economy - What We're Reading - StockBuz2024-03-29T12:31:14Zhttp://stockbuz.ning.com/articles/feed/tag/economyWatch US GDP To Tumble Pretty Hardhttp://stockbuz.ning.com/articles/watch-us-gdp-to-tumble-pretty-hard2023-04-12T16:40:05.000Z2023-04-12T16:40:05.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><iframe src="https://www.bloomberg.com/media-manifest/embed/iframe?id=d7308790-d445-4021-9771-a35a44244036" frameborder="0"></iframe></p>
<p>H/T Ryan</p>
<p> </p></div>It’s possible the US economy is not ‘late cycle’ but rather just recharginghttp://stockbuz.ning.com/articles/it-s-possible-the-us-economy-is-not-late-cycle-but-rather-just-re2019-12-07T22:12:11.000Z2019-12-07T22:12:11.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><div class="group">
<p>The idea that we are late in the economic and financial-market cycle is one that even most Wall Street bulls won’t dispute.</p>
<div class="BoxInline-container"> </div>
<p>After all, when the economic expansion surpasses a decade to become the longest ever and the <a title="" href="https://www.cnbc.com/quotes/?symbol=.SPX">S&P 500</a> has delivered a compounded return of nearly 18% a year since March 2009, how can the cycle not be considered pretty mature?</p>
<p>Yet it’s not quite that simple. Huge parts of the economy have run out of sync, at separate speeds. Some indicators have a decidedly “good as it gets” look, others retain a mid-cycle profile — and a few even resemble early parts of a recovery than the end. Friday’s <a title="" href="https://www.cnbc.com/2019/12/06/us-nonfarm-payrolls-november-2019.html">unexpectedly strong November job gain</a> above 200,000 reflects this debate, suggesting we are not at “full employment” even this deep into an expansion.</p>
<p>And the market itself has stalled and retrenched several times along the way, keeping risk appetites tethered and purging or preventing excesses.</p>
<p>In the “late-cycle” category we find several broad, trending data readings: Unemployment rate and jobless claims at a 50-year low; consumer confidence hit a cycle peak and has flattened out; and the broad index of leading economic indicators has slipped from very high levels. Auto sales peaked a few years ago. Corporate debt levels are near extremes, profit margins have retreated from historic highs and equity valuations are certainly full and in line with the latter phases of prior bull markets.</p>
<p>But corporate-credit conditions are sturdy, and households have simply not loaded up on debt this cycle, in a long period of enforced and then voluntary sobriety after the massive credit boom and bust that culminated in 2008. This leaves consumers in good shape. And the housing market, a drag on growth for years after the crash, has now perked up and is feeding off supply-demand dynamics that are more typical of an early-cycle environment.</p>
<div id="MidResponsive-8"> </div>
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<h2 class="ArticleBody-subtitle">What about the yield curve?</h2>
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<p>The summertime inversion of the Treasury yield curve — in which longer-term bond yields slip below short-term rates after the Federal Reserve has been tightening policy for a while — crystallized the debate on the cycle’s effective age.</p>
<p>Such an inversion, in the past, has started the countdown to a recession — but sometimes with a lag as long as two years. This indicator has been translated into a recession-probability gauge one year ahead by the New York Fed.</p>
<p><img class="inlineChart" src="https://fm-static.cnbc.com/awsmedia/chart/2019/12/06/santoli%20chart%201.1575653613839.jpg" alt="santoli chart 1.1575653613839.jpg" /></p>
<p><em>Source: New York Fed</em></p>
<p>It has turned lower since late summer as the yield curve has returned to its “normal” shape, but only in the 1960s has it ever climbed above 30% and fallen back to tame levels well ahead of any recession.</p>
<p>Have there even been enough cycles for this pattern to qualify as a statistically reliable “rule?” Do the extremely low absolute level of rates now (similar to the ’60s) change the interpretation? Was the inversion too shallow and short-lived to serve as a proper signal?</p>
<p>Whatever the answers, Jason Hunter, technical strategist at JP Morgan, notes that stocks have tended to have some of their strongest runs after an inversion, late in a cycle. “The longer-term bull cycles persisted for nearly two years after the initial [Treasury] curve inversion during the past three business cycles, with the majority of the late-cycle rally acceleration phases unfolding within the year after curve inversion.” The S&P on average has gained more than 20% over less than two years in the past four episodes before peaking.</p>
<p>One way to view the summer tumult is as the third severe “growth scare” of this expansion, following those of 2011-12 and 2015-16. Both brought with them nasty 15-20% equity downturns, new lows in Treasury yields and forced central banks to become more accommodative.</p>
<p>The Fed has referred to its shift from rate-hiking last year to three cuts this year as a “mid-cycle adjustment,” which would leave it on hold for now and summons happy memories of prior such Fed-enabled “soft landings.”</p>
</div>
<h2 class="ArticleBody-subtitle">‘Still upside’ for stocks</h2>
<div class="group">
<p>Jurrien Timmer, head of global macro at Fidelity, has been tracking the current market performance against previous mid-cycle “mini-bear markets” of the ’90s and 2011.</p>
<p><img class="inlineChart" src="https://fm-static.cnbc.com/awsmedia/chart/2019/12/06/santoli%20chart%202.1575653645339.jpg" alt="santoli chart 2.1575653645339.jpg" /></p>
<p><em>Source: Fidelity</em></p>
<p>Citing the recent upturn in global industrial surveys and central-bank pivots toward easier policy, Timmer says, “I’m not prepared to call it early cycle, but perhaps it’s a mini-reflation wave within an ongoing late cycle. Maybe the markets are whistling past the graveyard, but my sense is that this is the playbook right now.”</p>
<p>Citi’s Tobias Levkovich, says, “Our biggest concerns for the S&P 500 are more [second-half 2020] related, tied to the possibility of a business slowdown caused by management teams hunkering down prior to the elections, tighter [commercial] lending standards in October with a traditional nine-month lag, our margin lead indicator and the impact of the yield curve’s shape on volatility with a two-year lag… But in the interim there is still upside for equities even if such gains become more limited.”</p>
<p>Ned Davis Research, in its 2020 outlook, boils down four separate cycles — tied to the economy and earnings; Fed policy; the election-year cadence; and NDR’s own model of equity-market conditions and trend — to arrive at a year-ahead S&P target of 3225, up a few percent from here.</p>
<p>The fourth-quarter collapse in the S&P 500 last year amounted to a comprehensive flush for the market, pummeling the majority of stocks far worse than the indexes, resetting valuations to a five-year low and generating the highest investor-pessimism levels of this bull market. The reversal higher one year ago set off a rare “breadth thrust” signal of the sort more typically seen at the start of major market advances.</p>
<p>Now, the S&P is 34% higher with earnings just about flat and the trailing price/earnings multiple is near a cycle high above 20 and investor sentiment is far more optimistic. So perhaps the market is now priced for a glass-almost-full scenario rather than the end of a cycle. But if the market isn’t detecting signs of a recession, it tends to find a way to stay supported or work its way higher — even if fitfully, and shadowed by constant end-of-cycle warnings.</p>
<p>Courtesy of <a href="https://www.cnbc.com/2019/12/07/santoli-its-possible-the-us-economy-is-not-late-cycle.html?__source=sharebar%7Ctwitter&par=sharebar" target="_blank">CNBC</a></p>
</div></div>Yield Curve Inversion We're All Watchinghttp://stockbuz.ning.com/articles/yield-curve-inversion-we-re-all-watching2019-03-25T23:27:47.000Z2019-03-25T23:27:47.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>Whether you're watching CNBC, Twitter or another news outlet, you're hearing a great deal of talk about the odds increasing that the <a href="https://www.cnbc.com/2019/03/25/the-us-bond-yield-curve-has-inverted-heres-what-it-means.html" target="_blank" rel="noopener">Fed will drop rates</a> soon.  Everyone's cheering it on..........yet no one's talking about recession possibilities.  <em>Don't say 'recession' on live tv!  </em><em>Keep that notion out of your head!</em>  At least I believe that's what Trump is thinking as he warms up for his 2020 campaign.  He wants the market "up, up, up".  A strong stock market with plenty of green and profits in your pocket.  If it fails after 2020, so be it.  At least he'll have his re-election and be further away from any prosecutorial attacks for four more years.  If he loses, blame it all on the Democrats!</p>
<p>In the meantime our yield curve continues to invert, or decay if you see it that way; implying a rough road ahead for the U.S. as China and European countries slowing low and behold, the U.S. having a "global market", the U.S. looks to be slowing as well.  <em>Shocker!</em></p>
<p>Now the US housing market is slowing and everybody should be aware of this.  Then there's the <em>Washington Post</em> declaring <a href="https://www.washingtonpost.com/news/powerpost/paloma/the-finance-202/2018/11/20/the-finance-202-wall-street-predicts-economy-slowing-dramatically-as-2020-nears/5bf346a11b326b392905493e/?noredirect=on&utm_term=.2070c5930583" target="_blank" rel="noreferrer noopener" aria-label="(opens in a new tab)">“Wall Street Predicts Economy Slowing Dramatically.”</a>  The story says investment bank Goldman Sachs is predicting a second-half of 2019 slowdown due to the fading effects of federal tax cuts and rising federal interest rates. </p>
<p>So what do traders do?  Of course they now believe Powell will "bail us out" once again and lower rates, rather than raise.  <em>Save us from the big slowdown!</em>  The big question now is, how low can he go?  Now where near as low as they did after the financial crisis but will it be enough?  They're now betting on a rate cut in September but at least one Pragmatist stands by his guns and <a href="http://adventuresincapitalism.com/2019/03/25/fed-no-stop-raising-rates/" target="_blank" rel="noopener">hopes for a hike</a> - <em>bring it now. </em> I wish he were right but this is a market under Trump.  All normal bets are off.</p>
<p>Consider this:  The U.S. is on average two years ahead of Europe in terms of economic rebound and growth.  If we cut rates, they follow.  If we hike, they will eventually follow suit........once the nasty Brexit turmoil is behind them, but it won't be this year.  The U.S. should be leading.  We should hike further and let  equities suffer their correction.  That would be a buying opportunity for all. </p>
<p>The 2020 election should have nothing to do with price discovery.  Keep it separate and apart.  Now we must consider, will Trump let us?</p>
<p><a href="{{#staticFileLink}}1611175090,original{{/staticFileLink}}" target="_blank" rel="noopener"><img class="align-left" src="{{#staticFileLink}}1611175090,RESIZE_710x{{/staticFileLink}}" width="619" height="400" /></a><a href="{{#staticFileLink}}1611333468,RESIZE_1200x{{/staticFileLink}}" target="_blank" rel="noopener"><img class="align-right" src="{{#staticFileLink}}1611333468,RESIZE_710x{{/staticFileLink}}" width="558" height="271" /></a></p>
</div>Will Credit Cause A Slowdownhttp://stockbuz.ning.com/articles/will-credit-cause-a-slowdown2017-09-12T21:55:12.000Z2017-09-12T21:55:12.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><em>Saxo Bank thinks a slowdown in credit growth is bad news</em></p>
<p><a href="https://cdn.static-economist.com/sites/default/files/20170909_BLP518.jpg" target="_blank"><img src="https://cdn.static-economist.com/sites/default/files/20170909_BLP518.jpg?width=500" class="align-full" width="500" /></a></p>
<p>IF THERE is a consensus at the moment, it is that the global economy is finally managing a synchronised recovery. The purchasing managers' index for global manufacturing is at its <a href="https://seekingalpha.com/article/4103787-global-manufacturing-pmi-hits-highest-since-may-2011">highest level</a> for six years; copper, the metal often seen as the most sensitive to global conditions, is <a href="https://www.bloomberg.com/news/articles/2017-09-05/dr-copper-s-phd-in-question-as-rally-starts-looking-stretched">up by a quarter since May</a>. </p>
<div class="component-image blog-post__image"><a href="https://cdn.static-economist.com/sites/default/files/images/2017/09/blogs/buttonwood-s-notebook/20170916_woc638_0.png" target="_blank"><img src="https://cdn.static-economist.com/sites/default/files/images/2017/09/blogs/buttonwood-s-notebook/20170916_woc638_0.png?width=450" class="align-full" width="450" /></a>But Steen Jakobsen of Saxo Bank thinks this strength will not last. His leading indicator is a measure of the change in private sector credit growth. This peaked at the turn of the year and is now heading down sharply. Indeed the change in trend is the most negative since the financial crisis (see chart). Since this indicator leads the economy by 9-12 months, that suggests a significant economic slowdown either late this year or early  in 2018. He says that</div>
<blockquote>
<p>This call for a significant slowdown coincides with several facts: the ECB’s QE programme will conclude by end-2017 and will at best be scaled down by €10 billion per ECB meeting in 2018.  The Fed, for its part, will engage in quantitative tightening with its announced balance sheet runoff. All in all, the market already predicts significant tightening by mid-2018.</p>
</blockquote>
<p>Given the role played by central banks in propping up the economy and markets since 2009, it is certainly plausible that their role will be vital in ending the recovery.  And while copper is a good leading indicator, so is the bond market. At the turn of the year, most people thought the ten-year government bond yield would rise as a Trump stimulus fulled the global recovery; the yield is now 2.06%, down from 2.44%.</p>
<p>Courtesy of <a href="https://www.economist.com/blogs/buttonwood/2017/09/global-economy-0" target="_blank">TheEconomist</a></p>
</div>The Big Picturehttp://stockbuz.ning.com/articles/the-big-picture2017-05-16T15:52:57.000Z2017-05-16T15:52:57.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><div class="prose" itemprop="articleBody">
<p><em>First and foremost let me point out that Ray Dalio, <span id="dscexpitem_2042062067_12">founder of investment firm Bridgewater Associates</span>, has joined Twitter so I encourage you to <a href="https://twitter.com/RayDalio" target="_blank">follow him here</a>.  Secondly I suggest you grab a cup of coffee or maybe the entire pot as he gradually lays out what he sees ahead for the market.  Enjoy!<br /></em></p>
<p><strong>Big picture, the near term looks good and the longer term looks scary.</strong> That is because:</p>
<ol>
<li>The economy is now at or near its best, and we see no major economic risks on the horizon for the next year or two,</li>
<li>There are significant long-term problems (e.g., high debt and non-debt obligations, limited abilities by central banks to stimulate, etc.) that are likely to create a squeeze,</li>
<li>Social and political conflicts are near their worst for the last number of decades, and</li>
<li>Conflicts get worse when economies worsen.</li>
</ol>
<p>So while we have no near-term economic worries for the economy as a whole, we worry about what these conflicts will become like when the economy has its next downturn.</p>
<p>The next few pages go through our picture of the world as a whole, followed by a look at each of the major economies. We recommend that you read the first part on the world picture and look at the others on individual countries if you’re so inclined.</p>
<p><strong>Where We Are Within Our Template</strong></p>
<p>To help clarify, we will repeat our template (see <a href="http://www.economicprinciples.org" target="_blank" rel="nofollow noopener">www.economicprinciples.org</a>) and put where we are within that context.</p>
<p>There are three big forces that drive economies: there’s the normal business/short-term debt cycle that typically takes 5 to 10 years, there’s the long-term debt cycle, and there’s productivity. There are two levers to control them: monetary policy and fiscal policy. And there are the risk premiums of assets that vary as a function of changes in monetary and fiscal policies to drive the wealth effect.</p>
<p>The major economies right now are in the middle of their short-term debt cycles, and growth rates are about average. In other words, the world economy is in the Goldilocks part of the cycle (i.e., neither too hot nor too cold). As a result, volatility is low now, as it typically is during such times. Regarding this cycle, we don’t see any classic storm clouds on the horizon. Unlike in 2007/08, we don’t now see big unsustainable debt flows or a lot of debts maturing that can’t be serviced, and we don’t see monetary policy as a threat. At most, there will be a little touching the brakes by the Fed to slow moderate growth a smidgen. So all looks good for the next year or two, barring some geopolitical shock.</p>
<p>At the same time, the longer-term picture is concerning because we have a lot of debt and a lot of non-debt obligations (pensions, healthcare entitlements, social security, etc.) coming due, which will increasingly create a “squeeze”; this squeeze will come gradually, not as a shock, and will hurt those who are now most in distress the hardest.</p>
<p>Central banks’ powers to rectify these problems are more limited than normal, which adds to the downside risks. Central banks’ powers to ease are less than normal because they have limited abilities to lower interest rates from where they are and because increased QE would be less effective than normal with risk premiums where they are. Similarly, effective fiscal policy help is more elusive because of political fragmentation.</p>
<p><strong>So we fear that whatever the magnitude of the downturn that eventually comes, whenever it eventually comes, it will likely produce much greater social and political conflict than currently exists.</strong></p>
<p><strong>The “World” Picture in Charts</strong></p>
<p>The following section fleshes out what was previously said by showing where the “world economy” is as a whole. It is followed by a section that shows the same charts for each of the major economies. These charts go back to both 1970 and 1920 in order to provide you with ample perspective.</p>
<p><strong>1) Short-Term Debt/Economic Conditions Are Good</strong></p>
<p>As shown below, both the amount of slack in the world economy and the rate of growth in the world economy are as close as they get to normal levels. <strong>In other words, overall, the global economy is at equilibrium.</strong></p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAxBAAAAJDAyOGMxM2Q0LWEzMDAtNGNlMS05YmJjLTM0ZGQzNjM2ZDc2NQ.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAxBAAAAJDAyOGMxM2Q0LWEzMDAtNGNlMS05YmJjLTM0ZGQzNjM2ZDc2NQ.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAxBAAAAJDAyOGMxM2Q0LWEzMDAtNGNlMS05YmJjLTM0ZGQzNjM2ZDc2NQ.png?width=750" class="align-full" width="750" /></a></div>
<p><strong>2) Assets Are Pricing In About Average Risk Premiums (Returns Above Cash), Though They Will Provide Low Total Returns</strong></p>
<p>Liquidity is abundant. Real and nominal interest rates are low—as they should be given where we are in the longterm debt cycle. At the same time, risk premiums of assets (i.e., their expected returns above cash) are normal, and there are no debt crises on the horizon.</p>
<p>Since all investments compete with each other, all investment assets’ projected real and nominal returns are low, though not unusually low in relation to cash rates. The charts below show our expectations for asset returns (of a global 50/50 stock/bond portfolio). While those returns are low, they’re not low relative to cash rates.</p>
<p>Relative to cash, the ‘risk premiums’ of assets are about normal compared to the long-term average. So, both the short-term/business cycle and the pricing of assets look about right to us.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAmTAAAAJGM1NjA4ZmZkLWVmYjYtNGIyNy1iNDVkLTFmM2JhNGZmOThkYQ.jpg"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAmTAAAAJGM1NjA4ZmZkLWVmYjYtNGIyNy1iNDVkLTFmM2JhNGZmOThkYQ.jpg" /></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAuBAAAAJDRlYjNhYzI3LWMyMTAtNDY0NS1hYWFlLTY4MWFkYTcwMzlmOA.jpg"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAuBAAAAJDRlYjNhYzI3LWMyMTAtNDY0NS1hYWFlLTY4MWFkYTcwMzlmOA.jpg" /></div>
<p><strong>3) The Longer Term Debt Cycle Is a Negative</strong></p>
<p>Debt and non-debt obligations (e.g., for pensions, healthcare entitlements, social security, etc.) are high.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA1bAAAAJDFiZDNlMGFhLTk0YWQtNGQyYy1hMDRlLWEyMzcxYmViMDY3Mw.jpg"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA1bAAAAJDFiZDNlMGFhLTk0YWQtNGQyYy1hMDRlLWEyMzcxYmViMDY3Mw.jpg" /></div>
<p><strong>4) Productivity Growth Is Low</strong></p>
<p>Over the long term, what raises living standards is productivity—the amount that is produced per person—which increases from coming up with new ideas and implementing ways of producing efficiently. Productivity evolves slowly, so it doesn’t drive big economic and market moves, though it adds up to what matters most over the long run. Here are charts of productivity as measured by real GDP per capita.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA0yAAAAJDM2NTE5ODI4LTE5MmQtNGM5NS1iN2M5LWQ3ZDBiYmU5ODM2YQ.jpg"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA0yAAAAJDM2NTE5ODI4LTE5MmQtNGM5NS1iN2M5LWQ3ZDBiYmU5ODM2YQ.jpg" /></div>
<p><strong>5) Economic, Political, and Social Fragmentation Is Bad and Worsening</strong></p>
<p>There are big differences in wealth and opportunity that have led to social and political tensions that are significantly greater than normal, and are increasing. Since such tensions are normally correlated with overall economic conditions, it is unusual for social and political tensions to be so bad when overall economic and market conditions are so good. So we can’t help but worry what the social and political fragmentation will be like in the next downturn, which, by the way, we see no reason to happen over the next year or two.</p>
<p>Below we show a gauge maintained by the Federal Reserve Bank of Philadelphia that attempts to measure political conflict in the US by looking at the share of newspaper articles that cover political conflict from a few continuously running newspapers (NYT, WSJ, etc.). By this measure, conflict is now at highs and rising. The idea of conflicts getting even worse in a downturn is scary.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAm2AAAAJDYwZGQzMGQyLTI3ODEtNDRhMC1iMjdhLTM1ZDRiN2UyZTg0OQ.jpg"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAm2AAAAJDYwZGQzMGQyLTI3ODEtNDRhMC1iMjdhLTM1ZDRiN2UyZTg0OQ.jpg" /></div>
<p>Downturns always come. When the next downturn comes, it’s probably going to be bad.</p>
<p>Below, we go through different countries/regions, one by one.</p>
<h3><strong>Looking at the Individual Economic Blocs</strong></h3>
<p><strong>United States</strong></p>
<p>As shown below, the US is around equilibrium in the mid-to-late stages of the short-term debt cycle (i.e., the “in between” years), and growth remains moderately strong. Secularly, the US is at the end of the long-term debt cycle. Debt levels are high and have leveled off after a period of deleveraging. The Fed has started to tighten gradually, but interest rates remain low, so the Fed has limited room to ease in the event of a downturn. And as we’ve covered in prior <em>Observations</em> (so won’t go into here), the US is in a period of exceptional politicaluncertainty as the new administration’s policies continue to take shape.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAsJAAAAJDg2MDNjNTZlLTNjNDEtNGVkYy05ZmMxLTk0NDBjY2ZlNzI5YQ.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAsJAAAAJDg2MDNjNTZlLTNjNDEtNGVkYy05ZmMxLTk0NDBjY2ZlNzI5YQ.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAsJAAAAJDg2MDNjNTZlLTNjNDEtNGVkYy05ZmMxLTk0NDBjY2ZlNzI5YQ.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAyLAAAAJDk0YjQwNDk2LTlhOTAtNGI3YS1iMDQyLTg1OTI2YzIxMmMyYQ.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAyLAAAAJDk0YjQwNDk2LTlhOTAtNGI3YS1iMDQyLTg1OTI2YzIxMmMyYQ.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAyLAAAAJDk0YjQwNDk2LTlhOTAtNGI3YS1iMDQyLTg1OTI2YzIxMmMyYQ.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAArZAAAAJDk0M2NjYWFkLWExNTEtNDAyMS1hODcyLTFmZmUxODQ5YzBhNw.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAArZAAAAJDk0M2NjYWFkLWExNTEtNDAyMS1hODcyLTFmZmUxODQ5YzBhNw.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAArZAAAAJDk0M2NjYWFkLWExNTEtNDAyMS1hODcyLTFmZmUxODQ5YzBhNw.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAsBAAAAJDgzMjg4ZDE3LTg3ZTktNGYxNi1iNzY0LTc1MTc4OTdmNjk4Mw.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAsBAAAAJDgzMjg4ZDE3LTg3ZTktNGYxNi1iNzY0LTc1MTc4OTdmNjk4Mw.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAsBAAAAJDgzMjg4ZDE3LTg3ZTktNGYxNi1iNzY0LTc1MTc4OTdmNjk4Mw.png?width=750" class="align-full" width="750" /></a></div>
<p><strong>Eurozone</strong></p>
<p>While there are two Europes within Europe, we will talk about the Eurozone as a whole (as we have covered the different parts in other <em>Observations</em>). The region is around cyclical equilibrium, but this masks significant divergences between depressed periphery countries and Germany, where the economy is running hot. In response to ECB stimulation, growth has picked up a bit, but inflation is still very weak and below the ECB target. Secularly, Europe is also at the end of the long-term debt cycle. Debt levels are high and haven’t fallen much. Nominal interest rates on both the short and the long end are around zero and are priced to stay low for years. We won’t go into detail here, but Europe also faces one of the most challenging political backdrops due to the growing support for populism.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAqaAAAAJDQxOWQwZmQzLTFjYzMtNDZhZS05MWRiLWFiNzJkYTA3Yjc5Nw.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAqaAAAAJDQxOWQwZmQzLTFjYzMtNDZhZS05MWRiLWFiNzJkYTA3Yjc5Nw.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAqaAAAAJDQxOWQwZmQzLTFjYzMtNDZhZS05MWRiLWFiNzJkYTA3Yjc5Nw.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAq5AAAAJGQxMTljYTM5LTg3OTctNDFlMi1iY2JhLTMwYzFmMTcwZmE3Zg.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAq5AAAAJGQxMTljYTM5LTg3OTctNDFlMi1iY2JhLTMwYzFmMTcwZmE3Zg.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAq5AAAAJGQxMTljYTM5LTg3OTctNDFlMi1iY2JhLTMwYzFmMTcwZmE3Zg.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAvNAAAAJDVhZmJlMjQ3LWQ0NzEtNDA4NC1hNzA2LTcxMGRmNzFjYmE5Yg.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAvNAAAAJDVhZmJlMjQ3LWQ0NzEtNDA4NC1hNzA2LTcxMGRmNzFjYmE5Yg.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAvNAAAAJDVhZmJlMjQ3LWQ0NzEtNDA4NC1hNzA2LTcxMGRmNzFjYmE5Yg.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAuaAAAAJDRhYzZhMmNmLWM5NWUtNGNkYi1hODAyLWNkZTkyZDkyY2ExMQ.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAuaAAAAJDRhYzZhMmNmLWM5NWUtNGNkYi1hODAyLWNkZTkyZDkyY2ExMQ.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAuaAAAAJDRhYzZhMmNmLWM5NWUtNGNkYi1hODAyLWNkZTkyZDkyY2ExMQ.png?width=750" class="align-full" width="750" /></a></div>
<p><strong>Japan</strong></p>
<p>In Japan, policy makers are trying to reverse decades of ugly deflationary deleveraging and shift to a beautiful deleveraging. As shown below, over the last several years, the BoJ’s policies have produced a cyclical upswing and eased deflation. Japan is now around its cyclical equilibrium, growth rates have picked up a bit, and inflation is still very low but the economy is no longer in deflation. Secularly, Japan is at the end of the long-term debt cycle, with the highest debt levels in the developed world (which the BoJ is monetizing at the fastest rate). Debt is still rising, driven by government borrowing. Interest rates have been around zero for two decades and are priced to stay there.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAwXAAAAJDc0NWJlNDNiLTNhZGQtNGNmMy05MDBiLWVjMzg4ZjcwMTUyYg.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAwXAAAAJDc0NWJlNDNiLTNhZGQtNGNmMy05MDBiLWVjMzg4ZjcwMTUyYg.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAwXAAAAJDc0NWJlNDNiLTNhZGQtNGNmMy05MDBiLWVjMzg4ZjcwMTUyYg.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAm7AAAAJGYwYzczYTNhLTI0N2UtNGI0YS05ZTEwLTJlMWY0NThiMWM3NA.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAm7AAAAJGYwYzczYTNhLTI0N2UtNGI0YS05ZTEwLTJlMWY0NThiMWM3NA.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAm7AAAAJGYwYzczYTNhLTI0N2UtNGI0YS05ZTEwLTJlMWY0NThiMWM3NA.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAApqAAAAJGExNWJiZmM5LTQ2YzItNDU3Ny1hNzQ4LThjMDhmNjczZjhmZA.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAApqAAAAJGExNWJiZmM5LTQ2YzItNDU3Ny1hNzQ4LThjMDhmNjczZjhmZA.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAApqAAAAJGExNWJiZmM5LTQ2YzItNDU3Ny1hNzQ4LThjMDhmNjczZjhmZA.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAu0AAAAJDc4OWZhMjMyLTUwZmMtNDQzZi04MDM1LWZjZjFkZDVhMzEwMg.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAu0AAAAJDc4OWZhMjMyLTUwZmMtNDQzZi04MDM1LWZjZjFkZDVhMzEwMg.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAu0AAAAJDc4OWZhMjMyLTUwZmMtNDQzZi04MDM1LWZjZjFkZDVhMzEwMg.png?width=750" class="align-full" width="750" /></a></div>
<p><strong>China</strong></p>
<p>We’ve previously described that China faces four big economic challenges (debt restructuring; economic restructuring; capital markets restructuring; and the balance of payments/currency issue) that are being well managed. We won’t go into these challenges here other than to emphasize that they are an important backdrop for the perspective shown below. Cyclically, overall levels of activity in China are neither too high nor too low; growth has accelerated and is now strong; and while inflation has picked up some, it remains modest. Debt levels are high and growing rapidly. Interest rates remain relatively low, though these have risen some recently. Under the hood, these aggregate conditions are the net of “two economies” that look very different: a slowing, heavily indebted “old economy” with pockets of excess capacity, and a steadily expanding “new economy” driven by higher-end industries and household consumption.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAqvAAAAJGYxZjhhYTU3LTU1MDAtNDdkYy1hOWYzLTdkNGNjZGJiMThlOA.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAqvAAAAJGYxZjhhYTU3LTU1MDAtNDdkYy1hOWYzLTdkNGNjZGJiMThlOA.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAqvAAAAJGYxZjhhYTU3LTU1MDAtNDdkYy1hOWYzLTdkNGNjZGJiMThlOA.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAxwAAAAJGIyODQ4NDgyLWY3MGQtNGU0Ni04NDEwLTU3ODdjNTU4ZGIzMA.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAxwAAAAJGIyODQ4NDgyLWY3MGQtNGU0Ni04NDEwLTU3ODdjNTU4ZGIzMA.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAxwAAAAJGIyODQ4NDgyLWY3MGQtNGU0Ni04NDEwLTU3ODdjNTU4ZGIzMA.png?width=750" class="align-full" width="750" /></a></div>
<p><strong>Emerging Markets ex-China</strong></p>
<p>Obviously, this category aggregates many countries with many different sets of circumstances, which we won’t get into here. Overall, cyclical conditions in EM ex-China are a bit weaker than in the developed world, reflecting, that several of the largest countries (e.g., Brazil, Russia) are now recovering from balance of payments adjustments. But the longer-term picture is comparatively stronger. These EM countries haven’t yet seen much of a productivity slowdown akin to what the developed world has seen, and debt burdens remain low.</p>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAmsAAAAJDQzZTNmZWYxLWZmOWEtNDk3ZC1hMmJhLWU3ODA1YzViNWViMA.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAmsAAAAJDQzZTNmZWYxLWZmOWEtNDk3ZC1hMmJhLWU3ODA1YzViNWViMA.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAAmsAAAAJDQzZTNmZWYxLWZmOWEtNDk3ZC1hMmJhLWU3ODA1YzViNWViMA.png?width=750" class="align-full" width="750" /></a></div>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width" data-imgsrc="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA0oAAAAJDQ5NzE3YTMwLWVhZGItNDRiMy1hZjliLTlhYWJhZjBiNGU5NQ.png"><a href="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA0oAAAAJDQ5NzE3YTMwLWVhZGItNDRiMy1hZjliLTlhYWJhZjBiNGU5NQ.png" target="_blank"><img src="https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA0oAAAAJDQ5NzE3YTMwLWVhZGItNDRiMy1hZjliLTlhYWJhZjBiNGU5NQ.png?width=750" class="align-full" width="750" /></a></div>
<p>Courtesy of <a href="https://www.linkedin.com/pulse/big-picture-ray-dalio" target="_blank">Ray Dalio @ LinkedIn</a></p>
</div>
</div>Is The Fed About To Experience A Repeat Of 2016?http://stockbuz.ning.com/articles/is-the-fed-about-to-experience-a-repeat-of-20162016-12-28T23:49:58.000Z2016-12-28T23:49:58.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><div class="entry-body">
<p>In the most recent Summary of Economic Projections, Fed officials penciled in three 25bp rate hikes for 2017. The reality, however, could be very different. We all remember how “four” became “one” in 2016. The median dots are neither a promise nor an official forecast. As 2016 progressed, forecasts associated with a lower path of SEP “dots” evolved as the consensus view of policymakers. Will the same happen this year? I don’t think so; it is hard to see the Fed on pause for another twelve months.</p>
<p>As a starting point, I think it best to assume the US economy is near full-employment. But the US economy was near full-employment at this time last year as well. I think the key difference between then and now is that then the after-effect of the oil price slide and dollar surge placed a drag on the US economy sufficient to ease hiring pressure. At the same time, labor force participation perked up, setting the stage for a flat unemployment rate for most of the year. Inflationary pressures eased as well; the January inflation pop proved to be short-lived:</p>
<p><a class="asset-img-link" href="http://economistsview.typepad.com/.a/6a00d83451b33869e201b8d24ae9a9970c-popup" style="display: inline;"><img alt="PCE1116" class="asset asset-image at-xid-6a00d83451b33869e201b8d24ae9a9970c img-responsive" src="http://economistsview.typepad.com/.a/6a00d83451b33869e201b8d24ae9a9970c-500wi" style="display: block; margin-left: auto; margin-right: auto;" title="PCE1116" /></a>In effect, the US economy settled into a nice little equilibrium in 2016 that obviated the need for additional rate hikes. To expect a repeat scenario in 2017, one would need to assume that the US economy does not pick up speed and threaten that equilibrium by pushing past full employment.</p>
<p>Evidence, however, piles up suggesting that the slowdown of the past year is drawing to a close. ISM manufacturing and nonmanufacturing surveys are stronger, temporary help employment is heading up again, new manufacturing orders for nondefence, nonair capital goods have flattened out, and the broader inventory overhang is easing:</p>
<p><a class="asset-img-link" href="http://economistsview.typepad.com/.a/6a00d83451b33869e201bb09641387970d-popup" style="display: inline;"><img alt="ISRATIO1216" class="asset asset-image at-xid-6a00d83451b33869e201bb09641387970d img-responsive" src="http://economistsview.typepad.com/.a/6a00d83451b33869e201bb09641387970d-500wi" style="display: block; margin-left: auto; margin-right: auto;" title="ISRATIO1216" /></a>All of this occurs in the context of an unemployment rate that suddenly dipped toward the lower end of the Fed’s estimates of the natural rate of unemployment. And if the demographic forces reassert themselves, there is likely to be further downward pressure on the unemployment rate – job growth is well above estimates necessary to hold unemployment constant.</p>
<p>But would a total of 75bp of hikes be necessary to hold inflation in check? That depends in part the sensitivity of inflation to greater resource utilization. <a href="http://www.wsj.com/articles/trump-isnt-likely-to-rescue-the-global-economyor-wreck-it-either-1479317018">Greg Ip of the Wall Street Journal</a> noted last week:</p>
<blockquote>
<p>Unlike in 2009, this fiscal stimulus will be hitting when the economy is close to full employment with far less spare capacity. Yet it’s premature to assume inflation will therefore jump. In the last decade inflation, excluding swings due to energy, has proven surprisingly inertial, barely moving in response to high unemployment. The same is likely true if unemployment drops further below its “natural” level.</p>
</blockquote>
<p>It is true that inflation is fairly inertial, although some policymakers will dismiss the lack of response to high unemployment as a consequence of downward nominal wage rigidity. Moreover, others will claim the reason for inertial inflation is that the Fed has properly responds to weak or strong economic conditions to hold inflation and, importantly, inflation expectations, in check. In other words, you won’t see inflation if the Fed acts preemptively.</p>
<p>Still, the broader point remains true that while further declines in unemployment will pressure the Fed to hiking rates more aggressively, low inflation like seen in November will temper that response.</p>
<p>In addition, policy going forward depends on the relative tightness of financial markets in general, and the dollar in particular. And the dollar has been on a tear in recent weeks:</p>
<p><a class="asset-img-link" href="http://economistsview.typepad.com/.a/6a00d83451b33869e201b7c8c123ef970b-pi" style="display: inline;"><img alt="Dollar1216" class="asset asset-image at-xid-6a00d83451b33869e201b7c8c123ef970b img-responsive" src="http://economistsview.typepad.com/.a/6a00d83451b33869e201b7c8c123ef970b-500wi" style="display: block; margin-left: auto; margin-right: auto;" title="Dollar1216" /></a>The dollar serves as a break on the US economy. If activity expands as I anticipate, and the economy is near full employment as I believe, then some demand will be offshored as the rising dollar prompts the trade deficit to widen. Consequently, the Fed needs to be wary of feedback effects from the dollar as they tighten policy.</p>
<p>Bottom Line: The economic situation on the ground is very different from December of last year. Whereas the decision to raise rates at that time looked ill-advised, this latest action appears more appropriate given the likely medium-term path of the US economy. Assuming the US economy is near full employment, that path likely contains enough upward pressure on activity to justify more than one more rate increase in 2017. Three I think is more likely than one. That said, the change in administrations and the path of fiscal policy creates uncertainties in both directions.</p>
<p>Courtesy of <a href="http://economistsview.typepad.com/timduy/2016/12/is-the-fed-about-experience-a-repeat-of-2016.html" target="_blank">EconomistsView</a></p>
</div>
</div>Is The Stock Market Rally Over?http://stockbuz.ning.com/articles/is-the-stock-market-rally-over2016-11-05T22:00:58.000Z2016-11-05T22:00:58.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p style="font-family: 'Source Sans Pro', Helvetica, Arial, sans-serif; font-size: 15px; line-height: 20px; color: #414141; text-align: left; padding: 20px 50px 0px 50px; margin: 0;"><span style="color: #ffff99;">As technicians battle over whether our "<em>hated"</em> seven year rally still has legs, I continue to return and ask myself "<em>has anything truly blown up?".  I do personally believe the US Dollar will continue it strength and that will continue to put pressure on commodities, dividend payers and discretionary.  Financials and insurers will push higher.  Can the rest of the boat survive?  Are earnings guidance showing a 'rosey' picture of the future?  Will Trump win?  Too many unknowns for me. </em> This post, using monthly charts, brings me back to earth.  While I have no need to catch the absolute top, it gives me specific areas which need to be defined.  I remain cautious and yes, have numerous short positions as well as longs.  That doesn't mean, however, that I'm willing to give up just yet.  I hope you enjoy-</span></p>
<p style="font-family: 'Source Sans Pro', Helvetica, Arial, sans-serif; font-size: 15px; line-height: 20px; color: #414141; text-align: left; padding: 20px 50px 0px 50px; margin: 0;"><span style="color: #ffffff;">While the technicians usually write about the short tem, I want to zoom out a little and use a monthly chart of the New York Composite ($NYA). For those who follow my webinars, we are following the charts very closely as the market conditions are frail in my opinion. We could rally from here, but the long term charts continue to disappoint in my work. This <strong>New York Composite chart ($NYA)</strong> shows the close Friday, November 4th, 2016.</span></p>
<p style="font-family: 'Source Sans Pro', Helvetica, Arial, sans-serif; font-size: 15px; line-height: 20px; color: #414141; text-align: left; padding: 20px 50px 0px 50px; margin: 0;"><span style="color: #ffffff;">While the October 31st close did not close below the 10-month Moving average or give a MACD sell signal, it only took a pullback of one more day (November 1) to generate a sell signal on both the MACD and the 10 month moving average. That is a fine detail on a monthly chart. These can be seen looking at the Zoombox on the far right. By the Friday close shown below, the picture was getting a little more difficult. Martin Pring's Monthly KST is below zero as well.</span></p>
<p style="font-family: 'Source Sans Pro', Helvetica, Arial, sans-serif; font-size: 15px; line-height: 20px; color: #414141; text-align: left; padding: 20px 50px 0px 50px; margin: 0;"><span style="color: #ffffff;"><a target="_blank" href="http://stockchartscom.cmail19.com/t/r-l-yhthkjuk-bjyittruk-o/"><span style="color: #ffffff;"><img style="padding: 10px 0px 20px 0px; display: block; border: 0; margin: 0 auto; width: 100%; height: auto;" src="http://i8.cmail19.com/ei/r/2C/518/1A3/074942/csimport/1478291778294799949101_7.png" /></span></a></span></p>
<p style="font-family: 'Source Sans Pro', Helvetica, Arial, sans-serif; font-size: 15px; line-height: 20px; color: #414141; text-align: left; padding: 20px 50px 0px 50px; margin: 0;"><span style="color: #ffffff;">The note I wrote on this chart above back in August 2016 as the $SPX made it's high is extremely important now. We actually did cross above the signal line but so far this month we are below. We will need to wait for the November close and the level of 10414, but it is very important to realize how frail the market setup is. There were only 3 times on this chart that a monthly sell signal reversed higher. One was the coordinated central bank move in September 2012. The other was the brief rally in 1999 before the tech top. The current one is in play. If we close below 10414, we have an important signal.</span></p>
<p style="font-family: 'Source Sans Pro', Helvetica, Arial, sans-serif; font-size: 15px; line-height: 20px; color: #414141; text-align: left; padding: 20px 50px 0px 50px; margin: 0;"><span style="color: #ffffff;">Why is this so important? The real problem is understanding what has happened through the passage of time from the high on the MACD in 2014. As oil plummeted from June 2014 and the energy sector was decimated, it slowly affected other industries and sectors. By the spring of 2015, the $NYA chart above made marginal new highs over the 2014 level. As the industry dominoes started to fall, the market pulled back most of 2015 with a final low in January/February 2016 coinciding with Crude Oil's final low. As oil rallied, GDP numbers started to improve and recently we just had a GDP print of 2.9%.</span></p>
<p style="font-family: 'Source Sans Pro', Helvetica, Arial, sans-serif; font-size: 15px; line-height: 20px; color: #414141; text-align: left; padding: 20px 50px 0px 50px; margin: 0;"><span style="color: #ffffff;">My position is if energy (Oil, Natural Gas, Wind, Solar, Coal, Nuclear, Ethanol) fails to hold up, we could see more pressure on the economy. Since the market top of May 22,2015, three groups have gained meaningfully from that day, three are close to flat and three declined heavily.</span></p>
<p style="font-family: 'Source Sans Pro', Helvetica, Arial, sans-serif; font-size: 15px; line-height: 20px; color: #414141; text-align: left; padding: 20px 50px 0px 50px; margin: 0;"><span style="color: #ffffff;"><img style="padding: 10px 0px 20px 0px; display: block; border: 0; margin: 0 auto; width: 100%; height: auto;" src="http://i9.cmail19.com/ei/r/2C/518/1A3/074942/csimport/14782932931621646324954_8.png" />However, zooming in on the markets for the last 3 months after the initial rally off the floor in February 2016, we have a different picture. While energy and financials are marginally positive, big sectors like consumer discretionary, industrials and materials are down. As well, Biotech within Healthcare has been crushed. Technology has been relatively flat, even with Apple, Google, Amazon, Facebook and Netflix.</span></p>
<p style="font-family: 'Source Sans Pro', Helvetica, Arial, sans-serif; font-size: 15px; line-height: 20px; color: #414141; text-align: left; padding: 20px 50px 0px 50px; margin: 0;"><span style="color: #ffffff;"><img style="padding: 10px 0px 20px 0px; display: block; border: 0; margin: 0 auto; width: 100%; height: auto;" src="http://i10.cmail19.com/ei/r/2C/518/1A3/074942/csimport/1478293586406439420757_9.png" />In a nutshell, for my way of thinking, we need Energy to continue to rebound. If that doesn't happen, it is a global sector that slowed the MACD from the highs of 2014 to the very low levels we saw in the first chart. If Energy rolls over again, which it appears to be doing now, this could be the major derailment that gives our global markets negative momentum. The other sectors don't look strong enough to carry the economy forward in my mind. The monthly charts are warning us. It could break out to the upside, but I think it is important to understand what a sell signal in November and confirmation in December could mean for the longer term. We don't usually get two whipsaws on monthly charts.</span></p>
<p style="font-family: 'Source Sans Pro', Helvetica, Arial, sans-serif; font-size: 15px; line-height: 20px; color: #414141; text-align: left; padding: 20px 50px 0px 50px; margin: 0;"><span style="color: #ffffff;">Lastly, some of the webinars over the last two weeks have set the stage for how close this market is to a major reversal. If you are not aware of how fine that picture is, I would encourage you to watch <a target="_blank" href="http://stockchartscom.cmail19.com/t/r-l-yhthkjuk-bjyittruk-b/"><span style="color: #ffffff;">Commodities Countdown 2016-10-27</span></a> and then the <a target="_blank" href="http://stockchartscom.cmail19.com/t/r-l-yhthkjuk-bjyittruk-n/"><span style="color: #ffffff;">Commodities Countdown 2016-11-03</span></a>. I have been bullish until late September so I am not quick to jump on the bear bandwagon. But when the time comes, keeping your capital becomes more important than making money.</span></p>
<p style="font-family: 'Source Sans Pro', Helvetica, Arial, sans-serif; font-size: 15px; line-height: 20px; color: #414141; text-align: left; padding: 20px 50px 0px 50px; margin: 0;"><span style="color: #ffffff;">Courtesy of <a href="http://stockcharts.com/articles/chartwatchers/2016/11/the-monthly-close-for-october-couldnt-have-been-closer-to-a-sell-signal.html" target="_blank"><span style="color: #ffffff;">StockCharts.com</span></a></span></p>
</div>Is Brexit Truly The End Of The EU Itself?http://stockbuz.ning.com/articles/is-brexit-truly-the-end-of-the-eu-itself2016-06-28T13:12:41.000Z2016-06-28T13:12:41.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>The vote has come and gone. A major European nation has <a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=QYXXyRQK8bIZVfnjfEZLNO4sX2UuVNM0zAC9bX9Gn-2BVqZY5E55Fwv3J2GjUTAoKloLmovRROtAOJ1TA-2Bo3lFFw-3D-3D_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BLlMg0KEgsk8E0gvLKfJB7Mg8-2BYZrxdFxu6mch0cRAk0rSneEVAWxIwPfylfiq-2Fr5RHLabcOEWXXqL9oaZAEKK5Jqxj3svQVk-2BJW6RWrhJGwKYIp8fytcTQu-2F7I-2BGlWMNlSuMcLY0V5R58TmiMHzAElD0VbfBc-2Bu9h7VFW3JBrFN-2FGPOkbLYKXMHWVZYSVZtRT2kUPGO3WgbWOGMIeukHOTxuZV7YHdjKBPYvxSAotNtA-3D-3D">chosen to leave the EU</a>. The markets have had their obligatory decline. A weekend has passed. It is time to think about <a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=QYXXyRQK8bIZVfnjfEZLNO4sX2UuVNM0zAC9bX9Gn-2BUovslopIjHPDXN06VHaRi09f1IOiDijbh-2BpsgkDtsFGAmrdIq8G4AGGxP5vyYbzrl-2BRLm4kXHDOzTyO6PTuEb2_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BLlMg0KEgsk8E0gvLKfJB7MDWVrOT9euTBOQ49kwr8LkCSoICPmQl2CFuQojy6dd0VHooQ8gwambU5EemYYmhG7yWAX-2FA4kgAvGQVSoo4sgt59-2BBWYZxergY9e69niRpaA-2FC5HebCv-2FVx2mjuhi58Z1eT2Fx6df9ZwAPXeJn9qJFnYD-2BgbL0k5BVRfdGaSRG9DjQ4xE28jmz5BBKozzcOA1kDDFeEszg7pT2C2I0wfo1Q-3D-3D">what exactly has happened</a>… and what it means, if anything.</p>
<p>The real drive to leave had little to do with economics. It had a great deal to do with immigration. The EU’s economy has been in wretched condition since 2008.</p>
<p>The EU has been unable to forge a plan that would fix dire unemployment in southern Europe and revive the stagnant economy. The EU’s founding treaty promised prosperity. It has failed. Germany has the healthiest economy in Europe, but even it struggles to grow.</p>
<p>The case for staying in the EU was that leaving would ruin the British economy. This assumed, of course, that staying in a broken union would help the economy. The logic of that escaped me. It is hard to see any economic benefits that would be lost. As I put it in my book <em>Flashpoints</em>, “Britain will avoid the destabilization in Europe by pulling away from the EU and closer to the United States.”</p>
<h3>The EU, Not Britain, Is the Weaker Player</h3>
<p>The UK is Germany’s third-largest export market. It is the fifth-largest for France and Italy. It is absurd to think these countries would stop selling to Britain or put tariffs on British exports. The British would respond in kind, and Europe cannot afford a trade war even if it feels insulted. The EU did not create the existing trade patterns. They were already in place. The EU’s members will not allow Brussels to disrupt them.</p>
<p>Nor did the EU create the patterns of investment. Britain’s banks channel global capital and are a huge source of investment for the Continent. The EU is hardly going to hamper that flow by blocking investments.</p>
<p>As for regulations that could force EU banks to relocate jobs and resources to Frankfurt, this misses a number of points. Given Europe’s weakness, the burden is on the EU to show continuity. It needs the flow of capital.</p>
<p>Further, it is the clients who will determine the world’s banking hubs. London has been a traditional banking center preferred by foreign clients. New York—not Frankfurt—is the alternative to London. If clients had wanted to bank in Frankfurt, they would have already done so.</p>
<p>Obviously, <a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=QYXXyRQK8bIZVfnjfEZLNO4sX2UuVNM0zAC9bX9Gn-2BWsGXxgKcYnjy0fUfDVuDDHzWXcFQ3KLPSrfOtkuCNXYA-3D-3D_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BLlMg0KEgsk8E0gvLKfJB7MiDI6M7FVVrIy-2FI7qsOajVJoFcxdaLtgQHv5j97ECF3fdY1tkohaJGYs4c-2BNCV8JjdezF7dWOOozQs4iCrYkGP4lBcaIN5fq8poZz3-2FbZX75mOBNkVG8qxvQEWn2JRD8-2FIFlbSJPNlYn-2BPjLYZiWWCoscPnpcoG9ib5Soz5yvtClEYkyL-2BE74C1-2B8WUy50UJCPp9zZxa8MfFv0ejTlbCm7A-3D-3D">nothing will happen in the immediate future</a>. But it is not clear to me that there will be any real economic blowback. The UK is not Greece. Attempting to shun the British carries heavy potential consequences. Anything imposed on the British will resonate on the Continent. And Germany—which gets almost 50% of its GDP from exports—is not likely to let anyone hinder that trade.</p>
<p>The economic impact of the UK leaving the EU is minimal because the EU—not Britain—is the weak player. The EU is fighting with Poland over political changes… has criticized Hungary on human rights… is still engaged in the Greece disaster… has an emerging Italian banking crisis. Additionally, Finland is in grave economic trouble, and <a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=QYXXyRQK8bIZVfnjfEZLNO4sX2UuVNM0zAC9bX9Gn-2BWMdU0NYiM8MCPqsjWDD-2FgW3AyeXX-2B6W3fRf-2Bh1zoUO0w7ZYVpVNKbdCqsN-2F9fUWhFIU3n0SW9anXiE99obi5c0_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BLlMg0KEgsk8E0gvLKfJB7MoO7PME4dAZoe1F9EwSnXjByojzUTWVJujdNHGWEPONldRr7-2FeqRFKDfmauRsOFcRwgLHhp6VpjyGZZo6y2b7RCOtukeRrOaG0hs7OMVl5eHtA-2FiF-2F8wxK8IB5-2FNn-2BHMG82m4AG6IAqDIvIdBhwPT5c-2BRNjF0A3WD9ZqMVX0k4BuVB3Nbl4DOzY1SKrZ0QBM2BB8qWB6nP7EKmIuQFdwt-2Bw-3D-3D">anti-EU parties</a> are gaining strength in several member states.</p>
<p>The EU has so many internal issues they are hard to count. Its retaliation is the last thing Britain should fear.</p>
<h3>Immigration Seen as Loss of National Self-Determination</h3>
<p>As troubling as Europe’s economy is, it was not the prime mover in the referendum. The contentious immigration debate holds that honor. And immigration itself was not really the issue. Britain was quite comfortable with immigrants until Brussels began making demands.</p>
<p>The EU dictating the rules was the problem. It was a <a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=QYXXyRQK8bIZVfnjfEZLNO4sX2UuVNM0zAC9bX9Gn-2BWUE1xzOK4YVFcn09SMtzGs5nOcIA-2B-2FbBmBL0tCXUCOK5h82AGvF1fBGHPpO9o9azc-3D_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BLlMg0KEgsk8E0gvLKfJB7MFvANPg3lM0NxAUEB3i-2BmF3QI3ef7RXk7Q7CwWf9uAHFZkW3EL-2FnCklNLUxqiceZWIFcDs05aiOAzgSMm-2FQ103Z1-2BxjZBdthXs1ufOkXhFx-2BqUjQ-2BWHFA-2Bh3xOzh1FtW3tfZmnDsr5qNTyhN5H-2FPt9HEtdf4-2Bp6oh5YoCNMF9SwbqfBl-2BglL3glmZ5EIk-2FLlfsJ6cSkkAl9CF0Y-2Feb40gug-3D-3D">question of sovereignty</a>. That the EU could make decisions that would change the character of Britain was not okay.</p>
<p>Granted, there was a large vote for staying. The British media have been eager to point out that <a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=QYXXyRQK8bIZVfnjfEZLNO4sX2UuVNM0zAC9bX9Gn-2BXipyOimMzLF9HUYwDWGgAUShiK047lSqXRXqFDQPSkZFJj86kF7jFFWizGJLI25Hxec37XYxZlzwuyLDU0FuYH_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BLlMg0KEgsk8E0gvLKfJB7M1jgRmNPi9GG13cvjQHjNC0ryTgwrUwsdtCq6n2uAxQ5V6svwKHg6M-2BdzxYsOzwy8eSRLQQ0hPWP-2B4hq-2FxabB9EKSFb83bnHu8neOzjl-2F-2Bm-2FTOZg2Am99nNCB-2BK79-2FNTwPlg-2BFSxHZjPX89-2FGpxfueGC2WejIhQgaoOVfKJ2Il9YrG49Iynw7PyWQFihgwclKfx2TKVpZ0-2F0Sdi-2BUFCUtdQ-3D-3D">those who voted to leave were less educated</a>, had lower incomes, and so on. They were also most likely to be affected by immigration.</p>
<p>Immigration is socially destabilizing. There is always friction between older residents and immigrants. I immigrated to the US as a small child. The buffeting of that experience on both sides is burned into my memory.</p>
<p>But, better educated and wealthier individuals normally don’t experience this element of immigration. The tension on the streets rarely enters the halls of academia, senior civil service, or banking.</p>
<p>Not surprisingly, the question of sovereignty wasn’t critical to this class. Just as large-scale immigration did not concern them. Immigrants like my family would not be moving into their neighborhoods.</p>
<p>We moved to the Bronx in New York because that was all we could afford. We lived next to other people who settled there because it was all they could afford. The older residents had a sense of ownership of the neighborhood. As my family and others moved in, that ownership was threatened. They had little else to claim as their own.</p>
<p>In Britain, the immigrant issue was critical and created a sense of powerlessness. First, Britain was not in control of its immigration policy. Second, the British who were for it, to a large extent, did not feel the profound social costs of immigration.</p>
<p>That fee was going to be paid by those who—again with many exceptions—voted for leaving. So it was a revolt against the British establishment and the EU. As with most things, it was much more complex than it seemed.</p>
<h3>When All Else Fails, Acknowledge the Obvious</h3>
<p><a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=QYXXyRQK8bIZVfnjfEZLNO4sX2UuVNM0zAC9bX9Gn-2BUYmWmf-2Bw3dj-2FTpbVH55wKz6D1sXET1Dd1UNFBf-2FVACRg-3D-3D_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BLlMg0KEgsk8E0gvLKfJB7MiE-2BetgxSGIwTlG4exNjiUw2-2BwFXuU5efs-2BhHCQ1GYcKSuwrL6bgyseZiwPGy4HWSzU-2BJaL7HeOHB3G0pCWSEj6P3uGRB3Y3yM9XfdR3V8bXvzHYRnJb9Kk4TmkLQS0npyLcCa07LHbNn5JaiYi0rJQY-2BwLanPXD32-2Fwin8eLCq1OdkJAMo25uQ4vnW6oDQH5SjxisYmGKor-2FH7eryEFDLg-3D-3D">The EU has already responded.</a> This statement from the foreign ministers of Belgium, France, Germany, Italy, Luxembourg, and the Netherlands, defines the future:</p>
<p style="margin-left: .5in;"><em>We will continue in our efforts to work for a stronger and more cohesive European Union of 27 based on common values and the rule of law<strong>. It is to that end that we shall also recognize different levels of ambition amongst Member States when it comes to the project of European integration. While not stepping back from what we have achieved, we have to find better ways of dealing with these different levels of ambition so as to ensure that Europe delivers better on the expectation of all European states…. However, we are aware that discontent with the functioning of the EU as it is today is manifest in parts of societies. We take this very seriously and are determined to make the EU work better for all our citizens.</strong></em></p>
<p>This was the EU’s answer to Brexit. They recognized that not everyone wants the same level of integration and will respect that. They are aware that many are discontent with the EU.</p>
<p>In other words, after the British vote, they acknowledge the obvious. This is a unique evolution. It is not clear what they are going to do, but they are not going to punish Britain. They can’t afford to.</p>
<p>At the same time, there is a bit of humor in the statement. The EU has 27 member states and, apparently, only six foreign ministers met and drafted this response. Poland wasn’t there. Neither was Spain. Nor were the other 19 members. The new “inclusionary” EU has met and promised to do something. We’ll see if anything actually happens.</p>
<p>We will have much, much more to say on Wednesday when we release our <em>Deep Dive</em> into the future of Europe.</p>
<p>Courtesy of <a href="http://email.mauldineconomics.com/wf/click?upn=U8GusXYvzQrI-2BTfpBInOiw4cuS1SqQfCbK1N-2BAM97HF4HBtCmtnDwx9x1mIfsnDeKt4MZKUuddYvlbRf3pzsZw-3D-3D_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BLlMg0KEgsk8E0gvLKfJB7M8W8gpaKNV8tA6VbwraA8AQ1O2HmAtbKOhwCeg5hTHlyyrhdnsadiMgAsr39MLmi8H2kAATHlxLBBQ7hfkBCKAbqN6OIxOzmIzDxkF-2FZxM52FoDKjutgCNPCSUYw289DrYOEnhBM0UkF7FwcXVotaWVVvQA9TSL0oIis-2FfK8dJw5k7mdEnNE3E2u5eSn9VMTiMLopwaNbz6rFwVget3gyZQ-3D-3D" target="_blank">George Freidman</a></p>
</div>This One Map Sums Up the Economy of the Middle Easthttp://stockbuz.ning.com/articles/this-one-map-sums-up-the-economy-of-the-middle-east2016-05-12T19:25:08.000Z2016-05-12T19:25:08.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_blank" href="http://2oqz471sa19h3vbwa53m33yj.wpengine.netdna-cdn.com/wp-content/uploads/2016/05/most-valuable-exports-middle-east.jpg"><img class="align-full" src="http://2oqz471sa19h3vbwa53m33yj.wpengine.netdna-cdn.com/wp-content/uploads/2016/05/most-valuable-exports-middle-east.jpg?width=750" width="750" /></a>We’ll start with the obvious: the number one export for many countries here is crude oil or related petroleum products. Middle Eastern countries made up a significant portion of global oil export revenues during 2015 with shipments valued at $325 billion or 41.3% of global crude oil exports.</p>
<p>Saudi Arabia, Iraq, United Arab Emirates, Kuwait, Iran, and Oman were all among the top 15 exporters of crude oil in 2015. Russia and Kazakhstan, countries on the Central Asian part of the map, were also members of that same group.</p>
<p>Regimes in the region found that there were many other corollary benefits from this economic might. Unrest could be stifled by rising wealth, and these countries would also have more influence than they otherwise would in global affairs. Saudi Arabia is a good example in both cases, though a major driver of Saudi influence has been <a href="http://www.visualcapitalist.com/animation-oil-imports-to-u-s-shifted-15-years/">slipping in recent years</a>.</p>
<h2 style="margin-top: 0;">Outside of Oil</h2>
<p>Aside from exports of oil, there are some other interesting subtleties to this map. One of the most advanced economies in the region, Israel, is not dependent on oil exports at all. The country has had to find other ways to create value in the global market and its three major exports include electronics and software, cut diamonds, and pharmaceuticals.</p>
<p>War-torn Afghanistan, which is not a significant producer of petroleum on the world market, gets the majority of its export revenue from different natural resource. Opium is Afghanistan’s most valuable cash crop, and opiates such as opium, morphine, and heroin are its largest export. Fetching an estimated value of $3 billion at border prices, it was estimated to make up <a href="https://www.congress.gov/crec/2016/03/15/modified/CREC-2016-03-15-pt1-PgH1349-2.htm">about 15%</a> of the country’s GDP equivalent in 2013.</p>
<p>Lastly, countries on the map without oil wealth tend to be less influential on the world stage from a geopolitical perspective. Armenia, for example, mainly exports pig iron, unwrought copper, and nonferrous metals and is the world’s 138th largest exporter by dollar value, ranked in between Jamaica and Swaziland. Surrounded geographically by countries that Yerevan considers hostile, Armenia has <a href="https://www.stratfor.com/analysis/russia-tightens-its-hold-armenia">increasingly turned to Russia</a> for its support.</p>
<p>Courtesy of <a href="http://www.visualcapitalist.com/map-sums-economy-middle-east/" target="_blank">VisualCapitalist</a></p>
</div>The Global Economy: April 2016http://stockbuz.ning.com/articles/the-global-economy-april-20162016-04-26T19:47:31.000Z2016-04-26T19:47:31.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>The global economy has regained some composure, according to asset management firm Schroders. In their view, markets have regained a risk appetite following action by central banks, the normalization of commodity prices, and a lack of materialization for tail risks such as a U.S. recession or a Chinese hard-landing:</p>
<div style="clear: both;"><a target="_blank" href="http://www.visualcapitalist.com/global-economy-pictures-april-2016/"><img class="align-full" src="http://2oqz471sa19h3vbwa53m33yj.wpengine.netdna-cdn.com/wp-content/uploads/2016/04/economic-infographic-apr-2016.jpg" /></a></div>
<div style="clear: both;">
<p>While volatility is indeed near its YTD low with the benchmark VIX down 32% since the start of the year, we would point out that this is potentially some calm before the storm.</p>
<p><strong>Here are some upcoming waves, and we’ll see how they break:</strong></p>
<p><strong>Earnings and Buybacks:</strong> The blended earnings decline for the S&P 500 so far in 2016 Q1 is -8.9%, according to <a href="http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_4.22.16">Factset</a>. When earnings season is done and if this stays on target, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009. That said, companies are doing whatever they can to stifle these declines via share buybacks. S&P Dow Jones says that nearly one-third of S&P 500 companies have cut their share counts by at least 4% in Q1 of 2016.</p>
<p>Will investors continue to be “impressed” by this financial engineering, or will the reality of declining earnings finally hit?</p>
<p><strong>U.S. Recession Watch:</strong> The Atlanta Fed’s <a href="https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1">GDPNow</a> model forecasts U.S. growth at just 0.4%.</p>
<p><strong>Brexit:</strong> While the margin has widened on the Brexit vote in favor of the “remain” camp, one in five have <a href="http://www.telegraph.co.uk/news/2016/04/26/pic-and-pub-with-one-in-five-still-not-sure-how-theyll-vote-its/">still not decided</a> how they are voting. This means Brexit is still in play, especially if there is any voter complacency as the referendum draws closer. A “leave” decision could have significant impact: Britain makes up 15% of the EU GDP, 17% of EU domestic demand, and 13% of EU population. This previous post shows why Brexit could be a <a href="http://www.visualcapitalist.com/why-a-brexit-could-be-a-losing-proposition-for-everyone/">losing proposition for everyone</a>.</p>
<p><strong>Debt:</strong> The amount of debt is also hitting center stage. In the U.S. auto loans and student debt are two separate $1 trillion debt markets. Credit cards is getting there as well, and 62% of Americans now live paycheck to paycheck. Sovereign debt will close in on <a href="http://www.washingtontimes.com/news/2015/nov/1/obama-presidency-to-end-with-20-trillion-national-/?page=all">$20 trillion</a> by the end of Obama’s tenure.</p>
<p>Things in China don’t look so good, either. <a href="http://www.ft.com/intl/cms/s/0/acd3f2fc-084a-11e6-876d-b823056b209b.html#axzz46xR2ouar">Experts are warning</a> that the country’s 237% debt-to-GDP, the highest in emerging markets, could lead to a American-style financial crisis or Japan-style malaise.</p>
</div>
<div>Courtesy of: <a href="http://www.visualcapitalist.com">Visual Capitalist</a></div>
</div>On a Letter from an Expatriatehttp://stockbuz.ning.com/articles/on-a-letter-from-an-expatriate2016-04-16T16:45:28.000Z2016-04-16T16:45:28.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_blank" href="http://alephblog.com/http://alephblog.com/wp-content/uploads/2016/03/234447967_516894d7fc_o.jpg"><img class="align-left" src="http://alephblog.com/http://alephblog.com/wp-content/uploads/2016/03/234447967_516894d7fc_o.jpg?width=440" width="440" /></a>A friend I haven’t heard from in many years since he left the USA wrote me. He closed the letter in an unusual way, saying:</p>
<blockquote>
<p><em>PS — USA has gone completely bonkers these days? or what the heck is going on over there? would love to pick your mind over a glass of wine. someday!</em></p>
</blockquote>
<p>I’m not intending on writing on politics as a regular habit at Aleph Blog, and most of what I am going to say is economics-related, so please bear with me.  Hopefully this will get it out of my system.</p>
<p>To my friend,</p>
<p>There are a lot of frustrated people in the US.  Though you’ve been gone a long time, you used to know me pretty well; after all, I trained you on economic matters.</p>
<p>Let me give a list of reasons why I think people are frustrated, then explain how that affects their political calculations, and finally explain why they have mostly misdiagnosed the issues, and won’t get what they want regardless of who is elected.</p>
<p>The electorate is frustrated because:</p>
<ul>
<li>Living standards have declined for the lower 80% of society.</li>
<li>Many people lost jobs, homes, pensions, etc., during the recent financial crisis… those assets are not coming back anytime soon.  Much of the fault was theirs, but they don’t recognize that, preferring to blame others for their problems.</li>
<li>Many formerly attractive jobs are disappearing either due to technological change or offshoring (whether corporations or subsidiaries).</li>
<li>The economy muddles along, and economic policies that average people don’t understand dominate discussion.  Many wonder if anyone is seriously trying to improve matters.  They generally distrust the Fed.</li>
<li>It doesn’t seem to matter who gets elected, Democrat or Republican — the status quo remains because business interests support the Purple Party, which is the consensus of establishment Republicans and Democrats who duopolize politics in the USA.</li>
<li>Nothing good seems to happen in DC, and what few significant pieces of legislation have occurred in the Obama years have turned out to be bad (Obamacare) or useless (Dodd-Frank to the average person who doesn’t get it).</li>
<li>Immigration issues get short shrift, also trade issues.</li>
<li>Moral issues have basically disappeared from the political agenda in any classical form.  Everything is pragmatic, geared to serve the Purple Party.</li>
<li>In general, the candidates are pretty lousy, and the moral tone of the campaign has been poor.  That said, negative campaigning works, and the candidates that focus on being negative are doing better.</li>
</ul>
<p>Now take a moment and think about what people do when they are desperate.  In short, they take longer-shot chances than they would ordinarily take.  They think:</p>
<blockquote>
<p><em>“This person couldn’t be that much worse than what we have going now, and he sounds a lot different than the politicians that I have been hearing for so many years, ad nauseam.  He talks about issues that affect my situation, and is not willing to mince words.  He could be a LOT better than the status quo, which stinks.  </em></p>
<p><em>So, the downside is limited, and the upside could be significant.  I don’t care about the rough edges of this guy; the media always blows things out of proportion anyway, and helps foster the consensus candidates that never solve anything.  So, I’m just going to hold my nose and vote for <span style="text-decoration: underline;">(fill in the blank)</span>.”</em></p>
</blockquote>
<p>In my opinion, that’s why politics is nuts over here right now.  Given the relative inability of the electorate to digest complex explanations, there are a lot of matters that they can’t understand, and as a result, regardless of who they elect, they won’t be happy.</p>
<p>Most of the economic and political problems stem from:</p>
<ul>
<li>Technological change</li>
<li>Increasing returns to those that are smart versus those that are not</li>
<li>Not enough productive children being born</li>
<li>Attempts to improve the economy that don’t work</li>
<li><a href="http://alephblog.com/2013/10/04/two-is-company-three-is-a-crowd/" target="_blank">Gerrymandering</a></li>
<li>A diminishing consensus on what is right and wrong, and the proper role of government</li>
</ul>
<p>The technological change is the most important factor, and explains why attempts to limit immigration or <a href="http://www.bloomberg.com/politics/articles/2016-03-24/free-trade-opposition-unites-political-parties-in-bloomberg-poll" target="_blank">limit free trade</a> won’t help.  As a result of the internet, businesses can set up in many areas and benefit from the different aspects of each area — labor here, capital there, taxes way over there.  Unless governments are willing to work together to limit this, and they compete, they don’t cooperate here, this can’t be solved.</p>
<p>Information technology <a href="http://www.wsj.com/articles/why-restaurant-automation-is-on-the-menu-1458857730" target="_blank">can make lower skilled workers far more productive</a>, leading to a diminution of jobs in many sectors.  This can happen anywhere — in banks, investment shops, factories, and restaurants.  It works anyplace where you can turn 80%+ of a job into a set of rules.  That can move jobs away from where they currently are to places where inexpensive labor can do the work.</p>
<p>In the short-run, this is a problem for many.  In the long run, it will release labor to more valuable pursuits.  That said, many older people will not be capable of retraining, and younger people will gain the opportunities if they are smart.  the “know nots” are becoming “have nots.”</p>
<p>Part of this is payback for not studying enough in school, and/or studying topics that would eventually valuable in college.  As I have said before, “Follow your bliss” is selfish and dumb.  Real value comes, and society improves, from facilitating the bliss of others.  The more people you make happy, the greater the rewards are.</p>
<p>Now, <a href="http://alephblog.com/2015/04/02/on-human-fertility-part-4/" target="_blank">demographics are getting worse for most developing economies</a>.  Most economies do better when the fertility rate is over 2.1 — i.e., that population is growing.  Typically that means that opportunities are growing.  When working populations shrink, <a href="http://alephblog.com/2016/03/11/picturing-pensions/" target="_blank">social benefit plans begin to collapse</a>, and when populations shrink, countries lose vitality and creativity.  We need youth to replenish its ranks to keep our societies healthy.</p>
<p>Note that efforts to fix fertility by offering tax incentives do not work.  Once women are convinced it is not valuable to have kids, no reasonable amount of effort will change that.</p>
<p>As for economic policy, we are still running policy off of a model that assumes that debts are not high on order for policy to work.  That is why continued deficit spending and abnormal monetary policy (QE & Zero or Negative Interest Rates) aren’t helping.  <a href="http://alephblog.com/2016/03/23/fly-away-from-helicopter-money/" target="_blank">Helicopter money has its own issues</a>.</p>
<p>Regardless of what happens to the presidency, Congress will remain the same because of gerrymandering.  There’s only so much that even a good President can do if Congress is occupied by ideologues from both sides of the political spectrum.</p>
<p>Finally, the sides of the political spectrum are further apart because there is less consensus on what is right and wrong, and the proper role of government.  In some ways the internet facilitates this because you can filter out the arguments of those who disagree with you more easily.  I set up my news sources so that I am always reading liberals and conservatives, as well as those that don’t fit well on the political map, but few others do.</p>
<p>And that, my friend, is why the political scene is nuts in the US now.  There are a lot of disappointed and desperate people who are willing to try anything to get their prosperity back, even though <a href="http://alephblog.com/2016/03/04/they-cant-help-you/" target="_blank">none of the politicians can do anything that will genuinely help the situation</a>.</p>
<p>It is a recipe for disaster, and absent an act of God, I don’t see anything that will change the attitudes rapidly.  People across the political spectrum are happily believing their own myths; it will take a lot of pain to puncture them all.</p>
<p>PS — I’ve given up alcohol.  We’ll have to figure something else out if we get together.</p>
<p>Courtesy of <a href="http://alephblog.com/2016/03/26/on-a-letter-from-an-expatriate/" target="_blank">Alephblog</a></p>
</div>Byron Wiens Top 10 Surprises For 2016http://stockbuz.ning.com/articles/byron-wiens-top-10-surprises-for-20162016-01-05T19:25:44.000Z2016-01-05T19:25:44.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><span style="font-size: 14px;"><a target="_blank" href="http://www.wired.com/images_blogs/dangerroom/2010/06/crystal-ball.jpg"><img class="align-left" style="padding: 10px;" src="http://www.wired.com/images_blogs/dangerroom/2010/06/crystal-ball.jpg?width=300" width="300" /></a>Byron R. Wien, Vice Chairman of Multi-Asset Investing at <a href="https://www.blackstone.com/news-views/press-releases/details/byron-wien-announces-predictions-for-ten-surprises-for-2016" target="_blank">Blackstone</a>, today issued his list of Ten Surprises for 2016. This is the 31st year Byron has given his views on a number of economic, financial market and political surprises for the coming year. Byron defines a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which Byron believes is “probable,” having a better than 50% likelihood of happening.<br />
<br />
Byron started the tradition in 1986 when he was the Chief U.S. Investment Strategist at Morgan Stanley. Byron joined Blackstone in September 2009 as a senior advisor to both the firm and its clients in analyzing economic, political, market and social trends.<br />
<br />
Byron’s Ten Surprises for 2016 are as follows:<br />
<br />
1. Riding on the coattails of Hillary Clinton, the winner of the presidential race against Ted Cruz, the Democrats gain control of the Senate in November.  The extreme positions of the Republican presidential candidate on key issues are cited as factors contributing to this outcome.  Turnout is below expectations for both political parties.<br />
<br />
2. The United States equity market has a down year.  Stocks suffer from weak earnings, margin pressure (higher wages and no pricing power) and a price- earnings ratio contraction.  Investors keeping large cash balances because of global instability is another reason for the disappointing performance.<br />
<br />
3. After the December rate increase, the Federal Reserve raises short-term interest rates by 25 basis points only once during 2016 in spite of having indicated on December 16 that they would do more.  A weak economy, poor corporate performance and struggling emerging markets are behind the cautious policy.  Reversing course and actually reducing rates is actively considered later in the year.  Real gross domestic product in the U.S. is below 2% for 2016.    <br />
<br />
4. The weak American economy and the soft equity market cause overseas investors to reduce their holdings of American stocks.  An uncertain policy agenda as a result of a heated presidential campaign further confuses the outlook.  The dollar declines to 1.20 against the euro.<br />
<br />
5. China barely avoids a hard landing and its soft economy fails to produce enough new jobs to satisfy its young people.  Chinese banks get in trouble because of non-performing loans.  Debt to GDP is now 250%.  Growth drops below 5% even though retail and auto sales are good and industrial production is up.  The yuan is adjusted to seven against the dollar to stimulate exports.<br />
<br />
6. The refugee crisis proves divisive for the European Union and breaking it up is again on the table.  The political shift toward the nationalist policies of the extreme right is behind the change in mood.  No decision is made, but the long-term outlook for the euro and its supporters darkens.  <br />
<br />
7. Oil languishes in the $30s.  Slow growth around the world is the major factor, but additional production from Iran and the unwillingness of Saudi Arabia to limit shipments also play a role.  Diminished exploration and development may result in higher prices at some point, but supply/demand strains do not appear in 2016.<br />
<br />
8. High-end residential real estate in New York and London has a sharp downturn.  Russian and Chinese buyers disappear from the market in both places.  Low oil prices cause caution among Middle East buyers.  Many expensive condominiums remain unsold, putting developers under financial stress.<br />
<br />
9. The soft U.S. economy and the weakness in the equity market keep the yield on the 10-year U.S. Treasury below 2.5%.  Investors continue to show a preference for bonds as a safe haven.<br />
<br />
10. Burdened by heavy debt and weak demand, global growth falls to 2%.  Softer GNP in the United States as well as China and other emerging markets is behind the weaker than expected performance.   <br />
<br />
Added Mr. Wien, “Every year there are always a few Surprises that do not make the Ten either because I do not think they are as relevant as those on the basic list or I am not comfortable with the idea that they are ‘probable.’”<br />
<br />
Also rans: <br />
<br />
11. As a result of enhanced security efforts, terrorist groups associated with ISIS and al Qaeda do NOT mount a major strike involving 100 or more casualties against targets in the U.S. or Europe in 2016.  Even so, the United States accepts only a very limited number of asylum seekers from the Middle East during the year.  <br />
<br />
12. Japan pulls out of its 2015 second half recession as Abenomics starts working.  The economy grows 1%, but the yen weakens further to 130 to the dollar.  The Nikkei rallies to 22,000.<br />
<br />
13. Investors get tough on financial engineering.  They realize that share buybacks, mergers and acquisitions, and inversions may give a boost to earnings per share in the short term, but they would rather see investment in capital equipment and research that would improve long-term growth.  Multiples suffer.<br />
<br />
14. 2016 turns out to be the year of breakthroughs in pharmaceuticals.  Several new drugs are approved to treat cancer, heart disease, diabetes, Parkinson’s and memory loss.  The cost of developing the breakthrough drugs and their efficacy encourage the political candidates to soften their criticism of pill pricing.  Life expectancy will continue to increase, resulting in financial pressure on entitlement programs.<br />
<br />
15. Commodity prices stabilize as agricultural and industrial material manufacturers cut production.  Emerging market economies come out of their recessions and their equity markets astonish everyone by becoming positive performers in 2016.<a style="font-size: 14px;" href="https://www.blackstone.com/news-views/press-releases/details/byron-wien-announces-predictions-for-ten-surprises-for-2016" target="_blank"></a></span></p>
</div>Federal Reserve Ready To Hike Rates But Bond Market Is Skepticalhttp://stockbuz.ning.com/articles/federal-reserve-ready-to-hike-rates-but-bond-market-is-skeptical2015-08-09T12:52:33.000Z2015-08-09T12:52:33.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><em>While main stream media does their level best to keep us hugging our equities, they seem to ignore the fact that quantitative easing ran the market up from 2009 and while the economy has come a long way since the bottom, maybe, just maybe, it's strong enough to sustain us, but not equities at elevated levels.</em></p>
<p>Federal Reserve officials have signaled they think the economy is robust enough to withstand a round of interest-rate rises starting this year. But the bond market still seems skeptical.</p>
<p>While yields on short-term Treasury notes have started moving higher in anticipation of an interest-rate increase as early as September, yields on longer-term debt have remained stubbornly low. That is a sign that many investors are still doubtful about the health of the economy, and the ability of the Fed to keep raising rates without jeopardizing growth.</p>
<p>On Tuesday, yields on short-term U.S. Treasury notes rose <a href="http://www.wsj.com/articles/atlanta-feds-lockhart-fed-is-close-to-being-ready-to-raise-short-term-rates-1438709252" target="_self" class="icon none">after a Fed official sounded the latest all clear</a> for a rate rise as soon as September. The federal-funds overnight lending target has been near zero since 2008. Short-term yields <a href="http://www.wsj.com/articles/u-s-government-bonds-pare-price-loss-on-jobs-data-1438780387" target="_self" class="icon none">continued to rise Wednesday</a>.</p>
<p>But the reaction in longer-term bonds was more muted. That left the gap between the yields on two- and 10-year notes at its slimmest level since April.</p>
<p>The collision between rising short-term rates and soft longer-term rates underscores the growing uncertainty about the capacity of the U.S. economy to withstand even a minor rise in borrowing costs, even as Fed officials signal a willingness to consider their first interest-rate increase since 2006.</p>
<p>The Fed raising interest rates against a backdrop of sluggish global growth may be “premature,’’ said Erik Schiller, senior portfolio manager at Prudential Financial Inc.’s fixed-income unit, which has $560 billion in assets under management. Tightening monetary policy “could only help to slow the U.S. economy and pressure inflation expectations down,’’ which would make longer-dated bonds more attractive to buy, he said.</p>
<p>The persistently low yields on longer-term debt has continued to confound many investors who anticipated the 10-year yield may move toward 3% by the end of this year, from 2.211% on Tuesday.</p>
<p>“What I am missing?” asked Jason Evans, co-founder of hedge fund NineAlpha Capital. “The bond market may be telling me something that I am not aware of, such as growth, inflation, China or stocks.”</p>
<p>Mr. Evans says he still expects the 10-year yield to rise to somewhere between 2.5% and 2.75% at the end of the year. But he adds that he would change his views if the yield tumbles more from here.</p>
<p>The yield on the two-year U.S. Treasury note hit 0.728% in late afternoon trading Tuesday, the highest level since June and just shy of the highest this year, and compared with 0.665% on Monday. Yields rise as prices fall.</p>
<p><a target="_blank" href="http://si.wsj.net/public/resources/images/MI-CK993_CRDLED_9U_20150804183037.jpg"><img class="align-right" src="http://si.wsj.net/public/resources/images/MI-CK993_CRDLED_9U_20150804183037.jpg?width=400" width="400" /></a></p>
<p>The move came after Federal Reserve Bank of Atlanta President Dennis Lockhart said in an interview with The Wall Street Journal on Tuesday that the economy is ready for the first increase in short-term interest rates in more than nine years. Mr. Lockhart, who is a voter on the Fed’s policy-setting committee this year, said it would take a significant deterioration in the data to convince him not to move in September.</p>
<p>The yield on the benchmark 10-year Treasury note still is hovering near a two-month low. The yield premium to hold the benchmark 10-year Treasury note instead of the two-year note fell to 1.48 percentage point, the lowest level since April.</p>
<p>Fed officials signaled in their recent monetary-policy meeting in late July that they were on course to step away from crisis-era monetary stimulus as their outlook for the labor market brightened.</p>
<p>But softer energy prices have been heightening concerns over China’s economy while reducing U.S. inflation expectations. A stronger U.S. dollar is hurting U.S. exports and lowered prices of imported goods. These factors make the Fed more difficult to push up inflation to its 2% target in the medium term.</p>
<p>The 10-year break-even rate, the yield spread between a 10-year Treasury note and a 10-year Treasury inflation-protected security suggests investors expect the U.S. inflation rate to be running at an annualized 1.70% on average within a decade. A month ago it was 1.91%.</p>
<p>Money managers say they aren’t worried about a spike in the 10-year yield because the Fed’s tightening likely will be shallow and slow, baring big upside surprise from either the economic growth or wage inflation.</p>
<p>“I think the Fed can still begin to lift the policy rate from emergency levels at a very slow pace without causing meltdown and panic,” said Christopher Sullivan, who oversees $2.4 billion as chief investment officer at the United Nations Federal Credit Union in New York.</p>
<p>Still, bond investors are mindful of 2014, when bond yields tumbled even as the U.S. outlook improved and the central bank gradually phased out its bond purchases. Instead, sluggish growth overseas and U.S. bonds’ more attractive yields than many other markets sent the 10-year Treasury yield falling during the course of last year.</p>
<p>Courtesy of <a href="http://www.wsj.com/articles/the-federal-reserve-is-ready-for-rate-hikes-but-bond-market-is-skeptical-1438730547" target="_blank">WSJ</a></p>
</div>Economic Recovery? Only With A Bachelors Or Higherhttp://stockbuz.ning.com/articles/economic-recovery-only-with-a-bachelors-or-higher2015-05-24T02:41:35.000Z2015-05-24T02:41:35.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_blank" href="http://www.ritholtz.com/blog/wp-content/uploads/2015/05/ep_chart_001.gif"><img class="align-left" src="http://www.ritholtz.com/blog/wp-content/uploads/2015/05/ep_chart_001.gif?width=300" width="300" /></a>Saw this and had to share it because clearly, there are enormous masses out there that just are not feeling giddy over the economic "recovery".  Trickle down effect?  Yeah, o.k.   Sure, the stock market is enjoying all time new highs but is the economy truly humming along?  The numbers show obviously not for the majority.  Bribe your kids.  Do whatever it takes.  They'll need it later, even more than they need it today.</p>
<p>From <a href="http://www.ritholtz.com/blog/2015/05/how-is-your-personal-economic-recovery-going-2/" target="_blank">Ritholtz</a>:</p>
<p>The economy is, in a word, “lumpy.” It is strong in some regions, anemic in others. Strength by economic sector varies widely. There are myriad reasons for this: Some parts of the country were much harder hit by the real estate collapse; some sectors naturally rebound more quickly; some innovations lend themselves to more rapid growth.</p>
<p>The kind of recovery that you personally are experiencing is highly dependent upon many factors, but today I want to focus on three: education, market sector and geography. The data suggest these elements matter a great deal. Look closely, and you can see how your personal economic recovery is doing — and why.</p>
<p>Let’s take a closer look at what matters most:</p>
<p>• <strong><span style="text-decoration: underline;">Education</span></strong>: If there is a single lesson you need to learn from this crash and recovery, it is that education matters a lot. The data from the <a href="http://www.bls.gov/emp/ep_chart_001.htm" target="_blank">Bureau of Labor Statistics</a> makes clear the direct correlation between increased education and lower unemployment rates and higher wages.</p>
<p>We have a full year’s worth of data for 2014. Across all workers (over age 25 and working full time), the unemployment rate was 5 percent. For workers who had a high school degree or some college, the unemployment rate was a little higher than average (6 percent); with an associate’s degree, it was a little lower (4.5 percent). Schooling is where we really see a difference: Workers without a high school diploma had an unemployment rate of last year of 9 percent, double the average of workers with an associate’s degree.</p>
<p>Have a bachelor’s degree? Great, your peer group had an unemployment rate of only 3.5 percent. Master’s degree holders saw that fall to 2.8 percent, while doctoral graduates were at only 2.1 percent unemployment. Professional degree holders’ unemployment rate was the lowest at 1.9 percent.</p>
<p>Anyone who believes school doesn’t matter should recognize that enormous unemployment range of 1.9 to 9.0 percent.</p>
<p>If that does not convince, then look at compensation. Weekly wages are very similar in their distribution to unemployment: the average was $839 per week for all workers, but only $488 for those without a high school diploma. Those who held a professional degree averaged more than triple that amount at $1,639 per week. Bachelor’s degree holders averaged more than double at $1,101 per week.</p>
<p>• <span style="text-decoration: underline;"><strong>Geographic location/market sector</strong></span>: I’m conflating these two together because in my experience they’re so closely related.</p>
<p>Since I have not visited every city in the United States, this is a somewhat anecdotal analysis. My experiences are not the same as a true data read. Even so, it is clear that some areas in the country are doing much better than others and give you a leg up in experiencing a robust recovery. Here is my short Top 5 list:</p>
<p>-<strong>New York</strong>: Following a huge collapse, there is nothing like a trillion-dollar bailout to jump-start your economic recovery. In the face of an AWOL Congress whose fiscal stimulus was marginal by historical crisis standards, the Federal Reserve became the only game in town. Between TARP, ZIRP and QE, the Big Apple has been the recipient of much taxpayer largesse. Even Fed money that was destined for the rest of the country still passed through NYC. That worked to the advantage of the owner of the corner deli and the Porsche dealer alike.</p>
<p>The actions of the Fed not only cushioned the blow from the collapse but set the stage for the next round of expansion. In particular, finance and real estate sectors have been on fire in New York. Note that this is a theme in every city experiencing a boom. There always seem to be at least two hot sectors: (1) real estate and (2) something else. One drives the other.</p>
<p>-<strong>Washington, D.C.</strong>: If finance is driving the New York economy, the “business of politics” is driving the District. From lawyers to lobbyists to government contractors, the city is swollen with activity. We see it reflected in the real estate prices in the surrounding communities. Washington may talk about shrinking government, but leaders have been expanding all of the related industries that feed into — or off of — the seat of U.S. power and money.</p>
<p>-<strong>Seattle</strong>: This could very well be the hottest, fastest growing city in North America right now. It’s much more than just Amazon and Boeing and Microsoft (now in the midst of a Satya Nadella-led turnaround). There is Costco Wholesale, Starbucks, Nordstrom, Nike, T-Mobile US, Micron Technology and Expedia.</p>
<p>Intellectual capital abounds. What makes the place so vibrant is the huge number of new tech start-ups and expanding existing firms. One is reminded of how Silicon Valley was in the early 1990s. Despite rising real estate prices, it is a very civilized place to live, with great outdoor activities and beautiful scenery. Most important of all, there is an energy and enthusiasm and optimism among all of the people I met in town.</p>
<p>-<strong>San Francisco/Silicon Valley</strong>: Another full-on boomtown. Technology is running on all eight cylinders, or, perhaps more accurately, a fully charged Tesla PowerWall. Whereas the dot-com boom was frivolous and frothy, filled with pie-in-the-sky business models, this is more substantive and functional. Lots of wild ideas are still getting funded, but in this cycle, revenues count. The infrastructure built around software and semiconductors is much more mature than it was back in the 1990s. Apps, alternative energy, big data and relentless innovation are keeping the city and its even more important surrounding technology suburbs humming.</p>
<p>Of course there is some froth, as that is inherent to the venture investing process. On occasion, silly ideas get funded and good ideas see ludicrous valuations (and vice versa). Most technorati will admit — after you pour enough alcohol into them — that venture investing looks like a huge crapshoot. For each Uber there are still 100 Pets.coms. But so long as the community of engineers and programmers keeps finding new and disruptive ways to do things better, the economy here is going to keep growing.</p>
<p>-<strong>Boston</strong>: With about the same population as Seattle, Boston has quietly managed a very nice economic recovery. It may not be quite as booming as some of the others I’ve mentioned, but it is growing smartly. Boston has a foot in biotech, medicine and health care, finance, high-technology research and development, and education. About the only things that are not nicely inflated in this town are the New England Patriots’ footballs.</p>
<p>Of course, this is a very biased sample set: I visit cities where we have clients, and, by definition, wealth management clients tend to be fairly wealthy. Hence, my sample set of cities is likely to be doing better than a randomly selected group of metropolitan locales.Iowa, which also enjoys a diverse economy plus a huge agricultural footprint, also maintains a very low unemployment rate. Utah, Colorado and Minnesota have also been strong. So too has Texas, which is no longer as energy-centric as it once was. In the 1980s, a fall in oil prices was catastrophic; its diverse economic base is better able to weather a commodity crash these days.</p>
<p>That said, lots of other parts of the country have also been doing well. Warren Buffett’s home state of Nebraska boasts the lowest unemployment rate in the United States, at 2.6 percent. (It eclipsed North Dakota, which has seen a modest uptick in unemployment as crude oil prices were cut in half since last September). The state has a big agricultural sector and food processing, notably beef production. But the state is fairly diversified, including electrical machinery and manufacturing, telecommunications and information technology.</p>
<p>So if you can put it all together — if you have a good education, choose your field wisely and live in a thriving area — the economy’s looking pretty good to you right now. If not, well, my experience suggests that you should take a hard look at those factors.</p>
</div>The Future U.S. Consumerhttp://stockbuz.ning.com/articles/the-future-u-s-consumer2014-12-22T21:50:28.000Z2014-12-22T21:50:28.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>Back in the 1990's, we as Managers were trained in racial diversity and businesses began their slow and gradual integration for the Hispanic community (Spanish calls center workers, select "5" for Spanish on automated phone services, packaging with alternate language, etc.). The CBO had already made the predictions of the shift in U.S. ethnicity and companies had to prepare. Fast forward 10 or 25 years from now now and just what will be the face of the consumer ahead?  What about job growth, income growth and how many older Americans will fall off of the economic spending gap?</p>
<p><iframe bgcolor="#131313" type="application/x-shockwave-flash" src="http://player.theplatform.com/p/gZWlPC/vcps_inline?byGuid=3000341196&size=640_360" allowfullscreen="true" height="360" width="640"></iframe></p>
</div>Lower Oil Spawns Numerous Opportunitieshttp://stockbuz.ning.com/articles/lower-oil-spawns-numerous-opportunities2014-10-31T14:12:14.000Z2014-10-31T14:12:14.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290973?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1290973?profile=RESIZE_480x480" width="375"></a>As many Western economies are seemingly slowing down again, with most of them still struggling with stubbornly high unemployment levels, they will only benefit from the current sharp drop in oil prices which will stimulate the global economy. Moreover, countries now have the opportunity to replenish stocks and protect themselves against future price hikes. Stockpiling begs the question: how long will prices remain relatively low compared to recent years? Will they fall further? $60 would certainly kick start substantial economic activity or will supply be rained back?</p>
<p>In the past, we have seen the US and its Western partners put pressure on OPEC, and the world's only swing producer Saudi Arabia, to increase supply so as to lower prices or maintain price stability. Are we about to see them create further price fixing market imperfections by asking the Saudis to cut production so as to create a return to higher prices? Much of the Western economic commentaries are suggesting the Middle East will fall apart as falling oil revenues will create unaffordable budget deficits, cuts in government spending, and political uprisings amongst their populations and ultimately scare Middle Eastern governments into considering cutting back on OPEC supply.</p>
<p>The recent period of high but stable oil prices has induced an economic recovery in the US based on lower oil and energy prices, propped up Putin's government and economy which has become more heavily dependent upon its oil revenues, and increased the sovereign wealth funds of the GCC countries of the Middle East. Meanwhile, the rest of the world has suffered economic malaise consigning a generation to a life of unemployment and it appears that some commentators may want to maintain this status quo. Lower oil prices would likely benefit all via economic growth, and not just a few nations self-interests. This brings us to ask: have we been sacrificing economic efficiency for US energy self-sufficiency?</p>
<p>Food prices are also likely to fall, as food production, processing and sales distribution are energy intensive activities, thereby benefiting lower income groups further. Increased consumption will stimulate aggregate demand, creating investment opportunities and economic growth. Governments in the west may also have the opportunity to increase fuel taxes to cover the real cost of the negative externalities of carbon emissions, or raise revenue to improve public transportation systems. Furthermore, governments in the Middle East and Asia will reduce spending on their fuel subsidies and may take the opportunity to improve the workings of market forces, which the IMF and Western powers have been seeking for them to do.</p>
<p>If we can enjoy a period of sustained low oil prices where consumer disposable incomes rise and increase world aggregate demand, we may witness recovery in Europe and rising growth rates again in Asia. This would fuel economic activity at a time when a generation has been lost to unemployment, and maybe allow them to regain for a better future. In this case oil prices will either recover, or rise in demand may equally bring about a rise in supply, ultimately increasing the revenues of oil produces.</p>
<p>Economic theory suggests that a lower price delivered by lowest cost producers is economically efficient. The lower prices will either force high cost producers out of the market or encourage them to seek lower cost technological solutions to stay in the market. The economic solution to our energy requirements is to invest in low cost producers instead of preventing them from reaching the market by financing chaos in the Middle East and Africa. Instead, supporting the development of low cost oil reserves in the Middle East and Africa would benefit these populations. The wealth created from oil revenues could be used to develop infrastructure, education, and health systems, rather than being frittered away by corruption and cronyism. However, this requires international oil and gas companies as well as the US government to rethink their geopolitical strategies and adopt the capitalist model of economic efficiency, rather than supporting a model of imperfect competition and short term self-interest. As the world's largest open economy, the US would benefit more in the long run from encouraging world economic growth, rather than trying to protect its high oil price by fair means or foul.</p>
<p>Read more at <a href="http://www.brookings.edu/research/opinions/2014/10/30-oil-a-question-of-economics-alkhatteeb?utm_campaign=Brookings+Brief&utm_source=hs_email&utm_medium=email&utm_content=14723391&_hsenc=p2ANqtz-9TS-vfqSvTWKZ3NLrvPVtRQGWv8RU15eG7f7WWn8UH5k1R8bqBSme1hNcS-a3-wvDgzBcfu6F8KRMEAF5rbdyxNCa1xw&_hsmi=14723391" target="_blank">Brookings.edu</a></p></div>Zero Growth In 4Q For Germany? Dark Skies For Europehttp://stockbuz.ning.com/articles/zero-growth-in-4q-for-germany-dark-skies-for-europe2014-10-27T14:12:04.000Z2014-10-27T14:12:04.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_blank" href="http://www.cesifo-group.de/ifoHome/facts/Survey-Results/Business-Climate/Geschaeftsklima-Archiv/2014/Geschaeftsklima-20141027/main/01/imageBinary/GSK_271014_climate_ger.png"><img class="align-left" src="http://www.cesifo-group.de/ifoHome/facts/Survey-Results/Business-Climate/Geschaeftsklima-Archiv/2014/Geschaeftsklima-20141027/main/01/imageBinary/GSK_271014_climate_ger.png?width=300" width="300" /></a></p>
<p><span style="color: #ccffff;">If Germany is the European leader, one can easily see how this bodes for the rest across the pond as well as DEMAND for goods and services coming out of the U.S.</span></p>
<p>According to <a href="http://www.reuters.com//article/2014/10/27/germany-economy-ifo-economist-idUSL5N0SM1IF20141027" target="_blank">Reuters</a> Ifo economist Klaus Wohlrabe said on Monday he expected zero growth in the fourth quarter in Germany and that there were almost no bright spots for German industry at present.  <span id="articleText">"Things have not gone well for German industry and there are no bright spots for industry," he said. (click chart to enlarge)</span></p>
<p>Business sentiment darkened in October for a sixth month running, according to the Munich-based Ifo think-tank's business climate index, which fell to 103.2 from 104.7 the previous month. That was its weakest reading since December 2012.</p>
<p>Wohlrabe said recent upward momentum in the Purchasing Managers' Index (PMI) for Germany was not yet visible. Only firms' export expectations had risen slightly, he said, although it remained to be seen if this was sustainable.</p>
<p>Hans-Werner Sinn, President of Germany’s Ifo Institute, says the European Central Bank's exercise did not include the possibility of deflation in its stress-test scenario. He speaks to Guy Johnson and Francine Lacqua on Bloomberg Television's "The Pulse" after 25 European lenders failed stress tests led by the ECB, which found the biggest capital hole in the region’s banking system lurking in Italy.  <a href="http://www.businessweek.com/videos/2014-10-27/ifo-says-ecb-aqr-did-not-test-deflationary-scenario" target="_blank">View video</a></p>
<p></p>
</div>Five Reasons To Fear Deflationhttp://stockbuz.ning.com/articles/five-reasons-to-fear-deflation2014-10-24T18:56:34.000Z2014-10-24T18:56:34.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><div class="article-detail section" itemprop="articleBody">
<div class="lede">
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290958?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1290958?profile=original" height="396" width="404"></a>The <a href="http://online.wsj.com/articles/risk-of-deflation-feeds-global-fears-1413419211">deflation scare is back</a>, as Jon Hilsenrath and Brian Blackstone report on the front page of <em>The Wall Street Journal</em>. It’s worth taking a moment to contemplate why deflation is such a bad thing. After all, <a href="http://online.wsj.com/articles/eu-inflation-falls-to-five-year-low-in-september-1413451402">falling prices</a> sound appealing to consumers, especially compared with the alternative of higher prices.</p>
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<p>So why worry?<a target="_blank" href="http://normandyresearch.com/icon-mcabby-reveals-steamy-investment-taboos-crb-dbc/"><img class="align-right" src="http://normandyresearch.com/wp-content/uploads/2014/09/cci.png?width=268" width="268"></a></p>
<p>Here are five reasons:</p>
<p><strong>1.</strong> <strong>Deflation is a generalized decline in prices and, sometimes, wages</strong>. Sure, if you’re lucky enough to get a raise, your paycheck goes further–but those whose wages decline or who are laid off or work fewer hours are not going to enjoy a falling price index.</p>
<p><strong>2. It can be hard (though, as we’ve seen, not impossible) for employers to cut nominal wages when conditions warrant</strong>; it’s easier to give raises that are less than the inflation rate, which is what economists call a real wage cut. And if wages are, as economists say, marked by “downward nominal rigidity,” then employers will hire fewer people.</p>
<p>As Paul Krugman put it in 2010: “<a href="http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/">in a deflationary economy, wages as well as prices often have to fall</a>–and it’s a fact of life that it’s very hard to cut nominal wages. … What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines. See Estonia and Latvia, cases of.”</p>
<p><strong>3. As economic textbooks teach, the prospect that things will cost less tomorrow than they do today encourages people to put off buying.</strong> If enough people do that, then businesses are less likely to hire and invest, and that makes everything worse.<a target="_blank" href="http://si.wsj.net/public/resources/images/NA-CD128_DEFLAT_G_20141016115411.jpg"><img class="align-right" src="http://si.wsj.net/public/resources/images/NA-CD128_DEFLAT_G_20141016115411.jpg?width=277" height="340" width="398"></a></p>
<p><strong>4. Deflation is terrible for debtors.</strong> Prices and wages fall, but the value of your debt does not. So you’re forced to cut spending. This applies to consumers and to governments, and it is one of the biggest issues in Europe right now. As Yale University economist Irving Fisher <a href="https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf">wrote decades ago</a>, debtors are likely to cut spending more than creditors increase it, and this can turn into a really bad downward spiral. (The experience of Japan, though, proves that an economy can have a prolonged period of moderate deflation without falling into that downward spiral.)</p>
<p><strong>5. Cutting interest rates below zero is very hard.</strong> Yes, one way that central bank magic works is that the Federal Reserve and the European Central Bank cut inflation-adjusted interest rates below zero when times are bad, hoping to spur borrowing, spending and investment. But it’s almost impossible for them to cut rates below zero. (Sure, there are some examples of negative interest rates, but they’re not very negative.)</p>
<p>If there’s 4% inflation, a zero interest rate works out to a -4% real (or inflation-adjusted) rate. At no inflation, a zero interest rate is, well, zero. And with deflation, a zero interest rate is a positive real rate. Deflation just makes all this harder to do. When short-term rates hit zero the Fed turned to buying all those long-term bonds in what’s known as “quantitative easing,” or QE. But there is a lingering debate about how well QE works, and its side effects, and as the ECB demonstrates, there are political obstacles to launching QE that don’t apply to simply cutting interest rates.</p>
<p>Once upon a time, the U.S. and other economies seemed so prone to inflation that even low rates of inflation didn’t provoke fears of deflation. “<a href="http://www.brookings.edu/%7E/media/projects/bpea/spring%201999/1999a_bpea_delong.pdf">Today that belief in an inflationary bias is gone, or at least greatly attenuated</a>,” Berkeley’s Brad DeLong observed in 1999. There are still some people fretting that, given all the money the Fed has pumped into the economy in quantitative easing, inflation is just around the corner. But today, the bigger fear–especially in Europe–is just the opposite.</p>
<p>Courtesy of <a href="http://www.brookings.edu/research/opinions/2014/10/16-reasons-worry-about-deflation-wessel?utm_campaign=Brookings+Brief&utm_source=hs_email&utm_medium=email&utm_content=14565091&_hsenc=p2ANqtz-_fR6AAxdtuimyutSpFpR-JEkRLFxBOBEnkqLHB1l86l50uJ-couReTEzczXbgIMjeBkogBSm1VUnmbTHWg4CTok82wSw&_hsmi=14565091" target="_blank">Brookings</a></p>
</div></div>Solar Short Worth A Shothttp://stockbuz.ning.com/articles/solar-short-worth-a-shot2014-10-24T17:15:04.000Z2014-10-24T17:15:04.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290935?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290935?profile=RESIZE_480x480" width="375"></a>The right shoulder of a possible head-and-shoulders top in CSIQ seems to have formed, rebuffed at the 200d with a <em>dropping</em> 20d SMA (a sign of sellers there). Risk is defined with a cover alert (I don't use stops) above this weeks high. (click chart to enlarge)</p>
<p>Based on weak economic conditions both here and abroad, I don't see solar sales taking off anytime soon......without further government subsidies. Even then consider stagnating wages and new jobs being at the high and low end of the spectrum, I just don't see a catalyst for these names to go higher at this juncture.</p>
<p>They're already ridiculously cheap right now. Can you get any cheaper than free?</p>
<p>Already heavily shorted, your broker may have to track down shares to short - or buy puts and dump/take the hit above the right shoulder.</p>
<p></p></div>Jackson Hole 'Pop' Continueshttp://stockbuz.ning.com/articles/jackson-hole-pop-continues2014-08-18T13:42:41.000Z2014-08-18T13:42:41.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><span><a target="_blank" href="http://ts1.mm.bing.net/th?&id=HN.608002275123923129&w=300&h=300&c=0&pid=1.9&rs=0&p=0"><img class="align-left" src="http://ts1.mm.bing.net/th?&id=HN.608002275123923129&w=300&h=300&c=0&pid=1.9&rs=0&p=0" height="139" width="186" /></a>Markets being forward looking, I believe we're seeing a snap back ahead of this weeks Jackson Hole meeting (Aug 21-23) where policymakers will discuss at length their thinking around the labor markets of major economies, perhaps dropping clues about the path for monetary policy in the months ahead.</span></p>
<p>The spotlight will be on <a class="inline_asset" href="http://www.cnbc.com/id/10000336" data-nodeid="10000336" target="_self">Janet Yellen</a>, who will speak on Friday in her first appearance at Jackson Hole as Fed chair.</p>
<p>Most will recall <a class="inline_asset" href="http://www.cnbc.com/id/10000310" data-nodeid="10000310" target="_self">Ben Bernanke</a> two years ago that paved the way for an unprecedented $85 billion per month stimulus plan.</p>
<p>While most don't expect anything spectacular out of the Fed Chairwoman given the improvement in the unemployment rate and overall economy, I have to wonder what will happen <em>after</em> the air is let out of the hopium balloon.  QE is still set to end in October.  Tensions between Russian and Ukraine have sent yields lower.  Whether there is further escalation or a resolution is yet to be seen.  The economy is recovering like a limp noodle, but it <em>is</em> improving.  September and October are historically difficult months for equity returns.</p>
<p>Stocks are up, bonds have been holding.  One of them is lying.  Just sayin'.</p>
<p></p>
</div>S&P on Income Inequality, Education, Jobs and Taxeshttp://stockbuz.ning.com/articles/s-p-on-income-inequality-education-jobs-and-taxes2014-08-06T03:46:12.000Z2014-08-06T03:46:12.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>The topic of income inequality and its effects has been the subject of countless analysis stretching back generations and crossing geopolitical boundaries. Despite the tendency to speak about this issue in moral terms, the central questions are economic ones: Would the U.S. economy be better off with a narrower income gap? And, if an unequal distribution of income hinders growth, which solutions could do more harm than good, and which could make the economic pie bigger for all?</p>
<p>Given the decades--indeed, centuries--of debate on this subject, it comes as no surprise that the answers are complex. A degree of inequality is to be expected in any market economy. It can keep the economy functioning effectively, incentivizing investment and expansion--but too much inequality can undermine growth.</p>
<p>Higher levels of income inequality increase political pressures, discouraging trade, investment, and hiring. Keynes first showed that income inequality can lead affluent households (Americans included) to increase savings and decrease consumption (1), while those with less means increase consumer borrowing to sustain consumption…until those options run out. When these imbalances can no longer be sustained, we see a boom/bust cycle such as the one that culminated in the Great Recession (2).</p>
<p>Aside from the extreme economic swings, such income imbalances tend to dampen social mobility and produce a less-educated workforce that can't compete in a changing global economy. This diminishes future income prospects and potential long-term growth, becoming entrenched as political repercussions extend the problems.</p>
<p>Alternatively, if we added another year of education to the American workforce from 2014 to 2019, in line with education levels increasing at the rate of educational achievement seen from 1960 to 1965, U.S. potential GDP would likely be $525 billion, or 2.4% higher in five years, than in the baseline. If education levels were increasing at the rate they were 15 years ago, the level of potential GDP would be 1%, or $185 billion higher in five years.</p>
<p>Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening GDP growth, at a time when the world's biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population.</p>
<div class="sideBar">
<h1>Overview</h1>
<div class="sideBarBody">
<ul>
<li>At extreme levels, income inequality can harm sustained economic growth over long periods. The U.S. is approaching that threshold.</li>
<li>Standard & Poor's sees extreme income inequality as a drag on long-run economic growth. We've reduced our 10-year U.S. growth forecast to a 2.5% rate. We expected 2.8% five years ago.</li>
<li>With wages of a college graduate double that of a high school graduate, increasing educational attainment is an effective way to bring income inequality back to healthy levels.</li>
<li>It also helps the U.S economy. Over the next five years, if the American workforce completed just one more year of school, the resulting productivity gains could add about $525 billion, or 2.4%, to the level of GDP, relative to the baseline.</li>
<li>A cautious approach to reducing inequality would benefit the economy, but extreme policy measures could backfire.</li>
</ul>
</div>
</div>
<p>We see a narrowing of the current income gap as beneficial to the economy. In addition to strengthening the quality of economic expansions, bringing levels of income inequality under control would improve U.S. economic resilience in the face of potential risks to growth. From a consumer perspective, benefits would extend across income levels, boosting purchasing power among those in the middle and lower levels of the pay scale--while the richest Americans would enjoy increased spending power in a sustained economic expansion. Policymakers should take care, however, to avoid policies and practices that are either too heavy handed or foster an unchecked widening of the wealth gap. Extreme approaches on either side would stunt GDP growth and lead to shorter, more fragile expansionary periods.</p>
<p><a name="ID212" id="ID212"></a></p>
<h4>Is Income Inequality Increasing?</h4>
<p>Several institutions, including the Organisation for Economic Co-operation and Development (OECD), the Congressional Budget Office (CBO), and the International Monetary Fund (IMF), have published studies showing that income inequality has been increasing for the past several decades (3). According to a 2011 review by the OECD, the average income of the richest 10% of the population is nine times that of the poorest 10%--in other words, a ratio of 9-to-1. The U.S. ratio is much higher, at 14-to-1 (4). The U.S. Gini coefficient, after taxes, has increased by more than 20% from 1979--to 0.434 in 2010 (see chart 1).</p>
<div class="chart">
<h4 class="chartHeader">Chart 1<span>  |  </span><a href="https://www.globalcreditportal.com/ratingsdirect/getImage.do?id=8327273&sourceId=&type=&outputType=&from=GFIR&prvReq=&pager.offset=&SIMPLE_SEARCH_TYPE=&CONID=&entl=N">Download Chart Data</a></h4>
<a target="_blank" href="https://www.globalcreditportal.com/ratingsdirect/getImage.do?id=8327272&sourceId=&type=&outputType=&from=CM&prvReq=&pager.offset=&SIMPLE_SEARCH_TYPE=&CONID=&entl="><img class="align-left" src="https://www.globalcreditportal.com/ratingsdirect/getImage.do?id=8327272&sourceId=&type=&outputType=&from=CM&prvReq=&pager.offset=&SIMPLE_SEARCH_TYPE=&CONID=&entl=" /></a></div>
<p>Although a 2011 CBO report demonstrated that real net average U.S. household income grew 62% from 1979-2007, household income growth was much more rapid at the higher end of the income scale than at the middle and lower end. Revisiting the issue in 2013, the CBO showed that after-tax average income soared 15.1% for the top 1% from 2009 to 2010--but grew by less than 1% for the bottom 90% over the same time period, and fell for many income groups (5). Additionally, although the Census Bureau estimates that real mean household income increased 0.2% in 2011 and 2012, it declined for all groups other than those in the top fifth of earners (6).</p>
<p>This concentration of household income follows a long period in which income concentration remained relatively flat. Using U.S. tax returns, economists Thomas Piketty and Emmanuel Saez found that income concentration dropped dramatically following both World Wars and was roughly unchanged for the next few decades (7). It started climbing again in 1975, reaching pre-World War I levels by 2000--and Saez later observed that U.S. income inequality has now reached levels not seen since 1928 (8). In both cases, a similar pattern was in evidence--a boom in the financial sector, over-leveraged lower-income households, a massive, systemic financial crash--and the two worst economic slumps in U.S. history, the Great Depression and Great Recession, followed.</p>
<p><a name="ID1023" id="ID1023"></a></p>
<h4>When Ends Don't Meet</h4>
<p>A few factors help explain the concentration within so-called "market income," which consists of labor income (wages and salaries, plus employer-paid benefits), capital income (excluding capital gains), business income, capital gains, and other income--all before government taxes and transfers (see Glossary for full definition).</p>
<p>The first reason is relatively simple: All these sources of income are less evenly distributed now than a few decades ago. In 1979, the bottom four-fifths of the income spectrum earned nearly 60% of total labor income, about 33% of income from capital and business, and about 8% from capital gains. By 2007, the bottom four-fifths share of labor income had dropped to less than 50%, income from capital and business had decreased to 20%, and capital gains fell to about 5%. In other words, all sources of income were less evenly distributed in 2007 than in 1979 (9).</p>
<p>Some point to the "superstar status" effect, with professional athletes and movie actors enjoying astronomical increases in earnings in the past few decades, helped by technological innovation that broadened their reach across global markets and a "winner take all" phenomenon.</p>
<p>Another "superstar" is the "super managers." Piketty argues that the "primary reason for increased income inequality in recent decades is the rise of the super managers in both the financial and nonfinancial sectors," finding that about 70% of the increase in income going to the top 0.1% from 1979 to 2005 came from increasing pay for those professionals (10). Other studies show that, since the 1990s, deregulation, corporate governance, and a greater reliance on equity options in executive compensation contributed to the compensation gap (11).</p>
<p>Another explanation of market income concentration is technological innovation. This phenomenon boosted the value of high-skill workers, enhancing their productivity and growth, while rendering some low-skill workers superfluous. As automation and production efficiencies have reduced the need for labor in mid-level professional or service jobs, wages have fallen, and occupations requiring a college degree typically offer double the salary of those requiring a high school diploma or less.</p>
<p>Other arguments suggest international trade and increased immigration--as well as the decrease in unionization--may also dampen wages of domestic workers. However, research on the trade effect has been inconclusive, while the impact from increased immigration on domestic wages has been modest (see "<a href="https://www.globalcreditportal.com/ratingsdirect/showArticlePage.do?object_id=8515705&rev_id=2&sid=1351366&sind=A&">Adding Skilled Labor To America's Melting Pot Would Heat Up U.S. Economic Growth</a>," published March 19, 2014, on RatingsDirect) (12). Meanwhile, some research has shown that the sharp decline in the unionization in the country, especially in the 1980s, has had a small but measurable impact on the overall increase in inequality for men over the last few decades (13).</p>
<p>The juxtaposition of slow or stagnant federal minimum wage growth and soaring compensation at the higher end of the labor income scale is another factor to consider. The minimum wage, which has held at $7.25 an hour since July 2009, has suffered a decline in purchasing power for almost half a century--peaking in 1968, when it was at $1.60, or just shy of $11 in today's money.</p>
<p><a name="ID1062" id="ID1062"></a></p>
<h4>Not Just The Fruits Of Our Labor</h4>
<p>Though the share of income from labor and capital, excluding capital gains, has decreased, the share coming from capital gains and business income has increased over time. In particular, inherited wealth has increased since the World Wars and the Great Depression, as Thomas Piketty has shown (14), and with it the earnings from that wealth. This trend is important because labor income tends to be distributed across income levels more evenly than capital gains--so a shift in income composition can significantly affect inequality.</p>
<p>While labor income accounted for nearly three-fourths of market income from 1979-2007, that figure had dropped to two-thirds by 2007. Capital income (excluding capital gains) is the next largest source, but even at its 1981 peak, it represented only 14% of market income before falling to about 10% of total income in 2007. Conversely, income from capital gains rose, doubling to approximately 8% of market income in 2007 from about 4% in 1979. Business income and income from other sources (primarily private pensions) each accounted for about 7% of total income in 2007, up from about 4% each.</p>
<p>In addition, capital income has become increasingly concentrated since the early 1990s--and, despite declines in 2001 and 2002, concentration spiked from 2003 through 2007, with more than 80% of the capital gains realized by the top 5% of earners going to the top 1% alone (15). Capital gains also have become increasingly concentrated and are tied with business income as the most concentrated income source.</p>
<p><a name="ID1077" id="ID1077"></a></p>
<h4>The Impact Of Government Policy</h4>
<p>Government policies on taxation and government transfers, such as Social Security and Medicare, have done little to reduce income inequality--and may have contributed to a further widening of the gap.</p>
<p>Because government transfers and federal taxes are progressive, the distribution of net household income (after transfers and federal taxes) is more evenly balanced than the distribution of market income. That said, at the federal level, the equalizing effect of transfers and taxes on household income was smaller in 2007 than it had been in 1979. The CBO estimates that the dispersion of market income grew by about one-quarter from 1979-2007, but the dispersion of after-tax income grew by about one-third (16). The distribution of after-tax income in 2010 became slightly more even among different groups than before-tax income, though the dispersion of after-tax income in 2010 remained wider than in 1979 (see chart 2) (17).</p>
<div class="chart">
<h4 class="chartHeader">Chart 2<span>  |  </span><a href="https://www.globalcreditportal.com/ratingsdirect/getImage.do?id=8327274&sourceId=&type=&outputType=&from=GFIR&prvReq=&pager.offset=&SIMPLE_SEARCH_TYPE=&CONID=&entl=N">Download Chart Data</a></h4>
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<p>While the size of transfer payments rose by a small amount from 1979-2010, the distribution of transfers shifted away from households in the lower part of the income scale. The bottom 20% of households received only 36% of transfer payments in 2010, after receiving 54% in 1979 (18). This was largely because of the growth in spending on programs for the elderly (such as Social Security and Medicare), and benefits of these programs aren't limited to low-income households. Benefits for other programs that largely benefit the poor were also reduced (19). In addition, tax expenditures mostly benefit the affluent: Tax credits and tax deductions benefit those more at higher tax rates.</p>
<p>Changes in federal government tax policy have also exacerbated income inequality in recent decades (20). According to the CBO, the average rate for each income group in 2012 was below the rate that prevailed for that group in the 1990s and most of the 2000s even with the increases in average federal tax rates in 2010 (21). Indeed, the federal income tax rate for the top income earners fell to 35% in 2012 from 70% in 1979, while the government didn't reduce the payroll tax rate until the temporary Payroll Tax Holiday of 2010 (22). Keep in mind that the payroll tax that funds Social Security is levied on pay below a certain threshold ($117,000 this year). In practice, this means that those earning less than the cap pay a higher rate of Social Security tax than those who earn more than the cap. So, the composition of federal revenues has shifted away from progressive income taxes to less-progressive payroll taxes, and income taxes have become slightly more concentrated at the higher end of the income scale.</p>
<p>Increasing income inequality also poses a risk to certain states' finances, given the correlation between income inequality and revenue volatility in the slow growth after the Great Recession. According to Gabriel Petek, credit analyst at Standard & Poor's, the volatility of tax revenue seems to be increasing despite the states' less-progressive tax structures--suggesting that income inequality as a macroeconomic issue can translate to credit implications for states.</p>
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<h4>Undereducated Workers: Both Today's And Tomorrow's</h4>
<p>Technological achievement has saved us time and reconfigured our daily routines, allowing us to focus on our own skills and boosting productivity and growth. These advances are naturally disruptive in the beginning as workers adjust; that disruption becomes alarming when people don't have the means to adapt, making a lasting impact on career development.</p>
<p>Although the U.S. has been fairly quick to adapt in the past, today's workers have been left behind by technological change. Indeed, while recent advances now require many workers to have graduated from college, the supply of college-educated workers hasn't kept up with demand--and even the fraction of high school graduates has stopped climbing.</p>
<p>This education gap is a main reason for the growing income divide, and it affects both wages and net worth. From a wage perspective, occupations that typically require postsecondary education generally paid much higher median wages ($57,770 in 2012)--more than double those occupations that typically require a high school diploma or less ($27,670 in 2012). Further, those with a bachelor's degree had a median net worth value nearly twice that of people with a high-school diploma in 1998--climbing to almost 3.5 times greater by 2010 (see chart 3) (23). This difference is even greater higher up the educational ladder.</p>
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<h4 class="chartHeader">Chart 3<span>  |  </span><a href="https://www.globalcreditportal.com/ratingsdirect/getImage.do?id=8327275&sourceId=&type=&outputType=&from=GFIR&prvReq=&pager.offset=&SIMPLE_SEARCH_TYPE=&CONID=&entl=N">Download Chart Data</a></h4>
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<p>Harvard professors Claudia Goldin and Lawrence Katz argue that, rather than technology picking up speed, the reduced supply of educated workers is the key factor explaining the education gap, finding that between 1980 and 2005 the pace of the increase in educational attainment slowed dramatically. In 1980, Americans age 30 years or older had 4.7 years more schooling on average than Americans in 1930--but Americans in 2005 had only 0.8 years more schooling on average than Americans in 1980 (24). Based on this data, it would appear the problem isn't that technology has leaped ahead--rather, the supply of educated workers has stalled.</p>
<p>The impact of income inequality on future generations of qualified workers is particularly disconcerting. Michael Greenstone, Adam Looney, Jeremy Patashnik, and Muxin Yu (Hamilton Project-Brookings) examined the effect that the income divide in the U.S. could have on the future upward mobility of the country's children (25). They found that investments in education and skills, traits that increasingly decide job market success, are becoming more stratified by family income, threatening the earning potential of the youngest Americans.</p>
<p>These researchers note that, although cognitive tests of ability show little difference between children of high- and low-income parents in the first years of their lives, "large and persistent" differences start to appear before kindergarten and widen throughout high school (26). Indeed, researchers have found that the gap in test results of children from families at the 90th income percentile versus children of families at the 10th percentile has grown by about 40% over the past 30 years (27).</p>
<p>Not surprisingly, these differences persist into college and beyond. While there is a 45% chance that a child born into a poor family will remain there as an adult, chances of staying poor drops to 16% if that child finishes college (see chart 4). A child born into the bottom 20% will only have a 5% chance of reaching the top 20% of income earners as adults. But that increases to 19% if they earn a college degree.</p>
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<h4 class="chartHeader">Chart 4<span>  |  </span><a href="https://www.globalcreditportal.com/ratingsdirect/getImage.do?id=8327276&sourceId=&type=&outputType=&from=GFIR&prvReq=&pager.offset=&SIMPLE_SEARCH_TYPE=&CONID=&entl=N">Download Chart Data</a></h4>
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<p>However, college graduation rates have stagnated for low-income students, in sharp contrast with strong gains for wealthy students. While college graduation rates increased by about 4 percentage points between those born in the early 1960s and those born in the early 1980s for the poorest households, the graduation rate for the wealthiest households increased by almost 20 percentage points over the same period (28). These trends likely feed into the income potential for kids as they grew older, with children of well-off families much more likely to stay well-off and the children of poor families disproportionately likely to remain poor.</p>
<p>Given that education--particularly a college degree--is so important in a jobs market that increasingly demands a more educated workforce, these trends are disturbing. The findings suggest that last generation's inequalities will extend into the next generation, with diminished opportunities for upward social mobility. Moreover, the U.S. is losing the potential addition to growth of a worker who has reached his or her full potential.</p>
<p>The pace of U.S. education is also falling behind its peers (see chart 5). Approximately 43% of Americans aged 25-34 had a college degree in 2011, compared with more than half of people the same age in Canada, Japan, and Korea. Moreover, the proportion of degree holders among Americans aged 25-34 is virtually the same as that among those 55-64, meaning that graduation rates haven't changed much--a sharp contrast with the OECD average and a number of other countries, where graduation rates have increased significantly. As today's U.S. educational attainment slips behind other countries, the U.S.' ability to remain economically competitive in the international market is threatened.</p>
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<h4 class="chartHeader">Chart 5<span>  |  </span><a href="https://www.globalcreditportal.com/ratingsdirect/getImage.do?id=8327277&sourceId=&type=&outputType=&from=GFIR&prvReq=&pager.offset=&SIMPLE_SEARCH_TYPE=&CONID=&entl=N">Download Chart Data</a></h4>
<a target="_blank" href="https://www.globalcreditportal.com/ratingsdirect/getImage.do?id=8327269&sourceId=&type=&outputType=&from=CM&prvReq=&pager.offset=&SIMPLE_SEARCH_TYPE=&CONID=&entl="><img class="align-left" src="https://www.globalcreditportal.com/ratingsdirect/getImage.do?id=8327269&sourceId=&type=&outputType=&from=CM&prvReq=&pager.offset=&SIMPLE_SEARCH_TYPE=&CONID=&entl=" height="389" width="476" /></a></div>
<p>What if, instead, we broke that cycle? What if the supply of educated workers picked up its pace, and, more or less, kept up with technological changes? The U.S. has been no stranger to this in the past. In the early part of this century, technological advancements were accompanied by an education boom (29). What would be the impact to the economy and to people's pocketbooks if the U.S. workforce's pace of education were to reach rates of education seen 50 years ago? That was when the American workforce gained a year of education from 1960 to 1965, which is a bit stronger than the period from 1950 to 1980, where they gained an average of about eight months of education every five years (30). In this scenario, the U.S. would add another year of education to the American workforce. U.S. potential GDP would likely be $525 billion, or 2.4% higher in five years than in the baseline (see chart 6). If education levels were increasing at the rate they were 15 years ago, the level of potential GDP would be 1%, or $185 billion higher in five years. A more educated workforce would benefit from higher wages. While the increased supply of people with advanced degrees may initially slow wage gains for jobs requiring an advanced degree, a stronger economy would help support higher incomes for all and help government budgets.</p>
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<h4 class="chartHeader">Chart 6<span>  |  </span><a href="https://www.globalcreditportal.com/ratingsdirect/getImage.do?id=8327278&sourceId=&type=&outputType=&from=GFIR&prvReq=&pager.offset=&SIMPLE_SEARCH_TYPE=&CONID=&entl=N">Download Chart Data</a></h4>
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<p>Historically, data at the state level support these results. States with a well-educated workforce are high-wage states. A clear and strong correlation exists between the educational attainment of a state's workforce and median wages in the state, with more educated individuals more likely to participate in the job market and earn more, and less likely to be unemployed (31). The unemployment rate for people 25 years old and older with a college degree was 3.3% in June 2014, which is one-third of the unemployment rate of those with less than a high school degree.</p>
<p>Education is an investment in the health and livelihood of future generations, with greater parent education positively correlated to a child's health, cognitive abilities, academic achievement, and future economic opportunities. Education not only benefits workers today, but also children tomorrow.</p>
<p>With evidence indicating that a well-educated U.S. workforce is not just good for today's workers and their children but also for the economy's potential long-term growth rate and government balance sheets, what do we need to do to get there? This will likely require some investment in the human capital of the U.S. workforce, today and tomorrow. But studies have indicated that the benefits greatly outweigh the costs. Researchers estimate that, depending on the exact program, $1,000 in college aid results in a 3- to 6-percentage-point increase in college enrollment, with the total cost in aid averaging $20,000 to $30,000 to send one student to college (32). Given a college graduate is expected to earn about $30,000 more per year than a high school graduate over the course of their life, the benefits outweigh the costs. It also this means more tax revenue from higher income than otherwise would have been the case.</p>
<p>Other new low-cost interventions, like simpler financial aid applications, more outreach about financial aid options that are available to students from low-income households, as well as offering college mentors to students, could help send more kids to school and encourage them to stay once they get there (33). Indeed, while the sticker price of a college degree is high, according to the College Board in 2012, the actual price paid after financial aid is often lower. That may be enough to encourage more low-income families to enroll.</p>
<p>While most agree that increasing college graduation rates would be a boon for economic growth, what about education before college? Goldin and Katz argue that the U.S. had "pioneered" free and accessible elementary education for most of its citizens and extended its lead into high school education when other countries were introducing mass elementary school education (34). After World War II, U.S. universities were known to be the best in the world. But by the early 1970s, Golden and Katz note that high school graduation rates plateaued and have been relatively flat for more than three decades, and college graduation rates slid backwards. That educational slowdown is likely the most important reason for increased education wage differentials since 1980 and is a major contributor to income inequality today.</p>
<p>Even if the U.S. government offers financial aid for college, many high school graduates aren't prepared for the rigors of university education. The 2003 Program for International Assessment (PISA), for one, showed U.S. 15-year-olds to be substantially below the OECD average in mathematics literacy, problem solving, and scientific literacy (35).</p>
<p>Increasing aptitude in early education has been discussed in a number of studies. Most point to increasing the quality of K-12 education to improve high school graduation rates and postsecondary education (36). Some have argued that inadequate investments by states and local governments in education have weakened the ability of a state to develop, grow, and attract businesses that offer high-skilled, high-wage jobs (37). The Brookings Institution has found that a high-quality universal preschool program, costing about $59 billion, could add $2 trillion in annual U.S. GDP by 2080. This additional growth would generate enough federal revenue to easily cover its costs several times over (38). However, the authors note that it is difficult to win support for a short-term investment, like preschool programs, given the long-term nature of its benefits to the economy.</p>
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<h4>Catching Up With The Joneses</h4>
<p>As income inequality increased before the crisis, less affluent households took on more and more debt to keep up--or, in this case, catch up--with the Joneses, first by purchasing a new home. Further, when home prices climbed, these households were willing to borrow against their newfound equity--and financial institutions were increasingly willing to help them do so, despite slow income growth. A number of economists have pointed to ways in which this trend may have harmed the U.S. economy.</p>
<p>Professor of Public Policy at U.S. Berkeley Robert Reich argues that increased inequality has reduced overall aggregate demand. He observes that high-income households have a lower marginal propensity to consume (MPC) out of income than other households, and they're currently holding a bigger slice of the economic pie. Research by economists Atif Mian, Kamalesh Rao, and Amir Sufi backed that up, finding the MPC for households with an average annual income of less than $35,000 to be three times larger than the MPC for households with average income over $200,000 (39). Mian and Sufi also found that, as home values increased between 2002 and 2006, low-income households very aggressively borrowed and spent (possibly borrowing on increased home equity)--while high-income households were less responsive. Unsurprisingly, when housing wealth declined, the cutback on spending for low-income households was twice as large as that for rich households (40).</p>
<p>Mian and Sufi further used ZIP codes to locate areas with disproportionately large numbers of subprime borrowers (those with low incomes and credit ratings) and found that these ZIP codes experienced growth in borrowing between 2002 and 2005 that was more than twice as high as in ZIP codes with wealthy "prime" borrowers (41). They also found that ZIP codes with lower income growth received more mortgage loans during that time period, supporting the notion that government policy targeting low-income groups increased lending to the less well-off. After 2006, the subprime ZIP codes experienced an increase in default rates three times that of prime ZIP codes.</p>
<p>Raghuram Rajan claims that, while high-income individuals saved, low-income individuals borrowed beyond their means in order to sustain their consumption, and that this overleveraging, as a result of increased inequality, was a significant cause of the financial crisis in 2008 (42). An IMF paper by Michael Kumhof and Romain Ranciere also details the mechanisms that may have linked income distribution and financial excess and have suggested that these same factors were likely at play in both the Great Depression and Great Recession (43).</p>
<p>Unfortunately, coming back from the Great Recession appears to be taking longer than many had hoped. With a postrecession annual growth rate of 2.2%, our recovery is not even half the historical average annual growth of 4.6% for other recoveries going back to 1959. This is not a complete surprise, given that financial crises are often followed by prolonged recessions and a long bout of subpar growth--thanks in part to the deleveraging that comes as people try to repair their finances.</p>
<p>Indeed, during the recession, the consumption-to-income ratio of the bottom 95% of earners fell sharply, as banks and other lenders imposed tighter borrowing constraints, according to a study by Barry Z. Cynamon and Stephen M. Fazzari (44). Though the consumption-to-income ratio of the top 5% rose, this increase was not enough to offset inadequate demand coming from the bottom 95%. That makes sense. Between 2007 and 2010, the average U.S. household lost 39.6%, or about 18 years' worth, of their net wealth in the three years when the recession started in 2007 to the early recovery in 2010. The middle class lost over 40% of their wealth in just three years, while the top 10% of income earners actually accumulated an additional 2% to their wealth (see chart 7). Corporations that have been reluctant to invest or to cut prices to gain market share because of distorted incentives to seek short-term stock market gains have also depressed demand, according to Andrew Smithers (45). These two factors go a long way to explain why the recent recovery has been subpar in comparison with other postrecessionary periods.</p>
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<h4 class="chartHeader">Chart 7<span>  |  </span><a href="https://www.globalcreditportal.com/ratingsdirect/getImage.do?id=8327279&sourceId=&type=&outputType=&from=GFIR&prvReq=&pager.offset=&SIMPLE_SEARCH_TYPE=&CONID=&entl=N">Download Chart Data</a></h4>
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<p>Indeed, economist Robert E. Hall, a senior fellow at Stanford University's Hoover Institution, laments that "the years since 2007 have been a macroeconomic disaster for the United States of an unprecedented magnitude since the Great Depression," noting that U.S. economic output in 2013 was 13% below what the precrisis trend has predicted (46). He is skeptical that a sudden surge in output will help the economy recover the ground it lost. Rather, a possible scenario would be a gradual return to a precrisis growth rate, which leaves the U.S. permanently below the level of output that precrisis trends had suggested.</p>
<p>Indeed, while Standard & Poor's is expecting the annual real growth rate to climb above the 3% mark in 2015. That will be the first time since 2005 and comes after another year of subpar growth of just 2.0% expected for 2014. The U.S. already has averaged a mere 1.4% over the last 10 years, through 2013. After expecting to see that long-awaited burst of growth in 2014 of 3% at the beginning of the year, we have reduced our expectations for GDP growth back to that 2% mark once again. We now expect the 10-year average annual growth to be about 2.5% though 2024. To put that in perspective, five years ago, we forecasted the 10-year average annual growth rate to be 2.8%, with all yearly rates much higher than the 2% mark.</p>
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<h4>Secular Stagnation</h4>
<p>The Fed's expectation for long-run U.S. economic growth has drifted down even more than our forecasts. Five years ago, the Fed expected to see the economy ambling along at a respectable 2.65% annual pace over the long run. By June, the Fed's expectation for long-run growth in the U.S. had dropped to 2.2% (central tendency was 2.1% to 2.3%).</p>
<p>The IMF and CBO have also lowered their long-term growth projections. Last month, the IMF lowered its long-run growth forecast for the U.S. to about 2% (47). The CBO now projects that real (inflation-adjusted) GDP will increase at an average annual rate of 2.3% over the next 25 years, compared with 3.1% during 1970–2007.</p>
<p>Aside from the fact that there are different Federal Open Market Committee participants now than before, the Fed's reasons for lowering its expectations for long-term growth are likely similar to concerns that the IMF and CBO raised, including the effects of an aging population on the economy and more modest prospects for productivity growth. The CBO also noted that in addition to the retirement of the baby-boom generation, the declining birth rates and leveling off of increases in women's participation in the work force also helped slow the growth of the labor force.</p>
<p>In this light, former Secretary of the Treasury Lawrence Summers has said that the U.S. may be mired in a period of slow growth, marked by only marginal increases in the size of the workforce and small gains in productivity--what he called "secular stagnation" (48). This refers to an economic era of persistently insufficient economic demand relative to the aggregate saving of households and corporations. Here, the U.S. may be stuck in a long-run equilibrium where real interest rates need to be negative to generate adequate demand. Without that, the U.S. slides into economic stagnation. While specific causes of secular stagnation are still uncertain, possible reasons include slower population growth, an aging population, globalization, and technological changes. An increasingly unequal distribution of income and wealth is also cited as a contributing factor. Disparate income growth is important because those at the top of the distribution have a higher savings rate. Since income that is put into savings is not spent, it undercuts the overall level of economic activity that takes place. Mian and Sufi emphasize the role of income inequality and how recent years seem to suggest the only way the economy is capable of generating faster economic growth is by being juiced with more aggressive credit expansion, which does not last (49).</p>
<p>Unfortunately, the move toward low-paying jobs has continued unabated. In the past four years since the outset of the U.S. economic recovery, job gains have come mainly in low-paying positions, according to the National Employment Law Project, an advocacy group for low-income workers. While 22% of job losses during the recession were in lower-wage industries, 44% of employment growth in the past four years has come in this group--meaning that, today, lower-wage industries employ 1.85 million more Americans than before the downturn. And often these low-wage jobs have less access to benefits, such as private health insurance, pensions, and paid leave, compared with their higher-paying brethren (50). Considering the Bureau of Labor Statistics' forecasts that low-paying jobs will dominate employment gains for the next decade, it seems clear that labor-income disparity will continue to widen.</p>
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<h4>Not Just A Problem For The Poor</h4>
<p>Do societies inevitably face a choice between efficient production and the equitable distribution of income? According to IMF economists Andrew Berg, Jonathan Ostry, and Jeromin Zettelmeyer, the answer is no. They argue that the empirical literature on growth and inequality using long-run average growth may have missed how income distribution is tied to abrupt ends in growth.</p>
<p>Their work examined growth over a long time horizon, between 1950 and 2006, focusing on the duration of growth spells, and showed that there may be no trade-off between efficiency and equality (51). In fact, they posited that equality could be an important component of sustained growth, observing that the level of inequality may be the key difference between countries that enjoy extended, rapid expansion and those whose growth spurts quickly dissipate. In short, promoting greater equality may also improve efficiency in the form of more sustainable long-run growth.</p>
<p>Of the number of variables associated with longer growth spells, income inequality's relationship with the duration of growth spells was the strongest (see chart 8). They found that a 10% decrease in inequality (a change in the Gini coefficient to 0.37 from 0.40) increases the expected length of a growth spell by 50%.</p>
<div class="chart">
<h4 class="chartHeader">Chart 8<span>  |  </span><a href="https://www.globalcreditportal.com/ratingsdirect/getImage.do?id=8327280&sourceId=&type=&outputType=&from=GFIR&prvReq=&pager.offset=&SIMPLE_SEARCH_TYPE=&CONID=&entl=N">Download Chart Data</a></h4>
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<p>Meanwhile, the experiences of developing and emerging economies suggest that igniting growth is less difficult than sustaining it (52). Even the poorest of countries have managed to expand their economies for several years--only for growth to falter.</p>
<p>Berg and Ostry found that income inequality is the single most important factor in determining which countries can sustain economic growth. Using the GINI coefficient--which ranges from 0 to 1.0--they measured the extent to which economic growth falls as inequality rises. A country in which everyone earns exactly the same would have a score of 0, while a society in which one person owned everything would have a score of 1.0. Berg and Ostry saw that a GINI coefficient of higher than 0.45 could weigh on growth. Although correlation is not causation, we note that, based on after-tax income, the U.S. economy scored 0.434 on the GINI scale in 2010, according to the CBO, placing it near that threshold (53).</p>
<p>To be sure, it seems counterintuitive that inequality is associated with less-sustainable growth, since some inequality, by providing incentives to effort and entrepreneurship, may be essential to a functioning market economy.</p>
<p>But beyond the risk that inequality may heighten the susceptibility of an economy to booms and busts, it may also spur political instability--thus discouraging investment. Inequality may make it harder for governments to enact policies to prevent--or soften--shocks, such as raising taxes or cutting public spending to avoid a debt crisis. The affluent may exercise disproportionate influence on the political process, or the needs of the less affluent may grow so severe as to make additional cuts to fiscal stabilizers that operate automatically in a downturn politically unviable.</p>
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<h4>Striking A Palatable Balance</h4>
<p>The discussion about income inequality is hardly new, and contrary opinions abound. In his influential 1975 book "Equality and Efficiency: The Big Tradeoff," economist Arthur Okun argued that pursuing equality can reduce efficiency. He claimed that not only would more equal income distribution reduce work and investment incentives, but the efforts to redistribute wealth--through, for example, taxes and minimum wages--can themselves be costly (54).</p>
<p>Of course, income inequality in the U.S. was much less 40 years ago. Kristin Forbes found that, in the short- and medium-terms over a few years, an increase in income inequality has a significant positive relationship with economic expansion (55). But Forbes also found that the relationship was weakened (or could turn negative) when she increased the length of the growth spells. And a World Bank study later found that the positive effect on growth was almost exclusively reserved for the top end of the income distribution (56).</p>
<p>Income inequality can contribute to economic growth, and a degree of inequality is a necessary part of what keeps any market economic engine operating on all cylinders. Indeed, a degree of inequality is to be expected in any market economy, given differences in "initial endowments" (of wealth and ability), the differential market returns to investments in human capital and entrepreneurial activities, and the effect of luck.</p>
<p>However, too much of the focus in the debate about inequality has been on the top earners, rather than on how to lift a significant portion of the population out of poverty--which would be a good thing for the economy. And though extreme inequality can impair economic growth, badly designed and implemented efforts to reverse this trend could also undermine growth, hurting the very people such policies are meant to help (57).</p>
<p>There is no shortage of proposals for tackling extreme income inequality. President Obama has proposed an increase in the hourly minimum wage to $10.10 from the current rate of $7.25, and the IMF recently called on lawmakers to boost the wage (though it refrained from suggesting a specific level). Managing Director Christine Lagarde said that doing so would help raise the incomes of millions of poor and working-class Americans and "would be helpful from a macroeconomic point of view" (58).</p>
<p>An increase in the minimum wage would certainly carry with it short-term impacts, likely bringing 900,000 people above the poverty line in the second half of 2016--and, according to the CBO, lifting wages for 24 million workers at the next level above minimum wage. Fewer American households at or below the poverty line would also help bolster government balance sheets and likely improve state and local credit conditions.</p>
<p>But raising the minimum wage is not without negative consequences. Reduced labor demands resulting from higher wages could reduce potential hires by 500,000 jobs, according to CBO estimates (59). Further, while 49% of those workers making the minimum wage are under age 25, the CATO Institute reports that, of older workers (the other half of minimum wage earners), 29.2% live in poverty and 46.2% live near the poverty level, with family incomes less than 1.5 times the poverty line (60).</p>
<p>Apart from minimum wage discussions, a recent report from the OECD suggested that carried interest--the share of profits that money managers take in from an investment or fund--should be taxed as regular income rather than as returns on investment. Ian Ayres, professor of law at Yale, and Aaron S. Edlin, professor of law and economics at the University of California, Berkley, proposed an automatic extra tax, the so-called Brandeis tax, on the income of the top 1% of earners that would limit the after-tax incomes relative to median household income (61).</p>
<p>Warren Buffett, the chairman and chief executive of Berkshire Hathaway, who consistently ranks among the world's wealthiest people, has long argued along similar lines. He claimed that his 2010 federal tax bill--income taxes and payroll taxes--amounted to 17.4% of his taxable income (62). That, he wrote, was the lowest percentage of any of the other 20 people in his office, whose tax burdens were between 33% and 41% and averaged 36%.</p>
<p>Meanwhile, two Democratic California legislators--Loni Hancock and Mark DeSaulnier--have proposed tying the state's corporate income tax to the ratio of CEO-to-worker pay--a sliding scale in which a company's tax bill could shrink along with the gap in pay between executives and workers. The change would trim a company's tax rate for any corporation in which the chief executive makes less than a hundred times what the median worker earns.</p>
<p>Any clear-headed consideration of these options must recognize that heavy taxation--solely to reduce wage inequality--could do more damage than good. While the IMF studies found that some redistribution appears benign, extreme cases may have a direct negative effect on growth. Heavy taxation solely to equalize wages may reduce incentives to work or hire more workers. A number of studies have indicated that losses from redistribution are likely to be minimal when tax rates are low but rise steeply with the tax or subsidy rate (63).</p>
<p>IMF authors Ostry, Berg, and Tsangarides note that "redistribution need not be inherently detrimental to growth, to the degree that it involves reducing tax expenditures or loopholes that benefit the rich or as part of broader tax reforms (such as higher inheritance taxes offset by lower taxes on labor income)" (63). Moreover, redistribution can also occur when taxes finance public investment, or spending on health and education disproportionately benefits the poor, which help offset the growing divide in educational opportunities and outcomes, broadening the pathways for our future leaders, to the benefit of all.</p>
<p>That said, some degree of rebalancing--along with spending in the areas of education, health care, and infrastructure, for example--could help bring under control an income gap that, at its current level, threatens the stability of an economy still struggling to recover. This could take the form of reallocating fiscal resources toward those with a greater propensity to spend, or toward badly needed public resources like roads, ports, and transit. Further, policies that foster job-rich recoveries may help make growth more sustainable, especially given that rising unemployment correlates with rising income concentration. Additionally, effective investments in health and education promote durable growth and equity, strengthening the labor force's capacity to cope with new technologies.</p>
<p>The challenge now is to find a path toward more sustainable growth, an essential part of which, in our view, is pulling more Americans out of poverty and bolstering the purchasing power of the middle class. A rising tide lifts all boats…but a lifeboat carrying a few, surrounded by many treading water, risks capsizing.</p>
<p>Writer: Joe Maguire</p>
<p><a name="ID3210" id="ID3210"></a></p>
<h4>Glossary Of Relevant Terms</h4>
<p><a name="ID3214" id="ID3214"></a></p>
<h5>Market income</h5>
<p>Based on CBO analysis, market income includes the following components:</p>
<ul>
<li>Labor income: cash wages and salaries (including 401(k) plans), employer-paid health insurance premiums, and the employer's share of Social Security, Medicare, and federal unemployment insurance payroll taxes.</li>
<li>Business income: net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.</li>
<li>Capital gains: profits realized from the sale of assets. Increases in the value of assets that have not been realized through sales are not included in market income.</li>
<li>Capital income (excluding capital gains): taxable and tax-exempt interest, dividends paid by corporations (excluding S corporations), positive rental income, and corporate income taxes. The CBO assumes that corporate income taxes are borne by owners of capital in proportion to their income from capital, so the corporate tax is included in household income before taxes.</li>
<li>Other income: retirement income for past services and any other sources of income.</li>
</ul>
<p><a name="ID3242" id="ID3242"></a></p>
<h5>Transfer income</h5>
<p>Transfer income includes cash payments from Social Security, unemployment insurance, Supplemental Security Income, Aid to Families with Dependent Children, Temporary Assistance for Needy Families, veterans' benefits, workers' compensation, and state and local government assistance programs, as well as the value of in-kind benefits, including food stamps, school lunches and breakfasts, housing assistance, energy assistance, Medicare, Medicaid, and the Children's Health Insurance Program (health benefits are measured as the fungible value, a Census Bureau estimate of the value to recipients).</p>
<p><a name="ID3251" id="ID3251"></a></p>
<h5>After-tax income</h5>
<p>After-tax income is equal to market income plus transfer income minus federal taxes paid. In assessing the impact of various taxes, individual income taxes are allocated directly to households paying those taxes. Social insurance, or payroll, taxes are allocated to households paying those taxes directly or paying them indirectly through their employers. Corporate income taxes are allocated to households according to their share of capital income. Federal excise taxes are allocated to households according to their consumption of the taxed good or service.</p>
<p>Average tax rates are calculated by dividing federal taxes paid by the sum of market income and transfer income. Negative tax rates result from refundable tax credits, such as the earned income and child tax credits, exceeding the other taxes owed by people in an income group. (Refundable tax credits are not limited to the amount of income tax owed before they are applied.)</p>
<p><a name="ID3263" id="ID3263"></a></p>
<h5>The Gini Index</h5>
<p>The Gini Index is a measure of income inequality based on the relationship between shares of income and shares of the population. It is a value between 0 and 1.0, with 0 indicating complete equality and 1.0 indicating complete inequality (in which one household receives all the income). A Gini Index that increases over time indicates rising income dispersion.</p>
<p><a name="ID3272" id="ID3272"></a></p>
<h5>Chart 8 details</h5>
<p>Data from Berg, Ostry, and Zettelmeyer (2008).</p>
<p>Authors' calculations: The height of each factor represents the percentage change in a growth spell between 1950 and 2006 when the factor moves from the 50th percentile to the 60th percentile and all other factors are held constant. Income distribution uses the Gini coefficient. The political institutions factor is based on an index from the Polity IV Project database that ranges from +10 for the most open and democratic societies to –10 for the most closed and autocratic. Trade openness measures the effect of changes in trade liberalization on year-to-year growth. Exchange-rate competitiveness is calculated as the deviation of an exchange rate from purchasing power parity, adjusted for per capita income.</p>
<p><a name="ID3286" id="ID3286"></a></p>
<h4>Endnotes</h4>
<p>(1) "The General Theory," J. M. Keynes</p>
<p>(2) Rajan, "Fault Lines," 2010</p>
<p>(3) CBO, "Trends in the Distribution of Household Income Between 1979 and 2007," 2011; "The Distribution of Household Income and Federal Taxes, 2010," 2013; OECD, 2011; Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, "Redistribution, Inequality and Growth," IMF February 2014; Berg and Ostry, "Inequality and Unsustainable Growth: Two Sides of the Same Coin?," IMF April 2011; Berg and Ostry, "Equality and Efficiency," IMF September 2011</p>
<p>(4) "An Overview of Growing Income Inequalities in OECD Countries: Main Findings," OECD, 2011</p>
<p>(5) CBO, 2013</p>
<p>(6) To the extent that households benefit from company-sponsored health plans whose costs have risen sharply, these figures may be somewhat understated.</p>
<p>(7) Thomas Piketty and Emmanuel Saez, "Income Inequality in the U.S., 1913-1998," 2003</p>
<p>(8) Emmanuel Saez, "Striking it Richer: The Evolution of Top Incomes in the U.S.," 2013</p>
<p>(9) CBO, 2011</p>
<p>(10) "Capital," Thomas Piketty</p>
<p>(11) CBO, 2011</p>
<p>(12) The globalization of the world economy may have affected the distribution of wage rates at home. The U.S. has seen international trade and immigration increase in the past few decades, as well as an increase in the consumption of imported goods. Theoretically, an increase in imported goods, at the expense of domestic goods produced by lower-skilled workers, could hold down wages of domestic workers, though research on the subject has been inconclusive. An increase in the supply of foreign-born workers could also put pressure on wages in those jobs. But, here as well, the effects of foreign workers on wage rates have been modest. Indeed, research note that immigrant workers largely complement, rather than substitute, native-born workers, and thus have little impact on wages, while actually increasing overall growth.</p>
<p>(13) David Card, Thomas Lemieux, and Craig Riddell, "Unions and Wage Inequality," December 2004; "Interview with David Card," Federal Reserve Bank of Minneapolis, Dec. 1, 2006</p>
<p>(14) "Capital," Thomas Piketty</p>
<p>(15) CBO, 2011</p>
<p>(16) CBO, 2011</p>
<p>(17) CBO, 2013</p>
<p>(18) CBO, 2013</p>
<p>(19) CBO, 2013. The CBO noted that other transfers declined from nearly 3% to under 2%. Transfers to low-income households, such as Aid to Families With Dependent Children and Temporary Assistance for Needy Families, declined relative to market income.</p>
<p>(20) For example, the Bush Administration tax cuts of 2001 and 2003 reduced the income tax rate, capital gains tax rate, and dividend tax rate. Earlier, the tax cuts under President Ronald Reagan in the 1980s lowered the top individual income tax rate to 28% from 50%. There was no reduction to the payroll tax rate until the Payroll Tax Holiday of 2010.</p>
<p>(21) CBO, 2013</p>
<p>(22) CBO, 2011; taxfoundation.org, "Federal Individual Income Tax Rates History"</p>
<p>(23) Census, "Changes in Household Net Worth from 2005 to 2010," July 2012, http://blogs.census.gov/2012/06/18/changes-in-household-net-worth-from-2005-to-2010/</p>
<p>(24) Goldin and Katz, "The Race Between Education and Technology," Cambridge, MA; Belknap Press, 2009</p>
<p>(25) "Thirteen Economic Facts about Social Mobility and the Role of Education," Michael Greenstone, Adam Looney, Jeremy Patashnik, and Muxin Yu, Hamilton Project-Brookings, 2013</p>
<p>(26) Hamilton Project-Brookings, 2013</p>
<p>(27) Sean F. Reardon, "The Widening Academic Achievement Gap between the Rich and the Poor: New Evidence and Possible Explanations," 2011 "In Whither Opportunity? Rising Inequality and the Uncertain Life Chances of Low-Income Children," edited by Greg J. Duncan and Richard J. Murnane. New York: Russell Sage Foundation Press.</p>
<p>(28) Hamilton Project-Brookings, 2013</p>
<p>(29) Goldin and Katz, 2009.</p>
<p>(30) Barro, Robert and Jong-Wha Lee, "A New Data Set of Educational Attainment in the World, 1950-2010." Journal of Development Economics, Vol 104.</p>
<p>(31) Lily French and Peter S. Fisher, "Education Pays in Iowa: The State's Return on Investment in Workforce Education," May 2009</p>
<p>(32) Deming, David, and Susan Dynarski, "Into College, Out of Poverty? Policies to Increase the Postsecondary Attainment of the Poor," National Bureau of Economic Research, Cambridge, MA, 2009</p>
<p>(33) Hamilton Project-Brookings, 2013</p>
<p>(34) Goldin and Katz, 2009</p>
<p>(35) Goldin and Katz, 2009</p>
<p>(36) Goldin and Katz, 2009, Rajan, 2010, Hamilton Project-Brookings, 2013</p>
<p>(37) "A Well-Educated Workforce is Key To State Prosperity," Economic Analysis and Research Network, 2014</p>
<p>(38) "The Effects of Investing in Early Education on Economic Growth," The Brookings Institution, 2006</p>
<p>(39) Atif Mian and Amir Sufi, "Household Balance Sheets, Consumption and the Economic Slump," 2013</p>
<p>(40) Atif Mian and Amir Sufi, "House Price Gains and U.S. Household Spending from 2002 to 2006," 2014.</p>
<p>(41) Atif Mian and Amir Sufi, "House Prices, Home Equity-based Borrowing, and the U.S. Household Leverage Crisis," American Economic Review, August 2011.</p>
<p>(42) Rajan, 2010. He argues that political measures to increase affordable housing for low-income groups instructed the Department of Housing and Urban Development (HUD) to develop affordable housing goals for Fannie and Freddie and to monitor those goals. HUD then steadily increased the amount of funding it required the agencies to allocate to low-income housing. Pressure on regulators to enforce the Community Reinvestment Act (CRA), through investigations of banks and fines, may have increased lending activity in these areas.</p>
<p>(43) Kumhof and Ranciere, "Inequality, Leverage and Crises," IMF 2010.</p>
<p>(44) "Inequality, the Great Recession and Slow Recovery," Barry Z. Cynamon, visiting scholar at the Federal Reserve Bank of St. Louis, and Steven M. Fazzari, economics professor at Washington University, January 2014.</p>
<p>(45) "The Road to Recovery," Andrew Smithers</p>
<p>(46) "Economy May Never Fully Recover from Crisis", The Fiscal Times. June 2, 2014.</p>
<p>(47) CBO long-Term Budget Outlook 2014. July 2014. "IMF cuts US growth forecast as it urges minimum wage hike ", BBC, June 16, 2014</p>
<p>(48) "Crisis Yesterday and Today," Lawrence Summers, Jacques Pollack lecture, IMF.</p>
<p>(49) "Secular Stagnation and Wealth Inequality", Mian and Sufi, March 23, 2014)</p>
<p>(50) OECD Economic Surveys: United States. June 2014</p>
<p>(51) Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, "Redistribution, Inequality and Growth," IMF February 2014; Berg and Ostry, "Inequality and Unsustainable Growth: Two Sides of the Same Coin?," IMF April 2011; Berg and Ostry, "Equality and Efficiency," IMF September 2011.</p>
<p>(52) "Growth Accelerations," a study by Ricardo Hausmann and Dani Rodrik of Harvard University's John F. Kennedy School of Government, and Lant Pritchett of the World Bank, 2005</p>
<p>(53) CBO, 2013</p>
<p>(54) Arthur Okun theorized that some of the redistributed resources would "simply disappear" because of administrative costs and disincentives to work for both those who pay taxes and those who receive transfers.</p>
<p>(55) "A Reassessment of the Relationship between Inequality and Growth," Kristin J. Forbes, M.I.T. Sloan School of Management, 2000</p>
<p>(56) Roy van der Weide and Branko Milanovic, "Inequality Is Bad for Growth of the Poor," July 2014</p>
<p>(57) "The Moral Consequences of Economic Growth" Benjamin Friedman</p>
<p>(58) "IMF calls on the US to hike its minimum wage rate," CNBC, June 16, 2014</p>
<p>(59) CBO, "The Effects of a Minimum-Wage Increase on Employment and Family Income," February 2014</p>
<p>(60) Mark Wilson, "The Negative Effects of Minimum Wage Laws," CATO Institute, June 2012.</p>
<p>(61) "Don't Tax the Rich. Tax Inequality Itself," 2011 op-ed in the New York Times</p>
<p>(62) "Stop Coddling the Super-Rich," 2011 op-ed in the New York Times</p>
<p>(63) Barro R.J., "Government Spending in a Simple Model of Endogeneous Growth," Journal of Political Economy, 1990; Jaimovich, N. and S. Rebelo, "Non-Linear Effects of Taxation on Growth," NBER, 2012</p>
<p>(64) Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, February 2014; Saint-Paul, G., and T. Verdier, "Education, Democracy and Growth," Journal of Development Economics, 1993</p>
<p>Courtesy of <a href="https://www.globalcreditportal.com/ratingsdirect/renderArticle.do?articleId=1351366&SctArtId=255732&from=CM&nsl_code=LIME&sourceObjectId=8741033&sourceRevId=1&fee_ind=N&exp_date=20240804-19:41:13" target="_blank">S&P Capital IQ</a></p>
<p></p>
</div>Stock Buybacks; Sustainable Smoke And Mirrorshttp://stockbuz.ning.com/articles/stock-buybacks-sustainable-smoke-and-mirrors2014-07-14T17:42:29.000Z2014-07-14T17:42:29.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290774?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290774?profile=RESIZE_480x480" height="412" width="320"></a>My simplistic view of the stock market, the one my muddled brain is able to wrap around, is to imagine that of the waterfalls at the Continental Divide at Glacier National Park in Montana. Numerous rivers, all converging into to one. Hedge funds, pension funds, investment firms, your own 401k, option flows, you name it.........and share buybacks.</p>
<p>Throughout the recovery, the amount of cash being held on corporate balance sheets was in some instances, astounding, leaving many investors wondering if/when the cash would be deployed. </p>
<p>Well if you haven't noticed, they have been deploying more and more. Just imagine the many <em>streams</em> you see in this image to the right. One is M&A which can be the acquisition of a company to compliment ones existing structure OR a direct competitor which is a plus for a stock by making your space that much smaller. Another stream, a small one, is (hopefully) R&D, another stream represents cash being returned to shareholders via higher dividends and lastly we're seeing a <span style="text-decoration: underline;">great deal</span> (large, wide stream) in the way of share repurchase programs.</p>
<p>You may ask "why repurchase shares when the markets at an all time high?"</p>
<p>Smoke and mirrors my friend. Smoke and mirrors - especially when they're uncertain about near term sales and EPS growth. Allow me to explain:</p>
<blockquote>
<p>If a company has 10 million shares outstanding and earns $10 million per year, its earnings per share (EPS) is $1 ($10M/10M shares). If the stock has a price-to-earnings ratio (P/E) of 15, the stock will trade at $15 ($1 in EPS x 15 P/E).</p>
<p>When the company buys back 1 million of its shares, it still earns $10 million per year in profit, but now that $10 million is divided by 9 million shares instead of 10 million.</p>
<p>So although the company didn't earn any more money, earnings <em>per share</em> rises to $1.11 ($10M/9M shares). If the stock continues to trade at a P/E of 15, the stock climbs to $16.65.</p>
<p>Look at what just occurred. There was no change in the company's business, but through a reduced share count, earnings per share and the stock price jumped 11%.</p>
</blockquote>
<p>Now this gives companies the ability to beat EPS because of the smaller float. Nice trick, aye?</p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290809?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1290809?profile=RESIZE_320x320" width="300"></a>Now one alarm goes off in my head as I ponder this. <a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290828?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290828?profile=RESIZE_320x320" width="307"></a></p>
<p>Namely <em>how long can buybacks be sustained?</em> What happens when the river begins to dry up? </p>
<p>Well the hope would be that the economy, and overall demand, has recovered sufficiently to take over but what if it doesn't? </p>
<p>What if global economies continue to be slow to heal. Certainly rates are low, allowing companies to borrow on the cheap however is this trend sustainable?</p>
<p>Just food for thought my friends.......</p>
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<p>(Click image to enlarge)</p></div>Wage Hike Ahead? Small Business Survey Suggests Yeshttp://stockbuz.ning.com/articles/wage-hike-ahead-small-business-survey-suggests-yes2014-07-12T15:56:08.000Z2014-07-12T15:56:08.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290832?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290832?profile=RESIZE_320x320" width="299"></a>A view of the the NFIB survey and wage growth gives a hint of what may lie ahead in the wage sector. Consumer spending dropped $7 in June which surprised many. </p>
<p>(CLICK ON IMAGES TO ENLARGE)</p>
<p>While Americans' spending in June was generally on par or lower than their average May spending, this month's $7 drop is one of the largest recorded by Gallup during this time of year since 2008, when June spending fell by $10. The June 2008 spending average of $104 is still the highest average for that month in Gallup's six-year trend.</p>
<p>Can it be the <em>new</em> jobs being created (majority at the low end) is weighing on consumers pocketbook? #shocker! But what about the spending of the wealthy lifting all boats? You know; that good old trickle down effect?<br> <br> According to <a href="http://global.econoday.com/byshoweventfull.asp?fid=462618&cust=global-premium&year=2014&lid=0&prev=/byweek.asp#top" target="_blank">Econoday</a>, the drop in daily spending among all Americans can largely be attributed to upper-income Americans spending less in June. Could the wealthy be running low on things to buy? Yes sarcasm on my part but a drop is not what anyone wishes to see.</p>
<p>There are some encouraging signs out there however.</p>
<p>The latest from the small business survey <a href="http://www.nfib.com/surveys/small-business-economic-trends/" target="_blank">(NFIB)</a> shows that while inventories are holding and capital outlays and sales projections are down, what's up is job openings and plans to hire. </p>
<p>Yes, plans to hire.</p>
<p>So what's holding back the consumer? My guess: low wages and gas prices.</p>
<p>David Kotok penned on Wednesday:<a target="_blank" href="http://thinkprogress.org/wp-content/uploads/2014/07/FINAL_minimum_wage_2014-03.jpg"><img class="align-right" src="http://thinkprogress.org/wp-content/uploads/2014/07/FINAL_minimum_wage_2014-03.jpg?width=600" height="834" width="492"></a></p>
<blockquote>
<p style="margin-left: .5in;">Gasoline prices have reached levels that (1) will be sustained for a while in all likelihood and (2) that are, in real terms, equivalent to levels that previously led to economic slowdowns in the US. This development prompted our exit from [an overweight position in the Energy] sector.</p>
<p style="margin-left: .5in;">In a compelling study, Ned Davis Research examined the real price of gasoline, adjusted for the inflation rate, and its economic impacts. The inflation-adjusted price of gasoline today has reached levels that have historically throttled growth. Furthermore, the Ned Davis study finds that a higher price for gasoline would be the equivalent of a major shock. The research suggests that under either circumstance – current gas prices or prices that surge even higher – the weight on the economy from that adjustment is onerous.</p>
<p style="margin-left: .5in;"></p>
</blockquote>
<p></p>
<p>So we're at "do or die" levels in energy. They've been trying to get Americans accustomed to $3 gallon gasoline and any conflict in the Middle East, would spike the black gold and damage US spending even further........because $4/gallon harms consumer spending in a big way.</p>
<p>So do they let the price of crude oil and gasoline drop? Heaven forbid it hit big oil's pocketbook or profit margins in any way. (sarcasm) Or do we push for higher minimum wage to ease the pain?</p>
<p>Already in 2014 we have seen the push intensify for Congress to raise the minimum wage with many states, tired of the deadlock, moving forward on their own to raise their own state or local minimum wage which I've written about numerous times <a href="http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CCIQFjAA&url=http%3A%2F%2Fstockbuz.net%2Farticles%2Flist%2Ftag%2Fraise%2Bthe%2Bminimum%2Bwage&ei=s1TBU9PYJIqxyATLj4HoBg&usg=AFQjCNF1__rd2iZKL3tVc-6MMjobQr_GeQ&bvm=bv.70810081,d.aWw" target="_blank">HERE</a> <a href="http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0CC4QFjAC&url=http%3A%2F%2Fstockbuz.net%2Farticles%2Fminimum-wage-by-state%3Fcontext%3Dcategory-Opinion&ei=s1TBU9PYJIqxyATLj4HoBg&usg=AFQjCNFO3Mvfq7XHmTob4i3-GG0LcBe9dA&bvm=bv.70810081,d.aWw" target="_blank">HERE</a> <a href="http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&uact=8&ved=0CDQQFjAD&url=http%3A%2F%2Fstockbuz.net%2Farticles%2Flist%2Ftag%2Fminimum%2Bwage%2Bmyths&ei=s1TBU9PYJIqxyATLj4HoBg&usg=AFQjCNHSQaE2SEdBfzh7DmZ71ieU5yaapw&bvm=bv.70810081,d.aWw" target="_blank">HERE</a> and <a href="http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=0CDoQFjAE&url=http%3A%2F%2Fstockbuz.net%2Farticles%2Flow-wage-job-creation-persists&ei=s1TBU9PYJIqxyATLj4HoBg&usg=AFQjCNEttknJ1hsbe5Z0q3bkFtuP9kAoBw&bvm=bv.70810081,d.aWw" target="_blank">HERE</a> just to name a few. </p>
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<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290864?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1290864?profile=RESIZE_480x480" width="375"></a>Recent surveys also show that states which have raised their minimum wage, have seen job expansion (see left - click to enlarge.</p>
<p>With this, low and behold, their consumer spending went up, small business grew and jobless rates fell. Just checkout the links above for evidence. So much for the fear mongering out there. Job killers? Nonsense.</p>
<p>Raising the Federal minimum wage would also save the government <strong>millions</strong> each year in food stamps, housing assistance, etc. as the current minimum level places workers beneath the poverty level. Ending an obvious area of corporate welfare; pure and simple.</p>
<p>Oh, btw, with higher minimum wage, it opens the doors to higher inflation being tolerated. *wink wink* Markets love to inflate their way out of recessions. Just food for thought.</p>
<p>As more and more states are embracing a higher minimum wage, I believe we will see an increase in consumer spending overall. If only Congress would listen but with midterms in November, you know that's not likely to occur.</p>
<p><img style="width: 351px; height: 350px; background-color: #ffffff;" src="http://ww3.hdnux.com/photos/30/32/51/6400634/6/622x350.jpg" class="mainImage"></p>
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<p>Image courtesy of <a href="http://thinkprogress.org/wp-content/uploads/2014/07/FINAL_minimum_wage_2014-03.jpg" target="_blank">ThinkProgress</a></p></div>The Bond Markets Pessimism Is Vindicatedhttp://stockbuz.ning.com/articles/the-bond-markets-pessimism-is-vindicated2014-06-30T18:04:01.000Z2014-06-30T18:04:01.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><div class="separator" style="clear: both; text-align: left;">I've been a close observer of the bond market for over 25 years, and it continues to amaze me with its ability to see the future of inflation and real economic growth. </div>
<div class="separator" style="clear: both; text-align: center;"></div>
<div class="separator" style="clear: both; text-align: left;"><a target="_blank" href="http://1.bp.blogspot.com/-BGPLTK6frZA/U6tELCp9l4I/AAAAAAAAQ-Q/mAo3Jk_Usp4/s1600/5-yr+TIPS+vs+2-yr+GDP.jpg"><img class="align-left" src="http://1.bp.blogspot.com/-BGPLTK6frZA/U6tELCp9l4I/AAAAAAAAQ-Q/mAo3Jk_Usp4/s1600/5-yr+TIPS+vs+2-yr+GDP.jpg?width=400" width="400" /></a>I've been featuring the above chart for a long time, using it to argue that the market was quite pessimistic about the prospects for economic growth. My theory is that real interest rates ought to track the market's expectations for real growth, and indeed they have. Real growth and growth expectations were very strong in the late 1990s, and real yields on TIPS were very high. Since then, the economy has slowed down and real yields have fallen. 5-yr real yields on TIPS have been telling us for the past year that the market was braced for real economic growth to be as low as 1% or so. With today's revision to Q1/14 GDP growth, real growth over the past 2 years has been an anemic 1.4%. In effect, the bond market saw this slump coming a year ago. Needless to say, if the economy's prospects are going to improve going forward, we ought to first see real yields on TIPS rise to at least 1%. </div>
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<div class="separator" style="clear: both; text-align: center;"><a target="_blank" href="http://4.bp.blogspot.com/-CttZgrnQ9uM/U6tDK9hhoBI/AAAAAAAAQ-A/a2s0w37qkMM/s1600/Nom+vs+real+GDP+qoq.jpg"><img class="align-right" src="http://4.bp.blogspot.com/-CttZgrnQ9uM/U6tDK9hhoBI/AAAAAAAAQ-A/a2s0w37qkMM/s1600/Nom+vs+real+GDP+qoq.jpg?width=400" width="400" /></a></div>
<p><br />
The extent of the weakness in Q1/14 growth can be appreciated in the above chart. We haven't seen such negative numbers for real and nominal GDP growth without being in a recession. Yet I'm pretty sure we aren't in a recession, since the preponderance of evidence suggests the economy continues to grow, albeit relatively slowly: e.g., business investment is rising, bank lending to business is strong, residential construction is rising, unemployment claims are very low, jobs are growing about 2% per year, industrial production is rising, monetary policy is accommodative, government spending has shrunk meaningfully relative to GDP, the yield curve is positively sloped, and real short-term interest rates are negative, to name just a few. All of these are consistent with an ongoing business cycle expansion. The first quarter weakness was most likely a by-product of terrible weather.</p>
<div class="separator" style="clear: both; text-align: center;"><a target="_blank" href="http://4.bp.blogspot.com/-vmSGbRCiJ4Y/U6tD2fG1fII/AAAAAAAAQ-I/7gXooXOhqoQ/s1600/Real+GDP+vs+trend+50.jpg"><img class="align-left" src="http://4.bp.blogspot.com/-vmSGbRCiJ4Y/U6tD2fG1fII/AAAAAAAAQ-I/7gXooXOhqoQ/s1600/Real+GDP+vs+trend+50.jpg?width=400" width="400" /></a></div>
<p><br />
We are very likely still in a recovery, but the problem—as illustrated in the chart above—is that the economy is more than <a href="http://scottgrannis.blogspot.com.ar/2014/04/taking-measure-of-our-discontent.html">10% below where it could or should be</a> if long-term growth trends are extrapolated. This is without doubt and by far the weakest recovery in history. I think the reasons for this weak growth are a huge increase in regulatory burdens (e.g., Obamacare), a significant increase in top marginal tax rates, a hugely burdensome, complicated, and distorting tax code, and the developed world's highest corporate tax rates. Accommodative monetary policy is probably a contributing factor as well, since five years of extremely low and negative real short-term interest rates have likely created disincentives to save. In short, the economy has been growing in spite of all the government's "help," not because of it. Lift the burden of a smothering fiscal sector and we'll most likely see a much stronger economy.</p>
<p>Courtesy of <a href="http://scottgrannis.blogspot.com/" target="_blank">CalifiaBeachPundit</a></p>
</div>World Bank Cuts Outlook But There's Always A 'But'http://stockbuz.ning.com/articles/world-bank-cuts-outlook-but-there-s-always-a-but2014-06-11T15:43:21.000Z2014-06-11T15:43:21.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>Here we go again but should anyone be surprised?  This is one of those days when people will come out and say "the market is not the economy" yet we all know job growth remains tepid at best and with that, one has to ask "where will the growth come from?"  See the ginormous infographic below.</p>
<p><a href="http://www.worldbank.org/en/news/press-release/2014/06/10/wb-lowers-projections-global-economic-outlook-developing-countries-domestic-reforms" target="_blank">World Bank</a> has lowered its forecasts for developing countries, now eyeing growth at 4.8 percent this year, down from its January estimate of 5.3 percent. Signs point to strengthening in 2015 and 2016 to 5.4 and 5.5 percent, respectively. China is expected to grow by 7.6 percent this year, but this will depend on the success of rebalancing efforts. If a hard landing occurs, the reverberations across Asia would be widely felt.</p>
<p>There's always a BUT</p>
<p>Yet <a href="http://blog.variantperception.com/2014/06/09/deflation-not-a-danger-modest-inflation-with-with-wage-growth-ahead/" target="_blank">Variant Perceptions</a> survey of small businesses (a proxy for future growth) shows the belief that wage growth will pick up for the rest of the year driven by much tighter labour market. <span style="color: #ffcc00;"><em>(My thoughts: many of those who have left the workforce may not return and are now behind in skills needed?  That and Obama's push to raise the Federal minimum wage)</em></span></p>
<blockquote>
<p>"At present we’re seeing near record low levels of short-term unemployment, a surge in higher wage expectations by small businesses, and one of the higher levels of percentage of sectors expanding employment."</p>
</blockquote>
<p>Encouraging talk.  Yes markets are forward looking but is Mr. Market baking in expansion too soon?  2015 can't get here fast enough for my taste.  I'm sure bulls will BTFD.</p>
<p><a target="_blank" href="http://www.worldbank.org/content/dam/Worldbank/GEP/GEP2014b/GEP2014b_infographic_01.jpg"><img class="align-left" src="http://www.worldbank.org/content/dam/Worldbank/GEP/GEP2014b/GEP2014b_infographic_01.jpg?width=760" width="760" /></a></p>
</div>U.S. Private Sector De-leveraging; Where Are We?http://stockbuz.ning.com/articles/u-s-private-sector-de-leveraging-where-are-we2013-02-05T01:38:28.000Z2013-02-05T01:38:28.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p style="text-align: left;"><span class="font-size-2" style="font-family: trebuchet ms,geneva;">You know those moments.......when you were at a family function or out for a few cocktails with friends when someone brought up the topic of the economy or stock market.  Those conversations were fairly easy to side step  and ensure you'd still be on speaking terms tomorrow.  The last five years, however it's an entirely new ballgame and avoidance is not becoming any easier.  I think the basic problem for the general public (and many small investors) is that they expected a snap back in jobs in 2-3 years, as is normal after a recession.  The problem isn't the current administration.  The problem is that we didn't simply experience a recession.  We experienced a <span style="text-decoration: underline;"><em><strong>global</strong></em></span> financial crisis which is a horse of an entirely different color.  </span></p>
<p style="text-align: left;"><span class="font-size-2" style="font-family: trebuchet ms,geneva;">You really can't blame them for not understanding the difference between the two.  Most haven't been alive long enough or have knowledge of economic history to realize the ramifications.  According to a White House <a href="http://www.whitehouse.gov/sites/default/files/microsites/economic-report-president-chapter-3r2.pdf" target="_blank">Crisis and Recovery in the World Economy</a> "Although economic dislocations have been severe in one region or another at various times over the past 50 years, <span style="text-decoration: underline;">never in that time span has the annual output of the entire global economy contracted.</span>"  The end result boys and girls is not a 2-3 year rebound.    <a href="http://voices.washingtonpost.com/ezra-klein/2010/08/will_we_ever_recover_from_the.html" target="_blank">The Washington Post</a> warned:  housing prices tend to be depressed for years, and credit deleveraging takes about <span style="text-decoration: underline;">seven</span> years.  Additionally, real per capita GDP growth is significantly lower in the decade following a financial crisis.    Even today with global central banks easing, the recovery is far from over according to <a href="http://www.bloomberg.com/news/2013-01-29/it-s-too-soon-to-celebrate-a-recovery.html" target="_blank">Bloomberg</a>.   So where are we truly in the deleveraging process?  Roubini Global Economics breaks it down.  Enjoy-</span></p>
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<p style="text-align: left;">By Christian Menegatti and David Nowakowski<br />
<span style="text-decoration: underline;"><span class="font-size-4">Roubini Global Economics</span></span></p>
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<p style="margin-left: .25in;">• Question: Are U.S. households done deleveraging? Answer: Getting there; thanks to consumer credit rebounding, household debt increased in Q2 2012, for the first time since 2008, although it dipped again in Q3. Consumer credit held up with a significant acceleration in the pace of releveraging in 2012. Mortgage debt is still shrinking, as homeowners seek to rebuild equity or default.</p>
<p style="margin-left: .25in;">• Question: Why does it matter? Answer: It matters because deleveraging acts like gravity on economic activity, with repayment of debt sopping up income that would otherwise go into consumption and housing. The good news is that the housing market is looking a bit brighter after five years of residential investment contraction and will provide a significant contribution to GDP growth going forward. However, the welcome housing reflation will be too weak to boost the asset side of household balance sheets and consumption through wealth effects.</p>
<p style="margin-left: .25in;">• The financial sector is still deleveraging rapidly, partly as securitization markets and government enterprises continue to shrink. Corporations and small businesses are both leveraging up; the former robustly (although nowhere near the pre-2008 pace), the latter anemically. Unfortunately, this borrowing seems to be mainly for refinancing, cash hoarding and equity buybacks, along with some investment in capital stock, but little hiring.</p>
<p style="margin-left: .25in;">• Question: What does it mean for economic activity and asset classes? Answer: The end of private- sector deleveraging, and, eventually, credit growth increasing to the level of economic growth, will boost U.S. growth closer to its potential rate of 2.5-3.0%. It will allow for slower savings growth, more investment and smaller fiscal deficits. Unlike Japan, which remains in deleveraging mode decades after its bust, the U.S. seems close to ending this painful period of balance-sheet repair, and avoiding the lost decades of ZIRP and dismal equity market returns that come with it.</p>
<p><strong>Here Is How the Story Goes...</strong></p>
<p>RGE’s focus has always been on national balance sheets and the signals of health or sickness that those can send. In this case, the patient is the U.S. economy; the <a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=U8GusXYvzQrI-2BTfpBInOi53kbqOtjseShlePd1AMO2kW4jIcxPdXBTnAOTxrGNkj0cK4NHKt72AJqjK-2Fs54I7Q-3D-3D_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BJqj4MbpuY6BBAq-2Bcyvdn6R-2B9wZMM8iA7D5EuK5NfZi0-2FaRZH-2FoVY3SFa56ZZboRepQ3n-2BaCAey9lcsyrIHCt-2FzQ60Rsfyfddicd-2FDs7QJbBHwIzyR8qo4adg29URFtioyp1oDTBolBsQ5lFOpp99-2FaMHi-2BFiDDA0AvjOMgRyR8Tg-3D-3D">Flow of Funds Accounts of the United States</a> (the Fed Z.1 report) is our quarterly doctor’s visit. U.S. households are very familiar with deleveraging; associated with an economy that will take a long time to return to potential growth and full unemployment. But is the medicine working?</p>
<p>Being in the postcrisis, Minsky-moment aftermath makes us the lucky witnesses of a once-in-a-generation event (one hopes). After over 60 years of almost monotonic growth in the U.S. total debt-to-GDP ratio, the Great Recession unleashed a painful deleveraging process that depressed private demand and pushed policy makers into several rounds of fiscal and monetary stimuli. While fiscal stimulus (a.k.a., releveraging of the public sector to offset the private-sector deleveraging cycle) is now turning into <a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=U8GusXYvzQrI-2BTfpBInOi-2FAm6X1xG6kRGltrJSwoDKplYyl526FBU7CnE0BW1At8ADqivFQY0gyGy5I9w13OZw-3D-3D_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BJqj4MbpuY6BBAq-2Bcyvdn6RgW-2BmuR3hCv6XBUwoYTjF-2Bj3ks-2FsQJhl5Ko5F7zFh8-2BKR34oseW25gnmK8NIUM-2FrXat6I82GaBV9QgCjZW-2FnEHqnyOR03R-2B95PASzqNjH-2Bw4S3R5p6IaTA5ssvP2rbA7AyjFLlavBjHnAIK31iNcKtQ-3D-3D">a drag</a> on growth and source of uncertainty, and potentially a heavy one, the Fed has made its open-ended <a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=U8GusXYvzQrI-2BTfpBInOi-2FAm6X1xG6kRGltrJSwoDKrtZ9BnLlK2OTfcHP00H42i7-2FQIFfc-2BIoBm53t3VydO4g-3D-3D_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BJqj4MbpuY6BBAq-2Bcyvdn6RTf6rUkmw8E6ujSqB8HTsYZNWCwKu8oTDV-2FeJDEdaGO1M02AEXOhuhPwiqAmNWyCxEseNc-2Fk-2Fv5pynzBAZGinO1QgBIyx-2FrZjkU9H-2FWm-2Bbdhu9azqh7RpeUFR9XcslxVv0QWaI7ub6C0-2BGA0wuGwofw-3D-3D">monetary easing stance contingent to labor market performance</a>. Monetary policy can ease financial conditions and can build a bridge to a “better day” (a day in which deleveraging and uncertainty are gone), bu t it is the progress of balance-sheet repair of the household and financial sectors that will actually bring that “better day” a bit closer—the Fed has decided to extend the bridge as long as needed, conditional on inflation (actual and expected) developments.</p>
<p><strong>So, Is Private-Sector Balance-Sheet Repair Over? And Is That ‘Better Day’ on the Horizon?</strong></p>
<p><a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=U8GusXYvzQrI-2BTfpBInOi53kbqOtjseShlePd1AMO2kW4jIcxPdXBTnAOTxrGNkj0cK4NHKt72AJqjK-2Fs54I7Q-3D-3D_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BJqj4MbpuY6BBAq-2Bcyvdn6RAk21ot9b2vlD0woFNbmZY4igpt6oZt3zhtn9diSmGhBBbn80uDAiEm3Y8yxwkB4lM6weaH4rJWOd-2FbEsT9ZrjhZrDA1z8OwRzSRYIqH0TBrCTus24d-2BwPA3GL3uqFFK2RNiQdv-2B-2FOwmxdYnRgfldeQ-3D-3D">Pages 8 and 18 of Z.1</a> tell us that, in Q2 2012, total household credit flows printed a positive number, to the tune of $161 billion, for the first time since Q1 2008 (with the exception of a tiny blip in Q4 2011). That is a far cry from the average quarterly total household credit contraction that we lived with between Q2 2008 and Q1 2012. Unfortunately, Q3 2012 did not repeat the expansion of Q2. With a contraction of $262 billion, Q3 2012 was a bit worse than the average quarterly flow of the last four years. So, almost five years since the official beginning of the Great Recession, how far are U.S. households, in aggregate, into their deleveraging process?</p>
<p><strong>Total Household Credit: Good News and Bad News</strong></p>
<p>Without oversimplifying much, we can break down total household credit into consumer credit and mortgage credit. The good story is in consumer credit; the not so good story in on the mortgage side.</p>
<p><strong><em>Consumer Credit</em></strong></p>
<p><strong>Household consumer credit collapsed heavily post-Lehman and relapsed two years later, starting in late 2010, displaying an almost V-shaped recovery</strong> (Figure 1). The flow for Q3 2012 ($116 billion) was a bit weaker than in Q2 ($173 billion) but, nevertheless, the trend remains positive and intact.</p>
<p><img alt="" src="http://www.mauldineconomics.com/images/uploads/newsletters/130201_OTB_chart_1.jpg" style="width: 600px; height: 318px;" /><br />
<em>Source: Federal Reserve</em></p>
<p><strong><em>Mortgage Credit</em></strong></p>
<p><strong>Mortgage flows are still bad news</strong> and have been in negative territory since Q2 2008 (Figure 2). The mortgage sector remains stuck in deleveraging mode, even with home affordability at an all-time high. In H1 2012, flows of mortgages obtained by households were as bad as they have ever been since the beginning of this crisis—it does not look like there is much of an improvement there yet. Most likely, this is not just due to the supply side (the broken banking-credit-market channel that the Fed is trying to fix); the demand side is not yet feeling like loading up debt to buy a home.</p>
<p><img alt="" src="http://www.mauldineconomics.com/images/uploads/newsletters/130201_OTB_chart_2.jpg" style="width: 600px; height: 351px;" /><br />
<em>Source: Federal Reserve and Federal Home Loan Mortgage Group</em></p>
<p><strong><em>So, How Are U.S. Households Feeling?</em></strong></p>
<p><a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=U8GusXYvzQrI-2BTfpBInOi-2FAm6X1xG6kRGltrJSwoDKoeysPC78qPPv2G7LyP-2Bsb0_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BJqj4MbpuY6BBAq-2Bcyvdn6Rvhgf5z55TcdySmVNF2hjjp1m7bX0d1srDs787-2BeffJe1IxL1evAAoXtwZWt9LIeCm-2BY0kvdshxrfASS2AfzziKNGmeG2OChavotwGih6AHeNcCIIWF0Et49zTDcXYeBPUrG6kZtPZdDnbjsxcK9b1g-3D-3D">Home equity was allegedly an important driver for consumption</a> (and consumer credit growth) and sentiment (Figure 3). The good news is that home equity as a percentage of household real estate is improving, albeit very slowly, after the collapse of 2007. As homeowners gradually rebuild equity through repayments, and if home prices, after triple-dipping, start to recover in line with inflation, this long-time drag on economic activity could fade within the next year.</p>
<p><img alt="" src="http://www.mauldineconomics.com/images/uploads/newsletters/130201_OTB_chart_3.jpg" style="width: 600px; height: 353px;" /><br />
<em>Source: Bureau of Economic Analysis and Federal Reserve</em></p>
<p><strong>Stocks:</strong> <strong><a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=U8GusXYvzQrI-2BTfpBInOi-2FAm6X1xG6kRGltrJSwoDKrQVoV1e6aPmBsFVDsaIlP3nok00sQKq2ig5-2FeOCYpvkA-3D-3D_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BJqj4MbpuY6BBAq-2Bcyvdn6RT9Ak6kHECNqIzPXur190a8-2Fsv5kcfgaIE8Vb6NIONeQIg8keYODYR1QSpJ5RmuCeuxrBlDwixIqmtzP2zhgUAiOLotfs64BlontIijEnSJ76D-2BNoR-2Bx6sWrxbtIBsRQV4PR6zoUFAcERCZu8XsQK0g-3D-3D">Housing Matters</a></strong><a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=U8GusXYvzQrI-2BTfpBInOi-2FAm6X1xG6kRGltrJSwoDKrQVoV1e6aPmBsFVDsaIlP3nok00sQKq2ig5-2FeOCYpvkA-3D-3D_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BJqj4MbpuY6BBAq-2Bcyvdn6RASITUFKL0AGK2bh9xaSSkUfU2EziocVynNen3ZNqvkjY9-2FbuJuQeDBvnO1OIFBwJfOHXkeNNwW4fk89jI-2F1VjNW0ZkhBZ93CfRvyPVBDGLSlg9ZI35LW4ksM1VGjEX-2FJI9rG1Qg85z8Q2bHhinYjmA-3D-3D"><strong>...</strong></a></p>
<p>So far, we have only discussed flows. Looking at stocks (levels) gives us a better sense of where we are in the debt/asset journey. Housing is by far the largest single asset on the balance sheet of U.S. households (about $19 trillion out of $78 trillion of total assets). Clearly, U.S. households’ wealth effects and net worth depend a lot on what happens to home prices, where the future for both prices and quantities looks a bit brighter. RGE expects housing starts to grow by a whopping 30% in 2013 and to reach the 1.1 million mark at year-end (annualized rate; housing starts peaked at over 2.2 million in early 2006). Although residential investment is just about 3% of U.S. GDP, and therefore its contribution to growth is limited (about 0.4% in 2013), a housing recovery would have a positive multiplier effect and give a push to housing-related consumption.</p>
<p>The recent trajectory of growth in starts would suggest an even faster pickup. Estimates of housing needs are consistent with starts increasing to well over 1 million, and moving closer to 1.5 million-1.8 million eventually— depending on demand for second homes, capital replacement and household formation, including assumptions on immigration. That number might be a bit high given household formation collapsed during the recession to below 500,000 per year, from the 1.7 million per year in the decade prior to 2007, but a catch-up does need to take place, although some of it may be in rentals (multi-family or commercial real estate) rather than single-family starts.</p>
<p>On the price side, we forecast nominal house price gains of 4.0% in 2013 and 5.2% in 2014. This pace of housing reflation is insufficient to bring significant positive wealth effects; although $1.75 trillion of additional property wealth is nothing to sneeze at, it only makes up for a fraction of the value “lost” in the housing bust. However, the improvement will boost the sentiment of all those households that remain in negative equity, with no income or no income growth and with a high ratio of debt to disposable income that will force them to continue their deleveraging process. And those households might happen to be those with the highest propensity to consume.</p>
<p>In fact, it is overall wealth, arguably, that needs to be restored to something like its previous level before savings, leverage and consumption patterns are able to return to a more “normal” state. Figures 4 and 5 show that, despite the rebound in equity markets, household net worth in nominal terms is now probably back at its precrisis high of around $67 trillion, but still far off the precrisis trend. On another measure, wealth is at 5.5x income; much improved from 2009, but still only at the levels seen early on in the 1995-2000 “Clinton” and 2003-08 “Bush” recoveries. There is no clear-cut answer as to what wealth ought to be, and demographics and inequality may also play a role. But, after four years of deleveraging, the asset side of the balance sheet seems in good enough shape not to be an obstacle to credit growth. Could something else be holding it back?</p>
<p><img alt="" src="http://www.mauldineconomics.com/images/uploads/newsletters/130201_OTB_chart_4-5.jpg" style="width: 600px; height: 216px;" /><br />
<em>Source: Haver, Federal Reserve</em></p>
<p>As Figures 6 and 7 indicate, deleveraging on the private side of the economy has been the flip side of the large government deficits. (In fact, the urge to save and the need to default—rather than stimulus—is the main cause of the sustained slump that is in turn the main cause of the reduced revenues and thus the fiscal deficits.) Figure 6 suggests that, compared with the post-World War II trend of rising household indebtedness, the recent debt reduction is already enough. But there is no financial or economic argument for this trend being the right long- term equilibrium. If wealth and income levels are back to mid-1990 levels, and economic uncertainty at 1970-90 levels, then household indebtedness might be more appropriate at 65% of GDP or even 50% of GDP. Even if the current pace of GDP growth combined with defaults and savings continues, it would take until 2016 or 2019 to reach those levels once more.</p>
<p><img alt="" src="http://www.mauldineconomics.com/images/uploads/newsletters/130201_OTB_chart_6.jpg" style="width: 600px; height: 263px;" /><br />
<em>Source: Haver, Federal Reserve</em></p>
<p><img alt="" src="http://www.mauldineconomics.com/images/uploads/newsletters/130201_OTB_chart_7.jpg" style="width: 600px; height: 241px;" /><br />
<em>Source: Haver, Federal Reserve</em></p>
<p>A potential problem with the above estimates (indeed, with using debt/GDP or debt/income at all) is that they compare stocks with flows, and the resulting numbers are not just percentages, but should be given the correct units, which are “years.” There is no reference to the cost of the debt, its maturity, assets or growth of GDP.</p>
<p>One additional and useful measure would be the amount needed to service the debt. The Fed measures this by dividing the estimated payments on debt (inc. principal; e.g., minimum payments on credit cards and mortgage amortizations) by disposable personal income. In this way, longer maturities and lower real interest rates are better captured—and the result looks dramatically different, as shown in Figure 8. At 10.6% of income, the actual burden of debt is as low as it was in the early 1980s and early 1990s, after recessions and rate cuts. The broader measure, which includes auto lease payments, rent, homeowner’s insurance and property tax, is likewise near its historical troughs (below 16% of income, down from 19% in 2007). Although there was not the dramatic net deleveraging the U.S. is experiencing now, after a period of 4 years in the first case and 2.5 years in the latter, robust growth and leveraging were ready to begin again, and even tolerate aggres sive hiking cycles. However, in the early 1980s and 1990s, inflation (and nominal GDP) was running at over 10% and 6%, respectively—that has not been the case during this deleveraging episode.</p>
<p><img alt="" src="http://www.mauldineconomics.com/images/uploads/newsletters/130201_OTB_chart_8.jpg" style="width: 600px; height: 336px;" /><br />
<em>Source:</em> <em><a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=U8GusXYvzQrI-2BTfpBInOi53kbqOtjseShlePd1AMO2noqXTQU-2FvVcdYwU7FR521LoOmCiRnD5bYFs58iz5X5zw-3D-3D_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BJqj4MbpuY6BBAq-2Bcyvdn6Rc4O91XUMViJy-2BVm4Vs6JuLcskdqNwlbxZpRrKlaK5RhW-2BcBBI50NgHhprBOSEmQ3Hzlc-2BnY-2BSE6U5gGWU3ogCzZT0Uk-2Bu-2FiBjXYW9L44iSKiKFEpsWon8b-2B3N7fMCt6GI6cu8Wy2i-2FSS6yVLhPQPWg-3D-3D">Household Debt Service and Financial Obligations Ratios</a></em> <em>and U.S. Flow of Funds reports, Federal Reserve</em></p>
<p><strong>Enter the Fed</strong></p>
<p>The Fed is determined to push on a string until a significant improvement in labor-market conditions comes about. This will help nominal growth (rather than real), which seems to be the goal/target at this point (and not just for the Fed)—and also hopefully the achievement of <a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=U8GusXYvzQrI-2BTfpBInOi0gm1Y-2BPYdJ6WrAfJsE2A9auiiKhluUIsbpYp497zsKJJpM15AiWmyIuedE4QYPPlWDC2A2SvHsQwoGd2qyIf-2F7NNFD0pMd-2BvXSxOq6iKMCC8LiP0PEDCcqxE-2B-2BBNu3UUsq-2Bq4pa4f8Ev1fzp-2BeI8lv-2FnOWYRQBdbsDq0MigObma_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BJqj4MbpuY6BBAq-2Bcyvdn6RoCsbDyr1plvCRNqSOK-2F8Gq0DUOa3Yceuo5w1bLf-2Fne0HGHpVk4DBvzt6CVdTRJSDoqhIQ50S2yKMmgB568Ps9-2FnmptoY7AKGCQW-2F9nWAUtAZxMYtBA58Vs14ZdHlLRgh-2FJ1wbPv9O9AyR5YnsdUCbg-3D-3D">an even more beautiful deleveraging...</a>, comparing and contrasting with that of Japan for example (Figures 9 and 10).</p>
<p><img alt="" src="http://www.mauldineconomics.com/images/uploads/newsletters/130201_OTB_chart_9-10.jpg" style="width: 600px; height: 295px;" /><br />
<em>Source: Bureau of Economic Analysis, U.S. Treasury, Bank of Japan and Cabinet Office of Japan</em></p>
<p>QE3 will help prompt another wave of refinancing, but will it unlock the credit channel? The other not so good news on page 8 of the Fed’s Z.1 report is that the domestic financial sector is still in deleveraging mode (Figure 11).</p>
<p><img alt="" src="http://www.mauldineconomics.com/images/uploads/newsletters/130201_OTB_chart_11.jpg" style="width: 600px; height: 348px;" /><br />
<em>Source: U.S. Flow of Funds, Federal Reserve</em></p>
<p>It is important to remember that deleveraging is a vague term, if not a euphemism. Although it can take place through the saving and repayment of debt, it is also possible through other processes: Namely, default and inflation/growth. While nominal GDP growth is anemic, time is an important factor in the healing process. Defaults, on the other hand, are quick, but painful. And there has been plenty of pain to go around, but it is largely abating (Figures 12 and 13). In particular, after the spurt of subprime and Alt-A defaults that were inevitable, the bottoming out of housing, the belated and poorly implemented HARP programs and the weak recovery have stabilized mortgage defaults and foreclosures. If there is one sector to be worried about, it is <a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=U8GusXYvzQrI-2BTfpBInOi0Xl9wO0fcRfGMk-2BHnTReTvfF0bwBWq3lYPuVIMBf7N0qEc3-2Bxx41O3AUsF5f68n72S1TjY-2F44ZRNv1B5t5bBZFkoh-2BbVo0G4sv3ibXgZ5lWtJ36onhUrEIAi7um4ON1Q-2BuNbRExrCPmIXProDxQ86U-3D_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BJqj4MbpuY6BBAq-2Bcyvdn6RZyMqSaJTOhuwvN8Wc9OcHPJkaIV6yDWNp2CoXe-2BK41NabS9ByssPeUBzQaX47ibBxJugmsnXxQWvVFJpuSPM4QkxdezhmLSCugTArJo-2FWUMhUErRUqTZf5ncz2VulMcFNKyM4Cjrs-2BYJjGz9MnMHOg-3D-3D">student loans</a>. Although these loans are largely a federal exposure and total a mere $ 1 trillion (and so unlikely to trigger a systemic financial explosion), the sector is now bigger than auto loans or credit card debt, and is likely to be a dual burden on the current crop of college graduates, together with joblessness and underemployment.</p>
<p><img alt="" src="http://www.mauldineconomics.com/images/uploads/newsletters/130201_OTB_chart_12-13.jpg" style="width: 600px; height: 254px;" /><br />
<em>Source: Federal Reserve Bank of NY, Haver</em></p>
<p><strong>Conclusion</strong></p>
<p>From a balance-sheet perspective, the U.S. household sector is coming to the end of its period of deleveraging that began in 2008. Wealth has been rebuilt (Figures 4 and 5), debt has been cut through defaults and repayment, and incomes have recovered (Figure 14 shows the detailed decomposition of this process). As long as interest rates remain low, and deflation is avoided, a more normal period may soon begin, although debt levels in some sectors remain high. As households join corporates in borrowing (at a rate, one hopes, more in line with incomes and demographics), consumption and investment (residential and capital) will support a rate of GDP growth that will gradually return to the potential level, even as the baton is passed from <a target="_blank" href="http://email.mauldineconomics.com/wf/click?upn=U8GusXYvzQrI-2BTfpBInOi-2FAm6X1xG6kRGltrJSwoDKrApf-2FwC2ZEKpuBz65IxQt9ShE6AVInnl7-2B3G-2FIcWr-2F5A-3D-3D_JKLR1FBU0q0IqxJGrTtbPy0jh07eeWdb9hfaEUCFT-2BJqj4MbpuY6BBAq-2Bcyvdn6RMFGV51RcysHiZBiJZZR7xqJtDndx2BsHs4QkghZYCWJGP8QlFR9816dZv6klx67lKl8n6wa19D8uDEiEXVKVUScge2Lt-2FIz-2BQ8-2FMzyXNynELaLTtLcbgKuwp69T-2BE8UCqcCvk4lT0PYVfUtw2WCYmA-3D-3D">government income support and generous tax cuts</a>. But important questions to keep in mind, which we will address in forthcoming analysis, include the following:</p>
<p style="margin-left: .25in;">• What will happen to real wages, disposable income growth and savings?</p>
<p style="margin-left: .25in;">• Will the mini releveraging cycle, helped by low real rates and painstaking repayment, be killed off by the fiscal adjustment in the U.S. (even if the austerity is not as severe as it might have been under a full “cliff” scenario)?</p>
<p style="margin-left: .25in;">• Will recession/slowdown in the eurozone and China damage corporates and banks via financial conditions and sentiment, or hurt household balance sheets via the equity markets?</p>
<p style="margin-left: .25in;">• And even if assuming that deleveraging in the private sector is over in aggregate and across different types of liabilities, what will credit growth look like in the U.S. in the near future, and to what levels will leverage converge in the medium term... and what would that mean for growth?</p>
<p><img alt="" src="http://www.mauldineconomics.com/images/uploads/newsletters/130201_OTB_chart_14.jpg" style="width: 463px; height: 522px;" /><br />
<em>Source: RGE</em></p>
<p><em><img alt="" src="http://www.mauldineconomics.com/images/uploads/newsletters/130201_OTB_chart_15.jpg" style="width: 600px; height: 229px;" /></em><br />
<em>Source: RGE, Bloomberg, Federal Reserve Bank of St. Louis FRED</em></p>
<p></p>
<p><em>Reprinted with authorization from <a href="http://www.mauldineconomics.com/images/uploads/pdf/130201_OTB.pdf" target="_blank">John Mauldin</a> Outside The Box <a href="http://mauldineconomics.com">http://mauldineconomics.com</a></em></p>
</div>Blocking Stimulus For Politcal Gains?http://stockbuz.ning.com/articles/blocking-stimulus-for-politcal2010-08-29T20:30:00.000Z2010-08-29T20:30:00.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><em>Todays post from <a href="http://www.ritholtz.com/blog/2010/08/blocking-stimulus-for-political-gains/">Barry Ritholtz</a> refers to an accusation that further stimulus is being put off until <u>after</u> the November elections; something I strongly believe in, and eerily similar to my previous post on <a href="http://stockbuz.ning.com/profiles/blogs/1931-european-depression-redux">1931 European Depression Redux</a> where Austrian officials are putting off their 2011 budget until after their Fall elections [an unconstitutional act by the way]. Will we see more of this posturing for political gains across the globe? Me thinks so. I look forward to your thoughts and comments below. For your StockBuz consideration:</em></p>
<p></p>
<blockquote style="MARGIN-RIGHT: 0px" dir="ltr">
<blockquote>
<p><span style="FONT-SIZE: 1.2em"><font size="4">“Now I’m looking at the political system turning itself into a paralyzed beast. A lost decade now looms as a much bigger risk. The Fed’s running out of powder; Its really powerful ammunition has been expended.”</font></span></p>
<p>-Alan Blinder, former vice chairman Federal Reserve, on whether the US could sink into a Japan-style quagmire</p>
</blockquote>
<p><span style="COLOR: #ffffff">></span></p>
<p><a href="http://www.ritholtz.com/blog/wp-content/uploads/2010/08/29goodmangrphic-popup.jpg" target="_blank"><img class="size-full wp-image-58507 alignright" title="29goodmangrphic-popup" alt="" src="http://www.ritholtz.com/blog/wp-content/uploads/2010/08/29goodmangrphic-popup.jpg" width="206" height="374" /></a>Peter Goodman has a longish article in the NYT Week in Review, <a href="http://www.nytimes.com/2010/08/29/weekinreview/29goodman.html" target="_blank"><font color="#0066CC">What Can Be Done to Cure the Ailing Economy?</font></a>.</p>
<p>It is notable for a few reasons: Great chart porn (see right), a few good quotes (see above), and a bombshell from Bruce Barlett, the Treasury economist in the first Bush administration.</p>
<p>Bartlett has become a pariah to the Republican party, saying out loud what few people dare to even think. He notes that we are already in gridlock, with the GOP deploying a blocking strategy. He thinks nothing substantive is going to change for a simple reason:</p>
<blockquote>
<p>“Clearly, a <span style="TEXT-DECORATION: underline">weak economy in 2012</span> will be very good for whoever the Republican presidential candidate is. It’s hard to see how the Republicans lose <span style="TEXT-DECORATION: underline">by blocking stimulus</span>.”</p>
</blockquote>
<p>That is a pretty damning accusation. Bartlett is essentially arguing that the anti-stimulus crowd is doing so not for ideological beliefs, but for political advantage. He is implying their goal is to keep the economy weak in order to prevail politically.</p>
<p>That is quite an accusation . . . Do any of you buy it?</p>
<p><span style="COLOR: #ffffff">></span></p>
<p><em>Source:</em><br />
<a href="http://www.nytimes.com/2010/08/29/weekinreview/29goodman.html" target="_blank"><font color="#0066CC">What Can Be Done to Cure the Ailing Economy?</font></a><br />
Peter S. Goodman<br />
NYT, August 28, 2010<br />
<a href="http://www.nytimes.com/2010/08/29/weekinreview/29goodman.html">http://www.nytimes.com/2010/08/29/weekinreview/29goodman.html</a></p>
</blockquote>
</div>Pring Turner Capital Trend & Outlookhttp://stockbuz.ning.com/articles/pring-turner-capital-trend-amp2010-01-23T03:10:45.000Z2010-01-23T03:10:45.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div>Came across this presentation @ <a href="http://www.tradersnarrative.com/" target="_blank">tradersnarrative</a> <a href="http://www.pringturner.com/newsletters/tsa.pdf">http://www.pringturner.com/newsletters/tsa.pdf</a> and believe you would all find it very interesting as they outline where they believe the market is at and where it is headed in 2010. Doesn't make them right, but lots of good info. Short story, they believe we should be selling financials and consumer discretionary at this juncture and materials will be the place to be in 2010. At least for a while.
</div>