Here’s a Wordle of the April 27th FOMC press Q&A (only):
Click through for larger graphic
“Inflation” ruled the day by a longshot.
NOTE: I have removed the words “Chairman,” “Bernanke,” and “economy.” According to Wordle, the word “jobs” did not appear, or at least not sufficiently to make the cut (though the singular “job” did; it’s a bit southwest of “Inflation”) . “Unemployment” is east of “Inflation,” “Employment” just southwest of “job.”
To the press corps: Inflation was not then — and is not now — our most pressing issue. The labor market — unemployment and jobs (and how we’re going to create them) — is. Please focus your attention on that, at least until Kim Kardashian or Snooki does something noteworthy and you have to move on. Thank you.
The FOMC acknowledged the recent weakness in the economy but they believe the factors causing it “are likely to be temporary” as they think inflationary pressures will recede and the supply chain disruptions from Japan dissipate. On inflation, they again mention the influence of higher commodity prices and specifically did not say “measures of underlying inflation are still subdued” that they included in the April statement likely because the last CPI reading is no longer subdued. They hope though it is still ‘transitory.’ Unlike in past statements, the Fed is making a call that they expect “the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate.” While they think the economy will get better, they also inconsistently think “inflation will subside to levels at or below those consistent” with their dual mandate. I say inconsistently because Bernanke has cited greater demand as raising commodity prices, thus a better 2nd half recovery should not lead to lower inflation. They said MP2 (money printing) will end at month end but they will maintain the size of their balance sheet. Bottom line, I understand the huge focus on Fed action from here on but they have lost the ability to help the economy because a lower cost of money has proven impotent in helping an economy that is delevering. Asset prices and our currency is the only thing left for them to manipulate.
The FOMC acknowledged the recent weakness in the economy but they believe the factors causing it “are likely to be temporary” as they think inflationary pressures will recede and the supply chain disruptions from Japan dissipate. On inflation, they again mention the influence of higher commodity prices and specifically did not say “measures of underlying inflation are still subdued” that they included in the April statement likely because the last CPI reading is no longer subdued. They hope though it is still ‘transitory.’ Unlike in past statements, the Fed is making a call that they expect “the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate.” While they think the economy will get better, they also inconsistently think “inflation will subside to levels at or below those consistent” with their dual mandate. I say inconsistently because Bernanke has cited greater demand as raising commodity prices, thus a better 2nd half recovery should not lead to lower inflation. They said MP2 (money printing) will end at month end but they will maintain the size of their balance sheet. Bottom line, I understand the huge focus on Fed action from here on but they have lost the ability to help the economy because a lower cost of money has proven impotent in helping an economy that is delevering. Asset prices and our currency is the only thing left for them to manipulate.
Société Générale has a very interesting piece out this morning looking at the notion of economic surprises and a double-dip scenario:
“The economic surprise indicator has returned to very low levels, indicating that a lot of negative surprises are now discounted. We don’t believe that the indicator will remain low for long as the drop is mainly due to a combination of several exceptional factors in H1 2011, i.e. the earthquake and nuclear threat in Japan, the hurricane in the US and the oil price spike owing to turmoil in the ME/NA region.”
The economic surprise indicator is SocGen’s proprietary measure of deviation of economic data surprises, calculated as the difference between figures released and figures expected by consensus.
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Number of news articles related to double dip
click for larger chart
Source Bloomberg, Citigroup, SG Cross Asset Research
Their proprietary newsflow indicator suggests that doubledip scenarios have come back to the forefront of the news, supporting the bond market but penalising cyclical assets.
Source: Don’t believe the doom merchants
We don’t ascribe to the double-dip scenario: markets remain liquidity-driven
Société Générale Cross Asset Research, Q3 2011
Kiron Sarkar lives in London and Ireland where he works as a money manager. He occasionally attends the Scarsdales Equity idea lunches when he comes to New York, which is where I met him.
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Hi there,
Credit Suisse has recently issued an excellent report on Chinese banks
- basically downgraded them (ex ICBC) and the sector to “underweight”.
Basically they cite “asset quality concerns” – too true mate. The issues include:
Massive off balance sheet financing – credit to GDP has rocketed; Non financial companies have the lowest (since 2008/9) interest rate cover; Credit costs will rise; To summarise they remind readers that NPL’s were some 20% – 25% in the past.
BoA is likely to sell its approx 10% shareholding in CCB;
China’s National Development and Reform Commission forecast that inflation would rise above 6.0%. No surprise there. Indeed, actual inflation is likely to be above that number even now – however, Chinese statistics, well……..;
China’s response to its neighbours re Oil exploration in the South China seas “you are playing with fire”. China wants bilateral negotiations – no chance. In addition, they state that US involvement may end up making the situation “more complicated” ie go away. They add it would be better for the US to leave disputes in the South China Seas to the claimant countries – no chance;
Liquidity is proving a problem in China. Money market rates have risen to a 3 year high. The 7 day repo rate has doubled in less than a week.
The PBoC policy of hiking RRR ratios is clearly impacting;
Fitch stated yesterday that a Sovereign debt swap and/or a rollover of maturities, EVEN A VOLUNTARY ONE, will be deemed a default.
The FT refers to Article 125 of the Treaty on the Functioning of the European Union. It quote extracts from the relevant paragraph.
“A Member State shall not be liable for or assume the commitments of central governments, other bodies governed by public law, or public undertakings of another Member State”.
Just to remind you, the German Constitutional Court meets on 5th July to consider whether the present bail outs are legal !!!!!!!;
The Greek PM survived the confidence vote. Great, now he has to pass legislation through Parliament (on 28th June) to authorise a package amounting to some E78bn of spending cuts and revenues (the mythical privatisation proceeds). There are subsequently other hurdles.
Unions are calling for more public strikes etc – essentially the same old. same old.
Just listened to a representative of the Greek opposition party – now I know why they really should be given to Turkey;
The Euro Zone game has always been to avoid contagion spreading to Spain. However, a recently published IMF report is interesting reading. It states that “The repair of the economy is incomplete and risks are considerable” – tough remarks from the normally very diplomatic IMF. The Spanish Finance Minister was quoted as saying that the IMF report was “extraordinarily positive” – she’s was a pupil of Bernie Madoff, no doubt. The reality is that Spain is in deep trouble.
Interest rate spreads between Spanish and German bonds are large (currently nearly 250bps), Mrs Salgado !!!!!!;
Euro Zone April industrial orders were +0.7% MoM (+8.6% YoY – much lower than the +14.2% forecast), somewhat lower than the +1.0% forecast. Clearly shows slowing – may just be related to the Japanese disaster, but unlikely;
The BoE minutes have just been released. States that inflation will be over 5.0% (no surprise). In addition, more QE – virtual certainty in my view, as you know, though the vote was 8 to 1 to keep QE at £200bn for the moment. 2 members voted for a 25bps hike (as usual). The MPC judged that downside risks have risen and that current weakness in demand is likely to persist. Sterling is declining following the release of the minutes;
FED day today – unlikely to be anything of substance;
Summary
Markets mixed, though generally modestly lower – no real action.
Nikkei did quite well though. Oil down a bit and the Euro is strengthening somewhat. No real direction, but I remain bearish – looking to increase shorts – will dispose of my trading plays today. A clear warning sign was the VIX yesterday. US markets closed near their highs – but the VIX closed more than 1 point higher than its mid morning low. FED statement/press conference may result in something, but unlikely.
• Greek savers rush for gold (FT)
• Ex-IMF Chief Economist: Debt Ceiling Default Would Be “A Calamity” (TPM)
• L.A. suit calls Deutsche Bank a slumlord (LA Times)
• Robert Nozick: The Liberty Scam (Slate)
• In Defense: Why @Peanutweeter Should Be Considered Fair Use (Peculiar Sleep)
• Yahoo Bet on Alibaba Highlights Risk in China (Bloomberg)
• Our Story: The Press-Enterprise (My Stolen Home)
• Turntable.fm Really Is Awesome. Is It Legal? (All Things) see also How Apple’s iCloud Could Squeeze Billions More From Tightfisted Music Lovers (Fast Company)
• Louie: Season 1 (DVD Talk)
• Eddie Murphy: The Razor-Edged King of Late Night Comedy (1982) (New York Magazine)
Bruce Springsteen may have been on the covers of both “Time” and “Newsweek”, but he was positively unknown. This was half a decade before MTV, long before Reagan legitimized greed and money became more important than music. The only way to hear the music was to buy it, or to wait for your favorite radio station to play it. And the stations only played the hits, “Born To Run” was ubiquitous, but “Jungleland” was not. That was for fans. Who purchased the long player and went to the show.
And the show was a religious experience unknown to the mainstream. It wasn’t like you flipped the channels and stumbled upon the E Street Band by mistake. You had to go out of your way to buy a ticket. And the show was not about visual pyrotechnics, nothing was on tape, hard drives were not even known yet. No, all the fireworks emanated from the instruments, the performance itself.
Bruce had to prove it all night. Every night. Because that was how you made it.
In the wake of the untimely death of Clarence Clemons I’ve been inundated with links to articles and photographs and videos. But this one stopped me in my tracks, this one was positively stunning.
Sure, the Big Man was featured. He wailed. But Bruce and the rest of the band! Just watch this clip. They’re so hot, you’ll be closed even if you never got the Boss previously.
That’s the power of live performance.
Never mind how well-oiled they are. It’s the joy. Like they’d rather be nowhere other than here, on stage. That they want to earn the right to keep on doing this, forever and ever.
Despite the success of “Born To Run”, this was three years later. The band was almost starting all over again. Momentum had been lost. And “Darkness At The Edge Of Town” didn’t yield a hit single.
But you release an album and you go on the road, your hard core fans show up, they drag their friends and you fan the flames of the fire.
When Springsteen plays now, he’s carrying the weight of his career, of your expectations. Despite making albums for most of the seventies, on some level Springsteen is still new here. He’s still climbing the ladder. He’s still got a way to go.
And he’s gonna earn it.
He’s gonna play all night and wear you out. Showing that he’s more into it than you.
And you’re gonna walk out the door almost speechless.
But the next morning you’re gonna have a smile on your face, you’re gonna tell everybody you know, I WENT TO THE SHOW!
This whole damn gig is on YouTube. It goes on for hours.
The songs are not old chestnuts, they’re still in their prime.
But my favorite is “Candy’s Room”.
“Darkness” is my favorite album. Well, tied with “The Wild, the Innocent”, since that’s when I was converted, when I realized this was not some run of the mill act.
And I love “Racing In The Street”.
And when Bruce exclaims in “Streets Of Fire”, you feel his pain.
And the closer, the title track, is positively spooky, you want to spin the album again just to prevent being creeped out.
And that’s when you hear the raucous “Badlands”.
But “Adam Raised A Cain” and “Something In The Night” don’t prepare you for what comes next.
The agitation of Max’s sticks lead to an intimate scene, a boy confessing in his bedroom, within a halo of pixie dust.
Then you’re off on an unexpected roller coaster. You get all the confidence of a boy turning into a man. One who believes in himself, one who can get what he wants, what he deserves.
That first kiss puts you on the tilt-a-whirl. You want more but it seems almost unrealistic.
All the excitement of love, the hope that it’ll continue, the concept of finding someone on your level or above, who you’re gonna win, is in this song.
And I’ve never found a live take with both the intimacy and the excitement of the studio version until now.
Once upon a time there was no greater profession than rock star. Someone who wrote his own rules and played by them. Someone whose only goal was to reach deep inside himself in the hope that you’d connect. The money came last. You threw cash at him or her like you place bills in the collection plate, it was a religious experience, you wanted to be saved.
Clarence Clemons may be gone, but if you watch these videos, you’ll be saved. I promise.
“Candy’s Room”:
Bruce Springsteen – Capitol Theatre Passaic NJ 1978:
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I always find it interesting how ideas travel through society. Sometimes they are infectiously passed along like a virus; other times they spontaneously appear in multiple places at once, as an obvious and logical response to situations.
This has been on my mind this week. The second slowing of the US economy, the problems in Europe, the slowing (not slow down) in China, all trace their path to the overhang of the credit crisis.
We were willing to spend trillions on Iraq, and trillions on bailing out reckless bankers, and we are still spending $100s of billions of dollars in an ill advised back door bailout of banks bad mortgages by moving them at full value onto the taxpayers via Fannie/Freddie. Why not spend trillions on the national economic infrastructure instead?
If you were going to give me a 10 figures to stimulate the US economy so that the next expansion could proceed, here’s what I would do:
1) Greencard for Buying a home: This idea has been floating for a while, and its time to give it serious consideration. The problem with the US housing market is simply to much supply relative to the outstanding demand. That can be brought into balance by finding more qualified buyers. Post 9/11, we tightened up immigration rules excessively. Its time to bring in more scholars, engineers and well educated people from the rest of the world.
2) Corporate Tax-Free Repatriation: US corporations are sitting on trillions of dollars of cash in their overseas divisions. A one year tax holiday to bring that back to the US. It can be structured in tiers (0%, 5%, 10%). The goal should be to bring to the US a trillion plus in overseas profits.
3) One Year Payroll Tax Holiday: The Bush admin overlooked this when they did their version of the accelerated depreciation bill, emphasizing cap ex over hiring. We can increase job creation by Taxing it less. A 12 month employer FICA holiday will encourage job creation.
4) Pure Science R&D Program for Alternative Energy: Gains in the basic science of solar energy conversion, battery storage, alternative biofuels, etc has been incremental. The private sector does not patience for multi-year or basic science R&D.
5) Roads, Bridges, Tunnels: Why does the US love big construction projects, but dislike basic maintenance? Much of the transportation grid in the US is falling apart, in need of a massive repair. Repave everything, and turn our roads into showcases.
6) Electrical Grid Refurbishment: This is both an economic and national security issue: The electrical grid is an unreliable mishmash of public and private ownership, vulnerable to both blackouts and cyber-attacks. It needs to be upgraded yesterday.
7) Airports, Ports: Many of the older US airports are simply awful compared with European and Asian facilities — some US airports look like they are from 3rd world countries. Issue bonds, split the costs with the Airline industry, and make US airports globally competitive.
If we are going to deficit spend on ill advised wars, unfunded tax cuts, new entitlement programs, why not spend money on programs that leave behind a viable infrastructure? Other than the Payroll tax holiday (which offsets the accelerated depreciation law), all of these items leave behind a valuable infrastructure that can be built upon. Even the Housing idea will allow the US construction business some measure of repair.
The focus on Deficits today is absurd, forcing us towards another 1938-type recession. The time to reduce the government’s economic deficit and footprint is during a robust expansion, not during (or just after) major contractions.
During the de-leveraging following a credit crisis is the worst possible time to be deficit obsessed.
From a market perspective the confidence victory for the Greek PM is a relief but rather than being an incremental positive, it is just a lack of a negative as this political turmoil and parliamentary vote next week is just to satisfy the bailout deal that was struck a year ago. Assuming passage of the budget and an agreement on bailout Part 2 can be reached amongst all parties involved, this fire should be put out for now but only to be revisited in the next year or two as the Greek economy struggles to grow. That reality quickly shifts the market focus back to the global economy and its growth prospects and the Fed meeting today will highlight that. Bernanke will acknowledge the sluggish recovery and it’s why he’ll state that while its latest round of asset purchases will end next week, the size of their balance sheet will remain unchanged as maturing debt will get reinvested in US Treasuries. In terms of doing more (boost asset prices again) or doing less (aka exit), he will unlikely commit to anything with the huge amount of uncertainty on the outlook. Also, the staflation the US economy is now experiencing puts handcuffs on the Fed’s ability to do something more, which is a good thing.
Not exactly a blinding insight, but interesting regarding who its coming from:
“Those who advocate that job creation rests on corporate tax reform (lower taxes) or a return to deregulation of the private economy always fail to address dominant structural headwinds which cannot be dismissed: 1) Labor is much more attractively priced over there than here, and 2) U.S. employment based on asset price appreciation/financed as opposed to manufacturing can no longer be sustained. The “golden” days are over, and it’s time our school and jobs “daze” comes to an end to be replaced by programs that do more than mimic failed establishment policies favoring Wall as opposed to Main Street.” (emphasis in original)
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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