Just In - No Taper!

[c1ue]

Re: Just In - No Taper!

The labour "participation rate" dropped to 63.2pc in July, the lowest level since the late 1970s. The rate for men is at an all-time low. The unemployment rate has been falling, but chiefly because so many people are giving up hope and dropping off the rolls.

More sadly, the 1970s work force participation rates were before the latest wave of women into the workplace.

So what we've got is the same work force participation rate, but with 1.5x more workers.

[EJ]

Re: Just In - No Taper!

The Fed has been in a "zero degrees of freedom" policy trap for quite some time now...each removal of a prior QE has been followed by the invocation of another, named with a number one larger than the last. The latest round of QE has been dubbed "QE Infinity" by some commentators.

For some months I have been convinced that the Fed would come to its senses and start to taper, and the US economy would be strong enough (albeit, barely) to give it the cover it needed to do so. Others, including EJ, have been equally convinced that the economic indicators would not allow the Fed to act. I think the main reason I have been wrong is too close an association with the petroleum industry, which is the one sector in the US economy that is doing very, very well (other than the generous bonus "God's work" the bankers are doing, of course)...capital flows into upstream oil and gas have been relentless, wages have spiraled upwards, skilled labor is in short supply and the spin off into the economies of States such as Texas and North Dakota, and manufacturing sectors such as steel tubulars and pipe has been dramatic.

Nevertheless the Fed didn't act, and EJ and others who expected the Fed to stay the course have been proved correct.

In his 1954 book "The Great Crash, 1929", author and economist John Kenneth Galbraith wrote:

"Action to break up a boom must always be weighed against the chance that it will cause unemployment at a politically inopportune moment. Booms, it must be noted, are not stopped until after they have started. And after they have started the action will always look, as it did to the frightened men in the Federal Reserve Board in February 1929, as a decision in favor of immediate as against ultimate death. As we have seen, the immediate death not only has the disadvantage of being immediate but of identifying the executioner.

The market will not go on a speculative rampage without some rationalization. But during any future boom some newly rediscovered virtuosity of the free enterprise system will be cited. It will be pointed out that people are justified in paying the present prices - indeed almost any price - to have an equity position in the system. Among the first to accept these rationalizations will be some of those responsible for invoking the controls. They will say firmly that controls are not needed."

Seems we are back to a situation of "frightened men (and women) in the Federal Reserve Board", who do not wish to be seen to be responsible for any of the consequences of their collective actions.

And all the while Wall Street and parts of the Administration and Congress are saying firmly "that controls are not needed"...

I have another meeting at the Boston Fed coming up next month. It's interesting to see how the thinking of Fed economists has changed since the meetings in 2010 when it was all high fives over averting a second Great Depression and I've noted in recent meetings a pervasive sense of confusion and consternation over the fact that The Economy has not developed self-sustaining growth. The popular explanation among the Fed planners, by way of diverting responsibility for the Fed's contribution to this sorry state of affairs, is that politicians have failed to do their share of the stimulus heavy lifting; the Fed can't do it alone, Congress needs to increase federal government spending but won't for political reasons before the Nov. 2104 elections, thus the lugging of the economic engine.

I hope they will at some point be more open to the argument that I have made to them before, during, and after the crisis, that the problem is rooted in their misconception of the structure of The Economy as one monolithic versus two, a FIRE Economy and a Productive Economy, per Michael Hudson's conception.

A significant portion of what is measured as GDP is the result of economic activity that generates fees, interest, and other capital gains versus profits from value-add production as the inputs to personal consumption expenditures via incomes. Any Fed policy change that results in a reduction of this activity will slow the entire economy. The FIRE Economy in order to operate even at its current level requires low interest rates both to finance new projects and re-finance existing debt. The Fed in order to keep the entire economy on a growth track is on the hook to keep rates low to support in particular the real estate sector of the FIRE Economy via low mortgage interest rates, but also allow corporations to debt-finance additional capital outlays, which expansion you are seeing in particular in the energy sector. While I haven't done the research I suspect that the balance sheets of energy sector firms will show a decidedly large debt growth over the past 4 years compared to historical norms. The difficulty is that within the Productive Economy low interest rates produce such misallocations of capital as we see in the energy sector and others, that is, to keep the FIRE Economy humming along the normal risk/return signals that govern rational investment decision making by company management within the Productive Economy are distorted. The result is an economy that is, in total, highly leveraged and dependent on the continuation of low interest rates. This is why we have bet on low interest rates since 2000 and more recently a "no taper" decision. The Fed at some level understands the predicament, although not exactly as I've stated it. I'm hoping to get on the agenda to present to the group this winter or next spring.

[GRG55]

Re: Just In - No Taper!

that gives us 2 more years to PARTY!

And to figure out how pi factors into these so-called long cycles...

Anybody find an on-line tutorial...sort of a "Martin Armstrong to English" translation software.

[vt]

Re: Just In - No Taper!

In part the problem is that the FIRE lobbies are united and feeding campaign funds to politicians, while the TECI companies are not as united. We have to somehow break the political logjam. Yes the Fed is not supposed to be political, but the pressures brought to bear make it difficult to unwind 30 plus years of favoritism.

[don]

Re: Just In - No Taper!

good luck, boss . . .

and from the trenches, Dr Housing Bubble says . . .

The Fed surprised markets on Wednesday with their taper head fake. Was it because the economy is booming? No. Was it because household incomes were growing? Not exactly. Was it because inflation is non-existent? Not if we look at rents or medical care. In fact, going through the Fed’s statement it is largely holding back on the taper because of fear of budget negotiations in Congress. That is, we are hitting our debt ceiling yet again and the Fed wants some leverage here. Yet the larger signs all pointed to a taper if we consider that rents are rising at nearly twice the rate of the overall CPI. Also, the Census figures for 2012 were released and household income adjusting for inflation is now back to levels last seen in 1989. Lost decade? Try a lost generation. Also, recent data highlighted that the wealthiest in our country are capturing most of the income gains and given this trend and the Fed’s taper-less September, the feudalism trade is fully on.

Household income

The Fed is the housing market. Investors are dominating the market and this is their number one client. It is no surprise that a moderate rise in rates has essentially clobbered the “normal” home buyers out in the market. Regular buyers need every piece of help buying a home because household incomes have done this:


The above chart shows a full lost decade (24 years of weak income growth). Even in real terms, household income has plunged since the recovery started in 2009:

2007: $55,627
2008: $53,644
2009: $53,285
2010: $51,892
2011: $51,100
2012: $51,017

The Fed is largely playing the market and ironically, these moves are likely to continue the wealth disparity in the US further as investors once again plow into the real estate market to chase yields. For regular households, more income is going to go to housing on the rental front:



Keep in mind that rising rents with falling incomes is not exactly a good combination. Rents are rising at nearly twice the pace of the overall inflation rate. This divergence has accelerated since 2012. The Fed has made a one way bet here. The Fed is operating under a QE forever scenario. Take a look at the Fed balance sheet and tell me if you think a taper is in serious consideration:



The Fed is largely playing one big confidence game. The too big to fail are even larger today. Real estate investors are virtually half the market in 2013. Even in expensive California nearly one-third of all home sales are going to investors (in Las Vegas it is closer to 60 percent).

Reconcile all the facts coming out this month:

-Household incomes adjusting for inflation are back to levels last seen in 1989 (24 years ago – a lost generation)
-50 percent of income generated in 2012 is going to the top 10 percent of earners (highest ever since the early 1900s)
-Rents are rising much faster than overall CPI
-Investors are gobbling up an incredibly large share of all real estate purchases

There has been a serious disconnect going on since the recovery hit and these kind of divergent data points suggest we are in a mania like mode. Investors are largely chasing yield even on many deals that simply do make sense (i.e., cap rates are simply not panning out in many markets). The Fed taper is merely a magician’s trick. The Fed can’t taper to any large degree. It is an end-game in the mortgage market. The Fed is the housing market. The Fed is largely focused on helping member banks so it is no surprise that banks are doing exceptionally well and many financial institutions are the largest real estate buyers in the current market. For now, the investor trade will continue to play out even if people with common sense realize this is simply one giant shell game and the Fed is on its way to a $4 trillion balance sheet. Doesn’t seen so farfetched that we are entering a modern age of feudalism.

[Woodsman]

Re: Just In - No Taper!

These type of pinpoint predictions remind me of Nostradamus, the Mayans or various religions that are continuously preparing for the end of the world.

Yes, but Armstrong seems to be right on timing too often to dismiss out of hand. If only his methodology and writing were less inscrutable.

[Chris Coles]

Re: Just In - No Taper!

I have another meeting at the Boston Fed coming up next month. It's interesting to see how the thinking of Fed economists has changed since the meetings in 2010 when it was all high fives over averting a second Great Depression and I've noted in recent meetings a pervasive sense of confusion and consternation over the fact that The Economy has not developed self-sustaining growth. The popular explanation among the Fed planners, by way of diverting responsibility for the Fed's contribution to this sorry state of affairs, is that politicians have failed to do their share of the stimulus heavy lifting; the Fed can't do it alone, Congress needs to increase federal government spending but won't for political reasons before the Nov. 2104 elections, thus the lugging of the economic engine.

I hope they will at some point be more open to the argument that I have made to them before, during, and after the crisis, that the problem is rooted in their misconception of the structure of The Economy as one monolithic versus two, a FIRE Economy and a Productive Economy, per Michael Hudson's conception.

A significant portion of what is measured as GDP is the result of economic activity that generates fees, interest, and other capital gains versus profits from value-add production as the inputs to personal consumption expenditures via incomes. Any Fed policy change that results in a reduction of this activity will slow the entire economy. The FIRE Economy in order to operate even at its current level requires low interest rates both to finance new projects and re-finance existing debt. The Fed in order to keep the entire economy on a growth track is on the hook to keep rates low to support in particular the real estate sector of the FIRE Economy via low mortgage interest rates, but also allow corporations to debt-finance additional capital outlays, which expansion you are seeing in particular in the energy sector. While I haven't done the research I suspect that the balance sheets of energy sector firms will show a decidedly large debt growth over the past 4 years compared to historical norms. The difficulty is that within the Productive Economy low interest rates produce such misallocations of capital as we see in the energy sector and others, that is, to keep the FIRE Economy humming along the normal risk/return signals that govern rational investment decision making by company management within the Productive Economy are distorted. The result is an economy that is, in total, highly leveraged and dependent on the continuation of low interest rates. This is why we have bet on low interest rates since 2000 and more recently a "no taper" decision. The Fed at some level understands the predicament, although not exactly as I've stated it. I'm hoping to get on the agenda to present to the group this winter or next spring.

They are not going to listen until they are forced to view the overall economy sans such input. Then they will have no option but to be forced to recognise that they were wrong and you and Michael Hudson were right all along. They show every sign of being unable to accept their part in the process; that is, sad to say; classic intellectual bankruptcy.

[Mega]

Re: Just In - No Taper!

"...in Nov 2104...."

I think i be slighty dead by that time EJ............... ;)

This.....er crash thing EJ, i don't mean to be a pest......but i was assured by Marc Farber, Peter Schif, Max Kesser........you know "De Crew" that we be blasted & Gold $7,000 would now be the case...........

Its not sort of happening very quickly........i sat here in blighty EJ with little work to do..........i can see lots of nice young females whom are desprite for "Mega Assist program"........which is sadly lacking funds right now.

Be a good chap & when your at the FED try to talk up someone for Fed Chair that makes "Ben" look like Paul Volker!

Cheers
Mega

[Woodsman]

Re: Just In - No Taper!

Not intellectual, but moral bankruptcy:

"A credibility trap is a condition wherein the financial, political and informational functions of a society have been compromised by corruption and fraud, so that the leadership cannot effectively reform, or even honestly address, the problems of that system without impairing and implicating, at least incidentally, a broad swath of the power structure, including themselves.

Bill Black got it right seven years ago. No changes will come until the top 100 most aggregious leaders of this criminal cohort are eating off of metal plates and earning 35 cents an hour at their UNICOR job. The only way to fix America is to stop running it like it is Nigeria or Venezuela. But good luck with that.

[vinoveri]

Re: Just In - No Taper!

I have another meeting at the Boston Fed coming up next month. It's interesting to see how the thinking of Fed economists has changed since the meetings in 2010 when it was all high fives over averting a second Great Depression and I've noted in recent meetings a pervasive sense of confusion and consternation over the fact that The Economy has not developed self-sustaining growth. The popular explanation among the Fed planners, by way of diverting responsibility for the Fed's contribution to this sorry state of affairs, is that politicians have failed to do their share of the stimulus heavy lifting; the Fed can't do it alone, Congress needs to increase federal government spending but won't for political reasons before the Nov. 2104 elections, thus the lugging of the economic engine.

I hope they will at some point be more open to the argument that I have made to them before, during, and after the crisis, that the problem is rooted in their misconception of the structure of The Economy as one monolithic versus two, a FIRE Economy and a Productive Economy, per Michael Hudson's conception.

A significant portion of what is measured as GDP is the result of economic activity that generates fees, interest, and other capital gains versus profits from value-add production as the inputs to personal consumption expenditures via incomes. Any Fed policy change that results in a reduction of this activity will slow the entire economy. The FIRE Economy in order to operate even at its current level requires low interest rates both to finance new projects and re-finance existing debt. The Fed in order to keep the entire economy on a growth track is on the hook to keep rates low to support in particular the real estate sector of the FIRE Economy via low mortgage interest rates, but also allow corporations to debt-finance additional capital outlays, which expansion you are seeing in particular in the energy sector. While I haven't done the research I suspect that the balance sheets of energy sector firms will show a decidedly large debt growth over the past 4 years compared to historical norms. The difficulty is that within the Productive Economy low interest rates produce such misallocations of capital as we see in the energy sector and others, that is, to keep the FIRE Economy humming along the normal risk/return signals that govern rational investment decision making by company management within the Productive Economy are distorted. The result is an economy that is, in total, highly leveraged and dependent on the continuation of low interest rates. This is why we have bet on low interest rates since 2000 and more recently a "no taper" decision. The Fed at some level understands the predicament, although not exactly as I've stated it. I'm hoping to get on the agenda to present to the group this winter or next spring.

Why on earth do "connected" intellectuals continue to paint these officials as well-meaning but somewhat bumbling baffoons, when its clear to see that they understand exactly what they are doing regarding protecting the banking cartel and support rent extraction from the overall economy? At least Hudson calls a spade a spade. Interest rate repression is a direct wealth transfer from the private economy, enabling of deficit spending writ large, and most importantly THE FAILURE TO REGULATE THE SHADOW BANKING SYSTEM which is clearly enabled via the virtually free liquidity provided by the CBs. I've read so many apologetic articles in the last 24 hours as to why the Fed had to "not taper" for the good of the economy - and I call bullshit - every such commentary and opinion originating from "respected" sources is either written or sanctioned by someone in the 95%+ income/wealth bracket -that demographic and including the rent seeking speculators vastly benefiting from Fed policies. Geez, at least can't we be honest about the situation - power and influence is achieved by serving power and influence, and that is the situation. Fed is head of banking cartel who at behest of plutocrats exert tremendous influence on the ruling politicos to effect their goals. Forget all this "doing it for the economy and for the betterment of the population" nonsense. Why is everyone so shy about calling bullshit and a lie a lie? Same old quandary: won't get invited to participate if one alienates power, no doubt. Does being in presence of (or the prospect) power brokers really dazzle so much to obscure the truth to the point of thinking these folks are truly interested in anyone but themselves, their career, and their legacy? It's venality plain and simple.

[don]

Re: Just In - No Taper!

Very little attention is paid in most analyses of who is gaining, not by a little bit, but at a paradigm shifting magnitude. Where's the incentive to stop?

[DSpencer]

Re: Just In - No Taper!

Yes, but Armstrong seems to be right on timing too often to dismiss out of hand. If only his methodology and writing were less inscrutable.

Just to make sure, we are talking about this guy right:

http://en.wikipedia.org/wiki/Martin_A._Armstrong

I know very little about him, but I call BS. Can someone prove otherwise? Here are my questions:

1. Is there definitive proof that he actually predicted events correctly, before they happened? Or does he simply claim he predicted them afterwards like many others?
2. Is he right on a high percentage of all his predictions or is he the proverbial blind squirrel?
3. Does he have any rational basis for the claim that boom bust cycles occur every Pi x 10 days? Sounds like voodoo to me.

[Polish_Silver]

hudson on our predicament

A significant portion of what is measured as GDP is the result of economic activity that generates fees, interest, and other capital gains versus profits from value-add production as the inputs to personal consumption expenditures via incomes. Any Fed policy change that results in a reduction of this activity will slow the entire economy. The FIRE Economy in order to operate even at its current level requires low interest rates both to finance new projects and re-finance existing debt. The Fed in order to keep the entire economy on a growth track is on the hook to keep rates low to support in particular the real estate sector of the FIRE Economy via low mortgage interest rates, but also allow corporations to debt-finance additional capital outlays, which expansion you are seeing in particular in the energy sector. While I haven't done the research I suspect that the balance sheets of energy sector firms will show a decidedly large debt growth over the past 4 years compared to historical norms. The difficulty is that within the Productive Economy low interest rates produce such misallocations of capital as we see in the energy sector and others, that is, to keep the FIRE Economy humming along the normal risk/return signals that govern rational investment decision making by company management within the Productive Economy are distorted. The result is an economy that is, in total, highly leveraged and dependent on the continuation of low interest rates. This is why we have bet on low interest rates since 2000 and more recently a "no taper" decision. The Fed at some level understands the predicament, although not exactly as I've stated it. I'm hoping to get on the agenda to present to the group this winter or next spring.

I am embarrassed that it took a liberal like Hudson to point this out. But austrians also hate bank leverage.

T

he difficulty is that within the Productive Economy low interest rates produce such misallocations of capital as we see in the energy sector and others, that is, to keep the FIRE Economy humming along the normal risk/return signals that govern rational investment decision making by company management within the Productive Economy are distorted.

Very Austrian analysis of the situation.

[jpetr48]

Re: hudson on our predicament

On this taper or not too taper, I was intrigued by the interview of John Butler on Financial Sense. Three of the learning points:
1. Look at the voting structure of the FOMC and there you can see where the decision will fall. The "no no's" on further QE are not the core voting members rather they are the regional fed governors. The core votes come from dovish sentiment like Yellen. So why did the news of taper make it out to the media? To appease these regional governors and IMO to provide some political cover right before the fiscal kabuki show in congress on our budget. Front line story now shifts conveniently to how screwed up our elected officials are, drawing attention away from Bernanke.
2. The pending threat does not come from bond vigilantes rather the dollar vigilantes.The dollar is still in a long term downtrend from 2009 and just made a double bottom yesterday. It will be interesting to see how our foreign friends (besides Japan) respond our falling dollar.
3. As Don has started another thread on the Fed's assets balance, watch what the Fed does, not what they say.

Not a learning point, but Butler mentioned reading Volker's and committee members transcript in early 80's meeting. While all the committee members were focused on the data, Volker listened and did not acknowledge any of the data. Instead he focused on the qualitative and the perception of credibility. Does the Fed have any credibility? Maybe Yellen does with her accurate forecast of where GDP may end up, but after that, there is doubt on whether she or other probable successors can change perceptions of low Fed credibility.

[jk]

Re: hudson on our predicament

for the past several years since the great financial crisis, late winter into spring the economy looks a little perkier and the fed performs its rites of spring, hinting at some form of tightening. one year they were going to let qe "expire." another year they were planning their "exit strategy." this year they were going to start "tapering." so late spring and early summer rates tighten up a little and the economy begins to sputter. then we round the far turn and the annual congressional fall festivities come into view. this is when, in august or september, the fed loses its nerve, or rather loses faith the economy has gained "escape velocity." financial conditions loosen, markets rise, and by winter things look a little perkier.