The Unsustainable Meets the Irresistible
by ilene - January 23rd, 2011 8:30 pm
Courtesy of John Mauldin at Thoughts from the Frontline
This week’s letter is a result of two lengthy conversations I had today, which have me in a reflective mode. Plus, I finished the last, final edits of my book, all of which is causing me to mull over the unsustainability of the US fiscal situation. There is a true Endgame here, and it may happen before we are ready.
The first conversation was with Kyle Bass, Richard Howard, and Peter Mauthe, over lunch (more on Peter, who has come to work with me, below). Kyle is the head of Hayman Advisors, a very successful macro hedge fund based here in Dallas. Then I recorded a Conversation with David Rosenberg and Lacy Hunt, which is one of the best we have ever done. Subscribers will be very happy. The new Conversation with George Friedman is now online, too. You can learn more about Conversations with John Mauldin at www.johnmauldin.com/conversations/ . And please comment on this and future letters in the readers’ forums of my new website. Now, to this week’s letter. My goal is to make this one a little shorter than normal. We’ll see how I do.
The Unsustainable Meets the Irresistible
Kyle, Lacy, and David are typically pushed into the bearish category, but (not surprisingly to me) their forecast for the next few quarters is rather strong. None of us would be surprised by a high-3% number for GDP this quarter, and 4% is not out of the question. And we all see GDP tailing off as the year winds down. Inventory builds begin to slow, and in 2012 the 2% payroll holiday goes away. Plus, as I have written and David has noted, the pressure on state and local spending is getting larger with every passing day.
State and local spending is the second biggest component of the economy. The chart below, from David’s letter this week, gives us a visual image of just how large it is. Note…
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DiggLarge Companies Hiring, Small Companies Not; Federal Hiring Strong, States Cutting Back; Proposed Solutions; Bright Side of Fed Policies
by ilene - November 22nd, 2010 5:45 pm
Unfortunately, after reading Mish’s article "Large Companies Hiring, Small Companies Not; Federal Hiring Strong, States Cutting Back; Proposed Solutions; Bright Side of Fed Policies," most of us are not going to be happy about what Mish calls the bright side. – Ilene
Courtesy of Mish
A recent Gallup survey suggests Larger U.S. Companies Are Hiring; Smallest Are Not
Gallup finds that larger companies are hiring more workers while the smallest businesses are shedding jobs. More than 4 in 10 employees (42%) at workplaces with at least 1,000 employees reported during the week ending Nov. 14 that their company was hiring, while 22% said their employer was letting people go. At the other extreme, 9% of workers in businesses with fewer than 10 employees said their employer was hiring, and 16% said their employer was letting people go.
This Gallup question about company size is new, so it is unclear whether this pattern is a continuation of, or a change from, the past.
Hiring Also Much Higher at the Federal Government
The federal government is hiring more employees than it is letting go, while the opposite is true for state and local governments. More than 4 in 10 federal employees (42%) say their organizations are adding people and 21% say they are letting workers go. In contrast, state and local government employees report a net loss of workers.
Pitfalls, Flaws, Observations
There are huge flaws in the survey as well as a potential for additional flaws in analyzing the survey results. Nonetheless there are some important observations that can be made.
For starters, it is nice to see large corporations hiring, but there is no indication of by how much. Is the total headcount hiring 1 or hiring 2,000? Is the number up or down from last month?
Compounding that lack of information, we have seasonal flaws. Many retailers are now ramping up hiring for the Christmas season. So… is the hiring temporary or permanent?
The survey does not say. Moreover it does not say why they are hiring. Is business expanding or is this a short-term need?
That aside, the survey is not useless by any means. If this expansion was getting stronger, the number of companies hiring would be going up. It is not. Worse yet, small businesses which are the lifeblood of job creation, have not participated in the hiring…
Geithner Politicizes the Fed, Warns Congress to Not do the Same; Idiocies and Ironies; Economist James Galbraith Unfit to Teach
by ilene - November 22nd, 2010 4:37 pm
Mish discusses how Geithner Politicizes the Fed, Warns Congress to Not do the Same; Idiocies and Ironies; Economist James Galbraith Unfit to Teach. – Ilene
Courtesy of Mish
The hypocrisy of treasury secretary Tim Geithner would be stunning except for the fact hypocrisy from Geithner is pretty much an every day occurrence.
Geithner is blasting Congress for politicizing the Fed, while doing the same thing himself. To top it off, the Fed itself is politicizing the Fed by interfering and commenting on Fiscal policy while bitching about Congress commenting on monetary policy.
Please consider Geithner Warns Republicans Against Politicizing Fed.
U.S. Treasury Secretary Timothy F. Geithner warned Republicans against politicizing the Federal Reserve and said the Obama administration would oppose any effort to strip the central bank of its mandate to pursue full employment.
“It is very important to keep politics out of monetary policy,” Geithner said in an interview airing on Bloomberg Television’s “Political Capital with Al Hunt” this weekend. “You want to be very careful not to take steps that hurt our credibility.”
Fed Chairman Ben S. Bernanke defended the monetary stimulus in a speech in Frankfurt today and in a meeting with U.S. senators earlier this week.
The best way to underpin the dollar and support the global recovery “is through policies that lead to a resumption of robust growth in a context of price stability in the United States,” Bernanke said in his speech.
The asset purchases will be used in a way that’s “measured and responsive to economic conditions,” Bernanke said. Fed officials are “unwaveringly committed to price stability” and don’t seek inflation higher than the level of “2 percent or a bit less” that most policy makers see as consistent with the Fed’s legislative mandate, he said.
Bernanke Comments on Fiscal Policy
Flashback, October 4, 2010: MarketWatch reports Bernanke calls for tougher budget rules
In a speech delivered at the annual meeting of the Rhode Island Public Expenditure Council and devoid of comments on monetary policy, Bernanke said that fiscal rules might be a way to impose discipline, particularly if those rules are transparent, ambitious, focused on what the legislature can control directly, and are embraced by the public.
“A fiscal rule does not guarantee improved budget outcomes; after all, any rule imposed by a legislature can be revoked or circumvented by the same legislature,” Bernanke said,
…
John Hussman On Our Fed-Inspired Bubble,
by ilene - November 8th, 2010 9:11 am
John Hussman On Our Fed-Inspired Bubble, Crash, Bubble, Crash, Bubble (etc) Reality
Courtesy of Tyler Durden
Written by John Hussman of Hussman Funds
Bubble, Crash, Bubble, Crash, Bubble…
"Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."
Federal Reserve Chairman Ben Bernanke, Washington Post 11/4/2010
Last week, the Federal Reserve confirmed its intention to engage in a second round of "quantitative easing" – purchasing about $600 billion of U.S. Treasury debt over the coming months, in addition to about $250 billion that it already planned to purchase to replace various Fannie Mae and Freddie Mac securities as they mature.
While the announcement of QE2 itself was met with a rather mixed market reaction on Wednesday, the markets launched into a speculative rampage in response to an Op-Ed piece by Bernanke that was published Thursday morning in the Washington Post. In it, Bernanke suggested that QE2 would help the economy essentially by propping up the stock market, corporate bonds, and other types of risky securities, resulting in a "virtuous circle" of economic activity. Conspicuously absent was any suggestion that the banking system was even an object of the Fed’s policy at all. Indeed, Bernanke observed "Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits."
Given that interest rates are already quite depressed, Bernanke seems to be grasping at straws in justifying QE2 on the basis further slight reductions in yields. As for Bernanke’s case for creating wealth effects via the stock market, one might look at this logic and conclude that while it may or may not be valid, the argument is at least the subject of reasonable debate. But that would not be true. Rather, these are undoubtedly among the most ignorant…
WELCOME TO RICHARD FISHER’S “DARKEST MOMENTS”
by ilene - October 26th, 2010 1:28 am
WELCOME TO RICHARD FISHER’S “DARKEST MOMENTS”
Courtesy of The Pragmatic Capitalist
I wish I could say that I am surprised that Ben Bernanke’s
“In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places.”
Welcome to your darkest moments Mr. Fisher. The one thing we can positively confirm about QE2 is that it has not created one single job. But what has it done? It has caused commodities and input prices to skyrocket in recent months. Reference these 10 week moves that have resulted in the Fed already causing “mini bubbles” in various markets:
- Cotton +48%
- Sugar +48%
- Soybeans +20%
- Rice +27%
- Coffee +18%
- Oats +22%
- Copper +17%
Of course, these are all inputs costs for the corporations that have desperately cut costs to try to maintain their margins. With very weak end demand the likelihood that these costs will be passed along to the consumer is extremely low. What does this mean? It means the Fed is unintentionally hurting corporate margins. And that means the Fed is unintentionally hurting the likelihood of a recovery in the labor market.
Who Cares About Put-Backs? All the Reflationistas, That’s Who.
by ilene - October 19th, 2010 11:56 pm
Who Cares About Put-Backs? All the Reflationistas, That’s Who.
Courtesy of Joshua M Brown, The Reformed Broker
The mortgage fraud cost estimates for banks are a bit like QB Ryan Leaf - all over the place and without any accuracy whatsoever.
We’re hearing estimates of anywhere from a few hundred million bucks to as much as $200 billion! And in the meantime, Bank of America ($BAC) is telling us that they’ve found nothing wrong in their foreclosure process and that after halting all activity in 50 states, they are now back in business in half the country.
There are currently 7 million foreclosures in the housing market that need to be worked through and any delay will be costly for large lenders like B of A.
Should the states or the courts decide that many of these securitized mortgage-backed bonds are structured fraudulently (no one knows which mortgage is owned by whom), there is a possibility that the banks may have to buy them back due to a clause on most of this paper called the Put-Back.
In the absence of anything even resembling a consensus on how big the costs of mortgage put-backs may be, the temptation is to simply say, Who Cares? Well, I’ll tell you who cares…
For starters, how about hedge fund manager John Paulson? With a stake in Bank of America of 167 million shares, Mr. Paulson has about 2 billion reasons to care about how big their put-back exposure is.
Mutual fund monster Bruce Berkowitz (Fairholme) has about 667 million reasons to give a damn (54 million shares held).
Hedgie David Tepper of Appaloosa Management, no slouch himself in the "reflation trade", has about 337 million reasons to care (27 million shares).
These three investors make up the Triumvirate of the Reflationista Trade. These are the ultimate Don’t-Fight-The-Fed-ers.
That they are all in the same trade, BAC, is not a surprise – it is the quintessential call option on housing and employment. But they may not have bargained for the foreclosure mess that has hit the media with the gale-force wind of 2007′s sub-prime storm. Whether or not this particular storm blows over – or spills over – is very much of interest to Paulson, Berkowitz and Tepper, make no mistake.
Non-Farm Payrolls: US Economy Doing a Great Imitation of a Developing Double Dip
by ilene - October 9th, 2010 1:43 am
Non-Farm Payrolls: US Economy Doing a Great Imitation of a Developing Double Dip
Courtesy of JESSE’S CAFÉ AMÉRICAIN
The September Non-Farm Payrolls report was not good news.
This is a remarkably unnatural US economic recovery, with gold, silver, and other key commodities soaring in price, the near end of the Treasury curve hitting record low interest rates, and stocks steadily rallying as employment slumps and the median wage continues to decline.
The US is a Potemkin Village economy with the appearance of prosperity hiding the rot of fraud, oligarchy, and political corruption.
As monetary power and wealth is increasingly concentrated in fewer hands, the robust organic nature of the economy and the middle class continues to deteriorate.
This is what is happening, and monetary policy cannot affect it. The change must come from the source, which is in political and financial reform. And the powerful status quo is dead set against it.
The long term trend of employment has not yet turned lower which would make the second dip ‘official’ from our point of view. But the prognosis does not look good.
The Morality of Chinese Growth
by ilene - October 2nd, 2010 2:07 pm
The Morality of Chinese Growth
Courtesy of John Mauldin at Investors’ Insights
Oil at $125 a Barrel, Gasoline at $5
David Rosenberg and Capacity Utilization
Gary Shilling: Commercial Real Estate and Employment
The Morality of Chinese Growth
Another Birthday? What Happened to My Year?
Athens and the Barefoot Ranch
This week I am at a conference in Houston. I must confess that I don’t attend many of the sessions at most conferences where I speak. But today, the guys at Streettalk Advisors have such a great lineup that I am there for every session. But it’s Friday and I need to write. The solution? This week you get a "best of" letter. The best ideas I’ve heard and the best charts I’ve seen at this conference. Then we close with two short but very thoughtful essays from Charles Gave and Arthur Kroeber of GaveKal on "The Morality of Chinese Growth." Lots of charts and something to make you think. Should be a good letter.
Oil at $125 a Barrel, Gasoline at $5
John Hofmeister is the former president of Shell Oil and now CEO of the public-policy group Citizens for Affordable Energy. He paints a very stark (even bleak, as he gets further into the speech) picture of the future of energy production in the US unless we change our current policies. First, because of the after effects of the moratorium. It is his belief that the drilling moratorium will effectively still be in place until at least the middle of 2012. There won’t even be new rules until the end of 2011, and then the lawsuits start.
Gulf oil production will be down by up to 1 million barrels a day. Imported oil is now 67% of oil usage but will go to 75% by 2012. He thinks crude oil will be up to $125 and gasoline between $4-$5 at the pump. And it will only get worse.
He describes the problem with the electricity from coal production. The average coal plant is 38 years old, with a planned-for life of 50 years. Our energy production capability is rapidly aging, and we are not updating it fast enough.
He argues that the fight between the right and the left has given us 37 years without a realistic energy policy, as policy gets driven by two-year political cycles but good energy planning takes decades. There…
FOMC: No Change, Just Chillin’ Like Penicillin
by ilene - September 21st, 2010 3:32 pm
FOMC: No Change, Just Chillin’ Like Penicillin
Courtesy of Joshua M Brown, The Reformed Broker
In the most surprising move since Rosanne replaced Becky with a different actress and just acted like we should all shut up and watch and not freak out or anything, the FOMC announced today that the Fed Funds target rate would remain at zero.
I know, I’ll give you a moment for the shock to wear off.
Here’s the statement:
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. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.
Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.
I don’t have much else to add here. I’m too busy counting up all those interest rate dollars piling up in my money market account.
Source:
Board of Governors of the Federal Reserve
The Stagnating Labor Market, 1: Dropping Out Of The Labor Force
by ilene - September 20th, 2010 5:07 pm
The Stagnating Labor Market, 1: Dropping Out Of The Labor Force
By Mike Konczal, courtesy of The New Deal 2.0
New research from the Roosevelt Institute examines the current unemployment crisis.
Arjun Jayadev and I have another working paper out of Roosevelt Institute, this time focusing on the labor market in the current recession. The paper is: The Stagnating Labor Market (pdf). I hope you check it out; I’m going to talk about the main things we found in two posts.
Dropping Out of The Labor Force
This is what the labor market loops like. It is normally a dynamic machine where people transition between employed, unemployed, and out of the labor force. But recently sand has been thrown in the gears, and people’s transitioning between these states is slowing, with more and more people ending up in not in the labor force and staying there.
Here is one of the scariest chart I’ve seen in this recession:
It’s a little complicated, so let me explain. This is the percent of unemployment who leave unemployment every month and where they go. In normal times, you’ll see 25%+ of unemployed transition to employed. This is robust to several ways of calculating this number. This high number is the result of, and a justification for, our comparatively weak social safety net for the unemployed.
But notice what has happened in this recession: Starting in January 2009 it is more likely an unemployed person will drop out of the labor force instead of finding a job. More people are leaving unemployment by simply leaving the formal labor force rather than ending up with a new job. This has massive implications for how we all should view the unemployment numbers.
And notice that the sudden new normal of unemployed leaving the labor force instead of finding a job has been buffered by a sharp drop in the number of people leaving the labor force; this is no doubt in large part to the extension of unemployment insurance, which has incentivized people to continue looking for a job instead of leaving the formal economy.
To see if this is a new historical development, we use the data constructed by Robert Shimer’s and available on his webpage (with an update from Shimer that goes to Q1 2010). The data from June 1967 and December 1975 were tabulated by Joe Ritter and made available…
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