The Big Picture |
- Will Mom and Pop Return to Stocks?
- 10 Thursday PM Reads
- Bloomberg Visual Data: Billionaires
- S&P 500 Year-Over-Year EPS Growth
- Record 2012 Japanese trade deficit
- Washington’s Dirty Little Secret: The Deficit Doesn’t Matter
- Money Cannot Buy Growth
- Learning to Be A Central Banker in 10 Easy Steps
- I am not the driver you are looking for
- 10 Thursday AM Reads
- NBER Wealth Effects Revisited: 1975-2012
| Will Mom and Pop Return to Stocks? Posted: 24 Jan 2013 04:30 PM PST I have a brief quote in the Weekend WSJ:
The full article is worth reading . . .
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| Posted: 24 Jan 2013 01:30 PM PST My afternoon reads:
What are you reading?
The Most Important Graph on the Deficit | ||
| Bloomberg Visual Data: Billionaires Posted: 24 Jan 2013 11:30 AM PST | ||
| S&P 500 Year-Over-Year EPS Growth Posted: 24 Jan 2013 09:00 AM PST click for larger graphic
We will see if this changes this quarter, but so far, so good with earnings . . . | ||
| Record 2012 Japanese trade deficit Posted: 24 Jan 2013 08:21 AM PST Japanese exports declined by -5.8% in December Y/Y, the 7th consecutive monthly decline and much worse than the -4.2% decline expected, with the trade deficit coming in at Yen 641.5bn, the 6th consecutive monthly decline. Imports rose by +1.9%, mainly due to higher energy demands – LNG imports rose by +8.3% Y/Y. The 2012 trade deficit was Yen 6.93 Tr (US$79bn), the worst on record and the 2nd in 2 years. Exports to China, the US and Europe came in -15.8%, -0.8% and -11.1% down Y/Y, respectively. The Yen weakened on the poor data, though also on reports that N Korea is to test a nuclear weapon and is back above Yen 89 against the US$; More Japanese talk to weaken the Yen – the deputy economy minister states that Yen 100 against the US$ will not be a problem, though Yen 110 to Yen 120 would raise import prices – and the Yen weakening to Yen 100 wont !!!. Furthermore, I had thought that talk on currencies were supposed to be the responsibility of the Minister of Finance – obviously, the chap did not receive the memo; Flash January Chinese PMI came in at a 24 month high of 51.9, according to HSBC, better than the 51.7 expected and Decembers 51.5. The new exports component turned positive coming in at 50.1, as opposed to 49.2 in December. The output and the employment component rose to a 22 month and 20 month high, respectively. The data suggests that China will report that Q1 2013 GDP higher than the +7.9% Q4 2012 GDP growth rate, Q/Q. Most of the pickup is due to the improved domestic economy; The South African Central Bank kept interest rates on hold at 5.0%. The accompanying statement reported that there was no discussion on a rate cut. The Central Bank warned about the weak Rand and rising wages could impact inflation – well, they will .They estimated that 2012 GDP grew by +2.5% and that inflation would average +5.8% this year, higher than the previous forecast of +5.5%. Interestingly, they reported that the outlook for the mining industry was "bleak". I believe that South Africa will continue to face significant economic problems this year. For full disclosure purposes, I remain short the Rand, against the US$; Spanish Q4 unemployment rose to a record 26.02%, up from 25.01% in Q3 and marginally higher than the 26.00% expected. Unfortunately, the numbers are likely to get even weaker – forecasts are that unemployment will rise above 27% this year. The Spanish authorities remain in denial – they have forecast that GDP will decline by just -0.5% this year. The IMF suggests that Spain will contract by -1.5% this year. Unfortunately, other analysts expect Spanish GDP to decline by as much as -2.5% in 2013, which I suspect is closer to the truth. The market remains far too complacent over Spain (and France – see below), in my humble view; French flash January manufacturing PMI came in at 42.9 M/M, much lower than expectations of 45.1 and December's reading of 44.6. A very big whoops – don’t know the French for it; German flash January manufacturing PMI came in at 48.8 M/M, a 11 month high and much higher than both the 46.8 expected and December’s 46.0; EZ flash January manufacturing PMI came in at 47.5 M/M up from 46.1 in December and higher than the 46.5 expected – a 10 month high. Clearly much better German data made the difference to the EZ number; French flash January services PMI came in at 43.6, much weaker than the 45.6 expected and December's 44.6; German flash January services PMI came in at 55.3, well above Decembers 52.0 and a 19 month high; EZ flash January services PMI came in at 48.3 M/M, higher than the 48.0 expected and the 47.8 in December – a 10 month high – once again, Germany and, in addition, confirms that the domestic economy remains healthy; Me thinks theres a pattern here, namely Germany good and France bad. On a composite basis, EZ flash PMI came in at 48.2 M/M, higher than the 47.5 expected and the 47.2 in December. The Euro declined following the French news but rallied on the German data. I continue to believe that German official GDP forecasts of just +0.4% for the current year are way too pessimistic – I expect that these forecasts will be revised to closer to 1.0% as the year progresses. Personally, I continue to believe that German GDP will exceed +1.0% this year; Interestingly, reports circulated this morning suggesting that President Hollande will scrap the ludicrous 75% tax rate which he has imposed. A number of his colleagues will be upset, if it happens – there are denials from French sources; The US House of representatives passed a bill (by 285 to 144 votes) to allow a short-term extension (till 18th May) of the government’s borrowing capability. A majority of Democrats voted against the bill. It is expected that the Senate will follow through and the White House Press Secretary stated that the President would accept it. However, we now get to the trickier element, which involves spending cuts. The Chairman of the House Budget Committee, Mr Ryan is to prepare a budget plan which will eliminate the US budget deficit in 10 years by cutting spending, without raising taxes. Hmmmm. The President has insisted on tax increases, together with spending cuts, which will eliminate the deficit in 30 years. The deal represented a retreat by Republican's from their previous position that there would be no increase in the borrowing limit without comparable spending cuts. It looks as if the real political fight is to come and an automatic sequester on 1st March remains quite possible/likely?; US initial jobless claims came in at 330k, much better than the 355k and 335k last week. Its the lowest reading since January 2008 and has strengthened the US$ further, especially against the Yen; The IMF has reduced its global growth forecast marginally to +3.5%, from +3.6% last October, though higher than last years +3.2%. The forecast for 2014 has also been reduced marginally to +4.1%. The EZ is set to contract by -0.2%, rather than grow by +0.2%, though turn around in 2014 to 1.0%. They suggested that Spain would fare amongst the worst in the EZ, though also warned that German GDP would slow this year. They reduced US GDP growth marginally to 2.0% this year, though raised it to 3.0% next. The forecast for Japan remained unchanged at +1.2% for the current year, though reduced to just +0.7% in 2014, from +1.1% previously. Chinese growth is forecast at +8.2% this year, rising to +8.5% next; Outlook Asian stocks (ex Japan, which rose as the Yen weakened) were lower, with European stocks flat to marginally higher. US markets have opened higher. Apple shares declined over 10% in after hours trading yesterday on lower than expected revenues, which impacted the tech sector and, to a lesser extent, markets. The Euro, having traded weaker, has risen on the better German services and manufacturing PMI. Currently at US$1.3350. The Yen is weakening materially on the much worse than expected trade deficit and the comments that Yen 100 against the US$ would be OK . Had to cover my long position, fast. Yet more strange comments by the Japanese Finance Minister about limiting borrowing next fiscal year, but the momentum is for a weaker Yen, at present – currently Yen 89.81, as opposed to well below Yen 89 very early in the morning. The Yen is up near 1.3% against the US$ and even more (near +1.5%) against the Euro. Analysts are all over the place in respect of their forecast for the Yen this year – ranging from 85 (indeed just below) to 105+. Interestingly Goldman's are at 87 at the year end. Personally, I remain of the view that the Yen will weaken to (well?) above Yen 100 against the US$. Spot gold is trading around US$1671, with March Brent at US$112.55. Better European data, together with a weaker Yen and continuing flows into equities suggest that the market should hold up. The potential political issues in the US relating to the impending spending cut debate is clearly for a future date. However, I will wait as I still believe a sell off is possible in the next month or 2. Kiron Sarkar 24th January 2013. | ||
| Washington’s Dirty Little Secret: The Deficit Doesn’t Matter Posted: 24 Jan 2013 07:30 AM PST click for video | ||
| Posted: 24 Jan 2013 05:30 AM PST Money Cannot Buy Growth
China and the United States are running the greatest experiment in monetary stimulus in modern economic history, and the evidence shows it is not working Since Alan Greenspan became the Fed chairman in 1987, there has been a policy consensus on the primary role and effectiveness of monetary policy in cushioning an economic downturn and kicking it back to growth. Fiscal policy, due to the political difficulties in making meaningful changes, was relegated to a minor role in economic management. Structural reforms have been talked about, but not taken seriously as a tool in reviving growth. In the four years after the global financial crisis that began in the summer of 2008, the United States’ monetary base more than tripled and China’s M2 has doubled. This is the greatest experiment in monetary stimulus in modern economic history. Staving off crisis and reviving growth still dominate today’s conversation. The prima facie evidence is that the experiment has failed. The dominant voice in policy discussions is advocating more of the same. When a medicine isn’t working, it could be the wrong one or the dosage isn’t sufficient. The world is trying the latter. But, if the medicine is really wrong, more and more of the same will kill the patient one day. When the crisis began, I predicted how central banks and governments would react: they would ease monetary policy and increase fiscal deficits, the medicines wouldn’t work, they would increase the dosage and the end game is worldwide stagflation. I argued in favor of monetary and fiscal stimulus to the extent to stabilize the situation, not to revive growth. The latter needed structural reforms to be achieved. Structural reforms are difficult because they would upset a lot of people and are slow in producing results. Smart and powerful people usually want to produce quick results to show their worth. This is why policy actions often take the path of least resistance, even if they lead the world to the edge of the cliff. Smart People, Great Harm The effectiveness of monetary policy was last discredited in the 1970s. The persistent attempts to revive growth with easy money led to stagflation. The lesson had a powerful impact at the time. Many theories were developed to explain why monetary policy didn’t work. The rational expectation theory was the main one. Soon after inflation was killed by high interest rate policy and the resulting recession, many theories were developed to revive the argument in favor of monetary policy. Smart people want to be relevant and effective. This is why they cannot hold onto a theory that denies their relevance in the real world. This is why the economics profession so quickly embraced monetary stimulus again so soon after it failed so miserably. In parallel with the new fondness for monetary stimulus, the economics profession in the 1980s advanced the theory of an efficient market with respect to finance. It is a child of the rational expectation theory applied to finance. Even though the economics profession found enough ammunition to shoot it down in monetary policy, it embraced it for financial markets. The combination led to Greenspan’s monetary policy and financial supervision at the Fed for nearly two decades. He created possibly the greatest man-made economic catastrophe in human history. The world still lives under his shadow. The real world has turned to be opposite to the favored positions of the economics profession: the financial market is not only inefficient but systematically bubble-prone, and monetary stimulus has abetted in bubble creation and its growth impact is merely the bubble spillover. Greenspan managed the U.S. economy largely through building up asset bubbles, even though he may have believed otherwise. As the U.S. dollar is the reserve currency for the global economy, Greenspan’s policy was responsible for bubbles around the world.
Is Bernanke Greenspan II? When the subprime crisis hit in 2007, the Bernanke Fed cut interest rates to ease the pressure. The policy triggered a massive increase in commodity prices, which depressed the U.S. and other developed economies and increased the pressure for the debt bubbles to burst. By mid-2008, it became apparent that the U.S.’s financial system was bankrupt because its underlying assets were hugely overpriced. The Fed turned its focus to saving the financial system through direct loans and cutting interest rates aggressively to ease the pressure on asset deflation. It has been successful at saving the financial system. Of course, a central bank can always print money to save its financial system, if it doesn’t mind depreciating its currency. The unique status of the dollar as the sole global reserve currency gave the Fed plenty of room to increase money supply. The Fed has failed in reviving growth in almost four years. Five years after the crisis first began, U.S. employment is still lower and household real income is also lower. The Fed still believed that it could get growth going and introduced a third round of quantitative easing and QE4 for that purpose. As I have argued many times before that globalization has cut the feedback loop between demand and supply even for a large economy like the United States’. The traditional thinking on stimulus is unlikely to be relevant in today’s world. One angle in QE3 and QE4 is their focus on decreasing mortgage interest rates. When a central bank targets a particular asset, it’s likely to work in the short term. The current U.S. housing revival is largely due to the Fed’s policy. Unfortunately, the revival is strongest in areas where housing prices are already high, threatening another bubble. The most visible byproduct of QE is rising stock prices. After QE1 and QE2, stock prices around the world did well for six to nine months. When the Fed buys assets, some investors get the cash. The ones who get the cash first have the incentive to buy stocks to front-run the ones who would get the cash later. This dynamic is self-fulfilling in pushing up stock prices. The Fed seems worried about some localized bubbles and threatens to end QE this year. Its action could be (1) to slow asset price appreciation or (2) to shed responsibility for the bubble consequences. It is too early to say which. One thing clear is that Ben Bernanke can’t be Greenspan II. The world has changed: the debt levels are already too high, and the global economy is inflationary, as emerging economies are already experiencing high inflation. He couldn’t run a bubble economy even if he intended to. Bernanke is scheduled to leave the Fed in 2014. If inflation isn’t serious then, he would be lucky and pass the hot potato to the next chairman. If inflation hits before his exit, he would have to take action. The Fed’s balance sheet may top US$ 4 trillion then. It would be extremely difficult to shrink it fast enough to stop inflation. I suspect that the Fed would accept the money out already there turning into inflation. China’s Tipping Point China’s monetary policy has been an amplifier for the Fed’s policy. When the latter is successful in increasing credit to expand demand, China’s monetary policy would increase capacity to contain the former’s inflationary effect. China could further increase money supply to run a bubble economy on the side without worrying about currency devaluation. This bicycle monetary machine ended when the United States’ debt level became too high to grow. This is why the monetary growth between 2008 and 2012 had such low effectiveness on growth and many side effects like inflation, a property bubble and overcapacity. In 2012, China’s M2 rose by 13.8 percent and net fund-raisings reached 30 percent of GDP. The resulting growth was quite low. The National Bureau of Statistics showed no growth in thermal power production compared to 12.5 percent per annum in the previous decade. The Ministry of Railroads showed that the freight traffic in the first eleven months declined by 1.1 percent compared to 6 percent annual growth in the six previous years. Listed companies showed middle single digit revenue growth, which is likely in line with nominal GDP growth. Considering inflation was quite high, adjusting the nominal growth of listed companies for inflation suggests that the real economy had a very low growth rate in 2012. How could so much capital (30 percent of GDP) have created so little growth? Add up depreciation cash, retained corporate earnings and the portion of fiscal revenue in investment, and the total investment in 2012 probably reached 50 percent of GDP again. For such a high level of investment, a growth rate of 10 percent would be considered low. China’s official statistics showed a GDP growth rate of 7 to 8 percent. My estimate is 3 to 5 percent. Either would show extremely low efficiency in turning monetary resources into growth. The global economy was a debt bubble, functioning on China over-borrowing and investing and the West over-borrowing and consuming. The dynamic came to an end when the debt crises exposed debt levels in the West as too high. The last source of debt growth, the U.S. government, is coming to an end, too, as politics forces it to reduce the deficit. When the West cannot increase debt, China doing so is not effective on growth and could trigger yuan devaluation. Only Reforms Can Revive Growth Globalization has changed how a national economy works, even one as big as the United States’. The biggest change is that national policies can’t affect wages. They are internationally determined. When a government tries to stimulate with more fiscal spending and lower interest rates, its short-term effect, if any, is to increase capital income. As technologies become more effective in spreading work around the world, the wage squeeze in the developed economies would become more intense. The technology shock to the white-collar economy in the West is just beginning. It makes it easier to shift white-collar jobs around the world and eliminates even more jobs. The resulting efficiency gain is hard to realize if the displaced workers cannot find alternative employment quickly. The labor market statistics in the West strongly suggest the importance of this force. In the United States, the labor force has shrunk because, I believe, many found the available wage not worth the bother. These dropouts are better off shifting to pensions or disability benefits. The only way to bring them back into the labor force is to cut the cost of living to make the low wage worthwhile. I believe that the developed economies must make their labor market highly flexible, income redistribution efficient, and non-tradable components of the living cost – housing, health care and education – low and effective. This is a simple prescription. But it takes time to produce benefits and could upset vested interests in many industries. The easy way out is to print money, hoping that the pie would grow to take care of everyone. This has failed and will do so again. China’s competitive advantage is its labor cost. It is the reason for China’s growth in the past decade. But, the system has been allocating the fruits from growth through asset inflation. It is disproportionately in favor of the government. One effect is to increase investment beyond what a normal market economy would allow. The system essentially sucks in the labor productivity gains into the government through inflation tax. It has worked because the pie was expanding fast enough to withstand this burden. As the pie stops growing quickly, the inflation tax is hard to collect. This is why the property bubble is deflating and the government is short of money. So many who have benefited from the system long for the return of yesterday. The policy focus so far is to change perceptions through propaganda, hoping to revive asset markets. The problem is that China cannot put on this show alone. While the West suffers debt crises, China cannot crank up exports to charge up an asset bubble. The bad news is obviously not acceptable to those who are used to easy bubble money. China’s policy focus is likely to remain on changing perceptions in 2013. The Inflation Explosion Trying to bring back yesterday through monetary growth will eventually bring inflation, not growth. Emerging economies are already experiencing high inflation. Historically they worry about inflation, but don’t do much about it as long as their exchange rates are stable. India is already facing devaluation. It is taking inflation more seriously. Other big emerging economies don’t face the same pressure. They are not taking action. Their exchange rates will tumble when the Fed raises interest rates. The developed economies have low inflation rates because their labor markets are depressed and their economies are mostly about labor costs. Their inflation will come when either their labor markets tighten up due to declining labor force or imported inflation raises inflation expectation and wage demand. Both forces are intensifying. The Fed has promised to take action when the United States’ inflation rises above 2.5 percent. It was 2 percent last year. In 2014 it would break through the level. The Fed has to raise interest rates in 2014. | ||
| Learning to Be A Central Banker in 10 Easy Steps Posted: 24 Jan 2013 05:15 AM PST Welcome Mark Carney! I am certain many people have been offering you advice on what to me appears to be a rather thankless task. Undoubtedly your experience at the Squid will have given you the necessary sharp elbows and diplomacy to thrive, and your Canadian upbringing arms you with the right amount of earnestness for public service. Nonetheless, I thought you might find something worthy below in the primer I penned for Mr Bernanke in the waning days of 2007. Best of luck in your mission! Oh, and one final piece of advice: No matter how seductive and enthralling you might initially find the quality of life here in Blighty (considering the digs the Old Lady will finance for you), DO NOT NOT SELL YOUR CANADIAN BOLTHOLE. The novelty wears off quickly and England all-too-quickly becomes Moosonee without the clean air and the blue Walleye… * * * * * * * * * * * * * * * * * * * *
CONGRATULATIONS! You are now ready to set monetary policy for the largest economy in the world!! NEXT WEEK: In your next lesson we’ll introduce balls 4 and 5 in the form of a sub-prime crisis, and banking system solvency issues, just for fun! | ||
| I am not the driver you are looking for Posted: 24 Jan 2013 05:00 AM PST | ||
| Posted: 24 Jan 2013 03:30 AM PST My early morning reads:
Are you dressing in layers?
Stock Market Rallies | ||
| NBER Wealth Effects Revisited: 1975-2012 Posted: 24 Jan 2013 02:59 AM PST Wealth Effects Revisited: 1975-2012Karl E. Case, John M. Quigley, Robert J. ShillerNBER Working Paper No. 18667 We re-examine the links between changes in housing wealth, financial wealth, and consumer spending. We extend a panel of U.S. states observed quarterly during the seventeen-year period, 1982 through 1999, to the thirty-seven year period, 1975 through 2012Q2. Using techniques reported previously, we impute the aggregate value of owner-occupied housing, the value of financial assets, and measures of aggregate consumption for each of the geographic units over time. We estimate regression models in levels, first differences and in error-correction form, relating per capita consumption to per capita income and wealth. We find a statistically significant and rather large effect of housing wealth upon household consumption. This effect is consistently larger than the effect of stock market wealth upon consumption. In our earlier version of this paper we found that households increase their spending when house prices rise, but we found no significant decrease in consumption when house prices fall. The results presented here with the extended data now show that declines in house prices stimulate large and significant decreases in household spending. The elasticities implied by this work are large. An increase in real housing wealth comparable to the rise between 2001 and 2005 would, over the four years, push up household spending by a total of about 4.3%. A decrease in real housing wealth comparable to the crash which took place between 2005 and 2009 would lead to a drop of about 3.5%
This paper is available as PDF (729 K) or via email. |
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