Home » 2011
Yearly Archives: 2011
In the last summer, David Rosenberg made the recession call – he’s 99% sure the US will slip into recession. Despite a very volatile second half of 2011, the recent data on unemployment, consumer confidence and housing sales all seemed to indicate the US economy is getting better.
But according to the leading economic indicator, shown below, the US economy is still pretty much under recession-watch territory. Since late 1960s, the indicator only missed once in predicting the onset of recession — the second half of 2010. In other words, at the current level of the index, there is a very high risk that the economy is likely to head down, not up. So will the indicator miss the target again, or we are indeed heading into another recession in 2012?
[singlepic id=32 w=400 h=300 float=]
In the following video interview, the author of ECRI leading indicator explains to Bloomberg’s Tom Keen why he thinks the US is still not out of woods yet.
According to WSJ, the ECB last week rushed out emergency support for the euro-zone banking system, laying out an unprecedented €489 billion at its first-ever three-year lending operation.
The amount of money parked by euro-zone banks in the ECB’s 0.25% deposit facility surged to another new record of €452.03 billion Tuesday (Dec.27) , up from €411.81 billion over the Christmas break and well above the previous record high of €384 billion. News that euro-zone banks are parking more and more cash at the ECB’s low-yielding, but safe, deposit facilities adds to evidence that banks are more concerned with seeing out the year in safety than with putting it to work in the real economy or the euro-zone debt markets.
Watch this interview of Bob Mundell – he thinks this is the game changer, a blockbuster event.
Dennis Gartman seriously doubted it. In his recent investment newsletter, Gartman describes how Europe has arrived at its own “Lehman moment.”
The problem in Europe is that we’ve arrived at Europe’s own “Lehman-moment” when banks and institutions are wholly unwilling to lend money to anyone, anywhere. They are willing to draw down their lines of credit from the ECB, but they are re-depositing those borrowings back to the ECB itself. Initially we thought this reasonable. Initially we thought that the banks drew down their lines from the Central Bank and re-deposited them with the Bank awaiting investment elsewhere. We thought this normal. Now, however, we consider it disconcerting for it shows the utter sense of confusion and the even more utter sense of fear that has engulfed the banking system in Europe. Rather than viewing these new credit lines from the ECB as a source of funding for investment, the banks in Europe are viewing those ECB-created funds as a source of “fear capital” to be used should worst-come to-worse on the continent. Fear rather than optimism is driving the banking system.
We fear then that worse is about to happen, for the very core of things banking and economic depend upon trust and trust is now wholly lacking in Europe.
2011 will go down in history as one of the most volatile years for the stock market: The Dow Jones Industrial Average swung 100-plus-points from open to close more than 100 times.
Market timing became extremely difficult, especially after July. The best strategy should be just staying put, holding cash. You do better by doing nothing.
This chart gives you a nice illustration of what we have been through:
[singlepic id=31 w=400 h=300 float=]
The latest housing price, as captured by the Case-Shiller Index, continued to fall in October. Here are two sharp charts from Calculated Risk.
[singlepic id=27 w=400 h=300 float=]
Accumulated price fall by major US cities:
[singlepic id=26 w=400 h=300 float=]
Combined with latest sales figure, the inventory of existing home sale, after a faked jump due to government’s incentive program, seemed starting to move again. However, the new home sale is still very much depressed.
[singlepic id=28 w=400 h=300 float=]
[singlepic id=29 w=400 h=300 float=]
According to PNC’s Stuart Hoffman, 2012 will be a transition year for the housing market. The hope is that the gradual fall of the housing price may eventually clear the inventory, six years after the last housing peak.
If the economy turns weaker in 2012, the Fed may eventually be forced to buy more mortgage-backed securities. However, the likelihood of any household debt relief program is dim, considering the current fiscal situation. In 2012, we are likely to see a continued muted growth in the US. Now people began to appreciate the importance of housing in driving business cycles. Without robust recovery in US housing market, any talk of V-shaped recovery only sounds foolish.
Ronald Coase, Nobel-winning economist, whose economic theory on property rights has had a profound impact on China’s economic reform in the past 30 years, prescribes medicine for China’s long-term sustained economic growth: to have a free market for ideas.
What Coase essentially argued was that China needed to have a free and open society. This would immediately mean the transformation of the current political regime.
Watch this ten-minute video:
The recent initial claims on unemployment benefits shows a major improvement in the US labor market:
Similar to the soft budget constraints (or SBC) under former socialist countries, the budget rule under EU treaty is also “soft” in a sense that violating the rule won’t be really punished. Punishments, such as kicking the “rogue” member country out of the union, run contradictory to the political ambition of the European Union and would risk breaking the union altogether.
The other option is to rein in the government spending of the member countries. But that would require a centralized authority with direct control of the member countries, especially on their fiscal policies, i.e., how governments spend their money. At current stage, Europe is not ready for such radical change, which requires a big surrender of their own sovereignty. So what Europe will likely end up is a fake fiscal union with soft budget rules. The moral hazard problem is unsolved. Rest assured to see more budget rule violations in the future.
The following map from WSJ gives a very nice summary of how the union’s budget rule had been violated in the past.
[singlepic id=24 w=400 h=300 float=]