Diary of a Financier

Top Newsstuffs (December 24-30)

In Bookshelf on Sun 30 Dec 2012 at 06:22

To the threshold of 2013…

Everything you know about the federal deficit is wrong, and fixing it is painless | Business Insider
As I’ve said ad nauseum, the government’s budget deficit is strongly correlated to economic growth because countercyclical fiscal stimulus kicks in & tax revenues decline during recessions.  Empirically, unemployment in particular rocks the boat.  GDP growth will naturally fix the deficit, so the conversation should be focused solely on how to grow–somethingthe fiscal cliff endangers.
[Everyone freaks out about the national debt, but they're confused by economists' use of "debt" as metonymy for the deficit. US federal debt is too large, but the excessive portion (e.g. the deficit) will roll off as the economy grows. 2012's deficit ran ~$1.09T, so consider automatic stabilizers like welfare ($262B in 2007 to $473B in 2011) or healthcare ($642-860B) that have soared as a consequence of unemployment, as opposed to interest on Treasury debt ($237-230B) that has actually declined.]

America’s durable goods are getting old | Bloomberg Businessweek
Charts the average age of various consumer durable goods (1960-2012):
The aggregate age is at alltime highs, as are appliances (~5y) and automotives/cars (~4.2 years vs. 3.7 in 1990s & 2.6 in 1960s-80s).
#Bullish

Fed policy’s lag effect increasing since 1990s | McClellan Market Report
Charting 1s10s Treasury yield spread vs. Dow Jones Industrial Average (DJIA), it’s clear that Fed monetary policy now takes 22 months to affect stock market, while the lag was only ~12 months from 1950-1990.

Rail traffic weekly: Growth surge fully restores trend | Association of American Railroads (AAR)
Carloads -3.0% and Intermodal +3.4 (cumulative ytd volume); +0.9% and +10.2 respectively (vs. this week last year).
15 of 20 carload groups posted gains: Petroleum products +71.5%, stone/sand/gravel +29.5 & lumber +27.3; metallic ores -26.3 & coal -13.2.
[Effects of LA port strike now mitigated.]

Post bubble markets: Dot com v. financial crisis (2007-pres) | Bespoke Investment Group
Overlays S&P 500 Technology (2000-pres) v. Financials (2007-pres), whose peak-to-trough-to-recovery paths are very similar; financials slightly outperforming, but analogue says a correction should occur in 2014.

US Pension Benefit Guarantee Corporation’s FY12 fiscal update: Beware 2013 zombification | UBS
In 2012, PBGC deficit rose to record $34B (+32% y/y), despite 12.6% investment returns.  It’s still cashflow negative (payouts to cover terminated plans exceeded premiums by $2.75B), and underfunding worsened (DB plans fall from 75% to 70% funded).
PBGC’s base case model say it will face $322B in payouts from “reasonably possible terminations”… so with only $80B in assets, this is another GSE that’ll need a federal bailout.

Real home prices & price-to-rent ratios | Calculated Risk
While Case-Shiller index reports nominal home prices that have already bottomed (at 2004/5 levels), Bill McBride presents home prices adjusted for both inflation & owner equivalent rent, which are both just beginning a bottoming process near 1999-2000 levels.
[More importantly, I see that real prices have returned to trend growth and OER is back in its historical range between 1.0-1.2.]
#MeanReversion #Housing

Infographic: 2013’s global macro multiasset risk matrix | BBVA
Seven dimensional matrix ranks countries’ various asset classes according to risk, heading into new year.

The 10-step plan to end the era of Ponzi finance | Boston Consulting Group (BCG)
Noting that develop markets’ GDP growth rate per capita peaked in 1990s, BCG lays out steps to ending the economic status quo:
1. Restructure debt
2. Restructure unfunded liabilities (pensions)
3. Increase government efficiency
4. Prepare for labor scarcity
5. Liberalize immigration policy
6. Invest in education
7. Reinvest in infrastructure
8. Decouple economic growth’s dependence on raw materials/natural resources
9. Global cooperation
10. Launch next Kondratiev wave

–Romeo

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  1. [...] brings us back around to fundamentals and the question of an Earnings Recession.  I discussed this back in December too: Durable goods spending has been remarkably weak.  The average age of [...]

  2. [...] federal taxes +$120B annualized in 1q13 (0.8% GDP) & +7% annualized since 2009 [Previously: The deficit will fix itself & The fastest postwar deficit [...]

  3. […] consumer is tapped-out, but our cars are old, they need to be replaced & even prime buyers deferred new purchases since 2008.] #Bearish $F […]

  4. […] pounded-the-table (I, II, III & IV) on the US durable goods theme all year, but I grew wary of it by Q3-end, since […]

  5. […] Pensions make the most of stock rally | The Wall Street Journal (WSJ) Defined Benefit (DB) assets/liabilities have risen from 77% to 96% in 2013, almost entirely eliminating the underfunded obligation crisis. The equity market rally has increased asset values (responsible for 60% of funding gains), while rising rates have lowered actuaries’ future values (40%). Out from under this burden, corporations have gained greater financial flexibility, and some are/may even shift remaining obligations to insurance companies. [This is a very procyclical issue, so the risks are not gone until the plans terminate.  Previously: Reinhart says pensions are screwed & PBGC's mounting deficit could lead to bailout] […]

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