Labor Day Weekend Linkfest
Here are some of the things I have been reading this week . . .
• The Reluctant Bulls (Barron's)
U.S. stocks probably won't make much progress before year's end. But they're a better bet than most, say leading Wall Street strategists.
• Monolines, Back on Track? (MarketBeat)
• Credit Seizing as Banks Balk at Lending (Bloomberg)
• September: The horror story (Marketwatch)
Does September deserve its reputation as being bad for stocks?
• Lehman Brothers in urgent talks on capital injection (Telegraph)
• Value Investors Cut Losses (WSJ)
• 50 SPX Stocks Down > 50%
• THAT UNCERTAIN FEELING (New Yorker)
James Surowiecki on Volatility and Herding
• PERCENTAGE OF STOCKS ABOVE 50-DAY MOVING AVERAGES
• The four horsemen of the market (Marketwatch)
• Web sites give tips for savvy investing (SF Chronicle)
• The FDIC Wants in on the Bailout Action...
• Buybacks, Look Before You Leap (WSJ)
• Top 41 Untruths Perpetrated by Wall Street
• Lagging Incomes Signal U.S. Economy Weaker Than GDP Suggests (Bloomberg)
• The Death of the Credit Card Economy (Slate)
• Why Does It Feel Like a Recession? (Econbrowser)
• UK Economy at 60-year low, says Darling. And it will get worse (Guardian)
• From Sea to Shining Sea (Barron's)
Bellwether states are falling off the fiscal cliff.
• Don’t Turn Off Recession Siren Yet (Real Time Economics)
• Income and poverty: Size up your state (CNN Money)
• Shallow Recessions, Shallow Recoveries (New York Times)
• Japan offers economic stimulus package (FT)
• Is GDP Measuring Growth or Inflation?
• Unthinkable Happens: Manhattan Apartment Prices Fall (NY Sun)
Unthinkable? Does anyone remember 1989-1996?
• London Luxury-Home Prices Post First Drop Since 2003 (Bloomberg)
• Existing-home sales drop 13.2% as prices fall 7.1%
• June 2008 Case Shiller Housing Index Falls 15.9%
• The next wave of mortgage defaults (CNN Money)
• UK home sales boosted by desperate vendors (FT)
• Housing Is the Business Cycle
• Ron Paul followers gathering for own convention (AP)
• Gustav Could Wreck Economic Landscape (Real Time Economics)
• A Biblical Seven Years (NYT)
Thomas Friedman on the US versus China . . .
• Gallup Daily: Obama Stretches Lead to 8 Points
• Next Treasury Secretary: Geithner, Bair? (Real Time Economics)
• The Palin Stunner (Washington Post)
• 6 things the Palin pick says about McCain (Politico)
TECHNOLOGY & SCIENCE
• Graphjam: Pop Culture for People in Cubicles
• Why is a 99p price tag so attractive? (BBC)
• Internet Traffic Begins to Bypass the U.S. (New York Times)
• Can Jerry Seinfeld save Microsoft? (Marketwatch)
Seinfeld himself was featured in the original "Think different" TV ads that highlighted various figures and celebrities who supposedly think different(ly). If that's not embarrassing enough, Apple was the computer used extensively on the memorable "Seinfeld" TV series, and Jerry is thought to be an Apple user
• MIT Team Builds Nano sized "Virus-Based Batteries"
• Purging The Stupid Finally, software that zaps the most obnoxious Web chatter. (Mark Morford, SF Gate Columnist)
• Court: U.S. can bar mad-cow testing (USA Today)
MUSIC BOOKS MOVIES TV FUN!
• "Classic Tracks": A brief history of some all time classic songs (MIX)
• List of problems solved by MacGyver
• '100 Things to do before you die' author dies at 47 (book at Amazon) And, yes, he did all 100.
That's all from the last weekend of the summer, where we will be tuned into the US open.
Got a comment, suggestion, link idea? Or do you just have something on your mind? The linkfest loves to get email! If you've got something to say, send email to thebigpicture [AT] optonline [DOT] net.
UNOFFICIAL Troubled Bank List
I have no way to verify the accuracy of this --
Can anyone provide any feedback on this? How is this composed, ranked, or otherwise produced?
Variation on the GDP/Inflation Chart
GDP Deflator versus CPI
click for larger chart
chart courtesy of Eric Jantzen
In our exploration of how laughable the 3.3% GDP was on Thursday, we looked at the GDP Price Index versus the CPI. I was discussing this via email with Eric Jantzen of iTulip, and he showed me a variation of that, using the GDP Deflator (it should be very very similar to the price index)
Its no coincidence that the current situation resembles past ones where oil prices had spiked. Since more than half of the US Crude consumption is imported, the price and quantity go into all the GDP calculations as a negative.
This leads to a bizarre and counter-intuitive outcome: Any rise in the price of crude goes into the deflator as a NEGATIVE. This brings the total deflator down, making GDP appear better than it really is.
One of the commentators at iTulip added:
The other effect of the arithmetic is that the full effect of higher imported energy prices on the PCE happens with a lag. Once the imported oil is refined and the product moves up the GDP table from imports to Non Durable Goods consumption, the deflator for gasoline goes up and this is when it hits the PCE. The other problem this creates is that if you have period of rising import prices, the gain in period one goes into PCE in period two, but the effects of that can be masked by the further increase in import prices in period two.
what you are seeing is the arithmetic of the deflator. The CPI is showing the effect of higher refined product prices. The deflator shows the effect of higher imported oil prices.
I agree with that assessment.
And as I noted in comments yesterday, this isn't a grand conspiracy -- this is simply the way the models are constructed. There are inherent biases built in, and this month's GDP data reflects that.
Yes, there is some latitude in making certain selections -- I am not sure precisely how much -- but I do not believe all that huge.
Understand that this is not a political issue, but rather, a quantitative/analytical one, reflecting fair-to-poor econometric modeling, one with an inherent downside bias as to the inflation data, and an upside bias when it comes to GDP and job creation . . .
Its the odd way the model raises GDP when we import inflation that is my beef.
GDP Price Index versus CPI
click for larger chart
Is GDP (via BEA) Measuring Growth or Inflation? (August 2008)
GDP: Lowest Inflation Rate in 5 Years (August 2008)
Inflation in GDP Out of whack - Again
iTulip, 08-28-08, 03:58 PM
Bloggers versus MSM
Interesting discussion from the Denver Convention:
Gone Forecasting: Fishing for Economic Answers
CNBC's Steve Liesman on "Unique insights on the credit crisis and the future of the banking system from a stream in Maine..."
2001-07: Weakest Post WW2 Recovery on Record
Floyd Norris' column in Saturday's NYT hits upon one of our favorite themes: That the 2001-07 recovery was one of, if not the, weakest recovery from a recession:
The view of this recovery as an unusually weak one can also be seen in all four economic indicators that make up the index of coincident indicators, a way that the health of the economy is measured. Three of them are adjusted for inflation — industrial production, personal income, and manufacturing and trade sales — while the fourth is the growth in the number of nonagricultural jobs.
All of those are measured from the official beginning of a recovery to the official end, which in some cases can be well before a particular indicator turns up.
The postrecession trends in employment show particular signs of having changed. Before the recovery that began in 1991, the number of jobs always hit bottom at about the time the recession ended. But it took 14 months after the 1990-’91 recession officially ended for the number of jobs to rise the level when the recession ended. After the 2001 economic low, it took 28 months for the number of jobs to match the end-of-recession total.
All this and a ginormous chart, too:
Shallow Recessions, Shallow Recoveries
NYT, August 29, 2008
GDP: Lowest Inflation Rate in 5 Years
Barron's Alan Abelson takes a look at Thursday's GDP laugher, and sees the same issues we noted, plus a few more:
"GDP, IN COMMON PARLANCE, stands for gross domestic product, or the aggregate value of all the goods and services produced on these blessed shores. Or, at least, that's what it used to mean in those long-gone days of yore, when life was simpler and government statistics credible. These days, alas, those initials more typically signify "gross deceptive pap."
The insidious change has not gone unremarked, both in this magazine and by more than one skeptical scanner of the turgid flow of numbers flowing out of Washington. Yet purportedly professional seers, who draw handsome paychecks for sifting through the unending streams of digits and making sense of them for hoi polloi like us, deferentially pass along the official numbers unsullied by even a modicum of analysis, as if they were holy writ, especially when they're upbeat.
A case very much in point was last Thursday's revised report on second-quarter GDP, which helped spark a nice, if something less than enduring, leap forward by the stock market. The initial version released in July posited that the venerable economic barometer had risen by 1.9% -- up from the first quarter's meager 0.9% gain, but obviously no great shakes.
Comes now the so-called preliminary estimate that claims second-quarter GDP grew by a much more robust 3.3%. That was hailed by the incorrigibly constructive contingent in the Street as evidence of the resiliency (favorite word) of the economy and prompted the thinned-out ranks of investors to put their worries and their plans for an extra-long weekend on hold and pile into stocks. Hooray! Hooray!
But even a cursory look at what they're drooling over reveals pretty thin gruel. Nothing, for sure, that would cause any sentient being to start humming "Happy Days Are Here Again." For the ostensibly better GDP showing is a mirage, conjured up by the usual suspects out of smoke and mirrors.
The key here is the GDP deflator, which purports to adjust GDP for the impact of inflation; it's a curious calculation in that, contrary to its moniker, it seems designed to do the exact opposite of deflating GDP.
Thus, according to this accommodating measure (accommodating, that is, if you're determined to put a good face on a dreary report), inflation grew at an improbably restrained 1.33% in April-June. And maybe it did -- but not in the good old U.S. of A. However, obviously more important than accuracy to those doing the calculating is this simple equation: The lower the deflator, the greater the growth of GDP.
John Williams of Shadow Government Statistics, whose incisive description of the decades of willful distortion of inflation by Washington we cited a few weeks ago, points out that the supposed 1.33% increase in the second quarter would represent the lowest inflation rate in five years. Must be that plain folks stubbornly refuse to recognize the dramatic drop in inflation, because, as Phil Gramm said, we're such a bunch of whiners.
Of course, even by the government's not entirely extravagant figuring, the consumer-price index was up a hefty 8% in the latest quarter. Perhaps the computer that tallies the CPI doesn't talk to the computer that measures the deflator.
By John's reckoning, "a second-quarter year-to-year contraction of 2.9% would have been more in line with underlying fundamentals, past methodologies and the ongoing recession."
He suggests that a more telling picture of the economy's progress or lack of it is the alternative to GDP, known as gross domestic income, or GDI. It's a rough equivalent of GDP but measures the nation's income instead of production.
According to John, after adjusting for inflation, GDI in the June quarter weighed in at an anemic 0.5%, atop negative growth in the preceding two quarters -- which, as it happens, meets the popular definition of a recession.
Friday's disclosure that personal income in July suffered its biggest decline in three years doesn't exactly portend a rebound in the third quarter, and certainly didn't come as a big surprise to John, who sees the outlook for the economy remaining glum, with no early end to the banks' solvency crisis, as he terms it, nor the inflationary recession. (Emphasis mine)
Also worth noting: Merrill's David Rosenberg looks at the GDP version of Banks & Brokers profits:
THE ASTUTE ECONOMY-WATCHER for Merrill Lynch, David Rosenberg, also strongly advises digesting the suspect GDP report with a "very large grain of salt." Among other things, he casts a skeptical eye on how the report treats the decline in corporate profits. (We won't keep you in suspense: The answer is: "gingerly.")
More specifically, he notes, "national-account corporate profits declined at a 9.2% rate in the second quarter." For domestic industries, he goes on, profits are down 14.4% year over year.
But according to the GDP report, domestic nonfinancial profits fell at a much sharper 22% annual rate. The reason the drop in total corporate earnings was limited to 9.2% was that, David relates, profits in the financial sector, so claims the report, surged -- get this -- at a 27% annual rate.
His wonderfully eloquent comment:
"Are you kidding me?"
My original comment stands: If you believed that US economy grew at a 3.3% annualized in Q2 2008, I have a very reasonably priced bridge for sale in Brooklyn. Hardly used. Make an offer.
Henceforth, we shall rename the GDP deflator as the GDP Inflator, for that is what it does.
Goldman Sachs’ Jan Hatzius: Don’t Be Fooled by Inflation (August 2008)
Q2 GDP = 3.3% (kinda) (August 2008)
Is BEA Measuring Growth or Inflation? (August 2008)
Sizing Up Sarah
UP AND DOWN WALL STREET
Barron's September 1, 2008
Its a long holiday weekend, and the crowd is off to where ever they are going. For those of you left behind -- or arriving where ever you will be -- check out these tunes:
I love this Death Cab for Cutie song -- and I stumbled across an interesting pair of videos:
The first is this live version, essentially played with no studio effects or tape.
Here's the same video, with what sounds like the official audio version -- all cleaned up, and added backing vocals -- it sounds slightly speeded up also.
A bonus Friday afternoon guest post via Macro Man -- a portfolio manager at a London-based hedge fund, he trades global currencies, equities, fixed income, and commodities. Over a long and varied career, Macro Man has been an international economist, a sell-side currency strategist, and a currency options market-maker.
His amusing Friday afternoon topic? Market Monopoly!
With the Olympics and the summer drawing to a close, it's now time for market participants to get themselves back from the beach, turn off the TV, and focus on making money for the four-and-bit months that remain of 2008. Yet the Olympic spirit lives on, and many of us would love to channel our inner Usain Bolt or Michael Phelps.
Indeed, over the course of his career Macro Man has met many market people who are just as competitive as Bolt, Phelps, or Tiger Woods, for that matter. Sadly, while the mind is willing, the flesh is all too often weak (in this case, literally.) How, then, can desk-driving market people bring out the Olympian that lurks within us all and keep the competitive fires burning?
Macro Man has hit upon the answer: Monopoly. The game requires no discernible athletic ability and is predicated upon acquiring assets as cheaply as possible, levering them up, and separating other players from their cash. It's a skill set with which many (but by no means all) market punters are well-acquainted.
Of course, in Monopoly, as in life, chance can play a significant role in determining winners and losers. In real life, these slings and arrows of outrageous fortune can come from anywhere, but in Monopoly they derive from the dice and the Chance/Community Chest cards. Come to think of it, it looks like the game of Market Monopoly has already started, because some of the cards have already been drawn. Consider who's already holding the following (vintage) Monopoly cards:
ADIA, CIC, and Temasek holdings. These SWFs already own very significant stakes in a number of banks in the US and Europe, in many cases via high-yielding preferred shares. Though it may be a case of thrice bitten, four times shy, Macro Man can't help but think that at the end of the dilutive capital-raising process, these guys will be the only ones left with enough equity to get paid any meaningful dividend income.
Counterparties of Merrill Lynch and Lehman Brothers in the structured credit space appear to have quite a few of these cards up their sleeve.
Holders of 2007 vintage AA-rated ABX. Unfortunately, to collect the prize, they have to tender $100 of face. (Since this vintage card was printed, prices have fallen further. In the modern editions of Monopoly, second prize winners only get $10.)
John Thain. Mr. Thain's tenure at the helm of Merrill Lynch has been characterized by three things: large write-downs, a fire sale of assets to clean up the balance sheet, and Merrill itself providing the funding to the buyers in the aforementioned fire sale. Alternatively, this card could represent Merrill's settlement of its part of the auction rate securities fiasco.
Civilian Unemployment & Recessions
The year on year rate of change of the official civilian unemployment rate is the measure, and when this passes 15, then every time it has done this USA has been declared in a recession at a latter point in time (see 3rd panel)
Chart via iTulip
Legend: Shaded area are recessions
1st Panel - USA GDP and USA GDP without exports
2nd Panel - Civilian unemployment rate
3rd Panel - Rate of change of series in 2nd panel
Estimating Probabilities of Recession in Real Time Using GDP and GDI
Jeremy J. Nalewaik
Finance and Economics Discussion Series, Federal Reserve December 19, 2006