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