Robert Wenzel's speech at the NY Fed, April 2012

From the Economic Policy Journal;

   Thank you very much for inviting me to speak here at the New York Federal Reserve Bank.

Intellectual discourse is, of course, extraordinarily valuable in reaching truth. In this sense, I welcome the opportunity to discuss my views on the economy and monetary policy and how they may differ with those of you here at the Fed.

That said, I suspect my views are so different from those of you here today that my comments will be a complete failure in convincing you to do what I believe should be done, which is to close down the entire Federal Reserve System

My views, I suspect, differ from beginning to end. From the proper methodology to be used in the science of economics, to the manner in which the macro-economy functions, to the role of the Federal Reserve, and to the accomplishments of the Federal Reserve, I stand here confused as to how you see the world so differently than I do.

I simply do not understand most of the thinking that goes on here at the Fed and I do not understand how this thinking can go on when in my view it smacks up against reality.

Economic Condition Review: August 2011

Looking back since my last review in June the world has recovered from the tsunami and earthquake damage in northern Japan (Japan is still in recovery/clean up mode), the civil revolt and dictator overthrow in Egypt has resulted in a power vacuum which will be resolved by election later, the dictator of Libya, Muammar Gadhafi, has been defeated by his opposition according to news reports. Other uprisings are beginning to build in several other oil producing countries in the region, including Syria and Persian Gulf states. The threat of crude oil shipments being interrupted is a growing concern for all countries importing from this region. Despite these pressures, the price of Brent Oil has softened recently from more the $120 to now $108.62.

In Europe, the socialist government of Portugal has collapsed and is now moving on with a new center-right government. The government of Greece has had to renegotiate the bailout terms with the ECB (Germany and France) as a condition of getting the last installment of their bailout package. The renegotiated plan now calls for Greece to liquidate much of its net worth (state owned assets like airports and transportation services) as well as agree to new austerity. Can it get any more dire in Greece? Misery likes company and Italy, the eighth largest economy in the world, is drawing attention to itself for having public debt at 120% of GDP. That's second, to Greece, in the euro zone. Spain is on the radar screen now as well.

China is still wrestling with internal high food and shelter inflation threatening the massive lower classes, potentially destabilizing the power of the ruling party. Published reports describe interest rate increases are the tool to fight inflation in China, to slow lending for business and personal discretionary consumption.

In the US, the Treasury market is finding some strength on a risk-off move. The yield on the 90 day Bill is 0.00%, the 2 yr T-note is 0.19% and the 10 yr T-bond is 2.06%! The US$ is weak, trending between 73.50 and 76.00 during the past several months, and currently near the 74 mark. 'Risk off' has been a reaction to the US Congress displaying their lack of ability, building the case daily until the beginning of August when they finally extended the US public debt limit. The public display of incompetency was so much greater than expected that some economic activity slowed as a result of the spectacle and resulting loss of confidence in the leadership ability of the US government.

Calculated Risk has a summary of the recent economic reports which illustrate that the economy is not growing, but is not collapsing into recession. New home building is slow and existing home inventory is still large. Industrial production is  trending sideways or improving. Same trend for production capacity utilization.

The Federal Reserve is pulling the strings to guide global perception about the strength of the US$. The Fed has no choice but to continue it's zero interest rate policy and money printing practice. They will attempt to support the Treasury market when the primary dealers and global participants back away more than they have now. As mentioned above, yields are at historic lows. Doug Noland has this caution in his blog this weekend. "Fiscal and monetary policies are rapidly losing credibility.  Treasury prices may be inflated, but don’t mistake this for confidence in our system’s “core”." Financial markets around the world are expecting a return to quantitative easing (QE3) sometime soon. Bernanke is speaking at the annual Fed Conference at Jackson Hole where last year he hinted at QE2. The world will wait for his message on Aug. 26. Calculated Risk has a post on what he expects from this years Jackson Hole speech. There is a building awareness that the Fed is wrecking the currency. On top of the loss in confidence for the US government, the reaction to a new plan of quantitative easing does not guarantee support for financial markets. Doug Noland writes "The American people no longer buy the notion that piling on more debt and “money printing” offers a reasonable solution.  They are appreciating that it’s instead the problem, and there will be less tolerance for this “experiment” going forward."

Currency Risk, Debt and Gold

This is an interview of one great mind talking with another. They are James Turk, interviewer, and Jim Sinclair, interviewed. This interview took place following Sinclair's presentaion at GATA's Gold Rush 2011 conference in London on August 5, 2011.



Jim Sinclair interviewed by James Turk

Economic Condition Review 1Q2011

Looking back on the end of 1Q2011, the world is still reeling from the tsunami and earthquake damage in northern Japan, and traces of radiation turning up in unwanted places like certain food and drinking water sources and in ocean water along the plants. In northern Africa, the civil revolt in Egypt has resulted in the departure of the 4 decades long dictatorship of Hosni Mubarek leaving a power vacuum which will be resolved later, hopefully with a democratically run election. Next door to Egypt, the dictator of Libya is fighting his own countrymen who want him, Muammar Gadhafi, to give up his dictatorship. Other uprisings are beginning to build in several other oil producing countries in the region, including the Arabian peninsula. The threat of crude oil shipments being interrupted is a big concern for all countries importing from this region and is the reason for the multi-lateral military action intensifying now, particularly targeting Libya.

In Europe, the government of Portugal has collapsed. The government voted to not accept more austerity measures which was recommended by the former prime minister and his finance minister. This development is expected to lead to a bailout of the country's sovereign external debt by the European Central Bank and/or the IMF. The financial conditions attached to bailouts have been painful so far for Greece and Ireland. Both of those governments are debating how to incorporate the painful bailout conditions or to default on them. Default is immediately easier and politically popular in the countries. China is concerned with internal high and climbing food and shelter inflation threatening the massive lower classes, potentially destabilizing the power of the ruling party. Published reports claim that interest rate increases are on the calendar in China now to slow lending and personal discretionary consumption.

In the US, the Treasury market is finding some strength on a risk-off move recently. The US$ is weak, currently near the 76 mark. New and existing house sales numbers were reported recently by the Commerce Department and are lower than projections. Nationally, median house prices are now at December 2003 levels. Banks, the primary source of credit for economic expansion, both consumer and commercial borrowers, are lending only to prime customers, letting growth of credit remain below trend. Bank closings totalled 11 in January, 12 in February and 3 through March 25, according to the FDIC. Most businesses do not have pricing power, so prices are holding the line so far despite rising commodity prices. Exceptions are businesses with pricing power such as universities, health care services, food and energy producers. Inflation (see Q4 CPI) for gasoline in 2010 came in at 13.8%, the overall energy component at 7.7%, and in the major grocery store food groups, the index for meats, poultry, fish and eggs posted the largest increase at 5.5 percent.

The Federal Reserve is pulling the strings to guide global perception about the strength of the US$. The Fed has no choice but to continue it's zero interest rate policy and money printing practice. They will attempt to support the Treasury market when the primary dealers and global participants back away more than they have now. How the Fed uses it's power may look different and they will call it by another name to put watchers off the scent. But we are talking about a global economy here. Not just the US. Other major economies are directly impacted by the Fed's actions. So they become partners in the deed and will cooperate to the greatest possible extent. This will buy time. The possible time frames are wide ranging from many months to years. Unforeseen events, natural and physical, with financial consequences are wild cards that can, of course, shorten the time frame by changing the delicate balance in place now.

Economic Condition Review 4Q 2010

As 2010 ended, the wait began for Q4 corporate earnings reporting season. Expected are confirmation of the health of the US consumer and corporate guidance leading to confirmation of an economic recovery that is sustainable. Commercial balance sheets are doing everything possible to restore financial health, including cutting expenses by laying off workers and paying off debt. Banks, the primary source of credit for econimci expansion, both consumer and commercial borrowers, are lending only to prime customers, letting growth of credit remain below trend. Most businesses do not have pricing power, so prices are holding the line so far despite rising commodity prices. Exceptions are businesses with pricing power such as health care, food and energy. Inflation (see Q4 CPI) for gasoline in 2010 came in at 13.8%, the overall energy component at 7.7%, and in the major grocery store food groups, the index for meats, poultry, fish and eggs posted the largest increase at 5.5 percent.

During Q4 2010 the Fed implemented the follow-on to quantitative easing we call QE2. This liquidity program is ultimately responsible for accomplishing one of what has become three objectives (maintain price stability, maintain full employment, and now support reflation of US stock market indexes). Obviously the one objective the Fed is succeeding at is reflation of the stock markets. So far, the Fed is not being successful at their two primary objectives. Now a big question is how can US stocks maintain their advance without the rest of the world's participation. Hello Ben. An answer please.

Economic Condition Review, 3Q 2010

So far, the consumer is missing-in-action in the US economy, placing all the pressure on both commercial and government balance sheets. Commercial balance sheets are doing everything possible to restore financial health, including cutting expenses, mainly by laying off workers and paying off debt. Banks, the primary source of credit for consumers and commercial borrowers, are lending only to prime customers, letting growth of credit remain below trend. Most businesses do not have pricing power, so prices are holding the line. Exceptions are businesses with pricing power such as health care, food and energy. Interesting to include that food inflation is widely recognized in China too. Online newspaper Caixin reports that: A rise in food prices, driven by too much bank credit, quantitative easing measures in the United States, speculation in commodities and natural disasters, was mainly responsible for the worse-than-expected inflation, according to the National Bureau of Statistics.

The government is using it's balance sheet (Federal Reserve as proxy) with the QE2 strategy, with the goals of increasing inflation in assets and stimulating job recovery, by creating new money with serial quantitative easing. John Hussman describes, in his Nov 15, 2010 letter, the financial recovery seen in 2010 as "an "economic recovery" that requires a tripling in the Fed's balance sheet, continues to average 450,000 new unemployment claims weekly, and relies on fiscal stimulus to counter utterly stagnant personal income, is ipso facto (by the fact itself) not a "standard" economic recovery. We have swept an enormous volume of bad debt under rugs, behind dams, and in back of curtains (not to mention in off-balance sheet vehicles such as Maiden Lane that were created by the Federal Reserve). But it is all effectively still there, festering. Meanwhile, our policy makers are trying to reignite financial bubbles in order to create an illusory "wealth effect" to propagate spending patterns that were inappropriate in the first place." These are conditions that are almost identical to a year ago, not overlooking isolated and significant price inflation over the year.

One Eye on The Fed: The Other Eye on The Dollar

Here is a 9 minute video clip that is timely and helpful in understanding the currency challenges facing the major global economies. The discussion revolves around more money printing from the Fed and what Taylor believes will be the impact on the US$. Taylor then offers a high conviction trade suggestion at the very end.

John Taylor, chairman and founder of FX Concepts Inc., discusses the outlook for currency markets. Taylor, speaking with Erik Schatzker on Bloomberg Television's "InsideTrack," says another round of quantitative easing is mostly priced into the market and that the U.S. dollar will weaken through the end of November before recovering. (Source: Bloomberg)

Quantitative Easing: Pushing on a String?

John Hussman has published another in his series of weekly articles that is a must read. In the article titled "Bernanke Leaps into a Liquidity Trap" he describes his opinion of what should be expected from more expansion of the 'monetary base' or quantitative easing. One of his points is...

Certain economic equations and regularities make it tempting to assume that there are simple cause-effect relationships that would allow a policy maker to directly manipulate prices and output. While the Fed can control the monetary base, the behavior of prices and output is based on a whole range of factors outside of the Fed's control. Except at the shortest maturities, interest rates are also a function of factors well beyond monetary policy. 

Median Home Cost in Terms of Gold as Money

Today's chart presents the median single-family home price divided by the price of one ounce of gold. This results in the home / gold ratio or the cost of the median single-family home in ounces of gold. For example, it currently takes 144 ounces of gold to buy the median single-family home. This is considerably less that the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down 76% from its 2001 peak (to a level last seen in January 1983) and remains well within the confines of its six-year accelerated downtrend.

Scanner here: This chart is making the case for gold more clearly than the case of real prices still falling. But it is also saying that there is no question which one should be owned as an investment. Own a home for housing, decorate it with gold.

Inflation or Deflation?

From 1979 to 1987 he was Fed Chairman. During his tenure, he raised the Fed Funds rate, from a low of 8.34% to the peak of more than 21%, in his strategy to create a recession that would stall inflation wreaking havoc on the US economy. Paul Volcker, now chairman of the president’s Economic Recovery Advisory Board, had this to say recently about the current risk of inflation. “We’re in a situation right now where we’ve got a sluggish economy, a lot of excess resources, a lot of unemployment,” he said. “This is not an atmosphere that’s inclined to produce inflation. I think we ought to be sure that we don’t take actions that down the road might lead to an inflationary situation.” He was also asked about his concern for deflation. “I do not think we should be worried about and consumed by the problem of a potential deflation that doesn’t exist,” he said. Here is a link to the article these quotes are taken from.

And Now, From Olympia...

This news comes from the Seattle Times and Washington State's chief economist, Arun Raha, who gave lawmakers an update on the economy Friday and laid out his perspective.

"Economic activity has slowed to an agonizing crawl. May and June saw a pause in activity, and July brought little relief. Job growth remains anemic ... housing is looking for a new bottom and despite some easing in credit conditions, small businesses continue to face a challenging credit environment. There is considerable drag in the economy and increased uncertainty," Raha said, reading from his report.

That's not all. "We have cut our 2011 employment growth forecasts roughly in half, from 2.7 percent to 1.3 percent on an annual average basis. We do not expect to reach our pre-recession peak in overall employment until the second quarter of 2013." 

Bottom line of all that: "I do not believe that we will fall back into recession, it will just continue to feel like one," he said.

Washington has an economy weighted with export in airplanes, technology, and farm commodities. As a result, the economy was slow to enter recession and will be late to the other side, whatever that will be. What Raha did not say explicitly, based only on the quote "activity has slowed to an agonizing crawl", is that the revenue available for lawmakers is still shrinking. Like other governments, the coming session is going to require painful decisions because government, here and elsewhere, has steadily become a major employer in the economy it serves. That model is getting crushed by the reality that it does not sustain itself by creating new goods and services for sale. The jobs are expensive because they provide benefits that many private employers cannot afford to provide. Will lawmakers in Olympia have the strength of knowledge to make the decisions in Washington to change the pattern during the 2011 session, or are we going to watch foolish political gridlock guided by "the party" here too. This is a fascinating time.

Bullish or Bearish?

This is such an important and difficult discussion topic. A lot of net worth is at risk to a bear market mauling. Saving it from the potential value destruction depends on having a plan or at least having a clear idea of what market orientation is reflected in the asset allocation strategy at work now. Is it a bull market strategy or a bear market one? Having a position provides a base of information. My observations from talks with peers and industry colleagues is that many are paralyzed bulls and remaining at risk to the bear. There is nothing bad with being a bull or a bear. Losing money is what is bad and that is what I'm concerned about. If this period is recognized as a secular bear market period, which many call it now, losing money will be the outcome for those who could not get comfortable zipping on a bear coat for a while.

Here are a pair of perspectives to define the distinction between the bullish and bearish economic outlook, mostly measured by the stock market. Bob Doll, who is paid to be a bull, represents his investment manufacturing employer. The bear is David Rosenberg. His employer is a wealth management firm in Canada where he is chief economist, a position he held previously at Merrill Lynch. He should be expected to walk his talk. This interview was conducted back in March. After the video clip, there are some graphs that try to look at the economy from the positions taken by Doll and Rosenberg to examine what has changed compared with their expectations. They have not changed their market outlooks since March. One of them should, which one?

Sustainable Recovery or Recession Part 2

Perma-bear, David Rosenberg, faces a stiff challenge from two main street challengers in this video clip recorded Friday, Aug. 13. Rosenberg re-emphasizes that the stock market and economic recovery we are enjoying is mostly a bounce from a very low level, stimulated by corporate inventory replacement and cash as stimulus that is now drying up. He points out that comparisons of recent recessions and their recoveries is a comparison of unlike situations. What distinguishes the current economic period is the need for credit to be reduced substantially before real intrinsic growth can resume on a sustainable basis. He says that US consumers represent the biggest balance sheet in the world and are carrying debt equal to 20% of their assets. The long-term average level is 12.5%.

One Eye on the Fed: Quantitative Easing

Yesterday, the FOMC meeting was held. There was a lot of interest among financial observers on how they would use the carefully designed language in the press release from the group, and most importantly use the Fed's balance sheet to turn the slowing economy from a course that they acknowledge could be deflationary for assets and GDP. Today is a good time to reflect on my expectation and the reality.

In my post, Sustainable Rally or a Bear Trap?, I wrote about St Louis Fed Pres. James Bullard's recent public statements. His analysis of the economy concludes that deflation in the US is possible, even though he describes himself as an inflation hawk. His solution is for the Fed to initiate a new QE program that is a huge, targeted and managed release of money. This is a big departure from what I would expect from him as an inflationist. It increases my curiousity about his motive.

Stephen Roach, Global Economic Outlook, July 2010

Stephen Roach is not saying anything he has not said before, but this is a reminder of the economic conditions within China. It's an 18 minute interview. The interview covers the global debt crisis, the condition of China's economy, the condition of the US consumer and the chances for low, but positive, US economic growth to be sustained.

People With Jobs Are Losing Them at a Slower Rate

By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked jobless claims and adjusted their portfolios to anticipate these events. Obviously, there is no need for concern of wage inflation for years into the future. Wage deflation and unemployment, are the immediate concerns and so they are on the radar screen. Jobless claims illustrate wage deflation since unemployment benefits are not replacing 100% of employment income.

Weekly series fluctuate more dramatically than monthly series even when the series are adjusted for seasonal variation. The 4-week moving average gives a better perspective on the underlying trend

Data Source: Haver Analytics

Aging Japan / Keynesian theory / Inflation or Deflation

Andy Xie writes yesterday about the impact an aging population has on an economy, using Japan as the study case. In this article, he describes the point-of-view (POV) decisions people make. In other words, seniors have a POV that will be different than that of someone two generations younger. The impact will have economic implications that simply cannot be swayed when the numbers of people in the less productive older labor population are greater than the younger and physically productive working labor population. Most of his article addresses issues building over many years. The title of his article is "Our Next Economic Plague: Japan Disease" and includes a brief critique of Keynesianism because it is being promoted in Japan too. He says "Keynesianism is a prescription for a short-term economic hiccup. It's like a painkiller, not a cure. It tries to minimize output loss during a down cycle. It doesn't mean much for an economy in the long run. Without Keynesian stimulus, an economy is supposed to adjust properly. Using Keynesianism to explain or cure long term economic problems is just plain wrong." Using Keynesian theory makes for good policy when politicians are running for re-election, and after the election they can resume partisan games that produce token repairs to the damage brought on by Keynesian policies, like unlimited government borrowing and money printing.

Bernanke’s Dilemma: Hyperinflation and the US Dollar

Here is an analysis of the questions surrounding the existing condition of the US government as it struggles to save its legitimacy, that is, restore trust in it as a governing body. Then there are the questions surrounding the Keynesian policies of quantitative easing and the consequences of issued government debt hitting near 90% of GDP. Pile on top of that, the commitments for additional debt that have not been financed but must be, along with the total of private debt, yours and mine, and now we have debt to GDP approaching 300%! No wonder Ron Hera has done a great deal of research on the questions facing Bernanke, and the rest of us. Read this.
Bernanke’s Dilemma: Hyperinflation and the US Dollar

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The Case for Deflation: Discussion 2, the Case for Inflation!

Curious George has provided another informative post for inquiring minds...

Definitions:
“In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.” From Wikipedia

The Case for Deflation - Discussion 1 With the Challenger

I really like the points Gary Schilling makes in his abbreviated 2010 Outlook posted previously here on FS. I am in general agreement. Curious George is not in agreement on some important issues. With all respect, I would like to respond to his challenges to Schilling for the purpose of clarifying my perspective. This is an issue that has been on the top of my list of difficult questions and I have put a lot of time into forming a position. Without having a position defined, I would be drifting in the direction of the last best argument I listened to. I can't accept that. I know Curious George has also made the effort. He recently sent a message which said in part "Nothing is more central to portfolio management than the inflation / deflation debate. We can't afford to get this wrong." He and I have, so far, arrived at different conclusions. There is no need to agree, but we do need to understand the difference in our positions to better understand the situation. In the end we'll be much better advisors. There is no clear right or wrong yet. History will reveal that.