I erred yesterday when I referred to ECRI’s Lakshman Achuthan as the last of the Mohicans on an eventual U.S. recession. My apologies to John Hussman…
The chart below presents the 6-quarter growth of real gross domestic product (GDP) and real gross domestic income (GDI) since 1950. A good look at this chart provides some insight into why recession concerns have had a “Chicken Little” quality in recent quarters. Note that by the time the 6-quarter growth in income and production has slowed below 2.3% in the past, the economy was always either approaching or already in recession. It’s also worth observing the weakness in GDI growth approaching the 1990-91 and 2008-2009 recessions.
In the present instance, the 6-quarter average of real GDI and GDP growth has been below 2.3% for nearly a year, with no apparent recession, and in fact has bounced around that threshold since 2010. The monetary interventions of the past few years have helped to kick the recessionary can down the road in short-lived fits and starts. Still, they certainly have not been effective in producing sustained recovery (nor should they be expected to – being largely a manipulation of financial markets with no reliable transmission mechanism to the real economy).
The key question is whether the absence of an obvious recession should be taken as an indication that the deterioration in income and output growth can be ignored – in effect, whether we should assume that this time is different. From our standpoint, the evidence from a wide variety of economic series, including but not limited to broad measures like GDI and GDP, continues to indicate that the U.S. economy most likely entered a recession in the middle of this year.
…and to SoGens’s Albert Edwards:
In 2005 when Alan Greenspan was being hailed as a “maestro” I wrote that his policies would ruin the world and history would judge him to be “an economic war criminal”. I now think Ben Bernanke’s policies will prove even more ruinous than Sir Alan’s (yes unbelievably he still retains his honorary knighthood). Hence we are lowering our equity weighting to 30%, the minimum possible. The last time I did this was 8 May 2008.
- I’m reading some insanely stupid stuff at the moment. Okay, I know some of my writing is pretty insane, but when I read direct quotes and commentary about Bernanke’s policy of driving up asset prices in general and equity prices in particular, I almost want to cry over the ludicrousness of this position. The Fed is pursuing the same road to ruin as it did between 2003-2007. I’m becoming more and more convinced that, Gloom, Boom, & Doom’s Marc Faber is right when he says that “the Fed will destroy the world” – link.
- I agree with Philadelphia Fed President Charles Prosser, who dared to suggest the Emperor had no clothes by saying that QE, including the bank’s purchase of $40bn a month of mortgage bond purchases, was unlikely to do much to boost growth and decrease unemployment.
- Regular readers will know that in the main, my market timing is unerringly inaccurate, normally months if not years too early. But for those who might write off this move down to 30% as the yet more rantings of a lunatic, the last time I reduced my equity weighting to 30% was 8 May 2008 when the S&P was stlll standing at 1400. (Via ZeroHedge)
ONE MORE WARNING:
The Philadelphia Fed’s coincident economic activity diffusion index now sits at a level that has historically been consistent with recession. (RBC Capital)
- The Citigroup economic surprise index for major economies has turned down.
- ISI’s company surveys made a new low last week, led by truckers, which have the highest correlation with GDP.
- ISI’s company survey of China sales is now close to its 2009 low.
- ISI’s monitoring of insiders activity reveals that the US insider sell-to-buy ratio is currently over seven, compared to an average of 3.5 over the past 10 years.
- Weekly Chain Store Sales declined 0.3% last week. The 4-week moving average has declined for the last 9 weeks and is now up 2.5% YoY. Back-to-School sales have seemingly been weak, a bad omen for the rest of the year.
Occupied office space rose by about 5.4 million square feet in the three months through September, growth of 0.16%, according to a new report from real-estate research firm Reis Inc. The office-vacancy rate ticked down to 17.1% from 17.2% the prior quarter, said Reis, which tracks 79 metropolitan areas.
Rents sought by landlords nationwide rose 0.2% to an average $28.23 per square foot, continuing their anemic growth.
“It’s not going to have a profound effect on the economy and it’s not going to have any effect on inflation in the short run,” Volcker said today at a forum sponsored by Bloomberg Link at the New York Athletic Club. “The basic situation is not an inflationary situation.”
(…) one indicator that investors will want to keep an eye on is the monthly ISM commodity survey where participants are asked which commodities are up and down in price over the last month.
In this month’s survey, manufacturers reported rising prices in eleven commodities and declines in five. This represents the second straight month where more commodities were rising in price than falling, and keep in mind this data was collected before the most recent round of easing by the Fed. Over the last three months the average net monthly number of commodities rising in price has been +1.7. While this represents a four month high, it is still well off the high reading of 9.3 that we saw in April and May.
UNINTENDED OR INTENDED CONSEQUENCES?
Banks reap profits on mortgages after QE3 Full drop in funding costs not passed on to home buyers
(…) Although the average rate on a fixed 30-year mortgage reached 3.4 per cent this week – a record low – mortgage rates could be lower if banks passed on the full drop in their funding costs. (…)
The interest banks pay on mortgage bonds has dropped from 2.36 per cent on September 12, the day before the Fed announced its programme, to as low as 1.65 per cent last week. It edged up to 1.85 per cent on Monday.
That means the profit, or spread, banks earn from creating new mortgages for homeowners paying around 3.4 per cent and selling the loans into the secondary market has risen to around 1.6 per cent. That is higher than the 1.44 per cent spread they pocketed before QE3 and significantly greater than the 0.5 per cent they earned on average in the decade between 2000 and 2010. (…)
Banks say they are charging more because of capacity issues in processing new mortgages and tighter credit standards for borrowers.
“The banks are able to originate mortgages with these funds at prices well below the sale price in the secondary market,” said Dick Bove, bank analyst at Rochdale Securities. “Since the supply of new mortgages cannot meet demand until the origination facilities are rebuilt, the prices in the secondary market remain high [and] profits to the banks from mortgage originations soar.” (…)
America’s banks collectively hold over $1.2tn of the outstanding $8.4tn in agency mortgage-backed securities, according to Freddie Mac. Hedge funds, mutual funds and other such investors hold about $1.6tn of the securities.(…)
Spain is ready to request a euro zone bailout for its public finances as early as next weekend but Germany has signalled that it should hold off, European officials said on Monday. (…)
“The Spanish were a bit hesitant but now they are ready to request aid,” a senior European source said. Three other senior euro zone sources confirmed the shift in the Spanish position, all speaking on condition of anonymity because they were not authorized to discuss the matter. (…)
Privately, several European diplomats and a senior German source said Chancellor Angela Merkel preferred to avoid putting more individual bailouts for distressed euro zone countries to her increasingly reluctant parliament.
“It doesn’t make sense to send looming decisions on Greece, Cyprus and possibly also Spain to the Bundestag one by one,” the senior German source said. “Bundling these together makes sense, due to the substance and also politically.” (…)
Mariano Rajoy has told his regional presidents that the country will not be asking for a bail-out in the coming days. The Spanish PM made the comments at a dinner on Monday evening in Genova, according to Europa Press.
Tuesday’s Labour Ministry data showed the jobless rate rose by 1.7 percent to leave 4.7 million people out of work.
Euro area unemployment rate at 11.4%
Eurostat estimates that 25.466 million men and women in the EU27, of whom 18.196 million were in the euro area, were unemployed in August 2012. Compared with July 2012, the number of persons unemployed increased by 49 000 in the EU27 and by 34 000 in the euro area.
That’s a 0.2% MoM increase in the EZ, better than the 0.5% increases in July and the 1.0% jump in June. Peaking?
Industrial producer prices up by 0.9% in euro area
That’s a huge jump. The 6-month annualized increase in PPI is 1.8%. “Core” PPI rose 0.3% in August and 1.0% annualized in the last six months.
A Evans-Pritchard: Another domino falls as Hollande pushes France into depression
(…) His budget is pro-cylical error of the first order, carried out to meet an EU deficit target of 3pc of GDP that has no economic logic and is plucked out of thin air to meet bureaucratic tidiness and enshrined like so much other idiocy into EU treaty law. The certain result will be hundreds of thousands of lost jobs. (…)
France now joins Italy, Spain, Portugal, Greece, Ireland, and parts of Eastern Europe in synchronized tightening, with the Netherlands and Belgium cutting too, all dragging each other down in a 1930s slide into the political swamp. (…)
Data collected by Simon Ward at Henderson Global Investors shows that a key leading indicator of the money supply –`six-month real M1 money’ — is now contracting even faster in France than in Spain. The shock will hit over the winter. “The budget looks increasingly misguided and self-defeating,” he said. (…) (Chart from Markit)
Recent independent surveys in China reveal that the seasonal recovery has been weak in September.
- The forward-looking CEBM Industrial Expectations Index (NSA) declined to -5.0% in September from +4.0% in August. After adjusting for seasonality, the expectations index remains at a low level, suggesting a strong rebound in the PMI reading is unlikely for October. Except for cement producers, respondents in other industrial sectors including steelmakers, property agents, and machinery all expect demand to worsen.
- Container freight exports declined M/M during the traditional busy season, significantly below respondents’ expectations. The CEBM Volume vs. Expectation Index continued to decline to -62% in September from -21% in August. The index last reached this level during the financial crisis in 2008 and also during the rapid decline of exports in 4Q11.
Australia cut interest rates for the first time since June, a surprise move in reaction to falls in commodity prices and mounting evidence that its mining boom is fading.
The Reserve Bank of Australia surprised economists by announcing the quarter-of-a-percentage-point cut of its benchmark lending rate to 3.25%, a level last seen in late 2009 when the financial crisis was still playing out. Most economists had expected no change.
Australia’s mining industry is already feeling the pain of weakening global demand as Europe’s woes continue and China’s economy slows. In recent weeks, leading mining companies have scrapped big investment plans, closed mines and laid off thousands of workers.
“Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected,” RBA Governor Glenn Stevens said in a statement accompanying the bank’s decision. “As this peak approaches, it will be important that the forecast strengthening in some other components of demand starts to occur.”
South Korea’s consumer prices remained subdued in September, while manufacturing activity shrank for a fourth straight month, boosting expectations that the central bank will trim interest rates next week.
The U.K.’s manufacturing sector contracted again in September and at a steeper rate than in August, reflecting the continuing fragility of the country’s economy.
- Gaming US Fiscal Reform, Mohamed A. El-Erian
It sounded like a really clever idea: Use a very public and sizeable threat to get bickering politicians to collaborate and compromise. Well, it has not worked so far, and the already-sizeable stakes just got bigger.
Here’s Another Reason to Question Earnings Reports If you believe a recent academic study, one out of five U.S. chief financial officers chiefs have been scrambling to fiddle with their companies’ earnings.
Not Enron-style, fraudulent fiddles, mind you. More like clever—and legal—exploitations of accounting standards that “manage earnings to misrepresent [the company’s] economic performance,” according to the study’s authors, Ilia Dichev and Shiva Rajgopal of Emory University and John Graham of Duke University. Lightly searing the books rather than cooking them, if you like. (…)
What is more surprising though is CFOs’ belief that these practices leave a significant mark on companies’ reported profits and losses. When asked about the magnitude of the earnings misrepresentation, the study’s respondents said it was around 10% of earnings per share. (…)
Part of the problem is self-inflicted. Many companies provide quarterly guidance to investors, fueling a numbers game that ends up benefiting no one.(…)
The CFOs in the study named and ranked several red flags.
First and foremost, investors should keep an eye on cash flow: Strong earnings when cash flow deteriorates may be a sign of trouble. (…)
Secondly, stark deviations from the earnings recorded by the company’s peers should also set off alarm bells, as should weird jumps or falls in reserves.
The other potential problem areas are more subjective and more difficult to detect. When, for example, the chief financial officers urge stakeholders to be wary of “too smooth or too consistent” profits or “frequent changes in accounting policies,” they are asking them to look at variables that don’t necessarily point at earnings (mis)management. (…)