Archive | December 2014




Normally, I wouldn’t comment on any single economic release, but today’s GDP revision adds to the mounting evidence of a strengthening US economy. GDP growth in the third quarter was revised up to 5.0%, the fastest annualized pace since 2003 (see graph below).     This was not a case where the headline misled: all of the underlying components (except net exports) were revised higher. Corporate profits as a percentage of GDP reached a record high (see graph below). Following a 2% decline in output in the first quarter of the year, the economy racked up gains of 4.6% and Read More


Too Many Words


Among monetary economists, there is a raging debate over the merits of the Fed’s burgeoning balance sheet. Back in November 2010, an open letter to Fed chairman Ben Bernanke was published in the Wall Street Journal (, arguing that Quantitative Easing (QE) raised the risks of currency debasement and inflation. Some very smart economists signed on (Michael Boskin, Ronald McKinnon and John Taylor, all of Stanford), a few brilliant money managers (Cliff Asness of AQR, Seth Klarman of Baupost and Paul Singer of Elliott), and a couple of renowned historians (Niall Ferguson and Amity Schlaes), among others. I did not Read More


Energy Panic


Take a look at the price of a barrel of good ol’ West Texas Intermediate (see graph below). Two things jump out at me: big declines occur in recessions (which makes sense as demand falls), and there’s a fair amount of fluctuation all the time. The recent 50% drop is unusual in that it has not occurred during a recession (unless we’re in one now and don’t know it; but I don’t think so). So, why has the price of oil fallen so dramatically? And what else has been impacted by this plunge? And how should investors think about opportunities Read More


Europe Sputters, US Cruises


Europe’s unemployment rate is 11.5%. Europe is currently growing at less than 1%. A rule of thumb is that it takes excess growth of 2-2.5% to drop the unemployment rate by 1%. I think you see the problem. This is not advanced math. Mario Draghi, head of the European Central Bank (ECB), would like to juice the economy with some monetary stimulus, but he’s finding that there is a gap between what he would like, what the Germans would like, and what can actually be done. In the midst of the barrage of news about plunging oil prices and winter Read More


Deflation? Not US


The dramatic (40%!) drop in oil prices has caused some hysteria in the media about the rising risks of deflation. After all, lower energy prices is deflationary. Well, that’s not quite true. Inflation is a measure (imperfect, to be sure) of the general level of prices, not the relative price of one good versus another. If the price of steak rises relative to the price of chicken, people will consume less steak and more chicken. This has no impact on the overall price level in the economy. Likewise, the economy may spend less on energy, but then more on other Read More

Labor Market


Oh, this was a strong report this morning, on every level: 321,000 net new jobs in November. 10 consecutive months of +200,000 payroll gains (228,000 on average over the past year). Labor force expanded 119,000, and the labor participation rate held steady at 62.8%, its average of the past 8 months, so perhaps it is leveling off. Median number of weeks of unemployment fell to a recovery-low of 12.8. Quitters rose to 9.1% of those unemployed, signaling rising confidence in being able to find another job (this is one of Janet Yellen’s favorite stats). Average hourly wages rose 0.4% and Read More


Petropolitics-II (Implications)


Declining oil prices provide a net benefit to the global economy. A rule of thumb is every $10/barrel transfers around $330 billion, about 0.4% of world GDP, between oil producers to oil consumers. So there are winners (consumers) and losers (producers), but overall, the decline in oil should lead to global GDP growth around 0.5% higher next year than it otherwise would be. The US is both a large consumer and producer of oil, but we are still net importers.  Petroleum-related costs should fall about $280 billion, whereas the losses to US producers will be around $130 billion, for a Read More




For the past few years, oil has held steady at around $100/barrel, as supply and demand were largely held in check. Supply was disrupted in Libya and South Sudan, Venezuela saw production tumble due to incompetence and inefficiencies plus sanctions on Iranian exports more or less offset rising production in North America. But about 6 months ago, the world economy (esp. China, but also Europe, Japan, Brazil, began to slow at the moment when Libya quadrupled its output to 1 million bpd. When weakening demand collides with a spike in supply, the result is a plunge in prices, in Read More