EconomPics of the (Back in a Few) Week

Taking a breather... posts to resume in a few weeks.

GDP
Rocky Mountain High
Japanese Economy Grows... Nominal GDP Back to 1993 Levels

Economic Indicators
It's Always Sunny in Philadelphia
Leading Indicators Rise in October
New York Business Conditions "Deteriorate" in November

Inflation
Core CPI at All-Time Series Low
CPI Tame in October
The Impact of QEII

Other
New Home Starts Dive in October
Consumer Continues to Spend

And in honor of my break... The Bouncing Souls with Gone.

It's Always Sunny in Philadelphia

Solid news out of Flip-Flip-Flipadelpia.

Forex Pros details:

Manufacturing activity in Philadelphia increased significantly more-than-expected in November, rising to the highest level since February, official data showed on Thursday.

In a report, the Federal Reserve Bank of Philadelphia said that its manufacturing index rose to 22.0 in November, after rising to 1.0 in October.

Analysts had expected the index to rise to 4.5 in November.

The report said that all of the survey's broad indicators of economic performance showed improvement from their reading in October, and firms reported an increase in employment and work hours.

Survey Results

Survey Results of 6 Month Forecast



Source: Philly Fed

Leading Indicators Rise in October

Marketwatch details:

A “mild pickup” may be in store for the U.S. economy this spring following a post-holiday lull, the Conference Board said Thursday as it reported that its leading economic index rose 0.5% in October.

Economists polled by MarketWatch had expected the index, a weighted gauge of 10 indicators that are designed to signal business cycle peaks and troughs, to gain 0.6%. October’s result was supported by gains in the financial components.

Six of the 10 indicators rose in October, with the largest contribution from the interest rate spread. Among the two negative contributors, the largest negative contribution came from the index of supplier deliveries. Two of the indicators held steady in October.

Source: Conference Board

Rocky Mountain High

Source: BEA

Core CPI at All-Time Series Low

FT Alphaville reports:

Over the last twelve months, core CPI climbed 0.6 per cent, or “the smallest 12-month increase in the history of the index, which dates to 1957,” according to the BLS. There’s been a slight divergence between the core and headline numbers in recent months, with the majority of it accounted for by higher gas prices — but even then, the headline figure only climbed 1.2 per cent.

Source: BLS

The Impact of QEII

On September 21st, the FOMC signalled a new round of quantitative easing with the following:

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

An interesting theory from James Bianco (via The Big Picture) as to why we perhaps shouldn't be surprised that the positive impact of QEII has been outside the Treasury bond market (even though they are targeting $600-$900 billion in Treasury purchases).

Over the last several weeks we have repeatedly mentioned the Federal Reserve’s portfolio balance theory. In a nutshell, this theory states it does not matter what securities the Federal Reserve buys with newly printed money (QE2). The market will arbitrage this new money into the market that it thinks will have the most impact.

With that theory in mind, lets take a look at one relationship that seems to have diverged since the announcment of QEII... the rather strong relationship (outlined here) between gold and Treasuries.



Source: Yahoo

New Home Starts Dive in October

CNN Money details:

New home construction fell to an 18-month low in October, the government said Wednesday. Housing starts, or the number of new homes being built, fell 11.7% to a seasonally adjusted annual rate of 519,000 in October, down from a revised 588,000 in September, the Commerce Department said. The annual rate is the lowest since the 477,000 starts reported for April 2009.

The west's 91,000 annualized figure is the second lowest total in more than 50 years.

Source: Census

CPI Tame in October

Marketwatch details:

U.S. consumer inflation decelerated in October, the Labor Department said Wednesday. The consumer price index increased 0.2% in October, driven by a 2.6% gain in energy prices. Other price increases were moderate, including food. The core CPI, excluding food and energy costs, was flat for the third straight month in October. Economists were expecting the CPI to rise 0.3% in October and for the core rate to rise 0.1%. In the past year, the CPI has risen 1.2%. The core rate is up 0.6%, the slowest pace on record and well below the Fed's target of about a 2% rate.

Source: BLS

New York Business Conditions "Deteriorate" in November

Marketwatch details:

Business conditions in the New York area deteriorated in November, as the New York Fed's Empire State manufacturing survey plummeted 27 points to -11.1, driven by a sharp drop in new orders. The release was far worse than economist expectations for a +15 reading and marks the first negative reading since July 2009. The shipments index also fell below zero.

Update:

A reader points out that while the current index dropped, the outlook was quite positive.

Source: NY Fed

Consumer Continues to Spend

Marketwatch details:

U.S. retail sales rose for the fourth straight month, climbing 1.2% in October, as consumers flocked to auto showrooms and made more purchases online. Sales for September and August were also revised higher. Excluding motor vehicles, retail sales rose 0.4% in October, the Commerce Department reported Monday. Economists surveyed by MarketWatch had forecast total sales to rise by 0.7%, or 0.4% excluding the volatile automotive segment. Retail sales have risen at an annual rate of 6.3% over the past three months. Sales were revised to a 0.7% increase in September, compared to an original reading of 0.6%. August sales were revised up to 0.9% from 0.7%

Source: Census

Japanese Economy Grows... Nominal GDP Back to 1993 Levels

Bloomberg reports:

Japan’s economy grew more than forecast in the third quarter as consumer spending increased, shielding the expansion from a stronger yen and export slowdown likely to have a greater impact this quarter.

Gross domestic product rose an annualized 3.9 percent in the three months ended Sept. 30, following a revised 1.8 percent expansion in the previous quarter, the Cabinet Office said in Tokyo today. In nominal terms, the economy grew 2.9 percent.

The article goes on to detail that a lot of the growth was due to a purchases of fuel-efficient cars ahead of an expiration of a subsidy.

Longer term we see the remarkable fact that Japanese GDP in nominal terms is right where it was in Q3 1993 (yes 17 years ago), while real GDP is just 18% higher over that same time frame (less than 1% annualized growth).



Source: ESRI

EconomPics of the Week 11-12-10

Crazy f'n week in no particular order...

European Economic Rebound Slows
Is it a Bubble if a Reversal is Already Priced int...
Growth in Treasury Budget Deficit Slows
Undergrad Tuition Bubble?
The Importance of Emerging Markets
The Remarkable Gold Run Continues
Consumers Getting Responsible?

European Economic Rebound Slows

Nasdaq details:

The European Union grew by 0.4% over the 3rd quarter, declining from the 1.0% growth rate posted last quarter. The GDP figure just missed analysts´expectations of 0.5% forecasted ahead of time. Over the year, GDP over the EU remained unchanged as expected at 1.9%.

Source: Eurostat

Is it a Bubble if a Reversal is Already Priced into the Market?

Below is a chart of the 10 year Treasury yield and what the market is pricing in for the 10 year yield, ten years forward (along with the five year average of each).



What we see is that the current yield is well below the five year average (bringing up concerns there is a "bond bubble"), but we can also clearly see that the market is already pricing in the yield to rise to a level that is higher than its five year average in ten years.

If a reversion from these lows is already priced in (past its five year average), I don't see how we are in a bubble (i.e. "bubbles" are not supposed to be priced into the market).

Source: Federal Reserve

Growth in Treasury Budget Deficit Slows

Still catching up on yesterdays... the below shows the latest Treasury budget in nominal and relative (to GDP) terms... improving in second derivative terms.

It also puts the $900 billion in Treasury purchases ($600 billion in new QE, $300 billion from Mortgage purchase proceeds) in perspective (i.e. that is a LOT of purchasing).

Source: Treasury / BEA

Undergrad Tuition Bubble?

Investor Glossary details that bubbles are formed:

When excessive speculation enters a market. Instead of viewing the intrinsic value of an asset, speculators in a bubble market instead focus on the resale value of the asset. This is sometimes referred to as the greater fool theory of investing. In a bubble, it doesn't seem to matter that a price is irrationally high - it only matters that it can be sold for an even more irrational price at a later date. Bubbles often end with steep declines, where most of the speculative gains are quickly wiped out.

Chronicle (hat tip Infectious Greed) details that almost 10% of private undergraduate schools now cost more than $50k / year to attend (bold mine):

The ranks of the most expensive colleges have grown again: 100 institutions are charging $50,000 or more for tuition, fees, room, and board in 2010-11, according to a Chronicle analysis of data released last week by the College Board. That's well above the 58 universities and colleges that charged that much in 2009-10, and a major jump from the year before, when only five colleges were priced over $50,000.

This year marks a milestone as the first public institution has joined that elite club: the University of California at Berkeley is charging out-of-state residents $50,649 for tuition, fees, room, and board. (The price for in-state residents is only $27,770.)

Below is a chart of the top 20 such schools.



My thoughts:

1. education is not necessarily a traditional "asset", but an undergraduate education definitely has an intrinsic value
   
2. the cost of many / most private school undergraduate educations are (insanely) over-inflated relative to their intrinsic value; simply compare the cost to similar, yet more affordable alternatives (i.e. schools that don't cost more per year than GDP per capita)
3. the perceived benefit of these schools is in many cases focused on the resale value of the education (i.e. the value a corporation may perceive of that brand, which may be re-sold in the form of higher compensation, rather than what was actually learned)

Based on the above, I am comfortable claiming that private school tuitions are now in a bubble.

Amazing (to me) is that these schools have not only been able to raise the price of tuition / room / board to levels that are ridiculous in both absolute ($50k a year x 4 = $200k!!!) and relative (the national average is a still unreal $21k / year) terms, but they have done it in the years directly following the worst economic downturn since the Great Depression.

The Importance of Emerging Markets

As the FT notes:

These are at market exchange rates. At purchasing power parity, the emerging market share of global GDP rises to 53 per cent.

I'd add that 2015 is obviously only a projection... but remarkable.

Source: Ashmore

The Remarkable Gold Run Continues

Btw- a great post by Kid Dynamite which provides details of how the gold ETF (GLD) works here.

Source: USA Gold

Consumers Getting Responsible?

The NY Fed (hat tip Calculated Risk) details that the decline in consumer credit outstanding is due in large part to consumer retrenchment and not just outright default.

Excluding the effects of defaults and charge-offs, available data show that non-mortgage debt fell for the first time since at least 2000. Also, net mortgage debt paydowns, which began in 2008, reached nearly $140 billion by year end 2009. These unique findings suggest that consumers have been actively reducing their debts, and not just by defaulting.

“Consumer debt is declining but only part of the reduction is attributable to defaults and charge-offs,” said Donghoon Lee, senior economist in the Research and Statistics Group at the New York Fed. “Americans are borrowing less and paying off more debt than in the recent past. This change, which we continue to study carefully, can be a result of both tightening credit standards and voluntary changes in saving behavior.”

While the chart below shows the cumulative pullback in consumer credit outstanding, it is important to note that the total amount (revolving plus non-revolving) flipped positive for September (noise or a bottom?).



Source: Federal Reserve

EconomPics of the (Past Two) Week(s)

Asset Performance
Equities Poised for Breakout?
End of the Bond Bull Market
Everything is a Winner!
Fed is Literally and Figuratively "Printing Money"
Productivity and Equities
Front-End Loves... Long-End Hates... QEII
The Race to the Bottom Continues
Housing Rebound Stalls
MSFT vs. AAPL Earnings

Economic Data
Wages and Inflation
Employment Reports Split
Economy Showing Signs of Life
On the Value of High Yield
More on GDP
GDP Bounces... Still Below Trend
No Bounce in Income
Manufacturing Growth Strong in October
Auto Sales Jump in October
Services Bouncing Back
Large Corporations Aren't Hiring

Other
Levels Matter: Cry Me a River Edition
What is So F'n Funny?

And your video of the week... Radiohead with Nice Dream (love this tune)

Wages and Inflation

Paul Krugman details the connection between wages and inflation:

I get a fair number of comments to the effect that worries about deflation are all wrong, look at commodity prices. I’ve tried in the past to explain why we should focus on sluggish, sticky prices, not volatile prices like commodities — hence core inflation. But let me add another point: arguably the stickiest, sluggishiest prices are those of labor. So why not focus on wages?

Source: BLS

Employment Reports Split

Marketwatch details:

Nonfarm payrolls rose by a greater-than-expected 151,000 last month as private-sector employers added 159,000 jobs, the Labor Department said Friday. The September number was revised to show payrolls fell by 41,000, less than an original estimate of a 95,000 decline.

However, the unemployment rate, which is obtained from a separate household survey, remained at a lofty 9.6% in October. About 14.8 million people who would like to work can't get a job. The jobless rate has been above 9.0% since May 2009, right before the recession ended.

Odd reports... the headline non-farm payroll number jumped more than expected.



But, the household survey disappointed, with the number employed actually falling and those leaving the workforce jumping by more than 400k.



Source: BLS

Everything is a Winner!

Lesson #1: Investors don't mind a correlation of one across asset classes when everything goes up.

Source: Yahoo

Productivity and Equities

EconomPic detailed earlier that output per hour and hours worked both turned positive year over year. When this has happened historically, the equity market (as defined by the S&P 500) has done quite well (up 8% 12 months forward on average excluding dividends).



Source: BLS

Economy Showing Signs of Life

BusinessWeek details:

The productivity of U.S. workers rose more than forecast in the third quarter as companies redoubled efforts to rein in costs amid signs the recovery was cooling.

A measure of employee output per hour increased at a 1.9 percent annual rate after falling 1.8 percent in the previous three months, Labor Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg News projected a 1 percent gain.

Don't look now, but productivity as defined by output per hour AND hours worked are both increasing.



Source: BLS

Fed is Literally and Figuratively "Printing Money"

One aspect of quantitative easing that many may have missed is just how much money the Fed is set to make off these programs.

Last March the Fed starting their $1.25 TRILLION program of purchasing Agency MBS. For an entity that can borrow on the cheap (i.e. free) the returns have been spectacular.



The latest program is basically doing what banks have been doing for ages... borrowing short, lending long.

How much can be made?

The Fed's statement provides details of their purchases (here NY Fed). Using the current yield levels to determine an estimate yield of their Treasury purchases, an estimated yield of 1.2% - 1.6% seems likely.



Quick and dirty math = the Fed is getting PAID

Source: NY Fed

Auto Sales Jump in October

The overall market continues to bounce; Ford and Hyundai-Kia continue to take share; Chrysler is once again trying to be relevant; Japanese autos are falling behind.



Source: Autoblog

Levels Matter: Cry Me a River Edition

Bloomberg reports:

Wall Street traders, who typically receive the fattest year-end bonuses among bank employees, are poised to suffer the biggest pay cuts as revenue at their divisions dropped an average of 12 percent so far this year.

Goldman Sachs Group Inc., the New York-based bank that makes most of its money from trading and set a Wall Street pay record in 2007, slashed average compensation 26 percent in the first nine months. By contrast, Charlotte, North Carolina-based Bank of America Corp., which employs branch managers and brokers as well as bankers and traders, raised average pay 10 percent.

Perspective people...



Source: Bloomberg

Services Bouncing Back

But where are the friggin' jobs!

Respondents stated:

• "Sales are still down compared to last year, but showing a slight increase." (Public Administration)
• "Economy still slow for our industry, with very small signs of recovery. Strong downward pricing pressures from customers affecting business." (Professional, Scientific & Technical Services)
• "Some positive growth in comp [comparable] sales over the past 2 to 3 months." (Accommodation & Food Services)
• "Business is picking up ever so slowly, but improving." (Transportation & Warehousing)
  "Generally stable-to-improving demand for our products." (Wholesale Trade)

Source: ISM

Front-End Loves... Long-End Hates... QEII

Quantitative Easing II that is. The WSJ details:

The Treasury market delivered a vote of confidence to the Federal Reserve Wednesday as the price of the 30-year bond plummeted, a signal the market believes the Fed's big bond buying will eventually spur inflation.

"The market appears to be pricing in the likelihood that [quantitative easing] will eventually succeed, and is positioning itself ahead of the inflation that may materialize in years ahead as a result of a successful reflation program," said Kevin Giddis, president of fixed income capital markets at Morgan Keegan + Co. in Memphis.

Source: WSJ

Large Corporations Aren't Hiring

Source: ADP

The Race to the Bottom Continues

It looks like emerging markets are getting pulled into the race to the bottom whether they like it or not...

First, Bloomberg details expectations for QEII:

The Federal Reserve will probably begin a new round of unconventional monetary easing this week by announcing a plan to buy at least $500 billion of long-term securities, according to economists surveyed by Bloomberg News.

New York Fed President William Dudley set expectations for $500 billion in purchases when he said in an Oct. 1 speech that purchases totaling about that amount would add as much stimulus as lowering the Fed’s benchmark rate by 0.5 percentage point to 0.75 percentage point.

Which Japan may try to one up via an ETF purchases:

Bank of Japan board members said purchases of exchange-traded funds and real-estate investment trusts could increase transactions by supporting investor sentiment, minutes of the bank’s Oct. 4-5 board meeting show.

Where will all this liquidity go? Hopefully the actual economy, but more likely over the short-run... speculative investments, including emerging markets, in yet another reach for yield.

Example one:

Yields on bonds from junk-rated companies in emerging markets are approaching the lowest relative to investment grade since June 2008 as less creditworthy borrowers benefit most from cash pouring into developing countries.

“People literally cannot buy enough” junk bonds of companies in developing nations, said Steve Gooden, managing director of emerging markets in London at Macquarie Group Ltd., Australia’s biggest investment bank. Investors are buying corporate junk notes from such nations because high-grade supply can’t keep up with demand, he said.

Example two:

China’s U.S. dollar borrowing costs fell in October by the most since January as investors bet record currency reserves of $2.65 trillion will help the world’s fastest-growing economy win a higher debt rating.

The yield on China’s $1 billion of 4.75 percent notes due October 2013 dropped 31 basis points last month, or 0.31 percentage point, to 1.46 percent, according to Royal Bank of Scotland Group Plc prices. The extra yield over similar-maturity U.S. Treasuries narrowed 15 basis points to a three-month low of 95.

The race to the bottom continues...

Manufacturing Growth Strong in October

ISM respondents are saying:

• "The dollar is weakening again, which is resulting in higher costs for our materials we purchase overseas. It is hurting our profit margins." (Transportation Equipment)
• "Business slowing down but still double digit over last year." (Chemical Products)
• "Currency continues to wreak havoc with commodity pricing." (Food, Beverage & Tobacco Products)
• "Customers remain cautious, placing orders at the last minute, making supply planning a challenge." (Machinery)
• "Our customer base — auto manufacturers — is expanding capacity and making major capital investments." (Fabricated Metal Products)

Source: ISM

No Bounce in Income

Marketwatch details:

The savings rate for U.S. households fell to its lowest level in more than a year in September as incomes fell and spending increased, the Commerce Department said Monday. Personal income fell 0.1% in September. This is the largest decline since July 2009. Consumer spending rose 0.2%. Wall Street economists had expected a 0.2% increase in income and a 0.3% gain in spending.

Real disposable incomes fell 0.3% in September. Inflation moderated further in September. The personal consumption expenditure price rose 0.1% in September after a 0.2% gain in August. Inflation is up 1.4% in the past year. The core PCE was flat in September after rising 0.1% in August. Economists expected a 0.1% gain.

Source: BEA