Sunday, October 19, 2014
My Response to Pettis Latest Blog - Pettis is a "Must Read" - War on the Horizen - US complicit in EZ crisis
"How to link Australian iron to Marine le Pen"
As usual brilliant, and you are frighteningly alone showing your academic courage. But I have some thoughts which I hope are additive.
It should be understood that it is not just that there is a curious Dornbush "suddenness" that resolves imbalances, but if those imbalances were built as policy, especially policy that at its heart is meant to provide societal control, increase government power or repair a perceived deficiency in power or alleviate a risk to power (Tienanmen) , or to counter a foreign security risk, the imbalances created by policy can only be resolved by "un-policy". In other words via catastrophe and jumps which will be weeks in the process versus the decades that the policy required to build those imbalances. Since imbalances created are the results of policy, it means by definition they have the current group in power committed "all in" on those imbalances. China may actually be able to remedy the imbalances by a change in policy based on Confucius ideals of the greater good -but that has never been accomplished in history be it the Athenian mercantilism to Roman wheat trade with Egypt to American housing market. So the odds as defined by history is that China will experience a very severe cataclysm ,right up there with a Yihetuan or Taiping event. I hope not, as that would result in war.
That is what is unsaid - maybe it has to be unsaid - that such imbalances are not just severe economic conundrums lacking sensible policy - but are always the cause of all war. These imbalances, therefore, are the most important foreign policy and security issue for the USA and all world governments. If they are successfully deflected from the international lines of transmission - for example the USA "ate" the first phase of the China imbalance resolution via the solvency event of 2008 - they will always cause at best intense internal insurrection or a civil war and at worst global war. Very serious stuff indeed.
These imbalances are intolerable for this globalized world.
Your ideas on Saravelos "Euroglut" are thoughtful. And Saravelos is thoughtful to approach Europe on an international identity perspective like the good Minskian I am sure he must be. But that glut does not exist in truth. The real imbalance is not that that Germany and a few Nord fellow travelers have excess savings and low demand, but that all of those savings are matched and then some by the deficit in the PIIGS. The T2 accounting has become ubiquitous such that it no longer terrifies or even really acknowledged . And the Nord EZ feel they have successfully forced the PIIGS into a long term acquiescence of the policy that built the T2 imbalances, and they will remedy those imbalances via labor. Thus the 50% youth unemployment in Greece today, near matched in Spain and Portugal. And with Italy starting to follow. This remedy though is a fiction, a Potemkin policy which is providing the illusion that the Nord have the ability to consider exporting their excess savings and deflation to the USA. What will happen is all those savings will be marked down so the entire EZ will net to levels the T2 net would now indicate (and then of course the "shadow" netting added as well) so that all that Euroglut goes "poof". Of course the last time Europe had this process WW II occurred, and it is telling that you went to Keynes "Consequences of the Peace". The only constructive answer that can work for Europe is that the T2 and other shadow imbalances are netted across Europe via transfer payments both spot and forward via trans-Europe unemployment insurance like payments and social security and health coverage. There is the small issue of a constitutional apparatus being built to administer this. So I do not think the "Euroglut" is of any risk to the USA.
What I do know is that the highest levels foreign policy formulation in the USA from the beginning of the Euro crisis were well aware of all I say above and anticipated the current status. I heard such discussion first hand. The USA policy formulated for the EZ crisis from 2011 on was to give Germany a "green light" to force PIIGS to use labor to maintain and work to remedy the EZ imbalances. That very capable US analysis calculated thresh hold levels of unemployment in the PIIGS that they feel could be maintained before insurrection and the return of fascism. That Fed Reserve support of the regional central banks along with one off ad hoc measures like the IMF "troika" would also assist in maintaining German hegemony of Europe. France would be bought off by calling this a Gaullist European solution. This was sought by the USA policy authors because of the obvious logic that the only possible competitor to United States hard power would be a Monnet Plan "United States of Europe". So the USA is supporting the German hegemony at the terrible cost of strapping the PIIGS, thereby keeping Europe in one vast chronic "frozen" economic crisis. The USA has no interest in seeing a land and naval force develop that would equal the US military. And a United States of Europe would have a land and sea force the complete equal to the United States.
Lastly you are wrong (said with respect), There is one economist who clearly anticipated both the USSR demise as well as the Japanese crash. Whats more she correctly predicted the "lost decade(s)" of Japan that followed the 89 crash. I am not certain that she was aware of this (but I would imagine this autodidact economist must have read Minsk), but she used a very clean application of Minskian like identities to global imbalances to reach insight. Whats more she freed herself from the national account data and considered the world as populated by large city-state economic regions and where the imbalances reside. For example she would focus on imbalances between Honshu and Tokyo and much as Japan to the United States. That person was of course the great Jane Jacobs. Just as you went back to "Consequences", a read now of "City and the Wealth of Nations" is a good use of time.
Saturday, October 18, 2014
Common Sense Shows the Household Survey is in Error, Under-reporting Employment by 1 Million (5 1/8%)
But data clearly shows that the ratio of insured labor force to total labor force has been unusually steady, ever since the large influx of women entered the work force in the 1970s onward. The ratio of insured labor force to labor force does drop similar to the labor force participation rate drop, during the 2008 to 2009 business slowdown, but has corrected swiftly while the labor force participation rate has stayed unchanged.
The weekly initial claims and continuing claims data is accurate and timely. It is not a derived level or rate from a sample as it is comprehensive. But for the ARIMA seasonal adjustments, the insured claims is consistent and accurate and factual. It is what it is. The BLS and CES uses the state data to calibrate and revise the household survey which by definition is a sample, and the establishment business survey that derives payroll. The household and establishment data can only be accurately portrayed with little margin of error every 10 years with the census - but even then that window of accuracy comes as hindsight after the census data is ordered and cleaned. So BLS and CES depend on the above stable ratio to calibrate and revise the household and establishment data using the timely and comprehensive claims data. At least they have done so for the 40 years prior to 2008. But in this solvency event with both the slowdown and then the recovery, BLS and CES have not applied the claims data with the same rigor they have in the past. If they had done so, using the 80% to 85% insured to total labor force ratio, the unemployment rate would have experienced much higher rates at the economic nadir and then much lower rates as we recovered. It is obvious that given the insured labor force to labor force ratio relative stability, the household data is now in error and will have upward revision of approximately 1 million employed.
That would change the current 5.9% unemployment rate to 5.1% unemployment rate raising the labor force participation rate accordingly and eliminating the unusual spread between UER-6 and UER-3.
Here I take the weekly complete census of insured unemployment rate and divide continuing claims by that rate to end with a derived household unemployment rate using insured unemployment and the stability of the ratio of the subset insured labor force to labor force.
The magnitude of this error is shown in the Beveridge Curve for insured unemployment and for household unemployment.
This shows the insured data coordinates to other impressions of the recovery like retail sales, consumer lending, durable goods and especially autos; while the household unemployment data is out of synch with other economic data, including the JOBS data.
Detailed and complex contortions explaining why the household survey is accurate are more and more frequent, but none of these discussions even bother to explain the census based claims data - since it cannot be done - it is simply dismissed or there is some sort of bizarro world parallel universe explanations that claims data only reflects the rate of layoffs. That of course makes no sense when one considers the continuing claims data which drops only as employment picks up.
So the insured data Beveridge Curve is the accurate and complete depiction of the nations employment status.
This means that the FOMC is in the midst of one of the most significant policy errors in the history of the Federal Reserve since 1913. That the whole premise of "forward guidance" is in error as the inflation rate is not related to the output gap, and then the output gap now being used is in error as right now there is no labor slack left and, unless a new internet like technology flows into the economy as it did in the 1990s, heightening productivity, significant inflation given all the capacity being used will certainly occur.
But why is there no inflation now given a correct read of an extremely tight labor market? Where are the wage pressures that theory says should exist now.
That is easily explained pragmatically with obvious cause. The 2008 solvency event hitting the "consumer of last resort" USA market made the USA specific event a global event. That has created the illusion there is this Rogoff Reinhart "global economy" when there is not. There is the massive hegemon USA economy and then the rest.
As the other sovereign economic units respond to the USA solvency crisis, almost all have resorted to a mercantalistic currency policy. Abenomics, China and now Germany via the Euro reversed the trade weighted decline of the dollar to a consistent 2 1/2% per annum enriching of the dollar on a trade weighted basis. One can see when the dollar has a period of unchanged values then CPI then surges, as we saw in the the 2nd Q 2014. The lack of inflation is solely dollar level caused and explains about 130% of the inflation that would have occurred now given the lack of capacity in the US economy. If the FOMC persists in this gross misread of the current status - and perhaps Fischer does realize that as shown by his recent focus on exchange rates - and seeing that the dollar level has always been an administered rate, established by the US hegemon after considering security needs first then domestic needs second, the dollar will cheapen as it usually does, suddenly, after some keystone forum as the USA asserts their power. Then a calm to cheapening dollar will expose the reality of the tight labor market and little capacity of the US economy. A large surge in inflation will occur to levels that may approach 6%. That is if the Fed carries on with ZIRP.
The BLS, and the CES - who does the heavy lifting and revisions for the BLS - very clearly go over the source of error in the household data and how it is repaired/revised by claims data:
"On an annual basis, the establishment survey incorporates a benchmark revision that re-anchors estimates to nearly complete employment counts available from unemployment insurance tax records. The benchmark helps to control for sampling and modeling errors in the estimates."
And the margin of error for the household data can be substantial:
"...the threshold for a statistically significant change in the household survey is about 400,000..."
(Both quotes from http://www.bls.gov/news.release/empsit.faq.htm )
Given the solvency event was a once in century trend event that experienced a dramtic sudden reversal, it is easy to see that a cumulative error of three or four months has occurred of about 1 million employed.
The US current unemplyment rate is now about 5 1/8%. It is very difficult to refute the above logic. I cannot.
Wednesday, October 8, 2014
But Ebola is not a major health risk for the world.
- Why isn’t the CDC and the US public health authorities making this well known? One can conclude that they are spinning Ebola, again from the US perspective, into a monster story into realms of fiction – why? Why aren’t the US public health guys doing their job at a a most critical time of public concern? Why are they allowing this panic to emerge?
- If I am wrong and the public health authorities are making this available to the press – this CDC spread sheet was easily found – why is the press deliberately ignoring the facts and spinning this into a Hollywood horror sci-fi horror movie? If the press is aware I can only see this as one of the most callous if not criminal acts of the press that I can remember.
- Or is the press simply stupid and have been swamped by Twittter and have been reduced to a most ineffective and unprofessional status? If they are bungling to the point of malfeasance the Ebola story – what other stories are they also “blowing”? is this Ebola hack coverage defining?
- This presents a very grim picture of how terrible lifestyle , infrastructure and public policy is for those stricken African countries. If the most basic hygiene were applied or the most basic hygiene applied at mortuary or tending to the dead, or just if everyone would wash hands – Ebola would be as it should be, a bizarre one off event striking like lightening some very unlucky folks.
Monday, September 1, 2014
I decided to do a scatter on this after reading the great analysis Jim Hamilton did on the US Treasury 10 year rally and how this was a "conundrum". While very comfortable with his analysis of risk premium and GDP expectations - at first I was all set to agree - I decided to pull the data. I conclude there is no conundrum but a rare powerful technical move of the curve in anticipation of a sudden Fed Funds hike, a hike that given the pressure building will certainly be well before year end 2014. To my read it is akin to how the bay will empty of sea water prior to the arrival of the tsunami.
Over the long run the 5:30 curve is an equivalency to the 5 year UST yield with usually a vol ratio (5 year UST YV/32) making a .4 outright 5 y UST to every 1 5y amount in the 5:30.
However that vol ratio is now flipped and is 1.4:1 outright to 5:30.
To me this is indicative of significant if not massive pressure on the curve to realign so as to be priced for a regime shift - since the 5 year is still anchored in ZIRP, it means the longer maturities rally harshly to flatten the curve. Then after the Fed hikes, the curve will continue to flatten but the relationship of 5 y UST now normalized to the curve.
The surge in vol of the 5:30 relative to outright 5 y UST indicates to me a regime jump is about to occur, certainly well before year end. That regime shift would be a surprise rate hike that will lead to a 2 1/2% to 3% 5 year UST imminently.
Note that the small formation under the 8/30/2014 is the worst of the crisis, when it seemed calamity was to occur, from December 08 to January 2009. It is unlikely we reach such a stressed position so I suspect the 5 year (and UST yield in general) jumps suddenly to the prior regime. That is marked by the yellow arrow.
Those who have done well in the flattener to date should swap that position for puts on the 5 y UST.
For open 9/8/2014 followup:
The 5 year UST vs the UST 30s to 5s did move from the above 9/2/2014 opening. The 30s5s backed 6 basis points and 5 year UST backed 19 basis points, for a total net P/L impact, if you did the above swap, of 25 basis points or $8900 per million 5 year UST par amount. So far so good. I think there is a boundary at the data point of 8/29/2014 close.
Sunday, August 24, 2014
Federal Reserve "Dual Mandate" of Full Employment and Price Stability is Likely Unconstitutional and Radically New
To most the following clearly outlines a "dual mandate", a long running permanent foundation stone of the powers mandated to the Federal Reserve by Congress, an ubiquitous feature of monetary policy:
The “dual mandate” used in the Statement, the official lawful communique by the Federal Reserve, a radical ambitious (mis)interpretation of the law so as to justify the current focus of the Board of Governors, as led by the Chair, have on employment.
The following year Humphrey-Hawkins Act elaborated further on this intent and “finding of Congress” and clearly shows the non policy making role of the Fed by adding a reporting section 225 (b), which by listing what Congress wants reporting on shows the placement of employment in this intent:
Wednesday, July 9, 2014
This shows the basis point vol as reflected in the dispersion of the FOMC voters:
Or to paraphrase; “Expectations from the FOMC are reliable until they change, suddenly.”
Thursday, April 24, 2014
Editor's note: Below is a Q&A with Mac Robertson, an independent portfolio manager and macro strategist who recently Tweeted a critique of Thomas Piketty's new book, "Capitalism in the 21st Century." This Q&A went out to subscribers of our "10 Things You Need To Know Before The Opening Bell" newsletter on Monday morning. Sign up here to get the newsletter and more of these interviews in your inbox every day.
BUSINESS INSIDER: Your main point of criticism was Piketty's data set. What was wrong with it?
MR: National account income data is, by definition, made up of many subaccounts which have various weights waxing and waning. So as particular weights suddenly surge while others decline, the aggregate summation is not reflective of these dynamics. This is especially problematic with household income, both annual income or accumulating net worth. In particular income is a "fat tail" with extreme skew — a Pareto distribution — or is actually a bimodal or multi modal distribution.
This means policy acting upon one part of the distribution will often have little impact on another part. Policy changes for, say, the top decile will have no impact on the lower quartiles.
Or, if top decile, which might actually be a separate distribution, is reduced by tax, the lower quartiles may drop. The connectivity implicit when one discusses inequality does not really exist.
So, to use the aggregate tells you nothing and provides no prescription.
BI: You go on to say he erred in trying to compare nations' outcomes. What did you mean?
MR: Nation states, as far as macro economics, are really a fiction. The real aggregations are among hegemonic powers which set economic policy for their group or are a constantly morphing alliances of regions that transcend national borders.
And currently there is only one true hegemon which is the USA, but regional hegemons have defining capability if the USA has benign indifference in a certain region. For example Brazil has much clout in South America now. This is always a fact of life now and the usefulness of examining many nations hasn't really been useful since Metternich.
In fact many of the wars in the last 150 years have been caused by one power thinking that there was a balance of power and one could, by strategy, dominate. Germany and Japan made that mistake in the 1940s and China may be doing the same now. What this means is there is little relevancy or usefulness in comparing Italy in the 20th century to the USA, for example.
Some economic histories are useful as they produce a laboratory of unique events, like Weimar inflation or Sweden's solvency crisis of 1990s, but then only in terms or organizing ex ante thesis. The empirical record is useless.
BI: Piketty described a "fantasy world." What are you referring to?
MR: The fantasy world is the same as Rogoff and Reinhart offer: that there is a scientific theorem that can be developed from this analysis of many national accounts. But that assumes there is equivalency between nations and consistency of the subsector input that makes the national accounts. The above two points do a good job in briefly explaining why that is a fantasy.
BI: You said you preferred Henry George's analysis of income distributions. Who was he and what did he say?
MR: Henry George was akin to Keynes and also Locke, that sound economic policy cannot leverage "luck" in being given rare resources from an accident of birth or through lucky stratagems. George called this resource "land," later Keynes would call this capital and land. But the common denominator is one class of folks are "rentiers" who only seek a low risk return on their assets — usually inherited. That income is "rent." Again in George's time that was, for the most part, real rent on land leases.
George proposed that all funding of the public purse would be a tax on rent. Keynes went further and proposed that not only would rentiers be disproportionately taxed, but their " euthanasia" should be sought. George would propose that inequality between rentiers' capital accumulation and income of consumers and entrepreneurs is the only inequality to seek reducing or eliminating. Keynes agrees, so do I.
To not differentiate this income type, speaking to the first point above, invites disaster. Why would you tax a Bill Gates midstride? It would be very destructive. Yet Bill Gates' income explains much of the income inequality. But would taxing late-stage Buffett be good? Perhaps. Certainly to tax third-generation rentiers and forcing the money back into the hands of future Bill Gateses, perhaps by funding universal education to promote future Bill Gateses, is good.
BI: Is there anything Piketty got right?
MR: No, there is very little Piketty got right. And his work lacks integrity with solipsism and "pop" so that I suspect he is a careerist. All the above he would know well.
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