The UK's canary is about to croak
The fact that the personal savings rate has plunged to zero is dismissed as irrelevant; record levels of household debt will not cause any problems as they are just a logical by-product of frantically increasing asset values and record low interest rates. As for the world record current-account deficit-well, everyone knows America is God's chosen country and Asian banks have very little choice but to support the profligate American consumer. So the Teflon-like U.S. economy will carry on regardless and all will be well with the world.
Well, not exactly. According to a survey by MarketWatch, the blue-chip economists had been expecting GDP growth to clock in at 3.6 percent in the last quarter of 2004. But when the Commerce Department released the figures on January 28, it actually came in at 3.1 percent, down very sharply from four percent the quarter before. As the blue-chip economists have been proven wrong, yet again, I prefer to use the fate of Billy, Gregory, Molly and Charlie as being predictive of our future.
Watch the birdies
In November last year, Irene Clark of Lincolnshire, in the UK, removed a meat pie from her oven. As she sat down to eat her dinner, Billy and Gregory, her two budgerigars, began to squawk and died. Five minutes later her cockatiel Molly started to go all wobbly and pegged it. Later that same evening her parrot Charlie began to behave oddly and then expired. It turned out that all four were poisoned by gas emanating from the Teflon-covered non-stick tray upon which the meat pie was baked. Clark was told not to replace the birds for a week because of lingering gas traces.
DuPont, manufacturers of non-stick pans, admitted that when over-heated their Teflon products can harm birds. It would appear that perfluorooctanoic acid (PFOA), which is in Teflon and other non-stick coatings, is a health threat not only to birds but also to humans.
Another indication that not all is as it seems is provided by the inverted yield curve. In 1996, the New York Federal Reserve did a study on what indicators were the most reliable predictors of a recession. After researching 20 factors they found that only one of six indicators was significantly reliable. This was when short-term lending rates were lower than long-term rates. This is known as an inverted yield curve.
Blue-chip blarney
In the U.S. every time the yield curve is inverted or negative for 90 days then there is a recession in about 12 months' time. Thus, when in August of 2000 the yield curve in the U.S. went negative, John Mauldin, the man behind www.frontlinethoughts.com, predicted that the country would enter a recession in the summer of 2001. At the time none of the blue-chip economists predicted a recession as things just looked too good. Yet the Fed study clearly illustrated that all other data stayed positive until they turned negative and that only the yield curve showed any reliable predictive ability and that this rule applied everywhere without exception.
Last month, Mauldin, who is also president of Millennium Wave Advisors, entitled one of his weekly articles 'The canary in the coal mine.'
In it, he pointed out that English coal miners would put a canary in the coal mine to warn them of air-quality problems and that in the world of economics the inverted yield curve served the same purpose. More importantly, he revealed that whereas the yield curve was beginning to flatten in the U.S., in the UK it had inverted in August 2004 and has stayed inverted ever since. To quote: "Official UK unemployment is an amazing 4.7 percent. I am sure there are examples, but I cannot recall a major economic country with such a low unemployment rate. Consumer price inflation is under two percent. Wages rose by 4.4 percent in the three months through October. Retail price inflation hit 3.5 percent in December, the highest rate since summer 1998.
As safe as houses
"The housing market is still doing quite well. Housing in England rose 12.5 percent year-over-year in November, although only 0.2 percent in December. Meanwhile, UK household debt is 140 percent of post-tax earnings, which is above U.S. levels.
"Government spending is on the rise. To quote the analysis team at Gavekal: 'Just like the U.S., the UK participated in the supply-side revolution of the 1980s and 1990s. But unlike the U.S., the UK's supply-side revolution is in danger of being rolled back. UK government expenditures relative to GDP have been on the rise for seven long years, and the government has accounted for virtually all employment growth since 2001.
Rolling back the revolution
"'Little by little, increased regulation and ever-rising public spending are weakening the spirit of enterprise created by the Thatcher revolution,' they continue. 'This is a worrying development and if left unchecked, will undoubtedly have very negative effects on the growth prospects of the UK economy, and on their equity market.'"
Last week the British Bankers Association revealed that the number of mortgages approved had fallen for the seventh month in a row, a 38 percent fall from December 2003 to the lowest level for nearly five years. First-time buyer numbers are at their lowest level since 1981. It would appear that this canary is just about to croak. Cycles repeat.
Well, not exactly. According to a survey by MarketWatch, the blue-chip economists had been expecting GDP growth to clock in at 3.6 percent in the last quarter of 2004. But when the Commerce Department released the figures on January 28, it actually came in at 3.1 percent, down very sharply from four percent the quarter before. As the blue-chip economists have been proven wrong, yet again, I prefer to use the fate of Billy, Gregory, Molly and Charlie as being predictive of our future.
Watch the birdies
In November last year, Irene Clark of Lincolnshire, in the UK, removed a meat pie from her oven. As she sat down to eat her dinner, Billy and Gregory, her two budgerigars, began to squawk and died. Five minutes later her cockatiel Molly started to go all wobbly and pegged it. Later that same evening her parrot Charlie began to behave oddly and then expired. It turned out that all four were poisoned by gas emanating from the Teflon-covered non-stick tray upon which the meat pie was baked. Clark was told not to replace the birds for a week because of lingering gas traces.
DuPont, manufacturers of non-stick pans, admitted that when over-heated their Teflon products can harm birds. It would appear that perfluorooctanoic acid (PFOA), which is in Teflon and other non-stick coatings, is a health threat not only to birds but also to humans.
Another indication that not all is as it seems is provided by the inverted yield curve. In 1996, the New York Federal Reserve did a study on what indicators were the most reliable predictors of a recession. After researching 20 factors they found that only one of six indicators was significantly reliable. This was when short-term lending rates were lower than long-term rates. This is known as an inverted yield curve.
Blue-chip blarney
In the U.S. every time the yield curve is inverted or negative for 90 days then there is a recession in about 12 months' time. Thus, when in August of 2000 the yield curve in the U.S. went negative, John Mauldin, the man behind www.frontlinethoughts.com, predicted that the country would enter a recession in the summer of 2001. At the time none of the blue-chip economists predicted a recession as things just looked too good. Yet the Fed study clearly illustrated that all other data stayed positive until they turned negative and that only the yield curve showed any reliable predictive ability and that this rule applied everywhere without exception.
Last month, Mauldin, who is also president of Millennium Wave Advisors, entitled one of his weekly articles 'The canary in the coal mine.'
In it, he pointed out that English coal miners would put a canary in the coal mine to warn them of air-quality problems and that in the world of economics the inverted yield curve served the same purpose. More importantly, he revealed that whereas the yield curve was beginning to flatten in the U.S., in the UK it had inverted in August 2004 and has stayed inverted ever since. To quote: "Official UK unemployment is an amazing 4.7 percent. I am sure there are examples, but I cannot recall a major economic country with such a low unemployment rate. Consumer price inflation is under two percent. Wages rose by 4.4 percent in the three months through October. Retail price inflation hit 3.5 percent in December, the highest rate since summer 1998.
As safe as houses
"The housing market is still doing quite well. Housing in England rose 12.5 percent year-over-year in November, although only 0.2 percent in December. Meanwhile, UK household debt is 140 percent of post-tax earnings, which is above U.S. levels.
"Government spending is on the rise. To quote the analysis team at Gavekal: 'Just like the U.S., the UK participated in the supply-side revolution of the 1980s and 1990s. But unlike the U.S., the UK's supply-side revolution is in danger of being rolled back. UK government expenditures relative to GDP have been on the rise for seven long years, and the government has accounted for virtually all employment growth since 2001.
Rolling back the revolution
"'Little by little, increased regulation and ever-rising public spending are weakening the spirit of enterprise created by the Thatcher revolution,' they continue. 'This is a worrying development and if left unchecked, will undoubtedly have very negative effects on the growth prospects of the UK economy, and on their equity market.'"
Last week the British Bankers Association revealed that the number of mortgages approved had fallen for the seventh month in a row, a 38 percent fall from December 2003 to the lowest level for nearly five years. First-time buyer numbers are at their lowest level since 1981. It would appear that this canary is just about to croak. Cycles repeat.
