Saturday, June 25, 2016
Friday, June 24, 2016
I'd like to offer a rebuttal to NDDs post about the potential impact of Brexit on the US. To that end, consider these points from Fed President Lael Brainard:
The notable effects of recent crosscurrents from abroad should lay to rest any remaining lore that the United States is a closed economy. Financial linkages between the United States and foreign economies are immediate and extensive. Equity prices, long-term interest rates and risk spreads, and exchange rates show strong reactions to developments abroad, and, in recent months, foreign developments have at times been the dominant factor driving U.S. financial conditions. Weak foreign aggregate demand, as well as accompanying accommodative monetary policies in the euro area and Japan, and diverging expectations have been key among the factors causing a significant 10 percent appreciation of the dollar since last June. To the extent that exchange rate appreciation exerts a tightening force on financial conditions in the United States, it delays the return of U.S. interest rates to more normal levels
While trade is a smaller share of the U.S. economy than in many other economies, exchange rate changes of the magnitude seen recently can have large effects on aggregate demand. We have already seen a large negative contribution of net exports to U.S. GDP growth in the past two quarters. In addition, because some models estimate that exchange rates’ effect on net exports can last up to three years, it is possible that the drag from net exports will persist for some time.
Downgrades to foreign growth affect the U.S. outlook through several channels. First, weak growth abroad reduces demand for U.S. exports. Second, the expected divergence in U.S. growth increases demand for U.S. assets, putting upward pressure on the dollar, which, in turn, weighs on net exports. The estimated effect of dollar appreciation on net exports has been shown to be substantial and to persist for several years. Weak demand weighs on global commodity prices, which, together with the effects on the dollar, restrains U.S. inflation. Finally, the anticipation of weaker global growth can make market participants more attuned to downside risks, which can reduce prices for risky assets, both abroad and in the United States--as we saw in late August--with attendant effects on consumption and investment
Over the past year, a feedback loop has transmitted market expectations of policy divergence between the United States and our major trade partners into financial tightening in the U.S. through exchange rate and financial market channels. Thus, even as liftoff is coming into clearer view ahead, by some estimates, the substantial financial tightening that has already taken place has been comparable in its effect to the equivalent of a couple of rate increases.
To Brainard's comments, here's a 5-year chart of the dollar:
While the overall value was moving lower, expect it to catch a strong bid thanks to the Brexit vote.
All of this is occurring when future US growth is slowing. Consider this chart of the LEIs from Doug Short:
While the Atlanta Fed's GDP nowcast is predicting 2Q growth of 2.8%, the NY Fed's is lower at slightly over 2%. And the long leading indicators are mixed: corporate profits are lower while building permits at moving sideways. The only strong long leading indicators are M2 and Baa yields.
I certainly hope that NDD is right about this. But personally, I'm more concerned about the potential negative global feedback loops that exist.
- by New Deal democrat
I see where Bonddad has already waded in with his opinion re Brexit, so I thought I would add a few words.
1. The title of this post is the english translation of a Japanese proverb, which succinctly describes a crisis that does not much affect the locals. Earlier this morning the stock market futures in the US were off 5%. Does anyone really think that the UK potentially leaving the EU means that the US economy is suddenly worth 5% than it was yesterday? If Wall Street insists on putting US corporate stocks on sale, well . . . . .
2. The British had the cajones to do what the Greeks did not. The EU has all - or at least the lion's share - of the negotiating power, until the weaker player gets up and actually leaves the negotiating table. The Greek government and via polling its people made clear they were never going to leave the Euro, hence they were squashed like bugs. Now that the Brits have actually pulled the trigger, it is the EU which has the most to lose.
3. Which means that it is premature to assume that this is "Game Over" for the UK's participation in the EU. In the US there is a high bar to enacting a Constitutional Amendment -- 51.9% support ain't nearly enough. Apparently the actual Parliament, which must approve Brexit, is opposed. Meanwhile if Brexit moves forward, it appears likely the UK itself will see Scexit and Noirexit. Which leaves lots of room for Parliament to delay carrying out the results of the referendum to see if the EU can come up with a package of reforms that will satisfy the British while keeping them inside the fold. If that were to happen, a second referendum might well have a different result.
4. If Brexit does occur, it will certainly be a shame for Europe. The EU is perhaps the best thing to happen to Europe for peace in 100s of years, and anything that unravels that is a big loss. But the fact remains, from the North American point of view, it is a fire across the river (or Pond).
1-Year Chart of the Colombian ETF
New Orders are Dropping Due to Weak International Demand
Daily Chart of Japanese ETF
Chinese bankruptcies have surged this year as the government uses the legal system to deal with “zombie” companies and reduce industrial overcapacity as part of a broader effort to restructure the economy.
Courts in China accepted 1,028 bankruptcy cases in the first quarter of 2016, up 52.5 per cent from a year earlier, according to the Supreme People’s Court. Just under 20,000 cases were accepted in total between 2008 and 2015.
China’s legislature approved a modern bankruptcy law in 2007 but for years it was little used, with debt disputes often handled through backroom negotiations involving local governments.
Two of Donald Trump’s economic advisers, Lawrence Kudlow and Stephen Moore, have revived an idea about the source of the financial crisis that really should have been put to rest long ago.
In a column published and rebroadcast by many politically sympathetic sites, they lay the blame for the credit crisis and Great Recession on the Community Reinvestment Act, a 1977 law designed in part to prevent banks from engaging in a racially discriminatory lending practice known as redlining. The reality is, of course, that the CRA wasn’t a factor in the crisis.
Thursday, June 23, 2016
The Chemical Activity Barometer, published monthly by the American Chemistry Council since 1919, has jumped 3% in the past 3 months, and is up 2.5% in the past year. This strongly suggests that industrial production—which has been quite weak for the past year or so (due in part to the big slowdown in oil drilling and exploration)—will pick up in coming months. This should go hand in hand with stronger GDP numbers over the course of the year as well. Definitely good news.
Daily Chart of XLIs
3 Year Chart of the XLIs/SPYs
Truck tonnage, shown in the chart above, has also picked up this year. The February spike had looked a bit anomalous, but the May reading confirms that activity has picked up over the course of the year. Chemical activity and truck tonnage both track actual physical activity in the economy, and both are pointing to improvement.
1-Year Chart of the IYTs
Wednesday, June 22, 2016
1-Year Chart of India ETF
5-Year Chart of Annualized India Growth
Readers of the latest edition of the Federal Reserve Bank of Dallas's quarterly southwest economy publication might want to keep that quote in mind. News from the oil patch — the 11th Fed district that encompasses the shale heartland — is not encouraging, as it reveals a sharper rise in souring energy-related loans.
"The persistence of relatively low oil prices has begun taking a toll on district bank customers," the Dallas Fed said in its report. "Oil-price hedges become less effective the longer prices stay low, and the cushion built by energy firms during the good times gets thinner. Cash flow becomes stretched and collateral loses its value, further pressuring borrowers." That forces them closer to default unless banks are able to keep their lending spigots open.
Chart of Southwest Regional Banks From FINVIZ.com
Biotechnology-related exchange traded funds are stuck in a malaise, with the underlying biotech sector declining for the ninth consecutive session, its longest selloff in a twenty years.
Since June 6, the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB), which tracks the Nasdaq Biotechnology Index, declined 10.3%.
The underlying Nasdaq Biotechnology benchmark dropped 10% since June 6 as Biogen (NasdaqGS: BIIB) dragged on the index after plunging 18% in response to a failed mid-stage trial of its experiment drug for multiple sclerosis, Bloomberg reports.
Tuesday, June 21, 2016
- by New Deal democrat
The White House's Council of Economic Advisors has put out a report on the decline in labor participation by prime age males. Here's the link:
The prose is somewhat dense, but the report is well worth reading. They generally dismiss increases in people collecting disability and household responsibilities as drivers, and focus on low wages and the burgeoning incarceration rate as drivers.
The importance of incarceration is a major contribution (generally, that men who have been incarcerated find it nearly impossible to get a decent job thereafter). I'm not sure I buy into the remainder of the analysis. For example, the increase in household responsibilities is found to be inconsistent with responses to the Time Use Survey. But that is, in turn, inconsistent with what men are telling the Census Bureau in the monthly CLS. Why is one result from a different survey accepted over the result from the very same survey giving rise to the labor force participation rate itself? The CEA doesn't explain.
Anyway, lots of grist of the mill. Once I've taken a deeper look, I will probably post more in detail.
Economists Zarek Brot-Goldberg, Amitabh Chandra, Benjamin Handel, and Jonathan Kolstad studied a firm that, in 2013, shifted tens of thousands of workers into high-deductible insurance plans. This was a perfect moment to look at how their patterns of care changed — whether they did, in fact, use the new shopping tools their employer gave them to compare prices.
Turns out they didn't. The new paper shows that when faced with a higher deductible, patients did not price shop for a better deal. Instead, both healthy and sick patients simply used way less health care.
"I am a little bit surprised at just how poorly patients were able to do when looking at very similar products, like MRI scans, and with a shopping tool," says Kolstad, an economist at University of California Berkeley and one of the study's co-author. "Two years in, and there's still no evidence they're price shopping."
This raises a scary possibility: Perhaps higher deductibles don't lead to smarter shoppers but rather, in the long run, sicker patients.
1-Year Chart of Coal ETF
1-Year Chart of Wind Power ETF
Chart Comparing Coal and Wind ETF Performance
Monday, June 20, 2016
A note from Bonddad: my apologies for the lack of linkfests over the last few weeks. I have to admit that the presidential race, particularly the "Trump" situation, has been absolutely fascinating and terrifying. Never in my life have I seen a likely nominee this incompetent, incoherent and nutty. Nor have I ever seen someone who is so inept and terrifying from a policy perspective. And to top it off, he's splitting the Republican party in a fundamental way.
I have written many times for over a year that the Fed will have a period when they start soul-searching. They will realize that the business cycle got away from them and they will not be able to normalize rates. They just got too far behind the curve.
There is hardly any spare capacity left. Profit rates and top line revenue peaked at the end of 2014. The Fed rate is too far behind the curve. The Fed will not be able to raise rates going forward without triggering a contraction.
The Fed is frustrated. They want to normalize rates, but won’t be able to.
The soul-searching has begun.
The 10-2 Year Spread Points to Slow Growth
The 30-20 Year Spread Points to Slow Growth
Corporate Profits Have Been Moving Sideways Since 2012
The IEFs Are Still Rallying
The TLTs Are Near Multi-Year Highs
Recession chatter is on the rise lately. “After seven years of expansion, the U.S. economy appears to be headed for a recession,” writes an economics lecturer at Yale. Meanwhile, Bloomberg this week advised that US recession odds increased to 55% due to a flattening yield curve. And a survey of 400 real estate professionals shows that a majority expect a recession within the next 18 months. The dark forecasts may be right—or wrong. Based on the available data to date, however, the probability is still low that the US economy has fallen into an NBER-defined recession in the recent past.
Notice how the dollar's rise negatively impacted manufacturing employment:
This downward march of safe yields is a consequence of the safe asset shortage problem. What we are seeing in Germany is just the latest manifestation of it. What the above figure should make clear is that this safe asset shortage problem has been going on outside of QE programs and before central banks started doing negative interest rates. So don't blame central banks for the low interest rates.1
This downward march of safe yields across the globe is a big deal. It indicates the global economy needs more safe assets and lower interest rates to clear. However, at some point, the effective lower bound (ELB) will kick in and prevent rates from going lower. When that happens something else will have to adjust--output--and there will be a global race to the ELB. Here is Caballero, Fahri, and Gourinchas (2016) making this point...