about credit strategy

More involvement from the European Central Bank

2012-05-08T02:29:00.000-07:00

Stock futures pared early losses Monday after Sunday's elections in France and Greece rattled investors' confidence.
Dow futures were off 41 points. Nasdaq 100 futures traded down 8.25 points and S&P 500 futures dipped 4.2 points.
Voters in France dumped President Nicolas Sarkozy for socialist candidate Francois Hollande. Hollande ran in opposition to the austerity measures backed by Sarkozy, calling for higher taxes to support growth and more involvement from the European Central Bank.
In Greece's parliamentary elections, 60% of the popular vote went to fringe parties, but fell short of
producing a clear majority. The vote put the country's stance on austerity programs in doubt.
In stocks, BroadSoft (BSFT) dropped 17% ahead of the opening bell. The communications software provider reported first-quarter revenue and adjusted earnings above analyst consensus views. The company raised its full-year earnings guidance, but offered second quarter revenue guidnace below expecations.
Leaders were mostly quiet ahead of the open.
TJX (TJX), owner of the TJ Maxx and Marshall's chains, climbed 2% ahead of the open. The IBD 50 stock ended last week just below a fresh high atop a solid run following a rebound from 10-week support in December.
Colombia-based oil producer Ecopetrol (EC) pulled back 3% in premarket trade. Also an IBD 50 stock, it reversed in heavy trade off a new high last week, after rebounding from support at its 10-week moving average.

Agricultural chemicals industry

2012-05-06T23:24:00.001-07:00

IBD has long emphasized that investors ought to pay particular attention to relatively young companies.
Many such companies have become big stock market winners in the years just after their IPOs.
With that in mind, IBD's NYSE + Nasdaq Research Tables point out highly rated companies that came public in the last 15 years. Those stocks have a triangle next to their names.

The Stock Spotlight screen also can be a good place to look for recent IPOs.
Two agricultural chemicals companies that went public last year have made the screen: Sugar Land, Texas-based CVR Partners (UAN) and Los Angeles-based Rentech Nitrogen Partners (RNF).
The thinly traded CVR appears to be working on the right side of a new consolidation. The pattern appears to be part of a base-on-base formation.

The fertilizer maker reported strong quarterly growth in EPS and revenue in 2011, bouncing back from declines in 2009 and 2010.
But after hours Tuesday, CVR shares were down after it reported a profit of 41 cents a share. Sales increased 36% to $78.3 million. Both results missed consensus estimates.
Meanwhile, Rentech also has posted mostly big gains in EPS and sales in recent quarters.
It's also thinly traded, moving on average about 225,000 shares a day.
Despite that, the stock has been trading tightly in recent weeks.
The fertilizer maker has been up as much as 52% since coming public at 20 a share in November and is near a new high. It broke out of a base in January.
IBD's agricultural chemicals industry group was ranked 24 out of 197 in Tuesday's IBD. That's down from eighth three weeks ago, but up from 58th six weeks ago.

The previous session's steep losses

2012-05-04T02:31:00.000-07:00

Cocoa futures soared to a five-week high Tuesday, recouping the previous session's steep losses as the ICE market vaulted more than 6% on short-covering.
July cocoa soared $100, or 4.5%, to $2,319 per metric ton, the highest since March 28, after flying as high as $2,356. Cocoa climbed in an initial corrective bounce from Monday's 7.1% tumble, but sharply extended its gains ahead of the settlement window on a wave of short-covering, dealers said.
"It's a mixture of some spec short-covering, some new longs as we rejected the lows of yesterday," said Drew Geraghty, a commodity broker at ICAP North America in New Jersey. "I think this is technical short-covering."
Cocoa futures closed above their 100-day moving averages, after falling below those levels on Monday.
The rally lifted volumes, which were light prior to the surge, to just below the 30-day average, though traders in continental Europe were on holiday for the May 1 "May Day"and many dealers away from their desks before a trade dinner in London on Friday.
"The open interest reflecting yesterday's business shows the funds got short the market," Geraghty said. "Looking at the volume profile of yesterday's business, it looks like a lot of these shorts are trapped between $2,210 and $2,146, yesterday's low."
Open interest jumped to 182,814 lots on April 30, the highest in nearly six months, while Monday's volume jumped to nearly 36,000 lots, a two-week high, ICE data showed.

Health insurance plans

2012-05-03T07:11:00.000-07:00

Insurance companies will have to return more than $1 billion this year to consumers and businesses, thanks to a new requirement in President Barack Obama's health care overhaul, a report released Thursday concludes.
That's real money, says Larry Levitt of the Kaiser Family Foundation, which analyzed industry filings with state insurance commissioners. The law requires insurers to spend at least 80% of the premiums they collect on medical care and quality improvements — or issue rebates to policyholders.
"This is one of the most tangible benefits of the health reform law that consumers will have seen to date," said Levitt, an expert on private health insurance. The nonpartisan foundation is an information clearinghouse on the nation's health care system, and its research is widely cited.
The report comes with a caveat. It lacks data on the nation's most populous state, California, because complete filings there were not available. Nonetheless, the analysis estimates that consumers and businesses in other states will receive rebates of $1.3 billion, in some cases in the form of a discount on next year's premiums.

The insurance industry says consumers should take little comfort from the rebates, because the companies expect premiums to go up overall as a result of new benefits and other requirements of the new law.
"The net of all the requirements will be an increase in costs for consumers," said Robert Zirkelbach, spokesman for America's Health Insurance Plans, the main industry trade group.
"Given that health care costs are inherently unpredictable, it's not surprising that some plans will be paying rebates to policyholders in certain markets," Zirkelbach added.
Seventeen states applied for waivers from the 80% standard, producing evidence that it would destabilize their private health insurance markets. Federal regulators granted adjustments to seven states, usually meeting each state's request part way.
The future of the rebate requirement is uncertain, pending a decision by the Supreme Court on the constitutionality of Obama's law.

Among the leading stocks

2012-05-02T05:48:00.001-07:00

Stocks have shown better action this week, helping switch IBD's market outlook to "in confirmed uptrend."
That switch came after Wednesday's session, when the S&P 500 delivered a follow-through day.
Still, the follow-through day was on the marginal side. Investors following IBD's CAN SLIM strategy should proceed with caution.
Among the leading stocks that are acting well, one common theme is a rebound off support near the 10-week moving average.
Some of the main indexes are displaying that same behavior, so it's no surprise to also see it among highly rated stocks.
Remember that in a rising market, 10-week pullbacks can provide a chance to buy a winning stock or add shares to an existing position.
Credit-card networks MasterCard (MA) and Visa (V) both have executed 10-week rebounds. MasterCard's actually looks a little better. You prefer to see active turnover in a rebound, and MasterCard has that, while Visa has rallied in below-average volume.
Longtime leader Priceline.com (PCLN) also has lifted off support at its 10-week line. Its IBD industry group, Leisure-Travel Booking, continues to sport a strong ranking, standing at No. 13 out of 197 groups as of Thursday.
Genesco (GCO) has staged a 10-week rebound, too. The shoe and hat retailer tried to clear a 75.65 buy point from a flat base April 17, but it couldn't close above that level.
The stock then fell back near its 10-week line before jumping Thursday. It now has managed to close above 75.65.
Other leading stocks have at least regained their 10-week lines, even if they haven't lifted above them at this point. Take Lululemon Athletica (LULU), for example.
Lululemon could be working on a new base as it finds 10-week support. The seller of high-end athletic clothing has been consolidating for about three weeks.

U.S. Federal Reserve forecast

2012-05-01T03:56:00.003-07:00

Copper rallied Thursday to its highest level in more than two weeks, fueled by a more optimistic economic outlook from the Federal Reserve and by strong technical momentum that may drive prices back toward their 2012 highs.
Copper is higher for a third straight day, extending gains from the previous session during which the U.S. Federal Reserve forecast U.S. growth to "remain moderate over coming quarters and then pick up gradually."
The Fed also said it was ready to launch another round of bond buying if the U.S. economy weakens.
Copper prices moved through two lines of technical defense — the 100-day moving average at around $3.72 per pound and the 200-day at $3.76.
Matthew Zeman, head of trading with Kingsview Financial in Chicago, said the market's ability to hold above the 200-day should attract more buyers and again challenge the upper end of this year's trading range near $4.
"We're going to re-challenge the top end of the previous trading range ... just under $4 (per pound)," Zeman said.
July copper jumped 6.60 cents, or 1.8%, to $3.7735 per pound, after dealing between $3.6960 and $3.7845, another high dating back to April 10.
Comex volumes were heavy once again, with over 101,000 lots traded in late New York business, more than 40% above the 30-day average, according to preliminary Thomson Reuters data.

Expectations and the smallest increase

2012-04-28T03:20:00.000-07:00

The Dow Jones industrial average tacked on 0.5%, while the Nasdaq and S&P 500 each added 0.2%. Turnover was tracking lower across the board.
As earnings season keeps rolling, a number of leading stocks were making big moves on their quarterly reports.
Texas Capital Bancshares (TCBI) jumped 6% in fast trade, clearing a 36.71 buy point from a square-box base. The regional bank said quarterly EPS climbed 126% to 70 cents, beating views, as sales rose 32% to $102 million. It also scored an upgrade to buy from Sterne Agee.
SolarWinds (SWI) was up 18% in huge turnover after gapping above its 50-day line to an all-time high. The software maker said quarterly EPS grew 43% to 30 cents, topping forecasts and accelerating from a 21% jump in the fourth quarter of 2011. Revenue, including acquisitions, jumped 39% to $59.7 million. SolarWinds has lifted off support at its 10-week moving average.
O'Reilly Automotive (ORLY) was up 5% in strong volume and carved a new high before giving up some gains. The car parts retailer said quarterly EPS gained 37% to $1.14, ahead of estimates, as revenue jumped 11% to $1.5 billion. Its guidance was roughly in line. The stock hit a new high early Thursday, but has given up gains. It's well extended past its last buying range.
On the downside, Nu Skin Enterprises (NUS) shed 8% despite topping views. Before the open, the skin care products firm reported that its Q1 profit climbed 32% to 74 cents a share vs. expectations of 70 cents. Revenue grew 17% to $462 million, also above estimates. But Nu Skin sees Q2 earnings coming in at 79 cents to 83 cents a share, below expectations of 85 cents.
Celgene (CELG) gapped below its 50-day moving average, losing 4% after reporting disappointing Q1 results. The biotech earned $1.08 a share, up 30% from a year ago. But it missed views by a nickel. Sales rose 13% to $1.27 billion, below expectations and the smallest increase in 11 quarters. It was also the fourth straight quarter of sales growth deceleration.
In economic news, pending home sales jumped by a much better-than-expected 4% in March. Economists had expected a 0.5% gain. New jobless claims declined by 1,000 to a seasonally adjusted 388,000 last week, worse than forecasts for 375,000.

Experiment in economic policy

2012-04-26T03:46:00.001-07:00

Investors Business Daily opines that “Big government threatens our well-being with irresponsible health care “reform,” higher taxes on entrepreneurs, a tax-filled cap-and-trade energy bill, a host of new business-strangling regulations and trillion-dollar deficits as far as the eye can see.” Then they go on to say: “In late July, economist J.D. Foster of the Heritage Foundation put it succinctly: ‘This is no longer an experiment in economic policy. The results are in: Keynesian stimulus does not work.’ This GDP report doesn’t change that conclusion a bit”.
It is difficult to be more pessimistic than that. However, they do state that we have “stepped back from the abyss.” and that “our only hope going forward is the private economy. Though hindered by massive government intervention in housing, banking and industry, it’s still the most resilient in the world. Given the list of problems they cite, it is difficult to reconcile the optimism and pessimism contained in the piece. I suspect that we will slip back into recession in another quarter or so. I found little reason or justification for their, admittedly muted, optimism.

The stock cleared

2012-04-22T07:56:00.000-07:00

The S&P 500 snapped a two-week losing streak, but the Nasdaq failed to do the same. Top-rated stocks also showed some mixed action. Some marquee names further weakened, but a few of them managed gains amid choppy market conditions.
Apple (AAPL) logged a second straight weekly loss. The stock is now in its first test of its 10-week line since it cleared a cup-with-handle base in January. But its pullback came in heavy trading, which is not ideal.
The bellwether has had a long, steep ascent and has been above its 10-week line since December. Apple reports after the market's close Tuesday.

Panera Bread (PNRA), which was No. 40 in last week's 50, dropped out of this week's list. It tumbled 7% for the week and now sports an E Accumulation-Distribution Rating.
Chipotle Mexican Grill (CMG) snapped a 17-week win streak in big volume. A break can be expected after a long advance. But the stock fell hard Friday despite better-than-expected Q1 results late Thursday.
On a bright note SXC Health Solutions (SXCI), Sturm Ruger (RGR) and Spirit Airline (SAVE) all gained ground this week.
Taiwanese chip designer Silicon Motion (SIMO) also had a big week. The stock cleared a low handle in big volume.
Silicon Motion has delivered triple-digit profit growth in the past three quarters. It reports Q1 results Thursday, April 26. Analysts see its bottom line growth slowing to a still respectable 83%.
TransDigm (TDG), an aircraft parts maker, cleared a 121.58 buy point in a flat base. It passed an earlier buy point of 118.31 April 12, but did so in soft turnover.
Elsewhere, Herbalife (HLF) is near a record high after bouncing off its 10-week moving average. Volume, however, has been soft.
GNC Holdings (GNC) is near a record high after testing its 10-week line. Its relative strength line is at a new high ahead of price.
The nutritional supplement retailer came public just over a year ago and has doubled since then.
The IBD 50 fell 1.1% for the week. But SXC Health vastly outperformed with a 22% surge. The pharmacy benefits manager agreed to buy Catalyst Health Solutions for $4.4 billion.

Most understand economics only experientially

2012-04-19T04:38:00.003-07:00

The bailout fiasco is just now starting to show up for the act of desperation that many suspected it was. Instead of allowing markets to resolve a severely over-leveraged and distorted economy, the government decided to try to “bluff” its way through one more time. This strategy has been one used for almost 5 decades. Each time the credit stimulus required is bigger than the last. Each time the distortions to relative prices is made worse. Each time the misallocation of resources becomes greater. Each time the credit levels of individuals and government expand. Each time inflation becomes a bigger problem. Finally, a time comes when malinvestment and credit burdens are too large to be supported. It is probable that we have reached that point. To appreciate how far we have come regarding the abuses of credit creation, one need only note that since the Federal Reserve was created in 1913, the dollar has lost about 96% of its purchasing power. Most of that loss (probably in excess of 90%) has occurred since 1980.
There are still many that believe that government actions will get us out of our predicament. They won’t. When we come out of this mess, it will be in spite of these actions. They will serve to make the problem worse and cause it to last much longer. Japan has been employing similar stimuli for two decades, and its economy has still has not recovered.
As time passes, it will become apparent to all but the dullards that these interventions were non-helpful and actually harmful. Most understand economics only experientially. Events as discussed in the following post by Rolfe Winkler today are what will continue to surface with the passage of time and provide enough instances for the experiential learners.
Besides being a terrible decision that will cost taxpayers dearly, the article also talks about the unintended consequences of drawing deposits away from smaller, solid banks to the weaker GMAC. The unintended consequence is to weaken the stronger banks.

Overall price inflation was modest

2012-04-16T23:26:00.001-07:00

The Fed's April Beige Book was just released.
According to the report, the economy grew at a "moderate to modest" pace, but a rise in gas prices could hurt consumers in the near term.
The last Beige Book released in February showed economic activity growing steadily throughout the country.
A little more on fears of rising energy costs:

Overall price inflation was modest in most Districts. However, contacts in the Cleveland, Richmond, Atlanta, Chicago, Kansas City, and Dallas Districts cited rising transportation costs due to higher fuel prices. Minneapolis and Dallas noted that airlines have raised their fares to offset higher fuel costs. Richmond reported that rising fuel costs were a serious problem for both land and ocean shippers, while intermodal transportation firms in Dallas said that they had increased prices in response to higher fuel costs. In Atlanta, higher transportation costs were passed through to consumers without much difficulty. In contrast, contacts in Cleveland, Chicago, and San Francisco said it was difficult to pass through higher costs to consumers. Input costs for manufacturers in Boston, Cleveland, and Kansas City rose somewhat, but with little pass-through. Price pressures have eased somewhat for manufacturing firms in Philadelphia. Higher prices for construction materials narrowed profit margins for contractors in Kansas City.

Prepared by the Federal Reserve Bank of Cleveland based on information collected on or before April 2, 2012. This document summarizes comments received from business and other
contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.
Reports from the twelve Federal Reserve Districts indicated that the economy continued to expand at a modest to moderate pace from mid-February through late March. Activity in the Boston, Atlanta, Chicago, Dallas, and San Francisco Districts grew at a moderate pace, while Cleveland and St. Louis cited modest growth. New York reported that economic growth picked up somewhat. Philadelphia and Richmond cited improving business conditions. The economy in Minneapolis grew at a solid pace and Kansas City's economy expanded at a faster pace.
Manufacturing continued to expand in most Districts, with gains noted in automotive and high-technology industries. Manufacturers in many Districts expressed optimism about near-term growth prospects, but they are somewhat concerned about rising petroleum prices. Demand for professional business services showed modest to strong growth and freight volume was mainly higher. Reports on retail spending were positive, with the unusually warm weather being credited for boosting sales in several Districts. While the near-term outlook for household spending was encouraging, contacts in several Districts expressed concerns that rising gas prices could limit discretionary spending in the months to come. New-vehicle sales were reported as strong or strengthening across much of the United States. Tourism increased in most reporting Districts. Residential real estate showed some improvement, with many contacts citing expansion in the construction of multi-family housing. Activity in nonresidential real estate increased or held steady in most Districts. Agricultural conditions were generally favorable. Mining activity expanded and oil extraction rose, while natural gas drilling slowed. Banking conditions were largely stable, with some improvement seen in loan demand. Several Districts reported increased credit quality.
Hiring was steady or showed a modest increase across many Districts. Difficulty finding qualified workers, especially for high-skilled positions, was frequently reported. Upward pressure on wages was constrained. Overall price inflation was modest. However, contacts in many Districts commented on rising transportation costs due to higher fuel prices.
Manufacturing
Manufacturing continued to expand in most Districts, although respondents in the Boston and St. Louis Districts reported that manufacturing was mixed and Chicago reported that growth in manufacturing production leveled off after a strong start to the year. Contacts in automotive industries reported gains in Cleveland, Atlanta, and Chicago. The Kansas City, Dallas and San Francisco Districts reported increased sales for high-technology manufacturers, with Dallas noting key demand drivers continue to be mobile applications, cloud computing, and automobiles. The Philadelphia and Dallas Districts indicated improvement in demand for manufacturing with ties to residential housing and construction. Cleveland steel producers and service centers reported that volume was trending slightly higher, while Chicago steel producers said that capacity utilization was steady. For refiners in San Francisco, capacity utilization rates continued to hold largely stable, as weak domestic gasoline demand was offset by strong foreign demand for distillate products. In Dallas, Gulf Coast refiners noted steady margins overall.
Manufacturers in Boston, Cleveland, and Chicago are expanding payrolls but finding it difficult to find highly-skilled workers. Comments from the Cleveland, Atlanta, Chicago, and Kansas City Districts indicated a rise in capital spending. Manufacturers in over half the Districts commented on increasing input costs, focusing, in particular, on rising petroleum prices. Contacts in Boston, Philadelphia, Chicago, Kansas City, and San Francisco remained optimistic that activity will increase in the near term. However, several respondents in Cleveland and Dallas noted that their outlooks have become more cautious. Manufacturers in Boston and Cleveland expressed concern about the European economy. Expectations were mixed in St. Louis.
Nonfinancial Services
Demand for professional business services was characterized as modest to strong in the Boston, Philadelphia, Richmond, Kansas City, and Dallas Districts. St. Louis, Minneapolis, and San Francisco reported that demand was mixed. Boston and Richmond cited rising demand for advertising, marketing, and consulting services, while accounting services saw a modest pickup in Minneapolis and Dallas. Growth in technology-related services to the energy sector was noted in the Minneapolis and Kansas City Districts. St. Louis and San Francisco reported that activity in the healthcare sector was flat to down. Both Richmond and San Francisco noted increased sales for restaurants and food-related service providers. Freight transportation services were higher in the Cleveland, Richmond, and Kansas City Districts. Reports from Atlanta and Dallas were mixed due to declining air cargo volumes and railroad shipments. St. Louis reported that plans have been announced to close certain freight transport and distribution facilities. Contacts in Cleveland, Richmond, and Kansas City noted a shortage of qualified truck drivers.
Consumer Spending and Tourism
Retail spending continued to improve in almost all Districts. Contacts in the Boston, New York, and St. Louis Districts characterized retail activity as strong. Reports from Chicago and Richmond indicated a significant strengthening in retail spending. Sales expanded at a modest or moderate pace in Philadelphia, Minneapolis, Kansas City, and Dallas. Unseasonably warm weather boosted sales in the Boston, Philadelphia, Cleveland, Richmond, and Chicago Districts. Grocers in Cleveland and San Francisco reported sales as unchanged. Apparel sales were strong in Boston and New York. Purchases at home improvement stores were up in Richmond and Chicago. Reports from Boston, Atlanta, St. Louis, and Kansas City indicate a positive near-term outlook for retail spending; however, contacts in Philadelphia, Cleveland, Atlanta, Chicago, and Kansas City expressed concerns that rising gas prices could limit discretionary spending in the months to come.
Automobile sales were reported as stronger or strengthening during late February and early March in most Districts. Mild winter weather boosted sales in Cleveland but depressed motor vehicle service spending in New York and Minneapolis. Rising gas prices lead to increased purchases of fuel-efficient vehicles in Kansas City, Dallas, and San Francisco. Contacts in Philadelphia and Kansas City expect continued sales strength. Reports from Cleveland showed a mixed outlook, with some respondents expecting solid sales and others seeing the current pace of sales as unsustainable. Used-vehicle sales were reported as strong or robust in Cleveland and San Francisco.
Tourism was characterized as strong by respondents in the Boston, New York, Richmond, and Atlanta Districts. Minneapolis indicated a slowdown in activity due to a general lack of snow this winter. Conversely, warm weather boosted tourism in Richmond. Bookings were strong in New York, and occupancy rates improved in the Boston, New York, Atlanta, and San Francisco Districts. In Boston and Kansas City, business travel continues to be the main driver of tourism activity. Contacts in Boston and Atlanta expressed concern over high fuel prices as a possible drag on leisure spending.
Real Estate and Construction
Residential real estate activity improved in most Districts, though Cleveland and San Francisco noted that activity remained lackluster or at low levels. The St. Louis and Minneapolis Districts reported increases in building permits. The construction of multi-family housing units, including apartments and senior housing, expanded in many Districts. Home prices continued to decline in Boston, New York, and Minneapolis, but were largely flat in San Francisco. Contacts in Boston, Philadelphia, and Kansas City indicated that mild weather had boosted real estate activity.
Non-residential construction activity improved in the Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis Districts, though many of these contacts characterized the improvement as slow. Boston, New York, and San Francisco characterized non-residential real estate activity as unchanged or steady. The energy and high-tech sectors were driving much of the demand in the Dallas District. San Francisco noted a rise in the demand for office space from the technology sector. Cleveland and Chicago saw a boost in healthcare-related construction. Projects related to the education sector are showing growth in Boston, Cleveland, Philadelphia, and Richmond. The outlook of builders is described as positive or slowly improving in the Philadelphia, Cleveland, Atlanta, and Kansas City Districts, and as cautiously optimistic in Boston.
Banking and Finance
For most Districts reporting on financial services, banking conditions remained stable, with modest improvements in demand for lending. Loan demand was reported as improved in New York, Philadelphia, Cleveland, Richmond, Chicago, Kansas City, Dallas, and San Francisco, while lending activity was unchanged in St Louis. The Dallas District reported improved sentiment by national and regional banks due to improved middle-market and large corporate lending. Contacts in Cleveland, Richmond, and San Francisco reported that increased competition among lenders has been driving more aggressive loan pricing. In general, the demand for commercial and industrial loans remained steady, while several Districts reported an increase in commercial real estate lending activity. The Philadelphia and Cleveland Districts reported increased lending for multifamily housing and health care, and contacts in Richmond cited increased lending to small business to finance inventory and capital expenditures. Consumer lending has remained stable or risen modestly across a few Districts. The Cleveland and Richmond Districts reported increased home equity and auto lending, while bankers in Chicago noted improved credit availability for auto loans and credit cards. Several Districts reported that credit standards remain stable, but Richmond bankers reported that they were offering easier terms to attract new commercial borrowers. Several Districts reported increased credit quality, as delinquencies have continued to decline and few problem loans have been reported.
Agriculture and Natural Resources
Recent rain and snowfall has helped alleviate dry agricultural conditions from earlier in the year. Nonetheless, the Atlanta, Minneapolis, Kansas City, and Dallas Districts have all reported certain areas where drought conditions continue to persist. Due to unseasonably warm weather, contacts in several Districts reported that the planting of some crops is beginning earlier than normal, including corn in Chicago and wheat in Minneapolis. San Francisco commented that there has been an increase in certain input costs, such as fertilizer, while Chicago reported tight supplies of some agricultural chemicals and corn seed. Atlanta and Chicago reported an increase in the prices paid to farmers for soybeans; Chicago noted that the increase was due to lower-than-expected harvests in South America. Livestock prices rose in the Chicago, Minneapolis, and Kansas City Districts, while orders for livestock were robust in San Francisco. Farmland values in Kansas City continue to rise and are at record highs.
Activity in natural resources remained strong. The Kansas City, Dallas, and San Francisco Districts reported a shift from natural gas to oil exploration and production due to low natural gas prices and growing demand for oil. In the Cleveland District, leasing activity in the Utica shale is expanding. Cleveland and St. Louis noted that the production of coal has slowed over the past few months. The mining sector is expanding in San Francisco due to high prices for a variety of precious metals, and iron ore mines in the Minneapolis District continued to operate near capacity. Contacts in Kansas City reported a shortage of engineers and experienced technical support for oil and gas drilling.
Employment, Wages, and Prices
Hiring was steady or showed a modest increase in the Boston, New York, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, Dallas, and San Francisco Districts. Industries reporting some employment growth included manufacturing, freight transport, professional business services, and information technology. A preference for part-time and temporary workers was seen in the Richmond and Atlanta Districts. Atlanta noted that temporary workers were being utilized in order to contain costs and retain flexibility, while some employers in Richmond prefer temporary workers due to uncertainty about future demand. Some employers in the Boston, Cleveland, Atlanta, Chicago, Kansas City, and Dallas Districts reported having difficulty finding qualified workers, especially for certain high-skilled positions. Contacts in Philadelphia and Cleveland noted that new federal regulations are exacerbating a truck-driver shortage. New York commented that employers are planning to step up hiring activity in the months ahead. Boston, Richmond, and Atlanta said that employers in their Districts are cautious and need to see more robust growth before they expand their permanent payrolls further.
Wage pressures were characterized as contained or modest among reporting Districts. Contacts in Chicago, Dallas, and San Francisco noted some upward pressure on wages for skilled jobs, especially in manufacturing and information technology. In the Minneapolis District, strong oil-drilling and production activity continued to bid up pay. Transportation contacts in Cleveland noted some wage pressure due to a tightening of the driver pool. And medical benefits continue to put pressure on labor costs in Philadelphia.
Overall price inflation was modest in most Districts. However, contacts in the Cleveland, Richmond, Atlanta, Chicago, Kansas City, and Dallas Districts cited rising transportation costs due to higher fuel prices. Minneapolis and Dallas noted that airlines have raised their fares to offset higher fuel costs. Richmond reported that rising fuel costs were a serious problem for both land and ocean shippers, while intermodal transportation firms in Dallas said that they had increased prices in response to higher fuel costs. In Atlanta, higher transportation costs were passed through to consumers without much difficulty. In contrast, contacts in Cleveland, Chicago, and San Francisco said it was difficult to pass through higher costs to consumers. Input costs for manufacturers in Boston, Cleveland, and Kansas City rose somewhat, but with little pass-through. Price pressures have eased somewhat for manufacturing firms in Philadelphia. Higher prices for construction materials narrowed profit margins for contractors in Kansas City.

The world oil economy

2012-04-13T03:34:00.001-07:00

Natural gas in North America broke below the $2.00 barrier today, for the first time in ten years. It’s important to remember that, unlike oil, natural gas does not trade at a converged, global price. Accordingly, a million BTU in LNG form currently trades for over $9.00 in the UK, and over $15.00 in Japan. Such low prices for natural gas unquestionably give the US a competitive advantage. But, it will take a resurgence in manufacturing and related industrialism to full capture the price disparity. After all, the US is still very much an oil-based economy.
That said, energy transition will indeed continue–and even accelerate. It is simply unavoidable that any physical process, which could be switched to natural gas from oil, will be overlooked in this economy. Given that the world oil economy is contending with prices for a million BTU in the $17.00 to $20.00 range, we should begin to see an arbitrage that captures the N.A. natural gas advantage at $2.00 per million BTU. How appropriate therefore that the Oil and Gas industry itself should get the ball rolling, in this regard. See this Reuters story – Drillers dropping diesel for cheaper natural gas:
North American oil and gas companies are trying to take the sting out of low natural gas prices by using it instead of costlier diesel fuel to drive their drilling rigs… Apache Corp, the largest U.S. company focused solely on oil and gas exploration and production, is in the process of converting its first rig to run on power generated by liquefied natural gas (LNG). Canada’s Encana Corp’s already has 15 of its more than 40 rigs driven by gas, and plans to convert even more.
I’ve written extensively about the long, and economically painful process of energy transition but it now seems likely that the first five years of such a disruptive transition is now behind us. In the next phase, a longer period which should take at least another 10-15 years, we will see oil cede its primacy first to coal. This hand-off from oil to coal is already very much underway. Natural gas will then start to compete against coal more forcefully by mid-decade, and then later in the decade the fast rate of growth in renewables–taking place from low levels in the background–will break out to the upside and gain significant share of global primary energy supply.

Business investment spending

2012-04-13T03:22:00.001-07:00

Bill Dudley, the president of the New York Federal Reserve bank, indicated that he is most likely supporting additional action by the Federal Reserve to speed up the economy.

In remarks at an event in Syracuse, New York on Thursday morning, Dudley argued that "recent growth rates are barely keeping up with our potential."

"The incoming data on the U.S. economy generally has been a bit more upbeat over the past few months, "Dudley said. But it is "still too soon to conclude that we are out of the woods."

Some of the growth in sales and job creation in the first three months of the year may have been due to the mild winter pulling forward hiring and economic activity, Dudley said.

Extraordinary valuation levels

2012-04-13T02:38:00.003-07:00

Bill Gross: One of Our U.S. GDPs Has Gone Missing

[The last fifty years] produced a persistent increase in asset prices vs. nominal GDP that led to an average overall 50-year appreciation advantage of 1.3% annually. That’s another way of saying you would have been far better off investing in paper than factories or machinery or the requisite components of an educated workforce. We, in effect, were hollowing out our productive future at the expense of worthless paper such as subprimes, dotcoms, or in part, blue chip stocks and investment grade/government bonds. Putting a compounding computer to this 1.3% annual outperformance for 50 years, produces a double, and leads to the conclusion that the return from all assets was 100% (or 15 trillion – one year’s GDP) higher than what it theoretically should have been. Financial leverage, in other words, drove the prices of stocks, bonds, homes, and shopping malls to extraordinary valuation levels – at least compared to 1956 – and there could be payback ahead as the leveraging turns into delevering and nominal GDP growth regains the winner’s platform. …Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets – while still continuously supported by Fed and Treasury policymakers – is likely at its pinnacle. Out, out, brief candle.

The outcome for taxpayers will be the same

2012-04-10T05:48:00.000-07:00

Would you invest in a financial company that is going bankrupt? Actually, you already have! While you may have been an unwilling investor in FNM, you are continuing to invest every day, like it or not. Your “investment” is also increasing every day in Freddie and the FHA, both on similar trajectories. Welcome to the world of Alice in Wonderland where the solution to a credit-caused bubble is more credit.
The pressures from this nonsense continue to build. The fact that the US government is insolvent doesn’t seem to matter. Our government, the wounded and cornered animal, will do anything to survive. In this case, survival is keeping the game going as long as you can. But this game is Russian Roulette and taxpayers, knowingly or not are participants. No one knows whether the next revolution of the chamber will produce a click or the FINAL BANG.

It is unlikely that the government will change policy actions. It is even more unlikely that doing so would have any effect on the outcome. At this point, all one might get is less noise when the final bang happens. The outcome for taxpayers will be the same.
The government has morphed into the worst of WAPO, Enron and Worldcom, and on a much bigger scale. When the bills come due, the stockholders will be wiped out. We are all stockholders, whether we like it or not.

Fannie Mae Seriously Delinquent Rate Hockeysticks to 4.45% From 1.57% In Prior Year
The FNM “seriously delinquent” rate has gone parabolic, increasing by roughly 5% sequentially and just under 300% YoY. As mere text will simply not do this metric justice, please enjoy this chart of the dataset from Blytic. It tells you all you need to know about the Fed’s containment of the housing problem.

The August seriously delinquent single-family number comprised of a 2.87% non-credit enhanced delinquencies and a very bothersome 11.52%, consisting of credit enhanced loans.
The deterioration of FNM’s book however did not stop it from increasing the size of its book. In September Fannie’s total book of business hit $3.242 trillion, up from $3.229 trillion in August and $3.079 trillion in the prior year.
This trend should bother you, dear taxpayer, because it is your money on the hook here, which is not only massively mismanaged by Bernanke & Co., LLC, but which sees another $80 billion of free funding every month courtesy of the dollar printing press to onboard even more toxic garbage onto your balance sheet.

Most understand economics only experientially

2012-04-07T22:00:00.000-07:00

The current economic crisis

2012-04-05T04:17:00.001-07:00

A rosy assessment by Bloomberg. Their assessment of growth is reasonable; the statement that “… government stimulus helped bring an end to the worst recession since the 1930s…” is highly unlikely. It appears to be both an early and foolish call. During normal recessions, it is typical to have an intervening quarter or two of growth and then return to negative numbers.
This is no ordinary recession. There can be no recovery until the private sector (more properly called the productive sector) starts growing again. The public sector (better called the non-productive sector) produces virtually nothing, although it can appear to “cause” growth because of the manner in which GDP is defined. The government has no money of its own. It gets money either by taking it from the productive sector or by printing it. To get money from the productive center, it either coercively takes it in the form of taxes or sells bonds. Either way, the productive center has less funds to use. The government cannot produce growth in this fashion because of the dollar for dollar trade-off. Their spending makes us poorer in the sense that they do not spend the
way we would. Simply stated, as a consumer would you rather have $100 bill or have your neighbor spend the $100 for you and show up with gifts or groceries that he assumed you would like?
The third method the government can use to obtain funds is printing money. But this is inflation. Whether or not this strategy will work, depends on whether the productive sector is fooled. If so, temporary growth may obtain, but it is replete with misallocation of resources because of distorted prices. To the extent that monetary expansion works, it creates an unsustainable “high” that ultimately results in a “letdown.” It is this “success” (and prior abuses of this strategy) that has created the current economic crisis. Attempting to cure an over-leveraged economy with more credit borders on madness! As Ludwig von Mises stated long ago: “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.”
Our government obviously does not believe the previous statement or believes they can perform their Ponzi economics once again. In the social sciences, as opposed to the physical sciences, it is very difficult to perform definitive tests of hypotheses. Our current situation provides perhaps as close to a valid empirical test as one ever gets. My money, to the extent there is any left as a result of these nonsensical policies, will be put on Mises.

GDP Probably Grew as Stimulus Took Hold: U.S. Economy Preview

By Timothy R. Homan
Oct. 25 (Bloomberg) — The economy in the U.S. probably grew in the third quarter at the fastest pace in two years as government stimulus helped bring an end to the worst recession since the 1930s, economists said before reports this week.
The world’s largest economy grew at a 3.2 percent pace from July through September after shrinking the previous four quarters, according to the median estimate of 65 economists surveyed by Bloomberg News. Other reports may show sales of new homes and orders for long-lasting goods increased.
Americans flocked to auto showrooms and real-estate offices last quarter to take advantage of government programs such as “cash-for-clunkers” and tax credits for first-time homebuyers. Growing demand caused stockpiles to keep falling, which will prompt companies to rev up assembly lines and help sustain the recovery into 2010 even as unemployment climbs.
“The recovery is off to a decent but unspectacular start,” said Joe Brusuelas, a director at Moody’s Economy.com in West Chester, Pennsylvania. “While another large drawdown in inventories will be a drag on third-quarter growth, it sets the stage for a longer and stronger upturn in manufacturing.”
The Commerce Department’s report on gross domestic product is due Oct. 29. The four consecutive decreases through the second quarter marks the longest stretch of declines since quarterly records began in 1947. The economy shrank 3.8 percent in the 12 months to June, the worst performance in seven decades.
Stocks Climb
Stocks have rallied as earnings at companies from Caterpillar Inc. to Morgan Stanley topped estimates. Profits exceeded expectations at about 80 percent of the companies in the Standard & Poor’s 500 Index that have released results, according to Bloomberg data. That marks the highest proportion in data going back to 1993. The S&P 500 closed at a one-year high on Oct. 19.
Consumer spending last quarter probably jumped at a 3.1 percent annual rate from the previous three months, the biggest gain since the first quarter of 2007, the GDP report is also projected to show.
September readings on household purchases, due from the Commerce Department on Oct. 30, may show the quarter ended on a soft note after the Obama administration’s car incentive expired the month before. Spending probably fell 0.5 percent last month as car sales slowed after jumping 1.3 percent in August, the biggest gain since 2001.
The so-called cash-for-clunkers program offered buyers discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles. The plan boosted sales by about 700,000 vehicles, according to a Transportation Department estimate.
Homebuyer Credit
The administration’s $787 billion stimulus package, signed into law in February, included an $8,000 tax credit for first- time homebuyers that expires at the end of November.
New-home sales last month increased 2.6 percent to an annual pace of 440,000, the highest level since August 2008 and reflecting the boost from the credit, according to economists surveyed. The Commerce Department’s report is due Oct. 28.
Lawmakers in Washington are debating an extension of the credit through June, and are discussing expanding it to all buyers under an income cap.
A report from S&P/Case-Shiller home-price index due Oct. 27 may show home values in 20 U.S. metropolitan areas declined in the year ended August at the slowest pace since January 2008, according to the survey median.
More Orders
Orders for durable goods rose 1 percent in September, economists project the Commerce Department will report Oct. 28. A gain would be the fourth in the last six months and indicates companies are starting to invest in new equipment.
Business spending and housing “stand ready to provide the oomph necessary to generate continued optimism until consumer activity stabilizes,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.
Optimism among U.S. consumers in October is forecast to rise even as unemployment probably also increased, economists said. The Conference Board’s confidence index, due Oct. 27, climbed to 53.5 from 53.1, according to the survey median.
The economy will likely grow at a 2.4 percent annual rate from October through December, according to a Bloomberg survey earlier this month. GDP will also expand 2.4 percent next year and 2.8 percent in 2011, the survey showed, compared with an average of 3.4 percent growth over the past six decades.
“This has been the mother of all recessions in our working lifetime,” Jim Owens, Caterpillar’s chief executive officer, said on a conference call last week. The Peoria, Illinois-based company, the world’s largest producer of backhoes and bulldozers, predicted on Oct. 20 that sales may rise as much as 25 percent next year.

                        Bloomberg Survey

===============================================================
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
===============================================================
Case Shiller Monthly YO  10/27      Aug.     -13.3%    -11.9%
Case Shiller Monthly In  10/27      Aug.     144.2     144.9
Consumer Conf Index      10/27      Oct.      53.1      53.5
Durables Orders MOM%     10/28     Sept.     -2.6%      1.0%
Durables Ex-Trans MOM%   10/28     Sept.     -0.3%      0.8%
New Home Sales ,000’s    10/28     Sept.      429       440
New Home Sales MOM%      10/28     Sept.      0.7%      2.6%
Initial Claims ,000’s    10/29     17-Oct     531       525
Cont. Claims ,000’s      10/29     10-Oct     5923      5915
GDP Annual QOQ%          10/29      2Q A     -0.7%      3.2%
Personal Consump. QOQ%   10/29      2Q A     -0.9%      3.1%
GDP Prices QOQ%          10/29      2Q A      0.0%      1.3%
Core PCE Prices QOQ%     10/29      2Q A      2.0%      1.4%
Pers Inc MOM%            10/30     Sept.      0.2%      0.0%
Pers Spend MOM%          10/30     Sept.      1.3%     -0.5%
PCE Deflator YOY%        10/30     Sept.     -0.5%     -0.5%
Core PCE Prices MOM%     10/30     Sept.      0.1%      0.2%
Core PCE Prices YOY%     10/30     Sept.      1.3%      1.3%
Employ Costs QOQ%        10/30       3Q       0.4%      0.4%
Chicago PM Index         10/30      Oct.      46.1      48.7
U of Mich Conf. Index    10/30     Oct. F     69.4      70.0
===============================================================

Smooth transition in markets

2012-04-03T01:45:00.000-07:00

Below is today’s press release from the Fed. I have emboldened a couple of key statements.
“With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.” While this statement may be true (probably less so than we are led to believe) at the moment, ignore it. It is a “CYA” statement that provides cover for the Fed to continue pumping the economy. This statement or its equivalent will probably be in the Fed’s statement until a month or two before rampant inflation is obvious to everyone.
“The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.” This statement is inconsistent with the prior statement. It is either untrue or a diversion. There is no “smooth transition in markets” possible. While it might be possible that the Fed does actually honor this statement in a strict sense, they will merely shift their pumping to a different vehicle. To stop pumping now would mean a collapse of the mortgage market and the economy that will result in a Great Depression.
It is difficult to discern whether the Fed is merely being duplicitous or just plain wrong in their reading of the economy. After all, they have a pretty good track record for both.
If you believe what is in the statement, then I would get out of the stock market immediately. If not, then it is possible that the financial market fantasy can continue for awhile. Regardless of which you believe, be very careful. For me, I want no part in long positions in traditional stocks or bonds. This Ponzi scheme cannot go on much longer.

The differences in the absolute amount of total obligations

2012-04-03T01:23:00.000-07:00

For some who closely follow the economic situation, it is obvious that we are headed for a disaster. There can be no happy ending. It will be a tragedy! Only the timing and shape are unknown. However, most disagree, believing this crisis is merely another recession like so many before. How can there be such a discrepancy in beliefs? Is the former group merely populated by a type of loose wingnut, spouting their own form of Armageddon Economics?
I don’t consider myself a wingnut (of course it is likely that no wingnut does), yet I do fall into the first camp. About four months ago I undertook the task of teaching a course entitled “Surviving the Crisis” at the University of North Carolina in Asheville. The class was a group of talented and eager middle- to upper-age students, mostly retirees with highly diverse backgrounds. The course was dominated by “non-wingnuts,” members that believed that, yes things were bad but no worse than other downturns in their lifetime. Fortunately for me, I did not have to present my case in 1 – 2 hours, but was able to lay it out over six weeks and 12 hours of class time plus much internet

correspondence. My guess is that at the start of the class, perhaps 95% were “non-wingnuts.” By the end, I suspect that 60 – 75%, possibly more, had become “wingnuts.” Most of the class had no background in economics (perhaps that gave them an advantage). Was I able to convince them based on bullying with economic theory? No, we did not deal with theory other than tangentially. So why did so many change their perspective? The answer is relatively simple: data, data and data combined with elementary level mathematics!
At some point, I would like to reduce the course to a presentation for the Internet. At this point, the task appears overwhelming because I have no experience in such matters and the data changes every month. I am teaching the course again in January. Perhaps then, time permitting, I will undertake the task.
Until then, all you “non-wingnuts” should read the report from Sprott Asset Management to get some of the data that leads “wingnuts” to their position. If you don’t become a “wingnut” after this read, you either did not get enough data, learn enough elementary mathematics or are an ostrich with your head below the surface. Seriously, if nothing else, it should make you more cautious in some of your planning and investment decisions.
Here are a few excerpts from the report with my emphasis:

The bottom line is that there is serious cause for concern here – and don’t be fooled into thinking this crisis will fix itself when (and if) the economy recovers. Just how bad is it? Below we outline the obligations of the US Federal Government from 2004 to 2009. We present two sets of numbers, as government accounting can vary widely depending upon the source. In column A, we outline the Total US government Obligations, using actuarial reports from the Social Security Administration and the Medicare Trustees Reports. In column B we identify Total Federal obligations according to GAAP accounting provided by Shadow Government Statistics, calculated on a US fiscal year end basis with estimates for 2009. The differences in the absolute amount of total obligations ($114.7 trillion vs. $74.6 trillion in 2009) are a function of timing, the calculation timeline for Social Security and Medicare, and other obligations included under GAAP rules. Either way we choose to calculate it, the total number is preposterously large. From 2004 to 2009, US unfunded obligations increased by an average of almost 50% over this six year period under both calculation methods, while US government revenue increased by only 12%.6 No company or government can increase its liabilities by more than four times the rate of its revenue and stay solvent for an extended period of time.

Hemingway wrote that a man goes broke “slowly, then all at once”. We believe the same sentiment can be applied to governments. If fiscal abuses continue unabated, confidence eventually erodes until investors just stop lending. It happened famously to Lehman in September 2008, and it is happening now to the US government. The Q2 Flow of Funds Report published by the Federal Reserve revealed that the Federal Reserve purchased as much as half of the newly issued treasuries in the second quarter.14 This means that the Federal Reserve isn’t merely supporting the market for US treasuries… it is the market for US treasuries. Printing new dollars to support an almost $9 trillion dollar budget deficit that stretches out over the next ten years puts the US on the road to ruin, and the major governments of the world have noticed and are taking action.

Like dead men walking, the US government is merely biding its time until the moment of truth. Unlike Fannie Mae, General Motors or Citigroup, however, there is no one left to grant a reprieve.

Forecast such things

2012-03-25T23:00:00.001-07:00

Paulson, Bernanke and Geithner have horrible forecasting records. Anyone forecasting, leaves himself open for a certain amount of embarrassment. Yet these people persist in pretending that they are capable of managing the economic condition of the country. That is truly scary!
Now we have the latest bit of evidence of their prowess. Look at this statement (one of many in a detailed report) made by Frederick Mishkin when he was on the Federal Reserve Board: “… they clearly illustrate that Iceland is a well run, advanced Nordic country that has little in common with emerging market countries, a fact important to recognize when we start discussing financial stability in the next section.” Shortly thereafter, Iceland inconveniently and totally collapsed into financial rubble.
Perhaps it isn’t Bernanke; perhaps it is his aides that are so wrong. Actually it is neither. No one can accurately forecast such things. That they are wrong is not surprising; that they have the hubris to pretend to know these things is what is amazing. Frederick Hayek’s Nobel acceptance speech entitled The Pretence of Knowledge has much to say both about the problem and professional hubris. Perhaps this speech should be required reading by all Washington economic and other policy dunderheads.

The current economic crisis

2012-03-19T05:11:00.002-07:00

A rosy assessment by Bloomberg. Their assessment of growth is reasonable; the statement that “… government stimulus helped bring an end to the worst recession since the 1930s…” is highly unlikely. It appears to be both an early and foolish call. During normal recessions, it is typical to have an intervening quarter or two of growth and then return to negative numbers.
This is no ordinary recession. There can be no recovery until the private sector (more properly called the productive sector) starts growing again. The public sector (better called the non-productive sector) produces virtually nothing, although it can appear to “cause” growth because of the manner in which GDP is defined. The government has no money of its own. It gets money either by taking it from the productive sector or by printing it. To get money from the productive center, it either coercively takes it in the form of taxes or sells bonds. Either way, the productive center has less funds to use. The government cannot produce growth in this fashion because of the dollar for dollar trade-off. Their spending makes us poorer in the sense that they do not spend the way we would. Simply stated, as a consumer would you rather have $100 bill or have your neighbor spend the $100 for you and show up with gifts or groceries that he assumed you would like?
The third method the government can use to obtain funds is printing money. But this is inflation.
Whether or not this strategy will work, depends on whether the productive sector is fooled. If so, temporary growth may obtain, but it is replete with misallocation of resources because of distorted prices. To the extent that monetary expansion works, it creates an unsustainable “high” that ultimately results in a “letdown.” It is this “success” (and prior abuses of this strategy) that has created the current economic crisis. Attempting to cure an over-leveraged economy with more credit borders on madness! As Ludwig von Mises stated long ago: “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.”
Our government obviously does not believe the previous statement or believes they can perform their Ponzi economics once again. In the social sciences, as opposed to the physical sciences, it is very difficult to perform definitive tests of hypotheses. Our current situation provides perhaps as close to a valid empirical test as one ever gets. My money, to the extent there is any left as a result of these nonsensical policies, will be put on Mises.

GDP Probably Grew as Stimulus Took Hold: U.S. Economy Preview

                        Bloomberg Survey

===============================================================
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
===============================================================
Case Shiller Monthly YO  10/27      Aug.     -13.3%    -11.9%
Case Shiller Monthly In  10/27      Aug.     144.2     144.9
Consumer Conf Index      10/27      Oct.      53.1      53.5
Durables Orders MOM%     10/28     Sept.     -2.6%      1.0%
Durables Ex-Trans MOM%   10/28     Sept.     -0.3%      0.8%
New Home Sales ,000’s    10/28     Sept.      429       440
New Home Sales MOM%      10/28     Sept.      0.7%      2.6%
Initial Claims ,000’s    10/29     17-Oct     531       525
Cont. Claims ,000’s      10/29     10-Oct     5923      5915
GDP Annual QOQ%          10/29      2Q A     -0.7%      3.2%
Personal Consump. QOQ%   10/29      2Q A     -0.9%      3.1%
GDP Prices QOQ%          10/29      2Q A      0.0%      1.3%
Core PCE Prices QOQ%     10/29      2Q A      2.0%      1.4%
Pers Inc MOM%            10/30     Sept.      0.2%      0.0%
Pers Spend MOM%          10/30     Sept.      1.3%     -0.5%
PCE Deflator YOY%        10/30     Sept.     -0.5%     -0.5%
Core PCE Prices MOM%     10/30     Sept.      0.1%      0.2%
Core PCE Prices YOY%     10/30     Sept.      1.3%      1.3%
Employ Costs QOQ%        10/30       3Q       0.4%      0.4%
Chicago PM Index         10/30      Oct.      46.1      48.7
U of Mich Conf. Index    10/30     Oct. F     69.4      70.0

The return to risky behavior is already underway

2012-03-19T04:58:00.000-07:00

Hope and Change in the Banking System seems to be “hope” that the system can get through this economic cycle while “change” is non-existent. “Too big to fail” creates incentives for risk-taking that would not occur in a true free market. Taxpayers underwriting risk and backstopping failure ensure that firms will take on more, rather than less, risk.
Legislated rules need to be imposed to contain excessive risk-taking based upon taxpayer guarantees. While a truly free market could handle this better than legislation, there appears to be zero hope for that occurring. Thus, a reinstatement of Glass-Steagall or its equivalent is necessary. Without some type of legislation, we are merely waiting for the next crisis to occur. With it, crises will still occur, but they should be more manageable.
The return to risky behavior is already underway.

You might as well label JP Morgan the new Lehman Brothers because they are operating like an investment bank. So much for those bailouts helping the average American. The media really needs to scrutinize how these companies make their earnings. They are simply using hot and easy money to double down in the Wall Street casino on the taxpayer dime. No reform has happened since the collapse of Wall Street because these banks own our politicians.

This threat looms ever larger with the passage of time

2012-03-17T00:46:00.000-07:00

Julian Robertson, legendary investor, expressed what I believe to be the critical immediate problem facing the US (and the rest of the world). With my emphasis added, he said the following:

I prefer to run scared through here. I think that if the Chinese stop buying our debt, it is virtually the end of the financial world as we know it. The conventional thinking is that they will continue buying. But I don‟t think it’s logical to assume somebody will continue to buy our paper which declines in value. Our dollar is declining in value, and it’s been pretty shocking over the last four or five months. The politicians who are so tough on businessmen and so critical – they and the Federal Reserve caused us to be in this predicament. What really caused me to predict the problems we had in 2007 and 2008 was that we were spending so much and no one was balancing the budget. No family can keep doing that forever, no corporation can keep doing that forever and no nation can continue doing that forever. We did it on all three fronts – and it blew up in our face.

Robertson speaks of what happens if/when the US can no longer depend on the “kindness of strangers” to fund our deficits. If/when our benefactors stop lending us money, both Treasury bonds and the US currency will collapse. As he alludes , bonds and currency are merely symptoms of underlying problems. While many believe that Blanche du Bois (the United States) will be able to bypass what Robertson fears because strangers will continue to support us, I do not. Furthermore, unless and until we remedy the underlying problems (government spending that cannot be supported by taxes, weakness in the private sector, etc.), this threat looms ever larger with the passage of time. At this point, there are no signs of the US even addressing these problems. Government projections (probably highly optimistic) for the remainder of this decade show deficits 2-3 times larger than any prior to last year.
Our kind strangers are not altruists, have their own needs for funds and their own political/national objectives. The frightening part of this entire situation is that we literally have no control over the short-term outcome. We have lost most of our economic clout, are viewed as profligate and probably have lost much of our political clout. We appear to be following the path of Britain when it lost its world leadership. Whether we fall to what arguably approached third-world nation status for Britain before recovering to a much smaller role in the world or not is moot. Our role as economic leader appears to be quickly slipping away. Even so, geopolitically we will remain relevant so long as we are in possession of ICBMs, sort of like Russia today but without the natural resources.

It invites anarchy

2012-03-16T01:38:00.002-07:00

This swamp is too big and too far gone to be drained by electing “the other guys.” There are no other guys; they are all the same. I’m not sure what the answer is, but the wise words of Justice Brandies should have served as a warning and ultimately may become prophetic:
“In a government of laws, the existence of the government will be imperiled if it fails to observe the law scrupulously. Our government is the potent, the omnipotent teacher. For good or ill, it teaches the whole people by its example. If government becomes a lawbreaker it breeds contempt for law: it invites every man to become a law unto himself. It invites anarchy.”
Scary times with even more thrills ahead I am afraid.

At least from a monetary perspective

2012-03-16T00:50:00.001-07:00

This is a piece that I wrote in response to a request for a guest post over at ZeroHedge. It ran there yesterday garnering some nice attention and a diverse range of comments beneath.
Based on some of those comments, this article represents nothing more than my attempt to find an explanation that matches the data.

My central thesis to this crisis, developed a few years before it even hit, is that the economic troubles are the symptoms, while the money system itself is the cause. My views on this are expressed in the opening of an article that I initially penned in 2006 but updated in 2008:

Within the next twenty years, the most profound changes in all of economic history will sweep the globe. The economic chaos and turbulence we are now experiencing are merely the opening salvos in what will prove to be a long, disruptive period of adjustment. Our choices now are to either evolve a new economic model that is compatible with limited physical resources, or to risk a catastrophic failure of our monetary system, and with it the basis for civilization as we know it today.
In order to understand why, we must start at the beginning. While it was operating well, our monetary system was a great system, one that fostered incredible technological innovation and advances in standards of living, two characteristics that I fervently wish to continue. But every system has its pros and its cons, and our monetary system has a doozy of a flaw.
It is this: Our monetary system must continually expand, forever.

The article above provides the big-picture backdrop that drives my long-term vision and thinking. I raise it now so that you’ll understand that I principally view the economic world through a monetary lens.
The hot topic of the day is “Inflation or Deflation?” and the camps are firmly divided into groups of inflationistas and deflationistas. When asked which camp I am in, I reply “Yes.” Some would say that puts me in the confusionista camp, but I actually have an explanation for why are living in a world encompassing both.
From a technical perspective, we are absolutely in one of the most powerfully deflationary periods in history, yet, besides housing prices and a few over-produced consumer goods, we find that stocks, bonds, and commodities are all well-bid at the moment.
While we can ascribe some of this to the artificial wall of liquidity (come to think of it, is there any other kind?) currently being thrown into the financial market(s) by the Fed, it leaves hanging the question of why that money is not being completely swallowed into the bottomless black hole that the deflationist camp says lies at the heart of our current financial system.
And they are right; there is a black hole at the center. If we treat the credit doubling that occurred between 2000 and 2008 (from $26 to $52 trillion) as a normal bubble that will follow the same pattern of decline as numerous historical bubbles, then we might reasonably predict that some $26 trillion of debt will somehow “go away” over the next 6 years. This is indeed a massive black hole.
Yet everything just keeps perking along. What gives?
The answer, I believe, requires us to ask a Zen-like question along the lines of, “What is the sound of one hand clapping?” That question is, “If nobody recognizes a defaulted debt on their balance sheet, does it exist?”
Suppose, for the sake of argument, that there is a world in which banks are allowed by their regulators to pretend their default losses simply do not exist. And, even more outlandishly, some of these banks are allowed to sell heavily damaged loans to their central bank at nearly their full original price.
What does “deflation” mean in such a world? Not much, as it turns out. At least from a monetary perspective, because money is not being destroyed at nearly the rate that would be expected or predicted by the size and rate of the defaults.
This is the world in which we currently live. Trillions in probable and provable losses quietly exist, out of sight, on the balance sheets of the Federal Reserve and other financial institutions. If they ever come out of hiding and onto the books, I think the deflationists will be proven correct beyond all doubt.
But let me ask this: What prevents the authorities from simply storing them out of sight forever? Or at least long enough to allow the wave of liquidity to work its inevitable magic? So far, much to my great surprise, they’ve managed to do exactly that, with hardly a squeak from the mainstream press (although the blogsphere is on the job, as usual). I am now wondering if they cannot keep this up indefinitely.
So from a purely monetary perspective, money can only be “destroyed” if banks and other financial institutions are compelled to recognize the losses and take a hit to capital. If the loss is not recognized, no money is destroyed. At least it is not recognized as gone.
Perversely, when a bank sells a ruined loan ‘asset’ to the Federal Reserve, it is a double shot of money to the system – the money initially created upon the issuance of the original loan, which is still out there in circulation, and a second bolus when the Fed creates money out of thin air to buy the failing ‘asset’ from the bank. One blob of money into the system when the loan is made, another when it is bought by the Fed. One loan, two blobs of money. Many have failed to recognize this feature of the Fed’s asset purchase programs.
So from this perspective, we could even argue that by employing the ‘pretend and extend’ strategy, coupled with an aggressive Fed purchase policy, it is possible that more money is being created than destroyed right now. Which means that from a strictly monetary perspective, I am not yet sold on the idea that money is being destroyed at the rates sometimes implied by the deflationary arguments.
Also, the data is not really in support of that notion either:

Of course, this money needs willing lenders and borrowers, which brings us back to the matter of price deflation.
Out in the real world, where consumers and producers exist, the bursting credit bubble has severely cut off consumers’ access to and desire for new credit, and producers have dialed back excessive capacity and cut their prices in order to attract business and survive.
There is no doubt about this process, but here I would argue that falling prices are currently as much a matter of supply and demand as they are a monetary issue. In other words, the price deflation that we are currently seeing is not a pure monetary phenomenon.
Which means I think we are in a bizarre hybrid world, where deflation should be the order of the day, but it currently is not, because its impacts are being held in abeyance by the simple expedient of pretending the losses do not exist.
My current outlook calls for productive capacity to continue to fall out in the real world, even as the Fed conjures more money into existence in the make-believe world of ‘high finance.’ (What are they smoking over there?).
Is this not a recipe for eventual inflation? More money, but fewer goods and services? History says ‘yes.’
All that said, I would not disagree with the notion that there’s another year or three of grinding along (where stock and bond prices are concerned), possibly down, but maybe not, before the monetary/goods imbalance comes charging out of the chute ready to throw off the unwary and trample them in a blistering round of inflation.
But it could be sooner than that. Or later. The point here is that we really don’t know, and because our monetary system operates on faith, it means that we have to be prepared for the fact that a shift could happen at any time. Nobody can predict when a school of fish will suddenly turn to the left. Who knows what final trigger will cause a critical minority to suddenly determine that they’d rather hold things other than paper?
For now, while I understand and appreciate the deflationist argument, the only thing that would convert me fully to that camp would be a sudden return to rigorous application of honest accounting. If you derisively snorted at that last sentence, then we share the same assessment of the likelihood of that happening any time soon.
In order to answer the main question of this article, we regretfully have to turn to Dadaism* to develop an appropriately absurd non-sequitur:
“What is the sound of one hand clapping? Insanely high stock and bond prices.”

* Dada was a protest by a group of European artists against World War I, bourgeois society, and the conservativism of traditional thought. Its followers used absurdities and non-sequiturs to create artworks and performances which defied any intellectual analysis. The founders included the French artist Jean Arp and the writers Hugo Ball and Tristan Tzara. Francis Picabia and Marcel Duchamp were also key contributors.
The Dada movement evolved into Surrealism in the 1920′s.