Monday, February 29, 2016

Books: An Empire Of Wealth - Rise Of The American Economy By John Steele Gordon



(Drivebycuriosity) - The USA is the most powerful & wealthiest country of the world. How did that happen? Why did the US flourish while countries like Brazil and Argentina did not, even that they started with similar advantages? John Steele Gordon answers these and a lot of other questions in his excellent book "An Empire Of Wealth - Rise Of The American Economy 1607-2000" (amazon).

Gordon wrote not only a concise economic history of the United States, he also gives a top-notch introduction into advanced economics. "Empire" is very clearly & catchy written and I learned a lot by reading this book. Below some tidbits from the vast knowledge the author stretched over 492 pages:


Why could Europe dominate the whole world for centuries and conquer & develop the American continent? The old continent was more technological advanced then the rest of the world and  benefitted from a row of innovations & inventions:
  
- the invention of the printing press in the Renaissance that reduced the cost of books, and thus of knowledge. Cheap information fostered the rise of science and (early) technology,  it promoted trade and helped managing corporations
-  the creation of full-rigged ships made long ocean passages possible
-  the initiation of double-entry booking made it much more easier to detect errors and to invest in complicated and distant enterprises and still keep track of how these investment are doing
- the launch of the joint-stock company, the precursor of today`s stock market listed companies,  limited the risk an individual investor had to take and made it possible to amass big sums to invest in distant places like the American colonies. New York, Virginia and the New England colonies were not founded by the English state; they were founded by profit-seeking companies.

According to Gordon the "get-up-and-go mentality" was also an important factor for America´s rise. Americans are descended from those who got up and came - "those who chose to leave all they had ever known and come to a strange and distant land came to pursue their own ideas of happiness". The willingness to accept present discomfort and risk for the hope of future riches that so characterized these immigrants, and the millions who would follow over the next two centuries, has had a profound, if unmeasurable effect on the history of the American history.

America`s rise as industrial nation was driven by inventors & entrepreneurs like Samuel Slater, who developed a cotton spinning machine in the 18th century and Oliver Evans, who created a flour mill, the steel magnate Andrew Carnegie and Cornelius Vanderbilt, who was one of the first who built great industrial and transportation empires in the late 19th century. Railroads had an important role in the development of the vast nation. "In Europe railroads connected existing cities. In America, in many cases, they midwived them into existence". In the early 1920s Henry Ford, who was obsessed with driving production costs lower, made cars affordable for the masses and created so a huge industry and wealth for the whole nation.

All these factors worked beneficially together. "In the half century between the end of the Civil War and the beginning of World War I in Europe, the American economy changed more profoundly, grew more quickly, and became more diversified that at any earlier fifty-year period in the nation´s history". In 1865 the country was still basically an agricultural one. By the turn of the twentieths century the United States had the largest and most modern industrial economy on the earth, characterized by giant corporations undreamed of in 1865.






                                              Jefferson´s Inheritance

But America´s rise wasn´t smooth, instead it was a bumpy ride. While the American economy grew at an astonishing rate, it also was  the most volatile in the Western world, subject to an unending cycle of boom and bust whose amplitude far exceeded the normal ups and downs of the business cycle. In the 19th century America suffered frequent crashes of banks, railroads and other companies which started a panic leading to a depression. "Seller´s panic produce, by their nature, a sudden surge in demand for money as investors and depositors seek liquidity, and money, of course, is the ultimate liquid asset. Because there was no central bank empowered to regulate the money supply and to provide the liquidity needed to protect the banking system in times of stress, however, these sellers`panics greatly exacerbated the downward swings of the business cycle. Basically sound institutions collapsed by the hundreds when they were unable to meet the sudden demand for money. Often they took the life savings of families and the liquid assets of businesses with them".

One of the worst depressions started January 1837. The price of cotton, then an important income source for the US economy, fell by half in March. By April Philip Hone, a former mayor of New York, wrote in his diary that "the immense fortunes which we have heard so much about in the days of speculation, have melted like the snows before an April sun. No man can calculate to escape ruin but he owes no money; happy is he who has a little and is free from debt." By early fall, 90% of the nation´s factories were closed. Federal revenues fell by half in 1837. The depression didn´t reach bottom until February, fully 72 months after in began.

Another depression began in early 1893. "By the end of the year some fifteen thousand companies had failed, along with 491 banks. The gross national product fell by 12%, and unemployment rose rapidly from a mere 3% in 1892 to 18.4% two years later".

America owed these frequent crises partly to Thomas Jefferson. The third President of the US (1801-09 ) defeated his political opponent Alexander Hamilton, who wanted to create an central bank. Jefferson had a deep political aversion to cities and to the commerce that thrives them and described himself as “an enemy of banks”. His vision of the future of America was a land of self-sufficient yeomen farmers, a rural utopia. Jefferson, born one of the richest men in the American colonies - on his father`s death he inherited more than five thousand acres of land and three hundred slaves - spent money all his life with a lordly disdain for whether he actually had any to spend. He died, as a result, deeply in debt, bankrupt in all but name”.

Jefferson - and later his followers - balked Hamilton`s plan to create a central bank, modeled on the Bank of England. This institute should regulate the money supply by disciplining the private banks and should also be a source of loans for the government and other banks. But thanks to Jefferson and his followers for more than a century America had to do without out financial fire fighters. At the turn of the 19th century one man merged who tried to fill the gap: JP Morgan. The New Yorker banker used his own huge fortune and his enormous influence on Wall Street to hinder the bank panic from 1907 to evolve into a full-fledged depression. Using his own wealth and his power persuasion he talked other banks to pump liquidity into the market. The awareness that a man of the stature and probity of J.P. Morgan might be able to avert financial calamity in the future, but there was no guarantee that there would be such a man available, lead to the creation of the Federal Reserve System (Fed), the central bank, in 1913 - finally.


                                              The Great Depression

After World War I only the United States emerged from the struggle materially strengthened and Wall Street replaced London`s Lombard Street as the world`s  leading financial power. Cheaper cars and falling costs for electricity caused productivity to soar in the 1920s, increasing output per worker by 21.8 in the decade. This helped to push manufacturing output up by more than 90%. Economic growth fueled optimism and the stock market - a huge rally took off.

By the spring of 1929 the financial market began to disconnect from the economic fundamentals. The Dow Jones Industrial Average and the New York Times Index of widely hold stocks continued to rise while the economy began to move into recession, thanks to the Fed who started rising interest rates to clamp down the money supply. But the wider market, including thousands of secondary stocks and those not included in the most widely watched averages, had begun to decline along with the economy.

On September 5 leading stocks like U.S. Steel & AT&T dropped in the last hour of trading sharply. Over the next six weeks the market trended downward, with occasional plunges followed by more modest recoveries. On October 23 a wave of selling swept the market, causing a mountain of margin calls (broker cancelling stock loans) which accelerated the selling.  Thursday, October 24, the Black Thursday, was the most frantic in the history of the New York Stock Exchange so far. Short sellers, who borrowed stocks and sold them immediately in the hope to buy them back much cheaper, made the drop worse. Purchases by banks who tried to stop the panic caused a very short live rally, just a dead-cat-bounce. On Monday the selling resumed and on Tuesday, October 29, the Black Tuesday, the market plunged massively. Der Dow Jones Average at the end of the day stood 23% below where it had closed on Saturday, and nearly 40% below its high of early September.

But, as Gordon explains, the stock market crash didn`t cause the crisis, the sharp fall was just an effect of the forces moving the American and world economies into depression. Although the stock market had been an national obsession in 1929, its crash had not directly affected that many families - less than 2.5% of the population had brokerage accounts. The Federal Reserve, still young & unexperienced, made a rookie mistakes: The Fed did not move decisively to add liquidity to the banking system nationally. In the year 1931 the Federal Reserve moved aggressively to defend the dollar and maintain the gold standard as foreign banks and investors moved to repatriate gold. "It was an utterly disastrous decision, perhaps the greatest of all mistakes made in these years", comments Gordon. "Maintaining the gold standard required raising interest rates and cutting the money supply, causing an already severe deflation to become much more severe." Banks called loans to stay liquid, while customers postponed purchases in expectation of lower prices.

The Smoot-Hawley Tariff Act was another fateful mistake. This regulation put high tariffs on imported goods. "Tariffs are taxes, and taxes, inescapably, are always a drag on the economy. But far worse, high tariffs breed retaliatory tariffs in foreign countries". Great Britain and other countries nations responded with sharp restriction of US exports -  as result the world trade began to collapse.

Starting in the year President Franklin Roosevelt implemented the New Deal, a long list of measures, to revive the US economy. This included the Federal Reserve Act, which reformed and strengthen the central bank. "For the first time in ninety-nine years, since President Andrew Jackson had destroyed the Second Bank of the United States, the country had a fully functioning and empowered central bank. The country had paid dearly for the lack of it." The Glass-Steagall Act was part of the new program and separated deposit from investment bank to reduce power and risks of the banks.






                                                            Unprecedented Boom

At the end of World War II many economists & business leaders predicted a new depression because of the lacking military demand again. Instead an unprecedented boom started through the early 1970s. In the begin the US economy got some tailwinds from the GI Bill of Rights. This program was originally intended to reward veterans for their bravery and sacrifice in the war. It provided generous payments to veterans for education, buying houses and investing into businesses. The post-war boom ended when Opec implemented an oil embargo to punish the West for Israel´s Yom Kippur War (Oil Shock) which caused high inflation rates and new recessions. The US economy, which relied heavily on the car, was hit hard. President Ronald Reagan - and falling oil prices - rekindled the economy in the 1980s and a new period of prosperity started which lasted through the year 2,000.


In October 1987 the stock market crashed again and suffered the worst one-day decline in percentage terms - 22.8% - in history. Many thought that this signaled the start of a new Great Depression. In fact, the market recovered 104 points the next day and reached a new high on the Dow within 15 months, "The reason, principally, was that the Federal Reserve acted immediately and decisively to stem the panic and to protect the economic institutions of the country from harm". It "flooded the street with money", as it pumped massive liquidity into the economic system. The US economy grew 3.6% in 1987 and advanced 4.2% in 1988 in spite of the stock market turmoils. For the first time since Alexander Hamilton had stemmed the panic of 1792, federal monetary authorities had performed as the should in a moment of financial crisis.


The book ends with the stock market meltdown of 2000/01 and some words about  9/11. I really would enjoy if Gordon´s would also write an analyses and description of the 2008 financial crises and the recovery.




                                        A Man Who Dies Rich, Dies Disgraced

Gordon claims that the US "has never developed an aristocracy, because the concept of primogeniture, with the eldest sun inheriting the bulk of the fortune, never took hold. Thus great fortunes have always been quickly dispersed among heirs in only a few generations. The American super rich are therefore always nouveau riche". He continues"the giving of vast sums to eleemosynary institutions by the very rich is a uniquely American practice; the European upper classes have no such traditions".  It began with people like George Peabody (The Peabody Museums at Harvard and Yale, among much else), Peter Cooper (The Cooper Union, still the only major college in the US to charge no tuition) and John Jacob Astor, whose Astor Library is today the core of the New York Public Library, the larges privately financed library in the world).

As the 19th century began to wane, the people who were building great fortunes - like Henry Clay Frick, John d. Rockefeller &J.P. Morgan - began to found or endow museums, concert halls, orchestras, colleges, hospitals, and libraries in astonishing numbers in every major city. The billionaire Carnegie -one of these donators - wrote, that "a man who dies rich, dies disgraced" and gave away  nearly his entire fortune.




Conclusion: I learned how the US became the richest nation on earth, how economic crisis arise and how to fight them, how the gold standard & and new tariffs made the Great Depression even more worse, what America´s super rich do with their money and a lot more.

Sunday, February 28, 2016

Movies: The Assassin

(Drivebycuriosity) - Better late, than never. I had missed the Chinese film "The Assassin" in the cinema theaters last year (imdb). But last week I finally could enjoy the movie at home, thanks to Netflix.

"The Assassin" is a masterpiece, a work of epic beauty. The film is set into historical China, the Tang Dynasty of 9th Century Mainland China. A female, who is highly skilled in sword fighting techniques and other martial arts, has the order to assassinate the governor of a remote province. There is already a legion of Chinese martial films and Director Hsiao-Hsien Hou followed a tradition of movies that celebrate a female master of this art form who defeats all her male combatants like "House of Flying Daggers" and "Crouching Dragon, Hidden Tiger". But this film maybe the best of them all.

I didn´t care much about the plot and I am not sure whether the story made much sense. Anyway, not much happened. But, I was awed by the cinematography and I indulged into scenes which look like a fluent kaleidoscope of master paintings. Gorgeous!





Some scenes remind me a bit of the movie "The Leopard", even that this movie describes the life  of an Sicilian aristocrat in a very different time & situation. Both films are very slow & contemplative. Both take their time to submerge into the worlds and environments of their characters.

I would like to see more from Qi Shu, who impersonated the assassin with grace. Casting Chen Chang as the governor was an excellent choice. The actor, who is well known for his martial arts flicks, impressed here in very different and stoic role.

"The Assassin" is a must for cineasts and art lovers in general!

Saturday, February 27, 2016

Stock Market/Economy: Conflicting Signals


(Drivebycuriosity) - If we believe the stock market then the US economy is getting worse. Stocks fell 5% year-to-date and some days ago they hovered about 14% below last year`s peak. Commentators claim that the stock market´s drop signals a coming recession. But the news from the economic frontier sends a quite contrary message.

Yesterday we learned that in the US personal income and spending (consumption expenditures) both grew 0.5% in January (calculate). Personal spending and disposable personal income are again growing at 4%-plus rates in annual terms—the best gains in about a year (capitalspectator). Private-sector wage growth popped even more, posting a 4.9% increase in January vs. the year-earlier level—the strongest annual gain since last August (capitalspectator).

So, US consumers are earning more and they are spending more - and both trends are accelerating (charts below tradingeconomics). Other fundamental data also got stronger in January, including industrial production and durable goods orders (driveby reuters). The unemployment dropped to 4.90% and the weekly jobless claims hover close to a 40-years low.





So, stock market and fundamental data give conflicting signals. Who is wrong? I bet that the stock market gives wrong signals. This reminds me of a quote from the late Prof. Samuelson (driveby). He joked: “The stock market has predicted nine of the last five recessions”. The economist and nobel prize winner was right, double-digit losses and even bear markets (a drop of at least 20%) happened often without an economic downturn. For instance the infamous "Black Monday" crash from October 1987 wasn`t followed by a recession. The US economy grew in 1987 3.5% and accelerated to 4.2% in 1988.

This year`s drop shows how random and irrational the market sometimes behaves. The losses were caused by the gloomy sentiment and aggressive herding behavior. Hedge funds and other speculators typically buy and sell the same stocks, at the same time, and track each other's investment strategies. In the recent weeks traders - including the timid managers of huge funds and other portfolios - dumped  anything which seemed risky, their sales caused others to sell too, which lead to a snowball effect of more and more selling.

It seems that the stock market is obsessed with tumbling oil prices and the losses the banks - who  financed the US oil producers (frackers) - are suffering. The market neglects that the general economy - everybody is a consumer - is benefitting from cheaper gasoline, lower heating costs and reduced costs for transportation & materials.

The recent stock market losses remind of the year 2011 when a gloomy sentiment send stock prices deep south. I assume that the positive news flow from the economic frontier will continue - thanks to cheap energy & materials and technological progress - and will rekindle the stock market rally as they did in the year 2012.

Friday, February 26, 2016

Contemporary Art: Female Figures With Hidden Faces @ Jack Hanley Gallery, New York

(Drivebycuriosity) - Do you like contemporary figurative paintings? New York´s Jack Hanley Gallery (327 Broome Street, New York jackhanley) shows works by Heidi Hahn. The exhibition is called "Bend Idle" (through March 13, 2016).



I like the powerful style and the sumptuous use of color which reminds me of modern expressionism like the "Bay Area Figurative Movement" (wikipedia) and works by David Park & Richard Diebenkorn.  If you want a elaborate explanation of Hahn´s creations I link here to the press release jackhanley.





I show here my favorites, as usual a subjective selection. Let the pictures speak for themselves. Enjoy!

Thursday, February 25, 2016

Economy: Even Economic Crises Are *Getting Better* Over The Time

(Drivebycuriosity) - Many commentators compare the current soft spot of the US economy with the  crisis of 2008 or even with the Great Depression of the 1930s. Bloomberg commentator Justin Fox even sees a similarity with the 15th century - the bullion famine (bloomberg).

What can we learn from these comparisons?  I notice that these crises were worse the earlier they happened in history. 2008 was bad, but the depression of the 1930 was much worse. And the crises in the 19th century were even worse than the 1930 depression.

The historican John Steele Gordon describes in his economic history of America ("An Empire Of Wealth - Rise Of The American Economy" amazon) the frequent and severe crises of the 19th century. They were started by recurrent crashes of banks, railroads and other companies which caused a panic leading to a depression: "Seller´s panic produce, by their nature, a sudden surge in demand for money as investors and depositors seek liquidity, and money, of course, is the ultimate liquid asset. Because there was no central bank empowered to regulate the money supply and to provide the liquidity needed to protect the banking system in times of stress, however, these sellers`panics greatly exacerbated the downward swings of the business cycle. Basically sound institutions collapsed by the hundreds when they were unable to meet the sudden demand for money. Often they took the life savings of families and the liquid assets of businesses with them".

One of these frequent depressions began in early 1893: "By the end of the year some fifteen thousand companies had failed, along with 491 banks. The gross national product fell by 12%, and unemployment rose rapidly from a mere 3% in 1892 to 18.4% two years later", reports Gordon. The recession 2008, as bad as it was, was not comparable with this event or the 1930s depression.

The observation that crises got worse the farther you go into the past implies reversely (e contrario) that crises are getting less severe the later in history they occur. The 19th century crises were less apocalyptic then the famine of the 15th century. The Great Depression, as bad as it was, was not as catastrophic as the 1893 crisis. And the 2008 recession was by far not as desastrious as the Great Depression of the 1930s and the crisis of the 19th century.





                                                          Rookie Mistakes

I think this is a result of a general learning process. People are able to learn from their mistakes and they try to get better, that includes politicians, public institutions, banks and other corporations. In 1913 the US government finally had learned from the 19th century crisis and created the Federal Reserve System, the central bank. This institution was founded to stabilize the money supply and to supply liquidity in a bank panic. But the Fed was young, inexperienced and made rookie mistakes. 

In the year 1931 the Federal Reserve moved aggressively to defend the dollar and maintain the gold standard as foreign banks and investors moved to repatriate gold, writes Gordon: "It was an utterly disastrous decision, perhaps the greatest of all mistakes made in these years..Maintaining the gold standard required raising interest rates and cutting the money supply, causing an already severe deflation to become much more severe." Banks called loans to stay liquid, while customers postponed purchases in expectation of lower prices.

Milton Friedman and his colleague Anna Schwartz described in their book "A Monetary History of the United States, 1867–1960" , that The Great Depression could have been avoided if the Fed had not so badly botched its monetary policy (fee.org):  "Fed’s failure to carry out its assigned role as the lender of last resort. Rather than providing liquidity through loans, the Fed just watched as banks dropped like flies, seemingly oblivious to the effect this would have on the money supply. The Fed could have offset the decrease created by bank failures by engaging in bond purchases, but it did not".

As a result "from 1929 to 1933 the money supply fell by 27 percent—for every $3 in circulation in 1929 (whether in currency or deposits), only $2 was left in 1933. Such a drastic fall in the money supply inevitably led to a massive decrease in aggregate demand. People’s savings were wiped out so their natural response was to save more to compensate, leading to plummeting consumption spending" (fee.org).

And the US government made more fatal mistakes too (fee.org):

1) In response to a sharp decrease in tax revenues in 1930 and 1931 (caused by a slowdown of economic activities), the US government passed the largest peacetime tax increase in the history of the United States, which clearly applied the brakes on any recovery that could have taken place;

2) the US government also passed the Smoot-Hawley Tariff Act in 1930, substantially increasing tariffs and leading to retaliatory restrictions by trading partners, which resulted in a considerable decrease in demand for U.S. exports and a further slowdown in production (not to mention a loss of mutually advantageous division of labor).
 


                                                           Learning Process


The time since World War II shows that the Fed and other institutions had learned from the Great Depression. For instance the stock market crash from 1987 (Black Monday) - a drop of 22% over night - didn´t start a recession, because the Fed responded swiftly and "encouraged banks to continue to lend to one another on their usual terms" (federalreserve). The US economy grew 3.6% in 1987 and advanced 4.2% in 1988 in spite of the stock market turmoils. The 2008 crisis didn´t turn into a fully fledged depression in the 1930s style thanks to the Federal Reserve and other central banks who cut interest rates close to zero and flooded the markets with money (QE).

I expect that we will have another recession some day. But I believe that the next downturn will be less severe than the recession from 2008 because the Fed and other central banks have already learned from the 2008 crises. They have been refining and advancing their instruments (like negative interest rates, assets purchases) further and are better suited to response to a banking crises. The regulators are learning too. New laws (in the US the Dodd-Frank Act wikipedia) require the banks to hold more capital to collateralize their loans and they have to pass stress tests. Recessions are possible, they belong to a business cycle, depressions are highly unlikely. Everything is getting better over time - even the crises.


Wednesday, February 24, 2016

Street Art New York: A Documentary - February 2016 Edition

(Drivebycuriosity) - New York`s street art doesn`t need a winter break. Since my latest street art report (January 2016 driveby) I spotted more interesting new murals, stickers & graffiti @ Lower East Side, East Village, Soho and other Manhattan neighborhoods. As usual I document the newest street art in this area.

Above a mural I spotted on Essex Street and East Houston. Somewhat hypnotical.



This giant is at home on Lafayette Street near Prince Street.





                                                      Everybody Loves Panda Bears




It seems everybody loves panda bears. I found this cute guy on a shop shutter door in Chinatown.




Another shutter door - this time on Orchard Street.







The Lower East Side has more fanciful murals.






The stickers & stencil industry never sleeps.



This teddy watches over ABC City, I believe I saw him on 3rd Street, east of Avenue C.

 To be continued.

Tuesday, February 23, 2016

Economy: Why Is Oil So Volatile?

(Drivebycuriosity) - The price of oil moves like a yo-yo. One day it jumps 6% and more, the next day it drops at least 4%. Since summer 2014 through today oil lost more than 70% but this drop was interrupted by sharp rallies: Last year between February and May the oil price jumped about 50% and in August the oil price leaped of almost 30% - even that the markets were still flooded with oil.

Why is oil so volatile? Economists try to explain the wild price swings with the behavior of Opec and the scarcity of the fuel (scottgrannis). But, that doesn´t explain the daily yo-yo movements and not the speed of the price swings.

I think the volatility is not surprising because oil is traded on financial markets like stocks and other assets - and behaves therefore similar. Many hedge funds and other speculators are buying and selling futures and other other financial instruments based on oil (bloomberg). The most important oil instruments are the front-end futures (contracts for next delivery date) for Brent Crude (the international type of oil) and WTI ("West Texas Intermediate" or just "Crude Oil", the American type). These futures represent the price of oil. So the oil price is strongly influenced by financial actors (hedge funds and other speculators) and their behavior. This makes the price of oil virtual and almost independent from physical supply & demand - at least temporarily.

The speculators are betting either on rising (long position) or falling prices (short position). Very often hedge funds and others trader act like a herd, they are buying when others are buying and they are selling when others are selling. Last year´s rallies were caused by bets on a v-shaped price recovery (like in 2009). The recent rally was driven by bets on production cuts and on a falling US oil production. Rising oil price often attract more speculative buyers, the so-called momentum traders, who want to benefit from price trends and jump onto the "bandwagon". Otherwise falling prices animate to "jump from the train" or even to bet on lower prices (shorting).

History shows that crowds often behave unpredictable, irrational & dangerous (driveby). People can easily be scared into a stampede like a herd of cattle. In the short run the price of oil is influenced by the behavior of the traders on the financial markets and the laws of mass psychology and rather by the fundamental factors (physical supply & demand).

Monday, February 22, 2016

Economy: Do It Again, Janet Yellen

(Drivebycuriosity) - Recently there was a lot talk about a new Quantitative Easing and negative interest rates. But the facts from the economic frontier suggest that the Federal Reserve has to stay on course and has to continue the interest rate hikes this year.


1. The US inflation is accelerating. The core inflation rate climbed onto 2.2% annually (chart below).  It is highly likely that the tightening labor market will drive wages and therefore labor costs upwards which should translate into higher prices for services and labor intensive goods (like fashion). And we are already experiencing rapidly climbing rents and health care costs.




2. The US job market is getting tighter. In January unemployment rate dropped to 4.9%, average hourly wages  climbed 2.5% compared to last year and the weekly jobless claims are on a downtrend and  close to a 40 years low. A tighter job market will cause further climbing wages and translate into higher prices for services and labor-intensive goods.

The headline inflation rate (plus 1.4%) is momentary depressed because of the collapse of oil and other commodity prices. Today oil is around 40% cheaper than last year the same time and gasoline prices at the pump dropped about 25%. But the diminishing price effect of dramatical reduced energy prices is just temporary. Prices for oil and other commodities already started rising in the recent days. There is a risk that general inflation will climb next year more than 2% - and could accelerate - when the diminishing effect of cheaper commodities will run out.







3. The general US economy is sound. Retail sales (ex gasoline) are growing 4.5% year-over-year - and accelerating and industrial production is climbing too.

Abnormal low interest rates were necessary in the years after the recession to encourage investors & consumers. They don´t fit to a growing economy where inflation is already accelerating. I think that the Fed has to hike in April and then again in later quarters.

Sunday, February 21, 2016

Contemporary Art: Beautiful Abstracts @ Causey Contemporary, New York


(Drivebycuriosity) - Do you like abstracts? Then you might enjoy new works @ Causey Contemporary in New York´s trendy Lower East Side (29 Orchard causeycontemporary). I chose some works that caught my eyes, as usual a very subjective selection.

Above you can see "Mourning Painting" by Jane Swavely (Oil on canvas, 40 x 30 in, 102 x 76 cm). The price tag says $4,250.




Above this paragraph another masterpiece, it`s called "Where the When Was" by Alice Zinnes (2014, Oil on canvas,  30 x 38 in, 76 x 96 cm).




On the top of this paragraph you can see "The Scales (Version 2 – Inverted)" by Edward Holland (2015, acrylic, colored pencil and graphite on canvas with collage, 36 x 36 in, 91 x 91 cm) followed by Lisa Pressman´s "Point of Departure" (oil on panel) & "Orange Blossoms" by Elise Freda (oil, encoustic, collage on panel).



Let the pictures speak for themselves. Enjoy!

Saturday, February 20, 2016

Economy: Goldilocks Is Still Here

(Drivebycuriosity) - If we believe the media then the US economy is in a mess and on the brink of a recession. But the newest facts from the economic frontier tell otherwise:


- US retail sales (ex gasoline) are growing 4.5% year-over-year -and accelerating (Chart below)




- average hourly wages are advancing 2.5% year-over-year - and accelerating





- unemployment rate is at 4.9%




- weekly jobless claims are on a downtrend and  close to a 40 years low





- industrial production & manufacturing are growing (reuters)

- core inflation rate is 2.2% (calculatedrisk). Deflation?

There are lot of tailwinds: Gasoline, heating oil and natural gas (heating costs) all cost about halve of 2014.

- interest rates are very low

 Goldilocks is still here.

Friday, February 19, 2016

Economy: Inflation At The Gate

(Drivebycuriosity) - There is a lot talk about deflation. But the facts show that we are much closer to a comeback of inflation. This morning we learned that the US consumer prices were unchanged in January, but ex food & gasoline the prices rose already 0.3% (core inflation), the most in over four years (businessinsider). Compared to the prior year, the general price index rose 1.4% (inflation rate), ex food & gasoline prices grew already 2.3% (core inflation).

The core inflation has been climbing for months driven by rents, health care & other services  (calculatedrisk). In January core services prices jumped 3%, while medical costs rose 3.3%. There were also increases in the costs of cars, clothes and rents (businessinsider). I think that the core inflation rate will continue climbing because the labor market is tightening. Weekly jobless claims are on a historical low level, the job openings are on record high (stlouisfed), the unemployment rate dropped to 4.9% and wages started to climb.  It is highly likely that the tightening labor market will drive wages and therefore labor costs upwards which should translate into higher prices for services and labor intensive goods (like fashion). And we are already experiencing rapidly climbing rents and health care costs.



The headline inflation rate (plus 1.4%) is momentary depressed because of the collapse of oil and other commodity prices. Today oil is around 40% cheaper than last year the same time and gasoline prices at the pump dropped about 25%. But the diminishing price effect of dramatical reduced energy prices is just temporary. There is a risk that general inflation will raise next year more than 2% - and could accelerate - when the diminishing effect of cheaper commodities will run out.

The Fed was right to hike interest rates last December and I think they will continue hiking this year to keep inflation at bay.

PS For illustration I choose one of Andy Warhol dollar signs from 1981. 







Thursday, February 18, 2016

Oil: Opec - Eating The Cake And Still Keeping It?

(Drivebycuriosity) - It looks like that Opec wants to eat the cake and still keeping it. For months we have been hearing that Opec, especially the leader Saudi Arabia, wants to lower the price of oil to squeeze out the new competitors, the American oil producers. We also heard that many US frackers are already losing money because the oil price is too low and doesn´t cover their costs anymore. it seemed that is is just a matter of time that many frackers will got out of business and US oil production will shrink significantly.

But now we hear a new strategy. Apparently Opec members, including Saudi Arabia, and non-Opec producer Russia had agreed to curb production in order to raise the price of oil again. It seem they are trying to have their cake and eat it (wikipedia).

Opec cannot have it both - a shrinking US oil production and a rising oil price. If the current oil price rally continues it would work like a rescue mission for the frackers. The remaining US frackers will keep on pumping and those who had stopped pumping will produce again.

A rising oil prices will reduce their losses and even bring more profits. As a result the US oil production will climb again, aggravating the global oil glut - and a new oil collapse will be in the making.

Wednesday, February 17, 2016

Economy: Are We On The Brink Of A New Consumption Boom?

(Drivebycuriosity) - It looks like that the US will get a new consumption boom. Really! There is a combination of factors which are very favorable for consumption and should foster consumer spending in the coming months.

Last week we learned that the retail sales grew faster in January and advanced 0.2% (even that a snow storm covered the US North East - including New York - for 2 days). They climbed ex-gasoline 0.4% (revenues at gasoline stations fell by 3.1% in the month thanks to the dropping gas prices) and increased by 4.5% from January 2015 (first chart below calculate).

 I think that this acceleration will continue in the coming months. The growth rate of the retail sales could climb to a range between plus 6% and 10% like in the 1990s and 2006.



My assumption is based on 3 observations:

1. Consumers are benefitting from sharply lower commodity prices. Cheaper gasoline, heating oil & natural gas are working like a tax cut. The average gas price at US pumps is now about 25% below the same time last year and around 50% lower than February 2014 (fuelgaugereport). Natural gas costs about halve the price it had cost in winter 2013/0214. It seems that the positive impulse from falling oil prices on the financial markets (futures for Crude & Brent Crude) is working through the system and begins to foster the economy (I explained that here driveby).











2. Consumption is also getting tailwinds from a solid labor market (charts above). Last year the US economy created 2.6 million new jobs and the growth rate of the hourly wages accelerated to plus 0.5% in January. Hourly average wages climbed 2.5% in the recent 12 months. Unemployment rate dropped to 4.9% and the weekly jobless claims are close to a 40-years low. So, Americans are earning more income and their risk to lose the job is shrinking (thanks to dropping unemployment rate & lower weekly jobless claims which signal a tighter job market).

3. Interest rates are close to zero translating into cheaper mortgases and consumer credits - and will stay favorable for a while - even if the Fed hikes interest rates this year modestly.

I believe that these factors are all working together and are amplifying each other. Rising consumer spending should encourage companies to hire more and to pay better wages (to get employees) which should foster economic growth in 2016 and beyond.