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Here is the headline from an Associated Press story earlier this morning:
“US stocks rise after new European budgetary pact
U.S. stock indexes rose in early trading Friday after 26 European nations agreed to consider tying their economies together more closely in hopes of preventing another debt crisis.”
Here is a reality check:
1. This agreement has to be ratified by each country before they have anything.
2. A closer fiscal union (with sanctions) means each country will have to give up its sovereignty to whom (Germany, The Central Bank, or?)
3. Based on their current financial situation, who will lend them the money at an interest rate they could afford with the Euro zone sliding into recession.
4. They need $3 trillion or more not the less than one trillion they hope to raise over the next three years.
5. Their Sovereign Credit ratings are likely to be downgraded soon by S&P resulting in even higher interest rates.
6. Their banks have not been recapitalized (unlike U.S. banks) and consequently have leverage ratios three times higher than U.S. banks.
Net: This new credit line on top of their old credit lines doesn’t make sense. But, using hopium might get them a few yards down the road to an even bigger crisis. And no, the IMF (International Monetary Fund) will not bail them out either. They do not have the money and to get it, they would have to get an appropriations bill through our congress as we would be liable for about 27% of the total funds raised.
Wait. I wonder, could Bernanke just give them the money with a couple of keystrokes with out telling us?
Friday, December 9, 2011
Monday, November 21, 2011
What Is The End Game For The European Debt Crisis?
Can Europe get out of its sovereign debt crisis by adding more debt? No. Can Europe grow its way out of its current debt problem? No. It will have a difficult time growing its economy at all next year.
To make matters worse, they have a banking system that is leveraged three times higher than the U. S. banking system. But, we’re not sure because of the lack of transparency in the banking system. For example, they do not have to mark their “toxic” bonds to actual, current market prices. They can price them just about where they want. The rules were changed to keep the banks from becoming insolvent. Just like the U.S.
But unlike the U.S., they cannot do what we did to keep the banks solvent. Their government structure and the limited power of their central banking system prohibit it. This could change with new legislation but it would take time and they would have to overcome the opposition from Germany. Germany has already experienced hyperinflation caused by runaway money printing (i.e., in 1923, Germany’s inflation rate was running at 10,000% per year.)
We all know what happened to Greece recently and the moral hazard of that “agreement.” If Greece could get a 50% reduction on $200 billion of debt and additional money to spend, why wouldn’t every other country be entitled to the same?
The result of that agreement has institutional investors selling European debt as fast as they can and are now coming after Italy; next will be Spain, then France.
Italy has $2.7 trillion dollars of debt and they and must rollover $300 billion of it within the next year. They do not have the money to finance this, if they could find buyers, at an interest rate over 5.5%. Last week they sold $3 billion with an interest rate of 6.1%.
As this unfolds, major banks will have to take enormous losses. Estimates are that U.S. banks have a $600 to $750 billion dollar exposure to European banks. This could cause serious problems for American banks.
I do not know exactly how this “debt crisis scenario” will unfold over the next two weeks, two months or two years. Will the ECB get the authority to print money so they can kick the can down the road a bit longer? There is, also, severe pressure on Germany to go along and let the ECB print. Germany will have to foot much of the bill.
Therefore, the end game it seems is either default or inflate their way out of this debt crisis.
Regardless of exactly how it unfolds, I think the banks are due for a serious correction. What is in question is the timing. We may be unable to prevent this European debt crisis from happening, but there are ways to preserve your capital or profit if you know what’s likely to happen ahead of time and can position investments appropriately.
To make matters worse, they have a banking system that is leveraged three times higher than the U. S. banking system. But, we’re not sure because of the lack of transparency in the banking system. For example, they do not have to mark their “toxic” bonds to actual, current market prices. They can price them just about where they want. The rules were changed to keep the banks from becoming insolvent. Just like the U.S.
But unlike the U.S., they cannot do what we did to keep the banks solvent. Their government structure and the limited power of their central banking system prohibit it. This could change with new legislation but it would take time and they would have to overcome the opposition from Germany. Germany has already experienced hyperinflation caused by runaway money printing (i.e., in 1923, Germany’s inflation rate was running at 10,000% per year.)
We all know what happened to Greece recently and the moral hazard of that “agreement.” If Greece could get a 50% reduction on $200 billion of debt and additional money to spend, why wouldn’t every other country be entitled to the same?
The result of that agreement has institutional investors selling European debt as fast as they can and are now coming after Italy; next will be Spain, then France.
Italy has $2.7 trillion dollars of debt and they and must rollover $300 billion of it within the next year. They do not have the money to finance this, if they could find buyers, at an interest rate over 5.5%. Last week they sold $3 billion with an interest rate of 6.1%.
As this unfolds, major banks will have to take enormous losses. Estimates are that U.S. banks have a $600 to $750 billion dollar exposure to European banks. This could cause serious problems for American banks.
I do not know exactly how this “debt crisis scenario” will unfold over the next two weeks, two months or two years. Will the ECB get the authority to print money so they can kick the can down the road a bit longer? There is, also, severe pressure on Germany to go along and let the ECB print. Germany will have to foot much of the bill.
Therefore, the end game it seems is either default or inflate their way out of this debt crisis.
Regardless of exactly how it unfolds, I think the banks are due for a serious correction. What is in question is the timing. We may be unable to prevent this European debt crisis from happening, but there are ways to preserve your capital or profit if you know what’s likely to happen ahead of time and can position investments appropriately.
Thursday, November 3, 2011
The Zero Interest Program Is Doing Great Damage To Our Economy
Today, The Federal Reserve Indicated they would extend Zero Interest Rates beyond Mid-2013. This Zero Interest Rate Policy (ZIRP) is doing great damage to our economy. Here are a few reasons why:
1. ZIRP punishes savers and forces people to take on additional risk in order to earn needed income. Also, we need savings in order to get investment capital
2. ZRP hurts pension funds and insurance companies who depend on interest income to pay pensioners and cover insurance losses
3. ZIRP distorts prices and encourages malinvestments and new bubbles
4. ZIRP allows banks to make money from the carry-trade (by borrowing from the Federal Reserve at zero and then buying long-term Treasury bonds and capturing the difference in interest) basically risk free. We know the banks need the money.
5. ZIRP is not the way to get consumer spending back to bubble levels because the consumer credit cards are maxed out.
Also, the Federal Reserve is making things even worse with their latest “Twist” program.
This program has the Fed selling its short-term bonds (because demand is high due to world turmoil) and buying long-term bonds (10-30 years in maturity.) This is their attempt to drive down long-term interest rates to “help” the housing industry through lower mortgage rates. Someone should tell them that mortgage rates have been low for several years.
An even bigger problem is inflation. America’s $15 trillion in debt is currently financed at very low rates with an average maturity of less than five years. What happens when inflation hits and drives interest rates to the point where we cannot afford to refinance the debt we currently have? Look at the interest rates Europe is paying to get an idea (Greece two year bonds at 200% and Italy’s 10 year bonds at 8%.) Multiply that by $15 on our way to $20 trillion dollars.
What do you think is going to happen when the Federal Reserve stops buying Treasuries (the way they keep the rates down) and lets the market set interest rates based on time preference (how much interest one is willing to pay to buy the product now versus sometime in the future) and risk.
Be aware of what you can do in the current environment and prepare for higher interest rates in the future.
1. ZIRP punishes savers and forces people to take on additional risk in order to earn needed income. Also, we need savings in order to get investment capital
2. ZRP hurts pension funds and insurance companies who depend on interest income to pay pensioners and cover insurance losses
3. ZIRP distorts prices and encourages malinvestments and new bubbles
4. ZIRP allows banks to make money from the carry-trade (by borrowing from the Federal Reserve at zero and then buying long-term Treasury bonds and capturing the difference in interest) basically risk free. We know the banks need the money.
5. ZIRP is not the way to get consumer spending back to bubble levels because the consumer credit cards are maxed out.
Also, the Federal Reserve is making things even worse with their latest “Twist” program.
This program has the Fed selling its short-term bonds (because demand is high due to world turmoil) and buying long-term bonds (10-30 years in maturity.) This is their attempt to drive down long-term interest rates to “help” the housing industry through lower mortgage rates. Someone should tell them that mortgage rates have been low for several years.
An even bigger problem is inflation. America’s $15 trillion in debt is currently financed at very low rates with an average maturity of less than five years. What happens when inflation hits and drives interest rates to the point where we cannot afford to refinance the debt we currently have? Look at the interest rates Europe is paying to get an idea (Greece two year bonds at 200% and Italy’s 10 year bonds at 8%.) Multiply that by $15 on our way to $20 trillion dollars.
What do you think is going to happen when the Federal Reserve stops buying Treasuries (the way they keep the rates down) and lets the market set interest rates based on time preference (how much interest one is willing to pay to buy the product now versus sometime in the future) and risk.
Be aware of what you can do in the current environment and prepare for higher interest rates in the future.
Friday, September 23, 2011
“Print ‘Till You Drop” Update
In Scenario One: “Print ‘Till You Drop” I estimated the market would continue to drop until monetary policy (the Federal Reserve printing money) or fiscal policy (Government spending and borrowing money) began to re-inflate the economy and consequently the markets. The timing of the turnaround would be dependent on the “pain” felt by investors and politicians. My estimate was +/- Labor Day because it takes time to implement these programs and the election cycle begins to heat up.
Also, my assumption was a new stimulus program would be initiated (and one was introduced by President Obama as a “Jobs Program” for $445 billion) and a new Quantitative Easing (QE3) program from the Federal Reserve. The political mood is against more stimuli at the moment, but the Republicans can’t resist tax cuts so I assumed about $300 or $350 billion would get through the Congress. Net/Net: we basically have two options: Re-inflate the economy and markets (print ‘till you drop) or revert to a capitalist system (small government and a privately run economy.)
Since there is little chance we will go back to a capitalist system, my assumption was that the government would be “accommodative.” This assumption appeared to be correct when the debt ceiling was raised with almost no cut in spending until 2013. Then, a month ago, Fed Chairman Bernanke extended the zero interest rate policy (ZIRP) through at least mid-2013 and a statement that the Fed would remain “accommodative.” He re-iterated that statement when he was in Minneapolis a few weeks ago.
In the meantime, it was leaked that the Fed would, at minimum, initiate a “Twist” program. This program would sell about $400 billion of short-term treasuries and buy $400 billion of long-term treasuries in order to drive down long-term interest rates and help the housing industry refinance. This program would not increase the money supply (sell 400, buy 400) so it would not help re-inflate GDP or the markets. In fact, Since QE2 ended, money supply would actually contract because he did not replace the $600 billion in new money he printed for QE2. As you know, contraction takes away from GDP and thus the markets.
By the way, by itself, “Twist” will not help the housing situation either. It will also cause the yield curve to flatten (not much difference in interest rates between two year bonds and 30 year bonds) which takes the profits out of lending.
Many thought, me included, that the Fed would “surprise” the markets with additional easing or money printing. For example, stop paying banks interest for excess reserves held at the Fed which would force the banks back into the lending business. Also, to push additional money into the financial system to cause inflation (help GDP, help the markets, reduce value of the dollar to help with exports.)
On Wednesday, the surprise was that the Fed did not agree to create more money. Evidently, we have not reached their pain threshold yet. However, within hours of the Fed announcement, European markets began to fall apart again. World GDP growth rates were reduced, including the U.S. So, the question becomes: is this enough pain or do we have to wait until the next Fed meeting in November? Or is the political will to spend more money just not there?
Also, my assumption was a new stimulus program would be initiated (and one was introduced by President Obama as a “Jobs Program” for $445 billion) and a new Quantitative Easing (QE3) program from the Federal Reserve. The political mood is against more stimuli at the moment, but the Republicans can’t resist tax cuts so I assumed about $300 or $350 billion would get through the Congress. Net/Net: we basically have two options: Re-inflate the economy and markets (print ‘till you drop) or revert to a capitalist system (small government and a privately run economy.)
Since there is little chance we will go back to a capitalist system, my assumption was that the government would be “accommodative.” This assumption appeared to be correct when the debt ceiling was raised with almost no cut in spending until 2013. Then, a month ago, Fed Chairman Bernanke extended the zero interest rate policy (ZIRP) through at least mid-2013 and a statement that the Fed would remain “accommodative.” He re-iterated that statement when he was in Minneapolis a few weeks ago.
In the meantime, it was leaked that the Fed would, at minimum, initiate a “Twist” program. This program would sell about $400 billion of short-term treasuries and buy $400 billion of long-term treasuries in order to drive down long-term interest rates and help the housing industry refinance. This program would not increase the money supply (sell 400, buy 400) so it would not help re-inflate GDP or the markets. In fact, Since QE2 ended, money supply would actually contract because he did not replace the $600 billion in new money he printed for QE2. As you know, contraction takes away from GDP and thus the markets.
By the way, by itself, “Twist” will not help the housing situation either. It will also cause the yield curve to flatten (not much difference in interest rates between two year bonds and 30 year bonds) which takes the profits out of lending.
Many thought, me included, that the Fed would “surprise” the markets with additional easing or money printing. For example, stop paying banks interest for excess reserves held at the Fed which would force the banks back into the lending business. Also, to push additional money into the financial system to cause inflation (help GDP, help the markets, reduce value of the dollar to help with exports.)
On Wednesday, the surprise was that the Fed did not agree to create more money. Evidently, we have not reached their pain threshold yet. However, within hours of the Fed announcement, European markets began to fall apart again. World GDP growth rates were reduced, including the U.S. So, the question becomes: is this enough pain or do we have to wait until the next Fed meeting in November? Or is the political will to spend more money just not there?
Tuesday, September 20, 2011
The Lack Of Consumer Spending Is The Problem, Right?
Everyone knows that what is causing the recession is the “gap” in consumer spending, Right? That is the explanation according to Keynesian economics and that’s what we have been told. So after spending trillions of dollars trying to fill the consumer spending “gap” and creating $15 trillion in debt; we have been told (Paul Krugman, et.al.) that we just didn’t spend enough.
Great, so we are now about to spend some more on: 1, a new “jobs” bill that will do nothing but add to the debt and accomplish nothing long-term and 2, a new Quantitative Easing Program ( QE3 or money printing) to help the banks and hurt savers.
Printing money does levitate the market, especially when the new printed money goes to banks who can then invest it in the capital markets and in higher paying foreign investments. BUT, consumer spending is not our problem. Here are some numbers from the Bureau of Labor Statistics (dollars in trillions) that prove the point.
Year....................2006 2007 2008 2009 2010
Government
Expenditures...........$4.14 $4.43 $4.73 $4.99 $5.26
Personal
Consumption............$9.52 $10.00 $9.74 $10.34 $10.45
Private Fixed
Investment
(Business
Spending)..............$2.26 $2.26 $2.12 $1.70 $1.72
This is telling us that the real problem is Business Investment. It is down by $539 billion or 23% from the peak in 2007; and running at about 76% of the 2006 level.
Isn’t this the real question: Why are businesses unwilling to invest and grow? Or is all the investment overseas where the business climate is more favorable?
Great, so we are now about to spend some more on: 1, a new “jobs” bill that will do nothing but add to the debt and accomplish nothing long-term and 2, a new Quantitative Easing Program ( QE3 or money printing) to help the banks and hurt savers.
Printing money does levitate the market, especially when the new printed money goes to banks who can then invest it in the capital markets and in higher paying foreign investments. BUT, consumer spending is not our problem. Here are some numbers from the Bureau of Labor Statistics (dollars in trillions) that prove the point.
Year....................2006 2007 2008 2009 2010
Government
Expenditures...........$4.14 $4.43 $4.73 $4.99 $5.26
Personal
Consumption............$9.52 $10.00 $9.74 $10.34 $10.45
Private Fixed
Investment
(Business
Spending)..............$2.26 $2.26 $2.12 $1.70 $1.72
This is telling us that the real problem is Business Investment. It is down by $539 billion or 23% from the peak in 2007; and running at about 76% of the 2006 level.
Isn’t this the real question: Why are businesses unwilling to invest and grow? Or is all the investment overseas where the business climate is more favorable?
Tuesday, August 30, 2011
More Hopium On The Way
Our down trending economy and markets may have begun to levitate again with Chairman Bernanke’s Jackson Hole speech last week when he announced the Fed would keep interest rates at zero for two more years (that would be 4.5 years total.) I believe this is just the beginning of “QE3” (generally defined as more money printing.)
Because there is some opposition to more stimulus and money printing (including three of the Federal Reserve’s Presidents and members of Congress,) the Government and the Federal Reserve have to “justify” more spending. In other words, there has to be enough “pain” to justify more spending and interfering with the economy. I believe we will get more fiscal stimulus and more money printing because we have, over the years, turned our economy (and education, health insurance, parenting, retirement, etc. etc. over to the government) and stimulus and money printing are the only way they know how to fix things. Besides, there is an election coming soon and fixing will take time.
There are two data points coming this week that may give the government the “justification” they need. One is the ISM-Manufacturing Report on Thursday. I suspect it will be more negative than expected. The second is the jobs report on Friday. I think the consensus is for about 75,000 to 100,000 jobs. However, the data over the past month is so negative that we may see a much smaller number and even a negative number for August or September. A negative number will defiantly get attention.
These events will be followed up by President Obama’s speech on September 5th when he will tell us what his “plan” is for restoring the economy and creating jobs. I believe it will be a bigger, more expensive program than we have had to date. It will have to get through Congress, but did I mention an election is coming soon.
Also, on September 21st Chairman Bernanke will announce the decisions made by the Federal Reserve Board. If the data is bad enough, we should get QE3 almost immediately. If the data is not bad enough, we may have to wait. But we should not have to wait very long as the economy is sliding further into recession.
In summary, we may get some bad news with the ISM-Manufacturing Report and the August Jobs Report which would negatively impact the market. But, that would be immediately followed up by the President’s new stimulus plan and the Federal Reserves’ money printing plan. This hopium will levitate the market, if big enough, until +/- next Labor Day. Another short-term “fix” and a worsening long-term problem.
Because there is some opposition to more stimulus and money printing (including three of the Federal Reserve’s Presidents and members of Congress,) the Government and the Federal Reserve have to “justify” more spending. In other words, there has to be enough “pain” to justify more spending and interfering with the economy. I believe we will get more fiscal stimulus and more money printing because we have, over the years, turned our economy (and education, health insurance, parenting, retirement, etc. etc. over to the government) and stimulus and money printing are the only way they know how to fix things. Besides, there is an election coming soon and fixing will take time.
There are two data points coming this week that may give the government the “justification” they need. One is the ISM-Manufacturing Report on Thursday. I suspect it will be more negative than expected. The second is the jobs report on Friday. I think the consensus is for about 75,000 to 100,000 jobs. However, the data over the past month is so negative that we may see a much smaller number and even a negative number for August or September. A negative number will defiantly get attention.
These events will be followed up by President Obama’s speech on September 5th when he will tell us what his “plan” is for restoring the economy and creating jobs. I believe it will be a bigger, more expensive program than we have had to date. It will have to get through Congress, but did I mention an election is coming soon.
Also, on September 21st Chairman Bernanke will announce the decisions made by the Federal Reserve Board. If the data is bad enough, we should get QE3 almost immediately. If the data is not bad enough, we may have to wait. But we should not have to wait very long as the economy is sliding further into recession.
In summary, we may get some bad news with the ISM-Manufacturing Report and the August Jobs Report which would negatively impact the market. But, that would be immediately followed up by the President’s new stimulus plan and the Federal Reserves’ money printing plan. This hopium will levitate the market, if big enough, until +/- next Labor Day. Another short-term “fix” and a worsening long-term problem.
Friday, August 12, 2011
Are You Ready For Labor Day?
A lot has happened over the past week or so. I just want to cover the Federal Reserve meeting today. Fed Chairman Bernanke stated after the meeting that we are basically in a recession (my interpretation) that will last for some time; and that he will hold interest rates down until at least mid-2013. This is the normal Keynesian and Keynesian-Lite reaction to a “consumer spending gap” (a reduction in consumer spending.). Fiscal and monetary policy has been doing this (low rates and printing money) for several years now and it is not working very well.
We know that increasing the money supply increases the GDP, but maybe low interest rates and printing money are not our problem and in fact, may be prolonging our problem. However, I think the Fed believes we are still stuck in a “liquidity trap” (over simplified: I (individual, bank, company) have some money and I could borrow more, but I don’t want to spend it or buy on time or invest it because I don’t know what the future holds and if I will be able to pay it back in this uncertain economy.)
The Fed believes, to get out of this liquidity trap, they need to continue to keep rates low and flood the economy with new money which will encourage people to spend and invest. Many think this might be difficult to do now considering the recent debt debate. But this is all the Fed and the government know how to do. They can’t create jobs or fix the housing foreclosure problem or expand free trade agreements, etc. Besides, that’s what a lot of people (like Paul Krugman, et. al.) are demanding. They want the government to do something”.
Now we have a second quarter revision to GDP on August 26th. I think GDP will be revised down from 1.3% to under 1% and maybe down to as little as 0.5%. Since we are obsessed with GDP that is a problem. Two quarters under 1% growth when we need 3% growth to effect jobs growth and unemployment.
Then we have another Fed meeting on August 29th. I expect Chairman Bernanke to announce that additional help (accommodation) will be coming soon. Then throw in the fact t that Congress gets back to “work” after Labor Day and the Presidential Election season is underway.
Therefore, my assumption of Scenario One (Print Until You Drop) is that the economy may not turn up but GDP (the arithmetic model we call the economy) will turn up on new fiscal and monetary initiatives. This will then “lead” the market higher.
There are a lot of implications to this scenario on the upside and the downside for both equities and income securities. Start now to position yourself for what is coming.
We know that increasing the money supply increases the GDP, but maybe low interest rates and printing money are not our problem and in fact, may be prolonging our problem. However, I think the Fed believes we are still stuck in a “liquidity trap” (over simplified: I (individual, bank, company) have some money and I could borrow more, but I don’t want to spend it or buy on time or invest it because I don’t know what the future holds and if I will be able to pay it back in this uncertain economy.)
The Fed believes, to get out of this liquidity trap, they need to continue to keep rates low and flood the economy with new money which will encourage people to spend and invest. Many think this might be difficult to do now considering the recent debt debate. But this is all the Fed and the government know how to do. They can’t create jobs or fix the housing foreclosure problem or expand free trade agreements, etc. Besides, that’s what a lot of people (like Paul Krugman, et. al.) are demanding. They want the government to do something”.
Now we have a second quarter revision to GDP on August 26th. I think GDP will be revised down from 1.3% to under 1% and maybe down to as little as 0.5%. Since we are obsessed with GDP that is a problem. Two quarters under 1% growth when we need 3% growth to effect jobs growth and unemployment.
Then we have another Fed meeting on August 29th. I expect Chairman Bernanke to announce that additional help (accommodation) will be coming soon. Then throw in the fact t that Congress gets back to “work” after Labor Day and the Presidential Election season is underway.
Therefore, my assumption of Scenario One (Print Until You Drop) is that the economy may not turn up but GDP (the arithmetic model we call the economy) will turn up on new fiscal and monetary initiatives. This will then “lead” the market higher.
There are a lot of implications to this scenario on the upside and the downside for both equities and income securities. Start now to position yourself for what is coming.
Monday, August 1, 2011
We Again Kicked the Can, But the Road is Now Going Down Hill
The “Debt Deal” will likely pass the House and Senate today. It does not reduce the budget or spending very much. Here’s why. The base line or assumption is that the budget will grow about 7% every year (that means a 7% increase is priced in.) So, if the 2011 budget is 3.6 trillion, next year the budget will start out at $3.6 plus $250 billion or $3.85 trillion (assuming no more wars, etc.)
Therefore, in 2013 when the debt ceiling is reached again, the deficit will be $16.6 trillion rather than the $14.2 we have today; and the budget for 2014 will start at $4.1 trillion. Unless we have a national discussion about why we are spending this much money and reach a national consensus, we will continue to let politicians keep spending and monetizing our debt. If you create enough inflation to make previous debts meaningless, is that a default?
At the same time, the global economy, at a minimum, is contracting or slowing down. Therefore, the euphoria that passing the debt ceiling brings will be very short lived. We will have to immediately focus on the economy again and jobs. And there seems to be only one thing the government knows how to do, spend money and pass regulations. Also, it is only 15 months until election so stimulus and QE3 will have to be set up and implemented quickly.
Unfortunately, what we really need is for the government to get out of the way.
Therefore, in 2013 when the debt ceiling is reached again, the deficit will be $16.6 trillion rather than the $14.2 we have today; and the budget for 2014 will start at $4.1 trillion. Unless we have a national discussion about why we are spending this much money and reach a national consensus, we will continue to let politicians keep spending and monetizing our debt. If you create enough inflation to make previous debts meaningless, is that a default?
At the same time, the global economy, at a minimum, is contracting or slowing down. Therefore, the euphoria that passing the debt ceiling brings will be very short lived. We will have to immediately focus on the economy again and jobs. And there seems to be only one thing the government knows how to do, spend money and pass regulations. Also, it is only 15 months until election so stimulus and QE3 will have to be set up and implemented quickly.
Unfortunately, what we really need is for the government to get out of the way.
Monday, July 18, 2011
Moody's Has It Absolutely Wrong
July 18, 2011
There will be a market reaction to passing or not passing the debt limit. But it is time to start thinking about this problem as adults rather than as political party advocates. Moody’s comments the past few days are a prime example.
Moody’s, the credit agency has stated they are likely to downgrade America’s AAA credit rating if the debt limit is not raised.
Today, Moody’s stated that America should get rid of the debt limit ceiling altogether because it gives them a reason to downgrade our credit rating. This is not only illogical; it’s symptomatic of the way politicians, economists and pundits think. They almost always attack the symptom rather than the cause.
What Moody’s should be saying is that the Congress needs to pass a law that forces politicians to reduce the debit ceiling by some percent every year until our budget is balanced. Our problem is not the current debt ceiling. Our problem is that our budget is not balanced and on an unsustainable path upward.
There are two major reasons we spend too much.
One, the party out of office attacks the party in office for spending too much and the party in power defends the spending. When election results change, so do the positions of the parties. Congress has raised the debt ceiling 140 times since it was enacted in 1917.
By the way, the debt ceiling was created by President Wilson in order to pacify the opposition that he would not spend too much on WWI.
Two, we refuse to debate the cause of our problems. We only debate the amount of money we will spend on the symptom. For example:
1.Why does America with 5% of the world’s population spend about as much as the rest of the world does on defense? Is America responsible for most of the world? If it’s to protect democracy, why doesn’t Switzerland spend more?
2.Why hasn’t poverty been eliminated after trillions have been spent on the poor? Is poverty simply a percent of the population? Are the government and the population an enabler? Is our education system failing us? Etc. etc.
3.Why do we worry about the consumer price index (CPI)? It is only a symptom. Inflation is not a manipulated, mathematical index; it’s the increase in money supply. Should we be increasing the money supply?
I could give you a thousand examples but I think you got the idea. We need to change the way we think. Once we identify the real cause of the problem, we should be able to get consensus on how much to spend solving the problem.
By the way, America has defaulted on our debt five times starting in 1776. Also, the Federal Reserve can buy bonds to fund the government forever and never have to default on the “Public” debt (public debt is what we are talking about.)
There will be a market reaction to passing or not passing the debt limit. But it is time to start thinking about this problem as adults rather than as political party advocates. Moody’s comments the past few days are a prime example.
Moody’s, the credit agency has stated they are likely to downgrade America’s AAA credit rating if the debt limit is not raised.
Today, Moody’s stated that America should get rid of the debt limit ceiling altogether because it gives them a reason to downgrade our credit rating. This is not only illogical; it’s symptomatic of the way politicians, economists and pundits think. They almost always attack the symptom rather than the cause.
What Moody’s should be saying is that the Congress needs to pass a law that forces politicians to reduce the debit ceiling by some percent every year until our budget is balanced. Our problem is not the current debt ceiling. Our problem is that our budget is not balanced and on an unsustainable path upward.
There are two major reasons we spend too much.
One, the party out of office attacks the party in office for spending too much and the party in power defends the spending. When election results change, so do the positions of the parties. Congress has raised the debt ceiling 140 times since it was enacted in 1917.
By the way, the debt ceiling was created by President Wilson in order to pacify the opposition that he would not spend too much on WWI.
Two, we refuse to debate the cause of our problems. We only debate the amount of money we will spend on the symptom. For example:
1.Why does America with 5% of the world’s population spend about as much as the rest of the world does on defense? Is America responsible for most of the world? If it’s to protect democracy, why doesn’t Switzerland spend more?
2.Why hasn’t poverty been eliminated after trillions have been spent on the poor? Is poverty simply a percent of the population? Are the government and the population an enabler? Is our education system failing us? Etc. etc.
3.Why do we worry about the consumer price index (CPI)? It is only a symptom. Inflation is not a manipulated, mathematical index; it’s the increase in money supply. Should we be increasing the money supply?
I could give you a thousand examples but I think you got the idea. We need to change the way we think. Once we identify the real cause of the problem, we should be able to get consensus on how much to spend solving the problem.
By the way, America has defaulted on our debt five times starting in 1776. Also, the Federal Reserve can buy bonds to fund the government forever and never have to default on the “Public” debt (public debt is what we are talking about.)
Update on Scenario One
July 8, 2011
Scenario One still remains the most probable of my four scenarios. However, if the government or the Central Bank deviates from the “expected” course (from a capitalist point of view) other scenarios might become more probable.
Also, here are some assumptions to consider:
1. The following chart uses the S&P500 index to illustrate this scenario because it is easy to visualize.
2. My assumption is that money supply drives the economy or GDP (and there is a lag time involved here.) Increasing GDP drives business revenues and profits which then drive stock prices.
3. Money supply will slow up beginning in June but will expand when re-election fears really kick in and new “government help” adds stimulus (money creation weather it’s spending or tax reductions unless paid for) to drive up GDP in time to help with re-elections.
4. Serious spending cuts will be postponed until after the election.
Following is a brief description of each point on the chart.
Point 1. Housing bubble bursts and banks become insolvent. The government decides to save the banks by using taxpayer money to “keep them solvent” rather than demanding that the banks try to convert their bonds into equity. Recession is underway.
Point 2. March 2010. The massive increase in money supply which artificially and temporarily increases GDP begins, but results in malinvestments or bubbles. For example:
a. Interest rates reduced to zero and held there
b. Stimulus Programs begin (over $800 billion in stimulus spending and unpaid for tax cuts) plus $1.5 trillion in deficit spending,
c. Mark-to –Market accounting rules revised (allowing banks to increase the ”value” of their mortgage bonds to boost their equity and reserve requirements,
d. Central Bank buys “toxic bonds” from the banks (QE1) increasing ”excess reserves” at banks to $1.1 trillion from $4 billion,
e. November 2010, QE2 begins ($600 billion more pumped into banks but most of it ends up in foreign banks)
f. Money supply increases at double digit rates for 28 of last 29 months (see assumption 2 above.)
Point 3. May 2011. There is a “short-term” stock market top and correction due to anticipated contraction of the pace of money supply and other headwinds including slowing global growth and debt problems. For example:
a. Stimulus ending in June
b. QE2 ending in June (a and b both will contract money supply which will reduce GDP)
c. Debt ceiling “argument” (raise limit by $2-3 trillion and get more fiscal stimulus or austerity) deadline by August 2
d. Reductions in U.S. GDP (Central Bank reduces growth rate in June) and Global GDP rates
e. Increasing inflation rates (headline and core)
f. Housing still a big problem
g. Unemployment slowly getting worse
h. Earnings (Qr 2) in July should be at or near expectations but analysts are already cutting earnings for second half of 2011. It will be a negative for the markets if companies do not confirm current growth rates for second half.
Economy and markets will become more volatile and trend lower until the government “solves” the problems with more money creation, which is what I expect. Or some kind of austerity program including reduced spending is put in place, which I do not expect. However, if austerity happens, my Scenario Two (continued decrease in economy and markets) would come into play.
Point 4. Labor Day or possibly sooner (for example by the August debt ceiling limit) depending on our central planners (government and the Central Bank) the money supply will again increase raising GDP (with a lag) and then revenues, profits and markets. This up turn will last longer (with corrections along the way.)
a. My guess, debt limit increased with promise to cut spending starting in 2013 (after next elections)
b. As economy drifts lower, the pressure will be on government to “do something.” Therefore, I expect a new stimulus program (significant tax cuts because Republicans will have to vote for them and Democrats will get their stimulus because we will borrow the money displaced by the tax cuts)
c. New QE3 program (large) so central bank can continue to buy bonds and keep interest rates low (for housing, employment, etc.) This may be called something else so it can be framed differently for public consumption.
d. Timing of new stimulus for 2012 elections will become important to allow for lag time and momentum prior to elections.
Point 5. Top of Bubble (Sept-Dec 2012 +/-) caused by the huge increase in money supply added over the years and the malinvestments that have occurred as a result of this increased money supply. This bust will cause a very deep recession illustrated by the S&P500 going back down to 600-650 area.
Point 6.January 2015. Long period of stagflation with low, real GDP growth rates of 1-2% and high interest rates due to inflation.
Wednesday, June 22, 2011
Update On Scenario One
This remains the most probable scenario at this time (of my four total scenarios.) However, other scenarios are possible depending on what the government and central banks do (more money creation or money contraction) and what banks do (possible trillions in credit to consumers which is money creation) and how individuals react (credit defaults, savings, leverage, etc.)
1. March 2010 (massive increases in money supply which artificially and temporarily increases GDP but results in malinvestments or bubbles)
a. Interest rate reduction
b. Stimulus Programs
c. Mark-to –Market rules revised (allowing banks to increase value of mortgage bonds)
d. Central Bank buys “toxic bonds” from banks (QE1) increasing ”excess reserves” at banks to $1.1 trillion from $4 billion.
e. November 2010, QE2 begins ($600 billion more pumped into banks but most of it goes into European banks)
f. Money supply increases at double digit rates for 28 of last 29 months
2. May 2011
a. Stimulus ending in June
b. QE2 ending in June (both a and b will contract money supply which will reduce GDP)
c. Debt ceiling “argument” (raise limit by $2-3 trillion or austerity) deadline by August 2
3. Labor Day (+/-) or possibly sooner depending on our central planners (government and the Central Bank
a. My guess, debt limit increased with promise to cut spending starting in 2013 (after next elections) Raising the debt limit is priced into the markets now.
b. As economy drifts lower, pressure for government to “do something.” Therefore, I expect a new stimulus program (significant tax cuts because Republicans will have to vote for them and Democrats will get their stimulus because we will borrow the money displaced by the tax cuts)
c.New QE3 program (large) so central bank can continue to buy bonds and keep interest rates low (for housing, employment, etc.) This may be called something else so it can be framed differently for public consumption.
d.Timing of new stimulus for 2012 elections will become important to allow for lag time and momentum prior to elections.
4. Top of Bubble (then significant recession)
5. S&P500 down to about 650-600
The Next Three Months
June 10, 2011
The economy, meaning the GDP or consumption model, is struggling to say the least. The government has been pouring money into the economy trying to keep it from adjusting to its natural (equilibrium) level after the artificial high encored during the buildup of the bubble.
Now, the flow of money is scheduled to stop (stimulus money by the end of June, the Fed printing money by June 30), and reaching the debt limit ($14.2 trillion) for the 140th time. Now what’s going to happen: more money or austerity? It seems everyday the market flips back and forth.
On Monday, it appears that austerity is on the way which will reduce GDP (and revenues and profits) but the Fed will keep interest rates low “for an extended period of time.” Therefore, the markets react by buying the dollar and chasing high interest rates and selling stocks and commodities. The price swings are big but the intensity of buys and sells is not there.
On Tuesday, the mood swings and traders are convinced that the “government will do something” (more stimulus, additional tax reductions, more printing of money by the Fed, etc.) Therefore, the markets react by pushing up the stocks and commodities, selling off the dollar and high interest rate securities. Again, big price swings but not much intensity.
This may go on for the next three months or until it become clear what the government will do. Therefore, for the next three months you may be limited to very short trades or waiting for the printing presses to start rolling again. Based on how the political class has acted since 1913, I am not going to hold my breath for a balanced budget.
The economy, meaning the GDP or consumption model, is struggling to say the least. The government has been pouring money into the economy trying to keep it from adjusting to its natural (equilibrium) level after the artificial high encored during the buildup of the bubble.
Now, the flow of money is scheduled to stop (stimulus money by the end of June, the Fed printing money by June 30), and reaching the debt limit ($14.2 trillion) for the 140th time. Now what’s going to happen: more money or austerity? It seems everyday the market flips back and forth.
On Monday, it appears that austerity is on the way which will reduce GDP (and revenues and profits) but the Fed will keep interest rates low “for an extended period of time.” Therefore, the markets react by buying the dollar and chasing high interest rates and selling stocks and commodities. The price swings are big but the intensity of buys and sells is not there.
On Tuesday, the mood swings and traders are convinced that the “government will do something” (more stimulus, additional tax reductions, more printing of money by the Fed, etc.) Therefore, the markets react by pushing up the stocks and commodities, selling off the dollar and high interest rate securities. Again, big price swings but not much intensity.
This may go on for the next three months or until it become clear what the government will do. Therefore, for the next three months you may be limited to very short trades or waiting for the printing presses to start rolling again. Based on how the political class has acted since 1913, I am not going to hold my breath for a balanced budget.
Monday, June 6, 2011
What Slow Patch? Aren’t We Still In A Recession?
With the bad economic numbers we have been getting lately (employment, housing, manufacturing, etc.), the economy appears to be turning down again.
Consensus among mainstream economists is that the “recovery” is only entering a “slow patch” as we transition from a government funded recovery back to a private sector funded economy. The reason for this “slow patch” is that stimulus programs are running out of money and the Fed’s QE2 program is ending in June. Therefore, we have to be patient as the “real” economy continues to grow.
The real question is “Aren’t we still in a recession? We have spent trillions of dollars and all we have to show for it is debt. Now, we are going to have to go through a “slow down?”
Let’s face reality. Either the government gets out of the way and lets the economy reach equilibrium, as painful as that would be; or we borrow and spend more money to keep our economy growing at 1% (stagflation level). My guess is that the government will spend more without cutting or saying they will start to cut in 2014 (when they are all retired.)
Hit reply and tell me what you think:
Will they cut spending?
Will they spend even more?
There is one other thing they could try. They could stop looking short-term (definition: days to next election) or they could look at the cause of the recession (government intervention, spending on the flavor of the month, the tax code, trillions of unnecessary regulations, manipulation of interest rates, etc., etc.) That is what caused the bubble in the first place. Now, we are in the process of doing it over again. It’s time to re-think our priorities first, then budget levels.
Consensus among mainstream economists is that the “recovery” is only entering a “slow patch” as we transition from a government funded recovery back to a private sector funded economy. The reason for this “slow patch” is that stimulus programs are running out of money and the Fed’s QE2 program is ending in June. Therefore, we have to be patient as the “real” economy continues to grow.
The real question is “Aren’t we still in a recession? We have spent trillions of dollars and all we have to show for it is debt. Now, we are going to have to go through a “slow down?”
Let’s face reality. Either the government gets out of the way and lets the economy reach equilibrium, as painful as that would be; or we borrow and spend more money to keep our economy growing at 1% (stagflation level). My guess is that the government will spend more without cutting or saying they will start to cut in 2014 (when they are all retired.)
Hit reply and tell me what you think:
Will they cut spending?
Will they spend even more?
There is one other thing they could try. They could stop looking short-term (definition: days to next election) or they could look at the cause of the recession (government intervention, spending on the flavor of the month, the tax code, trillions of unnecessary regulations, manipulation of interest rates, etc., etc.) That is what caused the bubble in the first place. Now, we are in the process of doing it over again. It’s time to re-think our priorities first, then budget levels.
Friday, May 20, 2011
Get Ready for the Election Season and the End of QE2
Most economists believe that no serious disruption to the economy (or markets) will occur when the Federal Reserve ends QE2 (the printing of $600 billion) in June. They also believe the economy is on a sustainable growth path (but below trend growth levels) and that the economy will continue to improve over time.
Sure, there are some who think the government needs to print even more money to encourage employment growth and wage increases (besides, debt is not a problem and interest rates are low.) And there are a few who think the Fed should raise interest rates now to deter inflation and reduce taxes to incentivize employment (besides, spending is not the problem; debt and low interest rates are the problem.)
Since this view (borrow and spend) is what got us into this problem and is currenty keeping the economy levitated; it does not make sense that the government can simply stop increasing the money supply and we all go merrily on our way or we would have stopped printing money long ago.
Unless savings increase enough to fill the gap left by the Fed (unlikely), GDP will decline (maybe after some lag time) and politicians will panic (elections are coming! elections are coming!) We will be subjected to a news cycle of endless attack speeches, ads, vetoes, etc. about the debt ceiling, budgets, etc. Not exactly tranquility.
Also, with GDP declining, banks will be less inclined to lend (so neither savings or loans will make up for reduced government spending.)
Now, add in a slower-volume summer market and you have the ingredients for a very volatile market full of surprises (and counter surprises.) One must be nimble short-term. Longer-term, any time there is a dip in GDP or a stock market dip, I believe the government will do the only thing it knows how to do, borrow and spend.
Sure, there are some who think the government needs to print even more money to encourage employment growth and wage increases (besides, debt is not a problem and interest rates are low.) And there are a few who think the Fed should raise interest rates now to deter inflation and reduce taxes to incentivize employment (besides, spending is not the problem; debt and low interest rates are the problem.)
Since this view (borrow and spend) is what got us into this problem and is currenty keeping the economy levitated; it does not make sense that the government can simply stop increasing the money supply and we all go merrily on our way or we would have stopped printing money long ago.
Unless savings increase enough to fill the gap left by the Fed (unlikely), GDP will decline (maybe after some lag time) and politicians will panic (elections are coming! elections are coming!) We will be subjected to a news cycle of endless attack speeches, ads, vetoes, etc. about the debt ceiling, budgets, etc. Not exactly tranquility.
Also, with GDP declining, banks will be less inclined to lend (so neither savings or loans will make up for reduced government spending.)
Now, add in a slower-volume summer market and you have the ingredients for a very volatile market full of surprises (and counter surprises.) One must be nimble short-term. Longer-term, any time there is a dip in GDP or a stock market dip, I believe the government will do the only thing it knows how to do, borrow and spend.
Commodities and the Evil Speculators
When commodity prices rise to the point that constituents start calling their congressperson, something has to be done; and that something is to:
1. Blame someone other than politicians for the problem,
2. Attack the "symptom" (rising prices) rather than the cause and
3. Focus on and talk about the benefits (winners) and ignore the negative consequences (losers.)
That is exactly what the government did last week when they raised margin requirements on silver five times in five days increasing the total margin requirements by 84%; and then raised the margin requirements on oil.
The net result of their "margin increase" policy will be to disrupt the market for a short period of time (creating some winners and some losers,) BUT that short-sighted policy does not change the long-term trend of rising commodity prices because it does not attack the "real cause" of rising commodity prices.
In addition to supply and demand issues, the government and the Federal Reserve are addicted to borrowing and printing money as a way to stay in office. Increasing the money supply (demand) without increasing supply devalues the dollar. This means commodities prices raise to compensate for the devalued dollar. It's pretty simple.
If you are an investor, this correlation is an opportunity to "speculate." But, if the government stopped printing money or contracted the money supply, commodity prices would fall. However, if you think speculation is bad now, wait until people recognize that higher commodity prices are not "transitory." Then, commodity speculation will consume almost everyone like it did housing ("You don't flip") a few years ago.
May 12, 2011
1. Blame someone other than politicians for the problem,
2. Attack the "symptom" (rising prices) rather than the cause and
3. Focus on and talk about the benefits (winners) and ignore the negative consequences (losers.)
That is exactly what the government did last week when they raised margin requirements on silver five times in five days increasing the total margin requirements by 84%; and then raised the margin requirements on oil.
The net result of their "margin increase" policy will be to disrupt the market for a short period of time (creating some winners and some losers,) BUT that short-sighted policy does not change the long-term trend of rising commodity prices because it does not attack the "real cause" of rising commodity prices.
In addition to supply and demand issues, the government and the Federal Reserve are addicted to borrowing and printing money as a way to stay in office. Increasing the money supply (demand) without increasing supply devalues the dollar. This means commodities prices raise to compensate for the devalued dollar. It's pretty simple.
If you are an investor, this correlation is an opportunity to "speculate." But, if the government stopped printing money or contracted the money supply, commodity prices would fall. However, if you think speculation is bad now, wait until people recognize that higher commodity prices are not "transitory." Then, commodity speculation will consume almost everyone like it did housing ("You don't flip") a few years ago.
May 12, 2011
Is The Run In Commodities Over?
No. However, in the past couple of months, commodities rose "too quickly" approaching all time highs. Silver alone, was up almost 30 percent in the past month. Profit taking was in order. Then, commodities will be on the rise again.
Why? Nothing has changed. The government is borrowing and spending money the country does not have to keep the economy afloat. It's not working:
1. GDP growth was 1.8% last quarter (and 1.7% for the past 10 years. We have been levitating the economy for a long time),
2. Housing is beginning to take a double dip (falling prices and huge inventories and 25% of people with mortgages under water),
3. Employment, wages, and hours worked are not improving,
4. Inflation is climbing (it is not transitory as Bernanke stated. He also thought subprime mortgages were small and containable, that the financial crisis was containable and transitory, etc. etc.)
In fact borrowing and printing is making matters worse. It is not only prolonging the recession, our debt is so high that it is likely to restrict economic growth in the future and we refuse to do anything about it. Austerity looks like its going to be 0 for 3. Nothing of consequence happened with the 2011 budget. It looks like nothing of consequence will happen with the debt ceiling problem and nothing of consequence will happen with the 2012 budget. But maybe we can cut 1-2% of a rising budget after the 2012 elections.
Therefore, nothing has changed. We will continue to borrow and spend to levitate the economy, reduce the value of the dollar and cause commodity prices to rise.
May 6, 2011
Why? Nothing has changed. The government is borrowing and spending money the country does not have to keep the economy afloat. It's not working:
1. GDP growth was 1.8% last quarter (and 1.7% for the past 10 years. We have been levitating the economy for a long time),
2. Housing is beginning to take a double dip (falling prices and huge inventories and 25% of people with mortgages under water),
3. Employment, wages, and hours worked are not improving,
4. Inflation is climbing (it is not transitory as Bernanke stated. He also thought subprime mortgages were small and containable, that the financial crisis was containable and transitory, etc. etc.)
In fact borrowing and printing is making matters worse. It is not only prolonging the recession, our debt is so high that it is likely to restrict economic growth in the future and we refuse to do anything about it. Austerity looks like its going to be 0 for 3. Nothing of consequence happened with the 2011 budget. It looks like nothing of consequence will happen with the debt ceiling problem and nothing of consequence will happen with the 2012 budget. But maybe we can cut 1-2% of a rising budget after the 2012 elections.
Therefore, nothing has changed. We will continue to borrow and spend to levitate the economy, reduce the value of the dollar and cause commodity prices to rise.
May 6, 2011
Thursday, March 31, 2011
We’ll Keep Printing, Will They Keep Buying?
I have been concerned about all the money being pumped into the economy and the inevitable inflation that will result. However, the symptoms of inflation (Consumer Price Indexes or CPI) have been mild (by model definition) or perhaps even disappointing to Fed Chairman Bernanke. He wants to re-inflation the economy to help turn around housing and employment/wages. Why he wants to prolong this recession by preventing prices to reach equilibrium is an open question.
We do know is that all of this money is holding up or levitating GDP. And we know that to keep GDP going, we need to keep printing money. We can do it because we are a sovereign country and can print as much money as we want (not without consequences however.) We are currently borrowing 43 cents out of every deficit dollar we spend. The problem is that the Federal Reserve is buying about 40 percent of these dollars followed by China and Japan. Will these buyers continue to buy our Treasuries?
I am not sure. One reason is that the Federal Reserve’s Quantitative Easing (QE2) policy of buying $600 billion in bonds will end in June. Who is going to pick up that 40 percent in July? I have been saying that the Fed will probably initiate QE3 because they have to keep it going. The next election is not that far off.
What does appear more certain is that we will keep spending and printing. The rumor yesterday was that Congress has reached a compromise to cut $33 billion (less than 1%) of the budget. If they (both parties) can’t cut even 1%, how are they ever going to extricate themselves from micro-managing our mixed (or Statist) economy.
We do know is that all of this money is holding up or levitating GDP. And we know that to keep GDP going, we need to keep printing money. We can do it because we are a sovereign country and can print as much money as we want (not without consequences however.) We are currently borrowing 43 cents out of every deficit dollar we spend. The problem is that the Federal Reserve is buying about 40 percent of these dollars followed by China and Japan. Will these buyers continue to buy our Treasuries?
I am not sure. One reason is that the Federal Reserve’s Quantitative Easing (QE2) policy of buying $600 billion in bonds will end in June. Who is going to pick up that 40 percent in July? I have been saying that the Fed will probably initiate QE3 because they have to keep it going. The next election is not that far off.
What does appear more certain is that we will keep spending and printing. The rumor yesterday was that Congress has reached a compromise to cut $33 billion (less than 1%) of the budget. If they (both parties) can’t cut even 1%, how are they ever going to extricate themselves from micro-managing our mixed (or Statist) economy.
Tuesday, March 15, 2011
Will The Government Continue To Pump Money Into The Economy?
I spent most of last week in Auburn, Alabama at the Austrian Scholars Conference where I listened to 40 presentations on various aspects of the economy from Austrian (or Capitalist) economists. It was excellent. I thought I would share one of my "take home" ideas on government spending (fiscal and monetary).
I think the government will continue to pump money into the economy (financial system) to keep it afloat. Most of the "growth" in GDP growth is from the government and the amount of GDP growth per dollar spent is declining. I am assuming that if the economy were really turning around based on private investment and spending, the government would stop injecting borrowed money into the system.
There is a lot of talk about the election of "Tea Party" legislators and their willingness to reduce spending and begin to get government budget under control. I don't think that will happen. The Republicans are proposing a $60 billion reduction in spending (1.6%) and the Democrats have countered with $6 billion in cuts.
Neither amount is significant and the focus is on cutting a few dollars out of the budget. However, the focus should be on the cause of overspending not just the symptoms of it. Why are we overspending? Why are we willing to borrow 43 cents of every dollar we spend? For what purpose? For whose benefit?
For example: Why are we spending $800 billion a year on "defense" which is 50% of what the world spends on defense? Why have we politicized science: one administration spends billions on programs to get us to Mars (Bush) and the next administration (Obama) shuts down those programs (wasting that money, education, etc.) and then redirects billions on satellites to monitor global warming instead? Why do we have a government (both administrations) that spends hundreds of billions to bail out banks with taxpayer money when these banks could have saved themselves? These are the kinds of questions we need answered before we are going to get serious about priorities and cost reductions.
Therefore, I expect to see one or more of the following: Quantitative Easing III (the Fed printing more money) and or the Fed keeping interest rates low for a much longer time (well into 2012) and/or more "stimulus" programs (we haven't solved our problems yet.) This of course has implications for both business and investment planning.
I think the government will continue to pump money into the economy (financial system) to keep it afloat. Most of the "growth" in GDP growth is from the government and the amount of GDP growth per dollar spent is declining. I am assuming that if the economy were really turning around based on private investment and spending, the government would stop injecting borrowed money into the system.
There is a lot of talk about the election of "Tea Party" legislators and their willingness to reduce spending and begin to get government budget under control. I don't think that will happen. The Republicans are proposing a $60 billion reduction in spending (1.6%) and the Democrats have countered with $6 billion in cuts.
Neither amount is significant and the focus is on cutting a few dollars out of the budget. However, the focus should be on the cause of overspending not just the symptoms of it. Why are we overspending? Why are we willing to borrow 43 cents of every dollar we spend? For what purpose? For whose benefit?
For example: Why are we spending $800 billion a year on "defense" which is 50% of what the world spends on defense? Why have we politicized science: one administration spends billions on programs to get us to Mars (Bush) and the next administration (Obama) shuts down those programs (wasting that money, education, etc.) and then redirects billions on satellites to monitor global warming instead? Why do we have a government (both administrations) that spends hundreds of billions to bail out banks with taxpayer money when these banks could have saved themselves? These are the kinds of questions we need answered before we are going to get serious about priorities and cost reductions.
Therefore, I expect to see one or more of the following: Quantitative Easing III (the Fed printing more money) and or the Fed keeping interest rates low for a much longer time (well into 2012) and/or more "stimulus" programs (we haven't solved our problems yet.) This of course has implications for both business and investment planning.
Wednesday, March 2, 2011
What's Next For The Market?
Technically, the market is at an inflection point. According to the Dow Theorists, if the Dow breaks 11,823.7 if would signal a correction and even put the market into another bear market. While technical analysis can be correct sometimes, it can also be incorrect sometimes. If it always worked, you could buy the right algorithm, kick back and relax. But, on the other hand, many traders follow the Dow Theory and that alone could move the market for a while.
We do know that the markets are levitated due to government spending and require additional government spending to keep going. So far, talking about cutting government spending is just talk; nothing significant has actually happened. I suspect cuts, if any, will be minor (less than the $1.5 trillion needed to get us a balanced budget.) Therefore, for the moment, I assume overspending and quantitative easing will continue, maybe for years.
also, Fed Chairman Bernanke has the stock market targeted as one of him main objectives. He wants the market to go higher so “animal spirits or greed” will kick in and take over so “real” consumer spending can take place. Therefore, If the market should sell off to 10,000 +/- (about a 15% drop), I think the government will intervene with both stimulus and more quantitative easing (printing money.) After all, it’s only 19 months to the next election…and voter pain will not be tolerated.
We do know that the markets are levitated due to government spending and require additional government spending to keep going. So far, talking about cutting government spending is just talk; nothing significant has actually happened. I suspect cuts, if any, will be minor (less than the $1.5 trillion needed to get us a balanced budget.) Therefore, for the moment, I assume overspending and quantitative easing will continue, maybe for years.
also, Fed Chairman Bernanke has the stock market targeted as one of him main objectives. He wants the market to go higher so “animal spirits or greed” will kick in and take over so “real” consumer spending can take place. Therefore, If the market should sell off to 10,000 +/- (about a 15% drop), I think the government will intervene with both stimulus and more quantitative easing (printing money.) After all, it’s only 19 months to the next election…and voter pain will not be tolerated.
Monday, February 28, 2011
Of Course There Is Inflation. Why Haven’t We Seen It?
Every month we get an inflation report. We know gas prices have almost doubled in the past two years and food prices have risen significantly, but according to Fed Chairman Bernanke, we are not seeing any significant inflation. What gives? Why is the government reporting such low inflation numbers?
One reason is the way inflation numbers are reported and the way information is played out in the media. For example, inflation for January was +0.4% and +1.6% year-over-year. First of all, it was just “slightly” higher than expected. OK, it doesn’t sound that bad I guess. But what if it would be reported that + 0.4% annualized is +4.8%. Or that over the past year, inflation has risen steadily from a year ago. Or that inflation has risen 26.5 % since 2000 or 164.1% since 1980. In other words, there is not much context to the report and therefore, it is minimized.
Another reason is that the media is obsessed with speed rather than content so rather than a discussion about inflation or its content, they will simply move on to new information tomorrow. Besides, they think everyone is bored any way once they have heard the number.
Another reason is the way inflation moves through the economy. In the early stages of inflation, it generally rises slowly because the numbers are small in the beginning and people do not think that inflation is here to stay so why worry. If it persists, people begin to change their minds. Once they think inflation is here and growing, people begin to react and it begins to rise more rapidly. Since it’s a compounded percent, the longer it goes, the faster it rises.
We have an unusual situation also, The money supply has been increased dramatically (the cause of inflation) but many people including many economists and the Federal Reserve have been or are worried about deflation (definition is money supply contracting) because of lower sales, lower prices in some cases and consumers not spending as they did in 2007. Never mind that consumers haven’t de-leveraged themselves yet from historic levels in 2007.)
Also, the huge increase in money supply has gone to the banks for the most part. They do not need borrowers to make money. They have been putting the money into assets (bonds, stocks, etc.) and investing overseas. We do not count a rising stock market or heavy buying of bonds (which drives interest rates down) as inflation. Yet that is what is happening. So it appears that we are creating an asset bubble at this time, just different than the tech bubble or housing bubble.
We are also exporting much of our inflation to the Chinese: exchanging our higher cost of production for their low cost imports.
One last reason is the huge Federal debt. Imagine what “investments” could be made by the private sector if we didn’t have to pay hundreds of billions of dollars in interest to foreign countries.
That’s some of the reasons we are not “seeing” inflation. We are not looking for it. But it is here and it will be rising throughout the year.
One reason is the way inflation numbers are reported and the way information is played out in the media. For example, inflation for January was +0.4% and +1.6% year-over-year. First of all, it was just “slightly” higher than expected. OK, it doesn’t sound that bad I guess. But what if it would be reported that + 0.4% annualized is +4.8%. Or that over the past year, inflation has risen steadily from a year ago. Or that inflation has risen 26.5 % since 2000 or 164.1% since 1980. In other words, there is not much context to the report and therefore, it is minimized.
Another reason is that the media is obsessed with speed rather than content so rather than a discussion about inflation or its content, they will simply move on to new information tomorrow. Besides, they think everyone is bored any way once they have heard the number.
Another reason is the way inflation moves through the economy. In the early stages of inflation, it generally rises slowly because the numbers are small in the beginning and people do not think that inflation is here to stay so why worry. If it persists, people begin to change their minds. Once they think inflation is here and growing, people begin to react and it begins to rise more rapidly. Since it’s a compounded percent, the longer it goes, the faster it rises.
We have an unusual situation also, The money supply has been increased dramatically (the cause of inflation) but many people including many economists and the Federal Reserve have been or are worried about deflation (definition is money supply contracting) because of lower sales, lower prices in some cases and consumers not spending as they did in 2007. Never mind that consumers haven’t de-leveraged themselves yet from historic levels in 2007.)
Also, the huge increase in money supply has gone to the banks for the most part. They do not need borrowers to make money. They have been putting the money into assets (bonds, stocks, etc.) and investing overseas. We do not count a rising stock market or heavy buying of bonds (which drives interest rates down) as inflation. Yet that is what is happening. So it appears that we are creating an asset bubble at this time, just different than the tech bubble or housing bubble.
We are also exporting much of our inflation to the Chinese: exchanging our higher cost of production for their low cost imports.
One last reason is the huge Federal debt. Imagine what “investments” could be made by the private sector if we didn’t have to pay hundreds of billions of dollars in interest to foreign countries.
That’s some of the reasons we are not “seeing” inflation. We are not looking for it. But it is here and it will be rising throughout the year.
Thursday, February 24, 2011
Inflation Is Here And Should Increase Significantly This Year
The Federal Reserve and Chairman Bernanke keep telling us that inflation is not a problem at this time. The “small amount” of inflation that is out there (Consumer Price Index or CPI of 1.5% in December 2010) is nothing to worry about and is manageable. In fact their goal is to get inflation up to 1-2%. Therefore, they need to keep pumping money into the financial system in order to get the economy on solid ground and create jobs.
However, inflation is here now and will most likely get much higher this year. Frank Shostak, an “Austrian School” economist, has written an article showing that there is about a 36 month lag time from an increase in money supply until inflation (as measured by the government) will begin to show up as inflation. Based on that 36 month lag time, he has estimated that inflation (CPI) will rise to 2.4% by September (versus 1.1% last September) and up to 4.4% by December.
Mr. Bernanke prefers the “Core-CPI” (The CPI minus food and energy) because it is less volatile. That inflation index in on the rise also. The estimate is for 1.5% in September and 2.7% by December vs. 0.8% in December of 2010.
Inflation is here and should increase significantly this year. Start to prepare now for a significant erosion in purchasing power and higher interest rates, whether Mr. Bernanke likes it or not.
However, inflation is here now and will most likely get much higher this year. Frank Shostak, an “Austrian School” economist, has written an article showing that there is about a 36 month lag time from an increase in money supply until inflation (as measured by the government) will begin to show up as inflation. Based on that 36 month lag time, he has estimated that inflation (CPI) will rise to 2.4% by September (versus 1.1% last September) and up to 4.4% by December.
Mr. Bernanke prefers the “Core-CPI” (The CPI minus food and energy) because it is less volatile. That inflation index in on the rise also. The estimate is for 1.5% in September and 2.7% by December vs. 0.8% in December of 2010.
Inflation is here and should increase significantly this year. Start to prepare now for a significant erosion in purchasing power and higher interest rates, whether Mr. Bernanke likes it or not.
Friday, February 4, 2011
Why Would the Market Shrug Off a Bad Jobs Report?
One reason could be statistics. There was an alarming plunge in the number of people in the labor market. People drop out for many reasons including going back to school, retired, have given up looking for a job, etc. So, in spite of only creating a net of 35,000 jobs last month, the unemployment rate dropped from 9.4 percent to 9.0 percent. That number sure sounds better.
Another reason might be conflicting surveys. The 35,000 jobs created is from the Payroll Survey which is a survey sent to businesses. This survey is where the government gets the number of jobs created which is reported each month. By the way, the margin of error here is 100,000 jobs. The other survey is the household survey which is a telephone survey. This survey is used to determine the percent of people employed/unemployed. This survey showed a jump in employment of 598,000 jobs which measured against a reduced labor force number resulted in a reduction in unemployment to 9.0 percent.
There are a lot of other statistics that could be analyzed, but the most compelling for me is the amount of new money being pumped into the economy by the Federal Reserve: over $100 billion per month and yet GDP is only rising (or “growing”) by about $40 billion per month. Where this money is going will be the subject of another post. But, this money is levitating the economy and Mr. Bernanke said in testimony last week that until the jobs situation turns around (not sure of his definition but it’s not 35,000 jobs per month) the Fed is going to continue to pump money into the economy. If so, GDP rises which filters into the capital markets. So, what’s a bad number or two?
Another reason might be conflicting surveys. The 35,000 jobs created is from the Payroll Survey which is a survey sent to businesses. This survey is where the government gets the number of jobs created which is reported each month. By the way, the margin of error here is 100,000 jobs. The other survey is the household survey which is a telephone survey. This survey is used to determine the percent of people employed/unemployed. This survey showed a jump in employment of 598,000 jobs which measured against a reduced labor force number resulted in a reduction in unemployment to 9.0 percent.
There are a lot of other statistics that could be analyzed, but the most compelling for me is the amount of new money being pumped into the economy by the Federal Reserve: over $100 billion per month and yet GDP is only rising (or “growing”) by about $40 billion per month. Where this money is going will be the subject of another post. But, this money is levitating the economy and Mr. Bernanke said in testimony last week that until the jobs situation turns around (not sure of his definition but it’s not 35,000 jobs per month) the Fed is going to continue to pump money into the economy. If so, GDP rises which filters into the capital markets. So, what’s a bad number or two?
Tuesday, January 25, 2011
Consumer Spending Jumps, But Where Did They Get The Money?
Economists recently increased their estimates for GDP growth in 2011 after retail sales jumped in December. Did wages jump, no. Did employment jump, no. So where did these consumers get the money?
I don’t think consumers got it from paying off old debts. The consumer debt to disposable income ratio has dropped from 15 percent to 13.96 percent over the past three years (but mostly due to reduced interest rates). The amount of debt remains very high. It has dropped 3.5% over the last two years, but it has only dropped from $13.92 trillion to $13.42 trillion (and much less home equity to offset that debt.)
So it’s pretty obvious consumers received this new money from the government. Maybe the new near $900 billion dollar, December stimulus program (tax cuts, payroll tax deduction, extended unemployment benefits, accelerated depreciation, etc.). Or the $100 billion dollar a month deficit we are financing. Or the monthly $75 billion dollar Quantitative Easing (economist talk for printing money) program under way by the Federal Reserve.
Much of this money will go to either propping up GDP or increasing GDP. Either way, it’s just like the stimulus program, it’s temporary. That is unless we get new, temporary, “investments” (political talk for spending) in the months ahead.
I don’t think consumers got it from paying off old debts. The consumer debt to disposable income ratio has dropped from 15 percent to 13.96 percent over the past three years (but mostly due to reduced interest rates). The amount of debt remains very high. It has dropped 3.5% over the last two years, but it has only dropped from $13.92 trillion to $13.42 trillion (and much less home equity to offset that debt.)
So it’s pretty obvious consumers received this new money from the government. Maybe the new near $900 billion dollar, December stimulus program (tax cuts, payroll tax deduction, extended unemployment benefits, accelerated depreciation, etc.). Or the $100 billion dollar a month deficit we are financing. Or the monthly $75 billion dollar Quantitative Easing (economist talk for printing money) program under way by the Federal Reserve.
Much of this money will go to either propping up GDP or increasing GDP. Either way, it’s just like the stimulus program, it’s temporary. That is unless we get new, temporary, “investments” (political talk for spending) in the months ahead.
Monday, January 10, 2011
Are Bonds (Fixed Income) at a Tipping Point? Part Duo
The first of November, my Market Update asked if bonds were at a tipping point because they were not responding as Fed Chairman Bernanke wanted (lower interest rates, lower dollar and increased commodity prices.) I also said that we would know more within the next few months.
Since then, the 10 year Treasury has moved down very slightly or about 20 basis points (0.20). However, the yield curve has steepened (short rates down and long rates higher.) Not what Bernanke wanted (unless he wanted to make the environment for bank profits better.)
The dollar has been rising not falling. But the problem is that other countries are not going to simply sit back and let the U.S. devalue the dollar (to improve exports), so they have responded by devaluing their currency in order to compete. This currency war can’t go on forever, but in the meantime, it is destructive.
Commodity prices are about the same.
It seems that there is no definitive answer yet, but there is a lot of new money going into the banking system and the banks have three choices of what to do with the money:
1.Sit on these new assets and collect the overnight interest rate from the Federal Reserve, or
2.Lend this money out to companies and individuals who want to borrow money. There is not much of this going on because banks are sitting on nearly a trillion dollars of excess assets, (maybe banks don’t want to lend or maybe borrowers don’t want to borrow.) or
3.Buy assets with this money (bonds, stocks, commodities, foreign investments, etc.) Contrary to what many people think, banks do not need to lend money to borrowers to make profits, they can invest the money here and abroad, wherever they can make the most money.
Another thing that seems to be going on here is that we have not seen much inflation (by government statistics) in spite of all the new money that’s been created. The reason many people think is that inflation will not happen until those trillions of dollars in excess assets get turned into trillions of dollars of credit.
So, think about this, if the economy does turn around or people think it has turned around; and suddenly want to use credit, would those trillions of dollars of credit turn into instant inflation? If so, that may not be good for the bond (fixed income) market as investors will want to be paid for the inflation risk.
Since then, the 10 year Treasury has moved down very slightly or about 20 basis points (0.20). However, the yield curve has steepened (short rates down and long rates higher.) Not what Bernanke wanted (unless he wanted to make the environment for bank profits better.)
The dollar has been rising not falling. But the problem is that other countries are not going to simply sit back and let the U.S. devalue the dollar (to improve exports), so they have responded by devaluing their currency in order to compete. This currency war can’t go on forever, but in the meantime, it is destructive.
Commodity prices are about the same.
It seems that there is no definitive answer yet, but there is a lot of new money going into the banking system and the banks have three choices of what to do with the money:
1.Sit on these new assets and collect the overnight interest rate from the Federal Reserve, or
2.Lend this money out to companies and individuals who want to borrow money. There is not much of this going on because banks are sitting on nearly a trillion dollars of excess assets, (maybe banks don’t want to lend or maybe borrowers don’t want to borrow.) or
3.Buy assets with this money (bonds, stocks, commodities, foreign investments, etc.) Contrary to what many people think, banks do not need to lend money to borrowers to make profits, they can invest the money here and abroad, wherever they can make the most money.
Another thing that seems to be going on here is that we have not seen much inflation (by government statistics) in spite of all the new money that’s been created. The reason many people think is that inflation will not happen until those trillions of dollars in excess assets get turned into trillions of dollars of credit.
So, think about this, if the economy does turn around or people think it has turned around; and suddenly want to use credit, would those trillions of dollars of credit turn into instant inflation? If so, that may not be good for the bond (fixed income) market as investors will want to be paid for the inflation risk.
Monday, January 3, 2011
More Money Or Less Money In 2011, That's The Key
Will 2011 be the year the US creates massive amounts of new money to "solve" our problems and temporarily levitate our GDP? Or the year of austerity and GDP contraction? It seems to me the key to 2011 is more money or less money.
Economists, politicians and pundits have developed lists and lists of problems, strategies, and opportunities we face in the coming year; and there are many. With a few exceptions, they all seem to boil down to money.
Will the government decide that it has to create or print more money, even though we know we have to borrow it and worry about the burdensome debt later. By the way, the government just added about a trillion dollars in additional debt with the "tax compromise" bill they passes just before Christmas. If we print more money, the argument goes, we could:
1.Get the debt ceiling limit of $14 trillion raised before we reach it in March
2.Pay for the estimated budget deficit of $1.5 to $2.0 trillion again this year
3.Transfer money to the states so they could meet their out-of-control budgets. They will be about $200-400 billion dollars short this year and next.
4.Try to get our arms around the housing problem. The billions of dollars spent to date haven't solved the problem and now we could be looking at a double dip in housing.
5.The additional money banks will need if housing prices continue to decline causing millions more defaults and foreclosures
6.Add more government spending (stimulus) to fill the spending gap caused by consumers lack of spending.
Or will the government decide to cut spending and save the country from default or hyperinflation. Contraction of the money supply however, will cause GDP (the mathematical model we use to represent the economy) to decline. And yes, money contraction is deflation. That's how we get to equilibrium so we can get this recession over.
Within the first three months of this new congress we should know which direction our government central planners intend to go. Make plans. Be ready.
Economists, politicians and pundits have developed lists and lists of problems, strategies, and opportunities we face in the coming year; and there are many. With a few exceptions, they all seem to boil down to money.
Will the government decide that it has to create or print more money, even though we know we have to borrow it and worry about the burdensome debt later. By the way, the government just added about a trillion dollars in additional debt with the "tax compromise" bill they passes just before Christmas. If we print more money, the argument goes, we could:
1.Get the debt ceiling limit of $14 trillion raised before we reach it in March
2.Pay for the estimated budget deficit of $1.5 to $2.0 trillion again this year
3.Transfer money to the states so they could meet their out-of-control budgets. They will be about $200-400 billion dollars short this year and next.
4.Try to get our arms around the housing problem. The billions of dollars spent to date haven't solved the problem and now we could be looking at a double dip in housing.
5.The additional money banks will need if housing prices continue to decline causing millions more defaults and foreclosures
6.Add more government spending (stimulus) to fill the spending gap caused by consumers lack of spending.
Or will the government decide to cut spending and save the country from default or hyperinflation. Contraction of the money supply however, will cause GDP (the mathematical model we use to represent the economy) to decline. And yes, money contraction is deflation. That's how we get to equilibrium so we can get this recession over.
Within the first three months of this new congress we should know which direction our government central planners intend to go. Make plans. Be ready.
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