Recap 8-23-12

Main Items:

  • US Markit Preliminary PMI improved to 51.9 in Aug vs 51.5 exp and 51.4 prev
  • US Initial Jobless Claims increased to 372k last week vs 365k exp and 366k prev
  • Most brokers now appear to expect some sort of Fed easing in September, with the extension of the rate guidance as the consensus favorite.


  • EU PMI in Aug:
  1. Mfg improved to 45.3 vs 44.2 exp and 44 prev
  2. Services declined to 47.5 vs 47.7 exp and 47.9 prev. Looks like German Service companies drove the miss.

HSBC Flash Mfg PMI declined to 47.8 in Aug vs 49.3 prev

NYT: So many auto factories have opened in China in the last two years that the industry is only operating at about 65 percent of full capacity — far below the 80 percent usually needed for profitability. Yet so many new factories are being built that, according to the Chinese government’s National Development and Reform Commission, the country’s auto manufacturing capacity is on track to increase again in the next three years by an amount equal to all the auto factories in Japan, or nearly all the auto factories in the United States.

Upcoming Data:

  • Fri: US DGO
  • Mon: German IFO, Dallas Fed
  • Tues: US Consumer Confidence, Richmond Fed
  • Wed: German CPI, US Pending Home Sales, South Korea PMI,

Commentary & Links:

The BoE published a study of the effects of QE today that is quite interesting. It acknowledges that because of wealth inequality, the benefits of QE predominately helped the wealthy. But there is more to the story.

One of the ways monetary and fiscal stimulus interact is that the increase in asset prices resulting from lower discount rates tends to increase capital gains, which in turn increases tax revenue. Ceteris paribus, this allows the government to pursue a more simulative fiscal policy. However, the sharp decline in capital gains taxes along with loopholes and tax evasion over the past few decades has sharply weakened this relationship.

Furthermore, the sharp decline in real interest rates is in effect a wealth transfer, from people who have not saved much (the young) to those who already have assets. (the elderly) This is of course because falling real interest rates increases the present value of cash flow streams and hence asset prices & retirement accounts. By definition, this also decreases future gains in real prices, which penalizes those trying to save. It is not a coincidence that the young, uneducated / poor segment of the population is experiencing much higher rates of poverty than the old & educated segment.

In general, I believe that the increased concentration of wealth has both increased financial asset volatility but also weakened policy makers’ abilities to stabilize it. A continuation of this trend of greater wealth inequality and more volatile business cycles is ultimately destabilizing for the political economy. Tea Partiers and Objectivists should to take note, and think beyond the next election cycle. The Gilded Age lead to the Progressive Era. A similar political swing could result in many more poor voters echoing the Cookie Monster in asking, Share It Maybe?

2 thoughts on “Recap 8-23-12

  1. Low rates are a wealth transfer from those who saved to rise who did not. Savers are losing money (inflation adjusted)

    1. bk, low rates means the discount rate used to price cash flows declines, which means gains that would otherwise would have occurred in the future happens now. For example, let’s say in 2007 you bought a 10 year zero coupon treasury bond that you intended to hold to maturity. After the Fed eased, you would’ve realized a massive mark to market gain. But since you were planning to hold it to maturity, you would be broadly indifferent. That is why fully funded pension plans did not become much worse or much better off following QE with respect to their Asset-Liability mismatch.

      In other words, there are two effects from low rates. First is the increase in present value of asset prices. The second is the the decrease in future gains.

      Savers certainly are negatively impacted by negative real rates in the sense that their future cash flows are expected to fall sharply, but this is offset by the fact that they now have large mark to market gains on their assets.

      People who are just starting to to save also suffer from the drop in their future cash flows, but they do not have any capital gains to offset that. To some extent, this is offset by the fact that they hope that their wages increase in line with inflation, but the fact is that real wages have actually been falling since 1999!

      On balance, I think that people who have not yet saved are at a much bigger disadvantage than those who have already saved. And that is even before we start talking about the fact that the massive public debt load + increasing medicare costs will have to be paid for by the young!

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