Real retail sales set new high: real wages decline

 - by New Deal democrat

Based on the March reports, I can now update two of my frequent metrics:  real retail sales, and real wages.

March inflation was only +0.2%, which still caused a small increase in the YoY measure.  This is almost all due to the price of gas, which had already hit its 2013 high in early March, whereas gas is still increasing seasonally this year.

Real retail sales hit a new high in March:



so the expansion is intact.

Since real retail sales per capita tend to hit their peak a year or more before any recession, let's look at that measure as well:



Here we haven't quite made a new high.  Note that we had a similar decline in 2012 before sales per capita hit their stride again.

Finally, with the -$.02 decline in average hourly earnings in March, real wages took a significant hit:



Real wages are still up YoY, and there is no sign that the trend is changing.  Still, the average American household could use a raise, particularly since the increase in interest rates last year have brought refinancing to a screeching halt.

Indian Market Rallying on Election Hopes

India is in the middle of national elections.  There is strong hope that a technocratic politician will win be nominated prime minister and that his pro-business orientation will help to break the log-jams inherent in Indian politics.

Right now markets have topped out at highs established in early May of last year.  However, the uptrend remains firmly intact.

For more on this, see the NY Times coverage which has been very informative.

International Week in Review: More Problems From China Edition

International Week in Review: More Problems From China Edition:


http://community.xe.com/forum/xe-market-analysis/international-week-review-chinas-problems-continue-edition

Weekly Indicators for April 7 - 11 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com. The run of springtime positive data continues.

Putting stock margin debt in a longer term historical context

 - by New Deal democrat

I have a new post up at XE.com discussing the issue of record margin debt in stocks.  The CHARTS OF DOOM that you've probably seen only go back to about 1990.  What happens when we go back to the 1960s and 1970s, or even the 1920s and compare?

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For those of you who are long-term readers and remember us from our Daily Kos days, I wanted to add a note. One thing that makes my blood boil is when a person of modest means and very limited financial knowledge is panicked by a Doomer post, and asks them questions like, "I'm so scared.  What should I do with my 401k?  Should I cash it out?"

Literally I have messages bookmarked where the Doomers were bearish on stock in June 2009.  That's how bad the level of analysis has been.  I recall a top ranked diary from someone called "Stranded Wind" who argued that the FDIC was about to go bankrupt in July 2008 and actually wrote

Run, don’t walk, to your bank and get the funds you have clear of this mess before it gets any worse.

That diary got 610 comments and 345 recommends.  People actually followed his advice.  A full three years later he got banned after it was discovered that he apparently had a much darker side.

Well, the diaries in the last couple of weeks have given rise to some similarly panicked comments.  Anything is possible, but the panic these people spread has some real world consequences among their less informed readers.

QQQ's In Short Term Downtrend

The QQQs have broken their nearly year-long uptrend and are currently trading in a downward sloping channel.

Japan's Slow Growth Continues

This is over at XE.com

http://community.xe.com/forum/xe-market-analysis/japans-slow-growth-continues

Why isn't growth in the EU's LEIs leading to meaningful economic growth?

This is over at XE.com

 http://community.xe.com/forum/xe-market-analysis/why-isnt-growth-eus-leading-index-translating-meaningful-economic-growth

"Prices will fluctuate:" why progressives (and everybody else) should care about corporate profits and stock prices

 - by New Deal democrat

I was minding my own business yesterday when my attention was called to a diary on the Rec list at Daily Kos.  Didn't I disagree?

Well, actually, not really.  Although the conclusions hardly call out for breathless Doom-and-Gloom OMG IT"S GONNA CRASH!!!

Which is in stark contrast to the "stocks don't matter" (but only if they are going up) mantra of the Pied Piper of Doom.

But this is a good time to point out why, even if you are a card carrying leftie progressive, you ought to care about the direction of corporate profits and stock prices:  because for as long as records have been kept, they have reliably foretold the direction of jobs.  If corporate profits and stock prices are going up, there is an extremely high probability that jobs are going to be added to the economy.  If corporate profits and stock prices are going down, there is an excellent chance that a lot of people are going to be laid off, soon.

Although the data goes back many decades, here is a close up of the last 10 years of corporate profits (red, right index) and jobs (blue, left index):



And here is a close up of the last 10 years of stock prices (red, right index) and jobs (blue, left index):



The problem progressives (and many others too) have with the economy is that almost all of the gains have gone to producers, and almost none to labor.  We could have profits and stock prices going up at a slower rate, and still have increasing jobs as well as increased middle and working class incomes - not to mention spending on improving our infrastructure.

At the moment there is some concern among the financial press that corporate profits in the 1st quarter actually declined.  And because I care a lot about jobs, that means I am concerned too.

Before I conclude, a few comments about that diary yesterday.  Here's the conclusions the diarist actually made:

 [E}very time the overall price of stocks have gotten this expensive in the past there has been a crash.

 So is it really a radical suggestion to say that we are overdue for a severe stock market correction/crash?

Like stocks, when [houses] get expensive the risks switch to the downside.

Does this mean that the economy is about to collapse? That there is nothing ahead but doom-and-gloom?  No. But it does mean that there is almost no chance that we will avoid a serious stock market correction before the 2016 election. What's more, housing will soon be topping, if it hasn't topped already. Both of these things will be putting pressure on the banks and the economy in general.

Except for the breathless invocation of a "crash," I don't really disagree with this person.  Later on he defined "crash" to mean a 20% correction in stock prices at some point in the next 2 1/2 years.  Since stocks have corrected by at least 19% in more than half of the last years where there has been a midterm election alone, as shown by this graph:



And since stocks have declined by 20%+ on average about once every 4 years going back to 1900, a prediction of a 20% correction at some time before the end of 2016 is really just saying "stock prices will fluctuate normally."  Indeed, I've described in several posts how corporate profits tend to lead stock prices, and prices have increased about 20% more than corporate profits in the last 18 months.  Unless there is a real surge in corporate profits this year, a 20% correction in stock prices would hardly be unusual.  As to the increase in margin debt, that tells us nothing about timing.   All it does show - and it is significant - is that the more the leverage, the faster the decline might occur, when it does (because leveraged players in trouble have to unwind positions quickly, and can't hold them).

As to housing, for almost 6 months already, I've been forecasting an outright decline at some point this year, to the tune of -100,000 in permits or starts.  Last month starts were -62,000 YoY, and on a seasonally adjusted basis, all housing series have declined from their recent peaks.  As this graph of housing permits vs. the Case Shiller house price index shows:



sales peak and trough before prices.  If prices overshoot (and in at least some metro areas they almost certainly have), they will correct once sales start to dry up and inventory accumulates, as may already be happening in, e.g., Phoenix (h/t Calculated Risk:



So yes, there is reason to be concerned about housing, and reason to be concerned that stock prices will fall.  At some point housing, stock prices, and corporate profits are all going to have peaked, and then layoffs will cause an actual loss of jobs in the economy.  But the odds of an actual downturn in the economy with actual sustained job losses this year are virtually nil.

Staples Outperforming Discretionary

Above is a chart showing the ratio of consumer discretionary stocks to consumer staples stocks.  Discretionary stocks were outperforming from 04/13 until recently when the relationship broke down.  This indicates a change in the risk appetite among traders, at least in the short term.

More Signs Of A Short-Term US Market Top

On the weekly charts below, notice that all the MACDs have given a sell signal and "rolled over," meaning they are moving lower.

International Week in Review: The ECB Drops the Ball (Again) Edition

This is up over at XE.com

Weekly Indicators for March 31 - April 3 at XE.com

 - by New Deal democrat

My Weekly Indicators column is up at XE.com.

The spring rebound is continuing.

The ECB's Over-Reliance On Future Projections At the Expense of Current Data

This is over at XE.com

http://community.xe.com/forum/xe-market-analysis/ecbs-over-reliance-economic-projections-expense-current-data

March jobs report: new highs in aggregate hours worked, private sector jobs

- by New Deal democrat

In March 192,000 jobs were added to the US economy.  The unemployment rate was unchanged at  6.7%. January and February were revised upward by +35,000.

As usual, first, let's look at the more leading numbers in the report which tell us about where the economy is likely to be a few months from now. These were mixed but with a tilt towards positive.

• the average manufacturing workweek rose from 40.8  hours to 41.1, returning to its 2013 high. This is one of the 10 components of the LEI, and will contribute towards a strong positive number.


• construction jobs increased by 19,000. YoY 151,000 construction jobs have been added.


• manufacturing jobs fell by -1,000.


• temporary jobs - a leading indicator for jobs overall - increased by 29,000.


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - rose to 2,461,000, compared with December's 2,255,000 low.

Now here are some of the other important coincident indicators filling out our view of where we are now:

• The average workweek for all nonsupervisory workers rose by 0.3 hours from 33.4 hours to 33.7 hours.


• Overtime hours increased from 3.4 to 3.5 hours.


• the index of aggregate hours worked in the economy rose by 0.7 from 106.4 to 107.1. This is a new post-recession high and close to an all-time high.


• The broad U-6 unemployment rate, that includes discouraged workers increased from 12.6% to 12.7%.


• The workforce rose by 503,000. Part time jobs rose by 434,000.

Other news included:

• the alternate jobs number contained in the more volatile household survey increased by 476,000 jobs.  The household survey jobs numbers had been lagging the establishment survey numbers, but as expected this difference has now been entirely made up, with the household survey showing a 2,351,000 increase in jobs YoY.


• Government jobs fell by -1,000.


• January was revised up from 129,000 to144,000.  February was also revised up by 22,000 to 197,000  Upward revisions happen in expansions, and after a weak spot in late 2013, these revisions in the last several months have all been positive.


• average hourly earnings decreased  $.01 to $24.30. The YoY change is +22%.  As a result, YoY average real wages probably fell slightly in March, given the expected slight rise in consumer prices due to the weakening of the Oil choke collar.


• the employment to population ratio rose from 58.8% to 58.9%, and has risen +0.4% YoY. The labor force participation rate also from 63.0% to 63.2%, but has declined 0.1% YoY.  The usual  caveats about discouraged workers and Boomer retirements apply.

• the number of people who are not in the labor force but want a job now (the best measure of long time discouragement) totals 3,050,000.

This report had the best internals of any report in the last six or so months. Aggregate hours, overtime hours, and the manufacturing workweek, all of which had been weakening, made up all of their losses and in at least one case set a new high.  Counting by hours vs. jobs, almost all of the losses in the recession have been made up. Private sector jobs have now also made up all of their recession losses.

Wages remain a weak point, and the usual participation rate debate will continue.  We still are in the hole by several million jobs considering the population increase in the working age population since 2007, and the decline in wages in March does nothing to help consumer spending.

A maturing expansion: auto sales; PCE's v. real retail sales

 - by New Deal democrat

One of the themes of economic data this year is that the expansion is mature.  I'm not expecting to get materially better than it has been for the last several years, and while I see continued expansion throughout this year, I am on the lookout for signs of longer term deterioration.

Which brings me first of all to March vehicle sales.  The good news is, these made a new post-recession high of 16.4 million annualized.  Here's Bill McBride's graph:



New vehicle sales have in the past peaked at least half a year before any economic downturn.  So the new high is yet more evidence that the expansion will continue through this year.

But even taking March into account, first quarter 2014 vehicle sales were essentially equal to fourth quarter 2013 sales.  So if there was pent-up demand because of the hard winter, there was no evidence of an increase of demand in the last 6 months.

Even this isn't really bad.  Vehicle sales can plateau for a long time during an expansion without materially declining.  It simply emphasizes the point that this looks like a mature expansion.

Which brings me secondly to an update of my comparison of PCE's and real retail sales.  In all cases since World War 2, in the earlier part of an expansion the YoY% increase in real retail sales exceeded that of PCE's.  In the latter part, the reverse is true.  Since PCE's include more spending on necessities compared with retail sales, it makes sense.  People cut down more on discretionary spending first, before they cut back on necessities.

Here, the news is that for the second month in a row in March YoY PCE's have now exceeded YoY real retail sales:



This is absolutely not a sign of DOOOOM!!!  But it is the kind of thing I expect to see late in an expansion.

This month as usual I will pay a lot of attention to housing reports. And first quarter earnings will start to be reported, and the reports I have read so far are forecasting relative weakness in this long leading indicator.  We'll see.

A cautionary note about employment

 - by New Deal democrat

A lot of positive anticipation seems to be building about Friday's employment report, with many people predicting 190,000 or even above 200,000.  Most of these optimistic scenarios seem to be built around the recent weeks' rebound in weekly and March data, e.g., vehicle sales.

There may indeed be a post-winter rebound, but I remain cautious about the next few months.

In the first place, initial claims have a good record of anticipating the unemployment rate with a one or two month lag:



While initial claims dropped to near post-recession lows by the end of March, the unemployment rate is more likely to reflect the January and February increases in layoffs.

Secondly, the jobs report tends to move in the direction of real retail sales with a few months' lag.  Let's first look at jobs and real retail sales as a YoY% change averaged by quarter to cut down on some of the noise:



Since the above quarterly look ends with last December, now let me show the same data on a m/m basis:



In December through February, real retail sales took quite a hit on a YoY basis.  It's likely those poor comparisons are like to show up in the monthly jobs report at some point between now and mid-year. A negative month is well within the range of reasonable probability.

Reported corporate profits as a leading indicator for stock prices: an updated look

 - by New Deal democrat

I have a new post up at XE.com updating a previous comment on corporate profits as a long leading indicator for the economy compared with stock prices as a shorter leading indicator.

Is It Time To Become Positive About the EU?

This is over at XE.com

Italian And Spanish ETFs Break Though Resistance

Both the Italian and Spanish ETFs have been consolidating for the last 2-3 months.  The Italian (top chart) in an upward sloping wedge and the Spanish in an ascending triangle.  Right now, neither break is particularly convincing.  The break out days' candles are crosses rather than strong bars.  The lack of a strong bar is more problematic because of the high volume of the Spanish break-out day.

Adding to the concern is the broader EU ETF, which has yet to break out. 

Before making a move here, wait until we get broader confirmation.

Yellen Looks At A Far Broader Set of Employment Data

This is over at XE.com

Defensive Sectors Outperforming Since January 1

 

Since the first of the year, utilities and health care have outperformed consumer discretionary, consumer staples and the financial ETFs.

US Markets Appear to be Making A Short-Term Top

The IWMs have fallen through short-term support.  Momentum is declining and the CMF is showing a slight volume outflow.  Prices are below the short-term EMAs.  The logical target is the upward sloping trend line.

The QQQs are right below the trend line on declining momentum with a slight volume outflow.  Prices are below the short-term EMAs with the shorter EMAs all moving lower.

The DIAs appear to have printed a double top with momentum declining and the CMF weak.

Satiation, imitation, human error, and variable reinforcement: 4 lessons from psychology for economic theory

 - by New Deal democrat

(You know the drill.  It's Sunday, and I take a break from graphs and data and voice some opinions.  Regular nerdiness will resume tomorrow.)

Noah Smith ignited a discussion this past week with a post about the backlash against behavioral economics. He wrote:

There are two main knocks against behavioral econ. These are:

1. There is no "grand unified theory" of behavioral econ; instead it's a bunch of specific little theories for different situations. What we want is a widely applicable, unified theory of economic behavior.

2. The behaviors produced in a psychology lab are extreme effects produced by extreme, coordinated manipulations; in the real world, lots of stuff is going on, and what we care about is the average.

 Brad DeLong had a repost here. [Update:  Tim Harford's original post is here.  Cullen Roche's succinct, and devastating, rebuttal is here.]

This feeds into one of my long time grudges against the imperialism of economic theory.   Once upon a time I took my B.A. in psychology and was accepted into a hifalutin "public policy" Ph.D. program at a top ranked school.  I very quickly discovered that, despite claims of an "interdisciplinary" approach, in fact it taught "theoretical economics uber alles."  When I confronted a professor with my knowledge that the claimed outcomes contradicted actual, empirical psychological studies, he simply said "it all randomizes out."  I transferred out of the program.

So, let me briefly discuss 4 specific routes towards a "grand unified theory" of behavioral econ.

1.  Satiation.

Econ theory starts out with an assumption that drives are insatiable.  We all know that's not true (well, ok, sex might come close).  I may thoroughly enjoy steak, but not at every meal all the time.  Once we start from the proposition that drives are satiable, demand curves in particular change their shape. Once I have enough of something, I don't want any more at that or any price.

There is a very real world manifestation of this in the demand curve for labor.  Econ teaches that the more you pay someone, the more they will work.  If anything, over the long term, the reverse is true. Most people work in order to save for one or more purposes: whether paying this month's rent or feeding the kids for the poor, to saving for a house for the middle class, to saving for the kids' college education and retirement for the affluent middle class.

Once all of the targets have been achieved, there is no more economic reason to work (although there may be strictly social reasons in terms of keeping active and interacting with others).  If I have decided that I will retire once I have $500,000 set aside, and you double my pay, you have just halved the time I will continue to work.  Far from increasing my labor, you have decreased it.

2.  Variable reinforcement.

One of the oldest and most durable results from psychology is that the way to maximize a behavior is *not* to reward it all the time.  Once the behavior is learned, you decrease the number of times you reward it, and reward it on a random,  non-regular schedule.  Since your subject is working for a reward, you will get lots more of the behavior if it takes many repeated cycles to get the reward than if the reward is given every time.

I once pointed this out to Prof. Greg Mankiw on his blog.  He was not amused.

This point fits in very well with the discussion of satiation above.  If my lab rat can press one of two bars in order to get food, and one bar gives out food every time, and the other on a variable schedule, my rat is going for the bar that always rewards him.  He'll get satiated quicker, and then he'll stop.

But if I am an employer, or a casino, (of even Kos of DailyKos), what I want is to maximize the behavior that rewards *me.*  Casinos are an obvious example, but that's also why so many employers gradually reduce perks over time once an employee is hired, and why they are instituting variable annual bonuses.  Once they have the employee trained, variable reinforcement maximizes the employee-equivalent of bar-pressing, and complex bonuses dependent on many metrics increases the employees' performance on each, since they don't know which one will give rise to the biggest reward.

And if you participate in a big bulletin board like DK, the comment system ensures that you will keep coming back for interaction, and the comment recommendations that add up like pinball scores serve exactly as variable reinforcement.  I have no doubt that if we could hook up most Kossacks to an fMRI, we'd see endorphins released into the brain every time they see the number of recommendations for a comment increase.  It does wonders for Kos's page views.

3.  Imitation

"Monkey see, monkey do."  Much of, and maybe most, human learning takes place by imitation.  You imitate your parents.  You imitate your older siblings. You imitate your 'cool' classmates.  You imitate your professors and mentors.  You imitate a successful profit-making strategy.

In psychology, it is known as "modeling."  You model your behavior on others.  Economists really haven't explored this at all.  I once asked Prof. Mark Thoma about whether economists had ever thought to study learning, and got back a response indicating that some economists had used a system of successive approximation.  But brute force practice is not imitation.  The closest economists have come to discussing imitation is in the concept of herd behavior.

Imitation shows how a strategy, once novel, becomes commonplace and sometimes overshoots with catastrophic results.  A great example of the former is franchising.  Pioneered by McDonald's, and by Harlan Sanders, the founder of Kentucky Fried Chicken, franchising was quickly imitated and now there are probably thousands of franchising corporations, explaining why virtually any mall and any large plaza or strip mall looks virtually identical anywhere in America.

The problem arises when a behavior can only be imitated by a limited number of people without turning toxic.  A great example of this was house-flipping a decade ago.  Originally it was  a great success.  The flipper buys an old property, fixes it up, and resells it for a profit.  During the housing boom, then bubble, the number of flippers probably grew at an exponential rate.  At some point the market reached satiation, and then went right past it.  A successful profit strategy for some became a disaster for a far larger group of people.  Modeling as a psychological concept explains how that happens over time.

4.  Human error

It is a trite truth that all humans have different skill levels.  And probably everybody engages in some self-destructive behavior.  Even in a perfectly competitive market, different participants will better react to changes, or even to extended periods of stability.  If there are no barriers to entry, the less skillful (or lucky) participants leave the market, and newer ones come in.

But over time, most businesses tend to become oligopolies.  And oligopolists can engage in poor or unlucky decision-making as well.  When they do (Arthur Anderson in the Enron scandal, Circuit City), the oligopoly shrinks, tending further towards monopoly.

Too often even the most prominent economists seem to assume that the "free market" participants always make the most "optimal" decisions.  We know this isn't true, and the impact of poor human decision-making over time in conditions other than perfect competition appears to have been totally neglected by economists.

TO SUM UP:  Psychology isn't just about a bunch of discrete tiny behaviors that randomize out.  It is about human variation, how we learn, and how we engage in large systematic behavior patterns.  Satiation, imitation, human error, and variable reinforcement are general concepts that have major implications for any "grand unification" economic theory.

International Week In Review

This is up over at XE.com

Weekly Indicators for March 24-28 at XE.com

 - by New Deal democrat

OMG it's 'green shoots'!!!

There's been a definite "spring-ing back" in the indicators in the last two weeks.

Why I disagree that real private fixed residential investment forecasts economic improvement this year

 - by New Deal democrat

Bill McBride a/k/a the nicest blogger in the econoblogosphere has forecast a strong 2014, which is in contrast to my forecast for deceleration (i.e., positive but at a declining rate).

I wanted to lay out factually why, even though I have the utmost respect for Bill, I have disagreed.  The first post, dealing with real private fixed residential investment, is up at XE.com.

Brazil ETF Breaks Through Resistance

UK Economy Hitting Its Stride

This is over at XE.com

My housing bet with Calculated Risk: February results

 - by New Deal democrat

As most readers know Bill McBride a/k/a Calculated Risk and I have a charitable bet about the direction of housing in 2014.

In his forecast for 2014 residential investment, CR said, "I expect growth for new home sales and housing starts in the 20% range in 2014 compared to 2013."

By contrast, several months ago, in a post at XE.com, I said that "If the typical past pattern is followed, we will shortly see permits running 100,000 less than one year previously."

Here are the terms of our bet:  If starts or sales are up at least 20% YoY in any month in 2014, I will make a $100 donation to the charity of Bill's choice, which he has designated as the Memorial Fund in honor of his late co-blogger, Tanta.    If housing permits or starts are down 100,000 YoY at least once in 2014, he make a $100 donation to the charity of my choice, which is the Alzheimer's Association. 

This morning the final monthly report on housing for February, pending home sales, was reported by the NAR.  The index was down -0.8% m/m from January, but down -10.2% YoY, and in fact was the lowest reading in over 2 years:

[h/t Business Insider]

So, with February 2014 in the books, how do we stand?  Below are two graphs.

First, here is a graph of the change, in thousands, YoY of starts (blue), permits (red), new home sales (green), and existing home sales (orange) (note that the St. Louis FRED does not track pending home sales):

Next, here is the YoY% change in the same four statistics:

Both of these graphs show the clear deceleration in the housing market through 2013 and further into February 2014, to the point where 4 of the 5 monthly reports have turned negative YoY.  The strongest metric is housing permits, which rebounded slightly from a +3.3% YoY reading in January to a +6.5% rYoY eading in February.  Nevertheless, the graphs make clear that except for permits, deceleration has turned into outright YoY decline.

Bill's forecast of 20% annual growth will take a real reversal of momentum (housing starts and sales will have to be up about 25% on average YoY for the next 10 months), although there are some individual months where there are some easy YoY comparisons.  Obviously I am expecting some further deterioration, concentrated between now and mid-year.

Most people seem to be either surprised by or ignoring the housing slowdown.  And yet there is no doubt that the trend has turned negative as I forecast it would.

Initial claims return to post-recession lows; gross domestic income improves

 - by New Deal democrat

Just a couple of quick hits about data released this morning.

First of all, initial claims, at 311,000, caused the 4 week moving average to decline to 317,650, which is the lowest reading since the Great Recession with the exception of 3 weeks last September (and before that, October 2007!).  This bodes well for the unemployment rate in the March or April jobs report, since initial jobless claims tend to lead the unemploymeet rate in the payrolls report.

In the rear view mirror, fourth quarter gross domestic income was reported at +2.7%.  Gross domestic income is the mirror image of gross domestic product, and it is generally thought that GDP resolves in the direction of GDI.  Although "old" information, it confirms that we have not been on the verge of contraction.

The good initial claims report in particular is potent evidence that the wintertime slump has ended.

More Signs Of A Short-Term US Equity Market Top

The IWMs (top chart) have moved through the 117 level, although the longer-term uptrend is still in place.  The real concern now is the QQQ chart, where prices are right at long-term support with decreasing momentum and negative volume flow.

And finally, the DIA double top is still in play.

Chinese Rebalancing: A Work in Progress

This is over at XE.com

India ETF Breaks Through Resistance

The Indian ETF above had been hitting resistance in the upper 56-upper 57 region since 4Q of 2013.  However, prices have now moved through that level and are advancing higher.  The reason is hope the new government will be more business friendly:

On Wednesday, India’s two benchmark stock indexes, the Sensex and the Nifty, each rallied to their third new high this week. The foreign funds coming in to buy Indian stocks have shored up the rupee, which has risen nearly 14 percent as of Tuesday since hitting the record low.

India’s economy remains stagnant, but much of what is driving investor optimism is the rising expectation that the opposition Bharatiya Janata Party will replace the government, led by the Indian National Congress. A B.J.P. victory would be expected to install Narendra Modi, the chief minister of Gujarat, as the new prime minister, and in a country that has a reputation of being difficult to do business in, Mr. Modi has welcomed foreign investment in his home state.

In February, a survey by the Pew Research Center showed that 63 percent of Indians polled would prefer the B.J.P. to form the next government, compared with 19 percent who picked the Congress party.

‘‘Expectations are very high that Mr. Modi will lead the new government in India, and investors are viewing that as quite a game-changing event for India going forward because of his economic track record in Gujarat,’’ said Sam Mahtani, a director of emerging market equities at F&C Investments in London, which invests $3.3 billion in emerging markets, about 10 percent of which is in India. ‘‘He is viewed as a very pro-reform leader, and that is effectively what the market is anticipating and wants.’’

New home sales now *also* down YoY

 - by New Deal democrat

This morning the Census Bureau reported that seasonally adjusted February new home sales were 440,000, which is -1.1% lower than last February's 445,000.

January's number was revised down by -13,000  to 455,000, and not only is no longer a record, but as revised was *also* down YoY by -3,000.

That means that the only two measures of housing which were not negative YoY in January were permits and, as revised, starts.  So far this month, only permits are YoY positive.  (Admittedly I regard permits as the best, most forward looking measure).  The last important series, pending home sales, will be reported Thursday, and I'll update all of my graphs then.

While I haven't won my bet with Bill McBride a/k/a Calculated Risk, how many of you, dear readers, believed that  by this time so many measures of the housing market would be negative YoY?  If I haven't specifically been proven correct on my -100,000 YoY forecast for permits or starts, I got the trend of the housing market at the beginning of this year correct.

Latin Amercan ETFs Underperforming

Above is a one year comparison chart for 6 Latin American ETFs.  With the exception of Argentina, all are in negative territory.  There are two underlying reasons for this.  The first is the negative impact of China's economic re-balancing, which is negatively impacting countries like Peru and Chile.  Consider this chart of exports from those two countries:

While exports from both countries picked-up after the great recession, both have seen a stalling since roughly mid-2010.   This has also hurt Brazil, another net exporter.  Mexico's economic fortunes are tied to the US' so as concerns about the US economy built, Mexico's equity index underperformed.   

Can We Please Start Fixing Our Infrastructure Now?

From the NY Times:

It is a danger hidden beneath the streets of New York City, unseen and rarely noticed: 6,302 miles of pipes transporting natural gas.

Leaks, like the one that is believed to have led to the explosion that killed eight people in East Harlem this month, are startlingly common, numbering in the thousands every year, federal records show.

Consolidated Edison, whose pipes supplied the two buildings leveled by the explosion, had the highest rate of leaks in the country among natural gas operators whose networks totaled at least 100 miles, according to a New York Times analysis of records collected by the federal Department of

Transportation for 2012, the most recent year data was available.

The chief culprit, according to experts, is the perilous state of New York City’s underground network, one of the oldest in the country and a glaring example of America’s crumbling infrastructure.

In 2012 alone, Con Edison and National Grid, the other distributor of natural gas in the city, reported 9,906 leaks in their combined systems, which serve the city and Westchester County. More than half of them were considered hazardous because of the dangers they posed to people or property, federal records show. (There are more than 1.2 million miles of gas main pipes across the country. Last year, gas distributors nationwide reported an average of 12 leaks per 100 miles of those pipes.)

Weekly Indicators for March 17 - 21 at XE.com

 - by New Deal democrat

This week's edition is up at XE.com.

Appropriately for the week of the vernal equinox, the high frequency indicators sprung to life.

International Week in Review; More of the Same Edition

This is up over at XE.com

Chinese Yuan Moves Higher

This is up over at XE.com

No Oil Premium For Ukraine Situation

Above is a chart for West Texas Intermediate Crude.  It rallied a bit in the first part of the year, but prices broke support and are now trading right around the 200 day EMA.  Notice the sell-off occurred during the heightened tensions in the Ukraine, indicating the oil market is not pricing in a "Ukraine" premium.

Soft patch in production may be over, but beware outright losses in employment in coming months

 - by New Deal democrat

I have a new post up at XE.com.

While the important February data all looks positive so far, the 1% decline in real retail sales caused in part by the cutoff of extended unemployment benefits is likely to feed through into employment in the next few months, and may include significant outright monthly declines.

Grains and Softs Break Out On Weekly Charts

 

Above are the weekly charts for grains (top chart) and softs (bottom chart).  Both show clear downward trends for most of the past three years.  However, starting in late January, both started to rally strongly, breaking downside resistance. The grains have moved through the 200 week EMA as have the softs, although the latter are consolidating recent gains. 

The MACD indicates both of these ETFs have plenty of room to run this spring.

Fed Acknowledges Potential Deflation Problem

This is over at XE.com

The loosening Oil choke collar, declining unemployment may give us a new high in real wages by year end

- by New Deal democrat

 Not surprisingly, the loosening of the Oil choke collar appears to be having a number of virtuous side effects. The price of gas continues to be lower than it was in 2013, 2012, and even 2011 at this time.

Since changes in the price of gasoline are almost entirely responsible for the month to month deviations from the "core" inflation rate of roughly 1.5% a year, the YoY slow decline in gas prices has caused YoY consumer inflation to decline from nearly 3% 2 years ago, to between 1% and 1.5% recently.

Here's the graph of YoY CPI siince January 2012 showing that decline:



 And here is an overlay of gas prices (red), adjusted by 1.5% core inflation and scaled for easier comparison:



The correlation between the slow fade in gas prices and the deceleration in the CPI is obvious.

Now, let's take a look at the month over month percentage change in the nominal (i.e., not inflation adjusted) average wage of nonsupervisory workers over the last 2 years:



Over the last 5 months in particular, the monthly increase in average wages has signficantly picked up.  This suggests that the decline in the U3 unemployment rate to nearly 6% is real, since there is evidence at last of some slight upward pressure on wages.

This upward pressure on wages (to a whopping 2.5%, still over .5% less than at its worst point before the last recession), is evident on this next graph, which shows the YoY% change of  both the CPI and average nonsupervisory wages since October 2010:



Finally, as both a result of the deceleration in consumer inflation due to the loosening of the Oil choke collar and the recent acceleration in nominal nonsupervisory wages, here is average wages for nonsupervisory workers, normed to 100 at their peak in Octrober 2010:



Since last summer there has been marked improvement in the trajectory of real wages.  We are within 1% of the October 2010 peak, and if the current trend continues. we may finally set a new record high for real wages by the end of this year.

Maybe not worth 3 cheers, but 1 1/2 cheers at least.

Industrial Metals ETFs Trading Near Yearly Lows

Above is a chart of the industrial metals ETF.  Since midway through last summer, it has been trading in a descending triangle formation.  Prices have not only hit resistance at the upper descending boundary, but also at the 200 day EMA, indicating the chart is remaining in a bear market.  Prices broke through the downside in mid-March when Chinese export data dropped sharply.   

The Russian Central Bank Faces A Nightmare Scenario

This is up over at XE.com

Cattle ETF Rallying Strongly

Above is the weekly chart for cattle.  The ETF was in a downtrend for two and a half years, continually printing lower lows and lower highs.  However, prices broke through resistance in October of last year, fell back to trend, then moved higher in February of this year.  Over the last 6 weeks, we've seen an incredibly strong rally, moving from 28.5 to 32.5.  Several of the weekly bars are incredibly strong, indicating very strong demand.

Housing permits and starts for February: permits up, starts down -62,000 YoY

 - by New Deal democrat

As you all know, based on 60 years of history, almost always when interest rates have moved up 1%, housing permits at some point soon thereafter have been -100,000 lower YoY.

This morning permits rose 63,000 from January to 1.012 million, for a YoY 6.3% increase.  Starts fell -2,000 to 907,000 from January, but are -62,000 less than they were a year ago, or -6.4% YoY.  Here's the graph, starting from January 2012, of the YoY% changes in permits and starts:



Here is the same information, represented by 100,000s of units:



Finally, here are both permits and starts, normed to 100 as of September 2012 (when the decelerating trend began):



At first blush, it looks like the decelerating trend in housing has continued (granting that permits are at the top of their trend channel), and in the case of starts, we have had an outright YoY decline.   While we haven't hit my -100,000 target, I wonder how many people thought there would be a -62,000 YoY decline a few months ago when I first made my forecast?

BRICs All In The Red

Above is a chart of the BRIC indexes and ETFs.  All are in the red for the last year, some in a big way.

Russian ETF Tanks

Even before the Crimean situation, the Russian ETF was in trouble.  After peaking at 29.47 in October of last year, the ETF has been continually moving lower.  Price broke the 200 day ETF for the first time in December of last year and again in January 2014.  As the situation in Eastern Europe has intensified, so has the strength of the downward move.

The missing Malaysia airliner: an intriguing "hybrid" possibility

 - by New Deal democrat

I just wanted to follow up my post yesterday, in which I indicated that once a mid-air explosion is ruled out, only 3 possibilities appear to be left.

There's been some interesting discussion today that opens up a "hybrid" of the three.

First of all, the abrupt changes in altitude have been suggested to indicate a struggle for control in the cockpit.  Secondly, it has been suggested that an aborted 9/11 style attack against a city in India fits the evidence.

I don't buy that a pilot would go through all kinds of exquisite machinations just to let the plane go 5 hours on autopilot till it ran out of fuel as a means of committing suicide. But if, after the plane was intentionally diverted, some passengers and/or remaining crew struggled for control of the cockpit, as happened on flight 93 on 9/11, in the course of which the cockpit and passenger cabin were suddenly decompressed, then the flight might very well have continued on its most recent setting, a la the case of Payne Stewart, until it ran out of fuel.

If so, once the "black box" is found, then all we will hear over the 2 hours of tape is, literally, dead silence.

[P.S.:  But I still hope the world's anti-terrorist agencies are preparing against the worst case scenario I laid out yesterday.]

A thought for Sunday: society is most vulnerable to those things of which it has no firsthand memory

 - by New Deal democrat

A theme of several political and economic articles I have read in the past few days is the notion of an inflection point, where suddenly the paradigm shifts.

For example, Atif Mian and Amir Sufi wrote that there was a increase in household credit debt before the Great Depression, a discovery sufficiently profound that Mark Thoma included it in his daily links.  Which is interesting, because I wrote all about the 1920s credit bubble over six years ago, explaining how changed social attitudes about credit led to an explosive increase in installment debt in the 1920s, whereby furniture and appliances were purchased on time, where even one missed payment would give rise to repossession. When the downturn of 1929 hit, households cut back on purchases en masse in order to protect their existing possessions -- which only created a vicious cycle.

Similarly, the New York Times today has an article applying game theory to the Crimea/Ukraine crisis, in which it is explained that

In a recent blog post, Jay Ulfelder, a political scientist, noted that for the last 25 years the world has seen less violent conflict than might have been expected, given local conditions. Lately, though, peaceful settlements have been harder to find. This change may just reflect random noise in the data, but a more disturbing alternative is that conflict is now more likely.

Why? The point from game theory is this: The more peacefully that disputes are resolved, the more that peaceful resolution is expected. That expectation, in turn, makes peace easier to achieve and maintain. But the reverse is also true: As peaceful settlement becomes less common, trust declines, international norms shift and conflict becomes more likely. So there is an unfavorable tipping point.

Back when I blogged at Economic Populist, Rob Oak used to tell me that my posts on the Kondratiev cycle drew the least reads.  Which is a shame.

Because the Kondratiev cycle, the credit bubble of a the last several decades, and the Ukraine crisis are all demonstrations of the same long term phenomena.  That is, that society is most vulnerable to shocks of  the type of which it has no firsthand memory.  

World War 1 occurred after a century of nearly complete European peace.  The only major war after the Napoleonic War that ended in 1815, was the Franco-Prussian War of 1870, and that was both brief and decisive.

By the time 1914 came around, nobody in Europe had any living memory of a protracted, destructive, major war.  Since the living memory was gone, governments made all the mistakes that those who actually lived through a major war would have avoided.

Similarly, by the 1990s and 2000s, the living memory of the 1920s credit bubble was gone.  Yes, there might be some old codgers who would lecture their grandchildren about the evils of too much debt, but what did they know?  Times had changed.  Except of course, as it turned out in 2007-09, they hadn't.

Back in the 1970s, graphs showing how the sky-high interest rates then current "demonstrated" that the Kondratiev wave had no value, were published in investment books.  Except right on time in 1981 interest rates peaked,  almost exactly 60 years after their prior secular peak.  This is treated by most as strictly chance, although since then we probably had a secular low in 2012, 64 years after the prior secular low in 1948. We won't have a serious threat of inflation until the 2030's, by which time those of us who remember the 1970s will be old codgers shouting at clouds, or will have passed this mortal coil.

And the last naked major land-grab in Europe took place in 1945, as Stalin de facto annexed Eastern Europe to the Soviet Union.  Of course, it was Hitler's land grabs in Austria, the Sudetenland in Czechoslovakia, and finally Poland, which ultimately caused World War 2.  That was 70 years ago, and nobody under the age of 75 has any living memory of that event.

Which means I disagree with Jay Ulfelder.  Peaceful resolutions beget peaceful resolutions only up to the point that enough of the prior generation which remembers a major war is gone.  Once that point has been reached, many or most of the players will put their collective guards down, leaving them flatfooted in the face of the first major old-fashioned aggressive annexation. Now that Putin has successfully annexed several smaller pieces of the old Soviet Union without meaningful consequence, and is about to annex Crimea, Europe and the US are shouting about economic sanctions.  If I were Putin, I would be thinking, "they are already going to their maximal response.  I have nothing to lose by also annexing part or all of the remaining (militarily helpless) Ukraine."

The Millennial generation well understands the problems of excess credit and of laissez faire capitalism.  Those problems will not advance further and are likely to be pushed back dramatically during their watch.  But they don't remember inflation.  And no living generation today except for the very old remember World War 2.

Which is exactly why the world is becoming increasingly vulnerable to  acts of naked aggression, and  a resulting conflagration.

International Economic Week In Review: China and Russia Start Screwing Things Up Edition

The is up over at XE.com