Zero Hedge showcases Hugh Hendry’s December news letter: it is worth reading. He is correct in many of his observations on past events and possibly so with respect to near term global monetary policy. The question he avoids of course, is “where does the madness end?”, because that part of the cycle that ended with the 2007 – 2009 crisis is starting to look like a lesser version of the one that Hendry envisions to be our immediate future. He is clearly not a happy bunny…. The dynamics are nevertheless core!
US employment data looks to be perched atop an inventory cycle, and given that the recent rise in inventories is high historically, recent employment data may well not be as strong an indicator of the health of the economy as some may think.
The following chart shows the real change in inventory levels as noted in the BEA quarterly GDP accounts:
The revision to Q3 data came principally from a rise in inventories over and above those originally reported. In fact the revision to inventories swamped the upward revision to GDP on both a nominal and a real basis.
From the start of the crisis it was clear that consumer demand was going to be hit because of debt, and as we moved throughout the crisis through high unemployment and low wage growth. If we were to just look at PCE, you could say the US was close to or in a recession.
“Should the US increase its minimum wage?”
In a competitive market place it is unlikely that we would see the current large disparity between incomes and wealth, although we would see disparity naturally. There is just no way that the pool of candidates able to run the few hundred of our largest companies is as small as it appears (human beings are de facto mass clones of each other) – in a competitive market place the pool of those capable of running a company would drive the price down.
If you knew where to look, the late 1990s stock market boom and the developing build in debt was easy to spot, but the timing of the unwind was much more difficult. You never knew how long asset prices were going to spiral higher even though you knew the pricing risks – the higher the market for a given economic profile the lower the future return.
Nevertheless, you knew when the trigger came that asset prices would react. This was the same with the build up of debt (asset focussed money supply growth) and structural economic imbalances up to 2007: if you were aware of the magnitude you would have been aware of the risks.
There are a number of reasons why Q3 GDP came in at its highest level for some time. One of them is a fairly large increase in inventories:
If we exclude inventories the trend in GDP growth is one of lower highs and higher lows – in other words boundaries of growth are narrowing, which is interesting when you assess the historical boundaries:
The blog title is taken from a recent VOX column and an excerpt is noted below. Why am I emphasising this article? Well the IMF has raised the same point about the Canadian economy and the Bank of England seems to be taking the same tack too with the UK. But I have also raised concerns myself about the consequences of such misallocation of capital in the past (and I am not just talking debt but also more structural footprints), so the empirical evidence is interesting:
I do find it funny to see how many rely on the words of central banks to determine whether markets are or are not in bubble territory. Central banks these days are in the business of mind manipulation for the furtherance of asset price stability and economic survival and to expect them to malign the object of their obvious intent would be insanity. Central banks are supporting asset prices for balance sheet purposes and to suggest these prices were in bubble territory would be counterintuitive.
McKinsey state that QE does not appear to have affected equity prices. In a sense, you could say that because most of the cash used to buy the bonds has remained on the Fed’s balance sheet, and because the supply of money itself has little impact on future real returns, and if investors and agents assume that QE itself will not directly impact economic activity then in a rationale world it is unlikely that QE would impact equity prices – equity prices being determined by the future real supply of returns.
GDP grew at a 2.8% annual rate this quarter, although it is up a lesser 1.65% Q3 2013/Q3 2012. In the quarter growth was aided by inventories and residential structures – excluding these two components growth had risen by 1.63% on an annualised basis. If QE is impacting the demand for residential property, then we cannot rely on headline growth to find out the underlying strength of the economy.
Just watched a short clip on Zero Hedge with Ric Santelli and Eugene Fama discussing tapering. Fama said that tapering would be a neutral event.
Fama’s point was that tapering is a simple balance sheet exercise whereby the Fed transfers the securities it has bought for the short term debt (deposits) it has issued. I guess in a sense, if it is a neutral exercise, the impact would be determined by the interest rate differential on the two. But it could be a lot more than this.
If the poor consume the most and the rich defer consumption indefinitely, and the rich take an increasingly larger share of income and the poor end up funding consumption from increasing amounts of debt, we will have a rocket without fuel and without fuel this rocket is not going anywhere.
PMIs need to be interpreted within a much wider perspective and for many countries that means the health of the world economy, especially China and Europe and their own internal dynamics. Usually when underlying growth dynamics are positive PMIs can be strong indicators.
European PMIs registered no change in growth on the prior month and remain at modest growth levels that I would associate with a rebound from lower operating levels but not necessarily a recovery. Dynamics dominate and these are pretty heavy. The September Eurozone Retail PMI also fell back below 50 to 48.6.
While more of what there is may be flowing to the top 1%, there is altogether less of everything.
Real personal disposable income per capita remains at levels associated with recession, government personal transfer payments remain elevated well above pre recession levels and personal savings remains at post 2000 lows:
Corporate debt and household portfolio allocations
Nominal personal consumption expenditure in the US continued to weaken in the second quarter despite a very marginal recovery in consumer credit market debt:
Revisions to revisions: what are the sensitivities?
It is hardly a calm before the storm since pretty much all that could trigger a “crisis” is already in situ and happening. But it feels that way.
Total private sector employment increased by 152,000, but the prior month’s figures were revised down by 36,000. The last two months of increases represent the lowest two monthly increase since September of last year.
Wages and salaries excluding construction as a % of wages and salaries:
The June export/import figure already suggested a significant revision to preliminary GDP data anyways. I have already pointed out some basic facts about the trade figures which should soften some of the euphoria. Besides, a 10 point move on the S&P can be attributed to any a number of factors, many of which are random and unrelated to the particular news item, and the money shift required to make such a move is so small that a blink of an eye would sound like thunder in comparison.