Posts Tagged ‘black swan’

The data coming out of the US has been so very good over the last few weeks that I am beginning to think the unthinkable. The thing they some said can never happen, if you like, a reverse Black Swan; the economic crisis that descended on the US in late 2006/2007, which deepened with the collapse of Lehman Brothers in October 2008, and then acted as a catalyst for the rest of the world to enter a sustained crisis period, is drawing to a close. The economic crisis may be over or almost over. This is why and these are the lessons we can learn.

If I were to list all the positive data relating to the US economy over the last few weeks this article would drag on and on, but instead let me focus on the highlights.

Number one: and most obvious, we have the markets. The Dow Jones hit a new all-time high on Tuesday (28 May). The markets don’t always get it right – in fact they often get it very wrong, but it is evidence.

Number two: US house prices. They rose 7.2 per cent in the year to March, according to the Federal Housing Finance Agency. That was the biggest annual increase recorded since May 2006. In fact as of Q4 last year, US house prices were 24 per cent down from peak and, according to the latest OECD report, the ratio of average US house prices to average US income is 85 per cent of the long term average.

Number three: US consumer confidence. According to the Conference board, this hit a five year high in May.

Number four: the US fiscal deficit. Earlier this month, the Congressional Budget Office revised its estimate of the US deficit for this year downwards by $200 billion. It is now saying the deficit will be $642 billion. To put this in context, last year the deficit was $1.1 trillion. And if the estimate proves right, it will be the first time the US budget deficit was less than $1 trillion in five years.

Number five: US household debt. This reduced by $11 billion in Q1, and now totals $11.2 trillion, from $12.7 trillion in 2008. According to the IMF, US household debt to income has fallen from a ratio of around 1.3 in the mid-noughties to about 1.06 at the end of 2012. See page five of this report.     The OECD has drawn similar conclusions. See page 20 of this report.

Number six: US inflation was just 1.1 per cent in April. In fact prices dropped no less than 0.4 per cent month on month between March and April.

Number seven: US unemployment fell to 7.5 per cent in April, the lowest level since Barack Obama became US President. Since last November the rise in US non-farm payrolls has been in excess of one million. The next jobs report is out at the end of next week (7 June), and Capital Economics predicts a 175,000 rise in non-farm payrolls. There are signs that companies are moving manufacturing back to the US as wages rise in China. Talk is that the much hyped new Google Android phone will be made in the USA.

Number eight: earnings at US banks in the first quarter of 2013 were $40.3 billion, which is the highest ever recorded. Over the past 12 months, US banks have maintained a capital tier one ratio of 13.3 per cent; that too is a record high.

Okay, so why? I can think of three key reasons. The first is creative destruction. Softer rules regarding bankruptcy, and the fact that when a home in the US is repossessed, any shortfall between the mortgage and the value of the home is covered by the bank, have all helped the US get the pain over with much faster. The second is less austerity. Contrast the US policy towards austerity with the UK and Eurozone. The third reason is shale gas, which has pushed down the cost of energy in the US.

The US still has problems. Household debt to disposable income is still higher than it was in 2000. See the aforementioned OECD report. I am very worried about the awful levels of income inequality in the US. Maybe if manufacturers do start moving from China to the US this issue will be partially addressed. I think economist Joseph Stiglitz is right when he says US student loans has the potential to be a crisis on a scale comparable to the sub-prime debacle.

Don’t think that because I am optimist on the US, I feel the same way about Europe. The continent is stuck in depression. I don’t see this ending any time soon, and I worry about the global implications of the Eurozone adopting a Germanic type export-led model. There is even a chance that an escalation in the Eurozone crisis could hit the US.

As for the UK, I think the jury is out. The UK economy usually follows the US, albeit with a time lag. But austerity, the fact that our main export market is in depression, the fact that real wages are still falling, and that the UK is not likely to see a US style shale gas revolution are reasons for caution. But on the other hand, house prices are going up. Whether you think the UK’s reliance on rising house prices is sustainable or not, the fact is that in the short run, in Blighty, rising house prices are often associated with rising GDP.

© The Share Centre Blog 


Nobel Laureate Joseph Stiglitz reckons that US student loans are the next big western economic crisis in the making – the next sub-prime. In the UK, the numbers are not quite so scary, but we do seem to be adopting many of the worst elements of the US economy.

Meanwhile, we keep hearing about kids going to university, and coming back with degrees that are not much use to man nor beast – but they do have lots of debt.

In his book ‘Anti Fragile’, Nassim Taleb (author of ‘The Black Swan’) questioned the link between education and economic success. Taiwan had lower literacy rates than the Philippines before it embarked on its period of growth. South Korea had lower literacy levels than Argentina before its growth era, and before Argentina’s collapse.
When we look at a country’s wealth and compare it with education, we see a connection. Richer countries tend to spend more on education. But which way is the causation? Does education lead to wealth or wealth lead to education?

Taleb reckons that apprentice-type education models are more closely correlated with economic success.

Here is the snag. Higher and further education may not cause GDP to rise, but for individuals there is a link between education and wealth. Countries that offer free advanced education to all tend to see a more evenly spread distribution of income.

Besides, in the era we are set to enter, in which we will see 3D printing, and nanotechnology, many people may have to re-train several times throughout their career. Maybe a good education provides an essential foundation in a world of very rapid change.

© Investment & Business News 2013

And talking about the real world, have you seen the latest forecast from the OBR – the Office of Budget Responsibility?

You may recall, the OBR was set up by George Osborne as an independent economic forecasting group to act as a kind of objective judge on economic performance. And in a master stroke, George turned a poacher into a gamekeeper by recruiting the then boss at the Institute of Fiscal Studies (IFS) Robert Chote  – who had been having great fun ridiculing government projections – to head the OBR.

As it happens, Mr Chote is funny. When he was top man at the IFS he made some genuinely amusing presentations, which may be why he became so popular with the press – he is a good man to quote, as well as good at livening up dull press conferences.

But the forecasts from the OBR are no laughing matter.

It originally projected growth for 2012 at 2.8 per cent. Now it is saying minus 0.1 per cent. It is forecasting growth next year of 1.2 per cent, but frankly it is guessing. It has no idea what next year, 2014 and then 2015 will be like. It might as well stick a pin in a piece of paper, and then carry on with the data muddle it has been working with.

The man who may be closest to the truth is Bill Gross, the world’s leading bond investor. He and his colleagues at Pimco have started talking about what they call a new normal.

“In the past decade,” said Gross recently, “machines and robotics have rather silently replaced humans, as the US and other advanced economies have sought to counter the influence of cheap Asian labour.” He went on to cite a report from MIT, which “affirmed that workers are losing the race against the machine.” And concluded: “Technology may be leading to slower, not faster economic growth despite its productive benefits.”

A few years ago, the benefit systems had become silly. The incentive to work had diminished. But be careful. Some people who are unemployed have done everything possible to get a job. It may happen to you, too. Even people who have enjoyed tremendous success in the past can find themselves armed with antiquated skills, and have to go from a senior job in business to being turned down for jobs paying the minimum wage.

In an era when technologies, such as 3D printing, make it hard to see where jobs will come from, being unemployed is becoming a sin. In his Autumn Statement George has said he is going to increase benefit payments by less than inflation. A year or so ago, the ‘Telegraph’s’ Nick Cowie argued that the unemployed should not have the vote at elections. See: A tax-based alternative to the Alternative Vote

Maybe technology is why the OBR keeps getting it wrong. Technology has created a new normal, and economists are so busy insisting that technology is not creating growth, that they miss the real point. It is changing the world, but it is making jobs all the harder to come by. There are solutions, but until the cause is acknowledged, the solutions will not be considered. By the way, there is a new book by Nassim Taleb – author of the Black Swan and possibly the most influential writer in the world at the moment – called ‘Antifragile’ which makes a related point. For that matter ‘The Blindfolded Masochist’ by Michael Baxter, makes a similar point.

©2012 Investment and Business News.

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