Disclaimer

Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. I do make mistakes, but I try hard to do my analysis thoroughly, and to make sure my data are correct. Remember: the unexpected sometimes happens. The expected does too, but all too often it takes longer than you thought it would.

The Goddess of Markets punishes (eventually) greed, folly, laziness and arrogance. No matter how many years you've served Her. Take care. Be humble. And don't blame me.

BTW, clicking on most charts will produce the original-sized, i.e., bigger version.

Saturday, August 27, 2011

World Growth



Here's my chart of year-on-year growth in OECD and BRIC industrial production (2007 GDP weights)  OECD growth appears to be still decelerating, though more slowly.  Growth in Europe has basically stopped (chart not shown).  Once again, the ECB (European Central Bank) has demonstrated its rank incompetence.  It needs to cut rates now, before it's too late.  Certainly it ought to be doing some fairly serious quantitative easing.   The US is OK, Eastern Europe is growing slowly but still positive (chart not shown), and the BRIC countries continue to grow solidly (on average) though a biggish chunk of that is now coming from China. 


Friday, August 26, 2011

The US Budget Problem




The people want more spending, but they won't vote for higher taxes.  In fact, they want tax cuts as well.  The budget deficit took years to get here, and what's needed is not a massive spending cut/tax hike now (because that will plunge the US back into deep recession) but a plan over 5 or 10 years to achieve balance.

Sunday, August 21, 2011

Fix the Fiscal Roof only when it's sunny



An insightful article showing why household finances are not the same as the finances of a country.


Wednesday, August 17, 2011

My Coinciding Index for the US for July



We have most of the components now. Extreme-adjusted (a process which removes statistical aberrations), it rose 0.36%, unadjusted 0.40%. Quite respectable, really. It looks more and more plausible that at least part of the weakness in previous months was due to aftereffects of the Japanese earthquake and tsunami, and floods in the US Midwest.  You can see the effects very clearly in the "level" chart (the lower one)
Click chart to enlarge










The Global Public Debt Problem




This chart sums it up.


So should all the big deficit/big debt countries be slashing spending and upping taxes?  No.  Because that will just worsen the downturn and in turn increase the deficits and the debt.  So how do you square this circle?  You freeze spending, not cut it, and you increase taxes (modestly) in future years.  You can freeze spending by freezing defence spending, and removing or reducing indexation of pensions and public sector salaries.  While you're at it, you might also do some fundamental reforms, for example by introducing a gradual increase in the old age pension qualifying age.  Then you make sure monetary policy is very accomodative, and if inflation drifts up a little you pretend you haven't noticed.

Don't hold your breath.


Deep recession, but very sluggish recovery



Total employment is shown as a percent decline from the peak for each cycle.  The GFC crisis caused the biggest decline since the war.  In the past, sharp declines have been followed by sharp increases.  But not this time.

Frankly, despite the rebound in the markets I'm beginning to wonder whether the required yield on shares isn't going to start rising.  Which will mean that share markets will struggle.  Perhaps (and it's only perhaps, so far) this is a dead cat bounce. I'll be watching the technicals very closely for the next couple of months.


[Source: Morgan Stanley]

Tuesday, August 16, 2011

America is rotting at the core




An excellent guest article in Melbourne's The Age newspaper, by Hugh White from the Lowy Institute.

[...] until now it has been easy to assume that America itself is not in decline: that the global power shift is driven by China's growing strength, not by American weakness. China might grow stronger, but America would remain a uniquely vibrant, resilient and innovative country, and a beacon to the world.
Now one has to wonder. It is possible that we are witnessing not one but two remarkable national transformations, as America stumbles while China ascends. If so, that will make the shifting power balance between them much faster, more destabilising and more risky than we thought.

[...]

As manufacturing has declined, its place has been taken by new ''knowledge'' industries such as finance and IT. But these industries do not create the vast numbers of well-paid jobs that once provided the bedrock of American society. Instead they provide very high paying jobs for relatively few people. This produces the second big long-term change in America's economy - the stagnation in average incomes.

While the relatively few people who work at the top end of America's growth industries have done very well, average incomes have hardly risen for the past 30 years. That's a very sharp contrast to what's happened in Australia, for example, where average incomes have been rising steadily.

[...]


Which brings us to politics. Clearly America's political system has always been untidy, but it has mostly produced good government. Governing America has, however, become harder over the past few decades. Politics everywhere is first and foremost about choosing how to distribute wealth. Until recently the choices have always been relatively easy in America, because there has been a lot of wealth to go around. Now there is, relatively speaking, less to go round, the choices become harder, and the struggles over them intensify.

Several things then happen. First, the debt grows, as both government and people try to avoid choices by borrowing money. Second, politics becomes polarised, as voters scrabble harder for the choices that suit them best. Third, people become susceptible to any politician who can convince them that somehow the hard choices do not have to be made.

Americans believed George W. Bush when he said they could invade Iraq and cut taxes. And they believed Barack Obama's beguiling mantra. ''Yes, we can'' was a promise to Americans that they did not have to make hard choices - a promise he could never keep. Now many Americans seem to believe the Tea Party that cutting taxes will fix everything. As if.





Friday, August 12, 2011

A tale of two worlds





This chart is fascinating.  At least I think it is.  It shows the level of industrial production, indexed to January 2008, the beginning of the GFC.

Note how OECD IP (industrial production) is still below the peak in January 2008.  But BRIC (Brazil, Russia, India, China) IP is now nearly 40% above the January level.  Note also how the recession in the BRIC countries was mild and short, while in the OECD as a whole (there are exceptions: Turkey for example) the recession was very deep and the recovery, contrary to the usual pattern, where a sharp downturn is followed by an equally sharp upturn, output is rising only slowly and tediously.  And this is despite massive monetary and (initially) fiscal stimulus.

Debt is an obvious reason, and the tea party numpties' desire to eliminate the deficit is superficially laudable but actually beyond-belief cretinous.  Cutting government spending now will push the US back into recession.  In 1937, after a long and painful recovery from the Great Depression, the last downturn caused by excessive debt, the Republicans who had gained control of both houses in the previous election (though the President remained the Democrat Roosevelt) , cut the deficit ("it will restore confidence") and plunged the US back into the deepest recession since the Great Depression.  Does mankind ever learn?



Meanwhile, thank your lucky stars that despite the brainless ningies in Washington, China is still growing fast. For without it we really would be in the dwang.

Thursday, August 11, 2011

Red Means Recalcitrant




This Economist blog post had this incredibly revealing chart:


That about sums it up, neh?

Sunday, August 7, 2011

Forget the US -- we're dependent on China now




In an article in Melbourne's The Age newspaper, Michael Pascoe pours scorn on those Ozzies who tremble when the US struggles.

It's worth reading, not just for fellow Ozzies but also for those Americans who care about where the American economy, and with it America's power, are headed.

Nearly 40 per cent of China's exports went to the US in 2001. Now that figure is down about 20 per cent and falling as a matter of policy. The China Daily runs stories about exporters diversifying, targeting markets in Brazil, India, Egypt, anywhere other than the US. It's an entirely obvious strategy as two-thirds of the world's growth already comes from outside the G-7, the ''old world'' major industrialised nations.

What's more, Beijing knows it has to flick the switch from exports to domestic consumption to maintain the strong economic growth it needs for social stability. That's officially spelt out in the latest five-year plan. And, unlike the US, China is actively pursuing the required economic reform instead of just talking about it.


Good news for Australia. Depressing for the US.  The US's inability to come to terms with the facts reminds me of another great power, Great Britain, taking 30 years after the second world war to sort out its economic mess.  Will American pollies be that blind and stupid?  I'm very afraid they will.

Friday, August 5, 2011

Not yet a recession



So we have the two ISMs for July and the components for my coinciding index for June.  Weakening but not yet indicating recession -- more of classic mid-cycle slowdown.  Tonight we get payrolls, unemployment and overtime, all reliable indicators.

Meanwhile there's blood on the streets.  I recommend against panicking.

Click chart to enlarge it

Tuesday, August 2, 2011

The Long Term

We're inclined to worry a lot about short-term fluctuations in markets.  The media love drama:  they sell more newspapers/get more hits in bad times than on ordinary.  "Stock Market Losses Top $5 billion" is a catchier headline than "Stock Markets Gains Top $5 billion" Actually, though, in the fullness of time, the short term wobbles translate into huge long term growth.

Source:AMP Capital Investors, figures within brackets denote peak to trough % declines
This chart from AMP Capital Investors (and alas, it's the biggest I can make it), shows the long-term movement of the Ozzie stock market.  This is the total return, i.e., represents capital plus dividends and has been plotted with a log scale so that percentage movements are the same anywhere along the y-axis.  A chart for the US would have a different slope but the same aspect.

The long term return since 1900 has been 11.8% per annum (or 7.7% after inflation).  The calculation assumes that dividends are reinvested.  This period includes the great depression, the 1960s stock market stagnation (remember the nifty 50 share bubble?), the 1987 crash and the GFC.   The return since 1950 has been roughly the same.  You often hear people say, Oh, I doubled my money on my house since I bought it 20 years ago.  That sounds like a lot, doesn't it?  Yet it is a measly 3.5% per annum!  11.8% will increase your money by over 9 times over 20 years.  (I had to check that calculation to be sure I was right)

The markets may well go lower in the short term.  But there's every reason to believe that in 20 years time, assuming your reinvest your divvies, you'll have a lot more than you do now. And on that time horizon, at least here in Oz, it's a good time to buy.

The Debt Deal

Paul Krugman is right.  Obama has given in to the right wing extremists in the Republican party.  Once again America has shown its uniqueness.  In the worst possible way.

Start with the economics. We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.


The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn't work that way, a fact confirmed by many studies of the historical record.





Paul Krugman's overstating the case a little here, since its seems to me that most of the cuts are later rather than earlier, and "entitlements" had to be reined in because they were growing too fast.  But there will be big cuts shorter term as well.  And that's batty.  Yes, the deficit does need to be cut, but not savagely, and not yet:


Indeed, slashing spending while the economy is depressed won't even help the budget situation much, and might well make it worse. On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue. So those demanding spending cuts now are like mediaeval doctors who treated the sick by bleeding them, and thereby made them even sicker.


And here, he is again exactly right:



And then there are the reported terms of the deal, which amount to an abject surrender on the part of the President. First, there will be big spending cuts, with no increase in revenue. Then a panel will make recommendations for further deficit reduction - and if these recommendations aren't accepted, there will be more spending cuts.


Republicans will supposedly have an incentive to make concessions the next time around, because defence spending will be among the areas cut. But the GOP has just demonstrated its willingness to risk financial collapse unless it gets everything its most extreme members want. Why expect it to be more reasonable in the next round?


In fact, Republicans will surely be emboldened by the way Obama keeps folding in the face of their threats. He surrendered in December, extending all the Bush tax cuts; he surrendered earlier this year when they threatened to shut down the government; and he has now surrendered on a grand scale to raw extortion over the debt ceiling. Maybe it's just me, but I see a pattern here.

 This is The Economist's take:

If Republicans are the clear winner from this deal, the economy is the loser. An ideal deficit-reduction package would have coupled near-term stimulus with long-term consolidation that stabilised then reduced the debt as a share of GDP. This deal certainly doesn’t do the first and it’s unclear that it will do the second. True, it does not add significant new fiscal tightening: total discretionary spending would be a mere $7 billion lower in fiscal 2012 and $3 billion in fiscal 2013 than current levels, according to a Democratic Senate fact sheet. On the other hand fiscal policy is already set to tighten automatically; the International Monetary Fund estimates by the equivalent of 1.4% of GDP. Mr Obama had hoped to extend the payroll tax cut as part of the deal. He may yet do so during the Congressional negotiations, but that seems a fading prospect. It is striking that last Friday’s appallingly weak GDP data did nothing to shape the deal any further in the direction of near-term stimulus.

As for long-term fiscal consolidation, the deal also falls short. Total deficit reduction of $2.5 trillion is less than the $4 trillion that bipartisan groups and political leaders had more or less agreed was necessary to put the debt on a meaningful downward path relative to GDP. It’s also the number Standard & Poor’s, a credit rating agency, had suggested was necessary for America to avoid a downgrade to its AAA credit rating. And it’s worth noting that now that GDP has been revised to be smaller than we’d realised,  debt is larger as a share of GDP.

In the end, hopes for a grand bargain that addressed entitlements, taxes and near-term economic support ran aground on the harsh reality that all these things would require bridging profound philosophical differences that have developed over decades. The odds that the next few months will yield a different outcome seem low: further brinkmanship (albeit of a less terrifying sort than seen in the past weeks) is more likely. That has become the routine way that fiscal policy gets made in America. True, stockmarkets rallied with relief that the most reckless path has been avoided. Meeting such a low standard should hardly be considered a vote of confidence in America’s fundamental fiscal and political maturity.


Meanwhile, while US pollies focus entirely (and ineptly) on domestic issues, China continues to grow at 9% a year and the US at 2%.   In 10 years time, the US economy will be 25% larger, the Chinese 240%.   China will be the world's largest economy. Those of us who admire the US have cause for much concern.