Weekly Indicators for December 29 - January 2 at XE.com

  - by New Deal democrat

My Weekly Indicator post is up at XE.com.

The differing trends in the US as compared to internationally are continuing as of year end 2014.

Civeo: Not Really A Value Play

     Before reading any further: this is just my opinion.  I'm not asking anyone to buy or sell this security.  Do your own research and come to your own conclusions.

     Over at Seeking Alpha, Connor Gannon has a very interesting article up about a company called Civeo, which is currently trading at a very deep discount to its book value.  Mr. Gannon is using standard Graham and Dodd valuation; total assets minus total liabilities equals book value which he then divides by the number of shares outstanding.  However, he goes a few steps further in his analysis by completely discounting goodwill and intangible assets to arrive at a more realistic valuation.  Personally, I have a strong dislike for goodwill; until you actually put a company on the market and allow suitors to deeply analyze a company, goodwill is at best a highly hypothetical value.  And doing the same for intangible assets is also prudent.   

     By my back-of-the-envelope numbers, the company has a per share book value of $11.47 (I'm using standard assets-liabilities with no adjustments) with the stock currently trading a bit under $4.  Even with some serious adjustments to the balance sheet assets to account for the distressed nature of this particular industry (for example, lowering the value of AR and inventory to account for potential "fire sale" valuations), I think it's safe to say we really do have a classic situation with the stock trading below book value. 

     However, by looking deeper into the situation, I would have to respectfully disagree with Mr. Gannon on the potential of this company.  First, what exactly does the company do?  According to their latest 10-Q:

We are one of North America’s and Australia’s largest integrated providers of accommodations services for people working in remote locations. Our scalable modular facilities provide long-term and temporary work force accommodations where traditional infrastructure is insufficient, inaccessible or not cost effective. Once facilities are deployed in the field, we also provide catering and food services, housekeeping, laundry, facility management, water and wastewater treatment, power generation, communications and redeployment logistics. Our accommodations support workforces in the Canadian oil sands and in a variety of oil and natural gas drilling, mining and related natural resource applications as well as disaster relief efforts, primarily in Canada, Australia and the United States. We operate in three principal reportable business segments – Canadian, Australian and U.S.

Let's place their business into the oil field development timeline.  The oil field is first developed which in turn attracts oil field workers, leading to a need for Civeo's services.  Conversely, when the oil companies cut back on expenses, Civeo is one of the first companies to be negatively impacted.  Or, they are one of the last companies on the way up to be brought in and one of the first to be hurt when the situation turns negative. 

     This timeline creates a big problem for the company because it compresses the time during which they can exploit a market.  Rather then being present for the entire development process, the company is only able to earn a return for a smaller sliver of time.  And, in the event of a price collapse like that which has already occurred, the company is hurt that much faster.

     They also face a second problem that is geographic (again from the 10-Q):

Our business is predominantly located in northern Alberta, Canada and Queensland, Australia, and we derive most of our business from resource companies who are developing and producing oil sands and met coal resources and, to a lesser extent, other hydrocarbon and mineral resources. More than three-fourths of our revenue is generated by our large-scale lodge and village facilities.

Canada has some of the most expensive oil field development real estate in the oil world.  Consider this chart from the Econbrowser website:

The oil sands of Canada have a roughly $74/bbl breakeven point for development.  Oil closed at $52.81 on Friday.   That does not bode well for CVEO's current operations.  And, we've already seen a fair amount of budget cut announcements from oil companies as highlighted in this Reuter's article.

     Mr. Gannon's article highlights an often unspoken truth about "value investing."  In the modern market environment when there is a wealth of information available to all investors, finding a company that is actually trading below its book value is a very rare event.  In fact, it usually only occurs when there is either a fundamental problem with the company or an entire industry is going through a difficult period like the current situation in the oil market.  It is the latter situation that has lead to CVEO's weak price.   And, as Mr. Gannon correctly points out, the stock is trading far below its book value.  But, given the company's position in the oil field development timeline and its reliance on one of the most expensive oil fields to develop for company revenue, I don't think this is a good time to take a long position.

Big Thanks to Invictus At BP

Invictus over at the BP blog has given us a very nice shout out.  I wanted to thank him for that and also mention that NDD and I blog regularly over at the XE.com blog.

Potential International Economic Flashpoints For 2015

Russia

The EU

Japan

The #1 graph to watch in 2015: the unemployment rate and wage growth

 - by New Deal democrat

This is the final installment of my series showing the 5 economic relationships I expect to pay the most attention to in 2015.  So far, here is the list:

• #2. The number of those not in the labor force, but who want a job now
• #3. Involutnary part time workers as a share of the civilian labor force
• #4. The price of Oil vs. GDP
• #5.  Mortgage Refinancing

But the number one relationship on my list has to do with whether we will actually start to see real wage growth.

Since both the long and short leading indicators have continued to trend higher, I expect the economy to continue to grow throughout 2015.  And that means that the most important of the 4 big coincident indicators - namely, jobs - should also continue to be positive.

That means that the most important question for 2015 will be, does job growth finally translate into significantly improving wages?  Since I have previously shown that the unemployment rate is a pretty good leading indicator for nominal wage growth, that means in turn that the graph of the unemployment rate (blue) and nominal wage growth (red) is the graph to watch in 2015:

In this expansion, as in past expansions, wage growth YoY has started to improve when the unemployment rate falls below 7.5% +/- 1%.  The next graph is the same data as the first, but norms the data at "0" at the current unemployment rate of 5.8% and 2.0% nominal wage growth:

In the past 3 expansions, when the unemployment rate improved to 5.8%, nominal wage growth was 3.0%, 2.6%, and 2.1% YoY.  As the unemployment rate continued to improve thereafter, so did wage growth. Specifically, wage growth improved by +0.5% when the unemployment rate fell by another -0.4%, -0.2%, and -0.6%. Right now, nominal average hourly wages have grown 2.2% YoY.  In this expansion, the unemployment rate has fallen on average -0.2% every 3 months. It is reasonable to surmise that by the end of June, we will have an unemployment rate of about 5.4% and YoY wage growth of about 2.7%.

One note of caution.  Here is the close-up of the unemployment rate vs. nominal YoY wage growth for the past two years:

Nominal wage growth appears to have stalled in 2014, and even declined slightly in the last several months. There have been several such moves in the past, especially in the first half of the 1995, but typically actual declines in nominal wage growth have been short-lived.  Needless to say, I expect the trend to re-assert itself in the coming few months, and it will be a problem for my model if it doesn't.

I expect the unemployment rate and its components to fall in 2015.  Will that finally translate into wage growth.  That's the #1 relationship I expect to be paying attention to.

Whither US house prices?

 - by New Deal democrat

I have a new article up at XE.com.

I previously updated my analysis of US house sales through November.  With the release of the Case Shiller indexes, I can now update my analysis of prices as well.

5 graphs for 2015: #2, not in the labor force, but want a job now

 - by New Deal democrat

This is a continuation of my series on economic relationships I'll be paying particular attention to in 2015.  Here are the first three posts:

• #3. Part time workers for economic reasons
• #4. The price of Oil vs. GDP
• #5. Mortgage refinancing

Number 2 is straightforward, especially since I have been highlighting it all through 2014.

Some people are so discouraged that they completely stop looking for work.  But if it were available, they say, they would like a job now.  The Census Bureau measures this in the Household jobs Survey every month, under series NILFWJN.

Even in the best of times, about 4.5 million people told the Census Bureau they fit this category. But in and after the 2008-09 recession, this number boomed to over 7 million.  It started to decline, but when Congress cut off extended unemployment benefits at the end of 2013, it rose again, and 1 million more people fit that description now compared with a year ago:

To get down to 4.5 million, 2 million of these people would need to find work.  That's about 1.3% of the labor force.  This is about twice the number of involuntary part-timers I wrote about yesterday.

I certainly hope that this number improves as the economy continues to grow.  That's the expectation, anyway, and I will continue to watch this number closely in 2015.

5 graphs for 2015: #3, part time workers for economic reasons

This is a continuation of my series describing 5 economic relationships I'll be paying particular attention to in 2015.  Here are the previous posts:

• #4. The price of Oil vs. GDP 
• #5.  Mortgage refinancing

That the economic expansion will continue seems like an easy call.  That there will continue to be job growth each month comes with that territory.

But there are still too many workers, or potential workers, who aren't participating.  One measure of their stress is the level of part-time workers for economic reasons as a share of the civilian labor force.  Here's that graph going back 50 years:

Note that the 1982 recession created just as many involuntary part time workers as did the 2008-09 recession.  Note also that it took almost a decade to get close to a more "normal" relationship.

The level of involuntary part time employment affects the official unemployment rate. If there were as few involuntary part-timers as a share of the labor force as there were in 1989, given the number of hours of work available in the economy, about 0.5% of other part time workers would be out of work completely.  So without involuntary part-time employment, our current unemployment rate would be about 6.3% rather than 5.8%.

If the economy continues to grow in 2015 - and I expect it will - then the unemployment rate should decrease, and so should the percentage of involuntary part-time workers.  But by how much?  That's what I'll be watching.

Marking my 2014 forecast to market: I plead the polar vortex

 - by New Deal democrat

In my forecast for 2014 one year ago, I called for continued growth, but "A year of deceleration": 

In conclusion, unless we expect deflation (and right now I don't), there is every reason to view the long leading indicators, under either method, as being in agreement that the economic expansion will continue through the end of 2014.   

On the other hand, the deceleration of most of the indicators, and also the deceleration of the WLI, cause me to believe that the second half will be considerably weaker than the first half....  But ... I look for continued positive readings in employment, wages, industrial production, and GDP through the year.

My forecast for continued growth this past year was certainly borne out.  Both the short and long leading indicators one year ago were positive, and correctly forecasted continued growth -- with one obvious exception!  Thank you, Polar Vortex! - with an assist from the BEA in estimating the impact of Obamacare on health care spending.

Thanks to that same Polar Vortex, instead of "deceleration," the 3rd quarter was the third best quarter since turn of the Millennium 15 years ago, and the combined 2nd and 3rd quarters have only been exceeded one time - in late 2003 - during that period (at the moment, the Atlanta Fed's "GDPnow" function is forecasting about 3% growth in Q4):

In short, as we all know, the economy did a total faceplant in the first quarter, due mainly to the infamous "polar vortex" - the worst winter in over a decade in most of the US - and secondarily by the BEA's attempt to estimate the impact of Obamacare on health care spending.

Obviously "deceleration" was out the window after a first quarter performance like that. So I plead the Polar vortex in my defense.

Next, let's look at the same GDP data as in the first graph, but YoY:

Now the first three quarters of 2014 don't look like much of a change at all from 2013.  Smoothed over a year, the Q1 debacle basically offset the Q2 and Q3 fireworks.  But that still isn't deceleration.  That's because there was a second major trend at work as well, and it is a trend that I expect to continue to (positively) affect the economy in 2015. That, dear reader, is our old friend government spending.

Here is a graph of spending on health care services (blue) and government expenditures at all levels (red):

I saw a Doomer piece claiming that the government cooked the books as to health care expenditures in order to show great numbers in Q3 vs. Q1. Aside from being political nonsense (if you are going to cook the books, why make them look worse before the election, and only better after???), the above graph shows that health care expenses simply returned to their prior range of growth. The real, impactful change over the last year has been government spending.

Here is real GDP growth as reported (blue) vs. real GDP growth minus government spending (green):

Here is the same data measured YoY:

In short, take away government spending, and we DID have deceleration in 2014 compared with 2013, even ignoring the outlier first quarter.

Here is the breakdown of government spending between Federal (red) and state and local (blue):

Both levels of government have helped, but easily the Federal level was the biggest change,and the biggest contributor.

Finally, let's add in private residential spending (housing) to the above graph:

What happened in 2014, aside from a rebound from the first quarter Polar vortex faceplant, was that government spending completely offset the sharp deceleration in spending on housing.  This will continue to be important in 2015.

5 graphs for 2015: #4, the price of oil vs. gdp

  - by New Deal democrat

This is a continuation of my series of economic relationships I'll be paying particular attention to in 2015.  Yesterday was #5: mortgage refinancing

Relationship #4 is about whether the a new, lower range of gas prices remains for awhile.  The importance of oil and gas prices is easy to understand, given their recent collapse.  Lower prices put more money in consumers' pockets.  Conversely, when gas prices rise to a certain level of income, consumers feel pinched - and pinch the economy. 

In 2011 - 2014, gas prices remained quite high as a share of income, constricting the economy like a choke collar whenever it seemed poised to attain escape velocity.

Two similar metrics to measure the overall impact of gas prices are (1) the price of gas as a share of GDP, and (2) the price of gas as a share of disposable income.Here is the price of gas as a share of GDP compared with quarterly GDP growth: 

Generally, the closer the "oil choke collar" comes to engaging, the less the GDP growth.

In the past 10 years, whenever there has been a steep decline in the price of gas, it has bounced by about $0.25 to $0.30 off its winter low quickly, and risen on average about $1.00/gallon to its summer highs, as shown in the following graph from GasBuddy:

As I write this, gas costs about $2.25/gallon.  If that were the low, I would expect a quick bounce to about $2.50, and then a springtime increase to a peak of about $3.25/gallon.

All else remaining equal, if the price of gas remains in a lower overall range in 2015, we should see an acceleration of GDP growth, and with it, more jobs.

Will 2015 Be A Break Out Year For Micro-Caps?

Above is a chart that shows the relationship between microcaps and the SPYs.  It's current valuation is very low in comparison to the last 7 years.  That, of course, does not mean this sector is ready to rally; the relationship languished in a sideways pattern for all of 2012.  But, this does show an undervalued sector.

Starbucks is Still One Heck Of A Growth Play

     First, a caveat.  This analysis is my opinion.  I'm not soliciting bids for nor sales against this security.  Also, do your own research to verify my findings.  Put more bluntly: rely on this at your peril.

     According to their 10-K, 

Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world, operating in 65 countries. Formed in 1985, Starbucks Corporation’s common stock trades on the NASDAQ Global Select Market ("NASDAQ") under the symbol "SBUX." We purchase and roast high-quality coffees that we sell, along with handcrafted coffee, tea and other beverages and a variety of fresh food items, through company-operated stores. We also sell a variety of coffee and tea products and license our trademarks through other channels such as licensed stores, grocery and national foodservice accounts. In addition to our flagship Starbucks Coffee brand, we also sell goods and services under the following brands: Teavana, Tazo, Seattle’s Best Coffee, Evolution Fresh, La Boulange and Ethos

If you don't know about Starbuck then you obviously haven't left your house in the last 20 years, because in the U.S. at least, their coffee shops are literally everywhere.  And, as they note above, they have a very strong international presence.

Technical Analysis

The weekly chart shows two distinct trends, with the first being a rally that lasted for most of 2013, taking the stock from the lower 40s to the lower 80s.  However, for 2014, the stock made little upward progress, trading in a slightly upward sloping channel who's high (84.20) was only 3.3%above the 2013 peak of 81.15.  The weekly chart did offer several technical entry points over the year when prices traded around the 50 week EMA.  These entry points would have been appropriate for new purchasers or for other long-term investors to increase their positions if they thought growth was continuing.  However, it is probably best to consider 2014 a year-long consolidation of the previous year's rally.

The daily chart (obviously) shows more detail of last year's price action where we see several trends. 

1.) A slight upward sloping trend line connecting the lows of mid-April and mid-October.

2.) An price arc that last from mid-May to mid-October, which took the stock as high as 80, but then sent it back to the lower 70s. 

3.) A second rally that lasted until near year-end.

The reason for the stock's overall stall is it's expensive by most valuation measures.  It's PE is 30 and its P/B is 11.66.  From a valuation perspective, about the only good metric is the PEG ratio which is 1.68.  While not perfect, it does give us a bit of price elasticity.

Now, let's take a look at the company's financials.

Starbucks Balance Sheet

Starbucks has a strong balance sheet, with a current ratio fluctuating between 1.02 and 1.9 for the last few years.  Their overall cash level has fluctuated between $1.8 and $2 billion for the last four years.  They have increased their debt levels to a bit over $2 billion, but their interest coverage ratio is 50, so they've very secure by this metric.  Their inventory turnover ratio has increased from 5.2 to 6.2 over the last few years, but their receivables TO has decreased from 30-27 over the same period.  The only real drawback to their balance sheet is that while revenue has been increasing 10%-11% over the last few years, their receivables increased 25% and then 15% between 2012-2013 and 2013-2014.  The pace of increase was 12% from 2013-2014, which is more in line.  Finally, their book value (assets minus liabilities) has increased from $3.6 billion in 2009 to $5.2 billion in 2024.

Starbucks Income Statement

Despite their size. Starbucks is a growth machine, with top line revenue growth of 9%-13% since the end of the recession.  Their gross margin has decreased a bit from 43%-41%, but their operating margin has increased from 14% to 18% over the last few years.  And their net margin is between 8%-12% over the last few years.  They have decreased their cash conversion cycle from 51-44 days over the last two years as well.  These are the kind of numbers that make for a very predictable situation.

Starbucks Cash Flow

For four of the last five years, SBUX has had positive free cash flow fluctuating between $894 million and $1.7 billion.  In 2014, they had a $2.6 billion liability charge related to an arbitration award granted to Kraft.  According to the most recent 10-K, "This charge included $2,227.5 million in damages and $556.6 million in estimated interest and attorneys' fees."  Aside from the Kraft litigation, SBUX's cash flow is more than adequate to fund property investment, as these expenses have been between 25% and 48% of cash flow from operations.  This gives the company tremendous financing flexibility.  

Conclusion on Financial Statements

SBUX is in a very strong financial position.  They have more then enough cash flow to fund expansion in property.  Their margins are strong with little meaningful fluctuation and revenue growth is strong.  The balance sheet has ample liquidity and the decrease in the cash conversion cycle indicates management is on the ball.

Where Will Growth Come From?

China, pure and simple.  According to their latest 10-K, they have 544 licensed and 823 company owned stores in China as of the end of September, 2013.  Compare those numbers to 4,659 and 7,303 (for a total of 11,962) in the US.  While China has a lower standard of living than the US, and therefore couldn't handle the same number of stores, it's highly conceivable China could open up to 4,500-5000 stores total (about 3,000 more than their current number) and not seriously cannibalize existing sales. 

 

There are other regions that could also have additional stores.  For example, they only have 434 licensed stores in Mexico, 89 company stores in Brazil and 152 in Germany.  Simply put, there is ample room for international growth for the foreseeable future, largely based on international expansion.

While it may sound cliché to argue that international growth will drive the bottom line, this is one situation where that is more than possible.  Considering their stores require little capital to open -- especially compared to other eateries -- and that the company can open numbers locations, it seems more than obvious that international operations will more than supply growth.

 

Conclusion

 

So, yes, I like Starbucks as a company.  (I should confess that I really don't like their coffee).  Now, the question becomes about where to buy.  First, let's get this out of the way: you're not going to buy this at a PE of 4 or when the stock is trading at some level below book value.  That's just not going to happen.  

 

Over the last year, the upper 60s and lower 70s have been the stock's low points.  In an ideal world, I'd like to wait for those prices to occur again before buying.  However, the chart above also shows that the lower 80s -- should prices move through those levels -- would represent a breakout.  Yes, those levels do represent an expensive company.  But, as I noted above, this stock may be worth it at those levels.

 

   

 

 

 

 

 

 

5 graphs for 2015: #5, mortgage refinancing

  - by New Deal democrat

As we start a new year, I thought I would give you a short list of things to watch for in 2015.

Here's number 5:  interest rates and refinancing

Interest rates are always important. They can be thought of as the ultimate driver of the economy.  Essentially they are telling us how much it costs to use money.  

Since 1982, no recession has occurred unless interest rates have failed to make new lows for at least 3 years. With wages generally stagnant, asset appreciation (stocks, housing) or the refinancing of debt at lower interest rates have driven much of the increase in consumption. Interest rates last made new lows in the summer of 2012, nearly 3 years ago.

To watch this, the most on-point graph is that of mortgage rates and refinancing activity, published weekly by Mortgage News Daily.  Here's what it looks like now:

As you can see, refinancing abruptly stopped when interest rates went up in summer 2013.  In the last few weeks, it has shown signs of a pulse again.

If interest rates continue to go down, refinancing should pick up again, as should the housing market. If interest rates back up, refinancing will stay dead, and the housing recovery will continue to stall.  And we'll be in the "red zone," with increased chance of a recession in 2016.

Gallup economic confidence turns positive

 - by New Deal democrat

Last week I reported that CNN's survey of consumer confidence turned positive for the first time since before the Great Recession.

Gallup's daily economic confidence index has now also turned positive, also for the first time since the Great Recession:

The rise in confidence on this survey has been dramatic just in the last 3 weeks.  Since there is evidence that lower income households are particularly benefitted by lower gas prices, it looks like the shattering of the Oil choke collar is having a big effect on Main Street.

An Entire YEAR of Incompetent Economic Analysis From Powerline

     The guys at Powerline Blog amaze me.  Never has a group of individuals been so consistently wrong on the economy, yet continue to write about it as though they have something of substance to say.  For example, John Hinderaker was one of the many conservatives who argued that QE and government stimulus would lead to soaring interest rates and rampant inflation.  As he wrote in 2009:

I’ve assumed that the profligate spending and borrowing planned by the Democrats in Congress and the White House will run up a debt that we and our children just can’t pay, so, in the time-honored tradition of banana republics, the Obama administration or its successors will inflate our currency and repay its creditors (China, mostly) in devalued dollars. Thus, I’ve been buying gold. I’ve assumed that an actual default by the United States government is unthinkable. 

See also here and here.  Hinderaker was not alone.  A year later, a group of conservative economists signed a letter to the Federal Reserve arguing that QE would lead to inflation, largely using the same logic as Hinderaker.  Earlier this year, Bloomberg did an analysis of this prediction and determined that if you had followed their advice, you would have lost $1 trillion dollars.  And, now you know why I now refer to Hinderaker as “Trillion Dollar Loss.”  His economic incompetence can be quantified with a very large and quite unflattering number that shows the extremely negative ramifications of buying into his analysis. 

     But, Hinderaker is not alone at Powerline.  He shares his blog with several others who, like him, are just as incompetent at basic economic analysis.  And their collective posts from 2014 highlight the amazing breadth and depth of economic ignorance.  This is not a case two people debating finer points of a  particular discipline.  Instead, it's a group of people who literally have absolutely not one clue about what they're talking about, yet continuing to do so.

The First Quarter GDP Contraction

     US real GDP contracted in the 1Q at a 2.1% annualized pace.  Most economists attributed this to the inclement weather.  For example, the March Beige Book noted:

Reports from most of the twelve Federal Reserve Districts indicated that economic conditions continued to expand from January to early February. Eight Districts reported improved levels of activity, but in most cases the increases were characterized as modest to moderate. New York and Philadelphia experienced a slight decline in activity, which was mostly attributed to the unusually severe weather experienced in those regions. Growth slowed in Chicago, and Kansas City reported that conditions remained stable during the reporting period. The outlook among most Districts remained optimistic.

     CNN reported that Janet Yellen made the same observation:

"Part of that softness may reflect adverse weather conditions. But at this point it's difficult to discern exactly how much," Yellen told the Senate Banking Committee in a hearing Thursday. (Ironically, the hearing, originally scheduled for two weeks ago, had been postponed due to a snow storm in Washington.)

     Steve Hatward tried to show his capabilities in this post, in which he argued that we're in for "Japan style problems."

     And according to John "Trillion Dollar Loss" Hinderaker:

This morning, as Steve noted, the Commerce Department revised its estimate of 1st quarter GDP to show a shocking 2.9% annualized decline. The White House tried to spin the awful numbers, arguing that the drop was largely accounted for by cold weather

He then quoted from Senator Jeff Sessions press release, which stated:

The American economy is the victim of a tragic collision with reality. We are living out the truth that no amount of political rhetoric, professional spin, or expedient demagoguery can create a single job, produce a dime of prosperity, or boost opportunity for a single working person.

     However, a simple look at two publicly available indicators would have revealed just how wrong Hinderaker's and Hayward's analysis was.   These numbers are the leading economic indicators and coincident economic indicators, both available for free from the conference board.  Both numbers are composites of a broad number of economic statistics that are universally accepted as, well, leading and coincident indicators.  Neither of this numbers showed any signs of a contraction before the number was released, indicating that weather was most likely the primary reason for the contraction.  And, considering the US economy has been hitting its stride in the two subsequent quarters, it's a good bet that bad weather was in fact the main reason for the 1Q contraction. 

The part time work issue.

     On several occasions, the boys at Powerline have commented that all the job growth has been part-time.   Paul Mirengoff observed the following on July 15: “In reality, full time jobs decreased by 523,000 according to the Bureau of Labor Statistics — a shocking number that is obscured, but hardly offset, by the addition of 800,000 part time jobs.”   John Hinderaker made the same comment on November 2 with this chart:

Looking at that, you’d probably think that part time work was simply taking over!

But if you look at the historical data, you will notice a distinct trend:

Part time work always advances in the early part of a recovery as shown in the chart above.  And – just to add insult to injury – under Bush II, the economy had the exact same problem: part-time work rose after the recession was over, and then stayed high for a bit longer then usual.  Funny, but I seem to remember that Hinderaker though that economy was just "awesome! Awesome I tell you."  Yet when the exact same things happens under a Democratic president, it's a sign of extreme economic mismanagement.

     So, the whole part-time canard from Powerline can be explained by going to the St. Louis Federal Reserve’s FRED page and simply pulling up two charts which clearly explains that what is happening is normal.  You’d think that the guys at Powerline -- all of whom hold advanced degrees -- would know how to do that. 

The stock market is really just a giant bubble.

     I love this argument for several reasons.  Ever since the Fed engaged in QE, there has been a continual chorus of detractors arguing it was only inflating the stock market, not creating real and meaningful growth.  But, what else should the Fed have done?  Nothing? That is an absurd statement on its face.  And, you can rest assured that if the Fed had taken that tact, the same people would have been complaining about the Fed doing nothing.

     The best explanation and defense of the Fed's policy came from Steve Poloz, head of Canada's Central Bank:

     Let’s walk through a thought experiment together. What would our world look like today if, instead of keeping interest rates low to stimulate the economy, both Canada and the United States had moved their policy rates back up to neutral at the beginning of 2011? We estimate that the neutral rate of interest today is between 3 and 4 per cent for Canada, and use a similar number for the United States, so our thought experiment is to raise rates to about 3 1/2 per cent in both countries.

     Such a move would of course allow those headwinds we talked about earlier to blow us backwards. We estimate that, under this hypothetical scenario the output gap in Canada would have been around 5 1/2 per cent today, instead of around 1 per cent. Unemployment would have been around 2 percentage points higher than it is today, and core inflation would be running somewhere between 0 and 1 per cent.

     Most of the impact would be felt in reduced housing construction and renovation and auto production, as these were the sectors that responded to the policies put in place after the crisis. Moreover, these estimates do not capture the range of confidence effects that would permeate the rest of the economy under such a difficult scenario, so the story could even be worse.

     From this monetary policy-maker’s perspective, that’s an unattractive alternative. Our primary job is to pursue our 2 per cent inflation target, with a degree of flexibility around the time horizon of its achievement; that flexibility permits the Bank to give due consideration to financial stability risks, provided they do not threaten macroeconomic performance.

     Put more bluntly, not doing anything would have done, at minimum, just as much damage and potentially more by forcing the economy to work against itself.   This is, at best, a very poor policy option.

     On several occasions the boys at Powerline have argued that QE has led to a stock market bubble (see here and here).  The most obvious question to ask here is, have all of the individual authors making this argument taken their profits and placed their gains into money market accounts?  Or, are they still participating in the market against their own advice?
 
     However, let's also note that corporate profits -- the mother's milk of stock market gains -- are also at record highs which supports the market's current valuation.  Scott Grannis noted as much on
December 5 of this year:

Today's revision to Q3/13 GDP gives us our first look at corporate profits for the quarter, and they just keep on growing. Nominal after-tax profits are at a new all-time high, and have risen almost 9% in the past year. This is very impressive no matter how you look at it.

Record high corporate profits indicate that not only is there justification for the stock market rally, but that the underlying economy is in fact growing.  In fact, one could also argue the Fed's ZIRP policy has in fact been successful based on this economic metric alone.

    But, at bare minimum, the corporate profits picture indicates that the "we're in a stock market bubble caused by the Fed" is -- like most other Powerline observations -- a pure canard.

Continually comparing this expansion to the 1981 expansion

     Conservative commentators and economists have continually compared the economic results of this expansion to that which occurred after 1981.  They've done this for several reasons, the first of which is the 1981 recovery was far closer to a "v" recovery where the post-recession expansion picks up speed quickly.  The exact opposite happened post 2008.  Secondly, in using 1981 for comparison, conservatives get to invoke the name "Reagan," and, in doing so, allowing conservatives to get a nice case of warm fuzzies.

     Powerline has made this comparison on multiple occasions (see here, here, and here).  However, this comparison couldn't be more inappropriate -- a fact which is more than obvious to anyone who knows economic history and has a basic understanding of economics.  Reagan's recession was caused by the Fed raising interest rates to slow inflation.   That means that, once inflation was moving lower, the Fed could simply lower interest rates to stimulate growth.  On the expansion side of a Fed-induced recession is faster growth.

     But this expansion followed the popping of an asset bubble, which leads to a balance sheet recession, which can be explained thusly:

A balance sheet recession is a type of economic recession that occurs when high levels of private sector debt cause individuals or companies to collectively focus on saving (i.e., paying down debt) rather than spending or investing, causing economic growth to slow or decline. The term is attributed to economist Richard Koo and is related to the debt deflation concept described by economist Irving Fisher. Recent examples include Japan's recession that began in 1990 and the U.S. recession of 2007-2009.

As a result, on the other side of a balance sheet recession, consumers and businesses are diverting more of their income to debt repayment than consumption.  This leads to far slower growth, which is exactly what we've seen.  

     And, as noted above, to anyone who knows economics as claimed by the boys at Powerline, this should be obvious. 

Continually focusing on the labor force participation rate

     Conservatives discovered a new economic statistic starting about 2008: the labor force participation rate, which shows the percentage of the population that is actually "participating" in the labor force.  This number started to increase around 1970 as two demographic changes started to occur: women entering the labor force and the baby boomers hitting their prime earning years.  Those two trends are apparent in this long term chart:

     The boys at Powerline have blamed the post 2008 drop on this recovery in several posts (see here and here).  What's notably absent from their posts is any citation to the myriad reports done on this topic since 2008.  Thankfully, Invictus over at the Big Picture Blog has done the work the boys at Powerline should have done.   Here's the general economic consensus about the drop in the LPR:

Of note is the fact that the drop in the labor force participation rate was just 0.6 percentage point during the 2007–2009 economic downturn whereas, between 2009 and 2012, since the end of the recession, the rate declined by another 1.7 percentage points. A major factor responsible for this downward pressure on the overall labor force participation rate is the aging of the baby-boom generation.

If Powerline were in fact as adept at economic analysis as they claimed, this should have been obvious.

Conclusion

     The sum total of the above points is clear: Powerline's economic analysis has been completely wrong on numerous occasions throughout the entire 2014 year.  And their degree of ineptness is severe.  For example, they couldn't even go to the Fred system to draw a graph comparing part-time employment to total employment; they couldn't do a simple google search of LPR research, nor could they be bothered to understand what a balance sheet recession is even though that's the exact economic situation we're in.  This degree of ineptitude is beyond a minor disagreement but instead rises to the level of abject incompetence. 

    Put more directly, no one at Powerline has any clue about economics.  Period.

Weekly Indicators for December 22 - 26 at XE.com

 - by New Deal democrat

My Weekly Indicators column is up at XE.com.

'Tis the season for crashing commodity prices to power US consumers.

Housing sales: November 2014 update

 - by New Deal democrat

My detailed look at housing sales for November is up at XE.com.

November looked poor, but in large part that was due to the surge in housing starts in November of last year.

Requiem for a wager

 - by New Deal democrat

One year ago I had a significant difference of opinion from Bill McBride a/k/a Calculated Risk, and just about the nicest guy in the econoblogosphere, about the direction of the housing market.

Based mainly on interest rates, I wrote that:

Bill... is looking for stronger economic growth in 2014 in part because he expects that "the housing recovery should continue."  Unless the interest rate spike that began in April 2013 abates, I disagree that the housing recovery will continue, and that will have a negative effect on growth rates by the end of 2014.... 

[A] rise in 1% in interest rates YoY almost always leads to a decline of 100,000 or more housing permits a year, with usually no more than a 6 month lag.  The only 3 exceptions are in 1968, for a short period between between the two parts of the "double dip" 1980 and 1981 recessions, and during the 2004-05 blowoff phase of the housing bubble.

Based primarily on demographics, Bill said that:

I expect growth for new home sales and housing starts in the 20% range in 2014 compared to 2013. That would still make 2014 the tenth weakest year on record for housing starts (behind 2008 through 2012 and few other recession lows). So I expect further growth in 2015 too.

 Given our very different forecasts, we made a charitable wager. If permits, starts, or new home sales were down -100,000 YoY in any month, Bill had to make a charitable donation.  If any of those metrics were up by 20% YoY for even one month, I had to make a charitable donation.

Here's what actually happened in the first 11 months of 2014 compared with 2013:

• Permits averaged 990,000 in 2013. So far in 2014 the have averaged 1,020,000, for a gain of 3%. Their worst YoY loss was -8000 in January.  Their biggest YoY% gain was +8% in March and July.

• Starts averaged 930,000 in 2013.  So far in 2014 they have averaged 990,000, for a gain of 6%. Their worst YoY decline was -77,000 last month.  Their best gain was just over 20% YoY in April.

• Sales of single family homes averaged 431,000 in 2013.  So far in 2014 they have averaged 433,000, for a gain of less than 1%. Their worst YoY decline was -60,000 in March.  Their best gain was +15% YoY in August.

Since starts had a 20% YoY gain in April, I made good on our wager by donating to Tanta's memorial fund. In the larger picture, however, neither one of our forecasts came to pass.  Permits were never down YoY anywhere near -100,000, and the 2014 average for starts and sales were nowhere near +20%. I have gained a healthy respect for the importance of demographics, and if I read Bill correctly, he has begun to highlight the important effects of even a small change in interest rates.

I'll have a more detailed look at permits, starts, and sales for November up at XE.com later today.

I suspect our 2015 forecasts for housing will be much closer, but who knows, maybe there will be room for another wager!

Here's some Christmas cheer

 - by New Deal democrat

The next time some Doomer tells you that everything is still awful, and that the American people "on Main Street" know it, feel free to point them to this post.

Or, just post this graph, from that article:

More Americans now feel positive about the economy than negative.

Should we thank Saudi Claus?

For the record

 - by New Deal democrat

Over at Daily Kos, Meteor Blades has trotted out the canard that I made a big mistake in forecasting the kind of recovery we would have from the Great Recession.  So this post will serve to put that canard to bed.

Meteor Blades and I have not been on polite terms since I wrote a diary back in my DK days in May 2009, on that year's April jobs report, in which I said:

    The BLS reported this morning that in April the economy shed another 539,000 jobs.  The U3 unemployment rate also increased to 8.9%.  This is a .4% increase from March, and is what I expected.    This is one of those cases where "less awful" actually ought to give rise to some hope.

Meteor Blades  commented that:

One month may be the start of a new trend, but it is not of itself a new trend.

He followed that up with a front page post on that blog entitled  One Month of Slightly Less Terrible Jobless News does not make a Trend, in which he wrote:

Since the Bureau of Labor Statistics announced its monthly payroll survey numbers Friday, there’s been quite a bit of happy-talk – including from some progressives – about how we’re just around the corner from the end of the "Great Recession." ….Is the intent of the happy-talkers to use fact that unemployment is getting worse at a better rate to chill the widespread rage over what has - during the past three decades - brought us to the economic precipice? …. Beats me. 

….  Only the foolish can put a smiley face on Friday’s jobless report.

(my emphasis) 

Since then, Meteor Blades has steadfastly denied that his insult was aimed at either Bonddad or myself, but now that you can see the quotes side-by-side, the truth is pretty obvious.

Since, as it turned out, neither of us were foolish in the slightest, the canard that we predicted a V shaped jobs recovery is one of those things that the Doomers occasionally trot out to defend their abysmal record.  So let's set my record straight.

One of the things I am not afraid of doing is challenging the conventional wisdom, where there is data to support such a challenge.  In 2009, the conventional wisdom was that even after the recession officially ended, there would be a long period of increased unemployment and continuing job losses.  Since there was a contrary case to be made, I thought it was worth writing about, and did so in 3 parts. 

Here's the intro and conclusion from the first entry: 

Recently data has caused me to question the certainty of such a continuing "jobs recession."  While I'm not saying it will happen, there is a surprisingly decent case that contrary to the accepted wisdom, the recovery from this recession may not be "jobless" at all, but particularly in its earlier portion may feature quite robust job growth. There are several different reasons supporting such an outcome  

.... the recession is nearly over, but suggests that at least in the next few months, there could be actual job growth, more robustly than almost anyone suspects.

Notice that I challenged the "certainty" of a jobless recovery, and even highlighted the conclusion's "could be" in italics. 

And I repeated the qualification that I was only "making a case," not embracing a forecast, in part 2 and part 3 as well.  In the conclusion to part 2, I even posited a test to see if there would be a V-shaped jobs recovery or not, writing:

one way to tell if we [are] going to have a V-shaped recovery or not [is] "monthly manufacturing hours worked:"  an average rise of only 0.1 hours per month means a lackluster increase in plant use, over 0.15 supports a V-shaped recovery.

And here again is the into and conclusion in the last installment:

In this 3 part series, I am examining the mounting evidence that contrary to the accepted wisdom that we will have a "jobless recovery" where GDP turns up anemically but unemployment stubbornly rises, the recovery from this recession might not be "jobless" at all, but particularly in its earlier portion may feature quite robust job growth as the GDP starts to grow probably right now  

Finally, let me repeat that I am not saying that we will have a "V"-shaped jobs recovery -- only that a surprisingly substantial case can be made that it might indeed happen.

This is self-explanatory.  A "case can be made" for an alternative almost everybody seems to be dismissing, not "I forecast" X. I explicitly said to the contrary, and even noted a way to test the hypothesis.  In fact, a couple of months later,  I highlighted the contrary argument for a jobless recovery:

Since I recently hit the Rec list arguing that The Recovery may not be Jobless for Long, an admittedly minority view, it's only fair that I present the contrary conventional wisdom, which was ably set forth last week by Dr. David Altig

So what happened?  As to employment, that bottomed 8 months after the end of the 1991 recession, 22 months after the end of the 2001 recession, and 8 months after the 2008-09 recression.  The unemployment rate shows a more stark contrast,  peaking 15 months after the 1991 recession, 20 months after the 2001 recession, but only 4 months after the end of the 2008-09 recession. 

And by March 2010, I was able to write that there was a Bifurcated Recovery:

industry and associated economic metrics show a strong V-shaped recovery, the best since 1983, then once we look at that part of the economy most closely associated with average American consumers, another picture emerges entirely.

 I recommend that you check out the graphs in that last post. The recovery from the 2008-09 recession was indeed V-shaped for things associated with industry and production.  It also was relatively V-shaped for real GDP, and also, in the earlier part of the recovery, in terms of aggregate hours worked, which made up over half of their 22-month loss of 10% (to October 2009) over the next 26 months. For the number of jobs created, and certainly for wages, it was not.

Where I have made forecasts and been wrong, I have had no problem saying so.  In fact, earlier this year my forecast of a YoY decline of 100,000 housing permits didn't pan out.  What did I do?  I wrote about it publicly, and examined the data to see what might help my forecast - in the case of housing this  year, the fact that the huge Millennial generation created  upward pressure on household formation, and their presence was a boon to housing data just as that of the Boomer generation was half a century ago.

But the alleged forecast of a V shaped recovery isn't one of them, because that's explicitly what it was not.