5 Things To Ponder: Under The Surface

Tyler Durden's picture

Submitted by Lance Roberts of STA Wealth Management,

Alas, all good things must come to an end. As the kids summer vacation trip comes sadly to an end, it is only fitting that the final edition of "Thoughts From The Beach (TFTB)" would be this weekend's "5 Things To Ponder."

This week was very busy with economic data.  For the most part, the majority of the data came basically inline with expectations.  However, the internals of the various reports were much less encouraging. The most noteworthy report, and the least important from an investment standpoint, was the monthly employment report which came in at 288,000 jobs for the month. 

As with the bulk of other reports, the more important details were lost to the headlines.  The average number of hours worked made no gains, and hourly earnings growth remains muted. The bulk of the job creation remained focused in the lower wage paying areas of the economy such as retail and transportation.  Most importantly, full-time jobs fell by roughly 500k.

As I discussed in "Jobless Claims And The Issue Of Full Employment," there is only one analysis of employment that matters.  That is full-time jobs relative to the population. Full-time employment is what fosters household formation and long-term economic growth. As shown in the chart below, full-time employment relative to the working age population has remained primarily stagnant since the financial crisis and actually fell in the latest month. This is a key reason why economic growth continues to struggle.

Employment-FullTime-JoblessClaims-070414

However, I digress, and our plane is getting ready to board as we make our way back to reality.  Come Monday it is back to a dimly lit desk, stale coffee and the daily grind.  In the meantime, here is what I will be reading on the trip home.

1) The Next Financial Crisis Is Brewing Right Now by David Dayen via The Fiscal Times

"The Office of the Comptroller of the Currency (OCC), not typically seen as a strident regulator, is warning about risky lending as low interest rates drive a reach for higher yields. Both the OCC and the Federal Reserve have decried the slippage in underwriting standards on particular loan products. Fed Chair Janet Yellen cited 'pockets of increased risk-taking' in a speech yesterday. And the Bank for International Settlements (BIS), a consortium of the world’s central banks, cautioned this week about asset bubbles forming throughout the global economy."

2) BIS Warns Of Destabilizing Low Interest Rates by Yves Smith via Naked Capitalism

"Frameworks that fail to get the financial cycle on the radar screen may inadvertently overreact to short-term developments in output and inflation, generating bigger problems down the road. More generally, asymmetrical policies over successive business and financial cycles can impart a serious bias over time and run the risk of entrenching instability in the economy. Policy does not lean against the booms but eases aggressively and persistently during busts. This induces a downward bias in interest rates and an upward bias in debt levels, which in turn makes it hard to raise rates without damaging the economy – a debt trap. Systemic financial crises do not become less frequent or intense, private and public debts continue to grow, the economy fails to climb onto a stronger sustainable path, and monetary and fiscal policies run out of ammunition. Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent. In this context, economists speak of "time inconsistency": taken in isolation, policy steps may look compelling but, as a sequence, they lead policymakers astray."

Also Read:  Yellen To The BIS by Sigmund Holmes

3) It's Time To End "Crapitalism" by John Stossel via Reason

"But it's crapitalism when politicians give your tax money and other special privileges to businesses that are 'most deserving of help.' Often those businesses turn out to be run by politicians' cronies.

 

Many government agencies feed this crony capitalism. When there is scandal, such as when the Energy Department lost $500 million on Solyndra, we sometimes hear about it. But often we don't. You probably didn't know about the department's other fat losses on businesses like Solar One, the Triad ethanol plant, FutureGen, the Clinch River Breeder Reactor, and so on.

The biggest funder of this crony capitalism is the Export-Import Bank."

4) Is The IMF Looking To Expropriate Funds? By Martin Armstrong Via Zero Hedge

"Now the June 2014 report has a new, far-reaching proposal. This shows how lawyers think in technical definitions of words. There is no actual default if they extend the maturity. You could buy 30-day paper in the middle of a crisis and suddenly find under the IMF that 30 day note is converted to 30 year bond at the same rate.

 

The huge national debts could be reduced also according to the IMF by just expropriating all private pension funds."

5) The Failure Of Macro Economics by John Cochrane via The Wall Street Journal

"When models don't yield the spending policies they want, some Keynesians abandon models—but not the spending.

 

Sclerotic growth trumps every other economic problem. Without strong growth, our children and grandchildren will not see the great rise in health and living standards...Without growth, our government's already questionable ability to pay for health care, retirement and its debt evaporate... Without growth, U.S. military strength and our influence abroad must fade...

 

The 'demand' side initially cited New Keynesian macroeconomic models. In this view, the economy requires a sharply negative real (after inflation) rate of interest. But inflation is only 2%, and the Federal Reserve cannot lower interest rates below zero. Thus the current negative 2% real rate is too high, inducing people to save too much and spend too little...If you look hard at New-Keynesian models, however, this diagnosis and these policy predictions are fragile...

 

Where, instead, are the problems? John Taylor, Stanford's Nick Bloom and Chicago Booth's Steve Davis see the uncertainty induced by seat-of-the-pants policy at fault. Who wants to hire, lend or invest when the next stroke of the presidential pen or Justice Department witch hunt can undo all the hard work? Ed Prescott emphasizes large distorting taxes and intrusive regulations. The University of Chicago's Casey Mulligan deconstructs the unintended disincentives of social programs."