Hard Landing

February 1st, 2016

The Federal Reserve Board’s Open Market Committee met last week for the first time since raising interest rates in December and then published its usual policy statement full of mush.

It could have been written by Russia’s politburo.  It’s loaded with statements like this one: “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

In other words, if we’re not already in a recession, we’re pretty close to one, so the Fed is not going to raise rates to normal levels anytime soon. 20160128_policyerror_0

We’ll spare you the rest of the policy statement, which can be summed up as follows: “Blah, blah, blah.”  If the Fed were being honest, here’s what the latest policy statement would have said:

Well, that was a disaster.

We’ve been hearing for years that it was time to raise interest rates.  Virtually every economist on the planet, not to mention all of the journalists who think they understand the economy, had been predicting that the Fed would raise interest rates in December.  Read the rest of this entry »

In China, People Are Disappearing, but Problems Aren’t

January 25th, 2016

President Obama has to be at least a little bit jealous of the power yielded by China’s leaders.  He may use executive orders to get his way, but he has yet to follow the lead of Chinese President Xi Jinping.

In the U.S., we control the stock market by allowing the Federal Reserve Board to buy trillions of dollars’ worth of bonds and lower interest rates to zero.

China goes a bit further.  It not only duplicates the U.S. approach of using quantitative easing to manipulate its stock market and currency; when the market fails to obey orders and go only in the upward direction, the government makes people disappear. China

“In all, executives from 34 companies have disappeared, with only some reappearing,” according to The Wall Street Journal’s L. Gordon Crovitz. “Among those was Guo Guangchang, chairman of the Fosun Group, who is known as China’s Warren Buffett. His interests include Cirque du Soleil, Club Med and the former Chase Manhattan Plaza in downtown Manhattan. Brokers and hedge-fund managers are also among the mysteriously missing.”

We suspect that the potential of disappearing creates an even more effective performance incentive than a Wall Street bonus, but China’s leaders don’t stop there. Read the rest of this entry »

The Stock Market Needs “Seasonal Adjustment”

January 18th, 2016

How many jobs did the U.S. economy generate in December?

The correct answer is:

  1. 292,000
  2. 281,000
  3. 11,000
  4. None of the above

David Stockman wrote on his “Contra Corner” blog: “According to the BLS (Bureau of Labor Statistics), the US economy generated a miniscule 11,000 jobs in the month of December. Yet notwithstanding the fact that almost nobody works outdoors any more, the BLS fiction writers added 281,000 to their headline number to cover the ‘seasonal adjustment.’”

Before "seasonal adjustment."

Before “seasonal adjustment.”

After "seasonal adjustment."

After “seasonal adjustment.”

When we checked the jobs report, the BLS claimed that the economy generated 292,000 jobs in December (after seasonal adjustment), not 281,000.  We couldn’t verify Stockman’s claim that the actual figure should be 11,000, but searching the term “seasonal” turned up a whopping 41 hits in a single news release.  So Stockman’s numbers may not be 100% accurate, but he’s clearly on to something.

The BLS press release noted, “The effect of such seasonal variation can be very large.” But large enough to use a multiplier of 25+?

Stockman wrote that an upward revision for December is typical as an adjustment to account for cold weather, but December 2015 was an exceptionally warm month.  Santa arrived in shorts and sunglasses.  Read the rest of this entry »

An IOU World

January 11th, 2016

Investment performance made most investors a bit grumpy by the end of 2015, given that virtually every asset closed the year down a bit.  During 2016, grumpiness is giving way to fear.

Here’s how the year began:

  • On the first trading day of the year, China’s Shanghai index fell 7% intraday. Traders fled, triggering circuit breakers after China reported a fifth consecutive month of weak manufacturing data.
  • Saudi Arabia severed diplomatic ties with Iran in response to the storming of its embassy in Tehran. Bahrain also cut ties with Iran. Oil prices rallied on the news, but stock prices fell.
  • Bad news in China plus bad news in the Middle East equals bad news everywhere and a sharp selloff in equity markets. European markets dropped more than 2% across the board, Dow futures were down nearly 300, and S&P futures were trading down more than 1.6%. Global Debt

Things have only gotten worse since then.  By the time the market closed on Thursday, the Dow Jones Industrial Average was down 911 points – a drop of more than 5% in just four days.  That’s the worst four-day percentage loss to start a year on record, according to FactSet stats that go back to 1897.  The Nasdaq index, meanwhile, was down more than 6%, its worst start since 2000.  Read the rest of this entry »

Happy New Year: Meh.

January 4th, 2016

Well, it’s a brave new world for us cynics. Somehow, we all survived another year, but it wasn’t easy.

It was a good year for terrorists (Paris, San Bernardino), despots (hello Cuba, Syria, Iran, et al.) and hackers (any repercussions from China’s hacking of government records, federal employees sharing classified documents on unsecure servers, etc.?).

It was a bad year for investors.  Or, if not bad, not so good.  Heck, even Warren Buffett lost money, although he can afford a nick more than the rest of us. 2015

It would be generous to say that stocks ended the year “sideways,” as the year was volatile and the beginning was much more forgiving than the end.  Overall, though, the year was as flat as Twiggy in Nebraska.  As The New York Times put it:

“Name a financial asset — any financial asset.  How did it do in 2015?

“The answer, in all likelihood: Meh.

Read the rest of this entry »

Don’t Bet On It

December 28th, 2015

 “ … human beings have a natural tendency to manage risk after the fact.”

                              Michael A. Gayed, Pension Partners

 If I were betting on the ponies, Janet Yellen (or any Federal Reserve Board member, for that matter), would not be my first choice to bring along for consultation.

As we’ve previously pointed out, the Fed’s forecasting record is pretty lame.  The Fed has consistently projected a higher level of growth for the economy than we’ve actually seen (although even Fed projections are consistently well below the 3.3% average growth the economy enjoyed in the years between the end of World War II and the financial crisis). Fed Forecasts

The Fed projected growth rate for 2015 was 2.6% to 3%. While it’s too early to tell what the final numbers will be, the just-released latest estimate from the Bureau of Economic Analysis (BEA) for the third quarter of 2015 was 2.0% (down from its previous estimate of 2.1%), which isn’t too far off from the 1.5% growth rate for the first half of 2015.

As David Stockman noted, “Notwithstanding the most aggressive monetary stimulus in recorded history – 84 months of ZIRP and $3.5 trillion of bond purchases – average real GDP growth has barely amounted to 50% of the Fed preceding year forecast; and even that shortfall is understated owing to the BEA’s systemic suppression of the GDP deflator.” Read the rest of this entry »

Just In Time for Christmas

December 21st, 2015

Even if it were wrapped in shiny paper with a big red bow on it, virtually everyone would have guessed at this year’s Christmas present from the Federal Reserve Board.

For most of us, the rate hike will be the equivalent of coal in our stockings, but for the economists, analysts, stock pickers, pundits, talking heads and other assorted Fed groupies, the rate hike was essential, because it validates their existence.  After inaccurately predicting a rate hike throughout 2015, they finally got it right! 20151217_BAML1

The hike of 25 to 50 basis points in the federal funds rate is an insignificant increase (the Fed’s Board of Governors will raise the interest rate paid on reserves to 0.5% and the Federal Open Market Committee will offer a rate of 0.25% on reverse repurchase agreements), except that it represents the end of an era.  ZIRP, or zero-interest-rate policy, has now been replaced with ZIRP+ or maybe Near ZIRP, Almost ZIRP or A-Tad-Above ZIRP.  It’s still as close to ZIRP as you can get without being ZIRP.

Questions Raised

Regardless, after 84 months of ZIRP, it’s worth noting that interest rates have changed direction and are now heading up.  ZIRP was already old when this blog was started in January 2010.  Now what are we going to write about?  Read the rest of this entry »

Nothing Lasts Forever

December 14th, 2015

If the Federal Reserve Board has used all of its policy tools during the current expansion, what happens when there’s a recession?

That’s a question worth asking, even as the Fed appears ready to raise interest rates, albeit by just a smidgen, based on the pretext that ZIRP (zero interest rate policy) is no longer needed, given today’s allegedly booming economy.

On course, the economy’s not booming and we may even be heading into a recession, assuming we aren’t already in one (it’s hard to tell in today’s slow growth-no growth economy). Average Recovery

Just one sign that the boom is an illusion is the length of the current expansion.  The average recovery since the end of World War II has been 58 to 61 months, depending on whose numbers you use.  The current “recovery” hit the 58-month milestone in April 2014 – 20 months ago. As David Stockman pointed out this week in his “Contra Corner” blog, “the only expansion that was appreciably longer than the present tepid affair was the 119 month stretch of the 1990s.”

Nothing lasts forever and even Larry Summers, the former Treasury secretary and current Harvard professor, recognizes that the current expansion may be nearing an end. As he wrote last week in a Washington Post op-ed, “U.S. and international experience suggests that once a recovery is mature, the odds that it will end within two years are about half and that it will end in less than three years are over two-thirds.  Because normal growth is now below 2 percent rather than near 3 percent, as has been the case historically, the risk may even be greater now.”

Read the rest of this entry »

The Big Disconnect

December 7th, 2015

Imagine being stuck in a blizzard.  You look out your window and can see the snow piling up outside, yet the meteorologist on your TV is forecasting continuing sunshine and near tropical weather.

That level of disconnect is similar to that shown by some members of the Federal Reserve Board, who are preparing for liftoff, even as the economy implodes like a SpaceX rocket. The difference, though, is that the SpaceX failure was an unmanned flight; when the Fed acts, we’re all on board, like it or not.Fed Meteorologist

We recently reported that a couple of members of the Federal Open Market Committee had spoken publicly in favor of a rate hike. But this past week, they were no longer the outliers, as even Fed Chair Janet Yellen joined in during a speech before the Economic Club of Washington.

USA Today reported, “Federal Reserve Chair Janet Yellen signaled Wednesday that the Fed is all but certain to raise interest rates this month for the first time in nearly a decade, saying that gains in the economy and labor market have met the central bank’s goals.”

If you read on, though, that’s not quite what she said.  Given that inflation is nowhere near the Fed’s 2% goal, she couldn’t say that the central bank’s goals have been met. Read the rest of this entry »

Taper Tantrum Two

November 16th, 2015

Call it Taper Tantrum Two.

Two of the 12 members of the Federal Open Market Committee suggested on Thursday that it’s time to raise interest rates, causing the Dow Jones Industrial Average to drop 254 points.

To get a better idea of how ludicrous this is, consider the following:

  • The two hawks represent a sixth of the board. The hawks will need to more than triple their numbers to represent a majority.
  • Stock ChartThe two Fed members were speaking at a Cato Institute event called, “Rethinking Monetary Policy.” The event was not called, “Seven More Years of ZIRP,” “Zero Everlasting” or “Bring on QE4.”  Why would anyone be surprised that they spoke in favor of a rate hike?
  • One of the two, St. Louis Federal Reserve President James Bullard, is an alternate member of the FOMC and has long been advocating for a rate hike. This is the guy who caused the Dow to drop 100 points when he suggested in June 2014 that interest rates might be hiked in the first quarter of 2015.  We tried to determine the role of an alternate member, but the Federal Reserve Board’s description is about as clear as a Fed policy statement.  The page says there are 12 members of the FOMC, but lists 10, as well as four alternates.  So how do they come up with 12?  These are the people who are managing our economy.

Read the rest of this entry »