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

Visit msnbc.com for breaking news, world news, and news about the economy

Jim Bianco comments

Cramer was on Meet The Press yesterday with Alan Greenspan, Mitt Romney and Jennifer Granholm. About halfway into the discussion, he said:

The CEOs I talk to, they’re hiring. They’re hiring in Brazil, they’re hiring in Russia, China. Why are they hiring in those countries? Because it’s steady, we know what to get from the government. It’s a rather — it’s rather quizzical that we know what the Communists will give us but we don’t know what the capitalists will give us.

Let us get this straight, in corrupt and Communist countries companies are hiring. They have transparency … that the government can nationalize your company whenever they want and execute you if you complain. Here we are paralyzed because we don’t know whether our tax rate will be 40% or 42% next year.

Ahead of the 2 day FOMC meeting, in order to help guide them in their decisions I want them to digest the following stats so as to compare the conditions of Dec ’09 with that of Dec ’08 when they cut rates to a range of 0 to .25% from 1%. Since Dec ’08, the US$ index is down 7%, gold is up 33%, oil is up 57%, the CRB index is up 21%, the S&P 500 is up 28%, the 10 yr note yield has gone from 2.51% to 3.54%, the 30 yr to 4.48% from 2.96%, the implied inflation rate 10 yrs out has gone from .15% to 2.22%, the implied rate 5 yrs out has gone from -.23% (yes deflation) to 1.92%, Nov ’09 job loss was 11k, Nov ’08 was 597k, the ISM services index has gone from 37.4 to 48.7, the ISM manufacturing index went from 36.6 to 53.6, y/o/y CPI for Nov ’09 is expected to be 1.8% vs 1.1% in Nov ’08. The main stat that has continued to worsen is the employment rate which has gone to 10% from 6.8%. While times are still very uncertain, the period of free money should end now.

We have not looked at the shipping index in some time — so lets update this:

>

chart courtesy of Ron Greiss at The Chart Store

~~~

Source:
Outlook 2010: The Dollar Holds the Key, Todd Harrison Says
Aaron Task
Yahoo Tech Ticker Dec 11, 2009 10:18am EST

http://finance.yahoo.com/tech-ticker/article/388906/Outlook-2010-The-Dollar-Holds-the-Key-Todd-Harrison-Says

As much as I disagree with the macro view currently being espoused by Merrill Lynch (too optimistic), I completely agree with their just-released view on tampering with the Fed.

This is a topic that was covered Friday by Bonddad, who compares Why the Audit the Fed Movement is the Equivalent of Economic Birthers.

Here is Merrill’s Senior US Economist on the Fed Audit:

“The Federal Reserve System is facing its most extensive scrutiny in several decades. Plans to audit the Fed’s monetary policy decisions are likely to raise expected and actual inflation, reduce financial stability, and undermine policy transparency. In our view, a significant erosion of Fed independence represents one of the greatest long-term risks to the outlook.

Just about every major central bank today conducts day-to-day policy — setting interest rate targets or some other policy instrument — without direct political oversight. The proposed audits of the Fed’s interest rate decisions do not directly compromise the Fed’s independence along this dimension, but they do represent a sizable step down the slippery slope of politicizing US monetary policy.

The current proposal is supposed to avoid direct political interference by imposing a six-month lag between Fed decisions and potential audits of those decisions. However, for policy to be pre-emptive, the Fed must start hiking before the economy has fully returned to normal. Moreover, moving from warning about a possible hike to finishing a tightening cycle can take the Fed several years. These policy lags give Congress ample opportunity to double-guess the Fed before the hiking cycle is completed. The mere hint of a delay in raising rates could ratchet up inflation expectations.

Politicians are not known for their restraint when it comes to manipulating the economy to gain potential votes. Most democracies have chronic budget deficits, and fiscal policy is often eased ahead of elections. Applying these same principles to monetary policy is a recipe for ever-escalating inflation.[…]

Criticizing the Fed once again seems to be a sure-fire way to gain votes this political cycle. But we think it is a far cry from a responsible way to implement sound economic policy.[...]

We think it is ironic that those who criticize the Fed for laissez faire policies earlier in the decade are now lining up behind a Fed audit proposal introduced by a devout libertarian. One, if not both, of these sides is bound to be disappointed with the likely consequences should it become law.

>

Sources:
How not to fix the Fed
Michael S. Hanson, Senior US Economist
Merrill Lynch, 11 December 2009

http://www.ml.com/index.asp?id=7695_8137

Why the Audit the Fed Movement is the Equivalent of Economic Birthers
Hale Stewart
Bonddad Blog, December 11, 2009

http://bonddad.blogspot.com/2009/12/why-audit-fed-movement-is-equivalent-of.html

Former Morgan Stanley Economist Andy Xie explains why getting out of the current finacial situation will be a lot harder than getting in.

The Australian central bank just raised its policy rate by 25 bps (0.25%), the first major central bank to do so since one year ago when the crisis caused all the major economies to cut interest rates to historical lows. Financial markets have been chattering about the end of the stimulus for the past month now and the consensus is that the central banks will keep rates extremely low through 2010 and possibly beyond.

Central banks, on their side, have been delivering the message that they know how to exit, will exit before inflation becomes a problem, and that they don’t see the need to exit anytime soon.They are trying to assure bond investors that they don’t have to worry a lot about their holdings despite low bond yields, while stock investors are told that they don’t need to worry about high stock prices as liquidity should remain strong for the foreseeable future. So far the central banks have made both parties happy, but Australia’s action is likely to cause some concerns among financial investors.

Different economies will exit at their own pace according to local conditions. The US and the UK will keep real interest rates as low as possible in order to support their financial institutions. They don’t want to stop inflation, but rather to slow it. The Fed will raise interest rates by 100 bps in 2010, 150 bps in 2011, and 200 bps in 2012.The US could be stuck with a 4-5% inflation rate by 2012 and for many years beyond.

China’s stimulus will zigzag according to its lending policy. But China’s monetary policy is still linked to the dollar. Its inflation and interest rate will likely be similar to the US. Due to their strong currencies, the euro-zone and Japan will have higher real interest rates, lower nominal interest rates and lower real economic growth rates. This gives them few reasons to raise interest rates.

My central case is that the global economy is cruising towards mild stagflation with a 2% growth rate and 4% inflation rate.This scenario has an acceptable combination of financial stability, growth and inflation. But it sits on a pinhead. The world could easily fall into hyperinflation or deflation if one major central bank makes a significant mistake.In modern economics, monetary stimulus is considered an effective tool to soften an economic cycle. The dirty little secret is that monetary stimulus works by inflating asset markets.By inflating asset valuation, it leads to more demand for debt that turns into demand growth; i.e., monetary policy works through creating asset bubbles. This is why national indebtedness-debt to GDP ratio has been rising over the past three decades and led to a massive debt bubble. The current crisis is due to its bursting.

Read the rest of this entry »

Dubai pulled its ‘Get Out of Jail Free’ card that specifically says on it “This Card May Be Kept Until Needed Or Sold.” Abu Dhabi and the central bank of the UAE honored it and satisfied the repayment of $4.1b of bonds due today with a $10b injection. It’s nice to have a rich uncle. The news came out at almost 11:30 last night and all markets immediately rallied. Dubai’s stock market was up 10%. Greek bonds are not rising in sympathy as their 10 yr yield is up 11 bps ahead of the PM’s speech today which will tell us how Greece plans to cut its deficit. In the eyes of the market, a better than expected Q4 Japanese Tankan report was offset by a drop in cap ex spending plans and the Nikkei was the only major market not to rally as a result. The FOMC two day meeting begins tomorrow. The Fed may think it will be up to them when they raise rates but when the time comes, it will have been the bond market that dictated when.

The Puget Sound Business Journal has done yeoman’s work investigating the storied history of WaMu. (See The Rise & Fall of WaMu and The Last Days of WAMU).

I just found their most recent work, The fight for WaMu documents. It details some of the more absurd redactions that were made to the documents they requested of the Office of Thrift Supervision (OTS) under the U.S. Freedom of Information Act (FOIA) regarding communications between WaMu’s regulators.

The redactions were rather absurd:

And my personal favorite:

So much for more transparency under the new Adminsitration . . .

>

Previously:
The Rise & Fall of WaMu (February 2nd, 2009)

http://www.ritholtz.com/blog/2009/02/the-rise-fall-of-wamu/

The Last Days of WAMU (October 1st, 2009)

http://www.ritholtz.com/blog/2009/10/the-last-days-of-wamu/

Source:
The fight for WaMu documents
Kirsten Grind
December 11, 2009, 2:28pm PST

http://seattle.bizjournals.com/seattle/blog/2009/12/the_fight_for_wamu_documents.html

Here’s yet another reason why the Fed should not be driving interest rates to zero: It helps out far less people inthe economy that they imagine.

From the NYT:

“Mortgage rates in the United States have dropped to their lowest levels since the 1940s, thanks to a trillion-dollar intervention by the federal government. Yet the banks that once handed out home loans freely are imposing such stringent requirements that many homeowners who might want to refinance are effectively locked out.

The scarcity of credit not only hurts homeowners but also has broad economic repercussions at a time when consumer spending and employment are showing modest signs of improvement, hinting at a recovery after two years of recession.”

Sure, refinancing could save home-owners lotsof money they could then plow back into the economy — or even avoid foreclosure. But not if bank lending standards are too tight.

That is the problem with an abdication of lending standards — as we saw from 2002 – to 2007. After the collapse, the over-reaction sends the pendulum swinging too far the other way. Lending standards become too tight.

If only we monkeys could learn anything from history . . .

>

Source:
Interest Rates Are Low, but Banks Balk at Refinancing
DAVID STREITFELD
WSJ December 12, 2009

http://www.nytimes.com/2009/12/13/business/economy/13rates.html

Working in Washington 12/11/2009

The Congressional Budget Office is expected to release its analysis of the Senate’s health-care compromise, with Democrats looking for a vote before the end of the year. There’s also a number of tech companies reporting earnings. Stacey Delo reports.

~~~~

Asia’s Week Ahead: Central Banks in Action 12/11/2009

Traders will pay close attention to Japan’s tankan survey next week, as well as to policy-meeting minutes from the Reserve Bank of Australia. MarketWatch’s Andria Cheng reports.

~~~

Europe’s Week Ahead: Cadbury and H&M in Focus 12/11/2009

Cadbury reacts to Kraft offer, H&M reports sales and Philips may unveil guidance next week.