WildLife Guards Boy Scout Event

This past Saturday, September 26, I spent the day with seven of our ten Bridgeport WildLife Guards back at Brideport, Connecticut's Pleasure Beach. That is where they were stationed five days each week this summer, conducting education, conservation and advocacy activities and making a difference for rare or endangered plants and wildlife, highlighted by the federally threatened Piping Plover. They engaged visitors and beachgoers, offering unique and innovative programs to convey the philosophy of sharing the beach and respecting our natural world as well as the complex ecosystems of this important habitat.

Our assignment this autumn day was to teach groups of visiting children about Piping Plovers and other coastal waterbirds as a part of an event for the Boy Scouts of America. In the photos below you can see our crew helping the kids in building baby Piping Plovers out of marshmallows, chocolate, pretzels, and raisins, a deliciously informative activity. Our second task involved using objects like hair clips and clothespins as bird beaks to attempt to "forage" for "prey", showing how species like the Common Tern and American Oystercatcher have specially evolved bills to feed on certain organisms in different environments.

In short, we had a sensational time! Even in these pictures you can see how much the children enjoyed working with us in these hands-on tasks, and we made sure they all left with a greater knowledge and appreciation of our birds. Our WildLife Guards season has been over for several weeks now, and all of this was volunteer time willingly put in by our wonderful crew. A tremendous thanks goes out to Ira Lockhart, Talisha Ortiz, Jamiya Williams, Alfred Green, Paris Jordan, Nathalie Vincent, and Sara Gallo for coming out to Pleasure Beach for one last day in 2015. We are so lucky to have them as colleagues and friends. We have all kept in touch with one another, discussing school and classes, jobs and career paths, college and more as we try to assist our students in any way we can. They have volunteered with us in multiple ways, and we hope to have another WildLife Guards event at a local school in November. Our work is year-round, nonstop, and always expanding - and we would not have it any other way.

Scott Kruitbosch
AAfCW Volunteer Coordinator
RTPI Conservation & Outreach Coordinator

Walls of worry update

The inverse correlation between the market's level of fear, doubt and uncertainty as proxied by the ratio of the Vix index to the 10-yr Treasury yield) remains strong, as the chart above shows.

The list of worries is long: China, commodities, oil prices, energy sector debt, emerging markets (especially Brazil), regulatory burdens, high marginal tax rates, and more recently, healthcare stocks that face the threat of politicians who want to control the prices of certain drugs.

And it is still the case that, despite all these concerns and the rising level of corporate credit spreads, 2-yr swap spreads are unusually low. Swap spreads stand out in a field of nerves, because at current level they signal that systemic risk is virtually nonexistent, financial market liquidity conditions are very healthy, and the banking sector is strong (as well it should be, with trillions of dollars of excess reserves).

It's worth repeating that every recession in the past 60 years has been preceded by a severe tightening of monetary policy, which can be seen in a strong and rising dollar, high real yields, a flat to inverted yield curve, and rising credit spreads. Moreover, the past three recessions have been preceded by high and rising swap spreads (the swap market wasn't very active prior to that). Of all those preconditions, only  rising credit spreads can be found today, but as the chart above shows, they are not critically high. Without the confirmation of rising swap spreads, it looks like the problems of the HY debt sector—although serious, especially for the energy and commodity sectors—are not highly contagious.

Inflation is not too low

There's a meme running around that says that deflationary pressures are so acute (think falling oil and commodity prices, coupled with cheap Chinese imports) that the Fed is almost powerless to get inflation up to its 2% target and therefore they would be crazy to start raising short-term interest rates.

I think the current level of inflation (approximately 1.5% if you look at a variety of indicators) is just fine, and I wouldn't mind at all if it were a bit lower. In fact, zero sounds right to me, because I have never understood why 2% is ideal and zero is not. Inflation—no matter how low or high—is insidious; it robs the poor and ignorant, while benefiting governments and the financially astute. It transfers wealth from the private sector to the public sector, with the bulk of the wealth confiscation coming from savers and the uninformed. Governments (and their complicit partners, central banks) create inflation, and—surprise, surprise—governments are the major beneficiaries of inflation.

Regardless of what you think the ideal rate of inflation is, the real problem is figuring out how to measure it.

The mathematicians at the BLS face the daunting task of figuring out just how much prices for personal computers have declined over the years, given that their speed, memory, and capabilities have multiplied by orders of magnitude. How am I to compare what I spent in today's dollars on my first Mac SE in 1987? I paid about $2700 for it, but it had a small black & white screen, 1 MB of RAM, and a 20 MB hard drive. It talked to the internet at snail speed, and it took hours to back up the hard drive to floppy disks. For $2500 today, I can buy a MacBook Pro that is so much more powerful you'd think it came from a parallel universe: 16 GB of RAM, 512 GB SSD, 9 hour battery, and a 15" screen that rivals a National Geographic photo. It can download terabytes of data in the time it took my Mac SE to back up a few floppy disks. To make matters worse, today's laptop can perform functions (like editing full-length HD movies) that weren't even possible in 1987.

How can hedonic pricing figure this out?

As the chart above shows, the BLS has made a good faith effort to resolve this seemingly impossible task. They figure that a dollar spent on personal computers in 1998 is equivalent to about 4 cents today. In other words, they figure that the prices of personal computers and peripherals (which comprise only a few percentage points of the overall CPI index) have dropped by almost 96% since 1998 (nominal prices haven't dropped all that much, but the bang for the buck has been gigantic). The BLS is telling us that personal computers are almost 24 times more powerful today per dollar than they were just 17 years ago. I'm not sure that's correct, but then I don't think anyone knows the right answer. How important a role should the massive deflation of personal computers alongside their huge technological advances play in the overall CPI index? It's transformed society and the way we work and communicate with each other. What we take for granted today was not even possible at any price in 1998. Maybe computers have effectively fallen even more in price, and/or they should have a larger weight in the CPI.

But it's not just personal computers that have fallen in price. As the chart above shows, the BEA calculates that the costs of durable goods in general (e.g., TVs, cars, computers, appliances) have fallen by 32% on average since 1995. Meanwhile, the costs of just above everything else have been rising. (I chose 1995 as the start date for this chart since that is the first year in history that the prices of durable goods fell even as other prices rose. It's also not a coincidence that 1995 was the first year that China started exporting cheap goods to the U.S. in a serious fashion.)

Consider that the "Services" index in the above chart is a good proxy for personal incomes (both have risen by approximately the same amount since 1995). What this means is that durable goods have become very cheap relative to incomes in the past 20 years. One hour's worth of income today now buys almost two and a half times more in the way of durable goods than it did 20 years ago. Wow.

Is it a bad thing when our wages allow us to buy more of the things that enrich our life? If durable goods deflation is good, why should falling prices of other things be bad?

In any event, the falling prices of durable goods have to some palpable degree contributed to lowering the rate of inflation that we all have experienced. China gets the bulk of the credit, since China figured out how to transfer hundreds of millions of workers from the countryside to modern factories. A substantial portion of the world's workforce became dramatically more productive in a relatively short timeframe, and this resulted in a huge increase in the productivity of the average human being on this planet. More productivity in China has resulted in higher living standards for everyone. Progress of this sort is most definitely NOT a zero-sum game. (Donald Trump, call your office!)

When sharply lower oil prices (down by more than 50% since the summer of 2014) are factored in to the inflation indices, the result is lower headline inflation. But there's nothing wrong or sinister about that, is there? Cheaper computers, cheaper gasoline, it's all the same: our dollars go farther and our living standards rise. It's times like this when we have to look at "core" inflation, which factors out food and energy prices. As the chart above shows, the core rate of inflation according to the PCE deflator is 1.3% in the 12 months ended August, while the headline rate is a mere 0.3%.

But if we look at the annualized rate of change in both the indices over the past six months, the picture changes significantly. As the chart above shows, headline inflation by this measure is 1.8% and the core rate is 1.6%—pretty close to high end of the Fed's target. Oil prices are no longer falling, and the dollar has been relatively stable for the past six months. Maybe the CPI over the past six months is giving us a better reading of underlying inflation than most people realize.

As the chart above shows, the headline CPI is running at a 2.3% annualized rate over the past six months, and the core rate is running just over 2.0%. The ex-energy version of the CPI is up at a 1.9% annualized pace over the same period. Put all these together and I think it's safe to say that inflation today is at least 1.5%. How this presents a problem to anyone outside of the energy and computer industries (Apple's profit margins are still huge, by the way) I just don't know. Why it should keep the Fed from raising interest rates by a puny 0.25% I fail to comprehend. Shouldn't the Fed be forward looking? 

A tale of two diamond rings

These two platinum and gold diamond rings appraised for a cool $23.000.00 and they were found using the same metal detector but in two very different areas of the beach. 

I do things differently to the main beach and water hunting advice passed around on internet metal detecting forums, you can probably see that the jewelry I pull off the beach and out of the water on a regular basis. 
I doubt you would see many detecting forum experts telling you to go jewelry hunting at high tide, or go water hunting at beaches that see few people swimming, but that is exactly why these two chunks of ice are now resting in a safety deposit box at the bank.
The platinum Tiffany ring with 1.5 carat diamond was found last year at a small beach entrance that water hunters would barely notice on their way to hunt with the detecting crowds at a popular tourist beach. 
It was found using a waterproof pulse induction metal detector with an eight inch mono search coil,  designed more for hunting for small gold nuggets than gold jewelry, but it detects plenty of small pieces of gold jewelry too.
Finding platinum jewelry using a pulse induction metal detector with an 8-inch mono search coil at a quiet out of the way beach, would be considered water hunting blasphemy on the detecting forums.  The 14K gold ring with 2 carat iceberg was found earlier this summer in the high tide line at high tide using the same Minelab SDC 2300 pulse induction metal detector, another case of beach hunting blasphemy. 
Two very different jewelry hunting strategies that went against the usual beach and water hunting grain, but worked like a charm.
When I go beach or water hunting, I go out of my way to try different things and hopefully recover something good.
I never go to the beach and do the same thing every time I go metal detecting,  there are just too many variables to search the same way at every beach. 
In my opinion, it is better to go beach hunting where ever and when ever, as nothing is ever predictable trying to detect a gold ring or a coin in a wide open sandy space. 
Setting yourself apart from the beach hunting crowd is a great way to insure you do not endure slumps or long droughts between finds at the beach.  
The more rigid you stick to the same "Ground hog day " style beach or water hunting plan, the longer you will go between finds.

the prettiest travel journal ever

Swept away by WANDERLUST is a charming travel journal, bound in a premium, earthy latte-colored cloth, for the boho-chic traveler who wants to document her journey in a unique way. Each page is filled with fun questions, original writing prompts and witty ‘to-do’ notes enticing the traveler to jot down her thoughts, feelings and experiences while adventuring our big beautiful world. Whether taking the train down the California coast exploring the beaches or honeymooning in Paris, each journey can be celebrated and documented beautifully.

This journal is filled with encouraging life and 

travel quotes, thought-provoking prompts, 

edgy global photography and a world map.

"Stories are born every minute and forgotten the next, and finding a stylish and simple way for people to capture snippets of their own journey through this life is what our journals are all about," said Axel & Ash co-founder Hanna Axelsson.

Each journal will retail for $34.99 in boutiques nationwide beginning October 2015 and are currently available online at AxelandAsh.com.

ciao! fabiana

p.s.  what are your wanderlust destinations?

Chart du jour

The news at times seems overwhelmingly bearish. To paraphrase the consensus: China's economy is slowing down; China's currency has been devalued; commodity prices are falling, devastating the commodity producers; the Brazilian stock market is melting down; low oil prices are killing the oil producers; the Fed is gearing up for liftoff, which will boost the dollar and further crush commodities and emerging market economies; the Middle East is in shambles, with millions of immigrants flooding into Europe; Iran is going to get the bomb; US stocks are down almost 10% from their May highs; nerves everywhere are frazzled.

Amidst all this depressing news are two gems: U.S. GDP growth has been picking up and real yields on TIPS have been rising. Is the U.S. actually swimming against the tide and making progress? Seems incredible, but it might be true. This chart says it all:

Over the past two years, US GDP growth has accelerated to a 2.65% annualized pace, up from a 1.7% annualized pace two years ago. At the same time, real yields on TIPS have also increased. Real growth is up, and the bond market's confidence in future real growth (as embodied in TIPS yields) is up. Sometimes the news can color our perception of reality; this might be one of those times.

Spirit Of Akasha & Morning Of The Earth Limited Boxsets

This is pretty cool- in the merch stack for the Spirit Of Akasha tour that arrived (late) from Australia, there were the last 2 limited box sets for the films. Both are sealed and and fabulously deluxe- the Akasha box contains the double soundtrack CD, the MOTE redux vinyl, the double Akasha vinyl, a 7" single with bonus tracks, a fantastic 120 pg photo book, a t-shirt and a poster! The MOTE box meanwhile features the original film soundtrack (which holds up seriously well) as well as the  MOTE Reimagined version, both on CD and vinyl, a 7" single, a 120pg book with Alby's original images from the film as well as a shirt and a poster. Well cool, and as far as we know the last two available. Price is $130 each, email info @ foamandfunction.com for details.

Crab Park

Apparently, this waterfront green space east of downtown Vancouver began as Portside Park (fitting given its location), but has been renamed CRAB Park to memorialize its early supporters. Their cause was admirable - and successful: Create a Real Accessible Beach. But naming a beach with an acronym seems more like a U.S. Army Corps of Engineers thing to do!

You find this place by walking through Gastown, continuing on to Main Street, then looping up and over the tracks and down to the water. It is sort of hard to find, but what a nice little gem amidst the industry and rail yards and legacy of East Vancouver.

AERIAL VIEW

This pocket beach faces north across Burrard Inlet. The beachface was sandy at the east end, more gravelly at the west, with a fairly abrupt transition. Maybe this represents some manipulation (recently added material?), but I'm guessing it's a natural shift reflecting an asymmetry resulting from waves that approach more from the northwest than the northeast. I think this is consistent with some erosion of the bank behind the western end of the beach.

This was an awfully gray evening. Note to self: come back early on a clear morning, when the sun is shining on downtown and there are blue skies to the west.

Why a recession is very unlikely

Here are four charts that suggest that a recession is quite unlikely, at least for the foreseeable future.

As the chart above shows, the past three recessions have been preceded by a significant rise in 2-yr swap spreads. Swap spreads, as I explain here, are essentially barometers of systemic risk. When they are as low as they are today—which is quite low, in fact—they tell us that financial markets are extremely liquid and it is very easy for those who are nervous to lay off risk on others. It's almost the opposite of the "don't shout fire in a crowded theater" phenomenon, because those who these days are worried and want to get out have almost no problem doing so. The problems happen when everyone wants to get out at once, which is what leads to high swap spreads. If everyone is feeling scared, if everyone is worried about the ability of others to survive, if money is scarce, then the underlying fundamentals have deteriorated significantly and there is something very wrong out there. Today, swap spreads are telling us that the economic and financial fundamentals are very sound; thus there is a very low probability of a recession.

As the chart above shows, the past 8 recessions have been preceded by two very important developments in the bond market: high and rising real short-term interest rates (red line) and flat to negatively-sloped yield curves (blue line). High real short-term interest rates are the Fed's main tool for slowing down an "overheated" economy and reducing inflation. High real rates make borrowing expensive and increase the demand for money (remember: inflation happens when the supply of money exceeds the demand for money—taking steps to increase the demand for money thus reduces inflation pressures). When the Treasury yield curve becomes flat or inverted (i.e., when short-term interest rates approach and/or exceed long-term interest rates) this is the bond market's way of saying that monetary policy is so tight that it is unlikely to remain so for much longer. When long-term interest rates are higher than short-term rates, the bond market is effectively forecasting that short-term rates will be declining in the future because the Fed will sooner or later need to "help" the economy by reducing rates. A positively-sloped yield curve, on the other hand, is the bond market's way of saying that short-term interest rates are unlikely to remain low and are very likely to rise in the future because the Fed will at some point need to "withdraw the punch bowl."

In short, high real interest rates and a flat or inverted yield curve are very reliable indicators that monetary policy is so tight that it is threatening the health of the economy. That is manifestly NOT the case today. It would likely take years for these two indicators to move into the red zone.

It's common knowledge—or at least it should be—that the Fed manages monetary policy by targeting the overnight Fed funds rate. Actually, that's not exactly the case these days, because the most important tool the Fed now has is the interest rate it pays on excess reserves (IOER). But in practice they both mean the same thing: the Fed can cause short-term rates to rise or fall at will. However—and this is not so common knowledge—what the Fed is really trying to do by raising or lowering short-term interest rates is to change the level of inflation-adjusted short-term rates. If inflation is 10% and short-term rates are 5%, the monetary policy is extremely loose; but if inflation is 2% and short-term rates are 6%, then policy is extremely tight.

While the Fed can influence short-term rates directly, it has much less control over longer-term interest rates, which are set by the bond market depending on the market's expectations for inflation and real economic growth.

So the best way to understand Fed policy is to realize that the Fed controls the front end of the real yield curve, but not the back end. When the real yield curve is positively-sloped, the Fed is easy because the market figures that they will almost certainly have to raise real rates in the future. When it is flat or negatively-sloped the Fed is tight, because the market senses that the Fed will almost certainly have to lower rates in the future.

The chart above shows us two points on the real yield curve: the real Fed funds (overnight) rate and the real rate on 5-yr TIPS. Note that the red line exceeded the blue line before each of the past two recessions—which means that the real yield curve was negatively sloped prior to each recession. This chart thus reinforces the message of the preceding chart, since both the real and nominal yield curves prior to the past two recessions were negatively sloped. Today that is manifestly not the case. Real short-term rates are lower than real intermediate-term rates. The market, in other words, fully expects the Fed to increase rates going forward. Higher interest rates are a given, not something to worry about.

The chart above shows the level of real GDP on a semi-log scale, so that a constant slope is equal to a constant rate of growth (in this case 3.1% per year). The current recovery is unique in modern history, because the economy has for six years failed to recover to its prior trend growth rate. There is, in other words, a huge "output gap" which I estimate to be about 15%, or roughly $2.8 trillion per year in income that has gone missing. It's the weakest recovery ever.

What this means is that there is an enormous supply of unused capacity in the economy today. Maybe 5 or possibly as much as 10 million people who could be working but for whatever reason are not. Factories that have lots of idle capacity. Stores and shopping centers that have unused space. It's easier for the economy to slow down when there are lots of capacity constraints, than when—as is the case today—there is plenty of capacity. Capacity constraints tend to be associated with expensive prices for capacity, and when the Fed makes money scarce then it becomes harder for businesses to pay for labor, materials, and infrastructure. Capacity constraints plus tight money equal recession risk.

Today, money is abundant and resources are abundant. Even energy is abundant, because its price has fallen by over 50% in the past year or so. Corporate profits are near record highs, the supply of labor is virtually unconstrained, energy is suddenly cheap, and productive capacity is relatively abundant. This adds up to a lot of room for maneuver and very little reason for the economic engine of growth to shut down.

Chart updates

Markets continue to be nervous, but not nearly as much as they were a month ago. Oil prices are very low, commodity prices are still drifting lower, and the Brazilian stock market is imploding. But there are signs of stability: the dollar has been flat for the past six months. and swap spreads here and in the Eurozone remain quite low. 

Fears are still dominating the market, but they have receded substantially, lifting equity prices from their panic lows of a month ago.

Inflation expectations have fallen, but they are being driven almost exclusively by falling oil prices, as the chart above shows. Longer-term inflation expectations (e.g., the Fed's favorite—the 5-yr, 5-yr forward breakeven rate on TIPS) are still close to historical norms: just shy of 2%, whereas the CPI has risen an annualized 2% over the past 10 years. This tells us that the current fears are not related to deflation, since there is no sign here that the Fed is being too tight.

Commodity prices tend to move inversely to the value of the dollar, as the chart above shows. But the recent relative stability of the dollar (flat for the past six months) suggests that commodity prices are not being pressured by overly-tight monetary policy. More likely, commodities are being driven by weak demand from China, while supplies of commodities are up in a delayed response to their very high prices of just a few years ago. In contrast, the big increase in the dollar in the early 2000s was a sign of very tight money, and commodity prices were much lower then than they are now.

Credit spreads are elevated, but not by enough to signal widespread distress. Most of the damage is confined to the HY energy sector, where spreads today reached 1011 bps—still shy of their August 24th high of 1054. We continue to see the notable disconnect between credit and swap spreads (top chart). This suggests that the underlying fundamentals of the economy and the financial markets are still quite healthy, and that the distress in the energy sector is not spreading to other sectors.

Brazil, however, is in deep trouble. In dollar terms, the Brazilian stock market is down an astonishing 75% over the past five years. About half of this decline is due to the plunging real, which is now at a new all-time low of 4.05 to the dollar. Either way you measure it, this is a world-class, super-ugly bear market. From a contrarian perspective, however, the recent decline is beginning to look like the kind of panic selling that marks major market bottoms.