Living in a risk-on risk-off world

US GDP came out yesterday at 3.5% for the third quarter and investors ran to find risky assets. The last two weeks before GDP saw negative stock markets and tepid economic news. Risk-off was the trade. There is no clear intermediate-term view for the markets. I say intermediate because there is a the general belief that for the longer-term equities should move higher in a recovery, bonds should fall and the dollar should be in a downtrend as long as the Fed QE-type program is in place. Investors are looking for a confirmation in an news immediacy that they should invest. If they do not have the right conditions, then we move immediately back to safety.

This switching behavior has been the market characterization for the last nine months. We have an underlying trend which is stock up, commodities generally up, bonds flat, and dollar down. But don't get too comfortable with this environment because there will be short-term reversals which clear out some of the opportunistic traders and provides continued risk. We are seeing this risk come back in the form of higher volatility.

This is the environment we are living in and there seems like there is little tat has changed this behavior.

Ceres and short-sightedness

An interesting piece of trivia

"The statue of Ceres on top of the Chicago Board of Trade Building has no face. The powers that be at the CBOT at the time had determined that no building would ever be taller than the CBOT building, so it was not necessary to put a face on Ceres. No one would ever be close enough to see her face, these short-sighted men thought."

from John Lothian

Hayek on freedom

From economist F.A. Hayek on the nature of economic freedom.

"Without economic freedom, political and individual freedoms cannot possibly exist."

"Economic freedom is a necessary condition to freedom in general."

China reserve diverisification story but real issue is yuan appreciation

More talk from China on reserve diversification.

"...A newspaper published under the People’s Bank of China carried an analysis piece by a mid-ranking central bank official that said, in part, that China should increase its holdings of euro and yen in its now dollar-heavy foreign-exchange reserves."

We have heard this before and the story was not new news, but like a twig breaking before nervous herd of zebras, the pack will move immediately and sort out the details later. This makes for an unsettled market.

The main story from China is not dollar reserves but the need for yuan appreciation. It has moved in lock-step with the dollar and has made China goods cheaper around the world. This is driving the growth in China except it is at the expense of the rest of the world. If China sells more goods away from US, then it will be natural that they will want to further diversify reserves. The global imbalance story is still front and center.

Gentlemen and bonds -- too much of a good thing

“Gentlemen prefer bonds.”
Andrew Mellon

Treasury plans to sell $123 billion in one week.

$44 billion in 2-years
$41 billion in 5-years
$31 billion in 7-years
$8 billion in TIPS

Unfortunately, too much of a good thing may have an effect on price. Nevertheless, economic news trumps supply issues and the soft economy numbers were more relevant to investors than supply. What is very unusual is the strong bid to cover of these auctions. The 2-year bid to cover was over 3.5 which sends a clear signal that there is a strong demand for these securities. If investors are willing to hold the risk-free assets in a rising economy it suggest that they re not big believers in the economic recovery.

Romer says stimulus package peaking

“Most analysts predict that the fiscal stimulus will have its greatest impact on growth in the second and third quarters of 2009,” Christina Romer, who chairs the President’s Council of Economic Advisers, said in testimony prepared for Congress. “By mid-2010, fiscal stimulus will likely be contributing little to growth.”

So what are we going to do next year? If this is the case, then much of the current recovery is associated with this government spending surge. Like other programs, once the foot is taken off the accelerator there will be a slowdown. Thin of the clunkers program. This gives support for the double dip scenario.

Gold has downside protection

As James Grant eloquently put it: “Gold is a speculation. But it is a speculation on a certainty: the debasement of the currency.” Gold stocks, too, are a speculation. But they are a speculation on an inevitably higher gold price." from Daily Reckoning.

Gold is off the highs of 1050+ but there is little to suggest that we are in store for a major reversal. Why do I feel there is some downside protection? There will be a natural need for gold by central banks in the emerging markets and the Gulf States who are looking to hold something other than dollars. Gold reserves are very low in these countries relative to the G10. We think that any dips in price will be an opportunity for adding to reserve positions relative to other currencies.

EM trying to curtail appreciation - tough job

The Brazilian Bovespa index lost close to 3% in its first full trading session after the introduction of the 2% tax on portfolio inflows of equities and fixed income. The BRL depreciated from 1.71 to 1.75. A tax on inflows should take some of the speculative edge off of the currency market, but it is unlikely that this will be enough to reverse the currency direction. The cost will be borne by those that need capital. This may affect growth in the longer-run.

Watch for other countries to try similar policies. Mercantilist policies will not take the form of trade product protectionism but through the manipulation of the capital account.

Flexible work plans save employment in Europe

Europe has seen strong declines in GDP this year but there has not been the same increase in unemployment as in the US. So what are they doing differently? EU countries have all increased fiscal stimulus albeit not as much as would have been liked by the US. What they have been aggressive at implementing have been short-time work programs.

Workers can be kept on for reduced hours with the government providing support for the business as well as the workers. This allows for flexible wages on a temporary basis as cuts the cost for employers to hold onto workers. For example, Germany has enhanced its short-time program during this recession to provide more business and worker relief.

Key features of the German Kurzarbeitergeld programme from RBS -

To claim short-time benefit, employers have to present an application to the local Employment Agency proving that business conditions require a minimum 10% wage reduction, for any number of employees. Once allowances are granted the employment agency will reimburse 60% of the wage cut to the companies (67% for employee with children). The government will also compensate for some or all of the employers’’ social insurance contributions. The employees interested will not be made redundant but instead will work for a reduced number of hours (there is a lot of flexibility in the way effective numbers of hours worked can be modulated at the firm level).

This program could have worked in the US to protect some of the downside from the recession. Of course, there has been voluntary wage reductions and part-time work by many firms, but there is no relief for the business from the the taxes. This form of government business partnership could be an effective tool for many countries. The unemployment levels are distorted when comparisons are made between the US and the EU, but these types of policies can show that basics labor market principles can be applied in innovative ways to help an economy.

British 50-year bond sets record - what are bond buyers thinking?

UK raised 7 billion pounds for a 50-year bond while running extreme deficits and quantitative easing. Am I missing something? The yield is 2 bps less than the 2055 issue. The market was expected that the issuance would be between 3-5 billion ponds not the $11.6 billion raised. The bond will have a 4% coupon.

So much for inflation and deficit uncertainty. You would expect that an inflation prone monetary policy focused on easing and large fiscal deficits, investors would avoid this type of bond, yet the syndicated deal saw strong interest.

Bloomberg has noted that Ireland and Finland issued 15-year bonds for the first time and there is more interest in longer-dated issuance. While this is great for the issuer, it is out of the comfort zone of fixed income buyers. A simple explanation is that there is a strong shift away from equities and investors want the long duration paper as a substitute. My view is that investors will not be rewarded for this risk taking.

The link between employment, recession, and Fed tightening is not clear

We would like to see improvement in employment but it is highly variable how long it will take before we see job creation. It could start to happen at the end of the year or the lag could be much longer. There will be an even grater delay in the tightening of Fed policy.

From macroblog.typepad.com: Economic troughs, changes in the employment rate and Fed policy by John Robertson

Historical lag between end of recession, unemployment rate peak, and beginning of funds rate tightening cycle

End of Recession	Unempl. rate peak	Beginning of funds rate tightening cycle	Months from end of recession to unempl. peak	Months from unempl. peak to beginning of funds rate tightening cycle
Nov 2001	Jun 2003	Jul 2004	19	13
Mar 1991	Jun 1992	Feb 1994	15	20
Nov 1982	Dec 1982	Jun 1983	1	6
(Jul 1980)
Mar 1975	May 1975	May 1976	2	12
Nov 1970	Aug 1971*	Mar 1972	9	7

*Following the 1970 recession, the unemployment rate was 6.1 in December 1970 and again in August 1971. If the December 1970 peak is used, months from end of recession to unemployment peak is 1 and months from unemployment peak to beginning of funds rate tightening cycle is 15.
Source: Bureau of Labor Statistics, National Bureau of Economic Research, and Federal Reserve Board

The ongoing problem of emerging market currencies

Brazilian central bank president Henrique Meirelles

Central banks need to “alert investors and markets of the risks of exaggeration in the formation of prices, which can lead to future corrections and create unnecessary volatility,” Meirelles said in an interview late yesterday in New York.

We should start to see more intervention from emerging market currencies. The dollar decline has been just as strong in the broad dollar index as the major index o the cost of goods has gone up for many of these exports. Central banks will try and limit the increase to protect their trade driven recoveries.

Intervention will be a major theme as we close the year. The global imbalance problem will not go away.

Let's not forget that this is a balance sheet recession

Everyone wants to compare this recovery to past recoveries which have followed V-shaped recoveries. Fast in and fast out is the new buzz, yet we have to remember that the key issue that differentials this recession is the horrible balance sheet of consumers. We need to see improvement in this area to create an environment for stronger growth. The increase in the stock market certainty is providing gains in wealth but there are broader measures that need focus.

One simple measure is the ratio of liquidity assets to liabilities. This has started to improved but the numbers have been stretched through a strong decline from 2002-2007. When consumers were using their homes a piggy banks, they let the cash balances fall relative to liabilities. As wealth was added, the need for cash declined. At lower wealth levels, cash balances have to increase.

Consumer credit is still in decline and still shrinking. This is good for the repair of the balance sheet, but it also means that consumers are not going out and buying goods. The decline in consumer credit is stronger than the decline in retail sales, so households are trying to repair their balance sheets. This can be a good longer-term sign.

Household liabilities also have fallen but this is not just due to the paying down balances. Foreclosures and bankruptcies are also reducing the liabilities.

Corporations are actually behaving like consumers. They are all repairing their balance sheet which explains why corporate profits have not fallen as much as initially expected and why there has been little hiring. Full time workers are a luxury. Corporation have also borrowed close to $700 billion this year to restructure and hold higher cash. They do not want to be caught in liquidity crunch.

Focus on the balance sheet repair if you want to get a good idea of the potential for a strong V recovery.

Risk-wise investing thougths

The new book The Risk-wise Investor by Michael Carpenter provides some very interesting thoughts on risk.

Greater knowledge of a danger creates greater safety." B Mandelbrot

"The degree to which an outcome varies from expectations." Peter Oppenheimer

"3/4 of the mistakes a man makes are made because he does not really know the things he thinks he knows." James Bryce

"Expect the best, plan for the worst, and prepared to be surprised." Dennis Waitley

"Before a problem can be solved, it must be clearly stated and defined." William Feather

Mandelbrot discusses three types of uncertainty. There is mild, wild, and slow uncertainty. Mild uncertainty is the measurable. Wild uncertainty is the same as what Taleb describes as black swan events. Risk that can not be measured. Slow uncertainty is the transition state between the two extremes.

Risk can be viewed as a:

Hazard - What could be a potential harm?
Probability - What is the chance of an event?
Consequences What is the result from my action?
Potential adversity or threat - What is the risk of certain behavior or an action?

The panic was a monetary policy problem

Getting off Track: How Government Action and Intervention Caused, Prolonged and Worsened the Financial Crisis by John Taylor. This is a short book where the title tells us everything about what the author is thinking. There is no holding back from the economist who gave us the Taylor Rule. His strong views provides a serious consideration for those who are studying the Great Panic.

Taylor uses his simple rule as a measure of whether monetary policy was tight or loose during the end of the Greenspan era when he lowered rates to 1% to stop what was believed to be a potential deflation spiral. Taylor states that the Fed got it wrong. Lowering rates lead to a n asset price bubble in the housing market which created the panic of 2007-2008. If there was no boom, there would have been no bust. No cheap money and there would have not been a inflation of housing prices which caused excess speculation. The excessively low interest rates was the match that set the speculative fire. Interestingly, there are other researchers who have shown that the Taylor rule would have lowered interest rates. Nevertheless, the international evidence between loose monetary policy and housing price increases is compelling.

He is very clear with showing that this is not just US phenomena. Other countries which had loose credit also had housing booms. There was nothing unique about the US experience. As housing prices started their ascent, foreclosures and delinquencies declines. As the price of homes started to fall, there was an increase in housing credit problems. Taylor is a macroeconomist so he stays focused on the interest rate issue and does not discuss the regulatory problems which he would describe as secondary. Other would argue that regulation may be more important than monetary policy. We cannot test that proposition and we know that there was a regulatory framework in place during the housing run up.

A second major theme was that the problem was exacerbated because the Fed confused a liquidity crisis with counter-party risk. The panic saw an increase in LIBOR versus OIS spreads. This was counter-party risk among banks and not a lack of liquidity. The Fed flooded the market with liquidity but did not focus on the credit risk component. Additionally, the Treasury made things worse through the announcement of the TARP program. Spreads got wider not because the government asked for the money but because there was not a clear plan on how the money would be used. This created more uncertainty. On both these courts, the government may have made the problem worse. With hindsight this seem to a good argument, but during the crisis the easing of monetary policy seemed like the best policy.

The Fed and Treasury may have down well during a number of other crisis but there is a lack of clarity on what should be the correct policies during this "Mission Impossible." Now that the crisis portion of the Great Panic is over, we have to think through the correct longer-term policies.

Taylor discuss the solving of high inflation problem. Volcker as able to break the back of inflation and the Greenspan allowed the great Moderation to occur. Policy-makers were able to solve many of the emerging market crisis albeit the effected countries may dispute this conclusion. Taylor highlights the key crisis which were solved:
Tequila contagion
(Mexico, '94-'95, Argentina '95-'96),
the Asian contagion
(Thailand '97-'98, Indonesia '97-'98, Malaysia '97-'98, Korea, '97-'98)
Russian contagion
(Russia'98, Brazil '98-'02, Romania '98-'99, Ecuador '98-'99, Argentina '99-'01)
The ending
(Turkey 2000-2001; Uruguay 2002)

The final mission impossible is coordination of monetary policy around the globe. The Fed affects other central banks. It would have been good for Taylor to expand on this issue since this is our current monetary problem.

There is a lot packed into this book and will give the reader strong opinions on complex issues. Because they are coming from a leading macroeconomist, these are ides worth debating.

Bernanke's Fed as told by Ethan Harris

Ben Bernanke's Fed:The Federal Reserve After Greenspan by Ethan Harris is a very informative book on the mind and behavior of Ben Bernanke. It is in simple prose from a strong business economist. Even the complex issues of monetary policy are clearly describe for any business reader.

Harris spends time setting the stage through a discussion of macroeconomics and how the Fed works with a focus on the financial accelerator model which was developed by Bernanke. The channels of moentary policy are especially critical for understanding the current crisis.

He explains the politics of the Fed. The Fed tries to protect its independence at almost all costs. This has meant a lack of clarity on what it is doing to the economy through an approach of constructive ambiguity.

Harris does a good job of describing the ambiguity of policy that is desired by central bankers to remain independent and have flexibility with their policies. While Bernanke has made effort to reduce this uncertainty, he sometimes still falls into the camp of trying to be obstuse. But there is a long history of this behavior.

Asked for his reasons for his decisions he replied," Reasons, Mr Chairman? I do not give reasons. I have instincts" Montague Norman governor of the Bank of England before WWII.

Mervyn King once asked Pal Volcker if he had advice for a new central bankers. His answer was one word, "mystique."

After questioning Volcker at a hearing in 1980, one congressman remarked "You would make an excellent prisoner of war because you would not tell the enemy anything."

Former Fed Governor Larry Meyer says, "reading the Chairman's speeches and testimony was a bit like reading the children's book Where's Waldo?" He also said "One of my most prized possessions is my Greenspan decoder ring."

"If I seem unduly clear to you, you must have misunderstood what I said."
"I have learnt to mumble with great incoherence."
"I spend a substantial amount of my time endeavoring to fend off questions and worry terribly that I might end p being too clear".
"I'm trying to think of a way to answer that question by putting more words into fewer ideas than I usually do.
-Alan Greenspan.

However, the Fed has taken measurable steps to provide transparency despite all of the jokes, including:
Nov, 1993 - releasing transcripts of FOMC meetings with 5-year lag
Feb, 1994 - announcing policy changes
May, 1999 - reveal policy bias
Feb, 2000 - indicate whether growth or inflation is greater risk
Mar, 2002 - add vote to directive
May, 2003 - separate up/down risk for growth and inflation
Aug, 2003 - forward-looking language
Feb 2004- release minutes before next FOMC meeting

Bernanke has had the difficult job of following Greenspan even with the more tarnished image that currently paints the former Chairman; nevertheless, it would be a mistake to believe that Bernanke is the same person. There are four major policy objectives of Bernanke. All of these beliefs have been influenced by his monetary research. First, Bernanke is interested in better communication and moving toward inflation targeting. Bernanke may be one of the leading researchers on the topic of inflation targeting. Second, Bernanke has been greatly influenced by the behavior of the Fed during the Great depression and the behavior of the BOJ during its lost decade. Monetary policy should be used aggressively when needed. Third, a greater reliance on statistical modeling will better drive policy decisions. Fourth, a risk management approach during crises will solve problems with strong action.

Bernanke is a strong proponent of inflation targeting. That view still applies even under the current environment when prices are falling. Policy steps should be used to get inflation higher. Nonetheless, the Fed has a dual goals so it has been more difficult to focus solely on price inflation. Hence, the language of the Fed now includes OLIR, the optimal long-range inflation rate and MCIR, the Mandate-consistent inflation rate. These targets will be consistent with NAIRU, the non-accelerating inflation rate of unemployment. Clearly, these targets are consistent with an inflation target even if they are not called by that name.

Bernanke has been a keen researcher of the Depression. His recommendation to Japan on what should be done in a depression earned him the name of Helicopter Ben. In short language, Bernanke is not going to allow a depression on his wacth becasue of too tight monetary policy. His policy appoach to deflation is very clear. Push rates to zero. Lower long-rates through quantitative easing. Push down private rates through purchases in the market. Intervene in currency markets to weaken the dollar. Coordinate fiscal and monetary policy. Sounds like he is following the script he recommended to Japan pretty closely.


One of the key differences between Bernanke and Trichet at the ECB is the potential response to asset bubbles. Because it is difficult to identify and pop bubbles, Bernanke would prefer to act in a risk management or defensive role. The current question will be the role of the Fed as a regulator who has responsibility for systemic risk and potentially stopping bubbles before they occur.

So how has Bernanke done at the helm since Feb 2006? We can clearly say that he has stayed consistent with his research findings and principles from his academic days. He has been more communicative. He has been aggressive at using monetary policy. He has been effective at using staff to get different opinions and he has moved up the curve with regulatory issues. Did he make all of the right choices and communicated his intentions perfectly? No, but he has done better than what those who thought he would be a weak academic chairman. This opinion is coming from a leading business economist.

Should I be worried about insider trading?

Most recent report from Insider Score states that insiders have purchases approximately $410 mm while selling $7.4 billion. This means that the buy to sell ratio is 1 to 18. The P/E doe the US market is moving to the upside especially relative to where it should be at this point in the cycle. Should we be cautious or expect a Zarnowitz V-shaped recovery? I am still in the conservative camp.

The sobering debt numbers

But for all the talk from the Obama administration about the need to exert fiscal discipline—the president's 10-year federal budget is subtitled "A New Era of Responsibility: Renewing America's Promise"—the projected budget numbers anticipate a permanent pattern of deficit spending and vastly higher levels of outstanding federal debt.

By the end of 2019, according to the administration's budget numbers, our federal debt will reach $23.3 trillion—as compared to $11.9 trillion today. To put it in perspective: U.S. federal debt was equal to 61.4% of GDP in 1999; it grew to 70.2% of GDP in 2008 (under the Bush administration); it will climb to an estimated 90.4% this year and touch the 100% mark in 2011, after which the projected federal debt will continue to equal or exceed our nation's entire annual economic output through 2019.

In the European Union, countries wishing to adopt the euro must first limit government debt to 60% of GDP. It's the reference criterion for demonstrating "soundness and sustainability of public finances."

WSJ editorial by Judy Shelton


The link between the deficits and the value of the dollar and interest rates is not clear but the markets are spooked by the large numbers. The correlation is not high so it i no clear how we should behave while we wait for this crisis to come to a head.

What is the objective of QE?

FT Alphaville has an interesting story about a speech from Charlie Bean, the BOE deputy governor for monetary policy on QE. Bean focuses on the impact of asset purchases for QE in the private sector to boost asset prices. This is different then the traditional view of QE which is supposed to be through the banking channel.

Bean argues, contrary to earlier views, that by purchasing assets from non-banks, there will be a increase in asset prices which will be good for the overall allocation of capital. If financial assets, bonds increase, rates will decline and the cost of borrowing will also decrease. (Sounds like the Fed would like to do in the MBS market.) This is different than the conventional wisdom.

This will also be a key sticking point on what may happen with QE easing in the future. If the purchases are successful at raising prices what will happen when the policy changes. there should be a price drop which will have the effect of trashing the bond market. What will the Treasury think of their fiends at the central bank when that happens?

What happens if the output gap is wrong?

One of the key foundation for the current monetary easing in the US is that there will be persistent deflation risks because we have a large output gap. Chairman Bernanke is a strong proponent of this view, but there are others who are arguing hat the gap is much smaller. hence, there is a risk of higher inflation if growth starts to pick-up.

From a speach by St Louis Fed president James Bullard.

First, the key is the QE program.

On current monetary policy, “the key issue is how to think about the asset purchase program,” Bullard said. “Liquidity programs are shrinking, but the asset purchase program is only partially complete.”

Second, the output gap issue. The link is weaker than we think.

“I am concerned about a popular narrative in use today—the narrative being that the output gap must be large since the recession is so severe,” he said. “And so, any medium-term inflation threat is negligible, even in the face of extraordinarily accommodative monetary policy. I think this narrative overplays the output gap story.”

He added that measuring the gap is very difficult, both theoretically and practically. He cited research that shows much of the inflationary run-up in the 1970s can be attributed to a misreading of the output gap at the time.

“Even if economists were to accept a particular measure, the empirical relationship with inflation is not robust,” he said. In addition, traditional output gap measures do not account for the concept of bubbles.

“It has been popular to describe recent events as a collapse of a bubble in housing. A look at the housing data makes a convincing case,” Bullard said. “But when it comes to calculating traditional output gaps, there is no notion of a bubble. If part or most of the fall in output was a collapsed bubble, then today’s output gap would be smaller than it appears.” This would mean that inflation risks in the medium term are higher than otherwise thought.

The inflation may be a greater issue than expected over the medium term.

Leading indicators all pointing up

OECD leading indicators have turned up to create synchronous global business cycle.

Table from CIMB-GK and OECD CLI index. he leading indicators are showing steep increase especially for EU area. The US is the laggard relative to the G3 and emerging markets.

Duration of OECD Leading Indicator cycles
Duration (months)	Period
Trough to peak	29	Sep 1970 to Feb 1973
Peak to trough	23	Feb 1973 to Jan 1975
Trough to peak	46	Jan 1975 to Nov 1978
Peak to trough	44	Nov 1978 to Jul 1982
Trough to peak	17	Jul 1982 to Dec 1983
Peak to trough	24	Dec 1983 to Dec 1985
Trough to peak	35	Dec 1985 to Nov 1988
Peak to trough	48	Nov 1988 to Nov 1992
Trough to peak	22	Nov 1992 to Sep 1994
Peak to trough	12	Sep 1994 to Sep 1995
Trough to peak	23	Sep 1995 to Aug 1997
Peak to trough	14	Aug 1997 to Oct 1998
Trough to peak	16	Oct 1998 to Feb 2000
Peak to trough	19	Feb 2000 to Sep 2001
Trough to peak	8	Sep 2001 to May 2002
Peak to trough	10	May 2002 to Mar 2003
Trough to peak	12	Mar 2003 to Mar 2004
Peak to trough	15	Mar 2004 to Jun 2005
Trough to peak	23	Jun 2005 to May 2007
Peak to trough	21	May 2007 to Feb 2009
Trough to peak	6	Mar 2009 to Aug 2009
Averages since 1970
Peak to trough	23
Trough to peak	23

Gold from different perspectives

Hat tip to mineweb website for a story on the price of gold in other currencies. The dollar price is rising but we are not near the highs for producing and consuming countries.


The first graph shows the value of gold in dollars (red) , euros (grey), and yen (green). Clearly, the dollar price has exploded relative to euro and yen. The second graph shows prices in the currency of large buyers Turkish lira (red), Rupees (grey), and Riyal (green). We are not at the highs in price. The increases tell us why gold demand is down with some consumers.

The third graph shows the value in producing country currencies. Aus dollar is in (red), Canadian dollar (grey) and Rand in green. The producers have seen falling gold prices not near the record highs in dollars.

Dollar comments enhance downward spiral

“The dollar had been strong because the U.S. was a haven

in the storm, and now that the storm is abating, who needs the

dollar?” said Edmund Phelps, who won the 2006 Nobel Prize in

economics and teaches at Columbia University in New York.

“People got exasperated with the tiny returns on safe assets.”

"The currency keeps getting weaker; jobs keep moving overseas because that's where the capital is. Money wants to go to where it can get a steady return in real money, not in funny money. And in many ways the dollar is becoming the funny money currency for the world and that's not good for our competitiveness." David Malpass formr Treasury official.

This sums up nicely the current dollar environment.

Graphical displays of data - Visualization helps

Good creation of visual data is a skill. It takes a creative and statistical mind to see how to represent data, but it is a vital skill when there are large complex datasets. A good graph can tell a better story than any column of numbers or written paragraph. A good graph can compact information but also spotlight the most important issues within a dataset.

Howard Wainer's Graphic Discovery: A Trout in the Milk and other Visual Adventures discusses the development of graphical representations and why they are so relevant. This work is similar to the path-breaking books by Ed Tufte.

Wainer focuses on the father of graphical displays of data William Playfair. A true character (con artist) of the 19th century, Playfair worked hard to find ways of representing data in unique format so as to tell a story. Below are some examples from his book. These are just some of the stories that Wainer uses to tell the reader about data displays.

This first graph displays wheat and wages of workers. Notice how he uses two scales to tell the story.

Here we have a description of the balance of payments. Instead of two lines he has filled an area to more dramatically tell the story.

Our the third example describes the national debt with key wars marked as expenses.Think what the US deficit would look like if did a similar graph.

We need to work on our display of data to tell better stories about the complexity of the global macro environment.

Recession dating - it was over this summer

A recent article in voxeu.org by Roger Farmer discusses recession dating between the stock market and unemployment rate. The model is very simple. The turn round in the stock market precedes the trough in the recession by approximately four months. The peak in unemployment growth is coincident with the trough in the business cycle.

Looking at the combination of thee two factors, Farmer suggests that the economy bottomed in May. Others have called the trough in July. W may say with some confidence that the recession has bottomed bu that is a far cry from saying we will have a robust recovery. The slow turn around in unemployment growth gives pause that this may be a jobless recovery.

Table 1. Recession dating and changes of direction in stock market
and unemployment growth

Recession	Months that the trough in stock market growth precedes recession’s end	Months that the peak in unemployment growth precedes recession’s end
August 1929 – March 1933	9	-
May 1937 – June 1938	3	-
February 1945 – October 1945	3	-
November 1948 – October 1949	4	0
July 1953 – May 1954	5	0
August 1957 – April 1958	4	0
April 1960 – February 1961	4	0
December 1969 – November 1970	6	-1
November 1973 – March 1975	5	-2
January 1980 – July 1980	2	-1
July 1981 – November 1982	5	+4
July 1990 – March 1991	5	-3
March 2001 – November 2001	2	-1
December 2007 –	-	-
Mean	4.4	-0.5
Standard deviation	1.8	1.9

Raymond James shows October woes

“OCTOBERED?!”
WORST WIPEOUTS PLUNGE PERCENTAGE
October 1987 -23.22%
October 1929 -20.36%
October 1907 -14.80%
October 2008 -14.06%
October 1932 -13.50%
October 1917 -10.74%
October 1937 -10.61%
October 1930 -10.52%

So what is with October that makes it such a bad of the year? The onset of winter? Lack of sunlight? Who knows but be careful.

If the US is one of many, why should we get seignorage?

Important progress in managing imbalances can be made by reducing the reserve currency country's 'privilege' to run external deficits in order to provide international liquidity," UN undersecretary-general for economic and social affairs, Sha Zukang, said.

Speaking at the annual meetings of the International Monetary Fund and World Bank in Istanbul, he said: "It is timely to emphasize that such a system also creates a more equitable method of sharing the seigniorage derived from providing global liquidity."

He said: "Greater use of a truly global reserve currency, such as the IMF's special drawing rights (SDRs), enables the seigniorage gained to be deployed for development purposes," he said.

If the US believes in multi-lateralism with the UN, the natural result will be a demand for more haring on the international finance front. The dispersion of wealth across the world is leading to more calls for a dispersion of power and the special benefits of a reserve currency.