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.

Sunday, September 30, 2012

Spain bank audit paves way for bailout

The Age article here.

We're coming to the end of the GFC-related disasters (though note how the article points out that the current Spanish crisis has been made more severe by previous austerity; maybe the same will happen again).  No convincing signs yet that Europe has bottomed.  The usual suspects among the brokers have been wheeling out the champagne ("the worst is over") at a very modest rise in the European PMI.  I hae me doots.

Meanwhile the Spanish 10 year  bond yield has drifted up a tad (Chart from Bloomberg)  Personally, I would be extremely careful not to short Spanish or Italian bonds.  You'd be on a hiding to nothing -- if yields rise any more, a rescue will be announced and the ECB will then be empowered to buy unlimited quantities of bonds.  In other words:  if things improve by themselves, bond yields will fall, and if they don't, the ECB will open its purse, and bond yields will fall.



Friday, September 28, 2012

The real lesson from Japan's lost decades

An interesting thesis: instead of Central Banks setting inflation targets, they should  set nominal GDP targets.

In current conditions, it makes sense.  It stops the debt to GDP ratio spiralling out of control.  It means that if inflation accelerates, policy would automatically tighten unless growth were also falling.  And it means inflation short term will rise moderately.  A good thing when debt to GDP ratios are so high.

Just for the record, here's Japan's lost decade, using industrial production (IP) as the indicator.  I could use GDP, which has a modest upslope.  But I don't have up to date data, and I'm busy as, so meh.


Wednesday, September 12, 2012

China's president in waiting vanishes

An interesting report from The Age

Coups, attempted coups, massive internal dissension ..... if China goes, we are all in serious trouble.

Interesting times.

Monday, September 10, 2012

Testing times

Last week, the President of the European Central Bank Mario Draghi ushered in some reforms which will make it much less likely that solvent eurozone countries (as opposed to Greece which is insolvent) will be driven to default.  This week the German Constitutional Court rules on whether the European Stability Mechanism is consistent with Germany's constitution.

Personally, I don't think it's as important as the ECB's agreeing to buy the bonds issued by threatened eurozone members. Although the ECB will only buy the bonds if the country is part of a rescue process approved by the EEC, the European Stability Mechanism is not essential to bailouts.  It does help formalise the process.  But rescues can be cobbled together without it. What the ECB's bond buying initiative does is much more powerful.  In essence it says that if markets drive yields on government bonds to levels which potentially cause a default and therefore a bailout, it will buy the bonds in whatever quantity is necessary to drive their yields down.  In other words, it caps bond yields.  Which means default for a solvent eurozone country becomes very unlikely.   It also means that the banks in those countries can be saved, because they can borrow from the ECB at zero percent and buy their government's bonds at, say 6% and know that the capital loss downside is limited.  And the margin they make can be used to plug the black hole of property losses.  Clever.  The ECB is finally getting a grip of the problem.

See how Spanish bond yields have plumetted since the announcement?



[Chart courtesy of Bloomberg]

Saturday, September 8, 2012

Labour Market stats for August

Payrolls grew by just 96 K, but previous data were revised down, a sign of economic weakness.  Overtime hours in manufacturing (very sensitive to economic conditions) fell.  Oddly, the unemployment rate fell, but that came from a different survey (of households not firms) and has a much bigger standard error (is more "noisy") than the establishment ("payrolls") survey, and in any case can fall if people give up looking for work and exclude themselves from the labour force (which they did in August).

For now, I'll just show the unemployment rate chart, because it encapsulates the problem.




Note how in previous recoveries the unemployment rate has fallen sharply.  This has been the great strength of the American system: unemployment might soar during recession, but it also falls just as fast in recovery.  This time, its not happening.  Coupla points:

  • A sluggish recovery is entirely to be expected when an economy has to rebuild its balance sheets because of too much debt.
  • These numbers mean that Obama might well lose the election (forget all the hoopla, in years of strong economic growth, hoi polloi re-elect the incumbent or his party; in bad years they don't)
  • If the Romney gets in, the Tea-Party ideology which dominates the Repubs will cause the "fiscal cliff" I've muttered on about before.  GDP will fall at least 3%.  At least.
  • Which will push the unemployment rate way above its previous highs.  In fact, to post-war highs, to levels not seen since the Great Depression in the 30s. 
  • Very NOT good for shares. 

Friday, September 7, 2012

August's ISM data

The ISM (formerly NAPM) survey data correlate well with overall US economic activity, though not 100% at the month-to-month level.  They pretty much get the major and the minor cycles.  My judgement of last month's data (smoothed by my extreme adjustment program using the NBER's method) is that the slowdown apparent in recent months has come to an end.  Tonight (early morning US Friday) we'll get the employment and unemployment data for August, and we'll see whether that's evident in these numbers too.


The boom that keeps in giving

A trenchant piece about China's growth by Michael Pascoe from Melbourne's The Age newspaper.  Worth a read even if you're not Ozzie, but especially if you're American.  China is BIIIIIG, and getting bigger.


Monday, September 3, 2012

Jackson's Hole

Yep.  It really is called that.  Every year at about this time, the heads and support staff of the world's major Central Banks retreat here to discuss the problems facing the world economy and what they should do about it.  Ben Bernanke said a day or so ago that he was very concerned about the unemployment rate in the US and how slowly it's fallen this year.  And he said that the Fed would if it was necessary do something about it.  On the strength of this, share markets rallied, and the bulls swished around all excited.  Delicious animals.

The problems with o'erweening optimism are these:


  • Major markets are at previous highs (see charts).  To rise through these highs will require either much better economic data and/or serious, credible stimulatory measures in the US and China and Europe. Comforting words from Ben are not enough. Not any more.
  • The Chinese share market, though, isn't at previous highs.  It's slumped.  And that's because the Chinese leadership is embrangled in a leadership struggle, one that happens every five years, but which has had the bad taste to happen now when the Chinese economy is slowing sharply.  No one wants to make key decisions until they know who's going to be boss.  This is complicated by a shift in the Chinese growth model from export-led growth.  Lots of big decisions and no one to make them, probably until November.
  • The US (20% of the world economy) is still facing a "fiscal cliff" in January, when the rolling back of previous tax cuts and mandatory expenditure cuts will slice 4 or 5% from GDP.  We've all seen the result of swingeing austerity in Europe.
  • And, talking of Europe, even though a dim awareness that deep expenditure cuts and tax increases are counterproductive seems to be percolating through even to the Germans, so much needs to happen to generate a recovery -- an end to fiscal austerity; a common bank oversight model for the whole Euro zone; massive quantitative easing; and rate cuts.  They will happen in time, but while we await, markets could get very skittish.  Not so good, kitty malloona.  

I'm taking some money off the table and watching sectoral swings like a ... fund manager should.   Perhaps share markets will just go sideways for a while and then resume their uptrends.  And perhaps not.