Posts Tagged ‘Economy of the United States’

Yesterday was a day for selling. But it is noticeable that while gold fell to a 34 month low, and US government bonds to a 22 month low, on the whole equities merely fell to a one month low.

At the time of writing gold is trading at $1,295. To put that price in context, back in September last year it was going for $1,778. The last time it was so cheap was September 2010.

Some say they are puzzled by the falls, but gold really is one of those riddles wrapped in an enigma – a golden enigma, in fact.

Gold rose in the aftermath of the finance crisis, and then again in the aftermath of the aftermath, because many feared a major meltdown as countries raced to devalue, and it was being said that QE created the danger of hyperinflation.

Talk of QE creating hyperinflation always was nonsense. As this column has said before, what matters is the broad money supply, and at a time when banks didn’t want to lend, while households were trying to repair their balance sheets, there was little chance of the broad money supply rising significantly, whatever central banks did.

Now the US economy is showing signs of real recovery, and the Fed chairman Ben Bernanke has suggested QE will be easing up soon and interest rates are likely to rise in 2015, everything looks different.

When real interest rates are negative, the fact that gold offers no yield is a trivial concern. But now that rates seem set to rise, that lack of yield seems to matter a great deal.

As for bonds, the yield on US 10 year treasuries has risen from 1.38 per cent last July to 2.39 per cent at the time of writing.

Markets are moving away from so-called safe harbour assets. During the era of QE, many feared currency wars, as loose monetary policy pushed down on the dollar, and other countries tried to devalue so as not to lose their competitive edge. Now the era of loosening is approaching an end; currency wars have moved to currency peace, and the new fear is that some currencies are in danger of becoming too weak.

As for equities, they too have fallen sharply, but just remember that the falls are not as drastic as recent rises. The FTSE 100 started 2013 on 5,898, rose to 6,840 last month, going close to the all-time high set in 1999, before falling to 6,159 last night.

Look at how equities have fallen since the end of May, and the sell-off looks drastic. Look at equities this year, and the market still looks attractive.

Above all, just remember that it is good news on the US economy that lies behind markets selling.

As rates rise, there will be losers, and for a while the markets may even punish those with strong fundamentals, but a resurgent US consumer is a good thing, and once the dust has settled we will see plenty of winners. But watch the Eurozone, emerging Europe, and maybe Brazil, for the real woe.

© Investment & Business News 2013

It has been rush of good news on the US economy, but last week nearly saw it all spoilt. Thank goodness for Friday, because news out then just about saved the day, and stopped the good turning to bad.

Just to remind you: US consumer confidence has hit a five year high, US house prices are up, the US fiscal deficit is falling fast, and US banks suddenly seem to be well capitalised. For more, see: US debt is falling: does this prove austerity does not work?   US consumers create recovery, or does recovery create US consumers?  US banks see biggest profits ever: is the US back  and US economy close to shaking off last vestiges of the finance crisis 

But last week saw the latest Purchasing Managers’ Indices (PMIs) on the US economy, and they were not so good. The PMI tracking US manufacturing, and produced by ISM, fell to 49, a four year low. More to the point, since any reading under 50 points to contraction, the index suggests that the US manufacturing industry may be in recession. The PMI tracking US non-manufacturing improved in April, but with a reading of 53.7, it was nonetheless the second lowest score in nine months. Together the two indices suggest the US is growing at an annualised rate of around 1.5 per cent in Q2, from 2.4 per cent in Q1.

All eyes turned to the jobs report, which was out last Friday. This is one of the closest watched of all US indicators. In the end the report was a relief. No less than 175,000 workers joined the US non-farm payroll in May. According to the latest data, US non-farm payroll has increased by just 50,000 short of one million so far this year.

Okay, there is a chance that the latest data maybe revised downwards, but so far it looks good.

Right now, with a few exceptions in South East Asia and Latin America, the US economy seems to putting on just about the best set of data anywhere. There is even talk of manufacturers returning to the US. Yesterday Apple announced plans to manufacture one of its latest products in the US, and the latest Google/Motorola phone is being made in the US.

The US still has problems, perhaps the main ones being growing inequality, and falling median incomes. See: Will USA living standards ever again be as high as they were in the last century? 

And US student loans has the feel of a potential bubble in the making. See: Student Debt and the Crushing of the American Dream, by Joseph E Stiglitz 

But at least talk that the US is on a one way ticket to bankruptcy seems to be considerably wide of the mark. See: The scaremongers are wrong: the US is not even vaguely close to going bust 

© Investment & Business News 2013

Cynicism can be healthy, but sometimes you just need to acknowledge good news when you see it. Good news on the UK economy is certainly not flowing like a river at high tide, but it has grown from a trickle to something more like a stream.

Take the news out this week. The reading from the latest housing market survey from the Royal Institution of Chartered Surveyors, or RICS, rose from plus one in April to plus five. This index is good at signposting short term future changes in the economy. It went negative in August 2007, for example, many months before the UK fell into recession.

It moved back into positive territory in August 2009, before the UK came out of recession, and it went negative in July 2010, once again providing advance warning of the UK re-entering recession. The index has now been positive for two months, which is an encouraging sign, but then again a reading of plus five is hardly the stuff of a boom.

If you want more evidence of an improving economy, take a look at the latest Purchasing Managers’ Indices, or PMIs. Combined they point to an economy growing at around 0.5 per cent in the second quarter of this year, compared to 0.3 per cent in the previous quarter. That is good, but just like the evidence provided by the RICS Index, it’s a long way short of suggesting boom.

You will find more encouragement if you dig a little deeper, and stare at the innards of the latest PMIs. The manufacturing sector is seeing new orders growth accelerate; no less than three times as many construction firms anticipate a rise in output as those that forecast a reduction. As for services, there is evidence of growing commitment to new business, and sales have now risen for five successive months.

It is clear that house prices are rising, but it is not clear whether this is a good or a bad thing. The last trade data was encouraging, UK exports to China rose by 11 per cent in the most recent three month period for which we have data. Exports to the US rose by 7 per cent. Our main trading partner, the euro area, is stuck in economic depression, but the UK is at last seeing exports to areas further afield rise, and that is something to be celebrated.

There is even good news on our energy – at least it is good news if you are a believer in shale gas.

For the best news, however, look West. Since the UK economy tends to follow the US, but with a time lag, and data on the US economy really does provide reason for cheer.

The doubts relate to zombies, wages and productivity. There is a film out at the moment about zombies called World War Z, starring Brad Pitt. In the economy the term zombies relates to companies, or indeed households, that are unable to move forward. In the case of companies, the solution may lie with bankruptcy creating space for other companies to grow into.

It is possible that record low interest rates are propping up firms that should be allowed to fail, and that the UK may be repeating the errors made by Japan, 20 years or so ago. For more on that, see: Creative Destruction – an entry in a new, and still growing, Investment and Business News directory:

Strap yourself in. The next few months will tell us more.

© Investment & Business News 2013

It has been rush of good news on the US economy, but last week nearly saw it all spoilt. Thank goodness for Friday, because news out then just about saved the day, and stopped the good turning to bad.

Just to remind you: US consumer confidence has hit a five year high, US house prices are up, the US fiscal deficit is falling fast, and US banks suddenly seem to be well capitalised. For more, see:US debt is falling: does this prove austerity does not work?   US consumers create recovery, or does recovery create US consumers?   US banks see biggest profits ever: is the US back  and US economy close to shaking off last vestiges of the finance crisis 

But last week saw the latest Purchasing Managers’ Indices (PMIs) on the US economy, and they were not so good. The PMI tracking US manufacturing, and produced by ISM, fell to 49, a four year low. More to the point, since any reading under 50 points to contraction, the index suggests that the US manufacturing industry may be in recession. The PMI tracking US non-manufacturing improved in April, but with a reading of 53.7, it was nonetheless the second lowest score in nine months. Together the two indices suggest the US is growing at an annualised rate of around 1.5 per cent in Q2, from 2.4 per cent in Q1.

All eyes turned to the jobs report, which was out last Friday. This is one of the closest watched of all US indicators. In the end the report was a relief. No less than 175,000 workers joined the US non-farm payroll in May. According to the latest data, US non-farm payroll has increased by just 50,000 short of one million so far this year.

Okay, there is a chance that the latest data maybe revised downwards, but so far it looks good.

Right now, with a few exceptions in South East Asia and Latin America, the US economy seems to putting on just about the best set of data anywhere. There is even talk of manufacturers returning to the US. Yesterday Apple announced plans to manufacture one of its latest products in the US, and the latest Google/Motorola phone is being made in the US.

The US still has problems, perhaps the main ones being growing inequality, and falling median incomes. See: Will USA living standards ever again be as high as they were in the last century? 

And US student loans has the feel of a potential bubble in the making. See: Student Debt and the Crushing of the American Dream, by Joseph E Stiglitz 

But at least talk that the US is on a one way ticket to bankruptcy seems to be considerably wide of the mark. See: The scaremongers are wrong: the US is not even vaguely close to going bust 

© Investment & Business News 2013

There is something very contradictory about the fall seen in gold over the last few days.

As of Friday, gold was down 22 per cent from its highs set in the autumn of 2011, when it passed $1,999 a troy ounce. That was the worst bear run since the early 1980s.

Yesterday gold fell 9.2 per cent, suffering its biggest one day fall since the early 1980s. At the time of writing, the pretty yellow metal is trading at $1361 a troy ounce, and is now 29 per cent off its 2011 peak.

The contradictions are many, however.

Markets have often bought gold when QE is increased. Yet in Japan, QE is being launched that will make previous programmes look like a warm–up. The markets are celebrating and in the process selling gold for a complex reason. The economy is not so good, therefore QE will be increased, and therefore the economy will improve, ergo buy gold.

Except the markets did not celebrate at all yesterday, and the Dow lost 265 points. Gold is usually seen as a contrary asset. Buy gold in times of peril. It is unusual for gold and stock markets to fall in tandem.

One explanation is that stock markets fell for transitory reasons, gold for more fundamental reasons.

Yet consider Cyprus. It is selling gold, and that has helped push down the price. But why is it selling gold? Answer: because the government is all but bust. Governments not having any money is usually seen as a reason to buy gold.

The last few days has seen worrisome news on the economy. Bad news on the US, and bad news on China have compounded fears over the European economy. Yet gold has fallen too. See: Has US economy hit a spring time wobble, or something more serious?  and China sees growth disappoint as India sees some promise 

In part gold has fallen as other commodities dropped. Brent crude oil, for example, fell to a nine month low this morning.
Capital Economics said: “None of the fundamental explanations being discussed for the slump in gold prices really holds up.”

Unless that is the explanation lies with inflation. Despite all that QE, and despite warnings of hyperinflation, right now global inflationary pressures are very modest. Maybe the penny has dropped. QE, at a time when banks don’t want to lend, is not likely to lead to significant inflation. That may explain falls in gold.

But here is another reason: gold’s allure is purely psychological. It does well because people expect it do well. It does badly because people expect it to do badly.

Impressions matter more than fundamentals. On the BBC this morning, David Buik called gold trading a spiv’s market. It rose a few years ago, because the global banking sector went into meltdown, and some feared a kind of race to the bottom in currency markets, and hyperinflation to be the result. Many of those fears now look hysterical. The mood has changed. Gold does not glisten like it did. And when investors think gold has lost its sparkle, it will fall regardless of what fundamentals say.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

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The data speaks for itself. In the final quarter of 2012 US corporate profits were 11.8 per cent of US GDP. To find the last time the ratio was so high you would have to rewind the clock all the way to the beginning of time.

Maybe, it would be more accurate to say you would have to rewind the clock to the date when data was first available, which an economist might say is indeed the same thing as the beginning of time. In fact quarter on quarter data only goes back to 1947. Year on year stats are available from 1929, however. As far as the data is concerned Q4 2012 was a record.

It may surprise you to learn that until just under ten years ago, the record for corporate profits to GDP belonged to 1929, with a ratio of 9.9 per cent. It is a shame the data does not go back further, because 1929 is an awkward year for a story to begin. It was, after all, the year when Wall Street crashed, and the point when the US Great Depression began. So had corporate profits surged just before 1929, and was the high level of this ratio a cause of the Great Depression, or was it normal for corporate profits to GDP to be so high back then? We can only really speculate.

What we can say, however, is that, according to data going back 80 or so years, the only two periods when US corporate profits to GDP approached 10 per cent or went over it, the US economy was either in, or about to enter one of its two worst periods of economic performance during that period. Is that a coincidence? Maybe it is, but there are good reasons to think this apparent correlation is not random.
Drilling into the numbers we find that the ratio of profits to GDP actually passed the 1929 record in Q4 2005, fell back in 2007 and 2008, hit a new record in Q4 2011, and has pretty much being going upwards ever since.

The downturn in the US has some odd things about it. Employment has been improving, but is still lower than we need it to be. GDP has been growing, but, just as is the case in the UK, households have been struggling. US median wages, on the other hand, have seen an awful performance. US median wages, relative to inflation, were lower last year than in 1995. As households have struggled, markets have soared, with the Dow and S&P 500 hitting all-time highs in the last few weeks.

Investors and corporate bosses may say: so what? They may say it is good that profits are rising, that an increase in profits will be followed by an increase in hiring. But that is not how it is panning out. Sure we are seeing a modest rise in M&A activity. Sure dividends and share buy-backs are increasing. But to a very large extent US companies are sitting on the cash, as indeed are large UK companies.

This cash sloshes around the banking system, and much of it finally ends up buying US and UK government bonds.

To grow, the US economy needs to see demand rise, and without seeing a corresponding increase in debt, demand can only rise if wages go up.
Without this rise in demand, sooner or later the surge in corporate profits will stop, and go into shuddering reverse.

It may seem counterintuitive, but the rise in the ratio of profits to GDP is not in the long term interests of companies. It is most certainly not in the interests of the people who work for them, and it is not what we need to create sustainable economic growth. So what is the solution? See: Will a rise in the minimum wage put an end to zombie companies? And: Is it time to increase the minimum wage?

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here