Recession Watch: a turning Point in Unemployment Claims?

A new era has begun for the US and global economy, trashing the simple rules of the post-WWII era. Instead of the business cycle (the “clock” analogy found in textbooks), we have secular stagnation interrupted by frequent bubbles alternating with bouts of debt deflation that are fought by massive government stimulus programs.

Since we have no playbook for this new economic regime, investors must watch the data. Bulls look at signs of strength; bears focus on signs of weakness. Survivors look at broad indicators, showing the net effect of the many cross-currents affecting the economy. The number of new claims for unemployment is among the best: close to real-time (weekly), hard data, and a leading indicator.

New unemployment Claims: YoY in 2015

See the analysis at Wolf Street. Second of 2 posts today.

Will we repeat our mistakes in the Middle East & lose, or play defense & win?

Summary:  The West’s post-9/11 wars in the Middle East have run down, but our involvement in Syria’s civil war and the attacks by radical Islamists in American — and the far larger Paris attacks — have begun a new phase in this clash of civilizations. Before we attack, repeating the mistakes of the past 15 years, let’s consider an alternative strategy: play defense, and win.  {First of 2 posts today.}

Nike, goddess of victory

Goddess of Victory. Emanuel Lakozas at DeviantArt.



  1. A hegemon’s dilemma.
  2. How to eat soup with a knife?
  3. Who is attacking? Who is defending?
  4. Our response: attack!
  5. A better way: defend.
  6. Other posts in this series.
  7. For more information.

(1)  A hegemon’s dilemma

In chess, a zugzwang means that you believe that all moves weaken your position. It often results from a lack of imagination, an inability to break free from one’s patterns of perception and analysis.

Hegemons often see themselves as in a zugwang, where change itself threatens to their status as #1. For example, Britain responded poorly to Germany’s aggressive aspirations in the decades before WWI, rather than seeking to integrate them into a growing and prosperous multi-polar 20th century.

America’s major 21st century challenge might be cultural as well as geopolitical, as fundamentalist Islam challenges not just American dominance in the Middle East but the West’s cultural supremacy. We’ve reacted to the resulting insurgencies by waging war — treating fundamentalist Islam as an evil ideology, like the NAZI’s. With the usual perversity of events, we’ve succeeded only in toppling secular regimes (Afghanistan, Iraq, Libya, and perhaps Syria), who are replaced by Islamic regimes) — and setting the region afire.

To find a better solution let’s look at T. E. Lawrence’s Seven Pillars of Wisdom (1922), a handbook for insurgents written during the Arab Revolt of WWI.

“The Turks were stupid; the Germans behind them dogmatical. They would believe that rebellion was absolute, like war, and deal with it on the analogy of war. Analogy in human things was fudge, anyhow; and war upon rebellion was messy and slow, like eating soup with a knife.”

We have been “stupid and dogmatical” in our wars since 9/11, dealing with these insurgencies “on the analogy of war.” We are like the pitiful fool “eating soup with a knife”, spilling most of each attempt.

Does America have so few strategic options that we must, in effect, attempt to eat soup with a knife? Lawrence wrote about his experience fighting with locals waging a successful insurgency. American hawks see it as advice for doing the opposite — fighting insurgencies in foreign lands.

The hawks ignore the simple truth of Lawrence’s insight: you cannot eat soup with a knife unless you first change the situation.

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The Fed’s Vice Chairman warns about us about the strong dollar

Stanley Fischer (Vice Chairman of the Fed) gave us a warning in a speech on Nov 12. He’s someone we should list to.

Effect of rising US dollar on trade.

He reported that since July 2014 the US dollar has risen aprox 15% vs the currencies of our major trading partners, a “large, though not unprecedented” move. The Fed’s econometric model show that a 10% dollar rise reduces exports by 3% after one year and 7%+ after three years — and increases real imports by 4% after three years. The net effect on GDP: a decline of 0.7% after one year and 1.5% after three years (these numbers are roughly estimates). The bottom line…

Read my full report at Wolf Street.

How should we prepare, as a new era begins for the world economy?

Summary: Often the most important insight is the largest but least obvious aspect of a situation, hidden amidst the river of data that flows over us every day. Today the key thing to know is that we’ve entered a new world, once in which almost anything can happen. This creates new rules for individuals and business, with new risks and opportunities.  {1st of 2 posts today.}

“Innovation of new forms of society and technology. It is the key to our progress. It has allowed us to evolve from naked hunter-gatherers to the dominant species on this planet. This process is slow, normally taking hundreds or even thousands of years. But occasionally evolution leaps forward.”

— A slightly revised version of Professor Xavier’s words from the title sequence of the movie “X-Men”.

The new era begins

Signs of the new era

I find that even casual conversations with my fellow Boomers show that most of them feel that the world has changed since 2000, as if a tornado has carried us to Oz — a world where everything is different. Here are a few examples; you can add many more to this list (a longer list appears at the end).

The 2008 global recession was the worst since the 1930s, on a scale that economists believed could not happen again, with causes that remain poorly understood.

Bubbles are an inherent part of free market systems, randomly appearing during the past two centuries (they predate both fiat currencies and fractional reserve banking). The Wall Street adage was that “everybody gets one“. We’ve had three during the past two decades.

The post-WWII era was one of cyclical growth, as booms ended when Central Banks “took away the punch bowl” to stop inflation from rising above their limits. Now Central Banks set goals for a minimum rate of inflation to provide a cushion against deflationary busts. Despite massive increases in money and reserves they cannot bring inflation up to those targets.

Accurate economic predictions have become almost impossible, as we should expect during regime change. During the past five years we’ve seen frequent predictions by economics of inflation or hyperinflation on one hand, and on the other hand predictions of a “return to normal” or even “booming” growth. Astonishingly, both have proven wrong.

More broadly, paying attention to predictions has been a waste of time since 2010 — not just in economics. Who predicted the rise of the Islamic State (which reads like dystopian fiction), the Middle East aflame and sliding into what might become like the horrific Thirty Years War? Did any political guru predict that 3 months before the first primary, half of Republicans would support Trump or Carson, with the establishment candidates trailing far behind? Did anyone foresee the increasingly loud calls for “gender-neutral” bathrooms?

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What Will the US Do in a Recession? Look to Japan for Answers…

Summary: In a previous article I listed the powerful tools the US government would deploy during the next recession. Today we discuss something more important: will they work? We can look to Japan for an answer. Their great stagnation began with the 1989 crash, 11 years before the tech bubble burst and began America’s new era. Japan took fiscal and monetary policy to the outer limits. Now it’s in a recession. Although our circumstances differ, we’re following in their tracks.

Keiki Kaifuku, Kono Michi Shika Nai” (“Economic Recovery,
There Is No Road But This”).
— LDP Campaign Slogan, December 2014. If only this were true.

Japan: setting sun

Is that a setting sun, or a rising sun?

As Richard Koo predicted, during the Great Recession America repeated Japan’s mistakes during its “lost decade”. That’s the bad news. The good news is that America climbed into a slow recovery after the worst downturn since the 1930s. The worse news is that another recession lies ahead. Potentially a bad one, with both the world economy and many domestic sectors weak. The government will deploy powerful tools to fight this downturn. How well will they work? Look to Japan for answers…

Read the rest at Wolf Street.

After Paris: will we think first, or just repeat what’s already failed?

Summary: The call goes out just as it did after 9/11: kill, kill, kill — more evidence that we’ve learned nothing from our expensive post-9/11 wars that have set the Middle East aflame. So we’ll double down on stupid, testing to see if our great power can overcome our blindness, arrogance, and ignorance.  {1st of 2 posts today.}

River of Blood

First we begin with the myth-making, just like after 9/11, as in this by Zalmay Khalilzad (senior official in Bush Jr’s administration) in the National Interest

Under President Obama, America maintained robust policies on homeland security and counterterrorism, but adopted a passive and reactive approach to transforming the region. The administration withdrew from Iraq, provided minimal support to the opposition in Syria, and allowed safe havens to emerge after toppling the Qaddafi regime in Libya.

Khalilzad relies on our amnesia about recent history (much like Republicans blaming Obama for the slow response to Katrina). Bush signed the SOFA that ejected us from Iraq; Obama expanded our wars in Afghanistan, Yemen, and Syria; there was no support in the US for the massive intervention necessary to stabilize Libya after Gaddafi; etc.

On this foundation of fiction hawks build their case for a more intense and wider war. Some are coy about the specifics, as in this typically vague bluster from Mitt Romney: “Obama must wage war on the Islamic State, not merely harass it” — not saying what actions America must take.

Other voices are explicit: “We can’t stop the Islamic State with a ‘Desert Drizzle’“, David A. Deptula (General, USAF, retired; dean of the Mitchell Institute for Aerospace Studies), op-ed in USA Today.

“We have it within our capacity to destroy the Islamic State leading to the elimination of their sanctuary for terror. However, to do so will require moving beyond the current anemic, pinprick air strikes, to a robust, comprehensive use of airpower — not simply in support of indigenous allied ground forces, but as the key force in taking down the Islamic State.”

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Martin van Creveld asks: Has a new Thirty Years’ War begun in Europe?

Summary: Today Martin van Creveld gives us a chilling warning, one that appears more accurate after the attacks on Paris. Our invasions after 9/11 destabilized the Middle East, and the resulting  fires slowly grow hotter and spread. If events follow the course of the Thirty Years’ War, much worse awaits us in the future.

"The Disasters of War" by Francisco Goya.

“The Disasters of War” by Francisco Goya.

A Thirty Years’ War?

By Martin van Creveld
From his website, 22 October 2015
Posted with his generous permission

For those of you who have forgotten, here is a short reminder. The Thirty Years’ War started in May 1618 when the Protestant Estates of Bohemia revolted against the Catholic Emperor Ferdinand II. They threw his envoys out of the windows of the palace at Prague. Fortunately for them, the moat into which they fell was filled with rubbish and nobody was killed.

Had the revolt remained local, it would have been suppressed fairly quickly. As, in fact, it was in 1620 when the Habsburgs and their allies won the Battle of the White Mountain. Instead it expanded and expanded. First the Hungarians and then the Ottomans were drawn in (though they did not stay in for long). Then came the Spaniards, then the Danes, then the Swedes, and finally the French. Some did less, others more. Many petty European states, cities, and more or less independent robber barons also set up militias and joined what developed into a wild free for all.

For three decades armies and militias chased each other all over central Europe. Robbing, burning, raping, killing. By the time the Treaty of Westphalia ended the hostilities in 1648 the population of Germany had been reduced by an estimated one third.

The similarities with the current war in Syria are obvious and chilling. This war, too, started with a revolt against an oppressive ruler and his regime. One who, however nasty he might be, at any rate had kept things more or less under control.

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