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. But I can't by law give you advice, and I do make mistakes. Remember: the unexpected sometimes happens. Oddly enough, the expected does too, but all too often it takes longer than you thought it would, or on the other hand happens more quickly than you expected. 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.

Monday, July 30, 2012


There's been a debate about productivity in Australia.  The big end of town wants to make it easier to cut wages and sack workers (even though the top ecehelons of business have been getting 20% a year increases in remuneration for 2 decades now).  Other, more thoughtful observers point to other factors.

Ross Gittins of The Age/Sydney Morning Herald has this to say:

The debate over our seemingly weak productivity performance has come full circle, reverting to the explanation the big end of town was happy to accept under John Howard: almost all the weakness is explained by the special circumstances of the mining and utilities industries, which are nothing to worry about.

According to estimates by Reserve Bank researchers, after you exclude mining and utilities, labour productivity in the market sector improved at annual rates of 1.8 per cent over the 20 years to 1994, 3.1 per cent over the 10 years to 2004 and 1.7 per cent over the seven years to 2011.


Starting with electricity, it's long been the case that we've needed to invest in sufficient generating and distribution capacity to cope with occasional peaks in demand that far exceed the average level of demand. These days, such peaks in demand come on hot summer days, when everyone turns on their air-conditioners.

It costs a fortune to install the extra capacity - particularly, the power-cable capacity - needed to ensure that a lot of people turning on their air-con on just a few days of the year does not lead to the thing every state government dreads: blackouts.

But all this capital spending - and the political pain of 18 per cent increases in power bills - could have been avoided had state governments got on with installing smart meters in homes. This would have allowed the introduction of prices that vary with the time of day.

Significantly higher prices at the time of year when people are tempted to put on their air-conditioners would prompt many to think twice. It would also be easy to encourage big industrial users to reduce their demand for relatively brief periods when household air-con was at full blast.

With water, bills are composed of a fixed charge plus a usage charge that varies with how much water you use. In (simple) theory, the usage charge should reflect the long-run marginal cost of an extra unit of water. The fixed charge is whatever additional amount is needed to cover the water company's full costs (including a reasonable return on capital).
In practice, however, the usage charge is usually too low to have much effect on consumption behaviour. And the simple theory doesn't apply well to commodities that have to be stored.

As usual, in the last drought we relied on water restrictions, but they weren't sufficient to fix the problem and we ended up building desal plants in every mainland state capital, only to mothball them when the drought broke.
The economists' study of the price elasticity of demand for water leads them to argue that, had user charges been raised high enough, supply could have been better conserved and the building of desal plants avoided.

User charges could have been increased to the point where they raised more revenue than was needed, thus allowing the fixed charge to be a subtraction from the total user charge. Tooth argues that such an arrangement would have been fairer in its treatment of low-income users.

If all those jumping on the productivity bandwagon were more genuine in their concern to raise efficiency, they'd have a lot more to say about efficient pricing.

Well yes.  Exactly.  If a flexible price system is good enough for those at the bottom of the heap, it's surely good enough for those at the top too.

Sunday, July 29, 2012

Happy Days Are Here Again

 Robert S McElvaine  writes:

Eighty years ago today, the Casa Loma Orchestra recorded a song that was to become an American standard. What happened in the OKeh recording studio on Union Square in New York on October 29, 1929, however, is not nearly as well remembered as what occurred on that day about two miles to the south, on the corner of Broad and Wall Streets.
In what must rank as one of the most ironic coincidences in history, "Happy Days Are Here Again" was recorded on the day that was to be called "Black Tuesday" and become synonymous with the end of the happy days of the 1920s and the onset of the Great Depression.
The irony is perhaps best explained by the fact that the period that came to an end on this date eight decades ago, the Roaring Twenties, was in fact a time of a happy daze.
Now it has happened again. For much of the time from 1980 to 2008, most Americans were again living in a happy daze induced by the same sorts of delusions people had in the 1920s.
Here are the salient points about the two economic collapses:
  • The Great Depression should have been looked on as the Holocaust is: "Never Again!" Yet, beginning around 1980, economists and policymakers systematically unlearned the lessons of that terrible October eighty years ago, in effect saying, "Let's try it again!"
  • Champions of an unfettered free market in the 1920s insisted -- as they insist today -- that low marginal tax rates on the highest incomes, concentration of wealth at the top, lax regulation, and weak labor unions are the way to prosperity. On every count, history proves them to be dead wrong. When their ideals were in effect, in the 1920s and the early 2000s, they produced economic collapses. When the opposite was the case, in the middle decades of the 20th century, there was a sustained period of prosperity:

Read the rest of this Huffington Post article by Robert S McElvaine here.

Click on chart to see bigger image

Friday, July 27, 2012

1 in 4 Spaniards unemployed

Latest stats.  And the latest austerity measures by the government are likely to worsen the recession -- no, depression, because it is a deep and as long lasting as the Great Depression in the US.  And it's going to get even worse.

And here's where some of the money went.  Isn't it odd how the rich make the money through corrupt projects but the poor pay the price through pay cuts, higher taxes, and unemployment?

Useful Stuff

I added some more useful links in the left hand panel of Volewica; two links to Wikipedia articles on debt.

Did you know that the US's public debt is over 100% of GDP?  Why aren't US bond yields where Spanish bond yields are?

Because the US has its own currency and a Central Bank which can print it.

All the ECB has to do to stop the Euro and the European crises is print money.  All it needs to do is say that it will buy Spanish government bonds to whatever extent necessary to keep yields from rising above, say. 6%.  Bam!  End of crisis.

Jobless claims trending lower

I talked about this useful indicator two weeks ago, when it fell sharply (it falls when the economy is strong, and rises when it's weak). It rebounded in the next week after my previous piece, but has fallen again.  Another sign that "payback" is over.  [Chart courtesy of Econoday.]

The US looks like it will continue to grow.  The European slow-motion trainwreck is still an issue, but maybe Draghi's statement last night is a sign that finally -- finally! -- the ECB is going to start behaving like a real Central Bank.  More on Europe later.  I've just updated my world industrial production programs, data and charts.  But I'm busy as, so you'll have to wait!

Wednesday, July 25, 2012

Time to spend big

US 10 year Treasury bond yields are at decadal lows.  Forget that, they are at century lows.  Hard-headed investors are saying that they will lend money to the US government for just 1.4% per annum interest.  For CPI linked bonds, the interest rate is negative, in other words, investors are willing to pay the Federal Government to lend it money.  Bit like working as a waiter at a grand resto: you pay for the privilege (because it's assumed you'll make more than that in tips).

As Paul Krugman says, now would be a splendid time for the US government to build needed infrastructure: roads, schools, high-speed trains, airports, green power stations, ports, etc, etc.  This would add dramatically to demand in the economy but would also increase supply.  Eisenhower's interstate highway construction program is estimated to have added 1.2% per annum to the growth rate ( a huge increase when growth is around 3 or 4%) because of its impact on the overall capital stock.

Instead, the tea-party numpties are planning to cut spending drastically in the new year, the so-called "fiscal cliff", which will contract demand sharply precisely at the time when it's not a good idea.

We need a new FDR.   The collapse in bond yields is a splendid opportunity to transform America.  But it won't happen, because conservatives have gone from being pragmatic to true believers, and the US (and the world) is worse off because of it.

Click on chart to enlarge

Sunday, July 22, 2012

What would Keynes do?

John Maynard Keynes (right)
and his lover, the artist,  Duncan Grant

The first thing to be said about Maynard Keynes is that he was an astonishingly intelligent man. Bertrand Russell, his contemporary at Cambridge, described the economist as having "the sharpest and clearest intellect" he had ever known.

Having transformed the study of logic, Russell was himself one of the great minds of the early 20th Century. Yet when he argued with Keynes, Russell wrote, "I took my life in my hands, and I seldom emerged without feeling something of a fool."

Intimately familiar with the history of economic thought and widely read in many fields, producing a major treatise on the nature of probability alongside his famous General Theory of Employment, Interest and Money and a host of penetrating essays, Keynes had a depth of culture that few economists could claim today.

His brilliant intelligence wasn't exercised only in the realm of theory. Keynes was an outstandingly successful investor, who lost heavily in the 1929 crash, changed his investment methods and recouped his losses, growing the funds of his Cambridge college and leaving a substantial personal fortune. He had a deep understanding of the complex, unpredictable and at times insolubly difficult nature of human events.

But Keynes didn't start out with this understanding. As he records in his memoir, he and his friends in Cambridge and Bloomsbury believed they already knew what the good life consisted in and were sublimely confident that it could be achieved. Influenced by the Cambridge philosopher GE Moore, they thought the only things that had value in themselves were love, beauty and the pursuit of knowledge.

Some of the most bold of Moore's disciples - Keynes was one of them - ventured to suggest that pleasure might also be worth pursuing, but Moore, who was something of a puritan, would have nothing of this. Despite these disagreements, Moore's was a liberating philosophy for Keynes and his friends.

Keynes viewed his early philosophy as being entirely rational and scientific in character. Yet it was also his religion, he tells us - the faith by which he and his friends lived. And, in many ways, it was not a bad faith to live by. It armed him against idolatry of the market, which he described as "the worm that had been gnawing at the insides of modern civilisation... the over-valuation of the economic criterion". To identify the goods that can be added up in an economic calculus with the good life was for Keynes - young and old - a fundamental error. The market was made for human beings - not human beings to serve the market.

At the same time, Keynes's personal religion immunised him against the faith in central economic planning that bewitched a later generation at Cambridge. He was never tempted by the lure of collectivism, which he dismissed as "the turbid rubbish of the Red bookshop". Firmly believing that nothing had value except the experiences of individuals, he always remained a liberal.

You can read the rest of Professor John Gray's intriguing BBC article here.  John Maynard Keynes was also a very competent medieval Latinist and he could have as well made his career there as in economics.  He was gay or bisexual  as he loved both men (Duncan Grant, among others) and women and married the ballet dancer Lydia Lopokova.

For my own part I have no doubt whatever that Keynes would have advocated massive deficit spending and  the monetisation of  the government debt as a solution to the looming debt deflation in Europe.  But he would also have rebuked the European governments for allowing debt to balloon in good times and all governments for permitted the rank financial excess which led to the GFC.

US Housing starts up.

I said a coupla weeks ago here and here that it looked as if housing was finally starting to recover in the US. The June housing starts number (out on Thursday US time) was better than expected and, what was as significant, previous months' data were revised up, always a sign of a strengthening economy.

Starts have a long way to go before they reach even the recession lows of previous cycles, and remember, the US population has grown substantially over the last 30 years.  Nevertheless, they've started a sustained rise.  Now, housing construction is a small part of the economy, but it fluctuates a lot and so it can contribute a much larger percentage of the actual swing in overall output and incomes.  Also, when peopl buy new houses, they also tend to buy new white goods, curtains, and other semi-durable goods.  House prices have stopped falling, and may even be rising slowly; the mortgage rate is at decadal lows; housing starts are rising.  A virtuous circle which will help support the economy.  Alas, it needs this support: my coinciding index is flat, retail sales and employment are flat or barely growing, Europe is cactus, and China is only just really now putting the pedal to the metal.

Click on chart to enlarge

Wednesday, July 18, 2012

KMIT -- or should that be BRIMTICK?

Y'all are surely familiar with the BRIC countries.  It stands for Brazil, Russia, India and China.  The acronym and the whole idea was invented by Jim O'Neill of Goldman Sachs Asset Management (not to be confused with the investment bank Goldman Ripoff) back in 2001.  It represents the fast-growing large emerging economies, which now make up about 24% of the world's economy, larger than the whole European Union (22%).  Now GSAM has come up with a new acronym: KMIT (Korea, Mexico, Indonesia, Turkey) which account for 7-ish percent of the world economy.  Together, these BRIMTICK countries (to use the acronym cleverly invented by Malcolm Maiden of Melbourne's  The Age) account for nearly 1/3 of total world GDP.  And they're all either growing fast or about to resume growing fast (India might not do so well; its pollies are every bit as cretinous as the US's or Europe's)

One snippet from Maiden's article:

GSAM underestimated how quickly the four BRICs would grow in its first BRIC report. It expected them to roughly triple their gross domestic product to a bit more than $US6 trillion by 2010, and their GDP actually topped $US10 trillion in that year. Now, GSAM predicts that its expanded eight-nation ''Growth Markets'' group - the BRIMTICKs perhaps? - will account for more than 55 per cent of global growth in the next 10 years, almost three times as much as the United States and Europe combined.
You can read the whole article here.  It makes interesting reading.

As you can see from the chart (my data, my chart), the KMIT countries haven't grown as fast as the BRIC (though that's mostly China), but they are doing far better than Europe or the OECD as a whole.  Also much of the gap between the two series opened up during the GFC when they collectively fell further than the BRIC countries did.  And let's not even talk about (shudder) the European countries being made really ill by insensate austerity blood-letting--their IP data are still declining.  More on this later; my programs are still a little unwell.  And I would like to smooth the KMIT series.  Indonesian data in particular are very "spiky".

[see also this post]

Tuesday, July 17, 2012

Brazil eases again

Brazil's central bank, the Banco Central do Brasil cut the discount rate again.  It has a pretty good correlation with economic growth,  with falling rates leading recoveries in economic activity by on average six months.  In the chart, the bank rate is plotted with an inverted scale, and gives a clear indication of the possible rise in economic activity.  There are complications (aren't there always?), like a big rise in debt to GDP, plus global weakness which has impacted Brazil's exports.  All the same, it seems very likely that the economy will start an upturn soon.

Brazil is about 3% of the world's economy.  This means that 17% (including China) is poised to resume growth.   Unfortunately, since the Euro-zone (the currency area which uses the Euro) is also 17% of the world economy, the one offsets the other.  So we turn back to the US, roughly 20% of the world economy.  And the question remains: is "payback" over?  We'll be getting data soon which will help clarify the picture.  But something has changed: whereas before Brazil and China were dragging with Europe, now they'll be accelerating.  And that is an improvement.

Saturday, July 14, 2012

China pulls out all the stops

Chinese GDP in the year to June grew just 7.6%, by Chinese standards a recession. Share markets instead of falling, jumped, because the markets interpreted these data and also soggy industrial production (IP) data released at the same time as a clear signal that the Chinese authorities will pull out all the stops* to get growth going again.  And indeed this report suggests that China had already started to restimulate their economy. For example, infrastructure expenditure in the transport sector was up 44% year-on-year in June a huge increase from previous months.  My forecast is that we have seen the low in the Chinese economy, and growth will now start accelerating.

Why does this matter?  In 2007, China was 11% of the world economy.   Because of the sustained differential between Chinese and world growth, it's probably around 14% of the world economy now.  If Chinese GDP growth expands back to 10%, that alone will be enough to increase world growth by 1.4 percentage points.  If you add in Brazil (about to resume growing again) and other developing countries where growth remains elevated, the world could grow by 2% without America or Europe growing.  But more on Brazil, Europe and the debt default fandango later.

*this metaphor comes from organ playing.  You "pull out all the stops" when you want to get maximum volume from the pipes.  A mate, Horatio, gave me this little anecdote:

I have heard (from my paternal grandmother, so the story might be apocryphal) that when the steam organ was played at the Crystal Palace near London for the first time in the mid 1800s, the sound was so loud that people nearby believed it was the sound of the trumpets heralding the Last Days and fell to their knees in great agitation.

The moral of the story is in share markets, alas, is less uplfifting. When you hear that all the stops have been pulled, don't fall to your knees and repent. Buy, instead.

Friday, July 13, 2012

Jobless Claims

Initial unemployment claims total the number of people in the US signing up for unemployment relief for the first time.  As a series, it has some big advantages: it's a simple total, and not based on a sample survey; it's very timely (weekly) and out within ten days of the day it's calculated.  It also has some disadvantages.  It only represents new claims, and so is only a partial guide to total unemployment, though if initial claims are falling, so typically is the unemployment rate; and because it's weekly, seasonal adjustment is less reliable than it is with monthly series.  Remember that both fall when the economy grows.

The market has attributed the most recent big decline in weekly new jobless claims to seasonality problems: due to low inventories, car companies have postponed their annual plant holiday closedown.  These blokes expect the data to rebound when the car plants do actually shut down.  But the fact that car inventories are low is interesting, is it not?  Car sales have been  growing.  Low inventories leading to increased production and employment is a good thing, no?  A sign of re-accelerating growth, perhaps?

This series does have spikes, caused by bad weather or strikes or whatever -- look at the spike in June last year.  But  ... if the decline persists over the next couple of weeks, or is only partly reversed, it will be clear that "payback" is over and the economy once again growing.

Dr Gloom

Nouriel Roubini, who correctly forecast the GFC, more or less alone amongst his econorat colleagues(apart from a among others Gerard Minack at Morgan Stanley and yours truly), gives a deeply gloomy and reasonably convincing interview pointing towards a very bad 2013.  A double dip in the US, probable war with Iran, a slow-motion trainwreck in Europe speeding up, and an absence of government weapons to stop the economic and fiscal crisis.  He points out that the banks haven't changed, as evidenced by the Barclays Libor scandal.  And they haven't in respect of their behaviour, but they are far better capitalised now than then.  Some lessons have been learned.  Personally, I think the banks' proprietary trading should be split from the traditional banking business of borrowing short and lending long.  That's risky enough itself.  Add corrupt trading desks manned (and it's usually manned not womanned) by testosterone-high bullies interested only in short-term wins, still too low genuine capital (long term debt is NOT capital) and you have a toxic mix which will blow up again one day.  Maybe not in 2013, though.

Thursday, July 12, 2012

US Labour Mkt Data for June

Employment growth lower, the unemployment rate not falling.  On the face of it, further evidence that the economy is slowing, or that it's going through a payback period for faster growth earlier this year.  But one piece of evidence suggests otherwise:  overtime hours are rising.  This indicator is well correlated with the cycle.  It suggests that rather than take on new employees, firms are asking existing employees to work longer hours.  This is clearly not sustainable for long.

But it also suggests a degree of caution amongst employers, which does run the risk that it's self-fulfilling.  Why the caution?  The dreary European debacle has to be affecting sentiment.  But more likely is the prospect of the fiscal cliff in January.  The automatic tax increases and spending cuts which are forecast (depending on the forecaster) to reduce GDP by 3 to 5% must be affecting confidence.  This isn't irrational -- Japan tightened fiscal policy early in its now 20 year stagnation and caused the economy to plunge back into recession, and in 1937 in the midst of recovery from the Great Depression, a newly elected Republican Congress forced a balanced budget on the US causing a deep recession.

Time for the politicians to stop acting like three-year olds.

[As ever, click on charts to enlarge]
Change over 6 months, inverted

Tuesday, July 10, 2012

Computer disaster

My computer's been "upgraded".  All my Excel spreadsheets emitted an eldritch shriek and lay flailing feebly on the floor.  Danger!  Danger!  Danger!  Give me strength.

So I've been without a computer or data for too long ....

I wanted to comment on the US employment data, and as soon as I get my Excel VBA programs working again, normal programming will resume.  I'll do a piece on that tomorrow.

Sunday, July 8, 2012

Synchronised easing

Image from this rather charming site
Too late for May 1st, but I suppose better late than never, on Friday,  three Central Banks either cut rates or announced that they were adding more liquidity to the system.  China cut rates 31 basis points (0.31 per cent -- why such an odd number, nu?), the Bank of England promised to add more QE (quantitative easing) in the amount of £50 billion, and the ECB (what took them so long?) cut 25 basis points off its discount rate, and reduced the rate banks get on their deposits with the ECB to 0.  Cutting the rate on deposits at the ECB is designed to make all alternative avenues for surplus cash attractive, which is at least a step in the right direction, though when German short-dated bonds already yield zero, it's obviously directed at the soft underbelly of Europe banks (the PIIGS -  Portugal, Ireland, Italy, Greece, Spain)  In reality, the ECB discount rate should be also be zero, because if you want to avoid a debt deflation you must make cash costless and push so much liquidity into the system it's awash with it.  But (sigh) this is at least an acknowledgement that something is wrong.  Together with the shuffling steps from last week's summit to create a central euro bank rescue mechanism, this will help.  A little.  More to the point, though, would be an end to the senseless masochistic drive for austerity.  I'll write more about that later, but since it's a beaut winter's day here in southern Oz, and it's Sunday, you'll have to be patient.

Saturday, July 7, 2012

ISM blues

June's (US) service sector ISM was sharply lower, echoing the slide in June's ISM manufacturing index.  Even after extreme adjustment, the slide in the data is obvious.

Payback ... or something worse?  Each additional negative data release makes it more likely it's a more serious slowdown.  If so, what's left in the armoury to save the day?  Bernanke's "helicopter" is struggling.

[Click on charts to enlarge]

Thursday, July 5, 2012

White-Ray Electrical, or ...

... how I learnt about data --  a morality tale.

My sister used to work at a company in Cape Town called White-Ray Electrical.   I'd just started working as an economist and I was intrigued about data.  How to collect them, how to analyse them, whether they showed what was really happening in the economy.  I was the most junior person in the department so I was given the task of maintaining the times series in the Red Book, our record of what we considered to be relevant data series.  My sister told me that she used to fill in the Department of Statistics survey about employment, and, years before, the actual number of employees had deviated from the number they would put in the dept of stats survey.  So she would look at the change in their payrolls from the month before and adjust the number she put on the dept of stats survey by the this change.

I was horrified.  You're telling me that the numbers bear only the most tenuous relationship to reality?  How am I supposed to make decisions involving millions of dollars when I can't trust the data?  Eeep!

So I started a major project.  I graphed (by hand!  this was long before PCs) 20 major time series and put the charts up on the wall all round our office.  And guess what?  They all tended to show booms and recessions.  Oh, the amplitude of the waves would vary, the exact timing was different, but broadly, they tended to give the same picture.

And that was one of the best lessons about economic data I ever learnt.  Don't rely on just one series, look at different series from across the economy.  Allow for the White-Ray Electrical effect, but also assume that if you look at enough time series, they will give you a real picture of what's happening.

Things are seldom what they seem
Skim milk masquerades as cream

Anyway, the purpose of that little discursion across my personal history as an investment person is to provide an intro to the chart below.  Now I should have shown this before the ISM was published, but I had to persuade a friend to give me back data for the Chicago PMI, which I didn't have.  Notice how the average for the Philadelphia, Dallas and Richmond Fed surveys and the Chicago PMI closely follows the national ISM manufacturing survey, even though they from regions around the country, not for the country as a whole, and they're also taken at different dates during the month.

Of course, it still doesn't tell us whether this is "payback" for earlier mild weather.  But ... if it is, we should start to see upturns in the regional numbers when they come out over the next couple of weeks, and if we don't, then the risk that this is a renewed (albeit mild, perhaps) downturn rises sharply.  And the nice little stock-market rally will come to an abrupt end.

There's method in my madness.

Tuesday, July 3, 2012

US house price inflation turns positive

Calculated Risk comments that the CoreLogic house price index (an alternative to the Case-Shiller index I talked about here has turned positive year-on-year, and the data are a month more recent than the Case-Shiller series.

I think this is the beginning of a real housing recovery, if only because mortgage rates have fallen so much, with the 30-year fixed rate mortgage now just 3.6%

June's ISM

The June ISM fell back below 50%.  The index is a diffusion index, which measures what percentage of respondents have sales/production/orders up and what percentage have them down.  So going below 50% is a sign that in the manufacturing sector, activity is now going backwards.  New orders are contracting, export orders are contracting ....  This is pretty much what the average of the Fed regional PMIs pointed to.

The chart below shows the seasonally adjusted data (supplied by the ISM) and the extreme-adjusted data (calculated by me).  Extreme adjustment is designed to reduce large random fluctuations in the data.  Trouble is, it's not 100% reliable at the end of a time series, because the algorithm doesn't "know" what the next months' observation is.  If that is also low, then it will decide that two low numbers in a row are a no longer random fluctuations, but the beginning of a trend.  Just the sort of issue we have to wrestle with as investors.

And the underlying question is whether the decline in all these indices is simple "payback" for unseasonably warm weather earlier in the year, or whether it is a sign of a more serious, "real" slowdown.  But ... the decline in export orders has nothing to do with US weather.  And that is concerning.  Even simple "payback" does carry the risk of tipping a weak economy back into recession.  Add European recession, a Chinese slowdown and the "fiscal cliff"  and the risks increase.

Click on chart to enlarge