MWP seeks to explore the global macro environment for investing in order to seek the best place to preserve and create wealth at a time of global deleveraging.
Michael Krieger is a former oil analyst for Lehman Brothers and writer of opinions about global macro economics for the investment community around the world. Many of his opinions reflect my own, though he is much better at articulating them than I am. For this reason I'm re-posting his writing. Michael describes in the post below his surprise that the central banks have been able to hold things together as long as they have since the crisis of 2008 just as I have been. But unlike me, Michael sees a bigger picture and sees the collapse has already begun in other countries and will soon spread here. Markets can often seem completely calm on the surface just before things quickly go terribly wrong. This was the case with Greece sovereign bonds. Greece enjoyed low interest rates as a member of the EU until one day...they didn't anymore. Markets are like that. They can switch on a dime. Pay special attention to his analysis of the Dow:Gold ratio and his thoughts on Treasuries. The most important message though is that time is running out to prepare.
As gold moves mostly sideways since the announcement of QEternity its worthy to note there is a titanic struggle in the gold markets between central banks of the West who want to keep gold prices down to hide the negative effects of unlimited printing and Eastern (mostly China) central banks that are using the artificially low prices to acquire huge amounts of gold to diversify their currency reserves and hedge their US dollar and Euro positions in government bonds. There's no way to know how long this struggle continues or which way gold might break in the short term but one thing is for sure: Western central banks must supply the gold that Eastern central banks are taking delivery of. Paper derivatives are not going to satisfy the Chinese. They know the game. So how much gold will Western central banks give up to preserve the current price? Who knows, but I'm sure this won't end well for those of us in the Western hemisphere. John Embry has more:
The Labor Departmentsaid
weekly applications fell by 30,000 to the lowest level since February
2008. The four-week average, a less volatile measure, dropped by 11,500
to 364,000, a six-month low.
Applications
are a proxy for layoffs. When they consistently drop below 375,000, it
suggests that hiring is strong enough to lower the unemployment rate.
Only problem? The new numbers are missing a "large state" that did not submit their numbers in time.
It is likely that some of the jobless claims in one large
state--California--were not included in the claims reported to the
Department of Labor this week. This happens occasionally, our
source says. When a state's jobless claims bureau is short-staffed,
sometimes the state does not process all of the claims that came in
during the week in time to get them to the DOL. The source believes that
this is what happened this week.
The California claims that were not processed in time to get
into this week's jobless report will appear in future reports, most
likely next week's or the following week's. In other words, those reports might be modestly higher than expected.
The source believes that the number of California claims that were not processed totalled about 15,000-25,000.
I'm sure this was just an oversight by the Democratically controlled state of California.
In normal times it would be absurd to think that agencies of the government would manipulate economic data. But one wonders, in light of a highly politicized EPA and National Labor Relations Board that has openly pushed a partisan agenda, just how far and deep does the rot go?
If you go back to my last post you'll see a list of mass layoffs announce by large companies. Ask yourself, "Do the unemployment numbers and new unemployment claims numbers make sense?"
UPDATE 10/12/12
Looks like California is denying the state is them, but businessinsider is holding to their guns.
The Bureau of Labor Statistics (BLS) reported today that 114,000 jobs were created last month and the unemployment rate fell to 7.8% (U-3). Some have been a little more than skeptical. Rick Santelli of CNBC, who had predicted the rate would cross below 8% before the election said, "I told you so!".
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Jack Welch Tweeted: Unbelievable jobs number..these Chicago will do anything..can't debate so they change the numbers".
One might be excused for a little suspicion. The economy must add anywhere from 150-200K jobs per month to just keep up with the population increase. So how does an anemic 114K jobs lower the unemployment rate the most in 24 years??
There were many causes of the housing crisis that hi the US
in 2007 and set off the depression that began in 2008. Many of the problems remain
but the biggest question is what do we do now?
When the housing market began to decline many problems were
created. Banks that held hundreds of billions in Mortgage backed securities
found that what they had thought were low risk securities discovered they were
taking huge losses. Home owners could not afford their mortgages anymore and
the down real estate market put them “underwater”, that is, they owed more than
their homes were worth. Many individuals chose to walk away from their debt to
start anew while many others were foreclosed on by the banks. Banks hate
foreclosures because they must recognize the loss, begin what can be expensive
procedures to remove the occupant, and are stuck with property they don’t have
the means to maintain and run a high risk they will be either occupied by squatters
or gutted by criminals seeking a quick buck. Clearly, kicking homeowners out is
undesirable for both parties. Banks then must sell the home in a declining real
estate market bringing down the comps for the remaining neighbors, creating a “death
spiral” that put the remaining neighbors under water.
Up to this point, banks have chosen to let many foreclosed
homeowners stay in their homes paying nothing. This is known ad foreclosure stuffing. As stated above, this allows
banks to put off the recognition of the loss and allows them to put off selling
the home in a declining market. Whether banks foreclose or not they face a decline
in revenues and accounting losses. A home owner who moves out loses their home
and their families lives are put in upheaval. But for a new healthy real estate
market to emerge, prices must correct and be allowed to fall to their real
value. Only then will new buyers step in at the lower prices because one, homes
are more affordable to young people who begin household formations and two,
because people still view a home as their biggest investment and want to think
the odds are in their favor their investment will increase in value rather than
become a “money pit”.
Up to this point the Federal government has tried to help by
easing requirements for homeowners to refinance. But this does little for people
who are underwater by over one hundred thousand or more. Accounting standards
were also suspended to allow banks to “mark to model” rather than “mark to
market” making a joke of our accounting system which is a cornerstone of a free
market since analysts rely on reasonable accounting to value companies.
Meanwhile, the Federal Reserve has in both QE1 and the current QE3 bought
mortgage securities to provide liquidity to banks. Certainly this is helpful to
banks who get the bad debt off their balance sheet but is does little for the
homeowners and worse it socializes the losses from the banks to the US taxpayer
who see the value of their dollar reduced by the money printed by the Fed to
buy the bank’s mortgage securities. So neither of these programs helps reset
the market, rather they both stretch out the time it will take for the real estate
market to find its new, lower equilibrium. Neither of these solves the
documentation problem where documents on mortgages were incomplete, fraudulently
signed or where documents are completely missing. This has clogged our courts
with cases of homeowners suing their bank or fighting eviction and no clear
indication as to who the real owners is legally.
For the past four years the Federal Reserve, the President and Congress have operated under the Keynesian notion that we can spend our way through the recession/depression/financial crisis, and that if we did, economic growth would eventually return. Keynes had the idea that during an economic down turn governments should engage in deficit spending as a counter cyclical economic force to speed up a recovery. Keynes even postulated that it didn't matter how the money was spent. A work crew could be hired to dig a hole while another was hired to fill it in and the result would still be economic activity. Of course I'm over simplifying some what. Keynes also thought we should run surpluses when times were good. But it is essentially this theory that both the US government and the Fed have operated under in their attempt to get the economy moving again.
In February 2009 congress passed the American Recovery and Reinvestment Act of 2009. The bill's total cost was $831 Billion dollars. It was then thought that there would be a "multiplier" effect, that is for example, for every dollar spent on the stimulus, there would be say $1.50 of economic activity generated. This is precisely what Christina Romer (Chair of the Council of Economic Advisers in the Obama Administration) had predicted. So in other words, the $831 Billion spent would generate about $1.2 Trillion in new economic activity. This was the basis of the Obama administration's projections for unemployment shown below:
Obviously the actual results were not what had been expected. Why? According to John Cochrane:
Estimated macro models used for policy evaluation—whether old Keynesian
or new Keynesian—have this basic mechanism built into them. However,
they differ greatly in their predictions of the policy impact because
of different assumptions about expectations, the marginal propensity to
consume, the speed of price adjustment, and crowding out of other
spending. For example, Christina Romer and Jared Bernstein used old
Keynesian models to predict the effect of the stimulus package of 2009
before it was implemented. They predicted large effects of the package
with multipliers around 1.5. In contrast, in research with John Cogan,
Volker Wieland and Tobias Cwik, I used a new Keynesian model to predict
the effects of the 2009 stimulus. We predicted a much smaller effect,
with multipliers averaging 0.5, even less when you include transfer
payments.
As we will see it was actually much lower...about .2. Yep, for every $100 spent, we generated $20 of economic activity. Not a very good investment. It is explained rather well in the video below from Charles Biderman:
So we are spending far beyond our means (Over $1 Trillion each year for the past four years) and an extra $831 Billion on a stimulus that has not generated enough economic activity or growth to justify its use.
Its just as bad or even worse at the Fed where they have bought $2.5 Trillion of junk assets from banks and newly created treasury debt. The new QE3 will take us to about $5 Trillion over the next few years but is just as doomed to fail as QE1 & QE2. Why? The Fed operates under some assumptions that are dislocated from reality.
First, is the money multiplier which I've explained before using the example of the Fed's fractional reserve where a bank can take $100 of deposit money and make $900 in loans. QE is partially about getting more money to banks by buying Treasuries from banks in the hope they will make loans. In this way the money multiplier would create new economic activity in the economy. The problem however, is that the banks aren't lending or are being extremely tough with their underwriting of new loans. Anyone trying to get a new mortgage knows what I mean. So the money sits on their balance sheets or is lent back to the Federal reserve where they get paid for their excess reserves or they buy new treasuries paying a risk free rate of return of 2-3%. The result is that there is no money multiplier in the real economy.
The graph below from the St. Louis Fed shows the money multiplier has fallen below 1 since 2008:
The combination of both of these types of multipliers (monetary and fiscal) being essentially between zero and one explains why both monetary and fiscal stimulus have not worked so far.
