Saturday, April 13, 2013

Weekly Indicators: whipsaw week, all positive edition

 - by New Deal democrat

Monthly March data released in the past week included two very poor reports: retail sales sank by -0.4%, and the U. Michigan consumer sentiment reading was the worst since last year. Inventories rose slightly. Producer prices actually declined.

One of the points I routinely make about this high freequency weekly data I follow is that it can be noisy. This week it completely reversed last week's poor readings, suggesting that change in weeks for the Easter/Passover holidays skewed the YoY data.

Let's start this week's look at the high frequency weekly indicators by looking at employment data, which completely flipped this week vs. last week:

Employment metrics

Initial jobless claims
  •   346,000 down 39,000

  •   4 week average 358,000 up 3,750
American Staffing Association Index
  • flat at 91 w/w up 1.1% YoY

Initial claims have established a new lower range of between 330,000 to 375,000 this year. In the last two years, beginning at the end of the first quarter there has been a spike of 20,000+ in jobless applications, and we certainly did see the pattern repeat in the previous two weeks. This week jobless claims returned to their new, lower range.  The ASA is still running slighty below 2007, and slightly ahead of last year, although the comparison is deteriorating a small amount.

Daily Treasury Statement tax withholding

  • $140.1 B (adjusted for 2013 payroll tax withholding changes) vs. $141.7 B, -1.1% YoY for the last 20 days.  The unadjusted result was $164.1 B for a 15.8% increase.

  • $68.3 B was collected during the first 9 days of April vs. $65.1 B unadjusted in 2012, a $3.2 B or 4.9% increase YoY.
These are the best YoY comparisons in over two months. While my best estimate is that collections should be up 15% due to the payroll tax increases that took effect on January 1, since that may not be accurate, now that we have enough data from this year I'm starting to make comparisons with earlier this year, and those comparisons have been improving. This week even the adjusted data was close to positive.


Railroad transport from the AAR
  • +10,000 or +3.7% carloads YoY

  • +1800 or +4.8% carloads ex-coal

  • +400 or +0.2% intermodal units

  • +10,500 or +2.1% YoY total loads
Shipping transport Rail transport had its worst week in a long time one week ago, but this week completely reversed and was completely positive.  The Harpex index remains slightly off its 3 year low of 352, and the Baltic Dry Index remains above its recent low.

Consumer spending Gallup had been very positive for 3 months, but April spending so far has been the lowest daily amount so far this year and was only slightly ahead of last year.  The ICSC varied between +1.5% and +4.5% YoY in 2012. In the last month it was near or even below the bottom of this range, but rebounded this week. The JR report this week is in the upper part of its typical YoY range for the last year.  None of these match the poor March retail sales report, although Gallup's report weakened considerably in comparison with recent months.

Housing metrics

Housing prices
  • YoY this week +5.3%
Housing prices bottomed at the end of November 2011 on Housing Tracker, and have averaged an increase of +2.0% to +2.5% YoY during 2012, but the YoY comparison has been as high as +5.8% in March this year.

Real estate loans, from the FRB H8 report:
  • up 16 or +0.4% w/w

  • up 28 or +0.8% YoY

  • +2.4% from its bottom
Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012.  In the last month these completely stalled but this week increased again.

Mortgage applications from the Mortgage Bankers Association:
  • +1% w/w purchase applications

  • +3% YoY purchase applications

  • +6% w/w refinance applications
Purchase applications had been going sideways for 2 years. In the last couple of months they have finally broken out of that range slightly to the upside.  Refinancing applications were very high for most of last year with record low mortgage rates, but have decreased slightly recently.

Interest rates and credit spreads
  •  4.70% BAA corporate bonds down -0.13%

  • 1.81% 10 year treasury bonds down -0.09%

  • 2.89% credit spread between corporates and treasuries down -0.04%
Interest rates for corporate bonds have generally been falling since being just above 6% two years ago in January 2011, hitting a low of 4.46% in November 2012.  Treasuries have fallen from about 2% in late 2011 to a low of 1.47% in July 2012. Spreads have varied between a high over 3.4% in June 2011 to a low under 2.75% in October 2012.  The  last several months saw a marked increase in rates and credit spreads have widened, but this week yields came down and the spread narrowed slightly.

Money supply

  • +2.2% w/w

  • +0.7% m/m

  • +9.3% YoY Real M1

  • +0.6% w/w

  • +0.8% m/m

  • +4.9% YoY Real M2
Real M1 made a YoY high of about 20% in January 2012 and has generally been easing off since.  This week's YoY reading remained above a new low set a month ago.  Real M2 also made a YoY high of about 10.5% in January 2012.  Its subsequent low was 4.5% in August 2012. M2 made a new high this week after falling almost 1% from its previous high in January.

Oil prices and usage
  •  Oil $91.48 down -$0.89 w/w

  •   gas $3.61 down $0.04 w/w

  • Usage 4 week average YoY -2.4%
The price of a gallon of gas has declined sharply since the end of February, and is actually down narly 10% YoY. The 4 week average for gas usage turned negative after nine weeks in a row of being positive YoY.

Bank lending rates The TED spread recently increased slightly off its 18 month+ low.  LIBOR remained at its new 52 week low and is close to a 3 year low.

JoC ECRI Commodity prices
  • down 0.97 to 126.35 w/w

  • +3.73 YoY
The weekly indicators have shown evidence that the economy was beginning to soften starting from the first week of February, and the high frequency indicators became more neutral in the weeks since then. Last week they came close to a critical mass of negativity. This week that entirely reversed, with every single indicator at least slightly positive, with the sole, questionable, exception of withholding tax receipts, which were down slightly on an adjusted basis, but still had their best week in almost three months.

The positives include housing prices and mortgage applications, gas prices lower than one or two years ago, and money supply remaining positive, although less so than previously. Commodities are mildly positive measured YoY, although they have retreated over the last month. Consumer spending is positive, although Gallup is much less positive than the last 4 months. Initial jobless claims turned strongly positive again this week. Rail turned positive as well. Real estate loans improved, as did credit spreads.

Basically neutral indicators include shipping rates, interest rates and temporary jobs. Overnight banking loans haven't budged.

After a positive, but muted, tone in the last several months, one week ago the data was tilting a little more towards negativity. My suspicion was that the combination of the payroll tax increase and sequestered budget cuts are now showing up int he high frequency data. This week it all reversed, as the negatives all disappeared, and the data returned to almost uniformly positive.

Was this just a two week whipsaw based on the changes in springtime religious holidays? We'll see next week. Have a nice weekend.

Friday, April 12, 2013

Weekend Weimar, Beagle and Pit Bill

As you can tell, there are no pictures this week of the kids.  I'm out of town and am booked up to my eyeballs.

The kids will be back next week.  I'll be back on Monday; NDD will be here over the weekend.

How lower gas prices are impacting the CPI, retail sales, and real wages

- by New Deal democrat

I put together a bunch of graphs to throw up on this, but haven't had the time. Maybe I can update later today. But in the meantime ... gas prices at the pump have gone down almost 10% since the end of February. This is having an impact on lots of the data, including this morning's retail sales number.

As a general rule, if you take the month over month percentage change in gas prices, divide by ten, and then add 0.1% or 0.2%, you'll come pretty close to month over month non-seasonally adjusted CPI. The average gas price in March was only 1% higher than the average price in February. Dividing by 10 gives us +0.1%, meaning NSA March CPI should be up around +0.2% or +0.3%. We're already down about another -03% in April. Should that hold up as the average change between March and April, the NSA April CPI will be down -0.1% or -0.2%.

BUT, the seasonal adjustment expects prices to rise significantly in March and April, so the March SA is about -0.4% and the April SA is about -0.3%.

Factoring in the seasonal adjustments gives us an anticipated March CPI of -0.1% or -0.2%, and would give us an April CPI of -0.4% or -0.5%. Since the CPI increase for March and April 2012 were +0.3% and 0.0%, that decreases the YoY CPI something like -0.8% for a net YoY CPI change of +1.2%.

While unadjusted retail sales were down -0.4% today, after adjusting for inflation they are likely to be down only about -0.2% or -0.3%. In fact, it's worth bearing in mind that, ex-gas, March retail sales were only off -0.2%.

We found out last Friday that wages were down $-0.01. If we get the negative CPI print, it will turn out that real wages actually increased in March, and are likely to increase in April as well. That will be the best change in real wages for the average consumer in over 2 years.

So we have a battle between the positive effect of decreasing gas prices on the one hand, and increased payroll taxes and the impact of ridiculous Austerian economic policy in Washington on the other. If the latter prevails, then the blame for a new recession will lay squarely at the feet of those Washington politicians of both political parties who have been pushing contractionary economic policies.

Market Analysis: Euro

When talking about the euro's chart, it's actually best to start with the weekly movements as it allows us to see the two primary trends over the last few years:

From May 2011 to July 2012, we see s general downtrend that started and continued because of the continued fiscal problems of the region and the declining economic output.  Starting in July of last year, we have the Draghi rally -- caused by the ECB's head stating he would be whatever it takes to save the euro.  That was taken by the markets as an implicit guarantee of the euro and the capital markets of the region.  As a result, we see a rally that lasted for 8-9 months.  Finally, we see the latest sell-off that started in early February as the EU had another round of crisis started by the Italian elections and followed up by the Cyprus bail-out.  It was also during this time that we have seen continued weak economic numbers coming from the region.

On the daily chart, we see the Draghi rally from late July to early February, along with the sell-off that started in late February that broke the trend line.  Prices are now just above the 200 day EMA.  They have risen about the 10 and 20 day EMAs as a result of the BOJ's announcement to increase liquidity (making the euro more attractive relative to the yen) and the weak US jobs report (making safe haven currencies more attractive in the short run).

Over the last two months, also notice the weak MACD and CMF readings.

The euro is caught between two very strong currency trading currents.  On the bullish side, the euro is still a reserve currency, meaning other central banks hold euros in various percentages.  In addition, the EU is considered a safe haven -- a currency that is safe to hold in times of trouble.  However, consider this:
The euro’s challenge to the international status of the US dollar has been set back a generation as new data show developing countries dumping the European currency from their official reserves.

Central banks in developing countries sold €45bn of euros in 2012, according to data compiled by the International Monetary Fund, cutting their holdings of the currency by 8 per cent.
This highlights the damage Europe’s sovereign debt crisis has done to its standing in the international financial system as the chance of rivalling the dollar – one dream of the single currency’s founders – slips away.

On the bearish side we have some terrible economic numbers coming from the EU.  GDP is weak, unemployment is high, Italy is still trying to form a government, Cyprus has just been bailed out and the service and manufacturing numbers coming from most of the region via the Markit surveys are incredibly weak.

Both of these reasons for trading a currency are incredibly strong with the euro, meaning it could be whipsawed fairly easily in the current environment.

Thursday, April 11, 2013

Bonddad: Still Bullish on Housing

The housing market continues to look like its in a rebound.  Let's start this analysis by looking at the existing home sales market.  All graphs in this analysis are provided by the blog Calculated Risk -- which still has the best housing graphs on the web.

First, after the crash, sales fell to the 4 million annual units level in late 2009 -- the level of homes sales that we saw in the 1990s.  We also see the effect of the new home buyer tax credit and its expiration in 2010.  However, since mid-2011 we see a continual rise in the sale of existing homes.  The pace is far below the level we saw at the peak of the bubble (which is very good as it indicates we're nowhere near a bubble level).  However, the rise is very clear.

In addition, the inventory level has returned to much better and healthier levels seen in the early 2000s.

Let's turn to the new home sales market.

New homes sales cratered after the crash, falling to multi-decade lows.  However, like the rise in existing home sales, we see an increase starting in mid-2011 that continues to move higher.  Granted these are still low levels, but the overall trend is unmistakable.

More importantly, we have low levels of inventory, which is very important as this is leading increased building and increased prices.

The year over year percentage change in the Case Shiller index has been increasing since early 2012.  This is the result of the increased sales pace and decreased inventory.

In addition, we now have a clear positive trend in the building market.

The top chart shows total building permits and the bottom chart shows housing starts (which are the natural result of building permits).  Notice that both cratered after the housing bust,  but that both have rebounded and are each now printing  a solid uptick.

Finally, the homebuilding sector of the stock market has been in a rally since late 2011.

The signs are unmistakable at this point: housing is in the middle of a recovery. 

Market Analysis: France:

The French ETF is looking more and more like a great short opportunity.  As I first noted a little over a week ago, the French economy is in terrible shape: GDP has barely grown for the last 7 quarters, unemployment is rising, industrial production is dropping and the budget and current account deficits are increasing.

Now we have more data from Markit, indicating the services downturn is worsening:

The downturn in the French service sector deepened in March. Business activity fell at the fastest rate since February 2009, reflecting a similarly marked drop in incoming new work. Backlogs of work decreased at an accelerated pace, but the rate of job losses moderated slightly. Companies reduced their charges further in a bid to stimulate new business, whereas input costs continued to rise at a solid pace. Future expectations dropped into negative territory for the first time in five months.

And the manufacturing sector isn't doing much better:

Operating conditions in the French manufacturing sector continued to worsen in March. Although the headline Purchasing Managers’ Index® (PMI®) – a seasonally adjusted index designed to measure the performance of the manufacturing economy – inched up to a three-month high of 44.0, from 43.9 in February, it continued to signal a marked rate of deterioration. The average reading for the PMI over the first quarter of 2013 (43.6) was the lowest since Q2 2009 (43.1).

And  consider this chart of industrial production released earlier this weeK

The central tendency of manufacturing as a whole (CZ) and the various sub-components is down.  Here's the money quote from the report:

During the last three months, manufacturing output decreased slightly (-0.3%)…

During the last three months (q-o-q), output decreased slightly in the manufacturing sector (-0.3%), as well as industry as a whole (-0.1%).
Output declined in the manufacture of electrical and electronic equipment (-1.3%), in the manufacture of transport equipment (-1.3%) and was stable in other manufacturing (-0.1%). On the contrary, output increased in the manufacture of coke and refined petroleum products (+3.6%).

…but is lower than its last year’s level by 3.4%.

Manufacturing output fell by 3.4% (y-o-y). 

And a new report from the EU highlights that lack of reform progress from the new French government:

Brussels turned up the pressure on the French government to overhaul the country’s sputtering economy more quickly, issuing a stinging report on Wednesday that argues President François Hollande’s reform efforts thus far have been insufficient to restore the country’s competitiveness.
The report, one of 13 issued on the EU’s most troubled countries outside the four in full-scale bailouts, warned that France’s shrinking share of global exports and diminishing growth prospects are likely to continue unless more is done to make the country’s labour market more flexible.
In addition, it warns that France’s increasing sovereign debt levels, which are expected to rise to 93.8 per cent of economic output next year, are not only choking off growth prospects but are threatening the country’s banking system and the broader European economy.

Now, let's turn to the French ETF:

First, note the two red lines that represent the upward sloping trendline of several rallies.  Prices have broken both.  Secondly,  prices have fallen to the first   Fibonacci fan and are holding on barely.  They're also right at the Fib retracemement levels from the November to early February rally.  We also see the MACD declining.  However, there is a positive cash inflow.

On the weekly chart we also see a trend break from the rally that started last summer.  Prices are declining in a disciplined, downward sloping triangle on declining momentum.  The price level of ~22.5 established on three separate rallies is providing technical support for the sell-off right now.

Wednesday, April 10, 2013

The Best Damn Employment Chart Ever

The following chart is from Macroblog -- a blog issued by the Atlanta Federal reserve.

Here's their explanation:

As a first pass, we've organized a collection of variables we find interesting, grouped in the categories I just described. In the category of employer behavior we include payroll employment (from the BLS's Establishment Payroll Survey, also known as the Current Employment Statistics survey), job vacancies or job openings, and hires (from JOLTS). Variables in the confidence category include hiring plans (from the National Federation of Independent Business's jobs report), job availability (from the Conference Board's Consumer Confidence Survey), and quits (from JOLTS). The utilization group contains unemployment (from the BLS's Current Population Survey, or CPS), marginally attached workers (from the CPS), the job finding rate (defined as the ratio of short-term to long-term unemployed as described in work by University of Chicago professor Rob Shimer), and workers who are part-time for economic reasons (from the CPS). Finally, we capture leading indicators with initial claims for unemployment insurance (from the U.S. Department of Labor), difficulty in filling jobs (from the NFIB small business jobs report), and temporary help services employment (from the CES).

Here's what I like very much about this chart.

By definition, employment is an incredibly complex economic statistics that involves at least four sub-sets of data:
  • Employer Behavior includes indicators related to the hiring activities of employers.
  • Confidence includes indicators of employer and worker confidence in the labor market.
  • Utilization includes measures related to available labor resources.
  • Leading Indicators shows data that typically provide insight into the future direction of overall labor market activity.
The above chart really highlights that complexity and shows that some of the sets are already performing well (the leading indicators) while others (employer behavior and overall confidence) are still weak.  Utilization is in terrible shape.

They fully admit that this statistic is a work in progress, but I sincerely hope they continue to work on and refine this model.  I think it's the best thing out there.

Market Analysis: Canada

On March 14th, I posted a story titled, "Is It Time to Short Canada?"  Since then, the Canadian ETF has broken long-term support.  There have also been a few economic releases that should be highlighted.

Let's start with a few macro-level charts:

First, the annual percentage rate change in GDP has been declining for teh last two quarters, essentially being cut in half.  In addition, consider this chart of Canadian GDP from the latest Canadian GDP report:

Notice that the trajectory of the increase has been decreasing, collaborating the slowing in growth.  Let's get a bit more detail about GDP growth:

First, at the macro level the pace of month to month growth has been negative in three of the last six months.  Manufacturing has contracted at that pace as well.  And the service sector is barely growing at all over that period.

Let's now turn to employment and their latest employment report.

Following an increase the previous month, employment declined by 55,000 in March, all in full time. The unemployment rate rose 0.2 percentage points to 7.2%.

Despite the decline in March, employment was 1.2% or 203,000 above the level of 12 months earlier, with the increase mainly in full-time work. Over the same period, the total number of hours worked also rose by 1.2%.

 The chart above is for the Canadian unemployment rate.  Although it declined from early 2009 to late 2011, it has held steady over 7% for the last two years.

The above chart shows Canadian employment.  While the number has been increasing since early 2009, we've seen a few contractions over the last 6 months.  Going back to last summer, we see a leveling off and an additional month of contraction.

Now let's turn to the chart of the Canadian ETF:

Prices broke the long-term trend line last week in a big way, printing a strong bar.  Since the, prices have dropped below the 200 day EMA, the 38.2% Fib level and all the shorter EMAs.  Since then, prices have rebounded, but are still below all the EMAs.  Also notice that the MACD has given a sell-signal.  Also note the overall declining MACD reading, with the gradually decreasing peaks in September, February and April.

Tuesday, April 9, 2013

Market Analysis: the Yen

Before we get into the charts, here is a link to the latest BOJ meeting minutes which were released yesterday.  The short version of the domestic situation is that the numbers have stopped weakening.  However, there is a great deal of expectation built into the numbers.

For example:

Exports were expected to start picking up, mainly against the background that overseas economies would gradually emerge from the deceleration phase.

Business fixed investment was projected to remain somewhat weak for the time being, mainly in manufacturing, but follow a moderate increasing trend thereafter, partly due to investment related to disaster prevention and energy.

Although there still was a high level of uncertainty, it seemed likely that industrial production for the April-June quarter would pick up, mainly reflecting a moderate recovery in overseas economies.

While all of the above scenarios may come true, they are based on expectations of future growth that may not come.

All that being said, let's turn to the yen.

First, the above charts shows the yen's yearly performance versus the Australian dollar, the dollar, the pound, euro and Swiss franc.  Obviously, the yen is the clear net loser on this chart.

Above is a yearly chart of the yen's ETF.  Notice the extreme sell-off that occurred starting in mid-November.  We wee this translate into very negative readings across all indicators -- EMAs, MACDs and CMFs.  Also notice the increased volatility implied by the widening Bollinger Band indicator.  There have been three periods of sideways, slightly upward sloping consolidation -- mid-November -mid-December, February and March.  However, these have all been accompanied by further moves lower.

The weekly chart shows the real damage from a technical side.  This is a five year, weekly chart of the yen's ETF.  Prices have moved through levels last seen in 1Q12, 2Q10 and 1Q9.  Again, we see very negative technical indicators at extremely negative readings.  Also notice the increased volatility from the widening Bollinger Band readings.

The Oil choke collar loosens: natural gas

- by New Deal democrat

This is the final installment following up on my 2011 prediction that the Oil choke collar would begin to loosen by about this year. I expected that conservation, hybrid vehicles, new oil exploration coming online, technology, and alternate forms of energy, would all gradually increase to the point of overcoming the constricture of expensive crude oil.

One of those alternate forms of energy is already having a big impact: natural gas.

The most recent data up through 2010 published by the E.I.A. in August 2012 shows, proven reserves of natural gas doubled in 15 years, grew by 50% in less than a decade, and were up 25% or more just between 2005-10:

If that trend has continued, then by now reserves have already doubled since 2005. And there is every reason to expect that the trend is continuing. According to Forbes,
"Shell [Oil Company] says that it expects the global demand for LNG to double to $400 million tons by 2020

... [N]atural gas used for transportation costs 25% less than petroleum.
[my emphasis]

That huge difference in cost is already transforming the truck and bus fleets in the US. According to the Denver Post:
fleet operators increasingly are realizing the benefits of using natural gas fuel, which runs, on average, about $1.25 per gallon equivalent less than gasoline.

"Fleet operators can definitely see the return on investment," said John Gonzales, a senior engineer at the National Renewable Energy Laboratory in Golden.

Trash hauler Republic Services saved $420,000 last year in its 34 trucks that burn natural gas. The company plans to convert more than 3,000 vehicles to natural gas or other alternative fuels by 2015.
So clear is the reeturn on investment that:
According to the American Public Transit Association, nearly one-fifth of all transit buses were run by compressed natural gas (CNG) or liquid natural gas (LNG) in 2011. Currently, transit buses are the largest users of natural gas for vehicles. The fastest growing NGV segment is waste collection and transfer vehicles. Almost 40% of the trash trucks purchased in 2011 were natural gas powered.
As a result, Pike's Research's Smart Transportation estimated that:
By year-end [2012], 123,600 natural gas vehicles will be on U.S. roads, compared with 65,500 plug-in vehicles
Further, the Forbes article reference above, after noting that FedEx, UPS, and Waste Management are already using large numbers of natural gas powered trucks, reported that:
In 2013, four major manufacturers will introduce a 12-liter LNG engine, which is the optimum size for heavy-duty 18 wheeler trucks.
And the transformation isn't limited to buses and trucks. Oil and Energy Daily reported that:
Three of the biggest U.S. rail carriers – Burlington Northern Santa Fe LLC, Union Pacific Corp.(UNP), and Norfolk Southern Corp. (NSC) – are all turning to natural gas as an alternative power source for freight trains.
In summary, while natural gas has not been adopted for passenger vehicle use, America's commercial transportation fleet is becoming natural-gas-powered with astonishing rapidity.

Obama on Social Security: a chronology

- by New Deal democrat

Regular nerdy economic blogging will resume shortly. For those of you who read us and also another blog currently running a bunch of articles about Social Security, here is a diary I wrote 3 years ago, in which I set forth in chronological order virtually every pronouncement Barack Obama made on Social Security between early 2007 and early 2010. His position changed almost instantaneously once he was elected in 2008 (in fact, the dairy includes a bunch of quotes from candidate Obama specifically saying he opposes cuts to Social Security, with citations).

Please do click on the link above, and feel free to call it to the attention of readers of that other blog. You hae my permission to republish it in full should you wish.

Market Analysis: Japan: Recent Central Bank Action and GDP

From Bloomberg:

After watching Ben S. Bernanke take unprecedented steps for four years to rebound from the worst recession since the Great Depression, the Bank of Japan (8301) is signaling that the Federal Reserve’s full-throttle approach to stimulus is the way to end 15 years of deflation. 

New BOJ Governor Haruhiko Kuroda’s move this week to embark on record easing means the world’s four biggest developed-market monetary authorities -- the BOJ, the Fed, the European Central Bank and the Bank of England -- are aligned in their commitments to spur growth and return their economies to full strength. 

“This is unprecedented on many levels,” said Pippa Malmgren, president and founder of Principalis Asset Management LLP in London and a former financial-market adviser to President George W. Bush. “Not only do you have the most in terms of size of economy or number of central banks, but the effort is a record effort. We’ve never seen such unconventional methods used to create as much inflation as possible.” 

The Financial Times provides the details of the plan:

The BoJ said it would double Japan’s monetary base from Y135tn ($1.43tn) to Y270tn by December 2014, mainly by buying more long-term government bonds. That will raise the average remaining maturity of its holdings from about three years to seven years, keeping downward pressure on yields all along the curve.
Under the new measures, the BoJ will expand its balance sheet by 1 per cent of gross domestic product each month this year and by 1.1 per cent per month in 2014, according to estimates from Barclays.

Here is the intended result (we don't know if this is what will happen):

Private spending will rise if people think saving money will provide a feeble return, a weaker yen spurs exports, and expectations that prices will be higher in future prompt a desire to spend today. It also allows the government to borrow more without worries about funding the resulting higher deficits and debt. So long as there is spare capacity in Japan, such a move should improve output and growth without sparking an inflationary spiral.

And finally, here is the announcement from the BOJ.

Let's place these actions in context with an overview of the economic backdrop.

The top chart shows that since the big recession, Japan had a second recession caused by the natural disaster a of early 2011.  For the last three quarters, GDP has also been negative.  The lower chart shows that the primary reason for the contraction was a drop in private demand in the form of non-residential investment and a drop in exports.

The above chart from the same report shows that shipment of capital goods took a massive nose dive in 2012, highlighting the lack of domestic investment.

Let's turn now to Japan's Leading Index:

The Conference Board LEI for Japan increased for the second straight month in January after eight consecutive declines. Large positive contributions from business failures (inverted), stock prices, and the index of overtime worked more than offset negative contributors from the Tankan business conditions index and dwelling units started. Between July 2012 and January 2013, the LEI fell by 0.7 percent (about a -1.5 percent annual rate), a moderate improvement from the decline of 1.5 percent (about a -2.9 percent annual rate) between January and July 2012. Additionally, the strengths and weaknesses among the leading indicators have remained balanced in the last six months.

Let's look at the internals:

The biggest negative influence is the Tankin business conditions index, which has been negative for the last five months.  Dwellings units have recently subtracted from the number as well.  Also note that the dix month growth rate of labor productivity has been contractionary as well. 

Let's turn to the Japanese markets, first remembering that the new government has been in place a few months now.

On the daily chart, notice that prices traded in a range between June and mid-January, bouncing between the 8.6 and 9.4 level.  Prices first started to move higher in mid-December, and have been in a rally since.  There are several periods of consolidation (early January, late February, early March), but those gains were always followed by strong moves higher.  We do see a sell-off last week on the weakening economic news, but prices have rallied higher.  Also note the strong volume and rising CMF readings. 

The weekly chart is where the Japanese market really shines.  Notice the very strong MACD and CMF readings, along with the rising prices.

The market is rising in anticipation of the potential success of the new government's stimulus program.  

Monday, April 8, 2013

The Oil choke collar loosens: new exploration

- by New Deal democrat

Ove the last couple of weeks, I have been following up on my prediction two years ago that the Oil choke collar would probably begin to loosen this year. At the moment, gas prices at the pump are almost 10% less than they were a year ago, and also less than they were two years ago. Since prices started to rise at the end of the 1990s, this has been very unusual.

In 2011, I said that one of the components of the Oil choke collar loosening would be the coming to market of new discoveries of Oil, chiefly deep offshore.

One of those I mentioned was the Guara Oil field off Brazil. Now renamed the Sapinhoa field, the first well has started to produce:
The Cidade de São Paulo has capacity to process 120,000 barrels of oil per day and 176 million standard cubic feet of gas per day.
Another deep Oil discovery that was described at the time as a "gusher" turned out dsastrously to be exactly that -- BP's Macondo field in the Gulf of Mexico. Even that oil field is now poised to recover. According to a recent story in the Wall Street Journal:
After a steep drop in oil production in the wake of the Deepwater Horizon disaster, the U.S. Gulf of Mexico is set for an energy boom.

Gulf oil flows will increase by nearly 28% by 2022 to 1.8 million barrels per day, according to consulting firm Bentek Energy. ...

Including natural gas as well as oil, production in federal waters reached a peak of almost 1.8 million barrels per day in 2009. But the 2010 Deepwater Horizon spill led to a six-month drilling moratorium as the government drafted new safety rules.

Oil and gas flows in 2010 were off just slightly from the 2009 peak, but dropped 18% in 2011 to 1.4 million barrels of oil equivalent. They are expected to bottom out this year at 1.3 million barrels.
But new discoveries of crude Oil coming onlilne is dwarfed by an alternative fuel the usage of which has boomed almost overnight. And the alternate source isn't electricity.

To be continued . . .

Hot Air and Powerline: Not Exactly the Sharpest Tools in the Economic Tool Shed

I think it was Paul Krugman who same up with the phrase "zombie meme:" an idea that -- despite being debunked numerous times -- continues to come back from the dead.  If not, I apologize to the phrase originator.

However, there are two memes that we keep seeing pop up -- almost always from political writers masquerading as economic writers -- that are wrong.  The basic problem with their "analysis" is that they fail to consider nuance, making their statements at best incomplete and at worst deliberately misleading.

Let's start with the declining labor force participation rate argument.  This was noted by John Hinderaker at Powerline last week in discussing the latest employment report: "The real story here is the steadily declining labor force participation rate." Then there is Ed Morrissey over at Hot Air, who stated, "The new civilian workforce participation rate of 63.3% is the lowest seen in almost 35 years, since the fall of 1978 — an era not exactly known for a robust American economy."  And there is agreement on this point from Hot Air writer Erica Johnsen.

To explain why both are wrong in their statements, let's start with a chart of the data:

Well -- that does look bad, doesn't it? 

Before we hyperventilate into a partisan hissy fit, let's back up a bit and look at what exactly is the "labor force participation rate?"  Thankfully, for those inclined to actually use it, there is a glossary at the BLS.  The participation rate is "[t]he labor force as a percent of the civilian noninstitutional population."  This requires us to define two more terms.  The labor force "includes all persons classified as employed or unemployed in accordance with the definitions contained in this glossary."  While the the non-institutional population is defined thusly, "Included are persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces."

Putting all of this information together, we get the following.  The labor force participation rate is the percentage of people who are employed or unemployed as a percentage of the population that, for all practical purposes, is probably available to work if they want to.  The information is derived from the month household survey, which is one of two employment reports issued by the BLS every month.

Now that we've gotten that out of the way, here's where the nuance comes in.  First, the noninstitutional population has no upper age limit.  Hence, it includes people over the age of 65 -- the traditional retirement age.   What would happen if your population was getting older?  What if there was this demographic group called the baby boomers?  And what would happen if they happen to start retiring, say, over the last 10 years, but their retirements really kicked into high gear over the last few years?

You see, oh promoters of the "labor force participation rate decline means all things are bad and we're going to hell" meme, the labor force participation rate starting rising in the late 1960s because of two trends: the baby boomers entering the job market and women entering the labor job market.  These two trends increased the number of people who were either employed or unemployed, hence increasing the labor force participation rate.  And, as the baby boomers start to retire -- as we are now seeing at the pace of approximately 10,000 per day -- we're see that number decrease.   Ultimately, this analysis is based on definitions, math and fractions and understanding them in a bit more detail will increase your economic acumen.

For those who would actually take the time to research the issue (that means asking people who know what they're talking about) there is actually some very good research on the issue.  Take this report from the Kansas City Federal Reserve:

This article presents a variety of evidence—including data on demographic shifts, labor market flows, gender differences, and the effects of long-term unemployment—to disentangle the roles of the business cycle and trend factors in the recent drop in participation. Taken together, the evidence indicates that long-term trend factors account for about half of the decline in labor force participation from 2007 to2011, with cyclical factors accounting for the other half.


The steady decline of the LFPR since its peak at the turn of the century is also related largely to demographic factors. The primary factor behind this decline is the rising share of older workers in the population as the baby-boom generation ages and life expectancies increase. The rising share of older workers pulls down the LFPR because older workers have lower participation rates than prime-age workers. A second factor behind the gradual decline of the LFPR has been a steady  reduction in labor force participation among young people over the
last decade, resulting in large part from rising school enrollment

There is also this analysis from the Chicago Federal Reserve

Labor force participation has fallen significantly over the past decade. At least some of this decline is due to the recent deep recession and lackluster recovery. Additionally, for quite some time, economists have forecasted that shifting demographics, particularly in the age structure of the population, would put downward pressure on labor force activity. We estimate that just under half of the decline in LFPR since 2000 is due to such factors. We expect these demographic patterns to continue for at least the next decade, and likely far

Put another way, the research on the issue indicates that about half of the decline is due to demographic factors, primarily younger workers leaving the labor force and staying in school (isn't that a good thing in the long run?) and older workers retiring.

Now, that does mean that the other half of the decline is due to the current economic situation, which is not good.  But, let's ask the Powerline and Hot Air authors what their solutions to that problem are and and you'll get "austerity" as the answer -- a plan that is a primary cause of Europe's current problems and now 12% unemployment rate.  In short, their "solution" would exacerbate the problem.

Let's turn to "the recent upturn in disability payments are actually stealth unemployment benefits, making the increase a sign that the 47% are actually mooching off the government .... blah, blah, blah.  These meme was bolstered by a recent story on NPR about the rise of disability benefits over the last 5 or so years.  Powerline approvingly cited the NPR story here and Hot Air here (but isn't NPR a liberal news source not to be trusted?) 

The problem with this concept -- and the NPR story -- is a lack of  nuance.  Let's start with the raw data: how many of these claims are actually accepted?  According to the facts, it's actually a little less than half the claims:

Now, there has been an increase in the total number of applicants.  In 2005 we see total applications of 2.3 million and in 2010 we see total applications of 2.8 million.  However, also remember: we're getting older (see discussion above).  And as we get older, our bodies start to break down.

To get a more complete feel for the nuances of the issues, read this great interview over at the Post's Wonk Blog (this involves reading, which will probably prevent most people from actually, you know, reading the data).

In fairness to Powerline and Hot Air, they are both political blogs not economic blogs -- and both are quite skilled in that arena.  And  neither are known for their penetrating economic analysis or financial acumen.  In fact -- as a heads up to both  -- quoting Zero Hedge as an authoritative economic source is pretty much the last thing you want to do if you want to be taken seriously in the economic world. However, the above errors are large and should be corrected or addressed to clarify the point to their readers -- an act that won't ever happen.

NDD in the Christian Science Monitor

Congrats to NDD's Piece yesterday on the coming Democratic Götterdämmerung.  He was just cited in the in Christian Science Monitor.

Market Analysis: Treasuries Catch a Bid

Consider these two charts of the IEIs (3-7 year treasuries) and IEFs (7-10 year treasuries):

Both have been trading in a range for about 8 months: the IEIs have been trading between 122.25 and 123.50/.75, while the IEFs have been trading between 105.5 and 108.5.  The Fed's bid has provided a floor to the market.  The trading ranges can be classified by the two distinct rectangles I've drawn on the charts.

However, last week both charts printed strong rallies, with the IEIs moving through upside resistance at the 123.75 level and the IEFs right at upside resistance.

Let's turn to the longer end of the market:

Both the TLHs (10-20 year treasuries) and TLTs (20+ years treasuries) have similar charts.  Since the beginning of December last year, both traded in downward sloping triangle patterns. We see both moving through the 200 day EMA in late February and then selling off.  However, both also caught a strong bid last week.

Let's look at some of the reasons for last week's rally:

First, there was a surprise slowing in the ISM reading:

Treasurys rose on Monday, the first day of trading after the long holiday weekend in the U.S., as the ISM manufacturing survey posted a surprise decline in March. 

The ISM Index fell to 51.3% last month, the lowest pace of manufacturing expansion since December, compared with February’s 54.2%. Any level above 50% signals expansion. Economists polled by MarketWatch had expected the index to remain unchanged. 

“The miss is a pretty drastic one,” said Rogan. “Still showing a growth in the industry but if you look at this number, the momentum is certainly slowing down,” he said. 

Let's look at the data:

"The PMI™ registered 51.3 percent, a decrease of 2.9 percentage points from February's reading of 54.2 percent, indicating expansion in manufacturing for the fourth consecutive month, but at a slower rate. Both the New Orders and Production Indexes reflected growth in March compared to February, albeit at slower rates, registering 51.4 and 52.2 percent, respectively. The Employment Index registered 54.2, an increase of 1.6 percentage points compared to February's reading of 52.6 percent. The Prices Index decreased 7 percentage points to 54.5, and the list of commodities up in price reflected far fewer items than in February. In addition, the Backlog of Orders, Exports and Imports Indexes all grew in March."

Of the 18 manufacturing industries, 14 are reporting growth in March ...

There  is a breadth to the decline -- which occurred at the macro level and the new orders and production sub-indexes that is concerning.  However, it's only one month of data.

There was also the slower ADP jobs data and weaker ISM Services reading on Wednesday:

Lower-than-expected growth in private-sector payrolls and a decline in a U.S. service-sector gauge led to gains in Treasurys on Wednesday.

The U.S. economy added 158,000 private-sector jobs in March, well below economist estimates of 215,000 jobs, according to data from Automatic Data Processing Inc. The monthly gain was the smallest since October.

The ISM services index for March fell to 54.4% from February’s 12-month high of 56%, showing a relatively slower pace of business expansion. Economists polled by MarketWatch expected a decline to 55.8%.

Here's the press release from the ADP data:

Private sector employment increased by 158,000 jobs from February to March, according to the March ADP National Employment Report®, which is produced by ADP®, a leading provider of human capital management solutions, in collaboration with Moody’s Analytics. The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. Revisions to job gains in the two prior months were offsetting; February’s gain of 198,000 jobs was revised up by 39,000 to 237,000, and January’s 215,000 gain was revised down by 38,000 to 177,000.

 And the accompanying chart of the data:

 Notice how the ADP data tracks the BLS data pretty closely.

Then there is the ISM services data:

The NMI™ registered 54.4 percent in March, 1.6 percentage points lower than the 56 percent registered in February. This indicates continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 56.5 percent, which is 0.4 percentage point lower than the 56.9 percent reported in February, reflecting growth for the 44th consecutive month. The New Orders Index decreased by 3.6 percentage points to 54.6 percent, and the Employment Index decreased 3.9 percentage points to 53.3 percent, indicating growth in employment for the eighth consecutive month. The Prices Index decreased 5.8 percentage points to 55.9 percent, indicating prices increased at a slower rate in March when compared to February. According to the NMI™, 15 non-manufacturing industries reported growth in March. The majority of respondents' comments continue to be positive about business conditions; however, there is an underlying concern regarding the uncertainty of the future economy."

While the macro level number's drop could be attributed to statistical noise (it only dropped 1.6%), the internal drop in the new orders index and employment index were pretty steep.  In addition, the drop in new orders usually means lower ISM readings in the coming months.

Finally, we had weak employment news on Thursday and Friday (which we detailed here, here and here.  But also see NDDs positive comments here).

Remember that on the other side of rising treasury prices are declining treasury yields.  With CPI at 2% right now treasuries are a losing trade without capital appreciation, where limits the profit potential in anything beyond a short term trade.

Sunday, April 7, 2013

Let the Democratic Götterdämmerung begin

. - by New deal democrat

One of my stock lines in conversations about Daily Kos is that "the most important diaries are jotter's." By that I mean that the daily statistical update shows a steady hemmorrhage of participants that started all the way back with the Obama vs. Hillary battles in 2008. Many Hillary supporters (see, e.g., The Confluence, one of the most underrated progressive political blogs there is) left and never came back. Others left with Blackwaterdog, or when Bonddad and I left, or after other battles.

Still, Kos has managed to maintain un uneasy balance between participants who fall on each side of the "more and better democrats" that is the self-proclaimed reason for his blog's existence.

Until now.

Just after the November elections, there was a host of commentary about how the GOP might split apart, torn between its Chamber of Commerce wing and its Tea Party Social Conservative wing. To the contrary, I countered, it was more likely that the Democratic Party would split between Progressives and Wall Street social liberals. With Obama's specific proposals of cuts to Social Security and Medicare, there is no more dodging the bullet. This is where "more" democrats has taken us. To a proposal made by a man who is a self-proclaimed 1980s Reagan Republican to roll back the New Deal and bring Reagan's revolution to fruition.

For many grass-roots democrats, this is a bridge - no, an ocean - too far. Any "democrat" who supports these proposals is never going to get my vote. Period. I will support any primary opponents and I will accept a one term GOPer if necessary to end the political career of any Grand Betrayers, replacing them with a progressive in 2 or 6 years. And I know I am far from alone.

There is no choice. The Rubicon has been crossed, the die have been cast. I know where I stand. Shortly people like Kos, who has been conspicuously silent on this issue, will have to as well. Specifically, he'll have to decide whether or not to ban about half his commenters, who are ready to bolt. Let the Götterdämmerung begin.