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Current expectations say the economy (as represented by GDP) is recovering slowly but that growth will rise in the second half of the year; yet economic data points in the opposite direction. Which view is correct?
In the short-term, expectations are what drives the market. Current expectations assume that the “gap” in demand (consumer spending) can be filled by enough government spending; and that the markets (securities and housing) can be levitated by the Federal Reserve pumping $100 billion per month into banks to keep mortgage rates low and allow the banks to invest in equities etc.) Then, when the markets rise, housing prices rise and the spending gap is filled, the government and the Fed can begin withdraw money from the economy and raise interest rates. This “improving economy” story is told and repeated 24/7.
When a negative data point comes along like the jobs report on Friday (expectations of adding 193,000 jobs turns out to be 88,000 jobs on a model adjusted basis); they report the headline but focus on a single positive data point within the report like hours increased 0.1% and extrapolate from that single data point that things are still improving. They do the opposite when the headline number meets expectations like the prior months jobs report and ignore the underlying data points like the huge number of those jobs that were part-time, low-pay and no benefit jobs.
Net: current status quo maintained.
In the long-term, expectations will have to adjust to reality. This recession is not the result of an “inventory correction cycle” (prices rising faster than supply); this recession was caused by a debt cycle (debt rising faster than incomes.) Therefore, to get back on track, we have to reduce debt (sovereign, corporate and personal) to not only sustainable levels, but to levels where credit expansion can take place again. So, in the long-term, expectations are that economic growth is falling.
Net: the market is very short-term oriented; therefore, you must be positioned both positively and negatively.
Showing posts with label jim zitek. Show all posts
Showing posts with label jim zitek. Show all posts
Monday, April 8, 2013
Friday, February 22, 2013
More Of The Same
February 13, 2013
Opinion
Opinion
The President's message last night was, as expected, simply more of the same: More spending and more taxes.
It was expected because the presumptive opinion in America (as defined by politicians, economists and the media) is that the government will find a way to deal with our problems -whatever they are- and that we do not need to worry.
This view, made popular during FDR's reign and reinforced and expanded since by both political parties, believe that the government can and should inject itself into the economy because the economy needs to be managed. That market forces cannot do the job.
The president said we need to do more. I interpret that to mean we need to take more money from the people who earned it, the producers, because the 50-60+% percent being taken now isn't enough or even fair. And besides, the government knows how to spend this money better than the people who earned it.
You may think differently but right now we live, work and invest in this Keynesian world; therefore, going forward we can expect the following:
1. Governments (all levels) will continue to spend excessively and borrow or print more money because there is no incentive to stop (see ZIRP below.) When the States get into trouble, they believe the Federal Government will bail them out.
2. The Federal Reserve will continue their Zero Interest Rate Program (ZIRP) for as long as they can to help banks (it's their job); and to keep interest rates low to "help" people buy/refinance their homes. And maybe one other thing, the Federal Government can't afford to have rates rise because every 1% rise in interest rates will cost the government over $150 billion per year in additional interest.
3. Currently, the Federal Government is running close to $100 billion per month in deficit spending and the Federal Reserve is printing and pumping in another $105 billion per month. The results so far are not too good however. Preliminary Fourth Quarter GDP decreased at an annual rate of -0.1%. But, it's only been four years.
4. Normally, increasing money supply causes inflation. However, even with the trillions of dollars injected into the economy, we do not see inflation as measured by the Consumer Price Index (CPI.) One reason is of course the way CPI is calculated. The other is that the money being injected by the Fed is going directly into the banks. The banks are not lending the money because they can make more money by buying assets (stocks, bonds, currencies, foreign investments, etc.)
4. Therefore, we have a kind of stealth inflation because real inflation is not visible in the usual places. However, inflation is visible in asset prices (stocks, bonds, metals, etc.) because that is where the banks are "investing" their free or almost free money from the Fed.
5. This kind of malinvestments will eventually cause "cost-push inflation" (increased costs of materials including energy and labor will force prices up and thereby reduce supply.) Reduced supply then causes prices to increase.
6. Today, the government cannot raise rates to combat rising prices (remember Paul Volker) because U.S. debt is too large and interest on the debt would become unaffordable. Nominal rates on the 10-year Treasury of 5% would increase interest payments close to the size of the Defense budget.
So what do we know after the President's speech? The government is going to keep pumping money into the economy raising nominal GDP, asset prices (including the markets) and inflation. We will need to continue investing like a Keynesian whether you believe in this dogma or not, but keep an eye out for the black swan.
Wednesday, May 23, 2012
When Will The Federal Reserve Begin Printing Money?
Not being an insider, I don’t know. However, here are some of the estimates:
1.When the S&P500 gets down to 1150 (currently at 1290) where it was last December.
2.When the 10 year Treasury yield gets down to 1.5% (where it was the last time they intervened.)
3.When we get a series of really bad numbers on the economy (like the Philadelphia Fed report last week.)
4.When Chairman Bernanke “sees” prices decline (i.e., Consumer Price Index) as he fears deflation.
5.When Chairman Bernanks needs to keep the dollar from rising too high (which hurts exports and the recovery) and because he needs to support the Euro to prevent a disaster.
6.When Chairman Bernanke needs to help the European Central Bank flood the financial system with liquidity if/when Greece votes to exit the Euro and austerity.
Are We Headed For A Recession Or Another Money Bounce?
May 16, 2012
As I have been saying for some time now, the U.S. economy is headed toward “another” recession within the next few months, maybe June or July. The only thing that will temporarily stop and reverse this trend is another huge stimulus package or more money printing by the Federal Reserve.
Printing and spending more money will not solve our economic problems, it will only make matters worse in the long-term because the money will be gone and the debt will be even higher (Thanks Grandpa!) BUT, it will produce some hopium to lift the economic numbers and the market. This seems to be the politicians’ only solution to the problem. But, even this is getting more difficult to accomplish. In the first three months of this year, over $300 billion was “printed and pumped into the economy” yet GDP only increased a little over $150 billion.
There are a lot of reasons for the view described above including:
1.Money Supply. With QE’s done and the “Twist” program about to end, the pace of money coming into the economy has been slowing down for a couple of months. The pace of money injection is as important as the amount and has about six month lag time.
2.Credit. The yield curve (the price of credit over time) is being artificially held down by the Federal Reserve forcing savers and investors to take on more risk to get any yield. However, for the past few weeks, the credit markets have been telling us that an economic slowdown is coming. For, example, the yield on the 10 year Treasury is down to 1.75% and on the other side of the coin, the price of high yield instruments have been selling off (pricing in recession risk.)
3.Economic Indicators. The forty some economic indicators that come out each month have been showing many negatives, regardless of the “Headline Spin” being used to make it sound like things are improving. For example, for the past month, the weekly “Unemployment Claims” have carried headlines stating that the numbers of claims are down from the previous week. Yet, each week, they report that the claims the prior week were adjusted upward resulting in the current week’s claims being less. Net result is claims were up for the month but they were reported down each week. Shouldn’t random adjustment go in each direction?
4.There are also a lot of headwinds to be resolved like the deficit ceiling (estimate we will have to raise it again in October), 2013 budget (September), the “Doc Fix” for Medicare (December), the “Bush Tax Cuts” (December), and lots more.
Did I mention it’s an election year?
Back to paragraph one. This economy is headed for another recession and the only way politicians know how to change that trajectory is by printing more money. Therefore, I expect to see some form of QE3 or Stimulus soon; maybe at the June Fed meeting.
Wednesday, May 9, 2012
A Marginal Improvement in Employment? Maybe.
May 7, 20012
April’s Non-Farm Employment Report showed an increase of 115,000 jobs plus an additional 59,000 jobs in revisions for February and March. Unemployment rate dropped to 8.1% (due to reductions in labor force participation.) This is a marginal improvement because it exceeds the estimated number of new people entering the labor force each month. Also, long-term this number is very important; but this data point is a lagging indicator not a leading indicator.
The two leading indicators in this report: (1) wages, which were unchanged (negative if inflation included) and (2) hours worked which was unchanged as well at 34.5 hours per week. The net result was a very weak report.
This means both political parties will shout that something has to be done. The Keynesian-Left wants the government to borrow even more money for another round of stimulus to “fill the gap” in consumer spending; and then reduce spending sometime in the future. The Keynesian-Right wants the government to borrow even more money to reduce taxes and stimulate supply; and then reduce spending sometime in the future. Do you think the economists or the politicians really know what supply and demand means or how it works? If they did, they would attack the cause rather than the symptom.
There are a couple of real concerns however in this jobs report. One is that the model used to seasonally adjust this data has not been adjusted for the warm winter whether. The seasonally adjusted model has now added about 4.9 million jobs (jobs the government expects will materialize in the future) which will be re-adjusted (removed) from the actual numbers later in the year. Hopefully that will happen.
The other concern is that we are loosing full-time jobs (-812,000 in April) and replacing them with part-time jobs (+508,000 in April). What kinds of jobs are being created? This trend has been going on for some time now. This may also be a reason that wages are not moving higher.
With 90,000 people entering the workforce each month, and an election only months away, this slow jobs growth problem will become very important. Can you say QE3?
Thursday, April 12, 2012
Will The Fed Print More Money?
April 12, 2012
This is an important issue right now, especially in this election year. Consensus is mixed, depending on one’s view of the “recovery”, but the market appears to have melted up in anticipation of the Fed injecting more money into the economy. Then, when the minutes of the last Fed meeting were released on March 19th, the consensus of the committee was that the economy was slowly improving but they acknowledged that employment was still a concern. Therefore, additional accommodation (printing money) by the Fed may not be necessary. However, since then, the market has begun to sell off and one reason is its disappointment with the Fed’s position to not inject more money right now. Do you think the Fed really means this? Here are some thoughts from the different sides of this argument.
The Keynesians (mostly Democrats) View
In a recent article in the New York Times, Paul Krugman argued the following:
1. Because the Fed expects low inflation and high unemployment, the Fed should be much more accommodative in order to accelerate the recovery. If we don’t, we will choke off the recovery.
2. The reason we would not be more accommodative is the Republican’s misplaced fear of inflation.
3. But, we can’t worry about inflation; we should be more worried about employment. In fact, inflation of 4-5% would be a good thing. Not a bad thing.
The Keynesian-Lite (mostly Republicans) View
In a recent report written by Brian Wesbury of First Trust, he argued the following:
1. The Fed has finally admitted the economy has improved and took QE3 off the table. There is no need to print additional money.
2. Monetary policy has been accommodative, but monetary policy is not the driving force behind the market, profits are…and profit growth will continue.
3. The Fed will start raising interest rates before its stated date of late 2014. Increasing rates will keep inflation in check.
Capitalists/Austrian Economists View
1. The economy is still in recession as none of our problems have been solved. But, the Fed has already printed too much money and is prolonging the recession with additional injections of money. The only think they have accomplished is unsustainable debt and they are laying a foundation for inflation.
2. We have printed and spent $8.5 trillion dollars in the past four years. This money has raised nominal GDP. That’s because GDP is a mathematical model in which every new dollar created adds (arguably because nominal GDP has risen only $1.4 trillion) a dollar to GDP. But now the money has been spent, we have the debt and real growth has not occurred (8 million jobs lost, 7 million homes in foreclosure, banks under capitalized, interest expenses exceed 10% of income (tax revenues), wages have not kept up with inflation, sovereign, corporate and personal debt, etc.)
3. Now however, the pace of new money creation has slowed for the past two months. Because the money created with credit has been spent, the Fed has to create more money each year than it created in the previous year or the total amount of money supply contracts…. which contracts GDP.
4. Also, Bernanke and the Fed believe we are in a cyclical recession (normal, shallow) versus a systemic recession (major, caused by structural changes.) Therefore, they believe they can fill the spending “gap” with government spending which draws consumers back into the market and ends the recession. This recession is far more serious than a temporary gap in consumer spending.
Conclusion
This recession is far more serious than a temporary gap in consumer spending.
We have below trend growth and stagnant incomes and we have an election year. Do you think the politicians will print more money and kick the can down the road past the election or opt for austerity and a return into recession? I think the answer is they will print more money, but they need “an excuse” to do so (i.e., a bad jobs number or a market sell off or a war or?) because some voters are worried about our ever increasing debt. Therefore, we are now on a path toward more money, more debt or a deeper recession.
This is an important issue right now, especially in this election year. Consensus is mixed, depending on one’s view of the “recovery”, but the market appears to have melted up in anticipation of the Fed injecting more money into the economy. Then, when the minutes of the last Fed meeting were released on March 19th, the consensus of the committee was that the economy was slowly improving but they acknowledged that employment was still a concern. Therefore, additional accommodation (printing money) by the Fed may not be necessary. However, since then, the market has begun to sell off and one reason is its disappointment with the Fed’s position to not inject more money right now. Do you think the Fed really means this? Here are some thoughts from the different sides of this argument.
The Keynesians (mostly Democrats) View
In a recent article in the New York Times, Paul Krugman argued the following:
1. Because the Fed expects low inflation and high unemployment, the Fed should be much more accommodative in order to accelerate the recovery. If we don’t, we will choke off the recovery.
2. The reason we would not be more accommodative is the Republican’s misplaced fear of inflation.
3. But, we can’t worry about inflation; we should be more worried about employment. In fact, inflation of 4-5% would be a good thing. Not a bad thing.
The Keynesian-Lite (mostly Republicans) View
In a recent report written by Brian Wesbury of First Trust, he argued the following:
1. The Fed has finally admitted the economy has improved and took QE3 off the table. There is no need to print additional money.
2. Monetary policy has been accommodative, but monetary policy is not the driving force behind the market, profits are…and profit growth will continue.
3. The Fed will start raising interest rates before its stated date of late 2014. Increasing rates will keep inflation in check.
Capitalists/Austrian Economists View
1. The economy is still in recession as none of our problems have been solved. But, the Fed has already printed too much money and is prolonging the recession with additional injections of money. The only think they have accomplished is unsustainable debt and they are laying a foundation for inflation.
2. We have printed and spent $8.5 trillion dollars in the past four years. This money has raised nominal GDP. That’s because GDP is a mathematical model in which every new dollar created adds (arguably because nominal GDP has risen only $1.4 trillion) a dollar to GDP. But now the money has been spent, we have the debt and real growth has not occurred (8 million jobs lost, 7 million homes in foreclosure, banks under capitalized, interest expenses exceed 10% of income (tax revenues), wages have not kept up with inflation, sovereign, corporate and personal debt, etc.)
3. Now however, the pace of new money creation has slowed for the past two months. Because the money created with credit has been spent, the Fed has to create more money each year than it created in the previous year or the total amount of money supply contracts…. which contracts GDP.
4. Also, Bernanke and the Fed believe we are in a cyclical recession (normal, shallow) versus a systemic recession (major, caused by structural changes.) Therefore, they believe they can fill the spending “gap” with government spending which draws consumers back into the market and ends the recession. This recession is far more serious than a temporary gap in consumer spending.
Conclusion
This recession is far more serious than a temporary gap in consumer spending.
We have below trend growth and stagnant incomes and we have an election year. Do you think the politicians will print more money and kick the can down the road past the election or opt for austerity and a return into recession? I think the answer is they will print more money, but they need “an excuse” to do so (i.e., a bad jobs number or a market sell off or a war or?) because some voters are worried about our ever increasing debt. Therefore, we are now on a path toward more money, more debt or a deeper recession.
Friday, March 30, 2012
The markets are at the top of their range, where do we go from here?
March 21, 2012
Simple question but difficult to answer. Here is the long answer.
I still think that we are getting near a tipping point with both the economy and the markets. The “economy continues to improve” groups are basing their argument on headline numbers. For example,
1. Auto sales are up slightly but inventories are even higher;
2. or an average 200,000 jobs have been created over x months but that is not enough and half the jobs are part-time and for lower wages;
3. Or manufacturing and service indexes are over 50 and therefore show “modest growth,” but are higher inventories good for the economy or just GDP index.
4. Corporate profits are high (decades high levels) and going higher (implies margins will continue to expand), but many indications that margins will contract (rising costs, gasoline hurting consumers, increasing housing foreclosures mean people have to move and pay rent rather than spending their mortgage payment on restaurants and cars, etc.)
5. The warm whether is also a factor being ignored by the Fed’s models.
At the same time, the money the Federal Reserve and deficit spending have pumped into the economy is going into the markets as Bernanke wants to get them animal spirits going; and he is being helped by the media: consumer sentiment is improving and the VIX (volatility or risk measure) is now extremely low (what risk can there be?)
“Darth Vader” on the other hand is looking at the fact that the pace of money supply(the key driver of GDP) has started to contract and that means decline for the GDP by June/July unless there is a new stimulus program or QE3+.
I think the Fed is looking for an “excuse” to print more money but it can’t look like a political move so he needs some economic data to point to in order to pull the trigger. This could be some bad economic numbers or a market correction along with a correction in gold and silver. Or it could be done through stimulus as we prepare for to engage in another war.
Net/Net: The economy remains in recession and looks to stay there for some time because we have not addressed any of the issues that brought us into this recession or are keeping us there (spending, debt, central planning, printing money, government interference in the economy and markets, etc. etc.
But, the $8 trillion dollars pumped into the economy has helped GDP’s and increased assets. This is what politicians (including Fed Reserve politicians) do. It seems to be the only thing they know how to do. Therefore, I expect another round of stimulus or money printing in time to help the elections and before the new debate on the debt limit ceiling which will likely be reached by October.
Investments must be flexible (risk on, risk off) because the exact shape and timing of the markets are unknown; and tradable (for protection and opportunities) until the longer trend becomes known.
Net/Net: The short answer is that the market is at the top of its range and can only be held there by more action from the government.
Simple question but difficult to answer. Here is the long answer.
I still think that we are getting near a tipping point with both the economy and the markets. The “economy continues to improve” groups are basing their argument on headline numbers. For example,
1. Auto sales are up slightly but inventories are even higher;
2. or an average 200,000 jobs have been created over x months but that is not enough and half the jobs are part-time and for lower wages;
3. Or manufacturing and service indexes are over 50 and therefore show “modest growth,” but are higher inventories good for the economy or just GDP index.
4. Corporate profits are high (decades high levels) and going higher (implies margins will continue to expand), but many indications that margins will contract (rising costs, gasoline hurting consumers, increasing housing foreclosures mean people have to move and pay rent rather than spending their mortgage payment on restaurants and cars, etc.)
5. The warm whether is also a factor being ignored by the Fed’s models.
At the same time, the money the Federal Reserve and deficit spending have pumped into the economy is going into the markets as Bernanke wants to get them animal spirits going; and he is being helped by the media: consumer sentiment is improving and the VIX (volatility or risk measure) is now extremely low (what risk can there be?)
“Darth Vader” on the other hand is looking at the fact that the pace of money supply(the key driver of GDP) has started to contract and that means decline for the GDP by June/July unless there is a new stimulus program or QE3+.
I think the Fed is looking for an “excuse” to print more money but it can’t look like a political move so he needs some economic data to point to in order to pull the trigger. This could be some bad economic numbers or a market correction along with a correction in gold and silver. Or it could be done through stimulus as we prepare for to engage in another war.
Net/Net: The economy remains in recession and looks to stay there for some time because we have not addressed any of the issues that brought us into this recession or are keeping us there (spending, debt, central planning, printing money, government interference in the economy and markets, etc. etc.
But, the $8 trillion dollars pumped into the economy has helped GDP’s and increased assets. This is what politicians (including Fed Reserve politicians) do. It seems to be the only thing they know how to do. Therefore, I expect another round of stimulus or money printing in time to help the elections and before the new debate on the debt limit ceiling which will likely be reached by October.
Investments must be flexible (risk on, risk off) because the exact shape and timing of the markets are unknown; and tradable (for protection and opportunities) until the longer trend becomes known.
Net/Net: The short answer is that the market is at the top of its range and can only be held there by more action from the government.
Friday, March 9, 2012
Sovereign Bond Risks to Increase Significantly
February 21, 2012
If you remember, we were frightened when the U.S. Government threw out two hundred years of settled law when they arbitrarily threw out the superior claims of General Motors' bondholders in favor of the subordinated claims of the shareholders and unions. But, we have since dismissed this incident as being just against one company; and besides it was politically expedient.
However, we did the exact opposite in the financial crisis when we saved the bondholders with public funds. Again, it was politically expedient.
Saturday, the European Central Bank (ECB) did something they may regret later. They exchanged their existing Greek bonds for "New Greek" bonds that are not subject to the "collective action clause" (which allows a supermajority of bondholders to agree to a debt restructuring.) Now, under the new terms, the ECB has first claim to Greek assets over all other bondholders. They did this without the other bondholders consent and without objection from other European nations.
In other words, the ECB can now retroactively change the terms of any bond contract. For example, who has the superior claims against assets, the interest rates, the maturities, etc. at any time it's to their advantage and without bondholder acceptance. No rule of law. No judicial appeal.
Bond buyers will now have to reassess the current value of European bonds for this new risk and then evaluated them against U.S. Treasuries where we have had the rule of law. This increased risk should have an impact on Europe and on our markets.
If you remember, we were frightened when the U.S. Government threw out two hundred years of settled law when they arbitrarily threw out the superior claims of General Motors' bondholders in favor of the subordinated claims of the shareholders and unions. But, we have since dismissed this incident as being just against one company; and besides it was politically expedient.
However, we did the exact opposite in the financial crisis when we saved the bondholders with public funds. Again, it was politically expedient.
Saturday, the European Central Bank (ECB) did something they may regret later. They exchanged their existing Greek bonds for "New Greek" bonds that are not subject to the "collective action clause" (which allows a supermajority of bondholders to agree to a debt restructuring.) Now, under the new terms, the ECB has first claim to Greek assets over all other bondholders. They did this without the other bondholders consent and without objection from other European nations.
In other words, the ECB can now retroactively change the terms of any bond contract. For example, who has the superior claims against assets, the interest rates, the maturities, etc. at any time it's to their advantage and without bondholder acceptance. No rule of law. No judicial appeal.
Bond buyers will now have to reassess the current value of European bonds for this new risk and then evaluated them against U.S. Treasuries where we have had the rule of law. This increased risk should have an impact on Europe and on our markets.
The Drums Of War
February 20, 20012
Everyday there are additional stories about the dangers in the Middle-East and the threats posed by Iran. The next day, an even louder response. Then, came the sanctions on Iran and now the U.S. and NATO have began to tighten those sanctions. From an economic point of view, Iran gets 60% of its income from the sale of oil. These sanctions now include restrictions on who can buy Iran's oil in an effort to reduce their revenues and at the same time, the U.S. has put a hold on Iran's sovereign bank accounts. Logic tells you that if the sanctions work and Iran sees the "situation" as hopeless, they have nothing left to do but surrender or strike out. We know they have recently threatened to close the Strait of Hormuz.
We also know there is a rule of thumb that says currency wars (which are going on world wide now) lead to trade wars (more and more talk about tariffs, etc.) and trade wars eventually lead to real wars.
Therefore, if sanctions against Iran become crippling and they close the straits of hormuz for even five days, the price of oil would significantly increase and if something more severe would happen like the disruption of oil for 30 days, oil could jump to $200 or so. Who knows how high it could go.
Everyday there are additional stories about the dangers in the Middle-East and the threats posed by Iran. The next day, an even louder response. Then, came the sanctions on Iran and now the U.S. and NATO have began to tighten those sanctions. From an economic point of view, Iran gets 60% of its income from the sale of oil. These sanctions now include restrictions on who can buy Iran's oil in an effort to reduce their revenues and at the same time, the U.S. has put a hold on Iran's sovereign bank accounts. Logic tells you that if the sanctions work and Iran sees the "situation" as hopeless, they have nothing left to do but surrender or strike out. We know they have recently threatened to close the Strait of Hormuz.
We also know there is a rule of thumb that says currency wars (which are going on world wide now) lead to trade wars (more and more talk about tariffs, etc.) and trade wars eventually lead to real wars.
Therefore, if sanctions against Iran become crippling and they close the straits of hormuz for even five days, the price of oil would significantly increase and if something more severe would happen like the disruption of oil for 30 days, oil could jump to $200 or so. Who knows how high it could go.
Thursday, January 26, 2012
Why Is The Market So Optimistic? What’s Changed?
It’s not the economy. Not much has changed there except for a few of the many antidotal data points that are published each month. The expert’s points to three or four of the 30 reports published every month and conclude that they signal that the economy is recovering. Most don’t look at the context surrounding the data point so they don’t know what it means (do you think the guy writing headlines knows how the CPI index is adjusted for quality improvements verses price increases) or even if ”that data point” can be used to forecast the future.
There are two things that have changed. One, we continue to pile up debt (now exceeding 5 times our revenues) at a rate of $4 billion per day increasing the probability that we will have to eventually default on our sovereign debt. Two, the Federal Reserve continues to print money in increasing amounts and in many different ways like helping the European Central Banks with liquidity, or running a “Twist” program here to bring down long term rates, or the Zero Interest Rate Program (ZIRP) to help the banks and hurt savers (and force them into higher risk investment to earn any return on their investment.)
Then, yesterday, Chairman Bernanke announced that he intends to keep ZIRP in place through most if not all of 2014. Remember, both political parties were angry with Chairman Greenspan for the housing bubble because he held interest rates at one percent for a year. Bernanke intends to hold rates at zero for four years! And then, just to make things worse, he said he would be willing to “be more accommodative or in English, print more money) if the economy gets worse. Oh, by the way, he revised his estimate of GDP growth down another quarter percent.
Money supply data shows that the Federal Reserve has continued to increase the money supply and has increased the pace in the past month. In spite of what Bernanke says, this is money printing (QE3) pure and simple. Since we know that increasing money supply is how you increase GDP, the markets are pricing in the increased money supply.
There are two things that have changed. One, we continue to pile up debt (now exceeding 5 times our revenues) at a rate of $4 billion per day increasing the probability that we will have to eventually default on our sovereign debt. Two, the Federal Reserve continues to print money in increasing amounts and in many different ways like helping the European Central Banks with liquidity, or running a “Twist” program here to bring down long term rates, or the Zero Interest Rate Program (ZIRP) to help the banks and hurt savers (and force them into higher risk investment to earn any return on their investment.)
Then, yesterday, Chairman Bernanke announced that he intends to keep ZIRP in place through most if not all of 2014. Remember, both political parties were angry with Chairman Greenspan for the housing bubble because he held interest rates at one percent for a year. Bernanke intends to hold rates at zero for four years! And then, just to make things worse, he said he would be willing to “be more accommodative or in English, print more money) if the economy gets worse. Oh, by the way, he revised his estimate of GDP growth down another quarter percent.
Money supply data shows that the Federal Reserve has continued to increase the money supply and has increased the pace in the past month. In spite of what Bernanke says, this is money printing (QE3) pure and simple. Since we know that increasing money supply is how you increase GDP, the markets are pricing in the increased money supply.
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.
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.
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, 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.
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.
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