Oil Diet

Via Paul Kedrosky an informative interactive feature on oil.

Tracking the Global Recession

A great timeline of the crisis starting in Feb 2007. With hindsight so many canaries in the coalmine. (H/T Crossingwallstreet)

The World according to Facebook

How to get there is explained here
Where are China, Russia, Brazil? Many African countries are just absent, the Swiss Alps are clearly noticeable as is the surprising difference between Spain and the rest of Western Europe.

120000 Numbers

Peak Oil?

The Oil Man asks the question and posts this two similar charts.

1. From the IEA (International Enegy Association that uses the EIA data as a main source)

2. From the EIA (the US Enegy Information Administration)

Both charts tell a similar story, oil production forecasts have been constantly overestimated. Back in 2000 the EIA was estimating ca 93m bd in 2010 vs the actual 86m production. Further out the gap gets bigger. As time passes estimates are reduced downwards and with demand fairly inelastic and growing in emerging markets, prices may be sustained at high level.

Fascinating Stat

Crossingwallstreet posts this:
Most of the US market performance happens from close to open.

A Match Market vs Non Market

Brad Delong has an interesting post on the differences in material well being between "red" and more market oriented economies as measured just after the iron curtain fell. No market and close to 90% of the material well being disappears. And this is just the material cost.

The Recession is Officially Over...

...since June 2009.

The NBER annouced it on Sept 20 2010. Lasting 18 months it was the longest post war recession. With an official end to this recession a new slowdown will be viewed as a separate cycle.

Here is the link to all business cycles dates.

An Interesting Question

Prof De Long plays with some numbers and asks a very interesting question:
"Thus the key question in understanding the economies of long-long ago. Were they people with
motivations like us living in economies that worked more-or-less as ours does, and was the glacial pace of growth and the Malthusian structure the result of the disabilities they labored under? Or was there something very different—and from our perspective very wrong—with the stuff of the economic mechanism itself?"
http://www.j-bradford-delong.net/2008_pdf/20080120_longestrungrowth.pdf

Barristas, Potters, Yoga Instructors and Depression Economics

Brad de Long has a great introduction to Depression Economics here. Can't wait for lecture 3.

Real Estate as an Investment?

The lastest US new home sales numbers hit new record lows in July and am amazed how long this downcycle is. Inventory numbers are close to the lows of 40 years ago when population and household numbers were much lower but no sign of a rebound in sales.
Calculated risk has the analysis and the charts as usual:





The Baseline Scenario ponders why so many believe real estate is such a good investment after all. Looking at this long term chart nothing to be too excited about. Exclude bubble years and real real estate prices in the US have barely moved over longer time periods:

They argue:
"Housing is generally a worse investment than either stocks or simple U.S. Treasury bonds. Then why do so many people think it’s such a great investment?

1. Leverage. Let’s say inflation is 2% and housing returns 3% (1% real return). If you put 10% down, now your house is returning 30%, or a 28% real return; subtract a 6% fixed-rate mortgage, and you’re making about 22%–or twenty-two times the real return of the underlying asset. Of course, we all know the dangers of leverage.
2. Price illusion. People remember the nominal price they paid for their houses. When they sell them thirty years later, they look at the difference between the nominal purchase and sale prices and think they made a ton of money. This is especially true of the generation that bought houses in the 1960s and early 1970s before inflation hit; they saw their home prices go up by a factor of ten and thought it was due to high real returns.
3. Bubbles and optimism bias. Every now and then we have a huge bubble like the one at the right-hand end of the chart above. For a while, people think that’s the new normal. For a while after that, they continue to think it’s the new normal, because they are biased toward optimistic expectations about the world. (Note that during the first half of the decade that I was advising friends that housing was a bad investment, housing was actually a great investment, assuming you could get out in time.)"

Druckenmiller Quits

One of the hedge fund great is retiring. Bloomberg has the story with some interesting infos on the man who broke the ERM.
From the article:
"He made some of his biggest trades working with Soros, including one that cemented Soros’s reputation as a preeminent speculator: A $10 billion bet in September 1992 that the Bank of England would be forced to devalue the pound.

Breaking the Bank

By August of that year, Druckenmiller said he had initiated a $1.5 billion trade that would profit if the German mark rose versus sterling. He expected Europe’s exchange-rate mechanism, in which the currencies moved against each other within a limited band, to come under pressure as Germany raised interest rates to prevent inflation after reunification. Germany’s move forced the United Kingdom and other members of the ERM to decide whether to increase rates, which could damage their already troubled economies, or devalue their currencies and fall out of the ERM.

Druckenmiller said he calculated that the Bank of England didn’t have enough reserves to prop up the currency, and it couldn’t afford to raise rates. He was right, and selling by the Soros fund is credited with pushing the pound out of the ERM.

“He was so proud because until that point Soros had never made $1 billion on a bet,” said Roger Entress, a Pittsburgh surgeon and early Duquesne investor, who was golfing with Druckenmiller at the National Golf Links of America in Southampton, New York, the weekend before the devaluation."

A Bond Bubble?

Prof Paul Krugman does not think so. Using a simplified Taylor Rule and projections for employment and inflation from the CBO he derives a predicted fed fund rate which looks like this:



Low rates for years to come!!!
He adds: "That’s right: four years of near-zero short-term interest rates. Does a 10-year rate of 2.6 percent still sound so unreasonable? And bear in mind that I’m not using some doomsayer’s forecast; I’m using the staid folks at the CBO.

And just for the heck of it, I asked what interest rate on a 10-year security would yield the same present value as investing in short-term debt at the predicted rates, and rolling it over each year. (Actually, I cheated slightly, because I was getting tired; I considered a bond in which there are no payments along the way, just repayment of accumulated interest and principal in year 10; but I’m pretty sure it doesn’t make much difference).

And the implied interest rate was … 2.6 percent.

Here’s what I think is going on: aside from the obviously intense desire of some of the bond bubble folks to see a fiscal crisis — they’ve been planning for it, and they’re not going to take no for an answer — my sense is that a lot of people just can’t bring themselves to face the reality that we’re likely to be in a zero-interest world for a long time. They just keep assuming that the Fed is going to raise rates soon, even though there is absolutely nothing about the macro situation that would justify such a rate increase."

If no bubble and the bond market is right expect some dismal economic prospects for much longer. Bu hao!

Market Update

Econbrowser has a great analysis of where we stand market valuation wise. Using Prof Shiller's data he posts the following charts:
(1) 17% downside to be back to average

(2) A chart comparing PE and the following 10 year nominal returns of the S&P500. At the current PE do not expect much in the next years if history is any guide



(3) And among others a chart comparing the dividend yields vs tips' and bond yields.
While equities do not strike as bargains they still compare favourably to bonds.


He concludes: "A buyer of stocks today is usually getting a higher immediate yield than on TIPS, in addition to prospects of future dividend growth. Just as they did in the 19th century, stocks as priced today should give you a significantly better return than bonds"

Dividend Aristocrats 2010

Here is the list of the 42 companies from the S&P500 that have raised their dividends for 25 years in a row or more. In the past they have outperformed the S&P500 substantially.

3M Co	MMM
AFLAC Inc	AFL
Abbott Laboratories	ABT
Air Products & Chemicals Inc	APD
Archer-Daniels-Midland Co	ADM
Automatic Data Processing	ADP
Bard, C.R. Inc	BCR
Becton, Dickinson & Co	BDX
Bemis Co Inc	BMS
Brown-Forman Corp B	BF/B
CenturyLink Inc	CTL
Chubb Corp	CB
Cincinnati Financial Corp	CINF
Cintas Corp	CTAS
Clorox Co	CLX
Coca-Cola Co	KO
Consolidated Edison Inc	ED
Dover Corp	DOV
Emerson Electric Co	EMR
Exxon Mobil Corp	XOM
Family Dollar Stores Inc	FDO
Grainger, W.W. Inc	GWW
Integrys Energy Group Inc	TEG
Johnson & Johnson	JNJ
Kimberly-Clark	KMB
Leggett & Platt	LEG
Lilly, Eli & Co	LLY
Lowe's Cos Inc	LOW
McDonald's Corp	MCD
McGraw-Hill Cos Inc	MHP
PPG Industries Inc	PPG
PepsiCo Inc	PEP
Pitney Bowes Inc	PBI
Procter & Gamble	PG
Sherwin-Williams Co	SHW
Sigma-Aldrich Corp	SIAL
Stanley Black & Decker	SWK
Supervalu Inc	SVU
Target Corp	TGT
VF Corp	VFC
Wal-Mart Stores	WMT
Walgreen Co	WAG

Double Dip or Not?

Pros:

Dr Hussmann here

Google trend? (h/t Calculated Risk for the idea)


The markets (China down over 30% from recent peak, S&P500 down 16% from April 2010 peak)

Not technically but almost:

Calculated Risk here or here

Cons:

Econbrowser here
Gene Epstein in Barron's here

EIA on Chinese Oil Demand

Econbrowser has an interesting guestpost on Chinese Oil Demand.
Noting that Japan and Korea's oil consumption per capita are currently 1.4 and 1.9gallons per day this could imply over 50m bpd oil consumption for China, way more than EIA's forecasts of 16m bpd in 2030. The author concludes: "Is the EIA sure it has the numbers right?"

Optimists

Equity analysts have been too optimistic. McKinsey ran the numbers and in the past analysts have substantially overestimated earnings growth. Earnings have grown at ca 6% annually vs over 12% for the analysts' guess.
Get that 6% not more!
6% seems a lot like long term nominal GDP growth. According to BEA stat US Nominal GDP grew at 6.3% annually from 1929 to 2009 and at 5.3% annually over the past 25 years. No magic here over long period of times earnings just can't outgrow the economy.

Trade or Die...

This seems to be the conclusion from this new book reviewed in the NYT. (H/T Crossingwallstreet). The book's central thesis: "“At some point,” Dr. Ridley writes, “after millions of years of indulging in reciprocal back-scratching of gradually increasing intensity, one species, and one alone, stumbled upon an entirely different trick. Adam gave Oz an object in exchange for a different object.”"
And the author's prediction for the rest of the century: “Prosperity spreads, technology progresses, poverty declines, disease retreats, fecundity falls, happiness increases, violence atrophies, freedom grows, knowledge flourishes, the environment improves and wilderness expands.”

Where do we stand?

Brad DeLong points out to a slightly different version of this chart
Always hard to fathom how the small looking drop on the chart threw millions out of their jobs. And while real GDP is almost back to its peak the Urate is still extremely high.

Sovereign Defaults

Earlywarning refers to a nice chart on Sovereign defaults.



Key:
Sovereign defaults are recurring affairs.
Current rate still low

Is FSLR Toast?

This is what Brontecapital believes arguing that decreasing silicon prices will make silicon based solar panels more competitive than FSLR's thin-film.

The first part is here, the follow up here. Well argued posts.

Fuel Economy and Horspower

Great chart from Econbrowser:


"if weight, horsepower and torque were held at their 1980 levels, fuel economy for both passenger cars and light trucks could have increased by nearly 50 percent from 1980 to 2006; this is in stark contrast to the 15 percent by which fuel economy actually increased."

GMO on China

Edward Chancellor from GMO has a very interesting white paper on China "China's Red Flags". He argues that past manias and bubbles can be identified by the following characteristics:
(1) A compelling growth story
(2) A blind faith in the competence of the authorities
(3) A large increase in investments
(4) A surge in corruption
(5) Easy money or low interest rates
(6) Fixed currency regimes
(7) Fast credit growth
(8) Moral Hazard
(9) Fragile financial structures with high leverage and marginal returns on projects barely covering the financing costs
(10) Rapidly rising property prices

He then goes through the list with China's latest numbers, ticks the box by most and concludes:
"Were China's economy to slow below Beijing's 8% growth target, bad things are liable to happen. Much of the new infrastructure would turn out to be otiose; excess capacity would linger in many industries; the real estate bubble would burst and the banking sytem would face a rash of non-performing loans. Investors who are immersed in China Dream ignore this scenario. When the China juggernaut eventually stalls, they face a rude awakening".

The article contains a lot of interesting sources notably on China's urbanization and demographics. I have been warned!

Millennium's Englander on Hedge Funds

Dealbook has the keynote address. Due Dilligence a la Englander: make sure that
(1) Alignment of interests between manager and investors is in place
(2) The manager has sufficient skin in the game
(3) The strategy really is what you are looking for.

Easy!

Hedge Fund Tidbits

WIRED has a brief interview with Peter Thiel, co-founder of Paypal who runs Clarium Capital. Over at Bloomberg Katherine Burton (author of Hedge Hunters) updates us on Steven Cohen, whose track record, art collection and fee structure must be the envy of many.

Spain's Mess Explained

Prof Paul Krugman has an excellent summary of Spain's woes. He does not sound too optimistic "Spain now seems doomed to suffer years of grinding deflation and high unemployment" but affirms the Euro is here to stay "Am I calling, then, for breakup of the euro. No: the costs of undoing the thing would be immense and hugely disruptive. I think Europe is now stuck with this creation, and needs to move as quickly as possible toward the kind of fiscal and labor market integration that would make it more workable.

But oh, what a mess."

MGI on Debt and Deleveraging

McKinsey Global Institute has a new report out on debt and deleveraging. Key takeaways from the executive summary are:
- Over leverage is widespread, affecting many different countries and sectors (household, states, financial insititutions, commercial real estate and to a lesser extent corporates)
- Deleveraging has barely begun
- If past episodes are any guide growth will be slow to negative for a few years as
- Past deleveraging episodes lasted 6 to 7 years on average.

The long report (not read) is a goldmine of data with a detailed look at seven past deleveraging episodes.

BRIC's Contributions...

to growth and income via Paul Kedrosky who highlights a FT chart. FT's in depth BRIC section is worth a browse.
In 2000 the average G7 inhabitant was 11x richer than his BRIC peer, by 2014 he'll "only" be 5x richer.

A Nice Little Conversation

Ineichen has a nice three parts conversation on the crisis, finance, asset management, hedge funds, regulation, bananas. Full of re-usable quotes such as "Life is a tragedy for those who feel, but a comedy to those who think" or "It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so."

Here is part 1
Here is part 2
Here is part 3

Blue Sky for Bluecrest

Here is a nice profile of Michael Platt, co-founder of hedge fund firm BlueCrest Capital Management Ltd. Lucky guy he won the Fiat Cinquecento painted by Hirst at a charity buying 20 5000GBP tickets. Most likely an other good trade.

Economists are Optimists

Judging from James Montier's chart they at least don't like bumps in the road: