Wednesday, January 28, 2009

The Roulette That Is The Massively Disconnected Market Keeps On Spinning

I assume I am not the only one watching the big game of roulette on CNBC right now (i.e. the market). For all those clicking the buy button on E-Trade with the reckless abandon of Gary Busey doing... well, anything he does, we want to point out this interesting analysis on FT Alphaville. Tracy Alloway has looked at capacity utilization in two of Europe's largest economies, France and Italy, and the punchline is :"France utilization fell to 75.8 in January from 82.2 in October - the biggest decline ever seen. In Italy the same - utilization feel to 69.9 from 74.4 in October." However the January number really indicates data only thru the end November. JP Morgan says "on the basis of capacity utilization, output fell very, very dramatically in December and January. Furthermore, this collapse in capacity utilization suggest a big decline in capital spending and inflation in the months ahead."

As for why capacity utilization is important - some theory from David Mackie of JP Morgan:

"Capacity utilization plays a critical role in our thinking about the Euro area.
Given the lags in the production of the official output data, it influences our view of high frequency developments in production.

Because the denominator is influenced by the capital stock, the level of capacity utilization seems to play an important role in capital spending decisions.

It is a key determinant of pricing power and thus it is very significant in our Phillips curve for the region which drives our core inflation forecast.

And, last but not least, it plays an important role in our ECB forecasting tool, as it influences the appropriate policy rate."

However, it seems nobody cares what the underlying economic metrics are anywhere in the world anymore as long as the government is buying treasuries, mortgages, toxic assets, banks, oreos, California's IOUs and everything else... Bottom line is investors are convinced the only way to make money in this market is to keep front-running the Treasury and Fed until both of them hit double zero. Sphere: Related Content
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James said...

All the Fed is doing is destroying capitalism all together. What exactly are they trying to accomplish? Do they want everyone to live on the edge of bankruptcy? Constantly enticed by easy credit?

Anonymous said...

Yes, we do.

Anonymous said...

Yes, we do.