iftttwall

For anyone who still suggests, incorrectly, that Larry Summers was the “wrong” choice for Fed Chairman just because he would promptly end QE the second he was elected as the erroneous popular meme goes, we have one soundbite from his recent Bloomberg TV interview refuting all such speculation: “if you had to say, should we have used this tool or should we not have, I think the answer is overwhelming that we should have.” He had some other amusing logical fallacies (including discussing whether the market is in a bubble) all of which are transcribed below, but the best one is the following: “I think it does bear emphasis that the people who were most appalled by it are the people who have been predicting hyperinflation around the corner for four years now and they have been wrong at every turn.” And let’s not forget that “subprime is contained” – until it isn’t. Then again, the last time we checked, the history on the biggest monetary experiment in history – one in which both the Fed and the BOJ are now openly monetizing 70% of gross bond issuance – has certainly not been written. Finally, in the off chance Summers is indeed correct, what history will instead say, is why instead of monetizing all the debt from day 1 of the Fed’s inception in 1913, and thus pushing the stock market into scientific notation territory, did the Fed leave so many trillions of “wealth effect” on the table?

Full Bloomberg TV interview below:

Summers on whether quantitative easing has worked:

“I don’t think there’s any question that the Fed’s efforts to provide liquidity to the markets made a huge difference in getting us out of this crisis and preventing what could have been a depression scenario. I don’t think there’s much doubt, looking at the slow growth of output that we have had, the failure to achieve escape velocity, the fact that inflation is still trending down, that the right bias of policies towards accelerated rather than towards the break. Are the problematic aspects of QE? Of course. Are the reasons why it cannot be maintained forever? Of course. But if you had to say, should we have used this tool or should we not have, I think the answer is overwhelming that we should have. I think it does bear emphasis that the people who were most appalled by it are the people who have been predicting hyperinflation around the corner for four years now and they have been wrong at every turn. You can debate different views. I am not going to try to make a precise judgment as to just when tapering ought to take place. But on the question of whether the Fed stepping up and providing liquidity when no one else would was the right thing to do, I think historians will judge that about 98 to 2.”

On whether Washington understands that QE has benefited the financial industry:

“I’m a Democrat. My primary concern is not with the Street. It is with the incomes of the middle class. But sometimes doing the right thing has had some beneficiaries. That is not the motivation for doing QE. I think the primary consequence of QE is that we have avoided the bottom falling out of the economy in the way that it did when they did not do QE in 1930 and 1931 and made the depression great. As a consequence of saving the economy, has it been better for Wall Street? Yes, it has been. Is that a reason not to save the economy? I surely don’t think so. Would it be better if we were growing the economy in other ways? Should we be investing in fixing Kennedy airport which is in shambles at a time when we can borrow money cheap, at a time when construction unemployment is in double digits? Of course. Should we be doing something about 25,000 schools across the country where the paint is chipping off the walls? Of course. Should we be allowing a situation where the brightest young scientists who can’t get research funding until they are 40? Of course we shouldn’t be. Quantitative easing is not the best tool for growing the economy, but to say that because it has been a good time for Wall Street we need to put the brake on instead, would be to do grave damage to our economic future and I don’t think that is the right way to frame the question at all.”

On how he would tackle wealth disparity:

“I would be growing the economy. I would be starting to grow the economy by putting many more people to work, doing the things that build the economy. We have deferred more maintenance in the last five years than any time in the country’s history. We will pay for that. The next generation is going to pay for that. It is going to mean larger budget deficits in the future. Why isn’t this the time when we have so much unemployment, such cheap building materials, and the ability to borrow money and next to nothing — why isn’t this the time to be doing something about that? And that would mean a large number of middle-class jobs. We have pursued policies that have led to a lot more investment in derivatives and a lot less investment in fixing potholes than we should make as a country. Those policies are not defense policies. Those policies are the abdication of the responsibility to invest in the future that has been the consequence of our fiscal policies. A bunch of it is the public sector. The potholes, the failure to fix the airports, the fact that we still have an air traffic control system that relies on vacuum tubes like an old black and white TV — that is a large part of it. But it is also the case that we have a regulatory framework where it takes forever to cite anything and to get anything done. When you drive in from the airport in London or Beijing, you can talk on your cell phone and it does not get interrupted. That is not true when you drive in from LaGuardia or Kennedy airport as you well know. That is not the public-sector’s fault except in so far that it is the fault of a range of regulations that create great uncertainty.”

On whether he believes we need bubbles:

“I don’t believe in bubbles. Obviously almost when you say something it’s a bubble, you are saying it is not that great. What I did say and what I believe very profoundly is that it has been a long time since we have had rapid, healthy growth in this country. When we had growth prior to the financial crisis it was growth that was reliant on bubbles. We have a framework that may well not produce growth in the absence of bubbles. That is not an argument for bubbles. That is an argument for changing the framework. When I spoke at the IMF about the risks of what economists call secular stagnation, what I was calling for was not a resumption of bubbles, I was calling for a framework that would make bubble free growth possible.”

On whether he sees any bubbles right now:

“I think that under confidence is a much larger risk than overconfidence in the American economy today. Do I see certain developments, do I hear the word covenant-lite more frequently than i would like to? Yes I do. Are there spreads that look at little tight? Yes, there are. But in the fullness of it, I think the risks we are having too little confidence, too little lending, and too little spending our much greater than the risks of the reverse. Responding wisely and effectively to financial crisis requires — it is a very difficult thing for people to appreciate and people to recognize. This goes to almost every financial error. Almost every financial error takes the form of doing today what you wish you would have done yesterday. That is what bubbles are about. People see a stock go up and they wish they had bought it yesterday so they buy it today. And it goes up more and there’s a bigger bubble. Similarly with respect to panics. What caused this crisis is that there was overconfidence and complacency, excessive borrowing and lending, and unsustainable spending. That is what caused this crisis. But now, after the crisis, the only way we will get the economy back to normal is if we have more confidence, more borrowing and lending and more spending. It is that human tendency to do today what you wish you had done yesterday that can often lead us in the wrong direction. That is why i keep stressing the importance and emphasizing the accelerator rather than the brake, the importance of public and private spending, the importance of maintaining the flow of credit. Those are the things that need to be our priorities.”

On whether Washington is to blame:

“I think there are clearly excesses and I think that in particular in financial regulation, as with health care, policy has run ahead of execution. There are aspects of the execution that create great uncertainty. People cannot know what they will be prosecutors for. People make agreements and they cannot rely on those agreements completely holding. I think that is problematic. On the other hand, I don’t think there’s any question that our financial institutions need to hold much more capital than they were before this crisis and that was the right step. I don’t think there is any question that if we are going to avoid the panics and runs that we saw him that there needs to be tighter liquidity requirements. I think the broad thrusts of the change in financial policy are appropriate, but I think there are real things that need to be done.”

On whether corporate America would be investing more if there was less gridlock and political uncertainty:

“I’m sure they would be. I’m sure they would be investing if there was more rapidly functioning and more predictable regulatory frameworks around everything from citing to the choice of fuels to the nature of reporting to the rules of immigrants. I am someone who has been for public investment. I have also been someone who has said that confidence is the cheapest form of stimulus. That is a very important principle for government to remember going forward and we need to pay more attention going forward to increase business confidence.”

On whether austerity measures in the UK worked:

“I don’t think the right reading of the British situation would emphasize austerity. I think the British economy is not as strong as the way you just spoke would suggest. I think insofar as it is, it goes to easy monetary policy and it goes to the consequences of a much weaker pound. It goes to a number of structural reforms. I don’t think you’ll find many economists taking the position. I don’t think you’ll find many objective observers making the case that it was the austerity that was responsible for anything that’s positive that’s happening in Britain.”

On whether Washington is open to proposals from Wall Street regarding Fannie Mae and Freddie Mac:

“I think Washington should be and I suspect is open to advice from any quarter. I think the idea that somehow the right thing to do is to privatize these institutions to a coalition of hedge funds who have bought up the stock at a very low price and expect to earn an inordinate return. The idea that that is the right thing for public policy strikes me as being at the edge of ludicrous. It is not something that I would remotely support. It is not an argument against listening. There’s a big difference between listening and taking extraordinarily self-serving advice. I think one would have to recognize that how could it be otherwise that those who purchase large amounts of the securities that make proposals that would raise further the value of the securities, that their advice is anything but disinterested or detached.”

On why he pulled himself out of the running for Federal Reserve Chairman:

“Given the context and the controversy, I thought it was the right thing for the Federal Reserve for me to withdraw. I thought it was the right thing for the national economy. I don’t think that either would have been well served by the controversy that would have continued had I remained a candidate.”

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/U0nOWhgeBqc/story01.htm Tyler Durden

For anyone who still suggests, incorrectly, that Larry Summers was the “wrong” choice for Fed Chairman just because he would promptly end QE the second he was elected as the erroneous popular meme goes, we have one soundbite from his recent Bloomberg TV interview refuting all such speculation: “if you had to say, should we have used this tool or should we not have, I think the answer is overwhelming that we should have.” He had some other amusing logical fallacies (including discussing whether the market is in a bubble) all of which are transcribed below, but the best one is the following: “I think it does bear emphasis that the people who were most appalled by it are the people who have been predicting hyperinflation around the corner for four years now and they have been wrong at every turn.” And let’s not forget that “subprime is contained” – until it isn’t. Then again, the last time we checked, the history on the biggest monetary experiment in history – one in which both the Fed and the BOJ are now openly monetizing 70% of gross bond issuance – has certainly not been written. Finally, in the off chance Summers is indeed correct, what history will instead say, is why instead of monetizing all the debt from day 1 of the Fed’s inception in 1913, and thus pushing the stock market into scientific notation territory, did the Fed leave so many trillions of “wealth effect” on the table?

Full Bloomberg TV interview below:

Summers on whether quantitative easing has worked:

“I don’t think there’s any question that the Fed’s efforts to provide liquidity to the markets made a huge difference in getting us out of this crisis and preventing what could have been a depression scenario. I don’t think there’s much doubt, looking at the slow growth of output that we have had, the failure to achieve escape velocity, the fact that inflation is still trending down, that the right bias of policies towards accelerated rather than towards the break. Are the problematic aspects of QE? Of course. Are the reasons why it cannot be maintained forever? Of course. But if you had to say, should we have used this tool or should we not have, I think the answer is overwhelming that we should have. I think it does bear emphasis that the people who were most appalled by it are the people who have been predicting hyperinflation around the corner for four years now and they have been wrong at every turn. You can debate different views. I am not going to try to make a precise judgment as to just when tapering ought to take place. But on the question of whether the Fed stepping up and providing liquidity when no one else would was the right thing to do, I think historians will judge that about 98 to 2.”

On whether Washington understands that QE has benefited the financial industry:

“I’m a Democrat. My primary concern is not with the Street. It is with the incomes of the middle class. But sometimes doing the right thing has had some beneficiaries. That is not the motivation for doing QE. I think the primary consequence of QE is that we have avoided the bottom falling out of the economy in the way that it did when they did not do QE in 1930 and 1931 and made the depression great. As a consequence of saving the economy, has it been better for Wall Street? Yes, it has been. Is that a reason not to save the economy? I surely don’t think so. Would it be better if we were growing the economy in other ways? Should we be investing in fixing Kennedy airport which is in shambles at a time when we can borrow money cheap, at a time when construction unemployment is in double digits? Of course. Should we be doing something about 25,000 schools across the country where the paint is chipping off the walls? Of course. Should we be allowing a situation where the brightest young scientists who can’t get research funding until they are 40? Of course we shouldn’t be. Quantitative easing is not the best tool for growing the economy, but to say that because it has been a good time for Wall Street we need to put the brake on instead, would be to do grave damage to our economic future and I don’t think that is the right way to frame the question at all.”

On how he would tackle wealth disparity:

“I would be growing the economy. I would be starting to grow the economy by putting many more people to work, doing the things that build the economy. We have deferred more maintenance in the last five years than any time in the country’s history. We will pay for that. The next generation is going to pay for that. It is going to mean larger budget deficits in the future. Why isn’t this the time when we have so much unemployment, such cheap building materials, and the ability to borrow money and next to nothing — why isn’t this the time to be doing something about that? And that would mean a large number of middle-class jobs. We have pursued policies that have led to a lot more investment in derivatives and a lot less investment in fixing potholes than we should make as a country. Those policies are not defense policies. Those policies are the abdication of the responsibility to invest in the future that has been the consequence of our fiscal policies. A bunch of it is the public sector. The potholes, the failure to fix the airports, the fact that we still have an air traffic control system that relies on vacuum tubes like an old black and white TV — that is a large part of it. But it is also the case that we have a regulatory framework where it takes forever to cite anything and to get anything done. When you drive in from the airport in London or Beijing, you can talk on your cell phone and it does not get interrupted. That is not true when you drive in from LaGuardia or Kennedy airport as you well know. That is not the public-sector’s fault except in so far that it is the fault of a range of regulations that create great uncertainty.”

On whether he believes we need bubbles:

“I don’t believe in bubbles. Obviously almost when you say something it’s a bubble, you are saying it is not that great. What I did say and what I believe very profoundly is that it has been a long time since we have had rapid, healthy growth in this country. When we had growth prior to the financial crisis it was growth that was reliant on bubbles. We have a framework that may well not produce growth in the absence of bubbles. That is not an argument for bubbles. That is an argument for changing the framework. When I spoke at the IMF about the risks of what economists call secular stagnation, what I was calling for was not a resumption of bubbles, I was calling for a framework that would make bubble free growth possible.”

On whether he sees any bubbles right now:

“I think that under confidence is a much larger risk than overconfidence in the American economy today. Do I see certain developments, do I hear the word covenant-lite more frequently than i would like to? Yes I do. Are there spreads that look at little tight? Yes, there are. But in the fullness of it, I think the risks we are having too little confidence, too little lending, and too little spending our much greater than the risks of the reverse. Responding wisely and effectively to financial crisis requires — it is a very difficult thing for people to appreciate and people to recognize. This goes to almost every financial error. Almos
t every financial error takes the form of doing today what you wish you would have done yesterday. That is what bubbles are about. People see a stock go up and they wish they had bought it yesterday so they buy it today. And it goes up more and there’s a bigger bubble. Similarly with respect to panics. What caused this crisis is that there was overconfidence and complacency, excessive borrowing and lending, and unsustainable spending. That is what caused this crisis. But now, after the crisis, the only way we will get the economy back to normal is if we have more confidence, more borrowing and lending and more spending. It is that human tendency to do today what you wish you had done yesterday that can often lead us in the wrong direction. That is why i keep stressing the importance and emphasizing the accelerator rather than the brake, the importance of public and private spending, the importance of maintaining the flow of credit. Those are the things that need to be our priorities.”

On whether Washington is to blame:

“I think there are clearly excesses and I think that in particular in financial regulation, as with health care, policy has run ahead of execution. There are aspects of the execution that create great uncertainty. People cannot know what they will be prosecutors for. People make agreements and they cannot rely on those agreements completely holding. I think that is problematic. On the other hand, I don’t think there’s any question that our financial institutions need to hold much more capital than they were before this crisis and that was the right step. I don’t think there is any question that if we are going to avoid the panics and runs that we saw him that there needs to be tighter liquidity requirements. I think the broad thrusts of the change in financial policy are appropriate, but I think there are real things that need to be done.”

On whether corporate America would be investing more if there was less gridlock and political uncertainty:

“I’m sure they would be. I’m sure they would be investing if there was more rapidly functioning and more predictable regulatory frameworks around everything from citing to the choice of fuels to the nature of reporting to the rules of immigrants. I am someone who has been for public investment. I have also been someone who has said that confidence is the cheapest form of stimulus. That is a very important principle for government to remember going forward and we need to pay more attention going forward to increase business confidence.”

On whether austerity measures in the UK worked:

“I don’t think the right reading of the British situation would emphasize austerity. I think the British economy is not as strong as the way you just spoke would suggest. I think insofar as it is, it goes to easy monetary policy and it goes to the consequences of a much weaker pound. It goes to a number of structural reforms. I don’t think you’ll find many economists taking the position. I don’t think you’ll find many objective observers making the case that it was the austerity that was responsible for anything that’s positive that’s happening in Britain.”

On whether Washington is open to proposals from Wall Street regarding Fannie Mae and Freddie Mac:

“I think Washington should be and I suspect is open to advice from any quarter. I think the idea that somehow the right thing to do is to privatize these institutions to a coalition of hedge funds who have bought up the stock at a very low price and expect to earn an inordinate return. The idea that that is the right thing for public policy strikes me as being at the edge of ludicrous. It is not something that I would remotely support. It is not an argument against listening. There’s a big difference between listening and taking extraordinarily self-serving advice. I think one would have to recognize that how could it be otherwise that those who purchase large amounts of the securities that make proposals that would raise further the value of the securities, that their advice is anything but disinterested or detached.”

On why he pulled himself out of the running for Federal Reserve Chairman:

“Given the context and the controversy, I thought it was the right thing for the Federal Reserve for me to withdraw. I thought it was the right thing for the national economy. I don’t think that either would have been well served by the controversy that would have continued had I remained a candidate.”

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/U0nOWhgeBqc/story01.htm Tyler Durden

Some have suggested that the surge in "bubble-talk" implies there can be no popping of the bubble, Pater Tenebrarum has a different perspective…

Submitted by Pater Tenebrarum of Acting-Man blog,

Interest In Bubbles Makes them Disappear – Like Magic

There comes a time in every bubble's life when participants who have a stake in its continuation have to employ ever more tortured logic to justify sticking with it. We have come across an especially amusing example of this recently. “Good news!” blares a headline at CNBC “Bubble concern is at a 5-year high”. Ironically, since at least 1999 if not earlier, the source of this headline has been referred to as 'bubble-vision' by cynical observers (or alternatively as 'hee-haw'). Let us take a look at what is behind this 'good news' announcement:

“People are more interested in the concept of a "stock bubble" than they've been at any time since the housing bubble collapsed. But ironically, that very concern could be what prevents another bubble from forming anytime soon.

According to Google Trends, worldwide search interest in the term "stock bubble" is higher in November 2013 than in any month since October 2008. The rise in interest is even more pronounced in the United States, where in data going back to 2004, the volume of searches for the term is the highest it's ever been (with the exception of the bubble-period around November 2007.)

 

Paradoxically, many market participants say this should actually calm those who fret that equities are currently in a bubble. "That means, conclusively, that there is no stock bubble," Jim Iuorio of TJM Institutional Services told CNBC.com. "It means that people aren't caught up in the hysteria of being deluded that there is no bubble, which is the only way that a bubble can exist."

 

Mark Dow, a former hedge fund manager who writes at the Behavioral Macro Blog, diagnoses investors with a bad case of "disaster myopia."

 

"If you went through an earthquake, or were mugged, or whatever traumatic event it might be, you overestimate the probability of that event occurring again," Dow said. "It's because we just went through a bubble that everyone's looking for them. Generals always fight the last war, and firemen fight the last fire." Dow similarly believes that the tremendous deal of concern about a bubble will "probably prevent it," at least for a little while.

 

"It's never obvious, by definition, or you wouldn't get the bubble," he said.

(emphasis added)

At that point we really had to laugh out loud. There is no bubble because people search for the term on Google? Their act of searching for the term will 'prevent a bubble' from forming? Really? No-one seems to have noticed that the 'record high in bubble searches in November 2007 in the US' definitely did not indicate that one shouldn't be concerned.

Before we look at some empirical evidence that immediately blows these notions out of the water, let us briefly look at the basis of such claims. The idea that a 'bubble is never obvious' is obviously wrong, because as a matter of fact, all bubbles are 'obvious' to varying degrees to a great many people. Participants are just never sure how big they will become and all of them are hoping that they will correctly guess when the moment to jump off has arrived. In fact, this article itself – which denies the existence of a bubble – is a perfect example of the rationalizations people use to talk themselves into remaining  enmeshed and invested in the bubble. Note that no-one mentions valuations, monetary policy, or any of the other yardsticks or forces that may be relevant. Instead, the argument is solely based on search trends on Google!

We already briefly discussed behaviorism in a critical appraisement of Robert Shiller's article on economic science (see: “Economics Is a Science”). It is of course true that quite a bit of the decision making on the part of investors and speculators becomes increasingly irrational as an asset bubble progresses. The rationalizations tend to become ever more absurd once it becomes difficult to come up with tenable, rational arguments for remaining invested. It is definitely worth studying these phenomena and being aware of them as an investor.

However, what we must also ask is: are there fundamental economic causes for the formation of bubbles? The Mises Institute recently published an article by Frank Shostak that also takes a critical look at Robert Shiller's theories (we encourage readers to read Mr. Shostak's article in its entirety. Similar to the point we made in our article, he argues that behaviorism is definitely not economics. It belongs to the realm of psychology). A few excerpts:

“[…] at the World Economic Forum in Davos, Switzerland on January 27, 2010, Nobel Laureate in Economics Robert Shiller argued that bubbles could be diagnosed using the same methodology psychologists use to diagnose mental illness. Shiller is of the view that a bubble is a form of psychological malfunction. Hence, the solution could be to prepare a checklist similar to what psychologists do to determine if someone is suffering from, say, depression.

 

1. Sharp increase in the price of an asset.

2. Great public excitement about these price increases.

3. An accompanying media frenzy.

4. Stories of people earning a lot of money, causing envy among people who aren’t.

5. Growing interest in the asset class among the general public.

6. New era “theories” to justify unprecedented price increases.

7. A decline in lending standards.

 

What Shiller outlines here are various factors that he holds are observed during the formation of bubbles. To describe a thing is, however, not always sufficient to understand the key causes that caused its emergence. In order to understand the causes one needs to establish a proper definition of the object in question. The purpose of a definition is to present the essence, the distinguishing characteristic of the object we are trying to identify. On this, the seven points outlined by Shiller tell us nothing about the origins of a typical bubble. All that these points do is to provide a possible description of a bubble. To describe an event, however, is not the same thing as to explain it.”

(emphasis added)

This is a key point. Bubbles don't just drop out of the sky because a critical mass of people begins to display symptoms of a kind of mental illness. There is a causative force at work, something that actually enables bubble formation. So what actuates financial asset bubbles? For asset prices to rise sharply, there is a sine qua non, and that is an expansion of the money supply.

As Shostak points out, an expanding money supply diverts resources from wealth-generating activities to activities that end up consuming wealth, as it enables exchanges of nothing (money from thin air) for something (real resources). Monetary pumping by the central bank and credit expansion by fractionally reserved commercial banks are therefore at the root of bubbles from an economic standpoint.

We recently showed this chart of the broad US money supply TMS-2. Take a close look at the period from 2008 to today specifically. We would argue this is prima facie evidence that a bubble is indeed underway.

 

The History of Google Searches on Bubbles

When reading the CNBC article discussed above, we dimly remembered that Robert Prechter once mentioned that (paraphrasing) “as a bubble matures, there is increasing evidence of bubble talk”.

This is actually to be expected, as asset bubbles tend to exhibit certain repetitive patterns. As they move toward their final stage, corrections as a rule become ever smaller, and the ascent of prices steepens (see this discussion of the 'Sornette bubble model' by John Hussman).  In short, it becomes obvious that something unusual is going on. Those who argue that prices cannot be justified by the fundamental data tend to become more vocal as prices continue to rise above what they regard as fair value and public debate intensifies.

In order to find out if there is any correlation between price peaks and Google searches for the term 'bubble' in the context of specific assets, we decided to take a look for ourselves. The results are surprising.

It seems that peaks in 'bubble searches' slightly precede peaks in the prices of the assets concerned. In other words, a strong surge in 'bubble searches' is definitely not a reason to be complacent. On the contrary, it is a warning sign that a major price peak could be imminent. In the case of stocks, the correlation between 'bubble search' peaks and price peaks is a bit less precise than in the other assets we have looked at, but it is still noteworthy.

Below are several charts illustrating the situation:

 

---

 

Google searches for 'oil bubble' rose strongly as oil approached its 2008 top and peaked exactly one month before the oil price did – click to enlarge.

 

---

 

The peak of searches for the term 'silver bubble' occurred in April of 2011. The Silver price peaked on the last trading day of April – click to enlarge.

 

---

 

Searches for 'gold bubble' peaked in August 2011. The gold price peaked in early September – click to enlarge.

 

---

 

Searches for 'stock market bubble' peaked in May of 2007. The S&P 500 made an initial peak in July, then rose one more time to a slightly higher high in October. Currently searches for 'stock market bubble' are in a strong uptrend, but still remain below previous highs. As this chart shows, the rise into 'search peaks' often happens in a very short period of time, so this bears watching – click to enlarge.

 

---

 

Conclusion:

It definitely cannot hurt to be aware of market psychology and sentiment. However, the argument that a surge in searches for the term 'bubble' on Google can be interpreted as an 'all clear' for a bubble's continuation seems to have things exactly the wrong way around. Moreover, it certainly can neither show that there 'is no bubble', nor can it prevent one, as the economic cause for bubble conditions is money supply growth. One must therefore consider what is happening in the monetary realm when trying to ascertain whether a bubble exists. The misguided behavior of financial market participants that can be observed during bubbles is merely mirroring the clusters of entrepreneurial error monetary pumping brings about.

 

Addendum: Retail Euphoria

Incidentally, retail investors have recently become quite euphoric. We have  discussed this phenomenon previously, and shown that equity fund flows are usually strongly positively correlated with prices (sell low, buy high is the motto). In the meantime the news has found its way to Bloomberg as well. There is not much that is new here of course, aside from the information on allocation percentages which we found quite interesting: 

“Investors are pouring more money into stock mutual funds in the U.S. than they have in 13 years, attracted by a market near record highs and stung by bond losses that would deepen if interest rates keep rising.

 

Stock funds won $172 billion in the year’s first 10 months, the largest amount since they got $272 billion in all of 2000, according to Morningstar Inc. estimates. Even with most of the cash going to international funds, domestic equity deposits are the highest since 2004.”

 

[…]

 

The market run-up has left investors as a group with an unusually high allocation to equities, at 57 percent, said Francis Kinniry, a principal at Valley Forge, Pennsylvania-based Vanguard Group Inc., the world’s largest mutual-fund company.

Equity allocations were higher only twice in the past 20 years, Kinniry said: in the late 1990s leading up to the technology stock crash of 2000, and prior to the 2007-2009 global financial crisis. He based his calculations on the total amounts of money in mutual funds and exchange-traded funds across asset classes at U.S. Firms.”

(emphasis added)

We hasten to add that the information on recent fund flows should not be regarded as a market timing aid. As we have often pointed out, such information is best characterized as a 'heads-up', a sign that one must pay attention to the fact that risk is on the rise.

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/njvf-sZ9088/story01.htm Tyler Durden

The Washington Times reported yesterday that Nuclear Regulatory Commission workers watch porn instead of cracking down on unsafe conditions at nuclear plants.

That’s not an isolated problem …

We noted last year:

Investigators from the Treasury’s Office of the Inspector General found that some of the regulator’s employees surfed erotic websites, hired prostitutes and accepted gifts from bank executives … instead of actually working to help the economy.

 

Likewise, senior SEC employees spent up to 8 hours a day surfing porn sites instead of cracking down on financial crimes.

 

The Minerals Management Service – the regulator charged with overseeing BP and other oil companies to ensure that oil spills don’t occur – was riddled with “a culture of substance abuse and promiscuity”, which included “sex with industry contacts”.

The biggest companies own the D.C. politicians.  Indeed, the head of the economics department at George Mason University has pointed out that it is unfair to call politicians “prostitutes”.  They are in fact pimps … selling out the American people for a price.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/GqVXyT-uJBU/story01.htm George Washington

Back in September in “This Is What Happens When The Bureau Of Labor Statistics Is Caught In A Lie” (a topic that has gained substantial prominence recently), we concluded our series exposing BLS data “massaging”, when as we predicted the monthly JOLTS survey, which had been trending at an implied monthly job gain of 140K and diverging massively from the NFP average of 198K, as can be seen on the chart below…

 

… finally caught up with reality, resulting in the single biggest monthly outlier in the data stream in the history of the survey.

To be sure, we explicitly warned ahead of time that a massive data revision was imminent as never before had two congruent series diverged so spectacularly. Specifically we said “This means that either the JOLTS survey is substantially under-representing the net turnover of workers, or that once the part-time frenzy in the NFP data normalizes, the monthly job gains will plunge to just over 100K per month to “normalize” for what has been a very peculiar upward “drift” in the NFP “data.”

Even Bill Gross read our prior post on the topic from August and tweeted his personal observations:

Gross: JOLTS data do NOT validate 200K #payroll prints. More like 125K. #Taper may be delayed if #Yellen has a big vote.

— PIMCO (@PIMCO) August 6, 2013

Of course, now that this record outlier is in the history books, it is in the BLS’ interest to slowly but surely “massage” it out with historical revisions. And following today’s just released most recent JOLTS report, the BLS has started to make sure that its own two key job datasets no longer diverge so much as to make a completely mockery of its “data” collection and analysis. This is shown in the chart below.

We are confident that with every passing month, silent revisionist history will allow the BLS to smooth out all the prior “data” until the July “sore thumb” outlier is perfectly subsumed in the trailing average. Which is why will keep the original data as long as needed to keep reminding the BLS that someone keeps watch.

But while the above is indicative of BLS data manipulation, both concurrent and historic, a bigger issue is that even with the adjusted data, there is still a rather notable problem when it comes to reports of the US employment.

The reason is that as we have been explaining for the greater part of 2013, the data sets showing NFP job gains and the Net turnover from JOLTS (hires less separations) has to by definition match. And for the most part it has as can be seen in the chart from the start of 2011:

What is not evident on the chart above is what happens when one zooms in only on the data in 2013, and specifically what the average monthly job gain is per the BLS’ nonfarm payrolls report on one hand – perhaps the most watched number in history now that the Fed’s tapering and perhaps QE-ending decisions all are “data dependent” just on this series – and what the JOLTS Net Turnover series shows.

It shows the following:

In short: from January to September (we exclude the October 204K print as there is no matching JOLTS number yet) the average monthly jobs gain per the Non-farm Payrolls report is 184K. However, when looking at the implied job gains per the JOLTS Net Turnover, this number is a far more disturbing 150K, some 20% lower.

Keep in mind this is using the adjusted, post-revision data, prior to which JOLTS suggested an average monthly gain as low as 125K.

This is a crucial difference and one which may be very critical in the eyes of the Fed when deciding on whether or not to taper in December, or March. Because now that we have entered a period in which the Fed itself is talking down the impact of “overoptimistic” jobs data in an attempt to delay tapering as much as possible, even invoking the labor force participation rate as a mitigating factor in the unemployment rate drop, what Bernanke and soon Yellen need, is another core data series showing the reality is actually worse than is being represented.

And what better source than the BLS’ own “secondary” survey of jobs?

Finally, one wonders: why does the NFP report so persistently over-represent jobs and under-represent employment? Because if the only purpose of US economic data is to serve a political agenda, one can see why the only variable that matters in the New Normal is the Fed.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/lJh7AMf-rPg/story01.htm Tyler Durden