Archive for the 'Economy' Category

Yield Spreads and Market Tops

Posted on February 19, 2010, 12:28 pm. Closed

I have been trying to study and look at historical yield spreads to see how helpful they can be in describing risk and predicting market tops. For now I’ve just been downloading the historical data and manipulating it a bit in a spreadsheet, but I will try to see if there are any academic papers out there on the subject. For now, here is one of the charts I’ve created with various yield spreads and the S&P 500 price (click for larger view):

As you can just tell by looking at the chart, when spreads like the 10 year and the 3 month and the 2 year and the 3 month become zero or negative, you should be looking out for a market top as this seems to signal that there is no longer a risk premium (I think that’s the correct way to describe it). There is no fool proof way to predict tops or bottoms, but I think looking at such things as the yield curve should is a very worthwhile thing to do, for when the yield curve flattens out or inverts, that is usually a sure sign that things are getting silly.

An Illustrated History of U.S. Banks Net Interest Margins

Posted on October 2, 2009, 7:47 pm. 2 Comments

Below is a chart I created showing the net interest margin of U.S. banks (click for larger image):

NIM-2009

As you can see, the blue line is the net interest margin for all U.S. banks. Glancing at the data, you can see the net interest margins peak sometime in 1993 and from that point on, net interest margins have been in decline. Gee, I wonder if that has anything to do with total consumer credit beginning its 15-year long march upwards? (See my previous posts on consumer credit: What Portion of Past Economic Growth Was Debt-Fueled? and Predictably, Consumer Spending Declines).

Bank net interest margin peaking in 1993 I feel is more evidence that late 1992 and early 1993 was a real economic turning point for this country. People started to borrow and spend without abandon based on rising productivity, increased incomes, increasing asset prices, increasing home and land values, etc. I can only surmise this meant there was a lot more money out there in the economy, competition between banks for that money was fierce, and therefore net interest margins for the banks began to decline.

Another thing I find interesting is that the “small” banks with average assets under $1B seem to always have had a much better net interest margin than the “large” banks with average assets greater than $15B. The graph below shows the difference between the small and large bank net interest margins (click for larger image):

NIM-spread-2009

Since 1984, the average net interest margin spread between small and large banks has been 112 basis points. Another interesting thing is that the spread seems to fall a good deal during and after a recession, but once the economy gets going again, the spread then widens again. Perhaps this is because the large banks have usually been the ones to benefit most from government attention and from their closer relationships with the Fed and Treasury? Being too big to fail probably has its competitive advantages in moments of economic instability or crisis…

Interesting and Non-Traditional Economic Indicators

Posted on September 26, 2009, 8:52 am. Closed

The Cheapskate Blog from Time.com lists ten odd economic indicators. It’s interesting to see how different groups of people react to recessions and how those reactions effect the rest of society.

The signs are everywhere. You know the economy is struggling big time when your underwear is old, the armed forces don’t need recruits, there’s a hot resale market for cemetery plots, you can’t find the local pro football game on TV, your rich neighbors are clipping coupons, and your waitress looks like Megan Fox. That is, if you’re eating out at restaurants at all.

1. Appalachian Trail Hikers. When the going gets tough, the tough take a hike. There’s been a spike in the number of hikers making the long trek—meaning plenty of people have plenty of free time on their hands.

2. Immigrants in the U.S. After rising for decades, the number of foreign-born residents has stalled. Apparently, immigrants just aren’t as attracted to this country as they once were.

…

4. The Reselling of Cemetery Plots. When people buy one of these, you gotta assume that the thought never entered their heads that one day they’d want to—or have to—sell before putting them to use. People need the money, and suddenly cremation is cool.

…

7. The Toughness of Marine Ads. The Marines have met all of their recruitment goals, as typically occurs when the job market is bad. And so ads on TV are showing the toughest side of being a Marine, with barbed wire and even some dry heaving. Why? Because now they can be picky, and they want to attract the toughest, most highly motivated recruits.

…

10. The Hot Waitress Index. Here’s the theory: When times are flush, attractive women in big cities have many opportunities to make money through marketing gigs, modeling, hosting parties, and such. When times are less than flush, those opportunities dry up, and then restaurateurs scoop them up to wait tables—and to attract diners who like being served by hot waitresses.

There’s actually an investment opportunity listed above. Buy cemetery plots at a discount during  a recession and resell when prices adjust upward!

Some Links for 9/17/09

Posted on September 17, 2009, 12:22 pm. Closed

Here is some recent news I’ve found interesting:

The Financial Panic: A Mental Disorder

Posted on August 20, 2009, 12:53 am. Closed

A financial panic is precipitated by sudden, excited, and imprudent action. An industrial depression is precipitated by deliberate, thoughtful and prudent inaction. One is the result of mental excitement, which results in a temporary check to a natural flow of the media of exchange. It is a mental disorder. The other is the effect of calm, deliberate consideration, which results in reducing the rate of production of materials of physical wealth. It is a physical disorder.

A financial panic is an acute malady. Its beginning is sudden, intense, vivid, and startling. Its chief element is fright. It paralyzes finances at a single blow. Each subsequent step in its course is an alleviation. Each day, week or month shows a marked recovery. From its nature and intensity it is short-lived.

An industrial depression is a stubborn, chronic malady. Its beginning is gradual and quiet. It commences and goes on increasing in force for many months, unnoticed. Its cause is silently doing its fatal work while actual business is increasing by leaps and bounds. When actual depression appears, its cause has almost ceased to exist. From its nature and its deep-seated growth industrial depression is long-lived

A financial panic is usually a matter of a few months, weeks, or days. An industrial depression is usually a matter of one or more years.

A financial panic may be compared to a mob, in which a great number of excited minds work upon and incite each other until men act in a body as no one of them would act if left to himself. Industrial depressions, on the other hand, are the cumulative results of the deliberate and thoughtful decisions of individual men.

These two calamities can be classed together only because the results of each have a disastrous effect upon business. A panic has an effect which is short, exciting, and a temporary disaster, not to existing material wealth, but to the documentary representatives of wealth; a loss from which the country may entirely recuperate within a short time. The other is a compulsory laying down of the tools which produce wealth, by a vast army of wealth-creators; a loss that can no more be regained than a lost day or year can be regained.

This is an excerpt from an article written by George H. Hull in 1911 regarding panics and depressions. It almost sounds like it could have been written this year, which I find most interesting because this near-century-old article shows how investor psychology will always remain the same in any setting. The article also helps to serve as a reminder that business and the economy will continue to go up and down in cycles.

Another interesting thing is how Hull chooses to describe panics and depressions. He describes them as if they were diseases or afflictions, or rather, a psychological ailment or “mental disorder,” describing the symptoms and how the disorder will run its course through the economy.

Finally, I look up on this article as a reassurance for the tough times that many of us are experiencing in this country. If people back then could get through bank panics and economic depressions without the benefits of indoor plumbing, air conditioning, and sliced bread, then we really have no need to worry that things will eventually get better for us!

No, We Do Not Need a Second Stimulus

Posted on July 8, 2009, 1:04 am. Closed

Obama Adviser Says U.S. Should Mull Second Stimulus:

(Bloomberg) — The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was “a bit too small,” said Laura Tyson, an outside adviser to President Barack Obama.

The current plan “will have a positive effect, but the real economy is a sicker patient,” Tyson said in a speech in Singapore today. The package will have a more pronounced impact in the third and fourth quarters, she added, stressing that she was speaking for herself and not the administration.

This idiot should be removed to Japan immediately so she can understand how great that country fared after their bubble and ensuing (and seemingly perpetual) balance sheet recession. Japan tried to prop their economy by increasing debt to GDP but that didn’t help at all. Oh, and Wikipedia says this adviser was a Morgan Stanley director since 1997. Where is MS now? Oh wait, isn’t MS one of those FORMER investment banks (now a traditional bank holding company)? Why anyone would listen to a person associated with an organization that was a party to the global financial crisis is beyond me.

The real reason behind this so-called advice is to make the American people totally dependent on the government. This means politicians and bureaucrats will have more power to hand out political favors and so they can get re-voted into office and to continue collecting special favors and money from lobbyists and business interests. If you like the idea of going to the government for your every need, or you simply insist that the government can spend your money better than you can, please continue to support the petty politicians like Obama, Pelosi, Reid, or really 98% of the people in Congress.

I am becoming more and more convinced that the best solution to our problem of a short-sighted and power-hungry Congress is their ability to run for an unlimited amount of terms. Couple that ability with the power to spend money with abandon (thanks to a complicit Federal Reserve and Treasury Department) and you have a powerful and dangerous organization. I.e., a gangster government to which businesses and individuals must go for special favors or simply to conduct business or simply to protect the rights guaranteed to them by the Constitution.

Thus, in tandem with term limits for Congress persons, I am beginning to believe the Federal Reserve must be abolished. The idea that a collection of academics and economists can shape the economy, set interest rates, prevent booms and busts, makes no sense. Isn’t government control over the economy, government control of the marketplace, of the very place and concept upon which each citizen depends in order to provide for themselves and others, isn’t this just pure socialist communist crap? Isn’t government control of a person’s life and livelihood the ideological enemy against which we continually fought ever since World War II?

For now, I’ve said all that I can say. I think a new goal for me will be to continue to organize my thoughts into a sort of party platform. No, I’m not running for office, but I feel like I’m “partying” by myself and would simply like to see if there are more people out there who agree with me.

P.S.: I’m already thinking back on this post. Consider everything I said to be representative of an idealistic Doug, not so much a pragmatic or realistic Doug.

An Elegant Chain of Reasoning

Posted on April 30, 2009, 12:13 am. Closed

Page 433 of Cra$hmaker; Dominic Ancona and his campaign managers and regional operatives are discussing whether average Americans are able to figure out what’s best for them. One of the regional directors is skeptical and cynical, saying, “Most people base their political decisions on emotions and what they think are needs—all generated or manipulated by campaign advertising and managed news. Self-government’s usually an exercise in self-deception.”

However, Gregory Boston, one of Ancona’s managers, explains with absolute certainty how the campaign will presume average Americans can and will figure out what’s best for them. Dos Santos, another of Ancona’s leaders, explains the simple reasoning behind their message:

“Everyone wants economic security. Economic security depends on economic growth. And that depends on production, production on investment, and investment on savings. But government doesn’t produce, invest, or save—it only redistributes and wastes. So, to maximize economic welfare, America must minimize redistribution. Minimizing redistribution requires protecting private property and personal liberty. Liberty and property depend on restricting not just the government’s size, but also its ambit. And circumscribing that demands strict enforcement of the Constitution. So, specifically, we’ll focus on separating bank and state, repealing taxes that burden production, and otherwise freeing the market from Washington’s heavy hand. When everything comes into focus, people will see us as an all-American movement, because in the long run everyone except a tiny minority of elitists and their lackeys will benefit from the reforms we’re proposing.”

After this, Boston pulls out some t-shirts to give a graphic example of the tone of their campaign message: white t-shirts depicting black ants and green grasshoppers. “Ants versus grasshoppers—building for the future versus squandering the present.”

Predictably, Consumer Spending Declines

Posted on April 23, 2009, 10:17 pm. Closed

Bloomberg reports that American Express beat Q1 profit estimates. However, consumers spent less:

The company has posted profits and set aside more reserves for failed loans this year as surging U.S. unemployment makes it harder for customers to repay debt. The jobless rate reached 8.5 percent last month, a 25-year high, and American Express said today that it expects the rate to reach 9.7 percent in December. Consumers also spent less, charging an average of $2,391 in the quarter, 16 percent lower than a year earlier.

This is just an anecdote, so I decided to update my chart of total consumer credit outstanding.

tcco-sp-april09

I still am skeptical that consumers will soon be spending at 2005 levels. I feel that this crisis has possibly marked the beginning of a gradual shift towards less consumer spending. With a dramatically lower level of consumer spending, repayment of substantial debt, and baby boomers and others removing money from the stock market permanently, I think we will be lucky if the S&P surpasses its highs within the next seven years. I hope I’m wrong, but I feel like we’ve lived too high on the hog for too long not to endure a painfully long period of readjustment.

An 1897 Boom and Bust Retrospective

Posted on March 12, 2009, 9:18 am. Closed

This retrospective came to me via Alphaville and Option ARMageddon.

Way back in in 1897, L.M. Holt wrote a paper entitled “Panics and Booms”. When Holt wrote the paper, the economy was at the tail end of a depression that had begun in 1892. Holt argued that booms always follow busts, so folks should anticipate the return of flush times. Five years later, a new boom was in full swing, and a newspaper republished Holt’s paper as a warning that the next depression was due around 1910, give or take.  Option ARMageddon writes that “the Bank Panic of 1907 arrived a bit ahead of schedule.”

Here is a snippet of the paper:

During prosperous times, there being work for all, all are supplied with the means of accumulating wealth, and thus all are enabled to provide themselves, and families with all the necessaries, and many of the luxuries, of life; and hence, during the prosperous times the demand for goods and property increases and soon the demand exceeds supply, and then prices advance.

This rule, which is applied to the laborer, is also applied to the business man. Prosperous times induce business men to branch out in their several lines of trade…. The volume of trade being large, each gets a corresponding proportion of it. Many business men find that they can do more business than is allowed by their limited capital. They then buy on credit.

Prices are continually advancing, therefore they are able to make margins of profit not only on the capital furnished by themselves, but on the capital furnished through their credit.

This rule also applies to people dealing in real estate. The country is growing; money is easy; the times are good; business is prosperous and therefore speculation is favored. A man worth $5000 can buy four times that amount of property using his credit, and sometimes he buys ten times that amount or more. While prices are advancing he not only gets the benefits of the advance in the price of the property represented by the capital furnished by himself, but also on the capital furnished by his credit.

When prices of property and goods during a period of business depression are falling, the loss does not come on the entire property, but only on that portion of it represented by the cash capital the man has invested in it. The debt never shrinks until the real investment is all gone.

What Portion of Past Economic Growth Was Debt-Fueled?

Posted on March 6, 2009, 1:05 am. Closed

For the past several weeks I’ve been wondering to myself, “What portion of the economic growth we have experience in the past decade or so is solely attributable to the expansion of debt?” I have not been able to come up with an answer. However, I did create a chart that may or may not provide a vague, general answer.

For this chart I simply plotted the S&P monthly closes and the total consumer credit outstanding data (provided by the St. Louis Fed). My basic hypothesis is that the markets will find a bottom at their 1994-95 levels as this was the last point in time the markets started to increase after a period of zero or negative percent growth in consumer credit.

I am not an economist and I have no idea whether I’m right or wrong or just crazy. But I can look at a chart!

If anyone has an answer to the above question, please leave a comment.