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Thursday, January 30, 2014

No Surprises There, But An Interesting Story

I refer, of course, to Q4 GDP. This is the first release and there will be revisions.

There are several interesting things about this, but the takeaway is real disposable personal income, which explains the subdued inflation. If you refer to Table 7, you'll see that 2013 racked up an astounding 0.7% increase in real disposable personal income. In total. Of course that's due to tax changes, and also to the drawing-forward of dividends and investment proceeds in Q4 of 2012 in order to evade the 2013 tax increase. 

But still. ... FICA increases of course hit the average wage earner the hardest. Final sales of domestic product increased 1.7%, and final sales to domestic purchasers increased 1.5% for 2013. This is probably a better measure of economic activity than fficial 2013 GDP increase (1.9%) is

There are some other interesting aspects of this release, such as residential fixed investment (see Table 3) which fell 12.7 billion in the fourth quarter. In fact, even with the addition of the "intellectual property products" to GPDI, we still only picked up 22.2 billion in Q4. Fixed investment, which excludes inventory builds but now includes software, R&D and the creation of sculptures from dung by highly enterprising community-funded artists, only increased by 5.6 billion. Of that, intellectual property products accounted for 5 billion. You may perhaps be relieved to know that the mission-essential investment in Duck Dynasty episodes and dung sculptures only accounted for 0.1 billion of that, with software and R&D having a much more significant contribution. But still, I would cautiously comment that since this category was a 2013 invention, in effect we had no increase in fixed investment in Q4. 

Personal income is not quite as bad as it seems, because the investment payout pop in Q4 2012 had such  strong influence. If you will refer to Table 10, you'll see that real disposable personal income was 11,743 billion in Q4 2012, and then fell to 11,502 billion in Q1 2013. After that it rose for two quarters quite strongly to return to 11,704 in Q3, but in Q4 it only increased a bit to 11,726, thus ending 2013 year at a lower point than the end of 2012. But such increases in income have a delayed effect on spending, so Q4 2012's money contributed to the economy in 2013, and the later rebound will show up somewhat in 2014. 

So, for 2013 the official increase of real GDP was 1.9%, the actual real increase was closer to 1.7% and what is the forward trajectory for 2014? 

Here's my guess as to that question. First, it is highly unlikely that we could ever exceed 2.4%, because I think both housing and autos are near sustainable tops. But I also think that the floor is close to 2%, because although both are near the top money wants to come into the US, and neither are totally overblown. There is a downshift in the US economy now, but it's not a bad one. 

The thing that stuns me mostly is that there is so little change in forecast. Last year in the fall I calculated that the end June/early July 2014, the 10 year Treasury should be yielding around 2.83 or 2.84, and I don't come up with anything very different. Perhaps 2.78%? 

I  do expect income gains in the US to be quite subdued this year, partly due to last year's overhang, partly due to ACA effects, and partly due to whacky government policies which include actual impediments to growth, especially in regulation and taxation, which is now grossly unfavorable to actual investment.

Friday, January 24, 2014

Yes, yes, yes

I got rather sick. I survived. 

I have been watching the ACA meltdown with some fascination. It's hard to top stuff like this, but it is not funny for those who have paid their insurance bill, or had their accounts double-debited, and are still having to pay out of pocket for medicines and treatment. How long will it be before someone goes postal? 

From the provider side it's not much better - if you signed up to deal with this it is administrative chaos that has the potential to destroy a practice. 

It is not going to get better as the year wears on. The backend mechanisms aren't there, and several of the state sites are so bad they will probably be canned. The fixed expense/medical payout ratio in the law means that companies can't hire enough staff to straighten this out. Moody's is quite right.

I don't think that the government premium subsidies are being paid to the insurance companies, which is a big problem. From the insurance companies' perspectives, they are not getting paid the premiums, yet they have the problem of trying to straighten out the mess, and they have to pay claims without having received the premiums. It leaves little incentive. 

And then consider that a very small minority of their total insured counts have the capacity to overwhelm their entire customer service system - they must be scrambling to set up different numbers and try to segregate ACA customers from their paying customers. That's reality, folks, and it's why CA ACA "customers" can't get through to a human being.The government pretends to pay for your insurance, and then your insurance company pretends to provide insurance, and then your provider has to figure out what to do with patients who may or may not be insured.

From the provider perspective, all these people in healthcare limbo pose a distinct threat to your finances. If you provide care without getting payment, you are going to be in a hole, and if you don't provide care, you may get sued. In any case, straightening out the fuss for these patients is likely to chew up your customer service staff's time and cause problems for your entire patient base.

Again, this is not going to get better as the year wears on. It's going to get worse, and access to care for ACA insured people is going to degenerate as providers start to tumble to the fact that insurers are mandated to carry the policy for 90 days if the premium was paid once, but not mandated to pay claims after the first thirty days. It's going to convert to a cash-up-front deal, reimbursement later in a lot of circumstances.

Your pie-in-the-sky liberal thought of the day: It takes a village to dig a small child out of the global warming drift, although it goes somewhat faster if you use solar panels as improvised global warming shovels!!

Wednesday, December 25, 2013

Peace On Earth, Good Will To Men!

What else is there to say, really?

I hope each of you are having wonderful holiday time with family and friends!

Wednesday, December 18, 2013

Both Santa AND Grinch

Well, the Fed Grinch did the awful, cruel, horrible thing by cutting bond purchases by 10 billion, meaning they are only inserting a paltry 75 billion into the market each month. The HORROR. Little Citi Lou's eyes were just streaming!

BUT they also gave Mr. Market a candy cane by effectively changing their employment goal. It was 6.5%, but in this statement, mutatis mutandis: 
The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal.
Mama Yellen is going to be even kinder than Uncle Ben. The reason for this change is that the unemployment rate will fall to the 6.5% mark about the 2nd quarter next year, what with the fact of all the old farts staggering out of the work force. 

This is a de facto huge expectation loosening, and it will be interesting to see how inflation develops next year. Because in fact inflation in GDP terms came in right about 2%! So there isn't much margin there, and somewhere around the June meeting, Mama Yellen might have to come up with a little more mutatis mutandis syrup to heap on the stock market waffles. 

We know she will, though, because she loves all her children so well, especially Citi Lou and Goldie Saxaphone, the littlest Hoos. And you can be sure that she will just gather all her children into her warm loving arms next spring and wipe the tears of anxiety from their plaintive eyes and whisper words of comfort into their ears JUST FOR THEM. There is no need to fear while Mama is there. No need at all.

2015 will therefore be pretty interesting. This isn't going to stabilize easily now. The most likely market move after today is for an epic run on commodities, purely because everything else has run out. It may be very durable, and there is a possibility of a recession in 2015 because of it. There's a lot of money out there and a lot of it is going to want to run into the US.

I am now going to start the rotation out of stocks. Mama Yellen looks to me to be utterly unequipped to handle a boisterous teenage speculative recovery.  

Saturday, December 14, 2013

But They're Very Educated

This is why a society without a certain number of nitpicking engineers is dysfunctional. Billions and billions and billions. A fourth grader should have been able to catch this.


Friday, December 13, 2013

Welcome to Brooklyn!

Every once in a while the journalistic Dasein of the NY Times produces a gem of comedy, generally unwittingly. H/T Ann Althouse. There will be many good comments over at Ann's.

In this case, the unforeseen tragedy of the creative elites being forced to queue with truck drivers from Brooklyn in order to get health insurance gets a sympathetic placebo treatment. 

Cry for the children.
Many in New York’s professional and cultural elite have long supported President Obama’s health care plan. But now, to their surprise, thousands of writers, opera singers, music teachers, photographers, doctors, lawyers and others ... will be treated as individuals, responsible for their own insurance policies.
For many of them, that is likely to mean they will no longer have access to a wide network of doctors and a range of plans tailored to their needs. And many of them are finding that if they want to keep their premiums from rising, they will have to accept higher deductible and co-pay costs or inferior coverage. ...
“All these people had these customized plans which are better than most of the things out there, and most of them are saving only a small amount of money,” he said.
This is shocking and baffling, and the NYT staff is trying helpfully to explain it, because everyone knew that those in flyover country who were complaining about their ACA insurance options were too stupid to know what a great deal they were getting. All the WH press releases said so. 

The last three paragraphs are work of Mel-Brooksian farce - there must be some mistake - they're not from Brooklyn or Kansas, they're Obama people! 

Monday, December 09, 2013

An Excellent BIS Article

It covers international credit market developments. Points to note:
1) Central banks are in control of the conditions through their efforts at monetary easing.
2) Low investment opportunities in emerging markets have led to a search for other opportunities.
3) The focus has shifted to corporate bond issuance, and in the Euro area this is a big change:
The credit environment has benefited large non-financial corporates more than banks domiciled in advanced economies. Struggling to regain markets' confidence during the past five years, these banks have consistently faced higher borrowing costs than non-financial corporates with a similar credit rating. While the cost gap narrowed more recently, especially in the United States, it continued to exert upward pressure on bank lending rates. This prompted large non-financial firms to resort directly to debt markets, thus spurring corporate bond issuance. As a result, markets eclipsed banks as a source of new credit to corporates in the euro area.
4) The growth in corporates this year is mostly on the riskier side:
In the syndicated loan market, "leveraged" loans - granted to low-rated, highly leveraged borrowers - accounted for roughly 40% of new signings from July to November (Graph 3, centre panel). Remarkably, throughout most of 2013, this share was higher than during the pre-crisis period from 2005 to mid-2007. This was the result of both higher volumes of riskier loans (blue bars) and lower volumes in the safer part of the spectrum (red bars). In parallel, investors' drive towards high-yield credit resulted in a gradually falling share of those syndicated loans that feature creditor protection in the form of covenants (Graph 3, right-hand panel).
5) BIS seemed a little startled by the sudden yen for rolling bonds (the company doesn't have to pay the interest - instead it can just issue new bonds), despite the 30% default rate experienced in recent history:
The trend towards riskier credit was fairly general. It spurred, for example, the market for payment-in-kind notes, which give the borrower an option to repay lenders by issuing additional debt. Investors' renewed interest in these instruments resulted in more than $9 billion of new issuance over the first three quarters of 2013, one third higher than the overall issuance volume in 2012.
6) A sucker is born every minute, and PT Barnum's spiritual sons are working as European bankers and PE credit brokers:
Similarly, industry reports underscored the growing share of debt in funding private equity takeovers. In the United States, this share increased steadily after 2009 to reach two thirds in October 2013, a level similar to that in 2006-07. For their part, European banks took advantage of the borrower's market by stepping up issuance of subordinated debt, thus increasing the cushion that insulates their senior creditors from the fallout of potential future distress.
This goes on and on, but the most important part comes at the end. The easy credit granted to large corporates in the markets is not extending to smaller businesses, who are paying a large comparative tariff. This does not bode well for expansion, and it indirectly explains why low growth persists in spite of historically extreme easy money policies.

It's hard to see why this would stop - both India and China have credit difficulties of their own. In China's case, the rolling loan policy toward large state-ish companies has produced an epic wave of repayment dates and amounts in 2014, and no one knows what will happen. Will the plugs start to be pulled? Or will local Chinese governments keep the life-support plugged in? Sooner or later it will end.

However, as soon as interest rates do rise, corporations with a lot of debt will face difficulties in controlling future cash flows. Letting this trend continue for too long will result in future investment losses. .
  

Saturday, December 07, 2013

Why You Think The Economy's So Bad

In a lot of ways, you're right. This is Fed series A229RXO, Real Disposable Personal Income Per Capita.

There are obvious constraints on growth and obvious constraints on saving, which makes it hard for the younger to accumulate savings, and even harder for the older. Getting much in the way of inflation with these income statistics is an impossibility - if prices rise, people are forced to consume less.

Only time can heal this - next year the YoY change will be better, and the five year change will rise to about the 5% level, which would be a big help.

Under such circumstances, the domestic consumption growth is aimed toward necessities and lower priced luxuries. The good news is that the US economy is producing more energy, always produces a lot of food, and gets a decent amount of income off the lower priced luxuries. The bad news is that increases in taxation have the capacity to knock the recovery off its rocker, as do mandates to consumers to purchase services they can't afford, which is just another name for "tax".   

Wednesday, December 04, 2013

December Taper, If the Fed Is Still Sane.

There is no justification really for not doing it - and if they don't, I am going to have fun reading the FOMC discussion as to why not. Also satirizing it, because really, folks. This has passed all plausibility limits.

Auto sales were very good yesterday - very good indeed:

Unemployment claims have been solidly out of the trouble zone for months. Manufacturing, business and credit surveys are very healthy. Theories about "shocks" and so forth don't stand up to the solid data showing that in fact, the economy is strong enough to weather negatives. Thus it is time to roll up the fire hoses and put them away.

All the economic data shows consolidation of trend and the forming of a new floor at a level above the current one. At this stage in the game, the economy the Fed has grown used to regarding as a failure-to-thrive toddler is now a somewhat porky pre-adolescent that needs to get its butt off the couch before it turns into an obese adolescent. Take away the potato chips, Fed Papa!

The rational question is not whether to taper, but whether to taper by 20 billion or 40 billion. I don't suppose the NY Fed could refrain from mass suicide over 40, though, so that's out.

There was a very good global harvest, and that's going to help the next six months. There is a good supply of oil, and that's going to help. Europe is sort of staggering onwards, and that's not going to hurt. 

The Street is struggling to locate threatening-looking comets in the night sky to justify the fleets of Frito-Lay (brought to you by the Fed) trucks rolling through the streets of Manhattan,  but even the comets are not cooperating.

I don't expect the Establishment jobs figure to be good this month, because Establishment showed a huge gap over Household last month, but with initial claims like this, no one can really claim that jobs are the scary monster under the bed:
  

Further, the reality is that Boomer retirements are going to continue. This is a very hard, hard reality, and it means that jobs will open up for the younger folks. That's a very hard, hard floor for Main Street expansion, and only Main Street expansion can possibly generate a solid, continuing recovery that rebuilds the jobs base. No amount of financial flummery ever does that. 

At this stage, the Fed should be worrying about continuing expansion without distortion, and there they have a big problem - a problem that they evidently don't know how to address, given the last FOMC discussion. The theory about reserve fund interest rates was shot down aggressively by certain entities. 

If the Fed doesn't take it off, the Fed is going to create a much larger problem toward the end of next year. 

It's already almost too late. The Fed should have started the taper in September, and now it is running out of time to do it. They've already generated a bit of a problem, and the longer they wait the bigger it is going to get:
Top 100:
Other banks:  


If this goes too much further, the risks of a top-heavy credit load start growing astronomically. And I don't want to talk about all the crappy commercial paper out there, and the subprime loans on the autos.  

Update:
This isn't a problem now, because rates are so low. But if rates must rise ever, then a wise Fed needs to fire a few warning shots to prevent loans from growing too much:

When rates do rise, there's going to be pressure on non-financials if the Fed lets a Greenspan moment develop a la 1998-1999. The ability to carry those loans and fund further expansions must be preserved.

Monday, December 02, 2013

December Fed - Grinch or Santa?

I bet that the December Fed should be the Grinch but will opt to be the jolly old elf.

The reason I think the Fed should taper is that if it doesn't do it in December, there is no possible justification for doing it next March. Thus I think the Street wisdom on this matter is less than wise.

There are two things the Fed has to fear - the auto expansion slowing and the housing expansion slowing. Interest rates have a lot to do with both, and Q3 data has been iffy for both. So the one thing the Fed cannot have is interest rates spiking in March, right? No sane Fed would want that. Compared to 2013, the FHA annual premium has already been instituted, so low-downpayment home purchases are quite constrained.

Therefore, the Fed should begin to taper in December, so it can see how interest rates develop and adjust into the spring. They were clearly arguing over that matter very seriously recently.

But will they do that? The holiday retail season is going to be constrained, because the FICA increase means people just don't have the money to spend:
The rolling six-month expansion in cash in non-jumbo checkings/savings is, inflation-adjusted, very low and it means that holiday sales won't be that good. Some increase, but not huge.It's a short sales season, taxes have been raised on the upper income brackets, and there just isn't that much spare cash lying around.

Nor will credit purchases bail them out, because the only people who like to pay those credit card rates are very, very stupid or like to hang out in clubs with whips and chains:
People have been spending money, but mostly on cars. And auto inventories are filling up, because purchases have fallen off a bit:

Ward's projection is for a good increase in November sales, so that may even things up a bit, but inventories indicate a slight downshift in production soon unless it blows out. I don't think it will blow out.

Mind you, there is nothing wrong with this economy. It's currently solid, but just solid at lower levels. I don't think the Fed will want to take the chance of further suppressing the housing market, which is not going to be great next year. And construction gains are there, but slipping already, because home sales are a bit constrained:


The Fed doesn't want a significant interest increase in that. Investor sales carried it this year, but all things have their natural end. Rising prices plus a constraint in sales plus higher mortgage rates would not produce a good sales trend next year:
 

It seems to me that everything I have posted here indicates that a rational Fed would taper a bit in December, because they have to try the waters. They cannot try the waters again next March - they would not have time to save it if they needed to do so. 

But if auto sales and retail data are not above expectations, I suspect they won't.

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