Saturday, December 12, 2009
Click for a larger image
There are two points with the chart above.
First, notice that volume has been decreasing since the beginning of the rally. That tells us that fewer and fewer people are trading in the market. Part of the reason for this might be that a lot of people allocated capital at the low points in March and are simply holding onto gains. But some of it is also that we're not seeing a huge influx of new capital.
Secondly, notice the curve of the chart. The initial move from the March lows was strong. But notice the angle of the rally has slowly become more and more horizontal. Finally, notice that for the last month and a half prices have been stagnant at the top of the range, unable to move above ~111.
It is possible that some of this is simply the end of the year. Traders have some big gains, from the year, so they have hair triggers when it comes to selling. But it could also mean the market is stalling for now.
Friday, December 11, 2009
Turning to the high-frequency weekly indicators I track to try to gauge the sustainability of the economic expansion, The ICSC reported that same store sales declined -1.3% from the week of Black Friday, but were still up 2.6% YoY. Nevertheless, this is the 4th decline in five weeks.
They also reported
same-store sales for December is projected to increase about 2.0 percent [and its] November-December holiday season forecast of an increase by about 1.0 percent.Shoppertrak said that sales at U.S. retailers fell 0.3 percent last week YoY, down 18% from the week of Black Friday, and had fallen 0.1 percent in November as a whole.
The BLS reported that initial jobless claims rose to 474,000, but the 4 week moving average continued down to 473,750. The data is highly volatile at this time of year because of heavy seasonal layoffs, but the trend remains downward.
The EIA reported that gasoline prices were steady between $2.62-$2.70 for the 6th week in a row. Usage was slightly up in the last week and also YoY. The price of a barrel of Oil slipped to about $70, a necessity for continued economic recovery.
Rail traffic was up to year-high levels in basic, cyclical, and total traffic. Only intermodal traffic was not at a high for the year. Overall traffic was up again in the first week of December. This is a very strong showing. [Note: A couple of weeks ago a commenter asked me why I use Railfax instead to the AAR report. I forgot to get the graphs, but if you click on the AAR report, and compare the graph for total railcars + intermodals, and compare it with the Railfax graph of the 4 week average of total traffic (that already includes intermodals), you will see they are virtually identical. The difference is that the AAR report comes out once a month, whereas Railfax is updated weekly.]
Finally, The Treasury reported that as of December 9, withholding taxes paid for the month so far were $43,722M compared with $45,076M the same day last year, a decline of about 3%.
For U.S. Representative Ron Paul, the ninth time may be the charm.
After fighting for decades to increase scrutiny of the Federal Reserve or abolish it, the Texas Republican’s proposal requiring audits of the central bank’s interest-rate decisions is getting traction.
The long-shot 2008 presidential candidate whose anti-tax, anti-government politics struck a chord with a swath of voters is again channeling public frustration with big government, bailouts and rising federal debt. And as Paul trains his sights on his favorite villain, the Fed, many in Congress are listening.
This is a classic example of Congress demonstrating it is filled with idiots on both sides of the aisle.
First, all of the Fed's financial information is already online. If you want to find out about the Fed's overall position, click on the above line. In addition, the Fed has a financial audit every year:
The Board of Governors orders an annual external audit of the financial statements of the Board and the Reserve Banks.3 The current independent auditor is Deloitte and Touche.4 Each Reserve Bank publishes its audited financial statements, and the Board of Governors publishes the audited combined Reserve Bank financial statements and the Board's financial statements in its annual report to Congress. The Reserve Banks and the Board comply voluntarily with the internal control requirements of the Sarbanes-Oxley Act. The external auditors also perform an evaluation of internal controls over financial reporting.
So -- we already have an audit every year. Why do we need another one?
There are two answers to that question. The first is downright scary:
the Texas Republican’s proposal requiring audits of the central bank’s interest-rate decisions is getting traction.
The absolute last thing we need is for anyone to second guess the Fed's interest rate decisions. That would make the country's interest rates the whim of politicians. What would happen is easy to predict. Any attempt to raise rates would be stopped cold because someone would object. They would argue "that will hurt one of my constituents." And we'd be left with low rates until inflation destroyed the economy.
The second is people want "transparency" for all the Fed's transactions. This would also be a mistake of epic proportions. Currently -- and for the entire history of the Federal Reserve -- it has engaged in "open market operations." In other words, it has purchased various securities at various times in order to implement monetary policy. This is what all central banks do to carry out their mandate. And again -- the Fed has done this since they were formed; it is standard procedure. Making these trades transparent would tell all of Wall Street exactly what security the Fed is buying. Congratulations -- you have driven up the cost of performing monetary policy. Brilliant.
The audit the Fed crowd has gotten completely out of hand. If their proposals are implemented the US economy will be crippled to the point of economic deadlock. If you thought the economic fallout in 2008 was extreme -- you ain't seen nothin' yet.
The Commerce Department reported a surprise 1.3% increase in retail sales for November, also up 1.2% ex autos. October's sales were revised downward to +1.1%, and ex-auto were revized to 0 from +0.2%.
The report also said that Year over Year sales were up 1.9 percent. This is the first YoY gain since August 2008.
Improvements were broad-based, including cars and parts, and also building materials and appliances and electronic goods. The only negative was the increase of +0.6% in gasoline sales.
Assuming that November's CPI will come in very close to +0.1%, this means that real retail sales have increased about +1.9% in the 7 months since their smoothed 3-month bottom in April, (and ex-autos are up about +1.4%). This translates into a rate of about 3% real growth per year.
As of right now, all of the most recent reported data from the ISM manufacturing index, industrial production, initial jobless claims, and now real retail sales satisfy the criteria I set forth in my series When Will the Economy Add Jobs, namely:
ISM manufacturing index is above 53, ISM employment is at -5 or above, initial jobless claims are at least a sustained 16%-20% off peak, and both Industrial Production and Real retail sales have advanced at a rate of 2.5% or more year-over-year from the bottom.. If there are no negative surprises next week in industrial production, jobless claims, or the CPI, then (subject to the inevitable revisions!) this strongly suggests that actual job growth will be reported by the BLS for December nonfarm payrolls.
Household net worth rose by about $2.7 trillion in Q3. It now stands at about $53.4 trillion, the highest level in a year (click through for giant charts):
Our debt-to-income ratio, unfortunately, is still too elevated at 128%, and is only coming down very slowly. Continued improvement needs to be seen here.
Owners' Equity as a Percent of Household Real Estate was revised (downward) to a first quarter trough of a staggering, almost unthinkable, 33.5%. It has rebounded in the subsequent two quarters to a merely hideously pathetic 38%.
The chart above ties in beautifully with an article that coincidentally appeared in the WSJ (sub req'd) the same day the Flow of Funds report was released:
American Dream 2: Default, Then RentAs a societal matter, is the appeal of homeownership -- notwithstanding the various (mostly tax) advantages of owning (e.g. having a mortgage with an interest deduction) over renting -- going the way of the dodo bird? Could one not infer as much from the steady decline in owners' equity over the past many decades, as this metric has moved steadily downward from over 80% to under 40%? Are we destined to become a nation of renters, particularly in light of the pain that's been inflicted by the bursting of the housing bubble? What are the longer-term implications if such a shift is, in fact, taking place? (Our demographics -- an aging boomer population -- are going to further slow the housing market's recovery, but that's another post.)
PALMDALE, Calif. -- Schoolteacher Shana Richey misses the playroom she decorated with Glamour Girl decals for her daughters. Fireman Jay Fernandez misses the custom putting green he installed in his backyard.
But ever since they quit paying their mortgages and walked away from their homes, they've discovered that giving up on the American dream has its benefits.
Both now live on the 3100 block of Club Rancho Drive in Palmdale, where a terrible housing market lets them rent luxurious homes -- one with a pool for the kids, the other with a golf-course view -- for a fraction of their former monthly payments.
The housing bust has brought big changes to the 3100 block of Club Rancho Drive in Palmdale, Calif. See details on the homes, debts and residents.
"It's just a better life. It really is," says Ms. Richey. Before defaulting on her mortgage, she owed about $230,000 more than the home was worth.
People's increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.
Thanks to a rare confluence of factors -- mortgages that far exceed home values and bargain-basement rents -- a growing number of families are concluding that the new American dream home is a rental.
Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That's freeing up cash to use in other ways.
These two charts indicate we are not seeing a broad based advance -- in fact, we are seeing fewer and fewer stocks advance. Some of this is probably due to the end of the year -- we've seen a strong advance and traders are taking profits off the table. This may only be temporary. That is, when the new year starts and everyone has a clean plate we could see additional money committed to the market. However, the current technical position is a bit dicey.
Thursday, December 10, 2009
The U.S. Census Bureau announced today that October 2009 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $326.2 billion, up 1.2 percent (+/-0.7%) from the revised September level, but were down 9.6 percent (+/-1.6%) from the October 2008 level. The September preliminary estimate was revised upward $2.0 billion or 0.6 percent. October sales of durable goods were up 0.8 percent (+/-1.4%)* from last month, but were down 11.1 percent (+/-2.6%) from a year ago. Sales of computer and computer peripheral equipment and software were up 5.8 percent from last month and sales of electrical and electronic goods were up 5.3 percent. Sales of nondurable goods were up 1.6 percent (+/-0.7%) from last month, but were down 8.3 percent (+/-1.1%) from last year. Sales of petroleum and petroleum products were up 5.9 percent from last month and sales of farm product raw materials were up 5.1 percent.
Here is a chart of the relevant data:
Click for a larger image
Notice that sales have increased for six straight months. Some of this is a rebounding from low levels, but not all.
The 4-week moving average is now 473,750, down 7,750 from last week. The 4 week seasonally adjusted moving average is now about 27% lower than the peak of 658,750 on April 3 of this year. (In the last two "jobless recoveries", new claims never declined anywhere near 27% from peak).
Unadjusted, there were 664,865 new claims, an increase of 204,703 from the week before, and well below the 759,531 initial claims in the same week last year.
There is a lot of seasonal variability in jobless claims at this time of year, and arguably this week's reading is closer to the "real" declining trend number, which is obviously still getting better. Next week's initial jobless claims number is the Big One, because it will coincide with the week during which the BLS will do its December jobs survey. Here's the relationship between the initial jobless claims number in the refernce week (left) and the monthly jobs number (right) for the last few months:
2009-09-01 (+564) (-139)
2009-10-01 (+532) (-111)
2009-11-01 (+513) (- 11)
In summary, assuming there is no horrible surprise next week, initial jobless claims are predicting actual job growth in the economy during December.
In case you missed it, Berkeley Economics Professor Brad DeLong commented yesterday that he hopes I'm right about the relationship between jobless claims and payroll growth. I hope that if he is right (we need to get down to 400,000 jobless claims), I am proven wrong quickly!
Here is a chart of the relevant data:
Notice the 4-week moving average has been dropping since the mid-Spring. In other words -- the trend is strongly in place.
Fed's Flow of Funds will be released later today. Although the material isn't exactly fresh (in fact it's a bit stale), I love sifting through the household balance sheet, and I'm confident I'll get some posts out of it, as usual.
Click for a larger image
A.) The oil market was in a downward sloping trading range for the last two months
B.) Prices have broken through the lower line of support. At first they did so tentatively, but yesterday we saw a strong bar printed on a big volume surge.
C.) Momentum has been decreasing for the last two months
D.) The EMA picture has turned bearish -- all the EMAs are moving lower and the 10 and 20 day EMA have crossed below the 50 day EMA.
E.) Prices are weakening
F.) Money has moved out of the USO/oil market but not a alarming rates. However, this in conjunction with other indicators is bearish.
Wednesday, December 9, 2009
Click for a larger image
A.) Prices have been in a range for about the last month. Also notice that within the last month we've seen lots of poor candles -- narrow ranges, long shadows etc.. What we're seeing is a weakening of the market.
B.) The EMA picture is still bullish -- the shorter EMAs are above the longer EMAs. However, notice that prices and the EMAs are still in a tight range with prices moving around the EMAs. Also note the 10 day EMAs is moving almost sideways and the upward trajectory of the 20 day EMA is lessening.
C.) Momentum is in a clear downward trajectory.
D.) But we're not seeing money flow out of the market. At least -- not yet.
* To encourage investment by small businesses and improve their access to capital, the Administration is calling for a one-year elimination of the tax on capital gains from new investments in small business stock. The Recovery Act allowed a 75% exclusion from capital gains taxes on small business investments.
* Extension of enhanced expensing provisions for small businesses: The Administration is also calling for the extension through 2010 of the Recovery Act provision that allows small businesses to immediately expense up to $250,000 of qualified investment.
* Extension of Recovery Act bonus depreciation tax incentive: To give businesses an incentive to invest, the Administration is calling for extending the Recovery Act provision that accelerates the rate at which business can deduct the cost of capital expenditures. This provision will put more than $20 billion in the hands of businesses in 2010, while enabling Treasury to recoup much of the funding as business regain their strength.
* A new tax cut for small businesses to encourage hiring in 2010. Although the economy is now growing again, many businesses remain reluctant to hire. In this economic environment, an employment tax cut for small businesses has the potential to accelerate the pace of hiring. The Administration believes it is important to provide a short-term tax incentive to encourage small business hiring and support employment, and will work with Congress to design a provision that accomplishes these goals.
* Eliminating fees and increasing guarantees for small businesses that borrow through major SBA programs in 2010. The President called for the elimination of fees and an increase in guarantees for loans through the Small Business Administration, a measure that extends provisions in the Recovery Act through the end of 2010. In addition, the President called for continued Treasury efforts to use the TARP to support small business lending.
1.) This is a stupid idea unless the tax cut extension lasts for longer than 1 year. 1 year is enough time to invest and start the business. It is hardly enough time actually grow the business to meaningful levels such that selling stock is a good idea.
2.) Anything that allows for increased investment is a good idea.
3.) Extension of depreciation deductions is a standard way to encourage investment. However, I would add the removal of the deduction calculation from the alternative minimum income computation. That would encourage high net-worth individuals to put money into small business.
4.) Credits or tax incentives fir hiring is a good idea as well. The bottom line is businesses are worried about hiring right now. Anything that gets them off the fence is helpful.
5.) This should increase the flow of credit to small businesses -- another good idea.
* Additional investment in highways, transit, rail, aviation and water. The President is calling for new investments in a wide range of infrastructure, designed to get out the door as quickly as possible while continuing a sustained effort at creating jobs and improving America’s productivity.
* Support for merit-based infrastructure investment that leverages federal dollars. The Administration supports financing infrastructure investments in new ways, allowing projects to be selected on merit and leveraging money with a combination of grants and loans as was done through the Recovery Act’s TIGER program.
6.) Infrastructure is perhaps one of the best things to invest it, largely because of the high multiplier effect and fact that the multiplier lasts a long time. The multiplier effect tells you how much national income each dollar of spending gets you. Infrastructure has a high multiplier. And the multiplier lasts a long time. For example, build a road between two cities that had no transportation between them and you will increase business between them for a long time (as in decades). Eisenhauer built the national highways which forever increased the US' productive capabilities.
7.) I need to see more details to make a call on this one.
* New incentives for consumers who invest in energy efficient retrofits in their homes. Smart, targeted investments in energy efficiency can help create jobs while improving our energy security and saving consumers money. The President today called on Congress to consider a new program to provide rebates for consumers who make energy efficiency retrofits. Such a program will harness the power of the private sector to help drive consumers to make cost-saving investments in their homes.
* Expansion of successful oversubscribed Recovery Act programs to leverage private investment in energy efficiency and create clean energy manufacturing jobs. The Recovery Act included historic investments that have helped to build the foundation for a clean energy economy. The Administration supports expanding programs for which additional federal dollars will leverage private investment and create jobs quickly, such as industrial energy efficiency investments and tax incentives for investing in renewable manufacturing facilities in the U.S.
8.) Cash for caulkers: good idea for two reasons. First, it lowers peoples utility bills -- always a good thing. Secondly, it puts construction employees back to work. This part of the work force has been hit really hard because of the housing crisis. Bottom line -- thumbs up.
9.) Why we are not investing billions of dollars in clean energy is completely beyond me. He who creates cheap, clean energy will have customers for generations.
In view of last week's jobs data, and with Bonddad's permission, I am reposting in its entirety an entry of mine from September 21 of this year, which was entitled, Getting it wrong about Initial Jobless Claims and Nonfarm Payrolls (with a few updates at the bottom) for reasons that I hope will seem obvious as you read along:
Some time ago, Prof. Brad DeLong of Berkeley, thinking aloud with graph, drew a line across the 1991 and 2001 recessions and recoveries, making a "note to self" that it appeared that Initial Jobless Claims post those recessions had to decline to 400,000 or less before payroll jobs were added. Thus, mused Prof. DeLong, it must be so as well, post this "Great Recession." This "note to self" was subsequently repeated by Bill McBride at Calculated Risk, from which it has now been picked up and repeated at Prof. James Hamilton's site, Econbrowser. It is well on its way to becoming Holy Writ.
Let me say first of all that I have the highest respect for all 3 of the above gentlemen. Nevertheless...
IT IS WRONG.
The 1991 and 2001 recessions were very mild. Peak initial jobless claims in those recessions were 501,250 and 489,250, respectively. It would be nuts to think that jobs would be added to the economy anywhere near the 500,000 high water mark in jobless claims from those recessions.
The 1973-4 and 1981-2 recessions are much better comparisons. They were the two most severe post-WW2 recessions up until now, respectively featuring 9% and 10%+ unemployment. Furthermore, peak initial jobless claims in those recessions were 560,750 on February 1, 1975 and 674,250 on October 9, 1982, respectively; both peaks being much closer to our recession's peak initial claims number of 658,750 on April 4, 2009.
In the case of the recoveries from both of those recessions, payrolls started to grow as the ievel of initial jobless claims crossed 500,000, not 400,000.
Here it is in graph form, including initial jobless claims (in blue and green respectively) ending as of the week each crossed below 500,000, together with nonfarm payrolls (in red and orange) ending the same month:
It is easy to see that nonfarm payrolls troughed in the preceding month, and grew during that month that initial claims crossed below 500,000.
Here is the raw data from the St. Louis Fred site:
Initial jobless claims:
1975-02-01 560750 (peak)
and Nonfarm Payrolls:
Initial Jobless claims
1982-10-09 674250 (peak)
and Nonfarm Payrolls:
For good measure, in the 1980 Recession, in which unemployment peaked at 7.8%, jobs showed growth in August 1980 at the same time as Initial Claims averaged 546,000:
1980-06-07 629000 (peak)
[NOTE: When I originally posted this, a commenter noted that the way I posted the above was somewhat confusing. As I responded at the time, all of the data above is positive, e.g., +536,000 new jobless claims. The bolded numbers are the low point for payrolls during each recession, e.g., 76,463(,000) in 1975; and the two weeks marking where initial jobless claims crossed the 500,000 mark.]
IT IS SIMPLY NOT TRUE THAT INITIAL JOBLESS CLAIMS MUST DECLINE TO 400,000 BEFORE NONFARM PAYROLLS TURN POSITIVE.
Note that for all three Recessions/recoveries, I've included jobless claims from the previous month, when nonfarm payrolls troughed. In 1975, payrolls actually troughed at 536,000 new jobless claims. In 1980, they troughed at 580,000. In 1982, they troughed at 559,000 (the 4 week average of the months involved).
That is partly why I have taken the position that in this recession/recovery, payrolls will trough once there is a sustained reading of ~530,000 if there is a slow decline in initial claims, and 500,000 if the decline quickens.
I am utterly confident that there will be job growth long before jobless claims fall to 400,000.
UPDATE: Now, here is the data since I originally posted the above:
2009-04-04 658750 (peak)
Four days after that post, in a note entitled When Will the Economy Start to Add Jobs (VI), I concluded that it was most likely that jobs would turn positive in November or December, +/- 1 month, and gave a possible "glide path" to that number. That "glide path" is the first column below (in thousands). The current BLS revision is the second column:
2009-09-01 (-145) (-139)
2009-10-01 (- 91) (-111)
2009-11-01 (- 28) (- 11)
2009-12-01 (+ 34) ???
I am sure the data will make me look like a smacked a@@ soon enough, but just at this particular moment, I am smelling like a rose.
1.) Economists use charts to present data. That's because economists base their analysis on numbers. Graphs depict this data in an easy to understand form. A simple perusal of any economics text illustrates this point. To argue that using graphs is bad economics is the logical equivalent of saying, "Get the government out of my Medicare."
2.) Analyzing graphs of data is not "technical analysis." Technical analysis is the analysis of price charts for trading purposes. Again -- this is a rudimentary economic point. To not know the difference is another freshman mistake -- almost as bad as arguing an economist shouldn't use charts to ... oh wait -- he already did that.
3.) I still do plenty of fundamental analysis. Simply go back through all the postings and you'll I cover most major economic releases.
4.) I use to write a great deal about the amount of debt in the US economy. Then came the deflationary scare of 2008. For those of you who don't know history, this is what led to the Great Depression. To not use massive amounts of debt at the end of last year and this year would have resulted in a Great Depression II. I explained the logic in this article titled, Why the Stimulus is Needed. And I explained my new rationale about national debt in Can We Afford All This Spending. Here was the conclusion:
So -- the overall conclusion is we're going to be pushing the envelope of US finances which is never good. Overall debt/GDP will most surely be at 100% by the end of fiscal 2012. In addition, the interest component of the federal budget will surely increase as well. Now -- is this development fatal? No. But are we adding more stress to the system? Yes. But finally, do we have a choice? That is, is there another viable option right now? No. Fiscal conservatives (who by the way don't exist in the Republcan party's policy implementation arm) will argue to do nothing. But given the precarious nature of the economy right now that is still a recipe for economic suicide.
Let's look at the basic problems. First, EP doesn't know basic economic presentation methods and terminology. This is not a debate about the difference between two economists -- it's about how they don't know the basics of economics. In addition, a simple search of my work would have revealed why I changed my position about public debt. And that goes to the second issue -- they don't do their research. That makes all of their writing suspect at best. And in reality, it makes it all meaningless scribes of intellectual illiterates.
Economic Populist is angry because I called them and others out in an article titled Why Hysteria and Economic Blogs Are Best Friends. Economic Populist didn't like being told they are fitting facts to ideology. In actuality, that is all they have because arguing economists shouldn't use graphs and not knowing what technical analysis is indicates economic populist doesn't know anything about economics.
Copper has been in an uptrend for the last four months. Along the way we've seen several consolidation patterns (a rounding top in August - September and two pennant patterns after that), but the overall trend is still up. A.) In addition we've seen a continued increase in the A/D line indicating increasing volume flowing into the markets. B.) While momentum dropped a few months ago, it is returning.
The EMA picture is bullish. The shorter EMAs are above the longer EMAs, all the EMAs are rising and prices are above the EMAs.
Tuesday, December 8, 2009
A.) The QQQQs are forming a broadening top
B.) Now we have the possibility of a double top which is confirmed by
C.) Declining momentum.
This is a general theme across all the markets -- a slowing down at the end of the year. It's been a good year since the March 9 lows. Traders will be looking to book some profits for end-of-the year's sake. My concern is what will happen after the first of the year?
The very same data that told Bonddad and me seven months ago that the economic free fall was going to stop, and that has ever more strongly pointed to recovery, the Leading Economic Indicators, are now known for November.
As I hinted last week, this could be the first month since then that the LEI actually go down, although my best estimate is for a small gain, thanks to a surge in the manufacturing workweek, making it 8 positive months in a row. Here's the list with my best estimates:
The yield curve is still positive +0.25
Aggregate hours in manufacturing were up strongly +0.21
Stocks' 3 month gain is worth +0.1
Jobless claims were much better, +0.13
Durable goods' strong growth add +0.2
Consumer nondurables up substantially, + 0.1
Real M2* has turned slightly positive, so +0.05
ISM deliveries down, -0.08
Consumer sentiment down, -0.15
New home permits were down strongly -0.55
The bottom line: November LEIs (and revisions to October) will net the positive reading of +0.3; however, it is certainly withing the range of error if the weightings are slightly different for the index to go negative. Indeed, had the manufacturing workweek not grown, or had consumer nondurables not turned up, my estimate probably would have been negative.
I have bolded housing permits for an obvious reason: the shocking decline in housing permits and starts almost singlehandedly takes down the whole index for November. While I expect that number is a one-off event and will not be repeated in the next few months, it is a valid number and so the combined mediocre showing for October and November point to a softening economy during the first quarter of 2010.
On the bright side, YoY the LEI will probably be up 4.5% as of November. Simply going sideways this month would make the YoY LEI index up 5.1% this month, consistent with actual job growth in previous economic recoveries.
Listen very carefully to Ben Bernanke's response. We trade a central bank (say the EU) dollars for their euros. We are out no money. It is not a loan that we can lose money on. It is not money that the American public is out. It is simply a swap of currencies to provide liquidity to another market during the crisis (ie to stem a run on dollars). There is no conspiracy here and Grayson really shows his ignorance on the issue when he persists in questioning Bernanke about where "our dollars" went (ie to which specific banks). The answer from Bernanke is simply who cares. We have the euros from the central bank on the balance sheet and made the swap with the other central bank, not with other foreign banks directly. This is simply another one of Ron Paul's conspiracy theories that have been latched onto by some democrats for reasons unknown to me (other than a fear of what is not understood). Bernanke almost seems like he just wants to tell Representative Grayson to take an econ class and get back to him with the somewhat condescending nature of his answer.
For further evidence of Grayson's lack of understanding on issues related to the Federal Reserve, watch this video:
This line of questioning is pure conspiracy theory shit. This is right up there with the moon landing being filmed in a warehouse in Virginia or the Illuminati running the world. The only issue here is that the attorney (not being an economist) simply doesn't respond with enough force. The Fed does not manipulate the stock market other than through interest rate policy (ie lower rates tend to lead to growth, while higher rates constrain it). He also doesn't understand primary dealers (the banks that are forced to bid on auctions of treasuries to provide guaranteed liquidity) and clearly thinks that it is somehow linked to the stock market (hence the frontrunning comment attached to the question on primary dealers). This is so sophomoric that it should be insulting to Americans as a whole.
The question of whether the Federal Reserve possesses the gold it claims is in fact a conspiracy theory. This conspiracy theory is commonly touted by Ron Paul and his legion of worshippers and gold bugs and is so absurd I was loathe to even bring it up here, but since Representative Grayson seemed to have no problem bringing it up I felt like it needed to be rebutted.
Finally, I love Grayson's question of who got the increase in the balance sheet. The answer was not only simple, it was widely reported everywhere. Most of this increase was used to provide liquidity to the economy through the purchase of treasuries and various agency backed securities. What this means is that the Fed essentially bought bonds (broadly defined) in an effort to keep interest rates (especially mortgage rates) low in an effort to enable economic recovery. There simply is nothing nefarious going on here except for the conspiracy theories that Representative Grayson keeps postulating.
This showcases why we get into financial problems in this country, as the people who write the laws (or unwrite them in the case of Glass-Steagal) are simply ignorant about the issues but like to pretend otherwise. Don't count on Congress to fix the root causes of this mess anytime soon.
A Note from Bonddad:
I fully agree with SilverOz's statements here. The bottom line is Congress is full of economic incompetents who have absolutely no idea what they are talking about. Most are great at spouting talking points (government bad from the right or big banks bad from the left) but no one has the ability to address the extremely complex nuances of economic policy. And this whole "audit the Fed" crap that is going around -- despite the fact that all the Fed's finances are on their website -- is absurd on its face. And finally there is this point: like it or not, Bernanke and the Fed saved our collective economic asses with their "extraordinary measures. How do I know this? Read a Monetary History of the US -- especially the part about "The Great Contraction".
The NFIB's SBET has just been released and, consistent with last week's tease, it paints a deteriorating story:
Small Business Owners'Optimism in the Tank; Index Falls Again
WASHINGTON, December 8, 2009 – The National Federation of Independent Business Index of Small Business Optimism lost 0.8 points in November, falling to 88.3 (1986=100), 7.3 points above March’s recession bottom. In the deep 1981-82 recession, the Index never fell below 90 and quickly surged to a record high early in 1983. In this recession, the Index has been below 90 for six quarters, indicative of the severity of this downturn.
“The biggest problem continues to be a shortage of customers,” said NFIB Chief Economist William Dunkelberg. “Apparently, owners can’t find a good reason to be optimistic about the future of the economy or their personal future. The legislative agenda in Washington is a major factor blunting consumer and owner optimism.”
Putting aside Mr. Dunkelberg's politics, this report seems to follow the big business/small business decoupling trend that appears to have taken hold. It is hard to overstate the importance of small businesses to job creation, and this report indicates they are nowhere near out of the woods.
In a recent correspondence with a friend at the St. Louis Fed, we briefly discussed what the jobs trajectory growth rate might look like as we (hopefully) turn the corner. Suprisingly (at least to me), my friend commented that he'd been modeling "numbers from 1.8 to 2.7, but I've seen other forecasts with growth rates over 3 percent by the end of 2011." Personally, I think that's a bit optimistic, but let's go with it for the purposes of this post.What I've produced below is a chart that represents:
The average jobs recovery of eight recessions from 1948 - 1981 (gold)
The 1990 "jobless" recession (green)
The 2001 "jobless" recession (pink)
The current recession with a forecast (red)
Vertical lines represent the point in time that employment reached its previous peak, the longest recovery currently being the 2001 recession.
While we of course know that nothing goes from Point A to Point B in a nice, neat, linear fashion, it is interesting to see how things might play out. Using the comment from my St. Louis Fed friend, my forecast incorporates the following: Starts at 2 percent growth immediately and increases by 0.5 percent every six months (2.0, 2.5, 3.0, 3.5) until the previous high is reached. (Click through for giant chart.)
If we could get started straight away -- and Friday's number provided some hope that we can -- and get some jobs momentum going as detailed above, it's possible we could recover to our previous high just one month later (47 months) than in the 2001 recession (46 months). I think the odds of this outcome are very long, but not impossible. It is fairly clear to me that this will be the longest jobs recovery on record, and this chart from Calculated Risk tells much the same story:
What we need is a catalyst. My vote -- since I don't believe the consumer is going to lead us out of this -- would go to stimulating business in the alternative energy space, which I would like to see be the next "big thing."
Absent a catalyst, I don't think this forecast has a snowball's chance. Consider that there was no real catalyst after the 2001 recession but for the Bush tax cuts, perhaps one reason that recovery now defines "jobless recoveries" -- there was no big thing. But it will be interesting to check in on this post from time to time to see how it's playing out (and I will obviously be tracking the monthly numbers).
How does anyone else see it? How would you handicap the employment glide path going forward?
(Just noticed -- after completing this post -- that Floyd Norris sees things differently). And I also see that Tim Iacono has weighed in on this issue over at The Big Picture. Lastly, I see Calculated Risk has a very interesting post as well.)
A.) In the last week we've seen a broad sell-off in the Treasury market. Notice the large gaps down.
B.) However, the EMA picture is extremely jumbled. Notice there is no clear direction. First, they are all in a very tight range. Second, prices are clustered around the 200 day EMA. The reason for this EMA confusion is
The Treasury market is moving sideways -- there is no trend.
A.) Prices were flat for most of the day, unti
B.) A late day sell-off
The late day sell-off is important. It tells us that traders are not comfortable holding an overnight position. That means there traders are skittish -- they're nervous about what might happen overnight. In addition, it tells us that traders are more prone to pull the trigger on a sell-order.
Monday, December 7, 2009
Consumer Credit, which is going through an unprecedented contraction, and has declined by over $125 billion since August 2008, will be released by the Federal Reserve later today. Consensus estimates are for another drop, this time by about $9 billion.
UPDATE: The contraction was $3.5 billion, less than expected.
On the surface, things look pretty good in stock land, with indexes on the rise. But when analysts check the engine behind the recent growth, they see things that make them worry.
When stock advances are young and strong, a wide variety of stocks join in, led by smaller stocks that investors hope will respond quickly to an economic turnaround.
Now some of the early gainers are running out of steam, which can be a sign that the bull market is aging. Investors who track indicators like these don't expect significant declines anytime soon, but they are watching for problems next year.
As the Dow Jones Industrial Average and Standard & Poor's 500-stock index, both big-stock indexes, pushed to new highs in the past week, indexes of small and medium-sized stocks haven't kept pace. They have remained below their mid-October highs.
Financial and energy stocks, leaders in the recent rebound, also haven't yet surpassed mid-October highs. Technology stocks, another group of former leaders, have managed only small gains beyond October levels. Stocks that depend on strong economic growth seem to be losing favor, as investors shift toward health-care and telecommunications stocks they consider safer. That shift toward safety is another sign of weakening enthusiasm.
I have made this point several times over the last few weeks(see here and here and here) but it bears repeating. Consider these charts:
The miocrocap index is nowhere near new highs.
The Russell 2000 is nowhere near new highs.
The energy sector is heading lower
The financial sector has yet to make a meaningful advance
The NASDAQ advance/decline line is weakening and
The NYSE advance/decline line is stalling.
Bottom line: fewer and fewer stocks are participating in the rally.
I think that because businesses have become much healthier, the layoffs are about over. There may even be a labor shortage.Seriously, who in their right mind would look at Friday's report and suggest we may be facing a "labor shortage"? Whatever.
More interesting (and sane, and rational) was the commentary out of Merrill Lynch, whose economics team has done a very decent job of calling the tune for the past few months. Here's the part that caught my eye (emph. mine):
The U-6 measure of unemployment, which is the broadest measure around, ticked down to a still-depressing 17.2% in November from a record 17.5% in October. What was missed by the unemployment rate was the pick up in the duration of unemployment. The median duration of unemployment jumped to a record 20.1 weeks in November from 18.7 weeks in October. And, a record 38.3% of workers have been unemployed for at least six months. In other words, the unemployment the US economy is dealing with is structural in nature, which suggests that it is going to take a long time to absorb the over 15 million workers that are unemployed and that the natural rate of unemployment has likely moved higher this cycle. So, while this employment report forces us to bring forward our expectation for job growth to next month we are not ready to change our Fed call – we still see the Fed on hold for the duration of 2010.First off, Merrill's spot-on analysis here (and I've been critical of them) points out the absurdity of any notion we might be looking at a labor shortage any time soon.
Beyond that, the prospect that job creation is going to be painfully slow and that we may be in for a "naturally" higher rate of unemployment is exactly what concerns me most, and is what I fear will retard our ability to get back to any semblance of trend growth. Our recent gains in productivity would seem to support this notion.
To be clear: I'm not trying to be a doom and gloomer here by excerpting a research piece that happens to cite the rise in duration of unemployment. I'm solely focused on what the consequences of that fact might be: A painfully slow, jobless recovery with an attendant, semi-permanent higher unemployment rate.
I'll have a post up tomorrow morning that will examine further what the employment trajectory might look like.
The above chart has one purpose: to show that the market has not been able to get above the 110/112 area. That tells us there is a fair amount of exhaustion in the bull camp.
This daily chart shows the same thing but from a, well, daily perspective. Notice that prices are finding a large amount of resistance in the 111/112 area.
A.) On Friday, prices gapped higher at the open and then attempted to move higher. But prices could not keep the upward momentum.
B.) Prices then retreated on high volume.
C.) Prices remained in a subdued mood for the rest of the day.
What's important about this chart is that Friday the rally should have started early and continued all day. The one thing dogging this economy has been jobs. And Friday we learned that the pace of job losses is decreasing. We also learned that previous months job losses were revised lower, temporary hiring (a leading indicator) increased and hours worked increased. In short, this was the best employment report we've seen in a long time. The market should have screamed higher. Yet, it fell. That tells us the bulls are really tired right now.