nouriel roubini

by

Junkie Recovery

A bad jobs report that left headline unemployment above 8% — and much worse when we dig under the surface and see that the real rate is at least 11.7%, if not 14.7% or an even higher figure when we take into account those who have given up looking and claimed disability — has made QE3 seem like an inevitability for many analysts.

Reuters:

U.S. Treasuries rallied on Friday after a weaker-than-expected August U.S. jobs report boosted hopes that the Federal Reserve would buy more bonds to help shift the economy into a gear that could create higher employment.

Goldman Sachs:

We now anticipate that the FOMC will announce a return to unsterilized asset purchases (QE3), mainly agency mortgage-backed securities but potentially including Treasury securities, at its September 12-13 FOMC meeting. We previously forecasted QE3 in December or early 2013. We continue to expect a lengthening of the FOMC’s forward guidance for the first hike in the funds rate from “late 2014” to mid-2015 or beyond.

Jim Rickards:

Fed easing on Sept 13th is a done deal.

Nouriel Roubini:

Quite dismal employment report confirming anemic US economic growth. QE3 is only a matter of when not whether, most likely in December.

Gold has shot up, too, the way it has done multiple times when the market has sensed further easing:

The thing I can’t get my head around, though, is why the Federal Reserve are even considering a continuation of quantitative easing. Here’s why:

If the point of the earlier rounds of quantitative easing was to ease lending conditions by giving the financial system a liquidity cushion, then quantitative easing failed because the financial system already has a huge and historically unprecedented liquidity cushion, and lending remains depressed. Why would even more easing ease lending conditions when the financial sector is already sitting on a massive cushion of liquidity?

If the point of the earlier rounds of quantitative easing was to discourage the holding of treasuries and other “safe” assets (I wouldn’t call treasuries a safe asset at all, but that’s another story for another day) and encourage risk taking, then quantitative easing failed because the financial sector is piling into treasuries (and anything else the Fed intends to buy at a price floor) in the hope of flipping assetsto the Fed balance sheet and eking out a profit.

If the point of quantitative easing was to provide enough  liquidity to keep the massive, earth-shatteringly large debt load serviceable, then quantitative easing succeeded — but the “success” of sustaining the crippling debt load is that it remains a huge burden weighing down on the economy like a tonne of bricks.  This “success” has turned markets into junkies, increasingly dependent on central bank liquidity injections. After QE3 will come more and more and more easing until the market has either successfully managed to deleverage to a sustainable level (and Japan’s total debt level as a percentage of GDP remains higher than it was in 1991, even after 20 years of painful deleveraging — so there is no guarantee whatever that this will occur any time soon), or until central banks give up and let markets liquidate. Quantitative easing’s “success” has been a junkie recovery and a zombie market.

As I see it, the West’s economic depression is being directly caused by an excessive total debt burden — just as Japan’s has been for twenty years; the bust occurred on the back of a huge outgrowth of debt and coincided with the beginning of a painful new era of deleveraging. And the central bank response has been to preserve the debt burden, thus perpetuating the problems rather than allowing them to clear in a short burst of deflationary liquidation as was the norm in the 18th and 19th centuries.

Central banks have been given ample opportunity to demonstrate the effectiveness of reflationism. And yet economic activity remains depressed both in the West and Japan.

by

The Real Problem with Carbon Trading

A reader brings a bizarre leaked e-mail to my attention:

date: Mon, 18 May 1998 10:00:38 +010 ???
from: Trevor Davies ???@uea.ac.uk
subject: goldman-sachs
to: ???@uea,???@uea,???@uea

Jean,

We (Mike H) have done a modest amount of work on degree-days for G-S. They
now want to extend this. They are involved in dealing in the developing
energy futures market.

G-S is the sort of company that we might be looking for a ”strategic
alliance” with. I suggest the four of us meet with ?? (forgotten his name)
for an hour on the afternoon of Friday 12 June (best guess for Phil & Jean
– he needs a date from us). Thanks.

Trevor

++++++++++++++++++++++++++
Professor Trevor D. Davies
Climatic Research Unit
University of East Anglia
Norwich NR4 7TJ
United Kingdom

Tel. +44 ???
Fax. +44 ???
++++++++++++++++++++++++++

Now, I don’t really have any problem with the idea that a highly active and productive species like human beings can heavily influence our climate. In fact, I think there is a good deal of circumstantial evidence to suggest that we have been doing it for millennia.

From the Economist:

The ice-core record shows that the level of carbon dioxide in the atmosphere made an anomalous upturn about 7,000 years ago, and that methane levels, which were also falling, began to increase about 5,000 years ago. These numbers correspond well with the rise of farming in Europe and Asia.

The implication is that this small uptick in greenhouse gases has warmed the Earth, staving off new glaciation and thereby creating conditions beneficial to the development of modern civilisation.

So my real problem is with the view that somehow humanity can accurately predict future climactic trends via simulations and models. The idea that economies are simply too complex to accurately model applies even more to climates, which are vastly more complicated systems. Nonetheless, human activity seems to have caused atmospheric changes:

While we can’t reliably predict what the precise results of this will be, keeping global greenhouse gas levels close to the pre-industrial ones seems to be a good insurance policy. 

Imposing emissions limitations using carbon credits which can then be traded on exchanges is no such thing. Why?

  1. It does not address atmospheric greenhouse gas levels; it merely affects emissions. Stabilising greenhouse gas levels requires removing gases from the atmosphere, either through traditional means like planting new forests, or through exotic technologies like carbon-scrubbing.
  2. It creates systemic financial fragility; imposing an artificial cap on emissions in an economy which is still heavily-carbon based will in all-likelihood lead to some form of carbon derivatives bubble. A widespread transition to alternative energy — supposedly, what is to be encouraged — would reduce the value of carbon credits, which would mean big losses for speculators. It is entirely plausible that this could lead to bank failures.
Most likely, Goldman has long understood this cycle, and will be looking to profit on the way up, and on the way down, just as they have done with various other derivatives.

If the influential climate scientists at CRU were looking for a strategic alliance with Goldman Sachs, they were barking up the wrong tree in creating an effective insurance policy. If they were looking to enjoy the fruits of the global derivatives ponzi, then Goldman Sachs were precisely the right people.

In reality, US foreign policy — with its deep focus on keeping the global energy trade flowing — acts as an implicit multi-trillion dollar subsidy on keeping oil and hydrocarbons cheap. This is an artificial disincentive against the development of decentralised alternative energy infrastructure (solar, thorium, synthetic oil, carbon scrubbing, etc). Climate scientists who want to see real change would do better to focus on decreasing this market distortion, rather than creating more market distortion through carbon trading.

by

The Excesses of Crony Capitalism

That when government tries to play kingmaker in the markets is often disastrous is well known. Why is that the case? Well misallocation of capital is one reason: very often, the companies that government anoints are not very competitive. Another reason is false security: with the seal-of-approval of government, companies can excuse themselves for spending to high heaven on things they don’t need.

One anecdotal case is Solyndra.

From Bloomberg:

The glass-and-metal building that Solyndra LLC began erecting alongside Interstate 880 in Fremont, California, in September 2009 was something the Silicon Valley area hadn’t seen in years: a new factory.

It wasn’t just any factory. When it was completed at an estimated cost of $733 million, including proceeds from a $535 million U.S. loan guarantee, it covered 300,000 square feet, the equivalent of five football fields. It had robots that whistled Disney tunes, spa-like showers with liquid-crystal displays of the water temperature, and glass-walled conference rooms.

“The new building is like the Taj Mahal,” John Pierce, 54, a San Jose resident who worked as a facilities manager at Solyndra, said in an interview.

The building, designed to make far more solar panels than Solyndra got orders for, is now shuttered, and U.S. taxpayers may be stuck with it. Solyndra filed for bankruptcy protection on Sept. 6, leaving in its wake investigations by Congress and the Federal Bureau of Investigationand a Republican-fueled political embarrassment for the Obama administration, which issued the loan guarantee. About 1,100 workers lost their jobs.

The sad reality is that had Obama not intervened, Solyndra might still exist. If it had not ramped up production with the government’s help, it might have realised that its manufacturing process was no longer cost effective, and modified it to be so. If it had not received the loan guarantees, it would have constructed its factory more frugally, significantly lowering overheads and lowering the chances of insolvency. Spending the government’s money that you haven’t earned on flashy facilities is very easy. Spending the money of investors — who are expecting a return, and will watch your every move (and sue you for misfeasance) — is considerably harder.

I am still very optimistic about solar energy. Last month I wrote:

The solar energy hitting the earth exceeds the total energy consumed by humanity by a factor of over 20,000 times. More solar energy hits the world in a day, than we use in fifty years, at current rates.

So for me, solar is the future. Of course, there will be failures along the line. The story of capitalism is very much one of trying and trying and trying some more until a viable solution, product or system emerges. That’s why it’s a highly empirical and practical system.

But it is not for the government to take the risk, and taxpayers that take the hit. Nor is it for government’s denizens to create palaces of the absurd.

If Solyndra had failed in a less public and obnoxious fashion it would be just another startup that didn’t work out. Now, it might just stigmatise the solar industry in America for years to come. Companies that want investment for solar technologies will now find it harder to raise capital.

I hope the next administration learns that while investing in basic science and a level playing field for ideas is fine, picking winners and losers in markets is dangerous and damaging.

by

America Priced in Gold

Let’s imagine that the gold standard was not abolished in 1971, and was instead maintained — or, alternatively, assume that only gold is money and that other things are merely paper intermediaries. What would be the shape of economic data under that paradigm? Here’s retail gasoline:

Continue reading →

by

Wikileaks Strikes Back: Unredacted Cablegate Archive Unleashed

Whatever we all have to say about Wikileaks and Julian Assange, any lingering question marks about their credibility should be blown out of the water by the fact that they just unleashed a supervolcano of data — the entire unredacted Cablegate archive. Certainly, it seemed like they had run out of steam — ostensibly holding back information as a bargaining chip on Assange’s embattled head. From the Independent:

Continue reading →

by

The Great Crunch

From Bloomberg:

[Today[ U.S. stocks fell, capping a fourth straight weekly slump for the Standard & Poor’s 500 Index, as the cheapest price-earnings ratios since 2009 failed to lure investors amid concern the global economy is weakening. The yen touched a post-World War II high against the dollar.

The S&P 500 dropped 1.5 percent to 1,123.53 at 4 p.m. in New York, after rising as much as 1.2 percent. The Stoxx Europe 600 Index fell 1.6 percent to its lowest close since July 2009. The Japanese yen reached 75.95 per dollar, its strongest postwar level as investors sought refuge in the currency. Oil fell 0.1 percent as it also swung from gains to losses. Gold futures topped $1,880 an ounce for the first time. Ten-year Treasury yields were unchanged after reaching a record low yesterday.

Citigroup Inc. and JPMorgan Chase & Co. lowered their growth forecasts for the U.S. economy. German Chancellor Angela Merkel stepped up her rejection of jointly issued euro-area bonds, following speculation the European Union will start joint bond sales. Technology stocks in the S&P 500 retreated 2.8 percent, the most among a group of 10 in the index, as Hewlett- Packard Co. slumped 20 percent, its biggest drop since at least 1980.

Continue reading →