QUOTE OF THE DAY

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Posted on 24th April 2014 by Administrator in Economy |Politics |Social Issues

“All that is gold does not glitter,
Not all those who wander are lost;
The old that is strong does not wither,
Deep roots are not reached by the frost.

From the ashes a fire shall be woken,
A light from the shadows shall spring;
Renewed shall be blade that was broken,
The crownless again shall be king.”

J.R.R. Tolkien, The Fellowship of the Ring

Student Loan Forgiveness

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Posted on 24th April 2014 by Reverse Engineer in Economy |Politics |Social Issues

Off the microphone of RE

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Aired on the Doomstead Diner on April 24, 2014

logopodcast

Discuss at the Podcast Table inside the Diner

http://studentloancrisis.files.wordpress.com/2010/10/student-debt.jpg

Snippet:

…Problem of course is that as time went by, there were lots of graduates who couldn’t pay up, and more all the time these days as the economy circles the tidy bowl. Besides that, as more students now had more money to buy an education courtesy of these loans, the institutions started jacking up the prices and the cost to get one of these Sheepskins has gone up about 1000% since I jumped through the hoops 30 years ago. You can’t “work your way” through school anymore, you would have to work 2 jobs to pay a full tuition and room and board, leaving no time to actually attend class. If you cut down the number of classes to take to what you could afford pay as you go, just to get an Undergrad degree would take you 10-15 years, forget doing Grad Skule. Good luck getting a job as a College Grad with no experience at 30 years old.

The expectation here for the student is that if you get one of these Valuable Sheepskins, there will be a Job waiting for you that will launch you into the upper middle class that used to exist, but as time has gone by fewer of these jobs have been available to get while more people graduated qualified for them. This isn’t just a problem in the FSoA, it’s been a long standing problem in China and the old Soviet Union also, where there are tons of folks with Ph.D.s working clerical and sales jobs because there is nothing available in their area of expertiese.  At least in those countries though under the Commie system, they didn’t graduate with a debt load the size of K2…

For the rest, LISTEN TO THE RANT!

RE

WHY IS BARRY LAWYERING UP??

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Posted on 24th April 2014 by T4C in Economy |Politics |Social Issues

http://theulstermanreport.com/2014/04/23/must-read-obama-hires-top-criminal-defense-attorney/

 

Kathryn Ruemmler, current White House counsel, is being replaced by W. Neil Eggleston; and that is why this is newsworthy:

Eggleston is currently a partner at the powerhouse law firm of Kirkland and Ellis. He’ll be doing his second stint in the White House, where he served as an associate counsel to President Bill Clinton from 1993 to 1994.

Eggleston also served as deputy chief counsel to the House Select Committee to Investigate Covert Arms Transactions with Iran from 1987 to 1988 and was an assistant U.S. Attorney in the Southern District of New York. 

Eggleston has experience with issues regarding how the executive branch works with Congress and has represented former White House officials.  -

http://www.washingtonpost.com/blogs/post-politics/wp/2014/04/21/w-neil-eggleston-chosen-to-be-new-white-house-counsel/

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Mr. Eggleston, a partner at the law firm of Kirkland & Ellis LLP, has a long history of representing top government officials. A former associate counsel to the president under President Bill Clinton, he has represented and advised a range of cabinet secretaries and other political figures, including former White House Chief of Staff Rahm Emanuel.

A graduate of Duke University and Northwestern’s law school, Mr. Eggleston was a law clerk for then U.S. Supreme Court Chief Justice Warren Burger. He also served as deputy chief counsel on the House panel investigating the Iran-Contra Affair, and has represented a range of corporations facing congressional or regulatory scrutiny.

http://blogs.wsj.com/law/2014/04/21/eggleston-to-replace-ruemmler-as-next-white-house-counsel/

I wasn’t surprised by Ulsterman’s and the readers’ take on this, nor was I surprised by WaPo’s and WSJ’s blasé take on it; but the comments by the readers were not blasé.

The article from WaPo was written by Katie Zazima who was taken to task by this commenter. 

Nicely whitewashed, Katie. Is this the same W. Neil Eggleston who helped out on Whitewater and the Lewinsky mess? How about the fact that “he represented Rahm Emanuel during the scandal surrounding former Illinois Gov. Rod Blagojevich, as well as Sen. Kent Conrad (D-N.D.) and George W. Bush political director Sara Taylor when scandals touched them, Clinton Cabinet members Federico Pena and Alexis Herman during corruption probes, and various business people involved in “complex criminal investigations” according to the New York Times”? perhttp://www.whitehousedossier.com/2014/04/22/obama-…

Another:

After the November elections Obama may need a good lawyer.

In the WSJ:

This means Obama is looking for many charges to be brought against him. He has used all of Kathryn Ruemmler’s talents and now needs someone with much more expertise and a “NEW plan of attack”.

 

HEADS UP!!! Obama Hires Top Criminal Defense Attorney

by  on April 23, 2014

 

bo
As the president flies off on a trip to Asia, and taking much of the media attention with him, the Obama White House quietly put in place one of the top defense attorneys in the country to be Barack Obama’s new White House Counsel. And if you (rightfully) think that is a rather interesting situation, read on, as there appears to be even more to this story…

lawyer

While the Mainstream Media has barely noted Mr. Eggleston’s newly elevated position inside of the Obama White House, what little coverage there has been largely ignores the fact that Neil Eggleston has made his living, and his name, from defending those involved in serious political scandal.

I’ll repeat that for emphasis – Neil Eggleston defends those involved in serious political scandal, and now he has been made Barack Obama’s White House Counsel.

Eggleston was part of the Clinton administration defense during the Whitewater scandal, as well as two subsequent executive privilege battles.  He also worked with the Bush administration in 2007 during yet another executive privilege dispute.

And perhaps more important to the direct link to Barack Obama himself, Neil Eggleston was the one who provided current Chicago Mayor, and former Obama White House Chief of Staff, Rahm Emanuel, legal defense during the infamous Rod Blagojevich trial that included a myriad of pay to play allegations that eventually resulted in the former Illinois governor being sent to jail, while Rahm Emanuel emerged relatively unscathed.

Eggleston’s current placement in the Obama White House is a clear signal by the administration that it is preparing for battle should Republicans win back the Senate following the November 2014 Elections, and for the first time, face the prospect of REAL congressional investigations into administration wrongdoing.  Neil Eggleston is not a political legal wonk.  He is, first and foremost, a man who is called to protect politicians and/or administrations who find themselves in serious legal difficulties.

Time to get your popcorn ready reader…

 

Soooo…..This is probably Obama’s state-of-mind going forward.

 bo running

WHY DOES THIS KEEP HAPPENING?

15 comments

Posted on 24th April 2014 by AWD in Economy

It’s simply amazing how short people’s memories are. Practically nobody remembers the 2007/2008 crash. LIBOR froze up, intra-bank lending stopped. The whole financial system almost completely froze up. Somehow, a complete collapse was avoided, by the Fed pumping trillions into the banks and financial system. It was pretty scary, if you knew what was going on. Most people had no idea.

And now things are heading in exactly the same direction, only it’ll be much worse this time. The Federal Reserve didn’t see the housing bubble, didn’t see the collapse coming, and was saying “everything is okay” right up until things collapsed. The Fed had no idea, they were clueless, much like they are today. They keep blowing asset bubbles, ensuring another collapse. Take a look at this Michael Snyder article, the king of doom and gloom, and maybe you’ll be able to see what’s coming.

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Exactly Like 7 Years Ago? 2014 Is Turning Out To Be Eerily Similar To 2007

By Michael Snyder, on April 23rd, 2014

The similarities between 2007 and 2014 continue to pile up. As you are about to see, U.S. home sales fell dramatically throughout 2007 even as the mainstream media, our politicians and Federal Reserve Chairman Ben Bernanke promised us that everything was going to be just fine and that we definitely were not going to experience a recession. Of course we remember precisely what followed. It was the worst economic crisis since the days of the Great Depression. And you know what they say – if we do not learn from history we are doomed to repeat it. Just like seven years ago, the stock market has soared to all-time high after all-time high. Just like seven years ago, the authorities are telling us that there is nothing to worry about. Unfortunately, just like seven years ago, a housing bubble is imploding and another great economic crisis is rapidly approaching.

Posted below is a chart of existing home sales in the United States during 2007. As you can see, existing home sales declined precipitously throughout the year…

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Now look at this chart which shows what has happened to existing home sales in the United States in recent months. If you compare the two charts, you will see that the numbers are eerily similar…

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New home sales are also following a similar pattern. In fact, we just learned that new home sales have collapsed to an 8 month low…

Sales of new single-family homes dropped sharply last month as severe winter weather and higher mortgage rates continued to slow the housing recovery.

New home sales fell 14.5% to a seasonally adjusted annual rate of 385,000, down from February’s revised pace of 449,000, the Census Bureau said.

Once again, this is so similar to what we witnessed back in 2007. The following is a chart that shows how new home sales declined dramatically throughout that year…

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And this chart shows what has happened to new homes sales during the past several months. Sadly, we have never even gotten close to returning to the level that we were at back in 2007. But even the modest “recovery” that we have experienced is now quickly unraveling…

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If history does repeat, then what we are witnessing right now is a very troubling sign for the months to come. As you can see from this chart, new home sales usually start going down before a recession begins.

And don’t expect these housing numbers to rebound any time soon. The demand for mortgages has dropped through the floor. Just check out the following excerpt from a recent article by Michael Lombardi…

One of the key indicators I follow in respect to the state of the housing market is mortgage originations. This data gives me an idea about demand for homes, as rising demand for mortgages means more people are buying homes. And as demand increases, prices should be increasing.

But the opposite is happening…

In the first quarter of 2014, mortgage originations at Citigroup Inc. (NYSE/C) declined 71% from the same period a year ago. The bank issued $5.2 billion in mortgages in the first quarter of 2014, compared to $8.3 billion in the previous quarter and $18.0 billion in the first quarter of 2013. (Source: Citigroup Inc. web site, last accessed April 14, 2014.)

Total mortgage origination volume at JPMorgan Chase & Co. (NYSE/JPM) declined by 68% in the first quarter of 2014 from the same period a year ago. At JPMorgan, in the first quarter of 2014, $17.0 billion worth of mortgages were issued, compared to $52.7 billion in the same period a year ago. (Source: JPMorgan Chase & Co. web site, last accessed April 14, 2014.)

It is almost as if we are watching a replay of 2007 all over again, and yet nobody is talking about this.

Everyone wants to believe that this time will be different.

The human capacity for self-delusion is absolutely amazing.

There are a lot of other similarities between 2007 and today as well.

Just the other day, I noted that retail stores are closing in the United States at the fastest pace that we have seen since the collapse of Lehman Brothers.

Back in 2007, we saw margin debt on Wall Street spike dramatically and help fuel a remarkable run in the stock market. Just check out the chart:

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But that spike in margin debt also made the eventual stock market collapse much worse than it had to be.

And just like 2007, consumer credit is totally out of control. As I noted in one recent article, during the fourth quarter of 2013 we witnessed the biggest increase in consumer debt in the U.S. that we have seen since 2007. Total consumer credit in the U.S. has risen by 22 percent over the past three years, and 56 percent of all Americans have “subprime credit” at this point.

Are you starting to get the picture? It is only 7 years later, and the same things that happened just prior to the last great financial crisis are happening again. Only this time we are in much worse shape to handle an economic meltdown. The following is a brief excerpt from my recent article entitled “We Are In FAR Worse Shape Than We Were Just Prior To The Last Great Financial Crisis”…

None of the problems that caused the last financial crisis have been fixed. In fact, they have all gotten worse. The total amount of debt in the world has grown by more than 40 percent since 2007, the too big to fail banks have gotten 37 percent larger, and the colossal derivatives bubble has spiraled so far out of control that the only thing left to do is to watch the spectacular crash landing that is inevitably coming.

For a long time, I have been convinced that this two year time period is going to represent a major “turning point” for America.

Right now, 2014 is turning out to be eerily similar to 2007.

Will 2015 turn out to be a repeat of 2008?

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SEDITION

10 comments

Posted on 24th April 2014 by AWD in Economy

Some incredibly damning evidence presented in this article. Obama and his minions gave half a BILLION dollar worth of arms to an enemy of the United States (al Qaeda). If this isn’t treason, I don’t know what is.

Thanks to the Daily Mail, a British news source. I doubt we’ll here anything about this on the bought off USSA MSM.

1. Treason , sedition mean disloyalty or treachery to one’s country or its government. Treason is any attempt to overthrow the government or impair the well-being of a state to which one owes allegiance; the crime of giving aid or comfort to the enemies of one’s government. Sedition is any act, writing, speech, etc., directed unlawfully against state authority, the government, or constitution, or calculated to bring it into contempt or to incite others to hostility, ill will or disaffection; it does not amount to treason and therefore is not a capital offense.

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Benghazi attack could have been prevented if US hadn’t ‘switched sides in the War on Terror’ and allowed $500 MILLION of weapons to reach al-Qaeda militants, reveals damning report

-Citizens Committee on Benghazi claims the US government allowed arms to flow to al-Qaeda-linked militants who opposed Muammar Gaddafi
-Their rise to power, the group says, led to the Benghazi attack in 2012
-The group claims the strongman Gaddafi offered to abdicate his presidency, but the US refused to broker his peaceful exit
-The commission, part of the center-right Accuracy In Media group, concluded that the Benghazi attack was a failed kidnapping plot
-US Ambassador Chris Stevens was to be captured and traded for ‘blind sheikh’ Omar Abdel-Rahman, who hatched the 1993 WTC bombing plot

By David Martosko, U.s. Political Editor 22 April 2014

The Citizens Commission on Benghazi, a self-selected group of former top military officers, CIA insiders and think-tankers, declared Tuesday in Washington that a seven-month review of the deadly 2012 terrorist attack has determined that it could have been prevented – if the U.S. hadn’t been helping to arm al-Qaeda militias throughout Libya a year earlier.

The United States switched sides in the war on terror with what we did in Libya, knowingly facilitating the provision of weapons to known al-Qaeda militias and figures,’ Clare Lopez, a member of the commission and a former CIA officer, told MailOnline.

She blamed the Obama administration for failing to stop half of a $1 billion United Arab Emirates arms shipment from reaching al-Qaeda-linked militants.

‘Remember, these weapons that came into Benghazi were permitted to enter by our armed forces who were blockading the approaches from air and sea,’ Lopez claimed. ‘They were permitted to come in. … [They] knew these weapons were coming in, and that was allowed..

‘The intelligence community was part of that, the Department of State was part of that, and certainly that means that the top leadership of the United States, our national security leadership, and potentially Congress – if they were briefed on this – also knew about this.’

The weapons were intended for Gaddafi but allowed by the U.S. to flow to his Islamist opposition.

‘The White House and senior Congressional members,’ the group wrote in an interim report released Tuesday, ‘deliberately and knowingly pursued a policy that provided material support to terrorist organizations in order to topple a ruler [Muammar Gaddafi] who had been working closely with the West actively to suppress al-Qaeda.’

Some look at it as treason,’ said Wayne Simmons, a former CIA officer who participated in the commission’s research.

Retired Rear Admiral Chuck Kubic, another commission member, told reporters Tuesday that those weapons are now ‘all in Syria.’

‘Gaddafi wasn’t a good guy, but he was being marginalized,’ Kubic recalled. ‘Gaddafi actually offered to abdicate’ shortly after the beginning of a 2011 rebellion.

‘But the U.S. ignored his calls for a truce,’ the commission wrote, ultimately backing the horse that would later help kill a U.S. ambassador.

Kubic said that the effort at truce talks fell apart when the White House declined to let the Pentagon pursue it seriously.

‘We had a leader who had won the Nobel Peace Prize,’ Kubic said, ‘but who was unwilling to give peace a chance for 72 hours.’

In March 2011, Kubic said, U.S. Army Africa Commander General Carter told NBC News that the U.S. military was not actively targeting Muammar Gaddafi. That, Kubic revealed, was a signal to the Libyan dictator that there was a chance for a deal.

Read more: http://www.dailymail.co.uk/news/article-2610598/Group-US-switched-sides-War-Terror-facilitating-500-MILLION-weapons-deliveries-Libyan-al-Qaeda-militias-leading-Benghazi-attack.html#ixzz2zksBllu8

Eight Energy Myths Explained

8 comments

Posted on 23rd April 2014 by Administrator in Economy |Politics |Social Issues

Submitted by Gail Tverberg of Our Finite World blog,

Republicans, Democrats, and environmentalists all have favorite energy myths. Even Peak Oil believers have favorite energy myths. The following are a few common mis-beliefs,  coming from a variety of energy perspectives. I will start with a recent myth, and then discuss some longer-standing ones.

Myth 1. The fact that oil producers are talking about wanting to export crude oil means that the US has more than enough crude oil for its own needs.

The real story is that producers want to sell their crude oil at as high a price as possible. If they have a choice of refineries A, B, and C in this country to sell their crude oil to, the maximum amount they can receive for their oil is limited by the price the price these refineries are paying, less the cost of shipping the oil to these refineries.

If it suddenly becomes possible to sell crude oil to refineries elsewhere, the possibility arises that a higher price will be available in another country. Refineries are optimized for a particular type of crude. If, for example, refineries in Europe are short of light, sweet crude because such oil from Libya is mostly still unavailable, a European refinery might be willing to pay a higher price for crude oil from the Bakken (which also produces light sweet, crude) than a refinery in this country. Even with shipping costs, an oil producer might be able to make a bigger profit on its oil sold outside of the US than sold within the US.

The US consumed 18.9 million barrels a day of petroleum products during 2013. In order to meet its oil needs, the US imported 6.2 million barrels of oil a day in 2013 (netting exported oil products against imported crude oil). Thus, the US is, and will likely continue to be, a major oil crude oil importer.

If production and consumption remain at a constant level, adding crude oil exports would require adding crude oil imports as well. These crude oil imports might be of a different kind of oil than that that is exported–quite possibly sour, heavy crude instead of sweet, light crude. Or perhaps US refineries specializing in light, sweet crude will be forced to raise their purchase prices, to match world crude oil prices for that type of product.

The reason exports of crude oil make sense from an oil producer’s point of view is that they stand to make more money by exporting their crude to overseas refineries that will pay more. How this will work out in the end is unclear. If US refiners of light, sweet crude are forced to raise the prices they pay for oil, and the selling price of US oil products doesn’t rise to compensate, then more US refiners of light, sweet crude will go out of business, fixing a likely world oversupply of such refiners. Or perhaps prices of US finished products will rise, reflecting the fact that the US has to some extent in the past received a bargain (related to the gap between European Brent and US WTI oil prices), relative to world prices. In this case US consumers will end up paying more.

The one thing that is very clear is that the desire to ship crude oil abroad does not reflect too much total crude oil being produced in the United States. At most, what it means is an overabundance of refineries, worldwide, adapted to light, sweet crude. This happens because over the years, the world’s oil mix has been generally changing to heavier, sourer types of oil. Perhaps if there is more oil from shale formations, the mix will start to change back again. This is a very big “if,” however. The media tend to overplay the possibilities of such extraction as well.

Myth 2. The economy doesn’t really need very much energy.

 

We humans need food of the right type, to provide us with the energy we need to carry out our activities. The economy is very similar: it needs energy of the right types to carry out its activities.

One essential activity of the economy is growing and processing food. In developing countries in warm parts of the world, food production, storage, transport, and preparation accounts for the vast majority of economic activity (Pimental and Pimental, 2007). In traditional societies, much of the energy comes from human and animal labor and burning biomass.

If a developing country substitutes modern fuels for traditional energy sources in food production and preparation, the whole nature of the economy changes. We can see this starting to happen on a world-wide basis in the early 1800s, as energy other than biomass use ramped up.

Figure 1. World Energy Consumption by Source, Based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects and together with BP Statistical Data on 1965 and subsequent

Figure 1. World Energy Consumption by Source, Based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects and together with BP Statistical Data on 1965 and subsequent

The Industrial Revolution began in the late 1700s in Britain. It was enabled by coal usage, which made it possible to make metals, glass, and cement in much greater quantities than in the past. Without coal, deforestation had become a problem, especially near cold urban areas, such as London. With coal, it became possible to use industrial processes that required heat without the problem of deforestation. Processes using high levels of heat also became cheaper, because it was no longer necessary to cut down trees, make charcoal from the wood, and transport the charcoal long distances (because near-by wood had already been depleted).

The availability of coal allowed the use of new technology to be ramped up. For example, according to Wikipedia, the first steam engine was patented in 1608, and the first commercial steam engine was patented in 1712. In 1781, James Watt invented an improved version of the steam engine. But to actually implement the steam engine widely using metal trains running on metal tracks, coal was needed to make relatively inexpensive metal in quantity.

Concrete and metal could be used to make modern hydroelectric power plants, allowing electricity to be made in quantity. Devices such as light bulbs (using glass and metal) could be made in quantity, as well as wires used for transmitting electricity, allowing a longer work-day.

The use of coal also led to agriculture changes as well, cutting back on the need for farmers and ranchers. New devices such as steel plows and reapers and hay rakes were manufactured, which could be pulled by horses, transferring work from humans to animals. Barbed-wire fence allowed the western part of the US to become cropland, instead one large unfenced range. With fewer people needed in agriculture, more people became available to work in cities in factories.

Our economy is now very different from what it was back about 1820, because of increased energy use. We have large cities, with food and raw materials transported from a distance to population centers. Water and sewer treatments greatly reduce the risk of disease transmission of people living in such close proximity. Vehicles powered by oil or electricity eliminate the mess of animal-powered transport. Many more roads can be paved.

If we were to try to leave today’s high-energy system and go back to a system that uses biofuels (or only biofuels plus some additional devices that can be made with biofuels), it would require huge changes.

Myth 3. We can easily transition to renewables.

On Figure 1, above, the only renewables are hydroelectric and biofuels. While energy supply has risen rapidly, population has risen rapidly as well.

Figure 2. World Population, based on Angus Maddison estimates, interpolated where necessary.

Figure 2. World Population, based on Angus Maddison estimates, interpolated where necessary.

When we look at energy use on a per capita basis, the result is as shown in Figure 3, below.

Figure 3. Per capita world energy consumption, calculated by dividing world energy consumption (based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects together with BP Statistical Data for 1965 and subsequent) by population estimates, based on Angus Maddison data.

Figure 3. Per capita world energy consumption, calculated by dividing world energy consumption (based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects together with BP Statistical Data for 1965 and subsequent) by population estimates, based on Angus Maddison data.

The energy consumption level in 1820 would be at a basic level–only enough to grow and process food, heat homes, make clothing, and provide for some very basic industries. Based on Figure 3, even this required a little over 20 gigajoules of energy per capita. If we add together per capita biofuels and hydroelectric on Figure 3, they would come out to only about 11 gigajoules of energy per capita. To get to the 1820  level of per capita energy consumption, we would either need to add something else, such as coal, or wait a very, very long time until (perhaps) renewables including hydroelectric could be ramped up enough.

If we want to talk about renewables that can be made without fossil fuels, the amount would be smaller yet. As noted previously, modern hydroelectric power is enabled by coal, so we would need to exclude this. We would also need to exclude modern biofuels, such as ethanol made from corn and biodiesel made from rape seed, because they are greatly enabled by today’s farming and transportation equipment and indirectly by our ability to make metal in quantity.

I have included wind and solar in the “Biofuels” category for convenience. They are so small in quantity that they wouldn’t be visible as a separate categories, wind amounting to only 1.0% of world energy supply in 2012, and solar amounting to 0.2%, according to BP data. We would need to exclude them as well, because they too require fossil fuels to be produced and transported.

In total, the biofuels category without all of these modern additions might be close to the amount available in 1820. Population now is roughly seven times as large, suggesting only one-seventh as much energy per capita. Of course, in 1820 the amount of wood used led  to significant deforestation, so even this level of biofuel use was not ideal. And there would be the additional detail of transporting wood to markets. Back in 1820, we had horses for transport, but we would not have enough horses for this purpose today.

Myth 4. Population isn’t related to energy availability.

If we compare Figures 2 and 3, we see that the surge in population that took place immediately after World War II coincided with the period that per-capita energy use was ramping up rapidly. The increased affluence of the 1950s (fueled by low oil prices and increased ability to buy goods using oil) allowed parents to have more children. Better sanitation and innovations such as antibiotics (made possible by fossil fuels) also allowed more of these children to live to maturity.

Furthermore, the Green Revolution which took place during this time period is credited with saving over a billion people from starvation. It ramped up the use of irrigation, synthetic fertilizers and pesticides, hybrid seed, and the development of high yield grains. All of these techniques were enabled by availability of oil. Greater use of agricultural equipment, allowing seeds to be sowed closer together, also helped raise production. By this time, electricity reached farming communities, allowing use of equipment such as milking machines.

If we take a longer view of the situation, we find that a “bend” in the world population occurred about the time of Industrial Revolution, and the ramp up of coal use (Figure 4). Increased farming equipment made with metals increased food output, allowing greater world population.

Figure 4. World population based on data from "Atlas of World History," McEvedy and Jones, Penguin Reference Books, 1978  and Wikipedia-World Population.

Figure 4. World population based on data from “Atlas of World History,” McEvedy and Jones, Penguin Reference Books, 1978
and Wikipedia-World Population.

Furthermore, when we look at countries that have seen large drops in energy consumption, we tend to see population declines. For example, following the collapse of the Soviet Union, there were drops in energy consumption in a number of countries whose energy was affected (Figure 5).

Figure 6. Population as percent of 1985 population, for selected countries, based on EIA data.

Figure 6. Population as percent of 1985 population, for selected countries, based on EIA data.

Myth 5. It is easy to substitute one type of energy for another.

Any changeover from one type of energy to another is likely to be slow and expensive, if it can be accomplished at all.

One major issue is the fact that different types of energy have very different uses. When oil production was ramped up, during and following World War II, it added new capabilities, compared to coal. With only coal (and hydroelectric, enabled by coal), we could have battery-powered cars, with limited range. Or ethanol-powered cars, but ethanol required a huge amount of land to grow the necessary crops. We could have trains, but these didn’t go from door to door. With the availability of oil, we were able to have personal transportation vehicles that went from door to door, and trucks that delivered goods from where they were produced to the consumer, or to any other desired location.

We were also able to build airplanes. With airplanes, we were able to win World War II. Airplanes also made international business feasible on much greater scale, because it became possible for managers to visit operations abroad in a relatively short time-frame, and because it was possible to bring workers from one country to another for training, if needed. Without air transport, it is doubtful that the current number of internationally integrated businesses could be maintained.

The passage of time does not change the inherent differences between different types of fuels. Oil is still the fuel of preference for long-distance travel, because (a) it is energy dense so it fits in a relatively small tank, (b) it is a liquid, so it is easy to dispense at refueling stations, and (c) we are now set up for liquid fuel use, with a huge number of cars and trucks on the road which use oil and refueling stations to serve these vehicles. Also, oil works much better than electricity for air transport.

Changing to electricity for transportation is likely to be a slow and expensive process. One important point is that the cost of electric vehicles needs to be brought down to where they are affordable for buyers, if we do not want the changeover to have a hugely adverse effect on the economy. This is the case because salaries are not going to rise to pay for high-priced cars, and the government cannot afford large subsidies for everyone. Another issue is that the range of electric vehicles needs to be increased, if vehicle owners are to be able to continue to use their vehicles for long-distance driving.

No matter what type of changeover is made, the changeover needs to implemented slowly, over a period of 25 years or more, so that buyers do not lose the trade in value of their oil-powered vehicles. If the changeover is done too quickly, citizens will lose their trade in value of their oil-powered cars, and because of this, will not be able to afford the new vehicles.

If a changeover to electric transportation vehicles is to be made, many vehicles other than cars will need to be made electric, as well. These would include long haul trucks, busses, airplanes, construction equipment, and agricultural equipment, all of which would need to be made electric. Costs would need to be brought down, and necessary refueling equipment would need to be installed, further adding to the slowness of the changeover process.

Another issue is that even apart from energy uses, oil is used in many applications as a raw material. For example, it is used in making herbicides and pesticides, asphalt roads and asphalt shingles for roofs, medicines, cosmetics, building materials, dyes, and flavoring. There is no possibility that electricity could be adapted to these uses. Coal could perhaps be adapted for these uses, because it is also a fossil fuel.

Myth 6. Oil will “run out” because it is limited in supply and non-renewable.

This myth is actually closer to the truth than the other myths. The situation is a little different from “running out,” however. The real situation is that oil limits are likely to disrupt the economy in various ways. This economic disruption is likely to be what leads to an  abrupt drop in oil supply. One likely possibility is that a lack of debt availability and low wages will keep oil prices from rising to the level that oil producers need for extraction. Under this scenario, oil producers will see little point in investing in new production. There is evidence that this scenario is already starting to happen.

There is another version of this myth that is even more incorrect. According to this myth, the situation with oil supply (and other types of fossil fuel supply) is as follows:

Myth 7. Oil supply (and the supply of other fossil fuels) will start depleting when the supply is 50% exhausted. We can therefore expect a long, slow decline in fossil fuel use.

This myth is a favorite of peak oil believers. Indirectly, similar beliefs underly climate change models as well. It is based on what I believe is an incorrect reading of the writings of M. King Hubbert. Hubbert is a geologist and physicist who foretold a decline of US oil production, and eventually world production, in various documents, including Nuclear Energy and the Fossil Fuels, published in 1956. Hubbert observed that under certain circumstances, the production of various fossil fuels tends to follow a rather symmetric curve.

Figure 7. M. King Hubbert's 1956 image of expected world crude oil production, assuming ultimate recoverable oil of 1,250 billion barrels.

Figure 7. M. King Hubbert’s 1956 image of expected world crude oil production, assuming ultimate recoverable oil of 1,250 billion barrels.

A major reason that this type of forecast is wrong is because it is based on a scenario in which some other type of energy supply was able to be ramped up, before oil supply started to decline.

Figure 8. Figure from Hubbert's 1956 paper, Nuclear Energy and the Fossil Fuels.

Figure 8. Figure from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels.

With this ramp up in energy supply, the economy can continue as in the past without a major financial problem arising relating to the reduced oil supply. Without a ramp up in energy supply of some other type, there would be a problem with too high a population in relationship to the declining energy supply. Per-capita energy supply would drop rapidly, making it increasingly difficult to produce enough goods and services. In particular, maintaining government services is likely to become a problem. Needed taxes are likely to rise too high relative to what citizens can afford, leading to major problems, even collapse, based on the research of Turchin and Nefedov (2009).

Myth 8. Renewable energy is available in essentially unlimited supply.

The issue with all types of energy supply, from fossil fuels, to nuclear (based on uranium), to geothermal, to hydroelectric, to wind and solar, is diminishing returns. At some point, the cost of producing energy becomes less efficient, and because of this, the cost of production begins to rise. It is the fact wages do not rise to compensate for these higher costs and that cheaper substitutes do not become available that causes financial problems for the economic system.

In the case of oil, rising cost of extraction comes because the cheap-to-extract oil is extracted first, leaving only the expensive-to-extract oil. This is the problem we recently have been experiencing. Similar problems arise with natural gas and coal, but the sharp upturn in costs may come later because they are available in somewhat greater supply relative to demand.

Uranium and other metals experience the same problem with diminishing returns, as the cheapest to extract portions of these minerals is extracted first, and we must eventually move on to lower-grade ores.

Part of the problem with so-called renewables is that they are made of minerals, and these minerals are subject to the same depletion issues as other minerals. This may not be a problem if the minerals are very abundant, such as iron or aluminum. But if minerals are lesser supply, such as rare earth minerals and lithium, depletion may lead to rising costs of extraction, and ultimately higher costs of devices using the minerals.

Another issue is choice of sites. When hydroelectric plants are installed, the best locations tend to be chosen first. Gradually, less desirable locations are added. The same holds for wind turbines. Offshore wind turbines tend to be more expensive than onshore turbines. If abundant onshore locations, close to population centers, had been available for recent European construction, it seems likely that these would have been used instead of offshore turbines.

When it comes to wood, overuse and deforestation has been a constant problem throughout the ages. As population rises, and other energy resources become less available, the situation is likely to become even worse.

Finally, renewables, even if they use less oil, still tend to be dependent on oil. Oil is  important for operating mining equipment and for transporting devices from the location where they are made to the location where they are to be put in service. Helicopters (requiring oil) are used in maintenance of wind turbines, especially off shore, and in maintenance of electric transmission lines. Even if repairs can be made with trucks, operation of these trucks still generally requires oil. Maintenance of roads also requires oil. Even transporting wood to market requires oil.

If there is a true shortage of oil, there will be a huge drop-off in the production of renewables, and maintenance of existing renewables will become more difficult. Solar panels that are used apart from the electric grid may be long-lasting, but batteries, inverters, long distance electric transmission lines, and many other things we now take for granted are likely to disappear.

Thus, renewables are not available in unlimited supply. If oil supply is severely constrained, we may even discover that many existing renewables are not even last very long lasting.

ALL YOU ZOMBIES

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Posted on 23rd April 2014 by Administrator in Economy |Politics |Social Issues

All you zombies hide your faces
All you people in the street
All you sittin’ in high places
The pieces gonna fall on you

Outside the Box: Hoisington Investment Management Quarterly Review and Outlook, First Quarter 2014

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Posted on 23rd April 2014 by Administrator in Economy |Politics |Social Issues

Outside the Box: Hoisington Investment Management Quarterly Review and Outlook, First Quarter 2014

By John Mauldin

 

In today’s Outside the Box, Lacy Hunt and Van Hoisington of Hoisington Investment have the temerity to point out that since the Great Recession officially ended in 2009, the Federal Open Market Committee (FOMC) has been consistently overoptimistic in its projections of US growth. They simply expected QE to be more stimulative than it has been, to the tune of about 6% over the past four years – a total of about $1 trillion that never materialized.

Given that dismal track record, our authors ask why we should believe the Fed’s prediction of 2.9% real GDP growth for 2014 and 3.4% for 2015 – particularly with QE being tapered into nonexistence.

A big part of the reason the Fed has been so steadily wrong, say Lacy and Van, is its overreliance on the so-called “wealth effect,” which posits that an increase in consumer wealth – through higher stock prices or home values, for instance – will lead to increased consumer spending.

The wealth effect has been both a justification for quantitative easing and a root cause of consistent overly optimistic growth expectations by the FOMC. The research cited below suggests that the concept of a wealth effect is in fact deeply flawed. It is unfortunate that the FOMC has relied on this flawed concept to experiment with over $3 trillion in asset purchases and continues to use it as the basis for what we believe are overly optimistic growth expectations.

The effect isn’t completely absent, say the authors, but their research suggests that it may five to ten times weaker than the Fed assumes. Go figure.

Hoisington Investment Management Company (www.Hoisingtonmgt.com) is a registered investment advisor specializing in fixed-income portfolios for large institutional clients. Located in Austin, Texas, the firm has over $5 billion under management and is the sub-adviser of the Wasatch-Hoisington US Treasury Fund (WHOSX).

It is been a busy day for me here in Dallas. Besides nonstop meetings and conversations and my usual reading, I had the privilege of going to the Dallas branch of the Federal Reserve and watching President Richard Fisher make loans to a group of budding entrepreneurs to build lemonade stands. It is part of a fabulous organization called Lemonade Day. The basic concept is to enable young children to learn about entrepreneurship and capitalism by helping them launch a lemonade stand. Youth who register are taught 14 lessons from their entrepreneurial workbook, with either a parent, teacher, youth organization leader, or other adult mentor supervising. At the conclusions of the lessons, they are prepared to open their first business… a lemonade stand. Local businesses and banks volunteer to empower these kids by making them a $50 loan and helping them set up their business. By the time they come to talk with the “banker,” they have a business plan and a set of goals as to what they will do with them profits they make. Watching these kids respond to adults asking them about their plans brings joy to your heart.

On May 4, in some 35 cities across the country, 200,000 young people will be building lemonade stands and trying to turn a profit. If you drive by a lemonade stand, stop and support America’s future entrepreneurs. If you are in one of those 35 cities (click here to find out), make a point to find a few lemonade stands and support America’s future. And if you don’t have a lemonade stand in your city, consider following in the footsteps of local heroes (and my good friends) Reid Walker and Robert Alpert, who decided to launch Lemonade Day here in Dallas. This should be a spring ritual in every city in the country.

Buoyed by the kids and their enthusiasm, I then went to dinner with Richard Fisher and Woody Brock and a few other associates of Ray Hunt, who hosted us for a fabulous and thought-provoking session, talking economics, geopolitics, and even a little politics. There was an interesting mix of pessimism and optimism in the room about the future of our country, but there was not a person who was not concerned with the direction in which we are headed. Gerald Turner, the president of SMU, talked to us about how fiscally conservative and socially liberal his students are. That kind of mirrors my own children. The world is changing faster, both technologically and demographically, than many of us in the Boomer generation are comfortable with. But we’d better get used to it.

It’s been a tumultuous last few days, and tomorrow morning I have to leave early for San Francisco to do a video shoot with my partners at Altegris, before going right back to the airport and flying home to speak to a local group of investment advisers and brokers brought together by Peak Capital Management. It is late and time to hit the send button, because the alarm clock will go off early. Have a great week

Your wondering where all the time goes analyst,

John Mauldin, Editor
Outside the Box
subscribers@mauldineconomics.com

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Hoisington Investment Management – Quarterly Review and Outlook, First Quarter 2014

Optimism at the FOMC

The Federal Open Market Committee (FOMC) has continuously been overly optimistic regarding its expectations for economic growth in the United States since the last recession ended in 2009. If their annual forecasts had been realized over the past four years, then at the end of 2013 the U.S. economy should have been approximately $1 trillion, or 6%, larger. The preponderance of research suggests that the FOMC has been incorrect in its presumption of the effectiveness of quantitative easing (QE) on boosting economic growth. This faulty track record calls into question their latest prediction of 2.9% real GDP growth for 2014 and 3.4% for 2015.

A major reason for the FOMC’s overly optimistic forecast for economic growth and its incorrect view of the effectiveness of quantitative easing is the reliance on the so-called “wealth effect”, described as a change in consumer wealth which results in a change in consumer spending. In an opinion column for The Washington Post on November 5, 2010, then FOMC chairman Ben Bernanke wrote, “…higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.” Former FOMC chairman Alan Greenspan in a CNBC interview on Feb. 15, 2013 said, “The stock market is the key player in the game of economic growth.” This year, in the January 20 issue of Time Magazine, the current FOMC chair, Janet Yellen said, “And part of the [economic stimulus] comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.”

FOMC leaders may feel justified in taking such a position based upon the FRB/US, a large- scale econometric model. In part of this model, employed by the FOMC in their decision making, household consumption behavior is expressed as a function of total wealth as well as other variables. The model predicts that an increase in wealth of one dollar will boost consumer spending by five to ten cents (see page 8-9 “Housing Wealth and Consumption” by Matteo Iacoviello, International Finance Discussion Papers, #1027, Board of Governors of the Federal Reserve System, August 2011). Even at the lower end of their model’s range this wealth effect, if it were valid, would be a powerful factor in spurring economic growth.

After examining much of the latest scholarly research, and conducting in house research on the link between household wealth and spending, we found the wealth effect to be much weaker than the FOMC presumes. In fact, it is difficult to document any consistent impact with most of the research pointing to a spending increase of only one cent per one dollar rise in wealth at best. Some studies even indicate that the wealth effect is only an interesting theory and cannot be observed in practice.

The wealth effect has been both a justification for quantitative easing and a root cause of consistent overly optimistic growth expectations by the FOMC. The research cited below suggests that the concept of a wealth effect is in fact deeply flawed. It is unfortunate that the FOMC has relied on this flawed concept to experiment with over $3 trillion in asset purchases and continues to use it as the basis for what we believe are overly optimistic growth expectations.

Consumer Wealth and Consumer Spending

Many episodes of rising and falling financial and housing asset wealth have occurred throughout history. The question is whether these periods of wealth changes are associated in a consistent and reliable way with changes in consumer spending. We examined, separately, percent changes in real consumption expenditures per capita against percent changes in the real S&P 500 index (financial wealth) and against percent changes in Robert Shiller’s real home price index (housing wealth). If economic relationships are valid they should work for all time periods, regardless of highly different idiosyncratic conditions, as opposed to an isolated subset of historical experience. As such, we conducted our analysis from 1930 through 2013, the entire time period for which all variables were available.

Financial Wealth. Chart 1 is a scatter diagram of current percent changes in both real per capita personal consumption expenditures (PCE), the preferred measure of spending, and the real S&P 500 stock price index. It is made up of 84 dots, which constitutes a robust sample. Over our sample period, as with most extremely long periods, time will tend to link economic variables to each other; population is a key factor that can cause such an association. By expressing consumption in per capita terms, trending has been reduced, and in turn, an artificially overstated degree of correlation has been avoided.

If financial wealth drives consumer spending, an unambiguous positively sloped line should be evident on this scatter diagram. Larger gains in the S&P 500 would be associated with faster increases in spending; conversely, declines in the S&P 500 would be tied to lower spending. If there was a strong positive correlation, the large gains in stock prices would be associated with strong gains in spending, and they would fall in the upper right quadrant of the graph. In addition, sizeable declines in the S&P would be associated with large decreases in consumer spending, and the dots would fall in the lower left quadrant, resulting in an upward sloping line. For the relationship to be stable and dependable the dots should be packed in an around the trend line. This is clearly not the case. The trend line through the dots is positive, but the observations in the upper left quadrant of the graph and those in the lower right exhibit a negative rather than positive correlation. Furthermore, the dots are not clustered close to the trend line. The goodness of fit (coefficient of determination) of 0.27 is statistically significant; however, the slope of the line is minimally positive. This suggests that an approximate one dollar increase in wealth will boost real per capita PCE by less than one cent, far less than even the lower band of the effect in the Fed’s model.

Theoretically, lagged changes are preferred because when current or coincidental changes in economic variables are correlated the coefficients may be biased due to some other factor not covered by the empirical estimation. Also, lags give households time to adjust to their change in wealth. As such, we correlated the current percent change in real per capita PCE against current changes as well as one- and two-year lagged changes (expressed as a three-year moving average) in the S&P 500. The lags did not improve the goodness of fit as the coefficient of determination fell to 0.21. An increased dollar of wealth, however, still resulted in a one cent increase in consumption. We then correlated current percent change in real per capita PCE with only lagged changes in the real S&P 500 for the two prior years (expressed as a two-year moving average), and the relationship completely fell apart as the goodness of fit fell to a statistically insignificant 0.06.

Housing Wealth. Chart 2 is a second scatter diagram, relating current percent changes in real home prices to current percent changes in real per capita PCE. Once again, the trend line does have a small positive slope, but there are so many observations in the upper left quadrant that the coefficient of determination does not meet robust tests for statistical significance. The dots are even more dispersed from the trend line than in the prior scatter diagram.

As with the analysis on financial wealth, when current changes in consumption were correlated against the lagged changes in home prices (both the three-year moving average and the two-year moving average), the goodness of fit deteriorated significantly and was not statistically significant in either case.

Correlations, or the lack thereof, indicated by these scatter diagrams do not prove causation. Nevertheless, economic theory offers an explanation for the poor correlation. If a person has an appreciated asset and wishes to increase spending, one option is to sell the asset, capture the gain and buy something else. However, the funds to make the new purchase comes from the buyer of the asset. Thus, when financial assets are sold, money balances increase for the seller but fall for the buyer. The person with an appreciated asset could choose to borrow against that asset. Since new debt is current spending in lieu of future spending, the debt option may only provide a temporary boost to economic activity. To avoid an accentuated business cycle, debt must generate an income stream to repay principal and interest. Otherwise any increase in debt to convert wealth gains into consumer spending may merely add to cyclical volatility without producing any lasting benefit.

Scholarly Research

Scholarly research has debated the impact of financial and housing wealth on consumer spending as well. The academic research on financial wealth is relatively consistent; it has very little impact on consumption. In “Financial Wealth Effect: Evidence from Threshold Estimation” (Applied Economic Letters, 2011), Sherif Khalifa, Ousmane Seck and Elwin Tobing found “a threshold income level of almost $130,000, below which the financial wealth effect is insignificant, and above which the effect is 0.004.” This means a one dollar rise in wealth would, in time, boost consumption by less than one-half of a penny. Similarly, in “Wealth Effects Revisited 1975- 2012,” Karl E. Case, John M. Quigley and Robert J. Shiller (Cowles Foundation Discussion Paper #1884, December 2012) write, “The numerical results vary somewhat with different econometric specifications, and so any numerical conclusion must be tentative. We find at best weak evidence of a link between stock market wealth and consumption.” This team looked at quarterly observations during the 17-year period from 1982 through 1999 and the 37-year period from 1975 through the spring quarter of 2012.

The research on housing wealth is more divided. In the same paper referenced above, Karl E. Case, John M. Quigley and Robert J. Shiller write, “In contrast, we do find strong evidence that variations in housing market wealth have important effects upon consumption.” These findings differ from the findings of various other economists. In “The (Mythical?) Housing Wealth Effect” (NBER Working Paper #15075, June 2009), Charles Calomiris, Stanley D. Longhofer and William Miles write, “Models used to guide policy, as well as some empirical studies, suggest that the effect of housing wealth on consumption is large and greater than the wealth effect on consumption from stock holdings. Recent theoretical work, in contrast, argues that changes in housing wealth are offset by changes in housing consumption, meaning that unexpected shocks in housing wealth should have little effect on non- housing consumption.”

Furthermore, R. Glenn Hubbard and Anthony Patrick O’Brien (Macroneconomics, Fourth edition, 2013, page 381) provide a highly cogent summary of the aforementioned research by Charles Calomiris, Stanley D. Longhofer and William Miles. They argue that consumers “own houses primarily so they can consume the housing services a home provides. Only consumers who intend to sell their current house and buy a smaller one – for example, ‘empty nesters’ whose children have left home – will benefit from an increase in housing prices. But taking the population as a whole, the number of empty nesters may be smaller than the number of first time home buyers plus the number of homeowners who want to buy larger houses. These two groups are hurt by rising home prices.”

Amir Sufi, Professor of Finance at the University of Chicago, also indicates that the effect of housing wealth is much smaller than assumed in the policy models and earlier empirical research. Dr. Sufi calculates that an increase of one dollar of housing wealth may yield as little as one cent of extra spending (“Will Housing Save the U.S. Economy?”, April 2013, Chicago Booth Economic Outlook event). This is in line with a 2013 study by Sherif Khalifa, Ousmane Seck and Elwin Tobing (“Housing Wealth Effect: Evidence from Threshold Estimation”, The Journal of Housing Economics). These economists found that a threshold income level of $74,046 had a wealth coefficient that rounded to one cent. Income levels between $74,046 and $501,000 had a two cent coefficient, and incomes above $501,000 had a statistically insignificant coefficient.

In total, the majority of the research is seemingly unequivocal in its conclusion. The wealth effect (financial and housing) is barely operative. As such, it is interesting to note its actual impact in 2013.

Where Was the Wealth Effect in 2013?

If the wealth effect was as powerful as the FOMC believes, consumer spending should have turned in a stellar performance last year. In 2013 equities and housing posted strong gains. On a yearly average basis, the real S&P 500 stock market index increase was 17.7%, and the real Case Shiller Home Price Index increase was 9.1%. The combined gain of these wealth proxies was 26.8%, the eighth largest in the 84 years of data. The real per capital PCE gain of just 1.2% ranked 58th of 84. The difference between the two was the fifth largest in the 84 cases. Such a huge discrepancy in relative performance in 2013, occurring as it did in the fourth year of an economic expansion, raises serious doubts about the efficacy of the wealth effect (Chart 3).

In econometrics, theoretical propositions must be empirically verifiable. Researchers using numerous statistical procedures examining various sample periods should be able to identify at least some consistent patterns. This is not the case with the wealth effect. Regardless if examining a simple scatter diagram or something far more sophisticated, the wealth effect is weak and inconsistent. The powerful wealth coefficients imbedded in the FRB/US model have not been supported by independent research. To quote Chris Low, Chief Economist of FTN (FTN Financial, Economic Weekly, March 21, 2014), “There may not be a wealth effect at all. If there is a wealth effect, it is very difficult to pin down …” Since the FOMC began quantitative easing in 2009, its balance sheet has increased more than $3 trillion. This increase may have boosted wealth, but the U.S. economy received no meaningful benefit. Furthermore, the FOMC has no idea what the ultimate outcome of such an increase will be or what a return to a ‘normal’ balance sheet might entail. Given all of this, we do not see any evidence for economic growth as robust at the FOMC predicts.

Without a wealth effect, the stock market is not the “key player” in the economy, and no “virtuous circle” runs through the stock market. We reiterate our view that nominal GDP will rise just 3% this year, down from 3.4% in 2013. M2 growth in the latest twelve months was 5.8%, but velocity should decline by at least 3% and limit nominal GDP to 3% or less.

The Flatter Yield Curve: An Opportunity for Treasury Bond Investors

The Fed has indicated that the federal funds rate could begin to rise in the next couple of years, and the Treasury market has moderately anticipated this event. Similar to the 2004-2005 federal funds rate cycle, long before the federal funds rate increased short Treasury rates began their ascent (Chart 4). Interestingly, once the federal funds rate did begin to rise in 2004, long Treasury rates fell over the next two years. From May of 2004 until Feb. 2006 the federal funds rate increased by 350 basis point (bps) and the five-year note increased by 80 bps, yet the 30-year bond fell by 84 bps as inflation expectations fell. If the Fed follows through with its forecast and short rates rise, the dampening effect on inflation expectations should again cause long rates to fall. On the other hand, should economic activity continue to moderate then the downward pressure on inflation will continue. The prospect for lower Treasury yields appears favorable.

Van R. Hoisington
Lacy H. Hunt, Ph.D.


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