<![CDATA[Hedgehogs.net: '' related content]]> http://www.hedgehogs.net/tag/economic+theories?view=rss http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11486153/federal-reserve-chair-janet-l-yellen-at-the-the-new-normal-monetary-policy-a-research-conference-sponsored-by-the-federal-reserve-bank-of-san-francisco-san-francisco-california-march-27-2015-normalizing-monetary-policy-prospects-and-perspectives Sat, 28 Mar 2015 18:08:55 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11486153/federal-reserve-chair-janet-l-yellen-at-the-the-new-normal-monetary-policy-a-research-conference-sponsored-by-the-federal-reserve-bank-of-san-francisco-san-francisco-california-march-27-2015-normalizing-monetary-policy-prospects-and-perspectives <![CDATA[Federal Reserve Chair Janet L. Yellen, At The "The New Normal Monetary Policy," A Research Conference Sponsored By The Federal Reserve Bank Of San Francisco, San Francisco, California, March 27, 2015, Normalizing Monetary Policy: Prospects And Perspectives]]> I would like to thank President Williams for his kind introduction and the Federal Reserve Bank of San Francisco for inviting me to what promises to be a very stimulating and important conference.


http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11484011/dynamic-scoring-a-potential-super-model Sat, 28 Mar 2015 09:05:06 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11484011/dynamic-scoring-a-potential-super-model <![CDATA[Dynamic Scoring: A Potential Super Model]]> 11484011 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11483535/bank-of-england-chief-economist-flags-chance-of-interest-rate-cut Sat, 28 Mar 2015 05:46:59 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11483535/bank-of-england-chief-economist-flags-chance-of-interest-rate-cut <![CDATA[Bank of England chief economist flags chance of interest rate cut]]>

http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11482776/7-attractive-dividend-growth-stocks-with-solid-yields-and-low-price-ratios Sat, 28 Mar 2015 01:57:01 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11482776/7-attractive-dividend-growth-stocks-with-solid-yields-and-low-price-ratios <![CDATA[7 Attractive Dividend Growth Stocks With Solid Yields And Low Price Ratios]]>
This is only a content summary. Please visit our blog to read the full content - http://long-term-investments.blogspot.com
http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11482654/stocks-likely-to-drift-as-investors-await-fed-earnings Sat, 28 Mar 2015 01:38:38 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11482654/stocks-likely-to-drift-as-investors-await-fed-earnings <![CDATA[Stocks likely to drift as investors await Fed, earnings]]>
http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11478908/wonkblog-the-new-republican-tax-plan-is-just-the-bush-tax-cuts-on-steroids Fri, 13 Mar 2015 14:47:38 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11478908/wonkblog-the-new-republican-tax-plan-is-just-the-bush-tax-cuts-on-steroids <![CDATA[Wonkblog: The new Republican tax plan is just the Bush tax cuts on steroids]]>

http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11475341/audusd-elliott-wave-video Thu, 12 Mar 2015 11:51:06 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11475341/audusd-elliott-wave-video <![CDATA[AUDUSD Elliott Wave Video]]> AUDUSD is showing 7 swings down from 0.7914 high. Area between 0.7694 - 0.7655 is expected to complete 7 swings but our Elliott wave cycle studies and market correlation is suggesting that decline from 0.7914 high is likely to ...

http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11473708/2015012-inflation-dynamics-during-the-financial-crisis Sat, 07 Mar 2015 21:56:16 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11473708/2015012-inflation-dynamics-during-the-financial-crisis <![CDATA[2015-012: Inflation Dynamics During the Financial Crisis]]> 11473708 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11471544/a-simple-model Fri, 06 Mar 2015 00:24:09 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11471544/a-simple-model <![CDATA[A simple model]]> So the US economy is not, in fact, falling off a cliff...just yet.  Although durable goods orders are notoriously noisy, yesterday's solid print should assuage at least a few fears about the recent soft tone to some of the data.  That core CPI managed to beat expectations was icing on the cake, as the dollar and US yields both jumped smartly after the releases.   As Hannibal Smith used to say, "I love it when a plan comes together!"

Of course, it wasn't all pony rides and lemonade.  Weekly claims were quite a bit higher than expected, albeit in the context of seemingly interminable snowy, nasty weather for much of the country.  Still, the decline in claims seems to have stalled a bit recently; although it's probably too early to read too much into it, it nevertheless remains a development worth watching.

Every so often, Macro Man likes to take a step back and look at data in its unadulterated form- no rates of change, moving averages, or anything like that, just the level of the underlying data.  When looking at the level of durable goods orders, ex-transport, you can see the recent soft patch; put into context, it doesn't yet look particularly abnormal or worrisome.  Certainly the loss of momentum is nowhere as severe as it was in 2012.

Perceptive readers will note that durables are basically at the peak level of the last cycle, whereas the SPX is comfortably above it.  How, then, do these orders figures compare with other data?   Macro Man assembled a chart showing nominal retail sales, the ex transport orders noted above, and industrial production, scaling each series to 100 as of February 1992.  As you can see, the relative fortunes of the 3 data sets vary starkly.

As the title of the chart suggests, these three series capture the changes in the economy quite well.  Consumers have continued to spend (note that retail sales are substantially above the level of the pre-crisis peak), but not, it would appear, on goods made in the US.  This is hardly a stunning revelation, of course, but it's nice to see it demonstrated so sharply in a single chart.

This got Macro Man to thinking.   Retail sales, like the SPX, are very comfortably above pre-crisis highs, IP is marginally so, and orders are basically at the level.   What would happen if we regressed these 3 series against the SPX?  The results are set out in the chart below.

As you can see, the relationship is generally quite good, with an r-squared of .88.   Note that to some extent that should be expected, insofar as the entire time period was in-sample and your author regressed levels rather than changes.  Nevertheless, it's interesting to note that the divergence between the current level of the SPX and that suggested by sales, orders, and IP is larger than  it has ever been over the past couple of decades.

To a large degree, of course, that is a function of QE/easy monetary policy/low bond yields/low discount rates.   One would naturally expect, ex ante, that stocks should look a touch rich to exclusively growth-based indicators given that global policymakers have begged investors to move out the risk curve for more than half a decade.

Naturally, equities also benefit (and suffer) from leverage, both on a corporate and investor level.  Indeed, generally speaking the amplitude of changes in stock prices dwarfs that of changes in the underlying data, so it may well be the case that a simple linear regression is a decidedly imperfect tool.

To mitigate the impact of leverage, Macro Man ran the same regression, but on the natural log of the SPX to smooth the swings in stocks relative to the economy.  Upon obtaining model output, it was a trivial matter to reconvert the data back into SPX terms.  The results of this study are below.

This model suggests a closer fit between the current level of stocks and that implied by growth data (and a closer overall fit, with an r-squared of 0.93), though it still views equities as nearly 10% too high (when using current stock prices.)  However, "mispricings" of this magnitude are fairly ordinary; indeed, the same model suggests that stocks were undervalued by a greater amount in the run-up to the crisis.  That very fact should tell you everything you need to know about relying exclusively on growth-based indicators that take no account of financial conditions.

So what have we learned?  A very simple growth-based model suggests that US stocks should indeed be at all time highs, albeit at levels lower than those currently prevailing.  Introducing a liquidity term would indubitably close that perceived valuation gap; indeed, in Macro Man's own, more robust equity model, liquidity factors explain almost all of the ex ante expected return of the SPX.

As long as liquidity remains ample, growth doesn't necessarily need to roar to justify current if not higher prices.   If and when the tap gets closed off, on the other hand, simple indicators like these can provide a rough and ready guide to how deep the correction might be if we were to revert to using growth rather than easy financial conditions as the primary valuation metric.

http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11470516/yellen-in-june-2009-sluggish-recovery-low-inflation-for-few-years Thu, 05 Mar 2015 08:23:46 +0000 http://www.hedgehogs.net/pg/newsfeeds/hhwebadmin/item/11470516/yellen-in-june-2009-sluggish-recovery-low-inflation-for-few-years <![CDATA[Yellen in June 2009: Sluggish Recovery, Low inflation for "few years"]]> The Federal Reserve released the transcripts for the 2009 FOMC meetings today. Here is SF Fed President Janet Yellen in June 2009:
Thank you, Mr. Chairman. At our meeting in late April, we had begun to see hopeful signs of impending economic recovery, and subsequent economic and financial developments have strengthened the view that the economy is bottoming out. Even so, the outlook over the next several years remains disturbing. My modal forecast shows economic growth resuming next quarter, but I expect the recovery to be quite gradual. The output and employment gaps are, at a minimum, quite large, so it will take a long time to regain full employment under current monetary and fiscal policy settings. Although downside risks have diminished, I remain concerned that the recovery is still fragile.
And, of course, labor markets continue to deteriorate badly. It’s a sign of how bad things really are that near euphoria broke out with the announcement of 345,000 nonfarm jobs lost in May. The unemployment rate is soaring month by month, and, even worse, it appears to understate the true extent of the deterioration, given the unusually high incidence of permanent, as opposed to temporary, layoffs, and the unprecedented increase in involuntary part-time work....

My forecasts for output and employment are similar to the Greenbook’s, so I won’t go into the details. I do want to emphasize that I anticipate a rather sluggish recovery, not the rapid V-shaped recovery we have frequently seen following deep recessions in the past. The process of balance sheet repair that households and financial institutions are undergoing will result in subdued spending for an extended period, and monetary policies here and abroad are not able to play as big a role as usual in promoting recovery because of the constraint of the zero lower bound on short-term interest rates.

... [E]ven under the typical recovery simulation, which has much stronger growth than in the baseline, the unemployment rate remains well above the 5 percent NAIRU by the end of 2011, and inflation hovers around 1 percent. This outcome reflects the large unemployment and GDP gaps estimated for the first quarter. ...

So, to conclude, if the recovery is as slow as the Greenbook and I expect, it will take quite a number of years to get back to potential output. As a result, I expect core inflation to drift lower over the next few years, falling below the 2 percent rate that seems best to me.
Note that Yellen correctly forecast that the recovery was starting (this was June 2009), but that the recovery would be sluggish - not V-shaped - because of the need for "balance sheet repair" (I made the same argument in mid-2009), and that inflation would be low for some time. Many analysts were forecasting a strong recovery (ignoring the reasons for the recessions) and high inflation.