• Once the Debt Ceiling Is Hiked, Markets Have to Confront Slower Growth (Barron’s) see also Default a ‘Black Turkey’ as Advisers Tell Investors Not To Sell (Bloomberg)
• How Our Economy Was Overrun by Monsters & What to Do About It (Harvard Business Rev);
• Missing Milton Friedman (The Economist) see also A great divide holds back the relevance of economists (Reuters)
• A Daunting Path to Prosperity (NYT)
• U.S. Contingency Plan Gives Bondholders Priority (Bloomberg) see also Roach Says Chinese Officials ‘Appalled’ by Impasse on Raising Debt Ceiling (Bloomberg)
• Dream Cars You Coveted in High School, but Brand New (WSJ)
• Former Intel Chief: Call Off The Drone War (And Maybe the Whole War on Terror) (Wired)
• John McCain Now Should Probably Talk to John McCain in 2010 (The Rude Pundit)
• 30 All-TIME Best Music Videos (Time)
• A Bad Girl With a Touch of Genius (NYT)
The US economy grew a weaker than expected 1.3% vs the est of 1.8% AND Q4 GDP was revised to a gain of only .4% from the last reading of 1.9%. We thus grew less than expected off a smaller than expected baseline. The price deflator rose 2.3%, .3% more than expected, thus nominal GDP rose by 3.6%, vs the forecasted gain of 3.8%. The main drag was Personal Consumption which grew only .1%, the weakest since Q4 ’09 and was well below the est of a rise of .8%. This was mostly due to a drop in spending on auto’s/parts which we can partially attribute to the Japanese disaster. Government spending also was a drag, falling 1.1%, led by state and local. The positives were investment in equipment and software, non residential and residential construction. Trade also contributed to growth. Taking out the influence of inventories, Real Final Sales rose 1.1% after an unchanged reading in Q4. While headline PCE fell to 3.1% from 3.9%, the core rate rose 2.1% from 1.6%, the highest since Q4 ’09. Bottom line, the US economy grinded to an almost halt over the past 2 quarters, growing only .4% on a real basis from Q4 ’10 to Q2 and while Japan had an influence, it is not even close to explaining this weakness, especially at this point of the economic cycle. The market reaction in both equities and bonds to the number again points to the concerns about economic growth, much more so than political games of chicken.
Following weak regional surveys in NY, Philly, Richmond and Dallas, the July Chicago PMI at 58.8 was slightly below expectations of 60.0, down from 61.1 in June and is the 2nd lowest figure since last Aug. New Orders fell almost 2 pts to 59.4 and compares with the 6 month avg of 65.1. Backlogs though did rise by 6.4 pts to a 3 month high and got back above 50 at 55.7. Employment was a big disappointment, falling 7.2 pts to 51.5, the weakest since Dec ’09. Inventories rose to 53.2 from 46.9 but remain below the 6 month avg. Prices Paid rose slightly to 71.7 and while off its recent highs of 83.4, it remains above the long term avg. Today’s weaker data point follows a surprise upside to last months Chicago PMI that led to a better ISM. That respite in June looks like it won’t last as every region we’ve seen for July has now seen moderation in mfr’g and that will likely be confirmed when the national ISM merges all the data together for release on Monday. It is this growing reality of slowing economic growth that has superseded the debt ceiling talks in influencing market behavior. With this said, there is little question that when a deal does happen, stocks will knee jerk bounce but I question the extent of it.
The final July UoM confidence figure confirmed the preliminary report, coming in at the lowest level since March 2009 at 63.7, down 7.8 pts from June. Both Current Conditions and the Economic Outlook fell by similar amounts from June. Inflation expectations at 3.4% were unchanged with the preliminary report but down from 3.8% in June and the lowest since Feb. Bottom line, the data speaks for itself.
I have been putting together a presentation on cognitive foibles as applied to investors, and the folks at Agora were nice enough to let me use them as guinea pigs.
Long time readers know that I don’t care very much for the way most presenters use Powerpoint; I do not want to listen to someone stand in the front of the room and read verbatim slide after slide. So each table/chart/graphic is really a jumping off point for a discussion. As such, this is not the full version of the presentation without the audio.
“The chart below looks at how far investors have deviated in their equity asset allocations relative to the 25 year mean of a 60.00 % commitment to equities. As seen below current asset allocations to equities are just slightly below the aforementioned mean. Thus investors are not presently over committed to stocks like they were in 2000 when their allocations hit 18.00 % above the mean or 78.00 % commitment to equities. (Note the extreme under commitment to equities in 1987, 1990, 2002 and 2009 … all great buying opportunities.)”
>
Source: Fusion IQ
>
“Typically this indicator is best used at extremes to help gauge sentiment and related available liquidity (or lack thereof) that can come from extreme over commitment (ie. investors all in thus no buying power left to support higher equity prices) or extreme under commitment (ie. investors all out of stocks thus plenty of sideline liquidity to support stocks and a rally). What I think this indicator tells us at present is there is still available investor liquidity available to buy stocks with investors only at their mean commitment to stocks.
Thus any subsequent correction that may develop should be somewhat limited in scale and duration (ie. A modest corrections in the 5% to 12% variety). So while it doesn’t mean we can’t or won’t correct it does suggest that if a correction develops there should be bids below the market given liquidity is somewhat ample.”
As a reminder, check out this great chart from Société Générale showing who holds US Trasury debt. In the unlikely — thought increasingly possible — event of an unscheduled water landing failure to raise the debt ceiling, a technical default would be avoided by making the payments on these bonds:
>
click for larger graphic
Source: Global Insight, SG Cross Asset Research/Economics
Thanks Europe, you saved our arse this week from our own political incompetence. Outside of the very short term logistics issue with a possible delay in Government payments where the overnight repo rate, overnight LIBOR and 1 month T bill yields all were higher on the week, further out securities and the US$ had an ordinary week. This notwithstanding the drama in DC thanks to concerns with Spain and Italy and also following some worrisome economic commentary from US companies on the global outlook. From last Friday’s close, the 2 yr yield is up just 1.5 bps, the 5 yr yield is down 2.5 bps, the 10 yr yield is down by 5 bps and the 30 yr bond yield is lower by 3 bps. The 2 yr and 10 yr swap spreads are up less than 1 bp. Also, the euro heavy US$ index is up on the week by .20. The US$ is even up against the CAD. Thus, the weakness in US equities this week can be argued to be much more attributed to the concerns with global growth which was emphasized by some big multinational company commentary. Markets seemed to have blocked out the torturous hyperbole and focused more on the changing economic fundamentals.
Kevin Slavin argues that we’re living in a world designed for — and increasingly controlled by — algorithms. In this riveting talk from TEDGlobal, he shows how these complex computer programs determine: espionage tactics, stock prices, movie scripts, and architecture. And he warns that we are writing code we can’t understand, with implications we can’t control
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
Tweet
Facebook
Reddit
Digg this!
