It's that time of the week. Don't think about anything related to the economy or the markets until Monday. Until then ...
Friday, November 12, 2010
Weekend Weimar and Beagle
It's that time of the week. Don't think about anything related to the economy or the markets until Monday. Until then ...
Weekly Indicators: I hear catfood tastes yummy Edition
- by New Deal democrat
And so, at long last, in the last 10 days Barack Obama, who soared into office on the most brilliant intellect since John Quincy Adams and the most inspiring rhetoric since Ronald Reagan, has revealed himself as having the compassion of Herbert Hoover and the negotiating skills of Jimmy Carter. His "deficit commission" proposes *lowering* the tax rates on corporations and the wealthy, leaves Wall Street completely unscathed, and places almost all of the burden of balancing the budget on the backs of middle class households earning between $50,000 and $120,000 a year.
Tax rate simplification was tried in 1986. It lasted less than 6 years, by the end of which it was once again riddled with exemptions and loopholes. Only those who do not remember their history can believe it is worthwhile to repeat it. By turning Social Security into a welfare program for the lower 40%, paid for by the remaining 60%, the panel has ensured that there will be a powerful and growing constituency favoring its further destruction in 10 or 20 years. All this over a shortfall that, as Bruce Webb tirelessly points out, can be completely covered by a 1/2% increase in payroll taxes.
The rancid icing on the poison cake is the White House's capitulation on the issue of making the Bush tax cuts for the wealthy - the single biggest source of the persistent budget deficit and burgeoning national debt - permanent.
I was going to post an economic outlook yesterday, but in the midst of the biggest government inflicted catastrophe on the middle class in over 75 years, it seemed hardly worthwhile.
Here is this week's high frequency data:
The price of a barrel of Oil held steady at about $86 a barrel. If Oil goes over $90 and stays there, we will probably go right back down into a recession in a few months. Gas at the pump remained stable at $2.82 a gallon. Gasoline usage was exactly the same as one year ago, at 9.015. Gasoline stocks are down considerably, to no more than 5% above their normal range for this time of year.
Meanwhile the Mortgage Bankers' Association reported that its seasonally adjusted Purchase Index increased another 5.5% last week, the third straight week of increase. Purchase applications have stabilized generally in the last few months at a level about 20% lower than 2009. Meanwhile, the Refinance Index increased 6.0% from the previous week. Refinancing is still proceeding at a generally high rate.
The ICSC reported same store sales for the week ending November 6 increased 1.3% week over week, and also increased 3.4% YoY, the best comparison in over a month. Shoppertrak did not report for the week, and did report that sales were up only 1.6% YoY for the month of October. October's retail sales report, due Monday morning, will be the most important statistic next week.
The BLS reported 435,000 new claims, the lowest in over 2 years. The 4 week average has finally moved below 450,000. Next week will see if there is a new trend towards lower claims out of the 12 month range or not, the second big statistic of the week.
Railfax for the first time in a long time showed outright decline compared with last year's loads for all sectors. Some of this may be due to retailers ordering and receiving holiday goods early, after last year some were left without merchandise due to shipping delays, but we will see.
The American Staffing Association reported that for the week ending November 2, temporary and contract employment slipped 0.26 back to 100.0. Seasonality, in which temp help stabilizes and then declines in late December is probably the dominant factor at the moment.
M1 increased .9% last week, and was up 0.7% month over month, and up 5.7% YoY, hence “real M1” is up 4.6%. M2 declined .1% last week, but increased +0.6% month over month, and increased 3.3% YoY, so “real M2” is up 2.2%.
Weekly BAA commercial bond rates increased 0.04% last week to 5.80%. This compares with yields on 10 year bonds up +.13%. Thus there is no sign of buyers seeing increased default risk in B rated corporate bonds.
The Daily Treasury Statement showed $50.9 B in receipts vs. $47.4 B a year ago, a gain of about 7.2% for the first 7 days of November. For the last 20 days, receipts are up $125.2 B vs. $118.7 B a year ago, a gain of about 5.5%. Seasonality is beginning to be felt in the early November numbers.
In the short term, if Oil and a new Euro crisis do not again threaten the recovery (shades of May), the recovery still appears on track.
In the longer term, if G^d is still willing to show mercy on the country, then just as Lyndon Johnson - whose domestic legislative record of the voting rights act, civil rights act, immigration reform, and Medicare and Medicaid could not withstand the divisions of his Vietnam escalation - chose not to seek re-election in 1968, so Barack Obama may voluntarily step aside in 2012.
And so, at long last, in the last 10 days Barack Obama, who soared into office on the most brilliant intellect since John Quincy Adams and the most inspiring rhetoric since Ronald Reagan, has revealed himself as having the compassion of Herbert Hoover and the negotiating skills of Jimmy Carter. His "deficit commission" proposes *lowering* the tax rates on corporations and the wealthy, leaves Wall Street completely unscathed, and places almost all of the burden of balancing the budget on the backs of middle class households earning between $50,000 and $120,000 a year.
Tax rate simplification was tried in 1986. It lasted less than 6 years, by the end of which it was once again riddled with exemptions and loopholes. Only those who do not remember their history can believe it is worthwhile to repeat it. By turning Social Security into a welfare program for the lower 40%, paid for by the remaining 60%, the panel has ensured that there will be a powerful and growing constituency favoring its further destruction in 10 or 20 years. All this over a shortfall that, as Bruce Webb tirelessly points out, can be completely covered by a 1/2% increase in payroll taxes.
The rancid icing on the poison cake is the White House's capitulation on the issue of making the Bush tax cuts for the wealthy - the single biggest source of the persistent budget deficit and burgeoning national debt - permanent.
I was going to post an economic outlook yesterday, but in the midst of the biggest government inflicted catastrophe on the middle class in over 75 years, it seemed hardly worthwhile.
Here is this week's high frequency data:
The price of a barrel of Oil held steady at about $86 a barrel. If Oil goes over $90 and stays there, we will probably go right back down into a recession in a few months. Gas at the pump remained stable at $2.82 a gallon. Gasoline usage was exactly the same as one year ago, at 9.015. Gasoline stocks are down considerably, to no more than 5% above their normal range for this time of year.
Meanwhile the Mortgage Bankers' Association reported that its seasonally adjusted Purchase Index increased another 5.5% last week, the third straight week of increase. Purchase applications have stabilized generally in the last few months at a level about 20% lower than 2009. Meanwhile, the Refinance Index increased 6.0% from the previous week. Refinancing is still proceeding at a generally high rate.
The ICSC reported same store sales for the week ending November 6 increased 1.3% week over week, and also increased 3.4% YoY, the best comparison in over a month. Shoppertrak did not report for the week, and did report that sales were up only 1.6% YoY for the month of October. October's retail sales report, due Monday morning, will be the most important statistic next week.
The BLS reported 435,000 new claims, the lowest in over 2 years. The 4 week average has finally moved below 450,000. Next week will see if there is a new trend towards lower claims out of the 12 month range or not, the second big statistic of the week.
Railfax for the first time in a long time showed outright decline compared with last year's loads for all sectors. Some of this may be due to retailers ordering and receiving holiday goods early, after last year some were left without merchandise due to shipping delays, but we will see.
The American Staffing Association reported that for the week ending November 2, temporary and contract employment slipped 0.26 back to 100.0. Seasonality, in which temp help stabilizes and then declines in late December is probably the dominant factor at the moment.
M1 increased .9% last week, and was up 0.7% month over month, and up 5.7% YoY, hence “real M1” is up 4.6%. M2 declined .1% last week, but increased +0.6% month over month, and increased 3.3% YoY, so “real M2” is up 2.2%.
Weekly BAA commercial bond rates increased 0.04% last week to 5.80%. This compares with yields on 10 year bonds up +.13%. Thus there is no sign of buyers seeing increased default risk in B rated corporate bonds.
The Daily Treasury Statement showed $50.9 B in receipts vs. $47.4 B a year ago, a gain of about 7.2% for the first 7 days of November. For the last 20 days, receipts are up $125.2 B vs. $118.7 B a year ago, a gain of about 5.5%. Seasonality is beginning to be felt in the early November numbers.
In the short term, if Oil and a new Euro crisis do not again threaten the recovery (shades of May), the recovery still appears on track.
In the longer term, if G^d is still willing to show mercy on the country, then just as Lyndon Johnson - whose domestic legislative record of the voting rights act, civil rights act, immigration reform, and Medicare and Medicaid could not withstand the divisions of his Vietnam escalation - chose not to seek re-election in 1968, so Barack Obama may voluntarily step aside in 2012.
The German Economy is Recovered
From the WSJ:
The German economy's transformation from spluttering Trabant to purring Mercedes is complete.Although third-quarter gross domestic product growth of 0.7% was slightly below consensus, that was made up for by revisions higher for the first half of the year; the country is on track to grow 3.5% or more in 2010, its best performance since reunification and far above the 1.5% average in the precrisis decade. Crucially, domestic demand, both private and public, is now making an equal contribution to growth with investment and exports, suggesting the economy is rebalancing naturally, despite misplaced criticism from some trading partners.
Germany's GDP has now recovered more than 70% of the 6.6% fall in output as a result of the recession, J.P. Morgan Chase & Co. notes. Both companies and individuals are upbeat. With German bond yields so low and no fiscal concerns, the cost of borrowing is cheap. The latest survey by the German Chambers of Industry and Commerce showed a positive balance of 14% of companies planning to increase investment, far above the long-run average of minus 8% and close to a record; a similar picture emerges for hiring intentions. Unemployment has fallen below three million, its lowest level since 1992.
The Real Issues With QEII
There has been a fair amount of ink, stating that several countries have jumped on the Fed's back about QEII. Consider the following:
Several other countries have voiced their concern, largely about the increase of foreign inflows, which drive up the value of their respective currencies, hurting their exports and thereby lowering growth.
So -- let's ask a basic question: what exactly is currency manipulation? And more importantly, how do you separate it from a central bank's interest rate policy? For example, central banks lower interest rates to get countries out of a recession; that's central banking 101. But lowering rates also lowers the value of the country's currency, making their exports more attractive in other countries. Other countries view this negatively, because now their products are less competitive relative to the now devalued currency. However, the lowering of currency values is to be expected and is a by-product of the action; it's also a central element of a free floating currency system.
In addition, in a free-floating currency system, the values of the respective currencies should theoretically reflect the state of the underlying economy. For example, when a country starts to recover, international investors will want to put more money into that country. This drives up the value of the currency. So -- as the economy improves, the currency's value rises, which acts as a natural brake on the economy. The converse is true of a country in a recession; it's currency becomes less attractive and valuable, making its exports more attractive, which in turn helps the country get out of the recession.
That, of course, assumes the system is not rigged somehow. Now we return to the original point: what is currency manipulation? First, I would reject the notion that central bank interest rate policy is currency manipulation and should be treated as such. While interest rate policy has an impact on currency values, it is not the central purpose of the policy, which instead is used to spur economic growth or "tap on the breaks" to slow inflationary pressures.
As for QEII, or similar programs, we move into somewhat murkier territory, although it's also important to remember the economic backdrop against which these policies are implemented. The Fed's program is occurring at a time of slow growth and high unemployment; it's extremely doubtful they would engage in this policy in a 4% GDP growth and 5% unemployment environment. As such, this is primarily an economic program, not a currency manipulation program.
But that doesn't mean the currency dimension should not be considered at all. The big problem with the dollar is it happens to be one of the world's reserve currencies. In addition, all commodities are priced in dollars, adding further complications. This is, I think, at the core of at least part of the concern regarding QEII: a dollar devaluation is naturally inflationary because commodities are priced in dollars.
In reality, I believe the real question being asked is this: do we need a new international commodity price/currency system, where commodities are priced against a basket of primary currencies rather than just the dollar? I would answer yes, that would be an extremely good idea.
Global controversy mounted over the Federal Reserve's decision to pump billions of dollars into the U.S. economy, with President Barack Obama defending the move as China, Russia and the euro zone added to a chorus of criticism.
.....
The G-20 summit that begins Wednesday night in Seoul is shaping up as a showdown between exporting powers, such as Germany and China, and nations such as the U.S. that are struggling to emerge from recession and high unemployment.
The G-20 summit that begins Wednesday night in Seoul is shaping up as a showdown between exporting powers, such as Germany and China, and nations such as the U.S. that are struggling to emerge from recession and high unemployment.
Several other countries have voiced their concern, largely about the increase of foreign inflows, which drive up the value of their respective currencies, hurting their exports and thereby lowering growth.
So -- let's ask a basic question: what exactly is currency manipulation? And more importantly, how do you separate it from a central bank's interest rate policy? For example, central banks lower interest rates to get countries out of a recession; that's central banking 101. But lowering rates also lowers the value of the country's currency, making their exports more attractive in other countries. Other countries view this negatively, because now their products are less competitive relative to the now devalued currency. However, the lowering of currency values is to be expected and is a by-product of the action; it's also a central element of a free floating currency system.
In addition, in a free-floating currency system, the values of the respective currencies should theoretically reflect the state of the underlying economy. For example, when a country starts to recover, international investors will want to put more money into that country. This drives up the value of the currency. So -- as the economy improves, the currency's value rises, which acts as a natural brake on the economy. The converse is true of a country in a recession; it's currency becomes less attractive and valuable, making its exports more attractive, which in turn helps the country get out of the recession.
That, of course, assumes the system is not rigged somehow. Now we return to the original point: what is currency manipulation? First, I would reject the notion that central bank interest rate policy is currency manipulation and should be treated as such. While interest rate policy has an impact on currency values, it is not the central purpose of the policy, which instead is used to spur economic growth or "tap on the breaks" to slow inflationary pressures.
As for QEII, or similar programs, we move into somewhat murkier territory, although it's also important to remember the economic backdrop against which these policies are implemented. The Fed's program is occurring at a time of slow growth and high unemployment; it's extremely doubtful they would engage in this policy in a 4% GDP growth and 5% unemployment environment. As such, this is primarily an economic program, not a currency manipulation program.
But that doesn't mean the currency dimension should not be considered at all. The big problem with the dollar is it happens to be one of the world's reserve currencies. In addition, all commodities are priced in dollars, adding further complications. This is, I think, at the core of at least part of the concern regarding QEII: a dollar devaluation is naturally inflationary because commodities are priced in dollars.
In reality, I believe the real question being asked is this: do we need a new international commodity price/currency system, where commodities are priced against a basket of primary currencies rather than just the dollar? I would answer yes, that would be an extremely good idea.
Thursday, November 11, 2010
Yesterday's Market
As I noted a few days ago, prices for the SPY's moved lower after breaking through resistance and are now testing the 10 day EMA for technical support.
The market opened lower (a) but found support at previous levels (b) rallied to the 20 minute EMA and then traded lower (c) before moving through the 10 and 20 minute EMAs only to hut resistance at the 50 minute EMA (d). Prices moved lower m bit then rallied strongly in the afternoon (e). Prices broke support (f), clustered around the 200 minute EMA, before selling off and then rallying into the end (g).
Also note that prices had an upward trend bias for most of the day (a).
The Treasury market was closed yesterday.
Copper Hits a Record
From the WSJ:
Copper prices hit a record, as the seemingly relentless pace of Chinese demand and a potential supply shock from Chile bring the industrial metal's near-term scarcity into stark relief.China, the world's No. 1 consumer of the red metal, released data showing that industrial output and capital spending were holding steady even though Beijing has recently taken steps to cool investment in real-estate and other sectors.
There is an increasing amount of information coming from China that may thwart this upward move in commodities purchased by the Chinese industrial base. The big one is inflation:
China's consumer price index rose 4.4% from a year earlier in October, as food prices drove the fastest increase in two years. Price rises accelerated sharply from the 3.6% increase in September and beat market expectations of a 4% gain. Average inflation for the year has now reached 3% and is likely to march higher unless the readings slow sharply in the next two months.
This has a lot of people concerned that we'll see the Chinese central bank raise rates soon.
Will Oil Threaten the Recovery (Again)?
From Marketwatch:
Crude-oil futures settled at their highest in more than two years Wednesday, defying a rising dollar as a U.S. government report showed a larger-than-expected drop in inventories.Crude for December delivery added $1.09, or 1.3%, to $87.81 a barrel on the New York Mercantile Exchange. That’s oil’s best settlement since early October 2008.
The contract had traded lower just moments before the Energy Information Administration released its update on U.S. petroleum inventories as the dollar continued to rise.
A surprise decline in crude stockpiles for last week brought prices back into positive territory.
The government reported a decline of 3.3 million barrels in the nation’s crude-oil supplies in the week ended Nov. 5. Gasoline stockpiles fell 1.9 million barrels and distillates dropped by 5 million barrels, the Energy Information Administration said.
The update ran counter to analyst expectations of an increase for crude inventories and smaller declines for petroleum products supplies.
Analysts polled by Platts had expected an increase of 2.1 million barrels in stockpiles of crude, while gasoline was seen dropping 1.3 million barrels and distillates were forecast to decline 2 million barrels.
The government’s drawdown of 3.3 million barrels for crude came in smaller than the 7.4 million barrels estimated by the American Petroleum Institute late Tuesday.
Consider this chart:
The lower 80s provided strong resistance for oil prices for the last three months. But over the last week, prices have moved through this important area of resistance. In addition, the EMAs indicate the short and intermediate trends are bullish which is confirmed by the MACD.
Because of oil's central nature to the economy, this is a very important development that needs to be watched closely.
Wednesday, November 10, 2010
The Joke of US Fiscal Policy
From the Economist:
Think about this for a minute. The US is the largest economy in the world. And we have not sent a budget to the floor. That's beyond reckless; that's suicidal. And yet, here we are, waiting for god knows what shoe to drop as the process grinds forward.
Last week, I made this comment about US political parties:
Let me rephrase that. Everyone in Washington -- without exception -- is completely worthless. Please, for the love of God, could you please grow-up and act like adults?
YOU can’t watch the circus that America calls its budget process without suspecting it plays some role in the country's fiscal mess. Congress for the first time has failed to send a budget resolution to the floor, its continuing resolution is about to expire, as are a bunch of tax cuts, and there’s a battle looming over raising the debt ceiling. This does not look like rational fiscal policy.
Think about this for a minute. The US is the largest economy in the world. And we have not sent a budget to the floor. That's beyond reckless; that's suicidal. And yet, here we are, waiting for god knows what shoe to drop as the process grinds forward.
Last week, I made this comment about US political parties:
the Democrats can't lead at all -- they want everybody to get along -- and don't want to hear basic economic information when it runs counter to their narrative, the Republicans have walked away from logic and fact and the Tea Party could care less about mere competence.
Let me rephrase that. Everyone in Washington -- without exception -- is completely worthless. Please, for the love of God, could you please grow-up and act like adults?
Yesterday's Market
Prices dropped at the open (a), but then formed a strong rally for the rest of the day (b). Notice that prices consolidated in a triangle right after their bottom (c) and two other downward sloping pennant patterns.
Prices on the SPYs are moving lower, looking to find support at the 10 day EMA.
Treasuries moved a bit higher at the open (a), but soon moved lower (b), consolidating losses at two junctures (c and d). Prices rallied in the afternoon (e), after which they also consolidated gains (f and g).
The long-end of the Treasury curve has is still below the 200 day EMA, having broken the lower trend line of the downward sloping pennant pattern (a).
The dollar was in a rally for over a day (a), consolidating gains at several junctures (b, c and d). After topping out yesterday morning (e), they moved lower (f), but consolidated losses at the end of trading (g).
The dollar doesn't really have a clear pattern right now. Prices are conglomerating around the 10 and 20 day EMAs. The 10 and 20 have both moved higher, but this is an initial move and needs a great deal of confirmation. The spike in volume indicates a possible selling climax, but with the Fed buying Treasuries, it's hard to see a real reason for a strong rally, save a counter-trend rally.
Budget Panel's Tax Proposals; Completely Unworkable
This is interesting. The deficit reduction commission has released their plan, which is available here.
Here's what I find most interesting:
Here's what I find most interesting:
None of the proposals would take effect next year to avoid disrupting the economic recovery. Bowles said income-tax rates would be reduced to three levels: 8 percent, 14 percent and 23 percent.First, I'm a tax lawyer by profession, so I deal with the code every day. I'm also one of the few people who has actually read pretty much most of the code.Wiping out all tax breaks, including the home mortgage deduction, while lowering rates would save $100 billion a year, Bowles said. Members of the panel could decide to keep some tax breaks by offering offsetting cuts, he said.
Here's what I think they are thinking, which is purely conjecture on my part. If we eliminate all the deductions, then the IRS' compliance burden is greatly reduced. Hence, they lower the cost of tax administration. In addition, I'm thinking the rates they come up with would be the rates the average person in the tax bracket winds up paying anyway. (Again, this is pure conjecture).
While this is a nice idea in theory, there is no way it's going to be implemented. Here's the basic problem: off the top of my head, I'd say at least 35% of all the tax code sections are special interest giveaways. In addition, every year, Congress tinkers with all sorts of aspects of the code, as a sop to some special interest. The only way for this to work is if all the special interest deductions go away -- as in every single one. If you leave in one, then someone else will say, "what about mine? In addition -- none of them can ever come back, because as soon as one comes back, you open the doors to all of them. In other words, the basic premise underlying implementation is politically unworkable.
My initial thought is this is a document full of wonderfully magical thinking -- meaning, it's full of a lot of proposals that will never see the light of day. Basically, it says we can cut taxes and spending and balance the budget.
Current Unemployment Situation Remarkably Similar to Last Three Recoveries
There is understandably a great deal of concern about the current unemployment rate -- what caused it, and especially how long it will take to have it drop to meaningful levels. However, lost in this discussion and concern, is the fact the economy has been in this exact same situation before -- in fact, we've been here after each recession since the mid 1970s recession.
Note that after the mid-1970s recession, unemployment hit 9%. After four years it dropped to 6%, but never hit 5% -- the level most economists use to describe full employment.
After the second recession of the early 1980s, unemployment was nearly 11%. It took over 5 years to get back to "full employment."
After the early 1990s recession, unemployment rose to over 7.5%. Again, it took over five years to get back to full employment.
Although the unemployment rate increased after the early 2000s recession, it didn't hit very high levels. But like the last three recoveries, it took a long time (as in nearly four years) for the unemployment rate to drop.
This commonality with previous recoveries does not make the current situation any easier, and should not be used as justification for doing nothing. However, it is important to remember we've been here before.
Note that after the mid-1970s recession, unemployment hit 9%. After four years it dropped to 6%, but never hit 5% -- the level most economists use to describe full employment.
After the second recession of the early 1980s, unemployment was nearly 11%. It took over 5 years to get back to "full employment."
After the early 1990s recession, unemployment rose to over 7.5%. Again, it took over five years to get back to full employment.
Although the unemployment rate increased after the early 2000s recession, it didn't hit very high levels. But like the last three recoveries, it took a long time (as in nearly four years) for the unemployment rate to drop.
This commonality with previous recoveries does not make the current situation any easier, and should not be used as justification for doing nothing. However, it is important to remember we've been here before.
Tuesday, November 9, 2010
Yesterday's Market
Notice that equity prices found support at the opening from the price gap higher four days ago. This illustrates the rule that "markets have a memory."
Yesterday, prices moved higher at the open, but soon hit resistance at previous highs (a). Prices then started moving lower, forming several counter-trend moves (see b, c, and d). However, the overall trend for the day was clearly lower.
On the daily chart, notice that prices have moved above key resistance, but are now moving lower. Ideally, prices should find support at the 10 or 20 day EMA. This type of consolidation is normal; it shows that traders are taking profits form the recent rallies.
The long end of the Treasury market -- which had been forming a downward sloping wedge (a) -- fell through the 200 day EMA today (b). This is the line between bull and bear market.
The dollar's 5 minute charts shows a clear reverse head and shoulders pattern. Prices have moved through the neckline in a counter-trend move.
Fed Releases Senior Loan Officer Survey
From the WSJ:
The credit crunch is easing in the U.S. but it's far from over.
Banks loosened their lending standards in the third quarter, but loans remained hard to get by recent historical standards, a trend expected to continue for the foreseeable future, according to the Federal Reserve's senior loan officer survey, released Monday.
The survey—based on responses from 57 domestic banks and 22 U.S. branches of foreign banks—showed banks for the second quarter in a row eased standards on business loans to firms of all sizes.
But the picture for households is more mixed. Banks have tightened standards on prime mortgage and home-equity loans but have become more willing to make consumer installment loans, such as car loans.
Some lenders are also easing standards for approving credit cards. However, other banks cut the size of credit lines on existing credit card accounts.
"We sort of had to figure out where the new normal was," said Robin Paterson, executive vice president and chief credit officer at American Business Bank in Los Angeles. "Once you know what that is, credit loosens up for certain types of [borrowers], but tightens up for others."
Most respondents cited the improving economy and increased competition from other lenders as reasons for relaxing loan standards to businesses. The previous survey, covering the second quarter, found that big U.S. banks had started to ease terms on loans to small businesses for the first time since late 2006.
Commodity Prices Hitting Highs
Consider the following headlines from Bloomberg:
Gold Rises to Record on Concern European States Face Fundraising Hurdles
Copper Rises for Fourth Day, Reaches 28-Month High on Chinese Car Sales
Corn Rises to Two-Year High on Speculation U.S. May Reduce Crop Estimate
Sugar Rises to the Highest Price Since 1981 on Indian Export Speculation
Ask yourself this question: is talk about deflation even plausible in this environment?
Gold Rises to Record on Concern European States Face Fundraising Hurdles
Copper Rises for Fourth Day, Reaches 28-Month High on Chinese Car Sales
Corn Rises to Two-Year High on Speculation U.S. May Reduce Crop Estimate
Sugar Rises to the Highest Price Since 1981 on Indian Export Speculation
Ask yourself this question: is talk about deflation even plausible in this environment?
A Closer Look At Initial Unemployment Claims
Initial unemployment claims have caused me great concern over the last six months because they have remained at stubbornly high levels. However, this is not the first time we have seen this behavior from initial claims.
Notice in the above graph of initial claims there have been two different types of "recoveries" in initial unemployment claims; fast recoveries that occurred before the early 1990s expansion, and slow recoveries that occurred in the last three expansions. This is one of the primary reasons the last three expansions have been labeled "jobless" recoveries. I explained the reasons for this development of "jobless recoveries" in two posts, located here and here. NDD offered a rebuttal here.
Taking a closer look at the early 1990s expansion, notice the initial unemployment claims remained elevated for about a year and a half after the recession ended.
The same is true for the early 2000s recovery -- initial unemployment claims remained high for about a year and a half after the recession ended.
Notice that with this recovery, we are experiencing the same developments.
In short, it appears that while concerning, initial unemployment claims are behaving much as they have in the last two recoveries. This leads to a question regarding the definition of recovery -- that is, can you have a recovery without a drop in initial unemployment claims below a level of say, 400,000?
It's also very important to consider what the NBER looks at when dating recession, especially regarding employment:
Notice in the above graph of initial claims there have been two different types of "recoveries" in initial unemployment claims; fast recoveries that occurred before the early 1990s expansion, and slow recoveries that occurred in the last three expansions. This is one of the primary reasons the last three expansions have been labeled "jobless" recoveries. I explained the reasons for this development of "jobless recoveries" in two posts, located here and here. NDD offered a rebuttal here.
Taking a closer look at the early 1990s expansion, notice the initial unemployment claims remained elevated for about a year and a half after the recession ended.
The same is true for the early 2000s recovery -- initial unemployment claims remained high for about a year and a half after the recession ended.
Notice that with this recovery, we are experiencing the same developments.
In short, it appears that while concerning, initial unemployment claims are behaving much as they have in the last two recoveries. This leads to a question regarding the definition of recovery -- that is, can you have a recovery without a drop in initial unemployment claims below a level of say, 400,000?
It's also very important to consider what the NBER looks at when dating recession, especially regarding employment:
Q: How does the committee weight employment in determining the dates of peaks and troughs?
A. In the 2007-2009 recession, the central indicators–real GDP and real GDI–gave mixed signals about the peak date and a clear signal about the trough date. The peak date at the end of 2007 coincided with the peak in employment. We designated June 2009 as the trough, six months before the trough in employment, which is consistent with earlier trough dates in the NBER business-cycle chronology. In the 2001 recession, we found a clear signal in employment and a mixed one in the various measures of output. Consequently, we picked the peak month based on the clear signal in employment, as well as our consideration of output and other measures. In that cycle, as well, the dating of the trough relied primarily on output measures.Q: Isn't a recession a period of diminished economic activity?
A: It's more accurate to say that a recession–the way we use the word–is a period of diminishing activity rather than diminished activity. We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough. The time in between is a recession, a period when economic activity is contracting. The following period is an expansion. As of September 2010, when we decided that a trough had occurred in June 2009, the economy was still weak, with lingering high unemployment, but had expanded considerably from its trough 15 months earlier.
Q: How do the movements of unemployment claims inform the Bureau's thinking?
A: A bulge in jobless claims usually forecasts declining employment and rising unemployment, but we do not use the initial claims numbers in determining our chronology, partly because of noise in that data series.
Q: What about the unemployment rate?
A: The unemployment rate lags behind the NBER cycle dates as a general matter–it reaches a low point somewhat later than the peak in activity and usually remains at high levels after activity reaches its trough. For example, in the recovery beginning in March 1991, the unemployment rate continued to rise for 15 months after the trough. The lag was 19 months in 2001 to 2003. In the current recovery, the lag was only 4 months, from the trough in activity in June 2009 to the highest point of the unemployment rate in October 2009. But even in September 2010, the unemployment rate remained at high levels, even though these levels were below the maximum reached in October 2009.
Yesterday's Markets
The equity markets were very quiet yesterday. Prices dipped down after the open, eventually finding support at 122. Prices then rallied a bit, but really found a "center of gravity" at 122.35.
A very mellow trading day is to be expected, especially after last weeks jump higher (a) and ascent (b). Prices have spent the last day and a half in a very narrow trading range (c).
After a big jump higher (a) Treasury prices are drifting lower (b). However, they are still above key, short-term levels.
After consolidating losses (A), lumber is now in a small uptrend (B) which has been accompanied by two downward sloping pennant patterns to consolidate gains (C and D). The EMA picture has turned bullish (E), although the MACD is nearing a sell signal.
Gold is still in a strong uptrend (A). Although it sold off recently (B) it never moved below its long-term trend line. Now prices are making new highs (C). The EMA picture is strong (D) and the MACE has given a buy signal (E)..
Monday, November 8, 2010
"American Economic Policy in the 1980's" A Book Review
SilverOz here. In what I believe is a first for the Bonddad Blog, I am going to be writing a book review of an excellent tome I recently finished that was produced by the National Bureau of Economic Research (NBER) in 1994. The book is edited by (and is essentially a conference report) and comes with an introduction from Martin Feldstein and includes essays by many who were intricately involved in the formulation (or oversight) of economic policy during that decade of decadence (including Paul Volcker, David Stockman, Paul Krugman, and many more). "American Economic policy in the 1980's" is broken up into twelve chapters, each of which details a specific policy area during the decade in excellent first hand economic detail. These chapters include: a personal overview by Feldstein, monetary policy, tax policy, budget policy, exchange rate policy, economic regulation, health and safety regulation, financial regulation, antitrust policy, trade policy, LDC debt policy, and policy toward the aged. I will provide a brief synopsis of some of the highlights of the book in the review that follows.
Feldstein et al have done an excellent job of providing us with an overview of the economic policy of the decade through a window that was still close enough to the time period in question to prevent longer term changes in perception from skewing the reasons why certain policies were undertaken at the time. The book itself reads like an economic version of "Only Yesterday" by Frederick Lewis Allen (one of my all time favorite history books), as it is written without much time bias and thus stays very true to the thinking of the 1980's.
A couple of interesting notes from the book include that the Economic Recovery Tax Act of 1981 did not (as proposed by Reagan) include bracket indexing (the bracket indexing is really what ended up creating the large gap between revenues and spending as the decade went on, not the cuts themselves). The sudden and complete victory over inflation likely had more of an impact on the deficit than the cuts themselves, since the bracketing was delayed until 1985 (which under the assumed paradigm would have limited the "real" impact of the tax cuts), thus moving up the victory over inflation to 1982 made virtually all of the cuts "real" even before bracketing could lock them in place. And that a fair amount in the act was actually "bid up" by Democrats in an effort to offer their own alternative and eventually most of the proposals were included in the final bill. Another interesting note (although one fairly widely known) is that "too big to fail" originated in 1984 with the bailout of Continental Illinois Bank which is discussed in this book by some of the very individuals who worked on the case.
Overall, the book does an excellent job of explaining and providing background rational and economic logic behind many of the financial and economic policies in the 1980's from a perspective that is (for the most part) uncomplicated by political agendas or time horizons that have changed the outcomes of certain policies well beyond their initial intent. My favorite quote from the book comes from Robert E. Litan's essay on "U.S. Financial Markets and Insitutions in the 1980s: A Decade of Turbulence" where he states (and remember, the essay was written before 1994) "ultimately more significant, advances in data-processing made it possible for quasi-governmental financing agencies and private investment banks to "securitize" mortgage instruments by packaging them into bundles and then distribute units of the resulting trusts to individual investors, nonbank financial institutions (pension funds, mutual funds, and insurance companies), as well as to depositories. By turning formerly illiquid loans into tradeable commodities, the securitization process was gradually undermining the economic rationale for depository institutions as specialized evaluators and monitors of credit; markets instead were providing that role" (pg 525). This shows that mortgage securitization was something that caused worry even back in the 1980's and early 90's. That may be the most unique foresight about a financial innovation that took off in the 1980's and its impact on our economy today from a period well before securitization has entered the modern nomenclature.
My final word is that this book is well worth its relatively high cost for those interested in either economic policy formations or for a unique look at the 1980s as a decade.
Feldstein et al have done an excellent job of providing us with an overview of the economic policy of the decade through a window that was still close enough to the time period in question to prevent longer term changes in perception from skewing the reasons why certain policies were undertaken at the time. The book itself reads like an economic version of "Only Yesterday" by Frederick Lewis Allen (one of my all time favorite history books), as it is written without much time bias and thus stays very true to the thinking of the 1980's.
A couple of interesting notes from the book include that the Economic Recovery Tax Act of 1981 did not (as proposed by Reagan) include bracket indexing (the bracket indexing is really what ended up creating the large gap between revenues and spending as the decade went on, not the cuts themselves). The sudden and complete victory over inflation likely had more of an impact on the deficit than the cuts themselves, since the bracketing was delayed until 1985 (which under the assumed paradigm would have limited the "real" impact of the tax cuts), thus moving up the victory over inflation to 1982 made virtually all of the cuts "real" even before bracketing could lock them in place. And that a fair amount in the act was actually "bid up" by Democrats in an effort to offer their own alternative and eventually most of the proposals were included in the final bill. Another interesting note (although one fairly widely known) is that "too big to fail" originated in 1984 with the bailout of Continental Illinois Bank which is discussed in this book by some of the very individuals who worked on the case.
Overall, the book does an excellent job of explaining and providing background rational and economic logic behind many of the financial and economic policies in the 1980's from a perspective that is (for the most part) uncomplicated by political agendas or time horizons that have changed the outcomes of certain policies well beyond their initial intent. My favorite quote from the book comes from Robert E. Litan's essay on "U.S. Financial Markets and Insitutions in the 1980s: A Decade of Turbulence" where he states (and remember, the essay was written before 1994) "ultimately more significant, advances in data-processing made it possible for quasi-governmental financing agencies and private investment banks to "securitize" mortgage instruments by packaging them into bundles and then distribute units of the resulting trusts to individual investors, nonbank financial institutions (pension funds, mutual funds, and insurance companies), as well as to depositories. By turning formerly illiquid loans into tradeable commodities, the securitization process was gradually undermining the economic rationale for depository institutions as specialized evaluators and monitors of credit; markets instead were providing that role" (pg 525). This shows that mortgage securitization was something that caused worry even back in the 1980's and early 90's. That may be the most unique foresight about a financial innovation that took off in the 1980's and its impact on our economy today from a period well before securitization has entered the modern nomenclature.
My final word is that this book is well worth its relatively high cost for those interested in either economic policy formations or for a unique look at the 1980s as a decade.
Google trends: "double dip recession"
- by New Deal democrat
Adieu double-dip? ....
By the way, in case you missed it, a couple of weeks ago, ECRI's Lakshman Achuthan went on record stating definitively that the weakness in their Weekly Leading Index earlier this year does not portend a double dip recession.
Adieu double-dip? ....
By the way, in case you missed it, a couple of weeks ago, ECRI's Lakshman Achuthan went on record stating definitively that the weakness in their Weekly Leading Index earlier this year does not portend a double dip recession.
Recovery On?
Last week, we had several very positive economic reports -- both ISM indexes increased and the employment report was surprisingly good (we also saw increases in PMIs from other countries: China, India and Britain). That led me to start thinking whether or not the recovery -- which was on track until May and then dropped like a stone -- is back on track. Before I get to that, let's look at a few very important events over the last approximately six months to get a handle on what has been happening.
The Greek crisis started in April, when a massive budget deficit was announced. Much confusion and fear followed, with the ECB eventually agreeing on a bail-out package in early May. However, by then the damage was done. There was talk of bail-outs and impending crisis throughout the EU area. This event led to a big spike in Libor, which is a very important short-term funding rate that is used throughout the world. As such, there was tremendous negative pressure in economies throughout the world.
In the US, we had several events that hurt the domestic recovery. The first was the expiration of the first time homebuyer tax credit. The tax credit boosted sales through the summer, but led to a massive drop-off in sales after expiration. Secondly, there was repeated budget wrangling in Washington regarding unemployment benefits and aid to states. This on again/off again situation created havoc at the state level, where some states had already budgeted in federal grants, only to have to scramble when the aid was not forthcoming. Third, we had the BP gulf disaster, which had a negative impact on the gulf states.
So, through the end of the summer there were several events that "stalled" the recovery that was progressing at a good pace until say March. Note that overall GDP growth did not crash, although it did slow. However, last week there were three economic releases that gave signs the recovery -- which has been frozen for the last approximately six months -- is back on.
The first sign of this was the rally in industrial metals.
Click for a larger image.
Prices fell in reaction to the Greek crisis, but started to rally at the beginning of the summer and are now in a strong rally.
In addition, last week three indicators were released that showed considerable strength in the economy.
ISM Manufacturing:
Let's take a look at some numbers from the report:
As the chart of the composite index shows, the overall number was slightly weaker month to month for the last few months, although it never dropped to recession levels. However, last month's print was incredibly strong, as noted by the report. In addition, individual components were strong.
The chart above shows the new orders index was dropping and getting close of overall recessionary levels. However, last month's increase was the strongest we've seen in nearly two years.
The overall index dropped for a few months -- but again, never to recessionary levels -- and printed a strong number last week.
Interestingly, both apparel and leather goods (consumer non-durables) showed an increase, probably in anticipation of the holiday shopping season.
The manufacturing sector was pointing toward a slowdown. But the latest ISM number was very strong, indicating a new round of strength might be approaching.
Let's turn to the ISM non-manufacturing index:
Let's look at the data:
This number dipped a bit over the last few months, but not to the degree as the manufacturing number. However, last month the overall index printed an increase.
Let's take a look at the data:
This number was decreasing for three straight months, but last months print was incredibly strong. And there was also a nice jump in new orders
Bottom line: the ISM services looks to be improving as well.
However -- let me add a big caution: this is one month of data. The fact both prints occurred within a week and showed strong levels is important, but should be kept in perspective.
Finally, last week the employment report printed its best numbers in a long time . I covered this report here and here.
There are still issues in the economy that need to be addressed. The big one is initial unemployment claims, which are still printing in the 4500,000/week range. That number has been troubling me since the mid-summer. Oil is now at $86/bbl and approaching key price levels that could hurt a recovery. There are still states that need to pretty big help.
However, the pace of the good numbers last week and the fact they occurred is such a short time span is encouraging.
The Greek crisis started in April, when a massive budget deficit was announced. Much confusion and fear followed, with the ECB eventually agreeing on a bail-out package in early May. However, by then the damage was done. There was talk of bail-outs and impending crisis throughout the EU area. This event led to a big spike in Libor, which is a very important short-term funding rate that is used throughout the world. As such, there was tremendous negative pressure in economies throughout the world.
In the US, we had several events that hurt the domestic recovery. The first was the expiration of the first time homebuyer tax credit. The tax credit boosted sales through the summer, but led to a massive drop-off in sales after expiration. Secondly, there was repeated budget wrangling in Washington regarding unemployment benefits and aid to states. This on again/off again situation created havoc at the state level, where some states had already budgeted in federal grants, only to have to scramble when the aid was not forthcoming. Third, we had the BP gulf disaster, which had a negative impact on the gulf states.
So, through the end of the summer there were several events that "stalled" the recovery that was progressing at a good pace until say March. Note that overall GDP growth did not crash, although it did slow. However, last week there were three economic releases that gave signs the recovery -- which has been frozen for the last approximately six months -- is back on.
The first sign of this was the rally in industrial metals.
Click for a larger image.
Prices fell in reaction to the Greek crisis, but started to rally at the beginning of the summer and are now in a strong rally.
In addition, last week three indicators were released that showed considerable strength in the economy.
ISM Manufacturing:
"The manufacturing sector grew during October, with both new orders and production making significant gains. Since hitting a peak in April, the trend for manufacturing has been toward slower growth. However, this month's report signals a continuation of the recovery that began 15 months ago, and its strength raises expectations for growth in the balance of the quarter. Survey respondents note the recovery in autos, computers and exports as key drivers of this growth. Concerns about inventory growth are lessened by the improvement in new orders during October. With 14 of 18 industries reporting growth in October, manufacturing continues to outperform the other sectors of the economy."
.....
Of the 18 manufacturing industries, 14 are reporting growth in October, in the following order: Apparel, Leather & Allied Products; Primary Metals; Petroleum & Coal Products; Machinery; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Fabricated Metal Products; Paper Products; Printing & Related Support Activities; Transportation Equipment; Computer & Electronic Products; Food, Beverage & Tobacco Products; Plastics & Rubber Products; and Chemical Products. The two industries reporting contraction in October are: Nonmetallic Mineral Products; and Furniture & Related Products.
Let's take a look at some numbers from the report:
Manufacturing continued to grow in October, and at an accelerated rate as the PMI registered 56.9 percent, an increase of 2.5 percentage points when compared to September's reading of 54.4 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
As the chart of the composite index shows, the overall number was slightly weaker month to month for the last few months, although it never dropped to recession levels. However, last month's print was incredibly strong, as noted by the report. In addition, individual components were strong.
ISM's New Orders Index registered 58.9 percent in October, which is an increase of 7.8 percentage points when compared to the 51.1 percent reported in September. This is the 16th consecutive month of growth in the New Orders Index and the largest month-over-month improvement since January 2009. A New Orders Index above 50.2 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars).The 11 industries reporting growth in new orders in October — listed in order — are: Apparel, Leather & Allied Products; Petroleum & Coal Products; Miscellaneous Manufacturing; Primary Metals; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Machinery; Food, Beverage & Tobacco Products; Computer & Electronic Products; and Transportation Equipment. The five industries reporting contraction in October are: Nonmetallic Mineral Products; Printing & Related Support Activities; Wood Products; Chemical Products; and Furniture & Related Products.
The chart above shows the new orders index was dropping and getting close of overall recessionary levels. However, last month's increase was the strongest we've seen in nearly two years.
Here's a chart of the data:ISM's Production Index registered 62.7 percent in October, which is an increase of 6.2 percentage points from the September reading of 56.5 percent. This is the largest month-over-month improvement since January 2010. An index above 51 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. This is the 17th consecutive month the Production Index has registered above 50 percent.
The 11 industries reporting growth in production during the month of October — listed in order — are: Apparel, Leather & Allied Products; Primary Metals; Fabricated Metal Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Machinery; Transportation Equipment; Paper Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; and Chemical Products. The two industries reporting contraction in October are: Nonmetallic Mineral Products; and Furniture & Related Products.
The overall index dropped for a few months -- but again, never to recessionary levels -- and printed a strong number last week.
Interestingly, both apparel and leather goods (consumer non-durables) showed an increase, probably in anticipation of the holiday shopping season.
The manufacturing sector was pointing toward a slowdown. But the latest ISM number was very strong, indicating a new round of strength might be approaching.
Let's turn to the ISM non-manufacturing index:
"The NMI (Non-Manufacturing Index) registered 54.3 percent in October, 1.1 percentage points higher than the 53.2 percent registered in September, and indicating continued growth in the non-manufacturing sector at a slightly faster rate. The Non-Manufacturing Business Activity Index increased 5.6 percentage points to 58.4 percent, reflecting growth for the 11th consecutive month at a substantially faster rate than in September. The New Orders Index increased 1.8 percentage points to 56.7 percent, and the Employment Index increased 0.7 percentage point to 50.9 percent, indicating growth in employment for the second consecutive month and the fourth time in the last six months. The Prices Index increased 8.2 percentage points to 68.3 percent, indicating that prices increased significantly faster in October. According to the NMI, 11 non-manufacturing industries reported growth in October. Respondents' comments remain mixed about business conditions and vary by industry and company. The trend of the overall comments indicates that there are signs of economic stabilization."
Let's look at the data:
In October, the NMI registered 54.3 percent, indicating continued growth in the non-manufacturing sector for the 10th consecutive month. A reading above 50 percent indicates the non-manufacturing sector economy is generally expanding; below 50 percent indicates the non-manufacturing sector is generally contracting.
This number dipped a bit over the last few months, but not to the degree as the manufacturing number. However, last month the overall index printed an increase.
ISM's Non-Manufacturing Business Activity Index in October registered 58.4 percent, an increase of 5.6 percentage points when compared to the 52.8 percent registered in September. Ten industries reported increased business activity, and three industries reported decreased activity for the month of October. Five industries reported no change from September. Comments from respondents include: "Continued strength in core businesses and capital expenditures for balance of 2010" and "Increase in service calls/requests for service."
Let's take a look at the data:
This number was decreasing for three straight months, but last months print was incredibly strong. And there was also a nice jump in new orders
ISM's Non-Manufacturing New Orders Index grew in October for the 14th consecutive month. The index registered 56.7 percent, which is an increase of 1.8 percentage points from the 54.9 percent reported in September. Comments from respondents include: "Orders awarded that have been on customer hold" and "New projects approved."The 10 industries reporting growth of new orders in October — listed in order — are: Professional, Scientific & Technical Services; Mining; Educational Services; Finance & Insurance; Transportation & Warehousing; Accommodation & Food Services; Retail Trade; Information; Wholesale Trade; and Public Administration. The three industries reporting contraction of new orders in October are: Other Services; Construction; and Health Care & Social Assistance.
Bottom line: the ISM services looks to be improving as well.
However -- let me add a big caution: this is one month of data. The fact both prints occurred within a week and showed strong levels is important, but should be kept in perspective.
Finally, last week the employment report printed its best numbers in a long time . I covered this report here and here.
There are still issues in the economy that need to be addressed. The big one is initial unemployment claims, which are still printing in the 4500,000/week range. That number has been troubling me since the mid-summer. Oil is now at $86/bbl and approaching key price levels that could hurt a recovery. There are still states that need to pretty big help.
However, the pace of the good numbers last week and the fact they occurred is such a short time span is encouraging.
Sunday, November 7, 2010
Yesterday's Market
The QQQQs have been leading the way higher for some time. Notice they broke through key resistance in mid-October.
Last week, the SPYs broke through key resistance (a) as well.
And while the IWMs are still below key resistance, last week they gapped higher (a) which is always an important technical event.
In short, the combination of QEII and a spate of good economic reports moved the market higher.
Looking at last week's five minute price action, prices dropped on Monday, but consolidated in a pretty tight range for most of Tuesday and Wednesday (b). There was increased volatility after the Fed's decision (c). But the real move came Thursday AM with a big gap higher (d) and a continued move higher (e) for the rest of the day. Prices moved sideways on Friday, consolidating gains (f).
Taking a closer look at the dollar, notice prices are in a classic down, up, down, up, down, pattern.
The technical indicators underneath -- the A/D line, CMF line and MACD all indicated prices are going to reverse. But the question then becomes will this be a reverse of the overall downward trend of the last 6 months, or a chance to look for a good position to short overall? The answer I believe is the latter. First, consider the overall macro situation -- the Fed is engaging in QEII which has obvious negative consequences for the dollar. In addition, notice the EMAs are incredibly bearish -- the shorter EMAs are below the longer EMAs, all are heading lower and prices are below the EMAs. This tells us the trend in all major time frames (short, intermediate and long) is down. This obviously has bullish implications for commodities.
The long-end of the Treasury market is in a downward sloping pennant pattern (a). also note the shorter EMAs are becoming more and more bearish -- the shorter are below the longer and all are moving lower. Finally, prices are clustering around the 200 day EMA -- the demarcation line between bull and bear market.