EXTEND & PRETEND: Stage I Comes to an End!

by ilene - July 30th, 2010 12:58 am

EXTEND & PRETEND: Stage I Comes to an End!

The Dog Ate my Report Card

Both came to an end at the same time: the administration’s policy to Extend & Pretend has run out of time as has the patience of the US electorate with the government’s Keynesian economic policy responses. Desperate last gasp attempts are to be fully expected, but any chance of success is rapidly diminishing.

Whether an unimpressed and insufficiently loyal army general, a fleeing cabinet budget chief or G20 peers going the austerity route, all are non-confidence votes for the Obama administration’s present policies. A day after the courts slapped down President Obama’s six month gulf drilling moratorium, the markets were unpatriotically signaling a classic head and shoulders topping pattern. With an employment rebound still a non-starter, President Obama as expected was found to be asking for yet another $50B in unemployment extensions and state budget assistance to avoid teacher layoffs. However, the gig is up: the policy of Extend and Pretend has no time left on the shot clock nor for another round of unemployment benefit extensions. A congress that is now clearly frightened of what it sees looming in the fall midterm elections is running for cover on any further spending initiatives. The US electorate has been sending an unmistakable message in all elections nationwide.

The housing market is rolling over as fully expected and predicted by almost everyone except the White House and its lap-dog press corp. Noted analyst Meredith Whitney says a double dip in housing is a ‘no brainer’ with the government’s HAMP program clearly a bust as one third of participants are now dropping out. The leading economic indicator (ECRI) has abruptly turned lower, signaling the economy is slowing rapidly without the $1T per month stimulus addiction, which has kept the extend and pretend economy on life support.

The gulf oil spill that was initially stated as 1000 barrels per day has been revised upwards faster than the oil can reach the surface. It now appears to be north of 100,000 barrels per day. A 100 percent miss is about in line with the miss on how many jobs the American Recovery and Reinvestment Act of 2009 (ARRA) was going to create. Also, it appears the administration can’t even get its hands around the basics of administration management during any crisis event. Teleprompter politics…

Tags: austerity, budget, CHINA, Congress, Dollar, Economy, ECRI, Elections, Employment, Europe, extend and pretend, Federal Reserve, G20 meeting, GDP, Gordon T. Long, government, Great Depression, inflation, keynesian economic policy, MINSKY MELT-UP, Obama, Politics, risk, spending, Stock Market, teacher layoffs, unemployment extensions, velocity of money, Yuan

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The Implications of Velocity

by ilene - March 13th, 2010 3:09 pm

The Implications of Velocity

Courtesy of John Mauldin at Thoughts from the Frontline

The Velocity of Money
Our Little Island World
GDP = (P) x (T)
P=MV
A Slowdown in Velocity
Dallas and Thoughts on the Economy

This week we do some review on a very important topic, the velocity of money. If we don’t understand the basics, it is hard to make sense of the hash that our world economy is in, much less understand where we are headed.

But before we jump into that, I want to let my Conversations subscribers know that we have posted a recent conversation with two hedge-fund managers, Kyle Bass of Hayman Advisors [and his staff] here in Dallas and Hugh Hendry of the Eclectica Fund in London. Our discussions centered on what we all think has the potential to be the next Greece, but on a far more serious level. It was a fascinating time.

Then next Wednesday we will post a Conversation I had with George Friedman of Stratfor fame, and then the following Wednesday a Conversation that I just completed with Dr. Ken Rogoff and Dr. Carmen Reinhart, the authors of This Time Is Different.

For new readers, Conversations with John Mauldin is my one subscription service. While this letter will always be free, we have created a way for you to "listen in" on my conversations with some of my friends, many of whom you will recognize and some whom you will want to know after you hear our conversations. Basically, I will call one or two friends each month and, just as we do at dinner or at meetings, we will talk about the issues of the day, with back and forth, give and take, and friendly debate. I think you will find it very enlightening and thought-provoking and a real contribution to your education as an investor.

And as you can see, I can get some rather interesting people to come to the table. Current subscribers can renew for a deeply discounted $129, and we will extend that price to new subscribers as well. To learn more, go to http://www.johnmauldin.com/newsletters2.html. Click on the Subscribe button, and join me and my friends for some very interesting Conversations.

The Velocity of Money

The Federal Reserve and central banks in general are running a grand experiment on the economic…

Tags: debt, Economic Theory, Economy, GDP, John Mauldin, P=MV, the Fed, velocity of money

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New Mortgage Rate Adjustments Threaten Economy Further

by ilene - February 5th, 2010 2:19 pm

New Mortgage Rate Adjustments Threaten Economy Further

Courtesy of Paco Ahlgren at THE BOTTOM VIOLATION

click to enlarge

ARMS due to reset again.

Here’s the problem: in 2007 and 2008, mortgage rate-adjustments caused massive foreclosures. But remember, relatively speaking, rates were historically low already.

I know what you’re going to say. Rates are even lower now. The velocity of money is almost at zero. Upward adjustments aren’t realistic at this point. But you’re not looking ahead. Global central banks and governments are printing currency and easing rates at a pace we’ve never seen before in history. Ever.

Yes, the velocity of money may be low. And yes, rates might be low at this minute. But if I’m right about coming inflationary price pressure (which I am), and if I’m right about the fact that we will be facing double- or even triple-digit inflationary price increases (which I am), then adjustable rate mortgages are precisely the place not to be!

There is absolutely nothing pretty about this chart.

Tags: inflationary price pressure, Mortgage Rate Adjustments, velocity of money

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And Now For Some Really Bad Economic News…

by ilene - October 5th, 2009 11:56 am

Don’t let the name of the Report fool you… Ilene

And Now For Some Really Bad Economic News…

rainy days, bad news Courtesy of Mark Sunshine’s Sunshine Report

The U.S. economy has a long way to go before the economic recovery will be either sustainable or robust. Monetary indicators don’t look good and are once again getting worse. I am concerned that the financial system hasn’t recovered enough for the Federal Reserve to withdraw from its program of quantitative easing.

While most of the large financial institutions seem to be currently stable, abet with hundreds of billions of dollars of government investment and support, they aren’t strong enough to service the needs of Main Street. Almost all of the monetary and financial indicators point to shrinking lending and constrained credit. The part of the banking sector that supports business and consumer isn’t working and, in many ways, is getting worse. And, the shadow banking system is continuing to disappear and can’t be counted on to pick up the slack of banks.

Until the charts presented below start to point up, I don’t think there is going to be a real economic recovery (as contrasted with technical bounces from inventory adjustments and changes in population).

All of the data suggests that the U.S. remains in the grips of a liquidity trap, i.e., a period of time when interest rates are at or near 0% but yet traditional monetary policy is ineffective. The Obama administration needs to reexamine its cautious approach to the big banks and think about whether or not the largest banks are sapping the economic strength of the rest of the economy.

Money Supply and Bank Lending Charts – Important Note – Each chart is a link to a full page view of the chart. Sorry I am not better at presenting graphics.

The below chart indicates that, contrary to popular belief, money supply is somewhere between stagnant to shrinking. A growing economy requires an increasing money supply and an increasing money supply is a sign of a growing economy.

[click on chart for a sharper image, then click again when they open in a new window]

The velocity of money, i.e., the number of times a year money is spent and re-spent, continues to fall (which is very bad). Sustainable economic recovery can’t happen until the velocity of money starts to rise. The current velocity of money is signaling money hoarding by banks, businesses and individuals. Hoarding is a

…

Tags: economic recovery, Federal Reserve, Financial System, Money Supply, velocity of money

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ARE WE ABOUT TO SINK INTO A DEFLATIONARY HOLE?

by ilene - September 11th, 2009 10:34 am

ARE WE ABOUT TO SINK INTO A DEFLATIONARY HOLE?

Courtesy of The Pragmatic Capitalist

Despite a 50% rally in equities and the recent surge in gold prices there continue to be little to no signs of inflation in the economy. Consumer credit is still collapsing and banks are still hoarding cash. Perhaps most importantly, the velocity of money actually continues to decline:

SocGen’s Albert Edwards believes the ECRI’s leading indicators are forecasting a drastic and devastating decline in core inflation:

But it is collapsing core inflation that poses the greatest risk to the global economy going forward. We highlighted last week that core CPI inflation descends rapidly, with a lag, after the recession ends. If core US CPI inflation falls by around the 3% shown in the chart below over the next year, that will take the yoy rate to minus 1.5%! Hence the growth in nominal quantities (e.g. corporate revenues) is set to see disappointing lower highs in this upturn after lower lows. And that, in our view, is just a prelude to a 2010 collapse into outright deflation.

All of this makes you wonder just how real the rally in stocks has been and how much of it has been purely based on government stimulus and the return of confidence – perhaps overconfidence.

Source: SocGen

Tags: ALBERT EDWARDS, deflation, inflation, rally, velocity of money

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Creative Destruction

by ilene - August 27th, 2009 3:57 pm

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Excellent, educational article, courtesy of Mish

Creative Destruction

creative destruction Van Hoisington and Lacy Hunt have figured out what few others have, that excessive debt and falling asset prices have conspired to render the best efforts of the Fed impotent.

Please consider the Hoisington Second Quarter 2009 Outlook.

One of the more common beliefs about the operation of the U.S. economy is that a massive increase in the Fed’s balance sheet will automatically lead to a quick and substantial rise in inflation. [However] An inflationary surge of this type must work either through the banking system or through non-bank institutions that act like banks which are often called “shadow banks”. The process toward inflation in both cases is a necessary increasing cycle of borrowing and lending. As of today, that private market mechanism has been acting as a brake on the normal functioning of the monetary engine.

For example, total commercial bank loans have declined over the past 1, 3, 6, and 9 month intervals. Also, recent readings on bank credit plus commercial paper have registered record rates of decline. The FDIC has closed a record 52 banks thus far this year, and numerous other banks are on life support. The “shadow banks” are in even worse shape. Over 300 mortgage entities have failed, and Fannie Mae and Freddie Mac are in federal receivership. Foreclosures and delinquencies on mortgages are continuing to rise, indicating that the banks and their non-bank competitors face additional pressures to re-trench, not expand. Thus far in this unusual business cycle, excessive debt and falling asset prices have conspired to render the best efforts of the Fed impotent.

With that, we can safely add Hoisington to the small group of people who understand that Belief In Wizards Is Misguided. Continuing with a discussion from Hoisington:

The Complex Monetary Chain

The link between Fed actions and the economy is far more indirect and complex than the simple conclusion that Federal asset growth equals inflation. The price level and, in fact, real GDP are determined by the intersection of the aggregate demand (AD) and aggregate supply (AS) curves. Or, in economic parlance, for an increase in the Fed’s balance sheet to boost the price level, the following conditions must be met:

1) The money multiplier must be flat

…

Tags: Banking System, Bernanke, borrowing, commercial bank loans, creative destruction, deflation, Economy, Equities, FDIC, Fed's balance sheet, global debt bubble, inflation, lending, money multiplier, mortgage entities, Schumpeterian Depression, the Federal Reserve, velocity of money

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The Velocity of Money

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