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  • The Fed And GDP Growth [View article]
    Loonie - liquidity isn't used up and cannot be divided between real goods and financial assets or anything remotely of the kind. Your thinking, common enough, is simply confused on the point. The only form money takes is a money balance or physical currency, and its only use is to remain in that form for some one or other, providing a service of safety and easy exchange for that person only as long as he doesn't actually use it, then providing the sane, again, to its next holder. No amount of transactions in either real goods or financial claims uses up a single dollar.
    Aug 1, 2015. 10:02 AM | 5 Likes Like |Link to Comment
  • Stop Looking At Quarterly Growth Rates For The Economy: Year-Over-Year Growth Is Dismal [View article]
    This year's 2nd quarter vs 2nd quarter 2014, nominal GDP change was +3.3%.
    The previous 5 years were +4.5%, +2.5%, +4.3%, +3.9%, +3.8%. The 6 year average is 3.7% with a standard deviation of 0.7. The latest is entirely normal, lower than the mean but only by 1/2 an SD.

    And to Guardian's point, yes the stronger dollar has weakened US industrial output, notably passenger cars of domestic make (light trucks are fine, import make light trucks are gangbusters). Steel output is also down on the stronger dollar. Of course, the even bigger drop is in energy sector revenue on lower prices, but in a "terms of trade" sense that is a net benefit (we got lower prices on the import bill etc). It was also a year of much lower inflation for the same reasons - stronger dollar and lower energy prices.
    Jul 31, 2015. 12:39 PM | 1 Like Like |Link to Comment
  • The Fed And GDP Growth [View article]
    I basically agree with this analysis, but I think the Fed definitely needs to get moving. Watching the rate of decline in the unemployment rate as we add several million jobs per year, we only have about 18 months of slack left in that "rope" before we hit the labor market tightness of full employment conditions. The Fed basically needs to have completely withdrawn the foot-on-the-gas stimulus by then.

    If we look at inflation expectations as revealed by TIPS and similar, it all says that short rates would need to be up around 2% for outright stimulus effect to be removed. That wouldn't be restrictive, it would just be neutral - not offering negative real rates. Negative real rates plus labor market tightness is a recipe for uncontrolled increases in the inflation rate - not currently in prospect because we do still have unemployment slack, but as mentioned above, only another 18 months of it. If inflation expectations creep higher in the interim, the necessary short rate might be a point higher, but that's the ballpark.

    This means to reach neutral on a gradual path, the Fed needs to raise rates 2% in 18 months. Wait much longer and that stops being gradual and starts being fast. Really, they could have started 6 months ago. They held off because dollar strength and the oil price drop both made import of deflation a concern, and I get that. But that was going to be temporary, and it is over, and they just lost 6 months of gradual by worrying about it. The first couple of moves up to short rates still at 1% or less aren't going to have any impact to speak of, on their own, and there is very little reason to delay them.

    How I see it...
    Jul 31, 2015. 11:57 AM | 3 Likes Like |Link to Comment
  • Oil crash could be worst in at least 45 years, Morgan Stanley warns [View news story]
    "there is no "supply greater than demand""

    There are stocks. The stockpile of oil that has not been used reflects a time integral of an imbalance between production and final consumption. If you like, that is a form of "demand" that buys oil or pumps it, then just stores it without (yet) consuming it. But that is quite different in its impact on price than buying oil to process it into product and use it up. Some stock is necessary simply to keep the lines of communication and distribution filled and thereby prevent local shortages. This level of stocks they model using a five year average of stockpiled oil. When stocks are well above that average, they (rightly, in my opinion) regard the excess as an involuntary addition to stocks, from production outrunning final consumption usage.

    So yes, supply can exceed demand. When it does, stockpiled product runs up, involuntarily. It even presses against the limits of storage capacities. It causes supertankers whose proper function is to move oil to be repurposed just to sit offshore, anchored, holding it until someone actually needs it.

    Future consumption, meanwhile, is a round square and a misunderstanding. There can be *forecasts* of consumption well into the future. There can even be *speculative holds* of stocks of oil in the hope of selling later at a higher price than spot oil might fetch today. Such operations may be hedged by some if others take on the risks for them - though all oil stored and not used is necessarily a capital subject to changes in the spot price, borne by someone or other. But no one can consume a barrel of oil to be delivered in 2020, today. Changing prices cannot make physical commodities travel through time.

    The only time travel of commodities is forward in time - slowly - if not consumed. At a cost in storage and in lost earnings of capital bound up that way.

    A market clearing means that there are willing buyers for all those who wish to sell. When stocks rise involuntarily, there aren't buyers for all those who would like to sell. There are plenty of people who would willingly sell the extra stockpiles of oil that have built up since last year. They just can't find buyers, for more than what they regard as a pittance, so they sit on the stuff instead. You can call that price sensitivity of their willingness to sell extra "demand" for oil. But it isn't the kind of demand for oil that supports increases in its price, and it doesn't use up any of the oil involved. It just sits on it for another month, waiting.

    If an academic pinhead calls that sitting on the stuff "demand", it just makes the term meaningless and academic. Use of oil in physical production is something else.
    Jul 30, 2015. 04:31 PM | 2 Likes Like |Link to Comment
  • Oil crash could be worst in at least 45 years, Morgan Stanley warns [View news story]
    Russn8r - The one I am looking at says that non-OPEC production increases 0.86 mb/d for 2015, and is expected to grow another 0.30 mb/d in 2016, to a level of 57.69 mb/d.

    That puts the path of non-OPEC production for 2014, 2015, and 2016 at 56.53, 57.39, 57.69 mb/d.

    The OPEC production path is 31.38 mb/d for 2015, up 0.28 in 2015, meaning from a level of 31.1 mb/d 2014. It doesn't give an OPEC 2016 production estimate.

    On the side of demand, they give a demand "for" OPEC oil, by which they mean total world demand minus non-OPEC output, as 29.2 mb/d for 2015, vs 29.0 mb/d for 2014, and they predict 30.1 mb/d for 2016.

    That means their total demand series - the non-OPEC 3 years above, plus that (derived) demand for OPEC oil series - is

    85.53, 86.59, 87.79 mb/d

    The problem is OPEC production was already 31.1 mb/d in 2014 making total world output 87.63, 2.10 mb/d over demand. It is a higher 31.38 mb/d this year, making total output 88.77, 2.18 mb/d over demand. If OPEC output is unchanged next year, total output would be 89.07, still 1.28 mb/d over demand.

    Stocks meanwhile are 142 mb above their 5 year average.

    The best they are hoping for is that higher demand next year coupled with slower rest of the world output growth (but still growth) will narrow the imbalance between world output and world demand by about 40% - while still leaving output higher than demand. OPEC would have to cut its output by around 4% just to put world supply and demand back in line with each other next year. And instead their output this year is growing, not falling.

    Even those estimates depend on supply growth in the rest of the world falling from a rise of 0.86 this year to a projected (or hoped for) rise of only 0.30 next year. That expected fall of 0.56 in the rate of growth of supply in the rest of the world is what they are expecting will account for most of their projected / hoped for narrowing of the existing, over 2 mb/d, gap, between world output and demand.

    If output growth stalls for 2 years, then sure demand will catch up with existing rates of output. Big "if", and not yet happening. In the meantime, the existing imbalance is the reason prices fell in the first place, and there is no reasonable prospect of that price drop reversing unless and until that supply-demand imbalance disappears.
    Jul 29, 2015. 05:24 PM | 4 Likes Like |Link to Comment
  • Don't Ignore The Weakness In Commodities [View article]
    As someone who was actually investing in the early 1980s, I can tell you it really didn't matter what one bought. You needed to avoid a few fad bubbles like gold in 1980 and the Hunt silver "corner". You needed to avoid a bunker mentality being satisfied with T-bills paying double digits. Any risk asset you swung a stick at was a home run. Didn't have anything to do with the specific asset, just that you were willing to take on any risk at all, crossed with the perfect timing of that juncture in history, in which inflation was defeated and the macro tendencies of the US and European economies definitely turned, as neo-liberalism took hold.

    Today is not like that. The nearest similar occasion was in early 2009, when everyone was pessimistic as heck and every risk asset was again a home run. If your temperament or investment system tells you to swing for the fences on such occasions, it has done all it can do for you. It can't make such occasions. And it really doesn't matter which vehicle you pick, if you get the basic risk and timing calls right.
    Jul 29, 2015. 02:54 PM | 6 Likes Like |Link to Comment
  • The Right Way To Analyze China Equities [View article]
    User11385711 - when there is actual blood running in the actual streets - not metaphorical, not a price decline still leaving prices way higher than 6 months ago - then you can cite Baron Rothschild and his dictum as a reason to buy. Not remotely there yet. Wait. As for "comparative PE basis", the "E" part isn't worth the electrons they are written with. China faces trillions in bad debts and with it, trillions in revisions to apparent past performance. There are massive and so-far unallocated real losses careening around the Chinese financial system looking for an owner. Don't volunteer to be that owner.
    Jul 29, 2015. 12:14 PM | 2 Likes Like |Link to Comment
  • Oil crash could be worst in at least 45 years, Morgan Stanley warns [View news story] has monthly flipbooks on the web including production estimates, for OPEC and non OPEC. July is the latest and says 31.8 mb/day for OPEC. And yes, that up, not down.

    This took me less than five minutes to learn for myself. FWIW.
    Jul 28, 2015. 08:10 PM | 1 Like Like |Link to Comment
  • Gold And Gibson's Paradox [View article]
    Peter - Jackson hatred of banks did not remotely result in sound money. Instead it resulted in wildcat banking, with hundreds of separate paper currencies in circulation, issued by state chartered banks. Many of which failed in every financial crisis. In fact, it was arguably the least constitutional period in US monetary history, since it effectively had individual US states sanctioning paper monies by granting bank charters, and state paper monies are the only monetary arrangement explicitly forbidden by the US constitution.
    Jul 28, 2015. 04:03 PM | 3 Likes Like |Link to Comment
  • Gold And Gibson's Paradox [View article]
    Peter - Um, no. Owners of a stock index also received a dividend, one about equal to the low rate of inflation over that stretch. Yes the 2000 peak was an epic of overvaluation. No, cherry picking bad entries points won't make stock a bad asset class. You might as readily analyze gold only from its 1980 peak ($850 an ounce nominal, only 0.73% higher to date per year, way behind inflation over that stretch, etc).
    Jul 28, 2015. 03:16 PM | 3 Likes Like |Link to Comment
  • The Stock Market And Sector Performance [View article]
    TheUnknownInvestor - I don't disagree with the point that there is significant inefficiency in the US health care sector (and worldwide, come to that). Government subsidies thrown at demand in a sector specific way goose prices rather than actually providing significantly more in real delivered services, and US government spending hundreds of billions a year on health care without regard to price is definitely a major factor in health care prices increasing twice the general rate of inflation.

    But a lot of it would be happening anyway, with a richer but older population and galloping medical technology. In the last 7 years, since the recession lows, US household net worth has risen by about $35 trillion, a simple huge move, with stocks in various forms a major portion of that (owned directly, mutual funds, pension reserves, etc). Who are the ultimate owners and beneficiaries of all of that? Well to do retirees with stock portfolios accumulated over a working lifetime, dual professional income families pulling in 6 figures and saving in 401ks, etc. What are they going to spend any of it on? Health care, financial services, tech, some travel and entertainment and similar consumption.

    I've seen some stats that something like 25% of all health care spending is concentrated in the final 1-3 months of a person's life, fighting the inevitable. Is that inefficient? With a philosopher's hat on, no doubt, and Plato told us as much when medicine scarcely existed. When its your own parents - or oneself - on the other hand, doesn't seem so unimportant.

    As for the financing of it by government, that to me is not really the issue. Would we be better off with some entitlement reform, with adjustments to payroll taxes to keep medicare spending in line with what is actually collected for it, and so forth? Sure. But transfers do not make us rich or poor, first order. We can't collect them without paying them, neither to we pay them to a pit in the sky. To the extent we just goose prices without delivering more or better services, sure it is wasteful - all subsidized demand is.

    Even if the government didn't direct large percentages of GDP toward the old (and frankly, richer) portion of the population, to the lasting benefit of doctors and pharma shareholders more than retirees themselves, we'd still spend more on health care in the future than we spend on it today. Both for the demographic reason - longer life expectancies - and because we are getting richer, and our older people are owners of assets growing in real value.

    The natural thing to happen is for a lot of the less old to receive their share of those savings by providing useful services to our retirees. All the services our retirees use have to be produced but not consumed by their contemporaries. The only question is what those doing the work get in return for that real support. They can get a tax receipt that says "you gave, thanks" - not terribly fair. They can get a rather empty promise that hopefully someone will do the same for them later - which isn't as generous as it sounds, when one reflects that those making that promise won't be doing any of that actual work, either. Or they can be given shares of ownership of real estate and companies and other productive assets - and that is the honest and fair way for things to go.

    That happens if retirees sell their mutual funds (gradually) to pay for their retirements and care, and the workers caring for them save some of their income in the meantime and use it to buy up those shares as they get sold.

    The government should mostly avoid bolixing up that natural process by standing in the middle and making promises it can't keep.

    One man's opinion...
    Jul 28, 2015. 02:11 PM | 2 Likes Like |Link to Comment
  • The Right Way To Analyze China Equities [View article]
    User 11385711 - this doesn't shake out in 3 months. More like 3 years. It is still very early days, and there will be plenty of opportunity to pick through the wreckage after the smash. You don't have to try to buy individual bits flying off the explosion while the explosion is actually happening. Wait a bit first.
    Jul 28, 2015. 01:50 PM | 1 Like Like |Link to Comment
  • The Right Way To Analyze China Equities [View article]
    "domestic savings at 40%-50% compared to westerners at 2% means a net transfer of wealth to china"

    First, the US savings rate is 5%, not 2% - of a much higher per capita income, incidentally. Second, no, a higher savings rate in China does not "mean" a net transfer of wealth to China. Voluntary savings raise the future wealth of the person doing to saving, but they also raise the present wealth of those who makes use of those savings in the meantime. Expanding capital is not a zero sum game.

    Paying 2% interest to someone to use capital he saved into existence definitely benefits the person borrowing that capital, not just the person receiving that (frankly, tiny) interest payment. As long as one invests capital raised from others profitably, which the US certainly does.
    Jul 28, 2015. 10:16 AM | 4 Likes Like |Link to Comment
  • Are Stocks Overvalued? A Survey Of Equity Valuation Models [View article]
    the_tourist wrote in relevant part - "If interest rates are 15% and inflation is 14% that should be no different than if interest rates are 1% and inflation is 0%. You are really only paying 1% interest in either case and just inflating the other 14% away."

    First, I don't disagree that real rates matter. However, very high rates coupled with high inflation are not the same as low rates with low inflation. For one thing, the IRS views them rather differently. You can get real after tax returns of -5% a year with nominal rates at 15% and inflation at 14%. As a second point, only for short rates rolled over rapidly is even that true. For longer dated claims, what matters are whole holding period averages of such things, not one year figures. If IRs hit 15% on 14% inflation but that inflation lasts only 2-3 years, then bonds soar in real as well as nominal value afterward, when inflation is brought under control and nominal yields fall. The same process works in reverse for unexpected increases in inflation.

    Beware simplistic views that inflation "just" subtracts off the nominal return, therefore. In practice it all gets a heck of a lot messier than that, and high (and variable, and unexpected) inflation brings in its train higher effective real tax rates, much higher real value volatility, and a host of other phenomena, that are not present at all with low nominal, low inflation, rates.
    Jul 28, 2015. 09:42 AM | 2 Likes Like |Link to Comment
  • The Stock Market And Sector Performance [View article]
    Health care, finance, and tech are an apt description of the future of the US economy. That we also get decent consumer products participation is a sign of the cycle phase. These are all healthy and secularly growing economic sectors with high value added per worker. The economy continues to add 2.5 million jobs per year, and has another 18 months of slack in the labor market to continue doing so.

    Anyone expecting instead to see 5% real growth, or a focus on basic materials or heavy industry, just doesn't get the direction of international trade or which sectors are rising ones for the high capital, high income, aging, free allocating US economy. These are our strengths, and it is completely unsurpring, goong into the final third of this expansion (which we are already in), and with the dollar paricularly strong, that those would be the growth sectors, and heavy traded stuff we can buy abroad 10-15% cheaper than a year ago, are not the growth sectors.
    Jul 27, 2015. 07:54 PM | 4 Likes Like |Link to Comment