Federal Reserve

4 Years Until The Next Recession? Not Likely!

David Rosenberg, in one of his recent missives, wrote: "...based on the current trend in the LEI and the level of the diffusion index, history suggests that the next recession is at least four years away." While anything is certainly possible, it is highly unlikely that the current economic environment is supportive of another four years of a "struggle along" economy. Given the artificial supports during recent years, the extreme extension in assets prices, record levels of margin debt and the chase for yield in "junk credits," it is highly possible that the next recessionary decline could be much larger than the historical average.

It Begins: "Central Banks Should Hand Consumers Cash Directly"

"Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly.... Central banks, including the U.S. Federal Reserve, have taken aggressive action, consistently lowering interest rates such that today they hover near zero. They have also pumped trillions of dollars’ worth of new money into the financial system. Yet such policies have only fed a damaging cycle of booms and busts, warping incentives and distorting asset prices, and now economic growth is stagnating while inequality gets worse. It’s well past time, then, for U.S. policymakers -- as well as their counterparts in other developed countries -- to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jump-start the economy...  The transfers wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them"...

Ron Paul: "Americans Must Choose Non-Interventionist Free Markets For Peace & Prosperity"

Mark Spitznagel: "Mises will ultimately be right yet again about the inevitable final collapse of the current asset boom brought about by credit expansion. The term “black swan” (the surprising, unforeseen event) used for bursting financial bubbles has been and will remain a misnomer - we can and, indeed, should expect such tumults to occur at some point as a consequence of massive central bank intervention and economic distortion."

Ron Paul: "As to the unwinding of this mess, I’m convinced that when the current expansion ends it will be abrupt, gigantic, and worldwide. The 43-year expansion of Fed credit and debt, delivered to us by a fiat dollar standard, and held together artificially by an undeserved trust will end badly."

Why Isn't Monetary Pumping Helping the Economy?

Despite all the massive monetary pumping over the past six years and the lowering of interest rates to almost zero most commentators have expressed disappointment with the pace of economic growth. This should not be surprising though, since, any policy, which artificially boosts demand, leads to consumption that is not backed up by a previous production of wealth. This means that monetary pumping leads to the squandering of real wealth. All this however, can be reversed by shrinking the size of the government and by the closure of all the loopholes of the monetary expansion.

Meet The LMCI - The Fed’s New Goal-Seeked, 19-Factor Labor Market Regression Rigmarole

In the rush to make QE’s taper and the follow-on “forward guidance” appear more data-related than of due concerns about the structural (and ultimately philosophical) flaws in the economy, the regressionists of the Federal Reserve have come up with more regressions - a 19-factor model to determine Yellen's 'labor market conditions'. What does this mathematical reconstruction of the labor market tell us about the labor market? If you believe the figures, this has been one of the best recoveries on record. No, seriously...

The Status Quo's Model Of "How The World Works" Is Broken

The Status Quo is dysfunctional because its model of how the world works is broken. It won't matter if gridlock remains in place or one of the parties gets to impose its "brand" of policy-tweaks; since no one on the political spectrum has any concept that the current model described in these 12 points is broken, fixing the political dysfunction won't fix the systemic dysfunction.

The Winner-Take-All Economy

When the majority of Americans examine the world around them, they see a stock market at record highs and modest apparent improvement in the economy, but, as John Hussman notes, they also have the sense that something remains terribly wrong, and they can't quite put their finger on it. QE-induced speculation misallocates resources that might otherwise contribute to long-run growth, and while conditions could certainly be worse, the benefits of this economic recovery have been highly uneven. The economy is starting to take on features of a winner-take-all monoculture that encourages and subsidizes too-big-to-fail banks and large-scale financial speculation at the expense of productive real investment and small-to-medium size enterprises.

Guggenheim's Minerd: "Don't Fight The Treasury Bond Rally"

The consensus among market watchers last September was that, with U.S. interest rates so low and the U.S. Federal Reserve (the Fed) about to withdraw stimulus, interest rates would trend higher. However, Guggenheim's Scott Minerd took a different view, writing in a commentary that “10-year rates may be heading back to 2.25 percent or lower.”

Frontrunning: August 25

  • Jackson Hole Theme: Labor Markets Can’t Take Higher Rates (BBG), or anything else for that matter
  • Kidnappers free American missing in Syria since 2012 (Reuters)
  • More unpatriots: Burger King in merger talks with Canada's Tim Hortons (Reuters)
  • California Quake to Cost Insurers Up to $1 Billion, Eqecat Says (BBG)
  • Congo declares Ebola outbreak in northern Equateur province (Reuters)
  • Missouri Governor Defends Ferguson Prosecutor (BBG)
  • Kuroda Douses Japan Stimulus Expectations (WSJ)
  • London Jihadi Call Vies With Banks in Canary Wharf Shadow (BBG)
  • Netanyahu Signals Expansion of Air Attacks in Gaza (WSJ)
  • Libya's Islamist Militias Claim Control of Tripoli (WSJ)

The Broken Links In The Fed's Chain Of Cause & Effect

The Federal Reserve’s prevailing view of the world seems to be that a) QE lowers interest rates, b) lower interest rates stimulate jobs and economic activity, c) the only risk from QE will be at the point when unemployment is low enough to trigger inflation, and d) the Fed can safely encourage years of yield-seeking speculation – of the same sort that produced the worst economic collapse since the Depression – on the belief that this time is different. From the foregoing discussion, it should be clear that this chain of cause and effect is a very mixed bag of fact and fiction.

Krugman's Keynesian Crackpottery: Wasteful Spending Is Better Than Nothing!

Janet Yellen has essentially confirmed QE’s demise; good riddance. Unfortunately, I don’t think that is the final end of QE in America, just as it hasn’t been the end time after time in Japan (and perhaps now Europe treading down the same ill-received road). The secular stagnation theory, that we think has been fully absorbed in certainly Yellen’s FOMC, sees little gain from it because, as they assume, the lackluster economy is due to this mysterious decline in the “natural rate of interest.” Therefore QE in the fourth iteration accomplishes far less toward that goal, especially with diminishing impacts on expectations in the real economy, other than create bubbles of activity (“reach for yield”) that always end badly. What Krugman and Summers call for is a massive bubble of biblical proportions that “shocks” the economy out of this mysterious rut, to “push inflation substantially higher, and keep it there.” In other words, Abenomics in America. Japanification is becoming universal, and the more these appeals to generic activity and waste continue, the tighter its “mysterious” grip.