Jackson Hole: Myth of the All Powerful Central Banker Continues … For Now

Myth of the All Powerful Central Banker Continues In Jackson Hole  
The myth of the all powerful central banker continued in Jackson Hole.

Markets waited with bated breath for Fed Chair Janet Yellen’s and ECB Mario Draghi’s speeches at the annual gathering of central bankers in Jackson Hole, Wyoming.



Market participants were once again focussed on the short term and the silly ‘will she, won’t she?’ debate regarding Bernanke’s successor Yellen at the Jackson Hole symposium.

Yellen and Draghi obfuscated and did not give clear guidance regarding monetary policy as Trichet, Bernanke, Greenspan were past masters at.

We believe that further U.S. QE and money printing remains very likely given the poor structural state of the U.S. economy. We advise investors to fade out the short term noise emanating from Jackson Hole and from assorted policy makers on both sides of the Atlantic and focus on the reality that further monetary easing and currency debasement will continue for the foreseeable future.

ECB President Mario Draghi is under pressure to use his last remaining tool — printing money to buy huge amounts of bonds.

“We stand ready to adjust our policy stance further,” Draghi said.
The bank has cut interest rates, offered cheap loans to banks and is weighing up making asset purchases to pump more money into the economy, but Draghi did not offer new guidance on when the bank might take action.


There are continuing hopes that the ECB will embark on QE even though it has been less than successful in Japan and the jury is still out regarding its efficacy in the U.S.

The market believes EU QE is unlikely in the short term but there is a growing consensus that it will be seen in 2015. This would be bullish for gold prices, especially in euro terms.

Gold prices fell after minutes from the Fed’s July meeting on Wednesday showed policy makers debated whether interest rates should be raised earlier. Gold has fallen this week and there is speculation that it was due to fears that the Federal Reserve could hike interest rates sooner than expected.

However, if that were the case then stock markets would have also come under pressure instead of marching on to new record highs. From a market perspective this is very counter intuitive and suggests gold’s falls were for another reason.

A four-day rally for U.S. stocks carried the S&P 500 index to a fresh record yesterday. The S&P 500 reached 1992.37, its 28th record finish of 2014 and first since July 24.

Market talk is of Yellen pushing the S&P to new records at the psychological 2000 level. Irrational  exuberance is alive and well on Wall Street and being stoked by the ultra loose monetary policies of Yellen and her merry band of Jackson Hole cohorts.

It is worth noting that copper is heading for a 3% gain this week as are some other commodities. If markets were genuinely concerned regarding a sudden rise in interest rates, commodities and all risk assets would be under selling pressure.

Some market participants will rightly ask – why is it only gold and silver that have seen sudden declines this week?

The dollar hovered just below its 2014 peak against a basket of major currencies today. Dollar gains this week have pressurised gold. Speculators fear that better than expected data might prompt the Fed to raise interest rates.

Rising rates would hurt bonds and equities but would support gold. This was clearly seen in the 1970s when rising interest rates corresponded with rising gold prices. Gold becomes vulnerable towards the end of an interest rate tightening cycle when there are positive real interest rates and savers earn something on their deposits.

It is important to remember that central banker’s strategies of ultra loose monetary policies contributed in a significant way to the global financial crisis. Low interest rates by central bankers and Alan Greenspan in particular led to rampant speculation and risk taking on Wall Street, collateralised lending, the sub prime crisis and the stock and property bubbles.

Will a continuation of the same monetary policies that got us into the financial crisis really get us out? Conventional wisdom is that yes it will. However, the jury remains out on that question and time will tell.

History suggests that currency debasement on the scale we are seeing will end in significant inflation.  

Inform yourself of the 7 Key Gold Storage Must Haves here




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Immigration For Republicans

Submitted by Keith Weiner via Acting-Man blog,

This essay is not intended to address a crisis that may be occurring on the border at this time. We make no comment on that. Nor does it discuss the issues around war, such as how to deal with citizens of enemy nations. This essay is not a policy proposal, it does not set out, for example, when an immigrant can become a citizen and attain the vote or what to do to immigrants who commit crimes. It has but one purpose: to enumerate and respond to the common arguments used in favor of an impenetrable and guarded border fence to shut down immigration.

It's the Law …

Suppose you were born in a country that outlawed normal life. North Korea comes to mind. Venezuela is a slightly less extreme example, and there are many other examples which are slightly less bad than that socialist worker’s paradise.

I phrase it in these terms, because this is the essence of the issue. People are rightfully fleeing places where they cannot live.

Anyway, suppose you are in a place where life is a living hell. Every day, you are forced to beg and steal scraps of food to somehow stay alive. The best you can hope for is to subsist, one day at a time. You must avoid the gangs and the secret police.

If you could somehow scrape together the money to escape to America, would you?

You would take a job paying minimum wage—or less—doing long days of unskilled manual labor, if necessary. At least in America, you can work and you can begin to build a better life for yourself and your family.

But you notice that people call you “illegal.” They don’t refer to any crime you commit, because you are no criminal. You never steal from anyone, hurt anyone, and or do anything else that could objectively be called a crime. You work hard for every penny you earn. But they call you “illegal” anyway.

You come to realize that when they say illegal, they refer to you, not your actions. Your very existence so utterly offends them that they think you are crime incarnate.

You notice that most of them drive faster than the posted speed limit. Many don’t register their old handguns or refuse to pay tax when they sell a gold coin. They traffic in old toilets, which flush more than 1.6 gallons. They break the law in numerous ways.

On Facebook, there is a common meme that laughs at the statistic that everyone commits three felonies per day. Their crimes don’t bother them in the slightest, because they aren’t hurting anyone. They do get the concept of victimless crime, at least when they themselves are made into criminals by nonobjective law.

However, for you, amigo, none of that matters. “The law is the law,” they assert. “The law must be obeyed,” and they don’t mean the speed limit law here. They mean the law that does not allow you to live.

 

the law is the law

The law is the law (when it suits us).

 

Obviously, you are not going to oblige them by dying. This is the issue for you. Going back to hell may well be your death, or the death of your family.

This is the monstrous injustice of anti-immigration policy. Now let’s look at the arguments used to justify it.

 

Keeping Out Bad Ideas

The most intellectual argument is that immigrants bring bad ideas with them. Though I have not seen it phrased this way, this implies that we could build a Great Wall (or a Berlin Wall) to keep out socialism, fascism, cronyism, corruption, and the ideas of Kant and Marx. Surely, there would be no Che t-shirts if the wall were tall enough.

I find this argument unconvincing. In this era of radio, television, and the Internet, it’s the policy equivalent of locking the barn doors after the horses are not only out, but sold to the Saudis, and earning big purses racing in Abu Dhabi. Rotten ideas are not only here in America, but they have predominated for decades in our universities, media, and popular culture.

A lame duck president said, “I've abandoned free market principles to save the free market system.” When our current president was a candidate he said, “I think when you spread the wealth around, it’s good for everybody." We have a pejorative term for the wealthiest percentile of people, and one for bankers. Hollywood celebrities pose for pictures with socialist thugs like Hugo Chavez. These ideas are mainstream. Even conservatives will defend half a dozen of Marx’  ten planks.

 

bad ideas

A selection of communists – their evil ideas have become so ingrained in Western society, most people don't even realize their provenance anymore

 

If rational ideas prevailed in our culture and most people held to a rational philosophy, then evil ideas would find no fertile ground here. Proud people of healthy self-esteem who understand liberty, find nothing attractive about socialist utopias, death cults, thieving parasites, or paralyzing bureaucracy.

If you are un-persuaded, and you still believe that we have to keep out people with bad ideas, then you have to answer the following question. Are bad ideas intrinsically compelling?

Suppose a Marxist chants slogans on a street corner, or finds a willing American newspaper to publish his letter. Is this a threat to Western Civilization? Are reality and reason and liberty so weak and so un-compelling, that they are blown away by mindless communist propaganda?

At best, I think this argument reduces to another one that’s much more common. This argument does not address ideas, but voters.

Immigrants vote socialist, opponents of immigration tell us. But do they? I rather doubt that it’s nearly so prevalent as we’re told, though I don’t have the statistic. It doesn’t make any sense to me. These are people who have scrimped and saved to go to a foreign country. Many have risked their lives, and most of them are not fluent in the language. What motivates them to do this? I doubt it’s typically a desire to bring to the US the same socialism that forced them to flee.

What if immigrants are not voting for Democrats for their socialist policies, but for their pro-immigration stance? That would be a tragic irony to this argument. If the Republican Party stakes out the anti-immigrant position, then no one should be surprised when immigrants vote Democrat, along with their extended families, friends, and supporters.

The presumption that immigrants vote Democrat leads Republicans to oppose immigration, which leads immigrants to vote Democrat. Mr. Foot, meet Mr. Gun. Blam!

Incidentally, while I am criticizing the Republican Party, this very same issue is hurting them elsewhere too. Do gays all want socialism? Or do they want legalized marriage? Do women all want socialism? Or do they want legalized control over their own reproduction? Do biologists and other scientists want socialism? Or do they want legalized stem cell research and other scientific inquiry? Many members of these groups turn to the party that promises what they want.

 

Trespassers and the Collective

Moving on to the next argument, I hear often that an immigrant is like a trespasser or a burglar who breaks into your house. Think about what this argument says.

It says that the nation is owned collectively. If you are in the group, then you are part owner. If not, then you are a threat to the tribe. Today, it’s phrased in terms of criminal trespass, but it’s a primitive view of belongers vs. outsiders.

Of course the country as a whole is not owned, and certainly no collective has a right to violate anyone’s rights. Rights are neither a group benefit, nor a grant made by the government.

A related argument is that immigrants are taking our jobs. This argument is thoroughly Marxist. Thus, it’s ironic that it so often comes from conservatives, Republicans, and even some libertarians.

Our jobs? A job is a contract with an employer, not a birthright for an individual or a group privilege. If someone else is hired, but you are not, there is no injustice. If members of one group get hired and members of another group do not, then there is no cause for the government to interfere.

Jobs are not zero-sum. Under certain conditions, jobs are created and wages are rising. Under other conditions, jobs are stagnant or even destroyed. What conditions? Left free from coercion, people find ever more ways of coordinating their productive activities. Increasing production means hiring more people and paying them better wages.

However, when the government intrudes it reduces coordination, which means it reduces productivity, employment, wages, and quality of life. I proved this in my dissertation. One form of government intrusion is to block people, goods, or capital from crossing the border.

It may have taken a genius like Adam Smith or Frederic Bastiat to provide the original arguments to debunk state control, central planning, and government favoritism for cronies. However, today, a smart 8th grader can understand and make a cogent argument against this nonsense.

I don’t think anyone believes in bad economics for the sake of bad economics. No, there are two reasons people support junk economics. One is they want to get something they couldn’t earn in a free market. They seek protectionist measures to keep out competition. The other is they can see that the economy isn’t working properly. It is a fact that employment is far below its prior level. Such jobs as do exist pay lower real wages. Most people feel it at some level, and they’re angry.

They should be angry, but we should place the blame where it belongs. Taxes, regulations, litigation, and especially the Fed are the cause.

Please don’t take out  your anger on poor immigrants.

The idea that the economy is zero-sum is a Marxist idea. Lovers of America, the Constitution, and liberty should have nothing to do with it.

 

0-sum

The economy is not a zero sum game. The idea of a static economy providing a “fixed pie” to be fought over is a Marxist fallacy.

(Painting by Michael Morgenstern)

 

Welfare Tourists

The next argument is that immigrants come here to collect. We should not allow immigrants because they will only end up on welfare.

Compensation is when you deliberately and knowingly do the wrong thing, supposedly to fix a problem elsewhere that you cannot or do not wish to fix. My example is to let the air out of three tires if you have a flat. Shutting down immigration is compensation for the welfare state. We who don’t want to see the taxpayer bankrupted will do better to fight welfare, than to fight immigration.

This leads to a question I have asked several times, and received no answer. Why does Immigration and Customs Enforcement go after employers?

We’re told that immigrants are here to sell drugs and commit crimes. However, it’s obvious that you won’t find drug dealers, welfare queens, pimps, and bank robbers working at or below minimum wage in the hot sun. So why go after employers? There is only one reason.

It is to protect us belongers from losing our scarce jobs to those outsiders.

Can any of these arguments be applied to block immigration between the states? On Facebook recently, I saw someone post (half) jokingly that Texas should pass a law to keep out anyone from California who voted for its welfare schemes or high-speed rail boondoggle.

Logically, there is no reason they couldn’t be applied to interstate immigration. North Dakota has low unemployment. If they continue to allow open immigration, then pretty soon their unemployment will rise to the unfortunate heights of the rest of the country (maybe they should thank their harsh weather for putting the brakes on this).

The next step is to apply it to immigration within a state, from city to city. We wouldn’t want all of those Tucson people coming here to take our Phoenix jobs, would we? The end game is the socialist dictatorship, which clamps down on the right of people to move as they wish.

 

Screen Shot 2013-11-19 at 8.57.56 AM

US inter-state migration patterns (for an interactive version, see here) – via vizynary.com – click to enlarge.

 

The elephant in the room that must be named is some people of the anti-immigrant persuasion are motivated by racism. I don’t believe this is the majority, but it exists. They don’t dare openly declare their feelings, at least not in any forum I read. Instead, they couch it in another argument.

 

Back to Principles

One reason I started this essay off with a story was to establish the context and put the reader into the shoes of a recent immigrant. I had another reason as well: to illustrate the problems in the anti-immigration position. No one who fled a living hell will go back willingly. So what will be accomplished by demonstrating one’s resentment by slinging the name “illegal” at a man? He will react. He will feel like he is in a no-win situation. He may himself become resentful, and in that state he may adopt bad ideas that he did not originally hold.

What will happen if the law attacks his employer and renders him unable to keep a job? What would you do if you were permanently rendered unemployable by law? He will take welfare if he can get it. The only alternatives are to starve, to go back to hell, steal cars, or sell drugs. Nothing good can come from forcing someone to make that kind of choice.

Though it’s not my purpose in writing this essay, if your concern is whether the GOP will win elections, it’s hard to think of a more effective way to repulse a large voting bloc. However, I think there’s something much more important at stake. It is the theme of most of my writing on the gold standard.

We need to rediscover and return to the principle on which America was founded.  It is the principle that everyone has the individual rights of life, liberty, and property.  Let’s fight for those rights. Let’s fight to repeal welfare and to restore the Constitution and the Republic that was built on it.

It’s the right thing to do, and it also works.

 

quote-life-liberty-and-property-do-not-exist-because-men-have-made-laws-on-the-contrary-it-was-the-frederic-bastiat-13260

 

Picture captions by PT




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China Plans To Unveil Domestic “Operating System” In October

With Russia pushing to end its government’s dependency on Microsoft’s Operating System, it is perhaps not surprising (especially following the various raids that have been undertaken) that another BRICS member, as Reuters reports, China could have a new homegrown operating system by October to take on imported rivals such as Microsoft, Google, and Apple, Xinhua news agency said on Sunday. A spokesperson stated, China hoped domestically built software would be able to replace desktop operating systems within one to two years and mobile operating systems within three to five years.

 

As Reuters reports, China could have a new homegrown operating system by October…

Computer technology became an area of tension between China and the United States after a number of run-ins over cyber security. China is now looking to help its domestic industry catch up with imported systems such as Microsoft’s Windows and Google’s mobile operating system Android.

 

The operating system would first appear on desktop devices and later extend to smartphone and other mobile devices, Xinhua said, citing Ni Guangnan who heads an official OS development alliance established in March.

 

Ni’s comments were originally reported by the People’s Post and Telecommunications News, an official trade paper run by the Ministry of Industry and Information Technology (MIIT).

 

We hope to launch a Chinese-made desktop operating system by October supporting app stores,” Ni told the trade paper. Some Chinese OS already existed, but there was a large gap between China’s technology and that of developed countries, he added.

 

He said he hoped domestically built software would be able to replace desktop operating systems within one to two years and mobile operating systems within three to five years.

Of course this is no sudden decision as said in May China said that “governments and enterprises of a few
countries” are taking advantage of their monopoly status and
technological edge to collect sensitive information.

In May, China banned government use of Windows 8, Microsoft’s latest operating system, a blow to the U.S. technology firm’s business which raised fears China was moving to protect domestic firms. Microsoft is also under investigation for anti-trust violations.

In March last year, China said that Google had too much control over China’s smartphone industry via its Android mobile operating system and has discriminated against some local firms.

Mutual suspicions between China and the United States over hacking have escalated over the past year following revelations by Edward Snowden that U.S. intelligence planted “backdoor” surveillance tools on U.S.-made hardware.

The U.S. Justice Department, meanwhile, indicted five Chinese military officers in May on counts of extensive industrial espionage.

Ni said the ban on Windows 8 was a big opportunity for the Chinese sector to push forward its own systems, but that the industry needed further development and investment.

“Creating an environment that allows us to contend with Google, Apple and Microsoft – that is the key to success,” he added.

*  *  *

So Jack Lew promised no impact on the US economy from Russian sanctions and President Obama has, we are sure, calmed everyone’s fears over NSA spying…? But all the talking heads said the world relies on US tech knowledge?




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Local Paper Sums Up Jackson Hole Perfectly

There was something missing at this year’s Jackson Hole meeting of the world’s most ‘brilliant’ monetary minds – a stock market rally – and while VIX was slammed lower (by mysterious forces assuming that uncertainty must have fallen), even the local rag understood i) the context – Yellen did not even make the main headline in The Jackson Hole Daily (the ‘common folk’ preferring something far more – or less – trivial, like the weather); and ii) All she has done is raise uncertainty. We await the machines to manually read these headlines before the requisite trading actions are taken… It seems, as we noted before, the Fed’s magic is running out (for now).

 

 

*  *  *

Simply put, no one cares about Yellen except the 1%!

 

h/t @BCAppelbaum




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What’s $100 Really Worth In Each State?

Because average prices for similar goods are much higher in California or New York than in Mississippi or South Dakota, The Tax Foundation notes points out that the same amount of dollars will buy you comparatively less in the high-price states, or comparatively more in low-price states. Regional price differences are strikingly large, and have serious policy implications. The same amount of dollars are worth almost 40 percent more in Mississippi than in DC, and the differences become even larger if metro area prices are considered instead of statewide averages.

 

 

For example, Tennessee is a low-price state, where $100 will buy what would cost $110.25 in another state that is closer to the national average. You can think of this as meaning that Tennesseans are about ten percent richer than their nominal incomes suggest.

The states where $100 is worth the least are the District of Columbia ($84.60), Hawaii ($85.32), New York ($86.66), New Jersey ($87.64), and California ($88.57). That same money goes the furthest in Mississippi ($115.74), Arkansas ($114.16), Missouri ($113.51), Alabama (113.51), and South Dakota ($113.38).

A person who makes $40,000 a year after tax in Kentucky would need to have after-tax earnings of $53,000 in Washington, DC just in order to have an equal standard of living, let alone feel richer.

 

Source: The Tax Foundation




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Oil After US Hegemony

Via BofAML's Global Commodity Research team,

Oil after US hegemony

Volatility of global oil output has fallen to historic lows…

We recently discussed how a confluence of factors had pushed oil price volatility down in recent years (see “OPEC discord and oil stability”). Macro drivers such as massive monetary easing have helped, but a collapse in global oil production fluctuations to historic lows has been perhaps the key micro dampener of oil price volatility (Chart 2). The elimination of individual OPEC country quotas has led to increased operating flexibility for Saudi, Kuwait, and UEA. This shift has resulted in higher output swings at an individual OPEC country level, but lower vol for the cartel as a whole (Chart 3). In our view, the three swing suppliers have enough operational and financial bandwidth to keep going, and we have previously stated that Brent prices will not fall for long below $100/bbl unless Saudi wants them to.

…even though individual country disruptions skyrocketed

What are the limits of this operating bandwidth should geopolitics worsen? With Saudi theoretical spare capacity at 2.4 million b/d, the scope to accommodate the next major geopolitical event may be limited. In fact, supply disruptions are already at a very high point, as noted in our analysis of OPEC production volatility. Libya and Iran combined add up to 2.2 million b/d of oil supply lost, but many other countries have also failed to increased supply as expected (Chart 4). When looking at supply disruptions historically, we find that we are currently at the highest level since March and before that since the Gulf War of the early 90s (Chart 4). If we dig further and break down this data into violence and nonviolence related oil supply disruptions, we can clearly see how armed conflict has become a major driver of global oil output swings (Chart 5).

Geopolitical energy risk has risen a lot in recent years

From Arab Spring-related uprisings in Libya or Egypt, to a civil war in Syria and now violence in Iraq and the Ukraine, geopolitical tensions have been on the rise across many key energy production and transit countries (Chart 6). This increase in violent conflict has religious, ethnic, cultural, political, or economic roots, among others. Even climate change and the fight for increasingly scarce resources may be leading to more wars and conflict, according to a recent Pentagon report. And looking back in history, wars and conflict such as the Iranian revolution or the Iraqi invasion of Kuwait are easy to spot on a simple oil price series (Chart 7). But not every conflict around the world impacts oil markets in the same way.

…as evidenced by the link between conflict and output

Increased geopolitical risk, measured by combat deaths around the world, does not even correlate particularly well with oil market volatility or even oil price fluctuations (Chart 8). This is partly because not every country has the same importance for the oil market. If we adjust conflict deaths in key areas, the historical relationship between oil production and armed conflict strengthens significantly (Chart 9). After all, as many historical episodes suggest, oil development and distribution systems are hard to keep running when countries are immersed in civil wars or wars with neighboring countries. The recent trend in armed conflict deaths in the Middle East, North Africa, and Eastern Europe is therefore very worrisome, particularly in the light of the limited appetite the Obama Administration has shown to keep American boots on the ground.

US military spending still high, but risk appetite is low

The world remains mostly unipolar from a hard power standpoint (Chart 10) and the US still takes up about 38% of global military spending as of 2013. American defense capabilities cannot be matched by any other nation and no conventional army would risk direct confrontation. But, the American public has shown very limited appetite for foreign military adventures in recent polls. The withdrawal of US ground troops in Iraq and soon Afghanistan, the limited involvement in Libya, and the lack of action in Syria and the Ukraine points to a much more cautious stance on military intervention abroad. Even the recent announced operation to help contain Islamist insurgents in Iraq will not involve US ground troops. Yet, this military retrenchment may not be helping curb global violence. Quite the contrary, a continued decline in US combat deaths in recent years has been mirrored by a rise in combat deaths elsewhere (Chart 11).

American energy independence may bring isolationism…

Perhaps it has become harder to use hard power in the era of Facebook and WikiLeaks. Perhaps the American public or the Obama Administration has lost interest in exercising it. Or perhaps US energy independence has brought American Isolationism back to the fore. Following long and arduous wars in Iraq and Afghanistan, public opinion has firmly moved against military action that puts American lives at risk in recent years. Over the decades, different US Administrations have kept different positions on international conflict. Yet many military decisions in US history have been heavily influenced by the most recent prior experience as well as by the state of the economy at the time.

…as the economic case for military conflict has weakened

The American experience in World War I, for instance, resulted in a meaningful reversal of the Wilson doctrine of intervention. Thereafter, the Great Depression of the 1930s, coupled with memories of war casualties, further bolstered the case for isolationism and prompted Congress to initially even reject US participation in the League of Nations. Back then Congress even passed several Neutrality Acts in the run up to World War II, just as geopolitics turned increasingly virulent in both Europe and Asia. Recent US military adventures may have had a similar effect on public opinion. Plus the economic case to spend US tax revenues in military conflicts abroad has weakened after the deepest recession since the 1930s, a sharp decline in US crude oil and refined products net imports from countries outside North America (Chart 13), and a stagnating share of trade in US GDP (Chart 12).

…opening the door to turmoil in oil producing countries…

Against this growing reluctance to intervene, it is important to reiterate that the US still plays a key role in securing global trade and energy supplies for the global community. American military bases around the world are strategically located in nearly 30 countries or territories across six continents, compared to more limited and regional French military deployments in 15 countries, UK military in 10, or Russia also in 10. China, the world’s largest consumer of most commodities, is the only Permanent Member of the UN Security Council without significant military presence abroad. Yet, while there are no official plans to dismantle American presence abroad, the US military budget has been put on a diet (Chart 14). Key allies France and the UK have also seen their military spending decline on the back of deep austerity programs (Chart 15) and ageing populations.

…as regional powers try to fill the void left by the hegemon

Worryingly, as the hegemon retrenches, it has become apparent that other regional and local powers will come to fill the void. Russia’s attempt to increase its influence in Eastern Europe or ISIS’ run on Syria and Iraq are some of the most recent examples. Given the relatively strong link between war casualties in energy producing countries and oil output (Chart 16), we believe oil markets should prepare for more turmoil after US hegemony.

For now, Saudi and the other key swing suppliers within OPEC have the ability to respond to unexpected supply disruptions amounting to about 2 million b/d. But conflict deaths have quadrupled in the last 10 years and the trend is not particularly encouraging.

Following a structural decline in price fluctuations to multi-decade lows, implied volatility in long dated crude oil options at 15% is starting to look cheap (Chart 17).

*  *  *

As they conclude:

US reluctance to use hard power could exacerbate this trend Perhaps it is hard to deploy hard power in the era of Facebook and WikiLeaks. Or maybe US energy independence has brought back American Isolationism. Surely the economic case for war has weakened. Military spending is being cut back. Yet the US plays a key role to secure trade and energy supply for the world. Inevitably, as the superpower retrenches, other regional and local powers will come to fill the void. Russia’s attempt to exert influence on Eastern Europe or ISIS run on Syria and Iraq are recent examples. Following a drop to multi-decade lows, implied vol in long dated oil options at 15% looks cheap. Oil after US hegemony may not be as steady.




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The Broken Links In The Fed’s Chain Of Cause & Effect

Excerpted from John Hussman’s Weekly Market Comment,

The Federal Reserve’s prevailing view of the world seems to be that a) QE lowers interest rates, b) lower interest rates stimulate jobs and economic activity, c) the only risk from QE will be at the point when unemployment is low enough to trigger inflation, and d) the Fed can safely encourage years of yield-seeking speculation – of the same sort that produced the worst economic collapse since the Depression – on the belief that this time is different. From the foregoing discussion, it should be clear that this chain of cause and effect is a very mixed bag of fact and fiction.

To be fair, we do believe that some components of the Fed’s thinking are well-supported by economic evidence. For example, in her presentation at Jackson Hole, Fed Chair Janet Yellen observed that real wage inflation remains low, and that this is an indication of ongoing slack in the labor market that isn’t well-captured by the rate of unemployment. On this point, we would completely agree. To the extent that the true Phillips Curve (which relates unemployment to real wage inflation) describes reality, it’s sensible to assert that low real wage inflation informs us that the unemployment rate has not declined to a level that reflects labor market scarcity – though we should also recognize that real wage growth would already be much higher if there was not such an extreme gap between real wage growth and productivity growth.

Where we differ from Chair Yellen is in a variety of supposed cause-effect relationships that aren’t supported by evidence to any meaningful extent, and in the neglect of systemic risks that are undeniable if one has been paying any attention at all to the macroeconomy over the past 15 years.

Let’s trace some of the links in the chain of cause and effect.

First it’s clear that increasing the monetary base relative to nominal GDP will predictably and reliably lower short-term interest rates. This is true at least until the point that, as has occurred across history and across countries, inflation picks up rather uncontrollably – often following a supply shock coupled with government deficit spending – with very little at all to do with the prevailing unemployment rate. In any event, nearly a century of data provides very clear evidence of a tight link between monetary base/nominal GDP and the level of short-term interest rates.

 

The next link in the chain is the assumption that suppressed short-term interest rates are somehow good for economic growth and job creation. Here, the cause-and-effect link is much weaker. It’s certainly true that suppressed short-term interest rates result in yield-seeking and the enhanced availability of loans to low-quality borrowers who offer higher yields than are available on safe alternatives. But it’s also clear that QE does not do much to stimulate real investment, where there are numerous costs and risks beyond the cost of money (and where hundreds of billions of idle dollars are available on corporate balance sheets even in the absence of further QE). Rather, QE primarily encourages speculation, leveraged finance, and other forms of financial “engineering” where interest represents the primary expense. The objective of these activities is not job creation, but leveraging the “spread” between the return on one financial asset and the interest that one must pay to acquire it with borrowed money.

 

On Yellen’s inflation views, the argument that general price inflation will only follow real wage inflation is really an argument that general price inflation will only follow low unemployment. At best, this view is half right. There’s good evidence that low unemployment tends to result in higher real wage inflation (the real Phillips Curve), but it does not follow that real wage inflation is naturally associated with faster general price inflation. Indeed, because general prices are the denominator of real wages, faster general price inflation tends to reduce real wages in the absence of a spiral in all nominal prices where wages take the lead. That’s just arithmetic. Aside from some short-term cyclical pressures, we’re not terribly concerned about rapid inflation at present, but we also don’t find much evidence that unemployment, whether at current levels or lower levels, is the central factor that would determine inflation anyway.

 

The most dangerous assumption of the Fed is that the primary risk of QE is inflation, and that QE is somehow a benign policy in the absence of inflation risk. Yes, we would love to see lower unemployment, and agree that stronger growth in real wages would likely result from that. It’s just that the transmission mechanism from QE and zero-interest rate speculation to lower unemployment is either nonexistent or so poorly defined that the policy can only be considered reckless. The Phillips Curve dogma of the Fed has created blinders that narrow its view of risk to some abstract “tradeoff” between inflation and unemployment. Meanwhile, the speculative tenor of the markets is contributing to a very real risk of steep financial disruptions, not only because risk-assets are overvalued, but because debt is increasingly being purchased on the basis of yield rather than the careful evaluation of repayment prospects.

In short, the greatest risk of QE is not the inflation risk that may or may not emerge, but the financial distortion, overvaluation, and speculation that is already baked in the cake and is progressively worsening, in a manner quite similar to the 2000 and 2007 extremes, though less evident because the cyclical elevation of profit margins makes prices seem tolerable relative to current earnings. As I’ve frequently noted, based on equity valuation measures that are most reliably correlated with actual subsequent stock market returns, stocks are now more than double their pre-bubble historical norms, and presently suggest that the S&P 500 will be no higher a decade from now than it is today. We expect the current QE bubble to unwind no more kindly than the prior bubbles in 2000 and 2007. See Ockham’s Razor and the Market Cycle and Yes, This is An Equity Bubble for additional background on these concerns.

As for the U.S. economy, conditions aren’t bad overall, but the benefits of economic activity are highly uneven. 40% of families report that they are “just getting by,” with the majority essentially living paycheck to paycheck without enough savings to cover even a few months of expenses. We could be, and should be doing better, except that this complex adaptive system of ours responds to good incentives as well as bad ones, and has been repeatedly crippled by policies that have produced waves of malinvestment, bubble, and collapse. The economy is starting to take on features of a winner-take-all monoculture that encourages and subsidizes too-big-to-fail banks and large-scale financial speculation at the expense of productive real investment and small-to-medium size enterprises. These are outcomes that our policy makers at the Fed have single-handedly chosen for us in the well-meaning belief that the economy is helped by extraordinary financial distortions. The Federal Reserve is right to wind down quantitative easing, and would best terminate reinvestment of maturing holdings, ideally beginning in October or quickly thereafter. The issue is not whether the U.S. economy does or does not need “life support.” The issue is that QE is not life support in the first place.




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CME Delays Futures Opens Due To “Glitch”, USD Jumps On EUR, JPY Weakness

It appears – judging from FX markets this evening – that consensus on Jackson Hole is Yellen was more hawkish and Draghi & Kuroda more dovish than expected. The USD index is pushing on towards one-year highs as EUR is down 50 pips (not helped by a dovish FT article on deflation fears) to 11-month lows, and USDJPY broke to as high as 104.45 (weakest JPY in 7 months). In addition to this action, the CME confirms all Futures products will have a delayed opening due to technical issues with NO estimated opening time.

CME’s only statement… on GCC site…

 

 

 

 

USDJPY at 7-month highs

 

EUR tumbling to 11-month lows…

 

Of course, there is no need for futures trading anymore since The Fed will merely extend its “communications” policy to announce the end of day print for the S&P 500 each morning going forward…

Charts: Bloomberg




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The Fed Will Raise Rates in March 2015

By EconMatters

 

 

 

March or June?

 

The big question for financial markets is whether the Fed will raise rates in March or June, it used to be Whether it would be June or September of 2015, and I think as the data gets better in the second half of the year, and QE ends in October, the timeline could be moved up even further, say January of 2015 for the first rate hike.

 


Data Dependent creates box for the Fed

 

For example, what happens to expectations if besides the consistent 200k plus employment reports each month we get a 350k number? What kind of pressure will this put on the Fed to move on rates, especially sense QE has ended in October? I think there is a distinct possibility over the next five months that we have a 350k plus employment report, and the Fed line about changing data and data dependent comes into play. In this case they set the bar for moving sooner or later, and the bar would be surpassed with a 350k employment report. 

 


5.9% or 350k – which comes first?

 

Also what happens if the unemployment rate drops to 5.9% over the next 4 months, this key psychological rate number being below 6% is real close to approximating full employment by historical standards, and they are still sitting at zero percent in the fed funds rate? The questions and pressure just from their academic peers in the economics community for not addressing this change in data would be immense to say the least from a credibility standpoint.

 

I would estimate that there is a 40% chance that one of these two data measures in an outsized employment number of 350k plus, and/or a 5.9% reading on the headline unemployment rate comes to fruition that puts considerable pressure of the Fed to move up the first rate hike, or they have some serious explaining to do.

 

QE Ends in October

 

Things are going to be completely different when QE ends in October, they can no longer pacify markets with this kind of ‘tightening’ and financial markets are going to start re-pricing all on their own, in a sense telling the Fed where they will be going. This is what markets do, as investors try to front run Central Bank actions. And given how many participants have to switch directions, rates are going to start moving up in the second half of the year on any good economic data in the form of robust GDP reports, 250k plus employmentreports, and a drop in the headline unemployment rate.

 

 

Housing & Retail Sales

 

The second quarter earnings were better than expected, and if housing and retail sales start helping even a little bit, the bond market is going to start pricing in rate rises on the long end of the curve, which is where all the yield chasers have been hiding out. And once some key technical levels are breached to the upside regarding yields, the amount of stop hits and closing of positions is going to add further fuel to the rising yield momentum in the bond market as this is an extremely crowded trade, and they haven`t began to lose money off of very low yield levels. Once bond managers start to lose money in their portfolios as technical levels of resistance fail, selling begets more selling in these bond funds, and a 3% 10-year yield is here sooner than many complacent investors realize.

 

 

Re-pricing of Bond Markets

 

 

Therefore, watch for above trend economic data that comes out over the next four months; this is the key driver for forcing the Fed`s hand on ‘data dependent’ rate hikes. And if the economic data continues to move in the direction that it is currently moving I expect the Fed to raise rates by March of 2015, and this date isn`t currently priced into the bond market. 

 

Yield becomes a Four Letter Word

 

The future fund flows out of the bond market, especially at the long end of the curve over the next four months as the economic data comes in hotter each month, given the size of portfolio reallocation, is going to be staggering to watch as the realization that the Fed has to move on rates by March, and not June of 2015. Savvy investors can piggy back on this market dislocation when ‘Yield’ becomes a euphemism for ‘Sell’, as anything even remotely resembling a yield play will be sold with a vengeance over the next four to six months as the rate hike cycle begins in the United States.  Read More >>> Bond Kings to be Dethroned in Second Half of the Year

 

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