I've Got A Pin . . .

Anybody got a bubble?

Well, according to Bloomberg, global markets just had their best weekly rally in nearly two years!!  Yeah!!http://www.bloomberg.com/news/articles/2015-03-19/most-asian-futures-down-with-oil-dollar-holds-rebound 

Germany and the U.S. are trading at or near record levels and most markets are certainly at the highest levels they have seen since 2007.  Every thing is just honky dory.  Everything except . .

Factory Orders -

Down six months in a row.  Last time that happened was like 2008.  Remind me, what happened in 2008?

GDP 4th Quarter Actual and Forecasts - 

Recently released estimates for the fourth quarter GDP dropped to 2.2%, which is down from a GDP of 5.0% in the third quarter.  And this estimate is lower than the preliminary estimate.  Now my guestimate on the estimate that followed the preliminary estimate is that it will be wrong to the upside too.  .http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm 

And don't look for a lot of improvement this year.  The 2015 forecast put out by the Atlanta Fed has been falling like a rock the past few weeks.  At the beginning of February it was forecast at a 1.9% increase and now is at a meager 0.3%.  Not a pretty picture.   https://www.frbatlanta.org/cqer/researchcq/gdpnow.cfm 

Now the good news is the GDP forecast for Europe this year is a whopping 1.3%, but then again that is their Winter 2015 report that was done in January and came out in February, when the U.S. forecast was somewhat rosier, so who knows.  The next one is due out there in May.  http://ec.europa.eu/economy_finance/eu/forecasts/2015_winter_forecast_en.htm 

I note that if this forecast is accurate the European GDP will increase this year the most since 2010.  Let's just say that is a tad surprising when various countries there are squarely in deflation and most are still struggling.  But hey, why be a pessimist about it.  There has to be a reason why Germany's stock market is not only setting new records regularly but is leaving records of 2007 in the dust.  Really, there has to be a reason doesn't there?  Please, please tell me there is a reason the DAX is trading around 50% higher than it was then.  In the famous words of Sargent Schultz: "I know nothing, I hear nothing, I see nothing."

Wholesale Sales and Inventories

Hey, of these two one is up and one is down - that's at least neutral right?  I wish it worked that way.  Alas, the sales are down and the inventories are up in the U.S. 

http://www.census.gov/wholesale/pdf/mwts/currentwhl.pdf

Not wholly surprising given the rapid rise of the dollar against most currencies.  Imports are cheaper every day, so U.S. manufacturers are feeling the pain and will likely do so for a quite some time to come.

Along the same lines, it is worth noting that the factory order numbers in the U.S. were down in January for the sixth straight month, despite consensus forecasts for a slight rise.  Again, the rising dollar could be partly to blame or possibly, just maybe, perhaps, it is a slowing U.S. economy.  Never mind, forget I even said that.  It could never happen.

China to the Rescue!?

The big China economic engine should help salvage some of the abysmal numbers around the globe, right?  After all, it is the second largest economy after the U.S.  Now I did note last month that internal government forecasts on economic growth in China were recently reduced but still - at 7% - better than pretty much anywhere else.  Not so bad.  Well, not so bad if you believe the Chinese government.

I know it is shocking, but I am a smidge skeptical about government forecasts in general and when it comes to China am in pretty much total disbelief.  My point last month was simply that even the Chinese cannot fully hide that it is getting worse there.  If you dig deeper on China, and some very respectable people have, you will see it is heading for a very hard landing.  Certainly the government there will do everything it can to avert it but efforts to date have simply made the ultimate problem worse.

Mish, whose blog I highly recommend, notes that the debt in China is in the $30 US trillion range, which is about 300% of GDP, meaning GDP growth will need to be 21% just to service debt, and that ain't happening. 

http://globaleconomicanalysis.blogspot.com/2015/03/reality-check-how-fast-is-china-growing.html

To give perspective, the debt to GDP ratio in China is above the ratio in Japan (around 227%) and we all know what has been happening there for decades.  It is close to thrice (I love that word) the U.S. ratio, which is around 100%, and we all read regularly how bad that is.  Now I could go through how their numbers are terrible on every front but Mish does that well in the linked article.  Bottom line is that China, in my view, is heading for more than a recession and something a good bit worse than what we experienced here in 2008.  More akin to Japan, one might say, and Mish does.  This will not be pretty and it will not help the global picture.

P.S.

Following my post above the Mish pointed out a recent presentation by the Vice Premier of China, admitting that their economy is slowing and the growth of the past is "unsustainable" BUT there are bright spots.  With all these bright spots, one has to question why the government plans on spending more and generating the largest deficit (like it is not already way too big) this year than any other year since the beginning of the global crisis began. 

http://www.reuters.com/article/2015/03/22/us-china-economy-idUSKBN0MI01920150322

Then again, I could be all full of doo-doo.  You figure it out.

 

And the Beat Goes On

For the two of you who read it, I focused a good bit on my last post a month ago on two things - housing and the coming demise of the Bull market - so let me start where I left off.  On housing, we have now hit the lowest home ownership levels in 20 years:

http://www.latimes.com/business/la-fi-home-ownership-20150129-story.html

Now according to the linked article, steps are afoot to ease lending standards to help improve the numbers, like Fannie and Freddie allowing 3% down payment for mortgages. That sounds like a dandy plan to me.  Easy lending standards worked so well the last time around!

One might suggest that if folks cannot afford homes at a point presently when unemployment is low and interest rates are the lowest in my life time, perhaps, just perhaps, something else is just a tad off balance - like housing prices perhaps?  Oh, why didn't I think of that.

We have options here to improve the picture.  Option one, wait for wages to catch up to housing prices, which will require prices to stop climbing and wages to start climbing.  Given wage growth does not seem to be in the offing any time soon, it looks like - oh no, say it isn't so - real estate prices will not only have to stop climbing but may actually have to go down.  Obviously, this "improves" the picture if you are talking home ownership, but not so much if you are looking to build or sell.  Option two, we make a bunch of foolish moves, like 3% down payments, seeking to convince folks to buy homes they cannot afford and see how long that lasts before another bubble.  Of course option two will also eventually lead to a drop in home prices when the bubble pops, along with massive foreclosures, bank losses, credit being ruined, cats sleeping with dogs, and the like, but hey, people temporarily get to live in homes they cannot afford and realtors get to earn some commissions. Of these two options, any guesses on which is most likely? 

The second area I talked about last month was the stock market being somewhat long in the tooth (look it up) and ready for some correcting.  Not just because it is old, however, but because there is a fair amount of economic turmoil in the global economy (actually quite a bit) and the market was at levels that are not justified.  Indeed, the only real justification for the markets has been a lack of options.  You certainly are not going to make money in bonds or on your savings account.  Where else do you even have a chance to make money on relatively brainless investments? 

Well, the market just had a pretty nasty month and the second down month in a row, so that long tooth is wiggling a tad.  Two months does not make a trend per se, but aside from a few glimmers, like Apple profits, not a lot to stop this momentum at the moment.  Europe still doing poorly and Greece is showing us the growing discontent with the austerity efforts to date.  China to the rescue again?  Well, let's see what the Chinese leaders themselves think of their growth prospects this year versus last:

http://ftalphaville.ft.com/2015/01/30/2106222/chinas-new-normal-cut-out-and-keep-edition/?Authorised=false

As you can see in the table provided at FTAlphaville, all of the 31 provincial and municipal governments in China missed GDP targets in 2014 and have set reduced targets for 2015.  Based on provincial forecasts in 2014, nationally the expectation was for an increase of 9.2% GDP growth but reality came in at 8.5%.  And for 2015 the forecast is 8.0%.  Think about that a moment; the forecast for 2105 is actually lower than the reality in 2014.  Me thinks they see some writing on the walls in terms of the direction of things.  These percentages for China are not at all great.  Its average GDP growth from 1979 to 2010 was 9.91%, so 8% is poor projection and the projections are for this downward trend to continue for a few years to come, going below 7% by 2017.  As the second largest economy in the world, China's impact on the U.S. cannot be ignored.

I do have some good news.  We should be able to (legally) buy Cuban cigars in the not too distant future!  Maybe I will have to take up smoking cigars to have something to celebrate.

Long Time - But It's Time

It has been a long time since I last posted but I thought one before 2014 ends might be a good idea.  And I am better at seeing signs of trouble than signs of good times, so now is a good time for me to post again.

The good news is that the U.S. economy is doing well.  Unemployment is down, foreclosures are down, gas is down and the market is setting new records.  All honky dory, as they say.  There are, however, a few problems worth noting.  For example, while interest rates continue to hover near record lows and housing has recovered some, it is nonetheless cooling with sales dropping.  Some of this is undoubtedly seasonal, but some might be tied to the concept that median home prices have just gotten to where the average person cannot afford to buy, even with low interest rates. Don't believe me?  Well, check this out http://www.nakedcapitalism.com/2014/12/wolf-ricther-official-inflated-home-prices-strangle-us-housing-market.html  And just imagine how poorly housing would be doing if interest rates were to rise.  This I suspect is also tied to the very low rate of at which wages are increasing.  While the rate slightly exceeds the very low inflation rate, it still is not sufficient to keep up with significant increases in housing prices we have seen the past three years - as in double digit and high single digit percentage increases.  Tie all this to the concept that housing construction is a significant driver in our economy and you get the picture.

Housing is not the only issue we face of course.  The stock market is again setting records and has been on an unusually long bull market.  The median bull market is around 50 months and we passed that mark in May of last year, putting us around 69 months.  Now we are no where near a record.  The Great Depression followed 98 months and the bubble that burst in 2000 (from which the Nasdaq has still not fully recovered 14 years later) lasted a full 153 months, which tied the record.  Still, we are longer than median and longer than average and I personally do not see a whole lot of support for it continuing.  Indeed, looking at the P/E 10 Ratio to the S&P, explained here (http://www.advisorperspectives.com/dshort/updates/PE-Ratios-and-Market-Valuation.php) and you see we are at the third highest historical mark above mean, beat only by where we were in 2000 and 1929.  Just sayin'.  Of course, no one really follows this type of analysis, other than the likes of Benjamin Graham and Robert Shiller, but what do they know.

Need to get going, but let me add one more thing to chew on.  The U.S. is doing better economically than pretty much the entire rest of the world.  Europe has not recovered and parts are in deflation, as is Russia.  China has significant issues as well as Japan.  Let's see where that takes us.

Fiscal Cliff - Let's Go For a Nice Dive

There is a lot of press about the fiscal cliff.  You know, taxes going up, spending going down.  No one is going to like it much, but it is time to take the dive.  A good bit of pain by a good many people but, trust me, better this pain now than the pain it will inevitably lead to if we do not do it now.  I, for one, am hopeful that the dispute between the right and left is not resolved and we fall off the cliff.  For political reasons, it will be averted, but better if that does not happen.  Time for some serious cliff diving before the cliff gets significantly higher.

Stupid is as Stupid Does

If you have read my blog historically you know I am no big fan of Obama or his economic policies.  We can debate until we are blue in the face whether alternative strategies would have worked better.  The results have not been terrible but the deficit is troubling, unemployment is still way too high and real estate is returning too slowly.  Still, dealing with the worst economy since 1933 is a daunting task and I would give him a B grade for his work.  Now I still think some of the fixes I backed would have been better long term than what his administration supported but we will never know.

Now Romney is proposing some stuff, as is his VP running mate.  Not real clear where they are coming from on some of it.  But everyone should decide for themselves on whose plan might work best.

On a personal note, I just viewed the secretly taped video of Romney condemning the 47% who pay no taxes.  Now this is not wholly accurate as most of these folks do pay Medicare and Social Security but simply do not make enough to pay income taxes.  If you said to any of them that you can make millions a year on investments like Romney but have to pay 90% of the millions in taxes, I am sure they would all be quite happy to do so, but they do not have this silver spoon option.  Ask yourselves if Romney would be worth like a quarter of a billion dollars today if he was born poor.  Now ask yourselves if he is in a position to judge the 47% he chastises, most of whom I safely assume were not born millionaires.

The question has to be - are these 47% lacking in individual responsibility?  Are the funds they are receiving from the government the much maligned "entitlements?"  For some, perhaps even many, yes.  But for many others, no.  My own parents are part of the "entitlement" crowd.  They collect from Social Security and use Medicare to cover some medical bills.  Yet if anyone suggests they are leaches or did not earn what they are getting I would be enraged.  Most of my childhood my father worked two and sometimes three jobs.  My mom worked full time in a factory.  Dad worked full time until he was 78 and sickness made him quit.  They paid for the Social Security and Medicare dollars they are receiving many times over.  They are fully ENTITLED to receive these benefits, i.e. the money back that they already paid the government.  Any ass suggesting otherwise is not deserving of my vote.  Might I add that my parents are life-long Republicans - go figure.  For once I agree with Obama that being a President is about representing all the people in this country, not just the fortunate.

Note, just a few weeks ago I was truly undecided, but Romney is really proving he does not understand life for the average American, which I find quite troubling.

Been A While

Here we are all the way past the first quarter of the year 2012 and I have not done a single post all year. And this one will not be large or intense. Watch the EU carefully. Greece was nothing. Portugal, likely the next to fall, is really nothing either. Spain, on the other hand, will be significant and it is coming. France is not so smarvy either. Couple their problems (you are talking youth unemployment rates of over 50%) with a slow down in China and - it is coming. I have given up in guessing when as can kicking abilities surprise me all the time, but IT IS COMING. Good luck with all that

Choosing Words Carefully

There are few folks on Earth that choose their words more carefully than the Fed. Indeed, interpreting their verbiage is virtually a science. So when I read that the Fed told GOP senators that it does not have the intention "or the authority" to bailout Europe, you have to wonder exactly what they mean by that. Seriously, hundreds of millions of support by the Fed over the past few years directly went to assist European financial institutions. Did they lack the "authority" for that? Is support for their financial institutions not support for Europe? Does the Fed not intend to support European financial institutions if things take a dive, which odds are good they will eventually do in some countries? And are the GOP Senators asking the right questions?

http://www.washingtonpost.com/business/markets/bernanke-to-discuss-european-financial-crisis-with-republican-senators/2011/12/14/gIQAoZbEuO_story.html

So what else can I say - China real estate prices in decline (as the government there has pushed to do), old news. The shine wearing off the recent EU pact for a cure with bond rates climbing again (new news but hardly unexpected). Politicians kissing babies and otherwise in NH to get votes, an age old game.

Disclosures: None