Category Archives: Economy and Meltdown

Schiff Vs. Insana; Matter Vs. Anti-Matter

Perhaps no better example of the two camps of perspectives on the market’s performance and the Fed’s expectations was on display this afternoon on CNBC. In the ‘we need some destructive asset clearing in order to get back to any sort of growth trajectory and the Fed is feeding an inflationary monster with its band-aid upon band-aid money-printing’ camp is Peter Schiff; while the other side of the investing octagon is Ron Insana who sees a ‘100% rise in stocks as evidence of something and that the Fed must do something, anything in order that we avoid the reality under the surface of a deleveraging deflationary world economy’. We are not sure of the winner as the shouting became too much to bear – but nevertheless the vociferous nature of the two combatants (each proclaiming their #winning-ness) shows the bifurcated world in which we live.


Goldman On Spain's Tension-Inducing Arrogance

Spain needs external financial support – a view that is now clearly held by the consensus. A swift and smooth move by Spain to request external support is needed to validate the recent improvement in market sentiment towards Spain (and an improvement in financial markets more broadly). Mr Draghi’s announcement of the ECB’s new Outright Monetary Transactions (OMT) scheme offers a vehicle for that support. Goldman believes that the Spanish authorities now need to get on board the vehicle by requesting EFSF support.

Goldman Sachs: Tensions With Spain Set To Increase, Sooner Or Later

Spain’s larger size implies that this external support needs to be more flexible than was the case for Greece, Ireland and Portugal. This flexibility is what the ECB’s OMT scheme provides: the ECB’s balance sheet can be used to purchase short-dated sovereign debt when a country has accepted the conditionality that accompanies a request for parallel support from the EFSF.

Yet the effectiveness of the ECB’s initiative requires governments to act responsibly: both over the longer term in making the fundamental reforms to meet the conditions set by the EFSF and in the shorter term by moving smoothly to accept EFSF conditionality.

We had previously expected Spain to make a request for EFSF support at the Eurogroup meeting at the end of this week. This has proved overly optimistic and we therefore revise our view. While a later formal request to the EFSF ahead of Spain’s end-October redemptions should prove sufficient to contain re-emergence of intense market pressures, some disruptions cannot be ruled out. And while Spain is seen to prevaricate on the basis of domestic political concerns, German public and political opinion can become further inflamed. With German sentiment already sensitive to announcements, seeking protection in the form of tighter conditionality may only make Spain more reluctant to request help and therefore intensify the difficulty.


Near-term and medium-term risks becoming evident

Beyond the weak economic fundamentals that imply Spain will ultimately require further external support, the main risk currently stemming from Spain is that the government loses the incentive to reform if it is guaranteed that the ECB will purchase its debt.

  • Near-term risk – current deliberations over Spain’s agreement to conditionality suggest Spain is willing to push to the limit the market’s tolerance for a slower transition to EFSF support.
  • Medium-term risk – even when Spain is subject to conditionality within an EFSF programme, the imperfect nature of monitoring could tempt Spain to exploit the ECB’s preparedness to buy its debt.

In European Economics Daily ‘The ECB’s new measures: Bridging and/or breaking Europe’s ‘red line’’, we forecast that Spain would submit a formal request for external support at this week’s Eurogroup meeting. That request would then be followed in the second half of September with broader agreement on EFSF support with other Euro area member states. We also noted an alternative view where Spain delays seeking EFSF support so as to meet domestic political constraints. On account of signs of that reluctance – against a background of improved market conditions – we believe that the risk of this delay is materialising. Other interpretations of the delay are possible: Spain may be delaying on account of the publication of bank-by-bank stress tests at the end of September. Nonetheless, we are revising our view of the base case.

We also highlight, however, that the timing of any formal request will depend on market tensions, which in the past have proved a forcing mechanism for (often overdue) political action. We continue to believe that Spain will need to submit a request for EFSF support before its redemptions on October 29 and 31.

While – as we have seen in the case of Greece – various forms of cash management allow Spain to avoid a hard ‘cash flow’ constraint should support not be in place prior to the October redemptions, we would see a failure to deliver the anticipated programme request by then as disruptive.

Beyond the near term, a problem with incentives

As we have pointed out in the past, we continue to believe that a move by Spain to require EFSF/ESM support will ultimately prove inevitable. This suggests that the more substantial risk is the medium-term risk of a more awkward relationship developing between Spain and the broader Euro area. Based not merely on the latest signals from Spain but also on the incentives we have noted above, we believe this risk applies. Applying conditionality is always difficult in practice – still more so when a country has a large primary deficit, as Spain does, and can be perceived as taking undue advantage of central bank financing.

Beyond Spain, beyond the near term

Looking beyond Spain – specifically to Germany – brings together the two factors we have highlighted:

  • The risk of a near-term delay in Spain’s request for EFSF owing to a reluctance to be submitted to conditionality.
  • The ‘moral hazard’ risk that Spain slackens in its efforts to meet conditionality once external support is sought. We do not expect major changes to Spain’s current reform programme, although there is a risk of additional structural reforms being requested, particularly if Spain delays further.

The opposition seen in Germany in response to Mr Draghi’s preparedness to buy sovereign debt implies that current posturing in Spain will not wear well with the politics of signing a Memorandum of Understanding in Germany. The more the Spanish administration indulges domestic political interests and is perceived to be taking undue advantage of external support, the more explicit conditionality is likely to be demanded. This would add to any existing tensions, given Spain’s opposition to conditionality. This is disappointing partly because it is avoidable if Spain were to accept the external support on the terms currently available.

Spain will have the opportunity in the coming weeks and months to demonstrate that it wishes to avoid these incipient risks. But we continue to believe that some of the incentives created by Mr Draghi’s preparedness to act could prove difficult to resist.

Here's Hilsenrath With What To Expect Tomorrow

First thing this morning we tweeeted:

It is early for the Hilsenrumor. Those usually appear in the last 20 minutes of trading

— zerohedge (@zerohedge) September 12, 2012

We were off by 14 minutes, as today’s “Hilsenrumor” appeared at 3:26 pm, giving the market its closing oomph.

By now everyone knows that the WSJ’s Jon Hilsenrath is spoon-Fed information directly by the Fed. Even the Fed. Which is why everyone expected the Fed to ease last time around per yet another Hilsenrath leak, only to be largely disappointed, invoking the term Hilsen-wrath.

Sure enough, it took the market only a few hours to convince itself that “no easing now only means more easing tomorrow”, and sure enough everyone looked to the August, then September FOMC meetings as the inevitable moment when something will finally come out.

So far nothing has, as the Fed, like the ECB, have merely jawboned, since both know the second the “news” is out there, it will be sold in stocks, if not so much in gold as Citi explained earlier.

Regardless, the conventional wisdom expectation now is that tomorrow the Fed will do a piecemeal, open-ended QE program, with set economic thresholds that if unmet will force Bernanke to keep hitting CTRL-P until such time as Goldman is finally satisfied with their bonuses or unemployment drops for real, not BS participation rate reasons, whichever comes first.

As expected, this is what Hilsenrath ‘says’ to expect tomorrow, less than two months from the election, in a move that will be roundly interpreted as highly political, and one which as Paul Ryan noted earlier, will seek to redirect from Obama’s economic failures, and also potentially to save Bernanke’s seat as Romney has hinted on several occasions he would fire Bernanke if elected. Here is what else the Hilsenrumor says. 

From the WSJ:

In the past, it has announced programs with big numbers and fixed completion dates — like a $1.25 trillion mortgage-buying program that stretched 12 months through March 2010 and a $600 billion Treasury bond-buying program that stretched eight months through June 2011.
The activist wing of Fed officials, which support aggressive responses to high unemployment, want a large and open-ended commitment to bond buying. For instance, the Fed could announce it would buy at least a certain amount of bonds over a specified time period and signal they could buy more later if the economy doesn’t pick up.

Announcing an opening allotment over several months would blunt the ability of Fed policy hawks, who are skeptical of easing actions, to quickly call for the program to end. The hawks don’t want another round of QE, but if there is going to be one, they would want a small up-front commitment to bond buying and the opportunity to pull the plug on the program if the economy picks up quickly.

A four-month opening allotment would get the Fed past the election and through a Dec. 11-12 policy meeting, at which point it could consider whether to continue. A five month commitment could get it to a January press conference and another round of forecast updates. A seven-month opening allotment would get it through the first quarter of 2013 and to a March 19-20 policy meeting. If it decides to make decisions on a meeting-by-meeting basis, the next meeting is Oct. 23-24, two weeks before the election.

It’s hard to say how big a program the Fed would launch, here are some guideposts:

  1. The Fed is already purchasing $45 billion in long-term Treasury securities every month through the Operation Twist program and it plans to buy a total of $267 billion by year-end. That marks the lower bound of what Fed purchases will be for the rest of the year.
  2. If the Fed doubles the size of its current program by matching Treasury purchases with mortgage purchases, that would get its monthly purchases to $90 billion.
  3. Its controversial QEII program launched in November 2010 was smaller at $75 billion per month.
  4. Its first round of mortgage and Treasury purchases took place largely in 2009 and was designed to be immense to address the financial crisis. It amounted to more than $140 billion per month, an amount that seems likely to be far beyond the ambitions of what Fed officials are prepared to do now.

–WHAT TO DO WITH TWIST: Officials must decide what to do about the “Operation Twist” program if they launch a new bond-buying program. The Fed is funding the Twist purchases with money it gets by selling short-term Treasury securities. The Fed has two options:

  1. It could suspend the Twist program and replace it with a new bond-buying program in which it buys both Treasury securities and mortgage-backed securities, and funds those purchases with money that the Fed prints — rather than with proceeds from short-term securities sales. This would be more like the QE programs the Fed launched in March 2009 and November 2010.
  2. The Fed could continue the Twist program and launch a mortgage-bond-buying program by its side in which it buys mortgage bonds with newly printed money but continues to fund long-term Treasury purchases with sales of short-term securities.

In either case, the Fed would be launching a program which it considers to be more powerful than Operation Twist alone. One question for officials is which of these two complex approaches would be easiest to explain to the public? Another is which approach entails less risk of public backlash? Many critics worry that the Fed’s money printing will someday cause inflation or another financial bubble. Many officials don’t agree, but they’re sensitive to the argument. The second option would involve less money printing and might help to blunt that criticism.

COMMUNICATION: How the Fed describes its impetus for action, and its criteria for even more in the future, could matter a lot. Is it responding to a darkening outlook? Or has it decided to take more aggressive action because its patience with slow growth and high unemployment is running out and it has a new commitment to changing that?

If it emphasizes the former, it might just depress investors, households and businesses more and backfire. If it emphasizes new resolve, it could spur the public to change behavior in ways that lead to more economic growth but also risk more inflation.

Fed officials have long believed that their communications about monetary policy and the economy are as important as the actions they take, but they’ve struggled to strike the right message.

In a widely debated paper presented at the Fed’s Jackson Hole meeting last month, Columbia University economist Michael Woodford argued that the Fed should signal more strongly that it is committed to an easy money policy until the economy meets benchmarks for more output. The Fed seems to be moving tentatively in this direction. Its discussion about open-ended bond buying is one potential example.
Another: Minutes of the July 31-Aug. 1 policy meeting showed officials considered offering a new assurance that short-term interest rates will stay low even after the recovery progresses.

WHETHER TO LOWER ANOTHER RATE: The Fed now pays banks 0.25% interest on reserves they keep with the central bank. The Fed could reduce the rate it pays on reserves that aren’t required of banks (known as excess reserves) a little bit to try to give banks more impetus to lend. However many officials are reluctant to do so because they’re afraid pushing the rate any lower would disrupt short-term lending markets. It’s unclear whether the Fed will do anything on this front, especially with so many other hard decisions on the table.

Guest Post: De-Industrialisation And Male Jobs

Submitted by John Aziz of Azizonomics,

A whole lot of pundits are spending column inches trying to explain the cruel reality of the last forty years — stagnant wages for full-time male workers, and falling wages for men as a whole:

And there has been a huge outgrowth of men who aren’t in the labour force. In 1954, 96 percent of American men between the ages of 25 and 54 worked. Today, that number is down to 80 percent. That’s a humungous decrease.

The question is why.

Mainstream media pundits are suggesting that men are unsuited to the present economic landscape. The suggestion is that men have been bad at adapting to change, and that women have been good at adapting to change:

In The End of Men: And the Rise of Women, Hanna Rosin argues that changes in the world economy have dramatically shifted gender roles. Women have adapted more skillfully to the new socioeconomic landscape by doggedly pursuing self-improvement opportunities, rebranding as the economy requires it, and above all possessing the kind of 21st century work attributes — such as strong communication skills, collaborative leadership and flexibility — that are nudging out the brawny, stuck-in-amber guys. Rock steadiness, long a cherished masculine trait, turns out to be about as useful in our fleet-footed economy as a flint arrowhead. Life favors the adapters, and it turns out they’re more likely to be women.

Now two things have very clearly changed for women — access to birth control, and the end of the traditional social compact where women did housework, and men did wage work. In regard to the vast majority of expanding occupations today — teaching, medical services, bureaucracy — women no longer are at a material disadvantage due to their (on average) smaller size and lesser strength.

Overall, this has meant proportionally less jobs for men, and proportionally more for women.


But it’s not just that women have been advantaged. Men have been deeply disadvantaged. In sectors that due to physical characteristics men have traditionally been dominant in — manufacturing, agriculture, forestry, mining and heavy industry — there has been a vast decline in output-as-a-percentage-of-GDP, whereas in services — a sector in which men have not traditionally dominated — there has been a vast increase.


Yet it is not the case that there are less manufacturing jobs globally. As we mostly already know, this is a case of manufacturing and industry being exported overseas, most obviously to China. China manufactures, and America consumes. This is America’s trade balance with China:


This is reflected in China’s sectoral employment balance compared to Western nations, and the world at large:


So it’s not at all the case that the United States is cutting back on industrial jobs because industry is less in demand. The United States still has plenty of demand for industry. America has cut back on industrial jobs because it has the ability to run huge trade deficits, through the dollar’s role as global reserve currency, and shipped its manufacturing industry abroad. Other countries have required dollars for trade purposes, so have been more than happy to sell to the United States, making dollars and debt the United States’ greatest exports.

Yet the present paradigm has severely damaged the prospects of young men, for whom a generation ago jobs in industry and manufacturing were once plentiful. Quantitative easing led to a jobs boom — in China, for Chinese industrial workers. That doesn’t help the growing chunk of the male population in the United States who have been shut out of the job market by the rise of America’s Chinese addiction.

And it seems unlikely that the industrial jobs are coming back any time soon. Although there are reasons why America may soon import less from China — rising energy and transport costs, rising Asian wage costs, and questions of the dollar’s sole reserve currency status — there are plenty of places in Latin America with cheap and plentiful labour for America’s corporate elite to set up factories. Even the manufacturing jobs that remain in America will be under threat from increased automation and robotics.

This implies that barring a miracle, joblessness and stagnant or falling real wages will continue to be a significant and worsening challenge for young Americans, and particularly men, in the coming years.