Edward Harrison

Mother of All Inventory Corrections Not the Same as Restocking

That's about right, John. This post is about the difference between consumer demand and actual output as measured by GDP. There was a massive de-stocking earlier. It continued into Q2. So, when we make quarter-on-quarter comparisons as is the U.S. GDP convention, even de-stocking at a slow pace will be a boost to GDP. This will be a boost in Q3 and probably Q4.

But that is a purely technical or statistical artifact. It's the math of a first derivative statistic, which the change on GDP is. The real question has to do with re-stocking. Now that inventories are low on an absolute basis the question is how businesses will respond to the "new normal."

Will they re-stock? Consumption demand is much lower than it was in say Nov 2007 before the recession began. No one yet knows what the future path of consumer demand growth (or contraction) is, but businesses have to anticipate this by ramping up - often by increasing inventories.

To be clear, re-stocking inventory is output in excess of demand. At the beginning of the business cycle it artificially boosts GDP in anticipation of a demand catch up that comes. A recovery is the result. At the end of a business cycle it artificially boosts GDP in anticipation of demand that never comes. Recession is the result.

If business does re-stock, you can expect inventory builds to extend the business cycle as they normally would because of the knock-on employment and income effects. But, ultimately this will all depend on demand. If demand continues to lag even after re-stocking, this recovery is going to peter out.


On Sep 20 04:29 PM John Lounsbury wrote:

> Edward - - -
>
> Let me rephrase and then you can correct me if I do so incorrectly.
>
>
> The steep inventory declines 4Q/08 and 1Q/09 have stopped and production
> has been scaling back up to the "new normal". Since we are moving
> into an period where GDP was contracting (especially 4Q/2008), the
> comparable quarter one year later will be quite strong, even for
> a new lower level of consumption.
>
> If the production need has been over estimated, the increasing GDP
> of 3Q an 4Q/09 will fade as inventory excesses will result.
>
> Now, if this is incorrect or an over simplification, straighten me
> out.

It's Time to Sell Equities and Look to These 3 Areas

That is the most controversial of the three calls - especially for those expecting inflation and/or dollar depreciation. However, you should notice that the 30-year is now yielding a real rate of return of 4pct. On a risk-adjusted basis, that is pretty stellar. And given rates are still above 4%, there is still room for capital gains if we do not see a robust recovery or if deflation begins. This is the same calculation that Gross is making.


On Sep 19 06:50 AM TheFounder wrote:

> Agree with gold and the "black swan" option stategy but not with
> bonds. Why purchase bonds at these levels? the only rason I can come
> up with is expecttions for severe deflation and/or a depression.

It's Time to Sell Equities and Look to These 3 Areas

Yes, I meant gold.


On Sep 18 10:14 AM Roger Knights wrote:

> Good article and thanks for the link to the BR article.
>
> BTW, you meant "While GOLD is generally thought to be an inflationary
> hedge,"

It's Time to Sell Equities and Look to These 3 Areas

One other thing. There has been no correlation between inflation and gold over the past twenty-five years.

news.goldseek.com/Mill...

While inflation is generally thought to be an inflationary hedge, it is also a safe haven when there is currency revulsion. During the Depression, gold rose while deflation was everywhere.

It's Time to Sell Equities and Look to These 3 Areas

A tanking dollar does not mean treasuries get crushed. Right now the dollar is falling, treasuries are rising as is gold.

You'd want to be in treasuries even if the dollar fell if you expect the deflationary forces to outweigh inflationary forces from the currency depreciation. You'd want to be in gold if you think the inflationary forces of the depreciation would feed through.

Right now, both trades are being put on i.e. gold is rising and so are treasuries. When it becomes more clear which force is winning the deflation-inflation tension, I would expect a reversal in one or the other.

On Sep 18 06:39 AM bkdc wrote:

> "A scenario in which the Dollar tanks and there is a flight to safety
> in Treasuries is also one in which Gold could outperform at the same
> time."
>
> If the dollar tanks, no one will be buying Treasuries. A tanking
> dollar means a dumping of Treasuries.

Will Chimerica's Demise Take Down Global Economy?

Thank you, Matt. I will put that on my list


On Sep 17 04:52 PM matthewnlu wrote:

> I have been following your blog recently, and I'd like to share a
> series of books with you; President Obama and Secretary of Sate Clinton
> are both reading the first book of this series in preparation for
> Mr Obama's visit to Beijing in November. The book is China &
> America's Leadership in Peaceful Coexistence by John Milligan-Whyte.
>
>
> To quickly summarize, Mr Milligan-Whyte's series outline a grand
> strategy for a global partnership between America and China. He posits
> that neither the United States nor China can combat terrorism, failing
> or failed states, or climate change alone. Mr Milligan-Whyte's think-tank,
> the Center for America-China Partnership, is explains that although
> America's foreign policy has always revolved around 'win-lose' strategies,
> China is currently pursuing a 'win-win' strategy with America. His
> book explains how, by returning to the foreign policy advice that
> JFK and George Washington left the US, America can deal constructively
> and mutually beneficially with China.
>
> It is a fascinating read, and I encourage you to read it.
>
> Matt.

Stephen Roach: West Went on 'Drunken Binge of Excess Consumption'

That's good! :)


On Sep 16 12:21 PM LKofEnglish wrote:

> He might not mince words but I hear he minces meat. And then he
> puts it in a pie and EATS it.

Oil Refiners as Proxy for Demand

Generally, I am bullish on the oil patch because I believe excess liquidity will go into asset prices, especially commodity markets. That's bullish for Upstream companies. But, if prices rise quickly that squeezes refiner margins. So, I couldn't say i think VLO or TSO are going to benefit.

I do believe we have a glut of sour heavy crude over sweet light and that means the fundamentals will eventually re-assert themselves in the refiners direction (not SUN because they are not leveraged to complex refining).

The key word is eventually, of course, because refiners likely won't run-up until then.


On Sep 09 08:50 AM J. Bruun wrote:

> Hi Edward,
>
> Thank you for the article.
>
> How does this translate into trading recommendations? When is it
> time to go long if you fundamentally believe that over then next
> year or two we will be far out of this long recession? What I'm thinking
> is that when the 2012 LEAPS come for e.g. VLO it will be time to
> buy out of the money calls.
>
> Jan

Jobless Claims Stuck at 570,000

Mark, I was looking at weekly initial jobless claims in this post - and they have been running at 570K per week. I think you're talking about the monthly employment situation summary -which is more analogous to the ADP number of 298K.


On Sep 03 07:41 PM Mayascribe wrote:

> Mark: Can't wait to see how you come up with your conclusion. Make
> sure you tip me off about that Instablog, buddy!
>
> Edward, I'm a little confused about your numbers. On September 1,
> I calculated that during the last 15 days of August the "Official"
> unemloyment numbers increased by 135,848. The "Actual" increase during
> the last two weeks of August was 155,624.
>
> If you double those numbers you arrive at about 271K lost jobs officially,
> and 310K "Actual."
>
> These numbers are in line with what the Street is predicting, which
> is 280K lost jobs.
>
> My figures were arrived at from a two week study of this website:
>
>
> usdebtclock.org

China Intensifies Efforts to Ditch the Dollar

The Chinese are doing long-term planning and nothing more in my view. The world they see eventually would be one in which the Yuan is fully exchangeable, free-floating, and often used in bilateral trade as the U.S. Dollar, Euro, Pound, or Swiss Franc are.

At present, none of these is true. The question is: how quickly can they get there and what does this mean about the U.S. dollar's status? I take an agnostic view on this question because the Chinese are more concerned with the benefits of having an internationally-accepted currency without the negatives (wild valuation swings, capital flight, etc)

Americans tend to view this as a threat to the U.S. dollar, and it is to the degree it is precipitated by a growing distaste for dollar assets. But, that does not mean that the Chinese will get their international currency any time soon. Right now, they are laying the groundwork, much as the EU did for the formation of the Euro.

On Sep 01 04:04 AM Dialectical Materialist wrote:

> Would this mean they are making moves to float their currency? If
> so, this is ultimately a good thing right? I know there will be
> non-trivial short term impacts of less USD demand, but haven't we
> wanted China's prices to be more fair for a long time?
>
> Anyone who thinks these comments are completely ignorant needs only
> to educate me, as I'm not trying to argue a point or promote an agenda,
> I'm just trying to suss this all out.

Unemployment Claims Falling Faster than in Half of Past Recessions

Steve, you have hit the nail on the head. I will look to see what historical trends continuing claims and length of unemployment show. This recession is now more a problem of a lack of hiring than enormous layoffs.

So, the initial claims data show that the job losses are not out of the ordinary compared to prior recessions. What makes this a jobless recovery is the weakness to date of re-hiring.


On Aug 29 08:50 PM Steven Hansen wrote:

> is the issue the falling off of initial unemployment claims, or is
> it the length of time people are unemployed. this is the underlying
> data which defines the recession and its recovery.
>
> you would not expect the economy to be falling off forever. it adjusts
> and flattens out.

Bank Leverage: Forever Blowing Bubbles

John,

You are 100% right. Clearly when I say "let's hope...," I am engaging in some very wishful thinking.

Edward


On Aug 30 12:46 PM John Lounsbury wrote:

> Edward - - -
>
> Truly scary analysis. Are we simply trying to continue to run a
> broken financial model? I think so. This can not end well. I think
> you are engaging in wishful thinking when you say:
>
> "However, eventually the fundamentals will re-assert themselves once
> the malinvestment is discovered. Let’s hope the economy is on sounder
> footing when this occurs."
>
> How can the economy be on a sounder footing when we have not corrected
> the rotten foundation? Roger Knights said it all: "Kicking cans."
>

Case-Shiller: House Prices Up for Second Consecutive Month

Case-Shiller looks at 'sale pairs' data to make an analysis i.e. a sale of the same house in two different periods. The sales data includes all arms-length transactions available for these pairs. This includes distressed sales like foreclosure and short sales.

They describe it like this:

For each home sale transaction, a search is conducted to find information regarding any previous sale for the same home. If an earlier transaction is found, the two transactions are paired and are considered a “repeat sale.” Sales pairs are designed to yield the price change for the same house, while holding the quality and size of each house constant.

All available arms-length transactions for single-family homes are candidates for sale pairs. When they can be identified, transactions with prices that do not reflect market value are excluded from sale pairs. This includes: 1) non-arms-length transactions (e.g., property transfers between family members); 2) transactions where the property type designation is changed (e.g., properties originally recorded as single-family homes are subsequently recorded as condominiums); and 3) suspected data errors where the order of magnitude in values appears unrealistic.

More information is available in PDF form here:
www2.standardandpoors....


On Aug 25 11:13 AM NEOblogger wrote:

> Can someone please confirm for me if the Case Shiller index does
> or does not include data from foreclosures and short sales? I have
> read in the comments section on various occasions that is does not,
> but found nothing authorative.
>
> If this is true, then I am not sure we are getting a true picture
> of the market if we are excluding 30-40% of the market activity (according
> to NAR), especially as all of this would be on the low side.
>
> I would really appreciate if someone could clear this up for me.

Oil's Breakout Above 2009 High: Double Dip Indicator?

I have to disagree with your interpretation. Having read Arjun Murti's reports in the past, I know he never 'predicted $200 a barrel, but rather said it was a possibility, just as he had earlier suggested that $100 was a distinct possibility.

I consider a lot of the hubbub about Murti's call to be disinformation and I wrote a post about it back in June:

www.creditwritedowns.c...


On Aug 25 10:19 AM Maxe Paul wrote:

GS predicted $200 in 2008/9 from memory, so i would take the latest crystal ball figure as a contrary indicator.

Zero Hedge's Bloomberg Podcast: Why Did Bloomberg Delete It?

I hope not. Try this direct link to the mp3 file.
media.bloomberg.com/bb...

Cheers.
Edward


On Aug 23 02:31 PM User 458878 wrote:

> Mr. Harrison, I don't know if more censorship gremlins are at work,
> but where you say there shuld be alink to the video, there is a box
> with a red X.