Saturday, July 2, 2016
Friday, July 1, 2016
Solid June ISM, new orders point to receding recession threat
- by New Deal democrat
This post is up at XE.com.
There will be wailing and gnashing of teeth in the Doomer camp.
How "the Ultimatum Game" explains the Populist backlash to Globalism
- New Deal democrat
All over the developed world there has been an erupting surge of both left-wing (Sanders, Corbyn, Syriza in Greece, Podemos in Spain) and right-wing (Trump, UKIP, France's LePen) populism. The global elites recoil in horror. According to most tellings of mainstream economic theory, aren't free trade and globalization supposed to benefit everybody?
The latest and most bracing example of populism in action was last week's Brexit vote, which has served to concentrate a lot of minds.
I wanted to share excerpts of several articles I've read in the alst 24 hours that taken together make for an AHA!!! moment.
First, here is an opinion piece from Ireland (I'm summarizing but I strongly encourage you to click through and read the entire article):
There is a lot of data suggesting that ‘immigration’ was the dominant concern for those who voted to leave the EU. This should not be too surprising. In the latest Eurobarometer data, immigration was cited as the main concern of UK citizens . . . .
According to YouGov data, which is more revealing, income was the best predictor as to whether someone intended to vote to leave or remain. Basically, the lower your income, the more inclined you were to vote leave....
....
The precise data on how particular communities and constituencies across England voted is perhaps most revealing. The poorest twenty districts [those with the most wage stagnation] in England overwhelmingly voted to leave the EU. . . .
Brexit ... was a counter-reaction to a political economic system that is perceived to be designed in the interest of the comfortable elite.
So why did Britain's lower classes vote for something that almost surely will harm their economy in the aggregate?
Because human beings are hard-wired for strong reciprocity, i.e., most people will do some harm to their own situation in order to inflict an even greater loss on someone who is perceived as not being fair.
And here, as I've read in several articles this morning, is where the ultimatum game comes in. In the Ultimatum Game, one player is given $100 with complete discretion as to how much to share with a second player, whose only power is to accept or reject the division. While a strictly rational economic player would accept even a $1 share, in real life most people reject any share under $30. In so doing they harm themselves, but inflict even more harm on the greedy player, enforcing altrusim over the longer term. And so:
Because human beings are hard-wired for strong reciprocity, i.e., most people will do some harm to their own situation in order to inflict an even greater loss on someone who is perceived as not being fair.
And here, as I've read in several articles this morning, is where the ultimatum game comes in. In the Ultimatum Game, one player is given $100 with complete discretion as to how much to share with a second player, whose only power is to accept or reject the division. While a strictly rational economic player would accept even a $1 share, in real life most people reject any share under $30. In so doing they harm themselves, but inflict even more harm on the greedy player, enforcing altrusim over the longer term. And so:
These votes on Brexit and Trump that are being so widely decried need to serve as a wake up call. Yes, trade, globalisation, immigration are good things. They have grown the pie immeasurably.
But playing the ultimatum game and screwing the second player — those folks being screwed won’t care how much the pie is being grown if they feel they’re not getting a fair slice.
And there, dear readers, is both left and right wing populism in a nutshell.
In the real world, this game is being played ouit in many rounds by many players, in election after election. And it looks like it will take many more Brexit-type votes for the mesage to sink in. The first reaction by mainstream European economists after the Brexit vote was to call for even more austerity! As put by that same opinion piece from Ireland I cited above:
In the real world, this game is being played ouit in many rounds by many players, in election after election. And it looks like it will take many more Brexit-type votes for the mesage to sink in. The first reaction by mainstream European economists after the Brexit vote was to call for even more austerity! As put by that same opinion piece from Ireland I cited above:
This realisation, however, does not seem to have seeped through to policymakers in the EU or Germany, who, despite a near complete destabilisation of the parliamentary party system in Southern, Eastern and Central Europe, remain committed to their failed neoliberal economic adjustment of austerity induced cost competitiveness.I do think Brexit and, to a lesser extent, the nomination of Donald Trump by the GOP are watershed moments, where the elites in powerful Western nations have been suddenly and utterly swept aside. I expect this to be a dominant theme in politics over the next 10 years or more, as the neoliberal centrist consensus is destroyed and the left and right offer competing visions of a New Deal 2.0 vs. neofascism to replace it.
Bonddad Friday Linkfest
A comment I heard several times from "Leave" proponents is that the United Kingdom has fifth-largest economy in the world, and even outside the EU, it will remain an important player in the global economy. This argument strikes me as whistling in the dark. Yes, if GDP across countries is compared at market exchange rates, the United Kingdom ranks fifth (after the US, China, Japan, and Germany). But world GDP isn't a race, where finishing 5th of the 195 economies where the World Bank estimates a GDP level gives you a prize. Absolute size matters, and the UK is only about 3.8% of the global economy by size. In other words, if countries don't want to deal with the UK for whatever reason, there are lots of other options out there. If one compares GDP across countries using "purchasing power parity" exchange rates, then the UK ranks only 10th in the world, and is 2.4% of the total world economy. One of the main economic justifications for the EU is that with an internal market of more than 500 million people, and with a total GDP exceeding either the US or China (at market exchange rates), members will be better-positioned both to trade within the group and to be part of better deals negotiated outside the group.
All this uncertainty has contributed to a form of economic post-traumatic stress disorder amongst households and businesses, as well as in financial markets – that is, a heightened sensitivity to downside tail risks, a growing caution about the future, and an aversion to assets or irreversible decisions that may be exposed to future ‘disaster risk’.7
There may be an affect heuristic at work. Put simply, long after the original trigger becomes remote, perceptions endure. They become embedded in economic narratives and their salience persistently affects risk perceptions and economic behaviour.
This point is not trivial. Research has shown that people who have experienced low returns throughout their lives, like the ‘Depression Babies’ of the 1930s, report lower willingness to take financial risk, are less likely to participate in the stock market, invest a lower fraction of their assets in equities, and are more pessimistic about future returns.8
Gove said he didn’t expect Article 50, which sets the exit process in motion, to be triggered this year.
Treasuries Are Rallying
The Yield Curve Continues to Narrow
The Pound is Probably Going Lower
5-year Chart of the Pound/Dollar
5-Year Chart of the Pound/Euro
Thursday, June 30, 2016
Bonddad Thursday Linkfest
Indeed, a growing literature suggests that globalisation has created a common factor in inflation developments, which goes beyond fluctuations in energy or commodity prices. Higher import volumes have increased the importance of international prices and wages relative to domestic ones, making the global output gap more relevant.[1]
In that context there are two types of factors that are significant for the global low inflation environment we face today: more cyclical factors that have put downward pressure on prices; and more structural factors that have lowered the equilibrium real rate and slowed down the response of the economy to monetary policy.
The first type of factors includes the large negative output gaps generated by the financial crisis and its aftermath, which still average 1% among G7 economies today.[2] This global slack has dampened in particular import and producer price inflation, both of which have been weak for several years among advanced economies. Prices set by producers in the euro area and those set by producers in trading partner countries are indeed highly correlated.[3]
Also depressing global inflation has been the slump in demand for energy and commodities linked to the slowdown in emerging markets. This has fed not just into lower headline inflation, but also into lower underlying inflation through its effect on costs and imported prices. Indeed, if one decomposes inflation for the average advanced economy, one finds that since mid-2014 there has been a notable rise in the global component, linked largely to oil and commodity price falls.
.....
That low interest rate environment is a consequence of a global excess of desired saving over planned investment, which results from rising net savings as populations plan for retirement; from increased demand for and lower supply of safe assets; from relatively less public capital expenditure in a context of slowing population growth in advanced economies; from the secular shift from industries intensive in physical capital to those more intensive in human capital; and from a slowdown in productivity growth that reduces returns on investment
Daily Chart of the IEV, the Europe Tracking ETF
Japanese IP Y/Y
Wednesday, June 29, 2016
Good news and bad news from the gas and commodity front
- by New Deal democrat
The good news is, it appears that gas prices have peaked for the summer (h/t GasBuddy):
Perhaps just as good, the YoY% changes in gas prices have been roughly stable at about -15% in the last few months:
This suggests that gas prices still haven't hit a secular bottom -- which is great for US consumers (and probably showed up in this morning's good report on personal spending).
The bad news is, resource extraction states are still taking it on the chin. With the last two reports in this week for June, here's what the regional Fed manufacturing new orders indexes look like:
- Empire State up +16.4 to +10.9
- Philly down -1 to -2.9
- Richmond down -14 to -14
- Kansas City up +7 to +4
- Dallas down -20.9 to -14.9
- Month over month rolling average: -2.5 from one month ago to -4
These are very volatile. For example, two months ago Richmond was at +18! But the less volatile average, which was positive in March and April, has now returned to being negative for two months in a row. I am still of the opinion that the shallow industrial recession centered on commodities is ebbing, as this longer term graph of the average of the 5 Fed indexes shows (h/t Calulated Risk):
Good news and bad news from the gas and commodity front
- by New Deal democrat
The good news is, it appears that gas prices have peaked for the summer (h/t GasBuddy):
Perhaps just as good, the YoY% changes in gas prices have been roughly stable at about -15% in the last few months:
This suggests that gas prices still haven't hit a secular bottom -- which is great for US consumers (and probably showed up in this morning's good report on personal spending).
The bad news is, resource extraction states are still taking it on the chin. With the last two reports in this week for June, here's what the regional Fed manufacturing new orders indexes look like:
- Empire State up +16.4 to +10.9
- Philly down -1 to -2.9
- Richmond down -14 to -14
- Kansas City up +7 to +4
- Dallas down -20.9 to -14.9
- Month over month rolling average: -2.5 from one month ago to -4
These are very volatile. For example, two months ago Richmond was at +18! But the less volatile average, which was positive in March and April, has now returned to being negative for two months in a row. I am still of the opinion that the shallow industrial recession centered on commodities is ebbing, as this longer term graph of the average of the 5 Fed indexes shows (h/t Calulated Risk):
Good news and bad news from the gas and commodity front
- by New Deal democrat
The good news is, it appears that gas prices have peaked for the summer (h/t GasBuddy):
Perhaps just as good, the YoY% changes in gas prices have been roughly stable at about -15% in the last few months:
This suggests that gas prices still haven't hit a secular bottom -- which is great for US consumers (and probably showed up in this morning's good report on personal spending).
The bad news is, resource extraction states are still taking it on the chin. With the last two reports in this week for June, here's what the regional Fed manufacturing new orders indexes look like:
- Empire State up +16.4 to +10.9
- Philly down -1 to -2.9
- Richmond down -14 to -14
- Kansas City up +7 to +4
- Dallas down -20.9 to -14.9
- Month over month rolling average: -2.5 from one month ago to -4
These are very volatile. For example, two months ago Richmond was at +18! But the less volatile average, which was positive in March and April, has now returned to being negative for two months in a row. I am still of the opinion that the shallow industrial recession centered on commodities is ebbing, as this longer term graph of the average of the 5 Fed indexes shows (h/t Calulated Risk):
Bonddad Wednesday Linkfest
Damian Kimmelman is exactly the kind of entrepreneur the U.K. government says it needs. His London startup has 100 employees and expects to hire many more. Unfortunately for the British economy, Kimmelman’s new people won’t be in the U.K.:
He changed his plans after voters chose to to leave the European Union last week.“We’ll be distributing our team, opening up new offices in Europe rather than focusing on the U.K.,” said Kimmelman, whose company, DueDil, provides data-analytics tools to study private companies. “This is a miserable outcome for the economy.”
Kimmelman is among thousands of U.K. businesspeople, investors and consumers overhauling their plans as a result of the Leave campaign’s surprise victory. Hiring is being canceled or moved overseas, investments terminated and expansions shelved.
It all adds up to what economists warn could be a sudden recession -- especially if politicians don’t act fast to lay out a convincing plan for extricating the U.K. from the EU without major disruption. Almost three-quarters of economists consulted in a Bloomberg survey this week said they think the country is headed for its first recession since 2009.
..........
While full economic statistics won’t come in for weeks, the early signs aren’t good. A survey of 1,092 business leaders conducted after the referendum by the Institute of Directors, a London-based business organization, found a quarter are freezing recruitment and almost as many are considering moving some operations out of the U.K. In a survey of 2,000 consumers by Retail Economics, a consulting firm, 58 percent said they thought the vote would have a negative impact on their spending on non-essential items.
Participation rose steadily from the 1970s through the 1990s as increasing numbers of women entered the formal workforce. That process ran its course, and, around the year 2000, participation began a gradual decline because of population aging and the continuation of other long-term trends, particularly the decline in participation among prime age males. From 2008 through 2013, participation dropped sharply by 3 percentage points, but has remained about flat, on net, since late 2013 in a context of strong job growth and declining unemployment. Economists estimate that, as the population ages, participation will naturally tend to decline at a trend rate of about 0.2 percentage point per year, so this period of flat participation actually represents an improvement against the post-crisis cyclical drop. Today, participation is near its longer-run trend as estimated by a group of Fed economists whose work is widely cited on these issues.2 Some other estimates suggest that there is still a shortfall in participation, and, of course, estimates of the trend participation rate are surrounded by fairly wide bands of uncertainty. I am inclined to believe that there are potential workers at the margins of the labor market who will return as the recovery continues, the labor market tightens further and wages increase. The U.S. participation rate for workers in the 25-54 age group is now below those of most other advanced economies, including the U.K., France and Germany, for example.
A Long-Term Chart of the LFPR
A Long-Term Chart of the LFPR between for Men and Women (Careful of the different scales)
U-6 Unemployment Rate
Atlanta Fed Wage Growth Tracker
Tuesday, June 28, 2016
Bonddad Tuesday Linkfest
6-Month and 5-Year Chart of the Pound/Dollar to Show Magnitude of Sell-off
1-Year Daily Chart of the SPYs
Prices have broken the uptrend started in February; they are now below the 200-day EMA and are resting on/near the first Fibonacci retracement level. Volume over the last 2 days has been very heavy. Momentum is declining.
1-Year Chart of the IEFs
In contrast, treasuries are at their highest level in a year.
Culturally constructed ignorance played a major role in the Brexit vote, as we shall see after a bit of explanation.
Monday, June 27, 2016
How Do I Know Brexit is a Bad Idea? Because the Guys at Powerline Say Not to Worry
Powerline's writers suffer from the Dunning-Kruger effect: they are too stupid to know that they are, well, stupid when it comes to economics. If you search this blog for the word "Powerline" you'll see ample documentation that clearly demonstrates their economic incompetence. But two stand out for special mention.
1.) Powerline's entire economic analysis for 2014 was wrong. And I mean 100% wrong. That level of incompetence has to be developed and nurtured.
2.) A big reason why they're wrong? They rely on conspiracy websites for their economic numbers and analysis.
Now we have Steven Hayword stepping up to the plate with this deep thought on Brexit:
Likewise I think Britain will survive just fine or likely prosper (just as California boomed immediately after Prop. 13), and the EU might even consider laying off some of the 1,750 linguists, 600 full-time interpreters and 3,000 freelancers it uses to facilitate its meetings in Brussels and Strasbourg (because what good is a European parliament if you can’t have multiple locations), or even eliminating some of the many mid-level Eurocrats who have salaries higher than Prime Minister Cameron
Does Mr. Hayword offer any analysis -- as in numbers, facts or figures? No. It's all going to be better now because the UK has thrown off the yoke of their oppressive EU overlords.
So, given that Powerline is a great contrary indicator, I'm going to reassert my argument that Brexit is a colossal blunder of epic proportions. You can read my reasoning here. But, that article does have facts and figures, so it's probably way beyond what Powerline's writers could understand.
1.) Powerline's entire economic analysis for 2014 was wrong. And I mean 100% wrong. That level of incompetence has to be developed and nurtured.
2.) A big reason why they're wrong? They rely on conspiracy websites for their economic numbers and analysis.
Now we have Steven Hayword stepping up to the plate with this deep thought on Brexit:
Likewise I think Britain will survive just fine or likely prosper (just as California boomed immediately after Prop. 13), and the EU might even consider laying off some of the 1,750 linguists, 600 full-time interpreters and 3,000 freelancers it uses to facilitate its meetings in Brussels and Strasbourg (because what good is a European parliament if you can’t have multiple locations), or even eliminating some of the many mid-level Eurocrats who have salaries higher than Prime Minister Cameron
Does Mr. Hayword offer any analysis -- as in numbers, facts or figures? No. It's all going to be better now because the UK has thrown off the yoke of their oppressive EU overlords.
So, given that Powerline is a great contrary indicator, I'm going to reassert my argument that Brexit is a colossal blunder of epic proportions. You can read my reasoning here. But, that article does have facts and figures, so it's probably way beyond what Powerline's writers could understand.
Bonddad Monday Linkfest
Daily Chart of the Europe ETF
Performance of US Equity Sectors for the Last Week and Month (FINVIZ)
Interestingly, this will help both Bank of England (BoE) Governor Mark Carney and European Central Bank (ECB) President Mario Draghi in their efforts to reach their inflation targets. A weak euro and a weak pound may also assist the terms of trade for Europe. But Brexit certainly has the potential to increase the friction of transacting with and within the United Kingdom and the EU, offsetting any benefit from a cheap currency.
5-year Chart of the Pound/Dollar
5-Year Chart f the Pound/Euro
5-Year Chart of the Euro/Dollar
The uncertainty of the situation and what comes next hit all markets in the wake of the vote, and emerging markets were not exempt, with the MSCI Emerging Markets Index experiencing a sharp decline. However, I believe once the initial shock wears off, the longer-term impact should be more limited since emerging markets’ trade and investment are widely diversified; the amount of trade with the United Kingdom is relatively small for most emerging market countries.
However, some specific emerging markets have greater ties to the United Kingdom, and the impact could be felt more acutely in those countries. Some of the Southeast Asian nations with historic ties to the United Kingdom could be negatively impacted. Specific companies with operations in the United Kingdom could be impacted—banks, for example, that have property investments in the United Kingdom (or branches there) that help fund their projects.
1-Year Chart of the EEM ETF
Existing home sales increased 1.8 percent month-over-month in May from the prior month to a seasonally adjusted annual rate of 5.53 million, the National Association of Realtors (NAR) said on Wednesday. That was the strongest pace since February 2007. NAR flagged support from low rates and accumulated equity (driving trade-ups). The number of new homes sold fell -6 percent in May, better than the -9.5 percent slump anticipated by economists polled by Bloomberg. The rejuvenated housing market has provided a boost to the economy, helping offset a slowdown in business spending and a downturn in the energy sector
1-Year Chart of the XHB
Sunday, June 26, 2016
Brexit: A Colossal Blunder
Instead of writing my three weekly articles, this week I've written a longer piece on the international implications of Brexit.
Here's a quick summary: there are no good ramifications.
Here's a link to the article at XE.com
Here's a quick summary: there are no good ramifications.
Here's a link to the article at XE.com
A thought for Sunday: as they peer into an abyss, the EU and UK should look to the example of Abraham Lincoln
- by New Deal democrat
In 1914, the combined Empires of Europe bestrode the entire world like a colossus. With deep interconnectedness of trade, and breathtaking industrial innovations, a future of plenty beckoned.
Just over 30 years later, Europe largely lay in ruins and ashes. If it were not for outside intervention, much of its surviving population would have starved to death.
From that cataclysm arose the European Project, which at its heart was a vow that by ever increasing unification the demon of War that had stalked the continent for many centuries would be vanquished.
Whatever the flaws of the Euro - and they appear to be fundamental - and whatever the lack of accountability of the Eurocrats, the fact remains that the underlying European Project is probably the single best political event to have occurred on that continent in centuries.
For nearly 70 years, the arc of history bent towards the "ever closer union" that was the heart of the enterprise. Until Thursday.
Now that a major country has voted to leave the EU, the question becomes just how much centrifugal force has been unleashed.
Let me be a blunt as possible: the demise of the European Project would be an unmitigated disaster for all humankind. A return to pre-1945 nationalism ought to be unthinkable.
At one level this shows that MInsky's economic insight -- that periods of stability breed instability -- applies to politics as well. Put another way, humanity is most at risk of dangers that have not been seen during the present generation's lifespan, as those who remember the relevant past and vow not to repeat its mistakes, pass away from the scene.
It is worth noting that in neither the UK nor Greece nor any other of the EU nations clamoring for some sort of exit, has there been any clamoring for ending NATO. That transatlantic alliance that binds European nation states to each other and to North America now resumes renewed importance.
In the meantime, European elites need to take to heart the complaints of the many millions who have seen nothing but privation and unaccountability out of the EU for the last decade. Soul-searching about the Euro, about the limits to immigration both within and from without, and about the toixc fruit of doctrinaireausterity, need to be a first-order priority. Abraham Lincoln's words to the devasted South in his second inaugural address in 1965 seem particularly apt:
With malice toward none, with charity for all, with firmness in the right as God gives us to see the right, let us strive on to finish the work we are in, to bind up the nation's wounds, ... to do all which may achieve and cherish a just and lasting peace among ourselves and with all nations.
If Lincoln could say that to the defeated slave States, then surely after EU soul-searching takes place, the resulting reforms should placed before the UK with an invitation to remain or to rejoin freely and without penalty.