The real financial news today had nothing to do with Mr. Dimon at the Senate. It was again out of Europe. German mfg took a big drop per MarkIt, and Spain is nearly insolvent per Egan-Jones. So we had yet another sharp stock reversal to the downside and yet another lower high about the 150 day sma.
It continues to look as though Europe is going through the U.S. experience of 2008. Now it's nation-states, before it was the core financial structure of the sole superpower with immense global reach. Not sure which is harder to deal with! In any case, the other structural difference from the standpoint of this American observer is that what happened in 2008 occurred at the home of the most important central bank in the world. This European thing is different. The Fed in theory can loan them all they need. In this scenario in which Italy is up next and falls despite the various reassuring words out of Europe today on this topic, Treasury rates could drop to unimaginably low levels. As in Japan, the general stock averages would get hit hard. However, if no catastrophic "Lehman moment" occurs this time, there might be a lot of differentiation between stocks, as was the case in the major 2001-2 U.S. bear market.
In this scenario, volatility will go wild between deteriorating fundamentals and the certainty of intervention-- but when, oh when will they print, and how much and in what form? Summer 2011 set certain modern-day records for 1% up- or down-days. Could a rerun of some such volatility spikes be in the offing?
I am also paying no special attention to the Greek election. Whichever party wins will be happy to have the spoils of power and will do whatever they will do. It's impossible for an American to invest based on such unknowns and the high chance that even if Syriza wins, Tsipras will pull an Enda Kenny, who became P.M. of Ireland only to follow the bail-out course set by the previous guys.
Momentous, perilous times.
Sometimes cash is kingly.
Showing posts with label new normal. Show all posts
Showing posts with label new normal. Show all posts
Wednesday, June 13, 2012
Thursday, September 9, 2010
Gallup Confirms New Normal Stinks for Almost Everyone Who Didn't Get Bailout Money
Just in case you were feeling too cheery today, Gallup reports Consumer Spending Across All Income Groups Down in August:
Americans' self-reported average daily spending in stores, restaurants, gas stations, and online averaged $63 per day during August -- down $5 from July, and down $2 compared with August 2009. Consumer discretionary year-over-year spending is thus running just slightly below the depressed "new normal" rate of a year ago.
Despite the victory in the presidential election who would appear to be ideologically very comfortable in a Democratic Socialist party were he a European, please note what a disaster things have been for what should be his core constituency:
Middle- and lower-income Americans spent an average of $54 per day during August -- down from $64 in July and $62 in June, and lower than the $57 seen in August 2009. Americans in these income groups had been spending at the higher end of last year's "new normal" range of $52 to $61 but are now back to the lower end of that range.
Matters were no better in early September:
This year's somewhat disappointing back-to-school spending has been followed by few added expenditures for Labor Day. Consumer spending for the week before Labor Day averaged $61 per day -- the same as during the prior week, and down from a $70 average during the same week in 2009.
What Gallup does not say is that in the first part of 2008, discretionary spending was well over $100/day.
This is consistent with a modern-day depression.
Copyright (C) Long Lake LLC 2010
Americans' self-reported average daily spending in stores, restaurants, gas stations, and online averaged $63 per day during August -- down $5 from July, and down $2 compared with August 2009. Consumer discretionary year-over-year spending is thus running just slightly below the depressed "new normal" rate of a year ago.
Despite the victory in the presidential election who would appear to be ideologically very comfortable in a Democratic Socialist party were he a European, please note what a disaster things have been for what should be his core constituency:
Middle- and lower-income Americans spent an average of $54 per day during August -- down from $64 in July and $62 in June, and lower than the $57 seen in August 2009. Americans in these income groups had been spending at the higher end of last year's "new normal" range of $52 to $61 but are now back to the lower end of that range.
Matters were no better in early September:
This year's somewhat disappointing back-to-school spending has been followed by few added expenditures for Labor Day. Consumer spending for the week before Labor Day averaged $61 per day -- the same as during the prior week, and down from a $70 average during the same week in 2009.
What Gallup does not say is that in the first part of 2008, discretionary spending was well over $100/day.
This is consistent with a modern-day depression.
Copyright (C) Long Lake LLC 2010
Friday, July 9, 2010
Implications of Slow Economic Growth
The Economic Cycle Research Institute reports today that WLI Growth Falls Further. This joins a host of other reports, ranging from Discover's U. S. Spending Monitor being down again in June to various disappointing surveys of small business that the economy is sluggish. The Reuters ECRI press release is terse today:
A measure of future U.S. economic growth fell to the lowest since July 2009, indicating that the economy will continue to slow, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 121.5 for the week ended July 2, down from 122.3 in the prior week. That was the lowest level since July 24, 2009 when it stood at 120.3. The index's annualized growth rate fell to -8.3 percent after a -7.6 percent growth rate a week earlier.
This level of economic activity is nothing horrible in and of itself, but matters are out of balance related to debt and opaque derivatives. Governmental debt has increased more than consumer or business debt has diminished; and what passes for "austerity" in such places as the U. K. is any but austere, simply less improvident. It now appears that a significant slowdown in the recent economic growth rate is baked in the cake. So far as my research on the ECRI site allows, an 8.3% negative growth rate (as defined privately by ECRI) in the WLI has always been associated with recession. Yet ECRI's other indicators don't allow it to call an upcoming recession, so I'm certainly not qualified to opine on that topic.
As a borrower in its own currency and wishing to maintain the fiction of never having defaulted (despite having more or less overtly having defaulted first under FDR and again under Nixon), it makes sense for the Feds to devalue against as many countries from which it imports as possible. The "traditional" response of domestic inflation, or at least anti-deflation, will allow loans that are now underwater to look good.
In the WW II and Korean War periods, short rates were kept ultra-low even when inflation raged. This may be happening now, depending on what one thinks prices are doing. Since precious metals are no longer cheap, how does an American handle capital?
Granted that markets are efficient, we can consider that just perhaps the markets are giving too much credence to the idea that U. S. finances are 'AAA'. In that case, perhaps small countries with records of truly no defaults may offer foreign currency gains plus a current yield. This could include Norway and New Zealand. Larger "smaller" countries could include Australia and Canada, but the former is at risk from a major economic slowdown in China and the latter may be seeing a housing mini-bubble begin to burst.
Another approach involves multi-national financially strong companies. AAPL, MCD, etc. High quality U. S. companies screen very well in Jeremy Grantham's 7-year asset price projection, a series which has often been prescient. Given that a BP-type disaster can befall almost any company, and unless one is very diversified, one disaster can sink such a strategy, this strategy is not for the faint of heart.
Meanwhile, regular readers know that I have had kind words to say about Treasuries on and off for quite some time. Now I think they are for gamblers and that cash is prospectively about as good as Treasuries and therefore better given complete liquidity. Yes, the 10-year yield could go to new lows. But it could blow out to very high levels faster than almost anyone thinks. So, new money likely will be better off elsewhere, in my humble opinion.
These are unprecedented times with the lowest short-term interest rates in history in some major countries. As with very high and very low temperatures where strange physico-chemical rules may apply, the same may well come to pass in the economy and the financial markets. Flexibility may be more important than any specific prediction, given how abnormal the "New Normal" is.
Copyright (C)Long Lake LLC 2010
A measure of future U.S. economic growth fell to the lowest since July 2009, indicating that the economy will continue to slow, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 121.5 for the week ended July 2, down from 122.3 in the prior week. That was the lowest level since July 24, 2009 when it stood at 120.3. The index's annualized growth rate fell to -8.3 percent after a -7.6 percent growth rate a week earlier.
This level of economic activity is nothing horrible in and of itself, but matters are out of balance related to debt and opaque derivatives. Governmental debt has increased more than consumer or business debt has diminished; and what passes for "austerity" in such places as the U. K. is any but austere, simply less improvident. It now appears that a significant slowdown in the recent economic growth rate is baked in the cake. So far as my research on the ECRI site allows, an 8.3% negative growth rate (as defined privately by ECRI) in the WLI has always been associated with recession. Yet ECRI's other indicators don't allow it to call an upcoming recession, so I'm certainly not qualified to opine on that topic.
As a borrower in its own currency and wishing to maintain the fiction of never having defaulted (despite having more or less overtly having defaulted first under FDR and again under Nixon), it makes sense for the Feds to devalue against as many countries from which it imports as possible. The "traditional" response of domestic inflation, or at least anti-deflation, will allow loans that are now underwater to look good.
In the WW II and Korean War periods, short rates were kept ultra-low even when inflation raged. This may be happening now, depending on what one thinks prices are doing. Since precious metals are no longer cheap, how does an American handle capital?
Granted that markets are efficient, we can consider that just perhaps the markets are giving too much credence to the idea that U. S. finances are 'AAA'. In that case, perhaps small countries with records of truly no defaults may offer foreign currency gains plus a current yield. This could include Norway and New Zealand. Larger "smaller" countries could include Australia and Canada, but the former is at risk from a major economic slowdown in China and the latter may be seeing a housing mini-bubble begin to burst.
Another approach involves multi-national financially strong companies. AAPL, MCD, etc. High quality U. S. companies screen very well in Jeremy Grantham's 7-year asset price projection, a series which has often been prescient. Given that a BP-type disaster can befall almost any company, and unless one is very diversified, one disaster can sink such a strategy, this strategy is not for the faint of heart.
Meanwhile, regular readers know that I have had kind words to say about Treasuries on and off for quite some time. Now I think they are for gamblers and that cash is prospectively about as good as Treasuries and therefore better given complete liquidity. Yes, the 10-year yield could go to new lows. But it could blow out to very high levels faster than almost anyone thinks. So, new money likely will be better off elsewhere, in my humble opinion.
These are unprecedented times with the lowest short-term interest rates in history in some major countries. As with very high and very low temperatures where strange physico-chemical rules may apply, the same may well come to pass in the economy and the financial markets. Flexibility may be more important than any specific prediction, given how abnormal the "New Normal" is.
Copyright (C)Long Lake LLC 2010
Thursday, January 14, 2010
New Normal a Lot Like the Old Normal in Finance
The merry-go-round is turning. Consider the following from today on Bloomberg:
Asset-Backed Debt Revival in Europe Led by Ford, BMW
Jan. 14 (Bloomberg) -- Europe’s asset-backed bond market, dormant for a year, is coming back to life as Bayerische Motoren Werke AG and Ford Motor Co. sell more than 1 billion euros ($1.45 billion) of debt backed by automobile loans and leases.
BMW, the world’s biggest luxury car maker, is selling 742 million euros of bonds backed by German auto leases, said a banker with direct knowledge of the deal. Dearborn, Michigan- based Ford sold 300 million euros of debt tied to car loans on Jan. 8.
The revival in debt backed by consumer and business payments in the auto industry shows improving investor sentiment as Europe emerges from the recession. Yields on company bonds averaged 4.13 percent yesterday in New York, down from 4.37 percent at the start of the year, according to the Bank of America Merrill Lynch Global Broad Market Corporate Index.
“If BMW is successful, it would be a really good indicator for other issuers now monitoring the market,” said Markus Ernst, a credit analyst at UniCredit SpA in Munich. Borrowers testing the waters is “definitely a good sign as it underlines that the market is not drying up,” he said.
Sales of asset-backed bonds in Europe may rise to 50 billion euros this year, from 8 billion euros in 2009, according to Gareth Davies, a debt analyst at JPMorgan Chase & Co. in London. The region’s securitized credit market has been slower to recover than in the U.S. because there’s no equivalent to the Federal Reserve’s Term Asset-Backed Securities Loan Facility, which provides low cost loans to investors buying the bonds.
And this:
Junk Bonds Defy Krugman's Bubble Warning as Loomis Sees Gains
Jan. 14 (Bloomberg) -- The world’s biggest bond investors are dismissing concerns that the high-yield market is a bubble poised to burst after the Federal Reserve’s zero interest-rate policy spurred returns of 57.5 percent last year.
While Nobel Prize-winning economist Paul Krugman and Morgan Stanley’s Stephen Roach see as much as a 40 percent chance for another recession, Loomis Sayles & Co. says debt of the neediest corporate borrowers may be the best bonds to own for 2010.
I was told yesterday that JPMorgan Chase has also increased its exposure to junk bonds.
That this bullishness on junk is occurring while payment-in-kind bond sales have also returned does not mean that it must fail, especially in the short term,.
Meanwhile, Jeremy Grantham and GMO are out with their updated quarterly prediction of prospective real returns from different asset classes. Last I heard, he pegged fair value of the S&P 500 at 880.
On the other hand, GMO does peg U. S. "high quality" equities as producing a 6.8% real return annualized over the next 7 years, far exceeding the 1.3%, 0.5%, and 1.1% expected from U. S. large caps U. S. small caps and U. S. government bonds (duration unspecified, presumably Treasuries) respectively. GMO expects that high quality U. S. equities will outperform large cap, small cap and emerging market equities over this time frame.
All this is occurring while California and New York are out of money in one way or another, and central banks and national governments are creating credit money at record paces because the edifice collapsed. The cynical situation is that high unemployment allows reported price inflation to be low, thus allowing valuation models to flash green in the setting of historically low or record low governmental interest rates.
In a sense, high quality stocks in the modern era, which may have lots of cash flow but generally don't share much with existing shareholders, are similar to junk bonds which after all pay interest (ignoring PIK) and provide a superior claim on corporate assets vs. equity holders. So it may be consistent after all for GMO to be positive on high quality U. S. stocks and Loomis and JPM to be positive on high yield bonds.
In the meantime, the issuance of all this government/central bank debt (credit) is seeping inevitably into the markets and eventually a "boom" will be visible to the public. The financiers who have been bidding up the prices of stocks have not yet interested much of the public in joining in the fun. That may change soon as the public's memory of 2008 fades and it forgets (never understood) the essential corruption that underlay the late 1990s stock bubble and then the massive credit bubble that is now being reblown greater than ever.
Copyright (C) Long Lake LLC 2010
Asset-Backed Debt Revival in Europe Led by Ford, BMW
Jan. 14 (Bloomberg) -- Europe’s asset-backed bond market, dormant for a year, is coming back to life as Bayerische Motoren Werke AG and Ford Motor Co. sell more than 1 billion euros ($1.45 billion) of debt backed by automobile loans and leases.
BMW, the world’s biggest luxury car maker, is selling 742 million euros of bonds backed by German auto leases, said a banker with direct knowledge of the deal. Dearborn, Michigan- based Ford sold 300 million euros of debt tied to car loans on Jan. 8.
The revival in debt backed by consumer and business payments in the auto industry shows improving investor sentiment as Europe emerges from the recession. Yields on company bonds averaged 4.13 percent yesterday in New York, down from 4.37 percent at the start of the year, according to the Bank of America Merrill Lynch Global Broad Market Corporate Index.
“If BMW is successful, it would be a really good indicator for other issuers now monitoring the market,” said Markus Ernst, a credit analyst at UniCredit SpA in Munich. Borrowers testing the waters is “definitely a good sign as it underlines that the market is not drying up,” he said.
Sales of asset-backed bonds in Europe may rise to 50 billion euros this year, from 8 billion euros in 2009, according to Gareth Davies, a debt analyst at JPMorgan Chase & Co. in London. The region’s securitized credit market has been slower to recover than in the U.S. because there’s no equivalent to the Federal Reserve’s Term Asset-Backed Securities Loan Facility, which provides low cost loans to investors buying the bonds.
And this:
Junk Bonds Defy Krugman's Bubble Warning as Loomis Sees Gains
Jan. 14 (Bloomberg) -- The world’s biggest bond investors are dismissing concerns that the high-yield market is a bubble poised to burst after the Federal Reserve’s zero interest-rate policy spurred returns of 57.5 percent last year.
While Nobel Prize-winning economist Paul Krugman and Morgan Stanley’s Stephen Roach see as much as a 40 percent chance for another recession, Loomis Sayles & Co. says debt of the neediest corporate borrowers may be the best bonds to own for 2010.
I was told yesterday that JPMorgan Chase has also increased its exposure to junk bonds.
That this bullishness on junk is occurring while payment-in-kind bond sales have also returned does not mean that it must fail, especially in the short term,.
Meanwhile, Jeremy Grantham and GMO are out with their updated quarterly prediction of prospective real returns from different asset classes. Last I heard, he pegged fair value of the S&P 500 at 880.
On the other hand, GMO does peg U. S. "high quality" equities as producing a 6.8% real return annualized over the next 7 years, far exceeding the 1.3%, 0.5%, and 1.1% expected from U. S. large caps U. S. small caps and U. S. government bonds (duration unspecified, presumably Treasuries) respectively. GMO expects that high quality U. S. equities will outperform large cap, small cap and emerging market equities over this time frame.
All this is occurring while California and New York are out of money in one way or another, and central banks and national governments are creating credit money at record paces because the edifice collapsed. The cynical situation is that high unemployment allows reported price inflation to be low, thus allowing valuation models to flash green in the setting of historically low or record low governmental interest rates.
In a sense, high quality stocks in the modern era, which may have lots of cash flow but generally don't share much with existing shareholders, are similar to junk bonds which after all pay interest (ignoring PIK) and provide a superior claim on corporate assets vs. equity holders. So it may be consistent after all for GMO to be positive on high quality U. S. stocks and Loomis and JPM to be positive on high yield bonds.
In the meantime, the issuance of all this government/central bank debt (credit) is seeping inevitably into the markets and eventually a "boom" will be visible to the public. The financiers who have been bidding up the prices of stocks have not yet interested much of the public in joining in the fun. That may change soon as the public's memory of 2008 fades and it forgets (never understood) the essential corruption that underlay the late 1990s stock bubble and then the massive credit bubble that is now being reblown greater than ever.
Copyright (C) Long Lake LLC 2010
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