Janet Yellen Discovers Okun's Law Is Broken, Confused Record Russell 2000 Doesn't Lead To Plunging UnemploymentSubmitted by Tyler Durden on 02/11/2013 - 13:31
Moments ago Fed vice-chair Janet Yellen released a speech titled: "A Painfully Slow Recovery for America's Workers: Causes, Implications, and the Federal Reserve's Response." In it, Yellen finally revealed she is on the path to realizing the it is none other than the Fed's own actions that have broken the economic "virtuous cycle", and that Okun's Law - the bedrock behind the Fed's flawed philosophy of assuming more debt -> more GDP -> more jobs, is no longer relevant in the broken "New Normal." In other words, Yellen finally starts to grasp what Zero Hedge readers knew a year ago, when they read, "JP Morgan Finds Obama, And US Central Planning, Has Broken The Economic "Virtuous Cycle."
The economic collapse is not a single event. The economic collapse has been happening, it is is happening right now, and it will continue to happen. Yes, there will be times when our decline will be punctuated by moments of great crisis, but that will be the exception rather than the rule. A lot of people that write about "the economic collapse" hype it up as if it will be some huge "event" that will happen very rapidly and then once it is all over we will rebuild. Unfortunately, that is not how the real world works. We are living in the greatest debt bubble in the history of the world, and once it completely bursts there will be no going back to how things were before. But other than that, everything is rainbows and lollipops, right?
The overwhelming herding of AAPL's analysts highlighted by James Stewart in today's NY Times sets CNBC's Rick Santelli on a path of truthiness not often seen on business media. Citing the findings, most specifically, "analysts are, in the end, salesmen," Santelli notes that the average investor (listeners and viewers of financial media) have limited time and thus are forced to rely on this herd-like behavior. The audience, of course, hears what it wants to hear as confirmation or 'myside' bias' dominates each and every word uttered. But it's not just the financial analysts, its the political pundits who continue to abjectly ignore an exploding deficit in order to support the 'brand' of independence their media provides. The 'safety in numbers' argument holds up as the analysts group together - all knowing the reality ahead, but terrified to break ranks and admit the emperor is indeed naked.
As the chart below shows, in some 200 years of history, when expressed as a ratio of total sovereign debt to tax revenues, the empirical data as compiled by Reinhart and Rogoff ranges from 2x to 16x. This is shown by the blue bars in the chart below. So where are we in this cycle as the debt clock counts down? As the red bars show, we are in a very uncomfortable place, with Japan now at the highest such ratio in history, well above the highest recorded which always ended up in default, while the US, whose such ratio is over 600%, is above the long-term average of about 520% public debt/revenue. The problem is that every current and subsequent attempt to reflate merely pushes both of these higher, until one day the marginal growth creation of every dollar in new debt becomes negative. How much higher can consolidated global debt go before global GDP is not only no longer growing, but every incremental dollar in debt has a negative impact on GDP, as was the case for the US in the fourth quarter? Keep an eye on global economic growth: if and when the world enters outright recession: the most feared outcome by all central bankers who realize they are out of weapons and their only recourse is much more of the same, that may be cue to quietly leave town.
Just like for Alice, Spain's farcical kickback and bribery scandal's rabbit hole just keeps getting deeper. This morning El Pais reports that the alleged providers of payments to the government (via the kickback fraud) - known as 'Gurtel' - received an unprecedented EUR115mm in government contracts. With more than 70 people facing charges ranging from money laundering to bribing a public official, Rajoy's efforts at coming clean have fallen on deaf ears as 79% of Spaniards are dissatisfied with the explanations. This follows a weekend of disclosures including the fact that Rajoy gave himself a 32% pay rise up to 2011 as he push austerity down the throats of his people. As El Pais notes, "...The only thing that is clear is that most of the recipients of payments on the former treasurer’s list have admitted that they accepted money in cash...." The sad political truth is, as Deutsche notes, the likeliest course of action at this stage, in our view, is that on the basis of the internal investigation, Rajoy may go as far as letting go some members of his cabinet, but we think that he will protect the “hard nucleus” of his administration and will not resign. It appears, as they note, that the Spanish government's room for maneuver (over further austerity) is significantly diminished.
JPY could fall a lot further because weak JPY has been the most effective tool to create equity market wealth and spur Japanese demand. Moreover, Citi's Steven Englander notes, Japanese policymakers do not have many other options. If JPY is ticket for the Nikkei to regains ground lost versus other equity markets, USDJPY would have to go into three digits. By implication JPY would have to weaken a lot more. The loss of market share in part reflects long-term structural issues but Japanese governments (like others) are more mindful of incurring the anger of domestic political constituencies by making tough structural reforms than of G20 counterparts by weakening the exchange rate. From a political perspective, the Nikkei-JPY relationship is too much a good thing for Japanese policymakers to give up - but divergences are abundant at the short- and long-end of the JGB curve - and too much of a good thing in this case is a disaster.
Update: Just as predicted, and right on schedule a few hours after this hit the tape, here come the French: EURO GROUP MUST WATCH RISING EURO'S IMPACT ON GROWTH: MOSCOVICI
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The jawboning continues - but this time it's different. During a speech this morning, the ECB's Weidmann made it clear that the optics of EUR strength are critical to the union's survival (and Germany's balance of power vs the French):
- *WEIDMANN SAYS ECB CANNOT SOLVE CRISIS, GOVERNMENTS MUST
- *WEIDMANN: DEVALUATION HISTORICALLY DOESN'T HELP COMPETITIVENESS
- *WEIDMANN: IF MANY NATIONS DEPRESS FX, CAN ONLY END IN FAILURE
- *ECB'S WEIDMANN SAYS EURO ISN'T SERIOUSLY OVERVALUED
- *WEIDMANN WARNS POLICY MAKERS AGAINST TRYING TO WEAKEN THE EURO
Of course, as we head towards the G-20, everyone wants to talk their book - but in this case, Weidmann is talking the EUR up. As we have been saying, Weidmann is scared of what happens when the EUR downward slide accelerates and implicitly results in a blow up of peripheral yields leading to even faster EUR collapse, and ultimately fears of EUR redenomination. This has been the case every year; as the ECB had to step in and prop the EUR up - just the opposite of what every other central bank does.
With Italy's stock market down almost 9% (and falling again today), and Italian bond yields surging (2Y +35bps to 1.67%) in the last two weeks, it truly seems as though the two scariest words in global investing are not 'Iran-Israel', or 'Federal Reserve', but 'Silvio Berlusconi'. With the polls blacked out now until the election in just under two weeks, the posturing has begun and the media mogul is not backing down. As ANSA.It reports, Berlusconi has proclaimed "I believe that we have overtaken them... they are now (trailing) behind us," as we have been noting the convergence of the two parties poll results recently. Of course, he is still the lecherous old bastard he always was - which seems only to endear him to the Italian people (oh, and his promise of bread and circuses for all) - as ANSA notes, he is defending himself on Sunday, after Berlusconi asked a female solar power technician during a company visit if she made house calls, if she "comes to homes" and how many times she is willing "to come". Is debauchery the opposite of austerity? Never mind, the key for now is psychological as the opposition sparring will need to begin to avoid the "don't vote for the loser" bias.
While Dan Brown fans are intimately familiar with the details of Conclave, there are those who have not studied Robert Langdon's every clue-busting eureka moment under a microscope. For them, the AP has this handy step-by-step guide for how a new pope is chosen. Traditionally, this flowchart if followed upon the death of the Pontiff, but following today's first papal resignation since 1415, it is time to apply a little of the "New Normal" to the Catholic church as well. The only unknown after reading the below flowchart should be how Diebold will rig the Cardinal vote so that a Goldman partner is elected.
Ron Paul spoke with Bloomberg television and said that we are in a currency war and we have been for decades. He noted that governments have always competed against each other’s currencies even under Bretton Woods. It has always been a form or protectionism and will make people want to export more. Dr. Paul said don’t blame countries like China and Japan just look at the debt the U.S. is buying. There will always be currency wars. The Bank of Japan claims it has to defend itself against deflation and decades of slow growth. Ron Paul noted that the Bank of Japan’s yen devaluations will eventually lead to further price inflations that are to come. Investors and citizens will eventually reject the yen and switch to other currencies like dollars or Swiss francs. Then eventually people will move to hard assets altogether as they are losing confidence in paper assets. Dr. Paul was asked, “Do you think protectionism will lead to a crash in the international monetary system? He replied, “Nothing good can come of it. Even short run trade benefits leads to a weaker economy and higher prices. It doesn't solve the problem they won't face the truth. That is that all governments spend too much money, there is too much debt and they get away with it by taxing people”.
As most of Asia is on vacation for the lunar new year, UBS' Art Cashin is growing more and more concerned with the excessively bullish tone. While not screaming for an outright short, the venerable volatility-handler fears many factors he sees in the market currently from sentiment to vauation, and a lack of 'rotation', and while the January Effect and the Super-Bowl are in the bulls favor, he gently reminds that the 'Year of the Snake' has typically not been a good one for markets or man...
As we said a week ago in "Scapegoating Nemo", it was only a matter of time before Wall Street's heroic band of permabullish lemmings used a snow storm in the middle of, gasp, winter, as a "valid" excuse to justify why an economy priced to central planning-perfection may deviate slightly from a path that has missed every major upside inflection point in the past four years (but... but, there is always a reason... if only for the Fed to print). And appropriately enough, the first such excuse comes from none other than Groundhog Phil's nemesis Joe LaVorgna who just cut his Non-farm payroll forecast to 125K due to "inclement winter weather." Truly odd how there is never an exogenous reason for "better than expected" data. Ever. Next, and as always, rain in the spring will be blamed for a Durable Goods plunge in April, sun and balmy warm weather in the summer will be the cause of a collapse in retail spending in July, and finally, a gust of wind in the fall will lead to a double dip depression.
Thanks to a law banning horses from Romanian roads, the ever-enterprising and integrated European Union workers have apparently found a use for the millions of horses and donkeys that were slaughtered. In a bizarre report from The Independent, it appears 'donkey meat' has turned up on the shelves of British, French, and Swedish supermarket shelves (and no it doesn't taste like chicken or ass). The unintended consequence of the Romanian horse (and donkey) ban appears to follow a truly remarkable path from abattoirs in Romania (who must be busy) to a dealer in Cyprus (subcontracting for a Dutch dealer) to a meat plant in France which sold its frozen 'meat' onto a distributor in Luxembourg. French and British governments have forced the removal of the 'fake' beef from supermarket shelves as "a case of fraud and conspiracy against the public." Given last week's incredible footage from Greece, we suspect more than a few are willing to choke it down, as for now the British are pushing to ban meat imports.
It appears the tensions between Turkey and Syria are far from easing, as evidenced by the just reported car bomb explosion at the Turkish-Syria border where at least 9 people have been killed according to TV24. According to AA, the blast happened in a vehicle with a Syrian license plate, which is certain to inflame tensions between the two countries even more. Keep an eye on the already soaring Brent-WTI spread.
The precious metals market appears to have found a size seller this morning. Despite record breaking demand for physical coins from the Mint, gold and silver prices hit an air pocket around 8amET but had been sold all day in Europe. We humbly suggest that his Holiness spread out his retirement selling... of course we saw a similar gap last Tuesday and Thursday as Europe's risk-asset markets continue to slide (and perhaps collateral margin calls come due). Of course, the more important questions remain: which TBTF bank will the pope end up as vice-chairman in, and which ex-Goldman Managing Director/Partner will be the next head of the Vatican bank... and incidentally Catholic Church (it appears a Canadian is front-runner, rather coincidental given Carney's recent appointment).