Raytheon Unveils Military-Grade Smart Bond Technology

April 1, 2014
Raytheon Unveils Military-Grade Smart Bond Technology

Traditional bonds are not well suited to low level precision attacks on hardened deflationary ground targets. It is for this reason that we are proud to announce a new bond for the 21st century. The Pathway QE-IV Laser Guided Bond is the most advanced precision-guided bond in the history of monetary policy.

A complex algorithm involving 10-year traditional treasury yields and short-term Fed Funds rates allows these bonds to fly well below the radar of passing hyperinflationists. Further, a large warhead of excess automobile inventory makes this bond a true blowout bunker buster.

The most advanced technology lies (repeatedly) in its nose-mounted laser. This laser, firmly affixed to the current Fed Chairman's nose, has an extremely large field of view. An oversized rear view mirror has been installed as well, for those times when additional "forward" guidance may be necessary.

In optimal conditions, this bond has a precision of +/- 0.1%. However, the laser guidance does have limitations. In periods of severe bad weather (Operation Polar Vortex) or when the laser is simply switched off to conserve energy, all guidance is lost. In these situations, the bond reverts to its predetermined optimal glide path as seen in blue in the following chart.

Click to enlarge.

In all seriousness, why does every day feel like April Fool's Day? ;)

Source Data:
St. Louis Fed: Custom Chart

Parabolic Trend Failure of the Day (Musical Tribute)

The following chart shows the 12 month moving average of merchant wholesalers' drugs and druggists' sundries sales divided by disposable personal income.


Click to enlarge.



Source Data:
St. Louis Fed: Custom Chart

The Sarcasm Report v.188

March 19, 2014
U.S. News & World Report : The case for living on half your income

The payoff is pretty awesome if you can swing this major financial task. Asking a family to save half their income today is like asking most people to cut off their left hand. Thoughts abound around how this will happen and what sacrifices must be made. But the payoff in the end saves you money and keeps you afloat should a worst-case scenario materialize.

If this is awesome for some of us, then it certainly must be awesome for all of us!

The Roman Empire's Worst-Case Scenario Program

1. N = "I" (in Roman Numerals).
2. Save half of our current incomes.
3. Retail sales plummet.
4. Incomes plummet.
5. N = N + 1 (II, III, IV...).
6. Hello Great Depression N.
7. If greatly depressed, then go to Step 2.
8. Awesome payoff!

As you can clearly see, we can't actually make it to Step 8 without some help.

6a. Hello Great Depression N.
6b. Add "mother's little helper" to the public water supplies!
6c. More dogs and ponies (debt based euphoria)!
6d. More smoke and mirrors (uplifting political speeches)!

Ugly Chart of the Day: Automobile Repair and Maintenance (Musical Tribute)

The following chart shows the 12 month moving average of automotive repair and maintenance production and nonsupervisory employee minutes worked per thousand vehicle miles traveled.


Click to enlarge.

The exponential growth (red trend line) that we've seen in this recovery's automobile repair and maintenance employment failed one year ago. It would seem that the era of pent-up demand for automobile repair and maintenance has come to an end.

This is just one more indication that the party is winding down again, not that many seem to notice or care. Unless we can figure out a way to throw ourselves another epic Y2K party, I would find it very hard to believe that this economy can unexpectedly accelerate to the upside from here. We don't even have the strength needed to make it back to the trough of the dotcom bust apparently.

And on that note, heaven help us if we do indeed accelerate. As seen in the chart, up isn't the only direction possible. In fact, down happens at least as often.

I looked on outta the window and I started countin' phone poles, goin' by at the rate of four to the seventh power. Well I put two and two together, and added twelve and carried five; come up with twenty-two thousand telephone poles an hour.

I looked at Earl and his eyes was wide, his lip was curled, and his leg was fried. And his hand was froze to the wheel like a tongue to a sled in the middle of a blizzard. I says, "Earl, I'm not the type to complain; but the time has come for me to explain that if you don't apply some brakes real soon, they're gonna have to pick us up with a stick and a spoon."

Well, Earl rared back, and cocked his leg, stepped down as hard as he could on the brake, and the pedal went clean to the floor, and it stayed right there on the floor. He said it was sorta like steppin' on a plum.

Source Data:
BLS: Employment
St. Louis Fed: Vehicle Miles Traveled

Robbing Retiree Peter to Almost Pay Retiree Paul (Musical Tribute)

The following chart shows real interest income plus real Social Security benefit income (per Capita, February 2014 dollars). As expected, real Social Security income is rising as more and more people begin retire. Unfortunately, the same cannot be said of interest income.


Click to enlarge.

Hang in there Retiree Peter! I have it on "good" authority (CNBC), that it's only a matter of time before interest rates rise up from the ashes and enhance that retirement income! And if that doesn't work, you can always try swinging for the fences on high-priced risk assets. What could possibly go wrong again?

Retiree Peter's Song

Sitting in this carpool

They're talking like damn fools

Got CNBC news blues!

And they're serving up hope

As I'm trying to cope

With savings that are too few!

Is it any wonder I'm so queazy?

Is it any wonder this recovery?

Well I'm so tired of zero

We get nothing but ZIRP

My bank's jammed with CDs!

I'd go out cruisin'

But I've no fuel to go

It is nothing but QE!

Is it any wonder I think it's criminal?

Is it any wonder this saver's in hell?

Source Data:
St. Louis Fed: Custom Chart

The Scariest Employment Chart Ever

The following chart shows the total food stamp participants divided by the total manufacturing employees, construction employees, agriculture employees, and information services employees.


Click to enlarge.

Boo!

See Also:
Headline for Next Friday: "U.S. Private Employment at All Time High"

Source Data:
St. Louis Fed: Custom Chart
USDA: SNAP Annual Summary

Velocity of MZM Money Stock (Musical Tribute)

The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.

Click to enlarge.

Damn! We're really moving! Just look at that recovery!



See Also:
Sarcasm Disclaimer

Source Data:
St. Louis Fed: Custom Chart

The Job Apocalypse Is Hiding in Plain Sight

March 27, 2014
CEPR: The Job Apocalypse That Is Hiding From The Bureau of Labor Statistics

There is a growing industry in the United States of people promoting stories about how robots and other technological innovations are going to make us all unemployed.

...

The issue is simply one of how fast we might expect these new technologies to increase productivity and displace workers. The answer we have been getting to date from the Bureau of Labor Statistics (BLS) is not very fast.

The following chart shows real output per person in the business sector.


Click to enlarge.

It would seem that the exponential trend failure in this chart has created a Center for Economic and Policy Research sarcasm failure. That's two failures in one!

The Sarcasm Knife


Sarcasm is a dangerous weapon, especially when holding it by the blade instead of the handle.

Source Data:
St. Louis Fed: Business Sector: Real Output Per Hour of All Persons

Exponential Trend Failure of the Day: The White Picket Fence Dream

The following chart shows private housing building permits for 1-unit structures per capita.



Bad weather last year?

Source Data:
St. Louis Fed: Custom Chart

The Economy of SPAM

November 30, 2007
Laser-Faire Economics

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Don't even get me started on how many times we're called even though we're on the Do Not Call list. That has 0.0000% chance of paying off for anyone who tries it, at least in this household.

Despair.com: Persistence

It's over, man. Let her go.

Our "Durable" Economy

The following chart shows the 12 month moving average of real manufacturers' nondefense capital goods new orders excluding aircraft per capita (February 2014 dollars).


Click to enlarge.

Many financial "experts" are talking about growth really picking up from here but in reality:

1. We are really struggling to make it back to the trough of the dotcom bust.
2. Real growth has been really stagnant for the past 2 years.
3. Stagnation really happened at the top of the previous two bubbles.
4. What came next was really unpleasant.

So what's going to make growth accelerate from here? Taper 2.0? ZIRP^2? More hype?

King is the latest disappointment in a much-hyped and widely watched tech IPO.

Source Data:
St. Louis Fed: Custom Chart

Real Owners' Equity in Real Estate per Capita

Click to enlarge.

The Long-Term Plan for Financial Stability

1. Return to the trend line.
2. Reduce volatility.

Which trend line? Oh, please. Like it matters!

You are about to participate in a great adventure!

Source Data:
St. Louis Fed: Custom Chart

The Higher Education Business Cycle and/or Bubble

The following chart shows the percentage of employees who work in educational services.


Click to enlarge.

Hurray! We're back at the bottom of the channel again (last seen in November of 2007)! We might therefore expect a huge surge in higher educational services employment from here.

Don't let it concern you that the last two surges were due to the economy falling apart (as many discouraged unemployed workers therefore scrambled to get into college).

Look on the bright side. If this chart's long-term exponential growth trend is any indication, then the best education you can probably get would be to learn how to train other people to train other people. Leverage up!

Put another way, you train two people, and then they train two people, and so on, and so on! Just think of the sustainability! It's a Faberge economy!



It's only a matter of time before everyone is working in the educational services industry! Other than massively growing student debt, what could possibly go wrong? For the sake of argument, what's the worst case scenario? Would it really be so bad to have the most highly educated baristas on the planet?

March 27, 2013
Why a BA is Now a Ticket to A Job in a Coffee Shop

A new paper from Paul Beaudry, David Green, and Benjamin Sand argues that these worried kids--and their worried parents--are not just imagining things. The phenomenon is all too real. Skilled workers with higher degrees are increasingly ending up in lower-skilled jobs that don't really require a degree--and in the process, they're pushing unskilled workers out of the labor force altogether.

Source Data:
St. Louis Fed: Custom Chart

Sliding Into the Deflationary Abyss

The following chart shows the 3 month moving average of the 10 year treasury yield and the annual change in private production and nonsupervisory employee weekly earnings.


Click to enlarge.

November 21, 2002
Deflation: Making Sure "It" Doesn't Happen Here

As I have indicated, I believe that the combination of strong economic fundamentals and policymakers that are attentive to downside as well as upside risks to inflation make significant deflation in the United States in the foreseeable future quite unlikely. But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then?

Japan laughs at our arrogance? Just a thought.



Source Data:
St. Louis Fed: Custom Chart

Net Worth Bubbles on the Backs of the Workers

The following chart shows household and nonprofit organization net worth divided by annual private production and nonsupervisory employee earnings.


Click to enlarge.

What could possibly go wrong again?

Source Data:
St. Louis Fed: Custom Chart

Driving ZIRP Home

Click to enlarge.

The black line (left scale) shows the fed funds rate.

The blue line (right scale) shows the 12-month moving total of vehicle miles traveled.

Maybe we'll make it through the ceiling (seen in purple) this time. Maybe we won't. In any event, it is a long climb back to 2007.

Correlation does not prove causation, and that is certainly not what I'm trying to do here. I just find it interesting. That's all. Further, I think it is open for debate on which way the actual causation would be.

Has ZIRP caused oil prices to rise and therefore vehicle miles to stagnate? Or have struggling vehicle miles been a sign of a struggling economy and hence the Fed's desire to continue ZIRP? Or perhaps both working in combination?

For what it is worth, even if vehicle miles traveled do rise to 2007 levels at some point in the not too distant future, I would not expect to see the fed funds rate necessarily follow suit. This chart does not extrapolate backwards in time all that well. Over the long-term (until recently), vehicle miles traveled have been growing exponentially. The same cannot be said of the fed funds rate (which has generally been in decline for 30+ years).

Source Data:
St. Louis Fed: Custom Chart

Americans Not on Food Stamps

Click to enlarge.

Over the last 13 years, for each person our population has grown we have added one person to the food stamp program. We better hope that trend does not continue. It's already lasted 5 years longer than it did in the 1970s.

Source Data:
St. Louis Fed: Population
USDA: SNAP Annual Summary

CBO: Congressional Budget Optimists

The following chart shows the annual change in annual nominal potential GDP as estimated by the Congressional Budget Office.


Click to enlarge.

I hope they didn't spend too many man-hours coming up with those long-term future estimates. I managed to do it in a few minutes by simply extrapolating the past two bubbles (and adding the point heading into the recession of the early 1990s for extra stability).

Although the Congressional Budget Office clearly acknowledges the declining long-term potential growth in nominal GDP (much like I did with my trend line), they appear to be a bit overly optimistic looking forward.

That's assuming that you find it as hard to believe as I do that we can stick to that red trend line for 7 years in a row (from 2018 through 2024) without another recessionary linear trend failure occurring.

Further, if it takes ever larger "bubbles" to unlock the true declining nominal "potential" of our economy, then we are seriously @#$%ed over the long-term. What if we can't think up enough suitably epic bubbles to inflate? How could we make it back to the declining trend line?

In the meantime, might as well come up with something else to believe in, just so we have a backup plan.

February 23, 2010
The Earth is flat? What planet is he on?

"I haven't taken this position just to be difficult. To look around, the world does appear to be flat, so I think it is ­incumbent on others to prove ­decisively that it isn't. And I don't think that burden of proof has been met yet."

Does the chart in this post prove that our country is in decline? Not really. Perhaps it would be best to just ignore the evidence then and pretend it does not exist. See? Doesn't that make things feel better?

See Also:
Real Potential GDP Growth: 75 Years of Bad Weather So Far

Source Data:
St. Louis Fed: Custom Chart

Operation Titty Twister Update

In 2012, I posted the following chart. It is time for an update.

November 8, 2012
Operation Titty Twister

The following chart shows the Fed's treasury securities maturing in more than 10 years divided by the Fed's treasury securities maturing in 1 to 5 years.

Click to enlarge.

The twisting will continue until morale improves?

Here is the update. I have added retail sales growth to the chart so that you can see how effective all that titty twisting was.


Click to enlarge.

In black and blue (pun intended, left scale), you can see the ratio exponentially rise and then fail miserably. It's like the Fed just gave up. Out of curiosity, did anyone notice Bernanke waving a white flag at the time?

In the red (pun intended, right scale), you can see that total nominal annual retail sales growth has been declining for three years (and that the titty twisting pretty much had no effect).

As seen in the chart, I think it is safe to say that retail sales morale has not improved (or at the very least, shouldn't have). The titty twisting is over though. Go figure. Perhaps the next attempt will involve a swift kick to the gonads? Seriously, people need to know that the Fed is on top of the situation and is willing to do whatever it takes to improve morale. And if gonad kicking doesn't work, there's always eye-gouging and hair pulling, lol. Sigh.

As a lover of puns, how can I possibly be expected to resist referencing the Titty Twister bar from the movie From Dusk till Dawn? That's asking way too much of me!

In fact, this whole economy feels like a Quentin Tarantino movie. Titty twisting is at home in Sin City. There's plenty of Pulp Fiction, the Reservoir Dogs are running low, and Kill Bill is the Fed's ZIRP policy of choice. Treasury bill yields are pretty much dead now. That's not the worst of it though. Many seem to think that the economy is Death Proof thanks to ZIRP.

Hey, Pam, remember when I said this car was death proof? Well, that wasn't a lie. This car is 100% death proof. Only to get the benefit of it, honey, you REALLY need to be sitting in my seat. - Stuntman Mike, Death Proof (2007)

What fantastic timing! 2007? Genius!

We are the passengers! We are not the drivers! Literally. We are sitting in the wrong seats! Damn those Inglourious Basterds!

Let's sum this up. The economy expected a neverending stream of titty twisting but all it got was a wild orgy of excessive risk taking in its place. How sustainable will that be? Not very! Let's hope I'm wrong to be wary, but I see plenty of risks here and I have absolutely no desire to swing for the fences.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart

Manufacturing and Agriculture Employment

Click to enlarge.

1. We should definitely base our long-term investment decisions on the steady, predictable, and prosperous post World War II era. Every financial expert tells us this. Therefore, just extrapolate that trend channel well into the distant future I say! 50+ years of relative stability (until 1998 anyway) can't be wrong!

2. It's only a matter of time before we get back in the channel, and just think of the amazing growth opportunities we'll have as we do it. At a minimum, that's at least 6 million jobs coming our way!

3. Don't believe me? Look at the fantastic progress we've made since the end of the Great Recession. We've already gained back roughly 800,000 jobs of the roughly 7.5 million jobs lost since 1998. And it only took us 4 years to do it!

4. What is wrong with you? Why is this so hard to understand? Since 2009, the trend is definitely up and it is definitely sustainable. The employment future's so bright in manufacturing and agriculture that we've all gotta wear shades! Not only are we apparently ditching twenty-first-century combines, but we're also dumping smarter factory robots too. More hard manual labor is here to stay! Isn't that fantastic? Not only that, but we're going to spread all this extra wealth around too, as evenly as humanly possible no doubt. Gone are the days of rising income and wealthy inequality! Everyone will be working on farms and/or in factories again someday!

5. All it took was more debt and ZIRP that just won't quit. As the Chinese almost say, may we live in interest-free times! Some see it as a curse. Not me. We are truly blessed! The weaker our economy gets, the stronger and more resilient it becomes!

Damn. Where did everyone go? I was warned to not do a hard sell on this wacky prosperity theory. I clearly should have offered more free candy and refreshing iced beverages during my presentation. It's just that there have been so many budget cutbacks in these lean times. The costs of free candy and iced beverages can no longer be absorbed as easily as they once were. What's an optimistic pessimist, such as myself, supposed to do? I work with what I've got!

Oh, crap. I just broke my sarcasm meter. Those things don't come cheap either. Well, that's not quite true. I import them one cargo container at a time. I've got so many I don't even know what to do with them all.

This post inspired by Troy who pointed out the agricultural employment picture in a comment found here.

Source Data:
St. Louis Fed: Custom Chart

Quotes of the Day

September 12, 2011
Report: CD rates to go negative

If you would have told me five years ago we'd have a real possibility of seeing negative deposit rates in this country, I would have called you crazy, but the economics don't lie. If you have a ton of people putting money into deposit accounts and nowhere for the banks to achieve adequate returns on those deposits sufficient to pay interest to investors, then the result is negative interest rates. It happened in Japan when it was in a liquidity trap, and it very well could happen here.

This isn't the Matrix. I was not forced to choose between the blue quote and the red quote, lol. Sigh.

Most might argue that the 0.38% interest rate on the typical 12 month CD was pretty darned low. As seen in the following chart, that didn't stop it from getting cut in half during our "recovery" though.


Click to enlarge.

One can only imagine what might happen if the "recovery" begins to fizzle.

See Also:
Banks Don't Believe the Rising Interest Rate Story

Source Data:
St. Louis Fed: Custom Chart

Banks Don't Believe the Rising Interest Rate Story

Click to enlarge.

The data in black shows the interest rate spread between the typical 5-year CD and the 3-month CD on non-jumbo deposits. This series does not pay much attention to every little detail spoken by a Fed Chairman apparently. Just look how smooth and orderly the data moves.

The data in blue shows the interest rate spread between the 5-year treasury and the 3-month treasury. This series apparently loves to pay attention to every little detail spoken by a Fed Chairman. Just look how chaotically the data moves.

Based on the chart, banks sure aren't buying the rising interest rate story. Perhaps it might have something to do with the growing deposit glut. No matter how much lip service the rising interest rate story gets, banks still look at their deposits and no doubt wonder where the rising interest rates will ultimately come from. It's not like they are going to suddenly offer 5% CDs on a whim, now are they?

For what it is worth, the 5-year treasury currently yields roughly 0.75% more per year than the typical 5-year CD. The typical retail investor probably doesn't know how to buy a 5-year treasury though, and I doubt many on Wall Street are going to offer detailed instructions any time soon. And why is that? There's little a middleman likes less than being cut directly out of the transactions. It's also why few on Wall Street will mention I-Bonds or EE-Bonds.

How can Wall Street make enormous profits if everyone is buying directly from the government? No, sir. The best way to make money in today's economy is to day trade violent moves in the fixed income markets with a "trusted" Wall Street professional or two guarding your back. No doubt about it.

This is not investment advice (especially that last paragraph infused with heavy sarcasm).

Source Data:
St. Louis Fed: Custom Chart

A Bold Prediction: When Will Real Estate Fully Recover?

The following chart shows household and nonprofit real estate market value divided by disposable personal income (since 1980).


Click to enlarge.

So here is my bold prediction using 20/20 hindsight goggles. The market value of real estate compared to disposable personal income will fully recover one year ago!

As an added bonus, we're making sensational progress on reflating the next economy crippling housing bubble. This is fantastic news for those who believe that a stock market bubble alone can drive our economy forward in the coming years! Woohoo!

Too much sarcasm? Seems excessive again.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart

Desperately Attempting to Relive the 1990s (Musical Tribute)

The following chart shows the annual average of nonfinancial corporate equities divided by disposable personal income.


Click to enlarge.

We've had two "sure thing" exponential trends fail so far (as seen in the green and orange trend lines). We're now working on our third (as seen in red). It's only a question of timing, since there is no way that 10.7% annual growth rate is sustainable over the long-term.

Note that the 1990s had a 10.7% growth rate with a 0.97 correlation. We've had that same "sure thing" growth rate and that same "sure thing" 0.97 correlation since the Great Recession ended.

Don't let it concern you that the ratio is now higher than it was heading into the Great Recession. What's the worst that could happen again? Baby needs new shoes! You can't win if you don't play! Buy now or forever be priced out!

My brain says I'm receiving pain
A lack of oxygen
From my life support
My iron lung

We're too young to fall asleep
To cynical to speak
We are losing it
Can't you tell?

We scratch our eternal itch
A twentieth century bitch
And we are grateful for
Our iron lung

Update:

Here is a bonus chart to show why the 1980s and 1990s will not be soon repeated.


Click to enlarge.

1. Parabolic growth is not even remotely sustainable.

2. 2013's average ratio was 1.55, which is more than triple the 0.49 ratio seen in 1982.

Source Data:
St. Louis Fed: Custom Chart

Exponential Trend Failure of the Day

Click to enlarge.

Hey! We might actually recover from this failure. Woohoo!

Here's a flowchart to help you see where you stand.


Click to enlarge.

Source Data:
St. Louis Fed: Custom Chart

Peak Real Disposable Personal Income

The following chart shows the natural log of real disposable personal income in the United States. I am using natural logs so that constant exponential growth will be shown as a straight line.


Click to enlarge.

As seen in the red trend line, the growth path we are on is most certainly not straight. It is following a parabola much like a baseball in flight would. Should the extremely highly correlated trend (r-squared = 0.996) in red continue, peak real disposable personal income will be achieved in 2052. For those keeping track at home, that's just 38 years from now and we're currently right on trend (as seen in the purple data point).

It gets worse. This is the total real disposable personal income for all of us. If our population continues to grow, then real disposable personal income per capita will peak sooner (as more of us attempt to share the pie).

I'm not done yet though. Should income inequality continue to rise, then real disposable personal income for the median American will peak sooner still (as income is siphoned off to the richest among us).

If I could point to just one chart that summed up my entire "Illusion of Prosperity" beliefs (as a saver by nature), then this would be the one. I doubt I shall ever find its long-term equal. Sigh.

This chart also explains why I am and have been so willing to lock in real yields on long-term TIPS and I-Bonds. As a retiree, I certainly do not expect my real disposable personal income to explode higher in the coming years (especially in the land of ZIRP). Let's just put it that way.

Keep in mind that disposable personal income includes dividends and government transfer payments. From my perspective, the mix might change over time but it is unlikely that the total will. There have been many ups and downs since the Great Depression (wars, baby booms, moon landings, oil crises, stagflation, the booming 80s and 90s, globalization, fully automated factories, student loans, dotcom bubble, housing bubble, Facebook, Twitter, Bitcoin, and so on, and so on). None of it has materially affected the trajectory of our long-term path though, and it very much looks to be peaking. Try telling that to an optimist though. 200 years of history, blah, blah, blah, blah, blah...

And on that note, the future's so dim I gotta draw the shades (and brace for impact again). Sigh.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart

The Fed's Rear View Mirror

Click to enlarge.

The black line shows the annual growth in the 2 year moving average of retail sales.

The blue line shows the annual average of the 2 year moving average of the Fed Funds rate.

It might seem a bit silly to do the blue series this way (an average of an average), but I want to make sure that I'm comparing apples to apples, while simultaneously smoothing out the noise. Both smoothed series should be nearly perfectly aligned. My ultimate goal is to test the reaction time of the Fed as changes in retail trade occur.

Note that the growth rate in retail sales is currently slowing just like it was heading into the last two recessions. That's not good and very few seem to notice or care. It's especially bad because most people seem to think the 10-year treasury yield is artificially low. I strongly disagree. It's too high. Seriously, that's what I believe.

If I am right (might not be) and the next recession is looming then...

1. What can we expect for help when we're already in ZIRP?
2. When can we expect help?

I have no answer for the first question. Who knows what insanity the Fed will ultimately try next? I think I can offer some insight into the second question though. Take a look at that chart again. Do you see what I see? Here, let me help. I'm going to shift the blue series to the left by 2 full years.


Click to enlarge.

Pay special attention to the period from 2001 to 2009. Good @#$%ing grief. I had to impose a two year lag to get both series to line up, and line up they did!

The Fed apparently sees and reacts, with nearly crystal clarity, to what has happened 2 years previously. If that is true, then they are just now seeing the booming retail sales growth in January of 2012. No wonder they are tapering. No wonder they are talking about ending ZIRP in 2015. No wonder Bernanke couldn't spot the housing bubble in real time.

Now let's look at the Great Recession. Note that the Fed would have probably moved their rate well below 0% if it had been possible. Since it wasn't possible, they tried to make up for it by sticking with ZIRP for an extended period.

It was hoped that the economy would accelerate to the point the Fed would have to raise short-term rates at some point. I remain extremely skeptical. As seen in the charts, overheating would be the last word I would use to describe what's been happening to retail sales growth since 2012. And unless you truly believe that this winter's weather can explain a declining growth rate over two years, then you too may wish to be skeptical.

Update:

My first update stated that I had concerns over the math. The original post stands as is. Here are two fairly foolproof (but noisier) charts that confirm the theory. Whew!


Click to enlarge.

I think it could safely be argued that the Fed was putting out housing's 2005 inflationary fire in 2007. Awesome timing! Not.


Click to enlarge.

This chart once again shows the Fed's 2 year lag in all its glory.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart

Parabolic Housing Starts Growth (Musical Tribute)

The following chart shows the 6 month moving average of the annual growth of new privately owned housing units started.


Click to enlarge.

Oh the weather outside is frightful
But the fire is so delightful
And since we've no place to go
Let it snow! Let it snow! Let it snow!

Man it doesn't show signs of stopping
And I've brought me some corn for popping
The lights are turned way down low
Let it snow! Let it snow!

Sigh.

Source Data:
St. Louis Fed: Custom Chart

Heading Back Down to Nothing (Musical Tribute)

The following chart shows the 30 year moving average of the annual change in the consumer price index.


Click to enlarge.

Note the nearly perfect parabola.

March 18, 2014
Weak U.S. inflation, housing data point to sluggish growth

The Fed targets 2 percent inflation and it tracks an index that is running even lower than the CPI. With inflation falling short of their target, Fed officials are likely to bide their time before raising benchmark overnight rates from zero.

Shocking.


Nothing from LJ Frezza on Vimeo.

See Also:
Wrong Way Siegel Strikes Again

Source Data:
St. Louis Fed: Custom Chart

The Real Commodity Super Cycle Killer(s)

March 18, 2014
China facing fresh 'ghost town' crisis after developer collapse

Yu Xuejun, the Jiangsu banking regulator, said developers are running out of cash. This risks undermining land sales needed to fund local government entities. "Credit defaults will definitely happen. It's just a matter of timing, scale and how big the impact is," he said.

Emphasis added.

Floor space per capita has reached 30 square metres, surpassing the level in Japan in 1988 just before the Tokyo market collapsed.

There are many more terrifying tidbits about the Chinese economic growth "miracle" buried within the article. In fact, it was difficult to prioritize them all. Your prioritization may therefore vary. Sigh.

See Also:
The Real Commodity Super Cycle Killer

The (F)Leasing of America

The following chart shows consumer motor vehicle leases owned by finance companies divided by annual wage and salary disbursements.


Click to enlarge.

Don't you worry about those previous two exponential trend failures. Thanks to ZIRP, I've got a really good feeling about this latest trend!

What could possibly go wrong again?



See Also:
Sarcasm Disclaimer

Source Data:
St. Louis Fed: Custom Chart

The Real Commodity Super Cycle Killer

The following chart shows the 12 month moving average of the industrial production index for mining.


Click to enlarge.

Mining production certainly seems to love ZIRP and high commodity prices these days. I doubt very much that "sure thing" 6.1% growth rate is sustainable for much longer though. Exponential trends of that magnitude rarely are. If I am right (might not be of course), then we're setting ourselves up for a seriously disinflationary environment (at best). Hello Japan?

And on that note:

58 of 70 people found the following 1 star review of "Gold Bubble: Profiting From Gold's Impending Collapse (Hardcover)" helpful. The book was published on April 24, 2012 (the same day as the review). For what it is worth, gold's price on that day was $1638.75.

The world's central banks, the smartest people in the world when it comes to money, are the big buyers. This would be the first bubble in history that the dumb money was selling into and the smartest money on the planet was buying. Do you really think that the people with the least knowledge about money are getting this right?

Emphasis added.

Sale of UK gold reserves, 1999–2002

The sale of UK gold reserves was a policy pursued by HM Treasury over the period between 1999 and 2002, when gold prices were at their lowest in 20 years, following an extended bear market. The period itself has been dubbed by some commentators as the Brown Bottom or Brown's Bottom.

Smartest people in the world? Seriously?

February 21, 2014
Mish: Hilarious Transcripts of Fed Minutes from 2008 Reveal Completely Clueless Fed

January 29–30, 2008: Meeting of the Federal Open Market Committee

Vice Chairman Geithner: The world still seems likely to be a source of strength.

Mr. Mishkin: My view on the economy is that we are going to have quite a weak first part of 2008 , in which we’re going to skirt recession.

Chairman Bernanke: Certainly by this point there must be some pent-up demand for housing.

Smartest people in the world? Seriously?

Keep in mind that we were already in the Great Recession. It started back in December of 2007. The "smartest people in the world" just didn't realize it yet, nor did they have any idea of its magnitude.

They say never fight the Fed ("smartest people in the world"). I say hogwash. Stick them in a wet paper bag with a butter knife and 67.3% of the time they will fail to find a way out. I can't prove it of course. It's just a theory!

"Can't we just go out the bag's opening?"
"Maybe, but why have we been given a butter knife?"
"It must be here for a reason!"
"Yes, we should definitely use all tools at our disposal."
"It's the only way to rescue ourselves from this conundrum!"
"When should we use the knife?"
"Before or after we go out the bag's opening?"
"Let's plan multiple meetings before deciding."
"Agreed. None of us is as smart as all of us!"

I am not endorsing the gold bubble book by the way. I have not read it. I have little desire to read it. I will more than likely never read it. I just find the reviews of it fascinating. Here's a bonus 1 star review that 16 of 27 found helpful.

You don't lose money on physical gold until you sell it

You don't lose until you sell it? WTF! I think "Spazz" needs a few lessons from David Lereah on the proper wording of motivational commentary, but hey, what do I know?

"You Don't Lose Money on Real Estate Until You Sell It!"

Think how that book would have sold, lol. Sigh.

I don't mean to pick on those who own gold for the long-term. I just have a really bad feeling about commodities and China in general right now (and to me, gold is a commodity, not money). I think ZIRP has misallocated capital in ways that will soon be painfully counterintuitive to most. I could be wrong to think this way. Your opinions may vary.

This is definitely not investment advice.

Source Data:
St. Louis Fed: Industrial Production: Mining

The Gold Bubble v.2

The following chart shows the number of ounces of gold it would take to buy the median priced new house in the United States.


Click to enlarge.

I can only speak for myself, but I have no desire to buy gold at these prices. Your desire may vary.

This is not investment advice.

See Also:
The Gold Bubble

Source Data:
St. Louis Fed: Custom Chart

Consumer Price Index Details

The following chart shows the natural log of the consumer price index for services (in black), the consumer price index for nondurable goods (in blue), and the consumer price index for durable goods (in green). When using natural logs, constant exponential growth is seen as a straight line.


Click to enlarge.

I have added three trend lines.

In blue, we have nondurable goods (think food, gasoline, and clothing to name but three). That's pretty much been growing at a constant exponential pace since the end of the 1970s.

In black, we have services. That's not growing at a constant pace. It's definitely slowing down at a parabolically predictable pace, perhaps partly due to the relentless rise in nondurable goods and partly due to falling inflation in general. If current trends continue, it will peak in 2033 (19 years from now). Then what?

In green, we have durable goods. That's definitely not growing at a constant pace. What growth? Hello expanding factory automation and the outsourcing of manufacturing to China.

Let's sum this up.

The constant growth in the blue line is not good for the poor. If that's the growth engine of our long-term future, then we're going to need to expand the food stamp program considerably. Big shocker.

The falling growth rate in the black line is not good for the United States. If pricing power is dwindling for services, then that does not bode well for our service economy. Since services make up such a large part of our economy, this is the deflationary weak link for us, much to the dismay of this country's many service workers.

The falling growth rate in the green line is definitely not good for China. Ouch. No wonder they've taken to building ghost cities to fill in the gap. Good luck on that plan long-term.

And lastly, the Fed targets a constant inflation rate of roughly 2%. Maybe it can achieve it, maybe it can't. Some seem to think hyperinflation will soon be upon us. I am in a decidedly different camp. In any event, what good does 2% inflation actually do when one looks at the details?

The Fed has no power to save us from these details. They use a blunt hammer to decide what inflation should do, not a surgical scalpel. And on that note...

The blunt hammering will continue until morale improves!

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart

The Gold Bubble

I doubt this post will be popular (and I apologize in advance), but here goes.


Click to enlarge.

The red line shows gold as an index (2000-01-01 = 1).

The black line shows the consumer price index (2000-01-01 = 1) raised to the 4th power.

The blue line shows the producer price index for industrial commodities (2000-01-01 = 1) raised to the 4th power.

For every doubling of the producer price index for industrial commodities (which has yet to happen even once since 2000 by the way), gold doubles not once, not twice, not even three times, but four times (2 x 2 x 2 x 2 = 16 times in total).

Should these unsustainable trends continue and the producer price index for industrial commodities were to eventually go up by a factor of 10, then gold would go up 10,000 times and cost roughly $13,700,000 per ounce (or $1 million or so per ounce in inflation adjusted dollars perhaps). Good luck on finding many people on the planet able to buy a single gold ring if/when that were to happen.

Gold cannot be both a safe store of value *and* a speculative investment that grows this much faster than industrial commodities in general. One of the two theories is in error.

The following chart shows the real price of gold (adjusted by the producer price index for industrial commodities).


Click to enlarge.

We've been here before (at about these same real price levels). Disinflation came next. Seeing as how inflation has already been falling, deflation is a clear possibility.

These are just the opinions of a former gold bug (from 2004 to 2006) turned heretic. For what it is worth, I have absolutely no desire to own gold at these prices. All a rising gold price does for me these days is inspire me to hoard even more toilet paper. Since gold hasn't exactly been rising in recent years, it can't even seem to get me to do that lately.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart #1
St. Louis Fed: Custom Chart #2

Long-Term Interest Rates: Sliding Into Japan

The following chart shows the annual average interest rate spread between long-term government bond yields for Japan and long-term government bond yields for the United States.


Click to enlarge.

Three Observations:

1. The overall trend is down. Big shocker.
2. We get relatively higher yields at the peak of bubbles.
3. Relatively higher yields pop bubbles.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart

S&P 500 Déjà Vu

The following chart shows the 2 year moving average of the annual change in the S&P 500 index.


Click to enlarge.

The next chart uses that data to compare the behavior in the aftermath of the dotcom bust to the behavior in the aftermath of the housing bust (using the low points in both periods as the starting points).


Click to enlarge.

The next chart uses that data to create a scatter chart.


Click to enlarge.

The bulls better hope that the Fed has put a permanent stop to the business cycle. Good luck on that theory!

For what it is worth, I stand by the prediction that I made in 2012 that the next recession will occur on or before October 2014.

This is not investment advice.

See Also:
Bull Market Complacency After the Great Depression
Theory: The Four Phases of Extreme Bull Market Complacency

Source Data:
St. Louis Fed: Custom Chart

Interest Rates: Micro Trends in MZM

Money Zero Maturity Own Rate: Weighted average of the rates received on the interest-bearing assets included in MZM.

This is the interest rate that $12.4 trillion is currently earning (just 0.081%).

The following chart shows the natural log of MZM Own Rate. When using natural logs, constant exponential growth (or in this case decay) is seen as a straight line.


Click to enlarge.

Since the end of the Great Recession, all breaks in the exponential decay rate of the MZM Own Rate have been to the downside.

Rising interest rate environment my @$$.

This is not investment advice.

See Also:
The Growing Deposit Glut

Source Data:
St. Louis Fed: Custom Chart

Real Total Business Sales per Capita: A Tale of 4 Trend Failures

The following chart shows the 12 month moving average of real total monthly business sales per capita (January 2014 dollars).


Click to enlarge.

I have never seen so many "sure thing" linear trend failures in one chart before. I am pointing out four of the most important ones and will leave the other three as an exercise for the reader.

Okay, here's the commentary.

Investing in the Dotcom Bust Aftermath

1. Invest in the steep "sure thing" orange trend line until it fails.
2. Although you are well above the median in blue, just ignore it.
3. Invest in the flatter "sure thing" purple trend line until it fails.
4. Panic.

Investing in the Housing Bust Aftermath

1. Invest in the steep "sure thing" red trend line until it fails.
2. Although you are well above the median in blue, just ignore it.
3. Invest in the flatter "sure thing" green trend line until it fails.
4. Panic?

How can you possibly lose?

This is definitely NOT investment advice.

Source Data:
St. Louis Fed: Custom Chart

The Trip to the Mall: 2 Years of Bad Weather So Far

The following chart shows the nominal annual retail sales growth (not adjusted for inflation) at department stores, clothing stores, and food and drinking places per capita.


Click to enlarge.

If making it back to the middle of the declining trend channel is considered to be pretty good, then yes, retail sales were pretty good! Growth is no doubt destined to explode higher in the last half of the year. That's what the financial experts keep telling me and why would I think any differently?

Source Data:
St. Louis Fed: Custom Chart

Real Potential GDP Growth: 75 Years of Bad Weather So Far

Real potential GDP is the CBO’s estimate of the output the economy would produce with a high rate of use of its capital and labor resources. The data is adjusted to remove the effects of inflation.

The following chart shows the annual growth in real potential GDP.



It's not all bad news. As seen in the chart, we had a nice run in the 1980s and 1990s. We also seem destined to make it back to the middle of the trend channel (before continuing our long-term decline yet again). That's assuming economists aren't "expecting too much from the economy" of course.

March 6, 2014
The GDP in 2017 Is Not Looking Good

On Feb. 28, the Congressional Budget Office revised an estimate for potential GDP for 2017 that it had made in 2007. The new estimate is 7.3 percent lower than the original forecast. This downward revision wipes out $1.5 trillion of potential output, according to Andrew Fieldhouse, fellow at the Century Foundation, a think tank. So instead of forecasting a potential GDP of almost $20.7 trillion, the CBO predicts potential output closer to $19.2 trillion. For years economists have been expecting too much from the economy.

The chart's data was last updated on February 4, 2014. Downward revisions appear to be coming.

“The assumption has always been that the U.S. economy will gain back what was lost in a recession. Academics are coming to the realization that this time is different and that those losses appear permanent and cannot be regained.” The lower potential growth indicates to many economists that the recession did permanent damage to the economy.

Big shocker. And people wonder why I am a permabear? Sigh.

This is not investment advice.

See Also:
Retail Sales: 3 Years of Bad Weather So Far

Source Data:
St. Louis Fed: Custom Chart