Chart: US Consumer Holds Back Growth

Friday, March 12th, 2010

An interesting chart comes from the Consumer Metrics Institute (via Clusterstock - Chart of the Day) that constructs a US consumption index based on actual transactions data for a range of major discretionary purchases such as cars, houses, durable goods, and vacations.

Although the time series is rather short, the “Daily Growth Index” usually leads changes in US GDP (see chart below). Based on the historical relationship, the Index would seem to indicate slower GDP growth ahead. This concurs with a recent analysis of the US ISM non-manufacturing and ISM manufacturing surveys posted on the Investment Postcards site about ten days ago.

Source: Clusterstock - Chart of the Day, March 11, 2010.

Tags: Advertisement, Ahead, Cars, Consumption, Durable Goods, GDP, GDP Growth, Growth Chart, Growth Index, Houses, Ism Manufacturing, Leads, March 11, Metrics, Postcards, Relationship, Surveys, Time Series, Vacations
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Hugh Hendry: China Infatuation is Misguided

Friday, February 12th, 2010

Hugh Hendry, CIO, Eclectica Asset Management, writes in the Telegraph UK today, cautioning investors that China’s $1.4 trillion credit expansion and $586-billion domestic spend is a white elephant bet on a global recovery in consumption of its exports that remains to be seen.

“In China, investment spending has tripled since 2001 and the consequences are staggering. A country that represents just 7pc of global GDP is now responsible for 30pc of global aluminum consumption, 47pc of global steel consumption and 40pc of global copper consumption. The overriding problem is that the Chinese model leads to a deflationary spiral that is perpetual in nature. Domestic consumption never grows fast enough to absorb the supply, prompting the planners to commit to ever-higher levels of investment. Over-capacity inevitably plagues many sectors of the economy and Chinese profitability is already low.”

Read the whole article here.

Tags: Aluminum, Bet, China, China Investment, Chinese Model, Consequences, Copper Consumption, Credit Expansion, Deflationary Spiral, Domestic Consumption, Eclectica Asset Management, Elephant, Emerging Markets, GDP, Global Gdp, Global Recovery, Global Steel, Hugh Hendry, Infatuation, Investors, Planners, Profitability, Sectors Of The Economy, Steel Consumption, Telegraph Uk, Trillion, White Elephant
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GDP - What it Really Looks Like

Wednesday, February 3rd, 2010

By now we all know that a swing in inventories flattered the growth in U.S. Q4 GDP. The chart below, courtesy of Goldman’s chief US economist Jan Hatzius (via Clusterstock - Chart of the Day), shows the “real” story. It illustrates that the growth in real final demand - basically GDP excluding inventory restocking - is flat and doesn’t live up to past recoveries at all.

“There will be lingering headwinds to growth from the financial meltdown, such as ongoing credit restraint and an upward drift in the personal savings rate. The U.S. economic recovery should be sustained, but it will fall far short of what would normally occur in the wake of a very deep recession,” said BCA Research.

Without stronger demand growth, a V-shaped recovery is not on the cards and the unemployment rate will not start heading south.

Tags: Cards, Drift, Economic Recovery, Economist, Financial Meltdown, GDP, Gold, Goldman, Heading South, Inventories, Personal Savings Rate, Q4 Gdp, Recession, Swing, Unemployment Rate
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Which Way Now? Hard Assets or Government Bonds?

Sunday, January 31st, 2010

The debate in the market between inflationists (majority) and deflationists (minority) continues to complicate investors’ ability to make decisions about where to deploy funds.

During the course of the year, inflationists benefited from the tailwind provided by the declining value of the dollar. The rally in risk assets came thanks to Bernanke’s deflation-busting policy, and, ironically, therefore, as long as the news remained dire on GDP growth and unemployment, we could count on interest rates to remain around zero percent, and the dollar to continue lower as faithless investors ditched it.

For nine months, the dollar declined as the market put risk back “on.” At the very beginning of the rally, in March 2009, the market’s mood was very dark. The genesis of the rally was the short covering of bank stocks and financials, and the full scale launch of the dollar funded carry trade, mostly taking place in institutional and hedge fund trading rooms. Except for the wiliest, it most certainly was not driven by retail investors. The retail investor is usually late to the party once fear of missing opportunities sets in.

The rally in the dollar as of late November has confused the inflationist view as the tailwinds appear to have reversed. This has been, and remains a difficult time to make risk-based investment decisions.

Read the whole article here.

by Pierre Daillie (AdvisorAnalyst.com), GlobeAdvisor.com, January 31, 2010.
http://www.globeadvisor.com/advisoranalyst/aa20100131.html

Tags: Bank stocks, Bernanke, GDP, GDP Growth, Genesis, Globeadvisor, Government Bonds, Hedge Fund, interest rates, Investment Decisions, Late November, Launch, Nine Months, Rally, Retail Investor, Retail Investors, Short Covering, Tailwind, Tailwinds, Zero Percent
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Niall Ferguson: Others will Follow Greek Debt Tragedy

Friday, January 29th, 2010

The world debt overhang is threatening the world recovery, because markets will realize at some point how risky it is and the yields on bonds will increase, Niall Ferguson, professor of history at Harvard University, told CNBC on Thursday.

“I think we have a situation where Greece is leading the pack but other countries will follow,” Ferguson told “Squawk Box Europe.”

Very few countries were able to cope with debt of over 100% of GDP in the past, and “the classic question is whether or not you default or try to inflate it away,” Ferguson said.

The United States is in control of its currency and can print more to reduce its debt, but Greece and other countries in the euro cannot do this, therefore the cost of their debt will rise, he predicted.

Source: CNBC, January 28, 2010.

Tags: Bonds, Classic Question, Cnbc, Countries In The Euro, Currency, Debt Overhang, Europe, GDP, Greece, Greek Tragedy, Harvard University, Niall Ferguson, Reduce Debt, Squawk Box, United States, World Debt
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Economy and Bond Market Highlights

Sunday, January 24th, 2010

The Economy and Bond Market
Treasury yields rallied again this week as concerns over Chinese attempts to slow their economy may threaten the global economic recovery. It was reported that China’s government ordered banks to slow down their lending to prevent overheating the economy. The Chinese government has enacted several measures in recent weeks aimed at slowing their economy which expanded 10.7 percent on a year over year basis in the fourth quarter.

Economic data was mixed this week and other macro issues were more significant in driving the market. The Index of Leading Indicators (LEI) rose more than expected, rising 1.1 percent in December. The chart below plots the LEI index and GDP on a year over year basis since 1980. If economic activity follows historical patterns, GDP is due for a significant recovery as we move through 2010.

Strengths

• The Index of Leading Indicators (LEI) rose more than expected, rising 1.1 percent in December.
• China’s GDP rose a very robust 10.7 percent in the fourth quarter.
• 30 year mortgage rates dropped below 5 percent for the first time in four weeks.

Weaknesses

• The Chinese government has enacted several measures in recent weeks aimed at slowing their economy.
• Housing in general appears to be bouncing along a bottom but unable to make sustained improvement.
• The producer price index rose 0.2 percent in December and on a year over year basis has jumped 4.4 percent driven largely by rising energy prices.

Opportunity

• Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4 to 5 percent. The global economic recovery appears to be taking hold.

Threat

• Coordinated global removal of fiscal and monetary stimulus is the biggest threat to the financial markets.

The Economy and Bond Market

Treasury yields rallied again this week as concerns over Chinese attempts to slow their economy may threaten the global economic recovery. It was reported that China’s government ordered banks to slow down their lending to prevent overheating the economy. The Chinese government has enacted several measures in recent weeks aimed at slowing their economy which expanded 10.7 percent on a year over year basis in the fourth quarter.

Economic data was mixed this week and other macro issues were more significant in driving the market. The Index of Leading Indicators (LEI) rose more than expected, rising 1.1 percent in December. The chart below plots the LEI index and GDP on a year over year basis since 1980. If economic activity follows historical patterns, GDP is due for a significant recovery as we move through 2010.

Strengths

• The Index of Leading Indicators (LEI) rose more than expected, rising 1.1 percent in December.
• China’s GDP rose a very robust 10.7 percent in the fourth quarter.
• 30 year mortgage rates dropped below 5 percent for the first time in four weeks.

Weaknesses

• The Chinese government has enacted several measures in recent weeks aimed at slowing their economy.
• Housing in general appears to be bouncing along a bottom but unable to make sustained improvement.
• The producer price index rose 0.2 percent in December and on a year over year basis has jumped 4.4 percent driven largely by rising energy prices.

Opportunity

• Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4 to 5 percent. The global economic recovery appears to be taking hold.

Threat

• Coordinated global removal of fiscal and monetary stimulus is the biggest threat to the financial markets.

Tags: 30 Year Mortgage Rates, Banks, Bond Market, China, Chinese Attempts, Chinese Government, Economic Activity, Economic Data, Economic Recovery, Economy, Emerging Markets, Energy Prices, Financial Markets, GDP, Index Of Leading Indicators, Macro Issues, Market Economy, Measures, Producer Price Index, Rising Energy, Stimulus, Treasury Yields, Year Mortgage
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China Rate Hikes May Be Premature

Thursday, January 21st, 2010

An interesting report on China reveals that 8.0% growth is the minimum GDP growth China needs to achieve in order to keep things there going, and despite the 10.7% print this week, Michael Pettis of Peking University, discusses the fact that without the currency subsidy or the interest rate subsidy, many companies just won’t be able to make money.

Reading between the lines, it seems continued rate hikes as policy tightening, which has spooked world markets and commodities prices, would be premature. While China is experiencing asset price inflation, the export sector continues to be deflationary as there is still an enormous amount slack to take up.

Tags: Asset Price, China, China Rate Hike, Commodities, Commodities Prices, Currency, Emerging Markets, Export Sector, GDP, GDP Growth, Interest Rate, Michael Pettis, Money Reading, Peking University, Price Inflation, Rate Hikes, Reading Between The Lines, Slack, Subsidy, World Markets
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The Key to Normalcy in World Markets?

Wednesday, January 13th, 2010

The yen must replace the dollar in carry trades to restore normalcy to the global economy and markets, including Canada’s.

For nine months we were trapped in the bizarre world of “bad news is good news.” To the puzzlement of investors, stock markets rallied despite deteriorating economic fundamentals, negative GDP growth, 10%-plus unemployment, and the erosion of the dollar’s value globally.

Here’s why…

Read the whole article here.

Pierre Daillie (AdvisorAnalyst.com) GlobeAdvisor.com, January 13, 2009

Tags: Bad News, Bizarre World, Canada, Dollar Value, Economic Fundamentals, Erosion, GDP, GDP Growth, Global Economy, Globeadvisor, Investors, Nine Months, Normalcy, Puzzlement, Stock Markets, Trades, Unemployment, World Markets, World News, Yen Dollar
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Emerging Markets in 2010

Sunday, January 10th, 2010

This article is a guest contribution by Frank Holmes, CEO, US Global Investors (www.usfunds.com).

January 05, 2010

A recent story in The Economist summarizes the resilient opportunity in global emerging markets, which is part of the reason why we believe so strongly in the long-term potential of this sector.

2009 was expected to be a very rough year for emerging markets, due to the reliance on exports to developed markets. And while some countries and regions did take it on the chin, the overall outcome was not nearly as bad as anticipated. The disaster of 1997-98 did not repeat itself.

And this year, GDP in developing countries as a whole is forecast by the International Monetary Fund to grow about 5 percent (see chart) and developed countries at less than 2 percent.

A few of the key points from The Economist:

• Goldman Sachs estimates that the BRIC countries have been responsible for nearly half of global economic growth since 2007.
• In 2009 the stock markets in the largest emerging-market countries made up for all of their 2008 losses.
• The Institute for International Finance sees a doubling of capital inflows into emerging markets in 2010 to $672 billion.
• Belief in capitalism endured despite the weaker conditions. Nearly 90 percent of Chinese were “satisfied with national conditions” in 2009, compared to less than 40 percent of Americans, according to the Pew Global Attitude Project.

Here’s a link to the full story in The Economist.

Investments in natural resources, emerging markets and infrastructure are subject to distinct risks as described in the funds’ prospectus. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Tags: Belief, BRIC, Bric Countries, Capital Inflows, capitalism, Developed Countries, Developing Countries, Economist, Emerging Market Countries, Emerging Markets, Frank Holmes, GDP, Global Economic Growth, Gold, Goldman Sachs, International Finance, International Monetary Fund, Losses, Natural Resources, Pew Global Attitude, Prospectus, Reliance, Stock Markets, Us Global Investors
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Roundup: Economy and Bond Market (12/24/2009)

Sunday, December 27th, 2009

The Economy and Bond Market

The yield on the 10-year Treasury note increased by 26 basis points during the holiday-shortened week, leaving the yield at 3.80 percent. The spread between the two-year note and the 10-year note reached a record 285 basis points during the week, likely reflecting investor concern about future inflation levels.

Current inflation, as measured by the Personal Consumption Expenditure Core Price Index (PCE Deflator) shown below on a year-over-year basis, remains relatively contained. The November data released this week showed a 1.4 percent year-over-year increase and was flat on a month-to-month basis.

Strength

• Sales of existing U.S. homes in November rose 7.4 percent to an annual rate of 6.54 million homes, greater than the forecasted rate of 6.25 million.
• Price inflation data this week slightly beat expectations. The Personal Consumption Expenditure (PCE) Price Index for November was up 1.5 percent year-over-year versus a 1.6 percent consensus.
• Personal income in November increased 0.4 percent from October, the fifth consecutive month-over-month increase and the biggest monthly increase since May, while personal spending increased 0.5 percent. The increases left the savings rate unchanged at 4.7 percent for November.
• Initial jobless claims last week declined to 452,000, down from 480,000 the previous week. This was the lowest level since September, 2008. The four-week average for claims, which smooths out fluctuations, fell to 465,250, its sixteenth-straight weekly decline.
• Orders for durable goods increased 0.2 percent in November. However, durable goods orders excluding transportation increased by 2.0 percent, almost twice the 1.1 percent forecast.

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Weakness

• Sales of new U.S. homes in November fell 11.3 percent to a seasonally adjusted annual rate of 355,000, below the expected rate of 438,000.
• Real U.S. gross domestic product (GDP) for the third quarter was revised downward to 2.2 percent from the previously reported 2.8 percent.
• The Richmond Federal Reserve Bank’s Manufacturing Sector Activity Index fell to minus four in December from a positive one in November and a positive seven in October. The consensus expected it to rebound to five.

Opportunity

• Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4-5 percent. The global economic recovery appears to be taking hold.

Threat

• The Fed reiterated their monetary policy stance in the prior week and on the surface nothing really changed but they are incrementally moving to reduce the policy accommodation and often these things move quicker than many expect.

Tags: Admin Post, Amp, Avw, Basis Points, Bond Market, Cb, Ck, Consensus, D1, Decline, Deflator, Durable Goods Orders, Economy, Fluctuations, GDP, Gross Dom, Gross Domestic Product, Img Src, Inflation Data, Initial Jobless Claims, Investor Concern, Market Economy, Openx, Personal Consumption Expenditure, Personal Income, Price Index, Price Inflation, Random Number, Roundup, S Gross, Year Treasury Note
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Cheap Goods and Labour are not China’s only leading exports

Monday, December 14th, 2009

In an article published today at GlobeAdvisor.com, Pierre Daillie, Managing Editor, AdvisorAnalyst.com discusses the idea that cheap goods and labour are not all that China is exporting these days.

China is lauded as the most significant contributor to the world’s economy, printing 8.9% GDP growth during the third quarter. Its massive stimulus is helping to lift the world out of its economic funk. Or is it?

China’s chief export may no longer be just cheap goods or cheap labour, but controversy, over whether its policies are inflationary or deflationary for the developed world.

Read the whole story here:

http://www.globeadvisor.com/advisoranalyst/aa200912131.html

Tags: Advertisement, Cheap Labour, Chief Export, China, China Export, China Exports, Contributor, Controversy, Economy, Emerging Markets, Funk, GDP, GDP Growth, Labour, Managing Editor, Stimulus, World Economy
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Mental Midgets and Moral Pygmies

Thursday, December 10th, 2009

This post is a guest contribution by Niels Jensen*, chief executive partner of London-based Absolute Return Partners.

I have arrived at the fourth and final letter in our series about macro themes likely to shape the future. The topic this month is the role of the consumer; the fact that he has over-extended himself financially in recent years and the implications of that. Please allow me to start with a disclaimer: this topic is so vast that I cannot possibly cover every aspect of it. One area which I don’t touch on, for example, is the effect lower consumer spending will have on corporate earnings. Also, I fully accept that not all countries are as leveraged as the UK and the US; the following is predominantly a discussion about the Anglo-Saxon model. Accept the letter in that spirit and you should enjoy it.

Up to the neck in debt

It is really quite simple. The problem is leverage - leverage at every level of the economy. The consumer is up to his neck in debt, but so are our banks and our governments (or, at the very least, they soon will be). In the US (chart 1a), total leverage has risen from a post World War II level of about 150% of GDP to roughly 350% of GDP today with households and the financial sector responsible for most of that growth. Meanwhile, in the UK (chart 1b), total leverage has grown from 200% of GDP to a mind-boggling 500% of GDP in little over 20 years with households and financial companies also accounting for most of that growth.

Chart 1a: Total US debt as % of GDP

Source: Deutsche Bank

So, while it is true that governments on both sides of the Atlantic are currently taking on potentially dangerous amounts of debt, it is not quite true that they are behind the excessive creation of debt over the past few decades. If anything, they should be accused of naivety, ignorance and perhaps even stupidity for allowing the current situation to develop in the first place.

Midgets and pygmies

Now, why didn’t anyone see this coming? Why did our ‘midget’ leaders permit leverage to grow out of control? Well, as a starting point, it is important to understand that, from the consumer’s point of view, increasing leverage has been a logical response to the lower macro-economic volatility experienced over the past 25-30 years. As demonstrated by Dr. Woody Brock at SED (chart 2), household income has become much more stable in recent years with volatility on personal income being cut in half when compared to the 70s and by almost 80% when compared to the 40s. As a consumer, it is perfectly rational to increase financial leverage if you experience rising income stability. What is less rational is to take it to the extreme, as both US and UK consumers have done in the past 6-7 years (note how the slope of the US debt-to-income ratio in chart 2 steepens post year 2000).

Chart 2: Development of US household debt

Source: Strategic Economic Decisions, Inc.

Click here for the full report.

* Niels Jensen has 25 years of investment banking, private banking and asset management experience. He founded Absolute Return Partners LLP and is its chief executive partner.

Source: Niels Jensen, Absolute Return Partners LLP, December 8, 2009.

Tags: 1a, Absolute Return, Anglo Saxon, Consumer Spending, Corporate Earnings, Current Situation, Dangerous Amounts, Deutsche Bank, Executive Partner, Financial Sector, GDP, Governments, Growth Chart, Households, Leverage, Mental Midgets, Niels Jensen, Stupidity, T Touch, World War Ii
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