Market Talk

Capital Economics out today with a thorough, frank and reasoned report on the US economic outlook, taking a look at a host of areas like consumption, investment, external demand, labor market, prices and monetary & fiscal policy. The upshot? Recovery is “likely to remain muted for years to come.”

Let that sink in for a minute. For years to come. Doesn’t seem as if investors have really wrapped their heads around that concept, but the firm builds a pretty compelling case, in straight-forward terms. For example, this simple point:

The fundamental obstacle preventing a return to stronger economic growth is the damage done to the balance sheets of households and financial institutions by the housing bust and
the related financial crisis.

Household deleveraging is “still in its infancy,” the firm says, noting that since the start of 2008, household debt has fallen $470 billion, but half that decline has come because of defaults, not from folks paying off their debt. “Overall, the downward pressures on real incomes and the structural problems caused by high debt and lower asset prices mean that households will not be able to spend freely for at least the next two years.” Continue reading…

In my previous post, on the Fed and deflation, I didn’t get into the nuts and bolts of where things stand on the inflation/deflation front, for brevity’s sake. Given the Fed’s almost Ahabesque determination to create inflation, there is already mounting criticism that the Fed is in fact blowing a dangerous inflationary bubble. But two notes landed in my inbox this morning that make the exact opposite argument, and illustrate again why the Fed is doing what it’s doing.

The first comes from Capital Economics. “Fears that the Fed has put the economy on the path towards rampant inflation looked even more misguided last week when it was announced that core CPI inflation fell to a record low of just 0.6% in October,” the firm writes (the note is dated Nov. 22, so the reference to last week is actually about this week.) “The real danger is that the economy is heading towards deflation.” They continue:

Although housing costs are no longer falling, the high unemployment rate means that landlords will not be able to make rent rises stick. Core services inflation is therefore unlikely to rise back. Meanwhile, core goods inflation will continue to fall, not least as auto prices drop further.

Nominal rigidities have so far prevented core inflation from falling further. But with the economy set to remain saddled with a lot of spare capacity, the downward pressure on prices will eventually become overwhelming. It might not be long before the US is flirting with deflation.

The second comes via UBS’ Art Cashin, who clips part of a speech from John Williams, director of research at the San Fran Fed. Here’s what Mr. Williams had to say about deflation, excuse me, here’s what Mr. Williams had to say on the lack of inflation:

I’d like to turn now to inflation, or, I should say, the lack of inflation.  The measure of inflation we follow most closely is the core personal consumption expenditures price index.  These prices have been rising at a 0.9 percent rate so far this year.  This is the lowest nine-month inflation rate recorded in the over 50 years that this statistic has been compiled.  Our forecast is that inflation will come in about 1 percent for the year as a whole and stay at that rate next year.  That’s about 1½ percentage points below where it was at the start of the recession and well below the level of around 2 percent that most Fed policymakers have said is consistent with stable prices.

Continue reading…

One of the more absurd parts of the FOMC’s statement today is the committee’s references to their mandate of fostering price stability.

Judging by the crazy gyrations in financial markets after the FOMC’s QE2 announcement, there wasn’t much “price stability” being fostered there. Of course, it’s not unusual to see choppy moves after a Fed statement, but today’s seemed extra exaggerated, with abrupt turns, stomach-tickling drops and dizzying climbs all jammed into less than an hour’s worth of trading.

It’s been clear since the Fed signaled a couple months ago its intent on more QE that the plan was to provide plenty of cheap cash for speculation in order to inflate asset prices and hopefully create a wealth effect to spark consumption. How well does that m.o. align with a mandate to foster price stability? Continue reading…

US stocks surge, as does just about every “risk” asset, after the Bank of Japan tries again to arrest the yen’s rising, the most note-worth move among several from different central banks, including those in Australia and Brazil as well as the looming bond-buying program from the Fed, that have “currency war” written all over them.

DJIA jumps 193 (1.8%) to 10945, its highest close since May 3. S&P 500 rises 24 (2.1%) to 1161, Nasdaq Comp surges 55 (2.4%) to 2400.

It’s not just stocks: gold, crude, the euro all rise sharply, as investors are betting on a widespread bout of competitive devaluations among central banks. That’s good for nominal asset prices right now, but seems to us it’s bad for everybody in the long run.

It isn’t clear why the Fed seems so intent upon launching into all this dollar bashing, unless they think the economy is weaker than they’re letting on. If the recession’s over, and the economy’s recovering, why do something so dangerous destabilizing?

The Chicago Fed’s Charles Evans today said the central bank should do “much more” for the economy. Why’s that? “In the last several months I’ve stared at our unemployment forecast and come to the conclusion that it’s just not coming down nearly as quickly as it should,” he said. “This is a far grimmer forecast than we ought to have.”

This Friday’s jobs report will be an interesting one. While the sell siders and White House tout the private-sector jobs created, the fact of the matter is that over the past three months, the economy on the whole has shed jobs. Now, the jobs market doesn’t have to disgorge half a million workers a month for it to be bad. The economy needs to create at least 100,000-150,000 some-odd jobs just to keep up with population growth. To get the unemployment rate down, it’ll have to be closer to if not more than 200,000. So losing 54,000 may not sound so bad, but it is, because it just means the the employment picture is slipping for another month.

If we’re not creating jobs, it also stands to reason that wages aren’t growing, since there’s no upward pressure on employers to keep employees. If you ask me, the Fed’s afraid that this situation will slowly drag the economy back into recession. Coming as it would with an economy that hasn’t recovered from the first recession, the worst in our lifetimes, and coming as it would with a nasty bout of deflation to boot, it appears the Fed has plenty to worry about.

These central bankers all walk around in their suits and ties, and talk in these dull monotones and use a lot of big words, and most people have absolutely no idea what they’re talking about. A stance that would match their words better, would make their intent much clearer, would be if they were running around like the nutty professor in Back to the Future, and holding a big, round black bomb with the fuse lit.

The Bank of Japan announces a monetary easing program to spur economic growth, and cuts its interest rates to essentially zero — again — and the reaction is, well, this may help, it may not. Our central bank chieftain, Ben Bernanke, last night speaking to college students, opined ever so dryly that “additional (asset) purchases have the ability to ease financial conditions.”

What he should have said was “fire!”

This is just ridiculous. Do you see what they’re doing? The Japanese are trying to debase their currency. The Fed here in the United States is doing the same thing, although they’ll never say it. The Chinese don’t debase it, exactly, but have been ruthlessly suppressing it (and, actually, it seems to be working out rather smashingly for them.) Debasing the currency is about the most desperate thing a central bank can do. It never ends well. But this is the path they’ve chosen, and to change direction now would cause even greater carnage.

Continue reading…

We may have gotten an insight today into the Fed’s real thought process when it come to quantitative easing, the so-called QE2 everybody’s expecting. Brian Sack, the head of the New York Fed’s markets group, was speaking today about the benefits to the economy that could come should the Fed decide to launch into a big bond-buying program.

There has been fierce debate on the subject, even within (or, more precisely, especially within) the Fed itself. But most people still think this is a fait accompli, that the Fed, in not so many words, will be cranking up the printing press. What will they accomplish by this? Well, you can imagine that interest rates will stay low, if not move lower. How’s that an accomplishment when rates are already at historic lows? Well, it isn’t, but it also isn’t really the point.

From Mike Derby’s write-up of Sack’s speech:

While asset buying is an “imperfect policy tool,” Sack said “balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.”

“…by keeping asset prices higher than they otherwise would be.” Bingo! John’s the one that noticed that in the speech and jumped all over it. Because what’s he actually saying there, in typical Fed jargon, is that the central bank is looking to keep asset prices artificially high. That one of the goals of QE2 is to keep asset prices artificially high.

In less polite circles, that’s called market manipulation, and it often leads to perdition.

Continue reading…

She may just stay in port, folks.

Indecisive, choppy trading leaves stocks modestly lower in a session where the biggest influence was movement of EUR/USD.

Dollar abused again, euro parked above $1.36 and major US indexes seemed to mime every twitch and jog by EUR/USD. Materials, financials lead sector decliners, while energy and tech end in positive territory.

Lots of data coming tomorrow and Friday; comments from Fed officials today seemed to suggest bad economic data alone won’t warrant QE2 — only specter of worsening deflation will bring out the big guns. Philly Fed’s Plosser said as much, noting that beyond cutting rates (which is over and done with), the Fed can’t do much to help the labor market, and the central bank’s credibility is on the line if more asset buying fails to create the desired effect.

Weekly jobless claims, a third look at 2Q GDP and more regional manufacturing gauges all due tomorrow.

DJIA slips 22.86 to 10835.28, and Nasdaq Comp falls 3.03 to 2376.56. S&P 500 ends 2.97 lower at 1144.73.

(Photo courtesy of Wiki Commons.)

Pricey corn -- Ben Bernanke's new best friend.

Gold and Treasurys rally after FOMC yesterday signaled that they’re more concerned about deflation. “Maybe they haven’t checked the prices of commodities recently,” Terry Woo says at Minyanville.

He notes corn’s up 42% since June 1, while cotton’s up 27% and copper’s gained almost 13%, just a few examples of sharp commodities inflation lately. “So if you think this isn’t going to feed into your daily purchases at the local grocery store, then I have some oceanfront property to sell you in Arizona,” Woo quips.

“The currency debasement trade is still on and very strong and inflation beneficiaries will continue to outperform,” he says.

“Gold mining plays will shine as well as stocks with dollar-denominated liabilities and revenues coming from other countries with more stable currencies. If gold’s not your thing, look to McDonald’s (MCD), YUM Brands (YUM), and Walmart (WMT) as some potential plays.”

(Photo courtesy of Wiki Commons.)

Language that jumps out in this latest FOMC statement comes in the final paragraph. Clever, as Bernanke & Co. know that in show business, it’s always important to have a strong close.

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

Translation: We’re still prepared to do whatever it takes to get this economy off the ground, and ready to do battle with deflation.

See that little trick they used? Instead of using the words “deflation” or “deflationary” or “disinflation,” the committee said it’s ready to “return inflation” to levels “consistent with its mandate” (price stability.)

Committee certainly isn’t talking about returning inflation to lower levels. Sounds like the first time the FOMC is actually, in a very indirect way, saying it’s locked & loaded for deflation.

Market uncertainty has many investors playing defense, but financial advisor Ron Carson shares an offensive move he’s using with high-net worth clients. And if deflation does hit the economy there are several ways to prepare.

Dow Jones’ Veronica Dagher reports.