1.2% over 10 Years?

Posted on Monday, November 30, 2009
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Per Bloomberg:

Japanese bonds rose, following their best monthly performance this year, after the Bank of Japan said it will hold an emergency policy meeting today in Tokyo.

Ten-year yields dropped to the lowest level since January on optimism policy makers will expand extraordinary measures to increase liquidity in the financial system. The central bank may consider increasing monthly debt buying from the current 1.8 trillion yen ($20.7 billion), said Christian Carrillo, a senior interest-rate strategist at Societe Generale SA in Tokyo.

"They cannot come out of that meeting without doing anything and my guess is that it will be more purchases of long- term JGBs," Carrillo said. The BOJ may boost monthly buying of government bonds to 2.1 trillion yen, he said.

The yield on the 1.4 percent bond due September 2019 fell 3.5 basis points to 1.225 percent at the 11:05 a.m. morning close in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker.

While the chart below is the 7-10 year Japanese Government Bond Index (rather than just the 10 year yield, which I was unable to find), it does show how low yields are, BUT more amazing, how much lower they can potentially go (think 2002).



This almost makes that 3.2% U.S. Treasury yield seem attractive huh?

Source: Barclays

Jake 01 Dec, 2009

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Source: http://econompicdata.blogspot.com/2009/11/12-over-10-years.html
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Chicago PMI: Strength, but No Jobs

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Details of this morning's Chicago PMI release per Briefing.com:

• The Chicago PMI, which is compiled by the Institute of Supply Management - Chicago and Kingsbury International, Ltd., jumped to 56.1 from 54.2. The consensus expected the Chicago PMI to decline slightly to 53.3.
• At 56.1, the index is at its highest point since August 2008 and showed an expansion in manufacturing for the second consecutive month.
• The production rating, while still expanding at a strong rate, slowed as the index dropped from 63.9 to 57.6.
• Beyond production, employment is still under heavy contraction but the rate slowed slightly as the index rose from 38.3 to 41.9.
• Firms will also have to settle for lower profits as prices paid for supplies entered an expansion phase as the index rose from 48.6 to 52.6. Due to extreme slack in the labor market, firms will have a tough time passing the higher prices to the consumer.

Source: Briefing

Jake 30 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/chicago-pmi-strength-but-no-jobs.html
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Durable Goods Down, But Out?

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Catching up on some Thanksgiving week releases and saw that durable goods "surprised" to the downside following the upside spike in September. Per MarketWatch:

Orders for U.S.-made durable goods fell in October, declining 0.6% on weaker demand for machinery and defense goods, the Commerce Department reported Wednesday.

Excluding transportation goods, orders fell 1.3%. Economists surveyed by MarketWatch had expected a gain of 0.5% for durable-goods orders, and a gain of 0.4% for orders excluding transportation.

Overall, the report was "disappointing," wrote Millan Mulraine, an economics strategist with TD Securities, in a research note.

However, better times could be coming, according to Mulraine: "Despite the disappointing October print, we continue to maintain our bias for U.S. capital-goods orders to be fairly robust in the coming months as the combination of the U.S. economic recovery and weak dollar bolsters orders."

The reason why this (and other non-spiking economic indicators) are disappointing is that overall levels are still SIGNIFICANTLY below longer term trends (thus STRONG growth is needed just to make up lost ground). The chart below shows just that; while October durable goods new orders were weak, we see the massive drop YTD October vs. a similar period in 2008, thus plenty of room for a strong rebound if / when the economic recovery truly takes hold.



Not a surprise then that those areas showing relative strength were broadly the same areas that have fallen the furthest.

Source: Census

Jake 30 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/durable-goods-down-but-out.html
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The Scale of Hedge Fund Gold Purchases

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In case you missed it... early last week The Reformed Broker detailed the incredible amount of gold that hedge funds (in this case Paulson & Co.) have accumulated in a very short period of time:

John Paulson of Paulson & Co, the legendary hedge fund manager who made tens of billions betting on the mortgage crisis between 2007 to 2009, likes gold. He really likes it. He likes gold more than a friend.

To most market participants, this is not news, but here's something you probably didn't know: Paulson owns more gold than several major countries! Combined!

Retail investor (and more recently this hedge fund) support has made gold a one way bet for much of the past 6+ years. Thanksgiving's Dubai debacle however provided a glimpse into how quickly this may potentially all come to an end. Per the FT Alphaville:

Gold had at one stage dropped as much as 5 per cent as it responded to safe haven flows into the dollar. The precious metal has since recovered to trade about 3 per cent lower at $1,155.80.

Commenting on the sell-off, Davies — who had moved his fund to its maximum 50 per cent under weight gold position:

"It happened so quickly, I've never seen a quicker paper liquidation in gold ever."

Don't fret... gold has snapped back and now looks poised to make new highs (chart below per Kitco).



Regardless of what is or is not a justified price for gold, the only thing that matters is the next price that a buyer or seller is willing to transact. And while I continue to expect to see a one-sided trade, when that one sided trade ends, it has the potential to get real ugly, real fast (though I think we are still a long ways away) as this "tonnage" hits the market.

Jake 30 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/scale-of-hedge-fund-gold-purchases.html
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Japanese Industrial Production Up, but Disappoints

Posted on Sunday, November 29, 2009
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Bloomberg reports:

Japan's industrial production rose less than economists estimated in October, undermining the nation's recovery from its deepest postwar recession.

Factory output increased 0.5 percent last month from September, the slowest pace in eight months, the Trade Ministry said today in Tokyo. The median estimate of 27 economists surveyed by Bloomberg News was for a 2.5 percent gain.

The decline, led by automakers and electronics parts companies, adds to concern that the economy may slow once global stimulus spending wanes. Bank of Japan Governor Masaaki Shirakawa and Prime Minister Yukio Hatoyama will meet "soon" to discuss how to address a surging yen and slumping stock market, Chief Cabinet Secretary Hirofumi Hirano said today.

"These are weak numbers," said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. "We've been seeing a V-shaped recovery so far, but the pace is starting to moderate."

Below we see the speed and size of the recovery. While the six month change is still up ~15%, the size of this change has begun to reverse course. While not only indicating that we should not be looking for a "V" shaped recovery, it also puts how large the decline in output really was last Fall.



Source: METI

Jake 30 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/japanese-industrial-production-up-but.html
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EconomPics in Brief (Tryptophan Edition)

Posted on Friday, November 27, 2009
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Can't really call this EconomPics of the Week as there were only 6 posts and I'm too Turkey hungover to post anything today... I'll be back in force Monday.

Why the U.S. is Broke... Personal Current Tax Edition
Recovery in Perspective: Nominal GDP Edition
Q3 GDP Revised Down to 2.8%
Existing Home Sales Jump
Agency Mortgage Bonds are RICH
The New Moon... The Power of the Women Filmgoer

Jake 27 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/econompics-in-brief-tryptophan-edition.html
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Why the U.S. is Broke... Personal Current Tax Edition

Posted on Wednesday, November 25, 2009
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Always lots of interesting information within the Personal Income and Outlays release. Here is one such area... personal current taxes, which are:

Jake 25 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/why-us-is-broke-personal-current-tax.html
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Recovery in Perspective: Nominal GDP Edition

Posted on Tuesday, November 24, 2009
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Remember that "recovery" we experienced in the third quarter? Turns out nominal GDP bounced a "whopping" 3.2% (down 1% from the initial release). Or to put this figure in perspective, the 42nd highest quarter out of the last 251 or one of the lowest 17% quarters over the last 50+ years.

Jake 24 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/recovery-in-perspective-nominal-gdp.html
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Q3 GDP Revised Down to 2.8%

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WSJ reports:

Jake 24 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/q3-gdp-revised-down-to-28.html
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Existing Home Sales Jump

Posted on Monday, November 23, 2009
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Washington Post details:

The National Association of Realtors reported that sales of existing single-family homes, townhomes and condominiums in October surged to a seasonally adjusted annual rate of 6.1 million units from 5.54 million in September -- making last month the strongest since February 2007. Sales were up 23.5 percent from last October.

Every piece of housing data is scrutinized these days because it was primarily the housing market that derailed the U.S. economy, and its recovery is key to restoring economic vitality.

Low home prices, federal programs that helped push down interest rates and a temporary $8,000 federal tax credit mostly for first-time buyers have all played a role in boosting home sales in recent months. As sales picked up, the excess supply of homes started shrinking and prices began stabilizing.

Below is the non-seasonally adjusted October '09 figures vs those from October '08 (for some reason the seasonal adjustment multiplier was higher this October than last, resulted in an out-sized gain in the seasonally adjusted figure of 23.5% vs. 20.8% for the non-adjusted data). In looking deeper, we see the struggle the west coast continues to live through as the housing bubble continues to unwind.



The issue is the question of sustainability. Back to the Washington Post:

But real doubts linger about whether these gains can be maintained, especially if unemployment continues to rise and government intervention is curtailed. The federal "cash for clunkers" program boosted auto sales, for instance, but only temporarily. And many economists forecast weak growth once the government's broader economic stimulus spending winds down.

Source: Realtor.org

Jake 24 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/existing-home-sales-jump.html
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Agency Mortgage Bonds are RICH

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Bloomberg (via Calculated Risk) details Meredith Whitney's latest concern:

The Federal Reserve has begun slowing purchases in the $5 trillion market for so-called agency mortgage-backed securities after announcing in September that it would extend the timeline for its $1.25 trillion program to March 31 from year-end. Whitney said that banks are only originating home loans that they can sell to Fannie Mae and Freddie Mac.

"If Fannie and Freddie can't sell to an end buyer, i.e. the U.S. government steps back, the mortgage market at minimum contracts, rates go higher, and banks are poised with more writedowns," said Whitney, founder of Meredith Whitney Advisory Group. "This is probably the issue that scares me most across the board."

The chart below shows the option adjust spread "OAS" of Agency Mortgages to Treasuries. This is model driven (the below utilizes Barclays model) to estimate for pre-payments by borrowers and a number of alternative models suggest the OAS is now NEGATIVE to Treasuries (the power of subsidies!).



The question is who is buying mortgages at these levels besides the Fed? Easy... any investor in the Barclays Aggregate index (think pension plans, 401k participants, etc...) .

Source: Barclays Capital

Jake 23 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/agency-mortgage-bonds-are-rich.html
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The New Moon... Women LOVED It... Men... Not So Much

Posted on Sunday, November 22, 2009
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"Monster" weekend for The Twilight Saga: New Moon. Per the AP:

The vampire romance "The Twilight Saga: New Moon" sucked up $140.7 million in its first three days and pulled in a total of $258.8 million worldwide, according to studio estimates Sunday.

The No. 1 domestic debut for Summit Entertainment's "New Moon" was more than twice the $69.6 million haul over the same weekend last year for "Twilight," the first in the franchise based on Stephenie Meyer's novels.

"New Moon" placed third on the all-time domestic chart behind last year's $158.4 million opening weekend for the Batman blockbuster "The Dark Knight" and 2007's $151.1 million haul for "Spider-Man 3."

Among the top-10 all-time openings, "New Moon" is the only one that came outside of Hollywood's busiest time, the summer season. The movie adaptation of Meyer's next "Twilight" chapter, "Eclipse," arrives in the heart of summer, next June 30.

On Friday, "New Moon" set an all-time domestic high for opening day with $72.7 million, topping the previous record of $67.2 million by last year's "The Dark Knight.

And the devoted (teen / tween / female skewed) fans could not wait until Saturday to see the film. As detailed above, the film broke the record for the largest grossing Friday of all time and while Saturday was nothing to sneeze at, the drop from Friday was the 6th largest of all time (in percent... in $$ it was by far and away the largest).



So what kind of business can we expect from the New Moon going forward? Well, the next stage is typically driven by word of mouth based on the quality of review. And the viewers were split by just about as much as I've ever seen. Well, not viewers... just the sexes. Females LOVED the film for its Abercrombie'ish models acting. Men... not so much.



So my guess... females will continue to come out in droves. Men... not so much.

Source: Box Office Mojo / IMDB

Jake 23 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/new-moon-women-loved-it-men-not-so-much.html
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EconomPics of the Week (11/20/09)

Posted on Friday, November 20, 2009
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Breakin' Down the Growth
Leading Economic Indicators Losing Strength
No Inventory Correction in September
Retail Sales Upside Suprise... Still Weak Longer Term
Japanese GDP... 4.8% Growth, but Ugly?

Assets
Selecting a Domestic Fixed Income Benchmark
Housing Starts and Permits Down.... GOOD

Inflation / Deflation
Auto Prices and CFC; CPI and Capacity
Has Euro CPI Seen Its Lows?
What Stinkin' Inflation? PPI Edition

Struggles
1 in 7 Americans Affected by Food Insecurity

And your video of the week... rookie Brandon Jennings drops a double-nickel (and yes, the Knicks passed on him in the draft):

Jake 21 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/econompics-of-week-112009.html
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Selecting a Domestic Fixed Income Benchmark

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Barclays Aggregate is Yielding Just 3.5%

Last month I detailed that the yield to worst of the Barclays Capital Aggregate Bond Index (i.e. the most popular US dollar fixed income benchmark) was minuscule at just around 3.5%. Well it is now yielding just 3.35% and as a reminder, as an investor that is really all the expected return you can expect to receive (details here).

As a background, this benchmark is around 40% Government Related bonds, 40% securitized bonds (mainly Agency MBS - i.e. mortgages guaranteed by the government / agencies), and 20% Investment Grade Corporates. With low Treasury yields, rich Agency MBS after $1.25 Trillion in Fed purchases through Q1 '10, and much reduced credit spreads, that 3.35% yield is not necessarily a surprise.

How to Pick up Incremental Yield

There are two main ways for an investor to pick up incremental yield above and beyond that level in this market from their fixed income allocation... move down in quality (i.e. away from Government or Agency MBS to credit) and/or to move out along the yield curve (i.e. the yield curve is STEEP). For this reason, a popular benchmark some investors have moved to is the Long Duration (i.e. out further along the steep yield curve) Government / Credit Index (~50% government related / 50% credit blend).

Risk-Reward

The Long Government / Credit benchmark has a duration of almost 12 years vs. the Aggregate's ~4 years, thus an investor is not only taking more credit risk (i.e. 50% vs. 20%), but significant duration risk (i.e. exposed to interest rate movements by almost 3x more than the Aggregate index - if interest rates move up 1%, the Aggregate underperforms ~4%, whereas the Long Government / Credit underperforms by ~12% all else equal).

But, How Much Incremental Yield will this Add?

A record amount.



In other words, investors are being compensated 1.8% to take on the incremental credit and duration risk.

Breakdown of Incremental Yield

Below is a quick and dirty breakdown of what makes up that 1.8%. The quick and dirty methodology is as follows; the credit portion [red bars] is taken purely as the spread of the Long Government / Credit Index over the Long Treasury Index (i.e. "risk-free" government bonds), whereas what I label 'Yield Curve Positioning' [blue bars] is everything else being compensated for the move from the Aggregate to the Long Gov't Credit (assume for this Q&D that it is only yield curve positioning).



My Thoughts

In my opinion, duration is relatively attractive on a stand-alone basis, but with the incremental yield that compensates one to take that risk, it becomes very attractive in relative terms. However, that is based on my (non-consensus?) view that deflation and another downturn is a higher risk over the next 12 months than the risk of increased rates and/or inflation.

On the other hand I am a bit more cautious with regards to the credit risk associated with the 50% allocation to credit. As a substitute for equities? Definitely. But, I wouldn't be too shocked if spreads widen after the record rally we've seen over the past 7-8 months.

Source: Barclays Capital

Jake 20 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/selecting-domestic-fixed-income.html
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Leading Economic Indicators Losing Strength

Posted on Thursday, November 19, 2009
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The AP details the "best in 25+ year" run of the leading economic indicators that still somehow managed to disappoint:

A private forecast of economic activity over the next six months edged up less than expected in October, signaling slow, bumpy growth next year.

The Conference Board said Thursday that its index of leading economic indicators rose 0.3 percent last month. Economists polled by Thomson Reuters had expected an 0.5 percent gain.

The index climbed 1 percent in September.

"We're still getting some positive momentum, but it looks like things are slowing down again," said Jennifer Lee, economist at BMO Capital Markets. "A lot of the economic growth has largely been driven by the government stimulus packages."

The government's Cash for Clunkers program boosted the auto sector and consumer spending, while tax credits for homebuyers have propped up the housing market.

Still, the indicators have risen for seven straight months. The Conference Board said last month that the 5.7 growth rate in the six months through September was the strongest since 1983. That ticked down to 5 percent growth in the six months through October.

Taking a look at the details of that 7 month run, we see that October was a downside outlier in terms of performance (less "upside" in aggregate and consumer expectations / building permits causing a drag).



Another disappointment is the performance of the indicators less the HUGE contribution of the interest rate spread (i.e. the steepness of the yield curve), which actually printed a negative number in October.



Why exclude interest rate spread? While the spread still relays the current monetary policy (i.e. when the yield curve is steep, the Fed is typically adding liquidity to the system which drives growth), this becomes less relevant when individuals and business aren't utilizing that liquidity (i.e. borrowing) to invest in "actual" economic activity. Instead we see that the liquidity is just being used to drive up prices of already rich, but not yielding 0% assets and/or to recapitalize a beaten down, but not yet out banking system.

Source: Conference Board

Jake 20 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/leading-economic-indicators-losing.html
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Gone Fishing

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Posting to resume tomorrow...

Jake 19 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/gone-fishing.html
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CPI and Capacity; Auto Prices and CFC

Posted on Wednesday, November 18, 2009
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Marketwatch details the latest CPI release:

The consumer price index increased a seasonally adjusted 0.3% in October as energy prices increased for the fifth time in six months to offset another rare decline in rents, the Labor Department said.

The core CPI rate, which excludes food and energy prices in order to get a better look at underlying inflation in the economy, rose 0.2% last month, led by higher prices for cars and trucks, due in part to the unwinding of the government's "cash-for-clunkers" incentives program.

Prices for new cars rose 1.6%, the most in 28 years. Used-car prices also increased, up 3.4%, the most in 29 years.

The consumer price index has fallen 0.2% in the past year. The core CPI is up 1.7% in the past year. In September, the CPI and the core CPI were up 0.2%.

For the relationship between used car prices (actually higher) and cash for clunkers go here. And while cash for clunkers also plays the role in why prices for new cars is higher, it is not permanent, but what I would classify as a reporting blip. Broadly it goes like this... no cash for clunkers + no change in methodology to account for no cash for clunkers = higher prices feeding into CPI. Per the BLS:

The BLS did not change its estimation method to incorporate the cash for clunkers program. The standard method for estimating the transaction price on sampled new vehicles calls for collecting the retail price of the vehicle and its selected options, and asking the dealer for the average discount on that sampled model over the previous 30 days. The 30 day average is used because sales volumes per specific model per month are typically low at individual dealerships.

To the degree that the total dealer discount to the consumer is influenced by discounts or incentives to the dealer from any source, including the cash for clunkers program, it would be reflected in the CPI. The average discount for sampled vehicles would reflect both cash for clunker transactions as well as transactions not eligible for the program.

As mentioned yesterday, the opposite was true for PPI (autos were a drag on PPI as producer auto prices were impacted less directly than prices to the consumer). Expect CPI to bounce back (at least the auto portion) in November.

As for relationships to keep an eye on regarding future CPI prints; think capacity utilization. As I detailed back in July, the relationship between capacity utilization and CPI (lagged six months) has been very strong for more than 30 years.



So, if you think capacity will come back (good) or be eliminated from the system (bad) [i.e. numerator vs. denominator] eliminating excess capacity, then you probably should gear towards higher inflation (sell fixed rate bonds, buy who knows... depends on if the "good" or the "bad"). If you think capacity will remain low due to continued production capacity staying off-line (very possible) or new capacity being added (not likely), then inflation will likely be in check (fixed rate bonds = opportunity).

Source: BLS / Federal Reserve

Jake 19 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/cpi-and-capacity-auto-prices-and-cfc.html
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CPI and Capacity; Auto Prices and CFC

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Marketwatch details the latest CPI release:

The consumer price index increased a seasonally adjusted 0.3% in October as energy prices increased for the fifth time in six months to offset another rare decline in rents, the Labor Department said.

The core CPI rate, which excludes food and energy prices in order to get a better look at underlying inflation in the economy, rose 0.2% last month, led by higher prices for cars and trucks, due in part to the unwinding of the government's "cash-for-clunkers" incentives program.

Prices for new cars rose 1.6%, the most in 28 years. Used-car prices also increased, up 3.4%, the most in 29 years.

The consumer price index has fallen 0.2% in the past year. The core CPI is up 1.7% in the past year. In September, the CPI and the core CPI were up 0.2%.

For the relationship between used car prices (actually higher) and cash for clunkers go here. And while cash for clunkers also plays the role in why prices for new cars is higher, it is not permanent, but what I would classify as a reporting blip. Broadly it goes like this... no cash for clunkers + no change in methodology to account for no cash for clunkers = higher prices feeding into CPI. Per the BLS:

The BLS did not change its estimation method to incorporate the cash for clunkers program. The standard method for estimating the transaction price on sampled new vehicles calls for collecting the retail price of the vehicle and its selected options, and asking the dealer for the average discount on that sampled model over the previous 30 days. The 30 day average is used because sales volumes per specific model per month are typically low at individual dealerships.

To the degree that the total dealer discount to the consumer is influenced by discounts or incentives to the dealer from any source, including the cash for clunkers program, it would be reflected in the CPI. The average discount for sampled vehicles would reflect both cash for clunker transactions as well as transactions not eligible for the program.

As mentioned yesterday, the opposite was true for PPI (autos were a drag on PPI as producer auto prices were impacted less directly than prices to the consumer). Expect CPI to bounce back (at least the auto portion) in November.

As for relationships to keep an eye on regarding future CPI prints; think capacity utilization. As I detailed back in July, the relationship between capacity utilization and CPI (lagged six months) has been very strong for more than 30 years.



So, if you think capacity will come back (good) or be eliminated from the system (bad) [i.e. numerator vs. denominator] eliminating excess capacity, then you probably should gear towards higher inflation (sell fixed rate bonds, buy who knows... depends on if the "good" or the "bad"). If you think capacity will remain low due to continued production capacity staying off-line (very possible) or new capacity being added (not likely), then inflation will likely be in check (fixed rate bonds = opportunity).

Source: BLS / Federal Reserve

Jake 19 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/cpi-and-capacity-auto-prices-and-cfc.html
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Housing Starts and Permits Down.... GOOD

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Marketwatch reports:

New construction of U.S. houses fell sharply in October to the lowest level in six months, the Commerce Department estimated Wednesday. Starts fell 10.6% in October to a seasonally adjusted 529,000 annualized units weaker than the 590,000 pace expected by economists surveyed by MarketWatch.

This is the lowest level since April. Starts of new single-family homes fell by 6.8% to 476,000 in October, while starts of large apartment units fell 34.6% to 53,000. Building permits, a leading indicator of housing construction, fell 4% to a seasonally adjusted annual rate of 552,000. This is the lowest level of permits since May.

While this is not good for Q4 GDP expectations (or housing companies), this IS good for the long term re-balancing between supply and demand that needs to take place.

Source: Census

Jake 18 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/housing-starts-and-permits-down-good.html
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What Stinkin' Inflation? PPI Edition

Posted on Tuesday, November 17, 2009
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Briefing detailed the latest PPI release:

The producer price index rose 0.3% in October, well below the consensus expectation of an increase of 0.5%.

Excluding food and energy prices, core PPI fell an astounding 0.6% over the month. For the year, core PPI has only increased 0.7% after posting a 1.4% year-over-year increase in September.

On the surface, the numbers would suggest an increasingly deflationary environment. However, the data for October was skewed.

The decline in core prices was due to large drops in vehicle prices. Passenger car prices declined 0.5% month-over-month after increasing 1.0%. Light truck prices fell 5.2% and heavy trucks prices declined 0.1%.

Briefing then poorly explains the drop in auto prices:

The information on the decline in motor vehicle prices is sketchy. New 2010 model year vehicle prices were introduced in this month's PPI report. The drop in price would suggest that car manufacturers are planning on introducing new model vehicles at lower price points. If this hold true, prices should hold at these levels through next summer.

But Market News quickly disproves this theory:

Core was cut by -5.2% in light trucks and -0.5% in cars where quality changes/model year changes and slack demand cut prices. The Bureau of Labor Statistics said the value of quality changes for 2010 model cars was $250 and for light trucks $793, less than usual, and that this pricing was adjusted out.

My thought of why there was an increase (and this could be wrong). Cash for clunkers. When the government was throwing cash at the end-user, this artificially increased demand for autos (by dealers) from producers. As the program ran out, the demand ran out, thus the pricing power ran out.

Too logical?

Source: BLS

Jake 18 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/what-stinkin-inflation-ppi-edition.html
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1 in 7 Americans Affected by Food Insecurity

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Ed Harrison via Credit Writedowns (via The Guardian) details a disturbing trend:

The US Department of Agriculture highlights how the United States in the last decade, despite increased aggregate wealth, slid back significantly in terms of food insecurity as measure of poverty. With everyone now focused on the unemployment situation, it bears noting that even before the downturn in the economy there had been a large surge in food insecurity nationwide.

What is food insecurity?

Food insecurity - defined by the USDA as when "food intake … was reduced and their eating patterns were disrupted at times during the year because the household lacked money and other resources for food" - afflicted 14.6% of Americans in 2008. i.e., some 50 million people were too poor to guarantee being able to put food on the table.

Only three of the worst 17 states in terms of food insecurity showed an improvement over the past decade, my guess is has gotten a whole lot worse.



And things likely have gotten a whole lot worse over the past year. Lets realize what has changed since 2008. Back then, the percent of TOTAL people under or unemployed (i.e. U-6) was 5.5% LESS than it is now. Even then, 14.6% Americans were affected with food insecurity (that is one in less than 7 people THEN).

Back to Ed:

My interpretation of the data goes to income inequality. I see this as evidence that the last decade of growth in the U.S. has not been beneficial for poorer Americans. However, I would go further in saying that the downturn in the U.S. and rising unemployment, bankruptcy and foreclosure in the middle class has made plain that the middle class has also been left behind.

I'd go further. It hasn't only been the middle class that hasn't shared in the wealth creation... HARDLY ANYONE outside of the uber-rich have.

Source: The Guardian

Jake 18 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/less-than-1-in-7-americans-affected-by.html
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Has Euro CPI Seen Its Lows?

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The AP details:

Consumer prices in the 16 countries that use the euro fell by 0.1 percent in the year to October, official figures confirmed Monday. Eurostat, the EU's statistics office, kept the rate unchanged from its preliminary estimate, in line with market expectations.

October's decline was the fifth in a row. In the year to September, prices fell by 0.3 percent. Though falling prices may be good for hard-pressed consumers, it is a sign of just how shaky demand remains.

Inflation is expected to turn positive in the months ahead as last year's sharp falls in energy prices fall out of the annual comparison and growth returns — figures last Friday confirmed that the eurozone returned to growth in the third quarter of 2009, albeit at a fairly anemic level of 0.4 percent.

Source: Eurostat

Jake 16 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/has-euro-cpi-seen-its-lows.html
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Japanese GDP... 4.8% Growth and Ugly?

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EconomPic detailed Japan's odd Q2 GDP print in which real GDP rebounded to positive territory for the first time since Q4 2007, even as nominal GDP continued to contract:

This has happened before (but real GDP has never been higher, while nominal GDP was negative).

That is... until this release.



The issue with any recovery in real only terms is that the country's debt (and there is a ton in Japan) remains in nominal terms. Thus, the fact that Japan produced more (4.8% quarter over quarter annualized more in real terms), but the overall value of that production is still less in Yen terms (-0.3% in nominal space) makes it difficult to service that debt. It is not a surprise then that the cost of credit insurance on Japanese sovereign debt has risen during this "recovery". Per the WSJ:

Canary in the coal mine? The cost of insuring Japanese government bonds against default has doubled to 0.75 percentage point in the past three months, as markets fret about debt issuance. Credit risk is assuming ever-greater stature in government-bond markets previously blithely assumed to be risk-free.

Its debt-to-gross-domestic-product ratio is set to rise to a staggering 227% in 2010, the International Monetary Fund forecasts, making it particularly exposed to any rise in market interest rates. Japan's aging population is a crucial concern, driving a change from saving, much of which went into JGBs, to consuming.

Japanese government officials seem to share the concern that the "strong" print may not be all it initially seems. Per Bloomberg:

The acceleration in the world's second largest economy is projected to fade in coming quarters as the impact of stimulus spending wanes and job losses restrain consumer spending. Prime Minister Yukio Hatoyama said the economy remains "worrisome" and that another supplementary budget is "probably" warranted.

I second that and will repeat the question I posed last quarter; how strong is end-user demand really if the price deflator increases GDP a full 5% quarter over quarter?

Source: ESRI

Jake 16 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/japanese-gdp-worst-48-gdp-print-ever.html
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No Inventory Correction in September

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Forbes reported earlier this morning (traveling again all week so expects delays):

Total business inventories continued to fall in September by 0.4%, less than the 0.7% decline economists were expecting, the Commerce Department reported today. September now marks the thirteenth consecutive month of inventory declines, the longest streak since the 15 months ending April 2002. Total business inventories are 13.4% lower compared to August 2008.

Total business sales fell 0.3% in the month, breaking the three-month streak of growth. The decline can be attributed to a 2.6% decrease in retail sales, reflecting a 14.3% decline in auto sales. All other major types of retail stores experienced sales gains of less than 1% except for building material stores whose sales decreased by 0.6%. Manufacturing sales and wholesale sale rose 0.85 and 0.6% respectively.

Marketwatch explains what an inventory correction is and how it works its way through to final output figures:

Once businesses reduce their inventories to desired levels, any increase in sales will have to come from new production, which would boost both U.S. jobs growth and imports.

The inventories report typically receives little attention from investors, but the pace of inventory reduction will be at the heart of any economic recovery this year. Most economists believe inventories will continue to be cut for several quarters before general restocking is needed.

But unfortunately, the trend of a continued declining inventory to sales ratio was not in the cards for September.



While this is only one data point, without sales growing faster than inventories, we won't get the mother of all inventory corrections many (I included) expect.

Source: Census

Jake 17 Nov, 2009

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Source: http://econompicdata.blogspot.com/2009/11/no-inventory-correction-in-september.html
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