Category: US & Canada

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When debt levels turn cancerous – Telegraph Blogs

The professoriat has been a little too cavalier in arguing that debt does not really matter for the world as a whole because we all owe it to ourselves. Debtors are offset by creditors (not always from friendly countries). Common sense suggest that this academic solipsism is preposterous, and so it now proves to be.

“As modern macroeconomics developed over the last half-century, most people either ignored or finessed the issue of debt. Yet, as the mainstream was building and embracing the New Keynesian orthodoxy, there was a nagging concern that something had been missing…..There are intrinsic differences between borrowers and lenders; non-linearities, discontinuities… It is the asymmetry between those who are highly indebted and those who are not that leads to a decline in aggregate demand.”

Creditors do not step up spending to cover the shortfall when debtors are forced to retrench suddenly. So the economy tanks.

via Ambrose Evans-Pritchard|When debt levels turn cancerous – Telegraph Blogs.

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Reminder: we’re in a bear market

Don’t be fooled by current month-end froth in the markets — into thinking that the bear market is over or that the early August plunge was a false signal. The S&P 500 Index has made little headway after completing a double bottom at 1200 despite average volumes indicating the absence of strong selling. 63-Day Momentum peaking below the zero line indicates a primary down-trend. Expect the bear rally to test resistance at 1250/1260 before a retreat to 1100. Breach of 1100 would find support at the 2010 low of 1000, but the calculated target is even lower*.

S&P500 Index

* Target calculation: 1100 – ( 1250 – 1100 ) = 950

The Nasdaq 100 performed better, clearing 2200 to complete a double bottom with a target of 2350*. Bullish divergence on 13-week Twiggs Money Flow indicates buying pressure. But this is a bear rally in the middle of a bear market, and further falls on the Dow/S&P 500 would drag the Nasdaq lower.

Nasdaq100 Index

* Target calculation: 2200 + ( 2200 – 2050 ) = 2350

Fedex and UPS remain in a primary down-trend, indicating that economic activity levels remain poor.

Fedex and UPS

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HEARD ON THE STREET: Life in the New Macro World – WSJ.com

Macro issues such as the solvency of European countries and fears of a global economic slowdown have overshadowed fundamental differences between companies. The consequence is that stocks are moving in tandem, indicating a high degree of correlation.

Based on one-month trailing movements, S&P 500-index stocks have a correlation of 80%, even higher than the 73% peak reached during the crisis in late 2008, says Ana Avramovic of Credit Suisse.

via HEARD ON THE STREET: Life in the New Macro World – WSJ.com.

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One Number Says it All – Stephen S. Roach – Project Syndicate

The number is 0.2%. It is the average annualized growth of US consumer spending over the past 14 quarters – calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011. Never before in the post-World War II era have American consumers been so weak for so long. This one number encapsulates much of what is wrong today in the US – and in the global economy.

……With retrenchment and balance-sheet repair only in its early stages, the zombie-like behavior of American consumers should persist. The 2.1% consumption growth trend realized during the anemic recovery of the past two years could well be indicative of what lies ahead for years to come.

via One Number Says it All – Stephen S. Roach – Project Syndicate.

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The Second Great Contraction – Kenneth Rogoff – Project Syndicate

…The only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning.

Some observers regard any suggestion of even modestly elevated inflation as a form of heresy. But Great Contractions, as opposed to recessions, are very infrequent events, occurring perhaps once every 70 or 80 years. These are times when central banks need to spend some of the credibility that they accumulate in normal times.

via The Second Great Contraction – Kenneth Rogoff – Project Syndicate.

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Struggling with a great contraction – FT.com

Many ask whether high-income countries are at risk of a “double dip” recession. My answer is: no, because the first one did not end. The question is, rather, how much deeper and longer this recession or “contraction” might become.

…… the dire consequences of soaring risk aversion, against the background of such economic fragility. In the long journey to becoming ever more like Japan, the yields on 10-year US and German government bonds are now down to where Japan’s had fallen in October 1997, at close to 2 per cent. Does deflation lie ahead in these countries, too? One big recession could surely bring about just that. That seems to me to be a more plausible danger than the hyperinflation that those fixated on fiscal deficits and central bank balance sheet find so terrifying.

via Martin Wolf|Struggling with a great contraction – FT.com.

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Obama’s Jobs Plan May Include ‘Infrastructure Bank’

With only one week to go before President Obama details his plan to revitalize the stalling economy, Labor Secretary Hilda Solis vigorously defended the administration’s efforts to crank up hiring during a speech on Tuesday at the National Press Club. She stressed that Obama’s plan will include a payroll tax cut extension, an unemployment benefits extension, and the creation of a national infrastructure bank to rebuild roads and railroads with a mix of private and public funds.

via Obama’s Jobs Plan May Include ‘Infrastructure Bank’.

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It’s Too Late For Obama To Create Jobs, Says ECRI’s Achuthan

Economic Cycle Research Institute co-founder Lakshman Achuthan: “There’s nothing they’re going to be able to do about that near-term direction in the unemployment rate, especially if we slip into a recession because every time you have a recession by definition the unemployment rate will be spiking.”

… Achuthan says the time to act was in the spring when the economic indicators started to weaken. “We were above 200,000 [monthly payrolls] and we’re not going back there anytime soon,” he says. “We’re going to continue to weaken at least through the end of this year,” which is (more) grim news for the millions of Americans in need of work.

via It’s Too Late For Obama To Create Jobs, Says ECRI’s Achuthan.

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