Economy Archives - Page 99 of 137 - the patient investor

December 14, 2012

Labor productivity can be misleading

We are frequently bombarded with labor productivity statistics such as output per hour worked and unit labor costs — normally accompanied by political hand-wringing exhorting us to improve productivity — but how accurate are these statistics and what do they mean?

First let’s look at GDP per capita. This should tell us how well we are doing compared to our neighbors. Norway and Singapore lead the pack, ahead of the US, while Australia is comfortably in the middle.

Measuring in Purchasing Power Parity (PPP) adjusts for comparative price levels in different countries. Australia and Norway are most expensive, with relative price indices (PPP/exchange rate) of 1.61 and 1.58 respectively; while Singapore (0.83), Czech Republic (0.80) and South Korea (0.74) are cheapest.

Demographics such as an aging population or high birth rates, however, may distort per capita figures.

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Norway also leads when it comes to GDP per hour worked — which should alert us that productivity of resource-rich economies such as Norway and Australia may be inflated by profits earned from extraction (mining, oil and gas). Ireland surprisingly beats the US, while Singapore slips to near bottom of the table when measured by hours worked.

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Workers in Singapore and South Korea work far longer hours than most other OECD countries, while those in powerhouse Germany work even less than their counterparts in France.

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But hours worked can also give a distorted view of employee welfare. Compare the 3 or 4 hours that workers in Sydney, London or New York may spend commuting to and from work each day to a Korean assembly worker who lives in a housing estate adjacent to the assembly plant. If we compare GDP (adjusted for PPP) to employed persons, rather than hours worked, we get a slightly different picture. The real surprise is again Ireland, ranking third behind Norway and the US — and well ahead of Australia, Germany and the UK.

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What do we learn from this? It pays to live in a resource-rich country such as Norway (or Australia). It also pays to work clever — high-tech manufacturing like Germany and Ireland — rather than hard. Combine this with a low-tax jurisdiction — such as Singapore or Ireland — and you can become a world-beater.

Labor productivity

Labor productivity is measured as Output / Input

Where Output is the total of goods and services produced, normally measured by GDP.

And Input is the time, effort and skills of the workforce, measured either as:

total hours worked by the workforce; or

total number of employees.

Via OECD: Labour Productivity Indicators | Rebecca Freeman

Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.

December 13, 2012

EU Deal Reached on Bank Supervisor | WSJ.com

GABRIELE STEINHAUSER And LAURENCE NORMAN at WSJ write:

European Union finance ministers reached a landmark deal early Thursday that would bring many of the continent’s banks under a single supervisor, in what governments hope will be a major step toward resolving their three-year-old debt crisis. Ministers said the European Central Bank would start policing the most important and vulnerable banks in the euro zone and other countries that choose to join the new supervisory regime next year. Once it takes over, the ECB will be able to force banks to raise their capital buffers and even shut down unsafe lenders.

This is an important step, centralizing banking control in Brussels. Though there is bound to be dissent amongst member states as to capital buffers and unsafe lending practices.
Read more at EU Deal Reached on Bank Supervisor – WSJ.com.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

December 12, 2012

Risk Seen in Fed Bond Buying | WSJ.com

KRISTINA PETERSON at WSJ writes:

The Federal Reserve should stop buying bonds, even as the central bank is poised to purchase more, according to a narrow majority of economists in a new survey by The Wall Street Journal……”It’s distorting market prices and creating problems in the future,” said John Silvia, chief economist at Wells Fargo Securities, who said the Fed’s bond-buying was making long-term Treasurys too expensive without significantly easing problems in the labor market. “The Fed needs to back away and let interest rates rise just a little bit,” he said.

If past performance is anything to go by, Fed quantitative easing (or bond buying) is ineffectual in lifting the employment rate. And the lower that they drive bond yields, the greater the backlash when yields eventually rise. Yields are likely to spike up rapidly as bond-holders attempt to offload positions in order to avoid massive capital losses.

via Risk Seen in Fed Bond Buying – WSJ.com.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

December 12, 2012

New Research from Finland’s Central Bank Confirms that Government Spending Is Causing Stagnation in Europe | International Liberty

Dan Mitchell reports on new research from the Bank of Finland:

Europe suffers from a growth slowdown. The GDP growth in Europe has lagged behind the GDP growth in the US and has been far worse than the GDP growth in the NIC countries, particularly China… However, what is the reason for slow or rapid economic growth? …In many respects, the labour market plays the key role in the economy because it determines both the use of the labour input and the level of overall competitiveness of a nation. Obviously, the functioning of the labour market is not independent of the public sector. A large government is almost inevitably associated with a large tax wedge, and the functioning of the labour market appears to be critically dependent on the size of the tax wedge. It may be fair to say that the harmful consequences of a high tax wedge are exceptionally well and unambiguously documented in the literature. …On the basis of the estimates derived in this study, the following guide for growth policies appears to be warranted: …Do not over-expand the welfare state. Larger governments are associated with slower growth rates.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

December 12, 2012

Fed’s numerical thresholds are a bad idea

The Fed effectively tied its monetary policy to a balloon bobbing in the wind. Pedro da Costa writes on Reuters:

The Federal Reserve on Wednesday took the unprecedented step of tying its low rate policy directly to unemployment, saying it will keep rates near rock bottom until the jobless rate falls to 6.5 percent. That’s as long as inflation, the other key parameter of policy, does not exceed 2.5 percent.

Both unemployment and inflation are moving targets. Unemployment primarily because results are highly dependent on the participation rate: disheartened job seekers who give up looking for work are excluded from unemployment figures. Likewise, inflation measures are highly subjective. Weightings require constant adjustment because of advances in technology and changes in consumption patterns, while cost of housing estimates, which make up 39 percent of core CPI, seem to have little connection with reality. Scott Sumner points out:

The problem seems to be that, according to the Bureau of Labor Statistics, housing prices did not fall. On the contrary, their data shows housing prices actually rising between mid-2008 and mid-2009, despite one of the greatest housing market crashes in history. And prices did not rise only in nominal terms; they rose in relative terms as well, that is, faster than the overall core CPI. If we take the longer view, the Bureau of Labor Statistics finds that house prices have risen about 8 percent over the past six years, whereas the famous Case-Shiller house price index shows them falling by nearly 35 percent…..

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

December 12, 2012

Ray Dalio Explains The Rare Set Of Circumstances That's Making Him Bearish On Markets | Business Insider

Joe Weisenthal reports on hedge fund guru Ray Dalio’s outlook:

His novel set of circumstances he sees is an economy that faces austerity (due to the Fiscal Cliff, etc.) coupled with a Fed that’s mostly blown its bazooka, and can’t get much more juice out of QE.

Yields can’t go down anymore.

Austerity is coming.

Economy is running out of steam.

QE is losing its efficacy.

Rate turn probably finally coming late in 2013.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

December 12, 2012

Dangers of quantiative easing may be political more than technical

Glenn Stevens, governor of the Reserve Bank of Australia, in an address to the Bank of Thailand today commented on the dangers facing central bank monetary policy:

For the major countries a further dimension to what is happening is the blurring of the distinction between monetary and fiscal policy. Granted, central banks are not directly purchasing government debt at issue. But the size of secondary market purchases, and the share of the debt stock held by some central banks, are sufficiently large that it can only be concluded that central bank purchases are materially alleviating the market constraint on government borrowing. At the very least this is lowering debt service costs, and it may also condition how quickly fiscal deficits need to be reduced. There is nothing necessarily wrong with that in circumstances of deficient private demand with low inflation or the threat of deflation. In fact it could be argued that fiscal and monetary policies might actually be jointly more effective in raising both short and long-term growth in those countries if central bank funding could be made to lead directly to actual public final spending – say directed towards infrastructure with a positive and long-lasting social return – as opposed to relying on indirect effects on private spending.

The problem will be the exit from these policies, and the restoration of the distinction between fiscal and monetary policy with the appropriate disciplines. The problem isn’t a technical one: the central banks will be able to design appropriate technical modalities for reversing quantitative easing when needed. The real issue is more likely to be that ending a lengthy period of guaranteed cheap funding for governments may prove politically difficult. There is history to suggest so. It is no surprise that some worry that we are heading some way back towards the world of the 1920s to 1960s where central banks were ‘captured’ by the Government of the day.

via RBA: Speech-Challenges for Central Banking.

Hat tip to Walter Kurtz at Business Insider.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

December 12, 2012

Carney broaches dumping inflation target | FT.com

Claire Jones reports that Mark Carney says central banks should consider scrapping inflation targets and target nominal GDP instead — allowing more aggressive measures during a down-turn.

[Mark Carney, next governor of the Bank of England] suggested that a nominal GDP target, where a central bank sets monetary policy based on both inflation and growth, would do more to boost economic output. “For example, adopting a nominal GDP-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting,” he said.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

December 11, 2012

Republicans Send Fiscal Cliff Counteroffer To Obama – Business Insider

Brett LoGiurato reports that House Speaker John Boehner made a counter-offer in fiscal cliff negotiations. His spokesman Michael Steel issued a brief statement:

“We sent the White House a counter-offer that would achieve tax and entitlement reform to solve our looming debt crisis and create more American jobs. As the Speaker said today, we’re still waiting for the White House to identify what spending cuts the president is willing to make as part of the ‘balanced approach’ he promised the American people. The longer the White House slow-walks this process, the closer our economy gets to the fiscal cliff.”

via Republicans Send Fiscal Cliff Counteroffer To Obama – Business Insider.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

December 11, 2012

The Fed's interest rate policies are damaging rather than restoring confidence and should be reversed

Vince Foster at The Fiscal Times writes about this Wednesday’s FOMC meeting:

With Operation Twist due to expire at the end of the year and because the Fed is essentially out of short-term bonds with which to finance purchases, it is virtually assured that they will opt for outright purchases financed with printed money……….Now, said Ned Davis Research in a report last week, the Fed is likely to replace Operation Twist with purchases of Treasuries, perhaps in the $45 billion a month range, bringing its total monthly purchases to $85 billion.

Outright purchases of long-term Treasuries are far more expansionary than Operation Twist purchases which are off-set by the sale of shorter-term maturities.

Foster discusses Fed motives, considering that previous QE failed to lower interest rates or lift stock market values.

It has been my contention that the main objective is not to reflate asset prices but rather to stimulate credit creation and the velocity of money. According the Fed’s H.8 Release banks are holding over $2.6 trillion in cash that’s sitting idle on their balance sheet in securities portfolios. Bernanke is trying to flush the banking system out of these bloated securities positions and into extending credit by lowering bond yields to levels where banks can no longer afford to hold them.

Foster points out that negative real interest rates may be discouraging banks from lending, inhibiting the recovery. Also that bank balance sheets — bloated with Treasuries and MBS ($2.6 trillion) purchased as an alternative to lending — are vulnerable to capital losses should interest rates rise.

The Fed’s low-interest-rate policies have created a powder keg while being largely ineffectual in stimulating credit creation and consumption. The safest approach would be to reverse these policies and raise interest rates. Raising long-term rates to sustainable levels would reduce uncertainty and help restore confidence. House prices and stocks may initially fall but this would flush any excess inventory out of the system, giving purchasers and banks confidence that the market really has bottomed. With higher rates and stable collateral, banks will be more willing to lend.

At present we are all sheltering under the shadow of the Fed’s low-interest-rate umbrella, but with a nagging fear as to what will happen when the Fed takes the umbrella away. Fed policies are no longer adding confidence but increasing uncertainty. The sooner the umbrella is removed, the sooner the system will return to normality.

QE is likely to continue — Treasury needs to print money in order to fund the fiscal deficit — but this can still occur at higher rates. The fiscal deficit unfortunately will remain with us for some time — until confidence is completely restored and deflationary effects of private sector deleveraging are consigned to the history books.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.