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February 9, 2013

Whos Naked? January economic notables:

| Rodrigo C. Serrano, CFA | SIPA | Columbia University Master of International Affairs 14 Candidate | New York City, NY | 01-305-510-0181 | rcs2164@columbia.edu !

uried within Berkshire Hathaways 2001 Chairmans letter, Warren Buffet famously wrote, you only find out who is swimming naked when the tide goes out. This adage has special significance now that January is in the books in terms of economic data releases. Simultaneous restrictive monetary policy the Feds tapering and Chinas attempt to curtail its credit growth means a receding tide. Some countries with weak macroeconomic fundamentals have been exposed. Among the noteworthy: Argentina was forced to devalue its peso by roughly 20% after gross economic mismanagementi; Turkeys worsening political environment and deep current account deficit have sparked an investor exodus; Brazils real is approaching levels last seen since the financial crisis, largely due to fragile government finances and a record high trade deficitii. For the moment, various Fed members have suggested that tapering will continue, despite emerging market turmoil and less than stellar U.S. economic dataiii. The ebb drags on. Is there anyone else without swim trunks? The U.S. saw mixed data; however, weather likely played a distorting role. Fridays disappointing jobs report (a less than expected +113,000 jobs created with minimal prior month revisions) doesnt jive with a host of other data implying a firming job market. A solid services ISM employment sub-index (left chart), a relatively bullish Beige Bookiv, a new high in the NFIBs hiring plans sub-index (right chart), and a rebounding Rasmussen employment index together suggest continued healing. Furthermore the largest increase in labor demand since May, as measured by the BLSs JOLT survey, points to further job creationv. In manufacturing, the ISMs index plunged to an 8-month low, while new orders dove by the most in 33 yearsvi. By themselves, these results should cause great alarm. However, consider that major regional indices, such as the Empire and Philly surveys, did not flag a similar drop. Moreover, a closer inspection of the ISMs report yields a commentary mostly blaming the weather for a drop in business. As far as the general economy, bankers have noted an increased demand for loans and have grown more optimistic on its prospectsvii. While these counterfactual items may provide comfort, sluggish factory ordersviii and business investment do not indicate a surge in industrial activity over the coming quarter.
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Monetary tightening has produced a more critical market. Economic fundaimportance in this policy environment. In the U.S.: mentals will take on higher

Highlights

Wintery mix has warped the state of the labor market and manufacturing However, the consumer!s condition is worrying. Confidence data reflects an ongoing regression. sector.

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In Europe: Draghi!s risky bet: Europe!s ongoing recovery will strengthen, fending off deflation tendencies. In Asia: For China, markets may deliver a "decisive# knockout, not role. stage. Abenomics is at a critical

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The more worrying development is the increasingly precarious consumer-spending picture. From the payrolls survey, nominal wage growth remained stuck at 1.9% YoY, after falling under 2% in December. Using the latest CPI data, that puts real wage growth at a measly 0.4%. After a promising Q3, real income growth has fallen back to reality. The PCEs disposable income metric also reflects lackluster growth. Meanwhile, the national savings rate fell to 3.9%, a level last seen in 2006. The feeble pace of wage growth has perniciously manifested itself in consumer confidence surveys. Bloombergs consumer comfort index has struggled since November. Gallups poll was improving, but seems to be hooking back down. Discovers Spending Monitor, a gauge of consumers outlook and their propensity to spend,

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has slumped since mid-2013ix. Within the Conference Board (CB) and the University of Michigans indices, expectations have not advanced equally with present conditions subindicators. Consumers are increasingly subdued in their expectancy for future improvement. This development is in part due to structural changes in the labor market, a point focused on by Challenger, Gray & Christmasx, as well as a slowing in home price appreciation. As a result, indications of sluggish consumption have surfaced. Chain store sales were mostly flat on a YoY basis. While better weather would have likely helped, light vehicle sales have now underperformed in 4 out of the last 5 months. Taken together, the U.S. economy continues to grow and theres reason to believe that inclement weather played a role in much of the lackluster data. Therefore metrics should improve. The CBs leading indicator implies betterment ahead. Transportation activity gauges are firm. Growth of retail sales/spending remains positive. However, weather doesnt affect wage growth, which has weakened. For bulls forecasting accelerating growth over the coming months, this is a red flag. The wage picture needs to improve soon. The swim trucks are on, but they could slip off. ECB chief Mario Draghis reticence to lower interest ratesxi on Thursday represents a dicey bet on the Eurozone. Losing the bet means deflation becomes ensconced, which is bad for a credit-based economy. Falling prices mean a higher real debt burden. In expectation of lower prices, consumers would begin to withhold purchases; economic growth would shrivel. The region-wide recovery continues but remains asymmetric and fragile. Consumption has waxed. In Greece, retail sales posted their first positive reading in almost 4 yearsxii . YoY growth of French household consumption is sturdier. Euro-wide, Markits retail PMI hit a 33-month highxiii . While Decembers retail sales report was indeed disappointing, it is at odds with surging confidence data (ZEWxiv , European Commissionxv , etc.). Next months result should give us more color. In manufacturing, Markits Greek PMI entered expansion territory for the first time in 53 monthsxvi . Spains just hit a 41-month highxvii . Italian industrial production expanded for the first time in more than 2 yearsxviii . Eurozone factories expanded 1.8% on a MoM basis, the highest in 3.5 yearsxix (chart shows YoY measure). The bullish activity is confirmed by Markits PMI, which hit its highest level since Q2 2011. Meanwhile, home prices increased at their fastest pace in 2 yearsxx. Despite some bearish tidbits (French unemployment hit a record highxxi , while Spains unemployment change indicator rose the most in a year), in general the recovery is taking shape. It seems Europe may have found its bathing suit just in time. Regardless of overall improvement, however, an inimical deflationary cloud is descending on the region. Credit growth remains negative. M1 (chart) and M3 money supply growth have begun to sinkxxii . Both core and headline inflation have decreased to less than half the ECBs target of just under 2%. Draghis refusal to cut rates is a bet that improvement in the region will continue and ultimately buoy falling prices. Absent consideration of emerging market turmoil and the potential fallout from looming parliamentary elections in May (in other words, in a vacuum) the territory is poised for continued growth. Whether rates are cut or QE is deployed may therefore depend on these external events. The Asian region has generated more uncertainty. In China, headwinds caused by government aims to restructure the economy are increasing. HSBCs manufacturing index skidded into contraction territory for the first time in 6 months. Fixed asset investment in December fell to its lowest level of growth on a YoY basis in over a decadexxiii . On the service front, the figures add to the gloom. HSBCs PMI fell to a 2.5-year low, a reading exacerbated by sluggish new ordersxxiv . The governments own metric slumped to a 5-year lowxxv . There are silver linings though. Global trade flows may be firming. Australian exports, the majority with a final destination to China, just notched their strongest growth rate in almost 2.5 yearsxxvi . Furthermore, German exports to China are showing signs of life. In Japan, manufacturing growth is accelerating. Normuras PMI just hit a 6+ year high. Machinery orders are increasing at their fastest clip since 2011. This result implies that investment is set to increase over the first half of the year. However, consumption is flashing red for Abenomics. Real income for workers households dangerously slumped in Q4. Confidence measures signal distress as consumption power disappears. Abe is pleading with corporations to increase base wages, which account for roughly 80% of total compensation. Negotiations have started between unions and businesses. We are entering a critical time for the Japanese economy. Overall for the region: the tide is receding, but we cant quite see the swimsuit yet. -- (References on following page) -!"#$%&#'"%()*+,-%
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http://www.bloomberg.com/news/2014-01-30/the-price-of-argentina-s-devaluation.html http://www.reuters.com/article/2014/02/03/brazil-economy-trade-idUSL2N0L810E20140203 iii http://rationalcapitalistspeculator.tumblr.com/post/75647852381/feds-lacker-says-tough-to-see-pause-intapering-ahead iv http://rationalcapitalistspeculator.tumblr.com/post/74143807578/feds-beige-book-job-market-firming-up-wsjcom v http://rationalcapitalistspeculator.tumblr.com/post/74136789521/calculated-risk-bls-4-0-million-job-openings-in vi http://rationalcapitalistspeculator.tumblr.com/post/75638461850/manufacturing-slows-sharply-in-januarysends-new vii http://rationalcapitalistspeculator.tumblr.com/post/74799219323/analysis-u-s-bankers-voice-new-optimism-asbusinesses viii http://rationalcapitalistspeculator.tumblr.com/post/75922568086/us-factory-orders-down-1-5-percent-indecember ix https://www.discover.com/company/surveys/spending_files/DSMDec13.pdf x http://rationalcapitalistspeculator.tumblr.com/post/75928534102/planned-job-cuts-in-january-up-47-challenger xi http://rationalcapitalistspeculator.tumblr.com/post/75944222225/euro-jumps-as-ecb-resists-calls-for-cut-ininterest xii http://rationalcapitalistspeculator.tumblr.com/post/75632638473/update-1-greek-retail-sales-rise-in-nov-forfirst-time xiii http://rationalcapitalistspeculator.tumblr.com/post/75927410652/eurozone-retail-sales-return-to-growth-atstart-of-2014 xiv http://rationalcapitalistspeculator.tumblr.com/post/74553158754/euro-zone-january-zew-economic-sentiment73-30 xv http://rationalcapitalistspeculator.tumblr.com/post/74554677573/euro-area-consumer-confidence-improvesmore-than xvi http://rationalcapitalistspeculator.tumblr.com/post/75637110195/markit-greece-manufacturing-pmi-pmi-forfirst-time xvii http://rationalcapitalistspeculator.tumblr.com/post/75636814336/markit-spain-manufacturing-pmi-outputsurges-to xviii http://rationalcapitalistspeculator.tumblr.com/post/74531669212/italy-nov-industrial-output-rises-more-thanforecast xix http://rationalcapitalistspeculator.tumblr.com/post/74144277936/euro-zone-sees-surprise-jump-in-industrialproduction xx http://rationalcapitalistspeculator.tumblr.com/post/74144824911/euro-zone-house-price-rise-the-fastest-in-2years xxi http://rationalcapitalistspeculator.tumblr.com/post/75229277971/french-unemployment-rate-hits-new-recordthe-local xxii http://rationalcapitalistspeculator.tumblr.com/post/75544745312/slump-in-euro-zone-money-supply-growthhighlights xxiii http://rationalcapitalistspeculator.tumblr.com/post/74552671504/chinas-urban-fixed-asset-investment-growthcools-in xxiv http://www.euronews.com/business-newswires/2336226-chinas-jan-hsbc-services-pmi-falls-to-50-point-7lowest-in-2-point-5-years/ xxv http://rationalcapitalistspeculator.tumblr.com/post/75635945038/china-non-manufactuing-pmi-for-january xxvi http://rationalcapitalistspeculator.tumblr.com/post/75926797088/australias-exports-to-china-still-firing-realtime
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