Saturday, April 2, 2011

John Mauldin Talks Debt Crisis Reality Long-Time Reader

Kudos to Mr. Mauldin

I get a lot of email from readers. I recently got an impassioned letter from very-long-time reader Bill K., who asks some very pointed questions about austerity and spending cuts. It is a rather lengthy letter, so I will only quote part of it and use it is the launching pad for this week’s letter, where we look at today’s employment report, but from a little different slant. This letter will no doubt anger a few other long-time readers. I argue this week for the middle, but do so as a survivalist.
While Bill starts out by saying some very nice things about me (thanks), let’s jump to the meat of the letter:
“…. I would like to get something off my chest. I would like to know why you seem to side with those analysts who keep telling us that the only way we can sort out Western economies is by making the average guy suffer through austerity programs… You are a very intelligent guy – obviously. You can see how things work and what is broken. You can also see through the greed and excesses of Wall Street, and you can read the economic data which clearly shows that the wealthy continue to get more wealthy in America whilst the average Joe continues to see his standard of living going in the opposite direction. Capitalism today only works for the 'have gots'. It's been going in that direction for more than 30 years now. You saw the senseless and stupid greed of the derivative scheme which fueled the housing bubble which led to the meltdown which never melted because Bush/Obama handed out a huge welfare check to financial institutions that should have been allowed to fail.
“In the aftermath of all this, politicians in DC, you, and your guest pundits warn us that the world as we know it will end if we don't somehow reduce the average Joe's Social Security, pension, Medicare and Medicaid benefits. Oh and let’s not forget the budget, which is being argued in Washington as I type this. The line is that we have to make drastic reductions to spending on domestic programs, on our schools, on our infrastructure, on unemployment entitlements, on all the things that serve to give working people a chance at a dignified life. You're a smart guy. You can recognize what is fair and what is greed and excess. When the nation is as troubled as it is today and yet the wealthy are living even better than they did 30 years ago, what does that say about America? I wonder if we really care about our neighbors anymore? I wonder why such a great country with such great natural resources cannot find a way to be just and generous and a beacon to higher ideals? Ike warned us to be wary of the military-industrial complex. Looks like he was right. We're a nation constantly at war, spending trillions on defense, whilst at home we enrich the already wealthy and tell the average Joe that he has to pay for it. I wonder how you manage to rationalize all this away – if indeed you do?
“Thanks and with respect, Bill”

The Plight of the Working Class

Bill, you ask a very complicated question. There is not a simple black and white answer, but I am going to try and address your concerns. Let’s start with today’s employment numbers. We got a decent non-farm payroll number of 216,000, and 240,000 new jobs in the private sector (governments everywhere are still shedding jobs). That means over the last two months the private sector has added almost 500,000 jobs. If you take the household survey, that number looks even better. So why did all the consumer sentiment numbers in March come out so awful?
Looking deeper into the data we find that wages were once again flat, for the 4th time in the last five months. We are certainly not keeping up with inflation. The chart below shows real median household income since 1967. It is published in May of each year by the Census Bureau, so we don’t have the data for 2010, but it will not be good. Real median income, when the new data comes out, if I read the chart right, will not have grown for almost 14 years.

But all this has led to what David Rosenberg calls the “Wageless Recovery.” Wage growth just continues to fall.

And given the rise in food and fuel costs (which are now about 23% of the average person’s income), the recent lack of wage growth is even more frustrating.
Although the economy in the US is now producing more “stuff” than it did at its peak in 2007 (fact), we are doing it with 6.8 million fewer people. That means the productivity of the workforce is much better, which is good for corporate profits, but this has not yet translated into higher wages, although in past cycles higher profits have given way to higher wages (eventually, at least).

Can You Say Jobless Recovery?

The following chart is from the St. Louis Fed. It shows the spectacular fall in jobs in the last recession and the painfully slow recovery.

And note that we have gained 30,000,000 more people in the US over the last decade! And negative job growth!
And this next chart is courtesy of my friend Barry Ritholtz of The Big Picture. It is also from the Fed, but it’s one I have never seen.

That is a graph of the last three recessions, with employment indexed at 100, and it shows what employment did from the beginning of the recession, and then from the end of the recession. As Barry said, we don’t want to think about what the next recession will look like, if this is a trend.
The most recent survey from the National Federation of Independent Business shows that small businesses are indeed once again hiring. “The positive job creation observed in February was repeated again in March [sigh of relief here], confirming that the number of net new jobs reported on Main Street was decidedly positive. The March net increase in jobs per firm was .17 workers, a repeat of the February performance. Employment gains have not been this good since 2007.”

But that still begs the question of why wage growth has been so poor. And why do we now have such structural unemployment? Although the headline unemployment number went down to 8.8%, the only way you can get to that number is by not counting the millions who have dropped out of the employment pool, too discouraged to look, but who will take a job if they can get one. If you go back and take the number of people in the labor force just two years ago, the unemployment picture is back over 10% (back-of-my-napkin math).
GDP has recovered, but jobs haven’t. This chart from the NFIB shows the disparity.

Bill, I get it. The average guy is getting squeezed. You can see it in the numbers. For a while, it was masked by growing credit.

Drowning in Debt but Getting No Growth

This is an older chart, but it is relevant. We grew debt in this county in all forms by over 100% of GDP in the last decade. $14 trillion. And what did we get for it? No real job increases, no increase in wages. It was an illusion. In fact, my friend Rob Arnott pointed out to me today that a piece he is working on (which I hope to be able to give you soon!) shows that the only way you can show a positive GDP for the last decade is with government spending.

And that, Bill, is part of the problem. We have become a credit-addicted, credit-fueled economy, which works just fine until you have too much credit driving too little real growth. Without government spending, “real” GDP would be at levels it was over ten years ago. And it is real growth that drives wages and creates jobs.
You write: “The line is that we have to make drastic reductions to spending on domestic programs, on our schools, on our infrastructure, on unemployment entitlements, on all the things that serve to give working people a chance at a dignified life.”
That is not my line. My book calls for a large increase in funded infrastructure spending through a fuels tax (none of it going to the federal coffers!). I am not against unemployment insurance, but at some point it needs to become job training and a path to employment. I am a huge proponent of education, having spent a great deal of money on it over the years, with seven kids (and paid even more in taxes!). But does the current system really work? We have double the educational workers per student we had only a few decades ago, but no improvement in outcomes.
Yes, we have to make cuts to government programs. A 33% growth in federal discretionary spending (not including stimulus money) the last three years alone is not reasonable, given the size of the deficit. The last recession was not caused by too little government.

The Cancer of Debt

The problem is that the debt is like a cancer. The bigger it grows the more threatening it is. Pretty soon it consumes its host (think interest expense).
Bill, I am worried about the survival of the country economically. Another crisis caused by the bond market driving up interest rates, because they become concerned about the size of the debt and deficits, will seriously reduce the choices we have – with none of them being good. Ask Ireland or Greece how it feels. They are in what can only be called a depression, and likely to stay there for some time. You think we have it bad now? Avoid dealing with the debt and see what happens.
To think it cannot happen here is to simply ignore reality. Yes, the US can go longer than we might think, but there is a limit. I think that limit will come before the middle of this decade. Perhaps as early as 2013, if the new incoming President and Congress do not deal with the deficit in a realistic manner. Then Bang! , we have our own Greek moment. I want to avoid that.
In my book and on numerous radio and TV shows, I have made the case that we must get the fiscal deficit below the growth rate of nominal GDP. That means we need to cut, over time, about $1 trillion from the current budget deficit.
And that means entitlement spending has to be on the table, as well as tax increases. The polls clearly show that people want to keep Medicare and also are against tax increases (close to 70% in both cases). Those are not compatible objectives.
We have to have a national conversation about how much Medicare we want and how we want to pay for it. Writing the words tax and increase in the same sentence is difficult for me. Tax increases taken from private producers do nothing for economic growth, which is where we get new jobs. But I would rather have higher taxes than for deficits to be at a level where they threaten the economic survival of the republic. (And I make the case that if conservatives give in on tax increases, that means there needs to be a complete structural change to the tax system, gearing it more to encouraging growth, real Medicare reform, and even larger spending cuts, etc., that are linked to real, measurable metrics!)
I am just as frustrated as you about the bailout of banks, that we still have banks too big to fail, that credit default swaps are not on an exchange, that Fannie and Freddie still even exist in their current forms, and a host of other problems you mention. (Frank-Dodd was a disaster! It almost guarantees another crisis.)
I have become all too familiar with cancer of late. It tends to focus the minds of those who are suffering, and their families, on survival. Chemotherapy is nasty. It means putting a toxic drug into your body. That is something you don’t want to do under normal circumstances, but when your survival is the issue, you do it.
It is no less than economic survival we are talking about. Oh, the US has been through worse. Civil war, depressions, panics. We will survive as a nation, but the pain we will endure is simply more than most people can comprehend, Bill. Whole generations of savings and investment will be wiped out. Think the cuts I am talking about are serious? Wait until interest payments are eating up 25-30% of revenues in a 12%+ unemployment world. Think the underfunded pension problems are bad now? Let’s have a REAL bear market, with inflation.
I have some friends who think that is what it will take to get government smaller. They relish the thought, as they also think their gold portfolios will go through the roof. I am not in that camp. That is not a world I want for my kids and grandkids, Bill, most of whom are (for now) your average person. (Well, except for my exceptional grandkids.)
I want us to find that middle path, to cure the cancer of debt. Yes, I want smaller government and lower taxes, but survival is now my fixation. The cure for too much debt is not more debt. We can get it under control, but it is going to mean compromises, a word that I hate – but I also hate chemotherapy.
I get that we need to do things to make government more efficient. And we need to provide safety nets. We need a lot of things.
But most of all we need an adult conversation about what it is that we need, and what we can afford. The American people have to understand that the path back to a sustainable economy will not be easy. As I have written many times, cutting government spending will mean lower GDP numbers in the short term, but survival in the longer term. This is not a typical business cycle. We cannot simply grow out of our problem. We haven’t really grown, except for government spending, for ten years. Yes, there are numerous steps we can take that will make it better and easier and quicker than if we wait until we are forced by a crisis to act. But there are no “Easy” buttons.
Gentle readers, I promise you we get through this, one way or another. The 2020s are going to be a heck of a lot of fun!

We've Become Takers, Not Makers

by Stephen Moore at WSJ:

If you want to understand better why so many states—from New York to Wisconsin to California—are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.
It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills?
Every state in America today except for two—Indiana and Wisconsin—has more government workers on the payroll than people manufacturing industrial goods. Consider California, which has the highest budget deficit in the history of the states. The not-so Golden State now has an incredible 2.4 million government employees—twice as many as people at work in manufacturing. New Jersey has just under two-and-a-half as many government employees as manufacturers. Florida's ratio is more than 3 to 1. So is New York's.
Even Michigan, at one time the auto capital of the world, and Pennsylvania, once the steel capital, have more government bureaucrats than people making things. The leaders in government hiring are Wyoming and New Mexico, which have hired more than six government workers for every manufacturing worker.
Now it is certainly true that many states have not typically been home to traditional manufacturing operations. Iowa and Nebraska are farm states, for example. But in those states, there are at least five times more government workers than farmers. West Virginia is the mining capital of the world, yet it has at least three times more government workers than miners. New York is the financial capital of the world—at least for now. That sector employs roughly 670,000 New Yorkers. That's less than half of the state's 1.48 million government employees.

Don't expect a reversal of this trend anytime soon. Surveys of college graduates are finding that more and more of our top minds want to work for the government. Why? Because in recent years only government agencies have been hiring, and because the offer of near lifetime security is highly valued in these times of economic turbulence. When 23-year-olds aren't willing to take career risks, we have a real problem on our hands. Sadly, we could end up with a generation of Americans who want to work at the Department of Motor Vehicles.
The employment trends described here are explained in part by hugely beneficial productivity improvements in such traditional industries as farming, manufacturing, financial services and telecommunications. These produce far more output per worker than in the past. The typical farmer, for example, is today at least three times more productive than in 1950.
Where are the productivity gains in government? Consider a core function of state and local governments: schools. Over the period 1970-2005, school spending per pupil, adjusted for inflation, doubled, while standardized achievement test scores were flat. Over roughly that same time period, public-school employment doubled per student, according to a study by researchers at the University of Washington. That is what economists call negative productivity.
But education is an industry where we measure performance backwards: We gauge school performance not by outputs, but by inputs. If quality falls, we say we didn't pay teachers enough or we need smaller class sizes or newer schools. If education had undergone the same productivity revolution that manufacturing has, we would have half as many educators, smaller school budgets, and higher graduation rates and test scores.
The same is true of almost all other government services. Mass transit spends more and more every year and yet a much smaller share of Americans use trains and buses today than in past decades. One way that private companies spur productivity is by firing underperforming employees and rewarding excellence. In government employment, tenure for teachers and near lifetime employment for other civil servants shields workers from this basic system of reward and punishment. It is a system that breeds mediocrity, which is what we've gotten.
Most reasonable steps to restrain public-sector employment costs are smothered by the unions. Study after study has shown that states and cities could shave 20% to 40% off the cost of many services—fire fighting, public transportation, garbage collection, administrative functions, even prison operations—through competitive contracting to private providers. But unions have blocked many of those efforts. Public employees maintain that they are underpaid relative to equally qualified private-sector workers, yet they are deathly afraid of competitive bidding for government services.
President Obama says we have to retool our economy to "win the future." The only way to do that is to grow the economy that makes things, not the sector that takes things.
Mr. Moore is senior economics writer for The Wall Street Journal editorial page.

What to Expect as QE2 Ends

13 Fed officials have given us speeches over the past fortnight. We have heard various views. From Kocherlakota who suggested that interest rate should rise by the end of the year, to Dudley who made it pretty clear that he thinks it would be a mistake to back off the gas pedal anytime soon.

None of those speeches matter much. The only thing that counts is Bernanke. The Fed will end up doing what he wants. There is no true debate at the Fed. All the speeches are show ponies to demonstrate that there is open thinking at the Fed. I don’t believe a word of it. But I do believe when Jon Hilsenrath echoes Ben’s thinking. I believe the Ben/Jon duo was at work in this WSJ article today. The critical words from Ben’s lips: (link)

a $600 billion program of Treasury bond purchases known as quantitative easing looks likely to run its course as planned in June. This will effectively mean the Fed is moving to a neutral stance of no longer easing while not beginning to tighten policy.

Mark Ben’s, Jon’s and my words. This is what the future will bring us. QE will end in June. But the policy of ZIRP will be with us for a long time to come.

There are so many factors at play in the big capital markets these days. The Fed is just one element in the equation. But if you focused on just their effort you would have to conclude that the end of QE but never ending ZIRP will bring us the following:

-Long end yields are going higher. I think the Fed moves have set us up for a 5% long bond and a 4% 10-year. Long bonds are a sucker play when the Fed continues to pour on the gas.

-ZIRP is good for stocks. We shall see about this. One can’t deny that equities are a better place to be than in cash that has a negative return.

-The dollar is going to get crushed. The Yen is a wild card that is influenced today by the uncertainties of Fukushima. We could see more weakness there. But the rest of the currencies of the world are going to have to move higher. I see the Euro over 1.5 the Pound pushing 1.7 and the CHF at around 85 to the dollar. The C&A dollars will be a good place to hide as well.

-PMs have to move higher. We will maintain a policy of cheap money and dollar debasement. How could the metals not respond?

-Inflation is going to roar. The food and energy component of the puzzle that Bernanke refuses to consider is going straight up in my opinion. I wouldn’t be at all surprised to see the non-core CPI up by 5% by the end of the year. We could easily see $5 gas in six months.

I think this is an insane next step for monetary policy. We will all pay a very dear price for this. I think it is also insane to have monetary policy conducted through speeches, innuendo and newspaper leaks.

Friday, April 1, 2011

Crude Oil Reaches New Two-Year Record at $108.50

Corn Limit Up Two Days in a Row

Crude Just Pennies from $108

Subtle Inflation

from John Rubino at

John Maynard Keynes once said of inflation:

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
Here’s one of the “hidden forces of economic law” to which Keynes referred, courtesy of yesterday’s New York Times:

Food Inflation Kept Hidden in Smaller Bags
Chips are disappearing from bags, candy from boxes and vegetables from cans.
As an expected increase in the cost of raw materials looms for late summer, consumers are beginning to encounter shrinking food packages.
With unemployment still high, companies in recent months have tried to camouflage price increases by selling their products in tiny and tinier packages. So far, the changes are most visible at the grocery store, where shoppers are paying the same amount, but getting less.
For Lisa Stauber, stretching her budget to feed her nine children in Houston often requires careful monitoring at the store. Recently, when she cooked her usual three boxes of pasta for a big family dinner, she was surprised by a smaller yield, and she began to suspect something was up.
“Whole wheat pasta had gone from 16 ounces to 13.25 ounces,” she said. “I bought three boxes and it wasn’t enough — that was a little embarrassing. I bought the same amount I always buy, I just didn’t realize it, because who reads the sizes all the time?”
Ms. Stauber, 33, said she began inspecting her other purchases, aisle by aisle. Many canned vegetables dropped to 13 or 14 ounces from 16; boxes of baby wipes went to 72 from 80; and sugar was stacked in 4-pound, not 5-pound, bags, she said.
Five or so years ago, Ms. Stauber bought 16-ounce cans of corn. Then they were 15.5 ounces, then 14.5 ounces, and the size is still dropping. “The first time I’ve ever seen an 11-ounce can of corn at the store was about three weeks ago, and I was just floored,” she said. “It’s sneaky, because they figure people won’t know.”
In every economic downturn in the last few decades, companies have reduced the size of some products, disguising price increases and avoiding comparisons on same-size packages, before and after an increase. Each time, the marketing campaigns are coy; this time, the smaller versions are “greener” (packages good for the environment) or more “portable” (little carry bags for the takeout lifestyle) or “healthier” (fewer calories).
Where companies cannot change sizes — as in clothing or appliances — they have warned that prices will be going up, as the costs of cotton, energy, grain and other raw materials are rising.
“Consumers are generally more sensitive to changes in prices than to changes in quantity,” John T. Gourville, a marketing professor at Harvard Business School, said. “And companies try to do it in such a way that you don’t notice, maybe keeping the height and width the same, but changing the depth so the silhouette of the package on the shelf looks the same. Or sometimes they add more air to the chips bag or a scoop in the bottom of the peanut butter jar so it looks the same size.”Thomas J. Alexander, a finance professor at Northwood University, said that businesses had little choice these days when faced with increases in the costs of their raw goods. “Companies only have pricing power when wages are also increasing, and we’re not seeing that right now because of the high unemployment,” he said.
Most companies reduce products quietly, hoping consumers are not reading labels too closely.
But the downsizing keeps occurring. A can of Chicken of the Sea albacore tuna is now packed at 5 ounces, instead of the 6-ounce version still on some shelves, and in some cases, the 5-ounce can costs more than the larger one. Bags of Doritos, Tostitos and Fritos now hold 20 percent fewer chips than in 2009, though a spokesman said those extra chips were just a “limited time” offer.
Trying to keep customers from feeling cheated, some companies are introducing new containers that, they say, have terrific advantages — and just happen to contain less product.
Kraft is introducing “Fresh Stacks” packages for its Nabisco Premium saltines and Honey Maid graham crackers. Each has about 15 percent fewer crackers than the standard boxes, but the price has not changed. Kraft says that because the Fresh Stacks include more sleeves of crackers, they are more portable and “the packaging format offers the benefit of added freshness,” said Basil T. Maglaris, a Kraft spokesman, in an e-mail.
And Procter & Gamble is expanding its “Future Friendly” products, which it promotes as using at least 15 percent less energy, water or packaging than the standard ones.“They are more environmentally friendly, that’s true — but they’re also smaller,” said Paula Rosenblum, managing partner for retail systems research at, an online specialist network. “They announce it as great new packaging, and in fact what it is is smaller packaging, smaller amounts of the product,” she said.
Or marketers design a new shape and size altogether, complicating any effort to comparison shop. The unwrapped Reese’s Minis, which were introduced in February, are smaller than the foil-wrapped Miniatures. They are also more expensive — $0.57 an ounce at FreshDirect, versus $0.37 an ounce for the individually wrapped.
At H. J. Heinz, prices on ketchup, condiments, sauces and Ore-Ida products have already gone up, and the company is selling smaller-than-usual versions of condiments, like 5-ounce bottles of items like Heinz 57 Sauce sold at places like Dollar General.
Some thoughts:
  • When Fed officials claim that inflation is “well contained” are they measuring per ounce or per package? It wouldn’t be a surprise, given how disconnected from reality they frequently sound, if they’re being fooled by manufacturers’ packaging scams.
  • If manufacturers are playing games with package sizes you can bet they’re also using cheaper ingredients, so not only are we getting less of our favorite things, they’re probably not as good as they were when we first developed an attachment to them.
  • It’s an article of faith among modern economists that a little inflation is a good thing because it lets companies raise prices and workers get raises, so everyone feels richer. But that ignores the other side of the equation, which is, as we’re now seeing, a decline in product quality and producer credibility. In the end we don’t feel richer because we got a raise; we feel ripped off by companies we used to respect.
  • Those same economists see deflation as a bad thing because it makes debt harder to carry. But this also overlooks the impact of incentives on behavior and character. Consider: if you make, say, candy bars and the prices of sugar and chocolate are going down, you want to avoid having to cut your selling price because holding the line on price produces a wider profit margin. So you start using higher-grade chocolate or increasing your candy bars’ size — and you let your customers know that you’re improving your products. Your credibility goes up because you’re offering a better deal, and doing so very publicly. As this practice spreads through the larger economy, the result is a culture of quality and integrity and customer service. Where inflation turns merchants into secretive con artists, deflation produces transparent purveyors of ever-better deals. In a deflationary world, our paychecks don’t rise as much, but everyone seems to be working for us rather than trying to rip us off.
  • Viewed this way, only an idiot (or a Keynesian economist) would choose inflation over deflation.

Looking to the End of QE2

John Hussman gave me this perspective on the likely outcome of QE2 as it reaches an end:

Last week's stock market advance placed prevailing conditions firmly back to an overvalued, overbought, overbullish, rising-yields syndrome that has historically been hostile for stocks, on average. Our investment stance considers not only these factors, but also reflects the (present) accommodative stance of monetary policy, as well as a broad range of measures such as market internals, credit spreads, and economic statistics. I've noted before that as rules of thumb go, "the trend is your friend" historically performs better, with much smaller drawdowns, than "don't fight the Fed" (regardless of how that rule is defined operationally). While the market tends to perform better when both are true, the exception is the overvalued, overbought, overbullish, rising-yields syndrome, which is uniformly negative regardless of the random subset of historical data one examines. There is certainly a tendency for "unpleasant skew" featuring a persistent series of marginal new highs for some period of time, but on average, those are ultimately overwhelmed by steep and abrupt losses that finally clear this syndrome.

It's important to recognize that our present investment stance reflects these observable conditions, and is not driven by our views about the underlying state of mortgage debt, fiscal challenges, economic forecasts, expectations of credit strains, or any view about the appropriateness of Fed intervention. We do try to look ahead to some of the risks that may emerge in the quarters ahead, but our investment stance is not driven by this analysis. If we can clear some component of the observable, hostile syndrome of market conditions - probably either the overbought or overbullish feature - without a substantial breakdown in market internals (which would take us "out of the frying pan and into the fire"), we expect to quickly establish a moderately constructive investment stance. Our concerns regarding larger economic risks can be sufficiently expressed by holding a continued line of index put options to defend against any unanticipated continuation, but again, barring a breakdown of market internals (which would suggest a larger and possibly more durable shift toward investor risk aversion), I expect that clearing the present, hostile syndrome will be sufficient to accept a greater exposure to market fluctuations.
Our longer-term analysis remains that the S&P 500 is priced to achieve poor 10-year total returns, but that in itself doesn't resolve into the requirement to carry a persistently defensive position over the short- and intermediate-term. Even if the market remains overvalued and economic risks persist for a long time, we do expect that the "ensemble" solution to the "two data sets" problem we struggled with in recent years will result in more frequent periods of moderate investment exposure than we observed during that period. Still, our dominant investment horizon remains the full market cycle, so our usual "anti-marketing" applies - the Hussman Funds are not appropriate for investors who have a strong desire to track market fluctuations or whose investment horizon is shorter than a full bull-bear cycle. That said, even for investors who prefer to track the market up and down to a reasonable degree, it is worth emphasizing that combining a long-only approach with less correlated approaches that still compete well over the full cycle can significantly improve the return/risk profile of the portfolio over time.
QE2 - Apres Moi, le Deluge
Last week, a number of Fed officials came out in tandem with essentially the same message - the Fed's policy of quantitative easing is likely to end with QE2. It's important to think carefully about the implications of this for the markets. My impression is that investors are still in something of a "momentum" mentality both with respect to the market and the overall economy, and it's not clear that they've pieced out the extent to which this has been reliant on various stimulus measures that are now drawing to a close.
It is clear that the effect of QE2 has not been to lower interest rates, or to materially expand credit. Rather, QE2 has been built on two blunt forces. The first is that increasing the stock of non-interest bearing money in the economy toward $2.4 trillion, all of which has to be held by somebody, the Fed has created a market environment that has raised the prices and lowered the returns on all competing assets in order to accommodate that equilibrium. As asset prices are bid up, their expected future returns fall, and the process stops at the point where on a risk-adjusted basis, no asset is expected to achieve returns that compete meaningfully with cash (at least over some horizon of say, a year or two). The second force has been purely rhetorical. The opening salvo in QE2 was Bernanke's public endorsement of risk-taking in the Washington Post. Strikingly, he has seemed to eagerly take credit for the speculation in the stock market, particularly in small cap stocks, while denying any culpability for the commodity hoarding and dollar weakness that predictably results from driving real short-term interest rates to negative levels.
In our view, quantitative easing has been a reckless policy, not only because it has fueled what Dallas Fed president Richard Fisher calls "extraordinary speculative activity," but because aside from a burst of short-term optimism, the historical evidence is clear that fluctuations in stock prices have very little impact on real spending (the so-called wealth effect is on the order of 0.03-0.05% for every 1% change in stock prices). People consume off of perceived permanent income, not off of fluctuations in the prices of volatile assets. Now, it's true that QE2 has probably been good for a fraction of 1% in additional GDP, which should be sustained over a period of a year or two, and though we haven't observed real activity or actual industrial production that matches the optimism of survey-based measures such as the ISM indices, it's clear that some pent-up demand was released. Still, the links between monetary base expansion, stock values, and GDP growth are tenuous at best. The most predictable outcome was commodity hoarding, where our expectations have been fully realized, with awful consequences for the world's poor, not to mention for geopolitical stability.
So for our part, we'd be happy to see the termination of QE simply because it is misguided, reckless policy. In contrast, most of the Fed officials pulling back on their enthusiasm for QE argue along the lines that "the economy is strong enough now to do without it," which is unfortunate because it leaves the door open to continue this sort of lunacy should the economy weaken again. A few quotations from various Fed officials last week:
Charles Evans (Chicago Fed) "Following through on that to the tune of $600 billion, like we've said, I think is appropriate. I personally don't see as many needs for a further amount, as I probably thought last fall."
James Bullard (St. Louis Fed): "The economy is looking pretty good. It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the program or to stop a little bit short."
Charles Plosser (Philadelphia Fed): " If this forecast is broadly accurate, then monetary policy will have to reverse course in the not-too-distant future and begin to remove the massive amount of accommodation it has supplied to the economy. Failure to do so in a timely manner could have serious consequences for inflation and economic stability in the future. I don't think that is necessarily imminent, but we have to be very careful we don't get behind the curve. I worry about us getting behind the curve. "
Richard Fisher (Dallas Fed): "In essence what we have done as a central bank is to monetize the entire US debt through the end of June. Had I been a voter last year, which I am this year, I would have joined Hoenig and would have voted against what is known as QE2. In my opinion, no further accommodation is needed after June -- either by tapering off the bottom of the purchases of Treasuries, or by adding another tranche of purchases outright. In my view it is unlikely that we will have or need more accommodation by the central bank. I think we've done our job."
While the possibility of ending QE2 early may come up in the FOMC's April meeting, I doubt that the Fed will stop short. Regardless of the lack of meaningful "wealth effect" from stocks to GDP in the historical data, it's clear that Bernanke views a speculative stock market as a good thing, and my impression is that he would consider the risk of disappointing the markets as too great. Instead, the Fed will have enough on its hands simply removing the expectation of the market for QE3, not to mention telegraphing the potential for the Fed to eventually reverse course.
Still, barring a surprise early-conclusion to QE2, there are two important issues for the market as we look ahead to gradual changes in Fed policy.
First, what happens when QE2 is complete? From our standpoint, it is incontrovertible that the primary factor behind the market's recent advance has been speculation based on the belief, explicitly encouraged by Bernanke, that the Fed would provide a backstop for risk-taking. Investors clearly took Bernanke at his word. But without yet another round of QE, not to mention the potential for an unwinding of existing QE, a decline in speculative enthusiasm will likely have the identical effect as an increase in risk aversion.
Second, how likely is it that economic growth will be successfully "handed off" to the private sector as fiscal policy tightens and monetary policy becomes less aggressive? It is clear that the economy is enjoying some surface economic progress - the most notable being a gradual drop in new claims for unemployment. But the real fiscal "cliff" for states and municipalities doesn't hit until about mid-year, which is the same time that QE2 comes off. What we're observing at present is decidedly still fiscal- and monetary-induced growth. It is not enough that the data have improved gradually. The real question is whether it would have, or will, improve without that stimulus.
My intent is not to argue strongly that the economy cannot continue to expand as fiscal and monetary stimulus comes off, but instead to at least ask why this should be expected as a foregone conclusion. On the basis of leading indices of economic activity, we observe more indications of economic slowing worldwide than we observe growth. Moreover, strong periods of employment growth have historically been preceded by high, not low, real interest rates. This is far from a perfect relationship, but it is clear that historically, high real interest rates are far more indicative of strong demand for credit, new investment, and new employment than low real interest rates are.
The belief that low real interest rates are helpful is the result of confusing the demand curve with equilibrium itself. Yes, strictly from the demand curve, lower real interest rates are associated with greater demand for capital investment and so forth. But if we want growth, then what we really desire is a persistent outward shift in the demand curve. We want increased desire for real investment and employment at every level of real interest rates. Meanwhile, on the supply side, higher real interest rates help to induce a shift from consumption toward savings that can be directed to finance that new investment. In equilibrium, then, what generally precedes strong economic growth is an upward movement in real rates. Trying to engineer low real rates, which is what the Fed seems to want, is an attempt to move along the existing demand curve, which can never, in itself, be the source of sustained growth, and harms savers at the same time (as the Fed's Richard Fisher observed last week, it only works to "continue the injustice against the virtuous.")
On the employment front, it is important to recognize that while the annual growth of non-farm payrolls averaged about 2% and higher prior to the 1990's, each cycle of U.S. economic expansion and recession has resulted in slower and slower long-term employment growth. The chart below shows what I would characterize as a series of "vicious cycles" - particularly the most recent experience. On the chart, business cycles move counter-clockwise, with expanding year-over-year employment growth gradually improving the 10-year average, followed by a slowdown and eventually a contraction in employment growth that since the 1960's has dragged long-term employment growth to progressively lower levels in each successive business cycle. Given the high level of unemployment, the "mean-reversion benchmark" would normally be about 200,000 jobs monthly. We should sustain that for a few more months, but the likely effect of reduced policy stimulus should not be ignored looking out further.
The bottom of the chart is where we are at present. In my view, the poor performance of the U.S. economy from an employment standpoint cannot be separated from the Fed's attempts, for more than a decade, to make easy monetary policy a substitute for the accumulation of real savings and investment. All that we've done is to finance a huge stream of consumption, which we have quietly paid for by selling off claims on our assets and future output to foreign savers such as China and Japan. The Fed has surely helped us to build that indebtedness without pain from an interest rate standpoint, but the volume of claims is increasingly onerous. Unlike Japan, which has a high debt-to-GDP ratio but finances the bulk of it with its own savings, our debt is increasingly external, which means that someone else has a claim to our future output. Speculating and consuming off of cheap credit may feel better than saving, but the long-term results are profoundly different.
The problem for the financial markets here, in my view, is that the benefits of the speculation are now largely behind us. Our valuation models do assume that long-term growth in GDP and earnings will persist at the same roughly 6.3% peak-to-peak growth rate across economic cycles that has characterized the earnings channel for nearly a century. Yet given the level of stock valuations to normalized earnings - which better reflect the long-term stream of cash flows that investors can expect to receive - our present 10-year total return estimate for the S&P 500 is only about 3.4% annually (and to Mish, yes, the historical skew to these returns easily includes zero in the confidence interval).
None of this rules out further positive market returns over shorter periods, and we remain willing to accept moderate periodic exposures even here, provided that we can clear some component of the overvalued, overbought, overbullish, rising-yields syndrome we presently observe. But as Charles Dow said a century ago, "to understand values is to understand the meaning of the market." Occasional prospects for moderate exposure notwithstanding, I continue to view the long-term prospects for equities as weak. This is largely because we continue to rely on band-aids and overwhelming policy interventions to keep interest rates low and market valuations elevated, in preference to lower valuations (and commensurately higher interest rates and prospective equity returns) which would offer proper incentives to save and allocate capital for productive long-term uses.
Market Climate
As of last week, the Market Climate for stocks reflected a continued hostile syndrome of conditions that holds us to a well hedged investment stance in both the Strategic Growth Fund and the Strategic International Equity Fund. In bonds, the Market Climate remained characterized by relatively neutral yield levels as well as neutral yield pressures. The Strategic Total Return Fund continues to carry a duration of just over 4 years, with about 10% of assets allocated to precious metals shares. As I've noted before, very shallow corrections in gold followed by moves approaching the $1500 level would be consistent with increasing hazard risk, so I would expect that we'll tend to lighten our holdings on any "range expansion" moves in precious metals shares (large leaps in price that have a wider overall range than that of preceding weeks). For now, we're moderately constructive in both bonds and precious metals. We are defensive in stocks, but that would change on a decline sufficient to clear overbought, overbullish conditions without being severe enough to materially damage market internals (which would signal more a more significant shift toward investor risk aversion). As always, we'll respond to changes in market conditions as they emerge.

How the Community Reinvestment Act Destroyed the U.S. Economy

by Mish Shedlock at Global Economic Trend Analysis:

President Obama wants to expand the Community Reinvestment Act. Thus it should be no surprise that a self-serving report by the Obama Administration concludes that CRA "greenlining" (forcing banks to lend to low-income neighborhoods) did not contribute to the housing bubble or the financial crisis.

Investor's Business Daily takes apart ACORN and the CRA in an editorial Community Reinvestment Act: Separating Fact From Fiction

In light of the Obama administration's stated goal of expanding the CRA, separating fact from fiction regarding this issue is of towering importance — to set the historic record straight and to prevent another financial calamity.

FICTION: Because the CRA was passed in 1977, long before the subprime crisis, it couldn't have caused the recent explosion in bad loans.

FACT: The toothless 1977 regulations fully expired in July 1997, when President Clinton rewrote them to toughen CRA enforcement as part of a crusade to close the "mortgage gap" between blacks and whites.

For the first time, banks were required to show results. One of the five performance criteria in the "lending test" — the most heavily weighted component of the CRA exam — was adopting "flexible lending practices" to address the credit needs of poor borrowers in "predominantly minority neighborhoods." Banks that didn't bend their underwriting rules risked flunking the exam.

Ex-Federal Reserve Board Gov. Lawrence Lindsey, a staunch CRA defender, acknowledges that the changes "did contribute to a downgrading of credit standards."

FICTION: "Many of these (CRA) loans were not very risky," the FCIC report claims.

FACT: Studies show that CRA loans have higher delinquencies and defaults and act as a major drag on bank earnings. In 2008, CRA loans accounted for just 7% of Bank of America's total mortgage lending, but 29% of its losses on home loans. Also, banks with the highest CRA ratings tend to have the lowest safety and soundness ratings.

FICTION: Only 6% of subprime loans were originated by banks subject to the CRA, so the vast majority of risky lending was not tied to the law.

FACT: Among other things, the figure does not count the trillions of dollars in CRA "commitments" that WaMu, BofA, JPMorgan Chase, Citibank, Wells Fargo and other large banks pledged to radical inner-city groups like Acorn, Greenlining and Neighborhood Assistance Corp. of America (NACA) after they used the public comment process to protest bank merger applications on CRA grounds.

All told, they shook down banks for $4.6 trillion in such commitments before the crisis, boasts a report by the National Community Reinvestment Coalition, or NCRC, the nation's top CRA lobbyist (which conveniently removed the report from its website during the FCIC hearings).

FICTION: "These loans performed well," the FCIC report maintained.

FACT: Brookings found that the loan commitments were set aside for low-income minorities with "marginal credit scores" and posed a higher risk. They were even riskier than regular CRA loans, because the banks delegated underwriting authority to the nonprofit shakedown groups, which had no experience judging credit risk.

NACA thinks traditional underwriting standards are "patronizing and racist." It advertises that anyone — "regardless of how bad your credit is" — can qualify for the mortgages it's arranged through special deals with banks. Not surprisingly, one study found that its delinquency rates were eight times higher than the national average.

Banks reported delinquency rates ranging from 5% to 50% on loans made pursuant to their merger-related commitments.

Yet the FCIC refused to investigate the more than 300 CRA agreements that banks and community organizers entered into before the subprime bubble burst.

Despite repeated requests by Commissioner Peter Wallison, the panel never examined the performance of the trillions in loan commitments.

Why would Chairman Angelides steer blame away from the CRA? Because he's a big fan of the CRA. And as California state treasurer, from 1999 to 2007, he steered billions in state funds into unsafe CRA mortgages securitized by Freddie Mac.

At the time, Greenlining advised Angelides on where to invest California state funds, even providing him with its own CRA report card on "good" and "bad" banks. He has also personally benefited from CRA projects brokered by his real estate development firms, according to "The Great American Bank Robbery."

As part of the CRA racket, Angelides should have been a witness in the crisis investigation, not its chief inquisitor. With the cover-up complete, he now hopes that CRA critics will go away.

"The debate about the role of the CRA should now be over as evidence presented in the commission's report is clear," Angelides declared earlier this month.

Sorry, sir, but the debate will end when the public has all the facts, not just your cooked report.
The CRA certainly did not cause the financial crisis. However, it did contribute to it.

Ironically, the very same people who insisted money be lent to people who could not afford houses are the very same people now bitching about those same "predatory loans".

Forcing banks to lend money is a piss poor idea. Piss poor loans help neither the lender nor the borrower. Yet, those who added fuel to the housing bubble have now whitewashed their role in the affair and beg for still more funds.

President Obama want to expand the CRA. Instead it should be added to the scrap heap of history along with Fannie Mae, Freddie Mac, HUD, HAMP, and thousands of affordable home programs all of which did anything but make homes affordable.

Now that home prices are falling, one might think the affordable home advocates would be happy. They are not. The hypocrites now want to prop up home prices on the belief that falling home prices hurt neighborhoods.

When dealing with misguided activists and self-serving fools you simply cannot win.

Wednesday, March 30, 2011

Ag Commodity Inflation Is Here and Going to Get Worse

from Along the Watchtower blog:

Longtime readers will recall that we've had several conversations here regarding the impact that the Fed's quantitative easing policy is having on the costs of everyday food items. Soaring prices of agricultural commodities are going to continue to have a devastating effect on the purchasing power of average Americans and consumers around the globe. Since prices have now recovered some from the selloffs after the Japanese earthquake and tsunami and since there is no end in sight to QE, I thought it was time to once again take a look at out favorite commodities and assess where their prices may be headed over the spring and summer.

Let's start with the grains because rising grain prices cause all sorts of inflation. Not only are grains the raw input to countless consumer goods, grains are also the primary foodstuff for cattle ranchers and hog finishers as they prepare their herds for slaughter. Let's start with wheat, which is being influenced not just by the falling dollar. Price is also feeling the impact of the ongoing drought in the "winter wheat zone" of the high plains of Kansas, Oklahoma and Texas.
Now take a look at the chart. Long-term support held at $7.50 and wheat looks almost certain to catapult higher very soon.

OK, so how about corn? Corn is extremely important in food production as it is used not only as a primary ingredient but as a sweetener, as well. First, let's look at the chart. Support was found, as expected in the area around $6.50. I have no doubt that corn will soon resume its upward move along its primary trendline from last summer.
Now here's the deal with's expensive to grow! The primary fertilizer that Midwestern corn farmers utilize is anhydrous ammonia. Last year, anhydrous ammonia cost your average farmer about $425/ton. This year, the cost has almost doubled to $750-800/ton. So, while it might be tempting to seed a lot of acres with corn to capitalize on the high price, the input and production costs are so high that many farmers will choose to plant soybeans, instead. Less acres of corn planted lead directly to less production. Less production leads directly to even higher prices. (Remember that below when we get to cattle.)

So what about soybeans? Soybeans are the one grain that I don't expect to rise in price. They will, most likely, stay rangebound through the summer. Why? Besides the fertilizer costs affecting plantings, soybeans get extra acreage for another reason: Weather. Because soybeans have a shorter growing season, they are a "fall back plan" for many farmers who struggled to get corn planted due to overly wet spring conditions.
If the upper Midwest spring turns out cool and wet, many farmers will forego corn planting and turn, instead, to soybeans. Extra supply = Lower cost.

Now, let's get back to corn. Have you ever heard the term "corn-fed beef"? Most of the best steakhouses proudly champion corn-fed beef because, frankly, its tastes a helluva lot better than grass-fed. The high sugar content of the corn gets converted into fat. The fat makes its way into the muscle and you, Mr. Steakeater, get yourself a beautiful, marbled "prime" steak. Fat cows are also desirable at slaughter because, well, they weigh more and cattle are sold by the pound. OK, so now, pretend for a moment that you're a cattle rancher. As your cattle are growing and being prepared for market (the term is "finished"), you want to feed them as much corn as they'll eat and you can afford. Corn at $7.00/bushel really cramps your business plan. Your first reaction is to control costs by thinning your herd, i.e. you sell some prematurely, before they are "finished". You might also simply want to sell some of your herd to take advantage of today's high prices.
Either way, this extra supply in the short term has actually worked to keep cattle prices from soaring at the same rate as the grains. But this is temporary. By this summer, supply will decrease as cattle that would have been coming to market just then have already been slaughtered. Are we already beginning to see this play out on the chart? Well, take a look:
Many of the same dynamics are in play in the pig market. Note the similar chart pattern of a recent breakout to new highs.

So what does all this mean? It means you'd better prepare. Maybe you're comfortable and you have all the disposable income you need. Great, but what about your sister, trying to raise her three kids on 50 grand a year? What about your neighbor or your best friend who is trying simply to make ends meet after losing a job? What can you do to help them?

You start by warning them about the coming surge in food costs brought about by quantitative easing. All of the factors discussed above, combined with soaring fuel costs, will most certainly lead to a much higher "cost of living" in the near future. The time to act is now.

Stocks Futures Continue to Rise Despite Macroeconomic Data

Wall Street is so imbibed on monetary heroin that they will continue to ignore the fundamentals and overbought valuation levels until news hits that can no longer be ignored. Market overnight was very choppy.

from Knight Capital
Overview: Markets mostly positive this morning ahead of the ADP Employment numbers and despite sovereign ratings downgrades for Greece and Portugal yesterday.
U.S.: Housing figures continue to disappoint as MBA Mortgage Applications today showed a decrease of -7.5% for the week v 2.7% prior. Challenger Job Cut figures for March came in at -38.6% YoY v +20.0% prior. ADP payroll figures estimated at 208K additional jobs will also preview this month’s labor market as the anticipation for Friday builds. This estimate is compared to February’s 217K that exceeded market expectations and put the market into frenzy over the Friday release. All indications point to today’s release showing some traction and we tend to take the over on the 208K consensus. Yesterday’s consumer confidence of 63.4 v 65E disappointed the Street, but as we noted yesterday, this was not a total surprise given recent commodity price spikes and a still downtrodden housing sector. In an interview last night, President Obama showed confidence yesterday in the effectiveness of sanctions and U.N. military action against the nearly defeated Libyan leader Qaddafi. The President also noted that the U.S. may support Libyan rebels through the provision of arms. Luckily the speech did not interfere with “Dancing with the Stars”…
Europe: Yesterday S&P cut Portugal’s sovereign debt rating for the second time this week to BBB- from BBB and Greece’s rating from BB+ to BB-, with Portugal left on negative outlook and Greece left on watch negative. The decision centered on both countries’ unsustainable debt levels and inevitable draw on the EFSF as well as the agency’s rather dim view of the future ESM. We agree with the less-than-rosy-view of what one client has wittingly termed “the new new new new final comprehensive liquidity solution to the solvency problem.” The IMF appeared peeved by the announcements as a report published yesterday highlighted that ratings news adds to the region’s instability. Portugal will also have to revise their deficit figures to Eurostat after an accounting irregularity. With bank stress test coming up in April and the bad news continuing, we feel the agencies will have no choice but to continue their downgrade trend and that spreads remain too tight relative to risks. Fitch noted this morning that the summit results are unlikely to ease new term financing conditions for the periphery. Euro Zone consumer confidence in March continued to be hit by the region’s sovereign debt troubles and held steady at -10.6 v -10.6E. Ireland’s unemployment rate reached 14.7% in March v last month’s 14.7% revised up from 13.5%. German inflation remained at its two-year high in March, with preliminary HICP at 0.5% MoM v 0.6% prior and 2.2% YoY v 2.2% prior. Spanish inflation also remained elevated high in March, with HICP increasing 3.3% YoY v 2.4%E. These levels provide further support for Trichet’s proposed ECB rate hike. Retail sales in Spain fell again to -4.8% YoY v -4.7% prior on a real basis. The Bank of Spain also revised up its 2011 jobless rate to 20.7% for 2011 and 20.4% in 2012. Portuguese retail sales dropped 4.6% YoY v -7.1% prior revised down from -5.3%. Portuguese industrial production figures were more optimistic at +0.9% YoY v -0.7% prior and +1.5% MoM v -3.7% prior, although levels remain low.
Asia: Asian stocks on the rise after Japanese manufacturers resumed production for the first time since the earthquake earlier this month. The Chinese press is reporting that the PBoC may raise RRR 6 more times this year to add onto the 3 adjustments made already in 2011. The Chinese leading index pushed up slightly to 101.05 v 101.04 prior. New Zealand building permits fell 9.7% MoM v -1.0%E and erased last month’s +9.1%. South Korean real GDP in 4Q10 grew 0.5% MoM v 0.5% prior and 4.7% YoY v 4.8% prior. Preliminary figures for Japanese industrial production showed +0.4% MoM v -0.1%E, though these figures are pre-earthquake. Radiation concerns continue to grow in Japan as Iodine levels in seawater close to the nuclear power plant show abnormally high iodine levels. Japanese farmland will tested for radiation and will be complete in the next few weeks.
From Brian Yelvington of Knight Capital

Tuesday, March 29, 2011

U.S. Misery Index At All-Time High

Consumer Confidence Takes a Hit

But Wall Street is oblivious:

thanks for Zero Hedge:

The Confidence Board has released its Consumer Confidence Number, which in March went in freefall from the revised previous print of 72, highest in 3 years, to a below consensus 63.4 (expectations of 65). But while this number is largely irrelevant, the Inflation Rate index surged from 5.5 to 6.7, the highest since October 2008.
The chart below of inflationary expectations shows why Bernanke is in a bind: QE3 means this line will go parabolic; no QE3 means the market will go inversely parabolic. Pick your poison.

And longer-term. There has been a market crash after every historic surge.

The Confidence Board has released its Consumer Confidence Number, which in March went in freefall from the revised previous print of 72, highest in 3 years, to a below consensus 63.4 (expectations of 65). But while this number is largely irrelevant, the Inflation Rate index surged from 5.5 to 6.7, the highest since October 2008.
The chart below of inflationary expectations shows why Bernanke is in a bind: QE3 means this line will go parabolic; no QE3 means the market will go inversely parabolic. Pick your poison.

And longer-term. There has been a market crash after every historic surge.

But Wall Street Shrugs It Off, Rises

Housing's Continued Double Dip

from Zero Hedge:

Case Shiller data is out, and it is as horrible as ever. The Home Price Index came at 140.86 compared to 142.42 previously. Basically the double dip refuses to stop, and that even despite yesterday's "stunning"(ly irrelevant) pending home sales number.“Keeping with the trends set in late 2010, January brings us weakening home prices with no real hope in sight for the near future” says David M. Blitzer, Chairman of the Index Committee at Standard &  Poor's. “With this month’s data, we find the same 11 MSAs posting new recent index lows. The 10-City and 20- City Composites continue to decline month-over-month and have posted monthly declines for six consecutive months now. “These data confirm what we have seen with recent housing starts and sales reports. The housing market recession is not yet over, and none of the statistics are indicating any form of sustained recovery. At most, we have seen all statistics bounce along their troughs; at worst, the feared double-dip recession may be materializing."

Monday, March 28, 2011

Dallas Fed Sorely Disappoints, Reports Rising Inpute Costs As Cause

Stocks dipped a few points, but only temporarily, on this news. 

Kudos to Zero Hedge for this:

The Dallas Fed diffusion index is out, coming at a disappointing 11.5 on expectations of 18.4, with the market completely ignoring it. After all good diffusion index data is to be bought even if it confirms surging inflation, and bad diffusion index data is to be avoided. And while the component data is pretty bad (projected wages and benefits 6 months ahead plunge by 12 points as do Capital Expenditures, as firms refuse to spend any more organic cash on growth, offset by expectations of lower input costs, which remains TBD), the true nuts and bolts of the index can be gleaned from the respondent surve, presented below, although the most relevant one is here: "Prices are high, which makes for lower volume. The supply of cattle is limited. The cost of grain for livestock is unusually high because of high corn prices, partly attributable  to ethanol subsidies. All of our raw material costs are at record highs. The cost of diesel also hurts us. A weak dollar is not good for us." No surprise there.

Comments from Survey Respondents
These comments were selected from respondents' completed surveys and have been edited for publication.
Plastics and Rubber Products Manufacturing
We've seen a drop off of new orders and particularly repeat orders, perhaps related to the expiration of stimulus funds in the general economy.
Nonmetallic Mineral Product Manufacturing
Two factors have resulted in an increase in demand: consolidation of a sister location into our location and the closure of the sister location, and exit from the industry by a competitor in Florida. These factors have significantly improved order flow through our location. We have also seen a minor increase in order flow from existing customers, indicating the beginning of a recovery in the housing sector. Commodity-based raw material prices have begun to increase, partially due to higher energy prices and a weak U.S. currency. As a result, we will seek a small price increase for our products within the next two months. The impact of the recent situation in Japan on the world economy has yet to be determined, so we remain cautiously optimistic at this time.
Fabricated Metal Product Manufacturing
A large new project with a local maker of high-end furniture may double our volume of shipments.

Our oil field service, coal mining and minerals mining customers continue to accelerate their demand. Other markets remain soft. We are adding to our labor resources. The only area of difficulty we have is hiring and retaining qualified machinists.
Machinery Manufacturing
We continue to see a slow improvement in demand in our markets, but our industrial customers remain very cautious and cost-conscientious. My impression of the general economy is less optimistic than a month ago. Costs that matter to consumers, like food and fuel, are going up very significantly. The uncertainties in the Middle East and Japan are affecting everyone's confidence.
Chemical Manufacturing
We are seeing a small slowdown in new orders thus far this month, but we expect it to pick back up to February-type numbers.
Demand seems to be gaining traction slowly, but we are concerned about the effect of higher oil prices, particularly on consumer demand.
Furniture and Related Product Manufacturing
The outlook seems to be on the edge again, and we are very unclear as to the direction. The last three weeks, which are normally dramatically upward, are two weeks up and one week down. How much world events are playing on this is unknown, but gas prices are dampening business. All of our dealers are certain on that one point.
Computer and Electronic Product Manufacturing
Commercial aircraft business is anticipated to increase. Military and defense business is fairly flat.
About 10 percent of our revenue is sourced from manufacturing sites in Japan that have been affected by the recent earthquake. About 60 percent of our products are sourced from other facilities, and it is possible to move all production to other sites over time. Due to our manufacturing processes, most of our WIP (work in process) to meet the current quarter demand is in final stages in other parts of the world. Hence, supply impact will be greatest in second quarter 2011. Near-term, about 10 percent of our revenue ships into Japan, and customer sites vary from being fully back on line to not knowing when production would resume. The impact on demand is not known at this point.
Food Manufacturing
Prices are high, which makes for lower volume. The supply of cattle is limited. The cost of grain for livestock is unusually high because of high corn prices, partly attributable to ethanol subsidies.
All of our raw material costs are at record highs. The cost of diesel also hurts us. A weak dollar is not good for us.

Disposable Income Falls, Stocks Rise

Savings dipped, also! Makes perfect sense, doesn't it? Savings down, income down, stocks up! Trading is very choppy today!

WASHINGTON (MarketWatch) — Real disposable income declined in February as consumer prices jumped by the largest amount in 2 1/2 years, the Commerce Department reported Monday.
Economists said the data show that higher prices for gasoline is starting to take some of the steam out of the economy.
The personal consumption expenditure index, which Federal Reserve officials say is a more accurate gauge of inflation than the better-known consumer price index, increased 0.4% on the month, the largest monthly gain since July 2008.
The core rate of inflation, which excludes food and energy prices, rose 0.2% for the second straight month, as January’s reading was revised higher.