Land of the Setting Sun

November 21st, 2014

Let’s pretend that the United States economy is a football team.  The coach calls the play.  The running back runs right up the middle and is thrown for a loss.  What does the coach do on the next play?  Run the ball up the middle for a loss.  And the play after that?  Run the ball up the middle for a loss.  And the play after that?  Run the ball up the middle for a loss.

Other teams see what’s happening to the U.S. economy.  So what do they do?  Run the ball up the middle for a loss.  In Japan, in Europe and elsewhere the losses mount.  What’s the conclusion?

  1. Running the ball up the middle every play will result in a loss, or
  2. We need to run the ball up the middle more often.

JapanThe answer, if you’re paying attention to central banks and the actions of Japanese Prime Minister Shinzo Abe is, of course, B., as logic and politics rarely travel on the same highway.

Formerly the world’s number two economy behind the U.S., Japan’s future couldn’t have been brighter back in the ’80s, when “Japan Inc.” was all the rage.  Today, if there really was a Japan Inc., it would have long ago declared bankruptcy.  The “Land of the Rising Sun” has become the “Land of the Setting Sun.”

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Why It’s Called “the Almighty Dollar”

November 14th, 2014

It may be a good time to plan that European vacation.  The long-weak dollar is gaining strength again, which means you may be able to afford good food, good wine and a quality hotel if you visit the Old World.

During the Fed Reign of the past five-plus years, the dollar was like that elderly lady in the commercials who says, “I’ve fallen and I can’t get up.”  Other countries tried to help by weakening their currencies, of course, but the resulting currency wars appear to have ended along with quantitative easing and now the dollar is strong and getting stronger.

Dollar Index
The good news is that the strengthening dollar will make foreign goods cheaper for American consumers (so much for boosting inflation).  American companies may also reduce prices or keep them from rising to remain competitive.

As a result, Americans will spend less on essentials like oil and will have more money left to spend on other things, which should boost the economy.  A strong dollar will also attract foreign investors to American assets, such as U.S. Treasury bonds.

The bad news is that consumer spending on imports will increase the trade deficit – in fact, it already has.  American companies that rely on exports or that have multi-national locations will be hurt.

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“It’s the Economy, Stupid.”

November 7th, 2014

In this week’s election, Democrats attempted to label Republicans as “the party of ‘no.’ ”  Instead, voters labeled Democrats as the party of no jobs, no growth and no clue.

As a political strategist for Bill Clinton, James Carville coined the now over-used phrase, “The economy, stupid.” (which more commonly appears as “It’s the economy, stupid.”).  By focusing on the economy, Bill Clinton won the 1992 presidential campaign, defeating President George H.W. Bush. barack-obama

More than 20 years later, it’s still the economy, stupid.  According to Bloomberg, “The economy was voters’ most pressing concern as they cast their ballots in the midterm election, with seven of 10 rating conditions poor, preliminary exit polls showed.”

Apparently, voters didn’t realize that 2% annual growth and a workforce participation rate of 62.7% represent an economic boom.

In a Gallup poll, climate change, the Democrats’ raison de vivre, ranked 14th out of 15 in a poll about issues that worry voters.  It finished just ahead of “race relations” and just behind “the quality of the environment” – two other big issues for Democrats.  Meanwhile, in the real world, the top voter worries were “the economy,” followed by “federal spending and the budget deficit.”

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QE RIP

October 31st, 2014

So the Federal Reserve Board has made it official.  This is the end of quantitative easing.  It’s quits for QE.  Bond buying has gone bye bye.  Quantitative easing has been eased out of existence, tapered into extinction.  The QE case is closed.

If nothing else, QE has provided us with material for more of our blog posts than any other topic (55, not including this one!), so, given that we’ll now need a new source of inspiration, we’re almost sorry to see it end. Fed Portfolio

So is this an obituary for the greatest (in terms of dollars involved, if not in results) experiment ever in monetary policy?  Should we hoist up the “Mission Accomplished” banner, pop the champagne cork and make a toast to Ben Bernanke and his brethren?

Not so fast.  There’s still an epilogue worth drafting.  Closure is needed.  This may be our last chance to take a shot at QE, so we’re taking advantage of it.

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Repeat After Me: The Economy Is Improving. The Economy Is Improving.

October 22nd, 2014

If you repeat something often enough, you may even start to believe it.

So try this phrase: “The economy is improving.  The economy is improving.  The economy is improving.”

Certainly, the U.S. Bureau of Economic Propaganda (aka, the U.S. Bureau of Economic Analysis or BEA) would have you think that’s the case.  The BEA initially reported growth in gross domestic product (GDP) of 4% for the second quarter of 2014.  That seemed like quite a leap from the first quarter’s -2.9% contraction, but the BEA adjusted that number to “negative growth” of -2.1%. Household Income

That’s old news, though.  Thanks to “a larger than previously estimated increase in nonresidential fixed investment,” the BEA announced in August that second quarter growth was really 4.2%.  A swing of 6.3% in a single quarter!  Well done!

But wait … there’s more.  The BEA announced in September that second quarter growth was 4.6%!  The BEA cited “growing personal consumption, private inventory investment, exports, both residential and nonresidential fixed investment, as well as local government spending,” none of which apparently existed when the BEA gave its first two estimates.

We can hardly wait for October 30, when the BEA is scheduled to report Q3 results.  Maybe by then, we’ll learn that second quarter growth exceeded 5%.  It will be interesting to find out whether Q1’s negative growth was an aberration or whether Q2’s giant leap forward was an aberration.

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More Consideration of “Considerable”

October 16th, 2014

Yes, we’ve already discussed the word “considerable” at considerable length, in relation to its use by the Federal Reserve Board in its recent policy statement.

But apparently we are on to something of a considerable size.  Maybe it was a slow news day, but The New York Times devoted an article to the Fed’s use of the word, noting that “Federal Reserve officials are looking for a new way to reassure investors that they are not ready to start raising interest rates.” 

Fed Chair Janet Yellen

Fed Chair Janet Yellen

Commenting on the “considerable time” reference in the policy statement, The New York Times article reported that an account of the meeting “suggests that officials are trying to find a new way to say the same thing.”

Think about that.  Unemployment remains high, inflation goals are not being met, the Fed is holding trillions in bonds it will eventually have to sell and the stock market is acting wobbly … but the Fed is looking for a “new way” to say “considerable.”

Fed Chair Janet Yellen could just say the Fed is not ready to start raising interest rates.  She could say the Fed is not planning to raise rates “for a long time,” which would be reassuring to investors.  Or members of the Federal Open Market Committee could go to an online thesaurus and come up with more than a dozen synonyms in seconds.

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Satan Is a High-Frequency Trader

October 10th, 2014

Satan is now firmly in control of the markets.

No, we’re not talking about Ben Bernanke, aka Edward Quince.  His time has passed.  We’re talking about a high-frequency trader who also happens to be hell’s CEO.

satanAs evidence, consider Thursday’s market plunge.  The Dow Jones Industrial Average (DJIA) fell 334.97 points, its largest loss of the year.  The drop took place, as Zerohedge noted, after “ ‘someone’ canceled-and-replaced orders for 666 contracts 26 times in the 1130ET to 1200ET period,” after which “selling accelerated lower, no reversal, to close at the lows on heavy volume.”

The number 666 is, of course, the winning number in hell’s lottery.  To trade 666 contracts 26 times, you need a lot of capital in your account.  Most traders would avoid using the devil’s number, but someone – or, more likely, some firm – was trying to make a statement.

What could it mean?  That Satan is in charge, of course.

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Too Much Interest in Interest Rates

October 3rd, 2014

There has been much market panic of late over the possibility that the Federal Reserve Board will be raising interest rates sometime in the not-too-distant future.

Small cap stocks were the first casualty.  As September ended, the S&P 500 was still up 7.3% for the year, while the Russell 2000 was down 3.8% and off 7.4% from its high in July.  Even after being up more than 40% year-over-year at the end of December, the Russell 2000 was negative year-over-year on Wednesday before having its best day in six weeks on Thursday. 
20141002_RTY

As The Wall Street Journal explained, “Given that periods of market turmoil tend to buffet small stocks more than their larger counterparts, many investors in small companies are fearful as the Federal Reserve moves toward raising interest rates.  Even investors hopeful for small stocks are proceeding with caution.”

But should the markets be this skittish over interest rates?

In September, Fed Chair Janet Yellen announced that interest rates will remain low for “a considerable time” even after quantitative easing (QE), the Fed’s bond-buying program, ends.  QE is scheduled to end this month, but could be extended.

Economic data continues to be mixed.  The official U-3 unemployment rate dropped to 5.9%, but the percentage of Americans participating in the workforce is at a 36 year low.  Jobs are increasing, but four out of five of them are for low or minimum wages.  So QE could be extended, since its alleged purpose is to help the economy grow.

Even if QE ends this month, the “considerable time” Ms. Yellen cites could, indeed, be considerable, given the consequences of raising interest rates.

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It’s Only Money

September 26th, 2014

“Money often costs too much.”                                                                               Ralph Waldo Emerson

It really does all come down to money.

Money decides the outcome of wars and elections.  It ensures that we are properly fed and clothed.  It buys us an education and pays for all of our material needs.  And it may not be able to buy happiness, but it does have a dramatic impact on that vague thing that’s often referred to as “quality of life.”

All of us, if we’re being honest, would rather have more of it than less of it.

But the value of money is variable.  The currency of one country continuously fluctuates in value relative to the currency of every other country – and those fluctuations can have a dramatic economic impact.

A Stronger Dollar

You’d think countries would be striving to make their currencies stronger, but in recent years, we’ve had “currency wars” as competing countries have tried to weaken their currencies to increase demand for their imported goods.

DollarThe United States has criticized China for its currency manipulation, but in the meantime, the Federal Reserve Board’s easy money policies have deliberately weakened the dollar.

Now, though, as other countries’ currencies have become weaker, the dollar has strengthened.  In fact, the dollar reached a four-year high this week against a basket of major currencies, as The Wall Street Journal reported, “amid mounting expectations the Federal Reserve will raise interest rates next year while its counterparts in Europe and Japan consider further measures to raise inflation and spur growth.”

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Janet Yellen Takes Us Through the Looking Glass

September 18th, 2014

“When I use a word, it means just what I choose it to mean — neither more nor less.”  

               Lewis Carroll, Through the Looking Glass

The word for today is “considerable,” as in interest rates will remain low for “a considerable time.”

How long is “a considerable time?”

Long enough, apparently, for investors, who boosted the stock market to yet another new record this week, after Federal Reserve Board Chair Janet Yellen announced that the Fed would keep interest rates near historic lows for “a considerable time.”  The Dow Jones Industrial Average crossed 17,200 for the first time ever, closing at a new high of 17,157.

Apparently, investors are like kittens, because, as Alice notes, “whatever you say to them, they always purr.”

Looking-glass-lewis-carrollCNN Money interprets, with certainty, that “considerable” means summer 2015 “at the earliest.”  Yet The Wall Street Journal, referring to the policy statement, admitted, “we have no idea what it says about the future of monetary policy.  We doubt even Fed Chair Janet Yellen knows.”

“Better say nothing at all. Language is worth a thousand pounds a word!”

Lewis Carroll, Through the Looking Glass                                        

Having read the policy statement, we conclude that it means whatever you want it to mean, as it contains more hedges than the Palace of Versailles.  Consider this single sentence …

“The Committee continues to anticipate (hedge 1), based on its assessment of these factors (hedge 2), that it likely will be appropriate (hedge 3) to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal (hedge 4), and provided that (hedge 5) longer-term inflation expectations remain well anchored.”

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