"The-Policy-That-Must-Not-Be-Named" is finally unmasked.

It's "Monetization."  Japan has finally abandoned the pretense that central bank's printing of money to fund the government is a temporary measure designed to control the level of interest rates.  Will the markets find this candor "refreshing?"

from A6 in today's Wall Street Journal:

Shakespeare's take on the Fed's failure to raise rates

Thus conscience does make cowards of us all,

And thus the native hue of resolution

Is sicklied o'er with the pale cast of thought,

And enterprise of great pith and moment

With this regard their currents turn awry

And lose the name of action.




(Hamlet, Act III, Scene 1)

Net US international investment position continues down

Our net position is now -$7.3 trillion. Our national business model is broken, with too much consumption and not enough investment. What is worse, foreign flows are being used for even greater consumption. Present flows inward will need to be balanced with future flows outward. It is a formula for national impoverishment. Are we doomed? You be the judge.

The Economist, too, is living in a fantasy land: "The audacity of hope"

President Obama has rightly and repeatedly pointed out that anyone who believes the economy is not doing well is "living in a fantasy land."

The Economist has moved to this fantasy land. The current issue has a report on guaranteed incomes. ("Sighing for paradise to come") In it there is graph with the tongue-in-cheek title of "The audacity of hope." (That is also the title of Obama's 2006 book.) It shows that the median salaries of full-time workers in the US are basically unchanged since 2000 A.D. despite a 15% increase in GDP/capital. (Britain did better than the US in both GDP/capita and earnings.)

On top of that, of course, is the fact that fewer workers have full-time jobs and the numbers of those outside the workforce has grown considerably.



To misquote T.S. Eliot, "I'll show you malaise in a handful of dust." (I guess misquoting Eliot is one of the things people in a fantasy land do.)

"Trump's Great Economic Divide" (headline from the WSJ)

Today's "Ahead of the Tape" column in the WSJ mocks Trump's pessimistic view of the economy by contrasting his pessimism with the positive level of consumer sentiment. The journalist quips that the "gulf between scary headlines and current sentiment is 'yuge.'" Steven Russolillo, the journalist, provides a graph of the Michigan Index of Consumer Sentiment to illustrate his point that consumers are confident.

He should have shaded in the recession period and he would have noted that this is more of a coincident rather than a leading indicator. Here is the same graph with the recessions shaded.

(Also note that the journalist omitted the last data point, which turns down, so that his graph give the impression confidence is going up.)

In fact, one notices that sentiments tends to peak one year before a recession. . . But wait! The index peaked about a year ago! Does this mean we are now entering a recession? That we will know only in retrospect. In the meantime, we all should beware lest we let our politics cloud our economic analysis. (Remember Capt. Renaud's line about politics in Casablanca? "I have no conviction, if that's what you mean. I blow with the wind, and the prevailing wind happens to be from Vichy." He would have made a good economist, I think.)

My personal view is that our current economic setup is doomed, but that has little to do with either democrats or republicans.

"Honey, I shrunk the economy!"

As President Obama has rightly stated, "anyone who thinks the US economy isn't doing well is living in a fantasy land." The World Bank, which has just cut its forecast of world growth this year and has cut its US growth forecast particularly sharply, is clearly a denizen of that imaginary place.

The Bank's location was confirmed by this morning's CFA Institute News Brief:

"World Bank shrinks forecasts for economic growth
The World Bank has downgraded its outlook for growth of the global economy this year from 2.9% to 2.4%, which it characterized as insipid. A 0.5-percentage-point cut in its forecast for the wealthiest countries accounts for about half of the reduction. The development lender lowered its US growth forecast from 2.7% to 1.9%.Bloomberg (07 Jun.) "

Economist blames low capital spending on low interest rates.

In today's WSJ, we learn that economist Jason Thomas of Carlyle Group says that low interest rates are stimulating dividend increases and share buybacks at the expense of capital spending, which is expected to be negative in real terms in 2016. If he is right, then the Fed is preventing the very thing it seeks to achieve.

Here's how the article by Greg IP begins:

"One of the great mysteries of the recovery is why low interest rates have done so little to lift business investment.

"After all, that is supposed to be one of the ways monetary policy works: A lower cost of capital makes any project more viable. But what if lower interest rates are actually hurting investment by encouraging companies to pay dividends or buy back stock instead?

"That’s the theory advanced by economist Jason Thomas of private-equity giant Carlyle Group. It is at odds with conventional economics but has some intuitively appealing logic and supportive data.

"He calculates that since 2009, just after the Federal Reserve took interest rates to near zero, U.S. companies have boosted stock buybacks by 194% and dividends by 66.5%, but investment by 43%. Big energy companies have been slashing capital expenditures while boosting payouts. Even companies without the headwind of lower commodity prices are holding the line: McDonald’s Corp. and Eli Lilly & Co. are maintaining flat capital expenditures while raising dividends; Verizon Communications Inc. said it plans to trim its capital budget and has raised its dividend."

There's a great quote in the article:

Since 1976, higher-yielding stocks systematically outperform the overall market by 0.76 percentage point when inflation-adjusted interest rates fall 1 percentage point, Mr. Thomas finds. Moreover, the relationship becomes more extreme the lower rates go and the longer they stay low.

“John Bull can stand many things but he cannot stand two per cent,” Walter Bagehot, a 19th century editor of the Economist, once said, describing investors’ need for some minimum level of income.

It make sense to me.