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

Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.

His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.

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It is unfortunate the media does not make better use of an accessible resource: itself. Newspapers and financial TV are generally content to report what is being said today with no reference to the past. There seems to be no memory. A recent instance is Federal Reserve Chairman Ben Bernanke’s opinion that inflation is not a concern. In a sane world, his opinion would not matter much. We live in a more nonsensical atmosphere in which abstractions substitute for reality.

The Fed chairman’s inflation prediction is thought to reflect whether the Federal Reserve’s Open Market Committee (FOMC) will raise the fed funds rate from zero. It is not, then, Bernanke’s opinion about inflation that stirs imaginations (very limited imaginations, to be sure), but the train-of-thought that the global yield curve is a consequence of his purported wisdom. If the Fed Chairman’s public view changes, the residence of several trillion dollars will also change: carry trades, institutional asset mixes, and potential reallocations from stocks into money markets are examples of financial securities that are shipped from asset class to asset class according to the Fed chairman’s price-change gazetteer.

The real world today is repeating a pattern of a couple of years back. Prices are rising everywhere. This was also true when Bernanke became chairman of the Fed, in February 2006. Shortages, bottlenecks, black markets and prices were increasing when Bernanke became chairman. They continued to do so into late 2008. These conditions then retreated but are charging upward again.

To cut to the finale, a search through the files shows that Ben Bernanke was neither concerned nor understood the 2006 to 2008 inflation. It is certain, reading the evidence, that once again he will ignore (or remain malignantly ignorant, as the case may be) inflation until long after rice riots outside California supermarkets are a feature on the evening news.

To those unaccustomed to Fed-foolery, there is a motive for the chairman to day-dream through an inflationary swindle. The Federal Reserve wants to print money at will. An admitted problem with inflation would make it difficult to keep pumping money into the market.

Two conclusions can be drawn with near-certainty: the FOMC will not raise its zero-percent fed funds rate as long as Ben Bernanke remains Federal Reserve chairman. (A trivial 0.25% or 0.50% increase is possible.) Prices of things, particularly of commodities, will keep rising. This is an area to make money.

The Prosecutor’s Brief

In 2006, Bernanke had the excuse of being new to the job, without his predecessor’s experience at judging how every comment would be interpreted and analyzed. In the end, his inexperience with the media was not a disadvantage. (Discussed in the past tense, all of this is just as true today.) He talked in circles, made little sense, but criticism of the Federal Reserve Chairman’s remarks was confined to vocabulary. He could have bellowed his discontinuities of thought, of logic, of basic economics through the public address system before a full house at Yankee Stadium and the financial media would have remained deferential. An instance was his inflation commentary. An abbreviated sequence of Bernankeism follows.

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A few weeks ago, we moved from an aggressive cash position (80+%) to about 50% long. We continue to find intriguing set ups and attractive trades, mostly in the small and mid-cap space.

But that doesn’t mean we are sanguine about the likelihood of this rally going on forever. Indeed, there are many factors that are making me uncomfortable with our becoming even more aggressive.

Consider these 10 factors that are making me nervous:

1. Low volume: Friday’s quad-witch volume notwithstanding, volume has been extremely light for weeks now. Historically, light volume is associated with tops (disinterest) while heavy volume tends to accompany bottoms (capitulation).

2. Consensus on political outcome: If one more person announces coming gridlock is good for the market, I may have to scream. Conventional wisdom is unreliable about future unknowns. The widely held belief (assumptions, really) as to how this plays out is too pat, and creates an opportunity for surprise and disappointment.

3. Absence of Volatility: The VIX keeps sliding, as volatility fades. This may be reflecting complacency — never a net positive for stocks.

4. Housing overhang: One of several major macro economic factors weighing on the market. This is going to be an ongoing headwind, as we make our way down towards fair value.

5. Sentiment: Bullish sentiment (expectations that stock prices will rise over the next six months), rose 7% points to 50.9% in the latest AAII Sentiment Survey (historical average is 39%). Sentiment suddenly becomes bullish after each spasm higher sets off my contrary alarm bells.

6. Recession Porn “confusing“: The flip side of the bullish trader sentiment is the obsession with every negative datapoint. From Roubini to Zero Hedge, people seem to be hunting down anything foreboding. (How funny is this tweet: zerohedge once again pissed that asteroid avoided colliding with earth)

7. Overhead resistance:Market are coming up against levels where lots of supply lives. In the past, this is where resistance lay. Watch SPX 1152, NDX 2370, and Dow 10,800.

8. Job creation soft: The 2nd economic headwind. Until this improves, there can be little better than modest improvement in retail, home sales, and deleveraging.

9. Lack of market leadership: Quick, what are the market leaders in this cycle? Its hard to really say — Banks, Energy, Technology? Not really. How about Ag, Consumer Staples, Utilities? Its tough to see much in the way of leadership.

10. Consensus that gridlock is good: I am becoming increasingly wary of the consensus belief that gridlock is such a wonderful thing. If most of the market and economic gains have been driven by Fed/Treasury action, what does gridlock say about future market action?

None of these individual items are fatal to the market rally — but collectively, they are the factors making me nervous . . .

Two fascinating side-by-side front page stories in the Sunday Times makes for interesting cocktail party chatter

The first is G.O.P. Insider Fuels Tea Party and Suspicion. It essentially argues what started out as a legitimate 3rd party effort has been hijacked by the far right wing of the GOP. So much for a 3rd party coming out of THAT.

The second is Bloomberg Vows to Help Bolster Political Center (online version use the hed “Bloomberg Pushes Moderates in National Races”). Bloomberg is giving money, endorsements and support to both moderate GOP and Democratic candidates.

The most interesting thing to me from the article were these paragraphs:

“In the last election, Mr. Bloomberg, the nation’s most prominent and wealthiest independent elected official, explored the possibility of a presidential run but concluded that the moment was not right for a third-party candidacy. But his plunge back into national politics suggests he is once again seeking to elevate his profile and test the viability of running as a centrist problem solver.

Mike Murphy, a Republican political strategist who is advising Ms. Whitman’s campaign, called Mr. Bloomberg “a very special breed.”

“People see him not through a Democratic or Republican prism, but through a results, grown-up, get-it-fixed, make-it-work prism, which is very attractive,” Mr. Murphy said. “He has a very wide appeal.”

Fascinating stuff.

CrowdQuery: Can a legitimate third party arise in the USA? Can a 3rd party candidate really win the White House in the 21st century?

What say ye?

For those of you who have XM Satellite radio, I will be discussing the new proposed spending programs from 4:00 to 5:00 pm today on POTUS with Pete Dominick.

If you are unfamiliar with POTUS, it has been called “real Centrist talk radio” and “truly fair and balanxced.”

Here’s a recent review:

“. . . While Fox News gives lip service to “Fair and Balanced” reporting, POTUS walks that walk. Every weekday, POTUS airs new programming with balanced news and commentary that is punctuated by the most important speeches of the day from political leaders across the spectrum, usually presented in their entirety. They also deliver the daily White House press briefings raw and unfiltered.

Their shows focus on politics, and leave the kitschy programming about the day’s latest Bubble Boy or shocking court video of a raped and strangled child to the Springeresque channels like CNN and FOX.

Instead of the 60 second blip and 30 seconds of spin, POTUS listeners are able to digest the major live events of the day and make up their own minds as to what it means. . . It is refreshing to be able to hear enough of what is going on in the news day live that one can form their own opinion about major events and political policy.

The centerpiece of the POTUS schedule is perhaps the best-kept secret in talk radio: A three-hour political talk program called “Stand-Up with Pete Dominick.” It is probably the only show of its kind: Real Centrist talk radio. It is truly the best political talk show on the air today.

Dominick, a comedian and man-on-the-street for CNN, goes out of his way to place his XM/Sirius show on neutral ground, even setting aside his own perceptions and opinions. He catches and clamps down on spin from either side of a discussion. He generally gets a bit more thoughtful and thought-provoking discussion out of his program . . .”

Should be fun.

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Source:
XM/Sirius’ POTUS Channel May Be The Last Refuge of Balanced Political Journalism
Brian Ross
HuffPo, September 17, 2010
http://www.huffingtonpost.com/brian-ross/xmsirius-potus-channel-ma_b_720773.html

Today’s recession porn comes to us from The Economic Collapse blog:

15 Shocking Poverty Statistics.

#1 Approximately 45 million Americans were living in poverty in 2009.

#2 According to the Associated Press, experts believe that 2009 saw the largest single year increase in the U.S. poverty rate since the U.S. government began calculating poverty figures back in 1959.

#3 The U.S. poverty rate is now the third worst among the developed nations tracked by the Organization for Economic Cooperation and Development.

#4 According to the U.S. Department of Agriculture, on a year-over-year basis, household participation in the food stamp program has increased 20.28%.

#5 The number of Americans on food stamps surpassed 41 million for the first time ever in June.

#6 As of June, the number of Americans on food stamps had set a new all-time record for 19 consecutive months.

#7 One out of every six Americans is now being served by at least one government anti-poverty program.

#8 More than 50 million Americans are now on Medicaid, the U.S. government health care program designed principally to help the poor.

#9 One out of every seven mortgages in the United States was either delinquent or in foreclosure during the first quarter of 2010.

#10 Nearly 10 million Americans now receive unemployment insurance, which is almost four times as many as were receiving it in 2007.

#11 The number of Americans receiving long-term unemployment benefits has risen over 60 percent in just the past year.

#12 According to one recent survey, 28% of all U.S. households have at least one member that is looking for a full-time job.

#13 Nationwide, bankruptcy filings rose 20 percent in the 12 month period ending June 30th.

#14 More than 25 percent of all Americans now have a credit score below 599.

#15 One out of every five children in the United States is now living in poverty.

Real Time Economics references the Fed’s Z.1 Flow of Funds Accounts released Friday. What some economists have been assuming was Deleveraging was in fact Defaults:

“The sharp decline in U.S. household debt over the past couple years has conjured up images of people across the country tightening their belts in order to pay down their mortgages and credit-card balances. A closer look, though, suggests a different picture: Some are defaulting, while the rest aren’t making much of a dent in their debts at all.”

There are two ways, though, that the debts can decline: Pay them or default. The total value of home-mortgage debt and consumer credit outstanding has fallen by about $610 billion, to $12.6 trillion, according to the Federal Reserve. Of that $610 billion, “banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans.”

So much for the great deleveraging . . .

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Chart courtesy of Real Time Economics

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Sources:
Defaults Account for Most of Pared Down Debt
Mark Whitehouse
Real Time Economics, September 18, 2010
http://blogs.wsj.com/economics/2010/09/18/number-of-the-week-defaults-account-for-most-of-pared-down-debt/

Z.1 Flow of Funds Accounts of the United States
Flows and Outstandings Second Quarter 2010
Federal Reserve, September 17, 2010
http://federalreserve.gov/releases/z1/Current/z1.pdf

The Sept NAHB home builder sentiment index was unchanged at 13 holding at the lowest since March ’09 but was 1 pt below expectations. Both Present Conditions and Future Expectations held at the Aug levels but Prospective Buyers Traffic fell 1 pt to 9, the lowest since March ’09. NAHB chairman said “builders haven’t seen any reason for improved optimism in market conditions over the past month…if anything, consumer uncertainty has increased, and builders feel their hands are tied until potential home buyers feel more secure about the job market and economy.” Also an issue for builders is “the large number of foreclosed properties for sale.” Bottom line, we know the housing market has not responded to historically low interest rates due to the above reasons but also because of the pull forward of demand the tax credit wrought. The S&P’s breaking out to a new high since May tells us there is no surprise either.

The NBER has officially dated the end of the Great Recession June 2009:

The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date. (emphasis added)

No, we are not still in a recession as some people have asserted. No,its not a depression. The wheel has turned, the trough is more than a year behind us. This is not a robust recovery, but the economy is now expanding, not contracting.

If you are unsure of this, consider the charts of the 5 major economic factors the NBER considers in their dating criteria below:

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Real GDP

Real Income

Industrial Production

Retail sales

Employment (NFP)

Note the last chart — NFP — it goes back to 2000 instead of 2004.  The NBER may have jumped the gun when they declared the recession over in November 2001; Employment did not bottom for another 2 full years!

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The charts are from the nice folk at Economagic, who need to adjust their recession dating (I did it manually) Wow — that was fast!

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Source:
NBER Business Cycle Dating Committee Announces Trough Date
Business Cycle Dating Committee
National Bureau of Economic Research, September 20, 2010
http://www.nber.org/cycles/sept2010.html

PDF here

There was a ton of data released last week, some of which we only get quarterly or annually.  It would be virtually impossible to comment on all the items of interest contained in just three of the more bountiful reports — the Census Bureau’s annual release of Income, Poverty and Health Insurance in the United States, the quarterly Fed Flow of Funds report (one of my favorites, even though the data’s always a bit stale), and the monthly Small Business Economic Trends report from the National Federation of Independent Business.  That said, here are a few items that caught my eye which tend to be overlooked and not reported elsewhere.

HOUSEHOLD FORMATION

Among the things that jumped out at me in last week’s Income, Poverty and Health Insurance in the United States: 2009, which is always a fascinating read, was the virtually stagnant condition of household formation in the United States.  Page 13 of the report shows the number of households in the U.S. in 2008 as 117,181,000. For 2009, Census tells us the number rose to 117,538,000, for a gain of 0.30%, the lowest growth rate on record according to their database (and eclipsing what had been the previous lowest on record — 0.34% — in 2008).

Here’s a graphic (calculated using Table HH-1):

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The formation of new households is obviously critical for the growth of the economy for more reasons than I could detail here (think housing, for starters, then move on to durable goods, then perhaps autos).  While one would expect the rate to decline in hard times (job insecurity, wage stagnation), a continuation of this trend will only serve to exacerbate some of the challenges we’re trying to work through.

[ADDING 9/20/2010:  We have heard from Calculated Risk regarding the usability/utility of the chart above and the underlying data from which I derived it (i.e. it tends to be unreliable as a time series).  In fact, CR had a post here just Saturday on this very topic;  readers are encouraged to have a look.  That said, we do clearly agree that "combined data suggest extremely slow growth over the last few years," and that is my overarching point.]

HOUSEHOLD OWNERSHIP OF TREASURIES

Turning to Friday’s Fed Flow of Funds report, I noted that Treasury securities on the balance sheet of U.S. households have exploded — by $616 billion from the second quarter of 2009 to the second quarter of 2010.  From $447.448B to 1.063622T:

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Now, this is not to say I am in the bond bubble camp, as I am not.  I am merely pointing out that the flight to safety is — and will likely continue to be — in full effect as economic uncertainty prevails and boomers (and retirees) struggle to get what safe income they can.  I would also note that part of this equation probably has to do with the fact that — at ~2.75% on the 10-year — it takes a lot more bonds money to produce the same income than it would at, say, 5% or higher.  None of this is to say that Treasuries represent a significant percent of household assets — they do not.  But the almost vertical rise in dollar terms is noteworthy.

As Americans continue the long, hard slog of balance sheet repair, it is encouraging to see owners’ equity as a percent of real estate on the mend, though there’s a long way to go:

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NATIONAL FEDERATION OF INDEPENDENT BUSINESS – SMALL BUSINESS ECONOMIC TRENDS

The NFIB put out its Small Business Economic Trends report last week, and although the Optimism Index eked out a modest gain (though still mired in recessionary terrain), much of the commentary was downright depressing:

There is no life in the jobs market.
The environment for capital spending is not good.
The weak economy continued to put downward pressure on prices.
Those looking for loans predominately are looking for cash flow support, not funds to expand or hire (see Small Business Credit in a Recession, 12/09).
Overall, 91 percent of the owners reported all their credit needs met or they did not want to borrow, unchanged from July.

The first two comments are fairly obvious to anyone with a pulse living in the United States.  The third comment — supported by two inflation-related releases last week — argues that a deflationary scenario is not out of the question.  The fourth comment is very troubling, in my opinion.  It is disheartening to see that those businesses seeking credit are doing so to support their cash flow needs.  Over time, without a more sustained recovery, that will not end well.  While it is encouraging to see that 91% of small businesses either do not want to borrow or are having their borrowing needs met, it does call into question the talking point that “banks aren’t lending” or “credit is not available.”  Finally, I would note that Poor Sales continue to be the Number One problem cited by small business — above Taxes, Gov’t Regulation/Red Tape, or any other issue:  “What businesses need are customers, giving them a reason to hire and make capital expenditures and borrow to support those activities.”  So for all the rhetoric about “uncertainty,” the simple fact of the matter is a lack of demand.

AND A WORD ON INFLATION after the jump

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XKCD: