Paul McCulley

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Have Larry Summers And Paul Krugman Just Had Their Dimon/Dudley Moment?





A new opportunity to play "What's wrong with this picture" arose recently, with Larry Summers’ recent speech at the IMF and Paul Krugman’s follow-up blog. The two economists’ messages are slightly different, but combining them into one fictional character we shall call SK, their comments can be summed up "...essentially, we need to manufacture bubbles to achieve full employment equilibrium." With this new line of reasoning, SK have completely outdone themselves, but not in a good way. Think Jamie Dimon’s infamous “that’s why I’m richer than you” quip. Or, Bill Dudley’s memorable “but the price of iPads is falling” excuse for increases in basic living costs. Dimon and Dudley managed to encapsulate in single sentences much of what’s wrong with their institutions. Yet, they showed baffling ignorance of faults that are clear to the rest of us.

 


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Niall Ferguson – The Great Degeneration





While Harvard historian Niall Ferguson's off-the-cuff remarks during the Q&A were in his words "as stupid as they were insensitive", the core message of his presentation was clear: the party of the last 20 years is now over and the longer we fail to address the real issues the bigger the hangover will be in the future. The central question Ferguson asks is whether our institutions, corporations and governments, are degenerating. As Lance Roberts of Street Talk Live notes Ferguson believes that without addressing the structural problems that plague the economy from production to employment – stimulus will fail. The reality is that the 'punch bowl' won't fix employment growth, economic growth or the rule of law.

 


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Guest Post: Of Krugman And Minsky





Paul Krugman just did something mind-bending. In a recent column, he cited Minsky ostensibly to defend Alan Greenspan’s loose monetary policies. Krugman correctly identifies the mechanism here — prior to 2008, people forgot about risk.  Macroeconomic stability bred complacency. And the longer the perceived good times last, the more fragile the economy becomes, as more and more risky behaviour becomes the norm. Stability is destabilising. The Great Moderation was intimately connected to markets becoming forgetful of risk. And bubbles formed. In endorsing Minsky’s view, Krugman is coming closer to the truth. But he is still one crucial step away. If stability is destabilising, we must embrace the business cycle. Smaller cyclical booms, and smaller cyclical busts. Not boom, boom, boom and then a grand mal seizure.

 


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David Rosenberg: "Hope And A Prayer"





It is not going to be a new government that necessarily ushers in a whole new era of growth, prosperity and confidence. Even under the revered Ronald Reagan, the period of secular growth and bull market activity took two years to unfold — it didn't happen right away. It took the inflationary excesses to be wrung out of the system and concrete signs that the executive and legislative branches could work together to usher in true fiscal reform — and to get blue Democrats on board with reduced top marginal tax rates.  Hope isn't generally a very useful strategy, but there is reason to be hopeful nonetheless. The critical issue is going to be how we get Washington to move back to the middle where it belongs. This requires bipartisanship which in turn requires leadership. Reagan's whole eight-year tenure in the 1980s occurred with the House being in Democrat hands the whole way through. Bill Clinton's second term coincided with both the House and Senate controlled by the Republicans.

It can be done! 

With this in mind, the best that can happen is a Reaganesque and Clintonesque return to compromise on the road to fiscal reform.  It will be painful. We all know it will be painful.

 


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Bill Gross: "Ours Is A Country Of The SuperPAC, By The SuperPAC, And For The SuperPAC"





"Obama/Romney, Romney/Obama – the most important election of our lifetime? Fact is they’re all the same – bought and paid for with the same money. Ours is a country of the SuperPAC, by the SuperPAC, and for the SuperPAC. The “people” are merely election-day pawns, pulling a Democratic or Republican lever that will deliver the same results every four years. “Change you can believe in?” I bought that one hook, line and sinker in 2008 during the last vestige of my disappearing middle age optimism. We got a more intelligent President, but we hardly got change. Healthcare dominated by corporate interests – what’s new? Financial regulation dominated by Wall Street – what’s new? Continuing pointless foreign wars – what’s new? I’ll tell you what isn’t new. Our two-party system continues to play ping pong with the American people, and the electorate is that white little ball going back and forth over the net. This side’s better – no, that one looks best. Elephants/Donkeys, Donkeys/Elephants. Perhaps the most farcical aspect of it all is that the choice between the two seems to occupy most of our time. Instead of digging in and digging out of this mess on a community level, we sit in front of our flat screens and watch endless debates about red and blue state theologies or listen to demagogues like Rush Limbaugh or his ex-cable counterpart Keith Olbermann."

 


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Why Paul McCulley Would Be Shorting The Economy With Both Hands Right Now





According to the plethora of long-only managers willing to trot out on the public stage and beg for more commissions, the US has been (and will remain) the cleanest-dirty-shirt in the global risk asset laundry basket; but as David Rosenberg of Gluskin Sheff points out not only has the S&P 500 hit a new record high in its total return index but it also possesses a rather 'ebullient' valuation premium (2012E P/E) of 13.8x relative to China 9.8x and Europe 11.4x. However, while this is more than enough to slow some investors from backing up the long-truck, Rosie goes on to highlight a very worrisome indicator - that favored by ex-PIMCO's Paul McCulley. The YoY trend in the three-month moving average of core capex orders (which was updated last Friday) has just cracked negative, crushing the hopes of US growth prospects and we assume equity superlatives. However, since the market no longer reflects anything; certainly not the economy, but merely who will ease more when and how, one really can't short much if anything, even if McCulley is 100% spot on.

 


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Waiting For Godot





In the next days Greece will present her magic tricks at court and while the Dukes and Barons cheer in the wings it will be up to the Red Queen, this would be the bearer of the Holstein emblem, to decide if the tricks performed are worth the cost. There is a very good chance of the hand wave of dismissal here and then the theatrical event of the season, “Off with their Heads,” will begin. Then the savant of Madrid will be allowed in to show his wares claiming they are all of silk but coarse wool is closer to the truth. The money, if it comes, will be provided by the EFSF by the way because the ESM is not yet in existence. Then the plan is to transfer the loan to the ESM which will be senior to the holders of the Spanish sovereign debt. So this morning you must rush out and by the debt of Spain. You love to be subjugated; you delight in the masochism of the whip. Losing money is what you live for and why you breathe. Oh no; this is not you? Well then; maybe better not.

 


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Guest Post: Who Destroyed The Middle Class - Part 2





The middle class has a gut feeling they are being screwed by somebody, they just can’t figure out who to blame. The ultra-wealthy elite keep up an endless cacophony of propaganda and misinformation designed to confuse an increasingly uneducated and willfully ignorant public while blurring the facts for those educated few capable of understanding the truth. They have been able to keep the masses dumbed down through government run education; distracted by sports, reality TV, Facebook, internet porn, and igadgets; lured by mass media messages of materialism; and shackled with the chains of debt used to acquire the goods sold by mega-corporations. We’ve become a society oppressed by a small faction of ultra-wealthy masters served by millions of impoverished, uneducated, sedated slaves. But the slaves are getting restless and angry. The illegally generated wealth disparity chasm is growing so large that even the ideologue talking head representatives of the elite are having difficulty spinning it. Even uneducated rubes understand when they are getting pissed on.

 


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Guest Post: There Will Never Be A Failed US Treasury Auction... Until There Is





Do you think the US will always and forever be able to pay for our over-bloated military-industrial complex and our wars of choice? Do you think the federal housing agencies will always and forever be able to subsidize the real estate industry with money losing, non-economic mortgage loans? Do you think the government will always and forever be able to pay on the promises they've made regarding Social Security, Medicare and Medicade? Do you think the government will always and forever be able to extend debt-enslaving, subsidized student loans to anyone with a pulse? Do you think the fiat ponzi central planners at the Fed will always and forever be able to manipulate the Treasury curve to whatever levels the Oracles of Delphi decide? If you answer yes to the above, ask yourself this: how would all of these things be affected if the average interest rate paid by the US was to rise to 5%? At today's debt level of $15.6 trillion, the interest expense would be approximately $780 billion or about 35% of total government revenues. Welcome to the United States of Greece. Next stop, bankruptcy.

 


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Crescenzi On Tracking The Inflection Point In The Radioactive Hyperinflationary "Yucca Mountain" Excess Liquidity Warehouse





PIMCO's Tony Crescenzi is out with his latest summary of US monetary conditions. Nothing revolutionary, just a good solid theoretical summary of what to look for in anticipation of the "massive monetary madness" turn. Crescenzi likens the trillion in excess reserves to a "Yucca Mountain" of toxic, hyperinflationary "nuclear waste" storage, and suggests the following approach for tracking the inflection point: "when banks begin to utilize their excess reserves to make new loans and create new money rather than store the reserves in “Yucca Mountain,” the case will then grow for the Fed to begin removing the reserves. This has not happened yet, but when the process begins it will be evident from the Fed’s weekly H.8 report on the assets and liabilities of commercial banks." None of this is new for Fed watchers. As usual what we enjoy the most are the historical anecdotes of hyperinflation, the same way in ten years, historians will put America in the same case study: "History is laden with failed attempts at creating new money to shed debt. Greek tyrant Dionysius of Syracuse, now Sicily, at around 400 B.C. resorted to coinage debasement when his fortunes declined. Germany, of course, debased its currency before World War II, leading to hyperinflation. More recently, Zimbabwe printed massive amounts of currency, also leading to hyperinflation – I purchased trillions of Zimbabwe dollars on eBay for a few U.S. dollars! Such are the ravages of excessive use of the printing press." Certainly worth the read.

 


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Soaring With the Eagles





The tax compromise between the President and the Republican leadership has led to a wholesale rerating of the Treasury market. Massive, short term government stimulus is working far better than imagined or publicized. Needless to say, this is a hugely positive backdrop for stocks.

 


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How Keynesian Archduke Krugman Recommended A Housing Bubble As A Solution To All Of America's Post Tech Bubble Problems





The year is 2002, America has just woken up with the worst post dot.com hangover ever. Paul Krugman then, just as now, writes worthless op-eds for the NYT. And then, just as now, the Keynsian acolyte recommended excess spending as the solution to all of America problems. Only this one time, at band camp, Krugman went too far. If there is one thing that everyone can agree on, is that the Housing Bubble, is arguably the worst thing to ever happen to America, bringing with it such pestilence and locusts as the credit bubble, the end of free market capitalism, and the inception of American-style crony capitalism. Those who ignored it, even though it was staring them in the face, such as Greenspan and Bernanke, now have their reputation teetering on the edge of oblivion. So what can we say of those who openly endorsed it as a solution to America's problems? Enter exhibit A: New York Times, August 2, 2002, "Dubya's Double Dip?" Name the author: "The basic point is that the recession of 2001 wasn't a typical postwar
slump, brought on when an inflation-fighting Fed raises interest rates
and easily ended by a snapback in housing and consumer spending when the
Fed brings rates back down again. This was a prewar-style recession, a
morning after brought on by irrational exuberance. To fight this
recession the Fed needs more than a snapback; it needs soaring household
spending to offset moribund business investment. And to do that, as
Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing
bubble to replace the Nasdaq bubble.
" If you said Krugman, you win. Indeed, the idiocy of Keynesianism knew no bounds then, as it does now. The solution then, as now, to all problems was more bubbles, more spending, more deficits. So we have the implosion tech bubble: And what does Krugman want to create, to fix it? Why, create a housing bubble... Well, at least we know now how that advice played out.

 


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Guest Post: Gold Swap Signals the Roadmap Ahead





The news rocked the global gold market when an almost obscure line item in the back of a 216 page document released by an equally obscure organization was recently unearthed. Thrust into the unwanted glare of the spotlight, the little publicized Bank of International Settlements (BIS) is discovered to have accepted 349 metric tons of gold in a $14B swap. Why? With whom? For what duration? How long has this been going on? This raises many questions and as usual with all $617T of murky unregulated swaps, we are given zero answers. It is none of our business! Since President Richard Nixon took the US off the Gold standard in 1971, transparency regarding anything to do with gold sales, leasing, storage or swaps is as tightly guarded by governments as the unaudited gold holdings of Fort Knox. Before we delve into answering what this swap may be all about and what it possibly means to gold investors, we need to start with the most obvious question and one that few seem to ask. Who is this Bank of International Settlements and who controls it?

 


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Pimco's Richard Clarida Explains The Schizophrenic "Risk On, Risk Off" Market





A New Normal world is likely to
be one with frequent flips between “risk on” and “risk off” days. With
so much profit and loss riding on tail events and so little profit and
loss tied to the cluster of outcomes near ex ante means,
repositioning will likely be more frequent. This is because many
investors lack conviction in their understanding of the true
distribution, so that each passing day provides an opportunity to learn
or unlearn how likely the relevant tail events are. Positioning
for mean reversion will be a less compelling investment theme in a world
where realized returns cluster nearer the tails and away from the
mean.
James Carville said twenty years ago that he
wanted to be reincarnated as the bond market because the vigilantes had
so much clout over policymakers. But in the New Normal world, he might
wish to be reincarnated as the Asian equity markets because they are
where traders in Europe and the U.S. look to see if it is a “risk on” or
“risk off” day. With so much money chasing fewer assets with known
return distributions, and with reliable investment rules of thumb
scarce, frequent flips between “risk on” and “risk off” days will likely
be a continuing symptom of the Knightian uncertainty that still, to
some extent, hangs over global financial markets.

- Richard Clarida, Pimco

 


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