Output Gap

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Goldman's Economists Score 7 Out Of 10 For 2011





Since the 2012 Outlooks have now slowed to a drip, its appears retrospectives are the stocking-filler of choice for the week. Goldman's economist group reflects on their '10 Questions for 2011', released at the end of December 2010, and finds they were correct seven times. The tricky thing about judging the 'score' is the magnitude of the error - or more importantly the magnitude of the question's impact on trading views. Jan Hatzius and his team have had their moments this year, for better or worse, in economic sickness or health but they have largely been accurate at predicting Fed policy (or should we say 'directing/suggesting' Fed policy), but were significantly off (along with emajority of the Birinyi-ruler-based extrapolators from the sell-side) on growth (high) expectations and inflation (low) expectations. Nevertheless, the lessons learned from over-estimating the speed of healing from the credit crisis and the disin- / de-flationary effects of a large output gap (which BARCAP would argue is not as wide) when inflation is already low and inflation expectations well anchored are critical for not making the same overly-optimistic mistake into 2012.

 


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The Doves Resume Their Crying: Fed's Evans Sees More Easing As Necessary To Avoid "Debt Trap"; Fed Must Act Now





While Italy's Mario Monti earlier said that the country with the still ridiculously high bond yields would be somehow able to avoid a debt trap on its own (for its second largest debt load in the entire Eurozone), the Chicago Fed's Evans just said that America, which has the lowest rates in the world (with the possible exception of Japan) just said that unlike Italy, the US apparently needs far more help, and "further monetary stimulus is needed" to avoid a relapse into the debt trap. This probably means that sooner or later Italy will follow through with statements that "Italy is not the US" - after all, they are perfectly ok as is.

 


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The Grand Unified Presentation Of Everything





Physics has the elusive Theory of Everything which consists of several Grand Unified Theories and which represents the holy grail of the science and which "fully explains and links together all known physical phenomena, and predicts the outcome of any experiment that could be carried out in principle." In other words, once proven it would make life boring. We doubt it ever will be. Finance does not have anything like it, for the simple reason that while physics is a deterministic science, finance, predicated to a big extent on assumptions borrowed from the shaman cult known as 'economics' is always and everywhere open ended, and depends just as much on chaotic 'strange attractors' as it does on simple linear relationships. Yet when it comes to presentations, especially of the variety that attempt to explain not only where we are in the world, and how we got there, but also where we are headed, we have yet to see anything as comprehensive as the Investment Strategy guidebook from Pictet's Christophe Donay. If there is indeed a holy grail of presentations, this is it, at least for a few more instants, until something dramatically changes and the whole thing becomes an anachronism. In the meantime learn everything there is to know about global decoupling and the lack thereof, the reality of an over-indebted global regime and its 3 incompatible targets, the outlook for the US and the 30% probability of a hard recession, a recessionary Europe and the five possible outcomes of its crisis, China and its hard landing, and how this all ties into an outlook on where the world is headed together with appropriate investment strategies and proper asset allocation, the fair value of the EURUSD, systemic risk evaluation, cross asset correlation, the impact of central bank intervention, debt redemption profiles, the role of gold and commodities in the new reality, and virtually everything else of importance right here and right now.

 


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Goldman Releases Q&A On Nominal GDP Targetting, Says It Is Not Coming For A Long Time





It is no secret that over the past two months, Goldman has commenced a full endorsement of Nominal GDP targetting as a method to stimulate the economy, not to mention Wall Street's bonus pool, after Ben Bernanke completely ignored Hatzius' advice to reduce the Interest on Overnight Excess Reserve rate as well as subsequent pleading for a start of MBS LSAP. Mathematics once again aside, and as we demonstrated, the math works out to an non-trivial incremental $10 trillion in debt through 2016 on top of what will be issued, to catch up with the GDP growth run rate and to eliminate the excess slack in the economy, the question is whether NGDP would achieve any tangible stimulus at all, or merely reduce the Fed's ever smaller arsenal of non-conventional means to boost the economy by one more approach. The attached rhetorical Q&A just released by Goldman seeks to answer that and any other left over questions one may have on NGDP as a policy measure, and further puts out the inverse strawman argument that it is not coming out any time soon. To wit: "We do not expect a move to an NGDP target anytime soon, although the probability would increase if growth and/or inflation slowed by more than we currently estimate." Then again, with the whole reverse psychology trademark inherent in every piece of Goldman public product, and considering the squid's previous advances to determine monetary policy have been snubbed, it may just mean that the next time the US economy implodes, this is precisely the method the Fed may use in early 2012 to guarantee another record year of Wall Street bonuses considering 2011 will be abysmal for so many Swiss and other offshore bank accounts.

 


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Weekly Chartology : "Investors Uncertain About Lower Uncertainty"





Many wonder why hedge funds underperformed the market as dramatically as they did in October: simple - few, if any, had any conviction in the rally, and only those with an already abysmal Sharpe ratio and a penchant for risky beta chasing threw themselves headfirst into the turbulent short-covering riptide. David Kostin summarizes it best with the title of his latest weekly chartology: "Investors uncertain about lower uncertainty." - and indeed they are, as intuitively all know that nothing has been fixed and the only reason the market lurches from one extreme to another is the fear that a career rally will leave many of them with no LPs, if only to be faced with even worse news tomorrow, and suffer an even greater loss to AUM. Which is why those that are outperforming the market to date have battered down the hatches and are enjoying the sluaghter from the sidelines, knowing full well they will be able to pick off stocks at Greece-like valuations. As for the others: all the best, as the volatility experienced in the past few days will certainly persist through year end: "Investors are generally skeptical about the pace and magnitude of the market recovery. We expect uncertainty and below-trend growth to persist..."

 


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David Rosenberg On The Depression, The ECB, MF Global As A Canary In The Coalmine... All With A Surprise Ending





Consuelo Mack has just released a long overdue interview with David Rosenberg, in which the former Merrill strategist is allowed to speak for 27 whole minutes without commercial interruptions of manic depressive momentum chasers cutting off his every sentence, demanding he tell them what stocks he is buying right this second! In addition to the traditional now discussion of America's depression (see attached extended walkthru by Rosie), probably the more interesting part in the interview starts at minute 11 when the conversation shifts to MF Global which to Rosie is a canary in the coalmine, and is merely the 2011 version of Bear Stearns as there is "never just one cockroach." Then the Q&A shifts to Europe, the ECB's next steps and the future of the Eurozone and Germany in particular. Mack concludes with some thoughts on what bond rates indicate about the future of the word, how the 7% output gap as a % of GDP will drive deflation (although in a vacuum: there is little accounting for the Fed's and global central bank kneejerk reaction), and how the corporation is now more powerful than the sovereign, courtesy of more pristine corporate balance sheets than those of actual countries, all of which are on the verge. Will the IBM Stellar Sphere, the Microsoft Galaxy, Planet Starbucks take over when Europe and the US finally tumble? Oh, and like a good M. Night Shyamalan movie, there is a surprising twist ending.

 


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Bill Gross' Latest Monthly Thoughts: "Pennies From Heaven" Or Can You Solve Debt With More Debt?





Once again, Bill Gross proves he can think outside of the box better than most, with the following paragraph from his latest letter to clients: "the investment question du jour should be “can you solve a debt crisis with more debt?” Penny or no penny. Policymakers have been striving to answer it in the affirmative ever since Lehman 2008 with an assorted array of bazookas and popguns: 0% interest rates, sequential QEs with a twist, and of course now the EU grand plan with its various initiatives involving debt write-offs for Greece, bank recapitalizations for Euroland depositories and the leveraging of their rather unique “EFSF” which requires 17 separate votes each and every time an amendment is required. What a way to run a railroad. Still, investors hold to the premise that once a grand plan is in place in Euroland and for as long as the U.S., U.K. and Japan can play scrabble with the 10-point “Q” letter, then the markets are their oyster. Not being one to cast pearls before swine or little Euroland PIGS for that matter, I would tentatively agree with one huge qualifier: As long as these policies generate growth."..."My original question – Can you solve a debt crisis by creating more debt?” – must continue to be answered in the negative, because that debt – low yielding as it is – is not creating growth. Instead, we are seeing: minimal job creation, historically low investment, consumption turning into savings and GDP growth at less than New Normal levels. The Rogoff/Reinhart biblical parallel of seven years of fat followed by seven years of lean is not likely to be disproven in this cycle. The only missing input to the equation would seem to be how many years of fat did we actually experience? More than seven, I would suggest." And that, dear readers, is the bottom line: put otherwise, we have experienced 30 years of deviation from the mean courtesy of the biggest, and most artificial in history, cheap debt-inspired period of global "growth." And we are due for the mother of all mean reversions when the central planners finally realize their methods to defeat this simplest of methemaical concepts, have failed.

 


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When Fed Doves Cry: Chicago Fed's Evans Urges "Very Significant Amounts" Of Added Accommodation





Today's first Fed speech is out, this one by Chicago Fed dove, Chuck Evans who was recently interviewed by Russian speaking, guitar playing, arch-Keynesian Steve Liesman and dropped the first QE3 bomb a week ago, in which he basically says what he said before, namely that "very significant amounts" of added accommodation are needed. In other words: more of the same, and this time it will be different. After all 12 Fed presidents and 1 chairman can't all be insane all the time.

 


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JP Morgan Cuts Q3 GDP To 1.5% From 2.5%, Sees Unemployment Rate At 8.9% By End Of 2012





Yesterday, JPM's Michael Feroli who is now undisputedly the least worst Wall Street economist (RIP Hatzius) cut his 2012 GDP forecast to under 1% net of fiscal adjustments. As of minutes ago, he just slashed his Q3 GDP from 2.5% to 1.5%. And the worst news for Obama: he will be dealing with 8.9% unemployment during his re-election campaign, which can now Rest in Peace. Speaking of RIPs, here's to you growth Hockeystick. You will be fondly forgotten.

 


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Strategic Investment Conference: Luminaries In Finance Presentation Series: Part 2 - David Rosenberg





Following up to the presentation by Gary Shilling at this year's Strategic Investment Conference, we next move on to an old Zero Hedge favorite: David Rosenberg.

 


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Key Events And Catalysts In The Week Ahead





Next week is light on data, thus developments in the European and US fiscal tensions are likely to remain high on the agenda. The Eurogroup heads of state will meet on Thursday to discuss European financial stability and further aid for Greece. Expectations are for an increase in the Greek financial rescue package, alongside some form of voluntary ‘bail in’ for holders of Greek debt. More comprehensive solutions to stem contagion risk, such as secondary market purchases of EMU government bonds by the EFSF, are said to be also on the cards, but uncertainty is very large. Ahead of the statement resulting from the summit, the market may remain caught in the headlights of headline risk. Discussions over raising the debt ceiling in the US will continue. On the data front, the business surveys will be key to watch. Towards the end of the week the HSBC flash PMI for China, the Euroland flash PMIs and the Philadelphia Fed Survey will all be published. The Euroland surveys are expected to decline slightly, but the Philadelphia Fed survey is expected to rise although our forecast is for a notably smaller rise than that of the consensus.

 


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Rosenberg On The Debt Ceiling





When it comes to the debt ceiling, we have heard everyone and the kitchen sink's opinion on this issue at this point. Yet one person who has been silent so far is the original skeptic David Rosenberg. Summarized: "Despite the fear mongering, the U.S. government is not going to default. Any backup in bond yields from a failure to cobble together a deal will drive market rates down because of the deflationary implications from the massive fiscal squeeze that would ensue at a time of a huge 5% output gap. Even if there were to be some sort of "buyer's strike" if the U.S. were to be defaulted, rest assured that the Fed would step in aggressively." Obviously to a mega bond bull like Rosenberg, this is the only possible outcome. After all an alternative would mean the central planners have failed, and the most artificially inflated security in the history of man: US bonds, which are only there because they are the "best of all evils" was enjoying an extended "ignore the emperor's nudity" sabbatical... which alas does not change their evilness, nor is this equilibrium stable once more and more realize it is all about gold at the end of the day. And as yesterday demonstrated when existential fear grips the market, the impossible does happen, and both bonds and stocks can sell off, and in the process lead to all time records for gold. Bookmark July 14: it is a harbinger of what is coming.

 


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QE3 Or No QE3: The CIA's Take





Well not quite the CIA, but close enough. The good ex-spies of BIA Behavioral Intelligence Analysis have conducted another behavioral assay, this time targeting global overlord Ben Bernanke and specifically his Wednesday press conference, focusing not on the script but what was left unsaid between the lines. For those unfamiliar, "The BIA team represents a diverse mix of highly accomplished professionals from the national intelligence and business communities, who came together to create and deliver BIA’s ground-breaking solutions for our clients. Our intelligence experts average more than 20 years experience in interviewing, evaluating and collecting information across the globe and have been working with premier firms since 2001 to improve investing and business outcomes through application of our unique methodologies." In lieu of a lie detector being hooked up to the Chairman (Simpsons scene comes to mind), this may be one of the better analyses in interpreting what was said... and unsaid.

 


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GM's Channel Stuffing Catches Up With The Company: Dealer Backlogs Force Plant Shutdowns; Q3 GDP Cuts To Follow





A few days ago, JPM's Michael Feroli literally wrote off Q2 GDP: "Recent economic data have been dispiriting, and increasingly 2Q is being written off as a lost quarter in which no progress will be made in closing the output gap." The silver lining, however, according to Feroli was that Q3 GDP would jump on a surge in auto supplies and sales to fill the vacuum left in the post-Fukushima space: "Motor vehicle assemblies sank in April, particularly at the US plants of Japanese automakers, as supply lines for parts from Japan were interrupted. That, in turn, led to a steep drop in inventories of cars on dealer lots. As Japanese parts and supplies come back on line, automakers located in the US are planning to ramp up production to replenish lean inventories." Uhm, lean inventories? It seems Michael has not had a chance to actually see what inventories look like (unlike Zero Hedge readers). In fact as we demonstrated three weeks ago, GM dealer stuffing has hit an all time high, so we can attribute this oversight to Mr. Feroli's zeal to validate yet another projection hockeystick. Yet somehow we fail to see how this massively excess inventories situation will be amenable to prompt restocking. And now we are not the only ones. According to the AP, "General Motors plans to close two U.S. pickup truck plants for two weeks in July as sales of pickups begin to wane and trucks are backlogged on dealer lots, the Associated Press reported Tuesday, citing the auto maker." That sure doesn't sound to us like something that would happen to an industry that has just faced a "steep drop" in inventory.

 


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