The Taylor Rule Won’t Save Us

Various criticisms have been raised against the Fed, not only from the side favoring the abolition of central banking, but also from the side of those who argue that the Federal Reserve is indispensable for stability. One of those arguments came from respected economist John Taylor, who is the author of the often mentioned ‘Taylor Rule’ on how to conduct monetary policy, with two House Republicans recently proposing to impose this ‘rule’ on the Fed .
Like Taylor, politicians who advocate for such a rule blame huge credit expansion for the Great Recession. Unfortunately such policymakers are usually not convinced by the Austrian arguments in favor of abolition of the Federal Reserve. Instead they are convinced by John Taylor’s statistical demonstrations. According to Taylor, the Fed set the interest rates too low in the beginning of this century, which led to an unsustainable real estate boom. He adds nonetheless: if only the central bank followed his rule of proper interest rate levels, then monetary policy would work very well.
For Taylor, the Federal Funds rate in recent years should have looked something like this:

This post was published at Ludwig von Mises Institute on Wednesday, September 17, 2014.

Poor Americans carry a record level of debt leverage: Subprime economics and leveraging the poor into a treadmill of continual poverty.

Poor Americans carry deeper debt levels than they did during the depths of the Great Recession. To boost auto sales, many dealers have decided to offer subprime loans to prospective clients that have very little financial means. Many for-profit colleges have a business model that virtually solicits and lures in poor Americans into their debt saddling paper mills. So it is probably no surprise that poor Americans are now carrying the heaviest debt loads in history. The argument is interesting from some of these financial institutions and similar to what was being delivered during the subprime housing days. These ‘generous’ lenders are making loans where no one else is. Of course the caveat is they are gambling with other people’s money. In the case of student debt, the American people will foot the bill for any implosion that happens and in the mean time salaries for executives at these institutions are extremely high. The model of financing based on too big to fail is all too familiar. The financial system has mastered the art of being a viper and extracting all wealth possible before things go bust. Poor Americans are in worse shape today than during the Great Recession.
The poor are massively in debt
Our system has replaced access to debt with wealth. The days of prudently saving and paying for college or actually buying a car outright seem like a distant memory. When many universities charge $40,000 or $50,000 per year in tuition how is the typical US household making $50,000 per year going to pay for their kids to go to school? They can’t. And that is why we have a massive student loan bubble with $1.2 trillion in outstanding debt and the CBO is projecting another $1 trillion over the next decade.
While American households overall have deleveraged since the Great Recession hit, poorer households have not:

This post was published at MyBudget360 on September 16, 2014.

Is Risk-On About to Switch to Risk-Off?

Cranking markets full of financial cocaine so they never correct simply sets up the crash-and-burn destruction of the addict.
1. Junk bonds. Two charts below (one from Lance Roberts and the second from Chris Kimble) suggest the risk-on extremes have reached the point of reversal.
2. Soaring U. S. dollar. Without going into detail, it’s increasingly clear that the soaring USD is destabilizing the global foreign exchange (FX) markets. FX has been the source of many of the risk-on carry trades that have been driplines of financial cocaine for global stock markets.
3. Reversal of the Federal Reserve’s quantitative easing (QE) programs. Though the stock market has roundly ignored the withdrawal of $600 billion of free money for financiers stock market stimulus all year, the October end of the QE asset buying program now looms large.
The Fed has already trimmed its asset-buying binge from $85 billion/month ($1 trillion/year) to $25 billion/month. Risk-on proponents claim that this reduction has been replaced by Bank of Japan and European Central Bank QE programs, but this belief fails to take into account the diminishing returns on BOJ and ECB stimulus.
THose spigots have been open for so long that adding more monetary stimulus no longer moves the needle positively. Rather, the extreme measures push the global fianncial system into increasingly risky territory.
4. Geopolitical spillover. One key element of the risk-on trade is the magical-thinking belief that the U. S. stock market is completely decoupled from geopolitical dynamics. In other words, Japan and Europe can sink into recession, China’s growth can slow, the Mideast can be destabilized by multiple open conflicts and none of these issues will ever matter, as long as “the Fed has our backs,” “corporate profits keep rising,” etc.

This post was published at Charles Hugh Smith on SUNDAY, SEPTEMBER 14, 2014.

KOHL’S & THE REST OF THE RETAILERS ARE IN DEEP DOO DOO

‘Facts are stubborn things, but statistics are pliable.’
‘ Mark Twain

I never believe government manufactured numbers. They will always be adjusted, massaged, and manipulated to achieve a happy ending for the propagandists attempting to control and fleece the sheep. Yesterday, the government produced retail sales numbers for August that were weak and the corporate MSM propaganda machine immediately threw up bold headlines declaring how strong these numbers were. Positive stories were published on the interwebs and Wall Street hack economists were rolled out on CNBC, where the bubble headed bimbos and prostitutes for the status quo like Jim Cramer and Steve Liesman declared the recovery gaining strength. Woo Hoo.
If everyone else is whipping out that credit card, why aren’t you? Credit card debt has reached a new post recession high. They tell me consumer confidence is soaring. Forget about the 92 million working age Americans supposedly not in the labor force. Forget about real household income hovering at 1999 levels. Forget about median household net worth still 30% lower than 2007. Forget about what you see with your own two eyes in malls, strip centers and office parks as you motor around our suburban sprawl empire of debt. Those Store Closing, Space Available, and For Lease signs mean nothing.

This post was published at The Burning Platform on 13th September 2014.

Taking an exit from the labor force: Over the last ten years 16 million Americans have dropped out of the labor force.

The US economy has not recovered in typical fashion. Following the Great Recession, we witnessed a large growth in those not in the labor force. Part of this has to do with anolder population but that does not address the issue completely. The US has added 16 million people to the ‘not in the labor force’ category over the last decade and this trend has also assisted in padding the unemployment numbers. How so? If you are not in the labor force, you are not counted therefore the rate miraculously drops. It would be one thing if all older Americans were entering retirement age with adequate savings. This is simply not the case. Many Americans are simply broke and their version of retirement includes working until you drop. You would think that things got better since the recession officially ended back in 2009. The opposite is true since 12 million people have dropped out of the labor force within the last five years alone. In other words, the bulk of the people dropping out of the labor force occurred during a labeled recovery.
Taking an exit from the labor force
All things in economics intersect. For example, many people losing their jobs have decided to go back to school to pursue other avenues and careers. With the high cost of college, the student debt bubble continues to expand. These people selectively remove themselves from the workforce. However, a large portion of the growth has come in the form of people losing work and simply not being able to find it again. Many find work with wages that pale in comparison to what they once earned.

This post was published at MyBudget360 on September 13, 2014.

RETAILERS IN DEEP TROUBLE

‘Facts are stubborn things, but statistics are pliable.’ ‘ Mark Twain
I never believe government manufactured numbers. They will always be adjusted, massaged, and manipulated to achieve a happy ending for the propagandists attempting to control and fleece the sheep. Yesterday, the government produced retail sales numbers for August that were weak and the corporate MSM propaganda machine immediately threw up bold headlines declaring how strong these numbers were. Positive stories were published on the interwebs and Wall Street hack economists were rolled out on CNBC, where the bubble headed bimbos and prostitutes for the status quo like Jim Cramer and Steve Liesman declared the recovery gaining strength. Woo Hoo.
If everyone else is whipping out that credit card, why aren’t you? Credit card debt has reached a new post recession high. They tell me consumer confidence is soaring. Forget about the 92 million working age Americans supposedly not in the labor force. Forget about real household income hovering at 1999 levels. Forget about median household net worth still 30% lower than 2007. Forget about what you see with your own two eyes in malls, strip centers and office parks as you motor around our suburban sprawl empire of debt. Those Store Closing, Space Available, and For Lease signs mean nothing.

This post was published at Washingtons Blog on September 14, 2014.

Harsh Austerity Sends Italian, Spanish Debt To Record Highs

Damn you debt-reducing austerity-that-is-blamed-for-everything-that-is-wrong-with-Europe’s-triple-dip-recessionary-economy-when-it-is-the-corrupt-socialist-incompetent-politicians’-fault. Damn you to hell! Oh wait a minute:
Italy’s government debt rose to a record 2.169 trillion in July from 2.168 trillion in June, the Bank of Italy says in its public-finances supplement. Spain total govt debt amounted to a record 1.01 trillion in 2Q, up from 995.9b in 1Q, Bank of Spain says; 2Q Total Govt Debt Rises to 98.9% of GDP From 97.4% in 1Q With austerity like this, who needs to spend like a drunken sailor?

This post was published at Zero Hedge on 09/12/2014.

American credit-card debt hits a post-recession high

U.S. consumers may be relying too heavily on their plastic.
Americans added $28.2 billion to their credit cards in the second quarter of 2014, the largest amount in the last six years and nearly 200% more than in the second quarter of 2009, when the economy emerged from the depths of the Great Recession, according to new research from personal finance website CardHub.com. After paying off $32.5 billion owed during the first quarter of 2014, consumers ran up roughly 86% more debt during the following quarter.
The average household’s credit-card balance now stands at $6,802, up slightly from $6,628 in the first quarter, but still down from $8,431 at the end of 2008. By the end of the year, this figure is expected to exceed $7,000, reaching levels not seen since the end of 2010. U.S. consumers will be roughly $1,300 away from the credit card debt “tipping point,” where minimum payments become unsustainable and delinquencies skyrocket, the report says.

This post was published at Market Watch

Inside Today’s Inventory Report – -Signs Of Fading GDP Growth

The wholesale trade figures still confound both the ‘rebound’ narrative and the drastic revisions of GDP made in July. The broader context of wholesale trade remains as it has been since early 2013, as although growth appears to be increasing it is doing so at a deficient rate. That counts for both inventory and sales, though there is, I believe, more going on than just what these figures suggest.

The similarities between the current period and that which preceded the Great Recession are a reminder of how much inventory is unsettled around economic inflection. The fact that inventories gain is not necessarily a signal of optimism in the supply chain, as inventory calibrates badly to changes in demand at these points. It may be hard to determine of the chart immediately above, but it was wholesale sales that led inventory higher heading into the Great Recession. Currently, sales and inventory are much more aligned.

This post was published at David Stockmans Contra Corner on September 10, 2014.

Alan Greenspan’s Nine Reasons “Why The Economy Stinks”

Yesterday, former Fed Chairman Alan Greenspan was the keynote speaker at KPMG’s 2014 Insurance Industry Conference Tuesday, where he answered questions such as 1) where the economy is going, 2) why, and 3) when (if ever) is it likely to improve. The answers, as reported by Property Casualty 360, are:1) nowhere fast, 2) because nobody is willing to invest, and 3) eventually, but nobody can tell when. He listed 9 specific reasons why the “economy stinks”, although surprisingly, nowhere did he mention the fact that the current and future economic disaster is all a direct result of his ruinous reign at helm of the Fed where as a result of his “great moderation” and the Fed’s catastrophic monetary policies conceived mostly under Greenspan himself, the economy is now perpetually stuck in a boom-bust cycle, and where every time a bubble bursts another has to replace it or else the entire western way of life will be gone in a heartbeat.
So without further ado, here are, in reverse order, Greenspan’s 9 reasons why the S&P 500 is at an all time high the economy is a complete disaster (thanks to the Fed).
9. Lack of confidence.
The U. S. economy is in a state of extraordinary change, Greenspan said, the likes of which he has never seen before. The most interesting thing about the current recession and recovery, he said, is that in the 10 recoveries we saw since WWII, every one except the current one was led by construction, essentially. This recovery is so sluggish because construction is, as Greenspan so delicately put it, ‘dead in the water.’ The reason why construction is so dead is due, in part, to excess capacity built up before the economy crashed in 2008. But more importantly, businesses and households across the board are so skeptical of the future, they’re not willing to invest in it. Nobody is putting money into longer-lived assets, and until they do, the economy won’t really return to form.
Case in point: in the early 1990s, the amount of liquid cash assets companies were willing to invest in illiquid, long-term assets was way higher than it is now. You also see this in the yield spread in 5-year U. S. Treasury notes versus 30-year U. S. Treasury bonds, which is the widest in U. S. history. Why? Because people are far more willing to invest on a 5-year return than a 30-year one. That speaks to the depth of the worry people have in the future. And that kills growth.

This post was published at Zero Hedge on 09/10/2014.

US has Lost 1.4 Million Full Time Jobs Since 2008, Thanks To The Fed

Let’s cut to the chase: There were 1,446,000 fewer people working full time in August 2014 than in August 2008, according to the Bureau of Labor Statistics household survey (CPS).

That’s after an increase of 210,000 full-time jobs in August. That’s the actual count, not the seasonally adjusted abstraction. So we have to compare that with past Augusts to get an idea if its any good or not. August is a swing month, sometimes up, sometimes down. The average change over the prior 10 years, which included a couple of ugly years in the recession, was -63,000. So this number wasn’t bad. It was slightly better than August of last year and 2012, but come on….

This post was published at Wolf Street on September 8, 2014.

Deutsche’s David Bianco “Forecasts” The S&P (In One Simple Chart)

While not exactly a “bear”, Deutsche Bank’s David Bianco – until this weekend – had the lowest S&P 500 target for 2014 year-end at 1,850. That’s all changed now…
Laszlo Birinyi would be proud…

Via Deutsche Bank,
We raise 2015 yearend S&P 500 fair value target 7.5% to 2150 from 2000
We still expect a long lasting economic expansion of moderate growth, which should rival the US record of 10 years with S&P EPS growth averaging 6% until the next recession, on 5% sales growth, flat margins, 1% share shrink. Despite entering the latter years of a typical expansion and high margins vs. history, we now think the trailing S&P PE should average 17 vs. 16 until elevated recession risk returns. This is because we now expect long-term real interest rates to stay below normal through 2016 and thus lower our S&P 500 real cost of equity estimate from 6.0% to 5.5%. We raise 2014 and 2015 yearend S&P targets to 2050 and 2150 from 1850 and 2000 and introduce 2300 for 2016 yearend.

This post was published at Zero Hedge on 09/08/2014.

If The Economy Is Recovering, Why Is The Labor Force Participation Rate At A 36 Year Low?

Should we be concerned that the percentage of Americans that are either working or looking for work is the lowest that it has been in 36 years? In August, an all-time record high 92,269,000 Americans 16 years of age and older did not “participate in the labor force”. And when you throw in the people that are considered to be “in the labor force” but are not currently employed, that pushes the total of working age Americans that do not have jobs to well over 100 million. Yes, it may be hard to believe, but there are more than 100 million working age Americans that are not employed right now. Needless to say, this is not a sign of a healthy economy, and it is a huge reason why dependence on the government has soared to absolutely unprecedented levels. When people can’t take care of themselves, they need someone else to take care of them. If the percentage of people in the labor force continues to decline like it has been, what is that going to mean for the future of our society?
The chart below shows the changes in the civilian labor force participation rate since 1980. As you can see, the rate steadily rose between 1980 and 2000, but since then it has generally been declining. In particular, this decline has greatly accelerated since the beginning of the last recession…

This post was published at The Economic Collapse Blog on September 7th, 2014.

RED ALERT: The Velocity Of The Monetary Base Collapsed 75%, Europe Is Slipping Back Into A Recession

During the first and second quarters of 2014, the velocity of the monetary base was at 4.4, its slowest pace on record. This means that every dollar in the monetary base was spent only 4.4 times in the economy during the past year, down from 17.2 just prior to the recession. This implies that the unprecedented monetary base increase driven by the Fed’s large money injections through its large-scale asset purchase programs has failed to cause at least a one-for-one proportional increase in nominal GDP. Thus, it is precisely the sharp decline in velocity that has offset the sharp increase in money supply, leading to the almost no change in nominal GDP.
The hoarding of money, then, is attributed to two factors:
A (gloomy) economy after the financial crisis.
The dramatic decrease in interest rates that has forced investors to readjust their portfolios toward liquid money and away from interest-bearing assets such as government bonds
Why you should worry about Europe
It’s not ‘Credit Crisis 2′ but Europe is in rough economic waters again.
Even anemic growth has evaporated and the eurozone risks slipping back into recession. The euro has fallen 5% against the dollarover the past three months.
Here’s The Global Economic Chart Of The Summer

This post was published at Investment WatchBlog on September 7th, 2014.

A Lie that serves the rich – Roberts, Titus, Kranzler

The labor force participation rate has declined from 66.5% in 2007 prior to the last downturn to 62.7% today. This decline in the participation rate is difficult to reconcile with the alleged economic recovery that began in June 2009 and supposedly continues today. Normally a recovery from recession results in a rise in the labor force participation rate.
The Obama regime, economists, and the financial presstitutes have explained this decline in the participation rate as the result of retirements by the baby boomers, those 55 and older. In this five to six minute video, John Titus shows that in actual fact the government’s own employment data show that baby boomers have been entering the work force at record rates and are responsible for raising the labor force participation rate above where it would otherwise be. It is not retirees who are pushing down the participation rate, but those in the 16-19 age group whose participation rate has fallen by 10.4%, those in the 22-14 age group whose participation rate has fallen by 5.4%, and those in the 24-54 age group whose participation rate is down 2.5%.

This post was published at Paul Craig Roberts on September 4, 2014.

Labor Participation Rate Drops To Lowest Since 1978; People Not In Labor Force Rise To Record 92.3 Million

It is almost as if the Fed warned us this would happen. In a note released yesterday, a Fed working paper titled “Labor Force Participation: Recent Developments and Future Prospects“, looked at the US labor force and concluded that “while we see some of the current low level of the participation rate as indicative of labor market slack, we do not expect the participation rate to show a substantial increase from current levels as labor market conditions continue to improve.” But don’t blame it on the greatest recession/depression since 1929: “our overall assessment is that much – but not all – of the decline in the labor force participation rate since 2007 is structural in nature.”
Well that’s very odd, because it was only two months ago that the Census wrote the following: “Many older workers managed to stay employed during the recession; in fact, the population in age groups 65 and over were the only ones not to see a decline in the employment share from 2005 to 2010 (Figure 3-25)… Remaining employed and delaying retirement was one way of lessening the impact of the stock market decline and subsequent loss in retirement savings.”

This post was published at Zero Hedge on 09/05/2014.

Canadian Banks Got $114 Billion from Governments During Recession

Canada's biggest banks accepted tens of billions in government funds during the recession, according to a report released today by the Canadian Centre for Policy Alternatives.
Canada's banking system is often lauded for being one of the world's safest. But an analysis by CCPA senior economist David Macdonald concluded that Canada's major lenders were in a far worse position during the downturn than previously believed.
Macdonald examined data provided by the Canada Mortgage and Housing Corporation, the Office of the Superintendent of Financial Institutions and the big banks themselves for his report published Monday.

This post was published at CBC News

3 Things Worth Thinking About (Vol. 7)

[‘3 Things Worth Thinking About’ is a weekly publication of ideas, usually contrarian to the consensus, to provoke thoughtful discussions and decision-making processes. As a portfolio manager and strategist, I am sharing things that I am considering with respect to current investment models and portfolio allocations. Please feel free to email or tweet me with your comments and ideas.] Surge In Sentiment Surveys
There is an interesting divergence going on between sentiment based surveys, specifically the ISM Manufacturing and Non-Manufacturing surveys, and actual underlying economic data. This week saw both surveys rise sharply to cyclically high levels despite weakness in actual new orders and consumer consumption.
It is also somewhat intriguing that two groups measuring the same data are getting vastly different results. While the Institute of Supply Management survey saw sharp increases in optimism, Markit’s surveys of the same manufacturing and services related data saw declines. This is one of those cases where only one can be right.
The chart below shows the composite index of the ISM surveys (simple average of manufacturing and services data).

There is a running pattern in the surveys which the initial decline mid-economic cycle reverses back up to cycle peaks. The next decline in sentiment is during the latter stage of the economic cycle prior to the onset of the ultimate recession. The recent surge in survey activity, ex-underlying strength in the actual data, suggests that sentiment is anticipating a recovery that may or may not occur.

This post was published at StreetTalkLive on 04 September 2014.

What Mario Draghi Really Did

New ECB actions were specifically intended to reap benefits through Euro currency devaluation. To achieve this aim, Draghi announced cuts in interest rates as well as administering Euro ‘printing’ through balance sheet expansion (1,000bln or so). The ECB has had recent success as the EUR/USD dropped over 1.5% today and has fallen 5% since July.
A weaker currency is desirable during periods of recessions and subdued inflation. Doing so, however, is not always seamless or the most ideal policy. Many global central banks, for instance, needed to follow the Fed’s lead in cutting rates after the 2008 crisis or risked having an undesirable appreciation of their home currency. Tensions can periodically arise, because two countries cannot become ‘more competitive’ at the same time (‘a race to the bottom’). Clearly, a weaker currency in one country means a stronger currency in another.
There are times, however, when currency movements are mutually beneficial. Against the USD, Draghi is maximizing his efforts to weaken the Euro by trying to utilize ideal timing; expanding the ECB balance sheet at precisely the same time that the Fed’s is flat lining. The widening of interest rate differentials also helps. The FOMC likely welcomes today’s actions. Ideally, Draghi would have also wanted a Quid Quo Pro with Italy and France regarding economic reform; this sounds good in theory, but it is not how politics work.
Despite Draghi’s vacant pleas for fiscal ‘arrows’, he had to ‘do his part’, particularly after backing himself into a corner after his Jackson Hole speech. Nonetheless, ECB actions surpassed expectations today. However, this probably means that the bazooka of sovereign QE is off the table for a while.

This post was published at Zero Hedge on 09/04/2014.