Weighing The Week Ahead: Any Help From Housing? [View article]
Jeff I don’t know whether your article has been published in its entirety, but allow me to add a few thoughts to round out your excellent insights.
1) The crisis afflicting the euro area will be with for some time. Immediate issues are the increasingly likely exit of Greece from the EMU and the horrible condition of the Spanish banking system which could face write downs approaching euro 300 billion.
2) Global growth continues to slow as evidenced by dismal reports out of India and China. China reported its industrial production rose 9.3 percent from a year earlier in April, below expectations and down from nearly 12 percent in March. India's industrial output fell 3.5 percent in March from a year earlier on weak manufacturing and investment; output for the fiscal year ending in March rose 2.8 percent, down from 8.2 percent the year before. Explanations include weak domestic demand and slowing exports.
3) Banks remain a source of systemic risk though balance sheets are much improved. When Dodd Frank was written it only permitted hedging of assets but when it was released it included hedging of portfolios, reflecting the enormous influence of the banking sector. With the growing complexity of synthetic products and the ability to hedge portfolios, it’s impossible to discern underlying motives and whether trades are hedges or directional bets (prop trading) banned under the Volcker rule. This underscored by the JPM incident.
4) The CFNAI (Chicago Fed) and the ADS (Philly fed) are drifting lower and most recent releases are below trend growth, suggesting sluggish economic growth going forward. Recently the manufacturing and industrial sector has accounted for 40% to 50% of our GDP growth, raising the obvious question of whether persistent outsized contributions from manufacturing amid slowing global growth is sustainable.
5) Notwithstanding “beat rate” corporate earnings have been far better than realized, growing around 7% yoy year versus the 3.2% expected only months ago. Industrials enjoyed the highest growth of 17.5% with Boeing and CAT reporting some of the highest growth rates within the sector. Much as above, the obvious question is whether this divergent performance is sustainable amid slowing global growth.
Weighing The Week Ahead: Here Come The Candidates [View article]
In a humorous vein I like your judicious use of the word cautious. On a different note, the increase in sales was largely attributable France and Germany........but hey it's better than a decline. And as a reader, I appreciate the time and effort you invest in writing WTWH as you add much value in reporting weekly developments, placing them in context and offering the SA community a "blackboard" upon which to reply to your thoughts. Lastly, should things seriously unravel in Europe our exporters would suffer and the risk of exposure to sovereign debt would be magnified.
Weighing The Week Ahead: Here Come The Candidates [View article]
Good points madav, addressing the flip side of the argument made by Diva and the prospects of less austerity and the calls for growth initiatives.
Hollande may temporarily tip the balance in favor of less austerity now but he may also push the Germans in the opposite direction. If he ruptures relationships with Germany it will endanger the motor that drives the EMU: the Franco-German relationship. This would create a vacuum when leadership and decision making is most needed.
Moreover France desperately needs reform. Public debt is high and rising, the government has not run a budget surplus in over 35 years, banks are seriously under capitalized and unemployment is persistently high. And, at 56% of GDP, the French state is the biggest of any euro country.
Markets understand this and if France were the next EMU country to get in trouble it would overwhelm available rescue resources and, again, bring into question the viability of the euro zone.
Weighing The Week Ahead: Here Come The Candidates [View article]
Thanks Diva and you are spot on about Australia and the uncertainty surrounding China.
Offical state PMI's suggest modest expansion while the surveys devloped by HSBC suggest otherwise, leading to divergence partially expanied by the fact the state samples state owned enterprises while HSBC surveys privately held companies which enjoy less access to credit than do SOE's.
Angel you also make a great point regaring the elections being held in Greece. Bloomberg is reporting today that Greeks are voting in national elections that may determine whether the country has a future in the euro area.
The election will measure the Greek public’s resolve to continue the reforms that the EU and IMF say are imperative but many voters are likely to be in favor anti-bailout groups promising an end to “austerity” and further spending cuts of around euro 11 billion.
While polls show most people don’t want to leave the euro or the EU, analysts and economists warn that support for anti-bailout parties could tilt the balance in favor of rejecting the rescue terms and threaten Greece’s membership in the euro. Even an inconclusive outcome to the election could mean political instability that endangers bailout funds and, ultimately, membership of the euro.
A Greek exit would reignite concerns about the fate of other members of the euro area which face low growth and high debt and deficits. Fitch Ratings said in a report on May 3 that a Greek exit would spark a ratings review of all euro-area nations, with Cyprus, Ireland, Italy, Portugal and Spain probably downgraded on the risk of “contagion to banks, bond markets and capital flight.”
Weighing The Week Ahead: Here Come The Candidates [View article]
Jeff I would include among the ugly the condition of Europe, which continues to deteriorate and, in part, contributed to Friday's sell off.
Currently, there are nine Eurozone countries in recession, including Belgium, Cypress, Ireland, Italy, the Netherlands, Portugal, Greece, Slovenia and Spain. Outside of the 17 EMU countries, the UK, Denmark and the Czech Republic are in recession
And Eurozone manufacturing purchasing managers indices were released this week and it does not appear anything will change soon. The final Markit Eurozone manufacturing PMI hit a 34-month low of 45.9 in April as job losses accelerated to their fastest rate in over two years.
Significantly, manufacturing weakness was no longer confined to the periphery. German PMI fell to a 33-month low, conditions deteriorated sharply again in France and the Netherlands also contracted at a faster rate.
With respect to the French elections, a victory by Hollande could roil the markets until it becomes clear much noise was campaign rhetoric and that ultimately he will fall into line. The markets cannot have it priced in as its too close to call and the tightest race in the past thirty years.
Weighing The Week Ahead: Will The Fed Disappoint The Markets? [View article]
Possibly Jeff.
Most of estimates for operating earnings for the S&P 500 for 2012 I have seen fall in the $103 to $106 range, up from around $97 for 2011.
Based upon reporting to date, blended earnings are up only 2.2% for the quarter yoy and 7 of the 10 sectors are reporting declines which would suggest the consensus estimate(s) may be a challenge to reach as it would require earnings increases of 6% to 9% for the year.
However, only slightly more than 100 of the 500 have reported and we will know much more at the end of next week when we have the results from another 170 or companies. But, thus far, companies appear to be struggling to convert modestly higher sales of around 4.6% into higher earnings, underscoring the role of higher costs and slowing global growth. If we are to see earnings of $105, we will need to see double digit gains in the second half and, indeed, many analysts are back loading their estimates for the year.
Longer term, I am reasonably confident that earnings will “stagnate” while sales edge up, leading to a decline in margins. We’re already seeing hints of this in the reporting this quarter among non-financial companies whose margins are around 8.5%, the lowest since Q4 2010. Jeremy Grantham, among others, sees margin compression in the period ahead.
None of this is to say there won’t be investment opportunities as there will always be opportunities to “pick” great stocks or invest around compelling macro economic themes, the latter being my game where ETF’s, funds, hedging, futures and derivatives are used.
Weighing The Week Ahead: Will The Fed Disappoint The Markets? [View article]
Nice piece Jeff but I think that some of your reporting or interpretation of the data is open to debate or further refinement.
1) Rail traffic continues to slow and is consistent with a muddle through economy characterized by sub par growth of 2% or thereabouts. “The Association of American Railroads (http://bit.ly/zwz5Dk) today reported mixed weekly rail traffic for the week ending April 14, 2012, with U.S. railroads originating 276,789 carloads, down 6.4 percent compared with the same week last year. Intermodal volume for the week totaled 234,157 trailers and containers, up 1.6 percent compared with the same week last year.”
2) Earnings estimates for the first quarter have been reduced by around 10% since October of last year, lowering the bar needed to beat earnings. Additionally, bank earnings would be simply awful without taking advantage of accounting gimmicks such as FVO and DVA adjustments. According to Thomson Reuters, S&P 500 companies' earnings are seen rising 3.2 percent in the first quarter over the prior year ago period compared with growth of 9.2 percent in the fourth quarter and a jump of almost 19 percent in the first quarter of 2011 over the year-ago period. Over the long run corporate earnings must reflect the economy and there is widespread discussion of a mean reversion in earnings through margin compression which is already apparent in net prices as reported by the Philly Fed.
3) The market does seem to be paying extraordinary attention to the Fed, examining the institution more closely than the economy and the future outlook for profits. There is very little to suggest Fed policies have had a meaningful impact upon the real economy but there is abundant evidence to suggest QE, ZIRP and TWIST have suppressed interest rates and fed risk-on appetites and driven market prices higher. Investors almost seem hopeful the economy might falter enough to precipitate another round of quantitative easing, seemingly believing that the negative effect of a weak economy on corporate profits and dividends pales in comparison with the influence of the money received directly by sellers of securities to the central bank
Quick Thoughts On Friday's Disappointing Jobs Report [View article]
It's an interesting data point in a very noisy series; ensuing reports should provide additional light.
Along with weather and seasonal adjustments considerations, draconian employment cutbacks to enhance productivity reached an inflection point leading to sharp increase in employment as demand rebounded and productivty increases crested.
Longer term, demand for labor could be contained by continuing efforts among US housheolds to deleverage; mounting concerns over prospects for global growth and reluctance to invest and hire; and poor labor mobility, mismatches between what is available and what is needed and declining educational performance.
This week the EU expanded its firewall to euro 700 billion by adding committed funds of euro 200 billion to the forthcoming ESM of euro 500 billion in the hopes the IMF will pony up an additional euro 500 billion which is not likely.
Even if the troika had euro 1.2 billion it must be asked if this is sufficient in light of the Boston Consulting Group’s estimate that the EMU needs to reduce public and private debt by euro 5 trillion to reduce debt (real not reported) to a manageable level.
With respect to Spain, the country now expects this year’s deficit to total 5.8 per cent of gross domestic product, down from 8.5 per cent for 2011, but well above the 4.4 per cent it had previously agreed with the Commission.
To correct these imbalances the government has passed serious austerity and structural reform measures but passing legislation and implementing are not the same thing as we know from Greece.
In the CDS market attention is focused more on Spain than on Italy, largely because the former’s banking system is viewed as more fragile. Unlike Italy, Spain experienced, as noted by the author, an enormous housing bubble and many investors fret that the cleaning up of Spanish banks’ balance sheets has only just begun.
Home prices have fallen just 10-20% and the banks cannot afford to write down mortgages. But the decline in Spanish land and property prices appears far from complete and realistic estimates assume a 40-50% total drop to be more likely, and anecdotal evidence suggests it could be even more if the economy does not recover soon. Home prices fell by 50% in Ireland.
Understanding the fragile nature of the Spanish banking system, Willem Buiter of Citi believes Spain is likely to be pushed into a troika program of some kind during 2012. Spain could be pushed into a bailout by losing access to market funding on affordable terms or, more likely, by the ECB by modifying purchases of Spanish sovereign to include a condition that Spain use some of the proceeds to fund its banks, which are currently the main buyers of newly issued Spanish sovereign debt.
Everybody understands the Spanish banks are fragile, thinly capitalized and growing more vulnerable with each purchase of sovereign debt. As it stands, the banks are the weakest link in the triangle of weak sovereigns, slow growth and weak financial institutions.
Weighing The Week Ahead: Time To Worry About China? [View article]
Diva you remind of Barry Rithotz who describes himself as a miserable long. From Barrons:
Barry, who terms himself “miserably long,” admits to spending a lot of time worrying about what can go wrong with the market. And he points out that, despite disappointing news from Europe and weakness in China, the market couldn’t even muster a 1% down day. He observes that “contemporaneous to the rally has been a surge of bearish commentary,” and confesses to being empathetic to the negative takes. However, he sighs, the bears “have been on the wrong side of the trend for a long time.”
Weighing The Week Ahead: Time To Worry About China? [View article]
China's immediate challenge are (1) a narrowing trade surplus, (2) a real estate bubble undergoing adjustment, (3) moderately slowing economic growth (4) a somewhat restrictive monetary policy put in place after a surge in producer and consumer prices that cannot be easily reversed out of fear of reflating the property bubble and (5) piles of bad debt accumulated by special local government entities created to develop land so that local government would benefit from the sale of the land.
Longer term issues include, among other things, the need to reduce the role of SOE's (state owned enterprises) and rebalance the economy by furthering consumption and reducing investment. Rebalancing and reducing the role of SOE's will prove to be the most challenging as both are fraught with political claims and interests. Wages must rise, profits of SOE's must fall, interest rates must rise (ending financial repression) and social safety nets must be put in place to give consumers confidence to spend.
Michael Pettis, who used to work on Wall Street and now teaches at Peking University, writes extensively on China while drawing upon the insights of those "on the ground" including political leaders. He is a recognized expert and recently he put to paper some predictions for the next decade and while I may not agree with the degree of his pessimism I agree with the tone and direction of his thinking. From Pettis:
>BRICS and other developing countries have not decoupled in any meaningful sense, and once the current liquidity-driven investment boom subsides the developing world will be hit hard by the global crisis.
>Over the next two years Chinese household consumption will continue declining as a share of GDP.
>Chinese debt levels will continue to rise quickly over the rest of this year and next.
>Chinese growth will begin to slow sharply by 2013-14 and will hit an average of 3% well before the end of the decade.
>Any decline in GDP growth will disproportionately affect investment and so the demand for non-food commodities.
>If the PBoC resists interest rate cuts as inflation declines, China may even begin slowing in 2012.
>Much slower growth in China will not lead to social unrest if China meaningfully rebalances.
Madness This Week: Markets Up, Economy Improving, Recession Still Coming [View article]
As always Steven an insightful perspective on our economy.
The discussion of seasonal adjustment is particularly relevant because these adjustments simply further complicate gauging the true state of our economy, adding another layer of uncertainty upon constantly revised data and new fiscal and monetary regimes.
Another issue that weighs upon my thinking is the use of growth statistics masks meaningful comparison of absolute levels of economic activity. Auto sales, real business sales, factory output, housing, employment and a host of other economic variables, while all showing signs of growth, remain below prior peak levels. Are we recovering or growing?
The disconnect between growth statistics and output, the new fiscal and monetary paradigm and fluctuating data will introduce new dynamics that will challenge those trying to divine the future of the current economy with tools and models that may have worked in the past.
Gasoline Price Increases: Prelude To The Next Recession? [View article]
Interesting thoughts Steve.
The US is a net importer of oil to the tune of 9 mbd; we import around 2.1 mbd of refined products of which .6 mbd is gasoline; and we export close to 2.9 mbd of refined products of which .7 mbd is gasoline. Thus, as Dave notes, we are a net exporter of refined products even though our imports and exports of gasoline roughly offset each other.
Because we are unequivocally an importer of oil and that around 70% of the cost of gasoline is tied to the price of oil, its easier (at least for me) to look at the rising price of oil and its impact and effect upon the economy. After surging to $125 pb at the height of the Arab Spring, the price of Brent relaxed through all of last year and averaged around $110 to $115 pb only to surge again this year against heightened tensions with Iran and several supply disruptions.
Should oil average $150 through the balance of this year it would subtract close to 1 point of growth of the economy through higher export prices; should it average $130 pb it would drag economic growth down by a ½ point. And higher gasoline prices exert their own influence through reducing discretionary spending and increasing spending on essentials; whatever the effect, it cannot be good.
The impact of these potential consequences are magnified when an economy is already operating at or near stall speed; chopping a point of growth off a strong economy is different than taking the same from a weak economy. As previously noted, fourth quarter growth of 3% stemmed largely from investment and inventory accumulation; consumer spending added some growth but government spending subtracted from growth. Real quarter over quarter growth was 1.6%.
Further signs of weakness surfaced this week when the BEA released January’s personal income and spending. The headlines were OK but the real or inflation adjusted number were simply abysmal; real personal disposable income contracted .1% and personal consumption expenditures remained flat (as in zero) for the third month in a row.
As I have said repeatedly, we are very vulnerable to shocks.
ECRI Says Recession Is Still Coming - Evidence Is In Coincident Data [View article]
the data currently is not strong. what keeps rumbling around in my mind is the different economic dynamics today. part of the "weakness" is the weaning from the stimulus. another part when looking at YoY is that the same cycle occurred last year, but the "recovery" was a few months out of phase with this year. this causes a drop in YoY improvements (and a sharper rate-of-growth decline). ______________________... You're very close to saying what I have been thinking and that is the structure, composition and dynamics underlying the economy are far different what they were in 2007. Auto production is below prior peak levels, housing remains in the doldrums and well below prior peak levels and employment and other measures remains below prior peak levels. For instance, investment is presently around 13% of GDP compared to an average (eyeball) of around 18% prior to the great recession. But in parallel (1) government spending (budget) has increased from 20% of GDP in 2007 to 25% of GDP in 2011, expanding the role of the state while offsetting shrinking private sector demand and (2) we have seen unprecedented monetary policies in the form of QE and ZIRP to boost asset prices, expand liquidity and promote a wealth effect. These new fiscal and monetary initiatives will introduce new dynamics, which when accompanied by old data that is constantly being revised, will challenge those trying to divine the future of the current economy with tools and models that may have worked in the past. Conceptually, it's easier for me to see an economy over the intermediate terms that slips into and out of recessions (Japan) than economy growing at 4% in 2015 as suggested by the administration.
Weighing The Week Ahead: Any Help From Housing? [View article]
1) The crisis afflicting the euro area will be with for some time. Immediate issues are the increasingly likely exit of Greece from the EMU and the horrible condition of the Spanish banking system which could face write downs approaching euro 300 billion.
2) Global growth continues to slow as evidenced by dismal reports out of India and China. China reported its industrial production rose 9.3 percent from a year earlier in April, below expectations and down from nearly 12 percent in March. India's industrial output fell 3.5 percent in March from a year earlier on weak manufacturing and investment; output for the fiscal year ending in March rose 2.8 percent, down from 8.2 percent the year before. Explanations include weak domestic demand and slowing exports.
3) Banks remain a source of systemic risk though balance sheets are much improved. When Dodd Frank was written it only permitted hedging of assets but when it was released it included hedging of portfolios, reflecting the enormous influence of the banking sector. With the growing complexity of synthetic products and the ability to hedge portfolios, it’s impossible to discern underlying motives and whether trades are hedges or directional bets (prop trading) banned under the Volcker rule. This underscored by the JPM incident.
4) The CFNAI (Chicago Fed) and the ADS (Philly fed) are drifting lower and most recent releases are below trend growth, suggesting sluggish economic growth going forward. Recently the manufacturing and industrial sector has accounted for 40% to 50% of our GDP growth, raising the obvious question of whether persistent outsized contributions from manufacturing amid slowing global growth is sustainable.
5) Notwithstanding “beat rate” corporate earnings have been far better than realized, growing around 7% yoy year versus the 3.2% expected only months ago. Industrials enjoyed the highest growth of 17.5% with Boeing and CAT reporting some of the highest growth rates within the sector. Much as above, the obvious question is whether this divergent performance is sustainable amid slowing global growth.
Weighing The Week Ahead: Here Come The Candidates [View article]
Weighing The Week Ahead: Here Come The Candidates [View article]
Hollande may temporarily tip the balance in favor of less austerity now but he may also push the Germans in the opposite direction. If he ruptures relationships with Germany it will endanger the motor that drives the EMU: the Franco-German relationship. This would create a vacuum when leadership and decision making is most needed.
Moreover France desperately needs reform. Public debt is high and rising, the government has not run a budget surplus in over 35 years, banks are seriously under capitalized and unemployment is persistently high. And, at 56% of GDP, the French state is the biggest of any euro country.
Markets understand this and if France were the next EMU country to get in trouble it would overwhelm available rescue resources and, again, bring into question the viability of the euro zone.
Weighing The Week Ahead: Here Come The Candidates [View article]
Offical state PMI's suggest modest expansion while the surveys devloped by HSBC suggest otherwise, leading to divergence partially expanied by the fact the state samples state owned enterprises while HSBC surveys privately held companies which enjoy less access to credit than do SOE's.
Angel you also make a great point regaring the elections being held in Greece. Bloomberg is reporting today that Greeks are voting in national elections that may determine whether the country has a future in the euro area.
The election will measure the Greek public’s resolve to continue the reforms that the EU and IMF say are imperative but many voters are likely to be in favor anti-bailout groups promising an end to “austerity” and further spending cuts of around euro 11 billion.
While polls show most people don’t want to leave the euro or the EU, analysts and economists warn that support for anti-bailout parties could tilt the balance in favor of rejecting the rescue terms and threaten Greece’s membership in the euro. Even an inconclusive outcome to the election could mean political instability that endangers bailout funds and, ultimately, membership of the euro.
A Greek exit would reignite concerns about the fate of other members of the euro area which face low growth and high debt and deficits. Fitch Ratings said in a report on May 3 that a Greek exit would spark a ratings review of all euro-area nations, with Cyprus, Ireland, Italy, Portugal and Spain probably downgraded on the risk of “contagion to banks, bond markets and capital flight.”
* Some material cut and pasted from Bloomberg
Weighing The Week Ahead: Here Come The Candidates [View article]
Currently, there are nine Eurozone countries in recession, including Belgium, Cypress, Ireland, Italy, the Netherlands, Portugal, Greece, Slovenia and Spain. Outside of the 17 EMU countries, the UK, Denmark and the Czech Republic are in recession
And Eurozone manufacturing purchasing managers indices were released this week and it does not appear anything will change soon. The final Markit Eurozone manufacturing PMI hit a 34-month low of 45.9 in April as job losses accelerated to their fastest rate in over two years.
Significantly, manufacturing weakness was no longer confined to the periphery. German PMI fell to a 33-month low, conditions deteriorated sharply again in France and the Netherlands also contracted at a faster rate.
With respect to the French elections, a victory by Hollande could roil the markets until it becomes clear much noise was campaign rhetoric and that ultimately he will fall into line. The markets cannot have it priced in as its too close to call and the tightest race in the past thirty years.
Weighing The Week Ahead: Will The Fed Disappoint The Markets? [View article]
Most of estimates for operating earnings for the S&P 500 for 2012 I have seen fall in the $103 to $106 range, up from around $97 for 2011.
Based upon reporting to date, blended earnings are up only 2.2% for the quarter yoy and 7 of the 10 sectors are reporting declines which would suggest the consensus estimate(s) may be a challenge to reach as it would require earnings increases of 6% to 9% for the year.
However, only slightly more than 100 of the 500 have reported and we will know much more at the end of next week when we have the results from another 170 or companies. But, thus far, companies appear to be struggling to convert modestly higher sales of around 4.6% into higher earnings, underscoring the role of higher costs and slowing global growth. If we are to see earnings of $105, we will need to see double digit gains in the second half and, indeed, many analysts are back loading their estimates for the year.
Longer term, I am reasonably confident that earnings will “stagnate” while sales edge up, leading to a decline in margins. We’re already seeing hints of this in the reporting this quarter among non-financial companies whose margins are around 8.5%, the lowest since Q4 2010. Jeremy Grantham, among others, sees margin compression in the period ahead.
None of this is to say there won’t be investment opportunities as there will always be opportunities to “pick” great stocks or invest around compelling macro economic themes, the latter being my game where ETF’s, funds, hedging, futures and derivatives are used.
Weighing The Week Ahead: Will The Fed Disappoint The Markets? [View article]
1) Rail traffic continues to slow and is consistent with a muddle through economy characterized by sub par growth of 2% or thereabouts. “The Association of American Railroads (http://bit.ly/zwz5Dk) today reported mixed weekly rail traffic for the week ending April 14, 2012, with U.S. railroads originating 276,789 carloads, down 6.4 percent compared with the same week last year. Intermodal volume for the week totaled 234,157 trailers and containers, up 1.6 percent compared with the same week last year.”
2) Earnings estimates for the first quarter have been reduced by around 10% since October of last year, lowering the bar needed to beat earnings. Additionally, bank earnings would be simply awful without taking advantage of accounting gimmicks such as FVO and DVA adjustments. According to Thomson Reuters, S&P 500 companies' earnings are seen rising 3.2 percent in the first quarter over the prior year ago period compared with growth of 9.2 percent in the fourth quarter and a jump of almost 19 percent in the first quarter of 2011 over the year-ago period. Over the long run corporate earnings must reflect the economy and there is widespread discussion of a mean reversion in earnings through margin compression which is already apparent in net prices as reported by the Philly Fed.
3) The market does seem to be paying extraordinary attention to the Fed, examining the institution more closely than the economy and the future outlook for profits. There is very little to suggest Fed policies have had a meaningful impact upon the real economy but there is abundant evidence to suggest QE, ZIRP and TWIST have suppressed interest rates and fed risk-on appetites and driven market prices higher. Investors almost seem hopeful the economy might falter enough to precipitate another round of quantitative easing, seemingly believing that the negative effect of a weak economy on corporate profits and dividends pales in comparison with the influence of the money received directly by sellers of securities to the central bank
Quick Thoughts On Friday's Disappointing Jobs Report [View article]
Along with weather and seasonal adjustments considerations, draconian employment cutbacks to enhance productivity reached an inflection point leading to sharp increase in employment as demand rebounded and productivty increases crested.
Longer term, demand for labor could be contained by continuing efforts among US housheolds to deleverage; mounting concerns over prospects for global growth and reluctance to invest and hire; and poor labor mobility, mismatches between what is available and what is needed and declining educational performance.
All Spain All The Time [View article]
Even if the troika had euro 1.2 billion it must be asked if this is sufficient in light of the Boston Consulting Group’s estimate that the EMU needs to reduce public and private debt by euro 5 trillion to reduce debt (real not reported) to a manageable level.
With respect to Spain, the country now expects this year’s deficit to total 5.8 per cent of gross domestic product, down from 8.5 per cent for 2011, but well above the 4.4 per cent it had previously agreed with the Commission.
To correct these imbalances the government has passed serious austerity and structural reform measures but passing legislation and implementing are not the same thing as we know from Greece.
In the CDS market attention is focused more on Spain than on Italy, largely because the former’s banking system is viewed as more fragile. Unlike Italy, Spain experienced, as noted by the author, an enormous housing bubble and many investors fret that the cleaning up of Spanish banks’ balance sheets has only just begun.
Home prices have fallen just 10-20% and the banks cannot afford to write down mortgages. But the decline in Spanish land and property prices appears far from complete and realistic estimates assume a 40-50% total drop to be more likely, and anecdotal evidence suggests it could be even more if the economy does not recover soon. Home prices fell by 50% in Ireland.
Understanding the fragile nature of the Spanish banking system, Willem Buiter of Citi believes Spain is likely to be pushed into a troika program of some kind during 2012. Spain could be pushed into a bailout by losing access to market funding on affordable terms or, more likely, by the ECB by modifying purchases of Spanish sovereign to include a condition that Spain use some of the proceeds to fund its banks, which are currently the main buyers of newly issued Spanish sovereign debt.
Everybody understands the Spanish banks are fragile, thinly capitalized and growing more vulnerable with each purchase of sovereign debt. As it stands, the banks are the weakest link in the triangle of weak sovereigns, slow growth and weak financial institutions.
Weighing The Week Ahead: Time To Worry About China? [View article]
Barry, who terms himself “miserably long,” admits to spending a lot of time worrying about what can go wrong with the market. And he points out that, despite disappointing news from Europe and weakness in China, the market couldn’t even muster a 1% down day. He observes that “contemporaneous to the rally has been a surge of bearish commentary,” and confesses to being empathetic to the negative takes. However, he sighs, the bears “have been on the wrong side of the trend for a long time.”
Weighing The Week Ahead: Time To Worry About China? [View article]
Longer term issues include, among other things, the need to reduce the role of SOE's (state owned enterprises) and rebalance the economy by furthering consumption and reducing investment. Rebalancing and reducing the role of SOE's will prove to be the most challenging as both are fraught with political claims and interests. Wages must rise, profits of SOE's must fall, interest rates must rise (ending financial repression) and social safety nets must be put in place to give consumers confidence to spend.
Michael Pettis, who used to work on Wall Street and now teaches at Peking University, writes extensively on China while drawing upon the insights of those "on the ground" including political leaders. He is a recognized expert and recently he put to paper some predictions for the next decade and while I may not agree with the degree of his pessimism I agree with the tone and direction of his thinking. From Pettis:
>BRICS and other developing countries have not decoupled in any meaningful sense, and once the current liquidity-driven investment boom subsides the developing world will be hit hard by the global crisis.
>Over the next two years Chinese household consumption will continue declining as a share of GDP.
>Chinese debt levels will continue to rise quickly over the rest of this year and next.
>Chinese growth will begin to slow sharply by 2013-14 and will hit an average of 3% well before the end of the decade.
>Any decline in GDP growth will disproportionately affect investment and so the demand for non-food commodities.
>If the PBoC resists interest rate cuts as inflation declines, China may even begin slowing in 2012.
>Much slower growth in China will not lead to social unrest if China meaningfully rebalances.
Madness This Week: Markets Up, Economy Improving, Recession Still Coming [View article]
The discussion of seasonal adjustment is particularly relevant because these adjustments simply further complicate gauging the true state of our economy, adding another layer of uncertainty upon constantly revised data and new fiscal and monetary regimes.
Another issue that weighs upon my thinking is the use of growth statistics masks meaningful comparison of absolute levels of economic activity. Auto sales, real business sales, factory output, housing, employment and a host of other economic variables, while all showing signs of growth, remain below prior peak levels. Are we recovering or growing?
The disconnect between growth statistics and output, the new fiscal and monetary paradigm and fluctuating data will introduce new dynamics that will challenge those trying to divine the future of the current economy with tools and models that may have worked in the past.
Gasoline Price Increases: Prelude To The Next Recession? [View article]
The US is a net importer of oil to the tune of 9 mbd; we import around 2.1 mbd of refined products of which .6 mbd is gasoline; and we export close to 2.9 mbd of refined products of which .7 mbd is gasoline. Thus, as Dave notes, we are a net exporter of refined products even though our imports and exports of gasoline roughly offset each other.
Because we are unequivocally an importer of oil and that around 70% of the cost of gasoline is tied to the price of oil, its easier (at least for me) to look at the rising price of oil and its impact and effect upon the economy. After surging to $125 pb at the height of the Arab Spring, the price of Brent relaxed through all of last year and averaged around $110 to $115 pb only to surge again this year against heightened tensions with Iran and several supply disruptions.
Should oil average $150 through the balance of this year it would subtract close to 1 point of growth of the economy through higher export prices; should it average $130 pb it would drag economic growth down by a ½ point. And higher gasoline prices exert their own influence through reducing discretionary spending and increasing spending on essentials; whatever the effect, it cannot be good.
The impact of these potential consequences are magnified when an economy is already operating at or near stall speed; chopping a point of growth off a strong economy is different than taking the same from a weak economy. As previously noted, fourth quarter growth of 3% stemmed largely from investment and inventory accumulation; consumer spending added some growth but government spending subtracted from growth. Real quarter over quarter growth was 1.6%.
Further signs of weakness surfaced this week when the BEA released January’s personal income and spending. The headlines were OK but the real or inflation adjusted number were simply abysmal; real personal disposable income contracted .1% and personal consumption expenditures remained flat (as in zero) for the third month in a row.
As I have said repeatedly, we are very vulnerable to shocks.
ECRI Says Recession Is Still Coming - Evidence Is In Coincident Data [View article]
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You're very close to saying what I have been thinking and that is the structure, composition and dynamics underlying the economy are far different what they were in 2007. Auto production is below prior peak levels, housing remains in the doldrums and well below prior peak levels and employment and other measures remains below prior peak levels. For instance, investment is presently around 13% of GDP compared to an average (eyeball) of around 18% prior to the great recession. But in parallel (1) government spending (budget) has increased from 20% of GDP in 2007 to 25% of GDP in 2011, expanding the role of the state while offsetting shrinking private sector demand and (2) we have seen unprecedented monetary policies in the form of QE and ZIRP to boost asset prices, expand liquidity and promote a wealth effect. These new fiscal and monetary initiatives will introduce new dynamics, which when accompanied by old data that is constantly being revised, will challenge those trying to divine the future of the current economy with tools and models that may have worked in the past. Conceptually, it's easier for me to see an economy over the intermediate terms that slips into and out of recessions (Japan) than economy growing at 4% in 2015 as suggested by the administration.
ECRI Says Recession Is Still Coming - Evidence Is In Coincident Data [View article]
Try this: http://1.usa.gov/wdMOaA