Remember Econ 101? We got to learn about the Taylor rule. Although some confusion over coefficient seems to arise from time to time, below is the formula and suggested rate by Mr Taylor himself. From his blog;

• Over at Market Beat: WSJ.com’s inside look at the markets, Mark Gongloff reports that Standard Chartered’s David Semmens says that “Based on a strict Taylor-rule calculation, the first effective fed-funds rate increase shouldn’t come until the first quarter of 2013.”
• And over at Business Insider, Art Cashin of UBS reports that Jim Brown of Premium Investor says that “the Taylor rule says the Fed funds rate should be -1.65%” suggesting the need for a QE 2.5.
• But no calculations are provided in either report.
• Over here at Economics One, I can report that the Taylor Rule says that the fed funds rate should now be 1 percent, and I can provide the calculations. Available data (through the 1st quarter) show that the inflation rate is about 1.6 percent (GDP deflatorsmoothed over four quarters) and the GDP gap is about 4.8 percent (average of San Francisco Fed survey). This implies an interest rate of 1.5 X1.6 + .5X(-4.8) + 1 = 2.4 – 2.4 +1 = 1.0 percent. I am not sure why other reports differ, but at least the coefficients and numbers are here to see and check. Perhaps they are using different coefficients, but David Papell writing at Econbrowser earlier this month showed why the coefficients reported here work well.
• So I think the economy would be better off if the Fed started moving to a higher funds rate now rather than later, and I certainly see no rationale for another round ofquantitative easing. Unfortunately, it looks like the Fed will continue with its zero interest rate for a while longer, and traders will continue to debate whether or not there will be a QE3 adding volatility to the market.

Kathimerini reports;

As government officials and representatives of Greece’s foreign creditors sought to finalize details of the government’s midterm fiscal program and privatization plan late on Wednesday amid reports of fresh obstacles in negotiations, Moody’s rating agency struck an unexpected blow to the process by downgrading Greece yet again.

In a written statement issued by the Finance Ministry minutes after the agency’s decision went public, Greek irritation with the timing of the move was clear.

Meanwhile, sources told Kathimerini that talks in Athens between government officials and visiting envoys -originally due to be concluded by tomorrow – had stumbled on a dispute over collective labor contracts. Labor Minister Louka Katseli reportedly objected to the officials’ demand that employers who do not sign up to collective labor contracts should not be bound by their terms. Katseli is said to have the backing of Prime Minister George Papandreou on this issue.

One point on which the government and its creditors were said to see eye-to-eye was on an ambitious privatization program, agreeing to bring forward several sell-offs planned for 2012 to this year and launching those slated for 2014 and 2015 by the end of next year. The new plan reportedly foresees the state selling a 21 percent stake in Athens International Airport (currently 55 percent state-owned) as well as its entire 34 percent stake in Hellenic Postbank and 40 percent of its 74 percent stake in the Thessaloniki Water Supply and Sewerage Company (EYATH).

The only privatization project actually under way is the sale of a further stake in OTE telecom.

Late on Wednesday, Papandreou’s office said the premier is to travel to Luxembourg tomorrow for talks with Prime Minister Jean-Claude Juncker, who is chairman of the Eurogroup council of European of finance ministers.

Greece under further attack. Austerity, creditors stressing the country for a fire sale, people protesting. This will unfortunately get much worse. Look for the contagion effect spreading to other countries. Don’t forget Belgium, the home of EU, that still lacks a government….Below from Moodys;

The government’s efforts to streamline the country’s finances took another blow on Wednesday evening as Moody’s rating agency downgraded Greece’s local and foreign currency bond ratings deeper into junk status.

The agency cited an increased risk that the country will not be able to handle its debt problems without an eventual restructuring, downgrading its rating to Caa1 from B1 and maintaining its outlook as «negative.»

It also suggested that there is a 50 percent chance of a Greek default.

Apart from the increased risk of restructuring, the agency also cited «highly uncertain» growth prospects and missed targets in budget reforms.

Moody’s argued that the government failed to meet some of its targets for 2010 and is likely to also miss some of those for this year.

So we have a RISK OFFFF day today. After the wax on wax off market for the past weeks, we think the top is in. After trying to rally yesterday, everything reversed big time today. The set up is perfect. Like we wrote earlier this week, sentiment indicators are suggesting the top is in http://www.thetrader.se/2011/05/30/sentiment-indicators-suggesting-the-top-is-in/.

We have had people puke vol, and today they are chasing it. They still don’t want to understand Taleb’s words of wisdom, “don’t buy vol when you have to, buy when you can”. http://www.thetrader.se/2011/05/31/volatility/

As we laid out earlier this week, the market had reached important resistance levels, and failed to go above these levels. Instead we are getting big reversal wih decent volume on the down move. http://www.thetrader.se/2011/05/31/spx-and-dax-the-greek-winner-charts/

The speculator longs puked out their Euros at lows, and even went short, watched it go up, as suddenly Germany was Greece’s friends, and all was happy again, just to see it top out again. Specs have caught the currency moves totally wrong, and all moves have been going against the crowd. http://www.thetrader.se/2011/05/31/currency-moves/

We got the risk commodities pushing higher, just to get people to rush in again. With Silver reversing today, expect new big moves washing out these new longs.

Early this week, NYSE announced it’s margins. We are now at very high margin levels, meaning people are now more than fully invested. That capital on the sideline, is not there. It is looking for the exit.

All in all, it is a very nice set up, for a Flash Crash, just to clean out the system.

Some charts, click the charts for better view;

After the masses had to buy LinkedIn shares at 122 (1200 p/e), the stock is now close to minus 40% from the top. We can not more than congratulate the investors thinking LinkedIn would go to p/e 5000. We heard it before, “this time it is different”. We said it back then, we say it again, Welcome to Irrational Exuberance 2.0.

Base case scenario still intact. SPX reached resistance levels, all desperate Alpha chasers rushed in, and today we get the perfect reversal down. We expect 1300 to be taken out shortly, and then the real action should begin.

After the desperate printing last evening, where many shorts covered in panic mood, we are filling gaps below. These two day’s action is very important, as the index, despite manipulators, has no steam to go higher, and makes a big reversal. June starting off this weak is not a good sign. We expect the market to regain volatility, and eventually collapse in a Flash Crash mode.

Many have totally dismissed the VIX index and what vol is supposed to price. We have argued for the past months, that VIX is flawed due to QE2. The normal market practices have been offset by notorious QE2 pushing assets artificially high, and keeping volatility artificially low. We expect much higher volatility.

After the ADP totally missed, we suggested some hours ago the NFP revisions will start kicking in. Don’t forget what figures made Bernanke launch the QE2 last year. QE3 (or if it will be called something else) round table discussions are imminent. Here we go, NFP revisions;

Goldman cuts to 100 000

Morgan cuts to 120 000

CSFB cuts to 120 000

The above are all cuts of at least 50% or more. Thanks God we have those economist producing those expectations so accurately….Now let’s await further GDP revisions (already revised compared to some weeks ago). We just ask ourselves, is there any possibility GDP going negative, or is this outside the risk MATRIX? As we have been arguing, volatility is mispriced and dislocated to geopolitical and economic happanings around the World. Gold below, spiking, while we await QE 3.

News on the Economy continue coming in worse than expected. This is a truly negative surprise. NFP revision to follow asap. We have detoriating jobs market, double dip in housing (Case Shiller) and a falling GDP. We wonder where all the growth is going to come from? Remember China is leading lower….SPX futures falling, despite CME’s margin lowered yesterday.

Employment in the nonfarm private business sector rose 38,000 from April to May on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from March 2011 to April 2011 was revised down slightly to 177,000 from the previously reported increase of 179,000.

Today’s ADP National Employment Report suggests that employment growth slowed sharply in May. Employment in the nonfarm private-business sector rose 38,000 from April to May on a seasonally adjusted basis.

A deceleration in employment, while disappointing, is not entirely surprising. In the first quarter, GDP grew at only a 1.8% rate and only about 21⁄4% over the last four quarters. This is below most economists’ estimate of the economy’s potential growth rate and normally would be associated with very weak growth of employment.

The Chinese market has lately traded very poorly. Index is making new lows and underperforming the global markets. We still talk of the Chinese market leading us higher, giving the world the much needed “emerging” growth. Could it be though, the growth in China, is so dependent on the property boom, that a pop in the property sector, could derail the world’s economy? We know what happened in Dubai, US subprime and Spain. Is China next? FT reports;

It was not until the Chinese government decided to privatise much of the country’s urban residential housing stock in 1998 that most people in China had even considered the possibility of owning their own home.

While official figures show 89 per cent home ownership in the cities – a figure disputed by many – analysts say Chinese real estate constitutes the single most important sector for the health of the entire global economy today.
Real estate and housing construction pervade the entire mainland [Chinese] growth model,” says Jonathan Anderson, economist at UBS, the Swiss bank. “They are the most important determinant of commodity demand, a very big marginal driver of China’s external surpluses and indeed a crucial key to real understanding of household balance sheets, saving and investment.”

But when home appliances, property-related in­frastructure and other property-dependent sectors are included, as much as two-thirds of total steel consumption in China is broadly driven by property spending.

Full article,

http://www.ft.com/intl/cms/s/0/8b198ae2-8b9e-11e0-a725-00144feab49a,dwp_uuid=d2d846de-a954-11df-a6f2-00144feabdc0.html#axzz1O18NVygq

Below great Interactive map of the increase in property prices in China, by FT;

http://www.ft.com/intl/cms/s/0/70bdcad6-8ba4-11e0-a725-00144feab49a,dwp_uuid=d2d846de-a954-11df-a6f2-00144feabdc0.html#axzz1NyKzwHp8

591,6 per month salary for Greek young workers. This is one of the reasons and logic behind Austerity protests in Greece. Remember, Greece is a country, supposedly part of Europe. Living on 591 Euros a month is not possible in Europe, especially when everything increased in price since the Euro, when corrupt politicians have been filling up private pockets, and definitely not possible accepting the fire sale of the Greek proud History now when state assets are to be sold out at discount prices. Kathimerini reports;

Employers will be able to offer young people monthly salaries of less than 600 euros as part of labor market reforms that the government has agreed with the European Union and the International Monetary Fund, according to sources.

The government is expected to announce several changes to labor laws in the mid-term fiscal plan, which is currently being finalized.

One of these is to allow employers to pay anyone under the age of 25 20 percent below the monthly minimum wage (739.60 euros gross), as set by the national collective contract. This means that those affected will be paid a gross monthly salary of 591.60 euros.

A similar law was passed last year but the Manpower Organization (OAED) covered the difference between the minimum and lower wages. This will no longer be the case.

Among other changes that have been reportedly agreed, fixed-term contracts will now be for up to three years, rather than two. Employers will be able to renew these deals up to three times, thereby keeping employees on fixed-term agreements for up to nine years without having to hire them permanently. If at the end of the nine years, the employee is not kept on, he or she will not receive any redundancy pay.

The government and the troika have also agreed that businesses will be able to ask employees to be flexible in their working hours. An employer will have the right to ask for employees to work for 10 rather than eight hours for up to six months a year, rather than the current four, in return for working six hours for an equal time.

The reforms will apply to the broader public sector as well as the private sector, where many of these measures already apply unofficially.