WHAT DOES THE YIELD CURVE TELL US ABOUT FUTURE ECONOMIC CONDITIONS?
by ilene - December 21st, 2010 3:15 pm
Pragcap asks: "WHAT DOES THE YIELD CURVE TELL US ABOUT FUTURE ECONOMIC CONDITIONS?"
There are few indicators more prescient than the yield
The current curve, however, is quite steep and tends to be consistent with a Federal Reserve that is attempting to stimulate the economy (something they also have a tendency of overshooting). Based on past readings the Cleveland Fed says the current environment is consistent with 1% growth in real GDP:
“Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.0 percent rate over the next year, the same projection as in October and September. Although the time horizons do not match exactly, this comes in on the more pessimistic side of other forecasts, although, like them, it does show moderate growth for the year.”
But meager growth is better than no growth. At current levels the probability of recession is virtually 0%. Unfortunately, low growth means this is going to continue feeling like a recession for a large portion of the country. And in a balance sheet recession the usual Fed toolbox of altering interest rates is unlikely to have the usual stimulative impact.
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DiggJust Another Manic Monday – Stagflation Official in China
by Phil - December 13th, 2010 8:14 am
Wheeee, everything must be great!
We are crushing our levels as the market flies ever higher. Our 11,500 target on the Dow looks sure to be tested and we’re already flipping bullish with our "Breakout Defense" trades, in which our goal is to make 5,000% in 5 trades or less. We are not ashamed to jump on the bullish bandwagon – if they are giving away money, we’ll stand in line with everyone else, only we’ll take a larger share – thank you very much. We certainly know how to use leverage just like a Bankster – we have a spread and we’re not afraid to use it!
Speaking of Banksters, the must-read article of the weekend is the NY Times piece that goes into surprising details of secret bank meetings that are regularly held in NY where the Gang of 12 (just 9 of them) do their best to manipulate the derivatives market, influence regulations and regulators and, of course, crush their competition. The article even goes so far as to name my old friends at ICE as possibly maybe having something to do with these shenanigans and I am SHOCKED at these allegations as the good people at ICE were so good about telling me how I had things all wrong when I made similar statements last year (which I now legally know cannot be proven and therefore must not be true).
And thank goodness that the commodity and derivatives clearinghouse that was founded by Big Banks and is controlled by Big Banks cannot be proven to be operating in favor of Big Banks because we wouldn’t want to think that the Big Banks had some preferential treatment (beyond the access to the discount window and the TARP money and the POMO money, etc.) – that would just be unAmerican. By unAmerican, I mean the old America that they write about in the Declaration of Independence and the original Constitution, of course – not the Corporate Kleptocracy this country has developed into. Under the new guidelines, leveraging your influence and having the government rob the people to increase your profits on which you don’t pay taxes is the very definition of patriotism, isn’t it?
Ah well… As I said last Monday, this is really Somebody Else’s Problem because we are in "get it while the gettin’s good…
“The Secret Of Oz” – The Truth Behind The Modern Financial System, And The Money-Political Complex
by ilene - November 15th, 2010 12:40 pm
In case you missed the movie recommendation from Zero Hedge, it’s worth watching. I’ve got it playing in the background. – Ilene
"The Secret Of Oz" – The Truth Behind The Modern Financial System, And The Money-Political Complex
Courtesy of Tyler Durden
While America is entertained by a rather realistic cartoon of what happens when the Fed (semantics aside) prints money with which to buy up whatever assets it so chooses, and launders the cash for the Primary Dealers (a topic discussed ad nauseam on Zero Hedge), we present a rather more somber and serious look at the modern financial system, courtesy of Bill Still, creator of the movie: "The Secret of Oz" which explains in a far more nuanced manner the interconnectedness in the vicious square of power, politics, money creation and debt formation, and Wall Street, the Fed, and the Political forces in DC are intertwined to a degree that essentially makes the whole concept of democracy moot (a topic touched upon earlier by Bill Buckler). As Still says: "The world economy is doomed to spiral downwards until we do 2 things: outlaw government borrowing; 2. outlaw fractional reserve lending. Banks should only be allowed to lend out money they actually have and nations do not have to run up a "National Debt". Remember: It’s not what backs the money, it’s who controls its quantity." As more and more Americans are finally expressing an interest in what is really happening behind the scenes, but seem to not have the patience for simple algebra, we hope the following movie answers most of the pent up questions.
Still’s movie is well worth the two hours it takes to watch.
h/t Fiat Currency
BEN BERNANKE EXPLAINS THAT QE IS NOT INFLATIONARY, JUST AN ASSET SWAP
by ilene - November 7th, 2010 2:34 pm
Pragcap’s view of QE3 differs from a number of other financial writers we post here in the Favorites. If you’re puzzled after reading this article, I suggest reading Pragcap’s comment section, particularly comments by Kid Dynamite. – Ilene
BEN BERNANKE EXPLAINS THAT QE IS NOT INFLATIONARY, JUST AN ASSET SWAP
Courtesy of The Pragmatic Capitalist
Ben Bernanke was at Jacksonville University this past Friday discussing the Federal Reserve with college students. It’s actually a very good discussion. He goes through the banking crisis step by step and provides a very clear explanation of the Fed’s role during the crisis. He confirms most of what I have been repeating for weeks now.
Most importantly, however, he explains what the Fed is doing going forward. He makes several critical points:
- He explains that the Fed “is not printing money”. They are merely swapping treasuries for deposits (sound familiar?). As he mentioned in his op-ed the other day there is no reason to believe this operation is inflationary. It alters the duration of debt outstanding and nothing more. QE IS NOT INFLATIONARY.
- He says the price increases in commodities (caused entirely by speculators and not fundamental changes) are not a concern because the slack in the economy will make it difficult to pass these costs along to consumers (sound familiar?). Unfortunately, I think the Chairman is overlooking the fact that corporations will be less likely to hire as they see their margins squeezed. This is a significant issue the Chairman appears to be glaring over. It should not surprise any of us that he is viewing this environment as an academic and not as a business owner. Just one more piece of evidence showing he is unqualified for this position.
- The Chairman proves that he absolutely does not understand how the US monetary system functions when he says that the US is analogous to Japan in that we have high government debts. He claims that Japan funds their debt internally. He clearly has no idea that the bond markets fund nothing in the USA. He goes on to explain that the US budget deficit creates risks for the country despite previously explaining that high inflation is not a problem. Clearly, the Chairman believes the government balance sheet is no different than a household balance sheet. No wonder
…
Living Beyond Our Means: 3 Charts That Prove That We Are In The Biggest Debt Bubble In The History Of The World
by ilene - November 3rd, 2010 3:05 pm
Living Beyond Our Means: 3 Charts That Prove That We Are In The Biggest Debt Bubble In The History Of The World
Courtesy of Michael Snyder at Economic Collapse
Do you want to see something truly frightening? Just check out the 3 charts posted further down in this article. These charts prove that we are now in the biggest debt bubble in the history of the world. As Americans have enjoyed an incredibly wonderful standard of living over the past three decades, most of them have believed that it was because we are the wealthiest, most prosperous nation on the planet with economic and financial systems that are second to none.
But that is not even close to accurate. The reason why we have had an almost unbelievably high standard of living over the past three decades is because we have piled up the biggest mountains of debt in the history of the world. Once upon a time the United States was the wealthiest country on the planet, but all of that prosperity was not good enough for us. So we started borrowing and borrowing and borrowing and we have now been living beyond our means for so long that we consider it to be completely normal.
We have been robbing future generations blind for so long that it doesn’t even seem to bother most people anymore. We have become accustomed to living in debt. We go into massive amounts of debt to get an education, we go into massive amounts of debt to buy a home, we go into massive amounts of debt to buy our cars, and we even pile up debt to buy holiday gifts and to purchase groceries.
Just check out the chart posted below. It shows the total credit market debt owed in the United States. In other words, it is a measure of what everyone owes (government, businesses and consumers).
30 years ago, total credit market debt owed was less than 5 trillion dollars. Today, it is over 50 trillion dollars. Total credit market debt is now at a level equivalent to about 360 percent of GDP. This is what has been fueling the great era of "economic prosperity" that we have been experiencing….
So what is the answer to this problem?
The truth is that there is not an easy answer under our current system. The only way that the U.S. economy continues to "grow" is if the debt bubble continues to "expand". …
CHINA’S CREATIVE ACCOUNTING: USING DEBT AS A TOOL FOR ECONOMIC DEVELOPMENT
by ilene - November 1st, 2010 7:48 pm
CHINA’S CREATIVE ACCOUNTING: USING DEBT AS A TOOL FOR ECONOMIC DEVELOPMENT
Courtesy of Ellen Brown, at Web of Debt
China may be as heavily in debt as we are. It just has a different way of keeping its books — which makes a high-profile political ad sponsored by Citizens Against Government Waste, a fiscally conservative think tank, particularly ironic. Set in a lecture hall in China in 2030, the controversial ad shows a Chinese professor lecturing on the fall of empires: Greece, Rome, Great Britain, the United States . . . .
"They all make the same mistakes," he says. "Turning their backs on the principles that made them great. America tried to spend and tax itself out of a great recession. Enormous so-called stimulus spending, massive changes to health care, government takeover of private industries, and crushing debt."
Of course, he says, because the Chinese owned the debt, they are now masters of the Americans. The students laugh. The ad concludes, "You can change the future. You have to."
James Fallows, writing in the Atlantic, remarks:
“The ad has the Chinese official saying that America collapsed because, in the midst of a recession, it relied on (a) government stimulus spending, (b) big changes in its health care systems, and (c) public intervention in major industries — all of which of course, have been crucial parts of China’s (successful) anti-recession policy.”
That is one anomaly. Another is that China has managed to keep its debt remarkably low despite decades of massive government spending. According to the IMF, China’s cumulative gross debt is only about 22% of 2010 GDP, compared to a U.S. gross debt that is 94% of 2010 GDP.
What is China’s secret? According to financial commentator Jim Jubak, it may just be “creative accounting” — the sort of accounting for which Wall Street is notorious, in which debts are swept off the books and turned into “assets.” China is able to pull this off because it does not owe its debts to foreign creditors. The banks doing the funding are state-owned, and the state can write off its own debts.
Jubak observes:
“China has a history of taking debt off its books and burying it, which should prompt us to poke and prod its numbers. If we go back to the last time China cooked the national books big time, during the Asian currency
…
Obama No Longer Bothering to Lie Credibly: Claims Financial Crisis Cost Less Than S&L Crisis
by ilene - October 29th, 2010 3:29 pm
Obama No Longer Bothering to Lie Credibly: Claims Financial Crisis Cost Less Than S&L Crisis
Courtesy of Yves Smith at Naked Capitalism
I’m so offended by the latest Obama canard, that the financial crisis of 2007-2008 cost less than 1% of GDP, that I barely know where to begin. Not only does this Administration lie on a routine basis, it doesn’t even bother to tell credible lies. .And this one came directly from the top, not via minions. It’s not that this misrepresentation is earth-shaking, but that it epitomizes why the Obama Administration is well on its way to being an abject failure.
On the Jon Stewart Show (starting roughly at the 1:10 mark on this segment) Obama claims the cost of this crisis will be less than 1% of GDP, versus 2.5% for the savings and loan crisis (hat tip George Washington, sorry, no embed code, you need to go here):
The reason Obama makes such baldfacedly phony statements is twofold: first, his pattern of seeing PR as the preferred solution to all problems, and second, his resulting slavish devotion to smoke and mirrors over sound policy.
The savings & loan crisis led to FDIC takeovers of dud banks and the creation of a resolution authority to dispose of bad assets. That produced costs which were largely funded by the Federal government. I’ve heard economists repeatedly peg the costs at $110 to $120 billion; Wikipedia puts it at about $150 billion. This approach, of cleaning up and resolving banks, has been found repeatedly to be the fastest and least costly way to contend with a financial crisis.
The reason Obama can claim such phony figures is that many of the costs of saving the financial system are hidden, the biggest being the ongoing transfer from savers to banks of negative real interest rates, which is a covert way…
How You’re Going to Get Cornholed Thanks To Obama
by ilene - October 29th, 2010 3:22 pm
How You’re Going to Get Cornholed Thanks To Obama
Courtesy of Karl Denninger of The Market Ticker
The economy, that is.
This is a must-read from Chris Whalen. He’s spot-on, and I will reprint only the conclusions – read through for the why, what and how.
- The U.S. banking industry entering a new period of crisis where operating costs are rising dramatically due to foreclosures and loan repurchase expenses. We are less than ¼ of the way through foreclosures. The issue is recognizing existing losses ??not if a loss occurred.
- Failure by the Bush/Obama to restructure the largest banks during 2008?2009 period only means that this process is going to occur over next three to five years – whether we like it or not. Lower growth, employment are the cost of this lack of courage and vision.
- The largest U.S. banks remain insolvent and must continue to shrink until they are either restructured or the subsidies flowing from the Fed, Fannie Mae/Freddie Mac cover hidden losses. The latter course condemns Americans to years of economic malaise and further job losses.
Yep.
The bottom line folks is that the fraud – massive and outrageous concealment of losses, intentionally making bad loans in the mid-2000s (now admitted to under oath by Citibank’s chief underwriter, among others) and the selling of that paper everywhere and anywhere that the banks could manage, along with holding much of it themselves, condemns us.
The opportunity to take these banks into receivership in 2007 existed. It existed in 2008 too. I counseled on doing exactly this during those years.
Instead, both Bush and Obama decided to protect those who had committed these offenses. First by attempting to bail them out, and then when it became obvious that $700 billion of taxpayer money was literally trying to **** on a forest fire to put it out they decided instead to paper it over by extorting FASB so the losses could be swept under the carpet instead of recognized.
The problem is that unlike long-run spending problems like Social Security and Medicare, which will detonate in ten year or more, this is a current account cash-flow problem and the deterioration continues month-by-month as the payments are not made. It’s like a barrel of dead fish. The next morning it starts to stink. Every day it stinks worse. Putting a…
Thank GDP It’s Friday – Finally Some Facts
by Phil - October 29th, 2010 8:29 am
Is bad news going to be good news?
Last quarter, after several adjustments, it has been decided that our GDP grew at a 1.7% rate. The general consensus is that this quarter we should be up around 2% but the whisper number is a big miss, down to 1.3%. Slower GDP growth will be GOOD for the stock market as it gives Ben and Tim the excuse they need to crank up the printing presses for some real Zimbabwe-style inflation.
It’s easy to pay off $15Tn in fixed rate 2-year to 30-year notes when your country is cranking out $1Tn bank notes, right? Can this really be the path our nation is following? The markets are certainly betting on it but we have been betting against it with longs on UUP at $22.50 (still there) and a short play on the QID weekly $13 calls at .46 yesterday along with other bearish trade ideas we’ve entered ahead of the GDP as well as the elections and next week’s Fed meeting.
Why can’t we just give up and go with the flow? Well, first of all, you can read my last few weeks of posts or you can read our last few Newsletters so I won’t rehash the great global macros here but I will make the point that (and this may shock you) we are not alone in the World and the things we do, or try to do in our economy, affect the economies of other nations. Perhaps when the US was 40% of Global GDP, we could have gotten away with it but now we are 20% and falling fast yet we still attempt to run our foreign and economic policies as if we are large and in charge.
This is not the way the rest of the World sees us anymore. To the rest of the World we are unrealistic children with dangerous spending habits who happen to owe them A LOT of money. We borrowed $15Tn and our "plan" is to pay them back with hyperinflated dollars that are already discounted 33% from where we began cranking up the borrowing in 2002 (to pay for wars and tax cuts).
Already, other nations are refusing to lend us more money so we have begun to engage in what Bill Gross, the world’s biggest bond…
A Whiff of a “Mini” QE-2?
by ilene - October 22nd, 2010 2:27 am
A Whiff of a “Mini” QE-2?
Courtesy of Bruce Krasting
The 100% certain sure thing in the market today is that QE-2 will come on November 3rd and that it will be decisive in its scope. Well I am not so sure any more.
-The Fed’s Beige Book from yesterday did not make a case for an economy that needed emergency measures. Yes there was some discussion about the weak housing market and soft loan demand. But we know that QE-2 is not going to fix those problems.
-It is of significance to me (and should be to all) that Zero Hedge was featured in a Time/CNN article titled, Will the Federal Reserve Start a Civil War?
I am certain that the Fed reads Zero Hedge. But how much influence they have is a question. When it gets up to Time magazine however, it is another matter altogether. It is not possible for the Fed to avoid the collective roar that is coming from across the country at this point. If the Fed blunders with an unpopular QE-2 the results will be disastrous. Not only will the economy tank but the Fed will have lost a good chunk of its remaining credibility. The downside risks to Bernanke are enormous. I don’t think he believes he is in a popularity contest, but he does know he can’t run monetary policy with protesters outside his door. How much is he prepared to gamble given that he clearly does not have a consensus amongst his own board? He is an academic, not a gambler.
-Today St. Louis Fed Bullard made remarks to reporters that were a warning sign to me (and the market). He talked a much different game than what has been dished out of late. He made reference to a smaller program. Maybe less than $500billion (about half what is now in the street). He also threw out something that blew me away. He suggested that the 11/3 decision was in someway dependant on the Q3 GDP numbers that come out before the Fed meets. Bullard even “spun” the numbers on the hot side:
"it may come in a little stronger than the second quarter." So we have to keep our eye on that."
Bond traders shit in their pants and hit bids on long coupons. I like…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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