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HomeWhat Is a ‘Walking Pneumonia’ Economy?
Posted by Larry Doyle on September 22nd, 2010 5:12 AM |
Almost three full years from the official start of The Great Recession and fifteen months from its end, and our economy continues to limp along and languish amidst the weight of ongoing — even unrecognized — debts. Can we take a double dose of Nyquil, chase it with some Irish Mist, and hope we wake up feeling better in the morning? If it were only that easy.
The simple fact is our economy is battling a serious bout of seemingly terminal ‘walking pneumonia.’ How might we diagnose that malady? All we need to do is read yesterday’s Release from the Federal Reserve:
Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. (more…)
Invisible Taxes = Loan Sharking = Usury
Posted by Larry Doyle on August 24th, 2010 8:27 AM |
Why is it that the very people who saved and invested to finance a lot of the growth in our nation are now the very ones being penalized by the exceptionally low interest rate policy of the Federal Reserve? While Ben Bernanke and his Washington cronies maintain that our economy needs these artificially induced government driven interest rates, the very fact is these anemic rates are crushing those citizens in our country who live on fixed incomes and rolled their CDs. While savers are getting waxed on one side of the coin, the banks are sticking it to our brethren who rely on credit lines from their credit cards on the other side. That’s business, you say? No, that is not purely business. In the midst of an economy dominated by the government, our current interest rate and credit card policies are nothing more than invisible taxes on both savers and consumers alike.
There are two sides to this coin and on both sides banks are squeezing American citizens. Savings rates have plummeted while borrowing rates via credit cards move higher. Both these points are highlighted in recent commentaries. (more…)
Can We Add Some Inflation to Some Deflation and Claim Overall Prices Are Stable?
Posted by Larry Doyle on October 15th, 2009 11:03 AM |
Inflation? Deflation? What is it going to be? As we continue to navigate the economic landscape, that question – perhaps more than any other – is of paramount concern. As I assess the economy and the markets, I envision the following:
> Ongoing deflationary pressures in real estate. Foreclosures hit a record level based on a report this morning.
> A likely increase in deflationary pressures from wages as unemployment continues to increase, hours worked do not pick up, and average hourly earnings are stagnant. How are corporations reporting earnings? Not from growth in top line revenue, but from cutting costs, including headcount.
I firmly believe these two overriding forces most concern the Fed and the threat that the deflationary forces could grow if not counteracted. How does the Fed counteract these pressures? Keep the liquidity pump running via a 0-.25% Fed Funds rate and now increased speculation of perhaps more quantitative easing in the form of purchasing more mortgage-backed securities.
What has been the result of all this liquidity running into the system? A significant decline in the value of our dollar. What does that create? Inflation. That’s good, right? A little inflation will provide some pricing power which supports our equity market. Not so fast. The inflation is not directly addressing the deflationary pressures in real estate and likely deflationary pressure in wages. The inflation is being generated primarily in commodities. What does that mean? Prices for food, gas, oil, and other raw material inputs will increase. As those prices increase, the cost of living in America will increase. Regrettably, that increase in cost of living will not be offset by an increase in wages.
Daily Finance provides a preview of the coming rise in food prices in writing, Sticker Shock at the Supermarket: Food Prices Poised to Rise:
If there’s any silver lining to a recession — albeit a thin one — it’s that consumer prices typically go down. Make no mistake, deflation is a sign of a sick economy, but at least the net effect of cheaper prices for the basic necessities — food, clothing and shelter — helps folks get by when they are struggling to make ends meet.
But consumers should brace themselves for things to change, especially at the supermarket. As the global and U.S. economies emerge from the downturn, economists predict that there is going to be some sticker shock at the checkout line. Food prices, they say, are heading higher and when you combine that with an unemployment rate that’s expected to linger near a three-decade high for at least another year, it’s even more unwelcome news.
The U.S. Department of Agriculture expects overall food prices to rise as much as 4 percent in the U.S. by the end of 2010. Yet, some economists think they could climb by as much as 5 percent. Even using the government’s more conservative numbers, the price for eggs is forecast to rise 3 percent and beef is seen increasing 2 percent. Lamb, seafood and fish? All three categories are expected to jump as much as 5 percent.A 5 percent boost in your grocery bill may not seem terribly devastating, but consider this: If you spend $300 a week on groceries now, you’ll need to squeeze a raise of about a thousand dollars a year out of your boss (don’t forget withholding tax) just to keep up with higher chicken, beef, pork and dairy prices. Good luck accomplishing that little feat with a 9.8 percent unemployment rate and companies looking into every nook and cranny in order to cut costs.
Why again are these prices poised to increase?
the weak U.S. dollar means we will be exporting more of our homegrown food overseas, causing prices to rise at home.
The consumer will continue to get squeezed, but the wizards in Washington will be able to pronounce that the overall level of inflation is stable. Really?
-3 + 3 = 0 is not the same as 0 + 0 = 0 !!!
What a world.
LD
Big Ben Will Leave His Credit Card So Wall Street Party Can Rock On
Posted by Larry Doyle on August 12th, 2009 11:10 AM |
It’s getting late but the party is going strong. The chaperone is growing weary and knows it is time for a graceful exit. The partygoers, however, are having so much fun; their youthful exuberance and enthusiasm is peaking after a difficult stretch. What is the next dance that will break out?
Welcome to the world of Wall Street and Washington, August 12, 2009. Today all eyes are on Ben Bernanke as the Federal Reserve wraps up their two-day meeting, with a Fed release at 2:15pm.
How will Ben thread the needle in the process of keeping the inflation hawks at bay while not spoiling the current Wall Street bash? ‘Fed-speak’ is carefully scripted and typically all encompassing. In so many words, Bernanke will highlight the progress made to date, while simultaneously invoking the need for continued support given underlying economic concerns.
From a practical standpoint, there is little doubt Bernanke will again reiterate his message of leaving the Fed Fund rates at 0-.25% for ‘an extended period.’ He will likely try to spin the expected end of the Fed’s quantitative easing program as purely a function of the ongoing economic recovery.
The concern, though, remains that Ben will let the party get overly rambunctious. Don’t think for a second that the Wall Street crowd is not already feeling ‘mighty good’ and ‘well lubricated’ looking forward to a quick return to those outsized bonuses thanks to Ben’s easy money policy.
In short, figuratively Ben will look to leave the festivities but will leave his credit card so the boys can rock on.
Where are the cops?
LD
Related Commentary:
Bernanke Promises to Keep ‘Punch Bowl’ Filled (July 21, 2009)
Fed May Recognize Faster Growth, Keep Rates ‘Exceptionally Low’
by Steve Matthews and Vivien Lou Chen
Bloomberg; August 12, 2009
Front End Springs a Leak
Posted by Larry Doyle on June 5th, 2009 4:57 PM |
In a manner of speaking, the management of our economy has been nothing short of a major overhaul of a tired old ship. When the tide went out, the base of our ship was exposed as being filled with holes.
Little did we know at the time, but through many of those holes a number of “pirates” were running off with a whole lot of booty. In the process, many market participants riding along on the main deck were thrown overboard by the economic storm that hit our economy and markets over the last two years.
We do not have the luxury of bringing our ship into port for an overhaul. We have had to continue to sail this ship while trying to repair it. In that spirit, by necessity we have had to add significant ballast (liquidity) in our hull. In so doing, we need to recognize that the ballast can itself be inflammatory if the engine generates a spark.
In purely economic terms, this morning’s non-farm payroll number of -345k jobs was a hint of a spark. While various sectors of the market gyrated today, the front end of our ship, that is the front end of our yield curve, sprung a serious leak. How so? Interest rates on short term Treasury notes increased a DRAMATIC 35 basis points. Why?
Traders are already pricing in an expectation that the Federal Reserve will be forced to increase the Fed Funds rate prior to any hint of inflation or even the expectation of inflation gains a foothold. Bloomberg sheds color on this likelihood, Traders Begin to Speculate Fed Will Need to Tighten:
Traders are beginning to price in expectations the Federal Reserve will raise interest rates this year as the recession shows signs of abating.
Federal-funds futures contracts on the Chicago Board of Trade show a 70 percent probability the central bank will lift its target rate for overnight bank borrowing to at least 0.5 percent by November after a report today showed the U.S. economy shed the fewest jobs in May in eight months. Rate-increase odds were 27 percent yesterday.
The Fed cut the target rate to the record low range of zero to 0.25 percent in December as the economy lapsed into the worst recession in decades. President Barack Obama and Fed Chairman Ben S. Bernanke have committed $12.8 trillion to thaw frozen credit markets and ramped up government spending to revive growth. The Fed last raised borrowing costs in June 2006, when policy makers pushed the rate to 5.25 percent.
Fed governors and Fed chair Bernanke now face a serious quandary. Economic data will remain decidedly weak. Unemployment will continue to increase. Consumers are going to remain strapped. Corporations will face challenges. Municipalities will encounter an ongoing decline in tax revenues. Nobody is going to truly feel like the economy is improving to the point that the Fed should even think about increasing interest rates. Then why is the market starting to price that reality into the market? Let’s go back into the hull.
The bowels of our ship are flush with liquidity and given any sort of traction in the economy, the velocity and growth in the money supply will drive inflation.
What is Big Ben and team to do? The market is raising interest rates on him rather than his raising interest rates on the market. In the process, a very fragile economy will now be forced to deal with higher interest costs along with anemic growth.
What do I see on our economic horizon? In my opinion, today’s price action took us in the direction of the island known as Stagflation.
Please share your thoughts and comments.
LD
Putting the Genie Back Inside the Bottle
Posted by Larry Doyle on April 5th, 2009 11:43 AM |
The genie, in the form of the Federal Reserve, has granted the markets a lot more than three wishes over the course of these challenging economic times. What are some of the wishes granted so far? Let’s review:
1. cutting the Federal Funds rate to a range of 0-.25%.
2. backstopping a wide array of short term funding operations, including the Commercial Paper market, Money Market funds, and Swaps market.
3. opening the Federal Reserve discount window for investment banks prior to their conversion to commercial banks.
4. utilizing a massive Quantitative Easing program to purchase government, mortgage-backed, and government agency securities in an attempt to bring interest rates down and jumpstart borrowing by consumers and corporations.
5. working in concert with the Treasury and FDIC to implement the TARP (Troubled Asset Recovery Program), TALF (Term Asset-Backed Lending Facility) and PPIP (Public-Private Investment Program).
In the process of implementing all of these activities, this genie, the Federal Reserve, in the person of chairman Ben Bernanke, has gone places no genie has ever gone before.
The question before the court is whether the free market can ever get the genie back in the bottle. Additionally, aside from getting the genie back in the bottle, these wishes granted by the genie aren’t exactly free. How so? (more…)
Is the Wall St. Block Party at the Geithners and Bernankes Breaking Up?
Posted by Larry Doyle on September 23rd, 2009 12:37 PM |
We will all learn more today at 2:15pm or thereabouts when the Fed releases its regular statement assessing our economy. Will a slightly more positve view of the economy actually be met with a selloff in the markets? I believe that may very well happen. Why? The Wall Street party’s ‘hosts,’ that being Bernanke and Geithner, need to prepare the partygoers to sober up, which is a very delicate undertaking. As with any sobering process, the first thing you do is make sure you have called your friends down at ‘the station’ so nobody gets picked up unnecessarily. That ‘cover’ has worked wonders for a long time, but the partygoers may want one more ‘get out of jail free’ card at this juncture. We saw as much in the token fine assessed by the SEC ‘cops’ against Bank of America just last week.
Bloomberg highlights the predicament of the party’s host in writing, Fed May Signal U.S. Economic Recovery Has Started. We do not need to be mentalists to read the tea leaves indicating the Fed’s juice is likely to slow and that it may be time to go home. Bloomberg writes:
How are the partygoers on Wall Street preparing for the slowing, if not the end, of this block party? The Treasury yield curve is flattening today. I highlighted this likelihood yesterday when I wrote, “Is the Federal Reserve Readying a Stealth Tightening of Monetary Policy?”
You do not have to listen very hard, though, to hear the crowd on Wall Street sharing their feelings. In fact, this classic tune by Southside Johnny and the Asbury Jukes is playing on Wall Street right about now. ~ LD
Related Sense on Cents Commentary:
“Bernanke Promises to Keep ‘Punch Bowl’ Filled” (July 21, 2009)
Tags: Ben Bernanke, does fed see economy improving, Fed discussions to utilize reverse repos, Fed May Signal U.S. Economic Recovery Has Started, Fed statement on September 23 2009, Federal Reserve policy, Federal Reserve programs to monitor monetary policy, how will Fed react to imrpoving economy, how will Wall Street sober up?, Jeffrey lacker of Richmond Fed James Bullard of St. Louis Fed Dennis Lockhart of Atlanta Fed, Laurence Meyer comments on Fed's buying of mortgages, Tim Geithner, Wall Street cops protect the partygoers, will Fed change its quantitative easiing program in purchasing mortgages, will the Fed change policy to drain liquidity, will Wall Street be forced to sober up
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