On crisis early warning signs:

"Certainly, one of the indicators is looking at credit bubbles. There is a lot of evidence for that. I think central banks need to go back to looking a lot harder at what’s happened to credit throughout the cycle. It’s an indicator that has fallen by the wayside."

Actually, Bernanke says he can only forecast out two or three quarters. He rightfully associates credit growth with stronger GDP growth; but of course, this generally results in a crisis over the long term. 

"Housing bubbles are another indicator."

"It’s hard to know the exact timing."

On Recovery:

Typically housing takes five or six years

Unemployment can take double that.

On Countries:

Does not see another crisis around the corner, unless that comes from Europe or Japan

Europe and U.S. could be something like Japan, but talk of Greece is hyperbole

• wish he had commented on California

Lot of signs of bubbles in China

On Policy:

"tax hikes hurt proportionally more than spending cuts”

Current fight is just a skirmish in a war.

“I see the President’s strategy – the long term strategy – let’s raise taxes on the wealthy, then let’s do it again, then let’s do it again, and finally go the people and say this isn’t enough.”

Supportive of printing, wants higher inflation, thinks there is more to come.

Popularity: 9% [?]

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Phil Tetlock has been studying professional forecasters, penning a book on the matter.   In an interview with Edge.com, he shares what he’s learned.

One of the biggest surprises:

“I was assuming that political analysts were in the business of making accurate predictions, whereas they’re really in a different line of business altogether. They’re in the business of flattering the prejudices of their base audience and they’re in the business of entertaining their base audience and accuracy is a side constraint. They don’t want to be caught in making an overt mistake so they generally are pretty skillful in avoiding being caught by using vague verbiage to disguise their predictions.”

Practically speaking:

“We found three basic things: many pundits were hard pressed to do better than chance, were overconfident, and were reluctant to change their minds in response to new evidence.”

Here are ten steps to more effective forecasting:

1. Discount your forecast due to the “overconfidence bias”
2. Play or appoint a devil’s advocate.
3. Actively hunt for new information that counters your thesis.
4. Follow people with a track record of successful calls, more to learn about techniques used than for their current calls.
5. Think and speak in probabilities, not certainties.
6. Never mistake a clear view for a short distance.
7. Document your forecasts and review mistakes.
8. View mistakes as an opportunity to learn.
9. Avoid forecasting everything all the time.
10. Defer to models and/or aggregated crowd views unless there is data or information that cannot be modeled, or information not widely known.

The Fox vs the Hedgehog Forecaster, by Philip Tetlock

Philip Tetlock, The Expert who Models Experts

Model Thinking Notes I from Stanford Class

Popularity: 7% [?]

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Shinzo Abe is expected to be the next Prime Minister. He pledges to follow a familiar prescription: borrow, spend, then when you inevitably can not borrow anymore, print to pay it off with devalued currency.

Japan may avoid a hard default on public debt for a period through financial repression, such as interest rate caps and monetizing the debt, but the default will merely morph in form. Inflation is a tax and currency depreciation is a default. Of equal importance, debauching the currency is also least resistance politically. Benefits quickly become rights in the eyes of recipients. Politicians have to get reelected. One does not get reelected telling voters they overpromised.

This is compounded with delusions of grandeur; such as perhaps, ‘I can invest in alternative energy as well as Bill Gates, therefore will force people to invest in me by taxing them. I will generate a 56% return and bring unemployment down to 8% to pay for it all, even though I’m a lawyer, as is two thirds of Congress, not a scientist with a background in alternative energy. No, I couldn’t possibly have generated a negative return, and no, it doesn’t matter that investors in the private sector voluntarily take on that risk, while I force people to give to me to invest under the threat of jail (tax evasion).’

Government paper is the kerosene central bankers and their political brethren have saturated the earth with. Once ignited; it will create a forest fire. The inflation crisis will be confused with a boom, as is usually the case.  Inflation can manifest in asset bubbles just as much as consumer prices.

Given the amount of Japan’s debt outstanding, it will take an unfathomable amount of inflation to generate enough asset inflation to dissolve the debt. In fact, there could be so much inflation that it ends in a currency conversion.

‘Current account reversals are usually accompanied by sudden stops, large exchange rate depreciations, and often trigger banking crises,’ show Mello, Padoan, Rousová (2011). It’s worth mentioning that thanks to government induced bubbles, China and much of Asia is also nearing a current account reversal.

Political turnover does indeed raise the odds of crises, especially of the foreign exchange and debt variety.

·    “By examining political election cycles, we find that eight out of nine of the recent financial crises happened during periods of political election and transition (Mei, 1999)

·     “Monthly volatilities (based on local currency returns) on average tended to be 4% higher during period of political election and transition Julio and Yook (2012).

This comes at a time when Japanese companies are losing competitiveness: Sony to Samsung, Toyota to Hyundai; Panasonic to everyone. Exports to China were already predictably weakening as one of the largest bubbles in history bursts. Rampant jingoism, long simmering since the Raping of Nanking, compounds the problem.

Tensions in the South Sea are escalating over oil resources, an ominous sign. “Historically, territory has been the most common issue over which states go to war” Taylor (2007-2008). Wars are typically the catalyst for inflation. Japan would likely lose a war with China; unless the U.S. intervenes, in which a regional dispute could escalate into world war. It is common to blame other nations in order to deflect attention from a government’s own blunders, such a move is called, “rally around the flag.” Wars and nationalism spike poll numbers higher for incumbents.

Even without conflict with it’s larger, angrier neighbor, Japan is losing the currency war to the United States and Europe. Soon, the competitive devaluation will gain new entrants as a plethora of housing bubbles in emerging markets and developed markets deflate, and fears of inflation, morph to deflation. This will inevitably push energy prices higher on a country that imports over eighty percent of its needs.

Inflation in OECD has been highly correlated over the past 45 years, with this co-movement accounting for 70% of the variability of country inflation Ciccarelli and Mojon (2005). If and when Japan’s crisis comes to the forefront, it will likely come amid a global inflation and debt crises.

Land, real estate, energy, and gold are places to hide and equities to at least hold much of their purchasing power. As for government paper, especially Yen denominated, as Voltaire said: “paper money eventually returns to its intrinsic value – zero.”

Popularity: 8% [?]

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"In all countries and at all times the extreme distribution of income and wealth follows a power law behavior" ~ Pareto (1906)

"The excessive increase of anything causes a reaction in the opposite direction." ~ Plato

US:

The Federal Reserve to monetize 90% of all new government debt issuance ~ bloomberg

real banana republic stuff, hiding tremendous credit risk in the corporate market, inflation risk in the sovereign debt market. 

‘It would take very little in the way of a rate increase for investors to lose their total returns across many fixed income sectors’  ~ Barclays

If interest rates rose by 1%, the average corporate bond issued in 2012 would lose 5.12% of its value, says Barclays

the corporate bond market has expanded 40% since 2008 in notional outstanding to reach $8.8 trillion ~ Tabb #operationnewbubble

As profit growth falls and companies borrow to pay divs $$ 

US map showing farmland values and changes ~ @FarmlandNetwork

"Fracked wells tend to cost five times what wells used to cost, and then your well depletes twice as fast." ~ daily reckoning 

Top 10 tech predictions for 2013 from guru Mark Anderson ~ ComputerWorld

Most of these predictions simply extrapolate current trends; Anderson believes QCOM and ARMH will supplant intel, who missed the smart phone and tablet wave.

On an aside, many of these tech stocks have grown substantially since the bubble days, while their stocks have remained well under highs, like $QCOM $$

Apple board member Mickey Drexler revealed that Steve Jobs wanted to design an ‘iCar’. $AAPL

"C&I Loan Market at Risk of Overheating: CapOne’s Fairbank" ~ American Banker

"Since 1990 the cost of automation has fallen relative to labor by 40-50% in the rich world ~ Mckinsey"

interest rates are negative by about 5%(!) ~ ~ Krippner (2012) – (pdf, pg. 18)  #operationnewbubble

The U.S. government spends $61,000 in subsidies on a family of three deemed in poverty ~ Veronica de Rugy

World:

France: "All countries are nationalizing. The British nationalized six banks. I don’t see what the problem is." -French industry Minister ~ Kelly Evans

"We expect to see more credit events [in Europe], including the writing off of senior bank debt." ~ Carmen Reinhart ~ Barrons

"The UK’s growth of credit has outpaced GDP in recent years, a hallmark of a bubble" ~ Black Rock (Jun. ’11)

‘Central bank lending to Russian banks is sustaining rapid loan growth, risks inflation and credit bubble’ ~ Daily Times

"Total lending by Russian banks grew by 15 percent, outpacing the 9.4 percent increase in client deposits"

"The [loan to deposit] shortfall means that banks are instead turning to the central bank to fill the gap"

charts of important bubble indicators on Canada from @the_EggZit

Canada: Toronto home sales drop 16%  ~ @financialpost

Prices next, global slowdown could prick some bubbles $USDCAD

Brazil: Home loans increased at an annual pace of over 40% in the first half of 2012 ~ Brazilian Bubble $EWZ $USDBRL

“Cooking Books”: Brazilian homebuilders have been using creative accounting to hide massive losses  ~ Brazilian Bubble

Australia: ‘Melbourne new house sales plunge:” ~ Macrobusiness.au

$AUDUSD is about 38.1% Bloomberg’s purchasing-power parity equilibrium level and 25.6% above its 10-year moving average

"There’s one currency in Iran that has kept its value and can be used to purchase goods from abroad: bitcoins." ~ businessweek

Turkey’s Garanti Bank Says More Consumer Loans Are Souring @BloombergNews

China:

"Corporate China’s Black Hole of Debt" ~ businessweek

Chinese police plan to board vessels in disputed seas ~ Reuters

Chinese listed property developers need 7.8 years to sell all the housing stock vs an average of around 4.6 years in the past decade ~ bberg

Foxconn is down from $19.90 to $3.72 last 5 years. http://t.co/L4ygdVTt $AAPL has gone from $185 to $586. maybe manufacturing is over rated

Popularity: 7% [?]

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