Monthly Archives: December 2012

A Christmas Letter

We are reprinting an open letter from David R. Kotok, Chairman and Chief Investment Officer of Cumberland Market Advisors, to Mr. John Boehner, Speaker of the US House of Representatives. We do so since it is a wonderfully concise description of the US’s fiscal problems with a next step recommendation. The letter:

Flash Point: Where Has the Money Gone?

When we got the latest data on the household debt service ratio (blue line in Figure 1), we had to reconsider our recent assertion that the debt service ratio and not the absolute value of the total credit market debt outstanding is what determines economic expansion through marginal increase in spending (An Insight into the Impact of Debt on Economic Growth).

Figure 1. Household Debt Service Payments as a Percent of Disposable Personal Income (TDSP: blue line), Real Disposable Personal Income (red line), and Personal Consumption Expenditures (PCE: green line) (click to open in new window).

The red line in Figure 1 shows that TDSP has been flat since the recession started in 2007 bur PCE has been rising (green line). With about a 3.5% fall in TDSP since its maximum in 2007 just before the recession started, that should translate into roughly $350 billion of additional spending, but PCE has increased roughly 3 times this amount. This translates into roughly $700 billion of spending in addition to the marginal increase in disposable income available through the decrease in debt service payments.

Returning to Figure 1 in An Insight into the Impact of Debt on Economic Growth), if we look at the green line, we see that consumer credit has expanded by about $500 billion in the same time frame leaving an extra $200 billion of spending to find the source for funding.

We note that this period covers the entire period of active Fed intervention through its quantitative easy measures which have been designed to lower interest rates across the entire yield curve. This must have had a large impact on the decrease in debt service payments although we have no idea how to quantify such.

Distortions in the Global Economy

We have argued in several places that a high unemployment level in the US is structural. In today’s “Outside the Box” titled Sorting Out the Decade, John Mauldin presents two articles by Bill Gross and Charles Gave that have bearing on themes we have written on.

In the first, Bill Gross confirms our argument that high unemployment level in the US is structural (see the emphasized segment below):

Recently, Erik Brynjolfsson and Andrew McAfee at MIT have affirmed that workers are losing the race against the machine. Accountants, machinists, medical technicians, even software writers that write the software for “machines” are being displaced without upscaled replacement jobs. Retrain, rehire into higher paying and value-added jobs? That may be the political myth of the modern era. There aren’t enough of those jobs. A structurally higher unemployment rate of 7% or more is the feared “whisper” number in Fed circles. Technology may be leading to slower, not faster economic growth despite its productive benefits.

Three Cheers for Ethical Oil

Below is a new essay from Dr. Paul Merkley printed by permission of Paul and from The Bayview Review.

Ezra Levant’s national bestselling Ethical Oil: The Case for Canada’s Oil Sands (2010) presents compelling analysis on environmentalists’ apparent preference for doing business with fascist theocracies and other nasty regimes.

Viewing Canada’s oil sands as a blessing, Levant points out that Canada is the only genuine liberal democracy among the top ten largest oil-reserve nations. The human rights record of Saudi Arabia is no secret: women are forbidden to drive cars, teenage “criminals” have been “beheaded with swords in the public square,” and homosexuals are executed. Justice in Iran includes “death by stoning, crucifixion, or limb amputation.” There are many reports of human rights abuses in oil-producing nations such as Venezuela and Sudan.

Maps of War: Imperial History of the Middle East (Animation)

This is a 90 second animation of a map of the Middle East and its surrounds showing the different conquering empires and their extents. Unfortunately we were not able to embed the Flash player object so to access the animation, please click on the following link: http://www.mapsofwar.com/images/EMPIRE17.swf. The player’s controls are in the lower right allowing for start and stop actions.

It is useful as background for current issues such as the right of Israel to exist and Palestinian statehood.

Flash Point: Fed Math

Bloomberg has printed a summary of today’s FOMC meeting: Fed Expands Asset Buying, Links Rates to Joblessness, Prices. We will preempt the usual misinterpretations of a summary of the now and future position of the Fed’s balance sheet.

An Insight into the Impact of Debt on Economic Growth

An article on debt posted on ZeroHedge came to our attention: Consumer Debt – Still A Long Way To Go. It has a chart that we have seen much of recently, which we now reproduce from FRED® for the household sector as the blue line of total credit market debt and the red line as the total of outstanding mortgage debt.

Figure 1.Household debt outstanding. Left scale: total credit market debt (blue) and total mortgage debt (red). Right scale: total consumer credit (green) both revolving (violet) and non-revolving (orange).

Although all other forms of consumer debt are rising, mortgage debt and total debt are falling. As the article notes (emphasis ours):

This would be good news as lower debt levels means more personal savings which would lead to productive investment.  It would also mean more consumption that would provide stronger end demand to businesses.  Both of these outcomes are necessary for sustained economic growth.  The chart below has been used repeatedly to argue the deleveraging case for the economy.

This is standard economic doctrine. Apart from the fact that increased savings would not spur economic investment because the economy is swamped with – not starved for – liquidity, the falling mortgage debt levels do not translate into increased spending and the rising levels of other forms of consumer credit imply the opposite. The reason is the asymmetric relationship between total debt and debt servicing costs.

Robert D. Kaplan on the Middle East (Agenda)

Here is a longer video from Stratfor (12:11 minutes) that gives a helpful analysis of what is going on in the Middle East in general and Egypt in particular. We consider this to be an important viewing.

Flash Point: Did The Dinosaurs Kill Themselves?

Our local weather network site had a lead article today Study: Volcanic activity killed the dinosaurs. An interesting topic to be sure but what really grabbed our attention was their summary statement: A new study suggests that volcanic ash, sulphur in the atmosphere and global warming may have spelled the end of the dinosaurs. The weather site offered no supporting information on the claim to global warming as a cause of extinction so we went looking for the academic paper that originated the idea.

Flash Point: The Future of Housing in Canada

We came across this interesting graphic today from Business Insider titled CITI’S MATT KING PRESENTS: ‘The Most Depressing Slide I’ve Ever Created’. It shows a country’s dependency ratio on an inverted scale versus the county’s house price index.

Figure 1. The dependency ratio (dark line, inverted right scale) versus the house price index (light line, left scale) for six countries.

The six charts for specific global markets that have gone through a recent housing bubble suggest that the dependency ratio forms an envelope that the house price index moves inside of.

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