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Posts Tagged ‘stimulus’

Is Barack Becoming a Lameduck?

Posted by Larry Doyle on September 10th, 2010 8:40 AM |

To know my Dad is to love him.

He wears his heart on his sleeve and is not hesitant to let you know exactly where he stands on the issues of the day. That said, what are his passions? His family above all else. His faith. He has no problem critiquing our Roman Catholic hierarchy while practicing his faith and allegiance to the principles of Christ. Irish history. To hear him talk about the brutal treatment of the Irish at the hands of the English is a lesson worth learning. Red Sox baseball. I will admit my Dad is a fatalist when it comes to our Olde Towne Team but I got my wish that the Sox win a World Series before my Dad passed. The fact that they won twice, 2004 and 2007, is pure gravy. His golf game. Listening to him critique his short game is priceless. Another great passion is politics.

My Dad and his family grew up out of the Depression and political power was everything to the Boston Irish. Gaining control of City Hall provided access to jobs and a path to a better life. While I have my own passions, I do not share my Dad’s passion for politics. Why? As with almost everything in life, politics is about the people. While clearly our political process and political systems are critically important to our current and future well-being, I have little regard for the political crowds in general. Why do I raise this topic? We need look no farther than the state of our nation as we enter the fall 2010 election cycle. Are our national interests truly being served? Let’s navigate further.  (more…)

Second Stimulus Speculation Submarining Bonds and Supporting Gold

Posted by Larry Doyle on November 3rd, 2009 3:09 PM |

What are the biggest stories in the market today? Consider the following . . .

1. Warren Buffett makes his single largest acquisition ever with the $34 billion purchase of Burlington Northern

2. Ford posts surprisingly strong auto sales

3. Royal Bank of Scotland becomes the biggest banking bailout yet with another injection of capital

4. Johnson & Johnson announces plans to layoff 7% of its global workforce

Each of these developments is truly meaningful. Interestingly enough, numbers one and two are decidedly constructive while numbers three and four are clearly quite bearish about global prospects. Despite the magnitude of these stories, in my opinion, they pale in comparison to developments in the precious metals and bond markets today. What is happening? Let’s navigate.

The Treasury yield curve is steepening dramatically today with yields on longer term notes and bonds rising by 6 to 8 basis points, while shorter maturities are unchanged. A snapshot of the Treasury market is provided by WSJ Market Data.

Why is the curve steepening? What does that mean? What are the implications for other markets? All great questions. Let’s navigate further. (more…)

October 24, 2009: Month to Date Market Review

Posted by Larry Doyle on October 24th, 2009 7:32 AM |

Did the market merely take a breather this week or is the ‘little engine that could’ getting tired? Are we distinguishing the winners from the laggards? Are the cracks in our economic foundation repairing or are some just too large to hold back the flow of red ink, i.e. embedded losses? Perhaps we are experiencing all of the above as we continue our journey along the new and varied trails of our economy. Let’s review the major economic statistics for the week, along with the month to date returns across a wide array of market segments.

I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents. If you have any questions, please do not hesitate to ask.

ECONOMIC DATA

I largely discount positive news on the housing front as I view them largely manipulated by Uncle Sam while delinquencies, defaults, and foreclosures move ever higher. This may be an oversight on my part, but so be it.

Aside from that, I believe the most meaningful news this week was the GDP report from the UK. Please see my Friday morning commentary highlighting how the UK remains mired in recession.

Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis:

U.S. DOLLAR

$/Yen: 92.08 versus 89.68, +2.7%
Euro/Dollar: 1.500 versus 1.4635, +2.5%
U.S. Dollar Index: 75.44 versus 76.72, -1.7%

Commentary: the overall U.S. Dollar Index declined marginally this week. The dollar has improved versus the Japanese yen, but remains decidedly weak versus the Euro. The U.S. Dollar Index did break below 75.00 at one point early Friday. The correlation between the U.S. Dollar Index and the equity markets remains quite high. Both markets ended the week close to unchanged. Have too many people bought equities and commodities while having sold the U.S. greenback? I have been asking that question for the last month so no reason to stop now. The biggest impact of the weak dollar is seen in the commodity markets and long term interest rates. Commodities continue to trade with a firm tone while interest rates move higher.

I reiterate my comment from previous weeks: while I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade. On this topic, please read “Brazil Wants A ‘Real’ity Check.”

COMMODITIES

Oil: $79.65/barrel versus $70.39, +13.1% REMAINS VERY FIRM
Gold: $1055/oz. versus $1008.2, +4.6%
DJ-UBS Commodity Index: 137.32 versus 127.683, +7.5%

Commentary: I repeat from last week, unless you grow your own crops or have your own source of energy, you should expect to get increasingly squeezed as prices at the supermarket and gas station are likely to head higher. While Washington will not address this development, these price moves are directly correlated with Washington’s weak dollar policy. The banks and others able to borrow cheap money for trading and investing benefit from the weak dollar. American consumers and savers get stuck with the bill.

The  Baltic Dry Index once again moved higher and got back above the 3000 level. Is the improvement in the non-Japan Asian economic bloc for real? Certainly the economies in Europe and North American remain decidedly challenged.

I continue to believe these commodity tea leaves are an indication of inflationary expectations in these ‘inputs,’ while we encounter deflationary pressures in wages and real estate. (more…)

Dollar Devaluation Is a Dangerous Game

Posted by Larry Doyle on October 8th, 2009 9:24 AM |

Can we ‘devalue’ our way back to our days of economic ‘wine and roses?’

Many debt-laden countries throughout economic history have chosen to implicitly or explicitly pursue a devaluation of their currency as a means of improving their economies. Are the ‘wizards in Washington’ taking this approach? Aside from a few perfunctory comments in defense of the greenback, Washington has been largely silent on the topic of the declining value of the dollar. Many believe Washington very much favors a weaker currency as a means of supporting our economy. I believe this of Washington, as well. Let’s navigate.

Going back to the G20 in London last Spring, the Obama administration has attempted to curry political favor with emerging economies, especially the BRIC nations, by ceding dollar sovereigncy as the preeminent international reserve currency in return for support of global economic stimulus programs. Why does Washington believe a weak currency serves our economic interests? A weak currency generates and supports the following:

1. Promotes inflation as imports decline. Washington would like some inflation, given the massive deflationary pressures presented by falling wages and declines in the value of commercial and residential real estate.

2. Promotes exports for corporations with a multi-national presence.

3. Supports labor by making it more attractive for companies to keep jobs here as opposed to opening factories or sending work overseas.

So, in light of our current economic crisis, why wouldn’t we want a substantially cheaper dollar to maximize these benefits?

Recall that economists always need to keep certain variables static in order to study the impact of a change in another variable or multiple variables. This approach, known as ‘ceteris paribus,’ is not quite as easy as some may think. Why? Variables are NEVER static, or ‘ceteris is NEVER paribus.’ (more…)

U.S. Markets Play “Follow the Leader”

Posted by Larry Doyle on October 7th, 2009 9:40 AM |

Yesterday’s rise in rates by the Australian central bank is a bellweather sign of the global shift in the balance of economic power. While the rise in rates by the Aussies is the first central bank move, it certainly will not be the last. Why did the Aussies raise rates and what does it mean both in the short term and for the long haul? Let’s navigate.

The Australian economy did not have near the level of debt that burdens the U.S. and Europe and thus they did not need near the amount of monetary stimulus to weather this global recession. Additionally, Australia has benefited from extensive trade in the Asian hemisphere.

The knee jerk reaction in the markets was focused primarily on a selloff in the greenback which supported a move higher in commodities and global equities via the ‘positive carry trade.’ The commodity which garnered the greatest focus was gold, which moved toward $1040/ounce.

What do these moves mean? I see cross currents on the economic landscape, including:

1. The dollar may not necessarily continue to weaken, but given its current weakness it will support those companies which garner a greater degree of sales overseas.

2. A weak dollar is usually affiliated with inflation. I do not think we are in a position to look at prices in terms of one overall index. Why? Given the technical and fundamental factors in our economy, certain price components will likely project increased inflation while others will not.

To be more specific, given the labor situation in our country, I do not see any appreciable increase in wages anytime soon. In fact, I think it is likely wages will trend lower.

Given the glut of supply and vacancies in both the residential and commercial real estate markets, I have a tough time believing these prices will move appreciably higher anytime soon.

Commodities may very well move higher. Why? High five to MC for sharing with me that there is increased dialogue in the international trade community to move oil away from trading in dollars. In fact, that story likely had a big impact in yesterday’s trading. Even if there is not an immediate shift in this market dynamic, the mere fact that it is being discussed will support oil specifically, oil-based products broadly, and other commodities as well.

Given that these commodities are primarily inputs, the prices for the outputs will likely move higher. This development is clearly inflationary.

3. What happens to interest rates here in the United States? While on one hand we have some deflationary forces at work which would keep rates low, we have the tug of other factors pushing them higher. How does it play out? My gut instinct tells me that overall pools of capital will be flowing away from the United States and, as such, people and private corporations will have to pay more to attract capital here in our country. I think those entities which focus the bulk of their economic activity here in the United States will be forced to pay higher rates to attract funding.

4. What about our equity markets and the Fed? While the Fed will want to keep our rates low for an ‘extended period,’ they may not have that luxury. If other nations follow Australia in raising rates, the U.S. may need to withdraw some liquidity sooner rather than later. Kansas City Fed chair Thomas Hoenig made this very assertion yesterday.

What would higher rates mean or even the thought of higher rates mean? Slower growth and a tough road for equities going forward.

Thoughts, comments, questions always appreciated.

LD

Related Sense on Cents Commentary

Dollar Carry Trade Drives Global Equities (September 16, 2009)

“Cash for Clunkers” Final Grade: F

Posted by Larry Doyle on October 5th, 2009 3:31 PM |

How did that “Cash for Clunkers” program ultimately grade out? While auto dealers were relishing the traffic that overwhelmed their showrooms, the fact is the program was nothing short of a government redistribution charade masked as an economic stimulus. If this type of program is the best we can do, we are in worse shape politically and economically than I thought.

While some pundits would sing the praises of the “Cash for Clunkers” program, fundamentally I have a difficult time understanding how real value is created when current value is destroyed in the process. Additionally, there was never a doubt that this program was merely pulling demand forward. How do we know this?

U.S. auto sales declined 23% for the month of September on a year over year basis. Sales for GM (-45%) and Chrysler (-42%) vehicles declined precipitously while Ford (-5%) declined only marginally. What does that indicate? Car buyers want to purchase a vehicle in which they have confidence in the manufacturer.

The Wall Street Journal sheds further light on this ‘clunker’ in writing, Clunkers In Practice:

Cash for clunkers had two objectives: help the environment by increasing fuel efficiency, and boost car sales to help Detroit and the economy. It achieved neither. According to Hudson Institute economist Irwin Stelzer, at best “the reduction in gasoline consumption will cut our oil consumption by 0.2 percent per year, or less than a single day’s gasoline use.” Burton Abrams and George Parsons of the University of Delaware added up the total benefits from reduced gas consumption, environmental improvements and the benefit to car buyers and companies, minus the overall cost of cash for clunkers, and found a net cost of roughly $2,000 per vehicle. Rather than stimulating the economy, the program made the nation as a whole $1.4 billion poorer.

The basic fallacy of cash for clunkers is that you can somehow create wealth by destroying existing assets that are still productive, in this case cars that still work. Under the program, auto dealers were required to destroy the car engines of trade-ins with a sodium silicate solution, then smash them and send them to the junk yard. As the journalist Henry Hazlitt wrote in his classic, “Economics in One Lesson,” you can’t raise living standards by breaking windows so some people can get jobs repairing them.

In the category of all-time dumb ideas, cash for clunkers rivals the New Deal brainstorm to slaughter pigs to raise pork prices. The people who really belong in the junk yard are the wizards in Washington who peddled this economic malarkey.

I concur. What do you think?

LD

Tea Is Served

Posted by Larry Doyle on April 4th, 2009 4:45 PM |

I strongly believe Congress and the Obama administration know that the American public has no appetite for further government bailouts. This public demeanor presents a challenge for a government that has gotten used to writing big checks for Wall Street, the Stimulus, and automotive companies. 

What is the federal government to do for municipalities, insurance companies, commercial real estate companies, or others who may go bankrupt?

Secretary Geithner has laid the groundwork for government takeover of institutions deemed to present systemic risk. How that power is effected or implemented will be very interesting. (more…)

The Fed Levers Up

Posted by Larry Doyle on March 18th, 2009 6:30 PM |

When the economy experiences a massive delevering process, the void in the economy needs to be filled. There has been and will continue to be ongoing debate about the effectiveness of the stimulus plan, Obama’s proposed budget, ongoing government bailouts of a variety of industries, and moves made by the Treasury and Federal Reserve. Has enough been done? Is too much being done? Are our global partners pulling their weight? Are protectionist measures likely to exacerbate our economic problems? The answers to these questions will not be known for years.

Today’s action, Fed’s New Steps Shake Up Markets, is a sign that as everybody is delevering (selling assets purchased with borrowed money), the Federal Reserve is levering up. The Fed has indicated they will purchase billions more than previously advertised in U.S Treasury securities, mortgages, and consumer related assets. Why? By making these purchases, the Fed will attempt to drive the rates for these products lower and reignite consumer and institutional demand for credit. The market responded in startling fashion as 10yr government rates dropped an unprecedented .50% !!  Equity markets responded by moving higher by 1-2%. (more…)

Reich to Obama – Re: Geithner

Posted by Larry Doyle on March 16th, 2009 8:44 AM |

Cross Posted from No Quarter!! Thanks!
Major h/t Andy!!

Since this pretty much speaks for itself, I’m just going to step out of the way.

From Robert Reich’s Blog:

(Robert Reich was the nation’s 22nd Secretary of Labor and is a professor at the University of California at Berkeley. His latest book is “Supercapitalism.” This is his personal journal.)

FRIDAY, MARCH 13, 2009
Paul Volcker to Barack Obama

Former Fed Chair Paul Volcker is briefing President Obama today on how well the stimulus package is doing. I have no inside knowledge of what he’s saying, but if I were Volcker (and I’m not — he’s almost two feet taller than I am), I’d say the following:

Mr. President, it’s way too early to know exactly what the stimulus is doing because the money is barely out the door, but I’ve got to tell you I’m worried as hell. Unemployment is at 8 percent, and underemployment is over 14 percent of the workforce. The economy is shrinking much faster than it was when you put the stimulus together. It will be more than a trillion dollars short of its full capacity this year, and I have every reason to believe the same next. State governments alone are hundreds of billions in the hole, creating a huge drag. So your $787 billion over two years, only two-thirds of which is direct spending, isn’t going to get us nearly far enough. I’d strongly recommend you make ready a second stimulus, about the same size, and get it enacted as soon as possible, with the proviso that it will be implemented if and when unemplyment hits 8.5 percent or underemployment reaches 15 percent.

Oh, and by the way, Mr. President. You may not want to hear this, but your Treasury Secretary is making things worse. His dithering on what to do about Wall Street, and his incapacity to speak clearly to the Street and to the public about what needs to be done, is spooking everyone. Why doesn’t he just put the irrevocably insolvent banks into receivership under the FDIC, sell off their assets, protect depositors, and reimburse taxpayers with whatever remains? Let the rest of the banks fend for themselves — working out their bad loans with their creditors. As to AIG, well, that’s a complete basketcase. Put it out of its suffering. Take it over, sell its assets, protect policy holders (you’ll need to create a big co-insurance plan with every other major insurer in the world), then get out.

Want a cigar?

I don’t smoke, but a cigar and a health shot of tequila is sounding good about now. And it couldn’t make the sick feeling in the pit of my stomach any worse.

Overnight Trade

Posted by Larry Doyle on March 4th, 2009 6:31 AM |

Stocks in Asia rose on the heels of a report that China’s Wen May Announce New Stimulus Measures to Revive Growth

With China allocating this capital to a new stimulus, will that lead to lessened appetite for U.S. Treasury debt? In overnight trading, Treasuries Drop on Potential $60 Billion Note Sale Next Week.

In other market making news, the shine has come off gold somewhat. I had cautioned that I do not play in gold because of the large number of speculative traders. Gold dropped 3% overnight and is back to $910/oz.

The U.S. dollar continues to move higher versus the Japanese yen and is back close to par, 100 yen for $1 dollar.

I remain in the camp that the bond market will continue to be pressured by the global demand for capital.

One story that also bears watching is the “plundering” of Merrill Lynch. In breaking news the WSJ reports how Merrill Lynch paid a large number of individuals outrageous sums at the end of 2008. Merrill’s $10 Million Men highlights the details. If I am John Thain, I’m not sleeping well!!

LD






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