Krugman frequently accuses his opponents of being stupid and/or evil, when they present a view that he himself advanced in other circumstances. His typical readers would have no idea that Krugman once worried about bond vigilantes, or that his books lay out the standard case for why generous government unemployment benefits might contribute to structural unemployment. No, Krugman has led such typical readers to believe that anyone espousing such views is either a complete idiot - immune to theory and evidence that we’ve had since the 1930s - or is a paid shill who hates poor people.
"Eventually (un-manipulated) asset prices always return to their fundamental value, which is why bubbles always pop. The FOMC has backed itself into a corner. Current changes in policy are being designed around efforts to manage the unwind process seamlessly. Central bank (and government official’s) micro-management appears based on a belief that they can exert an all-encompassing central control over markets and peoples’ lives. Those in power have come to believe that policies have a precise effect that can be defined and managed. This is highly unlikely."
Following the battery of optimistic news from this morning that the debt deal is all but done, yields on short-term debt, soaring until about 9am, have tumbled as fears of an immediate default have been taken off the table. And moments ago today's most important auction, that indicating whether the "Money Market Vigilantes" have gone home, the auction of $20 billion 4-Week Bills took place. As a reminder, it was last week that yields on the same issue soared to a high of 0.35% - the most "distressed" yield since October 2009. Today, the fireworks were far more muted, however with a high rate of 0.24%, this was still a very elevated closing level, and still the second highest in years. So the question becomes: is this higher yield just a function of the lack of a definitive deal on the table, or has the broken Congress now assured that going forward so called "money equivalent" Treasury paper will have a step-wise higher clearing haircut, and if so, just how substantial is the structural damage to money markets, especially if all Congress does is kick the can forward by a few months?
The standard wisdom on gold is that it does well in times of economic bad news such as in the 1970s, a period of stagflation and recessions, when the yellow metal rose from $35/oz to peak at $850/oz in 1980. But this time, Don Coxe, a portfolio adviser to BMO Asset Management, believes, things are different. In this interview with The Gold Report, Coxe explains why gold will rise when the economy improves.
If this latest dose of harsh language from Gollum and the Bazooko Circus doesn't end the Egyptian civil war, nothing will. Maybe Egypt should just take a hint from the ECB and issue forward guidance on domestic violence, saying it will do "whatever it takes" to crack down on future coups and countercoups, or else it will fire an imaginary bazooka at the bond vigilantes.
Depending on one's sources, the death toll since the start of the "Days of Wrath" in Egypt is anywhere between 800 and several thousand. What is worse, the situation is spiraling out of control as the west, plagued by America's failed attempt at diplomatic non-intervention to preserve its "democratic transition" narrative, is paralyzed while the death toll mounts and the country is gripped by civil war in all but name. Below, via AP, is a rundown of key events that have taken place in Egypt over the past week together with a photo album of Egypt's very own Dies Irae.
With Italy's sovereign bond yields hovering at 3 year lows, one could be forgiven for falling for the constant stream of gibberish from EU leaders that the worst is over. However, aside from the 'promised' OMT foot on the wind-pipe of non-domestic bond vigilantes (fighting an inexorable demand from self-referential banks and pension funds bidding for BTPs), the situation remains bad at best and in terms of debt-to-GDP, the worst since 1925 when Mussoilini was proclaimed fascist dictator. With Letta and his allies forming the 64th cabinet since WWII (and 27th since 1980) his lifespan seems limited to change anything and with Italy accounting for 16.5% of the EU's GDP (and forecast to contract 1.9% next year) - the current real GDP is smaller now than in 2001. Attempts to revive growth are about to be thrown into tumult once again as Berlusconi's party threatens mass resignation. As we noted last night, do not be fooled by the apparent tranquility in Europe.
With all eyes fixed on GDP and unemployment data this week (and all their revised and propagandized unreality) for more hints at if (not when) the Fed will Taper; the dismal reality that few seem willing to admit is that it is when (not if) and that the announcement of a "Taper" has nothing to do with the economy. There are three key factors driving this decision: Bernanke's bubble-blowing and bond-market-breaking legacy, the political 'clean slate' his successor needs, and, most importantly, the fear that QE will be discovered for what it is - monetization. As BoJ's Kuroda admitted last night "if QE is seen as financing debt, this could lead to rise in yields." With deficits falling, the Fed's real actions will be exposed (unless QE is tapered) and as Kyle Bass has explained before, it was out of the hands of the BOJ (or The Fed) and entirely up to market psychology.
This might just be the cruelest time to be an asset allocator. Normally we find ourselves in situations in which at least something is cheap; for instance when large swathes of risk assets have been expensive, safe haven assets have generally been cheap, or at least reasonable (and vice versa). This was typified by the opportunity set we witnessed in 2007. Likewise, during the TMT bubble of the late 1990s, the massive overvaluation of certain sectors was offset by opportunities in “old economy” stocks, emerging market equities, and safe-haven assets. However, today we see something very different. As Exhibit 2 shows, today we see something very different. As Exhibit 2 shows, today’s opportunity set is characterized by almost everything being expensive. As I noted in “The 13th Labour of Hercules,” this is a direct effect of the quantitative easing policies being pursued by the Federal Reserve and their ilk around the world.
Presented with little comment... aside to ask "will those pesky oil vigilantes stall this central-bank-inspired 'recovery'?"
The catch 22 is that the Fed cannot exit now without markets and asset classes free-falling with markets at hundred year highs!
Moments ago, Caterpillar released its May 2013 dealer statistics breaking down the 3-month rolling average for machine retail sales. Curiously, unlike in previous months when Asia/Pac was the worst performing region on a year-over-year basis, in May it was the US that showed the worst results. Just how bad: retail sales in the US clocked at a -16% clip, just barely above the -18% drop in April, and only the second lowest print in the past 3 years. And just to put the CAT dump in perspective, the chart below correlates CAT North American retail data with a 3 month delay in Durable Goods Orders ex Transportation: has CAT become the best leading proxy for corporate CapEx, and if so, just how much more negative does it have to get before the recession-watchers join the bond vigilantes in waking from hibernation?
The global liquidation wave started with Bernanke's statement yesterday, which was interpreted far more hawkishly than any of his previous public appearances, even though the Fed had been warning for months about the taper. Still, markets were shocked, shocked. Then it moved to Japan, where for the first time in months, the USDJPY and the Nikkei diverged, and despite the strong dollar, the Nikkei slumped 1.74%. Then, China was swept under, following the weakest HSBC flash manufacturing PMI print even as the PBOC continued to not help a liquidity-starved banking sector, leading to the overnight repo rate briefly touching on an unprecedented 25%, and locking up the entire interbank market, sending the Shanghai Composite down nearly 3% as China is on its way to going red for the year. Then, India got hit, with the rupee plunging to a record low against the dollar and the bond market briefly being halted limit down. Then moving to Europe, market after market opened and promptly slid deep into the red, despite a services and mfg PMI which both beat expectations modestly (48.6 vs 47.5 exp., 48.9 vs 48.1 exp) while German manufacturing weakened. This didn't matter to either stocks or bond markets, as peripheral bond yields promptly soared as the unwind of the carry trade is facing complacent bond fund managers in the face. And of course, the selling has now shifted to the US-premarket session where equity futures have seen better days. In short: a bloodbath.
We’ll know more next week Wednesday when the Fed meeting concludes with a language parsing contest. In the meantime, stock market volatility is increasing as we’re experiencing alternating triple digit days now.
Just when you thought the R&R debate was finished, it seems Paul Krugman's latest "spectacularly uncivil behavior" pushed Reinhart and Rogoff too far. In what can only be described as the most eruditely worded of "fuck you"s, the pair go on the offensive at Krugman's ongoing tete-a-tete. "You have attacked us in very personal terms, virtually non-stop... Your characterization of our work and of our policy impact is selective and shallow. It is deeply misleading about where we stand on the issues. And we would respectfully submit, your logic and evidence on the policy substance is not nearly as compelling as you imply... That you disagree with our interpretation of the results is your prerogative. Your thoroughly ignoring the subsequent literature... is troubling. Perhaps, acknowledging the updated literature on drawbacks to high debt-would inconveniently undermine your attempt to make us a scapegoat for austerity."