Friday, September 30, 2011

See You Next Week

After a relaxing week that involved sitting on a beach, I expect posting to resume next week.

But, to leave you all with a song for the week... Foster the People with Helena Beat

Thursday, September 29, 2011

Nominal Mortgage Rates Never Lower

The AP details:

Fixed mortgage rates have fallen to historic new lows for a fourth straight week and are likely to fall further.

The average on a 30-year fixed mortgage fell to 4.01 percent this week, Freddie Mac said Thursday. That's the lowest rate since the mortgage buyer began keeping records in 1971. The last time long-term rates were lower was in 1951, when most long-term home loans lasted just 20 or 25 years.

The average on a 15-year fixed mortgage, a popular refinancing option, ticked down to 3.28 percent. Economists say that's the lowest rate ever for the loan.

Mortgage rates tend to track the yield on the 10-year Treasury note. The 10-year yield has risen this week to around 2 percent. A week ago, it touched 1.74 percent -- the lowest level since the Federal Reserve Bank of St. Louis started keeping daily records in 1962. As recently as July, the 10-year yield exceeded 3 percent.

Tuesday, September 27, 2011

Rebalancing and the Recent Equity Pop

There are lots of reasons why equity markets have sprung back to life (and bonds have "normalized" away from lows) the past few days. The most front and center reasons include a potential European debt deal and the fact that markets were simply oversold (I agree on both fronts), but here is another... institutional rebalancing.

The Example of Corporate Pension Plans

Over the past quarter bonds have ripped, while equities have RIP'd.

This has a profound effect on many an investor, none more so than corporate defined benefit plans. As some may not know, liabilities (i.e. the benefits they must pay out to employees) are discounted using a yield made up of high-quality, long duration corporate bonds. As a result, when long bonds perform well, this is actually a negative (all else equal) event for corporate plans as their liabilities increase at roughly an equal rate. A decent proxy for this is the BarCap Long Government / Credit index (below in red). Over the long-term, corporate sponsors hope to outperform this liability by investing in a mix of assets, including (or should I say predominantly) equities (below in blue).

The chart below shows just how trying this quarter has been for the approximately $2.5 trillion in size defined benefit plans (assets off... a lot, liabilities up... a lot).

This has been an UGLY quarter for pension plans. A back of the envelope calculation puts the loss in funded status terms (i.e. how much assets they have for every dollar of liability) for a plan with a roughly 60% equity / 40% long bond asset allocation at ~15% (i.e. if they were 90% funded, they are now ~75% funded).

But what does this have to do with rebalancing and the recent bounce in equities and sell-off in rates?

A corporate plan with that same 60% equity / 40% fixed income mix would have to reallocate ~6% of their fixed income allocation to equities just to get back to that 60% / 40% mix to start the fourth quarter. 6% x $2.5 trillion (the rough size of the corporate defined benefit market) = $150 billion (note that this is down from the $200 billion just a few days back).

I'd note that all corporate plans do not have the same asset allocation and some may have flexibility to hold back rebalancing, but this is offset by other institutional investor rebalancing outside of corporate plans that is bound to / has happen(ed).

As a result, I personally wouldn't be surprised to see support at these levels for equities and less support for long bonds through the end of the week (though if we were to weight Europe vs. rebalancing in importance, Europe dominates). After that, we better get some better news (or at least less bad news).

10/1 Update: Well that post proved itself wrong!

Friday, September 23, 2011

It's Not a Crash...

When prices are still up 45% (SLV) and 26% (GLD) over the past 12 months, I would call it a correction.

That's not to say it doesn't have risk to the downside (see Gold Prices Can Go Down).

Leading Indicators Outside the Fed's Control Remain Weak

While leading economic indicators expanded 0.3% during August, the expansion remains focused on areas controlled by monetary policy rather than the underlying economy. For the third month in a row (and four of the past five), indicators outside the Fed's control were negative.

Wednesday, September 21, 2011

Fixed Income vs Equities Dislocation... Which is Right?

Over the past ten years (less so prior), the relationship between the change in the 10 year Treasury yield and the change in the S&P 500 has been strong with the 10 year Treasury leading. Note the breakdown in the relationship over the past year (perhaps due to Fed intervention).

Monday, September 19, 2011

Tax (My Neighbor) Please

The Big Picture has an interesting table outlining recent polling results asking how individuals would prefer the budget deficit to be reduced; taxes (higher) or spending (lower). The chart below summarizes the most recent polls for each (some had more than one) and normalizes the responses by taking those for some / all taxes and dividing that by the number selecting no taxes (I did this as not all polls added to 100).

The Results

The results varied by survey showing there is always bias in polling (the NY Times -liberal- is near the top and Rasmussen -conservative- is near the bottom), but an overwhelming number of individuals favor at least some increase in taxation.

Friday, September 16, 2011

EconomPics of the Week (9/16/11)

Economic Data


And your video of the week... Broken Bells (lead singer from The Shins) with The Ghost Inside.

Enjoy the weekend everyone!

Extended Corporate Profits

Interconnected Markets

In a recent conversation with a friend, we discussed how interconnected global financial markets were (the conversation began with my assertion that the European situation could cause a lot more pain the U.S. than consensus likely believes).

Below are a few charts that outline just how interconnected things have become.

The first chart shows the international investment positions of the U.S. (the level of U.S. owned assets abroad and foreign assets owned within the U.S.). I normalized the amounts by showing the level relative to the size of the U.S. economy. As can be seen, the level of ownership both in and out of the U.S. has spiked since the early 1970's, with foreign ownership of assets within the U.S. increasing at a faster pace (U.S. owned assets abroad by almost 15% of GDP or more than $2 trillion).

The next chart outlines what makes up that $2 trillion difference. While U.S. investors own more in terms of foreign equity (direct investment and stocks) than foreign investors own within the U.S., foreign investors are much larger creditors within both the public (government) and private (corporate) sectors.

Rather than make any bold statement of what this truly means (I am trying to digest it myself), I'll instead leave readers with two (conflicting) quotes:

“A creditor is worse than a slave-owner; for the master owns only your person, but a creditor owns your dignity, and can command it.” -Victor Hugo

“If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” -Jean Paul Getty

Source: BEA

Thursday, September 15, 2011

The Evolution of Food Consumption

Illusion of Prosperity presents an interesting chart outlining the stagnation is real per capita restaurant sales over the course of the past decade (hat tip GYSC). I wanted to take a deeper look.

What the below charts outline are real per capita retail sales for food services (i.e. restaurant) and food stores (i.e. food for home). The figures are the result of discounting the nominal retail sales by inflation (the BLS breaks out inflation data for both food at home and food away from home), as well as population growth.

The results...

The overall level of food consumed appears to be relatively sticky (right around $300 / person per month), though overall consumption is down by 5% in real terms since 1992. During that time there has been a sizable shift to eating out, which could mean the decline in real terms has to do with eating "cheaper" fast food.

Breaking out each component, we can clearly see the shift to eating out from 1992 to 2006. Since then, it is pretty amazing to see the drop in both components during the crisis and the subsequent rebound (albeit to levels below the previous peak) since.

While not a surprise, this is rather concerning. I recently outlined that bottom earners have been earning less for the better part of the past 15+ years and it looks like it may be actually impacting the dietary habits of Americans (i.e. eating less [unlikely] or eating cheap / unhealthy food [likely]).

Source: Census, BEA, BLS

Wednesday, September 14, 2011

Retail Sales Flat in August

The WSJ details:

Retail and food services sales were virtually unchanged from the previous month at an adjusted $389.50 billion, the Commerce Department said Wednesday.

Economists surveyed by Dow Jones Newswires had forecast a 0.3% increase. July retail sales were revised down to a 0.3% gain. The Commerce Department originally estimated 0.5%.

Back in February, I outlined that retail sales data was extremely noisy during periods of volatile prices as the data is shown in nominal (rather than real) terms. As the chart below shows, the relationship between retail sales (again, a nominal figure) and commodity prices (as reflected by ETF DBC) is strong.

This in itself fed into the PPI data that was released today, showing energy related prices have retreated from earlier this year, and my expectation is that CPI will come in below consensus tomorrow (we shall see).

So, retail sales are stronger than shown? Not so fast. Looking at the components of retails sales we see weakness in big ticket items (autos, furniture) and restaurants (details of why that may be troubling can be seen in the Pub Power index), offset by electronics and sporting goods (back to school?).

Net net, the consumer (who the U.S. economy relies on for ~70% of growth) is definitely stretched and the economy is definitely slowing.

Source: BLS / Yahoo Finance

Tuesday, September 13, 2011

Real Median Household Incomes at 1996 Levels

The WSJ details:

The income of the average American worker—long the envy of much of the world—has dropped for the third year in a row and is now roughly where it was in 1996, adjusted for inflation.

The U.S. poverty rate, meanwhile, has continued to rise. America's median household income—what the statistical middle of the pack earns in a year—fell 2.3% to $49,445, adjusted for inflation, according to the Census Bureau's annual snapshot of living standards. The figure has fallen each year since 2007 as high unemployment and a tougher job market has made it harder for working Americans to get bigger paychecks.

This downdraft is part of a longer trend that has wiped out the wage gains of the last decade. Inflation-adjusted household income is now down 7.1% from its peak in 1999, and 2010 is the first time since 1997 that American households made less than a median of $50,000.

As the chart below shows, even upper incomes have been affected by the sluggish economy.

A large factor driving the have / have nots has to do with education. In the past (i.e. a long time ago), an individual could use either their hands or their minds and make a "livable" salary. As EconomPic has detailed multiple times, education matters and labor intensive jobs are no longer a viable means for most.

The issue has been amplified because individuals didn't act as if incomes were stagnant. Back to the WSJ.
"The past decade was just a mirage," says Justin Wolfers, an economics professor now visiting at Princeton University. That's because wage gains earlier in the decade were never that robust, yet people were able to take advantage of surging housing values and easy credit to spend more than they earned.
Source: Census

All Eyes on Europe

The lack of posts have been two-fold:
  • I’ve been swamped
  • I have been trying to wrap my head around the European situation (i.e. the slow moving car wreck)
While I don’t pretend to be an expert on Europe (though it was obvious enough to be asking the question back in January 2009 whether it was possible that a country would leave the Eurozone), below are my super high level thoughts.

In my opinion (the fact that this is only my opinion is key), it seems more and more likely that the only way the situation in Europe can be successfully resolved, is if the end result is a European fiscal union (this is just another way of saying that Germany needs to bail out those within the broader European Monetary Union if we are to avoid another systemic crisis). If this is the case, the obvious question becomes... is Germany willing to bail out the broader European Union?

The pros / cons of such a bailout for Germany can be broken down into at least two areas; political and economic.


Short-term: Politically, it seems that the easier choice is for Germany to say no, as German citizens are broadly opposed to a bailout. However this is countered by existing politicians who have their legacy tied to the European Union and will likely do anything it takes to maintain that legacy.

Long-term: If Germans are to take a longer term view, a fiscal union helps maintain peace within the region (which was the whole point of the economic union to begin with). That is unless the economic ramifications of a bailout cause political tensions between countries in a scale that exceeds those benefits.


I have no clue whether the systemic issues that Germany would inevitably feel resulting from sovereign defaults in Europe are greater than the cost of a bail out.

Positives of a bailout for Germany include allowing Germany to maintain an undervalued currency, bailing out Europe = bailing out European trading partners (which maintain demand for German exports), and most important (in my opinion) effectively bailing out the European banking system that owns all the European sovereign debt (including German banks).

Negatives of a bailout include the cost (unless you believe this is just one big liquidity crisis, it will be very expensive) and there is no historical precedent that these countries would get their house in order (i.e. will this just happen again?). More important (in my opinion) is what happens if the broader European solvency issue infects the last remaining healthy European balance sheet (i.e. is a German bail out similar to Bank of America purchasing Countrywide).

Sunday, September 11, 2011


As someone who lived and worked very close to the World Trade Center ten years ago on that horrible day, I have been greatly impacted by those day's events even though I was extremely lucky to have not known any of the victims at the time. I wish everyone the best that was directly impacted that day and I am amazed by the resiliency of so many and of the city itself. I just hope that ten years from now we are able to look back and see a lot more positive things that may still come from dealing with the tragedy, as well as resolved some of the hate that resulted from that day. Even though I have recently left NYC, I will always be a New Yorker and I know the city still has its best to come.

Friday, September 9, 2011

Unprecedented Times... Treasury Edition

Last August (2010), I outlined why I thought those claiming Treasuries were in a Bubble was Blasphemy, but even I didn't expect how much more room there was for Treasuries to run.

Reuters details:
Treasury debt prices rose on Friday, taking benchmark yields to the lowest in at least 60 years as investors looked for a safe haven on revived worries a European debt crisis could have a significant global impact.
Note the "at least" 60 years. The chart below shows the ten year Treasury yield over the last 110 years combining monthly data from Irrational Exuberance and daily data from the Federal Reserve once available.

The 1.91% reached today appears to possibly have been, a new all-time low (assuming there was no intra-month low pre-1962 lower than the end of month print).

Thursday, September 8, 2011

Students Heart Debt... Everyone Else Deleveraging

Bloomberg details:

Consumer borrowing in the U.S. rose by the most in more than three years in July, led by a gain in non-revolving credit that includes student loans.
Credit increased $12 billion after a revised $11.3 billion rise in June, the Federal Reserve said today in Washington. Economists projected a $6 billion gain, according to the median forecast in a Bloomberg News survey. The rise in non-revolving loans was the most since November 2001.
Revolving credit showed the biggest decrease in six months, indicating Americans may be cutting back on non-essential items as limited job and wage growth depresses consumer confidence. Employment and income gains may be required to help spark the household spending and the recovery.

Note that the chart above assumes all non-revolving consumer loans held by the federal government are student loans (and they mainly are).

Wednesday, September 7, 2011

Hedge Fund Performance Update

Hedge fund performance per Barclay Hedge (yellow are broader indices, compared to the S&P 500).

For more on my thoughts on hedge funds more broadly (some are good, some aren't), see my post What is an Investment in Hedge Funds?

Quits / Layoffs

Bloomberg details (the below was pieced together from a broader article):

The quits rate can serve as a measure of workers’ willingness or ability to change jobs. The number of quits (not seasonally adjusted) in July 2011 increased from 12 months earlier for total nonfarm, total private, and government. In the regions, the number of quits rose in the Midwest and West.

The layoffs and discharges level (not seasonally adjusted) declined over the 12 months ending in July for total nonfarm and government. The number of layoffs and discharges was little changed in all four regions over the year.
So, in theory an increase in the number of quits relative to layoffs should reflect an improving economy and an improving economy should be reflected in the equity market. I was surprised by how strong this was reflected in the data (maybe just luck).

If one were to believe in this relationship, then one would notice how equities seem to lead out of recessions, but the ratio would have given investors a heads up that things were not right back as early as late 2006. I'd also note that the ratio has come back since the market bottom, but not nearly as much as the equity markets have.

Source: BLS / Yahoo Finance

Friday, September 2, 2011

EconomPics of the Week... (Lack of) Labor Day Weekend Edition

Asset Classes
The Predictive Power of "Stocks as Bonds"
Generation Vexed... Housing Edition
The Month that Was...

Happy Labor Day Everyone!!!!
August Employment Shows No Job Recovery
Consumer Confidence Smack Down... Jobs Edition
On the Response to Irene...
Real GDP per Capita at March 2005 Levels
Manufacturing at Stall Speed... Production and New Orders Decline
Why a One Size Fits All Policy Doesn't Work
Where's the Investment?

And your quote of the week (don't expect this to be a regular occurence... I just really liked this quote):

Great minds discuss ideas; Average minds discuss events; Small minds discuss people.
-Eleanor Roosevelt

And your video of the week... The Decemberists with 'The Wanting Comes in Waves'

Happy Labor Day Everyone!!!!

Robert Reich (via PBS):

Labor Day is traditionally a time for picnics and parades. But this year is no picnic for American workers, and a protest march would be more appropriate than a parade.

Not only are 25 million unemployed or underemployed, but American companies continue to cut wages and benefits. The median wage is still dropping, adjusted for inflation. High unemployment has given employers extra bargaining leverage to wring out wage concessions.

All told, it’s been the worst decade for American workers in a century. According to Commerce Department data, private-sector wage gains over the last decade have even lagged behind wage gains during the decade of the Great Depression (4 percent over the last ten years, adjusted for inflation, versus 5 percent from 1929 to 1939).

He later notes:
The ratio of corporate profits to wages is now higher than at any time since just before the Great Depression.

Source: Politfact

August Employment Shows No Job Recovery

I'll keep my comments brief... any way you cut it, the employment report was extremely weak. Off to a long weekend...

Household Survey - unlike the establishment survey, this actually showed jobs being added (reversing last month's figure which showed a decline)... just not as fast as labor force growth)

Hours Worked per Person - once again turning negative

Source: BLS

Thursday, September 1, 2011

Real GDP per Capita at March 2005 Levels

First, what are we looking at...

  • Blue line: real GDP per capita (in 2005 dollars)
  • Red line: same 1951 starting point in real GDP terms, growing at the 2.15% annualized rate seen from 1951 through 2001 (hence the two lines intersect in June 2001)
  • Yellow line: the difference between the two


  • Real GDP per capita is currently at March 2005 (6+ years ago) levels
  • We are currently "below trend" (if you believe in trend) by $7000 per person (assuming all 300+ million people share the growth equally)
  • Real GDP per capita growth actually turned negative in Q1 2011 (flipped positive in Q2)
  • Despite the end the recession, the gap between real GDP per capita and trend is growing

Bulls would say "if you believe at all in mean reversion, then the U.S. economy is bound to bounce back". Bears would say "this time truly is different and the recession didn't wipe out excesses (i.e. debt, imbalances between classes, etc...), thus we still have a way to go".

Source: Population / Real GDP

Manufacturing at Stall Speed... Production and New Orders Decline

What respondents are saying:

  • "Earlier chemical price increases are beginning to soften." (Chemical Products)
  • "Business is soft, confidence is down, and we are cutting inventory and expenses." (Machinery)
  • "Exports continue to be strong — domestic weak." (Computer & Electronic Products)
  • "Domestic sales are showing small improvements. International sales are showing larger improvements." (Fabricated Metal Products)
  • "Demand remains constant and strong." (Paper Products)
  • "Current headwinds in the national and international economic environment have increased uncertainty, and are affecting our customers' willingness to commit to high-dollar equipment purchases." (Transportation Equipment)
  • "We continue to post solid numbers, but the situation seems tenuous." (Plastics & Rubber Products)
  • "Automotive business (represents 52 percent of our sales portfolio) continues to be strong. Core business has pulled back slightly." (Apparel, Leather & Allied Products)
  • "Sales continue to be sluggish." (Furniture & Related Products)

Source: ISM