January 10

Rosenberg says that Q1 US GDP may come out as high as at a 4% annualized rate. But...

What is important is what happens in the second and third quarter when we see the U.S. economy hitting an important air pocket. In Q2, there is a loss of fiscal support at the margin. Moreover, we will be deeper into this renewed leg of the downturn of home prices, with negative implications for the household wealth effect, confidence, and spending. We will be seeing the peak impact from the runup in energy prices too. The inventory cycle has pretty well run its course as well (it was responsible for half of the GDP growth in 2010). It would also likely be prudent to assume that some risk aversion will resurface from the renewal of European debt concerns in March after the Irish elections (if the opposition party wins, expect the EU deal to be renegotiated and the debt to be restructured, and if that happens, look for other countries to follow suit). Of course, we have the debt-ceiling issue to contend with in March-April and the GOP are dangling $100 billion of spending cuts in front of the White House in order to get a deal done. This is not last year’s lame duck Congress. And this doesn’t add to uncertainty and possible disappointment in the second and third quarter?

The long road ahead. Paul Krugman.
notes that economy has to grow at least 2.5% per year just to keep unemployment from rising, and concludes:

suppose that from here on out we average 4.5 percent growth, which is way above any forecast I’ve seen. Even at that rate, unemployment would be close to 8 percent at the end of 2012

three viewpoints on the economy

first, the conventional cyclical interpretation by most economists who view the credit crunch-inspired recession as little different than typical post-war recessions:
Glory days: another good year in 2011? Liz Ann Sonders, Charles Schwab.

This reacceleration has inspired an uptick in GDP forecasts both for the fourth quarter of 2010 and the full year of 2011. There are numerous reasons for this increased optimism, including:

• Taxes are not going higher, while the bill also includes a payroll tax reduction and immediate and full expensing for business investment.
• Leading indicators have reaccelerated and manufacturing is expanding at a seven-month-high pace.
• Initial unemployment claims have significantly broken out to the downside.
• Credit conditions are improving markedly for both consumer and commercial loans.
• Real consumer spending is back in expansion mode, having surpassed its 2007 high (ahead of GDP doing the same).
• Earnings growth remains high and steady, keeping valuations reasonable.
• Core inflation remains contained.
• Merger-and-acquisition activity is picking up sharply, especially among technology and energy companies.
• Long-term yields are up, but short-term rates are low and steady; lending support to the economically important steep yield curve.
• QE2 is having success boosting asset prices and should offset some of the recent drag on the savings rate while boosting household net worth and confidence.  
• The election cycle greatly favors the pre-election year (2011), with an average annual gain of over 17% for the S&P 500 index and no down years since 1945.

second, a secular perspective influenced by debt dynamics, which leads to the conclusion that sustained economic growth will be illusory if not well-nigh impossible:
Why the world is financially doomed. Charles Hugh Smith.

1. When money is dear and difficult to borrow, then productivity and capital accumulation are encouraged, speculation, malinvestment and debt-based consumption are discouraged.
2. When money is "free" (zero-interest rate policy) and liquidity is unlimited, then the opposite conditions hold: speculation in risk assets, malinvestment and debt-based consumption are all encouraged, and productivity and capital accumulation are heavily discouraged.
3. When debts exceed the value of the underlying assets, the only way out of the Tyranny of Debt is to write off the debt on both the borrower and lender's balance sheets, wiping out their capital via liquidation and bankruptcy.
4. The "extend and pretend" policy pursued by all major nations is simply transferring the impaired debt from private hands to the taxpayers (public debt), crippling the economy with higher taxes and higher debt service.
5. The Central State's "extend and pretend" policy requires heavy borrowing every year to prop up the status quo, pushing the Central State (or equivalent, i.e. the Eurozone) in an inescapable double-bind: either continue increasing public debt and cripple the economy with high taxes and high public-debt servicing costs, or let the financial status quo of "profits are private, losses are public" implode.

third, a sociological, structural/institutional perspective, which implies that though corporate profits and therefore stock markets may still have reason to do okay, they are doing so via multinationalist policies which come at the expense of domestic economic prospects:
Corporate America: paving a downward economic slide. Harold Meyerson, WaPo.

Our economic woes, then, are not simply cyclical or structural. They are also - chiefly - institutional, the consequence of U.S. corporate behavior that has plunged us into a downward cycle of underinvestment, underemployment and under-consumption.

other items of concern, in addition to those above, to contrast with Sonders' points:
- high oil and gas prices tax on consumer (undoing benefit of reduced payroll taxes)
- ditto for food price inflation
- persistently low inflation / disinflation
- steep yield curve helps banks but hurts savers (low short-term rates reduce household interest income) and hurts those in debt trying to refinance
- US housing prices in decline since July persists as more foreclosures come on stream (having been stalled in autumn due to fraud-closure and robo-signing scams and then due to holidays) and shadow inventory adds to existing excess supply
- revival of uptrend in residential mortgage delinquencies as Option ARM and Alt-A resets trend up from May through November, with residential mortgage rates now higher than they were in the fall
- delinquencies on commercial mortgage backed securities hit a record high in December
- potential political gridlock due to typical political dynamics but also to deficit hysterics
- what happens to QE come June: more? less? is a wildcard for both economy and markets
- policies of artificially boosting asset prices to induce a wealth effect to induce increased consumption are unsustainable and have historically worked for a time.... only until they failed miserably with a bust
- equity valuations based on reliable historical metrics, Shiller PE and Q-ratio, are very high
- forward earnings estimates' extrapolation of recent earnings growth implies expansion of profit margins from already very high levels, in contrast to historical very regular pattern of reversion to mean of profits/GDP
- markets not just over-valued but over-bullish and over-bought in period of rising yields
- high corporate cash balances not only mask high corporate debt burdens (cash is high in large part because debt issuance has been high) but indicate that companies are not willing to make investments in expansion of productive capacity
- state and local government retrenchment and possible defaults
- sovereign credit risk in Europe
- refinancing risk for both European banks and governments in spring
- risk of Chinese credit and housing and malinvestment bubbles popping due to government measures to cool inflation


Risk trades will test investors through 2011. Stacy Williams, Head of FX Quantitative Strategy at HSBC, in the FT.

[The risk-on / risk-off trading pattern] reflects the great uncertainty in the outlook for the global economy in the coming years. A world where stable growth returns and government indebtedness is brought under control is very different to one where growth falters and sovereign debt problems escalate. Markets are struggling to correctly price in these very different outcomes. Feelings of optimism and pessimism oscillate nervously within the markets and the prices of a whole range of assets move up and down with them.... Only when talk of quantitative easing, sovereign risk, and deflation starts to fade will we see any change. It would be optimistic to imagine this happening within the next eighteen months.

Baltic Dry and the risk trade. Bruce Krasting.
of the 3 things weighing on the BDI now, Australian floods leaving ships idle, new ships having come on service in last 18 months so no shortage of ships, and China's previously very aggressive pace of accumulating raw materials has slowed in last 60 days:

"China trumps everything. It's not just shipping rates; all the froth in the commodities market is at risk."

This is of course just one mans opinion. Who knows, maybe China will ramp up its infrastructure development again sometime soon. But given that they are going hell bent for leather in the opposite direction to cool an overheated economy I would suggest that a revival of their build-out program is the least likely thing we might see.

There are two basic trades. The Growth Trade and the No Growth Trade. In many areas of the markets (stocks, commodities, currencies and to some extent bonds) the Growth Trade is fully priced in at the moment. When (if) more evidence of a China slowdown comes out it is possible that a fair bit of “air” will have to be released. Nothing like that is in today's 'print'.

other fare, first 3 serious, then 1 hilarious:

Twelve virtues of rationality. Eliezer Yudkowsky.

The first virtue is curiosity. A burning itch to know is higher than a solemn vow to pursue truth.... The third virtue is lightness. Let the winds of evidence blow you about as though you are a leaf, with no direction of your own. Beware lest you fight a rearguard retreat against the evidence, grudgingly conceding each foot of ground only when forced

Peak oil and the changing climate. The Nation, featuring Bill McKibben, Noam Chomsky, Dmitri Orlov, James Kunstler, Nicole Foss, Richard Heinberg.

Population 7 billion. By 2045 global population is projected to reach nine billion. Can the planet take the strain? National Geographic.


Dave Barry's Year in Review. Washington Post.