Posted by: Tom Keene on December 15, 2010
Investment Before Jobs
"The interaction between gross investment spending and spare capacity is not straightforward." Kevin Daly, Goldman Sachs International
Okay. If the interaction is not there, then what? It is a mystery and has been so for a good decade. Daly measures out combined US, Eurozone, Japan and UK consumption at 61% and business fixed investment at 12%. But, and it is a critical but, the volatility of investment suggests 40% of the recession was investment reduction while consumption was a small 2%.
GDP$FIXI INDEX GPL Y ROLL: Here is Nominal Fixed Investment showing the unprecedented return to 1999/2000. What's more amazing is it's plotted semi-log (slope matters) with the 1990s mirroring the 1960s. We've gone flat. An eyeballed extrapolation of the good times suggests we are about $1.1 trillion light on investment. It's a Danny O'Keefe moment.
.BFIGDP INDEX GP Q ROLL: The same as above but compared to nominal GDP. The regression is 1950ish to the advent of the investment collapse. Summary: Fixed Invesment to GDP has evaporated, barely turned and is about 4-deviations off trend. We struggle for job formation avoiding the Econ 101 reality that investment leads to jobs.
Where is the investment? a) abroad? b) pending? c) waiting for the new new? d) the world does not need any more __________ fill in the blank?
Europe, Again
In the December rhetorical quiet, Europe gently "widens" as stress is seen from Belgium to Spain. Here is one spread that suggests markets are ahead of the Brussels.
.SPGER10 INDEX GP W ROLL: The Spanish 10-year widens, again, compared to the German equivalent. The real yield in Madrid is roughly 5.45% minus 2.3% = a 3ish% real rate. Not good.
Finally, here is my fave European chart. It's trade-weighted Swiss (CHF), that has exploded: strong Swiss franc versus a set of trading partners.
BPFXCHFS INDEX GP M ROLL: Here is the BNP Paribas T-W Swiss franc. From the contained, yet strengthening of 1997 to 2007. The currency has exploded 8+ deviations.
Surplus with China
Surprise! Switzerland has a trade surplus with China (Finland, Ireland and Sweden, as well.) Too often, market participants and the media focus on interest rates and simplistic one-off justifications for a trend (think, deposit flows from fearful Europeans to Switzerland). Perhaps, not.
Here is Philipp Hildebrand, Chairman of the Governing Board of the Swiss National Bank in a November 23 speech:
"Aside from Switzerland's classic exports - such as watches, cheese and chocolate - newcomers include Nespresso coffee capsules and Red Bull drinks."
Discuss.
Posted by: Tom Keene on November 21, 2010
Lower Toward Zero & There is No Bound
S = v(o)t + 1/2 gt ** 2 (pronounced, s equals vee oh tee plus one-half gee tee squared). This is the equation for acceleration. November is math month, Bloomberg Surveillance colleague Ken Prewitt growls at me while the Chairman & Co. squirm. Why does the Fed squirm? Because of acceleration. Because of immovable math, and immovable politics as they confront the descent of inflation and chronic unemployment.
Duration is a first-derivative change. Convexity (acceleration) is the first-derivative of the first-derivative or, the second-derivative. Newtonian fatigue? Try this: You're tooling down the highway and you step on the gas. Or, you brake hard and decelerate. Right about now, inflation is decelerating, big-time.
CPI XYOY INDEX GPL semi-log: Here is core CPI. Note how the series curves down, and the 3- and 12-month moving averages curve down. The "curve" is even more profound as the series describes a curve against a logarithmic y-axis. (Slope matters). Only the green 6-month is even remotely constructive. Disinflation is accelerating...lower toward zero and there is no bound.
The Same as Above From 1958: This view does not take us back to the early 1950s bout of deflation. But semi-log suggests Bernanke's convexity and there is no bound.
Shameless Book Plugs
A. Gary Shilling has been consistent in a dis/deflation call. When inflation whispers divisions of guessperts sting Shilling. The problem is, Gary has been more-or-less dead right for decades. Here is his new book and there is the classic.
Here is a Poole/Rasche love note on "Flation." Abby Joseph Cohen reminded me of this recently on Surveillance Midday. Here is the classic Abba Lerner book.
Here is Robert Samuelson with a very trenchant look-back at how early-1960s politics (and bad economics) manufactured inflation and a difficult aftermath.
Not Prices, Wages; and the Japanese Trend is...Persistent
Big deal. The aggregate price level goes nowhere or even declines. It hurts some, benefits others and life goes on. The political-economic fear, no, strike economic...the political fear is always fewer jobs and flat-to-decreasing wages.
So, we are hard-wired for say, 5% wage increase minus 2% inflation equals a 3% real wage gain. Yeah.
Or now, its 1.7% y-o-y AHE wage increase minus 1.2% inflation equals a +0.5% wage gain. Not so Yeah.
Could it be, 0.5% wage gain minus 2% inflation equals a 1.5% real wage decline. Boo.
JNLSCONT INDEX GP Q ROLL: This is a killer chart of Chairman Bernanke's worst nightmare. Well, at least one of them, vintage 2003. This is deflation-adjusted real wages for Japan. Granted, it is not perfect, particularly with the non-homogeneity with Tokyo versus the rest of the nation, but you get the picture. The real Japanese wage has tanked 6.5% or so in a decade-plus. And, the trend is...persistent.
Read This
John Makin is must-read, always. It's a Chicago tilt with great respect for the underlying dynamics of a given problem. Here is Makin on QE2 and concave-negative CPI. Here is John Taylor with a devastating push-back against the Fed and QE2.
Who's correct? I don't know. And, I understand that a modest set of other things are inflating...now. What I do know is I will consider each and every nuanced view and be alert for exogenous shocks (click on this link for Irish heartbreak). I will consider if the ultimate price of not clearing troubled-asset markets is Disinflation, Concave Negative.
Discuss.
Posted by: Tom Keene on November 7, 2010
They're Just Like Us
We'll no, they're not. Think 42' 4.5". That's the difference between the distance from third base to first base moving from little league to a major league diamond (it's a back-of-the-JPMorgan research report calculation and is subject to why-are-we-in-inches-and-not-metric brain-freeze. Lighten up!) At age 11, you can make the throw from third to first. And then, you can't while a very few others can.
Garbahge-in; Garbahge-out
I bring this up because as we digest and adjust and adapt to QE2 (and Roubini's QE3, 4, and/or 5), there is an assumption that we have all the answers and the smartest-on-the-planet are just like us. No, they are not. The amount of garbage (pronounced gar-bahge) I have seen thrown at the Chairman of the Federal Reserve in the past six (?) days is record setting. From legit "strategists" to the TV/radio pundocracy, it has been a remarkable week of simplistic, static and non-second-round effect analytical hot air.
If Allan Meltzer or Martin Feldstein want to take a shot that is one thing, they and their ilk (from Bennett T. MacCallum to J. Bradford DeLong, the next couple on #DWTS) are more than qualified to weigh in. Others (thousands?) are blathering along working off at best Econ 101 knowledge. There are important points of difference and debate but please, the various assembled would possibly enjoy a public debate at a bit higher level. Consider the learning curve and shoulders to get your non-curved throw to go from 84' 10.25" to 127' 3.375".
Macroeconomics: Imperfections, Institutions and Policies
Start with a rich set of entry level Econ. books. Choose your medicine. Dive into "The Begg" (Begg, Fischer, Dornbusch) or "Abel/Bernanke" or "Baulmol/Blinder". Then dash to "Blanchard" or "Mankiw". At some point, there is a dawning awareness of how dumb you are and how smart they are. Then confront "Krugman/Obstfeld" or "Obtsfeld/Rogoff" (yes, the columnist for the New York Times has a day job) and finish with my all time fave, "Carlin/Soskice."
Shut-up and Listen...More.
Our relative dumbness was brought up to me, magisterially, by one Peter George Peterson. On the passing of Milton Friedman, Secretary Peterson explained how the pride of Kearney, Nebraska, via Northwestern University, realised in about ten minutes at the University of Chicago that he was "the dumbest guy in the room."
That's the challenge right now. Would everyone shut-up and let the grown-ups who can make the throw from third speak and write and debate? Listen...more.
DSGE (and, Buiter is Right)
At issue is sequence: economics moves from concept (the foundation of the smart; the mainstay of Mark Twain's certain clueless, including the German Finance Minister) to geometry (euclidian and then on to a three-dimensional x-y-z space, read Struik) to algebras diverse and finally to a dynamic space that is rich with differential equations and quadratic functions (also known as the Land-of-Woodford). It's like The Hobbit but shot on location on Morningside Heights. And, Willem Buiter is right. The grand construction (also known as DSGE) assumes a too-complete, too-perfect market.
Bernanke Shall...
Enough. I defer to golfer Dennis Gartman who clearly and cogently (and with measured "shalls") notes a central bank "targeting 'asset values.'" Gartman, detesting the Clemson Tigers, waxes asymmetric (and asymmetric risk of price change is at the heart of the debate) and notes the political realities of the Chairman's non-political economics. I quote at modest length.
"Were we at the helm and were we to see housing remain moribund and to see the unemployment rate at 9.5% and rising we would have chosen the same path we think he's chosen." ... "Whether we like his policy or find it anathema is irrelevant."
Mr. Gartman is long "assets" until restriction descends.
Richard Clarida is Mike Schmidt
QE2 is original territory. I have grave doubts about the the instabilities, the dynamics out two years or so. I am watching inflation-adjusted rice. The 5s/30s spread is "original." Richard Clarida (Richard Clarida!) is searching for words. I am reading from and listening to those who, like Clarida and Mike Schmidt and Ron Santo, can make the throw from third base.
Here endeth a chart-free EconoChat.
Discuss.
Posted by: Tom Keene on October 31, 2010
Edward F. McKelvey Sees a Trend to 2016
It is one thing to line up some 842 economists and try to gauge their abilities. Who are the 50 Major Economists? (This is a must-own book!) It is an entirely separate effort to glean the nuance, the weekly dynamics in their writings and predicitions. I was honored to have Bill Dudley and Ed McKelvey write a chapter in my book on the nation's deficit. I am even more privileged to read McKelvey's work every week.
McKelvey, authoritative on the deficit, has been thinking about housing and the "framework of massive excess supply that we enunciated about three years ago." He sees a trend to...2016.
HOWNSART INDEX GP Q ROLL: Homeownership, pre-boom at 64%; post-boom at 66.9%. The regression from the 9-unit moving average extrapolates to the vicinity of St. Patrick's Day, 2016.
There is a Debate
I have the clearest memory of driving four-lane-West with my parents (Alan Mulally, you can't build this). Long hours of familial torture as back-seat battles were arbited by possible and rare violence from the front seat. And then the road stopped. We built a highway system. We built things. And, we need to build and repair, now.
Here is John B. Taylor of Stanford with a devastating critique of "stimulus."
"The portion allocated to infrastructure (gross investment) at the federal level was $0.9 billion in 2009 and $1.5 billion in the first two quarters of 2010. Thus, of the total $862 billion, 0.3 percent has been spent on federal infrastructure projects."
Here is too-much-information from Taylor/Weerapana. As Taylor writes, on the Keynesian multiplier, there is a debate.
CNSTPUHI INDEX GP Q ROLL: U.S. Public Highway & Street Construction shown arithmetic. Picks & Shovels shown logarithmic.
White, Sondhi & Fried
Now what? Elections, QE2, G-Whatever in Korea. If the marginal difference in economists and strategists views is the attempt to anticipate behavior, now what? One guess is a generational (societal?) shift in our personal and household accounting.
Long ago and far away (Warren was younger), we were more tempered. We (Philip Carret) kept one eye on assets and liabilities in a less-levered world. We (les boom des bebes) then shifted and presumed the top-line of the income statement would always migrate higher with various permutations to margins below. Some years good; some years better, but always advancing.
The shift is on. Not nostalgically back, but forward to our new, improved (?) behavioral accounting. To adjust your inner clock, serious torture is in order. Try White, Sondhi & Fried to understand better your inner accounting (for $142!). There are two mysteries in life: Daughters and equipment-lease accounting.
Which of the following actions would be least likely to be viewed as
conservative?
A. Company increases its estimated provision for bad debts.
B. Company uses the FIFO inventory method when inventory prices are
declining.
C. Company discloses contingency losses in the footnotes to the financial
statements.
D. Company uses the completed contract method for recognizing revenue for
long-term contracts.
Consider, just possibly, a lesser weight to the income statement.
2011 beckons. Post election, QE2, G-Whatever and wherever Cliff Lee lands (they don't spit in Boston), we will need courage to consider Balance Sheet Nation.
Discuss.
Posted by: Tom Keene on October 24, 2010
Halfway to Ronald Reagan
This is a remarkable chart. We have a debt burden. Now compare it to our disposable income. It is a true guesstimate with statistical baggage. Summary: We've de-burdened (It's like deplane) back to 1999, but our miles are from a more frugal time. We are halfway back to Ronald Reagan.
DSPBTOTL INDEX GP Q: The U.S. Household Debt Service Ratio (payments to disposable personal income) with 16-quarter (presidential) moving average.
O! Say Can You See
Where are we after the last decade? Can we see forward if we look back? The white line is top-line, current, nominal per capita disposable income. The red line is inflation or disinflation-adjusted. It is real per capita disposable income. The view back to 1980 is informative, but so was your Journey record collection. What about now?
PIDSDPC INDEX & PIDSDPCW INDEX normalized at end-1999: Nominal is up 47% in a decade+; real is up 17%. Note the ill-wind since 2008.
Fortress Parker Hannifin Corp.
Non-financial corporations create jobs. They do that when they invest. Mr. Dimon gets the Press with Fortress Dimon, Fortress JPMorgan, Fortress Manhattan? No one is really talking about Fortress John Deere or the 54,794 employees at Fortress Parker Hannifin Corp.
WNFFNWOS INDEX GP Q ROLL (semi-log): This is the growth of nonfarm nonfinancial corporate business net worth. It's back to 2005 (the green circle). Nominal housing is back to the vicinity of 1997, maybe 2002 under some metrics. Parker Hannifin's free cash flow T12 has migrated from about $160 million to $1,090 million in 10 or so years. The 10-year total return: 11.6% per year.
The Gift That Keeps On Giving
Japan has enjoyed a gift. Low interest rates that have allowed the nation to "manage" a mounting debt. The U.S. has enjoyed much the same gift in recent times. Perhaps, the giving is over.
EOUSG012 INDEX GP Q ROLL: This is the calculation and modest forecast of the OECD on the U.S. interest payment as a percent of GDP. It was good, and then ugly (~3.5%) and now it will...elevate. Of course the difference from the 1970s is there is a bit more debt and way lower interest rates. In the spirit of the United Kingdom, a debate is in order. Here is a Nobeled Pissarides of LSE on their and possibly our pending "Spending Review."
Discuss.
