gorgeous and hip in Costa Mesa

probably my favorite house from the Newport Harbor Home Tour this year...

the living room

black glass octopus chandelier

a stunning red chandelier over the kitchen island

my favorite room, the dining room

another fun chandelier

the marble dining room table is amazing!

guest room

a collection of beads

hallway gallery

another shot of the guest room, styled a bit differently

master bath

photos via  Pal+Smith and Newport Harbor Home Tour

ciao! Fabiana

Deflation is a no-show thanks to easy money and rising wealth

We now have the CPI and the Personal Consumption Deflator for April, and they show that inflation is running comfortably in the middle to the upper half of the Fed's desired range. As evidence, I offer the following charts that compare the year over year and 6-mo. annualized rates of inflation according to these two measures, using both the total and the core (ex-food and energy) versions of each:

In the 12 months ended April, the CPI rose 1.96%, and the core CPI rose 1.83%.

In the 6 months ended April, the CPI rose at an annualized rate of 2.13% and the core CPI rose at an annualized rate of 1.94%. This suggests that inflation pressures have increased a bit of late. Which of course runs counter to the prevailing belief that weak economic growth—such as we had in the first quarter—suppresses inflation. This further suggests that the Fed's model of inflation, which is grounded in the belief that a lot of excess capacity (e.g., a relatively high rate of unemployment and a relatively large "output gap") effectively inoculates the economy against rising inflation, may be faulty. I side with the monetarists on this: inflation comes from an excess of money.

Some years ago, the Boskin Commission found that the CPI tended to overstate inflation by as much as 1% a year. The BLS has since tinkered with and improved their methods, and more recently the CPI has tended to register about one-half of a percentage point higher than the more robust and generally more accurate Personal Consumption Deflator. In line with this, we see that the PCE deflator rose 1.62% in the 12 months ended April, and the core PCE deflator rose 1.42%, both being about half a point lower than their CPI counterparts.

Over the past six months, the PCE deflator has risen at an annualized rate of 1.59%, while the core PCE deflator rose at an annualized rate of 1.46%. 

I like to round things off and generalize, so I conclude from the eight measures of inflation shown above that inflation is running somewhere in the range of 1.5% to 2.0%, and that it has picked up slightly in recent months. This is not alarming, but it does not lend much support to the Fed's aggressively accommodative monetary policy stance. Why do they have the pedal to the metal when inflation is running comfortably in the middle to upper half of their target range? 

At the very least we can conclude that deflation is nowhere to be found in the official inflation stats. Whereas some of them were flirting with sub-1% inflation last year, that is no longer the case.

The above chart is arguably the best measure of the dollar's value against other currencies. As it shows, the dollar currently is relatively weak against most of the world's currencies: about 12% below its long-term average. A weak dollar is symptomatic of an oversupply of dollars relative to the demand for dollars, and that is the equivalent to a strong anti-deflation tonic. You don't get deflation when there is a lot of extra money floating around. You're more likely to see signs of positive and/or rising inflation with a weak currency.

Steve Ballmer's shockingly large bid of $2 billion for the Clippers suggests that there is a lot of money out there chasing relatively few sports assets. Could this be a harbinger of a generalized increase in prices in the future? I wouldn't be surprised if it proves to be. Financial markets have done exceedingly well over the past 5 years. Not only is there a relative abundance of dollars, there is now a relative abundance of savings and wealth.

Despite near-zero interest rates, U.S. banks have taken in $3.3 trillion in savings deposits since late 2008. This is symptomatic of strong demand for the relative safety of money and money equivalents. Strong money demand has effectively neutralized the Fed's easy money stance to date. Put another way, the Fed has engaged in QE in order to satisfy the world's seemingly insatiable demand for money. 

As I've explained before, strong deposit inflows have provided banks the wherewithal to purchase the $2.9 trillion of bonds that they then sold to the Fed as part of its Quantitative Easing efforts. To date, it would appear that the public is content to hold $7.3 trillion in bank savings deposits yielding almost nothing, and the banks are content to sit on $2.6 trillion of excess reserves yielding only 0.25%. But if and when the demand for all that near-zero-interest paying money starts to decline, the public's desire to reduce their cash holdings could result in a significant increase in the price of things (e.g., real estate, commodities, cars, vacations) they would rather hold instead. In short, there is a lot of money sitting on the sidelines that could serve as the fuel for higher inflation and faster nominal GDP growth. All it takes is a decline in the demand to hold the huge stock of money and money equivalents that exist today.

The first chart above shows Bloomberg's calculation of the market cap of exchange-traded U.S. equities, currently about $23 trillion, up from just $8 trillion a bit over five years ago. The second chart shows the market cap of all global equities, currently $64 trillion, which is up from $26 trillion just five years ago. The third chart shows the huge gains in the net worth of U.S. households, which have been fueled almost entirely by gains in financial assets. These add up to some very impressive gains in money and wealth. Perhaps the Ballmers and near-Ballmers of the world are feeling like they'd rather have some concrete possessions instead of all that money in their brokerage account. Ballmer's aggressive bid for the Clippers may be a sign that money demand is beginning to weaken.

As the chart above shows, the bond market is anticipating that CPI inflation over the next 5 years will average 2.0% per year (expected inflation is derived by subtracting the real yield on TIPS from the nominal yield on Treasuries of similar maturity). That's a pretty sanguine outlook, considering that the CPI has risen at an annualized rate of 2.3% over the past 10 years, and 2.1% over the past 5 years. 

So far, so good: some signs here and there that money demand is beginning to weaken and there is a surplus of money developing, but no sign yet of any worrisome increase in inflation. But it seems to me that the pressures for higher inflation are building. It may take awhile for inflation to show up in the official statistics, but for now there are growing signs of an abundance of money and wealth, and the beginnings of a weakening in the demand for money that tip the balance in favor of higher inflation in the future.

As I noted last year, the Fed's real objective with Quantitative Easing is to destroy the demand for money. They want to weaken the public's and the banks' demand to hold on to money balances and their equivalent by making cash a poor investment compared to other assets. They don't mind seeing equity prices rise, as that ought eventually to encourage people to take on more risk. After all, this has been a recovery dominated by risk aversion. The Fed wouldn't mind seeing inflation rise above 2%, and they probably wouldn't take corrective action until it got to 3%. But that's a dangerous game, since, as Milton Friedman taught us, the lags between monetary policy and the economy are long and variable.

Don't let quiescent inflation and a weak economy lull you into a complacent view of the future of inflation, and don't worry about deflation. Think instead about the weak dollar, a weakening in the demand for money, and very strong financial markets. 

my friday five

this white kitchen with vintage brass hardware is beautiful

I am a little obsessed with meyer lemons. 

They are gorgeous in the yard and so useful in the kitchen!  

I am planting two this weekend to eventually 

arch together at the entrance of my garden.

The jacarandas are now in bloom all across southern California 

easy and delicious crostini for your next party

meet our new kitten Jaz  

ciao! Fabiana

And Finally, Still Better Thanks To Cronulla

Awesome. We now carry the Neal Purchase Jnr.  Wolfhound fins! Crafted to NPJ's exacting standards in Australia by The Salty Merchant, these are the real deal. No stunts, but plenty of base and nicely thick which in simple terms equals drive. There's the 7.5" in the beer tint and the 8.5" in the bottle tint, both coming in a nice canvas and cord pouch. Very excited to have these, email info @ foamandfunction if you want in on the action. Better yet, this isn't really the final batch of new and good stuff coming. Post Wheels & Waves adventures there will be more- new Parmenters are on the way and there's a potential retail space in the very near future. Thanks for your interest and stay tuned....

The big picture is not very scary

The U.S. stock market has been rising for more than five years; the S&P 500 has delivered a total return of 217% since early March, 2009. Today the S&P 500 reached a new all-time high of 1920. You can hear the nail-biting, especially since Q1/14 real GDP notched negative with today's revision. Are we near the end of one of history's great stock market rallies? I don't think so.

These two charts help put things in perspective. The big picture is that the natural tendency of stock prices is to rise, which they have been doing for a very long time; that should hold as long as the economy is able to expand and inflation avoids negative territory. Economic growth is almost assured given ongoing growth in the population and in the number of jobs, and the Fed has taken extraordinary measures against an extended outbreak of deflation. As the top chart shows, stocks tend to rise, on average, about 6-7% per year in nominal terms (plus dividends). As the second chart shows, stock prices tend to rise about 3% per year in real terms (plus dividends). Prices are in the upper half of their long-term trends, but it's not what you might call "scary-overvalued." There is still plenty of room on the upside before historical precedents are violated.

This is also a plug for "buy and hold" investing. It's near-impossible to call the highs and lows with enough exactitude to make a fortune. But's it's easy to buy stocks when no one wants them—as was the case from late 2008 to early 2009—and hold on for the long haul.

The message of the first two charts—that stocks are a little above their long-term average growth path—is confirmed by the chart above. The 12-mo. trailing PE ratio (according to Bloomberg) of the S&P 500 is now 17.6, which is about 6% above its 55-year average of 16.6. By this measure, stocks are somewhat "overvalued," but not be a significant amount. Moreover, if you consider that Treasury yields are still historically low (the PE ratio of the 10-yr Treasury, which currently yields 2.5%, is 40), it's not unreasonable at all for PE multiples on equities to be above average. Show me an investor who prefers 10-yr Treasuries to equities today, and I'll show you an investor who expects corporate profits to plunge. Absent a plunge in profits, equities could handily outperform Treasuries, even on a risk-adjusted basis.

Menunketesuck Island fencing and more

Audubon Alliance for Coastal Waterbirds field staff has been extremely busy seven days a week with both assisting CT DEEP in exclosing four egg Piping Plover nests and continuing to add fencing and signage to locations with terns moving in, American Oystercatcher nests, and so forth. Yesterday our staff visited the critical Menunketesuck Island in Westbrook to continue this effort.

Elizabeth Amendola and Luis Martin completed this work and Elizabeth snapped a couple of shots before they left the island.

 

Looking good! Our staff being so busy does mean that there are many waterbirds nesting in Connecticut and we will do our best to ensure the maximum number of young fledge and head south in the coming months.

College Spotlight- Seattle University

I’m going to stay in the Pacific Northwest, with the next college to showcase. Seattle University is a Jesuit university in the middle of stunning Seattle. It has just over 4,500 undergraduate students with a diverse population of students and a myriad of top notch programs to study. When I first arrived on campus, I was struck by the beauty of the campus and how it meshed very well with the surrounding environment. Although the campus is right outside downtown Seattle, you are surrounded by water and snow-capped mountains, and the modern and unique architecture of the school buildings is quite breathtaking. I know Seattle is far for us east-coasters, but as I talked to students, faculty, and administration at Seattle University, I realized this was truly a special place with so much to offer for students across the county, and it is a place I would feel very comfortable recommending. Here are a few fun and helpful facts about the school, so enjoy!

Student Population: 4,500 Undergraduates, 35% minority students, average class size is 20, and the student-to-faculty ratio is 14:1.

AdmissionsInfo: Middle 50% GPA for acceptance: 3.3-3.9, SATs: 1600-1910, ACT: 24-29. Seattle U has both Early Action (11/15) and Regular Decision (1/15).

Cost: The current total cost of attendance is $46,410 per year. However, 96% of freshmen come in with financial aid help, which averages at $27,000 per student.

Colleges: Albers School of Business and Economics, College of Arts and Sciences, Collegeof Education, College of Nursing, College of Science and Engineering, School ofLaw, School of Theology and Ministry, Matteo Ricci College (Jesuit centered, humanities program).

Standout Majors Offered at Seattle University: Their nursing program is very competitive, where students should have a minimum 3.7 GPA, and mid 600s in each of the SAT sections. Other standout majors include cultural anthropology, digital design, prelaw, social work, sports and exercise science, finance, business economics, biochemistry, and engineering (civil, environmental, computer science/software, electrical, mechanical).

Seattle University has numerous Division 1 sports and a ton of school pride when it comes to athletics. Some of the sports they offer are baseball, basketball, golf, soccer, swimming and more.

Seattle U is committed to its Jesuit foundation and students there truly care about helping the surrounding community. They offer a program called the Seattle University Youth Initiative (SUYI), which is a popular organization at school where students are very involved in supporting and helping the neighborhood to improve academic and personal development. The sense of community is very noticeable at SU, both on and off of campus.

NotableRecognition:

·         US News and World Report ranked SU as the #6 institution in the west

·         SU has the #1 legal writing program in their school of law

·         Bloomberg Businessweek has ranked SU’s business school the #1 program for macroeconomics

·         SU has been ranked #1 in the nation among private institutions for increasing graduation rates and closing the gaps between Hispanic and Caucasian students

·         SU has the 5^th highest amount of Fulbright Scholars in the nation among master’s institutions in 2013-2014

·         In 2012, the White House honored Seattle University with the Presidential Award for community service

Final Thoughts:

I have been to many outstanding colleges across the country, and Seattle University is near the top of my list of standout institutions. It has an amazing community, strong and diverse academics, and is set on a stunning campus in one of the more beautiful parts of our country. Students who want to venture out to another part of the country and are committed to academics and being an active member of the community should definitely take a look at Seattle University. Whether you are in the engineering or humanities college, all students will come away with an education that will prepare them to become integral members of our society. Students are challenged to push themselves in the classroom, and to possibly go out of their comfort zone to help others in the community. The Jesuit education is very real at Seattle University, and the overall environment is a place that I foresee many students being very happy at. I know Seattle often has the reputation of rainy weather, but all I can say is that while I was there, the sun was shining and I felt a great sense of positive energy in a vibrant community…and I think if you dig deeper into Seattle University, you may just see the light too. Enjoy and happy searching!

-Mr. Joe Korfmacher, MA  

One negative quarter does not make a recession

Real growth in the first quarter was revised down to -1%, more than expected (-.5%).  The economy shrunk by about $40 billion in the first quarter, which in the great scheme of things is equivalent to a rounding error. These things happen occasionally, as you can see in the chart below. It hasn't been a jolt to the equity market because it was most likely only a temporary dip in economic activity.

The thing to focus on is not the weak first quarter, which is almost certainly weather-related, but the indicators that show the economy is very likely continuing to grow at a 2-3% pace. As a supply-sider, I think the things that drive growth are changes in work, output, incentives, and investment. A quick look at key indicators of the supply-side of the economy shows everything still pointing up.

First-time claims for unemployment last week fell to just about their lowest level ever: 300K. If the economy were unraveling, businesses would be stepping up the pace of firings. Instead, the pace of layoffs is about as low as it has ever been. 

With the expiration of "emergency" unemployment benefits early this year, there has been a huge increase in the incentive for the unemployed to find and accept a new job. In the past year, the number of people receiving unemployment insurance has dropped by almost half (-46%). So far this year, 2.2 million people have lost their long-term unemployment benefits. This is a significant change in incentives on the margin that will most likely work to strengthen the economy.

Industrial commodity prices have been rising for the past 8 months and are at relatively high levels from an historical perspective, suggesting that global industrial activity continues to improve.

U.S. manufacturing production rose at a 2.8% annualized pace in the first four months of this year.

The private sector added 840K new jobs in the first four months of this year. That works out to about a 2% annualized pace, which is in line with the trends of the past several years. With average productivity gains of about 1% per year, this pace of jobs growth can deliver 3% real growth over time.

Bank lending to businesses—presumably to finance expansion plans—is up at strong double-digit rates so far this year. Outstanding C&I loans have increased by $90 billion year to date (through mid-May), as shown in the chart above. Banks are more willing to lend and businesses are more willing to borrow; that's a good sign of rising confidence and a leading indicator of more jobs to come.

Capital goods orders—a good proxy for business investment—are up this year, and have been rising at about a 4% annual pace for the past year.

Corporate credit spreads are at post-recession lows. The bond market does not reveal any concerns about the future of corporate profits. Moreover, swap spreads, an excellent and leading indicator of systemic risk, are very near all-time lows.

First quarter growth was disappointingly slow, but that that was very likely just a temporary, weather-related dip in economic activity. Key indicators of current and future growth remain positive. Growth is likely to rebound in the current quarter.

And better still, thanks to Newquay this time

Asymmetrical spoon by Cornwall's Squire Surf. Amazing! This is coming to Biarritz with us...

AAfCW 2014 Volunteer Update #8

This is the eighth weekly update by the Audubon Alliance for Coastal Waterbirds (AAfCW) for the 2014 season. Today's update includes reports of Piping Plover, American Oystercatcher, Least Tern and Common Tern from May 19 through 4:00 p.m. on May 27 with sightings of birds by volunteers and staff spanning that period.

Informational updates:

Thank you to all of the monitors who spent extra time out on the beach last weekend! We educated and spoke to hundreds of beachgoers in the beautiful weather. We also had the first Piping Plover hatchlings of 2014 at Griswold Point and then Milford Point and Sandy/Morse Points. This will pick up very rapidly now with many young emerging in the next couple of weeks as our terns begin to nest as well. Please monitor as much as you can in this critical time!

Survey and monitoring updates:

Piping Plover
1 pair, 7 adults, 1 nest at Griswold Point on 5/19
1 pair, 1 nest at Harkness Memorial State Park on 5/19
2 adults at Bluff Point on 5/19
1 adult, 1 nest at Shell Avenue Milford on 5/19
2 adults at Milford Point on 5/20
2 pairs, 6 adults, 8 nests at Milford Point on 5/20
4 pairs, 3 nests at Long Beach on 5/20
1 pair, 1 nest at Pleasure Beach on 5/20
9 adults, 4 nests at Sandy/Morse Points on 5/20
1 pair, 2 adults, 3 nests at Long Beach on 5/20
3 pairs, 12 adults at Sandy/Morse Points on 5/20
2 adults at Sandy Point Stonington on 5/20
3 pairs, 2 adults, 5 nests at Sandy/Morse Points on 5/21
1 nest at Peck Ave. Beach, West Haven on 5/21
4 adults, 8 nests at Milford Point on 5/21
1 adult at Short Beach on 5/21
2 pairs, 5 adults, 4 nests at Sandy/Morse Points on 5/21
2 pairs, 4 adults, 4 nests at Sandy/Morse Points on 5/21
2 pairs, 4 adults, 2 nests at Long Beach on 5/21
1 adult at Short Beach on 5/22
14 adults, 8 nests at Milford Point on 5/23
2 pairs, 6 adults, 8 nests at Milford Point on 5/23
1 pair, 1 nest at East Broadway Milford on 5/23
3 pairs at Bluff Point on 5/23
12 adults, 3 hatchlings, 4 nests at Griswold Point on 5/24
1 pair, 1 nest at Shell Avenue Milford on 5/24
4 pairs, 2 adults, 5 nests at Sandy/Morse Points on 5/24
1 nest at Peck Ave. Beach, West Haven on 5/24
6 pairs, 2 adults, 8 nests at Milford Point on 5/24
4 pairs, 1 adult, 4 nests at Sandy/Morse Points on 5/24
8 pairs, 8 nests at Milford Point on 5/25
1 pair, 1 nest at Shell Avenue Milford on 5/25
8 pairs, 8 nests at Milford Point on 5/25
1 pair, 1 nest at Short Beach on 5/25
8 pairs, 4 hatchlings, 7 nests at Griswold Point on 5/25
4 pairs, 1 adult, 3 nests at Bluff Point on 5/25
2 pairs, 4 adults at Long Beach on 5/25
2 adults at Silver Sands State Park on 5/25
6 pairs, 3 nests at Sandy/Morse Points on 5/26
4 pairs, 3 nests at Long Beach on 5/26
1 pair, 1 nest at Pleasure Beach on 5/26
8 pairs, 4 hatchlings, 7 nests at Milford Point on 5/26
1 adult at Milford Point on 5/26
3 pairs, 5 adults at Sandy/Morse Points on 5/26
3 pairs, 1 adult, 3 nests at Long Beach on 5/27
15 adults, 2 hatchlings, 4 nests at Sandy/Morse Points on 5/27

American Oystercatcher
1 pair at Griswold Point on 5/19
1 pair at Bluff Point on 5/19
4 pairs at Cockenoe Island on 5/19
1 pair at Chimon Island on 5/19
2 pairs at Long Beach Island on 5/19
1 pair, 1 nest at Rocky Island on 5/19
1 pair at Fish Islands on 5/20
3 pairs, 1 adult, 1 nest at Menunketesuck Island on 5/20
1 pair, 1 adult, 1 nest at Duck Island on 5/20
1 pair at Salt Island on 5/20
3 adults, 2 nests at Milford Point on 5/20
1 adult at Tuxis Island on 5/20
4 adults at Sandy/Morse Points on 5/20
1 pair, 1 nest at Milford Point on 5/20
1 adult at Long Beach on 5/20
2 adults at Penfield Reef on 5/20
2 pairs at Sandy/Morse Points on 5/20
9 pairs, 9 nests at Sandy Point Stonington on 5/20
2 pairs, 2 nests at Sandy/Morse Points on 5/21
4 adults at Milford Point on 5/21
2 adults at Short Beach on 5/21
2 pairs, 1 adult at Sandy/Morse Points on 5/21
3 adults at Sandy/Morse Points on 5/21
1 adult at Sixpenny Island on 5/21
1 adult at Ram Island on 5/21
2 adults at Long Beach on 5/21
1 adult at Quinnipeag Rocks on 5/22
2 pairs, 1 adult at Milford Point on 5/23
2 pairs, 1 nest at Milford Point on 5/23
1 adult at Bluff Point on 5/23
1 pair at Sandy/Morse Points on 5/24
2 pairs, 2 nests at Milford Point on 5/24
2 pairs at Sandy/Morse Points on 5/24
2 adults at Milford Point on 5/25
2 pairs, 1 adult, 2 nests at Milford Point on 5/25
1 pair, 4 adults at Bluff Point on 5/25
2 pairs at Sandy/Morse Points on 5/26
2 pairs, 2 nests at Milford Point on 5/26
4 adults at Milford Point on 5/26
3 pairs at Sandy/Morse Points on 5/26
1 pair at Long Beach on 5/27
2 pairs at Sandy/Morse Points on 5/27

Least Tern
4 adults at Griswold Point on 5/19
1 adult at Harkness Memorial State Park on 5/19
1 adult at Bluff Point on 5/19
38 adults at Shell Avenue Milford on 5/19
4 adults at Norwalk Island Area on 5/19
18 adults at Milford Point on 5/20
12 adults at Sandy/Morse Points on 5/20
17 adults at Silver Sands State Park on 5/20
3 pairs, 19 adults at Milford Point on 5/20
5 pairs, 30 adults at Long Beach on 5/20
10 adults at Long Beach on 5/20
27 adults at Sandy/Morse Points on 5/20
3 adults at Barn Island on 5/20
7 adults at Silver Sands State Park on 5/21
20 adults at Milford Point on 5/21
5 adults at Short Beach on 5/21
2 pairs, 14 adults at Long Beach on 5/21
50 adults at Sandy/Morse Points on 5/21
20 adults at Sandy/Morse Points on 5/21
2 pairs, 5 adults at Long Beach on 5/21
1 pair, 1 adult at Short Beach on 5/22
20 adults at Milford Point on 5/23
10 adults at Bluff Point on 5/23
9 adults at Sasco Hill Beach on 5/24
35 adults at Sandy/Morse Points on 5/24
150 adults at Milford Point on 5/25
15 adults at Milford Point on 5/26
1 pair at Sandy/Morse Points on 5/26
24 adults at Long Beach on 5/27
10 adults at Sandy/Morse Points on 5/27

Common Tern
5 adults at Shell Avenue Milford on 5/19
5 pairs at Cockenoe Sand Spit on 5/19
1 pair at Westbrook Beach on 5/20
1 adult at Silver Sands State Park on 5/20
4 adults at Milford Point on 5/20
25 adults at Long Beach on 5/20
2 adults at Pleasure Beach on 5/20
3 adults at Penfield Reef on 5/20
4 adults at Long Beach on 5/20
2 adults at Sandy/Morse Points on 5/20
1 pair at Tuxis Island on 5/21
1 pair at Grass Island on 5/21
1 pair, 2 adults at Silver Sands State Park on 5/21
10 adults at Milford Point on 5/21
5 adults at Short Beach on 5/21
1 pair, 15 adults at Long Beach on 5/21
2 pairs, 11 adults at Sandy/Morse Point on 5/21
4 adults at Long Beach on 5/21
6 adults at Milford Point on 5/23
14 adults at Sandy/Morse Point on 5/24
15 adults at Peck Ave. Beach, West Haven on 5/24
2 adults at Milford Point on 5/24
12 adults at Sasco Hill Beach on 5/24
1 adult at Sandy/Morse Points on 5/24
4 pairs, 15 adults at Long Beach on 5/25
12 adults at Silver Sands State Park on 5/25
6 adults at Sandy/Morse Point on 5/26
3 adults at Long Beach on 5/26
12 adults at Milford Point on 5/26
2 adults at Sandy/Morse Points on 5/26
6 adults at Sandy/Morse Points on 5/27

This concludes update #8 through 5/27/14 as of 5:00 p.m.

Onward and upward

This is still the weakest recovery ever, but the economy continues to grow and conditions continue to improve. It's a sub-par recovery, as I've been predicting for the past 5 years, mainly because the private sector has been smothered by too much government spending and too many new regulatory burdens. Things could be a whole lot better, but that is no reason to be pessimistic about the future. Indeed, there are so many things that could be fixed for the better (e.g., major reform of the tax code, the reversal of Obamacare) that the case for optimism is still compelling. As I've said many times in recent years, the economy is growing in spite of all the "help" it has received from "stimulative" fiscal and monetary policy. Pessimists see it the other way around, of course, believing that if it weren't for all the government-sponsored stimulus the economy would be a total wreck.

What follows is a series of charts which make some important points about the ongoing improvement in the economy and the financial markets.

Capital goods orders have been lackluster for over a year, but today's release of April data contained some significant upward revisions to past data. A month ago, orders appeared to be essentially flat over the past year, but they now have a modest upward tilt. As the chart above shows, orders in real terms are still substantially below their 2000 high, but they are now at a new high in nominal terms. It's still the case that businesses are very reluctant to invest—despite record-setting profits—but at least we can say that investment in productivity-enhancing capital goods is expanding, albeit slowly. As an optimist, I look at this as a glass half-full: imagine how much stronger new investment could be if taxes on capital and regulatory burdens could be reduced. The November elections hold great promise for the future if they can tip the balance of policies in a more growth- and capital-favorable direction.

According to the Case Shiller data, housing prices have recovered almost half of what they lost from their pre-recession highs. The same goes for housing starts. The recovery is more modest in real terms, but it nevertheless continues. Every day the number of households suffering from negative equity declines. There is still plenty of upside potential in the housing market.

The market capitalization of global equity markets is now at a new all-time high, having gained $38 trillion from the March 2009 low. These are huge numbers, considering that the total market cap of the U.S. equity market is currently almost $23 trillion according to Bloomberg.

Pessimists don't get excited by the above chart, which shows that the implied volatility of equity options is very close to its historic lows. They worry that because the market is not very worried these days about something going wrong, it is vulnerable to bad news. As an optimistic, I prefer to think that the market is "vulnerable" to unexpected good news. Long-time readers may remember my post from August 2012, in which I posed the question "What if something goes right?" In retrospect it was quite prescient. I still think that is the right question to ask today.

The above chart of the PE ratio of the S&P 500 shows that multiples are only slightly higher than their long-term average (according to Bloomberg calculations). That lends strong support to the view that the market is far from being overly optimistic. There is still plenty of room for multiples to expand.

Consumer confidence is at a post-recession high, but as the chart above shows, it is still far below levels associated with healthy growth and widespread prosperity, such as we had in the late 1990s. Indeed, confidence today is at levels that in the past have been associated with the onset of recessions. There is still lots of room for improvement.

As the chart above shows, Eurozone equities have been rising in line with the ongoing recovery in  U.S. equities for the past two years. In fact, Eurozone equities have recorded outsized gains over the past two years: the total return on the S&P 500 is 51%, while the Euro Stoxx 50 index has posted a total return of 77%. The Eurozone may be lagging, but it is definitely improving. 

As an aside, I couldn't help but notice the proliferation of construction cranes and road repairs as we drove through almost 2,000 miles and 5 countries' worth of European countryside earlier this month. Things are definitely improving in Europe.

There will undoubtedly be setbacks along the way, but I see little reason to doubt that things can continue to improve, albeit slowly. Onward and upward.