Goldman Sachs on recession in Germany

Via Market Watch - Goldman Sachs foresees a period of recession in eurozone with Germany falling into negative growth in the forth quarter of 2011. In May 2011, we posted on recession in germany and showed that this period will be a lenghty one ( http://mechonomic.blogspot.com/2011/05/how-long-will-last-real-economic-growth.html) . Figure 1 reproduces  some details of our prediction  of real GDP per capita in Germany.

Figure 1. Observed and predicted rate of real GDP growth in Germany after the reunification.
Lower panel - The original curves are smoothed with MA(3).

Paul Krugman compares inflation in US and Japan

Paul Krugman, after this piece admitting the general failure of economics, explains in here why inflation in Japan is very low (due to deflation expectations) and why the US will repeat all the way down. Except the future of the US inflation, i.e. deflation starting in  2012, there is no right explanation os the driving force behind price inflation. We explained the case of Japan five years ago, and predicted an extended period of deflation in the US six years ago. 

Oil falls - attractive to buy

Today, oil price has been declining since early morning. It looks more and more attractive to buy. For $78 per barrel one cac obtain between 3% and  5% return in a week or so with the price at $82 to $84. Two weeks ago we proposed the same thing and the return was around 10% with back and forth oscillations between $84 and $79.

Time to buy oil futures. Again

Ten days ago the price of oil was very low relative to its expected level in September. We concluded that it was a good time to buy oil futures because the price had to bounce back to $84. It did happen several days later and we proposed to sell at $84. Now it is a good time again to buy oil futures since the current price is below the expected equilibrium level for October, which is between $80 and  $82. The expected return at a two-week horizon is about 3%.

Summer issue of Theoretical and Practical Research in Economic Fields

As an Editor, I am happy to announce that the summer issue of the Theoretical and Practical Research in Economic Fields has been published. There is my paper as well, pp. 86-93:

THE EVOLUTION OF FIRM SIZE DISTRIBUTION

Ivan O. KITOV

Institute for the Geospheres‟ Dynamics

Russian Academy of Sciences, Moscow, Russia

Abstract

Significant differences in the evolution of firm size distribution for various industries in the United States have been revealed and documented. For theoretical considerations, this finding puts major constraints on the modelling of firm growth. For practical purposes, the observed differences create a solid basis for selective investment strategies.

Keywords: firm size distribution, Pareto distribution, the USA, evolution, investment

JEL Classification: L11, L17, G1

Summer issue of Journal of Applied Economic Sciences

The summer issue of the Journal of Applied Economic Sciences has been published. It includes our paper "A win-win monetary policy in Canada", pp.160-180

Abstract

The Lucas critique has exposed the problem of the trade-off between changes in monetary policy and structural breaks in economic time series. The search for and characterization of such breaks has been a major econometric task ever since. We have developed an integral technique similar to CUSUM using an empirical model quantitatively linking the rate of inflation and unemployment to the change in the level of labour force in Canada. Inherently, our model belongs to the class of Phillips curve models, and the link between the involved variables is a linear one with all coefficients of individual and generalized models obtained by empirical calibration. To achieve the best LSQ fit between measured and predicted time series cumulative curves are used as a simplified version of the 1-D boundary elements (integral) method. The distance between the cumulative curves (in L2 metrics) is very sensitive to structural breaks since it accumulates true differences and suppresses uncorrelated noise and systematic errors. Our previous model of inflation and unemployment in Canada is enhanced by the introduction of structural breaks and is validated by new data in the past and future. The most exiting finding is that the introduction of inflation targeting as a new monetary policy in 1991 resulted in a structural break manifested in a lowered rate of price inflation accompanied by a substantial fall in the rate of unemployment. Therefore, the new monetary policy in Canada is a win-win one.

Keywords: structural break, inflation, unemployment, labor force, modeling

Good time to sell oil futures

In May 2011, we predicted oil (WTI) price to fall to the level of $70 per barrel by the end of 2011. This is a monthly revision for September 2011. We consider the average oil price of $84 per barrel what is equivalent to the producer price index of 244 in September. (Actual estimate will be published by the Bureau of Labor Statistics in the middle of October.)


Figure 1 compares our prediction with actual oil price in 2011. In August 2011, the predicted price is a bit higher than the measured one. In any case, we expect the price to fall by approximately $5 per month to the level of ~$70 in December 2011. We also expect the price to slowly fall through 2016 and put the uncertainty bounds for the long-term trend in oil price. The level of oil price in 2016 is between $30 and $60 per barrel. These bounds are also shown in Figure 1.

A week ago, when oil price was at ~$79 per barrel, we recommended buying oil futures. The intuition behind this idea was that $79 is approximately $5 below the expected price for September. This is a disequilibrium which should be recovered in the short run. Today, oil price is at the level of ~84. This is the equilibrium level for September. A small hike in oil price is possible during the next few days. However, at a two-week horizon, oil price should fall again. Therefore, I recommend selling now and buying in approximately two weeks or when the price will be around $75. It will grow to the level of ~$82 to $85 in October or November.

Figure 1. Oil price prediction in 2011. The price is expected to fall by $5 per month between June and December 2011. The price level is ~$70 in December 2011. We also show the range of expected price evolution by 2016.