A Lesson from Seinfeld

Since I have no cable in my apartment and the NHL & NBA playoffs are not always on, I began watching Seinfeld, my favorite sitcom.

Season 1 Episode 5 is about George discovering a stock tip from a friend (Simon) of a friend (Wilkinson), who has made millions off it already. George attempts to convince Jerry to go in with him on "Sindrax". Jerry asks, "what do they do?" "They have revolutionized a way to televise the opera better," proudly replies George and adds, "it has gone up 3 points already!". Plus, he tells Jerry his informant (Wilkinson) will tell him when to sell. Jerry caves in to George's peer pressure and buys the stock with George.

Buy Low & Sell High, Jerry

What follows is a nervous Jerry constantly checking the stock price everyday only to see it go down. In addition, George's informant has mysteriously vanished only to be tracked down at a hospital. In a matter of days, 60% of his capital is wiped out. Despite his girlfriend telling him the market fluctuates, he says, "I've been fluctuated out of all my money!" Jerry decides to sell his shares to get it out of his mind while he goes on vacation with his girlfriend in Vermont. George stubbornly says he "will go down with the ship." While on vacation Jerry sees the stock has shot way up. George cashes in on his tip treating Jerry and Elaine to dinner while touting around a cigar.

Ah, mistaking luck for skill

As the episode ends, George whispers to Elaine and Jerry about a new stock tip he has received about a company that is planning on releasing a robot butcher...

Castles In the Air

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Yen, the Drunk Driver of the Markets

The Yen is taking a beating. USDJPY down 6% since May 22nd. No new news here: when the Yen shows volatility the markets struggle. The Yen's problems arise from shorts and options covering, the volatile nature of the Japan Bond Market, and the market realization that Nikkei is not somewhere you want to park your money. The market is struggling to find where to park their money explaining the volatility we see across all stock indices, currencies, and bonds. The smart money is following the dollar already parking it in US Equities with Emerging Market- and Commodity-linked securities seeing money pour out which the media is starting to catch on now. Everybody is an expert once something has already happened. 

However, the Japanese policy is still to inflate and to debase their currency. They will go down with the ship. You can not have real growth with a weak currency just inflation. In fact, the BOJ is not reaching their inflation target as quick as they expected. It did not happen here in the U.S. and it will not happen anywhere, including Japan. 

Interesting moves in the markets lately. May 22nd has proved to be the point from Bullish expectations to "we are getting carried away here". One way to see we are getting carried away is the move (slope) in the 10 Year Bond Yield. 0.57 points since May 1st. That is a 32.53% move! The market is front running Bernanke fearing a tapering that will occur leading to a pop in the bond market & hopefully, commodities such as oil. Gold is following that example down -6.81% since May 1st.

The earliest Fed tapering forecasts are in late 2013 with the consensus being roughly mid 2014. The market is pricing in the tapering already. If the Fed does not taper quick enough the fact that the Balance Sheet of the BOJ is increasing at a faster rate the past year at 17.65% compared to the Fed's 1.65% is a way of tapering.

Sorry Mom & Dad, Going to Have to Stay At Home for a Bit

Another issue is Youth Unemployment. The Youth are unskilled workers so when the minimum wage is raised the Youth Unemployment also increases, as seen below. Not only are the youth not picking up valuable experience in the workplace, they remain in the unskilled labor pool due to A.) minimum wage discourages businesses from hiring B.) the Youth when they go on to graduate from college are riddled with debt and forced to take a lower paying job such as waiting tables, bar-tending, etc. to pay off their student loan debts and therefore, sacrifice future earnings potential making the college degree unnecessary. Unskilled workers are among the first to go during hard times because they are dispensable. When you have a minimum wage increase during rough periods such as in '07-'09, '90-'91, Mid-70s, and Early 80s it amplifies the Youth Unemployment rate further, as seen below.

Europe for Comparison:

Only Great Britain (U<25UK) is on the down-trend. Germany (U<25GR) & Euro Area (U<25EMU) are flattening  Italy, Spain, France are all heading up.

Until next time,
David Talbott

The Federal Chairman History...Well, since 1970

Cleaning everything out under my bed the other day when I came across my first macroeconomic principles test:

Question 1:

i.) Macroeconomics is the study of the economy as a whole examining trends in things such as GDP, Unemployment, Trade Balance, etc.
ii.) Macroeconomics looks specifically at what the economy is doing at a particular time period.
iii.) Macroeconomics is the study of the economy on an individual basis looking at consumers and firms

(A.) Only Statement iii is True
(B.) Statements i and ii are True
(C.) Only Statement ii is True
(D.) Only Statement i is True
(E.) All of the above Statements are False
Correct Answer: (D.)

I put (B.) because I am an idiot.

The reason I put that little tidbit in there is to a) poke fun at myself b) show how much I've grown from an undecided major who did not know the difference between macro and micro to a chart wielding nerd and c) be a little responsible to say, "hey, I do make (many) mistakes, but I do not make em again," which are coincidentally the same reasons I am writing this blog - an open journal of a few victories, many mistakes, and a story of a kid striving to be a better analyst, researcher, & trader but most of all: a better person.

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Anyway, below is the performance of the US Dollar, S&P, and Gold broken up by each of the fed chair head's tenure from Burns and on to 4/30/2013 Bernanke.

Arthur Burns: 02/1970 - 03/1978

Burns is the man if you own Gold and anything commodity linked. He makes Bernanke seem like an inflation hawk! That is scary. A 400% jump in the price of Gold from his first month in office in 1970 and till the end of his reign 1978.

George William Miller: 03/1978 - 08/1979

Miller is just a continuation of Burns really. Despite Miller's short term stay before picking up a swanky job as the Secretary of the US Treasury, he did jack up the price of Gold 63% in 17 months.

Paul Volcker: 02/1979 - 02/1987

Volcker is the man! After dealing with inflation and the tail end of the energy crisis he kicked Gold's butt for 8 years. From the peak of Gold prices in the early 80s, Gold depreciated 30.6% He and Greenspan's tenures saw some of the best USD and GDP growth numbers ever!

Alan Greenspan: 08/1987 - 01/2006

Greenspan is the one that stands out of all the Fed Chairman. He seems to have bipolar monetary policies. Under Reagan, Bush Sr, and Clinton administrations, he is PRO Dollar and Growth. The USD went up 4.6% from his first month in office to end of 1999 while the S&P (with some bubble help) jumped 483%! Gold, on the other hand, dropped 36.48% in that same span. Then under Bush Jr administration he loses his mind after the Dot Com Bubble and turns into a PRO Gold and Inflation kind of guy. Gold went up 97.5% from January 2000 until he stepped down in early 2006. With inflation rocketing the Dollar took a hit of -15.38%. The stock market normally absorbs some inflation; however, the S&P dropped 8.2% trying to recover from the Dot Com Bubble. Maybe instead of everyone throwing their money at the stock market, they decided to invest in real estate....?

Ben Bernanke: 2/2006 - Present

What can I say about Bernanke? Although, lately, he is backing off the Dollar. Just get out of the way, Ben! Taper some more to pop that bond market further. 

Nice little summary of the overall performance of the S&P, the Dollar, and Gold under the Fed Chairmen: 

	SPX	DXY	Gold
Burns	9.48%	-25.6%	402.29%
Miller	16.37%	-6.96%	63.24%
Volcker	191.49%	14.45%	46.78%
Greenspan	408.39%	-8.67%	25.47%
Bernanke	23.38%	-9.28%	162.97%

Why France is F*cked

I am sure a 75% tax increase on the upper income bracket of the French people got everyone's attention. Hollande backed out of the plan and instead decided to implement the 75% tax on business with over 1 million Euros. (http://www.france24.com/en/20130524-pierre-moscovici-tax-rate-salary-cap-france)

Brillant. So let's ignore the fact that:

• revenue generation will be minimal
• it chases business and people (if not already) out of the country
• this is class warfare
• opens the door for more crazy taxes and regulations
• creates more loopholes (lawyers, soccer players, docs are exempted)

The Keynesian Perspective

Keynesians don't even agree with Hollande's tax plan. Increase taxes during a recession goes against the logic of the Keynesian framework of something called the automatic stabilizer. The automatic stabilizer is simply defined as a way to implement tax cuts in a recession with Govt Spending flat or increased then as the country comes out of a recession you increase taxes and lower Govt spending (or flat). Then viola, you balance the budget. Nice in theory but reality is a different story (another discussion for another time).

France (and rest of Europe for that matter) are stuck in a recession.

So according to Keynesian framework there should be a tax cut there and supplement that with either an increase in or continuation of government spending. Yeah, that's not happening. Hollande has chosen to even ignore Keynes! THAT is how bad the French are dealing with their economics. 

Under the Hood

France's PMI has not crossed the 50 in over a year - major signs of contraction.

*source: http://www.businessinsider.com/french-pmi-2013-5

France's UE rate is trending upwards the last 5 years with Italy while Germany and the US trend downward. 

France is joining the PIIGs in higher yields:

EUROPE		Yield	1 Day	1 Month	1 Year	Time
Germany		1.52%	-2	+30	+25	12:00:10
Britain		1.96%	-3	+28	+32	11:59:42
France		2.10%	+4	+39	-38	11:59:58
Italy		4.11%	-7	+22	-182	11:59:59
Spain		4.34%	-5	+23	-229	11:59:57
Netherlands		1.85%	0	+28	+16	11:59:55
Portugal		5.44%	+1	-19	-637	11:59:16
Greece		8.80%	+23	-193	-2104	11:59:30
Switzerland		0.68%	-1	+14	+13	11:58:26

* Data taken from Bloomberg

France's industrial production just sucks:

Household confidence is dismal equalling the worse confidence as seen in the previous recession

Conclusion

Move...unless you're a soccer star.

For the week ending 5/24/13

For the week ending 5/24/13:

We saw some interesting things this week with the stock market potentially showing exhaustion then bouncing off the lines of support. There were also some economic indicators that show promising signs.

Economic Indicators: All about the Jawbs...

4 Week NSA Jobless Claims, the most important observation, saw it continue downward despite the blip the a couple of weeks back.

Durable Goods showed a 3.3% jump in April over -5.9% prior and 1.7% above "forecast" by the experts at 1.6%.

Existing home sales and MBA Mortgage Index did post disappointing numbers but are not far off the consensus and the trend for the data still show good signs.

Now some % Gain/Loss tickers for the week:

S&P    -1.07%

GLD   3.02%

OIL    -2.50%

DXY  -0.63%

10YR  4.14%

RUT   -1.20%

XLF   -1.10%

XLE   -0.49%

XLU  -3.70%

XLY  -1.30%

XLP   -0.55%

XLK   -1.58%

XLB   -1.67%

XLI    -1.04%

XLV  -0.55%

Please let me know of any tickers, ETFs, indexes, or whatever you want me to put up on there. 

Thanks for reading and enjoy your long weekend,

David

Inflation? Not with a Strong Dollar!

Here are 10 things the US has going for it:

1.) A Strong Dollar
2.) A Strong Dollar
3.) A Strong Dollar
4.) A Strong Dollar

Staring at the CPI and DXY price chart over the last 40 years paints an interesting picture. As the DXY rises the CPI drops.

 

So in other words when I see the DXY rolling: inflation is getting beat down. Other inflation indicators such as PCE and PPI (more of a better front runner for inflation) show a similar story:

    



 *Note: Data taken from St. Louis Fed, all graphs include: all items and one excluding food & energy 

As you can see from the charts above they're all heading downward in the last couple of years. That should be of no surprise. Not only do the inflation indicators point downwards but a rising dollar results in commodity deflation especially for Bernanke's Bubbles: Oil and Gold. The CRB Commodity Index over the last 10 years correlates -0.79 to the DXY. The CRB Index is down -3.04% YTD and the DXY is up 5.75% YTD. 

Next, the dollar perpetuates consumption. The US is a consumption economy with 70-73% of GDP. A higher dollar is equal to a tax cut not only at the pump but at the grocery stores and restaurants as well as energy prices are passed on to the grocery stores then on to you with higher prices for your ice cream. So why devalue the dollar? Some would argue a weaker dollar will even out our trade deficit, which is crazy unless you want to pay a larger grocery bill. I certainly dont!

Deflation is elsewhere besides at the pump and grocery stores. Check out home prices and the 30 & 15 year fixed mortgage rates. I know my mom and pop refinanced their home. They get the pay the house off quicker, which is nice because I am tired of paying rent in the basement!

More importantly, increasing mortgage rates and bond yields are rising not because of inflation signs but the TIPS are not moving with it which indicates growth not inflation.

Many people had their eyes on Bernanke and his (in)ability to wreak havoc on people's financial future. A higher CPI => lower dollar => bearish for growth => lower stocks. ECB is playing catchup as they implement rate cuts which has seen inflation (CPI #'s) decline the last couple of months.

Why the Almighty Dollar will continue:

Several Central Banks are holding the CTRL+P keys. Japan, S. Korea, Australia are in a fun little printing war. Euro is euro trash (although there are early signs of econ data improving). Many people are looking to the dollar as Bernanke and the Fed ran out of bullets in September of last year. What the hell is he going to do? Buy more bonds! Nope, he's cutting back those purchases.

The dollar spurns confidence in consumers which spurns better looking economic data. Jobless claims 4 week NSA avg is been looking great that last several months. Wanna see how much that influences the stock market? Invert the Jobless Claims and you will see it snug right up to the S&P. Like peas and carrots. Or how about the US 10 Year Yield and Jobless Claims? Housing data has already been picking up for better looking inventories, more new and old home sales, and less foreclosures. Plus, we are just underway in the home selling season.

Thanks for reading,
David