Posted by: Tom Keene on December 15, 2010
Investment Before Jobs
“The interaction between gross investment spending and spare capacity is not straightforward.” Kevin Daly, Goldman Sachs International
Okay. If the interaction is not there, then what? It is a mystery and has been so for a good decade. Daly measures out combined US, Eurozone, Japan and UK consumption at 61% and business fixed investment at 12%. But, and it is a critical but, the volatility of investment suggests 40% of the recession was investment reduction while consumption was a small 2%.
GDP$FIXI INDEX GPL Y ROLL: Here is Nominal Fixed Investment showing the unprecedented return to 1999/2000. What’s more amazing is it’s plotted semi-log (slope matters) with the 1990s mirroring the 1960s. We’ve gone flat. An eyeballed extrapolation of the good times suggests we are about $1.1 trillion light on investment. It’s a Danny O’Keefe moment.
.BFIGDP INDEX GP Q ROLL: The same as above but compared to nominal GDP. The regression is 1950ish to the advent of the investment collapse. Summary: Fixed Invesment to GDP has evaporated, barely turned and is about 4-deviations off trend. We struggle for job formation avoiding the Econ 101 reality that investment leads to jobs.
In the December rhetorical quiet, Europe gently “widens” as stress is seen from Belgium to Spain. Here is one spread that suggests markets are ahead of the Brussels.
.SPGER10 INDEX GP W ROLL: The Spanish 10-year widens, again, compared to the German equivalent. The real yield in Madrid is roughly 5.45% minus 2.3% = a 3ish% real rate. Not good.
Finally, here is my fave European chart. It’s trade-weighted Swiss (CHF), that has exploded: strong Swiss franc versus a set of trading partners.
BPFXCHFS INDEX GP M ROLL: Here is the BNP Paribas T-W Swiss franc. From the contained, yet strengthening of 1997 to 2007. The currency has exploded 8+ deviations.
Surplus with China
Surprise! Switzerland has a trade surplus with China (Finland, Ireland and Sweden, as well.) Too often, market participants and the media focus on interest rates and simplistic one-off justifications for a trend (think, deposit flows from fearful Europeans to Switzerland). Perhaps, not.
Here is Philipp Hildebrand, Chairman of the Governing Board of the Swiss National Bank in a November 23 speech:
“Aside from Switzerland’s classic exports - such as watches, cheese and chocolate - newcomers include Nespresso coffee capsules and Red Bull drinks.”