Archive for June, 2014

Who Let The PIIGS Out?

Wednesday, June 18th, 2014

Do you remember a couple of years or so ago when Europe was such an economic basket case that serious discussions about the continued existence of the Euro as a viable currency was hotly debated?  Well, Europe is still a mess in my humble opinion, but more about that later.  What I find of particular interest at this moment is the apparent vigor within some of the more problematic members of that union.

The European economy started unraveling in a serious way on the heels of our own collapse, and it did so for reasons similar to our own indiscretions.  Like us, the housing markets had soared in price,  was massively overbuilt, credit standards were continually lowered, and bad loans were bundled into obscure vehicles which tended to hide their shaky foundations.  When all of this came to a head, first here, then abroad, the subsequent collapse brought banking to a standstill, unemployment soared, and wealth began to vanish in huge chunks.  Some nations there felt the pain more deeply and many pundits did not see how they could possibly survive as viable members of the European Union.  Specifically, Portugal, Ireland, Italy, Greece and Spain were listed as those most likely to fail.  They were often referred to as a group by the acronym PIIGS.

Interest rates are typically seen as a measure of risk.  The riskier a loan appears, the higher the rate of interest levied on the loan tends to be.  Thus, back then, the PIIGS were paying a hefty premium for their troubles with percentages in some of the weakest reaching into the teens for longer dated bonds; interest rates for shorter term  paper even rose above 30% in Greece!  In Spain, seen during this period as a problem but not one as egregious as Greece, had interest rates on 10-year loans stretch up to 6.5% and higher.

While conditions today have not changed all that dramatically, interest rates have fallen substantially.  For instance, in April Greece was able to borrow via 30-year bonds at a rate of 4.5% despite seeing internal unrest continue.  But the strangest tale comes from Spain where the 10-year rate there just fell a smidgen below our own at around 2.6%!  This is a country where some states are seriously proposing secession, the king just abdicated, housing is still a mess, and unemployment persists around 25%.

How is it that the erstwhile PIIGS can now borrow so cheaply when for many of them their economies continue to teeter on the edge of recession or downright depression?  Historians may someday spin it differently, but for now we will lay this phenomena squarely upon the European Central Bank where short term rates were just dropped below zero.  That’s right; you have to pay them to hold your deposit.  It appears that money will go wherever it must to realize some kind of yield no matter how paltry or how risky that may be.  Our conclusion?  The seeds of a subsequent collapse, quite possibly worse than the last, are being planted by the very forces intended to engineer stability.           (by J R)

May Employment

Tuesday, June 17th, 2014

Traditional employment measures improved in May according to the Bureau of Labor Statistics. Unemployment remained steady at 6.3 percent and 217,000 new jobs were added in the period.  Private payrolls created 216,000 of the new positions, suggesting firms are confident enough in the future to increase the most expensive portion of their operations.

The labor market hit a couple of milestones in May.  For the first time since 1999, the economy has been able to increase payrolls by over 200,000 for four consecutive months.  Next, May was the month in which the economy was finally able to make up for all of the jobs lost during the great recession.  In other words, it took five years to add back all of the jobs lost during the 18 month recession between January 2008 and June 2009.  So we are back. Right? Well…probably not; for one thing, the economy continued to shed jobs for another six months after the recession ended, adding another 1.257 million to the tally of jobs lost as a result of the recession.  Also, there continues to be questions around the quality of the jobs being added versus those that were lost.  Then there are many other labor market metrics that are not confirming the idea of a recovered jobs market.  For instance, wages have been relatively stagnant, hours worked have not budged much, and labor participation has collapsed (although demographics are likely to blame for some of this).

Healing but not healed continues to be an accurate description of the labor market. American employers have added numerous employees to their payroll, but there continues to be a large subset within the working age cohort which has not fully recovered from the great recession.  As the expansion moves forward, some will make the transition back into working status, but how many remains a mystery.  It will largely be dependent on how much longer this recovery continues.  As a footnote, this economic upswing is getting long in the tooth by historical standards.  (by C. Cox)

April New Home Sales

Monday, June 16th, 2014

Spring is in the air, and the housing data is springing into action. In an earlier blog we wrote about the uptick in existing home sales, and now new home sales scraped off ice left over from the harsh winter and progressed in April according to the Census Bureau.  April’s sales volume on a seasonally adjusted annualized rate expanded to 433,000 units, a 6.4 percent increase over March’s 407,000 units (upwardly revised from 384,000).

Prices may have helped push the number of sales higher.  The median price paid for a new home in April fell 2.1 percent and is now $275,800.  Year-over-year, the median value fell by 1.3 percent.  For the second time in three months this price measure dropped from a year earlier.  Before February of this year, annual median price changes were positive in every month since June 2012.   Also, the average price paid for a new home in America is 2.0 percent lower, dropping to $320,100 from $326,700.  Year-over-year, the average has dipped 3.1 percent.

Inventories are analyzed two ways, and these two tallies moved in opposite directions.  There are currently 191,000 new housing units for sale, an increase of 2,000 units over March’s count.  Since housing sales improved at a faster pace than the uptick in new units, the monthly supply of homes fell to 5.3 months versus 5.6 months in March.

April’s improvement in the volume of housing transactions is seen as an encouraging sign here at Atlas.  It points to the impact weather had on this marketplace and may suggest other portions of the economy suffered a similar fate during the harsh season.  Early indications about the second quarter of 2014 are not pointing to a red hot economy but suggest more mild, spring like conditions.  Perhaps the economy will heat up in the second half of the year when the mercury’s volume also expands faster.    (by C.Cox)

Waiting for Go Dough

Friday, June 13th, 2014

There is a lot of discussion these days in financial circles about the timing of our Federal Reserve’s decision to raise interest rates.  Projections have been made for a couple of years now, always pushing the time horizon further out.  Some pundits still expect it to happen later this year.  Others are looking at some time in 2015.  Recently one of the Federal Reserve’s governors suggested such a move might not take place until 2016.

What are they waiting for?  Simply put, they are waiting for both the individual consumer and businesses to open their wallets and begin spending.  How is progress on this front to be measured?  They say they are waiting for sufficiently low unemployment and higher inflation, but bottom line, the entire issue centers around consumption and the attendant economic expansion that it is expected to generate.

For years now the Federal Reserve has increased the amount of money in our system as a way to add some oomph; they were hoping to create enough new dough to make things go.  So far, no such luck.  So they discuss tapering, raising rates, and seeking other ways to ignite the economy while never really achieving the positive results deemed adequate.  Their answer remains the same, to stay the course and wait for things to take hold.  Five years from now will we still be waiting for an event which seems to never come?         (by J R)

April Durable Goods

Thursday, June 12th, 2014

Orders for durable goods are considered a leading economic indicator.  As these requests turn into production, America’s output increases.  New orders for durable goods increased in April, the third consecutive month, according to the Census Bureau.  Up 0.8 percent, this follows March’s surge of 3.6 percent.  Transportation orders made the largest impact on the monthly tally; if they are removed, the figure increased by just 0.1percent.

Another way of approaching this indicator is to look at the order flows for capital goods from companies which are not involved in the defense business or aircraft industry.  These portions of the economy are removed because defense spending is a function of the government’s fiscal proclivity and aircraft orders tend to be very chunky since planes are expensive and usually ordered in multiples.  Atlas views this “core” measure as a proxy for business confidence, since firms are more likely to increase their capital expenditures when they expect better times ahead.  That being said, the nondefense capital goods orders excluding aircraft contracted by 1.2 percent in April.  If core durable goods orders were not so strong in March (up 4.7 percent), the downtick might be concerning, but is seems reasonable to give back some of the jump seen in the prior period.  Besides, it is still up 3.9 percent from a year earlier.

April’s tally for durable goods is encouraging.  Overall orders point to continued economic expansion. Defense and aircraft spending still count as part of gross domestic product, and those employed in these industries spend money just the same as other workers.  Atlas will look for indications of waning business confidence in the months ahead, but April’s slight downtick in core orders is not enough to create concern.        (by C. Cox)

What Has Changed? – Part One

Wednesday, June 11th, 2014

Commemorative ceremonies remembering the D-Day invasion have just been completed.  Perhaps a few of you were there back in 1944, but for most of us the memory, if it exists at all, is quite dim.  Certainly the majority of readers will refer to  history lessons when discussing this era rather than any personal experience.  Only one U.S. soldier, Eddie Slovik, was tried and executed for desertion during that period.

It may be hard to put politics aside, but I do see an interesting parallel which causes me to wonder just what has changed in America’s psyche since then.  I ask because the recent exchange of Sgt. Bowe Bergdahl for what one U.S. Senator calls a jihadist “Dream Team” seems to mark a significant change in attitude, at least in the higher levels of our government.  First off, and importantly, I am not prejudging Bergdahl as a deserter although some sort of trial to that effect appears to be certain and the firsthand testimony of members in the unit when he was serving there does at first glance seem compelling.  If the trial takes place, charges will probably include both desertion and the subsequent death of many soldiers sent to recover him.

What of the five Guantanamo prisoners who were swapped for Sgt. Bergdahl?   Two of them, Nabi Omari and Haq Wasiq, simply seem to have been regular Taliban fighter linked to Al Qaeda.  One (Khairkhwa) was a minister in the Taliban government; another, Noori, was a senior Taliban military commander.  Surprisingly, the fifth one, Fazi, also a senior commander in the Taliban Army, was actually wanted by the United Nations for war crimes being linked to th e death of thousands of Shiites in Afghanistan.  All were held by our government for over ten years while waiting for trial, a trial which will now never come.

World War II ended in 1945 and shortly thereafter the Nuremburg Trials began, charging many Germans seen as complicit in various parts of the hostilities as war criminals.  The initial trials were completed one year later.  Death sentences were delivered and carried out against men like von Ribbentrop, an ambassador, Keitel, the de facto German defense minister, and Kaltenbrunner, head of the Gestapo and intelligence.

Perhaps I am begging the issue but, had Slovik been captured by the Germans instead of the U.S., would Truman have negotiated privately with representatives of the Third Reich to swap some of these German leaders for him?  If you think not then tell me, what has changed?

This is not just idle thought or something far beyond the purview of Atlas.  Already we are seeing members of Congress questioning the legality of the negotiations made by President Obama.  If investigations do ensue, how will the resulting impact on consumer attitudes play out,  especially given the lack-luster state of our economic recovery to date?  Here at Atlas we will watch for signs of such and take appropriate measures when deemed necessary.       (by J R)

April Leading Economic Index

Tuesday, June 10th, 2014

Growth in the Conference Board’s Leading Economic Index (LEI) fell in April after March’s tally was revised higher.  Improving for the third consecutive month, the 0.5 percent increase follows upticks of 0.4 percent and 1.0 percent in February and March respectively.  Upticks suggest the economy should improve in the months ahead.

Continued growth is also being suggested by the 12-month trend in the leading index.  With the exception of the prior period, the year-over-year improvement in this indicator is the best since February 2011.  While it fell to 6.6 percent from 7.2 percent in March, the 12-month look back still points to a healthy underlying trend in output.  Taken by itself, the recent strength in this index suggests the weakness experienced in the first quarter of 2014 should be short lived because the LEI has moved past its own stall speed growth that it experienced in November 2013 through January 2014.

Here is the rub.  The uptick in the overall indicator was primarily caused by just two underlying components.  First, interest rate spreads added 0.29 to the overall uptick.  Atlas has been concerned about the artificial gap between the 10-year treasury yield and the overnight Federal Funds rate because so much of the chasm is being created by the central bank’s zero interest rate policy instead of real bond market pricing, thus making the value of the gap unclear.  More positively, building permits provided 0.24 to the headline number.  If these permits result in structures, real economic activity will be improved.  This is particularly interesting because business investment was such a drag on the economy in the first quarter.  If consumers can continue to improve their portion of output, greater business investment will lead to better gross domestic product readings in the quarters ahead.

Atlas views this release as constructive.  Even after removing the central bank influenced yield curve, the other components were a net positive.  The negative components of the indicator were either barely below zero in the period or followed very strong readings in March which were tough to beat.  It appears the current expansion will continue even after the economy’s weakness during the first three months of 2014.      (by C. Cox)