Additional Quantitative Easing – Comments

August 13th, 2010

Monday’s (August 9) Barron’s had an article titled “Time to Print, Print, Print.”

The article provides an overview of the concept of Quantitative Easing (QE) in the context of our current economic situation.

I don’t agree with many of its conclusions and insinuations, however.  In particular, the article seems overly positive on the idea of Quantitative Easing and its supposed positive effects, without providing significant discussion of its risks.

Quantitative Easing is an especially important concept now as I believe additional large-scale QE will continue to occur.  There are an array of risks embedded in such QE efforts.  Perhaps chief among these risks is the risk that excess “money-printing” poses to the currency.  The Barron’s article does acknowledge this by saying “Promiscuous growth in the money supply, of course, can both fan inflation and debase the currency.”  Although there has been virtually no commentary on the vulnerability of the US Dollar to substantial declines, I believe that such vulnerability does exist, as I discussed in the July 30 post.

Another large risk to QE efforts is that should QE prove successful in driving down interest rates, such a policy foments asset bubbles.  This is especially notable as many believe the housing bubble is but one example of an asset bubble that was caused by ultra-low interest rate policies.  My numerous posts concerning asset bubbles can be found under the “Bubbles (Asset)” category.  Asset Bubbles, and their future resolution, are an epic problem.

Most people fail to acknowledge the current existence of asset bubbles.  The Barron’s article seems to imply that no bubbles exist when it says “Damn the risks of triggering a bit of inflation and some modest investment bubbles.”

I will likely comment more upon the idea of QE once it is further implemented.

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Employment-Population Ratio – Chart And Comments

August 11th, 2010

Yesterday, The Wall Street Journal had an Op-ed titled “Unemployment: What Would Reagan Do?”

I found the article interesting as it provides a good explanation of the Civilian Employment-Population Ratio and its history.  An excerpt:

“Since America has about 238 million noninstitutionalized civilian adults of working age, this decrease means that we have nearly 12 million fewer jobs today than we would have if the employment-population rate were still at its 2007 level of 63%.

No other recession in the past 60 years saw such rapid job destruction in either absolute or percentage terms. In the 1979-82 recession, unemployment topped out at a higher rate, 10.8%, but the employment-population ratio declined by only three percentage points, to 57% from 60%.”

Below is the long-term chart of this ratio, as found on the St. Louis Federal Reserve site:

(click on chart to enlarge image)

Although this Civilian Employment-Population Ratio is not a statistic that gets a lot of mention, it is nonetheless an important statistic and concept.

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Profiting From Deflation?

August 10th, 2010

Deflation has been a popular topic lately.

Some have recently expressed that deflation can be a scenario from which one can remain unimpacted, or will profit from.   Examples include a August 7-8 Wall Street Journal article titled “How to Beat Deflation-And Even Profit From It.” A recent article by Robert Prechter Jr. in the August 9 Barron’s concluded by saying “If you shed market and institutional risk, you can sail through deflationary times unscathed.”

I have previously written of deflation, in the context of whether it would be a “benefit,” in a September 8, 2009 post.

Of course, the extent of deflation plays a major role in determining its impacts…

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3 Critical Unemployment Charts – August 2010

August 9th, 2010

As I have commented previously, as in the October 30 post, in my opinion the official methodologies used to measure the various job loss and unemployment statistics do not provide an accurate depiction.

However, even if one chooses to look at the official statistics, the following charts provide an interesting (and disconcerting) long-term perspective of certain aspects of the officially-stated  employment situation.

The first two charts are from the St. Louis Fed site.  Here is the Median Duration of Unemployment:

(click on charts to enlarge images)

Here is the chart for Unemployed 27 Weeks and Over:

Lastly, a chart from the Minneapolis Federal Reserve site.  This shows the employment situation vs. that of previous recessions (as characterized by severity):

As depicted by these charts, our unemployment problem is severe.  Unfortunately, there do not appear to be any “easy” solutions.

In July 2009 I wrote a series of five blog posts titled “Why Aren’t Companies Hiring?”, which discusses various aspects of the topic, many of which lack recognition.

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Economic Security Index – Notes

August 6th, 2010

The recently introduced “Economic Security Index” is notable on many fronts.

Here is a summary from the “About” page:

“The Economic Security Index (ESI), sponsored by the Rockefeller Foundation, measures the share of Americans who experience at least a 25% drop in their available family income whether due to a decline in income or a spike in medical spending or a combination of the two, and who lack an adequate financial safety net to catch them when they fall. A higher ESI therefore indicates greater insecurity, much as a rising unemployment rate signals a faltering economy.

Data are available for the ESI from 1985 through 2007, with projections for the most recent years (a less complete form of the index is available back to the late 1960s).

The ESI looks at actual economic losses, not at who fears or is vulnerable to them. The threat of such losses is real and growing for all Americans.”

From the homepage, this summary is provided:

“The Economic Security Index shows that economic insecurity disproportionately affects the less advantaged, but has risen substantially for all Americans.”

Here is a chart for 1985-2007 (with 2008-2009 projections):

my comments:

I find this Economic Security Index interesting for a variety of reasons.

There are many implications that can potentially be drawn.

Once I further research this Index, I will write another post(s) about it and its implications.

SPX at 1122.32 as this post is written


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2Q 2010 Corporate Revenues

August 4th, 2010

For the last few quarters, I have been commenting upon the general lack of revenue growth in corporate results.  I have focused on a variety of diversified manufacturers and distributors, all of them well-respected S&P500 firms.    My last comment on this issue was on May 5.

For the recently released 2Q 2010 financial results, there generally has been decent revenue growth.   Many companies have been posting seemingly strong, double-digit growth, but this has been against weak year-ago results.  As one would expect, revenue growth appears strongest in the Asia region.

It will be interesting to monitor these revenue growth figures going forward.  Revenue growth during our current period of economic weakness is a key issue, and generally lacks recognition, especially compared to earnings growth and whether companies are matching or beating earnings “expectations.”

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Durable Goods New Orders

August 2nd, 2010

Many people who are optimistic about economic growth site “New Orders” as a rationale.

For reference purposes, here is a chart of Durable Goods New Orders, through 6-1-10, on a Percent Change From Year Ago basis:

source: St. Louis Fed

Below is the latest ECRI WLI Growth chart.  I find the (loose) resemblance (from 2008) of it to the New Orders chart shown above to be curious.  Of course, the ECRI WLI Growth chart is more current (updated through Friday) and has a recent rapid downward trajectory to it:

source: Doug Short’s blog

(click on above images to enlarge charts)

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Blinder And Zandi Paper – My Comments

August 1st, 2010

Alan Blinder and Mark Zandi released a paper dated July 27 titled “How The Great Recession Was Brought To An End.” (pdf)

From the report, page 1: “In this paper, we use the Moody’s Analytics model of the U.S. economy—adjusted to accommodate some recent financial-market policies—to simulate the macroeconomic effects of the government’s total policy response. We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government’s response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.”

my comments: Needless to say, I don’t agree with many aspects of the report’s conclusions, focus and methodologies.

Much of my thoughts on intervention efforts, which includes stimulus, can be found under the “Intervention” category.

The main reason I highlight this report is for reference purposes.

I think the report will prove highly memorable, an iconic piece of the period.

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U.S. Dollar Target

July 30th, 2010

On July 8 I wrote my last post concerning the U.S. Dollar.  In the last line of that post I said “…I continue to believe the U.S. Dollar is highly vulnerable to a substantial decline.”

As “substantial decline” is somewhat open to interpretation, I would like to clarify what I meant.

Here is a chart of the U.S. Dollar on a monthly basis since 1983:

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

As one can see, the current price of 81.64 is approaching the technically significant 80-level.  This level has served as technical support on a number of occasions.

If that level is broken, there is not much precedence from a longer-term perspective.  For many reasons I doubt that the 70.7 level reached in 2008 will serve as any type of significant technical support.  Below the 70.7 level is obviously a “new frontier” with no obvious strong technical support.  In essence, from a technical perspective the downside would appear rather open-ended.

From a fundamental perspective, a substantial dollar decline appears likely as well.  As I wrote in my January 13 U.S. Dollar post, “Many people, especially those of the “hard money” and “Austrian” philosophies, have long held that many of the actions we (as a nation) have been taking to combat our current period of economic weakness would unduly pressure the dollar.  These actions have included very low interest rates, truly outsized interventions (including “money printing”) and deficit spending.”

Additionally, I would like to address one comment I have repeatedly heard regarding the U.S. Dollar.  Many people believe that the U.S. Dollar is (still) a “safe haven” as it has increased in price during The Financial Crisis of 2008-2009 as well as market turmoil during this year.  As such, this purported continual “safe haven” status is supposed to support the idea that the U.S. Dollar is strong fundamentally.

While I see the reasoning behind this logic, I don’t believe that this logic or interpretation of recent upward Dollar movements is correct.  Many complex factors impact the price movements of the U.S. Dollar, and I wouldn’t assume that just because it has recently increased during periods of market stress that it will continue to do so.

In summary, I continue to believe the U.S. Dollar is highly vulnerable to a substantial decline.  This decline has the potential to be rather open-ended in nature, as supported by both technical and fundamental factors.  Once the 70-level is broken, the U.S. Dollar decline would likely become very pernicious and levels of 50, as well as substantially below, should be considered possibilities.

Should such a U.S. Dollar decline occurs, this currency weakness alone would create an entire new set of severe economic problems and challenges.

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Updates On Economic Indicators July 2010

July 28th, 2010

Here is an update on various indicators that are supposed to predict and/or depict economic activity.  These indicators have been discussed in previous blog posts:

The July Chicago Fed National Activity Index (CFNAI)(pdf) updated as of July 26, 2010:

The Consumer Metrics Institute Contraction Watch:

The USA TODAY/IHS Global Insight Economic Outlook Index:

An excerpt from July 26, 2010:

“The July update of the USA TODAY/IHS Global Insight Economic Outlook Index shows real GDP growth, at a six-month annualized growth rate, slowing to 2.5% in December. The end of government stimulus spending and inventory buildup combined with continuing high unemployment, a weak housing market, tight credit and high debt are behind the slowdown.

The index predicts future real GDP growth (gross domestic product, adjusted for inflation) based on 11 leading economic and financial indicators.

Four of the 11 indicators were positive in July, down from five last month and the lowest number since USA TODAY first published the index in June 2009.”

The ECRI WLI (Weekly Leading Index):

As of 7/16/10 the WLI was at 120.17 and the WLI, Gr. was at -10.5%.  A chart of the Weekly Leading and Weekly Coincident Indexes:

The Dow Jones ESI (Economic Sentiment Indicator):

The Indicator as of June 30 was at 40.3, as seen below:

An excerpt from the June 30 Press Release:

““The ESI’s modest and steady rise over the last couple of months is a positive sign, but the U.S. is not out of the woods yet,” Dow Jones Newswires “Money Talks” Columnist Alen Mattich said. “Anxiety about the U.S.’s employment conditions and questions around Europe’s stability are key concerns that are unlikely to subside soon.”

The Dow Jones Economic Sentiment Indicator aims to predict the health of the U.S. economy by analyzing the coverage of 15 major daily newspapers in the U.S. Using a proprietary algorithm and derived data technology, the ESI examines every article in each of the newspapers for positive and negative sentiment about the economy. The indicator is calculated through Dow Jones Insight, a media tracking and analysis tool. The technology used for the ESI also powers Dow Jones Lexicon, a proprietary dictionary that allows traders and analysts to determine sentiment, frequency and other relevant complex patterns within news to develop predictive trading strategies.”

The Aruoba-Diebold-Scotti Business Conditions (ADS) Index:

Here is the latest chart, updated through 7-17-10:

The Conference Board Leading (LEI) and Coincident (CEI) Economic Indexes:

As of July 22, the LEI was at 109.8 and the CEI was at 101.4 in June.

An excerpt from the June 22, 2010 Press Release:

“”The indicators point to slower growth through the fall,” says Ken Goldstein, economist at The Conference Board.”

“New Financial Conditions Index”

I wrote a post concerning this index on 3/10/10.  There is currently no updated value available.

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

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