Posts filed under “Think Tank”
Fed President Bullard is giving a speech on exit strategies for the Fed and begins by saying “monetary policy is very accommodative now…It will remain very accommodative for an extended period…This is appropriate, given low inflation and weak economic conditions.” He believes the liquidity facilities that are in place should “wind down naturally” as they are used less. On asset purchases, he acknowledged the Fed is “printing money” as this is “one way to move inflation higher in an environment where inflation is ‘too low.’ The “short term goal is to avoid a deflation trap in 2009″ but expanding the monetary base “rapidly” is a future threat and said an exit “may have to rely on selling assets as appropriate…a policy feedback rule for asset purchases should be the goal.” I wish there was some mechanism spelled out on the timing of the exit but they are relying on “judgement calls” which I interpret as a form of winging it which I find somewhat unsettling since what they’ve done to the monetary base is “unprecedented in US postwar monetary history,” according to Bullard.
Consumer Confidence was 6 points less than expected at 49.3 and down from 54.8 in May as both the Present Situation and Expectations components fell. The overall # is still about twice the lows of Feb but the improvement has been almost solely due to Expectations. This # has risen to 65.5 from 27.3 in…Read More
With just days ahead of the July 4th long weekend, the average price of a gallon of gasoline, as of yesterday, has fallen for 8 straight days and is down .06 to $2.633 during this span according to AAA. This follows 54 straight days of gains that took prices to $2.693 from $2.048 (and up…Read More
The April S&P/CaseShiller 20 city home price index fell 18.12% y/o/y but was better than the forecasted drop of a fall of 18.63%. It’s the smallest rate of decline since Oct ’08. The fall off the high in July ’06 is now 32.6% up from 32.2% in March. All 20 cities still have y/o/y drops…Read More
In February I thought the stock market was on the cusp of the largest rally since the bear market began in October 2007, and that it would be ignited by economic statistics showing that the rate of decline in the economy was getting less bad. I thought the optimists would jump to the conclusion that less bad equaled recovery. Despite this expectation, the shift in psychology regarding the economy’s prospects has been remarkable. Four months ago, investors felt they were staring into an economic abyss deeper than the cosmic void. When the first series of less bad statistics suggested the economic hole was only as deep as the Grand Canyon, the sense of relief was palpable. Within weeks the phrase ‘green shoots’ was included in every serious discussion about the economy. Virtually over night any economist worth their salt had become a gardener. Initially, a few brave economists ventured that the economy might turn up in the first half of 2010. As additional stats in April and May improved from being extraordinarily bad to simply just awful, the notion that the recovery might begin before the end of 2009 took root. And after the Labor Department reported that only 345,000 jobs were lost in May, confidence that a V-shaped recovery blossomed. By mid June, conviction that a V-shaped recovery was so high the Federal funds futures were pricing a 70% probability that the Federal Reserve would raise rates in November. Green shoots had grown into mighty oaks in a matter of weeks. Who says economists don’t know a thing or two about hydroponic gardening?
As discussed in the April and May letters, GDP will likely be positive in the fourth quarter, and maybe in the third quarter. As noted, most of the improvement will be statistical nonsense. In the first quarter, business slashed inventories, which sliced 2.8% from GDP. With sales stabilizing and likely to improve as fiscal stimulus lifts demand, companies will increase production to restock their inventories. This will cause the inventory component within GDP to swing from deeply negative to a slight positive. The wholesale inventory-to-sales ratio jumped from 1.09 months in June 2008 to 1.34 in January. In April, it dipped to 1.31 months, so it is still fairly high, and suggests sales will have to improve more before companies will actually need to increase production. The large decline in exports lowered first quarter GDP by -4%. This drag on GDP will moderate as the global economy helps U.S. export volume to be less bad in coming quarters.
By the end of 2009, the bar chart of GDP will show how the economy plunged from a growth rate of 2.8% in the second quarter of 2008 to a negative 6.1% in the fourth quarter, before reviving into positive territory again. It sure will look like a V-shaped recovery. For those economists who didn’t see the deepest recession since the depression coming, or grossly underestimated its depth, the V will
also mean Vindication. For politicians, the V will be heralded as a Victory of policy. In lieu of a parade, the electorate will endure weeks (months?) of chest thumping and back slapping. A few ingrates will question whether spending trillions of dollars we don’t have actually qualifies as ‘policy’. But as they say, you can’t please everyone, even when you’re dolling out trillions.
The stock market has rallied smartly since its low in March, as have a number of commodities. The V-shaped recovery crowd has been quick to point out that since markets look ahead six to nine months, the run up in stock prices and oil are telling us a real recovery is afoot. In recent weeks, I’ve heard at least one expert every day make this statement on CNBC or Bloomberg. And every day I hope the television anchor will ask the expert a couple of simple questions. “If the stock market is so good at looking forward six to nine months, what was the S&P telling you about the credit crisis in October 2007 as it made an all-time high? When crude oil sold for $147 a barrel in July 2008, what was it telling you about global demand? And given how wrong the stock market and oil market were, why are you so sure now that they are sending the correct message?” Like Don Quixote, believing markets possess a paranormal clairvoyance adds a bit of mystery, even romanticism to the mundane task of tracking daily fluctuations in prices. The truth is far more straight forward, and absolutely impersonal. At every top and bottom, the market is always wrong.
According to the International Energy Agency, there was enough oil in storage at the end of March to satisfy 62.4 days of demand, 14.7% more than a year ago. Last week, the IEA said global inventories in OECD countries jumped 10.4 million barrels in April and another 30.5 million barrels in May. In the first quarter, OECD countries accounted for 55% of global oil demand, while China accounted for 9%. According to Reuters, Chinese crude-oil demand rose 3.9% in April over the previous year, but demand was down almost 2% in the OECD countries. Since OECD consumption is 6 times larger than Chinese demand, total global demand is falling. GaveKal estimates commercial crude oil inventories are six billion barrels. With oil around $70 a barrel, that represents more than $400 billion of working capital tied up in holding onto all that oil. With prices rising, holding inventories is easy. But if prices crack, some of the excess inventory will be sold into a falling market.
Oil prices have risen from $34 a barrel to $72 on the growing perception of a V-shaped recovery and the decline in the dollar. When the dollar topped in early March, crude oil was $45 a barrel. Oil has run up from $50 to $72 since late April, as the dollar index fell from 87 to below 79 in early June. After peaking in July last year, crude oil collapsed, as the dollar rallied 25% between July and November. This suggests any decent rally in the dollar will trigger a decline in oil prices that could be fairly sharp since the underpinnings of oil demand are so weak.
In order for the V-shaped recovery in GDP to become a self sustaining economic expansion, private demand will need to be strong enough to carry the economy forward, after fiscal stimulus has run its course. Since the consumer represents 70% of GDP, most of the heavy lifting will be dependent on consumer spending. Obviously, the primary driver behind consumer spending is job growth, which is not going to improve for a long time. The Labor Department reported that 345,000 jobs were lost in May, after adding 220,000 jobs based on their Birth/Death adjustment model. In other words, the real number of jobs lost in May was near 565,000, or worse. From January through May, the average monthly job losses reported by the Labor Department were 584,000. If the faulty B/D model adjustment is excluded, monthly job losses averaged 652,000. On the surface, the 345,000 figure is 41% below the 584,000 five month reported average, which is a noticeable improvement. However, the improvement is only 13%, if the B/D adjustment is excluded (565,000 vs. 652,000). In May, nearly 25 million (16.4%) Americans were either unemployed, underemployed, or had given up looking for a job. The average work week for those with a job fell to a record low 33.1 hours. In the last year, average weekly earnings rose just 1.2%.
Are we there yet? Yes kids, in about 8 hours. The S&P 500 will see its first quarterly gain since Q3 ’07, a streak of 6 negative quarters in a row, the longest since 1969-1970 and its on track for the best quarterly performance since Q4 1998. Overseas markets have similar stats with Japan in…Read More
Good Evening: In an attempt to finish a strong second quarter on a high note, investors began this holiday-shortened week by pushing stocks, bonds, and commodities higher today. Ex the Madoff sentencing and another rally in crude oil, market participants focused their waning attention spans on word from China that it was unlikely to radically…Read More
> China called for a new reserve currency, again. This killed the dollar, again. One can assume that China is unhappy with Bernanke and the status quo FOMC Communiqué. Income increased 0.3% due to tax rebates and increased entitlements, including unemployment pay. Most economists and pundits trumpeted the income gains as sign of economic recovery,…Read More
Six months after China became the 3rd biggest economy in the world (and now the most important country in the world right now IMO), trading in Yuan continues to grow and it has major implications for the US$ looking out long term but the process will be slow and steady rather than anything abrupt. Today…Read More
“Words from the Wise” this week comes to you in a shortened format as I do not have access to my normal research resources while on the road in Europe (also see my post “Gone A.W.O.L. – to Slovenia and Switzerland“). Although very little commentary is provided, a full dose of excerpts from interesting news items and quotes from market commentators is included.
While investors’ hopes of an economic recovery might have got ahead of reality, the cartoonists continually reminded us of worrisome issues …
Source: Signe Wilkinson, Philadelphia Daily News, dist. by The Washington Post Writers Group
The past week’s performance of the major asset classes is summarized by the chart below – a mixed bag so to speak.
A summary of the movements of major stock markets for the past week, as well as various other measurement periods, is given below. Although many indices saw little change, some short-term swings occurred in between.
Click here or on the table below for a larger image.
Stock market returns for the week ranged from top performers Côte d’Ivoire (+7.5%), Hong Kong (+3.8%), Taiwan (+3.5%), Argentina (+3.3%) and Bangladesh (+3.0%), to Ghana (-12.7%), Egypt (-11.1%), Nigeria (-10.7%), Cyprus (-6.6%) and the United Arab Emirates (-6.1%) at the other end of the scale. (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 leaders for the week included iShares MSCI Taiwan Index (EWT) (+6.6%), Market Vectors Gold Miners (GDX) (+5.9%) and iShares MSCI Hong Kong (EWH) (+4.4%). On the other side of the performance spectrum, laggards were centered in the energy sector, including United States Gasoline (UGA) (-5.9%) and iShares Dow Jones US Oil and Gas Exploration (IEO) (-5.2%).
Category: Think Tank