Posts filed under “Think Tank”
After hitting its best levels of the year on Wednesday ahead of the Federal Open Market Committee’s (FOMC) communiqué, the S&P 500 Index ran into heavy weather on the realization that the Fed could start scaling back on emergency support of the economy. US equities dropped further later in the week on renewed concerns about the state of the troubled housing market and weaker-than-expected durable goods orders.
In addition to global stock markets declining, risky assets such as commodities, oil, gold and other precious metals all sold off as pundits worried about the winding down of quantitative easing puncturing the “liquidity rally”. Government and corporate bonds, as well as the Japanese yen, emerged as winners.
Hat tip: The Big Picture, September 23, 2009.
The FOMC maintained its loose monetary policy following its meeting on Wednesday. The statement said the committee expected to keep the Fed funds rate target in the 0% to 0.25% range “for an extended period”.
“The committee extended the time period over which it plans to purchase Fannie Mae and Freddie Mac debt and mortgage-backed securities. The remarks on current economic conditions were more optimistic than in August, and the FOMC now believes the recession is over. The Fed will keep monetary policy loose in the near term to support the recovery but is laying the groundwork for an eventual tightening,” said Moody’s Economy.com.
Although the US Dollar Index (+0.4%) closed a little higher on the week, the greenback hit a one-year low against the euro on Wednesday, with the Fed’s indication of keeping US interest rates at current levels for a while longer underscoring the dollar’s status as a carry-trade funding currency. (Click here for a short technical analysis of the outlook for the dollar by INO.com‘s Adam Hewison.)
A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.
The MSCI World Index (-1.4%) and MSCI Emerging Markets Index (-1.2%) both closed the week in the red, with the Shanghai Composite Index (-4.2%) one of the biggest losers among the major stock markets. After bucking the global weakness that prevailed during the week, Chile is now only 5.1% down from its July 2007 highs and could be one of the first markets to wipe out all the financial crisis losses.
The major US indices declined for three consecutive days (from Wednesday to Friday) and registered their first weekly drop since the last week of August. The year-to-date gains remain in positive territory and are as follows: Dow Jones Industrial Index +10.1%, S&P 500 Index +15.6%, Nasdaq Composite Index +32.6% and Russell 2000 Index +19.9%.
Click here or on the table below for a larger image.
Top performers in the stock markets this week were Latvia (+8.0%), Cyprus (+6.8%), Israel (+5.0%), Ukraine (+4.9%) and Saudi Arabia (+4.1%). At the bottom end of the performance rankings, countries included Luxembourg (_8.7%), Ireland (-4.2%), China (-4.2%), Mexico (-4.0%) and South Africa (_3.3%).
Of the 98 stock markets I keep on my radar screen, 44% recorded gains (last week 81%), 51% (15%) showed losses and 5% (4%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)
John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included Global X/InterBolsa FTSE Colombia 20 (GXG) (+6.0%), Market Vectors High-Yield Municipal (HYD) (+2.9%), iPath S&P 500 VIX Mid-Term Futures (VXZ) (+2.9%) and United States Natural Gas (UNG) (+2.8%).
At the bottom end of the performance rankings, ETFs included United States Gasoline (UGA) (-10.8%), United States Oil (USO) (-8.4%), United States 12 Month Oil (USL) (-8.3%) and iShares Dow Jones Home Construction (ITB) (_8.3%).
Against the background of the International Monetary Fund’s approval of the sale of 403.3 metric tons of its gold and beggar-thy-neighbor currency devaluations, Richard Russell reminded us of the following quote from the Republican National Platform in 1932: “The Republican Party established and will continue to uphold the gold standard and will oppose any measure which will undermine the government’s credit or impair the integrity of our national currency. Relief by currency inflation is unsound in principle and dishonest in results.” Russell added: “My, how times have changed, and not always for the better.”
Other news is that the summit of G20 countries have agreed, inter alia, to plot a roadmap for the banking industry, align economic policy, ensure that tax havens comply with global standards and phase out subsidies for fossil fuels in the “medium term”.
Also, the Federal Deposit Insurance Corporation (FDIC) closed another bank on Friday, bringing the tally of US bank failures in 2009 to 95 (120 since the beginning of the recession). Meanwhile, according to The New York Times, regulators are considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the FDIC. This would enable the fund, which is running low on resources as a result of the myriad of bank failures, to continue to rescue the sickest banks … “You can’t make up stuff like this!,” commented Bill King (The King Report).
Next, a quick textual analysis of my week’s reading. Although “banks” still features prominently, the key words have started taking on a more normal pattern compared with the crisis-related words that have dominated the tag cloud for many months.
The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based) are given in the table below. With the exception of the Shanghai Composite Index, which is trading below its 50-day moving average, all the indices are above their respective 50- and 200-day moving averages. The 50-day lines are also in all instances above the 200-day lines.
Welcome to the New Normal September 25, 2009
By John Mauldin
What We See And What We Don’t See
The Statistical Recovery
A Double-Dip Recession?
Welcome to the New Normal
Birthdays, New Orleans, and then the Road Trip from Hell
Unemployment is high and rising. But if the recession is over, won’t employment start to rise? The quick answer is no. We look deeper into the Statistical Recovery and find yet more reasons to be concerned about near-term deflation. This week we consider all things unemployment and ponder the need to create at least 15 million jobs in the next five years to return to a full-employment economy – and the implications for both the US and world economies if we don’t. Economic is often about what we can clearly see, and yet it is understanding what we can’t see that gives us true insight. We start with a collection of facts that we can see and then begin a thought exercise to find
What We See
First, the unemployment rate is now officially at 9.7%. We are approaching the official high we last saw at the end of the double-dip1982 recession. In the chart below, notice that unemployment rose throughout 1980 and then began to decline, before rising rapidly as the economy entered the second recession within two years. Also notice the rapid drop in unemployment following that
recession, as opposed to the recessions of 1991-92 and 2001-02, which have been characterized as jobless recoveries. Unemployment was as low as 3.8% in 2000 and saw a cycle low of 4.4% in early 2007.
(For the record, all this data is available on the Bureau of Labor Statistics website. There is a treasure trove of data. They are quite open about what they do and how they do it. When I call
to ask a question, they are quite helpful. How people interpret the data is not their fault.)
This headline unemployment number (9.7%) is what we see when we read the paper. What we typically don’t see is the real number of unemployed. For instance, if you have not actively looked for a job in the last four weeks, even if you would like one, you are not counted as unemployed. You are called a “marginally attached” or “discouraged” worker. Often there are very good reasons for this. You could be sick, dealing with a family emergency, going back to school, or not have transportation.
Right now, about one-third of marginally attached workers actively want jobs but have not bothered to look because they believe there are no jobs in their area, at least not for them. If you add that extra 758,000 to the unemployment data, you get what is called U-4 unemployment, which today is 10.2%. If you count all marginally attached workers the unemployment number is 11% (U-5 unemployment).
> James Bianco has run Bianco Research out of Chicago since November 1990. He has been producing fixed income commentaries with a circulation of hundreds of portfolio managers and traders. Jim’s commentaries have a special emphasis on: money flow characteristics of primary dealers, mutual funds, hedge funds, futures traders, banks, and institutional investors. Prior to…Read More
The Final reading of the Sept U of Michigan confidence number was 3 points higher than expected at 73.5, up from the initial figure of 70.2 and from 65.7 in Aug. It’s at the highest level since Jan ’08. Both Current Conditions and the Economic Outlook rose from the preliminary report and from Aug. Of…Read More
For the past 42 years, Bob Bronson has applied a disciplined, analytical approach to understanding and forecasting capital markets and advising investment advisors. Through his rigorous analysis of capital markets and economic data and his background in mathematics and financial economics, he has developed a number of unique investment concepts and refined portfolio-management techniques that…Read More
August new orders of Durable Goods unexpectedly fell 2.4% headline vs a consensus rise of .4% and were flat ex transportation vs expectations of a gain of 1%. The prior month was revised a hair. Non Defense Capital Goods ex Aircraft, the core cap ex component, fell .4% after a 1.3% drop in July. Vehicles…Read More
Who? The Fed, the ECB, the BoE, etc, What? Unwind the large amount of policy accommodation. When? We don’t know but when the time comes whenever that might be. Fed Gov Warsh in the WSJ laid out what’s ahead for the Fed and said they will be aggressive in raising rates when the time comes….Read More
Existing Home Sales totaled 5.1mm annualized, 250k less than expected and down from 5.24mm in July. The chief economist placed some blame for the shortfall in closings relative to expectations on “rising numbers of contracts entering the system, with some fallouts and a backlog contributing to a longer closing process.” The NAR said 30% of…Read More
Marshall Auerback is a Denver, Colorado-based global portfolio strategist for RAB Capital plc and a Fellow with the Economists for Peace and Security (http://www.epsusa.org/). He is a frequent contributor to the blog, Credit Writedowns, and the Japan Policy Research Institute (www.jpri.org):
Government Spending is the Solution–Not the Problem
By MARSHALL AUERBACK
Tens of thousands of people marched to the U.S. Capitol on Sunday, carrying signs with slogans such as “Obamacare makes me sick” as they protested the president’s health care plan and our so-called “out-of-control spending”. The marchers were chanting “enough, enough” and “We the People.” Others, channeling their inner Joe Wilson, screamed “You lie, you lie!” while waving U.S. flags and the now omnipresent images of Obama as Hitler, Obama as the Joker, along with the usual placards decrying the “march to socialism”.
And the reaction against the expansion of the state is by no means restricted to America. According to the London Sunday Times, voters are overwhelmingly in favor of cutting public spending rather than tax rises to close the budget “black hole”. Sixty per cent want to shrink the size of the state to curb the £175 billion deficit amid mounting government disarray over the public finances. Naturally, there is also growing support for this line of thinking in the financial community, despite having successfully received tens of trillions of dollars, even for deeply insolvent financial institutions. The large banks and brokers lobbied for special treatment and got it.
To the extent that government spending is being used to prop up these economic zombies, I sympathize with the prevailing orthodoxy about wastage of our money. However, the fasct remains that the principle opposition to increased government spending is predicated on the simplistic notions about fiscal activism. We need to get past the deficit myths and wrongheaded notions of “national solvency” so that we can move forward in other areas. In the words of economist Bill Mitchell of the University of Newcastle, Australia:
“Within a modern monetary economy, as a matter of national accounting, the sovereign government deficit (surplus) equals the non-government surplus (deficit)…In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending. The sovereign government via net spending (deficits) is the only entity that can provide the non-government sector with financial assets (net savings) and thereby simultaneously accommodate any net desire to save and hence eliminate unemployment.”
A seemingly growing populist drive toward a return to fiscal orthodoxy follows a stream of similar pronouncements from Wall Street, the Fed, the European Central Bank, the OECD, all of whom are legitimizing a campaign against further public spending and mobilizing support for “exit strategies” as they confidently pronounce the end of the recession. Implicit is the view that somewhere along the line ongoing government involvement in the “free market” reaches a tipping point where fiscal “intrusions” no longer act as a stabilizing force, but serve to impede the natural tendency of the market to equilibrate to recovery. The major hypothesis is that anytime the government is involved in the economy, eventually things go bad. But markets do not self-regulate in ways that avoid major financial upheavals and activist government is required as a counterbalancing force.
President Obama himself has legitimized this line of thinking himself, committing himself to the goal of “fiscal sustainability” (whatever that means) as a medium term policy objective. He said as much last Wednesday again during his speech on health care. Having failed to understand what got us into the crisis, and equally having failed to appreciate the extent to which government spending actually prevented an economic catastrophe along the lines of the Great Depression, our policy makers who are championing this move toward neo-liberal fiscal orthodoxy are almost certain to drive us into the next recession if they take these demands to shrink government too aggressively.
Deficit hawks fail to understand that not all debt is created equally. As James Galbraith, L. Randall Wray and Warren Mosler have argued, there is no legitimate analogy to be drawn about the budgets of the government, which issues the currency, and the budgets of the non-government sector (households, firms etc) which uses that currency. The former does not have a financial constraint and can spend freely whereas the latter has to “finance” all spending either through earning income, drawing down savings or liquidating assets.