Archive - Nov 2013 - Story

Widely credited with being the seminal paper at the 2012 Jackson Hole conference and setting the scene for "threshold-based" policy, Michael Woodford discusses his views on the costs and benefits of "forward guidance" in this Goldman Sachs interview. The Columbia professor explains how he thinks about asset purchases versus forward guidance (it’s a mistake to think of asset purchases as a way to avoid having to talk about future policy intentions), and why the market and the Fed have seemed so disconnected at various points this year despite substantial attempts by the Fed to communicate more clearly (there were mistakes in communication, but that does not mean the situation would have been better if the Fed had instead kept its mouth shut, especially in such unprecedented times.) Ultimatley he warns, "by blinking when they did, I fear that they have made a negative reaction more likely in the future, because they are now back to square one, with people once again lacking a clear sense of how close the Fed is to tapering and thus vulnerable to surprise."

Despite the country’s macro figures and a budget which assumes that 30% of the country’s spending next year will go to debt interest payments, how is it possible that we are suddenly being bombarded with wonderful news about Spain’s current situation – no longer at a cross roads – and colorful future? Several things have happened, we think. First, the public wants to hear nice things because they are tired of hearing the bad; so if they want good stories, they’ll get them; second, time references have changed; and finally, the divorce between the people and their representatives has consummated. The government tells its stories while the people perceive a different reality. Yet this matters little. What matters is making it through tomorrow. And if to make it through tomorrow the government has to go back on its words and say it meant differently from what it said not long ago, so be it.

Westerners aren't used to the kind of inflation levels, government confiscation, and currency volatility so common in places like India; and so the need to own gold as protection isn't fully appreciated in the West. Westerners pay lip service to gold's being "an inflation hedge" or "a currency" or "a safe asset", but these terms are used in an extremely abstract way by the vast majority of the investing public, who see gold as mostly just another trading vehicle. India's love affair with gold is well-understood in Asia but completely misunderstood in the West — a phenomenon we have always found fascinating — but recently it has become abundantly clear that this disconnect is widening almost daily as the Western fixation with 'The Gold Price' and the Eastern obsession with 'The Price of Gold' take ever more divergent paths... In short, Asians like their gold to be heavy, shiny, and made of ... well, gold.

“If you like your health care plan, you can keep your health care plan.”

These words, spoken by U.S. President Barack Obama in various forms and iterations, have become a running joke amidst the rollout of the Affordable Care Act. All across the country, hundreds of thousands of citizens are receiving cancellation notices in the mail. The stringent requirements for insurance plans under the new edict are curtailing many individual policies. A simpleton can grasp the economics: you prohibit something, it goes away. And yet, for years prior, the White House ignored the oncoming train and is now slowly inching away from the wreckage.

This was not the unforeseen consequence of good-intentioned legislation.

The last time we looked at global corporate cash flow and capex as a percentage of G4 (US, UK, Europe and Japan) things were bad. Two quarters later, things have gotten much worse, with that purest proxy of true growth, or lack thereof, corporate cash flow (and not fudged, adjusted, normalized, pro forma earnings), sliding yet again tracking the ongoing collapse in capex, and now down to levels last seen during 2009, and what's worse going further back, all the way back to 2003 levels. In other words, even when taking into account the tens of trillions of liquidity injections by global central banks to prop up capital markets, the flow through to actual corporate cash flow has been non-existent, and the entire past decade is now a scratch despite the global asset price bubble rising to unprecedented new heights.

While Edward Snowden may be reviled at the top echelons of Western developed nations and is wanted in his native US on espionage charges for peeling back the curtain on how the gargantuan government machine truly works when it is not only engaged in chronic spying on anyone abroad, but worse, on its own people, the reality is that his whistleblowing revelations have done more to shift the narrative to the topic of dwindling individual liberties abused pervasively in the US and elsewhere, than anything else in recent years. And alongside that, have led to the first reform momentum of a system that is deeply broken. Which also happens to be the topic of a five-paragraph opinion piece he released today in German weekly Der Spiegel titled "A Manifesto For The Truth" in which he writes that his revelations have been useful and society will benefit from them and that he was therefore justified in revealing the methods and targets of the US secret service.

For all your Sunday morning chartporn needs.

A report by Bruce Bennett and the RAND Corporation has brought attention to one of the most important issues for international politics. Ironically, despite being a region of vital interest within American foreign policy, there has been very little public discussion of what to do in the event of government collapse in North Korea. Bennett’s timely report provides a series of vital contributions to the discussion and further outlines the lack of preparation in political, social, economic and military terms. Yet beyond the critical end game for the Korean peninsula are deeper questions concerning how any international force might respond. Specifically, how can the U.S. and Republic of Korea effectively mobilize regional powers with their differing security and development goals? Preparing for the unthinkable is not a simple moral imperative, but responsible leadership in the twenty-first century.

Having done a bang up job in Syria, where Obama nearly started world war III so Qatar could send its natgas to Europe at a lower price than  Gazprom's, while alienating America's legacy allies in the region, Saudi Arabia and Israel, and ensuring its enemies see it even weaker in the international arena following Obama's schooling by Putin, the US president continues to win friends abroad (while spying there, here and everywhere, namely the Pope) with the latest snafu coming from Pakistan, another former ally, where America just droned the leader of the Taliban fighters on Saturday, leaving his body "damaged but recognizable". 

Renegade Economist's "Four Horsemen" documentary lifts the lid on how the world really works. "Four Horsemen is a breathtakingly composed jeremiad against the folly of Neo-classical economics and the threats it represents to all we should hold dear." Free from mainstream media propaganda -- the film doesn't bash bankers, criticize politicians or get involved in conspiracy theories. It ignites the debate about how to usher a new economic paradigm into the world which would dramatically improve the quality of life for billions. Since it is becoming abundantly clear that we will never return to 'business as usual', 23 international thinkers, government advisers and Wall Street money-men break their silence and explain how to establish a moral and just society.

Any of these characteristics recognizable?

The Fed will have to increase QE (not taper it) because systemic debt is compounding faster than production and interest rates are already zero-bound. Lee Quaintance noted many years ago that the Fed was holding a burning match. This remains true today (only it is a bomb with a short fuse). Thirteen years after the over-levered US equity market collapsed, eleven years following Bernanke’s speech, five years after the over-levered housing bubble burst, and four years into the necessary onset of global Zero Interest Rate Policies and Long-Term Refinancing Operations, global monetary authorities seem to have run out of new outlets for credit. In real economic terms, central bank policies have become ineffective. In other words, the US is now producing as much new debt as goods and services.

Real estate guru Mark Hanson updates his housing view following this week's dismal housing industry data:

Sept. Pending Sales... the largest MoM drop since Sept 2001... not 2011... yes, 2001.

Don't let them tell you 'this is normal for Sept'. The 'oh-crap' moment is now in the can. Going forward, "Existing Sales" volume will disappoint on a YoY basis for several quarters. There is no way around it...

Following the slaying of two members of Greece's far-rght Golden-Dawn party (and wounding of a third) on Friday evening, the Greek government’s crackdown on the country’s 'extremist' party has revived a vexing question that seemed to have disappeared with the Cold War’s end: Is there a place within liberal democracies for apparently anti-democratic parties?

With the recent adoption of explicit forward guidance as a stimulative policy tool by the major European central banks, virtually every major central bank is now using the tool in some form. The potential benefits and dangers of such policies as central bank communications have evolved are unclear as "the form of guidance" matters. As Robin Brooks notes, and is so well illusrated below in the example of the Riksbank's and Norges Bank's 'failures', "[In terms of implications for rates] the jury is still out on how well forward guidance works. What is clear, though, is that markets prefer 'deeds' to 'words'."