Central Perk

luni, 25 octombrie 2010

Mish's Global Economic Trend Analysis

Liquidity Traps, Falling Velocity, Commodity Hoarding, and Bernanke's Misguided Tinkering

Posted: 25 Oct 2010 11:19 AM PDT

John Hussman has an interesting post this week on the misguided policies of the Bernanke Fed and how quantitative easing promotes commodity speculation and hoarding but does nothing for the real economy. Please consider Bernanke Leaps into a Liquidity Trap

The belief that an increase in the money supply will result in an increase in GDP relies on the assumption that velocity will not decline in proportion to the increase in money. Unfortunately for the proponents of "quantitative easing," this assumption fails spectacularly in the data - both in the U.S. and internationally - particularly at zero interest rates.

How to spot a liquidity trap

The chart below plots the velocity of the U.S. monetary base against interest rates since 1947.

Few theoretical relationships in economics hold quite this well. Recall that a Keynesian liquidity trap occurs at the point when interest rates become so low that cash balances are passively held regardless of their size. The relationship between interest rates and velocity therefore goes flat at low interest rates, since increases in the money stock simply produce a proportional decline in velocity, without requiring any further decline in yields. Notice the cluster of observations where interest rates are zero? Those are the most recent data points.

One might argue that while short-term interest rates are essentially zero, long-term interest rates are not, which might leave some room for a "Hicksian" effect from QE - that is, a boost to investment and economic activity in response to a further decline in long-term interest rates. The problem here is that longer-term interest rates, in an expectations sense, are already essentially at zero. The remaining yield on longer-term bonds is a risk premium that is commensurate with U.S. interest rate volatility (Japanese risk premiums are lower, but they also have nearly zero interest rate variability). So QE at this point represents little but an effort to drive risk premiums to levels that are inadequate to compensate investors for risk. This is unlikely to go well. Moreover, as noted below, the precise level of long-term interest rates is not the main constraint on borrowing here. The key issues are the rational desire to reduce debt loads, and the inadequacy of profitable investment opportunities in an economy flooded with excess capacity.

One of the most fascinating aspects of the current debate about monetary policy is the belief that changes in the money stock are tightly related either to GDP growth or inflation at all. Look at the historical data, and you will find no evidence of it.

You can see why monetary base manipulations have so little effect on GDP by examining U.S. data since 1947. Expand the quantity of base money, and it turns out that velocity falls in nearly direct proportion. The cluster of points at the bottom right reflect the most recent data.

Just to drive the point home, the chart below presents the same historical relationship in Japanese data over the past two decades. One wonders why anyone expects quantitative easing in the U.S. to be any less futile than it was in Japan.

Simply put, monetary policy is far less effective in affecting real (or even nominal) economic activity than investors seem to believe. The main effect of a change in the monetary base is to change monetary velocity and short term interest rates. Once short term interest rates drop to zero, further expansions in base money simply induce a proportional collapse in velocity.

Look at the price of gold since 1975. When real interest rates have been negative (even simply measured as the 3-month Treasury bill yield minus trailing annual CPI inflation), gold prices have appreciated at a 20.7% annual rate. In contrast, when real interest rates have been positive, gold has appreciated at just 2.1% annually. The tendency toward commodity hoarding is particularly strong when economic conditions are very weak and desirable options for real investment are not available. When real interest rates have been negative and the Purchasing Managers Index has been below 50, the XAU gold index has appreciated at an 85.7% annual rate, compared with a rate of just 0.1% when neither has been true. Despite these tendencies, investors should be aware that the volatility of gold stocks can often be intolerable, so finer methods of analysis are also essential.

Quantitative easing promises to have little effect except to provoke commodity hoarding, a decline in bond yields to levels that reflect nothing but risk premiums for maturity risk, and an expansion in stock valuations to levels that have rarely been sustained for long (the current Shiller P/E of 22 for the S&P 500 has typically been followed by 5-10 year total returns below 5% annually). The Fed is not helping the economy - it is encouraging a bubble in risky assets, and an increasingly unstable one at that. The Fed has now placed itself in the position where small changes in its announced policy could have disastrous effects on a whole range of financial markets. This is not sound economic thinking but misguided tinkering with the stability of the economy.

That is a decent sized snip, but I assure you there is much more in the article to merit a complete read.

Commodity Hoarding

Commodity hoarding and speculation and credit growth is rampant in China, as noted in Massive Inflation in China, US Inflation Nonexistent

I also happen to have had an email exchange with someone in the apparel industry regarding cotton over the past few days.

"AI" Writes ...

Mish,

As you know I work in the apparel industry. One item that the media is not discussing is the massive price increases for clothing that is coming in 2011. Retailers are beginning to feel the pricing pain as we speak. For now they and their vendors are absorbing through modestly lower margins. By early spring product shortages will become an issue. As we move into July and August we WILL see pricing for many items increase by 20% or more because of cotton shortages and hoarding in China.

I know of one "factory" that made a cash purchase of a substantial amount of "cotton"/piece goods. To their surprise only 20% was delivered along with a refund for the balance. The supplier said they plan to hold the goods longer as prices continue to increase rapidly.

"AI"

Definition of "Factory"

Since "Factory" was in quotes, I had to ask exactly what that meant. "AI" responds ...

A factory can be an actual production facility or it could be a sourcing agent who outsources production to various facilities. The term is often used interchangeably so I felt the quotes were needed. The same can be said for cotton as it is sometimes used when people are referring to fabric/piece goods. The hoarding example I provided was for actual fabric.

Apparel Price Increase Looms?

"AI" thinks a huge price increase looms. I am not so sure. Prices can only rise if consumers are willing to pay that price. Are they? For how long?

As for hoarding, there is always the risk of a price collapse. Given the fragile state of the economy, a sudden collapse in the price of cotton or commodities cannot be ruled out.

Cotton Weekly

Charts like that seldom turn out well for buyers at these prices.

Liquidity Trap?

I agree with what Hussman is saying about liquidity traps in general and how this "pushing on a string" cannot work. However, the entire notion of a "liquidity trap" is a Keynesian construct that implies "something" must be done.

In reality, the best thing to do is nothing. Eventually prices will fall low enough where real demand will pick up. The speculators (in this case the banks), would have been wiped out and the bondholders (mainly the wealthy), would have taken a hit.

Sadly that is not what we did. We did not even do the second best thing of funding genuine infrastructure needs. Instead, we bailed out the banks at taxpayer expense, paved a bunch of roads at huge expense that did not need paving, and gave money to states that squandered much of it on public unions.

In short, it would be hard pressed to find a policy response worse than what we did. QE cannot work as the charts from Hussman proves. Yet Bernanke is committed to a policy of more of the same from the Fed.

Meanwhile, Congress is apt to head the other direction (thankfully) and tighten up, even though Krugman is screaming his fool head off. Please see Krugman and the Inevitable "I Told You So" - Tim Duy "Bad Things Happen When You Fight the Fed"; Final End of Bretton Woods 2? for more detail.

The only remaining question is how big various commodity, stock market, and corporate bond bubbles get in the meantime, before things blow sky high once again. Risk is enormous and growing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Gallup: Consumers Plan on Spending Less this Christmas

Posted: 25 Oct 2010 08:44 AM PDT

A new Gallup poll says Consumers Issue a Cautious Christmas Spending Forecast

Gallup's initial measure of Americans' 2010 Christmas spending intentions finds consumers planning to spend an average of $715 on gifts, roughly on par with the $740 recorded in October 2009.

The $25 decrease in Americans' holiday spending intentions between October 2009 and October 2010 (not a statistically significant change) contrasts with a $61 year-over-year reduction in intended spending found last October and a $108 reduction found a year prior.

Gallup will update this measure in early November and again in early December. The December forecast has historically been a strong indicator of the direction of holiday retail sales, forecasting the extent to which sales will be higher or lower than the previous year. The October figure is not always predictive of the December forecast.

Americans' average prediction of the total amount they will spend on Christmas gifts this year is not highly encouraging for retailers, who may be hoping for a return to pre-recessionary buying habits.

The good news, however, is that the $25 decline in this year's October forecast is far less than what Gallup found in each of the prior two years at this stage in the season and, according to Gallup modeling, would point to a fairly flat year in holiday retail sales if it holds at this level through December.

Retail Key Unknowns

We don't know three things yet.

1. What's Priced In
2. Actual Spending
3. What Type of Stores Will Do Best

This is the third consecutive decline. On that basis any decline is significant. However, the final poll in December is a better forecast than this poll.

Perhaps people will feel better (or worse) after the mid-term elections. Certainly we are going to see sweeping changes, with Republicans highly likely to take the House, and a decent outside chance of taking the Senate as well.

Given the rebound in the stock market, there is a decent chance of a pickup in luxury items. In aggregate, however, the easy guess right now is flat +- 1% for overall spending.

Consumers are still tapped out and in need of deleveraging.

Projections Not In Line With Hiring Plans

Gallup projections are not in line store hiring plans. Note that Stores Plan Increased Hiring While Offering Increasingly Large Discounts. If stores hire a lot of temporary help, expecting a better season than happens, profits will suffer, especially if there are increasingly large discounts.

One key question is "What's Priced In?" We may not know that until January, but I suspect a lot more is priced in than flat +- 1%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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SEOmoz Daily SEO Blog

How To: Allow Google to Crawl your AJAX Content

Posted: 24 Oct 2010 04:14 PM PDT

Posted by RobOusbey

This post begins with a particular dilemma that SEOs have often faced:

websites that use AJAX to load content into the page can be much quicker and provide a better user experience
BUT: these websites can be difficult (or impossible) for Google to crawl, and using AJAX can damage the site's SEO.

Fortunately, Google has made a proposal for how webmasters can get the best of both worlds. I'll provide links to Google documentation later in this post, but it boils down to to some relatively simple concepts.

Although Google made this proposal a year ago, I don't feel that it's attracted a great deal of attention - even though it ought to be particularly useful for SEOs. This post is targeted to people who've not explored Google's AJAX crawling proposal yet - I'll try to keep it short, and not too technical!

I'll explain the concepts and show you a famous site where they're already in action. I've also set up my own demo, which includes code that you can download and look at.

The Basics

Essentially, sites following this proposal are required to make two versions of their content available:

Content for JS-enabled users, at an 'AJAX style' URL
Content for the search engines, at a static 'traditional' URL - Google refers to this as an 'HTML snapshot'

Historically, developers had made use of the 'named anchor' part of URLs on AJAX-powered websites (this is the 'hash' symbol, #, and the text following it). For example, take a look at this demo - clicking menu items changes named anchor and loads the content into the page on the fly. It's great for users, but search engine spiders can't deal with it.

Rather than using a hash, #, the new proposal requires using a hash and an exclamation point: #!

The #! combination has occasionally been called a 'hashbang' by people geekier than me; I like the sound of that term, so I'm going to stick with it.

Hashbang Wallop: The AJAX Crawling Protocol

As soon as you use the hashbang in a URL, Google will spot that you're following their protocol, and interpret your URLs in a special way - they'll take everything after the hashbang, and pass it to the site as a URL parameter instead. The name they use for the parameter is: _escaped_fragment_

Google will then rewrite the URL, and request content from that static page. To show what the rewritten URLs look like, here are some examples:

www.demo.com/#!seattle/hotels becomes www.demo.com/?_escaped_fragment=seattle/hotels
www.demo.com/users#!name=rob becomes www.demo.com/users?_escaped_fragment_=name=rob

As long as you can get the static page (the URL on the right in these examples) to display the same content that a user would see (at the left-hand URL), then it works just as planned.

Two Suggestions about Static URLs

For now, it seems that Google is returning static URLs in its index - this makes sense, since they don't want to damage a non-JS user's experience by sending them to a page that requires Javascript. For that reason, sites may want to add some Javascript that will detect JS-enabled users, and take the to the 'enhanced' AJAX version of the page they've landed on.

In addition, you probably don't want your indexed URLs to show up in the SERPs with the '_escaped_fragment_' parameter in them. This can easily be avoided by having your 'static version' pages at more attractive URLs, and using 301 redirects to guide the spiders from the _escaped_parameter_ version to the more attractive example.

E.G.: In my first example above, the site may choose to implement a 301 redirect from
www.demo.com?_escaped_fragment=seattle/hotels to www.demo.com/directory/seattle/hotels

A Live Example

Fortunately for us, there's a great demonstration of this proposal already in place on a pretty big website: the new version of Twitter.

If you're a Twitter user, logged-in, and have Javascript, you'll be able to see my profile here:

http://twitter.com/#!/RobOusbey

However, Googlebot will recognize that as a URL in the new format, and will instead request this URL:

http://twitter.com/?_escaped_fragment_=/RobOusbey

Sensibly, Twitter want to maintain backward compatibility (and not have their indexed URLs look like junk) so they 301 redirect that URL to:

http://twitter.com/RobOusbey

(And if you're a logged-in Twitter user, that last URL will actually redirect you back to the first one.)

Another Example, With Freely Downloadable Code

I've set up a demo of these practices in action, over at: www.gingerhost.com/ajax-demo

Feel free to have a play and see how that page behaves. If you'd like to see how it's implemented from a 'backend' perspective, hit the download link on that page to grab the PHP code I used. (N.B.: I'm not a developer; if anyone spots any glaring errors, please feel free to let me know so I can correct them!)

More Examples, Further Reading

The Google Web Toolkit showcase adheres to this proposal; experimenting with removing the hasbang is left as an exercise for the reader.

The best place to being further reading on this topic is definitely Google's own help pages. They give information about how sites should work to fit with this proposal, and have some interesting implementation advice, such as using server-side DOM manipulation to create the snapshot (though I think their focus on this 'headless browser' may well have put people off implementing this sooner.)

Google's Webmaster Central blog has the official announcement of this, and John Mueller invited discussion in the WMC Forums.

Between Google's blog, forum and help pages, you should find everything you need to turn your fancy AJAX sites into something that Google can love, as well as your users. Have fun!

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New White Board Video and a New Report on Women and the Economy

Economy and Jobs Agenda
Monday, October 25, 2010

The Week In Economy and Jobs

Last Thursday, President Obama travelled to Seattle, Washington and held a backyard conversation with women about their economic challenges and concerns. Earlier in the day the National Economic Council released a report that outlined the economic landscape for women and details many of the ways the Obama Administration is committed to strengthening America’s economy and providing opportunities for women across the country.

Earlier in the week, Chairman of the Council of Economic Advisers, Austan Gooslbee, released the second White House White Board video – this time taking a look back at the President’s record on the economy through the perspective of the last three years of private sector employment.

Highlights

Weekly Address: Letting Wall Street Run Wild Again
October 23, 2010
Pointing to the foreclosure crisis and the economy, the President cites passage of Wall Street Reform over the ferocious lobbying of Wall Street banks as a pivotal achievement -- and condemns Republicans in Congress for vowing to repeal it.

What Do They Expect in Return?
October 22, 2010
Communications Director Dan Pfeiffer zeroes in on the real significance of the flood of secret corporate money into our elections and the opposition of Republicans in Congress to the DISCLOSE Act.

President Obama Talks to American Women on the Economy: The People Behind the Report
October 21, 2010
The President takes some time in a backyard in Seattle, Washington to talk with women who are moving forward in every sector of our economy.

Tax Cut Facts: How Obama’s Tax Cuts Are Helping American Families
October 21, 2010
Jared Bernstein, Chief Economic Advisor to the Vice President, discusses widely underestimated benefits of President Obama's tax cuts.

TIGER II Grants to 75 Innovative Projects Will Change the Transportation Landscape, Create Jobs in 40 States
October 21, 2010
Transportation Secretary Ray LaHood writes about the funding of 75 innovative new projects that will put people to work today building a 21st century foundation for tomorrow's economic growth.

Providing Jobs and Economic Security for America's Women
October 21, 2010
Valerie Jarrett discusses a new report that outlines the economic landscape for women today and details many of the ways the Obama Administration is committed to strengthening America’s economy and providing opportunities for women across the country.

Report Shows The Recovery Act Creates Jobs and Changes Lives for the Better
October 20, 2010
Secretary of Agriculture Tom Vilsack releases a report outlining how Recovery Act funds allocated to seven programs administered by USDA Rural Development have sparked economic growth, created or saved over 300,000 jobs, and funded projects in almost 3,000 counties.

A Path Forward for Communities Affected by the GM Bankruptcy
October 20, 2010
Jared Bernstein with the Middle Class Task Force explains why the agreement between the Old General Motors and federal and state governments to establish a trust to clean up and repurpose 89 properties left behind in the GM bankruptcy is so significant.

Cutting Through the Rhetoric on Spending
October 20, 2010
The New York Times calls Congressional Republicans' bluff on their empty fiscal responsibility rhetoric.

What You Missed: Tuesday Talk with Austan Goolsbee
October 20, 2010
Watch the full video of our Tuesday Talk with CEA Chairman Austan Goolsbee, complete with links to jump to each question.

White House White Board: CEA Chair Austan Goolsbee Explains the Jobs Trends
October 19, 2010
In the second edition of White House White Board, Austan Goolsbee, Chairman of the Council of Economic Advisers, looks back at the President’s record on the economy through the perspective of the last three years in private sector employment.

A Task Force on Veteran Small Business Development
October 18, 2010
Marie Johns, Deputy Administrator of the U.S. Small Business Administration, discusses the first public meeting of the President’s Interagency Task Force on Veteran Small Business Development.

Taking On Black Lung
October 18, 2010
In the wake of the historic rescue of miners in Chile, Maureen Tracey-Mooney with the Office of the Vice President, discusses efforts to tackle an even more widespread danger to miners.

Weekly Address: GOP Rewarding Corporations that Create Jobs Overseas
October 16, 2010
The President lays out his agenda to foster investment here at home. He vows to close the tax loopholes for sending jobs and profits overseas that Congressional Republicans have tried to protect.

Get Updates

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Seth's Blog : Last call for the Los Angeles road trip event

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Last call for the Los Angeles road trip event

This is my only public west coast gig this year... I hope you can make it. November 9th at the fabulous Zipper Hall. Full day tickets are here. Use discount code sethsblog. It seems there are only twenty tickets left.

Inexpensive breakfast plus one-hour interview tickets are here.

• Email to a friend •

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My Turn to Answer Your Questions

Good afternoon,

As a Senior Advisor to the President, I spend a lot of time talking to President Obama about the issues that affect all Americans.

But tomorrow I want to try something a little different. I’m hosting a live chat with Americans from around the country to answer questions about the economy, health care, energy, education or really whatever is on your mind.

Can you join me at 1 p.m. EDT?

I’ve been in the White House with President Obama from Day One, and I know how important it is to the President to understand the concerns of the American people. That’s why he travels around the country meeting with families and small businesses and reads ten of your letters every day. And it’s why we do regular online discussions like Tuesday Talks and Open for Questions.

Over the past few weeks, Austan Goolsbee, Chairman of the Council of Economic Advisers, and Elizabeth Warren, who is leading the effort to get the Consumer Financial Protection Bureau off the ground, have taken some time to answer your questions. Now it’s my turn.

So, I hope you’ll join me tomorrow, and I’ll do my best to answer as many of your questions as I can.

I’m looking forward to talking to you.

Sincerely,

David Axelrod
Senior Advisor to the President

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Daily Snapshot: Helping Small Businesses Get Back on Their Feet

Your Daily Snapshot for
Monday, October 25, 2010

Photo of the Day

President Barack Obama greets Mieraye Redmond, 7, on the sidewalk next door to the home where he met with area families in Seattle, Wash., Oct. 21, 2010. Mieraye gave the President a letter she had written to him at school and attached it to a paper bouquet of flowers that she also made and colored. Sen. Patty Murray is at right. (Official White House Photo by Pete Souza)

Today's Schedule

Today, the President will travel to Rhode Island to tour the facilities of American Cord & Webbing in Woonsocket, Rhode Island, and deliver remarks to workers. Though American Cord & Webbing was hit by the economic downturn and forced to lay off some workers in 2009, they invested in new product development to pursue new customers and over the course of the past year they have brought all of their former laid-off employees back. American Cord and Webbing currently has 47 employees and plans on hiring more. And last month, the company was approved for an SBA loan that will help the company expand its Woonsocket facility, going from 30,000 sq. ft. to 43,000 sq. ft. by next spring.

All times are Eastern Daylight Time

10:10 AM: The President receives the Presidential Daily Briefing

10:40 AM: The President meets with senior advisors

11:00 AM: The President meets with Secretary of State Clinton

11:00 AM: The Vice President delivers remarks at the International Association of Chiefs of Police First General Assembly

2:30 PM: The President departs the White House en route Andrews Air Force Base

2:45 PM: The President departs Andrews Air Force Base en route Warwick, Rhode Island

3:55 PM: The President arrives in Warwick, Rhode Island

4:15 PM: The Vice President attends an event for Congressional candidate Ann McLane Kuster

4:40 PM: The President tours American Cord & Webbing Co. Inc

4:55 PM: The President delivers remarks to workers (audio only)

6:30 PM: The President delivers remarks at a DCCC reception

7:30 PM: The President delivers remarks at a DCCC dinner

8:15 PM: The President departs Warwick, Rhode Island en route Andrews Air Force Base

9:25 PM: The President arrives at Andrews Air Force Base

9:40 PM: The President arrives at the White House

Indicates Events that will be livestreamed on WhiteHouse.gov/live.

luni, 25 octombrie 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

SEOmoz Daily SEO Blog