Monthly Archives: August 2013

Measuring QE’s Impact

I have written extensively about Quantitative Easing (QE) and Interventions as I believe many aspects of these practices lack recognition and understanding.   My analyses indicate that QE (also referred to as “Large-Scale Asset Purchases” (LSAPs)) in general carries an array of risks, detrimental impacts, and unintended consequences.  It has complex impacts on the economy and markets.

Over time, there have been several studies and estimates made with regard to measuring the impact of QE programs, and those that I have seen indicate a wide range of conclusions. While I don’t necessarily agree with the methods used or conclusions reached in these various efforts, I do feel that the overall topic of assessing the impact of QE is of great importance, given its prevalence in U.S. monetary policy.

Measuring QE can take many different forms, as not only are there different QE programs (e.g. QE1, QE2, etc.) but also a variety of areas that can be assessed, including QE’s impact on the economy, on the bond market, and on the stock market; as well as on numerous other assorted areas, including market expectations and the potential for (mark-to-market) losses in the Federal Reserve’s portfolio, which I most recently discussed in the post of June 26 titled “Potential Losses In The Federal Reserve’s Portfolio.”

One recent study that I found notable, although don’t necessarily agree with, is the Federal Reserve Bank of San Francisco’s Economic Letter of August 12 titled “How Stimulatory Are Large-Scale Asset Purchases?”   This paper discusses the impact of QE2, derived through simulation, and compares these findings to other research. While I believe that this document should be read in its entirety, here are a couple of excerpts:

Our model estimates that such a program lowers the risk premium by a median of 0.12 percentage point. Figure 1 shows the program’s effects on real GDP growth and inflation. The red line is the median effect in annualized percentage points. The shaded areas represent probability bands from 50% to 90% around the median. The estimates reflect uncertainty arising from three factors: the sensitivity of the risk premium to the asset purchases, the degree of investor segmentation, and other model parameters influencing the economy’s response to interest rate changes.

The 0.13 percentage point median impact on real GDP growth fades after two years. The median effect on inflation is a mere 0.03 percentage point. To put these numbers in perspective, QE2 was announced in the fourth quarter of 2010. Real GDP growth in that quarter was 1.1% and personal consumption expenditure price index (PCEPI) inflation excluding food and energy was 0.8%. Our estimates suggest that, without LSAPs, real GDP growth would have been about 0.97% and core PCEPI inflation about 0.77%.

And, from the conclusion:

Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation. Research suggests that the key reason these effects are limited is that bond market segmentation is small. Moreover, the magnitude of LSAP effects depends greatly on expectations for interest rate policy, but those effects are weaker and more uncertain than conventional interest rate policy. This suggests that communication about the beginning of federal funds rate increases will have stronger effects than guidance about the end of asset purchases.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1685.39 as this post is written

NFIB Small Business Optimism – August 2013

The August NFIB Small Business Optimism report was released today, August 13.  The headline of the Press Release is “Small-Business Optimism? Not So Much.”  The subtitle is “July Index Increases Marginally.”

The Index of Small Business Optimism increased .6 points in July to 94.1.

Here are some excerpts from the Press Release that I find particularly notable (but don’t necessarily agree with) :

Sales. The net percent of all owners* reporting higher nominal sales in the past three months compared to the prior three months improved a point, rising to a negative 7 percent. The net percent of owners expecting higher real sales volumes rose 2 points, to 7 percent of all owners. These expectations remain depressed and are not the kind that will generate a lot of new employment or new orders for inventories.


Credit Markets. Credit continues to be a non-issue for small employers, five percent of whom say that all their credit needs were not met in July, unchanged from June and May, and the lowest reading since February 2008. Thirty (30) percent of owners surveyed reported all credit needs met, and 52 percent explicitly said they did not want a loan (65 percent including those who did not answer the question, presumably uninterested in borrowing).


Good Time to Expand. In July, 9 percent characterized the current period as a good time to expand facilities (up 2 points). The net percent of owners expecting better business conditions in six months was a net negative 6 percent, 2 points worse than June’s reading.

Here is a chart of the NFIB Small Business Optimism chart, as seen in Doug Short’s August 13 post titled “Small Business Sentiment:  Fractionally Higher In Its Historically Weak Trend” :

(click on chart to enlarge image)

Dshort 8-13-13 NFIB-optimism-index

Further details regarding small business conditions can be seen in the Small Business Economic Trends document as well as the August 2013 NFIB Small Business Economic Trends report (pdf).


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1685.69 as this post is written

The August 2013 Wall Street Journal Economic Forecast Survey

The August Wall Street Journal Economic Forecast Survey was published on August 12, 2013.  The headline is “Analysts See Growth Worthy of a Fed Pullback.”

I found numerous items to be notable – although I don’t necessarily agree with them – both within the article and in the Q&A found in the spreadsheet.

As to the question (seen in the spreadsheet detail) “Please estimate on a scale of 0 to 100 the probability of a recession in the U.S. in the next 12 months,” the average was 15%.

The current average forecasts among economists polled include the following:


full-year 2013:  2.0%

full-year 2014:  2.8%

full-year 2015:  3.0%

Unemployment Rate:

December 2013: 7.2%

December 2014: 6.7%

December 2015: 6.1%

10-Year Treasury Yield:

December 2013: 2.76%

December 2014: 3.32%

December 2015: 3.79%


December 2013:  1.8%

December 2014:  2.1%

December 2015:  2.3%

Crude Oil  ($ per bbl):

for 12/31/2013: $100.43

for 12/31/2014: $98.73

(note: I highlight this WSJ Economic Forecast survey each month; commentary on past surveys can be found under the “Economic Forecasts” category)


I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with many of the consensus estimates and much of the commentary in these forecast surveys.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1689.48 as this post is written

Zillow Q3 2013 Home Price Expectations Survey – Summary & Comments

On August 8, the Zillow Q3 2013 Home Price Expectations Survey (pdf) results were released.  This survey is done on a quarterly basis.

An excerpt from the Press Release:

The survey of 106 economists, real estate experts and investment and market strategists was sponsored by leading real estate information marketplace Zillow, Inc. (NASDAQ: Z) and is conducted quarterly by Pulsenomics LLC. Panelists said they expected median U.S. home values to rise to $167,490 by the end of this year, up from $156,900 at the end of 2012 and $161,100 currently. Based on current expectations for home value appreciation over the next five years, the panelists on average predicted that U.S. home values could approach new record highs by the end of 2017, coming very close to the previous peak level of $194,600 set in May 2007.

Various charts from the Q3 2013 Survey results are presented, including the following:

(click on image to enlarge chart)

Zillow 8-8-13 - Q32013_ZHPES_Chart


As one can see from the above chart, the average expectation is that the residential real estate market, as depicted by the U.S. Zillow Home Value Index Level, will continually climb.

The detail of the Q3 2013 Home Price Expectations Survey (pdf) is interesting.  Of the 106 survey respondents, only four (of the displayed responses) forecast a cumulative price decrease through 2017; and of those four, none foresee a double-digit percentage cumulative price drop.  The most “bearish” of these forecasts is that of Mark Hanson’s prediction of a 3.05% cumulative price decrease through 2017.

The Median Cumulative Home Price Appreciation for years 2013-2017 is seen as 6.00%, 11.30%, 15.02%, 19.14% and 22.91%, respectively.

For a variety of reasons, I continue to believe that even the most “bearish” of these forecasts (as seen in Mark Hanson’s above-referenced forecast)  will prove too optimistic in hindsight.  From a longer-term historical perspective, such a decline is rather tame in light of the wild excesses that occurred over the “bubble” years.

I have written extensively about the residential real estate situation.  For a variety of reasons, it is exceedingly complex.  While many people continue to have an optimistic view regarding future residential real estate prices, in my opinion such a view is unsupported on an “all things considered” basis.  Furthermore, (even) from these price levels there exists outsized potential for a price decline of severe magnitude, unfortunately.  I discussed this downside, based upon historical price activity, in the October 24, 2010 post titled “What’s Ahead For The Housing Market – A Look At The Charts.”


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1691.42 as this post is written

Long-Term Charts Of The ECRI WLI & ECRI WLI, Gr. – August 9, 2013 Update

As I stated in my July 12, 2010 post (“ECRI WLI Growth History“):

For a variety of reasons, I am not as enamored with ECRI’s WLI and WLI Growth measures as many are.

However, I do think the measures are important and deserve close monitoring and scrutiny.

The movement of the ECRI WLI and WLI, Gr. is particularly notable at this time, as ECRI publicly announced on September 30, 2011 that the U.S. was “tipping into recession,” and ECRI has reiterated the view that the U.S. economy is currently in a recession, seen most recently in these seven sources :

Other past notable 2012 reaffirmations of the September 30, 2011 recession call by ECRI were seen (in chronological order)  on March 15 (“Why Our Recession Call Stands”) as well as various interviews and statements the week of May 6, including:

Also, subsequent to May 2012:

Below are three long-term charts, from Doug Short’s blog post of August 9 titled “ECRI Recession Watch:  Weekly Update”  These charts are on a weekly basis through the August 9 release, indicating data through August 2, 2013.

Here is the ECRI WLI (defined at ECRI’s glossary):

(click on charts to enlarge images)

Dshort 8-9-13 ECRI-WLI 131.8

This next chart depicts, on a long-term basis, the Year-over-Year change in the 4-week moving average of the WLI:

Dshort 8-9-13 ECRI-WLI-YoY 7.4 percent

This last chart depicts, on a long-term basis, the WLI, Gr.:

Dshort 8-9-13 ECRI-WLI-growth-since-1965 5.3



I post various economic 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.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1693.64 as this post is written

St. Louis Financial Stress Index – August 8, 2013 Update

On March 28, 2011 I wrote a post (“The STLFSI“) about the  St. Louis Fed’s Financial Stress Index (STLFSI) which is supposed to measure stress in the financial system.  For reference purposes, the most recent chart is seen below.  This chart was last updated on August 8, incorporating data from December 31,1993 to August 2, 2013, on a weekly basis.  The August 2, 2013 value is -.57:

(click on chart to enlarge image)

STLFSI_8-8-13 -.57

Here is the STLFSI chart from a 1-year perspective:

STLFSI_8-8-13 -.57 1-year

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed August 9, 2013:


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.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1697.48 as this post is written

Recession Probability Models

There are a variety of economic models that are supposed to predict the probabilities of recession.

While I don’t agree with the methodologies employed or probabilities of impending economic weakness as depicted by the following two models, I think the results of these models should be monitored.

Please note that each of these models is updated regularly, and the results of these – as well as other recession models – can fluctuate significantly.

The first is the “Yield Curve as a Leading Indicator” from the New York Federal Reserve.  I wrote a blog post concerning this measure on March 1, 2010, titled “The Yield Curve as a Leading Indicator.”

Currently (last updated August 5, using data through July) this “Yield Curve” model shows a 1.61% probability of a recession in the United States twelve months ahead.  For comparison purposes, it showed a 2.52% probability through June, and a chart going back to 1960 is seen at “Probability Of U.S. Recession Charts.” (pdf)

The second model is from Marcelle Chauvet and Jeremy Piger.  This model is described on the St. Louis Federal Reserve site (FRED) as follows:

Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. This model was originally developed in Chauvet, M., “An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching,” International Economic Review, 1998, 39, 969-996. (

Additional details and explanations can be seen on the “U.S. Recession Probabilities” page.

This model, last updated on August 8, 2013, currently shows a .92% probability using data through May.

Here is the FRED chart (last updated August 8, 2013) :

RECPROUSM156N_8-8-13 .92 percent

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: Marcelle Chauvet and Jeremy Piger; U.S. Recession Probabilities [RECPROUSM156N]; accessed August 9, 2013:

The two models featured above can be compared against measures seen in recent blog posts.  For instance, as seen in the July 19 post titled “The July 2013 Wall Street Journal Economic Forecast Survey” economists surveyed averaged a 13% probability of a U.S. recession within the next 12 months.

Of course, there is a (very) limited number of prominent parties, such as ECRI (most recently featured in the August 2 post titled “Long-Term Charts Of The ECRI WLI & ECRI WLI,Gr. – August 2, 2013 Update“) that believe the U.S. is currently experiencing a recession.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1697.48 as this post is written

Deflation Probabilities

While I do not agree with the current readings of the measure – I think the measure dramatically understates the probability of deflation, as measured by the CPI – the Federal Reserve Bank of Atlanta maintains an interesting data series titled “Deflation Probabilities.”

As stated on the site:

Using estimates derived from Treasury Inflation-Protected Securities (TIPS) markets, described in a technical appendix, this weekly report provides two measures of the probability of consumer price index (CPI) deflation through 2018.

A chart shows the trends of the probabilities.  As one can see in the chart, the readings are volatile.

As for the current weekly reading, the August 8 update states the following:

The 2013–18 deflation probability, based on the 5-year TIPS issued in April and the 10-year TIPS issued in July 2008, was 6 percent on August 7, up from 4 percent on July 31. The 2012–17 deflation probability also rose from 4 percent to 6 percent over the same period.

Prices of Treasury Inflation-Protected Securities (TIPS) with similar maturity dates can be used to measure probabilities of a net decline in the consumer price index over the five-year period starting in early 2013 or the five-year period starting in early 2012.

I plan on providing updates to this measure on a regular interval.


I post various economic 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.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1697.48 this post is written

Thoughts Concerning The Business Cycle

Undoubtedly, many will find the defining and classification of the business cycle to be semantics – figuring that economic activity “is what it is.”   However, I believe that the correct interpretation of the business cycle is imperative  in understanding future implications and correctly setting expectations.

Of course, the “official” entity for defining and classifying economic periods into “business cycles” is the NBER Business Cycle Dating Committee (BCDC).  While I don’t agree with many aspects of the BCDC’s methodologies and conclusions, I do find their work interesting.

Among other things, I find it notable (as documented in the “The NBER’s Business Cycle Dating Procedure:  Frequently Asked Questions“) that the BCDC does not define or classify a (economic) Depression.   This is something I wrote of in the November 30, 2011 post titled “Defining An Economic Depression.”   As well,  another aspect I find notable is that the concept of a “Double Dip Recession” is not defined or classified.

While I don’t necessarily agree (my thoughts on the issue are complex and can best be summarized in “A Special Note On Our Economic Situation“) with the BCDC’s classification of the June 2009-current period as an economic “expansion,” if one assumes such is the case, various interesting comparisons can be made relative to past “expansionary” periods.

One characteristic that seems to lack widespread recognition is how long one might reasonably expect this current (putative) “expansion” to continue, given the BCDC-defined history of such previous expansions.  While I certainly don’t believe that the duration of an expansion is of paramount importance in defining its potential future longevity, at the same time I believe that duration should be considered.

Given the BCDC-defined June 2009 end of the recession, the current “expansion” is, of course, now over four years old.  If one reviews the statistics concerning business cycles, seen on the BCDC’s “U.S. Business Cycle Expansions and Contractions” page, one sees various statistics concerning the duration of past business cycles.  While there are various methods (and periods)  in which the past business cycles are summarized, one sees that the current post-June 2009 “expansion” is “getting up there” relative to the average duration of “expansions” as measured by the “Previous trough to this peak” measurement.  However, if one only looks at the post-1990 “expansions,” one can see that these three “expansionary” periods (ending in June 2009) have been “lengthy” compared to the average of various previous periods.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1690.91 as this post is written

Building Financial Danger – August 8, 2013 Update

On October 17, 2011 I wrote a post titled “Danger Signs In The Stock Market, Financial System And Economy.”  This post is a brief 27th update to that post.

My overall analysis indicates a continuing elevated and growing level of danger which contains  many worldwide and U.S.-specific “stresses” of a very complex nature. I have written numerous posts in this blog of some of what I consider both ongoing and recent “negative developments.”  These developments, as well as other exceedingly problematic conditions, have presented a highly perilous economic environment that endangers the overall financial system.

Also of ongoing immense importance is the existence of various immensely large asset bubbles, a subject of which I have extensively written.  While all of these asset bubbles are wildly pernicious and will have profound adverse future implications, hazards presented by the bond market bubble are especially notable.

Predicting the specific timing and extent of a stock market crash is always difficult, and the immense complexity of today’s economic situation makes such a prediction even more challenging. With that being said, my analyses indicate that the danger inherent in the financial system has surpassed the level at which a near-term stock market crash – that would also involve (as seen in 2008) various other markets as well – is of tremendous concern.

(note: the “next crash” has outsized significance and implications, as discussed in the post of January 6, 2012 titled “The Next Crash And Its Significance“)

As reference, below is a one-year daily chart of the S&P500 through August 7 (with a last price of 1690.91), indicating both the 50dma and 200dma as well as price labels:

(click on chart to enlarge image)(chart courtesy of; chart creation and annotation by the author)

EconomicGreenfield 8-8-13 SPX 1-year




The Special Note summarizes my overall thoughts about our economic situation

SPX at 1690.91 as this post is written