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 29, 2013

US pollies infantile

Once again the Tea Party and the Raving Right want to hold the US to ransom.  Get rid of Obamacare or we won't pass the budget or increase the debt ceiling!  I think they've painted themselves into a corner.  Elections in a November.  Does the public really find these shenanigans edifying or sensible?  Like a bunch of horrid tots throwing tantrums and food.




Cartoon by Bob Gorell

Iran - US rapprochement

About time.

This article in The Age says that the Presidents of Iran and the US have spoken on the telephone in person for the first time since 1979.  Countries don't have to be "friends".  But they ought to try not to be enemies.  Of course, grumps on both sides will try to sabotage any rapprochement, but it makes so much sense for the two sides to make peace.

A step forward, at last.

By Patrick Chapatte of the Int Herald Tribune



Thursday, September 26, 2013

Spot the housing bubble

This article has a really useful interactive chart showing housing affordability in several countries.

Frankly, houses look horribly expensive in Oz, and dirt cheap in the US (remember that the currency is irrelevant here)

At Th Age's website, you can select which countries to show, and compare them with your own.  Nice work!




Monday, September 23, 2013

China PMI up

The PMI series fit quite well with other economic data.  Markit releases preliminary PMIs on 24th of the month for that month.  They are sometimes revised when more data become available, but the revisions aren't usually too big.

The September PMI for China rose a little, extending the rise which began in August.   Looks to me that Chinese growth has bottomed.



Sunday, September 22, 2013

Serendipitous coincidence

The day after I did the post about global warming leading to rises in sea level, my sister in South Africa sent me this photo.  It shows Beach road in The Strand, a town I often visited (I used to surf further along the beach, to the right of this picture)  I haven't been there in 30 years.

The newspaper article about this flood suggested it was rain, but as you see, the entire beach is covered and the waves are breaking over the sea wall embankment and the dual carriageway which lines the beach.  There has been heavy rain, and as usual, parts of Cape Town (the poorer parts, as so often) have been flooded.  But to achieve this kind of flooding from rain, one would expect to see strong currents between the buildings (high-rise apartments and hotels along the waterfront) and as you see there are none.  The floodwaters would be flowing over the concrete sea wall out to sea.  The flow is the other way.

Sea levels are rising.  Steadily.  Inexorably.  Disastrously.  While the world fiddles about carbon emissions.


Tuesday, September 17, 2013

Escaping liquidity traps

A "liquidity trap" is where interest rates are zero, and so cannot be reduced any further, even if that is necessary to stimulate growth.   In most developed countries, the cash (discount) rate is at or very close to zero.  Stimulating growth requires further monetary stimulus, and the current technique is called QE (quantitative easing) where the central bank buys long-dated government stock to drive down long term interest rates.  But that hasn't been very effective.

The last time we had a liquidity trap on the scale we now do was during the great depression.  In this article, Nicholas Crafts shows how the government stimulated the British economy using unconventional measures.

In mid-1932, the UK had experienced a recession of a similar magnitude to that of 2008-09, was engaged in fiscal consolidation that reduced the structural budget deficit by about 4% of GDP, had short-term interest rates that were close to zero, and was in a double-dip recession (Crafts and Fearon 2013). The years from 1933 through 1936 saw a very strong recovery with growth of over 4% in every year. The Chancellor of the Exchequer, Neville Chamberlain (in office from November 1931 to May 1937) was the architect of this recovery. 

The policy framework adopted from mid-1932 has a strong resemblance to the so-called ‘foolproof way’ of escaping from the liquidity trap (Svensson, 2003) and to ‘Abenomics’ in today’s Japan:
  • After the forced exit from the gold standard in September 1931, by the middle of 1932 the Treasury had devised the so-called ‘cheap-money policy’.
Initially, short-term interest rates were cut to around 0.6% – and stayed there throughout the rest of the decade (see Table 1).
  • Second, a price-level target was announced by Chamberlain in July 1932 which aimed to end price deflation and return prices to the 1929 level.
  • Third, the Treasury adopted a policy of exchange-rate targets that entailed a large devaluation first pegging the pound against the dollar at 3.40 and then against the French franc at 77 (Howson 1980), intervening in the market through the Exchange Equalisation Account set up in the summer of 1932 (see Table 2).
Real interest rates fell quite dramatically and very quickly and gold reserves almost doubled within a year. By the end of 1936, the money supply had grown by 34% compared with early 1932 (Howson 1975).
The cheap-money policy followed the textbook approach for operating at the zero lower bound of seeking to reduce the real interest rate by raising inflationary expectations. A key aspect was that the Treasury under Chamberlain, rather than the Bank of England under Montagu Norman, ran monetary policy after the exit from the gold standard. The classic problem with the ‘foolproof way’, especially for central banks, is whether they can credibly commit to maintaining inflation once recovery appears to be under way. Because of its problems with fiscal sustainability, the Treasury was in a good position to persuade markets that it wanted sustained moderate inflation as part of a strategy to reduce the real interest rate below the growth rate of real GDP and to benefit from this differential in reducing the public-debt-to-GDP ratio. This reliance, based on ‘financial repression’, allowed more tolerance for lower primary budget surpluses and eased worries about ‘self-defeating austerity’ without a Keynesian approach to the public finances.
Obviously, for the cheap-money policy to work it needed to stimulate demand – a transmission mechanism into the real economy was needed. One specific aspect of this is worth exploring, namely, the impact that cheap money had on house-building. The number of houses built by the private sector rose from 133,000 in 1931/2 to 293,000 in 1934/5 and 279,000 in 1935/6 – many of these dwellings being the famous 1930s semi-detached houses which proliferated around London and more generally across southern England. The construction of these houses directly contributed an additional £55 million to economic activity by 1934 and multiplier effects from increased employment probably raised the total impact to £80 million or about a third of the increase in GDP between 1932 and 1934. House building reacted to the reduction in interest rates and also to the recognition by developers that construction costs had bottomed out; both of these stimuli resulted from the cheap-money policy (Howson 1975).

Read the rest of the article here.


Monday, September 16, 2013

Calorie consumption

An interesting chart from Business Insider/ Credit Suisse in this article


If you look at photos from the 20s, 30s , 40s and 50s hardly anyone was fat, let alone grotesquely obese. According to this wikipedia article, a 24 year old man weighing 80kg doing moderate exercise would need to consume roughly 3000 per day to keep his weight stable.  But if he did no exercise, he would have to restrict his intake to 1900 calories.  Since over the whole period depicted in the chart, consumption exceeded 3000 calories a day, it must have been exercise which kept them thin.

So it's not just the rise in calorie consumption which has led to the obesity epidemic.  It must also be the decline in exercise.  I don't mean going to gyms, I mean that 60 years ago ppl walked more, mowed the lawn with manual mowers, climbed stairs, got out of the car to open the garage, etc.  I used to cycle 10 k's to school each way.  And so on.

It won't be enough to cut calorie consumption.  We will also have to start to exercise in the way our grandparents and great grandparents did.  And (sorry, but there it is) the best way to cut calories is to adopt a mostly vegetable diet.  

Saturday, September 14, 2013

Global warming & sea level rise

A fascinating article in National Geographic about how the sea level is rising and what will happen as it rises.


This chart is particularly interesting:



[Source: http://ngm.nationalgeographic.com/2013/09/rising-seas/sea-level-chart ; click on chart to get full size]
Notice how the red line is steepening/accelerating.  It's not going to be the intermediate low, that's for sure.  The intermediate high? The high?  If we do nothing, are we are doing nothing, then ....

Thursday, September 12, 2013

Spain & Italy both recovering

Euro recovery is getting stronger, and spreading through the whole region.

[Charts from Macquarie Bank]


The Rich get Richer

Even though the averages for the economy (employment, unemployment rate, industrial production, etc,) have not yet passed the 2007 peaks (or low in the case of the unemployment rate) the rich are fine, thank you.









Second chart comes from The Dish

Wednesday, September 11, 2013

China resumes growth

Both IP (industrial production) and the PMIs (both the "official" and HSBC's) are strengthening again.  Plus retail sales are holding up and inflation is low.  Plan to redirect growth away from exports and investment towards domestic consumption continuing, so although trend growth will be lower (7% ish instead of 10%), a "hard landing" is unlikely.

But key relevance is that the US, Europe, UK, Japan and China are all picking up.





Sunday, September 8, 2013

Global warming continues



Yet more evidence:

The melting of Antarctic and Greenland ice sheets is accelerating and may trigger faster sea level rise than predicted, according to leaked details of the forthcoming Intergovernmental Panel on Climate Change report.
Greenland's ice added six times more to sea levels in the decade through 2011 than in the prior 10 years, according to details of a draft 2200-page study by the UN agency, obtained by Bloomberg.
The Antarctic experienced a five-fold increase, prompting the UN to raise its forecast for how much the two ice sheets would add to Earth's oceans by 2100.

And this throw-away line:

Together, Greenland and Antarctica contain enough ice to raise global sea levels by almost 66 metres.

[Read more here]

Toiling feebly along

US employment growth in August wasn't exactly robust. and the numbers for previous months were revised down, a bad sign.  But employment tends to lag a little, and this may be the delayed response to the "fiscal cliff".




However, as the chart below shows better than the one above, employment growth this cycle has been extraordinarily sluggish (Chart from Calculated Risk)





But the change in the unemployment rate (shown inverted on the chart, because unemployment rises in recessions and falls during recoveries) is still consistent with ongoing recovery.  I've plotted it against the yoy change in my coinciding index, which tracks GDP and the cycle.





And overtime hours in manufacturing, also a sensitive indicator to the state of the economy, were up in August.


My assessment is that growth continues, though (a) it's very far from a boom and (b) we still have a long way to go before we reach the previous peak. The GFC's consequences are still with us. (As usual, clicking on each chart will produce a bigger version)

Friday, September 6, 2013

World econ resumes growth. At last!

This shows the weighted average PMI indices for the US, Europe, China and (since the beginning of the year) Japan.  Growth is accelerating.  For most of the last 2 years, these indices have been below 50%, indicating recession.

By slashing government expenditure and raising taxes, Europe manged to push its economy back into deep recession.  But that folly is now past.

My take on it is that growth will increase form here, for now.

[See also yesterday's piece, Fiscal Folly]

Thursday, September 5, 2013

There are left-wing Christians

You could replace the name 'Paul Ryan' with 'Tony Abbott'.  And it would still be apposite.

[From The Christian Left]



Fiscal folly

From an article by Joseph Stiglitz in today's The Age newspaper:

While other countries fell into the global recession, Australia maintained strong economic growth, low government debt and a triple-A credit rating. With this record, you might expect the federal election to be focused on how to convert the strength of today's economy into resilience for the future. But instead the political spotlight has fallen on the perceived problem of government debt, with alarming proposals to bring austerity ''down under''.

For an American, Australia's anxiety about deficit and debt is a little amusing. Australia's budget deficit is less than half that of the US and its net debt is less than an eighth of the country's gross domestic product.

Most countries would envy Australia's economy. During the global recession, Kevin Rudd's government implemented one of the strongest Keynesian stimulus packages in the world. That package was delivered early, with cash grants that could be spent quickly followed by longer-term investments that buoyed confidence and activity over time. In many other countries, stimulus was too small and arrived too late, after jobs and confidence were already lost.

In Australia the stimulus helped avoid a recession and saved up to 200,000 jobs. And new research shows that stimulus may have also actually reduced government debt over time. Evidence from the crisis suggests that, when the economy is weak, the long-run tax revenue benefits of keeping businesses afloat and people in work can be greater than the short-run expenditure on stimulus measures. That means that a well-targeted fiscal stimulus might actually reduce public debt in the long run.

Australia may have successfully dodged the global crisis, but some politicians seem to have missed the lessons it taught the rest of the world. In this election, the conservative side of politics has foreshadowed substantial cuts to the government budget. This would be a grave mistake, especially now.

Recent experience around the world suggests that austerity can have devastating consequences, and especially so for fragile economies. Government cuts have helped push Britain, Spain and Greece's economies deeper into recession and led to widespread public misery.

The youth unemployment rate in Spain is above 50 per cent and the figure for Greece is above 60 per cent. Their tragic experience should be a warning to the world. But even seemingly healthy Germany was pushed into a recession from which it is just now emerging - but it is an economy that is still weaker than it was before taking the "dose" of austerity.


Proposals for substantial budget cuts seem particularly misplaced at this time given that Australia's economy is confronting new global challenges. Commodity prices are softening and growth is slowing in many key export markets. Australia is already facing declining mining investment. The slowdown in economic growth is not the result of flaws in government policy, but of an adverse external environment. It would be a crime to compound these problems with domestic policy mistakes.

Sharp cuts to public spending over the next few years will exacerbate these challenges. Withdrawing government spending as the economy weakens risks tipping Australia into recession and increasing unemployment.

Assuming standard multipliers(1), cutting public spending by $70 billion from an economy the size of Australia's over a four-year period could reduce GDP growth by around 2 per cent and cost up to 90,000 jobs.

Instead of focusing mindlessly on cuts, Australia should instead seize the opportunity afforded by low global interest rates to make prudent public investments in education, infrastructure and technology that will deliver a high rate of return, stimulate private investment and allow businesses to flourish.

Read more here.

(1) In fact the multipliers in those European countries which blindly imposed fiscal austerity have been unexpectedly large.



Read more: http://www.theage.com.au/comment/australia-you-dont-know-how-good-youve-got-it-20130901-2sytb.html#ixzz2e0mZx5AC

Bon mot

We are enduring a distressing election campaign in Oz.  An unregenerate conservative party is facing down the muddled left, and will probably win, and then go on to repeat the various fiscal tightening follies of governments elsewhere on the grounds that it will "restore confidence".

So I thought you might enjoy some insightful and acerbic insights from J M Keynes.

Capitalism is “the astonishing belief that the nastiest motives of the nastiest men somehow or other work for the best results in the best of all possible worlds.”