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Monday, June 30, 2014

BIS: Wouldja stop with the QE edibles, already?

This is the 84th Annual Report. Page link:
A new policy compass is needed to help the global economy step out of the shadow of the Great Financial Crisis. This will involve adjustments to the current policy mix and to policy frameworks with the aim of restoring sustainable and balanced economic growth

The global economy has shown encouraging signs over the past year but it has not shaken off its post-crisis malaise (Chapter III). Despite an aggressive and broad-based search for yield, with volatility and credit spreads sinking towards historical lows (Chapter II), and unusually accommodative monetary conditions (Chapter V), investment remains weak. Debt, both private and public, continues to rise while productivity growth has extended further its long-term downward trend (Chapters III and IV). There is even talk of secular stagnation. Some banks have rebuilt capital and adjusted their business models, while others have more work to do (Chapter VI). 

To return to sustainable and balanced growth, policies need to go beyond their traditional focus on the business cycle and take a longer-term perspective - one in which the financial cycle takes centre stage (Chapter I). They need to address head-on the structural deficiencies and resource misallocations masked by strong financial booms and revealed only in the subsequent busts. The only source of lasting prosperity is a stronger supply side. It is essential to move away from debt as the main engine of growth.
By "financial cycle" they mean debt cycle.  This is the table of contents. When you read headings such as Global financial markets under the spell of monetary policy, you sense skepticism.

When you start reading, you realize they are throwing down the gauntlet:
 Financial cycles differ from business cycles. They encapsulate the self- reinforcing interactions between perceptions of value and risk, risk-taking and financing constraints which translate into financial booms and busts. They tend to be much longer than business cycles, and are best measured by a combination of credit aggregates and property prices. Output and financial variables can move in different directions for long periods of time, but the link tends to re-establish itself with a vengeance when financial booms turn into busts.
In other words, if you're not fixing Main Street, you're not fixing Wall Street if the cause of Main Street's problems was originally the financial cycle rather than the business cycle. 
While there is no consensus definition of the financial cycle, the broad concept encapsulates joint fluctuations in a wide set of financial variables including both quantities and prices. BIS research suggests that credit aggregates, as a proxy for leverage, and property prices, as a measure of available collateral, play a particularly important role in this regard. Rapid increases in credit, particularly mortgage credit, drive up property prices, which in turn increase collateral values and thus the amount of credit the private sector can obtain. It is this mutually reinforcing interaction between financing constraints and perceptions of value and risks that has historically caused the most serious macroeconomic dislocations.
I would recommend reading at least this section. There's a lot of detail in it, and one of the central implications is that easy monetary policy in large countries has created a new set of correlations which are likely to be even more independent of central bank policy.


Once when one cuts through all the shouting, the upshot is that Pending Home Sales remain significantly below last year's levels. On an NSA basis, -6.9%, with all regions clocking in negatively. The Northeast and South have relatively small declines at -2% and -4%. The Midwest and West are a little more decided on the matter, coming in at -8.4% and -14.3%.

So the upshot is still that we cannot look to home sales to carry the recovery forward into 2015. 

Construction takes a while to peak and fade, so 2015 is the danger point.

Hobby Lobby/Conestoga decision is out, holding that closely held corporations do have religious protection under RFRA It seems to be about what I expected - a narrow ruling. The fun is going to be in the concurrences and dissents. 

Perhaps the next Obama legislative initiative will be to mandate that anybody above a certain net worth must buy a car? In that case, and in that case only, the Hobby Lobby decision might have a national impact.

Thursday, June 26, 2014

BofA Economists Smoke Or Eat Really Good Weed

Unfortunately, the result appears to be somewhat Maureen Dowd-like confusion rather than cosmic clarity. 

Exhibit 1: 
The weekly petroleum update through March.  Remember that really bad winter we had? This should have vastly increased the demand for heating oil (distillate), NG and propane. But look at the Products Supplied, and see the YTD drop for propane, the almost flat distillate (2.9% YTD, +0.6% last four weeks), and the huge drop in propane supplied for the last four weeks.

You know what that means? Consumers ran out of money, and so did a lot of businesses, so they turned the thermostats WAY down in just about unison. There was a corresponding drop in late-season deliveries in the affected areas. I know because I was so concerned I called some suppliers.

This meant that consumer spending in the second quarter would be affected. People who owed money would have to recover and pay off that bill, and those who didn't but had still turned down the thermostat would be socking money away for the next potential winter disaster. Nothing induces spending caution like having to live in a house at 58 degrees for six weeks when it is very cold outside. Rising food costs would reinforce the caution.

Exhibit 2:
Today's Personal Income and Outlays report.Many of those who do not inhabit the BofA Colorado economic prediction center have realized that Q2 is about over. While unquestionably economic activity rebounded, it really did so in March. Since, it appears that consumers have pulled back a bit, probably because they are doing so while they still can. 

So today's real consumer spending report covers the first two months of the second quarter, and the so-far figures are -0.2 April and -0.1 May. This compares to Q1 revised of -0.3 Jan, + 0.3 Feb and +0.8 March. 

Call me a troglodyte unenlightened slide-rule bearing primitive non-enlightened economic life form, but those figures make sense given the history, so I don't expect massive upward revisions in real PCE for this quarter.

PCE accounts for over 2/3rds of GDP, so no matter how ebullient the rest of the economy is, it seems unlikely that Q2 annualized can come out over 2.6-2.8% at this point.

Exhibit 3:
See, when you don't inhabit the Economic Weed Dome in CO,  you naturally go looking for confirmation of your assumptions. So what would be an indication that consumers outran their cash flow due to excessive basic costs in Q1, and will have to recover in Q2? Heh! Credit card debt. We can find that in H8. 
Note that this is seasonally adjusted, all commercial banks. That sudden "hockey stick" formation begins 3/26 and ends 6/11.Call me a crazy sober person, but the very strong correspondence with the sudden separation of demand and supply for winter fuel makes me suspect causation.

Call me a weed-edibles deficient economist, but that says to me that consumers are still struggling to comp, and that we have further consumer caution ahead. 

Now admittedly I have never eaten a hash brownie in my life, and thus can't really be in tune with up-and-coming economic thinking. But all my experience tells me that consumers are going to be getting those CC bills, and that they will have to recover over the summer. Their ability to fully do so seems somewhat questionable, especially since post-ACA, many of them are paying sharply higher copays and medical costs, with higher medical deductibles. This cuts into other spending, and it is in no way confined to the relatively small number of individuals who in fact have ACA policies.

So, marijuana chocolate aside, it looks like the rest of the year will be constrained on the consumer side. A lot depends on the weather, because utility bills in the southern regions are the big bank account drainer for the rest of the country that was not so winter-struck, and thus a correlating drive.

This leads me to a 75-80% certainty of consumer-led recession beginning in Q2 2015, becoming blatant at the end of Q3 2015. If we had a light winter next year maybe not - maybe the extra would produce a spending rebound in Q2 2015. 

The Fed did not get it last  year. They are moving counter-cyclically again, but I really don't know what they have left to shoot with. It's very hard to correct a consumer-led downturn from basically broken finances. That takes fiscal policy, not monetary policy. It's likely that the Fed would only make things worse if they tried to strongly ramp up the QE.

Wednesday, June 25, 2014

That Incredible Recovery

Real GDP rolling annual percent change:

As you can see, we just can't get out of the recession zone in any convincing manner. So while we may not be in a recession, we remain so close that it does feel recessionary.

-2.9%, Annualized

I was expecting something pretty bad after the last quarterly services survey, but not quite this bad.

The real source of the sudden downward revision is ACA, which sharply cut healthcare spending, and is still cutting healthcare spending. More on that later, but let's just say the earlier figures were strongly based on the idea that Americans have money to spend on health care when they don't even have money to spend on food. As a fantasy artifact, it was worthy of Walt Disney. 

Somewhat transient negatives were a truly awful winter and the need to pull down inventories. Those effects have passed out of the economy, but the income effect for many households probably hasn't.

Permanent factors remain - the rise in taxes on investment (hiking capital gains tax is remarkably counterproductive), a generally anti-business environment, and the fact, as so eloquently stated by Yulva in the comments on the last post:
Most people cannot afford a home even if you gave it to them for free…
It's incomes, stupid. It's cash flow. Real personal incomes ex current transfer benefits grew less than 30 billion from the previous quarter. Real disposable personal incomes (includes government benefits, subtracts taxes) grew about 43 billion. That's aggregate, so the reality is that higher needs expenses really cut into effective discretionary incomes last quarter.

Neither corporate profits nor Gross Private Domestic Investment show a strong economy. We are not really in a recession, but we are in a structurally VERY slow growth economy. From the quarter one year ago, corporate profits after taxes and when including inventory and capital consumption dropped 5.9%. Cash flow with inventory valuation adjustments fell 6.1% over four quarters.

GDI was approximately the same at -2.6%. 

I will post more later, but I am not sure when due to a pretty tight schedule.

Monday, June 23, 2014

The Volcano of Recession Is Rumbling

The last strong leg holding us out of a decline is autos. It's not clear to me how long that can stand, esp. given the administration's fixation on honeybees, dreamers and increasing consumer and business power costs. 

There is only one chart you really need to look at to understand why the ground seems to be quivering. I did not make it.

Here, from our dear NAR is a graph of May's existing home sales YoY broken out by sales price:
Ah! The economic weather report rears its ugly head once again. It only rains and snows on the less well-off.

Now compare this to the CW rhetoric:
“While the housing market has improved dramatically overall compared to where it was a couple of years ago, the recent recovery has been a little more choppy,” Chief Executive Officer Ara Hovnanian said during an earnings conference call on June 4. 

 Household formation will be the primary driver of long-term housing demand, he said and “the creation of well-paying jobs will go a long way” toward boosting the market. “Given the low levels of total U.S. housing starts, we remain convinced that we are still in the early stages of the housing industry recovery,” Hovnanian said. 
Well, it appears that starter homes ain't exactly where the market is, right? 

In other news, the Clintons aren't really well off! Fortunately, oil and gas prices are rising nicely, which should help to stimulate a few more sales in that 1 mil plus price range.

Existing home sales are down 8.2% YoY for May if you look at the raw numbers. You can get all the NAR stats here.

The economy is not in a recession now, but it's losing steam rapidly, and unless the administration's initiative to protect honeybees somehow bears strong economic fruit, next year is highly problematic. If real wages aren't rising, and if aggregate hours worked aren't rising, the only thing we can count on to spur spending is SS & Disability. Those cash flows get sapped quite quickly by inflation.

Rail data for the first quarter showed a strong contraction, which we will get confirmed in the next GDP report. It's something like an annualized -1.8%. But rail data then picked up strongly, and now shows a much, much healthier picture. Both Mexican and Canadian data show the continuing difficulties for NA as a whole, so I am not expecting honeybee miracles.

Some might claim that trying to ban pesticides when food prices are this high might be self-defeating, but hey, give the dream a chance.

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