This page has been archived and commenting is disabled.
The Bermuda Triangle Of Economics
Excerpted from Jacob Steen's Chronicle blog at Tradingfloor.com,
The mystique of the Bermuda Triangle has caught the imagination and interest of generations. In much the same way it has also caught my attention and I feel that now there is a Bermuda Triangle of economics - a space where everything tends to disappear without radar contact, a black hole in which rationality and science is replaced by hope, superstition and nonsense pundits like myself pretending to understand the real drivers of the economy.
The Bermuda Triangle in real life runs from Bermuda to Puerto Rico to Miami. The economic one runs from high stock market valuations to high unemployment to low growth/productivity. Just like the real Bermuda Triangle, in the Bermuda Triangle of economics there is plenty of scientific evidence that can explain most, if not everything, of what is going on. But that does not suit Hollywood, sorry, the US Federal Reserve.
Neither does it suit mainstream banking analysis or the media in dealing with reality and facts: the mystique simply sells better! After all, there is a reason why people leave science education for PhDs in apps and virtual reality.
There is a myth that the sunken Atlantis could be in the middle of this triangle. It has been renamed Modern Monetary Theory (MMT) to make it suit the black hole's main premise of ensuring there is a fancy name for what is essentially the same economic recipe: print and spend money, then wait and pray for better weather.
The economic Bermuda Triangle, or EBT, is getting harder and harder to justify - if for nothing else because the constant reminders of crisis keep us all defensive and non-committed to investing beyond the next quarter. We all naively think we can exit the "risk-on" trade before anyone else. A less cynical person than me could think that some things in life need to be experienced - not talked about.
Where to from here?
A long time ago, policymakers entered a one-way street where reversing is, if not illegal, then impossible. Enough though about the polices. What is more important is what is next?
If a political scientist should create a simple model for how this Bermuda Triangle works, the first action point would be to test the premise of the policy. No theory is better than its premise - clearly.
The Federal Reserve version of the premise is to create a positive wealth effect that ultimately leads to better sentiment and investment. The barometer of success is the stock market, but does the stock market really correlate to wealth? Clearly the stock market has been on a tear, but is everyone, including the average Joe, benefitting? Clearly not. Ownership of stocks is almost exclusively for the top 10 percent of the population. Social divide is much higher today than it was before the crisis.
In Japan, they are more open - they simply want to create a bubble. I repeat, a bubble. That is interesting when policymakers for years have said it is impossible to figure out when there is a bubble! I guess - proactively wanting a bubble makes it more transparent? Confused? Certainly I am, but then again Abenomics is "double Dutch" to me anyway.
So the premise does not hold, but how will the policymakers deal with failure? Change course? Never! It would be worse than blasphemy! A one-way street means cars can only go one way - not in reverse. Optionality is for democracies and capitalistic systems, not for a time of crisis. In times of crisis, we need the foresight of our great supreme leaders, sorry, politicians and central bankers, to guide us. Their divine insight will lead us safely ashore to the beaches of Lalaland, where the sun always shines.
No, the response is to do more. Take the Bank of Japan's quantitative easing (QE) infinite released on April 4. One month into the experiment and Japanese Government Bond (JGB) yields are higher, not lower.

The yield curve is steeper, inflation expectations are flat but the Nikkei and USDJPY are higher. A success? Yes, except in the one area you wanted to impact: the yield and the yield curve!
The other part is that for this to work, the stock market needs to keep outpacing the fall in JGBs. The Government Pension Fund manages more than USD 1 trillion. Its allocation? Sixty-five percent in JGBs and less than 11 percent in stocks. Hence, the present scoreboard would read:
USD 650 billion x (146.50 - 143.50) = 2% = - USD 13bn. USD 110bn x 40% = USD 48bn. A net gain of USD 35bn but...
What if the Nikkei comes off 10 percent - then USD 48bn becomes USD 37bn and the new equilibrium price of 138.50 is only five figures away.

A price point that will make Japan less well off, not better, plus it would have increased the funding price of the 240 percent debt-to-GDP ratio. Some strong macro fund managers think that a collapse in Japan is less than 12 to 18 months away, among them Mr. Kyle Bass stands out. Maybe Japan should be careful about what it wants. My conclusion on Japan is:
1. The Japan scenario is neither black nor white, but a continuous gradual process. Japan is notoriously slow in changing its political process and ultimately nothing will have changed materially one year from now. Yes, the Nikkei could be the start of a secular bull market as Stanley Druckenmiller recently said in New York, but it is already up 60 percent from the low. And with China and Europe slowing, it is likely to see a major correction and probably soon.
2. The unintended consequence of QE Infinite in Japan is so far (as shown above) a higher yield - even higher than the recent rise in US rates - USDJPY becomes vulnerable for a major correction down to 95/96.
3. Japan will not go bankrupt inside 12 months or even 12 years, but the hope of a recovery will wane and soon. Watch how the Upper House election in the Diet in July becomes the final destination for Abenomics. Prime Minister Shinzo Abe needs to secure 63 and 100 new seats; 63 seats to maintain momentum behind his economic policy and 100 to secure the majority to change the constitution.
Delivering "cheap money" is the easy part of his three pillar strategy, which got him elected. Using stimulus correctly and working on the supply side of the economy will be impossible due to structure, lack of immigration, health care and ageing costs. I wish Japan well, but nothing will be saved by using the economic Bermuda Triangle. Of all countries, Japan should know - it invented the economic version of it!
Another key event will be the German election.
In Germany, Chancellor Angela Merkel will win the battle (the election), but will probably lose the war: she needs to step up. Europe expects it. The market wants it. The problem is, she can't afford it.
Bailing-in will mean a loss of rating for Germany, while staying austere will cost exports and long-term growth. Which scenario to choose? I personally think she will fail - fail to reconcile. She is already short of a Chancellor's majority and after the election, the Greens and SPD will hold her hostage. Staying in power will mean giving in. Simply.
That, however, will be the end of the honeymoon for Europe. Germany cannot save Europe. Each country in Europe needs to realise that its recovery comes from its own political willingness to reform and eat reality pills. Europe is destined to repeat the history of Japan, unless an even more severe crisis makes us wake-up.
This means we see the July to October period as a very important time frame for this experiment. We firmly believe the German election will be the game changer, but we could get a surprise in July unless Mr Abe gets JGB yields under control.
Policy conclusion
The Federal Reserve is testing the waters with its "tapering", but Fed chief Ben Bernanke is financing the budget deficits via his QE. Hence, he will continue less aggressively, but QE is not ending.
The Bank of England gets a new boss in July. This will kick-start American-style policies, which sits right in the middle of the economic Bermuda Triangle, with GBP being the main casualty.
The Bank of Japan will soon correct its maturity in buying - buying longer and deeper - as the July election looms.
The European Central Bank is close, very close to doing something that smells and feels like QE. Selling the sick man of Europe - France - makes a lot of sense here.
Strategy
We are entering the realisation part of this global slowdown. Unlike three months ago, policymakers now realise that growth is not coming back in six months' time as they all love to estimate at their press conferences. So over the summer, the Federal Reserve, Bank of England, Bank of Japan, International Monetary Fund and European Central Bank will all go back to their drawing boards and... do more of the same.

The policy is not wrong; clearly, it is only the amplitude of it. I agree with Jeff Gundlach, who believes QE is here to stay for a long, long time, but also that the only thing that will get us out of this funk is innovation and reality. How do I reconcile this?
By allowing the 70 percent likelihood for Extend-and-Pretend Season 4 through to the July to October period (German and Japanese elections), which will lead us to Japanisation (dis-inflation, no growth and productivity plus an ageing population).

There is a 30 percent chance of failing before July - failing as in the market collapsing or social tensions rising, governments falling and the financial system under pressure.
We are due for a new crisis. We have governments and central banks proactively pursuing bubbles. Hence, the probability of bursting one of those bubbles will need to have risen by the same magnitude as the desperate moves of policymakers.
- 15828 reads
- Printer-friendly version
- Send to friend
- advertisements -



"Japan will not go bankrupt inside 12 months or even 12 years,"
Who else stopped reading there? It's saturday night. I've had my silver article red meat and now let's get some Jim Quinn for desert. He is an angry motherfucker. He could light the fuse and then we have at it fight club style.
Please god this is a joke and I hope ZH knows it....
http://www.youtube.com/watch?v=zo76Bvcov6I
Lol .....is Francis a member?
Japan won't go bankrupt? For cripes sake, if you have to borrow money to service your debt that means you're bankrupt. What's so hard to grasp about that concept? Who are these idiots ?
This is Abe's second pillar. From Nikkei.com...
Prime Minister Shinzo Abe pledged an all-out policy assault over three years to achieve a 10% jump in capital investment from the current level to an annual 70 trillion yen.
The growth strategy Abe unveiled in a speech on Friday also aims to double incomes at farming households over 10 years by boosting production and expanding exports.
Abe has positioned lifting capital investment as a pillar of his growth plans for the corporate sector. The government will promote leasing of factories and equipment as a way to ease financial burdens on businesses. A planned insurance program would help defray a portion of the losses that leasing firms incur when the value of plants and equipment declines.
Another initiative seeks to facilitate development of advanced technologies such as self-driving cars by temporarily easing regulations as long as manufacturers adopt certain safety measures.
To support the use of big data, which is seen by NEC Corp. (6701) and others as offering a wealth of business opportunity, the government will set clear guidelines for gathering personal information.
Japan is leading the next global crisis. We won't escape from that one without massive inflation.
http://seekingalpha.com/article/1428951-4-scary-charts-warning-of-the-ne...
When did we get out of the last one?
Great question. I didn't see a real recovery occur after the dot com implosion back in 2001, just toil, trouble and bubbles.
"For cripes sake, if you have to borrow money to service your debt that means you're bankrupt. What's so hard to grasp about that concept? Who are these idiots ?"
Circus fun house Economics
Debt to infinity, QE to infinity and bamboozle the sheep/muppets.
Full of mirrors not knowing what is real and what is not.
Until the bottom drops of and one by one the currencies show what they really are. Garbage.
US isn't doing so well either. Like Japan, gov't runs the banking industry (or vice-versa).
http://confoundedinterest.wordpress.com/2013/05/19/regulation-the-demise-of-the-sl-industry-and-the-rise-of-shadow-banking-regulatory-surge/
Homogeneous jokes are OK. +1
China should pay close attention.
I know, I know, O/T
Things That Make You Go Hmmm! 1. Back in 1961 people of color were called 'Negroes.' So how can the Obama 'birth certificate' state he is 'African-American' when the term wasn't even used at that time?> >> > 2. The birth certificate that the White House released lists Obama's birth as August 4, 1961. It also lists Barack Hussein Obama as his father. No big deal,right? At the time of Obama's birth, it also shows that his father is aged 25 years old, and that Obama's father was born in " Kenya , East Africa ". This wouldn't seem like anything of concern, except for the fact that Kenya did not even exist until 1963, two whole years after Obama's birth, and 27 years after his father's birth. How could Obama's father have been born in a country that did not yet exist? Up and until Kenya was formed in 1963, it was known as the "British East Africa Protectorate".> >> > 3. On the birth certificate released by the White House, the listed place of birthis "Kapi'olani Maternity & Gynecological Hospital". This cannot be, because the hospital(s) in question in 1961 were called "KauiKeolani Children's Hospital"and "Kapi'olani Maternity Home", respectively. The name did not change to Kapi'olani Maternity & Gynecological Hospital until 1978, when these two hospitals merged. How can this particular name of the hospital be on a birth certificate dated 1961 if this name had not yet been applied to it until 1978?> >> >Why hasn't this been discussed in the major media???RS re: Obama's Birth Certificate. Interesting, thanks for the info. I guess it slipped MSM's mind, along with the layered, unflattened photoshop document.
Why one would think that the opposition party in this country would jump on information like that. If we had an opposition party that is.
ever hear of Snopes.com?
http://www.snopes.com/politics/obama/birthers/birthcertificate.asp
maybe you should check it out.
Two words:
Flux Capacitors.
"Why hasn't this been discussed in the major media???" Do you reeaalllly need to ask that? Or perhaps it was just rhetorical?
I like the signature "U K Lele" at the bottom (yes really).
There's no place to go but FORWARD
And you will do it whether you like it or not
http://thehill.com/blogs/on-the-money/budget/300463-treasury-asks-congre...
"We will not negotiate over the debt limit," Lew wrote. "The creditworthiness of the United States is non-negotiable. The question of whether the country must pay obligations it has already incurred is not open to debate."
Jack Jew was a good pick to pile on the BS higher and deeper.
deleted
I love MadMen
The following joke is at least 15 years old. Feel free to tell me if I got it wrong, stuffed up the delivery (bad memory - I am talking 15 years ago) or how old this joke really is:
An Economics Professor notices a student asleep in class, and so throws his chalk at the student, yells at him to wake up, and asks him to answer the question he just asked. The student replies, "Increase the money supply."
The Prof is amazed. "How did you know the answer when you weren't even listening?", he asks.
Replies the student, "It's easy. This is economics. The answer to all the questions is 'Increase the money supply'".
That's much older than fifteen years ...
I could spend countless hours dissecting charts. Everyone knows, I know how to read a chart.
For once and for all, It's nap time.
Is "bubble" the new word for theft by government?
They have to keep changing the jargon. For example they no longer call for an elastic money supply because it sounds too much like writing rubber checks.
Or the way "anthropogenic global warming" became "global warming" became "climate change" as the layers of bullshit peeled away.
Money doesn't sleep.
Was that Professor B. Bernanke's class?
No, the student was Bernanke. That joke was 15 years old 15 years ago...
It used to be called a credit bubble or a Ponzi scheme.
"The policy is not wrong; clearly, it is only the amplitude of it"
The hell, you say! The "policy" is the friggin' problem! It was Federally sanctioned witchcraft that created the damned triangle in the first place.
The house should have been allowed to just fall on the Hags and end the insanity. We'd have been on the mend by now.
20 years ago I listened to the FRB lecture Japan on the virtues of that very action. Now we are Japan? WTF?
Central Bankers think they can control everything. Stock market plunges, print money. Banks fail, print money. Interest rates spike because you or your neighbours are broke, then print moar money!! The contries you work for spend way way more than they can ever rake in taxes, print moar money!!!. Yah, this will end well.
just because Wall Street is drinking from the Kool-aid means that you have to.
EBT - thought it was the SNAP... was behind a lady in the 'hood at Taco Bell who was asking through the bullet proof glass for a soda; unfortunately that Taco Bell did not take SNAP... odd that you can buy soda with welfare; even odder that you can can pay retail for it when 2 liters are usually 99-cents versus a few ozzies and a cup of ice at YUM?
Bernanke has it all going on right now - his nadir? low rates, USD getting stronger, SM up and inlfation low.
Banksters and politicians have managed to take "money" out of the hands of individuals who create it with sweat, energry and intellect. Instead, their created central banks, have been tasked with unlimited printing of fiat paper, not backed by any human activity other than a printing press.
This is acceptable, and indeed wanted by most of us. The FED and the Treasury - with Congressional Blessings- have been tasked with manufacturing and providing all the dollars needed above the tax threshold collected. An elegant solution to the problems of not enough tax revenue to support those idled by the various hardships of life.
Since most governments have adopted this policy - it begs the ultimate question. How long can this continue?
The central banks are terrorizing the money out of the citizens of the world. Let them implode, get rid of them forever and lets have some prosperous years without the sucubus from hell on our backs. To hell with the ChairSatan and his minions.
All the Fed can do now is blow and ever increasing bubbles.
How did it work out in 2000 and 2008?
In 2001 you could see much of the stimulus money going to China.
Reserve currency debasement and as the rest of the third world (soon USA included) who live on a few dollars a day get squeezed and moar an moar desperate. The big difference is now a days is kids living in shanty towns of Suid Afrika or Brazil are aware that Ben Bernanke bucks are maken food more expensive. This is a unknown result of social media an unintended consequence of fed policy that didn't exist a few years ago and with knowledge comes power an choice of PM or bitcoin over fiat currencies. These arrogant bastards think they can rob the billions of poor around the world an give it to Bankstas an get away with it. Its la la land for global elite who are becoming wealthy beyond anything ever seen in history
Iam just airing out my observation of macro events
Ask Donald Trump and his buddy Sarah Palin why with their millions in wealth why they never got anywhere with the Obama birth certificate issue.IMHO,it's all B.S.Just a way to manipulate the media in order to gain television time to make money.Like Donald and Sarah running together as a platform to get into the Whitehouse.Even more B.S. to shovel on the pile.Sarah could have made even more money off of all the suckers following her stupid pentecostal nonsense if she would have taken up the offer from Playboy.
I suspect the Don was advised that persuing the berther issue was alienating him from the populace and it would harm his 'reputation' and the marketability of his name... Also, maybe the O' team just made him an offer he couldn't refuse. Like those naked pics of him with that 15 year old a few years back, ending up in the MSM??? Or some other such set up that was concocted to hold him by the balls. As for Palin, she was probably just offered $20 to drop the issue.
With such negative bias, we all know one thing - the markets are heading higher.
why are equity bull runs "statistically significant" (and we are in the middle of a MASSIVE one right now) is the question to be asked. AND ANSWERED. And here is the answer: http://en.wikipedia.org/wiki/Butterfly_effect simply put "this changes everything Spock" and you have to "reanalyze and recompute" and i ain't talking QE which is utterly meaningless next to an actual self sustaining economic recovery. there is much in place that IN THEORY could create a HIGHLY expansive economic recovery..."beyond imagination" as they say...but public policy figures need to..."speak out"...in order to in my opinion say they believe they see a light at the end of this long and horrible tunnel and just as importantly "here's the plan i believe will get us there." obviously there is no "linear" reality when dealing with the economics profession. these things move in cycles...clearly we are in an "uptrend." as a consequence i cannot speak for where we are exactly in this cycle:http://en.wikipedia.org/wiki/Yin_and_yang but i very much believe we are in one of these cycles right now.