Economic theory tied to rational expectations has taken a beating in recent years, at least in some circles. Remember this contentious skewering from Paul Krugman in 2009? Defenders of the faith responded with all guns firing, including this take-no-prisoners response from “freshwater” economist John Cochrane. Whatever you think of ratex, it earned some lofty recognition yesterday with the news that the Nobel economics prize was awarded to a pair of Americans.
Is The Levered ETF Tail Wagging The Market Dog?
Douglas Kass of Seabreeze Partners tells Andrew Ross Sorkin that levered ETFs “have turned the market into a casino on steroids. They accentuate the moves in every direction — the upside and the downside.”
Sometimes (Macro) History Bites
By now there should be broad agreement on one point in the grand debate on macroeconomics. A recession born of a severe financial crisis is an especially destructive force, and one that isn’t easily solved. Irving Fisher outlined the basic problem more than 80 years ago in his prophetic paper “The Debt-Deflation Theory of Great Depressions. The blowback cycle of unusually deep recessions and protracted recoveries after acute turmoil in the financial sector is a familiar syndrome, as economists Carmen Reinhart and Ken Rogoff detail in This Time Is Different: Eight Centuries of Financial Folly
Book Bits For Saturday: 10.8.2011
● The Coming Jobs War
By Jim Clifton
Review via MoneyWeb
Clifton asserts that job creation will surpass all other issues to dominate politics. He likens the challenges to the second world war while further asserting that the war has already begun… It seems likely that “job creation” is destined to become the leader among business publication categories adding to the pressure on politicians everywhere. Few companies have Gallup’s experience in discerning data. The book points out that the world has 7 billion people with 5 billion being of working age. Of those, 3 billion desire full-time formal employment while globally there are only 1.2 billion jobs that meet his criteria, “pay check from an employer and steady work that averages 30-plus hours per week”.
Private Sector Jobs Rose 137,000 Last Month… Whew!
The labor market pulled back from the brink last month. Private-sector job growth rebounded in September for a net gain of 137,000, a dramatically higher pace over August’s meager 42,000 rise, the Labor Department reports. The case for expecting a recession’s near, in other words, has fallen a notch or two. But while September’s job market improved, the growth rate is still weak. The unchanged 9.1% unemployment rate for September makes this point loud and clear.
The Calm Before The Storm?
The Treasury market’s inflation forecast has been a reliable barometer of the ebb and flow of crisis and recovery in recent years. In July and August of 2008, just ahead of the implosion of Lehman Brothers that triggered a financial panic, the yield spread between the nominal less inflation-indexed 10-year Treasuries was falling sharply. That was a warning sign of trouble ahead. In early 2009, by contrast, this inflation forecast started trending higher, telling us that the worst had passed. When inflation expectations softened again in the spring of 2010, the shift sent a message that the economy faced new challenges. Later on in the year, when this market forecast hit bottom at the end of August 2010 and started climbing soon after, it represented a vote of confidence that the Fed’s newly announced QE2 monetary stimulus would have some traction in the economy. And earlier this year, when inflation expectations turned down again, starting in April, that was a sign that a new macro storm was lurking.
Dissecting The Problem (Down To The Bone)
Tim Duy’s Fed Watch let’s it fly in this post about the hurdles facing the economy courtesy of a central bank that tolerates passive tightening. In summary, Duy asserts: “Don’t Let Monetary Policy Off The Hook.” He charges that Fed Chairman Bernanke, via testimony earlier this week, is engaged in “a clear effort to shift the focus away from monetary policy onto the fiscal side of the equation,” a strategy that Duy argues is seriously flawed.
Bank Of England Embraces QE2
The Federal Reserve’s second round of quantitative ended in June, but Britain’s central bank today announced it was reviving monetary stimulus. “The Bank of England voted on Thursday to buy 75 billion pounds more in assets to shield Britain’s economy from the euro zone debt crisis and keep the faltering recovery going,” according to CNBC.
Diminished Expectations For Tomorrow’s Employment Report
A week ago I asked if we should see late-September’s sharp drop in weekly jobless claims as a sign of things to come. Today we have an answer, at least for the moment. New filings for unemployment benefits rose last week by 6,000 to a seasonally adjusted 401,000. As always, we shouldn’t read too much into the latest data point in this volatile series. But it was just too tempting to surrender to a bit of optimism last week when jobless claims dipped under the 400,000 mark for the first time since the spring. Oh, well—another jobless claims report, another disappointment.
Who Is Mario Draghi?
He’s the incoming president of the European Central Bank, of course, and he inherits the euro mess that remains Jean-Claude Trichet’s worry through the end of this month. The big policy question surrounding Mr. Draghi’s arrival is whether he’ll change course for the ECB and switch from Trichet’s hawkish stance to using the central bank as a lender of last resort by purchasing the euro region’s distressed debt in a bid to stave off the mounting pressures of deflation?