Ground Hog Day 2016: Results just in from Punxsutawney: No more winter

The Boston Globe anticipated this happy results:

Troubling budget dynamics, and economic insights from the Wicked Witch of the West

I just read an article on the federal deficit occasioned by the release of the January 2016 CBO projections. The CBO assumes 1.8% real GDP growth over the next five years, no new programs or program cuts, and interest rates staying below 3%.

The key points are as follows:

1. The deficit now begins to increase as a percent of GDP after falling for some years from the stimulus peaks.
2. Interest expense is over half the deficit this year and grows in importance over time.

The thing that struck me about these numbers is that whether or not the deficit is a problem or a disaster depends importantly on three factors:

1. The future rate of GDP growth. (1.8% is assumed; if it is higher, the deficit goes down, or, conversely, if lower it goes up.)
2. The assumed interest rates. (The CBO is assuming that the federal government will continue to finance the deficit at 1960s' rates. 1.7% this year rising to 2.9% in 2020)
3. The numbers do not include the deficits in social security and the other trust funds.

I do not know how this will all turn out, but I am reminded of the scene in the Wizard of Oz where the Wicked Witch of the West holds Dorothy prisoner in her castle and notes that Dorothy would certainly die, but that "how" was the question, because, "these matters must be handled delicately." Janet Yellin will need all her finesse in the years to come.

Is corruption protecting Nigeria from a downturn? Will the pain be felt in Switzerland?

Oil was 70% of Nigerian government revenues but is expected to be just one third this year due to the drop in prices. Nonetheless, the economy is expected to grow 3.25% this year, up from 2.8% last year and the budget deficit is expected to be only 2.2% of GDP. (Less that the US's 2.5%)

It is possible that the effects of the low oil price are attenuated in Nigeria by the fact that much of the oil money never reaches the economy in the first place. In 2014, for example, the head of the central bank lost his job when he complained to President Goodluck Jonathan that $20 billion had "disappeared" from the central bank's vaults over a single 18-month period. Likewise, when it turned out that despite having a big defense budget the Nigerian army soldiers sent to fight Boko Haram didn't have ammunition, one senator lamented that "we thought they were siphoning off 75% but it turns out it was 90%."

But no disadvantage is without some corresponding advantage, and we we seeing it in Nigeria. Since the money never reached the people, they do not feel its absence. The people who will ultimately suffer are the poor Swiss.

You may read the FT article on Nigeria's request for a $2.5 bn World Bank loan by clicking the picture below:

Retail sales trend say no US recession in the near term

The 0.7% annual rate increase in 4th quarter GDP was quite disappointing.  It was dragged down by negative numbers for investment and net exports.  But personal consumption remained strong at +2.2%.  The chart below from Fear & Greed Trader at Seeking Alpha indicates that the recession won't come until the Fat Lady (i.e. the consumer) stops singing.

4th quarter US GDP bodes ill for the future

GDP grew at 0.7% (annual rate) in the 4th quarter.  This is a weak result, albeit positive, and the balance of the sources of growth are unhealthy:

Personal consumption expenditures: +1.46%.
Gross private domestic investment:   -0.41%
Net exports of goods and services:    -0.47%
Government:                                      +0.12%
                                                           +0.70%

The biggest negative was net exports, and this is despite the positive effects of low oil prices in the balance.  The strong dollar is hollowing up US manufacturing; it is like the great sucking sound of famously heard  by Ross Perot.  The decline in investment also bodes ill for the future.

Consumption and government spending increasing are not sustainable sources of growth in the absence of the others.

2016 Outlook? Here is an cautionary anecdote about forecasting

From Prof. Schneider on Quora:

"Theodore Streleski spent 19 years working on his PhD at Stanford, and then beat his advisor to death with a ball-peen hammer, feeling that he had hurt his reputation and denied him scholarly support. . . 

"The irony is that the murder was in 1978, and Streleski was released in 1985, meaning he spent less time in prison for the murder than he originally spent in his PhD program. Upon his release he said 'I have no intention of killing again. On the other hand, I cannot predict the future.'"

I think that Streleski's humility is a healthy example for investors like us.

Canadian cash and all-in oil prod. costs are the highest.

The Canadian costs mean that their 2.5 million bpd of oil sands production will shut down as soon as the hedges run out unless WTI is at $40/barrel or better (WCS sells at a $15 discount.) Longer term, they need $70+.