It won’t be easy.  But if we are really going to achieve something good, for our clients and for ourselves, we’re going to have to defy Puttnam’s Law. No pain, no gain.  (Bob Seawright, Above the Market)

At today’s price of $2.43 per million Btu at the Henry Hub—though up 28% from the April low—drilling is destroying capital at an astonishing rate, and drillers are left with a mountain of debt just when decline rates are starting to wreak their havoc. To keep the decline rates from mucking up income statements, companies had to drill more and more, with new wells making up for the declining production of old wells. Alas, the scheme hit a wall, namely reality…. While drillers are getting slaughtered, power generators are laughing all the way to the bank. They have switched massively from coal to natural gas. According to the EIA’s just released Electric Power Monthly May 2012, net generation of electricity from coal-fired power plants fell 21.3% in March and 21.4% in the first quarter; but from gas-fired power plants it skyrocketed 40.2% in March and 33.3% in the first quarter. The confluence of sharply rising demand from power generators and declining production has started to burn through the gas in storage—though still at a record for this time of the year. Fears were being mongered earlier that storage would soon be at capacity and that gas would have to be flared, thus making it worthless and available for free, bringing its price effectively to zero. This scenario now appears silly.  (Capital Destruction In Natural Gas – Zero Hedge)

People often ask me what would have happened if the US had done 5% NGDP targeting, level targeting, in 2008.  I suggested we would have had stagflation.  A very mild and short recession, with above normal inflation.  Maybe 6% or 6.5%  unemployment.  Evan Soltas has a new post where he argues that the Bank of Israel has been doing NGDPLT in recent years, with a 6.5% trend rate of NGDP growth…(The Recession We Should Have Had – The Money Illusion)

I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a “fantastic object” – unreal but immensely attractive. The EU was the embodiment of an open society –an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position.  The process of integration was spearheaded by a small group of far sighted statesmen who practiced what Karl Popper called piecemeal social engineering. They recognized that perfection is unattainable; so they set limited objectives and firm timelines and then mobilized the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step. The process fed on its own success, very much like a financial bubble. That is how the Coal and Steel Community was gradually transformed into the European Union, step by step. (George Soros’ much talked about speech – Business Insider)

We would note that the profit share of GDP in the first quarter, reported in [last Thursday’s] GDP revision, shrunk for the first time in the current business recovery/expansion.Without much stronger nominal GDP growth, and with the low hanging fruit of lower interest rates and debt service costs already having been harvested, restoration of margins is achieved mainly through reducing labor costs. This factor may prove more enduring for the employment data. (A Marginal Bet – FT Alphaville)

If you want to accelerate someone’s death, give him a personal doctor. (Noise and Signal – Nassim Taleb)

Expectations are a large component of how monetary policy works but expectations only work when there is a clear and credible set of actions that serve as the bazooka(s) to enforce these expectations. In other words, what is it exactly that the central bank threatens to do if the market refuses to react sufficiently to its changed targets? It is easy to identify the nature of the threat when the target variable is simply a market price, e.g. an exchange rate vs another currency (such as the SNB’s enforcement of a minimum EURCHF exchange rate) or an exchange rate vs a commodity (such as the abandoning of the gold standard). But when the target variable is not a market price, the transmission mechanism is nowhere near as simple. (The Case Against Monetary Stimulus Via Asset Purchases – Macroeconomic Resilience)