Finance

Cutting a credit rating is significantly different that placing it on ‘watch’ or ‘under review’. Most readers are likely fully aware that Standard and Poor’s and Moody’s have sent out serious warning signals about the potential downgrade of the United States AAA credit rating. That said, another SEC officially recognized ratings entity has gone one step further and actually lowered Uncle Sam’s standing by one notch. What firm is so bold and brazen to send this volley across Capitol Hill and down Pennsylvania Avenue? Egan-Jones. Unlike the supposed brand name rating agencies which did little to help ordinary investors going into our economic crisis, Egan-Jones’ business model differs markedly from the industry incestuous nature of its counterparts. The resulting lack of inherent conflict allows Egan-Jones to speak freely and boldly. What a novel concept. What does Egan-Jones have to say about Uncle Sam?  Let’s review a commentary in this morning’s Financial Times which highlights, Debt Fears Lead to U.S. Downgrade, Egan-Jones has become the first US rating agency...

The intuition behind Okun’s law is very simple. Everybody can feel that the rate unemployment is likely to rise when real economic growth is very low or negative. An economy needs fewer employees to produce the same or smaller real GDP because of permanent productivity growth. Thus, Okun’s law describes quantitatively the negative correlation between real economic growth and the change in unemployment rate. We have rewritten Okun’s law using the growth rate of real GDP per capita instead of GDP. For the USA we have already obtained the following empirical relationship: dw = -0.406dlnG + 1.113, t<1979 dw = -0.465dlnG + 0.866, t>1978 (1) where dw is the predicted annual increment in the rate of unemployment, dlnG=dG/G is the relative change rate of real GDP per capita per one year. By definition, for a discrete form of Okun’s law one has: dui=dwi+ei, where ei is the model residual error at discrete time i. We have estimated all coefficients and the...

The U.S. Bureau of Labor Statistics has reported the estimates of various consumer price indices for June 2011. According to our quarterly schedule, we have to revisit the difference between the headline and core CPI in July 2011. As expected, these new estimates reveal a crucial turn in the difference. After 10 consecutive months of fall, the difference started to grow. This turn manifests the beginning of a new period leading to price deflation in 2012. We expect the rate of consumer price inflation to fall below zero somewhere in 2012. Figures 1 and 2 briefly repeat our concept of sustainable (quasi-linear) long-term trends in the difference between the headline and core CPI in the U.S. There were two clear periods of linear behaviour: between 1981 and 1999 and between 2002 and 2009. A natural assumption of the future evolution of the difference was that a new trend has to emerge around 2010 after a short period of...

Standard & Poor’s has placed the credit rating for the US on negative watch on the argument that internal disagreements within the government are creating significant obstacles for a seamless resolution in raising national debt limits.  S & P is suggesting that there is a 50% chance that the long term debt rating for the US could be lowered by the end of the third quarter. The US Fed Chairman (Bernanke) gave his congressional testimony for the second day and discussed possible outcomes for the debt ceiling debate (Fed purchases of the defaulted debt).  The spokesman for the President said that there is an agreement to reduce spending by $1.5 trillion Dollars, with a possibility for an increase of $200 billion, if needed.  Some analysts have suggested that these amounts will not be enough to solve the problem for the long term, which would mean that a similar vote would need to be undertaken again in the future.  Regional macro data...

China just released its June numbers, with 3 separate official sources delivering banking and money stats, international trade stats, and the core economic data. The June GDP numbers were pretty strong in the scheme of things, and the rest of the data pointed to a high likelihood of persistence in economic strength, at least in the medium term. In this article we explore some of the key data points, and come to the conclusion that a hard landing/significant slow down is a not a 2011 story...   1. China GDP China managed to show year on year GDP growth of 9.5% in the June quarter, which was slightly lower than the 9.7% it showed in the previous quarter and 10.3% in June 2010, and compares to a 10-year average of about 9.4%. So in the scheme of things GDP growth does not show a significant degree of slowing. However, if you redefined recession for China as passing below the long term average growth...

Equities Upbeat GDP data from China lifted Asian stocks, as the economy grew at 9.5% during the last quarter. The Shanghai Composite led the gains, rising 1.4%, followed by the Hang Seng, which advanced 1.2%. Japan’s Nikkei and the Australian ASX 200 both rose a modest .4%, and the Kospi climbed .9%. In Europe, the major indexes snapped a 3-day losing streak, as the DAX climbed 1.3%, the FTSE rose .6% and the CAC40 added .5%. Auto makers were amongst the top gainers, rising 2.4% after Morgan Stanley raised its outlook for the sector. Likewise, US markets rose moderately, boosted by Bernanke’s remarks that the economy still needs support from the Fed. The Dow tacked on 45 points to 12492, the Nasdaq rose .5%, and the S&P 500 gained .3%. Netflix shares gained 2.6%, as investors cheered a significant price hike in the company’s movie streaming service. Treasuries and Commodities US bonds inched up slightly, with the 10-year note up 1/32 to yield 2.87%, and 30-year...

We previewed the Fed Chairman Bernanke’s testimony earlier today as an important risk event, and we were not disappointed as his written testimony caused a sharp surge in risk appetite, boosting US equities, and causing higher yielders such as the EUR and commodity currencies like the AUD and CAD to gain on the safe-haven USD.   What was the Key From  Bernanke Prepared Statement: The jump in sentiment was boosted by Bernanke holding out the possibility that the Fed will pursue further stimulus measures if the economy continues to grow at a pace that does not bring down the unemployment rate. “On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support. Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more...

It seems the world has already grown tired of the continuous stream of negative macroeconomic news, although the real troubles are only just beginning. Moody’s is again acting as the instigator, downgrading Ireland’s credit rating from medium-grade Baa3 to junk status Ba1, which seems to have destroyed the remaining hope that Europe will manage to avoid a default on its peripheral countries’ debts. Deep Trust Trading analysts believe that the ratings agency is putting pressure on European leaders so that they will issue another tranche of financial aid to one of the five “problem countries,” although European regulators are saying that these downgrades are having an incendiary effect. Meanwhile, the world is anxiously expecting a decision on a new issuance of American treasury bonds. Yesterday, the Euro rose from its three-month low to $1.4050 while the US trade deficit reached a record high not seen since October 2008. The deficit exceeded even the most pessimistic predictions and reached $52.23 billion versus the...

David Galland interviews Terry Coxon, The Casey Report Terry Coxon worked side by side with best-selling author Harry Browne for years and is a rare expert in the arcane study of monetary systems. His remarks at this juncture in time, a time that might end up labeled in the history books as “Money Runs Wild,” are especially germane. David Galland: You were involved with Harry Browne during the last great inflation in the U.S. How does the increase in the money supply that kicked off in 2007-2008 compare in terms of scale to what went on leading up to the inflation in the ‘70s? Terry Coxon: The comparison is pretty muddled. In terms of the M1 money supply – the total of checkable deposits and hand-to-hand currency – we haven’t yet gotten near the persistently high growth rate that occurred in the 1970s. But the growth in the monetary base has been far more rapid than what happened in the 1970s. There is some...

What a happy coincidence! The Treasury had to sell $66Bn worth of notes this week and there was no POMO for the Fed to bid with. The US could have been really screwed but, luckily, the market crashed and everyone is panicking – INTO TREASURIES! Isn’t that convenient? With our 10-year auction tomorrow and the $33Bn 5-year auction today, yesterday’s panic sent the 10-year yield down to 2.82% – the lowest yield since December 1st and it should be even better this morning with TLT flying up to 97.50 and possibly getting back to November highs (hint for those of you not catching a theme – that was pre-POMO) if we can top 98. As you can see on David Fry’s chart, we are now repeating the pattern we had last summer but, unfortunately, last summer was annoying as we fell from 11,258 at the end of April to 9,614 in the beginning of July (14.6%), back to 10,720 (11.5%) in early...