News: 2013-11-19

By Edward Harrison On Nov 19, 2013

Markets

Stocks Are Way, Way Overvalued: GMO – MoneyBeat – WSJ

“In a report titled ”Breaking News! U.S. Equity Market Overvalued!“, Ben Inker, head of the asset allocation group at GMO, comes out with some eye-popping numbers. He argues that the S&P 500′s fair value is 1100, about 40% below Monday’s closing level, and the expected return is -1.3% a year, after inflation, for the next seven years.

Small-cap valuations, he writes, are even more elevated.”

The Dow, Adjusted for Inflation – NYTimes.com

Economics

Academics back students in protests against economics teaching | Education | The Guardian

Are real rates of return negative? Is the “natural” real rate of return negative?

The Grumpy Economist: New vs. Old Keynesian Stimulus

John Cochrane’s take shows you that there is an ideological view in the economics profession that is negative on fiscal stimulus. I believe this is why monetary policy recommendations have become so extreme.

“If you want to use new-Keynesian models to defend stimulus, do it forthrightly: “The government should spend money, even if on totally wasted projects, because that will cause inflation, inflation will lower real interest rates, lower real interest rates will induce people to consume today rather than tomorrow, we believe tomorrow’s consumption will revert to trend anyway, so this step will increase demand. We disclaim any income-based “multiplier,” sorry, our new models have no such effect, and we’ll stand up in public and tell any politician who uses this argument that it’s wrong.””

The New Keynesian Case for Fiscal Policy (Wonkish) – NYTimes.com

All in the family | occasional links & commentary

“My better half has insisted for years that I not be too hard on Paul Krugman. The enemy of my enemy. Popular Front. And all that. . .

But enough is enough.

I simply can’t let Krugman [ht: br] get away with writing off a large part of contemporary economic discourse (not to mention of the history of economic thought) and with his declaration that Larry Summers has “laid down what amounts to a very radical manifesto” (not to mention the fact that I was forced to waste the better part of a quarter of an hour this morning listening to Summers’s talk in honor of Stanley Fischer at the IMF Economic Forum, during which he announces that he’s finally discovered the possibility that the current level of economic stagnation may persist for some time).”

Larry Summers and the never-ending bubble economy

Krugman & Co. — totally flabbergasting neoclassical apologetics | LARS P. SYLL

“Is ideology only playing a role when it comes to fiscal policies? Hard to believe. As already Gunnar Myrdal argued 80 years go, ideology is all over all economists. Whether they are into monetary or fiscal policies is immaterial.

And — perhaps most disturbing of all — in both Krugman and Wren-Lewis we see a rather unbecoming self-congratulatory attitude, according to which all macroeconomists (allegedly) share the same basic mainstream neoclassical theory, so when we discuss and argue it’s only about which policy and model to choose. All the more or less licensed and shared models and policies are already there on the shelf and we just have to decide which one — with or without Euler conditions — to pick for today’s monetary or fiscal problem solving. This is of course nothing but pure nonsense. Today’s macroeconomic debates are about so much more than selecting models and giving policy advice.”

A Permanent Slump? – NYTimes.com

This is the key line here because it represents current mainstream thinking:

“central bankers need to stop talking about “exit strategies.” Easy money should, and probably will, be with us for a very long time.”

Me And The Bubble – NYTimes.com

Isn’t Paul Krugman denying here in 2010 that he was calling for low rates and a bubble in 2002. I believe his denial. The question I have is what about the situation today has caused him to think differently about low rates and bubbles. Is the economy different today in some way? Or has his position changed? Why?

He was calling for low rates in both cases.

Forecasts

OECD cuts global growth forecasts – FT.com

“The Paris-based organisation promoting the world’s largest advanced economies said the global economy would expand 2.7 per cent this year and 3.6 per cent in 2014, compared with estimates of 3.1 per cent and 4 per cent, made in May.

However, the projection for UK growth next year was revised up by almost a percentage point to 2.4 per cent – the largest upgrade to any OECD country. For this year, growth was revised from 0.8 per cent to 1.4 per cent.”

La OCDE prevé un crecimiento para España del 0,5% en 2014 y del 1% en 2015 | Economía | Cinco Días

The OECD has predicted a 1.3% contraction in the Spanish economy for 2013 and 0.5% growth in 2014. That will bring unemployment down to the still ridiculously high 26.3% in 2014.

North America

Census ‘faked’ 2012 election jobs report | New York Post

“Just two years before the presidential election, the Census Bureau had caught an employee fabricating data that went into the unemployment report, which is one of the most closely watched measures of the economy.

And a knowledgeable source says the deception went beyond that one employee — that it escalated at the time President Obama was seeking reelection in 2012 and continues today.

“He’s not the only one,” said the source, who asked to remain anonymous for now but is willing to talk with the Labor Department and Congress if asked.

The Census employee caught faking the results is Julius Buckmon, according to confidential Census documents obtained by The Post. Buckmon told me in an interview this past weekend that he was told to make up information by higher-ups at Census.”

The Center of the Universe » Blog Archive » Corporate Results Expose Lack of Confidence

“Though corporate profits were higher overall, companies slashed their spending on factories, equipment and other performance-enhancing investments by 16% from year-earlier levels, according to an analysis by REL Consultancy for The Wall Street Journal.”

Fed’s Plosser Objects to Open Ended Asset Purchases – Real Time Economics – WSJ

Federal Reserve Bank San Francisco | Expectations for Monetary Policy Liftoff

“The Federal Reserve has indicated that it may raise the federal funds rate from its current value near zero in 2015. This forward policy guidance is broadly consistent with expectations from business surveys on the most likely timing for the funds rate liftoff. It also appears in line with estimates of policy liftoff from forward interest rates derived from Treasury yields. However, in interpreting forward rates, it is important to account for the zero lower bound on interest rates. “

Home Builders’ Confidence Eases a Bit – WSJ.com

Majority in U.S. Say Healthcare Not Gov’t Responsibility

Europe

Madrid: Spanien zahlt rekordniedrigen Zins für frisches Geld – News-Ticker – NZZ.ch

Like Italy, Spain is borrowing at record low rates for short-term money. 0.678% was the latest one year rate versus 0.961% before the ECB’s rate cut.

Bundesbank says Italian and Spanish banks still hooked on home state debt – Telegraph Blogs

EU will learn that attacking German economic success is not the right strategy – FT.com

“as Europe’s pre-eminent economic power, Germany has the strength to block any action at EU level that it dislikes. It is therefore as certain as day follows night that nothing will come of the commission’s “in-depth analysis” of the German surplus – except, perhaps, a sharper awareness among the eurozone’s other governments that some fresh angle of attack will be necessary to inspire a change of heart in Berlin.

As Mr Rehn appreciates, Germany’s critics will get nowhere by proposing measures, such as a fiscal stimulus, big wage rises or tolerance for higher inflation, that are capable of being construed as a threat to the competitiveness of German business.”

Investment, not the surplus, is Germany’s big problem – FT.com

I don’t buy this analysis for one second. This is a cart before the horse analysis that blames Germany’s export orientation on poor domestic investment due in part to deregulation. Without even knowing this person’s ideological bias, that’s a red herring. WHy would German companies invest in an aging population short of aggregate demand. Demand comes first, investment follows.

Eurozone recovery fragile but no deflation risk: ECB’s Praet | Reuters

Handelsoverschot eurozone vergroot in september – De Standaard

The trade surplus for the eurozone was 13.1 billion euros in September. That is up from the 6.9 billion recorded in August. In September 2012, the number was 8.6 billion. Germany’s January to August surplus was 127.8 billion euros.

Greek current account surplus widens in September | Reuters

ekathimerini.com | Greek exports up by 5 pct Jan-Oct, imports down by 5 pct