Short Term Comments
Updates
Jan 29 Privatize the gains socialize the losses
Jan 27 No chance of second stimulus?
Jan 25 Good article on USD positives
Jan 19 Tap off
Jan 13 Economist talks about bubbles
Jan 2’10 Same Setup as 2008
Dec 28 Banks want better terms for next TARP and Japan 10y government bond yield
Dec 27 Market characterization , benefits cut, private debt down, public debt up
Dec 26 Yes and No
Dec 18 Banks are free to fail again
Dec 10 Federal Debt Service to Tax Revenue just 17% and Jobless Claims data not to be tracked and deflation continues see latest Z.1
Oct 20 Paul Andreassen Study ; Added Real Rates Portfolio
Sep 20 Governments losing battle against deflation
Sep 15 Banks have more trouble since Lehman; Look at my page Forces of Deflation
Aug 23 Two Points on recessions and lending
July 31 Fight over accounting rules continues
July 29 Era of speculation not over; accounting rule changes
July 28 Updated credit growth charts…see deflation in business and households but so far mild deflation…debt to GDP still rising now 368%
July 16 Consumer Credit still contracting
July 11 Added Scenarios web page and updated Outputs; Japanese savings rate at new low; US savings rate now higher than Japan’s!
May 23 Updated Outputs and delinquency pages. Bonds are due to rally soon when stocks and oil turn around.
Apr. 20 Bonds relative to gold and stocks still bullish
Mar. 24 Fed Pauses Money Printing
Mar. 18 Good News for Long Bonds
Feb. 28 Long Bonds still in bull market..
Feb. 21 Comments on Gold
Jan 18’09 Updated Leading economic indicators. US is still doing the best…and currency ideas…
Dec 26 Videos about Depression and Canadian Prime Minister’s Admissions
Dec 22 Bonds outperform Gold and Gold diverges from Oil
November 28 From what I can see, last month’s CPI -1.0% was the largest drop since 1938; see also Break Even Bond Yield falling since September
November 11 Credit Bubble Comparison and bailout effects study from IMF
October 23 Continued deflation pressure appears likely at this time
October 15 Don’t know if hyperinflation or deflation in 1-2 years but see consequences of Hyperinflation
June 21 Updated credit growth. Comment on Bernanke and Fed interventions. Wage inflation has been declining since Dec'06.
May 27 Commodity Bubble vs Housing Bubble and Soros on oil
May 24 "...we are currently in a state of wealth destruction. So if you can preserve your wealth in those conditions, you're doing very well." - George Soros, May 13, 2008 ; Also section on oil/commodity prices
May 22 Although not at record rates, delinquency rates are changing (ROC) in a shocking manner (also added as a leading indicator).
May 8 Article on Oil Speculation
May 4 Added payroll page. Payroll growth matches CPI inflation very well. If Fed is truly on hold, interest rate differential will narrow with Euro. USD will bottom/strengthen and we'll see if commodities fall.
May 2 No bailout for housing speculation. Proportion planning to take a vacation has never been lower!
April 17 Wage inflation mild. Payroll employment determines wage inflation.
April 14 Availability of Credit...the good and the bad; Oil/commodity prices are very volatile and can crash 40% in 9 weeks!
April 11 As unemployment rises, politicians will switch focus to 'make-work' from bank/asset price bailout.
April 9 Bernanke's Economic Plan from Mish and another cartoon, property tax delinquency rising
April 8 Commodity Bubble by Wall Street Journal...commodities not driven by China but US speculators! Depressions have long periods of instability...perhaps 3 years.
April 3 Russia runs up huge foreign private debt and its impact on Germany. Comment on foreclosures. Real Estate prices.
Mar 28 Business Loans exploding but not business investment. GPDI updated. Credit efficiency down to 16% before recession!
Mar 20 Best short-term speculation is the Chinese Yuan due to double in a few years
Mar 19 Updated CurrDD and top 5 economies show negative leading economic indicators; no place to hide I'm afraid!
Mar 17 TIPS reflect deflation and Bernanke comment
March 10 SP500 Earnings show negative operating earnings. Leading indicators added to Outputs page.
February 19 CPI and Recessions show inflation peaks at beginning of recession then falls quickly
February 5 US Gasoline Consumption shows declining trendline / Japan House Prices still falling
January 22 Cherished Assumptions of Greenspan/Bernanke Put Challenged
January 7, 2008 Pile in to shorts and gov't bonds as Official Bear Market Begins!
Updated Earthquakes link to include comment on network theory and interest rate rises
Comments on Networks and Credit Crises
December 2 Check the Spreads section for widening high-yield junk spreads...WOW
November 19 S&P Earnings Low!; German consumer confidence dropping, orders fall 3.7% in September
November 5 Oil Market Derivatives as % of Oil Trading at least 30%; Credit standards tightening WOW!
October 22 Credit Growth in Canada still high
October 15 San Diego Condo values fall 16%
October 5 Gasoline Demand has now dropped year over year; Updated credit flow rates Q2 on home page.
Sep 29 Gasoline Demand has narrowed year over year; Hedge funds. Changed many pages: Index, Outputs, Leading Economic Indicators
May 30 Perfect Foresight is not possible. Hindsight is the worst investment method - reading newspapers won't help.
May 29 A fascinating talk with Robert Trivers ...also experts in complex environments.
May 27 S&P 500 predicted with PCE see GDP Components
May 26 A challenge for investors Foxes and Hedgehogs at the race track
May 24 Margin Debt and the Dow, GPDI web page added, GPDI chart of recessions
May 23 Investing Advice by Warren Buffett and George Soros
May 22 Overlooked areas with Nassim
May 16 Comments on nature of credit bubble by Mark Gilbert
May 11 Comments on Nassim's Black Swan
May 10 Alcohol sales and recessions
May 9 SP500 performance and recessions show that S&P is not a good leading indicator for recessions
May 7 SP500 Operating Earnings show slowing, unbelievably financials have yet to show weakness
Mar. 30 Gross Private Domestic Investment shows no growth before recession
Mar. 30 Chart of credit crises and interest rates
Jan. 12 Fed futures hold steady for next 2 meetings. Comments added to overview section.
I believe the Delusion Gap has peaked. UK raises rates to 5.25% with vow to stop
inflation - collapse imminent. Will UK be source of contagion?
Jan. 11 US Trade Balance turning nicely, as predicted: commodities fall, bonds up (rest of year as well)
Jan. 9 US Home Equity Extraction has fallen considerably, Overview section includes Japan's Debt/GDP
Jan. 6 UK mortgage equity withdrawal still rising, comments of Lee Hsein Loong added in Overview section
Jan. 5, 2007 France Consumer Confidence falls, TLT Container revised
Dec. 29 German Consumers go on strike in 2007, Delusion and Investment Behavior
Dec. 28 Z.1 Table Credit deceleration now as bad as 2000!
Dec. 27 Reversion to the mean web page added
Dec. 19 Mortgage applications chart added, CPI at 2% and core 2.6% (falling) Soon Fed will drop
Dec. 2 USD weakness comment, trade balance, USD in recession and USD technical rally
Nov. 29 Bernanke comment and TLT tracking in Building Containers section
Nov. 26 Eurozone CPI, MEW chart and Disclaimer
Nov. 22 Housing Starts Added HousingStarts drop below 2001 levels, no future for housing
Nov. 16 Revised CPI Charts CPI drops to 1.3% (Not Good!) and CoreCPI to 2.7%
Fed policy will change at next meeting or Jan for sure..inflation is falling too rapidly!
Nov.15, 2006 Added PPI, CDW, and TLT charts TLT new high, Core PPI falls by most in 13 years
Nov.14, 2006 Real Rates Chart Soaring Real Rates, US and Canada now leading
Nov. 14, 2006 Comments on Housing Market Index and Countrywide Credit Charts
Nov.9, 2006 Added Core and Gross CPI Charts
Nov. 6, 2006 2006'Q3 UK Bankruptcy 27,550 up 55% over last year
Nov. 6, 2006 Added Fed Loan Survey Charts Mortgage Lending Standards - No Significant Change
C&I Loan Standards - Increasing
Nov. 6, 2006 Added CurrDD chart M1 money supply growth 0
Nov. 6, 2006 Added Housing Market Index Still Contracting at 31
The article below is a sign of hope as the momentum for real change is building. 2010 will be a very interesting year.
http://www.cnbc.com/id/34921639
US Does Not Have Capitalism Now: Stiglitz
JOSEPH STIGLITZ, ECONOMY, CAPITALISM, MORAL HAZARD, MONEY MANAGERS, GAMBLE, MARKET
CNBC.com
| 19 Jan 2010 | 08:39 AM ET
Layers of money managers that don't bear the brunt of losses but walk away with big payouts when things go well have turned the US economy to a type of "ersatz capitalism," Joseph Stiglitz, Columbia University professor and Nobel laureate, told CNBC Tuesday.
"An awful lot of people are not managing their own money," Stiglitz said. "In old-style 19th Century capitalism, I owned my company, I made a mistake, I bore the consequences."
"Today, (at) most of the big companies you have managers who, when things go well, walk off with a lot of money. When things go bad the shareholders bear the costs," he said.
Even worse, those giving the money to the companies are entities like pension funds that are managing money on behalf of other people, so there are "layers and layers of agency costs," Stiglitz said.
It's a system where "you socialize the losses and privatize the gains," which is not capitalism, he said.
There's "moral hazard everywhere," he added.
Need for Better Rules, Better Refs
Stiglitz stressed he is a big believer in market economies, but added that "if you don't have the right rules and you don't have the right referees the game doesn't work."
While stripping away rules like the Glass-Steagall Act -- which separated commercial and investment banks -- created an environment where credit default swaps and derivatives could thrive, he said.
"It was very clear that after the 1998 Long Term Capital Management (crisis), when one company almost brought down the global financial system, that we needed to do something, and yet we passed a law saying regulators couldn't do anything," Stiglitz said.
For 50 years after the depression there was lots of regulation and not one financial crisis and in the last 30 years there have been 100 financial crises, he said.
As for the argument that regulation stifles innovation, Stiglitz cited former Federal Reserve Chairman Paul Volcker, who said: "it's hard to find any evidence from anybody who's not in the industry that can show any clear link between the so-called financial innovations and increased productivity in our economy."
Instead of creating products to manage risks, the financial markets created new products that increased risks, Stiglitz added.
© 2010 CNBC.com
Jan 27
“There’s no chance of a second stimulus”
While I agree with the author in the short term, I’m sure another big meltdown will bring back the Congress to the table. But this government is highly reactionary and not proactive. The story is stimulus comes off then back to recession and crash. The next stimulus may be more job oriented and less focused on markets however. I would say markets are shrinking in the public’s mind now and less important relative to jobs.
See also comments at Davos that problems haven’t gone away…
http://www.reuters.com/article/idUSTRE60Q11S20100127?source=patrick.net
DAVOS, Switzerland (Reuters) - The Bank of England estimates governments the world over have spent or committed a staggering $14 trillion to prop up the financial system following the fall of Lehman Brothers in September 2008.
So, what did we get for all that dough?
Unfortunately, more questions than answers.
Indeed, many of the factors that helped cause the previous crisis -- a sustained period of low interest rates, high levels of consumer debt in the West and excessive risk-taking by financial institutions -- remain in place.
At the same time, supersized government bailouts could have created the conditions for future financial crises that will be larger and even more expensive than the one the world has just suffered.
Despite the protestations by politicians that such a large-scale rescue should never be allowed to happen again, their actions over the past two years suggest the opposite.
"Knowing this, the rational response by market participants is to double their bets. This adds to the cost of future crises," Piergiorgio Alessandri and Andrew Haldane of the Bank of England wrote recently.
"This is a doom loop."
This, however, is decidedly not the prevailing mood in the banking industry. Following their near-death experience, many bankers have been pleasantly surprised by the industry's rapid recovery. Markets have stabilized, courtesy of government handouts. Banks' profits -- and their share prices -- have recovered.
But all that has come with a price. By cutting interest rates to zero and pumping liquidity into the markets, the authorities risk encouraging a new round of risk-taking by banks and investors. And by loading the bailout costs onto the public sector they have undermined the creditworthiness of large developed nations. This, in turn, has sparked a growing political backlash
Jan 25
Note below savings rate in US heading North. Japan is at the end of its savings cycle. As they run out, it will be interesting to see what happens as money flees Asia and Japan to US. Eventually, US will have difficulty financing its deficit when its savings rate falls.
Treasuries will do well as oil, equities, and corporate bonds are sold off. Regulation by politicians is scaring banks about losing their trading activities. Without trading, they are insolvent leading back to a capitalization crisis again. Fed and Treasury are short term oriented and afraid of inflation…once again good for treasuries. They don’t realize that they are the only ones holding these markets up. O well, the roller coaster continues.
http://globaleconomicanalysis.blogspot.com/2010/01/no-way-out-for-japan.html
US Dollar Positives
- Japan demographics as noted above
- Greece bailout
- Spain property bubble
- Baltic state currency collapse
- Savings rate in US headed north
- Extreme bearish US dollar sentiment
- Pending implosion in the UK
- Canadian property bubble bursting
- Australian property bubble bursting
- Hard landing in China, collapse of the RMB
Jan 19
As individual investors have basically disappeared from markets, all that’s left is government money. An early sign that the taps are turning off is the state budgets of California, NY and Arizona who are making significant cuts no doubt because Washington has provided only so much. In addition, TARP has not been renewed although TARF is still playing out. Also check out Obama’s new budget:
http://www.usgovernmentspending.com/budget_gs.php
Federal spending drops by about 400B this year. Without this support, the economy goes back to recession by end of Q3. At that point as always, the question becomes will the flow be enough to turn the markets again?
Or will politics prevent the flow from returning to 700B levels or be sufficient enough?
Some articles of interest:
http://news.yahoo.com/s/ap/20100108/ap_on_bi_ge/us_shunning_stocks
660,000 drop from workforce in December
Asking rents fell 2.3 percent, also the largest decline in 30 years
Also:
Wall Street “banks” really are today are grossly over-leveraged “hedge funds
Australia and New Zealand Super Bubbles
Jan 2
S&P operating earnings fell from $15 (Q3, 2008) to $0 (Q4, 2008) abruptly due to trading and loan losses. Operating earnings had been falling (quarter over quarter) for 5 quarters from $24.06 (Q2, 2007) to $15(Q3,2008). The abrupt change in earnings (Q4, 2008) was caused by the market collapse first in oil and then stocks 3 months later. Why the drop in oil? The trading desks at the banks saw the mounting loan losses and panicked. Loan losses -> oil markets falling -> trading losses at the banks -> capitalization crisis -> stock market crash. So the setup is the same except greater loan losses will panic the traders as the next capitalization crisis will be bigger. I fully expect the Congress will authorize more capital for the banks but this time it will be with more hesitation and conditions. Capital from the markets has been totally inadequate lately and in the 2008 crisis, it was nonexistent. All of it is tied to the continuing and accelerating loan losses.
Dec 28
See this excellent link explaining excess reserves… http://globaleconomicanalysis.blogspot.com/2009/12/fictional-reserve-lending-and-myth-of.html
See below selected comments from Mish. Of interest to me is the non performing loans and the ALLL. Note how “allowances are at ridiculously low levels, bank earnings (and capitalization ratios) are wildly over-stated”
Banks are capital constrained. This tells me some huge write-offs are coming for the banks precipitating another round of capitalization crisis. I believe banks have raised another 160B in capital recently, completely inadequate. The markets won’t provide enough capital hence the crisis again.
Then why you may ask would banks return TARP money? Well they want better terms next time such as no bonus constraints. With the markets melting again (soon), they figure that they will get what they want.
Total Nonperforming Loans
The above chart is from St. Louis Fed based on Reports of Condition and Income for All Insured U.S. Commercial Banks.
Percentage of
nonperforming loans equals total nonperforming loans divided by total loans.
Nonperforming loans are those loans that bank managers classify as 90-days or
more past due or nonaccrual in the call report.
Nonperforming loans have soared to a record five percent for this series.
But wait. Banks
might have made provisions for those loan losses already, might they not? Well
... in a single word, No (as the following chart shows)
Assets at Banks whose ALLL exceeds their Nonperforming Loans
Because allowances for loan losses are a direct hit to earnings, and because
allowances are at ridiculously low levels, bank earnings (and capitalization
ratios) are wildly over-stated.
See also a chart of 10y government bond yields (price is opposite) in Japan. Notice how yields dropped considerably to approx. 0.5% during Asian crisis and 2002 stock market crashes.
This chart comes from ECB…I would say US yields have a long way to drop (in Japan’s case, another 5-7 years after onset of crisis, 1991-1998).
See analysis of current market and letter to the people by Arizona governor. This letter shows how programs will be cut in future and taxes increased. See also Comstock funds report that essentially argues my point that private debt will contract as government debt expands. Eventually, the private economy will recover and government debt can be paid down without falling into a hyperinflation. Their calculation of government debt includes social security. This is irrelevant as social security will be covered with payroll tax increases and decreased benefits due to deflation. No other country accounts for these debts in this way as government is considered one basket in and out.
http://blogs.reuters.com/great-debate-uk/2009/12/21/2010-another-year-another-crisis/
“…The trouble is we know how this story ends. The world economy is locked into a cycle which will repeat itself as long as the fundamentals remain unchanged. The sequence that culminated in the crisis of 2007-8 is being repeated like a film in fast-forward.
The authorities keep printing money so as to stimulate the economy, secure in the confidence that inflation is no problem. On the contrary, there may even be a threat of Japanese-style deflation, which would disastrously increase the real burden of debt.
But why is inflation so tame? How can the U.S. money supply increase by 20 percent without affecting consumer prices? Of course, much of the new money has simply remained in bank tills, helping to rebuild reserve ratios ravaged by debt write-offs, and with relatively high U.S. unemployment of labour and capital, inflations is bound to be muted….
So what are the prospects for 2010? In the 2008 crisis, almost every asset class which wasn’t actually toxic became blessed as a safe haven. So while anything to do with banks or real estate were untouchable, Government securities, especially US Treasuries, dollar assets, commodities, emerging markets were all seen as safe. This time around, some of last year’s saints will be added to the list of sinners.”
http://globaleconomicanalysis.blogspot.com/2009/12/arizona-governor-jan-brewer-we-face.html
“…This problem did not happen overnight.
- Five years of spending nearly doubled state government.
- The economic recession has reduced state revenues by almost 40 percent in just 3 years.
- Population growth in school children, university students, health care and welfare populations and inmates in our state prisons has fundamentally ruled out simplistic solutions like rolling the state budget back to levels from five, six, or more years ago.
- Federal and voter mandates prevent us from touching nearly two-thirds of the state budget.
- And procrastination, denial, and lack of will have allowed these problems to fester.
We must solve these problems and we must solve them now. More than calling for
cooperation, today I had state government implement various emergency measures
meant to ensure Arizona’s fiscal solvency. Among them:
- I ordered the Arizona Department of Corrections to return to the custody of U.S. Immigration and Customs Enforcement (“ICE”) -- as soon as possible -- all non-violent criminal aliens as is allowed under existing law. These inmates are the responsibility of the federal government (as is securing our border with Mexico). Arizona should not have to bear this cost.
- I am restating my Arizonans-only directives to state agencies to ensure that public benefits are provided only to those who are legally in this country and who reside in this state.
- Effective immediately, I have ordered all state agencies who benefits to citizens to implement means testing and sliding fee schedules. While the government safety net must stay in place, we need to secure help only for the neediest among us.
...
We owe it to the citizens of this state -- our children and grandchildren -- to
adopt and approve a solution.
Sincerely,
Jan Brewer
Governor”
http://www.comstockfunds.com/screenprint.aspx?newsletterid=1492
“The similarities to Japan at its 1989 economic and market peak leads us to believe that we are close to the same road map that Japan was on starting at that time and continuing until today. With that said, we expect current U.S. government debt of $15 trillion to double to about $30 trillion and private debt to drop in half to about $20 trillion over the next 4-5 years. ….
Only after the private sector rebuilds its balance sheet can we expect them to resume normal levels of spending and saving. However, we still will not be out of the woods since the government's balance sheet will be the next dilemma for the country. The government will have to rebuild its balance sheet just as the private sector is doing now.”
The world is like a train with the US (New York) as the locomotive with 50% of world assets and capital. Add in London and perhaps 75% of capital is between these 2 cities. Capital moves between these cities and the peripheries for example…
http://theautomaticearth.blogspot.com/2009/12/december-21-2009-weakest-hands-fold.html?source=patrick.net
"According to Nomura Holdings Inc., persistently low interest rates in the US, coupled with the perception that Asian economic growth is a one-way bet, is driving a "tsunami" of capital into the region. Data compiled by the Japan-based financial group show a half-trillion dollar reversal in foreign cash flows over the past year alone as investors pile their bets on a China-led economic resurgence. In the three quarters leading up to March of 2009, widespread economic meltdowns in the west saw some $262 billion vacuumed out of Asia’s red hot "tiger" economies as beleaguered funds in The City, Wall Street and elsewhere repatriated capital to meet crushing margin calls closer to home. However, over the past six months, almost all of that cash ($241 billion) has found its way back to Asian shores."
In essence, new money came mostly from the Fed to the banks in terms of excess reserves. They took these excess reserves and gambled the money in the markets in order to get them going. Once going, they relied on these trading profits to compensate for loan losses. Mark to market accounting rules were changed which also got the market moving in April. However, loan losses are still accelerating and the markets have been going sideways since October. In addition, Ron Paul and Fed oversight legislation may spook the markets. Already, no new TARP money is planned and the “No” forces are gathering again perhaps stronger this time. Congress is focusing more money on jobs recently allocating 75B of TARP money from banks to jobs programs.
So it all boils down to Yes and No from the Fed and Congress. When the answer was “No” as the first round of TARP showed in Oct 2008, the market crashed quickly then TARP was approved and excess reserves swelled. Markets recovered.
“No” forces will be stronger in 2010. Market losses will still affect bank balance sheets requiring new equity. Without TARP money readily available, banks will have another capitalization/equity crisis. Of course, I expect Congress will be spooked again. The market will be oversold providing an opportunity on the rebound. However, the risk on any meltdown is that the Congress will truly say “No” OR the allocated monies will be insufficient to turn the markets. Given that markets rallied to a point less than 2006 this indicates that capital HAS been reduced overall and that we are definitely at the beginning of the end of market reliance.
Also 2010 predictions from Saxo Bank see link…
Yields on sovereign bonds – the goods ones, not the bonds of quasi-basket cases such as Club Med, the UK, or Japan – will plummet as deflation raises its ugly head again later in 2010. The 10-year German Bund yield will fall to 2.25pc. "Bunds are the ultimate safe-haven if something goes wrong, perhaps in Greece. We may even see some safe-haven buying of US Treasuries as well, despite the irresponsible fiscal policies in the US," he said.
See 2 articles below. The politics with respect to the first article are bankers trying to collect their bonuses for 1-2 quarters. I don’t believe as the author suggests that the banks can be liquidated. But it does show the social mood has changed towards this issue.
There is a chance of more forms of direct lending through FDIC to support the housing and car businesses instead of supporting banks with capital.
Of course these policy changes will lead to a crash next year...but only until banks come begging again for more equity. It’s a back and forth process…very short term oriented.
Out from under TARP, banks are now free to fail again
…Top administration officials are fixated on voter rage over bank bailouts and the resulting hit to the president's poll ratings…
…. Of course, S&P was wrong once before about Bank of America, and it could be wrong again. The political reality is that, no matter how large or interconnected, no bank -- and certainly not Citigroup or Bank of America -- will be bailed out again anytime soon. The next time the government is forced to step in, that bank's shareholders will be wiped out, its executives and directors sent packing and its operations wound down or sold off to competitors. Most significantly, creditors and counterparties who were bailed out in the past will get only what they would have gotten from an orderly liquidation…
2010: "The Year of Severe Economic Contraction"
…Severe retrenchment has triggered a shift towards personal thriftiness which is reducing economic activity and strengthening deflationary pressures. 2010 is likely to be even worse, as mushrooming foreclosures and commercial real estate defaults force banks to slash lending accelerating the rate of decline…
…Additional stimulus will be no more than $200 billion, of which, a mere $50 billion will go towards jobs initiatives…
I guess the old claims data is now useless as these programs are now federalized.
Emergency Jobless Insurance Claims Surge By Most Ever In Prior Week
Submitted
by Tyler Durden on 12/10/2009
09:16 -0500
The number you won't hear mentioned anywhere in the Mainstream Media: 327,729. That is how many people shifted to Emergency Unemployment Compensation programs in the last week alone, hitting an all time record high of 4.2 million! So as everyone is focused on the benign picture of initial claims in the last week which was "only" 474,000, the number of people rolling off continuing benefits has exploded and is now a stunning 592,579 only in the last two week. Look for this number to keep going into the stratosphere as the 6 month continuing claims cliff keeps getting hit by more and more people who are unemployed and keep looking not only for believable change, but actual jobs to go with it.
And here is the chart that the administration would love to keep under lock and seal: the cumulative number of people on Emergency Insurance. At this rate those collecting EUC will surpass those on continuing claims (5.5 million) within a month.
Deflation continues from last Z.1 even Federal debt growth is slowing!
Too much information is toxic as noted by psychologist Paul Andreassen’s study.
From p. 326, How We Decide by Jonah Lehrer
“The first group could only see the changes in the prices of their stocks….the second group was given access to a steady stream of financial information.
The group with less information ended up earning twice as much…high-information students became focused on the latest rumors and insider gossip.
They were convinced that all their knowledge allowed them to anticipate the market. But they were wrong.”
Goldman Sachs Wrong on Economic Recovery, Macro Hedge Funds Say
By Cristina Alesci
Sept. 1 (Bloomberg) -- Paul Tudor Jones, the billionaire hedge-fund manager who outperformed peers last year, is wagering that Goldman Sachs Group Inc. and Morgan Stanley got it wrong in declaring the start of an economic recovery.
…….
Clarium watches the unemployment rate that accounts for discouraged job applicants and those working part-time because they can’t find full-time positions, Harrington said. July joblessness with those adjustments was 16 percent, according to the Department of Labor, rather than the more widely reported 9.4 percent.
……
High unemployment, lower wages and potential missteps by policymakers around the globe may stifle economic growth in 2010, Tudor said.
…….
Horseman, with $4.1 billion under management out of London, was investing in long-term U.S. Treasury bonds. The firm believes interest rates will stay low for longer than the market expects, benefiting the asset class.
“Despite every effort by government in North America and Europe to avoid deflation,” Horseman wrote, “the current numbers suggest they are losing the battle.”
Banks are in worse shape than ever. However, I disagree that there isn’t enough capital for government to pull on. World Equity, $20-30T, and world bond markets (3 times world equity) give plenty of room for government to intervene. However, if capital markets were to shrink by 80% for example, the government would start to have a hard time. So far government stimulus has been ineffective at growing the economy considering the continued deflation and rising unemployment. They are however supporting the economy. This is why I have argued for mild deflation.
Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman
By Mark Deen and David Tweed
“”Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.
“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.” “
http://www.bloomberg.com/apps/news?pid=20601087&sid=aYdgQkXu9eBg&
I have 2 points to make regarding near term economy…
See six out of last 10 recessions had a positive quarter in the middle:
Also check out recent history from BEA on GDP (Q2, 2008 was quite a bounce and PCE continues falling):
Of course, the best comment here…
Hans Redeker, currency chief at BNP Paribas, said the credit contraction was eclipsing recovery in Europe's bond market.
"At the end of the day, there is not going to be any durable recovery until we see a revival in credit," he said. German Second Wave
Also proving deflation is actually good for economy as expectations are reset: Iceland Krona
I have also updated ROC in Delinquency for Q2…
See article below. Will bank earnings be hit next quarter by down trading profits, rising defaults, and finally a change to accounting rules against them?
Accountants Gain Courage to Stand Up to Bankers: Jonathan Weil
Commentary by Jonathan Weil
July 23 (Bloomberg) -- Turns out America’s accounting poobahs have some fight in them after all.
Call them crazy, or maybe just brave. The Financial Accounting Standards Board is girding for another brawl with the banking industry over mark-to-market accounting. And this time, it’s the FASB that has come out swinging.
It was only last April that the FASB caved to congressional pressure by passing emergency rule changes so that banks and insurance companies could keep long-term losses from crummy debt securities off their income statements.
Now the FASB says it may expand the use of fair-market values on corporate income statements and balance sheets in ways it never has before. Even loans would have to be carried on the balance sheet at fair value, under a preliminary decision reached July 15. The board might decide whether to issue a formal proposal on the matter as soon as next month.
“They know they screwed up, and they took action to correct for it,” says Adam Hurwich, a partner at New York investment manager Jupiter Advisors LLC and a member of the FASB’s Investors Technical Advisory Committee. “The more pushback there’s going to be, the more their credibility is going to be established.”
See http://www.bloomberg.com/apps/news?pid=20601039&sid=a5BsXz90CMso#
The era of speculation is not over nor will it die easily. Something building from WW2 and most egregiously since 1980 will take a minimum of 5 years but perhaps, 10-20 years as with Japan. Japan is in year 19. Note below this article which explains the rally recently and by extension the crash last October. Simply this market responds to the big banks’ profits.
The trading speculation this last quarter gave them an earnings surprise but their loan books continue to deteriorate and will catch up. No doubt next time the trading losses will also accentuate the downturn in profits as we saw in the huge losses, Q4 last year.
http://www.forbes.com/2009/07/21/comerica-regions-bernanke-business-wall-street-banks_print.html
Wall Street
Regional Banks Wave Red Flag On Economy
Liz Moyer, 07.21.09, 3:22 PM ET
In stark contrast to the second-quarter gains logged by the biggest U.S. banks last week, regional banks that don't have big in-house bond trading desks and depend more heavily on traditional lending are demonstrating what conditions are really like for bankers out there.
Not good.
Comerica and Regions Financial posted second-quarter losses on deteriorating loan books and a lackluster business climate. Provisions for loan losses about doubled at each bank, which have big real estate exposures in Florida and other parts of the recession-scarred South and Midwest.
The banks said loan demand from consumer and business borrowers was down, a sign that revenue growth from lending activities--one of the things politicians in Washington hope will lift the economy to recovery--will be blunted until that turnaround comes.
Other large regional lenders, including KeyCorp, SunTrust Huntington Bancshares and Fifth Third, are expected to post losses in the quarter, as is CIT Group, a troubled lender to small and medium-size business. It scrambled over the weekend to arrange a $3 billion rescue deal with its bondholders but acknowledged in a regulatory filing Tuesday that the deal might not keep it out of bankruptcy court after all.
Wells Fargo, which inherited a big brokerage division when it bought Wachovia (and inherited a lot of troubled mortgage loans, to boot) is expected to report a profit Wednesday.
Federal Reserve Chairman Ben Bernanke said in congressional testimony Tuesday that unemployment would remain elevated through 2011, which could put a cap on the consumer spending that many believe is necessary for a recovery. "The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook," Bernanke said in Fed-speak.
At Dallas-based Comerica, its second-quarter loss was $16 million, an improvement, at least, from a $56 million loss in last year's second quarter. It could have been an $18 million gain were it not for the $34 million dividend on preferred shares Comerica had to pay the government as part of the Troubled Asset Relief Program.
Its provision for loan losses rose to $312 million from $170 million last year. Charge offs were $248 million, 2.08% of the bank's loans, up from $157 million in the first three months of this year. Comerica said the increase came in leasing and middle market banking and residential real-estate development in Florida and elsewhere.
The bank confirmed another observation Bernanke made to Congress on Tuesday: Commercial real estate loans are under pressure. "The key credit issue for us remains in our commercial real estate line of business, predominantly residential real estate development," said Ralph Babb, Comerica's chief executive officer.
At Birmingham, Ala.-based Regions, the quarter's loss was $244 million. Provisions for loan losses rose to $912 million, more than double the first quarter's provision.
Regions said its "most stressed" loan portfolios included loans to residential homebuilders, second lien loans in Florida and condominium loans. Retail and multifamily real-estate loans are coming under pressure.
While Regions does have a brokerage affiliate, Morgan Keegan (where results were up 23%), it is not big enough to overpower credit losses the way the stock and bond trading desks at JPMorgan Chase, Citigroup, Bank of America and Goldman Sachs could overcome their parent companies' struggles with lower revenues or losses in other businesses.
Consumer credit is still contracting. I guess rising credit card defaults leads to reduced credit and deflation. May 2009 data reported July 8, 2009. Growing 2004-2007 at a 5% rate it’s now declining at -3.5% rate.
I have updated the Outputs page with a VIX chart that cleans up the noisy nature of it. I have also added a scenarios web page showing a possible scenario whereby delinquencies rise at an ever increasing rate.
Stocks and oil are selling off so it’s a good time to buy TLT/long bonds. Deflation should also accelerate. I updated the federal debt service page with direct links to treasury data and average interest rates.
Japanese savings rates have been declining and are almost 1%. The interest payments on government debt is also rising. Whereas US interest is falling and savings rates are rising.
US savings rate now higher than Japan! Japan is the ‘canary in the coal mine’.
As Japanese interest rates are 1% or so, there’s not much room for rates to decline hence the inexorable rise in interest expense.
Japan will be the first to encounter the fiscal crisis and heavy money printing.
April 20
Bonds relative to gold and bonds relative to stocks still bullish…
March 24
The Fed seems to be pausing on the money printing possibly because of much criticism by foreign bond holders. I guess Bernanke never anticipated this in his famous 2002 speech?
See Fed Money Printed on Outputs page as well
March 18
Well it seems Fed is getting close to buying long term treasuries. Of course, China and the world continue to buy US bonds. Although of the $1.x trillion issued recently, China only purchased $250B in the last 12 months. Firstly, China is not the major buyer and second they do continue to buy. Why? USD is still the reserve currency of the world. Gold makes no sense until inflation (CPI) becomes a problem.
Will the Fed go long?
The Fed won't cut short-term rates at its next meeting, but look for long-term rates to drop if the central bank announces plans to buy Treasurys.
By Chris Isidore, CNNMoney.com senior writer
Last Updated: March 16, 2009: 9:23 AM ET
NEW YORK (CNNMoney.com) -- The Chinese are getting nervous about buying U.S. Treasurys. Does that mean it's time for the Federal Reserve to start buying long-term notes?
The answer could come as soon as Wednesday, when the U.S. central bank concludes a two-day meeting. The Fed has said in its last couple of statements that it was prepared to buy long-term Treasurys as a way to try to further help the economy. But so far, it hasn't given any details about how much it would buy, or when it would start doing so.
The meeting comes in the wake of Friday's comments from Chinese Premier Wen Jiabao, who expressed concern that the more than $700 billion in Treasury debt his country holds is at risk of seeing its value fall due to rising budget deficits here.
"We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets," said Wen at his annual news conference on Friday. "To speak truthfully, I do indeed have some worries."
If the Fed started buying 10-year Treasury notes, that wouldn't do anything to reduce risk tied to soaring U.S. budget deficits.
But it would provide some support for the value of the bonds, especially if the Chinese start to pull back on purchases as some economists are expecting.
So far, that hasn't happened. The Chinese Treasury holdings have increased by nearly $250 billion, or just over 50%, over the 12 months ending in December. And according to a report from the Treasury Department released Monday, China bought an additional $12.2 billion in Treasurys in January.
What's more, a large purchase by the Fed would help to lower the rates on longer-term Treasurys and other debt that is tied to the bond market, such as some corporate debt and mortgage loans. (Bond rates fall when prices rise.)
Former Fed Governor Lyle Gramley noted the Bank of England's announcement that it would buy about $100 billion in British government debt earlier this month was enough to lower long-term rates by a quarter-point to a half-point, even before the purchases started..
He believes the Fed is getting close to announcing its own Treasury purchase plans, especially since the central bank has already taken its key short-term interest rate, the federal funds rate, essentially to zero.
At its December meeting, the Fed floated the idea of buying Treasurys, stating it was "evaluating the potential benefits of purchasing longer-term Treasury securities."
By its January meeting, the Fed signaled it was getting closer to such a purchase, stating it was "prepared to purchase longer-term Treasury securities" if it became convinced that would be an effective way to get credit flowing through the economy once again.
But others think that long-term bond rates are not the economy's biggest problem. Even with the concerns voiced by the Chinese premier Friday, the yield on the 10-year rose only slightly, closing below 3%.
David Wyss, chief economist at Standard & Poor's, said the problem is that "people are scared to buy anything seen as having risks attached."
Wyss said the Fed's main focus now should be on new steps on getting battered banks to start lending more to businesses and consumers.
Still, if the Chinese and other major purchasers of U.S. Treasurys started to pull back on their purchases of the government notes, it would drive down the prices, and drive up the interest rates they pay, raising the cost of borrowing at a time when U.S. credit markets are still seized up.
And with the U.S. trade gap falling to the lowest level in six years in January in the latest reading Friday, there will be fewer incentives for foreign governments to buy Treasurys in the future. So that could force the Fed's hand at some point.
Still, there may be some resistance to buying Treasurys due to fears that such purchase would be sowing the seeds of inflation down the road and encouraging the U.S. government to go deeper into a debt hole.
But that may turn out to be a minor concern. Gramley said worrying about inflation now is like worrying about causing water damage when considering whether to spray a hose on a burning house.
http://stockcharts.com/h-sc/ui?s=TLT&p=W&yr=3&mn=0&dy=0&id=p14920876000
This chart shows bonds were overbought and have pulled back but still in a bull market. Technically gold is as well but I prefer the bonds as deflation favors those over gold.
The gov’t can’t default on its bonds as it simply prints money if the tax revenue is not sufficient. At this time, tax revenue is more than adequate. Bernanke is printing money for his programs but note he will issue less not more treasury debt because of this. In addition, quantitative easing will be employed to push down the yield curve similar to Fed rate at 0%. Until CPI shows inflation from these effects, deflation will dominate and favor long bonds.
From John Mauldin’s Newsletter Feb 28’09:
My good friend Peter Bernstein (who at 89 is still one of the most insightful and important analysts in the world) wrote a very insightful essay in the Financial Times called "The Flight of the Long Run." Let me quote a few selected paragraphs:
"The cold statistics have hardly been encouraging for the traditional [buy and hold] view. On a total return basis, the Ibbotson data show that the S&P 500 has underperformed long-term Treasury bonds for the last five-year, 10-year, and 25-year periods, and by substantial amounts.
February 21
Current situation: Classic Deflation + Some Money Printing = 'Managed Deflation', Forces of Deflation (asset prices falling) > Forces of Inflation (CPI =0%) [it also takes time to change this: min. 9 mo -2 years]
I own some gold but I’m not adding to my position. With deflation, the value of cash and US gov’t bonds rise. Hence, cash and bonds compete with gold for safe haven status. The gold bubble is short duration.
Reasons are:
1) Gold’s high of $2000 in current dollars occurred in 1980 when CPI was growing at 10%. Currently, we have 0% with deflation in many categories. In order for gold to run, you need high CPI inflation.
2) It’s simply another bubble as evidenced by the rapid growth in future contracts. GLD options open interest has exploded recently. This was the same scenario as oil in the first 6 months of last year. There was no fundamental supply/demand imbalance just mere speculation creating and closing contracts without owning or delivering any oil/gold. Gold may go to $1200-$1500 in the bubble though.
3) Hedge funds want to get anything going again. See how gold is rising as they are losing on stock investments. They are desperate to jump onto another bubble.
4) In depressions/deflations, gold often falls. If it does rise, it’s about 75% which has already happened.
5) In your local money mart, they are advertising cash for gold and jewelry and in India people are selling their gold for cash so they can buy groceries! Gold scrap is increasing and jewelry demand is falling with the world economy.
6) Like oil last year, there is no shortage of gold. While lead times may have increased, you can buy all you want at your local coin shop, bank, mint, etc.
7) USD is still rising and most money is flowing to treasuries. Gold should trade opposite the USD.
8) Wall Street has to market something speculative in order to generate significant commissions. They wouldn’t make any money recommending a savings account.
Perhaps in 2010 or 2011 inflation will return. Unless the congress starts mailing checks of increasing size such as 1k, 3k, 9k , etc., gold makes no sense as the value of cash rises with deflation. Bernanke has already stated that if inflation returns he can apply the brake to the Fed purchase of assets.
As in the last few years, an investor must be shown the fundamental evidence and not simply be another trend follower who gets burned when the music stops.
So far government bailout schemes are not sufficient to counterbalance forces of deflation. Increasing resistance from congress may also limit future bailouts as they are unpopular. No doubt, larger make work schemes will be proposed.
Some speculation ideas are shorting the yen later this year when it shows weakness…although clearly it’s in a bull. And shorting the pound at some point in the future after a rebound…
Yen is currently in a bull market BUT Japan’s economy is worse than almost any other and most susceptible to hyperinflation. Shortly a wonderful short opportunity…
Forces of money printing are about 1T so far but asset deflation is somewhere around 10T...so clearly deflation is winning. Of course the real effect is in the CPI - 'real economy'. So far that is approaching deflation. So the money printing has had no effect on the real economy. If default rates get high enough, banks will simply be unwilling to lend which will severely limit money and credit creation… Paul Kasriel
Bonds (Government Long Bonds / 30 year treasury’s, or TLT) are outperforming gold so forces of deflation are still dominant. CC is rising and CPI is collapsing.
As long as continuing claims for unemployment insurance (CC) are rising, disinflation will be present and good for bonds – at this rate CPI deflation may occur in 3 months. Long bonds are driven by inflation, stocks, and fed rate.
Fed rate is now 0 so stocks and inflation are driving the bonds. Factors to watch in the next 1-3 years for a sell indication are:
1) Continuing unemployment claims (CC) are flat or declining on a year over year basis…indicating neutral inflation pressure
2) Inflation not rising or falling – inflation pressure flat
3) Break even yield rises above 1%
http://www.bloomberg.com/apps/quote?ticker=USGGBE05:IND
4) $USB:GLD chart favors gold
But a significant change is gold diverging from oil…
Long bonds and TLT are doing quite well breaking out. It seems last month’s drop in CPI,-1.0%, had something to do with it. I checked back to 1930s and the last time CPI fell by 1% or more in 1 month was 1938, -1.4% in Jan 1938.
Despite the treasury plan to start monetizing some debt “money printing” as it were the government bond market sees deflation concerns as paramount see below…
Thoughts from the Frontline Weekly Newsletter
The Financial Fire Trucks Are Gathering
by John Mauldin
November 26, 2008
Yesterday the Treasury announced yet another huge $800 billion bailout, but this one has a different flavor. Much of the previous bailout money has come from the Treasury either borrowing money and buying assets (which does not create new dollars) or simply taking assets onto the national balance sheet, guaranteeing the debt. With this latest move, the Fed is going to buy $600 billion in mortgage bonds by monetizing, or creating, new dollars.
Normally this would set off more alarm bells, over worries about inflation. But these are not normal times. With the twin bubbles of the credit and housing crises still imploding, we are seeing a massive deleveraging and the disappearance of multiple trillions of dollars from consumers and businesses. And the bond market clearly expects more softening and maybe even deflation. The 10-year bond is below 3%. I wrote 10 years ago that we could see the 30-year US bond below 3% by the end of this decades-long cycle, which we began in the early '80s with Paul Volker.
Gold seems to be stuck in trading range although it hasn’t crashed from the recent CPI news.
November 11
Further to my point of US being in the middle of the pack with regard to credit bubbles, see chart below. In simple terms, you can’t borrow more than your income forever.
Notice how every single country chose to grow debt faster than GDP or income. US is 10th out of 15th on this list. Ireland and Spain are the worst. Reasons why you here mostly of US crisis-
a) US is largest economy
b) In America, the press cares a lot about finance and economics. Other countries less so.
c) Other countries cover mostly football and the like playing to nationalist sentiments. On the down side, they’ll cover high unemployment domestically.
I consider the IMF studies below as optimistic given the size and worldwide scale of the current problem. They are in the context of a growing world economy. With these banking crises,
stocks show a turnaround in year 3. If 2008 is the start, the earliest turnaround for stocks would be 2010. Gov’t bonds and disinflation do well for 4 years (2011+).
General Comment: On the plus side, continued large instability will “shorten” the correction period.
See also updated Outputs for breakeven rates chart. I believe this chart indicates long term bond yields should drop by 2% in the near future.
October 23
I am not buying more than 5% of my portfolio in gold at this time, 95% is still in long US bonds. Deflation pressure (disinflation) continues so I expect gold could get very low during the disinflation in the next 1-2 years. At that time, it will be necessary to review GDP, government debt service, and size of government debt relative to savings to see if the fiscal crisis will occur. I outline those indicators in the federal debt service page. Monetary policy has failed and the next to watch is the fiscal. I would argue that there is no need to panic into gold at this point. A new leader could arise who prioritizes jobs, etc. and reduces bailouts. CPI deflation is probably 1-2 years away at which point the long bonds will do very well indeed.
Hyperinflation may be inevitable as government after government guarantees bad loans although I believe this condition is still 1-2 years away. The stage has been set. Clearly the more rational thinkers in government have lost out. They don’t realize that government debt cannot be written off as with private debt. Hence, the special character of government debt is that it should be spent wisely because of its carrying effects. Eventually, a fiscal crisis will occur where confidence in government debt collapses. I am watching the Gold to USB chart to indicate when that transition occurs. Tbill rates will rise to reflect increasing risk of government debt. All rates on mortgages etc. will rise in turn collapsing all debt. Tbill rates rising significantly above the Fed rate is also an early indication of lack of confidence in government debt. A small stake in “insurance gold” say 5% is not a bad idea at this time although I believe the most likely outcome is gold falling with CPI over the coming year.
Of course a rapid deflation could still occur if the market doesn’t see government responding fast enough. The speed of government response has to be an issue here. Governments don’t perform in real time. The market is an impatient beast when market time quickens.
The moral hazard of these actions can be seen in the war in Yugoslavia and its hyperinflation. I quote from War Is a Force That Gives Us Meaning by Chris Hedges p. 99:
“Those who worked hard all their lives, put their meager savings into banks, and struggled to live on pensions or salaries, lost everything. The unscrupulous, who had massive debts, never had to repay them, lived off the black market or crime, used force to get what they wanted, and became fabulously rich and powerful. The moral universe disintegrated. There was a new code….
Hedonism and perversion spiraled out of control as inflation ate away the local currency. Those who had worked all their lives were now reviled as dupes and fools. They haunted the soup kitchens. The loyalty they had expressed to the state or to the institutions they worked for had left them beggars. They held worthless war bonds. They collected pensions, when they were paid, and that amounted to a few dollars. “
Also another system to collapse under hyperinflation was Russia in 1990s. When Yeltsin took power it was 400 rubles to the USD. It eventually soared to 3,081 rubles per dollar. Of course like Yugoslavia the crooks took over otherwise known as “oligarchs” who became billionaires overnight. Russian government debt collapsed when their government could no longer make payments in 1998.
Credit growth on the household side has fallen considerably as you might expect. Federal credit growth has charged ahead to a level not seen since the Iraq war. I suspect Bernanke will continue to make bailouts until his tenure ends in 2010. Bailouts however for banks don't necessary lead to an increase in asset markets for instance see Japan. Spain says it will not bailout homeowners.
I am paraphrasing but Soros says oil will fall once economy shows weakening. I interpret this as recession, negative GDP, in US.
Commodity bubbles are different from housing bubbles in that the effects are felt by the public every week. With a housing bubble, mortgages are amortized over 30 to 40 years, so the effect of the bubble is felt over a long period. Commodity bubbles work out sooner (and more volatile) because you don't borrow to purchase oil or gasoline over a 30 year period.
From a pbs interview with George Soros, May 13, 2008:
My highlights-
* we are currently in a state of wealth destruction. So if you can preserve your wealth in those conditions, you're doing very well.
* Right now, we are in a period of heightened uncertainty. Almost anything can happen.
* I think this is the most serious crisis of our lifetime. It's not just a housing crisis, but a crisis of the financial system.
* in the aftermath of the IT bubble, interest rates were kept too low too long. And that generated this housing bubble, and housing prices went up double digits for several years. And they are now in the process of correction.
* I call a super bubble that has been growing over the last 25 years at least, which basically consisted of an extension in credit, increasing use of leverage. That was the trend in reality.
* And you have to control the extension of credit while the bubble is growing. And you need for that new instruments, in fact, not new instruments, because the instruments already exist, minimum reserve requirements, margin requirements, but you must vary those. You have to use them, and you have to vary them, depending on market conditions.
* [Federal Reserve] also their job to prevent bubbles from developing, and they have not accepted that responsibility.
* I did well last year. This year, I'm slightly underwater, because I'm actually -- I've managed to offset my other -- the people to whom I give money to manage by my taking those positions. But we're slightly on the losing end. And I'm pretty satisfied with that, because we are currently in a state of wealth destruction. So if you can preserve your wealth in those conditions, you're doing very well.
* price of crude oil, ...How concerned are you?
GEORGE SOROS: I think that that is also a bubble. While we have -- you know, the housing bubble is being deflated, the oil bubble is being inflated right now. And I think it's just a matter of time before that bubble will burst.
From John Mauldin's letter, May 24, 2008:
"In many commodity futures markets, index speculators are now the single largest participant. What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant."
My comment: Of course, pension funds are desperate to get the promised 9% returns they've failed to return in the past 5 years, so they run recklessly into the commodity markets.
"Jakab Spencer noted in his always interesting Dow Jones column that there is a disconnect between the New York Stock Exchange and the New York Mercantile Exchange, just one mile apart. The NYSE is pricing in $75 oil in oil stocks, while the futures market is surging over $135, and there are calls for near-term $150-a-barrel oil. The stock market is telling us that oil, at least in futures terms, is in a bubble."
"more importantly pay attention to their actions, oil company executives simply do not believe that the price of oil is going to be $135 a barrel for the next few years. If they did, they would be punching more holes in the ground in places where it might be expensive to get the oil to market –but at $135 a barrel it would be profitable."
See article on oil speculation.....
60% of today's Crude Oil Price is Pure Speculation
By F. William Engdahl
www.engdahl.oilgeopolitics.net
Next thing to watch is when the Euro drops rates. If it does USD strengthens. Short USD and long Oil means that a strengthening USD will lead to lower commodity prices. To see if commodities really diverge from the currencies, you should see both commodities or gold rising when USD is steady or rising.
No bailout for investors here....
New York Times: Determining
Who Rides the Lifeboat
Published: May 2, 2008
"If investors choose to walk away because they put no money down and their free option is now worthless, we do not believe taxpayers should be held accountable. We are focused on helping homeowners who want to stay in their homes and have the financial wherewithal to do so.”
— Robert K. Steel, under secretary of the Treasury for domestic finance
As the mortgage crisis spilled over into a credit squeeze that threatened to bring down Wall Street, the government has tried to find ways to prevent disaster while not helping those who do not deserve help.
That can be seen in the program the Federal Housing Administration initially offered to homeowners facing ballooning mortgage payments. It would refinance their mortgages, but only if they had proved they were deserving by keeping current on the payments before the interest rate reset.
It turns out, as Rachel L. Swarns reported in The New York Times this week, that there are not enough of them who need help. So the program has been expanded to allow refinancings for those who had missed no more than two payments — but only if there were extenuating circumstances, like lost jobs, pay cuts or illnesses.
We want to help homeowners in trouble, but only if they are deserving. Alfred Doolittle would not be surprised.
Mr. Steel, in a speech this week to the Society of American Business Editors and Writers in Baltimore, made clear that he did not want to bail out homeowners who are not deserving of help, a class that includes “investors” who put no money down."
Also:
The Conference Board consumer confidence survey found that only 15 percent of Americans expect their income to rise over the next six months, the lowest figure since the survey began in 1967. The proportion planning to buy a house is at a 33-year low. The proportion planning to take a vacation within six months has never been lower.
Also:
I will reconsider gold investing if after the Euro drops rates, gold continues to rise and also CPI rises in US to 5%.
Wage inflation drove the inflation of the 1970s and notice the strong job growth 5%! Since 2000 at best we've seen 2% job growth.
Any business will tell you 70-85% of their costs is labor cost. Below is the employment cost index including wages and benefits. No out of control inflation here. Employees simply can't absorb energy and food costs. Therefore, they will spend less on everything else.
Notice payroll employment from 2000-on. When payrolls drop so does the core inflation for example, rents.
Core inflation, now 2.4% certainly not out of control, falls with declining payrolls. Here it falls and bottoms out in 2 years.
The reason core inflation isn't a problem is housing costs. Notice how housing inflation dropped considerably during the recession, 2001. For example, Oahu reports declining rents.
April 14
The unprecedented availability of credit has allowed almost everyone to live beyond their means. Like Japan, politicians were loathe to stop the party as everyone participated. The upside is a great equality-everyone could buy vacations and homes. The downside is that everyone is involved when the bubble bursts.
Commodity prices are very volatile. This chart certainly looks like a bubble blow-off to me. In addition, look how quickly prices can change in a 9 week period! They can crash by 40% in 9 weeks! Tell me what technical indicator will get you out in this time frame. A 40% crash brings oil to $66.
April 11
I suspect as unemployment rises politicians will switch (especially after the election) from bank bailouts to make-work projects. These actions will limit bailouts and asset bubble support. This will signal to the markets a political turn from Wall Street to Main Street. Asset prices will then fall faster at this point.
High unemployment/underemployment leads to foreclosures and declining rents, wages, and prices. It's the stuff of deflation. This is why the current situation will turn to deflation not inflation.
Bernanke's economic plan from Mish...
Property taxes are becoming delinquent which of course leads to municipal-bond collapses next...
Home prices per ft2...
From April 1 telegraph.co.uk:
"foreigners accounted for 70pc of Russia's debt market and are becoming wary of excess credit growth and other signs of stress in the economy. Russia's private sector has built up $378bn in foreign debts....Car sales rose 67pc last year to $53bn, led by German models. Critics say the oil bonanza is draining into shopping malls. If oil drops below $60 a barrel for any length of time, the hard landing could prove painful."
An untold story is Eastern Europe and Russia buying a lot of German cars/goods the last 2 years keeping Germany and therefore Europe afloat. If foreign investors flee this area the last support for Europe will fall.
One comment on US foreclosures: payment adjustment is not the major cause of foreclosure but loss of / lower paying jobs. This is why an increasing unemployment rate unnerves Wall Street. Most will throw in the towel without a job.
Causes of Foreclosure (July 2007)
58.3% Curtailment of income
13.2% Illness/Medical
8.4% Divorce
6.1% Investment property/Unable to sell
5.5% Low regard for property ownership
3.6% Death
1.4% Payment adjustment
3.5% Other
Gee... things really are different this time! The time honored adage that house prices never fall needs to be revised. Prices went close to 0 or -1 a few times but never this negative.
Spanish confiscate British beach homes. I thought you could never go wrong with beach property?
http://www.telegraph.co.uk/global/main.jhtml?xml=/global/2008/03/27/noindex/wcosta127.xml
Britons buying in Florida...
http://www.telegraph.co.uk/global/main.jhtml?xml=/global/2008/03/10/noindex/pflorida108.xml
Business credit is growing at a good clip but not spending. Where's the credit going? To pay down other loans such as junk bonds?
Real equipment and software spending not strong. Of course, 1990s were the best times.
Q4'07 updated Mar 28, 2008
For those of you worrying about inflation, this chart shows
the yield on the TIPs or treasury inflation protected security, due in 2 years.
In good times, inflation rises and you can see the yield rising
(2004-2007). After recessions (2001), it falls. But for the first
time, the TIPs show deflation in the next 1-2 years. All TIPS now confirm
falling inflation in the near future! While inflation is the worry now,
the smart guys in the bond market are predicting deflation.
High oil prices simply drive the US consumer into more saving! Bernanke can't simply lower rates and have his problems go away as the currency market reacts and sends the oil price higher. Not to worry as the other prices in the CPI will fall very quickly as the chart above implies.
Obviously, the market doesn't approve of Bernanke's half measures. Rest assured he will keep trying. However, nobody wants to borrow in a declining market as all sectors/prices are falling. His real problem is the rising delinquency rate. How does he get ahead of this curve?
Bernanke knows that every credit has a debit. The problem comes when the debtor simply "throws in the towel" and refuses to pay his bills. Capitalism relies on the debtor to pay his bills. And therefore, Bernanke underestimates the number of consumers who will simply say if Jones across the street isn't paying his bills, why should I?
In a recession, inflation peaks early then falls rapidly during or after the recession. So all the talk of inflation early in a recession is normal. Inflationary investments fall extremely quickly when the CPI falls.
I plotted US gasoline demand weekly for the past 1.5 years. The trend is towards declining consumption...dropping at 1% per year.
Japan home prices still falling.
For many years the market assumed it would be bailed out by the Fed or Congress. Guess what?
As I predicted, fiscal stimulus is preferred but not to Wall Street! Pelosi and Hillary prefer a broader base approach.
From Mon., Jan. 21,2008 New York Times:
"Reflecting what her aides said were very different conditions (from her husband) today, Mrs. Clinton put her emphasis on issues like inequality and the role of institutions like government, rather than market forces, in addressing them....economic excesses - including executive pay packages she characterized as often "offensive" and "wrong"...were holding down middle-class living standards."
Eras of easy credit are followed by tight credit and crisis/recession. We become more vulnerable as the debt to gdp ratio climbs that a crisis of scale reduces monetary policy to no effect.
As banks buy other banks and globalization of finance spreads, the network of world finance grows more vulnerable to a catastrophic failure.
The old system was characterized by many countries, many banks and currencies. The interlinks were many with relatively small banks. Today we have grown to a large network interlinked with some super-nodes.
What a bad earnings quarter! Look at the losses in consumer discretionary. How can they sustain this?
Worst earnings since Q4 2000:
Q4'00 -29%
Q1'01 -33% Q2 -64% Q3 -62% Q4 -40%
Q4'02 -45% (last negative quarter before current)
German consumer confidence drops to lowest this year and orders fall 3.7% in September. Germany is quickly following America.
America has falling consumer expectations and building permits fall to 1.1M rate.
Check out index page for tightening credit standards.
October 22
With high oil prices and low interest rates, the result is record credit growth in commodity economies.
Canada M2++ credit growth...July 2007
Obviously, it hasn't slowed yet.
Real estate can never fall? Check out San Diego chart from http://piggington.com/
Condos fall the fastest. Almost 20% down from peak. Look how much they've fallen from June. The cracks have opened up.
It looks like gasoline demand has finally dropped year over year. Contraction reports will be coming. Less gasoline means less consumption/trips to the store.
Always remember what the hedge funds giveth, they can can taketh away and usually very suddenly and without warning. Remember Soros: The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited.
Gasoline demand has narrowed year over year considerably since last October. Watching now for a decline year over year.
Are the gasoline producers sensing a swift drop in demand? Why doesn't anyone talk about this?
Is the premise of the oil market on shaky grounds?
Noam Chomsky believes in conspiracies too much (to him they only apply to US) but Trivers is worth listening to. Trivers discusses the effect of self-deception on group behavior. It explains why central bankers will deceive the public for example and even themselves. We tend to get locked into our dogmas. The key according to Soros is to recognize the fallacy ride it and be smart enough to look for the step off point. Believe the dogma to a point, "The crowd is right in the trends but wrong at the ends."
For example, China onward and upwards is a fallacy. It simply grows with outsourcing as long as companies get away with it by their governments. Chinese consume very little 35% of GDP and the corruption problem hasn't gone away - it is much larger. But the trend followers keep pushing China higher. I say step off now.
see Robert Trivers Conversation
Nassim Nicholas Taleb in RSA lecture about Trivers, wars and predictions -
"We are very good at pillaging ...horrible at predicting the outcomes of wars and we don't know it...same instinct of self-deception kicks in...once you start raiding you can never hesitate...once you get involved you convince yourself of a 100% chance of winning otherwise you'd waiver...mental mechanisms are self-serving...take the 1914 war...people thought it would be a picnic and they were rushing to get to the front to watch before it ends."
Also in the same lecture on experts in complex environments:
"all you have to do is sound convincing so what you need to do is just narrate...don't know if he's an expert but he can narrate."
Hedgehogs focus on one thing or aim. Foxes pursue many aims.
"A thousand people spend the day betting at the racetrack, and at the end of the day we select the ten bettors with the highest winnings-we'll call them our Great bettors. When we look closely at these most successful bettors, we're likely to find that all of them placed big bets on long shots - that's how they came out ahead of the other 990. They were Hedgehogs, focusing on a few big things. Very few Foxes will be among the top ten, because Foxes tend to diversify their positions.
Yet even if the top ten bettors were all Hedgehogs, it does not follow that Hedgehogs, on average, outperformed Foxes, because some Hedgehogs may have done very well but many more may have gone home broke. In fact, overall Foxes probably did better than Hedgehogs - they took more prudent risks and avoided big losses." p122 The Halo Effect
I like this example. It illustrates how the media can focus on a few Hedgehogs and lead everyone to believe that this latest hot area can yield the same results for them. It skews the investor toward risk taking and bad behavior. By somehow following the media, the investors think they will become the lucky Hedgehog.
May 24
Hedge funds at work again borrowing like crazy. Margin debt is expanding very rapidly-doubled in the past 3 years- and is responsible for recent rally. But as I show below, operating earnings are not stellar and are decelerating rapidly.
GPDI chart is showing we are on course for recession. see GDPI web page
"You must have a willingness to do
something when everyone else is petrified. You must learn the lesson of
following logic over emotion." (Warren
Buffett)
“It's only when the tide goes out that you learn who's been swimming naked.” (Warren Buffett)
"Economic history is a
never-ending series of episodes based on falsehoods and lies, not truths. It
represents the path to big money. The object is to recognize the trend whose
premise is false, ride that trend, and step off before it is discredited." (George Soros)
I tend to agree with Soros, but I think trends don't have to be lies just that the Delusion Gap can get out of hand as the trend wears on. The market becomes trend following ignoring any truths contrary to the trend.
I finally read the fine print on page 20 of the Black
Swan.
"I was not able to build a career just by betting on Black Swans - there
were
not enough tradable opportunities....my competitors became technologically
advanced...I discovered the easier business of protecting, insurance-style,
large portfolios against the Black Swan."
Essentially, he is an insurance salesman.
Nassim's book is good but he is somewhat dishonest in that he accuses others of
not recognizing reality, having no use for their theories, and yet he admits in
fine print and elsewhere in the book:
1. made his money on Black Swan in 1987 (luck)
2. you cannot trade Black Swan opportunities as they are too rare
3. he sells portfolio insurance or puts for a source of income (which I say has
problems)
4. competitors have now overvalued some of his strategies with use of computers
(George Soros' reflexivity)
BUT Nassim's options can become totally worthless in a Black Swan meltdown -
the counterparties give up or the exchange is closed. So how useful is
he? His recommendations are not as good as a gold bug. I learn more
about Black Swans from going to a gold bug convention than from Nassim (their
theories are more detailed). Eugene Levy with his solid gold as insurance
for your portfolio is a much better solution. But of course, Nassim is on Wall
Street.
He does recommend in Chapter 13 that an investor should have 80 to 90% in
T-bills, T-bonds, or savings accounts. The rest should be in
hyper-aggressive investments, for example many small bets - 10. If the BS
portfolio pays off rarely say 1 in 10 years and it pays 30:1, your return for
the 10 years turns out to be 5.9% per annum. Not a stellar performance BUT very
resistant to a Black Swan meltdown. If other investing methods lead to a
-50% over this period, net gain over other methods is 250%.
|
Yr |
Portfolio |
Black Swan |
Conservative |
|
|
|
(1 on 10 pays 30:1) |
Portfolio 5% ret |
|
0 |
100 |
10% |
90% |
|
1 |
104.5 |
10 |
94.5 |
|
2 |
109.2 |
10 |
99.2 |
|
3 |
114.2 |
10 |
104.2 |
|
4 |
119.4 |
10 |
109.4 |
|
5 |
124.9 |
10 |
114.9 |
|
6 |
130.6 |
10 |
120.6 |
|
7 |
136.6 |
10 |
126.6 |
|
8 |
143.0 |
10 |
133.0 |
|
9 |
149.6 |
10 |
139.6 |
|
10 |
176.6 |
30 |
146.6 |
|
|
|
Return Per Year |
5.9% |
A simple Black Swan Option Strategy:
Betting 1 per year with no reinvestment (you would lose everything if you did) and assume a Black Swan pays 20:1. Nassim says in his book there were 10 Black Swans in the last 50 years.
Bet total $50 (Bet 1 per year for 50y)
Win: $200 (win 10 times at 20:1)
$200/$50-1=300% return over 50 years
AVERAGE RETURN: 2.8% per year
Obviously doesn't pay compared to stocks, bonds, or real estate.
|
Credit Market `Bubble' May Be at Bursting Point: Mark Gilbert By Mark Gilbert May 17 (Bloomberg) -- The meteorologists of the global credit markets are fretting that the balmy weather investors have basked in for much of this decade is about to turn stormy. It's tricky, however, to identify the rods that might draw down lightning from the clouds. Calling the turn in the credit cycle has been a losing strategy in recent years. War, pestilence, leveraged buyouts and the collapse of the U.S. subprime mortgage market have all been unable to derail the rally in corporate debt. As the reasons for concern accumulate, strategists are starting to reach for their furry bear suits. ``We are growing extremely negative on credit markets, which we see as in a bubble,'' Tim Bond, head of asset allocation at Barclays Capital in London, wrote in a research note this week. ``U.S. companies are re-leveraging aggressively in an attempt to substitute earnings-per-share growth for earnings growth. 2008 should see a fairly savage bear market for credit, a large rise in defaults and an end to easy liquidity conditions.'' Dresdner Kleinwort's analysts, led by London-based head of credit strategy Willem Sels, scrutinized this quarter's U.S. earnings growth. They concluded that the 12.5 percent average figure is misleading because it measures earnings per share and is distorted by stock buybacks. Profit growth for the companies in the Standard & Poor's 500 Index is just 9 percent, and 3 percent for all U.S. ones. ``With net debt growing at 10 percent, leverage ratios are deteriorating,'' the Dresdner team wrote in a report this week. ``Clearly this is not in line with unchanged credit spreads.'' Shrinking Spreads U.S. corporate bonds yield an average of about 96 basis points more than government debt, down from as high as 246 basis points in October 2002 and a five-year average of 111 basis points, according to indexes compiled by Credit Suisse Group. Spreads on high-yield debt are down to a record low of about 300 basis points, compared with a 20-year average of more than 550 basis points, the indexes show. Spreads on euro-denominated bonds are also near their lowest ever, at about 31 basis points. Investor appetite for junk bonds shows no signs of waning. Seven years ago, Thai Petrochemical Industry PCL defaulted on its bonds and was declared insolvent with debts of $3.5 billion in Thailand's biggest bankruptcy. This month, the company, now called IRPC PCL, the nation's biggest petrochemicals maker, plans to sell $400 million of new bonds. Trouble Ahead The chorus of senior bankers warning that there's danger ahead grows almost daily, with Bank of America Corp. Chief Executive Officer Ken Lewis adding his voice this month. ``We need a deal to go bad, as long as we're not in it,'' he told the Swiss-American Chamber of Commerce in Zurich last week. ``We are close to a time when we'll look back and say we did some stupid things. We need a little more sanity in a period when everyone feels invincible and thinks this is different.'' The 2007 value of global mergers and acquisitions topped $2 trillion this week, some 60 percent ahead of the total at this time last year, which ended with a record $3.5 trillion. Investors, though, don't seem to get spooked by takeovers anymore. ``Credit spreads continue to go tighter with the market seemingly learning to live with the constant speculation surrounding possible bid targets,'' says Suki Mann, the senior credit strategist at Societe Generale SA in London. ``We're either heading for a spectacular collapse, which would likely be brought about by a major event impacting the global financial system, or we are going to stay like this for a while. We go for the latter.'' Recession Risks Economists' forecasts and the shape of the U.S. Treasury yield curve, not to mention former Federal Reserve Chairman Alan Greenspan, are still suggesting there's a risk of U.S. recession this year, which would typically hurt creditworthiness and corporate-bond spreads. The performance of the equity market, however, indicates the economic porridge is still fit for Goldilocks. The Dow Jones Industrial Average is at a record, up almost 8 percent this year, while the S&P 500 index has gained more than 6 percent. It might not last. ``You are seeing mergers and acquisitions tittle-tattle that makes me concerned,'' Fidelity International Ltd.'s Anthony Bolton said this week. ``I can't tell you when it's coming, but I can tell you the precursors are there.'' Bolton has successfully called the turn in equity markets twice previously, dumping telecommunications stocks in the first quarter of 2000 and protecting his fund from a decline in U.K. stocks that ran from April to June last year. Turn, Turn, Turn Will company earnings collapse as central-bank efforts to restrain inflation crimp economic growth? Will overly indebted borrowers seduced by central banks' easy-money policies at the start of the decade begin to default in droves? Does the current merger mania, with everyone bidding at premium prices for everyone else, erode lending standards to dangerously low levels? ``To everything (turn, turn, turn), there is a season (turn, turn, turn),'' sang Pete Seeger, channeling the Bible's Ecclesiastes text. ``A time to gain, a time to lose.'' When the credit markets finally turn, there will be plenty of time to lose the gains of recent years. (Mark Gilbert is a Bloomberg News columnist. The opinions expressed are his own.) To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net Last Updated: May 16, 2007 19:28 EDT |
I've been reading the Black Swan, a very good book. Two statements appeal to me now:
"We get closer to the truth by negative instances, not by verification!" p.56
"We can get negative confirmation from history, which is invaluable" p. 199
This reminds me of the Fed (and other central bankers), after being created in 1913, totally failed to prevent the great depression. The fed may or may not prevent a depression. The other point of Nassim is to consider the magnitude. It seems when governments fail, they fail miserably. Take the Great Depression, the fall of the Soviet Union (due to economy), and Japan from 1990-on. When they go, they really go. Hence by considering the worst case, we get closer to the truth. Hence, I will always keep 50% in treasury bonds or gold.
"But it remains the case that you know what is wrong with a lot more confidence than you know what is right." p. 58
For instance, Americans and Europeans can't grow their debt faster than their income forever. Nevertheless, it hasn't collapsed yet and the casino society continues. Which event is more important to guard against?
Of course, the public has all their money in housing and stocks - the most speculative and most Black Swan prone- and virtually none in savings.
While cynical, I believe based on my experience there are three types of investors in this world:
1) Those that are afraid of Black Swans and want to preserve their wealth; Worrying about errors of omission instead of co-mission!
2) Those that want Black Swans, a lottery ticket "Just show me how to get rich quick / retire early". They want Felicity Foresight.
3) Individuals who combine both with a lot of patience
Generally speaking, alcoholic beverage rate of increase slows considerably before or during a recession. This data reflects the most recent Q1'07.
See below the magnitude of the S&P 500 drop during recessions. 1973 was 40%. Notice how the S&P 500 does not always predict recessions (prediction being negative growth) note these recessions, 1980, 1982, 1990 and 1994.
S&P operating earnings slowed again this quarter (not negative yet). When it's negative, the market will fall quickly.
http://www2.standardandpoors.com/spf/xls/index/iee500_gics.xls
|
S&P 500 Operating Earnings Growth over same period last year |
||||||||
|
2006 |
|
|
|
2007 |
Above/ |
Median |
Market |
|
|
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Below |
5Q |
Cap % |
|
|
SP500 |
15% |
13% |
22% |
9% |
8% |
-5% |
13% |
100% |
|
S&P 500 Consumer Discretionary (Sector) |
27% |
8% |
56% |
0% |
-6% |
-14% |
8% |
10% |
|
S&P 500 Consumer Staples (Sector) |
6% |
6% |
4% |
6% |
4% |
-2% |
6% |
9% |
|
S&P 500 Energy (Sector) |
36% |
44% |
34% |
-6% |
3% |
-31% |
34% |
10% |
|
S&P 500 Financials (Sector) |
7% |
13% |
28% |
25% |
13% |
0% |
13% |
22% |
|
S&P 500 Health Care (Sector) |
23% |
-2% |
11% |
0% |
13% |
2% |
11% |
12% |
|
S&P 500 Industrials (Sector) |
20% |
16% |
13% |
16% |
13% |
-2% |
16% |
11% |
|
S&P 500 Information Technology (Sector) |
9% |
-3% |
3% |
-3% |
11% |
8% |
3% |
15% |
|
S&P 500 Materials (Sector) |
7% |
19% |
46% |
47% |
16% |
-3% |
19% |
3% |
|
S&P 500 Telecommunication Services (Sector) |
-1% |
0% |
8% |
41% |
-5% |
-5% |
0% |
4% |
|
S&P 500 Utilities (Sector) |
6% |
30% |
32% |
3% |
7% |
0% |
7% |
4% |
Based on the above analysis, I would say Financials have yet to show their true earnings thereby keeping stocks up.
They are the biggest group at 22%. Energy sector earnings are falling very quickly but they are only 10% market cap.
Gross private domestic investment chart shows no growth as of Q4'06. This series always goes to 0 or negative before a recession. This area includes construction and equipment/software spending.
Good chart illustrating credit flow investing...avoid the crises.
Jan.12
UK plans more rate rises. Will it be source of contagion?
Good news fed futures has rates high until after March meeting. This will bury housing more especially equity extraction
Jan.11
As predicted, USD rallies, long bonds up-trend, commodities falling, recession approaching and eventually stocks will also break
Trade balance improves and so does USD. I expect it should improve throughout this year.
Jan. 5
More French fun....
France Consumer Confidence Registers Surprise Decline In December
(RTTNews) - France consumer confidence indicator dropped to minus 26 in December, the statistical office INSEE said Friday. In November, indicator came in at minus 25. Economists expected the indicator to come in at minus 24. The balance of opinion about past financial position slightly rose to minus 19 from minus 20 in November. Personal financial position outlook remained unchanged at minus 5. The indicator concerning past living condition fell to minus 59 from minus 57 last month. Meanwhile, opinion regarding future living condition stood at minus 32 compared to minus 28 prior month.
Dec. 29
All this fuss about the euro because Germans are buying last minute before their "wise" government raises taxes in an economy suffering from high unemployment. Next year, the USD goes higher as the euro economy shows its true colors. From Nov. 26 post, France is already in big trouble.
From India Times:
What
happens to US Dollar-Euro exchange rate when German consumers go on strike in
January 2007?
Peter Oberois
Dec. 28, 2006
German economy is booming. People are buying washing machines, camera, refrigerators, computers, cars – you name it. The buying is furious. The ECB is raising rates to hold stand against the inflation. However behind the scene something sinister is coming. All these crazy buying by the German consumers is because of the coming 3% increased in value added tax in Germany to be in effect in Janauary 2007. International thinks tanks now believe, in January 2007 the German consumers will go on strike. A vaccum in buying will collapse the German consumer side of the economy in the first half of 2007.
The effect can be severe for Dollar-Euro exchange rate. The Dollar can sharply rise against Euro. Gold in terms of dollar can sharply fall. The stock markets will also fall triggered by abrupt Eurozone economic collapse.
Dec. 28
The Fed Z.1 came out on Dec. 7. Recession next year will be at least as bad as 2001.
Households have slowed from almost 12% growth rate last year to 6.8%! Business has slowed from 9.6% to 7.7%.
In 99, rate was 6.4% and fell to 4.9% (2000) or a 25% drop in the rate of credit growth. Notice recession started the next year, 2001, as there's about a 1 yr delay.
Take 6.7% Q3'06 / 9.5% in 2005, it's a 29.5% drop in the credit growth rate! So as bad as 2000...I'll check numbers at end of Q4'06.
Notice how households kept borrowing faster and faster from 2000-2002. This cushioned the last recession, 2001. Business is also slowing for this recession. Only state gov't are accelerating, but I wouldn't get hopes up as they're only 12% of GDP. Households are over 70%.
Dec. 2
USD rallies in a recession with an improving trade balance. Trade balance gets worse during the recovery as Americans buy with credit and are price insensitive. USD now has the highest real rates of any major currency.
In 2006, trade numbers are improving of late:
Jan. -68.5 July -68 Aug -69.9 Sep -64.3 (decrease 8% in 1 month!)
Let's compare numbers to the last recession. Recession Quarters were 2001 Q1 to Q3. Before recession in 2001, the trade numbers were
Jan 2000 -28
Jan 2001 -33.3 [increase of 18.9% in 1 yr]
After recession....
Aug 2001 -27.1 [Aug shows decrease of 18.6%]
Jan 2002 -28.5 [ yoy decrease of 14%]
What happened to the USD during this period?
If the 2007 recession turns to be very bad, trade balance will go to 0 as it has done in every other recession except 2001 (mild recession). If there's a mild recession in 2007, I expect the trade deficit will get worse in 2008 and on. However, I can't say how bad this recession will be. I have to judge that afterwards.
See below a chart of USD from 2004. The trade deficit was worsening during this period as the US economy recovered and boomed. From a technical point of view, an oversold USD (RSI below 30 - purple areas) leads to a rally every time. Hedge funds make some quick money and then the USD resumes an upward tack less than 1 month after. Headlines were very apparent every time the dollar took a quick drop. Here the newspapers are a contrary indicator.
Nov. 29
Bernanke made some comments recently confirming that he resides in the core rate inflation fighting camp. As I mentioned before, the Fed is caught between high core rates and rapidly falling inflation on the other side.
"A failure of inflation to moderate as expected would be especially troublesome," he said.
Overall inflation has showed signs of improving in recent months as once surging energy prices have calmed down. However, "core" prices -- which exclude energy and food and are closely watched by the Fed -- still remain "uncomfortably high," Bernanke said. Looking ahead, Bernanke said he expects those core prices to moderate gradually over the next year or so.
Consequently, the Fed will leave rates high for December meeting. This is very bad for housing and will lead to a recession next year. A recession will lead to declining stocks, housing, and commodities but rising bonds. Will they be able to save the next recession? I will monitor with my indicators. I believe in bailing out of markets before a recession as we don't know how bad the down side will be. Given the size of the excesses, it's better to stand back and take a wait and see approach.
Nov. 26
Of late, the Euro rose because the US economy is showing
signs of weakness but the Eurozone is robust?
See HCPI Eurozone chart below. Inflation has dropped below the ECB target
zone of 2% to 1.6%. This is similar to the US level of 1.3%.
An excerpt from Nov. 10 AP article:
"The French economy unexpectedly stagnated in the third quarter, national statistics institute Insee said Friday. French gross domestic product was unchanged in the July-September period, according to the Insee flash estimate, which is subject to revision as more economic data come in. France's abrupt slowdown, following a 1.2 percent expansion in the second quarter, puts pressure on the government's full-year forecast for growth between 2 percent and 2.5 percent.
Economists had predicted 0.5 percent growth in the quarter and 2.4 percent for the full year, according to a Dow Jones Newswires poll....Recent comments by ECB officials had also encouraged predictions of further hikes early in 2007, but some economists said that prospect now looks slimmer."
I`m even surprised by how truly integrated the world economy is. Once US goes to recession, world will follow 3 months later. In the near term, Euro can go up, except for the US trade balance which will get better. The US trade balance has been driving the USD for most of this year. It may take a few months for the market to wake up to this fact. When it does, I believe this will drive the dollar instead of eurozone economics. Also in 3 months time the eurozone will show weakness.
Nov. 22
Housing starts for Oct show a significant drop. Notice that they've completed a round trip. This is very bad for an economy based on housing.
From Bob Nardelli Home Depot's chairman and CEO, job losses in the home construction market are the worst he's seen in 35 years. The pain is starting to spread to the home renovation market. "I don't see anything that says it's going to get significantly better in 2007....the loss of jobs in the home construction market is at unprecedented levels"
In October, the one month retail sales reflect this with building materials down 0.3% (over the last 3 mo down at a 10.6% annual rate), furniture down 0.7%, and department store sales down 0.7%.
Core PPI numbers (Oct) were worse than expected (worst fall in 13 years). This means companies can't charge as much for products and pricing power has evaporated. What other period had a negative PPI number...?
What happened to stocks in 2002?
PPI finished goods (Oct 2006)
Of course, as predicted bonds are soaring (deflation bias coming see PPI above) and Canadian dollar falling, USD bonds are best....
In addition, here are some hedge fund comments which are responsible for weirdness in equities right now:
From New York Times "Closing in on Hedge Funds" : Hedge funds now account for "roughly half of all trading on New York and London exchanges" Hedge funds attracted a record of $44.5 billion in the third quarter.
Of course, what is their investment du jour? Undervalued dow stocks and others despite deteriorating fundamentals.
With respect to CPI, the Fed now has to watch cpi dropping and core cpi on the high side. The Fed must be concerned with gross cpi falling so rapidly. CPI may fall to deflation before the Fed can engineer negative real rates. In that vein, the October numbers are out and they're 1.3%! CoreCPI is now falling at 2.7%. I think the Fed may lower rates definitely in Jan. and possibly in December!
Gross CPI (Falling Too Rapidly at 1.3%!) Updated to 2% for Nov.
Core CPI (October Update)
