Archive for the ‘Recovery’ Category

Paper Taper

Friday, December 20th, 2013

So the taper begins in January.  Big deal.

That was the market’s initial reaction anyway.  In fact, the market viewed this week’s announcement as a positive, setting yet another record.  Conversely, when Fed Chairman Ben Bernanke first brought up the possibility of a taper in May, he sent the market reeling.  So talking about buying bonds has a greater impact than actually buying bonds.  Who knew?

Some believe the stock market rallied because The Fed made it clear that it will remain accommodative and that interest rates will remain near zero until the apocalypse.  That being the case, though, why did bond yields soar?  Go figure.Taper Impact

The taper announcement is not a big deal, though, because everyone knew it was coming – everyone except for the economists whose job it is to tell us when tapering is coming.  First they guessed wrong that it was coming in October, then they guessed wrong that it wasn’t coming in December.  Keep that in mind when you hear them tell you the economic benefits of more bond buying and more government spending.


Getting Your Bond Portfolio in Shape for 2014

Friday, December 13th, 2013

It’s time to start thinking about New Year’s resolutions.  It’s an American tradition to resolve to lose weight, exercise regularly, be nicer, work harder and give up everything you enjoy.

But who are we kidding?  Such resolutions are made to be broken.  So this year, why not make a resolution and keep it?  This year, resolve to pay attention to bonds.

That’s right.  Boring old bonds.  They don’t have the flash that stocks do, they lack the immediate thrill that cash can provide because of its liquidity and they’re not as mysterious as alternatives.  Yet, if you give them a chance, bonds can play a major role in ensuring that your retirement will be secure.Cost of zero interest rate

Bonds are not without risk – especially in a rising interest rate environment – but they can help you protect your principal, produce income and add to your total return.


The Off-On-Off Economy

Friday, August 9th, 2013

The economy recently has been full of stops and starts, ups and downs, good news and bad news.

Optimists will say that progress is being made, as we’ve moved beyond the all-bad-news days of 2007 and 2008.  Those of us who are less than optimistic would instead ask why it’s taken five years to get to the current dismal economic state.

Recovery always seems to be just around the next corner.  But the world is round and there is no next corner.

Zerohedge recently ran a series of 13 charts showing that any economic exuberance is irrational.  The charts compare the current “recovery” with four previous recoveries.  The trend lines in most cases are almost identical – except that the lines representing the current Keynesian-inspired recovery are well below the lines representing the previous four recoveries.  They show that:

  • Growth in gross domestic product is pitifully low.  If it were a patient, GDP would be signing up for hospice care.
  • The ISM Manufacturing Index has fallen significantly from two years ago.
  • Business inventories have risen significantly, signaling that new orders will likely drop.
  • Productivity is down, consumer spending is lackluster and housing starts, though improving, are nowhere near what they should be if the housing market were really recovering.

But cheer up … vehicle sales are up!  The recovery must be just around the next corner, wherever that is.


The Second Housing Bubble

Thursday, May 30th, 2013

“Demand is artificially high … and supply is artificially low.”
                                                                         Fitch Ratings

We’ve written frequently about the disconnect between the real world and the stock and bond markets. Now the housing market has drifted into its own false reality.

While Gluskin Scheff’s David Rosenberg has referred to the stock market’s recent climb as a “Potemkin rally,” what’s happening in housing is Potemkin in reverse.

Russian minister Grigory Potemkin created a fake village to impress Empress Catherine II during her visit to Crimea, giving us the term “Potemkin” to mean an illusion, reality propped up to look bigger and better than it really is.


Fingers Crossed In Economic Promise

Friday, April 19th, 2013

Like most promises made before an election, the promise of an economic recovery is beginning to look like a false promise.

Last fall, the housing market was showing signs of recovery and the unemployment rate was dropping.  The stock market since then has been propelled upward by the artificial stimulus of quantitative easing.

Now, though, economic indicators are less promising.  The Conference Board reported today that, after three months of gains, its index of leading indicators dipped 0.1% to 94.7 in March.


The Yin-Yang Economy

Friday, March 8th, 2013

Last week, with sequestration pending, President Obama and others warned of airplanes falling from the sky, tainted meat being served and schools being closed because of teacher layoffs.  The budget cut news was so bleak, tours of the White House were canceled.

This week, the stock market hit a record high.

It may be a coincidence.  The Washington Post gave sequestration no credit for the record and said the market was boosted by China’s announcement that it would put more money into the economy.  There is, it seems, a Keynesian explanation for everything.

But, as The Wall Street Journal noted, “One thing for sure, the stock market doesn’t mind the federal budget sequester.”

S&P 500 YTD

The only mention of sequestration in the Post story was to note that “some” are warning that it could dampen economic growth.  Of course, economic growth has been so slow, if it’s “dampened,” it’s possible that no one will notice.


GDP Doesn’t Stand For Great DePression

Saturday, July 28th, 2012

Measuring growth in Gross Domestic Product (GDP) is like taking the economy’s temperature.

The annualized growth rate of 1.5% at the end of the second quarter – which is a sliver above the projected 1.4% rate – indicates that the patient is still alive, but barely.

The economy is not quite on life support, but compare that growth rate with cumulative growth in the three years following previous recessions.  For the four recessions in the ‘60s, ‘70s and ‘80s, the cumulative growth fell between 15% and 20%.  For the most recent recession, the cumulative growth rate for three years is just 7.13%, according to The Wall Street Journal.

As the chart shows, post-recession growth was lower than the +16% cumulative rate of other modern-day recessions, and even well below the 9% growth rate of 2001.  That’s in spite of extensive government efforts, including the $814 billion economic stimulus program, two rounds of quantitative easing, Operation Twist and other efforts … or could these government programs have possibly slowed economic growth?

“In addition to years of negative real interest rates courtesy of the Fed, federal borrowing has grown at about three times the rate typical for postwar recoveries,” according to The Wall Street Journal.  “In other words, Washington already has unleashed far more firepower on the downturn than usual and received scant bang for its buck.”

In addition, 2010 GDP was revised from 3.0% to 2.4%, while Q3 2011 GDP was revised from 3.0% to 4.1%, according to, “indicating that the slowdown we are experiencing is in fact far worse than previously expected.”

Typically, the farther the economy falls, the greater the recovery in GDP growth, so the current recovery should have been stronger than other recent recoveries.

Under the Rule of Monetary Policy

Given overall economic conditions, it’s no surprise that profits are softening, too.  Facebook’s first quarterly report, for example, was underwhelming and did not cheer holders of its stock.

But some are cheered by this news, because they believe it will force the Federal Reserve Board to take action yet again and give us another round of quantitative easing (QE3).

It’s not a good sign when the market is moved by monetary policy, but by market fundamentals.

An Anorexic Recovery

Tuesday, July 17th, 2012

If we could put the recovery of the past few years on a scale, it would be the thinnest in history.  Recently, though, it has become downright anorexic.

Goldman Sachs announced today that it is revising down its estimate for second quarter gross domestic product growth to just +1.1%.

Retail sales were expected to gain 0.2% in June, compared with a year ago, but could not even manage that anemic gain and instead declined 0.5%.  It was the third consecutive month of decline for the retail sector.  Food and beverages, clothing and non-store retailers posted modest gains for the month.

About the only consolation we can take from these numbers is that at least we’re not Europe, which is in another recession.