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As Far as the Eye Can See: Stagnation

ilene's picture




 

For the Events Horizons section of MarketShadows "As Far As the Eye Can See" (10/14), I interviewed the extraordinarily gifted blogger, Jesse, of Jesse’s Cafe Americain to see what he thinks lies ahead. This is our third interview. For background, please read the first Interview at Jesse’s Cafe. Part 2 was at the Lodge. Now it’s late; we’re at the bar.

As Far as the Eye Can See: Stagnation

 Slow Drift to the Stagnant Sea

By Ilene with Jesse

Ilene: Jesse, thank you for doing another interview with me. I’m continually learning from your rational, and brilliant, insights into the markets, and more importantly, the human nature upon which they are built. It’s always a pleasure to explore your thoughts as events unfold.

Previously, when we discussed ‘flations, you believed we were heading into a stagflationary period. Not hyperinflation–you didn’t think prices would spiral up uncontrollably. Has the Fed’s new QE-Infinity program changed your mind?

Jesse: No, not at all, QE infinity was always within expectations, because of the way in which it has been constructed, in addition to the failure of the fiscal side of the house. The President and the Congress control fiscal policy, and the Fed controls monetary policy. “Fiscal” is how the government obtains and allocates money. It also involves setting priorities, tax policies, tariffs, etc. Fiscal policy is failing to do its part to reform the system that caused the financial bubble and collapse in the first place, and the Fed is manipulating monetary policy and its regulatory powers largely in the service of the financial sector.

Hyperinflation would result from a precipitous loss of confidence in the US dollar against some other measure. What is the dollar to be compared to? Europe’s Euro? China’s Yuan? The US has the cleanest dirty shirt. Gold and silver are lightly owned, and much afflicted by the status quo. But still they are greatly feared by the financial engineers. The Anglo-American financial cartel is adamantly opposed to changes in the SDR, or anything else that threatens the dollar currency regime. But it is eroding through bilateral and regional agreement.  So things change slowly, for now.

 Slow Drift to the Stagnant SeaHigh inflation does not equate to hyperinflation, and we do not have high inflation yet. The Fed is effectively bottling up its money printing within the financial sector, as indicated by the heavy growth in banking reserves and the very slack velocity of money supply.

Effectively speaking, the monetary and fiscal stimulus has been designed to prevent further deterioration from the bottom. The Fed’s monetary stimulus is primarily another bailout to the effectively insolvent Wall Street banks. The flip side of this is the slack growth in GDP and the low growth in the median wage.

The Fed stabilized the patient, but the patient remains in the ICU because the doctors cannot agree on the treatment. And of course, the medical directors are stealing the medicine and selling it on the black market. So we have quite the dilemma.

Ilene: Would you describe the economic condition as “stagflation” now?

Jesse: Yes, given the very low GDP and employment growth, and the inflation. The inflation, while not presenting itself broadly, is rather high in necessities like food, healthcare, and energy. It is not very pronounced but that is what I would call it. I would also accept “stagnation” for those who are fussy about how to measure inflation.

Ilene: Will this continue?

 Slow Drift to the Stagnant SeaJesse: Yes, stagflation, as far as the eye can see. It will take policy changes or an exogenous event to get us off this low growth track wherein the vast majority of the income goes to the top 1 percent. How people can look at this arrangement and see anything good or sustainable shows how far we have strayed. I have looked over John Williams’ scenarios again, and I don’t see the case for hyperinflation unless there is a significant exogenous event like an oil embargo or a war. It could be economic or military, but war is ahead in the path we are taking now.

Ilene: I’ve read many contradictory arguments about the economic numbers – good, neutral, bad. What do you think? These numbers are more tied to the economy than to the stock market, but investment-wise, a combination of the Fed’s action and the economy affects our options. What do you expect for the economy, and for the stock-market?

Jesse: I think the economy itself will continue to suffer from weak aggregate demand, which is no surprise because most consumers are hurting. Weak median wage growth goes back to before NAFTA, but people were able to turn to the tech and housing bubbles for additional income. Now that those have failed, we are up against the wall, for the most part.

The stock market is going to inflate IF the Fed steps up its monetization beyond supporting the banking system by subsidizing its mispriced assets. But earnings may provide significant headwinds to equities, and companies are sitting on record amounts of cash overseas. Global trade is failing, as well it should. It is a rigged game.

 Slow Drift to the Stagnant SeaIlene: Will the QE-Infinite money supply flowing from the Fed to the primary dealers end up raising the stock market, or will equities eventually selloff due to a poor economy–what wins: liquidity or fundamentals (if they even matter)?

Jesse: It depends on policy decisions. That is what make this so damn hard to forecast.

Really, it is an extremely difficult time for investors. The financial predators have effectively destroyed most of the normal market mechanisms, both international and domestic. Good investments are difficult to find and assess, due to improperly priced and hidden counter-party risks.

Ilene: Several other very popular financial bloggers argue that we are in a recession. Do you agree?

Jesse: No, we are in a sluggish recovery. I don’t think we will fall back into recession unless we do something quite senseless, like austerity.

Ilene: Do you have any ideas on fixing some of our nation’s biggest problems, such as the health care system?

Jesse: A modified single payer system that provides good basic healthcare with prevention. The notion of forcing private companies to provide insurance from monopoly health providers and suppliers, many of whom are vertically integrating the supply chain, is almost unbelievable. The US has a very good healthcare system for some, but overall it is about 30 percent overpriced and highly inefficient. People without access to affordable insurance are forced to use emergency rooms. That is expensive and ineffective.

Most of these problems come back to political and financial reform. Everything stems from that partnership between politics and big money that blossomed under Clinton and reached its maturity under Bush. Obama is a huge disappointment in this regard. I am not quite sure why, but he is, and the Democratic party stopped functioning as a balance to the increasingly rigid Republicans. The solution is a real reformer. It would take a Roosevelt, either a Franklin or a Teddy, to put the corporations and monied interests back into balance with the rest of the country. That might require a third party movement, and the system is heavily set against it. Just ask Ross Perot what it was like.

Ilene: You’re not very optimistic that a true reformer will show up and begin the process?

Jesse: No, and I am increasingly concerned that the powerful few are going to provoke a false flag or some draconian response to even modest and non-violent demonstrations. That will remind us that the reforms of the 1930s were born out of some serious conflicts that we have not seen in the US in quite some time. Typically these historical cycles overshoot, and this case looks to be no different.

What will provoke that change I cannot see. What that change will be I cannot say yet.

Ilene: Wait and see?

 Slow Drift to the Stagnant SeaJesse: Tell me who will be the president, what party will control the house and senate, and what they will do, and I could give you a better forecast.

The credibility trap is preventing genuine reform, and the financial system is continuing to distribute the bulk of all new income growth to the wealthiest few, which leaves the vast middle with little discretionary income to fuel demand and organic growth. It is a false equilibrium, but these can last for a decade or more. It really depends on what causes things to change. But change will come.

*****

This week's Market Shadows Newsletter, "As Far as the Eye Can See," features Chris Vermeulen and Springheel Jack on Gold and Silver, Lee Adler on Sentiment, and Mish Shedlock and Bruce Krasting on Currency Wars. 

 

Visit Jesse at the Cafe Americain. Previous interviews:

  1. Jesse at the Café Américain
  2. Enjoying Coffee at the Lodge 
 

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Tue, 10/16/2012 - 09:02 | 2893987 El
El's picture

I'm not as rational, brilliant, or as insightful into the markets as Jesse, but my observations of what is going on around me leads me to different conclusions. The pieces he has connected don't appear to fit well together from my perspective. I think he is mistaken, but as with all things, time will tell.

Tue, 10/16/2012 - 08:48 | 2893876 dizzyfingers
dizzyfingers's picture
Well said. Our town's a ghost.
Tue, 10/16/2012 - 08:13 | 2893809 Buzzworthy
Buzzworthy's picture

So, Jesse does not see current policies creating even a high inflationary outcome unless there is war, and yet he thinks there is going to be a war?  Nice job equivocating.  Why not admit that you are as clueless as the rest of us when it comes to seeing the future.  Also, you've got to love the red flag terms, like "aggregate demand."  Someone's been drinking too much Keynsian Jungle Juice.

Tue, 10/16/2012 - 08:12 | 2893806 falak pema
falak pema's picture

here is food for thought on the contrarian view of the economy espoused by ZH and us followers of this blog site : 

Reinhart, Rogoff New White Paper - Business Insider

Bottom line of this economic paper from elite Academia : 


Indeed, the U.S. economy recovery has indeed been sluggish compared to most recessions.  But relative to recessions sparked by systemic crises, the recovery has been pretty remarkable.

Read more: http://www.businessinsider.com/reinhart-rogoff-white-paper-2012-10#ixzz29Smr6cmd

we can chew on that! 

Tue, 10/16/2012 - 08:24 | 2893852 LawsofPhysics
LawsofPhysics's picture

indeed, especially since the report isn't worth the cellulose it was printed on.

Tue, 10/16/2012 - 08:04 | 2893783 Robslob
Robslob's picture

Well I guess the good news is "real" wage earners will be able to beat the once a month "foodstampers" to the grocery stores?

Tue, 10/16/2012 - 07:52 | 2893758 j0nx
j0nx's picture

Same exact things I've been saying for years. Maybe I should start my own blog or start pimping my skills Reggie style.

Tue, 10/16/2012 - 03:54 | 2893316 andrewp111
andrewp111's picture

Apparently, the Democrats are doing a Twitter campaign to convince the voters that there will be massive race riots and mayhem if Obama loses. If this campaign becomes self-fulfilling, there could be some very serious unrest after the election.

Tue, 10/16/2012 - 04:52 | 2893633 cossack55
cossack55's picture

I see race riots alright. The race to the supermarket and gas station before they are emptied and closed.

Tue, 10/16/2012 - 01:52 | 2893218 jimmyjames
jimmyjames's picture

Jesse: Yes, stagflation, as far as the eye can see.

************

I don't see too much other than slow/negative growth and too high of necessity prices that would constitute stagflation-

Base money patterns of today are not consistent with stagflation-

http://bit.ly/I8B8QH

Low bond yields are not consistent with stagflation-true the fed has influenced them lower-but-they have been falling steadily since 2001-

A strong dollar or at least not a falling dollar is not consistent with stagflation-especially with all the printing of late-

Commodity prices while still elevated-are falling which they shouldn't do in a stagflation-

Most of this is consistent with deflation-sort of a 50-50 thing at this point i suppose-

 

 

Tue, 10/16/2012 - 01:51 | 2893213 q99x2
q99x2's picture

About healthcare in the US. Today I asked my pharmacy what to do since the insurance company decided to quit covering my medicine. He agreed that I should call the insurance company and find out what medicine they cover so that I can tell the doctor what to prescribe.

That is the state of the US HealthCare system today. Under ObamaCare it most certainly will be worse since the insurance companies wrote it.

You know where insurance company executives go... To the same island that the deviate banksters are going to be sent to.

Tue, 10/16/2012 - 12:00 | 2893110 XitSam
XitSam's picture

Stagnation? Bullshit. Michelle said today that we are in the middle of a huge recovery

In other news, war is peace, hate is love and tyranny is freedom.

edit: say -> said. I should proofread what I write.

Mon, 10/15/2012 - 23:47 | 2893079 kito
kito's picture

Austerity is senseless?????....gee I thought spending 50pct more than what you earn was senseless......silly me.....

Tue, 10/16/2012 - 01:46 | 2893212 hmmtellmemore
hmmtellmemore's picture

Its hard to take any economic writer serious who thinks government misallocation of wealth is good for an economy.  Is it possible to rid these writers from ZH please?

Tue, 10/16/2012 - 06:51 | 2893705 falak pema
falak pema's picture

If you can't hear the arguments other than what your own mind concocts, you should leave the kitchen. 

Debate is always welcome as only the dogmatic believe in their own infallibility. 

ZH has the same problem; it believes in debt deflation but hates austerity, when say Europe does it. 

Jesse seems to feel that concerted action by central banks, is better than virulent contraction à la 1930s, if we pull the plug totally on the banks, without building a social net for the people.

What differentiates today's world from the 1930s is that although there are just as many Oligarchs around who have brought around this fake financialised economy and its debt mountain; as then, all in similar irrational exuberance, the central governments talk to each other to turn around the ship in a "command economy" play. Albeit not attacking the root cause of Oligarchy manic bank pumping, by reigning in the TPBF, and making their books transparent and devoid of shadow banking; where the real cancer is!

How Pax Americana leadership will act in the coming Presidency will condition how the cookie crumbles. We have to attack root causes not symptoms if we want to avoid the global financial Iceberg; eventually crazy Armageddon. 

Not that this route is easy to trace, its may already be too late...but we have no choice but to take the least painful route; the question is/remains for whose perspective! 1%, or 99%...first world or whole world.

Tue, 10/16/2012 - 07:09 | 2893721 Ghordius
Ghordius's picture

priceless: "ZH believes in debt deflation but hates austeriy, when say Europe does it." (ZH the Tylers or the Commentariat?)

it reminds me the words of the FT's Martin Wolf in 2010 (from memory): "roughly speaking, the world is trying to deflate the US and the US is trying to inflate the world", followed by his opinion that the US would eventually win because it can print more.

Jesse is, IMHO, a very honest fellow in his thinking. his blog is a worthwhile read. he subscribes to a moderate interventionist policy and to this new way of thinking of this new elite of banksters as "psychologically challenged", which I find interesting.

note the very interesting thread about Inverted Totalitarianism he posted here http://jessescrossroadscafe.blogspot.ch/2012/10/inverted-totalitarianism... , fascinating stuff. And fits to my understanding of history, what we have is not fascism, it's that moment in history that could be followed by fascism. Reading comments in ZH I sense many proto-fascist thoughts that practically scream for one truth, one system and one man to clean up the mess.

Tue, 10/16/2012 - 07:46 | 2893745 falak pema
falak pema's picture

we agree on that...2883099

correction above : "from" whose perspective...

Tue, 10/16/2012 - 07:53 | 2893759 Ghordius
Ghordius's picture

good one, I nearly missed it in that increadibly busy thread, thanks. I see and raise with my newest rant on UKIP Leader and MEP Nigel Farage, the darling of the banks 2893688 . It might break my record in red arrows, though up to now nobody dared to challenge my reasoning. Cowards.

Tue, 10/16/2012 - 08:01 | 2893774 falak pema
falak pema's picture

Lol, I have had the same experience; where the current protofascist and anarcho-populist trends in Euro nation-states that I commented, causing these break away movements we are seeing in European zone, under the pressure of current economic meltdown and which could also cross the pond...got the same lipstick from ZH : 2890885

Tue, 10/16/2012 - 08:12 | 2893808 Ghordius
Ghordius's picture

As I have written here, IMO the trend is to smaller nations, but nations nevertheless and members of a confederation2893693

The Flanders example is about keepind dwindling spending local and at the right level (which, for the smaller nations, includes the EU).

The Local and the European identities are both the Janus-headed reality of this continent.

Holy Roman Empire, bitchez. Now bring in the Inquisition, as usual.

Tue, 10/16/2012 - 08:30 | 2893877 falak pema
falak pema's picture

well that is an interesting thought. From the French perspective where the revolution left that nation with a very powerful centralised government. 

France is thus the exception to this region vs nation debate. But even France has to defer to more regional initiative in order to allow local talents to flourish; all the while having a nation state. 

Tipping times. I think the greater market is the expression of the old Roman Empire, and as Schauble is now advocating more fiscal discipline and more democratic power to Euro parliament down the road.

Wolfgang Schäuble Euro Plan - Business Insider

Tue, 10/16/2012 - 05:53 | 2893669 jeff montanye
jeff montanye's picture

"rid zh of these writers"

they didn't complain as much when it was forty acres and a mule plus a transcontinental railroad.

Mon, 10/15/2012 - 23:43 | 2893072 otto skorzeny
otto skorzeny's picture

you mean "a draconian response to a non-violent protest" like a handful of protesters getting taken down by fully-outfitted riot police goons at the Elwood IL Walmart warehouse a few weeks ago-say it ain't so. I think the US will skip the non-violent stuff and go right to full retard.

Mon, 10/15/2012 - 23:20 | 2893006 BigDuke6
BigDuke6's picture

 

To get healthcare in perspective I'm going to give you a few facts that show how the system in the USA is eating itself.

In Australia 1 in 10 people die in an intensive care unit .... Also known as an expensive care unit.

In the USA it's 1 in 4
In Florida it's 1 in 2

That's where a lot of the money is going and it's not a good allocation of resources

People need a better death and it's up to them to say 'enough' to their families.

I am interested in talking about how the system in the USA can really begin to work.

No one wants something unsustainable which the usa system seems

i came to australia from a different system and the aussie system is the best

the patients are content in the public and private set up where basically if you have a job you are pushed into having insurance.  the governement has strict regulations over the insurer and there is competition.

anyone can join (no refusals) and there is a 12 month wait and your period is over - no restrictions.

i tell people to join up - wait the year and then have your operation with or without expensive implants in the private hospital.

doctors are happy - you still get the dollars but you have to work hard for them.

the patient sees a doctor working fucking hard so has a lot of respect, that endears the system to the public.

as a doctor your skills are high so you feel fulfilled at being a the top of your game.

the system struggles here when doctors want to work less.... more cheap imports required..

there's no reason why the usa shouldnt be able to get on top of this

 

Mon, 10/15/2012 - 23:47 | 2893076 otto skorzeny
otto skorzeny's picture

Australia(like Canada) has immensely benefitted from an unwarranted spike in commodities thanks to Ben Shalom and his Benny Bucks-if that collapses the US housing bubble will be nothing compared to Aussies' and canucks'-good luck. and that "free health care" won't last forever with the skyrocketing costs to the state.

Mon, 10/15/2012 - 22:58 | 2892991 ebworthen
ebworthen's picture

DEVO - A Change is Gonna' Cum

http://www.youtube.com/watch?v=0lmQFiwGvJw

Mon, 10/15/2012 - 23:56 | 2893090 FEDbuster
FEDbuster's picture

Over a year ago I posted a couple of times that we would see hyperstagflation (that is what Jessie is talking about).

There are some outlires that could change it.  One of the biggest IMHO is the continued push for domestic oil production, this is where Romney could be a slightly better choice in November.   The price of gas and energy drops 50%, and the dynamic of the economy and consumer changes dramatically.  Plus, you could see millions of new jobs related to oil production, transport, refining (build some new refineries),etc....  Drill baby drill, just might spark a real domestic recovery?

Tue, 10/16/2012 - 01:22 | 2893197 ebworthen
ebworthen's picture

"The Fed’s monetary stimulus is primarily another bailout to the effectively insolvent Wall Street banks."

Jesse is on the money, and he has a great website, I recommend it.

Stagflation, and it doesn't matter who is elected.

Productive career employment is needed.

Oil is now a precursor to food.

Not enough in U.S.A.

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