- Consumer confidence at 5-year high (Marketwatch)
- Japan's retail sales fall most since Tsunami (Marketwatch)
- Official retail numbers (from Japan)
- US growth switching to more domestic oriented areas (BB)
- Korean manufacturers confidence falls second month (BB)
- India projects budget deficit at 3% of GDP by 2017 (FT)
- France's largest companies call for a decrease in their welfare burden (FT)
Monday, October 29, 2012
Bonddad Linkfest
Of Politics, Financial Crisis Recoveries and Complete Hacks
I've picked on John Taylor a great deal, largely because he continually compares this recovery to the 1980s recovery (see here and here). This comparison is wrong. It is 100% wrong. The reason is simple. The 1980s recession was inducted by the Fed increasing interest rates to a very high level in order to choke inflation out of the system. This recession was induced by a financial crisis. The last time we had something this severe was the Great Depression. For a complete explanation of this scenario, read the Debt Deflation Theory of Great Depressions.
Now, I'm not the only one who has noticed this. Krugman had this to say:
People have been asking me for a while to respond to John Taylor’s claim that financial-crisis-induced recessions aren’t characterized by slow recovery. It’s a very convenient claim for Romney/Ryan, of course, because if true it eliminates the best excuse for lackluster performance under Obama.
Well, Reinhart and Rogoff, who literally wrote the book on crises and their aftermath, have weighed in, and they’re not happy. They have two main complaints, both of which are completely valid.
The first is that looking at the rate of recovery from the trough is a very peculiar criterion — especially when, as Taylor does, you look only at the first year (!) of recovery. By this standard, the New Deal was a tremendous success story, because growth was fast in 1933-4. Never mind the fact that pre-crisis per capita GDP wasn’t restored for more than a decade. As R-R say, surely the relevant comparison is with the pre-crisis peak, especially given the fact that post-crisis economies often suffer periods of relapse (as is happening in Europe now).
The second is that Taylor is awfully free in designating recessions as the result of financial crisis. He counts 1973 and 1981 as financial crises, to which the only answer if you know your history is, what on earth is he talking about? These were both disinflation recessions, caused more or less deliberately by the Fed; the Fed pushed interest rates very high to calm prices, and a V-shaped recovery took place once the Fed decided we had suffered enough. This isn’t hindsight: the contrast between those kinds of recessions and the slump following the bursting of a housing bubble was the reason many of us predicted a long, slow recovery well in advance. (It’s been even slower than I predicted back then, but in early 2008 I didn’t realize how bad the debt overhang was).
(For more from RandR on this, see this link)
Then there is this observation from Martin Wolf at the Financial Times:
The first question is whether Prof Taylor is comparing like with like. Against him is widespread agreement that the aftermaths of systemic financial crises are worse than those of more normal downturns. The seminal research of Carmen Reinhart and Kenneth Rogoff in their classic book, This Time is Different, has shaped this consensus. It is also supported by the work of the economic historian Alan Taylor, of the University of Virginia, included in a recent paper entitled The Great Leveraging .
Profs Reinhart and Rogoff distinguish a “systemic financial crisis” as one characterised by a real estate bubble and high levels of debt. Neither of these preceded the recessions of 1973 and 1981, which are included in Prof Taylor’s chart. Both the precursors and results of the recent crisis were quite different from the downturns in the mid-1970s, early 1980s and early 1990s. This is true of real house prices, inflation, interest rates and debt (see chart).
Now we see that this disease of financial crisis denialism is spreading (Krugman again):
I managed to avoid reading this Times profile of Glenn Hubbard until now. Wow. But let me leave the consulting stuff to others, and talk about the bad economics.
Hubbard repeats what has now become the party line — that all deep recessions are the same, and that we should have had a V-shaped recovery from the crisis of 2008-2009, so that it’s all Obama’s fault:
This wasn’t just a political question: private-sector forecasters were divided, too. There were a number of people predicting the V. But they were wrong, and ended up either admitting that they were wrong or went silent.
The Reinhart-Rogoff data on aftermath of crises actually came well into this debate, but added to the conclusion that the recovery from 2008-2009 was likely to be nothing like the recovery from 81-82 or 74-75. And this was a view validated by theory, history, and, it turns out, by successful prediction in the current crisis.
So -- why is all of this important?
First, let's make two points: the argument that we should be recovering at a faster pace (like that experienced in the 1980s) is wrong -- as in 100% wrong. The data does not in any way support that conclusion (as an FYI, here are my thoughts on the pace of this current recovery from 2008). Second, the people that are spreading this tripe should know better. These are highly educated and intelligent people. Yet, they are subsuming with intelligence for the sake of their political party. And that is a very concerning issue. When the overwhelming conclusion of the data is not as important as fealty to a political lord, a very large problem exists.
But the bigger issue is the: the problem emerges that by sticking with this argument that we should be experiencing 1980s style growth, the proponents thereof would proscribe the exact wrong solution to the problem. Regarding the 1980s, standard supply side ideas would be appropriate -- cut rates and taxes, propose investment policies and you'll get solid growth. As one observer has noted:
Basically, supply-side policies work best when there is pent-up private sector demand. By lowering the cost of investment, you can unleash a self-reinforcing cycle. The bigger the pent-up demand, the bigger the payoff to an improvement in expectations. Without that pent-up demand, resources freed from supply-side measures and austerity get saved, not spent, and no self-reinforcing cycle is triggered.
But that's not what we're dealing with now. In fact, we're dealing with the exact opposite -- weak demand at the macro level. I explained the difference a few weeks ago:
Lack of demand means we have plenty of stuff, but not enough people are buying that stuff. Returning to the computer example from above, suppose we had plenty of computers, but there was a big inventory overhang. Let's assume this doesn't mean the industry has matured and is on the way out. What this means is there is either insufficient income to purchase these computers or insufficient credit to be expanded. That means that at the macro level we need to create income or increase the credit and or lending facility inherent in the overall system. Hence, the policy prescriptions between lack of supply and lack of demand are entirely different.
The way out of the above scenario is stimulus -- enough to increase incomes and therefore overall demand. This is what basic macro teaches (even Greg Mankiw's book advocates this policy, for God's sake).
So, let's assume Romney wins. His advisers now start proposing the wrong policies to kick-start the economy. What happens?
"I think there's a real chance that he'll manage to pursue a policy in the first couple of years that simultaneously blows up the deficit and depresses the economy," the Nobel Prize-winning economist said on HuffPost Live Wednesday. "Tax cuts for the rich, who won't spend them, and slash spending for the poor and the middle class, who will be forced to cut back. And so we end up managing to have a simultaneous deficit explosion and double-dip recession."
Now, I'm not the only one who has noticed this. Krugman had this to say:
People have been asking me for a while to respond to John Taylor’s claim that financial-crisis-induced recessions aren’t characterized by slow recovery. It’s a very convenient claim for Romney/Ryan, of course, because if true it eliminates the best excuse for lackluster performance under Obama.
Well, Reinhart and Rogoff, who literally wrote the book on crises and their aftermath, have weighed in, and they’re not happy. They have two main complaints, both of which are completely valid.
The first is that looking at the rate of recovery from the trough is a very peculiar criterion — especially when, as Taylor does, you look only at the first year (!) of recovery. By this standard, the New Deal was a tremendous success story, because growth was fast in 1933-4. Never mind the fact that pre-crisis per capita GDP wasn’t restored for more than a decade. As R-R say, surely the relevant comparison is with the pre-crisis peak, especially given the fact that post-crisis economies often suffer periods of relapse (as is happening in Europe now).
The second is that Taylor is awfully free in designating recessions as the result of financial crisis. He counts 1973 and 1981 as financial crises, to which the only answer if you know your history is, what on earth is he talking about? These were both disinflation recessions, caused more or less deliberately by the Fed; the Fed pushed interest rates very high to calm prices, and a V-shaped recovery took place once the Fed decided we had suffered enough. This isn’t hindsight: the contrast between those kinds of recessions and the slump following the bursting of a housing bubble was the reason many of us predicted a long, slow recovery well in advance. (It’s been even slower than I predicted back then, but in early 2008 I didn’t realize how bad the debt overhang was).
(For more from RandR on this, see this link)
Then there is this observation from Martin Wolf at the Financial Times:
The first question is whether Prof Taylor is comparing like with like. Against him is widespread agreement that the aftermaths of systemic financial crises are worse than those of more normal downturns. The seminal research of Carmen Reinhart and Kenneth Rogoff in their classic book, This Time is Different, has shaped this consensus. It is also supported by the work of the economic historian Alan Taylor, of the University of Virginia, included in a recent paper entitled The Great Leveraging .
Profs Reinhart and Rogoff distinguish a “systemic financial crisis” as one characterised by a real estate bubble and high levels of debt. Neither of these preceded the recessions of 1973 and 1981, which are included in Prof Taylor’s chart. Both the precursors and results of the recent crisis were quite different from the downturns in the mid-1970s, early 1980s and early 1990s. This is true of real house prices, inflation, interest rates and debt (see chart).
Now we see that this disease of financial crisis denialism is spreading (Krugman again):
I managed to avoid reading this Times profile of Glenn Hubbard until now. Wow. But let me leave the consulting stuff to others, and talk about the bad economics.
Hubbard repeats what has now become the party line — that all deep recessions are the same, and that we should have had a V-shaped recovery from the crisis of 2008-2009, so that it’s all Obama’s fault:
“It is absolutely possible, Ali, both in terms of models of policy effects on the recovery and historical experience,” he said, in a tone that was professorial but not patronizing, “If you look at the recovery from ’74, ’75, or ’81, ’82, you can easily get job growth in this range. We have the wrong policy mix. We’ve had a nasty shock, we’re in a different situation, but we could do a lot better.”Words fail me. Well, actually they don’t. Here are a few: Right at the beginning of the crisis, long before the people now advising Romney were even willing to admit that there was a problem, there was a debate between two ideas: that deep recessions were always followed by fast, V-shaped recoveries, and that financial-crisis recessions — which pushed monetary policy up against the zero lower bound — were followed by slow, “jobless” recoveries. Here’s my entry, from January 2008.
This wasn’t just a political question: private-sector forecasters were divided, too. There were a number of people predicting the V. But they were wrong, and ended up either admitting that they were wrong or went silent.
The Reinhart-Rogoff data on aftermath of crises actually came well into this debate, but added to the conclusion that the recovery from 2008-2009 was likely to be nothing like the recovery from 81-82 or 74-75. And this was a view validated by theory, history, and, it turns out, by successful prediction in the current crisis.
So -- why is all of this important?
First, let's make two points: the argument that we should be recovering at a faster pace (like that experienced in the 1980s) is wrong -- as in 100% wrong. The data does not in any way support that conclusion (as an FYI, here are my thoughts on the pace of this current recovery from 2008). Second, the people that are spreading this tripe should know better. These are highly educated and intelligent people. Yet, they are subsuming with intelligence for the sake of their political party. And that is a very concerning issue. When the overwhelming conclusion of the data is not as important as fealty to a political lord, a very large problem exists.
But the bigger issue is the: the problem emerges that by sticking with this argument that we should be experiencing 1980s style growth, the proponents thereof would proscribe the exact wrong solution to the problem. Regarding the 1980s, standard supply side ideas would be appropriate -- cut rates and taxes, propose investment policies and you'll get solid growth. As one observer has noted:
Basically, supply-side policies work best when there is pent-up private sector demand. By lowering the cost of investment, you can unleash a self-reinforcing cycle. The bigger the pent-up demand, the bigger the payoff to an improvement in expectations. Without that pent-up demand, resources freed from supply-side measures and austerity get saved, not spent, and no self-reinforcing cycle is triggered.
But that's not what we're dealing with now. In fact, we're dealing with the exact opposite -- weak demand at the macro level. I explained the difference a few weeks ago:
Lack of demand means we have plenty of stuff, but not enough people are buying that stuff. Returning to the computer example from above, suppose we had plenty of computers, but there was a big inventory overhang. Let's assume this doesn't mean the industry has matured and is on the way out. What this means is there is either insufficient income to purchase these computers or insufficient credit to be expanded. That means that at the macro level we need to create income or increase the credit and or lending facility inherent in the overall system. Hence, the policy prescriptions between lack of supply and lack of demand are entirely different.
The way out of the above scenario is stimulus -- enough to increase incomes and therefore overall demand. This is what basic macro teaches (even Greg Mankiw's book advocates this policy, for God's sake).
So, let's assume Romney wins. His advisers now start proposing the wrong policies to kick-start the economy. What happens?
"I think there's a real chance that he'll manage to pursue a policy in the first couple of years that simultaneously blows up the deficit and depresses the economy," the Nobel Prize-winning economist said on HuffPost Live Wednesday. "Tax cuts for the rich, who won't spend them, and slash spending for the poor and the middle class, who will be forced to cut back. And so we end up managing to have a simultaneous deficit explosion and double-dip recession."
Morning Market Analysis
The 30 minute SPY chart (top chart) shows that despite the hoopla surrounding the market narrative last week, the big downward move actually occurred between Monday's close and Tuesday's open. For the rest of the week, prices traded sideways. The 60 minute chart (middle chart) does indicate that prices are now below key support around the 142.5 area. The daily chart (bottom chart) shows that prices have broken below all the shorter EMAs (10, 20 and 50) and are now trading at a Fib fan level. However, momentum is dropping, prices are weakening and money is flowing out of the market, indicating that the most likely move over the short-term is down. The next price target would be 139.20.
The treasury market is not offering any upside hope from the equity market. The SHYs (1-3 years and shown in weekly form) is still at the upper end of its multi-year range (top chart). The IEIs (3-7 years, second from top, daily format) and IEFs (7-10 years, third from top, daily form) are both in the middle of a trading range/consolidation pattern while the TLTs (bottom chart, daily format) are at the upper end of a downward sloping channel. In fact, should the TLTs break through resistance, we'd have to conclude that the safety trade was back on in a big way.
Saturday, October 27, 2012
Weekly Indicators: no halloween fright here edition
- by New Deal democrat
The big economic news this week was that, in the rear view mirror, 3rd quarter GDP rose +2.0% on an annualized basis. Durable goods rose sharply, but not nearly enough to erase the huge decline in August. New home sales rose slightly. Consumer sentiment declined slightly from its 5 year high earlier this month.
A reminder: I watch high frequency weekly indicators not because they lead the economy, but because they are a snapshot of the virtual present, as opposed to looking in the rear view mirror. While there is plenty of noise, they should show turns or continuations in a trend before they show up in monthly or quarterly data.
Same Store Sales and Gallup consumer spending varied from weakly positive to outright negative:
The ICSC reported that same store sales for the week ending October 19 declined -0.7% w/w but were up +2.9% YoY. Johnson Redbook reported a weak 1.3% YoY gain. Johnson Redbook has consistently been lower than the other series for consumer spending. The 14 day average of Gallup daily consumer spending as of October 24 was $68, compared with $71 last year for this period. This is the first time since July that Gallup's YoY comparison has not been positive.
Bond yields were mixed and credit spreads narrowed further:
Weekly BAA commercial bond rates fell .05% more to 4.55%. Yields on 10 year treasury bonds, however, rose .08% to 1.79%. The credit spread between the two decreased to 2.76%, a new 15 month low. This continues an excellent trend, as it demonstrates a lack of fear of corporate default.
Housing reports were neutral to positive:
The Mortgage Bankers' Association reported that the seasonally adjusted Purchase Index fell -8%% from the prior week, but is up 7% YoY. These remain near the top end of their 2+ year range. The Refinance Index fell -13% for the week, retreating further from recent multi-year highs.
The Federal Reserve Bank's weekly H8 report of real estate loans this week decreased by 8, or-.02%, to 3530. The YoY comparison decreased to +1.2%, and is 1.5% above its bottom.
YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker increased +2.4% from a year ago. YoY asking prices have been positive for 10 1/2 months.
Money supply has been mixed in the last month or so but remains quite positive on a yearly basis:
M1 gained +1.2% for the week, and increased +1.1% month over month. Its YoY growth rate rose slightly to 13.1%. As a result, Real M1 also rose to +11.1% YoY. M2 rose +0.3% for the week, and was up 0.8% month over month. Its YoY growth rate also rose slightly to 7.2%, so Real M2 fell slightly to 5.2%. The growth rate for real money supply is still quite positive.
Employment related indicators were neutral to positive:
The Department of Labor reported that Initial jobless claimrowell 19,000 from last week's unrevised 388,000. The four week average rose 2,500 to 368,000, less than 1% above its post-recession low. Averaging the last two weeks' numbers is clearly the correct thing to do.
The American Staffing Association Index was again level at 95. The index is equal to its high reading for the year. The trend in this index is simialr to last year.
The Daily Treasury Statement showed that 18 days into October, $122.5 B was collected vs. $ 118.2 B a year ago, a $4.3 B or +3.6% increase. For the last 20 days ending on Thursday, $133.6 B was collected vs. $129.0 B for the comparable period in 2011, a gain of $4.6 B or 3.6%. The YoY comparison in tax collections has improved markedly since midyear.
Rail traffic remained negative YoY, but still due to coal, while the diffusion index decreased considerably:
The American Association of Railroads reported that total rail traffic was down -0.9% YoY. Non-intermodal rail carloads were again off a huge -4.4% YoY or -13,300, once again entirely due to coal hauling which was off -18,600. Excluding coal, carloads were actually up +13,800. Negative comparisons rose from 8 to 11 types of carloads. Intermodal traffic was up 8,500 or +3.5% YoY.
Finally, the prices of oil and gasoline fell, but gasoline usage was down slightly:
Gasoline prices fell $.13 last week to $3.69. This is nevertheless still very high. Oil prices per barrel declined from $90.05 to $86.28. Gasoline usage turned positive this week on a YoY basis. For one week, it was 8493 M gallons vs. 8501 M a year ago, down -0.1%. The 4 week average at 8611 M vs. 8767 M one year ago, was down -1.8%. The 4 week YoY decline is on top of the YoY decline last autumn.
Turning now to the high frequency indicators for the global economy:
The TED spread continued to fall to year another new 52 week low of 0.21. The one month LIBOR rose slightly from its 52 week low last week up to 0.2120. Both are well below their 2010 peaks and in the middle (TED) or low end (LIBOR) of their respective 3 year ranges.
The Baltic Dry Index rose again from 1010 to 1051, well above its recent 52 week low of 662. The longer term declining trend in shipping rates for the last 3 years remains. The Harpex Shipping Index fremained at 372, its 52 week low.
Finally, the JoC ECRI industrial commodities index fell again from 120.96 to 118.35, and once again turned negative YoY.
Positive comparisons continue to outweigh the negatives. Rail loads are down, but only because of coal. Harpex container ship traffic remains at a low, but open ship traffic continued to rise to nearly a yearly high. Commodities are weak, but this is largely because the Oil choke collar has loosened again. Housing continues to be improved, money supply is positive as are bond rates and credit spreads. Overnight lending rates are at or near 52 week lows. Consumer spending and employment indicators are mixed. This is hardly a strong economy, but it doesn't look like one in contraction either.
Have a nice weekend.
Friday, October 26, 2012
Back on Monday
No dog pictures this week -- it's been a bit hectic.
I'll be back on Monday and NDD will be here tomorrow.
Have a good weekend.
I'll be back on Monday and NDD will be here tomorrow.
Have a good weekend.
An Overview of the Chinese Economy and Their Move To Consumption Led Growth
There has been a lot of ink (both digital and otherwise) spilled over the current situation in China. However, it's been a bit since I've looked at the overall macro situation. So, let's simply see where the Chinese economy is in terms of its macro-level statistics.
The top chart shows the overall growth rate for Chinese GDP. While it has slowed down over the last few years, it has done so from a very high pace (11.9% at its peak). But, what's also important to remember is that with a very large and growing population, China needs to maintain a fast rate of growth, simply to continue creating enough overall wealth to increase the benefit received by all Chinese.
The bottom chart shows that the overall total amount of GDP -- despite the slowing -- continues to grow as well.
The above chart shows that total GDP per capita is a little over $2500 US dollars/person. This data does not take into account income inequality, but it does give us an idea from the amount of wealth created via the government's overall policies
Like most Asian economies, the Chinese government has based its overall growth rate on exports, which is demonstrated in the top chart. Exports have continually risen over the last four years. The lower chart shows imports -- some of which are used to create goods for export.
The top chart shows the current account to GDP, which peaked at the height of the global crisis, but has since moved to more reasonable levels. This chart shows the net exporting is still central to the overall economic model of the Chinese.
There is good and bad news in the inflation chart. The good news is that it's been moving lower, giving authorities more room to change policy. However, lower inflation usually translates into lower growth, as evidenced by the above discussed GDP charts.
China is in the process of trying to change from an exclusively export driven economy to one with a higher internal demand component. This is actually a lot harder than they thought it would be originally. The good news is they have plenty of space to work with -- their GDP is still high and inflation is low. And, the latest statistical releases shows its happening:
CHINA, you may have heard, announced its latest growth figures on Thursday. The speed of growth attracted most of the attention, but the source of growth is perhaps more striking. At a press conference (in Chinese; see an FT report here), the National Bureau of Statistics pointed out that in the first three quarters of this year consumption* contributed over half (55%) of China's growth, exceeding the contribution from investment. If that pattern holds, China's growth this year will not be investment-led (let alone export-led), but consumption-led.**
That hasn't happened for over a decade. Or so I thought. Until recently, the official statistics showed that investment made the biggest contribution to China's growth in every year since 2001. But earlier this week the new edition of the China Statistical Yearbook arrived on my desk with a thud. Its revised figures show that consumption contributed 55.5% of China's growth in 2011; investment contributed only 48.8%. (Net exports subtracted 4.3%.) In other words, China's growth was consumption-led last year as well.
The bottom chart shows that the overall total amount of GDP -- despite the slowing -- continues to grow as well.
The above chart shows that total GDP per capita is a little over $2500 US dollars/person. This data does not take into account income inequality, but it does give us an idea from the amount of wealth created via the government's overall policies
The top chart shows the current account to GDP, which peaked at the height of the global crisis, but has since moved to more reasonable levels. This chart shows the net exporting is still central to the overall economic model of the Chinese.
There is good and bad news in the inflation chart. The good news is that it's been moving lower, giving authorities more room to change policy. However, lower inflation usually translates into lower growth, as evidenced by the above discussed GDP charts.
China is in the process of trying to change from an exclusively export driven economy to one with a higher internal demand component. This is actually a lot harder than they thought it would be originally. The good news is they have plenty of space to work with -- their GDP is still high and inflation is low. And, the latest statistical releases shows its happening:
CHINA, you may have heard, announced its latest growth figures on Thursday. The speed of growth attracted most of the attention, but the source of growth is perhaps more striking. At a press conference (in Chinese; see an FT report here), the National Bureau of Statistics pointed out that in the first three quarters of this year consumption* contributed over half (55%) of China's growth, exceeding the contribution from investment. If that pattern holds, China's growth this year will not be investment-led (let alone export-led), but consumption-led.**
That hasn't happened for over a decade. Or so I thought. Until recently, the official statistics showed that investment made the biggest contribution to China's growth in every year since 2001. But earlier this week the new edition of the China Statistical Yearbook arrived on my desk with a thud. Its revised figures show that consumption contributed 55.5% of China's growth in 2011; investment contributed only 48.8%. (Net exports subtracted 4.3%.) In other words, China's growth was consumption-led last year as well.
US GDP Up 2%
I'll be dealing with this in far more detail next week after I have time to go through the data. For now, I'll say this is about par for the course in the current economy.
In addition, this is the FIRST estimate. There are two more releases which could print revisions that the bulls or bears don't like.
From the BEA
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.0 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.
The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), federal government spending, and residential fixed investment that were partly offset by negative contributions from exports, nonresidential fixed investment, and private inventory investment. Imports, which are a subtraction in the calculation of
GDP, decreased.
The acceleration in real GDP in the third quarter primarily reflected an upturn in federal government spending, a downturn in imports, an acceleration in PCE, a smaller decrease in private inventory investment, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by downturns in exports and in nonresidential fixed investment.
In addition, this is the FIRST estimate. There are two more releases which could print revisions that the bulls or bears don't like.
From the BEA
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.0 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.
The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), federal government spending, and residential fixed investment that were partly offset by negative contributions from exports, nonresidential fixed investment, and private inventory investment. Imports, which are a subtraction in the calculation of
GDP, decreased.
The acceleration in real GDP in the third quarter primarily reflected an upturn in federal government spending, a downturn in imports, an acceleration in PCE, a smaller decrease in private inventory investment, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by downturns in exports and in nonresidential fixed investment.
Morning Market Analysis
The Malaysian market is close to an important breakout. The weekly chart (top chart) shows that prices broke through long-term resistance and then consolidated those gains. On the chart, this occurred between 14.25 and about 15. The daily chart (lower chart) shows that prices have been making a run at the 15.25 level, but haven't broken through yet.
After recent gains, the homebuilding sector continues to consolidate between the 24.5 and 26 price level.
After breaking support, the Brazilian market in hanging on -- barely. However, the MACD and CMF are weak and the relative strength number is declining. Also note that prices hit the 200 day EMA and moved lower. we see the shorter EMAs in a tight range and bunched together.
The semiconductor sector has been in a decline for the last three months. Prices are now below the 200 day EMA -- as are the shorter EMAs. There is strong support in the 29.5-30 price level where prices will probably find support.
Thursday, October 25, 2012
Bonddad Linkfest
- UK GDP increases 1% (NSO)
- New home sales up 5.7% (Census)
- New home sales charts (CR)
- FOMC statement (FRB)
- Bank of Canada monetary policy report (BAC)
- Durable goods up 9.9%/2% (W/O transportation) (Census)
- CFNAI still indicates below trend growth (Chicago Fed)
- Ryan Avent dislikes Mitt Romney (DeLong)
- No, really, John Taylor has do idea what he's talking about (FT)
My Number 1 post-election priority
- by New Deal democrat
... will be to make sure that every corporatist "democrat" who stabs the middle and working class in the back by entering into any "grand bargain" with the Greedy Oligarch Party - a bargain which will last about 13 minutes into the next Republican Administration - pays for it with their seat. It will overrule every other priority and consideration. I will support any and all primary and general election opponents until the scum is taken out with the trash.
For reference: What Digby says..
Why the Free Market Doesn't Work For Health Care
From the New Yorker:
This is an appealing vision. In most areas of the economy, free-market principles insure that products and services keep improving, and that consumers get better and better deals. But the free market, though it may be the best way of allocating new TVs and cars, falters when it comes to paying for bypass surgery or chemotherapy. The reasons for this were established nearly fifty years ago, by the economist Kenneth Arrow, in a classic article entitled “Uncertainty and the Welfare Economics of Medical Care.” Arrow showed that health care is distinctive in ways that limit the power of the market. Because people don’t have the expertise to evaluate doctors, hospitals, or treatments, it’s hard for them to comparison-shop. Because they can’t pay for major care out of pocket, they must rely on insurance, thereby often losing the final say in what to buy or how much to spend. More fundamentally, markets work only when consumers have the power to say no if the price isn’t right. Yet it’s very hard for people to say no in the case of things like end-of-life care or brain surgery.
This is an appealing vision. In most areas of the economy, free-market principles insure that products and services keep improving, and that consumers get better and better deals. But the free market, though it may be the best way of allocating new TVs and cars, falters when it comes to paying for bypass surgery or chemotherapy. The reasons for this were established nearly fifty years ago, by the economist Kenneth Arrow, in a classic article entitled “Uncertainty and the Welfare Economics of Medical Care.” Arrow showed that health care is distinctive in ways that limit the power of the market. Because people don’t have the expertise to evaluate doctors, hospitals, or treatments, it’s hard for them to comparison-shop. Because they can’t pay for major care out of pocket, they must rely on insurance, thereby often losing the final say in what to buy or how much to spend. More fundamentally, markets work only when consumers have the power to say no if the price isn’t right. Yet it’s very hard for people to say no in the case of things like end-of-life care or brain surgery.
Morning Market Analysis
Oil -- which had been stranded at the 10/20/50 day EMA for the last few weeks -- has finally sold-off below levels established earlier this month. Notice especially the increase in volatility (although it is still at a low level) and the weakening of the overall price level. This is a chart that is moving into correction mode.
After rallying for a little over a week, the Chinese market is consolidating near 5-month highs. The real key to this chart is whether the 10 day EMA holds or not.
Although they have broken through resistance, grains haven't made strong move higher yet. The chart is sending mixed signals in that regard. While the MACD has given a but signal, volume is weak and the CMF is negative.
After breaking through resistance in the 162 area and rallying to 174, GLD prices have fallen back to the 165 price handle -- which is also close to the 61.8% Fib level. Like any correction, we see a declining momentum and weakening CMF readings.
Wednesday, October 24, 2012
Bonddad Linkfest
- EU consumer confidence at -24.2 (Eurostat)
- Richmond Fed manufacturing at -7 (Richmond Fed)
- Australian inflation at 1.4% for the quarter, 2% YOY (ABS)
- China manufacturing PMI at 49.1 (Markit)
- European PMI hits 40 month low (Markit)
- And now the earnings cliff (The Street)
- Data points to deepening EU crisis (FT)
- US results raise fresh fears for economy (FT)
- Home prices up .7% (BB)
- Ukraine confirms wheat export ban (BB)
The Difference Between Slack Supply and Slack Demand
From the latest IMF report:
Cyclical indicators point to ample slack in many advanced economies but to capacity constraints in a number of emerging market economies (Figure 1.9). WEO output gaps in the major advanced economies are large, varying from about 2½ percent of GDP in the euro area and Japan to 4 percent in the United States for 2012 (see Table A8 in the Statistical Appendix). These gaps are consistent with weak demand due to tight financial conditions and fiscal consolidation. By contrast, most emerging market and developing economies that were not hit by the crisis continue to operate above precrisis trends. However, their potential growth rates in recent years are judged to have been higher than indicated by the 1996–2006 precrisis average, and therefore WEO output gap estimates do not signal much overheating.
I realize that we keep hitting on this point over and over again. The question is, why? The answer is simple; lack of supply and lack of demand lead to two different policy prescriptions.
Lack of supply -- in its simplest terms -- means there is insufficient "stuff" at either the individual market level or at the macro level. Take, as an example, computers. Suppose the entire market were clamoring for computers but there was only one domestic company making them. Solving this problem from a policy perspective would involve tax breaks and or credits for the industry (for example advanced depreciation credits or deductions or decreased overall corporate tax rates), backstopping the financial industry to increase loans (creating a federal loan guarantee program) and opening up trade treaties with other countries that also produce computers.
Lack of demand means we have plenty of stuff, but not enough people are buying that stuff. Returning to the computer example from above, suppose we had plenty of computers, but there was a big inventory overhang. Let's assume this doesn't mean the industry has matured and is on the way out. What this means is there is either insufficient income to purchase these computers or insufficient credit to be expanded. That means that at the macro level we need to create income or increase the credit and or lending facility inherent in the overall system. Hence, the policy prescriptions between lack of supply and lack of demand are entirely different.
How do we tell the difference between these scenarios? There are two pretty good indicators -- inflation and employment. Higher inflation -- especially in a particular market -- probably means there is insufficient supply. The reason is simple: supply is constrained and more people are bidding for that restrained resource. Hence -- prices rise. A good example of that currently lies in both the agricultural and energy markets.
High unemployment typically means decreased income and hence a lack of demand. This is simple, macro-level economics. The primary way to deal with this problem is to increase employment. Hence, the standard policy proscription of increased macro-level spending on infrastructure. This increases incomes at the macro level, and thereby increases demand.
So -- where is the US now?
Consumer prices (top chart) and producer prices (middle chart) are tame. Unemployment (bottom chart) is high. It's lack of demand that is driving the market.
Cyclical indicators point to ample slack in many advanced economies but to capacity constraints in a number of emerging market economies (Figure 1.9). WEO output gaps in the major advanced economies are large, varying from about 2½ percent of GDP in the euro area and Japan to 4 percent in the United States for 2012 (see Table A8 in the Statistical Appendix). These gaps are consistent with weak demand due to tight financial conditions and fiscal consolidation. By contrast, most emerging market and developing economies that were not hit by the crisis continue to operate above precrisis trends. However, their potential growth rates in recent years are judged to have been higher than indicated by the 1996–2006 precrisis average, and therefore WEO output gap estimates do not signal much overheating.
I realize that we keep hitting on this point over and over again. The question is, why? The answer is simple; lack of supply and lack of demand lead to two different policy prescriptions.
Lack of supply -- in its simplest terms -- means there is insufficient "stuff" at either the individual market level or at the macro level. Take, as an example, computers. Suppose the entire market were clamoring for computers but there was only one domestic company making them. Solving this problem from a policy perspective would involve tax breaks and or credits for the industry (for example advanced depreciation credits or deductions or decreased overall corporate tax rates), backstopping the financial industry to increase loans (creating a federal loan guarantee program) and opening up trade treaties with other countries that also produce computers.
Lack of demand means we have plenty of stuff, but not enough people are buying that stuff. Returning to the computer example from above, suppose we had plenty of computers, but there was a big inventory overhang. Let's assume this doesn't mean the industry has matured and is on the way out. What this means is there is either insufficient income to purchase these computers or insufficient credit to be expanded. That means that at the macro level we need to create income or increase the credit and or lending facility inherent in the overall system. Hence, the policy prescriptions between lack of supply and lack of demand are entirely different.
How do we tell the difference between these scenarios? There are two pretty good indicators -- inflation and employment. Higher inflation -- especially in a particular market -- probably means there is insufficient supply. The reason is simple: supply is constrained and more people are bidding for that restrained resource. Hence -- prices rise. A good example of that currently lies in both the agricultural and energy markets.
High unemployment typically means decreased income and hence a lack of demand. This is simple, macro-level economics. The primary way to deal with this problem is to increase employment. Hence, the standard policy proscription of increased macro-level spending on infrastructure. This increases incomes at the macro level, and thereby increases demand.
So -- where is the US now?
Consumer prices (top chart) and producer prices (middle chart) are tame. Unemployment (bottom chart) is high. It's lack of demand that is driving the market.
Morning Market Analysis
While a lot was discussed about yesterday's sell-off, the real issue is that prices gapped lower at the open and then traded sideways for the remainder of the trading session. While there was a big sell-off at the end, prices did not close at their session lows.
The 30-minure (top chart) and 60 minute chart (bottom chart) show that the 142.5 level was a key support level for both charts. Prices moved through this level yesterday at the open and remained at that level for the remainder of the session.
On the daily chart we see several important technical developments. First, the 142.5 price level noted above was a key on the daily chart's consolidation pattern. Prices moved through that level and are now at a key Fib fan level. Second, notice the increase in volume over the last few trading sessions, indicating that overall traffic is picking up. The MACD is moving lower, prices are weakening, and the CMF is negative. All of this points the possibility of a prolonged correction.
The IWMs and QQQs are both in a net selling position as well. However, notice that neither printed a strong, downward sloping candle yesterday. Instead, the IWMs (top chart) printed a hanging man and the QQQs (bottom chart) printed a reverse hanging man.
Tuesday, October 23, 2012
Bonddad Linkfest
- Debate winners and losers (WaPo)
- 7 takeaways from the debate (Politico)
- Anti-science beliefs jeopardize democracy (Scientific American)
- CLOs make a comeback (FT)
- High fiscal multipliers undermine austerity assumptions (FT)
- Spain growth contracts for five quarters (BB)
- Chinese factories losing pricing power (BB)
Yes, the Financial Times Rules
Thursday marks the 4-week anniversary of my hip surgery. Now, I would love to tell you that I'm a pure iron man and the surgery had little to no effect on me. In reality, I was out for the entire week afterwords and have been making a slow climb back to being fully functional. In fact, this has been the first week since I've been back when I've actually felt pretty good.
The reason I mention this is that I missed about 2-3 weeks of news. I tried to keep up, but it was a losing game. My concentration was weaker and my attention span was shorter. So, there was a bit of a gap in my understanding about where the economy is.
That's where the Financial Times comes in. Over the last few days I've used it as my official "catch-up"news source. And it's been perfect. The know how to cover the financial industry, giving you a world view with the right amount of news and opinion. And they're great at finding the most important story of the day/week to help you understand what is really happening.
I made the decision about 6 months ago to drop the WSJ and go with FT as my paper of choice. Simply put, the WSJ is losing the game post Murdoch. They've just lost their edge and a fair amount of credibility. But most importantly, they just don't realize there is a world out there that needs explaining. Yes, the US is important. But it's tied to Asia, Europe, and the Far East in a myriad number of ways that the paper just doesn't get. The FT does -- and they explain it beautifully.
Anyway, the FT rocks, plain and simple.
The reason I mention this is that I missed about 2-3 weeks of news. I tried to keep up, but it was a losing game. My concentration was weaker and my attention span was shorter. So, there was a bit of a gap in my understanding about where the economy is.
That's where the Financial Times comes in. Over the last few days I've used it as my official "catch-up"news source. And it's been perfect. The know how to cover the financial industry, giving you a world view with the right amount of news and opinion. And they're great at finding the most important story of the day/week to help you understand what is really happening.
I made the decision about 6 months ago to drop the WSJ and go with FT as my paper of choice. Simply put, the WSJ is losing the game post Murdoch. They've just lost their edge and a fair amount of credibility. But most importantly, they just don't realize there is a world out there that needs explaining. Yes, the US is important. But it's tied to Asia, Europe, and the Far East in a myriad number of ways that the paper just doesn't get. The FT does -- and they explain it beautifully.
Anyway, the FT rocks, plain and simple.
Is the oil choke collar leading jobless claims?
. - by New Deal democrat
I've been speculating that the surprise increase in gas prices over the late summer would lead to an increase in initial jobless claims, a test if tge energy choke collar in action. Here's the latest data, whowing gas prices in red (right scale) and new jobless claims in blue (left scale):
It's hard to tell. It does look like there might be a correlation with about a 3 month lag, but if so it doesn't exactly jump out as being a tight relationship. And it certainly didn't lead the last couple of weeks (note this is the 4 week moving average, so the anolomies due to California don't affect the data very much).
If gas prices decline into winter, it will be interesting to see if we finally get a new low in iniial jobless claims - something we haven't had since the end of March.
Morning Market Analysis
The yen has been catching a safety bid as a result of all the EU turmoil. This has not helped the country, as a higher yen leads to lower exports. However, the weekly chart of the yen shows that prices have finally broken support and are now trading at the lower Bollinger Bank. Also note the negative CMF reading and sell signal from the MACD.
On the daily chart, we see that yen prices have moved through several layers of support over the last week and are now headed for the lower band of their 6 month trading range.
Industrial metals have taken a nose-dive this month, dropping around 10%. Prices are now at levels established at the beginning of August. Note the very quick way in which the chart turned bearish: the shorter EMAs are now below the 200 day EMA, the CMF is negative and the MACD is declining.
The financial sector is in the middle of a 6 month rally. Over the last month and a half, it has consolidated its gains. The MACD indicates that momentum has stalled for now, but this is usually a signal the markets give when they are consolidating gains. Until we see prices break trend, this is nothing to worry about for the bulls.
The technology sector is also in the middle of sell-off (as are the QQQs). Prices have moved below the shorter EMAs and are headed for the 200 day EMA. Prices are weakening, momentum is dropping and money is flowing out of the market.
Monday, October 22, 2012
Bonddad Linkfest
- How Romney and Obama can both win (Politico)
- Dispute between Japan and China lowers Japanese trade (FT)
- Great video on the Chinese Slowdown (FT)
- Italy has successful 4-year bond sale (FT)
- Indian temperatures predicted to soar (FT)
- The challenge of Indian retailing (FT)
- The the free market doesn't work for health care (New Yorker)
- The confidence fairy returns (Krugman)
- No, really, Romney's economic team is full of hacks (Krugman)
- 10 lessons from the 87 crash (BP)
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