NEW$ & VIEW$ (22 AUGUST 2014)

LEI says no recession in sight. Bizarre Philly Fed survey. Obamacare. Iran/Irak escalation.
U.S. LEI Begins to Accelerate

The index of leading economic indicators is beginning to accelerate. The three-month growth rate is 7.4% at an annual rate. Over the previous three months, it grew at a 2.0% annual rate. Over 12 months, it is growing at a 5.9% annual rate. At the same time, the coincident index is doing better; it’s growing at a 3.4% annual rate over three months. That’s up from 2% over six months and 2.3% over 12 months.

In July, the leading index rose by 0.5% after a 0.3% gain in June. The coincident index rose by 0.3% following June’s 0.2% increase. These are steady increases in the LEI and the coincident index over the last four months.

How strong are these growth rates? The year-over-year growth rate for the LEI has been higher only about 26% of the time. The coincident index growth rate has been higher about 54% of the time. Neither one of these growth rates is exceptionally strong. The coincident economic index is still very pedestrian even though it has accelerated. The leading economic index is more in the category of being solid-to-strong; it’s only higher about quarter of the time.

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  • LEI growth more driven by nonfinancial components

The encouraging news was that much of this increase was again concentrated in the non-financial components of the LEI. We estimate their contribution at 2.5% in the last six months (annualized rate). As today’s Hot Charts show, this is the first time since the beginning of the current economic expansion that the contribution of the non-financial components of the LEI exceeds 2%. This development suggests that the U.S. economy may finally be on the cusp of achieving “escape velocity”, i.e., a condition that no longer warrants extreme monetary policy accommodation.


U.S. Existing-Home Sales Up 2.4%

Sales of existing homes increased 2.4% from June to a seasonally adjusted annual rate of 5.15 million, the National Association of Realtors said Thursday. July sales were down 4.3% from a year earlier, when sales peaked for 2013 before a jump in mortgage rates threw the housing recovery off track. July was the fourth consecutive month sales rose from the prior month.

Not only were sales last month at their highest level since last September, but fewer transactions came from short sales of underwater homes and foreclosures. Distressed sales accounted for 9% of all sales in July, the lowest level since the trade group’s tally began in October 2008 at the peak of the financial crisis. More than a third of all sales in 2009 were distressed.

There is this lingering problem (chart from Haver Analytics):

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Just kidding Existing home sales look low compared to their 2006 peak but maybe we actually are back to normality as these CalculatedRisk charts suggests::

Philly Fed Hits Multi-Year High

The Philly Fed report for the month of August not only came in stronger than expected, but the General Business Conditions index hit its highest level since March 2011.  High five  Strangely enough, while the headline reading of the Philly Fed report showed strength, the business indicators within the report were practically all weak.  As shown in the table to the right, seven of the nine indicators declined this month, reversing last month’s gains.  The biggest declines of the general business indicators came in New Orders and Shipments.  In fact, while the headline reading of this month’s report was the best since March 2011, the New Orders component saw its largest monthly decline since August of that same year.   Net net, on the surface there was a lot to like about the report, but after digging into the internals a lot of the bloom came off the rose.


Pretty miserable scorecard if you ask me:image

The above could be part of the explanation why employment growth has been so slow and why consumers have increased their savings rate. More than 50% of companies surveyed have modified their health coverage plans: employees now pay more, face a higher deductible and receive less coverage. An aging population will naturally seek protection through higher savings.



With Rates Low, Firms Near Borrowing Record U.S. corporate-bond issuance is hurtling toward a record for the third consecutive year, as companies take advantage of a surprising interest-rate decline to stock up on cash.

[image]Companies around the globe have sold about $994.9 billion of bonds in the U.S. this year as of Thursday morning, according to data provider Dealogic, which has figures dating back to 1995. That is up more than 4% from a year ago, with sales on pace to cross the $1 trillion mark at the fastest clip on record. A $4.5 billion sale Thursday from Bank of America Corp. BAC +4.12% put the total closer to that milestone. (…)

Acquisitions have about doubled in the U.S. from last year to a recent $1.1 trillion, and U.S. bond sales earmarked for capital spending—purchases or upgrades of long-lived assets such as plant and equipment—have risen 90% from a year earlier to $40 billion, Dealogic said.


From Foreign Affairs:

(…) For now, it is impossible to say whether ISIS intended to provoke the United States to intervene or simply miscalculated. But it is hard to believe ISIS did not understand that threatening the capital of Iraqi Kurdistan would mean directly challenging the U.S. alliance with the Kurds and potentially provoking it to fight. Indeed, it is likely that ISIS viewed such a challenge as a win-win situation. (…)

If the United States decided to step in on behalf of its allies — as it did — then ISIS must have believed that it would be able to strengthen its position within the jihadi camp. ISIS could use the bombings as evidence that the United States is waging a war on Islam, and to portray itself as the defender of Muslims from “Crusader” aggression. In other words, ISIS would steal a page right out of al Qaeda’s playbook. And that puts more pressure on al Qaeda. After all, if ISIS wins vast territory in the heart of the Middle East, implements Islamic governance, and battles apostate regimes and their backers, al Qaeda will — after refusing to do so — have to give its full support to ISIS. Already, ISIS supporters are calling all jihadi forces to stand behind Omar al-Baghdadi, the leader of ISIS. As a result, the flow of fighters abandoning al Qaeda affiliates to join ISIS, which U.S. intelligence has already observed, is likely to increase. Moreover, leaders of al Qaeda franchises will come under greater pressure to shift allegiance from al Qaeda to ISIS.

Of course, getting the United States involved carries considerable risks. ISIS does not have an answer to American airpower. From the air, the United States is capable of delivering painful blows that can significantly degrade the group. And by supporting Kurdish forces on the ground, U.S. intervention could even reverse ISIS’ advances in the north. But U.S. President Barack Obama’s caution when it comes to foreign interventions, and his obvious distaste for getting entangled in Iraq again, appear to have mitigated the risks for ISIS. Indeed, the United States seems intent on the most minimal intervention possible, striking very few targets, and aiming to create deterrence more than rolling back ISIS advances on the ground. Moreover, Obama’s aversion to doing anything in Syria means that ISIS-controlled territories there will be a safe haven for the group no matter what happens in Iraq.

Although the push against the Kurds can be seen as serving the Islamic State’s strategic objectives, the persecution of minorities, particularly the beginning of a genocidal drive against the Yezidis, should be viewed not only as an effort to intimidate the opponents of ISIS, but also as the fulfillment of ISIS’ radical ideology, which includes special taxes for minorities, forced deportations or, as in the case of the Yezidis, a choice between conversion or death. This ideology is an integral part of ISIS’ broader effort to implement Islamic governance and has some precedents in its actions in Syria. In the absence of  concerted international action, it will continue to oppress, chase away, and, in the worst cases, kill minorities under its rule.

ISIS has been clear about its expansionist and exclusionary Caliphate project, and now that truth has finally sunk in with the Obama administration. Getting involved in Iraq carries risks, but if the United States will not lead — and from the front this time — the ISIS threat will only grow. A lasting solution to the problem requires deep political changes in Iraq and, just as important, in Syria, which Washington has largely ignored. Such changes are unlikely to materialize fast enough to answer an urgent threat. In the meantime, although a comprehensive aerial campaign could weaken ISIS considerably, the narrow scope of U.S. strikes will provide only modest and insufficient relief. Fighting ISIS will inevitably generate some resentment against the United States. However, the danger that would result from allowing ISIS to expand unchecked is far worse. Unless the United States is willing to walk away from the Middle East for good, it will have to face ISIS head on. And doing so will cost much more the longer the United States waits. 

Today in the FT: US signals escalation in Isis fight

Barack Obama’s top Pentagon adviser says the Islamist militant group in northern Iraq can be defeated only by tackling them in neighbouring Syria, signalling a substantial escalation of America’s military campaign.

General Martin Dempsey, the chairman of the joint chiefs of staff, said at a Pentagon press conference on Thursday that the Islamic State in Iraq and the Levant, or Isis, had to be addressed “on both sides of what is essentially at this point a non-existent border” between Iraq and Syria. (…)

Mr Dempsey’s statement suggests that he is ready to present the US president with options to extend US military operations into Syria. European countries are also looking at arming Kurdish forces.

Chuck Hagel, the defence secretary, (…) said the US had to prepare “for everything, and the only way you do (that is to) take a cold, steely hard look at it, and get ready”. (…)

Mr Dempsey said defeating Isis required a variety of instruments, “only one small part of which is air strikes”.

“I’m not predicting those will occur in Syria, at least not by the US. But it requires the application of all of the tools of national power – diplomatic, economic, information, military.”

Stratfor adds today:

(…) the situation in Iraq is driving the United States and Iran toward cooperation.

Though the Iranians have been running a limited number of air sorties in Iraq, the bulk of Tehran’s efforts will be ground-based, whether they involve actual troops engaged in combat and supporting Iraqi forces or the mobilization of militias. The United States will largely be engaged in air operations, given the domestic aversion to sending in ground troops. This works well for both sides; the Iranians do not have the air assets that the Americans do, and having the Iranians focus on ground operations serves the United States’ interests.


If you’ve got 160 IQ, sell 30 points to somebody else because you won’t need it in investing. What you do need is the right temperament. You need to be able to detach yourself from the views of others or the opinions of others.

You need to be able to look at the facts about a business, about an industry, and evaluate a business unaffected by what other people think. That is very difficult for most people.

Most people have, sometimes, a herd mentality which can, under certain circumstances, develop into delusional behavior. (Via Farnam Street)


The U.S. manufacturing sector displays booming conditions. Domestic demand is strengthening while increasing foreign demand amid weaker foreign economies indicate market share gains for U.S. manufacturers.

The seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 58.0 in August, up sharply from 55.8 in July and the highest reading for over four years. All five components of the Manufacturing PMI had a more positive influence on the headline index than in July, led by a robust and accelerated increase in employment.


August data indicated a further steep rise in production levels across the manufacturing sector. The rate of output growth picked up slightly since July and was one of the fastest seen over the past four years. Survey respondents mainly cited improving domestic economic conditions and an associated upturn in client spending.

Volumes of new work received by manufacturing companies rose at a sharp pace during August and, in line with the trend for production, the rate of expansion held close to its strongest since early 2010. Manufacturers also benefitted from a solid rebound in new export orders in August, with the pace of expansion picking up from July’s six-month low. Moreover, the latest increase in new business from abroad was the steepest for three years.

Stronger demand patterns, an accumulation of backlogs for the seventh month running, and improving confidence towards the business outlook all contributed to a further increase in manufacturing payroll numbers in August. Moreover, job creation picked up since July and the latest rise in staffing levels was the fastest for almost a year-and-a-half.

Greater production schedules and increased new business wins resulted in a sharp expansion of input buying across the manufacturing sector in August. The latest rise in purchasing activity was the fastest since the series began in May 2007, which in turn contributed to a survey-record increase in pre-production inventories in August. Stronger demand for inputs led to the most marked lengthening of suppliers’ delivery times since the snow-affected first quarter of 2014.

Meanwhile, stocks of finished goods rose for the second successive month, but the pace of expansion remained modest.

Pointing up Input cost inflation was unchanged since July and remained subdued in comparison with the survey’s historical average. August data also indicated a further rise in manufacturers’ factory gate charges. The latest increase in output prices was little-changed from July’s seven-month high, and a number of survey respondents reported passing on a proportion of their higher input costs to clients in August.