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HomeU.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)
Increasing Vacancy Rates Will Pressure Both the Rental Market and Home Values
Posted by Larry Doyle on October 6th, 2009 11:42 AM |
You do not need to take Economics 101 to understand that an increase in supply of any asset will almost always lead to a decline in prices. This ‘tremendous grasp of the obvious’ in regard to housing runs right in the face of assertions put forth by many real estate brokers and housing experts.
High five to our friends at 12th Street Capital for bringing attention to The Wall Street Journal‘s writing, Apartment Glut Expands:
Signs advertise apartments for rent in San Francisco in July. Rents declined during the third quarter, usually a strong period for rentals. (Getty Images)
Apartment vacancies hit their highest point since 1986, surging in cities from Raleigh, N.C., to Tacoma, Wash., as rising unemployment continued to chip away at demand during the traditionally strong summer rental months.
The U.S. vacancy rate reached 7.8%, a 23-year high, according to Reis Inc., a New York real-estate research firm that tracks vacancies and rents in the top 79 U.S. markets. The rate is expected to climb further in the fall and winter, when rental demand is weaker, pushing vacancies to the highest levels since Reis began its count in 1980.
(more…)
Unemployment Report: October 2, 2009
Posted by Larry Doyle on October 2nd, 2009 8:58 AM |
The widely anticipated October Unemployment Report covering the month of September was just released. Let’s dive right in and take a look at the numbers . . .
I. UNEMPLOYMENT RATE
July: 9.5%
August: 9.4%
September: 9.7%
– October Consensus Expectation: 9.8%
– October Actual: 9.8%
>> LD’s comments: as expected and only getting worse. The underemployment rate is 17%!! (High five MC). Long term unemployed (those out of work 24 weeks or more) is 5.4 million!!
II. NON-FARM PAYROLL (click here for definition of this term)
July: initial loss of 467k initially revised to a loss of 443k and now revised to a loss of 463k
August: initial loss of 247k revised to a loss of 276k, further revised to -304k
September: initial loss of 216k, revised to a loss of 201k
– October Consensus Expectation: loss of 175k
– October Actual: a loss of 263k, with revisions to the prior two months of a further loss of 13k jobs.
>> LD’s comments: decidedly worse than expected, this figure shoots a huge hole in the case of those who thought the economy would have a V-shaped recovery. Construction lost 64k jobs. The one sector of the economy that people would expect to support this number is government jobs. This did not happen as government payrolls declined by 53k jobs. This is an indication that cities, states, and towns are cutting payroll and services as tax revenues plummet.
III. AVERAGE HOURLY EARNINGS
July: 0.0%
August: +.2% revised to +.3
September: came in at .3 with the prior month revised to .3 as well.
– October Consensus Expectation: .2%
– October Actual: .1%, also worse than expected.
>> LD’s comment: This number inspires no confidence that the economy can expect a rebound in consumer spending and retail sales anytime soon. Be mindful that the prior month was revised to +.4%. That figure is largely a result of a rise in the minimum wage.
IV. AVERAGE HOURLY WORKWEEK
July: 33.0 hours
August: 33.1 hours
September: 33.1 hours
– October Consensus Expectation: 33.1 hours
– October Actual: 33.0 hours, another big disappointment
>> LD’s comments: this number is a confirmation that businesses see no pickup in new orders. This number may be the most disappointing of all components as it hits directly at what business owners view as the future business climate.
V. FURTHER COLOR
Although many Wall Street based economists, media mavens, and government pundits are reporting these numbers as disappointing, the mere fact is prior reports were reported in a far too ebullient fashion. Our economy is trying to adapt to a lack of credit. Meredith Whitney highlights this fact in today’s WSJ in writing, The Credit Crunch Continues. Expect an increased call for greater fiscal stimulus. The fact is the government programs have largely created safety nets and pulled consumer demand forward while the major structural unemployment issues in the economy loom very large.
VI. MARKET REACTION
At 8:10am:
2yr Tsy: .87%
10yr Tsy: 3.15%
S&P 500 Futures: -3.2
DJIA Futures: -27
U. S. Dollar Index: 77.22
At 8:50am, Post-Report:
2yr Tsy: .85%
10yr Tsy: 3.14%, we did get as low as 3.10% immediately after the report.
S&P 500 Futures: -12.00, which indicates that the stock market will open up down approximately 1.2%
DJIA Futures: -104
U.S. Dollar Index: 77.30…basically unchanged. Recall that a lot of hedge funds and speculators are short dollars and long a host of risk-based assets. The dollar may improve as those risk-based markets sell off.
Questions, comments, constructive criticisms always encouraged and appreciated.
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Thanks.
LD
Pimco’s El-Erian Properly Frames the Financial Debate
Posted by Larry Doyle on September 29th, 2009 9:34 AM |
Pimco CEO Mohamed El-Erian
I am increasingly impressed by Pimco CEO Mohamed El-Erian. Why? I believe El-Erian consistently provides a thoughtful and informed opinion and analysis of the global economic landscape. I witness his sagacity again this morning in reading his Financial Times commentary, Return of The Old Ways of Thinking Threatens Recovery:
We are at the point of maximum confusion in the multi-year transition of the global economy, markets and policymaking. We have left the global growth regime that was driven primarily by debt-financed consumption in the US, but we have not as yet reached a position of more balanced, albeit anaemic, growth. Those who lack a robust anchoring framework, be they investors or policymakers, risk being misled and backtracking to outdated ways of thinking.
I concur with El-Erian’s premise. As much as consumers, investors, bankers, and politicians may want to return to ‘business as usual,’ the fact is the global economy and the markets are a dramatically changed place. While market analysts and government policy wonks feed us a steady diet of ‘green shoots’ and ‘positive change in the rate of change,’ El-Erian properly frames the debate by focusing on the absolute levels expressed in economic and market data rather than merely the rate of change in those levels.
I made a less eloquent attempt at stating this premise this past July 29th in writing, “Economy and Markets: Improving, Declining, or Adapting?” I asserted:
While most economists and market analysts are looking at statistics and data to determine whether the economy and consumers are improving or rolling over, my take is different. I view the economy and consumers as adapting to the new dynamic at work in our country.
While those on Wall Street and their friends in the media would revel in short term developments and daily market swings, I view our market and global economy as akin to running a marathon. As such, I would place us at best at the 7 mile mark. El-Erian makes a similar assessment and states as much in writing:
Today’s lack of appropriate anchoring frameworks appears to be exacerbating short-termism. The issue goes well beyond the still-limited appreciation of the multi-year realignment of the global economy, which is gaining momentum. It also relates to tendencies well-documented by behavioural economists – such as framing the problem wrongly and refusing to question past approaches.
Given all this, we would be all well advised to follow the admonition of Mervyn King. Last month, the governor of the Bank of England stated bluntly: “It’s the level, stupid – it’s not the growth rates, it’s the levels that matter here.” Investors have not yet accepted his insight that the absolute levels of income, debt, wealth and unemployment, not just the rates of change, are what matters today. They need to, and soon.
What ‘heart rate monitors’ does El-Erian utilize to assess the overall health of our global economy? He offers the following:
>First, consumer indebtedness is still too high relative to income expectations and credit availability, particularly in the US and the UK.
>Second, some banks’ balance sheets are still too geared for the comfort of regulators or their own managers. This will inhibit them from lending to the real economy at a time when certain sectors (such as commercial real estate, but also residential housing) still require significant refinancing, and when consumers need time to work down their excessive debt loads.
>Third, unemployment has risen well beyond expectations, and is likely to prove unusually protracted.
>Finally, public debt has grown so rapidly as to spark concerns about future debt dynamics. This would inhibit the effectiveness of future stimulus measures, as well as complicating the formulation of exit strategies.
I encourage readers to take Mr. El-Erian’s assessment to focus on the absolute levels of economic and market data. In the process, please then incorporate that approach into the report on deflation I offered yesterday in writing, “Will Deflationary Forces Overwhelm Global Fiscal Stimulus?”
I commend Mohammed El-Erian for properly framing the debate. He is helping us all see the ‘forest for the trees’ as we navigate the economic landscape.
LD
Goldman’s Jan Hatzius: ‘Substantial Hangover’ in U.S. Economy
Posted by Larry Doyle on August 25th, 2009 8:22 AM |
Say what you want about Goldman Sachs in its entirety, but I tip my cap to Goldman economist Jan Hatzius for an extremely forthright and aggressive interview I just watched on Bloomberg Surveillance.
In so many words, Hatzius seems very concerned about a double dip recession here in the United States in 2010. That is my assessment. Hatzius himself did not use that phrase.
Highlights of his commentary include:
>> call for a 3% GDP in both the 3rd and 4th quarters of 2009 driven by fiscal stimulus programs and inventory buildup.
>> without the benefits of the stimulus and further inventory rebound, the U.S. economy will suffer from a ‘substantial hangover’ in 2010.
>> Hatzius does not see China or other surplus nations suffering from this hangover. He is quite bullish on prospects for the Chinese economy.
What are the effects of our hangover and implications for government policy?
>> likely double digit unemployment with no quick improvement
>> Federal Reserve will likely keep the Fed Funds rate at 0-.25% for all of 2010
>> no inflationary pressures for a few years
>> given lack of growth in the private sector, very real chance that the Federal Reserve will extend its quantitative easing program in which it purchases liquid assets (U.S. Treasury debt, agency debt, and mortgage-backed securities). Hatzius threw out that there is a very real possibility the size of the Fed’s balance sheet could double to $4 TRILLION. Be mindful that the Fed’s balance sheet has already doubled over the course of this crisis!!
>> substantial decline in commercial real estate has yet to occur.
>> Cash for Clunkers will likely add .3 to .4 to current quarter GDP, but some of that is certainly pulling demand forward and will be ‘paid back’ with slower growth in 2010.
>> when the economy does gain traction, he believes Bernanke (whom Obama will reappoint to another term) will raise rates aggressively.
Hatzius’ assessment is consistent with the Main Street economy which remains disconnected with Wall Street price action. While Main Street has a headache and hangover, Wall Street rocks on with easy money from Washington.
When will Main Street get in on the action?
LD
Unemployment Report: August 7, 2009
Posted by Larry Doyle on August 7th, 2009 9:02 AM |
The widely anticipated August Unemployment Report covering the month of July was just released. Let’s dive right in and take a look at the numbers . . .
Unemployment Rate
May 8.9%
June: 9.4%
July: 9.5%
August: 9.4%
>>LD’s comments: This number is surprising on its face, as expectations were for the rate to move to 9.6% or 9.7%. What happened? Overall, this report does certainly reflect a growing sense of stability in employment BUT this figure also reflects the fact that 422k people have left the labor force, meaning they have given up looking for work. Long term unemployed rose by 584k and now exceeds 5 million people. As time goes by, more and more of these people will stop receiving unemployment benefits.
Non-Farm Payroll (click here for definition of this term)
May: loss of 519k
June: loss of 322k
July: loss of 467k
August: loss of 247k
>>LD’s comments: This number, along with a positive revision of a net 43k jobs to prior months, is another indication of growing stability. Construction lost 76k jobs. Manufacturing lost 52k jobs. Before the economy can do better, it has to stop doing worse. This report plays into that. However, I would ask the question if the economy will merely adapt to overall lessened employment for a protracted period.
Average Hourly Earnings
May : +.1
June: +.1%
July: 0.0%
August: +.2%
>>LD’s comments: Another positive sign, although it is muted by the fact that last month’s hourly earnings was surprisingly weak. Over the two month period, an average of .1% per month is to be expected. Will this support a sudden pickup in consumer demand? I doubt it.
Average Hourly Workweek
May: 33.2 hours
June: 33.1 hours
July: 33.0 hours
August: 33.1 hours
>>LD’s comments: Again, this piece of data is consistent with the other parts of this report. For perspective, though, be mindful that last month’s reading was the lowest figure for this data since 1964.
Further Color: While many economists will spin this report as a clear sign of an improving economy, I maintain it is a sign of an adapting economy. I am surprised and disheartened by the fact that so many people have actually left the labor force. That level of discouraged workers, along with the level of long-term unemployed, plays into a real structural problem and long term drag on our economy.
Market Reaction: Equity futures have spiked by approximately .7%, but the biggest market reaction is in the bond market as interest rates have moved higher by approximately 12 basis points across the curve. What is going on there? The market is going to price in an expected increase in rates by the Federal Reserve sooner than Ben Bernanke would otherwise prefer. Recall how Bernanke at his recent Congressional testimony emphatically stated he would leave rates unchanged for an extended period. The market reaction is stating that he may not have that luxury. Why? Fears of inflation.
Additionally, this report will make the underwriting of the massive Treasury supply (3yr, 10yr, 30yr) next week very challenging.
The greenback also had a nice spike after this report. This move is consistent with a market expectation of an increase in rates by the Federal Reserve.
Can the equity market continue to rally in the face of rising rates? I will monitor closely.
Please track our work here at Sense on Cents via Twitter, Facebook, RSS feeds, or e-mail subscription. Visit and comment often!!
LD
Obama Playing ‘Four Corners’ Offense in Budgetball
Posted by Larry Doyle on July 20th, 2009 12:04 PM |
I thought Barack Obama liked basketball. Lovers of the game coerced the NCAA to utilize a 24-second clock in order to speed the game up, showcase players’ talents, and render the North Carolina ‘four corners’ offense ineffective. What was the basic premise of that offense? Stall tactics.
Well, welcome to the Brave New World of the Uncle Sam Economy where there is none other than President Obama working the budgetball around in true four corners fashion. The Associated Press reports White House Putting Off Budget Update:
The White House is being forced to acknowledge the wide gap between its once-upbeat predictions about the economy and today’s bleak landscape.
The administration’s annual midsummer budget update is sure to show higher deficits and unemployment and slower growth than projected in President Barack Obama’s budget in February and update in May, and that could complicate his efforts to get his signature health care and global-warming proposals through Congress.
The release of the update – usually scheduled for mid-July – has been put off until the middle of next month, giving rise to speculation the White House is delaying the bad news at least until Congress leaves town Aug. 7 on its summer recess.
Who is playing ball with Barack? Tim Geithner, Peter Orszag, Larry Summers, and Austan Goolsbee, along with every other member of his administration. No surprise. The question begs, though, who is playing defense to expose this purely partisan political stall tactic? (more…)
Reviewing the Current, Not the Waves
Posted by Larry Doyle on June 29th, 2009 8:33 AM |
Are we so focused on the beauty of the rolling surf that we have become blinded by the dangers of the shifting currents? No doubt!! Washington and Wall Street would have it no other way.
My wife and I attended a friend’s wedding on the outer part of Cape Cod this weekend. We had a few hours between the church service and reception. While enjoying a refreshment at a local waterside inn, we soaked in the beauty of the seaside setting. Little did I know, but along that very coastline the day before, two substantial homes had literally washed away as their foundations had been totally eroded by shifting tides.
In analogous fashion, haven’t Wall Street and Washington focused investors’ and taxpayers’ attention on short term goals and developments for their own profit while the public is stuck with an ever increasing bill? Sense on Cents strongly believes this to be true. The media is compliant in allowing the financial and political machines to define the ‘game’ and the ‘rules.’
The mission of Sense on Cents in navigating the economic landscape is to redefine the ‘game’ and the ‘rules’ so people can truly enjoy the beauty of the waves while fully appreciating the dangers of the shifting currents.
At this point, Wall Street is looking to return to ‘business as usual.’ Meanwhile, the programs and policies of the Obama administration are not only going with the ‘current’ that severely damaged our economic foundation, but are also strengthening that current. What do I mean?
Recall that after the market crash of 1929, the two driving forces that pushed our economy and country into The Great Depression were higher taxes and increased protectionism.
While Obama campaigned on targeted tax increases for the highest income earners, there is no doubt in my mind that our entire economy will be hit with higher taxes. These tax increases will come via formal tax legislation and also via increased costs passed along by industries impacted by new legislation.
The formal tax increases for every wage earner in our country paying taxes will result from anemic economic growth. Obama as much admitted last week in a Bloomberg interview that higher taxes across the board may be a necessity. I highlighted this prospect in writing, “The Taxman Cometh”.
Jack Welch stated the other day, “we’re going to have huge tax increases” given the enormous spending programs being launched by the Obama administration, in conjunction with little to no economic growth.
Over the weekend, I read 15 state insurance funds which pay unemployment benefits are now empty. How will these states address this issue? First stop, Washington. Second stop, higher taxes. (more…)
Federal Reserve Statement July 15, 2009
Posted by Larry Doyle on July 15th, 2009 3:50 PM |
The minutes of the Federal Reserve Open Market Committee meeting from June 23-24 were just released. Let’s not take anything on face value, so bring some tools as we review and continue navigating our economic landscape.
For the diehards in the audience, here are the actual minutes, including voting results, for your reading pleasure.
For those who may choose a synopsis complete with graphics, I submit the Fed’s Summary of Economic Projections.
What do we learn? For those not familiar with Fed policy and procedures, the target goals of the Federal Reserve are maximum employment and stable prices. Where do Fed governors think the economy stands now and where are we headed? They measure our economic health in terms of output growth, that is GDP (gross domestic product), unemployment, and inflation.
Output Growth Projections
Unemployment
Inflation
Overall, I read this sumamry as an admission by Fed governors that the economy has currently achieved a degree of stability with risks still skewed toward slower growth. In regard to unemployment, it is likely we will have a protracted level of heightened unemployment for a sustained period. On the inflation front, we have some concerns about increasing inflation although it is not imminent.
Over and above these consensus opinions, it is notable that the range of opinions amongst Fed governors is extremely wide. That to me spells real uncertainty as well.
On the topic of the Fed’s balance sheet, the governors do not believe they will need to implement more quantitative easing.
Taken in totality, our economic patient is certainly not dead nor a vegetable. That is the good news. However, in reading these minutes, the patient’s quality of life remains in serious question.
LD
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