The jobless claims data is still choking on the backlog blowback, or so it seems based on today’s weekly update on new filings for unemployment benefits. The modest dip in claims for the week through October 12—down 15,000 to a seasonally adjusted 358,000—is a step in the right direction after the previous surge skyward, which is also attributed to the after-effect of computer glitches. But the latest slide falls well short of convincing evidence that the trend is headed lower once more.
Macro-Markets Risk Index: 10.4% | 10.17.2013
The shutdown showdown is over, the government has re-opened, and the imminent threat of a Treasury default has been averted. Now the damage assessment can begin in earnest. Estimating the economic price tag for the fiscal war in Congress will take time, a process that will be hampered due to the missing updates on key economic indicators that became victims of the political stalemate in Washington. It’s unclear if these numbers, including September’s retail sales, will be published anytime soon, if at all. Meantime, let’s take a fresh look at what we do know via the latest macro profile based on market data. For the moment, a slight rebound appears to be underway. The Macro-Markets Risk Index (MMRI) closed yesterday, October 16, at 10.4%–a level that suggests that business cycle risk remains low. Yesterday’s close is MMRI’s highest reading since mid-September. If MMRI falls under 0%, that would be a sign that recession risk is elevated. By comparison, readings above 0% imply a bias for economic growth.
US Industrial Production: September 2013 Preview
Tomorrow’s US industrial production report for September will be postponed due to the government shutdown. Although the numbers are produced by the Federal Reserve, which remains operational thanks to funding that’s independent of Congressional approval, the central bank advises that this report relies on “a range of data from other government agencies, the publication of which has been delayed as a result of the federal government shutdown.” When (or if) September’s report sees the light of day is unclear at this point. That said, industrial production for September is expected to rise 0.2% over the previous month, according to The Capital Spectator’s average econometric forecast. Keep in mind that this forecast is impaired because it doesn’t reflect updates to the R-4 and VAR-7 models (see definitions below), which rely in part on the latest payrolls data. Unfortunately, the September employment report from the government is still a mystery due to the budget impasse in Congress. Using the available numbers, the Capital Spectator’s average forecast of a 0.2% rise for September industrial production represents a lesser pace from the previously reported 0.4% gain for August. Meanwhile, the Capital Spectator’s average projection for September is below several consensus forecasts based on recent surveys of economists.
US Housing Starts: September 2013 Preview
Tomorrow’s report on US housing starts for September will likely be postponed due to the government shutdown. When (if?) this update is published, US housing starts are expected to total 891,000 (seasonally adjusted annual rate), according to The Capital Spectator’s average econometric forecast. The projection represents a modest decline vs. the previously reported 891,000 total for August. Meanwhile, in contrast with The Capital Spectator’s average prediction, several consensus forecasts drawn from surveys of economists anticipate a moderate rise in September housing starts vs. the previous month.
Looking For Value… In Price Signals?
Recognizing value as a risk factor of significance is firmly established in the academic literature and it’s widely applied in the real world of money management. It’s not hard to understand why. Buying assets on the cheap has an encouraging history of delivering the performance goods, and there’s quite a lot of theoretical support for explaining why that’s so. The problem, of course, is that deciding if a given asset or asset class is priced at a discount is tricky in real time. One reason is because the traditional metrics of choice for estimating value—book value, earnings, and other accounting measures—are reported with a considerable time lag. Even worse, some asset classes (i.e., commodities) can’t be valued properly, if at all, by the cash-flow standards that apply to stocks, bonds and real estate. Value investing, in other words, requires a fair amount of time and effort. But in a bid to generate real-time value signals that can supplement the traditional methods, a recent paper offers an intriguing idea: look to Mr. Market’s price signals for guidance.
Just Gimmie Some (Fiscal) Truth
James Hamilton, a dismal scientist who teaches the dark art at University of California, San Diego, cuts through the noise and lays out the unvarnished truth on the needlessly convoluted and confused subject of red ink and spending in Washington:
Problem 1 is that the debt-ceiling vote has always been, and always will be, a political charade. The real decision is how much the government is going to spend on programs and how much it is going to collect in taxes. Once Congress has made those two decisions, if spending exceeds taxes, of course the government needs to borrow more. The idea of holding a separate vote on borrowing, as if it was a separate decision from spending and taxing, serves only one purpose — allow representatives from the minority party to grandstand as if they were actually doing something about the deficit.
Inching Towards Default
It’s Tuesday night and the prospects are looking increasingly dim for a political solution for the politically driven risk of a US Treasury default. The credit rating agency Fitch earlier today “placed the United States of America’s (U.S.) ‘AAA’ Long-term foreign and local currency Issuer Default Ratings (IDRs) on Rating Watch Negative (RWN),” the firm announced this afternoon. “The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This ‘faith’ is a key reason why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns.”
Welcome To A New Era Of (Permanent?) Political Chaos
The Senate is reportedly making progress in crafting a political solution that will reopen the government and raise the debt ceiling. But it’s becoming clear that any solution will be a temporary fix until next round of a potential shutdown and default return. It seems that we’ve entered a new world order where extreme political chaos is standard operating procedure. The price tag for this distressing change will include greater uncertainty and even temporary bouts of blindness on matters of analyzing the economy and pricing assets.
An Evening Of Macro & Markets Via R
Are you interested in R? R, of course, is the statistical software environment that’s becoming the standard for number crunching the world over. For the uninitiated, think of R as Excel on steroids, offering greater flexibility and power to analyze, well, just about anything (if you can tap into the numbers). Even better, R is free and it’s supported by a global army of users and programmers, including some of the smartest economists and statisticians on the planet who write “packages” for this software platform. In any case, if you’re near Iselin, NJ (roughly a 40-minute drive from New York City) next Tuesday, October 22, you’re welcome to attend the New Jersey R meeting at 7 pm at the Hilton Woodbridge (120 Wood Avenue South, Iselin, NJ), where I’ll be giving a brief presentation on macro and markets from the perspective of using R to investigate the finer points of the business cycle and investing. There are three other presentations scheduled too and so the evening should be quite interesting. The event is free, but please confirm your attendance in advance via email:
newjerseyR@mango-solutions.com
You can find more information here:
www.newjerseyr.org/
www.meetup.com/NewJerseyR/
Political Experiments On A $17 Trillion Economy
Another week and still no sign of a resolution to the political stalemate in Washington that’s kept the federal government partially shuttered. This is also the week that faces a Treasury default on Thursday, when the government reportedly will run out of money to pay its bills if Congress doesn’t raise the debt ceiling. The question is what happens on October 17 and beyond if the federal government can no longer borrow? The immediate result is that spending would be limited to cash on hand and incoming tax revenue. The big mystery is how such an event would impact the markets, the financial system, and the economy? No one really knows, but we may soon find out.