Posts Tagged ‘Economy’

Land of the Setting Sun

Friday, 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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“It’s the Economy, Stupid.”

Friday, 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

Friday, 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.

Wednesday, 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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Satan Is a High-Frequency Trader

Friday, 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

Friday, 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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Now Bad News Is Bad News

Friday, September 12th, 2014

With the end of quantitative easing due to take place next month, reality may once again have an impact on financial markets.

Since QE began more than five years ago, markets have soared on bad news and dropped on good news.  That’s because investors believed that bad news would prolong QE and good news would make it unnecessary.

And there’s been enough bad news over the past five years for the stock market to repeatedly surge to new record levels.20140911_claims

With QE ending in the U.S., but probably soon beginning in Europe, the Federal Reserve Board needs a different tool to manipulate the markets.  While Chairman Janet Yellen and others have been talking about “macroprudential supervision” as the next step, that line is selling like old fish, because no one has explained what Ms. Yellen means by “macroprudential supervision.”

The good news is that good news should finally be good news.  Fundamental performance and economic recovery should mean something again.

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Less than “Less than Zero”

Friday, September 5th, 2014

In June, the ECB lowered the interest rate on bank deposits, including reserve holdings in excess of the minimum reserve requirements, from zero to -0.10%.  This week, surprising just about everyone not named Mario Draghi, the ECB lowered the rate by another 10 basis points to -0.20%.

14950766600_d52f0bba78_zAs we wrote when the less-than-zero rate was announced, “banks will pay a fee on money they fail to lend out.  Whether or not that stimulates the economy, it could encourage banks to take more risk, approving loans that otherwise may not have been approved.  Isn’t that what caused the financial crisis?”

Zerohedge explained that while rates were already negative, “Now they’re even more negative. Because in the world of Central Banking if something doesn’t work at first the best thing to do is do more of it. Whatever you do, DO NOT question your thinking or your economic models at all.”

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The Economy Is Booming – For the Repo Man

Friday, August 22nd, 2014

“Credit is a sacred trust, it’s what our free society is founded on. Do you think they give a damn about their bills in Russia?”                                                                                                                                                 Bud in “Repo Man”

The good news for the economy is that consumers are buying more.  The bad news is that they’re not paying for what they buy.

The Urban Institute found that more than a third of Americans are not only in debt, but are being chased down by debt collectors.  Debt collectors are, of course, a last resort; they’re used when all else fails and the debtor is more than 180 days past due.  When a consumer goes six months without paying a bill, it’s a good sign the person either has no intention of paying or is unable to pay.

Yet about 77 million Americans – 35% of adults with a credit file – have debt in collections.  They owe an average of $5,178, which doesn’t sound like much, but keep in mind that’s debt that’s gone into collection, not total household debt.  It does not include mortgage debt, but does include credit card, medical and utility debt.

Consumer creditThe average American household has $15,480 in credit card debt alone and consumer debt totals $11.74 trillion.  Add in federal debt, corporate debt, state government debt, municipal debt and the debt of other countries and it’s a wonder that anyone anywhere is still solvent.

You may recall the cheering that took place in 2009, when consumer debt levels decreased.  But, as the chart shows, that was a small mogul on a steep and steadily rising mountain of IOUs.

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It’s a Mad, Mad, Mad, Mad World

Friday, August 8th, 2014

Isn’t summer supposed to be the time when life slows down and the world takes a vacation?

That may be the case for some of us, but the despots of the world are working overtime.  Consider just a few of the world crises taking place this summer:

  • Russia’s conflict with Ukraine continues.  The downing of Malaysian Airlines Flight 17 by pro-Russian rebels has done little to stop it.
  • Hamas is fighting with Israel over Gaza.  A cease fire is in place, but Hamas has shown little respect for previous cease fires and it is unlikely that this crisis has ended.
  • Muslim terrorists known as ISIS are making inroads in Iraq.  It’s reached the point where President Obama has reversed his policy and announced that U.S. military airstrikes will take place “if necessary.”
  • Syrian leader Bashar al-Assad continues to slaughter his people, while the country’s conflict threatens to spill over into Lebanon.
  • The newly inaugurated Libyan parliament has called for a cease fire and threatened to act against warring militias that continue fighting.
  • Al-Qaeda-linked sect Boko Haram continues to hold more than 200 schoolgirls captive in Nigeria.
  • Iran is developing nuclear weapons, although the U.S. State Department said U.S. and Iranian officials had a “constructive discussion” this week about Iran’s nuclear program.  There’s some conjecture that, even if Iran were to agree to halt its nuclear development program, it could outsource the program to North Korea.

    Gaza today.

    Gaza today.

Remember the end of the Cold War, the resulting “peace dividend” and the economic growth of the ’90s?  Remember life before the financial crisis?  Much has happened since then and most of it has not been good.

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