Monday, February 27, 2012

Five Leading Economic Indexes Increase

In the last week, the Conference Board is reporting increases in leading economic indexes for the Euro Area (+1.0% in January), Mexico (+0.2% in December), China (+1.6% in January), France (+0.3% in December), and Australia (+0.2% in December). 

46 Comments:

At 2/27/2012 11:50 AM, Blogger SteveH said...

ECRI, child of the Conference Board, is sticking to its recession call. Trim Tabs is as well. Both look at payrolls and real time tax collections they both say growth in both are weak. Also velocity of money continues to fall an indication of deflation.

 
At 2/27/2012 12:07 PM, Blogger Benjamin said...

Yahoo, DJIA over 13k. The snivelers, whiners and naysayers are wrong.

Dow up 60 percent since Obama took office.

Is Obama a great president? No, seriously mediocre. All we need is a mediocre president, and the private-sector will flourish.

The problem was that Bush jr. and the GOP Congress were seriously incompetent. Two unfinished wars, and a total collapse of our financial system on their watch. Medicare Part B, a larger liability by itself than the entire Social Security system.

No recession ahead, juts more slow growth. The Fed could juice things up a lot, if they would just get some nerve. Inflation dead.

 
At 2/27/2012 12:22 PM, Blogger morganovich said...

bunny-

the market is up with money supply, not the economy.

growth has died for 2 q's in a row.

gdp growth is just statistical shenanigans. deflate GDP at CPI, and growth has been pretty much zero for 2 q's.

deflate it at the kind of inflation the trade figures show and whoo boy, things do not look great.

the market is getting inundated with money due to twist and ZIRP.

it's quite possible to be bullish on that but bearish on real grwoth.

ps.

i re bought the TZA (triple negative smallcap) again right when i saw your comment.

looking to go 2 for 2 on you calling the high for the day by getting excited about the dow.

up almost a 1% already.

you are a great trading tool.

keep it up.

i will think of you as i buy myself a b-day present with the profits.

 
At 2/27/2012 12:32 PM, Blogger Buddy R Pacifico said...

"China (+1.6% in January),"

So, what does the World Bank, and a Chinese think tank that reports directly to China's State Council, write about China's economy?

"transition to a freer market system, or else face an economic crisis".

 
At 2/27/2012 12:34 PM, Blogger Jon Murphy said...

Also velocity of money continues to fall an indication of deflation.

Just a point of caution here, Steve. The velocity of money is calculated thus:

V=P/M

Where V is the velocity of money, P is the price level and M is the money supply. If P stays constant and M grows, than V will fall. This is not necessarily a sign of deflation as it is a sign of increasing money supply.

I'm not necessarily disagreeing with your analysis, but I'd just warn against making a sweeping statement without anything else to support it.

 
At 2/27/2012 12:37 PM, Blogger morganovich said...

i echo jon's sentiment on V.

you can have significant inflation with falling V.

if the real economy is flat, money grows 10% and v falls 5%, you still get a big jump in P.

 
At 2/27/2012 12:37 PM, Blogger Benjamin said...

Morgan-

Good luck with your TZA play.

You join Richard Fisher, FOMC board member, who bought $3 million (at least) in double-inverse S&P 500 ETF in June 2010--almost precisely the market bottom. He closed out at huge loss by October 2010.

Is this a market bottom or top today? I think we are nearing a long-term secular rally.

I have been saying we are in a rally mode as long as I have been posting at Carpe Diem, and that is just about when Obama entered office. Since then the Dow has rallied by 60 percent. Yet you say you are the smart one, and you have been consistently bearish in that same time frame.

No, I don't think Obama is great. I might vote for Romney. I would not vote for Santorum for other reasons unrelated to the economy (as in Santorum is a sanctimonious moralizer and a warmonger).

Let's see how you fare with TZA.

 
At 2/27/2012 12:45 PM, Blogger Benjamin said...

OMAHA, Neb. – Billionaire Warren Buffett says stocks remain relatively cheap compared to other investments right now, and the economy continues to improve slowly.

The head of Berkshire Hathaway appeared on CNBC cable network Monday to take questions about his annual letter to the conglomerate's shareholders. The letter was released Saturday.
Buffett says he believes stocks will perform better than bonds, gold or any other investment option over time. He says stocks still appear relatively cheap even after prices have improved.

 
At 2/27/2012 12:46 PM, Blogger morganovich said...

Is this a market bottom or top today? I think we are nearing a long-term secular rally.

nope.

it's just a intra day trade based on you.

with this much money coming in, betting against the tape would be very difficult.

we're generally bullish and having a great year.

you seem to feel i'm a bear on the tape.

i'm not.

i think the economy sucks, but i think money flows like this will support a market. there are always good things to own, even in a tape like 2008.

i sure would not want to be overweight cyclicals now.

 
At 2/27/2012 12:50 PM, Blogger morganovich said...

ps.

you are going to need to grasp the difference between the market and the economy at some point.

the fact that you equate being bearish on the latter automatically with being bearish on the former just underlines your lack of sophistication.

it's not that simple.

 
At 2/27/2012 1:47 PM, Blogger SteveH said...

Jon, At one time it was thought that velocity was a constant in the Equation of Exchange. It has not behaved that way as there has been a downtrend since the 1990s, (exactly when the FED started being concerned about deflation), and it has been quite volatile in previous periods.

Since velocity has continued to fall and inflation hasn't ticked up substantially I would think that the current downturn in velocity is an indication of deflation and why the FED is being accomodative to prevent it.

I think it is also another indication to be cautious about a recovery.

 
At 2/27/2012 2:00 PM, Blogger Jon Murphy said...

I see your point, Steve, but I'm not sure I agree.

With a few exceptions, prices haven't really been moving that much. If we assume P is constant, and M is increasing (which we know is true through 2 rounds of QE, Operation Twist, and the potential for a QE III), then we would expect the velocity of money to fall.

Again, I'm not necessarily disagreeing with you, but I think there are better indicators of deflation than VM

 
At 2/27/2012 2:06 PM, Blogger juandos said...

Speaking of TrimTabs Charles Biderman has this posting (short video clip): Finding Success While World Economies Shrink

'The US economy currently grosses less than $9 trillion a year in taxable income from all sources and that translates into $2.4 trillion in taxes. There is no way the US economy can grow fast enough to pay its bills. The same is true for Europe and Japan'...

skip

'At the same time as the US, Europe and Japan are imploding; China, India, Brazil among others are growing wealth very rapidly and at an increasing pace'...

 
At 2/27/2012 2:13 PM, Blogger Benjamin said...

Morgan-

I will try to become more sophisticated. Dumb ol' me, believing in the economy and market, when the DJIA has risen by 60 percent.

I am so pedestrian. Sorry.

 
At 2/27/2012 2:25 PM, Blogger Jon Murphy said...

I will try to become more sophisticated. Dumb ol' me, believing in the economy and market, when the DJIA has risen by 60 percent.

I think it's important to remember the difference between the stock market and the economy. The stock market is just one aspect of the economy. Just as we wouldn't say "the economy is in recession because the Paper Production industry is in recession", we cannot conclude the economy is growing simply because the stock market is growing. It may be an indicator, sure, but it, in and of itself, is not a reason.

The stock market, in and of itself, is meaningless. The DJIA breaks 13,000. So what? That doesn't mean anything. The stock market is an unreliable economic indicator, at best. Investors tend to react (or overreact) to small items. Take this past summer for example: the stock market plunged on debt talks in the US. Is that a sign the us economy was/would be falling? Nope. GDP still grew.

We have a weird obsession with the stock market. I say "weird" because the number has no intrinsic value.

The stock market is not the economy. It's an element of it, but not the whole thing. Just as sugar is an element of cake

 
At 2/27/2012 2:26 PM, Blogger morganovich said...

well, i must confess, as with many trades done more for fun than sense, this TZA is not going anyplace.

just sold it.

made 9 cents, 7 net of rt commis.

$700 not much of a win.

well, no indicator is perfect...

 
At 2/27/2012 2:28 PM, Blogger morganovich said...

This comment has been removed by the author.

 
At 2/27/2012 2:31 PM, Blogger morganovich said...

benji-

you really do not get it, do you?

the market is not the economy.

it's a nominal thing. the economy is real.

if money supply doubled tomorrow, the market would too, but the real economy would be unaffected.

until you see the difference, you are indeed severely unsophisticated.

like you,the stock market cannot tell inflation from real growth.

dow chemical's last q is a perfect example.

unit sales dropped, but revenues went up because price rose more than sales fell.

the stock is up this year even though a real sales decline was reported.

that's the difference between nominal and real.

the stock market can behave precisely the same way.

 
At 2/27/2012 2:42 PM, Blogger SteveH said...

Jon, velocity is the measure of the turnover of the currency to support a level of output. If that turnover is falling then economic activity is falling as well. EOE is an identity and is not very useful theorectically i.e. there is not a causation only a relationship among variables that are determined outside the EOE.

If the FED had not increased the money supply then prices would likely have fallen in 2008 and 2009 along with more output contraction but even with the stimulus and monetary stimulus nominal GDP fell for two quarters something we hadn't seen since the Great Depression.

I still think the turn in velocity in q3 of 2010 just when the stimulus was trailing off is curious. This would indicate to me some fundamental weakness in the economy that has extended to the present. It also shows how important the deficit spending has been to keep output from falling further. It is still all about aggregate demand as far as I can tell.

There would be a benefit to falling output and falling prices it would clear markets like housing faster though it would cause massive unemployment. But then we don't have the stomach for that when we can run deficits and expand the money supply.

 
At 2/27/2012 2:48 PM, Blogger morganovich said...

steeve-

"If that turnover is falling then economic activity is falling as well.'

that is not correct.

V = nT/M
where v = velcoity
nT = nominal transactions
M= money supply

lets take nT = 100 and M = 50 for a V of 2.

then, Nt goes up by 20 to 120, and so does M to 70.

V drops to 1.7, but transactions are up 20%.

you have the math on this wrong.

 
At 2/27/2012 3:00 PM, Blogger Jon Murphy said...

And the definition: the velocity of money is how often a single dollar bill changes hands. A rising/falling velocity may suggest a growing/contracting economy, does it doesn't necessarily (as demonstration by by colleague Morganovich)

 
At 2/27/2012 3:03 PM, Blogger SteveH said...

A thought on markets and the economy. Markets eventually react to real growth for that is wealth creation and trust me the equivalent purchasing power over time of total market capitalization is important. Ask portfolio managers about that one last year.

But that said the logn growth rates of M2 and the market value of equities are close. But money supply growth without output growth is just inflationary but that is not always true. During the 1970s MVoEs trailed money supply growth therefore the real adjusted value of equities declined over that decade much as the real value of equities has declined over this decade. Both periods are stock pickers markets unlike the 1980's and 1990's when indexes did just fine.

 
At 2/27/2012 3:24 PM, Blogger morganovich said...

steve-

"Ask portfolio managers about that one last year. "

funny you should mention it.

as a professional portfolio manager (i have founded and currently run 3 hedge funds) i agree that markets respond to real growth.

but they also respond to money supply and inflation.

look at dow chemical, up nicely this year, but real sales dropped in q4.

the huge run from q4-q1 has had more to do with a lack of other opportunities and money supply growth than real growth, which has slowed.

the q3-4 2011 gdp figures only look good because the gdp delflator used was so low.

q4 used an 80bp deflator vs a 320 bp cpi.

the current reported "real growth" is mostly statistical shenanigans.

 
At 2/27/2012 3:38 PM, Blogger SteveH said...

Jon and morganovich, The EOE can be manipulated as you have done but take the data and look at the relationships over time and you will not find these manipulated relationships to hold. Besides the EOE was never meant to be used as you have used it. It is an exercise to show relationships but real data show the reality of the narrow range of possibilities.

M*V = P*Q is the EoE. If velocity falls then nominal money supply must grow. If in a recession velocity falls and money supply remains constant like in the Great Depression then prices and/or real output must fall. But the determination of the variables are outside the EoE. But the monetary authorities and fiscal policy can dampen the worst effects of a recession.

But generally velocity rises in an expansion and contracts in a recession. Since the late 1990s we've seen a trend of falling velocity with slight upticks in mild recoveries. I think this indicates a fundamentally weak economy and something more is going on.

see: http://research.stlouisfed.org/fred2/graph/?id=M2V,

 
At 2/27/2012 3:47 PM, Blogger SteveH said...

morganovich, I couldn't agree with you more. Shenanigans, yes! Look at HP and supply chain manipulation and no innovation and where are they now? Almost a destroyed company. And those profits in prior periods gone in a flash because no true wealth was created. Two things are infinite, the universe and the stupidity of American Management.

 
At 2/27/2012 3:52 PM, Blogger morganovich said...

steve-

ideas like "generally" are not terribly applicable at the moment as the current fed and monetary policy is anything but typical.

money supply is growing far faster than the real economy. that tends to drive down v.

lots of "typical" indicators like the fed's bond spread model for recession are worthless in a time of twist, ZIRP, and massive purchases of mortgages by the treasury (through F+F) which them fuel levered bond purchases by banks.

with money supply growing at 10%, more than twice nominal gdp growth, it is entirely predictable that V would fall.

further the way in which m2 is being expanded matters. ZIRP, twist, and huge fed purchases of bonds along with bank requirements and leverage have wiped out the other options, so equities get big flows.

in the 70's, bond yields were attractive and a viable investment. today, you'd need to be looking at massive leverage on anything under 10 year govvies to even warrant consideration.

at 16bp yield on a 1 year, you need to be at 20:1+ just to break even on 3% inflation, and that's before taxes.

thus, one could expect far more of the created cash to flow to the equity markets than in the 70's.

 
At 2/27/2012 3:53 PM, Blogger Paul said...

Benji,

"Yahoo, DJIA over 13k. The snivelers, whiners and naysayers are wrong.

Dow up 60 percent since Obama took office."

Here are a few other things that are up since you voted for your boyfriend:

Unemployed Americans: Up 1 million

Unemployment Rate: up 6.4%

Gas price: up 100%

National Debt: up 45%

Food stamp Recipients: Up 45%

Americans in Poverty: up 6.4 million

This is a horrific performance only a mother, or Benji, could overlook.

 
At 2/27/2012 3:54 PM, Blogger Ron H. said...

morganovich: "$700 not much of a win."

Yeah, but not bad for a 2hr dip in the pool. What kind of return is that on an annualized basis? :)

 
At 2/27/2012 3:56 PM, Blogger morganovich said...

steve-

while there is certainly no shortage of bad management out there (and carly fraudarino was ceryinly up there on the list of liars and value destroyers, check out her time at LU), there are also always lots of great ones too.

IBM looked like ti was cooked, but had a VERY successful reinvention.

the same is true of apple, though i fear their rein is coming to an end.

personally, i prefer micro caps because you get much purer plays on management and innovation and lack the bureaucracy and legacy issue of the big guys.

i prefer to invest in the clever little rodents eating eggs than the big dinosaurs laying them.

 
At 2/27/2012 4:04 PM, Blogger morganovich said...

"Yeah, but not bad for a 2hr dip in the pool. What kind of return is that on an annualized basis? :)"

ahh, the annualization game.

you can gin up all manner of misleading stuff that way.

if i only made winning trades, well, then i'd have a unicorn to ride and maybe a magic mug that never ran out of beer.

but putting $180k to work to make $700 is not my idea of good investing. i'm really not much of an intraday trader.

if i were still in, i'd be up twice as much, but i hate holding stuff like that through overnight rebalances for no good reason.

but bunny made me a nice little pile friday-this AM when i caught a full point, so it works out. i'll get myself something nice for my day.

still, this is a silly thing for me doing and i'm going to knock it off.

it was more a proof of concept than anything else and i have now tainted the indicator by telling him about it.

i should probably have shut up.

 
At 2/27/2012 4:16 PM, Blogger Paul said...

Morganovich,

heh, too bad you tainted the indicator. As Ann Coulter once said of Al Gore: Benji is always leaping into the mosh pit at the precise moment the crowd parts.

 
At 2/27/2012 4:28 PM, Blogger SteveH said...

morganovich, I'll stop beating this dead horse with this post. The fall in velocity during the 2007-2009 recession predated the jump in M2 growth from its pre-recession rate. see:

http://research.stlouisfed.org/fred2/graph/?graph_id=67376&category_id=0

Growth in M2 was fairly constant into the recession and the rate of fall of velocity was reduced as soon as growth in M2 accelerated.

 
At 2/27/2012 4:31 PM, Blogger Ron H. said...

MV = PT

It's my understanding that Benjamin Anderson, and later Hayek, pretty well falsified Fisher's mechanical quantity theory of money? What am I missing?

 
At 2/27/2012 4:45 PM, Blogger Ron H. said...

morganovich: "if i only made winning trades, well, then i'd have a unicorn to ride and maybe a magic mug that never ran out of beer."

I must have misunderstood. I thought you DID have those things. :)

"but putting $180k to work to make $700 is not my idea of good investing."

I agree.

"but bunny made me a nice little pile friday-this AM when i caught a full point, so it works out. i'll get myself something nice for my day."

Well, happy birthday, old man.

"it was more a proof of concept than anything else and i have now tainted the indicator by telling him about it."

We can only hope so, I wouldn't automatically skip over his comments if he had something new to say.

 
At 2/27/2012 4:52 PM, Blogger morganovich said...

steve-

no, i get it.

my point is just that we are operating in such a bizarre environment right now full of weird if not flat out unprecedented monetary influences that the whole thing is a black swan.

normal indicators, especially single factor ones, just don't work.

i agree that a drop in V CAN indicate a slowdown (and i believe the economy stalled utterly in h2 2011) but my point was that is does not ALWAYS indicate one.

i'm just leery of it as a single factor predictor. it can mean a number of things.

witht he kind of m2 growth we are seeing in conjuntion with pretty much zero real growth, one would expect V to drop.

might it be dropping more because of a slowdown? yes. but separating that from the drop based on M growth and finding an accurate way to assess price is no easy task.

i'm just pointing out that as a single factor, its predictive value is low right now.

bond spreads often mean somehting as well, but they are worthless right now as a predictive indicator and have, in turn, made things like the LEI worthless as well.

this is the kind of market where you have to tear everyhting down to first principles and do all the math.

the traditional 1 factor indicators are badly tainted if not useless.

real gdp and cpi are a mess. u3 is an even bigger joke than usual. LEI etc are all being driven more than 100% by bond spreads and equity prices, which, in turn, are being driven by the fed.

this is the kind of situation you (hopefully) see once in a lifetime. it would be complex enough if the federal agencies tasked with reporting data were not so determined to distort the facts and lie to us.

the census guys seem to be the only ones trying to paint an honest picture.

compare their inflation data (on trade) with the BLS or BEA and it's pretty shocking.

the BLS is over 70% lower and the BEA is more like 90% (and just flat out farce).

we are in a market where no one knows what to believe or when the tide of easy money might start going back out.

it's going to be pretty sporty for a while.

 
At 2/27/2012 4:53 PM, Blogger morganovich said...

"Well, happy birthday, old man."

thanks.

i have 2 more glorious weeks in my 30's, then, it's all over.

gonna need some pants that come up to my pecs and some white shoes.

 
At 2/27/2012 5:00 PM, Blogger morganovich said...

ron-

"It's my understanding that Benjamin Anderson, and later Hayek, pretty well falsified Fisher's mechanical quantity theory of money? What am I missing?"

i don't think you can really ever falsify MV = PT.

in the end, it's really just an identity, essentially a tautology.

V is an abstract value defined as PT/M. it's not a value that can ever really be measured directly in a real economy, only defined and calculated.

as such, i have no idea how it could possibly be falsified.

you can argue over whether it matters or has any predictive value (it's not something i ever look at or use predicatively) but the relationship itself is entirely definitional. V is V because that's how it is defined.

 
At 2/27/2012 6:01 PM, Blogger Benjamin said...

Oh sure. Morgan went triple short on a rally day and made money. Okay.

 
At 2/27/2012 6:44 PM, Blogger morganovich said...

"Oh sure. Morgan went triple short on a rally day and made money. Okay."

check the timestamps bunny.

there was a lot of up and down today.

bot at 18.30, sold at 18.39.

would have done better if i'd held until the close.

also note:

the down closed DOWN, not UP. so did the russell.

and you wonder why i doubt your investment acumen...

 
At 2/28/2012 3:01 AM, Blogger Ron H. said...

"gonna need some pants that come up to my pecs and some white shoes."

Yeah, the nice thing about being 40 is you can dress any way you like.

 
At 2/28/2012 3:34 AM, Blogger Ron H. said...

morganovich: "
V is an abstract value defined as PT/M. it's not a value that can ever really be measured directly in a real economy, only defined and calculated.

as such, i have no idea how it could possibly be falsified.
"


I guess "falsified" was a poor choice of terms. I should have instead stated that Anderson showed that there is no fixed relationship or ratio that exists between the quantity of money and the price level, as a formula like V = PT/M would suggest, as it ignores time.

 
At 2/28/2012 9:40 AM, Blogger morganovich said...

ron-

actually, that equation suggests the opposite.

VM = PT reflects a highly changeable relationship between P and M for any given value of T.

V changes, so the relationship changes as well. i think his issue (with which i agree) is that since V is a derived variable and not one you can really predict, that the whole thing was just sort of a fudge factor and lacked predictive value.

 
At 2/28/2012 2:03 PM, Blogger Ron H. said...

morganovich: "V changes, so the relationship changes as well. i think his issue (with which i agree) is that since V is a derived variable and not one you can really predict, that the whole thing was just sort of a fudge factor and lacked predictive value."

I believe you are correct.

Hazlitt would say that the two sides of the equation are equal because they are identical. That what is paid is equal to what is received, and to speak of the velocity of circulation of money is the same as talking about the volume of transactions.

I think this equation is used to justify inflating the money supply.

 
At 2/28/2012 2:51 PM, Blogger juandos said...

Dump the the Conference Board, go with the Apple Index instead...

iBubble: Apple's Market Cap Is Now The Same As The Entire Retail Sector, Bigger Than All The Semis

This is simply stunning: one company, which has two flagship products, has a bigger market cap than the entire Semiconductor space, and is just shy of the entire S&P Retail sector....

 
At 2/28/2012 3:02 PM, Blogger morganovich said...

"I think this equation is used to justify inflating the money supply."

to be honest, i've never really been sure what anyone thinks the use of that equation is.

i guess you could make some assumptions about the most practicable/desirable level of V (which changes with technology, you can send 1's and 0's much faster than gold coins) and then try to set M for any given PT, but frankly, that seems silly to me as opposed to just targeting P.

 
At 2/28/2012 9:20 PM, Blogger Ron H. said...

morganovich: "to be honest, i've never really been sure what anyone thinks the use of that equation is."

Thanks. I have felt that way myself, but thought I might be missing something. SteveH spoke of it earlier on this thread as if it was something of value.

I can now put it back in the folder labeled things I don't need.

 

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