Labor Market Data & QE Effects

Jobless, US GDP data.

Journalists are neither statisticians nor data experts, so they really do not understand how to read the deluge of economic data being constantly released.  Instead, they slavishly hew to a simplistic narrative involving unemployment claims and job creation. If either claims fall or there is positive job creation, the MFP consider this “improvement.”

This is the wrong way to view these numbers.  Both data sets must be placed into context and reviewed with other data in order to create a complete picture of the American labor market.  Jobless claims usually begin falling during a recession, and this is a leading indicator of recovery; however, low jobless claims in the middle of an expansion indicate that it is running out of steam.  You can look at the chart and see for yourself what happens after jobless claims trough.  (Hint: those gray columns indicate recessions)

Four Week Average Initial Claims through 09.27.2013

The MFP also draws the incorrect conclusions from job creation data.  The country needs about 200,000 new jobs per month to absorb new entrants into the labor force indicated by the red line:

US Monthly Job Creation

The chart does not show an “improving” labor market, but a stagnant one.  Essentially, after an initial burst of euphoria in 2010, the job market just got stuck.  As long as job creation lags behind new entrants to the labor force, the labor market neither is improving nor will it improve.

As to why the labor market remains moribund despite the best efforts of the central bank, check out this chart:

Labor Force Participation Rate vs. Fed Balance Sheet
Labor Force Participation Rate vs. Fed Assets

Must be a coincidence, huh?

Originally published 11/8/2013


Around the Globe 11.05.2013

BOJ Gov. Kuroda Calls Easing Steps Successful –

BOJ Struggles to Convince on 2% as Abenomics Shine Fades – Bloomberg.

Japan Salaries Extend Fall as Abe Urges Companies to Raise Wages – Bloomberg.

Japanese Incomes  Japanese GDP Performance Through 2Q2013

Japanese Inflation Rate


Printapalooza throughout the world continues, but the Bank of Japan is leading the world in money creation.  Printing inflates asset prices while deflating labor costs, i.e. wages.  In the first chart, note the trend of Japanese wages since the BoJ began printing over a decade ago.  It is not surprising that the Japanese economy is weak, because consumers have been on a slow, inexorable wage reduction for almost 15 years.  The current round has proven ineffective at raising GDP growth, as illustrated in our second chart.  Indeed, Japan witnessed stronger growth in the aftermath of Lehman than it is under Abenomics, which is also the last time Japanese inflation exceeded 2%.  If you examine the third chart, you can see what happened after the last three times the mainstream financial press called an end to Japanese deflation.

In the meantime, the export and stock market gains fueled by the weak yen have probably peaked.  The USDJPY exchange rate is highly correlated to the ratio between BoJ and Fed assets.  As our last chart details, the market has already priced in the more rapid expansion of the BoJ’s balance sheet.  A reduction in Fed purchases, the dreaded taper, will allow the yen to depreciate further.

BoJ to Fed Balance Sheet Ratio vs. JPYUSD


Service Industries in U.S. Grow at Faster Pace Than Forecast – Bloomberg.

Service sector exapnds more than expected in October: ISM.

U.S. service sector growth quickens in October: ISM | Reuters.

ISM NMI 11.2013

The economic data continues to tell a tale of stagnation.  The MFP is breathlessly reporting that the services PMI beat the consensus forecast despite the “shutdown.”  Numbers above 50 signal expansion, but a 55.4 is nothing to write home about.  Expected GDP growth at this level is below 2%, which is far below the 3.5% growth required to stir the labor market.

Pressure mounts on Draghi following eurozone forecasts –

Rehn Confident Greece to Meet Targets as Troika Talks Resume – Bloomberg.

EU Forecasts Sluggish Growth as Austerity Continues –

EU cuts euro zone growth forecasts for 2014.

Uncertainty over ECB caps moves in shares, euro | Reuters.

Euro Fair Value at 1.37


Everyone is trying to predict what the ECB will do on Thursday: will it cut rates or not? Most commentators seem to believe that the ECB will cut its discount rate, because the EU just cut its Eurozone growth forecast for 2014 to 1.1%.  The EU has been relentlessly cutting growth forecasts since 2010, so there is no crisis here.  The only thing you need to know about how the ECB will conduct monetary policy is contained in the chart above.

As long as the euro remains weak enough to promote German exports, there will be no rate cut to lower the euro exchange rate.  If the euro attains and maintains the low $1.40’s for a time, then there will be a rate cut.  At the current rate of $1.35, Germany is benefiting from both low inflation and a weak currency.

Around the Globe 11.04.2013

Janet Yellen’s mission impossible—Commentary.

Could QE spur deflation, not inflation?.

There are two reasons why the Fed will keep printing. 1st:

Fed Balance Sheet vs. SP500 10.2013


US 10yr through 11.04.2013

The creation of the 401(k) years ago politicized the stock market.  The government’s policy of herding Americans into purchasing equities to fund their retirements has created an expectation that the government must do something about falling markets, so it does.  Additionally, the government must be able to finance itself.  A rise in treasury rates would result in higher deficits down the road; hence, the Fed must keep rates low and the only method currently at its disposal is the printing press, so print it does.

Ultimately, all of this printing is slowly destroying the economy, because QE is ultimately both inflationary raising assets prices and deflationary suppressing income growth.  Japan started its own money printing program in the late 90’s, and you can see for yourself how incomes are performing:

Japanese Incomes

Like the Fed, ECB expected to keep on pumping.

ECB may soon join the flight of the doves | Reuters.

Debt crisis has left Germany vulnerable –

USDEUR Exchange Rate vs Fed to ECB Balance Sheet Ratio

The MFP and its assorted shills, hangers on and supplicants believe that the ECB will begin printing in earnest to match pace with the Fed, and it just might but not for the reasons it endlessly touts: unemployment, lower inflation and economic contraction and stagnation in the periphery.  Rather, the only thing you need to know is the USDEUR exchange rate.  When it rises to a level that threatens Germany’s export machine, then there will be an ECB rate cut and not one second before.

The chart above illustrates the relationship between the dollar/euro exchange rate and the Fed/ECB balance sheet ratio.  As you can see, the rate has diverged from its long-term relationship, but these divergences are only temporary.  The euro will continue it general, upward trend for the near future.  Once the euro crosses the $1.45 line, the ECB will consider a rate cut because this is the rate that curtails Germany exports.

China reform checklist: How to tell that this time it’s for real? | Reuters.

China 7 Day Repurchase Rate 11.04.2013


Chinese leaders enjoy discussing economic reforms almost as much as the mainstream financial press hyping said reforms.  Chinese leadership has linked economic growth with political stability.  In light of this fact, this is all you need to know about Chinese economic reforms: if the reforms have any negative consequences, they will quickly be rolled back.  The PBOC has been attempting to liberalize the financial system by stepping away and letting the banks fund each other rather than relying on central bank liqudity.  Unfortunately, whenever it begins backing out of the overnight lending market, interest rates spike, so it rushes right back in.

This is exactly how government reforms will proceed.  The government will attempt to reform the economy.  Once adverse consequences erupt, (i.e. higher unemployment, the wrong guy’s factory being shuttered) the government will reverse course in short order.  After conditions settle down, it will make another feeble attempt to reform and change its mind once the consequences return.  Rinse and repeat.

High unemployment? Blame high home ownership, study says – NBC

Unemployment versus Home Ownership


This is an interesting study.  High rates of home ownership lead to higher structural unemployment.  This study’s conclusion makes sense, and it survives a careful reading.  Renters are more mobile than homeowners, and this affects the unemployment rates.  In the chart excerpted from Dr. Oswald’s study, we can see two examples that tend to prove the rule.  Of course, there are other reasons why Greece has a drastically higher unemployment rate than Germany, which is why the country is so far above the trend line.  BTW, Greece’s neighbor on the chart is Spain.

Around the Globe 10.28.2013

Pending Home Sales Show Sharp Drop –

Pending Sales of Existing Homes Slump by Most in Three Years – Bloomberg.

Pending home sales drop 5.6 percent in September.

U.S. pending home sales fall by most in more than three years in September | Reuters.

NAR Pennding Home Index through 09.2013

The MFP is rightly attributing this fall in pending home sales to the precipitous rise in mortgage rates since May, though the NAR would have you believe that the shutdown beginning on October 1 somehow affected pending sales from September.  Houses have become dramatically more unaffordable since May from rising rates and housing prices against the backdrop of stagnant incomes.  The only way for the housing market to improve at this juncture would be from gains in consumer income, which is not in the cars.


Hilsenrath to Wall Street: You don’t know Fed.

QE Infinity? No end in sight for money printing.

In Fed and Out, Many Now Think Inflation Helps –

Fed Balance Sheet vs. SP500 Last Year

If you wish to know the Fed’s future money printing output, this is the only chart you need to understand.  The Fed buys bonds, and the sellers invest those proceeds into stocks raising prices.  When the Fed stops or even threatens to stop, the whole trade begins unraveling. While the Fed claims to be concerned with unemployment and inflation, the Fed is extremely apprehensive about the consequences of a falling stock market.    Going forward, the Fed will continue to use low inflation and poor labor market data to justify continued printing to support both the government bond and stock markets.

Analysis: Convalescent euro zone seeks to escape debt overhang | Reuters.

Currency Woes Batter Europe’s Industrial Giants –

EURUSD 10.28.2013

From Yahoo Finance

The Eurozone and the MFP is really counting on PIIGS exports continuing their rise in order to support the Eurocrisis Recovery Narrative.  Unfortunately, a rising euro will stop the export “boom” in its tracks.  The Euro will continue to rise as the Fed continues to print.  Moreover, Eurozone banks are still selling overseas assets to bolster capital ratios back home.  This process has created  background buying pressure on the euro that may even pick up as these backs clean up their balance sheets in advance of the commencement of the “banking union” in late 2014.

Not happy at work? Wait until you’re 50 or older….

This article is typical of the drivel spewing from the mouth of the MSM.  People report increasing job satisfaction after 50 because of some rather obvious selection bias.  People switch jobs several times over the course of their careers.  If your job sucks, you quit it in the hopes that the next job will be better.  This process will continue until you find a job that you enjoy.  Then, you will stay with it as long as you can.  It is not surprising that people settle into a comfort zone with their employment when they reach the last stages of their careers.  So the article’s advice to sit around and “just wait” until you’re 50 is poor advice.  It takes a lot of work to obtain satisfying work, so get to work already!

Around the Globe 10.22.2013

Foreigners Sold U.S. Assets as China Reduces Treasuries – Bloomberg.

China Exports Last 24 Months



China has reduced its US T-bill purchases in two of the last three months, but the country remains the largest international holder of US debt.  Commentators sometimes worry about what would happen if China ceased purchasing US debt; however, this is much ado about nothing.  China maintains an low exchange rate for the yuan to promote export related jobs in manufacturing over consumption.  As a result of this policy, China runs a persistently high trade surplus with the US.  Spending that money would lower the price of the dollar and raise the price of the yuan as the supply of dollars increased while demand remained level, so it is stashed in T-bills.

As a consequence, interest rates in the US remain low spurring more consumption and higher trade deficits, and so on.  One day, this system will break down, just not today.  In the meantime, Chinese T-bill purchases will fluctuate based on a variety of factors including the gross amount of exports in a given month.

Wealthy could lose big if Fed stops money flow.

Collectibles Market 1H2013




The rich are different from you and me.  When you or I come into some money, we may splurge on a nice dinner, new electronics or a weekend getaway.  The rich are already consuming their maximum in these areas, so additional cash will flow to more esoteric sectors of the economy, like the collectibles market.  The reason  the world’s central banks claim to have inflation under control is due to where they look for it.

Energy and food prices have been generally stable here in the U.S., but check out the charts above.  (For reference, the CPI and S&P 500 grew about 1% and 10% during the first half of the year.)  Each collectible sector is growing at well above the rate of inflation save for art and antiques with the classic auto market possibly within bubble territory.

This data raises an interesting question.  Will inflation remain segregated to the 1%, or will it eventually spill over to the 99? Intriguingly, housing inflation is already striking the 99% with higher median home prices and rising rents.

Murky jobs picture likely to keep Fed on hold.

Employers Add 148,000 Jobs; Unemployment Falls to 7.2% –

Payrolls in U.S. Rise Less Than Forecast – Bloomberg.

Tepid job growth supports Fed’s cautious stance | Reuters.

Nonfarm Payrolls Through Sept 2013

Job creation ran at about 1/3 the number necessary to absorb all the new entrants into the labor market during the month, but unemployment dropped anyway indicating the continuing decimation of the American workforce.  This is actually good news for the stock market, because investors will expect more money printing and higher share prices bidding them up thus.

Supposedly, the Fed exercises monetary policy under a dual mandate of low inflation and low unemployment; yet, inflation remains high as we explained in the post above, and job creation has disappointed throughout the “recovery.”  This money printing has been quite ineffective at spurring employment, but it continues.  While the policy does little for the majority,  very rich minority has paid lots of money in campaign contributions to ensure they become even richer:

Fed Balance Sheet vs. SP500 10.2013

Moreover, the Fed had lost control of rates since taper talk began in May.  Informing markets  that the Fed will be buying billions in T-bills almost every day has bid the yield back down with U.S. debt maintenance costs.

US 10yr 10.22.2013


U.S. existing home sales fall, price appreciation slows | Reuters.

Here’s Why Existing Home Sales Slowed Down In September And Will Continue To Do So – Business Insider.

Home Sales Fell 1.9% in September –

Existing Home Sales Through Sept 2013


Existing home sales fell during September as higher financing rates and stagnant incomes have created significant headwinds for prospective purchasers.  Well, at least we managed to reattain 2003’s sales pace.  Look for more bad news in this space as the consequences of the government shutdown reveal themselves in October’s data.

Around the Globe Weekend Edition October 19-20


Euro Zone May Not Have Emerged from Recession, CEPR Says –

Eurozone Total Employed Persons US Labor Force Participation

The mainstream media is beholden to the standard definition of a recession, which is two consecutive quarters of GDP contraction.  If it chose to feature another data series as its bellwether of economic health, then it would be forced to alter the recovery narrative that it has been touting for the last few years.

As it happens to be,  the labor market reveals more about the experiences of the vast majority of taxpayers.  Both the Eurozone and the United States remain in labor market recessions, even though GDP is growing modestly.  Total jobs have decreased in the Eurozone, and there is no end in sight to the contraction.  In the U.S., job creation is positive but is not maintaining pace with the number of new labor market entrants; hence, the employment participation rate continues to decline.

If you own stocks, bonds or real estate, then this is the economy for you.  If you derive most of your wealth from the fruits of your labors, then the recession never ended.

From Friday’s Edition:

Heard on the Street: China Rebound Fails to Reassure –

Infrastructure drive powers China’s growth prospects –

China GDP

What goes up, must come down.  Recessions are normal.  These down periods give the economy time to reallocate resources so that productivity increases ultimately lead to rising GDP and employment levels.

Once politicians figured out that they will be blamed for the twists and turns of the business cycle, they began trying to prevent contractions.  The two methods for accomplishing this objective are government spending and money printing.  This has been occurring for years, but credit growth is reaching an important juncture.  The diminishing marginal returns of stimulus are fast approaching zero.  The U.S. has printed almost $3tr extra dollars and has added over $6tr to the government debt since Lehman, and this has only added $1.4tr to GDP.  That’s over a six to one ratio.

China is nowhere near that poor ratio, yet, but it is well on its way.  Chinese officials wish to maintain power, and they will create as much yuan as is necessary to accomplish their goal.

China Credit Growth


From Wednesday’s Edition:

Shutdown is having ‘notable impact’ on mortgages.

Home Builders Cite Waning Confidence –

New Purchase Mortgage Apps
Source: MBA/Zerohedge

New mortgage apps are plummeting, which does not bode well for home sales.  Even though the budget “impasse” will end with a deal before too much long-term damage to the nation’s standing is done, the consequences of this political theater will drag on for months.  Home sales will drop through October, but a November rebound will be touted by the mainstream media as a resurgence in the housing “recovery,” not the pent up demand from prior weeks.


From Tuesday’s Edition:

Fed’s Dudley: Large Balance Sheet Increases Inflation-Fighting Discipline – Real Time Economics – WSJ.

Exclusive: Fed’s Fisher, outspoken hawk, sees no QE reduction this month | Reuters.

Fed Balance Sheet vs. SP500 10.2013

The printfest will continue because it cannot stop.  Once the Fed stops creating dollars by monetizing federal and mortgage debt, the market will cease its rise shortly thereafter.  Eventually, the policy of printing money to increase asset prices will lose its efficacy.  First, additional QE will stop inflating market prices, but it will still be able to maintain some sort of stability.  Next, well, no one knows what happens next.


From Monday’s Edition:

Asmussen rules out ECB rollover of Greek bonds | Reuters.

Greek Government Budget Deficit Ratio

Asmussen must say things like this for two reasons.  First, Germany needs to keep up the austerity pressure, or else the Greeks will stop “reforming” the economy.  Second, Germany has not yet formed a government.  With sensitive coalition negotiations, it is an inconvenient time to admit that Greece needs a 4th bailout even though this is inevitable.  In order to preserve its export currency, the German government and the voters will continue denying that Greece needs more money until it does.  Then, it will gladly do whatever is necessary to bail Greece out.

Around the Globe 10.15.2013

Fewer US homes entered foreclosure track in third quarter.

Foreclosure starts vs sales


The mainstream media loves its housing recovery narrative and fervently guards it against the data.  This is the lede from the article above:

The number of U.S. homes set on the path to foreclosure slid to a seven-year low in the third quarter, reflecting a gradually improving housing market and fewer homeowners falling behind on mortgage payments.

That statement is false.  Foreclosures are sliding because banks are keeping delinquent properties out of the foreclosure, whether by design to maintain higher prices or because they simply cannot work their way through the backlog.  I believe the latter explanation is more likely as incompetence trumps malevolence.  If the housing market were really on its way back to health, the number of delinquencies would have plummeted in lockstep with the foreclosures.  It hasn’t:

Mortgage Delinquency Rate

This second chart shows that defaulted mortgages have remained near recession peaks and historic highs. What is really happening here is that the zombie inventory of homes continues to grow keeping supply out of the hands of the 99% who pay inflated prices for homes and rents for apartments.

Citigroup results hit by bond trading slowdown.

Citigroup Results Hit by Weak Fixed Income Trading –

Citigroup results hit by bond trading slowdown | Reuters.

Citigroup 10.15.2013


All of the TBTF banks are enduring lower profits due to smaller bond volumes and a decrease in mortgage applications.  This news has not mattered one iota to share prices as our chart of C shows.  A mild 50¢ sell-off at the open followed by a rally back to just about the pre-earnings level.  Corporate profits have ceased improving, so the current rally is exclusively beholden to additional multiple expansion.  The financial commentariat generally believes that this expansion is unlikely, but in light of the new Printmaster General’s dovish bonafides, I am not so sure.  The market is still far below record P/E levels, and the magic money machine isn’t finished yet:

S&P500 PE Ratio

Fed’s Dudley: Large Balance Sheet Increases Inflation-Fighting Discipline – Real Time Economics – WSJ.

Exclusive: Fed’s Fisher, outspoken hawk, sees no QE reduction this month | Reuters.

Fed Balance Sheet vs. SP500 10.2013

The printfest will continue because it cannot stop.  Once the Fed stops creating dollars by monetizing federal and mortgage debt, the market will cease its rise shortly thereafter.  Eventually, the policy of printing money to increase asset prices will lose its efficacy.  First, additional QE will stop inflating market prices, but it will still be able to maintain some sort of stability.  Next, well, no one knows what happens next.

Germany digs in heels as Europe moves towards banking union | Reuters.

Total Banking Sector Balance Sheet to GDP


The Eurozone has created a faux banking union, which should be sufficient to keep the bond vigilantes at bay for the moment.  There are several requirements for a real banking union as currently exists in the U.S. under the auspices of the FDIC, which you can read about in more detail here:

Cosmetic, Can-Kicking Banking Union Agreement in Play | DARECONOMICS

The sticking point is the money.  The rich countries refuse to become joint and severally liable for depository insurance and resolution costs with their poorer brethren.  What this means is that a euro in Germany is much safer than a euro in Spain, because the Germans have more money to bailout its banking sector.  Hence, the current agreement does not break the pernicious bank and sovereign link.  German banks will have money to lend to businesses, and the periphery won’t, so it will remain mired in stagnation.  This Nash equilibrium will remain until one of these countries decides to gamble on a euro exit.

Around the Globe 10.09.2013

Nothing to do but duck and cover if US defaults: Kyle Bass.

US Sovereign Credit Default Swap

There is nowhere to run if the U.S. government defaults, but that isn’t stopping the US CDS from rising dramatically since the “crisis” began.  If the government really defaults, then the financial system will freeze, and no one will get paid on their hedges.  After a time, the government will get its act together and reopen.  The debt will come off default, and the CDS hedges won’t matter.

Obama to choose Yellen for top Fed job, markets relieved | Reuters.

Janet Yellen, a Backer of Pushing the Fed’s Policy Boundaries –


Janet Yellen will easily be confirmed by the Senate.  Summers had administration support, but he was an unfavorable candidate from the perspective of the banksters.  Yellen is a known serial printer, but Summers would have probably ceased monetary easing.  The banksters spend a lot of money on the Senate, and this lobbying paid off.

At the very least, Yellen will continue to current program, and there is an excellent chance she may even add to it.  Bernanke would have begun winding down bond purchases had the government shutdown not intervened, so this development is being viewed favorably by the banksters and permabulls.

Icelanders Run Out of Cash to Repay Foreign Debts: Nordic Credit – Bloomberg.

Iceland must run a large current account surplus in order to generate the cash necessary to pay its debts, because foreigners will not invest in the country as long as the capital controls remain in place. Removing the capital controls is a giant gamble, but it is also the only way to take a shot at getting the country back to normal.  Expect no gambling from Iceland’s leaders.  They’ll have to go hat in hand to obtain another loan from someone.

Iceland Current Account to GDP

Puerto Rico Yields Above Venezuela’s in Worst Rout: Muni Credit – Bloomberg.

U.S. Treasury Said to Have No Puerto Rico Assistance Plan – Bloomberg.

MUB 10.09.2013

The Puerto Rican debt crisis is similar in form to the Eurocrisis. Ultralow rates have induced Puerto Rico to issue too much debt rather than cutting back on expenses. Furthermore, the dollar is too strong a currency for Puerto Rico, which renders the commonwealth noncompetitive on world markets.   You can say the same thing about Greece, Italy, Spain, Cyprus or even France.  There is no way to bail out a state or territory if it gets into trouble, which is similar to the relationship between the Eurozone countries and the ECB.  Saving Puerto Rico would require an act of Congress, and that does not seem likely at the present juncture.

Around the Globe 10.04.2013

No Jobs Report Complicates Fed’s Thinking –

Nonfarm Payrolls Through August 2013

The jobs report, among other economic indicators, is merely a pretext for the Federal Reserve to adjust its money printing program.  Flooding the world with dollars has bestowed extraordinary asset prices gains for the well-to-do, but this policy has done little to spur hiring.  The red line on the top of our chart represents healthy job growth for the U.S. economy.  The red line below is the actual performance.  The jobs number is not available due to the shutdown, but is there any number than would prompt the Fed to change tack? A spike upward or downward would just be a blip in a series of disappointing data.

Portugal Recovery Prospects Improve, Lenders Say –

Portuguese Recovery Sampler

A careful reading of the article belies the optimism of the headline.  First, the people predicting that the mighty Atlantic tiger Portugal will stir from its torpor is the troika, the same folks who have predicted the end of Greece’s depression several times and the onset of the Spanish recovery among other fiascoes.

The troika and the mainstream media are confusing the financial picture with the economic situation.  The ECB promise to print to infinity  is keeping Portugal solvent, but the country remains in the midst of depression.  Employment and output continue to shrink, and the government’s outstanding debts swell.

Portugal can recover, but this would require a painful adjustment to its own currency.  Since the political establishment remains slavishly attached to the euro, Portugal has years of high unemployment and economic stagnation in its future.

Netherlands in Budget Stalemate –

Italy and Netherlands Budget Comparison


During the last four years, Italy has posted a smaller deficit than the Netherlands three times with one statistical dead heat.  While this may seem surprising, it is not.  The Netherlands is suffering the aftereffects of its own property bubble and the ongoing competitive disadvantage imposed by its euro membership.  It seems that the ECB’s Teutonic monetary policy does not sit well with the Dutch.  As you can see for yourself, there is an excellent argument for the Netherlands to revert to the Guilder:

Euro Fair Value Netherlands


The euro for the Netherlands is overvalued by over 10% at today’s current rate.

Sarris Says Cyprus Unsure How to Remove Bailout Capital Controls – Bloomberg.

Regulator fines Bank of Cyprus for non-disclosure on Greek debt | Reuters.

Cyprus Bank Deposits


The last country to impose “temporary” capital controls before Cyprus was Iceland, and they are still in place five years later.  Despite Cypriot capital controls, deposits are still fleeing the country.  Meanwhile, regulators have fined Bank of Cyprus and its top officials a total of €460k for losing almost €2bn on nondisclosed holdings of Greek government bonds.  While this amounts to a slap on the wrist, it is one more slap on the wrist that American executive received after the subprime crisis.


Around the Globe 10.02.2013

U.S. Government Shutdown Threatening Housing Recovery – Bloomberg.

New Home Sales

Just a few weeks ago, the so-called housing recovery couldn’t be stopped, but now the shutdown is threatening to stop it in its tracks.  New activity will fall a bit due to the technical factors surrounding the shutdown, and then the economy will make this up in future months.  All in all, housing activity should remain around where it is now, as indicated by the red circle, unless incomes move sharply upwards.

Draghi Says ECB to Act If Needed to Control Money Markets – Bloomberg.

ECB says all options open to temper market rates | Reuters.

ECB Benchmark Rate Through October 2013

Draghi offered nothing new in today’s press conference.  ECB will maintain low rates and will consider cuts as the “recovery” progresses.  A rate cut will do little to assist the peripheral countries as their rates will not change relative to Germany’s, but that won’t stop any post-cut rally.

Gross Says Market Mispricing Eventual Fed Target Rate Increase – Bloomberg.

Pimco’s Gross says low interest rates may persist for decades | Reuters.

Japanese Benchmark Interest Rate From 1981

Japanese GDP Performance From 1981

Bill Gross is correct.  Rates will stay low for years.  If you do not believe that this is possible without stoking inflation, I present Japan.  The BoJ has maintained a near zero rate interest policy for seventeen years without any inflation.  While inflation may be avoided, there are other negative consequences.  To see for yourself, examine the charts above.  Compare Japan’s GDP performance on the left and right sides of the red line and consider what this will mean for the stock market for the next decade.

Berlusconi U-turn secures Italian government’s survival | Reuters.

Berlusconi Backs Down on Threat to Topple Government –


Italian political crisis #1,047 since WWII officially ended with Letta’s successful confidence vote.  You can start buying Italian government bonds again.  Unlike the U.S., Italy had a political broker, Giorgio Napolitano, President of the Republic who was able to move among the various factions to broker a deal.  Acrimony runs so high in Congress that there is no obvious deal maker.  When a group steps forward, things will get moving quickly and Congress will do its job.

Bad-Loan Revival Unburdens Banks –

Fed Holdings of MBS

There is no such thing as a free lunch.  The Fed’s action have inflated real estate prices and bailed out the nation’s banks from many poor lending decisions.  The problem with this policy is apparent from the anecdote within the article.

The bank was able to sell a foreclosed property for $1.1mm rather than the initial estimate of $972k on a $1.2mm loan.  Sure, the banks losses were lowered, but this money came from someone, in this case factory-owner Mr. Hong.  What do you think he would do with that extra $128k? Maybe, he would have hired more workers, invested in a new machine to increase productivity or increased his marketing budget.  Each of these activities would have increased GDP.  Instead, the wealth is being transferred to the banksters where it will line fat cat pockets but will do little to spur GDP growth.