Mixed picture on global inflation

Inflation in New Zealand, inflation in Dubai, low, inflation in Vietnam, low, inflation in India, low, little inflation in China, low inflation in Denmark, low inflation in Australia, low Indonesian inflation, and seemingly low inflation in The United States.

But what about American inflation – can we look deeper? The chart above shows US inflation, first monotonically then broken up as follows: first, overall inflation (CPIAUCSL, black line), compared to Medical Care inflation (CPIMEDSL, blue line), Food and Beverage inflation (CPIFABSL, red line) and Energy inflation (CPIENGSL, yellow line) from June 1st, 2007 – the start of the Credit Crunch – to the present. All series have been based line at the start, the data is captured monthly, Seasonally Adjusted

Across the board, since the onset of The Credit Crunch inflation is relatively subdued, overall running at 3.96%, with medical inflation the highest (7.90%), followed by food (7.28%) and a fall in energy prices of -3.96%. Just ain’t no inflation to be seen.

Most agree that inflation is coming; its just a question of who will be impacted and to what extent, with at least one analyst suggesting ” a 30 percent increase in consumer prices over the next 10 years.” couldn’t be ruled out.

Now you know what I’m holding onto my gold.

Where are the manufacturing jobs?

Lots of happy news in the US media recently about manufacturing in The United States, some suggesting we are the cusp of resurgence, arguing building goods in China no longer makes sense , others suggesting that as the trade deficit is lowered somehow US Manufacturers are “gaining ground”.

However few addressed the real reason why manufacturing jobs are needed – to provide stable, middle class jobs. If there is a “resurgence” where are the jobs? The chart above shows two series – Manufacturing Hires (JTS3000HIL, black line, left axis) and Manufacturing and Trade Industries Sales (CMRMT, blue line, in real dollars, right axis), over the period January, 2000 to July, 2013 with each series captured monthly.

Manufacturing sales are most definitely increasing and have almost rebounded to 2007 levels. However manufacturing employment is moving in the other direction – down. How will it all end?

Not well I suspect. We most definitely are seeing some degree of manufacturing returning to The United States, however this driver of employment is being countered by the rise of robots, with unskilled labor jobs robots performing many unskilled jobs previously held by more expensive – and demanding – humans.

Economist had a great article on robots, particularly on how they are being adapted to work with rather than fully replace humans.

Regardless, any Robotic / Human interaction is subject to European Safety standards, specifically ISO 10218-2:2011, Robots and robotic devices — Safety requirements for industrial robots

Not a taper tantrum but something

Properly used, Corporate Bond ratings are effective tools helping marketing participants to understand risk and return. Simply put, as riskier assets will have lower ratings, and must provide an increase return to investors to entice them to purchase the assets. In other words, “the higher the risk the higher the return”.

The chart above two series, both provided by BofA Merrill Lynch. The black line (BAMLC0A1CAAAEY) tracks the yield of AAA rated corporate debt, while the blue line (BAMLC0A2CAAEY) tracks the yield of AA rated corporate debt. Each series is captured daily for the period September 6th 2012 to September 6th 2013.

On the left side of the chart you’ll see the expected relationship; AA rated debt (blue line) yield more then AAA rated debt (black line); all good. However on the right hand side the relationship is clearly violated, with AAA rated debt yielding more than AA debt. The table below shows both Moody’s and S&P ratings for a variety of borrowers. What’s going on?

Bloomberg offered a fairly detailed explanation, with one analyst suggesting “Investors have been grabbing credit risk over interest rate risk, so there’s more desire for lower credits and a little bit less desire for the AAA credits,”

Forbes suggested the difference in yields reflected little more than a difference in average maturities; i.e., AAA bonds (in their study at least) had a longer maturity and thus reflected higher risk to investors capital. Specifically, “At present, the average AAA has 13.63 years to go before it matures,versus 8.92 for the average AA. The difference, 4.71 years, is unusually large. “

A couple of cogent explanations for a genuine anomaly. Of course I’d suggest that Federal Reserve participation in the debt markets – currently purchasing $85B a month but likely to be reduced – is having an unpredictable effect.

Watch out for taper tantrums in the market as The Fed withdraws.

Is the housing recovery over?

In spite of happy news regarding US housing, I have been pretty negative about the sector’s overall prospects and it now seems the markets are corroborating this view. The chart above shows three series directly related to the US housing market; XHB, the SPDR S&P Homebuilders Index, $DJSHMB, the Dow Jones US Select Home Construction Index and $DJUSHB, Dow Jones US Home Construction Index. Each series is captured daily since May 13th, 2013. Each series demonstrates sharp falls over the period considered, specifically XHB -9.07%, $DJSHMB -18.63% and $DJUSHB -26.45%.

Homebuilders are generally considered a leading indicator of future house prices. If the share price of homebuilders are falling then it seems investors are pricing in a decrease in future sales. Markets can be considered effective predictors, due the fact they integrate the views of large numbers of disparate investors into specific prices.

And we’re seeing three other factors that collectively indicate housing prices are due to slow, and perhaps even reverse in the near term.

First, much of the activity is being driven by individual investors and hedge funds.

Second, spot prices of key commodities – copper and lumber – are falling. In a sustained recovery we’d expect to see the basic building block of housings – copper and lumber – rising not FALLING as demand increases.

And third, as illustrated in the chart below, interest rates are beginning to rise, potentially impacting any further increases in home prices. Over the period in question we’ve seen mortgage rates increasing by roughly 1%, from 3.51% to 4.57%. While this increase might appear modest a one percent rise appears to be just the start.

Summer holiday

The four bedroom brick monster

The four bedroom brick monster

Due to a combination of summer holiday and a series of PhD deadlines I won’t be able to consistently update until Monday, September 2nd Monday, September 9th. I may be able to find time for sporadic updates and will certainly do so if the opportunity. presents.

Looking for work

mean (average) duration of unemployment, UEMPMEAN, measured in weeks, reported monthly, 2000 to 2013

Lots of happy news in the (where else?) US media about unemployment. “Things are getting better” is the underlying mantra, but if you’re unemployed and looking for work is this true?

The chart above shows the average time folks are out of a job, across two recessions. Specifically, the black line show the average time it takes to find a new job (UEMPMEAN, measured in weeks) over the past two recessions. Clearly the recovery from The Great Recession is unusual in that it now takes the unemployed 35.9 weeks to find a new job, compared to 17.9 weeks during the last period of economic expansion. Compounding matters, no economic recovery lasts forever.

Another housing bubble?

S&P Case-Shiller 20-City Home Price Index, SPCS20RSA, black line, Real Disposable Personal Income, DSPIC96, blue line, baselined at 100 on January, 2000, measured monthly

I’ve written before about the recent surge of house prices in The United States – much of which is being driven by hedge funds and private equity groups acquiring property at knock down prices to rent. The chart above shows two series: first, the S&P Case-Shiller 20-City Home Price Index (SPCS20RSA, black line) compared to Real Disposable Personal Income (DSPIC96, blue line). To aid in clarity, both series are baselined from 100 from January, 2000 and measured monthly.

Absent of speculative pressures, house prices should track real income; in other words changes in house prices should correspond with increases or decreases in incomes over time. Since house prices hit their post Great Recession low in December, 2011 they’ve rebounded some 13.5% while incomes, over the same period, have only increased 3.5%.

Evidence of a new bubble? Or will this sharp run up in a very short period of time start to lose steam. Even though a significant driver of these increases are institutional investors, some purchases are being undertaken by private individuals; increasing mortgage rates will start to taper this demand, a net negative for housing going forward. Home builder stocks, leading indicators for house prices, are already falling.

Manufacturing employment is shrinking

Manufacturing Employment, MANEMP, black line, thousands of persons, monthly, 2008 to 2013

The US media is pushing lots of happy news about a manufacturing resurgence. Headlines like “Rumors of U.S. manufacturing’s demise are premature”, “Why American manufacturing is on the rise” and “How Innovation and Location Are Leading a U.S. Manufacturing Resurgence” are common. Many of these articles focus on exports, conveniently omitting the inconvenient fact that while the businesses themselves may be thriving The American Worker simply is not.

The chart above presents Manufacturing Employment (MANEMP, black line, measured in thousands of persons, monthly) for the last five years. The table inset shows how many people are employed in the manufacturing sector monthly YTD 2013.

No jobs are being created in manufacturing. The US media continues to push a fundamentally wrong message – those solid, middle class jobs offering living wages and benefits the manufacturing sector historically produced simply are no longer being created.

Temporary employment is booming

temporary help services, TEMPHELPS, divided by total nonfarm payroll, PAYEMS, measured monthly in thousands of persons, 2003 to 2013

Lots of happy news in the US media recently about unemployment, specifically the continuing improvement in jobless claims.

Its probably best to look at the composition of the new jobs rather than then absolute number itself; the chart above shows. Specifically, two series – temporary help services (TEMPHELPS) is divided by total nonfarm payroll (PAYEMS), with each measured monthly in thousands of persons . In other words, this chart presents the percentage of the total labour force employed as temporary help.

Temporary employment is clearly booming, far exceeding increases last seen in 2006 to 2007. Generally we see a boom in temporary employment near the top of an economic expansion, as employers, scrambling to fill orders and having exhausted traditional sources of staff, move to short term contracts to get workers on whatever terms possible. As I’ve written before, the US is clearly not near the top of a “traditional” economic expansion, anything but. So I suspect what’s going on now is employers, lack necessary confidence in the economy to make a commitment to staff. In other words, temporary help is just that – temporary. If employers really believed in the so-called “economic recovery” they’d seek to acquire then lock in permanent staff. Another factor to keep in mind: every month there are between 125K to 150K new entrants to the labour force. In other words, even as the total labour force increases so does the percentage of staff who are working temporary contracts. These jobs generally lack benefits and, of course, the security of long term contracts. Not good for anyone involved I’d suggest.

A teetering economy

New Orders for Durable Goods, DGORDER, black line, Real Gross Domestic Product, GDPC1, blue line, January 2001 to May 2013, percent change from a year ago, measured quarterly, annualised

Lots of happy news about May’s increase in durable goods, with speculation about the impact on manufacturing.

Durable goods orders is a key economic indicator as this metric leads future economic activity to no small extent. Think of it this way: as orders for durable goods are placed, businesses will either increase or decrease staff levels to provide services, as well as purchase materials necessary for production.

The chart above presents two series: New Orders for Durable Goods (DGORDER, black line) and Real Gross Domestic Product (GDPC1, blue line). Both series capture percent change from a year ago, measured quarterly but annualised. Looking at durable goods we see the overall trend is down, from a peak of 27% YOY in April, 2010. At the same time GDP has effectively flatlined; in other words, in spite of very large increases in Durable Goods some three years ago there has been noticeable impact on GDP.

At the same time the US is spending some $85B in an effort to stimulate the economy. As I’ve written before, it’s not working!.