Welcome to the Vitus Capital Blog!
Notes to myself, possibly of interest to others.
-- Bill Northlich

Monday, May 12, 2014

DeLong Posts Definitive Geithner Day Disquisition

AND DAN DAVIES DELIVERS TIM GEITHNER'S SOLILOQUY AS THE EARL OF KENT IN "KING BARACK": MONDAY REAL-TIME SMACKDOWN WATCH

  1. Why was the "Rubin Question" not asked? Why didn't every meeting end with: "What do we need to do today in order to create room to maneuver in case our assessment of the economy is wrong?"? Why was there no contingency plan for what to do if the administration's view of the economy turned out to be wrong, and if the recession was either not relatively shallow nor followed by a strong, rapid recovery? Good question, totally agree.
  2. Why did the Treasury's loans to banks via the TARP come with neither bankruptcy-control rights (i.e., the ability to throw the organization into the courts if the government was displeased) nor shareholder-control rights (i.e., the ability to replace the boards of directors and the top management if the government was displeased)? He who pays the piper should call the tune, right? It was early in the game and everyone (except you and Paul Krugman) was scared of THE DREADED STATE OWNERSHIP. But Geithner ought to be made to say this out loud.
  3. Why was the Treasury's first priority in January 2009 not filling the post of Director of the FHFA with somebody smart who understood the depths of the housing finance crisis, the housing finance crisis's role in causing and maintaining the catastrophe, and the potential macroeconomic benefits to be gained from resolving the housing finance crisis? Nearly all such people wouldn't have gone near the job because of the reputational risk.
  4. Why was the Treasury's second priority in January 2009 not filling the Federal Reserve with Keynesian macroeconomists to balance the austerity-minded regional reserve bank governors, and not thus giving Ben Bernanke and his successor room to maneuver to pursue technocratic dual-mandate policies? An excess of Very Seriousness. I realise this is basically a rhetorical question though, along the lines of "why did this more or less economically illiterate, non-Keynesian administration, consistently fail to appoint Keynesians who knew what they were doing?"
  5. Why was the Treasury's third priority in January 2009 not setting-up the game table to make enacting a second round of fiscal stimulus easy, should the Recovery Act turn out (as it did, and is Christina Romer warned at the time) to be less than half as large as it should have been? See above...
  6. Why did the spring 2009 PPiP program never go much of anywhere? It seemed to me at the time to be a very wise way--albeit a very risky way--to utilize TARP money. Too tricksy and think-tank-wonky. Too many bells and whistles. In a crisis, everyone's mental bandwidth is maxed out and so clever-clever solutions never work.
  7. The Treasury senior-executive team that was assembled seemed to me to be relatively light on all of (a) Wall Street trading and management experience to actually interface with the financial firms to which the TARP money had been committed, (b) Fed-watching experience, (c) macroeconomic policy expertise, and (d) health-care finance expertise. Given that running the TARP, attempting to bring the Federal Reserve's FOMC to a state of understanding of the economy, spurring a strong and rapid recovery, and implementing health-care reform were the administration's top priorities, why were the Treasury's senior executives--excellent people, all--who they were? Don't know. Suspect that the depth of bench in Treasury is not what it was when you worked there.
  8. Former Obama OMB Director Peter Orszag has said if he had properly understood and internalized the lessons of work like Rinehart-Rogoff on the likelihood of slow recovery after financial crises he would have taken a significantly different position in the Obama administration NEC's policy debates in 2009-10--a position closer to Romer-Summers than to Geithner. How many of what clearly were, in retrospect, unforced macroeconomic policy errors by the Obama administration due to this failure to understand the likelihood of a prolonged, slow "jobless recovery"? Lots of them, although Orzag's sincerity can't be taken for granted.
  9. What were the three biggest unforced macroeconomic policy errors of the Obama administration, and why were they made? Inadequate stimulus, three times. Made first time round because Summers thought he was dealing with 1998-replay, and then second and third times round out of timidity with respect to Congress.
  10. The Obama administration began with two among the most-senior policymakers--Lawrence Summers and Christina Romer--having deep understanding of the macroeconomics of full employment and inflation and of the two episodes, the Great Depression and Japan's "lost decades", thought to be relevant to the U.S. situation at the end of the 00 decades. When they left in 2010 that expertise was not replaced at the most senior level. Why not? Why no Blinders or Tysons? Might have given advice that the Obama/Geithner/VSP community didn't want to be given.
  11. What was the thinking behind the decision that Ben Bernanke should--after 2007-9--be offered a second term as Federal Reserve chair? In retrospect, is that thinking still defensible? If not, why was that thinking convincing at the time? TBH, Bernanke didn't do a bad job in the face of total lack of help from the fiscal side. I don't think there's a question to be answered here.
  12. I understand that Neil Barofsky at SIGTARP was regarded by the Treasury as somewhat of a loose cannon, but why was that relationship handled so badly? Because twenty years' worth of regulatory capture isn't undone in a fortnight, even in conditions like 2008-9.
  13. I understand why the Treasury might think that Michael Barr was a better choice to run the CFPB than Elizabeth Warren, but why was that relationship handled so badly? Same answer as 12, with possible additional hints of sexism. OTOH, having run her out of the CFPB, the banking industry then ended up getting Prof. Warren to deal with on the Senate Banking Committee, so heckuva job lobbyists.
  14. Why did the Obama administration in 2011 think that the way to strengthen the economy was to pursue a long run "grand bargain" rather than to pursue short-run expansionary exchange rate, bank regulation, housing finance, and monetary policies? Because he's the management consultancy boss from hell who will always avoid taking a difficult decision if he isn't personally committed to it.
  15. Why was the Obama administration so certain in 2011 that Boehner wanted to come up with a reasonable long-run entitlement reform and tax increase deal, and that its key negotiating strategy should be to make anticipatory concessions in order to make sure the deal was sweet enough for Boehner to be able to convince his troops to take it?Literally no idea, but this is also surely a rhetorical question; if Geithner was capable of giving a sensible answer to it, he would surely not have made the mistake in the first place.
  16. Why was there never any explanation of what would happen in the event of a potential breach of the debt ceiling other than "default is unthinkable"? That line put Obama in a very poor bargaining position. The Republican leaders in the House could then pass what they wanted and adjourn--leaving the Senate with no option but to endorse it or to breach the debt ceiling. Obama would then have no option but to sign the House bill or breach the debt ceiling. Can anybody explain to me this throwing-away of the administration's power to threaten not to sign whatever was on the president's desk when the click ticked down to zero? Good question, agree.
  17. I understand that there was no macroeconomic policy between July 2009 and April 2010 because health-care reform soaked up all the oxygen. But why was there no macroeconomic policy in the Obama administration between April 2010 and November 2010? The facts from 2010 ought to make you consider whether the excuse was valid in 2009 either.
  18. I remember a phone conversation with Tim Geithner about Obama's decisive turn to and endorsement of "austerity"--the passage in Obama's 2010 State of the Union address that went: "Families across the country are tightening their belts and making tough decisions. The federal government should do the same. So tonight, I'm proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year.Starting in 2011, we are prepared to freeze government spending for three years..." Geithner told me: "I know that [senior administration official X] and [senior administration official Y] really think that I was an [expletive] for not strongly opposing that, but I did not support it." If the Treasury Secretary did not support it, how did it get approved by the NEC? If it did not get approved by the NEC, how did it get into the State of the Union text? Who did support it? Why did they support it? Very good question, although the possible explanation "Geithner wasn't being wholly candid with you on the phone" comes to mind.
  19. I remember a phone conversation with Tim Geithner in which Geithner said that entrenched and incumbent FHFA head Ed DeMarco would "push the limits of the reasonable envelope" with actions to accelerate and encourage the refinancing of underwater mortgages. Why did Ed DeMarco not do so? Why did Tim Geithner think he would?Institutional impossibility of getting anyone to get anything done in the god damn mortgage industry, IMO.
  20. Why was it not the first priority in deciding on the Federal Reserve chair to pick somebody who had had a substantially-correct understanding in 2007-9 of what was happening to the economy? All such people might have given advice that they didn't want to receive.

Thursday, May 1, 2014

A, uh, new post about, of course, Piketty. QOTD - Mike Konczal.

In the mode of YAPP (Yet Another Piketty Post), we'd like to quote Mike Konczal reviewing Piketty:  
"In an especially revealing passage on French rentiers at the turn of the last century, Piketty writes that “universal suffrage and the end of property qualifications for voting…ended the legal domination of politics by the wealthy. But it did not abolish the economic forces capable of producing a society of rentiers.”
This is a remarkable provocation for liberals. Piketty is, in a way, saying: go ahead and make whatever reforms you want. Break up the banks. Pass the campaign finance package of your dreams. Reach deep into the bag and pass all the non-reformist reforms that you can think of. All your reforms can’t guarantee that you are safe from the logic of r > g. Reforms won’t change the nature of capital: to accumulate, eat up a larger share of the economy, and let the past dominate the future. What then?"

Thursday, April 10, 2014

DeLong Week @ Vitus

Larry Summers:  An agenda for the IMF: "In the face of inadequate demand, the world’s primary strategy is easy money..
All this is better than the kind of tight money that in the 1930s made the Depression great. But it is highly problematic as a dominant growth strategy.We do not have a strong basis for supposing that reductions in interest rates from very low levels have a large impact on spending decisions. We do know that they strongly encourage leverage.... We cannot confidently predict the ultimate impacts of the unwinding of massive central bank balance sheets on markets or on the confidence of investors. Finally, a strategy of indefinitely sustained easy money leaves central banks dangerously short of response capacity when and if the next recession comes. A proper growth strategy would recognize that an era of low real interest rates presents opportunities as well as risks and would focus on the promotion of high-return investments... infrastructure spending... promote private investment, including authorizing oil and natural gas exports, bringing clarity to the future of corporate taxes... moving forward on international trade agreements.... Europe has moved back from the brink... But no strategy for durable growth is yet in place and the slide toward deflation continues.... A global growth strategy framed to resist secular stagnation rather than simply to muddle through with the palliative of easy money should be this week’s agenda." 
---DeLong

Wednesday, April 9, 2014

Breaking! Conservative Derp





WRM is a commentator with a lot of cred.  Vitus Read his book Power, Terror, Peace, and War. Which was largely good.  V. Recently decided to follow him on the T.  Above is the first tweet I see.  The article referenced is here.

Well, I read the NYT's article on Medicare overcharging this AM: "Sliver of Medicare Doctors Get Big Share of Payouts".  The equivalent of "US health care system incentivizes bad behavior", above, is, in the NYT article,
There’s a lot of potential for whistle-blowers and justified worry for fraudsters,” said Steven F. Grover, a lawyer who represents whistle-blowers who sue doctors and hospitals who they claim have committed fraud against the Medicare program. “There’s going to be a lot of litigation over this,” he said.
One should read both articles; the Mead one is short.

The previous couple of posts in this blog, below, talk about the new American fascists (as opposed to, um, Obama...).  Vice President Wallace's 1944 screed says of the American Fascists of the time "Their newspapers and propaganda carefully cultivate every fissure of disunity...Their final objective toward which all their deceit is directed is to capture political power so that, using the power of the state and the power of the market simultaneously, they may keep the common man in eternal subjection"

The NYT article manages - somehow (maybe by using a technique knows as "reporting") - to avoid garnering evidence form it's sources that "US health care system incentivizes bad behavior".

Clearly Mead is crafting his piece to further pry open the fissure of American disunity which is the controversy over healthcare, and to add to the world yet another Randian call for ridding the world of evil government.

There are many ways to skin a cat - and also to write about a complex event.  It's hard enough to present the facts.  It's easy, lazy, disingenuous, and deceitful to craft the description of an event solely to deceive and propagandize, and to proselytize one's politics.

Koch's: The New Nazi's

Vice President Henry A. Wallace, April 9, 1944: The American fascists are most easily recognized by their deliberate perversion of truth and fact. Their newspapers and propaganda carefully cultivate every fissure of disunity, every crack in the common front against fascism. They use every opportunity to impugn democracy. They use isolationism as a slogan to conceal their own selfish imperialism. They cultivate hate and distrust of both Britain and Russia. They claim to be super-patriots, but they would destroy every liberty guaranteed by the Constitution. They demand free enterprise, but are the spokesmen for monopoly and vested interest. Their final objective toward which all their deceit is directed is to capture political power so that, using the power of the state and the power of the market simultaneously, they may keep the common man in eternal subjection.
---HT DeLong

Paul Ryan - Healthcare Under the New Fascisism

DeLong:  It is unclear whether Paul Ryan understands what he is doing or not. But if he does, he is laying it all out there--that the Republican health-care endgame is as follows:
  • If you are already sick, have the wrong genetic markers, or are poor, the plan is for you to beg at your church for money to pay your health care bills.
  • Health insurance is to be reserved only for those from the middle class who lack adverse genetic markers and who have no preexisting conditions.

Thursday, March 13, 2014

Bullish on war

http://www.nytimes.com/2014/03/14/world/europe/ukraine.html?_r=0

Bush said "bring it on".

Wednesday, January 29, 2014

Rosenberg - Medium Term Investment Themes









David Rosenberg: No Bear Market Now; Green Light for One-Two Years

Rosenberg, 1/24:

The historical record is crystal clear: Go back to what happens at the peak of every bull market and you will see a yield Curve that is either flat or inverted...lofty multiples are not the metrics that bring on the bear market when it comes. What causes that to happen, with near certainty based on past experience, is the Fed tightening the liquidity spigots to such an extent that short-term rates rise above the level of long-term rates.

NAVIGATING THE MACRO AND MARKET OUTLOOK - IS THE TRAFFIC LIGHT FLASHING RED, AMBER OR GREEN?

Answer: Amber on a one-to-three-month horizon as valuation and sentiment extremes hopefully recede and open up a better buying opportunity at more attractive re-entry price point. Green on a one-to-two year basis as everything from the Leading Indicators index to the yield curve to the gap between nominal growth and long-term interest rates to the ISM are signaling a constructive fundamental backdrop which will transcend the near-term hurdles associated with market positioning, P/E multiples and technicals. In other words, stay the course until one or more of the fundamental factors illustrated below begin to Change!

One is the Conference Board's Leading Economic index, and not just the level, but the rate of change. The LEI rose 01% in December to 99.4 - the highest since February 2008. This was the ninth consecutive increase, so we have more information here about the durability of the expansion. Not just that, but the key YoY trend for the LEI improved notably to 5.41% in December from 1.95% a year ago. This is a critical momentum indicator and in and of itself contains some interesting forward-looking properties...

On average, how many months before a recession are we typically with the YoY trend where it is now? Historically. the YoY trend stands between 5.0% and 5.5% (currently it is 5.4%) 28 months before a recession (min: 15 months and max: 58 months)­ That is comforting because it means that recession risks for 2014 should be close to nil...

Another critical barometer is the yield curve. Only once in the past 60 years did it invert without foreshadowing a recession (back in the mid1960's). But every recession did indeed follow a period of curve inversion, including the last one, and the reason why Alan Greenspan developed the reputation as being a Maestro was because he flattened the yield curve in 1994 but did not invert it, and as such we experienced a ‘soft landing’ the following year that helped extend the Cycle at the time for another half-decade. And while corrections will come and go (October 1987 was a severe correction but not a bear market, August 1998 was a correction but nota bear market, the summer of 2011 was a correction but nota bear market), the reason they were not bear markets. which one measures in time, not just in magnitude. is because there was no recession.

Monday, January 20, 2014

On First Looking Into Chapman's Homer Gorton's Misunderstanding Financial Crises

Very clear and readable.   It's a wonderful book which lays out directly and in detail the problems embedded "Conservatism"'s relilgiostic pursuit of FINO marketism (Free In Name Only).

"Conservatives" invent magic, fantastical worlds of invisible hands racing around fixing things, invisibly of course - so that so-called Conservatives may abjure responsibility for contributing to the societal commonwealth to which they belong, and from which they withdraw so much.

Vitus Fils comments on chapter one:
We begin to see the “right versus everyone else” ideology coming to light in Groton’s work.  For one, the elimination of ‘note brokers’ and note brokering as a whole as a result of federal regulation (i.e. nationalization) is in direct conflict with the Glenn-Beckian/Mitt Romnian/Republican ideas of “free” market, or “guiding hand” or “freedom” in pursuing one’s livelihood (i.e. creating or developing a product or service that may or may not service society as a whole).  That there were substantial problems in “Free Banking” resulting in money not being traded at par precisely because of the rise of note brokers as a result of “Free Banking” directly illustrates the need for some federal regulation where it is required.  Of course, the likes of Bill O’Reilly will take this idea of ‘federal regulation’ and blow it up to a point where regular average Americans believe that a Marxist/Leninist conspiracy (a la our black president, which as we all know is the real problem) is taking over the U.S. 

Friday, January 17, 2014

David Brooks Says Republicans Deeply Concerned about the Poor. Um...

Yglesias:
In a curious column today, David Brooks asserted that Republican Party politicians are deeply concerned about the welfare of poor Americans, and that if liberals would just stop being mean to rich people the country could come together and help the poor:
"There is a growing consensus that government should be doing more to help increase social mobility for the less affluent. Even conservative Republicans are signing on to this. The income inequality language introduces a class conflict element to this discussion."
...at least on its face, it doesn't seem to me that there is a consensus on helping the poor that's being disrupted by a controversy about the rich. It is true that Republicans think one major problem in America today is that the highest-earning Americans don't have enough take-home pay. And it is true that the GOP view on this is impelling them to propose a budget that reduces spending on middle class entitlement programs. But it's also true that Republicans want to cut spending on low-income people much more drastically than they want to cut spending on middle class people. We saw that with Paul Ryan's budget, we saw it with the House GOP proposal to cut food stamps, and we saw it in Mitt Romney's campaign proposals.

Vitus:  For the Pro version of the daily Brooks takedown, see Dean Baker. Baker points out that Brooks starts with
"If you have a primitive zero-sum mentality then you assume growing affluence for the rich must somehow be causing the immobility of the poor, but, in reality, the two sets of problems are different, and it does no good to lump them together and call them 'inequality."
Baker money quote: "Fans of arithmetic everywhere know that if the rich get more, and the economy is not growing faster, then everyone else gets less."

Jeff Saut: Buy the dips in the coming months

From Minyanville:
 [I]f we get [my] prescribed rally into month's end, or into early February 2014, it should be accompanied by excessive optimism leading to the typical 5% - 7% pullback over the next three months, and something like a 10% - 12% decline over sometime in the next 12 months. Said anticipated declines should be BOUGHT on the expectance we are now in a new secular (multi-year) bull market. To reiterate, such declines are for BUYING because my sense is that we are in a secular bull market that has years left to run! Yesterday, however, was yet another stutter-step session in this week's manic-depression sequence whereby the equity markets cannot decide between "light and dark." Verily, is the glass half full, or half empty? I think that the glass is half full, which implies, as stated, "Pullbacks are for buying, NOT selling." That said, I think we are involved in the final stages of a short-term upside "blow-off" for equity prices in the very short term. In the ending stages of the 2007 "Tech Bubble," the NASDAQ rallied nearly 40% (like now), energy stocks surged nearly 50% (like now), and housing prices went exponential (like now). If we are about to see another such upside price "blow-off," it should happen between now and mid-February; and, I am a buyer during any such decline. Yesterday, after two days of advances this week, the SPX declined, but the downside conviction of that move was lacking given the accompanying volume characteristics. Accordingly, this morning the pre-opening futures are higher, driven by stronger economic data out of Europe and some decent earnings reports.

Monday, January 13, 2014

Everyone a CEO! Elysian Fields of Conservative Political Economy

Steve M (HT DeLong):
...right-wing arrogance [led] Michelle Malkin, back in 2012, to say with a sneer, "Romney types, of course, are the ones who sign the front of the paycheck, and the Obama types are the one who have spent their entire lives signing the back of them": the right simply believes that it's disgraceful to be an ordinary worker in the job market, subject to its ups and downs. If you're not a capitalist, you're scum.

Vitus:  Once, on a lark, V. went to a Ponzi-scheme prezzo at a hotel near SFO, put on by a person named Glen W. Turner from (of course) somewhere in the south.  There were easily 1000 people there.  The product being sold was the purest form of Ponzi - you were supposed to buy a franchise in a thing called "Dare To Be Great".  You would become "Great" by selling franchises of "Dare To Be Great".  We could only take about 20 min. of this stuff ourself, but clearly a lot of people there were desperate to believe in something which might give them a way out of their Mitty-esq lives.

This, it occurs to us, is a biggish part of the appeal of Tea-partydom.  I'm signing the backs of paychecks for now but...

It's of course all make-believe to think that "free" markets are self-regulating; that "I" am above needing help from the government; and that, as Romney said, we should (and could!) all borrow money from our parents and start businesses.  The right-wing "arrogance", above, is in fact religiostic phantasy.  All CEO's; no workers.  Sounds like a plan.

Saturday, January 11, 2014

The Un-Commonwealth of 'Murca

"we’re becoming a nation that doesn’t offer enough economic opportunity to the bottom half, or maybe even the bottom 80 percent, of its citizens."
---Krugtron

Friday, January 10, 2014

The Fed Sucks! Abolish the Fed and Base Our Currency on Gold! Wait...

David Andolfatto, ht Noah Smith

Q. Why doesn't the U.S. return to the gold standard so that the Fed can't "create money out of thin air"?
A.The phrase "create money out of thin air" refers to the Fed's ability to create money at virtually zero resource cost. It is frequently asserted that such an ability necessarily leads to "too much" price inflation. Under a gold standard, the temptation to overinflate is allegedly absent, that is, gold cannot be "created out of thin air." It would follow that a return to a gold standard would be the only way to guarantee price-level stability.
Unfortunately, a gold standard is not a guarantee of price stability. It is simply a promise made "out of thin air" to keep the supply of money anchored to the supply of gold. To consider how tenuous such a promise can be, consider the following example. On April 5, 1933, President Franklin D. Roosevelt ordered all gold coins and certificates of denominations in excess of $100 turned in for other money by May 1 at a set price of $20.67 per ounce. Two months later, a joint resolution of Congress abrogated the gold clauses in many public and private obligations that required the debtor to repay the creditor in gold dollars of the same weight and fineness as those borrowed. In 1934, the government price of gold was increased to $35 per ounce, effectively increasing the dollar value of gold on the Federal Reserve's balance sheet by almost 70 percent. This action allowed the Federal Reserve to increase the money supply by a corresponding amount and, subsequently, led to significant price inflation.
This historical example demonstrates that the gold standard is no guarantee of price stability. Moreover, the fact that price inflation in the U.S. has remained low and stable over the past 30 years demonstrates that the gold standard is not necessary for price stability. Price stability evidently depends less on whether money is "created out of thin air" and more on the credibility of the monetary authority to manage the economy's money supply in a responsible manner.

Tuesday, November 19, 2013

Jeremy Grantham - Bull Market for 1-2 years, then a bust

My personal view is that the Greenspan-Bernanke regime of excessive stimulus, now administered by Yellen, will proceed as usual, and that the path of least resistance for the market will be up. I believe that it would take a severe economic shock to outweigh the effect of the Fed’s relentless pushing of the market...My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up. And then we will have the third in the series of serious market busts since 1999...

In the meantime investors should be aware that the U.S. market is already badly overpriced – indeed, we believe it is priced to deliver negative real returns over seven years – and that most foreign markets having moved up rapidly this summer are also overpriced but less so. In our view, prudent investors should already be reducing their equity bets and their risk level in general. One of the more painful lessons in investing is that the prudent investor (or “value investor” if you prefer) almost invariably must forego plenty of fun at the top end of markets.
---GMO Quarterly letter (login rqd)

Kotok - Tutorial on QE

Very important and clear note on how QE works/is working.  Unusually for Vitus, presented in entirety (HT Ritholtz)
Tapering or Tightening?
David R. Kotok
Cumberland Advisors, November 17, 2013 
Janet Yellen did well in her Senate hearing. Markets have settled on the notion that Federal Reserve policy is not going to lurch abruptly in a new and surprising direction. The results are to (1) shrink risk premia, (2) add to the perception of some Fed policy predictability, and (3) marginalize the behavior of extreme senators like Rand Paul who would slow down the process.
Readers know we were critical of Senator Paul when he threatened to put a senatorial “hold” on Janet Yellen’s nomination. Yahoo-Finance’s Daily Ticker issued an invitation to me to debate with David Stockman on the Rand Paul response. Here is the link to an excerpt from that debate: http://ph.news.yahoo.com/video/rand-paul-absurd-hold-yellens-152616134.html.
A second part of that debate had to do with stock markets and bubbles. My argument is that we are not yet in a stock market bubble, a housing bubble, or any other sort of bubble. We may get there, but we are not there yet. We are in a period of rising prices. David Stockman countered with the opposing argument and called for immediate action because of bubble conditions. (Here is the link to that section of the debate).
My colleague and Cumberland’s Chief Monetary Economist, Robert Eisenbeis, has written about the evolution of Fed monetary policy and tapering and what it means in the short and long run. Bob and I and others in our firm discuss this issue frequently.
In the national arena, there are those who wring their hands about quantitative easing (QE), offering gloomy predictions. For five years now, we have heard that monetary policy will result in a huge inflation. Look around. The inflation rate in goods and services is somewhere between 1% and 2% and is falling. Rampant inflation as the result of money printing, predicted by so many, has not happened yet. It is not likely to happen for a while. Falling inflation is likely to be intensified if commodity and energy prices also decline.
Others have debated whether or not the Fed’s tapering constitutes a tightening. The Fed and Janet Yellen maintain that tapering is not tightening, but that view is controversial. Let’s consider this metaphor:
A car is moving at 80 miles per hour with the driver’s foot on the accelerator. The driver’s foot is then lifted from the accelerator to slow the car to 60 miles per hour. During the car’s deceleration from 80 mph to 60 mph, the engine is not providing any power. At some point the car reaches 60 mph, still slowing; the driver then puts a foot back on the accelerator to maintain speed at 60 mph. The engine is now providing the power again (think of this as monetary stimulus) to maintain that new speed. At all times, the car is moving forward. The rate of movement changed, but the direction did not.
Does the metaphor apply to monetary policy? That is much harder because the question cannot be answered in a vacuum, without other influences. Such influences might include foreign currency exchange rates or foreign central bank activities and how they interact with the US dollar and economy. What happens when the structure of the credit markets changes? Does that have an impact on the tapering versus tightening debate?
We think the answer to that question is yes. Before Lehman-AIG and at the onset of extraordinary monetary stimulus, the weighted duration of the Fed’s assets was 2. The size of the balance sheet was approximately $900 billion. Today, the Fed’s balance sheet is $4 trillion in size, and the weighted duration is 6. These durations are computed as estimates of a weighted duration and derived from an examination of the construction of the various Fed assets. We have gone from $900 billion with duration of 2, to $4 trillion with duration of 6. That is a massive change in market impact. The November, 2013, McKinsey discussion paper estimates that the Fed’s special programs “have reduced ten-year Treasury yields by about 65 to 100 basis points.”
That is in addition to taking short-term interest rates to near zero. The longer-term rates were reduced because the Fed extracted the weighted duration from the market and put it on the central bank’s balance sheet. The central bank funded that transaction by creating excess reserves in the banking system. Those excess reserves are presently costing the Fed a payment rate of 0.25% per year. The Fed takes the differential between that cost of 25 basis points and what it receives on the long duration it holds on its balance sheet and then hands the difference back to the US Treasury. Those remittances now take place on a regular and systematic basis. They approximate $100 billion per year. The Treasury takes the $100 billion and uses it to reduce the budget deficit. That is the circularity of the transaction as it exists today.
What happens if the federal deficit shrinks? The US Treasury creates fewer new federal securities relative to the number created before this process started. A shrinking deficit means not originating as many new Treasury notes, bonds, and bills as were previously created. This is happening today. As Stan Collender wrote, “Deficit numbers, especially good ones, are just not that interesting.” So we didn’t hear much about it. Fact: the deficit is now under 4% of GDP and falling.
If the Fed holds its quantitative easing policy stable at $85 billion per month and the US Treasury creates less duration than it did previously because of the shrinking deficit, the Fed’s extraction of new duration relative to GDP is going up. The Fed is presently absorbing roughly the entire new duration created by the US government in the issuance of Treasury securities. There is a similar and parallel activity going on in federal mortgage-backed securities.
What does this mean when the Fed begins to taper? We cannot be sure. If tapering means buying fewer than $85 billion per month in federally backed securities and it happens at the same time the federal government is producing fewer such securities, it is quite possible that tapering will not be tightening. Both the Fed’s purchases and the creation of new Treasury securities are two sides of a shrinking deficit. Both can be reduced in a fashion where stability and neutrality can be maintained.
In our view, it is uncertain as to whether tapering results in any type of tightening. At the moment, we do not know the process for tapering, and we do not know the rate at which tapering will occur. We expect it to commence early next year and to be consistent with the criteria outlined in Janet Yellen’s and Ben Bernanke’s testimony and speeches.
All of this means that asset prices in almost all categories – stocks, commodities that reflect monetary activity, art in auctions, real estate, and a host of other items – reflect an upward bias. The reason behind that upward bias is that the interest rate is maintained at a very low level. When interest rates are maintained at a very low level, the discounting mechanism to value assets works to raise the prices of those assets. That trend will continue worldwide in the major economies for several more years as all of them go through this process of central bank stimulus, plateauing, subsequent tapering, reaching a neutrality level, and then confronting in the out years how to permit the assets of the central bank to roll off and mature over time without shocking those economies.
The last item will take place years from now. We remain fully invested.

Republican plan for the future: Kill off the poor - Especially - disgusting old people.

The Washington Post editorial board wants to cut Medicare and Social Security...the Post has gone wild over recent suggestions that Social Security should be expanded, not cut...

In the future, income other than from Social Security will depend almost entirely on defined-contribution plans — basically 401(k)s. And 401(k)s are basically an experiment that failed, except for the already affluent

Sunday, November 17, 2013

Market correction - not in Jan, due to Republican Jihadists, but in the Spring, due to Fed exit?

The purchasing-manager survey and regional survey by the Fed look good. I could see the unemployment rate falling to 7% in February. They would have that data for the March meeting. If the market is a lot higher, they will really have to start tapering. Yellen has a real job ahead of her in exiting from this period of ultra-easy policy. I don't think it's in her DNA to walk away from ultra-easy policy. If she is forced to start tapering by events like a lower unemployment rate and a stronger stock market with elements of a bubble, she'll make it clear that the Yellen-led Fed will keep fed funds near zero for quite some time. So the problem with a melt-up is it really creates a mess for monetary policy and forces the Fed to react in such a way that it will lead to a significant correction in the spring. I would put 30% odds on that.
---Ed Yardini, Barrons

Friday, November 8, 2013

Fucktarding Our Way to Decline and Fall. Bare and Ruined, we Contemplate our Sodomitic World

[O]ur seemingly endless slump has done long-term damage through multiple channels. The long-term unemployed eventually come to be seen as unemployable; business investment lags thanks to weak sales; new businesses don’t get started; and existing businesses skimp on research and development.

...economic weakness has already reduced America’s economic potential by around 7 percent, which means that it makes us poorer to the tune of more than $1 trillion a year. And we’re not talking about just one year’s losses, we’re talking about long-term damage: $1 trillion a year for multiple years.

That estimate is the end product of some complex data-crunching, and you can quibble with the details. Hey, maybe we’re only losing $800 billion a year. But the evidence is overwhelming that by failing to respond effectively to mass unemployment — by not even making unemployment a major policy priority — we’ve done ourselves immense long-term damage.

...one main reason we’ve done so little about unemployment is the preaching of deficit scolds, who have wrapped themselves in the mantle of long-run responsibility — which they have managed to get identified in the public mind almost entirely with holding down government debt.

This never made sense even in its own terms. As some of us have tried to explain, debt, while it can pose problems, doesn’t make the nation poorer, because it’s money we owe to ourselves. Anyone who talks about how we’re borrowing from our children just hasn’t done the math.

True, debt can indirectly make us poorer if deficits drive up interest rates and thereby discourage productive investment. But that hasn’t been happening. Instead, investment is low because of the economy’s weakness. And one of the main things keeping the economy weak is the depressing effect of cutbacks in public spending — especially, by the way, cuts in public investment — all justified in the name of protecting the future from the wildly exaggerated threat of excessive debt.

Is there any chance of reversing this damage? The Fed researchers are pessimistic, and, once again, I fear that they’re probably right. America will probably spend decades paying for the mistaken priorities of the past few years.

Thursday, November 7, 2013

Saut - Excellent recap of the bull case for short/longer term.

Jeff Saut: The drivers of a new secular bull market remain, at least in my opinion, the election of smarter policy makers (and therefore smarter policies), the American Industrial Renaissance, and the Energy Independence theme driven by fracking and horizontal drilling. Those themes are profoundly bullish if you consider the implications of their impacts.

Indeed, in 2008, the Eagles Ford oil production resource was producing 352 barrels of oil a day; now it is producing 536,000+ barrels per day, which is coming close to eclipsing the Bakkan production that is slated to exceed 1,000,000 barrels per day by the end of this year! This energy independence theme is exceptionally bullish given that if we can end our dependence on Mideast oil, it could add 2 to 3 multiple points to our P/E stock market ratios.

If so, it implies a trading target for the S&P 500 (SPX/1770.49) of above 2000. That said, I do indeed have a negative timing point in the short-term for the SPX with the implication that the SPX "tops" between 1775 and 1825.

Longer term, I think the SPX goes substantially higher, but in the near-term, I think we are making
another short-term "trading top." Interestingly, yesterday's trading action tends to confirm that despite the Dow's Delight (+128). Indeed, yesterday was a fairly strange session with the Dow better by 128 points, while the Dow Transports, the Nasdaq Composite and the Russell 2000 were all down on the session. Moreover, there was a big rotation out of the biggest winning stocks of the year. To be sure, in Wednesday's session the three biggest losing sectors were Transports (-0.71%), Healthcare (-0.33%), and Consumer Discretionary (-0.24%), while Utilities (+1.32%) and Consumer Staples (+1.10%) were the biggest winners. Verily, the 50 SPX stocks that have been up the most this year were down an average of 1.02% yesterday as can be seen in the attendant chart.

The bottom line is that the new bull market high achieved yesterday was not accompanied by all of the metrics I would like to have seen. Thus, yesterday's move appears to be questionable. The Selling Pressure Index actual rose one point yesterday, while the Short-Term Trading Index fell. That is not the kind of action one wants to see when the Dow is better by triple digits. Accordingly, I am again going to respect the timing models, which are looking for a short-term trading peak beginning next week.

Friday, October 25, 2013

Reforming Nazi Socialist Muslim (or something) Medicare

CBO has redone its analysis, and finds that raising the Medicare age would barely reduce federal spending.

The basic reason is selection bias: many seniors get Medicare before 65 because of disability or specific medical conditions. The ones who have to wait until the headline age are, on average, relatively healthy and hence relatively cheap.

...it wasn’t really about saving money in the first place. Degrading the safety net and pushing people into more expensive private insurance weren’t bugs, they were features. 
---Krugman (Vitus emphasis)

Tuesday, October 15, 2013

Old Empires don't die; they just fade away.

Felix Salmon: The harm done to the global financial system by a Treasury debt default would not be caused by cash losses to bond investors...Rather, the harm done would be a function of the way in which the Treasury market is the risk-free vaseline which greases the entire financial system…. The US government, in one form or another, is a counterparty to every single financial player in the world...[W]e’re already well past the point at which that certainty has been called into question...

The global faith in US institutions has already been undermined. The mechanism by which catastrophe would arise has already been set into motion. And as a result, economic growth in both the US and the rest of the world will be lower than it should be. Unemployment will be higher. Social unrest will be more destructive…

Every day that goes past is a day where trust and faith in the US government is evaporating--and once it has evaporated, it will never return. The Republicans in the House have already managed to inflict significant, lasting damage to the US and the global economy--even if they were to pass a completely clean bill tomorrow morning, which they won’t.  (Vitus emphasis)

Monday, October 14, 2013

Lawrence Summers: Dysfunctional America. Know-nothing focus on deficit dragging US deeper into the Slough of Despond.

There is a chance future historians will see today’s crisis as the turning point when American democracy was to shown to be dysfunctional…[b]udget deficits are now a second-order problem…. Policies that indirectly address deficit issues by focusing on growth are sounder economically...If even half the energy that has been devoted over the past five years to “budget deals” were devoted instead to “growth strategies” we could enjoy sounder government finances and a restoration of the power of the American example.
---Source (HT DeLong); Vitus emphasis

Calling a Spade a Spade.

Mike (ht DeLong)
Mr. Tripcony… underwent heart surgery not long ago without health insurance, “a bad blow.”… He had heard of the online marketplace for insurance that opened on Oct. 1 under the Affordable Care Act. “I just don’t trust it,” said Mr. Tripcony, who has an equal distrust of President Obama. “I don’t like him, and I don’t feel comfortable with anything he’s got to do with.” Mr. Tripcony said he had a better idea for a system to provide health care at a fair price. “I think it should be the same for everybody,” he said. “One big company, whether owned by the government or private.” Informed that he had described the single-payer system that Mr. Obama abandoned when Republican critics called it socialized medicine, he said, “Yeah, I know, it’s crazy.”
On the policy, this guy is farther to the left than some Democrats. Yet he just doesn’t like Obama. The politics of racial and cultural resentment really do seem to be working for Republicans…. The Republican Party has become a white nationalist party.

Saturday, October 12, 2013

That Krugman... Grifter Truther

[W]hen you make as much money as the 0.1 percent does, it’s no longer about what you can buy — it’s about prestige, about receiving deference, about what Tom Wolfe (in an essay I haven’t been able to find) called “seeing ‘em jump.”...

In a way, this is an inversion of the usual argument made by defenders of inequality. They’re always saying that workers should be happy to accept a declining share of national income, because...the economic pie [is] bigger...

What’s really going on with plutocrats right now, however, is that they’re basically willing to accept lousy economic policies from right-wing politicians as long as they get a bigger share of the shrinking pie.
---Here.

Friday, October 11, 2013

"Discussions" with the Teas - Noted

Krugman - [T]he current Republican obsession with attacking programs that benefit Americans in need, ranging from food stamps to Obamacare, isn’t about some philosophical commitment to small government, still less worries about incentive effects and implicit marginal tax rates. It’s about anxiety over a changing America — the multiracial, multicultural society we’re becoming — and anger that Democrats are taking Their Money and giving it to Those People...

[A] key takeaway for us wonks is that none of the ostensible debates we’re having — say, the debate over rising disability rolls — can be taken at face value. Yes, we need to crunch the numbers, but in the end the other side doesn’t care about the evidence.

Friday, October 4, 2013

Good news - maybe.

David Kotok, Cumberland Advisors: We think the budget negotiations and debt-limit issue will all be resolved in our typical, dysfunctional American political way. The US will then continue its low-inflation, slow-growth recovery, while the military-option risk premium is likely to shrink. The bull market is not over. And the muni bond market remains cheap.

Thursday, October 3, 2013

The debt ceiling and markets

Robert Samuelson on Keynes, Marx, Communists.

Keynes, for example, was much more typical of our professional attitudes toward Marxism when he dismissed it all as "turbid" nonsense. (In view of the tendency of the radical right--for whom all Chinese look alike--to equate Keynesianism with Marxism, this ironical fact is worth nothing; and also its converse, since there is nothing communists deplore more than the notion that capitalism can be kept breathing healthily by the Keynesian palliatives of fiscal and monetary policy.)
---DeLong.  Recommended

Wednesday, October 2, 2013

The Matter with - Kansas and etc.

Kevin Drum: The reason the tea party caucus isn't willing to compromise is because there's no pressure on them to compromise. Their constituents are as crazy as they are. They want the safety net slashed, taxes cut, the EPA put out of business, and the Fed eliminated. ...

But why? There's always been a faction of right-wing craziness in America. It's part of our DNA. But how did it become so widespread? The usual answer involves the rise of conservative think tanks, conservative talk radio, Fox News, the Christian right, and racial resentment toward a black president. And maybe that's it. Somehow, though, it doesn't feel quite sufficient...

Complaining about tea party congressmen misses the big picture. The problem is the people who voted them into office. What happened to them?
---
Vitus: The problem is "[C]onservative think tanks, conservative talk radio, Fox News, the Christian right, and racial resentment toward a black president."   Not so complicated - Citizens United...  Also see Winner Take All Politics, chapter 7.

The Old World Always Suspected the New World Was Bogus (Martin Wolf does not say that, but it's what he means.)

In a democracy, people overturn laws by winning elections, not by threatening the closure of government or even an outright default. It is impossible to run the government of a serious country under blackmail threats of this kind. Every time the administration gives in, it stores up more difficulty for itself…. Playing chicken with credibly reckless people is always scary. But the administration cannot give in.  HT DeLong

Shutdown info/roundup - Jared Bernstein

Link
Who gets hurt by the shutdown? The short answer: lots of folks.  Depending on how long this drags on, we’re talking about students waiting on Pell Grants, low-income mothers and infants who benefit from the WIC nutrition program, elderly Meals on Wheels beneficiaries, and even cancer patients (including kids).  But it’s not just less-advantaged Americans who are effected.  Are you a federal contractor?  Did you want to bring your kids to the Zoo this weekend? If so, buckle up.
I’ll be updating this post throughout the day with news coverage of the effects, big and small, of the shutdown.  Feel free to add links I’ve missed or anecdotes of your own in the comments.
Government Shutdown: Capital Digs In for Long Haul
October 1, 2013
By Janet Hook, Kristina Peterson and Carol E. Lee
Wall Street Journal
Government shutdown effects hit Hill staff, food
October 1, 2013
By Lucy McCalmot
POLITICO
The shutdown’s effect on federal contractors is a huge source of uncertainty
October 1, 2013
By Brad Plumer
Washington Post Wonkblog
The nine most painful impacts of a government shutdown
October 1, 2013
By Brad Plumer
Washington Post Wonkblog
A small federal contractor on having her biggest client disappear
October 1, 2013
By Lydia DePillis
Washington Post Wonkblog
On Day 1, Parks Close, Workers Stay Home and ‘Panda Cam’ Goes Dark
October 1, 2013
By Michael Shear
New York Times
Workers Pack Up and Head Home
October 1, 2013
By Elizabeth Williamson and Melanie Trottman
Wall Street Journal
The shutdown could prevent kids with cancer from getting treatment
October 1, 2013
By Brad Plumer
Washington Post Wonkblog
Congress gets paid during a shutdown, while staffers don’t. Here’s why.
October 1, 2013
By Brad Plumer
Washington Post Wonkblog
Being a defense contractor during a shutdown: ‘I’m going to go update my resume’
October 1, 2013
By Lydia DePillis
Washington Post Wonkblog
Visiting veterans storm closed war memorials
October 1, 2013
By Michael E. Ruane and Debbi Wilgoren
Washington Post
By dawn’s early light, a city full of aimless tourists and workers
October 1, 2013
By Paul Duggan, Lori Aratani and Dana Hedgpeth
Washington Post
World Bank sees severe repercussions in shutdown
October 1, 2013
By Nathan Porter
Washington Times
800,000 out of work as US government shuts down
October 1, 2013
Associated Press
10 ways the government shutdown will impact your daily life
October 1, 2013
By Caitlin Dewey
Washington Post, The Fix blog
10 ways a government shutdown will affect your daily life
October 1, 2013
By David Simpson and Saeed Ahmed
CNN
Government shutdown hits home for Bay Area tourists, residents with plans to visit national parks
October 1, 2013
By Mark Gomez, Kristin Bender, Natalie Neysa Alund and Nak Nakaso
San Jose Mercury News
Government shutdown: 14,000 furloughed across New Jersey
October 2, 2013
By Malia Rulon Herman
New Jersey Courier-Post
Government shutdown: How it affects Southern California
October 1, 2013
By Q McCray, Eileen Frere, Leo Stallworth and Leticia Juarez
ABC 7 (California)
Federal shutdown begins to take its toll in Massachusetts
October 2, 2013
By Milton Valencia
Boston Globe
Shutdown Is Latest Bad News for Military Towns
October 2, 2013
By JEFFREY COLLINS and RUSS BYNUM
Associated Press
Government shutdown forces clinical trial patients to wait
October 2, 2013
By Val Willingham
CNN Health
Housing Recovery Threatened by Government Shutdown
October 2, 2013
By Richard Davies
ABC News
Shutdown may idle non-federal workers next week
October 2, 2013
By Paul Davidson
USA Today
Federal Shutdown Day 1: Preschoolers and Influenza Programs Hit
October 2, 2013
By David Stout
TIME, Swampland blog
[Updated 10:28AM]
Federal shutdown, local pain
October 2, 2013
By Keila Torres Occasio
CT Post
Sheriff Minor: Summit County in precarious position with government shutdown
October 1, 2013
By Joe Moylan
Summit Daily (Colorado)
Partial shutdown may hinder California’s rim fire cleanup
October 1, 2013
By Becky Oskin
Fox News