The golden years: 49% of Greek households still rely on pensions as primary income source

Italy and France are fast catching up. Full article. (Bloomberg)

Net US international investment position continues down

Our net position is now -$7.3 trillion. Our national business model is broken, with too much consumption and not enough investment. What is worse, foreign flows are being used for even greater consumption. Present flows inward will need to be balanced with future flows outward. It is a formula for national impoverishment. Are we doomed? You be the judge.

The Economist, too, is living in a fantasy land: "The audacity of hope"

President Obama has rightly and repeatedly pointed out that anyone who believes the economy is not doing well is "living in a fantasy land."

The Economist has moved to this fantasy land. The current issue has a report on guaranteed incomes. ("Sighing for paradise to come") In it there is graph with the tongue-in-cheek title of "The audacity of hope." (That is also the title of Obama's 2006 book.) It shows that the median salaries of full-time workers in the US are basically unchanged since 2000 A.D. despite a 15% increase in GDP/capital. (Britain did better than the US in both GDP/capita and earnings.)

On top of that, of course, is the fact that fewer workers have full-time jobs and the numbers of those outside the workforce has grown considerably.



To misquote T.S. Eliot, "I'll show you malaise in a handful of dust." (I guess misquoting Eliot is one of the things people in a fantasy land do.)

"Trump's Great Economic Divide" (headline from the WSJ)

Today's "Ahead of the Tape" column in the WSJ mocks Trump's pessimistic view of the economy by contrasting his pessimism with the positive level of consumer sentiment. The journalist quips that the "gulf between scary headlines and current sentiment is 'yuge.'" Steven Russolillo, the journalist, provides a graph of the Michigan Index of Consumer Sentiment to illustrate his point that consumers are confident.

He should have shaded in the recession period and he would have noted that this is more of a coincident rather than a leading indicator. Here is the same graph with the recessions shaded.

(Also note that the journalist omitted the last data point, which turns down, so that his graph give the impression confidence is going up.)

In fact, one notices that sentiments tends to peak one year before a recession. . . But wait! The index peaked about a year ago! Does this mean we are now entering a recession? That we will know only in retrospect. In the meantime, we all should beware lest we let our politics cloud our economic analysis. (Remember Capt. Renaud's line about politics in Casablanca? "I have no conviction, if that's what you mean. I blow with the wind, and the prevailing wind happens to be from Vichy." He would have made a good economist, I think.)

My personal view is that our current economic setup is doomed, but that has little to do with either democrats or republicans.

"Honey, I shrunk the economy!"

As President Obama has rightly stated, "anyone who thinks the US economy isn't doing well is living in a fantasy land." The World Bank, which has just cut its forecast of world growth this year and has cut its US growth forecast particularly sharply, is clearly a denizen of that imaginary place.

The Bank's location was confirmed by this morning's CFA Institute News Brief:

"World Bank shrinks forecasts for economic growth
The World Bank has downgraded its outlook for growth of the global economy this year from 2.9% to 2.4%, which it characterized as insipid. A 0.5-percentage-point cut in its forecast for the wealthiest countries accounts for about half of the reduction. The development lender lowered its US growth forecast from 2.7% to 1.9%.Bloomberg (07 Jun.) "

Economist blames low capital spending on low interest rates.

In today's WSJ, we learn that economist Jason Thomas of Carlyle Group says that low interest rates are stimulating dividend increases and share buybacks at the expense of capital spending, which is expected to be negative in real terms in 2016. If he is right, then the Fed is preventing the very thing it seeks to achieve.

Here's how the article by Greg IP begins:

"One of the great mysteries of the recovery is why low interest rates have done so little to lift business investment.

"After all, that is supposed to be one of the ways monetary policy works: A lower cost of capital makes any project more viable. But what if lower interest rates are actually hurting investment by encouraging companies to pay dividends or buy back stock instead?

"That’s the theory advanced by economist Jason Thomas of private-equity giant Carlyle Group. It is at odds with conventional economics but has some intuitively appealing logic and supportive data.

"He calculates that since 2009, just after the Federal Reserve took interest rates to near zero, U.S. companies have boosted stock buybacks by 194% and dividends by 66.5%, but investment by 43%. Big energy companies have been slashing capital expenditures while boosting payouts. Even companies without the headwind of lower commodity prices are holding the line: McDonald’s Corp. and Eli Lilly & Co. are maintaining flat capital expenditures while raising dividends; Verizon Communications Inc. said it plans to trim its capital budget and has raised its dividend."

There's a great quote in the article:

Since 1976, higher-yielding stocks systematically outperform the overall market by 0.76 percentage point when inflation-adjusted interest rates fall 1 percentage point, Mr. Thomas finds. Moreover, the relationship becomes more extreme the lower rates go and the longer they stay low.

“John Bull can stand many things but he cannot stand two per cent,” Walter Bagehot, a 19th century editor of the Economist, once said, describing investors’ need for some minimum level of income.

It make sense to me.

Prof. Boskin is "living in a fantasy land."

President Obama has rightly remarked that anyone who thinks the economy isn't doing well is "living in a fantasy land."  I agree.  We are living in a fantasy land.

Michael Boskin, the economics professor who changed the inflation calculation for social security so that it would rise less than actual inflation, that during the reign of the male Clinton, writes the following in an op-ed in today's Wall Street Journal:

"Mr. Obama will likely go down as having the worst economic-growth record of any president since the trough of the Great Depression in 1933—over eight decades spanning 13 administrations. Mr. Obama thus far has overseen 1.7% average annual economic growth, and the Blue Chip forecast for the remainder of 2016 is only slightly higher."

Given that capital spending is expected to contract in real terms in 2016, the immediate future does not look much different from the recent past. Nonetheless, I may choose to fantasize about a better outlook. (But I certainly wouldn't put money on it.)

Feldstein warns Fed's delay in raising rates is "dangerous."

In his essay in today's WSJ, Feldstein says, among other things, the following:

• "For price stability, the Fed since 2012 has interpreted its mandate as a long-term inflation rate of 2%. Although it has achieved full employment, the Fed continues to maintain excessively low interest rates in order to move toward its inflation target. This has created substantial risks that could lead to another financial crisis and economic downturn.
• "The S&P 500 price-earnings ratio is more than 50% above its historic average. Commercial real estate is priced as if low bond yields will last forever. Banks and other lenders are lending to lower quality borrowers and making loans with fewer conditions.
• "When interest rates return to normal there will be substantial losses to investors, lenders and borrowers. The adverse impact on the overall economy could be very serious.
• "With a margin of error that large, it makes no sense to focus monetary policy on trying to hit a precise inflation target. The problem that consumers care about and that should be the subject of Fed policy is avoiding a return to the rapidly rising inflation that took measured inflation from less than 2% in 1965 to 5% in 1970 and to more than 12% in 1980."

So Feldstein says the Fed should be worrying about speculation and inflation. The markets, and probably most Fed governors, are worrying about a lack of speculation and deflation.

Who is right? The monetarist Feldman or the Keynesian consensus? What I worry about is the possibility the central banks have created an unstable situation that they will at some point be unable to control.


Lincoln

Upsurge in China's housing market boosts its economy

There is a remarkable article in this morning's WSJ on A10, "China Housing Warms as Debt Clock Ticks," In the January to through April period, housing sales increase 61.4% yoy, property investment rose 7.2%, construction starts rose 21.4%.

This is after a multi-year contraction in housing/GDP. In 2013 housing contributed 22% to China GDP, which is about the same as in Spain and Ireland in 2007. This dropped to 19.8% in 2014 and to 15.1% in 2015. (Maybe 6% is something to aim at as a longer-term healthier number?)

This recent surge reminds me of what happened in Singapore, where we happened to be living during the Great Recession. The stock market went down and housing prices went up. The Chinese, who think multi-generationally, regard property as an investment and stocks markets as speculation. When they become leery of stocks, they buy property. In normal times Singaporeans speculate on stocks during the week and gamble on mahjong during the weekend. (In the local convenience stores the thick weekly books of stock charts are hot sellers.)

Here is a quote from the article: "'Leaving my money in the bank is meaningless and it will only devalue,' said Wang Hong, a 35-year-old office administrator who is looking to buy a second home in Nanjing." Holding fiat currencies is not considered a safe investment in Asia, where they do not benefit from the US dollar's strict stewardship.

Freudian slip? In decrying high debt levels in China, the Economist points out US and Europe are in worse shape

In a bit of possibly unconscious revelation, the Economist in its "Special Report" on finance in China, provided the graphic image below:

On the right you will note that debt levels have been rising rapidly in China and are now about the same as in the US and the euro area.  Everyone's debt level is too high, but the fact is that high debt levels are manageable in fast-growing economies like China's and a real problem in low growth areas like the US and Europe.  We all have a problem, then, but ours is worse.

I am reminded of this pretty smart passage from the Bible:

Matthew 7:3-5New International Version (NIV)

3 “Why do you look at the speck of sawdust in your brother’s eye and pay no attention to the plank in your own eye? 4 How can you say to your brother, ‘Let me take the speck out of your eye,’ when all the time there is a plank in your own eye? 5 You hypocrite, first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother’s eye."

The ECB and Germany play a confusing blame game

German finance minister Schauble blames the ECB for the rise of populist parties, which he attributes in part to the ECB's easy money policy. He thinks they should tighten up.

In reply, ECB Chairman Draghi mostly blames Germany for Europe's woes and for making the ECB adopt an easy money policy. According to Draghi, Germany's high savings rate compared to its neighbors is somehow forcing the ECB to stimulate because Germans are refusing to go into debt and splurge on consumption items.

Meanwhile, Europe's first quarter economy grew at a 2.4% annual rate (0.6%) with no inflation. This is a great result and the previous quarter was also good. Draghi, however, is unhappy because the inflation rate is too low in relation to the growth rate. (WSJ, A14)

I find this all very Kafkaesque.

1st Q US GDP: Right for the wrong reasons

1st quarter US GDP was reported at +0.5% yesterday, which is weak but still positive. This graphic from the WSJ shows that consumer spending on services, residential investment, and state and local government have accounted for more than all the increase.



Here is are some factoids from the "Contributions to Percent Change" table of the BEA press release:



Without the housing bubble (thanks, Fed), Obamacare, and government spending, 1st Q GDP would have been down .82% This does not seem like a productive economy to me, or am I missing something?

Driving Lessons from Greece: The consequences of central bank policy

Central bank policy has evolved from unorthodox to downright strange as politicians have failed to take control of the post-crisis economy. Sooner rather later they will confront a stark choice signposted Greece or Ireland.

Full article: http://www.euromoney.com/Article/3543283/Inside-investment-Driving-lessons-from-Greece.html?printrequest=true&copyrightInfo=true

Stairway to heaven: time for another step up?

There's a lady who's sure
All that glitters is gold
And she's buying a stairway to heaven

-- Led Zeppelin

Caveat emptor: The Wall Street Journal tosses out some interesting numbers, some of which are wrong.

I was recently embarrassed by quoting some statistics from the Wall Street Journal that were completely wrong. (I'm not saying which ones.) The WSJ people seem to be doing this more often than in the past. Perhaps there are fewer experienced editors and perhaps reporters are more rushed than they used to be.

In today's WSJ, an article ("Budget Cuts Fuel Monetary Policy Clashes," p. A2.) discusses how declining government revenues combined with rising transfer payments are turning the Federal budget into transfer payments only. Here is the graph:

The article states "Consumption and investment by all governments -- local, state and federal combined -- dropped to 17.6% of gross domestic product in the fourth quarter of 2015, matching its lowest level in 66 years, according to the Commerce Department." The fact is that the 17.6% number is for the federal government alone. But it's worse than that. The 17.6% figure is the approximate number for 2014 federal government tax receipts. Federal outlays in that year were 20.4% of GDP. So the graph relates federal tax receipts (not expenditures) to transfer payments. (The point that transfer payments are devouring the federal budget is correct, nonetheless, but the problem is not the level of expenditure as the article suggests.)

Moreover, state and local government spending isn't much less than federal spending, so total government expenditures are in the 35%-40% of GDP range, which is not abnormal.

The White House website has the following table of federal receipts and spending which I presume to be accurate;




The reporter graduated from college in 2001 and has been an economics reporter for three years, first for the Economist and then for the WSJ, so he should be a bit more aware of basic facts. Even more, his editor should.

"All power to the Soviets!" Central bank overreach in Sweden and elsewhere

I remembered Lenin's phrase "All power to the Soviets!" when I read this morning that Stefan Ingves, head of Sweden's central bank, thinks that the bank should have more power over the economy. Specifically, the Financial Supervisory Authority (FSA) is standing in the way of the central bank's direct regulation of the housing market. Ingves proposes that the FSA be merged into the central bank. (i.e. eliminated and its authority given to the CB)

Sweden's economy grew 4.5% last year and is expected to grow 3.5% this year. The central bank lending rate is -0.5%. (I believe that Sweden was the first to go negative.) The bank has also done the requisite quantitative easing. The fly in the ointment is that inflation is only 0.4% whilst the target is 2.0%.

Personally, I don't see why stable prices and a booming economy is not considered a good enough result. The Central bank, which seems quite pleased with itself, says, however, that it needs more power so that things will be even better.

It's human nature: everyone thinks he ought to have more power.

Factoid: US economic expectations in 2010

The WSJ today (A2) says that the US Government predicted in 2010 that growth from 2010 to 2015 would be 3.9%/yr and unemployment would drop from 10% to 5.9%. Growth was 2.1%/yr and unemployment dropped to 4.9%. The difference between growth and unemployment is anomalous; perhaps we are mismeasuring one or the other.

Factoid: Surprising increase in US gasoline demand

Today's WSJ reported that US gasoline demand in the 4 weeks ending last Friday averaged 9.4 million BPD, which is a summer peak-like level. (8.8 mn BPD in same period in 2014 and 2015.) Lower prices are having their logical effect. (Total oil demand was 19.4 mn BPD in 2015.)

Drug-induced optimism? Botox sales up. Consumer confidence down. It just doesn't make sense.

We note in the paper this morning that Allergan has reported good profits, thanks partly to higher sales of Botox (+10%) and Restasis (+18%). I guess the increase in Botox sales means the consumer is doing better; she has money to spend, and is ceasing to behave like the Madwoman of Chaillot, becoming more mindful of her appearance. Consequently, since it is hard to express emotion while under the influence of Botox, said consumer can neither cry nor laugh, pushing up Restasis dry-eye treatment sales.

What does this say about mass psychology following the Great Recession? We are clearly past denial, and maybe mostly through anger, but what about the other stages of grief? My bet is that ever more people are between depression and acceptance.

Should this trend continue, there will be fewer angry people to attend Trump and Sanders rallies as the folks start going about their business in a more normal way; GDP growth is likely to pick up.

At the same time, we learn this morning that consumer confidence has unexpectedly declined. Fed take note: More Botox is needed. (How about the Fed printing Botox certificates that are tradable and redeemable? A certain amount of economic activity would directly result; in addition, the Botox treatments would greatly increase confidence. It's time for the Fed to try something different, something that might work.)

Unfortunately, Allergan is already an expensive stock and its shareholders are smiling only slightly, which is probably the best they can do, under the circumstances.

Martin Feldstein among the faeries, reporting from a dreamworld.

Martin Feldstein says, “The US economy is in good shape.”

In this morning’s Wall Street Journal, Harvard professor Feldstein said, “The American economy is in good shape, better than critics think and financial investors fear. Incomes are rising, unemployment is falling, and industrial production is up sharply.” (p. A13)

I am glad to hear this because it echoes President Obama’s State of the Union assertions that “America right now has the strongest, most durable economy in the world,” and anyone saying America is in decline “is peddling fiction.”

The market problem is a market problem, according to Feldstein. Fed policy has pushed equities to artificially high levels; even after the recent decline, stocks are still 35% above normal.

He thinks the data showing that household income has stagnated is deceptive because it measures cash income. “The CBO explains that once corporate and government transfers are added to market incomes, and federal taxes are subtracted, the real income after transfers and federal taxes is up 49% between 1979 and 2010 for households in the lowest income quintile (with average total incomes of $31,000 in 2010). Real income is up 40% between 1979 and 2010 for households in the middle three quintiles (with average total incomes of $60,000) in 2010.”

These adjustments are interesting. Until a few years ago, the BLS when reporting on the number of Americans below the poverty line did not take into account government benefits. Today both numbers are available and you can choose between them depending on what point you wish to make. I noticed a couple of years ago, and wrote about it, that the average teacher in the local public schools with a master’s degree and 5-10 years of experience had about same effective income as a family of four on assistance. If the salary were $65,000, then about $20,000 comes off the top for health insurance (here the teacher pays half) and pension contribution (11% of gross income). Then we must subtract state and federal income taxes and NEA dues. On assistance, this teacher and his family could get subsidized housing, free healthcare, food stamps, and cash payments. In effect, he is no better off working, if we go by the numbers.

So why does he want to work? There are a number of reasons. He probably does not want to move his family to subsidized housing where he hears reports of frequent drug busts, shootings, assaults, and other crimes. He also likes being in a work environment where he is active, has interesting and dynamic colleagues, as well as other psychological rewards.

This is the point that Feldstein seems to miss. People don’t feel good about themselves if they are forced to depend on government programs. A good job is not an even trade for monetarily equivalent benefits. If you tell people in the latter group, or those who fear going there, that the economy is in good shape, they won’t believe you.