Earnings Season Preview: Corporate Profit Outlook Not Good [View article]
Hello bbro - - -
Also, the CMI Growth Indexes are going up strongly after going through a deep 2-year trough. (CMI = Consumer Metrics Institute, latest weekly report posted here: http://bit.ly/mZNBmd.) The Growth Index is strongly weighted by durable goods sales data.
What we have are some very mixed signals right now and I have the feeling that we are just waiting for one side or the other to blink. I sense a pivot point somewhere around here and, depending on which way that goes, we may see the DJIA above 12,500 or below 10,000 at year end. I have been expecting a trading range between 10,500 and 12,500 since early in the year and I am now opening my expectations window wider. I would take a stab at 50% probability of staying within the trading range and 50% of seeing the wider window. The wider 50%, more likely higher or lower? Right now the distress in financial stocks has me giving better odds of going below 10,000. Steve's worries about corporate profits squeeze just adds to my pessimism.
Latest From Europe: Calming Markets, Fire Escapes And Collateral For China [View article]
Chris - - -
This is a PS to the previous comment. If you can do any of the analysis discussed we will offer to post it as a feature article at Global Economic Intersection (www.econintersect.com/....
Latest From Europe: Calming Markets, Fire Escapes And Collateral For China [View article]
Chris - - -
I should have cited the Daniel Gros article. I am familiar with his work as he has posted at our site: econintersect.com/b2ev...
Yes, there is more CDS transparancy in Europe than in the U.S. accounting system. But I am still looking for someone who has done the analysis work to define what the overall CDS exposures are likely to be. There may still be some lack of transarency, however, because these sovereign debt CDSs have certainly become intertwined with U.S. banks. I don't have much of an idea about how the boundaries between the IFRS and GAAP function. Perhaps you can shed some light?
So I'll go back to my implied query in the comment reply to JBG - Has anyone dug out the data to define the interconnected global CDS exposures related to European sovereign debt and the European banks that hold much of it?
Chris, do you have (or know of) any work that does that? If so, perhaps you could get some of your "hoary chestnuts" roasting on an open fire.
Latest From Europe: Calming Markets, Fire Escapes And Collateral For China [View article]
JGB - - -
Setting aside your unauthorized use of humor, right back at you. I have been looking for somebody who can get to the data to address the CDS issue. If you recall the entire panic over the Lehman collapse, it was the lack of knowledge of what the final CDS exposure would end up being that was the biggest crushing burden in the next few weeks.
The situation is something like a giant loop of dominoes stood on end. If only one falls it can take out everything else in the loop.
In the fall of 2008 the biggest domino turned out to be AIG and something well over 100 billion (I think about $170 billion?) was poured into that hole in the dike.
Financial weapons of mass destruction, indeed.
But it's all good. Some people made many millions selling those bombs.
The Current Stage Of The European Crisis And The Phantom of Rescue [View article]
Seth - - -
Yes, the graphic is like a piece of Fantasia, but the message is when things are booming (euphoria) risk is highest and when there is despondency and depression there is more opportunity.
I'm one who likes to measure correlation functions and coefficients so the graphic does little more than amuse me. Consider it a cartoon, if you like.
I know you are attempting humor, but it might be called ghoulish humor. In June Brad Lewis asked "Will Greece be Colonized?" econintersect.com/b2ev... (and that was a serious discussion)
They just put it up a little while ago (almost 24 hours after submission). Tonight they put this article on the front page. I thought I was writing time senstive stuff but maybe not. Perhaps it is timeless? (:
We have the latest news on the crisis summarized tonight at GEI News but I don't think we'll post it at Seeking Alpha - there is not much original material - just a brief summary of the news and what some others have written. econintersect.com/b2ev...
I submitted an article to SA yesterday which discusses the China-Italy negotiations and reviews what several others have reported on the crisis. It has not been accepted or rejected as yet, so it is in limbo. It is based on the GEI News brief: econintersect.com/b2ev...
We've Got A Sub-Par Recovery For Investment, Not Consumption [View article]
The data indicates the problem is excess capacity. Consumption expenditures have risen without a corresponding increase in investment. There are two aspects to this:
1. Imports continue to be larger than exports so the inference is that the excess capacity is not only domestic but is also overseas. The domestic capacity utilization is at a low level (77.5% for July, data not shown by the author).
2. The excess capacity could become utilized if consumption was larger than it is, so the statements indicating that consumption is not the way to address the problem are not considering the entire picture.
The article is operating on the assumption that demand is sufficient because if has recovered.
The assumption could just as well have been that the level of consumption is providing insufficient demand to warrant increased investment.
The narrowness of the implied assumption reveals the economic theory bias of the author. Not that the bias is wrong - it is simply preventing a more complete discussion of possible solutions.
The quote used contains the following:
<<<<Every Keynesian seems to believe that because consumers are in a dreadful funk, only government stimulus spending can rescue the moribund economy, given (to them, at least) that investors will not spend more because the Fed, having already driven interest rates to extraordinarily low levels, cannot use conventional policies to drive them any lower and thereby elicit more investment spending.>>>&...
There simply is no effort by the quoted reference to consider the demand side of the equation. If demand were higher and capacity utilization got well above 80%, don't you think that investment in additional capacity would occur to meet the demand?
The next problem is, of course, where would the investment occur? If the pattern of the past decade is any indication, much of it wouldn't occur in the U.S.. The incentives described in the article to improve the conditions on the supply side (corporate tax reductions, etc.) are the correct ones to be evaluated. But those efforts will be ineffective if there is continued high investment overseas. And there are some accommodations to encourage investment that are very short-sighted. Abandoning good pollution control practices, for example. Do we want to compete with a cesspool operation?
There is simply no effective way to proceed that ignores the fact that demand is insufficient to use capacity already built. Until there is progress on both sides of the economic balance sheet we will not work our way out of this mess.
Greek Debt: Being Given Away And Still Overpriced? [View article]
skiman - - -
My logic is simple but my explanation in the article may not be.
I am comparing the Greek bond to the comparable German bond. In the case of the two-year instruments, the German rate is negligible (0.43%) compared to the Greek rate (~45%) so the risk free interest rate was ignored in the back-of-the envelope calculation.
What follows may be more detailed than you need. If so, I apologize in advance.
When we come to the ten-year case, the German yield is around 1.8% and the Greek yield around 18% (that was on Friday, today over 19.5% last time I checked). Let’s take a hypothetical Greek ten-year auction at Friday’s yield. That means the implied return at maturity is principal plus 180% (ignoring compounding / reinvestment effects).
If no principal is repaid then 100% of the 180% can be applied to recovering principal and the remaining accumulated coupon payments are now 80%. (The spread to the 10-year bund accumulates to about 62% over ten years.) The two investments end up equivalent if the two ultimately return the same amount. That means that to recover 1,180 euro accumulated by the bund including return of principal, the Greek bond uses the first 1,000 euro to replace principal and the next 180 is the first year coupon. Any of the remaining 9 years of payments are in excess of the break even vs. the bund and can be considered a risk premium on a defaulting Greek bond investment (total principal default).
The assessment of the market price in this case is that if Greek 10-years default on principal completely, the most probable case the market is pricing (dividing line between making money and losing money vs. the bund) is for about 90% of the coupon payments to also be forfeited.
What if the ultimate haircut on principal is 50%? Then the accumulated 1,800 euro (for 1,000 face value and investment) is applied 500 euro to replace lost principal and 1,300 euro for interest payments. This means that the Greek bonds will exceed the return of the equivalent bund by 1,120 euro (1,300 – 180) if all coupons are paid. Equivalence of return is achieved when 3.8 years of Greek coupons are received (500 principal payment + 500 replaced principal from coupon payments + 180 additional coupons). The needed coupon payments to reach equivalence is 680 euro. That is 680 / 180 = 3.8 years of coupon payments. Payment of any of the additional 6.2 years of coupons is the risk premium for a 50% haircut.
If the market has priced the Greek 10-year correctly at Friday’s yield, the haircut for exact equivalence to the bund is 62% for the Greek bond. That is the reduction of principal repaid at maturity if all 10 years of coupons are paid at 18%. The math: 1,800 - 1,180 = 620, the amount applied to replace haircut.
Again I’ll repeat that these are back of the envelope numbers and will be modified if reinvestment/compounding are included.
I have a project that needs to be finished which is to construct the historical and future projected age demographic tables for the U.S. It won't take much more effort to finish - I just have to find a few hours to wrap it up.
My reason for doing this is the very point that you raise. When evaluating productivity only the working age population (say 20-65) should be used for normalization. When evaluating "wealth" the entire population should be used for normalization.
There are many other uses of demographic population data, including forward projections. I intend to have demographics estimated to 2050.
I do not know if anyone else has done such a project, but if they have it may be brought to my attention when I post my results and make the spread sheets available for people to work with. Then I will have something against which to evaluate possible shortcomings in my analysis.
First let me address your question about how many work visas are granted each month. We have posted some discussion about how U.S. employers "game" the work visa system to undercut employment opportunities for Americans. (Pardon my not digging for the links right now.)
A much bigger problem was pointed out in work I reported on at the beginning of the year. Using official data I was able to show how many millions of jobs had been (in effect) exported by the negative trade balance growth over the past 20 years. See econintersect.com/word....
That was followed by analysis that showed what economic growth we had during that period could not have occurred without the jobs being "exported" and a wave of immigration (legal and illegal) to provide enough labor. We simply did not have the demographics to support the consumption taking place during those years. (Of course the consumption was being financed by debt and shouldn't have occurred under the circumstances if Americans practiced any sort of sound finance. But that is another story.)
So we went in debt to to raise our level of consumption of goods and services being produced by immigrants and overseas labor until the credit card maxed out. When things collapsed and demand fell we no longer needed the same level of "labor" from overseas and immigration and we actually saw aggregate demand drop to the point that there were not even enough jobs for the existing native labor force.
If we hadn't "shipped jobs" overseas to places like India and China but had instead used temporary imported labor that was properly accounted for, then we could have sent the temporary labor back home and opened jobs for the Americans who had been insufficient in number in the good times and had become excess in number in The Great Recession.
But we didn't have a temporary solution to the labor shortage that existed before the recent years - the solution was permanent and the jobs "sent" to China and India, for the most part, are never coming back. And immigrant labor has never been properly managed so that it can be effectively used when needed and sent home when not needed.
Earnings Season Preview: Corporate Profit Outlook Not Good [View article]
Also, the CMI Growth Indexes are going up strongly after going through a deep 2-year trough. (CMI = Consumer Metrics Institute, latest weekly report posted here: http://bit.ly/mZNBmd.) The Growth Index is strongly weighted by durable goods sales data.
What we have are some very mixed signals right now and I have the feeling that we are just waiting for one side or the other to blink. I sense a pivot point somewhere around here and, depending on which way that goes, we may see the DJIA above 12,500 or below 10,000 at year end. I have been expecting a trading range between 10,500 and 12,500 since early in the year and I am now opening my expectations window wider. I would take a stab at 50% probability of staying within the trading range and 50% of seeing the wider window. The wider 50%, more likely higher or lower? Right now the distress in financial stocks has me giving better odds of going below 10,000. Steve's worries about corporate profits squeeze just adds to my pessimism.
Latest From Europe: Calming Markets, Fire Escapes And Collateral For China [View article]
This is a PS to the previous comment. If you can do any of the analysis discussed we will offer to post it as a feature article at Global Economic Intersection (www.econintersect.com/....
Latest From Europe: Calming Markets, Fire Escapes And Collateral For China [View article]
I should have cited the Daniel Gros article. I am familiar with his work as he has posted at our site: econintersect.com/b2ev...
Yes, there is more CDS transparancy in Europe than in the U.S. accounting system. But I am still looking for someone who has done the analysis work to define what the overall CDS exposures are likely to be. There may still be some lack of transarency, however, because these sovereign debt CDSs have certainly become intertwined with U.S. banks. I don't have much of an idea about how the boundaries between the IFRS and GAAP function. Perhaps you can shed some light?
So I'll go back to my implied query in the comment reply to JBG - Has anyone dug out the data to define the interconnected global CDS exposures related to European sovereign debt and the European banks that hold much of it?
Chris, do you have (or know of) any work that does that? If so, perhaps you could get some of your "hoary chestnuts" roasting on an open fire.
Latest From Europe: Calming Markets, Fire Escapes And Collateral For China [View article]
Setting aside your unauthorized use of humor, right back at you. I have been looking for somebody who can get to the data to address the CDS issue. If you recall the entire panic over the Lehman collapse, it was the lack of knowledge of what the final CDS exposure would end up being that was the biggest crushing burden in the next few weeks.
The situation is something like a giant loop of dominoes stood on end. If only one falls it can take out everything else in the loop.
In the fall of 2008 the biggest domino turned out to be AIG and something well over 100 billion (I think about $170 billion?) was poured into that hole in the dike.
Financial weapons of mass destruction, indeed.
But it's all good. Some people made many millions selling those bombs.
The Current Stage Of The European Crisis And The Phantom of Rescue [View article]
Yes, the graphic is like a piece of Fantasia, but the message is when things are booming (euphoria) risk is highest and when there is despondency and depression there is more opportunity.
I'm one who likes to measure correlation functions and coefficients so the graphic does little more than amuse me. Consider it a cartoon, if you like.
Europe On The Brink [View article]
I know you are attempting humor, but it might be called ghoulish humor. In June Brad Lewis asked "Will Greece be Colonized?"
econintersect.com/b2ev...
(and that was a serious discussion)
Europe On The Brink [View article]
They just put it up a little while ago (almost 24 hours after submission). Tonight they put this article on the front page. I thought I was writing time senstive stuff but maybe not. Perhaps it is timeless? (:
We have the latest news on the crisis summarized tonight at GEI News but I don't think we'll post it at Seeking Alpha - there is not much original material - just a brief summary of the news and what some others have written. econintersect.com/b2ev...
Europe On The Brink [View article]
I submitted an article to SA yesterday which discusses the China-Italy negotiations and reviews what several others have reported on the crisis. It has not been accepted or rejected as yet, so it is in limbo. It is based on the GEI News brief: econintersect.com/b2ev...
We've Got A Sub-Par Recovery For Investment, Not Consumption [View article]
1. Imports continue to be larger than exports so the inference is that the excess capacity is not only domestic but is also overseas. The domestic capacity utilization is at a low level (77.5% for July, data not shown by the author).
2. The excess capacity could become utilized if consumption was larger than it is, so the statements indicating that consumption is not the way to address the problem are not considering the entire picture.
The article is operating on the assumption that demand is sufficient because if has recovered.
The assumption could just as well have been that the level of consumption is providing insufficient demand to warrant increased investment.
The narrowness of the implied assumption reveals the economic theory bias of the author. Not that the bias is wrong - it is simply preventing a more complete discussion of possible solutions.
The quote used contains the following:
<<<<Every Keynesian seems to believe that because consumers are in a dreadful funk, only government stimulus spending can rescue the moribund economy, given (to them, at least) that investors will not spend more because the Fed, having already driven interest rates to extraordinarily low levels, cannot use conventional policies to drive them any lower and thereby elicit more investment spending.>>>&...
There simply is no effort by the quoted reference to consider the demand side of the equation. If demand were higher and capacity utilization got well above 80%, don't you think that investment in additional capacity would occur to meet the demand?
The next problem is, of course, where would the investment occur? If the pattern of the past decade is any indication, much of it wouldn't occur in the U.S.. The incentives described in the article to improve the conditions on the supply side (corporate tax reductions, etc.) are the correct ones to be evaluated. But those efforts will be ineffective if there is continued high investment overseas. And there are some accommodations to encourage investment that are very short-sighted. Abandoning good pollution control practices, for example. Do we want to compete with a cesspool operation?
There is simply no effective way to proceed that ignores the fact that demand is insufficient to use capacity already built. Until there is progress on both sides of the economic balance sheet we will not work our way out of this mess.
Greek Debt: Being Given Away And Still Overpriced? [View article]
My logic is simple but my explanation in the article may not be.
I am comparing the Greek bond to the comparable German bond. In the case of the two-year instruments, the German rate is negligible (0.43%) compared to the Greek rate (~45%) so the risk free interest rate was ignored in the back-of-the envelope calculation.
What follows may be more detailed than you need. If so, I apologize in advance.
When we come to the ten-year case, the German yield is around 1.8% and the Greek yield around 18% (that was on Friday, today over 19.5% last time I checked). Let’s take a hypothetical Greek ten-year auction at Friday’s yield. That means the implied return at maturity is principal plus 180% (ignoring compounding / reinvestment effects).
If no principal is repaid then 100% of the 180% can be applied to recovering principal and the remaining accumulated coupon payments are now 80%. (The spread to the 10-year bund accumulates to about 62% over ten years.) The two investments end up equivalent if the two ultimately return the same amount. That means that to recover 1,180 euro accumulated by the bund including return of principal, the Greek bond uses the first 1,000 euro to replace principal and the next 180 is the first year coupon. Any of the remaining 9 years of payments are in excess of the break even vs. the bund and can be considered a risk premium on a defaulting Greek bond investment (total principal default).
The assessment of the market price in this case is that if Greek 10-years default on principal completely, the most probable case the market is pricing (dividing line between making money and losing money vs. the bund) is for about 90% of the coupon payments to also be forfeited.
What if the ultimate haircut on principal is 50%? Then the accumulated 1,800 euro (for 1,000 face value and investment) is applied 500 euro to replace lost principal and 1,300 euro for interest payments. This means that the Greek bonds will exceed the return of the equivalent bund by 1,120 euro (1,300 – 180) if all coupons are paid. Equivalence of return is achieved when 3.8 years of Greek coupons are received (500 principal payment + 500 replaced principal from coupon payments + 180 additional coupons). The needed coupon payments to reach equivalence is 680 euro. That is 680 / 180 = 3.8 years of coupon payments. Payment of any of the additional 6.2 years of coupons is the risk premium for a 50% haircut.
If the market has priced the Greek 10-year correctly at Friday’s yield, the haircut for exact equivalence to the bund is 62% for the Greek bond. That is the reduction of principal repaid at maturity if all 10 years of coupons are paid at 18%. The math: 1,800 - 1,180 = 620, the amount applied to replace haircut.
Again I’ll repeat that these are back of the envelope numbers and will be modified if reinvestment/compounding are included.
Non-Farm Payrolls Below 2001 Level [View article]
Thanks. I can make reference to your aticle in the right situations.
Non-Farm Payrolls Below 2001 Level [View article]
See my reply to murmuru.
Non-Farm Payrolls Below 2001 Level [View article]
I have a project that needs to be finished which is to construct the historical and future projected age demographic tables for the U.S. It won't take much more effort to finish - I just have to find a few hours to wrap it up.
My reason for doing this is the very point that you raise. When evaluating productivity only the working age population (say 20-65) should be used for normalization. When evaluating "wealth" the entire population should be used for normalization.
There are many other uses of demographic population data, including forward projections. I intend to have demographics estimated to 2050.
I do not know if anyone else has done such a project, but if they have it may be brought to my attention when I post my results and make the spread sheets available for people to work with. Then I will have something against which to evaluate possible shortcomings in my analysis.
Non-Farm Payrolls Below 2001 Level [View article]
First let me address your question about how many work visas are granted each month. We have posted some discussion about how U.S. employers "game" the work visa system to undercut employment opportunities for Americans. (Pardon my not digging for the links right now.)
A much bigger problem was pointed out in work I reported on at the beginning of the year. Using official data I was able to show how many millions of jobs had been (in effect) exported by the negative trade balance growth over the past 20 years. See econintersect.com/word....
That was followed by analysis that showed what economic growth we had during that period could not have occurred without the jobs being "exported" and a wave of immigration (legal and illegal) to provide enough labor. We simply did not have the demographics to support the consumption taking place during those years. (Of course the consumption was being financed by debt and shouldn't have occurred under the circumstances if Americans practiced any sort of sound finance. But that is another story.)
So we went in debt to to raise our level of consumption of goods and services being produced by immigrants and overseas labor until the credit card maxed out. When things collapsed and demand fell we no longer needed the same level of "labor" from overseas and immigration and we actually saw aggregate demand drop to the point that there were not even enough jobs for the existing native labor force.
If we hadn't "shipped jobs" overseas to places like India and China but had instead used temporary imported labor that was properly accounted for, then we could have sent the temporary labor back home and opened jobs for the Americans who had been insufficient in number in the good times and had become excess in number in The Great Recession.
But we didn't have a temporary solution to the labor shortage that existed before the recent years - the solution was permanent and the jobs "sent" to China and India, for the most part, are never coming back. And immigrant labor has never been properly managed so that it can be effectively used when needed and sent home when not needed.
This demographic mismanagement was discussed in econintersect.com/word....
So I really had a much longer story to tell with this article that I basically left out. For that oversight I apologize.
Mallarde, you were so on target with your comment that I feel quite embarassed by my failure to add more of the larger picture to this post.
Gold - How Can Some See a Bubble and Others Can't? [View instapost]
As I have time I'll look for that or for the data and do the graph. The key part of that is "as I have time."