Mish's Global Economic Trend Analysis

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• Demographics and Changing Social Trends Behind Gasoline Sales Plunge; What About Car Sales?
• "Not ECB's Job to Tackle Spain's Problems" Says German Central Bank President; Sparks Will Fly as France-Germany Rift Widens
• Is Capitalism Dead, or Simply Dying?
• Huge Dilemma: Do You Protect Your Job or Your Clients’ Money?

Demographics and Changing Social Trends Behind Gasoline Sales Plunge; What About Car Sales? Posted: 19 Apr 2012 11:03 PM PDT It's no secret (at least it shouldn't be) that gasoline sales have plunged. Here is a chart from my April 6 post Another Plunge in 3-Month Rolling Average of Petroleum and Gasoline Usage for Jan, Feb, March 2012 Jan-Feb-March 2012 petroleum and gasoline usage vs. the same three months in prior years. click on chart for sharper image Every month for quite some time, the rolling average of petroleum and gasoline usage has been trending down. The question is "Why?" Some pin this on car mileage improvements but that answer is easy to discredit. Fuel efficiency has been rising for more than a decade, but the plunge did not start until the Great Recession in 2007. However, the Great Recession is over, yet gasoline sales have not rebounded. Is this an indication another recession is on the horizon? That the recession never ended? Something else? Transportation and the New Generation Inquiring minds are reading a Frontier Group study Transportation and the New Generation: Why Young People Are Driving Less From World War II until just a few years ago, the number of miles driven annually on America's roads steadily increased. Then, at the turn of the century, something changed: Americans began driving less. By 2011, the average American was driving 6 percent fewer miles per year than in 2004. The trend away from driving has been led by young people. From 2001 and 2009, the average annual number of vehicle-miles traveled by young people (16 to 34-year-olds) decreased from 10,300 miles to 7,900 miles per capita – a drop of 23 percent. The trend away from steady growth in driving is likely to be long-lasting – even once the economy recovers. Young people are driving less for a host of reasons – higher gas prices, new licensing laws, improvements in technology that support alternative transportation, and changes in Generation Y's values and preferences – all factors that are likely to have an impact for years to come. America's young people are decreasing the amount they drive and increasing their use of transportation alternatives. According to the National Household Travel Survey, from 2001 to 2009, the annual number of vehicle-miles traveled by young people (16 to 34-year-olds) decreased from 10,300 miles to 7,900 miles per capita – a drop of 23 percent. In 2009, 16 to 34-year-olds as a whole took 24 percent more bike trips than they took in 2001, despite the age group actually shrinking in size by 2 percent. In 2009, 16 to 34-year-olds walked to destinations 16 percent more frequently than did 16 to 34-year-olds living in 2001. From 2001 to 2009, the number of passenger-miles traveled by 16 to 34-year-olds on public transit increased by 40 percent. According to Federal Highway Administration, from 2000 to 2010, the share of 14 to 34-year-olds without a driver's license increased from 21 percent to 26 percent. Young people's transportation priorities and preferences differ from those of older generations. Many young people choose to replace driving with alternative transportation. According to a recent survey by KRC Research and Zipcar, 45 percent of young people (18-34 years old) polled said they have consciously made an effort to replace driving with transportation alternatives – this is compared with approximately 32 percent of all older populations. Many of America's youth prefer to live places where they can easily walk, bike, and take public transportation. According to a recent study by the National Association for Realtors, young people are the generation most likely to prefer to live in an area characterized by nearby shopping, restaurants, schools, and public transportation as opposed to sprawl. Some young people purposely reduce their driving in an effort to curb their environmental impact. In the KRC Zipcar survey, 16 percent of 18 to 34-year-olds polled said they strongly agreed with the statement, "I want to protect the environment, so I drive less." This is compared to approximately 9 percent of older generations. The trend toward reduced driving has occurred even among young people who are employed and/or are doing well financially. The average young person (age 16-34) with a job drove 10,700 miles in 2009, compared with 12,800 miles in 2001. From 2001 to 2009, young people (16-34 years old) who lived in households with annual incomes of over $70,000 increased their use of public transit by 100 percent, biking by 122 percent, and walking by 37 percent. Long-Term Unemployment Generation Y is not the only reason behind the plunge. Please consider Mean Duration Long-Term-Unemployment. From 1980-2010 the average length of unemployment is between 15 and 20 weeks. Now it is 40. The unemployed are not driving to jobs they do not have. Labor Force vs. Those Not in Labor Force Labor Force Analysis Between 1980 and 1990 those not in the labor force was relatively constant while the labor force grew at a steady rate. Between 1990 and 2007 the labor force grew faster than those not in the labor force. Since  2008 those not in the labor force is in a strong uptrend while the labor force has been flat. Nearly 9 million have dropped out of the labor force since November 2007 while the labor force itself is flat. It is safe to assume that group of dropouts is driving far fewer miles on average than they were before. Boomer Demographics The mass retirement of boomers, much of it forced retirement is also in play. By forced retirement I mean those who exhausted unemployment benefits and retired to collect social security benefits even though they really want a job. Cash-for-Clunkers Timing is such that we can safely rule out cash-for-clunkers as a significant reason behind the plunge. Likewise, improvements in fuel mileage have continuous over decades and cannot account for a sudden plunge. Reasons for Plunge in Gasoline Sales in Order of Importance Huge rise in those "not in labor force" Boomer demographics and retirement (much of it forced) Chronic long-term unemployment Changing social trends in younger generations, no doubt accelerated by the recession and student debt Declining real wages leave consumers with less discretionary spending cash (think shorter vacations closer to home) High price of gasoline Increase in online shopping means fewer trips Improved fuel rates and cash-for-clunkers   What About Car Sales? Points two and three are a subset of those "not in labor force". Looking ahead, points 1 through 4 (especially points 2 and 4) will help put a cap on car sales. Thus, those looking for auto sales' reversion-to-the-mean plus an overshoot, may have seen the overshoot already. 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.

"Not ECB's Job to Tackle Spain's Problems" Says German Central Bank President; Sparks Will Fly as France-Germany Rift Widens Posted: 19 Apr 2012 05:29 PM PDT Echoing sentiment that should be widely-held but unfortunately is not German central bank president  Jens Weidmann says Not ECB's Job to Tackle Spain's Problems. Spain should take a rise in its bond yields as a spur to tackle the root causes of its debt woes, not look to the European Central Bank to help by buying its bonds, European Central Bank policymaker Jens Weidmann told Reuters. In a wide-ranging interview, Weidmann, who turns 44 on Friday, also said he saw no reason to discuss a third LTRO, the funding instrument with which the ECB has pumped over 1 trillion euros into financial markets since late last year. "I don't think you will find any colleague (on the ECB Council) who is of the view that the Eurosystem (of euro zone central banks) is there to ensure a particular interest rate level for a particular country." Some investors are betting that the rise in Spanish borrowing costs will force the ECB to dust off its bond-buying programme, but Weidmann suggested countries should not be looking to the central bank for such help. "It is not our job to provide financial aid in order to extend necessary adjustments over time," Weidmann said. "That is exactly what the bailout fund is for." SARKOZY REBUFF French President Nicolas Sarkozy, who is currently campaigning for re-election, demanded earlier this week that the ECB be given a bigger role in driving growth. Weidmann responded to Sarkozy's call by saying the best contribution the ECB could make to growth was to deliver stable prices, in line with the bank's existing mandate. "It fills me with concern that a softening of the mandate is being discussed," Weidmann added. "A fundamental discussion about changing the mandate can definitely have effects on inflation expectations." Sparks Will Fly as France-Germany Rift Widens The rift between Germany and France widens. That rift will widen further when French president Nicolas Sarkozy is booted for socialist François Hollande in the May presidential election. Hollande leads Sarkozy in round two polls by double digits, and Hollande has promised to rework the tenuous "Merkozy" treaty not yet ratified in France. Specifically, Hollande outlined plans to raise taxes from the country's banks, big companies and higher earners to close the country's budget deficit. Hollande's manifesto includes a call to renegotiate the new eurozone "fiscal compact" including for the creation of eurobonds to overcome the sovereign debt crisis. Think that's going to fly? I don't. I think sparks are going to fly. 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.

Is Capitalism Dead, or Simply Dying? Posted: 19 Apr 2012 10:41 AM PDT Noted financial author Richard Duncan says Capitalism is Dead, Credit New King. The world needs to clue in to changes to its economic system, including the death of capitalism, according to noted financial author Richard Duncan, who warns that attempts to turn back the clock on our credit-driven economies could be cataclysmic Recognizing that the world operates on a different set of rules from the laissez-faire capitalism of the 19th century is among the key arguments in Duncan's 2012 book, "The New Depression: The Breakdown of the Paper Money Economy." Stuck with 'Creditism' Duncan sees the global economy as having undergone a fundamental transformation during the past 43 years. Since changes in 1968 that freed the Federal Reserve from holding physical gold in reserve against dollars in circulation, total global credit has expanded 50 times, or from about $1 trillion to $50 trillion in 2007. Over that period, credit creation and consumption, or what Duncan calls "creditism," took hold as the growth dynamic behind the global economy, displacing capitalism, which he says relied upon sound money, hard work and capital accumulation. Attempts to break the global economy's reliance on credit creation as a driver and reboot back to earlier ways won't work, said Duncan, who sees "sound money" policy recommendations as a recipe for disaster. Duncan believes that true capitalism died in 1914, when nations across Europe abandoned gold-backed currencies, running up huge deficits in preparation for what would come to be known as the Great War. "I'm recommending making use of this new economic system. Borrow money at the government level at very low interest rates and then invest that money and change our world for the better." Duncan said. Building a national solar-energy grid that could tap the arid landscapes of Nevada are among Duncan's recommendations. Duncan said he first outlined his thinking on government-led investment in a 2008 book. On speaking tours, he encountered the "greatest push-back" from free-market, libertarian thinkers who are skeptical of government involvement in the economy. He says many libertarians "are with me along through the argument" on causes of the global crisis, but that they tend to be "very surprised" by his conclusion that part of the solution requires governments to spend more — not less. Monetary Madness Duncan is yet another author who predicted a financial crisis but whose solutions can only be described as monetary madness. "Glutted with excess industrial capacity and a banking system laden with massive loans that will never be paid back, China faces difficult decisions much as Japan did" says Duncan. Indeed! Then like an economic madman, Duncan wants the US government to undertake massive infrastructure projects just like the ones that bankrupted Japan and China's State-Owned-Enterprises (SOEs). Obama's Excursions Into Clean Energy Look at Obama's backing of Green Energy companies Ener1, Solyndra Inc., and Beacon Power, all three now bankrupt as noted in Another Obama-Backed Green Energy Company Goes Bankrupt. Solar Energy Madness in Europe In an effort to spur solar energy in France, Germany, Spain and other European countries, bureaucratic dunces decided to pay as much as 10 times market rates for those supplying energy to the power grid. In response, farmers in France have started building "barns" that serve no other purpose than a place to put solar panels. Supermarkets put solar panels on their roofs and unused sections of parking lots. It has been a boom to solar panel makers (China), but it is costing the French power company Electricite de France SA more than a billion euros ($1.3 billion) a year to meet government mandated pledges to accept solar energy from those supplying the grid. At the end of 2010, EDF received 3,000 applications a day to connect panels to the grid. In 2008, the number of applications was 7,100 for the entire year. The results should have been easy to predict in advance, but you can never explain anything to economic illiterates interfering in the free markets hoping to make things better. They never do. For more details, please consider EDF's Solar 'Time Bomb' Will Tick On After France Pops Bubble Is Capitalism Dead? If capitalism is dead, it is because socialists, fascists, bureaucratic fools, and central-planner advocates like Duncan destroyed it via foolish proposals to improve on it. The idea that governments can invest wisely in technology, at reasonable costs, and the free market cannot is downright absurd as the US, Japan, China, and Europe have proven in spades. In short, Duncan has lost his mind. 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.

Huge Dilemma: Do You Protect Your Job or Your Clients’ Money? Posted: 19 Apr 2012 03:07 AM PDT Every day I face the question: Do You Protect Your Job or Your Clients' Money? The above link points to an 11 page PDF by Jeremy Grantham in his latest GMO quarterly newsletter. Here are a few excerpts. Jeremy Grantham The central truth of the investment business is that investment behavior is driven by career risk. In the professional investment business we are all agents, managing other peoples' money. Missing a big move, however unjustified it may be by fundamentals, is to take a very high risk of being fi red. Career risk and the resulting herding it creates are likely to always dominate investing. The short term will always be exaggerated, and the fact that a corporation's future value stretches far into the future will be ignored. As GMO's Ben Inker has written,2 two-thirds of all corporate value lies out beyond 20 years. Yet the market often trades as if all value lies within the next 5 years, and sometimes 5 months. Ridiculous as our market volatility might seem to an intelligent Martian, it is our reality and everyone loves to trot out the "quote" attributed to Keynes (but never documented): "The market can stay irrational longer than the investor can stay solvent." For us agents, he might better have said "The market can stay irrational longer than the client can stay patient." Over the years, our estimate of "standard client patience time," to coin a phrase, has been 3.0 years in normal conditions. Patience can be up to a year shorter than that in extreme cases where relationships and the timing of their start-ups have proven to be unfortunate. For example, 2.5 years of bad performance after 5 good ones is usually tolerable, but 2.5 bad years from start-up, even though your previous 5 good years are well known but helped someone else, is absolutely not the same thing! Please consider that last paragraph closely. It precisely matches my own experiences. My clients that came on board in 2007 or 2008 and thus avoided the huge initial decline have hardly said a peep. However, my clients that came on in 2010 or later have been generally frustrated. Grantham continues ... You apparently can survive betting against bull market irrationality if you meet three conditions. First, you must allow a generous Ben Graham-like "margin of safety" and wait for a real outlier before you make a big bet. Second, you must try to stay reasonably diversified. Third, you must never use leverage. In my personal opinion (and with the benefit of hindsight, you might add), although we in asset allocation felt exceptionally and painfully patient at the time, we did not in the past always hold our fire long enough or be patient enough. It is the classic failing of value managers (and poker players for that matter) to get impatient and bet too hard too soon. In addition, GMO was not always optimally diversified. We are generally more cautious (or, if you prefer, "more experienced") now than in 1998 with respect to, for example, both patience and diversification, and at least we in asset allocation always stayed away from leverage.3 The U.S. growth and technology bubble of 2000 was by far the biggest market outlier event in U.S. market history; we had previously survived the 65 P/E market in Japan, which was perhaps the greatest outlier in all important equity markets anywhere and at any time. These were the most stringent tests for managers, and we were 2 to 3 years early in our calls in both cases. Yet we survived, although not without some battle scars, with the great help that we did, in the end, win these bets and by a lot. My own personal experience with leverage years ago - following initial success - has been disastrous. Arguably the worst thing that can happen to those who use leverage is to be successful the first time. I now calmly state "don't do it" (and we don't). Yet, at the same time I point out that incentives to use leverage are massive. The typical hedge fund collects 2% up front plus 20% of gains. Blow up, start again. Win big and 20% of the gains go to the manager. These models encourage speculation and risk-taking and it is the rare firm (the exception) who avoids the risk and thus underperforms on moves higher. Grantham continues ... Career and business risk is not at all evenly spread across all investment levels. Career risk is very modest, for example, when you are picking insurance stocks; it is therefore hard to lose your job. It will usually take 4 or 5 years before it becomes reasonably clear that your selections are far from stellar and by then, with any luck, the research director will have changed once or twice and your deficiencies will have been lost in history. Picking oil, say, versus insurance is much more visible and therefore more dangerous. Picking cash or "conservatism" against a roaring bull market probably lies beyond the pain threshold of any publicly traded enterprise. Remember, expensive markets can continue on to become obscenely expensive 2 or 3 years later, as Japan and the tech bubble proved. That is the state I face now. That is the state John Hussman at Hussman Funds faces now and that is the state Grantham faces now. Moreover, the longer this rally lasts, the more likely it is that value investors throw in the towel at precisely the wrong time. Fed Force Grantham continues ... Over the years, we at GMO have certainly done our share of Fed bashing. Most of our complaints have centered on the way in which overly accommodative monetary policy and a refusal to see the dangers of, or even the existence of, asset bubbles can lead to economic problems. We're about to pile on the Fed again, but this time it's personal. Our major complaint about Fed policy is not about the risks today's ultra-loose monetary policy imposes on the global economy (which are considerable), but rather the fact that Fed policy makes it tricky for us to know whether we are doing the right thing on behalf of our clients. One thing that we can say about the 2000 and 2007 asset bubbles is that, while they may have done significant damage to the economy and investors' wealth, it was at least simple for us to know what to do with our portfolios. If we avoided the overvalued assets (which in 2007 was pretty much everything risky) we knew we were doing the right thing. Of course, even when investing is simple, it isn't necessarily easy. In both episodes, but particularly 2000, the conservative portfolios we were running underperformed until the bubbles burst, causing plenty of consternation for our clients in the process. Today, the Fed has engineered a situation in which the really unattractive asset classes are the ones we have always thought of as low risk: government bonds and cash. And unlike the internet and housing bubbles, this time it isn't a quasi-inadvertent side effect of Fed policies, but a basic aim of them. The Fed has repeatedly said that a central part of the goal of low rates and quantitative easing is the creation of a wealth effect by pushing up the price of risky assets. By keeping rates very low and taking government bonds out of circulation, the Fed is trying to entice investors into buying risky assets. The question we are grappling with today is whether we should take the bait. Question of Timeframe This post primarily pertains to investors and those holding stocks for longer terms. If you are a day-trader or seek to hold stocks for a couple of weeks in a swing trade, much of what I said above is of little use. Problems arise when people trade outside their normal timeframes. For example, day-traders should not be holding stocks for weeks.  Likewise, value investors should not be chasing short-term liquidity moves by the Fed and ECB. Take the Bait? On page nine of his post, Jeremy Grantham says "the question we are grappling with today is whether we should take the bait." Indeed that has been the question for at least a year. Without a doubt the market has reacted to every hint of financial stimulus (real or imagined)  for  two years. At some point the market will react in a hugely negative fashion to the idea that still more stimulus is needed. However, in light of overwhelming "don't fight the Fed" sentiment, my suggestion may seem silly, perhaps even foolish, but I assure you it is no different than my claims in 2005 that the housing bubble would burst in spectacular fashion. I also point out that the "don't fight the Fed" mantra was completely useless in 2008. All I can say for certain is the "fiscal stimulus" rubber band continues to be stretched and the longer this lasts, the greater the snapback. Markets do not mean revert, they invert. Broken Record I feel like a broken record. Jeremy Grantham, John Hussman, and Lance Roberts of Streettalk Live surely feel the same way. Please see Lance Roberts' latest post 10 More Years of Low Returns I have been preaching the "low returns for a decade" concept for quite some time as noted by the following: February 07, 2011: Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think March 15, 2011: Anatomy of Bubbles; Negative Returns for a Decade Revisited; Is Gold in a Bubble? August 23, 2011: Another "Lost Decade" Coming Up; Boomer Retirement Headwinds; P/E Expansion and Contraction Demographic Model; Negative Returns for a Decade Revisited August 29, 2011: Value Restoration Project: Stock Market Valuations and Trends Over Time January 23, 2012: Debt and Deleveraging: Did the U.S. Overcome the Debt Crisis? Light at the End of the Tunnel Anywhere? Five-Pronged Solution Clearly that is a consistent message, and equally clearly the market has had other ideas. I was in a similar situation in 2006, calling for a recession when the yield curve inverted, waiting an agonizingly long time for it to arrive. It is very tough preaching caution, when caution is routinely tossed to the winds. Yet history has proven time and time again, that such times are precisely when caution is warranted, even though timing the precise moment is simply impossible. 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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