Category: zerohedge

Today’s Chart of the Day comes by way of SocGen’s Albert Edwards who in one image shows why, with gross debt issuance needs between budget funding and rolling maturities at 60% of GDP, Japan has no choice but “to print and print and print“

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We can only imagine the overwhelmingly positive perspective that Boehner and the GOP leadership will have as they discuss Obamacare’s early days… What’s worse than a “train wreck?” …grab your popcorn…

 

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Submitted by F.F. Wiley via Cyniconomics blog,

We followed the latest Paul Krugman feud – this one with Niall Ferguson – until Krugman’s tag team partner and CYNICONOMICS reader Brad DeLong entered the fray.

After about a half dozen posts on Krugman and DeLong this year, we had some topic fatigue.

Yesterday, we learned that we dropped out too soon. It turns out that Ferguson followed his DeLong post with possibly the definitive piece on Krugman – a three-part series published in the Huffington Post earlier this month (h/t Tim Iacono and Ralph Benko).

On one level, Ferguson’s series reinforces what we already know. Those familiar with Krugman’s positions are well aware that his regular boasts about being “right about everything” are blatantly false. We know, for example, that he recommended creating a housing bubble in 2002, which didn’t work out so well in hindsight. We also know that he says completely different things about government debt depending on which political party is driving the deficit higher. When the GOP is responsible, he complains about “fiscal train wrecks” and the “threat to the federal government’s solvency.” When advising the Democrats to add even more debt, he claims that “we’re not facing any type of fiscal crisis.”

But Ferguson raises the scrutiny on Krugman’s work in his “HuffPo” series. He draws on meticulous documentation of Krugman’s public positions on the global financial crisis and Euro crisis. He also calls out the posse of liberal bloggers who follow Krugman’s lead by insulting and name-calling anyone who doesn’t think as they do. (See here for one of our related posts.)

Benko published a nice summary of Ferguson’s articles in Forbes.

I’ll combine the links with a handful of other Krugman-related posts we saved this year, starting with the HuffPo series:

• In “Krugtron the Invincible, Part 1,” Ferguson notes that he didn’t make up his title – it’s actually a name Krugman calls himself (!) – and focuses especially on Krugman’s stated views on the Euro. Here’s an excerpt:

“I like to think,” Krugman wrote on August 14, “that if I had been proved … utterly wrong … I’d have had the strength of character to admit it and question my premises. But I don’t know for sure, and with some luck I’ll never find out.” Now that I have shown Krugtron the Invincible to have been utterly and repeatedly wrong about the euro, I look forward to reading his admission of error.

To be precise, I would like to see him admit that he got the biggest call of the last several years dead wrong, again and again and again…

• In part 2, he turns to the global financial crisis and again scours the public record to show that Krugman failed to understand events as they developed, concluding that:

One might have expected a little more humility from an economist who so clearly failed to understand the nature of the biggest financial crisis of his lifetime until after it had happened. Or at least a little less egomania: “Yes,” he wrote in January, “I’ve heard about the notion that I should be Treasury Secretary. I’m flattered, but it really is a bad idea.”

• The third part places both Krugman and Krugman’s economics in their proper context. I’ll share the first two paragraphs and recommend reading the whole piece if you haven’t already done so:

In my previous two articles, I have shown that Paul Krugman – revered by his acolytes as the Invincible Krugtron – failed to anticipate the financial crisis and wrongly predicted that the single European currency would fall victim to it. I have exploded his claim to intellectual invincibility. Very clearly, he has made at least twice as many major mistakes in his career as the mere two he has previously admitted to.

You may ask: Why have I taken the trouble to do this? I have three motives. The first is to illuminate the way the world really works, as opposed to the way Krugman and his beloved New Keynesian macroeconomic models say it works. The second is to assert the importance of humility and civility in public as well as academic discourse. And the third, frankly, is to teach him the meaning of the old Scottish regimental motto: nemo me impune lacessit (“No one attacks me with impunity”).

Like a Fourth of July fireworks show, Ferguson’s series feels like a grand finale to a succession of Krugman feuds and clashes this year. Here are just a few of the skirmishes from the past six months:

False accusations, unsuccessful forecasts and other errors

• Krugman joined a host of other pundits in badly misrepresenting the Reinhart-Rogoff controversy in April. He continued to spread misinformation more than a month after the story broke, finally prompting a reply from Carmen Reinhart and Ken Rogoff, which set the record straight on several matters including their past policy advice and the public’s access to their data. Krugman was shown to have made false accusations and called out for childish antics.
• Responding again to a critique of his work, Rogoff showed that Krugman’s various positions on Europe’s economy and financial markets were contradictory, while discussing flaws in Krugman’s analytical framework.
• Robert Murphy showed that Krugman incorrectly forecast disinflation in a blog post dated February 2010. Instead of drifting toward deflation territory as predicted by Krugman, inflation soon turned around and began to trend upward.  Murphy points out t
  hat the facts make a mockery of Krugman’s claim to inflation forecasting supremacy.
• Presumably to compensate for Krugman’s inability to admit mistakes, Tyler Cowen intervened on his behalf in June. In a post amusingly titled “Krugman and I were both wrong about the Fed and interest rates,” Cowen pointed out that the second quarter’s taper-induced bond market rout invalidated Krugman’s näive claim that bond yields were mostly impervious to QE.
• Krugman challenged a Cowen post containing a hypothetical comment about El Salvador. But he discussed the country’s currency without realizing that Cowen chose El Salvador for his example because it doesn’t have its own currency – it uses the U.S. dollar. Note that any other blogger arguing a point on such an obviously mistaken premise would have surely faced Krugman’s snark. In the same response in which Cowen acknowledged Krugman’s correction, he demonstrates that Krugman managed to not only contradict but also parody his own prior views.

Egotism and pomposity

• Despite sharing some of Krugman’s core views, Clive Crook objects to his contemptuous attitude.
• Bryan Caplan disputes Krugman’s boast that he can see the other side’s argument but they can’t see his.

Just to be clear, I’m not criticizing Krugman for the number of battles he gets himself into. If he argued his case truthfully and respectfully, there would be little reason for this post. But Krugman accumulates enemies by inventing his own facts, denying obvious mistakes, displaying über-arrogance and insulting those with opposing views. Fortunately, folks such as Ferguson occasionally bring these points to light.

(For more on Krugman’s public positions, see our critiques of his book, End This Depression Now. In “It’s Time to Change Focus From Reinhart-Rogoff Witch Hunts to Krugman’s Contradictions,” we flagged the circular logic in one of Krugman’s favorite excuses for fiscal profligacy. In “Testing Krugman’s Debt Reduction Strategy and Finding It Fails,” we exposed the flaws in his claim that $5 trillion in additional government debt isn’t such a “big deal.”)

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While the world awaits with bated breath until the moment that Greece can no longer afford to pretend it is solvent and has to apply for its third bailout from Europe, or else threaten to take down Deutsche Bank and its tens of trillions in gross derivatives, the world has to listen to the constant jawboning from the Troika which for the past nearly 4 years continues to express its displeasure with Greece, and yet still provides every Euro of funding the imploding country requests. In the latest iteration of this charade, the Troika has apparently flexed its muscles and made it clear that if Greece wants to receive the next round of cash, it will have to shutter the state-owned Hellenic Defense Systems (EAS) and the Hellenic Vehicle Industry (ELVO). In short: shut down the domestic defense and auto industries, and we’ll talk. Oh, and if as a result you have to import your guns and cars from Germany (whose generous funding has kept you afloat so far), and have to take out Deutsche Bank loans to pay for them, so be it.

From Kathimerini:

The heads of the troika mission in Greece are due to return to Athens at the beginning of November, it was revealed on Tuesday as sources in Brussels insisted that the country’s lenders would not back down over their demands for further fiscal measures and the closure of Hellenic Defense Systems (EAS) and the Hellenic Vehicle Industry (ELVO).

 

The Greek government has balked at suggestions it may have to find as much as 2 billion euros more than it has planned in savings next year. However, EU sources told Kathimerini that the troika does not consider the draft 2014 budget reliable. Greece’s creditors believe the plan overestimates tax revenues and underestimates social spending.

 

As a result, the troika wants to thrash out more measures with the Greek government, ensuring that the deficit target for 2014 will be met. The European Commission, European Central Bank and International Monetary Fund agree with Athens’s positions that any extra savings should not come from “horizontal” cuts to wages and pensions.

 

The precise amount needed to cover Greece’s fiscal gap next year will not be assessed fully until the current troika review is completed. This requires Greece to meet the milestones agreed with its lenders, such as rounding off the first phase of a public sector mobility scheme. EU sources noted that Greece could survive without receiving its next loan tranche until spring, thereby underlining that the troika is not in a rush to complete the review.

 

With regard to EAS and ELVO, Greece’s lenders do not believe it is possible to save the two state firms as they are a drain on public finances, in contrast to other European countries, where companies in the defense industry are profitable.

 

Athens has been in contact with the European Commission over the past few days to respond to queries about its plans to keep the firms afloat. The government believes that it could turn EAS into a profitable company with two years. EU sources said Brussels had heard similar pledges from Greek governments over the past 20 years.

The last snarky sentence was from Kathimerini, not us.

And of course, all of the above would be dramatic if it wasn’t quite clear apriori that this is merely the latest iteration of the kick-the-can closed loop, best summarized by the schematic below.

h/t @GreekFire23

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The FHFA reported home prices gained at the lowest pace in 11 months (0.3% MoM vs 0.8% expected) missing expectations by the 2nd largest amont on 13 months. It seems, just as we pointed out that with fast money leaving the room and slow money crushed by higher mortgage rates at the margin that indeed something had to give… Prices in the South Atlantic and East Central actually fell MoM.

 

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Only 38% of S&P 500 companies that have reported have beaten revenue expectations – compared to a historical average of around 46%. As Bloomberg notes, Q3 2013 will be the first time for 3 consecutive quarters of sub-50% meeting expectations since their records began. Earnings are not much better having seen a slide in performance relative to expectations for 4 quarters now. It seems the hockey-stick of H2 2013 earnings hope that we so vociferously pointed out as ridiculous early in the year is indeed far too high and combined with valuations (as we noted here) that are stretched (Price-to-Sales at 1.6x is around twice the norma since the 1990s) it suggests that any hint of a taper will remove the only leg left for stocks – that of hope-based multiple expansion.

 

 

Source: Bloomberg

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With the government reopened, and the debt-ceiling non-negotiation off the table, if only for another 3 months, Wall Street’s experts have fallen back to what they do worst: attemping to predict when the Fed will Taper. And just as virtually all economists were convinced the September tapering is a done deal, so nobody sees a Taper in the next three months, and certainly not before March, or, in the case of Larry Fink, June 2014. One thing, however, that nobody in polite, statist company has brought up yet is not only the possibility, but the probability there may not be a taper. At all. Well, Deutsche Bank – the first of any major Wall Street institution – just floated “that” particular bubble. To wit: since “the Fed possibly only has a narrow window to taper before it’s faced with economic headwinds again and if this is the case then why bother taper at all?”

From Deutsche’s Jim Reid:

After yesterday’s payroll number the opening paragraph writes itself this morning with the softness clearly further reducing the probability of tapering over the next 3-6 months. I suppose the only concern is that this is becoming consensus and perhaps too obvious. However if the employment data isn’t improving its hard to imagine a Yellen-led Fed risking upsetting the recovery whatever their fears about the risks of ongoing QE. What else is there? Potentially cleansing defaults have been a policy no-no for years now and expansive fiscal policy which might be useful for jobs and growth is not going to happen with politics so divided. So QE remains the highly imperfect main policy tool.

 

If you’re looking for a less consensus view, I was chatting with DB’s US rate strategist Dominic Konstam yesterday and he is continuing to run with his recent theme that the labour market is exhibiting “late cycle” tendencies which lead him to believe that this cycle only has a 50/50 chance of extending much beyond 2015. Therefore he is considering the prospect that the Fed possibly only has a narrow window to taper before it’s faced with economic headwinds again and if this is the case then why bother taper at all? If employment is indeed late cycle maybe the conditions don’t quite get strong enough in 2014 to persuade the Fed to be too aggressive in pulling back liquidity. He also thinks 2.25% is a good near-term target for 10 year yields and like us feels that risk assets will be supported over the next few months by the Fed’s taper delay but worries whether they can always resist gravity, especially when the cycle turns. An interesting chat and his thoughts are always worth listening to.

Expect many more to join this particular bandwagon, subsequent to which, we also expect that other uber-heretic thought, that instead of tapering, the Fed will instead proceed to monetize even more than $85 billion per month, crumbling collateral environemnt and shadow banking be damned. Heretic, because it will mean that the Fed not only can’t limit its monthly flow, but will have to monetize ever more and more each month, until it ultimately, and logically, runs out of stuff to buy. Which is why, in retrospect, the appointment of Yellen may have been the best thing to happen to the Fed: if nothing else, she will at least bring on the grand reset of a broken monetary and economic system that much faster than someone who may have been at least superficially cautious.

 

 

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With the government reopened, and the debt-ceiling non-negotiation off the table, if only for another 3 months, Wall Street’s experts have fallen back to what they do worst: attemping to predict when the Fed will Taper. And just as virtually all economists were convinced the September tapering is a done deal, so nobody sees a Taper in the next three months, and certainly not before March, or, in the case of Larry Fink, June 2014. One thing, however, that nobody in polite, statist company has brought up yet is not only the possibility, but the probability there may not be a taper. At all. Well, Deutsche Bank – the first of any major Wall Street institution – just floated “that” particular bubble. To wit: since “the Fed possibly only has a narrow window to taper before it’s faced with economic headwinds again and if this is the case then why bother taper at all?”

From Deutsche’s Jim Reid:

After yesterday’s payroll number the opening paragraph writes itself this morning with the softness clearly further reducing the probability of tapering over the next 3-6 months. I suppose the only concern is that this is becoming consensus and perhaps too obvious. However if the employment data isn’t improving its hard to imagine a Yellen-led Fed risking upsetting the recovery whatever their fears about the risks of ongoing QE. What else is there? Potentially cleansing defaults have been a policy no-no for years now and expansive fiscal policy which might be useful for jobs and growth is not going to happen with politics so divided. So QE remains the highly imperfect main policy tool.

 

If you’re looking for a less consensus view, I was chatting with DB’s US rate strategist Dominic Konstam yesterday and he is continuing to run with his recent theme that the labour market is exhibiting “late cycle” tendencies which lead him to believe that this cycle only has a 50/50 chance of extending much beyond 2015. Therefore he is considering the prospect that the Fed possibly only has a narrow window to taper before it’s faced with economic headwinds again and if this is the case then why bother taper at all? If employment is indeed late cycle maybe the conditions don’t quite get strong enough in 2014 to persuade the Fed to be too aggressive in pulling back liquidity. He also thinks 2.25% is a good near-term target for 10 year yields and like us feels that risk assets will be supported over the next few months by the Fed’s taper delay but worries whether they can always resist gravity, especially when the cycle turns. An interesting chat and his thoughts are always worth listening to.

Expect many more to join this particular bandwagon, subsequent to which, we also expect that other uber-heretic thought, that instead of tapering, the Fed will instead proceed to monetize even more than $85 billion per month, crumbling collateral environemnt and shadow banking be damned. Heretic, because it will mean that the Fed not only can’t limit its monthly flow, but will have to monetize ever more and more each month, until it ultimately, and logically, runs out of stuff to buy. Which is why, in retrospect, the appointment of Yellen may have been the best thing to happen to the Fed: if nothing else, she will at least bring on the grand reset of a broken monetary and economic system that much faster than someone who may have been at least superficially cautious.

 

 

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With every passing quarter, Caterpillar, perhaps the last truly industrial company in the epically misnamed Dow Jones (non)-Industrial Average, provides an ever clearer answer to the question we posed this past July, namely “Is CAT Nothing But The Dow’s Most Overpriced Dog?” The most recent confirmation that CAT is indeed a massive dog, came moments ago when the company announced Q3 earnings which were for lack of a better word, disastrous: EPS came at $1.45 on expectations of $1.67, revenues missed by a whopping $1 billion, when the sales print $13.4 billion missed expectations of $14.47 billion – perhaps the biggest top-line miss in the company’s history since the Lehman bankruptcy. But it was the guidance that is slaying the stock right now: “The company has revised its 2013 outlook and now expects sales and revenues to be about $55 billion, with profit per share of about $5.50.  The previous outlook for 2013 sales and revenues was a range of $56 to $58 billion with profit per share of about $6.50 at the middle of that range.” But don’t worry: despite our continuous warnings about the sad state of this company the trend, it is only “transitory”, and any minute now thing may get better. Unless they don’t.

From the report:

“This year has proven to be difficult, with expected sales and revenues nearly $11 billion lower than last year.  That is a 17 percent decline from 2012, with about 75 percent of the drop from Resource Industries, which is principally mining.  We expect Resource Industries to be down close to 40 percent for the full year and Power Systems’ and Construction Industries’ sales to each be down about 5 percent,” said Caterpillar Chairman and Chief Executive Officer Doug Oberhelman.

 

Not only is mining down from 2012, the demand for equipment has been difficult to forecast.  Orders for new mining equipment began to drop significantly in mid-2012 and have continued at very low levels.  As a result of weak orders and feedback from end users, the sales and revenues outlook provided in January of 2013 included a decline in mining sales.  At that time, based on strong mine production for many commodities, the company’s outlook expected that order rates would improve later in 2013.

 

“Unfortunately, order rates have not picked up much despite continuing strong commodity production.  That has caused us to ratchet down our sales and revenues outlook as we have moved through 2013,” Oberhelman said.

And the outlook:

From an economic standpoint, the company expects better world growth in 2014.  However, significant risks and uncertainties remain that could temper global economic growth.  The direction of U.S. fiscal and monetary policy remains uncertain; Eurozone economies are far from healthy and China continues to transition to a more consumer-demand led economy.  In addition, despite higher mine production around the world, new orders for mining equipment remain very low.  As a result, the company is holding its outlook for 2014 sales and revenues flat with 2013 in a plus or minus 5 percent range.  The company expects sales growth in Construction Industries, relatively flat sales in Power Systems and a decline in Resource Industries’ sales.

 

“There are encouraging signs, but there is also a good deal of uncertainty worldwide as we look ahead to 2014, and our preliminary outlook reflects that uncertainty.  Despite prospects for improved economic growth and continued strong mine production around the world, we won’t be increasing our expectations for Resource Industries until mining orders improve.  We can’t change the economy or industry demand, but we’ve taken many actions to align our costs with the environment we’re in currently.  While we’ve done much already, we’re not finished and expect to take deeper actions to improve our cost structure and balance sheet.  We’re not seeing bright spots in mining yet, but the turnaround will happen at some point, and when it does, we’ll be ready to respond,” Oberhelman added.

Sure. “At some point” it will happen. Just not now and not for the foreseeable future. In fact, as long as the Fed is monetizing, kiss any recovery goodbye.

But that’s ok: who needs revenues, and certainly earnings, when all Bernanke needs to do is crank up the P/E multiple expansion by one more notch. And all shall be well until next quarter.

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With every passing quarter, Caterpillar, perhaps the last truly industrial company in the epically misnamed Dow Jones (non)-Industrial Average, provides an ever clearer answer to the question we posed this past July, namely “Is CAT Nothing But The Dow’s Most Overpriced Dog?” The most recent confirmation that CAT is indeed a massive dog, came moments ago when the company announced Q3 earnings which were for lack of a better word, disastrous: EPS came at $1.45 on expectations of $1.67, revenues missed by a whopping $1 billion, when the sales print $13.4 billion missed expectations of $14.47 billion – perhaps the biggest top-line miss in the company’s history since the Lehman bankruptcy. But it was the guidance that is slaying the stock right now: “The company has revised its 2013 outlook and now expects sales and revenues to be about $55 billion, with profit per share of about $5.50.  The previous outlook for 2013 sales and revenues was a range of $56 to $58 billion with profit per share of about $6.50 at the middle of that range.” But don’t worry: despite our continuous warnings about the sad state of this company the trend, it is only “transitory”, and any minute now thing may get better. Unless they don’t.

From the report:

“This year has proven to be difficult, with expected sales and revenues nearly $11 billion lower than last year.  That is a 17 percent decline from 2012, with about 75 percent of the drop from Resource Industries, which is principally mining.  We expect Resource Industries to be down close to 40 percent for the full year and Power Systems’ and Construction Industries’ sales to each be down about 5 percent,” said Caterpillar Chairman and Chief Executive Officer Doug Oberhelman.

 

Not only is mining down from 2012, the demand for equipment has been difficult to forecast.  Orders for new mining equipment began to drop significantly in mid-2012 and have continued at very low levels.  As a result of weak orders and feedback from end users, the sales and revenues outlook provided in January of 2013 included a decline in mining sales.  At that time, based on strong mine production for many commodities, the company’s outlook expected that order rates would improve later in 2013.

 

“Unfortunately, order rates have not picked up much despite continuing strong commodity production.  That has caused us to ratchet down our sales and revenues outlook as we have moved through 2013,” Oberhelman said.

And the outlook:

From an economic standpoint, the company expects better world growth in 2014.  However, significant risks and uncertainties remain that could temper global economic growth.  The direction of U.S. fiscal and monetary policy remains uncertain; Eurozone economies are far from healthy and China continues to transition to a more consumer-demand led economy.  In addition, despite higher mine production around the world, new orders for mining equipment remain very low.  As a result, the company is holding its outlook for 2014 sales and revenues flat with 2013 in a plus or minus 5 percent range.  The company expects sales growth in Construction Industries, relatively flat sales in Power Systems and a decline in Resource Industries’ sales.

 

“There are encouraging signs, but there is also a good deal of uncertainty worldwide as we look ahead to 2014, and our preliminary outlook reflects that uncertainty.  Despite prospects for improved economic growth and continued strong mine production around the world, we won’t be increasing our expectations for Resource Industries until mining orders improve.  We can’t change the economy or industry demand, but we’ve taken many actions to align our costs with the environment we’re in currently.  While we’ve done much already, we’re not finished and expect to take deeper actions to improve our cost structure and balance sheet.  We’re not seeing bright spots in mining yet, but the turnaround will happen at some point, and when it does, we’ll be ready to respond,” Oberhelman added.

Sure. “At some point” it will happen. Just not now and not for the foreseeable future. In fact, as long as the Fed is monetizing, kiss any recovery goodbye.

But that’s ok: who needs revenues, and certainly earnings, when all Bernanke needs to do is crank up the P/E multiple expansion by one more notch. And all shall be well until next quarter.

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