The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Fed Pres Fisher is also speaking on the economy today and the Federal Reserve and one comment specifically stands out. He said that a goal of the Fed is to maintain the purchasing power of the US dollar. To quantify the success of this or lack thereof, one should look at the rate of increase in the CPI to measure how much a like basket of goods cost over different periods of time. Using Bloomberg data going back to 1920 (as far back as it goes and the Federal Reserve was established in 1913), the purchasing power of the US$ has fallen 91% since 1920. Since 1971 when the US went off the gold standard, the US$ has lost 81% of its value. Greenspan took office in 1987 and the US$ has since lost 47% of its purchasing power. Bernanke followed Greenspan in Feb ’06 and since then the US$ has lost 8.3% of its value. This report card of the Fed’s ability to achieve a key goal speaks for itself.

Outside of talking about the economy, the improved financial conditions with still “significant” challenges remaining and the labor market, he actually talks about the US$ in his discussion about inflation. He concludes that “inflation seems likely to remain subdued for some time,” the same wording we saw in the last FOMC statement but today he is actually talking about the rise in commodity prices, “likely reflecting the pickup in global activity… and the recent depreciation of the dollar.” He also said “we are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate.” He believes their commitment to their dual mandate “will help ensure that the dollar is strong and a source of global financial stability.”

This is the first time I have heard Ben talk about the US$ in these terms. Whether its comments from the Chinese and other global economies that compete with them or finally an acknowledgement that a weak US$ may actually be a factor in inflation, Bernanke finally is doing what any self respecting central banker does, admit that the weakness of the reserve currency of the world matters. Jawboning is one thing, but until the world sees actual action, the US$ will remain in secular decline but today’s comments may be enough to halt its current fall for now. Money will go where its best treated and monetary and fiscal policy in the US is not currently treating the US$ well (an understatement I know) relative to other countries.

Over at Clusterstock, John Carney takes a look at the CRE mess, and assigns lots of blame to lots of people, government agencies, central banks and investors.

He did a yeoman’s job on this overview. I cannot say I am on board with everything he trashes, but he gets a lot more right than wrong. Note especially his pointed commentary about the Fed, how CMBS were allowed such light weight reserve requirements, and the rise of regional and community banks in riskier CRE activities.

The gross data points he cites are horrific:

“Commercial real estate prices have fallen 33% this year and 45% from their peak. Greater than 55% of commercial mortgages are underwater. Some analysts say that as many as 2/3 of the loans may be underwater.

As many as 65 percent of commercial mortgages maturing over the next few years will not be able to qualify for refinancing because of the drop in the value of the underlying property.”

Its worth checking out (despite the obvious click whoring!):

“In a pattern familiar from the housing crisis, the value of commercial real estate has been plunging while the volume of distressed commercial real-estate loans is rapidly rising. The problems in commercial real estate could slam financial institutions, especially smaller regional and community banks, with billions of dollars in new losses. That, in turn, could snuff out whatever chances we have of a sustained economic recovery.

In some ways, this shoe has already dropped.

• The MIT Real Estate Center said that commercial property prices has dropped almost 42% over the past 2 years.
• As a result of that drop, about fifty-five percent the $1.4 trillion commercial mortgages that will mature in the next five years are underwater.
• The delinquency rate for commercial mortgages climbed to 5% in October. A year ago the delinquency rate was just 0.77%.
• About half of all commercial mortgages sit on the balance sheets of smaller banks. So the massive number of bank failures this year is significantly attributable to losses from commercial real estate.
• Late last month, one of the largest commercial real estate finance companies in the world filed for bankruptcy.

It’s only natural that you’re asking how the hell we wound up in this mess. Why did a bubble inflate in commercial real estate? Why are smaller banks so disproportionately exposed? What caused this catastrophe?

Good stuff . . .”

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Source:
How A Government Bailout Created Today’s Commercial Real Estate Catastrophe
John Carney
Business Insider, Nov. 16, 2009

http://www.businessinsider.com/the-guide-to-the-commercial-real-estate-catastrophe-2009-11

A recent study shows people are twice as likely to seek information that confirms their beliefs than they are to consider evidence that contradicts thems. WSJ Intelligent Investor columnist Jason Zweig tells Kelsey Hubbard how this “confirmation bias” can influence their financial decisions.

I found this announcement amusing:

Goldman Sachs CEO Lloyd Blankfein may have had his tongue in his cheek when he said his bankers were doing “God’s work,” but the company’s critics aren’t laughing.

In fact, a couple hundred of them — led by Service Unions International Union president Andy Stern — plan to gather outside of Goldman Sachs’ Washington offices Monday morning to protest the firm’s mega-bonuses, and demand the end of the “too big to fail” doctrine, according to a press release.

The event will be held outside 101 Constitution Ave. N.W., an office building that’s home to many of the most powerful lobbyists and corporations in town, including Goldman. It’s also where you can find POLITICO’s Capitol Hill bureau (in the basement).

Swing by, chant a few protests, drop off a resume . . .

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Source:
SEIU’s Andy Stern to lead Goldman Sachs protest
VICTORIA MCGRANE
Politico.com, 11/13/09

http://www.politico.com/news/stories/1109/29492.html

Art Cashin, head of floor operations at UBS, has the latest buzz from the NYSE.

All too often, pundits, financial writers and commentators look at markers, they try to create an “If Then” causation narrative.

This typically creates a false impression that X caused Y. It is difficult to disprove, because we lack the counter-factual, i.e., where the X event did not occur under the exact same circumstances, and whether Y subsequently occurred anyway.

Bloomberg has a perfect example this morning:

“Federal Reserve Chairman Ben S. Bernanke has succeeded in returning the U.S. economy to growth after the longest contraction in more than six decades. So far Wall Street, not Main Street, has been the primary beneficiary.

Bernanke . . . has helped spark a 62 percent rally in the stock market since March 9 by pledging to keep borrowing costs “exceptionally low” for “an extended period.” His efforts haven’t stopped unemployment from reaching a 26-year high of 10.2 percent in October.

The Fed’s benchmark rate is already near zero and its balance sheet is just below a record at $2.14 trillion, leaving Bernanke, 55, with little room to maneuver. He may be faced with growth that doesn’t generate many new jobs, while stocks keep rising because companies including Caterpillar Inc. and Home Depot Inc. are cutting costs and meeting demand by improving productivity.”

There is no doubt that the Fed chair is a significant player, but to credit him exclusively with an economic recovery and a 62% rally is to fundamentally misunderstand the complexity inherent in these systems.

Further, it denigrates even the possibility, much less the likelihood of an eventual economic recovery and market snapback — regardless of Fed action (See Four Stages of Secular Bear Markets).

We monkeys prefer to find concrete ways to conceptualize what occurs in the economy and the markets, but . . .

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Previously
Confusing Cause & Effect: Elections and Markets (January 9th, 2008)

http://www.ritholtz.com/blog/2008/01/confusing-cause-effect-elections-and-markets/

Correlation (March 9th, 2008)

http://www.ritholtz.com/blog/2009/03/correlation/

Four Stages of Secular Bear Markets

http://www.ritholtz.com/blog/2009/08/aftermath-of-secular-bear-markets/

Source:
Bernanke Lunches on Wall Street as Jobless Rebound Buoys Stocks
Michael McKee and Rich Miller
Nov. 16 (Bloomberg

http://www.bloomberg.com/apps/news?pid=20601109&sid=atHiMqxlVsZY&pos=10

With some markets and many economic data points back to levels last seen in Sept ’08, the Baltic Dry Index is just shy of joining the club. It’s up today for a 13th straight day by another 2.7% and at 4220, is just 71 points from the highest since Sept 24th, 2008. It is now up 535% off the Dec ’08 low but still remains 64% off its record high in May ’08.

The Nov NY Fed survey, the 1st Nov manufacturing figure out, was 23.5, 6.5 pts below forecasts but comes after an almost doubling in Oct to 34.6. It still is the 2nd highest reading since Nov ’07 but is clearly volatile month to month. New Orders fell by almost half but puts it back in line with the Aug/Sept levels. Backlogs fell 5 pts to -2.6 and Employment fell 9 pts to 1.3 but remains positive for a 2nd month for the first time since May/June ’08. Inventories rose 1 pt but remain firmly negative at 17.1 and thus no signs yet of inventory stocking. Prices Paid fell by almost half but Prices Received rose to a one year high (although still slightly negative). The overall 6 month outlook rose almost 2 pts to 57, the highest since Oct ’04. Bottom line, manufacturing is recovering but it clearly will be a lumpy process and the weak US$ is likely helping the 6 month outlook, notwithstanding the longer term negative implications of it.

Oct Retail Sales rose 1.4%, .5% more than expected but ex auto’s they were up just .2%, .2% below forecasts. The Sept headline figure was revised lower by .8%, so taken together, the Sept/Oct data is a touch light. It’s worth looking at together as the auto industry see’s post clunker activity. Motor vehicles/parts sales rose 10.2% in Aug, fell 14.3% in Sept and rose 7.4% in Oct. Ex auto’s, Sept was revised up by .1%. Sales ex auto’s and gasoline rose 3%, right in line with expectations. Sales rose in the following categories: food/beverages, restaurants, health/personal care, clothing, department stores and online retailers. They fell in furniture, electronics, building materials and sporting goods. Bottom line, last week’s earnings from WMT, M, KSS, JWN, JCP, and ANF gave us plenty of good retail sales info, thus taking some surprise out of today’s data.

Like right out of the movie “Groundhog Day,” Phil Connors wakes up on Monday morning (any morning in the movie) that greatly resembles last Monday where government officials say the stimulus spigot will remain wide open, the US$ weakens and markets rally. Last weekend the G20 kept the green light on and this weekend was the turn of the Asia Pac group to do the same. Interestingly, in ’06 the US Nat’l Film Registry deemed “Groundhog Day” “culturally, historically, or aesthetically significant,” but I digress. Q3 GDP in Japan grew 4.8% annualized, well above forecasts of a 2.9% rise but Japanese stocks and bonds were little changed in response. At 12:15 Bernanke speaks about the economy and this will follow a comment over the weekend from a top Chinese official that said low US interest rates and a weak US$ is “seriously impacting global asset prices and encouraging speculation in stock and property markets.”