MacroScope

Vote here on Japan’s economy and its election

Britain’s Association of Investment Companies has UK investors who run Japanese equity funds whether they think the general election on Sunday will have a positive impact on the country, which is slowly emerging from recession.

Their answers can be found here, but the consensus was that the Democratic Party of Japan would defeat the ruling Liberal Democrat Party and that this would result in more consumer friendly policy or economic revival through higher living standards.

Managers were more divided on how long-lived any positive impact on stock market would be.

Our unscientific mini-poll below gives you the chance to vote on the issue — but as ever your comments are also welcome. Will Japan’s economy benefit if the opposition DPJ win election?

    Yes No No Difference
Created on Aug 26, 2009

View Results

poll by twiigs.com

Ranking economic forecasts

Financial journalists spend a lot of time surveying market economists ahead of macro-economic data releases to find out how they think the next CPI or GDP number is going to turn out. A poll 20 or 30 economists gives a market median forecast, which will determine how traders react when the data comes out. If the figure beats expectations and points to a strong economy and likely rate rises, the currency will jump, and vice versa.

But how good are these forecasts? Why react if there’s no track record for accuracy? Economists have a pretty good feel for how reliable forecasts are for different indicators, but it would easier to have a number that tells us how reliable forecasts are for data such as GDP, jobs data or the CPI?

Forecast accuracy is a live topic in academic journals. There’s the MAE and the MSE, the sMAPE and the MAD/Mean ratio among others. Some measures depend on scale so they can’t be used to compare different series of data, such as GDP and the jobless rate. Using percentage error — the MAPE — can overcome this but it gives whacky results with outcomes of zero or near zero. One possible solution is to use the mean absolute scaled error – or MASE – suggested by Professor Rob Hyndman at Australia’s Monash University and colleague Anne Koehler from Miami University, Ohio in 2006.

from Global Investing:

The Big Five: Themes for the Week Ahead

Five things to think about this week:

CENTRAL BANKERS IN A HOLE
-- The global economy and financial system appear on the road to recovery but that is in large part due to unprecedented official stimulus that will have to be withdrawn at some point - the questions investors want answered are when, and how.  Central bankers no longer appear to be quite as shoulder to shoulder with one another on coordinated policy as they were last year in the aftermath of Lehman's collapse.
 

CHINA STOCK WATCHING
--  It is August, liquidity has dried up with the summer holiday season in full swing, and investors are palpably more cautious about the economic outlook now than they have been for months. It is against this backdrop that that the Chinese stock market is emerging as the focal point and driver of all other asset markets. The Shanghai Composite technically slipped into bear market territory earlier last week, shedding 20 percent in the two weeks from Aug. 4 to Aug. 19 on profit taking from the 90 percent surge this year. There is no major Chinese economic data scheduled for release this week, leaving thin markets at the whim of sentiment in what is a notoriously volatile stock market.
 

GROWTH FOUNDATIONS
-- The United States, Britain and Germany unveil revised estimates of Q2 economic growth. Revised GDP figures rarely garner much attention but with initial estimates from Germany, France and Japan earlier this month all showing that these countries exited recession in the last quarter, investors will be looking for further evidence the world economy has turned the corner. The hard data is stronger now than it has been for some time but is the global economy building a solid base for recovery, or is it more likely to buckle were authorities to begin withdrawing the massive fiscal and monetary stimulus?
 

Things for an economist to do on a Friday

Three things for the economy-minded to be doing on a Friday in July:

– Study a very, very clever interactive graphic from the New York Times showing that the business cycle is far from round. Here.

– Marvel at one of the Centre for Economic Policy Research’s new papers — either “The Potato’s Contribution to Population and Urbanization” or “Kinky Choices, Dictators and Split Might: A Non-Cooperative Model for Household Consumption and Labor Supply”.

– Come up with a new visual metaphor for the direction of the global economy. We have had L, U, V and W. Most recently we have heard of the Nike Swoosh and saxophone-shaped recovery (with the flat mouthpiece heading off into the distance).

Crisis reading: What’s in the book bag?

Readers of MacroScope who live in the northern hemisphere will be gearing up for some summer reading.

James Montier, the market psychologist who is also an equity analyst at Societe Generale, has come up with his annual recomendations of what to read. The full list is here, but for the current economic and market crisis he has this to offer:

My favourite book in this category is Bill Fleckenstein’s ‘Greenspan’s Bubbles’ – an excellent exposé of incompetence during Alan Greenspan’s tenure as Fed Chairman. The next choice in this group is Whitney Tilson and Glen Tongue’s ‘More Mortgage Meltdown’. This book explains clearly how we ended up in this mess (and is based on the authors — real time experience), and an added bonus is the insight into Tilson’s investment process provided by the case studies. My final choice in this section is Jim Grant’s ‘Mr. Market Miscalculates’. I’ve mentioned this excellent book before, and I believe it deserves a place on all investors’ bookshelves.

How to calculate the decline of decline

Analysts and strategists assessing whether there’s an economic recovery on the way are increasingly referring to “second derivatives”. It usually means a measure, say production, has declined, but not by as much as it did last month, or quarter.

Are second derivatives a strong basis for optimism? If you have to perform differential calculus to make a point, it may be a sign of desperation.

Equities markets continue to factor in a recovery, with the FTSE 100 up about 30 percent from its six-year low of March 9.

UK house prices close to a trough?

MacroScope is pleased to post the following from guest blogger Simon Ward. Simon is chief economist of Henderson Global Investors in London and previously worked for New Star Asset Management and Lombard Street Research. His own blog is Money Moves Markets.

UK house prices are no longer expensive relative to a measure of “fair value” based on rents. Prices fell significantly below fair value during the major house price busts in the 1970s and 1990s but a big undershoot is unlikely in the current downturn because low interest rates will limit forced selling.

The notion that housing is no longer overvalued is controversial because the house price to income ratio remains far above its average since 1965. This average, however, is unlikely to be a good guide to fair value because the ratio has trended higher over time, reflecting factors such as improving quality, the pressure of an expanding population on constrained supply and a high income elasticity of demand for housing.

from Global Investing:

Big Five

Five things to think about this week:

REBOUND
- The global stock market has lost some of its spring, although it still managed a seventh straight  week of gains last week. A serious pullback has yet to be seen and the VIX is managing to hold fairly close to the sub-40 lows. Faced with a deluge of earnings, investors are picking their way through a mass of mixed earnings news and forecasts and displaying a more symmetric reaction to good/bad news than in past months.

STRESSES
- The U.S. financial stress testing timeline will put the focus back on the health of financials. Results, which are expected to point out banks' varying ability to cope with a severe recession, are due out on May 4 and the financial industry is already flagging the risks of failing to spell out what would happen to the weaker links in the chain. Stress test results and any rumours or leaks before publication could prompt volatility.

DATA FLOW
- The release of advance Q1 U.S. GDP will offer investors a clearer sense of whether worst is in the past and could point way to what might feed any eventual "green shoots" of recovery. In the euro zone, national and regional sentiment indicators will point the way to firms' and consumers' mood at the start of Q2.

Punctured Britain

If British chancellor Alistair Darling now occasionally tires of being reminded of his party’s erstwhile promise of  “no more boom and bust”, he won’t thank British accountancy firm Grant Thornton  for sending journalists a bike puncture repair kit.

Billed as “Darling’s economic repair kit — fixes deflation in all business cycles”, the marketing gimmick highlights the serious challenge facing Darling as he prepares to deliver his annual budget to parliament on April 22.

Researchers at the non-partisan Institute for Fiscal Studies  say Britain needs to find another 40 billion pounds in savings or higher taxes, equivalent to nearly 3 percent of GDP or £1,200 per family, if it is to balance its budget by the 2015/16 tax year, as Darling promised to do in his October pre-budget report.

Big five

Five things to think about this week:

– IS RATE OF ECONOMIC CONTRACTION SLOWING?
Some economic reports have been pointing to a slowdown in the pace at which economic conditions are deteriorating — eg U.S. home sales data; auto sales data; PMIs; UK lenders seeing improved credit availability in Q2, and PMI data. While job destruction is continuing apace, signs that inventories are being drawn down leave room for hope for those inclined to look for the silver lining, or even seek a bottom to the current downturn.

– REBOUND MOMENTUM
Investors are wondering whether equity markets can extend a solid Q2 start now that major fiscal stimulus announcements, rate cuts, QE  (in most developed economies), the London G20 meeting, and other big milestones are largely behind them. A sustained narrowing of corporate spreads, the VIX clearly breaking out of ranges that have held post-Lehman, and any shift out of defensive stocks are just some of the signals that would suggest that the rebound has legs.

– QE CLUB
The European Central Bank opted to wait another month before deciding on whether to join the QE club and unexpectedly left itself room for a further refi cut. By contrast, curveballs are unlikely from Bank of England and Bank of Japan policy meetings given their quantitative easings are under way. The relative performance of their respective sovereign debt markets is in focus as a result, as are the inflation outlooks being priced in by index-linked paper at a time when some are pondering the longer-term fallout of QE policy. The Reserve Bank of Ausstralia also meets this week week but markets finding it tough to call the outcome.