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Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.
Europe Stocks Drop for Second Week as Banks Fall to 16-Month Low (Namitha Jagadeesh and Jonathan Morgan, Bloomberg) In the longest losing streak in almost three months, the Stoxx Europe 600 Index lost 1.3% to 337.93 on above average volume. Biggest concerns: (1) ECB's (European Central Bank) bond-buying plans won’t be enough to shore up the economy; and (2) a U.S. employment report showed a drop in hourly earnings. Today’s decline brought the measure down 1% for the week.
2014 in Review: Best of the Silver Bullet Awards (Jeff Miller, A Dash of Insight) Jeff Miller writes a Sunday column which appears on GEI Investing, The Week Ahead. The award is named after the ammo of choice for that "truth seeker" of our youth, The Lone Ranger. In 2014 he named 11 award winners, two from articles posted at GEI (by Paul Kasriel and John Lounsbury). Early in 2014 there was a very widely distributed chart which compared the then current market to the top of 1929. Apparently many were taken in by the use of two different vertical axes scales to create a frightening but totally incorrect impression. This is one of the oldest "dirty tricks" in the book to make a point that is actually false. (Note: This specific award was made to articles not posted on GEI.) The chart on the left is the "false propaganda" and if you do not immediately see why it is misleading you better spend a little more time looking.
Consensus Oil Forecasts Expected Soon (Josh Brown, Twitter) Brown obtained an "inside picture" of the analysts' meeting.
Articles about events, conflicts and disease around the world
AirAsia Flight 8501
NSA / CIA
Still Crazy After All These Years: Understanding the Budget Outlook (Alan J. Auerbach, Jason Furman, and William G. Gale, brookings.edu) Yesterday there was discussion in WWRT (What We Read Today), both public section and 'behind the wall' of the terrible track record of the CBO (Congressional Budget Office) on long-term projections (more than one year, sometimes two years at the very most). This paper from 2007 focuses on that shortcoming.
The U.S. has undergone major fiscal changes in recent years. Despite the tax cuts enacted early in the decade and the increased spending enacted since then, the Congressional Budget Office (2007b) currently projects a baseline surplus of $586 billion in the unified budget over the next 10 years. Under the baseline, the deficit will decline over the next few years and turn to a surplus by 2012 that will continue to grow through 2017.1 This article evaluates recent fiscal outcomes and assesses future fiscal prospects.
Econintersect note: The next 10 years did not see a cumulative surplus of $586 billion. Instead there was a cummulative deficit of $6.876 trillion in the 8 years on the books so far with little chance that it will not increase almost certainly well over $7 trillion for the full 10 years. Obviously the CBO did not foresee the Great Financial Crisis just around the corner. This article does review of the CBO record in there long-term projections in years prior to 2007.
The graph below compares the CBO 10-year forward budget projections in January 2001, January 2006 and March 2007. Two big things that were not recognized in the 2001 projections were the 2001 Bush Tax cuts and the 2002 recession. Econintersect offers the profound (sarcasm) observation:
It is obvious that projections of things that are unknown have a high probability of not being correct.
The authors attempt to determine how much of the CBO "miss" in 2001 was due to shortcomings in their own methodology (as determined by the CBO) and how much was due to fiscal (and to some extent monetary) policy changes. For the fiscal year 2001 (which was more than 25% completed when the CBO report was issued January 2001) the contributions to poor projections for things under CBO control are substantial but less than 50% three years, then decline for several years to the point of being negligible (about 7% of the total miss). In other words, even though the CBO methodology has self-identified deficiencies, it is the unknown about the future that dominates inaccuracies for projections 5-7 years or more in the future. See the second graph below.
The CBO would do well to hire former Yankee catcher Yogi Berra as a consultant. (Berra is reportedly still going strong at age 89.) We expect the first piece of advice the CBO would receive is (statement attributed to Berra but never actually found in his writing and generally attributed to physicist Niels Bohr):
"Prediction is very difficult, especially if it's about the future.'
He might also tell them that "you can observe a lot by watching". But the CBO really doesn't need that advice; their tracking of current numbers and projecting a couple of quarters ahead is generally excellent.
And finally the CBO would do well to consider these Berra aphorisms:
"The future ain't what it used to be."
"In theory there is no difference between theory and practice. In practice there is."
"You've got to be very careful if you don't know where you are going because you might not get there."
Self-correcting depression and virtue of deflation (John Authers, Financial Times) Authers looks at the contrasts offered by two books. James Grant: The Forgotten Depression; and Barry Eichengreen: Hall of Mirrors. Both Grant and Eichengreen have contributed to GEI. Grant's book is about the depression of 1921 and Eichengreen writes about the Great Depression and parallels to the Great Recession. Grant says that the depression of 1921 cured itself because there was no interference in the "natural" progression of market forces and the severe depression was over in 18 months, leading to the Roaring 1920s. But Authers does not indicate if he knows for whom it was roaring: The top 1% increased their share of income by 50% (from 15.6% to 23.9%) between 1923 and 1928, the fastest annual rate of increase since 1913.
The Roaring 20s were actually a wage and salary depression for the working class. See first graph below. Authers says that "deflation was the market mechanism that allowed the economy to find an ignition point." But deflation did not provide a quick fix for most of the country, just the very top. This is also seen in the depression for housing prices which bottomed in 1921 and did not recover 1916 real price levels until after the end of World War II. See second graph below.
Authers quotes Eichengreen briefly with the opinion that the Fed needs to avoid "another 1937" where tightening monetary policy and new fiscal restraint (austerity?) coincided with a return to recession and a reversal of employment growth that had characterized the preceding four years. Authers seems to side with the Grant prescription for he suggests it is time to raise rates and tighten policy. He provides the following graph. Why? Is the message that now labor has been driven down while the top echelon in the economy have prospered greatly, so it is time to make sure they stay there so the two decades of deflation seen in the previous crisis can be repeated?
Jeff Miller Positions For 2015: Still Plenty Of Life In The 'Aging Bull' (Interview conducted by Seeking Alpha) Jeff Miller is a weekly contributor to GEI Investing. Very worthwhile read. The final thought (GBM is interviewer George Moriarity):
GBM: Each week’s WTWA has a final thought. Do you have one for 2015?
Goldman Sachs: Euro to Slide to Parity Against Dollar by End of 2016 (James Ramage and Tommy Stubbington, The Wall Street Journal) Now the "big boys" are joining the "pioneers" who have suggest a euro dollar parity in 2016, as we have discussed here in WWRT the last couple of days. And like a good tournament poker player Goldman's card sharks are raising the bet to $0,90 in 2017. GS says the faster the ECB (European Central bank) moves and the larger the moves the faster the euro will fall. But isn't that what many were forecasting for tthe U.S. dollar and the $4 trillion of Fed QE only managed to drive the dollar index down from 2009 highs by 17% at the deepest point (2Q 2011) and in the middle QE3 (1H 2013) it was only down about 9%. Can the analysts be overestimating the effects that the ECB can have? The euro is already down 15%. Could this be in anticipation of QE and when QE starts could it already be mostly priced in? See below the 7-year dollar index chart from Trading Economics.
Fed officials' estimates for "appropriate time of policy firming" as of December meeting (Pedro da Costa, Twitter) Source is http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20141217.pdf …
The hidden message in the jobs report: rising inequality now a structural feature of America. (Fabius Maximus) FM has contributed to GEI. He has good collection of charts showing how inequality growth seems to be embedded in the fabric of the American economy. He says:
The December jobs report show that years of well-funded, carefully planned effort by the 1% have produced a rich harvest for the 1%. Public policy has shifted from fostering growth to re-distribution — from the bottom 80% to the top 1%. A few pictures tell the story, showing how economic growth no longer provides much benefit to workers. We get more jobs, often at low wages with few or no benefits — but little or no growth after inflation.
But he really cuts loose with the sarcasm when talking about the shrinking of government (typo corrected):
At least we know who the blame: the socialist Muslim usurper Obama, under whom the government has massively increased in size. Except that it hasn’t.
See also next article.
The Percentage Of Workers In Government Is At A 54-Year Low (Andy Kiersz, Business Insider) Government employment since the 1970s has grown at a slower rate than employment overall, causing the proportion of government employees among total employees to remain on a mostly downward trend over the last 30 years.
As of December, about 15.6% of all employees worked for the government. The last time the percentage was lower than its current level was in August 1960 (via Eddy Elfenbein).
Other Economics and Business Items of Note and Miscellanea
Forecast 2015 — Life in the Breakdown Lane (James Howard Kunstler, Doomstead Diner) 11 outrageous predictions, the first already fulfilled just 3 days after this was posted.
RBS Says Sayonara to World's Weirdest Bond Market (Bloomberg View) No vigilantes here. Because there is no bond market- BoJ buys all the bonds.
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