Saturday, September 11, 2010

The Death of Keynesian Economics, and US Along With It?

from Sprott Asset Management:

Despite our firm’s history of investing primarily in equities, we’ve spent much of this past year writing about the government debt market. We’ve chosen to focus on government debt because we fear its impact on the equity markets as a whole. Government debt is an intrinsically important part of the financial landscape. It is the bellwether by which we measure risk, and we believe we have entered a new era where traditional "risk-free" assets are undergoing a tremendous shift in quality.

In studying the government debt market, we have inadvertently been led to question the economic theory that most fervently justified recent government spending programs: that of Keynesian economics. The so called "beautiful theory" of Keynesian economics is arguably the most influential economic theory of the 20th Century, shaping the way Western democracies approached the balance between free market capitalism and government initiatives. Like many beautiful theories, however, Keynesianism has ultimately succumbed to the ugly facts. We firmly believe the Keynesian miracle is dead. The stimulus programs are simply not producing their desired results, and the future debt costs associated with funding these programs may cause far greater strife in the future than the problems the stimulus was originally designed to address.
Keynesian economics was born with the publishing of John Maynard Keynes’ "The General Theory of Employment, Interest and Money" in February 1936. Keynesian theory advocates a mixed economy, predominantly driven by the private sector, but with significant intervention by government and the public sector. Keynes argued that private sector decisions often lead to inefficient macroeconomic outcomes, and advocated active public sector policy responses to stabilize output according to the business cycle. Keynesian economics served as the primary economic model from its birth to 1973. Although it did lose some influence following the stagflation of the 1970s, the advent of the global financial crisis in 2007 ignited a resurgence in Keynesian thought that resulted in the American Recovery and Reinvestment Act, TARP, TALF, Cash for Clunkers, Quantitative Easing, etc., all of which have been proven ineffective, ill-advised and whose benefits were surprisingly short-lived.
The economic historian, Niall Ferguson, recently described a 1981 paper by economist Thomas Sargent as the "epitaph for the Keynesian era".1 It may have been the epitaph in academic circles, but the politicians clearly never read it. Almost thirty years later, we now get to experience the fallout from the latest Keynesian stimulus binge, and the results are looking pretty dismal to say the least.
There are a number of studies we have come across that suggest stimulus is the wrong approach. The first is a 2005 Harvard study by Andrew Mountford and Harald Uhlig that discusses the effects of fiscal policy shocks on the underlying economy. Mountford and Uhlig explain that from the mid-1950’s to year 2000, the maximum economic impact of a two percent increase in government spending was an ensuing GDP growth of approximately three percent. A two percent spending increase inevitably requires an increase in taxes. Due to the nature of interest costs, however, the government would have to raise taxes by MORE than two percent in order to pay back the initial borrowing. According to their data, this increase in taxes would generally lead to a seven percent drop in GDP. As they state in their study: "This shows that when government spending is financed contemporaneously that the contractionary effects of the tax increases outweigh the expansionary effects of the increased expenditure after a very short time."2 Stated simply, ‘borrowing to stimulate’ has never worked as planned because the cost of paying back the borrowed funds surpassed the immediate benefits of the stimulus.
In a follow-on study, Harald Uhlig estimated that an approximate $3.40 of output is lost for every dollar spent on stimulus.3 Another study on the same subject by C’ordoba and Kehoe (2009) went so far as to say that, "massive public interventions in the economy to maintain employment and investment during a financial crisis can, if they distort incentives enough, lead to a great depression."4
If the conclusions of these studies are even close to being correct, we are now in quite a predicament – not just in the US, but across the Western world. Remember that the 2007-08 meltdown was only two years ago, and as we highlighted in April 2009 in "The Elephant in the Room", the US government has spent more on stimulus and bailouts, in percentage of GDP terms, than it did in the Gulf War, Operation Iraqi Freedom, the Vietnam War, the Korean War and World War I combined.5 All that spending was justified by the understanding that it would generate sustainable underlying growth. If it turns out that that assumption was wrong, have the governments made a fatal mistake?
Another recently published Harvard study looked at stimulus at a micro-economic level and derived some surprising conclusions. Entitled "Do Powerful Politicians Cause Corporate Downsizing?", the authors compiled 232 occasions over the past 42 years when either a Senator or a Representative was voted into a controlling position over a big-budget congressional committee. Unsurprisingly, the ascendancy of the politicians resulted in extra spending in their respective districts – typically in the form of an extra US$200 million per year in federal funds. The researchers examined the economic effects of this increase in spending and found "strong and widespread evidence of corporate retrenchment in response to government spending shocks." The average firm cut back on capital investment by 15 percent and significantly reduced its R&D spending.
Companies collectively operating in the affected state reduced capital investment by $39 million a year and R&D by $34 million per year. Other consequences included increases in unemployment and declines in sales growth.6,7 Yikes!! That is not the response we’re supposed to get from government spending!
The Canadian government’s experience with Keynesian-style stimulus has been no better. The Fraser Institute reviewed the impact of the Government of Canada’s "Economic Action Plan" and found that "the contributions from government spending and government investment to the improvement in GDP growth are negligible."8 They state that, of the 1.1% increase in economic growth between the second and third quarter of 2009, government consumption and government investment contributed a mere 0.1%. Of the 1% improvement in economic growth between the third and fourth quarter of 2009, government investment and consumption contributed almost nothing. In the end, it was actually net exports that were the largest contributor to Canada’s growth. No Keynesian miracle in this country.
Our own findings compare favourably to the academic studies cited above. We looked at government spending and current dollar GDP increases in our ‘Markets at a Glance’ entitled, "A Busted Formula". Our findings, using decidedly un-econometric techniques, showed similar results, and are presented in Table A below. We looked at current dollar increases in GDP as published by the Bureau of Economic Analysis (BEA) and current dollar expenditures and receipts for the US government taken from the Treasury. One current deficit dollar resulted in an increase in current dollar GDP of a mere 10 cents. Again - no miracle Keynesian multiplier here.

If we use the Fed’s own numbers, the impact of debt on GDP is even more dismal. In Chart B below, we present the marginal impact of debt on marginal GDP since 1966 using data from the Federal Reserve. Deficit spending, which has generated smaller and smaller increases in GDP over time, is now generating a negative impact on GDP due to the costs of servicing the debt. The chart suggests we have already entered what PIMCO refers to as the "Keynesian endpoint", where the government can no longer afford to increase debt levels.10 No debt = no stimulus. No stimulus = ???
A more timely epitaph for our Keynesian funeral comes from a recent op-ed piece by Jean-Claude Trichet, President of the European Central Bank, that was published in the Financial Times and entitled "Stimulate No More". In it Trichet states that, "…the standard economic models used to project the impact of fiscal restraint or fiscal stimuli may no longer be reliable."11 He explains that while debt in the euro zone has increased by more than 20 percent in only four years and by 35 to 40 percent over the same time period in the US and Japan, we have very little, if anything, to show for it. We agree. New housing sales are at all time lows, consumer intentions for auto purchases are at multi year lows, the University of Michigan consumer confidence index has turned negative, new jobless claims have started to increase, and the ECRI - a composite of leading indicators - is now forecasting a recession (see Chart C).
Since Keynesian economics is no longer relevant, some are now arguing that tax cuts will save the day. Two of the academic studies we reviewed suggest that tax relief is a much stronger stimulus to the economy than government spending, and under normal circumstances this is probably true. But we are not in a normal economic environment. Even if the tax cuts implemented by George Bush in 2006 are extended by the next Congress, the US will still face the ‘Keynesian Endpoint’. A Government Accountability Office (GAO) report published in January 2010 states the following: "In our Alternative simulation, which assumes expiring tax provisions are extended through 2020 and revenue is held constant at the 40-year historical average; roughly 93 cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2020."12 Extending tax cuts won’t solve anything.
In the end, Keynesian stimulus ultimately fooled us all. It roped in the politicians of the richest countries and set them on an unsustainable course of debt issuance. Recent Keynesian stimulus has even managed to fool the sophisticated economic models designed by central banks. The process of accounting for massive government spending ‘confuses’ the models into calculating a recovery trajectory when it doesn’t exist. The Bank of England confirmed this with its announced £3.5 million overhaul of its current model due to its inability to generate accurate inflation and recession forecasts.13
Keynesian stimulus can’t be blamed for all our problems, but it would have been nice if our politicians hadn’t relied on it so blindly. Debt is debt is debt, after all. It doesn’t matter if it’s owed by governments or individuals. It weighs on the institutions that issue too much of it, and the ensuing consequences of paying off the interest costs severely hinders governments’ ability to function properly. It suffices to say that we need a new economic plan – a plan that doesn’t invite governments to print their way out of economic turmoil. Keynesian theory enjoyed a tremendous run, but is now for all intents and purposes dead… and now it’s time to pay for it. Literally.

I Am This Blog's Sole Reader

I posted this today in comments to a news sstory about lawsuits for sharing news stories on blogs.

Friday, September 10, 2010

USDA Cuts Wheat, Corn Harvest Forecasts

* USDA cuts world wheat forecast for fourth month in a row
* U.S. corn stocks/use ratio lowest in 15 years-USDA
* Rise in corn futures buoys wheat, soy down 1.4 percent
* USDA sees record-high farm-gate corn price in 2010/11
* Higher costs likely for meatpackers and foodmakers
 (Rise in corn also boosts wheat futures, adds closing prices)
By Charles Abbott
WASHINGTON, Sept 10 (Reuters) - U.S. corn supply will
shrink to its tightest in 15 years next year due to strong
global demand and a smaller-than-expected crop hit by hot, dry
weather, the Agriculture Department said on Friday in forecasts
that stoked corn prices but tempered wheat.
While painting an unexpectedly tight picture for a corn
market that has already surged more than 40 percent since late
June, the USDA cut its wheat supply forecasts by less than
expected, allaying fears that the world was headed for a repeat
of the 2008 food-fear crisis.
The USDA cut its forecast for the U.S. corn stockpiles to
1.116 billion bushels (28.4 million tonnes) by the end of
2010/11, down 15 percent from its report a month ago and a
nearly 20 percent decline on the year.
That put the stocks-to-use ratio at 8.3 percent, or about
the equivalent of one month's consumption, the smallest since
1995/96. [ID:N07254444]
With the fall harvest under way, USDA cut its U.S. corn
crop forecast by 2 percent to 13.16 billion bushels (334
million tonnes) -- a bit below forecasts for 13.2 billion
bushels -- due to hot, dry late-summer weather that helped
prices rise by nearly 17 percent since August.
USDA cut its forecast of the world wheat crop for the
fourth month in a row, but its forecast of 643 million tonnes
was not as low as expected. USDA lowered its forecasts for
Russia's wheat harvest by 2.5 million tonnes from August and
the European Union's by 2.4 million tonnes. [ID:N10224730]
USDA lifted its forecast for the U.S. soybean crop by 1
percent from its August estimate.
The world wheat crop would be the smallest in three years,
since fears of a food shortage were rampant.
But supplies are far larger than in 2008 and USDA raised
its forecast of 2010/11 wheat end stocks by nearly 2 percent,
to 177.79 million tonnes, due to larger supplies in Canada.
U.S. farmers "are in an economic sweet spot" of large crops
and high prices "and we think this will persist well into
2011," said analyst Mark McMinimy of Washington Research Group.
"Downstream users, however, such as meat processors and baking
companies and food manufacturers will likely labor under higher
input costs."
CBOT December corn futures CZ0 settled up 7-1/2 cents at
$4.78-1/4 on Friday, with the tighter supply forecast buffered
by a lower-than-expected weekly export sales total.
December wheat WZ0 settled 1-1/4 cents at $7.36 and 3/4 a
bushel. November soybeans SX0 ended lower 15 cents at $10.31
a bushel. While USDA forecast larger supplies than traders
expected, export sales for wheat and soybeans were above

Global Food Supplies Tight

Agri-Food Price Index makes new high!

value of 100 investment
One road to wealth is to only own those assets for which the price is rising. That seems to be a rule that equity investors have forgotten. In any event, a great market technician once suggested only looking at those things with prices making new 52-week highs. His reasoning was that for the price of something to rise it must eventually make a new high. Well, based on the above chart, that technician would be all over Agri-Food commodities and associated investments. Our Agri-Food Price Index recently made a new high!
Recent embargo of grain exports by Russia due to problems with their wheat crops has served to highlight the tenuous nature of the world’s Agri-Food situation. Cessation of Russian exports did not cause prices to rise.  It just helped to uncap them. The fundamental Agri-Food shortage facing the world did not suddenly arise. It has been building for years.
List of countries that cannot feed their people is not a short one. Included in it are all the nations of the Middle East, Egypt, India, China, Philippines, etc. With prosperity beginning to arise in China and on its way in India, these two nations will increasingly turn to global markets to feed their citizens. They have no choice, as they lack the land and all-important water to feed their people. In the global game of Agri-Food, those nations that bid the highest will get the food.
If one reads the commentaries or listens to traders, the discussion still drones on about absolute size of grain reserves in the world. And yes, they are sizable. That view, however, focuses on a meaningless metric. Gasoline stocks today are many times the size that existed when this author was a teenage driver.  We are not, however, paying 19 cents a gallon for gasoline. For what matters is not the size of the reserves, but those reserves relative to consumption.
days of consumption
In our first chart this week, above, is plotted the days of consumption held in global reserves for the Big Four, corn, soybeans, wheat, and rice. They all fall into a range of 60-95 days. If no production of these grains occurred, in less than 60 days no corn would be available. In the case of rice, in less than 80 days none would be found.
Numbers in that chart do not portray a picture of overwhelming bounty. Such is the reason that global grain markets responded to the Russian announcement. At the same time, the world has really not yet come to know the impact of the floods on Pakistani rice production. That country is the number three exporter of rice.

New 90-week high about to happen?

us cash corn
When Agri-Food is short in supply anywhere, the world turns to North America. Per the latest USDA report, U.S. wheat export sales are running 60+% ahead of a year ago. For rice, the same number rounds to being up 30%. Those sales are tightening the prices of all grains, such as corn in the above chart.
Corn has not yet risen to a new 90-week high, but it is well on its way to doing so. China, long a net importer of soybeans, is now moving to becoming a net importer of corn. That importation takes two forms, physical corn and dry distillers grain. Latter is a byproduct of ethanol production. Essence of the problem for China is that it lacks the water to grow sufficient corn. Importing corn is the importation of “virtual water.”
When corn is $11 a bushel, who will benefit from it? Will your wealth? Two good ways exist to participate in the tightening of the global Agri-Food markets. One is through stocks of those companies that serve the global Agri-Food market. Second is through investment in Agri-Land. For those that might think in terms of the latter, our 4th Annual U.S. Agricultural Land As An Investment Portfolio Consideration - 2010 will soon be available at our web site. This report is the definitive annual study of the returns earned on U.S. agricultural land.

What On Earth Is a "Melt Up"?

What Does Melt Up Mean?
A dramatic and unexpected improvement in the investment performance of an asset class driven partly by a stampede of investors who don't want to miss out on its rise rather than by fundamental improvements in the economy. Gains created by a melt up are considered an unreliable indication of the direction the market is ultimately headed, and melt ups often precede melt downs.

Investopedia explains Melt Up
Financial analysts saw the run-up in the stock market in early 2010 as a possible melt up because unemployment rates continued to be high, both residential and commercial real estate values continued to suffer and retail investors continued to take money out of stocks.

U.S. Economic Forecast from Goldman's Ed McKelvey

This guy has a good track record. We should listen!

Despite the fact that our US outlook has been well below consensus, most indicators have surprised us to the downside over the past three months.  In this comment, we summarize those results relative to our early June “road map” and extend this road map into early 2011.

The list of weaker-than-expected indicators is extensive, covering consumer spending except auto sales, confidence, housing activity, durable goods orders, payrolls, claims, and the all-items CPI.  In fact, only industrial output and the Institute for Supply Management’s (ISM’s) manufacturing index surprised us significantly to the strong side, though the unemployment rate and core inflation were also firmer than expected (i.e., lower for unemployment).

Looking ahead to the fourth quarter of 2010 and the first quarter of 2011, we expect: (1) sluggish consumer spending, (2) rebounds in starts and sales from post-tax-credit paybacks (but further declines in construction outlays), (3) a stall in industrial activity, (4) renewed (but modest) labor market deterioration, and (5) a slight slowing in core inflation.

Three months ago we issued a road map for the slowdown in US growth that we anticipated for the second half of 2010.  As has become our custom, we evaluate the progress to date, and are extending the road map into early 2011.  With the slowdown already in place, the revised road map becomes one that we think will be consistent with a sluggish 1½% annualized growth rate.

Despite the fact that our US outlook three months ago was well below the “consensus” view, most indicators surprised us to the downside.  In particular, reports on housing activity, consumer spending on items other than motor vehicles, and consumer confidence came in well below the levels we regarded as consistent with our forecast for real GDP growth to slow from a 3% annual rate in the first half of 2010 to a 1½% rate in the second half; data on initial claims, payrolls, and durable goods were also weaker than we expected.  Upside surprises were confined mainly to industrial production and the Institute for Supply Management’s (ISM’s) manufacturing index; in this latter case the jury is still out, as our milepost was for the ISM index to fall below 55 in the fourth quarter.  Core inflation was also firmer than we expected.  On balance, these results are consistent with the fact that real GDP growth was weaker in the second quarter than we then expected and could still have downside risk in the current quarter despite this morning’s better-than-expected trade balance.   Meanwhile, about a month ago we marked up our core inflation forecast modestly, reflecting the higher-than-expected results and upward revisions to data stretching back much farther.

Looking ahead, we envision a road map for the fourth quarter of 2010 and the first quarter of 2011 with the following landscape:

1.     Very slow growth in consumer spending.  For both quarters, we expect real consumer spending to increase only 1% at an annual rate, which implies gains of slightly less than 0.1% per month.  Vehicle sales will probably rise somewhat faster, though we do not expect them to crack the 12-million annualized barrier on a sustained basis.  In turn, the implication for (nominal) nonauto retail sales is for increases averaging 0.2% per month.  Confidence indexes, which suffered unexpected setbacks in recent months, are apt to fluctuate around their latest readings.

2.     Rebounds in housing starts and home sales from severe post-tax-credit paybacks, but to levels that remain depressed.  The latest observations on home sales and, to a lesser extent, housing starts reflect an unexpectedly sharp payback following the expiration of the homebuyer tax credit.  The levels to which sales have fallen are thus well below their ultimate settling points in our view.  We therefore expect some improvement, albeit to sales rates that remain extremely low by longer-term historical standards – about 375,000 to 400,000 for the annual rate of new home sales and about 5 million for sales of existing units.  Starts of single-family units should exhibit  a similar, though less pronounced pattern.  Reflecting the decline in starts and the weak fundamentals in other sectors of the construction industry, outlays for construction projects should trend lower throughout the period.

3.     A stall in industrial activity.  Although manufacturing output and the ISM’s index for that sector have surprised us to the upside in recent months, both our analysis of the inventory cycle (if it’s not over, then it’s moving into a phase of unintended and/or unsustainable accumulation) and key indicators (differences between indexes of new orders and inventories in various surveys, including the ISM’s) point to a significant deceleration in the near term.  Specifically, we look for the ISM index to drop to 50 or below by the first quarter of 2011 and for industrial output to grind to a virtual halt on a similar timetable.  As durable goods orders have already signaled in coming months, we expect little net change in such orders, with risks tilted to the downside.

4.     Renewed labor market deterioration.  As business firms seek to protect margins in an environment of sluggish growth, net hiring is apt to come close to stalling as well, putting the unemployment rate under renewed upward pressure.  Specifically, we expect payroll gains to slow to 25,000 per month (ex Census workers) and the jobless rate to drift up to 10% over the next half year.  Initial claims have never fallen to a rate that was consistent with payroll growth.  That plus the presumption that control over headcount will focus on limited hiring rather than renewed firing suggests that claims will remain roughly where they have been during most of 2010.

5.     A slight slowing in core inflation.  As already noted, core inflation has been a bit higher than we anticipated in recent months, though the pattern is still one of gradual—if uneven--deceleration.  We expect that to continue in coming months (quarters, years, and possibly decades), with monthly increases slipping once again below 0.1% on average in early 2011.

Engineering Inflation: Major Commodity Bull Market Debunks Deflationary Fears

I would add that we are in a bull market for corn, soybeans, wheat, sugar, coffee, cotton, cattle, hog, and orange juice futures. 

from Seeking Alpha:

The deflationist camp continues to hog the limelight in the press of popular opinion, leading us to believe that prices of things are falling or at least will fall over the coming months. However, on the quiet the average commodity appears to be engaged in a raging bull market.
I put together an index of some 35 commodities to demonstrate just how strong the underlying commodity market is. Many of the commodities in this index are not included in the popular commodity indices such as the CRB Reuters, Goldman Sachs and UBS Bloomberg indices. Some of the commodities that make up this index are as follows:

  • lumber
  • coal
  • polyethylene
  • ethanol
  • pulp
  • newsprint
  • handysize baltic
  • bunkers
  • jet fuel
  • diesel
  • iron ore
  • uranium
It is interesting to note what has happened to commodity prices over the last 2 months, just when deflation and double-dip banter increased exponentially.

Index of 35 Commodities Equally Weighted

Now, since when did a bull market in commodities equate to conditions of deflation? Has the supply of virtually every commodity suddenly contracted? I think not; more likely demand has picked up. Of course, that would suggest the world economy and by default the US economy is not slowing down as your local economist would have you believe.
Do your own research don't become beholden to believing what a programming director wants you to believe just because that is what the crowd wants to hear!

Thursday, September 9, 2010

Gordon Long: America Has a Structural, Not Cyclical, Problem

I gave President Barrack Obama six months to roll-out his doomed Keynesian policies, twelve months to discover they were flawed and eighteen months to realize that the solution to America’s problems must lie within a different economic framework. I had hoped by the end of twenty-four months to see new policies closer to an Austrian economic philosophy emerge. I was wrong.
Though, even the Wall Street Journal recently featured an article on the re-emergence of the Austrian School of Economic philosophy, it would appear that President Obama’s administration still neither gets it, nor I am afraid ever will. Key defections by his leading economic advisors, talk of the need for QE II and a Stimulus II, and a political collapse in public confidence suggests a growing awareness that Keynesian policies are not working, as many predicted they wouldn’t. Obama's exciting rhetoric of Hope and Change has left myself and the majority of recent polled Americans disillusioned and disappointed. What I see the administration failing to grasp is twofold:
I-America has a Structural problem, not a cyclical business cycle problem. Though the cyclical business cycle was greatly worsened by the financial crisis, I would argue that the structural problem facing the US is actually a contributor to what caused the financial crisis.
II- America has a Credit demand problem, not a Credit supply problem. It isn’t that the banks won’t lend, but rather that few can any longer afford or qualify (on any reasonably and historically sound basis) to borrow.



We are all painfully aware that the US has not produced sufficient exportable product to support its standard of living for many years. Manufacturing in the US has been in steady decline since the 1960’s and the excess spending during the Vietnam War. It has been 50 years since the US had a balanced budget (forget Clinton's social security slight of hand). Over the last 10-15 years the US has seriously compounded this problem by accelerating the de-industrializaton of America without a strategy to replace salable export product. Corporate industrial strategies of outsourcing, downsizing, and off-shoring were never countered other than by an excess consumption splurge which fostered massive real estate and retail expansion distortions.

Simply said: A US Service Economy that is based on 70% GDP consumer consumption does not pay the bills!

For a brief period of time following the dotcom implosion, the US operated as a mercantile “Financial Economy” that turned out to have been nothing more than a historic illusion.
As the graphs below clearly show, since late 1999 with the surge in the adoption of the internet, unemployment in the US has spiked. Clerical, manufacturing and almost any job that could be further automated through networking advancements were replaced. 


2) Creative Destruction: Slowing Innovation Rate
In my recent paper INNOVATION: What Made America Great is now Killing Her! , I described how the dotcom bubble ushered in a change in America that is still reverberating through the nation and around the globe. The Internet unleashed productivity opportunities of unprecedented proportions in addition to new business models, new  ways of doing business and completely new and never before realized markets.  Ten years ago there was no such position as a Web Master; having a home PC was primarily for word processing and creating spreadsheets; Apple made MACs and ordering on-line was a quaint experiment for risk takers.
In 1997 prior to the ‘go-go’ Dotcom era unfolding, America’s unemployment was less than half of what it is today at 4.7%.  At that time the US added 3 Million net jobs which reflected the creation of 33.4 Million new positions while obsolescing or cutting 30.4 Million old positions. Job losses occurred in old vocations such as typists, secretaries, filing clerks, switchboard operators etc.  Hired were new occupations such as C++ programmers, web masters, database managers, network analysts, etc. 
As our research chart above however illustrates, the additions have fallen off precipitously while the job losses have stayed relatively flat. In 2009 job losses were 31M and only slightly larger than 1997, which would be expected with further internet application development. New job creation however was only 24.7M which is dramatically lower than the 33.4 in 1997.
Over 98% of all jobs created in America have traditionally been created by companies with less then 500 employees. Recent research by the Kaufman Foundation shows that in fact new start ups versus existing businesses dominated the creation of new positions.
America’s slowing ability to innovate which is reflected in published research papers, patents issued and numbers of college graduates with advanced math and science degrees has seriously fallen behind. I laid out the seriousness of this problem in my early 2010 paper: America - Innovate or Die!
It is more than a little disconcerting that after 13 Trillion in stimulus measures we see business spending on capital investment STILL shrinking in the US.
It can’t be any clearer, the US has a structural problem. The administration can not possibly fail to realize this. My sense is they just don't know what to do about it.


1) Credit Available - Demand Flat.

According to the Federal Reserve's latest quarterly survey of banks' lending practices recorded during July 2010, “for the first time since 2006, banks are making commercial and industrial loans more available to small firms, with about one-fifth of large domestic banks having eased lending standards. This offset a net tightening of standards by a small fraction of other banks."  Also, for the past six months, banks have continued easing lending to large and mid-sized firms. What's more, banks also reported that they stopped cutting existing lines of credit for commercial and industrial firms for the first time since the Fed added the question in its survey in January 2009. As for consumer loans, banks also reported easing standards for approving loans.
Credit is available, but demand remains flat.
Asked in the July survey how demand for commercial and industrial loans has changed over the past three months, 61% of banks responded "about the same," while 9% said "moderately weaker." While it was good news that 30% responded "moderately stronger," it's not exactly a surge in demand.  Even in a slowly recovering economy, the growing distaste for credit among our debt-weary public has hampered the way for new purchases and investments.
This isn't all that is surprising. The latest economic indicators paint a very exhausted consumer: In the years leading up to the financial crisis, he bought too much house and too many cars. The consumer is in burn-out mode, more focused on either saving or paying down credit card debt than buying more appliances and gadgets.
The amount consumers owed on their credit cards during the three months ending in June dropped to its lowest levels in more than eight years, indicating that cardholders continue to pay off balances in the uncertain economy, according to TransUnion's second quarter credit card statistics.
The average combined debt for bank-issued credit cards fell by more than 13% to $4,951 over the previous year. This represented the first three-month period where credit card debt fell below $5,000 since the three months ending in March 2002. Meanwhile, personal savings have risen to 6.4% of after-tax incomes, about three times higher than it was in 2007.
Perhaps what the Fed's quarterly report is really saying is this:

"There's a growing distaste for credit. The American consumer is the child who ate too much and spoiled his dinner. And even if you hand him his favorite meal on a silver platter, he's just not that hungry.”

2) Shifting Demographics

Another obvious but seldom highlighted factor affecting demand is shifting demographics. The Baby Boomer generation is no longer the consumption engine it has been to the US economy.

We have a generation that, as has been predicted for some time, is reducing its expenses but it may be even more dramatic than forecasted. With home housing prices no longer being the wealth generation vehicle they had expected it to be, stocks not delivering the returns they had been told to expect for the 'long term’ investor and medical expenses climbing above their worst budgeted targets, the baby boomers are being forced to cut back even further than the expected demographics were warning about.
The demand for credit to finance new acquisitions is not the same priority it was only a few years ago. Harry Dent's extensive demographic research lays this out in indisputable detail.
All Federal Reserve and Government actions are about increasing credit supply.  None effectively address demand.

40.8 Million Americans on Food Stamps
Employment at unprecedented lows


Expect it to get worse until the administration finally realizes that we have both a structural and demand problem facing America, not a cyclical business cycle and credit availability problem. I personally don't believe for a minute that the Obama Administration haven't come to realize something is wrong. The White House simply doesn't know what to do about it. They are doing the only thing our Washington political machine knows what to do - throw money and credit at the problem, which is precisely what got us into this problem in the first place.


Doctored Unemployment Claims Data

The BLS has announced that as a result of the Labor Day weekend, 9 states (among which the biggest one California) did not report initial claims data to the bean counters, so instead the government had to "estimate" what the data would have been: yep, estimate, what the data was in these nine states. From Bloomberg: "For the latest reporting week, nine states didn’t file claims data to the Labor Department in Washington because of the Labor Day holiday earlier this week, a department official told reporters. California and Virginia estimated their figures and the U.S. government estimated the other seven." Official data is now made up on the fly. This US economic data reporting has just entered the twilight zone. Also, when the data is officially made up, it is not that difficult to get data that is "better than expected." The full list of states is: DC, Illinois, Idaho, Hawaii, Oklahoma, Michigan, and Washington. California and Virginia estimated themselves.

Can't Compete! U.S. Competitiveness Declines

from AP:

BEIJING — The U.S. has slipped down the ranks of competitive economies, falling behind Sweden and Singapore due to huge deficits and pessimism about government, a global economic group said Thursday.
Switzerland retained the top spot for the second year in the annual ranking by the Geneva-based World Economic Forum. It combines economic data and a survey of more than 13,500 business executives.
Sweden moved up to second place while Singapore stayed at No. 3. The United States was in second place last year after falling from No. 1 in 2008.
The WEF praised the United States for its innovative companies, excellent universities and flexible labor market. But it also cited huge deficits, rising government debt and declining public faith in politicians and corporate ethics.
"There has been a weakening of the United States' public and private institutions, as well as lingering concerns about the state of its financial markets," the group said.
Mapping a clear strategy for exiting the huge U.S. stimulus "will be an important step in reinforcing the country's competitiveness," it said.
The report was released in Beijing ahead of a WEF-organized gathering of global business executives next week in neighboring Tianjin. The group is best known for its annual Davos meeting of corporate leaders.

Urgent Letter to Obama

from the Daily Capitalist blog:
The President
White House
Washington, D.C. 20500
Dear President Obama:
I observed with some concern a photo of you and your glum economic team in the White House Rose Garden during your September 3 address on the jobs report.

I am aware that you are gravely concerned about the economy and the employment situation. Understandably so since your policies of fiscal and monetary stimulus have failed to create economic growth or employment. Yet despite such failures you advocate more of the same remedies in the face of their failure.
On Labor Day you announced new spending of $50 billion on infrastructure construction to create “jobs”. This is in addition to the American Recovery and Reinvestment Act commitment of $499 billion for similar projects. According to your web site,, only $296 billion of that amount has been spent so why do we need more?
Yet the economy is stagnant, if not declining, unemployment is high and going higher, and credit is still largely unavailable to most American businesses even if they were willing to borrow. Home buyer credits have failed to stop the decline in home prices and Cash for Clunkers has had no lasting effect on the auto or appliance industries.
I suggest that since existing policies have failed to revive the economy, your Administration should try something different. I offer you several innovative policies that would actually speed a recovery and lead to higher employment.
The problems that we need to quickly solve are:

  • High unemployment.
  • Declining output.
  • Credit freeze.
  • Surplus of housing and commercial real estate.
  • High private debt load.
  • High federal debt.
Until the economy starts growing again, these problems will persist.
Unless we understand the causes of our problems, solutions are not easy. Because you place great emphasis on “what works” rather than economic theory, I will get to the specific issues straightaway.
Here are some guiding principles for “what works”:
  1. Economies can repair themselves without a lot of government help. History has proven this time and again.
  2. Government interference in the repair process can hinder recovery or even make things worse.
  3. Government spending is very inefficient.
  4. Individuals can make better choices about what to do with their money than the government.
  5. Economic growth only comes from private enterprise. The corollary of this is that government can only spend money, not make money.
  6. Since government produces nothing, then real growth and real jobs can only come from private enterprise.
  7. If government spending is inefficient and if economic growth comes only from the private sector, then taking vast amounts of money out of private hands and putting it into government hands will hinder growth.
  8. Government spending to revive an economy has failed wherever and whenever it has been tried.
  9. More legislation increases uncertainty for businesses, making them reluctant to expand (called “regime uncertainty” in economic terms).
With these time-tested guiding principles in mind, here are some specific policies that you should immediately implement to allow the economy to quickly recover. They will “work.”
Fix the Banks
Cure the credit freeze by eliminating policies that cover up the fact that many of our banks are financially unsound. These policies generally relate to how banks value the assets that secure real estate loans, primarily commercial real estate (CRE) loans. These policies allow banks to overvalue their loan assets. These policies include “mark-to-make-believe” (rather than “mark to market”) and “extend and pretend” each of which allow banks to maintain a fiction. If the actual values of these loans were realized, banks would be required to foreclose on these bad assets. By getting these loans off their books, they would be able to recapitalize and become  financial sound.
Why is this important? It is the only way to restore credit to small- and medium-sized businesses and resolve the oversupply of CRE. Big businesses have plenty of credit from the big money center banks. It’s the regional and local banks which finance the rest of us that are in trouble.
We have just gone through the world’s biggest financial bubble. During this bubble, projects that made no sense but for the cheap Fed money and the false appearance of paper prosperity, were hugely over-produced. Now that the bubble has burst, we are in the mopping up stage of recovery. Banks are reluctant to extend credit because they are unsure of their financial future. The longer banks hold on to these malinvestments, their balance sheets will remain clogged up, and credit will remain restricted. Yes, more banks will go out of business; the process is never pretty but it is necessary. It is important to keep in mind that until this done, millions of unemployed Americans will stay jobless longer.
Bring Back the RTC
If you allow banks to fail as did President Bush I (mostly S&Ls actually), then there will be many foreclosed CRE projects that will need to be liquidated by the FDIC. Alan Greenspan, then Fed chairman, for all his faults did the right thing by urging the creation of the Resolution Trust Corporation, a separate entity whose function was to liquidate S&Ls and sell off the foreclosed assets from failed institutions. It actually worked pretty well and a huge slug of bad real estate, mostly apartments, were sold off to investors. The investors got great deals, but, more importantly, the economy recovered sooner.
The RTC dealt with 747 S&Ls with total assets of $394 billion (according to the Wikipedia article). According to the latest FDIC report there are 829 “problem” banks with $403 billion in assets as of Q2 2010. It is conceivable that this idea would work again.
Stop Passing Laws
Surveys reveal that the number one problem for business is uncertainty created by the government. They have been hit with an onslaught of complex legislation the consequences of which they don’t understand. This is called “regime uncertainty” in economic terms. The truth is, according to the surveys, that even if credit was available, businesses aren’t borrowing because they don’t know what the government will do to them next. Consider that three major pieces of legislation have been passed during your administration: the American Recovery and Reinvestment Act, the health care bill, and the Dodd-Frank financial overhaul bill. Further, they are uncertain if taxes on them will be raised.
No new laws are required to allow the economy to recover. I urge you to speak to business and tell them that we Americans trust their ability to drive our economy, and that your Administration will enact no new laws that will create greater burdens on their ability to expand, borrow, hire, and reap profits.
Stop Useless Spending
While your Administration has gamely tried to convince us that you have created jobs, we know that is fiction. The CBO report and claims by prominent economists have no credible evidence that any real jobs were created. If it were the case that government could create jobs then there would be no need for the private sector. Of course you know well that history has proven that policy to be a disaster.
Only private enterprise can create a real job. Having the government pay people to work is not a “job” in the same sense as a job in the private sector. When a business hires an employee, it is because somewhere down the line consumers want the end product of his or her productivity. The job created by the business is generated by economic activity until consumers decide otherwise.
If the government pays someone to do something, it isn’t generated by economic activity. When the money stops, the job stops. That has been the case of all of fiscal stimulus spending. While someone is earning money from the government, the money to pay him or her comes from taxes, which ultimately can only be generated from private enterprise.
If the government takes money out of the economy to pay people to do things it wants done rather than let the economic forces of private enterprise work, then businesses who create real jobs will have less money with which to expand their businesses. You should consider what the person from whom the money was taxed was going to do with the money. It would aid recovery to let private enterprise keep their money.
Encourage Saving Rather Than Spending
With historically high debt loads, job uncertainty, a lack of retirement funds, and declining home values, is it not reasonable for people to increase savings? Urging people to spend at this time runs counter to people’s innate sense to take care of themselves. While people are trying to repair their financial condition after the housing and credit bubble, urging more spending is reckless advice. People are rightly using their common sense.
There are two substantial benefits to saving. It allows families to reduce their debt burdens. Once they pay down their debts, they will be more willing to spend without the fear that they will end up homeless. Saving also creates the new capital that will be required for businesses when they decide to expand. It is not as if the Fed can just print dollars to create wealth and capital; wealth can only come from savings.
Policies that encourage spending such as Cash for Clunkers or home buyer credits or various tax credits for government-favored projects only encourage spending and thus reduce savings. Furthermore, they appear to have no lasting economic impact.
Don’t Raise Taxes
In light of the detriment to the economy of giving the government more of our earnings right now, an increase in taxes would be harmful to a recovery. While we face a serious deficit in the federal budget, the only way to pay down national debt is to have a vigorous growing economy and a reduction of government spending. With the right policies put in place, lower taxes would help create economic growth.
Raise Interest Rates
Fed policies to expand the money supply to create inflation will eventually succeed. Thus they are planting the seeds for perpetual stagnation and inflation. To prevent this new disaster, the Fed should immediately raise the Fed Funds rate and stop new attempts at quantitative easing. This will have an immediate positive impact. First, it will encourage saving as people seek higher, safer returns on their capital. Second, it will unmask malinvested projects, clear away the burden of their related debt load, and allow capital to be redirected to profitable ventures. Third, it will prevent the rise of inflation which robs savers of their wealth. Fourth, it will prevent the creation of a new destructive stagflationary cycle.  Fifth, as in the Volcker era, greater savings and low inflation will eventually lead to new economic growth and higher employment.
I strongly urge you to adopt these innovative solutions to solve our nation’s desperate economic problems.
Dr. Jeffrey Harding

Wednesday, September 8, 2010

Goldman Sees Much Slower U.S. Growth

US Macro Outlook for the Next 12 Months and Dollar Implications

Combining the new information over the summer with our global growth forecasts, it appears the most likely scenario now is one of ‘pro-cyclical decoupling’ of the US economy from the rest of the world.

As the table shows, we expect the US economy to grow substantially below trend over the next 12 months and in 2011 as a whole. This expected weakness remains directly linked to a number of persistent structural imbalances, which in some cases have started to deteriorate again. In particular, the following points have caught our attention:

  • Survey data points to sluggish growth. The latest ISM readings for the manufacturing and nonmanufacturing sector point to continued sluggishness in the  respective sectors. Although the latest headline reading in the manufacturing ISM showed marginal improvements, the order-inventory gap and other forward-looking components suggest further sequential slowing lies ahead.
  • Persistent high unemployment is a particular feature of the current US problems, hinting at a large output gap. It reflects the need to reallocate considerable economic resources from artificially inflated sectors (in particular, real-estate-related). A shift of a sizeable part of the labour force from one sector to another takes time.
  • The US household savings rate remains too low relative to the US’s own long-run history, international comparisons and the demographic situation. As savings rise, the unusually high share of consumption in GDP will likely decline.
  • Import demand has picked up strongly during the inventory cycle, highlighting just how little the US economy has rebalanced and how much US demand seems to depend on foreign supply. Relocating production to the US is a slow process.
  • Rate differentials have moved sharply against the USD as markets increasingly priced in our own sluggish US growth scenario. Our expectations of renewed Quantitative Easing in the US, following the recent ‘baby step’ of extending the mortgage program, suggest rate differentials are unlikely to boost the USD anytime soon. On the other hand, stronger growth outside the US, in a positive decoupling scenario, would likely weaken the US via a corresponding shift in rated differentials.
  • Finally, fiscal consolidation needs in the US are among the most important globally and on many measures, including from the IMF, the adjustment need in the US is comparable to that in the UK, Spain and Greece. Tighter fiscal policy will add to the outlook for slowing final demand in the US, a potentially USDnegative development.

Retail Investors Run for the Exits

This is getting really ridiculous. In the week ended September 1, domestic equity mutual funds saw $7.5 billion in outflows: the biggest one week outflow in 2010 since the $13.4 billion redeemed in the Flash Crash week. The trend developing is simple: retail investors withdraw increasingly greater numbers in weeks in which the market is down even a little, and withdraw just a little in weeks in which the low-volume melt up presents them with an opportunity to get out at a better price level. Of course, the common thread is that as we have said for 18 consecutive weeks, retail just wants out. And now that, courtesy of Mary Schapiro, retail has finally put two and two together, and knows that even the regulators are concerned about redemptions, which are perceived by the SEC as being a function of distrust in market structure, we now fully expect more and more redemptions.

Year to Date the total pulled out is a whopping $62 billion, incidentally with both inflows and the market having peaked at the same time in April. On thr other hand, if the market were tracking mutual fund redemptions (whose net liquidity is now down to just 3.5% of assets and getting worse by the day), the S&P would be in the 900 range. Once the destructive impact of the Fed's daily meddling in the stock market is eliminated, it will get there. The longer stocks are artificially held up at current artificial levels, the greater the crash when reality and anti-gravity finally meet.

PS, for those confused by contrary media reports elsewhere, ETFs, as we disclosed previously, saw a major outflow in August as well (except for notable gold ETF exclusions). This is a secular rotation out of stocks. Period.

It's Curtains for Credit Cards

Sept. 8 (Bloomberg) -- Americans are shunning their credit cards and using debit to avoid incurring more debt, said Javelin Strategy & Research.
Total payment volume for debit cards surpassed credit-card volume for the first time in 2009 and will continue to eclipse it in 2010, according to a report released today by the Pleasanton, California-based market-research firm that specializes in financial services.
At San Francisco-based Visa Inc., the world’s biggest payments network, the total payment volume for debit cards increased by 7.9 percent in 2009 to $883 billion as credit-card volume declined by 7.3 percent to $764 billion. Volume for debit cards at No. 2 MasterCard Inc. in Purchase, New York, rose by 5.8 percent and 2.8 percent at No. 4 Riverwoods, Illinois-based Discover Financial Services.

Beige Bunk

Very little impact on stocks.

"Reports from the twelve Federal Reserve Districts suggested continued growth in national economic activity during the reporting period of mid-July through the end of August, but with widespread signs of a deceleration compared with preceding periods." -- Federal Reserve beige book

Food Inflation: Corn Continues Climb

Corn futures in Chicago generated record trading Sept. 3 as signs that U.S. farmers won’t harvest as large a crop as once expected fueled buying from speculators.
A total of 556,034 corn futures contracts changed hands at the Chicago Board of Trade on Sept. 3, the exchange said today. That was the corn market’s busiest day since the CBOT began trading the grain in 1877, topping the previous one-day record of 516,076 contracts on June 12, 2008.
Grain trading surged this summer after drought slashed Russia’s wheat crop and harvest prospects in the U.S. eroded, sending corn up 35 percent since the end of June to 15-month highs.
Many traders expect the U.S. Department of Agriculture will lower its estimate for this year’s corn harvest after excessive rains in some areas of the Midwest hampered crop development, said Jack Scoville, a vice president and analyst with Price Futures Group, Inc., in Chicago.
“People are finally starting to realize that maybe the production isn’t there,” Scoville said today, referring to corn. “Some areas got too much rain, some areas got a combination of too much and then too little. For whatever reason, the yields don’t seem to be coming in so well.”
Based on early harvest results from Arkansas, Indiana, Ohio and southern Illinois, “yields have not been too impressive,” Scoville said.
The USDA, in an Aug. 12 report, estimated the 2010 corn crop at 13.37 billion bushels, up 1.9 percent from the 2009 crop and an all-time high.
But the recent rise in corn futures suggests the market expects the USDA to reduce its crop estimate to about 13.2 billion bushels, Scoville said.
A harvest at that size “is still a nice crop,” Scoville said. But “if we’re trading 13.2 (billion bushels), we’re not going down” in price.
The USDA is scheduled to release its next Crop Production report Sept. 10.

At today’s close, corn for December delivery was unchanged at $4.64 ½ a bushel, after reaching $4.69, the contract’s highest price since June 2009. December corn is up about $1.21 from a contract low of $3.4325 reached June 29.
The recent surge in grain futures trading has been primarily driven by speculators, Scoville said. An upswing in agricultural futures this year also reflects bull markets in cattle and hogs that have attracted hedge funds and other speculators.
Moreover, many investors have piled into crude oil and other commodities the past few years, seeking better returns as traditional investments such as stocks languished.
“With the Russian weather, people are looking to get involved in commodities,” Scoville said. “There’s still a lot of interest in owning commodities right now. People are starting to realize they better get something on the books” in commodities.
Chicago corn futures trading this year through August averaged 249,146 contracts a day, up 23 percent from the same period in 2009. Wheat futures averaged 96,875 contracts a day, up 38 percent.
In addition to corn, futures contracts based on wheat, soybean meal, soybean oil and live cattle notched record trading days in 2010, according to Chicago-based CME Group Inc., the exchange operator that bought the CBOT in 2007.
On Aug. 19, trading in CME’s live cattle futures and options totaled an all-time high of 109,420 contracts, surpassing the previous record of 109,397 in June 2007.
At today’s close, October lean hog futures fell 1.45 cents to 75.75 cents a pound, while October live cattle fell 2.025 cents to 96.425 cents a pound. The CME hog contract is based on carcass values.

Societe Generale's Albert Edwards Cuts Lose on Equities

"The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious...

The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930's experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown. In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landing and we can kid ourselves all is well.

I read an interesting article recently noting the equity market typically does not begin to slump until just AFTER analysts begin to cut their 12m forward EPS estimates (for the life of me I can't remember where I read this, otherwise I would reference it). We have not quite reached this point. But with margins so high, any cyclical slowdown will crush productivity growth. Already in Q2, US productivity growth fell 1.8% - the steepest fall since Q3 2006. Hence, inevitably, unit labour costs have begun to rise QoQ. This trend will be exacerbated by recent more buoyant average hourly earnings seen in the last employment report. Whole economy profits are set for a 2007-like squeeze. And a sharp slide in analysts' optimism confirms we are right on the cusp of falling forward earnings (see chart below).
Edwards get downright hostile when discussing recent economic data out of US. We understand - the ever more acute manipulation of data by the BEA drones is getting infuriating. (bold below is Albert's)
August's rebound in the US manufacturing ISM was an even bigger surprise. This is a truly nonsensical piece of datum as it was totally at variance with the regional ISMs that come out in the weeks before. The ISM is made up of leading, coincident and lagging  indicators. The leading indicators - new orders, unfilled orders and vendor deliveries - all fell and point to further severe weakness in the headline measure ahead (see chart above). It was the coincident and lagging indicators such as production, inventories and employment that drove up the headline number. Some of the regional subcomponents (eg Philadelphia Fed workweek) are SCREAMING that recession is imminent (see left hand chart below).
Lastly, Edwards discusses the feasibility of his S&P 450 target in light of a Fed that is resolute in never ever allowing stocks to fall again.
Indeed we know that a central plank of the unhinged policies being pursued by the Fed and other central banks is to use QE to deliberately target higher asset prices. Ben Bernanke in a recent Jackson Hole speech dressed this up as a "portfolio balance channel", but in reality we know from current and previous Fed Governors (most notably Alan Greenspan), that they view boosting equity and property prices as essential for boosting economic activity. Same old Fed with the same old ruinous policies. And by keeping equity and property prices higher, the US and UK Central Banks are still trying to cover up their contribution towards the ruination of American and British middle classes - (see GSW 21 January 2010, Theft! Were the US and UK central banks complicit in robbing the middle classes? - link). The Fed may indeed prevent equity prices from slumping with any QE2 announcement. But this sounds a familiar refrain at this point in the cycle. For is monetary easing in the form of QE that different from interest rate cuts in its ability to boost equity prices? Indeed announced rate cuts in previous downturns often did generate decent technical rallies. But in the absence of any imminent cyclical recovery, equity prices continue to slide lower (see chart below).  The key for me is whether QE2 can revive the economic cycle, not equity prices temporarily.
And here is the kicker for all those expecting a massive stock surge on the imminet QE2 announcement: 
Many of our clients think QE2 might give a temporary flip to the risk assets but that the subsequent failure to produce any cyclical impact will cause an extremely violent reaction as investors lose faith in QE as a policy tool and Central Banks in general.
Forget our suggestion about the Greenspan-Edwards deathmatch (aside from the obvious outcome) - we cede it to the SocGen dude preemptively:
If we plunge back into recession, do not place too much confidence in the Central Banks having control of events. As my colleague, Dylan Grice, said last week "let them keep pressing their buttons." Ultimately they cannot fool all of the investors, all of the time.