EconomPic

Checking in on Personal Consumption

2012-01-30T21:54:00.001-08:00

U.S. consumer spending was flat in December as households put the largest rise in income in nine months into their savings, potentially signaling slower consumption early in 2012. It was the weakest reading on spending since June, the Commerce Department said on Monday, and it followed two tepid gains in October and November.

The slow fourth quarter pushed the year over year real per capita spending (i.e. the amount of actual spending per person adjusted for inflation) down to 0.7%, the lowest reading since the crisis and the lowest reading since the early 1990's recession excluding the crisis.

Source: BEA

EconomPics of the Week (1/27/12)

2012-01-27T12:16:00.000-08:00

Your EconomPic links for the past two weeks...

Economic Data

Asset Classes

And your video of the week... a song I can't get out of my head. Gotye with 'Somebody That I Used to Know' (found it from this viral video cover of the song)

GDP Print Okay, Composition Disappointing

2012-01-27T08:41:00.001-08:00

Peter Boockvar (via The Big Picture) details this quarter's GDP print (slightly edited / reformatted):

After three quarters (in a row) that averaged just 1.2%, fourth quarter GDP grew 2.8%, a touch below expectations of 3.0%, but Nominal GDP grew well below forecasts. Because the price deflator was up just 0.4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%.
Personal Consumption rose 2.0% vs the forecast of 2.4%.
Fixed Investment rose 3.3% (helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%).
Trade was a slight drag on GDP growth and government spending was as well, led by a 12.5% decline on national defense spending.
State and local government spending fell by 2.6%.
Inventories added almost 2% to growth and, taking out this influence, Real Final Sales rise just 0.8% vs 3.2% in Q3.
Thus, inventories were a large swing factor in the Q4 rebound. Bottom line, Real GDP was near estimates, but nominal GDP was the weakest since Q3 ’09 and Real Final Sales were the 2nd softest since Q1 ’10.

Details below... we can see the HUGE impact of inventory rebuild (potential is there for this to be a HUGE drag in Q1 '12) and the continued drag of local government (i.e. austerity measures).

The below chart shows the longer term breakdown of GDP, showing the importance of consumption on growth. We can see the huge shift in consumption from goods (i.e. things) to services (i.e. outsourcing of "actions" to make out lives easier). Of note, for all the chatter about how large government has become, the Federal government (excluding defense) has not really become a larger as a component of GDP.

Source: BEA

Durable Goods Grip It and Rip It in December

2012-01-26T09:53:00.001-08:00

Reuters details:

New orders for U.S. manufactured goods rose in December and a gauge of future business investment rebounded, showing the U.S. economy ended the year with more momentum than previously thought.

Commerce Department data showed orders for durable goods climbed 3.0 percent last month. That was likely boosted by a surge in orders at aircraft builders like Boeing. Economists had forecast orders rising 2.0 percent.

Strong month, but note that excluding the highly volatile nondefense aircraft component, the index would have been up a (still healthy, yet not as impressive) 1.6%.

Source: Census

The New (and Improved) Leading Economic Indicator Shows Expansion

2012-01-26T09:32:00.001-08:00

Bloomberg details:

The Conference Board’s gauge of the outlook for the next three to six months increased 0.4 percent after climbing 0.2 percent in November, the New York-based group said today. The median forecast of 44 economists surveyed by Bloomberg News called for a gain of 0.7 percent.

The article also outlines a change in a major component of the index (the first change in the index since 1996):

Changes in the components of the leading index were announced earlier this month. Instead of the inflation-adjusted money supply, the Conference Board used its own Leading Credit Index, which aggregates measures of the yield curve, interest- rate swaps and the Fed’s senior loan officer survey. The Institute for Supply Management’s supplier deliveries gauge was replaced by the group’s index of new orders.

The change from money supply to credit index is a major change, removing a component that was directly in the hands of the Fed (money supply), with one that is only partially in the hands of the Fed (credit index). Note that in past months, EconomPic has removed the money supply component, as well as stock and interest rate components, for an index excluding Fed involvement.

A comparison of the new (revised) index, the old index, and the "EconomPic" index that excluded Fed control is shown below. What we see is the new index is much more aligned with one excluding the Fed's control and shows the index likely overstated underlying economic strength over the summer.

Source: Conference Board

The Impact of Low Rates Through 2014

2012-01-25T15:28:00.000-08:00

Bloomberg details the latest from the Fed:

Chairman Ben S. Bernanke said the Federal Reserve is considering additional asset purchases to boost growth after extending its pledge to keep interest rates low through at least late 2014.

Policy makers are “prepared to provide further monetary accommodation if employment is not making sufficient progress towards our assessment of its maximum level, or if inflation shows signs of moving further below its mandate-consistent rate."

The immediate market reaction was a risk asset rally, a huge rally in gold (per Calculated Risk: Bernanke made it clear that even if inflation moved above the target - and unemployment was still very high - the Fed would only slowly pursue policies to reduce the inflation rate), and a rally at the belly of the yield curve (the yield curve flattened out to five years... shorter rates couldn't fall as they are already at or near zero). Why? The "late 2014" date is much later than the June 2013 date previously projected by Bernanke last summer.

The impact of this announcement (and the previous projected rates) can be seen in the chart below that shows the Fed Funds rate curve (implied by EuroDollar futures) for March 2013 through December 2014, as of various dates over the past year.

What do we see? We see an initial drop between March and June of last year as Bernanke indicated low yields for the foreseeable future, then a huge drop (mid-summer) after Bernanke stated rates would remain zero through June 2013. Today's announcement really did nothing through June 2013 (that was already projected), but was felt further out along the curve.

The key question is what is the Fed trying to accomplish?

In "normal" times, low yields = cheap financing = increased consumption (it creates an incentive for individuals to borrow and banks to lend), but in today's zero-bound world the impact is minimal. Increased consumption is limited as individuals are trying to rebuild their own balance sheets and those that might benefit most from borrowing, don't necessarily have the credit to qualify for a loan. In terms of impact on unemployment, GYSC (of Economic Disconnect fame) states:

Unemployment is a structural problem, not a cyclical one, but the FED is still stuck in the past.

In addition, there are some theories that consumption may actually be negatively impacted by zero bound rates. As I outlined over the summer, I think it is possible that negative real interest rates may actually cause individuals to save more, while Kid Dynamite outlined yesterday that low rates forecasted may cause individuals to hold off from making a loan fueled purchase:

Let me explain: right now, one appealing factor of home buying/selling decisions is that interest rates are very low – you can afford to buy more house. If I think that interest rates are going to remain low for a long period of time, I will be in no hurry to lock in this low rate on the debt I’m borrowing – I will be in no hurry to go out and buy a house.

So what is it then? Corporations!

There is one sector that I think will be positively impacted by the latest announcement.... corporations. Don't let their record profits as a percent of GDP (while personal income is at record lows) fool you into thinking they don't need help at the populations expense. Seriously though... my initial reaction upon hearing that rates would be held down near zero through 2014... buy credit... WITH duration out to around ten years (the secondary impact is positive for equities, as explained below).

While Treasury yields are at all-time lows, corporate spreads remain at elevated levels (when yields fell during the summer when we had to deal with the US downgrade and Europe, spreads widened significantly).

In "normal" times, when markets calm these spreads would be expected to narrow, which I still believe is the case. One would also "normally" expect Treasury yields to rise as investors shift out of Treasuries, causing the hard interest rate component of corporate yields (rate + spread = yield) to rise, but this risk has been removed for the foreseeable future out to around ten years. The result is that corporate bonds seem like a very safe investment. This decreased risk should mean even cheaper financing for longer dated maturity corporate bond issuance.

So will this finally set off a round of corporate fueled expansion? If they don't see aggregate demand improving, then I don't see how this will impact the underlying economy. But, with the cost of equity high (i.e. what I perceive as fair to cheap equity valuations) and cost of debt low (i.e. these lower yielding corporate bonds), we may see significant change in capital structures (perhaps via private equity).

Source: Barclays Capital

European Manufacturing Feeling the Downturn

2012-01-25T08:57:00.001-08:00

Marketwatch details:

Industrial orders in the 17-nation euro zone fell 1.3% in November after a 1.5% rise in October, the European Union statistics agency Eurostat reported Tuesday. Compared to November 2010, orders fell 2.7%, the agency said. Economists had forecast a 2.3% monthly decline and a 2.8% year-on-year fall.

Since the European crisis re-emerged in mid-summer, the European core has seen a rather sharp drop off in new industrial orders, while Emerging Europe (and the UK / Ireland) have shown strength (note that Greece didn't release data for November, but was down 5% from July through October).

Source: Eurostat

Apples Numbers Were B-A-N-A-N-A-S

2012-01-24T20:15:00.000-08:00

Before jumping on the Apple bandwagon, I'll turn it over to Tadas of Abnormal Returns fame who summarized Apple's blow out earnings with the following powerful statement:

Apple’s results highlight this simple fact: no one knows nothing. The most followed (and analyzed) company in the world was able to exceed even the most bullish analysts’ estimates by a wide margin. If this can happen, then it should remind us that anything, good or bad, can happen in the markets. Any one telling you they know something will happen for certain, just remind them about Apple 2012 Q1 results.

Now to the blow out earnings.... just a part of the exponential growth the firm has seen over the past eight or so years.

Data shown is from quarterly financial statements

Billions of this size is hard to grasp, so the following chart attempts to put it in perspective. Apple's sales over the last twelve months are equal to almost 1.2% of all U.S. personal consumption over that time (yes, I know Apple has sales outside of the U.S., but think about how much stuff 1.2% of everything U.S. citizens consume is) and around 2% of last quarter's consumption.

Data shown is rolling twelve month

Source: BEA / EDGAR

Existing Home Sales Rise

2012-01-20T09:02:00.000-08:00

Bloomberg details:

Sales of previously owned U.S. homes rose for a third month in December to the highest level since January 2011, a sign the housing market ended last year with momentum.

Purchases increased 5 percent to a 4.61 million annual rate, the National Association of Realtors said today in Washington. The pace was less than the 4.65 million median forecast of economists surveyed by Bloomberg News. The gain helped push down the inventory of homes for sale last month to the lowest level since 2005. Purchases in 2011 climbed 1.7 percent from a year earlier as prices fell.

Historically low mortgage rates and a pickup in employment may be giving Americans the confidence to purchase homes that have fallen in value. At the same time, another wave of foreclosures may inhibit a faster recovery in real estate as more distressed properties are put on the market.

Looking at the data, it appears sales are on the rise as prices are creeping lower (to a level where demand is finally meeting supply). My guess is the reason higher priced home sales are less is two-fold... they don't qualify for conforming loans and prices are being reduced (i.e. houses formally in the $500k-$750k "bucket" are now in the $250k-$500k bucket).

Source: Realtor.org

CPI Steady in December

2012-01-19T08:31:00.000-08:00

CNN Money details:

Inflation overall held steady last month, as declining gas prices balanced out higher prices for other items.

The government's key measure of inflation, the Consumer Price Index, showed prices were virtually unchanged from November to December. It marked the second month in a row CPI has barely moved.

In the past 12 months, prices rose 3%, a slowdown from a 3.4% annual inflation rate in November. The numbers are seasonally adjusted.

Source: BLS

Do Initial Claims Matter?

2012-01-19T07:39:00.000-08:00

Fox Business details:

New applications for unemployment benefits dropped to a near four-year low last week, a government report on Thursday showed, pointing to continued improvement in the labor market.

The Labor Department said initial claims for state unemployment benefits dropped 50,000 to 352,000, the lowest level since April 2008 and the biggest drop since September 2005. The prior claims data was revised up to 402,000 from the previously reported 399,000.

Good news, no doubt. BUT, initial claims SHOULD be falling (and falling dramatically). According to the BLS, we still employ less than 5 million people from the peak employment achieved in late 2007. Initial claims simply tell you the number of new people filing for unemployment benefits (i.e. those just laid off). If you have already shed 5 million people, this number SHOULD be falling (there are less people to lay off) even without an improved underlying economy.

The following chart in no way is intended to be a good measure of normalized initial claims, but it is meant to make that point. It shows the initial claims figures (through December) as an absolute figure and relative to the number of new jobs made over the previous 95 months (an arbitrary number that is the length of time from the bottom in employment during the '01 - '02 recession and the latest recession) and shows that the reduction in initial claims is less apparent when you take in account the sluggish employment growth.

So do initial claims matter? You sure don't want to see them rising. But. there is only a limited amount of information in the data when an economy has experienced the type of employment recession the US has faced the previous 4 years.

Source: DOL / BLS

Checking In on Capacity Utilization

2012-01-18T11:35:00.000-08:00

Source: BLS / Federal Reserve

China Still Buying Treasuries

2012-01-18T09:02:00.001-08:00

I feel like a broken record, but once again the mainstream media and fear-mongering finance blogs get the Chinese Treasury holdings data wrong. Here's Zero Hedge:

Today's TIC data confirmed what Zero Hedge readers have now known for quite some time: namely that foreigners are selling US paper. And while we have used contemporaneous Custody Account data from the Fed to present that in the past 7 weeks foreigners have sold a record amount of bonds, we now get confirmation via TIC that in November the selling continued, especially at the biggest non-Fed holder of US paper, China, which saw its holdings down to $1,132.6 billion, the lowest in the past year.

As EconomPic readers know, China's purchases are just flowing through the United Kingdom (and are later revised to China... see here, here, and here for a few examples).

I did note last month that:

The pace of growth in Chinese purchases of Treasuries has declined rather dramatically (in percentage terms). This may prove to be a smaller issue for the U.S. in terms of Treasury demand (the smaller percent is off a larger base, so in $$ terms the growth is still significant), but it may reflect the difficulty China may have growing their export driven economy at the scale required to prevent social unrest, as global aggregate demand has waned.

Source: Treasury

China's Growth in Perspective

2012-01-17T08:57:00.000-08:00

Credit Writedowns highlights Goldman Sachs Asset Management Jim O'Neill's views on the latest 9.2% Chinese GDP growth rate:

"It’s a bit stronger than I thought as well, actually. It is a bit of a blow for the hard landing guys, given inflation has come down so much as well. And policy makers are moving away from restraints and flirting with some sort of stimulus. If I was a hard landing guy, I would not be feeling very excited this morning."

I personally question the sustainability of an economy that has grown to be such a large part of the global economy, yet still relies so heavily on exports (and growing imbalances), as well as central planning (i.e. misallocated capital), but the below charts clearly show the (rather epic) growth China has seen over the past 40+ years.

Source: Wikipedia

S&P 500 / VIX Matrix

2012-01-16T23:04:00.000-08:00

As a follow up to last week's VIX as a Predictor of Equity Returns and Model Building / Data Mining posts, I put together the following two 'VIX Matrix' tables. These tables show the:

One month forward return of the S&P 500
One month change in the VIX index

against a number of scenarios involving the one month month change in the VIX and the absolute value of the VIX since its 1990 inception.

S&P 500: Less than -1.0% = Red, -1.0% to 1.0% = Yellow, Greater than 1.0% = Green
VIX: Less than -2.5% = Red, -2.5% to 2.5% = Yellow, Greater than 2.5% = Green

Lots of interesting information in these tables that I won't bother summarizing (look at it yourself), except to say that even in these turbulent times (bull market 90's, roller coaster 00's), markets were (on average) very mean reverting.

Note that there are plenty of limitations to these tables, most of which involve the limited data points for a number of the cells.

One-Month Forward S&P 500 Performance

One-Month Forward VIX Change

Update: much more on the above from my friend Bill over at Vix and More blog.

Source: Yahoo Finance

The Treasury Rally that Keeps on Trucking

2012-01-15T23:12:00.000-08:00

The WSJ reports on the Treasury Rally that Won't Die:

According to investment-research firm Morningstar, a portfolio of U.S. Treasurys with an average maturity of 20 years—the quintessential safe haven—rose 28% last year, even better than its 26% jump in 2008. You would have to go back to 1995 to find a better year.

More confusing still: Last year's surge came in the 30th year of a historic rally. Since 1981, long-term Treasury bonds have returned 11.03% annually, 0.05 percentage point better than the Standard & Poor's 500-stock index.

This comes a full year and a half after the WSJ said Treasuries weren't only overpriced, but that we were experiencing The Great American Bond Bubble (my rebuttal 'Bond Bubble Blasphemy' is here, while my rationale for the value of Treasuries at the time can be found here).

One of the charts outlined in my post back then (and updated below, but brought back to 1941 using data from Shiller) shows the takeaway... treasury rates have been a reflection of the historical growth of nominal GDP going back 50 years. Before that there was a huge disconnect following the Great Depression (when nominal GDP dropped by ~50% between 1929 and 1934... yes 50%!) and World War II, which conveniently allowed the U.S. to grow out of the massive amount of debt the nation had accumulated.

By this measure, the 3.8% annualized nominal GDP growth over the past ten years makes the current sub-2% interest rate seem low, but not as much when you take the following into account:

Five year annualized GDP growth is only 2.2% (i.e. we are trending down)
The Fed has made it clear they won't be raising short-term rates anytime soon / they have taken significant Treasury supply out of the market with quantitative easing programs
Deflationary pressures / potential shocks from Europe remain
Investors continue to flee risk assets into "safe" assets

So, does that make me a buyer of Treasuries at these levels? Not necessarily. I'd rather take a barbell approach to investing by allocating to return seeking assets on one side (I'll never tell you where) and cash on the other (for preservation of capital purposes). 2% is just not worth it for me and the beauty of investing for the average investor is we don't have to manage our own investments to a benchmark. That said, I don't think Treasuries are ridiculously priced given the circumstances.

Source: Federal Reserve / BEA

EconomPics of the Week: Friday the 13th Edition

2012-01-13T12:17:00.000-08:00

Asset Classes

Consumer Confidence and Equity Returns
Model Building / Data Mining
VIX as a Predictor of Equity Returns

Economic Data

Retail Sales Weak... A Reflection of Lower Prices?
Consumer Credit Set to Be a Positive Contributor to Growth

Where the Ladies at?
Men at Work

Other

China, Liberty, and the Products We Love

And your video of the week... in honor of the return of Portlandia, the theme song... Washed Out with Feel It All Around

Consumer Confidence and Equity Returns

2012-01-13T10:01:00.000-08:00

Businessweek details:

Confidence among U.S. consumers increased more than forecast in January, reaching its highest level in eight months on signs the labor market is improving.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment climbed to 74 from 69.9 at the end of December. The median estimate in a Bloomberg News survey called for 71.5. The measure has increased 9.9 points in the last two months, the biggest such gain since April-May 2009.

The Interloper and I have had some discussion regarding consumer confidence and the impact (if any) on forward equity returns. Looking at the data, it became clear that on average consumer confidence is a lagging, rather than leading, indicator for equity returns (great chart here and can be seen in the table below in the average columns).

There does however appear to be pockets of opportunity at extremes.

The table below outlines the average three month forward S&P return against the three-month change in the Michigan Confidence index and the absolute value of the index since 1979. While the data is limited for each "box" (and in some cases, there were no data points), it does show that the S&P 500 has performed very well on a going forward basis when:

Confidence Levels are low (less than 70) and stabilizing (between -5% and 5%)
Confidence Levels are high (greater than 85) and slightly falling (-10% to 0%), indicating potential "buying the dips" opportunities

On the other hand, returns were much more volatile at low confidence levels and when confidence fell abruptly.

Note we are currently up 22% in three months to that 74 level, which would indicate stability in equity returns going forward if the table is to be trusted.

Source: Bloomberg

Retail Sales Weak... A Reflection of Lower Prices?

2012-01-12T10:13:00.000-08:00

Peter Boockvar (via The Big Picture) details:

December retail Sales were light relative to expectations, rising just 0.1% month over month headline and falling 0.2% ex auto’s vs up 0.3% for both that was expected. Sales ex auto’s and gasoline were flat vs an expected rise of .4% and also taking out volatile building materials, sales fell 0.2%.

November was revised up slightly for all categories but not enough to offset the December weakness relative to expectations. Sales weakness was seen in the 3.9% drop in electronics sales after just a 0.5% rise in Nov. Department store sales fell after zero growth in November and online retail sales fell 0.4% after a 1.7% rise in November.

The below chart outlines the change in sales by category. What is important to note (and NEVER reflected in reporting by mainstream news or economist forecasts) is that retail sales is a reflection of nominal, rather than real sales. We already know for example that the decline in gasoline sales was a direct result of the decline in the price of gas during December.

What does this mean?

It means that if CPI was flat or negative in December (my guess is it will be) then actual sales aren't as bad as reported in real terms (i.e. it won't be as big a hit to GDP growth expectations). That said, it would still reflect real weakness and the power of consumers to demand larger discounts during the holiday shopping season (perhaps resulting in lower sales in 'holiday' items like electronics and general merchandise).

Source: Census

Model Building / Data Mining

2012-01-11T11:08:00.000-08:00

Yesterday, I outlined findings of a model that allocates to the S&P 500 when the VIX is below 20 and to cash when above 20. This post will expand on that post to build a model that outperforms the S&P, with less volatility, over the 1993-2011 time frame. The post is less about how great the model is (that is to be determined), as much as just how easy it is to use simple data mining techniques to build models that look GREAT using historical data (i.e. buyer beware of all these new funds / models coming out).

The Model

When analyzing the original model, we saw that the S&P 500 actually performed quite well on average (albeit with huge swings at times) at both low (VIX below 17.5) and high (VIX above 25 levels). Thus, a simple model would allocate to stocks when the VIX is below 17.5 or above 25 and cash when it is not. But, let's see if we can ~~data mine~~ improve on that further. When stocks do poorly, bonds (especially government bonds) tend to do very well (i.e. they become negatively correlated). Using Fidelity's Government Income Fund 'FGOVX' (I am not vouching for this fund, it was simply the first I found with daily returns going back to 1993), we compare returns of government bonds within each volatility "bucket" relative to what we found for the S&P 500.

As can be seen above, in each of the 17.5 to 25 VIX "buckets", government bonds outperformed (on average). This is just what we were looking for.

To the model's results... in 'daily rebalancing' we allocate on a daily basis to the S&P 500 (ETF SPY) when VIX is below 17.5 or above 25 and to government bonds (fund FGOVX) when it is not (monthly is simply on a monthly basis). This rotation strategy had excess returns over SPY's 7.7% annualized return since 1993 of almost 3% on a daily basis and 1.7% on a monthly basis annualized (excluding transaction costs) with volatility reduced around 3% over that time frame.

Model Results (January 1993 - December 2011)

So is this legit model building or data mining? I believe it may be both (if a potential legit model, it needs further testing across markets and time frames), but in no way am I confident this performance can be replicated on a going forward basis.

Source: VIX, SPY, FGOVX

VIX as a Predictor of Equity Returns

2012-01-10T15:01:00.001-08:00

Marketwatch has a post Cash is still king, at least for now, which points to a model that goes to cash when the VIX is above 20:

Consider a hypothetical portfolio that switched in and out of the Wilshire 5000 index according to whether the VIX was above or below 20 — investing in the market on a given day if the VIX closed the previous session below that level, and otherwise staying in cash. This portfolio would have produced an 8.9% annualized return since 1990, when the CBOE’s data for the VIX commence, in contrast to 8.5% for buying and holding. (I chose 20 as the threshold level for illustration purposes only; it is not far from VIX’s median level over the last two decades.

I thought I'd take a look at the results using daily VIX levels and SPY data for daily equity performance. As SPY didn't launch until January 1993, the comparison isn't apples to apples in terms of equity index or timing, so I can't vouch for the accuracy of the returns in the paragraph above, but I can state the model didn't work as anticipated for the data I pulled. More important, it did show some interesting results that I will share.

The chart below shows the different "buckets" of VIX levels I utilized, which were selected based on getting a close to even distribution across these buckets (as can be seen each grouping had between 500 and 700 days of returns to analyze).

Then I simply took the daily 1-day forward returns (including dividend) associated with each bucket and calculated annualized returns and standard deviation based on a 252 day trading year.

The result?

While volatility was significantly less when VIX was lower (showing volatility is sticky), returns appear to have been better at extreme readings, perhaps when securities were selling at a huge discount. Also of note, performance appears to have been worst when VIX levels read between 17.5 - 20 and 22.5 - 25, while performance was best (in sharpe ratio terms) when the VIX read between 15 and 17.5.

A further breakout of bucket '30+' is shown below (note these buckets are not even, as most data points fall within '30-35').

My thoughts based on data from 1993 - present... when the VIX creeps higher from teens to low 20's, be cautious. When it flashes red, if you can stomach EXTREME volatility (and EXTREME drawdowns) it may be a good time to buy.

Source: Yahoo Finance

Consumer Credit Set to Be a Positive Contributor to Growth

2012-01-10T08:46:00.000-08:00

The WSJ details:

The level of consumer credit outstanding increased by $20.37 billion to $2.478 trillion, the Federal Reserve said Monday. Economists surveyed by Dow Jones Newswires had forecast an $8.0 billion increase.

In percentage terms, the increase was the biggest since October 2001 and a big driver of the gain was revolving credit, which includes credit-card debt. It increased by $5.60 billion to $798.27 billion.

Nonrevolving credit also surged, rising $14.78 billion to $1.679 trillion. The increase was fueled by federal government, a category that includes student loans and has been increasing a lot over the past year–a sign high joblessness in the U.S. has led many people to go back to school.

The below chart shows where consumer credit stands in nominal terms (click here for a chart outlining consumer credit relative to personal income). We can see that more than 100% of the growth over the past 12 months has come in the form of student loans (i.e. consumer credit growth excluding student loans is negative year over year), as the consumer continued to delever. Note that the rate of this decline has decreased and appears ready to flip positive on a 12-month basis, indicating that consumers will once again be levering up in nominal terms, a positive sign for short-term growth.

Source: Federal Reserve

China, Liberty, and the Products We Love

2012-01-09T21:59:00.000-08:00

When Steve Jobs passed away, I commented:

The 5 iPods, 3 iPhones, iPad, and 2 Macs currently in my home attest to the fact that I believe Steve Jobs' was brilliant. And at times he was more than a "computer guy" and truly inspirational.

On the flip side of Apple's success, I want to link to an extremely powerful This American Life podcast, Mr. Daisey and the Apple Factory, that shares how Apple products (and most electronics from China) come to be. Specifically how China allows corporations (corporations that American corporations outsource jobs to) to use their citizens like (almost) zero-cost depreciating assets. The portion I won't forget (definitely more powerful in context of the broader story):

How often do we wish more things were hand made? Oh, we talk about that all the time don't we? I wish it was like the old days. I wish things had that human touch. But that's not true. There are more hand made things now than there have ever been in the history of the world. Everything is hand made. I know. I have been there. I have seen the workers laying in parts thinner than human hair. One. After another. After another. Everything is hand made.

How can we compete with that?

Source: This American Life

Where the Ladies at?

2012-01-09T07:55:00.000-08:00

My last post Men at Work outlined that employment among men has rebounded since 2009, while employment among women has stagnated over that time after strong relative performance (as compared to men) at the beginning of the recession.

Taking a deeper dive, after a 60+ year trend (think WWII) of women entering the workforce in large numbers, we have now seen a decline not only relative to population growth, but in absolute terms as well.

A chicken or the egg argument can be made for the relationship between employment among women and real economic growth (were women more likely to work when the economy was strong or did women entering the workforce create a strong economy), but the relationship is strong none-the-less.

Source: BLS

Men at Work

2012-01-08T22:38:00.000-08:00

The NY Post details (hat tip Eddy):

Since the US economic recovery started in mid-2009, a whopping 97 percent of the new jobs — all but 43,000 of 1.4 million positions created — have gone to the guys, according to data released yesterday by the National Women’s Law Center, which analyzed jobs data between June 2009 and December 2011.

By my calculation, using figures from the BLS, the numbers are even more striking. Since June 2009, women have lost ~750 thousand jobs while men have gained ~1.5 million. Since the bottom in BLS data (December 2009), men have gained 93% of all new jobs (2.62 million of the 2.82 million).

It is important to note that men have simply regained employment they had lost, as the recovery still puts job losses by men above women since the beginning of the recession.

Source: BLS

EconomPics of the Week... 2012 Edition

2012-01-06T15:57:00.000-08:00

Economic Growth
How Do We Grow From Here?
Leading Economic Indicators Rise in November
GDP Revised Down to 1.8% on Weaker Consumption
Something Positive for the New Year

Employment
BLS: Employment: Positive, But No Blow Out
ADP: Is this the Employment Figure We've Been Waiting For?

Manufacturing / Services
Manufacturing Data Starts 2012 On a Positive Note
ISM Services Expands in December

Consumer
Confidence Upswing Continues
Consumers Don't Care About Savings Rates
Breaking Out the 0.1%

Housing
Even More Perspective on Housing
Some Perspective on Housing

Other
What a Year it Was!!!
Auto Recovery Perspective
Gingrich Sliding in Polls... Phew!

And your video of the week... M83 with Midnight City

Employment: Positive, But No Blow Out

2012-01-06T08:21:00.001-08:00

The Good: Unemployment rates (both headline and those including underemployed) continued to decline.

The Bad: unemployment rates continued to decline in large part due to individuals dropping from the labor force.

The Good: there is a definitive sign that hours worked per person (an important aspect of GDP growth) has bottomed and is once again growing.

The Pretty Good: private sector growth has been consistent (but perhaps too low), but headline figures have been dragged down by a decline in government workers (due to austerity). My opinion is that government workers tend to add less to economic activity, so headline employment may underestimate GDP growth.

Source: BLS

Is this the Employment Figure We've Been Waiting For?

2012-01-05T08:54:00.000-08:00

Is this finally an employment figure that shows we are out of the weeds? Not so fast per Peter Boockvar (via The Big Picture):

ADP said private sector job adds totaled 325k in Dec, a blowout compared to expectations of 178k and compares with 204k in Nov. Job gains were mostly led by small and medium sized businesses in the service providing sector but we also saw job gains of 52k in the goods producing area of which 22k were created in manufacturing and 26k in construction. Bottom line, it’s great news to see this level of job gains in the private sector but Macroeconomic Advisors, which compiles the data, did say December seasonals may have had ‘idiosyncratic’ influences of the report. Dec ’10 also saw a big jump from the prior few months only to fall back in the months after.

We'll see official employment figures tomorrow. Fingers crossed...

Update:

The FT outlines why this may be a seasonal event (even more at Calculated Risk)

Source: ADP

ISM Services Expands in December

2012-01-05T08:44:00.000-08:00

ISM reports what respondents are saying:

"Year-end uptick in activity." (Finance & Insurance)
"Business is stabilizing — some good signs in the private sector for commercial construction." (Construction)
"Some additional proposal requests, but clients continue to delay decisions on capital spending. Expect first quarter 2012 activity to be sluggish." (Professional, Scientific & Technical Services)
"Automotive industry growth seems to be outpacing the rest of the economy." (Information)
"Demand increasing gradually." (Wholesale Trade)
"Business is holding steady. Outlook for December and first quarter 2012 is good." (Retail Trade)

Source: ISM

Auto Recovery Perspective

2012-01-04T15:48:00.001-08:00

MSNBC details:

Countering earlier concerns about a double-dip recession, U.S. auto sales wrapped up a skittish 2011 on a positive note, surging in the final weeks of the year, with Detroit’s automakers helping drive the overall market to its highest level since the start of the long economic downturn.

Overall sales of new cars, trucks and crossovers increased by 10.2% during 2011, largely paced by a surge in demand for domestic brands.

The chart below shows the 2011 bounce (Honda excluded) among the largest companies in the world, but also shows the changing auto landscape from December 2005 peaks. South Korean Hyundai Kia Automotive Group not only took market share, but surged, as the US big three and Japanese big two struggled (Nissan performed very well).

Source: Autoblog

How Do We Grow From Here?

2012-01-03T09:08:00.001-08:00

Paul Krugman's latest article Nobody Understands Debt outlines why government debt is different than private debt:

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

How do you grow the tax base? Two ways, increase the tax rate and/or (with fixed rate debt) grow nominal national income. My view is that an increase in taxes is inevitable, so let's move on to some components of national income to determine areas of "opportunity".

The chart below breaks out nominal GDP by real GDP per hour worked and hours worked (which combined make up real GDP per capita), population growth (which added to real GDP per capita equals real GDP growth), and inflation (which added to real GDP growth equals nominal GDP growth) over rolling ten year periods. As can be seen, the "lost decade" has resulted in GDP growth levels at generational lows.

So.. what are the opportunities?

Inflation: it seems easiest to simply inflate our way out of our debt issues, raising nominal GDP without concern over the impact on real GDP. Our monetary policy (i.e. zero rates through at least 2013, quantitative easing, etc....) is aiming at just that. The problem is it really isn't all that easy to add "good" inflation (all price move higher), rather than just commodity inflation which actually adds deflationary pressure to non-commodity goods (less disposable income remains). In addition, as long as debt deflation concerns remains in the U.S., European issues continue to work their way through the financial system, and a lack of global aggregate demand continues, downward pressure remains on price levels.

Population: to me this is the easiest way to grow nominal GDP in theory (i.e. just open immigration for the wealthy and educated), but probably the most difficult to enact new policy to deal with considering we have an entire party against this. In a perfect world, this brings in wealth (i.e. aggregate demand), population (a component in the above chart), and technical skills (i.e. increases the GDP per hour). Oh well...

Hours worked: we face a continued lack of aggregate demand, so corporations aren't hiring / the public sector continues to shed jobs in the face of required austerity. In a perfect world we put people able to work... to work. This could include any project that has positive return on capital and with our dilapidated national infrastructure, there are in my view plenty of projects that can do just that. In addition, as I've mentioned before on the blog, any policy dealing with outsourcing of jobs abroad would have (in my opinion) a positive impact.

Productivity (GDP per hour): we need investment, which requires an increase in savings. Looking at the chart, it looks like GDP per hour jumped in the early part of last decade. The issue is that a lot of this was simply due to outsourcing labor abroad (hence the decline in hours worked). This is coming to roost as outsourcing and lower savings has caused productivity growth to slip to generational lows despite the number of people working on the decline.

Source: BEA

Manufacturing Data Starts 2012 On a Positive Note

2012-01-03T08:10:00.000-08:00

ISM details what respondents are saying:

"Slow Q4 — lots of destocking and inventory reduction going on." (Chemical Products)
"Business seems strong, but likely due to tax advantages of purchasing capital expense items." (Machinery)
"Our business is stable with a very good outlook for 2012." (Miscellaneous Manufacturing)
"Food prices seem to have peaked as demand is starting to wane." (Food, Beverage & Tobacco Products)
"All auto demand remains strong." (Fabricated Metal Products)
"Continued conservative hiring, with tight discretionary spending controls due to slower growth expectations for 2012, driven by Euro zone sovereign debt concerns and lack of viable U.S. legislative process through the 2012 election." (Computer & Electronic Products)
"Business beginning to slow down (seasonal), but will finish with a very strong year." (Plastics & Rubber Products)
"Business is steady today around the world." (Transportation Equipment)
"Market has definitely slowed in the last month, and is expected to remain so this month." (Wood Products)

Source: ISM

What a Year it Was!!!

2011-12-30T13:20:00.000-08:00

So... what happened to asset classes in 2011?

Bonds crushed equities. Real assets were mixed.

More important (to me)... what happened to me in 2011?

1) I retired from blogging
2) I un-retired from blogging
3) I moved across the country
4) I found out my wife was pregnant (with our first child) the first night in our new place post-move
5) I quit my job (it involved commuting away from where I moved to each week... a kid [see point #4] made that a non-viable option for us)
6) I called everyone I knew who may have known someone in the city I moved to, met 100's (literally) of people for coffee, lunch, dinner, and drinks, then interviewed... then interviewed... then interviewed. Did I mention, I interviewed?
7) Had an amazing kid (though he is still in "blob" phase [i.e. he can't do much except eat, sleep, and sh@t, but he does them very well])
8) In the past month I have received three job offers! (I understand how lucky I am as, amazingly, two of them sound ideal. It will be a tough decision)

So a new job, a new city, and a new kid. I can only hope that 2012 is as great, but MUCH slower.

EconomPic in Review

There are now 2520 subscribers to EconomPic (wow!)

The Top 5 Most Read Posts of 2011 were...

1) Emerging Market Rotation Strategy
2) Unsustainable: Transfer Payments
3) Secret Sauce Continues to Grip It and Rip It
4) Gold Model Still Rocking
5) China Owns Lots of Paper

Not a surprise that 4 of 5 were asset class (rather than economic data point) related. Asset class posts tend to get linked to by financial blogs / forwarded more, which drives traffic whereas most of my readers that are interested in economic data view the blog via an RSS feed.

Videos of 2011

Reader GYSC says I have good taste in music, so that is all the encouragement I needed to list all the live performance music videos posted at EconomPic during 2011 (quite an eclectic mix I must say, which I hadn't realized started in January and ended in December with The Black Keys)

The Black Keys - Gold on the Ceiling

Fugazi - Waiting Room

AWOLNATION - Sail

Sublime - Badfish

Broken Bells - The Ghost Inside

The Decemberists - The Wanting Comes in Waves

Edward Sharpe and the Magnetic Zeros - Home

Jay-Z + Toto = Girlfriend in Africa

ThePETEBOX (cover of The Pixies) - Where is My Mind?

Iron and Wine (cover of the Postal Service) - Such Great Heights

The Strokes - Under the Cover of Darkness

Passion Pit - Little Secrets

The Black Keys - Tighten Up

Happy New Year!!!!

Something Positive for the New Year

2011-12-30T12:14:00.001-08:00

An ugly (yet improving) chart shows the number of hours worked per person...

Which, when combined with real GDP leads to a new high in GDP per "man hour".

We have never been more productive with our labor in our history than now (because this is meant to be a positive for the New Year, I won't get into detail why this is also a result of outsourcing labor to emerging countries which has been a horrible policy move IMO).

Source: BLS / BEA

Breaking Out the 0.1%

2011-12-27T10:53:00.000-08:00

Greg Mankiw outlines who earns the 0.1% of national income:

Here is an interesting paper that answers the question. Some highlights from Table 3 about the top 0.1 percent:
18 percent are financial professionals.
42 percent are executives, managers, or supervisors in nonfinancial businesses. More than half of those are in closely-held (presumably often small) businesses.
7 percent are lawyers.
6 percent are in medicine.
3 percent are in arts, media, or sports.
Less than 1 percent are professors or scientists.

Note that this is only as of 2005 (my guess is financial professional income spiked as a percent of 0.1% of income from 2005 to 2008). It also doesn't show that the 0.1% earned 2.8% of all income in 1979, but 7.3% in 2005, or how much the above figures changed over the years. The latter is outlined below (i.e. the shift to finance was dramatic).

Confidence Upswing Continues

2011-12-27T07:22:00.001-08:00

Bloomberg details:

Confidence among U.S. consumers rose in December to the highest level in eight months as an improving job market helped regain all the ground lost following the mid- year government budget battle and credit-rating downgrade.

The Conference Board’s index increased to 64.5, exceeding all estimates in a Bloomberg News survey and the highest since April, from a revised 55.2 reading in November, figures from the New York-based private research group showed today.

Source: Conference Board

Consumers Don't Care About Savings Rates

2011-12-23T07:50:00.001-08:00

LA Times details the (lack of) savings:

Consumer spending last month grew faster than people’s take-home incomes as households cut their savings rate a bit to support their purchases of cars and other goods and services.

The government said Friday that the personal saving rate — the percentage of after-tax income that’s not spent — fell to 3.5% in November from 3.6% in October. As recently as June, the rate was 5% after being consistently at about that level or higher since late 2009.

I'm not sure why it took me so long to realize the below relationship (I have been looking over this data for years now), but the savings rate broadly does not matter to consumers. In fact, over the past 50 years (as the chart below shows), it hasn't mattered at all.

What has mattered for the average American is simply that a specific amount is saved, which has been around $100-$200 a month in real (after-inflation) terms, irrespective of the amount they have actually earned. So while real disposable income and consumption have roughly tripled over the past 50 years on a per capita basis, savings is up a less-than-whopping 13% (0.25% annualized growth).

The other thing to notice in the above chart is the declining level of real per capita disposable income, something that will have to reverse to keep the concept that we can grow our way out of our debt alive.

Source: BEA

Leading Economic Indicators Rise in November

2011-12-22T08:19:00.001-08:00

BusinessWeek details:

The index of U.S. leading indicators climbed more than forecast in November, a sign that the world’s largest economy will keep growing in early 2012.

The Conference Board’s gauge of the outlook for the next three to six months rose 0.5 percent after a 0.9 percent October increase, the New York-based research group said today. The median forecast of 54 economists surveyed by Bloomberg News projected the gauge would advance 0.3 percent.

Source: Conference Board

GDP Revised Down to 1.8% on Weaker Consumption

2011-12-22T08:08:00.001-08:00

The WSJ details:

The U.S. economy expanded less than thought during the third quarter as consumer spending fell short of an earlier estimate, though signs point to stronger growth in the final months of the year. Gross domestic product, the broadest measure of all the goods and services produced in an economy, grew at an inflation-adjusted annual rate of 1.8% in the July to September period.

The revisions cause?

The latest estimate showed personal consumption expenditure, which accounts for about two-thirds of spending in the economy, rose by 1.7% in the third quarter. That compares to a previous estimate of a 2.3% increase.

Source: BEA

Even More Perspective on Housing

2011-12-21T07:37:00.000-08:00

In response to my post Some Perspective on Housing, reader Tom Lindmark commented:

It would be interesting if you could take the time series back far enough to account for the rise of the Boomer generation. My guess is that if it were at all possible to normalize the data for their outsize impact we might see a far lower number of new home starts than what economists predict would occur in a "healthy market".

The chart below normalizes housing starts by the 16+ year old population (not perfect as it does not account for family size... the smaller the family size, the more housing units needed). What we see is that the most recent spike in housing units during this bubble was not as outsized as I would have thought (at least relative to the baby boom when household formations spiked), while the drop off remains severe. For reference, 0.5% roughly equates to 1.2 million homes (i.e. the number of homes economists referenced in a healthy market).

Source: Census / BLS

Some Perspective on Housing

2011-12-20T10:56:00.000-08:00

Washington Post puts some perspective on the new housing data:

Builders broke ground on a seasonally adjusted annual rate of 685,000 homes in November, a 9.3 percent jump from October, the government said Tuesday. It’s the highest level since April 2010.

Still, the rate is far below the 1.2 million homes that economists say would be built each year in a healthy housing market.

Construction of single-family homes rose 2.3 percent in November to a seasonally adjusted annual rate of 447,000. Apartment construction jumped 32 percent to a rate of 238,000 units. Single-family homes account for about 70 percent of homebuilding.

The chart below shows the increase in 5+ unit buildings (i.e. apartments) and the continued struggle in single family homes (November 2011 was actually below the level seen in November 2010).

Source: Census

Gingrich Sliding in Polls... Phew!

2011-12-20T10:35:00.000-08:00

I try to steer clear of politics for the most part here at EconomPic, but the thought of Gingrich in any position of power frightens me (here is one example as to why). So, Insider Advantage's most recent poll showing a complete 180 in terms of favorite for the Iowa Caucuses brings me some comfort.

Source: RealClear Politics

EconomPics of the Week (12/16/11)

2011-12-16T11:33:00.000-08:00

Economic Data

Breaking Down CPI

Real Retails Sales per Capita

Real Retail Sales Ex Autos and Gas Makes New High

Consumer Credit (Excluding Student Loans) Now Below 50 Year Average

Public Sector Balance Sheets Leveraged to Offset Private Sector Deleveraging

Global
China's Slowing Treasury Purchases

Will the US be Importing Deflation?
Trade Deficit Narrows

Global Manufacturing Recession or Noise?

Asset Classes
European Expectations and the Price of Gold

Why Do Large Cap Firm's Trade at a Discount to Market?

And your video of the week... The Black Keys with 'Gold on the Ceiling' off their (AWESOME) new album El Camino.

Breaking Down CPI

2011-12-16T08:15:00.001-08:00

SF Gate details:

Overall consumer prices increased 3.4 percent in the 12 months ended November, the smallest year-over-year increase since April. The core CPI climbed 2.2 percent from November 2010, the most since October 2008.

The Fed's preferred price gauge, the Commerce Department's measure that excludes food and fuel and is tied to consumer spending, rose 0.1 percent in October after no change the prior month. It was up 1.7 percent in the year ended in October, at the lower end of Fed policy makers' long-run projection of 1.7 percent to 2 percent.

"Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable," Fed policy makers said in a Dec. 13 statement after their most recent monetary policy meeting.

The chart below breaks out the components of the 3.4% headline figure. As can be seen, the bulk of consumer inflation is embedded within transportation, specifically fuel which is up 20% year over year. As lower fuel prices from the first quarter of 2011 begin to roll off during the beginning of next year, expect headline CPI to move significantly lower unless gas prices rise again over the next few months (knock on wood). This roll-off can already be seen in the six month chart below.

12-Month

6-Month Annualized

Source: BLS

China's Slowing Treasury Purchases

2011-12-15T08:32:00.000-08:00

With almost each Treasury holdings release, the mainstream media claims China is selling Treasuries, when in reality purchases are just flowing through the United Kingdom (and are later revised to China... see here, here, and here for a few examples). So, not a surprise when I read this via the AP:

China bought less U.S. Treasury debt in October and total foreign holdings dipped for the first time since July.

Total foreign holdings of Treasury debt edged down 0.1 percent to $4.66 trillion, the Treasury Department reported Thursday.

China, the largest foreign holder, bought 1.2 percent less to bring its total holdings to $1.13 trillion. China had increased its holdings 1 percent in September after a reduction of 3.1 percent in August.

The small decline in overall holdings still left them at high levels that suggest foreign demand for U.S. debt remains strong.

Details as to why the United Kingdom's holdings should be included can be found here.

BUT, when I looked at the data, something caught my eye. While the month over month level of Treasury holdings actually declined this time when accounting for the United Kingdom, which could simply be noise, the longer term trend is clear. The pace of growth in Chinese purchases of Treasuries has declined rather dramatically (in percentage terms). This may prove to be a smaller issue for the U.S. in terms of Treasury demand (the smaller percent is off a larger base, so in $$ terms the growth is still significant), but it may reflect the difficulty China may have growing their export driven economy at the scale required to prevent social unrest, as global aggregate demand has waned.

Source: Treasury

Will the US be Importing Deflation?

2011-12-14T09:01:00.000-08:00

Bloomberg details:

The import-price index climbed 0.7 percent, the first increase in four months and followed a 0.5 percent drop in October, Labor Department figures showed today in Washington. Economists projected the gauge would increase 1 percent, according to the median forecast in a Bloomberg News survey. Prices excluding fuel decreased 0.2 percent for a second month, the first back-to-back drop in more than a year.

Oil prices may have reached a plateau this month, indicating increases in the cost of imported goods may moderate as slowing growth from Europe to Asia and a strengthening dollar hold down prices. Federal Reserve policy makers yesterday said they expected inflation to slow and reiterated their pledge to hold the benchmark rate “exceptionally low” at least through mid-2013.

The below chart outlines the longer term trend in imported inflation. Over the past three months, the price of imported goods (excluding petroleum) has declined for only the third time since 2005 (six month figure is now flat), while the twelve month change is turning lower (below 4%) after it peaked at over 5% as recently as September.

Source: BLS

Real Retails Sales per Capita

2011-12-13T13:27:00.000-08:00

Following this morning's post on real monthly retail sales, a few readers asked to see the chart adjusted for population growth. I'm glad they did, as the results show why the recovery doesn't feel as strong as headline figures would otherwise indicate. To be more specific, retail sales excluding autos and gas are roughly where they were 12 years ago on a per capita basis.

Source: Census / BLS / BEA

Real Retail Sales Ex Autos and Gas Makes New High

2011-12-13T07:23:00.000-08:00

Bloomberg details the latest retail sales:

U.S. retail sales rose in November at the slowest pace in five months, indicating faster job growth may be needed to spark the biggest part of the economy.

The 0.2 percent gain in sales followed a 0.6 percent advance in October that was more than initially reported, Commerce Department figures showed today in Washington. Economists projected a 0.6 percent November increase, according to the median forecast in a Bloomberg News survey.

It is important to remember that retail sales figures are nominal (i.e. they include inflation), thus any decline in the price of goods would make this figure appear lower. As a result, November likely understates retail sales as gasoline fell abruptly during the month (chart here). However, (sorry if this becomes confusing) if gasoline sales are understated... that means retail sales ex gasoline are overstated (all else equal).

Longer term, we are still making slow progress, but we have passed an important milestone. By my calculation (backing out BLS inflation figures for each of the below components), we have now made a new high in terms of real (i.e. after inflation) retail sales less autos and gasoline.

In other words, we're still purchasing a heck of a lot of stuff.

Source: Census / BLS

European Expectations and the Price of Gold

2011-12-12T17:23:00.000-08:00

You never want to read too much into any short-term trend, but take a look today's market performance, as well as the "correction" we've seen across asset classes since spring / summer peaks and notice which assets have done well (high quality income producing bonds) and which have done poorly (equities, non-US currencies, commodities, AND gold). I highlight gold because over the past three years risk-asset sell-offs have broadly been met by strong bids for Treasuries and gold, but today's performance and the drawdowns indicate it may be losing that flight to quality bid.

Daily Performance (December 12th, 2011)

Drawdown from 52 Week High

As Eddy Elfenbein's gold model outlined (further optimized by Willem Weytjens), gold has broadly done well in low (or negative) real interest rate environments. In fact, should inflation run at its historical levels the next two years, Willem's revised model calls for $4000+ per ounce gold in the next few years.

Yet, gold is down about 12% from its recent peak. One possible reason is the concern over Europe. My own thinking... how unlikely is it that things get worse, impacting global aggregate demand and the financial system more broadly? In that case, how improbable is disinflation or deflation, which in turn would mean these low nominal rates may actually move a lot higher in real terms.

Source: Yahoo

Trade Deficit Narrows

2011-12-09T08:07:00.001-08:00

Bloomberg details:

The trade deficit narrowed in October to the lowest level of the year, reflecting a drop in imports that will help give the U.S. economy a lift.

The gap shrank 1.6 percent to $43.5 billion, smaller than projected, from $44.2 billion in September, Commerce Department figures showed today in Washington. Purchases from overseas fell to the lowest level since April, due almost entirely to a plunge in demand for petroleum.

Imports of capital goods, like computers and aircraft, and consumer goods climbed, showing spending by American companies and households is keeping the economy growing. Exports to China and South and Central America reached records, indicating demand from developing nations that is benefiting companies like Dow Chemical Co. (DOW) may cushion the U.S. from any slowdown in Europe.

The below chart outlines the 12-month change in real net exports by category (as well as the breakdown between the change in real imports and exports). As can be seen, the trade deficit is improving, due to improved industrial supplies and consumer goods trade balances.

Source: Census

Why Do Large Cap Firm's Trade at a Discount to Market?

2011-12-08T13:15:00.000-08:00

Aleph Blog outlines why he believes "behemoth" companies (i.e. firms with a market value greater than $100 billion) trade at relatively compressed price to earnings ratios:

For Behemoth companies to achieve large earnings growth, they have to find monster-sized innovations to do so. Those don’t come along too regularly. Even for a company as creative as Apple (or Google), it becomes progressively more difficult to create products that will raise earnings by a high percentage quarter after quarter.

As a result it should not be a surprise that Behemoth stocks trade at discounts to the market when global growth prospects are poor. They have more assets and free cash flow to put to work than is useful in a bad environment. Not every environment offers large opportunities.

The below chart outlines, by sector, the market cap of the current 39 behemoths using data from a follow up post at Aleph Blog (he adds even more granularity in his post).

I would also add that I believe these behemoths trade at an aggregate discount due in part by their composition. Financials (and to a lesser extent energy firms) trade at a large discount due to the damage they inflicted upon themselves and the threat of future regulatory restrictions that may impede profitability, both of which may force them to dilute shareholders as they raise / write-down capital. Technology firms on the other hand are constantly threatened by innovation and becoming irrelevant by the next generation of firms (i.e. what happened to Yahoo via Google), thus earnings become difficult to project past even a few years.

Public Sector Balance Sheets Leveraged to Offset Private Sector Deleveraging

2011-12-08T10:49:00.000-08:00

From table D.3. of the Fed's Flow of Funds, we see that as the private sector deleverages, the public sector has added even more debt, which (in my opinion) has (thus far) prevented a debt deflation cycle.

Source: Federal Reserve

Consumer Credit (Excluding Student Loans) Now Below 50 Year Average

2011-12-07T14:58:00.000-08:00

Bloomberg outlines:

U.S. consumer borrowing rose in October to the highest level in two years, propelled by gains in non-revolving debt like auto and student loans.

Credit increased by $7.65 billion to $2.46 trillion, the most since October 2009, Federal Reserve figures showed today in Washington. The advance was in line with the median forecast of economists surveyed by Bloomberg News that projected a $7 billion gain.

While overall consumer credit rose, consumer credit excluding student loans continued to decline as a percent of personal income from 15.74% in September to 15.71% in October. Of note, total consumer credit (revolving and non-revolving) is now below the 50 year average when viewed relative to personal income, with the big caveat that this excludes student loans*, a category that is now more than 3% of personal income (up from less than 0.5% on average the past 50 years).

Source: Federal Reserve / BEA

* this assumes all Federal student loans are student loans.

Global Manufacturing Recession or Noise?

2011-12-05T05:21:00.000-08:00

Source: Investment Postcards via The Big Picture

EconomPics of the Week (12/2/11)

2011-12-02T13:01:00.000-08:00

Economic Data
Traction on the Jobs Front... Headline vs. Actual
Construction Decline Bottoming

ISM Manufacturing Moves Higher

The Importance of Small Business Hiring

Consumer Confidence.... Things Are Looking Up as it Can't Get Much Worse Edition

European Industrial New Orders Crumble

GDP Growth Revised Down Due to (Lack of) Inventory Build

Asset Classes
The European Impact on Financials and Risk Assets
Whipsaw
Auto Recovery in Perspective

Are Home Prices Inexpensive Relative to History?

Corporate Profits vs. Personal Income

Random
Morality and Religion

And your song of the week... one of the more popular songs to cover in punk rock history, Fugazi's Waiting Room. For Fugazi fans, they just posted more than 1000 of their live concerts online here.

Not the best quality video, but the energy in that room (way back in 1988) appears to have been rather epic.

Enjoy the weekend!

Traction on the Jobs Front... Headline vs. Actual

2011-12-02T07:44:00.000-08:00

First the (very strong) "headline", then the details.

The WSJ with the headline:

The U.S. labor market strengthened in November as private employers continued to add jobs at a healthy pace, while the unemployment rate fell to its lowest level since March 2009.

Nonfarm payrolls rose by 120,000 last month, the U.S. Labor Department reported Friday in its monthly survey of employers. Private companies added 140,000 jobs, while the public sector—federal, state and local governments—lost 20,000 jobs.

The unemployment rate, obtained by a separate survey of U.S. households, fell to 8.6% in November from 9.0% the previous month. The rate hadn't been below 9% since March, when it was 8.8%. The rate is now lower than at any point since March 2009, when it was 8.6% as well.

In another positive development, October's figure for nonfarm payrolls was revised upward to show a gain of 100,000 from a previously reported 80,000, while September was revised up to a 210,000 gain from 158,000.

The chart below shows the good news... an improving job market with declining unemployment and underemployment.

Now the details...

A improvement in the sense that jobs are being added, but a bifurcation between the "haves" (those getting jobs) and "have nots" (those so disgruntled they are leaving the workforce completely). Notice the huge spike in the number not in the labor force. In other words, the unemployment rate dropped not only due to an increase in the number of individuals employed, but also due to the number no longer counted as unemployed because they have dropped out of the labor force. Also notice the huge split between men (getting jobs) and women (losing jobs and leaving the job market). No clue what is going on there...

A better picture emerges when viewed as a percent of the total population of individuals qualified to work. The chart below shows the number in the labor force as a percent of that broader population, as well as the number employed. The good news is we continue to see stability in the employment to population ratio (i.e. jobs are growing at the rate of population), the bad news is that rate has been stagnant and remains near a 30 year low. The other concern is that the number of people participating in the job market continues to decline, so unemployment could present a long term issue even if the economy bounces back (those that left the workforce may find themselves unqualified to return).

If the above trend continues, expect the unemployment rate to continue to decline regardless of whether the job market improves. The good news is that this will result in a positive headline each month. It will be interesting to see if that headline helps with confidence, which makes a the recovery self fulfilling.

Source: BLS

Auto Recovery in Perspective

2011-12-01T16:54:00.000-08:00

SF Gate details:

Four of the six largest automakers by U.S. sales beat expectations, boosting industry sales to a 13.6 million seasonally adjusted annualized rate, according to Autodata Corp. The pace exceeded the 13.4 million average estimate of 14 analysts surveyed by Bloomberg and is the best month since sales were helped by "cash for clunkers" in August 2009.

"Consumers have been waiting for this," Jessica Caldwell, an analyst for the researcher Edmunds.com, said today in a phone interview. "Cars are getting old, and people are getting to the point where they need to replace them. There's recession fatigue and people want to buy. We're getting tired of being in this saving pattern."

While any recovery is good news, we are still at very low levels relative to recent history. The chart below outlines historical auto sales normalized by population (i.e. "people per car"). What we see is that year-to-date auto sales are in the neighborhood of 1 auto sold per 24 people, down from 29 in 2009, but up from the 17 average seen from 1971 - 2007.

Source: Wards Auto

Construction Decline Bottoming

2011-12-01T08:49:00.000-08:00

The AP reports:

U.S. builders spent more in October on homes, offices and shopping centers, pushing construction spending up for a third straight month. Despite the gains, construction spending remained depressed.

Construction spending rose 0.8 percent in October to a seasonally adjusted annual rate of $798.5 billion, the Commerce Department said Thursday. While an improvement, that's barely half the $1.5 trillion that economists consider healthy. And through the first 10 months of this year, construction spending is 2.9 percent below the dismal levels from 2010.

While things do remain well below normal levels, but not nearly the "half" quoted above. Even during the boom times earlier last decade, the US never approached the $1.5 trillion "healthy" figure (though I would note the below is in nominal terms, thus in real terms would look worse).

Source: Census

ISM Manufacturing Moves Higher

2011-12-01T07:17:00.000-08:00

ISM Reports:

WHAT RESPONDENTS ARE SAYING ...
"Business still holding its own. Some growth in margin now that some of the raw materials prices have abated. Oil is pushing $100 so that has not been favorable." (Chemical Products)
"Orders for the remaining two months have increased after an extended 'summer dip' in sales overall. We expect to finish the year approximately 10 percent above 2010." (Electrical Equipment, Appliances & Components)
"Seeing a slight slowdown in orders; could be related to the holidays." (Primary Metals)
"Material lead times are getting longer. Seems like no one is hiring. Trying to do twice the output with the same amount of people." (Food, Beverage & Tobacco Products)
"Japanese auto production has returned to 100 percent, and domestic manufacturing continues to increase." (Fabricated Metal Products)
"Oil exploration seems to be really picking up. Government is permitting again, so business is the busiest we've ever seen." (Computer & Electronic Products)
"The EPS ruling about higher fees for coal-generated electricity can have a huge, negative impact on our business if implemented in January 2012. We are at the peak of our seasonal demand push." (Plastics & Rubber Products)
"Thailand flood impacting our business. Honda and Toyota cut production forecasts, and we are chasing some components made in Thailand." (Transportation Equipment)

Source: ISM

The Importance of Small Business Hiring

2011-11-30T07:48:00.000-08:00

The WSJ details the potential good news on the job front:

Private-sector jobs in the U.S. rose by 206,000, according to a national employment report published by payroll giant Automatic Data Processing Inc. and consultancy Macroeconomic Advisers.

Economists surveyed by Dow Jones Newswires expected ADP would report an increase of 130,000. The October data were revised to show a rise of 130,000 versus 110,000 reported earlier.

The chart below shows that the bounce has come almost entirely by small and medium sized businesses (i.e. those with payroll of less than 499 employees). I would note that hiring among companies with payroll of less than 50, saw the highest jump in hiring since November 2006. I personally wonder whether those that can't find jobs are creating their own or if there are opportunities out there that corporations aren't seeing as they have downsized and focused on reducing expenses.

Either way, this is part of a longer term trend in the job market. Corporate payroll now makes up less than 16% of overall payroll, according to ADP, down from almost 18.5% a decade ago. The issue of course is that small and medium size businesses haven't grown their share, but rather corporations have reduced their share through the outsourcing of jobs overseas.

Source: ADP

Are Home Prices Inexpensive Relative to History?

2011-11-29T12:26:00.001-08:00

It depends on the time frame you are looking at. The below charts show real appreciation (after inflation), by city where available, going back 5, 10, and 15 years.

5 Years (Home Prices Appear VERY Cheap)

10 Years (Home Prices Appear Quite Cheap)

15 Years (Regions Impacted Most by the Recent Recession Appear Cheap... Others Quite Expensive)

Source: S&P

Consumer Confidence.... Things Are Looking Up as it Can't Get Much Worse Editition

2011-11-29T08:06:00.000-08:00

BusinessWeek details:

Consumer confidence climbed in November by the most in more than eight years as Americans grew more upbeat about employment and income prospects.

The Conference Board’s index increased to 56 from a revised 40.9 reading in October, the biggest monthly gain since April 2003, figures from the New York-based private research group showed today. The gauge, at a four-month high, exceeded the most-optimistic forecast in a Bloomberg News survey of economists.

An improvement (a much stronger than anticipated one at that) is a good thing, but we are bouncing off of extreme lows.

Source: Conference Board

The European Impact on Financials and Risk Assets

2011-11-27T22:45:00.000-08:00

I wrote back in early October that financials have been an important factor in risk asset performance for the better part of the past four years. The below chart shows that since June, financials are still an important sector to keep an eye on, but that the sector appears to be driven (remarkably well) by the situation in Europe.

Source: Yahoo Finance

Whipsaw

2011-11-25T20:35:00.001-08:00

What was down (risk assets), was up, then down again. What was up (Treasuries), was down, then up again. Below is an assortment of sector ETFs sorted by three month performance (Long Treasuries are up the most, EM Equities down the most).

Source: Yahoo Finance

European Industrial New Orders Crumble

2011-11-23T14:04:00.000-08:00

Industrial production within Europe for the month of September was ugly (see here), but nothing compared to new orders made during the same month (which leads to future production). The Economic Times details:

Euro zone industrial new orders slumped in September, the EU said on Wednesday, the deepest fall since December 2008 and far worse than economists had forecast, in the latest sign that Europe may be heading for a recession.

Orders in the 17 countries sharing the euro tumbled 6.4 percent in the month compared to August, well below expectations of a 2.5 percent fall, with Germany and France registering sharp contractions, the EU's Statistics Office Eurostat said.

"The scale of the deterioration is surprising," said Clemente de Lucia, an economist at BNP Paribas. "We are entering some kind of contraction in the last quarter of this year that will continue in the first quarter of next year," he said.

Interesting to note that the core of Europe appears to be doing much worse than the periphery (a reader noted that the core is where "stuff" is made").

Source: Eurostat

Corporate Profits vs. Personal Income

2011-11-23T08:25:00.001-08:00

Stagnant wages and outsourced production (reduced expenses for corporations - higher unemployment / underemployment for individuals), combined with cheap financing (lower interest payments for corporations - lower income on savings for individuals) have fed record corporate profits, while personal income slowly rebounds (and remains below pre-crisis levels).

Another way to view the same data is to compare real corporate profits (still the red line) with the difference between real GDP growth and real personal income. What we see is that when real GDP grows faster than real personal income, more of national income makes its way into corporate bottom lines.

What this misses is that for corporate income to continue to grow either:

National income needs to grow
Corporations need to grab an even larger slice of national income from individuals

Both of which will be much tougher on a going forward basis (the former a good thing, the latter not so much).

Source: BEA

GDP Growth Revised Down Due to (Lack of) Inventory Rebuild

2011-11-22T07:41:00.001-08:00

Bloomberg details:

The economy in the U.S. expanded less than previously estimated in the third quarter, reflecting a drop in inventories that points to a pickup in growth as 2011 comes to a close.

Gross domestic product climbed at a 2 percent annual rate from July through September, less than projected and down from a 2.5 percent prior estimate, revised Commerce Department figures showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg News called for no revision. Excluding stockpiles, so-called final sales climbed 3.6 percent, the most since last year’s fourth quarter.

As can be seen below, the decline was almost entirely due to the negative impact from inventories (i.e. we consumed what we had previously stored and businesses didn't restock), offset in part by an increase in net exports.

As I mentioned following the most recent trade release:

Trade (imports) is down not because we are consuming goods made in the U.S., but rather because businesses paused on rebuilding inventories.

In other words, it seems we are simply consuming past imports, thus when inventories are rebuilt, the above "should" revert to negative territory unless aggregate demand collapses. Something else to keep an eye.

Source: BEA

Morality and Religion

2011-11-21T07:55:00.001-08:00

Lots of interesting topics in the PEW Research Center's The American-Western European Values Gap. Here's one...

Note: bringing up religion among any group of individuals where everyone is not like-minded is the equivalent of playing with fire, so I will not be making any comments.

Source: PEW

EconomPics of the Week

2011-11-18T13:31:00.000-08:00

U.S. (Pointing Up)
Leading Indicators... Full Steam Ahead
Retail Sales Ratchet Higher
Capacity Utilization vs. Inflation

Employment (Ugly / Stagnant)
Unemployment: Due to Lack of Domestic Expansion, Not Layoffs
R.I.P. Teen Workforce

Europe (Getting Uglier)
European Recession?
France is No Germany

Investing Isn't Easy
Bill Miller Stepping Down as CIO

And your video of the week... AWOLNATION with Sail

Leading Indicators... Full Steam Ahead

2011-11-18T08:14:00.000-08:00

Whether or not the U.S. can truly break away from European concerns is still an open question, but recent economic data points to a decreased likelihood of a double dip.

Bloomberg details:

The index of U.S. leading indicators climbed more than forecast in October, signaling the world’s largest economy will keep growing in early 2012.

The Conference Board’s gauge of the outlook for the next three to six months rose 0.9 percent, the biggest jump since February, after a 0.1 percent September increase, the New York- based research group said today. The median forecast of 56 economists surveyed by Bloomberg News projected the gauge would advance 0.6 percent.

Source: Conference Board

Unemployment: Due to Lack of Domestic Expansion, Not Layoffs

2011-11-17T08:33:00.000-08:00

The BLS released their latest Business Employment Dynamics report that breaks out positive change in employment (by expansions and new business openings) and negative change in employment (by contractions and business closings). The data lags a few quarters so it is not very good for looking at short-term trends, but the long-term trend is quite interesting.

The first chart outlines each component, which I then normalized by population to get an apples to apples comparison over the years. What may be surprising is that the negatives (contractions and closings) have actually come down as a percent of population over the past few decades (in fact there has been a huge "contraction in contractions" recently). The bad news is that the level of expansions and openings are down (by an even larger amount) over that time frame.

The next chart compares expansions vs contractions (i.e. existing business employment dynamics) and openings vs closings (i.e. new business employment dynamics). From the below chart we can see that the largest contributor to (the lack of) job growth has been existing business dynamics (though a long-term decline of new businesses have likely played a role in the lack of expansion hiring).

Taken together, we can summarize the charts as follows:

Layoffs via contractions and closing may be less of an issue (than at least I thought)
There has been a decline in new business employment over the past few decades
The lack of expansionary hiring (and negative expansionary "shocks" during the last two recessions) seems to be the the likely reason we are facing high unemployment

The issue we face is that the lack of expansionary hiring among businesses is structural in nature. As I've detailed before, the shift in hiring by existing businesses from the U.S. to overseas has played a huge role (the example of China is shown here). The good news is that policy may be able to fix some of this, either through incentives for new business development and/or shifting employment back to the U.S. (the latter of which I expect targeted policy at some point, regardless of the kicking and screaming by pro free-trade economists and corporations).

Source: BLS

Bill Miller Stepping Down as CIO

2011-11-17T07:55:00.000-08:00

Update: the Yahoo Finance data for LMVTX that I had used appears to be wrong (no clue why and quite frankly concerning). The chart has been replaced by one from Morningstar.

Following the Legg Mason announcement that Bill Miller will step down as CIO after a 30 year run with the firm, Abnormal Returns details the difficulty of providing consistent above average equity returns:

Bill Miller co-manager of Legg Mason Capital Management Value Equity announced he was stepping down as CIO of LMCM effective April 2012. Like Woods Miller had a fifteen year period where he was seemingly unstoppable. His fund topped the performance of the S&P 500 every year over this time period.

Bill Miller has managed the Legg Mason Capital Management Value Equity fund (LMVTX) since 1982 and results of that data (relative to the S&P 500) is shown below. The data now shows the average performance pre-1991, the remarkable performance from 1991-2006, and the underperformance since due to the misplaced bets on financials.

Back to Abnormal Returns on the potential danger of allocating to outperforming managers:

In investing a fall from grace is a common occurrence. In 2011 we have seen both John Paulson who conducted the “The Greatest Trade Ever” and Bruce Berkowitz, Morningstar’s manager of the decade both stumble badly.

Source: Morningstar

Capacity Utilization vs. Inflation

2011-11-16T07:48:00.000-08:00

Marketwatch details:

The output of the nation’s factories, mines and utilities rose 0.7% in October, the Federal Reserve said Wednesday in another sign the manufacturing industry is still expanding.

The October gain was the biggest since July and was stronger than the 0.4% increase expected by analysts.

Source: BLS / Federal Reserve

France is No Germany

2011-11-15T07:41:00.001-08:00

FT Alphaville details:

The 30-year German bond yield is close to a record low, around 2.48 per cent at pixel time. France might be able to borrow for 30 years at just 4.4 per cent (i.e. hardly a distressed credit)… but the days of convergence are long gone.

Retail Sales Ratchet Higher

2011-11-15T07:18:00.001-08:00

The WSJ details:

U.S. retail sales rose in October as Americans spent their dollars at electronics stores and on the Internet, a sign that consumers are willing to open their wallets ahead of the all-important holiday shopping season.

Separately, U.S. wholesale prices in October dropped at the fastest monthly pace since February 2010, a move that gives the Federal Reserve leeway to boost the economy and jobs with its monetary stimulus.

Retail and food services sales climbed 0.5% last month from September to an adjusted $397.67 billion, the Commerce Department said Tuesday. That came on top of a strong 1.1% gain in September retail sales.

Electronics saw a spike due to huge demand for the latest iPhone, but strong results across the board in the face of declining energy prices during the month.

Source: Census

R.I.P. Teen Workforce

2011-11-14T21:18:00.001-08:00

Last Thursday, my friend GYSC had a post at his blog Economic Disconnect titled Odd Jobs Over the Years. He outlined the jobs he has had over the years, many of them during his pre-teen / teenage years.

Reading the post allowed for some self reflection on jobs I had before turning 20 (lawn mowing, snow shoveling, race track concession stand, snack bar at a swim club, waiter at a retirement community, waiter at a diner, painter, medical assembly line, data entry at a local college... to name a few). While some of these jobs were miserable and some quite enjoyable, I truly believe that in aggregate they helped me figure out what it was that I wanted to be (and what I didn't), the "rules" of work, as well as the importance of hard work.

Which is why the below chart is absolutely terrifying to me. It shows that for the next generation of teens (and now early 20-somethings) only 1 in 4 teens are employed, down from the 40-50% range from 1950 through the end of the century. A large portion of the next generation will be left behind.

I had the above post all ready to go, when I came across a similar post over at Rortybomb, but that post points to something perhaps more concerning:

To leave the United States for a minute, one way people are trying to understand the Arab Spring is through the lens of mass youth unemployment and inequality. Given how high unemployment has been in these MENA – Middle-East and North African – countries, what else could we expect besides revolution?

He then shows a series of charts (this one is telling) that shows unemployment among the youth in MENA countries is awfully similar to levels seen among 16-24 year olds in the U.S.

Source: BLS

European Recession?

2011-11-14T08:09:00.001-08:00

Expect there to be a larger focus on European economic data in the coming months. With that in mind, Bloomberg details European industrial production for September:

European industrial production declined the most in 2 1/2 years in September, led by capital and consumer goods, as the sovereign-debt crisis pushed the economy toward a recession.

A few things to note in the above...

Germany appears to have been severely impacted by broader European austerity
Italy was crushed
Eastern Europe (an area that was initially impacted more by the crisis) saw positive growth in industrial production

Warning: While my guess is the above is more of a trend than a blip, the data is backward looking (over a month ago) and just one data point, thus it will be important to see how this progresses.

Source: Eurostat

EconomPic Recap: We're Not Gonna Take It Edition

2011-11-11T11:43:00.000-08:00

Similar to the sentiment hopefully shared by all of you, I am appalled by the horrific events that have taken place over the course of the last 15 years by one sick individual and a lot of potential individuals that didn't report it (and allowed it to continue) at Penn State. What most readers don't know is that I happen to be an alum of the university, thus in addition to the disgust I had a huge sense of disappointment in the (lack of) leadership from the organization. That disappointment led to initial feelings of shame as I called Penn State home for four years of my life.

Fortunately for me, a fellow alum (and good friend) Jerry Needel, didn't allow that shame to linger as he (along with his wife and a few friends) put the control back into our own hands. The thought was if the leadership of the university was going to hide when needed most and the (minority of) students were going to provide the media an easy way to showcase the worst reactions, then we all needed to show what the Penn State community was really about.

Hence, the Proud to Be a Penn Stater movement, which outlines that we are:

A grassroots network of proud Penn State alumni, students, parents, and fans, who are embarrassed and shocked by the recent events at Penn State
Here to stand up for the victims of abuse and help Penn Staters get their pride back
Tired of feeling helpless in this situation and are compelled to do our part by mobilizing the Penn State fan base - alumni, students and college sports fans - to ensure something like this never happens again - anywhere
Partnered with RAINN.org, one of the largest anti-sexual violence organizations in the country, to launch a Penn State-specific donation campaign
Looking to raise over $500,000 - one dollar for each of the 557,000 Penn State alumni

And how's that going? Parabolic. As of this writing, "we" have raised over $130,000 (about $10,000 an hour) showing that we will not be defined by the acts of a few individuals. Regardless of whether you have a connection with Penn State, I encourage everyone to think about donating to a great cause. If interested, go to Proud PSU for RAINN.

Make your own comparisons to the Occupy Wall Street movement and the potential of that energy if it is focused on making actual change.

Now, to links from the past few weeks:

Income / Spending

The Rich Get "Slightly Less Baller"

Unsustainable... Transfer Payments

Spending, Transfer Payments, and Taxes

Jobs

Job Opening and Labor Turnover Point to (Slow) Recovery

Breaking Down Employment

How's the Job Recovery?

Economic
Breaking Down Trade

Deleveraging is Not a Myth
Economy Grows at 2.5%, Led by Spending and Investments
Below Trend Growth

Consumer Uncertainty

Assets
On the Seasonality of Equities

Breaking Down Trade

2011-11-11T10:02:00.001-08:00

While the U.S. still imports MUCH more than we export ($43.1 billion more in September alone to be exact), the trend has shown positive signs. The below chart outlines the year-over-year change in the real (adjusted for inflation) level of imports and exports, broken out by petroleum and non-petroleum trade. Note that an increase in exports is shown as a positive contributor below, while an increase in imports is shown as a detractor.

What can be seen:

The pace of growth in non-petroleum imports is down significantly over the past year
The pace of growth in non-petroleum exports is relatively flat over that time
Petroleum imports are actually down in real terms (i.e. we are importing less)
The net change is actually positive (i.e. trade is a positive contributor to GDP)

The good news is that this net decline in trade balance has not been met with reduced consumption (i.e. it is not a reflection of reduced aggregate demand). Potential bad news is that petroleum trade is down (good for the long-term independence of the U.S., but a potential short-term signal of an issue - see Bonddad Blog for further detail) and that trade is down not because we are consuming goods made in the U.S., but rather because businesses paused on rebuilding inventories (see here).

In other words, it seems we are simply consuming past imports, thus when inventories are rebuilt, the above "should" revert to negative territory unless aggregate demand collapses. Something else to keep an eye.

Source: Census

Job Opening and Labor Turnover Point to (Slow) Recovery

2011-11-10T08:08:00.001-08:00

NPR reports:

U.S. employers advertised more jobs in September than at any other point in the past three years. The increase suggests hiring could pick up in the next few months. Competition for jobs is fierce. And many employers aren't rushing to fill some because they are worried about the strength of the economy. Still, most economists say the increase in openings is a reassuring sign. Nearly 3.4 million jobs were posted in September, the Labor Department said Tuesday. That's the most since August 2008, one month before the financial crisis intensified.

Digging into the data, we see that hiring, openings, and layoffs are moving in the right direction, but the levels of hiring and openings are still significantly below pre-crisis levels. Also note that while job openings are bouncing, we haven't seen the same improvement in actual hiring (perhaps this points to the difficulty in finding talent and/or we are due for a bounce in hiring).

Diving a bit deeper, the below chart shows the ratio of quits and hires to layoffs. In a nutshell, when people are confident enough to quit or are being hired at an increasing pace relative to layoffs, it means things are improving.

So we are bouncing off of lows (a good thing), but still need a lot of improvement.

Source: BLS

Deleveraging is Not a Myth

2011-11-08T05:54:00.000-08:00

The New Yorker's The Develeraging Myth states (at a high level) that consumers are not deleveraging because they are still spending:

Americans certainly have lots of debt, but the evidence that it’s killing the recovery is surprisingly sketchy. For a start, American consumers are not actually keeping their wallets closed. Real consumer spending, after collapsing in 2009, has risen for nine straight quarters; this past quarter it was up at an annualized rate of 2.4 per cent. That looks anemic by the standard of past recoveries, but, with an unemployment rate near ten per cent and wages barely rising, that’s to be expected.

EconomPic has explained how spending has remained strong in the face of lower income and higher savings here. More curious is why an article on consumer credit focuses on spending, rather than consumer credit.

Looking at the actual consumer credit data, we see that consumers (with the exception of student loans) have reduced consumer credit dramatically. Both revolving (mainly credit card loans) and non-revolving (excluding student loans) credit levels are back to 2004 levels. As a percent of GDP, the reduction has been even greater.

Note that in the chart above, federal non-revolving loans are assumed to be 100% student loans. Likely close, but I can't find specific details.

Source: Federal Reserve

Breaking Down Employment

2011-11-04T13:25:00.000-07:00

BusinessWeek details:

U.S. employment climbed in October at the slowest pace in four months, illustrating the “frustratingly slow” progress cited by Federal Reserve Chairman Ben S. Bernanke this week.

The 80,000 increase in payrolls was less than forecast and followed gains in the prior two months that were revised up by 102,000, Labor Department figures showed today in Washington. The unemployment rate fell to a six-month low of 9 percent from 9.1 percent even as the labor force expanded.

The above 80,000 figure was non-farm payroll. Taking a deeper dive into the household data (the figure used for the unemployment rate and one that historical has better captured any upturn in employment), we see a slightly improved, but sluggish employment recovery.

Month over Month

277,000 more employed individuals (better than the headline payroll figure of 80,000)
95,000 less unemployed (the difference being population growth)
Only 17,000 individuals leaving the labor force

Long-Term

The sluggishness of the recovery can be seen below in both the longer term picture of unemployed (i.e. unemployment rate) and underemployed (i.e. broader total unemployment), which remains extremely elevated.

How About the Levels

Another way to view the magnitude of the downturn and lack of recovery is below. While the number of individuals employed is roughly 3% higher than seen 10 years ago, the number after normalization for population growth is down a whopping 8% and has not seen any improvement since the downturn (i.e. since the downturn in employment bottomed, the rate of employment growth has matched population growth).

Source: BLS

How's the Job Recovery?

2011-11-02T19:42:00.001-07:00

While MF Global and the situation in Europe significantly reduce the importance of any economic release, I thought I would highlight today's ADP employment figure anyhow.

The chart below outlines the change in goods producing, service providing, and total employment figures going back ten years. Note that over this time there have been no jobs added, while the population has grown roughly 10% (i.e. it looks bad, but it's been even worse).

The good news: service providing jobs (the type that make up the majority of jobs these days) are rebounding

The bad news: goods producing jobs (the type that actually produce stuff) are down almost 25% (yes 25%) since 2001

Source: ADP

Spending, Transfer Payments, and Taxes

2011-10-31T03:05:00.000-07:00

As the chart below shows, personal outlays (i.e. spending) has grown significantly faster than wages over the past decade. Even before the crisis, consumers spent more of what they earned.

Since the 2008 crisis, wages initially declined (and have since remained stagnant) and the level of savings has moved higher (both of which are negative for consumption on a stand-alone basis), but spending remains strong.

How is this possible?

Well, when one adds in transfer payments (i.e. money provided by the government) and subtracts less taxes from wages, we see a different story... growth that has actually outpaced consumption since the downturn.

The reduced tax burden is a result of lower incomes to tax, a lower tax rate via the progressive tax structure, and tax cuts enacted to stimulate demand.

Telling (to me) is that over the last 10 years, wages plus transfer payments less taxes have grown at pretty much the exact same rate as personal outlays, despite weak wage growth. Going forward, unless there is change in the austerity sentiment that has been the focus of both Republicans (less spending) and Democrats (higher taxes), expect the boosts we have seen, to soften.

If that happens, we'll likely need actual wage growth via an employment recovery in order for the consumption rebound to continue.

Source: BEA

Economy Grows at 2.5%, Led by Spending and Investment

2011-10-27T10:21:00.001-07:00

BusinessWeek details:

The U.S. economy grew in the third quarter at the fastest pace in a year as Americans reduced savings to boost purchases and companies stepped up investment in equipment and software.

Gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate, up from 1.3 percent in the prior three months, Commerce Department figures showed today in Washington. Household purchases, the biggest part of the economy, increased at a 2.4 percent pace, more than forecast by economists.

Looking at the chart below, another potential bright sign is the pickup in non-residential investment in the quarter showing that corporations may finally be using all that cash to reinvest in their businesses (though they also appear to have "paid" for this investment by delaying inventory purchases).

If the next step in this cycle is an inventory rebuild and (don't want to jinx it) hiring, we may be in business.

Source: BEA

Unsustainable... Transfer Payments

2011-10-27T03:37:00.000-07:00

Transfer payments are defined simply as:

Money given by the government to its citizens.

As long-time readers know, I am all for government involvement / income distribution for projects / policies that attempt to provide:

Everyone (specifically youth) with the same chance
A needed shared service
A positive return on investment (education, security, infrastructure, etc...)

In addition, I do believe that a safety net (such as unemployment benefits) provides additional security that allows the broader system (in the case of unemployment benefits, the labor market) to work more efficiently.

BUT, many of these projects / policies have been extremely neglected (education, infrastructure are two easy examples) and/or are being threatened with further cuts, as a way to put off answering tough questions. Tough questions such as "should we be spending our national wealth on programs that will provide for the betterment of society in the future or should we use it to allow individuals to retire while they are still productive / to extend the life of a sick elder by another six months?".

As unfortunate as it may be... does anyone really think the chart above looks sustainable?

Source: BEA

The Rich Get "Slightly Less Baller"

2011-10-26T16:53:00.000-07:00

Greg Mankiw points out that we've been forgetting about a demographic that has been hit extra hard by the economic downturn... the rich:

Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.

That's right kids... in 2009, the top 1% of earners made only 13.2x more on average than the rest of the top 50% (i.e. by definition those that are themselves better off than the average), down from a peak of 16.3x in 2007. Ignore the fact that this is still almost twice the level seen in the early 1980's.

I should also point out that the title of his post is "The Rich Get Poorer", so before I sign off why don't we quickly take a look at the definition of poorer:

Having little or no wealth and few or no possessions.
Lacking in a specified resource or quality: an area poor in timber and coal.
Not adequate in quality; inferior.
Lacking in value; insufficient.
Lacking fertility.
Undernourished; lean.
Humble.
Eliciting or deserving pity; pitiable.

Way to show those Occupy Wall Streeters some perspective!

Source: Tax Foundation

Consumer Uncertainty

2011-10-25T09:53:00.000-07:00

Source: Conference Board

On the Seasonality of Equities

2011-10-24T18:22:00.000-07:00

EconomPic has outlined the seasonal performance of the equity market (with a "secret sauce" twist) a number of times (most recently here).

The Big Picture details equities seasonal phenomenon since 1959:

Here are the specifics of seasonality: Imagine we start with two $10,000 accounts, and use them to make investments in an S&P 500 Index fund. One account invests in one 6-month period, the other invests in the remaining 6-month period. Account A is invested from November 1st through April 30th each year, while Account B is invested from May 1st through October 31st.

Here are the numbers:

• Account A portfolio grew from $10,000 to over $438,967. That is a 42-fold increase.

• Account B portfolio barely doubled to $22,659.

A chart outlining the above phenomenon going back to 1959 can be found here, but I thought I'd take some alternative looks.... one that goes back further in time (all the way to 1871) to see when this seasonality started and one taking a look at the real return (i.e. after inflation) of each leg since 1959.

140 Year Rewind

Using S&P data from Professor Shiller's Irrational Exuberance site, I constructed the below chart going all the way back to 1871. The outperformance of the November - April time frame since 1959 can be seen, but interestingly enough before that date both periods had almost the exact same performance. Begging the question... what changed around 1959?

Real Seasonality (1959 - 2011)

You thought the original May - October figure looked bad in nominal terms? After inflation, total returns for that six month period over 52 years (312 months) were negative, while the November - April time frame posted annualized real returns ~10%.

Source: Irrational Exuberance

Below Trend Growth

2011-10-23T20:57:00.000-07:00

The WSJ details:

It looks as if, despite everything, gross domestic product picked up in the third quarter, easing fears that the U.S. was on the cusp of another recession. But that doesn’t mean the economy is anywhere near where it needs to be.

Economists expect Thursday’s GDP report from the Commerce Department will show the economy grew at a 2.7% annual rate in the third quarter. That would still leave economic output 6.7% below what the Congressional Budget Office estimates its potential is. In other words, in a world where employment and economic activity were as high as they could be without the economy running into inflationary trouble, the U.S. would be producing about $900 billion more in goods and services a year than it is now.

Experts quibble about exactly where potential GDP is these days, and that’s especially true in light of all the damage the economy has suffered.

As the last portion of the article outlines, experts quibble where potential GDP is these days. I (a non-expert) will outline an alternative way to project potential GDP... past performance. While past performance does not guarantee future performance for investments, it also does not guarantee where the economy should be today. That said, it does represent a growth rate that Americans and American systems (tax levels, spending, debt accumulation) were used to dealing with / expected.

Below is a chart outlining just that... real GDP going back to mid-1971, along with what real GDP would look like today if it grew at the 3.1% pace of growth it saw on average between June 1971 and June 2007. In addition, the yellow line is the difference between the two.

In this case, the differences implies current GDP is 11% below potential.

Source: BEA

EconomPics of the Week

2011-10-21T16:19:00.000-07:00

Investing

Emerging Market Rotation Strategy

It's All About Financials

Industrial Production "Inflection" to Lead Equities Higher?

Economic Data

China's Investment Conundrum
More on Chinese Investment

Explaining the Retail Sales / Confidence Dislocation
Leading Economic Indicators
Inflation
Employment Reports Mixed
Finance and Government... Such a Drag (On Jobs)
Manufacturing Expands in September

Other
RIP Steve Jobs

And your video of the week. Sublime with Badfish.

Explaining the Retail Sales / Confidence Dislocation

2011-10-21T10:46:00.000-07:00

My buddy Sami Mesrour (from Blackrock) had a write up earlier this month titled Follow What I Do, Not What I Say; Consumer Spending and Consumer Confidence that outlines the surprise rebound in retail sales (bold mine):

The US consumer is feeling down. Several indicators of confidence collapsed over the summer with the declines beginning in May as job growth slowed, and the bulk of the drop in sentiment occurring during August. It is likely that the intense focus on the country’s deficit problem and the attendant prospects of lower government spending going forward were the main drivers in the decline of consumer expectations. Forecasters are concerned over this development because of what it implies for the growth of consumer spending—historically sentiment has been a good reflection of sales in the US.

This time, however, something strange is going on: consumers are apparently saying one thing, but doing another

Very timely analysis, as this was ahead of last Friday's report that showed retail sales surprised, significantly, to the upside (September was up a 1.1%, while June and July were revised higher as well).

The year over year figure is even more impressive, up more than 8%.

Sami outlined (in detail - go to his report for more) the following four drivers:

Borrowed time (ability for the consumer to once again borrow to spend)
Income distribution (the rich keep getting richer and are driving spending, while individuals struggling are driving the confidence surveys lower)
Transfer payments (outlined at EconomPic here)
Foreclosures (squatters and those moving home with their parents are effectively not paying rent, increasing their ability to spend on goods)

I broadly agree with these points, especially #2 and #3, and I'll lay out a fifth... inflation. While inflation may be the best (and only) politically viable option to reduce the level of nominal debt in the system, there are always interesting implications.

The below chart outlines the nominal year over year change in retail sales, along with my best effort in matching the applicable inflation figures for each category (by all means imperfect). The real retail sales change is simply the difference between the two.

Building this out further with data going back to the mid 1990's, the below chart outlines the year over year change in the following consumption measures:

Nominal goods (very closely aligned with retail sales)
Nominal consumption (includes the less inflationary services sector)
Real consumption (i.e. less inflation)
Real per capita consumption

In addition, the dotted lines show the average for each category from 1996 to 2008 (i.e. pre-crisis).

What we see is that while the "spike" in retail sales (via nominal goods consumption) is higher than pre-crisis, all other measures are below their historical levels of growth.

In other words, the growth in the amount that individuals are consuming is lower, but individuals are paying more for what they are consuming. For those individuals where food and energy are a higher percent of their consumption basket (i.e. those that earn less), this is an even bigger impact.

Makes a lot more sense why individuals would be unhappy.

Source: BEA / BLS / Census

Leading Economic Indicators

2011-10-20T22:41:00.001-07:00

Bloomberg details:

The index of U.S. leading economic indicators increased in September at a pace that suggests a slower rate of growth in the coming months.

The Conference Board’s gauge of the outlook for the next three to six months climbed 0.2 percent after a 0.3 percent gain in August, the New York-based research group said today. The September increase, the lowest since a decline in April, matched economists’ projections, according to the median forecast in a Bloomberg News survey.

A Federal Reserve survey published yesterday said the economy maintained its expansion last month even as more companies reported more doubt about the strength of the recovery. An acceleration in growth is needed to support the job gains that drive household spending, the biggest part of the U.S. economy.

Source: Conference Board

Inflation

2011-10-19T14:20:00.000-07:00

Source: PPI / CPI

Industrial Production "Inflection" to Lead Equities Higher?

2011-10-17T08:54:00.000-07:00

The WSJ reports:

U.S. industrial production grew in September but the gain was small, underscoring the economy's lack of vigor.

Production rose by 0.2%, with a modest gain in manufacturing and a sharp drop in utilities caused by moderating weather. The Federal Reserve report on Monday showed overall production was flat in August, revised down from a previously estimated 0.2% increase.

Manufacturers in the U.S. have been feeling the weight of a lackluster economy, hamstrung by high unemployment. While it is still growing, the factory sector has, with the overall economy, slowed.

While the rebound in industrial production may be lacking the ideal punch, the index (which tends to have a positive relationship with the S&P 500) did turn positive this month on a three year rolling basis.

More interesting (to me) industrial production appears to have led the S&P 500 higher when rolling three year industrial production turned positive (i.e. the "inflection" point). The below chart strips out the S&P 500 rolling returns and replaces it with the three year forward (annualized) performance of the S&P 500 following the inflection point.

Source: Federal Reserve

It's All About Financials

2011-10-11T17:48:00.000-07:00

The chart below compares the absolute return of an investment in the S&P 500 vs. the excess return of an investment in the investment grade financial bond index (as compared to Treasuries) over rolling three-month periods going back 10 years. Note that pre-financial crisis there was a small relationship (even less so the prior decade) with the return streams below showing an r-square from 1988-June 2007 of less than 0.20. Since that time, an investment in the S&P 500 and financial bonds have been remarkably similar in terms of performance with an r-square of 0.56.

Source: Barclays Capital / S&P

Emerging Market Rotation Strategy

2011-10-10T08:38:00.000-07:00

Along with taking a deeper look at macro trends / releases to try to figure out this whole economy thing (in these all-too-interesting times), I spend quite a bit of my time creating (long-term oriented) trading models. The goal? To better allocate my investments by taking away some of my emotion.

The following model I will walk through is a simple model (available for download here) based on my friend Meb Faber's (of World Beta blog and Cambria Investment Management) Timing Model.

What is it...

It is an Emerging Market "EM" timing model that allocates between two EM sectors... fixed income and equities. As a way of background, since 1999 (I could only pull data for both indices as of December 1998 - due to the methodology below, the start of the model is 10 months later), both EM fixed income and equities have had very similar returns, but have had VERY different ways of getting there (see chart below). At a high level, EM equity tends to outperform when both are trending higher, but EM fixed income outperforms when EM beta struggles.

With that in mind... what is the model? On an end-of-month basis:

If EM Equity Total Return index > 10-Month moving average, allocate to EM Equities
If EM Equity Total Return index < 10-Month moving average, allocate to EM Fixed Income

The result? Over this time frame, the rotation strategy has significantly outperformed both EM fixed income and equities with volatility and drawdown levels right between the two (note that a 50/50 blend had returns of around 10.7% with slightly less volatility than the rotation strategy).

If anyone can pull data for EM indices going back further in time, please send my way as I'd like to see how this performs over the longer term.

Source: MSCI, JP Morgan, World Beta

Model: Download here

Employment Reports Mixed

2011-10-07T07:46:00.000-07:00

PBS details:

According to the "establishment survey" of places that hire, the economy added more jobs than predicted: just over 100,000. More significantly, the last two months' numbers were revised upward by another 100,000 or so.

Yet when we turn to the "household survey" of actual people, the headline unemployment rate remains unchanged at 9.1 percent. How come?

The numbers suggest that the working-age population (16 and over) grew by 200,000 last month, and another 200,000 people rejoined the workforce - that is, are back looking for work. The household survey also shows that 400,000 more Americans were employed this month than last. So it's a wash.

Disturbingly, our U-7 number actually went UP. How so? Because -- and here's the bad news in this month's numbers -- the total number of workers toiling part-time, but looking for FULL-time work, jumped by 400,000, about 5 percent. Since "part-time for economic reasons" are included in our U-7, the number rose from 18.26 percent to 18.41 percent, the third highest month since we inaugurated U-7 back in December.

Source: BLS

More on Chinese Investment

2011-10-06T21:43:00.000-07:00

Yesterday, I posted about China's Investment Conundrum (specifically, that China can't keep growing their investments at the torrid pace we've seen due to simple math). Below is a comparison of the composition of China's economy vs. that of the U.S., as well as growth in each component from 2001-2010.

To show this in a different way, below is just U.S. and Chinese investment. Combined, they have grown at a ~4.5% annualized clip, which not coincidentally is just about the pace of global GDP growth over that time frame. In other words, China has been taking production market share (a lot of it) from the U.S. (and developed world). At some point in time there isn't any more market share to take (or in theory the outsource trend could reverse), thus the entire consumption pie (including Chinese consumption) needs to grow at a faster pace in order for China to maintain the outpaced growth seen.

Source: BEA / Chinability

China's Investment Conundrum

2011-10-05T17:25:00.000-07:00

The chart below was created using data from a table within a recent Michael Pettis newsletter (his great blog China Financial Markets will produce a condensed version of the newsletter within a week or so) that outlined the composition of China's GDP by year (broken out by C, I, G, and NX) and multiplying the component percents by the size of the Chinese economy for each year.

What the chart shows is the remarkable growth across all the components, but the unreal growth in investment which now makes up almost 50% of China's economy (the fact that consumption grew by 75+% likely allowed for the other components to grow even faster as the citizens saw their lifestyles dramatically improve, allowing for the flexibility needed with central control by the government).

But, much like the exponential growth in China's currency holdings this investment growth is not sustainable, especially in a world that appears to have more than enough supply for the current (and waning) level of aggregate demand globally. So this begs the question... if there will be a rebalancing away from investment, will it happen due to the pace of Chinese consumption simply increasing (i.e. will China "save" the global economy) or will investment growth (and the Chinese economy) slow substantially?

Source: Chinability