Mish's Global Economic Trend Analysis

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Illusion of Cheap Money; Major Promises in Europe But No Real Reform; Does the Bond Market Have it Wrong? 30 years of Japanisation? Posted: 26 Mar 2012 05:29 PM PDT Major Promises But No Reform Steen Jakobsen, chief economist at Saxo Bank in Denmark discusses the illusion of cheap money, bond market yields, and the lack of European reform in his latest email. In Spain, things are going from bad to worse. Last weekend's local election in Andalucia, where Spain's centre right People's Party failed to secure an outright majority, left Prime Minister Rajoy without a mandate to carry on with tough austerity. It was a bad start to week where we on Thursday will see a major general strike aimed at… Yes, you guessed it: Austerity measures. Spain 10-Year Bonds and 5-Year CDS Illusion of Cheap Money The European story remains one of major promises and no actual reforms. A low interest rate and an extreme sense of "security" created by the illusion of easy money and low interest rates won't last forever. As I wrote in Interest rates: the market has it all wrong, we could be on route to an exit strategy from central banks which at a bare minimum will be a goodbye to "unconventional measures" and if so, the low in interest rate cycle is in place. 30 years of Japanisation? The only way central banks can create a proper exit from unconventional is to hand over the torch to reforms from governments and politicians. Unlikely, yes, needed? Absolutely, otherwise we are doomed to 30 years of Japanisation. I concur with the above analysis. What cannot last forever by definition won't. That includes a market whose only focus at the moment is on the "illusion of cheap money". Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Bernanke Puzzled Over Jobs, Cites Okun's Law; Six Things Bernanke is Clueless About Posted: 26 Mar 2012 10:06 AM PDT Bernanke's blind faith in empirical formulas over common sense is again in play with his speech today on Recent Developments in the Labor Market. In any given month, a large number of workers are being hired or are leaving their current jobs, illustrating the dynamism of the U.S. labor market. For example, between 2001 and 2007, private employers hired nearly 5 million people, on average, each month. Total separations, on average, were only slightly smaller. Taking the difference between gross hires and separations, the net monthly change in payrolls during this period was, on average, less than 100,000 jobs per month--a small figure compared to the gross flows. The recent history of these flows suggests that further improvement in the labor market will likely need to come from a shift to a more robust pace of hiring. As figure 7 shows, the declines in aggregate payrolls during the recession stemmed from both a reduction in hiring and a large increase in layoffs. In contrast, the increase in employment since the end of 2009 has been due to a significant decline in layoffs but only a moderate improvement in hiring. To achieve a more rapid recovery in the job market, hiring rates will need to return to more normal levels. The Change in Unemployment and Economic Growth: A Puzzle? What will lead to more hiring and, consequently, further declines in unemployment? The short answer is more-rapid economic growth. Indeed, the improvement in the labor market over the past year--especially the decline in the unemployment rate--has been faster than might have been expected, given that the economy during that time appears to have grown at a relatively modest pace. About 50 years ago, the economist and presidential adviser Arthur Okun identified a rule of thumb that has come to be known as Okun's law. That rule of thumb describes the observed relationship between changes in the unemployment rate and the growth rate of real gross domestic product (GDP). Okun noted that, because of ongoing increases in the size of the labor force and in the level of productivity, real GDP growth close to the rate of growth of its potential is normally required just to hold the unemployment rate steady. To reduce the unemployment rate, therefore, the economy must grow at a pace above its potential. More specifically, according to currently accepted versions of Okun's law, to achieve a 1 percentage point decline in the unemployment rate in the course of a year, real GDP must grow approximately 2 percentage points faster than the rate of growth of potential GDP over that period. So, for illustration, if the potential rate of GDP growth is 2 percent, Okun's law says that GDP must grow at about a 4 percent rate for one year to achieve a 1 percentage point reduction in the rate of unemployment. In light of this historical regularity, the combination of relatively modest GDP growth with the more substantial improvement in the labor market over the past year is something of a puzzle. Resolving this puzzle could give us important insight into how the economy is likely to evolve. Okun's Law is Useless There is no puzzle. Rather, Bernanke fails to see the obvious. Demographics are vastly different today in the face of boomer retirements than they were 50 years ago. This a not typical cyclical recession. Instead, it's a consumer deleveraging and balance sheet recession. Instead of relying on charts, Okun's Law and the Beveridge Curve, how about a little common sense? Bernanke concluded with ... ... cyclical rather than structural factors are likely the primary source of its substantial increase [in long-term unemployment] during the recession. If this assessment is correct, then accommodative policies to support the economic recovery will help address this problem as well. We must watch long-term unemployment especially carefully, however. Even if the primary cause of high long-term unemployment is insufficient aggregate demand, if progress in reducing unemployment is too slow, the long-term unemployed will see their skills and labor force attachment atrophy further, possibly converting a cyclical problem into a structural one. If this hypothesis is wrong and structural factors are in fact explaining much of the increase in long-term unemployment, then the scope for countercyclical policies to address this problem will be more limited. Even if that proves to be the case, however, we should not conclude that nothing can be done. If structural factors are the predominant explanation for the increase in long-term unemployment, it will become even more important to take the steps needed to ensure that workers are able to obtain the skills needed to meet the demands of our rapidly changing economy. Cyclical or Structural Problem? Bernanke thinks the problem is cyclical. Moreover, his structural thesis involves training. Good grief. He is clueless on both counts. Instead of his cyclical theory, I propose Fundamental and Mathematical Case for Structurally High Unemployment for a Decade; Shrinking Job Opportunities and the Jobs Gap; The Real Employment Situation. The problem is debt and deleveraging, not retaining. Bernanke wants consumers to spend more. However, boomers are up to their eyeballs in debt, facing retirement with insufficient income, and a need to downsize lifestyles. These are not the typical cyclical forces, this is a massive demographic shift. Factor in global wage arbitrage and student debt, and the problems are massive. Middle-Aged Borrowers Pile on Student Debt Speaking of student debt, Bernanke also missed the fact that Middle-Aged Borrowers piled on student debt hoping to get a better job. Such debt has a negative payback. For a discussion, please see Consumer Credit "Demolishes Expectations" Really? No Not Really! The "Non-Bounce" in Non-Revolving Credit People going back to school and staying in school longer explains a significant part of the decline in the participation rate. Disability Fraud Looking for another reason for an artificially low unemployment rate? Consider disability fraud, people claiming disabilities they do not have such as mental illness. Prior to the great recession 33% of applicants claimed mental illness. The number is 43% now. There was fraud before, of course. There is even more fraud now. Please see Disability Fraud Holds Down Unemployment Rate; Jobless Disability Claims Hit Record $200B in January for further discussion. Is Bernanke Angry With Bond Market? MarketWatch proclaims Bernanke getting angry at the bond market There are lots of ways to interpret the Federal Reserve's continual talking down of the U.S. economy, but the comments from Ben Bernanke on Monday have a clear target: the bond market. Ben has commanded: "Thou shalt take risk." He also has commanded from Mount Jackson Hole, and other venues: "Bond rates shall stay low." But Wall Street traders were starting to disobey. The yield on the 10-year note 10_YEAR +1.70% has been heading the other way. UBS economists have declared the three-decade long bull rally in government bonds is set to end. Bernanke is fearful that an increase in yields will kill off the recent gains seen in the U.S. economy. That's why the Fed has started quarterly press conferences and revealing the interest rate forecasts of Federal Open Market Committee members — all to keep a better grip on interest rates. But that grip is loosening, and probably not helped by the hawks on the Fed who have been on the warpath saying the central bank really isn't committed to low rates, after all. Just an hour before Bernanke spoke, Philadelphia Fed President Charles Plosser was in Paris, warning an audience of a central bank without boundaries. Bernanke is willing to tolerate the likes of Plosser and Dallas Fed Chief Richard Fisher in the name of academic diversity so long as no one actually believes them. But confronted with evidence the hawks are making inroads, Bernanke went to Arlington, Va. to say who's boss. The U.S. economy needs low interest rates and the Fed's bond purchases, Bernanke said Is Bernanke commanding the bond market or is Bernanke simply clueless?  Six Things Bernanke is Clueless About Bernanke somehow missed the fact that demographics are vastly different today than they were 50 years ago. Bernanke somehow missed the fact this a not typical cyclical recession. Instead, it's a consumer deleveraging and balance sheet recession. Bernanke missed student debt problems Bernanke missed structural problems of debt deflation Bernanke missed disability fraud explanation of falling participation rate Bernanke missed middle-age re-schooling reason for falling participation rate Through it all, Bernanke wonders why Okun's Law does not appear to work. Is that clueless or what? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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