MONETARY FUDGING

If the unemployment rate--due to be announced this Friday--falls to 5.9%, it'll be the lowest that figure has been in six years.

This is the number that the Yellen-led Fed stated it's following not GDP. Besides fighting just inflation somewhere along the line the Fed took up the task of providing stable employment. The consensus guess, and that's the operative word, guess, is for 225,000-250,000, depending on whom does the guessing.

With all the fines and money many of these quasi-government agencies have been raking in one would think these bureaucrats would want more bubbles to burst. Some observers even go so far as to claim the Fed not only wants these bubbles but purposely makes them.

For these folks the Fed by focusing on things they don't have a clue about--job creation and income growth, etc.-- resort to blowing bubbles via the now well-known so-called "wealth effect."  "Hey, man, my stock portfolio is skying, my house resale value is out of sight. We're all feeling good. Let's go spend some money."

And for those who don't recall Mr. Greenspan during his infamous tenure talked much about the wealth effect. Here's a quote from a Wall Street Journal article May 8, 2000, entitled "How Greenspan Finally Came to Terms with  the Market."

In August 1999, Mr. Greenspan formally announced his abandonment of "irrational exuberance" at the Fed's annual retreat in Jackson Hole, Wyo. He said the market reflected the "judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific companies that make up our broad stock price indexes." The Fed had no business contradicting those investors, he concluded.

That didn't mean, however, that his concern with the market had gone away. He remained as preoccupied as ever, especially when the Nasdaq soared nearly 50% in the three months after Jackson Hole. But his line of his inquiry shifted from trying to understand why stocks were rising to the impact of rising stocks on the economy at large.

The buzzword inside the Fed became the "wealth effect" -- how riches generated by stocks and real estate were changing the psychology of consumers, leading them to spend more of their wages and salaries and putting a smaller portion into savings. 

In a presentation for the Fed chairman, forecaster Joel Prakken flashed a picture from his local paper, the St. Louis Post-Dispatch, with a dog in a spacious room under the headline, "Luxury boarding kennels are only one indication that people ... are spending more freely." Mr. Prakken inserted a caption that had the dog proclaim, "I sure enjoy consuming master's recent stock-market gains!"

Mr. Greenspan mixed and matched statistics to discern wealth effect patterns. His research indicated to him that, even if it were wholly rational, the bull market was hauling the U.S. economy into warp speed by generating greater spending.

Indeed, the more he and his colleagues believed that the New Economy and the stock market made sense, the more they worried that the economy was veering out of control. 

At policy making sessions through late 1999 and early 2000, intense debates broke out as officials grappled with the ways that changing productivity affects the economy. It was a question the central bank hadn't confronted for four decades. Fed Vice Chairman Roger Ferguson literally dusted off his old macroeconomics textbook from college


Now it shouldn't surprise that there is little agreement in the economic profession about the wealth effect, home values or stock values. Some claims equities have little or no affect. Others claim the opposite. Still others believe higher homes prices do and some believe both do.

Fudging is what it is. It's not against the law. But maybe when it comes to Wall Street and the government it ought to be. There are at least two places where we know fudging routinely takes place, economic predictions and earnings reports. Both are prominently the news this week.

Sure the numbers are coming this Friday and there will be some reaction. But keep in mind these folks are academics in the main. And numbers get revised. Which brings to mind an old saying about never send a kid to do a man's job. 

Maybe investors would be well informed to tweak that a bit: Never let a bunch of academics run your monetary policy. If you do you deserve all the fudging you're going to get.
t. man hatter

GOLD

We like to bring you other views from time to time. This one is about gold. We've cited the reference below. And as always you can read it and decide for yourself.

IMF Warns Pound Overvalued; What About Other Currencies?

Is the British pound overvalued? What about the Euro? The US Dollar? The Yen?

Curiously, economists make that case for all of those currencies.

And today, the IMF is pounding the drums with this proclamation "Overvalued" Pound Prevents Rebalancing. 

 The International Monetary Fund warned on Monday that the pound was “overvalued” and preventing the rebalancing of the economy away from a reliance on spending and imports.

In its annual assessment of the UK economy, the fund said sterling was between 5 and 10 per cent overvalued because of a “lack of competitiveness and limited export diversification”.

“Staff estimates that the current account balance is 2.6 per cent weaker than its equilibrium level, and that the real exchange rate is overvalued by about 5–10 per cent,” the IMF said.

Equilibrium Level Madness

Apparently the IMF is the arbiter of the "equilibrium level" of any and every currency. A few examples will prove the point.

New Zealand Dollar Overvalued by 20%

On April 10, 2014 the IMF warned New Zealand Dollar May Be Overvalued.

Canadian Dollar Overvalued by 10%

On March 2, 2014 the IMF Warned Canadian Dollar Overvalued by 10%" despite recent depreciation, thus the Bank of Canada should wait before hiking rates..

Australian Dollar Overvalued by 10%

On November 21, 2013 the IMF Stated Australian Dollar Overvalued by 10%.

US Dollar Overvalued

This dates back a while but on October 28, 2010 the IMF said US Dollar 'Overvalued' On Currency Markets.

Swiss Franc Overvalued

Returning to this year, on March 24, 2014, IMF Suggests SNB Use Negative Rates if Franc Pressured because the "franc remains moderately overvalued."

Euro Overvalued

As shocking as this may seem, I cannot find a recent IMF opinion on the Euro, but on May 8, 2014, Mario Draghi, president of the ECB discussed the Pernicious Effects of an Overvalued Euro.

I am pretty sure the IMF would agree.

Yen and US Dollar Overvalued 

On October 12, 2012, the Wall Street Journal proclaimed If Yen Overvalued in IMF View, So May Be Dollar. 

 Japan's finance minister may have breathed a sigh of relief Thursday when the International Monetary Fund chief reaffirmed the yen is "moderately overvalued," a phrase traders believe is supportive of potential market intervention to weaken the currency against the dollar.

Not so well-known in the market, however, is that the 188-member international lender also sees the dollar as "moderately overvalued," a view that makes it harder to conclude the IMF would endorse future intervention by Tokyo in the dollar-yen market.

Yuan "Moderately" Undervalued

On May 29, 2013, and contrary to sentiment in Washington DC that says the Yuan is massively undervalued, The IMF Seeks Flexible Chinese Yuan, Says "Moderately Undervalued".

US Dollar Index



click on chart for sharper image

Summary

Note that the US dollar is about where it has been since the beginning of 2012, but higher than it was in October of 2012 when it was judged to be "overvalued".

Is it more overvalued today?

Apparently the British pound, New Zealand dollar, Australian Dollar, the US dollar, the euro, and the yen are all overvalued.

The yuan is the one major currency that is allegedly undervalued, but only "modestly".

Mathematics

IMF overvalued-undervalued judgments are generally on a basket of currencies basis.

However, it is not mathematically possible for all those currencies to be 5-20% overvalued against all the other currencies in the same basket.

Even if it was possible, based on precise timings and currency fluctuations, the idea that the IMF can fine tune currency valuations to the nth degree as it has done is absurd.

All Currencies Overvalued

Nonetheless, the IMF appears to be on target with all those "overvalued" assessments, not against  other currencies in the basket or against each other individually, but against gold, and by far greater percentages.

If you agree with my assessment, and perhaps even if you don't, please consider How Much Gold Should Someone Own? Where and How To Own It?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Disclaimer:The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Read more at http://globaleconomicanalysis.blogspot.com/2014/07/imf-warns-pound-overvalued-what-about.html#eIJQ7kcyekVWKPe1.99

AROUND THE WEB

Owing to the shortage of bank bond trading the game has changed.

If corporate bonds don’t trade frequently enough for you, one solution is to turn elsewhere.
More and more investors are betting on whether the notes will go up or down in value without owning the securities, using derivatives. This has been attractive for asset managers looking to be nimble in markets or make big bets, especially as corporate-debt trading volumes wane.
Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, is one who’s using credit-default swaps for bullish wagers on company debt. He accelerated his use of the contracts in the three months ended June 30 by selling protection against credit losses, according to a quarterly report. 

Gross isn’t alone: Outstanding bets on a credit-swaps index tied to North American high-yield bonds have soared to the highest level since at least 2011. Net wagers on the latest Markit CDX North America High Yield Index rose to $31.5 billion as of July 18, compared with a peak of $29.1 billion on the last series in March, according to data compiled by Bloomberg.
Investors are looking for faster ways to express views on investment-grade and high-yield bonds, which are trading less as a proportion of the overall debt outstanding as Wall Street banks use less of their own money to make markets.Bloomberg
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If you like chocolate you better like higher prices too.

Hersey, the big Pennsylvania candy maker, recently announced it was hiking prices 8% owing to higher prices for chocolate, dairy and nuts. Note here the announcement names not just chocolate but dairy and nuts.

Hit hard this year by an on-going drought, California, which grows almost half of the nation's nuts, fruits and veggies, not to mention its role as leading the nation in producing milk and dairy, in 2012 produced nearly 19% of all dairy products.

Last week chocolate prices closed around $3,200 a metric ton, after hitting a three-year of $3,284 earlier in the week.  Mars Candy Company, the privately owned firm noted for its Mars Bars among others, raised prices 7% last week also.

As is usually the case several factors are being blamed for the high coca prices from smuggling in Ghana to 
the Ebola virus.http://247wallst.com/
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Someone once said denial is not just a river in Egypt.

The United States Federal Reserve System is one of the most powerful governmental organizations in the history of the world. America's central bank has control over the supply of dollars, and currently exerts great influence over interest rates, both for short-term and long-term borrowing. And, though the Fed was partly responsible for the regulatory failures that led to the global economy's near-meltdown in 2008-2009, post-crisis reform has left it with even greater authority and more responsibility for overseeing the financial system.

In many countries, people on the right of the political spectrum provide a bastion of support for the central bank. In northern Europe, for example, the European Central Bank's independence is seen as essential for price stability — and politicians on the right typically attach a higher priority to this goal.###



The situation is quite different in the US. Here, the right, represented by the Republican Party, has long been suspicious of the Fed, reflecting its opposition to a powerful federal government, as well as nostalgia for the days of the gold standard (particularly the version that operated before the Fed was created in 1913). The Fed as it currently operates is being protected by the left (the Democratic Party).


For example, I recently testified at a hearing of the House Financial Services Committee on Republican-proposed legislation that would impose on the Fed greater limitations on both monetary policy and regulation. House Democrats oppose the bill and invited me to the hearing, where I explained that the proposed constraints would, in my view, greatly hamper the Fed's effectiveness — including its ability to help the economy return to full employment and to prevent the financial system from spinning out of control again. 

Note: The key paragraph is highlighted ### in this academic's story.

This is academic BS tossed at you from the banks of the Charles River. Dodd-Frank will turn into one of the worst pieces of legislation since 1913 when the IRS and The Federal Reserve Bank were both created in a twofer against the American public.
http://www.cnbc.com/id/101872556

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OUR ESPN VIEW

We seldom venture off but this is as much a political story as it is one about sports.

Bringing this guy down is long over due. He's an arrogant nobody who's been out of control for too long. If nothing else he's learning that PC is a two-way street, not one that just applies to white folk. 

You like it, you live with it like the rest of us. On the overall cosmic scale just how important is his over-paid commentary on sports anyway? We don't know Mr. Smith and there is nothing personal here. We're just exercising our opinion as he did.

The real story here, sadly, isn't Mr. Smith. Dumb is as dumb does. His comments in another era would be innocuous and should be today if everyone weren't as thin skinned as a cheap roll of  tissue paper at an airport restroom. 

 

It's the lack of testosterone of ESPN executives. Anyone else would have been suspended. Competition in a semi-free market is great. And from what we read competition for ESPN is on the way, a good thing to be sure.

We don't think Mr. Smith should have been suspended for his comments. Nor do we think he should've had to go on national media and apologize. He said what he said. And we as a nation need to get over it. If ESPN didn't think he was competent they wouldn't over pay him and he wouldn't be there.

That's what semi-free markets are about, the right to hire and sink with unproductive, incompetent workers. And ESPN with all of its headiness ought to have that right just as the rest of us.

That's our view. We hope you know yours.

 

WHEN THE PADDY WAGON COMES

You've no doubt heard of passive-aggressive behavior.

You might like us even know someone. If you do we hope she's your ex-girlfriend like ours.

Well, don't look now but that pretty much describes investor behavior lately, according  to studies by Goldman Sachs and Morningstar, the big mutual fund tracker.

As fears about junk bonds grow investors appear to be leaving behind their more aggressive behavior and heading into more passive funds once popularly known as balanced. Balanced funds under the old term used to hold a certain percent of equities and a certain percent of fixed income securities.

The fixed income portion holds down the beta or volatility giving  investors a feeling of calm as they worry about huge swings in equities. 

Rest assured whatever Wall Street calls them, and they will usually respond with some eye-catching, money-fetching name, they are essentially balanced funds. Right now they're tossing around the term multi assets which is in some ways a ringer for diversification.

Everyone knows cash yields nothing these days and one thing Wall Street hates more than regulations is hoards of investors sitting on cash.Yet cash is in all probably the one place investors should be sitting given this market's run-up.

Buying junk bonds with spreads as narrow as they are was indeed aggressive. This move is suppose to be passive. It's also a statement, some are claiming, about active management or so-called alpha. Alpha in brief is that extra oomph professional active management is suppose to add to investor gains. 

If you follow the hedge fund world you realize one of the burning questions making the rounds these days is: Who took the alpha out of hedge funds? 

Investor activity like this can be directly traced to the Fed and its ZIRP nonsense for the past several years. If  there's an explosion--and the odds grow daily there will be one--these multi asset funds will take a hit too.

And the surprise here given a rising interest rate scenario greater than expected could be just how big a hit the bond portion might take.   

There's an old saying about prostitution and parties. When the paddy wagon comes it doesn't discriminate. It takes the good girls along with the bad ones downtown.

Like it or no, this is another way of saying you're judged by the company you keep. In our view investors would be sage here to fade the bureaucrats.



  

WIGGLE ROOM

It's about wiggle room folks. And with this octopus in Washington, you don't have much left.

As we have written before if you care about preserving any apart of America's semi-free market system, you will use whatever influence you have to block the government's blocking of tax inversions.

They're running scared. Inversions are a real threat to the spend and waste government that's plagued our nation for years. Corporations should be free to move, to leave this country. Oppressive tax burdens are at the core of this nation's founding.

The only thing un-American and un-patriotic here are those burdens levied by gluttonous politicians and bureaucrats most of whom are tone deaf to what the people of this nation really want. They want a middle class. Anybody seen one lately?

This is a major event; the shoe is pinching. Today it's corporations. Tomorrow it's us. There is something here politicians and bureaucrats hate--leverage for the people.

Check out how this government via its favorite attack dog, the IRS, treats ex-patriots who legitimately migrate to other nations. Here's the link to what we're saying. Their urgency speaks for itself. The bigger government gets, the more regulations it passes the less wiggle room its subjects have.

http://www.reuters.com/article/2014/07/28/us-usa-tax-shay-id

PC FRENCH STYLE

 
Want an example of PC at its worst or just how weird the French are?

For her writeup, French Blogger Fined $2,000 for Restaurant Review, Too Prominent on Google.

A blogger eats in an Italian restaurant in southwestern France. She thinks the food is bad, the service even worse, and she writes up a review that is not glowing, to put it mildly.

It’s a scenario that plays out daily in the cyberworld. Hair in a dish of pasta? Many would snap a photo and share it on Twitter or Facebook. An insufferable waiter? Blog it out.

But this blogger, a French woman named Caroline Doudet who runs “Cultur'elle,” got sued for it by the restaurant Il Giardino. And a judge has ruled that she must amend the title of her piece – because with it the post appears too prominently in Google search results – and that she owes $2,000 in damages.

The judge, according to court documents reported by the BBC, said that her blog, with over 3,000 followers, came up as the fourth result any time someone searched for the restaurant in Google. Therefore, she [the judge] reasoned, the title should be changed so “place to avoid” was less prominent.

Doudet made very good point to the local newspaper Sud Ouest that if bloggers don’t have the liberty to write bad reviews, good reviews become essentially meaningless.

We first spotted this article at http://globaleconomicanalysis.blogspot.com/. 

The EU in general and the French in particular are apparently not too fond of Google. So one has to wonder, was it the lady's review or Google the judge was going after?

The real message here is blog what you want but use a local or European search engine.

HATS AND RABBITS

Magicians are famous for pulling rabbits out of hats. Politicians and bureaucrats are famous for pulling regulations out of their...well, you get the idea.

Jeremy Grantham, main strategist for GMO, recently pulled up a number for the S&P 500, 2250, that would indicate in his view bubble territory for this long running equity circus. At its recent close of 1978, we're not there yet.

In more arcane terms, according to a recent Financial Times article, "a bubble is when prices rise two standard deviations above their norm--something that would occur every 44 years if markets behaved as statisticians would like." 

The key words here are "behaved as statisticians would like." Our old girlfriend never quite behaved as we would've liked. But then that's the same charge she leveled at us. Having said all that, we still think it's a good number to keep in mind if for no other reason this is not in our view a market to toss new money at.

We've said before and we'll repeat it: There are folks who want to keep this party going. In Grantham's noted view that includes, with a few exceptions, the current Fed. Despite what they will claim, they are not your friends.That giant sucking sound you hear is them trying to suck in more innocent money before they yank the drain pug.  

It's called the "Wealth Effect." We all feel better, bigger and richer and so we'll rush out and revamp the national past time--consumption. 

Yea, we're well aware of the fear of missing out phenomenon. Quite influential, for sure. It's right up there with its Siamese twin, the fear of being in when the stampede begins.

Nonsense knows no bounds. Mexico and Canada recently floated 50-year and 100-year bonds. A few years ago Coca Cola floated a 100-year bond. So far, so good. Now your friends at the U.S. Treasury are contemplating the same. Lemmings tend to flock.

This could be a good deal for the government which means in all likelihood it's a bad deal for you. In part it's about rollover costs. If interest rates are higher you have to finance your new debt at a higher cost. That's your government's thinking.

For you here's an exercise: Buy one of those puppies at par and when interest rates rise a few years down the road try rolling it over with 95 years to go to maturity. Rabbits aren't the only thing that get pulled out of hats.
t. man hatter
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WHATEVER IT TAKES TIME

t. man hatter

Bazooka Ben, Dragster Draghi, Just-Noise Yellen, choose whatever nickname you want.

For Draghi and his fellow ECB crew members our new suggestion is: Whatever-It-Takes Draghi.

Given the recent slowdown in the EU's biggest economy, Germany, this past week stocks took a hit. Even the seemingly-never-going-to-weaken euro dipped below $1.35.

Stubborn is as stubborn does. Earlier this year we suggested the euro's true value was somewhere around $1.20, a level Draghi and company probably pray for privately. We're not changing our view.

The 1.15% yield on the German 10-year bond is now solidly in second place in the bond-yield race to the bottom just behind Japan's 0.53% whooper. With a bit of imagination that makes the U.S. 10-year Treasury yield of 2.47%  junk bond status in this crazy central bank induced milieu. To which most can only utter: Oh well!

Germany's IFO economic research outfit delivered a not-so-welcome blow last week to ECB President Mario Draghi and his central banking colleagues. Blaming in part geopolitics--as if they're ever new--the agency noted a headwind in July for Deutschland businesses for the third straight month.

Germany is the EU's locomotive. Now it faces another decision--sanctions against Russia. No small matter, this will put further pressure on Draghi as most likely his worst nightmare whatever-it-takes time has arrived.

AROUND THE WEB

Here are some new figures for unemployment in China's urban areas. Are they to be believed?

60-Second News for July 25: Unemployment Statistics

The NDRC releases full urban unemployment statistics for the first time, showing that 5.05 percent of work-capable city residents are without a job

The country's top economic planning body has decided to release a more inclusive figure for unemployment in the nation's urban areas, ending the long-running practice of excluding migrant workers from the publicly announced unemployment count.

The newly released rate is about one percentage point higher than the "registered unemployment rate" the commission has published in the past. Called the "survey unemployment rate," it represents the percentage of people without jobs among all those who have lived in a given city for at least six months and are capable of work, including migrant workers whose households are registered in rural areas.

The NDRC's numbers show that this rate has declined for four consecutive months, and that cities and towns added 7.4 million jobs in the first half
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Goldman Sees 10-year bond yield at 3% in six months.

  Government bond yields will rise in the coming year, with the 10-year U.S. Treasury note yield touching 3% within six months, according to a report by Goldman Sachs on Friday. The strategists, led by Anders Nielsen, wrote: “We expect bond yields to be pushed higher by sustained high U.S. growth and accelerating inflation, a decline of deflationary concerns in Europe and an improving inflation outlook in Japan.” The 10-year Treasury note yielded 2.47% on Friday. The projected rise in government bond yields prompted Goldman to downgrade its allocation to corporate bonds to underweight. Goldman is neutral on stocks over the next three months, but overweight during the next 12 months. MarketWatch

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How would you like to be hung up in limbo for more than six years?

Well, that's how long the Keystone XL pipeline's been there. Set to carry oil from Alberta to the Gulf of Mexico, it's been as one writer recently put it;
 "...ground up in regulatory and political hell, and due to a groundswell of local opposition working in conjunction with national environmental groups, the issue was pushed to the top of the agenda in Congress. And once an issue becomes controversial in Congress, partisan gridlock usually sets in."

Why is this important? Well, Canada's been trying to move its tar sands oil to the east coast, but Portland, Maine recently voted 6-1 against allowing the shipments to come through their port, closing off another avenue moving oil out of Canada.

Here's an excellent summary of the situation from oilprice.com

The oil industry and its allies have long argued that blocking Keystone XL would accomplish nothing because Canada would simply ship the oil to China via their own west coast. And with Keystone XL on ice for now, Enbridge is trying to fulfill that promise. It is seeking to build the Northern Gateway pipeline, which would take Alberta oil to the west coast of Canada.

Canadian Prime Minister Stephen Harper – an ally of the industry – approved that route on June 17. However, a week later, the Canadian Supreme court handed down a major victory for First Nations tribes in and around the Canadian oil patch. The decision granted native tribes much greater power over major infrastructure projects. And with many of them voicing opposition to Northern Gateway, the west coast route for Canada’s oil sands could be in danger.

That is why the South Portland decision could be so important. With Keystone XL up in the air, the Gulf Coast route is uncertain. With empowered native tribes in Canada opposed to the Northern Gateway pipeline, the route to Canada’s west coast is in doubt.

Now, a relatively easy route to the Atlantic Coast – by reversing existing pipelines – could be blocked. That means oil sands companies may have to continue to do what they have been doing: shipping much of their production by rail. But that is proving to be more costly than expected. As costs rise and the vast oil sands reserves are blocked in every direction they turn, production may have to be cut back. And this is exactly what environmentalists have been arguing for all along. 

Now anyone following this story might realize that America's so-called abundance of oil might not benefit Americans all that much. Back in May (5/25/14) in our post, Unwanted Energy Abundance, we wrote about the rail car problems. 

With what only crazy legislators in California can do, drivers there may see a 12 cent hike per gallon in gas prices come 2015. Again, it's about the environment.
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