New Zealand hit by Marmageddon

Because of the catastrophic earthquake in Christchurch one of the two plants where they produce the right form of marmite (not that strange yeasty kind they make in England or the Australian vegemite) is so damaged that they must build a new plant. Now suddenly without warning they don’t produce anything until at least July. Because of their education it is almost impossible to have breakfast without marmite as true New Zealander, it is a lot worse than the Dutch with their liquorice.
The marmite shortages are becoming dire. The people of New Zealand are asked a sacrifice to consume temporarily less marmite and not to hoard marmite to deprive the other companions in misfortune of their daily marmite.
The marmite company prescribes toe at marmite exclusively on hot toast, so you need less of marmite and the marmite will last longer and you probability increases you will survive the production stop of marmite.

Of course this is the last days the trending topic on Twitter for New Zealand, so you can see how grave the situation has become.

In a poll of the New Zealand Herald 33% is saying they are hoarding as much marmite as possible, 38% considers temporarily to use vegemite and 29% doesn’t care because they hate marmite (as I do also). The UK marmite seems to be out of question (no Falkland like rescue is necessary from the Albion). By the way last year Denmark has forbidden to sell marmite because of the added vitamins. Some Englishmen/ Anglophiles have started a bring back marmite campaign without success until now.
Concentration risk, tail risk it is everywhere nowadays.

Benderly: commodity prices will go up unless hard lending of China

Jason Benderly c.s. has been churning the data and constructed models for commodities based on mainly the ISM, monetary policy, the strength of the US $ and the growth of the industrial production in Asia (he took the all commodities index HWWI, the broadest commodity index).
The chart above gives his scenarios with much growth in the US soft landing in China to little growth in the US and hard landing in China.
For 2012 we seem to have seen most of the rise because of the weak growth in China and also the ISM probably will not rise much further and the US $ is too strong. By the way, the ISM is now high enough to get (ceteris paribus) higher commodity prices.

The monetary policy produces with some delay higher commodity prices. The easy monetary policy is without much doubt causing higher commodity prices at the moment.
Better growth in Asia in 2013 would be enough to get higher commodity prices next year.

Benderly is rather optimistic about the US growth in 2013 (despite the fiscal hurdles), but maybe too pessimistic about the growth in China. A hard landing in China while the US avoids recession would cause commodity prices to dive with 15-20% annualised.

Maddison and the distribution of power since the Romans

Angus Maddison was my hero, in his time at the OECD he has collected a treasure of data from very long ago.
The Chart above has nice colours and is well made by Sasha Nikitin.
Europe was before the Industrial Revolution not very important and the US did even not exist. Even Italy was dwarfed by China and India in the times that Rome dominated the world (as we learn in the West, the charts show a more realistic picture). Only China and India were important those days and the other countries were second fiddle.
Columbus didn’t change the balance powers a lot (but you saw India losing market share). The Industrial Revolution was the decisive change. Asia couldn’t follow the progress made possible by the Industrial Revolution (it was inflexible, no democracy, corrupt, bad institutions etc). The Opium Wars were the ultimate blow for China.

Deng, the most important man of the 20st century, caused the watershed (helped by the ICT-Revolution that made the world flat): from that moment you see China coming back and soon afterwards also India. Around 2050 you will see again the normal situation of before the Industrial Revolution with the US and Europe playing the second fiddle. They will remain interesting like Rome made Europe interesting after 0.
Hattip Lukas Daalder and source: http://img703.imageshack.us/img703/9841/balanceofpowerhistory20.png

Amlan Roy(2): the demographic trend of PE’s

Yesterday Amlan Roy was in and enthusiastically he commented in very high pace every chart of his 70 page presentation.
The most popular chart probably is the expected development of the PE of the S&P500 according to the relative development of age cohorts. When you believe this our pessimistic Kondratieff chart ill be too optimistic (the decline will last longer).
The decline of the PE’s will be caused by retired baby-boomers selling ever more desperately their equities to the much smaller younger saving age cohorts.

Amlan Roy thinks just like me that the decline of the PE’s will be smaller because people will have to work to a higher age and will sell equities at a higher age than the Miller Modigliani Doctrine prescribes to get a less miserable income at their old day.

Siegel thinks it will not be that bad because foreigners will buy US equities at a very big scale. There is no choice for foreigners, they have to buy US assets as long as the current account is negative (by economic definition that is true). Foreigners until now choose overwhelmingly for fixed income with its very low interest rates, but the preference can go more into the direction of equities. At the moment you can buy equities that are maybe safer than government bonds with dividend yields of 3 to 4% like Exxon and McDonalds. That looks a lot more attractive than 10 year treasuries with their paltry yield of 2%.

By the way, the correlation between relative development from cohorts of relative dissavers versus savers is not so strong in Europe. That is because the elderly in Europe don’t possess as many equities as in the US, so their liquidating of equities will not hurt so much.

Amlan Roy (1) demographics: the G6 and the Netherlands

There are lots of differences in the demographics of the western countries. You have the hopeless cases of Japan, Germany and Italy where the fertility rate keeps decling to the no sex please levels, the population declines and where the young can expect to pay at least 78% taxes in some years when the promises of retirement income care etc. remain the same (what of course will not be possible).

The US scores best in all categories, then the UK, France and the Netherlands. The countries with rising fertility rates are not necessarily doomed.
But according to Amlan Roy it is completely clear that the Eurozone is doomed to disintegrate because the demographics of some countries are unsustainable. Greece ranks number 1 in demographic unsustainability: it is an illusion that Greece will pay somewhat back of the new € 130B help. Also Italy, Germany and and even France will have big problems to pay for pensions, healthcare and other care.
So the Netherlands have to leave the Eurozone as soon as possible and must join the UK in a pound zone.

Watling and the Kondratieff wave: bonds near long period of rising rates

Watling of Longview thinks bond yields follow a Kondratieff wave. We (Ter Veer and I) don’t share that opinion: the bond cycle lasts about 65 years against about 54 for the Kondratieff wave.

But that is not the main message: we have had a period of more than 30 years of declining bond yields and in the past you often saw then a long lasting reversal of rising bond yields. You can be easily wrong for more than five years, but as a long term investor you know you can’t expect much from bonds now in the coming decades.

The end of the long period of declining bond yields and the first decade of rising bond yields can go like in the previous long wave:
First a sideways move of 8 to 10 years like 1942-1951 of very low bond yields and slowly rising yields afterwards in the first decade of rising yields. Just like now government debt was extremely high and the FED committed itself to very low rates for years even when the inflation was exploding like in 1947 (19%) and 1951 (9%). It sound familiar but I think it will go differently: when the peiod of about 2% 10 year yields is over you will see in a few years bond yields of 5%+. No guarantee of course, a further long period of sideways going bond yields is possible, Plosser is not that influential.

Watling compares the bond yields with the long cycles of equities and commodities. They don’t move together. That is why it is so difficult to make long waves convincingly visible. There are no indicators that show 100% correct a Kondratieff wave. The real equity prices (S&P500) give the best picture according to us: it says something about confidence, profit margins and the value of business..

We see the long equity cycle different from Watling. We see 1920-1929 as an extreme aberration, overoptimism of the then important emerging economy, the US, just like what happened in the important emerging economy of the 80’s, Japan. The decline of 2007-2009 is according to us also an extreme aberration from the long trend to the downside. That long trend is up, because the West is no longer leading in this long cycle and because profits will continue to rise strongly. Productivity growth will be high because lots of innovations, especially in Emerging Markets.

The commodity cycle is in a structural uptrend that probably not has finished. We agree in this respect with Watling.

Employment growth US in line with SP500

Again surprised the employment growth in the US to the upside, 227,000. Better than the consensus of 204K but less than the visions of Elfenbein of Crossing Wall Street. The government only shed 6,000 jobs and seems to have fired enough civil servants. The unemployment rate didn’t decline even while in a normal month 140K employment growth is enough to stabilise unemployment rates. Now there are suddenly a lot more people that are searching for a job and have enough confidence to say they are searching for work. The disappointing employment growth for women was bend completely in February. The employment growth was revised higher in the previous months. So everybody was happy (except Plosser maybe)..

The employment growth is at the moment pretty normal for an economy that is already for some time out of a recession. The chart above shows that employment growth correlated pretty well with the strength of the S&P500 in a (four year) cycle. Sometimes it was even a leading indicator. In 1987 and 2000 the S&P was much higher than the employment growth suggested, that should have been a warning. Equity markets do well when the employment growth accelerates, so it is not that strange that so many people try to forecast what the employment growth will do.

Ever lower income growth for lower middle class, others see more income growth

Since about a year the wage growth in the US is calculated for all labourers together, for the ordinary employees (lower middleclass) and their bosses, supervisors etc. (upper middleclass)
The average of those two groups shows a stable rise of wages. The old wage numbers took only the lower middle class wages into account and by doing so it was hard to explain why consumption growth was doing so well.

The chart of Benderly shows that the wage of the lower middle class is rising less and less. That trend is inexorably down, even while the recession has ended three years ago.

For the upper middleclass the bad times are over. They get salary rises (in the US). Around the credit crisis those wages were going down, but now it is Goldilocks for them. This means bigger income inequality is continuing.

Real interest rates US too low

The chart of Guggenheim shows the real interest rates are too low compared to the –by the way still recessionary low- consumer confidence.
As long as the belief in 0% interest rates until 2015 is almost uncontested and there are enough zombie buyers (that is questionable after June when the Fed has ended Operation Twist) the long dated bond yields can remain way lower than the fundamentals indicate.
The interest rate risk is asymmetrical now: the interest rates cannot go down much but they can rise a lot when the FED starts worrying about inflation (as the bad development of unit labour costs and higher rents make almost unavoidable) or money growth will become too high (M2 growth already 10% now).

China: 7.5% growth is minimum; support for emergency fund US infrastructure

The plans of China influence the world more than ever since the start of the Industrial revolution. Asian markets tumbled on the news the new growth target of China was only 7.5%. That is low for China and much more growth in 2012 is unlikely. But to be so afraid economic growth in China will fall down to an anaemic 7.5% in the coming years is not necessary. 7.5% is just the minimum, see the chart of JP Morgan.
A little bit more worrying is the target for growth of M2:14% That is (too?) low when you want more than 7.5% GDP growth.

China is unbelievable successful in producing infrastructure in developing countries with good growth prospects. Now China is creating an emergency fund for US infrastructure according to the China Daily. The American infrastructure is crumbling and now no longer competing with many developing countries. is zo aan het verkruimelen dat die nu onderdoet voor menig ontwikkelingsland. Daar kan een noodfonds The Chinese emergency fund can help the poor Americans. 90% of the workers to make that infrastructure will be Americans, so they don’t need to be afraid for Chinese stealing US jobs. China is the only believable parner to make high speed trains in California. The US no longer has the Money to fund new infrastructure as is the normal case fora n (under)developing country. China is TINA: there is no alternative and they think the Americans wil understand this soon.

Yes we live in a strange world now that has changed, it is the world of the New Normal, but it will go differently from how Reinhart/Rogoff describe, according to China.

Goldman Sachs too pessimistic about US house prices

Two charts of the expected development of the house prices in the US: ee plaatjes van de ontwikkeling van de huizenprijzen in de VS: above the one of Goldman Sachs (Hatzius c.s.) and below the one of the house futures (radar, housing report to Obama) (source Calculated Risk).
Goldman Sachs thinks the house prices in the US are now at an equilibrium level but will overshoot somewhat to the downside before they will rise again. The trend of the Case Shiller prices for the prices in 20 biggest cities point in that direction.

The futures however price in a rise. We should have seen the low. These futures don’t look too optimistic. In 2009 the futures prices were too pessimistic, even while they saw earlier a turn in the prices.

At the moment you see a divide in the price development: the prices of forced selling (foreclosures) are still in a solid downtrend, while the houses that are sold normally are rising again. For the time being the foreclosures did win from the voluntary sellers, but maybe that is already over. Credit growth is accelerating and it is becoming less difficult to get a mortgage (even while it is still difficult). At many places not enough is built, the number of households is growing since employment growth is decent. This ought to lead to higher prices in an ever bigger part of the country (unfortunately I can’t give a guarantee).

It is odd that so many Americans think that the current house prices are normal, in equilibrium and not very cheap as the Europeans think or the price to rent or the record high affordability indicate.

Who will buy US Treasuries this year when the zombie buyers go at strike?

There were plenty of buyers to finance the huge US government deficit until now. Before 2009 China and Japan with the OPEC in a supporting role were fighting to buy as many as possible treasuries. This even caused a (not to prove number of) 0.6% lower bond yield according to some calculations then the fundamentals were saying.
Since 2009 the FED had an irrepressible appetite for treasuries. Very fast they acquired so many that they own now 20%+ of the US Treasuries, of some issues they have 60-70%. First they bought the short durations, since Operation twist they have all durations, even the very long where the FED should have no business.

In the short run the big buyers of US Treasuries go in strike (FED) or remian at strike at best (China and Japan). The FED will stop because Operation twist is finished and QE3 will not arrive soon. China is stopped (even worse, they were selling according to the last numbers) because they want to diversify better over the world and also because the growth of their currency reserves will be lower (partly because of more imports and less exports to Europe; the government has signalled that the currency reserves are too big). Japan is getting now structural trade deficits and that will limit their buying structurally.

That menas that all three big zombie buyers at any price are out of the market soon. Other investors will have to buy those US treasuries. They have to be seduced by something else than the current low yields. It helps that there are very few long bonds and a new zombie buyer will be there: the insurer zombies that have to buy because of Solvency II to match their interest rate risk. But insurers probably have done that already for a big part, it was already way too risky not to hedge duration and not necessary with their high coverage rates.

Banks are only small buyers of treasuries in the US and individuals prbably also. Households are big buyers of treasuries but that is because households is a residual category. Individuals almost don’t buy mutual funds of sovereigns. Only hedge funds are big buyers trying to get rich because of the promise of 0% interest rates until 215 by Bernanke.

Global Macro Monitor thinks the bond vigilantes suddenly will wake up and cause an Arab spring for US Treasuries: Plosser (the super hawk of the FED) will become the hero, they will start to believe in very high rates. Or people see suddenly that the American banks are giving plenty of credit to everybody, business (an acceleration is already visible in the numbers). That will create a lot of demand for money and trigger fears of the FED and so cause higher bond yields.

There is a tail risk of an Arab spring for bond yields: the probability that 7-10 year treasurie yields in the US will go to 5%+ in 2013 is not zero.

sources: Global Macro Monitor: Is the Fed ready for the bond market’s Arab Spring? via http://www.ritholtz.com/blog/2012/02/is-the-fed-ready-for-the-bond-market%e2%80%99s-arab-spring/

Sober Look http://soberlook.com/2012/03/its-matter-of-time-before-luck-runs-out.html has a comparable view on the bond market: foreigners have to buy Treasuries in a big way and that will be a problem when China and Japan are not buying: all hope is that OPEC will buy enough, but..

ISM 52.4: everything down except inventories and prices

The ISM was a disappointment and it is a big blow for people that hoped the Citigroup Surprise Index would continue to surprise to the upside. The consensus thought it would be 54.5, like my little model. Orders/inventories declined for the second month in a, to make things worse: more people will adjust downward their expectations for ISM in the coming month(s). My model sees a renewed rise to 56. Benderly thinks that the ISM will move slowly with final demand and retail sales as inventories/sales are normal (and no catch up is necessary).

ISM prices rose, no surprise as commodity prices rose.
The PMI’s of other countries were pretty much unchanged or down a bit and that caused the upward trend to stop.

Still the mood of the respondents was up given their remarks: WHAT RESPONDENTS ARE SAYING ...
• "Business is holding steady. Concern over commodity prices ongoing." (Chemical Products)
• "Still somewhat cautious about recovery. Expecting a good year, but not seeing orders yet." (Machinery)
• "Demand remains consistent to strong on all levels." (Paper Products)
• "Demand from auto makers is getting stronger." (Fabricated Metal Products)
• "Manufacturing is busy. Spending money on new equipment to accommodate customer demands. Material prices are staying in check." (Food, Beverage & Tobacco Products)
• "There seems to be a much more positive outlook for the economy. Customers are ordering material for stock rather than just working hand-to-mouth." (Fabricated Metal Products)
• "Global GDP softening and beginning to impact the demand chain." (Computer & Electronic Products)
• "Production is busy — several new large projects." (Primary Metals)
• "Customers [are] lowering inventory levels, anticipating price decrease due to third-party published reports on materials." (Plastics & Metal Products)
• "We are optimistic about the U.S. market this year, a little hesitant about what may happen in Europe and unsure about China." (Transportation Equipment)
• "Shipments are increasing over last year. Waiting to see if the trend continues." (Wood Products)

€ 530 billion LTRO: wasted Money or Goldilocks longer around?

The equity market was eagerly looking forward to LTRO 2 and its miraculous consequences. First people were dreaming of a trillion, but after a closer look 530 billion is still quite a lot. A bigger part than at LTRO 1 is not necessary, now c. 5 300B versus € 200B in round 1. So the banks will have more inentives to do something nice wit hit like patriotic buying of PIIGS sovereigns and maybe some credit growth will be triggered. The total amount was Goldilocks: not that little that there wasn’t a liquidity push and not so much that you can derive tremendous financing troubles of banks from it.

At the moment the rosy evaluations of QE and LTRO are dominant. More and more people see it as a game changer (even the pessimists, they see it as the opening of the portals of hell).

Current views judge that because of QE/LRO confidence is growing (and so it makes money moving again and that will cause more growth), markets are rising, banks can finance itself, stress diminished, inflation is no problem (even good: the probability of deflation is going down), interest rates of Italy c.s. can go down, what increases the affordability of too much debt.

What a change since September when the pessimistic views dominated: QE was a disaster, even with QE economic growth had gone down again, the solvability of banks and sovereigns was not improved, not for a dime, the commodity prices were blew up and so ere reducing consumption and economic growth. The risk of the return of the inflation monster that will crush the world is becoming bigger and it will turn up suddenly: first there seem to be no inflation problems like in Germany in 1920 and two, three years later hyperinflation emerged and with an ounce of gold you could buy blocks of houses in Berlin.

The balance sheets of central banks are inflated to unthinkable proportions until suddenly the Minsky Moment will be there: the moment the market will conclude that central banks have insurmountable problems and are bankrupt at the cost of the riches in the concerning countries.


Central banks think improving confidence is more important than the inflation risk. They think they can get in time all the extra liquidity out of the market with higher interest rates (so the banks get a new gift: first you give them money for almost nothing and than suddenly to prevent you will use the money you will pay a lot of interest on it). The pluses seem to win from the minuses. Maybe they will regret LTRO in some time, but more likely they say that thanks to the ECB the economy is growing again/ banks are saved and that the resulting inflation was welcome to alleviate the debt pains.
So Goldilocks will be longer around (maybe with a pause in Q2 or Q3).