More of the same is not working, and it just may require lower equity prices for investors to get what they really wish for.
Following his somewhat epic blog debate with Paul Krugman, Steve Keen appears on Capital Account with Lauren Lyster to debunk more Keynesian propaganda and the kleptocratic status quo 'debt doesn't matter' arguments. Poking holes in the stable/exogenous shock equilibrium 'model' versus the real-world's dynamic systems, the Aussie economist warms up with the zero-interest rate conundrum and liquidity trap; moves on to the empirical falseness of the debt-to-unemployment relationship - implying 'debt matters all the time' as Keen explains common-sensibly (but not Neoclassically) that the 'change in debt adds to demand' and that involves banks which breaks modern economic theory (since lending is credit creation not savings transfer). Echoing the deleveraging from the Great Depression, it could take 15 years of unwinding this epic debt bubble before its all over - but not if the status quo of deficit spending is maintained - as Keen somewhat controversially concludes: "you can't just cure this with deficit spending [since debt is already beyond the black-hole's 'event horizon'], you have to abolish the private debt as well" by "quantitative easing for the public".
Recent economic data, and especially today's unemployment numbers reveal the powerlessness of the Fed in the face of underlying economic problems that they fail to understand. The Fed has tried every trick in the book for the past 4 years to revive the economy only to see it continue to weaken. Unfortunately they only know how to do one thing—print. The ultimate effect of this will be more economic stagnation, not real economic growth. Here is why.
With global PMI rolling over again, dimming unemployment growth, and slowing EM Asia impacting global production, it is no wonder than BofAML's economics team sees a dearth of 'feelgood' factors in the market. In fact, as they note, further rate cuts in the euro area and China along with around $500bn of NEW QE in this quarter are priced into the market with any hope for risk assets to rally more consistently, investors will need to see not just willing-and-able central bankers but an abatement of the sovereign crisis in Europe and improvement in global data - neither of which they expect anytime soon. Easier monetary policy can only cushion the blow from higher uncertainty in the US and Europe. Effective policy breakthroughs would thus have to come from compromises in the European Council or in US cross-party politics. Investors have yet to zero in on the real impacts of rising economic uncertainty in the US. As Ethan Harris and Michael Hanson have argued, it is unlikely that the cliff is fully priced into the markets and US political dysfunction will share the spotlight with the European crisis over the next few months. And as last time, the joint act will likely undercut investor confidence.
In a market which was left for dead with virtually no hope of a CTRL-Peus Ex Machina, and which otherwise would have tumbled to close at the lows, we realized that something was missing. In fact we noted it less than an hour ago:
Need a Hilsenrath rooomer
— zerohedge (@zerohedge) July 6, 2012
Sure enough, moments ago, with minutes left in the trading day and week, here comes the Fed's favorite leaking scribe, advising the market that not all is lost, and that Pavlovian dogs can, and in fact should continue to salivate at ever poster of a half naked toner cartrdige.
The idea that short-duration bond funds are a good bet due to “the FED’s complete control with regards to suppressing and maintaining short-term interest rates” is completely wrong on every level; they’ve been a losing investment in real terms for most of the last 5 years, and the Fed is determined to keep it that way. The Fed’s control over nominal interest rates is precisely the reason that I wouldn’t want to invest in treasuries; not only has it consistently made bonds into a real losing proposition, but it also creates a good deal of systemic currency risk. Simply, the Fed will — in the pursuit of low-rates — monetise to the point of endangering the dollar’s already-under-threat reserve currency status. The only things that would turn bonds into a winning proposition — rising interest rates, or deflation — are anathema to the Fed, and explicitly opposed by every dimension of current Fed policy. Of course, creating artificial demand for treasuries to control nominal rates has blowback; if the buyers are not there, the Fed must inflate the currency. Hiding inflation is hard, so it is preferable to a central bank that old money is used; this is why Japan has mandated that financial institutions buy treasuries, and why I fear that if we continue on this trajectory, that the United States and other Western economies may do the same thing.
A worldwide phenomenon – just as the slowdown is cascading around the globe.
While conflicts within and with the Middle East region are still among the top global risks, the paradigm has definitively shifted to China and Europe.
Despite the July 4th mid-week holiday, the coming week will be packed with major economic updates. Goldman Sachs summarizes what to look for in the next 5 days.
Cliff Asness, head of the quant hedge fund AQR, has been known to be a vocal opponent of various failed governmental policies in the past few years. Today, he has shared his "dictionary" (of "humorous" persuasion as he himself notes, with definitions "written sarcastically as a faux left-winger, some just conservative/libertarian interpretations of what the left really means.") of the key terms dominant in Progressive America right now. In a world in which other people's money has pretty much run out, and ahead of a rather historic Supreme Court ruling tomorrow, we believe some of these are quite relevant.
Only a wilful and ideological Keynesian could ignore the salient detail: as soon as the USA left the gold exchange standard, total factor productivity began to dramatically stagnate. Coincidence? I don’t think so — a fundamental change in the nature of the money supply coincided almost exactly with a fundamental change to the shape of the nation’s economy. Is the simultaneous outgrowth in income inequality a coincidence too? Keynesians may respond that correlation does not necessarily imply causation, and though we do not know the exact causation, there are a couple of strong possibilities that may have strangled productivity. It’s not just total factor productivity that has been lower than in the years when America was on the gold exchange standard — as a Bank of England report recently found, GDP growth has averaged lower in the pure fiat money era (2.8% vs 1.8%), and financial crises have been more frequent in the non-gold-standard years.
There are now reports that the Reserve Bank of India (RBI) is likely to clamp down on gold bullion coin sales by banks as the rising bullion imports are adding pressure to the current account deficit and weakening the rupee.
Western central banks and mints will not be clamping down on gold bullion coin sales in the near future as demand for gold and silver bullion coins fell in Q1 2012.
In a detailed discussion with Bloomberg TV's Tom Keene, Gluskin Sheff's David Rosenberg addresses everything from Europe's "inability to grow its way out of the problem" amid its 'existential moment', Asian 'trade shock' and commodity contagion, and US housing, saving, and fiscal uncertainty. He believes we are far from a bottom in housing, despite all the rapacious calls for it from everyone, as the over-supply overhang remains far too high. "The last six quarters of US GDP growth are running below two percent" he notes that given the past sixty years of experience this is stall speed, and inevitably you slip into recession". He is back to his new normal of 'frugality' and bearishness on the possibilities of any solution for Europe but, most disconcertingly he advises Keene that "when you model fiscal uncertainty into any sort of economic scenario in the U.S., what it means is that businesses raise their liquidity ratios and households build up their savings rates. This comes out of spending growth. And that's the problem - you've got the fiscal uncertainty coupled with a US export 'trade shock'."
“Pessimism has become tiresome, so optimism is gaining a foothold”
Turkey raised its reported gold holdings by another 2% in the month of May. Turkey’s gold holding rose by 5.7 tonnes in May to total 245 tonnes, International Monetary Fund data showed, making it the latest in a string of countries to increase gold bullion reserves this year. Turkey has allowed banks to hold more of their reserves in gold to provide extra liquidity. The central bank this month raised the proportion of reserve requirements that can be held in foreign exchange to 50 percent from 45 percent, while the limit for gold was increased to 25 percent from 20 percent. The changes will add as much as $2.2 billion to gold reserves. Gold accounts for about 9.1 percent of Russia’s total reserves, 5.1 percent of Ukraine’s and 15 percent of Kazakhstan’s, according to the World Gold Council. That compares with more than 70 percent for the U.S. and Germany, the biggest bullion holders, according to Bloomberg figures. Kazakhstan plans to raise the amount of gold it holds as part of its reserves to 20 percent, Bisengaly Tadzhiyakov, deputy chairman of the country’s central bank, said earlier this month.