Is Janet Yellen Smarter Than Me?

Yellen`s Talking Points


During Janet Yellen`s Senate Banking Committee testimony to paraphrase she said that she doesn`t see a bubble in stock prices based upon some of the metrics they utilize at the Fed, and she mentioned that the rise in the 10-year Bond Yield approaching 3% caused the Fed to delay their previously telegraphed taper move in October.


There are a couple of disturbing points that came out of her take on bubbles and the rationale behind not tapering a mere 10 or 15 Billion dollars given the monthly commitment of 85 Billion in Fed Purchases every month. 


Since when did the Fed outright Buying of Bonds become Normal?


Just the mere notion given the history of markets and the Fed`s participation in Markets that the Federal Reserve buying $85 Billion of Monthly Asset Purchases is somehow normal or not just an exceptionally unusual participation in financial markets is quite troubling. 


First problematic issue is that they do not think this policy is extraordinarily unusual, and second problematic issue is that such an extraordinary policy might not have some unintended consequences or side effects for financial markets. 


Are Markets Free or Social Instruments?


The Federal Reserve has no business whatsoever in affecting market prices of stocks and commodities, and it seems that the original purpose of easing monetary policy by lowering the Fed Funds Rate to near Zero is one thing, and yes this derivatively will effect Bond Prices and the Bond Markets, but they have no business artificially influencing the Bond Market through outright purchases of government Bonds.


This is far overstepping their purview and it vastly distorts market prices, which is bad enough in and of itself, markets exist for a reason to set prices given fundamentals of supply and demand that reflect economic conditions in the real world. 


But to not expect the massive influencing of the Bond Market to then have derivative effects into other markets like commodities and equities and that somehow prices could appreciate to unsustainable levels that come crashing down once the intervention is discontinued is just the height of irresponsibility and short-sightedness.


Market & Trading Experience in Short Supply at the Federal Reserve


Anybody that has actual market experience, someone who regularly through good and bad business cycles trades stocks, bonds, commodities and currencies recognizes how these instruments trade under all conditions. 


This is what the Fed lacks is any understanding of what constitutes normal price discovery in financial markets. Economic theory may be great for setting interest rate policy from a Macro level, but once the Fed started directly intervening in Markets, then they need some trading experience to spot bubbly conditions of asset prices, i.e., how the instruments normally trade versus the current market price action.


Distorted Price Discovery in Markets


Whenever traders get to the point where they know they can buy every dip for the last five years because the Fed was always going to bail them out either by restarting another QE Initiative, or the current backstop of 85 Billion of Direct Market Asset Purchases this distorts in a highly artificial manner true market price discovery.


It also leads to borrowing heavily on margin further incentivized by exceptionally low borrowing costs that adds additional fuel to the fire in elevating asset prices to unusually highs levels relative to the actual fundamentals of the market under normal pri
ce discovery conditions. 


Isn`t this the same Methodology & Psychology of the Last Bubble Cycle?


The most irresponsible portion of this behavior is that this is precisely the behavior that led to the financial crises, the housing crash and resultant mortgage, bank and financial system bailouts of Wall Street firms like AIG, Bear Sterns, Lehman Brothers and Citibank. 


Every regulator, politician, Fed Policy figure and Bank Executive all agreed that they had learned the lessons of using excessive leverage, excessive risk taking, and that the Federal Reserve especially was going to set the precedent of “Moral Hazard” in that they were going to go out of their way to avoid the monetary policies of excessive intervention that led to the overly disproportionate risk taking responsible for the Housing Bubble. 


And yet in just five short years we have forgotten all this wisdom and learning points and have thrown prudent risk management strategies regarding monetary policy out the window and summarily fail to recognize the Fed`s hand in creating a massively unsustainable bubble in financial markets once again.


10-Year Yield & 3% Threshold – Really?


If the Federal Reserve was threatened by the 10-Year Bond yield approaching 3% so much that they couldn`t taper a mere 15 Billion dollars, then what does that foretell for the future of these markets? The Fed ought to ask themselves this very question, and it ought to keep them up at night! 


This says more about the problem that the Fed has gotten itself into with regard to this unusual monetary policy initiative to intervene in financial markets – than at what price level constitutes bubbly conditions in stock prices. 


They cannot even approach un-intervening in markets because they have overstepped any normal fed policy boundary or any market policy for that matter that the level of artificial influence is to such a high degree that they basically are the entire market in certain pricing dynamics – unless they are prepared to be the market (whole other set of unintended consequences) then going from an interventionist market back to a free market means absolute chaos – and the classic example of an artificial bubble!


This is the 10-Year Bond Yield; the fact that a 3% yield threatens the Federal Reserve is absurd. This is not the 1-Year Yield, we are talking about a 10 year time period; shoot the Fed Funds Rate was 5.5% just 6 years ago! 


Get a grip Fed because you’re worried about the least worrisome dynamic of your Fed Policy`s unintended consequences – what happens when you have a Bond Market after five years of intervention that returns to market forces all the sudden and the US is facing a 12% interest payment on its debt? This is what the Federal Reserve should be worried about down the line. 


My parents actually had mortgage rates in the 18% range during their lifetime – this degree of escalation in higher yield is not so unprecedented as some might think. It can happen once again!


This isn`t my First Bubble Rodeo!


I have been a market participant for the last fifteen years and have seen the Tech Bubble, The Enron-World Com Bubbles, The Housing and Financial Crisis Bubbles, and I can tell Janet Yellen asset prices including stock prices are in bubble territory. 


When I look at how easily the Google’s, Tesla, Netflix, Priceline’s, Twitter, Amazons of the world have reached these lofty price levels over the last five years the Fed has set the stage for massive price depreciation in stocks and people`s portfolios once the interventionist Fed policy is taken away – these are not normal market conditions Janet Yellen! 


Accordingly you may have an economic background, and have economic and financial models that lead you to believe that stocks are not in bubble territory Janet, but from a trading perspective, someone with actual experience in buying and selling financial assets over the last fifteen years – there is no true price discovery, i.e., instruments don`t trade in a two-sided pricing discovery process.


It is Risk-On all the time with no consequences yet for the inevitable unintended consequences of such behavior – the inevitable crash when conditions get unsustainable under any intervention policy.


Now or Later – That is the Question!


This is the real danger to forestall the cessation of intervention for longer, to delay the stepping away, to the point where asset prices get so elevated, that even with an $85 Billion Monthly Asset Purchases, the decline and losses from such elevated levels, means that stocks just crash right through levels in humongous freefalls.


This is the scenario where losses exacerbated by out of this world leverage, cause that 85 Billion to be nothing but a mere entry point for more shorting, as the Market Crash takes hold, and stocks freefall dropping chunks of losses along the way that has fund managers selling without Algos – just get this stuff out the door at any price – this is where we were in 2007 with 15 Billion Quarterly Write-Downs by the Banks! 


Hence you can pay now or pay later, but you’re going to pay Janet! So until you get some actual market experience, you keep to worrying about how to create jobs, and let me tell you when there are bubbles in stock prices Janet! 


Yes Janet I am smarter than you when it comes to Stock Market Bubbles, and we are currently in a stock market bubble. Consequently when do you want to Pay Janet – it is going to cost you either way, Pay now or Pay Much More Later on down the line!


via Zero Hedge EconMatters

A-Rod And Janet Yellen: What Valuation, Debt And The Fed Can Say About The Next Bear Market

Submitted by F.F. Wiley of Cyniconomics

What Can Valuation, Debt and the Fed Tell Us about the Next Bear Market?

We last wrote about stock valuation in August, when we looked at three types of P/E multiples and argued that stocks were more stretched than you would think if you only relied on the simplest measure.

Since then, we’ve had the non-taper, non-Larry Summers Fed, non-Syria ultimatum, non-keeping your plan if you like it, and non-market bubble (according to Janet Yellen’s soon-to-be authoritative judgment).  You might say we’ve had an unusual amount of non-sense.

After all that’s happened – and with the S&P 500 (SPY) about 7% higher – it seems time to update our research. We’ll look at the three P/Es again as part of a new analysis that ties in credit markets and the Fed and ends with a prediction about the next bear market.

We start with a chart that marks and categorizes 11 historical bears that will play a part in our conclusions:

These bears are slightly different to other lists you may have seen because we’re using Robert Shiller’s long data history, which shows average figures for each month without the daily detail. We’re also identifying all corrections of over 20% as bears, even if the market failed to make a new all-time high at the prior peak.  “Mega-bears” are corrections of more than 40%, while “über-bears” are corrections of over 60%.

Now for the valuation history, starting with traditional P/Es based on trailing 4 quarter earnings:

Here are Shiller’s P/Es, which are based on 10 year trailing averages for earnings:

And here are P/Es derived from 40 years of trailing earnings but using trend lines instead of Shiller’s averages (click here for further detail):

Trailing P/Es are inferior to the other two measures because they don’t account for earnings cycles. As we wrote in August:

[I]t’s clear that changing perceptions about earnings explain a substantial portion of the market’s volatility. Just as investors can easily forget that P/E doesn’t rise forever, they sometimes forget that earnings don’t climb forever. And when earnings are unusually high, traditional P/E multiples fail to capture the full risk of a correction.

Moreover, earnings cycles are more pronounced in recent decades, due to the Fed’s increasing interventions.  (See here for more on this topic.)  Interventionist policies suggest an even stronger case for following the Shiller P/Es or trend earnings P/Es – not the more traditional measure – and we’ll come back to these results in a moment.

Turning to the credit markets, the next chart combines the Fed’s “Flow of Funds” data on nonfinancial private debt with an earlier series that isn’t exactly the same but captures credit trends, nonetheless:

Three time periods stand out as distinct debt or policy regimes:

1929 to 1946 (the Great Deleveraging). Private debt fell from a pre-Great Depression high of 163% of GNP in 1928 to 83% in 1947. Moreover, there was an even greater fall from the economic trough in 1932-33, when nominal GNP dropped to about half the 1929 amount and pushed private debt above 250% on a GNP ratio basis.

1946 to 1998 (the Long Re-Leveraging). Using the Flow of Funds data this time, nonfinancial private debt climbed from only 37% of GDP in 1945 to about 130% by 1998.

1998 to today (the Big Experiment). While re-leveraging continued through the housing boom, it was further supported during the Alan Greenspan and Ben Bernanke Feds by a new policy approach, which combines limited intervention in good times (leaving bubbles alone, for example) with ample stimulus at any whiff of volatility, deleveraging or deflation. The Greenspan/Bernanke “puts” have emboldened risk takers and pushed valuation measures upward, as shown in the P/E charts. For credit and asset markets, the puts mark a new regime that stands far apart from the old-fashioned approach of “taking the punch bowl away when the party gets going.” We’ll call the new regime a “Big Experiment.”

The Big Experiment began, arguably, with the Fed’s actions after the 1987 market crash and then strengthened progressively. But we chose a 1998 start date because it coincides with Greenspan’s aggressive response to the LTCM crisis and implicit support for the Internet bubble, while also marking the early stages of the housing and mortgage booms.  By the end of the 1990s, the Fed had clearly crossed the Rubicon into a new era that David Stockman aptly calls “bubble finance.”

The three regimes’ relevance may not be immediately clear, but consider what happens when we sort all bear markets since 1929 by size:

It turns out that sorting by size is the same as sorting by our three regimes. Together with the P/E histories, the table gives us a few reasons to expect the next bear to be a big one. (Note that we’re separating the size of the bear from its timing, which we’ll discuss in a later post and doesn’t depend much on valuation.)

First, one thing we’ve learned about the Big Experiment is that stocks tend to fall a long way after the Fed loses its grip.  The bear markets of 2000-03 and 2007-09 were more severe than all but the Great Deleveraging bears of the 1930s and 1940s.

Second, stocks are more expensive than at any of the Long Re-Leveraging peaks, which is the only period in
which bear market losses fell short of 40%.  In fact, the Shiller P/E is now higher than it was in any bull market before the Internet bubble except for the 1929 peak, while the trend earnings P/E has breached even the 1929 levels.

What’s more, it’s reasonable to expect big cycles to persist in today’s policy environment, because it relies so heavily on the Fed. When so much depends on a single, binary factor (in this case, faith in the FOMC’s support), corrections tend to be particularly severe after the factor reverses (when judgment swings from full faith to loss of faith). By comparison, a less manipulated market responds to a wider variety of inputs, most of which develop gradually.

Why so doom and gloomy?

If you disagree with these conclusions, you probably believe we’re headed for another long re-leveraging, thanks to the fall in private debt since the housing boom. The Fed’s policies, you may say, are merely cushioning the path to a lower debt burden and more balanced economy. It’s only a matter of time before the post-WW2 credit boom reignites. In Ray Dalio’s parlance, this scenario would be a “beautiful deleveraging.”

While the beautiful deleveraging is worth contemplating, it seems highly unlikely. Here are three reasons for skepticism:

  1. Private debt hasn’t fallen all that much. Nonfinancial private debt was 156% of GDP as of the latest data point, which is exactly where we were in the second quarter of 2006 as the housing boom was running out of steam.
  2. The Fed’s actions have barely registered with the all-important middle class. Not only is median household income 8% below its 2007 peak after adjusting for inflation, but it was still falling as of 2012 (the latest data point). The median household is now earning the same real income as it was in 1989 – 24 years ago! In addition, the jobs picture is abysmal by any honest assessment (which should include the composition of job gains, unemployed folks who’ve dropped out of the labor force and involuntary part-time workers).
  3. Just about everywhere you turn these days, you’re looking at another classic sign that credit and asset markets are getting out of hand. From record margin debt to a deluge of covenant-lite loans to 1990s-like enthusiasm for Internet companies, it’s hard not to see froth (regardless of your views on bubbles). When we compare these warning signs to the slow progress on debt reduction and no progress for the middle class, the financial economy is too far ahead of the real economy for the eventual outcome to be beautiful.

Put differently, the giant gap between the financial and real economies tells us that any normalization of the real economy will prove fleeting.

Think of it this way:

You’re a baseball player trying to break into the majors despite mediocre fielding skills, no foot speed, and a batting average that hovers around 250. Egged on by your friend, A-Rod, you think you can make it by using steroids and turning yourself into a power hitter. But it doesn’t work out as planned. After a year, you’re losing hair, your skull’s gotten bigger, there’s fatty tissue on your chest that wasn’t there before, and you’ve still only managed 18 home runs in a season. You finally accept that it’s not going to happen for you.

In the baseball scenario, steroids didn’t show enough payoff before the side effects told you enough was enough. And you can say pretty much the same thing about our economic scenario and monetary steroids.  We’re seeing dubious benefits and fast developing side effects from the Fed’s actions, causing many observers to recommend a rethink of the Big Experiment. Yet, the experiment continues.

Getting back to our question about the next bear market, the Fed’s unshakable commitment to its approach – despite growing evidence that it may do more harm than good – is our last reason to expect the next bust to be another killer. When the bull finally runs out of steam, it’s likely to be March 2000 or October 2007 all over again.

Bonus result for Austrians

Although we started our analysis with the Great Depression (because of limited debt data and less familiarity with earlier markets), we sized up all of the bear markets in the Shiller database, which goes back to 1871.

These include a fourth regime: the classical gold standard from 1880 to 1914. There’s also an extra period from 1914 to 1921 that was marked by both World War 1 and the fact that the newly hatched Federal Reserve hadn’t yet established its so-called stabilization policies.  I’ll call this period “transitional.”

Here’s the full list of bear markets, sorted by size:

Note that every one of the pre-Fed stabilization bears is less severe than:

  • All of the Great Deleveraging bears
  • The most extreme Long Re-Leveraging bear (the 43% drop in 1973-74, which would look much worse if you were to factor in inflation)
  • All of the Big Experiment bears

In other words, our stock market history doesn’t reflect very well on the Fed.

(Click here for technical notes about this article and a few more charts.)


via Zero Hedge Tyler Durden

Baylen Linnekin Pours Cold Water on San Francisco’s Proposed Soda Tax

SodaLast month the San Francisco city
council introduced a proposal to tax soda at a rate of two cents
per ounce. The tax, which would have to be approved by voters,
would add a whopping $1.44 to the cost of a six-pack of soda. The
council liked the idea so much that they soon introduced a
competing proposal to tax soda at exactly the same rate. But, as
Baylen Linnekin points out, Research also shows soda taxes don’t
work. For example, a 2010 study published in the Archives of
Internal Medicine suggested that even an enormous soda tax of 40
percent would not make people healthier. Maybe that’s why lawmakers
and voters elsewhere have defeated and repealed such soda-targeting

View this article.

from Hit & Run

Baylen Linnekin Pours Cold Water on San Francisco's Proposed Soda Tax

SodaLast month the San Francisco city
council introduced a proposal to tax soda at a rate of two cents
per ounce. The tax, which would have to be approved by voters,
would add a whopping $1.44 to the cost of a six-pack of soda. The
council liked the idea so much that they soon introduced a
competing proposal to tax soda at exactly the same rate. But, as
Baylen Linnekin points out, Research also shows soda taxes don’t
work. For example, a 2010 study published in the Archives of
Internal Medicine suggested that even an enormous soda tax of 40
percent would not make people healthier. Maybe that’s why lawmakers
and voters elsewhere have defeated and repealed such soda-targeting

View this article.

from Hit & Run

Dollar and Yen Weakness may Persist, Aussie Poised for Bounce

The British pound was the only major currency to have gained against the US dollar over the past month.  Its 2% gain helped it finish November at its highest level since August 2011. The dollar rose against the other majors, with its 4.1% rise against the Japanese yen being the largest.


 The dollar-bloc currencies, alongside the Norwegian krone were also laggards, losing between 1.2% (Canadian and New Zealand dollars) and 3.6% (Norwegian krona and Australian dollar).  The Swedish krona fell 2.5%.   Most emerging market currencies also fell against the dollar over the past month.  This is not the of price action one would expect if the yen’s carry trade status has been rekindled, as many observers have claimed in recent weeks as the yen as fallen.


The US dollar’s weakness seen over the past week is very narrowly based, largely concentrated against the euro (and its two shadow currencies Swiss franc and Danish krone) and sterling.   Given that the US Dollar Index is heavily weighted toward Europe, it has traded heavier, but it is not truly reflective of its overall performance.  It finished last week with its seventh consecutive session of recording lower highs.  Technical indicators warn of scope for additional near-term declines.  Key support is seen around 80.00.


Of the currencies reviewed here, the Australian dollar may have the greatest potential for a trend change in the period ahead.  The MACDs are about to turn and the RSI did not confirm the new 12-week low.  The Aussie bears struggled to sustain the downside momentum in the second half of last week. The first real test of the Aussie bears comes in near $0.9200.   If the technicals are anticipating fundamentals, it may suggest either better than expected data and/or a central bank that continues to seem to be in no hurry to cut rates again from record lows.  That said, we still do not want to rule out a rate cut in late Q1 2014.


Maybe it was the lack of participation in the second half of last week, but the euro’s (upside) momentum appeared to stall around $1.36.  A retracement of the euro’s fall from the $1.3830 area is found near $1.3630, which also corresponds to the top of the Bollinger Band.  The technical indicators we look at are still constructive for the single currency.  A break to the upside would encourage another run at the $1.38 area.


Sterling’s advance has taken it to within striking distance notable resistance in the $1.6400-25 area.  It is where the long-term trend line drawn off the 2009 high near $1.70 and the 2011 high near $1.6750 intersects.  It is also a retracement objective of the decline since from the 2007 high near $2.1150.  If offers in this area are successfully absorbed, technically potential may extend into the $1.70-$1.73 area. Support is likely what appeared to be a double top in October near $1.6260.  


The dollar finished November at its highest level against the yen since May.  It appears to have broken out of the six month consolidative pattern.  The next target is JPY103.75, but the measuring objective of the chart pattern may be closer to JPY109.  


The yen is also weak against the euro.  The euro is pushing through to new five year highs and although the JPY140 area may mark psychological resistance, but the JPY141 area may be more significant from a technical perspective as it represents a key retracement (61.8%) of the euro’s slide from JPY170 in 2008 to last year’s low near JPY94.  


Sterling is at its best level against the yen since late-2008.  At the end of last week, it approached the 38.2% retracement of the more from the 2007 high near JPY251 and the 2009 and 2011-2012 low near JPY117. A break above here would suggest a move toward JPY180-JPY185. 


The Korean won’s appreciation against the yen is also noteworthy.   It is trading at 5-year highs against the yen and is approaching the JPY10 level, which is thought to be important for Korean corporations and, consequently, politicians as well.   The won is also strengthening against the US dollar too.  Some reports suggest that Korean officials have been intervening by buying dollars.  


Besides the Hong Kong dollar, which is of course pegged to the US dollar, the Korean won was the only Asian currency to have gained against the dollar in November (~0.25%).  Over the past three months, the won has gained almost 5% against the dollar.  This is second in the region, behind the Indian rupee, which was still recovering from the June-August swoon.  Officials will likely escalate their defense especially if the yen remains weak and the dollar threatens the KRW1000 level.  We note that in the past week, foreign investors have bought back about 2/3 of the Korean shares they had sold in the first part of the month.  


The US dollar finished November at 2-year highs against the Canadian dollar.  The next target is seen in the CAD1.0660-80 area.  A break of that could open the door to another 1-2 big figure move (CAD1.0760-CAD1.0860.  It is notable that the Canadian dollar failed to get any traction before the weekend despite better than expected GDP figures (Q3 2.7% annualized).   


The greenback has been consolidating against the Mexican peso and the technical indicators are not particularly helpful presently in handicapping the direction of the breakout.  The range that has dominated in recent sessions is MXN13.03-MXN13.1450.  However, a breakout will not be confirmed until the wider MXN12.96-MXN13.20 band broken.  


The latest CFTC Commitment of Traders report on the CME currency futures is delayed by the Thanksgiving holiday.  We will resume our position 


via Zero Hedge Marc To Market

Griffin 32, Sandy Creek 26

No team from Fayette County will be playing for a state football title in 2013.

The Sandy Creek Patriots’ quest for a fourth championship in five years came to an end Friday night at the Battlefield in Tyrone, as the Griffin Bears overcame a nine-point deficit in the fourth quarter to clinch a AAAA semifinal berth with a 32-26 win.

read more

via The Citizen

E-Gold Founder Launches New Gold Backed Currency

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

It was only a matter of time before the success of Bitcoin led to a new attempt to create a digital currency backed by gold. It seems as if that day has now arrived.

Douglas Jackson is the founder of e-gold, which was shut down by U.S. authorities a little over five years ago under accusations of money laundering. While I fully think the ultimate monetary solution will be a decentralized payment protocol that merges Bitcoin-like technology with the ability to back it with gold, silver or whatever people want, I am of the view that it cannot be done from an overly centralized authority or protocol. There are several reasons for this.

First, when you have a centralized single issuer of a currency who also is responsible for vaulting the gold within the payment system you have an enormous degree of counter-party risk. The vault itself could be seized by “authorities” in whatever jurisdiction it is located in.


Second, the human beings or company behind any currency system can themselves be pressured or threatened in order to comply with more powerful interests. The beauty of Bitcoin is that there is no “Bitcoin corporation.” It truly is decentralized and anarchic in nature. It basically puts “the powers that be” in a position that if they want to completey destroy it, they’d have to destroy the internet itself.

That said, I do believe the evolution of money is headed to a Bitcoin type system with the ability to have whatever backing is desired by the market. So at this point my questions to Mr. Jackson would be:

1) How decentralized is this currency system intended to be if at all?
2) Will there be an open source protocol available to all?
3) Are the units of currency distributed to those that own gold in a particular vault or vaults under a the custodianship of a particular company?
4) Is the currency limited to those who own gold in the currency issuer vaults, or will they be linking vaults all over the world if such vaults care to be linked.

While I love the idea, it would have to be done right or it will be doomed to fail. I’m very curious to learn more about this and I’d also love to hear reader feedback on this.

From the Financial Times:

The founder of one of the earliest virtual currencies has re-emerged with a rival to Bitcoin, more than five years after his first venture, e-gold, was shut down by the US Department of Justice


Douglas Jackson is consulting for a membership organisation called Coeptis that hopes to launch a new version of his gold-backed currency, which attracted millions of users at its height.


Coeptis’s “global standard currency” would be fully backed by reserves of gold, held in a trust, in effect turning the precious metal into a medium of exchange.

Full article here.


via Zero Hedge Tyler Durden

Guest Post: (Un)Paving Our Way To The Future

Submitted by James H. Kunstler via Peak Prosperity blog,

You can’t overstate the baleful effects for Americans of living in the tortured landscapes and townscapes we created for ourselves in the past century. This fiasco of cartoon suburbia, overgrown metroplexes, trashed small cities and abandoned small towns, and the gruesome connective tissue of roadways, commercial smarm, and free parking is the toxic medium of everyday life in this country. Its corrosive omnipresence induces a general failure of conscious awareness that it works implacably at every moment to diminish our lives. It is both the expression of our collapsed values and a self-reinforcing malady collapsing our values further. The worse it gets, the worse we become.

The citizens who do recognize their own discomfort in this geography of nowhere generally articulate it as a response to “ugliness.” This is only part of the story. The effects actually run much deeper. The aggressive and immersive ugliness of the built landscape is entropy made visible. It is composed of elements that move us in the direction of death, and the apprehension of this dynamic is what really makes people uncomfortable. It spreads a vacuum of lost meaning and purpose wherever it reaches. It is worse than nothing, worse than if it had never existed. As such, it qualifies under St. Augustine’s conception of “evil” in the sense that it represents antagonism to the forces of life.

We find ourselves now in a strange slough of history. Circumstances gathering in the home economics of mankind ought to inform us that we can’t keep living this way and need to make plans for living differently. But our sunk costs in this infrastructure for daily life with no future prevent us from making better choices. At least for the moment. In large part this is because the “development” of all this ghastly crap — the vinyl-and-strandboard housing subdivisions, the highway strips, malls, and “lifestyle centers,” the “Darth Vader” office parks, the infinity of asphalt pavements — became, for a while, our replacement for an economy of ecological sanity. The housing bubble was all about building more stuff with no future, and that is why the attempt to re-start it is evil.

Sooner rather than later we’ll have to make better choices. We’ll have to redesign the human habitat in America because our current environs will become uninhabitable. The means and modes for doing this are already understood. They do not require heroic “innovation” or great leaps of “new technology.” Mostly they require a decent respect for easily referenced history and a readjustment of our values in the general direction of promoting life over death. This means for accomplishing this will be the subject of Part II of this essay, but it is necessary to review a pathology report of the damage done.

Launching Nirvana

I have a new theory of history: things happen in human affairs because they seem like a good idea at the time. This helps explain events that otherwise defy understanding, for example the causes of the First World War. England, France, Russia, Germany, and Italy joined that war because it seemed like a good idea at the time, namely August of 1914. There hadn’t been a real good dust-up on the continent since Waterloo in 1814. Old grievances were stewing. Empires were both rising and falling, contracting and reaching out. The “players” seemed to go into the war thinking it would be a short,  redemptive, and rather glorious adventure, complete with cavalry charges and evenings in ballrooms. The “deciders” failed to take into account the effects of newly mechanized warfare. The result was the staggering industrial slaughter of the trenches. Poison gas attacks did not inspire picturesque heroism. And what started the whole thing? Ostensibly the assassination of an unpopular Hapsburg prince in Serbia. Was Franz Ferdinand an important figure? Not really. Was Austria a threat to France and England? It was in steep decline, a sclerotic empire held together with whipped cream and waltz music. Did Russia really care about little Serbia? Was Germany insane to attack on two fronts? Starting the fight seemed like a good idea at the time — and then, of course, the unintended consequences bit back like a mad dog from hell.

Likewise America’s war against its own landscape, which got underway in earnest just as the First World War ended (1918). The preceding years had seen Henry Ford perfect, first, the Model T (1908), and then the assembly line method of production (1915), and when WW I was out of the way, America embarked on its romance with democratic motoring. First, the cities were retrofitted for cars. This seemed like a good idea at the time, but the streets were soon overwhelmed by them. By the mid-1920s the temptation to motorize the countryside beyond the cities was irresistible, as were the potential profits to be reaped. What’s more, automobilizing the cities made them more unpleasant places to live, and reinforced the established American animus against city life in general, while supporting and enabling the fantasy that everyone ought to live in some approximation to a country squire, preferably in some kind of frontier.

The urban hinterlands presented just such a simulacrum of a frontier. It wasn’t a true frontier anymore in the sense of civilization meeting wilderness, but it was a real estate frontier and that was good enough for the moment. Developing it with houses seemed like a good idea. Indeed, it proved to be an excellent way to make money. The first iteration of 1920s car suburbs bloomed in the rural ring around every city in the land. An expanding middle class could “move to the country” but still have easy access to the city, with all its business and cultural amenities. What a wonderful thing! And so suburban real estate development became embedded in the national economic psychology as a pillar of “progress” and “growth.”

This activity contributed hugely to the fabled boom of the 1920s.  Alas, the financial shenanigans arising out of all this new wealth, along with other disorders of capital, such as the saturation of markets, blew up the banking system and the Great Depression was on. The construction industry was hardest it. Very little private real estate development happened in the 1930s. And as that decade segued right into the Second World War, the dearth continued.

When the soldiers came home, the economic climate had shifted. America was the only industrial economy left standing, with all the advantages implied by that, plus military control over the loser lands. We already possessed the world’s biggest oil industry. But after two decades of depression, war, and neglect, American cities were less appealing than ever. The dominant image of city life in 1952 was Ralph Kramden’s apartment in The Honeymooners TV show. Yccchhh. America was a large nation, with a lot of agricultural land just beyond the city limits. Hence, the mushrooming middle class, including now well-paid factory workers, could easily be sold on “country living.” The suburban project, languishing since 1930, resumed with a vengeance. The interstate highway program accelerated it.

The Broken Promises of Suburbia

It seemed like a good idea at the time. Country life for everybody in the world’s savior democracy! Fresh air! Light! Play space for the little ones! Nothing in world history had been easier to sell. Interestingly, in a nation newly-addicted to television viewing, the suburban expansion of the 1950s took on a cartoon flavor. It was soon apparent that the emergent “product” was not “country living” but rather a c
artoon of a country house in a cartoon of the country. Yet it still sold. Americans were quite satisfied to live in a cartoon environment. It was uncomplicated. It could be purchased on installment loans. We had plenty of cheap energy to run it.

It took decades of accreting suburbia for its more insidious deficiencies to become apparent. Most noticeable was the disappearance of the rural edge as the subdivisions quickly fanned outward, dissolving the adjacent pastures, cornfields, and forests that served as reminder of the original promise of “country living.” Next was the parallel problem of accreting car traffic. Soon, that negated the promise of spacious country living in other ways. The hated urban “congestion” of living among too many people became an even more obnoxious congestion of cars. That problem was aggravated by the idiocies of single-use zoning, which mandated the strictest possible separation of activities and forced every denizen of the suburbs into driving for every little task. Under those codes (no mixed use!), the corner store was outlawed, as well as the café, the bistro, indeed any sort of gathering place within a short walk that is normal in one form or another in virtually every other culture.

This lack of public amenity drove the movement to make every household a self-contained, hermetically-sealed social unit. Instead of mixing with other people outside the family on a regular basis, Americans had TV and developed more meaningful relations with the characters on it than with the real people around them. Television was also the perfect medium for selling redundant “consumer” products: every house had to have its own lawnmower, washing machine, and pretty soon a separate TV for each family member.  The result of all that was the corrosion of civic life (a.k.a “community”) until just about every civic association except for school oversight (the fabled PTA) dwindled and faded. And the net effect of all that was the stupendous loneliness, monotony, atomization, superficiality, and boredom of suburbia’s social vacuum. It was especially hard on the supposed greatest beneficiaries, children, who, having outgrown the play space of the yard by age eight, could not easily navigate the matrix of freeways and highways outside the subdivision without the aid of the “family chauffeur,” (i.e. Mom).

Cutting Our Losses & Moving On

A couple of  points about the current situation in suburbia ought to be self-evident. One is that our predicament vis-à-vis oil, along with cratering middle class incomes, suggests that we won’t be able to run this arrangement of things on the landscape a whole lot longer. The circulatory system of suburbia depends on cars which run on liquid hydrocarbon fuels. Despite the current propaganda (“drill, baby drill”), we have poor prospects of continuing an affordable supply of those things, and poorer prospects of running the US motor vehicle fleet by other means, despite the share price of Tesla, Inc. The second point is how poorly all suburbia’s components are aging — the vinyl-clad houses, the tilt-up strip malls, the countless chicken shacks, burger stands, and muffler shops, all the generic accessories and furnishings that litter the terrain from sea to shining sea. There are a lot of reasons these things now look bad (and lose value) but the chief one is that most of them are things nobody really cares about.

In Part II: A Better Human Habitat for the Next Economy, we explore the necessary behaviors we’ll need to adopt if we hope to have any prosperity in the years ahead. What seemed like a good idea at the time — through the 20th century and a little beyond — is looking more like an experiment that failed. Our sunk costs in it promote a tendency to agonize over it. I propose that we just give up the hand-wringing and prepare to cut our losses and move on. The reality of the situation is that the response to all this will arise emergently as circumstances compel us to change our behavior and make different (and we should hope) better choices. That is to say, don’t expect programmatic political action to change this, especially from remote authorities like federal or state governments. We will reorganize life on the ground because we will have to.

Click here to read Part II of this report (free executive summary; enrollment required for full access).


via Zero Hedge Tyler Durden

Visualizing Abenomics – Japan’s Dangerous Experiment

The early effects of the reform program have triggered a surge in the Japanese stock market, accelerated by the anticipation of growth revival. So far, so good for the markets and traders. But how will Abenomics accommodate public debt of over 200% GDP, and will Abe’s radical policies inspire a long-term economic recovery in Japan? Saxo Capital Markets’ new infographic explores the efficacy of Japan’s prime minister’s dangerous experiment to stimulate economic growth.

(click image for large legible version)


Via Saxo Capital Markets,

Can Abenomics save the Japanese economy?

Abenomics is based on the untested formula of monetary easing, fiscal stimulus and structural reforms. In early 2013, Abe promised to increase public spending across Japanese infrastructure and renewable energy, committing $116 billion to reignite Japan’s struggling economy. This short-term stimulus aims to boost GDP and job creation by building business confidence and inspiring private investment.

A new inflation target of 2%, conceived by Abe and enacted by the Bank of Japan, prompted a massive quantitative easing programme worth $1.4 trillion. This stimulus measure was introduced with the aim of buying up government debt in a battle to counter deflation. Monetary easing has resulted in a weakening of the yen to the point of a rise in inflation. A devalued yen is a boon to Japanese exports, as manufacturers can sell more goods to a more receptive foreign market. As a result, the Nikkei stock index has rallied by gaining more than 40%, driving stock price increases and, consequently, invigorating business growth. Japan’s lower currency has dipped against the US dollar, with forecasts suggesting wages, prices, employment and business investment will all rise.

The third, and potentially most critical, strategy of Abenomics is the unrolling of proposed structural reforms. Abe’s move to revamp Japan’s healthcare field, energy policies and IT industry is an overhaul in key industry sectors to maintain economic growth beyond short-lived QE lifts and fiscal spending. To what extent does Japan’s financial stability hinge on these structural reforms? Abe’s decision to join negotiations on the Trans-Pacific Partnership (TPP), a regional free trade agreement, may be crucial to elevating the ratio of Japan’s international trade from 20% to 70%, under the free trade agreements.

A series of initiatives to lay the groundwork for future growth includes schemes to help Japanese engineering companies to sell more nuclear power plants and high-speed trains abroad as well as a domestic-based proposal to increase female numbers in the workforce.

For Abenomics to succeed, Japanese households will need to reverse the recent deflationary trend of excess saving and encourage consumers to spend more. In the infographic, Mads Koefed, Head of Macro Strategy at Saxo Bank, suggests that ‘the new experiment in Japan has boosted consumer sentiment and that has now resulted in consumers spending more of their money’. Will a more optimistic outlook translate into a revival for the world’s third largest economy? It is premature to gauge the success of Abenomics at this stage, and there are question marks over the proposed structural reforms. Fears remain over Japan’s alarming national debt, and an eventual rise in interest rates would add a greater burden on the government, undercutting reform measures. Will an offshoot of Abe’s remedies to Japan’s macroeconomic problems inflict a greater debt load?

Further problems await Japan: the unsustainable ratio of the elderly to the working population, fallout should fiscal stimulus fail, and snowballing costs for imports. This symptom of a weakened yen is exemplified by Japan’s post-Fukushima nuclear programme, which relies heavily on imports. Although Japan’s aggressive monetary easing programme has helped the yen devalue against the US dollar, Abe’s monetary easing plans threaten to distort the financial markets. The Bank of Japan’s purchases of financial assets have created significant uncertainty in the bond markets, with Japan’s 10-year government bond unexpectedly rising to a record high in May 2013.

Abe’s structural reforms carry with them several risks. The domestic agriculture sector could suffer from increased marketplace competition should tariffs on imports be removed. Any agreements with the TPP would mean greater dependency on government support among Japanese farmers, adding a further load on finances.

Finally in the infographic, Saxo have looked at the percentage of their clients, based in the UK, that hold a net-long position in the US dollar against the Japanese yen, compared to the number of those who are net-short USDJPY. The majority (83%) hold a net-long position, which reflects the position many traders take on the success of Abenomics.

Data published in late November indicates that household spending has risen 0.9% in October (from 2013 figures), but is this a long-term ascent, leading to stable economic growth?

Recent data suggests the Japanese economy is recovering from its deflationary cycle, with inflation at its highest for a half a decade. Japan’s consumer price index (CPI), which identifies the change in prices of consumer goods and services over a specific period, reveals an upward trend in consumer costs. Is this a sign of Abenomics in action? Next year’s consumption tax increase means the BOJ’s fiscal stimulus is expected to continue during 2014 to target the 2% inflation rate, despite the promising figures in the CPI release.


via Zero Hedge Tyler Durden