Out of Thin Air

By: Doug Noland

Friday, May 29, 2015

In its basic form, Credit is someone's promise to pay "money" at some point in the future.

Credit instruments are an "IOU." Importantly, new Credit/"IOUs" create additional purchasing power.

Especially late in prolonged Credit booms, financial instruments and claims come to account for enormous amounts of system "wealth." Crises are the process of rectifying the divergence that develops between financial wealth and actual underlying economic wealth. This process invariably unmasks the systematic wealth redistribution that gathered momentum throughout the boom cycle.

Borrowing language from Murray Rothbard, money (and Credit) can be created "Out of Thin Air."

Such Credit expansion is referred to as "Credit inflation." And, importantly, the resulting inflation in purchasing power can exert various price and other inflationary effects. It's a popular misconception that consumer price inflation is the prevailing and more dangerous type of inflation. Never has this been more apparent than right now.

Traditionally, banks and governments were the culprits responsible for Credit expansions that on occasion turned into runaway booms and devastating busts. There are excellent historical accounts and analyses of centuries of Credit Bubbles. Even so - and even post-2008 - central bankers remain more determined than ever to disregard Credit theory, history and analysis.

The current global Credit Bubble is unlike anything in history (and the analysis incredibly challenging). I've tried to explain its origin was the Federal Reserve's response to the early-nineties banking crisis. The Greenspan Fed spurred non-bank Credit growth that evolved into a historic Credit expansion. The upshot was a Bubble in Credit instruments intermediated through Fannie Mae, Freddie Mac and the Federal Home Loan Bank System. Closely related was a corresponding general boom in securitizations and derivatives, along with myriad Credit instruments involved in securities finance/leveraging ("repos," Fed funds, financial CP, special purpose vehicles, etc.). Over the years, I referred to this powerful new financial apparatus as "market-based Credit" and "Wall Street finance."

Updating Minsky's analysis, I coined the term "Financial Arbitrage Capitalism" to describe the period of the nineties through 2008. The extraordinary post-mortgage finance Bubble reflation compelled another analytical "update." We are now well into our seventh year of "Global Government Finance Quasi-Capitalism." There should be little mystery surrounding so-called "secular stagnation," as well as social stress and geopolitical friction.

The creation of "money" and Credit ("Out of Thin Air") throughout the market-based Credit apparatus evolved into history's most powerful Credit mechanism. It also proved fatefully contagious.

Unprecedented access to cheap mortgage (along with auto, Credit card, student loan, etc.) borrowings was granted to millions of individuals with deficient Credit histories. Similar dynamics created unimaginably easy Credit Availability for business borrowers. For sovereigns, the boom in market-based finance doomed the likes of Argentina, Iceland and Greece (to name only a few). Predictably, the resulting busts have been progressively more spectacular.

"Market-based" Credit has always been somewhat of a misnomer. Sure, the nineties saw Trillions of new Credit instruments trade freely in the marketplace at impressive valuations (i.e. narrow spreads to Treasuries). Yet the entire marketplace was constructed upon the explicit and implied guarantees from the Treasury and Federal Reserve. The resulting "moneyness" of this Credit apparatus ensured excesses neared catastrophic extremes.

The consensus view holds that today's financial backdrop is benign. Policymakers have learned from previous mistakes. There is nothing comparable to the excesses of subprime and Lehman Brothers.

The reality is that governments globally have now overtly commandeered so-called "market-based finance." Securities markets are openly manipulated. Trillions of securities have been monetized.

Prices and risk perceptions throughout global securities and derivatives markets have been perverted like never before. The upshot has been a globalized Bubble of unprecedented scope.

Looking back, the 2008/09 crisis was a case of major market distortions coming home to roost.

Today's global market distortions greatly overshadow those of 2008.

Backed by concerted government manipulation and intervention, global "money" and Credit have become fungible. Tens of Trillions of electronic debits and Credits spur the free-flow of "money" in and about global markets. Never have such enormous quantities of global securities and financial instruments been perceived as safe or low-risk ("money-like").

There are a few critical aspects to the backdrop worth keeping in mind. For all intents and purposes, it's become one enormous global Bubble - the U.S., China, EM, Europe and Japan.

Unfettered fungible "money" and Credit - "Out of Thin Air" - have provided both the fuel and the glue.

Especially after BOJ and ECB QE/currency devaluations - and the resulting flow of speculative finance to "king dollar" securities markets - tightly interrelated global Bubbles essentially converged into one. With China's renminbi tied to the U.S. dollar, the two super financial and economic Bubbles have for awhile now been closely interlinked. As cracks have surfaced in China - surely exacerbated by global competitive currency devaluations - Chinese and American Bubbles have become only further melded.

Throughout history, booms have been a source of major increases in perceived wealth and power. Yet Credit inflations and Bubbles are at their roots about wealth redistribution and destruction. Given sufficient time and opportunity, the creation of "money" and Credit "Out of Thin Air" will have profoundly adverse consequences and ramifications. And, indeed, this runaway global Credit inflation's deleterious effects are these days on display.

I'll borrow a Larry Lindsey quote from last week's CBB: "Because the government will not voluntarily let itself go out of business. It will use all of its powers - I'm not talking about just our government but any government - will use all of its powers in order to fund itself..."

So much of the world's wealth now hinges upon the global Credit Bubble. It's a given that governments around the world will use all their powers to fund themselves. Will they also use all their powers to protect their nation's wealth - real as well as perceived wealth that has inflated so profoundly during this boom? When government officials in today's increasingly hostile world focus on "security" matters, do they place financial security in equal footing with military security? And this gets to the heart of a critical facet of the globalized adoption of market-based finance: inflated securities market prices have become fundamental to a nation's wealth, national interests, political and social stability, and national security. In an increasingly polarized and spiteful world, who is now willing to take away the punchbowl?

At this point, global central bankers remain united in their cause. Military leaders are not. On the one hand, central banks around the world face similar pressures and remain motivated to work in concert to sustain both domestic Bubbles and the greater global Credit Bubble.

Government and military officials, though, are increasingly focused on a spectrum of pressing security issues - military, cyber, economic and financial. With the global pie no longer expanding, policies have turned inward looking and insecure. Integration and cooperation are giving way to antagonism and aggression. We saw it again this week.

And this framework helps explain what can appear a confounding paradox: In an increasingly troubling and uncertain world, global securities markets seemingly couldn't be more upbeat. At this point, markets remain fixated on central bankers. And the more antagonistic the geopolitical backdrop, the more confident market players have become that timid central bankers will fall in line.

There's too much to lose. Thursday WSJ headline: "Fed's Williams Says Never Use Rates to Prick Bubbles." Only use rates to inflate Bubbles.

My deep concerns for the global Credit Bubble are coming to fruition. The Chinese Bubble got completely away from officials. They recognized their predicament too late and too reluctantly.

Meanwhile, a complex geopolitical backdrop has unfolded. No longer is reining in Credit Bubble excess viewed as a priority. Chinese domestic fragilities were much greater than previously appreciated - and there's today no tolerance for risking a bust. Meanwhile, opting out of the inflating global Bubble would not be in China's interest. With the U.S., Japan and Europe desperately inflating a securities market Bubble, Chinese officials may have decided the risks of being the lone Bubble Popper were too great.

I believe future historians will look back at Russia's invasion of Ukraine as a major geopolitical and financial inflection point. Putin's speeches laid it out rather clearly: Russia can only be pushed around for so long. There is a line that can't be crossed - and the U.S. and the "West" crossed that line. Putin slammed the U.S. for blatantly violating Russia's vital national interests in neighboring Ukraine.

A year ago economic sanctions were going to discipline an "isolated" Russia. In a world of integrated markets and economies, changes in behavior could be dictated without resorting to tanks and bombers. Moreover, in this dispute between Russia and the West, China was viewed as neutral at worst. Putin's rants against U.S. domination of global finance, trade and security arrangements could be dismissed as a lunatic's senseless tirade.

The U.S. is now involved in an increasingly tense standoff with the Chinese in the South China Sea. Presidents Putin and Xi have become fast friends. And I just don't see aggressive behavior from Russian and Chinese governments as coincidental. They will both err on the side of belligerence.

Last year's Ukrainian crisis corresponded with serious cracks throughout the emerging markets, not to mention a collapse in crude (that Russia claims was orchestrated as punishment) and commodities. It quickly became an inopportune juncture for the Chinese to rein in their Credit Bubble. Instead, opportunity beckoned to begin building a formidable non-U.S. alliance and competing (non-dollar) global financial structure. This would require ongoing Chinese economic expansion and a stable currency. The Chinese must have viewed the benefits of a new global structure as exceeding the risks associated with accommodating additional Bubble excess. Moreover, imposing sanctions on Russia awakened the Chinese to the risks of something similar befalling their economy.

Global market Bubbles have benefited from the Chinese backtracking from Bubble containment. In the short-term, this lessened the risk of a Chinese financial accident. Similarly, having the Chinese focused on their currency attaining international reserve status has also reduced near-term risk of a disorderly currency devaluation. This has as well been pro-global Bubble.

Meanwhile, intermediate- and long-term risks are rapidly escalating. Regrettably, China has prolonged its "Terminal Phase" of excess, with dire consequences. Extending the life of the global Bubble comes with similar risks. At the same time, the building of a non-U.S. alliance and competing global financial infrastructure unfolds in earnest. Clearly, the Chinese military is preparing for a world that is changing in profound ways. The U.S. military has begun to adjust as well.

Global markets remain unsettled. The Chinese stock market Bubble has all appearances of an accident in the making. A Greek accident could be only days away. European periphery debt markets appear more fragile. EM seems more vulnerable. Currency markets are highly unstable. The dollar, bunds and Treasuries caught decent safe haven bids this week.

The age old problem with creating "money" is that once commenced in earnest it's extremely difficult to curb. There comes a point where the soundness of the underlying Credit structure begins to be questioned. Such questioning is well overdue. Do central bankers have any idea of their role in fomenting geopolitical turmoil? Just print "money" Out of Thin Air.

The Inflation Puzzle
Martin Feldstein
MAY 29, 2015
. puzzle pieces

CAMBRIDGE – The low rate of inflation in the United States is a puzzle, especially to economists who focus on the relationship between inflation and changes in the monetary base.

After all, in the past, increases and decreases in the growth rate of the monetary base (currency in circulation plus commercial banks’ reserves held at the central bank) produced – or at least were accompanied by – rises and falls in the inflation rate. And, because the monetary base is controlled directly by the central bank, and is not created by commercial banks, many believe that it is the best measure of the impact of monetary policy.
For example, the US monetary base rose at an annual rate of 9% from 1985 to 1995, and then slowed to 6% in the next decade. This decelerating monetary growth was accompanied by a slowdown in the pace of inflation. The consumer price index (CPI) rose at a 3.5% rate from 1985 to 1995, and then slowed to just 2.5% in the decade to 2005.
But then the link between the monetary base and the rate of inflation was severed. From 2005 to 2015, the monetary base soared at an annual rate of 17.8%, whereas the CPI increased at an annual rate of just 1.9%.
To explain this abrupt and radical change requires examining more closely the relationship between the monetary base and inflation, and understanding the changing role of the reserves that commercial banks hold at the Federal Reserve.
When banks make loans, they create deposits for borrowers, who draw on these funds to make purchases. That generally transfers the deposits from the lending bank to another bank.
Banks are required by law to maintain reserves at the Fed in proportion to the checkable deposits on their books. So an increase in reserves allows commercial banks to create more of such deposits. That means they can make more loans, giving borrowers more funds to spend.

The increased spending leads to higher employment, an increase in capacity utilization, and, eventually, upward pressure on wages and prices.
To increase commercial banks’ reserves, the Fed historically used open-market operations, buying Treasury bills from them. The banks exchanged an interest-paying Treasury bill for a reserve deposit at the Fed that historically did not earn any interest. That made sense only if the bank used the reserves to back up expanded lending and deposits.
A bank that that did not need the additional reserves could of course lend them to another bank that did, earning interest at the federal funds rate on that interbank loan. Essentially all of the increased reserves ended up being “used” to support increased commercial lending.
All of this changed in 2008, when a legislative reform allowed the Fed to pay interest on excess reserves. The commercial banks could sell Treasury bills and longer-term bonds to the Fed, receive reserves in exchange, and earn a small but very safe return on those reserves.
That gave the Fed the ability in 2010 to begin its massive monthly purchases of long-term bonds and mortgage-backed securities. This quantitative easing (QE) allowed the Fed to drive down long-term interest rates directly, leading to a rise in the stock market and to a recovery in prices of owner-occupied homes. The resulting rise in household wealth boosted consumer spending and revived residential construction. And businesses responded to this by stepping up the pace of investment.
Although a link between the Fed’s creation of reserves and the subsequent increase in spending remained, its magnitude changed dramatically. The Fed increased its securities holdings from less than $1 trillion in 2007 to more than $4 trillion today. But, rather than being used to facilitate increased commercial bank lending and deposits, the additional reserves created in this process were held at the Fed – simply the by-product of the effort, via QE, to drive down long-term interest rates and increase household wealth.
That brings us back to the apparent puzzle of low inflation. The overall CPI is actually slightly lower now than it was a year ago, implying a negative inflation rate. A major reason is the decline in gasoline and other energy prices. The energy component of the CPI fell over the last 12 months by 19%. The so-called “core” CPI, which excludes volatile energy and food prices, rose (though only by 1.8%).
Moreover, the dollar’s appreciation relative to other currencies has reduced import costs, putting competitive pressure on domestic firms to reduce prices. That is clearly reflected in the difference between the -0.2% annual inflation rate for goods and the 2.5% rate for services (over the past 12 months).
Nonetheless, inflation will head higher in the year ahead. Labor markets have tightened significantly, with the overall unemployment rate down to 5.4%. The unemployment rate among those who have been unemployed for less than six months – a key indicator of inflation pressure – is down to 3.8%. And the unemployment rate among college graduates is just 2.7%.
As a result, total compensation per hour is rising more rapidly, with the annual rate increasing to 3.1% in the first quarter of 2015, from 2.5% in 2014 as a whole and 1.1% in 2013. These higher wage costs are not showing up yet in overall inflation because of the countervailing impact of energy prices and import costs. But, as these temporary influences fall away in the coming year, overall price inflation will begin to increase more rapidly.
Indeed, the inflation risk is on the upside, especially if the Fed sticks to its plan to keep its real short-term interest rate negative until the end of 2016 and to raise it to one percentage point only by the end of 2017. If inflation does rise faster than the Fed expects, it may be forced to increase interest rates rapidly, with adverse effects on financial markets and potentially on the broader economy.
Read more at http://www.project-syndicate.org/commentary/low-inflation-quantitative-easing-by-martin-feldstein-2015-05#smG0Slfgu4gyQRrF.99

May 31, 2015 3:12 pm

Shadow banks grab record US loans share

Ben McLannahan in New York

MIAMI - OCTOBER 01: A for sale sign is displayed outside a home on October 1, 2009 in Miami, Florida. Declining home prices, low mortgages rates and government stimulus programs have helped push up the number of pending home sales according to the National Association of Realtors, as they rose by 6.4 per cent in August and were up by 12.4 per cent from a year ago. (Photo by Joe Raedle/Getty Images)©Getty

Non-bank lenders have overtaken US banks to grab a record slice of government-backed mortgages, after regulatory curbs on risk-taking and billions of dollars in fines forced mainstream providers to retreat from the $9.8tn home loan market.

So-called shadow banks such as Quicken Loans, PHH and loanDepot.com accounted for 53 per cent of government-backed mortgages originated in April — almost double their share in April 2013.
The non-banks’ increased share of home loans comes at a time when big lenders such as Wells Fargo, Bank of America and JPMorgan are pulling back, according to a study by academics at Harvard’s Kennedy School. The banks say they are reacting to tighter capital requirements and heavy penalties for mis-selling imposed by financial watchdogs after the 2008 crisis.
Shadow banks perform bank-like functions such as lending but are subject to lighter supervision because they are funded by professional investors rather than retail depositors protected by government insurance schemes.

However, their tightening grip on mortgages is beginning to cause concern in Washington. The Department of Justice sued Quicken, the biggest non-bank lender, in April, claiming that it knowingly broke rules when making loans backed by the Federal Housing Administration.
Then in May, Fannie Mae and Freddie Mac, the government-controlled mortgage buyers, strengthened standards on non-banks servicing mortgages.
The shadow banks’ rise is one of the “unforeseen consequences” of five years of increasingly tough oversight of depository institutions since the Dodd-Frank Act, said Marshall Lux, senior fellow at the Kennedy School and co-author of the study, which uses data from the American Enterprise Institute’s International Centre on Housing Risk.

While much of the competition from newer lenders is healthy, he said, there were “concerning” signs of slipping standards in underwriting. That raises risks for the FHA, an 81-year-old agency which insures lenders against losses on certain classes of mortgage, as well as for Fannie and Freddie.

In the fourth quarter last year the median credit score of FHA-insured non-bank borrowers was 667 on the commonly used FICO scale, compared to 682 for bank borrowers, said Robert Greene, Mr Lux’s co-author.

Securities linked to risky subprime lending, which generally involves borrowers with scores below 660, were major contributors to the financial crisis.

Bob Walters, chief economist at Detroit-based Quicken, said that “any implication that non-banks are doing riskier loans than banks is flat-out wrong”. He had not seen the study but said non-banks were performing a vital role for America’s mortgage market.

Mr Walters added: “If banks are terrified to originate these [government-backed] loans, because — to use the trading adage — they’re picking up nickels in front of a bulldozer, there is not going to be liquidity. First-time homebuyers, minorities, low-income households; they’re the folks getting squeezed out.”

The new entrants have also brought new technology to the mortgage-application process that has improved an often lengthy and paper-intensive experience for borrowers, the Kennedy School study notes.
Regulators should weigh those benefits against the costs of cracking down on non-banks too harshly, said Mr Lux. “If [they] were not in the market, then the American dream of owning your own home would be significantly hurt,” he said.

This month Republicans unveiled a draft bill that they said would ease the burden of regulation for banks in various markets, including mortgages. Senator Richard Shelby, chair of the Senate banking committee, said that “a serious, bipartisan effort” was needed “to reform our mortgage finance system”.

martes, junio 02, 2015



Review & Outlook

Worse Than Illinois

Connecticut Democrats are raising taxes again after promising not to.

May 29, 2015 6:46 p.m. ET

Connecticut Gov. Dannel P. Malloy   Connecticut Gov. Dannel P. Malloy Photo: Associated Press/Jessica Hill

The Census Bureau says Connecticut was one of six states that lost population in fiscal 2013-2014, and a Gallup poll in the second half of 2013 found that about half of Nutmeg Staters would migrate if they could. Now the Democrats who run the state want to drive the other half out too.

That’s the best way to explain the frenzy by Governor Dannel Malloy and the legislature to raise taxes again and blow through a state constitutional spending cap. They’ve been negotiating behind closed-doors over the details of a two-year $40 billion budget that could be revealed this weekend, but it’s already clear that Connecticut residents will pay big time.

Mr. Malloy promised last year during his re-election campaign that he wouldn’t raise taxes, but that’s what he also said in 2010. In 2011 he signed a $2.6 billion tax hike promising that it would eliminate a budget deficit. Having won re-election he’s now back seeking another $650 million in tax hikes.

But that’s not enough for the legislature, which has floated $1.5 billion in tax increases. Add a state-wide municipal sales tax that some lawmakers want, and the total could hit $2.1 billion over two years.

One reason Mr. Malloy needs cash is because the state economy isn’t growing. According to the federal Bureau of Economic Analysis, the state grew a scant 0.9% in 2013, the last year state data are available. That was tied for tenth worst in the U.S. The state’s average compounded annual growth for the last four years is 0.42%.

Slow growth means less tax revenue but spending never slows down. Some “40% of the state budget goes to government employee compensation and benefits, including payroll, state pensions, teacher pensions and current and retiree health care,” says Carol Platt Liebau, president of the Hartford-based Yankee Institute. “These items are growing at a rate that exceeds the growth of the economy.”

The Tax Foundation ranks Connecticut as one of the 10 worst states to do business. The state finished last in Gallup’s Job Creation Index in 2014 and now ties with Rhode Island for the worst job creation in the index since 2008.

This will only get worse if the state Assembly gets its way. Democrats want to make permanent what has been a temporary surtax of 20% on a company’s annual tax liability, while limiting the use of accumulated tax credits. They also want to apply the 6.35% state sales tax to services, increase the top marginal income tax rate for individuals to 6.99% from 6.7%, and add a new 2% surcharge on capital gains income, which is now taxed as ordinary income.

In a sign of grasping desperation, the proposal also calls for the Connecticut Lottery to put keno in bars and restaurants. Not too many years ago Connecticut was a tax refuge for New York City workers, but since it imposed an income tax in 1991 the rate has kept climbing, as it always does.

We’re tempted to say that the Connecticut voters who re-elected Mr. Malloy after he dissembled on taxes the first time are getting what they deserve. But this is what happens when a state, like Illinois and New York, becomes dominated by public unions and gentry liberals. They soak the middle class.

On May 13 Nutmeggers became the last U.S. residents to reach Tax Freedom Day, when they finish paying the government each year and begin working for themselves. No wonder so many want to leave.


The economics of bluffing

When political leaders turn into option-writers

May 30th 2015 

WILL Greece default on its debts and leave the euro? Will Britain decide to leave the European Union? Politicians in the two countries have threatened, implicitly or explicitly, to take these drastic steps if their European colleagues do not offer them inducements to stay.

Many people regard these threats as a bluff. They think that Greece does not really want to leave the euro, and that David Cameron, Britain’s prime minister, does not want his country to exit the EU.

When push comes to shove, Greece will do a deal and Mr Cameron will persuade British voters to stay in the EU in his planned referendum. But there are risks that neither outcome will turn out as planned. In both cases, political leaders are making a risky bet.

The financial analogy is with writing (selling) an option. In the markets, an option is the right to buy (a call) or sell (a put) an asset at a given price; say shares of Apple at $130. In return for granting the buyer of the option this right, the writer receives a payment called a premium, rather like an insurance company receives a premium for protecting a homeowner against fire or theft. But if Apple shares do rise above $130, the buyer of a call option is likely to exercise it, to the writer’s cost; if they fall below it, the holder of a put option is likely to cash in.

Political leaders in Greece and Britain have in effect written an option on exit. The premium they receive is political popularity—for opposing the demands of international creditors, in the case of Greece, or for asserting Britain’s sovereignty, in Mr Cameron’s.

But in the financial markets, option-writing is a very risky strategy, unless the position is properly hedged. A lot of small profits can be earned from the option premia, only for all the gains to be wiped out when an option is exercised at an unfavourable time. Of course, the buyer of an option is most likely to exercise it when the cost to the writer is greatest.

For the political leaders of Greece and Britain, the difficulty is that they do not get to decide whether the option gets exercised. The other nations within the euro zone and the EU may decide to call Greece or Britain’s bluff. In Britain, the electorate also has the right to exercise the option of exit—which they might use in the referendum to protest against government policies in general rather than voting on the merits of EU membership in particular.

This leads to some complex calculations. Unlike Apple’s shares, the price of Grexit or Brexit at any moment is highly uncertain; political leaders cannot be sure what the costs and benefits will be. So this is rather like an option on one of the complex securities that proliferated before 2007—a collateralised debt obligation based on subprime mortgages, for example. The uncertainty makes it less likely that Europe will exercise the option and risk the departure of Britain or Greece.

If that gives the bluffing states an advantage, they also face a difficult trade-off. The more intransigent their demands, the more they may please their electorates (ie, the greater the “option premium”). However, such intransigence may make it more likely that the option will be exercised.

European leaders may feel that making too many concessions to Greece or Britain will simply encourage other countries to make similar demands, and thus destroy the European project. In Britain, there may be a huge gap between the expectations fostered during the negotiating process and the reforms that emerge. This may create the impression that the government has failed, making the public more inclined to vote for exit.

This discrepancy between the high-flying nature of political promises and the mundane reality of policy outcomes lies at the heart of recent voter discontent. Promises may result in short-term electoral success but at the cost of increasing disillusionment in the long term. The most significant short-term influences on growth—the oil price, Federal Reserve policy, China’s success in managing its economic growth—are outside the control of European politicians.

National leaders are, in effect, bluffing when they say their own policies can make much difference.

Europe’s failure to generate much in the way of economic or wage growth over the past decade means that voters are not just turning against the parties in power—they have lost faith with the mainstream opposition as well. The effect can be seen everywhere, from the rise of Marine Le Pen in France to the emergence of brand new parties like the Five Star Movement in Italy and Podemos in Spain. Years of short-term gains for the mainstream parties have resulted in a long-term loss.

Heard on the Street

Adjusting the Fed’s View of Growth

Central bank can look past negative first-quarter GDP report

By Justin Lahart

Updated May 29, 2015 11:17 a.m. ET

Severe winter weather in places like Boston weighed on the first-quarter GDP results. Severe winter weather in places like Boston weighed on the first-quarter GDP results. Photo: Elise Amendola/Associated Press

If there ever was a contraction in the economy the Federal Reserve could look beyond, the drop in first-quarter gross domestic product was it.

The Commerce Department on Friday released revised figures showing that GDP fell an annualized 0.7% in the first quarter from the fourth, adjusting for seasonal swings. But those seasonal adjustments are posing a bit of a problem, with a number of researchers, including economists at the San Francisco and Philadelphia Federal Reserve Banks finding that GDP has tended to be understated in the first quarter. The Commerce Department says that with the release of second-quarter GDP on July 30 it will introduce steps to mitigate the problem. So the first-quarter figures will get revised higher.

How much, exactly, isn’t clear. But economists who have applied the San Francisco Fed’s methodology to Friday’s figures reckon GDP grew at a bit more than a 1% rate in the first quarter. And given that West Coast port disruptions and severe winter weather also weighed, the underlying trend of the economy was probably a bit better.

Not enough better to qualify as anything other than lackluster, but good enough that the Fed can still feel comfortable about raising rates at its September meeting. If GDP is weak in the second quarter, or if the job market starts to falter, that will require a different sort of adjustment.

martes, junio 02, 2015



Social change

The weaker sex

Blue-collar men in rich countries are in trouble. They must learn to adapt

May 30th 2015   

AT FIRST glance the patriarchy appears to be thriving. More than 90% of presidents and prime ministers are male, as are nearly all big corporate bosses. Men dominate finance, technology, films, sports, music and even stand-up comedy. In much of the world they still enjoy social and legal privileges simply because they have a Y chromosome. So it might seem odd to worry about the plight of men.

Yet there is plenty of cause for concern. Men cluster at the bottom as well as the top. They are far more likely than women to be jailed, estranged from their children, or to kill themselves. They earn fewer university degrees than women. Boys in the developed world are 50% more likely to flunk basic maths, reading and science entirely.

One group in particular is suffering. Poorly educated men in rich countries have had difficulty coping with the enormous changes in the labour market and the home over the past half-century. As technology and trade have devalued brawn, less-educated men have struggled to find a role in the workplace. Women, on the other hand, are surging into expanding sectors such as health care and education, helped by their superior skills. As education has become more important, boys have also fallen behind girls in school (except at the very top). Men who lose jobs in manufacturing often never work again. And men without work find it hard to attract a permanent mate. The result, for low-skilled men, is a poisonous combination of no job, no family and no prospects.

From nuclear families to fissile ones
Those on the political left tend to focus on economics. Shrinking job opportunities for men, they say, are entrenching poverty and destroying families. In America pay for men with only a high-school certificate fell by 21% in real terms between 1979 and 2013; for women with similar qualifications it rose by 3%. Around a fifth of working-age American men with only a high-school diploma have no job.

Those on the right worry about the collapse of the family. The vast majority of women would prefer to have a partner who does his bit both financially and domestically. But they would rather do without one than team up with a layabout, which may be all that is on offer: American men without jobs spend only half as much time on housework and caring for others as do women in the same situation, and much more time watching television.

Hence the unravelling of working-class families. The two-parent family, still the norm among the elite, is vanishing among the poor. In rich countries the proportion of births outside marriage has trebled since 1980, to 33%. In some areas where traditional manufacturing has collapsed, it has reached 70% or more. Children raised in broken homes learn less at school, are more likely to drop out and earn less later on than children from intact ones. They are also not very good at forming stable families of their own.

These two sides often talk past each other. But their explanations are not contradictory: both economics and social change are to blame, and the two causes reinforce each other. Moreover, these problems are likely to get worse. Technology will disrupt more industries, creating benefits for society but rendering workers who fail to update their skills redundant. The OECD, a think-tank, predicts that the absolute number of single-parent households will continue to rise in nearly all rich countries. Boys who grow up without fathers are more likely to have trouble forming lasting relationships, creating a cycle of male dysfunction.

Tinker, tailor, soldier, hairdresser
What can be done? Part of the solution lies in a change in cultural attitudes. Over the past generation, middle-class men have learned that they need to help with child care, and have changed their behaviour. Working-class men need to catch up. Women have learned that they can be surgeons and physicists without losing their femininity. Men need to understand that traditional manual jobs are not coming back, and that they can be nurses or hairdressers without losing their masculinity.

Policymakers also need to lend a hand, because foolish laws are making the problem worse.

America reduces the supply of marriageable men by locking up millions of young males for non-violent offences and then making it hard for them to find work when they get out (in Georgia, for example, felons are barred from feeding pigs, fighting fires or working in funeral homes). A number of rich countries discourage poor people from marrying or cohabiting by cutting their benefits if they do.

Even more important than scrapping foolish policies is retooling the educational system, which was designed in an age when most men worked with their muscles. Politicians need to recognise that boys’ underachievement is a serious problem, and set about fixing it. Some sensible policies that are good for everybody are particularly good for boys. Early-childhood education provides boys with more structure and a better chance of developing verbal and social skills. Countries with successful vocational systems such as Germany have done a better job than Anglo-Saxon countries of motivating non-academic boys and guiding them into jobs, but policymakers need to reinvent vocational education for an age when trainees are more likely to get jobs in hospitals than factories.

More generally, schools need to become more boy-friendly. They should recognise that boys like to rush around more than girls do: it’s better to give them lots of organised sports and energy-eating games than to dose them with Ritalin or tell them off for fidgeting. They need to provide more male role models: employing more male teachers in primary schools will both supply boys with a male to whom they can relate and demonstrate that men can be teachers as well as firefighters.

The growing equality of the sexes is one of the biggest achievements of the post-war era: people have greater opportunities than ever before to achieve their ambitions regardless of their gender. But some men have failed to cope with this new world. It is time to give them a hand.

martes, junio 02, 2015



Gold: Still Waiting

By: Jordan Roy-Byrne

Friday, May 29, 2015

Gold has been frustrating for bulls and bears since its crash in Q2 2013. In the two years since it has traded in a wide range, frustrating traders and investors. The net result has been nothing but the passing of time. Until Gold breaks above $1300 or breaks below $1150, we will remain in waiting mode. Personally, I believe Gold is far more likely to break lower in the weeks and months ahead. In any case, we are still waiting.

Below is the updated Gold bears analog chart. The chart excludes the extreme bear in terms of time (1987-1993 bear) and the extreme bear in price (1980-1982 crash). The other three bears in the chart provide good context for the current bear which has closesly followed the 1996-1999 bear. Considering only this chart, the $1050 area is a reasonable target.

Gold Bears Chart
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The next chart shows a weekly bar plot for Gold and its net speculative position (as a percentage of open interest) at the bottom. Gold has strong weekly support at $1150 but if that breaks then we can anticipate a move down to stronger support at $1000 to $1050. The net position is at 31% (as of last week) which is very high considering Gold is not yet in a bull market. Too many speculators are left. Two years ago Gold made a low around the same price (~$1200) with

 $GOLD Gold - Spot Price (EOD) CME

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Another reason Gold likely has more downside ahead is the US$ bull market may not be finished. While Gold has held in very well with the rising US$, it failed to rally when the US$ corrected from 100 to 93. If the US$ had put in a major top then precious metals would have surged. This chart argues that the US$ has another push to the upside before it makes a major peak.

US$ Bull Markets
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We are still waiting for Gold to make its final break lower. In considering history, technicals and sentiment, we have little reason to think Gold will break to the upside. Mind you, we are huge gold bulls and expect a very sharp rebound from the $1000-$1050 area. If and when Gold reaches that area it will do so in a very oversold state with very negative sentiment. The combination of those factors (very oversold, very negative sentiment) meeting with very strong support can produce big rebounds.

If metals are heading to new lows then it would likely create one last chance to buy quality junior miners at fire sale prices.