Show Me The Money!

July, 19, 2012

According to Chairman Bernanke’s testimony in Congress the other day, he said he is concerned by two major events: The Fiscal Cliff on January 1, 2013 (expiration of the Bush tax cuts and the imposition of new taxes in the health insurance program) and the deteriorating situation in Europe. Oh yea, the economy is “growing” too slowly and employment levels are unacceptable. Also, that the Federal Reserve stands ready to add additional “accommodation” if necessary.

 

Here is the translation: without more money from the government, the economy is headed back into recession. Why?

 

1. We have not solved the problems associated with the b bursting of the financial bubble (bank, housing, consumer debt, etc.)
2. The “solution” (increasing the money supply) we have taken has made matters worse.

• Stimulus wasted
• QE1, QE2, Twist, Zero interest rate policy, etc. causing mal-investment
• Chronic, excessive spending at over $1 trillion per year
• Regulations that don’t make sense and are undefined
• We haven’t even discussed current mal-investments (other bubbles) like education, free healthcare, bloated government and financial system.)

3. Will more money solve our problem? No, but we have been able, through massive insertions of money, to “reduce the pain” of recession by postponing reality; but this only means that it will take longer and the problems will get more severe when we are forced to deal with reality. For example:

 

• We have added, in sovereign debt alone, $9 trillion (nine thousand billion dollars) and we can not even cut one billion from our spending.)
• Our debt is now (before next year’s budget and a new higher debt limit) at 102% of our GDP. That of course is before corporate debt, consumer debt, state and municipal debt, etc.)
• Even more troubling is that our sovereign debt is now at 10% of our revenues (taxes) and 10% is the line that determines risk and no risk. And that’s at our current low interest rates. Therefore, going forward, by definition, U.S. Treasuries will no longer be “risk free;” and you can see what’s happening in Europe. 

Will we solve our economic problems?

 

Yes. But the method and timing are uncertain. In the meantime, we are left with letting the economy slide back into recession (enabling the problems solve themselves) and accepting the pain that goes with it OR adding more paper money and trying to kick the can a little farter down the road. My guess is that the politicians will, when they begin to feel the pain of reelection, show us the money.

 

It is theoretically possible to get a politician to define and articulate a strategy to get our economy back to reality in X number of years. But, if that politician doesn’t show up soon, we will eventually be left with two options: default or very high inflation.

 

Our economy and markets are now unfortunately left to the whims of politicians which mean we have to think differently and adjust our strategies to match reality.

 

Three Big Events Coming In The Next Two Weeks

June 14, 2012

Everyone knows we have lots of headwinds facing the U.S. and the global economies over the course of this year. But, I wanted to comment on three events that could move the markets in the next two weeks.


First is the Greek election on Sunday, the 17th.

The conventional story is that if the far left party, headed by SYRIZA, wins, he will negate the "Memorandum of Understanding" that the Greeks made with the EU in order to get their latest bailout money. If that happens, many feel that Greece would have to voluntarily leave the Euro and go back to their old currency which would be very painful in the short term or the EU would have a reason expel Greece from the Euro. The election is too close to call.

From everything I can find it looks like SYRIZA may modify his view to one of re-negotiation rather than simply tearing up the Memorandum. One reason is that a survey says 80% if Greeks want to stay with the Euro; they just don't want the severe austerity that goes with the agreement. Also, Spain just received a promise of a bailout package without the severe austerity demands placed on Greece. Also, a large number of SYRIZA's supporters are government workers and want to keep getting paid.
Therefore, on Monday morning, the S&P500 could open up much higher or much, much lower. And this is not to mention Egypt with the military decree that the last election was illegal.
Second is the decision of the Federal Reserve on Wednesday, the 20th

The country is disproportionally divided on whether the government should inject more money into the system. Keynesians are demanding additional government spending and money printing. Keynesian-Lite's are demanding tax cuts and defense spending paid for with borrowed money. Net, more spending and more printing of money.

The markets appear to be waiting for the Fed announcement which they believe will be for more printing or QE3. Or at the least, more "Operation Twist" for a few months with QE3 coming soon. If the Fed says they are standing pat, it could disappoint. If the Fed's goal is to keep markets stable or prices stable, they need inflation (QE3 which is money going into banks so they can drive up asset prices) to offset the deflation going on in depressed industries.

Therefore, we could have a much higher market or a much lower market on Wednesday.

Third is the Supreme Court Decision on ObamaCare

The Supreme Court usually announces decisions on Monday's in June before they recess for the summer. This means next Monday or the following Monday. The two big issues I think are the mandate that everyone is required to buy health insurance or pay a fine/tax; and if the court will through out the entire 2,000 some page law altogether.

The result will move the market either way.

I Am Schocked!

June 6, 2012 European politicians have announced that they have found a way to keep the banquet going for a while longer. Isn't that what politicians are supposed to do: keep kicking the can down the road past the next election?) They are in the process of putting together a program to refinance Spain's banks through European guaranteed loans. Not recapitalize the banks but get them refinanced. According to the press reports, Germany will agree to this (it can't be done without German guarantees); and Spain will agree because they will not impose an austerity program on them like they forced on Greece. When is this supposed to happen? After the banks are audited, they expect a package ready by the beginning of July. Will this actually happen? Who knows but there is great pressure on Germany, even Tim Geithner is telling Europe to do something (and it not to pay taxes.) Also, for a small kick down the road and more time, the short-term costs to Germany may be less than the long-term costs. Maybe they can even get help form the U.S. Many Keynesian economists are telling Bernanke to help. Even Steve Liesman of CNBS called for the US to help bail out Europe. The rhetoric is beginning to change here also from "we're done" to more stimulus and money printing. Isn't that what politicians are suppose to do? Yesterday in the Wall Street Journal, Jon Hilsenrath wrote an article about how the Fed may now be ready to be more accommodative (Federal Reserve information is often leaked through Jon). He indicated it could be a short-term extension of the "Twist" program while they wait for more negative economic news or maybe direct purchase of bonds. Timing could be June20 meeting or maybe August depending on how they see the economy performing. Are you shocked?

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.

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?

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.