Mish's Global Economic Trend Analysis |
- Recession Sessions - 16 Songs About the "Great Recession"
- Rasmussen Employment Survey: 19% of Workers Report Their Firm is Hiring, 25% Laying Off
- Non-Manufacturing ISM Plunges Below Prediction of All 73 Economists, New Orders Collapse, Prices Firm; Did Rosenberg Capitulate at the Top?
- Is Inflation High and Rising or Low and Falling? A Four-Quadrant Model of Investing Analyzed
| Recession Sessions - 16 Songs About the "Great Recession" Posted: 04 May 2011 07:43 PM PDT Ryan Stotland of the Bull and the Bear band pinged me with an email about an album of songs regarding the "Great Recession". Hello MishIn an Email exchange with Ryan, he confirmed that 33% of money raised will go to the Somerville Homeless Coalition. The song that started it all three years ago is called Central Bankers' Dilemma. Since then, the group has added 15 more songs. For more information about the artists and the songs please see Recession Sessions. Three years and several continents later, the album is finished, but Ryan asks "is the crisis really over yet?" I have a one word answer to that question: No. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| Rasmussen Employment Survey: 19% of Workers Report Their Firm is Hiring, 25% Laying Off Posted: 04 May 2011 01:11 PM PDT In contrast to a Gallup poll that shows more companies are hiring than firing, a Rasmussen Reports poll shows the opposite. Please consider Rasmussen Employment Index 19% of Workers Report Their Firm is Hiring, 25% Laying Off The Rasmussen Employment Index, which measures workers' perceptions of the labor market each month, regained five points in April after falling to a recent low in March. At 74.9, the Employment Index is up two points from a year ago and 11 points from two years ago. Yet despite April's gain, confidence in the Labor Market is still down from the beginning of 2011.28% Worried About Losing Their Job One of the key finding in the survey is the number of people worried about losing their job. Those with such worries are not likely to go on spending sprees. However, I cannot explain the huge divergence between the Rasmussen survey and the recent Gallup survey. Gallup Survey Question Based on what you know or have seen, would you say that in general, your company or employer is -- 1) hiring new people and expanding the size of the workforce 2) not changing the size of its workforce 3) letting people go and reducing the size of its workforce  Gallup hiring minus firing = +13. Rasmussen hiring minus firing is-6. That is a huge difference for which I have no explanation. For details and commentary on the Gallup survey, please see Gallup: U.S. Job Creation At Post-Recession High; What's Next? How Congress Can Spur Job Creation Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| Posted: 04 May 2011 10:35 AM PDT The April 2011 Non-Manufacturing ISM plunged 4.5 points to 52.8 from 57.3 The drop was below expected range of all 73 economists in a Bloomberg ISM Survey. The range of economists' forecasts in the Bloomberg survey was 54.5 to 59 with the median forecast up a tick to 57.4. Tellingly, new orders collapsed by 11.4 points from 64.1 to 52.7. Employment, one of the weaker measures and up only 8 consecutive months fell to 51.9. One more reasonably bad month and services employment will contract. Please consider the April 2011 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in April for the 17th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.ISM Prices Firm, What About Profits? This was a pretty grim ISM report, especially compared to expectations with the median prediction from economists was up not down. Unless this report is an outlier, if prices paid remain firm, profits can't. Employment is also suspect and close to contraction. One month does not a trend make. However, if this is the start of a directional change, the report does not bode well for GDP, profits, or the unemployment rate. Expect Keynesian clowns to howl for more stimulus. Did Rosenberg Capitulate at the Top? CNBC reports Rosenberg Goes Bullish: Is the End Nigh? Published: Wednesday, 27 Apr 2011 | 12:52 PM ETWall of Worry? What Wall of Worry? There has not been any worries for at least a year. What little worry there was a year ago vanished in a sea of liquidity, followed by a Fed-induced Quantitative Easing euphoria. Yesterday, for the first time ever, I got a cold-call from a commodities broker telling me I should buy silver futures. It is hard to find anyone who does not think buying this dip right now with both hands is a poor idea. They could be right. Anything is possible. However, history suggests that buying the first dip following a parabolic spike is not a wise action. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| Is Inflation High and Rising or Low and Falling? A Four-Quadrant Model of Investing Analyzed Posted: 04 May 2011 02:52 AM PDT I received an interesting email out of the blue yesterday from Archie Kangethe, a Vice President at Morgan Stanley Smith Barney. Good Morning Mish,2Q 2011 Guide to the Markets Kangethe forwarded a chart showing "four quadrants of inflation": high and rising, low and rising, high and falling, and low and falling. I asked to see the context and received a link to 63 page PDF called the 2Q 2011 Guide to the Markets by Dr. David P. Kelly, CFA and four others on the JPMorgan Market Strategy Team. I did a double-take on this and in case you missed it, Kangethe works for Morgan Stanley, the chart and PDF in question is from JPMorgan. I found a number of interesting charts in the PDF to comment on and will get to "four quadrants" last. Here are some charts that caught my eye. In all cases, anecdotes in red or blue on the charts are mine. Total Private Payroll  In the "Great Recession" 8.8 million jobs were lost. Only 1.8 million have been added. It's worse than it looks because in general, it takes 125,000 jobs a month (1.5 million annually) to keep up with birth rate and immigration. The recession ended June 2009. In theory (all things equal which they seldom are), unemployment should be rising. The only reason it has fallen from 10.1% to 8.8% is several million people dropped out of the labor force. Millions want a job but stopped looking for work and are therefore not counted as unemployed. Forward Earnings Estimates  One thing supporting rising earnings is lack of hiring. If you outsource to Asia, and/or get by with fewer workers profits rise. Still, those operating earnings are highly suspect. A far better valuation case can be made by looking at 10-year normalized "real" earnings as opposed to fluff forward estimates that are frequently wildly off as they were in 2007-2008. Moreover, most stock market gains and losses do not come from earnings but rather the price investors are willing to pay for those earnings. GDP - The Great Depression vs. The Great Recession  One of the things that smoothed out GDP is that government spending by definition adds to GDP. Whether anything useful is produced is irrelevant. When you throw $trillions at a problem one might expect more than the paltry rise in GDP and employment we have seen in this alleged recovery. However, the question as always is "where to from here?" US Headwinds
Global Headwinds
That is veritable cornucopia of headwinds. I struggle to see many tailwinds other than exceptionally low interest rates. Worse yet, exceptionally low rates fueled what I believe is another stock market bubble, another commodity bubble, and another round of speculative mania in junk bonds. CPI 1960-2011  The above chart shows the CPI as computed by the BLS. Many would dispute that chart. I dispute it for completely different reasons. I think actual housing prices belong in the CPI, not Owners' equivalent rent that is the single largest component in the CPI with a 25.2% weighting. I have talked about this many times before but the most recent chart I have is a year old. Please consider Case-Shiller CPI Now Tracking CPI-U; Real Interest Rates Are Once Again Negative CS-CPI vs. CPI-UNote that at the height of the property bubble CS-CPI was at 8% vs. 4% as reported by CPI-U. The opposite happened in the housing crash. Given the renewed downturn in housing, CPI inflation is overstated now. Four Quadrants of Inflation  click on chart for sharper image Archie Kangethe wrote "The data from the US government would lead me to believe we are in the lower left quadrant, but my daily life leads me to believe we are in the upper left." Is one's daily life a measure of inflation? Can one ignore housing? Is there a representative basket? More importantly, where to from here? Inflation may be high as measured by commodities, education, and energy but not housing, electronics, or food bought on sale and stored. I do all of our grocery shopping and I think food is a bargain. Sale prices on meat are no higher than they were 10 years ago. As noted above, I do not think one should ignore housing. Housing prices used to be the CPI at one point until someone got the not-so bright idea to use rent prices instead. The CPI would certainly be lower today if housing prices were factored in. It would have been way higher in 2006. Greenspan missed huge inflation by failing to incorporate housing prices. Bernanke repeated Greenspan's mistake. Prices a Poor Measure of Inflation Regardless of how one feels about the above price commentary, prices are a poor measure of inflation for numerous reasons that I have spelled out at length. One such example is Inflation: What the heck is it written way back in 2006. I have since changed my definition slightly to include a "mark-to-mark" valuation of credit. Certainly by my own definition we have been in a period of inflation since March 2009 even though various measures of credit have declined. Another way of looking at things is by conditions one might expect to see in periods of inflation, deflation, and hyperinflation as described in Humpty Dumpty On Inflation in December of 2008. At that time, a table of 16 factors signaled deflation. Most are synonymous with inflation now. However, and I keep point this out to many deaf ears, my model has been the US would go in and out of deflation over a long period of time similar to Japan. We were in deflation then, we are not now, and I expect another credit crunch and another round of deflation to which Bernanke will likely respond again, probably pushing gold up again. Four Quadrant Inflation as a Method of Investing Can it Be that it was all so simple then? Or has time rewritten every line? No, it's not that simple. In 13 times since 1971 inflation was "low and falling" yielding a return of 12%. In 2008 inflation was low and falling yielding a return of -50% or so depending on what index one wants to measure. Foreign equities did worse because of the rising dollar. By the way, I need to be fair to JPMorgan. They posted that quadrant chart without comment. They did not say it was a way to invest. Nonetheless, assume for a moment that Kangethe is correct, and that inflation is high and rising. Look at the upper left quadrant. Does one expect cash to return 7%? With interest rates near zero, I should hope not. Are commodities even the place to be now? Personally I doubt it as explained in Manufacturing ISM Prices Paid Hits Another High, Up 22nd Consecutive Month; Inflation Hysteria? Four Quadrants a Poor Investing Model The four quadrant model of investing has two more serious flaws.
Valuations Matter Valuations are a critical factor in investment decisions. In case you missed it, please consider Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think Annualized Rates of Return for Select YearsCommodities Analysis In regards to Quadrant I investing (high and rising), once again assuming that is where we are (which I doubt), does one really want to plow into silver at $50 up from 5, oil at $110 up from $35, etc? Someone may, but I don't, especially given the headwinds I noted at the beginning of this post. The time to buy sectors is when they are undervalued and unloved, not when nearly every hedge fund in the world is plowing into commodity futures and leveraged mo-mo bets on equities. Are there any bears left? On anything other than the dollar and treasuries? Ironically, cash can do well at zero% if commodities and equities both tank. Given extreme bullish sentiment including a number of prominent bears throwing in the towel, that is a rather likely possibility. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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