MORNING BID – Long in the tooth

Sep 3, 2014 13:28 UTC

A frequent refrain among commentators is that this ongoing growth in the stock market has to ‘come to an end’ at some point because of, well, mostly because it’s been going for a while and that it’s gone entirely too far in the last few years.

Given the market’s penchant for 50 percent corrections since the turn of the century, the latter point can’t be discounted entirely, but the former – that essentially, the bull market is endangered because it’s long in the tooth – feels a bit reductive. The day’s figures on car sales due out from the major automakers are likely to support the worries people have about a slowdown that’s just a short drive away from the economy going into a ditch, or something like that (it’s not as if the economy is awesome right now), but the belief in a mid-cycle slowing in some key consumer metrics is probably more the ticket.

Right now the business cycle points to the U.S. being in a mid-cycle area – business inventories are 6 percent higher than a year ago but that doesn’t appear out of whack, notes Dan Greenhaus of BTIG. Job growth has been better than it has been since 2000 (1.375 million private sector jobs in the last six months), and that may underscore how sluggish the growth has just been for 15 years and perhaps less about what’s happening now – the new normal many discuss isn’t emerging now, just confirming the activity of the last decade-and-a-half, where the heaviest fuel for job growth was in the ill-considered housing bubble era of 2005 and 2006.

Furthermore – and the recent August experience probably overstates this – low volatility and still ho-hum capital spending suggest the expansion has further to go as well, as the kinds of imbalances present (too much spending on pie-in-the-sky projects that will take too long to finish) aren’t there just now (examples would be the Empire State Building, World Trade Center, Shanghai World Financial Center, Burj Khalifa in Dubai – basically, when the world’s next tallest building is under construction, it’s time to sell).

With this in mind Morgan Stanley even predicts the S&P could get all the way to 3000 if the economy continues to grow at this steady pace with 6 percent earnings growth for the next five years. Those types of predictions are the kinds of things that usually get people in trouble amid long-running expansions, but Morgan Stanley also points out that the jobless claims figures dropping to the 300,000 range and consumer confidence moving up into the 90s readings really reflects (finally) recovery from the deleveraging that dominated the last several years. (We pause once again to consider just how awful this recession was.)

MORNING BID – European Deflation

Aug 28, 2014 14:16 UTC

Never say the Europeans aren’t cautious. The dollar has been on a roll of late, in part because of the market’s growing expectation for more stimulus from the European Central Bank before long that would include some kind of larger-scale quantitative easing program after a speech last week from Mario Draghi that European markets seem to still be reacting to several days later. Reuters, however, reported that the ECB isn’t quite likely to do move quite so fast (heard this one before) and that took some of the wind out of the dollar’s sails and boosted the euro a bit.

Some of the move in the euro will depend on the trend in European yields, where everything is going down – German Bunds continue to make their way rapidly toward zero, and Bund futures remain in an overwhelming bullish trend, per data from Bank of America-Merrill Lynch. Analysts there also anticipate the dollar is going to experience some kind of medium-term correction – but remains in rally mode otherwise. There’s a headwind there for equities from that – rising greenback makes U.S. goods more expensive, but the gains are still only in earlier stages, and haven’t pushed into territory that would otherwise indicate surprising strength that we haven’t seen in some time.

What’s happening in part is that there’s been a definitive change in how bond markets are viewed – even the peripheral markets like Spain and Italy are less favorable as investments when compared with the United States; Merrill analysts foresee more of a move into U.S. fixed income assets after several months of seeing European funds garner strong inflows (the count is $158 billion to $86 billion, favor the Europeans so far this year). So what’s going on here? Many investors have been perpetually frightened of “catching a falling knife,” and the number of big-name bond managers who have shied away from Treasuries on the assumption that the Fed was going to declare the party over in due course are a great many. “The perceived tail risk associated with Eurozone bonds is lower than that for U.S. bonds,” they write.

Then again, this year has been a class study in foiled expectations, particularly in the bond market. Rates have remained stubbornly low; the bullish investors in the government market have reaped big rewards, and even if the U.S. dollar creeps higher, the ongoing interest out of pension funds for higher yielding credit will continue to pressure yields. And Merrill sees more buying in the bond market from foreigners, an increasing percentage of that from Europe and other investors. That should again benefit the dollar, which is expected to stay near where it is.

MORNING BID – Retail therapy

Aug 13, 2014 13:11 UTC

All that’s left for investors now when it comes to earnings season is the shouting, but if the rest of the retailers post results anything like Kate Spade did on Tuesday, the shouts will be screams of terror rather than anything that assuages investors over the state of the overall economy. Kate Spade’s executives went into some detail on its conference call as to the nature of its margins shortfall – which Belus Capital chief equity strategist and longtime retail analyst Brian Sozzi said are not likely to improve until the middle of 2015 – and the company then did itself no favors by declaring that it wouldn’t be discussing the margin issues any further on the call. (Craig Leavitt, the CEO, violated that rule to some degree, but basically, investors don’t like it when you tell them flat-out that you’re not going to talk about your problems, and when you’re a company with a forward price-to-earnings ratio of 77.5 and a price-to-book value of 119, that’s going to be particularly true.)

Other luxury retailers have noted their own problems with attracting customers at this time, including Michael Kors Holdings, which saw its own shares stumble of late after also warning of margin pressures due to expansion in Europe, but at least Kors has a forward P/E ratio around 19, which puts it in line with peers like Coach and Ralph Lauren.

After Macy’s, which reported this morning – and put some ugly numbers out there

Wal-Mart has trailed the S&P for the last several years.

Wal-Mart has trailed the S&P for the last several years.

- the next big retailers out of the gate are Kohl’s, Nordstrom and Wal-Mart, and of course they’re all over the map when it comes to big retailers; Nordstrom profiles a bit more like Coach and Kate Spade in terms of clientele, but they’re a big department store, so not really comparable at all. Nordstrom’s growth, though, is expected to come from the Nordstrom Rack outlet stores, with same-store sales estimates for the entire company at 3.3 percent, but a 1.2 percent decline expected in the full-line sales, according to Thomson Reuters data.

Either way, investors will be keeping an eye on margins at Nordstrom’s and Tiffany & Co (which reports later in the month). Nordstrom, in its last release, said it expected a 30 to 50-basis point decline in gross profits for fiscal 2014 (which ends early 2015), compared with 10 to 30-basis points prior to its May earnings release, and its earnings before interest and taxes fell to 7.9 percent in the May quarter 2014, from 8.7 percent a year earlier. While some companies this quarter talked of margin pressures as a result of rising prices, with retailers it seems more to be their inability to get away from hefty discounting to bring consumers into the stores.

Wal-Mart is a trickier case. Sozzi, for his part, believes the company could fall short of results if inventory growth continued to grow faster than net sales, and if they relied heavily on clearance zones to move inventory, that will hurt overall margins as well. The company forecast second-quarter profit below analysts’ expectations in May, and so investors are going to see if there’s any sign that its execution is changing now that it has appointed a new CEO and new head of online business. The company has seen margins slipping as well, as its pre-tax, pre-interest and depreciation margins dipped from the high 7s between 2011 and 2013 to 7.5 percent in 2014, and it’s trailing the S&P badly in the last several years.

MORNING BID – What’s all the Yellen about?

Jul 15, 2014 12:51 UTC

Rants from TV commentators aside, the market’s going to be keenly focused on Janet Yellen’s congressional testimony today, with a specific eye toward whether the Fed chair moderates her concerns about joblessness, under-employment and the overall dynamism of the labor force that has been left somewhat wanting in this recovery. The June jobs report, where payrolls grew by 288,000, was welcome news even as the economy continues to suffer due to low labor-force participation and weak wage growth.

Inflation figures are starting to show some sense of firming in various areas, for sure, but still not at a point that argues for a sharp move in Fed rates just yet. Overall, a look at Eurodollar futures still suggests the market sees a gradual, very slow uptick in overall rates – the current difference between the June 2015 futures and June 2016 futures are less than a full percentage point – not as low as it was in May of this year, but still lower than peaks seen in March and April 2014 and in the third quarter of 2013, before a run of weak economic figures and comments from Fed officials themselves scared people again into thinking that the markets would never end up seeing another rate hike, like, ever again.

Now the expectations for Fed moves have coalesced around late in the first half of 2015 for at least the first token rate rises, and it might even be a bit sooner depending on what happens with employment and inflation figures. On this front, Liz Ann Sonders of Charles Schwab points out that some of the leading and coincident indicators for the labor market look promising – noting that the jobless rate overall and the payroll figures are lagging indicators.

She points out that private-sector employment is up 9 percent since the end of the recession, outpacing the economy’s overall 5.9 percent growth rate – and that’s clearly due to a lot of local and state government austerity that was forced upon municipalities and other localities due to diving tax revenues and weak growth. Government employment didn’t finally trough until mid-2013, and has since started to come up a bit more, but it’s still down 3 percent from the end of the recession; the gains in private employment don’t completely obviate whatever need there is for government jobs and services – particularly if federal and state employment tends to be middle-class labor.

Job quits and layoffs figures are improving.

Job quits and layoffs figures are improving.

Other factors pointing to strength – the improvement in the JOLTS data, the job openings labor turnover survey, which shows job openings rising to levels consistent with the 2007 area – still not at the same level as it was in 2001 during the end of the tech boom, but much better than what’s been happening of late.

The “quit rate” also measured by JOLTS points to more people voluntarily leaving jobs – again, the 2.1 percent rate for private payrolls falls short of the 2.5 to 2.6 percent level during the end of the last boom and far from the 2.8-2.9 percent level back in 2001 – but it’s important enough that Yellen may modify some of her language. Given she’s learned pretty quickly to try to bore people to death after the “six months” remark that set people off, those looking for lots of news may be disappointed. But if there is to be any, it could be here.

MORNING BID – Closet cases

Jul 10, 2014 12:57 UTC

Usually when retailers warn of earnings weakness – particularly if they’re saying the entire economy is in a funk – there are two possible explanations:

1: They’re right, and the real economy is truly suffering, or
2: It’s all their own fault.

That the likes of Lumber Liquidators and Container Store Group should warn of comings earnings shortfalls and weak results in the next few quarters – pegging to a consumer that didn’t rebound after the weak weather-hammered first quarter – would seem to fall into the former category, at least at first glance. After all, Container Store, despite stocking its shelves with all sorts of bric-a-brac designed to keep other bric-a-brac, has built its reputation on its Elfa closetizing system that to the normal person is a weird Rube Goldberg contraption but yet stores all 300 of your pairs of shoes, et cetera. And Lumber Liquidators is pretty binary – they sell discounted hardwood flooring. And so with both citing weak conditions that persisted past the weather-related mishegoss that dominated the first quarter of 2014, that’s at least enough to raise some eyebrows.

Both companies deal with the kinds of purchases that speak to substantial renovation and therefore depend specifically on the housing market, which of course weakened in the first half of the year and hasn’t rebounded to levels seen last year. Existing-home sales are still about 5 percent below the level reached a year ago, according to the latest from the National Association of Realtors, even though the May figures did represent an increase from April, suggesting a bit of increased momentum. But if the first-quarter housing weakness then gives way to an ongoing lag in the kind of spending that had people expecting a rebound in the second quarter, well, all the optimism about earnings that’s been baked into stock prices in recent days will surely unravel.

Of course, it’s plenty possible that the companies are screwing things up on their own. Container Store only went public for the first time last year, and after a brief rally that brought shares to a 52-week high of $47 around the end of 2013, it’s been a dog since, losing 43 percent of its value in short order. More than 10 percent of the shares are being shorted right now, and StarMine shows a whole load of worrying metrics with the company – it ranks worse than 90 percent of U.S. names in terms of its price-to-earnings ratio, and also sports a high price-to-book and price-to-cash flow level right now.

Lumber Liquidators doesn’t look much better in this regard. About 13 percent of shares are being borrowed for short bets, and it ranks in the lowest quartile in terms of relative value, given it’s very high price-to-book ratio and price-to-cash flow ratio, which again, just suggests investors are valuing the company’s assets pretty highly given the weak earnings expectations and ongoing reductions in its outlook. The stock is down nearly 32 percent year-to-date, and that doesn’t even include what is likely to be another selloff on Thursday, as it was down about 20 percent in overnight action.

The day’s earnings do not include too many names that can be seen as corollaries for these retailers; Kaufman & Broad, a homebuilder, is about the closest. Interestingly, in late May, Home Depot did reaffirm its earnings outlook for the year and raised its per-share earnings outlook in part due to improved expectations for sales growth. HD has a way of crowding out others – but another such update of that kind might settle just whether there’s a bigger storm coming in retail, or if it’s just warping the hardwood floors.

MORNING BID – All bonds, all the time

May 29, 2014 14:16 UTC

There’s nothing dull these days about the bond market, which is exhibiting an unforeseen, profound level of strength that’s spread through the various asset classes on the fixed income side, and that continues to remain unexpected for the most part.

As of Wednesday the Barclays US Aggregate Index had notched a year-to-date return of 3.62 percent; the 10-year-plus index was up a crazy 9.39 percent, and the Barclays Intermediate High Yield Index was up 4.05 percent. Looking at one of their competitors, the Bank of America/Merrill Lynch Corporate Index has so far netted a 5.39 percent return year-to-date while the Merrill High Yield CCC and Lower Index is up 4.45 percent. So that’s pretty solid returns across the board – comparing favorably with the S&P 500’s total return of 4.3 percent so far this year. Explaining how it’s all happening in the bond market is the more difficult task, but let’s give it a whirl.

The Barclays US Aggregate Index had a duration of 5.62 years as of Wednesday – duration declines throughout the month as various maturities in the index slowly mature, and then the figure bounces back up again on the first of the month following the Barclays rebalancing of that index.

So at the beginning of May it was 5.70 years and at the beginning of April was 5.72 years – as long as the duration has been since 1979 and reflective of the Federal Reserve’s steady move away from its monthly bond buying and the recent decline in auction sizes for two- and three-year notes. Estimates from traders on Wednesday were that the next extension would boost that duration to about 5.75 years, still taking us back to the Carter Administration in terms of overall duration.

Taken together that’s affecting the buying in the long end of the curve in a way that some other factors, including pension fund purchases or the effects from Europe may not be (generalized fear and big, big short positions still arrayed against more gains in bonds are also contributing, however). Notably the 10-year hasn’t been able to break through what some analysts identified as resistance around 2.45 to 2.47 percent. This is the second time that’s been tested in recent days (there’s no technical strategy that abides by the ‘third time is the charm’ adage, just FYI).

Furthermore, we might also start to see some convexity-related buying out of the MBS sector in coming days: Vitaliy Liberman, portfolio manager of mortgage-backed securities at DoubleLine Capital, said on Wednesday that he sees another 20 basis point drop in the 10-year Treasury yield, telling Jennifer Ablan that “at that point, you might see some scrambling to hedge out convexity.” (When interest rates fall and homeowners refinance, investors of mortgage-backed securities get back their principal, which they have to reinvest at lower rates. To offset the resulting shortening of their portfolios, they buy non-callable Treasuries.)

Either way, though, most of the reasons offered up for bond yields sinking are undercut in some fundamental way: it’s hard to argue that the safe-haven rally is what’s keeping bond yields dropping as sharply as they are – volatility indexes, be it the VIX or the MOVE Index, are all pretty much saying that there’s no volatility right now. Valuation doesn’t quite explain it – if anything, the move in the bond yield puts it at 400 basis points less than the S&P 500’s earnings yield of about 6.45 percent right now, which is way past the usual difference of about 138 basis points.

One could point to lack of inflation, which is to say it’s possible that expected low inflation – as seen in the five-year/five-year forward rate that still only puts inflation at about 2.5 percent five years from now – as a likely enough catalyst. And rising rates and weak demand would certainly explain that combination – mortgage demand is low, wage growth is weak, overall economic growth came in at -1 percent in the first quarter (even if the weather had something to do with it – which it did).

That mélange of stuff lines up relatively smoothly with the notion that the market is discounting a weak economy in the future that market players just don’t believe right now, and volume in the last couple days has been high enough to warrant this a second look as an explanation. Where it falls apart, of course, is the possibility that the equity market is the one that’s correct here, and that economic growth is about to take off (we’ve heard this before, no?) and with that the bond market gets whipsawed into oblivion.

MORNING BID – Inflation situation, what’s up with that?

Apr 30, 2014 13:21 UTC

The Federal Reserve faces a relatively easy decision at the end of the day – it is going to continue to reduce its monthly bond buying, this time to $45 billion a month, and truth be told the action in the bond market of late has made things a bit easier for them when it comes to worrying about slack in the economy – long-term rates have not skyrocketed to nowhere as some had thought might happen, so that’s encouraging – mortgage rates are actually down by about 20 basis points on the year (yes, they rose dramatically last year, but they were somewhere in the realm of nothing early in 2013).

The tougher aspect of this to reckon with for the Fed is stubbornly low inflation that’s going to mean the Fed will be more than likely to be raising rates at a time when the economy is not doing what they want – prices aren’t really going up, and economic growth will struggle to get to that 3 percent rate for the rest of the year that the Fed is hoping for. Boston Fed President Eric Rosengren has suggested keeping rates low until we see 2 percent inflation and the economy is within a year of full employment – something others, like Dallas Fed head Richard Fisher, disagrees with.

Either way inflation expectations really haven’t advanced all that much for all of the time that the Fed has been underwriting risk-taking, be it through moving further out in the yield curve, buying corporate bonds or high yield bonds or more esoteric assets altogether. The five-year/five-year forward rate for inflation expectations is currently about 2.41 percent per the St. Louis Fed’s massive website of awesomeness (seriously); it has gotten as high as about 2.9 percent over the last five years, which again isn’t exactly pointing to a major outbreak of inflation, but still, that’s more like what you’d expect after all this. And in 2013 when the Fed started to point to a taper people built in greater inflation expectations, moving that rate from 2.2 percent in May to 2.8 percent late in the year.

With the situation remaining relatively persistent — that is, mediocre economic growth but relatively high confidence that it will improve — that’s forced a lot of money, be it overseas or in various types of funds, into credit. Investors keep going there even though they believe its overvalued, according to Bank of America/Merrill Lynch strategists, because inflows keep coming. “Inflows are also why sell-offs are short and, and getting shorter over time. Again, investors accumulate money that eventually needs to be put into the market. That dynamic becomes self-fulfilling, as even investors that are able to time selloffs early on, struggle to make money as they are unable to repurchase bonds before it’s too late,” they wrote. They warn that this will change, violently, when rates truly rise sharply.

When does this change occur? When the Fed starts raising rates – and that depends on the economy. Today’s Fed meeting isn’t the issue – it’s the jobs data, and forthcoming lending data, and spending

MORNING BID – Pitfalls and switchbacks

Mar 31, 2014 13:36 UTC

This week profiles as one that contains a bunch of potential minefields that could challenge the market’s prevailing view on what’s to happen with major market-moving events.

The ECB meeting is one of the more obvious ones, what with investors expecting for some time that the euro would push higher and higher on the expectation of an improved outlook in the economic situation there.

That changed somewhat abruptly last week when Bundesbank President Jens Weidmann came out with some rather dovish comments that threw people for a loop. This looks like there could be some kind of situation where people are positioned against a rebound in the euro, only to be disappointed by the lack of action from the ECB should it go down that way.

The same can be said when it comes to events like Friday’s jobs report. The market still has to try to suss out the likely reaction to this and weekly positioning figures that show the market’s short position in five-year Treasury notes getting bigger than a week ago, as for other parts of the yield curve. A modest long position in two-year futures turned into a short position last week; long positions in the 30-year contract were trimmed, and investors extended short positions in the five- and 10-year area as well.

That seems to set up nicely for a jobs-report-weather-payback kind of deal this Friday, but it’s entirely possible that this won’t happen, and we’ll have another weak result on the jobs front. The latter would certainly reverse a lot of these bets and make for some volatile action as investors try to figure out what’s going on.

Either way, Jason Goepfert of Sundial Research points out that the positioning in the five-year hasn’t been this short since 2005, and even then, that short position was eventually overrun by unexpected consequences that resulted in a multi-month rally – so let’s be extra careful out there.

Ukraine’s situation remains fraught with concerns about Russian designs on part of the Ukrainian mainland following the annexation of Crimea.
And herein we have a third possibility of surprise, where tensions worsen, the price of oil spikes, and the European economy, much more dependent on Russian engineering than the US or the Far East, feels the pain, again, hitting the euro.

And then there’s China. The Financial Times reported bad loans written off by China’s biggest five banks increased by 127 percent in 2013. This is an ugly situation that will stoke concerns about a potential debt crisis, one made worse by the strange nature of many Chinese loans, whereupon deals made to borrow in dollars were backed by copper – which has been sinking as investors sell the metal for collateral.

MORNING BID – But I never could find…(sha na na na, sha na na na na)

Feb 7, 2014 14:05 UTC

An odd jobs report sets the tone for what’s likely to be another choppy day in the markets – stock futures plunged, briefly, after the Labor Department said nonfarm payrolls grew by just 113,000, but the household survey saw a drop (again) in the unemployment rate to 6.6 percent on a big gain in jobs in that survey. An odd decline of 29,000 in government payrolls offset the overall about-at-trend-but-let’s-not-kid-ourselves-about-this-being-awesome 140,000 or so gains in the private jobs market, so there’s a little bit to like, some to shake one’s head at, and still more to wonder about how many people didn’t get to work because their feet froze to the ground when they tried to get into their cars.

(More seriously on that point – the establishment survey doesn’t get some kind of massive job loss just because of a storm on a particular day of surveying, so it’s not as if a snowstorm destroys job growth, so let’s not overstate the weather issue here. It’s a factor, but don’t look for a revision to +300,000 or something.)

The activity in equity futures, however, seems to point to where we’ve been all along: jobs growth, factory activity and overall economic figures are just enough to put a brake on getting any kind of incipient rally and keeping the buyers less motivated right now, though the shallow correction we’ve seen so far appears to have hit a stopping point for the time being. Futures bottomed out around 1758 on the S&P E-Minis, a few points below the level the market had been sitting at before the downdraft that took futures to about 1730 for a few days. Stocks recovered from that level and now appear content to hang out around 1760 or so or even a bit higher, while the bond market is doing something similar – a quick post-jobs rally that took yields down to about 2.64 percent on the 10-year before the buyers eased off the throttle, lifting yields again to around 2.67 to 2.70 percent. Absent more emerging markets turmoil – and this appears to have been somewhat stemmed in the last few days, though maybe that’s just because we haven’t had bad news from China in the last day or two – these levels might end up prevailing for some time.

The jobs number of course raises the usual back-and-forth about whether the Fed might decide to accelerate or decelerate its schedule for winding down stimulus, but with the Federal Reserve – and especially with a new chair coming in – predictability when it comes to this policy is probably the preferred course of action. There’s enough weather-related shenanigans and uncertainty about global growth offsetting the relatively solid economic figures for the Fed to not want to jolt markets, and the Fedsters have been talking pretty tough on this one, essentially making it clear that this wind-down will become the equivalent of stock buyback programs: They continue, no matter what, unless something drastic happens to alter that expectation.

While we’re on the subject of buybacks, Apple is upping the ante on its own share repurchase schedule, succumbing to some of the pressure from the likes of Carl Icahn and others who have demanded the company boost shareholder returns in the absence of real spending plans. And of course, Apple has a ton of cash on hand, and they’re generating enormous profits even if they’re not the growth engine they had been in the past. It’s a bit early to say that the company should be lumped in with the likes of Exxon or IBM – gigantic businesses mostly notable now for moving money around, using up their free cash flow (and then some, thanks to low borrowing costs) for buying back their own shares.

Some analysts, notably Tobias Levkovich of Citigroup, have done studies that show that serial repurchasers – those who are steadily reducing their outstanding share count (share shrinkers, to come uncomfortably close to a Costanza-ism here) – have been better performers in the stock market over the last decade, with a total return of about 550 percent coming into the year compared with the S&P, which is up about 200 percent since the beginning of 2003. From a shareholder perspective, that works as long as these companies are so entrenched that their products deliver big sales at steady margins; once they fall behind, though, look out.

Growing pains

Nov 11, 2013 22:45 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to

At the IMF’s research conference last week, three Fed economists examined America’s economic wounds. A paper, by Dave Reifschneider, William Wascher, and David Wilcox, studied whether the economy has been permanently damaged by the effects of the financial crisis. Economists call it “hysteresis”, a concept coined in 1986 by Larry Summers and Oliver Blanchard, in a seminal work on the European labor market.

The Fed authors find that America’s potential GDP is about “7 percent below the trajectory it appeared to be on prior to 2007”. Before the crisis, America’s economy had the potential to grow at about 2.6% per year, the authors find; since the crisis, America’s potential growth rate has been just 1.3%. You can blame this decrease in productive capacity, the authors write, on things like lower productivity and persistently high unemployment.

Paul Krugman’s term for this is “The Mutilated Economy”: “The long-term unemployed eventually come to be seen as unemployable; business investment lags thanks to weak sales; new businesses don’t get started; and existing businesses skimp on research and development”. Worse, he writes, this is self-inflicted harm: the US simply hasn’t done enough to help the economy since the crisis.

Gavyn Davies argues that this paper takes the Fed into some new territory, and has three takeaways for investors. First, the Fed has moved on from debating the rough date of when it’ll start tapering; second, based on his reading of a paper by the Fed’s William English, he says the central bank may keep rates lower for a longer period of time; and third, he argues that the Fed has shifted the way it thinks about supply and demand during recoveries.

The worrying over America’s output gap — or the difference between the economy’s potential GDP, as measured by the CBO, and its actual GDP — isnt new. Last year, Grep Ip was reluctantly optimistic that the US hadn’t lost its growth potential. But Felix argued that lower growth rates may be here to stay, as America weans itself off “the artificial stimulant of ever-accelerating credit.”

Last year Greg Ip also looked at previous jobless recoveries (1991 and 2001) and found that the economy eventually recovered its growth potential. John Cassidy warns against drawing overly broad conclusions from the new Fed paper: “ Is it realistic to suggest that the economy’s capacity to expand has halved in five years? Population growth hasn’t ceased. Americans aren’t any less hardworking than they were five years ago, and their skills haven’t declined precipitously.” -Ryan McCarthy

On to today’s links:

Long Reads
The food stamp diet: America’s hungriest region is also its most overweight – Eli Saslow
Assets of the Ayatollah: Inside the Iranian spiritual leader’s massive financial empire – Reuters

Americans’ shrinking credit card debt – Matt Phillips

The CMS wars: On the companies that will dominate the future of digital publishing – Felix

New Normal
Wall Street is slowly beginning to worry about income inequality – WSJ

Right On
What it will take to fix climate change for good – Quartz

Possibly Not-So-Useless Data
What can statistics tell us about causality? – Andrew Gelman

“Cars aren’t people. Babies aren’t luxury consumer goods. That’s just how it is.” – Matt Yglesias

“It would be quite a paradox if green regulation ended up being a bigger threat to Tesla than its safety record” – Matt Klein

A really nice overview of the companies trying to mine raw Twitter data for a market edge – Will Alden
Worried about market manipulation, big banks may block traders from chat rooms – WSJ
Some chilling signs of a market top – Josh Brown

Must Read
“In these secular, jobless, globalised times when ever more of us live alone, we are no longer very sure who we are.” – Simon Kuper

Study Says
Gentrification helps credit scores – Cleveland Fed

The Fed
The Fed’s role in the recent big IPO pops – Macro Man

Follow Counterparties on Twitter. And, of course, there are many more links at Counterparties.