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.

Friday, March 30, 2012

Bull markets continue

For the S&P500, the golden cross back in January has proved exactly correct. As to why the market is roaring, how about:

  • Expansive monetary policy.  Bernanke has said no rate rises until the end of 2014.  Not that that doesn't mean that QE1 and 2 won't be gradually withdrawn.  But they aren't  needed any more because ...
  • The economy has started self-sustaining growth.  Rising confidence, a floor in housing, rising employment etc all suggest profits will keep on growing.

Meanwhile, the Ozzie market has just broken out of the top end of a wedge after making its own golden cross in Mid February.   Very positive formations.


  • Oz market is cheap
  • China will start reflating soon
  • World mid-cycle growth correction is over
  • A$ (surprisingly!) has peaked.  
  • What else do you buy?  Bond yields are rising, cash yields less than shares, property is iffy ....

Wednesday, March 28, 2012

Hawks Doves and Turkeys

An interesting article.

Is the Fed going to repeat past mistakes, as Elliott argues?  Well, maybe.  I was once told that if you turn off a tanker's engines, it will take it 20 miles to stop.  Economies are like tankers.  It takes a long time to stop them or restart them.  So monetary policy has to be designed to deal with what's happening next year and the year afterwards, as well as what's happening right now.  And right now, I see no signs of current or imminent global overheating -- rather the contrary.  The risks of fiscal tightening have been clearly demonstrated in Europe, now plunging into recession.  And too early monetary tightened has delivered Japan two decades of no growth.  The weak link in the US recovery picture, housing is improving but is still far from boom conditions (see chart).

The article also mixes up cyclical and structural factors.

All the same, at some point the Fed is going to have to start withdrawing stimulus.  And that will be a very "interesting" time in markets!

Click to enlarge

Monday, March 19, 2012


I mentioned here that the last month or so of data for some of the World Industrial Production (IP) series are estimates.
Recent IP data over the last couple of weeks have been marginally positive relative to my expectations, even in Europe.  China was a little worse, UK and Spain and Italy worse, Greece (surprisingly) better, the rest of Europe marginally better, Asia outside China better.

Notice the recent divergence between the "shape" of the charts for the US & Japan on the one hand, and Europe on the other.  The authorities in Europe haven't exactly covered themselves with glory, have they?

One thing seems very clear:  the US mid-cycle correction is over.  And with the Fed promising not to raise the cash rate until the end of 2014, more or less whatever happens to inflation, growth (there) is set to continue.

But my overall world IP diffusion index (not shown), which measures just how much of the world economy is rising, is still at just 20% and hasn't started rising.  Previously, it has started to rise 3 to 6 months before the actual growth rate in world IP has turned up.  So it has to be a concern that it's not doing it now.  All the same, I'm convinced that the global recovery has resumed or is about to.  We'll see.

Saturday, March 17, 2012

World IP

World industrial production continues to slow.  But the BRIC countries just go on growing while the OECD countries (as a whole), without even reaching the previous peak, have stagnated again.  Look at the levels of BRIC IP and the OECD on the second chart.  The world, adding together the BRIC countries and the OECD is still growing, just, but it's a close thing.

Quantitative easing in Europe, relaxed money in the US, and renewed stimulus in China, India and Brazil will lead to a recovery.

[By the way, you won't find a monthly world IP series anywhere else. There's a quarterly series from the UN, but it's quite out of date.  I was the first to calculate a monthly IP series, back in 1992, and as far as I know, I'm the only one who does a world IP.  The reason I did it then, and continue to do it, is because focussing on a single country makes you miss what's really happening.  It would be easy now to believe that the world is collapsing, if you thought Europe was all.  But it isn't.  And China, India, Brazil and Russia (and other Eastern Europe) is doing OK.]

Friday, March 16, 2012

My Coinciding Index & GDP

The problem with GDP is that it is such a comprehensive measure.  Everything goes into the pot: spending, production, incomes, trade, inventories.  That's a problem?  Yes, because it means that preliminary estimates of GDP tend to be revised after newer and better data become available.

So I watch my coinciding index as a good and timely guide to GDP.

Click to enlarge

There's a bit of a gap opened up between the COI and GDP.  Has my trusty indicator stopped working?  I suspect not.  In fact, I think it's because GDP will be revised upwards in a year or two, as the results of census data become available.  The latest couple of years of GDP data are always a work in progress.  The reason for the excellent fit in the past is because GDP data have by now been revised.  But my COI has not been substantially revised -- seasonal factors have shifted a little, and some of the component data have been tweaked.

The US economy is quite strong.

Pity about Europe.

[Oh, and yes, my programs are working again]


My time series analysis programs are in pieces on the kitchen floor -- I'm rewriting them, and since they all use common subroutines and functions, they're pretty much all unusable right now.  So I can't extreme-adjust series, or seasonally adjust them or fit moving averages or calculate diffusion indices.  No matter, they'll be fixed soon (that's what I thought last week!)

So some thoughts on recent data releases (impressions because I need to inspect the data properly, and I can't just yet) :

  • US retail sales -- strong.  The US recovery is finally self-sustaining.
  • Europe data -- I had very pessimistic views on the euro area and in some cases numbers are a little better than I thought.  But not much.
  • Time for China to reflate.  They've started; they need to do more.  Longer-term, the Chinese need to do some work to re-engineer the growth engines of their economy.  They are, but that could make for a bumpy ride.
  • India starting to reflate (about time)
  • Brazil now at the low.  
  • The US market (i.e., the share market) punched straight through previous resistance -- it's heading for the all time high.  When it's gets there, I'll prolly be a seller.
  • The Ozzie All Ords has formed a wedge with a flat top and a rising bottom.  This kind of wedge usually breaks out on the upside.  Once again, I'll prolly sell when it reaches the highs of last year.
  • Commodity prices have resumed their uptrend.
Longer-term, we still have to deal with too much debt.  And that will take a decade or more, and maybe longer if European pollies are stupid about it.  And oil is going to be a major problem one of these days (more later on this)

Tuesday, March 13, 2012

Europe in recession

A combination of fiscal tightening; a (bizarre!) rise in the ECB's discount rate; and ongoing excessive debt have pushed Europe into recession.  I expect it it to be deep.

Euro currency area, France & Germany:

Spain, Italy, UK (not part of the Euro currency area):

ECB: epic fail.  Epic.

[N.B.  data for the latest month are in some cases projections.  My experience over many years suggests my estimations are good except, occasionally at turning points. ( Isn't that always the case?)  So when actual data come out over the next week or two, I could be proved to have been too pessimistic.  On verra.  I'll keep you posted.]

Saturday, March 10, 2012

US Employment data for February

Once again, revisions to the payroll data were positive.  But overtime hours ( a very sensitive indicator) were revised down for January though they rose again in February.  And the unemployment rate didn't fall in February.

But these are statistical zigs and zags.  The stats are based on sample surveys with random fluctuations in the measurements around the "true" picture.  The best guide to the true picture is the trend over a couple of months.  The chart below shows the 6 month change in the unemployment rate, inverted because unemployment falls when the economy strengthens.   This indicator is the strongest it's been in nearly 30 years.  (As ever, if you click on the chart you should get a bigger image)

The chart below shows the change in payrolls, 3 monthly average.  It's not yet exceeded the records set over the last 27 years.  But it's fairly typical of a normal economic recovery.

The Bernanke "helicopter" is working.  All we have to avoid now is a premature tightening in monetary policy and a cretinous tightening in fiscal policy (the deficit is already falling thanks to the recovery).

Friday, March 9, 2012

Brazil ready to start growing again

The chart below shows the central bank discount rate and the year-on-year change in industrial production for Brazil.  The bank rate is plotted on an inverted scale, so a fall on the chart means that interest rates are rising.  As you'd expect changes in the bank rate are followed with a lag by changes in industrial production.

My guess is that the Brazilian economy is bottoming right now, an impression confirmed by the recent rises in the HSBC/Markit PMI indices.  Meanwhile, US employment data are out overnight.  So far, the numbers have been better than expected and previous data have been revised better.  Usually a good sign.

Just as well, as Europe looks very sick (more on that later).