Third Quarter GDP -- Does One Quarter Make A Trend?

Even after accounting for government-program induced spending on cars and homes, there were enough positive signs in the data this morning to signal that a statistical end to the recession has occurred. The big jump in GDP will. . . .


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Durable Goods Orders - The Fed is Debating What?

We are all guilty of converting data into changes, percent changes or percent changes of the percent change for the purpose of identifying early a change in trend. I thought it would be a good idea today to just look at the dollar amount of new orders for durable goods without putting the series through a series of mathematical calisthenics (see chart below). Not being able to resist some sort of contortion I show the series in real dollar terms as well. Either way, the stark collapse in orders and the meager bounce from the bottom suggests what today’s consumer survey told us – the economy has bottomed but it isn’t bouncing.

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Bernanke Calls For Balance & Asia Could Care Less

 Fed Chairman Ben Bernanke spoke today on "Asia and the Global Financial Crisis" at the Federal Reserve Bank of San Francisco’s Conference on Asia and the Global Financial Crisis, Santa Barbara, California. This call for balanced growth policies in Asia has been made before by Bernanke, Geithner, Summers and others. The call appears to be falling on deaf ears as far as Asian exporters are concerned. Here are some excerpts from today's Bloomberg News article "Won Crushes Yen as Dollar Substitute in Asian Rally" --

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Capacity Utilization, Fed Policy, Oil and China -- One Big Gordian Knot

The production and capacity numbers released this morning indicate that the recession likely ended in June. But it as important, if not more so, to recognize that the reported 70.45% capacity utilization rate only just reaches the 70.93% low of the 1981-82 recession (the previous worst economic crisis since the Depression). The importance of this indicator owes to the Fed’s historic consideration of capacity utilization as the best real time indicator of economic activity (see the working paper “Improving Real-Time Estimates of the Output Gap” by Thomas Trimbur). From the official end of the past two recessions it took the Fed 38 and 32 months respectively before the first increase in the funds rate (see chart). The timing, of course, depends on how fast spare capacity is taken up. After the 2001 recession it took 32 months for capacity utilization to go from 73.53% to only 77.74%

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Cash for Clunkers -- It Worked!

The "cash-for-clunkers" program has been the subject of more negative comments and bad puns than anything an administration has put out for a long long time. Most of the comments have focused on the program's inevitable failure to permanently raise the level of spending for autos and/or anything else. By extension, the reaction is that Obamanomics is a complete bust. Political rage absent of thought to other possibilities is not the best way to go through life, unless your goal is to get crankier as you get older. The chart below plots out auto industry inventories, sales, and the inventory/sales ratio.The cash for clunkers progam moved the auto industry out of depression and into recession at an extraordinarily rapid pace. This saved a lot of investors, public and private, a lot of money,

We can see now that the program was never really intended to be a permanent boost to sales, I think even Larry Summers and Ben Bernanke knew that. The cash for clunkers trade was meant to alleviate an extraordinary overhang of unsold cars under which an entire industry was about to collapse. Normal recession metrics for sales, inventories, and production are now in play and they will be for some time but the government accomplished what it set out to do -- saving an industry and giving it the time to do what's necessary to save itself short-term and for the long haul. It will be a while before we know whether the auto industry finally gets it right, but at least they now have the time to figure it out.

Retail Sales - A Question of Momentum

Pronouncements that the “Great Recession” is over require third quarter spending to continue into the final three months of the year. While it looks like Wall Street employees will have the cash to buy holiday gifts, the country is a lot bigger and today’s retail sales give some pause to the notion that the economy has positively turned positive.

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Stocks & Bonds -- In Synch

In the past several years there have been some divergent valuations between the credit and equity markets, with the equity market tending towards the more optimistic. The chart below compares the P/E ratio of the S&P500 Industrial sector to the option adjusted spread (OAS) of the Merrill Lynch BBB Coporate Index. This chart of daily data covers the period from Jan 2002 up until yesterday. The data points for the past month are in red.

If there is undue optimism in the market it is shared by bond and equity investors. The P/E ratios travelling between 14 and 16 line up on the marginally conservative side relative to OAS levels just over 300 basis point -- but keep with the general trend of lower OAS translating into higher P/E ratios. In sum, the credit and equity markets are cautiously optimistic over future earnings and the ability to pay off debt. This isn't to say they are right, only to say that there is a reasonable consensus.

The Price of Gold Says Nothing About The Dollar

The price of gold is up sharply and so is the chatter about inflation, debt, and the demise of Western Civilization. At a time when the critical global economic issue is unbalanced growth the golden chatter ignores gold’s price in real dollars versus gold’s nominal price in yen, euros, and sterling. If the U.S. is coming apart at the seams how come the real dollar price of gold is only 66% of the 1980 peak? Why does the yen today buy as much gold as the dollar does and also as much as the dollar did in 1980? Gold costs less for Europe than it does for Japan or the U.S., fair enough, but gold also costs Europe 1.5 times more than it did when gold peaked globally in 1980.

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Technical Outlook for 10-Year Treasury Yield -- Update

I have been writing on the technical outlook for Treasury yields for some time and since the spring my forecast has been for a second half rally based on two factors. First, Treasuries rally in the second half of the year. I can not give anyone a good reason why that should be true, market prices really should not have any seasonal bias, but I have been around long enough to recognize a strong pattern when I see one and not let fundamentals get in the way. Second, yields and inflation bottom in the first year of economic recovery -- and we haven't turned that corner just yet. If you want to be optimistic and say the recession ended in June (a view I do not share, as my work tells me the fourth quarter will be negative for real GDP) then the bottom for yields occurs next year.

As for the current marketplace, the chart below shows that yields have dropped through some key selling pressure and the 10-year is set to at least challenge 3.00% and more likely to drop to a 2.80% yield. This is all on target with my writings in the spring and there is certainly nothing to dissuade me now.

Longer-term please understand that the market is building a base to finally break through the downward yield channel that dates back to 1986. Look for the big break to higher yields to begin in the first half of 2010.

Part and parcel with the recovery is higher real yields to temper the leveraged consumption growth that was so damaging to the structure of the economy. This is going to be a capital spending expansion, if the policy makers get it right, supported by a revalued yuan and yen. Can we stop talking about the horrors of a depreciated dollar and begin talking about ending the unfair competitive nature of Asian trade policy -- keeping their currencies unreasaonably cheap in order to keep their labor cheaper. But that is a tale for a different article.

The V Flops to an L as Duration of Unemployment Hits a New Record

The September employment data and attendant revisions should put to rest any notion of a “V” shaped recovery . . . .

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New Orders Index Bodes Well For Employment, CDS Spreads Augur Caution

On the eve of the September employment data, the ISM data released this morning bodes well . . .

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