Employment, Spending and Our Pals at the Nursery

By most any measure the US economy is on a road of recovery. Yet you wouldn’t know that from some small business owners, including our nursery friends. They claim they haven’t been flattened by a customer rush for the roses. Yet we know that some discretionary spending is indeed booming, for example cruise bookings, or, nice jewelry which simply won’t stay on the shelf. What gives here?

Observers have for some time highlighted a so-called “two-tier recovery,” one which many claimed would collapse upon itself. It won’t but that’s not the point of this sketch.

Fact is that the top 10% of spenders happen to be those with a good deal of financial assets and are doing fine, in isolation from the rest. They’re buying jewelry and booking cruises. And the other 90%? Look no further than Barack Obama for the answer.

Corporations were scared witless by the administration’s statist agenda. This is no longer news. We have it from them directly. These potential employers had no guarantee that the election of Nov/2/10 would stop the damage, that repairs would be put in place. So 2008 and 2009 they made changes long delayed - not just improvements in productivity (common during the early stages of a recovery) but elimination of job slots permanently. Not knowing what would come next from an activist administration, one which never made a secret of its disdain for free enterprise, they had no choice. A new employee had become a ticking time bomb.

This explains why discretionary spending from the other 90% lags in this recovery and why plant and picture frame sales aren’t booming. We’ll get there, and now at a quicker pace given a new found affection for free enterprise at the White House.


Robert Craven

Reformation at the Fed - An Escape From the Dark Ages - A Special

Islam is the only religion not to have experienced a reformation. Many of us have suffered as a result. The Fed was the only major central bank not to have experienced a complete reformation. We all suffered as a result.

Chairman Bernanke’s recent decision to hold four press conferences following FOMC meetings signals that a central bank still clinging by a finger to the dark ages has finally relinquished that hold.

The story of reformation begins Oct/19/1993 with three of us before the House Banking Committee. We had been called as witnesses to explain the damage done to markets and taxpayers through the Greenspan Fed’s lack of transparency and lack of accountability. My presentation addressed three concerns - communication of policy change, Fed leaks, and reckless inter-meeting commentary from bank presidents and governors (something which Andrew Brimmer, former Fed gov, called an “open-mouthed practice which must be stopped.”)

Greenspan’s practice was never to announce a policy change; it had to be guessed by watching Fed numbers. This provided work for “Fed watchers” but served no other purpose aside from sparking great confusion. Sometimes Greenspan himself would leak the change to one of two WSJ reporters (an act which would have the rest of us taking our meals through a slot). We scolded one of these for cooperating. “I’ve got to feed my kids,” he responded.

Convoluted policy communication, outright leaks and careless media stunts from Fed members often resulted in violence in US markets, sometimes much higher yields on Treasury debt than would be otherwise. We taxpayers picked up the tab.

All the Fed presidents and governors were there that October day. They had our concerns up front so a few days earlier Greenspan held a practice session on a conference call as to how to best beat the rap. Indeed, each of the fifteen parroted the other, all in unison that we were wrong. Instead, they were wrong.

It did not hurt that I had Milton Friedman’s endorsement along the way. Then after the hearing we circulated a petition among street economists and academics. That received wide press coverage. This, coupled with Congressional pressure, effected the desired result. In early 1994 the Fed decided to announce policy change same day; that formalized Feb/95. The markets took this in stride, exactly as we predicted. The leaks also stopped. So did the reckless commentary.

And ground zero, the heart of darkness at the Greenspan Fed? Simply an economist’s horror at being found out, at not wanting to be cornered.

As a private economist Greenspan’s record as a forecaster was awful, “the worst” as Worth mag put it. He was a mortal; he simply did not want the rest of us to find out (a malady effecting many other policy makers). This is why at the hearing he denied there were any tapes available of past deliberations. This proved to be false.

And that is why he felt he had to be slippery when policy was changed. More than once colleagues reported Greenspan as “depressed” because markets reacted to policy change differently than he had predicted. But if the process of discovery was protracted, a cushion was provided along with an escape from accountability.

We have always praised Bernanke for his intellectual honesty. His recent change in procedure is proof we were right.


Robert Craven

US Economy Has Its Legs But Heads Up For The Piano - The Week Ahead

Economic forecasters have been busy. We’ve got several key releases next week, among these Feb Personal Income on Monday, the Mar Chicago Purchasing Managers Index and Feb Factory Orders on Thursday, then Mar Vehicle Sales, Feb Construction Spending and the key Mar Employment report on Friday.

And what are we to make of this release stream? Just this: At the end of the week we will see that the labor market continues to improve, that factory activity is strong, that vehicle sales are robust.

Clients should prepare for that result.



Also next week we can expect the Japanese to make further progress in sculpting a rescue package. Production stoppage exists but is priced in. We can’t comment on renewed nuclear concerns aside from the caution to discount the headlines - for those in search of the truth, the media make poor bed mates.

Japan’s Nikkei average dropped 10% the week of Mar/13. On Mar/14 there was pure panic, world financial markets. On that day we provided an anchor, telling clients to look for resolve, resilience, a quick rescue package, this as the herd went off the cliff. We noted that economic contagion would be limited. The only real potential danger to US interests, we noted, was repatriation. So we advised clients to expect a quick turnaround. Sure enough, Asian stocks last week just showed the largest gain since November. Thank you very much.



So far, so good. In the most general sense then, clients can expect a continued firming in US equity prices and higher interest rates.

Unless:

The Mid East will continue as the principle potential retardant to US vigor.

All sorts of “rules-of-thumb” exist on the Street - $10 higher in crude triggers such and such % reduction in US GDP. We don’t use “rules-of-thumb” around this shop. We know that conditions for price discovery rarely repeat. Let the kids resort to gimmicks.

It’s enough to know that course-of-least resistance for crude will remain higher over the intermediate term. Witness unrest in even Jordan for goodness sake. Still doubt contagion?

We printed 106.69 on May WTI, Thursday, closing Friday at 105.52. Prices in this range will discourage spending. A Saudi / Iranian conflict would print our 120 high-side target in a jiffy. An Israeli strike would do the same. This is dangerous stuff here folks. It is not as Bernanke implied, a blip. Take it seriously.

Robert Craven

Home Sales Tank / Mid Eastern Craziness - The Week In Review

We do not recommend trades in this report, not equity, fixed income nor foreign exchange. Our job is to identify near - to- intermediate term change in the economy, those events which are not yet priced in. We isolate these for our clients and they take it from there.

All of us know now that the US economic engine is accelerating. This was not as obvious months ago when we highlighted this prospect for clients. Sure, it has not all fed down quite yet, we haven’t all felt it, but it’s there and on the way (short of the potential Mid East retardant). This, in spite of the administration’s bungling. So this is a good thing.

Yet how can we say this when this very week we saw figures related to housing which were in the tank? Well, it is known this sector is going nowhere; it’s priced in. That is why New Home sales Wed at a record low did not stir the markets. And one reason for that it that banks are more immune to this reality, having raised $300 bln in new equity in the last two years.

Of course homeowners are not immune, which is why forecasters figured last year that massive imbalances in housing would dampen spending ahead. This, along with their lack of appreciation of traction to be secured by Nov/2, led to their forecasting mega miss. We advised our clients that homeowners would spend anyway, which they did.

Let us move to offshore.

Fiscal events in Japan have concluded quickly this week. A rescue package is gaining critical mass, the currency has stabilized.

US firms have very little equity exposure to Japanese companies, a good thing. Next, there will be disruptions in supply lines for sure, but these are already priced in. There will be internal argument over funding for resuscitation also. We predict the Bank of Japan will support the effort but they adamantly deny it at the moment. For the US the event will amount to either a wash or modest spark.

Finally, we know the Mid East, not EU considerations provides the primary potential retardant to US growth. To restate the obvious, it is foolish at the moment to be constructive on energy prices. Events this week simply support our view for an expanding transformation, one painful and destructive in its youth yet constructive for all of us as it approaches middle age.

Robert Craven

Today's key releases, a mixed bag - An Alert

Today’s Feb Durables number came in less than expected, -0.9% vs + 1.2%, consensus. We noted (incorrectly) in the Week Ahead that the risk was for the release to exceed expectations.  However, it is known that this number can be volatile, so we suspect this result will be ignored.

Note as we are on the subject that there is a component of this release called Non-Defense Capital Goods Shipments, a good proxy for capital spending. This measure is just a bit above its Q4 level, suggesting capital spending rose only modestly in Q1.

Today’s key Claims number was a tad stronger than expected (fewer claimants); this as predicted. Over the near term the number of claimants will head even lower, our view.

We know the economy is hitting on 6 of 8, and heading, or was heading to 7. We know that two key areas felt to be destined for the dumpster a few months ago - jobs and spending - were gaining momentum.

A new element was inserted into the equation in Feb - our friends in the Mid East. This is why we warned clients yesterday to look for forecasters to shave their forecasts for 2011 GDP.

It wasn’t fun to write those lines; hopefully we are wrong, but this is the risk.

Robert Craven

Estimates for 2011 GDP to head lower, near term.

Forecasters will begin to reduce their estimates for 2011 GDP in the near term, eventually by perhaps 1%. Clients to prepare for this reality up front.

Background: Mid Q4 we predicted that the economy would perform far in excess of estimates, and the reasons why. We predicted that forecasters would revise their estimates for 2011 GDP much higher. That was the result. Mid December, PIMCO, Goldman and others revised their forecast from 2%, to 3 or 3.5%. Key - since consensus drives price change, clients were provided with a leg up in making their planning or investment decisions.

That bring us to Q1 and eruption in the Mid East. Few observers have yet to appreciate the implications of this event. The very real risk is for much higher crude into Q3, perhaps beyond. Even today’s 105 print (May contract, WTI) is corrosive if maintained for any time. That’s the best case.


We understand from Gordon Wood in Revolutionary Characters that the founders Jefferson, Madison and Paine envisioned, “A world held together by the natural interests of commerce.” They understood that, “In both the national and international spheres monarchy (or despots) and their intrusive institutions were what prevented a...harmonious flow of people’s feelings and interests.” That is - democracies get along.

This is the eventual destination, Mid East. It’ll just be a heck of a ride getting there.

Robert Craven

Look Past Libya

Those planners and investors who may have an interest, either as a user or perhaps investor in energy concerns are to look past Libya (2% of global production).

The Libyan conflict is priced in, likely at 103, WTI. Yet we have 120 as the top side.

It is foolish to be constructive on oil prices over the intermediate term.

Look no further than Bahrain. A Sunni minority rules the country; the majority Shia population identifies with Iran, a Shia stronghold. Hint: A recent Iranian newspaper article claimed Bahrain was a province of Iran! From the Telegraph, “Since the 1979 Islamic revolution, the ayatollahs have assumed a protective role over the world's Shia. They will not have taken kindly to the sight of 1,000 Saudi troops driving across the 15-mile causeway that links their country to Bahrain, in support of their fellow Sunni royalists.”

Thus the arrival of these troops highlights region-wide hostilities between non-Arab Shi’ite Iran and Sunni Arab states. More than just a few in US and UK security circles tag this as the major potential conflagration - a Saudi - Iranian conflict. Guess where crude would go then? The Saudis are pacifying their own people with handouts; that won’t work with the mullahs.

From Karim Sadjadpour of the Carnegie Endowment for Interl Peace, “Whatever ensues, however, the Arab risings have revealed that Iran’s revolutionary ideology has not only been rendered bankrupt at home, but it has also lost the war of ideas among its neighbors.” This makes the mullahs all the more dangerous over the near term.

Thus, if freedom fighters within Iran (long abandoned by Obama) do not in some way, and pretty quickly, de-louse their country of these Muslim thugs, then a major conflagration awaits us.


Robert Craven

Feb Existing Home Sales - far below expectations. An Alert

After their recovery the prior 6 months, existing home sales for Feb fell by 9.6% to 4.88MM, far below expectations. These sales are now 2.8% below the year ago level, almost 33% below the Sep/05 record high. No doubt because of a still bloated inventory, prices are 2.7% below their year ago levels.

We are going nowhere on home prices until the inventory-to-sales balance improves and the number of distressed properties is reduced.



Robert Craven

The Week Ahead

Events offshore will muscle our markets this week, perhaps eclipsing domestic considerations. The Mid East was reviewed earlier. We take a look at Japan, following our guide to the week’s data.

We have Feb Existing Home sales on Mon (expected to be lower), Feb New Home sales on Wed (expected to be higher). We have Feb Durable Orders on Wed. This key number reflects orders placed with manuf’s for delivery of hard goods. The number is expected to be up 1.5% but the risk is for something more. The unemployment Claims release on Thus is also key. The risk is that this release will cheer the market, falling below expectations. The third revision for Q4 ‘10 GDP is on Friday - ancient history. Also on Fri we have the Mar Univ of Mich sentiment figure, something to be ignored by planners and traders as it carries few leading characteristics.

Now to Japan. Anyone who bets against Japan does so at their peril.

True to the anchor set earlier we can expect the nuclear emergency to continue to diminish, we can expect the gov’t to rapidly set machinery in place for resuscitation, a process that will flatten St estimates. GDP may take a hit near term (maybe 1%) aggravated by a temporary national power shortage, but can be expected to surge, Q4. A major rescue package is nearing completion, including tax breaks. We expect the Bk of Japan to monetize the deficits needed to fund construction (although they currently deny such a step) and with that, pressure the yen lower, also a plus.

Production constraints associated with the crisis will be concentrated in Asia. Observers have highlighted supply considerations for US manufacturers; there will be little impact on our economy in this regard as Japan’s competitors move quickly to fill the gap. Look for headlines this week to cooperate with that view. This tragedy will provide an immediate spark to US industry. There will be some added pressure to energy prices as Japan will rely more on natural gas for power generation, at least for the near term. There will also be added pressure to materials prices - cement and re-bar come to mind.

We likely over-estimated the US price risk associated with repatriation but we do know accompanying yen strength would have retarded the Japanese recovery. Japan requested and received G-7 assistance in this regard. That potential crisis has passed. Look for further weakening, this currency.

Longer term implications for the US will be determined by the extent the growth of nuclear projects worldwide is impaired. From the Telegraph, we understand that the world has 442 reactors, with 65 under construction. “They generate 372 GW, covering 13.8pc of global electricity. The share is higher in the rich world: France 75pc, Belgium 52pc, Ukraine 47pc, Korea 35pc, Japan 29pc, the US 20pc, and the UK 18pc. In China it is just 2pc.” In the most general sense, output was expected to double over the next twenty years. A set back obviously translates back to conventional energy prices. Our view is that after some examination, nuclear will recover.

Robert Carven

The Middle East - A Special

In judging energy prices look past Libya. Gadaffi may have seen his last sunrise; probably not as the mission does not target him but crude prices will drop on any optimism tagged to this conflict. If so, treat this as a correction, certainly not trend.


We opened the current chapter with a UN resolution with teeth (a rarity), then support of the Arab League (now withdrawn), then rapid mobilization. A repeat of the Iraqi no-fly zone, with us for years? Doubt it. Either way, there is much more to come in the entire region.

Most of us now realize that the old Mid East political order is disintegrating, a region that Chris Skrebowski, ed of Petroleum Review reminds us provides 36% of global oil supply and holds 61% of proven reserves.

For anyone who still clings to the notion that violence in energy prices will quickly subside after Gadaffi, witness the Yemen massacre, witness the mass protest by Bahrain's Shi'ite majority against the ruling Sunni dynasty. Witness the accompanying bloodshed, and key - tension thus sparked between the Saudis and Iran. Or witness this weekend’s mass demonstrations in Syria - “We are people infatuated with freedom.” If this does not convey a message that we are in for something profound, then better crawl back under the rock.

Key - Given the left’s emasculation of US energy independence, we’re stuck; thus it is important to understand that consensual government in the Mid East is in our best economic interest.

Democracies do not war upon one another; they find it in their own commercial interest to get along. Still, critics are everywhere. Easy to criticize from the cheap seats - the whole shebang will be hijacked by Muslim thugs. Or, no way these fanatics will ever embrace democracy. That’s no contribution, simply noise.

The easy way out is to lay a template on the thing and be done with it. It’s just too darn easy to discredit motives in a region fraught with intolerance. Sure there’s the temptation to label the whole bunch as clowns but then that’s no help. Value instead is to look for the unexpected. The unexpected will be the birth of new governments, grasping at something consensual, experimenting with what the West understands to be the rule of law, making a mess of it, but advancing in ratchet fashion nevertheless.

Finally, we return to Fouad Ajami, fellow at the Hoover Institution, “Today’s rebellions are animated, above all, by a desire to be cleansed of the stain and the guilt of having given in to the despots for so long. Elias Canetti gave this phenomenon its timeless treatment in his 1960 book ‘Crowds and Power.’ A crowd comes together, he reminded us, to expiate its guilt, to be done, in the presence of others, with old sins and failures.”


Robert Craven

Obama - Primary Retardant

In the old days folks, things were simple. Park at the Santa Fe depot and count the cars. Tour a shopping center parking lot. On a trip to Long Beach, check out port activity. That was about all there was to it. That’s all we needed to get a pretty darn good idea of consumer activity ahead. That’s worth 70% of the equation right there.

No more. As we noted the other day, you need a spook or two in the Mid East and half of Congress wired, or your without a leg up.

Well, we try to get by.

With all the noise and ruckus offshore, it is easy to forget that we’re sitting astride a US engine which was firing on 5 of 8 and is trying its best to go to 6 or 7. We’ve noted potential retardants, the Mid East key among these. But we had through ‘09 and ‘10 a very real retardant, nothing potential about it.

We were in school when Nixon convinced Burns to fire the economy on 9 of 8 cylinders, inflation be damned. Short of that event, never before has a correct sense of political reality so directly impacted economic strategy.

In fact, the single key hindrance to a recovery resides in the White House, or did. And don’t forget that Obama and his party are partly or wholly responsible for sparking the crisis in the first place (protected the twins from reform to buy black votes).

We stated in posts ahead of the Nov election that results would spark the economy. Forecasters missed this point completely; that is, the delivery of economic traction. As we predicted, both business and consumer were cheered by the result and then further cheered as the new majority in the House began quickly, more quickly than most suspected, to make repairs.

Obama’s education has represented a huge expense for all of us. He’s learned enough to act the right way to get re-elected. OK. To the extent he can refrain from further interference, the US economy will do just fine.


Robert Craven

Week in Review

It is our exercise to absorb the inflow of economic data, discard the chaff and then present the rest to our clients in distilled form. Thus, one Week in Review will generally suffice. Two are required for this week: yesterday’s summary of key data and how that may fit client anchors, and, today’s summary of impact, the myriad of events offshore.

Turmoil in the Mid East remains the key potential retardant to US growth. That consideration took a back seat this week given the tragedy in Japan.

The press continues to sensationalize, embellish and distort Japan's crisis. Reality remains that which we highlighted at the onset: 1) Japan will recover more quickly than most expect (despite excessive debt), 2) the nuclear situation and contagion will be limited and 3) influence on the US economy will be a wash, perhaps even positive. We also highlighted a wild card, a potential retardant tagged to this situation - Japanese repatriation and the selling of US assets. With that goes Yen strength, which if maintained over the inter term would retard the Japanese recovery. Today’s stunning G-7 activity reduces that possibility.

So back to the Mid East. A complete stoppage of crude deliveries from Libya was priced in at around 102 - 104. Thus, many look for a long term improvement in energy prices past this event and today’s “cease fire.” No. We have noted in several past posts why this time is different (see rt column). Contagion will continue to sweep the region, and with that, turmoil and threat of violence. On the plate is growing tension between Iran and Saudi Arabia. The potential of stoppage, or blockage of trade routes will remain a significant one. Eventually we know the spawning of consensual gov’t in this region is a plus, we’ll simply be a while in getting there.

We reminded our clients that when Bernanke implied that higher energy costs are a blip he was dead wrong, that when the IEA states that higher prices are here to stay, they are also wrong. But there is now a new potential element which may impact energy; that would be the demise of nuclear and the resultant increase in the demand for fossil products. We don’t think that will happen, but it’s now part of the equation.


Robert Craven

Data Week in Review

The beginning of each week we review that week’s scheduled eco data releases, highlighting those with mkt-moving hrsp, then predicting result vs consensus. Sometimes there are other influences which may interfere, the mkt crowd otherwise occupied (a temporary state of mind). Nevertheless, ongoing, this exercise is key to value provided by this service.

Mon (Mar/14) we predicted that releases this week would indicate more vigor ahead and building price pressures. This fits our long-held view that forecasters have yet to catch up.

Headline Feb PPI on Wed rose by double the consensus, the headline at consensus. The headline and core Feb CPI results today were both slightly higher than expected. Also today Claims for unemployment benefits confirmed the improving trend in the labor mkts, falling 16M to 385M. So far, so good.

Feb Ind Production today did not cooperate, printing -0.1% when +0.5% was expected. What happened? Manuf which makes up 75% of the total and was up nicely but utility activity tanked. It’s a mystery to us. It’s also a blip. Expect stronger readings ahead.

Finally, the key Philly Fed business outlook survey has been, over the many years we have monitored it, a reliable lead for US manuf sector trends. The Mar read today blew through expectations, making crow bait of St forecasts. The read also indicated that price pressures - “prices paid” - are rising rapidly. This of course cooperates very nicely with client anchors set earlier.


Robert Craven

Japan, repatriation and pain here at home. An Alert

We noted this am that Japanese repatriation was a major risk but that we could not provide guidance or a risk-of-result. Well, today it became the piano, falling from the 10th floor.

The Japanese are pulling their money back home just as they do after every crisis, and, judging by Yen strength today, doing so with great determination. The Yen printed 77.48 / $, passing the old post WWII high of 79.75 (Apr/95). That is, investments which swapped Yen for some other currency, are being unwound. They want their money back; they’re a tad nervous. Now the other currency is being sold, and all of them buying Yen like crazy.

So when Japanese folk liquidate global assets, including not just those of lesser credits such as Brazil, but debt and commodity investments in the EU and UK for example, and yes, equity investments in the US (closed down 242 did we not?), what happens? We get hurt.

Thus, it is not the physical destruction that we fear. That if anything adds to US GDP by the way of US firms involved in reconstruction. It is not a long absence of Japanese demand that we fear, for we have already highlighted the reality of quick resuscitation. No, it is abrupt, short-term retrieval of offshore investments, an emergency fund for the Japanese when needed. Over the near term, US interests will suffer the consequences.


Robert Craven

Anchors

Anchors are key these days. Let’s review.


Japan - Visited in the past two blogs, we stated that the mkt crowd has over-reacted to this crisis, underestimating Japanese powers of resuscitation. Sure enough, the Nikkei recovered about half its Tues losses today. The major unknown right now is the extent of repatriation, what one observer called the “snap back in capital flows,” in Japanese offshore wealth, this being a sort of bank or fund for such a crisis. We can’t judge that factor. In isolation of that factor, the situation in the Mid East, not Japan, provides the key potential retardant to US growth.

Mid East - Nothing has changed. Turmoil will continue, likely accelerate. We are going to a place that means more manageable energy for the West but it will be no fun in getting there. These folk embody the meaning of intolerance but we’re stuck with them. Simply witness the Christian / Muslim conflict in Egypt, the current Sunni / Shiite conflict in Bahrain. Still, a gradual move to consensual gov’t represents reality for this region, and this in spite of Obama’s voting “present.”

US - The US economy can be expected to continue to accelerate into Q4. This will be lead by job creation and expanded domestic spending. Any impact from slower Japanese demand will be small. And of course, crude prices will remain a threat Q2 and Q3. And if the event in Japan means the end of the nuclear renaissance, we must factor this in too.

Fed cheerleaders - Bernanke & Co. said yesterday that inflation effects of increased commodity costs, “will be transitory.” How “transitory”? Witness today’s Feb PPI, the headline number double expectations, the largest jump in two years. Sure, it is true that companies don’t have much pricing power to pass these costs along, just yet. But if the Mid East situation extends in Q4 and higher crude with it, this will either dampen growth, of spark inflation, or more likely - both. So why “transitory”? The truth is, the Fed is without a clue, slippery as ever.


Robert Craven

Japan - A Special

We noted in yesterday’s sketch that it is best for clients to expect more resiliency in recovery, not less, highlighting the Kobe disaster and response, as an example. No one agrees with us, not even the Japanese, the Nikkei off nearly 11% today. Still, if we are to error in our judgement, let it be in this direction. This is the course-of-least resistance, our view. This is to serve as an anchor for clients as the event continues to unfold. Best to anticipate these headlines as they surprise the rest.

We have already seen projected recovery-cost figures, something on the order of 1% of Japan’s GDP, perhaps to go to 1 ½ %. The Telegraph put this figure in context this am, noting such a package is less than a third, by scale, of the US fiscal stimulus plan. The two are also differentiated by impact - the US plan was a wash, a waste, a tragedy; Japan’s plan will impact immediately.

Resources for recovery will come from savings, both individual and now especially, corporate. The gov’t can spend like crazy because almost all its borrows comes from within Japan, from domestic savers, not from offshore. That’s how they will get away with it.

Next, the Bk of Japan’s response to the crisis was/is a perfect one, flooding the mkts with cash with no hesitation. They want to keep the yen down too so as not to discourage exports (a mistake made after the Kobe crisis - they waited too long).

Finally, to nuclear. The media cannot disguise their glee in reporting on this issue. Best to distance oneself from these lepers, tossing out the headlines.

The nuclear experts we have spoken to or listened to agree that the nuclear portion of this crisis is in the end likely to be more similar to Three Mile Island than to Chernobyl, Chernobyl being the equivalent of 1 million Three Mile Islands. Toxicity in the worst case would be contained in Japan (risk is “quite low” according to the World Health Org) and according to Columbia’s David Brenner even in that worst case - complete meltdown of the core(s) - exposure on the west coast of the US would be next to nothing.


Robert Craven

The Week Ahead

This week we have two key price numbers: Feb PPI on Wed and Feb CPI on Thursday. Also on Thursday we have Claims, Feb Ind Production and the Mar Philadelphia Fed manuf outlook survey. There are other releases but only these five carry potential mkt-moving hrsp. As we approach these numbers we will review each in more detail but all in, they are likely to indicate more vigor ahead, and building price pressures.


The tragedy in Japan remains a key near-term consideration. We suggest objectivity, which requires a distancing from the headlines.

Having the advantage of working closely with Japanese institutions, past years, we can confidently advise our clients to look for more rapid resuscitation than is now priced in.

Recall the Kobe quake of Jan/95 which killed 6400 people and caused damage observers put at 2% of GDP. Kobe is a key container port. Recovery was so fast that, according to Alan Wheatley of Real Clear World although Japan’s Ind Production fell 2.6% in Jan it rose 2.2% in Feb and again in Mar. GDP rose 3.4%, Q1 ‘95.

The “experts” put the Kobe recovery at a decade. But as we are reminded by the late George Horwich of Purdue, Kobe’s manufacturing was at 98% of pre-disaster levels in 15 months.

Japan not only has abundant resources, physical and human capital but the social and economic infrastructure to utilized resources in a hurry, including those contributed by the US and others. And - KEY - the current disaster is in a region far less populated and far less an economic factor than Kobe.

Finally, the word “meltdown” is a gift from heaven for the world press, very useful for bottom line purposes. It’s application is made by the media not only to single power units, but to the world industry. We must be cautious in this regard. Conventional wisdom has it that the renaissance in nuclear power is now finished. Perhaps not. The plants in question are very old.

We spoke this weekend with a nuclear engineer assigned to PGE’s Diablo Canyon nuclear plant. He advises that new back up systems likely would not have suffered the same fate - loss of power. He adds that the key now is to observe success +/- in Japan’s shut down process..

Caution is in order before leaping to oil and coal sectors; don’t write the obituary for nuclear just yet.


Robert Craven

Security - Hard to Come by These Days - Weekly Review

The last two day’s mkt violence blamed first on Spain’s unfortunate encounter with Moodys, then EU contagion as spreads for the likes of Ireland, Portugal and Greece jumped. Next to blame, China’s less-than-thrilling trade result; then it was the US claims result. Finally it was the Saudi cops shooting their own folk. No, none of that; it’s the charts said the techies. Now it’s the tsunami and shock treatment for a country - Japan - just emerging from slumber.

It’s been a great week for selling headlines, each tagging price change to a single event. None were accurate, and then again, perhaps they all were. That is, no mortal or any collection of mortals can gather up every single factor affecting price change in the world auction market. Factors impacting price discovery are too complex and too numerous to isolate.


What can we do? It is our practice to establish anchors along the way, counting on these to provide some shelter from the storm .

The first of these is that notwithstanding perceived or real weakness in China, notwithstanding EU contagion or the soon-to-be applied ECB brake, notwithstanding the upcoming end to Fed generosity, the trend in improvement, US economy, will remain with us. Particularly, we can expect employment and spending to exceed forecasts, near term. This week’s releases pretty much support out view with the exception of claims which were a tad higher. This is not trend, our view, and we follow up on that The rest - imports surging, better domestic spending, even for discretionary items, fit nicely. We also saw today that Jan inventories are lean in relation to sales, this to fire factory production in the coming months.


Robert Craven

Consumers - some appetite! An Alert

Consumers are still shopping despite fuel costs, despite lousy weather, despite sluggish income growth and despite relatively tight (but now loosening) credit. Today’s number (+1.0% vs +0.9%, latest consensus) was broad based, with solid gains in many discretionary spending categories. Retail sales are now almost 9% above their year-ago level. This fits our anchor quite nicely.

With every imaginable headwind about, folks shop anyway. Today’s result does not represent a final spurt, some sort of orgasmic shopping spree before collapse; it represents instead - trend ahead.


Of course we will always have wild cards, some driven by acts of God (tsunami), some by a sub-surface churning and yearning for freedom, suddenly upon us.

The Mid East will remain such an event, providing a potential retardant for US growth. We don’t have a clue re day-to-day price change in crude. We do however understand the dynamics of the situation in this region.

No doubt a complete stoppage of Libya crude delivery has been priced in. But it is more than that. Given the situation as we understand it, there is the risk much more turmoil to come before the we see the day. Stay at the sidelines if this reality will discomfort your investment or planning decision. And above all, ignore authority figures.

Bernanke told the mkt crowd last week - not to worry, higher crude would only cause a problem if extended (implying that it would not be). The IEA told the same crowd the same day that much higher crude prices are here to stay.

They’re both wrong.

Over the intermediate term the course-of-least resistance for crude prices will remain higher. In the end, progress to consensual gov’t in the Mid East means a more manageable energy situation for the West. Hold on in the meantime.


Robert Craven

Claims for Unemployment Benefits Disappoint - Simply Pause, or Trend? An Alert

Today’s result for the number of first-time claimants for unemployment benefits, week ending Mar/5, was higher than expected.

The mkt-crowd is disappointed, having been caught looking in the wrong direction Q4, they adjusted, and now feel they have been bushwhacked again. Thus, fear now is for a slacking of momentum, this sector.

No. Today’s number does not represent trend. The pace of layoffs has slowed; continuing claims will continue to decline. It is true that hiring does not yet match the pace of layoffs but that relationship will reverse, H2.

Look for significant improvement ahead in the jobs market. This was our original insight Q4. On Mar/6 we refreshed that view. If there is any flaw to St estimates for jobs ahead, it is still, even now, for an underestimation of vigor.

Clients are to fold this reality into their decision-making process.


Robert Craven

The Week Ahead

To the extent there is a focus on eco data this week we’ve got little on the burner until Thurs’s Claims result (for the wk ending Mar/5) and Fri’s Feb Retail Sales, that expected to be up 1.0%. A Sales result through expectations will encourage the mkt crowd a tad but a result inside of expectations will greatly disappoint. This reflects the state of mkt tension at the moment. Results are not adjusted for price change so we’ll see how gas prices may have impacted the headline number.

We also have the Mar Michigan consumer sentiment survey on Friday. There are other popular consumer surveys but clients are well advised to ignore all of them, that is, not to fold them into the investment decision-making process.

Over the past many years it has been our experience that there is very little correlation between polling response and spending ahead. Consumers will belly ache like crazy to the pollster while on the way to shop for a new car. These surveys may be money makers for their owners but they won’t help us.


Summary, US economy:

Employment is not yet vibrant but as we all know now, it is improving, that in spite of the administration’s anti-business agenda. The pace of improvement will accelerate in the months ahead due to 1) real demand, and 2) the reversal of much of the administration’s blockage.

After flattening estimates for Q4, spending has eased a tad so far in Q1, but this is pause, not trend. We will look for spending to accelerate and in both cases - jobs and spending results will exceed forecasts.

Manuf will continue on its way to the moon; the positive trend in non-manuf activity will remain with us.

Energy prices driven by wild card events tagged to Mid East unrest fill the role of primary potential retardant at the moment (Obama already having done his part).

Robert Craven

The Middle East - Update

During the weeks ahead we suggest investors, planners adhere to our anchor and acknowledge the glaring risk associated with this region. Course of least resistance for crude prices to remain higher over the intermediate term. Higher crude is not an inflation threat, it is a retardant, and a powerful one if maintained through Q2.

We have seen the beginning of a movement which will swing the entire region. For us it’s a birth we predicted (prematurely) 4 years ago. The little infant’s a tad late but just as welcomed nevertheless.

Pessimism re this region comes easy for world observers. Many confidently await a reversal. As Thomas Sowell maintains, “There is very little sign of tolerance in the Middle East, even among fellow Muslims with different political or religious views, and all too many signs of gross intolerance toward people who are not Muslims.”

This time will be different. “Today’s rebellions are animated, above all, by a desire to be cleansed of the stain and the guilt of having given in to the despots for so long,” Fouad Ajami reminds us. Protests have been more orderly than most expected, devoid of any radical political agenda. Yes, thugs still abound; one is killing his own people and we just this moment heard of violence in Alexandria; yet, subsurface there is a maturity to this movement, a demonstrated sense of responsibility that we have not seen before. The people have shown courage, character and a deep yearning and appreciation for consensual gov’t.

Yes, this time will be different but still fraught with awful risk. This is why we said earlier that any investor would be just plain nuts to listen to authority figures who assure them they are looking at a blip. We set the upside on WTI at about 120. Of course we don’t know for sure and hope we’re wrong but you’re a whole lot more likely to see a 120 print before you ever see 75 again.



Robert Craven
The Craven Report

The good 'ol days

We've had our differences with Greenspan over the years. He could not be more correct however in a recent article in International Finance. Gov’t “activism” he said, including fiscal stimulus, housing subsidies, and the slew of new regulations on the employer, are holding back the recovery. Companies’ hesitation to hire and invest, “can be explained by the shock of vastly greater government-created uncertainties....”

The only difference we have with Greenspan on this one, is timing. This paragraph fit perfectly pre-Nov/2. Since then, damage has been stopped and efforts made at resuscitation. Consumers have taken note. Employers have taken note. This event - Nov/2 - explains more than any other single factor the surprising growth of recent months.

Buy holy moly folks, in the good ‘ol days, all you had to know was economics. Now you’ve got to have half of Washington wired and a spook or two in the mid east or you can’t make strategy worth beans.


Robert Craven

Review

One’s track record is key. It is in fact all you own in this business.

If we cherry pick, slide away from past predictions we then become simply one of the crowd, holding hands, shouting out together in the dark. One of these was the economist Paul Samuelson who said that, “.. to be published is to be found out.” We’re not interested in joining that club.

Most of what we predicted Q4 for the US economy is now reality, much of it priced in. However, it is useful to visit those sectors where we could have done better. One of these is manufacturing. That sector has flattened estimates. Our job is to detect major flaws in consensus but we missed that one. Next, although the consumer cooperated Q4, he slowed his pace a tad, so far Q1. But we predicted an acceleration for Q1.

Aside from these we are fairly pleased with results, which includes of course jobs. Private sector growth is expected to increase 200M for Feb, that release tomorrow morning. If so that will fit our anchor quite nicely. But even if tomorrow’s report is for some reason weaker than expected, we can look for much stronger reads ahead. That will be the trend for this key sector.

Finally, to the Mid East: The pursuit there of consensual gov’t will only increase by the way of breadth and intensity. That movement will be adorned with major upheaval and no doubt more violence along the way. Thus the clear risk of higher crude prices remains. So for example an abrupt and peaceful ending to the crisis in Libya would cheer markets, tanking crude. We would then advise our clients to take advantage of this price movement because there is more to the Mid East than Libya. This week’s arrest of a Saudi cleric for calling for democratic reform and a constitutional monarchy simply reinforces this view.



Robert Craven

Perspective

Things have been a tad hectic, past days. Let’s step back.

The US economy is performing much better than most expected it would. We know now that manufacturing is especially vibrant by the way of new orders, order backlogs, jobs, exports, production; manuf’s have longer delivery times and their input prices are at the highest level since Jul/08 (when oil was surging).

Employment continues to lag a tad. Obama’s statist agenda has meant every new employee carries a larger liability than before. This means that employers have either permanently eliminated positions (productivity up) or put off that decision. Still, employment will gather strength in the months ahead as more of Obama’s policy is rejected.

Consumer activity (about 70% of GDP), after blowing off the charts has slowed at tad, Q1. We predicted more, so it would be easy to blame this all on weather. Some is weather but some is a deliberate pause on the part of the consumer. Nothing unhealthy about this. We have seen this pattern the many years we have followed this sector. Sure enough, pause over, we learn today that Feb vehicle sales rose to their highest level in more than 2 years.

If we were considering a longer-term prospective we would be compelled to examine Obama’s budget, which Newsweek’s Evan Thomas (whose past fawning towards Obama was better seen before dinner) described as a “profile in cowardice.”



The UK economy is hitting on 5 of 8; housing prices are better, construction activity has bounced back and manuf has shown a record start to the year. Germany? Germany is vibrant. And the entire Euro zone has seen manuf grow at the fastest pace in 10 years. Only some of the periphery credits are making little to no contribution. The whole 17-member Euro Zone may grow near 1.7% this year, with the likes of German, twice that.

China is braking a tad, still healthy. Japan, in a slumber for a decade, is showing signs of life with better exports and better industrial production.

Everybody is seeing price pressures. But then we knew that, didn’t we?



Eclipsing all of this is renewal in the Middle East. To appreciate this situation is to know that it’s not just about a despot here, a tyrant there. It is about a people who want what we have and have collectively gathered the courage to get there.

This presents a down side risk for the US economy over the intermediate term because of higher crude prices. We put that gain earlier at 30% which means about 120 +/- on WTI.

Hopefully we won’t get there at all but any investor or planner would be plain nuts to listen to authority figures who assure us that what we see is merely a blip.

Robert Craven

"Expensive Oil Is Here To Stay?

The International Energy Agency's chief economist said this morning that expensive oil is here to stay.

The IEA is an autonomous organization of 28 member countries, founded in response to the 1973/74 oil crisis. They’ve been around a while so you’d think they’d know something about oil. Apparently not.

We know that the course-of-least resistance for crude is higher over the intermediate term. But during that period, Obama’s backwards energy policy will be revised. Next, we will witness a gradual evolution to more consensual gov’t in the Middle East. Both events will birth conditions that foster lower, not higher energy costs in the longer term. The IEA’s chief economist could not be more mistaken.

Robert Craven

It Won't Go Away

Most observers have yet to come to understand the dynamics of the situation in the Mid East.

Bernanke was a cheerleader for the economy today, saying the recent surge in oil prices is unlikely to have a major effect on growth or inflation as long as higher prices do not become sustained. Well ya but the clear risk is that they will be sustained for goodness sake, not indefinitely, but over the intermediate term.

We are witnessing nothing less than the birth of a new Mid East. We don’t know just how tumultuous that adjustment may be but we know the course-of-least resistance is for more turmoil, for more violence, for more interruptions in the flow of crude.

This is the risk as we highlighted earlier. Investors would be well advised to work this into the equation while heeding the words of Fouad Ajami, fellow at the Hoover Institution, “In the tyrant’s shadow, unknown to him and to the killers and cronies around him, a moral clarity had come to ordinary men and women.”

It won’t go away, not this time.


Robert Craven