Wednesday, May 4, 2011

Are you still sure the US will grow robustly in 2011?

So it has been a few more days and some are still confident that the U.S. economy is in 'escape-velocity'.

That is why 10yr USTreasuries have rallied 50bps from its recent highs.

Job growth was good, right?
That's quite a sudden change in Initial Jobless Claims, no? 4wk average up 20k in a few weeks. Headline number 53k higher in 9-10 weeks. This is the single number that I pay attention to instead of trading my life away on the monthly volatile and unreliable NFP.

Since the U.S. doesn't have a lot of manufacturing and its economy is based on services and consumption we should take a look at the american services PMI, the ISM Non-Manufacturing:

First chart: what a miss! Market expectations targeting 57 or so... the number came out way lower. Its components were simply horrible.

New Orders: back to 2009 levels, largest drop ever recorded.
Employment, slight drop, back to Oct2010 levels, barely expansionary.
New Orders - Inventories, NSA, seen in the seasonally adjusted chart: This baby is below 2007, 2008, 2009, 2010 levels.

It is tough to believe the economy will keep its growth pace, especially when QE2 ends, when I expect the equity markets to drop after a few misses in earnings and lower guidances from companies.

In the mean time... the US Dollar, the Euro and the GBP should keep its path lower against robust currencies from countries with low debt, hard assets in storage...

Will Bear-non-QE come to the rescue again?
I am sure the U.S. cannot afford eternal fiscal deficits.


  1. good a place to start with here...your recent post re: Jim Rogers reeled me in. So i've started at the beginning and working forward and already see i share a lot of your biases, outlooks, and heroes.

    "I am sure the U.S. cannot afford eternal fiscal deficits."

    Why not? Ok maybe not eternal. Special relativity uses objects moving 'near the speed of light' because only light moves at the speed of light, so lets call it, 'near eternal' -- or at the margin.

    Do you expect self-imposed constraints of default & austerity, or a market-imposed nWo, or growth miracle to end deficits?

    What are the alternatives?

    It appears to me self-imposed constraints will be still-born or used as pretext. So, what is the evidence pointing to a market-imposed smackdown of the dollar reserve system?
    ...or do we carry on, living in market hell for the next 30 years, with 1 foot always over the cliff, looking at it as the least worst scenario for all parties involved(anyone with electricity), boom-busting our way out from under the debt overhang...until finally the miracle of cold fusion kicks in and we all get rocket packs.

  2. Eternal Deficits:

    My base case is that the US cannot afford to either cut public spending or raise rates.
    Economic activity is simply too slow during the ongoing balance sheet recession. Any bump on the journey hits the US like if it was a mountain.
    We saw it last year when QE1 ended and the European Debt Crisis hit the markets. No wealth effect, no animal spirits.
    Now we're seeing it through the end of QE2, Japan's tragedy and global inflation (ongoing global monetary and fiscal tightening).

    The US is running over a trillion dollars in fiscal deficits and ZIRP. But what is the growth rate? Still 1.8% in 1Q and 2-2.5% is all we get for 2Q. NOT 'escape-velocity' in my humble opinion. No marginal effect of ZIRP and deficits.

    So I am pretty confident that spending will remain strong (or else = double-dip).
    But I don't think this spending will be enough (allied to ultra-loose monetary policy) to make growth higher than fiscal deficits and bring debt-to-GDP down. To improve earnings x expenditures.

    ** That means eternal nominal deficits.

    I expect a modest pace in US Dollar debasement to erode the value of the debt, through inflation. But this move will go on for a long time.
    Inflation kicks in, hurts the economy even more, and monetization is required due to greater need for public spending.

    There is no market-imposed signal now in the markets and I don't expect it to happen until the Fed buys a whole lot more debt. Without inflation or rapid USD debasement there will be no sell-off in USTs and higher rates. Check Japan.

    There are no good options for the US, Europe or the UK either. Bad times should come for these countries.

    On the relativity theory comes the "Printing presses x Growth Currency Basket" I posted somewhere on the blog (the USDCNY Calls posts references it): the only way for the US to get out of this mess is to inflate its way out. The US, the UK and Europe will be worse than other nations, therefore their currencies will suffer.

    To the endgame question I simply have no opinion about, but a good tail risk bet, that fits nicely in any portfolio nowadays, is having a 10-year S&P Index calls at strikes like 10,000 (10k). It costs around 40bps, so 4bps/year. It is very cheap in my opinion. Good risk-reward.

  3. ""But I don't think this spending will be enough (allied to ultra-loose monetary policy) to make growth higher than fiscal deficits and bring debt-to-GDP down. To improve earnings x expenditures.""

    Debt-to-GDP seems like an arbitrary target. The name of the game is getting re-elected and postponing pain for another day. Ratios are just a manifestation of the Rorschach dynamic, no?
    However, Steve Keen's research makes me believe the most important factor for economic growth is the marginal change in growth rate of debt. Nothing to do with the aggregates per se.

    I'm not ready to dive into the inflation debate yet.

    I like the 10yr S&P call idea. interesting.

  4. I like to view the Debt issue through other metrics as well:

    1. Interest payments as % of Expenditures
    2. Revenues as % of Total Debt
    3. Revenues as % of GDP
    4. Expenditures as % of GDP

    These are useful to gauge the ability of any company to pay down its debt.

    And charts on these are useful for detecting trends...