Tag Archives: Global Business Forecasts

Japanese economy, macroeconomic forecasting

Some Thoughts on Japan

November 20, 2014 Clive Jones

I saw the news that Japan has fallen into recession again. This “hit the wires” just after the Bank of Japan surprised everyone and announced a major new quantitative easing (QE) program.

Japan is a country of 127 million persons (2013) with one of the largest economies in the world, as this chart shows.

Basically, though, the Japanese economy has been a start/stop mode since the mid-1990’s. According these GDP estimates, China surpassed Japan 2008-2009, and now in nominal terms has a production level twice that of Japan.

The data are from the World Economic Outlook database (IMF) and are not inflation-adjusted, but are converted into US dollar equivalents.

Where’s the Beef?

Well, a person In Kansas might say, “So what?” Why is Japan important?

I think there are several reasons.

First, a recession in Japan, because of its continuing economic size, has the capability of affecting global markets.

According to the CIA Factbook .. on a purchasing power parity (PPP) basis that adjusts for price differences, Japan in 2013 stood as the fourth-largest economy in the world after second-place China, which surpassed Japan in 2001, and third-place India, which edged out Japan in 2012.

Simultaneous recessions in Japan and Europe almost surely would trigger a global economic slowdown, unless the American consumer just went crazy.

Test Case for Macroeconomic Policy

Another reason Japan is important is as a sort of test case for macroeconomic policy, as well as for the impacts of an aging population.

This chart shows the intermittent economic growth in Japan since the 1990’s along with the deflationary trend.

These figures are developed from official Japanese statistics.

Notice that you could start at around 1999 and draw a trendline for the Japanese CPI to about 2013, where a brief period 2008-2009 would appear as a blip away from this trendline.

Deflation has been a twenty year phenomena in Japan, and the current government, under Abe, has sought to break its hold with a triple-threat of fiscal policy, monetary policy, and structural reform.

The result is a continuation of the climb in the liabilities to GDP ratio of the Bank of Japan (BOJ), as shown in this chart extracted from Bloomberg sources.

So “steady as she goes,” the monetary base of Japan will reach about 50 percent of Japanese GDP within a year or two. This compares with a figure of just less than 20 percent for the United States.

The swing into negative growth in 2014 was triggered by a substantial increase in the VAT or value-added tax in Japan, and there is vigorous debate about future increases – viz Krugman Japan on the Brink.

Structural Reform

I wonder whether it might be better to question the religion of economic growth, than to attempt “structural reform” aka reductions in the real wage.

In any case, it easy to see that the recent surge in Japanese inflation, combined with additional consumption taxes and, indeed, negative economic growth mean that Japanese real wages are being reduced in real time here. Indeed Edward Hugh documents this with reference to official Japanese statistics.

But this is a slippery slope.

On the one hand, reductions in the real wage could make domestically produced Japanese goods more competitive in international markets.

On the other hand, domestic purchasing power could suffer, or, at the least, there could be a move to increasing concentrations of wealth. We’ve certainly seen that in the United States, where the real wage of workers has declined off and on, since 1971, compensated for, to an extent, by the entry of women into the workforce and two-wage households.

The limits of human intellect can be found right here. The enormous production growth in China has been accompanied by choking air pollution which, I can assure you from personal experience, is simply amazingly bad sometimes. Health-threatening. Yet the Chinese naturally want to expand their productive apparatus to the extent they can, for purposes of providing for their vast population and in order to secure China’s place in the global economy.

But life in Japan – during these decades when economic growth has been very intermittent and prices have dropped – life has been fairly good. That’s one reason why many Japanese are now starting to enjoy their older years in a degree of relative comfort unimaginable one or two generations ago.

Maybe some Japanese visionary can come up with a sequel to Herman Daly’s steady state economy idea – a kind of reverse mortgage for an entire economy perhaps.

global business forecasts, macroeconomic forecasting, Uncategorized

Investment and Other Bank Macro Forecasts and Outlooks – 2

November 13, 2014 Clive Jones

Today, I take a brief look at economic forecasts available from Morgan Stanley, Wells Fargo, and the French concern Credit Agricole. As readers will note, Morgan Stanley has a lively discussion of the implications of the US midterms, while Wells Fargo has a very comprehensive and easy-to-access series of economic projections, ranging from weekly, to monthly and annual. Credit Agricole (apologies for omitting the accent mark) is the first European bank profiled in these brief looks, and has quarterly updates of fairly comprehensive economic projections across a range of variables.

And I might mention that these publications, which date back into September in many cases, are interesting to review both because of their projections and because of what they miss – notably the drop in oil prices and aggressive new round of quantitative easing by the Bank of Japan.

The fact these developments are missed in these September and even later releases qualifies them as genuine surprises. Thus, their impacts are not discounted in past market developments, and, going forward, oil prices and Japan QE could exert significant, discrete effects on markets.

Morgan Stanley

According to the Federal Reserve’s National Information Center, Morgan Stanley is the nation’s 6^th largest bank.

The Global Investment Committee (GOC) Weekly for November 10 is notable for some straight talk on the Implications of the US midterms, which Morgan Stanley see as slightly pro-growth, positive for equities, with constructive compromises, characteristic of lame duck presidencies. I quote fairly extensively, because the frankness of the insights and suggestions is refreshing.

The maxim that gridlock in Washington is good for markets has certainly held true during the “do nothing” Congress of the past two years. Now, with the Republicans winning control of the Senate and adding 15 seats to their House majority, the outlook appears to be for more of the same. Happily for investors, an analysis going back to 1900 shows that equity markets have averaged annualized 15% returns when the Congress is controlled by Republicans and the White House by a Democrat.

Although many pundits have suggested that the GOP sweep creates a mandate, the Global Investment Committee (GIC) sees the results as a mandate for change in the functioning and compromise in Washington rather than the embrace of a specific agenda. On that score, unlike the deeply partisan divide between the House and the Senate of the last four years that prevented any compromise bills from getting off the Hill, legislation may actually get to the president’s desk. While President Obama will be free to veto, he is now playing for his legacy and may be apt to compromise on some issues.

The Republicans’ challenge is to demonstrate leadership and competence in governing, a task that will require corralling the Tea Party caucus and, as Morgan Stanley & Co. Chief US Economist Vincent Reinhart wrote last week, “sequencing priorities” in a constructive way. Lacking a coherent issue-driven platform, most Republicans simply ran against Obama. Party infighting or an immediate battle about the debt ceiling and budget authorizations would likely be disastrous for the GOP—and the markets. From the GIC’s perspective, a better result would be for Congress to focus on job-creating initiatives and not on eviscerating the Affordable Care Act (ACA).

Agreement should be easiest around initiatives involving the energy sector, where this year’s 25% decline in oil prices has been front and center. American energy independence is no longer a dream but a real prospect with profound geopolitical as well as economic consequences (see Chart of the Week, page 3). Heretofore, the Keystone XL pipeline, a six-year-old proposal to connect Canadian oil with US Gulf Coast refineries, has been stalled amid wrangling with environmentalists. We believe the pipeline is now likely to win approval, creating a large national infrastructure project. Similarly, the growth of US energy supply is likely to reignite a debate on oil exports, which have been banned since the Arab oil embargoes of the 1970s. With US dollar strength likely to crimp other exports, expanding energy exports is a way to maintain economic growth. There is likely to be similar debate about exports of liquefied natural gas as the US is the world’s largest and lowest-cost producer. We believe that energy exports would be a major beneficiary focus if the new Congress approves the Trans-Pacific Partnership, a free trade agreement that would give the president authority to negotiate deals with 11 Asian nations.

Beyond energy, we expect repeal of the medical-device tax; expansion of defense spending, which has been curtailed under sequestration; and a debate on corporate tax reform, especially given the noise around tax-driven international mergers. Revisions to the ACA, to the extent they are pursued, will likely focus on measures that impact the number of insured and thus, hospitals and managed-care companies. The employer mandate, which requires employers with more than 100 workers to make available health insurance for any employee working more than 30 hours per week, is most likely to be revised, in our view.

As a final note, a review of state and local ballot initiatives suggest that voters are far from embracing an ideological position on fiscal austerity. Minimum-wage increases were passed in each state where they were on the ballot as did several large new-money infrastructure projects in New York and California—a development that MS & Co. Municipals Strategist, Michael Zezas, notes will likely increase bond supplies in 2015.

It looks like the august Global Economic Forum is being being published more infrequently than in the past, the last edition being March 5 of this year.

Wells Fargo

Wells Fargo, accounting to Wikipedia is –

an American multinational banking and financial services holding company which is headquartered in San Francisco, California, with “hubquarters” throughout the country… It is the fourth largest bank in the U.S. by assets and the largest bank by market capitalization…Wells Fargo is the second largest bank in deposits, home mortgage servicing, and debit cards. In 2011, Wells Fargo was the 23rd largest company in the United States.

The Wells Fargo website has a suite of forecasting reports, ranging from weekly, to monthly, to the big annual report, all downloadable in PDF format.

In October, the bank also released this video interview about their economic outlook.

In case you did not get time to watch that, one of the key graphics is the PCE deflator, which has been trending down recently, raising the spectre of deflation in the minds of some.

Credit Agricole

Credit Agricole is an international full services banking company, headquartered in France, with historical ties to French farming,

Their website offers at least two quarterly macroeconomic forecasting publications.

The publication Economic and Financial Forecasts presents a series of tabular forecasts for interest rates, exchange rates and commodity prices, together with the Crédit Agricole Group’s central economic projections. This is a kind of “just the numbers ma’am report.”

Macro Prospects is more discursive and with short highlights on key countries, such as, in the September issue, Brazil and China.

I signed up for emails from Credit Agricole, announcing updates of these documents.

financial forecasts, global business forecasts, macroeconomic forecasting

Investment and Other Bank Macro Forecasts and Outlooks – 1

November 12, 2014 Clive Jones

In yesterday’s post, I detailed the IMF World Economic Outlook revision for October 2014, recent OECD macroeconomic projections, and latest from the Survey of Professional Forecasters.

All these are publically available, quite comprehensive forecasts, sort of standards in the field.

But there also are a range of private forecasts, and I want to focus on investment and other bank forecasts for the next few posts – touching on Goldman Sachs and JP Morgan today.

Goldman Sachs

Goldman Sachs – video presentations on global economic outlook with additional videos for the US, Europe, and major global regions. December 2013

Goldman Sachs, Economic Outlook for the United States, June 2014, Jan Hatzius

Goldman Sachs Asset Management, FISG Quarterly Outlook Q4 2014, (click on the right of the page for Full Document). This is the most up-to-date forecast/commentary I am able to find, and has a couple of relevant points.

One concerns the policy divergence at the central bank level. This is even more true now than when the report was released (probably in October), since the Bank of Japan is plunging into new, aggressive quantitative easing (QE), while the US Fed has ended its QE program, for the time being at least.

The other point concerns the European economy.

Among our economic forecasts, our negative outlook on the Eurozone represents the biggest departure from consensus. We believe policymakers will struggle to correct the trend of poor growth and disinflation. Optimism about the peripheries has faded, and the Eurozone’s powerhouse economy, Germany, has slowed amid weak global demand. Once again the Eurozone’s political divisions and fiscal constraints leave the ECB as the only authority able to respond unilaterally to the threat of a sharper downturn, though hopes of fiscal action are mounting.

Some signs of a sustainable Eurozone recovery have not held up to closer inspection. The peripheries have made substantial progress on austerity and structural reforms, but efforts appear to have stalled, and Spain has probably reaped the most it can from its adjustment for now. Italy’s policy paralysis and relapse into recession is disappointing given this year’s changing of the political guard, which saw Silvio Berlusconi’s exit and Prime Minister Matteo Renzi’s election on a heavily reformist platform. Renzi has shifted gears from political reform to labor reform, which could get under way in early 2015. But Italy’s high debt stock makes it particularly vulnerable to a market backlash, and we are watching for signs of investor pullback that could drive sovereign yields higher.

JP Morgan

JP Morgan has a 2014 Economic Outlook in a special issue of their Thought magazine. This is definitely dated, but there is a weekly Economic Update in a kind of scorecard format (up/down/nochange) from their Asset Management Group.

I’ve got to say, however, that one of the most exciting publications along these lines is their quarterly Guide to the Markets from JP Morgan Asset Management. Here are highlights from an interactive version of the 4Q Guide.

First, the scope of coverage is impressive, although, note this is more of an update of conditions, than a forecast. The reader supplies the forecasts, however, from these engaging slides.

But this slide does not need to produce a forecast to make its point – which is maybe we are not in a stock market bubble but at the start of a long upward climb in the market. Optimism forever!

There are plenty of slides that have moral to the story, such as this one on education and employment.

Then, this graphic on China is extremely revealing, and suggests a forward perspective.

I’m finding this excursion into bank forecasts productive and plan coming posts along these lines. I’d rather use the blog as a scratch-pad to share insights as I go along, than produce one humungous summary. So stay tuned.

Top photo courtesy of the University of Richmond

Chinese economy, emerging market forecasts, global business forecasts, macroeconomic forecasting

Global and US Economic Outlook – November 2014

November 11, 2014 Clive Jones

There are a number of free, publically available macroeconomic forecast resources which have standing and a long track record.

Also, investment and other banks make partial releases of their macro projections.

IMF World Economic Outlook

The International Monetary Fund (IMF) revises its World Economic Outlook (WEO) toward the end of each year, this year in October with Legacies, Clouds, Uncertainties.

One advantage is comprehensive coverage. So there are WEO projections over 1, 2 and 3 year horizons for more than 100 countries, even obscure island principalities, and for dozens of variables, including GDP variously measured, inflation, imports and exports, unemployment rate, and population.

Here are highlights of the October revision (click to enlarge).

Largely due to weaker-than-expected global activity in the first half of 2014, the growth forecast for the world economy has been revised downward to 3.3 percent for this year, 0.4 percentage point lower than in the April 2014 World Economic Outlook (WEO). The global growth projection for 2015 was lowered to 3.8 percent.

The global recovery continues to be uneven, with some countries and areas struggling, while others move forward into growth.

Downside risks are increasing and include –

SHORT TERM: worsening geopolitical tensions (Ukraine, Syria) and reversal of recent risk spread and volatility compression in financial markets

MEDIUM TERM: stagnation and low potential growth in advanced economies (Eurozone flirting with deflation) and a decline in potential growth in emerging markets

Organization of Economic Cooperation and Development (OECD) Projections

The OECD Economic Outlook Advance Release for the G-20 from October 2014 projects the following growth rates for 2014 and 2015 (click to enlarge).

For total global GDP growth, the OECD projects 3.3 percent for 2014 and 3.7 percent for 2015 or 0.1 percent less for 2015 than the IMF.

Chinese economic growth is ratcheting down from double-digit levels several years ago, to around 7 percent, while Indian GDP growth is projected to stay in the 6 percent range.

There are significant differences in the IMF and OECD forecasts for the United States.

Survey of Professional Forecasters

The Survey of Professional Forecasters (SPF) is another publically available set of macroeconomic forecasts, but focusing on the US economy. The SPF is maintained by the Philadelphia Federal Reserve Bank, which polls participating analysts quarterly, compiling consensus results, spreads, and distributions.

The latest SPF Survey was released August 2014, and is somewhat more optimistic about US economic growth than the IMF and OECD projections.

Investment Bank Data and Projections

Wells Fargo Securities Economics Group produces a monthly report with detailed quarterly forecasts for the US economy. Here is a sample from August 2014 (click to enlarge).

I’m compiling a list of these products and their availability.

The bottom line is there are plenty of forecasts to average together to gin up high likelihood numbers to plug into sales and other business forecast models.

At the same time, there is a problem with calling turning points in almost all these products.

This is not a problem on YouTube now, though. If you search “economic forecasts 2015” on YouTube today, you will see a lengthly list of predictions of economic collapse and market catastrophe by the likes of Jim Rogers, Gerald Calente, and others who dabble in this genre.

We need something like the canary in the coal mine.

global business forecasts, impact of QE, Quantitative Easing (QE)

The End of Quantitative Easing, the Expansion of QE

November 9, 2014 Clive Jones

The US Federal Reserve Bank declared an end to its quantitative easing (QE) program at the end of October.

QE involves direct Fed intervention into buying longer term bonds with an eye to exercising leverage on long term interest rates and, thus, encouraging investment. Readers wanting more detail on how QE is implemented – check Ed Dolan’s slide show Quantitative Easing and the Fed 2008-2014: A Tutorial

The New York Times article on the Fed actions – Quantitative Easing Is Ending. Here’s What It Did, in Charts – had at least two charts that are must-see’s.

First, the ballooning of the Federal Reserve Balance sheet from less than $1 trillion to $4.5 trillion today –

Secondly, according to Times estimates, about 40 percent of Fed assets are comprised of mortgage-backed securities now – making the Fed a potential major player in the US housing markets.

Several recent articles offer interpretation – what does the end of this five-year long program mean for the US economy and for investors. What were the impacts of QE?

I thought Jeff Miller’s “Old Prof” compendium was especially good – Weighing the Week Ahead: What the End of QE Means for the Individual Investor. If you click this link and find a post more recent than November 1, scroll down for the QE discussion. Basically, Miller thinks the impact on investors will be minimal.

This is also true in the Business Week article The Hawaiian Tropic Effect: Why the Fed’s Quantitative Easing Isn’t Over

But quantitative easing is the gift that keeps on giving. Even after the purchases end, its effects will persist. How could that be? The Fed will still own all those bonds it bought, and according to the agency itself, it’s the level of its holdings that affects the bond market, not the rate of addition to those holdings. Having reduced the supply of bonds available on the market, the Fed has raised their price. Yields (i.e. market interest rates) go down when prices go up. So the effect of quantitative easing is to lower interest rates for things Americans actually care about, such as 30-year fixed-rate mortgages.

Some other articles which attempt to tease out exactly what impacts QE did have on the economy –

Evaluation of quantitative easing QE had “some effects” but it’s one of several influences on the bond market and long term interest rates.

Quantitative easing: giving cash to the public would have been more effective

QE has also had unforeseen side-effects. The policy involved allowing banks and other financial institutions to exchange bonds for cash, and the hope was that this would lead to improved flows of credit to firms looking to expand. In reality, it encouraged financial speculation in property, shares and commodities. The bankers and the hedge fund owners did well out of QE, but the side-effect of footloose money searching the globe for high yields was higher food and fuel prices. High inflation and minimal wage growth led to falling real incomes and a slower recovery.

What Quantitative Easing Did Not Do: Three Revealing Charts – good discussion organized around the following three points –

QE did not work according to the textbook model
QE did not cause inflation
QE was not powerful enough to overcome fiscal restraint

Expansion of QE

But quantitative easing as a central bank policy is by no means a dead letter.

In fact, at the very moment the US Federal Reserve announced the end of its five-year long program of bond-buying, the Bank of Japan (BOPJ) announced a significant expansion of its QE, as noted in this article from Forbes.

Last week, as the Federal Reserve officially announced the end of its long-term asset purchase program (commonly known as QE3), the Bank of Japan significantly ratcheted up its own quantitative easing program, in a surprising 5-4 split decision. Starting next year, the Bank of Japan will increase its balance sheet by 15 percent of GDP per annum and will extend the average duration of its bond purchases from 7 years to 10 years. The big move by Japan’s central bank comes amid the country’s GDP declining by 7.1% in the second quarter of 2014 (on an annualized basis) from the previous quarter following the increase of the VAT sales tax from 5% to 8% in Japan earlier this year and worries that Japan could fall into another deflationary spiral..

The scale of the Japanese effort is truly staggering, as this chart from the Forbes article illustrates.

The Economist article on this development Every man for himself tries to work out the implications of the Japanese action on the value of the yen, Japanese inflation/deflation, the Japanese international trade position, impact on competitors (China), and impacts on the US dollar.

What about Europe? Well, Bloomberg offers this primer – Europe’s QE Quandary. Short take – there are 18 nations which have to agree and move together, Germany’s support being decisive. But deflation appears to be spreading in Europe, so many expect something to be done along QE lines.

If you are forecasting for businesses, government agencies, or investors, these developments by central banks around the world are critically important. Their effects may be subtle and largely in unintended consequences, but the scale of operations means you simply have to keep track.

macroeconomic forecasting, mixed data frequencies, nowcasting, predicting recessions, predicting turning points

Forecasting the Downswing in Markets

November 4, 2014 Clive Jones

I got a chance to work with the problem of forecasting during a business downturn at Microsoft 2007-2010.

Usually, a recession is not good for a forecasting team. There is a tendency to shoot the messenger bearing the bad news. Cost cutting often falls on marketing first, which often is where forecasting is housed.

But Microsoft in 2007 was a company which, based on past experience, looked on recessions with a certain aplomb. Company revenues continued to climb during the recession of 2001 and also during the previous recession in the early 1990’s, when company revenues were smaller.

But the plunge in markets in late 2008 was scary. Microsoft’s executive team wanted answers. Since there were few forthcoming from the usual market research vendors – vendors seemed sort of “paralyzed” in bringing out updates – management looked within the organization.

I was part of a team that got this assignment.

We developed a model to forecast global software sales across more than 80 national and regional markets. Forecasts, at one point, were utilized in deliberations of the finance directors, developing budgets for FY2010. Our Model, by several performance comparisons, did as well or better than what was available in the belated efforts of the market research vendors.

This was a formative experience for me, because a lot of what I did, as the primary statistical or econometric modeler, was seat-of-the-pants. But I tried a lot of things.

That’s one reason why this blog explores method and technique – an area of forecasting that, currently, is exploding.

Importance of the Problem

Forecasting the downswing in markets can be vitally important for an organization, or an investor, but the first requirement is to keep your wits. All too often there are across-the-board cuts.

A targeted approach can be better. All market corrections, inflections, and business downturns come to an end. Growth resumes somewhere, and then picks up generally. Companies that cut to the bone are poorly prepared for the future and can pay heavily in terms of loss of market share. Also, re-assembling the talent pool currently serving the organization can be very expensive.

But how do you set reasonable targets, in essence – make intelligent decisions about cutbacks?

I think there are many more answers than are easily available in the management literature at present.

But one thing you need to do is get a handle on the overall swing of markets. How long will the downturn continue, for example?

For someone concerned with stocks, how long and how far will the correction go? Obviously, perspective on this can inform shorting the market, which, my research suggests, is an important source of profits for successful investors.

A New Approach – Deploying high frequency data

Based on recent explorations, I’m optimistic it will be possible to get several weeks lead-time on releases of key US quarterly macroeconomic metrics in the next downturn.

My last post, for example, has this graph.

Note how the orange line hugs the blue line during the descent 2008-2009.

This orange line is the out-of-sample forecast of quarterly nominal GDP growth based on the quarter previous GDP and suitable lagged values of the monthly Chicago Fed National Activity Index. The blue line, of course, is actual GDP growth.

The official name for this is Nowcasting and MIDAS or Mixed Data Sampling techniques are widely-discussed approaches to this problem.

But because I was only mapping monthly and not, say, daily values onto quarterly values, I was able to simply specify the last period quarterly value and fifteen lagged values of the CFNAI in a straight-forward regression.

And in reviewing literature on MIDAS and mixing data frequencies, it is clear to me that, often, it is not necessary to calibrate polynomial lag expressions to encapsulate all the higher frequency data, as in the classic MIDAS approach.

Instead, one can deploy all the “many predictors” techniques developed over the past decade or so, starting with the work of Stock and Watson and factor analysis. These methods also can bring “ragged edge” data into play, or data with different release dates, if not different fundamental frequencies.

So, for example, you could specify daily data against quarterly data, involving perhaps several financial variables with deep lags – maybe totaling more explanatory variables than observations on the quarterly or lower frequency target variable – and wrap the whole estimation up in a bundle with ridge regression or the LASSO. You are really only interested in the result, the prediction of the next value for the quarterly metric, rather than unbiased estimates of the coefficients of explanatory variables.

Or you could run a principal component analysis of the data on explanatory variables, including a rag-tag collection of daily, weekly, and monthly metrics, as well as one or more lagged values of the higher frequency variable (quarterly GDP growth in the graph above).

Dynamic principal components also are a possibility, if anyone can figure out the estimation algorithms to move into a predictive mode.

Being able to put together predictor variables of all different frequencies and reporting periods is really exciting. Maybe in some way this is really what Big Data means in predictive analytics. But, of course, progress in this area is wholly empirical, it not being clear what higher frequency series can successfully map onto the big news indices, until the analysis is performed. And I think it is important to stress the importance of out-of-sample testing of the models, perhaps using cross-validation to estimate parameters if there is simply not enough data.

One thing I believe is for sure, however, and that is we will not be in the dark for so long during the next major downturn. It will be possible to deploy all sorts of higher frequency data to chart the trajectory of the downturn, probably allowing a call on the turning point sooner than if we waited for the “big number” to come out officially.

Top picture courtesy of the Bridgespan Group

business trends, energy forecasting, gasoline price forecasts, global business forecasts

Oil and Gas Prices – a “Golden Swan”?

October 19, 2014 Clive Jones

Crude oil prices plummeted last week, moving toward $80/Bbl for West Texas Intermediate (WTI) – the spot pricing standard commodity.

OPEC – the Organization of Petroleum Exporting Counties – is a key to trajectory of oil prices, accounting for about 40 percent of global oil output.

Media reports that the Saudi Arabian Kingdom, which is the largest producer in OPEC, is advising that it will not cut oil production at the current time. The US Energy Information Agency (EIA) has a graph on its website underlining the importance of Saudi production to global oil prices.

Officially, there is very little in the media to pin down the current Saudi policy, although, off-the-record, Saudi representatives apparently have indicated they could allow crude prices to drift between $80 and $90 a barrel for a couple of years. This could impact higher cost producers, such as Iran and burgeoning North American shale oil production.

At the same time, several OPEC members, such as Venezuela and Libya, have called for cuts in output to manage crude prices going forward. And a field jointly maintained by Saudi Arabia and Kuwait just has been shut down, ostensibly for environmental upgrades.

OPEC’s upcoming November 27 meeting in Vienna, Austria should be momentous.

US Oil Production

Currently, US oil production is running at 8.7 million barrels a day, a million barrels a day higher than in a comparable period of 2013, and the highest level since 1986.

The question of the hour is whether US production can continue to increase with significantly lower oil prices.

Many analysts echo the New York Times, which recently compared throttling back US petroleum activity to slowing a freight train.

Most companies make their investment decisions well in advance and need months to slow exploration because of contracts with service companies. And if they do decide to cut back some drilling, they will pick the least prospective fields first as they continue developing the richest prospects.

At the same time, the most recent data suggest US rig activity is starting to slip.

Economic Drivers

It’s all too easy to engage in arm-waving, when discussing energy supplies and prices and their relationship to the global economy.

Of course, we have supply and demand, as one basis. Supplies have been increasing, in part because of new technologies in US production and Libyan production coming back on line.

Demands have not been increasing, on the other hand, as rapidly as in the past. This reflects slowing growth in China and continuing energy conservation.

One imponderable is the influence of speculators on oil prices. Was there a “bubble” before 2009, for example, and could speculators drive oil prices significantly lower in coming months?

Another factor that is hard to assess is whether 2015 will see a recession in major parts of the global economy.

The US Federal Reserve has been planning on eliminating Quantitative Easing (QE) – its program of long-term bond purchases – and increasing the federal funds rate from its present level of virtually zero. Many believe that these actions will materially slow US and global economic growth. Coupled with the current deflationary environment in Europe, there have been increasing signs that factors could converge to trigger a recession sometime in 2015.

However, low energy prices usually are not part of the prelude for a recession, although they can develop after the recession takes hold.

Instead, prices at the pump in the US could fall below $3.00 a gallon, providing several hundred dollars extra in discretionary income over the course of a year. This, just prior to the Christmas shopping season.

So – if US oil production continues to increase and prices at the pump fall below $3.00, there will be jobs and cheap gas, a combination likely to forstall a downturn, at least in the US for the time being.

Top image courtesy of GameDocs

analytical software, artificial intelligence (AI), climate change, machine learning, robotics, technology forecasting

Video Friday on Steroids

October 3, 2014 Clive Jones

Here is a list of the URL’s for all the YouTube and other videos shown on this blog from January 2014 through May of this year. I encourage you to shop this list, clicking on the links. There’s a lot of good stuff, including several instructional videos on machine learning and other technical topics, a series on robotics, and several videos on climate and climate change.

January 2014

The Polar Vortex Explained in Two Minutes

https://www.youtube.com/watch?v=5eDTzV6a9F4

NASA – Six Decades of a Warming Earth

https://www.youtube.com/watch?v=gaJJtS_WDmI

“CHASING ICE” captures largest video calving of glacier

https://www.youtube.com/watch?v=hC3VTgIPoGU

Machine Learning and Econometrics

https://www.youtube.com/watch?v=EraG-2p9VuE

Can Crime Prediction Software Stop Criminals?

https://www.youtube.com/watch?v=s1-pbJKA3H8

Analytics 2013 – Day 1

https://www.youtube.com/watch?v=LsyOLBroVx4

The birth of a salesman

https://www.youtube.com/watch?v=pWM1dR_V7uw

Economies Improve

https://www.youtube.com/watch?v=5_DeCMIig_M

Kaggle – Energy Applications for Machine Learning

https://www.youtube.com/watch?v=mZZFXTUz-nI

2014 Outlook with Jan Hatzius

https://www.youtube.com/watch?v=Ggv0oC8L3Tk

Nassim Taleb Lectures at the NSF

https://www.youtube.com/watch?v=omsYJBMoIJU

Vernon Smith – Experimental Markets

https://www.youtube.com/watch?v=Uncl-wRfoK8

Forecast Pro – Quick Tour

https://www.youtube.com/watch?v=s8jMp5qS8v4

February 2014

Stephen Wolfram’s Introduction to the Wolfram Language

https://www.youtube.com/watch?v=_P9HqHVPeik

Tornados

https://www.youtube.com/watch?v=TEGhgsiNFJ4

Econometrics – Quantile Regression

https://www.youtube.com/watch?v=P9lMmEkXuBw

Quantile Regression Example

https://www.youtube.com/watch?v=qrriFC_WGj8

Brooklyn Grange – A New York Growing Season

http://vimeo.com/86266334

Getting in Shape for the Sport of Data Science

https://www.youtube.com/watch?v=kwt6XEh7U3g

Machine Learning – Decision Trees

https://www.youtube.com/watch?v=-dCtJjlEEgM

Machine Learning – Random Forests

https://www.youtube.com/watch?v=3kYujfDgmNk

Machine Learning – Random Forecasts Applications

https://www.youtube.com/watch?v=zFGPjRPwyFw

Malcolm Gladwell on the 10,000 Hour Rule

https://www.youtube.com/watch?v=XS5EsTc_-2Q

Sornette Talk

https://www.youtube.com/watch?v=Eomb_vbgvpk

Head of India Central Bank Interview

https://www.youtube.com/watch?v=BrVzema7pWE

March 2014

David Stockman

https://www.youtube.com/watch?v=DI718wFmReo

Partial Least Squares Regression

https://www.youtube.com/watch?v=WKEGhyFx0Dg

April 2014

Thomas Piketty on Economic Inequality

https://www.youtube.com/watch?v=qp3AaI5bWPQ

Bonobo builds a fire and tastes marshmellows

https://www.youtube.com/watch?v=GQcN7lHSD5Y

Future Technology

https://www.youtube.com/watch?v=JbQeABIoO6A

May 2014

Ray Kurzweil: The Coming Singularity

https://www.youtube.com/watch?v=1uIzS1uCOcE

Paul Root Wolpe: Kurzweil Critique

https://www.youtube.com/watch?v=qRgMTjTMovc

The Future of Robotics and Artificial Intelligence

https://www.youtube.com/watch?v=AY4ajbu_G3k

Car Factory – KIA Sportage Assembly Line

https://www.youtube.com/watch?v=sjAZGUcjrP8

10 Most Popular Applications for Robots

https://www.youtube.com/watch?v=fH4VwTgfyrQ

Predator Drones

https://www.youtube.com/watch?v=nMh8Cjnzen8

The Future of Robotic Warfare

https://www.youtube.com/watch?v=_atffUtxXtk

Bionic Kangaroo

https://www.youtube.com/watch?v=HUxQM0O7LpQ

Ping Pong Playing Robot

https://www.youtube.com/watch?v=tIIJME8-au8

Baxter, the Industrial Robot

https://www.youtube.com/watch?v=ukehzvP9lqg

Bootstrapping

https://www.youtube.com/watch?v=1OC9ul-1PVg

Chinese economy, climate change, global business forecasts, global warming, new business formation, predicting epidemics, Russian economy

Links, end of September

September 27, 2014 Clive Jones

Information Technology (IT)

This is how the “Shell Shock” bug imperils the whole internet

It’s a hacker’s wet dream: a software bug discovered in the practically ubiquitous computer program known as “Bash” makes hundreds of millions of computers susceptible to hijacking. The impact of this bug is likely to be higher than that of the Heartbleed bug, which was exposed in April. The National Vulnerability Database, a US government system which tracks information security flaws, gave the bug the maximum score for “Impact” and “Exploitability,” and rated it as simple to exploit.

The bug, which has been labeled “Shell Shock” by security experts, affects computers running Unix-based operating systems like Mac OS X and Linux. That means most of the internet: according to a September survey conducted by Netcraft, a British internet services company, just 13% of the busiest one million websites use Microsoft web servers. Almost everyone else likely serves their website via a Unix operating system that probably uses Bash.

Microsoft’s Bing Predicts correctly forecasted the Scottish Independence Referendum vote

Bing Predicts was beta tested in the UK for this referendum. The prediction engine uses machine-learning models to analyse and detect patterns from a range of big data sources such as the web and social activity in order to make accurate predictions about the outcome of events.

Bing got the yes/no vote right, but missed the size of the vote to stay united with England, Wales, and Northern Ireland.

Is the profession of science broken (a possible cause of the great stagnation)? Fascinating discussion which mirrors many friends’ comments that too much time is taken up applying for and administering grants, and not enough time is left for the actual research, for unconventional ideas.

What has changed is the bureaucratic culture. The increasing interpenetration of government, university, and private firms has led everyone to adopt the language, sensibilities, and organizational forms that originated in the corporate world. Although this might have helped in creating marketable products, since that is what corporate bureaucracies are designed to do, in terms of fostering original research, the results have been catastrophic.

Climate

Climate Science Is Not Settled The Wall Street Journal piece by a former Obama adviser and BP scientist inflamed the commentariat, after publication September 16, on the eve of the big climate talks and march in New York City. See On eve of climate march, Wall Street Journal publishes call to wait and do nothing for a critical perspective.

This chart, from NOAA, is one key – showing the divergence in heat stored in various layers of the oceans –

Nicholas Stern: The state of the climate — and what we might do about it TED talk.

Ebola

The public response to the Ebola epidemic is ramping up, but the situation is still dire and total cases and deaths are still increasing exponentially.

Ebola outbreak: Death toll passes 3,000 as WHO warns numbers are ‘vastly underestimated’

“The Ebola epidemic ravaging parts of West Africa is the most severe acute public health emergency seen in modern times.Never before in recorded history has a biosafety level four pathogen infected so many people so quickly, over such a broad geographical area, for so long.”

Global Economy

What Does a ‘Good’ Chinese Adjustment Look Like? Michael Pettis argues that what some see as a “soft landing” is in fact a preparation for later financial collapse. Instead, based on an intricate argument regarding interest rates and the nominal GDP growth rates in China, he proposes a reduction in Chinese GDP growth going forward through control of credit – in order to rebalance the Chinese consumer economy. Pettis is to my way of thinking always relevant, and often brilliant in the way he makes his analysis.

What Went Wrong? Russia Sanctions, EU, and the Way Out

Washington, Brussels and Moscow are in a vicious circle, which would spare none of them and which has potential to undermine global recovery.

Venture Capital

22 Crowdfunding Sites (and How To Choose Yours!)

currency forecasts, European economy, financial forecasting, macroeconomic forecasting

Europe, the European Union, the Eurozone – Key Facts and Salient Issues

September 9, 2014 Clive Jones

Considering that social and systems analysis originated largely in Europe (Machiavelli, Vico, Max Weber, Emile Durkheim, Walras, Adam Smith and the English school of political economics, and so forth), it’s not surprising that any deep analysis of the current European situation is almost alarmingly complex, reticulate, and full of nuance.

However, numbers speak for themselves, to an extent, and I want to start with some basic facts about geography, institutions, and economy.

Then, I’d like to precis the current problem from an economic perspective, leaving the Ukraine conflict and its potential for destabilizing things for a later post.

Some Basic Facts About Europe and Its Institutions

But some basic facts, for orientation. The 2013 population of Europe, shown in the following map, is estimated at just above 740 million persons. This makes Europe a little over 10 percent of total global population.

The European Union (EU) includes 28 countries, as follows with their date of entry in parenthesis:

Austria (1995), Belgium (1952), Bulgaria (2007), Croatia (2013), Cyprus (2004), Czech Republic (2004), Denmark (1973), Estonia (2004), Finland (1995), France (1952), Germany (1952), Greece (1981), Hungary (2004), Ireland (1973), Italy (1952), Latvia (2004), Lithuania (2004), Luxembourg (1952), Malta (2004), Netherlands (1952), Poland (2004), Portugal (1986), Romania (2007), Slovakia (2004), Slovenia (2004), Spain (1986), Sweden (1995), United Kingdom (1973).

The EU site states that –

The single or ‘internal’ market is the EU’s main economic engine, enabling most goods, services, money and people to move freely. Another key objective is to develop this huge resource to ensure that Europeans can draw the maximum benefit from it.

There also are governing bodies which are headquartered for the most part in Brussels and administrative structures.

The Eurozone consists of 18 European Union countries which have adopted the euro as their common currency. These countries includes Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Latvia, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland.

The European Central Bank (ECB) is located in Frankfurt, Germany and performs a number of central bank functions, but does not clearly state its mandate on its website, so far as I can discover. The ECB has a governing council comprised of representatives from Eurozone banking and finance circles.

Economic Significance of Europe

Something like 160 out of the Global 500 Corporations identified by Fortune magazine are headquartered in Europe – and, of course, tax slides are moving more and more US companies to nominally move their operations to Europe.

According to the International Monetary Fund World Economic Outlook (July 14, 2013 update), the Eurozone accounts for an estimated 17 percent of global output, while the European Union countries comprise an estimated 24 percent of global output. By comparison the US accounts for 23 percent of global output, where all these percents are measured in terms of output in current US dollar equivalents.

What is the Problem?

I began engaging with Europe and its economic setup professionally, some years ago. The European market is important to information technology (IT) companies. Europe was a focus for me in 2008 and through the so-called Great Recession, when sharp drops in output occurred on both sides of the Atlantic. Then, after 2009 for several years, the impact of the global downturn continued to be felt in Europe, especially in the Eurozone, where there was alarm about the possible breakup of the Eurozone, defaults on sovereign debt, and massive banking failure.

I have written dozens of pages on European economic issues for circulation in business contexts. It’s hard to distill all this into a more current perspective, but I think the Greek economist Yanis Varoufakis does a fairly good job.

Let me cite two posts – WHY IS EUROPE NOT ‘COMING TOGETHER’ IN RESPONSE TO THE EURO CRISIS? and MODEST PROPOSAL.

The first quote highlights the problems (and lure) of a common currency to a weaker economy, such as Greece.

Right from the beginning, the original signatories of the Treaty of Rome, the founding members of the European Economic Community, constituted an asymmetrical free trade zone….

To see the significance of this asymmetry, take as an example two countries, Germany and Greece today (or Italy back in the 1950s). Germany, features large oligopolistic manufacturing sectors that produce high-end consumption as well as capital goods, with significant economies of scale and large excess capacity which makes it hard for foreign competitors to enter its markets. The other, Greece for instance, produces next to no capital goods, is populated by a myriad tiny firms with low price-cost margins, and its industry has no capacity to deter competitors from entering.

By definition, a country like Germany can simply not generate enough domestic demand to absorb the products its capital intensive industry can produce and must, thus, export them to the country with the lower capital intensity that cannot produce these goods competitively. This causes a chronic trade surplus in Germany and a chronic trade deficit in Greece.

If the exchange rate is flexible, it will inevitably adjust, constantly devaluing the currency of the country with the lower price-cost margins and revaluing that of the more capital-intensive economy. But this is a problem for the elites of both nations. Germany’s industry is hampered by uncertainty regarding how many DMs it will receive for a BMW produced today and destined to be sold in Greece in, say, ten months. Similarly, the Greek elites are worried by the devaluation of the drachma because, every time the drachma devalues, their lovely homes in the Northern Suburbs of Athens, or indeed their yachts and other assets, lose value relative to similar assets in London and Paris (which is where they like to spend their excess cash). Additionally, Greek workers despise devaluation because it eats into every small pay rise they manage to extract from their employers. This explains the great lure of a common currency to Greeks and to Germans, to capitalists and labourers alike. It is why, despite the obvious pitfalls of the euro, whole nations are drawn to it like moths to the flame.

So there is a problem within the Eurozone of “recycling trade surpluses” basically from Germany and the stronger members to peripheral countries such as Greece, Portugal, Ireland, and even Spain – where Italy is almost a special, but very concerning case.

The next quote is from a section in MODEST PROPOSAL called “The Nature of the Eurozone Crisis.” It is is about as succinct an overview of the problem as I know of – without being excessively ideological.

The Eurozone crisis is unfolding on four interrelated domains.

Banking crisis: There is a common global banking crisis, which was sparked off mainly by the catastrophe in American finance. But the Eurozone has proved uniquely unable to cope with the disaster, and this is a problem of structure and governance. The Eurozone features a central bank with no government, and national governments with no supportive central bank, arrayed against a global network of mega-banks they cannot possibly supervise. Europe’s response has been to propose a full Banking Union – a bold measure in principle but one that threatens both delay and diversion from actions that are needed immediately.

Debt crisis: The credit crunch of 2008 revealed the Eurozone’s principle of perfectly separable public debts to be unworkable. Forced to create a bailout fund that did not violate the no-bailout clauses of the ECB charter and Lisbon Treaty, Europe created the temporary European Financial Stability Facility (EFSF) and then the permanent European Stability Mechanism (ESM). The creation of these new institutions met the immediate funding needs of several member-states, but retained the flawed principle of separable public debts and so could not contain the crisis. One sovereign state, Cyprus, has now de facto gone bankrupt, imposing capital controls even while remaining inside the euro.

During the summer of 2012, the ECB came up with another approach: the Outright Monetary Transactions’ Programme (OMT). OMT succeeded in calming the bond markets for a while. But it too fails as a solution to the crisis, because it is based on a threat against bond markets that cannot remain credible over time.

And while it puts the public debt crisis on hold, it fails to reverse it; ECB bond purchases cannot restore the lending power of failed markets or the borrowing power of failing governments.

Investment crisis: Lack of investment in Europe threatens its living standards and its international competitiveness. As Germany alone ran large surpluses after 2000, the resulting trade imbalances ensured that when crisis hit in 2008, the deficit zones would collapse. And the burden of adjustment fell exactly on the deficit zones, which could not bear it. Nor could it be offset by devaluation or new public spending, so the scene was set for disinvestment in the regions that needed investment the most.

Thus, Europe ended up with both low total investment and an even more uneven distribution of that investment between its surplus and deficit regions.

Social crisis: Three years of harsh austerity have taken their toll on Europe’s peoples. From Athens to Dublin and from Lisbon to Eastern Germany, millions of Europeans have lost access to basic goods and dignity. Unemployment is rampant. Homelessness and hunger are rising. Pensions have been cut; taxes on necessities meanwhile continue to rise. For the first time in two generations, Europeans are questioning the European project, while nationalism, and even Nazi parties, are gaining strength.

This is from a white paper jointly authored by Yanis Varoufakis, Stuart Holland and James K. Galbraith which offers a rationale and proposal for a European “New Deal.” In other words, take advantage of the record low global interest rates and build infrastructure.

The passage covers quite a bit of ground without appearing to be comprehensive. However, it will be be a good guide to check, I think, if a significant downturn unfolds in the next few quarters. Some of the nuances will come to life, as flaws in original band-aid solutions get painfully uncovered.

Now there is no avoiding some type of ideological or political stance in commenting on these issues, but the future is the real question. What will happen if a recession takes hold in the next few quarters?

More on European Banks

European banks have been significantly under-capitalized, as the following graphic from before the Great Recession highlights.

Another round of stress tests are underway by the ECB, and, according to the Wall Street Journal, will be shared with banks in coming weeks. Significant recapitalization of European banks, often through stock issues, has taken place. Things have moved forward from the point at which, last year, the US Federal Deposit Insurance Corporation (FDIC) Vice Chairman called Deutsche Banks capitalization ratios “horrible,” “horribly undercapitalized” and with “no margin of error.”

Bottom LIne

If a recession unfolds in the next few quarters, it is likely to significantly impact the European economy, opening up old wounds, so to speak, wounds covered with band-aid solutions. I know I have not proven this assertion in this post, but it is a message I want to convey.

The banking sector is probably where the problems will first flare up, since banks have significant holdings of sovereign debt from EU states that already are on the ropes – like Greece, Spain, Portugal, and Italy. There also appears to be some evidence of froth in some housing markets, with record low interest rates and the special conditions in the UK.

Hopefully, the global economy can side-step this current wobble from the first quarter 2014 and maybe even further in some quarters, and somehow sustain positive or at least zero growth for a few years.

Otherwise, this looks like a house of cards.

Business Forecasting