970s.)

    We've so far escaped major inflationary/devaluation consequences because most of the new credit is not circulating as money, but just sitting on someone's balance sheet; and because EM countries have tacitly agreed (or have been forced) to import commodity inflation as a safety valve. But confidence in the dollar has eroded dramatically in the last decade, and it can't be abused like this for much longer -- maybe 3-5 more years, according to Barry Eichengreen, the economist and historian at UC Berkeley.
    Mar 26, 2012. 06:02 PM | 1 Like Like |Link to Comment
  • "We are finding that homebuyers are no longer expecting home prices to decline further, which is creating some sense of urgency to buy now," says KB Home (KBH) CEO Jeff Mezger. A key reason for the Q1 miss is a "spike" in cancellation rates from customers unable to get mortgages, even those already with full loan approval letters. (h/t Joe Weisenthal)  [View news story]
    False dawn: new home prices are probably close to a bottom. But existing home prices have another 10% to drop, roughly. More wishful thinking.
    Mar 25, 2012. 04:40 PM | 2 Likes Like |Link to Comment
  • A Confluence Of Negative Factors [View article]
    No question about this article's fundamental premises, which are dead-on. It took about 30 months for Argentina to go from first crisis to final collapse, default, and abandonment of the dollar peg. On that schedule, Geeece will be in its final phase of euro-thralldom this summer. And this summer in Europe promises to be long, chaotic, and hot.

    There's no way with our current administration to get any resolution of the Icelandic type. Obama's presidency is shot through with the same leveraged finance crowd we saw under Clinton, the same crowd that set us on the road that ended in 2008-9. Watch their latest antics with Corzine, Obama's chief Wall Street fundraiser in 2008 and the governor who nearly destroyed New Jersey. Notice how the MSM keeps avoiding the obvious connections, desperate as they are to get Obama re-elected.

    The OWS movement was a confused attempt to call attention to this reality, manipulated successfully by Obama and the political class to deflect attention from the responsible parties, the Washington-Wall Street fusion. OWS, like Obama's supporters generally, are rubes. Only the Tea Partiers get it!
    Mar 25, 2012. 04:38 PM | 7 Likes Like |Link to Comment
  • The Age Of The Dollar Is About To End [View article]
    Everyone should read Rickards' new book on currency wars. I don't totally subscribe to his views, but his arguments are well-thought out and interesting.

    It's important to distinguish trading versus reserve currency. The dollar is still the world's dominant trading currency and will be for the foreseeable future. But as a reserve currency, it's been slowly losing ground since 2002 or so, paralleling its big decline in value since then (about 40%) and the broad rise in commodity prices. People want to be liquid in dollars more than in any other currency. But they're increasingly reluctant to save in dollars. This is the one factor holding up the euro, which would otherwise be trading at 1.20 or 1.10 USD, its fundamental value.

    As for Iran, the gold market is far too small to use for trading oil or anything else. Iran is now cut off from the global electronic trading and accounts system, which is dollar-based. The squeeze on Iran is going to be dramatic, although the impact will be more on Iranian society, not the regime, which is unfortunate. What people want gold for is saving, not trading - just like the euro. Gold is an alternative reserve, not a trading currency.

    The dollar's loss of dominant reserve status (it will always be *a* critical reserve currency) will have a big impact on its value and especially on the US Treaury and agencies market. It will take another one or two years to see it. But, like the coming debt crisis in Japan (about a year away), it foreshadows the end of the QE-high deficit era. Hopefully, it will end for good the reputation of the Keynesian quacks and the fringe monetary theorists always ready to promise ways to print to prosperity. We will no longer be able to abuse our dominant reserve status, just as Japan can no longer abuse its once-high savings rate (now about zero - Japan's living off liquidating foreign assets).
    Mar 25, 2012. 04:13 PM | 1 Like Like |Link to Comment
  • When Wall Street Captures Washington [View article]
    Any industry that government deems "essential" will become the object of govt largesse, then regulation, then (in dialectical fashion) respond with lobbying, and (if you're Golden Slacks) then respond with the highest form of cronyism -- the fusion of public service and Wall Street success. Cf. Rubin, Geithner, Corzine, Orzag, Sperling, etc., almost all Democrats (with an occasional Republican, like Paulson, thrown in for balance). Goldman practices this in its most accomplished form, although Citi is very good at it as well. It's good to remember that, among the commercial banks, it was only Citi that was in serious trouble in 2007, when the crisis first started. For that we can blame Rubin more than anyone. The rest of the problems were in the investment banks and the non-traditional lenders, such as Countrywide, run by Angelo Mozilo, good friend of ... Chris Dodd.

    If there's a partisan theme here, it's obvious. The transformation of the Democratic party into Heroes of Leveraged Finance was the result of the Clinton years, another long-term consequence of Bill and his friends. Of course, a cooperative Fed was needed too, for which we can thank Greenspan (speaketh with forked tongue) and all that coziness at the NYFed (back to Geithner, Dudley, et al.), as well as Bernanke, the academic True Believer in his own faulty theories about deflation.

    The Clinton crowd is back in the saddle, no matter what the Dem flacks do to keep distracting the populace.

    Meanwhile, the Republican problem is cluelessness. The business class from that side largely comes from the "real" economy, not finance. Only the Tea Partiers really get it!
    Mar 21, 2012. 12:25 PM | 1 Like Like |Link to Comment
  • Decrying Goldman Sachs' (GS) "rip your eyeballs out" capitalism following Greg Smith's "shot heard round the world," Joe Nocera writes in the NYT that Lloyd Blankfein should look at the "moral capitalism" of Howard Schultz, who will this week make a speech linking Starbucks'(SBUX) record profits with its larger societal role. "The value of your company is driven by your company’s values," Schultz plans to say.  [View news story]
    Nocera is a Democratic hack who is still trying to deny the role of Fannie, Freddie, and Congress in the housing crisis. Why does anyone listen to him?

    The real problem is that Goldman just practices the "conflict-of-interest" style of all corporate investment banks et simila better than everyone else. (See: Lehman, Merrill, and Bear for those that failed at this game, or Morgan Stanley for the also-rans.)

    These institutions can do this ONLY because they're TBTF and sit on the NYFed's board, helping to ensure that the Fed's liquidity largess keeps flowing. Goldman, with its political operatives everywhere, especially in the Democratic party and at the Clinton and Obama White Houses, plays this part of the game far better than anyone else. Without central bank support, the system of corporate investment banks world-wide -- and all those highly leveraged who depend on it -- would collapse in a heap of unpayable debt.

    This is crapitalism: crony capitalism, at its apex and apogee. This is what needs to end. The difference that Schultz represents is simple: he's in the real economy, and his company produces real goods and services -- unlike Goldman.
    Mar 18, 2012. 03:12 PM | 2 Likes Like |Link to Comment
  • The End Result Of The Fed's Cancerous Policies [View article]
    An interesting sideshow here is what ZIRP is doing to insurance companies. For example, major insurance companies will no longer write long-term care policies because they can't guarantee they can meet their obligations 20 or 30 years from now.
    Mar 18, 2012. 03:03 PM | 6 Likes Like |Link to Comment