Putting the spice back into investing.

Back again (but only for a while)

Tuesday, July 27, 2004
I just managed to get rid of most of the urgent stuff on my desk so I finally have time to blog a little.

Not much has changed from last week - Fed officials are still singing the praises of a recovery which - at least in my opinion - is losing steam month after month. Federal Reserve Bank of Kansas City President Thomas Hoenig stuck to the official hymn sheet yesterday and reaffirmed the view that we'll see a very strong economy this year by saying:

I think the economy is really doing well and improving and I think it will continue to improve. ... We are looking at a more positive economy, we are seeing business fixed investment pick up

Well yes. Fixed investment is probably still feeling the boost from the accelerated depreciation which is still possible until the end of the year. No guarantee though, that we'll continue to see this kind of strength in 2005.

Some leading indicators are looking pretty soft. Last week saw the release of the index of leading U.S. economic indicators which came in 0.2% weaker - the first drop in over a year. No need to get overly excited - this kind of indicator needs a couple of back-to-back negative readings to actually get anybody all hot and bothered but the writing may be on the wall.

Equity markets have been weak across the board - market action was pretty lackluster as no real impetus to price action surfaced.


Thursday, July 22, 2004
Not much blogging for the past couple of days - work is really stressing me. Not to worry though - I really hope that I'll be able to dig myself out from under my workload shortly.  Thank you.

Straight from the core

Monday, July 19, 2004
Friday's CPI data had something for everyone. While inflation hawks focused on the larger than expected rise in the headline number the doves looked at the lower than expected rise in the core data. The cost of energy was again the culprit in the headline number while the price of food which managed to rise an astonishing 0.9% in May was almost flat. I guess this is good news because it is probably easier to drive than than to stop eating.
The recent rate of fluctuations in the oil price - and thus in the price action in the energy category - is a pretty good argument for the use of core data. Critics of core data say that we should use an overall measure of inflation as prices are obviously rising so it would be sophistry to eliminate energy price hikes as people are actually paying more.
This is true - it just doesn't help from a policy perspective. If geopolitical tensions are causing gyrations in the oil market a rate hike isn't really going to help contain price inflation. Or do we think that militants will stop bombing pipelines etc. because the Fed raises the Fed Funds rate?

10:30 AM :: Karsten :: permalink ::

Pre Weekend update

Friday, July 16, 2004
Lots of data out yesterday - the problem with it was that we still don't have a very clear picture of what is on the cards for the economy. Producer prices were lower instead of higher with the headline number way below expectations and the core number pretty much in line. This gives me some hope that today's CPI data will come in on the soft side.
The New York and Philly Fed surveys were pretty upbeat with the crucial "hiring intentions" part looking positive in both. The other data was somewaht mixed with the New York data weaker than the Philly data (especially new orders and pricing power).
Reality was a little less kind: June industrial production dropped by 0.3% and capacity utilization fell as well.
In all this is a not too hot, not too cool kind of picture which gives the Fed wiggling room with regard to interest rates. Inflation hawks should slowly begin to tone down their rhetoric as the current expansion loses steam in the second half and inflationary pressures abate.
11:56 AM :: Karsten :: permalink ::

The truth?

Wednesday, July 14, 2004
An old saying goes something along the lines of "If you want to demonstrate that there is a linear relationship between two variables it helps to work with only two points of data". Prof. Tufte examines the cavalier way economists work with data in his excellent post which is succinctly titled "Uh Oh". Let me give you a taste:
1) economists publish papers with results that are not replicable, and 2) few make enough effort to notice
As they say, read the whole thing. If I'm not totally mistaken, I think that the Economist had an article which made many of the same points a couple of weeks ago with regard to the use of statistics in the social sciences. Is there anyone out there who can confirm this?

By the way, when you've finished reading the article on Prof. Tufte's "private" site, go visit his other Blog. You're thinking "why should I"? Easy, Tufte's Economics Classes Blog is a great experiment - the good Professor is using a blog to get his macroeconomics students to write about (mostly) economic issues. Students get "points" by writing and commenting. Now how cool is that? So I encourage all of you to go there and use the comments feature - you can then take pride in helping people learn about econ-stuff (how about Prof. Tufte calls all commentators "Deputized Tutors").

Supersize my earnings

I just can't resist! McDonalds managed to "supersize" reported earnings. This particular Happy Meal offered 27% more profit! The market said I'm lovin' it and went into buying mode. The rest of the US is in eating mode with 2 out of every three adults overweight (as in fat, not as in holding much of one stock).

Retail sales

US retail sales fell 1.1% in June - worse than the consensus was expecting. It is a little worrying that the core data (ex cars) came in at a disappointing -0.2%. I was looking for some strength in this particular number. EUR/USD jumped higher after the news and broke through the 1.24 level.

We should be wary of reading too much into single points of data - the trend matters and it is much to early to say that John Q. Public is starting a spending strike. It could well be that consumers are just taking a breather from shopping - but we better hope that the news (payrolls!) doesn't turn sour. If fiscal incentives taper off without something there to replace them, a retrenchment might not be far off.

A little note of caution (mostly to myself): "do not underestimate the US consumer".

Odds and Ends

More noise coming out of the Fed with regard to the transient nature of inflation - Dallas Federal Reserve Bank President Robert McTeer said
The American people, including American workers, in my opinion, will be able to enjoy rapid noninflationary growth for the foreseeable future
A little to grandiloquent for my taste but his meaning is clear. When pressed on the subject of inflation he added
I think it is most likely a blip. It's going to come back down one way or the other, on its own or with a little nudging from us
This sentiment was echoed by Federal Reserve Bank of Kansas City President Thomas Hoenig who is on record thusly
How that (inflation rise) plays is a very important consideration. My own view is that we will have inflation numbers that remain in the 2 percent range
Looks like the entire Fed is singing from the same hymn-sheet.

In other news: markets are looking for a weak retail sales number today. The consensus seems to think that we'll see a decline of around 0.7% for June. Declining auto sales and high gas prices (...it's too expensive to drive to WalMart every day...) seem to be the main culprits. My recommendation is to ignore the car-sales influenced headline and focus on the underlying retail sales trend - it might even surprise on the upside. But what will the future bring?

The National Retail Federation thinks that spending growth will continue to be strong in the second half (they look at GASF = general merchandise, apparel, sporting goods, home appliances and furniture - no cars in the list). Being a smart bunch of people they hedge their bets by noting that the phasing out of tax benefits will firmly shift the brunt of new spending on disposable income derived from traditional means (such as a paycheck!). They say
Therefore we are counting in the improvement in the labor markets and increase in wages and salaries to provide the financial wherewithal for consumers to keep on spending. If employment growth stumbles, we could see consumer spending soften
How true!
12:39 PM :: Karsten :: permalink ::

Prices again

Tuesday, July 13, 2004
Philly Fed President Santomero weighed in on the inflation outlook yesterday and noted that prcing power may yet evaporate. This is pretty much the view that I've come around to.
10:29 AM :: Karsten :: permalink ::

Bond time?

Friday, July 09, 2004
The recent weakness in equity markets has shown that the torrid love affair with the market some people have restarted over the past year may yet turn out to be a form of fatal attraction.

Recent economic data in the US has been negative and may point to a slowdown in growth over the next couple of months. Consumers have been profiting from enhanced incomes courtesy of tax cuts, refinancing debt and - at least in some cases - new jobs. Alas, the time of tax cuts seems to be over just as interest rates have started to rise. This leaves the burden of the recovery firmly on the back of the "real economy".

Against this backdrop expectations for earnings growth are still very robust. You will probably not be surprised that I don't share this view. The stimulus provided by fiscal and monetary measures is ebbing, thereby revealing that many of the excesses of the bubble have not been worked off. Capacity is still high while utilization is still relatively low - the absence of stimulus may lead us right back on a path of slow growth going forward.

In the event that the recovery fizzles and rate expectations get slashed, we may yet kick ourselves that we didn't buy bonds!
11:13 AM :: Karsten :: permalink ::


My weekly column, Postcards from Old Europe, is up over at Angry Bear's place.
11:10 AM :: Karsten :: permalink ::

Bull run!

Wednesday, July 07, 2004
No, not in the markets. The bulls are on the rampage here.

The beauty of real estate...

...is that it's safe! You don't believe me? I found a nice article on how people are flipping unbuilt condos which not only has gems such as
Wealthy investors are buying and selling beach-front condominiums on Alabama's Gulf Shores before they ever get built and are turning fancy profits on the rapid-fire deals. The practice, known as "flipping," has become so widespread that real estate companies are promoting it, along with their more traditional ads aimed at people wanting second homes.
At Wireman's Caribe Resort, some units have sold four or more times.
But also tells us that you don't need to tie up much money in the process. The great thing about this is that it works like trading a future - you only need a little cash to control a very expensive condo. The magic lies in giving the developer a letter of credit which will usually only cost you around 1% of the notional sum. The article provides an example
For example, say that an investor bought a $500,000 condominium at its initial offering two years before closing and chose to provide the 20%, or $100,000, down payment in the form of a letter of credit. If that investor's bank sold such notes at 1% a year, the investor would pay just $2,000 to control the condo for two years until the building was finished.

Then, if at some point before closing, the investor sold the unit for $600,000, he would reap a $98,000 profit on his $2,000 investment.
Fantastic! The best thing is that this is really safe! Really, I'm not kidding. Just listen to the experts. The article cites a certain Chuck Norwood who is a real estate broker and therefore fully unbiased who tells us
The last time he heard so much talk about easy money was right before the bubble burst on tech stocks. The good news, Norwood said, is that with condos, unlike the stock market, "you won't wake up in the morning and lose half your value."
How about he tells that to people who invested in Japanese real estate in 1988?

Economic Orkut

Tuesday, July 06, 2004
Hello everyone, welcome to experiment time! As social networking is all the rage and economics is a social science, how about we inject some economics into Orkut?

So, I'll send anyone who is interested in economics an Orkut invite - let's see if we can take our blog-subject into another format. If you're interested, just send me an email (karsten.junge(at)gmail.com) or leave your name and email somewhere in the comments.

ISM Services

The ISM Services Index came in at a still expansionary 59.9% albeit below the 65.2% level we saw last month. This was below Wall Street forecasts but still not as awful as one might think. Employment was still looking robust and new orders didn't look half bad. But we still have to concede that the momentum of the current cycle is slowing - the 64k question is "how much momentum will we lose?"

The always popular Challenger Survey came out today as well. Challenger Gray & Christmas is an outplacement firm which conducts a private survey of business hiring and firing intentions. This month's report shows that job cut intentions are at a 12 month low (the good news) but hiring intentions are around 30% lower than last month (the bad news).

Reports like this are like little mosaic stones which serve to assemble a picture of very cautious companies who tread carefully around subjects such as hiring and investment. No irrational exuberance here!

The kindness of strangers - or - who paid for your tax refund?

One of the things that distinguishes a professional commentator from your host at CurryBlog is that the pro is able to convey an old story in an interesting and accessible way without rambling on forever.

This is the case with a Washington Post column by Allan Sloan who writes about the foreign ownership of the US public debt. While political pundits lambast many foreign countries for not helping in the war against terror they forget that very many of these countries have been fighting the war against recession (and financing the anti-terror campaigns) in the US. From the article:
The statistics show that foreign and international investors account for the entire increase in privately owned Treasury securities since George W. Bush took office. Issuing those securities is how the Treasury covered federal budget shortfalls.
Now, a little math. Privately owned debt, as you can see, was up by $620 billion since the Bush administration started -- but foreigners' holdings were up by $680 billion. This means that foreigners accounted for the entire increase in privately held debt -- and then some.
Well imagine that! As US consumers boycott French products some Pierre or Francois may just have been buying a T-Bond. This bond then may have financed some of the goodies people bought with their refund checks! It may even have provided money to finance the war against terror! Oh my, I wonder if there is a way to check where individual refund money came from...
10:01 AM :: Karsten :: permalink ::

ISM again, other random thoughts

After last week's batch of economic releases we have only one noteworthy report out this week. Today will see the release of the non-manufacturing ISM survey for June. This particular index fell in May and the consensus is looking for another small fall in today's release.

As there is not much other economic data out, markets will focus on the companies that traditionally kick off earnings season (Alcoa, Yahoo,...). Expectations for earnings are still very positive and we should see some strong reports come in. Regular readers know that I'm not all that optimistic about the US economy's prospects going forward, so you won't be that surprised if I tell you that I see any gains on the back of strong earnings as a chance to reduce exposure to the stock market.

While the US economy has been handing us negative surprises lately, the Japanese economy is still looking pretty good. The index of leading indicators has now been in expansionary territory for nine months and this months reading crept higher to 66.7. The real good news is that the Japanese are opening their wallets and spending at a faster rate - the government released a report today that showed household spending rose 4.8% in May. This is good news for the entire Pacific Rim as Japanese demand is one of the key factors which determines the region's economic well-being.

The good news is also especially important for Japanese Prime Minister Junichiro Koizumi who faces an election on Sunday. Recent polls have shown that the ruling LDP is having a difficult campaign. This news is weighing on sentiment vs. the Yen as markets are factoring in the possibility of Koizumi having to resign on the back of an election defeat.

Good morning!

Monday, July 05, 2004
Last Friday saw the release of the payroll data for June and the result was not pretty. While the consensus was looking for a gain of around 250.000 jobs reality only delivered about half of the projected number. Even more worrying was the fact that all the supporting data such as hours worked was negative as well.

This number was a wake-up call for those market participants who were extrapolating recent strength into the future. If the June data does not turn out to be some kind of aberration the overly optimistic analysts will have to rethink their forecasts for the second half. Just a week ago everyone was fretting over inflation and employment was just a afterthought - everyone knew that the jobs machine was just purring along.

The first part of the rethink is already in progress - the futures market is now pricing in a 2% Fed Funds rate by year end - not the 2.25% we were looking for previously. The Fed's use of the word "transitory" with regard to inflation may prove to be prescient.
10:10 AM :: Karsten :: permalink ::

Stupid German Money?

Friday, July 02, 2004
The fabulously intricate German tax law has encouraged local investors to invest in a whole raft of assets that they would never have thought of without the tax incentive. The term "stupid German money" was coined to describe the cash flooding into Hollywood to finance movies on the back of a German tax loophole which made it possible to write off the entire investment in the current tax year. Some people estimate that
about 20% of Hollywood's entire production budget is financed through German media funds
Another favorite investment has been the purchase of US real estate because foreign rental income is more or less tax free in Germany. This is the reason that the Chrysler Building, Chelsea Market, 666 5th Avenue in New York or the AMA Building in Chicago to name but a few, belong to German private investors.

And what are they doing? Well, they're selling. One of the largest fund companies, Jamestown, has decided that the time is right to cash out and started to sell some of its properties. The CEO has also publicly declared that they won't place any more funds until the real estate market quiets down. Maybe the stupid German investor has learned something?
12:31 PM :: Karsten :: permalink ::

New postcard

My column "Postcards from Old Europe" is up over at Angry Bear's place.
12:29 PM :: Karsten :: permalink ::


Thursday, July 01, 2004
The June Manufacturing ISM Report On Business is out today and it came in just a whisker away from the 60 I was looking for yesterday. Well, to be honest I was much more pessimistic than the consensus which was looking for a number of 61.6 or so, but at least I got the direction right. Again: not much real content to this report - activity is still expanding albeit at a reduced pace. Same story as the Chicago PMI yesterday.

All eyes now shift to the employment data out tomorrow. The jobs number will very much make or break the week as it really is a big data point and there is much more uncertainty surrounding payrolls than - say - the Fed rate decision.


Alright, I'm pretty sure that everyone has by now realized that the FOMC increased the Fed Funds Rate by 25bp. This comes as no surprise - or rather: it was a surprise for some that things turned out to be exactly the way the consensus called it.

The Fed acted somewhat like a driver who starts signaling his turn miles ahead. The people in the following cars would probably think that this particular driver is being overly cautious. As the exit approaches some might start to wonder if the leading driver really wants to leave the highway. He might have switched on the turn signal by accident after all! All breathe a collective sign of relief when he does exactly what he communicated from the start.

The FOMC statement is consistent with recent Fed rhetoric. The Fed will continue at a "measured pace" while giving themselves some breathing space by commenting that "the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability". Speaking of which: the FOMC shares CurryBlog's view that the inflation we are seeing right now is "transitory" and that the rate of price increases will probably moderate in the coming months.

What should we look for policy-wise? I posit that we'll see a sequence of small (25bp) hikes at the next meetings. I'm certain that any large loss of economic momentum in the second half will cause the Fed to be very cautious with regard to hiking. It is not a foregone conclusion that we'll see a 2% Fed Funds by year-end.

As usual you can find the FOMC statement below. Your humble correspondent has highlighted the changes from May.
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1-1/4 percent.

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid pace and labor market conditions have improved. Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors.

The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.