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Thursday, January 26, 2012

Claims Much Better, Money Flow Brooding

Not the headline, of course, but the whole thing. The headline is that claims increased from 356K to 377K. But that's totally misleading - raw claims were rather high last week, and this week they look much better. Seasonal adjustments are a bit off here due to calendar changes. At 377,000 initial claims this week are right in line with the four week moving average of 377,500.

It appears likely that some of the seasonal hiring was retained due to better business and lower initial staffing levels. That does not square with what I have seen walking around, so I am iffy on that. There are probably some good regions out there. California is doing better, which is a big help.

Durables are good. Not great, but good. As long as primary metals hold out we know we have a few months of cushion. Some of the optimism over the US economy is overblown. Supermarkets and electronics look awful, for example. People really do not have much spare cash, and some stores are light stocking.

BUT I think we have finally seen some more balance sheet recoveries at smaller companies. This is a huge help that could be durable. Our weather is highly favorable - probably adding 3/4s of a percentage point to US GDP in Q1, so I am more positive. The reason for the huge surge is that a lot of the potential upside in the US this year is in construction/reconstruction, and that is unfortunately weather dependent. Everyone has to get lucky now and then, and this was our lucky winter. The last two were most definitely not. I expect better conditions in the US to help Canada and Mexico also in Q1.

Each year I go through my personal economic calendar and mark down anomalies - times when odd things have happened that will make the current period not directly comparable to the same period next year. Last year, for the first time, I have a nearly total annual coverage of anomalies, and for months at a time, they cover areas of the globe that exceed 50% of world economic output. By the time we got to the Thai floods, I was mentally staggered by the extent and continuity of the economic disruptions.

My conclusion is that I need three months of data this year to achieve certainty levels normally seen with one month's.

The flip side of that is that last year it was mostly negative anomalies, which strongly suggests that we get help this year from less in the way of negatives. We need that help.

Friday's rail data will be the first marginally comparable data this year. The first week of February will be the first reasonable petroleum data this year. I won't feel sure about claims until the middle of March. I will start to become more confident about employment data in February.

With those cautions, China appears to have a pretty big problem. Japan's problems shouldn't be sudden this year, but may diffuse into the region. When I look at data like this for Indonesia, I experience great bouts of thoughtfulness. Malaysia's still hanging in there, but Singapore is oscillating between negative and positive quarters. India's got a problem, and the problem is not really improving at all. The Japanese debt now becomes a real issue. The fix is for the yen to depreciate. That is the only possible fix, so I assume it will happen.

I am guessing that the flood of money inserted into the global economy by the European money toss will cushion the Japanese pull-back for a while this year. After that issues may emerge. China has built up a huge cushion in recent years, but I think it will need to use much of it to stabilize itself internally. Therefore I am sitting here thinking that global money flows may change quite dramatically over the next few years.

This BIS paper on global liquidity seems timely. Perhaps Chinese banks and trusts will be able to pick up some of the global slack. Perhaps not. European banks were tremendous funders of growth in peripheral countries.

Still love you and glad to see you have been posting more lately. I was wondering if all was well for a while, or if you were just enjoying Christmas.
I had a question about your anomaly calendar. The assumption would be that the ratio of helpful anomalies to hurtful anomalies would remain constant - thus the high level of hurtful anomalies last year makes a bounce back more likely if we return to the norm. What has that ratio done over time? If we have experienced an increase in the ratio of hurtful to helpful anomalies, that would bode poorly. Just curious if the high number of hurtful anomalies was an anomaly or a trend.
WV: antgesp - seems totally random
So Japan and Europe devalue which in turn gives Ben
cover to print without raising oil prices as much. A slowly
improving economy I. The short to medium term, a poorer
population in the longer term, and a greater wealth divide.
on the way.
If Japan and Europe going to devalue, rather than running the printing presses at the Fed, we should shift our debt issuance to as long a term as the market will bear. Take a holiday from issuing anything shorter than the 5-year bond; lock in the low rates as much as possible now.

In regard to your observation about last year having a lot of anomalies: It only takes one BIG anomaly to ruin your whole economy.
John - of course you are right. It buys us a few years. However you need a lot of short-term securities for the balancing act, so you can't do it entirely.

Also there is much less appetite for long-term debt, so they have to be very careful about overloading the market.

Banks can't buy long term treasuries, because their deposits are short-term and if you buy 10 year bonds and wind up getting less on those bonds for 7 or 8 years of the decade than you are paying on the deposits that you used to fund them, your ass is grass.

That is one of the reasons that the Fed is in the longer-term market.
Anon - I don't see that the anomalies have increased at all. If anything, they may have diminished in their impact.

Two factors do come into play. The epic movement of so much production into Asia means that disasters in Asia have more of an impact on the world economy than they used to have. Second, the supply lines for the higher-tech stuff are pretty extended, so the effect of localized disruptions in certain areas can be be very wide.

I don't expect huge help this year from the recovery from last year's whacks, which included quakes and flooding in Australia/NZ, the Japanese disaster, the storms in the SE of the US, some flooding north, the floods in Thailand, etc.

All that was pretty normal, except the quake in Japan was huge and it forced a change in energy policy in Japan that will have very global impacts, plus it precipitated a German exercise in navel-gazing which, it appears, will have significant impacts on Europe.
Spork - since the world economy is shifting toward a slower growth mode, it would seem that greater wealth divides are baked in no matter what.

The only thing that lessens income inequality is growth. Consider the "rich" nations, and consider how most of the wealth in these nations is generated by jobs.
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