Silver is Once Again on a Tear

Similar to gold (see a past post On the Value of Gold) silver has been on a tear due to low interest rates, fear of inflation, and a declining dollar (actually not similar to gold, but more like in multiples greater than gold). While the price of gold or silver is already a reflection of a weak dollar (i.e. if silver increases in price, it is outperforming the dollar), the relationship between the dollar index (relative to other currencies) and silver since the beginning of the year has been rather striking.



The warning note to the above is that while this relationship is not new, the scale of the relationship of ~10x since last summer, is (from 2007-mid 2010 it was closer to 2x).

Perhaps this time is different and we should simply be Ready to Ride the Golden Silver Bubble.

Source: Yahoo Finance

Market Smack-Down

In the battle of technicals vs fundamentals, on this day fundamentals are winning.



I just dipped my feet back in the water with some calls on the S&P. While vol has spiked today, a level below 20% considering everything going on in the world seems cheap and indicates the market may prefer to move higher. No way I (personally) would be buying outright here though.

Source: Yahoo Finance

Hours Worked per Person Flatlining

Hours Worked per Person (Employment to Population Ratio x the Average Work Week of Private Workers), shows the sluggish rebound in "labor usage" relative to the population.

The concern... for the last 25 years there has been a very strong relationship between hours worked per person and real GDP growth (a decent relationship prior to 1986, but with a lot more noise), but notice the huge gap since the "recovery" began.

Unless "this time is different" there are two possibilities:

• The Good: Employment will follow (it just needs an unprecedented amount of time)
• The Bad: The economy is outperforming due to all the government support / transfer payments, the impact of which will be fading going forward

Source: BEA / BLS

Is Education Over-Rated?

This data would indicate it is not...

Source: BLS

No Good News in Employment Report

The LA Times reports:

Analysts had raised their job-growth forecasts for June to 100,000 or more in recent days, hopeful of a rebound after surprisingly few job gains in May, which many attributed to temporary factors such as Japan's earthquake and the spike in oil prices.

But, in fact, the growth of 54,000 jobs previously reported for May was revised down Friday to just 25,000. And the nation's payrolls followed that with a barely perceptible 18,000 new net jobs last month.

Friday’s jobs report was remarkable in that there was nothing positive in it. Manufacturing, instead of bouncing back up as many had expected, added a meager 6,000 jobs. Hiring in construction remained dismal. The once-fast-growing temporary-help industry shed jobs for the third month in a row. And budget-strapped government offices eliminated an additional 39,000 jobs from their payrolls. Services remained weak.

Even for those with jobs in June, there was bad news. The average weekly work hours declined by 0.1 to 34.3. And the average hourly earnings for all private-sector employees dropped by one cent to $22.99.

Things are even worse if you look at the Household survey (the survey used to determine the unemployment rate), where more than 440,000 jobs were lost during the month as individuals are flying out of the workforce. That figure takes into account the 59,000 teenagers finding jobs (not exactly the high paying jobs).

Source: BLS

ADP Employment Better than Expected

CNN details:

Payroll processing company ADP said private jobs grew rapidly in June -- a figure that was much higher than expected and more than four times higher than the prior month. May's figures were downwardly revised to 36,000 jobs. Economists were expecting a gain of just 60,000 private sector jobs, according to consensus estimates from Briefing.com. Smaller businesses led the charge in June. Small businesses, defined as those with fewer than 50 workers, added 88,000 jobs in June. Medium-size businesses, defined as those with between 50 and 499 workers, gained 59,000.

Don't get me wrong, a better figure is good news, but let's put this in perspective.

Source: ADP

ISM Employment Improving... But Lacking Snap Back

As we wait for the ADP employment figure this morning (not sure why its delayed), below is a chart summarizing the ISM Manufacturing and Services employment indices with the total number employed.

Source: BLS / ISM

Equity Valuation Based on GDP Growth

An update (with a small addition) of a post from May 2010

Step 1) Take the S&P 500 Index (lots of data here) and divide that level by the current level of nominal GDP (you can find that here).

Below is a chart of just that going back to 1951 and the corresponding 60 year average.



Step 2)

Fair Value Methodology: Take that 60 year average (8.25%) to normalize the first year of your 'Fair Value S&P 500' "FV" Index by taking nominal GDP at the starting date (in this case June 1951 = $336.6 billion) and multiplying by the percent (x 8.25% = 27.77). In this case 27.77 = the FV Index level (or the starting value normalized).

Matched Starting Value Methodology: Simply start the index at the value of the S&P 500 as of June 1951 = 21.55.

Step 3) Using that 27.77 (or calculated value using a different time frame) as the FV Index starting value or 21.55 as the matched starting value, at each interval increase the index by the change in nominal GDP (note... in the chart below, I estimated the Q2 GDP at 2.0% annualized). Why nominal GDP? Go here.

The below chart shows these calculated indices vs the actual S&P 500 index.

Step 4) Calculate the percent the S&P 500 Index is over or under valued relative to each calculated index.

Relationship (returns are annualized)....

Note 1: under these methodologies, the S&P 500 is currently at or above fair value, still implying a decent ten year forward change in the S&P 500 plus dividends minus inflation.
Note 2: a change in the starting value of the FV Index would simply shift the x-axis to the right or left (i.e. it would not change the relationship between the two)

Source: Irrational Exuberance

Chicago Manufacturing Beats Expectations

The WSJ Blog details:

U.S. manufacturing activity was stronger than expected in June, with rising orders and easing price pressures, according to the monthly survey of Chicago-area purchasing managers.

The closely-watched Chicago Business Barometer broke three months of slowing growth in June, rising to a seasonally-adjusted 61.1 from 56.6 in May, well above the 53.5 consensus among analysts surveyed by Dow Jones Newswires.

Chicago PMI: Index > 50 = Expansion

Another important detail from this months report was the decline in inventories, which infers that manufacturers will need to produce more to meet demand (they met a portion of current demand simply out of inventories), a good sign for future growth.

Source: ISM

How We're Chillin...

When I took a look at the difference in the amount of leisure between those employed / unemployed and educated / uneducated, I was reminded of the old adage "cash rich, time poor". And apparently I watch a LOT less TV than most (actually... this may average out during football season) and spend WAY too much time on the computer.



Source: BLS

New Home Sales Flatlines

Reuters details:

The Commerce Department said May new home sales fell 2.1 percent to a seasonally adjusted annual rate of 319,000. Analysts polled by Reuters were expecting a slightly slower pace of 310,000 for the month.

The decline ended two straight months of strong gains, with sales rising 6.5 percent in April and 8.9 percent in March. May's new home sales were 13.5 percent above the May 2010 level.

Lets take a look at those recent "strong gains" by sale price.

And relative to the longer term by region (note that "strong gains" in percent terms are easy when the base is 80% below previous peaks).

As GYSC noted in a previous post:

I cannot believe how many run thier game under "The FED is behind us no matter what!". 

While that is a great trade when the market simply needs liquidity, as seen above it doesn't help so much when the asset has fundamental issues.

Source: Census

Suppressed Yields?

In a recent post titled Suppressed Volatility, EconomPic posited:

It is simply (in my view) that volatility across ALL sectors and asset classes has been suppressed by the liquidity that has successfully (to date) been finding its way into riskier and riskier asset classes following the combination of unprecedented fiscal / monetary stimulus and a lack of "real" investments (i.e. investments that feed into economic growth and create jobs) for this liquidity to go.

Here is a visual depiction of that mechanism.



That's right. In the first quarter, the Fed purchased $1.4 trillion in Treasury securites or 190% of all net issuance for the quarter (a period in which households reduced Treasury holdings by more than $1 trillion). This $1 trillion went somewhere (think risk assets). Also would seem to explain why Treasuries snapped back sharply in the second quarter when disappointing economic news and a subsequent rebound in demand for Treasuries was met by a reduced net supply.

Source: Federal Reserve

If the Fed is Missing This Big With Their 2011 Projections...

Source: Federal Reserve

Suppressed Volatility

FT Alphaville has a post Crouching Vix, Hidden Volatility claiming that:

Volatility is out there. You just have to look for it — and not by glancing at industry-standard, the CBOE Vix index.

The blog then points to a post by ConvergEX that states:

If you only focused on the CBOE VIX Index, you’d be tempted to think that the recent market volatility was pretty modest.

The problem is that it wouldn't only be a temptation, it would be a fact.

Looking at implied volatility, as defined by the VIX, relative to actual realized three month volatility of the S&P 500, the VIX has (much like most of history) been consistently overstating volatility (the VIX recently closed at 19 vs. three month realized volatility of 12, a difference of 7 relative to the average difference of 4 over the previous 20 years).

This isn't to say that I believe the VIX accurately reflects the economic environment and risks associated with investing in the current environment (I absolutely don't). It just isn't some conspiracy theory that the VIX is being artificially suppressed relative to the underlying market or that volatility is more accurately reflected in other sectors.

It is simply (in my view) that volatility across ALL sectors and asset classes has been suppressed by the liquidity that has successfully (to date) been finding its way into riskier and riskier asset classes following the combination of unprecedented fiscal / monetary stimulus and a lack of "real" investments (i.e. investments that feed into economic growth and create jobs) for this liquidity to go.

So tread carefully my investment friends. The part of the investment cycle where an investor can generate positive returns by simply providing liquidity to the market is likely over.

Source: Yahoo Finance

Leading Indicators Bounce

With everything going on in Europe, this release feels worthless, but here it is anyway.



Source: Conference Board

Foreigners Still Buying Treasuries

I'm reminded of the quote "Cleanest dirty shirt". Bloomberg details:

China, the largest foreign owner of U.S. government debt, added to its holdings for the first time in six months in April as economic data weakened and the Federal Reserve signaled no extension of its $600 billion purchase plan.

Chinese officials, as well as those in Germany and Brazil had been critical of the Fed’s asset purchase plan when it was first announced in November, said the proposal would be inflationary and could hurt the value of dollar-denominated assets. The Fed became the largest owner of Treasuries through what has become known as its policy of quantitative easing, in which bonds were bought to add cash into the economy and reduce the risk of deflation. The purchases end this month.

Also of note (and outlined previously at EconomPic here):

Even with the increase, the data “underestimates what China’s buying,” said Scott Sherman, an interest-rate strategist at Credit Suisse Group AG in New York, a primary dealer. “China deals through foreign intermediaries” leading to initial tallies counting their purchases as belonging to other holders, such as the U.K.

Hence the China and United Kingdom aggregation below.



Source: Treasury

Producer Prices Moderate in May, Highest Year over Year Level Since September 2008

Marketwatch details:

U.S. wholesale prices rose in May at the slowest pace in 10 months as the cost of food fell and the increase in energy prices tapered off, the government reported Tuesday.

The producer price index rose 0.2% last month, the Labor Department said. It was the smallest gain since July 2010.

Food costs dropped 1.4%, owing mainly to lower vegetable prices, to mark the biggest one-month decline in almost a year. The price of food has fallen twice in the past three months, although food costs are still 3.9% higher compared to one year ago.

Energy prices, meanwhile, rose 1.5% in May, the slowest rate since September. A surge in fuel costs have push wholesale prices sharply higher since last fall, but oil prices have pulled back over the past month. Many economists expect the modest decline in oil prices to ease pressure on wholesale costs.

Over the longer term, easy money policy sure is working at the producer price level with finished goods increasing 7.3% year over year, the highest level since September 2008. One issue is that the easy money isn't feeding into demand / price increases for labor (likely because it is so focused at the producer levels, rather than the consumer level where corporations can pass on price increases) so the below acts as an added tax on goods used as inputs.



Source: BLS

Retail Sales Decline, but Beat Expectations

Reuters details:

Retail sales fell in May for the first time in 11 months as receipts at auto dealerships dropped sharply, but the decline was less than expected, offering hope of a pick-up in economic activity.

Retail sales last month were depressed by a 2.9 percent drop in sales of motor vehicles, the largest decline since February 2010, as a shortage of parts following the earthquake in Japan left inventories lean and prompted manufacturers to raise prices.

Excluding autos, retail sales rose 0.3 percent last month, the smallest gain since July, after rising 0.5 percent in April.

Below are the details. While any given month is potentially just noise, it is interesting to see the largest declines in "big purchases" including autos, furniture, and electronics while healthcare, food services (i.e. eating out), and clothing grew.



Source: Census

Trade Balance Improves in April

The WSJ details:

The U.S. deficit in international trade of goods and services declined 6.7% to $43.68 billion from a downwardly revised $46.82 billion the month before, the Commerce Department said Thursday. The March trade gap was originally reported as $48.18 billion.

The April deficit was much smaller than Wall Street expectations, with economists surveyed by Dow Jones Newswires having predicted a $48.3 billion shortfall.

A rebound in oil prices to levels not seen since the 2008 spike erased the modest reduction in the trade gap from late last year. But Nymex crude futures have settled back to around $100 a barrel after surging to nearly $115 a barrel in early May.

In other words, expect the fall in both the demand and the price for oil to continue to reduce the trade balance going forward in both real (due to demand) and nominal (due to price) terms.

And over the longer run...

The below chart compares April 2010 and April 2011 trade balances* for a number of items in real terms.

Note the big improvement in industrial supplies (though this may be due to the disruption in Japan - a drop of $3.2 billion in imports came from March alone) and the big jump in consumer goods imports. The latter is a trend I imagine will continue as consumers look for cheaper and cheaper goods that are increasingly produced outside of the U.S.

Not broken out is trade in oil, which improved greatly in real terms; exports up by $700 million, imports down by $2 billion (the problem is the price more than made the trade balance worse in nominal terms).

Source: Census

Federal Debt per Employee

This will be the last employment related chart for a while (I think) following recent posts This Time IS Different... Employment Edition and Breaking Down Productivity. This specifically outlines a much broader issue that will affect us over the long-term. Specifically, the level of U.S. debt and the number of workers available to pay down that debt.

The amount of debt per employed person has spiked in recent years to more than $100,000 per employed worker, up from ~$55,000-$60,000 throughout the 1990's.



There are a number of ways this problem can be solved / corrected:

• Economic growth (good)
• Higher taxes (not bad depending on your point of view, but not good for underlying growth expectations of the U.S. economy)
• Decrease government spending (good IMO, but also not good for underlying growth expectations of the U.S. economy)
• Inflation (decrease the "real" value of debt via a "tax" to savers / earners unable to keep up their returns / wages with inflation)
• Outright default (not feasible)

When evaluating the options, economic growth is the best, but difficult. Default is the worst and least likely. That leaves higher taxes, decreased government spending, and inflation as the most viable and likely (IMO).

All that said, debt deflation is still a major concern of mine due to the levels of debt and political grandstanding currently taking place in D.C. See Steve Keen's epic piece that changed my understanding of the economic collapse here for more on this possibility.

Source: Treasury Direct / BLS

Great Depression Employment Situation

In response to my post This Time IS Different, reader DIY Investor asked to see the information EconomPic presented, but for the Great Depression. Here you go...



The key takeaway... things were WAAAAAYYYYY worse than the recent 6% drop. Note (however) the rather remarkable snap back post 1933. The result is that within 10 years following the start of the Great Depression, employment was within 4% of the previous peak (and was positive year 11). Sadly, not too dissimilar to the -2% reduction in private employment we have seen over the last 10 years.

Source: U-S History

EconomPics of the Week (June Gloom Edition)

Lots of economic data was released this week and it was pretty much consistently bad (or at least disappointing).

On the investment front, that is partially offset by a crowd turning VERY bearish (normally a sign to buy). Not bearish enough for me though... similar to what I've done in the past when unsure, I am reigning it in BIG time. Almost all of my risk taking is through relative value trades (i.e. everything is at least partially hedged) and options (happy to pay sub 20% vol on calls to get my long equity beta exposures).

Here were those economic events as reported here at EconomPic.

This Time IS Different... Employment Edition
Breaking Down Productivity
Japanese Autos Crushed
Pace of U.S. Recovery Slowing
Gas Rules Everything Around Me
Chicago PMI Misses

And the video of the week... let's slow it down with Iron and Wine's 'Such Great Heights' (cover of a great / very different sounding Postal Service tune).

This Time IS Different... Employment Edition

Not different from past financial crises, but certainly different from recessions over the previous 40 years.

The first chart should look similar to other charts presented on the blogosphere. It shows the change in the total number of employed during past recessions. The key takeaway... this time is worse, but things are improving (albeit slowly).



The next chart shows how much worse. It takes the same data as the chart above, but shows the relative performance of this recession as compared to past recessions. For example, as compared to the last recession we are now trailing the employment situation by about 6.5% (we currently have 4.5% less jobs than our previous peak, while at this point following the 2001 recession we had 2.1% more jobs).



The concerning thing is that things seem to be getting worse, even though it "should be" easier to improve following a severe downturn (hiring back workers is typically easier than creating new jobs).

Seems more and more like a structural issue that cannot be addressed by simply trying to stimulate aggregate demand.

Source: BLS

Breaking Down Productivity

Bloomberg details:

The productivity of U.S. workers slowed in the first quarter and labor costs rose as companies boosted employment to meet rising demand.

The measure of employee output per hour increased at a 1.8 percent annual rate after a 2.9 percent gain in the prior three months, revised figures from the Labor Department showed today in Washington. Employee expenses climbed at a 0.7 percent rate after dropping 2.8 percent the prior quarter.

“Productivity growth has slowed in the past year but from very strong rates and it remains fairly decent,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said before the report. “Labor costs have moved higher because of the slowing in productivity growth, but they were generally falling for some time and remain very weak, essentially implying no threat to the inflation outlook.”

Let us dive into the numbers...

The first chart below shows total productivity broken out between its two components... hours worked and output per hour (you can only increase productivity by increasing one or the other).

Rolling One Year Change



A few points to notice... the snap back post recession was relatively small as compared to past downturns (especially considering how far things fell - a rebound to trend would have appeared especially large in itself) and the pace of productivity growth is slowing.

Rolling Five Year Change

The longer term trend above shows why we are feeling so much pain; we are at a multi-generational low in total productivity, almost entirely driven by the unprecendented decrease in hours worked.

The next chart outlines (in my opinion) the bigger story. It is the change in the productivity to hours worked ratio over rolling ten year periods. As an example of how to interpret the chart, the most recent period shows a change of around 40%. What this means is that productivity has grown by about 40% relative to hours worked over the past 10 years (they've grown 30%, while hours are down about 8%). This is by far a multi-generation high.



This helps explain a lot of the current situation. While productivity in itself is not a bad thing at all (in fact, I would argue it is one of the most important things for sustained economic growth), when productivity is increasing solely to offset hours worked, a lot of structural imbalances result UNLESS there is policy (education, reallocation from those that benefit to those that suffer, etc…) that helps transition the broader economy to a new “balance”. If this does not happen, workers replaced with new productive resources find themselves not only suffering personally, but dragging the economy down as they are no longer adding to the hours worked component of productivity (as I mentioned, it is one of only two inputs).

The other important question is whether the productivity is truly an increase in productivity or just a shift in the hours worked component from the U.S. to those abroad. As I’ve outlined here, over the last 10 years (i.e. when the output / hours worked ratio spiked in the chart above) there was a huge labor supply shock coming from emerging Asia. My concern is that we are not really becoming all that more productive with new technologies, process, etc..., but simply outsourcing a lot of the hours worked overseas. This would explain a ton, including the strength of emerging Asia relative to the U.S., the disparity between “haves” and “have nots” by educational attainment (i.e. the economic slump has been felt to a much greater extent by those with less education whose jobs have been exported), and the soaring profits by corporations even in the face of lower growth (cutting costs vs. increasing revenues).

Source: BLS

Japanese Autos Crushed

The WSJ details:

The Japanese auto makers were hit hardest, but nearly all major auto makers reported declines from a year ago. GM's sales fell 1.2% while Ford Motor Co. said its May U.S. sales declined less than 1%. Toyota's sales dropped 33%, Honda's sales fell 23% and Nissan Motor Co.'s dropped 9.1%.

Chrysler's sales rose 10.1%, giving the company a 10.9% shares of the U.S. market, putting it ahead of Toyota, which had a 10.2% share. GM, Ford and Chrysler together accounted for 49.7% of the month's sales. The last time they had more than 50% was September 2008.

Hyundai capitalized on a lineup that has the highest combined fuel efficiency of any in the industry and attractive prices relative to competitors. The South Korean auto maker has pulled drawn customers from Toyota, Honda and Nissan, which suffered production disruptions because of the March 11 earthquake in Japan.

Since the Japanese earthquake / Tsunami on March 10th, Hyundai's stock price has soared by more than 20%, while Toyota has slumped 7%.

Source: Auto Blog

Pace of U.S. Recovery Slowing

Growth in the economy appears to be slowing (not that the recovery was all that amazing to begin with).

ISM Manufacturing



ADP Payroll (the "real" figure arrives this Friday)

Source: ADP

Gas Rules Everything Around Me

Let me quickly explain what the chart below shows...

Since 1995 (the furthest back you can easily obtain real consumption by category), nominal gasoline purchases as a percent of personal consumption has increased by 44% (gasoline was 2.8% of all personal consumption, now it is 4.0%), while it has decreased by 33% in real terms (we now consume about 5% more gas in real terms, while overall consumption is up more than 58%).

In other words, we are spending a LOT more of our paychecks on gasoline, which in turn is becoming a much smaller portion of our real consumption. It would be rather interesting to know where the U.S. economy would be if all this consumption was freed for other goods / services (i.e. the benefit for the nation of investing in alternative energy).

Source: BEA

Chicago PMI Misses

The WSJ reports that decline in the Chicago PMI (Purchasing Managers' Index) was the largest one month drop since October 2008 (i.e. Lehman). While significant, a level above 50 does indicate expansion... in this case very mediocre expansion.



Source: Chicago PMI

EconomPics of the Week (Memorial Day Edition)

Below are posts since coming out of semi-retirement (btw- digging the new schedule of posting a few times / week). Enjoy the long weekend everyone!

Investing
Are Equities Ahead of Themselves?
Cash is King
Commodities Take a Spill
"No Sign of Recovery" in Commercial Real Estate
Secret Sauce Continues to Grip It and Rip It
LinkedIn IPO: Is This Time Different?

Consumption without Production = Debt
Part I - Where Are The Jobs At?
Part II - Wages and the Fed's Reaction

US Growth
Leading Indicators Turn Negative in April
Taking a Look at the "Transitory" Slowdown in Q1 GDP
What Job Recovery?
Negative Savings Rate
Q1 GDP Unchanged at 1.8%

Developed Non-US
Germany as the Poster Child for Fiscal Responsibility
European Debt Once Again Front and Center
Japan's Nominal Economy Approaching 20 Year Low

And the video of the week... a song I can't get out of my head. The Strokes with Under the Cover of Darkness.

Are Equities Ahead of Themselves?

The april durable goods report disappointed (i.e missed estimates and down in absolute terms) yesterday. Per the WSJ:

Durable goods orders were down 3.6% in April, compared with expectations of a 2.2% decline. Last month’s gain was revised up to 4.4% from 4.1%.

This is one more piece of evidence lining up on the side of those seeing a slowdown in the second quarter (and maybe beyond). The upward revisions to March’s numbers do ease the sting a touch, but this could bring down some second-quarter GDP forecasts.

I am less concerned with the figure as Japan weighed heavily (and the down month followed a very strong March), but I am concerned that equities are pricing in VERY strong forward expectations. The chart below attempts to segregate durable good results with companies within the industrials sector (industrials aren't a perfect fit, but pretty good). More specific, the chart compares the rolling two-year change in durable goods (new orders) with the industrials equity sector going back to data from 2005.



Part of the reason for the strong performance has been VERY strong earnings driven less by top line revenue growth, but more by widened profit margins from squeezing out costs (i.e. increased productivity through the laying off of workers) and cheap financing for corporates (see below for the huge supply of bonds at the ten year and in portion of the yield curve).

Investment Grade Corporate Bond Universe



Unless durable goods figures spike to the upside in coming months / years, this sector seems awfully ahead of itself.

to Source: Yahoo Finance / Census

Q1 GDP Unchanged at 1.8%

More trade, less consumption, more investment = net unchanged (below trend) 1.8% annualized growth.



Source: BEA

"No Sign of Recovery" in Commercial Real Estate

Calculated Risk details (via Bloomberg):

The Moody’s/REAL Commercial Property Price Index dropped 4.2 percent from February and is now 47 percent below the peak of October 2007, Moody’s said in a statement ...So-called trophy properties in New York, Washington, Boston, Chicago, Los Angeles and San Francisco are helping those markets avoid the drag caused by distressed asset sales nationwide, Moody’s reported.

The overall index shows “no sign of recovery,” Moody’s said.

The Moody's / REAL Commercial Property Index is in nominal terms (despite the "real" name), but still hit a post-bubble low. In real terms? 21% down since the series began back in December 2000 and 50% below August 2007 levels....

Source: MIT / BLS

LinkedIn IPO: Is This Time Different?

I'll quickly state that in my view the answer to the title is a resounding "no". It will be interesting to see how far this can move in either direction over the short run.

As of this post, LinkedIn is valued at $11 billion. I have either lost my ability to "get it" (quite possible) or LinkedIn is simply for suckers that are buying for speculative (i.e. have no interest in understanding what they are actually buying) purposes. My initial questions:

1. Was my assumption that the majority of people signed up to LinkedIn because they felt they "had to" or "why not" vs. they want to regular use the site incorrect?
2. Does this imply Facebook is perhaps the largest company in the world by market value? After all, in my Google search they have 5x LinkedIn's users and 130x the page views (i.e. people actually use the site).
3. Why can't Facebook simply add a broader "professional business" feature for those interested in connecting?
4. Do I have absolutely no sense of the value of niche social networking?
5. Is Monster Worldwide (an online employment company with 4x LinkedIn's 2010 revenues and priced at a 6x lower valuation) actually cheap?
6. When can trading at almot 50x revenue (revenues were $243 million in 2010) be justified by "this time is different"?
7. Should the CEO be happy that the investment banking consortium raised $352 million for the company or upset that it "could have" (if priced at current levels) raised more than $850 million for the same issuance?
8. When can I buy puts and/or sell calls on LinkedIn?

Interesting analysis of what is fair LinkedIn value is over at Musings on Markets.

Update: LinkedIn closed its first day of trading with a $9 billion market cap. Still WAY too high IMO.

Leading Indicators Turn Negative in April

Bloomberg details:

The index of U.S. leading indicators fell in April after nine months of gains, depressed by a pickup in jobless claims that reflects temporary setbacks including auto-plant shutdowns.

The Conference Board’s gauge of the outlook for the next three to six months decreased 0.3 percent after a revised 0.7 percent gain in March, the New York-based group said today. Economists forecast a 0.1 percent increase, according to the median estimate in a Bloomberg News survey.

The chart below shows the broader concern of what will happen to the US economy when the Fed is no longer as accommodating as they have been with monetary easing (low interest rates + QE + QEII). Excluding those levers they can pull, leading indicators were down 0.65 month to month.



Source: Conference Board

Japan's Nominal Economy Approaching 20 Year Low

Bloomberg details:

Japan’s economy shrank more than estimated in the first quarter after the March 11 earthquake and tsunami disrupted production and prompted consumers to cut back spending, sending the nation to its third recession in a decade.

Gross domestic product contracted an annualized 3.7 percent in the three months through March, following a revised 3 percent drop in the previous quarter, the Cabinet Office said today in Tokyo. The median forecast of 23 economists surveyed by Bloomberg News was for a 1.9 percent drop.

The March disaster hit an economy already weighed down by years of deflation and subdued consumer spending.

While real GDP was down 3.7% in the quarter (annualized basis), nominal GDP was down an even higher 5.2% due to continued deflation. The chart below shows that nominal GDP is now at an almost 20 year low, hitting the lowest point since June 1991.



For a country indebted with an increasing amount of nominal debt, it makes you wonder how they will ever be able to get out of this situation.

Source: ESRI

Secret Sauce Continues to Grip It and Rip It

The secret sauce was first revealed back in July 2008 when I had about 50 readers (and had no idea how to make charts "pretty").

What is the secret sauce? An alternative to the "sell in May, go away"; sell the S&P 500 at the end of May and then invest in the Long Government / Credit bond index (rather than sit in cash). The "strategy" (I wouldn't necessarily call it that) takes advantage of data (mining) that shows the Long G/C has outperformed the equity market for the May through October time frame. The result is better annualized performance (14.1% vs. 10.7%) with less volatility (12.1% vs. 15.8% standard deviation).

Growth of $1 (log chart shown last year here).



Rolling Ten Year Performance



Source: Barclays Capital, S&P

Cash is King

Scott Grannis of Calafia Beach Pundit points to the recent surge in the money supply as defined by M1, which consists of very liquid money (i.e. cash, checking, etc...) and notes that something seems different this time.

As this next chart shows, the growth rate of currency since mid-2010 is no longer correlating to dollar strength. In fact, currency demand has surged as the dollar has fallen. If currency demand were rising because the dollar is considered to be a safe haven during a time of crisis, why is the value of the dollar falling, and even hitting new all-time lows?

He shows the relationship in the following chart.

While he notes that M2 has not shown nearly the same growth as M1, in digging into the data this appears to be the key. The punchline is that M1 does not appear to be rising due to demand for currency (in the flight to quality nature as past periods, such as during the financial crisis), but instead appears to be rising due to the lack of demand for a few components that make up the M2 money supply (and not M1).

These two components are time deposits and money market accounts, which historically have compensated investors with a premium, at the expense of liquidity. In today's low rate environment, investors simply aren't being compensated enough to give up the liquidity.

The chart below shows these four categories (note that savings accounts, which are much more similar to checking accounts these days, is not shown and has risen substantially over this time).



Source: Federal Reserve

What Job Recovery?

While the economy has shown some signs of life, the employment situation continues to disappoint. The chart belows shows the cumulative change in employment per the household survey.



The details of the last year:

People are continuing to drop out of the workforce: the employment "recovery" has seen a 1.1 million drop in the labor force even though the population has grown 1.8 million in size (i.e. 2.9 million more people can work, but are not looking for work).

The number of women and teens working has declined: only men are finding more work than at this time last year.

The decline in unemployment makes up less than 1/2 the size of those that left the workforce: those unemployed declined by 1.4 million, less than half the number that dropped out of the labor force.

Source: BLS

Commodities Take a Spill

Almost one year to the day of the Flash Crash, commodities took a spill.



The cause? Simple. More sellers than buyers (love that answer). Why? People have been piling in to commodities (a trade you can apply a ton of leverage to) for the past 10 months. As a result, it should be of no surprise that the dollar rallied today as part of the unwind - see more here. For everyone claiming this is a crash, forget about it. Commodities, including silver, are still way up in bubble territory.

Bubble or not, I did dip my toe in and bought a bit of CEF near the close at what turned out to be a 8.5% discount on the theory of an oversold market (hat tip Kid Dynamite).

Source:Bloomberg

CWP=D: Part II - Wages and the Fed's Reaction

In Part I of the EconomPic "series" CWP=D (consumption without production equals debt) we took a look at one of the earlier factors that played a role in the high debt and unemployment levels we have today; namely the huge labor supply shock from emerging markets.

In Part II, we'll take a look at the impact of that labor supply shock on the price and quantity of U.S. labor and more importantly, the reaction by the Federal Reserve to that impact.

Part II: Impact of Supply Shock on U.S. Labor

Incremental cheap foreign labor should have:

• Been disinflationary (or deflationary) for labor and goods that used that labor as an input
  
• Caused NAIRU (the natural rate of unemployment) to rise

What Happened?

Well, it took a bit of time (more on that at a later date), but real wages (shown below as personal income less the amount transferred by the government) fell and NAIRU (if the employment to population ratio shown below is a good indicator - I think it is) rose (i.e. employment fell).

Personal Income

Employment-Population Ratio

If you earn less, you should in theory "have" to consume less, but the Federal Reserve having missed the fact that there was a labor supply shock overseas (causing jobs to leave the U.S.), provided a big boost that allowed consumers to spend without earning (i.e. they lowered rates in an attempt to stimulate hiring through an increase in the economy's aggregate demand).

This response is shown in the chart below which details the Fed Funds rate less the 12 month headline CPI going back to the 1960's. Real rates over the past 10 years have now averaged a negative level for the first time since inflation drove real rates negative in the 1970's.

In the past, increased consumption would have flowed through to the supply side of the U.S. economy, pushing corporations to hire U.S. labor to keep pace. This time, a large amount of the increased consumption leaked out of the U.S., which explains why we had a "jobless recovery". This helped mask the initial misallocation of capital as the rising cost of shelter and commodities were offset by "imported deflation" in the form of cheap goods utilizing the cheap labor from abroad.

To be continued...

Source: BEA, BLS, Federal Reserve