Great idea. Now how do we pay for it?

 - by New Deal democrat

Franklin Delano Roosevelt was a political genius. He deliberately designed Social Security as a social insurance program into which virtually everybody paid, and virtually everybody benefited. By so doing, he ensured that the program would have the broadest possible support, and would withstand GOP attempts to destroy it.

That genius is showing even now, as 5 years into the term of a President who has repeatedly put cuts in Social Security benefits "on the table," and with the most reactionary GOP House majority in nearly a century, Social Security remains intact.

Let me be blunt about FDR's genius:  the moment SS is turned into a welfare program, it is dead.  It will not survive even one generation.

So while I agree with calls to increase the well being of seniors, who have been disastrously failed by private pensions being abrogated in bankruptcy, and by 401k plans that require them to be investment geniuses, and I also applaud moving the Overton window, so that we are discussing expanding, rather than cutting, middle class programs. .. , I have a question for Profs. Mark Thoma, -Paul Krugman,  Elizabeth Warren, andDuncan Black .

How are you going to pay for it?

If you believe that SS should pay those benefits, (as opposed to some separate program paid for out of the general fund), and you don't fund them, or you are unable to explain why the lower  interest rate bound means we can just print the money (if you believe that is true), then you have just signed Social Security's death warrant.

Lowest inflation in 50 years (ex-great recession) helps wages, jobs

  - by New Deal democrat

I've been saying for months that all you really need to know in order to estimate inflation is the prices of gasoline, and exactly as I predicted 3 weeks ago, the decline in gas prices to a near three year low caused October consumer prices to decline -0.1%, and YoY inflation to come in at +0.9%, the lowest inflation rate in 50 years outside of the Great Recession.  Here's the graph:




As a result of the nearly non-existent inflation, real wages have continued to improve, and are now only 1.2% below their 2010 peak:




October Retail sales also came in strong yesterday, at +0.4%.  This means that real retail sales increased +0.5%.

A long time ago, I pointed out that real retail sales are a particularly good leading indicator for jobs.  The YoY comparison in real retail sales had been declining, although still positive, coming into this year, but again, almost certainly due to the loosening of the Oil choke collar, the trend in YoY real retail sales has improved, as shown in the below graph in blue:



Shown in red in the above graph is the YoY change in jobs.  First of all, as I said above, real retail sales are a good leading indicator for jobs.  Note that since 2011, as the trend in sales decreased, so did the trend in jobs, with a lag.  Now that the trend in sales is increasing, albeit slightly, the trend in jobs looks like it is turning up slightly as well.  October sales suggest that the YoY trend in jobs should continue to improve for the next few months.

Colombian ETF Provides A Shorting Opportunity

The Colombian  ETF is providing a solid potential short.  Prices consolidated in an upward sloping pennant pattern from August through October, but then broke support.  Last week prices rebounded but ran into upside resistance at the 10 day EMA.  Momentum is weak and money is leaving the market.

Past corporate profits as a leading indicator for future stock prices

  - by New Deal democrat

I have a new post up at XE.com about how reported, as opposed to estimated future corporate profits are a leading indicator for stock prices.  This is one of the rare times I comment on investments vs. economic issues.

Yellen's Benchmarks (Link Fixed)

What economic indicators does Janet Yellen look for?

The Social Security Trust Fund surplus was never going to be locked untouched in a vault

 - by New Deal democrat

[Note: I think Bonddad is overwhelmed with work this week. I should have a nerdy post up at XE later today or tomorrow, and of course I'll link.  In the meantime, let me continue to follow up on Monday's post.]

My post Monday was picked up by Doug Short and posted at his investment site, where it got a very different readership from here.  One of the readers contacted me, and repeated the claim that the Social Security Trust Fund is fictional.  My reply included a point I've never heard anybody else make, but needs to be understood:  of course the SS Trust Fund surplus was spent, and should have been spent.  The only question was who decided how it was spent, and so who had to cash in the investments when the Boomer generation retired.

The 1983 SS reforms created the modern Trust Fund.  Mindful of the fact that the massive Baby Boom generation would inevitably retire and tap into the system someday, withholding taxes were raised to create several what is presently a $2.7 trillion reserve, designed to pay out starting about now.  Think of it as a massive 401k plan, where withdrawals from the plan are natural and intended once the contributor reaches retirement age.

Does anybody seriously believe that the excess paid into SS since 1983 should have been locked away in a vault or an underground cave, unused?  Can you imagine just how badly the economy would have performed in the last 30 years if, literally, trillions of dollars had been withdrawn from it (not to mention the multiplier effect of that withdrawal)?

Of course the SS surplus should have been invested back into the economy.  The only two questions were, first, who was to act the fiduciary of those funds?  Anybody think, in retrospect, Wall Street would have been a good choice?  Passing that little issue,  how to spend it could have been decided by private enterprises, public enterprises (i.e., government), or both.  The surplus could have been invested for either private or public spending, or both. Even if it were private entities investing the excess SS funds, and there had been returns of X and Y, the problem of what to do with the returns would still have existed.

What actually happened is that, instead of banks or private enterprises investing the funds, government invested the funds in the general economy, and promised to pay the money back - exactly what would have happened had private firms invested the money.  They would have had to promise to pay the money back.

The second question was, how were the Trust Funds to be invested?  Like a good fiduciary, the US Treasury decided, by law, to invest the SS Trust Fund proceeds in a conservative, safe, highly liquid asset - interest bearing US Treasury bonds themselves.  One certainly hopes (against all odds) that private fiduciaries would have made a not dissimilar choice.

The bottom line is that, at the end of the day, either (e.g.) Goldman Sachs could have promised to cash in those Treasury bonds to pay back the SS Trust Fund when the Boomer generation retired, or the US Treasury could promise to pay back the SS Trust Fund when the Boomer generation retired.  That was the choice. Period.

So now, hopefully, we have established 4 things:

1.  The SS Trust Fund was always going to be invested back into the economy.

2.  The fiduciary of the Trust Fund would almost have to invest most of those funds in US Treasuries and similar vehicles.

3.  The only real question was who was going to be the fiduciary.

4.  When the Boomer generation started to retire, the funds held by the fiduciary in US Treasury bonds and similar conservative investments would have to be cashed in.

That it is the general fund controlled by the US Treasury which has to cash in those bonds vs. a dedicated Goldman Sachs account - or maybe you would prefer a dedicated MF Global account? - is a distinction without a difference.

We can fix it our way, or ...

- by New Deal democrat

It's pretty clear Duncan Black (Atrios) read my piece yesterday and didn't much care for it. ("We need to ruin it our way").

While I agree that the fetishists and the GOP will never be satisfied, the fact is that there is a shortfall - relatively small and relatively remote - but nonetheless real.

Right now Dems have to reply that "Yes there is a problem but ..." whereas if there were a democrat-only fix they could reply, "The Trustees say it is fully funded, so STFU".   Or more polite politician-speak for the same thing. 

Plus, you know, the actual problem would actually be fixed.

A plan to keep Social Security solvent forever

- by New Deal democrat

My modest goal in this post is to set forth a plan that keeps Social Security able to pay promised benefits forever, that does not require any "compromise" with the  GOP and so can be passed simply with democratic majorities in Congress, and can explicitly be embraced as a campaign promise.

This plan relies upon using the Social Security Trustees' Report projecting the condition of the fund 20 years out, and automatically making small adjustments each year in the direction needed to balance the Fund over that time frame.  In this way it maintains the solvency of the Fund - forever.  How can I make such a bold claim?   Because if small changes are made automatically each year to maintain the program in actuarial balance 20 years out, the changes can run in both directions, alternately increasing or decreasing the Trust Fund balance as necessary, in very small and gradual steps.

The small adjustments each year are made to all four measures that have been suggested to balance the fund over the 30+ years since the retirement of the Baby Boom generation has been proclaimed as entitlement Armageddon, plus a fifth that, frankly, should have been put in place 30 years ago, but better late than never.

I offer this in contrast to the approach by corporatist democrats in Washington, who are back to doing what they seem to do best: pre-compomising with a resolutely intransigent GOP to give away the progressive family jewels of the 20th century in return for (tempoary, until the fist year of the next GOP Administration) tax increases on the wealthy, or maybe even just some transient infrastructure or education spending.  Let me be as clear as a bell. I do not favor any "grand bargain" of any sort with the GOP. It is clear that when the GOP next returns to power,whenever that will be,they will welch on the deal, just as George W. Bush took Clinton's emerging budget surpluses and "gave you back your money" by taking the surpluses in the trust fund accounts and giving them to the top 1% in the form of mammoth income tax cuts. 

So let's start by understanding why we need to address this issue at all:

While revenues from payroll taxes are less than current Social Security benefits, the program also receives interest payments on accumulated trust fund surpluses. Those surpluses now exceed $2.7 trillion and are projected by program trustees to rise to more than $3 trillion by 2021. Under current rules, surpluses would then decline due to rising numbers of baby boomer retirees and growing annual deficits. The trust fund would be depleted in 2033, at which time annual payroll taxes would fund about 75 percent of promised benefits.

Note that this is hardly a looming crisis, and you can find all kinds of quotes from the 1990's and even the 1980's if you try, that by now, i.e., 2013, the program would be broke or exhausted. To deal with the shortfall, it is estimated that expenditures to continue to fund Social Security benefits at current levels must rise from 3% to 4% of GDP.  Meanwhile, tax receipts have decreased from 1980 from about 22% of GDP to 18% of GDP.

In short we have a real, but relatively distant, and relatively small, problem with Social Security, that needs to be addressed, but need not in any way materially change the program. Over the 30 years+ since this problem was first identified, four types of fixes for this shortfall have been proposed:

• 1. Withholding taxes, currently at 6.2% per employee,and matched by 6.2% from the employer,up to about $113,000, can be increased.
• 2. The amount of wage revenue captured by the trust fund can be increased. When Social Security started, 90% of all earned income was subject to the tax. Due to ballooning income inequality, the last time I checked only 83% of earned income was subject to the tax.
• 3. The retirement age, currently slowly rising to age 67, can be further increased.
• 4. Benefits can be cut, by not keeping up with consumer inflation (for example,by implementing an alternative, lower calculation of inflation).

All of these approaches have drawbacks, especially if implemented singularly.  I want to examine each.  If you want to cut to the chase, skip down to the heading "HOW THE PLAN WORKS."

1.   Increasing withholding taxes

The Northwest Plan, proposed by Bruce Webb and Dan Coberly, makes no cuts at all but relies entirely on increases to withholding taxes:

restoring Social Security to Short and Long Term Actuarial Balance requires tax boosts of 0.02% ( 0.20% per year (once again about a $1 a week for the median income household) for the ten years starting in 2026. Starting in 2036 those increases slow to only needing to change every four to ten years.

While this plan avoids cuts, it is unclear if average workers of Gen X or the Millenial generation would be willing to stomach a 2% increase in taxes from 6.2% to 8.2% in order primarily to fully fund Boomer retirements.

2.  Raising the amount of earned income subject to tax withholding.

What about the remedy touted by 2008 candidate Obama?  According to a report prepared by the Congressional Budget Office [pdf]:

Raising or eliminating the cap on wages that are subject to taxes could reduce the long-range deficit in the Social Security Trust Funds. For example, if the maximum taxable earnings amount had been raised in 2005 from $90,000 to $150,000—roughly the level needed to cover 90% of all earnings—it would have eliminated roughly 40% of the long-range shortfall in Social Security. If all earnings were subject to the payroll tax, but the base was retained for benefit calculations, the Social Security Trust Funds would remain solvent for the next 75 years. However, having different bases for contributions and benefits would weaken the traditional link between the taxes workers pay into the system and the benefits they receive.

As noted in the quote, an over reliance on this alternative makes Social Security look more like a welfare program, transferring money from the affluent to the working poor, and once Social Security is viewed as a welfare program it is politically doomed.

3.   Raising the retirement age.

One type of cut sometimes touted is to the age at which Social Security benefits can be collected.  The Social Security Trustees reported:

[If] the increases in the retirement ages occur over a very long period[, a] mid-career worker born in 1972 and turning age 62 in 2034 would have a FRA of 67 and 6 months under all three options, with an EEA ranging from age 62 under the growing-gap option to 63 and 6 months under the gap-4 option ..... The growing-gap option would produce the maximum number of early retirement months (that is, 66 months) for this worker, resulting in a benefit reduction of about 32 percent (see the previous tabulation). The effects on benefits for a midcareer worker would not be significantly different from scheduled benefits; however, the effects on benefits would be larger further in the future. An individual born today and turning age 62 in 2074 would have a FRA of 69 and 2 months under each of the options, with an EEA ranging from age 62 under the growing-gap option to 65 and 2 months under the gap-4 option. The growing-gap option would produce the maximum number of early retirement months (that is, 86 months) for this worker, resulting in a benefit reduction of about 40 percent.

As is obvious from the above quote, raising the retirement age for workers can result in a drastic cut in benefits, ultimately gutting the program.

4. Implementing a lower measure of inflation

During his 2008 presidential campaign, Obama repeatedly said that he favored raising the amount of earned income subject to withholding taxes to fix the problem.  He has not said a peep in favor of this solution since he won that election.  Instead, he has most recently explicitly embraced cutting benefits over time by indexing them to chained CPI , which tends to rise about 0.3% less per year than the usual CPI measure of inflation.

How would that change impact retirees?  The AARP reports that

If the chained CPI-U were implemented in 2014, a single person claiming the SSI federal benefit standard in 2030 would receive $32 less (-4.6%) per month in real terms, and a person claiming SSI benefits in 2050 would receive $71 less (-10%) per month in real terms, than if the CPI-W continued to be used to determine the SSI benefit standard. In addition, a Social Security COLA based on the CPI-W is applied to SSI benefits after receipt has started. After 10 years of SSI benefit receipt, the SSI benefits of a person who first claimed in 2030 would, by 2040, be $52 less (-7.3%) per month in real terms, and the benefits of a person claiming in 2050 would, by 2060, be $89 less (-12.6%) per month in real terms, than if the CPI-W had been used to determine the benefit standard and the COLA.

If chained CPI were used to calculate benefits continuously over the next few decades, ultimately Social Security would dwindle into a cipher.  In short, over the lifespan of today's teenagers, Social Security would essentially cease to exist.

Obama's current pre-comprosmise of moving to a chained CPI, with increased benefits to lower earners, will effectively kill the program over about a 50 year span, partly by turning it into an unpopular welfare program, transferring withheld wages from affluent middle class earnersand giving them to working class and poor workers, and partly because the chained CPI continues to cut into benefits forever, eventually rendering Social Security a cypher of its present self.  In fact I am on record that any "democrat" who votes for such a cut will never under any circumstances have my support or my vote, and if that causes a new progressive political party to rise, I will join that party.

5. Claw back excess benefits paid after the beneficiary has passed away

 One other option that I've never seen discussed, but in my opinion should have been implemented long (as in, maybe 30 years) ago, but better late than never,  is a clawback of excess benefits due from estate  tax.  Since the automatic COLA was added in the early 1970's, there were many recipients of Social Security who received far more in "real" benefits than they ever paid in.  At some level,  these excess benefits should be clawed back on a progressive basis.  In other words, if a worker received much more in Social Security benefits than s/he paid in, adjusted for inflation, then the excess should be remitted back to the Fund on the recipient's death, for example, $1 clawed back for every $3 that the estate exceeds $500,000.

HOW THE PLAN WORKS

My plan is actually pretty simple.  How to ensure that there is no shortfall in 20 years or so? Very gradually, on an annual basis, make small changes - in baby steps so that no impact is large - to all four of the above items (only applied to those not already receiving the benefits), until the program is in long term balance, plus implementing the clawback provision.

Here's my specific proposal:  in addition to a clawback provision, in every year where the Trustees report that the Fund will be underfunded by at least 5% 20 years out, the following measures (none of which would apply to current recipients) are taken:

• 1. The percent of total earned income collected by the fund increases by 1%, and continues to rise by 1% a year until it reaches 90% of all earned income! the percentage it was in the early decades of the program.
• 2. Withholding taxes increase by 0.1%.  For example, in the first such year withholding taxes increase from 6.2% to 6.3%.
• 3. The age at which persons qualify for benefits, and to qualify for full benefits, increases by one month.
• 4. The annual cost of living increase is reduced by 0.1% a year for 10 years (meaning a 1% cut in benefits 10 years out.

The process would get repeated every year until the Trustees report that the Fund is not projected to have any shortfall 20 years out. 

In addition to the clawback, the only embellishment to this method is that raising the amount of income captured to 90% of all income in 1% annual steps should be done regardless of the status of the other steps, since that is the level of income that in earlier times was subject to withholding.

The result is that, under this scenario, about 40% of any such shortfall is made up by raising the amount of income subject to the withholding tax. The remaining 60% would be made up at about 20% apiece by each of the other measures. (plus an unknown amount due to the clawback provision). At current projections, it would probably require 4 or 5 years of such measures in order to fully fund Boomer retirements.  If 5 years were required, then withholding taxes would rise to 6.7%, the age for full retirement would rise to 66 years and 5 months, and benefits 15 years out would be 5% less than at present.  To repeat, once this is done then the Trust Fund is fully funded for all future retirees.

Aside from the fact that the current projected shortfall is addressed in baby steps, the virtue of this plan is that its automatic adjustment process is permanent.  Should the Fund ever be overfunded by 5%, then each of the 4 measures can be reversed in the same baby steps.  Benefits can gradually be increased and retirement ages and withholding taxes lowered until the Fund is reduced to show balance in 20 years.

This plan does include minor, and limited, cuts.  A 5% decrease in the average annual benefit of roughly $1225.45 a month, or $14,305.40 a year, is $715.20 a year (15 years from now, only as to new beneficiaries).  Over a 20 year life expectancy from age 65, this would total about $14,300, so the average wage-earner would have to save this amount over their work lifetime to make up for this cut.   At some point at the low end of the scale, asking a member of the working poor to save even another $4,000 or $6,000 over a 40 year work-life still may involve hardship.  If so. this should be addressed outside of the Social Security system, since anything that turns Social Security more into welfare will severely undercut its broad public support.

Similarly, some progressives, such as Duncan Black a/k/a Atrios, are calling for Social Security benefits to actually be increased.  This plan does not address that issue.  My point is that, first, we have to balance the current system.  Once we do that, if we decide funding must be increased, then we can discuss raising withholding taxes or the percent of earned income captured even further.   Any giveaway that detracts from the public seeing that the Trust Fund is solvent in the long term, undercuts the long-term political viability of the system.

To put it bluntly, once this plan is implemented then Social Security is, or should be, "off the table" forever, even unto the grandchildren of today's teenagers and beyond.   Since it is a budget item, it could be passed with 51 votes in the Senate. I offer it as proposed legislation to be pledged and passed by the Democratic Party, with no participation or compromise with the GOP whatsoever, should the voters give democrats a majority un both Houses of Congress.

Weekly Indicators for November 11-15 at XE.com

- by New Deal democrat

Weekly Indicators are up at XE.com.

Hopefully the link takes you directly there. If not, click on the "forum" header in the tabs at top, and then click on "Market Analysis" and it shold be the first topic.

The post-shutdown bounceback is complete, but the long leading indicators don't look so healthy ....

Yes, the decline in gas prices is a good thing

- by New Deal demorat

I have a new post up at XE.com about the shift in the secular trend in gas prices, responding to Barry Ritholtz's piece in Bloomberg wherein he speculated that the near 3 year low in gas prices was about economic weakness.

http://community.xe.com/forum/xe-market-analysis

In order to get to the article, click on "forums" and then "market analysis" and the article will turn up.

P.S.  XE.com assures us that they are working on the blog format and making other improvements so that our posting abilities are easier and more thorough.  It hasn't helped that "upgrading" to Apple's iOS 7.0.3, necessary for me to post at XE, has seriously degraded its ability to play well with Blogger.

Employment Slack Gives Central Banks Plenty of Room to Keep Rates Low

This is up over at XE.com.

Chinese Market Consolidating at Low Levels

Above is a weekly chart of the Chinese market.  Prices have been moving lower for the last three years.  Over the course of 2013, we've seen consolidation between 1950 and 2443. 

Japanese Market Consolidating

The weekly Japanese shows two important trends over the last year.  First, we see the post-Abe rally, when the market became excited about the prospect of reforms that would finally lead Japan out of the deflationary era.  Second, we see prices consolidating gains, starting in the second quarter. 

Now we wait to see which way prices break before making another move.

Higher Inflation Numbers Add Upward Pressure to India's Rates

This is over at XE.

Mexican ETF Breaks Support

The above chart shows that for the last 4-5 months, the Mexican ETF has been consolidating in a symmetrical triangle pattern.  Momentum has been weak and volume flow has been fluctuating between positive and negative territory. 

Prices has had a difficult time maintaining any momentum above the 200 day EMA.  Prices broke through in August and September, but quickly retreated below this important technical line.

The weekly chart confirms the weakness in the market.  Last week prices printed a long candle on fairly decent volume.  The MACD is still in negative territory as well.

Low Commodity Prices Are Giving Central Banks Plenty of Room to Keep Rates Low

This is up over at XE.

Europe ETF Is At A Buying Point

The Europe ETF has been in a good rally since the beginning of July.  Prices are in a "higher high, higher low" bullish pattern.  Currently, prices have fallen back to the trend line connecting the early September and early October lows.  In addition, the numbers coming from the EU have been fairly positive for the last few months, adding more momentum to the chart.

The oil choke collar disengages: gas prices near 3 year low

  -- by New Deal democrat

As you all know by now, I think one of the big hidden stories in the economy for the last decade has been the Oil choke collar, where growth causes energy prices to spike, causing growth to slow,  causing energy prices to decline, meaning that energy prices have acted as a governor limiting US economic growth in particular.

Several years ago, I suggested that trends in exploration, efficiency, alternative fuels and conservation  would finally have enough combined impact that the choke collar might start to disengage in 2013.  It looks like that is happening.

In the last few days, gas prices have declined to the point where gas is no cheaper than at any point in 2011 and 2012.  It is at a near 3 year low, as shown on this graph from Gas Buddy:



Gas prices started rising on a secular basis from less than $1/gallon in early 1999.  As the below graph of YoY price changes shows, with the exception of the bottoms of the last 2 recessions, and the near recession of 2006, 2013 has marked the biggest YoY price decline since the secular bottom:



Here's a close  up of the last couple of years,showing that prices have been lower most of this year than they were at the equivalent time one year ago:



 As a result,YoY inflation is likely less than 1%, the lowest reading outside of the great recession in 50 years.  This also means an increase in the real wages of the median  American working household.

Treasuries are Looking Like A Short

The US treasury market has been slightly off for the last few years, largely because of one large buyer: the Fed.  The central bank's bond purchases have put a continual bid in the market, thereby keeping prices are elevated levels.  However, the charts are telling us the market thinks the Fed is a bit closer to getting out of the bond buying business, which tells us it's time to short the market.  Let's take a look at the charts:

 

On the daily chart, we see the May-September sell-off which was caused by the Fed stating it was going to begin to taper it's bond buying program.  During this sell-off, the market lost a little over 9%.  But from September to the beginning of November a small rally occurred.  There are two reasons for this.  First, we have a natural counter-rally to the sell-off, as some traders thought the sell-off was overdone and subsequently buy at what they perceive to be as value levels.  At the same time, some of the overall economic numbers were printing at weak levels, which implied the Fed wouldn't be tapering as soon as thought.  

However, last week we had two important reports: GDP printed at 2.8% and the employment report printed at a little over 200,000 jobs created.  This indicated the economy had withstood the shutdown in fairly decent shape, which implies the underlying economy is in fact far stronger than anticipated.  As a result, the IEFs broke their short-term trend line from the September-early November rally.

Just as importantly, the weekly charts shows that prices have broken a weekly trend line as well. 

These charts are all saying the same thing: if you're going to short treasuries, now's the time.

A thought for Sunday: putting this all in perspective

- by New Deal democrat

First of all, apologies for the light posting this past week. Both Bonddad and I were up to our elbows in alligators with our day jobs, and neither of us had any spare time.

In my case, I was attending a seminar that required 12 hours+ of partipation and study in another part of the country, Rather than talk shop with other members of my own profession, I got acquainted with a guy who was in the US on his very first, 2-month, assignment outside of the third world country that is his home.   I had noticed that he had breakfast and dinner by himself, so I went over and introduced myself.  He told me that he stayed in touch with his wife and family by skype each night.

He also told me that the island he lived on had just one month ago been the epicenter of a magnitude 7 earthquake, and showed me photos of the damage in the town where he lived -- in the central Philippines.

On the last night of my stay, he asked me if I had heard about the approaching supertyphoon.   I hadn't.   We were going to say our good-byes at breakfast the next morning, but he never showed.

I can only imagine what it must have been like to skype with his young wife as Supertyphoon Yolanda bore down on their town, and the power went out.

I'll try to get back in touch this week, and I'll let you know if I hear anything.

Weekly indicators for November 4 - 8 at XE.com

- by New Deal democrat

Click on the link for this week's edition of Weekly Indicators at XE.com. The nearly 3 year low in gas prices, plus the receding of the effects of the government shutdown, cetainly are helping.

Commodity Prices Are At Bay

Above is a weekly chart of the total commodities index.  While it is fairly dominated by oil, the other commodities are present in sufficient quantities to make the following point: there just isn't much commodity based inflation in the system right now.  And overall, that's a very good thing as it allows the various central banks to keep rates low as the world at large is still in pretty weak economic shape.

Primary coincident economic indicators for September continue to show slow growth

- by New Deal demorat

[Note: this was supposed to be a post at XE.com, but we're still working on uploading graphs, and I wanted to make sure I got this information out.]

For four years, there has been a brand of pundit I mock as "Doomers." These are the people who, week after week and month after month have written long-winded, persuasive sounding epistles, usually accomplanied by whatever data point is pointing south now, explaining that the economy is nowhere near growing, or never adding jobs, or heading for a double dip, a triple dip, or whatever dip it is going to be next. When the eonomy doesn't cooperate, or last month's sure-fire negative indicator improves, it is lost to the memory hole and on to the next sure harbinger of DDOM! we go.

Meanwhile those of us who are just boring nerds keep our eyes focused on the data, operating under the theory that it is far more likely than not, that it's not different this time, and that data has consistently told a story of slow but steady improvement.

September brought us more of the same. Typically the NBER looks at four sets of data -- production, jobs, sales, and income -- to decide if the economy is in a recession or expansion. Two of those -- sales and income - have already surpassed their pre-recession peaks. This month a third -- industrial production -- moved wtihin 1% of its prior high.

Here's what the four primary coincident indicators of the economy look like as of their last report.

First, here's industrial production, which is sort of "the first among equals." Most often the NBER dates recessions from the month this series tuns:



Industrial production rose 0.6 in September. At its current pace, it will finally exceed its 2007 peak sometime this winter.

Next, here is real income excluding transfer payments (e.g., disability payments):



This broke through its pre-recession high over a year ago, and as of its last report in August, was still rising.

Next, here is real retail sales:



These also exceeded their pre-recession highs about a year ago. While real retail sales declined slightly in September, the positive trend is fully intact.

Finally, here is nonfarm payrolls:



Jobs have been the real laggard among the four big categories. While about 7 million jobs have been added since their low at the beginning of 2010, we are still close to 2 million below that peak. At our current pace, it will take another year before we have as many jobs as we did at the end of 2007 -- and that isn't adjusting for population growth.

So the story remains the same as it has been since the bottom of the recession in 2009. The economy continues to impove, just not enough to substantially improve the lot of the average American household.

Mexican ETF Consolidating

The weekly chart for the Mexican ETF shows two important trends.  The first is a rally that started in mid-2011 and lasted until the Spring of 2012.  During this time we see rising momentum and increased CMF readings, indicating money flowing into the market.  From trough to peak, prices increased about 68%, which is an impressive showing for any index.

But for this year, prices have retreated as the overall economy has slowed.  Here's a chart of the annual percent change in Mexican GDP:

In addition, the new president is attempting to push through an impressive and broad series of economic and political reforms, which has led to a slowing economy.

   

Weekly Indicators for October 28 - November 1 at XE.com

- by New Deal democrat

Due to a significant decline in interest rates from their recent highs, weekly indicators are generally improving and for the most part have bounced back from their weakness during the federal government shutdown. Click on the link for the full report at XE.com.

P.S. I'm not 100% sure the link will take you directly to the post. If it doesn't, please let me know in comments.

Oil Breaks Support and Continues Move Lower

Oil has broken the support level at the 97/98 level and is continuing to move lower.  Prices have moved through the 200 day EMA and are currently resting at the 38.2% Fib level from the mid-April - late August rally.  More importantly, the chart is in a very bearish orientation right now: prices are clearly moving lower, momentum is dropping and volume is flowing out of the market.

This is a very important development for the economy, as the decrease will give consumers more in-pocket income to spend.

California glitches still having major impact on initial jobless claims

. - by New Deal democrat

UPDATE: California says this week's number does not include any backlog. The following post describes its large continued impact on last week's number.

Computer issues in California continued to bedevil the weekly initial jobless claims reports through last week's report. In early September, computer issues prevented the Sunshine State from entering all of its initial claims. That ended after a few weeks, but then California had to catch up in its data entry, thus distorting data to the upside. There is a one week delay in reporting state by state data, so this post does not discuss this morning's report.

But get a load of this: last week unadjusted initial jobless claims fell by 49,000 in the other 49 states, but rose by 15,000 in California!

Now , to the nerdy numbers. As I did last year with regard to Superstorm Sandy, we can arrive at a good estimate the "real" initial jobless claims have been, by comparing the unadjusted average for the other 49 states this year vs. last year in the same week, and projecting this year's "real" number by assuming that the percentage of claims in the other 49 states are the same percentage of the total this year as they were last year.For the other 49 states, claims were 83.2% of what they were last year. Since last year, seasonally adjusted, there were 372,000 claims, if California behaved similarly the 50 state number this year last week would have been 309,000.

Using this method, the below list shows the seasonally adjusted weekly jobless claims number on the left, and the right is the average adjusting for the likely impact of California's computer issues:

Sep 07  294,000  318,000
Sep 14  311,000  327,000
Sep 21  307,000  313,000
Sep 28  308,000  314,000
Oct 05  373,000  329,000
Oct 12  362,000  335,000
Oct 19 350,000 309,000
Oct 26. 340,000. -------


[Note: Since the raw state data is published with a one week lag, we do not know yet what this week's number will be.]

Here's what happens to the 4 week moving average:

Sep 28 305,000 318,000
Oct 5 324,750 320,500
Oct 12 337,500 323,500
Oct 19 348,250 321,750


October 5 and 12 were the two weeks during which federal workers affected by the government shutdown applied for unemployment insurance. In September, California's problems probably resulted in an underount of -53,000 claims by the above calculations. I had hoped that one week ago was the last week affected by California distortions, since cLose to 50,000 of those claims we're made up in the prior two weeks. That obviously wasn't the case, but hopefully this week was the end.

YoY Consumer prices in October likely Near or at lowest in 50 years ex-great recession

- by New Deal democrat

For the last few months I have been using the change in the price of a gallon of gas to forecast that month's CPI in advance. My point has been, that all you really need to know about inflation is the price of gasoline. So far each prediction has turned out to be within 0.1% of the actual number.

For September I predicted a rise of +0.1%. Inflation was actually reported at +0.2%, making the YoY inflation rate +1.2%:



On Monday the E.I.A. reported gas prices for the final week of October, so we can estimate October's inflation rate now. My method is to take the change in the price of a gallon of gas and divide by ten, then add 0.1% to 0.2% to account for core inflation, or else divide by 16 to be more conservative, to arrive at the non-seasonally adjusted inflation rate.

In September the average price of a gallon of gas was $3.53.2. This month it was $3.34.4. That is a -5.3% decline. Dividing by 10 gives us -0.53%, and adding 0.1% to 0.2% gives us a rounded -0.4% decline. Dividing by 16 gives us a -0.33% decline, and adding 0.1% to 0.2% gives us a rounded -0.2% decline.

The seasonal adjustment for October last year was +0.2%. This gives us a final seasonally adjusted inflation rate that rounds to -0.2% to 0.0%.

That will replace last October's +0.2% inflation rate, so that the YoY inflation rate will be approximately +0.9%. This will be lowest YoY inflation rate for the last 50 years outside of the great recession.

Since my number one concern is jobs and income, it's worth noting that this inflation rate is also subdued enough to suggest that real YoY wages have probably increased again in October (graph below is though September):



and may be getting closer to their all-time high set in 2010.

European ETF In Strong Rally

For the longest time, the EU was in a recession.  However, over the last few months it appears that the region is slowly pulling out of its economic malaise.  The markets -- acting in their role of leading indicator -- anticipated this improvement as shown by the weekly IEV chart:

The IEV bottomed in late 2011 and retested its lows about 9 months later in the spring of 2012.  However, since then we've seen a strong rally as prices moved through the 200 week EMA, printing a series of higher highs and higher lows.  Now we see prices above all the EMAs and the greater distance between the shorter and longer EMAs.  Also note the increase in volume over the last few months, indicating a move by investors into this ETF.

The daily chart shows a strong rally over the last four months, as again prices are printing a series of higher highs and higher lows.  But pay particular attention to the MACD: it may be moving to give us a sell signal -- or at least a signal not to make a move into the market just yet. 

Cattle Rallying

While most of the commodity world is decidedly bearish, cattle is rallying.  Let's start with the weekly chart:

Cattle was in a downward trend for most of the last two years.  But recently, prices have broken through resistance and moved above the shorter EMAs.  Momentum is positive and money is moving into the market.

The daily chart shows the rallying in far more detail.  Prices bottomed in mid-May and have been moving higher since.  We see a fair amount of resistance around the 26.75-27.25 area -- which also corresponds to the 200 day EMA.  Once that line was crossed, prices have consistently moved higher.

Last Week's Important International Economic Numbers

This is over at XE.com

Chinese Market Breaks Support

The Chinese market had a sharp sell-off in early June.  Since then, however, we've seen a sustained and very solid rally.  Prices consolidated in a triangle pattern through September and August, with prices using the rally's trend line as the lower line of support.  The MACD was declining during this time, but this is a standard technical development during periods of consolidation. 

Last week prices took a major drop, breaking support.  This is occurring right inside a key technical area -- the Fibonacci retracement levels from the early February highs and late September lows.  Adding to the importance of this development is it's occurring around the 200 day EMA.

Two notes for Sunday: on Social Security and XE

- by New Deal democrat

It's Sunday, so you know what that means: I get to say whatever I want.

First, a note on XE.com. I know posting has been light here for a couple of weeks, but that has more to do with the government shutdown and lack of data than with Bonddad and me being elsewhere. I expect posting to ramp back up somewhat starting this week.

If you've followed our links over to XE, you know that the format is a little clunky. We can't crosspost in both places, but as we said when we told you we had landed paying gigs, we absolutely want you to be able to follow us, so we've been posting links to make it easy for you. XE intends to improve the format, probably by establishing a separate "blog" header at the top of their home page. They also want to give us more functionality with graphs and hyperlinks. It's a work in progress, and it should improve over the next few months. And, by the way, in case you didn't click over yet, in this week's "Weekly Indicators" column we find out that somebody on the President's Council of Economic Advisors apparently knows of or reads the column, because they adopted an almost identical format with the same name, "Weekly Indicators," to report data during the government shutdown.

Also, nothing makes me go so berserk as talks of grand bargaining away Social Security. I've been working on a Democrat-only, no GOP compromise desired, no-catfood plan to keep the Social Security trust fund solvent forever - and I do mean, so long as the USA exists. Crucially, it relies on automatic triggers that kick in both if the program is overfunded and underfunded - so, for example, withhholding taxes can automatically go down, and benefits be increased, under this plan. There is never, and I do mean never, a need for further Congressional legislation. The plan takes Social Security off the table not just for Boomers and X'ers, but Millenials -- and the grandchildren of Millenials when that time comes as well.

I had hoped to have the post ready for today, but it's going to take at least one more week. Stay tuned.