G3 Recap 5-31-11

Main Items:

  • EU leaders have ruled out a “total restructuring” of Greek debt and will decide on additional aid for the country by the end of June. There are talks that Germany has also softened its stance on requiring a restructuring of sorts before providing any additional aid.
  • US Consumer Confidence declines to 60.8 in May vs 66.6 expected and 65.4 previously
  • Chicago PMI declined to 56.6 vs 62.0 expected and 67.6 previously
  • Dallas Fed Manufacturing Index declined to -7.4 in May vs +8.5 expected and 10.5 previously.
  • S&P Case/Shiller 20 city Composite declined -3.6% YoY in March vs -3.4% expected and -3.3% previously
  • BoC kept rates unchanged as expected, but said “To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflation target.”
  • Canadian GDP rose 2.8% YoY in March vs 2.6% expected and 2.9% previously


  • EU CPI rose 2.7% YoY in Mary vs 2.8% expected and previously
  • EU Unemployment was unchanged at 9.9% in April as expected. German Unemployment declined -8k in May vs -30k expected and -37k previously.
  • South Korea IP growth slowed to 6.9% YoY in April vs 9.2% expected and 8.7% previously
  • Swiss GDP growth slowed to +0.3% QoQ in Q1 vs 0.7% expected, mainly as a result of a decline in inventories. Net exports contributed a surprisingly strong 3.2% to GDP.


  • This article in the Times got me to do some digging. Here is the breakdown of US tax receipts as a percent of GDP, as presented by the OMB.

    A few takeaways:
    1) Individual income taxes are at the lowest level as a percent of GDP since 1951.
    2) Even if the income tax receipts increase to the long run average of ~8%, it would only correct 2% of the 10% budget deficit.
    3) Corporate taxes are also near the historical lows. HOWEVER – we note that foreign earnings now represent almost a third of total S&P 500 earnings, which is taxed at a much lower rate. That actually doesn’t show up on this chart because foreign earnings are likely reported in a way that is not incorporated into GDP calculations.
    Federal government tax receipts are clearly too small relative to GDP. The solution is clearly NOT to lower taxes – either corporate or individual. However, there needs to be some short term pain because the current budget deficit of 10% is 8% above the average budget deficit of 2.1% from 1960-2008. A reversion of individual and corporate tax receipts to their long term averages would only cover 3%, suggesting that the budget deficit needs to contract a further 5% of GDP to be sustainable.


4 thoughts on “G3 Recap 5-31-11

  1. yes indeed there are a lot of one off items ranging from weather related to japan to concerns about the debt ceiling but i genuinely think there is something else going on and i just don’t know if its “another” mid cycle slow down.

    1. rate hikes are finally starting to affect aggregate demand or output in EM but still not stabalizing inflation pressures in a number of EM countries that keep fighting tooth and nail from genuinely slowing down domestic credit led expansion

    2. fiscal stabilization means that a lot of geographic regions will no longer have governments as a net contributor to growth. in some cases without this and export growth the situation becomes dire. denmark gdp prints are a case in point with a relatively dynamic economy being hampered by a real estate/banking issue and government cut backs.

    equity may have the earnings to back current valuations but what happens when macro picture changes … or subsidization of corporate sector by government spending ceases? indeed if US starts taxing corporate earnings at a global level just like it does with its own citizens we might see some rebalancing as corporate earnings as share of economy at highs.

    having just been to portugal, the mood in lesser developed europe is gloom as people no longer have the capability to leverage up anymore, unemployment is structural and the socialist nanny state is no longer there to lend a helping hand. how perverse that evem in germany where things have been going well deep routed resentment of the current government escalates.

    anyway, new order in PMIs should indicate that rate hikes to be taken out, curves to bull flatten more and who knows what happens with equity. EM demand, and expectations of QE3 may lend a helping hand to commodities for the time being but again vis a vis what is happening to the bond market, things are looking mis-priced. this may be a volatile summer after all.

  2. Hey Bert –
    I’ve always wanted to go to Portugal. Hope you had a good time.

    The problem with equity guys has often been that they rely on corporate guidance for earnings forecasts, which are them selves based on lagged data. Decreases in earnings expectations could well be the factor that sends equities sharply lower, as it’s really the only supporting leg left.

    There appears to be some interesting plays in option structures in the red and green packs of the eurodollar curve… cheap ways to bet on a QE3. Most talking heads are dismissing it still. Maybe that’s true, but by the time this move is over, it could be fully priced it.

    I’m somewhat surprised that gold isn’t higher here. Maybe it’s getting hit by more deleveraging flows?

    1. well if you ever decide to go to portugal very happy to give you some pointers including a new found restaurant set in a cellar where you have 800 different wines to chose from … with next to no markup.

      should deleveraging flows escalate I guess cash will go into sub 5 year sectors of curves and swissy … but another round of QE should definitely drive folks into PMs … problem is with oil and core inflation creeping up, stoking inflation expectations may very well be counterproductive even in the short run for the economy though not necessarily risky assets with a bias for inflation hedging.

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