Sunday, January 30, 2011


The recovery is over! It ended during the fourth quarter of last year when real GDP exceeded the previous record high during Q4-2007. From that peak, real GDP plunged 4.1% through Q2-2009. Since then, it has recovered 4.5%. The economy is transitioning from the recovery phase to the expansion phase of the business cycle. Growth should be more self-sustaining as the pace of employment quickens. So there should be less need for stimulative fiscal and monetary policies.

State and local spending has been flat for the past decade following a 33% increase during the 1990s. It is likely to be the weakest component of GDP this year, and could also weigh on consumer spending. That’s because these governments are running out of federal stimulus money and will have no choice but to reduce their payrolls, especially after July 1 when their fiscal years begin.

Thursday, January 27, 2011

The Fed & the PBOC

What is happening with the Fed’s balance sheet? It is expanding under QE-2.0. It rose to a record $2.21tn, up $165.8bn since QE-2.0 was announced on November 3, 2010. Over this period, the Fed’s holdings of US Treasuries rose $231.6bn, while its portfolio of other securities (Agency Debt + MBS) declined by $65.8bn. On the liability side of the Fed’s ledger, bank reserves rose $79.0bn over this period, while US Treasury deposits are up $24.7bn.

China’s central bank is the world’s champ among quantitative easers. The Chinese continue to accumulate lots of foreign exchange reserves as they continue to manage the foreign exchange value of their currency. These purchases have not been “sterilized,” i.e., offset by selling domestic assets of the PBOC. As a result, the central bank’s balance sheet continues to grow rapidly and so do the reserves (and loans) of China’s financial institutions.

Wednesday, January 26, 2011

Technical & Fundamental Indicators

There may be too many bulls in the stock market, suggesting that a correction is increasingly likely. Investors Intelligence Bull/Bear Ratio climbed to 2.9 this week, after slipping from an 8½-month high of 3.0 to 2.7 last week. The reading was at 0.8 at the end of August, which was the lowest since March 24, 2009.

On the other hand, our Fundamental Stock Market Indicator (FSMI), which is a very good coincident indicator of the S&P 500, was at a cyclical high last week.

Monday, January 24, 2011

Crude Oil Demand

Global oil demand is back at a record high. It rose to 87.3mbd over the past 12 months through December, surpassing its previous record high during the summer of 2008. That’s a very impressive recovery from the 2009 cyclical low of 84.5mbd. Yet, the price of a barrel of crude oil remains well below its record high of $145.29 on July 3, 2008. That’s because the supply of crude oil also rose to a record high during December of last year. This happened with Saudi Arabia still producing less than it did during previous times when global oil demand was rising to new highs. In other words, the world’s swing producer still has plenty of excess capacity to stop oil prices from climbing above $100 and retesting the 2008 highs anytime soon. That is likely to change over the next 2-3 years as global oil demand continues to soar, especially among the emerging economies.

Oil demand in the New World now exceeds demand in the Old World by 29.1%. We track demand in the Old World countries of Japan, the US, and Europe versus the rest of the world, a.k.a. the New World. In the former, it just started to recover late last year, but remains near the lowest readings since the summer of 1994. The New World’s demand, which exceeded Old World oil usage for the first time on record in January 2005, now exceeds it by 11.1mbd, rising to a record high of 49.2mbd in December. (We update these charts monthly for our subscribers in our "Global Oil Demand & Supply.")


Sunday, January 23, 2011

Leading Economic Indicators

Unlike the ECRI's Weekly Leading Index, the monthly Index of Leading Economic Indicators (LEI), compiled by the Conference Board, did not dip last year, though it did increase at a slower pace from June through October. Since then, it has been on a tear again with a gain of 1.0% during December, following November’s 1.1% increase. During both months, eight of the 10 components of the LEI rose. Such broad-based increases are good harbingers for economic growth during the first half of the year. By the way, the LEI is at a record high. It actually surpassed the previous record high during November 2009.

The Index of Leading Economic Indicators is a great 12-24 month leading indicator of federal tax receipts. It certainly would come as a big surprise to lots of New Normal prognosticators if federal, state, and local governments start to report improving tax revenues and record highs in these receipts by 2012. The 12 month sum of federal tax receipts through December rose 7.9% above the December 2009 total to the highest since May 2009. (We update these charts monthly for our subscribers in our "High Frequency Economic Indicators" and our "US Government Finance" briefing books.)

Wednesday, January 19, 2011

Inflation in China

China’s CPI inflation rate was 4.6% on a y/y basis during December, down a tad from 5.1% in November. In the US, the CPI inflation rate remained subdued at 1.5% during December. The CPI for food is soaring in China, rising 9.6% y/y in December, while it was up just 1.5% in the US during December. Excluding food, the CPI rates of inflation in China and the US are closer at 2.1% and 1.5% in December, respectively.

China’s global outreach program is clearly motivated by the nation’s desperate need for more food, energy, and industrial commodities. With such a large motivated buyer in the market, it’s no wonder that commodity prices are soaring, and should continue to do so this year. The Chinese are bound to counter Washington’s demands for a stronger currency by complaining that the Fed’s QE-2.0 program is boosting commodity prices. Nice try. The fact is that China’s inflation problem is homegrown. No one does quantitative easing better than the Chinese. As I’ve noted previously, over the past two years through November, China’s international reserves, bank reserves, and M1 are up 47.6%, 51.9%, and 57.1%. (We update these charts monthly for our subscribers in our China briefing book.)

Tuesday, January 18, 2011

World Exports

Global stock markets have been rallying since early 2009 because world trade has rebounded and is booming again. The value of world exports soared over 50% since its February 2009 cyclical low. It should surpass the record high of 2008 early this year. Emerging nations are leading the boom, with their exports up 65% during the current global recovery. That’s nearly double the gain of G7 exports, which are also staging an impressive recovery.
Emerging nations’ exports surpassed the exports of the G7 nations  in July 1996. Since then, their share of world exports expanded from 50.1% to 65.5%, while G7’s share dropped from 49.9% to 34.5%. The divergence between the New and Old World’s shares should continue to widen as the emerging economies continue to expand at a rapid clip and trade more with each other. (We update these charts monthly for subscribers in our World Trade Economics Alert.)

Industrial Commodity Prices

Our favorite indicator of global industrial activity is the CRB raw industrials spot price index. It has been in a vertical ascent into record high territory ever since the Fed started to discuss QE-2.0 late last summer. The index includes the following 13 commodity prices: burlap, copper scrap, cotton, hides, lead scrap, print cloth, rosin, rubber, steel scrap, tallow, tin, wool tops and zinc.
While it is widely believed that rising commodity prices are bad for profits, this chart shows that the y/y growth in 12-month forward earnings of the S&P 500 is highly and positively correlated with the y/y change in the CRB raw industrials spot price index. Rising commodity prices may squeeze some companies’ profit margins, but many others can pass them through to prices or offset them with productivity gains. In addition, commodity-related industries certainly benefit from higher commodity prices. (These charts are updated regularly for subscribers in our High Frequency Economic Indicators.)