Consumption stabilizing at 2006Q4 levels

Data monthly to July.  With Total Capacity Utilization at 69 percent and still very high levels of uncertainty in the financial markets, it is difficult to see investment spending adding much of a kicker to aggregate demand.  The political will for much additional government stimulus spending appears to be lacking.  Net exports are constrained by economic weakness abroad.  Consumption spending will continue to be depressed by increased saving and additions to the ranks of the unemployed, especially those not covered by unemployment insurance, and shrinking overall employment.  Hence, an L-shaped recovery appears likely in the intermediate term.  A further debt-deflationary collapse may follow in about five years.

As measured by the BLS, inflation appears to have returned to an Oh-Oh Decade trend rate of ~2.5 percent.  Declining value of the dollar will put pressure on inflation through import prices, constraining physical demands and further discouraging investment.

‘Bout halfway down

Via:  thoughtofferings.com  h/t zero hedge 

Warning:  This is research, not investment advice.  You invest at your own risk. 

China likes gold

Via:  Telegraph

China, Bernanke, and the price of gold

By Ambrose Evans-Pritchard Economics Last updated: September 7th, 2009

China has issued what amounts to the "Beijing Put" on gold. You can make a lot of money, but you really can't lose.

I happened to see quite a bit of Cheng Siwei at the Ambrosetti Workshop, a gathering of politicians and global strategists at Lake Como, including a dinner at Villa d'Este last night at which he listened very attentively as a number of American guests tore President Obama's economic and health policy to shreds.

Mr Cheng was until recently Vice-Chairman of the Communist Party's Standing Committee, and is now a sort of economic ambassador for China around the world — a charming man, by the way, who left Hong Kong for mainland China in 1950 at the age of 16, as young idealist eager to serve the revolution. Sixty years later, he calls himself simply "a survivior".

What he said about US monetary policy and gold – this bit on the record – would appear to validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation.

He played down other metals such as copper, saying that they could not double as a proxy currency or store of wealth.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market," he said.

In other words, China is buying the dips, and will continue to do so as a systematic policy. His comment captures exactly what observation of gold price action suggests is happening. Every time it looks as if the bullion market is going to buckle, some big force steps in from the unknown.

Investors long-suspected that it was China. We later discovered that Beijing had in fact doubled its gold reserves to 1054 tonnes. Fait accompli first. Announcement long after.

Standing back, you can see that the steady rise in gold over the last eight years to $994 an ounce last week – outperforming US equities fourfold, even with reinvested dividends – has roughly tracked the emergence of China as a superpower in foreign reserve holdings (now $2 trillion).

As I have written in today's paper, Mr Cheng (and Beijing) takes a dim view of Ben Bernanke's monetary experiments at the Federal Reserve.

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

This line of argument is by now well-known. Less understood is how much trouble the Fed's QE policies are causing in China itself, where they have vicariously set off a speculative boom on the Shanghai exchange and in property. Mr Cheng said mid-level house prices are now ten times incomes.

"If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise."

"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."

Of course, China cold end this problem by letting the yuan rise to its proper value, but China too is trapped. Wafer-thin profit margins on exports mean that vast chunks of Chinese industry would go bust if the yuan rose enough to close the trade surplus. China's exports were down 23pc in July from a year before even at the current exchange rate, and exports make up 40pc of GDP. "We have lost 20m jobs in this crisis," he said.

China's mercantilist export strategy has led the country into a cul-de-sac. China must continue to run its trade surplus. It must accumulate hundreds of billions more in reserves. Ergo, it must buy a great deal more gold.

Where is the gold going to come from?

Labor Day 2009 by the numbers

Via:  Economic Policy Institute  A statistical picture of a nation with a broken social contract. 

Labor Day by the numbers
By Anna Turner

September 7, 2009 | An EPI Fact Sheet

compiled by Anna Turner

Note that all numbers are current as of September 4, 2009.

TOTAL JOBS LOST DURING THE RECESSION: 6.9 MILLION

• New jobs needed per month to keep up with population growth: 127,000
• Jobs lost in August 2009: 216,000
• Jobs needed to regain pre-recession unemployment levels: 9.4 million
• Manufacturing jobs lost since the start of the recession: 2.0 million (14.6% of sector's jobs)
• Construction jobs lost in the recession: 1.4 million (19%, nearly one in five construction jobs)
• Mass layoffs (50 or more people by a single employer) in July 2009: 2,157; jobs lost: 206,791

UNEMPLOYMENT RATE: 9.7%

• Number unemployed: 14.9 million  (up from 7.5 million in December 2007)
• Underemployment rate: 16.8%; Share of workers un- or underemployed: roughly 1 in 6
• Under- and unemployed, marginally attached and involuntary part-time workers: 26.4 million
• Unemployment rate, ages 16 to 24: 18.2%
• Male unemployment: 10.9%; female unemployment: 8.2%
• White unemployment: 8.9%; black unemployment: 15.1%; Hispanic unemployment: 13%
• Unemployment rate, young college graduates: 5.9% (2nd worst on record); Worst recorded unemployment rate for young college graduates: 6.2% (1983)
• Traditional ratio of young college grads' unemployment to overall rate: 50%; Current ratio: 70%
• Portion of unemployed who have been jobless more than six months: one third
• Average weekly unemployment benefit in July (including additional $25 per week from the American Recovery and Reinvestment Act): $332

STATES WITH DOUBLE-DIGIT UNEMPLOYMENT IN JULY, 2009: 16; WHEN THIS LAST HAPPENED: 1983

• Highest unemployment rate: Michigan, 15.0%; lowest: North Dakota, 4.2%
• When California's Hispanic unemployment surpassed black unemployment: 2nd quarter, 2009
• Projected African American unemployment for Michigan, 2nd quarter of 2010: 24.9%

INCREASE IN AVERAGE U.S. WORKER'S PRODUCTIVITY, 2000-07: 19.2%

• Decrease in all prime-aged worker's real median weekly wages, 2000-2007: $1; Decrease for African Americans: $3
• Annual growth rate of private-sector workers' wages, last three months: 2.6%
• Annual growth of wages in managerial, professional, and related occupations, 2009, 2nd quarter: 0%
• Annual growth rate of real (inflation-adjusted), average, hourly wages since June 2000:  0.70%*
• Ratio of average CEO's pay to typical worker's pay in 1979: 27 to 1; Ratio in 2007: 275 to 1

EXPECTED NEW SPENDING (12-MONTHS) FROM THE NEW $7.25 MINIMUM WAGE: $5.5 BILLION

• Share of minimum wage workers with high school diploma in 1979: 57.5%: Share in 2008: 72%
• Workers getting a raise from latest minimum wage increase: 4.5 million
• Share of affected workers with annual family income below $35,000: 57.1%;  Share working at least 20 hours a week: 81.6%
• Extent to which the minimum wage's real value is lower than in 1968: 17%

AMERICANS UNINSURED IN 2007:  45 MILLION

• Drop in children covered through parents' employers, 2000 to 2007: 3.4 million
• Share of people under 65, with incomes in the top 20%, covered by employers in 2007: 86.4%; Share with incomes in the bottom 20%, covered by employers: 21.9%
• Share of Hispanic workers who are uninsured: 39.8%
• Percentage of under-65 Americans with employer-sponsored health insurance in 2000: 68.3%; In 2007: 62.9%
• Average monthly cost of COBRA with American Recovery and Reinvestment Act subsidy: $370; Without American Recovery and Reinvestment Act subsidy: $1,057
• Rise in out-of-pocket spending for the 1% of adults with the greatest medical expenses, 2004-2007: 42%
• Increase in health care premiums since 1999: 119%
• Amount by which U.S. private health insurance administrative costs exceeded all Canadian national health spending in 2007: $25 billion**
• Share of total U.S. health care costs paid by private insurers in 2007: 35%
• Share of total health care costs paid by U.S. government in 2007: 46%

SHARE OF PEOPLE NEAR RETIREMENT AGE WITH A 401(K) BALANCE UNDER $40,000 IN 2007: 50%

• Percentage of amount needed to maintain living standards that is held by average 401(k) participant approaching retirement: 20-40%
• Share of 401(k) assets estimated to be lost since 2007: 29%

WORKPLACES WITH NO CONTRACT MORE THAN THREE YEARS AFTER ELECTION IS WON: 25%

• Share of employers that interrogate workers in mandatory one-on-one meetings, 1999-2003: 63%; Share of employers that threaten workers in such meetings, 1999-2003: 54%
• Increase in likelihood that firm will fail if unionized: 0%
• U.S. manufacturing workers ranking on "value-added per employee," compared to 16 nations with higher compensation: 2

ANNUALIZED RATE OF ECONOMIC CONTRACTION, 2nd QUARTER, 2009: 1%

• Likely size of this contraction without the American Recovery and Reinvestment Act: 3-4%
• Jobs lost with the American Recovery and Reinvestment Act, 2nd quarter, 2009: 1.3 million
• Jobs that would have been lost without the American Recovery and Reinvestment Act, 2nd quarter, 2009: 1.8 million at least***

* EPI analysis of CPS and BLS data
**EPI analysis of HHS CMS, OECD, and World Bank data
***Mark Zandi, Moody's Economy.com

U.S. economy stabilizing

It is with a bit of trepidation that I present results of a “recession” forecasting model, using NBER-defined recession, in the current environment, with the tremendous debt overhang and the bite it is taking out of consumer purchasing power, not to mention the increased saving rate in America, and the collapse of debt-pyramided asset values around the world.  However, the model captures the pulse of the postwar business cycle and has forecast the last two recessions in real time a year or more in advance, so I do believe it signals an intrinsic desire of the economy to return to some sort of normality, probably in the form of an L-shaped stabilization of the cycle in the near term, with perhaps some mild acceleration as measured by small gains on a small base in the intermediate term.  The bad news is that the politicians will probably not address fundamental problems of fiscal imbalance and maldistribution of income, debt and wealth (which I believe is the cause of the current crisis—the social contract is broken).  See Paul Farrell’s recent commentary on this.  As I mentioned in the post on confidence levels, I believe the depression will hit bottom in about five years.  The recession forecasting model should give ample warning of the oncoming collapse.

‘Animal spirits’ still on track to rise

The 0.2 percentage point increase in the unemployment rate is not enough to throw rising “animal spirits” or confidence off track.  Americans are still depressed by an unemployment rate higher than adaptation level but they are getting used to it.  Given the forecasted path of unemployment shown in the graph I expect the current cycle to peak in early 2013 and then for a walloping fiscal debt crack-up to send us to the bottom of the current, still developing depression.  Even with a much more bearish forecast for the unemployment rate the qualitative conclusions hold.  Unemployment is forecast to rise for the next year.

The bubble at the end of the age

Before commenting on the stock market, which everyone cares about, I must indulge a small obsession with the way that mainstream economists are able to ignore relevant research in psychology even when they are doing inherently psychological work themselves, and even when the relevant work in psychology was actually published by an economist—but in a journal with “psychology” in the title. 

I refer of course to the article by Robert Shiller in Sunday’s New York Times, “An Echo Chamber of Boom and Bust,” which apparently resulted from Shiller talking to himself in his office.  In their book on “animal spirits” Shiller and Akerlof ignore a seminal article in the Journal of Economic Psychology relating “animal spirits” to the first law of psychology, the Wundt Curve describing sensitivity to adaptation level. (see this and this).  The obscure economist who wrote these papers might reasonably be really pissed off at the arrogance of Shiller and Akerlof.  I have it on good authority that Shiller declined to respond to correspondence on the subject.

Paul Samuelson once said words to the effect that, "As economists, we don’t care what other people think of our work—we write for ourselves.”

I’m just a blogger, as Calculated Risk likes to say (and CR is someone who does respond to emails, BTW). 

As August has come to a close and a lot of folks are looking for a stock market pullback (and yours truly is slightly bloody from a small –2 beta position on the NDX), I thought it would be appropriate to update the Coppock Guide and my own “animal spirits” of the stock market oscillator that are both monthly models. 

The picture is pretty astoundingly bullish on a pure emotion basis.  Of course, it would require a veritable tsunami of liquidity to float the market on top of an economy that is in a depression.  But that’s what we have a Federal Reserve and Goldman Sachs for! 

Here’s the picture:

Click on graph to see bigger image in new window.

Now, I am as blown away as anyone to think that the U.S. stock market would have the unmitigated chutzpah to complete a gigantic head-and-shoulders pattern by climbing another ~50 percent from today’s levels, but this is what the emotional nature of the market wants, and it’s what Ben Bernanke would most like to deliver.  It might happen after the current pull back, as more economic indicators stabilize, and the dollar rallies on weakness in foreign economies.

It could be the bubble at the end of the age for America.  The way things are going the next collapse, due by my reckoning in 2013 or 2014, will be worse than this one.  The stock market will see new lows, in real terms if not in nominal terms.  If, as many expect, the government responds to fiscal bankruptcy by starting a big hot war and getting an inflation or hyper-inflation going, the stock market could continue to go up.

Next “animal spirits” update will be after the unemployment rate data is released on Friday.