Posts filed under “Think Tank”

Economic data

Sept PPI fell a sharp .6% vs expectations of flat and the core also unexpectedly fell .1% vs a forecasted rise of .1%. The headline drop was led by a 2.4% fall in energy prices, especially in gasoline which was down by 5.4%. This will reverse though in Oct as gasoline prices are back up by over 4%. The drop in natural gas prices kept a lid on residential gas prices. A 1% rise in the wholesale price of passenger cars was offset by a 1.4% drop in trucks. Inflation in the pipeline though, ex f&f, is rising as goods in the intermediate stage of production saw a rise of .9% m/o/m and prices at the initial stage rose 3.6% m/o/m ex f&f. Bottom line, with the CPI already out last week, the PPI today lost its market moving impact and with the continued rise in commodity prices, the drop in today’s data should reverse. The implied inflation rate in the 10 yr TIPS is unchanged this morning at 2.04%, up 6 bps from Friday and the highest since June.

Sept Housing Starts totaled 590k, 20k less than expected and Permits at 573k were 22k below forecasts. A drop in multi family construction was the drag on starts as single family homes rose but the reverse was true for permits. With the housing tax credit possibly about to expire, the drop in single family permits was not a surprise and buyers rushed to take advantage of it going into Sept, thus helping starts. Single family Permits fell in the Midwest, South and West but rose a touch in the Northeast. I highlight permits because the recent trends in starts becomes irrelevant in extrapolating future building IF the tax credit doesn’t get extended as we’ll have another Cash For Clunker type hangover since most of those who took advantage of the tax credit were going to buy a house anyway and all we did was pull forward demand.

Category: MacroNotes

David Einhorn, Value Investing Congress, October 19, 2009

Einhorn Vic 2009 Speech

Category: Bailouts, Credit, Markets, Think Tank

The big multinational companies continue to deliver and other stuff

Earnings overall continue to be excellent with a higher % of revenue beats than Q2. Apple of course was incredibly impressive. The big multinational companies with healthy exposure outside of the US definitely took advantage of the stronger rebound overseas. Emerging markets, led by Brazil, may be under pressure today after Brazil’s decision to levy…Read More

Category: MacroNotes

NAHB index unexpectedly falls

The Oct Nat’l Assoc of Home Builders index, an index measuring home building sentiment, was 18, 2 pts below forecasts and down from 19. Present conditions fell 1 pt while future expectations fell 2 pts. Prospective Buyers Traffic fell 3 pts as the West, South and Midwest regions dropped with the West showing the biggest…Read More

Category: MacroNotes

Bernanke speaks and stays on topic

Bernanke talks nothing about monetary policy and keeps his speech focused on Asia and our trade relationship with them. His bottom line, the US needs to save more, Asia needs to consume more and this would rebalance trade imbalances. Of course with US interest rates at zero, savings in the US has been more of…Read More

Category: MacroNotes

Bernanke on Asia and the Global Financial Crisis

Chairman Ben S. Bernanke

At the Federal Reserve Bank of San Francisco’s Conference on Asia and the Global Financial Crisis, Santa Barbara, California

October 19, 2009

Asia and the Global Financial Crisis

The rise of the Asian economies since World War II has been one of the great success stories in the history of economic development.  Japan’s transition to an economic powerhouse was followed by the rapid ascent of the Asian tigers, and subsequently by China taking a prominent place on the world economic stage.1 Since the beginning of this decade, Asia has accounted for more than one-third of the world’s economic growth, raising its share of global gross domestic product (GDP) from 28 percent to 32 percent.2 Importantly, its economic success has resulted in large-scale reductions in poverty and substantial improvements in the standards of living of hundreds of millions of people.  China and India, which together account for almost 40 percent of the world’s population, have seen real per capita incomes rise more than 10-fold and 3-fold, respectively, since 1980.  As would be expected given the increasing size and sophistication of their economies, the nations of the region have also begun to exert a substantial influence on global economic developments and on international governance in the economic and financial spheres.

It is widely agreed that a key source of Asia’s rapid advancement has been the openness of countries in the region to global trade and finance.  Notwithstanding this consensus, the considerable progress of these countries in developing domestic institutions, policies, and industrial capacity–together with their strong growth in the initial phase of the ongoing global financial crisis–led some to speculate that the Asian economies had “decoupled” from the advanced economies of North America and Europe.  Of course, in hindsight, given the magnitude of the shocks that have struck these advanced economies over the past two years, as well as their strong economic and financial links to Asia, it should not have been surprising that Asia was ultimately hit quite hard by the global downturn, even though the origins of the turmoil were elsewhere.

As a prelude to the papers and discussions to follow, I will provide a brief overview of the Asian experience during the global financial crisis.  I will highlight the diversity of experiences, both within Asia and between Asia and other regions, and draw some inferences about the different channels through which the effects of the financial crisis were transmitted around the world.  I will discuss Asia’s policy response to the economic and financial consequences of the crisis.  Finally, I will focus on medium-term challenges.  For both Asia and the United States, perhaps the greatest medium-term challenge is to achieve more balanced growth and, in the process, to further reduce global imbalances.

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Category: Federal Reserve, Think Tank

Bernanke to speak

With Barron’s now chiming in with its belief of what Bernanke should do with rates, and that is higher, as emergency rates are not appropriate now that the emergency has receded, Bernanke speaks at 11am on Asia and the Financial Crisis where off topic monetary policy comments are always possible as its getting tougher for…Read More

Category: MacroNotes

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 the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).


Some Observations about Spot Interest Rates and Forward Interest Rates: with help from Jason Benderly, Jim Bianco, Ned Davis & Howard Simons
October 18, 2009

“What going to happen to interest rates when the inflation comes?” This is a recurring question in our quarterly client review meetings.

In a normal cycle one can make some reasonable projections about the changes in interest rates when the economy bottoms. The usual sequence is that the Fed first allows the economic recovery to gain traction and then eventually starts to tighten policy by raising the short-term interest rate. Other rates also rise, first in anticipation of Fed action and then as the Fed persists. At some point the Fed reaches a level which slows the inflation tendency of the economy. The yield curve flattens and longer-term rates stop rising, even as short-term rates continue to do so. In extreme cases the short-term rate is pushed above the long-term rate.

We are not in a normal cycle.

The operation of interest rates and Fed policy is quite different this time, as the Fed is engaged in quantitative easing; there is no serious inflation, there is huge federal debt issuance and the policy-prescribed interest rate is effectively near zero. Traditional dynamics of monetary policy don’t work. There are many reasons why this is true, and we will discuss them in future Commentaries. Japan is an example of how this zero-rate status with no inflation and huge deficits can persist for a very long time.

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Category: Think Tank

Words from the (investment) wise 10.18.09

Words from the (investment) wise for the week that was (October 12 – 18, 2009)

Risky assets remained in favor during the past week, generally helped along by fairly robust economic data and better-than-expected corporate earnings reports. A number of bourses, crude oil, inflation-linked bonds and high-yielding corporate bonds and currencies recorded fresh highs for the year, whereas gold hit an all-time high of $1,070.20 per ounce.

Assets such as government bonds and the US dollar saw fading demand as safe havens, now that the global economy is on the mend. Similarly, credit default spreads tightened markedly and the CBOE Volatility Index (VIX) declined to its lowest level since early September 2008.

The Dow Jones Industrial Index passed a psychological milestone this week as the Index broke above the 10,000 level for the first time in a year, although it then declined again to fall shy of the roundophobia number by four basis points by the closing bell. The Dow first broke above 10,000 more than ten years ago in 1999 and has since done so on 26 occasions. Yes, a ten-year buy-and-hold index investor has had no capital gain over the period!


Source: The Wall Street Journal, October 16, 2009.

Meanwhile, according to the Financial Times, a survey of 44 leading economists by the National Association of Business Economics (NABE) showed the jobs that were lost during the Great Recession are not expected to return before 2012, while anemic wage growth of only 1% this year and 2.2% next year is forecast – the slowest two-year period on record. “But the way that investors are almost relying on unemployment to stay high [and central banks not to start exiting from the exceptionally low interest rates any time soon] demonstrates that the recovery, in markets and the economy, remains on shaky foundations,” warned FT’s investment editor, John Authers.


Source: Walt Handelsman, October 14, 2009.

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers that indicates an increase in risk appetite.



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 (+2.1%) both made headway last week to take the year-to-date gains to +25.6% and an impressive +70.4% respectively. Interestingly, Chile is now only 1.5% down from its July 2007 highs and could be one of the first markets to wipe out all the financial crisis losses.

Notwithstanding a down-day on Friday, US indices closed higher for the week. The year-to-date gains remain firmly in positive territory and are as follows: Dow Jones Industrial Index +13.9%, S&P 500 Index +20.4%, Nasdaq Composite Index +36.8% and Russell 2000 Index +23.4%.

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Category: Think Tank

Dick Alford on Opportunities Lost by the Fed

Our colleague Richard Alford comments on recent Fed history and particularly how the organization failed to take notice of the warnings of one of its longest serving bureaucrats — Ted Truman — as he ended decades of service at the central bank.   I worked with Dick at the FRBNY where he contributed to the weekly report for the FOMC on the foreign currency markets.    — Chris

Opportunities Lost
By Richard Alford (

Against a backdrop of continued financial fragility and extraordinary policy actions, policymakers are discussing re-balancing global growth, restoring financial stability, and the future of the Dollar as the world’s reserve currency. In 2005, Edwin Truman proposed a list of policy measures that if followed would have reduced the US external imbalance and placed the reserve status of the Dollar on better footing.  Truman’s proposal differed from the standard litany of US fiscal discipline, Dollar adjustment, and increased demand in surplus countries. It called upon the Federal Reserve to slow the growth in US demand. More recent research, by Shin and Adrian, suggests that if the Fed had heeded Truman’s prescription, then monetary policy would have also mitigated the recent turmoil in financial markets.

In short, the Fed ignored external imbalance and the increasingly precarious nature of financial institution balance sheets when it pursued accommodative policy during the bubble years. The Fed disagrees. The official Fed position is that US monetary policy has no role to play in adjusting external imbalances:

“Members of the Committee noted that monetary policy was not well equipped to promote the adjustment of external imbalances …..Fiscal policy had a potentially larger role to play by promoting an increase in national saving, but the adjustment would involve shifts in demand and output both domestically and abroad…..” (FOMC 2004)

Truman pointed to the excess of total demand (gross domestic purchases/”absorption”) over potential output and the more rapid growth of demand relative to the growth of potential output. He concluded that:

“external adjustment is not just about the effects of exchange rates on exports, imports, and trade balances. It is also about slowing the rate of growth of domestic demand (gross domestic purchases) relative to the growth of production (GDP). To achieve any adjustment of the imbalance in real terms as a share of GDP, the growth rate of the former must be less than the growth rate of the latter.”
“… What the Federal Reserve has not acknowledged is that monetary policy has a role to play in slowing the growth of total domestic demand relative to the growth of total domestic supply or domestic output.”
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Category: Markets, Think Tank