Putting the spice back into investing.

Bernie at the Fed

Wednesday, March 31, 2004
If this is true (Greenspan had a heart attack) we should hope that he recovers quickly! Otherwise we might have to implement John McCain's Plan B:
The only moment in the entire night that seemed unscripted came after Forbes asserted that he would need to have a "heart-to-heart" with Federal Reserve Chairman Alan Greenspan to see if he truly buys into "the bogus economic theory that prosperity causes inflation."

Asked if he agreed with Forbes, McCain said that as president he would not only reappoint the chairman but "if Mr. Greenspan would happen to die -- God forbid -- I would do like they did in the movie 'Weekend at Bernie's': I'd prop him up and put a pair of dark glasses on him and keep him as long as we could."

Intervention Update

MoF March intervention data is out. The market was expecting something between 3,500 - 5,000bn yen. Total intervention was 4,702.6bn which is at the upper end of the range - no wonder that the last Treasury note auction was well bid. No sign of "no more intervention" in that number! Dollar up over 104 right now.

Happy (Fiscal) New Year

The Japanese fiscal year ended today. The crowd didn't celebrate by igniting fireworks - they preferred to buy the yen. The resulting move was pretty impressive with the currency blasting through the 105 level vs. the greenback. This led to further stop-loss induced selling which contributed to the yen's further rise. The currency is floating around the 103.5 level at the time of writing. We should see the release of the "intervention data" today - keep in mind that some of the yen strength is being attributed to the rumored fact that the MoF is stepping down intervention. News flow shows that we should expect March currency sales to come in at February's level
Hiroshi Watanabe, head of the Finance Ministry's international department, said in parliament that this month's currency sales were "a bit higher'" than February's sales of 3.34 trillion yen.

The Bank of Japan sold 10.5 trillion yen in the two months through Feb. 25. The Ministry of Finance will release figures for this month at 7 p.m. in Tokyo. The ministry directs the central bank to buy or sell yen.
The same Bloomberg piece linked to above has a little gem on the possibility of an ECB rate cut tomorrow:
Jan Smets, a member of the National Bank of Belgium's governing council, yesterday said that if asked whether the ECB would lower its benchmark rate tomorrow, "I'd say maybe, which is a very diplomatic answer. Everyone knows that when a diplomat says yes, he means maybe, and when he says maybe, he means no.''
This confirms my view that the ECB is stepping up the rhetoric to prepare the markets for a rate cut some time in the summer. Not much chance of them cutting tomorrow. While the ECB is busy signaling a further policy ease, the FED is sending out the opposite signal. Two Fed speakers (Poole and Guynn) made hawkish remarks about further policies saying things like:
the Fed needed to "get back to a more neutral level" on interest rates, because prolonging the current state for too long could "contribute to excesses".
In the meantime Fed governor Ben Bernanke reaffirmed the official line by calling for further patience.

To sum it up: methinks that we will see a cut by the ECB in summer and might see a hike by the Fed in the second half.
11:15 AM :: Karsten :: permalink ::


Tuesday, March 30, 2004
Consumer confidence stayed steady at 88.3 (86.5 expected). See confidence rise, see dollar spike up!

The report was nicely ambiguous for those looking for input on the jobs front - you can make a case for rising or falling employment on the basis of what the Conference Board said. Samples:
Says Lynn Franco, Director of The Conference Board's Consumer Research Center: "While consumers claimed business conditions were more favorable in March than last month, they also claimed jobs were less readily available. The labor market not only continues to dampen consumers' present-day spirits, but it is also making them less optimistic about the short-term outlook."


Consumers claiming jobs are "hard to get" increased to 30.0 percent from 28.9 percent. But those saying jobs are "plentiful" rose slightly to 14.7 percent from 14.5 percent.
The expectations component of the index was rather weak - I wonder if consumers are realizing that the phasing out of tax rebates is going to leave them with just their "regular" incomes to subsist on. No, I won't even imagine such a thing. Too scary to think what would happen if everyone stops shopping. Heck, if all Americans stopped consuming I might even get a chance to buy an iPod mini!

No news

No US data out yesterday. Japan's industrial production was down 3.7% in February confirming my view that the Japanese miracle isn't all that miraculous. Japanese companies seem to share my reservations about the future spending power of foreign (i.e. US) consumers. In the linked article Morgan Stanley analyst Takehiro Sato opines:
Japanese manufacturers are limiting gains in production and keeping inventories close to a 14-year low on concern that overseas demand may ebb after exports rose to a record last year
The article goes on to quote Shuji Shirota of Dresdner Kleinwort Wasserstein:
There is no change in the scenario that Japan must depend on exports and capital investment as sources for growth.
Exports means US consumers buying. If they stop buying, Japan stops growing - same for the Eurozone although Europe's "export led recovery" is even more of a myth than the recovery we're seeing in the land of the rising sun.
12:34 PM :: Karsten :: permalink ::

Currency blogs!

Monday, March 29, 2004
Both Fester and Kash have posts up about the MoF and its (rumored) decision to stop buying the US currency. Remember: Your read it here first (unless you follow the fx markets - the you'll have read it somewhere else even earlier). As I said before - I'm going to wait until Wednesday to see what really happened in March and I'll believe that Japan is abonding the 105 line when I see it. Even then I think they'll try to hold at lower level.

Off to bed now - I have a doctor's appointment tomorrow before work.
10:22 PM :: Karsten :: permalink ::

Waiting for the Big Day

This week will probably be characterized by market participants waiting for the big data point on Friday. I am of course talking about payroll data, which will be released on April 2nd. The "official" consensus is looking for an addition of 100k jobs. I'm pretty sure that most pundits are just using this number as a fig leaf to avoid looking too stupid if we get a seriously weak number. In private most everyone is talking about this being the month that we see a strong number. So don't be surprised if we get a reading og 150k or so and no one really cares.

The other numbers out this week are consumer confidence tomorrow and a couple of manufacturing surveys and factory orders data on Wednesday and Thursday.

European markets were stronger this morning and the euro was weak as the market digested further ECB-speak. Important ECB figures such as President Trichet and Board member Tumpell-Gugerell (love that name) fueled expectations of an imminent rate cut by saying things like:
On the economic side our working assumption is of a gradual European recovery. We are currently analysing data coming from the economy. We are vigilant and alert. In case our expectations for stronger household consumption and overall domestic demand were not to materialise, we would work out our assessment accordingly, fully in line with our monetary policy strategy.
This sounds like "if the nascent recovery sputters, we'll cut rates" to me. I really liked how Trichet described the mechanics of a recovery. In his words:
In the normal course of economic activity, recovery most often starts with net exports, then passes over to investment and then, as the third stage of the rocket, so to speak, arrives at consumption.
If I look at the US I would have to argue that things are upside down there as consumption was the catalyst for the current cycle.

There is an ECB meeting at the end of this week but I don't think that we'll see lower rates there (but what do I know!). My take is that this is the last round of verbal intervention - if a combination of the expectation of lower rates and a strong US payroll report leads to fall in the euro's value vs. the USD the ECB will be pretty pleased.

While the ECB is trying to move markets by speaking frankly, the Japanese are playing their role as inscrutable Asians with mastery. Finance Minister Tanigaki said reports that intervention had stopped were false. This comes after a whole spate of reports that the BoJ was going to stop intervening. More of the truth will emerge on Wednesday when the Minitry of Finance reports how many yen the BoJ sold for them in March.

New Postcard

Friday, March 26, 2004
The newest installment of my weekly column "Postcards from Old Europe" is up over at Angry Bear.

My thoughts exactly

Thursday, March 25, 2004
NY Fed President Timothy Geithner had a couple of very interesting things to say to the New York Bankers Association today. Please RTWT - excerpts follow:
Despite the uncertainty that exists about the sources and durability of this apparent moderation in some types of risks, financial market prices now reflect a very benign view of economic and credit fundamentals. Credit spreads generally and risk premia in many asset classes are at levels that are very low even in relation to previous periods of relative optimism.
In plain English: the risks are to the downside. If the economy zigs instead of zagging you are going to get your head handed to you.
The stability of the financial system also depends significantly on the quality of macroeconomic policy, not only in terms of the credibility of monetary policy, but also in the degree of confidence investors have in U.S. fiscal management. The current deterioration in the U.S. fiscal position and the acute decline in the net national savings rate represent risks to the financial system and the economy as a whole. These risks are magnified by the size of the U.S. external imbalance and the unprecedented scale of financing requirements it reflects.
Translation: if we keep spending like crazy (hey, let's go to mars!) instead of starting to save, we had better hope that those stupid foreign devils continue to give us their money.

Bubble redux?

I was browsing through CNN/Money's personal finance section and came across an article which conjured up fond memories of the dot com bubble. The story features a "tycoon in the making" who was smart enough to put all her money in real estate. The article starts like this:
No hurt in dirt Esther Diller has her entire nest egg in one basket: real estate. BEND, Ore. (CNN/Money) – Esther Diller, 40, marches to one investing mantra: "You don't get hurt when you're in dirt."
I thought they were being ironic but they seem to be serious. Reminds me of the "oh, I have all my money in stocks they always rise in the long run". And who says that "you don't get hurt in the dirt"? Sounds like groundhog philosophy. The writer then goes on to tell us the following modern-day fairy tale:
In late 2000, after having been laid off twice in less than a year, she started her own mortgage brokerage firm, First Choice Lending Mortgage Corporation, out of her basement in Langhorne, Penn. A single mother at the time – her son, Matthew, is now 10 years old – Diller decided she couldn't risk being downsized yet again. Using $20,000 in severance pay as capital, she hired her former assistant and went to work making cold calls.
A couple of years ago this would have read like this:
In late 2000, after having been laid off twice in less than a year, she started her own internet-based petshop, Turtles-R-Us, out of her basement in Langhorne, Penn. A single mother at the time – her son, Matthew, is now 10 years old – Diller decided she couldn't risk being downsized yet again. Using $20,000 in severance pay as capital, she hired her former assistant and went to work building a web site.
I feel as if I'm in the Twilight Zone! Ok, this nice lady operates a boiler-room operation which cold-calls people and tells them to refinance. Instead of slamming down the telephone and telling her minions to bugger off they say yes, refinance and use the cash to buy some chinese-made doodad. Our intrepid heroine uses her hard earned cash to buy - of all things - real estate.

The article then adds up estimated value of her real estate and finds that she is pretty darn rich as she owns real estate which is "worth" $1.1 million. Hmm, sounds just like people looking at their internet-stock portfolios just before the lights went out. The key here is the concept of "worth". Let me explain what I mean:
She paid $143,500 for the property, which generates enough rental income in the summer season to cover its mortgage for the year. "The unit next to me just sold for $208,000," she said.
She bought her second property, a $310,000 townhouse in Ocean City, the following summer. A recent appraisal valued the house at about $370,000.
Let me translate:
She paid $143,500 for the stock, which will generate enough growth to start making money sometime. "The stock just sold for $208,000," she said.
She bought her second stock, a $310,000 internet service provider, the following summer. A recent analyst report came to the conclusion that the stock's fair value was $370,000.
Problem is that nobody cares what something sold for yesterday or what an expert says something is worth. Everything hinges on the price you achieve if and when you really sell. If the property market tanks, you can take your appraisal and use it as toilet paper. Add in the fact that 3 of the 4 properties were bought recently (and were financed) and this sounds like someone buying an inflated asset on margin.

And what is the media doing? They are lauding this person's financial acumen.

Forecasting dilemma

I promise you that I will not attempt any further forecasting of payroll data. If I look at the consensus' dismal record wrt to their forecasts I start wondering why they don't just call it quits as well. But no, some analysts are already starting to formulate their expectations. I've activated CurryBlog's patented "GiveMeTheFactsQuick"-feature for those of you who don't want to read the whole thing - fasten your seatbelts:
The report on April 2nd is going to be either a) a blowout with 250k + new jobs or b) horrible.
That was a quick survey of analysts sentiment. Now back to our regularly scheduled programming...

Jobs again

Initial claims came in at 339k almost unchanged from last weeks (revised) number. The four-week moving average trended down as well and sits at 341.5k. Not much news here - keep in mind that the employment situation is like a resort pool in the summer - you have people jumping in (initial claims) and people climbing out (hiring). If you prefer an empty pool (low unemployment) you really need to see people swimming to the ladder to get out. Having less people jump in is always second best. A well-functining labor market would consist of someone jumping in, swimming one lap and getting out in a world-class time. Right now you could get the impression that some bathers have started to play chess in the water.

OK - enough pool stories, back to work (Waiter, one Pina Colada please!).


Wednesday, March 24, 2004
Too busy to comment much but the low rates are still working their magic - new home sales are up by 5.8% in February. Speaking of demand - 26bn$ worth of Treasury 2-Year notes are being auctioned off today. This should give market participants an opportunity to assess (foreign) demand. Why should we care? Well, the Japanes are among the main buyers of this paper and they only buy if they have USD on hand. They get USD from intervention in the fx markets so the demand for the note could serve as a proxy for the intensity of intervention over the past couple of days. Keep in mind: the Japanese made noises about stopping intervention.

Orders for durable goods were up on the back of stronger demand for transportaion equipment. The gain of 2.5% was much higher than the number the consensus was looking for (1.7%). I'm especially happy an anonymous coworker that orders for civilian aircraft were up - at the time of the last report he said: "Microsoft should just buy helicopters for all it's employees". Well maybe they heard him! If we strip out the aircraft and defense we get a decent rise of 1.1%. This number is often used as a proxy for investment so we should always hope for some strength there.

Markets don't care- they disregarded the data and decided to drop (at the time of writing at least). Oh, I forgot - ECB rate cut rumors have helped the greenback.

Regular Service

will resume today. I was at an offsite meeting Monday and Tuesday. Just give me a couple of hours to get back into a markets frame of mind. On a related note: I was positively surprised by the amount of comments my post over at the Angry Bear blog generated. Just goes to show that some of the best content is created by the blogs readers. Recipe: Just write something which is nicely ambiguous and sufficiently vague and even dares to mention "Europe" and "US" and you get people ventilating - almost reminds me of the OS wars with Mac, OS/2 and Windows advocates duking it out.
10:53 AM :: Karsten :: permalink ::

How the CPI is calculated

Friday, March 19, 2004
Please go to Barry Ritholz's personal blog and read this.

Triple witching!

Triple witching today in Germany (methinks quadruple in the US) - always fun to look at the intraday chart of the Dax-Future as traders slam it up and down ahead of expiration. You can get an impression of the moves here (link only valid today).

March manufacturing moderates markedly

I commented on the weaker-but-still-expanding reading given by the Philly fed index yesterday. I forgot to mention the special question which the survey's participants were asked. Survey said:
Firms were asked special questions this month regarding their experience in filling recent job openings (see Special Questions). Seventy-three percent of the firms indicated that they have had job openings in the past three months. The most frequently cited problem in filling such positions is a lack of qualified applicants (89 percent). Nearly 41 percent of the firms indicated that they have filled recent openings with temporary or contract workers. Almost 77 percent of firms anticipate openings over the next six months, although 33 percent of these positions may be filled with temporary or contract workers.
Why does this remind me of Greenspan's recent speech on life-long learning? The survey data gibes nicely with the numbers we've been seeing in the payroll data and confirm that firms are not as comfortable that this recovery has "legs".

No other major news overnight and no important data points on the agenda for today (or next week). This weeks Fed release will continue to make it's way through the market's collective digestion tract - we'll just have to see what comes out in the way of positioning. I still see the data flow as bond positive. The equity market is still pretty resilient with several sentiment indicators looking better in the wake of last week's sell off. I'm just bugged by the fact that almost everyone is telling me the same story right now: "We're in a correction, markets will trend higher till June and then sell off". Clients, co workers and the press seem to accept this scenario. This of course means that it is not going to come to pass.

One of two things will probably happen. "If the market is going to sell off in June, I'll get out in May. No wait, everyone will be doing that, I'll get out in April!. Oh no! Other people might get out in April as well - oh heck, sell!". I call this the "sneaking weakness by backward induction (SWBBI)" alternative. The other possibility is that market participants will wait for the market to fall in summer. And wait. And wait. And wait. Then someone comes and buys and off we go on a merry bull run.
11:04 AM :: Karsten :: permalink ::

The thrills are multiplying...

The great Angry Bear blog has gotten even better - Angry Bear and Kash have asked me to guest blog there on a regular basis. The column is called "Postcards from Old Europe" and I'm trying to inject a foreigner's viewpoint into the fine content provided over at AB. We are aiming for one column a week - so if you haven't been over there do visit!


Thursday, March 18, 2004
One report on a lonely website
Momentum sinking fast
Investor's eyes staring cold and silent
Is the recovery past?

We fade to Grey

Sung to the tune of Fade to Grey by Visage

The Philly Fed report nicely confirmed the impression that the Empire State survey left - the momentum in this recovery mini cycle is fading fast.

To intervene or not to intervene?

Much noise about the BoJ's apparently changed stance re intervention in the past couple of days (here, here or here). Various Japanese officials have taken turns saying things like "the government can't sell yen forever." Let me tell you a secret: they can. They just have to live with the consequences - but more on that some other time.

I do have to concede that the BoJ has a great sense of timing - we saw reports showing that there were quite many people long the dollar vs. the yen and then they come out and yank the rug out. The result:
"What's confusing is that we don't know what the authorities are trying to do," said Daisaku Ueno, head of international financial research at Nomura Research Institute.
Well I don't know either - my best bet is that the BoJ's printing press ran out of ink. You can bet your last yuan that I'll be watching the 105 "line in the sand" (just like everyone else).

Phantom price numbers surface

The long awaited PPI data has finally appeared. Although some people were whispering about a government conspiracy to suppress something explosive reality turned out to be much less interesting. The data offers no real surprises. It confirmed the impression given by manufacturing surveys. The gist: inputs are getting more expensive while finished goods are selling for the same - or lower - prices.

Less layoffs but not more hiring?

Initial claims for unemployment insurance hit another low of 336k today - a further sign that companies are moderating the pace of layoffs. Although this is good news no one is getting excited about it. Why? Well, less layoffs do not mean more hiring. To sum it up: less people are joing the "enhanced leisure time club" but there arn't many people leaving it either.

Good News for Balance Sheets, Bad News for Retailers?

Wednesday, March 17, 2004
It seems that some consumers are wising up as to the real implications of debt. A poll by the National Retail Federation shows that a majority of consumers are planning on using their refund to pay down debt. Around 49% of those surveyed said that they are going to pay down debt, 37% want to save the refund, 27% are using the windfall for everyday expenses and 12% are using the loot to fund a major purchase.

I really like the different angles of spin put on this piece. CNN/Money writes:
Paying down high-interest, non-deductible debt is one of the smartest uses for a refund, since it can effectively add hundreds if not thousands of dollars to the value of your refund in terms of interest payments saved over time.
The Retail Federation doesn't think that this is a problem - the glass is half full
Though many consumers plan to use their refund checks to pay down debt (49.2%) or add to their savings (37.4%) [Ed.: unpatriotic scoundrels!], others will use their refund for everyday expenses (27.0%), to make a major purchase (11.6%), or for vacation (12.2%) [Ed.: good for them!].

"Tax time provides a big boost to retailers during a traditionally slow time of the year", said NRF President and CEO Tracy Mullin. "Though some consumers will choose to spend their refunds while others plan to save, these tax refunds will ultimately put consumers in a better position to spend, now and in the future."
Great interpretation - I always thought that spending today and spending tomorrow were linked by this thing called saving. The more I save today, the more I can spend tomorrow. Tax refunds now enable me to spend today and tomorrow - presumably because I'll be saving some portion of the cash.

To all this I say "Your messages I hear, but faith has not been given; the dearest child of Faith is Miracle" (Goethe, Faust). I suspect that consumer's animal spirits will assert themselves and that much more of this windfall money will be spent. A paper by David S. Johnson, Jonathan A. Parker and Nicholas S. Souleles examined the effect of the 2001 tax rebates and found that
Using special questions about the rebates added to the Consumer Expenditure Survey, we find that households spent about 20-40 percent of their rebates on non-durable goods during the three-month period in which the rebate was received, counter to the PIH [Ed.: Permanent Income Hypothesis].
Add in the purchase of durables and you might suspect that people will change the indicated course of action when they get their grubby little hands on the cash. Am I being pessimistic again? Again I quote from the paper:
A concurrent paper by Sumit Agarwal, Chunlin Liu, and Nicholas S. Souleles (2003) exploits the random timing of the rebates to identify the dynamic response of credit-card payments, spending, and debt to the rebates. They find that households initially use some of their rebates to increase credit card payments and thereby pay down debt, but soon afterwards credit card spending temporarily rises such that debt returns back near its prerebate levels.


Nothing much happened at the FOMC Meeting yesterday - that didn't stop the market from gyrating as the "news" was digested. The Fed statement said:
The Committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid pace. Although job losses have slowed, new hiring has lagged. Increases in core consumer prices are muted and expected to remain low.

The Committee perceives the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation.

[Note: Changes from January highlighted]
This minimal change in wording led to market participants trying to outguess each other as to the implications of solid vs. brisk (in terms of increase in output). The other big piece of news was that the Fed seems to have realised that "hiring has lagged". Wow! Talk about insight! The two underwhelming payroll reports seem to have made their way into the Fed's ivory tower after all. The most interesting reaction came from Mr. Market:
Stocks rose after the Fed announcement, then fell, then rose again, with the major indicators finishing higher for the day, as many investors apparently welcomed the prospect of continued low interest rates but were concerned about the possible drag on economic growth from a weak job market.
I guess we have to thank the FOMC for opening our eyes to the fact that the weak job market might be the albatross around the economy's neck.

The Treasury market was well bid as the spectre of a rate hike diminished further. I suspect that a couple of large investors are waking up and smelling the coffee - i.e. realising that the carry afforded by longer maturities might just be worth the increased risk at the longer end of the curve. They sure need the pick up in yield! Most people are probably still kicking themselvse for not having loaded up on bonds in the fourth quarter when the yield on the 10-year was around 75 bp higher than today - but we were all thinking "rising rates" and no one was actually buying.

Speaking of which - the mighty consumer should be ain a buying mode soon. The Mortgage Bankers Association refinancing index jumped 40% last week as home owners took advantage of low rates to increase disposable income. I'm sure that everyone will take their savings to the bank (cough!).

Yesterday's data

Tuesday, March 16, 2004
The Empire State Manufacturing Survey was published yesterday - the readings foreshadow the coming Philly Fed and ISM results.The main message is that expansion is still robust, albei with a lower momentum.

There was not much news on the employment front - there just doesn't seem to be much interest in hiring people. The most interesting story was - again - in the price data. The NY Fed writes
The prices paid index rose sharply - nearly 20 points - to a record-high 50.0. For the first time in the survey’s history, no respondents reported a decline in prices paid, while half reported rising prices. The prices received index was positive for a third consecutive month, reaching a new high of 11.8. Twenty-one percent of respondents reported receiving higher prices, up from 15 percent last month, while 9 percent - a fraction similar to that of the past few months - reported a decline in prices received.
This means that the prices paid for inputs (raw materials) are rising faster than the prices which companies can demand from their customers. Imagine a pair of scissors snapping shut - that is exactly what is happening to margins (i.e. profits) right now. I wonder if manufacturers would agree that "inflation is quiescent".

Industrial Production was up 0.7% last month easily beating the consensus of 0.4%. Capacity utilization rose to 76.6% - still well below the 1972 - 2003 average of 81.1%. This number signifies that there is still enough slack in the economy to backstop rising demand.

This data should not really impact the FOMC meeting scheduled for today - a slight change in wording is all I'm looking for.

Monday Update

Monday, March 15, 2004
The Madrid blasts have been reverberating acroos the media over the weekend and the increased insecurity is evident in the markets. The DAX volatility index (as a proxy for European sentiment) has surged over the past couple of trading days as the market has dropped. The political implications of the attack have been profound as well - some people are attributing the Socialist Party's victory to an Al-Qaeda effect. The really bad news is that the incoming government has made noises about bringing the Spanish troops home from Iraq which - in my opinion - means victory for the cowardly criminals in Al-Qaeda.

Most people will be waiting for the FOMC meeting on Tuesday - needless to say that no change in rates is expected. For those of us interested in large numbers: be sure to look at today's TIC data which will probably tell us that foreigners kept buying US paper. The question is "How much did they buy this time?". Demand for US Treasuries was weaker during the course of Q4 - we'll have to see if the record pace of Japanese intervention in January (everyone repeat after me: "seven trillion yen") fed through into foreign holdings of Treasury securities.

The other data point out today is industrial production which should come in slightly higher than the January number. Inflation-hounds will scrutinise the capacity utilization ("slack in the economy"). The consensus is looking for a slight rise of around 0.4% (production) and a capacity utilization of around 76.4% - well below anything which would mean "inflationary pressure". This does not mean that we don't have to fear inflation (we should actually be quaking in our boots) - it just means that the inflation beast is somewhere else!

Quick Note

Friday, March 12, 2004
Just a quick note to say that there will be no posting until Monday. Yesterday's market turbulence on the back of the Madrid blast led - and is leading - to a high workload in real life. Please come back on Monday for some fresh insights and rants! Have a great weekend and remember to check out some sites from the blogroll!
12:47 PM :: Karsten :: permalink ::

The Japanese current account surplus...

Wednesday, March 10, 2004
...more than doubled year on year. The surplus rose to 1,045bn JPY which was an increase of 135% vs. January 2003. Much of the rise is attributable to the trade surplus which rose 128%. Japan is almost a mirror image of the US where consumers are on an incredible spending binge which is being sustained by credit and being met by imported goods. Bloomberg reports that
Consumer spending increased in January for a third month, a government report showed March 1. A report last week from the Federal Reserve in Washington showed that consumers added $14.3 billion to their non-mortgage debt load in January, the biggest increase in eight months, to finance purchases of cars, other goods and services.


Container shipments into of Los Angeles and Long Beach, the two busiest U.S. seaports, rose 25 percent in January from a year earlier. Exports rose 4.3 percent.
I should add that the hottest US export is probably the export of manufacturing jobs. All this monetary and fiscal stimulus which has been thrown at the economy is leading to massive job gains - in the pacific rim. The strange thing about this is that we are even trying to convince ourselves that the jobless recovery is a good thing - rising GDP and a stable employment situation mean that productivity is on the way up. The new paradigm is not "why save, the market will do it for me" but "why work, productivity is so high that everything gets produced out of thin air - I'll just subsist on the stupid foreigner's largesse".

The aforementioned strategy might even work - all our intrepid consumer needs is the conviction that he'll never have to pay back his debts because of an act of God or that inflation will just inflate the pain away. The problem with this is that inflation is not - on the whole - a desirable state of affairs.

The disconnect between saving and spending wouldn't be half bad if we could safely assume that the US will continue to be a vibrant and innovative economy that foreign countries will be pleased to finance. Keep in mind that current account deficits have been around for a while - I'm pretty sure that the US ran a current account deficit over most of the 19th century. European nations were quite happy to finance the building of infrastructure (railways!) and the founding of companies. The US had ideas, entrepreneurial spirit and a large market - the other countries had the cash.

I'm not so sure that this is still the case. My gut feeling is telling me that very many other countries are "hungrier" than we (the "western world") are. Alan Greenspan recently spoke about the critical role of education in the nation's economy - brain power is one of the safest competetive advantages a nation can have. The principle of innovate or die is becoming ever more relevant! Whoever is assuming that some kind of neo-mercantilist policy can prevent jobs and entire factories moving to "cheaper" countries is deluding him- or herself. Any kind of protectionism of this kind will lead to all consumers footing the bill for the protected constituency. Most Germans or Americans will - if asked - agree that they would prefer local products. This theoretical agreement turns to practical disregard when shopping - they'll usually choose the product with the best value for money. This product is probably from China.

The bad news is that the population is so large that it stands to reason that not everyone will be able to participate in a knowledge-based economy on equal terms. There will be losers and winners and the only way to be a winner is to be hungrier for education and more eager to apply your knowledge than your national or international competitors. Only a "productive nation" - irrespective of the fact that products or ideas are being produced - can afford a huge tertiary sector. Anything else just means living on borrowed time.
11:34 AM :: Karsten :: permalink ::


Tuesday, March 09, 2004
Just a short note today as work has intruded on blogging. Not much news flow overnight, German industrial production data was the big economic event here (it came in slightly weaker than expected). European markets were weak on the back of some downbeat news coming out of some major stocks (Volkswagen,...) while the US market is doing nothing at the time of writing. See you all tomorrow!

Savings/Spending Puzzle

Monday, March 08, 2004
Kash over at Angrybear writes about consumer debt:
It [Ed: the Flow of Funds report] shows debt levels, especially among consumers, that have increased very rapidly in recent years. Much of this is due to the famous increase in mortgage debt that consumers took on last year, but other types of consumer debt also grew at a healthy clip. In all, consumer debt grew by 10.4% in 2003.

The odd thing is that such rates of increase in consumer debt are more typical of a year near the peak of the business cycle than a year near the trough. In fact, as this CBS Marketwatch story pointed out, the last time consumer debt grew this fast was back in the boom year of 1988.

I confess to being a bit puzzled. I have never really heard a satisfactory reason for why consumers have recently been willing to increase their debt at such a rapid rate when their incomes have been stagnant.
My sentiments exactly. Now I'm sure that someone can try to explain exactly what is going on by constructing an elaborate economic model which will work exactly once (in this situation). I simpler explanation can be had by going over to Gary North's column. RTWT but I'll cite some salient points below:
In recessions, the rate of thrift rises. People get scared. They worry about losing their jobs. They recognize that they are vulnerable. Like the overweight person who finds that his clothes are too tight and who thinks, "I must start dieting today," so is the spendthrift in a recession. He can no longer put off a savings program, he thinks. He must begin saving. So, he does.

But, like the overweight person who loses 20 pounds and whose clothes again fit, the saver is tempted to go off his budgetary diet. The money seems good. The job seems safe. He stops saving.


Here's why. When he loses the willingness to save, this affects his outlook regarding the future. He consciously decides that the payoff of self-denial today is a losing proposition. He concludes that the system is rigged against him in his capacity as a saver. He is correct: the system really is rigged in favor of the spender and the debtor.

When a recession hits, Keynesian policies of deficit financing are adopted by the Federal government. The central bank starts buying government debt with newly created fiat money. The government and the central bank adopt policies that are disastrous for individuals to adopt: reduced saving, more spending, more borrowing.

The public is so utterly ill-informed today - as ill-informed as Keynesian economists - that people mimic the state. They spend. They take on consumer debt. In the 2001 recession, they bought homes and new cars. This, we are assured by government economists, was a good thing. The consumer did not falter. The consumer spent the country into prosperity.


We have again seen the rate of thrift fall to about 1%. We have seen the Federal government's percentage of the economy rise to 25%. These phenomena are the result of the same mind-set. As surely as the determination to save is related to the determination to become independent economically, so is the determination to take on consumer debt to buy depreciating assets linked to the determination to find someone else to solve life’s economic problems. "Make it stop hurting!"
Think about it.

A warm welcome to everyone visiting from the CotC!

A warm welcome goes out to anyone visiting via the Carnival of the Capitalists which is being hosted by Catallarchy.net this week. I hope that you like the content presented here and invite you to stay a while and look around. I appreciate any and all comments and mails (and I love it, when people blogroll me!).

The good news

There is nothing more pathetic than listening to a market strategist of any kind who is indignant about the market's refusal to do what he or she considers to be the right thing. That is the reason that I'll spare you any further ranting and raving on the subject of the market's reaction to Friday's weak payrolls. I'll just do what everyone else is doing and comment on the positive part: the Fed can now afford to wait a while longer until it raises rates! I do have to admit that this argument says more about where the market wants to go than about where it should go - but hey, Mr. Market is always right. Maybe these low rates will give even more people and firms the chance to borrow themselves out of debt.

We'll all have to wait until midweek for economic data with initial claims and retail sales on Thursday and March consumer sentiment on Friday.

The Bank for International Settlements released a new edition of it's quarterly report today which makes for interesting reading. If you've been watching this space for a while you'll know that I am pretty sceptical about the current strength seen in almost all risky assets. The folks at the BIS seem to be a pretty smart bunch (i.e. they agree with me) because they write:
Financial markets around the world rallied into the new year, adding to the impressive gains recorded in 2003. Improvements in global growth prospects and corporate finances, coupled with a robust appetite for risk, underpinned increases in equity and credit prices.
This hunger for risk and return has not gone unnoticed by companies who have been very happy to supply investors with their favorite drug by increasing the issuance of new stocks and bonds. The Chinese have cottoned on to this pretty quickly - they are not just content with shipping tangible goods to the rest of the world - the new trend is to suck in further money by selling equity to the foreign devils. Corporate insiders (no, I don't mean Martha) have been way ahead of the Chinese on all this selling with insider sales highest since May 2001. But hey, what do they know?

That brings us back to today - another Monday spent at my desk looking at little lines go up and down on my screens while investors continue to pile into a market which is editing out all negative information.I just keep wondering what the market is expecting.

Payrolls again

Friday, March 05, 2004
The main points besides the headline number:

Wage growth is still weak - this doesn't bode well for a recovery in personal income (income being the stuff you're supposed to use to finance your expenses).

Hours worked were unchanged. Hours can be a good indicator of where employment is going - the rationale being that your boss will try to squeeze more working hours out of you before he hires someone else. In this context unchanged working hours are not good.

Government added all the newly created 21k jobs (GWB's secret election plan?)

How low can you go?

US nonfarm payrolls came in at +21k vs. 130k official and 150 - 170k unofficial consensus. Reminds me of...
Nothing left to do here
There's nothing new here
It's all the same

You're going down, down, down
How low can you go?
[...] Garbage, Subhuman - Lyrics from here.
My daily charts had to rescale themselves twice as EUR/USD spiked up and european equity markets reversed earlier gains in an eyeblink. Gold rose, Treasuries are up with the 10-year yield under 3.9%. Adding to the discomfort is the fact that Nov. and Dec. payrolls were revised downwards. This is not good news - the only thing going up is the series of deficits the US economy is addicted to.

Weekend fun

Try this:
1. Go over to Douwe Osinga's Google Hacks page.
2. Choose "Visual Poetry"
Poetry is supposed to project images in your mind. VisualPoetry translates any text into a series of images by looking up the words on Google image search and projecting the most relevant results as a slide show.
3. Type "Greenspan loves easy money" in the box and hit "Go". Or just try this:
4. Look at the sequence of pictures displayed!
12:44 PM :: Karsten :: permalink ::

Holding pattern

European markets are in a holding pattern ahead of today's payroll numbers. The consensus is looking for something around 130k new jobs. I think that this is a very conservative number which results from everyone having been very wrong on the past couple of calls. So don't expect muchprice appreciation of the market and the greenback if we see a "blowout" payroll number of 160 - 180k. I'm pretty sure that the market has priced in some strong data for today (...but what do I know).
11:57 AM :: Karsten :: permalink ::

Quick look at the ISM

Tuesday, March 02, 2004
Yesterday saw the release of the ISM which came in at 61.4 vs. 63.6 in January. This reading still signals continued expansion of manufacturing output which bodes well for Q1 GDP. New orders and employment picked up while inventories kept falling.
Low inventories and many new orders are a positive factor. Companies have obviously been keep a tight rein on inventories - time will tell if now is a great time to start stocking up. Just imagine what will happen if companies build up inventory now just ahead of a potential slump in demand. This demand slump could of course come from consumers having to depend on the (meager) growth of their wages from the middle of the year onwards instead of using tax rebates to shore up their spending.
The increase in the employment index is heartening - I'm hoping that Friday's payrolls reflect this upbeat piece of data.
Although everyone considers inflation to be dead - or quiescent - we should keep in mind that producer prices have been rising for a while now. The prices-paid index jumped from 64 in November to 81.5 (!) in February. Most basic materials used in manufacturing are going up in price because of high domestic - and foreign - demand. The quiescent state of the CPI shows that producers are not able to pass on most of this price appreciation to consumers. Is this a good thing? Well if you are an investor it isn't - it means that margins are shrinking while a potential downturn to demand because of falling incomes might be just around the corner.

Earning, spending and the difference

Monday, March 01, 2004
Today saw the release of the January Personal Income and Outlay report. Spending was up by 0.4% while personal incomes were up by 0.2%. In real numbers:
Personal income increased $18.4 billion, or 0.2 percent, and disposable personal income (DPI) increased $67.8 billion, or 0.8 percent, in January, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $32.1 billion, or 0.4 percent. In December, personal income increased $29.6 billion, or 0.3 percent, DPI increased $27.4 billion, or 0.3 percent, and PCE increased $42.9 billion, or 0.5 percent, based on revised estimates.
A quick look shows that people are spending money quicker than they are making it. Whoaaa! Not so fast! Disposable personal income was up by a whopping 0.8%. Good news? Well, that depends - the release goes on to state that
The January change in disposable personal income (DPI) -- personal income less personal current taxes -- was boosted by several special factors.
The report then goes on to state that tax reductions played a large part in ramping up disposable income. Without these one-off factors disposable income would have increased by 0.1%. The pace by which spending has grown is also slowing - but consumption is still more healthy than earning. This is why economists are all hoping for rising payroll numbers - the stimulus from tax refunds and mortgage refis is going to keep fading as the year progresses. The people over at CBSMarketwatch write
Economists hope bigger tax-refund checks -- the residual effect of last year's tax cuts -- and an improving job market in 2004 will boost income and spending this year.
Households are using most (all) of their cash to buy things instead of repairing their private balance sheets. This held true even through the recession - instead of using money to pay down debt (or - gasp! - save) consumers just continued spending. Any windfall money (tax rebates!) was promptly blown on anything that took the mighty consumer's fancy - no wonder that we're not seeing any pent up demand. People seem to have defined a ceiling on debt service and have used falling rates to leverage up further. Just imagine someone who owes 100k @ 6% - he'll have to pay 6k interest a year. A fall in rates to 4% means that he can take on another 50k in debt without increasing his monthly payment. Repayment of principal? Well, he'll just extend the life of the loan! This strategy will probably work out as long as rates that being paid remain steady and the debtor's economic situation doesn't deteriorate - all other cases look pretty risky to me.

A very scary article in USA Today shows what this looks like in the market for cars:
New car buyers are paying more, making the lowest down payments ever and taking increasingly longer loans.
It's a trend that will continue to increase the number of people who owe more on their cars than they are worth after three or four years. That's currently true of 40% of all trade-ins.[...]In 1997, banks financed an average 89% of a new vehicle's cost. Last year, it was 101%, says the Consumer Bankers Association, as consumers sought loans that cover a new car and thousands more they owed on the old one.[...]But her friend Nick Garofolo of Detroit couldn't resist buying a new Acura RSX last year, even though he owed $2,500 more on his Lincoln LS than it was worth. "I get an itch for a new car every few years, and I have to scratch it," he says.
And I used to think that I needed to save until I can afford something. Silly me! Keep in mind that Mr. Garofolo can probably only afford to finance his new Acura because the Japanese are running the "largest vendor finance operation in the history of the world" (via James Grant of Grant's Interest Rate Observer). One positive bit of news was in the aforementioned report - the savings rate nudged up from 1.4% to 1.8% (although I suspect that a couple nudges more might be needed to restore the some households financial health).

Must read

For a concise summation of why the imbalances in the US economy are so very frightening be sure to read this paper (pdf) by Niall Ferguson and Laurence J. Kotlikoff. I'd like to thank Barry Ritholz for pointing out the link on his fine blog.

Under Pressure

A round of political spinning by Eurozone politicians and weaker than expected inflation numbers have helped sentiment vs. the dollar of the past couple of days. Some people are even expecting a rate cut by the ECB on Thursday. The greenback has been supported by short covering ahead of Thursday's meeting as evidenced by the Feburary 24. CFTC data. The switch in positions is most marked vs. the yen with traders now long dollars - albeit only marginally. A weak ISM (today) and especially a soft payroll number (Friday) could lead to renewed pressure on the dollar - lets just hope that "Under Pressure" will not turn into the greenback's hymn! Speaking of which...
Greenback's Hymn
Bah bah bah bah bah bah bah bah
Bah bah bah bah bah bah
Pressure pressing down on me
Under pressure
That burns a market down
Splits a family in two
Puts people on streets

Bah bah bah bah bah bah
Bah bah bah bah bah bah

That's o-kay!
It's the terror of knowing
What this world is about
Watching some good friends
Selling me out
Pray tomorrow takes me higher
Pressure on people
[...] slightly adapted from David Bowie's original lyrics

10:20 AM :: Karsten :: permalink ::