Week in Review

The collective market view is that we are experiencing a moderate slowing: in China, due to Bk of China braking; in Japan, as expected, due to the tragedy; in the UK, sideways but with the threat of a lift over its head; in the EU, the reality of the periphery disassembling, only Germany and France packing the load; and finally, in the US, with manufacturing slowing, with signs of employment doing the same and with the reality of gasoline and Fed policy (lower $) smacking the consumer where it hurts.

We are not in a sweet spot at the moment; we cannot detect just where there may be a major flaw in consensus, just where resides the next opportunity for our clients. We’ve got a long weekend ahead, so plenty of time for thought.


Robert Craven

Violence - The Week In Review

It was more world focus this week than US focus. That is, US debt and equity prices were to a large extent driven by offshore events.

S&P was unkind to Greece on Monday, but then nobody cares about the periphery, except the periphery (and of course California).

Not a problem; later in the week here comes the EU with its Q1 GDP print far through expectations, due to strength in Germany and France (the rest in the trough). It’s ancient history but everybody got excited anyway; until that is they all recalled that central banks are just no fun.

China worried world markets when its Industrial Output, although vigorous, was just less vigorous than expected. That didn’t stop the Bank of China from lifting reserve requirements another 50 basis points a day later. This really worried the world’s markets, those of the US especially.

Commodity prices gyrated wildly but ending lower, partly on some corny view of a world slowing. So much for our February prediction that WTI would print 120 tagged to Middle Eastern violence. Of course in the time-tested way of economists, once our prediction comes true, even if a decade later, we’ll be sure to brag about it.


Robert Craven

The World Beast

We had a bit of a mortgage problem here in the States back in ‘08. As a result, Iceland imploded. What? This week we witness China’s output slowing to just a mini explosion from a full-blown explosion, and crude drops off the screens. Last Thursday US Claims blew through expectations (more claimants) and next day a dozen currency traders in Japan go out the window.

Holy cow!

The world markets - one big, throbbing organism, connected by nerve, muscle and fiber, a colossal beast which quivers, jumps, turns summer salts and mashes anything in its way.

And what insight can we fetch from all of this? Easy. Never take the markets or yourself too seriously; remember that a little levity goes a long way.

And always - our motto - Keep It Simple.


Robert Craven

China

The US and China just finished the so-called US-China Strategic and Economic Dialogue. There was progress - less protectionism from China was key among these.

China of course has been booming but we saw this morning that China’s industrial output increased less than expected (13.4% yr / yr) for April. So it looks as if the Bank of China’s tighter monetary policy is working (Apr/5 was the last rate hike). We also see that consumer inflation came off a bit in April from the 32-month March high (5.4% annualized).

These are good things and prevent a government panic. A controlled slowdown is what we all want. And US interests have improved as China appears more willing to allow the Yuan to strengthen, and the recent talks should further the process. Also, China has allowed the Yuan to strengthen to fight inflation. So this is good news for US exporters.

China is not a "wild card" in the economic sense. They are well managed. From Reuters: "The Chinese government knows it’s time for a change. The old economic model based on cheap exports and eye-popping investment can’t be sustained. The latest five-year plan, covering 2011-2015, aims to boost internal consumer demand as the main engine of growth. It envisages a bigger share in the economy for services, which are currently only 43 percent of GDP — barely half America’s level. The plan calls for more high-tech industry and for greener, less carbon-intensive growth. There’s also to be a big push into social housing, so the poor can afford somewhere to live."

Robert Craven

Offshore

Japan? What problem? China? A tad less prone to protectionism and wary of inflation, this a positive for US exporters (stronger Yuan). The EU - from each according to his ability, to each according to his needs. It can’t work. It will unravel gradually however, nothing sudden. Little impact as we have limited exposure, that region. Germany - a buoyant consumer. Best economic expansion in two decades, tied to exports. UK - a modest recovery yet a trigger-happy Bk of England caps anything more.


Robert Craven

Bad Timing for the Chinese

We see today that China’s April trade surplus with the US exploded 16%. Bad timing. Right now (5/9 the first day of talks) US officials are beating on our Chinese friends to allow their currency to adjust, to drop the claim they’re crippled. This result helps shred their argument and thus may be good news for US exporters ahead (stronger yuan).

Robert Craven

World Manufacturing

A key Chinese manufacturing index just released has fallen south of expectations, partly or maybe wholly as a result of Bk of China tightening. Not a problem. Given the Bank of China brake, the yuan is a tad stronger vs the $, good news for US exporters (and good news for Chinese consumers). Tomorrow’s market crowd will digest that development, then an April survey for German manufacturing, finally, our own Manufacturing survey. Manufacturing can only carry the ball so long.

The CPI, Fashion in Central Banking and the Fast Draw

We all recall Abe’s story - just because you call a calf’s tail a leg doesn’t make it so. And so it goes with today’s inflation report. The Federal Reserve is excused because one of them, Art Burns, snowed the BLS and Congress, Alan Greenspan style, to ex out any dangerous stuff.

Today’s CPI headline was as expected, up 0.5% yet because core was up only 0.1% the Federal Reserve by calling the tail a leg can sit tight for a bit.



In the old days folks we just plain had more fun. Politics played more of a role in worldwide central banking - no politician in his right mind wants their central bank to stomp on growth - and a lot of the central bankers went along, Burns style. That’s no longer in fashion.

It’s the fashion nowadays among central bankers to be tough hombres. We know some of them personally. It’s good for their career. Like Wyatt and Morgan Earp, they practice their fast draw at every opportunity.

Bernanke has just forced those at the ECB and Bank of China to clear leather.

Bernanke’s Federal Reserve through the policy of supplying liquidity in great excess, liquidity we in the US never needed, liquidity which like rain on saturated ground flows elsewhere, is the key culprit in triggering commodity inflation offshore (see our post of Feb/16 for background).

Now it’s understood that certain excesses are no longer appropriate. Thus, the ECB and Bank of China have already lifted their key interest rates because it’s in fashion to do so. After today’s news - higher core numbers for the EU and China, these guys will move again in the near term.

These developments cannot help our recovery, one which others have now come to understand is already being hampered by events in the Middle East.

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

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

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

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

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

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

Update

First, to spending. Last week we saw that consumer spending for Q4 ‘10 gained 4.4% (the most since Q1 ‘06 ) following a 2.4% increase Q3. We did not know at the beginning of Q4 that spending would print 4.4%, only that it would flatten St estimates. This was the result.

Look for any surprises over the near term to be to the side of more, not less vigor than forecast. This is the course-of-least-resistance for the US economy and it is especially true for discretionary spending. Thus planners in those businesses linked to such activity are to embrace the reality of more demand for their product, H2, not less.

Background: Most analysts missed recent vigor because they 1) did not fold results of Nov/2 and traction obtained into their models, 2) gave imbalances in housing and the mess in states’ finances too much weight and 3) took consumer confidence reports to heart.



Of course, there are always wild cards - those cataclysmic events which carry the hrsp to retard US growth. A closure of the Suez Canal is one. This brings to mind the current crisis.

We followed the Mid Eastern situation (including the Brotherhood from ‘06) in a separate blog. http://bobcraven.blogspot.com/

Better, see the recent article by Vic Hansen for a primer http://pajamasmedia.com/victordavishanson/whats-the-matter-with-egypt/.

After that exercise readers will understand the failure of Mid Eastern society, and, the West as the appointed scapegoat. Along comes the internet and anyone under 40 got jealous. Dictators stand in the way. Here is the cause of recent violence. The trigger however was food prices.

Some Western observers have blamed the Fed for the recent chaos and even deaths; they argue the US is an exporter of inflation expressed in the very commodity prices which triggered this deal. Let’s see what this is all about.

Sure enough, inflation in milk and flour prices triggered protests in Algeria that left 3 people dead. Then a food vendor in Tunisia set himself alight. Now Egypt is ablaze. Egyptians suffer for example because cereal grains are up 39% in the last year, oils and fat, up 55%. Going after the nearest bad-guy target - Mubarak - is understandable.

But is Bernanke also one of the bad guys? In the sense that he conducts US monetary policy without the interests of the developing world folded in, he is. But it takes two to tango and the complainer, the developing country must make the decision to import inflation to get things going!

Higher commodity prices are not just a monetary phenomena of course - witness the worst drought in Russia and the Black Sea region for 130 years, late rains in Canada, Nina disruptions in Argentina, and a series of acreage downgrades in the US. But what about money?

We know the Fed is flooding the world with $’s; the more of them the less they’re worth. And we know that an Egypt, or a China, or an Algeria or any other developing country must buy their food in $’s. But these guys are mostly exporters. What happens if the $ cheapens relative to their currency? Right, this dampens their exports (one $ buys less), their life blood. So what do their central banks do? They print their currency out of thin air and buy dollars. Why? To keep dollars expensive to the local currency. Thus, just like China is doing these countries make a choice or decision to import inflation. That is the core to their problem. At the expense of their own savers they flood their own mkt with their own currency. That’s about all there is to it.

An Egypt or China which may want to insulate itself from this food inflation has to appreciate its currency significantly. But then its exports would tank. No way they’ll do that. Or, they have to subsidize food prices - price controls. These measures always fail. Absent these two drastic measures, countries have to live with the implication of US monetary policy.

Robert Craven

Update

Of the few economic releases this week none carry much mkt-moving potential. So perhaps best to reflect on other events, center stage, which may impact US growth.

Key among these is Obama’s sudden conversion from gov’t planner to free-market maven. “It’s amazing how far he has moved off his campaign promises to the left, and moved over to the center-right,” noted one St observer. Of course we and future generations have paid his tuition; the cost - outrageous. We know he is looking to the election but at least he’s become practical, perhaps even useful.

This has not been lost on major employers. For example, manufacturers have become more optimistic. These were already cheered by results of Nov/2; they are now all the more buoyant given the new business-friendly attitude in the WH. Intel’s Paul Otellini noted the other day, “In 2011, everything gets better. The economy is forecast to improve.” Otellini like so many others had been a critic of Obama’s past fetish for throwing encumbrances on employers.

There are other reasons to be constructive. Well-advertised, higher commodity prices (food, metal, oil, etc) reflect stronger demand, US and abroad. This is a good thing. The other side is the inflation threat but as Zach Pandl with Nomura notes today, “U.S. companies in aggregate aren’t as affected by the rising commodity prices because they spend far more on wages and worker benefits than they do on commodities.” Maybe. Certainly the Fed agrees. The Fed of course “ex’s out” these price pressures, preferring the core CPI measure which excludes food and energy, as their guide.

Background: Major world commodities are priced in dollars. Countries earn these dollars through trade with the US. We run a trade deficit with most of these countries so they have plenty of dollars, more than ever nowadays given the Fed’s expansionary policies. These countries - many now expanding rapidly - buy food, metals and oil with these dollars, bidding up the price. So loose policy here (core CPI as the excuse) translates to commodity inflation in countries abroad.

This leads the discussion to China. China has more of these dollars than anyone; to keep this hoard safe a good chunk is in US treasuries. So much in fact that China has a lever over US policy - if they sell, up go US yields. This is why the Chinese have in the past gotten away with linking their yuan to the dollar. This keeps Chinese exports cheap but fuels Chinese domestic inflation, and by contagion eventually that in the US, biting into household pockets. This is one reason the US has warned China to speed the appreciation of the yuan to the dollar. This too will be a major part of this week’s discussion with Chinese president Hu.

Robert Craven

Update

Let’s take a look at the balance of the week.

We’ll see the Fed’s Beige Book tomorrow (1/12). This will reflect Bernanke’s recent commentary that improvement is noted here and there.

Thur (1/13) we’ll see the PPI for Dec, then CPI on Fri (1/14). Both of these numbers have acquired market-moving potential because of the Fed’s aggressive expansion of the money supply. If either or both are to print numbers say double expectations, the world mkt will assume the Fed’s got itself in a tight spot and yields will spike. The odds for such a print are low, but this does accurately reflect the tension in the marketplace.

Also Fri (1/14) we will have Dec Retail Sales. Estimates have been shaved a tad due to extreme weather, the end of the reporting period. Still, past few months we have predicted that consumer activity would surprise to the side of vigor. This has been the result, especially for discretionary purchases. We look for more of the same, ongoing.

Finally, the media is saturated with news of distress, EU credits. What’s this mean for the US? Not much.

There will be a nick in US exports given the recent weakness of the Euro to the $(a Euro buys fewer $’s). But major contagion? No. Our banks have very little exposure to the EU periphery credits. The real wild card as we noted earlier is a collapse of the currency. That’s something else.

Background: Nothing good can come from paranoia. But that is just what birthed the EU - the dread of US competitiveness. Sovereignty was ditched throughout Europe. There was a great leveling. Terrified, all rushed together, the weak and the strong, to row one boat. Weaker members inevitably slack on the oars. The ship is now off course and perhaps, bound to run aground.

Solutions to the current crisis were being delivered piecemeal, without recognition for example that Greece, Ireland and Portugal are insolvent. The stubborn ECB had refused to do much. But today Japan eclipsed the ECB and offered to buy a good hunk of the bonds being readied to support EU periphery credits. That helped. So did China’s promise to buy Spanish debt. And so did rumors today of increased ECB purchases of Portugese debt.

The lesser credits of Europe the poor devils got themselves in a trap - borrowing heavily, pre-crisis, in hopes of a continuum. US Democrats, always made out to be darlings in the European press were trusted by this bunch - those same Democrats who sowed the seeds to tank the world markets. Now we’re alright, or getting there, but these credits never recovered. Investors are selling their bonds as they can’t seem to pay their bills. And as investors do that, these credits’ debt bills soar even more as interest rates climb.

World creditors now demand 7% to loan the Portugese 10 year money (actually 7.24% at one point yesterday, triggering ECB purchases which put the rate back down closer to 7%), vs the already high 5.5% that Greece and Ireland are paying the EU emergency fund, vs 3.51% for the UK Gilt 10yr and 3.35% for the US. And if Portugal goes, and she may as she’s not growing fast enough to service her debt, then Spain is right behind, or such is the perception. Makes sense - Spanish banks are one of the largest holders of Portugese debt.

These folks should have listened to Thatcher.

Robert Craven

FRAUD

More "Stimulus" ? It will not work. We know that, our readers know that, Obama knows that, almost every economist knows that. The difference between most of us and this administration - most of us are not chronically disingenuous.

The latest plan is called a jobs plan, stealth for stimulus. Please. It is in fact another $50 billion in infrastructure spending (e.g., roads, trolleys, trains, and sewer systems). Government infrastructure spending is widely believed by the masses to be a quick ticket to job creation and economic prosperity. That is false. This plan is the administration's attempt to pull another fast one at the expense of all of us. This is a scam designed to take in the masses and appease the left.
We have explained before why these schemes don’t work. Let’s review. The track record of government stimulus is all failure. The New Deal doubled gov’t spending but unemployment remained above 20% until WWII. Japan’s 10 stimulus bills over 8 years had zero impact. The 2009 BO "stimulus" was a flop, exactly as we predicted in this blog.

Why? Start here: Where is the world does this money come from? Thin air? Only if the Fed is in cahoots with the administration. A slush fund put away for such emergencies? Come on. It comes dear readers from areas where it could be put to better use.

So again, from where do these funds arise? Hear the term "crowding out" before? The funds arise from taxes, from inflation, from gov’t borrowing. That’s it. If taxes, Obama is only redistributing existing purchasing power. If from borrowing either from us or from foreigners, there is then exactly that offset in less to invest or spend in the private sector, which is by the way, always more efficient. (Borrowing from China and others will only adjust the balance of payments by equally raising net imports, leaving total demand and output unchanged.)

Haven’t yet accepted the fact you’re being taken? Obama wouldn’t do this to you? Still believe what you hear from labor union types or partisan Nobel laureates? Fine. Don’t take our word for it. How about from the government itself, in this case the Congressional Research Service, which noted, "To the extent that financing new highways by reducing expenditures on other programs or by deficit finance and its impact on private consumption and investment, the net impact on the economy of highway construction in terms of both output and employment could be nullified or even negative."

Look at this example. Obama’s guys claim $1 billion in highway spending can create 47, 576 new jobs. So assume they borrow that money from the private economy (as they claim they intend to do). From the Heritage Foundation, "Highway spending simply transfers jobs and income from one part of the economy to another. The only way that $1 billion of new highway spending can create 47,576 new jobs is if the $1 billion appears out of nowhere as if it were manna from heaven."

The funny thing is, almost no one argues with this. The Dept of Transportation and the GAO confirmed the statement above. Obama’s counting on the lack of scholarship of the masses to get this deal done.

Fellow critics of this fraud argue that it’s like taking water out of one end of a swimming pool and putting into the other. They’re partly right, but that’s only a wash. Most of these programs are in fact a retardant, in that they take a dollar from folks who can spend it productively and give that dollar to those that have demonstrated they can’t.

Think of this the next time you hear Obama harping on stimulus. At least you’ll know up front you’re about to be shorn (ok, this word is a noun, but if Faulker and Twain got away with it, so can we).

Robert Craven

Equity Market - "Outlook"

Free-market pricing is too complex for any one individual to completely understand or predict. Bond market, stock market, the dollar - a galaxy of contradicting or reinforcing factors - an immense stew of input that somehow sculpts a closing price, every day. No one, not even Buffett, understands the process (as he has just learned). Certainly not those pundits on the many networks who offer false comfort every evening, pretending they know - an act of fraud.

What we do know is that the Dow is off 30+% since Obama was elected, 45% since the crisis came to a head. We did not predict the crisis but we have isolated the primary cause. Globalization and contagion compounded errors made initially in the US. Late Q4, major central banks successfully prevented a melt down. It was not a solution, only a band aid.

There are a maze of factors which impact the Dow: Bk of Eng policy, GM’s whining, China’s stimulus package, the weather. And there will always be surprises. In investing, the business of the future is to be dangerous. What we may do however is to stand back, away from the thicket, not expecting to predict a turn or bottom necessarily but to at least corral the odds and bring them into our camp. To be, if not more right, then less wrong.

We can learn to become good listeners. Market reaction, hindsight, has signaled that banks/credit must be addressed first. Because Obama has refused to do that the equity market has suffered significantly. There are many other causes of course, some known and some not. The "stimulus" plan is seen by reasonable observers as at best a wash, the stuff for our political blog but not this one, so likely little market-moving impact there. But the budget is seen by reasonable observers as this: Big Government as the ultimate hero; the private sector at best in a supporting role. Who that does not live under a rock does not understand that to the equity market, this is poison? All of it is corrosive to the economic fabric of this country.

The market has told us part of what it needs, that is, that which will provide sustenance. By listening we may not have the Holy Grail but we’ll have a leg up. Thus, until Obama 1) maps a plan for the banks, 2) quits lying about "investment" vs "spending", and "savings" and 3) shows the world markets that he is not a far-left ideologue, meaning he will not try to transform health care, education and energy as the stock market fears he will, be content to stay close to home.

Robert Craven

No Yawning Please

Got an audience? Want to put them to sleep? Talk of interest rates will do the trick every time. This is a tad ironic as this topic impacts all of us personally.

World markets trade bonds just like anything else. There is a key relationship between price and interest rate. Let’s start there.

Assume that company A wishes to borrow and issues an IOU, a bond ($1000 minimum denomination). Assume lenders require A to pay a 6% coupon for that loan, or $60/yr, say for 10 years. Now assume over the next 12 months economic conditions slow so that when B, an identical credit to A needs to borrow, B needs only to offer 5% to acquire the funds. But assume you are a holder of bond A and wish to sell after one year. Will you ask only $1000, face value? Naturally not as the interest rate associated with similar credits to A is now 5%. Instead you will price your bond at $1200, making the attached coupon of 6% worth 5%, or the market rate. Nice little profit.

Instead of general conditions, there may be some extraneous factor(s) which make A’s bonds attractive - say a cure for cancer. Thus investors will drive A’s bond price up steeply and quickly even though the general interest rate environment has not changed.

Thus, interest rates down, prices up. Or, interest rates up, prices down. That’s all there is to it.
Conditions of individual bond pricing are far more complex but it is only necessary for most of us to understand this simple relationship or axiom to acquire a long leg over most laymen.

Now let us look at the current situation, at the US instead of company A as a borrower. Given the latest world financial turmoil large investors (China, Saudis, St of Cal pension, college endowment funds, etc) seek shelter. The safest place to shelter one’s funds is in short-term US treasuries. This tremendous demand, something we call "flight-to-quality" (could be a cure for cancer) has driven treasury prices through the roof. And so we know that yields must correspondingly take a nose dive. They have. The yield on 90 day treasury bills is 0.02% for goodness sake. So in a bit of a twist the US is paying next to nothing to finance the billions in rescue packages orchestrated in Washington.

Robert Craven