Recovery US since 2009 this time different

The two charts of benderly (Applied Global Macro Research nowadays) show that goods have recovered as should have happened after a deep recession (manufacturing base in the US is coming back), while the service sector is doing way worse than ever after a recovery. Normally services are growing fast and take an ever bigger part of GDP.
This time was different. Productivity growth is hurting civil servants and maybe some other jobs in the service sector. That is quite unusual (productivity growth is only measured for the private sector, the productivity growth of the government is by definition 0; this definition should be changed).

Employment growth by sector before and from 2009 in the US

The chart shows employment growth before and from 2009 and how big the sector is. Construction and somewhat surprising civil servants are the big losers since 2009. Also the financial sector (all those mortgage sellers to muppets etc.) did do badly.

Cars, professionals and temps did very well since 2009. The rebirth of US manufacturing seems to have started.
Healthcare was and is the big engine for employment growth (a touch less since 2009)

source: Atlanta FED
http://macroblog.typepad.com/.a/6a00d8341c834f53ef016764261d7e970b-800wi

Biggest food consumers: per country and expressed in Big Macs

In the article Grocers' green signalled The Economist that China has become the biggest player again in a new market: the grocery market (China overtakes America to become the world's largest grocery market)
That China has become the biggest market is only caused by its huge number of people, not because of their high consumption per capita (at the right side in the table of The Economist). That is why India is also high on the list, even with its very low spending for food per head.


I added a table what the list would be per big country the list when they had spent all their Money at Big Macs. Then you get a bit the food consumption according to purchasing power parity.
Then you see per head France is still at the top of the list with a hypothetical consumption of 1070 big macs, followed by England with 958 and Australia with 909. Russia is on a suprisingly high place four with 874, even before the US (698) and Japan (745).
In Germany they obviously don’t spend much money on food (it is living like Gof in France, not in Germany)..
The other BRIC’s are together with Indonesia at the lowest places. Because big macs in Brazil are extremely expensive and cheap in Mexico, is Mexico still above Brazil, even while they spend less money at food in Mexico than in Brazil (in dollars).

Why are gold mines so cheap?

In the Barrons' Abelson thinks gold mines will do what their name suggest (Up and Down Wall Street Saturday, April, 2012 A Golden Opportunity). He not the only one. A lot of well known investors/ hedge funds think gold mines are cheap. They have burned severely their fingers in the last months. Gold mines are already for quite some time ridiculously cheap and they are not following the gold prices up very well. The market prefers the real thing: gold in their hands, even the gold ETF’s are mistrusted because maybe they cannot deliver the physical thing and maybe some other things could go wrong. And that is what you don’t want when you buy gold, all those fears.

For commodity prices it has been quite normal that the commodity producers couldn’t follow the commodity prices. But for gold mines te difference starts to become too big and it seems to get only worse. Many gold bulls are now so disappointed that they to their horror are selling. The sentiment is for the fourth time in a year bearish and so the bulls hope on a contrary movement. Gold mines have too much cash and they are slowly buying each other. Even that has not helped te prices.
The reasons for the bad performance are the preference for physical gold and the higher volatility of the prices of gold mines and the unreliable following of the gold prices.
In the articles quoted below these things are discussed well. Especially the argument that the relative volatility is now not a problem could be the right reason to become bullish. After so much underperformance you can argue it has to turn but markets can remain longer cruel than your patience.

source: Where’s the Beef for Gold Equities? By Frank Holmes
http://advisorperspectives.com/commentaries/global_041312.php

How big are the fixed income/ sovereign markets in the world according to IMF

The IMF had a chapter about safe fixed income markets in the world. A bit prudent they called it potentially safe investments. Somewhat curious they counted gold as a safe fixed income investment.

The numbers are only about quoted bonds, not the loans of the social securities in the US that own big chunks of US non quoted sovereign debt. It is also not about normal bank loans and mortgages.

The table below gives the sovereigns in some important countries/ areas and who owns these return free risks.

Pension funds don’t owe so many as I thought, but together with insurance companies they have plenty of them. The Japanese Postbank is a huge player in Japan and there they keep the investors awake that they don’t buy any Japanese sovereigns.
The central banks of the US, Japan and the UK have lots of sovereigns, the ECB owns almost nothing (so there is room to buy lots more).

source http://www.imf.org/external/pubs/ft/gfsr/2012/01/pdf/c3.pdf

Trulia: house prices in the US will go up

Trulia signals since a few months higher asking prices in the US, now +1.4%. These asking prices seem to lead transaction prices: it could lead Case Shiller house price indices by as much as six to seven months.
Trulia also presented a chart of the 100 big metro areas. In many of those areas the situation is improving also in formerly very bad areas like the sand back states. Prices are still declining in many areas, see for example the West Coast, but things are clearly improving.

Housing prices in Europe: too high, too indebted and overbuilding in several countries (André)

The faster the house prices, the more houses are built. Consequence: a combination of too high prices and way too much new supply. Disaster strikes as we saw in Ireland in Spain. The Netherlands is an outlier in the first chart: despite high house prices almost no new houses are built.

The other chart shows where the mortgage debt is the highest compared to the income. That is again in the countries where the house prices have risen the most. There some core European countries are at the top, like Denmark and the Netherlands.
Many housing markets at risk because of too high house prices (for example price to income is 40% too high in The Netherlands and price to rent 30%, see (here not shown) charts in the presentation of Cristophe André), too much debt and overbuilding.
In some countries the opposite is true, like in Germany: house prices are 20-30% too low, mortgage debt is low, no overbuilding at all.

source: http://www.frbatlanta.org/documents/news/conferences/12fmc/12fmc_andre_pres.pdf

Club of Rome after 30 years: disaster still coming

Lukas Daalder had yesterday a chart from Smithonian Magazine (http://www.smithsonianmag.com/science-nature/Looking-Back-on-the-Limits-of-Growth.html#ixzz1riJDM6WT) in which the prophecies for disaster of Meadows (club of Rome) wre tracked until 200 (by Graham turner). The conclusion was that the Club of Rome (The limits of growth) had done a pretty good job in forecasting the trends.
You cannot find a scale in the chart and how things are calculated/ measures is completely unclear. But let us believe what the chart says.
Most things have gone better than the Club of Rome predicted, but not so much better until 2000. Especially there is now much more food per head than thought, The service sector has grown faster (ICT Revolution) and industrial production slower. This has been favourable for pollution. The growth of the world population has been predicted very well.
What happened after 2000 until now is not completely clear to me. The exponential increase of the pollution did not happen in the West and the industrial production has risen less than the predicted trend. In the Emerging Market pollution has increased but also there they are doing a lot to limit pollution. There industrial production grew fast, but after the credit crisis also less fast.
The amount of non renewable energy did not decline as much as the Club of Rome indicated. The last years that is mainly caused by non conventional new energy from tar sands/ shale oil/ natural gas.
The next decades there will be new mehodes invented to produce more renewable energy. The prices of solar energy are plunging and the down trend will continue. Hopefully other renewable energy will get its breakthroughs.
The most important prediction that the world population will go down because of pollution looks unlikely. People live much longer. Exactly because of those higher life expectations the population growth is slowing almost everywhere, especially outside the OECD.
The structural downturn of production is reasonably in line with what Ter Veer and I predicted as the declining part of the current Kondratieff cycle.
The main conclusion of the Club of Rome that the world uses too many of its commodities resources and that this is untenable still holds very well. Global warming is now almost uncontested (except for born again Christians in the US Bible Belt). Still one can expect that pollution will not be an as grave problem as the Club of Rome indicated. It is possible that the world population will decline after 2030 because some bacterial diseases are harder and harder to battle, so who knows.

The mini cycle of the SP500 : 2012=2011=2010

In the chart the S&P500 is indexed with itself 13 and 26 months ago.
Then you see the regularity of the mini cycle for the S&P500: what a resemblance with 2010 and 2011!
The bears will get their best times only around August, maybe already at the end of May/June when the resemblance will stay strong (it probably will be not as strong as the chart let you believe).
Now the attention is focused on the resemblance with now and 2011, but the comparison with 2010 would be stronger according to me.
By the way, the comparisons with 2010 and 2011 learn that the current correction could be over soon.

The rule of 4% spells disaster

Strategas had as most important reason why economic growth in the US will disappoint the rule of 4%. Every time when the nominal GDP growth of the Us fell below 4% the economy came into a recession. Now that seems to have happened again. Maybe that is why ECRI so stubbornly holds to its view that the US will soon be in a recession.
This time is different?
No, the economic growth in the US of 2011 probably will be revised higher (GNI higher) in the coming years.

Bianco: QE3 will arrive, employment growth to deteriorate

On his monthly conference call Jim Bianco showed his bearish feelings again. That has become quite common in the last years, but he warns that you will get a new wave of monetary easing (QE) when the pessism gets rampant and that has been excellent fuel for equity markets and commodity prices.

The FED hast been erratic in the last weeks about QE3. The majority of Fed governors is more and more against even more QE because of its dark influences on (implicit) inflation expectations. But the troika that determines everything (Bernanke, Yellen and Dudley; dthe others are muppets) is addicted to QE and will seize every opportunity to enact a new round of QE. That will not happen as long as Operation Twist is still going on (=until the end of June), so long they can control their selves, but from their meeting on June 25 on it will become exciting.

QE3 don’t has to arrive when they maintain their norms and values for inflation: PCE (personal consumption expenditures, weighted as in the GDP) has to get below 2% (according to their expectations). To keep the interest rates at 0% the inflation must remian below 2%, otherwise they have to write a note like the Bank of England that the inflation is too high at the moment, but, mark my words, the inflation will go down soon, be patient.

The realised PCE inflation in the VS is already for quite some time above 2%, especially because of higher commodity prices. The coming months you can safely bet according to Bianco that the PCE inflation will not decline below 2% thanks to the higher gasoline prices and the higher core inflation. That is no problem for the FED, because of their trick with the inflation expectations of all Fed governers. They revealed all (including the hawks) that the inflation at the end of 2014 will be below 2%. As long as those forecasts will remain low enough the FED has a perfect excuse to perform a QE3 in emergency cases (=when equity markets fall too much).
The track record of the FED inforecasting inflation has been very poor according to many studies, but the rules are for the time being as the troika have instated. .

For the time being, because the bond vigilantes can spoil the party. When they see too many rounds of QE coming they can send implicit inflation expectations to all time highs and then the FED has to listen (otherwise: Bernanke= Von Havenstein, the bank president of the Weimar republic).

QE3 will arrive according to Bianco, because Bernanke is right and the US economy will prove too weak to get a good sustainable recovery. Bernanke had three reasons for that:
1. The employment growth has accelerated, but only unproductive people got work.
2. It is very well possible that the potential growth of the US is overstated; it will not be 2.5% but 1.75-2%. That is a disaster scenario, then all risk on investments are 20-30% overpriced.
3. Because of record hot winter weather (3 degrees C more than normal) 72.000 more people got work in December/February each month (Global Macro Advisors calculations) than normal. That will be a drain on the employment growth in the coming month (March was the first one).

To summarise, economic growth will fall back. Profit growth in the US will be very bad in Q1 and Q2 according to Bianco. The guidance is since January horrible (see chart) and profits are now growing less than inflation. Profits will no longer support equity markets, especially when the GDP growth falls back.
But thanks God, then QE3 will arrive and the S&P500 can get with some luck an all time high over some time.

ISM and SP500

The last years, after 1998 and especially 2007, the S&P500 rose (and declined) often in line with the ISM. On a yearly base the correlation is high. Deutsche Bank’s Jim Reid and Stephen Stakhiv concluded from the relation between the ISM and the S&P (I took their idea via FT Alphaville and made the charts above) that the S&P is still somewhat undervalued (and in this case that means it offers some hope you can profit from an undervaluation).

For timing for selling equities the indicator was sometimes a disaster: you became optimistic in 2008. For the timing of buying equities it looks somewhat better. At the end of 2002/start 2003, in 2009 and at the end of 2011 you saw equities were way to cheap. Since 2009 it is doing pretty well (no guarantee for the future).
It is clear you mainly can profit when you can forecast the ISM well, then you have some clues where the S&P will go. Especially when you see the ISM dive below 48 for some protracted period you can better say goodbye to equities, but when you see that the ISM will recover distinctively that is a powerful signal to buy equities (when your forecasts are really good).

Unfortunately it is very hard to forecast the ISM (the efficient market forces this: you can earn too much money from forecasting well the ISM, so there is arbitrage to the best ISM consensus models that are hard to beat)
It is not always impossible to forecast the ISM. After 2008 the ISM followed pretty well the average of the preceding seven recessions (as I blogged on the sister blog Beleggen op de golven until the end of 2011). Now we are too far in the cycle and I have another forecasting model. That is doing a reasonable job, but is far from perfect.

Nikkei follows US interest rates

No equity market (including the S&P500) follows so slavishly the US interest rates as the Nikkei Dow Jones. When the yield on 10 year Treasuries risies with 0.01%, the last years the Japanese equities rise on average 0.17% (above the normal rise of about 3% in six months).

So when you make the forecast that the (US) interest rates will rise you also forecast that equity market will go up (17 times as fast in Japan and about 12 times as fast in the US for example)

It looks like we have seen the best of the rally in the past months in Japan. When the Japanese equity market cannot follow enough the rise of US interest rates you often will see troubles. That is a bit odd, when equities seem to cheap you should sell. The reasoning behind that is the rule that when markets no longer react on good news you have to sell (and the other way around).

Kondratieff wave of commodity prices according to Stiefel

The chart of Stiefel illustrates their view on the Kondratieff wave, viewed through the spectacles of commodity prices (that is mainly the specialty of Rostow and Kondratieff).

The dating of good and bad parts of the Kondratieff wave is controversial because since Keynes the good times are mostly not the times that commodity prices rose. Not commodities but governments and higher wages were the main culprits for higher inflation since Keynes.

Also the dotted line for the future is of course debatable. Stiefel sees immediately a decline of commodity prices with a big recovery afterwards. I see this big fall only happen in a hard landing of China. I expect that to happen after 2015, possibly 2018-2020.

Source: http://www.businessinsider.com/commodity-kondratiev-cycles-2012-4