I have a feeling this is all due to the end-of-quarter attempts to lock in profits. I suspect this will present some nice buying opportunities.
Tuesday, June 30, 2009
Crude Oil Symbolic of Broad Commodity Sell-Off
Wheat - New 2009 Lows
Wheat and soybeans have dropped precipitously also, but these two crops are rising again as buying takes over. Wheat has reached a new low for 2009!
Corn: Limit Down!
The daily chart really shows the magnitude of the picture! In a single day, we've taken out both the late April and March lows! The USDA report this morning showed greater planting and better crop emergence than was expected for all the grains. 
Socked Stocks
As the quarter ends, stocks are taking it on the chin this morning. Perhaps this is profit-taking. Fund managers are locking in solid returns for the first quarter.
Record UK GDP Contraction
The Pound is getting pounded today.
from FT.com:
Not since 1958 has the quarter-on-quarter decline in GDP been greater, while the 4.9 per cent drop compared to a year earlier was the largest since records began in 1948.
“‘You’ve never had it so bad’ seems the most apt summary of the state of the UK economy in Q1,” said Ross Walker, economist at RBS. “Although to some extent this is ‘old news’, it does serve to emphasise the size of the hole out of which the UK must climb.”
The precipitous decline in GDP in the first quarter reflected the fallout after the credit crisis escalated dramatically from September of last year onwards and highlights the depth of the recession that the UK has been suffering.
But since the end of the first quarter there have been growing signs that the economy is stabilising. Manufacturing output actually grew in March and April, while survey data suggested the economy has returned to growth.The respected economics thinktank, the National Institute for Economic and Social Research, said it thought the economy began to grow again in April.
“The survey data suggest we have at least stopped digging, but the economy remains on course for a lacklustre pace of recovery,” Mr Walker said.
The Bank of England has warned that the economy faces a slow recovery, as banks remain fragile and lending weak.
The output of the construction was revised down to show a 6.9 per cent decline from the first estimate of a 2.4 per cent drop. However, the fall in output was actually less severe than the 9 per cent fall that a more recent ONS revision had suggested, which had led many to expect GDP to be revised down sharply.
Services output, which makes up about three quarters of the UK economy, was revised down to see a drop of 1.6 per cent rather than the 1.2 per cent orginally reported.
“Revisions to GDP are larger than usual, reflecting greater uncertainty in measurement during a period of rapid change in economic activity,” the ONS said.
The GDP figures confirmed that the recession began in the second quarter of last year, after the economy shrank by 0.1 per cent in the April to June period, rather than the 0.0 per cent decline originally reported.
The economy contracted by 4.9 per cent from its peak in the first quarter until the first quarter this year. That is worse than the 2.5 per cent drop in the 1990s recession, but less than the 5.9 per cent fall in the early 1980s recession.
Despite the dramatic contraction in the economy rating agency Fitch reconfirmed the top triple-A rating on the UK’s sovereign debt at stable - along with the US, France and Germany - refusing to follow rival Standard & Poor’s which recently changed the UK’s debt outlook to negative.
The household saving ratio fell to 3 per cent from 4 per cent in the final quarter of last year, as households’ real disposable income dropped by 2.4 per cent due to lower earnings, but consumption did not fall as sharply.
Business investment fell by 7.1 per cent during the quarter. Inventories made a smaller drag of 0.4 percentage points out of the 2.4 per cent fall in GDP, compared to the previous estimate of 0.6 percentage points.
“The UK national accounts ... underline the fact that the economic recovery is built on very fragile foundations,” said Capital Economics.
“With the annual rate pulled down from -4.1 per cent to -4.9 per cent, average GDP growth in 2009 now looks likely to be -4 per cent or weaker rather than the -3.5 per cent we previously expected.
“Note too that the breakdown is not pretty, with the renewed fall in the household saving ratio from 4 per cent to 3 per cent underlining that the adjustment in the household sector has a long way yet to go.”
Not since 1958 has the quarter-on-quarter decline in GDP been greater, while the 4.9 per cent drop compared to a year earlier was the largest since records began in 1948.
“‘You’ve never had it so bad’ seems the most apt summary of the state of the UK economy in Q1,” said Ross Walker, economist at RBS. “Although to some extent this is ‘old news’, it does serve to emphasise the size of the hole out of which the UK must climb.”
Monday, June 29, 2009
Self Review for Self Improvement
from Dr. Brett-
In a recent post, I emphasized that much of the development of trading expertise is a function of pattern recognition and the ability to act upon patterns promptly in real time. A classic example of performance by pattern recognition is the development of competence and expertise among radiologists. Reading an x-ray or other form of imaging means being able to detect normal variations from abnormal ones. In the beginning, to the untrained eye, most medical images will look alike. Only with repeated exposure to images and their variations will medical students learn to make and rule out diagnoses. No amount of book work can substitute for learning at the bedside and reviewing film with experienced physicians.
The trader who video records his or her trading has a powerful tool for accomplishing three learning tasks:
1) Seeing more market patterns and cementing those more firmly in mind;
2) Reviewing performance to assess areas of trading that need more work and to formulate goals for such work;
3) Reviewing performance to assess areas of trading that represent strengths, so that these can be crystallized and recruited during future trading.
When I left my full time work with proprietary traders in Chicago and began working with bank and hedge fund traders, I was surprised by the sophistication of the latter group in terms of portfolio management and equally surprised by that group's utter lack of feel for short-term market movement. Many times, a portfolio manager would describe an excellent idea to me and then execute it at the absolute worst time of day. I realized that, as savvy as the institutional traders were, they lacked the frequency of exposure to short term market patterns and hence had no real "feel" for when buyers or sellers were dominating (or losing their dominance) from minute to minute, hour to hour.
Traders who use video recording in essence double their exposure to market patterns--and to their own patterns as traders. Because pattern learning is a function of the number of repeated exposures to various configurations, the trader who not only views markets, but also reviews them, is more likely to enjoy an accelerated learning (and performance) curve.
The two most common means of recording that I've encountered in my work with traders is desktop video (software that records your screen) and actual video recording with a camcorder pointed at the screen. The former is available through programs such as Camtasia; the latter is best accomplished with a camcorder that includes a large hard drive.
Of course, it doesn't make sense to review the entire trading day, every trading day. In general, the best reviews come from your best trades and your worst: those will cement what you do right and what you need to improve. If traders only reviewed their single best and worst trades each day--what the markets did and what they did--I suspect they would be more likely to achieve competence, and would do so in less time than the trader who packs it in at the market close.
Remember, however, research suggests that it is not just what you review but how that makes all the difference in learning. The most powerful learning takes observations and turns them into concrete goals for future observation. Passive watching of markets (and one's own performance) is much less powerful than active watching and goal setting.
Wage Deflation and It's Impact on Jobs, the Economy
from David Rosenberg:
The deflation vs. inflation debate seems to be settling down, with everyone agreeing that we're seeing both at the same time.
The split is: Things we want to see going down are going up (oil, food) and things we want to see going up are going down (houses, wages).
In his latest piece, David Rosenberg talks wage deflation:
A survey conducted by YouGov for the Economist magazine found that 5% of
respondents had taken a furlough this year and 15% had accepted a pay cut
(see The Recession and Pay: The Quiet Americans on page 33 of this week’s
edition).
As wages deflate, workers are looking for ways to supplement their shrinking
income base, for example, by moonlighting. Indeed, a poll undertaken by
CareerBuilder.com and cited in the USA Today found that one in every ten
Americans took on an extra job over the last year; another one in five said they
intend to do so in the coming year. These numbers are double for the 45 to
54 year olds who now see early retirement, once around the corner, as an
elusive concept.
Most pundits who crow about green shoots and about an inventory restocking in the third quarter giving way towards some sustainable economic expansion live in the old paradigm. They don’t realize, for whatever reason, that the
deflationary aftershocks that follow a post-bubble credit collapse typically last
for 5 to 10 years. Businesses understand better than the typical Wall Street
or Bay Street economist and strategist that everything from order books, to
output, to staffing have to now be restructured to adequately reflect a
permanently lower level of leverage in the economy.
Indeed, by our estimates, there is up to another $5 trillion of household debt that has to be eliminated in coming years and that process is going to require that consumers go on a semi-permanent spending diet. Companies see this,
which is why they are not just downsizing their payroll, but have also cut the
workweek to a record low of 33.1 hours. Fewer people are working and those
that are still working have seen their hours dramatically cut this cycle.
Companies are finding other ways to save on the aggregate labour cost bill as
well, which may be a factor reinforcing the uptrend in the personal savings
rate (see more below). For example, a rapidly growing number of employers
are now suspending contributions to worker 401(k) plans. According to a joint
survey by CFO Research Services and Charles Schwab, nearly 25% of U.S.
companies have either suspended their plans or are planning to do so (this is
up from 2% at the turn of the year). Again, how we end up squeezing inflation
out of the system when the labour market is clearly deflating wages and
benefits for the 70% of the economy called the consumer is going to be
interesting to watch.
The op-ed column by Bob Herbert in the Saturday New York Times really hit
the nail on the head on this whole ‘green shoot’ issue — how can there be
‘green shoots’ when the labour market is deteriorating at such a rapid clip
fully nine months after the Lehman collapse. The full brunt of the credit collapse may be behind us, but please, the other two shocks, namely deflating labour markets and deflating home prices, are very much still front and centre. For every job opening in the USA, there are more than five million unemployed actively seeking work vying for those jobs. That is unprecedented and nearly double what we saw at the depths of the 2001 recession. The
official ranks of the unemployed have doubled during this recession to 14
million and if you take into account all forms of labour market slack, the
unofficial number is bordering on 30 million, another record. For those who
still believe that we somehow managed to avoid an economic depression this
cycle because of a 13% fiscal deficit/GDP and a pregnant Fed balance sheet,
the Center for Labour Market Studies at Northeastern University estimates
that the real unemployment now stands at 18.2%, which is actually higher
than the posted rate at the end of the 1930s.
Nigerian Unrest Drives Crude Sharply Higher
from Dow Jones:
Crude oil closed Monday at the highest point in 2 1/2 weeks, as traders looked past a dreary appraisal of longer-term oil demand and reacted to supply threats closer at hand.
Light, sweet crude for August delivery settled at $71.49 a barrel, up $2.33, or 3.4%, on the New York Mercantile Exchange. Brent crude on the ICE futures exchange settled at $70.99 a barrel, up $2.07, or 3%.
Nymex crude is up 60.3% in 2009. Monday's close was the highest settlement since June 12.
Buyers were galvanized by the latest reported production outage in Nigeria's strife-torn oil-producing region. Royal Dutch Shell PLC (RDSA) confirmed it was halting some output after militants claimed attacks on two clusters of wells at the company's Estuary field.
More than 700,000 barrels a day in Nigerian output has been halted due to civil unrest in the country, whose sustainable crude-production capacity totals about 2.6 million barrels a day, the International Energy Agency says. As Nigeria's president offers amnesty to rebels, a spokesman for the main militant group said Monday it set off a "massive explosion" at Shell's offshore Forcados production platform.
"The situation in Nigeria is not going away," said Christopher Mennis, president of brokerage New Wave Energy in Aptos, Calif. "It seems to be getting worse and worse."
Live Cattle -- Limit Up Bull!
Limit up on live cattle today, with feeder cattle almost the same.
from Dow Jones:
CHICAGO (Dow Jones)--Chicago Mercantile Exchange live cattle closed sharply higher Monday, and August settled limit up, on fund-buying, short-covering and buy stops.
Feeder cattle also wound up sharply higher. July-through-October hogs ended higher, but other months finished mostly lower. And pork bellies settled sharply lower with February limit down.
Live cattle opened firm on underlying technical support and shorts that covered previously held positions. Last week's steady cash-cattle sales and positive beef-packer margins spurred talk that fed-cattle prices would be no worse than steady this week.
Cash-basis cattle last week fetched mostly $82 per hundredweight, which was comparable to the prior week's sales.
Spot-June, which will expire on Tuesday, made further headway after it set off buy stops on the way to a two-month top. Nearby-August peaked at an April 16 high soon after it broke through the 100-day moving average barrier.
Traders are now left wondering whether cash-cattle negotiations will keep pace with Monday's steep climb or fall victim to a possible downward adjustment on Tuesday.
Sunday, June 28, 2009
Is The End of the Recession Near?
from John Mauldin:
The End of the Recession?
I walked into the office yesterday evening and there was someone on CNBC talking about how the 50-day moving average of the S&P 500 rising above the 200-day moving average was telling us the market was getting ready to rise and the recovery had started. I listened to his babbling for another 2-3 minutes and couldn't take it anymore (and no, it was not my friend Larry Kudlow, who is a lot more balanced than whoever was on.)
We keep getting told that the market is telling us "something," usually that the recession is going to end. For some reason, people keep repeating the bromide that the market looks out about 6 months. To that I politely say, rubbish.
Riddle me this, Batman. Did the market see the recession in October of 2007? We were already in recession and the S&P 500 (see below) was making new highs! Where was the market prescience? Did it see the 25%+ drop in January of this year? And I could go back and cite scores of examples where the market "missed" the future turning points over the past ten decades.
What about the shibboleth that the market turns up 6 months before the end of a recession? Sometimes that is true. But does it mean anything? The same people who said it meant something last December and January are saying it means something now. But now it's June and the recovery is not here, so maybe the market wasn't telling us something in January after all.
Gentle reader, there will be a recovery. We will talk about what kind in a few pages, if we have the time. And it is (statistically speaking) likely that the markets will have turned up before the actual recovery. But does that mean anything today?
Go back to the chart above. Notice that in 2003, when the market finally turned up, we were already well out of recession. And the market had a very quick 12% or so drop while we were in recovery, while later we went on to a 90% run-up! Was the drop telling us anything, or do we explain it away?
"In the short run," St. Graham said, "the market is a voting machine. In the long run it is a weighing machine." The voting is based on current sentiment, but what the market weighs in the long run is earnings. The market tries to forecast future income streams. And it gets it wrong as often as it gets it right.
Let's look at this yet another way. This is an important concept, and it should be a component of your economic BS detector. The CNBC host talked in breathless terms about the importance of the 50-day average moving above the 200-day average. It means nothing until it means something, and we won't know what that something is for some time.
Earlier this week (Monday, I think) the 50-day average moved BELOW the 200-day average. The analysts at Bespoke Investment Group noted:
"Going back to 1928, this is the 25th time that the S&P 500 has declined through both of these levels on the same day. On page two we have provided a table showing each of these occurrences as well as the index's returns going forward. Based on those prior instances, the S&P 500's returns going forward have been notably negative. While the S&P 500 has averaged positive returns over the next week, average returns have been negative over the next month, three months, and six months." (emphasis mine)
But 33% of the time, the markets were up six months later, often by quite a bit. And sometimes down quite a bit, but on average only slightly. Which means that as a forward-looking indicator it is interesting but not anything I would put my money (or client money) on!
(I saw some reports that differed, selecting fewer such data points and suggesting that market returns were up after such an event. Logically, that can't be. Let's be generous and just assume sloppy research.)
Before major market moves down, the 50-day average will always move below the 200 average. And the reverse is also true. It is not a sign. It is just what statistically MUST happen. And sometimes they reverse themselves, and sometimes they don't. We have no way on God's green earth of knowing whether the two moves (both up and down) this week will be bullish or bearish six months from now, based simply on the moving averages crossing. You can make the data say anything you want, but you are still just guessing.
Sidebar note: Trend Following 101. I spend a lot of time analyzing trend-following money managers of one kind or another. Basically, they look at data and try to spot trends and then invest in them. A trader who is right 70% of the time is amazing and very rare. 50% is more like it for successful traders. But they have sharp risk controls that cut their losing trades and let their winning trades "ride." Being right 50% of the time can be profitable over time. (Being right 50% of the time is harder than it looks!)
But in the media you get these "analysts" who talk a good game, acting as if a 50-70% probability is something meaningful. "The market has turned. The recession is over." And they say that when we have the first balance-sheet recession in 70 years, yet they want to compare garden-variety recessions to what we have now. Again, we can only know which of the moves (above and below the 200-day moving average) will be the real "indicator" in six months. It is only an indicator today to the extent that we can drive our cars forward looking in the rear-view mirror.
The New Normal Is Still In Our Future
Now let's take that principle a little further. Last week I detailed how air, trucking, and rail shipping is down 20% year-over-year. Global trade is down about 30% in the major exporting countries (see below).
World trade shrinks: Chart 1: Year-over-year change in total exports from 15 major exporting countries (1991 to 02-2009) - Chart 2: Year-over-year change in exports from 15 major exporters between February 2008 and February 2009 (size of circles reflects volume of exports in 2008)
End of the world? Do we just keep falling? No. At some point, six months or a year from now, the year-over-year comparisons become easier. If you are at 100 and fall to 80, then a year later you are at 88 and voila! you have a 10% increase! And the perma-bulls will be talking it up. The fact that you are still down 12% from the peak is ignored.
The point is that we have fallen quite a bit in a lot of major categories. There is really only so much you can fall. And then when you reach that new lower level of the New Normal, you begin to rise. At some point, we will be on the path to "recovery." That does not mean that we will be back to the halcyon days of mid-2007 within a year. It just means that we have stopped falling and now have to adjust to the levels of the New Normal.
The Hidden Problem Within Unemployment Data
This is going to be most evident and painful in the unemployment numbers. Last month saw the number of unemployed rise by 345,000. What was not in the headline data was that 217,000 of those jobs were estimated from the "birth-death" ratio. The US economy creates new businesses that do not get counted in the data, so the BLS estimates what that number is, using previous data patterns. When the economy turns, it overestimates new jobs in recessions and underestimates them in recoveries. No conspiracy, it is just the best methodology we currently have.
But does anyone really think 200,000 jobs were created last month? The real number of lost jobs is worse than the headline. And next month the birth-death number will likely be over 200,000 again. Add another 100,000 or so to the headline number to get closer to reality,
Again, analysts talked about a turnaround because job losses were "just" 345,000. That is a higher number than any month in the 2001-02 recession, and larger than the month after 9/11. That is a green shoot? Yes, we will see the monthly unemployment numbers fall, but they are falling from historic highs. And based on some research by the San Francisco Federal Reserve, it is likely that we will see still higher unemployment that will persist for a while longer.
Let me quote and summarize through the research at http://www.frbsf.org/publications/economics/letter/2009/el2009-18.html. (It is not long, and worth reading.)
"Our analysis generally supports projections that labor market weakness will persist, but our findings offer a basis for even greater pessimism about the outlook for the labor market. Specifically, we suggest that the relatively low level of temporary layoffs and high level of involuntary part-time workers make a jobless recovery similar to the one experienced in 1992 a plausible scenario."
Essentially, there are always workers moving into and out of employment. What they note is that the patterns seem to be changing. In the '70s and '80s, job losses were quick and deep, but the recovery was also quick. In the last two recessions, job recovery was noticeably slower, giving rise to the term "jobless recovery." It was the lack of hiring, and not firing, that was responsible for the slow employment recovery. MY thought is that before 1990 many of the job losses in recessions were from manufacturing. Businesses were quick to lay off and quick to rehire. We now have fewer manufacturing jobs, so the rehiring process has been much slower in recent recessions.
"The long and gradual return to pre-recession unemployment levels implied by the Blue Chip consensus forecast is consistent with a labor market recovery that is slightly weaker than that experienced in 1983 and slightly stronger than that experienced in 1992. However, should labor market conditions instead proceed along the path taken in the 1992 recovery, the unemployment rate could peak close to 11% in mid-2010 and remain above 9% through the end of 2011."
That is not in any Congressional budget forecast. Want to run an election campaign at 10% unemployment levels?
"... What does all this mean for the course of the labor market? We combine data on involuntary part-time workers with the standard unemployment rate to arrive at an alternative measure of labor underutilization. We plot this measure in Figure 3, which shows that the labor market has considerably more slack than the official unemployment rate indicates. The figure extends this labor underutilization measure using the Blue Chip consensus forecast for the unemployment rate as a benchmark and then adding a share of involuntary part-time workers based on the proportion of workers in that category to the unemployed during the current recession. This projection indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-World War II period, implying a longer and slower recovery path for the unemployment rate. This suggests that, more than in previous recessions, when the economy rebounds, employers will tap into their existing workforces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates." (emphasis mine)
Was Income Really Up?
Now, let's turn our attention to today's headline. Income is surprisingly up. That has to be a green shoot, right? Well, not if you look at the underlying data.
Personal income from wages and salaries was down $12 billion in May. So how did income go up? A large increase in "government social benefits" and a decline in personal taxes accounted for all the gain, and then some. The increase was the effect from the recent stimulus package, which is (for now) temporary, and not the result of a recovering economy. Hardly green shoots. It is just borrowed money from another (government) source. In principle, it is not much different than home equity withdrawal, except that taxpayers are on the hook.
And those government subsidies are going to increase. Look at the graph below. What it shows is that the average duration of unemployment is at a 60-year high, and rising. It is now at 22.5 weeks. Unemployment benefits stop at 39 weeks, temporarily up from 26 weeks. More and more people each week are thrown into very dire circumstances when they fail to find jobs and lose the benefits. Care to wager whether, when Congress comes back from vacation, the time people are allowed to be on unemployment will be increased?
And speaking of the increase in government payments to individuals, what did they do with them? In aggregate, what is happening to this stimulus? The data came out today, and I must admit I was surprised. I have been writing for years that American consumers would start to save in this recession, but I (and nearly every credible observer I read) thought that we would see a more gradual rate of increase in the savings rate. The increase in savings has been nothing short of remarkable. (See graph below.)
From a negative 3% in late 2005 (the result of massive borrowing, primarily mortgage equity withdrawal and credit cards), we have risen to a positive 6.9%. That is the highest rate since 1993. The savings rate was less than 1% last August. And totals savings (on an annualized basis) was $608 billion in April, rising to $768 billion in May. That is a 30% month-over-month increase! Maybe the American consumer has found a new religion!
But, there is more than just a new savings fervor at work. Spending rose more than disposable income, so without that increased level of government transfer payments, it is unlikely that savings would have risen as much. Before we get too giddy about savings going through the roof, we need to wait a few months to see if this was the result of new savings religion or government transfer payments (stimulus), which will soon wind down
That being said, given the sharp increase in savings, it's no wonder shipping is down 20% and global trade in the exporting economies by 30%. No wonder retail sales are down, except for Wal-Mart and other lower-price venues.
Final thought for today. The Congressional Budget Office released another report this week, saying that the current deficit levels are unsustainable. They suggest that either taxes must increase by $440 billion or spending must be cut by a like amount, or some combination. If you assume some of the new health-care and other programs are enacted, the number comes closer to $700 billion.
This is not a Congress that wants to cut other parts of the budget by $700 billion. Raising taxes by $700 billion (over 4% of GDP) will dip us back into recession. Not raising taxes will result in debt that cannot be funded at anywhere close to today's rates. A recent IMF study is very sobering about the worldwide problem of growing country debt. Finding a trillion dollars in the market every year, when every other country is also trying to raise debt is simply not going to happen. It will destroy the dollar. There are few good choices in front of us, and fewer still good choices that are likely.
OK. One final suggestion for your weekend reading. Atul Gawande, writing in The New Yorker, weaves a very sobering picture of the problem of reining in health-care costs. He contrasts two Texas border cities with similar demographics, yet one spends twice as much on health care. One town has doctors who order every possible test and the other doesn't. There is no real difference in outcomes. And then compare it to other areas, and the problem facing any health-care policy becomes all too evident. Reportedly, Obama has had everyone read this, and you should too. It provides a very different angle on the problem. http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande?yrail
Tulsa, London, and The Baltics
Last Tuesday I went to an Eric Clapton and Steve Winwood concert. At 64, Clapton can still play the guitar as well as anyone on this planet. It is always fun to see a man at the top of his game.
I get up early tomorrow, flying with family to get to Tulsa to be at my daughter Amanda's wedding shower, and then celebrating the twins 24th birthday tomorrow night. Amanda's wedding is August 22, right around the corner. If there is a recession going on, no one in the wedding industry seems to know. This is the second wedding in two years, and I still have two more unmarried daughters. It's a good thing the word retirement is not in my vocabulary. If we can't get the wedding budget under control, I am going to need about 600 new Conversations subscribers in July.
July 15th I leave for London and will guest host CNBC Squawk Box from 7-9 on Friday the 17th. Then on to Finland, St. Petersburg, and the Baltic capitals, and ending in Rome. (Why Rome? Because that is where we could get mileage tickets back to Dallas. But I might as well spend a few days.)
Then I (and my son Trey) will spend one evening and morning in New York August 5-6 before going on to Maine for the regular August fishing extravaganza with David Kotok and a rather fun crowd of economists and other ne'er-do-wells. It is a tough ticket to get, and I am glad to be invited.
There are lots of exciting things happening in my business, and we will be making announcements in the next few weeks. You have a great week.
Your going to listen to more hard blues analyst,
John Mauldin
John@FrontlineThoughts.com Copyright 2009 John Mauldin. All Rights Reserved
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Friday, June 26, 2009
How International Markets Can Help Time Trading U.S. Markets
Below is a video by Peter Navarro which explains how he uses a select group of international exchange traded funds to better help him time trades in the domestic market, in particular, the S&P 500 (SPY). The three international indexes he follows include the FXI (following 25 large and liquid Chinese companies, sometimes called the Dow of China - betting that as China goes, so goes Asia), the IEV (following the S&P Europe 350 Index), and the ILF (following the S&P Latin America 40 Index).http://link.brightcove.com/services/player/bcpid1079049304?bctid=27461401001
While I have not back-tested these specific indexes for providing leading signals, the video does remind us of the benefits of looking at other data for helping one to spot trends and even forecast movements in domestic indexes. A number of years ago I was engaged in some research that was looking to see if the S&P 500 could be used to help predict trends in various international indexes. After all, the feeling was that as the U.S. goes, so goes the rest of the world - or so we assumed. As our research progressed, and we began doing correlation studies, principle component analysis, information-based data mining, and everything else we could throw at the problem, it became clear that in many instances we had it backwards. The international indexes were more predictive in helping forecast the U.S. market. While some of these correlations broke down over time, it nonetheless helped send the message that we could not assume that the U.S. markets were always driving the world markets, or that the influence was always consistent, in either size or direction. While this is more clear today, and less of a surprise, it still seems as though few traders and investors use such information. The three international ETFs mentioned above are a good place to start your own studies.
Bloomberg: Cap and Trade Will Increase Oil Imports, Reduce Domestic Production
from Bloomberg:
America’s biggest oil companies will probably cope with U.S. carbon legislation by closing fuel plants, cutting capital spending and increasing imports.
Under the Waxman-Markey climate bill that may be voted on today by the U.S. House, refiners would have to buy allowances for carbon dioxide spewed from their plants and from vehicles when motorists burn their fuel. Imports would need permits only for the latter, which ConocoPhillips Chief Executive Officer Jim Mulva said would create a competitive imbalance.
“It will lead to the opportunity for foreign sources to bring in transportation fuels at a lower cost, which will have an adverse impact to our industry, potential shutdown of refineries and investment and, ultimately, employment,” Mulva said in a June 16 interview in Detroit. Houston-based ConocoPhillips has the second-largest U.S. refining capacity.
The same amount of gasoline that would have $1 in carbon costs imposed if it were domestic would have 10 cents less added if it were imported, according to energy consulting firm Wood Mackenzie in Houston. Contrary to President Barack Obama’s goal of reducing dependence on overseas energy suppliers, the bill would incent U.S. refiners to import more fuel, said Clayton Mahaffey, an analyst at RedChip Cos. in Maitland, Florida.
“They’ll be searching the globe for refined products that don’t carry the same level of carbon costs,” said Mahaffey, a former Exxon Corp. refinery manager.
Prices Seen Rising
The equivalent of one in six U.S. refineries probably would close by 2020 as the cost of carbon allowances erases profits, according to the American Petroleum Institute, a Washington trade group known as API. Carbon permits would add 77 cents a gallon to the price of gasoline, said Russell Jones, the API’s senior economic adviser.
“Because it’s going to be more expensive to produce the stuff, refiners will slow down production and cut back on inventories to squeeze every penny of profit they can from the system,” said Geoffrey Styles, founder of GSW Strategy Group LLC in Vienna, Virginia. “We will end up with less domestic product on the market and a greater reliance on imports, all of which means higher, more volatile prices.”
U.S. motorists, already facing the steepest jump in gasoline prices in 18 years, would bear the brunt as refiners pass on added costs, Exxon Mobil Corp. Chief Executive Officer Rex Tillerson told reporters after a May 27 meeting in Dallas.
CBO Says Budget Shortfalls Are Going From Bad to Worse
from the Washington Post:
The nation's long-term budget outlook has darkened considerably over the past six months, and President Obama's plan to extend an array of tax cuts and other policies adopted during the Bush administration has the potential to "create an explosive fiscal situation," congressional budget analysts reported yesterday.
In a new report, the Congressional Budget Office found that extending the Bush administration tax cuts, reining in the alternative minimum tax and canceling a scheduled reduction in payments to Medicare doctors would dramatically slash tax collections at a time when federal spending would be "sharply rising."
States Running Out Of Funds to Pay Unemployment
from CNBC:
The government checks keeping Candy Czernicki afloat are fast running out. The reason? U.S. states obligated to pay benefits to the swelling ranks of jobless Americans are piling debt onto strained budgets.
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CNBC.com |
Fifteen states have depleted their unemployment insurance funds so far, forcing them to borrow from the U.S. Treasury.
A record 30 of the country's 50 states are expected to have to borrow up to $17 billion by next year, said Rick McHugh of the National Employment Law Project, a nonpartisan advocacy group.
"We are setting the stage for big pressures for states to restrict eligibility and benefit levels," McHugh said. "Those type of restrictive actions undercut the (Depression-era program's) economic and social stability purposes."
The state-run unemployment insurance programs are normally financed with payroll taxes paid by employers on each worker. But the funds' tax revenues are falling at the same time as benefit demands are rising.
Nine million Americans are receiving jobless benefits, triple the number who got checks at the beginning of the year. Experts predict the number of recipients will peak sometime this summer as long-term unemployed run out of benefits, which were recently extended and last for 59 weeks in most cases.
States Running Out Of Funds to Pay Unemployment
from CNBC:
The government checks keeping Candy Czernicki afloat are fast running out. The reason? U.S. states obligated to pay benefits to the swelling ranks of jobless Americans are piling debt onto strained budgets.
Fifteen states have depleted their unemployment insurance funds so far, forcing them to borrow from the U.S. Treasury.
A record 30 of the country's 50 states are expected to have to borrow up to $17 billion by next year, said Rick McHugh of the National Employment Law Project, a nonpartisan advocacy group.
"We are setting the stage for big pressures for states to restrict eligibility and benefit levels," McHugh said. "Those type of restrictive actions undercut the (Depression-era program's) economic and social stability purposes."
The state-run unemployment insurance programs are normally financed with payroll taxes paid by employers on each worker. But the funds' tax revenues are falling at the same time as benefit demands are rising.
Nine million Americans are receiving jobless benefits, triple the number who got checks at the beginning of the year. Experts predict the number of recipients will peak sometime this summer as long-term unemployed run out of benefits, which were recently extended and last for 59 weeks in most cases.
More on the Global Warming Sham
from WSJ:
Steve Fielding recently asked the Obama administration to reassure him on the science of man-made global warming. When the administration proved unhelpful, Mr. Fielding decided to vote against climate-change legislation.
If you haven't heard of this politician, it's because he's a member of the Australian Senate. As the U.S. House of Representatives prepares to pass a climate-change bill, the Australian Parliament is preparing to kill its own country's carbon-emissions scheme. Why? A growing number of Australian politicians, scientists and citizens once again doubt the science of human-caused global warming.
Among the many reasons President Barack Obama and the Democratic majority are so intent on quickly jamming a cap-and-trade system through Congress is because the global warming tide is again shifting. It turns out Al Gore and the United Nations (with an assist from the media), did a little too vociferous a job smearing anyone who disagreed with them as "deniers." The backlash has brought the scientific debate roaring back to life in Australia, Europe, Japan and even, if less reported, the U.S.
In April, the Polish Academy of Sciences published a document challenging man-made global warming. In the Czech Republic, where President Vaclav Klaus remains a leading skeptic, today only 11% of the population believes humans play a role. In France, President Nicolas Sarkozy wants to tap Claude Allegre to lead the country's new ministry of industry and innovation. Twenty years ago Mr. Allegre was among the first to trill about man-made global warming, but the geochemist has since recanted. New Zealand last year elected a new government, which immediately suspended the country's weeks-old cap-and-trade program.
The number of skeptics, far from shrinking, is swelling. Oklahoma Sen. Jim Inhofe now counts more than 700 scientists who disagree with the U.N. -- 13 times the number who authored the U.N.'s 2007 climate summary for policymakers. Joanne Simpson, the world's first woman to receive a Ph.D. in meteorology, expressed relief upon her retirement last year that she was finally free to speak "frankly" of her nonbelief. Dr. Kiminori Itoh, a Japanese environmental physical chemist who contributed to a U.N. climate report, dubs man-made warming "the worst scientific scandal in history." Norway's Ivar Giaever, Nobel Prize winner for physics, decries it as the "new religion." A group of 54 noted physicists, led by Princeton's Will Happer, is demanding the American Physical Society revise its position that the science is settled. (Both Nature and Science magazines have refused to run the physicists' open letter.)
The collapse of the "consensus" has been driven by reality. The inconvenient truth is that the earth's temperatures have flat-lined since 2001, despite growing concentrations of C02. Peer-reviewed research has debunked doomsday scenarios about the polar ice caps, hurricanes, malaria, extinctions, rising oceans. A global financial crisis has politicians taking a harder look at the science that would require them to hamstring their economies to rein in carbon.
Credit for Australia's own era of renewed enlightenment goes to Dr. Ian Plimer, a well-known Australian geologist. Earlier this year he published "Heaven and Earth," a damning critique of the "evidence" underpinning man-made global warming. The book is already in its fifth printing. So compelling is it that Paul Sheehan, a noted Australian columnist -- and ardent global warming believer -- in April humbly pronounced it "an evidence-based attack on conformity and orthodoxy, including my own, and a reminder to respect informed dissent and beware of ideology subverting evidence." Australian polls have shown a sharp uptick in public skepticism; the press is back to questioning scientific dogma; blogs are having a field day.
The rise in skepticism also came as Prime Minister Kevin Rudd, elected like Mr. Obama on promises to combat global warming, was attempting his own emissions-reduction scheme. His administration was forced to delay the implementation of the program until at least 2011, just to get the legislation through Australia's House. The Senate was not so easily swayed.
Mr. Fielding, a crucial vote on the bill, was so alarmed by the renewed science debate that he made a fact-finding trip to the U.S., attending the Heartland Institute's annual conference for climate skeptics. He also visited with Joseph Aldy, Mr. Obama's special assistant on energy and the environment, where he challenged the Obama team to address his doubts. They apparently didn't.
This week Mr. Fielding issued a statement: He would not be voting for the bill. He would not risk job losses on "unconvincing green science." The bill is set to founder as the Australian parliament breaks for the winter.
Republicans in the U.S. have, in recent years, turned ever more to the cost arguments against climate legislation. That's made sense in light of the economic crisis. If Speaker Nancy Pelosi fails to push through her bill, it will be because rural and Blue Dog Democrats fret about the economic ramifications. Yet if the rest of the world is any indication, now might be the time for U.S. politicians to re-engage on the science. One thing for sure: They won't be alone.
Controlling Speculators -- A Guarantee of Higher Prices
here is my reply today to someone calling for Congress to control commodity traders:
I guarantee that this will cause HIGHER fuel prices, NOT lower them! There are several reasons:
1) CFTC study last fall, following the commodity boom last year, found that speculators were NOT the cause of higher prices.
2) The study found that speculators were EVENLY split between long and short positions.
3) The study found that NON-exchange-traded commodities rose HIGHER and FASTER in price than exchange-traded ones! Speculators tend to STABILIZE prices, not drive them. Speculators are the first ones to see an overbought market and short that market. They FOLLOW trends; they don't create trends!
4) Speculative trades represented a smaller percentage of trades in 2008, during the commodity boom, than they did in 2006 when there was no commodity boom. Presence of speculators tends to DAMPEN and reduce price swings, NOT exacerbate them!
5) Speculative trades in any given commodity represented only 15-18% of the total. Since they were evenly split between longs and shorts, speculative longs were only about 8-9% of the total in any given commodity. There is no way a small minority of the trades could have controlled or driven the market.
6) There are other liquid futures exchanges around the world, including Shanghai, Dubai, Europe, Singapore, etc. If investor funds are unwelcome in the United States, these funds will go overseas to other futures markets. The capital flight will crush the Dollar, and this will lead commodity prices HIGHER! Lower Dollar = Higher commodity prices!
7) Smaller, less liquid markets. Remember when the Hunt Bros. cornered the world silver markets? The small silver market was easily manipulated, until prices rose so high that even housewives were selling their silver in pawn shops. The market grew until the Hunt Bros. could no longer manipulate the market and prices collapsed. A blue whale can throw its weight around MORE in a small pond than in the Pacific Ocean. Less liquidity and smaller markets EMPOWER large market participants, and make it EASIER for them to manipulate prices. The larger the pool of liquidity, the LESS any one player -- including speculators -- can influence prices. The worst thing we can do is shrink the size of the market. This would give Goldman Sachs MORE market influence, not less.
8) The oil and other commodities will flow to those places that are willing to pay market prices for them -- like China.They are signing long-term contracts for every barrel of oil they can find. If we try to manipulate prices here by controlling the market, that oil will go ELSEWHERE. Do you want to wait 5 hours in line to fill your gas tank -- and pay $7-$8 per gallon for the privilege? Just try to control prices by shutting speculative traders out of the market, and you'll have that privilege.
9) Speculators play a critical role in the futures markets -- one that the liberal news media ignores. They provide liquidity and constant price discovery to the market. Absence of these two -- LIQUIDITY and PRICE DISCOVERY -- were what caused the mortgage crisis because those derivatives couldn't be bought, sold, or priced. So now we want to impose those same conditions on the commodity markets? That would be a disaster!
10) The futures markets were developed to bring MORE money and speculative funds into the markets because until they existed, prices for all commodities were erratic with huge swings and price fluctuations. In the fall, farmers could only get pennies for their crops, but during the winter, grain prices were so high no one could afford to buy them. The futures markets brought speculators in and thereby reduced the peaks and valleys, making prices more stable throughout the year. Hence, the use of "contracts". This brings MORE price stability, not less.
Congress and overspending affect commodity prices more than speculators. They aren't the only factor, of course, but if you look at charts for the price of crude oil this year, it is an almost perfect inverse correlation with the Dollar. If you want to see cheaper oil, then lobby Congress for a stronger Dollar, not hobble the futures markets!
Thursday, June 25, 2009
Cap and Trade Smoke and Mirrors
This will, over the long term, devastate the U.S. economy. The intent is good, but the end never justifies the means.
from WSJ:
House Speaker Nancy Pelosi has put cap-and-trade legislation on a forced march through the House, and the bill may get a full vote as early as Friday. It looks as if the Democrats will have to destroy the discipline of economics to get it done.
Despite House Energy and Commerce Chairman Henry Waxman's many payoffs to Members, rural and Blue Dog Democrats remain wary of voting for a bill that will impose crushing costs on their home-district businesses and consumers. The leadership's solution to this problem is to simply claim the bill defies the laws of economics.
Their gambit got a boost this week, when the Congressional Budget Office did an analysis of what has come to be known as the Waxman-Markey bill. According to the CBO, the climate legislation would cost the average household only $175 a year by 2020. Edward Markey, Mr. Waxman's co-author, instantly set to crowing that the cost of upending the entire energy economy would be no more than a postage stamp a day for the average household. Amazing. A closer look at the CBO analysis finds that it contains so many caveats as to render it useless.
For starters, the CBO estimate is a one-year snapshot of taxes that will extend to infinity. Under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally; companies then buy or sell permits to emit CO2. The cap gets cranked down over time to reduce total carbon emissions.
To get support for his bill, Mr. Waxman was forced to water down the cap in early years to please rural Democrats, and then severely ratchet it up in later years to please liberal Democrats. The CBO's analysis looks solely at the year 2020, before most of the tough restrictions kick in. As the cap is tightened and companies are stripped of initial opportunities to "offset" their emissions, the price of permits will skyrocket beyond the CBO estimate of $28 per ton of carbon. The corporate costs of buying these expensive permits will be passed to consumers.
The biggest doozy in the CBO analysis was its extraordinary decision to look only at the day-to-day costs of operating a trading program, rather than the wider consequences energy restriction would have on the economy. The CBO acknowledges this in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."
The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.
When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.
Note also that the CBO analysis is an average for the country as a whole. It doesn't take into account the fact that certain regions and populations will be more severely hit than others -- manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.
Even as Democrats have promised that this cap-and-trade legislation won't pinch wallets, behind the scenes they've acknowledged the energy price tsunami that is coming. During the brief few days in which the bill was debated in the House Energy Committee, Republicans offered three amendments: one to suspend the program if gas hit $5 a gallon; one to suspend the program if electricity prices rose 10% over 2009; and one to suspend the program if unemployment rates hit 15%. Democrats defeated all of them.
The reality is that cost estimates for climate legislation are as unreliable as the models predicting climate change. What comes out of the computer is a function of what politicians type in. A better indicator might be what other countries are already experiencing. Britain's Taxpayer Alliance estimates the average family there is paying nearly $1,300 a year in green taxes for carbon-cutting programs in effect only a few years.
Americans should know that those Members who vote for this climate bill are voting for what is likely to be the biggest tax in American history. Even Democrats can't repeal that reality.
Foreign Demand for U.S. Debt May Be a Mirage
This is an interesting story from the Fund My Mutual Fund blog:
I found this little tidbit in the Wall Street Journal and it really shows (again) it is just business as usual, in all branches. One of the big stresses in the market has been the enormous glut of US debt coming (both new and rollover). In the past week alone the Treasury put on the market a staggering $104B of debt. Sit back and think about that for a moment... then annualize it ($104B x 52 weeks). Then sigh.
But I digress! Money is free in America as it grows on trees. Going back to the earlier point, the stress is eventually our foreign owners, err creditors will (a) demand much higher rates of return i.e. higher yields - to compensate for all the debt we are issuing and the long term risks it entails or (b) they will begin walking away. This is more an issue in the long term bonds (10 year or 30 year) rather than short term. Indeed China for example has been slowly moving their purchases away from the long term and into short term - much easier to walk away from when the day eventually comes. [May 21, 2009: NYT - Chinese Becoming More Picky About Debt]
Without getting technical, in the bond market there are direct and indirect purchases... indirect being foreign issuers. From the Federal Reserve's New York branch website
Purchases by indirect bidders, in particular, are a fairly good proxy for foreign purchases of Treasury notes, but not Treasury bills.
For those that don't know, "notes" are generally 2 years of duration or longer. "Bills" are the very short term things like 3 months, etc.
Long story short people will now obsess over the INDIRECT purchases of our longer term notes. This is expressed as a percentage; the higher the better in terms of "demand" from foreign central banks.
We've recently had some long term auctions that went reasonably well, and the indirect purchases allayed some fears. Cool right?
Err... fine print time. Follow as with all government reports - when the data begins to work against you, start to make adjustments. Banana Republic style... because folks, we can't handle the truth. We've done it for inflation, employment, GDP - we've lose entire reports like M3 (money supply)... its a pattern. As for this one? Another feather in the cap for Uncle Timmy G.
- The sudden increase in demand by foreign buyers for Treasurys, hailed as proof that the world's central banks are still willing to help absorb the avalanche of supply, mightn't be all that it seems.
- When the government sells bonds, traders typically look at a group of buyers called indirect bidders, which includes foreign central banks, to divine overseas demand for U.S. debt. That demand has been rising recently, giving comfort to investors that foreign buyers will continue to finance the U.S.'s budget deficit.
- But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners.
- The new definitions are deep in the arcane world of Treasury auctions. The change involves buyers who place orders through primary dealers. Those had been counted as direct buyers, but as of June 1 they were classified as indirect buyers, making that group larger than before. Because investors view that group as being dominated by foreign buyers, they assumed foreign demand was higher.
- Getting a better sense of investors' appetite, especially overseas, is imperative to the U.S. at this time when it needs to sell record amounts of debt in order to tackle surging budget deficits and fund massive stimulus programs to revive the economy.
- Treasury officials didn't respond to requests for comment.
Surely.
And here from the WSJ:
The sudden increase in demand by foreign buyers for Treasurys, hailed as proof that the world's central banks are still willing to help absorb the avalanche of supply, mightn't be all that it seems.
When the government sells bonds, traders typically look at a group of buyers called indirect bidders, which includes foreign central banks, to divine overseas demand for U.S. debt.
Corn and Wheat Both Back Near Support Levels Near Lows of 2009
It's amazing to me that both grains would both be close to the lows of the year, given that the stock market is still relatively strong. Both are daily charts.
Corn - searching for support at around $4/bushel
Wheat - nearly at support from past Spring
It's Been a Long Time Since I've Seen This
Both stocks and treasuries are moving higher strongly at the same time! Very strange!
Stocks
Treasuries
Hey Warren! If There are "Green Shoots", Then Why Would We Need More "Stimulus?
If find it amusing that Warren Buffett thinks we need another stimulus to the economy. If the first two didn't work, why would a third one? It will only add to an already monstrous deficit! And if there really are "green shoots", to use Barack Obama's term, and the economy is growing again, then why would one be needed at all? This is a tacit admission of defeat, since claiming that another one is needed is an acknowledgment that the first two didn't accomplish what they promised, and since unemployment is now substantially higher than they promised if we implemented stimulus #2!
from Bloomberg:
Billionaire investor Warren Buffett said the U.S. may need a second economic stimulus package as unemployment is poised to continue rising.
“It looks like we’re going to need more medicine, not less,” Buffett said today in a Bloomberg Television interview. “We’re going to have more unemployment. The recovery really hasn’t got going.” Buffett is chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc.
Stocks Can't Hold Gains, In Red Leading Into Open
I was surprised last night when stocks rose very solidly and sharply at about 10:00 pm local time, but didn't see any follow-through (see green maribozu candle spike higher at left side of chart). I was unable to locate a news event that caused this gain, an 80-point spike in the Dow within 15 minutes. It's enough to convince me of a conspiracy or government manipulation of some sort.Then, overnight, stocks failed to follow through with further gains, instead sinking back into negative territory to begin the trading day today. Pundits have indicated that until now, the stock market rebounded on faith, but so far, data has failed to confirm that faith with signs of lasting improvement. Thus, stocks have begun to sink again (chart shows declining trendl throughout the night). The right side of the 15-minute chart (above), and the shorter-term charts (below) show the story of steady declines. This morning's unemployment claims showed an increase, both in the weekly data and the 4-week average. This is not a sign of bottoming unemployment.
Has the Fed Thrown In the Towel on Quantitative Easing?
This morning on CNBC, pits reporter Rick Santelli suggested that in yesterday's Fed statement, the Fed appears to have "given up" on artificially lowering interest rates through treasury purchases. This would be suggestive of additional future interest rate hikes. Despite that, the treasury auction was well bid yesterday and recently. This chart is suggestive of a consolidation.
Wednesday, June 24, 2009
It Looks More Like the Great Depression Than Pundits Admit
from John Mauldin's Outside the Box, written by two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O'Rourke of Trinity College, Dublin:
New findings:
- World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots'.
- World stock markets have rebounded a bit since March, and world trade has stabilized, but these are still following paths far below the ones they followed in the Great Depression.
- There are new charts for individual nations' industrial output. The big-4 EU nations divide north-south; today's German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
- The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
- Japan's industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.
The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only "half a Great Depression." The "Four Bad Bears" graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.
Comparing the Great Depression to now for the world, not just the US
This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.
Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices.
In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.
Updated Figure 1. World Industrial Output, Now vs Then (updated)
Source: Eichengreen and O'Rourke (2009) and IMF.
Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.
Updated Figure 2. World Stock Markets, Now vs Then (updated)
Another area where we are "surpassing" our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.
Updated Figure 3. The Volume of World Trade, Now vs Then (updated)
Sources: League of Nations Monthly Bulletin of Statistics, http://www.cpb.nl/eng/research/sector2/data/trademonitor.html
It's a Depression alright
To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The "Great Recession" label may turn out to be too optimistic. This is a Depression-sized event.
That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.
Policy responses: Then and now
Figure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally.
Updated Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)
Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank.
Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.
Figure 5. Money Supplies, 19 Countries, Now vs Then
Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.
Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF's World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.
Figure 6. Government Budget Surpluses, Now vs Then
Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.
[They added some country data in their revision that I put here, hence the two figure 5's, but they are labeled as such on the website and I did not change their labellling – JFM]
New Figure 5. Industrial output, four big Europeans, then and now
New Figure 6. Industrial output, four Non-Europeans, then and now.
The facts for Chile, Belgium, Czechoslovakia, Poland and Sweden are displayed below;
New Figure 7: Industrial output, four small Europeans, then and now.
Conclusion
To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.
The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.
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