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Friday, July 31, 2015

Bloomberg: The U.S. Economy Is on Track to Finish a Decade Without Significant Growth

The U.S. Economy Is on Track to Finish a Decade Without Significant Growth

It would take a miracle for growth to reach 3 percent this year, marking a decade without it

A worker tightens a bolt on a completed lawnmower at a manufacturing facility in Coatesville, Indiana.

The U.S. economy keeps chugging ahead, more like a tortoise than a hare. At this rate, it won't be anywhere near where economists expect it to be at the end of the year.

Gross domestic product expanded at a 2.3 percent annualized rate in the second quarter, according to Commerce Department figures published Thursday. While that was an improvement over the 0.6 percent pace in the first three months of the year, it was less than economists had forecast.

The new figures all but assure GDP for the year yet again will fail to reach the 3-percent mark, the pace economists generally say is needed in order for the average American to really feel it.

``This has been a uniquely slow period of growth that's delivered very little for low- and middle-income households,'' said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities in Washington and former chief economist for Vice President Joe Biden. ``We need to grow faster and more equitably.'' 

The economy would have to grow at a 4.75-percent rate during the final two quarters of 2015 to reach 3 percent for the year. A recent Bloomberg survey of 70 economists found that the median forecast for the remainder of the year was for GDP of 3 percent.

A Decade without 3 Percent

The last time America expanded at 3 percent-plus for the year was 2005, according to Commerce data.  That means the nation is on track to miss such growth for an entire decade, a first in the post-World War II era. Why?

The recession was really bad

The most obvious explanation is that the nation suffered a financial crisis and deep recession driven by a bubble in housing that collapsed. It's simply taking a long time to recover. 

Housing numbers illustrate just how far from normal the U.S. still is. New home sales, for example, increased to a record 1.28 million in 2005. Then they dropped off a cliff for the next six years. Although they've started climbing again — and the pace of housing improvement is much healthier this time around — they're at only about a third of 2005's level.

The economy is less efficient

Another explanation is that whatever's restraining growth was operating in advance of the recession, and its effects were masked by, among other things, the housing bubble.

That's what the substantial drop in the growth of productivity, or output per hour of work, suggests. Labor Department figures show that productivity growth peaked in 2002, well before the economy slowed and contracted. Although productivity made a comeback in the midst of the recession, most economists agree that was the result of big layoffs that made companies look a lot more efficient, not any real improvement.

Productivity as Cause of Slow Growth

The nation is losing its entrepreneurial drive

Some analysts argue that the nation is losing its entrepreneurial drive, on which they say growth depends. They point to Census data that show that among U.S. firms, the share that are young -- less than a year old and with at least one employee -- has fallen from 11 percent in the early 1990s to 10 percent early in the last decade to 8 percent early in this decade.

Meanwhile, the fraction of firms that are 16-years-old or more has gone from 23 percent to 29 percent to 35 percent. 

Thursday, July 30, 2015

Bloomberg: The Amount of ETF Shares Being Traded Has Eclipsed U.S. GDP

The Amount of ETF Shares Being Traded Has Eclipsed U.S. GDP

And Wall Street loves it

Everyone is talking about how exchange-traded funds have now overtaken hedge funds in terms of total assets.

That's small change compared with how much ETFs trade nowadays.

In the past 12 months investors traded $18.2 trillion worth of ETF shares, according to data from the New York Stock Exchange and Bloomberg. That's a 17 percent increase from the 12 months prior and more than triple what it was 10 years ago. For perspective, that means the amount of dollars exchanging hands through ETFs is now more than the U.S. gross domestic product, which stands at $17.4 trillion. (Sadly, both those numbers are less than the U.S.'s $18.5 trillion in debt.)

Source: Bloomberg

But perhaps even more astonishing than the raw amount of trading is that U.S. ETFs only have $2.1 trillion in assets. In other words, the turnover in ETFs is about 870 percent a year. This is more than four times the turnover for U.S. stocks, which comes in at about 200 percent.

The increase in volume over the years can be attributed to both repeat customers as well as new participants who like anonymously darting in and out of everything from small-cap stocks to high-yield bonds to oil futures in an instrument that trades like a stock. Like a snowball rolling downhill, as an ETF sees volume increase it tends to attracts more, and bigger, investors, which in turn increase the volume.

All this manic trading is led by the insanely active SPDR S&P 500 ETF (SPY), which makes up a third of the total, or $6 trillion. That breaks down to about $24 billion a day, which is four times more than any other security on the planet and more than the next nine most traded equities combined. With $177 billion in assets, SPY's yearly turnover equates to a mind-boggling 3,400 percent.

Beyond SPY, ETFs account for three of the top four most active equities, with the iShares Russell 2000 ETF (IWM) and the Powershares QQQ Trust (QQQ) trading over $3 billion a day each. Beyond equities, another big-time contributor to the trading volume is the iShares 20+ Year Treasury Bond ETF (TLT), which trades $1.1 billion a day, or more than what Citigroup stock trades. TLT's massive volume shows just how thirsty investors are to trade bonds like stocks. (Individual bonds traditionally trade over the counter, and investors' use of ETFs to dip in and out of less liquid fixed-income assets has prompted quite a bit of controversy in recent years.)

But it isn't just the old-timer ETFs contributing to this trading as some of the newer, more complex ETFs are also throwing down some ridiculous numbers.

Nothing exemplifies this more than the VelocityShares Daily Inverse VIX Short-Term ETN (XIV), which trades $830 million worth of shares a day. That's more than what blue chip stocks such as Johnson & Johnson and Wal-Mart trade. On top of that is the fact that XIV only has $675 million in assets, which means its turnover is 122 percent a day, or 31,000 percent a year. Try getting your head around that. And when you are done getting your head around that, try getting your head around the fact that XIV is up 325 percent in five years from shorting VIX futures.

Source: Bloomberg

So what is the consequence of all this trading?

Well, on one hand it is certainly good for Wall Street because it means about $9 billion in revenue from making markets based on the asset-weighted average bid/ask spread of 0.05 percent, which is the difference between what a market maker will buy and sell an ETF for. This is compared to the $6 billion in estimated annual revenue that ETF issuers make based on the asset-weighted expense ratio of 0.30 percent.

But is it good for Main Street? It depends. If retail investors can fend off the temptation to trade, then all that increased activity is — perhaps rather ironically — a good thing for them, because it brings down the round-trip cost by tightening up the bid/ask spread. This can be seen in the fact that there are now well over 200 ETFs with an average bid/ask spread of 0.03 percent or less. That, combined with a low fee for a product that kicks out virtually no capital-gains taxes, and you have a sweet deal.

But if individual investors can't resist the temptation to jump into the fray and trade themselves silly, then they will just be making Wall Street richer, as well as justifying John Bogle's famous claim that "an ETF is like handing an arsonist a match."

Eric Balchunas is an exchange-traded-fund analyst at Bloomberg. This piece was edited by Bloomberg News.

—With assistance from James Seyffart in the Princeton office

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