About a decade ago….. I estimated the following simple formula for setting the federal funds rate:
Federal funds rate = 8.5 + 1.4 Core inflation – Unemployment
….Eddy Elfenbein has recently replotted this equation. Here it is:
via Greg Mankiw’s Blog: The Liquidity Trap may soon be over.
Neurosis: Emotional disorder arising from no apparent organic lesion or change and involving symptoms such as insecurity, anxiety, depression, and irrational fears…… No longer in scientific use.
Eurosis: Economic disorder involving symptoms such as insecurity, anxiety and depression, arising from rational fears of a collapse of the European monetary and banking system……. No longer of much use.
Europe
Dow Jones Europe index encountered (medium-term) resistance at 240. 21-Day Twiggs Money Flow below zero warns of selling pressure. Expect a test of primary support at 210. Failure of support would indicate a fall to 160*.
* Target calculation: 210 – (260 – 210 ) = 160
US
The S&P 500 index is stronger, testing resistance at 1300. Breakout would signal resumption of the primary up-trend. We are likely to see significant window-dressing ahead of the November 2012 election. The market may well respond, but the real picture is bleaker with an economy reliant on deficit-spending in order to avoid a slide back into recession. Respect of resistance at 1300 would warn of another test of primary support at 1160.
Australia
ASX 200 index reflects the middle ground. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure but the index is presently testing primary support at 4000. Failure would signal a fall to 3650*. News of a fresh stimulus program in China, however, should help support resources stocks.
* Target calculation: 4000 – (4350 – 4000 ) = 3650
Here’s my entry for Overlooked Chart of the Year. It shows how the S&P 500 (in blue) and the market’s inflation expectations (the 10-year TIPs spread in red) have been waltzing partners for the last four years.
Here are three more to add to the list.
First, U.S. consumers pull back again. U.S. households have been resilient which has lifted global producers. But future spending will depend on better job growth and incomes growing ahead of prices…..
Second, a U.S.-China trade war breaks out. China has slowed down. If growth drops more than expected and social unrest increases, Beijing might react by blaming U.S. regulations for the loss of work…..
Last but not least, fiscal policy blunders big-time. Never underestimate the ability of Washington to screw up the economy if political points can be scored…..
via Euro Zone Isn’t Only Potential 2012 Boogey Man – Real Time Economics – WSJ.
To arrive at an outlook for the year ahead we first need to analyze the big trends that endure for decades and in some cases even longer.
The number one dynamic over the last century has been the exponential rise in global population. It took 123 years for the world population to grow from 1 to 2 billion (by 1927) and only 12 years to grow from 5 to 6 billion (by 1999). Growth, however, is now slowing and we are predicted to rise from the current 7 billion to a peak of 9 billion in the 2050s.
At the same time we are faced with increasing scarcity of food and water. Advances in technology have improved crop yields, but increased meat consumption in China and other Asian economies will reduce overall output. The area of land required to produce an equivalent amount of edible protein from livestock is 4 to 5 times higher compared to traditional grains and legumes, and up to 10 times higher for beef. Diversion of land use for ethanol production will also restrict food output.
Global warming, whether man-made or a natural cycle, may also contribute to declining food production — through droughts, floods and depleting fish stocks.
We are also depleting global deposits of ferrous- and non-ferrous ores — as well as energy reserves of crude oil and coal — as global industrialization accelerates. Commodity costs can be expected to rise as readily available resources are depleted and we are forced to dig deeper and endure harsher conditions in order to access fresh deposits. Deep water ocean-drilling and exploration within the Arctic and Antarctic circles are likely to increase.
As energy resources are depleted, nuclear energy production is likely to expand despite current safety concerns. Development of technologies such as thorium fluoride reactors hold out some hope of safer nuclear options, but these may be some way off. Wind and solar energy are likely to remain on the fringe until technology develops to the point where they are cost effective compared to alternative sources.
Competition for scarce resources will increase tensions between major economic players, with each attempting to expand their sphere of influence — and secure their sources of supply. The Middle East, Africa, South America, Australia, Mongolia and the former USSR are all potential targets because of their rich resource base.
In addition to competition for scarce resources, we are also likely to see increased competition for international trade. Resistance to further currency manipulation — initiated by Japan in the 1980s and perpetuated by China in the last decade — is likely to rise. US Treasury holdings by China and Japan currently sit at more than $2.3 Trillion, the inflows on capital account being used to offset outflows on current account and maintain a competitive trade advantage by suppressing their exchange rate.
Another factor contributing to instability is the rise of democracy in some parts of the world. The Arab Spring is still in its infancy, but the development has no doubt caused concern amongst autocratic governments around the globe. Food shortages and rising global prices will act as a catalyst. The likely result is increased suppression in some autocracies and a rapid transition to democracy in others, like Myanmar. But the transition to democracy is never smooth — especially in countries with clear fault lines, such as language, religious, racial or cultural differences — and can lead to decades of conflict before some degree of stability is achieved.
On the other hand we are witnessing the decay of long-standing, mature Western democracies. Undue influence exerted by special interest groups with large cash resources — such as banks, big oil, and armaments manufacturers — force politicians to serve not only their electorate but their financial sponsors. Aging populations pose a new threat: large voting blocs who are not participants in the economic workforce will wield increasing influence over distribution of social welfare payments such as Medicare and Pensions. And politicians are increasingly guilty of over-spending, running up public debt and debasing currencies, in their attempt to keep voters happy and secure re-election.
The long term hope is that we evolve a more consensus-based form of democracy, along the lines of the Swiss model, and away from the excesses of the current winner-takes-all system.
The decay in Western democracy resulted in a massive debt binge over the last 3 decades, with private debt often growing at double-figure rates, accompanied by burgeoning public debt levels. The massive debt bubble far outstripped GDP growth, effectively debasing currencies and causing soaring inflation of consumer and asset (housing and stock) prices. The GFC marked the peak of the debt expansion and was followed rapid contraction as the private sector diverted income to repay debt. Debt contraction is catastrophic, however, and can cause GDP to fall by up to 25 percent as in the Great Depression of the 1930s.
The response has been a massive expansion of public debt as governments run deficits in order to offset the private debt contraction. Overall debt levels hardly faltered as government spending programs filled the hole left by private debt contraction. While this succeeded in plugging the gap, many Western governments are left with huge public debt and increasingly nervous bond markets.
Central banks such as the Fed and BOE stepped into the breach, purchasing government bonds with newly-created money. Apart from putting gold performance on steroids, central bank asset purchases had little impact on inflation because the effect was offset by the deflationary debt contraction. But cessation of the debt contraction would let the genie out of the bottle.
Here is how I believe these big trends will impact on 2012. I do not claim to have a crystal ball and it may be amusing to review these predictions at the end of the year:
I wish you peace and prosperity in the year ahead but, most of all, the good health to enjoy it.
Regards,
Colin Twiggs
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Wall Street’s biggest banks expect the Federal Reserve‘s 0% interest rates to persist into at least 2014, and see good odds the Fed will provide additional stimulus to the economy in the near term, according to a Federal Reserve Bank of New York survey of primary dealers.
…..The median expectation that the Fed could provide additional stimulus in the form of bond buying that would push the balance sheet beyond its current $2.9 trillion level stands at 60% over the year.
via Big Banks See Better Than 50/50 Odds of QE3 – Real Time Economics – WSJ.
Senator Ron Wyden (D-OR) and House Budget Committee Chairman Paul Ryan (R-WI) did a remarkable thing: They announced a bipartisan plan to fix Medicare, probably the most contentious of policy issues.
And amazingly, what they came up with might just work…….
Ryan-Wyden would work like this:
via TaxVox » Blog Archive » A Medicare Reform Plan That Just Might Work.
For 2012, U.S. real estate players must resign themselves to a slowing, grind-it-out recovery following a period of mostly sporadic growth, confined largely to “wealth island” real estate markets—the primary 24-hour gateways located along global pathways.
via Emerging Trends in Real Estate 2012 – CRE Console Blog.
Comment: ~ Commercial real estate yields are following Treasury yields lower. This may present short/medium-term capital gains but long-term pain when Treasury yields revert to their normal range.
To pay down liabilities like these would require the permanent allocation of an additional 8% of GDP. Where would we find the will to do that? I suspect as a result that we will see real decreases in Medicare benefits — things that won’t be eligible for payment. Hospice care will be indicated at higher frequency when healing an old person would be costly. So just be aware that something has to change, either taxes have to rise, or Medicare benefit levels have to fall.
via 2011 Financial Report Of The U.S. Government – Seeking Alpha.
