Undergrad Tuition Bubble?

Investor Glossary details that bubbles are formed:

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

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

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

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

Below is a chart of the top 20 such schools.



My thoughts:

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

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

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

The Importance of Emerging Markets

As the FT notes:

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

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

Source: Ashmore

The Remarkable Gold Run Continues

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

Source: USA Gold

Consumers Getting Responsible?

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

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

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

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



Source: Federal Reserve

EconomPics of the (Past Two) Week(s)

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

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

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

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

Wages and Inflation

Paul Krugman details the connection between wages and inflation:

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

Source: BLS

Employment Reports Split

Marketwatch details:

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

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

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



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



Source: BLS

Everything is a Winner!

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

Source: Yahoo

Productivity and Equities

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



Source: BLS

Economy Showing Signs of Life

BusinessWeek details:

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

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

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



Source: BLS

Fed is Literally and Figuratively "Printing Money"

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

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



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

How much can be made?

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



Quick and dirty math = the Fed is getting PAID

Source: NY Fed

Auto Sales Jump in October

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



Source: Autoblog

Levels Matter: Cry Me a River Edition

Bloomberg reports:

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

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

Perspective people...



Source: Bloomberg

Services Bouncing Back

But where are the friggin' jobs!

Respondents stated:

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

Source: ISM

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

Quantitative Easing II that is. The WSJ details:

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

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

Source: WSJ

Large Corporations Aren't Hiring

Source: ADP

The Race to the Bottom Continues

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

First, Bloomberg details expectations for QEII:

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

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

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

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

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

Example one:

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

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

Example two:

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

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

The race to the bottom continues...

Manufacturing Growth Strong in October

ISM respondents are saying:

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

Source: ISM

No Bounce in Income

Marketwatch details:

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

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

Source: BEA

Rebalance

The WSJ (hat tip The Big Picture) with some faulty numbers:

Advisers, too, have been buying higher and selling lower. Those who use TD Ameritrade had an average of 26% of clients’ assets in bonds and cash on Oct. 9, 2007, the day the Dow Jones Industrial Average hit its all-time high of 14164.53. By March 9, 2009, the day the Dow scraped rock bottom at 6440.08, the advisers had jacked up bonds and cash to 51%.”

Barry piles on:

The simple explanation is that advisers (or at least the bulk of them) are reacting emotionally to market swings. They are over-confident after markets have had big moves up, so that’s when they buy; they dump equity shares in a panic late in a down turn.

Does Ameritrade even provide investment advice? Either way, the numbers shown above don't exactly make the case that these investors were buying high and selling low.

Why?

First take a look at performance of equities and fixed income since that October 9th period.



The relevance?

Ameritrade investors weren't buying high and selling low, they were doing what investors have been told to do... "buying and holding". A passive investor with a 26% allocation to fixed income (i.e. the starting point) would have had a 47% allocation to fixed income on March 9th, 2009 (equities sold off more than fixed income, thus increasing the allocation to fixed income). Very close to the allocation detailed in the WSJ article.



So rather than an article that headlines why investors should be wary of advisers because they are over-confident, perhaps the data shows that investors should simply have advisers that aren't scared to provide advice and can share one of the easiest investment lessons... the power of rebalancing.

Source: Yahoo Finance

More on GDP

The chart below shows the draw down (the percent below the previous peak) of each sub-component of GDP (C + I + G + NX - NI). What this shows is that while things are bouncing back, outside of government spending all other areas are still below their previous peak (consumption is slightly down).



All four of these sub-components have been below the previous peak for 9 straight quarters. Is this really so different?

Compared to the last three recessions... yes.

During the early 00's recession we only had this happen during one quarter, during the early 90's recession this didn't happen once, and during the early 80'd we saw a similar situation for about 2 quarters. We have to go back to the recession of the mid 1970's when this situation occurred 11 straight quarters.

During that time there was stagflation, which is not a good thing, but at least it prevented nominal debt from accumulating in real terms; not the case during the most recent disinflationary period.

Source: BEA

GDP Bounces... Still Below Trend

The WSJ details:

The U.S. economy expanded at a slightly faster pace in the third quarter as consumer spending inched up, but growth remains too weak to cut unemployment any time soon.

Gross domestic product, the value of all goods and services produced, rose at an annual rate of 2.0% after climbing 1.7% in the second quarter, the Commerce Department said Friday. Economists polled by Dow Jones Newswires were expecting GDP to rise by 2.1% in the July to September period.

The government report was the last significant economic indicator before midterm elections Nov. 2 and a Federal Reserve meeting ending Nov. 3. More than a year after the recession ended, stubbornly high unemployment could hurt Democrats in Congress and is likely to be a key factor in getting the Fed to resume bond purchases.

The GDP breakdown showed that spending by Americans, accounting for about 70% of demand in the U.S. economy, rose at a 2.6% rate. That's up from a 2.2% increase in the April to June period and a 1.9% in the first quarter.

Source: BEA

What is So F'n Funny?

WSJ (hat tip Infectious Greed) details:

Before settling in Sunday for your 10-hour NFL binge, there's a pretty good chance you'll watch the hour-long pregame shows. There's also a pretty good chance you'll notice something slightly odd about their hosts: They never stop laughing.

Source: WSJ

Equities Poised for Breakout?

Marketwatch (hat tip Crossing Wall Street):

In all, with roughly half of the S&P 500 reporting by Wednesday, 81% had exceeded expectations, with just 13% coming up short, according to data compiled by Thomson Reuters.

If that percentage holds, it would be the highest level of companies beating estimates in a quarter ever — or a least since Thomson Reuters began tracking them 16 years ago. It would top even the 79% mark hit in the third quarter of 2009, when the economy came off the absolute rock bottom of late 2008.

Earnings beats are great, but earnings are only important relative to the price of those earnings (i.e. P/E or the inverse... earnings yield). The below looks at earnings yield by quarter (annualized) relative to the index (note that Q3 is an estimate) and things look pretty... pretty... good.



The question has been whether these earnings are sustainable. To get a glimpse, the above also shows sales relative to the price level of the index. While things don't look as rosy, they still look much improved from the richness seen over the past decade.

Source: S&P

End of the Bond Bull Market

Lets take a quick look at the Treasury market over the past 15 years.



Bull run?

Absolutely (i.e. rates have trended down for a long time).

The end of a bull run?

In other words, can you expect capital appreciation to provide returns in excess of the yield? No... so yes, an end of a bull run.

Is Jake an "investor" in Treasuries?

Not at all. I'll detail my current investment strategy another day, but it mainly involves betting against ETF's and ETN's that "attack".

Why?

Jake (a patient investor with no specific benchmark or liabilities) believes he can do better waiting for the next opportunity (even if it means speaking in third person under a pseudonym).

So given all of that... longer duration Treasuries are rich... right?

Not necessarily. As I detailed in Yield Wins in the Long Run, a 2.7% 10 year and 4.03% 30 year yield simply means that investors should expect a nominal return of 2.7% and 4.03% for the duration of that type of investment (currently around 8.5 years for a 10 year Treasury and 17 years for a 30 year Treasury). BUT, as described in the posts On the Value of Treasuries and Investing in a Low Return Environment there is a strong possibility (in my opinion) that these yields may simply reflect a period of stagnant growth and disinflation.

So, a good investment? If there is inflation... heck no. Deflation... heck yes.

Conclusion

Uncertainty and until I have some, I'll be yet again be (mainly) sitting on the sideline.

Source: Federal Reserve

QE Disappoints?

Bloomberg details:

“The market is consumed with QE,” said John Spinello, chief technical strategist in New York at Jefferies Group Inc., one of 18 primary dealers that trade with the Fed. “There are indications that the marketplace is disappointed at the fact that it’s more than likely not going to be a huge initial undertaking and no one knows the amount.”

Is the daily performance the result of this lack of QE?



Or perhaps investors have realized a 10-20% run up in risk assets / real assets in a month (due to QEII) is a bit ridiculuous...

Source: Yahoo

Housing Rebound Stalls

The Case Shiller home price index since August 2000. Rocky rode, but up ~36% (3.1% annualized) since August 2000. To put that in perspective, that compares to a 25% increase (2.3% annualized) in CPI.

Source: S&P

On the Value of High Yield

Back in June in a post titled Zombie Nation EconomPic relayed:

Low interest rates are allowing zombie corporations to stick around (i.e. their business models may be dead, the economic environment may be dead, but low financing costs allow them to remain "alive"). But why would someone invest in a company that just a living dead entity?

Investors are willing to take the risk due to the perceived relative value of high yield issuers.

Bloomberg provide the update:

The lowest-rated junk bonds are the most expensive corporate debt following a Federal Reserve- induced rally in high-risk assets, adding to concern fixed- income securities are overvalued.

The extra yield investors demand to hold global bonds rated CCC or lower instead of government debt is about 10.2 percentage points, or 3.3 percentage points narrower than the average over the past 12 years, according to Bank of America Merrill Lynch index data. Debt with B ratings is the only other part of the market trading tighter than its historical average.

Record-low interest rates in the U.S. and Europe, and speculation the Fed will purchase more bonds to keep the economy from faltering, are encouraging debt investors to take on riskier securities and stoking concern prices are rising to unsustainable levels.

I personally don't see the Fed letting off the gas pedal anytime soon, but beware of the impact on liquidity fueled performance when they do.



Source: Barclays Capital

MSFT vs. AAPL Earnings

Ahead of this Thursdays Microsoft earnings (consensus is at 55 cents / share or ~$4.76 billion), a comparison of Microsoft's quarterly earnings (in billions) to Apple's.



I'll leave the fundamental analysis for those smarter than me, but as can be seen:

1) Microsoft still out-earns Apple
2) That earnings gap is decreasing rapidly as Apple's earnings growth have been nothing short of astronomical
3) Microsoft earnings have been nothing to sneeze at, up more than 13% annualized over the past four years (June '10 vs June '06) despite the economic slowdown
4) You can buy a dollar of Microsoft earnings for a bit more than $12 or about half the price of Apple's (this does not make Apple rich; it just means Apple better keep growing at a fast clip)

Source: Daily Finance

Out of Office....

Taking an early weekend and may (TBD) extend this through next week (the real job is keeping me real busy).

Economic Data
Leading Economic Indicators Continue to Point Up
When 9.6% Growth Isn't Enough
Time to Pat Myself on the Back...
The Importance of the Emerging World
Look Out for Eastern Europe

Assets
Commercial Real Estate Collapse Continues
China Hearts US Treasuries
Gold over the LONG Run

Enjoy the weekend everyone...

Leading Economic Indicators Continue to Point Up

NPR reports:

The Conference Board, a private research group, said Thursday that its index of leading economic indicators increased 0.3 percent last month. It edged up 0.1 percent in August, slower than the initial 0.3 percent estimate.

The index had grown steeply since April 2009 on the strength of the stock market, record-low interest rates and a rebound in manufacturing. But the rate of expansion tapered off this summer as U.S. economic growth slowed.

A continued rise due to monetary policy (money supply, interest rate spread, and stock prices) offset (in part) by the actual economy.



Source: Conference Board

When 9.6% Growth Isn't Enough

Marketwatch details:

China's economic growth slowed to 9.6% in the third quarter from the same period a year earlier, the National Bureau of Statistics reported Thursday. The result compared to 10.3% growth in the second quarter and was just slightly above a 9.5% average forecast from a survey reported by Dow Jones Newswires. Consumer prices for September rose 3.6% year-on-year, as expected by the Dow Jones survey, ticking up from a 3.5% gain in August. Producer prices were up 4.3%, matching August's increase and coming in above a 4.1% forecast.

Looking at the chart above, we see that this time may be different. Over the past ten years of remarkable Chinese growth there has not been an instance when GDP was trending down and inflation was trending up. Hence, although growing at a strong 9.6% clip, China has a real balancing act to deal with.

Time to Pat Myself on the Back...

Bloomberg reports the TARP bailout actually made money:

The U.S. government’s bailout of financial firms through the Troubled Asset Relief Program provided taxpayers with higher returns than yields paid on 30- year Treasury bonds -- enough money to fund the Securities and Exchange Commission for the next two decades.

The government has earned $25.2 billion on its investment of $309 billion in banks and insurance companies, an 8.2 percent return over two years, according to data compiled by Bloomberg. That beat U.S. Treasuries, high-yield savings accounts, money- market funds and certificates of deposit.

Back in an October 2nd, 2008 post titled Bailout Can Work and at No Cost to Taxpayers I concluded:

The bailout will not solve all the economic problems we are currently facing. In fact, not even close. We still have a massive amount of leverage in the system that needs to be unwound. However, if this bailout is done right, it should help unfreeze credit markets (which are currently non-functioning) at little or no cost to taxpayers.

More here and back to normal broadcasting (I promise)...

The Importance of the Emerging World

I think the below clearly illustrates the importance of the emerging world and relative decline in the importance of the developed world. Not only are they growing faster, but they are a much larger (and growing) percent of the world's population.

Source: Eurostat

Look Out for Eastern Europe

Missed this last week... Extremely strong industrial production out of eastern Europe...



A few points...

The Good

• It seems that everyone had been counting out Eastern Europe (including me)
• The European Union "should" allow lower GDP per capita countries (i.e. Eastern Europe) outpace higher GDP per capita countries simply by utilizing new technologies / open trade

The Bad

• The above chart shows the rebound off a large collapse, so it remains to be seen if this is a rebound or the start of a longer trend
• The above was before the Euro spiked up 15-20%, so we'll see if the drag of a stronger currency on exports impacts these countries

Source: Eurostat

Commercial Real Estate Collapse Continues

WSJ details:

U.S. commercial real estate prices fell 3.3% in August from a month earlier, putting prices at 2002 levels after a third straight month of declines, Moody's Investors Service said Tuesday.

Prices for office buildings, shopping centers and apartment complexes are now down 45% from their late-2007 peak, said Moody's. Rental demand has diminished, shrinking properties' cash flow, while a tighter financing market has restricted investors' ability to inflate their returns using leverage.

The decline in nominal terms is to 2002 levels. In real terms... we are at pre-index levels.

Source: MIT / BLS

China Hearts US Treasuries

Maybe they don't heart Treasuries, but with a soaring trade deficit they don't have much of a choice if they want to keep the Yuan cheap. The FT details the broader demand for Treasuries:

Foreign investors scooped a near record amount of US debt in August and sharply increased their holdings of Treasury bonds, according to the latest Treasury International Capital report.

August was marked by fears that the US economy faced a possible double dip recession and yields on Treasury bonds fell sharply as bond investors priced in a move by the Federal Reserve to start another round of quantitative easing. The Fed announced in August that it would start reinvesting principal payments from its agency debt and agency mortgage-backed securities in longer-term Treasury securities.

And China is by far the biggest foreign buyer. Over the last 12 months, China has purchased more than 40% of the marginal increase in foreign Treasury holdings assuming that purchases of the United Kingdom are in fact simply Chinese purchases (see here for more on why the bulk of the UK jump is in fact Chinese purchases).



Source: Treasury

Gold over the LONG Run

A follow up from last week's post "A View from the Gold Perspective", the chart below shows the price of consumer goods / services in gold terms since 1800. As I mentioned in my previous post (and can be seen below):

The Great Depression was a deflationary environment as the dollar was backed by gold. Today, rather than deflation in dollar and gold terms, we have a disconnect between the dollar (slight inflation) and gold (massive deflation) in terms of goods / services.

Source: Minn Fed / Measuring Worth

EconomPics of the Week 10-15-10

This week's posts, presented in no particular order...

J-E-T-S

A View from the "Gold Perspective"

Wall Street: The Market Environment Weak But SHOW Me the Money

Corporate Bond Performance

Threat of Consumer Disinflation Continues... Here Comes Bernanke
Empire Manufacturing Jumps

PPI: Headline - Core Diverge
Is China Really the Issue?
Trade Imbalance Increases
We're #7! We're #7!
Employment, Productivity, and Economic Growth
How's the Box Office Doing?

And because I'm having a rough day... Bottle Up and Explode by Elliot Smith.

Empire Manufacturing Jumps

I can't remember... is good news good because it's good or bad because less bad means less stimulus? Either way, this appears to be good.

Marketwatch reports solid manufacturing data out of New York:

Conditions for New York state manufacturers improved markedly in October, according to a report released Friday morning.

The New York Fed’s Empire State manufacturing survey jumped nearly 12 points to 15.7. Economists polled by MarketWatch expected the gauge to climb to 6.5 from 4.1 in September.

The New York Fed said it’s a clear gain over the relatively low but positive readings seen from July through September. Fewer respondents said conditions had worsened, and the new orders index moved higher. The shipments index rose above zero, climbing 20 points to 19.4.

Source: NY Fed

Threat of Consumer Disinflation Continues... Here Comes Ben

BusinessWeek details the (lack of) inflation:

The cost of living in the U.S. rose less than forecast in September, indicating limited consumer demand is making it difficult for companies to raise prices.

The consumer-price index rose 0.1 percent after 0.3 percent gains in the prior two months, figures from the Labor Department showed today in Washington. Economists projected a 0.2 percent gain, according to the median forecast in a Bloomberg News survey. Excluding volatile food and fuel costs, the so-called core rate was unchanged for a second month.

Outside of energy, which has much lower year over year increases (with the financial crisis induced collapse, which one year later appeared as a spike) rolling off, consumer inflation (with the exception perhaps of the recent run up in food prices) is nowhere to be found.

Which leads us to Bernanke's latest speech per Bloomberg:

Federal Reserve Chairman Ben S. Bernanke said additional monetary stimulus may be warranted because inflation is too low and unemployment is too high.

“There would appear -- all else being equal -- to be a case for further action,” Bernanke said today in the text of remarks given at a Boston Fed conference. He said the central bank could expand asset purchases or change the language in its statement, while saying “nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.”

He didn’t offer new details on how the Fed would undertake those strategies or give assurances the central bank will act at its Nov. 2-3 meeting.

Bernanke and his central bank colleagues are considering ways they can stimulate the economy as the unemployment rate holds near 10 percent and inflation falls short of their goals. After lowering interest rates almost to zero and purchasing $1.7 trillion of securities, policy makers are discussing expanding the Fed’s balance sheet by purchasing Treasuries and strategies for raising inflation expectations, according to the minutes of the Federal Open Market Committee’s Sept. 21 meeting.

Source: BLS

PPI: Headline - Core Diverge

Marketwatch details:

U.S. wholesale prices jumped 0.4% in September, mainly because of higher meat and natural gas costs, the government reported Thursday.

Core producer prices, which exclude the volatile food and energy categories, rose 0.1%. The core number tends to draw the most attention of economists.

After the report on wholesale prices as well as rising weekly jobless claims and a growing trade deficit, both bonds and stocks fell. See story on jobless claims.

The Fed is unlikely to let the report stand in the way of another round of bond purchases, economists said.

“Over the last ten months, core prices have increased 0.1% seven times, hardly sufficient to warrant concerns about inflation,” said Dan Greenhaus, chief economic strategist at Miller Tabak.

My expectation is that the gap between headline and core PPI will continue to grow as the weak dollar will continue to cause commodities (input) prices to rise, whiel the muddle through economy will weigh on the ability to pass-through these price increases.



Source: BLS

Is China Really the Issue?

The WSJ details:

China's monthly trade surplus narrowed to its lowest level in five months in September, official data showed Wednesday, as commodity imports staged an unexpected rebound and export growth continued to slow.

Even after declining to $16.88 billion in September from $20.03 billion in August, China's trade surplus is still substantial, and the latest data aren't likely to substantially alleviate friction between China and its major trading partners. Last month, the U.S. House of Representatives passed a bill that would penalize China for its exchange rate policy, and on Tuesday, U.S. Treasury Secretary Timothy Geithner said the U.S. wants to make sure the yuan appreciates "at a gradual but still significant rate."

China's exports grew 25.1% from a year earlier in September, down from August's 34.4% expansion, data from the General Administration of Customs showed on Wednesday. Imports rose 24.1% from a year earlier, down from August's 35.5% increase. Economists had expected exports to rise by 26.0% and imports to rise by 25.0%.

Now for the contrarian view... A simple Q&A:

• Are Chinese exports significantly higher than their imports? Yes
• Do China's imports (commodities) consist of items exported from the U.S.? No

Both of which cause political issues for China from the U.S. BUT, in looking at overall levels of imports relative to that of the U.S., China imports MUCH more than I would have guessed and has become an increasingly large global player in a VERY short time.

Source: Haver

Trade Imbalance Increases

Bloomberg details:

The trade deficit widened more than forecast in August as growing U.S. demand for foreign autos and capital equipment swamped gains in exports.

The gap grew 8.8 percent to $46.3 billion, exceeding the $44 billion median forecast of economists surveyed by Bloomberg News, Commerce Department figures showed today in Washington. Imports rose 2.1 percent, while exports increased 0.2 percent.

The result is that net exports will continue to be a drag on GDP, but the optimist would note that the most recent datapoint (August) was before the collapse in the US dollar, which should (all else equal) make U.S. goods / services more attractive (i.e. cheaper) to foreign businesses / consumers. The opposite point of view on this is that it will simply cause the imports we need (i.e. low cost consumer goods from China / petroleum) to be more expensive.



Source: Census

We're #7! We're #7!

Zerohedge details:

While the US was #1 10 years ago, due to an abysmal growth rate of only 23%, by far the lowest of all the ranked countries, the US has now dropped from first to seventh, falling behind such countries as Sweden and France.

While the US was in fact still a distant #2 behind Switzerland in 2000 (60% less for the Swiss was $232k / head, while 23% less for the US was $192k), the relative results since 2000 are still rather sobering.



Source: Credit Suisse

Employment, Productivity, and Economic Growth

The economy can grow one of two ways... an increase in the number of people working (i.e. employment) or getting more out of these workers (i.e. productivity). Over the last few years the employment side has been horrendous, but has been (partially) offset by a jump in productivity (i.e. getting more out of the existing workforce).



The issue (as I see it) is the longer trend that can be seen above. Employment has been on a 30 year slowdown in terms of growth, while productivity has just recently slowed following a 20+ year period from a consistent rise from the early 80's through early 00's (lack of investment?).

Source: BLS / BEA

J-E-T-S

My J-E-T-S are dominating, but the most shocking thing about the below chart is that the Arizona Cardinals are 3-2. and the Chargers are 2-3. There must be some sort of investing analogy in this...

Click for Larger Image



Source: ESPN

Wall Street: The Market Environment Weak But SHOW ME THE MONEY

Dealbook reports:

Despite everything, Wall Street salaries are still on track to reach a record high for the second year in a row, a study by The Wall Street Journal has revealed.

Compensation appears to be going up faster than bank revenue, according to the report, with a pay increase of four percent, from $139 billion in 2009 to $144 billion in 2010, across the 35 firms surveyed by The Journal.

Bloomberg follows that expectations from employees are high, despite the less-than-stellar environment (bold mine):

Half of Wall Street finance professionals surveyed expect their bonuses to increase for 2010, eFinancialCareers.com found.

About 71 percent of the 2,145 people who responded to the e-mailed poll in the U.S. said they are anticipating at least an equal bonus from last year, with 50 percent expecting a bigger payout, the job-search website said in a statement. About 11 percent said their bonus will jump by at least half, according to the survey.

The percentage expecting a bigger bonus increased from 36 percent in last year’s poll, when firms faced pressure from regulators and lawmakers to rein in pay after many accepted billions in government rescue funds. Almost 60 percent of respondents cited market conditions as the biggest concern for their compensation.

So why pay?

“The signs of bonus euphoria may be hard to find, but Wall Street employers will have to deal with professionals who believe they are in contention for fatter paychecks and the inevitable retention issues should their expectations be dashed,” Constance Melrose, managing director of eFinancialCareers North America, said in the statement.

Ah... we're back to the good old days (pay because they deserve it when times are good - pay or they leave when times are bad). Lets break out the old Wall Street Bonus Matrix.



Actually, did they ever change?

A View from the "Gold Perspective"

A reader of Crossing Wall Street blog responds to Eddy's gold model post (which I looked into here) and puts everything in terms of gold, rather than dollars. Note that this is just a portion of that response and I recommend readers take the time to read the whole thing and think about it as it puts everything in a very different perspective. That response:

First, the dollar derives its value from its relationship to gold. So instead of the dollar price of an ounce of gold, it should be thought of as the gold price of a single dollar. (For instance, the current of gold price of single US dollar is presently about 1/1345th of an ounce of gold)

Second, on this basis, the relationship is somewhat clearer: when the purchasing power of an ounce of gold rises (i.e., when an ounce of gold commands more dollars) interest rates will be low; and, when the purchasing power of a an ounce of gold falls (i.e., when gold commands fewer dollars the interest rate will be high).

In other words... gold doesn't rise in dollar terms when real interest rates are low (or negative), but rather interest rates are low because their is no demand for the dollar in gold terms.

A View from the "Gold Perspective"

Under the assumption that Gold IS the only real currency (it has the huge benefit that it cannot be depreciated - an ounce of gold in year 1 is an ounce of gold in year 2, year 3, ... year 100), then the recent run up in gold is not appreciation relative to the dollar, but rather the US dollar has seen a severe depreciation relative to real currency (i.e. gold).

But, if the dollar is collapsing, then why aren't prices of goods and services jumping?

Perhaps (bear with me, this perspective is new to me) we happen to be in a severe deflationary environment in real currency (i.e. gold) terms, offset (intentionally?) by a devaluation of our fiat currency to prevent a collapse in the price level of goods in $$ terms. This devaluation may be saving the economy from falling into a deflationary spiral if not pursued (our economy has a lot of hard assets that are used as collateral for dollar loans. A drop in the assets value would be extremely destructive as the value of these loans would fall if the price of the collateral was allowed to fall, which would cause asset prices to fall further... rinse - repeat).

The Great Depression was a deflationary environment as the dollar was backed by gold. Today, rather than deflation in dollar and gold terms, we have a disconnect between the dollar (slight inflation) and gold (massive deflation) in terms of goods / services.

Below is a chart of headline CPI (i.e. purchasing power of the dollar) vs. gold CPI (purchasing power in gold terms). Since the consumer price index began in 1947, goods / services cost ~900% more whereas goods / services cost 70%+ less in gold terms.



And a year by year comparison of CPI in dollar terms and gold terms shows the economy went "gold deflationary" during the telecom / Internet induced recession early last decade.



Still getting my head around this, but any comments are more than appreciated...

Source: Measuring Worth / BLS