Off To the Races
The topic of discussion on various financial programs was the futility of Fed quantitative easing and the dangers of devaluing the dollar. Such policies could lead to higher interest rates on the long end the curve, although growth remains subdued. This is the dreaded phenomena known as stagflation. However, other nations are aggressively devaluing their currencies in a veritable race to the bottom.
Today we had the third and final look for second-quarter GDP and although today's 1.7% beat street expectations of 1.6%, the data confirms that the pace of recovery has slowed significantly from a first-quarter pace of 3.7% (and 5.00% for Q4 2009). The winding down of government stimulus and a persistently-high unemployment rate are creating significant headwinds to growth.
JP Morgan chief U.S. economist, Michael Feroli told Bloomberg News:
"We have a slow-growing economy. What we’re getting will do nothing to bring down the unemployment rate. The improvement in the labor market is very slow."
There in lies the problem. The Fed has cyclical tools, but high unemployment and slow growth are the cause of structural changes to the U.S. economy. Today's jobless claims data do little to comfort the markets. Sure, the numbers were down a bit, but the prior numbers were revised somewhat higher. Truthfully, today's drop and last week's higher revision are nothing more than "noise". The street consensus for growth for the balance of the year to remain below 2.00%.
The treasury market has given up earlier gains after fears of even worse jobless data and slower growth were alleviated. However, today's jobless data was poor in real terms. Besides 4,457,000 people counted in the continuing claims data, there are an additional 4.88 million people receiving extended benefits. Although it is true that is an improvement of 293,000, one has to wonder how many people were hired and how many simply ran out of benefits. With few report of large scale hiring, it could be that displaced workers are falling off benefit rolls. Declining jobless claims may not always indicate job growth. In fact, few economists think that is the case. next week's employment data should provide more insight. The street consensus for Non-farm Payrolls is for a gain of 82,000 jobs. Although this would be an improvement from a prior 67,000 jobs, it does not keep pace with the number of people entering the workforce.
Much is being made in the financial media of the Fed using cyclical tools to repair structural problems. That is all the Fed has. Some rocket scientists say that the Fed is devaluing the dollar and that rates cannot stay down at these levels forever. My response is : Duh! Of course rates are going to be much higher than today's levels, eventually. However, that does not mean they will be higher in a month, a year or two years. Look around, other governments are trying to devalue their currencies as well. There is a definite race to the bottom. All the Fed has to do is beat its partners to the punch when tightening.
The danger is that the Fed has lost or will lose its independence and its handlers on Capital Hill will force it to keep rates lower, longer for political purposes. If that happens, the so-called bond vigilantes could sell the heck out of longer-dated treasuries. However, they need a place to go. Yes, commodities provide a destination for some capital, but there are still trillions of dollars which need to be invested in safe,. secure interest paying vehicles. If China does not let its currency and debt be delivered outside of China (and insists on not floating the yuan), China will not be a viable alternative. Europe is even more dysfunctional than ourselves (in spite of what Cramer insists) and other major exporters (Japan, Brazil et al) hare bound and determined to fight currency appreciation. At some point the potential a U.S. interest rate blow-out could be very real, but for now we are probably anchored at today's levels.
More mixed economic data was provided by the better-than-expected Chicago Purchasing Manager's report and the softer-than expected NAPM - Milwaukee report. The strength in the Chicago data was due to businesses ordering more machinery to replace outdated equipment. One pundit on CNBC noted that such increases in equipment spending has "always" resulted in hiring in the past." When in the past have we had this kind of global economy in which we are still dragging our hind quarters in the midst of record stimulus while facing higher taxes and more employment expenses for businesses. It could be that more efficient equipment is being ordered to keep payrolls as lean as possible. We shall soon see.
There has been much discussion in the field regarding whether or not forthcoming economic policies are affecting business and hiring decisions by businesses large and small. I have been of the opinion that concerns regarding forthcoming policies are a major factor. Today's Wall Street Journal reports that McDonalds is considering eliminating its health care plan for store workers. McDonalds offers what is known as a "mini-med" med plan which offers limited coverage for affordable premiums. Under the new health care law, the plan would not satisfy the requirement which states that the insurer must spend 80% to 85% of the premium on medical care. The unintended consequence could be that McDonalds ceases to offer health care. For other business, the result could be a lack of hiring as providing benefits for employees becomes more expensive. I am not commenting on the benefits or lack thereof of the new health care legislation. I am just reporting on how businesses are reacting. You may choose to disagree with either the health care legislation the the response to it by businesses, but it is dangerous to ignore the resulting developments.
Thursday, September 30, 2010
Tuesday, September 21, 2010
No Surprises
No surprises from the Fed. Policy makers saw growth slow, but remain positive. The Fed stated that it is prepared to ease further, if necessary, but declined to engage in another round of quantitative easing.
The Fed is just about out of ammo. Businesses have few structural reasons to hire. It is no secret that many business leaders are not happy with forthcoming health care and tax policies. Could there be a bit of vigilantism going on? It is possible, but there are few reasons to hire at all. What about all the cash on corporate balance sheets? It could be used for mergers and acquisitions. M & A is usually not an engine of job growth.
I will be writing much less going forward, as I have a few other things going on, but I will be back from time to time.
Cheers!
The Fed is just about out of ammo. Businesses have few structural reasons to hire. It is no secret that many business leaders are not happy with forthcoming health care and tax policies. Could there be a bit of vigilantism going on? It is possible, but there are few reasons to hire at all. What about all the cash on corporate balance sheets? It could be used for mergers and acquisitions. M & A is usually not an engine of job growth.
I will be writing much less going forward, as I have a few other things going on, but I will be back from time to time.
Cheers!
Friday, September 17, 2010
Smash Mouth
Smash Mouth Economy
This week’s economic data was lackluster to say the least. Empire Manufacturing was poor, Philly Fed was negative. Continuing jobless claims only came in lower because the previous week’s data was revised upward to over 4.5 million (the highest in nearly two months.) Even that old interest rate driver, inflation, was tame on both the producer and consumer side. Pundits, politicos and equity bulls were all hard pressed to find positives in the data (though the lovely, but seemingly dim Becky Quick of CNBC sure did try.)
However, the data is not pointing toward a double-dip recession, at least not yet. The data is pointing toward slow forward progress. If one were to compare the economies of the past two decades to the high-flying San Diego Chargers’ offense of the late 1970s / early 1980s, the current economy may be more similar to the offense of the 1990 New York Giants which succeeded with 3.5 yard gain after 3.5 yard gain. This is a “smash mouth economy.
What exactly is a “smash mouth economy?” It is an economy where growth must be hard-fought. Nothing will come easy and bug gains will be few and far between. However, if the defense can hold up, the U.S. economy can succeed. In this case the defense is government policy. Poor decision on that side of the economic ball can doom the recovery because the offense (U.S. consumers and small businesses) do not have ability to reach the goal of success if they are placed in a deep hole.
This flies in the face of those who said that there must be a sharp and robust recovery because the recession was so sudden and. Such views are not well thought out. There are factors which make recoveries robust and sharp after recessions. The main factor is to put cash in the hands of those who are willing and able to spend it. During the past two decades that was done via ever cheaper and easier to access credit. This is not a sustainable economic model. As we have so rudely discovered, rates cannot be set ever lower (zero is finite) and eventually you run out of people who can borrow.
There is a similar flaw in relying on housing to be the driver of U.S. economic growth. Real estate values should be the result of a healthy economy, not the main source of economic growth. After all, we can’t build large numbers of homes forever. Eventually you run out of space and, as the population ages (and possibly shrinks as in Europe and Japan), you run out of qualified home buyers.
A very knowledgeable fixed income strategist whom I know and respect states that he believes rates remain anchored at these levels with the risk of heading lower in the near term. He also believes that the Fed will be on the sidelines until at least mid 2011. I agree with him. Short-term rates remain unchanged for at least a year. Long-term rates will slowly rise over time, but the 10-year stays under 4.00% for at least another year and the economy moves forward three yards at a time with a cloud of dust.
This week’s economic data was lackluster to say the least. Empire Manufacturing was poor, Philly Fed was negative. Continuing jobless claims only came in lower because the previous week’s data was revised upward to over 4.5 million (the highest in nearly two months.) Even that old interest rate driver, inflation, was tame on both the producer and consumer side. Pundits, politicos and equity bulls were all hard pressed to find positives in the data (though the lovely, but seemingly dim Becky Quick of CNBC sure did try.)
However, the data is not pointing toward a double-dip recession, at least not yet. The data is pointing toward slow forward progress. If one were to compare the economies of the past two decades to the high-flying San Diego Chargers’ offense of the late 1970s / early 1980s, the current economy may be more similar to the offense of the 1990 New York Giants which succeeded with 3.5 yard gain after 3.5 yard gain. This is a “smash mouth economy.
What exactly is a “smash mouth economy?” It is an economy where growth must be hard-fought. Nothing will come easy and bug gains will be few and far between. However, if the defense can hold up, the U.S. economy can succeed. In this case the defense is government policy. Poor decision on that side of the economic ball can doom the recovery because the offense (U.S. consumers and small businesses) do not have ability to reach the goal of success if they are placed in a deep hole.
This flies in the face of those who said that there must be a sharp and robust recovery because the recession was so sudden and. Such views are not well thought out. There are factors which make recoveries robust and sharp after recessions. The main factor is to put cash in the hands of those who are willing and able to spend it. During the past two decades that was done via ever cheaper and easier to access credit. This is not a sustainable economic model. As we have so rudely discovered, rates cannot be set ever lower (zero is finite) and eventually you run out of people who can borrow.
There is a similar flaw in relying on housing to be the driver of U.S. economic growth. Real estate values should be the result of a healthy economy, not the main source of economic growth. After all, we can’t build large numbers of homes forever. Eventually you run out of space and, as the population ages (and possibly shrinks as in Europe and Japan), you run out of qualified home buyers.
A very knowledgeable fixed income strategist whom I know and respect states that he believes rates remain anchored at these levels with the risk of heading lower in the near term. He also believes that the Fed will be on the sidelines until at least mid 2011. I agree with him. Short-term rates remain unchanged for at least a year. Long-term rates will slowly rise over time, but the 10-year stays under 4.00% for at least another year and the economy moves forward three yards at a time with a cloud of dust.
Tuesday, September 14, 2010
A Little Bit Faster Now
After selling off for much of the past two weeks, prices of long-dated treasuries have rallied the past two days. Recently higher yields and the specter of renewed Fed purchases of U.S. treasuries are responsible for the rally. Even better-than-expected retail sales data couldn't stop the rally. Nor did it spark an equity rally.
The markets have accepted reality. The reality is that although a double-dip recession is not the most likely scenario, neither is a v-shaped broad economic recovery. Welcome to a world of consumer deleveraging and repenting for the sins of past excesses. I think David Semmens of Standard Chartered Bank said it the best today when he stated:
"This will see them (consumers) emerge from the recession in significantly better shape than they entered it but the pain in the meantime still needs to be borne."
There you have it. A return to traditional growth and consumption. A developed economy cannot experience emerging market type growth without consequences. We are experiencing those consequences now.
The markets have accepted reality. The reality is that although a double-dip recession is not the most likely scenario, neither is a v-shaped broad economic recovery. Welcome to a world of consumer deleveraging and repenting for the sins of past excesses. I think David Semmens of Standard Chartered Bank said it the best today when he stated:
"This will see them (consumers) emerge from the recession in significantly better shape than they entered it but the pain in the meantime still needs to be borne."
There you have it. A return to traditional growth and consumption. A developed economy cannot experience emerging market type growth without consequences. We are experiencing those consequences now.
Wednesday, September 8, 2010
A Mismatch Made in Heaven
A Mismatch Made in Heaven (or not)
When last I posted we were awaiting the August employment data and although the economy bled jobs over all (and added a below replacement rate number of private sector jobs) the data was not as bad as many on the street had feared. However, the good news may end there.
Today’s Fed Beige Book report indicates that although the economy is growing it is experiencing “widespread deceleration.” Adding to the unemployment woes are what the report termed “a mismatch between job requirements and applicant skills.” Minneapolis Fed President, Narayana Kocherlakota, speaking today in Missoula Montana stated: The mismatch problems in the labor market do not strike me as readily amenable to the kinds of monetary policy tools currently available to the Fed.” The problem lies on where businesses are seeing demand. Much of the demand for goods and services is coming from abroad. This is also were most lower-skilled jobs are being created. Here at home, businesses are looking for workers with specialized skills to aid in the research, development and distribution of products and services. Workers looking for jobs in manufacturing, construction, retail or real estate services are being left on the sidelines without the necessary skills to fill job vacancies.
Another problem is that there are not enough jobs at the top of the economic food chain to provide jobs for large numbers of displaced workers even if they acquired the desired skills. A comparison between the jobs market and the food chain is warranted. As with the food chain, a smaller number of highly developed life forms are necessary to keep the chain functioning. A company may need 50m R&D professionals to develop products which will be built and purchased in Asia. The result is that many workers remain unemployed.
The current dynamic is one in which corporate profits could remain high, but so does unemployment. Some economists are forecasting an unemployment rate over 10% in the coming months. There is little evidence that businesses are poised to begin hiring en masse. Tax and health care policies which are viewed in a negative light by many business owners and executives are not helping the employment situation.
Persistently-high unemployment may be part of the “new normal” frequently mentioned by Pimco’s Mohammed El-Ehrian. In a recent presentation at a major bank Mr. El-Ehrian mentioned that policymakers are using cyclical tools to try to fix structural problems. What he is saying is that the economy is structured differently than it was just a few years ago. Investors and prognosticators, especially in the equity markets, are waiting for a reversion to the economic mean. What they fail to understand is that the mean changes. It is a moving target. The best hope for America may be to increasingly focus on developing small business and fostering more entrepreneurism. However, such an economy runs counter to the ideology of many Americans. Like it or not, behaving like an ostrich does not do any good.
Meanwhile, in spite of all of our problems, the U.S. remains the world’s safe haven and the dollar the world’s reserve currency. This was evidenced by today’s very strong 10-year auction. Today’s auction saw the strongest indirect bidding in a year. Indirect bidders include foreign central banks. The yield of the auction came in a basis point below the WI trading level. If not for Portugal’s successful bond auction allaying fears of a European debt crisis, prices of long-dated treasuries may have recovered. However, markets are looking for any positive signs, no matter how thin, so treasuries ended the day in negative territory.
I am not sure if I will be continuing this blog. Those of you who know me in my professional life remember that, until two years ago, I published a widely-read market commentary piece at my place of employment. That publication has returned. The fact that I am writing professionally again and that some readers at work have mentioned this blog in e-mails makes me uncomfortable. I have not yet made my decision and will keep my readers posted.
When last I posted we were awaiting the August employment data and although the economy bled jobs over all (and added a below replacement rate number of private sector jobs) the data was not as bad as many on the street had feared. However, the good news may end there.
Today’s Fed Beige Book report indicates that although the economy is growing it is experiencing “widespread deceleration.” Adding to the unemployment woes are what the report termed “a mismatch between job requirements and applicant skills.” Minneapolis Fed President, Narayana Kocherlakota, speaking today in Missoula Montana stated: The mismatch problems in the labor market do not strike me as readily amenable to the kinds of monetary policy tools currently available to the Fed.” The problem lies on where businesses are seeing demand. Much of the demand for goods and services is coming from abroad. This is also were most lower-skilled jobs are being created. Here at home, businesses are looking for workers with specialized skills to aid in the research, development and distribution of products and services. Workers looking for jobs in manufacturing, construction, retail or real estate services are being left on the sidelines without the necessary skills to fill job vacancies.
Another problem is that there are not enough jobs at the top of the economic food chain to provide jobs for large numbers of displaced workers even if they acquired the desired skills. A comparison between the jobs market and the food chain is warranted. As with the food chain, a smaller number of highly developed life forms are necessary to keep the chain functioning. A company may need 50m R&D professionals to develop products which will be built and purchased in Asia. The result is that many workers remain unemployed.
The current dynamic is one in which corporate profits could remain high, but so does unemployment. Some economists are forecasting an unemployment rate over 10% in the coming months. There is little evidence that businesses are poised to begin hiring en masse. Tax and health care policies which are viewed in a negative light by many business owners and executives are not helping the employment situation.
Persistently-high unemployment may be part of the “new normal” frequently mentioned by Pimco’s Mohammed El-Ehrian. In a recent presentation at a major bank Mr. El-Ehrian mentioned that policymakers are using cyclical tools to try to fix structural problems. What he is saying is that the economy is structured differently than it was just a few years ago. Investors and prognosticators, especially in the equity markets, are waiting for a reversion to the economic mean. What they fail to understand is that the mean changes. It is a moving target. The best hope for America may be to increasingly focus on developing small business and fostering more entrepreneurism. However, such an economy runs counter to the ideology of many Americans. Like it or not, behaving like an ostrich does not do any good.
Meanwhile, in spite of all of our problems, the U.S. remains the world’s safe haven and the dollar the world’s reserve currency. This was evidenced by today’s very strong 10-year auction. Today’s auction saw the strongest indirect bidding in a year. Indirect bidders include foreign central banks. The yield of the auction came in a basis point below the WI trading level. If not for Portugal’s successful bond auction allaying fears of a European debt crisis, prices of long-dated treasuries may have recovered. However, markets are looking for any positive signs, no matter how thin, so treasuries ended the day in negative territory.
I am not sure if I will be continuing this blog. Those of you who know me in my professional life remember that, until two years ago, I published a widely-read market commentary piece at my place of employment. That publication has returned. The fact that I am writing professionally again and that some readers at work have mentioned this blog in e-mails makes me uncomfortable. I have not yet made my decision and will keep my readers posted.
Wednesday, September 1, 2010
Serf City Here We Come
Serf City Here We Come
Today’s rally in the equity markets and selloff in the fixed income markets were impressive. The DJIA was up more than 2.00% and the S&P 500 was up nearly 3.00%. This was due to stronger-than-expected economic data from China and Australia and better-than-expected manufacturing data via the ISM report. The markets paid little attention to the ADP Payrolls report which indicated a contraction of private sector jobs to the tune of -10,000. What many pundits and investors seemingly fail to grasp is that it comes down to domestic jobs. One CNBC pundit proclaimed this morning that due to profits, corporations have the wherewithal to hire. The wherewithal maybe, but there is little desire and even less need to add workers.
Some have pointed to the renewed strength in the manufacturing sector. Manufacturing makes up less than 10% of the U.S. economy. Even there most blue collar jobs have either been automated or sent overseas. For example: Caterpillar’s CEO said the company could add up to 9,000 jobs in the coming month… worldwide. Chances are that most actual manufacturing jobs will be created close to end users where labor is less expensive and logistics make local production more cost-effective.
Meanwhile politicians debate how much more temporary stimulus may be needed to re-spark the economy. Auto sales came in much softer than a year ago during the “cash for clunkers program.” There is a growing contingent of government officials who would like to implement more temporary incentives to spend and borrow. To think that we the people cannot see temporary stimuli for what they are is insulting. The American people are being treated like medieval peasants who can be placated by throwing us a few baubles or treats.
The American people deserve more credit than that. We know that the economy is going through a structural change, not a cyclical correction (sorry Ms. Romer). We want to see changes to policies which make it easier and more advantageous to start or expand businesses. That is how jobs will be created. That is how the economy will recover. Temporary credits and rebates will yield temporary benefits.
It appears that the political and intellectual elite believe they are living in serfdom. The American people cannot be soothed to behave like trained lackeys to spend and borrow (irresponsibly if necessary) to drive the economy forward. Growth will be slow and the recovery shallow until consumer deleveraging is finished and the glut of homes on the market is absorbed by a growing population and no about of optimistic rhetoric, cash for clunkers or other government programs are going to change that.
Bring on Nonfarm Payrolls.
Today’s rally in the equity markets and selloff in the fixed income markets were impressive. The DJIA was up more than 2.00% and the S&P 500 was up nearly 3.00%. This was due to stronger-than-expected economic data from China and Australia and better-than-expected manufacturing data via the ISM report. The markets paid little attention to the ADP Payrolls report which indicated a contraction of private sector jobs to the tune of -10,000. What many pundits and investors seemingly fail to grasp is that it comes down to domestic jobs. One CNBC pundit proclaimed this morning that due to profits, corporations have the wherewithal to hire. The wherewithal maybe, but there is little desire and even less need to add workers.
Some have pointed to the renewed strength in the manufacturing sector. Manufacturing makes up less than 10% of the U.S. economy. Even there most blue collar jobs have either been automated or sent overseas. For example: Caterpillar’s CEO said the company could add up to 9,000 jobs in the coming month… worldwide. Chances are that most actual manufacturing jobs will be created close to end users where labor is less expensive and logistics make local production more cost-effective.
Meanwhile politicians debate how much more temporary stimulus may be needed to re-spark the economy. Auto sales came in much softer than a year ago during the “cash for clunkers program.” There is a growing contingent of government officials who would like to implement more temporary incentives to spend and borrow. To think that we the people cannot see temporary stimuli for what they are is insulting. The American people are being treated like medieval peasants who can be placated by throwing us a few baubles or treats.
The American people deserve more credit than that. We know that the economy is going through a structural change, not a cyclical correction (sorry Ms. Romer). We want to see changes to policies which make it easier and more advantageous to start or expand businesses. That is how jobs will be created. That is how the economy will recover. Temporary credits and rebates will yield temporary benefits.
It appears that the political and intellectual elite believe they are living in serfdom. The American people cannot be soothed to behave like trained lackeys to spend and borrow (irresponsibly if necessary) to drive the economy forward. Growth will be slow and the recovery shallow until consumer deleveraging is finished and the glut of homes on the market is absorbed by a growing population and no about of optimistic rhetoric, cash for clunkers or other government programs are going to change that.
Bring on Nonfarm Payrolls.
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