Monday, April 26, 2010
In a speech to Wall Street today, President Obama talked of a "failure of responsibility" in Washington and on Wall Street. But the financial sector is the most regulated part of the economy, so surely responsibility lies mostly with Washington. It was the federal government that created deposit insurance, which removed risk (and therefore caution) from bank deposits. It was also the feds that created "too big to fail," our new system of private profits and socialized losses. Most importantly, it was federal taxes and regulations that undermined our productive capacity, rendering us weak in the face of financial shocks.
In this speech castigating private greed, no mention was made of Fannie, Freddie, or the FHA's role in encouraging sub-prime loans, nor of the Fed's ultra-low interest rates which made the mortgage "teaser rate" possible. The maligned "unregulated derivatives" market was largely based on exposure to these government-backed loans.
Obama claims he wants "common sense rules" to be put in place. Yet, his reform proposal defies common sense.
The new "resolution authority" is an attempt to replace the traditional bankruptcy court system with a bailout bureaucracy that subordinates the rule of law to political expediency. The result of this reform will be to increase uncertainty for any honest market participants - and create a protected sandbox for firms connected to the executive branch.
The "Volcker Rule" to split up large firms runs directly counter to this, and the past, Administration's encouragement of dominant banks to buy their weaker competitors. Ironically, the additional regulations put in place by the bill will create tremendous barriers to entry for new firms, and strongly advantage those firms that can create the largest economies of scale (number of productive employees per compliance officer).
So long as the Fed continues to hold interest rates artificially low and the government continues to guarantee mortgages, real estate prices will remain distorted, credit will be misallocated, moral hazards will increase, and the underlying fundamentals of our economy will continue to deteriorate. Contrary to the President's assertion, government bailouts and stimulus have weakened the underpinnings of our economy, not saved it. As a result, the next economic crisis, likely to hit within a few short years, will be that much worse. Not only will this new regulation do nothing to prevent the second phase of the crisis, it will more than likely increase its severity.
The President seems to insinuate the he saw the crisis coming. Well, I was on national television as far back as 2005 explaining the problem and warning of an impending crash. This was back when Senator Obama was voting for the bills that made it all possible.
Saturday, April 24, 2010
Chart of the Day commentary puts it as follows:
[The] chart presents the median single-family home price divided by the price of one ounce of gold. This results in the home / gold ratio or the cost of the median single-family home in ounces of gold. For example, it currently takes 153 ounces of gold to buy the median single-family home. This is considerably less that the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down 75% from its 2001 peak and remains well within the confines of its five-year accelerated downtrend.
As mentioned in previous posts, gold is a measure of long-term wealth; therefore is a good relative indicator when comparing different products/service on an intertemporal basis. Based on the trajectory of the graph we are headed to levels seen around 1979-1980. This means that house prices will fall further.
Wednesday, April 21, 2010
Sir, John Kay is only partially correct about the failure of economics (“Economics may be dismal, but it is not a science”, April 14). Economics is indeed a science, just like psychology or sociology. The problem is that, just like certain psychologists and sociologists, many economists today are not acting scientifically.
In the social sciences, knowledge acquisition is limited first by the focus on human conduct that is itself not yet fully understood, and second by the difficulty of isolating human experimental subjects from their social, cultural and temporal contexts. We are, after all, studying ourselves. Yes, recent macroeconomic theory has gone astray. However, the reason for this departure is not in the individual ideas, but in the public administrators’ (and certain scientists’) premature reliance thereon to make policy decisions that are way beyond the scope of current economics.
Markets are efficient; but they don’t take only data into account, they also react efficiently to fear and excitement. Most long-term investors may resent being subject to these sometimes violent market stimulants.
Rational expectations theory doesn't suggest people act rationally in the sense of “logically”. The stickiness here is one of word definition. People are sometimes emotional, and scientists should “rationally expect” seemingly irrational behaviour resulting – quite rationally – from the play of emotion.
The dynamic stochastic general equilibrium theory can be a useful tool to understand certain cause-effect relationships, but it cannot be applied outside the laboratory without risk. Anyone but an ivory-tower theoretician realises that too many unexpected variables will invariably spoil the desired effect.
My father, Edward C. Harwood, founder of the American Institute for Economic Research, spent his life studying the acquisition of knowledge and the nature of economics as a science. He, professors George A. Lundberg and Stuart C. Dodd of the University of Washington, and a small team brought a good dose of common sense and insight to economics, but unfortunately the unpopularity of true scientific rigour limits its appeal and prevents a more lucid evaluation of the validity of the results.
I hope that George Soros and his New Economic Thinking are serious about their effort to re-energise the field, but let’s hope he goes about it in the right direction, ie, towards modesty. It will not be easy, because most academic economists and their political counterparts just don’t have the incentives. Humility doesn’t lead to “breakthroughs”, published work, tenure, and public office.
Marina Del Rey, CA, US
Tuesday, April 20, 2010
(graph obtained from "The Recession: when did it end?", printed in The Economist Magazine)
Saturday, April 17, 2010
After the Lehman Brother collapse in 2008, the Federal Reserve Board (FED) engaged in the expansion of its balance sheet (i.e. its monetary base) in an unprecedented manner. The FED’s balance sheet represents money that is in the economy. Through fractional reserve banking, this money is multiplied many times over, consequentially causing prices to rise. When the FED withdraws money or slows the pace of its creation, its balance sheet’s must inevitably contract. Against this backdrop, prices will fall. Consider the following graph (see clear view here):
This graph illustrates the behavior of the “percent change from a year ago” (aka year-over-year or YOY) for the adjusted monetary base from 1984 to April 2001. We can easily see that the contraction in economic activity (synonymous with market crash) almost always preceded the trough of the most recent credit expansion. In other words, when the YOY figure dropped sharply, a market crash is probable. The graph should contain another shaded rectangles to demonstrate the bond market crash in 1994 and the Asian and Russian crisis in 1997.
Notice this next graph, which illustrates data for the first decade of 2000 (see clearer view here).
The gyrations in the YOY change of the monetary base were less pronounced. In fact, the downward trend was relatively smooth in comparison to prior periods. This allowed the appearance of stability to extend longer than it should have. Ultimately, however, the market ran out of steam by 2008 and the previous bull market subsequently turned bear and severely crashed. All of the FED’s liquidity facilities (TALF, TAF, etc.) have now expired; therefore I don’t expect the monetary base to continue to increase (this means rates will go up). Notice the sharp fall, hitting (what appears to be) the low in January 2010. Indeed the trend can continue lower to a YOY change between 5-10%, a percentage consistent with what was seen in the early parts of the 2000s. In light of the massive expansion of monetary policy, this is inconsequential. If history is any guide, a market crash is in the works for sometime later this year.
Let’s look back to some of the major financial crises since 1980.
1982: Emerging market debt crisis.
1987: U.S. stock market crash
1990: Japanese stock market crash
1994: Bond market crash
1998: Asia financial crisis/Long-Term Capital hedge fund insolvency
2000: Technology stock market crash
2006-2007: U.S. housing market crash & subsequent stock market crash (in 2008).
The most recent financial meltdown has been the one of greatest intensity and longevity since the institution of the fiat monetary system. As a result, it required an unprecedented amount of money printing to stabilize the system. The money printing represents future obligations (i.e. debt) which should be paid but never will. Our economic future doesn’t bode well, despite what U.S. elected leaders say. As can be noted, every 4 years or so we’ve had a major crisis. There is no evidence that this patter won’t be sustained. However, it is difficult to predict how much longer we have until the present market rally peters out.
“On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters. Significant restraints on the pace of the recovery remain, including weakness in both residential and nonresidential construction and the poor fiscal condition of many state and local governments.”
Carefully crafted, his statement forecasting economic activity achieved its intention: give the impression things are looking up, despite “weaknesses.” Make no mistake, Mr. Bernanke is a Keynesian economist. Never judge a person by his/her words, but rather by their actions. And Mr. Bernanke’s actions reveal a deep trust and abiding faith in an economic interventionist policy, a modern legacy of Lord Keyes.
The aforementioned “weaknesses” are quite obvious. This deep recession has cut significantly a vast source of revenue for governments: taxes. The fact of the matter is that long-term unemployment, i.e. those people who have been out of work more than 27 weeks, currently stands at 6.5 million. This number constitutes approximately 44% of those unemployed. This can only mean that people that have been let go from their jobs are not finding new ones. Furthermore, this gives evidence that jobs that were created during the last boom period are not returning. It is no wonder why the Obama administration extended for several months unemployment benefits.
The housing market, it goes without saying, is in shambles. Over the last year, the government, through the Federal Reserve Board, committed to purchased $1.2 trillion of Agency mortgage back securities with the objective of keeping mortgage interest rate low. Rates began a downward trajectory. However, these purchases ended in March 2010. As you can see here, 30-year mortgage rates are going up, which will undoubtedly put pressure on housing prices.
Overall, the trillions of dollars of fiscal and monetary stimulus have had a relatively subdued effect, particularly if one considers that present levels of debt are not only nonproductive but also a restrain on economic growth. See here. We are in a period of transition, which is being sustained by government intervention of the economy. When the pace of such support slows, invariably its effects will subside over time, ultimately leading to an economic bust. Support has slowed. It is only a matter of time before this sham economic growth extolled by Mr. Bernanke reverses. Court economists will be the last ones who will see the oncoming crisis.
Friday, April 16, 2010
Today's chart illustrates rallies that followed massive bear markets. For today's chart, a 'massive' bear market is defined as a decline of greater than 50%. Since the Dow's inception in 1896, there have been only three bear markets whereby the Dow declined more than 50% (early 1930s, late 1930s until early 1940s, and during the very recent financial crisis). Today's chart also adds the rally that followed the dot-com bust during which the Nasdaq declined 78%. One point of interest is that the current Dow rally has followed a path that is fairly similar to that of the Nasdaq rally that began in late 2002. It is also worth noting that each rally lasted from about 300 to 370 trading days and then moved into a trading range/choppy phase that lasted for a year or more. In the end, the current post-massive bear market rally is by no means atypical.
Tuesday, April 13, 2010
Monday, April 12, 2010
04/12/10 Buenos Aires, Argentina – Argentina is for economists with a sense of humor, if there are any left. It’s for anyone who likes a good drink and a good laugh. And for anyone who wants a peek at the future.
What do defaults look like? Look at Argentina. The Argentines pulled off the biggest default on sovereign debt in history. In 2001, they defaulted on $132 billion in loans. Later, they negotiated a settlement that left lenders with their worst haircut ever.
But at least the lenders must have had fun. They came down to Buenos Aires on rich expense accounts. They stayed at the Four Seasons. They ate steaks that were thicker than glaciers…and washed them down with a whole rio of malbec. They probably went to a few tango shows too. The visit may have cost them billions…but heck…
…it wasn’t their money.
How about inflation? Want to see that? Argentina has had plenty. Even hyperinflation. In 1989 alone, prices rose 5,000%. By 1992, it took about 100 billion 1982 pesos to equal one single new peso. And who remembers the austral? That was a currency introduced in ’85. It was worthless by ’92.
Don’t think you have to worry about inflation? The lure of a little inflation will be irresistible. The arrival of a lot of inflation will be irreversible.
Ask the Argentines; they’re the experts.
So what kind of crisis will the US have? No one knows. But our bet is that it will have them all. Inflation…deflation…default…hyperinflation… Get ready; they’re probably all on the way.
Saturday, April 10, 2010
1. Hubris born of success. Or, as Bill Bonner from the Daily Reckoning often remarks, “nothing fails like success.” This is characteristic of complacency that emanates from good fortunes (i.e. success). You believe that because you are successful, you must be good at what you do. In fact, success could have been solely the outcome of being at the right place at the right time; not because you were actually good at what you do. A false impression gets created.
2. Undisciplined pursuit of more. Or, in plain English, this is the idea that says, “hey, look, I’m good, I’m going to up the stakes to show you how exceptionally good I am.” Of course, in this stage, undue risk is taken.
3. Denial of risk and peril. That is, ignoring the obvious warnings. As Mr. Collins writes, when these “Internal warning signs begin to mount, [the] external results remain strong enough to 'explain away' disturbing data or to suggest that the difficulties are 'temporary' or 'cyclic' or 'not that bad,' and 'nothing is fundamentally wrong.'... leaders discount negative data, amplify positive data, and put a positive spin on ambiguous data ... blame external factors for setbacks rather than accept responsibility" ... slogans and ideologies beat out "vigorous, fact-based dialogue that characterizes high-performance teams ... those in power begin to imperil the enterprise by taking outsize risks and acting in a way that denies the consequences"
4. Grasping for salvation. This is the stage of desperation. Actions are taken, which under normal circumstances would not be considered. In this stage, the true character of the organization is evident. Loss is inevitable, yet a grasp of hope is retained.
5. Capitulation to irrelevance or death. After all silver bullets have been fired, it become obvious that jumping ship is the best thing to do. As Mr. Collins writes, “accumulated setbacks and expensive false starts erode financial strength and individual spirit to such an extent that leaders abandon all hope of building a great future. In some cases the company's leader just sells out; in other cases the institution atrophies into utter insignificance; and in the most extreme cases the enterprise simply dies outright."
Where is our society, i.e. the U.S.A., in this continuum? In my view, we are at stage 4, grasping for salvation.
America was founded with the concept of the right to life, liberty, and the pursuit of happiness. These aspects are unique in historical perspective; that is, no other nation since time immemorial had been created under a creed of individualism. Sure, the Magna Carta can be argued to be the first western civilization creation trumping the concept of individual rights, yet it was limited in comparison to the foundations of America.
It was the belief that one can come to America, mind his/her own business, and live the life he/she has imagine (as H. Thoreau wrote), that garnered the nation unprecedented prosperity, not only in monetary terms but also in non-monetary terms. Indeed, it was not a perfect nation, but in relative terms it was.
But there was underground force that sought to stir its control over politics and invariably the economy. This was manifested by the creation and subsequent dissolutions of several Central Banks. This can be encapsulated in what President Andrew Jackson said of the operators of the Second Bank of the United States,
“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.”
But the financiers and their political appointees who aimed to extend the control over all economic activity ultimately won out. This was first manifested in the creation of the Federal Reserve Board in 1913, the institution of the federal income tax in the same year, and America’s official imperial ambitions by entering in WWI. The goal was expanded in the 1930s by the creation of the New Deal. The military-industrial complex, which was left over after the involvement in WWII, was amplified in the subsequent decades through the coercion of foreign nation building (i.e. gunboat diplomacy, or spreading democracy by force). These affairs invariably involved (and continues to involve) a significant cost. For some time now, the expansion of centralized political power has determined the allocation of economic resources, which almost always redistributes them inefficiently. This inefficiency manifests itself in the form of recessions. Of course, the economic theory taught in higher learning institutions funded by the same centralized political powers never exposes the fallacy of their expositions.
The crisis America is currently experiencing is the result of policies and other political maneuvers that have been in place for well over a century. The masses have learned to live with them. In 2008, America officially (out of desperation) embraced the socialization of all economic risk. This was unprecedented in American history. This is a point of no return. The only enigma now is how long we, as a society, will stay in stage 4. Stage 5 is inevitable.
Thursday, April 8, 2010
Bubbles lurk in government debt
As the global economy reflates, many people are asking: “Is the next bubble in gold? Is it in Chinese real estate? Emerging market stocks? Or something else?” A short answer is “no, yes, no, government debt”.
In my work on the history of financial crises with Carmen Reinhart , we find that debt-fuelled real estate price explosions are a frequent precursor to financial crises. A prolonged explosion of government debt is, in turn, an exceedingly common characteristic of the aftermath of crises. As for the probable non-bubbles, most emerging markets face better prospects in the decade ahead than does the developed world, and their central banks will probably want to continue diversifying their reserve holdings. Of course, huge volatility and corrections along the way are normal.
But a deeper question is whether economists really have any handle on ferreting out dangerous price bubbles. There is much literature devoted to asking whether price bubbles are possible in theory. I should know, I contributed to it early in my career.
In the classic bubble, an asset (say, a house) can have a price far above its “fundamentals” (say, the present value of imputed rents) as long as it is expected to rise even higher in the future. But as prices soar ever higher above fundamentals, investors have to expect they will rise at ever faster rates to make sense of ever crazier prices. In theory, “rational” investors should realise that no matter how many suckers are born every minute, it will be game over when house prices exceed world income. Working backwards from the inevitable collapse, investors should realise that the chain of expectations driving the bubble is illogical and therefore it can never happen. Are you reassured? Back in my days as a graduate student, I know I was.
But then along came some rather clever theorists who noticed that bubbles might still be possible (in theory), if we lived in a world where the long-run risk-adjusted real rate of interest is less than the trend growth rate of the economy. Basically, this condition raised the possibility that the bubble might grow slowly enough that houses would never cost more than world gross domestic product. Oh, no! But there soon followed empirical research reassuring us that we did not live in such a bizarre land.
Science moves on. Eventually, economists realised that in a real-world setting replete with non-linearities and imperfect markets, the same set of fundamentals can, in principle, support entirely different classes of equilibria. It all depends on how market participants co-ordinate their expectations. In principle, prices can jump suddenly and randomly from one equilibrium to another as if driven by sunspots. (I believe this notion of self-fulfulling multiple equilibria is quite closely related to George Soros’s notion of “reflexivity”.)
The problem of reflexive bubbles turns out to be even more acute when the government’s policy objectives are inconsistent, as they so often are. For example, Maurice Obstfeld famously demonstrated how self-fulfilling investor expectations can bring down a fixed exchange rate. If investors gather with enough sustained force, and if the central bank lacks sufficient resilience and resources, investors can blow out a fixed exchange rate regime that might otherwise have lasted quite a while longer.
The real issue is not whether conventional economic theory can rationalise bubbles. The real challenge for investors and policymakers is to detect large, systemically dangerous departures from economic fundamentals that pose threats to economic stability beyond mere price volatility.
The answer, as Carmen Reinhart and I demonstrate drawing on centuries of financial crises, is to look particularly for situations with large rapid surges in leverage and asset prices, surges that can suddenly implode if confidence fades. When equity bubbles burst, investors who made money in the boom typically swallow their losses and the world trudges on, for example after the bursting of the technology bubble in 2001. But when debt markets collapse, there inevitably follows a long, drawn-out conversation about who should bear the losses. Unfortunately, all too often the size of debts, especially government debts, is hidden from investors until it comes jumping out of the woodwork after a crisis.
In China today, the real problem is that no one seems to have very good data on how debt is distributed, much less an understanding of the web of implicit and explicit guarantees underlying it. But this is hardly a problem unique to China. Even as published official government debt soars, huge off-balance-sheet guarantees and borrowings remain hidden for political expedience around the world. The timing is very difficult to call, as always, but even as global markets continue to trend up, it is not so hard to guess where bubbles might be lurking.
Wednesday, April 7, 2010
[My Thoughts: Keynesian economists believe a priori that capitalism is inherently unstable; therefore, government intervention is absolutely necessary to smooth out the drop in consumption during recessions. They never consider seriously enough that recessions are in fact a result of prior government policies, which in our modern times it emanates from Central Bank controlling the price of money (i.e. the interest rate). Maintaining low interest rates necessarily requires printing money. The excess money floods the economy, which pushes up prices. Slowing down the prining of money or removing it completely from the economy (which in economic speak means tightening monetary policy) eventually leads to a bust. No one, except the "Austrian" economists adhere to this philosophy. I do. This philosophical framework is what allowed me to forsee the previous financial crisis; it is reason that i can confidently determine another crash, in much greater intensity, is on the way. The following missive from the Financial Times gives evidence that the policy of excessive money printing is slowly coming to an end. This is inconsequential because an economic bust will inevitably occur once money printing slow.]
The People’s Bank of China is playing a waiting game but with the benchmark one-year deposit rate currently below inflation, a rate rise is likely in the next few months
The Federal Reserve said in March rates would remain at ‘exceptionally low’ levels for an ‘extended period’. Market expectations are for rates to stay on hold for six months or more
The European Central Bank sees growth and inflation remaining moderate, which means markets are not pencilling in a rise in the main policy rate until next year
The central bank has kept its target overnight rate at 8.75 per cent since July but sent a strong signal last month of an imminent rise. Economists expect the rate to hit 11.25 per cent by 2011
The Reserve Bank of India raised interest rates in March for the first time in almost two years in what is expected to be a long tightening cycle as it tries to cool rising prices
Despite cutting rates to 0.1 per cent, Japan is still mired in deflation, putting pressure on its central bank. Markets judge that rates will remain close to zero for at least a year
The Bank of England voted unanimously in March to hold rates at 0.5 per cent and halt monetary easing, but noted that a close eye needed to be kept on the public’s inflation expectations
The central bank is likely to keep monetary policy loose for some time despite the latest official data putting monthly inflation at a nearly four-year high of 1.2 per cent in February
Tuesday, April 6, 2010
Monday, April 5, 2010
Pay attention to the “fiat capital era,” which is the one marked by the creation of the Federal Reserve Board—the U.S. Central Bank. Fiat literally means by decree; in other words, value is not set by the economic law of scarcity but rather by political legislation. A Dow measure of, say 11,000 is insignificant unless it is compared against a standard of value. Gold has historically been such standard.
As you can see from the graph, true stock market bottoms are set when the Dow-Gold ratio is between 1.5 and 3.0. Presently the ratio stands at 9.74, which about 33 points below of the all-time high set in 1999. Two things have caused this shrinkage: the Dow has declined and gold has risen. Based on this measure of value, the stock market is significantly overvalued on a long-term basis. This will be corrected in our generation. What is impossible to predict is exactly when it will occur.
Saturday, April 3, 2010
The Fed, through its New York regional bank, also identified the securities acquired in the 2008 bailout of American International Group. (Source: Bloomberg)
(Video runs 4 mins 19 secs).
For example, notice the following:
- The number of long-term unemployed (those jobless for 27 weeks and over) in-creased by 414,000 over the month to 6.5 million. In March, 44.1 percent of unemployed persons were jobless for 27 weeks or more.
- The number of persons working part time for economic reasons (sometimes re-ferred to as involuntary part-time workers) increased to 9.1 million in March. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.
- Employment in federal government was up over the month, reflecting the hiring of 48,000 temporary workers for the decennial census.
The announcement figures are merely statistical noise. The employment situation continues to be dismal.
Today, the Labor Department reported that nonfarm payrolls (jobs) increased by 162,000 in March -- the largest increase in three years. Today's chart puts that decline into perspective by comparing job losses following the beginning of the current economic recession (solid red line) to that of the last recession (dashed gold line) and the average recession from 1950-1999 (dashed blue line). As today's chart illustrates, the current job market has suffered losses that are more than triple as much as what occurs at the lows of the average recession/job loss cycle. It is also worth noting that previous job market declines did not tend to end abruptly but rather flattened out before moving back into an expansionary phase. Today's relatively positive jobs report provides an early indication that the current job market is moving from a phase of stabilization to that of expansion [emphasis mine].
I highlight the last statement from Chart of the Day’s commentary because it demonstrates the problems of deriving conclusions simply by looking at charts; namely, the concept of spurious correlation. In other words, that a relationship exists between 2 variables may in fact be caused by something else entirely. That is, correlation does not imply causation. This results in the idea that since unemployment has stabilized, growth will return. Furthermore, this conclusion is furthered fortified by the assumption that the past is indicative of the future. All chart lack context, yet they provide a valuable simplification of what is happening. But like all tools, they must be used appropriately.
The only valuable conclusion we can derive by looking at the chart is that the expected expansion most likely will be weaker than the 2001-2006 expansion. Weaker employment means a reduction in the confiscation base (i.e. tax payers). In light of burgeoning fiscal spending, this could translate in a greater deficit than expected.
Let me mention other things that were left out of the commentary above:
- The majority of job losses in the present recession originated in the bloated financial and construction sector. These jobs are not coming back!
- The 2001-2006 average was significantly below the 1950-1999 average.
- The phase of “stabilization to that of expansion” in the 2007-present bucket may mean an upward move that still falls below 0 percent. In plain English, this means nonfarm payrolls move from a phase of really ugly to really bad. This is a very loose sense of expansion.
- Intertemporal comparison is limited because the structure of the economy has changed over the years (e.g. manufacturing employment is not as relevant today vis-à-vis the past). This distorts averages.
- The chart does not mention anything about the long-term unemployed (i.e. those who have been unemployed greater than 27 weeks).
Friday, April 2, 2010
"By the end of this year, OECD sovereign debt will have exploded by nearly 70 per cent from 44 per cent of GDP in 2006 to 71 per cent. According to the Bank of International Settlements, it would take fiscal tightening of 8-10 per cent of GDP in the US, the UK and Japan every year for the next five years to return debt levels to where they were in 2007."
I don't immediately recall any OECD country that has undergone such drastic cuts in public expenditures. We know for a fact that as far as the U.S. goes, government deficit will increase as far as eye can see.
by Vincent Fernando, CFA and Kamelia Angelova
Today's ISM Manufacturing index result blew away expectations, hitting 59.6 vs. an expected 57. March ISM data shows the fastest U.S. manufacturing expansion since July 2004.
Yet hidden underneath the powerful headline ISM number is an even more powerful break-out by the ISM Prices sub-index, which is a component of the total ISM.
As shown by the black line below, the ISM Manufacturing Prices index jumped 8 points in March, to 75 from 67. This signals a sharp rise in inflationary pressure. According to the ISM, 17 industries reported paying higher prices on average in March and no industry reported paying lower prices.
Furthermore, as shown below by the Producer Price Index (PPI) for crude materials in orange below, a rise in the ISM Prices Index makes a rise in the PPI highly likely, as highlighted by Waverly Advisors. This means we should expect more confirmation of inflationary forces in the near future.
Which means you can pretty much put the final nail in deflation's coffin. The real threat is inflation, especially given the recent liquidity-bias of the U.S. fed, and today's ISM result has moved Ben Bernanke one step closer to pulling the trigger on interest rates.