Dominant Narrative is still Central Bank Omnipotence

Anemic growth remains the Goldilocks scenario for markets, not so cold as to make for a recession but not so hot as to take the Fed out of play for “emergency” monetary policy implemented on a permanent basis. Good real-world news is bad for markets, and vice versa, because that’s the dynamic that impacts Common Knowledge around the Fed. The market is in a tough spot right now, as good news will not make the market go higher (Fed stays on the tightening path) and bad news can make the market go lower if it’s really bad news (or if the Fed gives more signals that they’re tightening regardless of how bad the news gets).

This tough spot is made even tougher by both a market fatigue with Fed jawboning (excuse me. communication policy) and a growing sense, fair or not, that the Yellen Fed is kind of flailing around right now. The dominant Narrative by a mile is still Central Bank Omnipotence, where the Fed is responsible for all market outcomes, but there are definitely signs of a growing counter-Narrative, one that I call “The Incompetent Magician“, that bears close watching. The Incompetent Magician Narrative is a story that’s very dangerous for markets, because it’s a story of loss of control. This is what makes private sources of liquidity dry up, this is what makes for a deep bear market, and this is what would drive gold into the stratosphere. The Incompetent Magician Narrative has been around for decades, usually resting deep in the depths of counter-cultural media and the like, sort of like a flu virus that can lay dormant for years within an animal population. Over the past few weeks, though, I’ve seen a few outbreaks of this virus, or at least a strain of the virus, within mainstream media. Nothing to be concerned with yet, but like I say.something that bears watching. 

W. Ben Hunt, Ph.D.

http://www.salientpartners.com

Federal deficit collapses

Federal deficit collapses

If President Obama wants to distract voters’ attention from the ongoing failure of Obamacare and the miserably slow recovery, he should simply direct everyone to this blog post. Under his watch, the federal budget deficit has collapsed by two-thirds, from almost $1.5 trillion in his first year as president (in which he inherited a lot of emergency spending from the Bush administration and began spending the almost $1 trillion included in his ARRA) to just under $0.5 trillion in the year ending last March.
The chart above shows the federal deficit as a % of GDP. By this measure the deficit has plummeted from a high of 10.2% of GDP in 2009 to 2.9% (my estimate) in the 12 months ending last March.
This rather extraordinary achievement was not due to any of his initiatives, however. As the chart above shows, the big reduction in the deficit has been the by-product of flat to declining spending in recent years and multi-year increase in tax revenues. Most of the reduction in spending can be credited to a deadlocked Congress (which has ignored Obama’s repeated requests for ever-rising spending), and to declining costs for social safety nets (mainly unemployment insurance, which still remains unusually high). The bulk of the increase in tax revenues is due to an expanding tax base (e.g., increasing numbers of jobs, rising incomes, and rising corporate profits, all of which flow from even a weak recovery), with a modest boost attributable to the higher tax rates which took effect last year.

Despite effective marginal tax rates that are now at their highest level ever for many taxpayers, tax revenues relative to GDP are still relatively depressed. That’s mainly a reflection of the weakness of the current recovery, which has yet to create more jobs than existed at the end of 2008. There would have been upwards of 10 million more jobs today if this had been a typical recovery, and that would show up in the form of much stronger revenues, which would probably be well over their post-war average of 17.5% of GDP by now.

The reduction in spending relative to GDP, on the other hand, has been extraordinary—we haven’t seen anything like this since the unwinding of WW II spending. Federal spending topped out during WW II at over 40% of GDP in 1945, then promptly collapsed to 14.7% by the end of 1947. Then, as now, a huge decline in government spending failed—despite the warnings of Keynesian-trained economists—to generate a depression, and failed to send the unemployment rate skyrocketing. Supply-siders, in contrast, have an answer for what happened that makes sense: when the government controls fewer of the economy’s resources, the private sector has more room in which to practice that in which it uniquely excels: entrepreneurship, cost-cutting, risk-taking, and productivity gains.

One reason Obama is unlikely to link to this post: If we hadn’t had all that massive emergency and “stimulus” spending in the 2008-2012 period, the economy would be much stronger today. But now that the spending has been scaled back there is a decent chance that the private sector can give us some better growth numbers going forward. Those chances would rise appreciably if Washington could manage to reduce today’s unprecedented regulatory burdens (e.g., Obamacare, Dodd-Frank), reduce corporate tax rates from the highest level of any developed country, and simplify our mind-numbing and hugely burdensome tax code in exchange for a reduction in marginal income tax rates.

UPDATE: Charles Koch has written a brilliant and powerful essay in the WSJ on many of the problems that need to be fixed: “I’m Fighting to Restore a Free Society.”

If there’s any reason to be optimistic these days, it’s that there are so many problems out there that could be fixed in relatively easy fashion.

via Calafia Beach Pundit: Federal deficit collapses.

MOF’s: plastics of the 21st century?

this is a great example of lateral thinking: natural gas would vastly more useful if we could store it without expensive heavy tanks under high pressure, so Christopher Wilmer imagines a new way to store the same amount of gas without high pressure or refrigeration. How? MOF’s (metal organic frameworks) seem to have the magical properties required as “we can engineer the anatomically detailed geometry of our materials” which he compares to how plastic was a revolutionary material of the previous generation.

Solve for X – Christopher Wilmer – Efficient Gas Storage and Separation

Solve for X – Christopher Wilmer – Efficient Gas Storage and Separation – YouTube.

breakthrough fusion to lower electricity costs by ten times?

Lawrenceville Plasma Physics Tungsten Electrodes will be ready in mid-May and the rest of the plan to achieve breakthrough commercial fusion to lower electricity costs by ten times … this is a possible world-changer

In the 1980s, Eric Lerner turned his innovative mind from astrophysics to fusion research. His knowledge of quasars gave him an idea that others had missed. Using known laws of electromagnetism and quantum physics, he derived a mathematical model of plasma behavior in a self-squeezing magnetic bottle. This math predicts a shocking possibility: 5-megawatt fusion generators (power for 2000 homes) mass-produced for under $1M each, with trivial fuel cost, which would slash the cost of electricity by over 90% and launch civilization into a new era.

In March 2012, LPP published a paper in the leading international journal for fusion scientists (Physics of Plasmas from the American Institute of Physics). The most-read paper in that journal that year, it reported experimental proof that LPP achieved two of the three conditions required for hydrogen-boron ignition. The first condition is plasma temperature of 1.6 billion degrees. LPP achieved 1.8 billion, which is the hottest ever reported for a fusion fuel, and hotter than the core of the sun. The second condition is plasma confinement time of 20 nanoseconds. LPP achieved 30. The third condition is plasma density of 7 grams per cubic centimeter. LPP has not achieved that yet, but Lerner’s math predicts that the self-squeezing magnetic bottle (called a plasmoid) will do it.

lots more great info here, including the crowd-funding
via Lawrenceville Plasma Physics Tungsten Electrodes will be ready in mid-May and the rest of the plan to achieve breakthrough commercial fusion to lower electricity costs by ten times.

Plasma Fusion — hoax or breakthrough reality?  RT America (from 2012)

financial warning flags

For what warning flags should investors watch out now?

Howard Marks:  There are two main things to watch: valuation and behavior. A great thing about investing is that you have historic valuation standards. You should be aware of them, but you shouldn’t be a slave to them.  You can compare the current P/E ratio to historic standards and see that the current P/E ratio is about fair relative to history. So valuations are moderate to a little expensive in most areas. Looking at investor behavior, you can ask yourself: Is everybody at the club, on the train or in the office talking about stocks? Is everybody having fun and making easy money? Is everybody saying «even though the market has doubled, I’m going to put more money in»? Is every deal sold out? Is every fund sold out? In other words: Is the party rolling? And if that’s the case, then you should be very cautious. It’s like Warren Buffett says in one of my favorite quotes: «The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs».

via AdvisorAnalyst Views – Howard Marks: “In The End, The Devil Always Wins”.

Natural Gas: is supply virtually infinite?

The forward strip is now high enough to test the thesis that $4+ gas is attractive for drillers with superior acreage.

Gas can certainly keep rising before the end of winter, as the severity of the inventory crunch becomes better understood. But the longer dated strip is notably flat, despite the common knowledge that LNG exports are imminent, inventories are at record lows, coal plants will be decommissioned in droves, and hydro power will significantly underperform this year due to droughts in the west. Industrial demand and net imports are also expected to show a bullish move in ’14.

Some producers have rallied, but we have yet to see much opportunity to hedge in 2015 and beyond, and if the storage and distribution system survives the winter intact, drill sites and rigs will not be the weak link as the industry gears up to meet the many sources of incremental demand.

Producers no longer face much prospect of a near term price collapse, but we can expect to see inventories recover quickly when winter ends. The strip is telling this story, and investors are still wise to wait. These prices will damage demand and attract rigs quickly, and a single season of high prices will not translate into equity appreciation that rewards investors adequately.

via Natural Gas: Will Low Inventory And Low Rig Counts Balance The Market? – Seeking Alpha.