Early Q4 we predicted that forecasters would revise their forecasts for 2011 GDP much higher. Consensus was then on the order of 2.3%. All did so, the average now something like 3.6%.
We also predicted early Q4 that consumer activity would continue to blow through estimates, Q1. Instead, we have seen a moderation from the surprising strength of Q4. Most, converted by results of Q4 and not anxious to be wrong once again, blame this on weather and gasoline prices. Maybe. We think these’s some “pause” in this too, that is, intent.
We have a slew of key releases this week, concluding with Feb Payroll on Friday.
Today we have seen that Jan spending rose 0.2%, only half of expectations.
Today we also saw the result of a Chicago purchasing manager survey, which shows manuf activity in the region surged in Feb, expanding at its fastest pace since Jul/88. All of the major manuf indexes were strong for Feb. This fits our anchor quite nicely.
Again, the risk to our view for the US real sector is that which is driven by events in the Mid East (see previous blogs). But even these events carry very positive implications for the US economy, years ahead.
Robert Craven
Monday, February 28, 2011
Middle East
We have followed the Mid Eastern situation rather closely past years. Investors world wide are at this writing trying to guess the extent of contagion in that region. We can help them. It will be all enveloping.
A fissure has been detected and it will be exploited. To repeat from an earlier sketch - this movement will not be limited to Egypt and Libya. We are now at launch time.
The degree of violence accompanying this adjustment is an unknown to us. However, the course of least resistance for crude prices over the intermediate term is higher. A 30% increase in crude (for ex., 125 on W Texas inter.) is the high side risk as we take this path. And that would deliver a significant retardant to US growth, especially crimping consumer activity, shaving at least 1 ½ % from GDP if maintained for very long.
Corporate planners and investors are to account for this risk.
From Mark LeVine, a prof at UC Irvine, and sr visiting researcher at the Centre for Middle Eastern Studies at Lund Univ in Sweden: “The youth of the Arab world, until yesterday considered a ‘demographic bomb’ waiting to explode in religious militancy and Islamo-fascism, is suddenly revealed to be a demographic gift, providing precisely the vigour and imagination that for generations the people of the region have been told they lacked. They have wired - or more precisely today, unwired - themselves for democracy, creating virtual and real public spheres were people from across the political, economic and social spectrum are coming together in common purpose.”
And so it is. Even now we witness the unthinkable - protest in the quiet backwater of Oman, before a sedate and tranquil country. Two people have been killed. Suddenly the Sultan has promised to create 50M jobs, plus an allowance equivalence of $390 for job seekers.
The Sultan does not understand that he and his kind cannot provide a solution; they are the problem.
Naturally, an evolution to consensual gov’t in this region is a plus for the US. It is a guarantee as we said before of long-term energy security (another is enlightened US energy policy, material for another sketch).
We have witnessed the birth of a new era in the Mid East, one which can only enhance the interests of the West in years to come.
Robert Craven
A fissure has been detected and it will be exploited. To repeat from an earlier sketch - this movement will not be limited to Egypt and Libya. We are now at launch time.
The degree of violence accompanying this adjustment is an unknown to us. However, the course of least resistance for crude prices over the intermediate term is higher. A 30% increase in crude (for ex., 125 on W Texas inter.) is the high side risk as we take this path. And that would deliver a significant retardant to US growth, especially crimping consumer activity, shaving at least 1 ½ % from GDP if maintained for very long.
Corporate planners and investors are to account for this risk.
From Mark LeVine, a prof at UC Irvine, and sr visiting researcher at the Centre for Middle Eastern Studies at Lund Univ in Sweden: “The youth of the Arab world, until yesterday considered a ‘demographic bomb’ waiting to explode in religious militancy and Islamo-fascism, is suddenly revealed to be a demographic gift, providing precisely the vigour and imagination that for generations the people of the region have been told they lacked. They have wired - or more precisely today, unwired - themselves for democracy, creating virtual and real public spheres were people from across the political, economic and social spectrum are coming together in common purpose.”
And so it is. Even now we witness the unthinkable - protest in the quiet backwater of Oman, before a sedate and tranquil country. Two people have been killed. Suddenly the Sultan has promised to create 50M jobs, plus an allowance equivalence of $390 for job seekers.
The Sultan does not understand that he and his kind cannot provide a solution; they are the problem.
Naturally, an evolution to consensual gov’t in this region is a plus for the US. It is a guarantee as we said before of long-term energy security (another is enlightened US energy policy, material for another sketch).
We have witnessed the birth of a new era in the Mid East, one which can only enhance the interests of the West in years to come.
Robert Craven
Wednesday, February 23, 2011
Opportunity
Wild card events are just that - wild because they present a complete surprise to the auction markets - they are not priced in. The popular surge against despots in the Mid East is such an event. No one we knew anticipated the pace of contagion after initial Egyptian turmoil. No one we knew guessed that a guy named Gaddafi might threaten to sabotage his own oil fields a few days later.
A 30% increase in the price of oil is a reasonable target if violence continues. Such a price if maintained for say six months would shave at least 1 ½ % from GDP, likely more, our humble guess. Costlier crude would tip many nations into a recession.
The markets aren’t horribly worried at the moment; there has been some quality flight to US treasuries but there is no panic. Most high users like airlines always hedge fuel costs, so for example one major airline is actually saving money when crude rises above $88. And it’s expected that the Saudi’s will kick in to help, plus OECD reserve levels are high. Finally, one of two functioning democracies in the region - Iraq - will contribute. (It is no surprise that Iraq and Israel have not been visited by uprisings.)
Still, the risk is a set back in US growth delivered by higher oil prices. This is so because most observers do not appreciate the fervor of those so long oppressed in the Mid East. Free society will pay a hefty price to deliver consensual gov’t to this region. We won’t get there without further turmoil, and we won’t get there at all unless the administration comes to understand the use of US leverage in delivering change.
Obama failed to support the Iranian freedom protestors, ignored the abuses of the Cuban and Syrian totalitarian regimes, and kept silent about the destruction of democracy in Venezuela.
He is at the very bottom of his learning curve. He needs to understand that the best guarantee to long-term energy security are free people and free markets; and, he needs to do his part.
Robert Craven
A 30% increase in the price of oil is a reasonable target if violence continues. Such a price if maintained for say six months would shave at least 1 ½ % from GDP, likely more, our humble guess. Costlier crude would tip many nations into a recession.
The markets aren’t horribly worried at the moment; there has been some quality flight to US treasuries but there is no panic. Most high users like airlines always hedge fuel costs, so for example one major airline is actually saving money when crude rises above $88. And it’s expected that the Saudi’s will kick in to help, plus OECD reserve levels are high. Finally, one of two functioning democracies in the region - Iraq - will contribute. (It is no surprise that Iraq and Israel have not been visited by uprisings.)
Still, the risk is a set back in US growth delivered by higher oil prices. This is so because most observers do not appreciate the fervor of those so long oppressed in the Mid East. Free society will pay a hefty price to deliver consensual gov’t to this region. We won’t get there without further turmoil, and we won’t get there at all unless the administration comes to understand the use of US leverage in delivering change.
Obama failed to support the Iranian freedom protestors, ignored the abuses of the Cuban and Syrian totalitarian regimes, and kept silent about the destruction of democracy in Venezuela.
He is at the very bottom of his learning curve. He needs to understand that the best guarantee to long-term energy security are free people and free markets; and, he needs to do his part.
Robert Craven
Monday, February 21, 2011
A Must Read for Obama
This week’s event calendar is light, primarily related to housing. We will also see Jan Durable orders on Thur. Durables is a key release but it’s so volatile recently that we can’t assign a risk to the number.
There is however something far more profound by the way of potential impact to US interests and prosperity than any number of key releases might ever be. That would be the eruption in the Mid East, the surging demand for consensual government.
We reprint in its entirety our sketch from May/06. Yes, we jumped the gun a tad. And yes, this administration has so far done nothing to foster democracy in this area. Nevertheless, we are witnessing the beginning of the end for a few, and the beginning of the beginning for many.
Obama needs only to let the four paragraphs below become his guide, and to sculpt US policy accordingly.
May/03/06:
Over the next 12 to 18 months we will witness a conflagration of sorts: Democracy will spread throughout the Middle East as a pace very few can now appreciate; with the encouragement of the US, dissidents will upset primitive, brutal, autocratic and theocratic regimes and replace these with a new beginning - the foundations for a responsive government.
Realists have maintained that the Mid East is the least hospitable place in the world for a democracy. They are mistaken. Arab countries have aped western ideas but sought to implement these through state power - failed capitalist dictatorships. The inevitable decay and failure, the brutality of rule have together bred a growing sub-surface counterculture of resistance. It is this reservoir of energy, before constrained or crushed by ruling thugs, that now will be married to an enlightened US policy, ultimately transforming the region. And so now we are witnessing the beginning of the end for the old order.
The Administration’s formula is a simple one. It begins with the truth that all men and women will chose self determination over a directed and compulsory existence. Next is the fact that the spread of consensual government is in the direct interest of the US. A free society is not a threat to its neighbors. Trade and enhancement of wealth are only furthered.
Finally, the US will promote democracy in nondemocratic regimes by linking our foreign policy, our money, expertise and markets to internal reform - how these societies treat their own. All the countries in the Mid East are dependent on the West. We have the leverage. Given the base of internal dissent a regime need only give a little, say in the election process in exchange for US trade preference, and the fissure provided will quickly open to unleash a torrent.
Robert Craven
There is however something far more profound by the way of potential impact to US interests and prosperity than any number of key releases might ever be. That would be the eruption in the Mid East, the surging demand for consensual government.
We reprint in its entirety our sketch from May/06. Yes, we jumped the gun a tad. And yes, this administration has so far done nothing to foster democracy in this area. Nevertheless, we are witnessing the beginning of the end for a few, and the beginning of the beginning for many.
Obama needs only to let the four paragraphs below become his guide, and to sculpt US policy accordingly.
May/03/06:
Over the next 12 to 18 months we will witness a conflagration of sorts: Democracy will spread throughout the Middle East as a pace very few can now appreciate; with the encouragement of the US, dissidents will upset primitive, brutal, autocratic and theocratic regimes and replace these with a new beginning - the foundations for a responsive government.
Realists have maintained that the Mid East is the least hospitable place in the world for a democracy. They are mistaken. Arab countries have aped western ideas but sought to implement these through state power - failed capitalist dictatorships. The inevitable decay and failure, the brutality of rule have together bred a growing sub-surface counterculture of resistance. It is this reservoir of energy, before constrained or crushed by ruling thugs, that now will be married to an enlightened US policy, ultimately transforming the region. And so now we are witnessing the beginning of the end for the old order.
The Administration’s formula is a simple one. It begins with the truth that all men and women will chose self determination over a directed and compulsory existence. Next is the fact that the spread of consensual government is in the direct interest of the US. A free society is not a threat to its neighbors. Trade and enhancement of wealth are only furthered.
Finally, the US will promote democracy in nondemocratic regimes by linking our foreign policy, our money, expertise and markets to internal reform - how these societies treat their own. All the countries in the Mid East are dependent on the West. We have the leverage. Given the base of internal dissent a regime need only give a little, say in the election process in exchange for US trade preference, and the fissure provided will quickly open to unleash a torrent.
Robert Craven
Thursday, February 17, 2011
Employment The Laggard
The US economy is progressing at a far better pace than most observers expected. Still, employment lags during this recovery.
Why? Shock treatment provided by Obama.
Potential employers took one look at Obama’s statist agenda and realized quickly that new employees were ticking time bombs. One could almost feel the collective corporate decision. Not just the health burden; witness the NLRB’s more aggressive attacks on the employer; then there is the notion of mandatory IRA’s for small employers. Or that in Jan/09 Obama signed the Lilly Ledbetter Fair Pay Act (S. 181). The new law will increase the number of pay discrimination claims, make them much more difficult to defend, and force employers to retain records relating to compensation decisions far longer than they have in the past.
In past reports we have quoted several CEO’s; it’s all the same - Obama scared the daylights out of these guys. The employment dept was closed. Naturally. Why in the world would anyone in his right mind want to take on a new employee with this guy at the helm?
Witness the recent sharp growth of shipping in the ports of LA and Long Beach, as reported in today's LA Times. Did trade employment numbers respond also? Only partially. As explained by one trade economist, “Trade employment numbers don’t reflect the growth in cargo movement because many companies have gotten more efficient......”
Companies made investments in efficiency, investments that were put off before. These planners were literally shocked into action.
Here is the answer to lagging employment.
Robert Craven
Why? Shock treatment provided by Obama.
Potential employers took one look at Obama’s statist agenda and realized quickly that new employees were ticking time bombs. One could almost feel the collective corporate decision. Not just the health burden; witness the NLRB’s more aggressive attacks on the employer; then there is the notion of mandatory IRA’s for small employers. Or that in Jan/09 Obama signed the Lilly Ledbetter Fair Pay Act (S. 181). The new law will increase the number of pay discrimination claims, make them much more difficult to defend, and force employers to retain records relating to compensation decisions far longer than they have in the past.
In past reports we have quoted several CEO’s; it’s all the same - Obama scared the daylights out of these guys. The employment dept was closed. Naturally. Why in the world would anyone in his right mind want to take on a new employee with this guy at the helm?
Witness the recent sharp growth of shipping in the ports of LA and Long Beach, as reported in today's LA Times. Did trade employment numbers respond also? Only partially. As explained by one trade economist, “Trade employment numbers don’t reflect the growth in cargo movement because many companies have gotten more efficient......”
Companies made investments in efficiency, investments that were put off before. These planners were literally shocked into action.
Here is the answer to lagging employment.
Robert Craven
Data Week in Review
We predicted on Monday that this week’s data would show that 1) core price pressures remain contained (because that which is not “contained” is ex’d out), that 2) consumer activity will continue to grow and 3) that manufacturing is booming. Let’s take a look.
Core CPI rose 0.2% vs consensus of 0.1%; core PPI rose 0.5% vs expectations of 0.3%. Core consumer prices are 1.0% above their year ago level, one of the slowest paces in the 52 years of data collection. Fine and dandy, and of course when transportation, apparel and medical care prices begin to spark, suppose we can ex those out too. And eventually, growing price pressures at the producer level will filter through.
Next, consumer activity continued to grow alright, but a tad slower than the St expected, given forecasters are now used to consumers broaching expectations. Some blame it on weather. But the weather was no secret. We’ll see. Retail sales rose 0.3% in Jan vs expectations of 0.5%. The consumer is alright, and is still shopping despite high unemployment, sluggish income growth and tight (but now loosening) credit.
Finally, manuf activity is indeed booming. We saw that activity of NY based firms improved further in February, and today, that activity in the mid-Atlantic region (Phil Fed survey) is off the charts, the survey at the highest level since Jan/04; new orders at the best pace since Sep/04; shipments at the fastest pace since July/04 and employment at its highest level since record keeping began in 1968.
(We did receive the Bloomberg consumer conf survey today and it was lower. Ignore all confidence surveys. They contain nearly zero leading characteristics, our experience.)
Bottom line: Basement price pressures are building, yet are on the radar so nothing really mkt moving yet, that is, this reality is priced in. Manuf activity and related employment was not on the radar and will cause forecasters to improve their forecasts. Finally, after our significant insight early on regarding consumer activity, we are now in neutral and will monitor this sector over the near term.
Robert Craven
Core CPI rose 0.2% vs consensus of 0.1%; core PPI rose 0.5% vs expectations of 0.3%. Core consumer prices are 1.0% above their year ago level, one of the slowest paces in the 52 years of data collection. Fine and dandy, and of course when transportation, apparel and medical care prices begin to spark, suppose we can ex those out too. And eventually, growing price pressures at the producer level will filter through.
Next, consumer activity continued to grow alright, but a tad slower than the St expected, given forecasters are now used to consumers broaching expectations. Some blame it on weather. But the weather was no secret. We’ll see. Retail sales rose 0.3% in Jan vs expectations of 0.5%. The consumer is alright, and is still shopping despite high unemployment, sluggish income growth and tight (but now loosening) credit.
Finally, manuf activity is indeed booming. We saw that activity of NY based firms improved further in February, and today, that activity in the mid-Atlantic region (Phil Fed survey) is off the charts, the survey at the highest level since Jan/04; new orders at the best pace since Sep/04; shipments at the fastest pace since July/04 and employment at its highest level since record keeping began in 1968.
(We did receive the Bloomberg consumer conf survey today and it was lower. Ignore all confidence surveys. They contain nearly zero leading characteristics, our experience.)
Bottom line: Basement price pressures are building, yet are on the radar so nothing really mkt moving yet, that is, this reality is priced in. Manuf activity and related employment was not on the radar and will cause forecasters to improve their forecasts. Finally, after our significant insight early on regarding consumer activity, we are now in neutral and will monitor this sector over the near term.
Robert Craven
Wednesday, February 16, 2011
Central Planners at the Fed
It never works. A planned economy that is. As most of the world has given it up - China and India the largest and most recent examples - first Obama, and now Bernanke have embraced it.
With 2012 in mind Obama pretends he’s learned his lesson. Bernanke makes no such overtures.
The Fed’s mandate was price stability; full employment is now included. An individual or individuals may see to the first, the later is far out of scope for any would-be social architect.
When the Fed sticks close to home - supplying or extracting short term funds, letting the rest of the term structure see to its own, it does pretty well. When the Fed tries to manipulate longer term interest rates - rates then no longer driven by the old fashioned myriad of mkt pressures, but by planners at the FOMC - we are in for some trouble (See our Feb/9 sketch).
Sure they’ve got all the statistics at their disposal, sure they’re all experts, these Fed types, sure they’ve got the power to pull almost any trigger. But that’s no different from any planners of the past - all of whom have failed. Heck, even modern day Communists and socialists have begun to repudiate this approach. Communist China, a phony, knows best. As they replaced planning with more reliance on markets their growth rate spiked.
Thomas Sowell reminds us that, “Elites may have more brilliance, but those who make decisions for society as a whole cannot possibly have as much experience as the millions of people whose decisions they preempt. The education and intellects of the elites may lead them to have more sweeping presumptions, but that just makes them more dangerous to the freedom, as well as to the well-being, of the people as a whole.”
Robert Craven
With 2012 in mind Obama pretends he’s learned his lesson. Bernanke makes no such overtures.
The Fed’s mandate was price stability; full employment is now included. An individual or individuals may see to the first, the later is far out of scope for any would-be social architect.
When the Fed sticks close to home - supplying or extracting short term funds, letting the rest of the term structure see to its own, it does pretty well. When the Fed tries to manipulate longer term interest rates - rates then no longer driven by the old fashioned myriad of mkt pressures, but by planners at the FOMC - we are in for some trouble (See our Feb/9 sketch).
Sure they’ve got all the statistics at their disposal, sure they’re all experts, these Fed types, sure they’ve got the power to pull almost any trigger. But that’s no different from any planners of the past - all of whom have failed. Heck, even modern day Communists and socialists have begun to repudiate this approach. Communist China, a phony, knows best. As they replaced planning with more reliance on markets their growth rate spiked.
Thomas Sowell reminds us that, “Elites may have more brilliance, but those who make decisions for society as a whole cannot possibly have as much experience as the millions of people whose decisions they preempt. The education and intellects of the elites may lead them to have more sweeping presumptions, but that just makes them more dangerous to the freedom, as well as to the well-being, of the people as a whole.”
Robert Craven
Commodity Price Inflation - A Closer Look
World commodity price inflation continues to monopolize the headlines. We spotlighted this topic in January. Food inflation (and income inequality, and high youth unemployment) has sparked much of the recent violence in the developing world. A closer look is in order.
We hear that price hikes in food and energy stocks, past 12 months, are impoverishing folks in lesser developed countries. Mother nature had a hand in much of this. We just saw the worst drought in Russia and the Black Sea region for 130 years, lasting long enough to damage winter planting as well as the summer harvest. This was compounded by late rains in Canada, Nina disruptions in Argentina, plus increased US grain acreage for ethanol, so on and so on. For example, the world’s stocks-to-use ratio for corn is nearing a 30-year low of 12.8pc, according to Rabobank.
Next, we know the developing world is booming, or was. So this - world demand - adds pressure. But these conditions have existed before, even in tandem. What else is there? Why the spike? Many blame Bernanke. Let’s see.
Take China as an example.
Chinese consumers find themselves paying exorbitant prices for food stuffs. Here is the money portion of the equation: Everybody in the world wants to invest in China. The Fed’s printing a ton of “hot money” (money which does not come from an increase in wealth or consumer demand, but from the press) and since there’s no need for it in the US a heck of a lot of it headed for China. Coming on top of China’s massive trade surplus (in dollars) these inflows provide a migraine to the Bk of China. Why? A cheaper dollar makes their yuan more expensive; their exports shrink. So the gov’t mops up these dollars from exporters and banks and prints yuan for each dollar purchased. That’s a heck of a lot of yuan thrown on the domestic market.
This is fine for the chosen policy of mercantilism but tough on Chinese consumers. Their currency is depreciated; they pay more for cooking oil and wheat while their export industry prospers. The Chinese gov’t is sacrificing the consumer on the alter of trade by choosing to import US monetary policy. Other countries who cannot resort to currency management are doling out more subsidies for energy and food. This behavior runs the risk of stalling the recovery in the developing world.
So yes, if you inflate the world’s money supply by $1.5 trl nowadays, you can be pretty sure that you’ll spark prices on those global, auction-priced goods priced in $’s, such as food and energy. In the meantime Bernanke plods along, battling the deflationary ghost.
Robert Craven
We hear that price hikes in food and energy stocks, past 12 months, are impoverishing folks in lesser developed countries. Mother nature had a hand in much of this. We just saw the worst drought in Russia and the Black Sea region for 130 years, lasting long enough to damage winter planting as well as the summer harvest. This was compounded by late rains in Canada, Nina disruptions in Argentina, plus increased US grain acreage for ethanol, so on and so on. For example, the world’s stocks-to-use ratio for corn is nearing a 30-year low of 12.8pc, according to Rabobank.
Next, we know the developing world is booming, or was. So this - world demand - adds pressure. But these conditions have existed before, even in tandem. What else is there? Why the spike? Many blame Bernanke. Let’s see.
Take China as an example.
Chinese consumers find themselves paying exorbitant prices for food stuffs. Here is the money portion of the equation: Everybody in the world wants to invest in China. The Fed’s printing a ton of “hot money” (money which does not come from an increase in wealth or consumer demand, but from the press) and since there’s no need for it in the US a heck of a lot of it headed for China. Coming on top of China’s massive trade surplus (in dollars) these inflows provide a migraine to the Bk of China. Why? A cheaper dollar makes their yuan more expensive; their exports shrink. So the gov’t mops up these dollars from exporters and banks and prints yuan for each dollar purchased. That’s a heck of a lot of yuan thrown on the domestic market.
This is fine for the chosen policy of mercantilism but tough on Chinese consumers. Their currency is depreciated; they pay more for cooking oil and wheat while their export industry prospers. The Chinese gov’t is sacrificing the consumer on the alter of trade by choosing to import US monetary policy. Other countries who cannot resort to currency management are doling out more subsidies for energy and food. This behavior runs the risk of stalling the recovery in the developing world.
So yes, if you inflate the world’s money supply by $1.5 trl nowadays, you can be pretty sure that you’ll spark prices on those global, auction-priced goods priced in $’s, such as food and energy. In the meantime Bernanke plods along, battling the deflationary ghost.
Robert Craven
Monday, February 14, 2011
Conspiratorial? Certainly Not!
We’ll see quite a little data this week folks. Some carries no mkt-moving potential. Some does, beginning with Jan Retail Sales tomorrow, then on to the Jan PPI, Housing Starts and Ind Production data, all on Wed., then finally to Jan CPI and the Phil Fed’s Regional Manuf’s Outlook survey on Thur.
By Friday we will have seen that core price pressures remain contained (because that which in not “contained” is ex’d out). We will see that consumer activity continues to grow, that manuf is booming. If longer-term interest rates where only impacted by this data, in isolation then they would be just a tad higher at the end of the week, and only a tad as the mkt crowd is told there is no inflation; they take that home with them.
We can peer offshore for just a moment however to see what would happen to US rates if the mkt view grew for inflationary pressures. The UK Gilt (10 yr UK obligation) is now 50 or so basis points (each “basis point” is .01 of 1%) higher that beginning year levels, last at 3.85%. The US 10 yr is only 30 bps higher for the same time period, last 3.66%. Measured inflation in the UK is almost double that in the US and the Fed-fueled spike in global commodity prices has had a heck of a lot to do with it (along with a weak currency). But Bk of Eng gov King won’t budge, won’t brake with a hike, parroting Benanke that inflation is near zero if one ex’s food and energy.
Well folks, we are not of a conspiratorial bent. However, if we were we might say that the Fed is going to extremes, looking for any excuse to keep rates in the cellar, because of its incestuous relationship with major St firms - the two are linked at the waist. We know from personal experience this to be a fact. Unusually and unnaturally low rates make a ton of $ for St firms; they can finance practically any inventory at a profit. There is a good part of your answer why the Fed, and maybe even the Bank of England are looking the other way.
Oh, but then we’re not conspiratorial. Forgot that.
Robert Craven
By Friday we will have seen that core price pressures remain contained (because that which in not “contained” is ex’d out). We will see that consumer activity continues to grow, that manuf is booming. If longer-term interest rates where only impacted by this data, in isolation then they would be just a tad higher at the end of the week, and only a tad as the mkt crowd is told there is no inflation; they take that home with them.
We can peer offshore for just a moment however to see what would happen to US rates if the mkt view grew for inflationary pressures. The UK Gilt (10 yr UK obligation) is now 50 or so basis points (each “basis point” is .01 of 1%) higher that beginning year levels, last at 3.85%. The US 10 yr is only 30 bps higher for the same time period, last 3.66%. Measured inflation in the UK is almost double that in the US and the Fed-fueled spike in global commodity prices has had a heck of a lot to do with it (along with a weak currency). But Bk of Eng gov King won’t budge, won’t brake with a hike, parroting Benanke that inflation is near zero if one ex’s food and energy.
Well folks, we are not of a conspiratorial bent. However, if we were we might say that the Fed is going to extremes, looking for any excuse to keep rates in the cellar, because of its incestuous relationship with major St firms - the two are linked at the waist. We know from personal experience this to be a fact. Unusually and unnaturally low rates make a ton of $ for St firms; they can finance practically any inventory at a profit. There is a good part of your answer why the Fed, and maybe even the Bank of England are looking the other way.
Oh, but then we’re not conspiratorial. Forgot that.
Robert Craven
Friday, February 11, 2011
Inflation (of another sort) at the Fed
Bernanke was taken to task yesterday by Rep Paul Ryan, a well know critic. Ryan is more than a critic; he is a would-be executioner. Some at the Fed think Ryan’s elevator doesn’t go all the way to the top. Yes it does and he’s providing a real service to all of us.
Since CSPAN came along most legislators fear a confrontation with Fed policy makers. When challenged at a hearing for example Greenspan would launch a circuitous counter attack, saying nothing really but drawing on endless words and numbers which snowed his opponents, and, right in front of their constituents. Thus, most just let it go.
Ryan won’t do that. Whether we agree of not with his view, Ryan’s providing fresh air.
Bernanke’s intellectual honesty distinguished him from his predecessor. We hope it still does. Yet he is in fact a tad “cocky” as Ryan noted. What’s behind that exactly?
Being human, policy makers are often drawn in by the aura of their surroundings, by the complexity of their wares, by the fawning of the masses, their egos soon inflating to before unknown proportions. After a while they admit they’re still mortals, but just barely. Or so they pretend.
Fed presidents remain more grounded in this regard; governors less so. Presidents work their way up, actual business people; gov’s are appointed. Some like Greenspan are simply and purely politically promiscuous. For example, Worth mag noted that Greenspan when in private practice was the “worst forecaster ever.” No problem.
All of the FOMC however, every one of them carry with them a haunting, a perceived vulnerability, their own heart of darkness. That would be the very fact that they know they don’t know a whole lot more than the rest of us; they’re not seers and they’re not prophets. Policy making is a crap shoot; they know it, they’ll just never admit it. For the rest of us to know that they know it, would, or so they believe obliterate their credibility. That is why for example they had and will always fight to the death, efforts to video tape their deliberations.
They’ve got a tough job. They make it a lot tougher by pretending they’re something they’re not.
Robert Craven
Since CSPAN came along most legislators fear a confrontation with Fed policy makers. When challenged at a hearing for example Greenspan would launch a circuitous counter attack, saying nothing really but drawing on endless words and numbers which snowed his opponents, and, right in front of their constituents. Thus, most just let it go.
Ryan won’t do that. Whether we agree of not with his view, Ryan’s providing fresh air.
Bernanke’s intellectual honesty distinguished him from his predecessor. We hope it still does. Yet he is in fact a tad “cocky” as Ryan noted. What’s behind that exactly?
Being human, policy makers are often drawn in by the aura of their surroundings, by the complexity of their wares, by the fawning of the masses, their egos soon inflating to before unknown proportions. After a while they admit they’re still mortals, but just barely. Or so they pretend.
Fed presidents remain more grounded in this regard; governors less so. Presidents work their way up, actual business people; gov’s are appointed. Some like Greenspan are simply and purely politically promiscuous. For example, Worth mag noted that Greenspan when in private practice was the “worst forecaster ever.” No problem.
All of the FOMC however, every one of them carry with them a haunting, a perceived vulnerability, their own heart of darkness. That would be the very fact that they know they don’t know a whole lot more than the rest of us; they’re not seers and they’re not prophets. Policy making is a crap shoot; they know it, they’ll just never admit it. For the rest of us to know that they know it, would, or so they believe obliterate their credibility. That is why for example they had and will always fight to the death, efforts to video tape their deliberations.
They’ve got a tough job. They make it a lot tougher by pretending they’re something they’re not.
Robert Craven
Thursday, February 10, 2011
This morning's unemployment claims.
The number of claimants for benefits fell by 36M for the week ended Feb/5, far better than forecast and the lowest level since July/08.
Now folks, there’s always the temptation to cherry pick results to fit one’s prediction. For example, we stated early Q4 ‘10 that jobs data would flatten estimates. Most measures have cooperated, but the last two payroll releases did not, or at least, nothing to rave about.
On its face, this am’s claims number provides major support to our view, or would, if not for the weather. That has a lot to do with this read no doubt, although the Labor Dept claims weather effects, which delay the filing and processing of claims, are unwinding. Maybe. From years observing this data we know there is typically a lot of volatility in the claims data between Nov and mid-Feb.
Bottom line: The jobs market is performing better than almost anyone expected, six months ago. It is not booming, but improving very gradually. Due to results of Nov/2 - the cheering of potential employers - look for acceleration in this rate of improvement.
Robert Craven
Now folks, there’s always the temptation to cherry pick results to fit one’s prediction. For example, we stated early Q4 ‘10 that jobs data would flatten estimates. Most measures have cooperated, but the last two payroll releases did not, or at least, nothing to rave about.
On its face, this am’s claims number provides major support to our view, or would, if not for the weather. That has a lot to do with this read no doubt, although the Labor Dept claims weather effects, which delay the filing and processing of claims, are unwinding. Maybe. From years observing this data we know there is typically a lot of volatility in the claims data between Nov and mid-Feb.
Bottom line: The jobs market is performing better than almost anyone expected, six months ago. It is not booming, but improving very gradually. Due to results of Nov/2 - the cheering of potential employers - look for acceleration in this rate of improvement.
Robert Craven
Wednesday, February 9, 2011
Thouhts on the Fed chair before the House.
Chairman Bernanke defended his expansionary policy today. Our view is that it’s misguided.
But whatever it is, it is a stealth operation. Bernanke points to Core CPI (not the broader #) as cover for QE2, noting that Core CPI is now as low as it's been in many years. Well naturally Ben. It’s “EX” everything that’s on its way to the moon - food & energy. This is convenient for the Fed, just as it was when Art Burns decided to take food & energy out so he could fuel Nixon’s reelection. It stuck. His rationale? The Fed has no control over wheat or oil prices; these are mostly driven by weather and other acts of God.
Now of course the spike in world commodity prices is driven, not just by natural phenomena but by the Fed’s dollar-creation machine. It hits first the 40-odd countries who peg or closely peg to the $. As we noted in an earlier sketch, they either import inflation (print their local currency to buy $’s to keep the $ expensive) or they allow their currency to strengthen and tank their exports. Either way, it comes back to hit us, or a portion of it does.
Too bad for offshore folk but not to worry here in the US says Bernanke because he can exit gracefully when things become overheated. Maybe so but we don’t see how. Recall that under QE1 & 2 the Fed buys longer-term treasuries and mortgage paper through so-called recognized dealers. It pays for these bonds by crediting the banks’ account at the Fed. (If the bank wants paper $, the Mint takes care of that, and delivers the things in trucks.)
So how will Bernanke reverse? He will sell securities to this group, reversing the process by taking the money out of circulation. If he sells short-term T-bills, short term rates will move higher. If he sells longer-dated stock, longer term rates will come under pressure. They don’t own as many t-bills so we guess they’ll hammer the longer end - 2 - 10 yrs perhaps that impact all of us.
He figures he can fine tune the act but over the years we have never known the Fed to have much of a handle on anything but their traditional targets - O/N money and reserves. They are far out of their league when they try to figure the direction of longer rates.
Every prospective home buyer, corporate planner, trading operation and saver has a stake in just how they pull this off, if at all.
Robert Craven
But whatever it is, it is a stealth operation. Bernanke points to Core CPI (not the broader #) as cover for QE2, noting that Core CPI is now as low as it's been in many years. Well naturally Ben. It’s “EX” everything that’s on its way to the moon - food & energy. This is convenient for the Fed, just as it was when Art Burns decided to take food & energy out so he could fuel Nixon’s reelection. It stuck. His rationale? The Fed has no control over wheat or oil prices; these are mostly driven by weather and other acts of God.
Now of course the spike in world commodity prices is driven, not just by natural phenomena but by the Fed’s dollar-creation machine. It hits first the 40-odd countries who peg or closely peg to the $. As we noted in an earlier sketch, they either import inflation (print their local currency to buy $’s to keep the $ expensive) or they allow their currency to strengthen and tank their exports. Either way, it comes back to hit us, or a portion of it does.
Too bad for offshore folk but not to worry here in the US says Bernanke because he can exit gracefully when things become overheated. Maybe so but we don’t see how. Recall that under QE1 & 2 the Fed buys longer-term treasuries and mortgage paper through so-called recognized dealers. It pays for these bonds by crediting the banks’ account at the Fed. (If the bank wants paper $, the Mint takes care of that, and delivers the things in trucks.)
So how will Bernanke reverse? He will sell securities to this group, reversing the process by taking the money out of circulation. If he sells short-term T-bills, short term rates will move higher. If he sells longer-dated stock, longer term rates will come under pressure. They don’t own as many t-bills so we guess they’ll hammer the longer end - 2 - 10 yrs perhaps that impact all of us.
He figures he can fine tune the act but over the years we have never known the Fed to have much of a handle on anything but their traditional targets - O/N money and reserves. They are far out of their league when they try to figure the direction of longer rates.
Every prospective home buyer, corporate planner, trading operation and saver has a stake in just how they pull this off, if at all.
Robert Craven
Thalidomide and the Fed
Until their plan to buy everything-under-the-sun the Fed provided (or extracted) liquidity mainly through an O/N market by the way of so-called “repos” or “reverse repos,” these with so-called registered dealers. The Fed fine-tuned with “Fed Funds” as the speedometer. FF’s is the rate prime banks charge each other for O/N money on which to make their required reserves good with their regulator. Some are flush, some aren’t. The hungrier banks are to make loans the more pressure on FF’s. If the Fed wants to slow things then they won’t meet the demand in that mkt; short term rates will spike, and in theory, economic activity will slow. If the Fed wants to be accommodative they supply more money to that market; banks take it as reserves and (Econ 101) the multiplier effect takes over.
Key here folks is that nothing was forced on the market, on the general interest rate environment; takers could come to or stay away from the trough, given demand or lack of in the economy. Longer-term rates ( 2 - 30 yrs) which impact all of us, were left to find their own level.
This worked fine until Q4 ‘08. Policy makers were desperate. Nothing in the medical cabinet would impact this new pathogen. Thus massive Fed intervention - no longer just short term operations, but buying long treasuries and mortgage paper, QE 1 (12/08 - 3/10) - was meant to 1) prevent a world meltdown and then 2) fire a recovery with lower rates. The meltdown was prevented. No one knew the side effects of this kind of medicine however.
Now there is no crisis but they’re at it again. We all know that Bernanke decided on the second major dose - QE 2, Nov ‘10 and plans to continue that medication to Q3 ‘11. Bernanke is now out of his league; if there is a Oath of Hippocrates for central bankers he hasn’t taken it.
Instead of a central banker he has become a government planner. QE2 is fraught with danger. His intervention is a useless as Obama’s attempt at gov’t planning, that which delayed the recovery. Bernanke is providing money which is not needed or wanted, except by the gov’t, banana republic style (The fed owns more Treasuries now than the Bank of China.) The US economy in not in need of liquidity.
The Fed’s program is meant to 1) feed the gov’t and to 2) feed the home market, a repeat mistake. It only penalizes the prudent - savers who would otherwise put their savings to more productive uses. This provides a distortion as these lower rates are purely artificial, driven by money created out of thin air. The Fed’s buying spree could create the very bubbles which brought us here in the first place. At the very least it is creating malformations on the US economic body.
Robert Craven
Key here folks is that nothing was forced on the market, on the general interest rate environment; takers could come to or stay away from the trough, given demand or lack of in the economy. Longer-term rates ( 2 - 30 yrs) which impact all of us, were left to find their own level.
This worked fine until Q4 ‘08. Policy makers were desperate. Nothing in the medical cabinet would impact this new pathogen. Thus massive Fed intervention - no longer just short term operations, but buying long treasuries and mortgage paper, QE 1 (12/08 - 3/10) - was meant to 1) prevent a world meltdown and then 2) fire a recovery with lower rates. The meltdown was prevented. No one knew the side effects of this kind of medicine however.
Now there is no crisis but they’re at it again. We all know that Bernanke decided on the second major dose - QE 2, Nov ‘10 and plans to continue that medication to Q3 ‘11. Bernanke is now out of his league; if there is a Oath of Hippocrates for central bankers he hasn’t taken it.
Instead of a central banker he has become a government planner. QE2 is fraught with danger. His intervention is a useless as Obama’s attempt at gov’t planning, that which delayed the recovery. Bernanke is providing money which is not needed or wanted, except by the gov’t, banana republic style (The fed owns more Treasuries now than the Bank of China.) The US economy in not in need of liquidity.
The Fed’s program is meant to 1) feed the gov’t and to 2) feed the home market, a repeat mistake. It only penalizes the prudent - savers who would otherwise put their savings to more productive uses. This provides a distortion as these lower rates are purely artificial, driven by money created out of thin air. The Fed’s buying spree could create the very bubbles which brought us here in the first place. At the very least it is creating malformations on the US economic body.
Robert Craven
Sunday, February 6, 2011
A SOUFFLE?
A growing chorus of observers sense a two-tiered recovery, one which they maintain is fragile and will eventually collapse on itself. Let’s take a look.
These observers admit that yes, the Dow is up, banking is cooking, corporations in general are more efficient than ever and cash rich to boot and that yes, manufacturing is actually booming. But these same folk claim that only 10% of the population - the moneyed class - have prospered. They maintain that’s not enough, thus this recovery is not sustainable. What is needed? Correct - government investment.
Reflect a moment folks: For two years Obama took water from one end of the pool and put it in the other, expecting something to happen. That was gov’t “investment.”
Then Nov/2 came along. We could predict ahead of that event that the consumer would be cheered. This was the result. Consumer activity, Q4 and so far Q1 has flattened estimates. We never claimed that the economy would catch fire, only that the St consensus was dead wrong about the consumer.
What did these economists miss? Half of them are fresh out of some Ivy League place where apparently all they learn about is ivy; not knowing any better they listened to consumer surveys, almost always a mistake. Next, even the seasoned forecasters did not account for economic traction obtained from Nov/2; they did not understand that 1) damage would be stopped pronto and 2) steps quickly taken for repair. Finally, they misjudged the average spender. Huge housing imbalances did not prove the hindrance to spending that they reckoned on. After all, most Americans have a job.
It’s very easy in this business to cherry-pick results to fit one’s forecast. We must remain sober in that respect. And in our sobriety we can say that the recovery ahead will not be V shaped for some and L shaped for most others. All will begin to prosper.
This recovery will not suffer the fate of the one and only souffle we ever made.
Robert Craven
These observers admit that yes, the Dow is up, banking is cooking, corporations in general are more efficient than ever and cash rich to boot and that yes, manufacturing is actually booming. But these same folk claim that only 10% of the population - the moneyed class - have prospered. They maintain that’s not enough, thus this recovery is not sustainable. What is needed? Correct - government investment.
Reflect a moment folks: For two years Obama took water from one end of the pool and put it in the other, expecting something to happen. That was gov’t “investment.”
Then Nov/2 came along. We could predict ahead of that event that the consumer would be cheered. This was the result. Consumer activity, Q4 and so far Q1 has flattened estimates. We never claimed that the economy would catch fire, only that the St consensus was dead wrong about the consumer.
What did these economists miss? Half of them are fresh out of some Ivy League place where apparently all they learn about is ivy; not knowing any better they listened to consumer surveys, almost always a mistake. Next, even the seasoned forecasters did not account for economic traction obtained from Nov/2; they did not understand that 1) damage would be stopped pronto and 2) steps quickly taken for repair. Finally, they misjudged the average spender. Huge housing imbalances did not prove the hindrance to spending that they reckoned on. After all, most Americans have a job.
It’s very easy in this business to cherry-pick results to fit one’s forecast. We must remain sober in that respect. And in our sobriety we can say that the recovery ahead will not be V shaped for some and L shaped for most others. All will begin to prosper.
This recovery will not suffer the fate of the one and only souffle we ever made.
Robert Craven
Friday, February 4, 2011
Jan Employment
Today’s BLS payroll release for Jan was down right discombobulating. The headline figure was nothing near expectations yet the unemployment rate looked great. What gives here?
First to jobs. The private sector gain was only 50M. We have maintained for a long time that these jobs would flatten estimates. And that in fact has been the evidence past weeks, esp just recently in manuf. Today’s result is conveniently blamed on weather. Maybe. The past many years we have followed this release, weather has not been much of a factor. We’ll see.
Next to “unemployment,” down to 9% from 9.4% when forecasters predicted 9.5%! Why the result? Because of 1) a sharp decline in the labor force (-504M) and 2) combined a gain of 118M in household employment, leading to a plunge in the number of unemployed (-622).
There are really two surveys here folks - one of business establishments, and the other, taken from households. The household survey generates the unemployment rate, the business survey - workers gain or loss by sector, and earning and hours. Hourly earnings rose 0.4%, now almost 2% above their year ago level. The av workweek fell by 6 minutes to 34.2 hours from 34.3 - this clearly a result of the weather.
Robert Craven
First to jobs. The private sector gain was only 50M. We have maintained for a long time that these jobs would flatten estimates. And that in fact has been the evidence past weeks, esp just recently in manuf. Today’s result is conveniently blamed on weather. Maybe. The past many years we have followed this release, weather has not been much of a factor. We’ll see.
Next to “unemployment,” down to 9% from 9.4% when forecasters predicted 9.5%! Why the result? Because of 1) a sharp decline in the labor force (-504M) and 2) combined a gain of 118M in household employment, leading to a plunge in the number of unemployed (-622).
There are really two surveys here folks - one of business establishments, and the other, taken from households. The household survey generates the unemployment rate, the business survey - workers gain or loss by sector, and earning and hours. Hourly earnings rose 0.4%, now almost 2% above their year ago level. The av workweek fell by 6 minutes to 34.2 hours from 34.3 - this clearly a result of the weather.
Robert Craven
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