Tag Archives: economics

Always Think About Inflation

profit-loss-riskMy Thoughts About This: Inflation is one of those existential threats I always talk about with clients. But it’s like watching a car rust. You simply don’t notice it on a daily or monthly basis.

But the Oh MY God inflation that happened to the Weimer Republic in 1921-24 or perhaps more recently in Argentina, is enough to make you pay attention. However, I recall an understanding from college economics that some inflation is a good thing. It validates the idea behind the need for an economy to grow, as opposed to one that shrinks.

Meanwhile, in Russia, with the world watching Putin play strongman in Syria and with Turkey, the Russian economy is shrinking rapidly. It’s down about 4% so far this year and inflation right now is about 15% annually. It’s probably going to get worse.

Nov 20, 2015 By Rusty Vanneman

Inflation — and how to outpace it — should always be a top concern for investors. Over the last several years though, it really hasn’t.

Inflation, as defined by the Consumer Price Index, has been falling for about four years and has now essentially flat-lined, with 0% year-over-year changes. Other inflation measures, such as the Producer Price Index and import prices, have recently had negative year-over-year changes, and the Personal Consumption Expenditures Price Index (PCE) has lagged Federal Reserve targets for more than three years. No wonder investors aren’t all that worried.

Nonetheless, advisers and investors should remain vigilant. Investing really isn’t about beating benchmarks so much as meeting long-term objectives and liabilities. For long-term investing to be successful, long-term returns need to outpace inflation. For example, what good is getting a 4% return when inflation is 5% (which would be a -1% real return)? It’s better to have a 3% return when inflation is 1% (for a real return of +2%).

Inflation may be finally starting to return. Some measures of inflation are starting to perk up and there are indications of more inflationary upticks moving forward. Take the CPI. If we strip out food and energy (otherwise known as Core CPI), we see closer to 2% year-over-year growth — and the latest data is starting to move higher. In addition, the economy is witnessing rising house prices and wage growth. These are important clues.

Higher housing prices flow through not only to higher housing costs for homeowners, of course, but also eventually to non-homeowners as rents will start to increase. And as for wage growth, which does have a chicken and an egg relationship with inflation, it is definitely on an upswing.
How can investors fight inflation? There are several traditional ways.

One is to emphasize real assets, which derive their value from physical or tangible assets. They include commodities, natural resource stocks and real estate. These types of holdings typically perform better during inflationary periods. Another attractive feature of real assets is that they typically have low correlation with stocks and bonds.

In addition, another asset class that has tended to do well in inflationary environments is emerging market stocks. Given their traditional production/consumption of commodities, this connection has historically made sense.
Examples of emerging market ETFs:
• Emerging Markets:
o Vanguard FTSE Emerging Markets (VWO)
o Wisdom Tree Emerging Markets Equity Income (DEM)
o iShares Core Emerging Markets (IEMG)

What about fixed-income investing? Historically, when inflation is rising, so are interest rates. The best thing investors can do is shorten duration (i.e., decrease interest-rate sensitivity by emphasizing shorter-term bonds over longer-term bonds) and be tactical by emphasizing certain fixed-income sectors such as high-yield corporate bonds (since it’s easier for companies to pay back debt with inflated prices) and inflation-linked bonds (which are linked to actual inflation and should outperform nominal bonds).

Examples of ETFs in fixed income that should help performance in an inflationary environment:
• Short maturity:
o PIMCO Enhanced Short Maturity (MINT)
o iShares Floating Rate Bond (FLOT)
o Powershares Senior Loan Portfolio (BKLN)
• High yield:
o PIMCO 0-5 Year High Yield Corporate (HYS)
o iShares iBoxx High Yield Corporate (HYG)
• Inflation-linked Bonds:
o PIMCO 1-5 Year U.S. TIPS Index (STPZ)
o iShares TIPS Bond ETF (TIP)

In the end, long-term investors need to remain concerned about real returns. Preserving the ability to pay future inflation-adjusted liabilities remains tantamount to achieving long-term financial success.

Rusty Vanneman is chief investment officer at CLS Investments.

China’s Currency Conundrum

china-currencyMy Comments: Our standard of living, yours and mine, used to be a function of how well we built our house and how well we managed to feed and clothe ourselves. That was perhaps 250 years ago, a single blip in the passage of time.

A blip later it’s a little more complicated. Among the forces at work today is the ability of a few billion people, living on the other side of the planet, to build their houses, feed themselves, and influence their government.

It wasn’t easy a blip ago, and it’s not easy now, just different.

October 23, 2015 Commentary by Scott Minerd

There is a striking discontinuity of thinking about the greatest economic headwind facing the world today: the slowdown in China. Investors seem to universally agree that China will continue to weigh on the global economy until it devalues its currency, yet few think such an adjustment is likely anytime soon. Passive Chinese policymaking can provide a more benign environment for risk assets in the short-term, but ultimately, it holds back the world’s second largest economy and, consequently, global growth.

The bottom line is that China cannot remain competitive if it does not significantly devalue the renminbi (RMB). Consider that Japan, China’s fourth largest trading partner, has seen its currency weaken by 35 percent against the RMB since late 2012, just before Prime Minister Shinzo Abe came to power. For China, the optimal approach would be a long glide path of currency depreciation that would ultimately act as a catalyst for stronger economic growth in China and in emerging markets. For many reasons, a dramatic adjustment of the RMB is untenable for Chinese policymakers. A sudden Chinese devaluation would pose serious financial stability risks in China and around the world. If this were to happen it could push U.S. 10-year Treasury yields below 1 percent as capital rushes to find a safe haven. To this effect, Chinese policymakers are expected to announce a 2020 deadline for dismantling currency controls as part of the country’s 13th Five-Year Plan. The current proposal, to be debated at the Chinese Communist Party’s upcoming plenum, reportedly includes an open-ended commitment to speed up these reforms. Still, China is unlikely to take any dramatic action in the near term, which is consistent with the 50-basis-point reduction in the reserve requirement ratio overnight. Expect more of the same.

In the meantime, the impact of China’s slowdown is having a marked effect on Japan, Europe, and the United States. I do not believe the situation in China will derail the U.S. economic expansion, but it poses a serious threat to Europe and Asia and puts pressure on their central banks to act. At this juncture, however, it does not much matter how they respond. If benchmark interest rates were 4 percent, for example, and quantitative easing pushed rates to 2 percent, it would have a meaningful effect on economic activity. But with 10-year government yields at 0.50 percent in Germany and 0.30 percent in Japan, further quantitative easing seems unlikely to do a whole lot in terms of stimulating economic activity, though it can boost risk assets in the near-term. Case in point is the bounce that followed European Central Bank Chief Mario Draghi’s recent comments alluding to the possibility of more stimulus in December.

In the United States, I am becoming less convinced that monetary policy will lift off this year. My base case is now that there is only a 50/50 chance that the Fed moves in December. William Dudley, President of Federal Reserve Bank of New York and Vice Chairman of the Federal Open Market Committee, recently said he believed it would be appropriate to raise rates in 2015, but later said there was no urgency, especially if data did not support the move. This tells us how ambivalent the Fed is at this point about the specific date of the first rate hike after seven long years at zero percent. I see no reason to raise rates right now: The risks associated with tightening too soon are greater than the risks of delaying liftoff until next year.

The potential for higher rates, along with the headwinds of declining export activity, the strengthening of the dollar, an ongoing inventory adjustment, and continued fallout from China, has many economists on edge. Consensus estimates for U.S. third-quarter GDP have been declining steadily and many expect 1-1.5 percent growth. I believe this is too pessimistic—consumption remains strong and a figure approaching 2 percent is more realistic. The U.S. economy is clearly bearing the brunt of the headwinds I described, but I believe the market has already discounted them. Investors are being well-compensated for risk at this point, and it is prudent to consider increasing beta exposure, especially in high-yield and bank loan portfolios. As positive seasonal factors come into play, our analysis indicates that U.S. equities may increase another 7–8 percent, and that the S&P could climb to around 2,175 in the coming months. When equity prices rise heading into the holiday retail season, consumer spending also tends to be higher. This suggests that the Christmas selling season will be a reason for investors to celebrate—especially as market participants come to realize that policymakers in China are beginning a glide path to reduce domestic policy rates, which ultimately reduce the exchange value of the RMB and improve the prospects for domestic Chinese economic activity.

The conclusion is that risk assets are back in vogue. As we have indicated in the past weeks, now is the time to increase beta by adding to equities and below-investment-grade debt.

9 Charts Showing Big Global Slowdown Is On Its Way

money mazeMy Comments: There are two messages here. The first is a global recession is most likely about to happen. The second is the published report has 49 pages with dozens of charts. If looking at charts makes you happy, you will be thrilled.

Will Martin Nov. 14, 2015

The Organization for Economic Cooperation and Development released its twice yearly Economic Outlook on Monday, and it makes for pretty gloomy reading. Angel Gurria, the OECD’s secretary general spoke in Paris on Monday morning, and he reflected the OECD’s generally pessimistic tone.
“The slowdown in global trade and the continuing weakness in investment are deeply concerning. Robust trade and investment and stronger global growth should go hand in hand,” said Gurria.

Alongside the Economic Outlook, the OECD releases a huge amount of information, including a boat load of charts and graphs, some of which show just why the organization thinks that the current economic situation is so worrying.

Source article: http://www.businessinsider.com/economic-outlook-2015-key-charts-from-the-oecd-2015-11?op=1

Fifth Generation Warfare: Follow the Food!

My Thoughts About This: For several years I followed the writings of Thomas P. M. Barnett. About 3 years ago, he suddenly closed his blog. He posted thousands of ideas and articles about global economics and security issues, most of which made sense. I never forgot one of them where he predicted that by 2045, (no further forward than 1980 is backward) conflict among nations and peoples will be about food.

Keep this in mind as we re-commit boots on the ground in the middle east and how we build and maintain the defense industry going forward over the next decade. In another post he suggests that among the most civilized nations on earth, we are the best prepared to satisfy our own need for food, compared to the rest. And that will influence how our grandchildren and beyond will live and die in the coming years.

By Thomas P. M. Barnett , June 08, 2011

Everybody thinks that the future is going to see fights over energy, when it’s far more likely to be primarily over food. Think about it: The 19th century is the century of chemistry and that gets us chemical weapons in World War I. The 20th century is the century of physics and that gets us nuclear weapons in World War II. But the 21st century? That’s the century of biology, and that gets us biological weaponry and biological terror. My point: obsessing over nuclear terrorism is steering by our rearview mirror.

Which gets me to our Spanish friend over here: an actual E. coli outbreak in Europe, centered largely in Germany, kills upwards of two dozen while sickening hundreds more. The early fingers point at Spanish cucumbers, but that’s looking iffy on investigation. Truth is, we may never know, but once the accusation is levied, Spain’s vegetable and fruit export industry may never be the same, and to me, that’s an interesting pathway for what I expect Fifth-Generation Warfare (which focuses – by some experts’ definition – on the disruption of the enemy’s ability to “observe” in John Boyd’s OODA loop) will be all about in the 21st century: biological terror to create economic dislocation and loss (along with the usual panics).

Same basic dynamic happened to the US beef industry early last decade: In 2003 US exports of beef amounted to about 1.3 million metric tons. Then there was a whiff of mad cow that year. They were real cases, all right, but the cause? One cow imported from Canada was fingered. The result was clear enough, though, as US beef exports plummeted by a million metric tons. The US beef industry has struggled to regain its previous level ever since, as major Asian markets that immediately shut themselves down to US exports have been very reticent to open back up again.

My point: if you’re a terrorist looking to sow fear and confusion, disrupt supply chains and ruin crucial industries, you can’t do much better than to work some biological mischief on food networks. Make that one cow happen from Canada. Make that one batch of messed-up veggies go into Germany – whatever. If you think people are afraid of radiation (dirty nukes, etc.), that’s nothing compared to their fear of tainted food.

The timing on the E. coli outbreak in Europe is perfect: right on the heels of the “periphery” debt crises, you’ve got the same countries (Spain, etc.) squared off against the same “victims” (Germany foots the bailout bill disproportionally and now suffers disproportionally on this tainted food outbreak). Bottom line: you – Mr. Terrorist – have created tons of enmity, economic loss, and discombobulating fear. If I’m al Qaeda, I’m claiming this one on principle.

The average farm-to-fork journey in this world is now about 1,500 miles, and it’s getting longer by the week. Global climate change will make it harder to grow food across a thick band of territory (roughly up to/down to the 35th parallel) centered on the Equator. That’s where most of the population growth and water stress problems will erupt in coming decades, and it’s also where countries all tend to be highly dependent on imported food. See your Arab Spring and realize how much of this unrest is caused by rising food prices and you’ll get the overall picture.

Mark my post: this century is all about biology, rising food demand – and thus dependencies exacerbated by climate change (see the buying-up of arable land in Africa by Arab and Asian nations), and thus biological terror comes to the fore. Forget about energy nets, because they all go far more localized with smart grids, co-located generation/distribution, etc. It’s food that will be the most vulnerable global network in the future.

A Fantasy World?

deathMy Comments: My cousin vowed to stop shouting about the state of political dialog these days; he asked me to do the same, and to some extent, I’ve tried.

There are dynamics at work right now that overwhelm the electorate and the media as we stumble toward the next presidential election in 12 months. But as an economist by training, I cannot ignore the fantasy world that continues to emerge from the Republican hopefulls as they spin their training wheels.

Amanda Marcotte Nov 11, 2015

A little more than halfway through what felt like the millionth Republican primary debate, this time in Wisconsin and run by Fox Business, Rand Paul had a momentary and clearly unwelcome brush with reality. After hours of hearing one candidate after another indulge the childish fantasy that we can cut taxes and balance the budget, apparently only by cutting food stamps, Paul broke every rule in the Republican playbook and pointed out that military spending is a huge sinkhole for taxpayer money.

“How is it conservative to add a trillion dollars in military expenditures?” Paul sniped at Marco Rubio during one particularly heated moment in the debate. “You can not be a conservative if you’re going to keep promoting new programs that you can’t pay for.”

Rubio, facing a clearly unexpected challenge to the widespread Republican notion that you can cut taxes and eliminate the debt without cutting a dime on Republican-cherished budget items like the military, got flustered and tried to deflect with fifth grade debating tactics. “We can’t even have an economy if we’re not safe,” he whined. “There are radical jihadists in the Middle East beheading people and crucifying Christians.” Luckily, we were all spared him whipping out an American flag and a cross and asking us to pray for him, but you could feel it was probably coming if Paul kept pressing his point.

None of this makes Rand Paul a good guy. Paul is just as much a delusional fantasist as the rest of the GOP field. He has to be, to run for President on a dovish platform in front of a Republican crowd that eats it up when, for instance, Jeb Bush suggests that “Islamic terrorism” is the greatest threat facing the country. And he spent of the rest of the debate spinning out pure nonsense, a bunch of meaningless garbage about how he has a 14.5 percent flat tax that is “revenue neutral” and probably wipes your butt and does the dishes for you.

Still, in a debate situation where most candidates were climbing over each other to argue that their tax plan was the flattest, his point about military spending circled slightly closer to reality than most candidates dare go. Now wonder he can’t seem to get any higher than 3 percent in the polls.

One thing seemed certain during this debate: The continued popularity of Donald Trump and Ben Carson clearly sent a signal to the rest of the field that primary voters simply hate reality, particularly when it comes to economics, and will swiftly punish any candidate who feeds them anything but soothing, if ridiculous fantasies.

Republicans haven’t changed their economic views over the decades. They continue to be the party that wants to enrich the wealthy at the expense of everyone else, economic or social consequences be damned. But they’ve all clearly read the various think pieces arguing that Donald Trump is appealing to “white populists”, so the theme of the night was pretending that Republicans are here to protect the working Joe against the decadent elite as well as the vampiric poor.

The attacks on low income people started right off the bat in the main stage debate, with Donald Trump, in response to a question about the minimum wage, busting out the line of the night: “Wages are too high.”

Fox Business moderators only made Trump and Carson—the two candidates that the party elite is eager to push out of the campaign so “real” candidates can move forward—go on the record as opposed to the minimum wage. (Most Americans want a minimum wage hike.) But Rubio pounced on the question anyway, though the moderators graciously declined to ask him about it, spinning out an answer that made it sound like opposing higher wages for working class people will somehow stick it to the educated elite: “For the life of me, I don’t know why we have stigmatized vocational education. Welders make more money than philosophers. We need more welders and less philosophers.”

The audience, stoked by years of right wing media telling them to hate pointy-headed intellectuals, ate it up. But this clearly practiced talking point really crystallized the strategy that nearly every candidate employed on stage, implying that the poor and the wealthy are somehow in cahoots to screw over the middle class. And so the next two and a half hours were spent listening to a bunch of rich Republicans who want to cut taxes for even richer Republicans all pretend that they are fighting for the little guy against those rich bad guys.

In response to a question about income inequality, for instance, Rand Paul sneered, “And I think that we ought to look where income inequality seems to be the worst. It seems to be worst in cities run by Democrats, governors of states run by Democrats and countries currently run by Democrats.” God only knows what countries run by Democrats he’s talking about (two out of three branches of our federal government are controlled by Republicans), but he clearly wants you to believe that, say, New York City has a whole lot of rich people in it and Wichita, Kansas does not because New York City is somehow stealing from the working man to give to the rich. As opposed to the likelier explanation, which is that people who can choose where they want to live gravitate to big, vibrant, and yes, liberal cities like New York.

But this was the theme of the night, Republicans all bashing the rich and the big banks and swiping rhetorical ploys right out of that hated socialist, Bernie Sanders’s playbook. Nearly every candidate not named Rubio or Bush touted that perennial right wing hobbyhorse, the flat tax, and the claim, repeated well past the point of tedium, was that it’s somehow a boon to middle class taxpayers to take away their mortgage interest deductions and child credits so that the wealthy can see their tax rates cut in half or more.

But the contortions the candidates had to twist themselves into got increasingly comical as the night went on, culminating in Rubio trying to pull of one of the biggest howlers of the night: Arguing that the best way to break up big banks so they’re not too big to fail is bank regulation.

“Do you know why the big banks got big? Because big government made them big,” he said. He had some labored explanation claiming that it’s because only big banks can afford the lawyers to deal with regulations, which probably impressed people who don’t like thinking very hard, or much at all. But for the rest of us, the notion that banks in a capitalist system would be so grateful for a low regulatory system that they’d elect to stay small instead of trying to expand their power and profit margins by buying each other up is so dumb that I kind of want to slap myself for even typing that.

The reality is that every single candidate on stage has a tax plan meant to screw over the entire country so that the already wealthy can buy bigger yachts, just as it was under Bush and every Republican before him. Rubio and Bush’s tax plans require cutting so much federal spending it would tank the economy, all so that the Donald Trumps of the world can finally start wiping themselves with gold cloth instead of mere silk sheets. A few dollars thrown to middle class voters in the short term cannot hide the fact that it’s a terrible idea to grind our economy to a halt to make the rich even richer.

The flat taxers are even dumber, which is saying a lot. It is, as it always was, just about giving a bunch of money to the rich by gouging working people.

But such is the power of fantasy in this election cycle. The Republican voters clearly want to believe that they you’re sticking it to the rich by lowering their taxes and somehow that you can afford all of this, while also balancing the budget, while seriously reducing the government’s ability to earn income. Oh yeah, and while we’re in fantasy land, Ted Cruz even went so far as to claim he could abolish the IRS. Maybe we can do this without collecting any income taxes at all!

At this point, there’s no reason for Republicans not to nominate Donald Trump. You almost have to feel sorry for the guy. Everyone calls him out for being full of shit, but, sit through enough Republican debates and you quickly realize he is no more so than the rest of this sorry field.

Very Strong Jobs Numbers Underpinned By Wages

Bruegel-village-sceneMy Comments: Politicians of all stripes consider employment numbers relevant, and well they should. Right now we have the lowest unemployment numbers in this country that we’ve seen for a long time. And it’s all because of that idiot in the White House.

This came from a group called Bespoke Investment Group, a name I am not familiar with. Also, there are several charts that I’ve chosen not to replicate here. But if you want to see them, here’s the URL where I found this article: http://seekingalpha.com/article/3662136-very-strong-jobs-numbers-underpinned-by-wages?ifp=0

Nov. 8, 2015

Friday’s Employment Situation Report delivered an extremely strong Nonfarm Payrolls print (+271,000 vs +185,000 expected and 142,000 previous, revised down to +135,000). While that headline number is extremely strong, the “guts” of the report were even stronger. Unemployment fell to 5.0%, the U6 measure of broader unemployment came in at 9.8% versus 9.9% expected and 10.0% previous, and the labor force participation rate held steady.

But the real story, in our view, was wages, which were boosted in part by a recovery from an extremely weak reading in September. Even still, the gains were nothing short of breathtaking. Below we show MoM annualized wage changes, along with the level for each industry.

As shown, there were broad-based wage gains across the economy in October, with Construction leading the way, up 18.2% MoM annualized. Other “low pre-requisite” industries also had steady gains, with Leisure and Hospitality printing a steady +4.82% MoM annualized level. The strength wasn’t universal (notable weakness in Manufacturing, Retail Trade, and Other Services) but overall this was a solid wage print. Looking at Construction, below we show the MoM annualized Construction Production and Nonsupervisory wage series, MoM annualized. This was the second-best print for that series in over 20 years, eclipsing one of the worst prints in years last month.

To get an idea of the broader trend in average hourly earnings, we show the YoY change in AHE for the last 10 years. Total private wages are +2.48%, while production and nonsupervisory earnings are +2.22%. The former is the best print of the recovery and a notable move above the range that had prevailed since the recovery began. Production and Nonsupervisory wages are still underperforming, but the spread between the two YoY series moved from 0.32% in July to 0.26% this month, notable progress.

Guy Fawkes Night

My Comments: My grandson was five yesterday. It reminded me of my early days in England and my anticipation of an event that happened every November 5th. Guy Fawkes Day. Fireworks and bonfires and lots of excitement.

Here, courtesy of Wikipedia, is an explanation.

Also known as Guy Fawkes Day, Bonfire Night and Firework Night, it’s an annual commemoration observed on 5 November, primarily in Great Britain.

Its history begins with the events of 5 November 1605, when Guy Fawkes, a member of the Gunpowder Plot, was arrested while guarding explosives the plotters had placed beneath the House of Lords.

Celebrating the fact that King James I had survived the attempt on his life, people lit bonfires around London, and months later the introduction of the Observance of 5th November Act enforced an annual public day of thanksgiving for the plot’s failure.

Within a few decades Gunpowder Treason Day, as it was known, became the predominant English state commemoration, but as it carried strong religious overtones it also became a focus for anti-Catholic sentiment. Puritans delivered sermons regarding the perceived dangers of popery, while during increasingly raucous celebrations common folk burnt effigies of popular hate-figures, such as the pope.

Towards the end of the 18th century reports appear of children begging for money with effigies of Guy Fawkes and 5 November gradually became known as Guy Fawkes Day. Towns such as Lewes and Guildford (Note: I was born and lived within a few miles of these towns.) were in the 19th century scenes of increasingly violent class-based confrontations, fostering traditions those towns celebrate still, albeit peaceably. In the 1850s changing attitudes resulted in the toning down of much of the day’s anti-Catholic rhetoric, and the Observance of 5th November Act was repealed in 1859.

Eventually the violence was dealt with, and by the 20th century Guy Fawkes Day had become an enjoyable social commemoration, although lacking much of its original focus. The present-day Guy Fawkes Night is usually celebrated at large organised events, centred on a bonfire and extravagant firework displays.

Settlers exported Guy Fawkes Night to overseas colonies, including some in North America, where it was known as Pope Day. Those festivities died out with the onset of the American Revolution. Claims that Guy Fawkes Night was a Protestant replacement for older customs like Samhain are disputed, although another old celebration, Halloween, has lately increased in popularity, and according to some writers, may threaten the continued observance of 5 November.