The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

I was trying to explain the gear mechanism in a 6 speed to someone, when I found this animation:

The mechanism also called as “stick shift” is used in cars to change gears mannually

via World of Technology

Jess Bachman, who did several of the fantastic illustrations for Bailout Nation, turns his attention to this epic infographic of all of Google’s acquisitions in the pipe:

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click for ginormous graphic

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via SEO site Scores.com

Everyone knew that Existing Home Sales were going to stink the joint up today — but I just had to laugh when I read the NAR commentary; The headline along was priceless: July Existing-Home Sales Fall as Expected but Prices Rise. Too bad they don’t cover other events: “Lincoln attends theater opening; leaves early with headache.”

They are the world’s most awesome/awful cheerleaders on the planet.

Bloomberg notes: “Foreclosures and short-sales are boosting the so-called shadow inventory, and competing with owners trying to sell properties. Home seizures increased almost 4 percent in July from the previous month, with 325,229 properties last month getting a notice of default, auction or bank repossession, RealtyTrac Inc. said Aug. 12.”

The housing data itself contains some worthwhile data points:

• National median existing-home price was $182,600 in July 2010 — 0.7% higher than June 2009.

• Distressed homes were 32% of sales, vs.  31% in July 2009.

• First-time buyers purchased 38% of all homes, down from 43% in June, according to an NAR survey. The decrease in the purchase of starter homes helps to explain the price rise.

• All-cash sales were at 30%, up from 24% in June.

• Total housing inventory rose 2.5% to 3.98 million homes — an 12.5 month supply at the current sales pace, up from 8.9 months in May.

• Unsold inventory remains 12.9% below the record of 4.58 million in July 2008.

• Existing-home sales in the Northeast dropped 29.5% (30.3% down from July 2009):  They were down 35% in the Midwest (off 33.3% from July 2009);  They fell 22.6% in the South (19.8% lower than July 2009); and were down 25% in the West (off 23% from July 2009).

Note that July home sales still have some tax credit closings, so the data is not perfect.

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UPDATE: An error was made in transcribing some of the data from the NAR release; it has been corrected; the bullet points above reflect the updated data. Our apologies for the error.

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Source:
Existing-Home Sales Slow in June but Remain Above Year-Ago Levels
National Association of Realtors, July 22, 2010
http://www.realtor.org/press_room/news_releases/2010/07/ehs_june

July Existing-Home Sales Fall as Expected but Prices Rise
National Association of Realtors, August 24, 2010
http://www.realtor.org/press_room/news_releases/2010/08/ehs_fall

From Academy Award® nominated filmmaker, Charles Ferguson (“No End In Sight”), comes INSIDE JOB, the first film to expose the shocking truth behind the economic crisis of 2008. The global financial meltdown, at a cost of over $20 trillion, resulted in millions of people losing their homes and jobs. Through extensive research and interviews with major financial insiders, politicians and journalists, INSIDE JOB traces the rise of a rogue industry and unveils the corrosive relationships which have corrupted politics, regulation and academia. Narrated by Academy Award® winner Matt Damon, INSIDE JOB was made on location in the United States, Iceland, England, France, Singapore, and China.

http://www.insidejobfilm.com

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*Genre: Documentary
*Director: Charles Ferguson
*Cast: Matt Damon

Hat tip Infectious Greed

Fears of faltering economic momentum is what is weighing on global stock markets and boosting bonds with the German 10 yr bund yield in particular at fresh record lows and the US 10 yr yield back to the lowest since Mar ’09. In terms of what to do from a policy standpoint, the WSJ today gives us ‘inside info’ on the thinking of the Federal Politburo, I mean Federal Reserve, on how to deal with their balance sheet and its impact on policy. In Europe, the EU’s Rehn talked about initiating random bank stress tests to keep investors up to speed in order to reinforce “confidence for transparency and sound and solid analysis.” The yen continues to be a beneficiary of the global growth concerns and is at 15 yr highs vs the US$ and 9 yr highs vs the euro. The Japanese PM and FM tried jawboning it lower today but to no apparent avail. US July Existing Home Sales will include some pre and post tax credit closings so will thus be distorted.

One of the things we have harped on around here is the tendency for humans to be backwards looking in their sentiment.

The Recency Effect means we monkeys place disproportionate emphasis on recent stimuli or observations, regardless of worth or significance. Indeed, investors become bullish after they buy stocks, bearish after they sell them, as part of the self-rationalization process to justify their actions.

Consider: In October 2007, 4 days from the all time market top, the WSJ discussed how unlikely another 1987-like crash was (Exorcising Ghosts of Octobers Past). That was a backwards looking perspective, coming after 5 years of upwards market movement.

Perspectives sure changed following the economic collapse: One week after the Flash Crash, the WSJ noted how “the May 6 selloff had parallels to 1987” (How the ‘Flash Crash’ Echoed Black Monday); Is it any surprise that a 55% collapse in indexes during the prior 30 months subsequently impacted the tone of that article? (Note: We discussed both of these articles here).

The above psychological factors are what makes me point out the following two economic comments making the rounds. They fall into the category of recession-porn, and are worth considering.

The first is an “An Important Note Of Caution” from motivational-speaker Tony Robbins. He references a Trader who got the 1987 crash correct, then was wrong and lost money for many years, then made some good calls, and did not-great-but-good in 2008. Robbins references this trader as a warning about the next economic collapse. Without access to the person’s trading history, it sounds more like a case of Fooled by Randomness to me.

The second is mark Cuban’s recent pronouncement to “Put Money in the Bank,’ Not Stocks.” In a blog posting, Cuban noted that The Stock Market is still for Suckers. Note that cash has outperformed stocks over the past 5 years. Such pronouncements to “sell stocks, go all cash” from Cuban would have been quite valuable in 2005, less so in 2010.

(UPDATE: Cuban responds here)

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I don’t doubt the business acumen of either of these gentlemen; Each is wildly successful in their chosen fields. However, I cannot help but note that neither of their fields involve analyzing the data that goes into determining economic or market collapses. Indeed, it smells more like a case of Recency effect than anything else.

Note that I am not talking my book: We have been mostly cash since May 5th (as much as 100% then, 50% cash in June). We are now over 80% cash, and are looking for a move down towards 950 on the SPX. So what both of these commentators are saying actually matches both our positioning and our perspectives (as well as this AM’s futures).

What I am pointing out is the unusual perspective of two businessmen discussing a crash that is so far outside of their expertise, following a 55% drop from the market top, and a 16% drop from the April highs. Perspectives such as this would be more valuable before, rather than after, a huge crash. (We will revisit these in 6 or 12 months).

It reminds me in some small part of the parade of sports figures and celebs on CNBC in late 1999 discussing their equity trades, or the Playboy bunny turned RE Agent in 2005 (also on TV) just as that market peaked. These were all late cycle momentum calls, as opposed to insightful analysis based on new data, fresh perspectives, or creative research.

I doubt the Cuban/Robbins calls rise to the level of full contrary indicator, but it makes me nervous to be on the same side of the trade of what can be described as “scared” or “dumb” money.

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Previously:
Experts, Crashes, Media, Skepticism (February 19th, 2009)

1987 Redux: Impossible or Likely? (May 18th, 2010)

Sources:
An Important Note Of Caution
Tony Robbins, August 3rd, 2010
http://business.tonyrobbins.com/78/an-important-note-of-caution/
Tony Robbins Economic Warning (You Tube)

The Stock Market is still for Suckers and why you should put your money in the bank
BLog Maverick Aug 20th 2010 11:24PM
http://blogmaverick.com/2010/08/20/the-stock-market-is-still-for-suckers-and-why-you-should-put-your-money-in-the-bank/

‘Put Money in the Bank,’ Not Stocks, Cuban Says: Chart of Day
David Wilson
Bloomberg, Aug. 23 2010
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=ag4SWrlru.hc

Inflation, Not Deflation, Mr. Bernanke
Andy Xie
08.16.2010 18:12

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The global economy seems to be bifurcating into the ice-cold developed economies and red-hot developing economies as a result of globalization and policy mistakes

In the wake of a barrage of bad economic data, the yield on two-year U.S. treasury notes has tumbled to 0.5 percent and the 10-year note to 2.8 percent, almost reaching the levels after Lehman’s collapse. Pundits in the U.S. and other Western countries are talking about deflation again. The decline in CPI for the past three months gives this view ammunition. The Fed is coming under pressure to resume quantitative easing (QE). In anticipation of the Fed resuming QE, nicknamed “QE 2,” the dollar has declined quickly by 10 percent from its recent high. Both the treasury and currency markets have already priced in “QE 2.” It just downgraded the U.S.’s economic outlook and decided to reinvest its proceeds from its huge mortgage bond holdings in treasuries. It is not quite “QE 2,” as it doesn’t involve additional QE, just maintaining the past liquidity injection. But it leaves much for the market to imagine.

Economic news from Europe has been surprisingly positive. This is to be expected. First, its short-term economic problems are less serious than the U.S.’s. The property bubble was restricted to Ireland and Spain. Second, the sovereign debt crisis is mostly about small southern countries and is less serious than the fiscal crisis of the state governments in the U.S. And, the average budget deficit is much lower than the U.S.’s. Third, the euro’s decline has boosted export-oriented economies like Germany. While Europe’s long term problems remain serious, it looks better than the U.S. or Japan in the short term. This is why euro has performed well lately.

But, Europe’s economic performance may deteriorate in the next twelve months. The euro has rebounded and won’t help its exports like before. Its fiscal contractions will negatively affect its domestic demand. Europe’s employment situation has always been poor. The U.S.’s employment data has been poor relative to its past but is still better than Europe’s. The U.S.’s private sector is still adding jobs. The odds are that Europe’s private sector will still lose jobs.

Similarly, Japan’s situation has improved but remains poor. Its nominal GDP has stopped declining. But, if the yen remains as strong as it is now, it could decline again. Japan’s employment has stabilized, thanks to strong exports. As the yen’s strength drags down its exports, employment will resume its decline. With national debt above 200 percent of GDP and annual fiscal deficits at 8 percent of GDP, Japan urgently needs to rein in its debt growth. Hence, if its economy improves, it will likely increase its consumption tax to decrease its fiscal deficit, which would slow the economy. Japan is essentially structured to not have a good economy.

The developed world is essentially competing on bad economic news. Major currencies move on who is worse at the moment. The Greek debt crisis caused the euro to plunge. Now the weak employment and resuming property weaknesses have caused the dollar to plunge. Maybe the yen is next.

On the other side of the world, inflation is sweeping over the emerging economies. Oil has climbed above US$ 80 per barrel again. Copper is back above US$ 7,000 per ton, closing in on the pre-crisis peak. The prices of agricultural commodities are gapping up. India is seeing double digit inflation. Emerging economies as a whole are experiencing inflation rates above 5 percent on average. India, Korea, and Taiwan have recently raised their interest rates, fearing accelerating inflation and an overheated property market. China has taken steps to rein in the overheating property market. It is still reporting moderate inflation. But, as the data loses touch with what people feel on the street, the pressure for rate hikes may become too strong to resist. Inflation and asset bubbles dominate the concerns of emerging economies.

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Andy Xie is a former Morgan Syanley analyst now living in China
originally published at Caing.com

Good article from Bob O’Brien in Barron’s warning about the dangers of 2X Short funds: Beware of Leveraged Short ETFs.

Its not just the short leveraged ETFs, its all of the leveraged ETFs that have the same slippage characteristic over time.

As anyone who has ever traded them can tell you, they fail to track their benchmark dollar for dollar. This is because they use futures contracts and swaps, and are reset each day. The slippage from their targets us anywhere from 200 to 500 basis points — the longer the time held, the greater the potential slippage. (We use the 2 for 1 leveraged ETFs, both long and short).

Barron’s:

“These short ETF funds – and there are 39 of them available – afford investors the opportunity to capitalize on a market decline in a relatively inexpensive, accessible fashion. Like all ETFs, these products are listed, so they trade like stocks. Their associated fees are half – or less – than the cost of comparable mutual funds. And because many of these products use leverage – mainly through the use of swaps – investors can effectively double or triple their exposure to a market decline at no additional cost or risk.

So if you’re betting that the market is going to fall, leveraged short ETFs have a lot of appeal, at least conceptually.

Their performance in the last three months testifies to that appeal. Since the S&P 500 topped out this year on April 23rd, the ProShares UltraShort S&P 500 has gained 20%. By comparison, the S&P 500 itself has lost 12%.”

Note that the ProShares UltraShort S&P 500 (SDS) has about $3.7 billion of AUM, and is the most popular ETF of its kind . . .

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Source:
Beware of Leveraged Short ETFs
Bob O’Brien
Barron’s AUGUST 23, 2010
http://online.barrons.com/article/SB50001424052970203534304575441874200791144.html

Some quick reads before I run out the door to find my way home — my damn railroad is on fire!

• In Striking Shift, Small Investors Flee Stock Market (NYT)

• Ex-Fed Governor Mishkin in ‘Pay for Say’ Controversy Over Icelandic Economy (Jesse’s Café Américain)

• The Atlanta Fed now has 3 blogs (FRB Atlanta)

• How Treasury Thinks (Interfluidity)

• Mish pisses all over Ken Fisher (Global Economic Analysis)

• The Annual Energy Review (AER) is the U.S. Energy Information Administration’s primary report of historical annual energy statistics (Annual Energy Review)

• Far from Ground Zero, other plans for mosques run into vehement opposition (WaPo)

• World helium reserves are running out, Nobel laureate claims (Telegraph)

• Palin Says Refudiate Appears in Fictionary (Borowitz Report)

What is on your browser?

Peter T Treadway, PhD
Historical Analytics LLC
DOES THE FED MATTER?
August 23, 2010

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Be Careful What You Wish For

As a student of the Great Depression of the 1930s and the Great Japanese Stagnation of 1910-1930, Fed Chairman Ben Bernanke has acquired a deathly fear of deflation. Hence most observers including myself have discarded the possibility of any increase in US short term interest rates in 2010 and probably 2011. Renewed quantitative easing is a strong possibility. The Fed’s not going to raise the short rates it controls so long as the US economy is limping along in near recession, real estate prices are heading south and Bernanke thinks deflation is public enemy number one. Actually if Bernanke could he would lower the Fed funds rate further. But rates can’t go below zero. So that weapon of the central bank is useless.

It’s a little disconcerting to have a Fed Chairman whose avowed goal is to debase the currency he is sworn to protect. But it may not matter. Bernanke is concerned with faltering US consumer led demand. But all the quantitative easing in the world won’t do much for the overleveraged American consumer. Bernanke, unlike his Chinese counterparts, can’t just order the banks to start lending all the reserves he has created. And efforts by the Obama Administration to reduce the consumer debt burden are likely to backfire. The private sector debt that gets forgiven will either be added to the already out of control Federal debt or become a hit to the profits of the just recently “rescued” and still fragile banking system. Recent talk of a preelection program of mortgage forgiveness by Fannie and Freddie suffers from the above defects. The US consumer led deflation that Bernanke and the Administration fear so much is beyond their control to prevent.

But the US no longer remotely resembles a closed economy. It’s a big world out there. Unfortunately the only way Mr. Bernanke is likely to get his inflation is by importing it. And I would ask two questions: One, does he really want that? Two, is there anything the Fed can do about this anyway?

Imported inflation is bad inflation by any measure. Deflation – or the threat of it – hangs over the US, Europe and Japan. But in places like India and China it is inflation that is the problem. The US continues to run a massive trade deficit. The export model has been the prevailing paradigm for recent decades and it has driven global economic growth. Massive amounts of cheap labor have been added to the global workforce in countries like China, India and Brazil. Overall, the currencies of these labor intensive exporting countries(especially China) have been undervalued against the US dollar. Their exports have flowed into the US, resulting in what has been called “good supply side” deflation.

But all good things do not go on forever. Dollar reserves, particularly those of China, have been piling up. The renminbi in particular is a candidate for revaluation against the dollar in real terms – either by domestic inflation or nominal currency revaluation. Wages in the exporting countries have been moving up. The profits of many Chinese firms in the export business are said to be paper thin. The US trade deficit has diminished in 2010 largely due to the recession although the July deficit moved back up sharply. The point is that the current level of US current account and trade deficits cannot go on indefinitely. A major decline of the dollar—which is one solution to the current account and trade imbalances and one favored by many in the US — would bring an increase in imported inflation. And of course a major decline of the dollar against the Asian currencies is exactly what the Administration and many in Congress want. Keep in mind that the post 1971 fiat money dollar-based international financial system is inflation prone.

We live in a complicated world. Consumer led deflation in the so-called advanced Western countries is not inconsistent with inflation in the rest of the world.

So far the US has been lucky in this respect. Monthly data on import prices have averaged zero percent in 2010 so far. The good global supply side deflation is still with us. The imported inflation shoe hasn’t dropped…yet. Although we got a taste of it when oil spiked in 2008.

Energy and commodity prices in general deserve mention here. Thus far recessions in the US, Europe and Japan have offset growing demand for energy and commodities in so called emerging nations. Near term that phenomenon may continue. But the long run trend is for increasing global demand as countries like India and China grow their economies. Indians and Chinese want cars; the Americans can walk if they want to. Increasing energy supplies may not be as simple as in the past. For one thing, the environmental costs of energy extraction are rising as the “low hanging“energy fruit has been gathered. The recent BP oil spill in the Gulf of Mexico is an example and one that may contribute to significantly higher costs for offshore oil in the future. Oil derived from shale is high cost and not without environmental negatives. Also, it must not be forgotten that so much of today’s global oil reserves are located in nations which are politically unstable or hostile to the United States. Green energy alternatives? Don’t hold your breath. They will not provide reasonable substitutes for conventional energy for some time to come. The US will remain a net energy importer and a price taker. Every American President since the days of Richard Nixon has put forth the goal of energy independence. It’s an impossible dream and a political con job. Bernanke if he is rational should be hoping that the globally determined energy prices do not rise too much.

But not to worry about Bernanke’s intellectual preferences for inflation. Worry about something else. Bernanke and the Federal Reserve are very limited in their ability to bring about “good” US consumer led inflation or prevent “bad” imported inflation. What we have is an impotent monetary authority. And the potential for the US to be more helpless economically since its emergence as an economic superpower after WWI.

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