So to my surprise, Obama's deficit reduction committee announced some ideas recently. http://www.foxnews.com/politics/2010/11/10/deficit-commission-recommends-changes-social-security/ . The reason it surprised me is that usually these types of committees don't amount to anything. But, since they are led by some former politicians, they are savvy and know that the first person to propose something sets the discussion for the future debate.
As for the actual merits of their proposals? I would love to hear from the expert on government spending, Mr BQ Budget Master.
Thursday, November 11, 2010
Dirty Sexy Money
Money and politics go hand in hand, but luckily, there is still some hope for democracy. This site lists candidates by how much of their own money they spent on their election. As one can see, the self funders don't have the greatest record. http://www.washingtonpost.com/wp-srv/politics/dollars-per-vote/index.html
However, there is still plenty of money in politics with so much political fundraising as well as outside spending. I guess we need to make some smart investment choices so we can buy votes in the future.
Tuesday, November 9, 2010
Something interesting from MMC's earnings report
Marsh and McClennan (MMC) has been a perpetually disappointing stock and the single worst of my DRIP plans since I bought it in 2005. That was one of those cases where I tried to venture into something I didn't understand after they had a bid rigging scandal that crushed the performance of their primary insurance brokerage unit and then had a scandal in their Putnam Funds unit as well. The result was that until recently every single earnings report they had was an incredible disappointment. Now they are just mildly disappointing.
In any case, when I was going through their press release, I couldn't help but notice that Mercer Consulting is seeing strong revenue growth in the area of health benefits (8% growth on an underlying basis). Earlier this year they were only experiencing about 2% growth. It could be that comparisons are easier now, though I don't quite think that's the case. More likely, this is an interesting side effect of the health care reform law. An entirely different storyline is visible in their "Rewards, Talent & Communications" line which often has to do with HR consulting for executive compensation packages. The growth there was quite strong at 12% on an underlying basis. It's possible that this signals more white collar employment and compensation growth in the near future, though it is good to avoid reading too much into any one number.
In any case, when I was going through their press release, I couldn't help but notice that Mercer Consulting is seeing strong revenue growth in the area of health benefits (8% growth on an underlying basis). Earlier this year they were only experiencing about 2% growth. It could be that comparisons are easier now, though I don't quite think that's the case. More likely, this is an interesting side effect of the health care reform law. An entirely different storyline is visible in their "Rewards, Talent & Communications" line which often has to do with HR consulting for executive compensation packages. The growth there was quite strong at 12% on an underlying basis. It's possible that this signals more white collar employment and compensation growth in the near future, though it is good to avoid reading too much into any one number.
Milton Friedman on the Gold Standard
Since Robert Zoellick, a man of a profoundly meager intellect, decided to open his trap on the Gold Standard, I think it might be worth having a man of a far greater intellect speak on the subject. While I certainly do not endorse everything Milton Friedman stood for, he was a brilliant man who was a generous enough man to recognize the brilliance of Keynes even though he disagreed with him vehemently.
Robert Zoellick is an Idiot
http://www.ft.com/cms/s/0/213e17aa-eb5d-11df-b482-00144feab49a.html?ftcamp=rss#axzz14mw57feO
Basically, Robert Zoellick, head of the World Bank, is saying that we should entertain the return of gold-backed currency largely because markets, at the moment, are treating gold as an alternative to paper currency. Somehow, he believes, currencies backed by gold would provide more stable economies. Never mind that while global economies were on the gold standard in the 19th and early 20th centuries we had routine severe financial crises about every seven years and a very nasty tendency toward deflation.
James Hamilton over at Econbrowser has a fairly succinct post on this matter about how the gold standard actually contributed to the Great Depression (and probably made previous depressions worse as well). http://www.econbrowser.com/archives/2005/12/the_gold_standa.html
Basically, Robert Zoellick, head of the World Bank, is saying that we should entertain the return of gold-backed currency largely because markets, at the moment, are treating gold as an alternative to paper currency. Somehow, he believes, currencies backed by gold would provide more stable economies. Never mind that while global economies were on the gold standard in the 19th and early 20th centuries we had routine severe financial crises about every seven years and a very nasty tendency toward deflation.
James Hamilton over at Econbrowser has a fairly succinct post on this matter about how the gold standard actually contributed to the Great Depression (and probably made previous depressions worse as well). http://www.econbrowser.com/archives/2005/12/the_gold_standa.html
Sunday, November 7, 2010
QE and the Macro Climate for Stocks, Bonds, and Commodities
Since the Fed has decided to further monetize the debt in bid to try even more monetary stimulus, a few things are clear. One is that the Federal Reserve is absolutely nowhere near tightening and won't be for many months to come. That should be no surprise considering the size of the present shortfall in employment. The other is that the dollar looks like an extremely unfavorable investment right now, meaning that foreign stocks are comparatively more attractive in the interim as the supply of dollars will increase greatly as well as the fact that US interest rates will do a poor job of attracting fixed income investments. Foreign investors holding dollar denominated investments better watch out.
One thing that is abundantly clear is that financial markets have interpreted this Fed action as an all clear signal and everything from gold to Goldman Sachs (GS) has joined in. We are not in bubble territory in the stock market, though we are almost there in some, though not all, commodities markets. Those who are using commodities as a substitute for investing in financial assets in times of loose monetary policy continue to push those assets further and further from their fundamental values. There is no need to be worried about a bubble being fueled in the real estate markets. Those are so far deflated that no amount of monetary or fiscal stimulus could re-inflate them because investor expectations of returns have been so brutally throttled.
In the short run, meaning the next few weeks, I would not be stunned to see some retracement of recent gains on the order of as much as 5% in domestic stock markets. However, the next 12 months or so should be quite good. Earnings growth for the time being is strong and interest rates will not be a headwind. Commodities markets are probably a better than even shot to outperform in this environment as this global distrust of "paper" currencies seems to really be hitting a frenzy. However, once this current period of extremely loose policy relents those investments will crack much worse than the equity markets in the aggregate because there is much less of a link to fundamental value.
Stocks are supported by extraordinary levels of corporate profitability that make overall valuations quite reasonable. This is due in no small part to the current levels of slack in the labor markets that allow corporations to enjoy a larger share of productivity gains without passing them along as wage increases. However, lack of investment in both human and physical capital means, to a large extent, that corporations are cannibalizing future earnings for current earnings. Invariably this means that future earnings growth will be relatively muted as corporations need to hire and expand plant and equipment to grow sales as conditions normalize. That will prove to have a dampening effect on the later stages of the present rally.
Bonds, on the other hand, are currently being supported by Fed purchases, but this obviously will wear off, particularly as investors in long term bonds become frustrated by their low rates of return compared to high rates of return elsewhere. As such, prices will fall and yields will rise, possibly considerably. Long term treasuries are thus not a particularly good place to be.
Now, all of this is just my own opinion, which in no way constitutes professional advice, and I could certainly be wrong as I have been in the past. Still, it seems to me that this represents a fair summary of where we are right now.
One thing that is abundantly clear is that financial markets have interpreted this Fed action as an all clear signal and everything from gold to Goldman Sachs (GS) has joined in. We are not in bubble territory in the stock market, though we are almost there in some, though not all, commodities markets. Those who are using commodities as a substitute for investing in financial assets in times of loose monetary policy continue to push those assets further and further from their fundamental values. There is no need to be worried about a bubble being fueled in the real estate markets. Those are so far deflated that no amount of monetary or fiscal stimulus could re-inflate them because investor expectations of returns have been so brutally throttled.
In the short run, meaning the next few weeks, I would not be stunned to see some retracement of recent gains on the order of as much as 5% in domestic stock markets. However, the next 12 months or so should be quite good. Earnings growth for the time being is strong and interest rates will not be a headwind. Commodities markets are probably a better than even shot to outperform in this environment as this global distrust of "paper" currencies seems to really be hitting a frenzy. However, once this current period of extremely loose policy relents those investments will crack much worse than the equity markets in the aggregate because there is much less of a link to fundamental value.
Stocks are supported by extraordinary levels of corporate profitability that make overall valuations quite reasonable. This is due in no small part to the current levels of slack in the labor markets that allow corporations to enjoy a larger share of productivity gains without passing them along as wage increases. However, lack of investment in both human and physical capital means, to a large extent, that corporations are cannibalizing future earnings for current earnings. Invariably this means that future earnings growth will be relatively muted as corporations need to hire and expand plant and equipment to grow sales as conditions normalize. That will prove to have a dampening effect on the later stages of the present rally.
Bonds, on the other hand, are currently being supported by Fed purchases, but this obviously will wear off, particularly as investors in long term bonds become frustrated by their low rates of return compared to high rates of return elsewhere. As such, prices will fall and yields will rise, possibly considerably. Long term treasuries are thus not a particularly good place to be.
Now, all of this is just my own opinion, which in no way constitutes professional advice, and I could certainly be wrong as I have been in the past. Still, it seems to me that this represents a fair summary of where we are right now.
Sometimes the interplay between politics and economics doesn't make sense:
http://www.ritholtz.com/blog/2010/11/wtf-data-point-dems-lost-seats-better-economies/
When you think about it, Democrats did quite well in California (12%+ unemployment) and quite badly in my home state of Wisconsin (7.8% unemployment). Does that make much sense? Not really. Of course, I have argued that we are simply in an era of dramatic political volatility rather than any particular ideological movement one way or the other. If you look at Europe, center-right governments in Germany, France, and Italy are all on the verge of collapse or are at the very least deeply unpopular. The newly elected center-right government in the UK already has fallen behind Labour in recent polling.
At the same time, Japan has recently lurched right after electing its first clear center-left government in several decades. Some of the Latin American governments seem to be shifting right, though that certainly didn't hold in Brazil where the Worker's Party (which is effectively Socialist) won quite easily. Spain's socialist government is probably quite likely to lose when the next election happens there due to truly crippling unemployment rates and an economy very unlikely to right itself anytime soon.
We are simply at a time where it is advantageous not to be in power and this was even true in 2008 as well. There were parts of the Democrats' success, or alternatively the Republicans' weakness, that under most elections would have been quite stunning, but in an environment of extreme economic strife such things can happen. The same applied this year as well in reverse.
I suspect that 2012 will see a fairly large number of seats change hands again in the House. If we enter a protracted period of stagnation, or something that at least feels like it, don't be surprised if party control changes routinely. The interesting consequence of that is that we might see truly paralyzed decision making at a time when fairly decisive action is required.
When you think about it, Democrats did quite well in California (12%+ unemployment) and quite badly in my home state of Wisconsin (7.8% unemployment). Does that make much sense? Not really. Of course, I have argued that we are simply in an era of dramatic political volatility rather than any particular ideological movement one way or the other. If you look at Europe, center-right governments in Germany, France, and Italy are all on the verge of collapse or are at the very least deeply unpopular. The newly elected center-right government in the UK already has fallen behind Labour in recent polling.
At the same time, Japan has recently lurched right after electing its first clear center-left government in several decades. Some of the Latin American governments seem to be shifting right, though that certainly didn't hold in Brazil where the Worker's Party (which is effectively Socialist) won quite easily. Spain's socialist government is probably quite likely to lose when the next election happens there due to truly crippling unemployment rates and an economy very unlikely to right itself anytime soon.
We are simply at a time where it is advantageous not to be in power and this was even true in 2008 as well. There were parts of the Democrats' success, or alternatively the Republicans' weakness, that under most elections would have been quite stunning, but in an environment of extreme economic strife such things can happen. The same applied this year as well in reverse.
I suspect that 2012 will see a fairly large number of seats change hands again in the House. If we enter a protracted period of stagnation, or something that at least feels like it, don't be surprised if party control changes routinely. The interesting consequence of that is that we might see truly paralyzed decision making at a time when fairly decisive action is required.
Saturday, November 6, 2010
How Big is the Employment Gap?
When trolling around blogs, I've seen some discussion about the size of the employment "gap". Put simply this is the difference between where we would be in total employment in a healthy labor market relative to our labor force compared to where we are now. The old rule of thumb that is used is that we have to create about 150,000 jobs a month just to break even on this proposition. Given that we were seeing employment contracting virtually non-stop from the beginning of 2008 until the end of 2009 by a total of nearly 8 million and have grown by less than 100,000 a month on average since then, this gap is huge.
However, there are some complications in arriving at it. One is that the proportion of the adult population involved in the labor force is not a constant even beyond the swings related to economic activity.
By the way, the reason that the trend has kinks in it is that the non-institutional civilian population number tends to be adjusted periodically and that leads to these one-time adjustments like that. In any case, by this measure we are 11.4 million below where we need to be. What's interesting is that we barely got where we needed to be in the last expansion because it was quite weak. One could argue that outside of the housing bubble and its associated positive effects including booms in the construction and financial services industries, we didn't have much of an expansion at all between 2002 and 2007. Growth was sub-par as it was and Lord knows where we would have been in absence of the housing bubble. Going forward, it appears that the number of new jobs we need in the establishment survey to break even is around 116,000 a month.
The employment gap isn't necessary to close in order to restore growth, but until it starts narrowing a great deal you are going to have substantial downward pressures on wages. The prospects for generalized inflation with this much slack in the labor market are quite low.
However, there are some complications in arriving at it. One is that the proportion of the adult population involved in the labor force is not a constant even beyond the swings related to economic activity.
Excluding cyclical activity, the employment to population ratio clearly was in an up trend from the early 1970s to the late 1990s as more women entered the labor force. However, it is possible that this has started to slide into reverse, but it is hard to tell at the moment given the enormous magnitude of this recession. If the employment to population ratio is actually in decline, this somewhat lowers the threshold of necessary job creation. Let's say for the sake of argument that the average of the employment to population ratio from March of 2001 (the start of the last recession) to December 2007 (the start of this recession) is a decent proxy for a healthy participation rate. That works out to be 62.79% or so. If we take that percentage and multiply it by the adult non-institutional population, we get something like this:
This is household survey data rather than the headline establishment survey data we generally see in the press. It's harder to turn establishment survey data into these sorts of numbers, but that doesn't mean that I won't try. In any case, by this measure, the employment gap is approximately 10,712,000. This gap gets worse by about 122k a month with no job creation.
Just for the sake of comparison, let's do something one should never do and compare establishment survey data to this and mix some data sets. This is a big no-no, but it's to try to put the headline number of +151k in context.
The employment gap isn't necessary to close in order to restore growth, but until it starts narrowing a great deal you are going to have substantial downward pressures on wages. The prospects for generalized inflation with this much slack in the labor market are quite low.
Friday, November 5, 2010
October Employment Report
The overall change in non-farm payrolls was +151,000. The interesting piece was what happened to hours worked in that the aggregate hours worked increased a smidge over 0.4%, which is actually a very strong number. Government continues to be a drag, but not in the way that some who say that government is out of control would imagine as employment dropped 8,000. Interestingly, with revisions, the private sector has gained more than 100,000 jobs each of the last three months while government has averaged nearly 100,000 in losses.
Overall, this was actually a flat-out solid report and it does seem to echo what we saw in the ISM indices earlier this week. We still aren't going to make any meaningful dent in unemployment for several months even if we keep this rate up.
Overall, this was actually a flat-out solid report and it does seem to echo what we saw in the ISM indices earlier this week. We still aren't going to make any meaningful dent in unemployment for several months even if we keep this rate up.
Wednesday, November 3, 2010
October Auto Sales Fairly Strong
In case you missed it, October was a, by recent standards, a banner month for auto sales. We are still at levels that during normal times would indicate serious problems or would otherwise be dismissed a freakishly low, but the fact that the automakers are profitable at these sales levels speaks well to the performance of their stock prices.
Ford (F), has had quite a nice run as well all know, but it still is not that richly valued. According to Marketwatch data, it's trading at a little over 7x forward earnings estimates, which are probably too low. Even after rising so much so fast, it's still not exactly that rich. Now, will you make 10-fold on your money again? Certainly not. However, a decent 40% from here is certainly conceivable.
Looking elsewhere in the automotive sector to automotive parts suppliers, I don't see so many good buys, however. Borg Warner (BWA) is looking a little pricey, at least relative to the market. Johnson Controls (JCI), a personal favorite of mine, looks good from here, but not better than Ford. I kind of like Dana (DAN), but it still doesn't exactly scream "buy".
All of them have had impressive one year runs, however.
Notice the S&P 500 down there, having a respectable 15% gain that looks positively puny. Normally, after a sector has had such a break-out performance one would expect that it might be about to go through a phase of dramatic underperformance. However, before that happens I think there is still room to run for the sector as a whole, though Ford seems to be the best positioned. As for the looming GM IPO, I would need to take a good look at their financials. They've been somewhat opaque while in their quasi-public-private status.
Ford (F), has had quite a nice run as well all know, but it still is not that richly valued. According to Marketwatch data, it's trading at a little over 7x forward earnings estimates, which are probably too low. Even after rising so much so fast, it's still not exactly that rich. Now, will you make 10-fold on your money again? Certainly not. However, a decent 40% from here is certainly conceivable.
Looking elsewhere in the automotive sector to automotive parts suppliers, I don't see so many good buys, however. Borg Warner (BWA) is looking a little pricey, at least relative to the market. Johnson Controls (JCI), a personal favorite of mine, looks good from here, but not better than Ford. I kind of like Dana (DAN), but it still doesn't exactly scream "buy".
All of them have had impressive one year runs, however.
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