Friday, April 19, 2013

Weekend Wiemar, Beagle and Pitbull

Wow -- it seems like time has stopped today as we await the resolution of the Boston situation. 

Here's some cuteness too alleviate some of the stress:

Global Reseve Currencies to Date

Over at All Star Charts, JC has posted a very interesting chart showing that the only major equity markets in the world to post gains over the course of the year to date are the US and Japan.  Here is a chart along those lines, except we're looking at the major currency ETFs:

First, the only currency to hold it's value in positive territory this year is the US dollar.  The Australian dollar is just barely negative.   I believe a key issue here is their interest rates are still relatively high (standing at 3%).  The big loser is the yen, which the Japanese are deliberately trying to crash to boost exports.

The oil choke collar and wages

- by New Deal democrat

One of the themes I've been exploring is whether and how much the Oil choke collar has been responsible for the slow growth in the US economy since the turn of the Millenium. The increase in the price of a gallon of gas from $0.91 at its low in February 1999 to $4.11 in July 2008 was certainly spectacular, as shown in the graph below:

So significant is that rise that at one point Professor James Hamilton estimated that the Oil shock of 2008 was responsible for nearly half of the entire decline in GDP during the great recession.

During that same time since 1999, the average Amercian's wages in real, inflation-adjusted terms have only risen very slowly, and have been very much constrained by the increasing price they must pay at the pump, as shown in the next graph which compares the increase in the price of gas (blue, left scale) with the increase in real wages (red, right scale):

Real wages have only grown about 7% over the last 14 years, almost all of that growth during three stairstep increasies coinciding with gas price declines during two recessions and during the very weak economy of 2006.

Focusing on the last several years, earlier this week I ran a graph of real hourly wages showing that deflation in March meant that real wages had turned back up albeit slightly:

I noted the other day that the loosening of the Oil choke collar this spring is giving Joe Sixpack a little respite. The improvement really shows up when we switch to a measure of the YoY% change in real wages. March, along with January marked the best comparison in two years:

Just how close the correlation between gas prices and real wage growth has been since gas prices began to rise in 1999 is shown on the next graph, in which gas prices are inverted so that lower prices are higher on the graph, and higher prices lower:

The renewed surge in gas prices past $3 all the way back to $4 in 2011 caused an actual decline in real wages, that persisted until the end of last year. As you can see in the graph above, the loosening of the oil choke collar this year has led to the first YoY increase in real wages in 2 years.

Dependiing on what happens with gas prices in the next two weeks, we could get the biggest one month decline in consumer prices since the depths of the great recession this month. Whether the decline in gas prices is momentary or signifies a real secular event makes all the difference as to whether or not this is just a brief respite or starts a real improvement in the outlook for the average Amercian family.

Market Analysis: US

Let's start with a look of the latest LEI release:

The Conference Board Leading Economic Index® (LEI) for the U.S. declined 0.1 percent in March to 94.7 (2004 = 100), following a 0.5 percent increase in February, and a 0.5 percent increase in January.

Says Ataman Ozyildirim, economist at The Conference Board: “After three consecutive gains, the U.S. LEI dipped slightly in March, with equally balanced strengths and weaknesses among its components. The leading indicator still points to a continuing but slow growth environment. Weakness in consumer expectations and housing permits was offset by the positive interest rate spread and other financial components. Meanwhile, the coincident economic index, a measure of current conditions, is down since December due to a large decline in personal income.”

Says Ken Goldstein, economist at The Conference Board: “Data for March reflect an economy that has lost some steam. In addition to headwinds from government spending cuts, the private sector economy may struggle to maintain its momentum. The biggest challenge remains weak demand, due to nervous consumer sentiment and slow income growth.” 

Let's look at the data in more detail, first by focusing on the components:

The biggest contributor is average weekly manufacturing hours.  The assumption here is that more production means strong demand for goods.  This is healthy regardless of the cause -- it doesn't matter if it's strong business demand (fixed investment) or consumer demand (increased consumption).  The ISM new orders index is the next largest component, which also plays into the manufacturing theme: and increase in new orders means increased demand.  Next is consumer expectations.  An increase here indicates the potential for increased consumption, while the interest rate spread tells us about the condition in the treasury market and what traders think about the state of growth.

Overall, the readings over the last 7 months have been positive.  There has been one month with a 0 reading and this month's -.1 reading.

As noted in the press release, 5 components were negative while five were positive -- not exactly the type of readings we'd like to see in this figure.  Also note two things: 1.) the ISM new orders index has printed negative readings in 5 of the last six months and the average consumer expectations for business conditions have been negative for the last 6 months.  Neither of these developments is good.

In addition, we also had the Beige Book release on Wednesday.  Here's the summation from that report:

Reports from the twelve Federal Reserve Districts suggest overall economic activity expanded at a moderate pace during the reporting period from late February to early April. Activity in the Cleveland, Richmond, St. Louis, Minneapolis, and Kansas City Districts was characterized as growing at a moderate pace, while the Boston, Philadelphia, Atlanta, Chicago, and San Francisco Districts noted modest growth. The New York and Dallas Districts indicated that the pace of expansion accelerated slightly since the previous Beige Book. 

Most Districts noted increases in manufacturing activity since the previous report. Particular strength was seen in industries tied to residential construction and automobiles, while several Districts reported uncertainty or weakness in defense-related sectors. Consumer spending grew modestly, and firms in some Districts cited higher gasoline prices, expiration of the payroll tax cut, and winter weather as factors restraining sales growth. Retailers in several Districts expect continued sales growth in the near term. Overall vehicle sales remained strong or increased, but sales of used automobiles declined in some Districts. Travel and tourism expanded across most reporting Districts, boosted by both business and leisure travel. 

Demand for nonfinancial services increased at a modest pace, and several Districts noted growth in freight and transportation services. Most Districts said residential and commercial real estate improved markedly since the last report. Home prices were rising in many areas of the country. Loan demand was steady to slightly up in most Districts. Reports on agricultural conditions were mixed, as drought or cold weather adversely impacted some Districts while others reported a strong agricultural sector. Oil and natural gas activity remained robust over the reporting period, with contacts in the Cleveland, Kansas City, and Dallas Districts expecting a rise in activity in coming months, while coal production continued to decline. 

Employment conditions remained unchanged or improved somewhat, and reports of hiring were most prevalent in the manufacturing, residential construction, information technology, and professional services sectors. Wage pressures were generally contained, although several Districts cited upward pressures in occupations experiencing labor shortages, such as information technology, construction, and engineering. Aside from reports of increases in home prices and residential construction materials, price pressures remained mostly subdued across Districts. 

Outlooks among respondents remained optimistic across sectors and Districts, with growth mostly expected to continue at the same or a slightly improved pace. Some uncertainty remained, primarily regarding fiscal policy and health care reform. 

A few observations:

1.) Manufacturing is still growing - always a good sign
2.) The housing rebound appears to be picking up steam.  This is without a doubt the best piece of economic news in the report.
3.) Car sales are still strong -- also a healthy sign for consumers.
4.) The payroll tax cut is dampening demand.
5.) It's always good to hear about freight demand increasing; growing economies always need to move goods from point A to point B.
6.) Once again, we see the word "moderate" used to describe the economy.

For the longest time now, the Federal Reserve has continually used the word "moderate" in the Beige Book reports to describe the current expansion.  And they're right. 

Thursday, April 18, 2013

Market Analysis: Brazil

I've been writing about Brazil's inflation and growth problem since a little after the first of the year.  See here, here, here, here and here.

Yesterday, the central bank raised interest rates 25 basis points.  Several news sources highlight the salient issues.

From the FT:

“The committee judged that the high level of inflation and the dispersion of price increases, among other factors, contributed to resilience in inflation and required a monetary policy response,” the central bank said in a note.
“On the other hand, the committee considers that internal and, principally, external uncertainties surround the prospective scenario for inflation and recommends that monetary policy be administered with caution.”

From Bloomberg:

“Inflation expectations have deteriorated by more than a reasonable amount,” Jose Francisco de Lima Goncalves, chief economist at Banco Fator, said in a telephone interview from Sao Paulo before today’s meeting. “The bank is in a tough situation where it’s practically mandatory to respond.” 

Both consumer and investor perceptions of inflation have worsened, and their views may be driving down consumption, according to Carlos Kawall, chief economist at Banco Safra SA.

From Forbes:

Wednesday initiates what will likely be a new and probably small tightening cycle. The overall tone of the monetary policy committee’s statement was surprisingly dovish, said Marcelo Salomon, an economist at Barclays Capital in New York. The decision to raise rates was split, and the two dissident votes were casted for no hikes (Directors Aldo Luiz Mendes and Luiz Awazu Pereira da Silva).

Moreover, in the statement accompanying the decision, the Central Bank did not bring any decisive strong hawkish sentiments for the market to chew on. While they stated that the high, resilient and disperse inflationary process called for higher interest rates, domestic and especially external uncertainties recommend cautious movements.

Here is the primary problem facing the country:

The inflation rate has been creeping higher for the last year and a half.  As one commenter noted, the bank's hands have been forced by the market.

Also remember that this increase is coming in the face of lower overall growth:  

Anytime a central bank raises rates in a declining growth environment, they are very clearly saying they are worried about the direction that prices are taking and that they need to take immediate action to thwart the increase.

Of the international ETFs that I watch on a regular basis, Brazil has been one of the worst performers for most of this year (since January 1, 2013).  Let's start with a look at the broad picture of the last five years:

After the big recession sell-off, the EWZ rallied sharply.  At the end of 2009, it was just shy of the its pre-recession heights.  But notice that prices have barely moved higher from that level, three years later.  In 2001, the highest point reached was 71.61.  A little over a year later, we see a price of 76.16 -- a little over 6% higher.  For nearly the last year prices have been trading within the Fib levels established between the 2009 lows and highs for nearly the last year.  Recently, the 200 week EMA is providing tremendous upside resistance.  Finally, the market has had no momentum since the beginning of the year, and weak momentum readings for the last two years.

A closer look at the weekly chart shows that prices are near a three year low.  We see a slight uptrend that started mid-last summer but prices have been contained by the 200 week EMA.  Now we see that prices are selling off and approaching the trend line.

The daily chart shows a very weak technical picture.  Prices are below the 200 day EMA and the shorter EMAs are moving lower.  Prices have also broached the 38.2% Fib level of the mid-November early March levels.  The MACD is declining and negative, while the CMF is showing a negative reading. 

This rate increase has signaled to the market that Brazil has some fairly deep problems that need to be dealt with.  I wouldn't go long here until we get a far clearer read on inflation. 

Market Analysis: Chile

Let's start with a look at the macro picture, with a table of data from the Central Bank:

Note the strong reading for various parts of the GDP report for the last two years: GDP growth was strong at 5.9% in 2011 and 5.6% in 2012.  There are strong numbers from domestic demand and investment and total consumption.  The only weak point is the international trade position.  However, for a developing country, a negative current account usually means there's decent domestic demand for various goods.

The above chart shows the quarterly change in GDP for the last 10 years.  Notice the strong rates of growth, clocking in at 4% for most of the previous expansion, and then returning to strong growth after the great recession.
Also note the inflation is under control.  It rose 3% in 2012, with a December reading of 1.5%. 

The overall condition of the economy was solid, as expressed in the latest Central Bank Minutes;

Locally, the unemployment rate had declined further and domestic capacity conditions were estimated to be still tight. Output was growing somewhat above trend estimates, driven by domestic demand and especially investment. The recent rebound in private consumption had gone hand in hand with higher labor income growth—reflected in the evolution of employment and wages—, and with the recent drop in CPI inflation.

Meanwhile, household debt had been slowing, particularly in its consumer loans component. The greater demand pressures had manifested in an increase in imports and a wider deficit of the current account, thus moderating its effects on the use of domestic resources and inflation. Core inflation had dropped further for both goods and services, and it was already down to 0.8% annually, while headline inflation was at 1.3% annually. This slow inflation trajectory was worth noting, contrasted with the dynamism shown by domestic expenditure, output and employment. This trend reflected the transitory influence of some recent factors, such as the appreciation of the peso, the normalization of earlier shocks in the prices of some perishables, and the reduction in the stamp tax, but more permanent effects could not be ruled out, such as faster productivity growth. For the time being, the diagnosis remained that this was a temporary phenomenon, which should tend to fade into the horizon projection, but such a hypothesis required further evaluation. Notwithstanding this expected normalization, the recent drops in international food prices and lower regulated utility rates expected for the coming months would lessen the manifestation of this normalization in the short term.

Overall, this report is very encouraging.

So, let's now turn to the charts of the Chile ETF/

On the weekly chart, the first point to stand out is the MACD.  Notice how it's been right below negative levels for most of the last year and a half.  The current "top" is very close to the "top" from early 2012.  There are two trend lines.  One which starts from the lows of late 2011 that connects to lows from mid-2012.  Prices broke this trend twice, with the most recent break coming a few months ago.  The second trend line connects two lows from 2012.  Prices are right at these levels now.

The daily chart shows that prices have been in a downtrend for most of the year.  They've moved through all the relevant fib fans and broken major support just below the 64 price level.  Prices are below the 200 day EMA, indicating bear market territory.  The MACD is declining and in negative territory and the CMF is negative.

So, why is the market declining when the fundamentals of the economy are good?  Chile is a natural resource exporter, heavily dependent on copper exports to China.  Recent news out of China has been bearish (although they're still growing at a strong clip).  In addition, there have been stories about the copper market being over-supplied, meaning Chile's primary export is over-supplied as a whole.

Wednesday, April 17, 2013

Is economics science? Or just philosophy with calculus? A case study

- by New Deal democrat

Since Bonddad, along with everybody else, has already weighed in, let me put in my $.02 about the Reinhart and Rogoff bombshell.

First of all, you should take everything that you have read about this story since it broke - including this post - with multiple grains of salt (with the exception of the spreadsheet error, which Reinhart and Rogoff have admitted to. Supposedly, however, the spreadsheet error only changes the ultimate result as to highly indebted countries by 0.3%. The other two criticisms - which have to do with methodology and potentially cherry-picking - have a much larger impact on the results.). That's not because the revelations are false, but rather because nobody has had time to give the revelations sober reflection. After a week or two, it may turn out that the scale of the story is accurate. Or there may be less to the story than initially meets the eye. Or the repercussions could be even bigger (particularly if the suggestion that the authors cherry-picked their data turns out to be the truth). It's never sexy to wait until the dust settles, but in matters like this (and just like not jumping to conclusions about the Boston Marathon bombing), boring is better and more accurate.

But let's proceed with the assumption that all three criticisms of the Reinhart and Rogoff study are appropriate and accurate, as is the contention that Reinhart and Rogoff supposedly refused to share their raw data until recently.

If this were a study in physics or biochemistry or psychology, there would almost certainly be major reputational consequences. But far more importantly, if the results of a major study were found to be substantially flawed in a way that almost completely undercut the claimed results, professionals in the field would change their minds, or at least be far more measured and circumspect in their conclusions as to the point in question.

So this controversy is a case study as to the nature of the economics profession itself. If the critique holds up, does anybody change their mind? If nobody changes their mind; if no economist who supported austerity based on Reinhart and Rogoff so much as qualifies their opinion; then it will be evidence that economics - at least as practiced by broad swaths of the discipline - is not science, since data and results do not cause a change in underlying ideologies.

So this isn't an "Emperor has no clothes" moment for Reinhart and Rogoff alone, or just economists supporting austerity. This is an "Emperor has no clothes" real live test of a large portion of the profession of economics itself.

From Bonddad: what NDD said.  

Austerity R.I.P.: April 16th 2013

We've made a great deal of fun about austerity here at the Bonddad Blog.  Simply type in the word austerity in the search tab in the upper left and a bevy of posts will turn up. 

My reasoning is pretty simple.

1.) NDD and I did a series of articles on the Great Depression about 5-6 years ago.  The data from that episode is incontrovertible: well structured government spending during a period of weak demand increases GDP.  The same philosophy underlies Chinese investment policy as well, and they've been growing by leaps and bounds.

2.) The basic GDP formula uses addition.  One of the variables in this equation is government spending.  Hence, simple (and I mean really simple) math tells us that austerity lowers growth by definition.

The primary arguments against government spending are

1.) political (the government is a bad thing)
2.) Moral (our children will drown in debt)
3.) the theories of Reingard and Rogoff

Points 1 and 2 usually only come out to play during Democratic administrations.  Hence, they should be ignored.

Points number three are derived from a paper that argued when a country's debt goes over 90% of GDP, growth slows.  Now it turns out that that paper had some serious errors in it.  Mike Konczal over at the Next New Deal has the lowdown on exactly what was involved.  But the end result is the research didn't add up.  At all. 

So, here's the deal:

If you have argued for austerity in any way over the last five years, realize this:

1.) The paper which backed up your theories was deeply flawed.
2.) The actual experience of countries that have tried these theories shows little to no growth.

This means that austerity doesn't work in theory and and doesn't work in practice.

Or, more bluntly: austerity doesn't fucking work.  Period. 

Market Analysis: Gold

First, please read Barry's gold bug column from yesterday.  It's a hoot -- and remarkably accurate.

Let's start with a look at the P&F chart.  These are great for getting a good look at the pure price movements.

First, notice the incredible rally gold experienced for the 2009, early 2011 period.  We see move in the gold ETF from 88 to 184.  In 2011 and 2012 we see a triple top at the 174 level.   The far right circle of "O"s shows that prices have been decreasing since December of last year.

What's particularly interesting about this chart is the triple top in 2011 and 2012.  I don't remember anybody talking about that.

The monthly chart has broken a trend that goes all the way back to mid-2005 -- before the "great recession."  That makes this trend break incredibly important from a technical standpoint.

On the weekly chart, notice that the 150-155 level has provided technical support for the last year.  Over the last two weeks, prices have broken this level in  a huge way -- printing very large candles on incredibly high volume.  Notice how the declining MACD telegraphed this move over the last year.

Finally, we see the daily chart which shows a literal crash of GLD.  Once the chart broke through the 150 level, it dropped like a stone.

Here's the bottom line: I have never seen the bottom fall out of a market like this before.  This is literally one of the sharpest, most severe sell-offs I've seen ever.

Tuesday, April 16, 2013

Deflation returns, but is it good or bad?

- by New Deal democrat

As I expected, March consumer prices clocked in at -0.2%, the third deflationary reading in a year (May 2012 showed -0.1% and November 2012 showed -0.2%). This had everything to do with the unexpected springtime decline in gasoline prices.

The good news is, this means that real, inflation adjusted hourly wages for the average American actually rose in March on a seasonally adjusted basis, and while they haven't made back all of February's decline, are again close to a 2 year high:

Gasoline prices are giving Joe Sixpack a break.

When we zoom in on more recent behavior in gas prices, we can see that as of mid-April, they are down -10% YoY, the deepest decline since the great recession:

And zooming in even closer, we can see that average month-over-month gas prices are down an average of over -2.5% so far this month:

If that were to hold up for the entire month, I would expect a -0.1% or -0.2% non-seasonally adjusted CPI for this month, and a seasonally adjusted -0.4% or -0.5% CPI. YoY CPI would only be about +1.0%.

On the other hand, weak petroleum prices have typically been associated with economic weakness and outright recession. Here's a graph of the YoY% change in gas prices since their bottom in February 1999 (blue), compared with the YoY% change in real GDP (red, scaled *10 to better show changes):

Bottom line: if this is just a cyclical move in gas prices, it portends real economic weakness. If, however, this really is a symptom of the Oil choke collar loosening, i.e., a secular move, then this is good deflation and helpful to the economy. With industrial production improving by over 1.5% in the first three months of this year (whatever is ECRI going to say now?), I lean towards the optmistic interpretation.

Thinking About Employment: Why Aren't Employers Hiring More People?

I want to return to this chart from MacroBlog:

Here is an explanation of the above chart from Macroblog:

The circle at the perimeter of this chart represents labor market conditions that existed just before the recession. We have dated this as late 2007. The inner circle represents the state of affairs when payroll employment reached its trough in late 2009. The oddly shaped red figure inside the perimeter depicts where each of the indicators was in March 2011 relative to the benchmarks. The purple figure depicts the state of the labor market in March 2012. Finally, the blue figure shows where the indicators were as of March 2013. All of the indicators are scaled so that outward movement represents improvement. The progression of these point-in-time snapshots provides us with a picture of how labor market conditions have evolved over the past four years.

As you can see, substantial improvement has arguably been achieved in the leading indicator series. As a group, these data points are approaching their prerecession levels. Employer hiring behavior and confidence are slowly moving outward but remain quite weak relative to their prerecession benchmarks. Finally, the labor utilization measures are very weak and, notably, have hardly improved at all over the past two years.

As I previously mentioned, I think this is the best chart on employment out there, largely because it shows how complicated this concept is.  Unfortunately, we (Bonddad Blog included) tend to only focus on two employment statistics: weekly unemployment claims and the monthly jobs report.  And the monthly jobs report has become subject to a fair amount of political skew at the expense of actual analysis.  In contrast, the above chart recognizes there are numerous factors and statistics that go into a full interpretation of the jobs market and what is actually happening. 

As the writers at MB note (see above), the leading indicators in the above chart are good.  Temporary hires are rising and initial claims are dropping.  These two numbers are a big reason why many people (myself included) have been bullish about the jobs market.

However, there is a fair amount of data that suggests that bullishness is not warranted -- or at least, should be pretty severely tempered.  The reason for this is twofold with the first number being employer behavior as measured in the JOLTs survey.  First, let's get an overview for what's involved with JOLTs:

The Job Openings and Labor Turnover Survey (JOLTS) produces monthly estimates of job openings, hires, quits, layoffs and discharges, and other separations. JOLTS data help measure the demand for labor (employers' need for employees) and track the health of the economy.

So, as the MB graph notes, this survey shows what employers are doing (not what they're saying) on the employment front.  In short, it shows us demand for labor.

Consider this chart of total job openings:

First -- there isn't a lot of data here to compare the current totals to.  While that is a shortcoming, at least we have something.

Second, here's a definition of job opening (the variable being measured above) from the BLS Glossary: A specific position of employment to be filled at an establishment; conditions include the following: there is work available for that position, the job could start within 30 days, and the employer is actively recruiting for the position.

As the chart shows, the total openings dropped sharply as a result of the great recession, with total openings falling to ~2 million.  This is 800,000 below the lowest level of the previous expansion, which was preceded by a fairly mild recession.  (It should also be noted that the jobs market in the previous expansion was also pretty weak; for the first few years it too was also referred to as a jobless recovery). 

The number increased from the end of 2009 to 2012.  However, the number didn't hit the 2.8 million level (the lowest point from the previous expansion) until midway through 2011.  So, the current expansion was far weaker than the previous expansion (which was also very weak) for the first three years of the current recovery.

That leads to the question: why do we have this weakness in the JOLTs job opening survey?  For that answer, we have to turn to the National Federation of Business' small businesses monthy business survey, and most importantly, this chart:

I've drawn three vertical red lines: one that corresponds to the beginning of 2009, 2012 and 2013.  Notice that for three consecutive years -- 2009, 2010 and 2011 -- sales were the single most important problem facing businesses.  Also note that the level  for "sales" being the biggest concern among employers during this expansion was far higher than this statistic had been reading for the entire history of the data series going back to 1986.  Additionally, the current level for the sales response (which is the lowest for the current data series) is just below the highest it's achieved at other times (1992 and 2003).  This indicates that sales (or the lack of it) is still a huge concern for small business and provides a fairly big reason why job openings are low and why they stalled last year.  

In addition, we have this chart from the same survey:

First, the issue of regulation has been the "single most important problem" for businesses since 2010.  I would guess that a fair amount of this has to do with the Affordable Care Act.  However, let's add a few caveats to that observation.  First, only 20% of firms are citing regulation -- meaning for 80% of the companies out there (a big and vast majority) regulation isn't the single biggest issue.  Secondly, during the previous expansion (the early 2000s), the biggest concern was insurance -- or, more specifically, health insurance (for more information on this, please see the Kaiser Family Health Care Foundation's website).  Piecing this information together into a coherent picture, we see that health insurance in general has been the biggest issue for the last 10+ years, with costs dominating concerns in the early 2000s and the implementation of the ACA leading concerns over the last three years.

In addition, before the political right steps up with their typical health care hyperventilating, they should remember that the individual mandate -- which is at the heart of the ACA -- was actually their idea:

The mandate made its political début in a 1989 Heritage Foundation brief titled “Assuring Affordable Health Care for All Americans,” as a counterpoint to the single-payer system and the employer mandate, which were favored in Democratic circles. In the brief, Stuart Butler, the foundation’s health-care expert, argued, “Many states now require passengers in automobiles to wear seat-belts for their own protection. Many others require anybody driving a car to have liability insurance. But neither the federal government nor any state requires all households to protect themselves from the potentially catastrophic costs of a serious accident or illness. Under the Heritage plan, there would be such a requirement.” The mandate made its first legislative appearance in 1993, in the Health Equity and Access Reform Today Act—the Republicans’ alternative to President Clinton’s health-reform bill—which was sponsored by John Chafee, of Rhode Island, and co-sponsored by eighteen Republicans, including Bob Dole, who was then the Senate Minority Leader.

So, returning to the complexity of the job market, we see employers holding back from hiring because of weak sales, and to a lesser extent, the ramifications of the ACA. 

Let me add a few points. 

1.) Lack of sales is still a big issue for businesses.  The readings for this statistic are still very high, especially when considered relative the peaks of this statistic in other recoveries.  Put another way, concern about sales was the highest its been since 1986 for the years 2009-2011, and is still elevated by historical standards.

2.) The issue of health care is interesting.  It has clearly been one of the dominant concerns of businesses over the last 10-15 years and for understandable reasons.  The situation before the ACA was unsustainable; prices were increasing to the tune of 8%+ per year.  But this level of increases is going to cause concerns for any businesses.  At the same time, change in the form of a solution to this problem brings with it an entirely new set of anxieties, largely centered around the compliance issue -- how will this law be implemented and how do I make sure I'm following the law?  And remember -- this is a complex law where regulations are still being written (and will be for the foreseeable future).



Market Analysis/Updata: Australia

On April 2, I posted a piece titled, "Are We At A Short-Term Peak?", where I highlighted a weakening Australian economy.  I noted that the LEIs had peaked and that the Central Bank noted some weakness.  The big issue for the country is that they appear to be rebalancing.  Their economy up until now has been heavily based on mining and raw material exports going to the Chinese juggernaut.  However, with China rebalancing, the raw material capital projects are slowing and the rest of the economy is trying to pick up the slack.

Let's take a look at the market action last week:

We see a sell-off to the 26.15 level, followed by a rally to previous highs at 27.70, followed by a sell-off on Friday and a sharp sell-off yesterday.  The reason for last week's rally is three-fold.

1.) The Australian market is rising in sympathy with other markets around the globe.  The US hit new highs, and we saw other markets rally.  The Australian market is along for the ride.

2.) Japan is seriously going after re-flation.  The hope is this will bring back the Japanese economy.  Also note the massive drop in the yen, making Japanese goods more competitive, which should help Australian exports.

3.) Belief in an Australian central bank interest rate cut.  Australia has room to cut rates.  With a weakening economy, there is hope that the bank will do just that.

However. consider this seasonally adjusted data about the Australian labor market released on Thursday:
  • Employment decreased 36,100 (0.3%) to 11,592,700. Full-time employment decreased 7,400 to 8,111,300 and part-time employment decreased 28,700 to 3,481,500.
  • Unemployment increased 25,900 (3.9%) to 686,900. The number of persons looking for full-time work increased 30,900 to 501,900 and the number of persons looking for part-time work decreased 5,000 to 185,000.
  • The unemployment rate increased 0.2 pts to 5.6%.
  • The participation rate decreased 0.2 pts to 65.1%.
  • Aggregate monthly hours worked decreased 5.0 million hours to 1,627.3 million hours.
Also consider these charts from the same report:

Overall employment is increasing.  

However ...

We also see a year long increase in the unemployment rate.  While the level is still low (and slightly above "full employment") the trend is still there.

Also consider the LEI and CEIs from the above linked post.  The LEIs are decreasing and the CEIs have stalled.

In short, I still think the Australian market is at a short-term top.  There are a few things that would change that analysis:

1.) A cut by the Australian Central Bank.  This would add upward pressure on a short-term basis.

2.) An announcement from a major raw materials company that they were re-committing to a massive capital project.

However, consider this summation from the just released central bank minutes:

Members noted that the national accounts data, released the day after the March Board meeting, confirmed that growth of the economy was close to trend over 2012 as a whole, but with slower growth over the second half of the year. GDP expanded by 0.6 per cent in the December quarter, reflecting strong growth in resources exports, mining investment and dwelling investment, while household consumption recorded modest growth and public demand declined further. Overall growth over the year was 3.1 per cent, which, with total hours worked recording a small decline over the same period, implied strong growth in labour productivity. 

The limited new data to hand for this meeting were broadly consistent with the earlier outlook for the economy. In particular, mining investment still appeared to be close to its peak (and hence its impetus to growth was likely to slow) but resources exports were projected to continue to grow strongly. A moderate rise in dwelling investment was expected and household consumption was forecast to grow broadly in line with household incomes, while growth in public demand was likely to be modest. Non-mining investment was likely to remain subdued in the near term but to pick up gradually in the second half of 2013. 

Recent indicators suggested that growth of consumption had increased over recent months after a softer December quarter. The value of retail sales picked up strongly in January and the Bank's liaison pointed to further growth in February and March. Motor vehicle sales had remained high, though they had fallen a little from their recent peak. In addition, measures of consumer confidence had risen to be clearly above their long-run averages. 

Members observed that conditions in the housing market had continued to improve. House prices increased again over March, to be 4¼ per cent above their mid-2012 trough, auction clearance rates had moved higher and there were signs of somewhat stronger growth in housing loan approvals. The Bank's liaison with home builders suggested that demand for new housing had been a little more positive of late, with a rise in activity reported in most capital cities.

Surveys of business conditions were somewhat mixed over the month, although conditions generally remained a little below long-run averages. Business conditions appeared to have improved for the construction industry overall but declined in the mining sector, notwithstanding the prospect of strong growth in resources exports. Information from the Bank's liaison indicated some willingness on the part of firms outside the mining sector to increase investment spending, especially on information technology assets and systems. Business debt was still growing, albeit at a somewhat slower pace over recent months; credit to smaller businesses was rising at a steady pace and large corporations were able to access non-intermediated funds.

Members discussed the various labour market indicators. There was a surprisingly large increase in employment in February, accompanied by a rise in the participation rate. However, a substantial part of the increase in employment appeared to reflect changes in the sample. The unemployment rate, which tends to be less volatile than employment growth, was unchanged at 5.4 per cent. While the most recent quarterly data showed a decline in vacancies, higher-frequency forward-looking indicators showed tentative signs of stabilising. Overall, these indicators were consistent with moderate growth in employment in the months ahead.

Monday, April 15, 2013

Gov. Howard Dean threatens to leave Democratic party over Obama budget

- by New Deal democrat

Former Vermont Governor Howard Dean has told Business Week that if Obama's budget passes, with its cuts to Social Securtiy and restoration of virtually all the cuts made by the sequester to the Pentagon, he may have to leave the Democratic party and register as an independent.

This is a Big Deal, in my opinion. Should even a small fraction of current and former democratic officeholders leave the party over the Grand Betrayal, it's likely they won't simply sit at home crocheting. We could see the founding of a new major political party for the first time in 150 years.

And if Obama's budget passes, that new party will have my full support.

No, the Tax Code Really Isn't That Complicated

One of the most common refrains used about the tax code is that it's so complicated that no one can use it.  People who rail against it complain about it's length (there are over 2000 pages to it, after all), the odd way in which it's written and the fact you sometimes have to read multiple sections in multiple subsections to understand what's going on.

First, all of the above is true.  However, let's ask a follow-up question: how many people actually have to see this complexity as part of their daily economic life?  The answer is not many -- easily less than 5% of the total population.  Let me spend the rest of this article explaining the last paragraph.

First, the tax code is organized as a hierarchy: it's largest "section" is title, followed by sub-title, then chapter, followed by sub-chapter, then part and sub-parts and finally sections and sub-sections.  Here is how it looks conceptually.

                                   Sub- Section

For the purposes of most taxpayers, the most important divisions are the "sub-chapters," the vast majority of which no one will ever see.  For example, do you own a bank or insurance company?  How about a non-profit corporation or for-profit corporation?  Any exposure to natural resources?  Any international income, trusts, real-estate investment trusts or corporations used to eliminate taxes on shareholders?  If you answered no to all of the above questions, then you don't need to know anything about the vast majority of the tax code.

In fact, for most people, the only major sub-chapter they'll ever see is sub-chapter B, computation of taxable income. And here's the best part: if you use any of the major accounting packages to do you taxes (turbo tax etc...), you're already way ahead of the game as these packages are really good and work for the vast majority of people.

Now, when we look in detail at some of the other sub-chapters (estate and gifts, partnership tax, corporate tax, estates and trusts, and international tax) there are some complex issues.  However, most of this complexity is the result of anti-avoidance provisions built into the law.  These are rules that are put into place to plug previously exploited loopholes, a situation that fills the corporate tax code (sections 301-395), international tax code (sections 861-1000) and estate tax code (Subtitle B).  And, if you're involved in these areas of the code in any way, you're already working with accountants and lawyers who specialize in this area of the law.

And finally, consider this: the reason why we spend time preparing taxes etc... is because the US has a self-reporting tax system -- that is, we tell the government what we make and the fear of audit keeps us in check.  Do you really want the other system where the government is that much more aggressive?

So here's the real tax deal.  Yes the tax code is over 2000 pages (and that doesn't include the accompanying Treasury Regulations which easily add over 20,000 more.  I know because I've read the vast majority of them).  However, over 95% of the US population will never see this complexity because it doesn't apply to them.  Additionally, a primary reason for the complexity is that people have tried to get around the law with cute legal maneuvers (the vast majority of which wouldn't survive a substance over form challenge) requiring Congress to plug loopholes.  This means these sections need to be in the code to prevent abusive practices.

Market Analysis: The US

Let's turn our attention to the US markets, by first looking at the SPYs.  I prefer these as the benchmark US market because they are far wider and more diversified than the DIAs or QQQs. 

The weekly chart is very encouraging.  We see a triangle consolidation occurring through most of 2012, with prices making a big push through upside resistance a the end of 2012 around the 145 level.  Since then, prices have been in a strong uptrend, with rising EMAs, MACD and CMF.  There have been strong candles (beginning of March and beginning of April) followed by periods of consolidation.  In essence, this is pretty much a bullish chart.

On the weekly chart, we see a rising price trend, strong EMA picture and solid CMF reading.  Prices have moved through resistance on three separate occasions: 144 at the beginning of the year; 152.60 at the beginning of March and 157.2 in April.  However, notice that momentum is slowly decreasing.  It is still at high rates, but the downward trend tells us there is some weakness in the market.

Let's turn to the QQQs

As the daily chart shows, this has been one of the weakest US markets.  While we see an upward movement, we also see a tremendous amount of consolidation -- the market spent most of January and Market moving sideways.

On the weekly chart, notice how the QQQs are just now approaching the period when they are making new highs -- the level right below 70 has proved very difficult to break.  They've been stuck in a downward sloping momentum trend since the spring of 2012.

Let's turn to the IWMs:

The daily chart has two upward sloping trend lines -- both of which are in red.  Notice that prices have broken both.  In addition, prices are currently using the lower trend line for resistance rather than support.  Finally, notice the decreasing MACD picture along with the declining CMF reading as well.  This is a chart that may be "turning over."

The weekly chart shows that current price action is part of a strong rally that pushed through upside resistance in December around the 86 level, leading the market higher.  This was followed by a strong move by both the MACD and CMF.  However, the MACD is close to giving a sell signal and the upward price movement appears to be stalled around the 94-95 price level.

Finally, let's turn to the DIAs:

The daily chart shows many of the same traits as the SPYs.  First there is a strong uptrend.  Prices have continually moved  through resistance, first at the 132.5 level in January, then the 140 level at the end of March and the 146.5 level recently.  This has occurred on strong CMF readings, although the MACD is showing some weakness.  

The weekly chart shows the current rally to be very strong.  We see a strong uptrend followed by strong MACD and CMF.  There is also a strong EMA reading.  Also note that this year there are several strong candles indicating good movement during the week.