Sunday, April 20, 2014

Solar Power and the Near Future

I admit openly that I do not know much about solar power in spite of the fact that I have done quite well with a clean energy ETF called Guggenheim Solar (symbol: TAN).  I was surprised and a little shocked at the advances made by solar energy in the last few years.  For example, did you know that there has been more solar capacity put in place in the last 18 months in the US than in the last 30 years.  It is a combination of declining pricing for solar energy production, increasing efficiency, and high prices for fossil fuels.  Below is an article I recently found from the UK Telegraph extolling the virtues and consequences of solar power.
The article is in italics and the bold is my emphasis.  From the UK Telegraph:
Solar power has won the global argument. Photovoltaic energy is already so cheap that it competes with oil, diesel and liquefied natural gas in much of Asia without subsidies.
Roughly 29pc of electricity capacity added in America last year came from solar, rising to 100pc even in Massachusetts and Vermont. "More solar has been installed in the US in the past 18 months than in 30 years," says the US Solar Energy Industries Association (SEIA). California's subsidy pot is drying up but new solar has hardly missed a beat.
The technology is improving so fast - helped by the US military - that it has achieved a virtous circle. Michael Parker and Flora Chang, at Sanford Bernstein, say we entering a new order of "global energy deflation" that must ineluctably erode the viability of oil, gas and the fossil fuel nexus over time. In the 1980s solar development was stopped in its tracks by the slump in oil prices. By now it has surely crossed the threshold irreversibly.
The ratchet effect of energy deflation may be imperceptible at first since solar makes up just 0.17pc of the world's $5 trillion energy market, or 3pc of its electricity. The trend does not preclude cyclical oil booms along the way. Nor does it obviate the need for shale fracking as a stop-gap, for national security reasons or in Britain's case to curb a shocking current account deficit of 5.4pc of GDP.
But the technology momentum goes only one way. "Eventually solar will become so large that there will be consequences everywhere," they said. This remarkable overthrow of everthing we take for granted in world energy politics may occur within "the better part of a decade".
If the hypothesis is broadly correct, solar will slowly squeeze the revenues of petro-rentier regimes in Russia, Venezuela and Saudi Arabia, among others. Many already need oil prices near $100 a barrel to cover their welfare budgets and military spending. They will have to find a new business model, or fade into decline.
The Saudis are themselves betting on solar, investing more than $100bn in 41 gigawatts (GW) of capacity, enough to cover 30pc of their power needs by 2030 rather than burning fossil fuel needed for exports. Most of the Gulf states have comparable plans. That will mean more crude - ceteris paribus - washing into a deflating global energy market.
Clean Energy Trends says new solar installations overtook wind turbines worldwide last year with an extra 36.5GW. China alone accounted for a third. Wind is still ahead with 2.5 times old capacity but the "solar sorpasso" will be reached in 2021 as photovoltaic (PV) costs keep falling.
The US National Renewable Energy Laboratory says scientists can now capture 31.1pc of the sun's energy with a 111-V Solar Cell, a world record but soon to be beaten again no doubt. This will find its way briskly into routine use. Wind cannot keep pace. It is static by comparison, a regional niche at best.
A McKinsey study said the average cost of installed solar power in the US across all sectors has dropped to $2.59 from more than $6 a watt in 2010. It expects this fall to $2.30 by next year and $1.60 by 2020. This will put solar within "striking distance" of coal and gas, it said.
Solar cell prices have already collapsed so far that other "soft costs" now make up 64pc of residential solar installation in the US. Germany has shown that this too can be slashed, partly by sheer scale.
It is hard to keep up with the cascade of research papers emerging from brain-trusts in North America, Europe and Japan, so many brimming with optimism. The University of Buffalo has developed a nanoscale microchip able to capture a "rainbow" of wavelengths and absorb far more light. A team at Oxford is pioneering use of perovskite, an abundant material that is cheaper than silicon and produces 40pc more voltage.
One by one, the seemingly intractable obstacles are being conquered. Israel's Ecoppia has just begun using robots to clean the panels of its Ketura Sun park in the Negev desert without the use of water, until now a big constraint. It is beautifully simple. Soft microfibers sweep away 99pc of the dust each night with the help of airflows.
Professor Michael Aziz, at Harvard University, is developing a flow-battery with funding from the US Advanced Research Projects Agency over the next three years that promises to cut the cost of energy storage by two-thirds below the latest vanadium batteries used in Japan.
He said the technology gives us a "fighting chance" to overcome the curse of intermittency from wind and solar power, which both spike and drop off in bursts. "I foresee a future where we can vastly cut down on fossil fuel use."
Even thermal solar is coming of age, driven for now by use of molten salts to store heat and release power hours later. California opened the world's biggest solar thermal park in February in the Mojave desert - the Ivanpah project, co-owned by Google and BrightSource Energy - able to produce power for almost 100,000 homes by reflecting sunlight from 170,000 mirrors onto boilers that generate electricity from steam. Ivanpah still relies on subsidies but a new SunPower project in Chile will go naked, selling 70 megawatts into the spot market.
Deutsche Bank say there are already 19 regional markets around the world that have achieved "grid parity", meaning that PV solar panels can match or undercut local electricity prices without subsidy: California, Chile, Australia, Turkey, Israel, Germany, Japan, Italy, Spain and Greece, for residential power, as well as Mexico and China for industrial power.
This will spread as battery storage costs - often a spin-off from electric car ventures - keep dropping. Sanford Bernstein says it may not be long before home energy storage is cheap enough to lure households away from the grid en masse across the world.
Utilities that fail to adapt fast will face "disaster". Solar competes directly. Each year it is supplying a bigger chunk of peak power needs in the middle of the day when air conditioners and factories are both at full throttle. "Demand during what was one of the most profitable times of the day disappears," said the report. They cannot raise prices to claw back lost income. That would merely accelerate what they most fear. They are trapped.
Michael Liebreich, from Bloomberg New Energy Finance, says we can already discern the moment of "peak fossil fuels" around 2030, the tipping point when the world starts using less coal, oil and gas in absolute terms, but because they cannot compete, not because they are running out.
This is a remarkable twist of history. Just six years ago we faced an oil shock with crude trading at $148. The rise of "Chindia" and the sudden inclusion of 2bn consumers into the affluent world seemed to be taxing resources to breaking point. Now we can imagine how China will fuel its future fleet of 400m vehicles. Many may be electric, charged by PV modules.
For Germany it is a bitter-sweet vindication. The country sank €100bn into feed-in tariffs or in solar companies that blazed the trail, did us all a favour, and mostly went bankrupt, displaced by copy-cat competitors in China. The Germans have the world's biggest solar infrastructure, but latecomers can now tap futuristic technology.
For Britain it offers a reprieve after 20 years of energy drift. Yet the possibility of global energy deflation raises a quandry: should the country lock into more nuclear power stations with strike-prices fixed for 35 years? Should it spend £100bn on offshore wind when imported LNG might be cheaper long hence?
For the world it portends a once-in-a-century upset of the geostrategic order. Sheikh Ahmed-Zaki Yamani, the veteran Saudi oil minister, saw the writing on the wall long ago. "Thirty years from now there will be a huge amount of oil - and no buyers. Oil will be left in the ground. The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil," he told The Telegraph in 2000. Wise old owl.

Tuesday, March 18, 2014

Analysis of the Job Market - Is It Strong?
Below is some recent research completed by the American Institute of Economic Research (AIER) that discusses the strength of the job or labor market.  The article is interesting because it goes behind the numbers indicating that one metric like the unemployment rate is probably too simple to explain the complexity of the labor market.  In addition the article puts numbers to the effect that the recent winter weather can have on the job market.  This is not opinion, but some objective numbers so you can decide.  The research turned out by the AIER is always worth a look.   
Severe weather was likely an important factor in the latest employment report from the Bureau of Labor Statistics (BLS), but the good news—for a change—is that the results weren’t terribly weak.
The unemployment rate ticked up to 6.7% in February from 6.6% in January, but that wobble is probably little more than statistical noise.  The big news is that non-farm payrolls rose by a stronger-than-expected 175,000 in February.  Most people who watch these numbers were bracing for a  weaker result, owing to the impact of severe weather.
Yes, the weather in February was worse than usual… yet again. But the timing last month was especially bad: Winter Storm Pax, which crippled most of the eastern half of the country, struck during the week in which the BLS conducts its employment surveys. While you might not lose your job because you are snowed in, the BLS will not include it in the payrolls tally unless you actually did paid work during the survey week. The number of people in February who reported having a job but not going to work because of the weather during the survey week was 601,000, compared to just 237,000 in the same month last year. What if an employer planned to start a new hire on February 12 but delayed the start date to the following week because of the storm? That new job won’t count toward the monthly gain in payrolls.
Considering the toll February’s bad weather probably took—the BLS does not provide a direct measure of weather effects—the 175,000 rise in payrolls suggests the labor market continues to strengthen, despite weaker readings (also weather-affected) of 129,000 in January and  84,000 in December.
Just how weak are those numbers? If you follow the economic data in the news, you might get the sense that a jobs report is not strong unless it includes at least a 200,000 gain in payrolls.  Last year’s monthly average was 194,000, which would make it slightly-less-than strong, and certainly not impressive. This assessment no doubt contributes to the widespread skepticism that the decline in the unemployment rate, from 10% at the peak to 6.7% in February, overstates the improvement in the labor market.
But it’s worth revisiting assumptions about what constitutes a “strong” or “weak” gain in jobs. For a number of reasons—most of which have nothing to do with the strength or weakness of the economy—our labor force just isn’t growing as fast as it used to. Baby boomers are a huge demographic bulge, and as they retire and leave the workforce in droves, they are offsetting much of the gain in new entrants to the labor force, which itself is not what it used to be.
In order to keep the unemployment rate from rising, the number of new jobs in the economy must match the net growth of the workforce—the difference between the number of new entrants and the number of “leavers.” Of course, some people hold more than one job, but only about 5% of the labor force as of the latest data.
If we want to see overall unemployment decline in the economy—bringing the unemployment rate down—then payroll growth must surpass the net growth of the labor force. There’s certainly a lot of ground to make up: The economy shed over 8.6 million jobs during the recession, and since then there has been a net increase in the workforce of about 1.6 million people. So far in this recovery, the economy has created about 8 million new jobs. So we still need to see bigger gains in employment than increases in the labor force to close the unemployment gap. But what kind of numbers are we talking about?
Take a look at our chart below, which lines up labor force growth and jobs growth. The labor force numbers are erratic from month to month, so we’ve smoothed them using 12-month averages. Every time the blue area rises above the red area, the economy is creating enough jobs to bring down unemployment. Over the last year, jobs growth has exceeded labor force growth by a much wider margin, and more frequently, than it did during the early 2000s, when monthly payrolls gains would regularly surpass 200,000.
Based on the trend in labor force growth since 2012, sustained gains in payrolls in excess of 75,000 per month are enough to reduce the unemployment rate over time. That means the average gains of 194,000 per month we saw last year were quite strong—and even the lackluster 152,000 average so far this year is enough to keep chipping away at the unemployment rate. Of course, the greater the gains in jobs, the faster the unemployment rate will come down.

What is Going to Happen to Fannie Mae and Freddie Mac?

A quick update on the fate of Fannie Mae and Freddie Mac from Market Watch.  The article below is an opinion piece with a few news updates added.  This post goes along with my previous post that home ownership is going to become more difficult in the future due to high minimum down payments, higher interest rates, higher credit standards, and higher transaction costs.  Whether this is a good or bad thing is another issue.  But, as stated in the previous post I do not see a strong home price appreciation in many markets going forward due to the rising cost of home ownership.
After decades supporting a political and economic creed that honored affordable and accessible home ownership, Washington is trying to shift gears on a $9.9 trillion system without grinding the machine to an abrupt halt.
A bipartisan team from the Senate Banking Committee reached an agreement Tuesday (March 11) on a broad bill that would unwind Fannie Mae and Freddie Mac the government-sponsored mortgage companies bailed out by taxpayers and placed under conservatorship during the financial crisis.
The plan replaces the god of government backed housing for a more private-market model. It would replace Fannie and Freddie with a new system of federally insured mortgage securities in which private insurers would be required to take initial losses before any government guarantee would be triggered.
Private enterprise was all but eliminated from the mortgage finance process as banks dumped massive amounts of mortgages into the laps of Fannie and Freddie in the run up to the meltdown. The government and taxpayers gradually shouldered the entire mortgage load.
The intended benefit of the system was that it made housing cheaper and available even to those with less than credit-worthy profiles. The unintended consequence was an uncompetitive and distorted marketplace where home buyers underpaid for their loans and the risk was borne by everyone.
The trick for the new bill will be its ability to reintroduce some shared risk-taking and market pricing to an industry that was, if not socialized, then financially engineered by the government in the politically driven zest to create the widest, easiest path to a “man’s (or woman’s) castle.”
Ultimately, prices will certainly go up as private insurers, bond originators and investors will demand more of a premium to offset risk. To shift a system built over four decades amid a fragile housing recovery will take a lot of patience and political nerve — the lack of which got us into this mess in the first place.
Further comments from the Senate later in the week indicated that the chances of this bill passing in a midterm election year are fairly slim (CNBC).  After all, how do you explain to your constituents that the government is not going to help the housing market in your district or state.  In addition both Fannie and Freddie (GSEs) provide some fairly nice profits that go back to the government.  Lastly, there is the question of who profits from the dissolution or break-up of these GSEs,  Right now it could be those "pesky" hedge funds.  All this needs to be sorted out before this bill can move forward.  There oftentimes is a big difference between economics and what can really be done politically.  "O what a tangled web we weave . . ." -Sir Walter Scott

Last note.  The bill was introduced in the Senate on Sunday March 16 (Market Watch).  

Friday, March 14, 2014

Is the Housing Market for Real or Just More Hot Air? The News of a Strong Market is not Supported by the Data.

For some time I thought all the talk about the housing market, that is, things are coming back, prices are going up, we will return to the days prior to the financial crisis, etc. was a lot of hot air.  Now I am convinced of it.

I admit that prices are going up.  I believe that some of that is basically the purchaser and seller thinking that things are back to normal, ergo the pre-2006 period.  Existing home sales have come back to the levels common during 2000 - 2002 (thanks to Calculated Risk), but not even close to the 2004 - 2006 period.

New home sales, however, have not recovered to the pre-2006 period (thanks again to Calculated Risk).  In fact current new home sales are at levels not seen since the recessions of the 1970s and 1980s.

In addition a recent article on the Washington Post Blog indicates that the expectation for housing price appreciation for the next 10 years has been declining since 2004.  The most recent survey shows that the sample of buyers in 4 major metropolitan areas expect an appreciation rate of 3% per year for the next decade.  This is lower than the current mortgage rate, not much of a return on your money.  As an aside this survey is completed by the Karl Case and Robert Shiller, the same people that bring us the Case-Shiller Housing Price Index.

Below is the results of the annual survey:
Screenshot 2014-02-26 12.42.12

A recent poll of real estate forecasters by Pulsenomics showed that experts expect a nationwide house price appreciation of 4.5% in 2014 declining to about 3.3% by 2018.  This is similar to the results of the Case-Shiller annual survey of home buyers.

So what is the housing market going to do?  The housing market is always local.  Some areas will appreciate and others will largely stagnate.  But, overall I am not seeing a lot of strength in the housing market.  Mortgage rates will increase over time as interest rates increase. Lending standards are going to remain tough.  Higher FICO scores and 20% down (except for first time home buyers) will become the standard.  Young people will continue to find home buying difficult because of the down payment and because of what they saw their friends and family go through as the real estate market collapsed after 2007.

You should look at the numbers and make up your own mind, but as for me, I am in no rush to buy a home.  I think owning a home will eventually become what it should have always been - not an investment issue, but a cash flow issue.

Wednesday, February 27, 2013

Is the Great Rotation a Myth?  

The Great Rotation is the rotation of investor dollars from bonds back into stocks.  

The article is in italics.  The bold is my emphasis.  From

As investors begin to dip back into the stock market, chatter about a so-called Great Rotation has been growing louder.  But so far it's proving to be more of a myth.

The Great Rotation came into the spotlight at the end of 2012, when Bank of America Merrill Lynch investment strategist Michael Hartnett predicted that investors who had fled the stock market for the safety of bonds would start to rotate back into stocks.

In fact, investors have added more money to bonds than stocks almost every week this year. In total, U.S. stock mutual funds have raked in nearly $20 billion in 2013, while bond funds have attracted more than $40 billion, according to data from the Investment Company Institute.

Rather than trimming their bond exposure, investors have been adding to stocks at the expense of their cash holdings, said Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock.

"In the panic following the 2008 collapse, investors initially flocked to cash," said Rosenberg, noting that assets in money market funds jumped by nearly 40% to about $3.5 trillion and peaked at $4 trillion in 2009.

Cash levels declined steadily from there until the end of last year when fiscal cliff fears sent investors back to cash. And once a deal to avoid the cliff was struck, assets in money market funds and bank deposits began to fall - that's the money that has been flowing into stocks, said Rosenberg.

While the Great Rotation out of bonds and into stocks may still be coming, it won't be anytime soon, according to Tobias Levkovich, chief U.S. equity strategist at Citigroup.

"Unfortunately losing money in bonds may not cause a huge outflow from bond funds which would then pour into stock funds," he wrote in a recent note. Investors didn't start consistently pulling money out of stocks until two years after the tech bubble and stock market peaked in 2000, he noted, adding, "Believing in a rotation now seems fairly premature."

Still, even shifting from cash toward stocks signals a change in sentiment, according to Bill Stone, chief investment strategist at PNC Wealth Management.

"Perhaps some of the residual fear from the financial crisis that caused investors to shun stocks is starting to dissipate," he said.

Monday, February 25, 2013

The Millennials are Borrowing Less
People I talk to are always wondering when things are going to get back to normal.  The point is they are not ever going to be like they were prior to the Financial Crisis of 2007 - 2008.  One of the major issues is that Millenials (those born between 1982 and 2004) are borrowing less.  They are similar to the generation of Americans brought up during the Great Depression.  Not sure, but my guess is this is permanent behavior change in this group.
The article is in italics and the bold is my emphasis.  From CNNMoney:
Since the Great Recession, countless Americans have shunned the idea of taking on more debt. Homeowners discovered that stretching to buy bigger houses would result in years of financial turmoil. Jobless college grads unable to pay down their student loans now wonder if their degrees are really worth it. And as Europe grapples with its own debt problems, Washington lawmakers struggle to find a way to reduce the US deficit.
Indeed, many have learned a few harsh lessons. But debt isn't always a bad thing. More of it can reflect a healthy economy -- one where consumers, as well as lenders feel comfortable taking on more risks.
Young adults, however, haven't taken on nearly as much debt as their parents. It's uncertain if the trend will continue as the economy improves, but for now, those under 35 years old have shed debt faster than older ones, according to a report by Pew Research Center released last week. The study doesn't say if this is a good or bad development, but many signs suggest the drop means Millenials are more anxious than responsible about their finances.
It's a negative sign. The Federal Reserve's policies to keep interest rates super-low has spurred more home and car sales by getting consumers to borrow more, but it appears young adults have benefitted less from the central bank's bond-buying program.
Across households headed by people under 35 years old, median debt fell by 29% to $15,473 in 2010, compared with $22,000 in 2007, according to the report. That compares with a much smaller 8% drop at households headed by those 35 and older during the same period.
To be sure, the decline partly reflects a fall in home loans and purchases by young adults. This doesn't necessarily signal that younger people aren't able to afford a house, since many have been delaying marriage (which is typically followed by homeownership) for various reasons. However, the share of first-time homebuyers typically comprised of young adults has fallen. And young people are less willing to take on credit card debt and auto loans, suggesting they aren't in financial positions to commit to monthly payments. Compared with 50% in 2001, only 39% of young households in 2010 had credit card debt. When it comes to vehicles, 73% of households headed by an adult younger than 25 years old in 2001 owned or leased at least one vehicle. By 2011, that share fell to 66%.
What's maybe most perplexing is that student debt has increased while all other consumer loans fell. Still, roughly three-quarters of household debt for young adults comes from home loans; student debt makes up only 15%.
The study's results are similar to other research looking at the finances of young adults. In a 2012 Rutgers University survey of college graduates, 40% said student debt was making them delay large-scale purchases, such as a house or a car. Faced with big monthly payments, recent college graduates aren't earning as much as graduates before them. The median salary for those graduating between 2009 and 2011 was $27,000 -- $3,000 less than 2007. The difference is significant. It could mean having enough to help with a down payment on a home or spending money for everything from clothes and furniture.
For now, the no-debt Millenials have spawned a generation that rents most everything.

Tuesday, February 19, 2013

Is Inflation the Problem? Part #2

This is actually part 1 of the previous post on inflation.  The article gives a good sense argument why the US and other countries are not headed for high inflation.

The article is in italics and the bold emphasis is mine.  From Economic Matters:

Cocoa Prices and Inflation

Everyone is currently worried about inflation with the central banks printing like there is no tomorrow. But the actual inflation numbers are much less than people think inflation is in their everyday lives. 

For example, Let`s look at Cocoa prices, literally at the bottom of their five year range at 2,227 per ton, well below the 3,800 per ton level established in March of 2011.

Rough Rice Prices and Inflation

If we take Rough Rice which closed at $16.34 per cwt. it is well below the highs of $22.65 and $19.02 per cwt. established in April 2008 and September 2011 respectively. Sure there is a general trend higher in Rough Rice if we go back to 2003, but how actively traded was the instrument back then from an overall investment standpoint? However, the bigger picture of the last five years shows no real signs of inflation for a major food staple in the world`s diet. 

Wheat Prices and Inflation

If we look at Wheat prices which closed at 756 cents per bushel or $7.56 per bushel these prices are also well below the highs of $13.00 per bushel and $9.65 per bushel established in February 2008 and April 2011 respectively. Again Wheat prices are much higher than 2003, but markets were so much smaller back then from a global and fund perspective. 

There are just a lot of investment dynamics that modern markets with ETFs opening up additional investment options, and electronic markets allowing for greater participation levels, plus the natural progression of inflation of assets over time that play a large role in these elevated prices during a 10-year time span. 

However, it should be noted that despite the price spikes, and inflation fears in the media and the investment community, wheat prices for the most part have been pretty stable the last five years. Not exactly runaway inflation for a mass consumed food staple! 

Emerging Markets and Inflation

There is no doubt that there is food inflation in emerging markets with some of the cause due to central banks exporting some inflation pressures, but most of the food inflation these countries experience is due to inefficient food supply chain issues, and poor governmental policies regarding currencies and financial market structural issues.

Of course population factors in many of the emerging economies add their own set of price pressures as well. But these issues are nothing new and not a direct result of central bank monetary policies in the developed world for the most part. 

Higher Spending Levels and Inflation

In conclusion, for there to be runaway inflation in the developed economies that everyone fears right now it is going to take much more spending pressures by consumers along the entire supply chain of goods and services needed for everyday living. Not just a couple of areas like Healthcare or Education which exhibit definite higher inflation trends, and are actually mainly the result of government, corporate and insurance related subsidy issues. 

Fed Injected Liquidity Chases Stocks and Bonds Not New Clothes

There just isn`t the demand needed to push up spending levels to the point necessary for more capital chasing fewer and fewer goods and services. It is still skewed in the opposite direction, despite all the increase in monetary capital, but this capital isn`t chasing essential goods and services in the economy. 

The loose monetary capital is meant to fill the void and help offset the lack of actual consumer spending in the economy, and the nasty effects of the deflationary, deleveraging process. The one area where we experience inflation due to the central banks is in more capital chasing fewer investment opportunities, and thus prices rise in stocks and bonds as a result during this loose monetary policy period. 

But consumers are not so well off, or flush with cash, that they are massively consuming at the levels needed to cause major inflation pressures in the goods and services area of the economy. 

The Wealth Effect and Spending

The wealth effect will even be less than policy makers would like because not everyone is invested in 401k`s in the stock market, and investors don`t feel comfortable enough with their retirement levels to start cashing out major amounts, and putting this new found wealth back into the economy. Shoot investors are just now back to the level they were five and ten years ago. 

In addition, the problem is not all assets can be reflated as many companies have gone out of business with the tech and financial market collapses, that investment capital is forever lost, and completely deflationary in nature. You can`t get back to even if you were completely wiped out in an invested company, or you were wiped out so bad, that you pulled your money from the market. 

Other examples are small businesses that went bankrupt and lost all their built up equity in the business, or homeowners who lost their homes and all the money they invested over the years of home ownership. If you bought at the top of the housing market you are also caught in the deflationary trap. 

That is what makes re-pricing in assets such a nasty process, and very deflationary in nature. There is so much personal wealth that is forever lost, and nothing central banks do from a monetary perspective can ever bring this wealth back into circulation chasing goods and services in the economy.   

Banks have recapitalized their balance sheets; Consumers still have a long way to go!

Banks and financial institutions have enjoyed the fruits of the asset recapitalization in markets far greater than actual retail investors participating in financial markets over the last 10 years. Maybe if the Dow goes to 25,000 new investors will all be rich and pull this money and put it to use buying goods and services in the economy. 

But there just aren`t enough actual consumers of overall goods and services who are doing so well in their personal finances given that wages have been stagnant for seven years to increase the spending part of the curve so that there is more capital chasing fewer goods. 

The Underemployed and Unemployed Not Flush with Cash to Spend=Deflationary Pressures

As I said earlier, it is still a buyer`s market, i.e., please buy the goods and services that we bring to the market.  With the high number of the total unemployed or underemployed still putting substantial deflationary pressures on the demand for goods and services in the economy because they lack the financial resources we have a while to go before runaway inflation rears its unmanageable head in the developed economies of the world. 

Sunday, February 17, 2013

Is Inflation a Problem?

Everyone worries about inflation, but we are seeing deflationary pressure in a number of areas in the economy.  The article points out a few that are worth noting.

For some interesting insight into the economy and the markets.  Give Economic Matters a try.  Some of their material is pretty interesting.

The article is in italics and the bold is my emphasis.  From Economic Matters:

Consumers only focus on Inflation, they ignore deflation areas.

It seems that to exclusively focus on one side of the equation can be human nature at times, and with regard to inflation concerns humans never see the other side of the equation, i.e., areas where they are actually experiencing deflation in their lives.

The Housing Market

Let`s start with housing, the Case-Shiller 20-City Home Price Index shows quite clearly that after years of inflation, consumers are getting a large break on prices due to the deflationary effects in the housing industry over the last five years.

Mortgage & Interest Rates

How about interest rates, rates for getting financing either to finance a first purchase or refinance an existing loan have been a real boon to consumers, and rates generally have been coming down for twenty years. I am sure your parents or grandparents can tell stories of 18% mortgages; we are definitely experiencing deflation in financing costs around borrowing money.

Copper Prices

Next let us look at Copper prices for the last five years down over 2%, and that is after a price spike for the first quarter, wait for the first major selloff in markets and copper will be much cheaper, i.e., Copper prices can easily sell off 30 cents or more per pound when assets sell off over the annual summer selloff. 

The first quarter the last three years has been good for asset prices, but it is important to take the yearly average in prices to smooth out the fund inflow noise that look to make a quick buck on the first quarter ramp up in investment flows. 

But again Copper is a major component used for industrial & commercial economic projects and an inflation hedge, and it is exhibiting deflationary effects the last five years, especially when you factor in ‘real terms’ it is even more deflationary. 
Natural Gas Prices

Let us next take Natural Gas prices down over 40%  for the last ten years, but consumers don`t want to factor the areas where they are doing much better in regards to the “pernicious effects” of inflation.

Yes Natural Gas prices are another major economic input cost for many manufactured products from plastics to chemicals, and this major economic input commodity is in a major deflationary cycle.
Gasoline Prices

Now let us take everyone`s poster child for inflation gasoline prices; over the last five year`s they are up 20%, but this is misleading as we are at the highest point ever for this time of year, and gasoline like oil prices are quite volatile. 

For example, they were down 10% over a five year period in June of 2012, so again it is important to take the yearly average in gasoline and oil products. 

But even one of the worst categories for inflation, at the height of a recent influx of capital, is only averaging 4% annual inflation. 

Plus there are other factors at work here including the newly minted exporting of gasoline and petroleum products that has occurred as a trend the last three years in these markets that are making these numbers worse than they otherwise would be.

Just be patient folks gasoline prices will come down as high prices are actually deflationary for the product, and the old adage applies, there is no better cure for high prices than high prices for economic sensitive goods. 

Expect a pullback in gasoline prices for the second half of the year, and when we revisit these numbers I can envision a negative print for gasoline prices over the last five years.
Electronics have built in Deflationary Cycles

But we haven`t even gotten into electronics, televisions, computers, cell phones etc. there are many other areas which continually have deflationary product cycles that help cancel out the areas where we do have inflation effects, and even some areas that are indeed “pernicious”! 

I am not saying there is no inflation, clearly even the government numbers show over a 2% annual inflation rate.  But the exercise is meant to show that there are major deflationary pressures still at work in our economy, and they are worth taking notice of to balance some of the inflation rhetoric that seems built into our psyches. 

Wholesalers Probably Take Advantage of Inflation Fears

I think a lot of wholesalers, middlemen, retailers, etc. actually fatten margins because consumers believe inherently in the “pervasiveness” and “perniciousness” of inflation; why not tap into this and confirm their worst fears, and gain some pricing power along the way.

The input costs that I have presented over these two articles are actually quite deflationary, and I can keep going as there are so many examples of deflationary price pressures in many commodities.  The second article will be posted on Monday (Feb 18)

The fact that I can easily find so many examples should in itself say something regarding the inflationary environment in the economy. I literally just started pulling up charts and indexes, and was not cherry picking for results. 

Sure I can find many areas that are inflationary, but if inflation was really as “Pernicious” and “Pervasive” as everyone seems to believe these days, I shouldn`t be able to find so many counterexamples to their argument so effortlessly.  

Thursday, February 14, 2013

The Minimum Wage - Actual and Corrected for Inflation



The grey line shows the minimum wage, unadjusted for inflation, whereas the blue line shows you what it would be worth in 2012.
When President Franklin D. Roosevelt first created the minimum wage in 1938, it was 25 cents. Adjusted for inflation, that would be worth $4.07 today.
The minimum wage had its lowest buying power in 1948, when it was worth about $3.81 in today's dollars. It had its highest buying power in 1968, when it was worth about $10.56.
At $7.25 in 2012, our current minimum wage is in the middle of those two extremes.
President Obama's proposal to raise the minimum wage to $9 would put it back to a value last seen in the early 1980s.

Wednesday, February 13, 2013

US Fiscal Policy - A Problem

Below is an article from the New Yorker that articulates fairly well the issues in Congress when it comes to the budget deficit.  The article is in italics.

Reading through the new budget outlook from the Congressional Budget Office, which was released on Tuesday, three figures made the biggest impression on me: 1.4 per cent, 2.4 per cent, and 76 per cent. Taken together, these three numbers explain a good deal about what’s wrong with Washington, and how we are focussing on precisely the wrong things. Rather than tackling the projected rise in entitlement spending, which does present a long-term threat to the country’s prosperity, policy makers, particularly congressional Republicans, are intent on making short-term spending cuts across the board, which would threaten the current economic recovery. In short, they’ve got things upside down.

The 1.4 per cent figure is the C.B.O.’s forecast for how much the economy will grow this year. If you think this sounds like a low figure, you’re right. Last year, which was hardly a rip-roaring one, the inflation-adjusted gross domestic product rose by 2.4 per cent. In an economy recovering from a deep recession that has kept the unemployment rate close to or above eight per cent for four years now, we need annual growth of three per cent or higher to make a real dent in the jobless figures.

You might think, therefore, that both parties would be doing all they can to get the economy humming, and avoiding anything that risks plunging the country back into a recession. But you would be wrong. Ever since the November election, practically the entire debate in Washington has been about cutting spending and raising taxes, both of which reduce the level of demand for goods and services. The fiscal-cliff deal raised the taxes that most working Americans pay by two per cent, and high-income taxpayers had a bigger hike. Now we are faced with the so-called sequester, which, if enacted on March 1st, will cut defense spending by forty-eight billion dollars (about eight per cent of the total) and non-defense spending by twenty-nine billion dollars (about five per cent of the total).

The C.B.O. estimates that, taken together, the fiscal-cliff deal and the sequester will reduce G.D.P. growth by about 1.5 per cent. Another way of putting it is that if neither of these policies had been introduced, growth this year would have been close to three per cent, which is what we badly need. In the interest of reducing the budget deficit and stabilizing the debt-to-G.D.P. ratio, policy makers have effectively hacked growth in half—that’s assuming the sequester goes through, which most people in Washington now think will happen. Consequently, the C.B.O. says, the unemployment rate is likely to stay close to eight per cent for at least another couple of years.

True, the C.B.O.’s forecasts could be wrong. (Like all economic predictions, they often are.) Despite the fact that the G.D.P. fell slightly in the fourth quarter of 2012, according to last week’s advance estimate from the Commerce Department, I think the economy has enough forward momentum to withstand the fiscal hit and still grow at a reasonable pace in 2013—say, 2.5 per cent, or even a bit higher. But I could well be being overly optimistic. When other countries with big deficits shifted from stimulus to austerity, the results were disappointing. In Britain, for example, the outcome was a double-dip recession, which is currently threatening to turn into a triple dip.

The U.S. is taking a big risk, to say the least, by turning to austerity policies, and for what end? Contrary to popular belief, the country is not facing an immediate fiscal crisis. Since peaking in 2009, at 10.1 per cent of the G.D.P., the budget deficit has been steadily declining. This year, according to the C.B.O., it will be 5.3 per cent of the G.D.P., and next year it will be 3.7 per cent. By 2015, it will be just 2.4 per cent of the G.D.P., which is below what it averaged in the three decades prior to 2007.

These figures are based on the assumption that all of the sequester will go into effect, and that Medicare payments to doctors will be cut by a quarter at the start of next year. If neither of these things happen—Congress regularly suspends the Medicare cuts—the deficit would be a bit higher than the C.B.O. projections, but not dramatically so. Under any likely policy scenario, assuming the economy doesn’t go into another slump, the deficit will be back down to manageable levels within a couple of years. Alarmists who say we have to slash now or meet the same fate as Greece are just that: alarmists.

That’s the good news. The worrying thing is that, even according to the C.B.O. projections, the deficit starts to rise again after 2015—not dramatically, but enough to be of concern. By 2021, it will be up to 3.8 per cent of the G.D.P., and thereafter, according to the Budget Office’s latest long-term projections, which it released last summer, things start to get pretty dire. By 2037, according to the C.B.O.’s “extended alternative fiscal scenario,” which assumes that most current policies continue, the debt-to-G.D.P. ratio would be close to two hundred per cent. (At the moment, it is about seventy-five per cent.)

While some countries with very high savings rates, such as Japan, have managed to live with and finance such a high debt burden, the United States, which has a low savings rate—we love to shop—might well have trouble finding enough foreigners willing to buy Treasury bonds. In extremis, the result could be a U.S. default. More likely, a sharp rise in Treasury yields, and quite possibly a generalized financial crisis, would force the government to tackle the problem at some point before then.

It’s no mystery what underpins this worrying scenario: a big rise in entitlement spending—on Medicare, Medicaid, Obamacare, and Social Security, mainly—and interest payments on the rising debt. Forty years ago, mandatory spending, which largely consists of entitlements, made up about a third of the federal budget. Today, it makes up about three-fifths of the budget, and the share is rising. Add in interest payments, which can’t be avoided, and the situation is even more stark. By 2023, according to the C.B.O. projections, three-quarters of the budget will be going to entitlements and interest payments.

The exact figure is seventy-six per cent—the third number I mentioned at the start of the post—which would leave just a quarter of the budget to cover everything else: defense, homeland security, income-support programs for the poor, education, scientific and medical research, national parks, and so on. It doesn’t take a genius to figure out that there wouldn’t be enough money to go around, meaning that the only options would be higher taxes to boost revenues or big cuts in spending on popular programs.

With neither party willing to tell Americans that they need to pay more in taxes, the only sensible alternative would appear to be obvious. Go easy on immediate spending cuts—we need to let the economy recover—but start work now on trimming entitlement programs, essential as they are, so they don’t eventually swallow the rest of the budget. Unfortunately, that order of proceeding runs into party politics. Many anti-government Republicans want to slash federal spending as a matter of principle. Many Democrats are dragging their heels about making cuts to Social Security and Medicare.

On Tuesday, President Obama called on Congressional Republicans to replace the sequester with smaller spending cuts and the elimination of some corporate-tax loopholes. He was right. In recent months, however, he has backed away from earlier suggestions that he would be willing to make tough choices in tackling entitlement reform. The country needs both things: immediate action on the sequester and a sound long-term fiscal strategy. But with the two sides digging in, the most likely outcome is more upside-down policies.

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