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From time to time friends tell me that they get annoying popups every time they visit my blog. I have no idea why that is happening, but I assume it is Google (the blog sponsor) that does it. I have never seen a popup myself when I look at the blog, and the reason is that I use Safari and Firefox for my browsers, and both give you the option of blocking popups. I would highly recommend either browser over Explorer, and would encourage anyone still using Explorer to give them a try.

I would welcome suggestions, in any event, as to how I might turn off this feature or otherwise improve the blog. I'm sure there are any number of steps I might take to improve the format, but I consider myself still a novice at this.

Apologies to those who have been annoyed by popups, but please do consider using Safari or Firefox.

Federal budget update


Here's my belated update of the federal budget charts for February, with data that were released yesterday. (Skiing has been fabulous, and extracurricular activities have taken their toll on blogging. We've skiied Breckinridge, Copper Mountain, and Keystone, and Keystone gets our vote for one of the best places we've ever been to.)



The bad news is that the deficit for the 12 months ended February was $1.5 trillion, just over 10% of GDP. There's a study going around that says that deficits become a significant drag on growth once they reach 10% of GDP or so, and that makes sense to me. When the federal government borrows that much, it that effectively soaks up a lot of the economy's savings, which could otherwise have been put to more productive use.



The good news (tough to find, but I don't want to be a partisan hack) is that revenues in February were much higher than they were a year ago, high enough to make the 12-month rolling sum of revenues turn rise relative to the January number. Given the typical pattern following recession ends, we might have seen the low in federal revenues, or something very close to the low. That would help mitigate the size of the deficit, but it is still projected to be huge for many years unless there is a significant change in the direction of policymaking in Washington. If the level of spending relative to GDP starts to decline, that would be real cause for cheer.

Households' balance sheet repair continues (2)


According to the Federal Reserve's calculations, the net worth of U.S. households as of last December had increased by $5.7 trillion (up 11.6%) from the low of last March. The gains came from a combination of higher equity and bond prices and reduced debt that overwhelmed declining real estate values. This reflects a healthy realignment of households' balance sheets (lower debt ratios, less reliance on real estate), as well as healthy improvement overall. However, it will take a few more years before households have recovered their peak net worth.

I note that the ratio of household's tangible asset holdings to total assets is now 33.7%, which is below the average of this ratio (36.6%) since records began to be kept in 1950 (see chart below). To me, this suggests that the correction in real estate prices has largely run its course. You might say that real estate is now somewhat "cheap" relative to financial assets. Think of the "tangible asset ratio" as a measure of how enthusiastic households are to own real estate instead of other sources of wealth such as stocks and bonds. Also note that the public's willingness to pay up for real estate is roughly correlated with underlying inflation, as the chart suggests. Tangible assets are a natural inflation hedge, so this makes a lot of sense. If inflation has bottomed out this past year and begins to rise in the years to come, then we could expect tangible asset prices to recover.

Fear subsides, prices rise (17)


Yet another update to this chart which shows how equity prices move virtually in lockstep with the Vix index. The selloff in Jan-Feb was driven by increased fears that the economy was faltering. Now confidence has come back and prices are within inches of regaining the Jan highs.

This is also a reminder that one of the major factors behind the recession of 2008-9 was a lack of confidence. With confidence returning (slowly but surely), demand is returning, economies are expanding, and asset prices are within shouting distance of their previous highs. This process is not yet over.

Used car price update


Over time, one would expect the average selling price of used cars to climb in line with inflation and in line with new car prices. As this chart shows, that is indeed the case, if your time horizon is sufficiently long. Notable exceptions to this occurred in the early 2000s, and then in 2008. The first period was one in which the economy was feeling the after-effects of very tight monetary policy from 1996-2001. Tight money had led to declining commodity prices, declining gold prices, and a very strong dollar. Weak used car prices were reflecting deflationary pressures that were showing up in a lot of asset markets. The second period was dominated by the sudden collapse in confidence and spending that in turn was the fallout from the financial crisis. Prices fell because demand collapsed.

 The significant rise in prices over the past year reflect that 1) the effects of the financial crisis have largely passed, 2) demand is coming back, and 3) there is no sign here of any asset price deflation. Markets continue to obsess over deflation risks, yet here is yet another example of how prices are rising. The folks at Manheim have some commentary on the specifics of the used car market here.

Spread update


Spreads hit a 2-year low on January 8th of this year, and equity prices peaked shortly thereafter. From January 8th through February 8th of this year, spreads rose and equity prices fell. This means that the market suddenly began to worry about the durability and breadth of the recover which began last year. In recent weeks, those worries have been assuaged, and equity prices have risen and credit spreads have come back down, and that process started on Feburary 8th. Reasons? There has been further progress on the jobs front, commodity prices continue to be strong, a catastrophic default on Greek government debt seems to have been averted, industrial production continues to rise, housing seems to have stabilized, the productivity of labor has increased sharply (which further suggests that corporate profitability is very healthy), and manufacturing and service sector activity has picked up, to name just a few. On the political front (sometimes just as important as economics, if not more so, since politics can influence the economy for years to come), the Obama agenda has run into serious obstacles, and the key concern of the electorate is now the size of government and the burdens this places on future prosperity. It is not unreasonable to think that the political tide is turning in favor of smaller government, and it is not unreasonable to think that this is a very big deal.

It continues to pay to be optimistic.

Commodities update


Commodity prices continue to be well-bid. They are only marginally lower than the highs they hit in mid-2008. I think this reflects a) strong global growth, and b) accommodative monetary policy in most major countries. I think this is bullish, because I believe that markets are still very concerned about the durability of the recovery that started some 9 months ago, and the markets are still very concerned about the risk of deflation. Rising commodity prices continue to suggest that these concerns are misplaced.

Baltic update


I haven't shown this chart for awhile, so an update is called for. I don't see any new information in this chart; shipping costs remain elevated from a long-term historical perspective. This is perhaps noteworthy inasmuch as many report that a lot of new shipping capacity has come online in the past 6-9 months. I can't be sure of the exact balance between supply and demand for shipping, but the chart says that whatever the numbers are, the supply is in relatively short supply to the demand on the margin. Global commerce remains strong, and this provides important support to the U.S. economy.

Gone skiing

I'm in Breckinridge for some skiing with my brother and some good friends, so blogging may be light this week.