Posts filed under “BP Cafe”

The Economic Outlook

Vice Chairman Donald L. Kohn
At the Hutchinson Lecture, Newark, Delaware
April 20, 2009
The Economic Outlook

I’m pleased to be here and honored to be invited to deliver the Hutchinson Lecture. Although I never met Harry Hutchinson, I very much wish I had. Like Harry, I received a Ph.D. in economics from the University of Michigan, and my professional interests have centered on money and banking. Given Harry’s expertise and his keen interest in teaching, I’m sure he would have had valuable insights about the recent financial turmoil to share with all of us. In this talk, I will focus on the economic outlook, which, of course, has been significantly influenced by that turmoil. After a brief review of recent developments, I will discuss the factors that are likely to support a resumption of economic growth over coming quarters as well as the likely contour of that recovery.1

Recent Developments
The U.S. economy and financial markets have been through an extraordinarily difficult period. The downturn in economic activity that has been under way since late 2007 steepened considerably last fall as the strains in financial markets intensified, credit conditions tightened further, and asset values continued to slump. Partly in response to the financial turmoil, consumer and business confidence plummeted, and nearly all major sectors of the economy registered steep declines in activity. In all, real gross domestic product (GDP) dropped at an annual rate of 6-1/4 percent in the fourth quarter of 2008; the Commerce Department’s advance estimate for the first quarter of 2009–which will be released next week–is expected to show another sizable decrease. This recession seems likely to be among the deepest and longest in the post-World War II period.

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Category: BP Cafe, Economy, Federal Reserve, Think Tank

Big Changes in Muniland

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from…Read More

Category: BP Cafe, Fixed Income/Interest Rates

Monetary Policy in the Financial Crisis

Vice Chairman Donald L. Kohn
At the Conference in Honor of Dewey Daane, Nashville, Tennessee
April 18, 2009
Monetary Policy in the Financial Crisis

In response to the financial turmoil and economic weakness of the past 18 months, the Federal Reserve has taken unprecedented steps in conducting monetary policy. Not only have we reduced our target federal funds rate aggressively, essentially to zero, but we have also made credit available to institutions and markets in which we had not previously intervened. To varying degrees, similar actions have been taken by other central banks around the world. For Dewey’s class each January, I have been describing my take on the framework for making monetary policy. I thought a natural extension of that role and a way of honoring Dewey and his abiding interest in policymaking would be to talk about how the crisis has and has not affected that framework. Chairman Bernanke has done that already in several speeches, but participants in this conference might find my perspective useful. In providing it, I will try to address some of the questions people have raised about our policy actions.1

Although our actions have been unprecedented, the framework in which I have been considering them remains, at its most fundamental level, the same as the one I have been describing to Dewey’s classes over the years. Our objective is to promote maximum sustainable employment and stable prices over time. These goals are enshrined in law, and they also make sense in economic theory and practice. Central banks are uniquely suited to promoting price stability, and they contribute to maximum employment and growth over time by eliminating the uncertainties and distortions of high and unstable inflation. The goal of maximum employment also is critical: A balance between aggregate demand and potential supply is needed to maintain price stability; in addition, significant fluctuations in output impose costs on our economy, add to uncertainty, and impede planning and growth. Our monetary policy actions in the crisis have been aimed at fostering both broad objectives.2

We achieve our objectives by influencing financial conditions–the cost and availability of credit as well as asset prices. Changes in financial conditions, in turn, affect spending and thus the balance between aggregate demand and potential supply. And how close we are to maximum employment is a basic ongoing determinant of inflation, with slack reducing inflation and overly high resource utilization increasing it. The other major determinant is inflation expectations: If expectations are not anchored–if they vary in response to our actions or to persistent gaps between actual and potential output–inflation itself will follow.

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Category: BP Cafe

Words from the (investment) wise for the week that was 4.19.2009

Words from the (investment) wise for the week that was (April 13 – 19, 2009)

Spring is in the air – at least in the Northern Hemisphere and on global bourses. Last week marked the sixth consecutive up-week for stock markets as investors’ risk appetite returned amid signs of global economies and the financial sector embarking on the road to recovery.

19-april-v1.jpg

Source: Tom Toles, The Washington Post.

Speculation that the unprecedented stimulus measures are starting to take root saw the safety appeal of government bonds diminishing, despite the buying support from central banks’ buying programs. Similarly, gold bullion struggled to find traction as investors continued to unwind positions. Silver and oil also languished in the red, but copper, other industrial metals and soya beans surged ahead.

The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com. A picture tells a thousand words …

19-april-v2.jpg

Equity investors breathed a sigh of relief with Goldman Sachs (GS), JP Morgan (JPM), Citigroup (C) and General Electric (GE) all reporting better-than-expected first-quarter results. Goldie also announced a $5 billion capital raising. Meanwhile, the US Federal Reserve has told banks to keep mum on the results of “stress tests” that will gauge their ability to weather the recession, Bloomberg reported. This is to ensure the report cards don’t leak during earnings conference calls scheduled for this month.

The quote du jour belongs to Elizabeth Warren, chairperson of the Congressional Oversight Panel on Tarp, who said (as paraphrased by Jon Stewart): “Capitalism without bankruptcy is like Christianity without hell.” Fed chairman Ben Bernanke was in agreement, saying that “… any firm that cannot meet its obligations should bear the consequences of the marketplace. But recent circumstances have been truly extraordinary.”

Global stock markets, led by financials, added to the gains of the rally that commenced on March 10 (see table below). The MSCI World Index gained 2.3% (YTD -4.2%), the MSCI Emerging Markets Index 1.7% (YTD +13.5%) and the S&P 500 Index 1.5% (YTD -3.7%). These indices have risen by 28.0%, 32.6% and 28.5% respectively since the March lows.

Click on the table below for a larger image.

19-april-v3.jpg

Returns around the world ranged from top performers Ukraine (+15.2%), Denmark (+12.3%) and Norway (+11.4%) to Côte d’Ivoire (-7.0%), Kenya (-2.8%) and Ecuador (-2.6%) experiencing selling pressure. The Japanese Nikkei 225 Average (-0.1%) was the only major index not making headway, notwithstanding the government’s announcement to support the stock market. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

Focusing on the US stock markets, it is interesting to note that stocks across a broad front have participated in the six-week old rally. This is also illustrated by the graph below which, in addition to the customary market breadth measures, shows the outperformance since the March lows of the Rydex S&P Equal Weight ETF (+40.8%) compared with the S&P 500 Index (+28.5%) – a market-capitalization weighted index.

19-april-v4.jpg

Source: StockCharts.com

John Nyaradi (Wall Street Sector Selector) reports that the strongest exchange-traded funds (ETFs) on the week were the Claymore/Delta Global Shipping (SEA) (+14.8%), iShares Dow Jones US Home Construction (ITB) (+11.9%) and SPDR S&P Homebuilders (XHB) (+11.2%). On the other end of the performance scale the Market Vectors Gold Miners (GDX) (-6.3%), ProShares Short Financials (SEF) (-4.9%) and United States Oil (USO) (-4.0%) performed poorly.

On the credit front, the cost of buying credit insurance for US and European companies eased during the past week as shown by the narrower spreads for both the CDX (North American, investment grade) Index (down from 183 to 177) and the Markit iTraxx Europe Index (down from 156 to 146).

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “economic”, “economy”, “market”, “prices” and “China” featured prominently, with others such as “bank” and “government” just a notch behind.

19-april-v5.jpg

Turning to the stock market again, the chart below from Ron Griess’s The Chart Store puts the movements of the S&P 500 since the beginning of 2007 in perspective.

19-april-v6.jpg

As shown in the table below, the 50-day moving averages have been cleared comfortably by all the major US indices and the early January highs are the next important targets. As a matter of fact, the Nasdaq Composite Index is already 1.2% above this level. It has to rise by a further 6.7% in order to reach the key 200-day moving average – an indicator often used to distinguish between primary bull and bear markets. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to remain intact.

19-april-v7.jpg

From a technical perspective, a primary bear market still exists as long as the major indices remain below the January highs and the 200-day moving averages. Many of the rally’s leaders (indices and sectors) seem to be running into major resistance at these levels and look susceptible to retrace at least a portion of the gains since the March low.

Further evidence of a short-term top in the making comes from a chart showing the percentage of S&P 500 stocks trading above their 50-day moving averages. Altogether 90% of the stocks are currently trading above their 50-day lines – higher than the 80% level typically seen at prior peaks during this bear market. This looks overdone in the short term, but for a primary uptrend to manifest itself the bulk of the index constituents should remain above the 50-day line and also trade above their 200-day averages (26% at the moment).

19-april-v8.jpg

Source: StockCharts.com

Still on the topic of whether stock markets are running out of gas, Adam Hewison of INO.com prepared a short technical analysis of the S&P 500′s most likely direction and important chart levels. Click here to access the video clip.

The sharp fall (-4.0%) on Friday in Taiwan – one of the strongest stock markets over the past few weeks – may be a precursor of short-term downside potential in other markets. (Click here for a chart.)

“Mistaking a temporary jump for a sustained bull market can be costly. In 41 so-called bear market rallies since 1928 – gains of more than 10% that are later wiped out – equities fell an average 25% after peaking,” warned Laszlo Birinyi (Birinyi Associates) via Bloomberg. “Buying stocks is like crossing Fifth Avenue when the light is red. You might make it, but the odds are not with you.”

David Fuller (Fullermoney) summarized the outlook as follows: “We are seeing nothing less than the greatest global asset reflation in history. This is bullish and all that bearish sentiment tells us that there is still plenty of cash on the sidelines, capable of fuelling additional gains in stock markets and commodities over at least the medium term.

“On a short-term basis, stock markets are technically overbought as the rally continues for a sixth consecutive week. However, this persistent, non-volatile strength provides clear evidence that demand has regained the upper hand. Consequently, downside risk should be limited to a temporary reaction and consolidation of recent gains, before cash on the sidelines supports additional strength.”

Interestingly, analyst earnings revisions for the S&P 1500 Index and most sectors have once again improved during the past week. According to Bespoke, analysts have cut estimates for 772 companies in the S&P 1500 and raised estimates for 290 over the last four weeks. This works out to a net of -482, which represents 32.1% of the Index – the highest level since late September. “… rather than dismiss these numbers as negative, we would continue to note that it’s a start, and before things start to get better, they have to get less worse,” said Bespoke.

Dozens more companies report on their first-quarter results next week, including heavy-weights like Bank of America (BAC), IBM (IBM), Apple (AAPL), Boeing (BA) and Morgan Stanley (MS).

For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Are stock market gains built on solid foundations?“, “Moving averages – indicating bull or bear markets?“, “Technical talk: Buying power not tapped out yet” and “Commodities have turned the corner“. (And do make a point of listening to Donald Coxe’s webcast of April 17, which can be accessed from the sidebar of the Investment Postcards site.)

Twitter
In case you missed last week’s paragraph on Twitter, I regularly post short comments (maximum 140 characters) on topical economic and market issues on this fascinating medium. For those not doing so already, you can follow my “tweets” by clicking here. The Twitter posts also appear on my Facebook page and in the sidebar of the Investment Postcards site.

Economy
“Global business confidence remains very weak. Survey responses regarding sales, hiring, and equipment investment are notably poor. Businesses also report little pricing power,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. However, it is encouraging that businesses are becoming steadily less negative about the economy’s prospects later this year.

Fed chairman Bernanke introduced the term “green shoots” a few weeks ago and it has since become a part of economic and financial vocabulary.

19-april-v9.jpg

Source: The New York Times, April 7, 2009 (hat tip: Northern Trust).

How widespread are the green shoots? I posted a short article last week on a recent research report by the Goldman Sachs Global Economics team, showing that the global economy appears to be stabilizing. To monitor whether economic data are indeed improving they have developed a simple Diffusion Index, recording whether a particular data series has increased or decreased relative to its previous reading. Thirty-four monthly economic data points from the US, Europe, China, Japan, Brazil, Russia, Korea and India are analysed.

After having languished below 50 since the spring of 2007, the Diffusion Index increased to above 50 in February and March. Any reading between 0 and 50 indicates the data are deteriorating, whereas above 50 implies improvement.

19-april-v10.jpg

When looking regionally, the Goldman Sachs economists believe the worst of the cycle has been seen in the US and the UK, but this does not appear to be the case in Euroland and Japan.

Turning to the US, a snapshot of the week’s economic data is provided below. (Click on the dates to see Northern Trust‘s assessment of the various data releases.)

April 17
• University of Michigan Consumer Sentiment Index – improvement in outlook for consumers

April 16
• Housing Starts appear to be establishing a bottom
• Jobless Claims – mixed news
• Philadelphia Fed Factory Survey – is regional progress a precursor of nationwide progress?

April 15
• Lower energy and food prices help to contain inflation
• Factory sector remains significantly weak
• Home Builders Survey shows optimism

April 14
• Retail Sales – story of weak consumer spending
• Wholesale prices report – benign figures
• Small businesses remain gloomy about the future

According to Moody’s Economy.com, the Federal Reserve’s Beige Book report – covering most of March and early April – indicated that overall economic conditions continued to deteriorate or remained weak. However, nearly half of the 12 reporting Fed Districts noted that in some sectors, conditions appeared to be moderating or stabilizing. Reports of a deceleration in the pace of decline or some levelling off appeared mainly in manufacturing and residential real estate.

Pulling the strings together, Asha Bangalore (Northern Trust) said: “… ‘green shoots’ are appearing simultaneously with spring and we will be watching for more signals that will herald the economic recovery. For now, it is not self-sustaining economic growth yet. Stability in the financial sector with clean balance sheets of banks and a working credit machine will be necessary for self-sustaining economic growth. The positive economic signals are small but significant because a further slide in economic activity is not the scenario one would want to envision in the sixth quarter of a recession.”

Back to the global economy, real GDP growth in China slowed from 6.8% in the fourth quarter of last year to 6.1% in the first quarter, the slowest year-over-year growth rate in about nine years.

19-april-v11.jpg

Source: Financial Times, April 16, 2009.

Jay Bryson (Wachovia Economics Group) commented as follows: “In our view, the Chinese economy probably bottomed in the first quarter and growth should strengthen over the next few quarters. Although the global economy is very weak at present, many economies appear to be nearing inflection points. Therefore, exports should exert less drag on the Chinese economy over the next few quarters.

“In addition, there is still a fair amount of fiscal and monetary stimulus in the pipeline in China. Although the Chinese economy is not large enough to have a significant effect on the US economy, stronger growth in China should help American exports on the margin.”

19-april-v12.jpg

Source: Dilbert.com, April 16, 2009 (hat tip: News N Economics).

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Date

Time (ET)

Statistic

For

Actual

Briefing Forecast

Market Expects

Prior

Apr 14

8:30 AM

Core PPI

Mar

0.0%

0.0%

0.1%

0.2%

Apr 14

8:30 AM

PPI

Mar

-1.2%

0.0%

0.0%

0.1%

Apr 14

8:30 AM

Retail Sales

Mar

-1.1%

0.5%

0.3%

0.3%

Apr 14

8:30 AM

Retail Sales ex-auto

Mar

-0.9%

0.2%

0.0%

1.0%

Apr 14

10:00 AM

Business Inventories

Feb

-1.3%

-1.2%

-1.2%

-1.3%

Apr 15

8:30 AM

Core CPI

Mar

0.2%

0.1%

0.1%

0.2%

Apr 15

8:30 AM

CPI

Mar

-0.1%

0.1%

0.1%

0.4%

Apr 15

8:30 AM

Empire Manufacturing

Apr

-14.65

-36.0

-35.0

-38.2

Apr 15

9:00 AM

Net Long-Term TIC Flows

Feb

$22.0B

NA

$14.0B

-$36.8B

Apr 15

9:15 AM

Capacity Utilization

Mar

69.3%

69.7%

69.6%

70.3%

Apr 15

9:15 AM

Industrial Production

Mar

-1.5%

-0.9%

-0.9%

-1.5%

Apr 15

10:30 AM

Crude Inventories

04/10

+5670K

NA

NA

+1645K

Apr 15

2:00 PM

Fed’s Beige Book

-

-

-

-

-

Apr 16

8:30 AM

Building Permits

Mar

513K

545K

549K

564K

Apr 16

8:30 AM

Housing Starts

Mar

510K

560K

540K

572K

Apr 16

8:30 AM

Initial Claims

04/11

610K

645K

658K

663K

Apr 16

10:00 AM

Philadelphia Fed

Apr

-24.4

-32.0

-32.0

-35.0

Apr 17

9:55 AM

Michigan Sentiment -Prel

Apr

61.9

59.0

58.5

57.3

Source: Yahoo Finance, April 10, 2009.

The US economic highlights for the week, courtesy of Northern Trust, include the following:

19-april-v13.jpg

Click here for a summary of Wachovia’s weekly economic and financial commentary.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

19-april-v14.jpg

Source: Wall Street Journal Online, April 17, 2009.

Bernard Baruch said: “If you get all the facts, your judgment can be right; if you don’t get all the facts, it can’t be right.” Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers in gathering the most pertinent facts and making the right calls.

That’s the way it looks from Cape Town (from where I will be departing for Newport Beach, California in three days’ time).

19-april-v15.jpg

Source: Peter Broelman, April 16, 2009.

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Category: BP Cafe

The Trend May Not Be Your Friend

Two weeks ago I presented my thoughts on the current economic situation at my 6th Annual Strategic Investment Conference in La Jolla (co-hosted with Altegris Investments). The speech was well-received, at least to judge from the comment forms. So this week and next, we are going to revisit that talk (with a few edits). Let’s start with a little set-up to explain the first few paragraphs.

My speech was Saturday morning. On Friday, I wore a nice grey suit with a Leonardo tie. For those who know about Leonardo’s, they are “statement” ties. I should note that Tiffani picked the tie out for me about ten years ago and persuaded me to wear it. It took some getting used to. It is 16 silk-screened colors, bright blues and pinks and grays, the central feature of which is a very vivid parrot. It is not subdued.

When my good friend George Friedman of Stratfor gave his speech on Friday, he commented rather derisively about my taste in ties, which got him a few laughs. This did not bother me too much since, while George is a brilliant geopolitical analyst, his sense of sartorial style is not exactly top-drawer. So now, let’s jump into the speech.

Dressing Like an Economist

Three years ago I was here at our third conference, and my daughter Tiffani came to me in the middle of the conference and said with a very serious face, “Dad, we’ve got to have a talk.” Oops, we have to have a talk? This was her “You’ve done something wrong” face. But I didn’t know what I had done. Had I been speaking with my zipper down? Was something I said wrong? So I said, “Well, let’s go talk right now.” And she says. “No, we can do this when you get home.” And I said “No, now.”

So we go to another room, and I ask, “What’s wrong?” And she says, “Dad, the partners wanted me to come and talk with you.” Oh God, I think, what is it?

Now, Art Laffer (he of the napkin and Laffer Curve fame) had spoken earlier at that conference. If any of you have ever seen Art speak, Art dresses to the nines. He gave a speech with which I did not agree. It was brilliantly delivered, but he was just wrong. But he looked really good being wrong.

So Tiffani says, “Dad, the partners want me to talk with you. You dress like an economist. You are supposed to be a guru. We’ve got to get you some new clothes.” And it was true, I had not bought many new clothes for years.

So this is my guru suit. Somebody at least has some sartorial taste — Tiffani and others picked it out. You can see the evidence of true style and taste by the way she dresses, can’t you? And she picked out the tie, too. (And I should point out that the one person in George’s family with outstanding taste, his wife and partner Meredith, liked the tie as well.)

Thoughts on the Continuing Crisis

Ok, with that out of the way, let’s talk about some of my thoughts on the continuing crisis.

This cartoon is pretty much where we are right now. The consumer is shell-shocked. That pot of gold has now become just a pot. The 401k’s are now 201k’s. People are trying to figure out how to go forward. Let’s go back and get some sense on how we got here and what the landscape looks like and what I think the future will look like.

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Category: BP Cafe

The Eternal Optimism of Opening Day

This is the speech I gave earlier this week to a Pension Fund conference

As we are one week removed from Opening Day, the eternal optimism this time of the year is always apparent. The weather gets nice and the forever belief of a fan is always ‘this is the year.’ Cub fans can relate, with no disrespect to them as I am the Cubs of my baseball fantasy rotisserie league, aka never won. There is also the hope now that 2009 will be the bear killer as we are just a few months away from matching the length of the longest post WWII recession, that of the early 1980’s. There are also fingers crossed that the extraordinary steps taken by our Fed, Treasury, Congress and President can engender a recovery.

Before I give my opinion on this, let me first give my quick background review on what brought us to today. Alan Greenspan, an Ayn Rand disciple who ironically became head of the Kingdom of Market Manipulation and industrial policy, the Federal Reserve, sowed the seeds for the credit bubble as artificially low interest rates created a mad scramble for yield that resulted in a massive misallocation of capital and huge leverage. Many go drunk at the credit party, such as consumers, bankers, other lenders and politicians, but Greenie, Mr. Bernanke and their cohorts brought the booze, the kegs, shot glasses and funnels.

The broken damn that flooded us with easy credit coincident with too much spending at all levels has brought us a total debt level to GDP of 350% and a household debt to disposable income ratio of 123%, from below 90% in 1995, both higher than in the great depression. If only the Fed let the 2000-2002 cap ex led recession run its course, I wouldn’t be here talking about monetary policy and political science. I’d be talking about P/E ratio’s, returns on equity and earnings growth instead. But, we’re here and our future right now is beholden to those who live and work in our nations capital instead of to the industriousness of our private sector.

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Category: BP Cafe

Can we do this again?

It was March 10th when Vikram Pandit told us that Citi was profitable for the first two months of the year and the S&P’s are up 28% from the March 9th close. After better than expected earnings from WFC, GS and JPM, Citi gave us details today of their earnings beat. What is clear from…Read More

Category: BP Cafe

Markets Rise After Tax Day Tea Parties

Good Evening: Keying upon a positive earnings announcement this morning from JP Morgan, stocks were able to overcome some mixed economic data and two fairly large corporate bankruptcies to once again post solid gains. Believers that the worst is now behind us still hold sway in our capital markets, and their presence could be seen…Read More

Category: BP Cafe, Markets

The Goldman Exit

The Goldman Exit April 16, 2009 Bob Eisenbeis is Cumberland’s Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is…Read More

Category: BP Cafe

Sector Workhorses of the Rally from the March Lows

Financials — and, to a lesser extent, industrials — have not only accounted for a hefty share of the S&P 500 Index’s nearly 25% gain so far, but have also more than held their own vis-à-vis their index weighting. By the same token, while the most heavily-weighted sector, information technology, has played a major role…Read More

Category: BP Cafe, Markets