By B.P.T., on October 20th, 2010
The Mortgage Bankers’ Association purchase index was released at 7:00 AM EDT, and there was a week to week decrease of 6.7% in the Purchase Index and a week to week decrease of 11.2% in the Refinance Index.
At 11:00 AM EDT, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.
At 2:00 PM EDT, the Beige Book report will be released, giving us more information about economic conditions in each Federal Reserve district in advance of the next Fed meeting.
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By Winton Bates, on October 19th, 2010
In the last post Ruth, a mental health nurse, discussed how she had been more willing to participate in risky activities such as bungee jumping while she was working in prisons. This led to a discussion of changes in perception of identity that may be associated with drug taking by young people who are seeking to escape from emotional pain. Ruth discussed how mental health patients with a history of drug use could be helped to perceive a wider set of possibilities for their future lives.
This post explores implications of evidence that some adolescents take drugs as a form of sensation seeking. A literature review by Jonathan Roberti notes that sensation seeking individuals tend to engage in behaviours that increase the amount of stimulation they experience. Sensation seeking is more common among young males than other groups. While risk-taking is involved it is not a primary motive – high sensation seekers tend to appraise risky and stressful situations as less threatening than do low sensation seekers.
Sensation-seeking is associated with stimulating occupational choices e.g. a desire for greater novelty and flexibility in work and with choice of risky vocations such as fire fighting. It is also associated with a preference for arousing music e.g. hard rock; travel to less familiar places; participation in relatively risky sports e.g. bungee jumping, white water rafting, surfing, snow boarding, scuba diving and parachute jumping; gambling; crime; impulsive behaviour; and health risk behaviours e.g. unsafe sex, unsafe driving, binge drinking and use of illicit drugs (‘A review of behavioral and biological correlates of sensation seeking’, Journal of Research in Personality, 38, 2004).
Roberti has high hopes that adverse consequences of sensation seeking traits could be reduced by substituting sensations with low health risks for sensations with high health risks:
‘Early identification of risky behaviors, attitudes, and preferences in young adults, such as engaging in promiscuous sexual activities, reckless drinking habits, use of illicit drugs, gambling, and high-risk sports and replacing those with non-risky options is essential in reducing negative health consequences. Recommending appealing, non-risky forms of sensation seeking to individuals that once engaged in risky behaviors is one way of reducing negative health consequences. The effectiveness of using alternative arousal sources that are non-risky but are equally stimulating has yet to be determined and would be a fruitful line of research’ (p 274).
When I consider this from an economics perspective, it is not entirely clear whether, or to what extent, sensation seekers would view such activities as substitutes. It would be nice to think that an afternoon engaging in an extreme sport would satisfy a sensation seeker’s desire for thrills until the following week – and that the culture associated with all extreme sports would tend to encourage healthy living. It might be possible, however, for a sensation seeker to spend an afternoon engaging in an extreme sport, followed by an evening of illicit drug use and gambling, and then to end the day participating in a sex orgy (although I can’t verify this from personal experience). More research may be required. (Perhaps I should clarify that I am suggesting surveys of the lifestyles of people who engage in various extreme sports.)
Jonathan Roberti draws attention to research suggesting that sensation seekers prefer certain types of friends and tend to surround themselves with others who have similar sensation seeking characteristics. I expect that the behaviour of sensation seekers in this respect would be strongly influenced by their own sense of identity.
How can parents ensure that children with sensation seeking tendencies develop a sense of identity consistent with adopting healthy lifestyles? My previous consideration of this question suggests that the main environmental shaper of personality is a child’s peer group. Parents may not be able to choose their children’s friends for them, but parents do make decisions about where they live and what schools their children attend.
By B.P.T., on October 19th, 2010
At 7:45 AM EDT, the weekly ICSC-Goldman Store Sales report will be released, giving an update on the health of the consumer through this analysis of retail sales.
At 8:30 AM EDT, the Housing Starts report for September will be released. The consensus is that construction on 580,000 new homes were started last month, which would be a decrease of 19,000 from an unusually strong August.
At 8:55 AM EDT, the weekly Redbook report will be released, giving us more information about consumer spending.
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By Trace Mayer, on October 18th, 2010
Gold is the numeraire par excellence. As the most reliable unit of account for performing mental calculations of value it is important to use gold and silver to reveal ominous changes to the average American’s standard of living based on consumer spending trends. Viewing current Gallup data through these lenses shows how The Great Credit Contraction has impacted the average person’s daily life.
Clearly the American way of life is intensely threatened.
CONSUMER SPENDING TRENDS
A recent Gallup poll revealed some ominous data about the decline in American consumer spending. The following charts adjust the original poll data to GoldGrams and silver ounces. There has been a stunning decline in standard of living based on consumer spending trends.
STANDARD OF LIVING CHANGES
The low to middle income groups have realized nearly 63% decline in standard of living going from spending 3.19 GoldGrams per month in September 2008 to spending 1.17 GoldGrams in September 2010. In silver the decline is nearly 70%. The upper income groups have likewise been affected with their consumer spending declining to 2.89 GoldGrams in September 2010 from 6.48 in May 2008 representing a decline of about 55% and about 61% in silver.
CONCLUSION
These significant declines in living standards based on consumer spending trends measured in gold and silver represent a tremendous impact from the recession on the average American’s daily life. While some debate whether there is inflation or deflation it appears fairly clear the effects of the massive deflation coupled with negative effects of inflation on the economy have resulted in The Great Credit Contraction which has impacted the average American and resulted in a 55-70% decline in standard of living. Clearly the American way of life is intensely threatened.
DISCLOSURES: Long physical gold, silver and platinum with no position the problematic platinum, SLV or GLD ETFs.
By B.P.T., on October 18th, 2010
At 9:00 AM EDT, the Treasury International Capital report for August will be released, showing the flow of capital in and out of the United States economy.
At 9:15 AM EDT, the Industrial Production report for September will be released. The consensus is that there will be an increase 0f 0.2% in production and an increase of 0.1% in industrial capacity utilization.
At 10:00 AM EDT, the Housing Market Index for October will be announced. This index is created from a survey of homebuilders, so it shows the confidence that the sector has in the overall economy and their business.
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By Claus Vistesen, on October 15th, 2010
It is not that I don’t enjoy a good old bull/teflon run as much as the next guy but just to provide some form of balance to the current QEasy Money Hymn I almost choked on my oatmeal earlier this week when I loaded up Bloomberg and learned that everything suddenly was fine in the erstwhile whipping boy (alongside Greece) of the Eurozone as the economy apparently has the cash to starve off any foreign bond vigilantes;
(quote Bloomberg)
Ireland expects its 20 billion-euro ($28 billion) cash pile to stave off a Greek-style rescue, as the government taps the funds to avoid paying record rates to borrow. The government canceled next week’s debt auction and another scheduled for November after the yield on 10-year Irish bonds rose to a record 454 basis points above benchmark German bunds. Finance Minister Brian Lenihan has said Ireland is “fully funded” through the middle of 2011. The country has 4.4 billion euros of bonds maturing next year, compared with about 27 billion euros in Greece.
I find this fascinating for a number of reasons. First of all there is root of the problem itself in the form of Anglo Irish Bank which will cost Ireland perhaps up to 30 billion Euros and will be responsible for a fiscal deficit in 2010 to the tune of of an unbelievable 32% of GDP. Naturally, this is expected to be a one-off expense and the whole exercise on cancelling auctions is because Ireland feels that the yields it would be able to borrow for at the moment would not reflect the long term health of the economy.
This makes sense. Why borrow if you don’t have to and especially if you are not happy with the terms put forward by your potential creditor. On this point I am, in principle, on Ireland’s side as it were. But what if costs for bailing out Irish banks are understated? Indeed, what is the real cost of assuming the entire bad loan book of Irish banks with no haircuts to bondholders or no restructuring of any kind? I don’t know, but more importantly; I am not sure the people concerned in Ireland know either. After all, the fact we are now looking at a +30% deficit as % of GDP in 2010 was not part of any of the official rescue manuals I think.
Consequently, let me throw another number at you; 3 % of GDP which is the fiscal deficit targeted for 2014 and which the market is supposed to take as collateral for a lower yield on Irish debt offerings in 2011.
Yet, is this plausible?
Basically, you have a confirmed 32%/GDP deficit today and you are promising to bring this down to 3% in a manner of 3 years. What are your assumptions here? What kind of nominal growth in GDP is build into the model? How will national debt evolve over this period? I am sure the good people at the National Treasury Management Agency are busy calculating just that as I type, but the problem is more profound.
Ireland has basically made the bet that in using its remaining reserves today and thus avoiding going to the market it can bring back its house in order and then return to borrow at that time, but this is circular thinking. The main question is whether Ireland has enough money to bail out its banking system such as it is. Alan McQuaid, quoted by Bloomberg, puts it well;
“They are taking a gamble that the budget will deliver and get spreads down,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “If that doesn’t happen, maybe you skip a few auctions at the beginning of the year. But at some point, you have to go to the market. If you can’t go to the market, then you have to look at outside aid.”
And Danske is even more sanguine, but then again they would be wouldn’t they as they own National Irish Bank and thus effectively depend on this gamble to succeed (at least in terms of the health of their Irish operations).
“The government has a significant problem” unless yields fall, said Soerensen of Danske Bank, which owns Dublin-based National Irish Bank. “But it isn’t under any immediate pressure to raise cash, and even in the unlikely event that the government had to call upon IMF/EU aid, investors would still get paid. There isn’t going to be a default.”
But I think that we are still missing the main point here. This is not only a question of how dubious it is that Ireland can get its house back in order (and what kind of economic pain it will take) it is also a matter of whether it is in Ireland’s interest to enter the market at all. Essentially, the current interest rates are unpayable for Ireland today but also in the middle of 2011 since this is where, presumably, the full force of fiscal contraction will be put on the Irish economy.
So, my reading of this is that Ireland has now played itself into whatever deal it can broker with the IMF and EU and while I may be persuaded otherwise by a credible fiscal plan it is not the actual promise I will be looking at but the assumptions of debt/gdp and nominal GDP growth which underlies it.
Until then, Ireland can continue to heed the old proverb that cash is king; it sure is … until you run out.
By Ajay Shah, on October 15th, 2010
From the mid 1990s onwards, the US trade balance has steadily become bigger. This is a centrepiece of the problem of `global imbalances’. Starting from values of roughly zero, this got all the way to values like $70 billion a month, where the US was importing over $2 billion a day of capital to pay for the trade deficit. Here’s the picture:
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| The US trade balance (goods+services, per month, seasonally adjusted) |
This was termed as the `Bretton Woods II’ configuration, where exporting countries like China gave loans to the US, in a form of suppliers’ credit, and the US bought Chinese goods. This magnitude of capital import was unsustainable for the US. Something had to give.
Warning for Indian readers: In India, the term `trade balance’ pertains only to merchandise trade. In the US, the monthly trade data covers both goods and services. So it is a meaningful measure of what is going on in international trade, unlike the corresponding Indian data.
Bretton Woods II first broke down in the financial crisis. In the downturn, the mighty American consumer purchased fewer 50″ television sets. The US trade deficit dropped nicely all the way to $25 billion per month. Alongside a rise in the US savings rate, this looked like a world which was rebalancing. In recent months, this movement reversed itself and the US trade deficit once again started getting worse. A deterioration of $20 billion per month is visible; i.e. a deterioration of $240 billion a year. Suddenly, the story of global imbalances righting themselves came under question. The present US run rate is around $40 billion a month or $0.5 trillion a year.
Alongside this, we have news that the Chinese reserves rose by $194 billion in Q3 2010. The Chinese seem to have also passed on some of their problems of exchange rate pegging upon their neighbours by purchasing Japanese, South Korean and Indonesian assets. I am not aware of such behaviour having been observed prior to this in human history. Japan, South Korea and Indonesia have taken unkindly to this behaviour. Given the opacity of the Chinese regime, one can’t help wonder if similar things are going on through less visible channels – e.g. a Chinese sovereign wealth fund buys $10 billion of OTC derivatives on Nifty.
So we seem to be headed for quite some escalation of conflict over the Chinese exchange rate regime. Here are some interesting readings on the subject:
By B.P.T., on October 15th, 2010
At 8:15 AM EDT, Ben Bernanke will deliver a speech at the Boston Federal Reserve’s conference on Revisiting Monetary Policy in a Low Inflation Environment.
At 8:30 AM EDT, the Consumer Price Index report for September will be released. The consensus is that CPI increased by 0.2% last month, with a 0.1% increase in CPI when food and energy are removed.
Also at 8:30 AM EDT, the Empire State manufacturing index for October will be released. The consensus is that the index value will be 8, which would be an increase of nearly 4 points from September as the new orders index showed improvement.
Also at 8:30 AM EDT, the Retail Sales report for September will be released. The consensus is that retail sales increased 0.5% from August, after a 0.4% increase last month.
At 9:55 AM EDT, Consumer Sentiment for the first half of October will be announced. The consensus is that the index will be at 69, which would be an improvement of 0.8 points from the level reported in the second half of last month.
At 10:00 AM EDT, the Business Inventories report for August will be released. The consensus is that inventories increased 0.4% from July.
At 2:00 PM EDT, the Treasury budget for September will be released. The consensus is a deficit of $32 billion, which is larger than the historical average, but less than last September.
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By Richard Daughty, on October 14th, 2010
Now that the federal government’s fiscal year ended on September 30 and they had to “square up” their accounting, we find some very interesting things, if you will forgive the use of the phrase “very interesting” when I should have used the more descriptive Poop In Your Pants Scary (PIYPS).
One of these PIYPS things is that the one-year increase in the national debt, thanks to the unbelievable fiscal insanity of the deficit-spending Obama administration and the corrupt and moronic Congress, which is not to mention the monstrous monetary insanity of the loathsome Federal Reserve creating so much new money for them to borrow that inflation in prices will destroy us all. It is now revealed that in FY 2010, the national debt rose $1.72 trillion! In one year!
The government, of course, only counts $1.3 trillion of this as “deficit spending,” but nevertheless, $420 billion more debt somehow appeared from somewhere to equal the $1.72 trillion increase in the national debt in one year.
The sheer staggering size of this incredibly enormous $1.72 trillion in borrowed money spent by the federal government is more than all the $1.3 trillion the government collected in personal and corporate taxes!
And remember that this $1.72 trillion is just the deficit-spending, and we are not even including the gigantic $3.5 trillion federal budget for 2010! Gaaaahhhh! We’re Freaking Doomed (WFD)!
If you are thinking that we are NOT doomed by astonishing long-term Congressional fiscal irresponsibility and Federal Reserve monetary treachery, then perhaps you will change your mind if I came over there, hauled you up out of that seat and slapped your face repeatedly until you got some smarts, which usually happens to most people pretty fast, usually about the time I reach out and grab them by the throat so that I can keep their heads from moving around while I am administering a therapeutic dose of Mister Slappy.
There are, of course, a lot of logistical problems associated with my kind, generous Mr. Slappy offer, not the least of which is that, after awhile, my hands would get really sore from the slap, slap, slapping. Ow!
This is why I am going to try to achieve the same “get smart” effect by using my new Mogambo Pedantic Method (MPM) of using real, “it’s going to happen to you” horror to terrorize and shock you into a huge fight-or-flight response, flooding your system with enough adrenaline and other save-your-butt biological hormones and doodads to make your central nervous system more receptive to threatening stimuli.
What threatening stimuli? Well, just the federal budget deficit – alone! – means that each, each, EACH of the 90 million American private-sector workers in the Whole Freaking Country (WFC) must produce enough profit by their labors (as they are the only workers who can actually make a profit from their labors) to pay down another $18,889 in federal debt accumulated over the last year!
And this crushing new debt burden comes on top of these sad, selfsame, sorry 90 million private-economy workers making enough to pay the painful principal-and-interest payments to support their $150,000 share of the $13.5 trillion national debt already in existence!
And this staggering load of debt is, with only some exaggeration, barely enough to even Scratch The Surface (STS) of all the debt that is owed, where $60 trillion is the total of all private debts on top of the national debt, and (staggeringly) all of it relying totally on these same few 90 million people being so immensely productive and profitable that everyone, literally, benefits.
The kicker is that they are supposed to do this on an average household income of $54,000 a year! Hahahaha!
If you are, like me, already raging from an overload of adrenaline in your system generated by the sheer, mortal horror of all of this, then leave it to the Mighty, Mighty Mogambo (MMM) to administer a sedative that will make you smile: Buy gold, silver and oil!
With them you will protect yourself from the federal government’s apparent plan to destroy you by turning the dollar into worthless crap, and it’s so easy to do that you, too, will rejoice as do I, shouting loud huzzahs to the beautiful, blue sky, specifically, “Whee! This investing stuff is easy!”
The Mogambo Guru
US Debt on the Shoulders of 90 Million People originally appeared in the Daily Reckoning.
By Ajay Shah, on October 14th, 2010
MoF press release on FSDC.
For the background on FSDC, see: the budget announcement of Feb 2010, a newspaper column of mine on 16 March, and a collection of responses in the media on 20 March.
Does the FSDC amount to clipping RBI’s wings? The FSDC is only a committee. It is not backed by law. So nothing changes about RBI’s role and function. RBI staff have done speeches saying that financial stability is their job. The RBI Act does not contain the word `financial stability’. So while some in RBI might aspire to such a function, the present role and function of the RBI does not include financial stability.
The FSDC is not a new law, it’s merely a committee, so what changes? We already had the HLCC. What changes with the FSDC? The FSDC is intended to have a full-time technical secretariat which will work on the problems of financial stability and development. This is something the HLCC lacked. And, the HLCC was chaired by the RBI Governor. He was unable to resolve three classes of situations:
(a) Differences between two financial agencies such as the ULIPs question
(b) Differences between two financial agencies when one of them was RBI
(c) Problems of financial stability which require system thinking, which no one Indian agency is good at understanding, given the silo system that is in place.
The FSDC should fare better on all three fronts by virtue of being chaired by the finance minister (and backed by a strong secretariat). So will the FSDC help matters? It all depends on the staff quality that DEA is able to put into it. The “strong secretariat” is only an aspiration at the present moment.
What is the right role for autonomy for an agency external to MoF? There are two clear areas where autonomy is required. The first is about specific transactions. As examples, what entities get bank licenses or exchange licenses? Or, when RBI/SEBI investigate Bank of Rajasthan or MCX-SX. It is highly desirable for MoF to be completely hands-off on these kinds of activities of agencies external to MoF. The second is about monetary policy, i.e. the setting of the short-term interest rate. For these two areas, there is a strong and clear case for de-politicisation and autonomy. In other questions, the case for autonomy is not clear-cut. So is it okay for MoF to meddle in the decisions of an external financial agency on subjects like the policy framework for exchange ownership, or the rules about private bank entry? The staff quality that DEA is able to put into these functions is supremely important. It is possible to do this right.
Is FSDC opening a Pandora’s box by asking too much of DEA staff quality? I think it is an attempt in the right direction. Largely speaking, it is converting the existing de facto arrangements into de jure with greater formal structure. If FSDC builds up top quality staff, then it will make progress. Else, it will be irrelevant and the present will continue mostly unchanged. There will of course be ups and downs, but when I look back at the brainpower at DEA from 1993 onwards I feel optimistic about the expected value of FSDC.
The attempt at building a team which works on financial stability and development is an important and a good one. Success on putting together a top quality team cannot be taken for granted. But at the same time, if MoF had not tried this, there would have been a certainty that such a team would not have come together. It is possible to spin this in a gloomy way, but an oversupply of cynicism can crowd out attempts at progress.
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