Mish's Global Economic Trend Analysis

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• Obama Goes After UK, Australia, the World for "Constant China Accommodation"; US Influence Clearly Waning
• Banco Madrid Files Bankruptcy Following Money Laundering Charges, Accounts Frozen
• Dollar Shortage Revisited; Is Japan Zimbabwe? Who's in Control? World Gone Mad
• Putin Prepared to Use Nukes to Keep Crimea; Wild Rumors of Putin Missing Debunked
• Wage Growth vs. Economic Theory

Obama Goes After UK, Australia, the World for "Constant China Accommodation"; US Influence Clearly Waning Posted: 16 Mar 2015 07:56 PM PDT Constant China Accommodation A major spat between the US and the UK broke out last week with the Obama administration attacking UK prime minister David Cameron and the UK for Britain's decision to join AIIB, a new China-sponsored financial institution that allegedly could rival the World Bank. In particular, Obama accused David Cameron of "Constant China Accommodation". The Obama administration accused the UK of a "constant accommodation" of China after Britain decided to join a new China-led financial institution that could rival the World Bank. The rare rebuke of one of the US's closest allies came as Britain prepared to announce that it will become a founding member of the $50bn Asian Infrastructure Investment Bank, making it the first country in the G7 group of leading economies to join an institution launched by China last October. Thursday's reprimand was a rare breach in the "special relationship" that has been a backbone of western policy for decades. It also underlined US concerns over China's efforts to establish a new generation of international development banks that could challenge Washington-based global institutions. The US has been lobbying other allies not to join the AIIB. Relations between Washington and David Cameron's government have become strained, with senior US officials criticising Britain over falling defence spending, which could soon go below the Nato target of 2 per cent of gross domestic product. A senior US administration official told the Financial Times that the British decision was taken after "virtually no consultation with the US" and at a time when the G7 had been discussing how to approach the new bank. "We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power," the US official said. US Pressure, Self-Serving Statement In a self-serving if not downright idiotic statement, a US official claimed "Large economies can have more influence by staying on the outside and trying to shape the standards it adopts than by getting on the inside at a time when they can have no confidence that China will not retain veto powers." I do not believe it's possible to ever have more influence on the outside than in. And certainly had the US, UK, other European nations, and Australia all gotten together on the inside, the position of the US is downright idiotic. The US pressured Australia to not join the group. Australia initially relented, but now has had second thoughts. Australia Shifts Stance Please consider Australia Shifts Stance on China-Led Development Bank Australia may overturn its opposition to joining the China-led Asian Infrastructure Investment Bank after the UK opted to sign up to the institution against the wishes of Washington. The rethink by one of America's key allies — alongside Japan and South Korea — that has not yet applied to join the $50bn bank before the March 31 deadline will further irk Washington, which is already angered by the UK 's move to become the AIIB's maiden G7 member. "I note that the UK has indicated an intention to sign up for the negotiations, the New Zealanders before Christmas signed up for the negotiations, the Singaporeans likewise, the Indians likewise," said Tony Abbott, Australia's prime minister. "We're looking very carefully at this and we'll make a decision in the next week or so," he told The Australian newspaper. The UK's move last week to join the AIIB has reopened the debate over whether Australia's national interests lie with bolstering economic ties with China or deferring to the concerns expressed by its key military ally, the US. "The UK joining the bank has given a good pretext for the government to rethink its original decision," said Kerry Brown, director of the China Studies Centre at Sydney university. "There is a feeling it acted as a bit of a poodle of the US and it should take a more independent stance." France, Germany, Italy Join AIIB Finally, please consider Europeans Defy US to Join China-Led Development Bank. France, Germany and Italy have all agreed to follow Britain's lead and join a China-led international development bank, according to European officials, delivering a blow to US efforts to keep leading western countries out of the new institution. The decision by the three European governments comes after Britain announced last week that it would join the $50bn Asian Infrastructure Investment Bank, a potential rival to the Washington-based World Bank. Australia, a key US ally in the Asia-Pacific region which had come under pressure from Washington to stay out of the new bank, has also said that it will now rethink that position. The European decisions represent a significant setback for the Obama administration, which has argued that western countries could have more influence over the workings of the new bank if they stayed together on the outside and pushed for higher lending standards. US Influence Clearly Waning Clearly US influence on global financial matters is seriously eroded. I happen to think that is a good thing. Yet, please do not consider it an endorsement of AIIB, on which I have no opinion. "We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power."  What about constant accommodation of a waning power? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Banco Madrid Files Bankruptcy Following Money Laundering Charges, Accounts Frozen Posted: 16 Mar 2015 07:03 PM PDT A bank run on Banco de Madrid following money laundering charges did the bank in today. The Wall Street Journal reports Banco de Madrid Files for Bankruptcy After Parent Accused of Money Laundering. Banco de Madrid SA, the Spanish unit of an Andorran lender accused of laundering money for organized-crime groups, has filed for protection from its creditors, Spain's central bank said Monday. Banco de Madrid has been hit by substantial client withdrawals, the central bank said, which has impacted the ability of the lender to "meet its obligations in a timely matter." Filing for creditor protection will allow depositors and other creditors "equal treatment." Deposits of up to €100,000 ($104,970) a client are protected by Spain's deposit-guarantee fund, the central bank said. Banco de Madrid held €674.7 million in customer deposits as of September 2014, according to data from Spain's banking association AEB. he Spanish lender said it had undergone a "sharp deterioration in its economic and financial situation" in recent days after its parent company was named a "primary laundering concern" by the U.S. government. Banco de Madrid had over €6 billion in assets under management before the intervention, according to news releases published by the bank in recent months. The lender had 15,000 clients and 21 offices in major cities such as Madrid and Barcelona as of March 11, a spokeswoman said Monday. The bank targeted high-net worth clients with deposits above €500,000, she added. Goodbye Bank Madrid Guru Huky says Goodbye Bank of Madrid. Operations Suspended Huky comments ... "Banco de Madrid, will be the first bankrupt entity to see in action at our brand new Deposit Guarantee Fund which guarantees the first €100,000 depositors have in a financial institution in trouble." Looking at financial numbers Huky concludes "Oh, well, [Banco de Madrid] is a technically bankrupt zombie with a negative net worth of €1.637 billion." Anyone who had over €100,000 in deposits probably lost it. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com   Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Dollar Shortage Revisited; Is Japan Zimbabwe? Who's in Control? World Gone Mad Posted: 16 Mar 2015 09:57 AM PDT This post is a followup on the alleged US dollar shortage thesis as well as further discussion of the Yuan, and the Yen. Let's start with a recap of the US dollar debate, after which I will tie up some loose ends. US Dollar Margin Call Shortage Thesis On March 8, ZeroHedge commented The Global Dollar Funding Shortage Is Back With A Vengeance And "This Time It's Different". ZeroHedge wrote "The last time the world was sliding into a US dollar shortage as rapidly as it is right now, was following the collapse of Lehman Brothers in 2008. As we discussed back then, this systemic dollar shortage was primarily the result of imbalanced FX funding at the global commercial banks, arising from first Japanese, and then European banks' abuse of a USD-denominated asset-liability mismatch, in which the dollar being the funding currency of choice, resulted in a massive matched synthetic 'Dollar short' on the books of commercial bank desks around the globe: a shortage which in the aftermath of the Lehman failure manifested itself in what was the largest global USD margin call in history." No Shortage Thesis On March 11, I replied to the above idea with Is There a US$ Shortage? Will it Sink the Global Economy? Again? "I do not believe there is a dollar shortage or even a synthetic dollar shortage. More importantly, a dollar shortage certainly did not cause the crash in 2008. Excess debt and speculation caused the crisis in 2008. Any alleged or apparent dollar shortage was a result, not a cause of the crash." Demand for Dollars It's amusing to discuss currency shortages given all the central banks are or have been flooding the markets with currency in an inane attempt to cure a debt problem by forcing more debt into the system. I discussed this on Monday in Draghi's Goal: Higher inflation and Negative Yields; ECB's Asset Purchases to Outstrip Supply 3-1; Is There a Catch? That interest rates are negative in Germany for every duration from one month through six years (only two basis points from seven) speaks for itself. There is no demand for loans relative to supply of euros from the ECB. Same as 2008 or Opposite? The US dollar index is at roughly the same level as in 1998, also 1988 (not shown). The peak in 1985 was 164.72. The peak in 2001 was 121.21. Lehman Bankruptcy On September 15, 2008, Lehman filed for bankruptcy. The dollar bottom was in April of 2008, at 71.33. At that time, anti-US$ sentiment was massively in vogue. The Schiff's of the world were screaming hyperinflation. Today, US hyperinflationists are thoroughly discredited and in hiding. Today, nearly everyone loves dollars and hates gold. Dollar swaps that were not in place then, are in place now. All things considered, conditions are nearly the opposite of 2008. Acting Man Chimes In Pater Tenebrarum at the Acting Man blog contributed to my reply. Then on March 12, Tenebrarum did his own followup: The Dollar Squeeze – How Problematic Is It? "The visible currency effects (such as a soaring dollar exchange rate and funding gaps, see below) are usually mainly a consequence, not a cause of crisis conditions. Of course, the recent rise in the dollar was initially triggered by perceptions of monetary policies between the US and other currency areas diverging – everybody expects the Fed to hike rates, while rates are being lowered everywhere else. It should be added to this that there are of course feedback loops at work: the stronger the dollar becomes, the more difficult it will be for dollar debtors abroad to service their debt, so any future crisis situation will tend to feed on itself. Note in this context that if a debtor has hedged his dollar exposure, the associated currency risk has not disappeared – it has merely been shifted to his counterparty." Tenebrarum provides many charts in his explanation. I caution that it's not light reading to say the least. Then again, money in general is nearly always a complex read. $9 Trillion Stress Test On March 11, Ambrose Evans-Pritchard at the Telegraph chimed in with Global Finance Faces $9 Trillion Stress Test as Dollar Soars. Contrary to popular belief, the world is today more dollarized than ever before. Foreigners have borrowed $9 trillion in US currency outside American jurisdiction, and therefore without the protection of a lender-of-last-resort able to issue unlimited dollars in extremis. This is up from $2 trillion in 2000. The result is that the world credit system is acutely sensitive to any shift by the Fed. "Changes in the short-term policy rate are promptly reflected in the cost of $5 trillion in US dollar bank loans," said the BIS.  The BIS paper's ominous implications are already visible as the dollar rises at a parabolic rate, smashing the Brazilian real, the Turkish lira, the South African rand and the Malaysian Ringitt, and driving the euro to a 12-year low of $1.06. The dollar index (DXY) has soared 24pc since July, and 40pc since mid-2011. This is a bigger and steeper rise than the dollar rally in the mid-1990s - also caused by a US recovery at a time of European weakness, and by Fed tightening - which set off the East Asian crisis and Russia's default in 1998. Emerging market governments learned the bitter lesson of that shock. They no longer borrow in dollars. Companies have more than made up for them. "The world is on a dollar standard, not a euro or a yen standard, and that is why it matters so much what the Fed does," said Stephen Jen, a former IMF official now at SLJ Macro Partners. Mr Jen said Asian and Latin American companies are frantically trying to hedge their dollar debts on the derivatives markets, which drives the dollar even higher and feeds a vicious circle. "This is how avalanches start," he said. BIS data show that the dollar debts of Chinese companies have jumped fivefold to $1.1 trillion since 2008, and are almost certainly higher if disguised sources are included. Among the flow is a $900bn "carry trade" - mostly through Hong Kong - that amounts to a huge collective bet on a falling dollar. Woe betide them if China starts to drive down the yuan to keep growth alive. I have no problems with the above. However, close scrutiny  shows conditions are opposite of the conditions ahead of the Lehman crisis. In 2007-2008 there was a flight out of dollars. Now everyone seems to want them. How times change. Tightening More Urgent? Pritchard continues ... The most recent Fed minutes cited worries that the flood of capital coming into the US on the back of the stronger dollar is holding down long-term borrowing rates in the US and effectively loosening monetary policy. This makes Fed tightening even more urgent, in their view, implying a "higher path" for coming rate rises. That last paragraph makes no sense to me. But rather than plant the same idea in anyone's head, I simply asked Tenebrarum what he made of it. Tenebrarum replied ""It can't be right. It has things the wrong way round. A stronger dollar is akin to a tightening, not a loosening of policy, in the sense that it will pressure import prices and that prices in the economy at large will adjust to that with a lag - precisely what usually happens when monetary policy becomes less accommodating. If you look at short term rates, you will see they keep hitting new highs for the move (1, 2, 3, 5 year yields). It is actually the market perception that tightening is underway that causes the dollar to move higher."" Speculator Dollar Shorts Let's now take a look at speculator positions on US dollar bets. On the futures market, for every long there is a short, but let's look at who is long and who is short, and by how much. Charts are courtesy of SentimenTrader. Hedgers are the commercial traders including market makers like JP Morgan. The market makers take the opposite side of speculators such as hedge funds. The number of contracts in numerous currencies is at all time high levels. US Dollar Hedgers Euro Hedger Positions Canadian Dollar Hedgers Yen Hedgers Extreme Opposite of Conditions in 2007 Not only are the positions opposite that of the start of the crisis in 2007, the magnitude of the bets is enormous. The motto appears to be bet with leverage. Hedge funds that win on such bets win big. If they lose, well, it's typically OPM (other people's money). That does not mean a reversal is guaranteed. Hedgers after all, hedge (and that is why JP Morgan never was hurt being allegedly short silver all the way up to its high near $46). But given that speculators and hedge funds (in spite of their name) don't often hedge, the above charts show there is fuel for a massive reversal. Five Reasons for Dollar Strength ECB and Bank of Japan are now QE king and Queen Nearly everyone believes the Fed will hike US 10-Year interest rates are close to 2%, elsewhere they are close to zero percent US stock market has been a one way bet Currency speculators (shown in the above charts), have a huge bet on the dollar If any of those conditions change, and especially if there is a cascade of reasons, a reversal in the fate of the US dollar will be enormous. This is not a timing mechanism, but rather an observation there is potential for this alleged "dollar shortage" thesis to start looking like a "euro shortage" event. And that is not all that far-fetched. Events in Greece or Spain can change things in a hurry. Investors who believe the ECB has everything under control,may find out otherwise. In fact, I guarantee you things are not under control anywhere: Not in the US, not in Europe, not in China, not in Japan. Is Japan Zimbabwe? Having discussed the dollar and euro in depth, let's turn the spotlight on the Yen for a moment. Axel Merk asks Is Japan Zimbabwe? The other day, when I was on a panel discussing unsustainable deficits in the U.S., Eurozone and Japan, the risk of inflation and Zimbabwe style hyperinflation came up. When asked about the difference about Japan and Zimbabwe, I quipped that there isn't any. My co-panelists were all over me, arguing Japan is different. Notably that Japan could not possibly go broke because, unlike Zimbabwe, it's an advanced economy. The argument being that Japan produces goods the world wants. To be clear: Zimbabwe and Japan are not the same. But are they really that different? Zimbabwe not only had a much weaker economy, but also much weaker institutions. But the old adage that something unsustainable won't last forever may still hold. The difference between Zimbabwe and Japan – and Europe and the U.S. for that matter – is that advanced economies have more control over their destiny. However, all these regions have made commitments they cannot keep by continuing business as usual. A weak country may simply implode. A strong country has choices. The preferred choice these days appears to be to kick the proverbial can down the road. The path an advanced economy with unsustainable finances takes is in many ways a cultural and political question. Unsustainable government finances tend to be accompanied with unsatisfied citizens that have seen their standard of living erode, either because inflation has eaten away their purchasing power or because the government has taken away benefits. Such an environment is fertile ground for populist politicians to be elected. In the U.S., this may be the rise of the Occupy Wall Street or Tea Party movements. In Japan, a populist prime minister is in power. What officials have in common is that they rarely blame themselves, but seek to shift blame on the wealthy, a minority group or foreigners. It's no co-incidence that Abe wants to abandon Japan's pacifist constitution; if Japan were able to balance its books, I allege that odds of such a discussion would be much lower. Similarly, by the way, Ukraine would not be in its current mess if it were able to balance its books. Japan unlike Ukraine, though, has well functioning government institutions. Inflation is a slow motion form of default. The "advantage" of inflation, as long as it doesn't turn into hyperinflation, is that it is less prone to the so-called "contagion." In a default the risk is that many solvent players are drawn into insolvency as a house of cards implodes. The reason why a government default tends to start out as a slow motion locomotive before it falls off a cliff is because stakeholders want to buy time. In the Eurozone debt crisis, for example, risk-averse investors were caught off guard when they realized their peripheral Eurozone debt was not risk free. By now, everyone should know these securities are not risk free which reduces the risk of contagion, as these assets have mostly moved away from financial institutions to those that can bear the risk. No one is going to cry if a hedge fund loses money; similarly, if the International Monetary Fund (IMF) loses money, the losses are 'socialized'. Back to Japan: Japan can continue on its current course as long as the market lets it. It's impossible to predict if and when the market might lose confidence. The Eurozone debt crisis has shown that sentiment can switch rather suddenly, even for countries with fairly prudent long-term debt management, such as Portugal or Spain. It may be naïve at best to think that there will be plenty of warning should market sentiment shift. What we do know is that central bank actions have masked risks. Risky assets don't appear risky anymore. But of course they are still risky. So when volatility surges – for whatever reason, investors might flee with a vengeance. A default, by the way, is not the end of the world. While the socio-economic impact on a country may be severe and a default may cause institutions to fail, especially those that own debt of the defaulting country, the reset button of default doesn't affect everything. Government institutions may survive and so may many manufacturers. Japan induced hyperinflation to hit the reset button after World War II. Who says this can't happen again? Yen Shortage? A curious thing happens in hyperinflations. It actually appears to leaders of countries in such circumstances that there is a shortage of currency. After all, money doesn't buy anything. They need to print more and more of it to purchase anything, with obvious results. The current COT position is such there could be a different kind of demand for Yen. Which comes first? I don't know and neither does anybody else. That said, way back in 2005 I made a couple of statements that seemed absurd at the time. The US would experience deflation, not hyperinflation  Japan would go into hyperinflation before the US The US did go into deflation, depending on how one measures it. My definition is credit marked to market. On a CPI basis (a very flawed but widely used measure) the US also went into deflation. My many times stated proposal still holds: The US will go in and out of deflation a number of times over the next decade. I discussed deflation at length in 2008, in Humpty Dumpty On Inflation I remember that title well because I have referred to it many times. Curiously, that post started with a discussion by Axel Merk. Here we go again, this time with a discussion on the Yen. Who's in Control? Hopefully the answer to that question is obvious. No one. This is clearly uncharted territory with competitive currency debasement ending (for now) in the US but taken over by the ECB and Bank of Japan. Odds of a Greece default are huge, and in my opinion rising. Is the ECB and eurozone prepared? They say they are, I think they are mistaken. With 691 Trillion Dollars of Derivative Bets, how can anyone believe any central bank is in control of anything? US GDP is not quite 18 trillion. Derivatives are roughly 38 times US GDP. Imagination Sets In These numbers defy my imagination. Yet ... ECB president Mario Draghi thinks we need more euros.  Prime Minsiter Shinzo Abe and the Bank of Japan think we need more Yen Janet Yellen and the Fed have concluded the world does not need more dollars (at least for now). And people are dumping gold for dollars because the Fed is "tightening" It's truly a world gone mad. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com  Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Putin Prepared to Use Nukes to Keep Crimea; Wild Rumors of Putin Missing Debunked Posted: 16 Mar 2015 09:52 AM PDT Putin resurfaced today following wild rumors on March 13 after he failed to appear at some expected meeting. Back from hiatus, Putin says he was Ready to Put Nuclear Weapons on Alert in Crimea Crisis. Vladimir Putin was ready to put Russia's nuclear weapons on alert last year during Russia's annexation of Crimea. "We were ready to do this," Mr Putin said in comments shown as part of a Russian state TV documentary on the one-year anniversary of Crimea's annexation. "[Crimea] is our historical territory. These are our Russian people there. We couldn't abandon them and leave them in danger." Mr Putin said that Moscow had been prepared to use any military means necessary to defend Crimea against "the nationalists" in Kiev and their "puppet masters": the US government. He said Russia's interests in Crimea and the surrounding region would always outstrip those of its western partners. "You are where? Thousands kilometres away?" Mr Putin said, addressing the US in the broadcast. "We are right here. This is our land . . . We were ready for the worst possible scenario." Mr Putin, who has not appeared in public since March 5, was the star of Crimea: Return to the Motherland, a two-and-a-half-hour documentary that paid heavy homage to Mr Putin and his role in Russia's annexation of Crimea last year. Putin Missing Rumors I had written what follows for a post on Saturday but considered the theories so ridiculous I did not bother. Now that Putin is back, let's take a look at what was circulating. Here's a summation of rumors regarding the "missing" Putin taken from the Financial Times article Russia in a Spin as its Main Man Goes Missing. Rumor 1: On Twitter, critics of the president have been tweeting morbid jokes and memes under the hashtag "Putin is dead", while Russian bloggers and pundits pore over the official Kremlin website looking for discrepancies in Mr Putin's alleged work schedule. Rumor 2: Andrei Illarionov, a former adviser to Mr Putin now based in Washington, claimed in a blog post that Mr Putin had fallen victim to a palace coup and fled abroad. There was no link to the alleged blog. Rumor 3: Konstantin Remchukov, an influential Moscow editor, alleged that the state-owned oil company Rosneft's chairman Igor Sechin was about to get the boot, indicating that a big government shake-up was looming. Rumor 4: In Switzerland, the news outlet Blitz.ch ran a report claiming that Alina Kabaeva, a former gymnast and Duma deputy who has been linked romantically with Mr Putin, had given birth to a child this week in Switzerland's Italian-speaking region of Ticino, suggesting that the Russian president had taken time off for a "baby mission". Mr Putin was last seen in public on March 5 at a Moscow meeting with Matteo Renzi, Italy's prime minister. In subsequent days, the Kremlin cancelled a series of important engagements, including with the leaders of Kazakhstan and Belarus. Perhaps he was sick. Or tired. Or preparing a documentary on Crimea. If anyone in Washington is paying Illarionov for his advice, they are fools. Small Price Theory Those who propose the Crimea annexation cannot be allowed to stand, need to reconsider their "small price to pay" thesis because it now clearly involves nuclear war. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Wage Growth vs. Economic Theory Posted: 16 Mar 2015 12:25 AM PDT If economists were right, wage growth and inflation would be soaring. After all, the Phillips Curve states that decreased unemployment in an economy will correlate with higher rates of inflation [and higher wage growth]. Let's explore that thesis. Average Hourly Earnings Percent Change From Year Ago Civilian Unemployment Rate Let's hone in on that theory, this time with three charts. Average Hourly Earnings Percent Change From Year Ago - Detail Civilian Unemployment Rate - Detail CPI Detail If Economists Were Right The Phillips Curve theory is so preposterous, I wonder why anyone still believes it. Even those who disbelieve the theory (at long last), still wonder why the theory went wrong. I will explain the reasons in a moment. First, please consider the Bloomberg article that brought the ridiculous Phillips Curve theory into the spotlight once again: If Economists Were Right, You Would Have a Raise by Now. Six years into the U.S. expansion, the link between falling unemployment and rising wages -- once almost as basic to economic theory as supply and demand -- seems to be coming unhinged. The disconnect is puzzling to people like Colorado Governor John Hickenlooper. With one of the best growth rates among the 50 states, a population that's younger and better educated than the nation's and a jobless level that's fallen further and faster than the national average, Colorado seems to have everything going for it. Yet the rise in the state's median wage since the recession ended in mid-2009 has averaged just 1.1 percent a year, based on data from the federal government's Current Population Survey. That's no better than the lackluster 1-percent-to-2-percent national pace. What gives? "The whole notion that wage growth has been lagging job growth -- that's the crux of the problem here," Hickenlooper said in an interview. "We're working very hard to figure out why." Divergence Pronounced The divergence is even more pronounced at the state level. Wages aren't growing faster in states with lower, sometimes substantially lower, jobless rates than the nation's. They're also not rising nearly as fast as they did at similar points in the past. In fact, the link between state unemployment rates and wages, which weakened during the 1990s and 2000s expansions, is fraying still further this time around. "If we think unemployment is going to continue to fall, we can't assume, as we once could, that that's going to bring wage growth with it," said Matthew Notowidigdo, an economist at Northwestern University in Evanston, Illinois, who specializes in state labor markets. The break in the bond "has got to make you wonder whether any of the traditional economic policy tools can work as well as they used to." What Went Wrong Inflation is understated Unemployment is understated Global wage arbitrage still matters Robots matter 1. Economists are 100% clueless as to how to measure inflation. Monetary inflation does not always manifest itself in the form of higher consumer prices. Therefore, the CPI is an absurd measure. The CPI ignores asset bubbles (stocks, bonds, land, housing, etc). Given that economists and central banks have a perfect track record of never spotting asset bubbles until after they pop, it's no wonder inflation looks benign. Bear in mind this discussion comes from a confirmed deflationist. Economists who cannot spot inflation now are simply brain dead. My off the cuff guess is that 90% of them are indeed brain dead. 2. Unemployment is what it is. By definition, I cannot argue with the number. But I can argue with the idiocy of a definition that discounts disability fraud, students continuing education because they cannot find a job, people so discouraged they drop out of the labor force, and those who retire not because they want to, but rather because unemployment benefits ran out and they need to collect Social Security to survive. 3. Wages in China are rising. But wages in other places aren't. So, price  pressures remain. 4. Robots take jobs left and right. And the higher the minimum wage and the lower the cost of capital, the more industries are likely to fire workers and replace them with hardware and software robots. For this point, blame legislatures for higher minimum wages and blame the Fed for suppressing borrowing rates. Nearly Every Mainstream Economic Theory Wrong I started to write nearly every mainstream economic theory is suspect. I changed the subtitle to wrong because there is not a single mainstream theory that takes into consideration asset bubbles instead of a fatally flawed CPI as a measure of inflation. Add to that, misinterpretation of GDP and unemployment, and it's no wonder that many theories behave so badly in practice. Economists cling to fatally flawed ideas. Garbage in - Garbage Out is the general rule of thumb. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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