NEW$ & VIEW$ (22 OCTOBER 2013)


Sales rose 1.4% last week. The 4-week moving average declined for the 10th consecutive week however and is +1.6% YoY. Last year, sales remained weak until early December and recovered somewhat during the final 3 weeks, possibly due to a sharp decline in gas prices. Will we witness the same this year?




Demand is flat while U.S. supply is rising (chart from Doug Short):



U.S. Existing Home Sales and Prices Move Lower

Sales of existing homes declined 1.9% (+10.7% y/y) last month to 5.290 million (AR). The drop followed no-change during August revised from a 1.7% rise, according to the National Association of Realtors. Consensus expectations had been for 5.30 million sales. Sales of existing single-family homes alone fell 1.5% to 4.680 million (+10.9% y/y).

The median price of an existing home fell to $199,200. The decline was the third straight down month and left prices at the lowest level since April. The peak was $230,300 in July 2006.

Sales performance was mixed during September. The greatest m/m decline occurred in the Midwest with a 5.3% shortfall (+12.6% y/y). Next was the Northeast which posted a 2.8% sales drop (+15.0% y/y. In the South, sales fell 1.4% m/m (+9.9% y/y) but sales in the West improved 1.6% (7.8% y/y).

The supply of homes on the market was roughly unchanged at 5.0 months of sales, down from a high of 11.9 months in July of 2010. The actual number of homes on the market increased 1.8% y/y last month. That started to reverse a 21.1% decline during all of last year and a 23.2% drop in 2011.

Listed inventory, now up YoY (+1.8%), typically declines a little in September. Listings are creeping up.


Sales of homes priced above $500,000 (10% of the market) jumped 37.2% YoY, while sales of homes under $250,000 (60% of the market) are up only 6.3% YoY. First-time buyers (normally 40-45%) accounted for 28% of September sales, down from 32%
last year. More examples of the two-speed economy: that of the top 1% is in high gear while the remaining 99% are in neutral at best.

CalculatedRisk notes:

The NAR reported total sales were up 10.7% from September 2012, but conventional sales are probably up close to 25% from September 2012, and distressed sales down.  The NAR reported (from a survey):

Distressed homes – foreclosures and short sales – accounted for 14 percent of September sales, up from 12 percent in August, which was the lowest share since monthly tracking began in October 2008; they were 24 percent in September 2012.

Although this survey isn’t perfect, if total sales were up 10.7% from September 2012, and distressed sales declined to 14% of total sales (14% of 5.29 million) from 24% (24% of 4.78 million in September 2012), this suggests conventional sales were up sharply year-over-year – a good sign.

China Housing Prices Rise Faster

(…) Prices were up from a year earlier for the ninth consecutive month, data released Tuesday by the National Bureau of Statistics showed, with the pace accelerating for the eighth consecutive month. As in August, prices were up in 69 of the 70 cities in September, despite nearly four years of controls on the property market. Month-on-month price increases moderated slightly. In August, prices were up from a month earlier in 66 cities. (…)

The average increase from a year earlier accelerated to 8.19%, from 7.48% in August and 6.70% in July, calculations by The Wall Street Journal showed. The average rise from a month earlier in September was 0.67%, moderating from 0.79% in August. (…)

In particular, there have been steady increases in home prices in tier-one cities—Beijing, Shanghai, Shenzhen and Guangzhou—which offer the best jobs and schools and so attract home buyers from the rest of the country. And the pace of increase accelerated in all four cities last month: Average home prices in Beijing were up 16% from a year earlier, beating August’s 14.9%. In Guangzhou, the pace increased to 20% from 18.8%; in Shanghai, to 17% from 15.4%; and in Shenzhen, to 19.7% from 18.1%. (…)

Soaring London House Prices Fuel Concerns

Home sellers in London raised their asking prices by 10% during early October, adding to concerns that the U.K. capital may be on the verge of a fresh property bubble.

The average asking price for a London home advertised via online real estate agency Rightmove’s website surged by £50,484 ($81,617) to a record-high £544,232 in October. By contrast, house prices rose between 1% and 4% in most of England and Wales, falling in two regions.

Asia’s housing bubbles put UK in shade

(…) Property prices in Hong Kong rose by 19.1 per cent year-on-year in Q2, and those in Taiwan swelled by 15.4 per cent, according to Knight Frank’s global pricing index. House prices in Shanghai and Beijing look pretty heady, too, growing at 14.8 per cent. Look at a longer time frame and there is evidence of a boom:

Source: Capital Economics

The fast pace of price rises, in comparison to incomes, indicates that Hong Kong and Taiwan are going through a bubble, according to Capital Economics. The Chinese story is more complicated (more of this later).

Hong Kong’s house prices have more than doubled in under five years. (…) Gareth Leather of Capital Economics thinks prices are over-valued by at least 40 per cent, and even bigger falls are possible. House prices in Taiwan’s capital, Taipei, are over-valued to a similar degree. But there need not be a crash like the US 2007 housing bust. Leather writes:

Housing construction in Hong Kong and Taiwan accounts for a relatively small share of GDP compared to the US on the eve of the global financial crisis. Meanwhile, banks in Hong Kong and Taiwan have required much bigger down-payments […] If property prices fall sharply, the damage to local banks should be limited.

In China’s larger Tier I cities, house prices are high: the move from countryside to city means housing demand outstrips supply. But the reverse is true elsewhere: in over 200 small cities – which make up more than half of total property sales – there is a downward pressure on pricing. This explains why China’s average house prices rose about 5 per cent year-on-year in Q2:

Source: GK Dragonomics

Supply now exceeds demand in a number of small Chinese cities. Easy money and government subsidies after 2009 pushed up the supply of housing in small prefectural-level cities. But the demand has not kept up, as rural dwellers often cannot afford to move, according to Rosealea Yao of GK Dragonomics. “We are more worried more about falling prices in small cities than high prices in big cities,” she writes. (…)

Bundesbank warns of property bubble Report fuels concern on impact of loose ECB monetary policy

The Bundesbank has warned that apartment prices in Germany’s biggest cities could be overvalued by as much as 20 per cent, stepping up its concern about a real estate boom in the powerhouse of the European economy.

The warning will feed into German concern that the European Central Bank’s monetary policy is far too loose for the country. The bank’s main refinancing rate is 0.5 per cent, a record low.

It also adds to signs that international investors are fuelling rising property prices around the world. The trend reflects the lack of opportunities investors regard as a safe haven and low returns for traditional asset classes such as bonds and stocks.

Rapid price rises have particularly affected the seven largest cities in Germany, the central bank said on Monday, although the value of houses had risen at a more moderate pace. Flats in Berlin, Munich, Hamburg, Cologne, Frankfurt, Stuttgart and Düsseldorf had, on average, seen prices rise more than 25 per cent since 2010.

“After the real estate bubbles in the US and several European house markets burst, the German property market, which had been quiet for many years, became more attractive to international investors,” the Bundesbank said in its monthly report for October. (…)

Asian cities such as Hong Kong and Singapore have imposed new taxes on foreign buyers in an attempt to limit the effect on their housing markets. Prices of the most expensive homes are now above their pre-crash highs in Hong Kong, according to data from estate agent Knight Frank. (…)

The property market trend is unusual in Germany, a nation of home renters with historically slumbering property markets, and is in sharp contrast to the rest of the eurozone, where house prices are near seven-year lows following property slumps in Spain, Ireland and the Netherlands. (…)

“In the short term, the [upward] price pressure will not ease,” the Bundesbank said. But it was “not very likely that the price structure on real estate markets currently represents a serious macroeconomic risk. The observed price movements are an expression of delayed increases in supply.”

However, “the empirical evidence shows there is no substantial overvaluation of the German residential property market as a whole”, the central bank said. (…)


Eni chief warns on impact of shale gas
Energy intensive industries drawn to US from Europe over prices

Paolo Scaroni, chief executive of the Italian oil and gas group, warned that European economies face a long-term structural challenge of competing with industrial operators in the US, which now enjoy far cheaper gas and electricity prices than those prevailing across the EU.

“Why would anyone invest in anything energy intensive [in Europe] rather than go to Texas, where the cost of electricity is half and gas a third, on top of all the other favourable factors,” he said on Monday. “We have seen clients moving investment from Europe to the US.”

Speaking at the Financial Times Global Shale Energy Summit, Mr Scaroni said the start-up of exports of liquefied shale gas from the US to European markets, combined with other global supplies coming on stream, could see European gas prices moderating from a predicted $10-$11 per million British Thermal Unit (mBTU) to $8 in the coming years.

However, he said the differential would still leave Europe disadvantaged. “Is $8 per unit enough to compete with the US? I think that it isn’t enough.” (…)


NEW$ & VIEW$ (15 OCTOBER 2013)

Senate Nears Deal on Debt, Shutdown

Top Senate leaders said they were within striking distance of an agreement to reopen the government and defuse a looming debt crisis just days before the U.S. could run out of money to pay its bills.

The latest proposal would reopen the government at current spending levels until Jan. 15 and extend the federal borrowing limit until early February, according to aides familiar with the talks. Lawmakers also would begin longer-term negotiations on the budget, with the task of reaching an agreement by Dec. 13. (…)

Still, a deal would mark a major breakthrough in the impasse that has gripped Washington for weeks, shutting federal agencies and threatening the government with a debt default. (Cartoon by Mike Flugennock)

This is the new definition of a “major breakthrough”?

Storm cloud  Here’s a real breakthrough!:


Chain store sales have been weak for a while, +2.0-2.3% YoY since mid-summer, but the 4-week moving average slipped to +1.5% last week, breaking through 1.5% for the first time since February 2010.

Commercial-Property Loans Rise

(…) As of June 30, U.S. banks had $991.2 billion in total commercial real-estate loans, up 3.3% from a year earlier, according to research firm SNL Financial.

J.P. Morgan Chase JPM +0.38% & Co. on Friday reported that outstanding commercial-real-estate loans rose to $61.5 billion in the third quarter, a 12% increase from a year earlier. “The commercial-real-estate business continues to grow strongly,” J.P. Morgan Chief Financial Officer Marianne Lake said during a conference call with analysts, noting loans have increased “every month for the last 13 months.” (…)

Last year’s 2.4% rise in total commercial real-estate loans to $972.7 billion was the first growth in four years, according to SNL. Analysts said the lending rebound, still in its early stages, is being fueled largely by one area: apartment projects. The boom could start to peter out as the single-family housing market recovers, but for now banks are eager to keep lending. (…)


Early report from Factset:

With 6% of the companies in the S&P 500 reporting actual results, the percentage of companies reporting earnings above estimates is below the four-year average, and the percentage of companies reporting revenues above estimates is also below the four-year average.

Overall, 31 companies have reported earnings to date for the third quarter. Of these 31 companies, 61% have reported actual EPS above the mean EPS estimate and 39% have reported actual EPS below the mean EPS estimate. Over the past four quarters on average, 70% of companies have reported actual EPS above the mean EPS estimate. Over the past four years on average, 73% of companies have reported actual EPS above the mean EPS estimate.

In terms of revenues, 52% of companies have reported actual sales above estimated sales and 48% have reported actual sales below estimated sales. The percentage of companies beating sales estimates is above the percentage recorded over the last four quarters (48%), but below the average over the previous four years (58%).

In aggregate, companies are reporting sales that are 0.4% below expectations. Over the previous four quarters on average, actual sales have exceeded estimates by 0.4%. Over the previous four years on
average, actual sales have exceeded estimates by 0.7%.

Heading into the start of the peak weeks of the Q3 2013 earnings season, 110 companies in the index have issued EPS guidance for the third quarter. Of these 110 companies, 91 have issued negative EPS guidance and 19 have issued positive EPS guidance.

If 91 is the final number of companies issuing negative EPS guidance for the quarter, it will mark the highest number of companies issuing negative EPS guidance since FactSet began tracking guidance data in 2006. The current record is 88, which was recorded in Q2 2013.

If 19 is the final number of companies issuing positive EPS guidance, it will mark the lowest number of companies issuing positive EPS guidance
for a quarter. The current record is 22, which was also recorded in Q2 2013.

The percentage of companies issuing negative EPS guidance is 83% (91 out of 110). If this is the final percentage for the quarter, it will mark the highest percentage of companies issuing negative EPS guidance for a quarter since FactSet began tracking the data in 2006.

Call me  If you missed it, I recommend that you read yesterday’s New$ & View$’ EARNINGS WATCH segment.


Home Sales, Prices Slowing in Bust-and-Boom Markets

(…) Phoenix: Investor purchases fell to 20% of sales in September, down from 29% a year earlier, and purchases by nine major institutional investors dropped to 110 sales, down 72% from 398 sales one year ago. Just four of the nine investors bought homes in September, compared with all nine one year ago. Second home purchases dropped by 23%, but purchases by owner-occupants increased by 21%, according to the Arizona Multiple Listing Service.

There were 2.5% fewer homes sold in September compared with a year earlier, even as the number of homes for sale increased by 9.4% over that span, according to the Arizona MLS. (…)  Distressed sales were down 59% from a year earlier.

Sacramento: The number of homes that sold in September fell by 6.8% from a year earlier, and the number that went under contract fell by 3.6%. Listings jumped by 40.3%, according to TrendGraphix Inc. Median prices rose by 1.2% from August and by 36.1% from one year earlier.

Las Vegas: The share of homes that sold in cash last month stood at 47.2%, down from 54.8% in August and one year ago, and down from a high of 59.5% in February, according to the Greater Las Vegas Association of Realtors. Many cash buyers tend to be investors.

Home sales were down 1.2% from a year earlier, even though there were more homes for buyers to choose from. The number of single-family homes listed for sale, at 14,659, stood 12.6% below last year’s levels, but the inventory of “non-contigent” listings—homes that don’t have any offers and aren’t under contract—was 60.5% above year-earlier levels. The median sales price in September fell for the first time in 19 months.

(…) “the market is softening tremendously,” said Bryan Lebo, a local real-estate agent. “Buyers are becoming a lot pickier. They’re more patient.”

In some neighborhoods, he says, homes are now selling for 10% less than they were just a few months earlier, and builders are beginning to offer generous incentives, such as home upgrades to buyers and commissions to real-estate agents, in order to stay competitive.


Official GDP data released later this month looks set to announce the end of the recession in Spain, in line with PMI data covering the manufacturing and service sectors, which in Q3 posted its highest quarterly average since the current recession began in Q2 2011.

One of the most positive aspects of the recent PMI data has been strong growth of manufacturing exports. New export orders increased at the fastest rate in more than two-and-a-half years in August, and maintained this pace in September. Exports have now risen for five months in a row. (…)


Spanish firms have been able to take advantage of recent signs of economic improvement in some of their main export markets. PMI data suggest that the eurozone recovery gathered pace at the end of Q3, while the UK posted particularly strong growth. The Export Climate Index for Spain suggests that conditions for exporters have strengthened in three successive months, largely on the back of these improvements.

Monthly export data from the Bank of Spain also highlight the UK as a key source of current growth in external demand, with rises also seen in the eurozone. However, after increasing strongly towards the end of 2012, exports to the US have shown signs of weakness in recent months.

Further evidence of the recent solid performance of exports in Spain can be seen by splitting the PMI data into exporting and non-exporting companies. This shows that manufacturers that export have recorded growth in overall new orders in recent months, while non-exporters have continued to see falling levels of new business as domestic demand in Spain lags behind. (…)


This over-reliance on external markets is a cause for concern given that economic recoveries in the eurozone and UK are far from assured, and political stalemate in the US has the potential to throw the world economy back into turmoil. It is therefore too early to judge whether the Spanish economy is starting a real recovery or just experiencing another false dawn.

But Spain is not out of the woods just yet (chart from The Economist):


Nor is Europe for that matter (chart from CLSA):


Goldman Sachs: The Growing Income Divide in Four Charts How the rich and poor view the economy has diverged to some of the widest levels in years, data from Goldman Sachs’s latest consumer survey shows.

Pointing up  Chris Wood at CLSA (tks Gary):

Meanwhile, a dramatic social development in America is the ever more glaring extremes in terms of the distribution of income. The latest information on this came from a recently published study by economic professor Emmanuel Saez at University of California, Berkeley, based on income tax data published by the IRS (see “Striking it Richer: The Evolution of Top Incomes in the United States”, 3 September 2013 by Emmanuel Saez, UC Berkeley).

The results are startling and have not surprisingly generated media attention. But the findings are worth repeating for those who missed them. The incomes of the top 1% Americans rose by 19.6% in 2012 while the incomes of the bottom 99% of Americans rose by only 1%. As a result, the top 1% accounted for 19.3% of total household income, excluding capital gains, in 2012, the largest share since 1928. While if capital gains are included, the top 1%’s income share has risen from 18.1% in 2009 to 22.5% in 2012 (see Figure 6).


The above findings provide more evidence that quanto easing is helping the wealthy via asset price appreciation but doing little to improve the overall economy. This is potential politically explosive.


NEW$ & VIEW$ (27 SEPTEMBER 2013)

U.S. GDP growth confirmed at 2.5% in Q2

The US economy grew at an annualised pace of 2.5% in the second quarter, in line with the previous estimate but defying analysts’ expectations of a pick up to 2.6%.

There was better news on final sales, which strip out inventories, which grew faster than previously thought, increasing at an annualised rate of 2.1% instead of 1.9%.

Pointing up  Worryingly, it looks like even this relatively modest growth is only being achieved by firms cutting prices. Prices charged for goods and services fell at an annualised rate of 0.1%. That was the first time these prices have fallen since the dark days of early-2009 and points to a general lack of demand growth.

The data therefore look likely to further dissuade policy makers that the economy is ready to withstand any tapering of the Fed asset purchases programme, especially as more up to date indicators such as retail sales, manufacturing output, the flash PMI and durable goods orders all suggest the economy has lost momentum again as we move towards the fourth quarter.


Pending Sales of Existing Homes in U.S. Decreased 1.6% in August

The index of pending home sales fell 1.6 percent, after a revised 1.4 percent decrease in July that was bigger than initially reported, figures from the National Association of Realtors showed today in Washington. Economists forecast a 1 percent decline in the gauge from the month before, according to a median estimate in a Bloomberg survey.

(Haver Analytics)

Sad smile This is the fourth straight month of declining pending sales and prior months were revised down. Inventory remains low but it has increased in six of the past seven months at rates exceeding historical averages.

Confidence Gap” Widens to Record Levels

For more than a year now, we have been highlighting the growing “confidence gap” among Americans based on income.  While it is common for wealthier people to be more confident than poorer people, the discrepancy in confidence levels continues to be at record levels.  More recently, there has been growing commentary regarding this disparity’s impact on the economy in the form of weak sales from low income retailers like Wal-Mart (WMT), while retailers to the higher end and luxury markets have been holding up much better.

Goldman’s Analyst Index Plunges Most In A Year

Goldman Sachs Analyst Index (GSAI) tracks manufacturing and service sectors based on bottom-up analyst input on a firm by firm basis to generate a real-time indicator of US economic strength akin to the ISM data. After spiking to multi-year highs in August, it has collapsed by the most in a year in September as the New Orders sub-index retraced its outsized gains from August. The sales/shipments index fell, while the employment index stayed flat and below the 50 mark. The underlying composition of the GSAI weakened in September with a few sectors noting lower sales and/or a downgrade in expectations, and on balance sentiment with respect to business conditions seemed a touch weaker since August and employment remained below 50 for the sixth month.

The September GSAI joins other business surveys (stronger Philly Fed, mixed Empire State, and weaker Richmond Fed) in sending a mixed signal about recent business activities.

Fingers crossed  Maersk calls bottom of trade cycle

Container shipping line says demand to rise 4-6% over two years

Maersk Line said on Thursday it believed the downturn in trade had bottomed out and predicted demand for global containers would grow by 4-6 per cent in 2014 and 2015, up from recent forecasts of 2-3 per cent for this year.

Maersk is one of the best corporate indicators of global trade as it carries 15 per cent of all seaborne containers. (…)

Each of the last three quarters has seen a small increase in annual growth of container demand as trade between emerging markets has increased. But Mr Stausholm conceded: “Because of more regionalisation and nearshoring, it means there are much lower growth rates for Asia-Europe trade.”

Container shipping is not the only part of the industry to see an increase in trade looming. The Baltic Dry index (…) has climbed over 200 per cent this year as trade has gingerly picked up. (…)

Europe Tops U.S. as Global Growth Locomotive

(…) A 1 percent increase in aggregate demand in Europe’s developed nations gives 33 of 39 international economies a bigger lift in their gross value added, a proxy for gross domestic product, than if the higher demand had occurred in the U.S., Barclays strategists including London-based Jim McCormick said in a Sept. 25 report.

The impact of the European demand rise on the entire world is more than 0.25 percent, three times the U.S. effect. The explanation is that that Europe has a bigger economy with greater trade links and its banks are more exposed globally, McCormick, Barclays’ global head of asset allocation research, told reporters in London yesterday.

Europe’s positive spillovers were calculated using historical relationships between economies. The ripples extend as far as emerging Asian economies and to some in Latin America.

“While it is often believed that the U.S. cycle is a bigger source of global growth shocks, statistics suggest otherwise,” the Barclays report said.

The observation was contained in a study suggesting “the evolution of the European recovery could well be the most important factor for financial markets in the months ahead.”

Among other reasons for that analysis: The euro region’s eight-quarter recession may have hurt asset markets abroad too. Barclays noted that assets typically linked to growth have underperformed the Standard & Poor’s 500 Index by almost 20 percent since Europe’s slump began in the middle of 2011. Since the rebound started this year, growth assets have started to gain against the S&P.

Japan Prices Jump, But it Could be the Peak Market watchers who conclude from Friday’s consumer price data that Japan is speeding out of deflation could be setting themselves up for disappointment in the months ahead.

Economists say the 0.8% jump in core prices, which exclude fresh food, is likely the peak in a three-month rally that politicians have hailed as the beginning of the end to 15 years of falling prices. It was the biggest monthly jump since 2008. (…)

When energy and food are excluded from core CPI – giving “core core CPI” – prices fell for the 56th straight month in August. Economists say that getting prices of everyday expenses like rent and karaoke to rise requires stimulating demand from consumers through higher wages – an unlikely prospect with Japanese companies trying to cut costs instead.

Crying face  Obama and Republicans poles apart on US budget Stand-off over debt ceiling appears intractable


NEW$ & VIEW$ (26 SEPTEMBER 2013)

Durable-Goods Orders Tick Up

Orders for long-lasting manufactured goods inched ahead in August, suggesting businesses and consumers are holding back on big purchases amid slow economic growth and an uncertain outlook.

Total orders for durable goods rose 0.1% to a seasonally adjusted $224.92 billion in August, the Commerce Department said Wednesday.  Durable-goods orders dropped 8.1% in July, lower than the 7.4% decline initially reported. Economists had forecast a 0.6% drop from the prior month. (…)

A key gauge of business investment—nondefense capital-goods orders, excluding aircraft—increased 1.5% from the prior month, retracing some of the prior month’s 3.3% drop. So far this calendar year, business investment is up 4% compared with the same period in 2012. (…)

Markit has a different, less buoyant view:

Orders for US-made durable goods rose 13.7% on a year ago in August, the largest annual increase since December 2011. However, orders were up just 0.1% compared with July; a month in which orders slumped 8.1%. The quarterly rate of growth has consequently weakened, registering an increase of just 3.0% in the three months to August, down from 5.6% in the three months to July and 6.6% in the second quarter.

Excluding volatile transportation goods, the picture is somewhat bleaker. Orders fell for a second month running in August, down 0.1% after a 0.5% fall in July. Over the latest three months, orders for durables other than transport goods were up just 1.2%. By comparison, these orders were rising at a quarterly rate of 3.2% at the start of the year.

Growth is likely to have weakened again in September. Markit’s manufacturing PMI survey showed growth of new orders slowing sharply to a five-month low in September. The lack of demand also hit job creation, which slumped to one of the lowest seen since the height of the financial crisis four years ago.

Both the official data and the survey evidence therefore point to a renewed slowing of growth in the manufacturing economy after a brief pick-up earlier in the summer. Fed policymakers will be further worried that the pace of recovery for the US economy has taken a step back since earlier in the year, when robust growth made a strong case for policy to start being tapered.



Deja Vu for Wal-Mart

Shares of Wal-Mart (WMT) as well as the broader market just took a new leg lower this afternoon after a Bloomberg story hit the wires suggesting that based on emails the company obtained, WMT is cutting orders to suppliers due to higher inventories.  

If this story sounds familiar, that is because it is.  Back on February 15th, the S&P 500 saw a 50 bps decline intraday after another Bloomberg story hit the wires quoting an executive saying that same store sales were off to their worst start in seven years.  Here’s a link to that story.  As shown in the chart below, following the prior Bloomberg story, the S&P 500 regained nearly all of its declines by the end of the day.

So how did Wal-Mart (WMT) perform following the February article?  As shown below, you couldn’t have picked a better buying point.


The S&P 500 digested the negative WMT news a bit differently back in February.  While the market bounced back intraday in the immediate aftermath, we did see a decline over the next week before ultimately surging higher in late February and early March.

Ergo: we should all rush out and buy WMT or the whole market for that matter.

But maybe WMT was right after all. Sales have been very slow since last Christmas.


It could well be that the slow consumer demand has made merchants worried that their inventories might be too high coming into the holiday season. If I have to bet on street economists or on Wal-Mart for a sense of what’s really happening, I’ll take WMT anytime.

Keep that chart in sight:



Careful out there!


U.S. Running Out of Cash More Quickly

The government is closer to running out of money to pay its bills than previously thought, the Treasury Department warned, clarifying the fiscal deadlines confronting Congress.

ClosedTreasury Secretary Jacob Lew said the government would be left with just $30 billion cash on hand “no later” than Oct. 17, and the Congressional Budget Office predicted these funds would be used up between Oct. 22 and Oct. 31 if legislation isn’t enacted to raise the ceiling on government borrowing.

That little cash could make it difficult, if not impossible, for the government to pay the roughly $55 billion in Social Security, Medicare and military payments due Nov. 1. (…)

The Bipartisan Policy Center, a group founded by lawmakers from both parties to forge consensus, has estimated that the government would be unable to pay 32% of its bills in the first month if the debt ceiling isn’t raised in time.

Congress has raised or suspended the debt ceiling five times during President Barack Obama’s tenure. Among those instances, the White House and Republicans brokered an agreement after a bitter debate in August 2011 that put spending restraints in place through 2021. And early this year, Congress agreed to suspend the debt ceiling for several months in exchange for an agreement that both the House and Senate would pass budget resolutions.

The suspended debt ceiling expired in May, and the Treasury has been using emergency steps since then to buy itself more time. Treasury had estimated that by mid-October it would have $50 billion remaining to pay government bills, but it lowered that estimate on Wednesday.

Investors Brush Aside Washington Brinkmanship Washington is in for another ugly battle on the budget and debt ceiling, but markets haven’t exhibited much anxiety at the moment.

(…) Pimco’s Mr. Crescenzi said fiscal impasse was one of the reasons why the Federal Reserve decided not to cut back bond buying last week. The Fed’s decision has sooth fears over rising interest rates, sending benchmark 10-year Treasury yield lower and encouraging buying in stocks.

The 10-year Treasury note yielded 2.643% recently, near a six-week low. The yield earlier this month briefly rose above 3%. (…)

From Credit Suisse:

Credit Suisse strategists have also estimated exactly when markets will run out of patience with the situation. “Markets…are not likely to get much beyond October 10 without pricing for some potential mishap,” they wrote. As of now, the path to a political solution remains unclear, and if politicians follow the same script they did in 2011, they will only act at the very last minute – prolonging the collective panic attack as long as possible. President Barack Obama is taking a hands-off approach to the problem this time around, saying that it is up to Congress to come up with a plan. That’s a very different tack than the public courtship that took place in 2011, when even a well-publicized 18 holes of golf with House Speaker John Boehner, R-Ohio, followed by a meeting at the White House, ultimately failed to lead to a deal.

There’s a needle of good news in that haystack of Washington dysfunction: Credit Suisse’s strategists noted that House Republicans appear willing to have separate debates over the budget and the debt ceiling this time around. That’s important, because it decreases the possibility that the GOP will insist on further budget cuts before agreeing to increase the debt limit. As the strategists noted, the government has already made significant cuts in discretionary spending over the last three years, leaving only entitlement programs such as Medicaid, Medicare and Social Security with any room to yield spending cuts of any significant size. The problem is that changes – especially cuts – to these popular programs are a political minefield for politicians of either party. Still, the strategists think that some small changes may be possible, such as changing the formula by which benefit levels increase each year.

For now, the country — nay, the world — can only hope that a potential compromise is in the offing. But that hope assumes that a conversation is even happening in the first place. With only a month to go before the U.S. runs out of spare cash once again, the Wall Street Journal reported Tuesday that no known talks are going on in Congress around the debt ceiling issue. Get the antacid ready, investors. This fall, it may well come in handy.

Government Closure Would Hurt More Now Than in 1995

As we careen toward a possible shutdown of most of the U.S. federal government, it’s worth looking back at the last time this happened during the combined four-week span from November 14 to November 19, 1995 and from December 16, 1995 to January 6, 1996. Real federal government spending shrank 12% annualized in the fourth quarter of 1995, carving 0.9 percentage points from GDP growth.

But growth slowed only moderately and remained healthy at 2.9% in that quarter because of broad strength in the domestic and external economy. Yet, private-sector payrolls still weakened. Stocks wobbled initially before turning higher, while Treasuries firmed. With the economy on softer ground this time amid sequestration and much higher rates of unemployment and foreclosure, the consequences could be more severe—especially for workers. Congress might want to consider this since most of their jobs are up for renewal next November. (BMO)



Prices of New Homes Start to Level Out

Prices of new homes, which have risen at double-digit rates in the past year, are starting to level out, the latest evidence that builders are backing away from aggressive increases.

(…) Contracts for sales of new homes remained relatively brisk in August, rising 7.9% when compared to the previous month, to a seasonally adjusted annual rate of 421,000 units, according to data released Wednesday by the U.S. Census Bureau. But the average sale price registered $318,900 in August, roughly on par with the July figure of $318,500 and up 4.4% from August 2012, according to Census release.

Industry executives said the sales data, which are highly volatile from month to month, are masking a slowdown that began over a month ago and is starting to show up in builders’ financial reports.

National builder Hovnanian Enterprises Inc. said this month that it dialed back prices in August after being too “aggressive” with increases in some markets this year. Lennar Corp. said Tuesday that it is using incentives such as down-payment assistance to bolster slow sales in some markets. Texas builder Castle Rock Communities recently started offering more incentives to spur sales after its 12% increase in prices this year deterred some buyers.

Much of the sales falloff has occurred in the Western U.S., where average new-home prices increased 15.7% in the second quarter from a year earlier to $363,300, Census data show. Meanwhile, August sales in that region declined 21% from a year earlier. (…) “And we have seen that trend continue into September, as well,” he said.

Household Wealth Hits Peak

Rebounding home prices and a rising stock market helped boost household wealth by more than $1.3 trillion in the second quarter of this year, Federal Reserve data showed Wednesday. The gain marked the seventh consecutive quarterly increase and pushed household net worth—the value of homes, stocks and other assets minus debts and other liabilities—to $74.8 trillion, an all-time high. Adjusting for inflation, net worth is about 4% below its peak, meaning households have made back about 80% of what they lost during the bust.

Households’ net worth rose about 6% in the first two quarters of 2013, and have likely increased further in the past few months. Stock prices and real-estate values have continued to advance with the Standard & Poor’s 500-stock index up 5% since the end of the second quarter.

(…)  The Fed’s figures showed that the value of corporate equities and mutual funds owned by households rose nearly $300 billion, while the value of real estate owned by households climbed about $525 billion. Americans also have more equity in their homes. A measure of owners’ equity in household real estate as a percentage of household real estate holdings hit 49.8% from 48.1% a quarter earlier.

Household Net Worth: The ’’Real’’ Story




French Budget Relies on Tax Rises

The government unveiled a 2014 budget that still relies on tax increases, threatening to further dent household spending power and President François Hollande’s record low popularity.

(…) net new taxes are still set to increase by €3 billion, with households shouldering the greatest burden, including an increase in the sales tax. (…)

French companies and households have been hit hard by a steady increase in taxation since Mr. Hollande was elected 16 months ago. He introduced more than €7 billion ($9.3 billion) of fresh taxes after coming to power and another €20 billion in the 2013 budget, in a bid to restore France’s public finances and rein in its budget deficit.


The government went to great lengths Wednesday to stress it is undertaking more spending cuts than tax increases and detailed €15 billion in savings. But the effort to constrain spending is focused more on fighting an automatic increase in expenditure that would otherwise have happened, rather than a net decrease in outlays. For example, at the level of the central state, the €9 billion of savings cut the nominal level of spending by €1.5 billion next year compared with this year.

Overall spending will still rise 0.4% in 2014, even if that is below the 2% annual increase between 2002 and 2012, Budget Minister Bernard Cazeneuve said at a parliamentary hearing. Such efforts to control spending will have more potency if economic growth picks up.


NEW$ & VIEW$ (24 SEPTEMBER 2013)

Global Manufacturing growth slowly gains momentum

The latest flash PMI data from Markit covering the eurozone, China and the US indicated a continuation of the tentative global manufacturing upturn in September. Growth was evident across all three regions, with all PMIs above the 50.0 no-change mark which separates growth from contraction for the second month running. Such a broad-based upturn has not been seen since mid-2011.

However, although growth accelerated to the fastest for six months in China, the manufacturing PMIs signalled weakening rates of expansion in both the US and eurozone, highlighting the ongoing fragility of the global economy.

Content to rent?
Americans change tack on property ownership

(…) The US home-ownership rate has dropped to an 18-year-low at about 65 per cent – down from a peak of 70 per cent before the crash – and economists say it is set to fall as low as 60 per cent. Some industry watchers are now asking if the US, after a multi-decade push towards home ownership, is shifting towards being a nation of renters. (…)

In recent years a sharp increase in foreclosures, amid job losses, decreased incomes and reduced asset values, has forced many one-time homeowners to rent. For each percentage point decline in home ownership, there has been a shift of approximately 1.1m households to the rental market. To meet this demand new construction of multi-family apartment blocks has surged 353 per cent since the housing market trough, while ground breakings of single-family homes has risen 78 per cent, commerce department data say.

(…) “For the first time since the 1920s, cities are growing faster than suburbs. More and more people are renting, from striving graduate students to the working poor, and the government needs to recognise this change.”

The idea that a structural shift is taking place has pushed institutional investors into the rental housing sector. Many are betting the business of buying single-family homes and converting them into rentals is not just a short-term, opportunistic bet on rising home prices but a sustainable business model that could grow into what Morgan Stanley says is a $100bn market opportunity. (…)

Just 74.8 per cent of Americans aged 25 to 34 are employed, which is closer to the low point during the recession (73-74 per cent) than to the pre-bubble norm (78-80 per cent), Bureau of Labor Statistics data show.(…)

But while home sales are up, new construction is rising and there are fewer homeowners in negative equity, household formation has not picked up at the same pace. Many analysts have predicted these “missing households” would make a comeback when the economy was on sounder footing. So far this has not happened.

This is largely because people aged between 18 and 34 are still not setting up households at a robust rate, according to an early analysis of 2013 population data by Jed Kolko, chief economist at property website Trulia.

They are being held back by problems pinning down a job, huge student debt burdens and difficulties saving up for a big downpayment – all barriers to household formation, Mr Kolko says.

This period of early adulthood is the prime time for people to get on to the property ladder in the US. But many of them are still living with their parents. The share of young adults doing so has risen to more than 31 per cent, from about 27 per cent before the crash.

Even as the national unemployment rate has declined to 7.3 per cent, the level among the country’s young adults is almost twice as high. More and more of these individuals are dropping out of the labour force altogether. (…)

High five  Housing “Recovery” Endgame Escalates


Och-Ziff were perhaps a little early but used the last 10 months to unwind their real estate and exit the landlord business as the hedge-fund sponsored echo-bubble in housing rolled over into the mainstream. “American-Homes-4-Rent”‘s IPO suggested a scramble to exit. With 60% of home purchases now being cash-only (explains the ongoing and massive layoffs in the mortgage business not just due to rate-driven weakening of demand), it is therefore a concern when one of the biggest funds playing in this space – OakTree Capital – announces plan to exit the buy-to-rent trade – selling roughly 500 fully-leased homes. As Reuters notes, it is yet another indication that early investors are looking to cash-out on the “recovery” in U.S. housing prices.

Via Reuters,

Oaktree, which manages about $76 billion, and its partner Carrington Mortgage Services are entertaining bids for the portfolio of fully-leased homes as they seek to exit from the buy-to-rent trade that has become popular the past two years with hedge funds and private equity firms.

Citigroup Cuts Mortgage Staffing

The end of the refinancing boom continues to shake up the U.S. banking sector, as Citigroup Inc. said Monday it laid off 1,000 workers in its mortgage business.

That brings to more than 7,000 the number of jobs lost at major lenders this year as the surge in home loans fades. (…)

Guy Cecala, Inside Mortgage Finance’s CEO, said that, in the wake of the housing meltdown and amid criticism over taking on risky home loans, banks moved more mortgage-related responsibilities in-house. As refinancing activity wanes and fewer homeowners default, banks are now paring back staff in an unprecedented way, Mr. Cecala said. “We’re just seeing the beginning of it,” he said.

Fingers crossed  Prices at the Pump Drop to Lowest Levels Since January

US manufacturers ‘reshoring’ from China
Shift reflects China’s ebbing low-cost advantage, survey says

(…)The Boston Consulting Group survey found 21 per cent of a sample of 200 executives of large manufacturers were either already relocating production to the US, or planning to do so within the next two years. A further 33 per cent said they were considering it, or would consider it in the near future.

Pointing up  Those figures are sharply increased from a similar BCG survey early last year, which found 10 per cent of respondents moving production to the US, and a further 27 per cent considering or close to considering it.

Labour costs were the factor most commonly cited by executives as determining location decisions, and China’s advantage has been slipping. Wage inflation has been running at about 15-20 per cent per year. Average hourly earnings in US manufacturing have risen just 1.6 per cent per year since 2011. (…)

BCG is predicting that, by the end of the decade, reshoring and rising exports will have created 0.6m-1.2m new manufacturing jobs in the US.

The effect will vary across industries, BCG says. Prime candidates for reshoring are industries that have relatively lower labour costs, and relatively higher transport costs or other reasons to be close to their customers.

Ready, ready, …


Risks Mount on Debt Ceiling President Obama’s strategy to not negotiate over terms for raising the nation’s debt ceiling carries risks to his political standing as lawmakers head for another showdown on the issue.

With no known talks now occurring among lawmakers over the debt ceiling, businesses, market analysts and lawmakers themselves are uncertain about whether a deal can be reached to avoid the government falling behind on its payments.

“It’s extremely dangerous,” said William Hoagland, who spent 25 years as a Senate Republican aide, primarily on budget matters. “To keep on flat-out saying ‘I’m not considering anything, I won’t consider anything,’ I would say that puts us in the risk of actually going over the brink.”

Others say Mr. Obama’s stance is a response to Republican demands that a higher debt ceiling be paired with other policies that Democrats are sure to reject, such as a delay in the new federal health law, a landmark of the president’s first term.

William Galston, a former policy adviser to President Bill Clinton, said both parties are contributing to the stalemate. “If this was a game of chicken, which it appears to be, then the consequences of miscalculation and a crash would be really horrendous,” he said.

Credit Suisse estimated Monday that the government will run out of money by Oct. 24 and that markets could become volatile beginning Oct. 10.


NEW$ & VIEW$ (23 SEPTEMBER 2013)

Still travelling. After Munich, Amsterdam and Antwerp (sounding like John Maudin!), we are spending the week in beautiful Bruges with Suzanne’s sister and her Belgian companion. This will no doubt be the most challenging part of the trip as far as weight control goes.


It is highly possible that you will hurt yourself driving blind on the German autobahns. Driving blind in Amsterdam, however, it is highly likely that you will hurt other people because car drivers need to constantly anticipate what cyclists will do. In effect, cyclists have priority, they know it and they use it. And there are quite a few of them. A driver may well decide that he wants to go from A to B and proclaim it as much as he can, if cyclists see it differently, the driver will need to wait, even change route.

Ben Bernanke is no Dutch but he just learned the Dutch roulette. He and his fellow economists did not expect longer term interest rates to jump when he announced the taper last May. But they did, slowing the nascent housing recovery and spooking financial markets. And now, he has to wait, and possibly change route.

And thanks to his vow to “communicate” (!), he also had to admit that he his blind. In reality, he has few clues about where we are and where we are heading.

Equity investors, looking forward with eyes wide shut, reacted positively to the non-taper after cheering Larry Summers’ decline of the Fed chairmanship. Fixed income investors concluded that the Fed would continue to bid long rates down for a while longer and that the economy was not about to turn in a way that would change that anytime soon.

And with Janet Yellen coming, the “financial heroin” would keep flowing.

And so it might be for a while longer according to the bulls: a slow enough economy to keep the Fed away from tapering ideas but a strong enough economy to keep profits growing.

The problem is, unless you have your eyes wide shut, profits have stopped growing 15 months ago.

The other problem is that Fed communications, leadership and trustmanship that remained have been broken. Add the totally unpredictable political scene and we are all driving blind.

This is not so bad when equity markets are selling at decent valuation levels. But current valuations offer little downside protection if any of our drivers fail to stay the right course.

But as a talking head said last week on CNBC, after leastening to another one saying that markets are fairly valued, “it’s not because markets are fairly valued that they can’t get overvalued.”

Perhaps. But that has not happened during the last 5 years (see chart below).

NOW: TAPER WATCH!!! For those having nothing else to do.

Fed Officials Amplify a Discordant Message

Less than 48 hours after the Federal Reserve surprised markets by not pulling back on its signature easy-money policy, one of its main communications challenges was on full display—mixed messages from different central-bank officials.

The two officials, Kansas City Fed President Esther George and St. Louis Fed boss James Bullard, were speaking at separate events in New York on Friday and disagreed over whether the Fed did itself a favor with the decision to keep in place for now its bond-buying program or may have shot itself in the foot.

“It enhances our credibility” to press forward with the $85 billion a month in bond purchases, Mr. Bullard told reporters after a speech to the New York Association for Business Economics. The decision taken at the Fed’s policy meeting Wednesday proves its actions depend on the state of the economy, not market expectations, he said.

Ms. George, speaking at the Manhattan Institute for Policy Research, took the opposite view. She said the decision risked hurting the central bank’s credibility after Fed officials had spent months preparing investors for the likelihood that the program would begin winding down as the economy improved. “By delaying, I think the committee will have to think about challenges about credibility and predictability,” she said. “Actions at this meeting, it created confusion, it created a disconnect.” (…)

Mr. Bullard said the decision to continue with the program unchanged “was a close call. It wouldn’t take much to tip things toward a small tapering” of the bond purchases at the next meeting, at the end of October, he said. (…)

The cacophony should continue next week when Ms. George and seven other regional Fed bank presidents—those from New York, Boston, Chicago, Cleveland, Dallas, Minneapolis and Atlanta—are scheduled to make public remarks.

The Fed is wrong to delay its tapering
Bond-buying is no longer a big stimulus to growth or employment, writes Martin Feldstein

The US Federal Reserve’s decision last week to delay the start of its so-called “tapering” has confused investors about the reliability of its forward guidance. It has also created a trap that will make it difficult to start the tapering programme in the future unless the Fed changes its basic approach.

(…) the FOMC’s projections in recent years have been repeatedly too optimistic. It looks as though they are repeating the mistake again. At the end of its recent FOMC meeting the Fed released a summary of the economic projections of the FOMC members – the governors of the Fed and presidents of the 12 regional Federal Reserve banks. The central tendency of these projections foresees real gross domestic product growth of 2.0-2.3 per cent for the 12 months starting with the fourth quarter of 2012.

That would be higher than the US economy has achieved in any of the past three years. For the first half of 2013 the official annualised GDP growth number is now only 1.8 per cent, and more than one-third of that growth was just inventory accumulation. Private estimates for GDP growth in the current third quarter are at about the same level. To reach the midpoint of the FOMC’s central tendency range for this year as a whole would require the growth rate to jump to an annualised rate of 3.2 per cent in the fourth quarter.

Looking further ahead, the FOMC projections call for a growth rate of between 2.9 per cent and 3.1 per cent in 2014. That forecast is already a substantial reduction from the range of 2.9 per cent to 3.5 per cent that the FOMC was predicting less than two months ago. As we get closer to 2014, the prospects for that year are likely to look weaker again.

As Mr Bernanke noted, the rise in long-term interest rates since May is likely to depress the pace of residential construction, the strongest sector in the past year. Consumer spending is likely to remain weak because real after-tax income per capita is lower now than it was a year ago. A fall in the household saving rate has helped to sustain consumer spending but leaves little scope for a further decline in saving to boost future spending. Making the start of tapering depend on the economy achieving the Fed’s optimistic outlook is therefore likely to lead to another decision to continue the current pace of bond-buying.

It is hard to argue with the Fed’s approach that its economic policy should depend on the data. But it is equally hard to reconcile a strategy of multiyear forward guidance with policies that are sensitive to changes in month-to-month economic news.

There is a better strategy that would allow the Fed to start tapering in October and end bond-buying by the middle of 2014. The Fed has stated that the pace of bond-buying should reflect a balancing of the benefits that the policy achieves in strengthening employment and growth against the costs that they impose on the economy. Putting that into practice would justify – indeed require – the Fed to begin tapering.

Although the initial burst of bond-buying may have helped to stimulate demand in 2010 and 2011, the current strategy is now doing very little to stimulate economic growth and employment. At the same time, continuing to buy long-term bonds and promising to keep the real short-term rate below zero even after the economy has returned to full employment have serious costs. They distort the investment behaviour of individuals and institutions, driving them to reach for higher yields by taking inappropriate risks. They lead banks to make riskier loans in order to get higher returns. The longer this process of abnormally low rates continues, the more disruptive will be the return to normal conditions.

It would be wise, therefore, for the Fed to shift away from its focus on short-term data, to recognise that it has achieved as much as monetary policy can do, and to start at its next meeting on a path to stabilise the size of its bond portfolio.

No good options for the Fed on QE

(…) Despite the audible sigh of relief in global markets, Mr Bernanke and his successor now face a conundrum. A sudden end to quantitative easing could imperil the recovery, especially if asset prices fall quickly enough to produce widespread insolvencies. Yet if a gradual end is announced, a more sudden one will automatically ensue. Nor can this be pursued by stealth. If markets are kept in the dark, their behaviour will be dangerously unpredictable.

Gavyn Davies Forward misguidance

The Fed’s actions last Wednesday created more outrage than usual from investors, some of whom clearly felt that they had been misled, inadvertently or not, by the FOMC’s botched attempts at forward guidance during the summer months.

Challenged at his press conference, Mr Bernanke said that he makes monetary policy for the good of the economy, not to ratify the expectations of investors. (…)

Mr Bernanke said that the Fed believes that forward guidance on rates is now “stronger and more reliable” than asset purchases. Furthermore, his possible successor Ms Yellen was chair of the Fed committee which designed the current communications strategy. Her “optimal control” approach, committing to holding short rates below their normal level as the economy recovers, would place even more weight on forward guidance. If so, the FOMC really needs to get better at deploying it. (…)

Lately, however, the Fed has become determined to be almost painfully transparent in its communications with the public, and this has led to problems. (…)

On Wednesday morning, Mr Bernanke seemed to have the financial markets exactly where he wanted them, but then came the bombshell. If the Fed can appear so cavalier after spending so much time and credibility guiding expectations on this decision, why should we believe them next time?

All of the complexity surrounding these calendar dates, unemployment thresholds and inflation knock-outs was well meaning, but only succeeded in obscuring the Fed’s main point, which was that tapering would be data determined and would depend on there being a “substantial improvement in the outlook for the labour market in the context of price stability”. If the Fed had simply stuck to this formula, the scope for confusion would have been greatly reduced.

The Fed’s leadership no doubt believes that it has not misled anyone, and certainly its actions last week can be made to appear consistent with the precise language of its previous statements. In June, the Chairman clearly said that “our policy is in no way predertermined”, and “reductions in the pace of purchases could be delayed”. But that is not the impression he was seeking to give at the time. He cannot have it both ways: either he is giving meaningful forward guidance, or he is not.(…)

Neither extreme seems optimal. The next Chairman of the Fed needs to reconsider the current approach, which is to overcome the problem of time inconsistency by hemming itself in with an ever-growing number of apparently explicit commitments (though wriggle room is always left in the fine print). This may work for short periods, but it leads to a loss of credibility when the inevitable happens and some of these solemn commitments are jettisoned.

The credibility of the Fed is one of the most precious commodities which America possesses. Over time, breaking commitments is costly. If it insists on pursuing forward guidance, it could greatly simplify its message, along the following lines:

“We think that there is still a large margin of spare capacity in the economy, and currently we do not intend to raise short rates for several more years.”

It is very doubtful whether any central bank can usefully go much further than that.

Meanwhile, back at the ranch:

Philly Fed Beats Forecasts By a Wide Margin

(…) the Philly Fed Index came in at a level of 22.3, which was significantly ahead of the consensus forecast of 10.3.  This morning’s release was also the highest level since March 2011.  Today’s release was not only strong on the headline reading, but it was also strong in its internal readings. (…) all nine of the index’s components also showed increases compared to last month’s levels.  Even more encouraging was the fact that the biggest gains came in Shipments (+22.1) and New Orders (+15.9).  Like the overall index, the levels for these components were also at their highest levels since the spring of 2011.


U.S. Existing Home Sales Improve Further

Sales of existing homes increased 1.7% during August (13.2% y/y) to 5.480 mil. units (AR), according to the National Association of Realtors. Earlier figures were unrevised and the latest was the highest since February 2007. Consensus expectations had been for a decline 5.260 million sales. Sales of existing single-family homes alone increased 1.7% to 4.840 million (12.8% y/y). These data have a longer history than the total sales series. Sales of condos and co-ops gained 1.6% to 0.640 mil. (16.4% y/y).

Italy lowers economic output forecasts
Government warns it risks overshooting budget deficit target

(…) The government forecast the economy will shrink 1.7 per cent this year, against a previous projection in April of a 1.3 per cent contraction. Projected growth for 2014 was revised down to 1 per cent from 1.3 per cent.

Mr Saccomanni told reporters he expected the third quarter to be flat after a decline of 0.3 per cent in the second, but that growth would return in the final quarter.

The government said the budget deficit was heading towards 3.1 per cent of gross domestic product this year but Mr Saccomanni said this had to be corrected “quickly” to remain on track to meet the 3 per cent limit agreed with the EU. (…)

The forecasts released on Friday showed public debt this year would reach more than €2tn, including arrears owed to the private sector and financial support to other eurozone countries, or 132.9 per cent of GDP (up from 127 per cent in 2012). The level is expected to edge down to 132.8 per cent next year. Last April’s forecasts for this year and next stood at 130.4 per cent and 129 per cent respectively.

Italy industrial revenue drops
WTO cuts forecast for global trade

Industrial turnover dropped 0.8 per cent in July , while new orders fell 0.7 per cent month-on-month, slowing the contraction of 2.5 per cent seen in June. The drop in new orders came from the domestic market where they fell 2.6 per cent, while new orders from overseas markets increased 1.8 per cent. Industrial turnover is 3.6 per cent lower than it was in July 2012, while new orders are down 2.2 per cent.

(…) the World Trade Organisation has said that world trade is likely to grow less than expected. Demand for imports in developing economies increased at a slower rate than anticipated, hindering export growth in the first half of this year. The WTO downgraded its forecast of growth for 2013 to 2.5 per cent for the year (from the 3.3 per cent forecast in April). It also projected that trade would increase 4.5 per cent in 2014, rather than five per cent.

Merkel Wins Big in German Election

Angela Merkel’s conservatives won a resounding victory in Germany’s elections, despite a surge by an anti-euro party that helped push her junior coalition partner out of parliament.

India’s Central Bank Raises Key Rate

India’s central bank surprised markets by raising its key lending rate for the first time in two years, demonstrating its commitment to fighting inflation even as the country struggles with a slowdown.


While market watchers and talking heads debate tapering, analysts continue to ratchet their estimates down, although very slowly. Q3 estimates are now $26.94, down a dime (0.4%) from Aug. 29. If so, earnings would be up 2.2% from Q2 and +12.3% YoY.

And now this:
Deutsche Bank to warn on debt market
German bank joins rivals with gloomy outlook

Deutsche Bank is set to warn that a recent slowdown in fixed income trading will drag down revenue growth in the third quarter, adding to the gloom among investment banks about conditions in the debt markets.

The German-based bank is expected to give an update on trading conditions next week at a banking conference in London, where its co-chief executive Anshu Jain is due to speak on Wednesday. Mr Jain is expected to confirm that revenues in the bank’s fixed income division are likely to be lower than in the third quarter of 2012.

Mr Jain’s comments will add to warnings from senior executives at other investment banks, including Barclays, Credit Suisse and Jefferies, that a slowdown in bond trading has hit their earnings in the third quarter. (…)

Bankers are also warning that third-quarter results will suffer by comparison with the same period of last year, when the European Central Bank’s promise to do “whatever it takes” to save the euro led to a flurry of activity in the fixed income markets. (…)

Earlier this week US investment bank Jefferies reported an 83 per cent fall in net income in its fiscal third quarter – which ended in August – on the back of lower bond revenues.

The US bank said the drop was due to the rising interest rate environment, widening spreads, redemptions from bond funds that muted trading and related writedowns within Jefferies’ inventory.




Rising demand adds to evidence world growth is picking up

Global manufacturing growth edges higher

The growth rate of the global manufacturing sector continued to edge higher in August. Although the overall pace of expansion remained only moderate at best, it was nonetheless the fastest signalled since June 2011.

At 51.7 in August, up from 50.8 in July, the JPMorgan Global Manufacturing PMI™ – a composite index* produced by JPMorgan and Markit in association with ISM and IFPSM – signalled growth for the eighth month running.


Manufacturing production rose for the tenth successive month, with the rate of growth accelerating to the highest since January. The main drag came from broad-based weakness in a number of emerging markets, with India, Taiwan, South Korea, Indonesia, Vietnam and Brazil were among the countries to report lower output volumes.


US manufacturers reported a slowdown in production growth to a ten-month low in August, which offset some of the momentum gained through a return to growth in China and faster expansions in Japan and the UK. The rate of increase in UK manufacturing output surged to its highest since 1994 and in Japan hit a two-and-a-half year high. The recovery in the euro area also gained traction.

Pointing up The rate of growth in global manufacturing new orders rose to a 30-month high in August. The acceleration was also firmer than that seen for production, raising the possibility that output may continue to rise in the months ahead. Moreover, the ratio of new orders to stocks of finished goods – which acts as a bellwether for the near-term trend in output – also hit a 30-month high. Holdings of pre- and postproduction inventories both fell over the month.

Manufacturing employment ticked higher in August. The latest data point to a slight increase in payroll numbers, with job creation reported by the US, Japan, the UK, Canada, Mexico, India, Taiwan, Turkey, Vietnam, Poland, Czech Republic and Ireland.

August saw average input prices rise at the fastest pace since January. On a regional basis, rates of increase accelerated in Asia and eased slightly in North America. Cost inflation was recorded for the first time in seven months in the European Union.

Euro-Zone Recovery Broadens

Data provider Markit said its poll of executives in euro-zone services and manufacturing companies showed the highest reading for business activity in over two years. The composite purchasing managers index rose to 51.5 in August from 50.5 in July. (…)

Wednesday’s survey results suggest growth, albeit still modest, is spreading to some of the bloc’s weaker countries, said Chris Williams, Markit’s chief economist.

“The euro-zone recovery is looking increasingly broad-based, with more sectors and more countries emerging from recession,” he said.

What’s Behind Manufacturing’s Rebound?

(…) From all of which, a couple of themes seem to be emerging. One, the euro zone looks to be bottoming out. Two, China and Germany are once again proving to be the engines driving other economies. And three, the U.S. seems to be offering support, but without being a significant driver of global growth.

The question now is how sustainable and strong are these boosts likely to be. There’s every reason to believe that although the euro zone is getting a little better, it’s still a long way from health. Car sales remain weak across major euro-zone markets, with France, Italy and Spain reporting big year-on-year declines in the summer. This squares with data showing household credit continues to contract across the single currency area.

German manufacturers are likely to be sucking in regional manufactured imports–components and the like. But a lot of this is likely to be re-exported. The International Monetary Fund continues to point to strong German current-account surpluses for the coming years. If its euro-zone neighbors aren’t importing because their economies are too weak, this implies exports elsewhere.

China has been a strong source of demand for German manufactured goods. Chinese manufacturers seem to be benefiting from recent government efforts to restimulate their economy, as well as from restocking.

So as long as Chinese stimulus continues, the global economy will look better. (…)


Volume of retail trade up by 0.1% in euro area

Core retail sales declined 0.4% in July after a 0.6% drop in June and a combined 1.8% gain in April-May which itself followed a 1.4% decline in Feb-March. Very volatile. In total, however, core sales are down 0.6% during the last 6 months.

Confused smile German retail sales declined 1.4% in July after a 0.8% drop in June. German sales are off 2.2% since February. France sales jumped 2.0% in July after a 1.4% decline in June. They are up 2.0% since February. Should we believe these stats?



Why are German retail sales so soft? The FT may have the answer in this article (Germany’s gold standard jobs record masks hidden flaws).

(…) But the German “jobwunder” has come at a cost – the big increase in low paid, precarious types of employment such as part-time work, temporary contracts, so-called “minijobs” and outsourcing. (…)

The number of temporary workers in Germany has almost trebled in Germany over the past 10 years to about 822,000, according to the Federal Employment Agency.

Meanwhile, more than 7.4m Germans have a ‘minijob’ – a relatively new type of German contract that permits an employee to earn up to €450 a month tax free.

Popular with middle class housewives and students, minijobs have become widespread in service industries such as retail, hotels and restaurants.

However, for the majority of recipients, the minijob is their primary form of employment and hourly wages can be extremely low.

Minijobbers are commonly unable to set aside enough money for retirement and minijobs also have not proved the stepping stone to regular employment that many had hoped. (…)

Rings an American bell?

Weekly chain store sales remain slow in the U.S. indicating a pretty sluggish back-to-school season. The 4-week moving average is up 2.2% as of August 31.


ISI’s consumer surveys, including homebuilders, continue soft.

Mortgage applications rise first time in four weeks: MBA

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, rose 1.3 percent in the week ended August 30, after sliding 2.5 percent the prior week. (…)

The refinance index rose 2.4 percent last week. (…)

Pointing up The gauge of loan requests for home purchases, a leading indicator of home sales, fared worse, dipping 0.4 percent. (…)


Smile  U.S. small business borrowing rises to six-year high

The Thomson Reuters/PayNet Small Business Lending Index, which measures the volume of financing to small companies, rose 11 percent in July to 117.7, the highest level since August 2007. (…)

Pointing up Historically, PayNet’s lending index has correlated to overall economic growth one or two quarters in the future.

The stronger reading in July, up 12 percent from a year earlier, came as the Federal Reserve signaled it is prepared to begin reducing its massive stimulus program as soon as this month. (…)

Because small companies typically take out loans to buy new tools, factories and equipment, more borrowing could signal more hiring ahead. (…)

Low financial stress at small businesses, with more of them paying back loans on time, could also bode well for future borrowing.

Delinquencies of 31 to 180 days fell in July to an all-time low of 1.48 percent of all loans made, according to the Thomson Reuters/PayNet Small Business Delinquency Index.

Accounts overdue as a percentage of all loans have fallen steadily since rising as high as 4.73 percent in August 2009.

Support for U.S. Strike on Syria Builds

Obama’s drive to build support for an attack against Syria gained significant momentum. Leaders of a Senate committee reached agreement on a resolution authorizing military strikes against Syria that adds restrictions.


John Hussman has been a very vocal and much quoted bear all along this bull market. His latest weekly note seems to warn of a possible change in his narrative:

(…) One result of this discipline is that even though I expect that the present cycle will be completed by a market loss on the order of 40-55%, conditions can certainly emerge over the course of this cycle that could warrant a more constructive stance than we have presently, though possibly less extended than we’d like. The most likely constructive opportunity would emerge from a moderate retreat in market valuations, ideally to “oversold” conditions from an intermediate-term perspective, coupled with an early firming in measures of market internals. Though larger cyclical risks here will probably make some line of defense important in any event, our outlook certainly has room to be more constructive as conditions change. We would expect such opportunities regardless of whether bull or bear market outcomes unfold ahead.

Light bulb  “A New Way to Deal With Telemarketing Calls,” (The Freakonomics Blog)

A man in the U.K. is charging telemarketers for calling him. From BBC News:

A man targeted by marketing companies is making money from cold calls with his own higher-rate phone number.

In November 2011 Lee Beaumont paid £10 plus VAT to set up his personal 0871 line – so to call him now costs 10p, from which he receives 7p.

The Leeds businessman told BBC Radio 4′s You and Yours programme that the line had so far made £300.

Phone Pay Plus, which regulates premium numbers, said it strongly discouraged people from adopting the idea.


NEW$ & VIEW$ (30 AUGUST 2013)

This is a long post but I think well worth reading during the long week-end.


Second-Quarter GDP Revised Upward

The U.S. economy entered the second half of the year on firmer footing than previously estimated, with stronger growth, an uptick in corporate profits and consumers feeling better amid a rebound in housing.

[image]Strong exports, improved business investment and solid consumer spending helped U.S. gross domestic product grow at a 2.5% rate in the second quarter, the Commerce Department said Thursday. That marked a significant improvement both from the first three months of the year, when the economy grew at a 1.1% annual rate, and from the government’s earlier, preliminary estimate of second-quarter growth of 1.7%. The latest report means U.S. per capita economic output has finally—four years after the end of the recession—returned to the pre-crisis peak it reached in late 2007.

BMO Capital offers a good summary:

The good news is, the U.S. economy grew more than initially expected a month ago. The first stab at the Q2 real GDP on July 31st was 1.7% a.r. Then the trade numbers came out and wow, the view changed and it looked like GDP grew in the neighborhood of 2½% a.r. Then, as the
days went by, more data on inventories and consumer spending caused estimates to be trimmed, leaving consensus and us at around 2.2%-to-2.3% for the second quarter. Now, gentle reader, it looks like we should’ve stuck with the trade data as real GDP did rise 2.5% a.r. in Q2, the largest increase in nearly one year. That and the fact that consumer spending wasn’t revised at all (still 1.8% a.r.) is encouraging. Exports were revised up nicely, and inventories added more to the bottom line.

But perhaps the biggest surprise was the huge swing in nonresidential investment in structures (factories, buildings, etc)—initially pegged at 6.8% and is now looking like 16.1%. One should, perhaps, regard this with some skepticism, particularly as private nonresidential construction spending has been soft over the past year. Offsetting all of these pluses was a larger-than-estimated drop in government spending.

But aside from the stronger headline, underlying demand isn’t what I’d describe as … fabulous. It’s alright, but not fab. Final domestic demand (GDP excluding inventories and net exports) was trimmed to +1.9% a.r. from +2.0% but this also takes into account government cutbacks. Private final sales (GDP excluding inventories, net exports  and government) was unchanged at 2.6%, which is not fabulous but still decent.

Doug Short illustrates the difference between “fabulous” and “alright”. Quite a step down from a 3.3% cruising speed to 1.8%.


The only thing not revised up was consumer spending, 70% of the economy. There, the downshifts were from 5.5% in the late 1990’s to 3-4% in the mid-2000’s to the current 2% pace.


But that is in spite a real disposable income per capita no longer growing. How long can a 2% spending pace be sustained without income growth?



In the second half of 2012, consumer spending got support from a sharp drop in gas prices. Ain’t happening just yet.image

Could that help? Saudi Arabia Set to Pump 10.5M Barrels of Crude a Day

Saudi Arabia is set to pump 10.5 million barrels a day of crude in the third quarter, a million bpd increment over the second quarter and its highest quarterly level of production ever, leading U.S. energy consultancy PIRA said. (…)

“This is the tightest physical balance on the world oil market I’ve seen for a long time.” PIRA reported its estimate to clients earlier this week.

Libyan oil output has fallen from 1.4 million bpd to just 250,000 bpd after protesters shut oilfields. (…)

Ross said about 400,000 bpd of the incremental supply would go to feed domestic Saudi power usage during peak summer demand for air conditioning. (…)

U.S. Prepares for Solo Strike Against Syria

The Obama administration laid the groundwork for unilateral military action, a shift officials said reflected the U.K.’s abrupt decision not to participate and concerns Bashar al-Assad was using the delays to disperse military assets.

France ready for Syria strike without UK
Hollande to discuss next move with Obama


This morning:

Consumer Spending in U.S. Increase Less Than Forecast as Income Gains Slow

Consumer purchases, which account for about 70 percent of the economy, rose 0.1 percent after a revised 0.6 percent increase the prior month that was larger than previously estimated, the Commerce Department reported today in Washington.

Sad smile Adjusting consumer spending for inflation, purchases were unchanged in July compared with a 0.2 percent increase the previous month, according to today’s report.

The Commerce Department’s price index tied to spending, a gauge tracked by Federal Reserve policy makers, increased 1.4 percent in July from the same period in 2012. The core price measure, which excludes volatile food and energy categories, rose 1.2 percent from July 2012.


Bidding Wars Continue to Tumble as Housing Market Rebalances

Competition in the US residential real estate market dropped for the fourth consecutive month in July, underscoring the market’s overall trend towards balance. Nationally, the percentage of offers written by Redfin agents that faced multiple bids fell to 63.3 percent in July, down from 68.6 percent in June, and 75.7 percent at the peak in March.image

The slide in competition reflects multiple factors that are beginning to erode sellers’ market dominance across the nation:

Buyer Fatigue: First and foremost, Redfin agents report that buyers in the nation’s most competitive markets are growing weary. (…)

Budgets: The combined effect of rising prices and mortgage rates continues to price buyers out of the market, reducing competition for available inventory. Nationally, the median home price per square foot for single-family homes was up 18.7 percent in July from the year before and average weekly 30-year fixed mortgage rates in July were up about one percentage point from May. For a $250,000 mortgage, this jump in prices and mortgage rates translates to a rise in mortgage payments of more than $300 per month.image

Growing Inventory: Rising prices and mortgage rates are also driving homeowners to list their homes in greater numbers, which is boosting options for buyers. As of June, the number of single-family homes for sale in Redfin markets was up 7.8 percent from March and the national months of supply of inventory grew from 2.7 in May to 3 in June. Some homeowners who were underwater on their mortgages are becoming more confident that their homes can fetch a fair price and are deciding to list. Furthermore, our agents in San Francisco and Chicago report that mortgage rates are also leading homeowners to list. Homeowners, too, want to capitalize on historically low rates and move up before rates increase further. (…)

Further Cooling on Tap for Autumn: Looking forward, we expect that bidding wars will continue to cool slightly during the autumn months. The real estate market was atypically hot during autumn of 2012 because buyers were rushing to lock in low mortgage rates once home prices stabilized. Now that rates are higher, home prices continue to rise, and more inventory is coming available, buyers are likely to battle for homes less often.(…)



Euro-Zone Adds 15,000 Jobs

The number of people unemployed in the euro zone fell in July for the second month in a row, adding to tentative signs that a modest recovery under way in the currency bloc’s economy is starting to erode its sky-high levels of joblessness.

Eurostat said the annual rate of consumer-price inflation fell to 1.3% in August from 1.6% in July, putting it considerably below the central bank’s target area of a little below 2%.

Sad smile  German Retail Sales Unexpectedly Drop in Sign of Uneven Recovery

German retail sales unexpectedly fell for a second month in July, signaling an uneven recovery in Europe’s largest economy.

Sales adjusted for inflation and seasonal swings dropped 1.4 percent from June, when they declined 0.8 percent, the Federal Statistics Office in Wiesbaden said today. Economists predicted an increase of 0.6 percent, according to the median of 27 estimates in a Bloomberg News survey. Sales climbed 2.3 percent from a year earlier.

These are big drops!

Fingers crossed Eurozone sales rise marginally in August

Retail sales in the eurozone rose for the first time in nearly two years in August, Markit’s retail PMI® data showed. The value of retail sales increased since July, albeit only marginally. Employment at retailers also rose slightly following a 16-month sequence of decline. National differences in sales trends remained, however, as Germany registered further strong growth, France achieved a back-to-back modest rise and Italy posted an ongoing sharp decline.


Germany’s retail sector continued to drive the overall increase in eurozone retail sales. Sales rose on a monthly basis for the fourth successive survey, the longest sequence of growth in 17 months.
Moreover, the rate of expansion was little-changed from July’s two-and-a-half year high.

Retail sales in France rose for the second month running in August, and at the strongest rate since October 2011. Prior to July, sales had fallen for a survey-record 15-month period.

Italy remained the weak link in the eurozone retail recovery mid-way through Q3. Sales fell for the thirtieth successive month, and the rate of
contraction remained sharp despite easing since July.


Retail sales in the eurozone continued to decline on an annual basis. That said, the rate of contraction eased to the slowest since October 2011. A further sign of the nascent recovery in the eurozone retail sector was a rise in employment in August. This mainly reflected recruitment at German retailers, while retail employment in France stabilised following a prolonged period of cuts and Italian retailers shed staff at the slowest rate since August 2010.

Pointing up imageAverage purchase prices paid by retailers for new goods rose at a sharper rate in August. By product sector, food & drink again posted the steepest rate of inflation, followed by clothing & footwear. Among the three national retail sectors covered, Germany posted the steepest increase in average input costs. Meanwhile, gross margins across the eurozone retail sector declined at the slowest rate since April 2011.

Note that the retail PMI is barely above 50 and has shown a very high volatility in recent years. The German engine remains fairly sound but the Italian and French engines remain unreliable. See below on France.

DOUCE FRANCE from BloomberBriefs:

President Francois Hollande’s pension reforms will probably fail to eliminate the pension deficit or make the French economy more
competitive. France’s government spends the most in the euro area relative to its GDP and has the third-highest labor costs.

People under the age of 40 will have to work beyond 62 to earn a full
pension. Contributions by both workers and employers will increase by
0.3 percentage point in 2017, though the government will cut other payroll charges in an effort to contain labor costs. The pension system is still likely to have a deficit of 13.6 billion euros in 2020, instead of 20.7 billion euros, even if all the announced measures are adopted, according to the French pension council.

The proportion of population over the age of 65 is forecast to climb to 18
percent next year from 17.1 percent in 2012. France has the third-highest
share of labor costs allocated to employers’ social contributions, according to Eurostat, at 34.2 percent, compared with 21 percent in Spain. The nation is ranked the 21st most competitive economy in the world, compared with sixth for Germany, according to the Global Competitiveness Index.


The government may be forced to introduce additional spending cuts and
tax increases to meet its commitment to balance the budget by 2017. It is
likely to miss the target of narrowing the deficit to 3.7 percent of GDP this
year from 4.5 percent, having abandoned the original target of 3 percent.
France has failed to balance its budget since 1974, and the shortfall has
averaged 3.9 percent of GDP over the last decade.


The government claims two-thirds of its austerity measures will come
from changes to the tax system this year, with 20 billion euros in tax
increases planned, compared with 10 billion euros in spending cuts. Taxes
accounted for 45.9 percent of GDP in 2011, compared with a euro-area
average of 40.8 percent. Public spending in France amounts to 57 percent
of GDP, the highest level in the euro region.


U.S. equity markets have done well recently against flattening earnings, stable inflation rates and higher interest rates. Rising investors confidence has translated into absolute P/E ratios that are 10% above their historical mean and Rule of 20 readings that are unfavourable from a risk/reward ratio standpoint.

Earnings expectations for Q3 and Q4 look increasingly vulnerable. Can confidence stay high enough to offset “natural”, more dependable forces?

Ben Hunt’s latest note is highly relevant here:

(…) The shift in perceptions of Fed competence is being driven by opinion leaders’ public statements questioning the Fed’s communication policy. Here’s the critical point from an Epsilon Theory perspective: these public statements are not questioning the content of Fed communications; they are questioning the USE of communications as a policy instrument in and of itself. In exactly the same way that a magician immediately becomes much less impressive once you know how he does his trick, so is the Fed much less impressive once you start focusing on HOW policy is being communicated rather than WHAT policy is being implemented.

For example, this past Saturday Jean-Pierre Landau, a former Deputy Governor of the Bank of France and currently in residence at Princeton’s Woodrow Wilson School, presented a paper at Jackson Hole focused on the systemic risks of the massive liquidity sloshing around courtesy of the world’s central banks. For the most part it’s a typical academic paper in the European mold, finding a solution to systemic risks in even greater supra-national government controls over capital flows, leverage, and risk taking.  But here’s the interesting point:

Pointing upZero interest rates make risk taking cheap; forward guidance makes it free, by eliminating all roll over risk on short term funding positions. … Forward guidance brings the cost of leverage to zero, and creates strong incentives to increase and overextend exposures. This makes financial intermediaries very sensitive to “news”, whatever they are.”

Landau is saying that the very act of forward guidance, while well-intentioned, is counter-productive if your goal is long-term systemic stability. There is an inevitable shock when that forward guidance shifts, and that shock is magnified because you’ve trained the market to rely so heavily on forward guidance, both in its risk-taking behavior (more leverage) and its reaction behavior (more sensitivity to “news”). This argument was picked up by the WSJ (“Did Fed’s Forward Guidance Backfire?”) over the weekend, and it continues to get a lot of play. It’s an argument I’ve made extensively in Epsilon Theory, particularly in “2 Fast 2 Furious.”

Landau’s paper is probably the most public example of this meta-critique of the Fed, but I don’t think it’s been the most powerful. Highly influential opinion leaders such as David Zervos and John Mauldin have recently written in their inimitable styles about the Fed’s use of words and speeches as an attempt at misdirection, as an ultimately misguided effort to hide or sugarcoat actual policy. FOMC members themselves are starting to question the Fed’s reliance on communications as a policy instrument, as evidenced by the minutes released last week. Combine all this with the growing media focus on the “battle” between Yellen and Summers for the Fed Chair – a focus which will create policy disagreements between the candidates in the public’s perception even if no such disagreements exist in reality – and you have a recipe for accelerating weakness in perception of Fed competence.

The shift in perception of non-Fed central bank competence, especially of Emerging Market central banks, is even more pronounced. Actually, “competence” is the wrong word to use here. The growing Narrative is that Emerging Market central banks are powerless, not incompetent. The academic foundation here was made in a paper by Helene Rey of the London Business School, also presented at Jackson Hole, where the nutshell argument is that global financial cycles are creatures of Fed policy … period, end of story. Not only is every other country just along for the ride, but Emerging Markets are kidding themselves if they think that their plight matters one whit to the US and the Fed.

Just as malcontents with the exercise of Fed communication policy may be found within the FOMC itself, you don’t have to look any further than Emerging Market central bankers and finance ministers themselves for outspoken statements protesting their own impotence. Agustin Carstens, Mexico’s equivalent to Ben Bernanke, gave a speech on the “massive carry trade strategies” caused by ZIRP and pleaded for more Fed sensitivity to their capital flow risks. Interesting how the Fed is to blame now that the cash is flowing out, but it was Mexico’s wonderful growth profile to credit when the cash was flowing in. South Africa’s finance minister, Pravin Gordhan, gave an interview to the FT from Jackson Hole where he bemoaned the “inability to find coherent and cohesive responses across the globe to ensure that we reduce the volatility in currencies in particular, but also in sentiment” now that the Fed is talking about a Taper. Christine Lagarde got into the act, of course, calling on the world to build “further lines of defense” even as she noted that the IMF would (gulp!) have to stand in the breach as the Fed left the field. To paraphrase Job: the Fed gave, and the Fed hath taken away; blessed be the name of the Fed.

I’ll have a LOT more to say about all this in the weeks and months to come, but I thought it would be useful to highlight these shifts in Narrative structure in real-time as I am seeing them. Informational inflection points in the market’s most powerful Narratives are happening right now, and this is what will drive markets for the foreseeable future.

Right on cue:

India’s Central Bank Governor Concedes to Missteps

It is rare for officials to admit that their policies have been less than perfect, but India’s central bank governor Duvvuri Subbarao did just that late Thursday, in his last public speech as head of the Reserve Bank of India.

Mr. Subbarao, whose five-year term as RBI governor ends Sept. 4, said the bank could have done a better job of explaining the intentions behind the various steps it has taken in the last three months to support India’s declining currency.

“There has been criticism that the Reserve Bank’s policy measures have been confusing and betray a lack of resolve to curb exchange-rate volatility,” Mr. Subbarao said at a lecture in Mumbai. He said that the RBI is unequivocally committed to curbing volatility in the rupee. “I admit that we could have communicated the rationale of our measures more effectively,” he added.

Ghost Über-bear Albert Edwards will scare you even more, courtesy of ZeroHedge:

(…) The fabulously entertaining Zero Hedge website keeps running the charts showing that the evolution of bond yields and equity markets this year resembles closely what happened in 1987 (see below). Now we should all take these comparisons with a pinch of salt, but what if…

I remember the 1987 crash well. I was working at Bank America Investment Management as an economist/strategist at the time. Of course, the immediate trigger for the equity crash was the fear of US recession caused by the fear that the US would have to hike rates sharply to defend the dollar. Those fears were triggered by Germany raising rates at a time when the G6 had recently agreed to stabilise the US dollar at the February 1987 Louvre Accord, after two years of sanctioned dollar weakness. Investors got into a tizzy about recession, jumping many steps ahead of the game. But, in the wake of a run-up in US bond yields that year, equities were richly priced and so very vulnerable to recession fears, however unfounded. And then the machines took over. That couldn’t possibly happen again, or could it?

Therein lies one of the key lessons I learnt in my 30 years in the markets. Pointing up It is not just to try to predict what will happen, but to second-guess what the markets fear might happen. Indeed a recession did not ensue and the 1987 crash turned into a tremendous buying opportunity.

Edwards then links with the EM debacle:

But another shoe will surely drop soon. China has gone off the radar in the last month, as the data have firmed, but it is set to return centre stage. Our China economist Wei Yao, thinks “this sudden turn-around is similar to that during Q4 2012, when the multi-quarter deceleration trend reversed shortly after the policy stance shifted to “cautious” easing. But that growth pick-up did not last for more than one quarter.” A continued slowdown in credit growth will strangle the current buoyancy of house price inflation (see charts below), with property sales growth having already peaked. Wei expects the Chinese data to relapse in Q4.

“Many people are writing about a Chinese credit crunch and banking crisis. I disagree. The authorities will have a choice as to whether to accept such a crunch or devalue and launch a new credit cycle to keep the balls in the air once again. Devaluation is the preferred option…..So the (recent) spike in SHIBOR was not a tremor indicating the earthquake of a banking crisis, but a tremor of a forthcoming RMB devaluation.” That will be the biggest domino of all to fall. And, as with the 1987 crash, markets will react to the fear of the devaluation and the deflation it will bring to the west, rather than the event itself. (…)

The emerging markets “story” has once again been exposed as a pyramid of piffle. The EM edifice has come crashing down as their underlying balance of payments weaknesses have been exposed first by the yen’s slide and then by the threat of Fed tightening. China has flipflopped from berating Bernanke for too much QE in 2010 to warning about the negative impact of tapering on emerging markets! It is a mystery to me why anyone, apart from the activists that seem to inhabit western central banks, thinks QE could be the solution to the problems of the global economy. But in temporarily papering over the cracks, they have allowed those cracks to become immeasurably deep crevasses. At the risk of being called a crackpot again, I repeat my forecasts of 450 for the S&P, sub-1% US 10y yields and gold above $10,000. Ghost

Indian Growth Slows to Four-Year Low as Rupee Drop Dims Outlook

Gross domestic product rose 4.4 percent in the three months through June from a year earlier, compared with 4.8 percent in the prior quarter, the Statistics Ministry said in New Delhi today. The median of 44 estimates in a Bloomberg News survey was for a 4.7 percent gain.

Emerging Markets Raise Rates

Indonesia raised its benchmark rate by half a percentage point on Thursday, one day after a half-point increase by Brazil and a week after a rate increase by Turkey. Other developing economies are under mounting pressure to tighten credit to support their weakening currencies. Brazil’s central bank hinted at further increases to come.


(…) The value of India’s rupee has fallen by a fifth against the U.S. dollar since the beginning of May. The Reserve Bank of India’s initial response was to stop easing monetary policy, holding benchmark interest rates steady in June and July. When the rupee kept falling, the RBI limited the amount of money banks could borrow from it.

Investors saw that as effectively raising interest rates, at a time when India’s economy was growing at its slowest pace in a decade. Bonds and stocks sold off after the RBI’s steps. Yields on both short- and long-term rupee bonds jumped.

Some analysts say the incoming Indian central-bank governor may have no choice but to raise interest rates sharply, much as Fed Chairman Paul Volcker did in the U.S. in the 1980s.

South Africa is in a similar bind. Authorities want to halt declines in its currency, which has lost nearly a quarter of its value against the dollar over the past year but are reluctant to smother already weak growth.

Inflation reached an annual rate of 6.3% in July, but when South African central-bank officials meet to discuss rates again next month, they will be loath to raise rates in an economy struggling to meet forecasts for 2% growth this year, analysts say.

Some investors worry that they could see a repeat of the Asian financial crisis of 1997-98, or the stampede out of emerging-market currencies a decade later in 2008. But there are reasons to believe it won’t be that bad.

Pointing up Most emerging-market currencies today are allowed to float, so central-bank officials don’t have to defend a fixed exchange rate as they did during the Asian crisis. The government debt levels of countries like Indonesia, India and Brazil aren’t particularly high and are denominated mainly in local currency.

Not just in the U.S.: Elections Complicate Economic Decisions for India,Indonesia Upcoming elections in India and Indonesia, two of the countries hardest hit by the selloff in emerging-market assets, are making it more difficult to make the tough decisions both countries need.

Pointing up  Ft Alphaville has a great post on the EM situation:

From a recent Citi presentation, a chart stressing the potential risk of negative-feedback loops in the options available to those emerging market countries now trying to stem capital outflows and defend their currencies:

The chart makes an important point and is self-explanatory, but it isn’t comprehensive.

Notably excluded is the imposition of capital controls on outflows, which thus far have been mostly resisted with the exception of some limited measures in India. (…)

Also unmentioned is the option to lobby the central banks of developed countries, encouraging them not to tighten policy too quickly. This option appears to have been pursued with some vigour at Jackson Hole last weekend, but probably won’t carry much weight at the next FOMC meeting.

So the immediate options, at least those of a sweeping nature, are unattractive. And the possibility that emerging market central banks and governments will overreact and excessively tighten policy is a singular concern. (…)

But the broader issue is that it remains quite difficult to gauge the severity of the year’s EM currency and asset selloff — and to know whether it is more attributable to an acute market crisis versus a more fundamental economic shift.

Among the various possible causes normally cited are the Fed’s talk of tapering; the unwinding of carry trades; Chinese rebalancing; the pass-through effects of this rebalancing on commodity-exporters (Australia, South Africa, various countries in South America); the end of the commodity super-cycle generally; the limits to growth in countries that procrastinated on necessary structural changes; continued sluggishness by developed-country consumers; and dwindling investor patience with widening current account and budget deficits.

The causes aren’t mutually exclusive, of course, and some influence the others in various ways.

It’s also tough to know, at least for the inexpert or non-obsessive follower of international economics, how prepared the affected countries are to handle it.

The current situation — has it reached the level of “crisis” yet? — inevitably will have a similar feel to the crises of the 1990s given the reversal of hot money flows, the threat from speculators attacking various currencies, and even the involvement of some of the same countries. But so much is different, and most of the differences are positive.

As our colleagues David Pilling and Josh Noble wrote in Wednesday’s FT:

Back then, many countries had fixed exchange rates and their companies were heavily exposed to foreign debt. As currencies came under pressure, central banks desperately spent reserves to defend them. When the peg finally broke, currencies collapsed and companies’ foreign-denominated debts soared.

Thailand, Indonesia and South Korea had to seek help from the International Monetary Fund. Partly as a result of now largely discredited IMF austerity packages, they subsequently plunged into deep recession. Indonesia, the worst affected, lost 13.5 per cent of GDP in a single year. Suharto, the dictator, was toppled.

Today the picture is very different. Asian economies have flexible exchange rates, much higher reserves and sounder banking systems. India, for example, has reserves to cover seven months of imports compared with only about three weeks when it had its own “come-to-IMF” moment in 1991.

Nor, this time around, has India’s central bank wasted much firepower on defending the currency. Instead, it has largely allowed the rupee to slide. A weaker currency should boost exports and slow imports, closing the current account deficit automatically.

And so it might, hopefully without much lasting damage. We would also note the still-favourable growth differentials between developed and emerging market countries, which didn’t exist in the 1990s.

Admittedly this doesn’t preclude a new crisis or crises of a different flavour, and do read the full FT piece for the thoughts of more-pessimistic commentators, with careful attention to the points of Ruchir Sharma. Still, for the moment the problems seem at least endurable, if not actively manageable.

And although these countries’ immediate choices are regrettably limited, there is also a more hopeful longer-term story that can be told about this year’s events.

It’s mainly about how (some of) the lessons of the 1990s and the recent developed-world financial crisis have been heeded. In addition to the ability of emerging market currencies to respond to market forces, the relevant Asian countries also better understand the need for multi-lateral coordination and support during crises.

Furthermore, as economists from Standard Chartered explained, it’s likely that investors have become more discerning about the details of countries’ external funding problems. The economists looked at the short-term external debt situations for India, Indonesia, and Thailand — the three countries involved running a current account deficit — and found that “in all three cases the vast majority of the debt due within one year does not come with serious financing risk”.

More broadly, we’ve been especially interested in tracking the continued expansion of local-currency debt and capital markets, where tremendous progress has been made in the last decade and a half, especially in sovereign and corporate bond markets.

They’re important for a few reasons.

Companies in emerging markets find it easier to borrow in their own currencies, and are better able to hedge their debt if they rely on imports denominated in foreign currencies. Currency swings therefore become less threatening. (…)

Emerging market governments with sophisticated capital markets also have less need to build up massive stores of foreign currency reserves, a process that exacerbated the unnatural problem of global imbalances in the decade prior to the crisis of 2008 — when too much capital flowed from developing countries to developed countries rather than the other way round.

And of course, robust local-currency debt and equity markets, when accompanied by sound governance practices, reduce the dependence on foreign bank lenders and lead to a more diversified base of stakeholders. (…)

International trade and capital flows collapsed after the financial crisis of 2008. Within Europe the balkanisation of financial markets has mostly remained in place. But as both Citi’s presentation and a helpful McKinsey report explain in detail, by 2012 capital inflows to emerging markets had returned nearly to their pre-crisis levels.

These inflows returned, however, mainly in the form of foreign direct investment and investments via capital markets rather than bank lending.

Foreign direct investment is already considered to be a more stable kind of inflow. And the progress in developing local-currency capital markets also indicates that the growth in portfolio flows will be less worrying in the future, if certainly not yet.

These were favourable trends. Despite the present slowdown, in time they are likely to resume course given the disproportionately shallower financial markets in developing countries.

Investors in local-currency emerging market debt have been shellacked this year, and clearly the FX markets are spooked. Maybe the selloff will accelerate and new balance of payments crises really are imminent. We don’t know: much depends on policy still being decided, especially given the recent introduction of heightened geopolitical risks. We certainly don’t mean to dismiss the possibility of a terrible outcome, especially for an individual country.

Fingers crossed For now, however, the problems appear both different in nature and smaller in scale, and unlikely to spread uncontrollably. If we’re right about that, then a plausible explanation is that the lessons of the 1990s haven’t gone entirely ignored. And if a number of emerging market countries are about to enter a grinding period of slower growth and structural adjustments, or to experience new financial strains, at least they do so better prepared. (…)

Japan inflation highest in five years
Weaker yen pushes up cost of fuel and electricity

Consumer price inflation in Japan rose to an annual rate of 0.7 per cent in July, its highest level in almost five years, as the effects of a weaker yen pushed up the cost of fuel and electricity.

Excluding fresh food, the all-items index rose by 0.7 per cent from a year earlier and by 0.1 per cent from June.

But excluding the cost of energy from the calculation brings the yearly CPI to minus 0.1 per cent. The prices of items such as housing, furniture, medical care and culture and recreation all fell from a year earlier, while charges for fuel, light and water rose by 6.4 per cent.

Other data released on Friday morning were positive. The jobless rate dropped to 3.8 per cent, from 3.9 per cent in June, while industrial production rose by 1.6 per cent on a yearly basis and 3.2 per cent on the previous month.

Household spending edged up 0.1 per cent from a year earlier, from a 0.4 per cent fall in June.

Signs of Japanese Investment Uptick Investment by Japanese companies has been a laggard in the nation’s economic recovery. But things could be turning, data showed Friday.

Industrial production jumped 3.2% on month in July, reversing a 3.1% downturn in June.

The government was keen to point out that much of the production seems to show companies are spending more on increasing production.

The output of capital goods, which includes machinery, was at its highest level on a seasonally-adjusted basis since May 2012, a Japanese official said. The official also pointed toward big jumps in the output of goods such as steam turbines and equipment used in the plastics industry – tentative signs that companies are investing in increasing capacity. (…)

Other data today added to a sense that companies’ optimism is returning. Japan’s Purchasing Managers’ Index rebounded to 52.2 in August from 50.7 in July. That’s not far off a high of 52.3 in June. New orders, a sign of renewed corporate activity, were strong.

Have a good one!