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. While I do make mistakes, I try hard to do my analysis thoroughly, and to make sure my data are correct (old habits die hard!) Also, don't ask me why I called it "Volewica". It's too late, now.

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

Tuesday, January 31, 2012

US recovery strengthening

I mentioned a couple of posts ago that the US data were surprising on the upside and that revisions were to the upside too.  These are usually signs of a strengthening economy.   Over the next few days we'll get a slew of new data: the labour market indicators and the ISM indices.

While the unemployment rate lags the cycle, the change in the unemployment rate coincides with the cycle.  You have to invert it, because unemployment falls as the economy recovers.  You can see from the chart below how strong this indicator now is, after the mid-cycle correction associated with the aftermath of the Japanese earthquake and tsunami.

Click to enlarge

Similarly, the change in payrolls is also improving, as the chart below shows.  Nowhere near fast enough, given the slump during the GFC, but still -- improving.

Click to enlarge

Meanwhile, housing appears to have finally turned the corner. But more of that tomorrow.

Wednesday, January 25, 2012

Draghi not a drag

The new head of the ECB, Mario Draghi, has moved decisively to short-circuit the debt-refinancing crisis in the euro area.  Unlike Trichet, the previous head, Draghi is an economist, and he clearly understands feedback loops.  The ECB last month lent banks an unprecedented E489 billion (US$ 606 billion) at a low interest rate for three years, and the banks promptly used the funds to buy the national government's government stock.  Yields on 2 year Spanish government paper have fallen 180 basis points (1.8%) to 3.14%; yields on Italian 2 year bonds fell 2.7% to 3.54%.  The impact on 10 year bonds has been smaller, but still material (see chart)
Source: Bloomberg

Since it was high interest rates on the government bonds which were causing government deficits to blow out, this was a decisive circuit breaker, and was seen as such by the markets, with big name borrowers (RaboBank Nederland and Nordea Bank, for example) able to raise E19.5 billion in new senior unsecured debt, which had been impossible before.

There is to be a second bidding for loans at the end of next month, and the ECB will ease the rules on what constitutes acceptable collateral.  This will give another fillip to confidence.  Meanwhile, the negotiations on a sensible debt restructure for Greece are close to completion, with only an argument about precisely what rates the new 30-year paper is to pay.

The good news lies more in the clear signal the ECB has given:  it's prepared to use very unconventional means to prevent the euro and the European economy melting down.  Yes, the pollies are still squabbling like cockies looking for an evening roost.  Yes, longer-term austerity will still be needed as budgets move towards balance.  And yes, the level of debt is still high.  But if the ECB has at last started behaving like a real Central Bank we can realistically hope that a 1930s-type collapse has been averted.

Tuesday, January 24, 2012


The copper price looks as if it's started a new run (see chart) as has my base metals index (not shown).  The close is above the 50 day moving average, which is rising, though the 50 day isn't yet above the 150 day.  But it looks a lot like early '09 doesn't it?

The US is accelerating, the ECB has decided to act like a real central bank and provide the unlimited support to the European banks it's supposed to, and China is at its low point.

Sunday, January 22, 2012

It's been a while ...

I've been wrestling with the usual demons.  Not to mention time-short.

So just a quickie.

Some thoughts:

  • US data have been consistently better than expected and also consistently revised upwards, always a reliable sign of growth strengthening
  • European data have done the opposite -- no surprise, given Europe's problems and the staggeringly inept response of the pollies and the ECB
  • Chinese data have been weak and anecdotal reports suggest that monetary tightening has bitten deep.  Since inflation has decisively peaked, I expect the Chinese pooh-bahs to aggressively stimulate this year.  They've already started with one cut to liquid asset requirements.  They're going to do a lot more.
  • The S&P 500 has broken upwards, but the Ozzie market hasn't yet.  The S&P has broken out on the top side of a bullish wedge, the 50 day moving average has turned up, the original has crossed the moving average on the upside, the 150 day moving average has turned up and the 50 day has crossed the 150 day on the upside.  Actually all this happened a coupla weeks ago, and I meant to alert y'all, but I didn't get round to it.  :-(