Category Archives: Deficit

macro update

Posted on by

Let’s look at the Saudi price cuts in the context of the accounting identity that states that for everyone who spent less than his income, another must must have spent more than her income or that much output would not have been sold. ;)

The price cut itself shifts income from producers to consumers. And to the extent that consumers have a higher propensity to spend that gain than the amount the producers will cut spending more output will get sold. So the analysts who are forecasting a net gain for the US economy are hanging their hats on consumers spending more of their fuel savings than producers who lose that much income cutting back on their spending. Not to forget the potential loss of US exports that are sold to non residents spending their incomes earned from oil production, and the new US consumer spending that will be spent on imports. In other words, there may not be a whole lot of difference in total spending.

And there is another factor. While new oil related investment was partially financed from earnings it was also funded via agents ‘spending more than their incomes’ through bank loans and other forms of debt.

That is, part of the ‘spending more than income’ that was critical to the support of US domestic demand was coming from the energy sector. And much of that support is fading fast, as reports of reduced capex, falling rig counts, etc. continue to accelerate.

Additionally, to the same point, a deflationary environment tends to subdue bank lending, as previously discussed. And housing prices, for example, were already softening prior to the oil price cuts.

Therefore, to the extent that the ‘borrowing to spend’ falls back more than the oil consumers vs producers propensity to spend increases, aggregate demand/sales/GDP/employment falls.

Not to mention the oil price itself goes into the GDP calculation to the extent the oil price drop exceeds the GDP deflator.

I was already looking for a weak Q4 and beyond due to the deficit being too small for the current degree of credit expansion, and now this makes it a whole lot worse…

Share

Housing starts, Japan discussion, China, US pmi, store sales

Posted on by

Looks bad to me. Remember, for GDP to grow at last year’s rate, all the pieces on average have to contribute that much. And, as previously discussed, hard to see how starts and sales can grow with cash buyers and mtg purchase apps declining year over year.

The charts look like we are well past this cycle’s peak and headed into negative territory. Not to mention multifamily had been leading the way and those units tend to be smaller/cheaper, so if you were to look at the $ being invested vs prior cycles it would look even worse.

Housing Starts
housing-starts-nov
Highlights
Housing remains on a flat trajectory. Single-family starts and multifamily starts moved in opposite directions. Housing starts dipped 1.6 percent after rebounding 1.7 percent in October. Analysts projected a 1.038 million pace for November. The 1.028 million unit pace was down 7.0 percent on a year-ago basis.

November strength was in the volatile multifamily component. Multifamily starts rebounded 6.7 percent after declining 9.9 percent in October. In contrast, single-family starts fell 5.4 percent in November after gaining 8.0 percent in October.

Housing permits declined a monthly 5.2 percent, following a 5.9 percent jump in October. The 1.035 million unit pace was down 0.2 percent on a year-ago basis. Market expectations were for 1.060 million units annualized.

Overall, recent housing numbers have oscillated notably. October was relatively good but November was not. On average, housing growth appears to be flat to modestly positive.

hs-nov-1

hs-nov-2

hs-nov-3
And how about this headline? Make any sense to you?

hs-headline

Japan’s got issues, but ability to ‘service it’s yen debt’ isn’t one of them, as it’s just a matter of debiting securities accounts at the BOJ/by the BOJ and crediting member bank accounts also at the BOJ. But markets don’t seem to quite believe that:

jgb-cds

Meanwhile, Japan’s ‘depreciate your currency to prosperity’ policy combined with tax hikes on domestic consumers- about as ‘pro exporter at the expense of most everyone else’- is producing the outcomes previously discussed. They include falling real domestic incomes/real standards of living, increased exporter margins/sales/profits, etc. And more to come, seems, under the ‘no matter how much I cut off it’s still too short, said the carpenter’ mantra now practiced globally.

A few anecdotes:

The day after his ruling coalition secured more than two-thirds of the seats in parliament’s lower house, Mr. Abe acknowledged at a news conference that higher stock prices and corporate profits under his administration have yet to translate into worker gains.

“As I toured around the nation during the election, I heard the opinions of ordinary citizens who are suffering from price increases and small-business owners in difficulties due to price hikes in raw materials,” Mr. Abe said, adding that he will draft an economic stimulus package by the end of the year.

For the second year in a row, the conservative prime minister and his historically pro-business Liberal Democratic Party find themselves in the position of imploring corporations to cut into their profits and give workers more. Mr. Abe said he would summon executives and labor leaders to a meeting Tuesday to make his pitch ahead of next spring’s annual wage talks.

The reason: If wages don’t rise as quickly as prices, households could cut back on spending, endangering an economic recovery. There have only been four months since Mr. Abe took power in December 2012 when real wages—the value of paychecks after accounting for inflation—have risen. A weaker yen has made imported food and other goods more expensive, and a rise in the national sales tax to 8% in April from 5% hit consumers further.

While wages have gone up in nominal terms this year, rising prices — partly the result of a consumption tax hike in April — have negated those gains. Adjusted for inflation, total cash earnings fell 2.8% on the year in October, dropping for a 16th straight month. Unions hope that with this month’s lower house election shaping up to be partly a referendum on Abenomics, the prime minister’s plan for ending deflation, Japan will see a serious debate on wage growth.

The corporate sector is coming to terms with the need to raise pay to some degree next spring.

“What is important is escaping the deflation that has persisted for 15 years,” Sadayuki Sakakibara, chairman of the Keidanren business lobby, told reporters Wednesday.

“Companies that have succeeded in growing their profits ought to reflect that success in their wage increases,” he added.

For the second year in a row, Keidanren will explicitly encourage member companies to raise wages in its guidance for the spring’s “shunto” negotiations.

But even as big export-driven manufacturers cruise toward record profits, many smaller companies, particularly those dependent on domestic demand, are suffering the side effects of a weak yen and still waiting for consumer spending to recover from the tax hike.

China continues to go down the tubes and the western educated hot shots keep pushing the tight fiscal and what they think is ‘loose monetary’ policy that’s failed every time it’s been tried in the history of the galaxy:

Operating conditions deteriorate for the first time since May

(Markit) — Flash China Manufacturing PMI slipped to 49.5 in December from 50.0 in November. Manufacturing Output Index ticked up to 49.7 from 49.6. New Orders decreased while New Export Orders increased at a faster rate. “The HSBC China Manufacturing PMI dropped to a seven-month low of 49.5 in the flash reading for December, down from 50.0 in November. Domestic demand slowed considerably and fell below 50 for the first time since April 2014. Price indices also fell sharply. The manufacturing slowdown continues in December and points to a weak ending for 2014. The rising disinflationary pressures, which fundamentally reflect weak demand, warrant further monetary easing in the coming months.”

Not good here either:

PMI Manufacturing Index Flash
dec-pmi

And this came out. Note the year over year trend.

icsc-goldman-dec

Share

personal income and consumption charts and comments, and a word on oil

Posted on by

This is after tax personal income not adjusted for inflation. Note that there was anticipation of an acceleration from the first quarter, but now it looks like the growth has slowed and rolled over:

11-28-1

Here you can see how it was growing steadily, then shifted down when my payroll tax holiday expired, sort of resumed growing at the same rate, and now may be falling off, even with what the mainstream call ‘solid’ payroll growth:

11-28-2
Likewise, there’s been a lid on the growth personal consumption expenditures where the growth rate dipped for the cold winter, recovered, and then fell off some:

11-28-3

11-28-4

Adjusted for inflation/cpi the pattern is the same:

11-28-5

Oil- Not all that much to it.

The Saudis remain price setter as a simple point of logic.

No telling what their price target may be at any time, but they simply set price for their refiners and let them buy all they want at that price. And no one else has the excess capacity to do that.

Possible motives?

Put high priced producers out of business with $trillions of losses to make sure that when the subsequently raise prices to 150(?) new investment in high priced crude will then be considered to risky for anyone to finance?

And/or it’s not illegal for insiders to have gotten short for their personal accounts prior to the price cuts and subsequently covering prior to increasing prices, functionally transferring a bit of wealth from the state to private accounts?

Ramifications for the US:

US consumers helped a bit- about $100 billion/year last I heard?

Capex gets hurt by at least that much?

Trillions in value lost from loans and investments going south?

Thousands of high paying jobs lost in North Dakota, etc. due to reduced capex?

(EU not so much as they don’t invest nearly as much in high priced energy exploration/production?)

Canada, Mexico, Venezuela, Australia etc. economies and related securities/investments toast?

etc.

Share

State and local govt charts

Posted on by


The bulk of the boost is coming from state and municipal governments. After tightening their budgets for three years following the end of the recession, they began stepping up spending in 2013 and continued to do so this year

Except state taxes are growing faster, a headwind for the private sector.

But income taxes down- not sure why.

state-local-govt-1

Not sure what this is about either:

state-local-govt-2

Total tax collections still rising:

state-local-govt-3

state-local-govt-4

Up some but still historically low:

state-local-govt-5

Very minor increases here:

state-local-govt-6

state-local-govt-7

Overall the states are still running deficits and are motivated eliminate them:

state-local-govt-8

Share

There is no right time for the Fed to raise rates!

Posted on by

There is no right time for the Fed to raise rates!

Introduction
I reject the belief that economy is strong and operating anywhere near full employment. I also reject the belief that a zero-rate policy is inflationary, supports aggregate demand, or weakens the currency, or that higher rates slow the economy and reduce inflation. Additionally, I reject the mainstream view that employment is materially improving, the output gap is closing, and inflation is rising and returning to the Fed’s targets.

What I am asserting is that the Fed and the mainstream have it backwards with regard to how interest rates interact with the economy. They have it backwards with regard to both the current health of the economy and inflation, and, therefore, their discussion of appropriate monetary policy is entirely confused and inapplicable.

Furthermore, while I recognize that raising rates supports both aggregate demand and inflation, I am categorically against raising rates for that purpose. Instead, I propose making the zero-rate policy permanent and supporting demand with a full FICA tax suspension. And for a stronger price anchor than today’s unemployment policy, I propose a federally funded transition job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment. Together these proposals support far higher levels of employment and price stability.

So when is the appropriate time to raise rates? I say never. Instead, leave the fed funds rate at zero, permanently, by law, and use fiscal adjustments to sustain full employment.

Analysis
My first point of contention with the mainstream is their presumption that low rates are supportive of aggregate demand and inflation through a variety of channels, including credit, expectations, and foreign exchange channels.

The problem with the mainstream credit channel is that it relies on the assumption that lower rates encourage borrowing to spend. At a micro level this seems plausible- people will borrow more to buy houses and cars, and business will borrow more to invest. But it breaks down at the macro level. For every dollar borrowed there is a dollar saved, so any reduction in interest costs for borrowers corresponds to an identical reduction for savers. The only way a rate cut would result in increased borrowing to spend would be if the propensity to spend of borrowers exceeded that of savers. The economy, however, is a large net saver, as government is an equally large net payer of interest on its outstanding debt. Therefore, rate cuts directly reduce government spending and the economy’s private sector’s net interest income. And looking at over two decades of zero-rates and QE in Japan, 6 years in the US, and 5 years of zero and now negative rates in the EU, the data is also telling me that lowering rates does not support demand, output, employment, or inflation. In fact, the only arguments that they do are counter factual- the economy would have been worse without it- or that it just needs more time. By logical extension, zero-rates and QE have also kept us from being overrun by elephants (not withstanding that they lurk in every room).

The second channel is the inflation expectations channel. This presumes that inflation is caused by inflation expectations, with those expecting higher prices to both accelerate purchases and demanding higher wages, and that lower rates will increase inflation expectations.

I don’t agree. First, with the currency itself a simple public monopoly, as a point of logic the price level is necessarily a function of prices paid by government when it spends (and/or collateral demanded when it lends), and not inflation expectations. And the income lost to the economy from reduced government interest payments works to reduce spending, regardless of expectations. Nor is there evidence of the collective effort required for higher expected prices to translate into higher wages. At best, organized demands for higher wages develop only well after the wage share of GDP falls.

Lower rates are further presumed to be supportive through the foreign exchange channel, causing currency depreciation that enhances ‘competitiveness’ via lower real wage costs for exporters along with an increase in inflation expectations from consumers facing higher prices for imports.

In addition to rejecting the inflation expectations channel, I also reject the presumption that lower rates cause currency depreciation and inflation, as does most empirical research. For example, after two decades of 0 rate policies the yen remained problematically strong and inflation problematically low. And the same holds for the euro and $US after many years of near zero-rate policies. In fact, theory and evidence points to the reverse- higher rates tend to weaken a currency and support higher levels of inflation.

There is another aspect to the foreign exchange channel, interest rates, and inflation. The spot and forward price for a non perishable commodity imply all storage costs, including interest expense. Therefore, with a permanent zero-rate policy, and assuming no other storage costs, the spot price of a commodity and its price for delivery any time in the future is the same. However, if rates were, say, 10%, the price of those commodities for delivery in the future would be 10% (annualized) higher. That is, a 10% rate implies a 10% continuous increase in prices, which is the textbook definition of inflation! It is the term structure of risk free rates itself that mirrors a term structure of prices which feeds into both the costs of production as well as the ability to pre-sell at higher prices, thereby establishing, by definition, inflation.

Finally, I see the output gap as being a lot higher than the mainstream does. While the total number of people reported to be working has increased, so has the population. To adjust for that look at the percentage of the population that’s employed, and it’s pretty much gone sideways since 2009, while in every prior recovery it went up at a pretty good clip once things got going:

The mainstream says this drop is all largely structural, meaning people got older or otherwise decided they didn’t want to work and dropped out of the labor force. The data clearly shows that in a good economy this doesn’t happen, and certainly not to this extreme degree. Instead what we are facing is a massive shortage of aggregate demand.

Conclusion
There is no right time for the Fed to raise rates. The economy continues to fail us, and monetary policy is not capable of fixing it. Instead the fed funds rate should be permanently set at zero (further implying the Treasury sell only 3 month t bills), leaving it to Congress to employ fiscal adjustments to meet their employment and price stability mandates.

Share

Case-Shiller housing price index

Posted on by

Looks to me like this business cycle is over?

This is a lack of demand story.

The FICA hike in Jan 2013, followed by the sequesters in April, and the aggressive automatic fiscal stabilizers doing their thing to reduce govt net spending add up to the walls coming in on the economy:

S&P Case-Shiller HPI


Highlights
Home prices were contracting sharply in July, down 0.5 percent for the third straight decline and the steepest monthly decline in Case-Shiller 20-city seasonally adjusted data going all the way back to November 2011. The reading is below the low end of the Econoday consensus and far below the 0.1 percent gain that was expected. The year-on-year rate, which has been coming down steadily all year from the low double digits, is at plus 6.7 percent for the lowest reading since November 2012 and down sharply from 8.0 percent in June.

Fourteen for the 20-city sample show declines in the month with Chicago and Minneapolis showing the most severe declines, at minus 1.6 percent in the month. Three cities show no change leaving three with gains led by Las Vegas at only plus 0.3 percent.

Share

The first L shaped US ‘recovery’

Posted on by

Some 5 years ago when the talk was about whether the US recovery was going to be V shaped or U shaped, I suggested that it would be more L shaped, as a 0 rate policy requires a larger deficit, etc. That is, after a sharp fall it would go sideways.

Here are a few illustrative charts:

Adjusting this next one for population growth makes the point even more:

The growth rate of personal consumption has leveled off at over half of prior cycles:

And looks like deep down ‘those demon banks’ haven’t fared all that well either:

Share

Producer prices chart and other news

Posted on by

Remember all that ‘hyper inflation’ talk surrounding 0 rates and QE?

No sign of it here. Or anywhere else I’ve looked:

Nor do you hear any more talk about ‘credit acceleration’ since its post winter growth fizzled:

And wage growth (NOT adjusted for inflation) remains next to nothing:

And you only hear about these ‘minor’ reports on retail sales when they go up…

ICSC-Goldman Store Sales


Highlights

Store sales fell back sharply in the September 13 week, down a same-store 2.6 percent from the prior week for a year-on-year rate of plus 3.0 percent vs 4.0 percent in the prior week. But the declines appear to be isolated to the latest week, based on the text of the report which calls the results healthy.

Redbook

Seems the data continues to support my narrative- the deficit is too small given ‘credit conditions’ all of which contributes to a ‘macro constraint’ on the US economy. And the rest of the world is doing same, putting a macro constraint on the global economy.

Furthermore, seems the exporters are in control everywhere, pushing their narrative designed to increase global ‘competitiveness’ by keeping real wages low via low domestic demand and high unemployment.

Share