Output Gap

A Look At This Week's "Other" Big Event

With the Italian referendum now in the rearview mirror, the market's attention focuses on this Thursday's second most important event, the ECB meeting on Thursday. Here are the key questions the market will want answered.

Tempering US Economic Growth Expectations

Much of the recent optimism seems to stem from a the belief that the new administration will be able to dramatically (and immediately) increase economic growth. The problem is that the US and global economy continue to face major structural issues that seem to be beyond the control of any politician. Increasingly, it is feeling like we are in a “buy the rumor, sell the news” kind of market.

Like Everything Else, History Repeats (Almost Exactly) Because Power Truly Corrupts

The FOMC has no idea what it is doing, just like Bank of Japan officials about a decade before them. Rather than learn from all the experimentation, the power and prestige still, somehow, afforded to all of them is just too much to give up. They would clearly rather keep themselves on top of the political power structure as it relates to the economy than to admit what is increasingly obvious (a second time).

Deutsche Bank Loves Helicopter Money: Why "Big Inflation Is Coming... But Will First Require A Crisis"

Helicopter policies are not advocated in ‘a normal world’. They are however almost inevitable in the next recession. "Japan will be the flag bearer of fiscal stimulus.” Which will be sufficient to breath some inflationary spirit into the system. “But this is all febrile and can get over-turned by the slightest change in wind direction,” he said, tentative. “This will be the little inflation before the big helicopter-driven inflation.” But that will first require a crisis.

Loonie Surges As BOC Keeps Rate Unchanged, Cuts 2016, 2017 GDP, Blames Brexit, Wildfires, Weak Consumption

The Bank of Canada did not surprise moments ago when it kept the overnight rate at 0.5%, as expected The Bank said that the "current stance of monetary policy is still appropriate" adding that risks to inflation profile are roughly balanced. It also said that "fundamentals remain in place for a pickup in growth over the projection horizon, albeit in a climate of heightened uncertainty." Where the BOC did surprise was in its latest cut to Canada's economic outlook: the central bank now expects GDP to grow 1.3% in 2016, 2.2% in 2017, down from 1.7%, 2.3%, respectively.

This Is What Draghi Said To Spark Speculation Of Another Global Central Bank Bailout

The head of the ECB avoided mentioning the U.K.’s vote to leave the European Union but instead called for greater alignment of policies globally to mitigate the spillover risks from ultra-loose monetary measures.  “We can benefit from alignment of policies,” Draghi said at the ECB Forum in Sintra, Portugal. “What I mean by alignment is a shared diagnosis of the root causes of the challenges that affect us all; and a shared commitment to found our domestic policies on that diagnosis."

Academic Skullduggery – How Ivory Tower Hubris Wrecks Your Life

Monetary policy may seem technical as clever people debate among themselves whether the optimal policy rule should be one part inflation and one part output gap or one part inflation and two part output gap with various degree of flexibility in its interpretation. In reality it is just a bunch of academics looking at an extremely simplified mathematical representation of the world under the pretense of knowing the consequences of their actions. They do not. It is all made up as they go along and the repercussion for their hubris will be borne by all of us. It is glaringly obvious to us that the extraordinary decisions made by our money masters over the last decade will end in an extraordinary correction of malinvested capital. Applying the scientific method of natural science on a social system is the gravest error of them all.

Will "Inevitable USD Strength" Lead To Another Market Selloff

With stocks the biggest beneficiary of the late January "Shanghai Accord", it stands to reason that the US Dollar was the biggest loser. Sure enough, overnight the WSJ writes that the "powerful rallies that have lifted stocks, crude oil and emerging markets for the past three months have one important thing in common - the falling dollar - and investors are growing anxious that it could prove to be the weak link." But is a strong dollar about to make another appearance and unleash the next leg lower in risk assets?

Still Looks Like A Trap

“If the weather forecast suggests it might rain, wouldn’t you carry an umbrella?

The Cult Of Central Banking Is Dead In The Water

So what is to be done, as Lenin once queried? In a word it is this. Fire the Fed. Attend to supply side policy. Let market capitalism do the rest. The cult of central banking is dead in the water.

Why The US Output Gap Means The 10 Year Is Going Below 1%

In an asset management context, US Treasury interest rates tend to trend lower when there is an output gap and trend higher when there is an output surplus. This simple, yet overlooked rule has helped to guide us to stay correctly long US Treasuries over the last several years while the Wall Street community came up with any reason why they were a losing asset class. We continue to think that US Treasury interest rates have significant appreciation ahead of them. As we have stated before, we think the 10yr US Treasury yield will fall to 1.00% or below.

Bank Of America Reveals "The Next Big Trade"

Markets have stopped focusing on what central banks are doing and are "positioning for what they believe central banks may or may not do," according to BofA's Athanasios Vamvakidis as he tells FX traders to "prepare to fight the central banks," as the market reaction to central bank policies this year reflects transition to a new regime, in which investors start speculating which central bank will have to give up easing policies first.