Mr market and yield curve/ Japan

Yield curve out of sync with economic momentum
Gold/ silver rate, ISM and IFO are pointing to much flatter yield curves than we see at the moment. Quantitative easing is still pegging the short dated yields at lower levels than otherwise should have been the case, triggering very steep yield curves because of pricing in that central banks are behind the curve.

Japan
The earthquake will bring money back to Japan, but strength of the yen is uncertain because the Bank of Japan will have to step up quantitative easing. The problem for Japan to find profitable infrastructure investments is solved for the time being. Toyota will have to build more new cars (but import them from abroad). One should not overestimate the growth stimulus from the earthquake. Damage repair will take money away from investments that should have be done otherwise. But the damage repair could help to improve the confidence of Japan that it can do some things really good, as for the time being seems the case (the help from government is many times better than after the Kobe earthquake, the nuclear meltdown problems are way better treated than Harrisburg/ Chernobyl, the damage to buildings is incredibly low because of uge advances in earthquake proof building). The reaction of Wall Street Friday on the earthquake was as if it were a non event.

Maybe the influence is not that big on markets. It should cause a touch higher bond yields, lower prices for some Japanese stocks but also higher growth expectations for Japan that could translate into higher share prices.

Mr Market and oil, copper

quities are reacting negatively on higher oil prices, after a long period the opposite happened. This is caused by the market seeing higher risks when oil prices rise above certain levels (+50% in six months is often mentioned as trigger for bad times) and triggering lower growth. Until recently higher oil prices were seen as sign that economic growth was accelerating.

That view is confirmed by Dr. Copper. The copper prices were rising very closely in line with the oil prices until recently. The last weeks you see clearly falling copper prices and higher oil prices (see chart FT): the higher oil prices will cause lower economic growth, so demand for copper will go down as the market is now discounting in the oil prices.

Dr. Copper gives more attention to China and other Emerging Markets than to the US/Europe, so Dr. Copper is saying economic growth will be a bit lower in China/ Emerging Markets than previously thought (e.g. China not growing 10%+ but 8-9%)).

The market is not seeing the rise of the oil prices as permanent. Backwardation has returned in the oil prices, discounting somewhat lower prices after a short period from now.

The share prices of global energy are suddenly breaking down despite the high oil prices, meaning the oil price is not seen to go up from current levels because it will trigger lower economic growth.

The stock markets in the Middle East are in recovery mode, signalling that they fear a lot less potential contagion from the Jasmine Revolution to Saudi Arabia/ severe oil production disruptions.

BCA: no stagflation, Emerging markets have inflation problem that they export to the West

BCA had a special on inflation. Economics has not found out if the current situation of excessive money growth, high increase in commodity prices and high output gap should lead to more inflation.

The relationship between money growth and inflation is away for more than twenty years in the U.S. iso the Fed gives little attention to money growth. The velocity of money has been erratic in yhat period, unpredictable. In the US the correlation between money groth and credit growth not very high (in Europe it was higher, maybe because the short rate of the ECB was less below normal).

Central banks will only wake up when you see strong credit growth (at a certain moment there will be a sudden acceleration when the trust of business is big enough to spend: when they see the competition is brave, fiscal help will disappear, they will follow soon). Then the FED will hike rates, presumably late.

The rise of food prices will lead to only very small rise of the CPI in the US. A 10% rise of commodity prices for food will rise to 4.3% rise of producer prices of food products and they will charge only 1.8% higher prices in the end products of food in the US and that wil lead to 0.7% higher food prices in the supermarkets and that will lead to only a 0.1% higher CPI in the US.

The output gap is still huge in the West and because of that the rise of wages will remain very low, people (and unions) don't dare to ask for higher wages because of higher food and oil prices (unlike in the seventies). That is why you will not see stagflation. The underlying rise of productivity is very high and that also will cause only limited inflation. Because the the rise of unit labour costs lags inflation, one should not be that assured from low unit labour cost growth keeping inflation down.

BCA concludes that inflation in the West will not rise much, especially when core inflation will remain between 1 and 2%, as probably will be the case in the US for the time being.

In emerging markets the inflaton story is completely different. There they have a real inflation problem. High monetary growth is leading to higher inflation (unstoppable as long as they peg their currencies to the dollar and so cause a tremendous growth of foreign currency reserves). The food prices are a big problem because they have a much higher weight in their CPI's and commodity prices are translated much earlier in higher CPI because they have more basic food (not the luxury deserts with lots of marketing costs of the West etc). Because in emerging markets the output gap often is negative you will see high wage demands because of the high food prices.
In the end that will lead to higher export prices, even higher commodity prices and higher inflation everywhere in the world.

My opinion: for the time being inflation will remain moderate, because the rise of productivity will remian high, especuially in emerging markets and in the West the rise of wages will remian limited. But there are several mechanisms that can lead to sudden rises of inflation. Until certain levels monetary growth will not lead to inflation, the big output gaps also help and that will keep infation because of higher commodity prices limited. But when you surpass the safe money growth levels,the output gap in the world is closed (because of emerging markets) inflation kan rise a lot. Suddenly wages will rise to compensate higher gasoline and food prices, credit growth can explode suddenly. The stronger and stronger divide between income growth of the upper class versus the middle class in the West can force highly inflationary wage growth of the upperclass (especially when after that the middleclass doesnt take it any longer and also forces higher wages).

David Bowie caused credit crisis

A commission of republicans and democrats is studying the reasons how the credit crisis erupted (by the way: a nice time line for the credit crisis: http://www.money.co.uk/article/1006239-tracking-the-global-recession.htm). The republicans have leaked that it is the faut of government that forced Fannie Mae and Freddie Mac to give subprime mortgages to individuals that wanted to buy a house. It is not the fault of complicated financial constructions of banks, no it is big government with its bankrupt GSE's that cause huge losses for tax payers.
Democrats and people that can count to ten don't take this version for granted (Fannie Mae and Freddie Mac were initially rather conservative, only at the end of the subprime hype they joined the party). Anyway the leaking causes that you willl not get a generally accepted version what caused the credit crisis.

You don't need big studies: it is already known who has caused the credit crisis: it is David Bowie (http://www.mirror.co.uk/celebs/news/2009/01/12/david-bowie-s-back-catalogue-bonds-may-have-started-the-credit-crunch-115875-21036649/).
David Bowie (his advisors) invented in 1997 securitisation. He discovered how you could cash immediately with securitisation of Bowie Bonds the future revenues of his music. He didn't receive any longer the royalties of his music, but he had now the proceeds of the Bowie Bonds. The innovation of David Bowie triggeerd a lot of followers and so a securitisation markets was generated in all kind of difficult constructions. Without David Bowie the credit crisis should not have happened, at least it should have lasted longer before it should have erupted.

Inventions are plentiful, enough for recovery optimism

Strategas was in a bad mood that the PE's have gone down so much,while bond yields and inflation are so low. There are too many uncertainties and the US government is not nice for three sectors in the economy (financials, pharma and energy.

The confidence hasto come back and that is only possible when the US starts to believe again in progress. Strategas had the list above of the most important inventions. Around these years there have to be a lot of new ones. What these inventions are you normally don't know, that becomes clear only after decades. Those inventions were already around for decades before the use of it became general. Now we have some suspicions (DNA gen therapy, iPhones/pads and special gadets, speach recognition, robotics, Facebook, Google search, electric cars, durable energy like cheap solar eenerg, batteries that last very long), but it remains guessing.
All these new inventions and more important new innovations like iPad/iPhone etc should be enough for a restorement of confidence, but maybe it is because the US is no longer that dominant in innovations as in nineties (they did 95% of the important innovations at that time).

That confidence is now present in the Emerging Markets and much less so in the US and non existent in Europe ex Germany/ Scandinavia tigers.
It will come back when growth recovers further and the unemployment rate declines substantially. That is the most probable scenario for the next five years, not that of the New Normal. There are enough possibilities to make new innovatve products and services at hgh margins. But it is only for the Emerging Markets to have tailwinds eevrywhere: from convergence to our prosperity with a growing middle class, urbanisation and good non corrupt governance, hugely improving education etc, low debtsand high savings and especially the favourable demography with a fast growing working population and lower depedency rates.
The West will see back some growth from the Emerging Markets and mainly from new profitable innovations and several new suddenly big companies like Netflix.

First Day of the Month

In the month the first half is better than the second. Especially the first day of the month is excellent, see chart of Bespoke.

Monthly Equity Cycle

Bianco had today un update what the monthly performance of the S&P 500 has been.
September is the worst month, November and Decemebr the best.

Is China a bubble?

Last week i got a lot of stories that China is a bubble or will become one soon.
Chris Watling had one and also John Mauldin in its weekly column Out of the Box told by the Russian Vitaliy Katsenelson from het Casey Report (in http://www.businessinsider.com/shadow-over-asia-2010-11) his as usual pessimistic thoughts about tremendous Chines bubbles.

The Russian had three good reasons why everything will go wrong in China ("the only question is when"): the way too big credit growth of 29% that makes plausible a big part of that will be classified as misinvestments over some years (that is why China will do evrything to limit credit growth to 15% next year; once 29% is mo problem after a weak year, but several years is dangerous); the second reason is the over speculation in real estate that has made houses unaffordable. In the chart you see that a house in Shanghai or Bejing costs 12 or 15 times the average yearly income and in total China it is 9 times, even more than the 7 times of Japan in 1990 (N.B.: it is not just to judge affordability with the two most expensive cities; that is the same houses in the US are unaffrdable because they are so expensive in Manhattan and San Francisco,(the VS and China are much bigger than these two expensive cities)). Also last years for everu Chinese should be constructed 25 square feet commercial real estate. The vacancies are high. Renting of apartments doesn't make sense by the way, the value as rented is much lower than vacant and so vacant real estate gives better returns than rented real estate at current negative real interest rates.
The third reason is that government determines investments. In history that hasn't gone well for a long time. The free market, the invisible hand, should determine investments.

Watling has about the same reasons, but doesn't see the bubble bursting that soon. Investments are 45% of the GDP, that is too much and guarantees malinvestments, especially in infrastructure and real estate.
Consumer debts rose a 10% of GDP, that is going too fast.
The local government is for the financing of its spending way too dependent from selling land to speculators/ developing the real estate by its own constructors at abig profit (that is not so different in other countries, most local governments don't have other tricks to get some money).

Both compare the growth of China with that in Japan, thee Sowjet Union and the Asian tigers.
Watling cites Krugman in his study about Asia in 1994. In the fifties the growth in the Sowjet Union was tremendous (especialy according to their statistics). That was then reason enough for plenty of scientists to forecast that in the seventies the Sowjet economy would surpass that of the US. A central governed state should produce better growth people thought then and now for China. That leads the pessimistss now to the conclusion China will never surpass the US [N.B.: that is ridiculous, in dollar terms is the Chinese growth at least 10% higher than in US (5% real GDP and 5% because of higher inflation in China combined with a stronger yuan)].

China is growing about 10% each year since 1979. Before 1979 Japan did about the same after 1950 until 1990 and for example Taiwan and South Korea did that from 1960 until 1997. After that period the growth was much lower: about zero in Japan, but still about 4% in South Korea and Taiwan.
That probably also will happen with China: 40 years after 1979 is 2019. After every about ten years China had a big crisis (credit crisis 2008, Asian crisis 1998, Tienanmin in 1988, end of cultural revolution in 1978, famine 1957/8 etc). After 1978 China recovered easily. After 2019 that could become much more difficult.

For the time being China has a long road to go to converge to the prosperity of for example Korea in 1997. For that you need huge investments, also in infrastructure, so that is not so bubbly yet. The prices of houses in the chart are for houses only buyers, this is the upper middle class and higher, can afford, so for incomes that are substantially higher than average. The wages are rising 10 to 15% in the coming years, so houses are not clearly too expensive. The houses that were built were too much only for high incomes. Fortunately te Chinese government will build a tremendous lot of new cheap houses for the lower incomes (so China still needs steel and copper, even when they maybe will build less expensive houses). That acceleration will lead to an overbuilt situation in Chinese houses, but it will last several years 98?) to get the housing crash.
A centrally planned economy can be excellent in the convergency process to the whealth of the West. When you are there or almost there it becomes much more difficult, see Japan after 1990. But it is still possible: see Singapore that in thecoming decades will become much richer than the US or Europe (at current policies).
A Singapore, that probably will prove to be too difficult for China, China is too big for that and is not stable enough (outer provinces), the government will continue to try to decide everything what will not work after some (Minsky) moment (that is a strong view: China will undergo that after some time near about 2019). China can become easily a lot richer for the time being (fortunately) (and that probably will be true for many emerging markets). The coast of China was during centuries the richest part of the planet. That can happen again.

Gold Overbought?

On the dutch site IEX Cees Smit had a worrying chart about the gold price: according to his twindicator the gold price has gone down too much below the twindicator support level.
There is so much uncertainty in the world and central banks are printing money in astronimical amounts and still the gold price seems vulnerable.
Several other commodity price charts suddenly have bad charts. They are probably overbought. There was too much speculation on hogher prices because of QE27 of the Fed, signs that economic growth in the world is accelerating and weakness of the dollar.
Because of all the Irish doom and the coming attacks on Spain the euro will be weak and the dollar will be strong as safe haven. That strength of the dollar should be negatie for the gold price and other commodity prices.
All the disasters of today didn't cause a spike in the gold price. That indicates gold and silver are overbought.
BCA is careful with gold, because the gold silver rate has fallen below 50 and now gold and silver are too expensive because of that.
Negative for gold is also that economists are writing less panicky about QE2, it will be not that inflationary (more stories to follow).

Still it is difficult to remain negative about the gold price for a longer period when real short interest rates are so much lower than 2% for an extended period as the Fed promises. The uncertainty about Spain is favourable for the gold price and the growing preference of many Emerging Markets for a bigger part gold in their currency reserves will help. But watching what the gold prices does now could be prudent.

Super cycle: China more important than US and China together in 2030

Standard Chartered extrapolated the growth of the countries in the world to 2030 according to their own expectations. They are 2,5% growth for the US and Europe and 6,9% for China and 9,3% for India.
From 2010 to 2030 the world GDP in $ will rise tremendously, it will be five times bigger than today.
Standard Chartered is afraid they calclulate not enough growth for India, 12% is possible when the red tape goes down structurally and when they continue to invest lots and lots in infrastructure as they suddenly are doing now (they have seen the success of China by doing this).
The growth for the US is a bit too low I think, 3% is definitely possible until 2030 and maybe 3,5% also. For Europe 2% should be already quite an achievement given the much worse demography of Europe than that of the US.

The estimates for 2030 are also very difficult because of the expected rise of the currencies of China and India in real terms. That can be more than now is calculated or less. The results for 2030 are higher than tou normallty see because a rise of value of the currencies is supposed, what most forecasters don't take into account.

Based on the assumptions of Standard Chartered you see that the size of the Chinese economy in 2030 is almost as big as that of the US and Europe together (and that with that favourable 2,5% growth expectation for Europe and that cautious forecast of 6,9% for China). India could be in 2030 almost as big as the US (that is more optimistic than I have ever seen before).
Japan will become pretty unimportant in 2030 (still they will get 1% growth despite the decline of the population).
(picture of Harry Camp at story about China from Ferguson in WSJ)

Off To The Mall: ISM hopes On Santa

The retail sales are the most important indicator for growth in the US. It leads a bit ISM orders. At the end of 2008 and at the beginning of 2009 the retail sales fell too far below trend and a recovery had to start. Then the retail sales moved too far above trend in 2010 and a correction started that was finished in the third quarter. That correction was overhyped and the New Normals told a double dip was unavoidable. The trend of the retail sales is marginally rising. For a stronger trend car sales must go up further (is improving already), the housing market should recover more convincing (H2 2011?) and employment growth must be clearly stronger (also H2 2011).
To get a strong/ stronger ISM the Christmas sales must be better than last year. Friday is Black Friday and there is the big test for retail sales. Prices are slashed eve n more than in previous years.

The front page of Barrons (see picture) had: Off To The Mall. Jacqueline Doherty wrote an optimistic story about the growth of consumption in the US. The consumer credit is back again at normal levels versus income and consumption is no longer lower because of that. She cites Paulsen of Wells Fargo (he could be a very good member of my club of optimists). The consensus sees a rise of 2.3% for the Christmas sales, but Paulsen thinks it will be 3.5-4%. And in 2011 the American economy will grow about 4%, as also Clifton from Strategas says (and he saw 2009 and 2010 excellently). Clifton says the Bush tax cuts will be extended for at least a year and because of that consumption growth will not be hit as hard as the consensus thinks.
Doherty also takes into account what the New Normals are saying: deleveraging will continue for several years, this is an unstoppable process especially because net assets are still 23% below the 2006 levels.
The New Normals had good reasons why the American consumer should change from a grasshopper to an ant, but that doesn’t seem the case. People that sent the key of their house start consuming again and buying on credit if possible.
Dohety’s article gives losts of arguments why the Christmas sales and consumption growth will be good. Saving will not go up now employment is growing again, consumer debt is back to normal levels, interest rates are so low, the amount of defaulting consumers is going down rapidly. Credit card companies send 3 times as much mails as previous year to get a credit card. Starbucks saw 5% more traffic and 8% higher spending.
That all makes it plausible that the lines for Macy’s etc will grow, but that’s unfortunately also true for food stamps. In total that is leading to more consumption, but the distribution could be a lot more just.

Good News November 19

o Chinese equities went down a bit on the 0.5% hike of needed reserves for banks, but at the end of the day the market recovered and closed higher. There are stil lots of fears about Chinese monetary tightening (and not buying of Treasuries).
o In Japan more people start to believe it is going reasonably well in the US and that there is a growing appetite for buying Toyotas (+1.6% today) and that the yen will remain pretty stable. Also it is possible that Japanese get more confidence that the bank of Japan will buy enough equities and J-reits(BOJ’s Moromoto told that buying equitiess etc is a strong option for the BOJ). Japan is now that cheap that KKR wants to buy Japanese companies.
o IMF said that investors overestimated the probability of defaults of PIGS.
o Trichet disturbed markets, especially PIGS, by saying he could hike rates before the ECB still is doing liquidity support programs.
o The war about rare earth elements between China and Japan seems to be over, the Chinese will restart next week the exports.
o The momentum of GLI, Goldman Sachs leading indicators for growth in the world impoved further (see chart), especially driven by the US. Only the Baltic Dry Index is falling further.
o The number of according the survey of AAII has declined considerably (see chart Bianco). The sentiment had become too optimistic about QE2 and is correcting fast to normal levels. That should not be too bad for equities.

Core CPI too low for fed

The analysis of Tilton (GS) puts question marks behind my expectation for a marginal rise of US core CPI based on higher rents. The three main trends (see chart) force this: rents are going up almost nothing, goods deflation will be back and srvice inflation will go down.
Rents will rise only a little bit (less than I thought), the service inflation will decline (I agreed already, but ISM Prices non manufacturing suggests something else) and goods deflation will be back in town, but not hugely (you will get more deflationary good prices than I thought). Cars, tobacco and apparel caused the big rise of the core goods inflation past year. For cars and tobacco (+30%) these tremendous price inflation will not return.

So the conclusion is clear: core CPI will be too low for the Fed.

Benderly thinks the trend of the core CPI is now 1%, higher than the current core CPI because the cyclical part (LUPAT) has gone down too much. I agree, but the trend of LUPAT is down, even while in the short run it will go up (see chart Benderly).

The American Dream Is Alife, also in India

This story is sent to me by a collaegue form the English The Independent, but you see it at many places, also in India (they also dream about this). The comment was he had chosen the wrong profession, even while he was nerdish enough.

Independent: Talent tug of war makes Silicon a happy valley
2010-11-13 05:22:06.107 GMT

By Guy Adams

As web giants fight over executive geeks, bonuses are booming. Guy Adams reports

CHRISTMAS CAME early this year at Mountain View, the sunny "campus" near Palo Alto, California, that is Google's global headquarters. On Wednesday, the firm's CEO, Eric Schmidt, emailed all of his 23,300 employees with a piece of happy news: they'd each be getting a 10 per cent pay rise in the New Year, along with a seasonal bonus of $1,000 (617).

"We believe we have the best employees in the world. Period. The brightest, most capable group of this size ever assembled," he declared. "It's why I'm excited to come to work every day - and I'm sure you feel the same way. We want to make sure that you feel rewarded for your hard work."

If Heineken made bosses, they'd probably come in the shape of Schmidt, a captain of industry who knows exactly what makes his workforce tick.
That sort of cash will, after all, buy an awful lot of trendy T-shirts and Apple gadgets for the bright young things at the heart of every Silicon Valley success story.

It will not change lives, however. And therein lies the problem with Schmidt's extravagant gesture. As a sop to stem a trickle of talent which has been leaving the firm that Does No Evil for smaller rivals such as Facebook and Twitter, or edgy new start-ups, it looked like a sign of weakness.

In America's tech capital, cold hard cash isn't usually thrown around by companies wanting to keep top staff. Instead, they tout free meals and yoga lessons. If money must be a carrot, then it usually comes via stock options.

Lately though, Silicon Valley has become the setting for an arms race every bit as vulgar as that fought among the pin-striped elite of Wall Street. A flood of new start-ups, combined with the expansion of bigger firms has sparked a war for talented employees. And with demand trumping supply, Google is increasingly seen as part of the dusty establishment.

"The market is frothing and new companies are being created faster than the people who can develop them," says Paul Daversa, whose eponymous firm is one of the tech industry's top headhunting outfits.
"It's a firestorm out there, and talented people looking for creativity and innovation and technical advancement seem to believe that instead of Google, they must go to a cool start-up. It's a problem for them."

Despite the grim wider US economy, job listings in Silicon Valley are up 69 per cent from last year. Seed funding has increased by a factor of ten, reflecting the fact that - in contrast to the tech- bubble of the late 1990s - most internet firms have now worked out how to extract revenue from the medium.

You can see the results of this boom in Palo Alto's buoyant property market. Twitter just signed a lease for 200,000 square feet of new office space. Zynga, the social gaming giant, just added 270,000 more.
Google is recruiting 200 new employees each month. Facebook hopes to double its 2,000-strong payroll by 2013.

The hot commodity is software engineers. Tales of excess abound.
Graduates with a decent computer science degree from MiT or Berkeley, the Oxbridge of US engineering schools, can expect to earn $120,000 in their first year after graduation.

After that, the sky's the limit. Techcrunch, the Silicon Valley news site, this week reported that a staff engineer at Google was given $3.5m in company shares to ignore an overture from Facebook's HR department. One of his more junior colleagues, on a salary of $150,000, was offered a 15 percent rise and a $500,000 bonus to remain... but still decided to jump ship.

The incidents come during a wider landgrab by Facebook, which is aggressively courting Google's top talent. At least200 of Mark Zuckerberg's employees came from the search engine, including Bret Taylor, who is now his CTO and Lars Rasmussen, co-founder of Google Maps who rubbed salt into the wound of his departure by telling
reporters: "The energy [at Facebook] is just amazing, whereas it can be very challenging to be working in a company the size of Google."

Matthew Papakipos, the engineer in charge of Google Chrome, joined Facebook in the summer, along with Android boss Erick Tseng, and sales chief David Fischer. In an audacious move, Facebook even managed to poach Josef Desimone, its rival firm's executive chef. Mark Zuckerberg was persuaded to pursue him after falling in love with his hot dogs.

Just one poor soul is not sharing in this gold rush. He, or she, is the unfortunate staffer who leaked Eric Schmidt's memo this week to Business Insider and Fortune magazine. A day later, Google announced, curtly, that the employee in question had been terminated. These may be happy days in Silicon Valley, but they don't want to rub our faces in it.

[US Outlook, Business, page 55]

BRET TAYLOR

The co-creator of Google Maps left to start his own company - which Facebook bought for $50m

JOSEF DESIMONE

Facebook even poached Google's top chef - Zuckerberg can't get enough of his hot dogs

ERICK TSENG

Google's top mobile apps developer moved to take over Facebook's smartphone operation

LARS RASMUSSEN

Facebook founder Mark Zuckerberg hired the engineer after Google dumped Wave, his pet project

MATTHEW PAPAKIPOS

The mastermind behind Google Chrome was tempted away by Facebook earlier this year