The unfolding tragic comedy (maybe melo-drama tragedy might be better) that is being written for our economic future does not appear to have a very happy final act – and there will be no curtain call. The cast of characters seem to have forgotten their exit cues and are adlibbing (winging it might best describe it)this latest act of the play. With each new improvised line we head further toward chaos and no one wants this act to end – especially the main characters! For I believe they know that the next act will surely bring the house down.

The Spins Of The Fathers

Submitted by Tyler Durden on 04/25/2013

Submitted by Mark Grant, author of Out of the Box

A Dali Landscape

Imagine that you are walking through a Salvador Dali painting. Everything is disjointed, tilted and mangled. The clocks are dripping, the colors are ravishing and the trek is difficult as disorientation precedes each step.

In the financial world at present the markets are fueled by the liquidity of the central banks. Not only is nothing else of importance but good news becomes the joyful noise of some divinity, bad news is elevated to good news and horrible news brings ecstasy as it will enlarge the contributions of Mr. Bernanke and Mr. Draghi. 

The various economies are irrelevant. Growth is insignificant. Debt levels are made up and then ignored. The growing stockpile of small bits of pulp mixed with water is all that matters as we stumble along in our Paper Mache world.

Now I do not argue with reality. Equities up, bond compression unrelenting, yields down and we play the Great Game to win and not to be right. Yet I am aware, I am always aware, that reality is lurking in the swirling mists. There is nothing that separates us from chaos except the unrelenting supply of money because the underlying economies in America and especially in Europe cannot support these kinds of markets. Even in Germany, who reports a debt to GDP ratio of 81% while the real number exceeds 200%; the storm clouds are gathering.

The next barrage will be fired soon by Mr. Draghi. It will be a cut in interest rates that will cause the next heretical dance but it will be short lived I fear. Markets up, the Euro down and right at Kelvin’s Absolute Zero will be the temperature reading. There is not a normal in sight. Not the old normal or the new normal or any sort of normal; just the Fed and the ECB with their fingers in the dike.
It is the land of easy money. Heaps of it more than just before the 2008/2009 debacle! That last go round was money provided by the private banks. This go round is provided by the central banks. The last time leverage was in play. This time the capital is minted by creation. Easy money though, always leads to serious mistakes as it gets shoved into inappropriate places.

Yields may be down for sovereign debt in Europe but debt levels are up as every country on the Continent has entered the sinkhole. Mandated debt levels are now being ignored as exemplified by Spain with a 10.6% ratio as ever more debt is added which must be serviced as the total amount of debt cannot be paid regardless of the interest rate.

We live in a world where everything is ignored but the time will come when this ignorance will be shattered. We will pay the price for our stupidity because there is always a price to be paid. Mr. Bernanke and Mr. Draghi have been the Saviors but the church has been built on thin air and the weight of the building is increasing and increasing at an alarming rate. This kind of normal is unsustainable.

The lessons of the past are being ignored once again but I caution you to not forget what you have learned.

Fed's medicine.....

What a tangled web we weave in our financial house of the dual mandate.

“What the Fed needs to do in order to achieve its macroeconomic objectives will create instability in financial markets…..”

Is the Fed's Medicine Really Poison?

By Caroline Baum - Apr 22, 2013

It's not every day that a central banker admits that his medicine for curing the last crisis may be laying the groundwork for the next. But that's exactly what Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, said last week at the annual Hyman P. Minsky Conference at the Levy Economics Institute of Bard College.

Kocherlakota said low real interest rates are necessary to achieve the Fed's dual mandate of maximum employment and stable prices. He also said that low real rates lead to inflated asset prices, volatile returns and increased merger activity, all of which are signs of financial market instability. Listen to what he calls his "key conclusion" -- and what I'd call a true conundrum:

"I've suggested that it is likely that, for a number of years to come, the FOMC will only achieve its dual mandate of maximum employment and price stability if it keeps real interest rates unusually low. I’ve also argued that when real interest rates are low, we are likely to see financial market outcomes that signify instability. It follows that, for a considerable period of time, the FOMC may only be to achieve its macroeconomic objectives in association with signs of instability in financial markets."

Just think about that for a minute: What the Fed needs to do in order to achieve its macroeconomic objectives will create instability in financial markets. There's more:

"On the one hand, raising the real interest rate will definitely lead to lower employment and prices. On the other hand, raising the real interest rate may reduce the risk of a financial crisis —- a crisis which could give rise to a much larger fall in employment and prices. Thus, the Committee has to weigh the certainty of a costly deviation from its dual mandate objectives against the benefit of reducing the probability of an even larger deviation from those objectives."

Damned if we do, damned if we don't. Other Fed officials have warned about froth in asset markets, but none to my knowledge has been as forthright in describing the Fed's life-saving medicine as systemic poison.

Like his colleagues, Kocherlakota believes effective supervision and regulation of the financial sector are the best ways to address threats to macroeconomic stability. Yeah, and the tooth fairy leaves money under your pillow if you're good.

For central bankers to believe regulation is the answer, they have to ignore history and disregard the tendency for regulators to be co-opted by those they are assigned to regulate, a phenomenon known as "regulatory capture."

The Minsky Conference was the ideal place for Kocherlakota to deliver his remarks. Minsky observed that, during periods of prosperity and financial stability (the Great Moderation), investors are lulled into taking on more risk with borrowed money.

At some point, investors are forced to sell assets to repay loans, sending asset prices into a downward spiral as cash becomes king. This is what's known as a "Minsky moment."

Kocherlakota seems to be saying such an outcome is inevitable. If only he could tell us when.

(Caroline Baum is a Bloomberg View columnist. Follow her on Twitter.)

word for the week

The word for the week: dysfunctionality  

The inability to think beyond today while making decisions that will have unintended negative consequences tomorrow yet believing that all is well and we are on the right path.

Dsyfunctionality reaches into all facets of today’s life and it’s effects are felt throughout our country….

yields

Are we going to repeat last year’s spring fall off?

Ten Year Treasury Yield 

Fed's peak at the National Economic Conditions

Latest Fed speak buzz words to watch for –

fiscal drag, fiscal restraint, moderate growth

…mild restraint in 2012 to much greater restraint in 2013,

…will continue purchasing assets until it sees substantial improvement,

…a self-sustaining economic expansion,

…situation has changed in a meaningful way

The Outlook for the National and Local Economy

April 16, 2013

William C. Dudley, President and Chief Executive Officer

National Economic Conditions

Turning to the national outlook, the U.S. economy remains on the slow growth track that has persisted since the recession ended in mid-2009. In fact, real gross domestic product (GDP) grew just 1.7 percent in 2012, below the 2.2 percent rate of the preceding two years. This lackluster and disappointing performance masks the fact that the underlying conditions that support growth have been gradually improving. However, in the near-term, this improvement in fundamentals is being offset by federal tax increases and spending cuts, which economists call “fiscal drag.”  The most obvious example of this is the end of the partial payroll tax holiday at the beginning of this year.  This reduced the take-home pay for all those that pay into the Social Security system. 

In a recent speech to the Economic Club of New York, I discussed a number of areas where economic fundamentals have improved.  Here, let me concentrate instead on some areas of the economy where the impact of this improvement in fundamentals has been most evident: consumer spending, the housing market, and investment in equipment and software.

Despite the increase in payroll taxes and in high-income tax rates, real—that is, inflation-adjusted—personal consumption expenditures rose solidly in January and February.  As has been the case for some time, the growth of consumer spending has been led by purchases of durable goods.  Car and light truck sales in the first quarter were at the highest pace since the fourth quarter of 2007.  This growth in consumer spending probably is due, in part, to improvements in labor market conditions, household balance sheets and household access to credit.  However, retail sales were quite weak in March, suggesting that the tax increases that occurred at the start of the year may be beginning to have a material effect.  

After a long period of being a drag on the economy, the housing market is now providing lift to economic activity, with upward trends evident in housing starts, home sales, and home prices.  To see why this is so important, in 2009 residential investment exerted a 0.4 percentage point drag on GDP growth, while in 2013 it is likely to provide a boost to growth on the order of 0.5 percentage point—a swing of nearly a full percentage point.  In addition, rising home prices can create positive spillovers to the rest of the economy as higher home prices lift household wealth and reduce the number of homeowners with negative equity.

Business investment in equipment and software, another component of private final demand, strengthened in the fourth quarter, and shipments and orders for nondefense capital goods suggest further growth in the first quarter.  Moreover, indicators of the U.S. manufacturing sector, including the ISM manufacturing index and most Federal Reserve regional manufacturing indexes, point to continued moderate growth in the sector.  

So why isn't the U.S. economy growing more quickly? The most important reason is the sharp shift in federal fiscal policy from mild restraint in 2012 to much greater restraint in 2013. The increase in payroll tax rates, the rise in high income tax rates, the increase in taxes associated with the Affordable Care Act, and the sequester will result in fiscal drag of about 1¾ percentage points of GDP in 2013, an unusually large amount of fiscal restraint when the economy doesn’t have strong forward momentum and unemployment is still elevated.

In terms of the labor market, we have seen only a moderate improvement in labor market conditions over the past six months or so. After an encouraging pick up in the pace of job creation around the turn of the year, the employment report for March showed a gain of only 88,000 jobs. While I don’t want to read too much into a single month’s data, this underscores the need to wait and see how the economy develops before declaring victory prematurely.  I’d note that we saw similar slowdowns in job creation in 2011 and 2012 after pickups in the job creation rate and this, along with the large amount of fiscal restraint hitting the economy now, makes me more cautious.  

Since September, payroll employment has increased an average of 188,000 per month, compared with an average of 172,000 per month over the previous two years.  The unemployment rate has declined from a peak of 10 percent in October 2009 to 7.6 percent in March; however, much of the decrease is due to a fall in the number of people actively looking for a job.  Furthermore, as of March there were still almost 3 million fewer jobs than at the end of 2007, and the ratio of employed Americans to the working age population was actually lower than it was at the end of the recession.  Also, in an indication that employment is far from healthy, job finding rates have changed little since the recession. New York Fed staff research agrees with the broad consensus that cyclical factors are the major reason for the continued weakness in labor market conditions. 

In sum, these developments lead me to expect sluggish real GDP growth over the course of 2013 of about 2 to 2½ percent.  As such, I anticipate that the unemployment rate will decline only modestly through the rest of the year.

In the near term, there is considerable uncertainty about the outlook, particularly because the multiplier effects from fiscal drag and sequestration are still unclear. This uncertainty should gradually decline—for better or for worse—over the coming months, as the sequester’s impact takes hold and more economic data come in, giving us a clearer picture of the forward momentum of the economy.

Inflation, as measured by the personal consumption expenditure deflator, is currently well below the Federal Reserve's objective of 2 percent. There is substantial slack in the labor market and in the markets for goods and services, and underlying measures of inflation are subdued.  Moreover, peoples’ expectations of inflation remain well anchored at levels consistent with our 2 percent longer-run objective. Thus, I conclude that the risk that inflation could significantly exceed our 2 percent objective is quite low over the next few years, even if the economy were to strengthen considerably.

With inflation well below its longer-run goal and high unemployment, the FOMC decided at its March meeting to maintain a “highly accommodative” policy stance: a federal funds rate in a range of 0 to 25 basis points with forward guidance based on economic thresholds.   Moreover, to support a stronger economic recovery, the FOMC is purchasing long-term Treasury securities at a rate of $45 billion per month and agency mortgage-backed securities (MBS) at a rate of $40 billion per month, and will continue purchasing assets until it sees substantial improvement in the outlook for the labor market, conditional on ongoing assessment of benefits and costs.  Combined, these actions are intended to ease financial conditions and thereby help to establish a self-sustaining economic expansion.

As I stated in my recent Economic Club speech, the benefits of our asset purchases—as reflected in improving financial conditions and the quickening pace of interest-sensitive spending such as that on consumer durable goods, housing, and capital goods—exceeds the costs.  Furthermore, the labor market outlook has yet to show substantial improvement.  Consequently, I see the current pace of asset purchases as appropriate.

At some point, I expect that I will see sufficient evidence of improved economic momentum to lead me to favor gradually dialing back the pace of asset purchases.  Of course, any subsequent bad news could lead me to favor dialing them back up again. As Chairman Bernanke said in his press conference following the March FOMC meeting "when we see that the…situation has changed in a meaningful way, then we may well adjust the pace of purchases in order to keep the level of accommodation consistent with the outlook."

What does this fore tend for the housing markets in the new normal?

What does this fore tend for the housing markets in the new normal?

Housing Starts Surge Due To Rental Housing Construction, Permits Miss Even With Seasonal Distortion

Submitted by Tyler Durden on 04/16/2013

On the surface, today's Housing Data was good. Yes, there was a miss in the housing permits number, which declined from a downward revised 939K to 902K, on expectations of a strong 942K print, but let's ignore that: after all bad news is good news (although as the chart below shows even this number was highly skewed due to seasonal adjustments and the NSA number hasn't really budged in the past year). But look at the housing starts: what a whopper: at 1036K, this was the highest print since June 2008 - great news, right? Not really, because the one key indicator here, single-family units, actually posted a sizable drop from 650K in February to 619K in March. The offset: construction starts of multi-family, aka rental units, which in March was a whopping 392K, a 83K seasonally adjusted surge from February, which brings the total multifamily starts to the highest since January 2006 at 423K. Of course, in January 2006, single-family units hit a record 1823K, or about three times as much as the March 2013 number.

Thank you Fed and QE for making yet another capital allocation mockery as America is increasingly shifting into a nation of renters. At this pace expect multi-family starts to surpass single unit starts in 4-6 months for the first time ever.

Housing Permits seasonal vs non-seasonally adjusted number:

And Housing Starts: note the single vs multi-family divergence:

Source: Census Dept

Interesting correlation data

Interesting correlation data for consideration……

Ten-Year Treasury yields have followed the same pattern each year since the crisis started - a modest correction full of hope that the recovery and growth is here followed by a collapse in yields...

And 2012-13's US Macro data has traced a very similar pattern to 2011-12's with the latest little hope spur seeming to fade very rapidly now...