I'll post this in the AM -- swamped right now.
HS
HS
Wednesday, February 24, 2010
Consumer Confidence Drops
From Bloomberg:
Let's take a look at the data:
Note that after bottoming, confidence rose to the 55-60 level, and has stayed there for the better part of a year. The main issue here is jobs. While the employment picture is improving (job losses are near 0), we're not seeing the type of job gains associated with an expansion. In addition, there are certain segments of the employment market that have taken it on the chin in this recession (think manufacturing and construction and lower educated employees). As a result, there is reason to be concerned certain segments of the jobs market won't be coming back (which they probably aren't). And that has people concerned for good reason.
The consumer's mood is definitely downbeat, a strong indication that the jobs market isn't improving. The Conference Board's consumer confidence index fell back in a surprising and sizable way, down nearly 10 points to 46.0 in February (January revised to 56.5). Expectations, the index's leading component, fell more than 13 points to 63.8 reflecting a sweeping sentiment downturn in income, employment, and business conditions. The expectations index never really got going last year, barely approaching the watershed 80 level, a level consistent in the past with economic expansion.
The trouble in expectations signaled trouble for the present-situation component which dipped into the teens and toward the record lows of the early 80s. The index fell nearly 6 points to 19.4, reflecting pessimism over current business conditions where only 6.2 percent of the 3,000-home initial sample describe them as good. Only a miniscule 3.6 percent describe jobs as currently plentiful with 47.7 percent, up 1.2 percentage points from January, describing them as hard to get. This latter reading, which gets a lot of attention, will raise talk of trouble for February's jobs report.
Let's take a look at the data:
Note that after bottoming, confidence rose to the 55-60 level, and has stayed there for the better part of a year. The main issue here is jobs. While the employment picture is improving (job losses are near 0), we're not seeing the type of job gains associated with an expansion. In addition, there are certain segments of the employment market that have taken it on the chin in this recession (think manufacturing and construction and lower educated employees). As a result, there is reason to be concerned certain segments of the jobs market won't be coming back (which they probably aren't). And that has people concerned for good reason.
Case Shiller Mixed
Yesterday, Standard and Poor's released the Case Shiller home price index. In contains good and bad news.
On the good side, while the pace of year over year declines is still negative the rate of year over year decline continues to improve.
However, on a month to month basis we're seeing price appreciation stall, as evidenced by
the fact a majority of cities have seen a decline over the last two months.
So -- what does this mean? Starting in November there was confusion in the market about the new home buyer tax credit program. As it was set to expire, we saw a big drop in existing home sales on a seasonally adjusted basis. Weaker demand = lower prices. We'll have to see how all of this plays out over the next few months.
On the good side, while the pace of year over year declines is still negative the rate of year over year decline continues to improve.
However, on a month to month basis we're seeing price appreciation stall, as evidenced by
the fact a majority of cities have seen a decline over the last two months.
So -- what does this mean? Starting in November there was confusion in the market about the new home buyer tax credit program. As it was set to expire, we saw a big drop in existing home sales on a seasonally adjusted basis. Weaker demand = lower prices. We'll have to see how all of this plays out over the next few months.
Wednesday Commodities Round-Up
The DBBs appear to be in a classic up(A), down (B) and up (C) pattern which prices just broke at point D. Also note the lack of volume on the stretch C -- the volume is much lower than we would like to have on a rally.
A.) Prices rose to the 50% Fibonacci area, but couldn't keep the momentum going any more. Also note
B.) The EMA picture. In a true rally, prices maintain their momentum above the EMAs. Yesterday -- after they had risen through the EMAs -- prices fell back, printing a strong negative bar on increased volume. Also note prices moved through all three EMAs - a bad technical development.
Tuesday, February 23, 2010
Today's Market
A.) The drop in consumer confidence hit stocks hard after the open.
B.) Prices hit upside resistance from the EMAs
C.) After nearing the 38.2% Fibonacci level, prices retreated.
No, Virginia, US Manufacturing Isn't Dead
First -- a big hat tip to co-blogger SilverOz for starting this line of thought.
There is a common theme across the internet: US manufacturing is dead and it's never coming back. Well, there's a big problem with that analysis: it's not true. In fact, as the chart above indicates, it's actually false. Note that since 1960, the index of industrial production has risen from a little below 30 to its current level of about 100. And note the increase is continual -- meaning the number didn't just hover around 30 for most of that time only to spike up in one big move. The index has continually risen over that entire period.
Instead, what people are commenting on is the drop in manufacturing employment. Consider these two charts.
Durable Goods Employment remained fairly steady at 10 million to 11.5 million employees between the mid-1960s to the early 2000s. Then total employment dropped like a stone, losing three million people over the last 10 years. These are levels last seen in 1950.
Non-durable goods manufacturing is even worse. From the mid-1960s to the early 200s, total employment in this area hovered around a 6.8 million. However, starting in 2000, the number fell off a cliff, losing almost 2 million people. This is the lowest the number has been in over 60 years.
However, over the last 15 years we've seen an increase in manufacturing productivity. Consider the following:
Manufacturing Output per hour has increased continually since records have been kept, as has
Multi-factor productivity.
What does all this information tell us?
US Manufacturing is alive and well. The real issue is manufacturing employment, which is dropping like a stone. And the reason for the drop is an increase in productivity.
In addition, SilverOz adds the following:
Many people have a knee-jerk reaction to the decline in manufacturing jobs and immediately blame outsourcing/imports for this decline. The following graph demonstrates that the linkage between increased imports and a decline in manufacturing jobs is virtually nonexistent.
What we clearly see is that imports increased quite dramatically over the last 30 years, while good producing jobs remained fairly level (dipping during recession and then recovering) until this last recession, which took a huge toll on manufacturing employment even though imports actually declined. This again plays much better to the argument that productivity increases are the greatest contributor to our decline in manufacturing employment than the outsourcing/imports argument.
There is a common theme across the internet: US manufacturing is dead and it's never coming back. Well, there's a big problem with that analysis: it's not true. In fact, as the chart above indicates, it's actually false. Note that since 1960, the index of industrial production has risen from a little below 30 to its current level of about 100. And note the increase is continual -- meaning the number didn't just hover around 30 for most of that time only to spike up in one big move. The index has continually risen over that entire period.
Instead, what people are commenting on is the drop in manufacturing employment. Consider these two charts.
Durable Goods Employment remained fairly steady at 10 million to 11.5 million employees between the mid-1960s to the early 2000s. Then total employment dropped like a stone, losing three million people over the last 10 years. These are levels last seen in 1950.
Non-durable goods manufacturing is even worse. From the mid-1960s to the early 200s, total employment in this area hovered around a 6.8 million. However, starting in 2000, the number fell off a cliff, losing almost 2 million people. This is the lowest the number has been in over 60 years.
However, over the last 15 years we've seen an increase in manufacturing productivity. Consider the following:
Manufacturing Output per hour has increased continually since records have been kept, as has
Multi-factor productivity.
What does all this information tell us?
US Manufacturing is alive and well. The real issue is manufacturing employment, which is dropping like a stone. And the reason for the drop is an increase in productivity.
In addition, SilverOz adds the following:
Many people have a knee-jerk reaction to the decline in manufacturing jobs and immediately blame outsourcing/imports for this decline. The following graph demonstrates that the linkage between increased imports and a decline in manufacturing jobs is virtually nonexistent.
What we clearly see is that imports increased quite dramatically over the last 30 years, while good producing jobs remained fairly level (dipping during recession and then recovering) until this last recession, which took a huge toll on manufacturing employment even though imports actually declined. This again plays much better to the argument that productivity increases are the greatest contributor to our decline in manufacturing employment than the outsourcing/imports argument.
Case-Schiller CPI turns positive
- by New Deal democrat
The Case-Schiller house price index was reported this morning at -3.1% YoY for the month of January. This is the mildest decline in several years. This report, together with last Friday's inflation report, which showed a decline in core inflation due in part to "owner's equivalent rent," is cause for looking at an obscure but in my opinion crucial metric.
One of the most interesting alternate measures of the economy was first presented a couple of years ago by Tim Iacono of The Mess that Greenspan Made. The CS-CPI is the consumer price index, with the Case Schiller house price index substituted for owner's equivalent rent. When he introduced this measure, Tim noted that owner's equivalent rent had "utterly failed" to catch the inflationary implications of the housing bubble, and specifically that the Fed would have felt far more compelled to act than they actually did, believing inflation at the time to be quiescent.
By replacing owner's equivalent rent with the Case Schiller housing index, the CS - CPI captures the relative strengths of inflation vs. the deflationary impact of the bursting of the housing bubble on the economy. Thus, while Tim treated it as just a curiosity, I believe the CS - CPI uniquely captures an important dynamic. When it went negative in 2008, that meant that the contractionary impact of the housing bust was overwhelming the rest of the economy. On the other hand, I always suspected that the "real" bottom in the economy might be when the CS-CPI bottomed, meaning that the deflationary pressure on all things bought or sold by average Americans, including houses, was beginning to ease.
I hadn't looked at this statistic since last September. At that time I calculated that in January 2009 the CS - CPI measured (-10.1%), but that by September, it had risen (-5.3%). Here's a the most recent graph I can find, updated part-way through 2009:
Last Friday's negative core CPI due in part to a negative Owner's Equivalent Rent made me curious about what the CS - CPI was showing now. And I was in for a surprise.
The CS - CPI has now turned positive. By December it was +1.2% and in January it was +1.8%.
Of course, that doesn't mean it couldn't turn negative again, especially once the $8000 home buyers' credit expires. But for now at least, the CS - CPI is showing, for the first time in nearly two years, that the forces of contraction are not overwhelming the rest of the economy.
The Case-Schiller house price index was reported this morning at -3.1% YoY for the month of January. This is the mildest decline in several years. This report, together with last Friday's inflation report, which showed a decline in core inflation due in part to "owner's equivalent rent," is cause for looking at an obscure but in my opinion crucial metric.
One of the most interesting alternate measures of the economy was first presented a couple of years ago by Tim Iacono of The Mess that Greenspan Made. The CS-CPI is the consumer price index, with the Case Schiller house price index substituted for owner's equivalent rent. When he introduced this measure, Tim noted that owner's equivalent rent had "utterly failed" to catch the inflationary implications of the housing bubble, and specifically that the Fed would have felt far more compelled to act than they actually did, believing inflation at the time to be quiescent.
By replacing owner's equivalent rent with the Case Schiller housing index, the CS - CPI captures the relative strengths of inflation vs. the deflationary impact of the bursting of the housing bubble on the economy. Thus, while Tim treated it as just a curiosity, I believe the CS - CPI uniquely captures an important dynamic. When it went negative in 2008, that meant that the contractionary impact of the housing bust was overwhelming the rest of the economy. On the other hand, I always suspected that the "real" bottom in the economy might be when the CS-CPI bottomed, meaning that the deflationary pressure on all things bought or sold by average Americans, including houses, was beginning to ease.
I hadn't looked at this statistic since last September. At that time I calculated that in January 2009 the CS - CPI measured (-10.1%), but that by September, it had risen (-5.3%). Here's a the most recent graph I can find, updated part-way through 2009:
Last Friday's negative core CPI due in part to a negative Owner's Equivalent Rent made me curious about what the CS - CPI was showing now. And I was in for a surprise.
The CS - CPI has now turned positive. By December it was +1.2% and in January it was +1.8%.
Of course, that doesn't mean it couldn't turn negative again, especially once the $8000 home buyers' credit expires. But for now at least, the CS - CPI is showing, for the first time in nearly two years, that the forces of contraction are not overwhelming the rest of the economy.
Treasury Tuesdays
A.) At the start of the year, the IEFs rallied to the 50% Fibonacci level, but couldn't get above same. Since then, they have pulled back.
B.) Note the EMA picture is bearish. First, prices are below the 200 day EMA indicating we're in a bear market. Also notice the shorter EMAs are below the longer EMAs and that prices are below all the EMAs.
A.) The long end of the market is in the middle of a downward sloping channel.
B.) The EMA picture is negative. Prices are below all the EMAs, all the EMAs are negative and prices are below all the EMAs.
C.) Note the heavy resistance prices hit at the 50 day EMA; this was an incredibly strong area of resistance.
Monday, February 22, 2010
Today's Market
A.) Prices moved through resistance and
B.) Are right at the 61.8% Fibonacci number
A.) The 10 day EMA crossed over the 20 day EMA. In addition
B.) The EMA picture is improving -- all the EMAs are now moving higher.
An In-Depth Look At the Federal Budget
Last week, the president announced the creation of a panel to look at the federal budget. As such, it seems appropriate to look at the federal budget in detail to get a sense of what's there. All of the information contained in the graphs that follow is available from the CBO. Please click on all images to see a larger image. Also, all data starts in 1970 and goes through fiscal 2009.
Let's start with a chart of government revenues and expenditures, starting in 1970:
The US has run a surplus 4 years since 1970, or about 10% of the time. Over those 39 years we've had Republican and Democratic control of both the White House and Congress. This leads to a very simple conclusion: no party can make a legitimate claim to being fiscally responsible.
Above is a chart of the total deficit for each year going back to 1970. First, note (again) only four years show a surplus. This means that for 35 years (and in fact for a longer period) the US has issued debt on a continuing basis to pay for its revenue shortfall. This means the US -- like most US corporations -- has to manage its Treasury operations. All this means is the US Treasury has to decide what maturity of Treasury bond to issue, how much of a particular Treasury bond to issue and when to issue it. Again, this is standard procedure from a corporate finance perspective.
Currently, total US debt is approximately $12.4 trillion and total US GDP is approximately $14.4 trillion. That makes the debt/GDP ratio 86%. While that is not good, it is not fatal.
Above is a chart of total federal outlays as a percent of GDP. Notice the number has been remarkably constant since 1970, fluctuating right around 20% for most of that time.
Let's take a look at the components of federal revenue.
Personal income taxes (the top blue line) comprise the largest percentage of federal tax receipts. In addition, these have continually comprised about 45%-50% of total federal receipts. The biggest change since 1970 has occurred in social insurance taxes (the yellow line), which have increased from a little over 20% to about 35%-40% over the last 10 years. Corporate taxes (the light purple line) have also been consistently responsible for about 10% of total tax receipts. Finally, note that estate and gift taxes (the light blue line at the bottom of the graph) overall contribution is more or less negligible on a percentage basis.
The above chart looks at federal receipts from a percent of GDP basis. Fist, note the percentages have been fairly consistent since 1970. Personal income taxes total between 8%-10% of GDP, corporate taxes total about 2% of GDP and estate and gift taxes account for less than 1% of GDP. The only big change has been an increase in social insurance taxes, which have increased to about 6% of GDP.
The above chart breaks federal spending down into mandatory, discretionary and interest payments. Mandatory spending has increased from a little under 40% of the federal budget in 1970 to right around 60% over the last few years. Discretionary spending has decreased from right around 60% in 1970 to a little under 40% over the last few years. The progression of mandatory spending is at the center of much of the budgetary concern in Washington and the public.
Finally, note that interest payments are in fact pretty much under control. The primary reason for this is the near 20 year downward trajectory in interest rates:
Above is a chart of the 10-year CMT (constantly maturing treasury). Interest rates have been dropping for about 20 years. While there is considerable debate regarding the possibility of this continuing, we'll have to wait and see how that plays out.
Above is a chart of mandatory and discretionary spending as a percent of GDP. Interestingly enough, despite the increase in the dollar amount of discretionary spending, it has remained more or less constant on a percent of GDP basis. The recent spike may be the result of the extraordinary budgetary circumstances the country is currently in. Additionally, discretionary spending actually dropped until the beginning of the decade when it started to rise again. Finally, interest payments are under control for now.
Finally, the chart above shows the percentages of SS, Medicaid and Medicare of mandatory spending. The big issue here is clear: note the increase of medicare as a percentage of mandatory spending. It's been increasing for some time.
So, what does all of this tell us about the US budget?
1.) The total federal debt/GDP ratio and interest rate payments (both on a percent to total expenditures and percent of GDP) are manageable at current levels. All of this has been aided by a two decade long decrease in interest rates. It's doubtful that will continue given the current pace of expenditures. Most importantly, given the current rate of spending and debt growth, changes will have to be made once we are out of the recession for sure. And that's where the real political problem lies.
2.) While mandatory spending has remained constant as a percent of GDP, it's increase to about 60% of the current federal budget is perhaps the biggest problem the US faces going forward. And as the percentage increase in medicare payments indicates, medical payments are a primary reason for the problems the country faces at the federal fiscal level.
3.) The argument that the US is taxed to death is wrong. On a percent of GDP basis the US is taxed at moderate rates.
4.) I'm surprised how unimportant estate and gift taxes are to the overall scheme of things. Even before the generous estate tax credit of the last few years (essentially exempting estates worth less than $3.5 million), estate and gift taxes are remarkably unimportant from a total revenues perspective. It's obvious they serve another purpose such as the theoretical prevention of dynastic wealth transfer.
Let's start with a chart of government revenues and expenditures, starting in 1970:
The US has run a surplus 4 years since 1970, or about 10% of the time. Over those 39 years we've had Republican and Democratic control of both the White House and Congress. This leads to a very simple conclusion: no party can make a legitimate claim to being fiscally responsible.
Above is a chart of the total deficit for each year going back to 1970. First, note (again) only four years show a surplus. This means that for 35 years (and in fact for a longer period) the US has issued debt on a continuing basis to pay for its revenue shortfall. This means the US -- like most US corporations -- has to manage its Treasury operations. All this means is the US Treasury has to decide what maturity of Treasury bond to issue, how much of a particular Treasury bond to issue and when to issue it. Again, this is standard procedure from a corporate finance perspective.
Currently, total US debt is approximately $12.4 trillion and total US GDP is approximately $14.4 trillion. That makes the debt/GDP ratio 86%. While that is not good, it is not fatal.
Above is a chart of total federal outlays as a percent of GDP. Notice the number has been remarkably constant since 1970, fluctuating right around 20% for most of that time.
Let's take a look at the components of federal revenue.
Personal income taxes (the top blue line) comprise the largest percentage of federal tax receipts. In addition, these have continually comprised about 45%-50% of total federal receipts. The biggest change since 1970 has occurred in social insurance taxes (the yellow line), which have increased from a little over 20% to about 35%-40% over the last 10 years. Corporate taxes (the light purple line) have also been consistently responsible for about 10% of total tax receipts. Finally, note that estate and gift taxes (the light blue line at the bottom of the graph) overall contribution is more or less negligible on a percentage basis.
The above chart looks at federal receipts from a percent of GDP basis. Fist, note the percentages have been fairly consistent since 1970. Personal income taxes total between 8%-10% of GDP, corporate taxes total about 2% of GDP and estate and gift taxes account for less than 1% of GDP. The only big change has been an increase in social insurance taxes, which have increased to about 6% of GDP.
The above chart breaks federal spending down into mandatory, discretionary and interest payments. Mandatory spending has increased from a little under 40% of the federal budget in 1970 to right around 60% over the last few years. Discretionary spending has decreased from right around 60% in 1970 to a little under 40% over the last few years. The progression of mandatory spending is at the center of much of the budgetary concern in Washington and the public.Finally, note that interest payments are in fact pretty much under control. The primary reason for this is the near 20 year downward trajectory in interest rates:
Above is a chart of the 10-year CMT (constantly maturing treasury). Interest rates have been dropping for about 20 years. While there is considerable debate regarding the possibility of this continuing, we'll have to wait and see how that plays out.
Above is a chart of mandatory and discretionary spending as a percent of GDP. Interestingly enough, despite the increase in the dollar amount of discretionary spending, it has remained more or less constant on a percent of GDP basis. The recent spike may be the result of the extraordinary budgetary circumstances the country is currently in. Additionally, discretionary spending actually dropped until the beginning of the decade when it started to rise again. Finally, interest payments are under control for now.
Finally, the chart above shows the percentages of SS, Medicaid and Medicare of mandatory spending. The big issue here is clear: note the increase of medicare as a percentage of mandatory spending. It's been increasing for some time.
So, what does all of this tell us about the US budget?
1.) The total federal debt/GDP ratio and interest rate payments (both on a percent to total expenditures and percent of GDP) are manageable at current levels. All of this has been aided by a two decade long decrease in interest rates. It's doubtful that will continue given the current pace of expenditures. Most importantly, given the current rate of spending and debt growth, changes will have to be made once we are out of the recession for sure. And that's where the real political problem lies.
2.) While mandatory spending has remained constant as a percent of GDP, it's increase to about 60% of the current federal budget is perhaps the biggest problem the US faces going forward. And as the percentage increase in medicare payments indicates, medical payments are a primary reason for the problems the country faces at the federal fiscal level.
3.) The argument that the US is taxed to death is wrong. On a percent of GDP basis the US is taxed at moderate rates.
4.) I'm surprised how unimportant estate and gift taxes are to the overall scheme of things. Even before the generous estate tax credit of the last few years (essentially exempting estates worth less than $3.5 million), estate and gift taxes are remarkably unimportant from a total revenues perspective. It's obvious they serve another purpose such as the theoretical prevention of dynastic wealth transfer.
