The three technological revolutions of 2012: big data, smart manufacturing and communication

The Wall Street Journal had an interesting article about the three technological revolutions, breakthroughs of around 2012: The Coming Tech-led Boom (http://online.wsj.com/article/SB10001424052970203471004577140413041646048.html?mod=WSJ_hp_MIDDLTopStories).

They (Millsand and Ottino) compare the current time with 1912 when there were also all kind of technological revolutions occurring: mass production (the T-Ford), stainless steel, electricity and telephony/ radio. The influence of these revolutions were tremendously underestimated.

What see Millsand and Ottino as the current revolutions?
1. Big data, working in the cloud.
There are huge amounts of data that can be stored for almost nothing; from these data all kind of new services will emerge and revolutionary scientific research.
All kind of (inter)networks are interconnected including social media networks and this will become –with endless number crunching- new now unimaginable markets. A medical revolution should come from this.
2. Smart manufacturing
Mass production will be replaced by individual production with the help of new materials. More and more will be produced from a molecular base, for example with 3D printing (see The Economist: How to print a Stardivarius).
Many new new materials, new alloys were discovered in the past years. Graphene got a Nobel price. Some of these materials have properties you cannot find in nature (the invisibility cloak of Harry Potter is almost reality in experiments where cannot see things anymore).
3. Communication with smart phones etc
Billions of people communicate/ trade/ socialise simpler/ faster/ cheaper than ever with (smart) mobiles. These things can more than supercomputers from the seventies or eighties.
Michio Kaku thinks that in the future (not next year) there will be everywhere connectivity with the internet and people use chips at their eyes to get information and to do all kind of commands.

The combination of the three revolutions will trigger fast rechnological change and high productivity growth and so economic growth should become high. The society has to adapt to these changes and will push on the brakes from time to time. However, you cannot stop these changes as for example the Arab spring learned.

The writers of the article see, just like Obama in the State of the Union, that only America can, will and must lead these revolutions. That is a little short sighted, even while America has led until know in these areas and even while the demography of the US is better (=more young inventors, innovators) than in Europe/China /Japan. But the world is bigger: India (IT), Africa/ Indonesia (communication) should surprise.
Striking is that in the article clean and cheap energy is not mentioned. The last year there are many stories about how cheap sun collectors have become (80% cheaper than a few years ago), so they are starting to get really competitive.
Also the coming medical revolution with gen therapy etc could have mentioned a bit more prominently.

Loss of growth versus trend because of the credit crisis

The chart of The Big Picture (Ritholtz) shows how far the economy has fallen below trend (by part of the economy) since the credit crisis did its New Normal damage. It is questionable if it were possible to close the gaps in the coming years. First can that be possible for exports, then for investments (you need a lot of growth for this, but that is possible, as well as by residential investment when the housing market recovers as well as by software & equipment), but for consumption you see that it still moves way farther from trend. That should happen when consumption is more than 70% of GDP.

The chart of Citigroup shows that accumulation of debts and deleveraging in the US is following nicely the average path according to the New Normal of Reinhart/Rogoff. That is not the case in the UK and the Eurozone, where the debts are still way too high and not falling fast enough and so will get more New Normal times (that probably is not going to happen in Emerging Markets, the US and Germany etc).

Business Insider: report about euro for Dutch PVV will destroy support for euro and bail outs of Greece etc

As you can expect from a blog like Business Insider they had a panic header for the report that Lombard Street research has written for the influential Dutch right wing liberal party PVV about the euro: The report that will blow up the Eurozone (http://www.businessinsider.com/the-report-that-will-blow-up-the-eurozone-2012-1).
This report will be published over a few days and some parts of the report have leaked already (in Algemeen Dagblad). Will this report undermine the talks about Greece and worsen the euro crisis?

The talks about the diminishment of Greek debts with c. € 100B , increase of maturities to 30 year, lowering of interest rates to 3.6% are making progress so we read about every day. Portugal is seen almost every day as a more likely candidate for PSI and debt relief.
In the meantime the patience of Germany c. s. about non complying of Greece with deficit reduction/ tax collecting/ government spending is ending. A budget tsar from Brussels is needed that can overrule the Greek government to stop excessive spending/ not collecting enough taxes. Every new calculation shows it will become more difficult for Greece to bring back government debt/ GDP to below 120% in 2020.

What are the arguments of Charles Dumas of Lombard Street Research to make the politicians so angry about the euro that they don’t take it anymore?
1. Southern Europe needs permanently a support of 5% of their GDP, some € 150 billion, to stabilise the situation. Germany has to supply € 60B, France € 50B and the Netherlands € 15B (each year!)
2. The euro is a kind of suicide pact that only caused misery and no welfare for Germany and the Netherlands. By wage restraints the German business (and Dutch) have gained substantial market share, but the people in the street did not see anything of this. In Southern Europe the wages rose a lot more and they have profited a lot more from the euro: lower interest rates and higher government spending.
3. Joe Sixpack has since the introduction of the euro handed in thousands of euro’s of their income because of the euro adventure.

So, according to Dumas, Germany and the Netherlands should leave the Eurozone as soon as possible. The PVV will act as a good marketing instrument to sell this and together with the party that according to the polls is now the biggest party in the Netherlands, the very left wing SP there will eb almost a majority in the Netherlands to say goodbye to the euro.(It is unlikely that this will happen because other calculations showed that the euro was very profitable for the Netherlands (but only for business) and most political parties have so bad polling results they don’t want new elections, so they are in the mood to support current government). Should the Netherlands leave the euro that should mean an expensive guilder that will reduce exports a lot, softened by much higher government spending for care etc.
Business Insider is probably overestimating the power of the PVV to cause an euro crisis, but the report will influence also the german voters away from Europe.

Summary of financial economic news of the past week (January 22-29)

The FED got the most attention with its new way of communicating. Every member had to indicate for years ahead what the FED rate could be. This resulted in a solemn promise of Bernanke not to hike rates before the end of 2014. Suddenly an inflation target was presented of 2% for PCE (personal consumption expenditures weighted as in the GDP). So the US is now in a Japan trajectory with an ejection possibility when inflation should become too high. Bernanke also suggested a new round of QE was around the door.
All these wonderful things did the markets progress and the dollar regress.

In Europe the worries continued about Greece where Private Sector Involvement in the form of getting rid of c. € 100 billion of debts, while the worries also grew about Portugal. The ten year rates of Italy declined to an anaemic 6% and in Spain to below 5%.

In Germany the IFO was very good, the growth in the first quarter in Germany is very likely positive, but in France the INSEE was a mess. In Spain the unemployment rate rose to an disappointing 22.9% (reason for Fitch to lower its rating).
The growth of M3 in the Eurozone was only 1.6%, far below the norms of the old BUBA and the ECB ought to repair this with quantitative easing but the market doesn’t believe this, see the stronger euro last week.

In the US the orders for durable goods rose a strong 3% and together with a higher Richmont Fed Manufacturing index this points to a higher ISM this week. The new leading indicators rose 0.4% and the Chicago Activity Index (a repository of about 80 surveys about the US economy) was positive again, implying near or a bit above trend growth. The housing market indicators were weak.
The growth of the GDP in the fourth quarter was with 2.8% a bit below consensus (mainly because of defence spending subtracting 0.7% from growth) and 1.9% was caused by inventories what was dismayed by the markets.

A lot of central banks of Emerging Markets were in a mood to easse monetary policy. Thailand lowered the rates, India the reserve requirement ration. Brazil indicated to lower rates further. China disappointed (not at all surprisingly) by not lowering the reserve requirement ratio as a new year wish.

The profit season is a bit disappointing in the US (main reason the strong dollar), especially revenues are lower than expected and the guidance is not in the direction of prosperity. The numbers are not that bad (especially technology, industrials and materials surprised very positively, but energy, staples, telecom and utilities negatively). In Europe the profit numbers were also a bit disappointing, while you could have expected some help of the lower euro.

Several sentiment indicators are showing now a bit too much optimism.

Who owns the financial assets in the world?

The West still owns the most of the financial assets of c. $200 trillion in the world: 70% for the US and Europe. China is a runner up with 10% already, not far behind Japan.
In the US and to a much lesser degree equities are much more popular than in the rest of the world.
The bad returns for Japanese equities make equities not popular in Japan but also before 1990 equities were not that popular in Japan.

The preference for equities in rich countries is pretty normal, you start with cash and fixed income and when you have more money you invest in more riskier things like equities. So when the Emerging Markets get richer and their experience with equities is better than in Japan you can expect that they will invest more in equities.

In the West the demographics are working against equities: they are the most popular in the ages 35-65 and then they start to sell (but probably less so than in the past because people work to higher ages nowadays and so start to sell later).

source (via The Big Picture):
http://www.wallstreetrant.com/2012/01/who-owns-worlds-financial-assets-and.html

New US leading indicators: 2% economic growth and slowing of growth industrial production

From time to time it is time to trash the old leading indicators and adjust them to what the spirit of the age thinks is better. There were serious complaints about money growth as leading indicators and credit indicators were sorrowfully missed. So they have shaken old with new leading variables and a new set has seen the light.
That new set shows the leading indicators are suddenly at a much lower level than before (see chart of Strategas).
The new set leading indicators explained economic growth two quarters ahead was still not that good. I made two charts for the relation between the new leading indicators and economic growth respectively growth of the industrial production. Since 1995 32% of the fluctuations of the economic growth could be explained and 52% of the changes of the growth of the industrial production.
There are periods in which the leading indicator structurally indiacato too much or too little economic growth.
At the moment the new leading indicators seem to point to economic growth of 2% in the US (but growth was recently lower than the leading indicators indicated) and also a fall back in the growth of the industrial production seems in the offing.

Strategas: risk of 10 year Treasuries not rewarded

What is the market telling since the revelations of the views of the FED- members, that tell they forecasts a hike until in 2015 and the promise of Bernanke that QE is very interesting?
1. They price in a first hike at the end of 2013 (but history learns the market prices in hikes often too early)
2. Half 2014 the pace of hiking accelerates (history learns that the markets often underestimates the pace of hiking when they have started)
3. In the long run over many years, when I should already be retired for quite some time, the FED rate ought to be 4%


Further Strategas analyses that investors in 10 years Treasuries are not good at their mind.
In the coming three years, the period in which one can hope the FED members stick to their forecasts and not start hiking, investors take a priced in return of 0.94% a year on their 10-year rags. Do you really want to take all the price risk on a 10-year bond for such a paltry 0.94%? Of course not when you are a rational expectations believer, but too many buyers including the FED with QE and some central banks that want to prevent a rise of their currency or because of Solvency II, are buying at any price. As long as the belief that there are more buyers at any price than sellers at too high prices the hedge funds and other fixed income pirates still dare to go long in Treasuries.
(By the way. for investors in 5 –year Treasuries the coming three years a holding period return was priced in of 0.96%, that means you don’t get rewarded when you take more duration risk (of the 10-year bond)).

Is the increase of the central banks a never ending story?
At a certain moment (I think that will be one, two years away at least) the bond market vigilantes will say that we have seen a Minsky moment for central balance sheet sizes; some central banks will be seen as having gone too far and they will have to reduce their balance sheet as fast as possible, that will be impossible because they will suffer huge losses when they sell too fast.

FED: inflation below official target, QE interesting, LT FED rate 4%

The last meeting of the FED had several new things: an official inflation target of 2% (for the first time in history) and a new way of communicating: All 17 members of the FED had to give their forecasts for the FED rate in the coming years. The Fed hopes that people will believe even more that they will keep interest rates near zero for quite some time. Officially the FED told the rates will remain near zero until (at least) the end of 2014, not half of 2013 as previously was signaled and from the individual forecasts you can even deduct that according to the forecasts a hike will arrive in 2015 (or maybe further away).

The FED suddenly told they had an inflation target of 2% for the PCE (prices of personal consumption expenditures as measured by the GDP) and the central forecast (chart of ABN AMRO) shows they expect the PCE to remain below 2% in the coming years. Meanwhile they expect the unemployment rate will decline but remain way to far above the 5-6.5% that could be normal (NAIRU). That and the fear to lose their job made Bernanke to announce a new round of QE (quantitative easing) was an interesting idea.

The individual forecasts of FED- members are indicated with dots by Calculted Risk. There is an Albanian majority that the FED rates will not rise in the coming year, but also that the FED thinks in the long run the FED rate ought to be 4%.

IFO points to 2% growth in Germany

Even SocGen was in an enthusiastic mood: the IFO index (the best German indicator for the well-being in Germany) did rise so much that the recession in Germany is over(but recession, it was not that bad in Germany?).
The normal IFO was still saying that growth was positive In Germany, but with IFO expectations it went fat downhill: that was pointing to negative growth. But the Verelendung is already finished (when the ECB the value of the ECB holds down even when the FED will arrive with plenty of QE3) and the growth is according to the IFO c. 2% (annualised) in Germany.

Saunders: the Japan scenario is way too good for Europe, it is worse than the thirties

Yesterday Michael Saunders of Citi spouted out about the macro fundamentals. He was not pessimistic about the US, but for Europe he is very negative. -1.5% growth for Europe (including Germany) in 2012 and in 2013 the recession will continue (-0.4%). In the US fiscal austerity will depress growth in 2013.
He showed several charts about how several countries in Reinhart-Rogoff style recovered after getting in a deep financial crisis. You see that Japan did very well and the US is also doing reasonably well.

In Europe they have to thank God on bended knees to get economic growth as high as in Japan after 1990. Because of the credit crisis at least 10% growth is definitely lost and there will be no end to the sufferings of Europe in the coming years because there has not yet made any progress in the deleveraging of banks, private sector, the healing of the housing markets while government debts are exploding over sustainable levels in many countries.

The central banks have colossal balance sheets: China 1, ECB 2

In 2006 the Bank of Japan, the inventor of huge QE, had to surrender the first place to the Peoples Bank of China, while the ECB continued to follow the Chinese track. In the last few years the Fed attacked to get the second position, but the last few months the ECB is racing ahead in the direction of the PBoC.

(chart of Bianco: all the balance sheets are translated to US Dollars)

Obama's State of the Union: Justice is important,not justice

The State of the Union is very important to see the spirit of the age. Under the reign of Bush freedom was all important. He used the words freedom and liberty in one year more than 40 times. Under the reign of Obama it is all about justice, fairness.
That is important: when the emphasis is on freedom markets are more inclined to be risk-on, when the emphasis is on care and justice (only when the institutions are already OK) this usually is bad for inflation and risk-on. In our book we distinguished three domains of the spirit of the age (according to how van Staveren and McCluskey did): freedom, care en justice. In some times the emphasis is on freedom, in others on care and/or justice.

The republicans say freedom is by far the most important: freedom, freedom of speech, the possibility to make lots of profits, the right to defend your belongings with guns and as less as possible government intervention.

The democrats go more for justice (it is not fair that the secretary of Warren Buffett pays a higher tax % of her income than her boss; something that is partially set right by making her a special guest at the State of the Union ceremony) and care (Obama-care where everybody can get medicare, but also a better environment/ cleaner energy etc; this was mentioned in the State of the Union, but not prominently).

There were no shocking plans proclaimed that could move the markets. Obama did drop a hint that he will come in a few days with a grand plan for mortgages, how to get easier refinancing at the current low mortgage rates. ("I'm sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates. No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won't add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust”. )

The proposal to impose a Buffett- tax on the rich so that they pay at least 30% taxes is not feasible in the congress and widely seens as election propaganda.

The republicans of course were disgraced about all the talk of Obama about justice: Daniels (GOP) said: "We do not accept that ours will ever be a nation of haves and have nots; we must always be a nation of haves and soon to haves."

(cartoon from conservativebyte.com)