Guest post by Lance Roberts of Streettalklive.
The Bureau Of Economic Analysis reported that Personal Incomes in September advanced 0.4 percent from August which had increased by only 0.1 percent. More importantly, wages & salaries gained 0.3 percent tacking onto the 0.1 percent increase in August. However, digging down into the report revealed some interesting issues.
The chart below shows the changes to personal income broken down by major subcategories. The most notable change from last month’s report on personal incomes is that is that Government Social Benefits (welfare) jumped from a -1.8 billion dollar decrease in August to an increase of 12.6 billion dollars in September. This increase in social benefits accounted for more than 26% of the latest increase in personal incomes. Also, interesting is that personal dividend income rose less in September than August, presumably from stock liquidations, while personal interest income declined by 12.1 billion dollars again in September.
While investors still focus on one subject only, Europe, the Asian Tigers are definitely getting more tired. Latest out we had the Chinese figures earlier today, showing China is getting closer to contraction. Is the “sudden” slowdown going to be used as an excuse for more stimulus? From the Telegraph.
The bellwether economies of Taiwan and Singapore both contracted in the second quarter. Korea’s industrial output fell in June, while Japan’s manufacturing PMI index fell in July to the lowest since the Fukushima disaster, with the export gauge crashing to recession levels.
“Factory output, new orders and exports all decreased at the fastest rates since April 2011. These are worrying developments given the weakness of global demand,” said Markit’s Alex Hamilton.
While China has ostensibly held up much better, electricity use has been falling in recent months. “Unless the Chinese steel and aluminium industries have discovered how to make do without electricity, it would appear that their growth has virtually ground to a halt,” said Berkeley professor Barry Eichengreen.
Some points on interest rates and the creation of housing bubbles. What goes up must come down. From Voxeu.
In the aftermath of the recent global financial crisis, central banks have been widely criticised for having kept interest rates too low for too long. Several authors have argued that exceptionally low interest rates spurred excessive risk-taking in the banking sector, leading to the build-up of imbalances and finally the crisis (see eg Ciccarelli et al 2011 or Altunbas et al 2010). Since property prices have been shown to play an important role during episodes of financial instability (see among others Goodhart and Hofmann 2007 and Bank for International Settlements 2004), understanding the link between monetary policy stance and the emergence of housing bubbles has become an important and topical issue for policymakers.
Great news, market is soaring on thin volume. This could turn out to be very interesting start to the year. It reminds us very much of last year’s start to the year. Markets are trying to break up on light volume, people are forced into buying this rally, and many of the “smart” shorts are covering in this very thin market. Let’s not forget, the World needs to refinance many trillions of debt this year, and yes rates will probably stay very low. El Erian on the zero rate policy, that must hold, or….By Bloomberg;
“You’ll see policy rates in the U.S. and Europe floored at or near zero,” Newport Beach, California-based El-Erian said in the interview. “I don’t think there will be any appetite or need to raise interest rates in the U.S. and Europe.”
The Federal Reserve has said it will keep its target rate for overnight loans between banks between zero and 0.25 percent through mid-2013, and is now selling $400 billion of its short- term Treasuries and reinvesting the proceeds into longer-term government debt in a program traders dubbed Operation Twist.
The year has started on a positive note. Bloomberg is picking up on the theme we outlined yesterday. There are some quite big numbers to refinance this year. Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year. The amount needing to be refinanced increases to more than $8 trillion when interest payments are included. Video below;
We have to agree with some of the emails we have received from our readers lately. Yes, the Eurozone is in a great mess, but countries like Portugal, Greece, Ireland are not of great importance to the World Economy. Investors have been focusing on the Euromezz, and seldom do we hear about the US debt nowadays. Let’s not forget, the US has now joined the 100% club, and counting. With interest rates at record lows, it is easy to forget about what would happens if interest rates start going up to a “normal” average. We doubt this time is different, and rates will stay low for ever….
Below are some charts from last year, still worth recalling.
More on the hottest topic of the day, the collapsing Gold price. As our readers know, we have not been overly positive on Gold in the short term. The trade is very crowded, volatility too high at these levels (suggesting something is “wrong”) and speculation high. A slightly more positive view and good insight on Gold, by Gresham’s Law;
It may be just me, but it seems like the majority of market participants are terrible at dealing with one of the rudiments of life as a human being; time. It is almost as if the herding man lives in constant contempt for his former self and dogmatic surety about his current convictions (whether they relate to past, present or even the future). If this hunch happens to be true, then it doesn’t take much to see the folly – for surprise surprise; as time passes the much-loved present conviction joins the realm of past regrets. So to thwart the arrogance of the gold bubble-top callers and the long-for-the-sake-of-being-long speculators here I outline why you, they and — hell — I might just buy that forthcoming parabolic move in gold.
Apologies if I sound like a broken record – but nothing about the future is obvious. However, given that the typical 21st century futureologiest has a tendency to look at the past to guide his actions – gold may be regarded as particularly perplexing. For whereas equities have never (ever) met the widespread expectation that characterises its top (i.e. a ‘permanent plateau’ of abundant delight – a cornucopia), gold has frequently met the widespread expectation that envelopes its market top; hyperinflation. Gold, widely regarded as the objectification of worriment, has no precedent of not meeting the expectation held at its market top. Unlike most other assets on the radar of the speculator, the currency price of gold has often never returned to the levels traded on the eve of the bull run.
Despite having picked the Wrong Trade, once, you should listen when Bill Gross speaks. PIMCO’s latest reading summary. We advise to read the whole article here.
- Once interest rates inch close to zero and discounted future cash flows are elevated in price, it’s difficult to generate much more return if economic growth doesn’t follow.
- Equity markets should be dominated by dividend yields and the return of capital via share buybacks, as opposed to growth.
- In fixed income assets, we suggest that portfolios should avoid longer dated issues where inflation premiums dominate performance.
What if things were so easy, lower interest rates, fix the unemployment, and voilá, the Economy is fixed. Some thoughts for those who still think that lower interest rates will lead to lower unemployment. By World Complex.
Observing the change is easy (if we disregard Keynesian axioms). Deducing the nature of the change is more difficult.
One observation that leaps out at me is this. Real interest rates fell to an extreme low in August 2005, followed by an extreme high in October 2006. They fill to an extreme low in June 2008, and rose to an extreme high in November 2008. In the first case, there were no dire effects on unemployment. But the second time around, we got a bifurcation.
Is the answer here?
Remember those interest rates? Interest rates down, market up, or? Quick recap of yields vs equities. With yields at record lows, the US is enjoying the luxury of cheap funding, but for how long? Don’t forget the average interest rate since WWII is much higher….
Flattening Yield curve will hurt Banks…
2/10s at rather low levels…
One of the Markets must be wrong, let’s see who’s right and who’s wrong.