recovery

Growth. It's what every economist and politician wants. If we get 'back to growth', servicing debts both private and sovereign become much easier. And life will return to normal (for a few more years). There is growing evidence that a major US policy shift is underway to boost growth. Growth that will create millions of new jobs and raise real GDP. While that's welcome news to just about everyone, the story is much less appealing when one understands the cost at which such growth comes. Are we better off if a near-term recovery comes at the expense of our future security? The prudent among us would disagree.

No shame. 

That the fine economists at the San Fran Fed are known to spend good taxpayer money in order to solve such challenging white paper conundrums as whether water is wet, or whether a pound of air is heavier than a pound of lead (see here and here) has long been known. Furthermore, since the fine economists at said central planning establishment happen to, well, be economists, they without fail frame each problem in such a goal-seeked way that only allows for one explanation: typically the one that economics textbooks would prescribe as having been the explanation to begin with. Today, is in some ways a departure from the default assumptions. In a paper titled "Why is Unemployment Duration so Long", a question which simply requires a brief jog outside of one's ivory tower to obtain the answer, Rob Valleta and Katherin Kuang, manage to actually surprise us. And while we will suggest readers read the full paper attached below at their leisure, we cut straight to the conclusions, which has some troubling observations. Namely, they find that "the labor market has changed in ways that prevent the cyclical bounceback in the labor market that followed past recessions...  In addition, anecdotal evidence suggests that recent employer reluctance to hire reflects an unusual degree of uncertainty about future growth in product demand and labor costs."Oddly enough, this is actually a correct assessment: the mean reversion "model" no longer works as the entire system has now broken, and since the administration changes rules from one day to the next, companies are not only not investing in their future and spending capital for expansion, and hoarding cash, but have no interest in hiring: an observation that previously led to a surge in profit margins, yet one which as we pointed out over the weekend, has now peaked, and margins have begun rolling over, even as the rate of layoffs continues to be at abnormally high levels, meaning all the fat has now been cut out of the system. Yet it is the following conclusive statement that is most troubling: "These special factors are not readily addressed through conventional monetary or fiscal policies." And that is the proverbial "changeover" as the Fed has just acknowledged that both it, and Congress, are completely powerless at fixing the unemployment situation. In which case is it fair to finally demand that the Fed merely focus on just one mandate - that of controlling inflation, and leave the jobs question to the market, instead of making it worse with constant central planning tinkering which only makes it worse by the day?

All you need to read.

What is the bottom line?  The stark decline in the BDI today should be taken very seriously.  Most similar declines have occurred right before or in tandem with economic instability and stock market upheaval.  All the average person need do is look around themselves, and they will find a European Union in the midst of detrimental credit downgrades and on the verge of dissolving.  They will find the U.S. on the brink of yet another national debt battle and hostage to a private Federal Reserve which has announced the possibility of a third QE stimulus package which will likely be the last before foreign creditors begin dumping our treasuries and our currency in protest.  They will find BRIC and ASEAN nations moving quietly into multiple bilateral trade agreements which cut out the use of the dollar as a world reserve completely.  Is it any wonder that the Baltic Dry Index is in such steep deterioration? Along with this decline in global demand is tied another trend which many traditional deflationists and Keynesians find bewildering; inflation in commodities.  Ultimately, the BDI is valuable because it shows an extreme faltering in the demand for typical industrial materials and bulk items, which allows us to contrast the increase in the prices of necessities.  Global demand is waning, yet prices are holding at considerably high levels or are rising (a blatant sign of monetary devaluation).  Indeed, the most practical conclusion would be that the monster of stagflation has been brought to life through the dark alchemy of criminal debt creation and uncontrolled fiat stimulus.  Without the BDI, such disaster would be much more difficult to foresee, and far more shocking when its full weight finally falls upon us.  It must be watched with care and vigilance...

• Euro-Region Debt Sales Top $29B This Week (Bloomberg)
• Greek Fury at Plan for EU Budget Control (FT)
• Greek "football players too poor to play", leagues running out of money, may file for bankruptcy (Spiegel)
• After insider trading scandal, Einhorn wins the battle: St. Joe Pares Back Its Florida Vision (WSJ)
• China Signals Limited Loosening as PBOC Bucks Forecast (Bloomberg)
• China's Wen: Govt Debt Risk "Controllable", Sets Reforms (Reuters)
• IMF Reviews China Currency's Value (WSJ)
• Watching, watching, watching: Japan PM Noda: To Respond To FX Moves "Appropriately" (WSJ)
• Cameron to Nod Through EU Treaty (FT)
• Gingrich Backer Sheldon Adelson Faces Questions About Chinese Business Affairs (Observer)

You've just crossed over...

In addition to telling everyone to short the euro and go long the dollar (wink) Goldman Sachs is kind enough to summarize what the recurring Eurocentric rumor-based headlines of the coming week will be: "The week ahead starts with the EU Heads of State Summit, where discussions will be focused on finalizing negotiations around the fiscal compact, where we think important progress has been made, not least by allowing individual countries to police each other's budget policies. Attention will also be squarely focused on Greece, where negotiations over PSI continue, in addition to negotiations between the Troika and the government. The IMF mission is scheduled to remain in Athens at least through Friday. The week also brings important bond auctions, starting with Italy on Monday (at 5- and 10-year tenors), followed by France and Spain on Thursday. Outside of Europe, key data include the slew of global PMI's on Wednesday. Consensus sees China's PMI slipping below the 50 threshold in January. We are slightly more cautious than consensus on the ISM, expecting an essentially unchanged reading. The week ends with the all-important nonfarm payroll release. We think nonfarm payroll growth probably slowed somewhat in January given less of a boost from favorable weather and seasonal factors. However, we think the pace of employment growth, combined with weak labor force participation, may still be enough to pull the unemployment rate down a touch."

A brief and comprehensive summary of the main events in the past week, both good and bad.

Bloomberg's Trish Regan (yes, she is no longer at CNBC), has just announced that the bank which earlier announced it is shutting down its catastrophic prop trading desk (at which point shreholders let out a sigh of relief), has proceeded with slashing banker pay by 30% for overall comp and some bonuses by as much as 70%. This follows earlier announcements by Bank of America and Morgan Stanley which earlier said they would limit cash bonuses to $150K for senior positions. At the end of the day, the biggest losers are secondary, non-financial New York jobs (supposedly there are some: rat exterminators; strippers; limo drivers; food spitters also known as waiters?) as each banker jobs indirectly supports up to 3 downstream jobs. In other words between layoffs and comp cutting, the immediate impact will likely be to leave New York City, which is the farthest point on the economic procyclical receiving end, with hundreds of thousands of layoffs. Which incidentally, to the bizarro crazy scientists at the BLS, means that initial claims are about to go negative (with the traditional upward revision in the following week).

Festive Friday fun:

• FITCH TAKES RATING ACTIONS ON SIX EUROZONE SOVEREIGNS
• ITALY LT IDR CUT TO A- FROM A+ BY FITCH
• SPAIN ST IDR DOWNGRADED TO F1 FROM F1+ BY FITCH
• IRELAND L-T IDR AFFIRMED BY FITCH; OUTLOOK NEGATIVE
• BELGIUM LT IDR CUT TO AA FROM AA+ BY FITCH
• SLOVENIA LT IDR CUT TO A FROM AA- BY FITCH
• CYPRUS LT IDR CUT TO BBB- FROM BBB BY FITCH, OUTLOOK NEGATIVE

And some sheer brilliance from Fitch:

• In Fitch's opinion, the eurozone crisis will only be resolved as and when there is broad economic recovery.

And just as EUR shorts were starting to sweat bullets. Naturally no downgrade of France. French Fitch won't downgrade France. In other news, Fitch's Italian office is about to be sacked by an errant roving vandal tribe (or so the local Police will claim).

That Europe has been unable to do the simplest thing, and come to a conclusion in its negotiation with Greek creditors, now running into its six month, is not very surprising. After all this is Europe, where nothing gets done before the deadline, only in the case of Greece the deadline also means the risk of runaway contagion. And as of today there are about 53 days left before the March 20 Greek D-Day. Yet the one thing European should at least be able to do is to have their story straight on what happens once Greece defaults. If nothing else, to show solidarity for optics' sake. Alas, it can't even do that. Because just overnight we have two diametrically opposing stories hitting the tape. On one hand we have Spanish economic minister Luis de Guindos telling Bloomberg TV in Davos that the euro region could withstand a Greek default. This is very much in line with the Jamie Dimon line of thinking that there will be limited fallout. Yet on the other hand, it is that perpetual bag of hot air, Europe's very own head propaganda master Jean Claude Juncker, who ironically told Le Figaro that a Greek default must be avoided at all costs as it would lead to Contagion (read tipping dominoes all over the place). Too bad that both Fitch and S&P said that a Greek default at this juncture is inevitable. And while Juncker's statement in itself is absolutely true, the fact that discord is appearing at the very core of European propaganda - the one place it can afford to stay united until the very end - is troubling indeed. Especially since Juncker also told Le Figaro that Germany can not be asked to do everything alone. Is that a quiet request for the Fed to keep bailing out Europe since the ECB apparently has no interest in doing so?

Let’s cut the BS here. The Fed has maintained a more than highly accommodative stance for three years now and U-16 unemployment, food stamp usage, home prices, and virtually every other economic metric indicate that they’ve done little to boost the US economy in any meaningful way. QE has and always will be about boosting asset prices in the hope that the Fed can stimulate a recovery by getting the S&P 500 to some level.

It seems self-evident. The government can debase the currency and thereby be able to pay off its astronomical debt in cheaper dollars. But as I will explain below, things don’t work that way. In order to use the debasement of paper currencies to repay the debt more easily, governments will need to issue and use the gold bond. The paper currencies will not survive too much longer. Most governments now owe as much or more than the annual GDPs of their nations (typically far more, under GAAP accounting). But the total liabilities in the system are much larger. The US dollar game is a check-kiting scheme. The Fed issues the dollar, which is its liability. The Fed buys the US Treasury bond, which is the asset to balance the liability. The only problem is that the bonds are payable only in the central bank’s paper scrip! Meanwhile, per Bretton Woods, the rest of the world’s central banks use the dollar as if it were gold. It is their reserve asset, and they pyramid credit in their local currencies on top of it. It is not a bug, but a feature, that debt in this system must grow exponentially. There is no ultimate extinguisher of debt. In reality, stripped of the fancy nomenclature and the abstraction of a monetary system, the picture is as simple as it is bleak. Normally, people produce more than they consume. They save. A frontier farmer in the 19th century, for example, would dedicate some work to clearing a new field, or building a smokehouse, or putting a wall around a pasture so he could add to his herd. But for the past several decades, people have been tricked by distorted price signals (including bond prices, i.e. interest rates) into consuming more than they produce. In any case, it is not possible to save in an irredeemable paper currency.  Depositing money in a bank will just result in more buying of government bonds.  Capital accumulation has long since turned to capital decumulation... I propose a simple step. The government should sell gold bonds. By this, I do not mean gold “backed” paper bonds. I mean bonds denominated in ounces of gold, which pay their coupon in ounces of gold and pay the principal amount in ounces of gold. Below, I explain how this will solve the three problems I described above.

"Bernanke is betting the ranch on open-ended QE and zero interest rates and it worries me" is how Stephen Roach of Morgan Stanley starts this must-see reality-check interview with Bloomberg TV's Tom Keene. The reason for his concern is simple, the current Fed modus operandi is a framework for rescuing economies in crisis but does little to sustain economic recovery. Roach agrees with Cal's Eichengreen that the European and US central banks are indeed in a policy trap, committed to a path of action that has to be perpetually ante'd up to maintain the dream. With Europe in recession already in his view, Roach does not expect the tough structural action until we see greater social unrest or overwhelming unemployment and reminds us of how close we got when Greece threatened the referendum in the late summer. He goes on to discuss China (positive on their efforts and 'solid strategy') and it's relative success as a regime which he contrasts with our "central bankers who pull the wool over our eyes with ZIRP and magical QE". Taking on the mistakes of Greenspan, letting capitalism go unchecked, and his incredulity at the 'glide-path' charts we were treated to yesterday by the Fed's bankers ('accountability'), Roach sees the painful process of deleveraging from excess debt, insufficient savings, and over-consumption as likely to take a long time as we should not assume investment will be the driver as Obama goes 'protectionist' (in the SOTU) on our 3rd largest export partner - yes, China.