Global warming stopped 16 years ago, Met Office report reveals: MoS got it right about warming... so who are the 'deniers' now? | Mail Online

http://www.dailymail.co.uk/news/article-2261577/Global-warming-stopped-16-years-ago-Met-Office-report-reveals-MoS-got-right-warming--deniers-now.html

Global warming stopped 16 years ago, Met Office report reveals: MoS got it right about warming... so who are the 'deniers' now?

By David Rose

PUBLISHED: 20:12 EST, 12 January 2013 | UPDATED: 20:13 EST, 12 January 2013

Last year The Mail on Sunday reported a stunning fact: that global warming had 'paused' for 16 years. The Met Office's own monthly figures showed there had been no statistically significant increase in the world's temperature since 1997.

We were vilified. One Green website in the US said our report was 'utter bilge' that had to be 'exposed and attacked'.

The Met Office issued a press release claiming it was misleading, before quietly admitting a few days later that it was true that the world had not got significantly warmer since 1997 after all. A Guardian columnist wondered how we could be 'punished'.

Pause: Last year The Mail on Sunday reported global warming had 'paused' for 16 years

But then last week, the rest of the media caught up with our report. On Tuesday, news finally broke of a revised Met Office 'decadal forecast', which not only acknowledges the pause, but predicts it will continue at least until 2017. It says world temperatures are likely to stay around 0.43 degrees above the long-term average – as by then they will have done for 20 years.

This is hugely significant. It amounts to an admission that earlier forecasts – which have dictated years of Government policy and will cost tens of billions of pounds – were wrong. They did not, the Met Office now accepts, take sufficient account of  'natural variability' – the effects of phenomena such as ocean temperature cycles – which at least for now are counteracting greenhouse gas warming.

 

Surely the Met Office would trumpet this important news, as it has done when publishing warnings of imminent temperature rises. But there was no fanfare. Instead, it issued the revised forecast on the 'research' section of its website – on Christmas Eve. It only came to light when it was noticed by an eagle-eyed climate blogger, and then by the Global Warming Policy Foundation, the think-tank headed by Lord Lawson.

Then, rather than reporting the news objectively, Britain's Green Establishment went into denial. Neither The Guardian nor The Independent bothered to report it in their paper editions, although The Independent did later run  an editorial saying that the new forecast was merely a trivial 'tweak'. Instead, they luridly reported on the heatwave and raging bushfires in Australia.

One of the curious features of Green journalism is that if it  gets unusually cold, this will be dismissed as mere 'weather' of no significance, while a heatwave or violent storm will be seized on as a warning that catastrophic climate change is already here.

Instead of focusing on the news that global warming had halted, other newspapers reported on the heatwave and raging bushfires in Australia

Where the new forecast was mentioned on the BBC and other websites, experts were marshalled to reassure apocalypse-hungry readers that the end of the world was just as nigh as before.  A warming hiatus of a mere  20 years, they said, was nothing.

This would all be faintly humorous, if it wasn't so deadly serious. Back in 2007, when  the Labour Government was preparing what became the Climate Change Act, far from being neutral, the Met Office made a blatant attempt to influence political debate.

In a glossy brochure, it revealed it had a 'new system' that could predict the future, by combining analysis of natural variability with long-term trends. The system, it warned, showed that by 2014 'global average temperature is expected to have risen by around 0.3 degrees compared to 2004, and half of the years after 2009 are predicted to be hotter than the current record hot year, 1998'.

It boasted that this showed how the Met Office used 'world-class science to underpin policy'.  No doubt some of the MPs who voted for the Act, with its hugely expensive targets to replace fossil energy with 'renewables' such as wind, were swayed by it. Barely five years later, it is clear this forecast was worthless. But the Met Office is unrepentant. 'Climate models do predict periods of little or no warming, or even cooling,' a spokesman told me. Despite the pause, the long-term projection that the world is likely to warm by about three degrees if the proportion of carbon dioxide in the atmosphere doubles was still on course.

Inconvenient truth: The MoS report last October that was vilifed by the Green Establishment

We all get things wrong, and by definition futurology is a risky business. But behind all this lies something much more pernicious than a revised decadal forecast. The problem is not the difficulty of predicting something as chaotic as the Earth's climate,  but the almost Stalinist way the Green Establishment tries to stifle dissent.

There is, for example, the odious term 'denier'. This is applied to anyone who questions the new orthodoxy about global warming. It doesn't matter if one states that yes, CO2 does warm the planet, but the critical issues we need to address are how fast and how much: if one doesn't anticipate catastrophe, one must be vilified, and equated with those who deny the Holocaust.

Yet the real deniers are those who don't just claim that the pause is insignificant, but that it doesn't exist at all. Such deniers also still insist that the 'science is settled'. The truth is that the unexpected pause has triggered  a new spate of research, in which many supposed 'consensus' conclusions are being questioned.

Some scientists are revisiting some basic assumptions of climate prediction models, such as the effects of clouds and smoke particles in the atmosphere. They now think that the claim that the warming effect of CO2 is 'amplified' by things such as cloud cover have been seriously exaggerated. In their view, doubling CO2 may only warm the world by 1.5 degrees or so, giving us many more decades to develop lower carbon energy sources.

How have the Green deniers been so successful in concealing such debates?

Partly it is the web of commercial interests that both fund and are sustained by Green climate orthodoxy. But it is also their dissenter-trashing machine.

A day before the revised Met Office forecast broke, US blog site Planet 3.0 awarded me its Golden Horseshoe award for the 'most brazenly damaging and malign bad science of 2013'.'

I'll be clutching it when they burn me at the stake.

 

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Calafia Beach Pundit: Why the modest growth in jobs means an end to QE

http://scottgrannis.blogspot.com/2013/06/why-modest-growth-in-jobs-means-end-to.html?m=1

Why the modest growth in jobs means an end to QE

The May employment report shed no new light on the state of the labor market. For the past two years, and for the past six months, the private sector has been adding jobs at about a 2% annual pace. Consideriing the huge job losses that came with the Great Recession, that adds up to the slowest recovery in the jobs market in modern times, and it's the source of lots of angst and hand-wringing. Things could be a lot better, but at least jobs are growing. There is no boom or double-dip recession out there, and neither appear likely for the foreseeable future. It's simply modest-to-moderate growth.

But as I've been asserting for a long time, avoiding recession is all that matters when the yield on cash is zero. If the labor market continues to grow at the pace of the past two years, investors who avoid cash are likely to do better than those who hold cash, because the yield on non-cash assets is much higher. Zero-interest cash only pays off if the economy suffers a disruption that reduces cash flow, increases default risk, and/or impairs profits (since any of those is likely to depress the prices of risk assets). As time passes and the economy continues to grow, the cumulative outperformance of non-cash assets will increase the world's temptation to reduce cash holdings, and that will eventually show up as higher prices for risk assets.

The Fed will eventually succeed in reflating the economy, but not by "printing money." Reflation requires convincing the world that holding lots of cash (and relatively safe assets like short-term Treasuries) doesn't make sense. To date, the Fed has been working hard to supply bank reserves to the world in order to satisfy what has proved to be an extraordinary demand for cash and cash equivalents. As the demand for cash declines, the Fed should be able to reverse its Quantitative Easing with no adverse consequences, because it will be trading higher-yielding assets (e.g., notes and bonds) for the cash the public has tired of holding. The key to reversing QE is thus a declining demand for money, and we are seeing the early signs of that in the recent rise in real yields on TIPS and nominal yields on Treasuries (see chart above). Rising yields on relatively safe assets such as 5-yr T-notes and 5-yr TIPS are the flip side of falling prices (i.e., falling demand). Put another way, rising real yields on TIPS are a sign of increased confidence in future economic growth (or decreased pessimism). Increased confidence in the future comes hand in hand with reduced demand for cash and cash equivalents.

But back to the labor market. As the chart above shows, the economy continues to add jobs. Since the low in early 2010, the private sector has created between 6.7 and 6.9 million new jobs, according to the government's two employment surveys. There is no sign that this growth is ebbing or accelerating.

Overall jobs growth has been a bit slower than the growth of private sector jobs, because the public sector has been shedding jobs for the past four years. This is actually a healthy development, since the private sector is generally more efficient than the public sector, and since the public sector had grown like topsy over the past decade or so. A shrinking public sector frees up resources for the more productive private sector, so over time that should boost growth somewhat. We probably haven't seen the end of this shrinkage either.

Private sector jobs growth has been averaging just over 2% a year for more the past two years. This is almost exactly the same pace as jobs growth in the mid-2000s. In a sense, it's business as usual.

The most unusual thing about this recovery is the very slow growth of the labor force over the past four years. Instead of growing about 1% per year (in line with growth in the population), labor force growth has been extremely weak, and has posted only 0.4% growth in the past year. Demographics (e.g., the aging and retirement of baby boomers) can explain some of this slowdown, but it's likely that the large increase in transfer payments since 2008 (e.g., food stamps, social security disability, emergency unemployment benefits) has played a role as well. When compassionate government doles out money to assuage the victims of a recession, it inadvertently acts to retard the recovery because it reduces the incentives to get back to work. It's also likely that the big increase in regulatory burdens in recent years (e.g., Dodd-Frank, Obamacare, EPA rules) has created disincentives for businesses to expand, thus limiting job opportunities and leaving many would-be workers discouraged. Higher marginal tax rates haven't helped either, since they are a disincentive to work and invest. The economy is growing at 2% despite all these headwinds.

Does the Fed really think that buying $85 billion worth or Treasuries and MBS each month and paying for them with bank reserves will change this relatively slow-growth picture? How exactly will more bank reserves lead to more job creation? It's not obvious to me.

As the chart above shows, there is no evidence that the Fed's Quantitative Easing efforts have resulted in any unusual amount of money growth. The M2 measure of the money supply, arguably the best, has grown only slightly faster than 6% per year since the Great Recession. That growth is easily explained by strong money demand: the vast majority of the growth in M2 in the past 4-5 years has come from an increase in bank savings deposits. At the same time, virtually all of the Fed's $2.3 trillion worth of purchases of Treasuries and MBS have gone to support increased currency in circulation and excess reserves. Banks now hold $1.9 trillion of excess reserves at the Fed; they are presumably happy to do so because reserves pay interest and are thus effectively a substitute for T-bills. Banks are still quite risk averse as is the public, since households continue to deleverage. Hardly any of the flood of new bank reserves has been used by banks to increase lending and expand the money supply. Currency in circulation is up more than $0.34 trillion since Q3/08, largely because people all over the world want to hold more dollars under the mattress, so to speak.

This can't go on indefinitely. At some point attitudes toward risk will change, and the demand for safe assets and cash will decline. Bank lending will increase. Money supply growth will increase. Nominal GDP growth will increase. The prices of risk assets will rise further. All of these will be signs that the Fed should begin to reverse QE. As mentioned above, there are already tentative signs of this, and one more non-recessionary jobs report such as today's only makes it more likely that this process is getting underway. I'm reminded of my post last March:

... the biggest risk we all face as a result of the Fed's unprecedented experiment in quantitative easing is the return of confidence and the decline of risk aversion. If there comes a time when banks no longer want to hold trillions of dollars worth of excess bank reserves for whatever reason (e.g., the interest rate the Fed is paying is no longer attractive, or the banks feel comfortable using their reserves to ramp up lending, or the public no longer wants to keep many of trillions of dollars in bank savings deposits), that is when things will get "interesting."

I suspect that the Fed has been engaged in a bit of false advertising, claiming that it is buying billions of Treasuries and MBS in order to lower interest rates and thereby goose the economy. The dirty secret is that monetary policy can't create or stimulate growth, it can only facilitate growth. As I discussed the other day, interest rates are now higher than they were when QE3 started late last year. Paradoxically, rising interest rates are the clearest sign that QE has achieved its real purpose. In reality, all the Fed is doing is satisfying the world's demand for safe assets: exchanging bank reserves for notes and bonds. There's nothing wrong with that, and if they hadn't done this we'd be in a world of hurt—there would have been a shortage of safe money and that could have led to deflation and worse. The Fed has satisfied the world's demand for safe assets, but there is no evidence at all that the Fed's actions have translated into more jobs or faster growth. The economy has been growing all along the old-fashioned way: by adjusting to new realities, by working harder and more efficiently, and by investing more, in spite of all the obstacles. Economic growth and new jobs are not created by adding bank reserves to bank balance sheets.

The issue right now is when the Fed will begin to "taper" its QE program, and whether this will hurt the economy or not. The Fed has suggested that the unemployment rate needs to fall much further before they start to unwind QE, but we're not likely to see a 6.5% unemployment rate anytime soon if current trends continue—it could take another year.

Meanwhile, there seems to be growing unease among FOMC members with the obvious progress the economy is making. It's risky to keep the monetary pedal to the metal year after year when the economy has already demonstrated the ability to create jobs at the same pace as it did in the mid-2000s.

I think this explains why the Fed is trying now to accelerate its transition to an unwinding of QE, well in advance of the economy hitting the targets the Fed had previously proposed. It's a tacit admission that the purpose of QE wasn't really to create more jobs, it was to satisfy the world's demand for safety in uncertain times. Now that the economy has demonstrated the ability to grow for the past four years, and now that the public's demand for safe assets is beginning to decline (witness also the big drop in gold prices in recent months), QE is no longer necessary. Godspeed. It will not be missed. Higher interest rates do not necessarily pose a threat to growth, they are a natural result of growth.

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Calafia Beach Pundit: Putting today's market action in perspective

http://scottgrannis.blogspot.com/2013/06/putting-todays-market-action-in.html


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http://pragcap.com/the-broad-money-supply-is-always-endogenous

The Broad Money Supply is ALWAYS Endogenous

Monetary Realism starts with a simple understanding – money matters within the monetary and the dominant form of money in today's monetary system is bank deposits.  Bank deposits are created when banks make loans.  And banks make loans when creditworthy customers have demand for loans.  So the USA has a money supply that is "endogenous" and elastic.  That is, the money supply is determined by the amount of new lending that is done and it's elastic in that it can expand and contract (repayment of loans destroys deposits).*

The central bank exists primarily to ensure that the payments system in the monetary system is stable.  Because we have private for profit banking there's an inherent instability in the banking system.  That is, there are times during the business cycle when banks might ease lending standards and issue more loans than their customers can actually pay back.  This can be potentially destabilizing and there are few things worse for the economy than a payments system (which is run by the banks) being unworkable.  So the Fed tries to ensure an orderly payments system before all else.

The reason I bring all this up is because I noticed Scott Sumner making a relatively basic banking error in a recent post and I think it's important to get this stuff right if we're going to actually understand the monetary system and how various policies might impact the monetary system.  He said:

"Individual banks are not constrained in making loans in the short run, as they can always borrow needed reserves in the fed funds market.  If they do so that will put upward pressure on interest rates, and the Fed will supply the needed reserves to maintain their fed funds target.

In the long run banks are constrained, as the Fed will adjust the monetary base to prevent economic overheating.  The endogenous money folks, who are right about the period between Fed meetings, overlook this longer run problem with their theory.  Six weeks is not a long enough period to have major macroeconomic consequences.  But in the very short run the banks are not constrained by a lack of reserves, if the Fed is targeting the short term interest rate.  The base is endogenous during that period."

The first paragraph is correct.  The money multiplier is a myth.  The Fed will always supply reserves to the banking system if the banking system as a whole cannot meet its reserve requirements.  But the second paragraph gets things wrong.  I won't quibble over the fact that the "long-run" is just a series of "short-runs", but I do have an issue with the rest.  Adjusting the monetary base will not necessarily have any impact on the amount of loans the banking system can make.

Let's say the Fed started to reduce QE tomorrow.  This would not mean banks can make fewer loans.  Banks make loans and find reserves later if they must.  But the banking system is awash in excess reserves so finding reserves to cover their requirements is not necessary in today's environment.  The Fed could reduce the monetary base by several trillion dollars before it runs into a level where it would then NECESSARILY supply reserves to the banks if they needed to meet reserve requirements.  But even at this point there would be no "Fed choice" in the matter.  If it wants to maintain an orderly payments system the Fed MUST supply the reserves necessary for banks to settle payments and meet reserve requirements.  But that concept is largely inapplicable to a system that has a $3T+ monetary base and excess reserves through the nose….

Now, all of this might influence the spread at which banks make loans (in some cases of QE it might even impact bank capital which could impact lending), but that's secondary and doesn't make the broad money supply any less endogenous.  It just means the Fed can very indirectly impact the lending capabilities of the broader banking system.  But the monetary base does not directly determine the amount of lending the banks can do….

Lastly, it's important to note that the thrust of Sumner's post is basically correct.  That is, the Fed's exit strategy is rather simple from here.  If it needs to raise interest rates while maintaining its current balance sheet it will simply raise the interest rate on excess reserves, which is today serving as a de-facto Fed Funds Rate.

* QE via a non-bank can also increase deposit levels, but this is not relevant to this discussion.  

** Some people might claim cash is a portion of the monetary base that is exogenous.  But this is false.  Cash is supplied to the banking system by the Treasury (not the Fed) in order to meet demand by bank customers for cash needs.  

*** Someone seems to be commenting on Scott Sumner's site using my name.  I NEVER comment on other websites (MR or PC) so if you see my name then it's not actually me.  Though this person appears to be quoting me via Twitter so I can't say it's not me at all.  

**** Endogenous money means the money supply is mostly created endogenously as credit.  This means that private banks are the primary issuers of money and do so based on the demand from creditworthy customers.  So the central bank has far less control over the money supply than one might presume if they learned the money multiplier theory.  This is the central point in understanding endogenous money.  

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People Are Awesome 2013

http://www.flixxy.com/people-are-awesome-2013.htm?utm_source=nl


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Magnus, on spending our way out of the Mumps | FT Alphaville

http://ftalphaville.ft.com/2012/10/09/1197791/magnus-on-spending-our-way-out-of-the-mumps/

Magnus, on spending our way out of the Mumps

Mumps. A viral inflammatory disease. Or… the case of "most unusual monetary policies".

According to George Magnus of UBS, most of the western world has now been struck by the latter. And — contrary to popular belief — the disease is underpinned not by western profligacy, but possibly the very opposite phenomenon. Too much thrift. The want and need for too many savings in economies that demands spending on available capacity and goods today. It's a theme also being explored by Paul Krugman as part of his anti-austerity reasoning.

As Magnus explains in his latest research note, it is unlikely that mumps can ever solve the economic problem. At most, mumps can buy time until society realises the collective need to stop saving and start spending:

Second, down on the ground, mumps only work if the central bank can shift the private sector's preference for savings out of current income towards borrowing and spending. In a deep and protracted deleveraging, this simply cannot happen, at least on a sufficient scale. Generally speaking, the net financial savings of the private sector in advanced economies remain elevated or high, especially in the corporate sector. If mumps were going to have a galvanising impact on any sector, it should be on companies, which were and remain the only major sector with relatively low debt ratios. But despite, strong profits, good balance sheets, plenty of cash and the lowest borrowing rates in a generation, investment spending has continued to trend down (as a share of GDP), notwithstanding the bounce after the recent slump.

In other words, there is no point in being frugal.

Investment is and always will be the other side of saving. Culturally, we have become fixated with the idea that we need to save for our future. But there may be a solid economic justification for why those savings are yielding an ever lower return: society does not need us to defer spending the way we used to.

Ordinarily, via investment, deferred consumption is redirected towards consumption focused on boosting future output.

But the problem we arguably face today is that there is more demand for saving than there is opportunity for investment — at least the sort that can eventually yield a return that does not involve over-using the one thing the economy is truly constrained by: natural resources.

Which brings us back to the base money confusion and the misunderstanding about what "base money" is. As Magnus explains:

Third, the belief in mumps is based on the erroneous view that the creation of additional bank reserves, per se, will cause banks to turn them into new lending. As bank reserves rise, banks can lend more to one another if they choose, but that simply means that the money created by mumps stays locked in the banking system. What drives new loans is new sight, or demand, deposits and that's the outcome of economic activity. Replacing government bonds or other assets with reserves on the balance sheets of financial institutions, or changing the maturity profile of government bonds held in private portfolios does some things, but stimulating lending and spending isn't one of them. Nor, in the current environment, is creating inflation.

In short, the problem is not money availability but rather a lack of opportunities to deploy that money towards.

Think of it as the modern paradox of investment. We don't necessarily need investments in things that produce more stuff. Rather, we need investment in companies that produce the same amount of stuff only more efficiently — or more stuff with less resources. There's also the need to invest in big ideas, public infrastructure and utility projects, all of which are notoriously hard to squeeze profits out of.

It's possibly one reason why the corporate sector has become so margin obsessed.

And here's where the limits of growth debate comes in.

If there is a need in society, and a company moves to service that need, the company will usually derive a profit from filling that gap. (Unless it's infrastructure-based in which case it's about covering one's costs and ensuring enough income can be generated to maintain operations.) So it makes sense to redirect today's available capital, labour and output from an investor — who has no need for those things today, but believes will need more of those things tomorrow — to a company or entrepreneur, and reward the investor with additional output tomorrow.

Throughout history, bankruptcies have been caused by companies that were not able to keep those promises to investors in the future — mostly because the things they were making were less needed than anticipated.

With the resource constraint, however, you now also have to consider the "waste effect' on marginal utility — the degree to which demand for stuff detracts from available resources.

Yet there is another under-appreciated consequence of mumps — one that highlights its possible ultimate futility as well as its role in accelerating what could be the inevitable: its impact on savings.

Mumps, after all, is just as much about coercing people into spending today — rather than deferring spending until tomorrow — as it is about adding liquidity to the system. Central banks do this by effectively killing yield more quickly than the economy itself is killing yield. The point is to convince people that there is an ever greater opportunity cost in not spending today.

As Magnus notes:

Fourth, mumps may be harming the economy to the extent that low policy rates and bond yields are withering the savings side of the economy, even as people and companies want to save, at least in an ex ante sense7. They are certainly undermining pension plans, and giving corporate sponsors additional reasons to hold on to cash. And they may also be having adverse distributional effects across income groups. The first part of this is about the loss of interest income. In the US, for example, household interest income from assets has dropped to below $1 trillion, compared to $1.4 trillion in 2008. That $400 billion drop is equivalent to a fall from 11.5% to below 7.5% as share of personal income, and, in passing, to the size of President Obama's stimulus programme in 2009. What the left hand giveth, the right hand taketh away.

Since taking mumps away from the economy is not a practical solution, especially when the private sector refuses to spend, it stands to reason that the government must spend on behalf of the economy instead.

As Magnus argues, this is largely about recognising that one does not detract from the other, and that it's not a question of 'either-or':

But moving on, the second is that if central banks can't re-energise sustainable economic growth or tackle structural economic weaknesses, governments should. But this entails their switching tack to implement both demand-side and supplyside policies, and not treat them as an 'either-or' choice. This is common sense because the economic gains from structural reforms are medium- to long-term, while the pain they inflict is up front. To compensate, and give structural policies stronger political legitimacy and a chance to succeed, demand-side fiscal changes are needed too, in particular those that aim to raise employment and labour force participation rates. Most advanced economies face this challenge, not least the US as the so-called fiscal cliff looms, but in the Eurozone, it has become critical.

To Europe's political class he thus states:

Politicians still don't get it: in spite of some rhetoric regarding the need for growth since the election of President Hollande in France earlier this year, not everyone can save more at the same time without perpetuating or deepening the depression. In such an environment, governments need to accommodate the deleveraging and additional savings of the private sector, not exacerbate them. And while some sovereign invalid nations have no option but to make painful fiscal cutbacks, they should be allowed and encouraged to do this not as caseby- case, errant countries, but in the context of a) a holistic approach to economic policy making in the Eurozone, involving creditors, and wider use of debt restructuring or relief arrangements, and b) a banking and fiscal union, which will require debtor, and especially creditor, nations to take a deep breath, and give up their political sovereignty.

We feel the point here is that yes, structural reforms have to be taken in many European countries. However, the sooner the world realises that the old debt rules don't necessarily apply to economies that to this day cannot justify delayed consumption — because there is more than enough capacity and output to go round, and there is no need to consume less today in order to ensure more output tomorrow — there isn't the same importance attached to ensuring that old investor promises are kept sacrosanct.

After all, it may not be the case that the economy has failed to provide the additional output investors were promised and that there is thus a scramble over a small amount of goods — something that would have given those who held promises "to more output" a clear advantage in society (making those promises extremely valuable). In those circumstances, the unexpected cancellation of promises would naturally lead to someone, at some point, having had to go without.

What we are arguing instead is that today that's not the case, and that tangible output has most likely exceeded expectations. So whether you hold a promise or not is largely irrelevant. The promise is part of a semantic debate over the quantitative value of the promises, rather than the goods which are redeemable with them. After all, what does the number of promises in the economy matter, when there is more than enough goods and services to go round? In this scenario, cancelling the promise allows the economy to reset the allocation system of the wealth that's freely available — it does not, however, result in someone at any point having to go without.

The reset is about consuming what is available today — stopping it from going to waste — and, most importantly, creating a more sensible wealth allocation system for a future that is far too productive for its own good. It's not about promising more to those who delay consumption today for the sake of more output tomorrow, but rather rewarding those who don't consume enough today with the ability to do so — perhaps in this curbing the inequality gap. That's not to say all investment becomes futile, because there has to be a reward distributed to those who dedicate current consumption towards efficiencies that will keep improving the standard of life for all, but without posing an additional burden on resources.

But perhaps that's what the crisis is about? Figuring out how people can be incentivised to keep improving the world, in an environment that no longer requires people to go without to get stuff done.

Owning an equity stake in the business that employs you *might* be one way around it. Then again, so might moving towards a more equity-based currency exchange system. Who knows.

Related links:
Corporate margins reaching record levels – FT
Rubik's Revolutions - FT Alphaville
Don't call it money printing, rubik's cube edition - FT Alphaville
A time of hoarding and inflation fears, 1930s edition – FT Alphaville
Is unlimited growth a thing of the past? – FT

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Welcome to the ‘Desert of the Real’ — a postmodern economy | FT Alphaville

http://ftalphaville.ft.com/2012/10/09/1200681/welcome-to-the-desert-of-the-real-a-postmodern-economy/

Welcome to the 'Desert of the Real' — a postmodern economy

Volatility guru Christopher Cole, who heads up the volatility fund Artemis Capital Management, is known for making interesting arguments when it comes to volatility and risk. Previous philosophical thoughts have questioned the concept of volatility, proposed that risk itself is changing, and that QE and other forms of government intervention are warping volatility beyond recognition.

His latest note, though, takes us to an entirely new dimension of market abstraction.

Here's a starter sample:

Modern financial markets are a game of impossible objects. In a world where global central banks manipulate the cost of risk the mechanics of price discovery have disengaged from reality resulting in paradoxical expressions of value that should not exist according to efficient market theory. Fear and safety are now interchangeable in a speculative and high stakes game of perception. The efficient frontier is now contorted to such a degree that traditional empirical views are no longer relevant.

—

Likewise how certain are we that the elevated two-dimensional prices of risk assets and low spot volatility have anything to do with fundamental three-dimensional reality? In this brave new world volatility is an important dimension of risk because it can measure investor trust in the market depiction of the future economy. The problem is that the abstraction of the market has become an economic reality unto itself. You can no longer play by the old rules since those rules no longer apply. I know what you are thinking. You didn't get your MBA to be an amateur philosopher – your job is to make cold-hard decisions about real money – not read Plato. You are out of luck. For the next decade this market is going to reward philosophers over students of business. Why? Because the modern investor must hold several contradictory ideas in his or her head at the same time and none of them really make any sense according to business school case studies. Welcome to the impossible market where…

We, for one, like where he's going with this.

His point seems to be that it's not just a question of the old rules changing. More that we may be standing on the edge of a paradigm shift so unexpected that nobody has yet been able to imagine it. A shift, we dare say, that could take conventional business and investment practice and spin it on its head entirely.

For now that means volatility is both cheap and expensive, according to Cole.

In many respects it's a quantum investing universe.

This makes sense to us since it suggests that value itself can only really be determined by an independent observer, subjectively. Until it's observed, it can be both valued and not valued simultaneously. Or perhaps, weirder still, there is no universal value system at all?

If that's not mind-bending enough, here's some more reflective thought from Cole:

The perfectly efficient market is by nature random. When the market has too much influence over the economic reality it was designed to mimic, the flow of information becomes increasingly less efficient with powerful consequences. Information becomes trapped in a self-reflexive cycle whereby the market is a mirror unto itself. Lack of randomness ironically leads to chaos. I believe this is what George Soros refers to as "reflexivity". The impossible object is a visual example of reflexivity. Deeper dimension markets like volatility, correlation, and volatility-of-volatility are important because they measure our confidence in the financial representation of economic reality.

If financial markets are the mirror reflecting a vision of our economy third dimension markets measure the distortion in the reflection. If you are familiar with Plato's Allegory of the Cave volatility is best understood as our collective trust in the shadows on the wall. In the 1985 work "Simulacra and Simulation" French philosopher Jean Baudrillard recalls the Borges fable about the cartographers of a great Empire who drew a map of its territories so detailed it was as vast as the Empire itself. According to Baudrillard as the actual Empire collapses the inhabitants begin to live their lives within the abstraction believing the map to be real (his work inspired the classic film "The Matrix" and the book is prominently displayed in one scene). The map is accepted as truth and people ignorantly live within a mechanism of their own design and the reality of the Empire is forgotten (10). This fable is a fitting allegory for our modern financial markets.

To get all Matrix on this, it's like saying the market has a clear-cut choice to make. It can either continue to take the blue pill and fool itself into thinking everything is as it always was — despite the glitch in the Matrix that was 2008 — or dare to see the economic reality for what it is by taking the red pill.

Naturally, the risk associated with taking the red pill is impossible to quantify — it could, after all, compromise our very understanding of economic reality.

It's understandable, in that context, that dishing out the blue pill seems so much more palatable to so many. We've called this the makings of a Jedi economy. Cole, however, puts it this way:

In the postmodern economy market expectations are more important to fundamental growth than the reality of supply and demand the market was designed to mimic. Our fiscal well being is now prisoner to financial and monetary engineering of our own design. Central banking strategy does not hide this fact with the goal of creating the optional illusion of economic prosperity through artificially higher asset prices to stimulate the real economy. In doing so they are exposing us all to hyperreality or what Baudrillard called "the desert of real".

In Fed speak this is what Bernanke calls the "wealth effect" and during his September 13th press conference he explained the concept: "if people feel that their financial situation is better because their 401k looks better or for whatever reason… they are more willing to go out and spend, and that's going to provide demand that firms need in order to be willing to hire and to invest." (11) In the postmodern financial system markets are a self-fulfilling projection unto themselves while trending toward inevitable disequilibrium. While it may be natural to conclude that the real economy is slave to the shadow banking system this is not a correct interpretation of the Baudrillard philosophy. The higher concept is that our economy is the shadow banking system… the Empire is gone and we are living ignorantly within the abstraction. The Fed must support the shadow banking oligarchy because without it the abstraction would fail.

Meanwhile, a nice graphic to illustrate the economy's journey to the 'Desert of the Real'…

As to how this all applies to the price of volatility, the following is a useful excerpt (our emphasis)

When the market is an impossible object the price of risk can change radically as perception shifts. Hence what may be sound judgment one minute may be completely foolish the next. If two contradictory ideas can exist simultaneously then there is no such thing as "simple perception" anymore. How is it possible for safety to be risky and for otherwise calm markets to be rich in fear? Paradox is now fundamental. The investor who can adapt to shifting perspectives will endure the volatility of an impossible object. Common sense says do not trust your common sense anymore. Don't live in a box or walk a flight of stairs that leads back from whence you came. We cannot assume that the paradigm of the last three decades of lower interest rates and debt expansion will be relevant going forward nor can we find shelter in the consensus rules formed around that standard. Today's market is the most infinitely complex impossible object ever imagined and for the investor to thrive in it he or she must think creatively and be adaptable to the changing modes of acuity. You must be able to imagine different realistic states of the world and think as both the mathematician and the artist. Ironically he or she who plays it safe may be assuming the greatest risk of all.

In short, we're talking paradigm shift — if not the reassessment of what value really is.

Who knows, maybe in the new postmodern economy hyperinflation is a necessity. Deflation is a reality. And value itself is impossible to define monetarily?

Whatever the answer is, "prepare for the entirely unexpected" seems to be the message from the volatility markets according to Cole.

Related links:
Rubik's Revolutions - FT Alphaville
Jedi Economics - FT Alphaville
The calm before the (volatility) storm - FT Alphaville
A time of hoarding and inflation fears, 1930s edition – FT Alphaville
Is unlimited growth a thing of the past? – FT

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The Center of the Universe » Blog Archive » QE still driving portfolio shifting

http://moslereconomics.com/2010/11/04/qe-still-driving-portfolio-shifting/

QE still driving portfolio shifting

Posted by WARREN MOSLER on November 4th, 2010

I've been watching for a 'buy the rumor sell the news' 'risk off' reversal, but it happened at best only momentarily after the Fed announcement, when the 10 year tsy note dipped to maybe 2.62 very briefly, stocks dipped, the dollar sort of held, gold was off a touch, etc. But now it looks like it's 'risk back on' with a vengeance as both believers in QE and those who believe others believe in QE are piling on.

The fact remains that QE does nothing apart from alter the term structure of rates.

There are no 'quantity' effects, though from the following article and market reactions much of the world still believes there are substantial quantity effects.

And what we are seeing are the effects of ongoing portfolio shifting and trading based on the false notions about QE.

To review,

QE is not 'money printing' of any consequence. It just alters the duration of outstanding govt liabilities which alters the term structure of risk free rates.

QE removes some interest income from the economy which the Fed turns over to the Tsy. This works against 'earnings' in general.

QE alters the discount rates that price assets, helping valuations.

Japan has done enough QE to keep 10 year jgb's below 1%, without triggering inflation or supporting aggregate demand in any meaningful way. Japan's economy remains relatively flat, even with substantial net exports, which help domestic demand, a policy to which we are now aspiring.

QE does not increase commodity consumption or oil consumption.

QE does not provide liquidity for the rest of the world.

QE does cause a lot of portfolio shifting which one way or another is functionally 'getting short the dollar'

This is much like what happened when panicked money paid up to move out of the euro, driving it briefly down to 118, if I recall correctly.

No telling how long this QE ride will last.

What's reasonably certain is the Fed will do what it can to keep rates low until it looks like it's meeting at least one of its dual mandates.

Asians Gird for Bubble Threat, Criticize Fed Move

By Michael Heath

November 4 Bloomberg) — Asia-Pacific officials are preparing
for stronger currencies and asset-price inflation as they blamed
the U.S. Federal Reserve's expanded monetary stimulus for
threatening to escalate an inflow of capital into the region.

Chinese central bank adviser Xia Bin said Fed quantitative
easing is "uncontrolled" money printing, and Japan's Prime
Minister Naoto Kan cited the U.S. pursuing a "weak-dollar
policy." The Hong Kong Monetary Authority warned the city's
property prices could surge and Malaysia's central bank chief
said nations are prepared to act jointly on capital flows.

"Extra liquidity due to quantitative easing will spill
into Asian markets," said Patrick Bennett, a Hong Kong-based
strategist at Standard Bank Group Ltd. "It will put increased
pressure on all currencies to appreciate, the yuan in particular
has been appreciating at a slower rate than others."

The International Monetary Fund last month urged Asia-
Pacific nations to withdraw policy stimulus to head off asset-
price pressures, as their world-leading economies draw capital
because of low interest rates in the U.S. and other advanced
countries. Today's reactions of regional policy makers reflect
the international ramifications of the Fed's decision yesterday
to inject $600 billion into the U.S. economy.

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The unintended consequences of QE: not what you think | FT Alphaville

http://ftalphaville.ft.com/2012/08/29/1136621/the-unintended-consequences-of-qe-not-what-you-think/

The unintended consequences of QE: not what you think

By now, everyone is familiar with the mantra that QE is [arghh!] money-printing and that a major unintended consequence could be a chronic and uncontrollable inflation. (One could call this the goldbug, Austrian, Republican case).

Less well known, perhaps, is the theory that QE could be just as unexpectedly deflationary — because long-term micro yields come to threaten a number of financial sectors outright, as well as general expectations of risk-free returns which lead to capital destructive feedback loops.

FT Alphaville readers will be more familiar with this second point, since it's something we've been arguing for a while… (see examples from our compendium on the matter here, here and here, including Cardiff Garcia's epic case against lowering the IOER ).

Yet, it's nice to see that someone from the economic big league is making a similar point.

Case in hand, the latest Federal Reserve Bank of Dallas working paper from William (Bill) White entitled "Ultra Easy Monetary Policy and the Law of Unintended Consequences".

In many ways it's a radical shift in mindset from the central banking arena, not least because of the statement on central bank independence that's made right from the offset (our emphasis):

It is also the case that ultra easy monetary policies can eventually threaten the health of financial institutions and the functioning of financial markets, threaten the "independence" of central banks, and can encourage imprudent behavior on the part of governments. None of these unintended consequences is desirable. Since monetary policy is not "a free lunch", governments must therefore use much more vigorously the policy levers they still control to support strong, sustainable and balanced growth at the global level.

What White goes on to suggest is that if asset purchases and ultra low yields do anything, they buy time. They are not, nor ever have been judged, an outright cure.

Ultimately, as time runs out, unintended long-term consequences will inevitably begin to impact. And these, he suggests, could manifest in many forms… deflation included.

Indeed, when it comes to price expectations, there's good reason, says White, to fear the D word just as much as inflation:

A further concern is that the reductions in real rates seen to date, associated with lower nominal borrowing rates and seemingly stable inflationary expectations, might at some point be offset by falling inflationary expectations. In the limit, expectations of deflation could not be ruled out. This in fact was an important part of the debt/ deflation process first described by Irving Fisher in 1936. The conventional counterargument is that such tendencies can be offset by articulation of explicit inflation targets to stabilize inflationary expectations. Even more powerful, a central bank could commit to a price level target, implying that any price declines would have subsequently to be offset by price increases.

However, there are at least two difficulties with such targeting proposals. The first is making the target credible when the monetary authorities' room for maneuver has already been constrained by the zero lower bound problem (ZLB). The second objection is even more fundamental; namely, the possibility that inflationary expectations are not based primarily on central banker's statements of good intent. Historical performance concerning inflation, changing perceptions about the central banks capacity and willingness to act, and other considerations could all play a role. The empirical evidence on this issue is not compelling in either direction.

That end point on central banking, meanwhile, is glaring.

What White seems to be saying is that if and when the QE ruse runs out and the time comes to influence markets through direct price level targeting, it could theoretically be too late.

That's to say there's a good chance that the credibility of the central bank will have been damaged so much, that it will be impossible to sway markets through policy declaration alone.

In short, the central bank will have lost control. And with the central bank not there to steer the economy, there'd be little stopping real-world deflationary forces — if they do exist — from running wild.

White doesn't dismiss the arguments for inflation outright. The bulk of the paper addresses both sides of the argument in equal balance. Yet it's the paper's exploration of the unintended consequences in the financial sector and for central banks themselves, which lean to the deflationary side, which we feel stand out the most.

There's no denying, for example, that extended low yields ultimately spell doom for many of today's financial business models.

As White writes:

Given the unprecedented character of the monetary policies followed in recent years, and the almost complete absence of a financial sector in currently used macroeconomic models, there might well be other unintended consequences that are not yet on the radar screen. By way of example only, futures brokers demand margin, and customers often over margin. The broker can invest the excess, and often a substantial portion of their profits comes from this source. Low interest rates threaten this income source and perhaps even the whole business model. A similar concern might arise concerning the viability of money market mutual funds, supposing that asset returns were not sufficient to even cover operating expenses. A final example of potential problems has to do with the swaps markets, where unexpectedly low policy rates can punish severely those that bet the wrong way. This could lead to bankruptcies and other unintended consequences.

When it comes to central banks, meanwhile, White identifies yet another key risk.

It's possible, he says, that central banks end up cornering the very markets they are trying to reset. In so doing they end up obfuscating important market signals and confusing their understanding of what's really going on:

Third, with central banks so active in so many markets, the danger rises that the prices in those markets will increasingly be determined by the central bank's actions. While there are both positive and negative implications for the broader economy, as described in earlier sections, there is one clear negative for central banks. The information normally provided to central banks by market movements, information which ought to help in the conduct of monetary policy, will be increasingly absent. Finally, with policies being essentially unprecedented, wholly unexpected implications for central banks (as with others) cannot be ruled out.

That this eventually compromises central bank independence is understandable. Government and central banks interests inevitably become completely intertwined.

Yet herein lies the irony. For, if it's clear that low-yield policies and QE buy time, and only time, this inevitably puts the onus on governments, not central banks, to steer the economy out of the path of the unintended consequences of monetary policy.

Indeed, as White concludes:

If governments do not use this time wisely, then the ongoing economic and financial crisis can only worsen as the unintended consequences of current monetary policies increasingly materialize.

Which, by the way, happens to be something that Bernanke and others have been hinting at for a long time.

Related links:
Ultra Easy Monetary Policy and the Law of Unintended Consequences – Federal Reserve Bank of Dallas
The cost of global central bank balance sheet expansion – FT Alphaville
Are western central banks having an existential crisis? - FT Alphaville
Why cutting IOER would be suicidal – FT Alphaville
The base money confusion – FT Alphaville

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A Fresh Harvest of Widows in the Widowmaker Trade | Monetary Realism

http://monetaryrealism.com/a-fresh-harvest-of-widows-in-the-widowmaker-trade/

A Fresh Harvest of Widows in the Widowmaker Trade

There is a famous trade out there called "The Widowmaker". Here is Joe W of Business Insider describing the trade:

"In finance, the "Widowmaker" trade basically means one thing: Shorting Japanese Government Bonds (JGB) and inevitably losing money.

Because of Japan's gigantic national debt, and because the Japanese bond rally has gone on so long, investors have called the top in the Japanese bond market for years, only to get impaled"

This has been going on for over 20 years now, and yet people have been crushed by the trade over and over again.

People are starting to think the government bonds in the United States should be shorted – because the U.S. has run up too much debt, and is engaged in "unlimited" QE. I put "unlimited" in quotes because in this case "unlimited" means "about as much as we did the last few times". But the overall structure of the thinking is nearly exactly the same as how people have been thinking about Japan for the last 20 years.

The widowmaker trade works with a few easy to spot steps:

1. Lots of people convince themselves inflation is right around the corner
2. They sell government bonds in huge quantities
3. They lose a ton of money when they are wrong about inflation

If you want to trade bonds while QE is going on, you need to think like a bond vigilante during QE, and then do the opposite once QE ends.

During QE, it is foolish to fight the massive tsunami of bond selling pressure. The CME is setting record volumes in their futures contracts, which is mostly due to the amount of volume in the interest rate complex.

Here is a quote from that post (bold mine):

"One interesting development in the U.S. Treasury and related interest rate markets is the soaring volume of transactions as all types of market participants position themselves for a life without the Federal Reserve as a guaranteed buyer."

Hmm. We will come back to this idea a bit later.

And of course, the real world data seems to support this idea.

Recently Izabella Kaminska is running a bit of a victory lap because she is finally getting well-deserved recognition she was one of the first on the "QE causes deflation" bandwagon.

People starting to realise QE was actually becoming a deflationary force? m.europe.wsj.com/articles/a/SB1…

— Izabella Kaminska (@izakaminska) May 31, 2013

 

This is a long time after she pointed out it was likely QE would cause deflation rather than inflation in this great post at FT alphaville.

The traditional thinking on QE is that it causes massive inflation. That QE is money printing of the most despicable method. That a bit of QE will cause massive hyperinflation.

Yet, we are well into our third round of QE here in the United States and inflation is subdued.

Still, this post is about the fresh harvest of widows that is about to be reaped in the widowmaker trade. One of the other ways to think about QE is through my soon-to-become-famous cash for clunkers QE bond trading model. Here is the description from when I called the top of bond yields right before QE II ended:

"I am starting to think that QEII does the same thing with Treasury debt. It pushes potential sales of Treasuries forward into the actual period of QEII.If you were looking to sell $50bn of Treasury bonds in August, wouldn't you at least consider moving the sale forward a few months, and selling those bonds in May or June?  Who wants to sell during one of the all time great bond selloffs?The U.S. Federal Reserve has stated they would buy truckloads of bonds during QE II.  So you know you can go into the market and sell, sell, sell – without any real impact on market prices.And if you're considering selling Treasuries in May, why not sell them today?  QEII might be suspended…and who wants to sell during one of the all time great bond selloffs? Why not sell them before that happens?

I think that every asset allocator in the world who is even considering selling Treasuries this year will do it earlier rather than during one of the great all time bond sell offs.

It's cash for clunkers argument applied to Treasuries.  It turns out that the critics of Cash for clunkers were correct – car sales did slow after CfC ended.   Basically, it pulled a bunch of car sales out of the future and into the time frame of the Cash for clunkers program.

The Fed's QEII is a great opportunity for weakly committed holders of Treasuries to exit their positions.  There is a known huge buyer of Treasuries in the market – why not sell to that known huge buyer?

I suspect this same thinking has something to do with the huge rally that happened at the end of QE I as well.  If you recall, there was nearly universal bearishness for the post-QE I bond market, but the day it stopped, bonds went on a historic rally.  All of the sellers had already sold when they knew the Fed would be there – so only natural buyers were left in the market.

 So we have a cash for clunkers effect, because people prepare for life without a guaranteed buyer.

Here is Barry Ritholtz saying the same thing.

"1) Large bond portfolios (think PIMCO, DoubleLine, etc). are getting out of the way in advance of Fed tapering. You can debate if they are early or not, but it is what it is.2) Watch the impact this has on credit driven purchases: House (especially) but also Autos and CapEx."

This mentality isn't hard to find at all.  It's really common belief in the markets "boy, if yields are going up today, wait until you see whats going to happen when the fed stops buying!"

If QE causes real world deflation, while people thing (incorrectly) QE causes inflation, then you'd expect something like a huge rally in bonds once QE ends, and then this rally to continue as it becomes obvious from real world data QE is causing deflation instead of the expected inflation. Combine this with a desert of sellers (who already sold when the fed was buying), and you have the recipe for huge, huge bond rallies once QE ends.

We know Japan engaged in QE on several occasions during the last 20 years. I don't have a good timeline that lines up japanese policy and yield movements, but we do have the legend of the widowmaker. Anyone thinking yields will continue to go up once QE ends (or is tapered off) is almost certainly going to be part of the next harvest in the widow maker trade.

 

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A Fresh Harvest of Widows in the Widowmaker Trade | Monetary Realism

http://monetaryrealism.com/a-fresh-harvest-of-widows-in-the-widowmaker-trade/

A Fresh Harvest of Widows in the Widowmaker Trade

There is a famous trade out there called "The Widowmaker". Here is Joe W of Business Insider describing the trade:

"In finance, the "Widowmaker" trade basically means one thing: Shorting Japanese Government Bonds (JGB) and inevitably losing money.

Because of Japan's gigantic national debt, and because the Japanese bond rally has gone on so long, investors have called the top in the Japanese bond market for years, only to get impaled"

This has been going on for over 20 years now, and yet people have been crushed by the trade over and over again.

People are starting to think the government bonds in the United States should be shorted – because the U.S. has run up too much debt, and is engaged in "unlimited" QE. I put "unlimited" in quotes because in this case "unlimited" means "about as much as we did the last few times". But the overall structure of the thinking is nearly exactly the same as how people have been thinking about Japan for the last 20 years.

The widowmaker trade works with a few easy to spot steps:

1. Lots of people convince themselves inflation is right around the corner
2. They sell government bonds in huge quantities
3. They lose a ton of money when they are wrong about inflation

If you want to trade bonds while QE is going on, you need to think like a bond vigilante during QE, and then do the opposite once QE ends.

During QE, it is foolish to fight the massive tsunami of bond selling pressure. The CME is setting record volumes in their futures contracts, which is mostly due to the amount of volume in the interest rate complex.

Here is a quote from that post (bold mine):

"One interesting development in the U.S. Treasury and related interest rate markets is the soaring volume of transactions as all types of market participants position themselves for a life without the Federal Reserve as a guaranteed buyer."

Hmm. We will come back to this idea a bit later.

And of course, the real world data seems to support this idea.

Recently Izabella Kaminska is running a bit of a victory lap because she is finally getting well-deserved recognition she was one of the first on the "QE causes deflation" bandwagon.

People starting to realise QE was actually becoming a deflationary force? m.europe.wsj.com/articles/a/SB1…

— Izabella Kaminska (@izakaminska) May 31, 2013

 

This is a long time after she pointed out it was likely QE would cause deflation rather than inflation in this great post at FT alphaville.

The traditional thinking on QE is that it causes massive inflation. That QE is money printing of the most despicable method. That a bit of QE will cause massive hyperinflation.

Yet, we are well into our third round of QE here in the United States and inflation is subdued.

Still, this post is about the fresh harvest of widows that is about to be reaped in the widowmaker trade. One of the other ways to think about QE is through my soon-to-become-famous cash for clunkers QE bond trading model. Here is the description from when I called the top of bond yields right before QE II ended:

"I am starting to think that QEII does the same thing with Treasury debt. It pushes potential sales of Treasuries forward into the actual period of QEII.If you were looking to sell $50bn of Treasury bonds in August, wouldn't you at least consider moving the sale forward a few months, and selling those bonds in May or June?  Who wants to sell during one of the all time great bond selloffs?The U.S. Federal Reserve has stated they would buy truckloads of bonds during QE II.  So you know you can go into the market and sell, sell, sell – without any real impact on market prices.And if you're considering selling Treasuries in May, why not sell them today?  QEII might be suspended…and who wants to sell during one of the all time great bond selloffs? Why not sell them before that happens?

I think that every asset allocator in the world who is even considering selling Treasuries this year will do it earlier rather than during one of the great all time bond sell offs.

It's cash for clunkers argument applied to Treasuries.  It turns out that the critics of Cash for clunkers were correct – car sales did slow after CfC ended.   Basically, it pulled a bunch of car sales out of the future and into the time frame of the Cash for clunkers program.

The Fed's QEII is a great opportunity for weakly committed holders of Treasuries to exit their positions.  There is a known huge buyer of Treasuries in the market – why not sell to that known huge buyer?

I suspect this same thinking has something to do with the huge rally that happened at the end of QE I as well.  If you recall, there was nearly universal bearishness for the post-QE I bond market, but the day it stopped, bonds went on a historic rally.  All of the sellers had already sold when they knew the Fed would be there – so only natural buyers were left in the market.

 So we have a cash for clunkers effect, because people prepare for life without a guaranteed buyer.

Here is Barry Ritholtz saying the same thing.

"1) Large bond portfolios (think PIMCO, DoubleLine, etc). are getting out of the way in advance of Fed tapering. You can debate if they are early or not, but it is what it is.2) Watch the impact this has on credit driven purchases: House (especially) but also Autos and CapEx."

This mentality isn't hard to find at all.  It's really common belief in the markets "boy, if yields are going up today, wait until you see whats going to happen when the fed stops buying!"

If QE causes real world deflation, while people thing (incorrectly) QE causes inflation, then you'd expect something like a huge rally in bonds once QE ends, and then this rally to continue as it becomes obvious from real world data QE is causing deflation instead of the expected inflation. Combine this with a desert of sellers (who already sold when the fed was buying), and you have the recipe for huge, huge bond rallies once QE ends.

We know Japan engaged in QE on several occasions during the last 20 years. I don't have a good timeline that lines up japanese policy and yield movements, but we do have the legend of the widowmaker. Anyone thinking yields will continue to go up once QE ends (or is tapered off) is almost certainly going to be part of the next harvest in the widow maker trade.

 

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TaxProf Blog: Anderson: The Problem Is Not Just IRS Lawyers; The Problem Is All Federal Government Lawyers

http://taxprof.typepad.com/taxprof_blog/2013/06/anderson-.html

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June 11, 2013

Anderson: The Problem Is Not Just IRS Lawyers; The Problem Is All Federal Government Lawyers

Robert Anderson (Pepperdine), The IRS as Microcosm:

I searched the Federal Election Commission database for contributors with the term "lawyer" or "attorney" in thee occupation field. I then sorted the results by government agency (including the many permutations of agency names in the database). This produced a list of 20 federal agencies with at least 20 employees contributing to either Barack Obama or Mitt Romney in the 2012 election.

The results for the IRS were striking. Of the IRS lawyers who made contributions in the 2012 election, 95% contributed to Obama rather than to Romney. So among IRS lawyers, the ratio of Obama contributors to Romney contributors was not merely 4-to-1 at previously reported, but more like 20-to-1. The ratio of funds to Obama was even more lopsided, with about 32 times as much money going to Obama as to Romney from IRS lawyers.

So has the IRS gone off the rails into hyper-partisanship, leaving behind other more balanced federal agencies? ... The data show, however, that the partisanship of the lawyers in the IRS is not unusual or even particularly extreme among federal agencies. In fact, the lawyers in every single federal government agency--from the Department of Education [100%] to the Department of Defense [68%] -- contributed overwhelmingly to Obama compared to Romney. The table below shows the results for all agencies with at least 20 employees who contributed to either Obama or Romney. ... 

AGENCY	NUMBER OF LAWYERS CONTRIBUTING TO		PERCENT OBAMA
	OBAMA	ROMNEY
NLRB	44	0	100.00%
UNITED NATIONS	23	0	100.00%
DEPT. OF EDUCATION	47	0	100.00%
DEPT. OF LABOR	66	2	97.06%
FEDERAL PUBLIC DEFENDER	65	2	97.01%
FINRA	26	1	96.30%
FEDERAL ENERGY REGULATORY COMM.	23	1	95.83%
ENVIRONMENTAL PROTECTION AGENCY	86	4	95.56%
FEDERAL TRADE COMMISSION	80	4	95.24%
INTERNAL REVENUE SERVICE	38	2	95.00%

... The IRS is near the top in terms of partisanship, but does not stand out as being markedly different from the other agencies. Some agencies, such as the Department of Education and the NLRB, did not have a single lawyer who contributed to Mitt Romney, even though dozens contributed to Barack Obama. The Department of Justice had the largest number of lawyer contributors of any federal agency, and 84% of those employees contributed to Obama. ...

The political contribution numbers of government lawyers show that the IRS controversy is really a symptom of a larger disease -- the rule by career bureaucrat lawyers. Lawyers as a group are not politically representative of the country as a whole, and neither are government employees, so the combination of the two of them creates a dramatic mismatch with the bulk of America. The result of the mismatch is that government agencies lack the political diversity that is necessary to effectively represent the American people. The idea that the Department of Justice, on which we depend for fair and impartial enforcement of the law, is so overwhelmingly tilted to one side should make everyone uneasy regardless of political viewpoint. Whatever the reason for the disparity,the numbers reveal a severely dysfunctional culture in government agencies, one that does not serve the country well.

The media and Congress have understandably focused on the IRS specifically in sorting out the controversy. The numbers, however, suggest that the problem is not with the IRS in particular, but with the federal government as a whole (and indeed, with state governments as well). The root of the problem is the rule by a class of career government employee lawyers who lack the diversity of opinion that is found in the non-lawyer private sector. The IRS inquiry, rather than focusing narrowly on "who knew what" within the agency, should lead to a top-to-bottom rethinking of who's doing the administration in the modern bureaucratic administrative state.

June 11, 2013 in IRS News, Tax | Permalink

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Economically speaking, isn't there probably a pretty good argument that whether or not they actually believe in President Obama's policies, those lawyers were just protecting their own interests, since Romney made lots of noise about eliminating government jobs?

That cynical perspective aside, "government lawyers" as a group, and especially those working for the agencies listed here, are going to be inherently politically self-selecting. When one party's principles call for raising tax burdens and a personal responsibility to "pay one's fair share," and the other's call for minimizing tax burdens and applaud clever tax avoidance, the sort of people who actually want to work for the agency in charge of collecting taxes are probably going to fall primarily on one side of the aisle, no?

Anderson explicitly states that he's ignoring the reasons behind the disparity, but it's hard to do so when they preclude any effective solution to the problem. Where exactly is the IRS, or the Department of Labor, or the EPA going to find Republicans who even _want_ to work for them, much less have the requisite qualifications or necessarily low salary requirements?

Posted by: K1 | Jun 11, 2013 4:28:25 PM

What would be far more meaningful would be the addition of a third column that showed the number of lawyers in each agency that give to neither candidate. I wager that most agency attorneys abstain from making political gifts. The problem with reporting that data would be that the story may evaporate. Doing good empirical research is rough because it often produces a result that does not support the author's hypothesis.

Posted by: Bill Turnier | Jun 11, 2013 4:33:07 PM

Bill,

I starting shaking my head as soon as I saw that third column was missing. This study is woefully incomplete.

Posted by: HTA | Jun 11, 2013 5:10:09 PM

Alternative theory; the Obama administration sent out word that anyone NOT donating heavily to the Obama re-election campaign might find themselves "sequestered" out of a job!

Posted by: Michael Rivero | Jun 11, 2013 5:11:44 PM

It's the chicken or the egg theory. Are the lawyers liberals when they go into government work, or do they tend that way to support their own jobs.

My experience? They are liberals when they come in. Why? Because they are willing to take lower salaries than those offered by private practice. They want to save the world.

Posted by: of course | Jun 11, 2013 5:15:49 PM

Of course, maybe people who support the opposition will be more likely to contribute to a 501c4 instead of directly to the candidate...If that is true, this chart tells me that Obama was president in 2012, and the GOP candidate was the challenger.

Posted by: Anon | Jun 11, 2013 5:18:54 PM

these data would be more meaningful if romney were a credible candidate.

Posted by: r. willis | Jun 11, 2013 7:05:08 PM

Speaking from personal experience, the data above appears to reflect the truth. When I practiced law for a Federal agency, at least 9 of 10 attorney colleagues were committed and vocal supporters of the Democratic Party. Government attorneys of the Republican stripe were a very small minority, and often ridiculed by their peers.

It really does not require too many grey cells to understand the mutual attraction between the Federal civil service and attorneys who support a larger government. People who dispute this relationship have their head in the sand.

Posted by: Jake | Jun 11, 2013 8:49:31 PM

What a meaningful application of "science"!

Posted by: person | Jun 11, 2013 9:43:50 PM

Anyone reading this would automatically look for some data on the number of lawyers; Robert Anderson is expert enough that this cannot have been inadvertent, so by his kind of analysis it suggests a massive right-wing conspiracy.

I jest, of course. But: "The political contribution numbers of government lawyers show that the IRS controversy is really a symptom of a larger disease -- the rule by career bureaucrat lawyers . . . a dramatic mismatch with the bulk of America." I mean, really.

Posted by: Ed | Jun 11, 2013 9:45:00 PM

Conservatives at management levels in federal agencies are treated the same as conservative professors in most universities -- they better keep their opinions to themselves and not be politically active if they know what's good for their careers. The Obama Administration's Chicago-styled politics with a history of personal destruction doubles down on the threats. That emboldens liberals in agencies who can use their positions to attack conservative donors and organizations.

Posted by: Woody | Jun 11, 2013 10:25:15 PM

I worked as an attorney for the IRS Chief Counsel Office for a year. I was not aware of any other attorney's contributions or affiliations with any party. My take was that everyone there had a job to do, and they did it.

Posted by: Allen | Jun 12, 2013 12:59:51 AM

Those who hate government in general and the tax man in particular do not apply for government jobs or try to become the tax man. My bet is that this is a universal law which you could get confirmed in any country.

Posted by: GSo | Jun 12, 2013 6:32:38 AM

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