This page has been archived and commenting is disabled.
Economic "Hope" Vs. Indicators Of Economic Reality
Submitted by Lance Roberts of STA Wealth Management,
There is much hope that after a dismal Q1 GDP report of -1% annualized growth in the domestic economy, that Q2 will see a sharp rebound of between 3-4% according to the bulk of economists. The Federal Reserve is predicting that the U.S. economy will grow as strongly as 2.8% in real terms for the entirety of 2014. The achievement of the Fed's rather lofty goal would require a real 4% annualized growth in each of the next three quarters. The problem with this assumption is that the last time that the U.S. economy grew at 4% or more, over three consecutive quarters, was in 1983.
It is very likely that the Federal Reserve will curtail their GDP growth forecast at their next meeting. However, this should come as no surprise as this has been the "modus operandi" of the Federal Reserve since they began publishing their economic and policy forecasts 2011. The chart below shows the history of the average range of their forecasts versus actual economic outcomes.
"Why did God create economists? To make weather forecasters look good."
However, as I discussed in regards to the recent NFIB survey, the current economic recovery is starting to show signs of age. What most economists and analysts have failed to include in their ever ebullient forecasts is the lifespan of an economic and business cycle.
Economies and businesses do not operate on a rational basis of only producing exactly what is necessary to sustain the current demand. Instead, as demand rises, supply is rapidly increased to the point of excess. At some point the excess supply, or supply glut, leads to a down cycle until that excess is reduced to excessively low levels. It is at this point that the cycle renews as demand exceeds supply creating the next up cycle.
It is from this point of view, real supply versus real demand, that I am suggesting that current economic activity may indeed be far weaker than headline statistical reports currently suggest. (I recently wrote a deeper discussion on this topic - read here.)
There are a few important indicators, in my opinion, that reflect upon the actual strength of economic activity. Rail traffic, shipping of bulk dry goods, and some very specific commodities such as lumber and copper. The two I want to focus on specifically in this missive are shipping and copper.
According to Wikipedia:
"The Baltic Dry Index (BDI) is a number (in USD) issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index provides 'an assessment of the price of moving the major raw materials by sea. Taking in 23 shipping routes measured on a timecharter basis, the index covers Handysize, Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.'"
Since this is not a "traded" index, it is void of the volatility that can be created by financial market activity. Most directly, the Baltic Dry Index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand).
"The supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and a ship's fixed costs are too expensive to take out of circulation the way airlines park unneeded jets in deserts. So, marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly.
Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food; the index is also seen as an efficient economic indicator of future economic growth and production.
Howard Simons, an economist and columnist at TheStreet.com. 'People don't book freighters unless they have cargo to move.'"
Therefore, it would seem to be a reasonable assumption that IF economic growth was indeed on the cusp of rapid acceleration, that the demand for raw materials would be rising thereby increases the cost of shipping. The chart below shows the Baltic Dry Index (monthly basis) as compared to real, inflation adjusted, gross domestic product.
The currently declining levels of the index confirms much of the recent economic data that has been a continuation of the "struggle through" economy rather than an acceleration of organic economic growth.
The same holds true for copper. Because of copper's widespread applications in most sectors of the economy - from homes and factories to electronics and power generation and transmission - demand for copper is often viewed as a reliable leading indicator of economic health. This demand is reflected in the market price of copper. Generally, rising copper prices suggest strong copper demand and hence a growing global economy, while declining copper prices may indicate sluggish demand and an imminent economic slowdown.
The chart below is a comparison between spot copper pricing and real GDP.
Like shipping prices, copper prices are also suggesting that current economic data may also be overstating the actual underlying economic activity.
If this is indeed the case, this could present a potential issue for the Federal Reserve as it reduces its economic support due to the statistical strength in government produced data. It is highly likely that at the next FOMC meeting there could be an acceleration of the "taper" from $10 billion per meeting since the beginning of the year to $15 billion. This would also move up the actual termination date of the program to September from October. As I published earlier this year in "FOMC Purchases Vs. S&P 500":
"The chart below shows the historical correlation between increases in the Fed's balance sheet and the S&P 500. I have also projected the theoretical conclusion of the Fed's program by assuming a continued reduction in purchases of $10 billion at each of the future FOMC meetings."
"If the current pace of reductions continues it is reasonable to assume that the Fed will terminate the current QE program by the October meeting. If we assume the current correlation remains intact, it projects an advance of the S&P 500 to roughly 2000 by the end of the year. This would imply an 8% advance for the market for the entirety of 2014.
Such an advance would correspond with an economy that is modestly expanding at a time where the Federal Reserve has begun tightening monetary policy."
With the market already approaching the 2000 mark currently, the Fed reducing support, and market exuberance hitting levels normally associated with bull market peaks, any disappointment in actual economic activity could lead to a fairly sharp correction in the financial markets. While I AM NOT suggesting that the Baltic Dry Index or Copper prices are predicting an economic "disaster," I am suggesting that there is an increased risk of disappointment in the coming months.
Considering that the markets have now gone 26 months without a correction of 10% or more, a historically long span, the probability of such is exceedingly high. All that is lacking is the catalyst to induce "fear" into an overly complacent marketplace.
- 9675 reads
- Printer-friendly version
- Send to friend
- advertisements -



Quick, to the printing presses, Monitary Man!
It's the only thing the Fed can do. Back-door purchases of US treasuries and support more and more of the economy with printing.
One huge paper printing fest, backed by nukes.
After all the shit in the past 6 years that didn't materialize fear, I can't imagine what will.
Aliens attack
Asteroid
Godzilla
The plague
Finding Barry's birth certificate
Seeing Hillary' cock
Every Mexican moves into LA
Monetary Man! He hands out money so yours is no longer worth anything! Thanks Monetary Man!
You're obviously predicting QE4ever
After 'Trading Places' with theBenbernak Janet Yellen is hoping for 'Easy Money' with 'Return Of The Fedi'
The hope is in the dope.
I was just thinking..if you were an exporting manufacturing plant in the USA...and with the new Obama regulations coming along like Obamacare and the Epa coal reduction regs that will raise your energy costs 30%....what are you thinking about.....hiring or moving...or just quitting....
immigration to Singapore or something similar is a good choice
I have permanent sinus damage due to hopecaine.
Jesus H. Christ! What is so hard to understand here?
The economy CAN'T grow until people start SPENDING MONEY!!!
WHERE are they going to GET the money to spend?
Fix THAT, and your fucking economy will GROW!!!
That's it...that's IT...that's ALL IT FUCKING IS!!! Fuck ALL of your charts, and graphs, and Venn diagrams, polls and statistics...fuck them. FUCK THEM!
Get money into the consumers hands, and they will spend it. It really doesn't matter HOW you do that...employ them and pay them adequate wages, keep them all on welfare and give them money to spend, drop cash from low-flying planes, or send drones into everyone's homes at night and deposit cash under people's pillows...it doesn't matter. Pick one, come up with another, but GET MONEY INTO PEOPLE'S HANDS!!!
God!
Glass Ceilings & Other Such Nonsense
Money at work is an illusion, which the majority wants to believe, perpetuating crimes against itself. Legacy simply organizes the syndicates, in cities grown for the purpose, to feed itself.
From a historical perspective, slavery is wealth, which is why the politician’s move is to cut you down first, employing another, and ask questions at the autopsy later, moving up in the ponzi in the misdirection. Labor market data is collected to normalize the process.
From the perspective of labor, it doesn’t matter whether the magician controls the crowd or the crowd controls the magician. They short out their own mobility every time, if uninterrupted.
How many $15/hr jobs does it take to support a million dollar vacant condo? 95ct/hr?
The answer depends upon labor productivity surplus, which can only exist if labor accepts the debt as income mythology, which will only happen if it turns off its brain, which eliminates productive labor, which is why the propaganda of dependency begins at birth, in a hospital built for the purpose.
A woman giving up childbirth to be President, as an example to others, is the dumbest possible move, because the future rests upon childbirth, and the past on the politics of materialism. History is littered with empires that have played the divide and conquer game.
Ignoring the mythology of History for a moment, what political leader in your lifetime have you seen do anything that has withstood even that test of time? RE occupation built upon a demographic ponzi has never been sustained, and replacing the slaves with fixed cost robots is the dumbest move in this cycle so far.
The morons can take your children, but they can’t do anything with them. The ‘homeowners’ are taxing themselves onto the street with public housing, price inflation and welfare proliferation. Public education can only teach the politics of money misdirection, more of the same. And law enforcement is only tasked with finding a scapegoat.
The net result is critters on the street looking at empty buildings. China is by no means the only nation building lost cities. Is Phoenix any better off? Have you been inside those shiny buildings in San Francisco? Ever measure foot traffic?
You don’t have to leave your community to see landlords inflating rents on vacant unit comparables, subsidized by the bank with debt on a relative credit gradient, and dropping like flies as they are taxed to death. How many times have you heard some peer pressure moron lamenting a neighbor’s potential negative effect on property values? Those D kids.
Careful what you wish for. Legacy isn’t flooding the credit network layers with debt reserves and pulling up all the vertical ladders by accident. This is the slaughter phase, when the middle class starves itself out. Natural resources per capita are going up, while the critters wait, and wait, playing last to lose, assuming peak resources on demographic expansion, based upon statistical projection of government data.
The majority busies itself with economic activity, building dead inventory financed with paper, substituting increasingly arbitrary activity for productivity, to go nowhere, faster and faster. What you might want to do instead is track your own productivity at intervals to see what you gain net, that the State cannot take.
A new car is much less productive than a reliable used car, because its return on risk is much lower. That’s why the bank has to pay people with more debt credit to buy diminishing return, and why the ponzi participants are so desperate to prove that debt works, even as their communities crumble around their latest toys.
The only difference between Detroit and Seattle, GM and Boeing, is the debt feed. GM has many global competitors. Boeing has one, and is subsidized by the airlines globally. Why do you suppose Boeing can stay put with all that stupidity going on there?
Boeing’s business was built on the fly in about 6 months, by people who left shortly thereafter. Same with Microsoft. Ask an old-timer on Whidbey about human obsolescence, or save yourself the trouble and chart gain variability against demographics. Are waves of young people moving to Detroit?
Why is that you see demographic collapse and so many ignoring it? Why are the totalitarian states reversing demographic policy with no effect? What is the momentum of entitlement funding? Why are hedge fund managers paid so well as an example to others? Why are governments so eager to feed their stock markets with pensions?
What has Hillary, or any of the ‘leaders’ actually accomplished, but short term delusions of grandeur? Napoleon, Alexander and Cleopatra accomplished nothing that has withstood the test of time. How do the former compare to the latter?
If you want to be a hero, help someone who needs you now. That is the critical path to the future. The rest is bullsh-. The world is what you make of it, while the politicians take credit for what you did yesterday, blaming you for their stupid derivatives, but if you move forward, relentlessly, their cities will crumble behind you.
That’s empire. That’s life, that’s History, and that’s quantum statistics. Labor is there until it isn’t and isn’t until it’s there. Sit in the back of class by the door and leave when you see the distribution, keeping tabs on those chosen to succeed, gravity. That’s public education.
How do you suppose Alexander swept across the planet, and where is his new world order now?
Tell the politicians that debt is off the charts and they'll say, nuh uh, we'll just provide bigger charts!
I don't know if you saw this or not, but so long Jeopardy and Healthcare, chief scientists from IBM Watson left and is now working for a hedge fund...follow the money right? I put a good video in the post too with a PBS interview with former DE Shaw Quant Cathy O'Neill who tells you exactly what life is like as a Quant at a hedge fund and how they think...really good insight...after you listen to her interview you'll know exactly what the former IBM Chief Scientist will be doing over there.
http://ducknetweb.blogspot.com/2014/06/ibm-computer-scientist-leaves-ibm...
That video too is one of the Killer Algorithm flicks too. I have never written a book before but in my stats, I see people are searching for a book by that name:)
http://www.ducknet.net/attack-of-the-killer-algorithms/
I thought the FED did away with business cycles.....
They're going to keep working on it until they get it right.