Monday, December 31, 2012

Soak the working folks

What no one is talking about in the discussions of the nauseating fiscal cliff negotiations is that the payroll tax holiday, a full 2 percent of individual incomes below about $110,000, is being let expire.  For most households with two parents working, this will be a full 2 percent reduction in take home pay.  Since consumption tends to track disposable income with a correlation >99 percent—combined with some reflexive belt tightening—this tax increase for the majority of households will almost certainly result in a slowing of the economy.  Meanwhile, as the floor for tax increases on the rich will be raised to approximately half a million dollars, the change in rates will likely have little effect.  As a commenter at Daily Kos points out, incomes at that level are largely driven by profits and capital gains and are highly variable, so that the increased tax rate will not even be perceived, at least for a long time.

Happy New Year, everybody!

Saturday, December 29, 2012

’Animal spirits’ update

Industrial Production had a nice bounce in November, putting the probability that we are currently in recession (according to my recently developed model) at about 8 percent.


However, the essence of this model is that any six month decline in the exponential moving average adaptation level used is a 100 percent accurate indicator of being in recession.  The average made a new cyclical high in November, at 96.8, which is bullish, while the index was at 97.5.  Subsequent values of Industrial Production falling below 96.8 will increase the likelihood of recession, and a May value falling below that level will be confirmatory.

Thursday, December 20, 2012

Economy at stall speed; recession imminent

I hypothesize that “animal spirits” or confidence levels in the economy are largely a function of how things in the economy are relative to adaptation level.  In the model presented up to now I have used the psychologically sensitive unemployment variable as the basis for the calculation.  Today I am playing around with Industrial Production.  Just as stock market investors become discouraged when a stock’s price slips below a moving average, I hypothesize that much the same pertains to managers of industrial concerns (and throw in an inventory cycle for good measure).

In this case the measure of “animal spirits” would be

A = (IP – IPMEAN) / Sigma (IP)

where A is the “animal spirits” metric, IP is Industrial Production, IPMEAN is its exponential moving average over a the past several years (heavily front-end weighted compared to the unemployment model), and Sigma is its standard deviation over the same period.


The picture that emerges suggests we are just at the cusp of a new recession starting.

One of my back burner research projects is to customize a composite contraction measure using several salient macro variables. 

“Animal spirits” matter most in the contraction, when discounting is taking place below an anchor level (we discount losses more than we value gains of same size, in “utility points”).

A simple logistic model using this new “animal spirits” metric and a recent percentage change in Industrial Production produces a quite credible contemporaneous indicator of being in an NBER recession, probability of being in recession now running at about 40 percent:


I will update this new model when new data becomes available.  Here is the picture of Industrial Production and its adaptation level, showing that we’re entering the zone of loss discounting:


With one false positive in the period leading up to the 1990-1991 recession, if the exponential moving average used here is down over any six month period then the economy is in recession.  It’s not a great leading indicator, but it’s 100 percent accurate coincidentally:


As the data here is up to October 2012, we should know by April if the economy is in recession.  The adaptation level is 96.65 of Industrial Production.  An April value falling below that will be confirmatory.

Favorite Blog List Modified

As my loyal readers have probably figured out, I have a limited amount of time to devote to the site, and simply relinking great articles from other sites does not add value.  This site is non-commercial anyway.

I am revising my list of regularly read blogs to reflect my updated preferences.  I’ve removed Calculated Risk (too old fashioned) and a few others, and added New$ To Use, which still has a sell-side emphasis but better international coverage. 

Mish and Zero Hedge are still in there for their number-crunching and ascerbic analysis, both exemplars of the Austro-libertarian point of view.  John Hussman’s scrupulously intellectually honest weekly postings, usually available Monday morning, have been added.  Hussman’s point of view most closely mirrors my own, being academically trained and a total apostate from the corrupt academic economics and finance establishment (I am currently trying to earn an honest living providing credit to small businesses).  Yves Smith and cohorts at Naked Capitalism go more than far enough in expressing their, and my, disgust at the impotence of progressives in our increasingly atavistic American political culture.  Jesse maintains a nice link list, though like Yves’s, I often skip his sermons.  There are a couple of sites I visit when I have time to waste, Jim Quinn’s The Burning Platform, another puerile libertarian blog but with an occasional nice article on the fourth turning (although his support for Romney as the next Boomer generation Prophet really cut his credibility with me), and The Economic Collapse, which offers a usually well-researched fundy end times perspective on latter day America.  Here’s a recent post on the state of children in America todayThe Browser is a general interest linking site, with good links.

The news flow from these sources (I mostly follow links) is a torrent.  My contribution will be to identify using my animal spirits model when the next collapse of confidence will likely occur.  A rising unemployment rate will precede it, but the event itself will be highly nonlinear.  I am still forecasting an “official” recession to begin in mid-2013.  Mish, ECRI and Hussman all say we’re “in recession” now.

BTW, I run AdBlock on Chrome on my PC, and having recently gotten an iPad (and become a convert to the tablet *and* touch screen modalities—my next PC will be a 15 inch Mac with a touch screen, I think) and Chrome for the iPad not having an ad blocker, I have been appalled at what Zero Hedge and other sites look like unfiltered.  I read most of my blogs in Google reader, and don’t see ads when I go to the site itself.  But these folks deserve to make money. 

Happy winter solstice!

Monday, December 17, 2012

Moral Hazard R US

Forbes recently ran a story describing QEternity as basically a gigantic money laundering operation (here). The bad assets go into the Fed at pretend and extend prices in return for high-powered reserves money. The HSBC settlement proved that bankers are above the law, that too big to fail is too big to prosecute.

The financial sector of the US is poised for a fall.


Savage America, heal thyself

We Americans kill children the world around without a second thought, hundreds dead in Pakistan and Afghanistan from the President's personally ordered drone strikes, hundreds of thousands of women and children in Iraq because of the last President's fraudulent war.

But the MSM only "grieves" for our own. This is hypocrisy and misdirection on a grand scale.

Not until America repents of its greedy, violent core values will a new morning dawn in America.


Saturday, December 15, 2012

The public players are all fools

How long will our MSM political discourse be limited to witless exchanges between cartoon ideologies? The libertarians are lazy, puerile pikers who want no one to take their toys away. The evangelicals follow like sheep their war-mongering false prophets, funded by greedy rich bastards who laugh at their stupidly. The screeching leftists like Krugman and Bernanke are too brainwashed in fiddle with the dials neoclassical macroeconomics to fully realize that the problem is the distribution, stupid. How long will progressives who sense a fundamental corruption in the military-industrial-financial-fascist complex resulting in the erosion of Constitutional protections, blatant suppression of significantly disruptive opposition (Wikileaks), the lack of a single prosecution of anyone responsible for the massively fraudulent activity that led to the financial crisis and the subsequent bailout of the perpetrators--how long will rationally skeptical progressives be labeled "conspiracy theorists"?

Most of the American people probably would fall into the latter category if they were honest about their views.

At this point They already know all of our political opinions through their surveillance of all our private communications, so what is there to lose in the American people tying up the phone lines to Congress more often with expressions of our disgust with our "representatives"? What other power do we have? Are we going to continue taking this lying down?


Thoughts on the fiscal cliff

I overcame my cynicism for just one moment and emailed the President to say that I thought raising taxes on rich people is perhaps the most important thing he could do to start to bring our ruling elite--"we are gods!"--back down to Earth. Going over the cliff will precipitate a recession anyway, if any fiscal tightness is applied at all, so the President would be well-advised to take his recession early in his term.

Hope springs eternal.


Monday, December 10, 2012

What a democratic solution to a banking crisis looks like

Via:  Imagine what our response would have looked like if our political system weren’t totally corrupt, but actually responded in a reasonable way the will of the people.  The Millennials wouldn’t be debt serfs looking to rent their next apartment from a hedge fund, while Wall Street “bankers” snap up their second and third vacation properties.

BTW, I actually wrote the White House today (wow, political activism!) informing the President that I was one of his progressive supporters who has been disappointed many times by his policies, but urging him not to blink on raising taxes on the rich.  Until our selfish, corrupt ruling class is made to heel at least a little bit to the needs of the bottom 80 percent, we are on the express train to neo-feudalism.

Depending on how much backbone Obama actually has and on how secure the Devil’s grip on America’s throat is, we could see very dark days ahead.  On the other hand, Obama could cave, like he usually does.  Few people want to consciously become martyrs.  In this case the forecast is for continued collapse of effective demand.  America joins Brazil as a full-fledged banana republic.

Fighting Recession the Icelandic Way

By the Editors - Sep 26, 2012

Few countries blew up more spectacularly than Iceland in the 2008 financial crisis. The local stock market plunged 90 percent; unemployment rose ninefold; inflation shot to more than 18 percent; the country’s biggest banks all failed.

This was no post-Lehman Brothers recession: It was a depression.

Since then, Iceland has turned in a pretty impressive performance. It has repaid International Monetary Fund rescue loans ahead of schedule. Growth this year will be about 2.5 percent, better than most developed economies. Unemployment has fallen by half. In February, Fitch Ratingsrestored the country’s investment-grade status, approvingly citing its “unorthodox crisis policy response.”

You can say that again. Iceland’s approach was the polar opposite of the U.S. and Europe, which rescued their banks and did little to aid indebted homeowners. Although lessons drawn from Iceland, with just 320,000 people and an economy based on fishing, aluminum production and tourism, might not be readily transferable to bigger countries, its rebound suggests there’s more than one way to recover from a financial meltdown.

Nothing distinguishes Iceland as much as its aid to consumers. To homeowners with negative equity, the country offered write-offs that would wipe out debt above 110 percent of the property value. The government also provided means-tested subsidies to reduce mortgage-interest expenses: Those with lower earnings, less home equity and children were granted the most generous support.

Debt Relief

In June 2010, the nation’s Supreme Court gave debtors another break: Bank loans that were indexed to foreign currencies were declared illegal. Because the Icelandic krona plunged 80 percent during the crisis, the cost of repaying foreign debt more than doubled. The ruling let consumers repay the banks as if the loans were in krona.

These policies helped consumers erase debt equal to 13 percent of Iceland’s $14 billion economy. Now, consumers have money to spend on other things. It is no accident that the IMF, which granted Iceland loans without imposing its usual austerity strictures, says the recovery is driven by domestic demand.

In addition to easing consumer debt, Iceland reduced government spending and increased revenue by raising taxes and cutting deductions that mainly benefited the well-off, a path the U.S. might profitably emulate. In fact, relief for overburdened U.S. consumers is a cause promoted by former U.S. Federal Deposit Insurance Corp. Chairman Sheila Bair in a new book published this week. Bair would have done more to aid sinking homeowners and done less for banks, but she says her efforts were blocked by Treasury Secretary Timothy Geithner and others.

It worked in Iceland. A deficit that reached 13.5 percent of gross domestic product in 2009 fell to 2.3 percent last year. The IMF predicts Iceland will have a primary surplus (excluding interest on debt) of 1.5 percent this year.

As for the banking industry, Iceland never had an option to adopt the too-big-to-fail policy that led governments in the U.S. and Europe to prop up their banks. Assets held by Iceland’s three largest lenders had swelled to nine times the size of the economy. After they defaulted on $85 billion in debt, the government seized control of them.

Initial plans to repay foreign creditors, mostly U.K. and Dutch depositors, collapsed in 2009 as street protests led to the demise of the government. Repayment of obligations to overseas creditors was either postponed or written off, leaving the reconstituted banks with much smaller domestic operations. Twice, Icelanders rejected national referendums on repaying foreign depositors, who are pressing their claims in European courts.

Holding Accountable

A new government led by Johanna Sigurdardottir embarked on a campaign to hold accountable the so-called neo-Viking bankers at the center ofIceland’s crisis. Instead of picking a prosecutor from law firms in Reykjavik, which had depended on the banks for business, the government drafted an investigator from a remote village. Although a number of bankers fled the country to avoid prosecution, the former chiefs of two of the three biggest banks have been indicted and are standing trial.

Undoing the damage caused by the crisis is a work in progress; not every Icelandic innovation would be feasible in the U.S. or Europe. Iceland’s debt stands at almost 100 percent of GDP. Many of the country’s professionals have left for Norway and Denmark amid a dearth of jobs. Iceland still must figure out how to ease constraints that barred investors from withdrawing as much as $8 billion from the country and transferring it overseas. Inflation remains stubbornly high. To counter that, and to prevent capital flight, Iceland’s central bank has increased interest rates five times in the past year. But raising interest rates makes credit more expensive, checking growth.

Iceland’s central bank on Sept. 18 released a report suggesting the country go slow with plans to enter the European Union, a process started in 2010 when the euro seemed sounder than the krona. Becoming a member won’t be easy: If the issue were put to a referendum, Icelanders would probably reject admission. And why would Iceland want to join now? Euro-member nations such as Greece and Ireland offer testimony to the risks of being yoked to a currency along with stronger economies.

Devaluation of the kind Iceland suffered is never fun. Reneging on debts leaves a legacy of violated trust. But it still looks better than recession with no obvious way out.

Saturday, December 8, 2012

What the Big Money Wants Now: Inflation

As I wrote years ago in my diagnosis of the response of the central banks to the financial crisis, their only possible response to papering over the bad debt and loading it onto the sovereigns would be to initiate the super nova of the Breton Woods II fiat fractional reserve world monetary system, in a massive race to devalue their currencies and inflate their way out of over-indebtedness. An intermediate step was ZIRP, made to order for the well-heeled and well-connected of the world. Now that they've had a chance to leverage up again with real estate the world 'round, they are just itching for the next inflation to get going. They don't want to have to wait too long for their killing. Quickest way to get an inflation going: war.

Friday, December 7, 2012

US Effective Demand

Source:  FRED  Both charts are percent change from a year ago, data to 2012Q3.


Will exports pick up the slack?