This page has been archived and commenting is disabled.
LEI LIES
The Leading Economic Indicator (“LEI”) came in at +.2% in the most
recent read. There was a time that I looked at this data set pretty
seriously. Not any more. I think it produces a false read. A key
component comes from the Interest Rate Spread. Drawing any conclusions
about the current economic status quo and or predicting future economic
activity based on the LEI read is a mistake in my opinion.
The following graph tracks the components of the LEI. It is rather
messy. I want you to focus on just the green line at the top of the
graph. This measures the yield curve (“YC”). It is consistently the
highest numeric component in the index.
To be sure a positive and steep yield curve has historically been a good
indicator of an expanding economy. The steeper the slope, the better
the prospects. Similarly a negative or flat yield curve is a sign a
slowdown is coming. The folks who came up with the LEI index were wise
to include the shape of the yield curve in their index. It has been a
reliable barometer for many years. Up till now.
We are now two years into ZIRP. There can be no doubt but that this
policy will last a minimum of another 12-18 months. We have gone through
1.75 Trillion of QE-1. The QE-2 that Bernanke wants to bring us will
probably double that.
We are living through a period where the credit markets are a dirty float.
From overnight to thirty-years it is all managed by the Fed. The
magnitude of Fed POMO purchases distorts supply and demand. Short rates
at zero are a joke. The objective is to devalue savings and force
consumption. There has never been a time in history where this level of
intervention in the capital markets has been undertaken.
The NBER says the recession ended 15 months ago. Short-term rates would
normally be rising at this point in the cycle. But the Fed still has the
cost of money set at zero. A more reasonable level for Fed Funds would
be 2%. On paper that would eliminate most of the steepness we currently
see.
With this in mind it is a mistake to study the entrails of the credit market and draw conclusions about the future.
The LEI is not going to change. The shape of the YC will continue to support the index. The question is, “How much should one discount the impact of YC when evaluating the LEI?”
-If
you were on talking head on TV you wouldn’t consider any change. If you
were a bullish pundit you would be touting the result as an excuse to
buy more.
-On
the other hand if you were a guy like me you would just ignore YC
altogether. There is a strong case to be made that in 2010 it is just
noise, not reliable data.
the other hand if you were a guy like me you would just ignore YC
altogether. There is a strong case to be made that in 2010 it is just
noise, not reliable data.
-Others might just haircut the YC by 50% and see what the index is saying based on that.
This is a graph of the LEI from the Conference Board that tracks the index.
This is my graph of the data from August 2009 on. It assumes (1) YC unchanged, (2) YC cut by 50% and (3) YC is excluded from the index.
That YC is overstating the LEI is not a new observation. But I think it is interesting that the index trajectory has turns flat in the 50% YC adjustment and has gone decidedly negative for the past four months if YC is excluded.
Make what you like of this, but here is a bet. At the all-important next Fed meeting the only sane reasonable person in the room, Thomas M. Hoenig will say:
“The LEIs are still pointing up. Do we really need to take this extraordinary step (QE-2) at this time?”
And Bernanke will pull out a slide that looks something like mine and he will say:
“Yeah, but….”
The end result will be a very big "QE-2 Celebration Bash" on November 5th for Bernanke and the other “deciders” at the Fed.
Hat tip: JH
»
- advertisements -
The ratio of coincident to lagging is and has been a better indicator than leading for quite a long time.
Will the current administration attempt to blackmail the US voter with QE2?
If you don't vote for the current administration you won't get QE2.
Thanks for the post. I feel vindicated once again. I haven't trusted most of the economic indicators for some time. They've been manipulated to be tools.
I trust the BDI and that's on it's way back down in a hurry.
Strange how "QE2 is coming" has turned into a very successful meme in a very short time, although one would think that the Fed has no need at all for it while SPX > 1000 and rocketing upwards.
So this is basically a sell the news type of event but i doubt they will even wait to sell on the news, but will sell to any latecomer chasing the ramp up...the ramp only pays if they manage to unload.
Bruce,
When I was a bond trader on the Street we called it Lagging Economic Indicators. That was in 1990. And it still is the same old shit. It has no relevance, no reason for even being reported and for most every bond trader, simply a non-event. All the while, the MSM can hype it as a forecasting tool. And the idiot stock traders can ramp it for a day on not so bad news.
The truth is those that follow it are the tools.
Bruce,
Thank you for the post. In your view, what published information is not in some way gamed or fixed?
everything is ginned...
The picture at the end of the post, Crusader Rabbit related, where did it come from. CR was the best!
I googled "QE- Celebration Bash". The image came up. I loved the picture. 1950's vintage. What is CR?
http://www.youtube.com/watch?v=n67xgr9P2Zw
http://en.wikipedia.org/wiki/Crusader_Rabbit
Tks. Can you imagine Bernanke wearing a rabbit hat at his "party". Sadly, I can.
so is the double dip in Europe or the USA? Or will one drag the other into it? Is that the connection? Only time will tell, but we will know. Perhaps as soon as Monday.
Double dip????
Yeah ,get me some garlic bread too!!!!!!
...is our deficit spending irrationally exuberant, Easy Al?
In other news, social pariah and former Fed Chairman, Alan Greenspan got himself in further hot water by telling the truth on a national news station on Friday.
He had the audacity to tell PBS news viewers that our debt is too high and if we don't get it down we will face catastrophic consequences when our interest rates go up (besides pointing out our interest rates will go up at some point).
He was promptly ignored as the Dow prepared to go up another 100+ points on Monday.
http://www.pbs.org/newshour/bb/business/july-dec10/greenspan_09-24.html
excellent video, thanks for posting the link.
more people need to be watching that.
'terrible vs catastrophic' , amazing that he used such strong terms, yet, no one is listening.
guess catastrophe it will be!
These people are on a drinking binge that can only lead to the gutter.
Reminds me of the Kremlin in 1991.
he said "dirty float"
So.....when does the Fed/Treasury begin to offer 1-3 Week bonds? 1-3 Day bonds?
Excellent post.
Another good post Bruce. Keep after the bulltards. I'm sharpening my pitchfork.
All weekend I get to look at Ransquawk:
"Fed's Bernanke says financial markets for most part stable but policy so far not produced robust recovery, drop in unemployment"
Hey Ben, if it's not working, why do more of it? Bulltard!
Will a hatchet serve as a good substitute for the pitchfork? Much more up close and personal!
The election is slated for Nov 2, and the FOMC for the 2nd and 3rd, right.
What is behind the motive for the FED to wait to make QE offical, which appears to be its intention?.......just looking for insights and opinions.
I think it's already official. Monetizing the debt and leaving all availbale options open means it is already happening. It won't be the same as QE1--and for those of you that are waiting for the midterms to change a thing--you are still captured (look it up).
There is one party in this country and the Tea Party as represented by Christine O'Donnell, Sharron Angle, Rand Paul, and other wing-nuts is a complete joke. What a bunch of half-baked nutjob phucknuts. And who the fuck is Alvin Green? Just a set-up after N.C. allowed Republicans to vote in Democratic primaries. The guy is a shill and a fraud. And then there are all the other upsets that Ms. Palin has endorsed across the country. She is the ultimate phucknut.
Yeah, I really want Christine O'Donnell in the Senate to represent a state with 275,000 people and preach no sex, ever, and to explain her education, mortgage, taxes, et al. Her only interesting quality is that she dabbled in witchcraft in the late 1990's. As for Sharron Angle, she needs her cosign to be tangent to her sine--unfortunately she has had a complete lobotomy and needs to get back to the institution, ASAP. As for Rand Paul--he can go fuck himself with his pro BP and utter lack of consideration for anything the US is based on. Daddy definitely didn't home school the boy. He is out of his element and has no idea what "Taking back our country" means. Because what he says means we need to give our country completely over to corporate interests in the name of free markets since corporations are so wonderful and responsible. He's an asshole. Corporate Farcism at it's best. And he would screw every veteran and disabled person for not getting it together and fuck every minority too. Such a nice guy that I would buy the Chianti for Hannibal Lechter to have him for dinner with some fava beans. Ayn Rand needs to stay in her grave along with her idealistic horseshit.
This is the truth folks. We are no longer a white country. Having spent much of the last 3 1/2 years in Toronto as a minority I get it. It's simple math. Unfortunately, it has taken the party (R=D) a long time to accept this. They still don't. I think the Elephants really have a hard time with this. But in 10-15 years, caucasions will be a minority in this country. Get used to it--you have no choice.
The truth is, the elections don't matter. If they were so damn important and the Fed had so much power, why did Sep-Oct 2008 happen as it did? Who thinks that internal/external economic events were the only consideration of the Bush administration at that time? Do ya think they could have changed the fact that the world was ending as we know it? They just kicked the can down the road but it did not change one thing in the elections. If the market is down, throw the bums out. Bernanke and Turbo aren't going to lose their power in any shake-up in the Congress and Senate, unless someone gets real and decides no more bailouts.
Maybe that's where the divide in the Republican party will finally come together and let the ship sink. But how in the hell could that happen given the power of the bank lobbyists? It isn't like the Senate Finance Committee is going to change overnight with Chris Dodd retiring!
And we all know the Democrats will be listening to the Keynesians and try more cash for clucknuts.
There is only one answer and that is to let it fail. How will that happen without a Black Swan that seizes the system? It won't. We need to start over because the political system and the markets are rigged.
So here we are, very close to the touted oh so important elections. No we aren't. We are on the precipice of a meltdown that cannot be stopped. All markets that are overbought now will tank soon. The Euro - down. Stocks - down. Flight from fear will boost the dollar, further inflate TSY's and perhaps gold. But mark my words, the elections mean nothing. They never do. And if the Bush tax cuts on the wealthy are not stopped, the Republicans are going to have a real problem on their hands. Fuck every one of them that gets by paying 39%. Bring back Reagan era taxes for a sense of fairness. Bring back Clinton. Enough of this nonsense because it is just another transfer of wealth completely akin to the bailouts. We are bailing out the wealthy who do not create jobs with these types of tax policies. ENOUGH! Tax them until they renounce their citizenship. Tax then so we save 6 trillion. They can afford it. They have been living is the land of milk and honey since Bush put the supply side tax cuts into law and started the wars. Fuck every last damn one of them. It isn't fair. It isn't right. It's just plain wrong when you are worth millions and don't pay more. My parents are worth millions and they believe they should be paying more. Bill Gates believes he should be paying more. Is Larry Kudlow the only cheap fuck that actually believes in trickle down your pants economics and that is would harm job creation? Seriously. The tax cuts of the last 8 years have done little to create jobs. It's just made the divide wider between them and the simple man--actually from 30% to 70& wider. In 8 years. Great policy, indeed.
Junk away.
The tax wealth transfer was done on the back of FICA tax in 1980s. All FICA tax flows into the general fund where it is spend. Until recently, FICA taxes collected provided a surplus which enabled the Reagan and Bush administrations to reduce taxes on the wealthy while claiming that the rich paid most of individual income taxes, and ignored FICA contributions made by the poor. So now, key Republican thinkers propose to gut the Social Security claiming that FICA is just a tax that is paid without entailing payor to anything.
If all savings were used up in productive investments or as seed capital, taxing idle cash would be unproductive and destructive to an economy; however, as most of idle cash flows into assets and creates asset bubbles, it not only causes malinvestments(pension fund retirement fictitious return projections, housing over construction etc); but, it eventually causes recessions and depressions.
(Could I repost your original post in its entirety with proper attribution on another forum.)
p.s. i lived in toronto most of my life, and the best thing that has happened to this city is the immigration, turned this place from the most boring city on earth to a vibrant metropolis with great food, finally.
Don't forget we also got some really exciting crime news for a change, and you can now buy drugs any hour of the day or night.
like i said, i feel sorry for you people who live in fear.
too bad you'll never get to live in the most interesting and lively cities of the world, like Rio, Buenos Aires, Bogota, Mexico City, etc etc.
ayn rand was the first to point out how the socialists, racists, statists were all cut from the same cloth.
shining example you are.
She was great at generalizing, wasn't she? Ayn Rand was a power hungry ego-centric ideologist that primarily wanted to make it in Hollywood. Instead, she started a cult with Alan Greenspan as one of her disciples. Look how well that turned out.
what she was great at is pointing out the common principal assumption or idea behind ideologies previously thought to be contrary, such as communism and religion, or socialism and racism.
don't worry, you'll never understand, that's ok.
Quality rant but know your enemy ... or kiss the pope's hand.
Sounds like you need anger management Howard. Bring back Bill Clinton? Seriously, more taxes is your best plan? That's what FDR did in 1936 and it cratered the economy until WWII.
I used to think you were halfway intelligent, not some guy who has to drop the f bomb every other word to make his point - like some hack screenwriter.
I was talking about Clinton tax rates on the top 1% of the country. Were you actually reading what I was writing about? And the F is not a bomb. It's a noun, verb, adjective, etc. WTF?
nice rant
Idiocracy.
Although I agree with you that the idea that this election will fix our problems is ludicrous, I would like for you to expain to me how pouring more taxes into the black hole maw of the federal government is in ANY way helpful. What is it that the federal government is doing, aside from defending the country and building infrastructure that is worthy of sharp increases in taxes on ANYONE. The problem is, as always, spending, way too much of it. Much of what you said, I agree with, but taxing doesn't fix anything. You do understand that cutting up a shrinking pie is a losers game don't you? As far as I can see we went from a dull roar of looting the country to full on riotous looting of everything in sight. With no discernable end in sight. Vote for Harry Reed over Sharron Angle? You must be joking. He is a virtual certainty to continue a wild ride to oblivion, at least she is crazy enough to maybe push the country in a new direction. However, I agree, in the end, a collapse is probably the only way to force a realization on people. The election is only a signal, and none of the candidates is openly advocating real fixes to the system yet, merely shifts in direction. I'm not quite convinced that accelarating a collapse is in anyway helpful, which the current administration is hell bent on doing. I agree, we are on the precipice, but maybe it isn't quite time for the Thelma and Louise solution.
well said...anyone who thinks taxes are the answer for what ails us, loses all credibility.
It's a hot button issue pre-election as well as what were to be temporary tax cuts. That's the only reason I brought it up, except maybe, uh, the damn deficit.
Seems you keep good company Howard as Gore Vidal agrees with you over there being only one party;
"There is only one party in the United States, the Property Party...and it has two right wings: Republican and Democrat. Republicans are a bit stupider, more rigid, more doctrinaire in their laissez-faire capitalism than the Democrats, who are cuter, prettier, a bit more corrupt--until recently... and more willing than the Republicans to make small adjustments when the poor, the black, the anti-imperialists get out of hand. But, essentially, there is no difference between the two parties."
Amen Howard
Speak on
I believe your parents are free to send the Feds as much money as they want Howie.
I have so much more to rant about but I need sleep.
Thanks for the thumbs up, bretondog. I expect I will be seriously junked by the AM. And I couldn't care less. :)
Looks like you need some yoga and scented candles before you sleep Howard
All is well!!!!!!!!!!!Alll isss wellll!!! aaahh....