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Posts Tagged ‘2011’

By Greg Robb
MarketWatch
August 25, 2011

Bernanke will open the Fed conference with a speech on Friday morning at 10 a.m. Eastern. Stocks have moved higher this week after being pummeled in mid-August, and many analysts attribute the move to investor hopes that Bernanke will use his speech to promise another round of asset purchases, or QE3.

Economists said that the recent weakness in the economy stems from structural issues like foreclosed properties and an unskilled pool of unemployed labor that are immune from monetary policy stimulus.

“I hope he talks about the limitations of monetary policy,” said Mickey Levy, chief economist at Bank of America.

Fed policy is very effective at preventing a downturn but once weak demand is in place, monetary policy cannot lift it, Levy said.

“All the targeted counter-cyclical stimulus is not going to address the huge pocket of distressed properties,” Levy said.

John Silvia, chief economist at Wells Fargo, agreed that the woes facing the economy are structural in nature and described the Fed policy options as modest.

“The Fed has shot the big cannons. They are now playing the game with smaller ammunition,” Silvia said.

At its interest rate meeting earlier this month, the central bank surprised the markets by promising to keep its benchmark Federal funds rate near zero until mid-2013.

Former Fed governor Randall Krozner said that is all the Fed is prepared to do at the moment, and speculation of an announcement of QE3 in markets was misplaced.

Such a big policy shift would only come at a formal Federal Open Market Committee meeting and not in a speech, he said.

Many Fed watchers, including former vice chairman Alan Blinder, believe the central bank is likely to engineer another round of asset purchases, or quantitative easing. Bernanke ready for action but when is in doubt.

In the first round of bond purchases between Dec. 2008 and March 2010, the Fed bought $1.7 trillion of mostly mortgage securities, and in the second round between November and June, the central bank snapped up $600 billion of Treasury bonds.

These purchases did not stimulate demand, Levy noted.

“The slowdown is not the fault of not enough liquidity,” he said.

Levy said he expected Bernanke to say the Fed will do whatever it has to do to avoid recession.

Ultimately, the next step is likely to be take steps to alter the composition of the composition of the Fed’s balance sheet to keep bond yields low, he said.

“That is all the Fed can do,” Levy said.

“More QE would not help. Lower long-term yields on the margin would help,” he added.

Silvia forecast sluggish growth in the 2% range over the next 18 months.

“We are in one of those periods where the economy grows far below potential and the unemployment rate will probably rise,” he said.

“It is a very challenging economy. I just don’t see a silver bullet or a special spark,” he said.

Read the entire article HERE.

By Matt Andrejczak
MarketWatch
June 9, 2011, 4:09 p.m. EDT

The total average cost of 16 items used to prepare one or more meals was $51.17, up $2.10 from the previous survey, with sirlion tip roast, russet potatoes, sliced deli ham and bacon increasing the most in price.

Whole milk was up 16 cents to $3.62 a gallon, while toasted oat cereal cost was up 12 cents to $3.17 for a nine-ounce box, the American Farm Bureau said in its quarterly poll based on 72 shoppers in 30 U.S. states.

Just two of the 16 items surveyed dropped in price: Boneless chicken breasts fell 23 cents to $3.09 a pound. Shredded cheese dropped 7 cents to $4.56 a pound.

U.S. food companies, including Kraft Foods KFT
+0.06% , Kellogg
K
-0.02% and Sara
Lee SLE
-0.11% , have been raising prices to combat a sustained surge in costs to buy
corn, coffee, oats and other staple food ingredients to consumers.

Skyrocketing fuel costs are a recent challenge, fattening the bill food makers pay for freight and storage.

On Thursday, J.M. Smucker SJM
+0.60% , maker of Folgers coffee and Hungry Jack
pancake mix, said its cost of products sold will jump 25% over the next 12 months. Read more on Smucker’s price increases.

“Further retail price increases are likely to be the new normal as we move through 2011, especially for meats,” American Farm Bureau economist John Anderson said in a statement.

Based on first quarter reports, Kraft appeared to be the only major food company that was able to raise its prices enough to cover its commodities tab. Read Kraft tops rival in commodities fight.

Read the entire article HERE.

by Charles Hugh Smith
Of Two Minds
April 25, 2011

What’s behind the disturbance in the financial Force? QE, ZIRP, the dollar peg and inflation, to name a few factors.

There is a great disturbance in the world’s financial Force. Many sense it as a storm on the horizon, something not yet visible but telegraphed by a rising, swirling wind and a new electric scent in the air.

I don’t claim to have a complete narrative that accounts for all the points of friction wearing down the moving parts, nor do I claim a “solution.” But a few observations might help inform our awareness of the disturbance.

As many of you know, readers provide most of the intelligence on this site (“of two minds, yours and mine”). I am the student and skeptic who learns from you and tries to make sense of a few dynamics, and extend them to some sort of coherent end-state. We share the same project of encouraging critical thinking.

1. There is a rising loss of faith in the conventional (i.e. propaganda) account of the U.S. economy. Readers tell me their local coin store has no silver coinage left, as the public has been buying with a vengeance. This is significant. (Silver has long been called “the poor man’s gold.”)

In the conventional view, the “herd” always gets it wrong: the “retail” “small speculator” investing public buy stocks and real estate at the top just as the “smart money” is distributing/selling. This “dumb money” cycle is certainly evident in manias and bubbles.

But there are also examples of “the public” acting well in advance (perhaps a form of “crowdsourcing”) of the “experts.”

One of the most remarkable trends of the past decade is the steady rise of the classic hedges against inflation and financial disorder: precious metals.

While the Federal government and a veritable army of conventional economists have repeatedly assured us over the past 10 years that the economy and the dollar are both sound, gold has quintupled from under $300 an ounce to over $1,500 an ounce.

Given that official inflation measured 26% for the decade 2001 – 2011, then clearly the public isn’t “buying” the “sound dollar, sound economy” story.

They’re also not buying the “you can’t afford not to own stocks in the New Bull market” story: the public has sold some $350 billion of domestic mutual funds in the past two years.

These are unmistakable signs that the public has lost faith in the Federal Reserve’s account of the dollar, U.S. stocks and the economy.

2. The idea that quantitative easing is benign has lost credibility. Even the MSM is reporting the dismal real-world results of QE2, for example, Stimulus by Fed Is Disappointing (understatement of the year?).

Another conventional view of QE–that it isn’t “injecting liquidity” because it’s simply an asset swap– The end of QE and what it means for the market–misses the point, which is that boosting bank reserves (what QE accomplishes) enables additional leveraged 20-to-1 (or more) lending. QE also keeps U.S. interest rates near-zero, which encourages a carry-trade of dollars flowing around the globe seeking higher returns and offsets to global inflation, which is certainly higher than officially recognized. It’s this flow of cash that’s driving up commodity costs.

A T-Bill sits there earning interest but cash is mobile–it can go anywhere to seek a return. A T-bill cannot. So QE is not just some benign asset swap–it has the pernicious effect of feeding a vast risk trade in stocks, emerging markets and commodities.

If that flow of new cash ceases (QE ends), then the risk trade (and Treasury bonds) both lose a key support.

3. Much of the analysis of U.S. policy is narrowly U.S.-centric. The U.S. has often ignored the international consequence of its parochial concern with domestic politics. Indeed, the U.S. has dropped 5 million tons of bombs and killed 500,000 people (as well as cost its own citizens their lives) overseas in pursuit of domestic policy (“we can’t ‘afford’ to lose Vietnam to the Commies because that would cost me the election.”)

This blindness to the consequences of domestic policy is most striking when it comes to China.

The key dynamic is the linkage of the renminbi (yuan) and the U.S. dollar. When the dollar tanks, oil rises when priced in dollars–and thus it also rises when priced in yuan. Thus the decline of the dollar and the consequent rise in commodities has directly fueled inflation in China, which is more dependent on a per capita basis on materials than the U.S.

Yes, the yuan peg has declined from the 8.5 range down to 6.5 to the USD, but it is still firmly pegged. As the cost of materials priced in dollars soars, it feeds higher input costs in China.

China’s policy-makers have exacerbated inflation by excessive money creation and lending by their own banks, but that alone is not sufficient cause for gasoline/petrol to cost as much in China as it does in the U.S. Oil is the foundation for petrochemicals, fertilizers, transport, plastics, etc., so the rise of oil driven by dollar depreciation is a driver of inflation throughout the Chinese economy.

No wonder the Chinese leadership is unhappy with the Fed’s crush-the-dollar strategy.

Though the cost of soy beans imported from the U.S. remains fixed in terms of currency, the relentless rise in oil is also raising the cost of China’s imports which are heavily dependent on oil, such as soy beans from the U.S.

4. China appears to be in the grip of a classic wage-price spiral inflation. Minimum wages are leaping by 25%, prices of many food items are doubling–this self-reinforcing dynamic is clearly visible in China. That is not the case in the U.S., which is being throttled by stagflation (rising prices and stagnant wages except for the top tier).

As I have noted before, price inflation in essentials hurts the lower income citizenry much harder than the top tier, as essentials make up a much larger percentage of the household expenses. A 30% jump in the cost of gasoline means little to a household in which gasoline accounts for 2% of total net income, but it certainly hurts a household in which gas accounts for 10% of total net income.

As noted in Your Pick, Ben, But One Goes Off the Cliff, the Fed’s ZIRP and QE policies have pared future policy down to a stark fork in the road: end ZIRP and QE, and send the risk trade (stocks and commodities) off the cliff, or keep pushing the dollar down and the rising cost of oil will shove the U.S. economy over the cliff.

That would also feed inflation in China, which already threatens to destabilize its economy. Correspondents within China recall that rising inflation was an important (if conveniently forgotten) dynamic in the 1989 era of dissent and disruption. The heavy-handed repression of domestic dissent and foreign reporting is evidence that the leadership in China has a keen appreciation of the connection between instability and rampant inflation.

So why is the Fed carpet-bombing the global economy? To protect the domestic economy? That makes no sense, for the Fed’s policies are pushing oil up to the point where there is no way to keep the U.S. economy from tipping into recession. It isn’t acting on behalf of the domestic economy, of course; it’s acting on behalf of domestic banking and Wall Street.

The Fed is busily destroying the village, suposedly to save it–only it’s the global village. But the Fed isn’t the only player with a stake in its game, and the other players, notably China, are tipping their hand that they will have to act, and soon, to protect their own domestic economies from the Fed’s destructive policies.

Read the entire blog post HERE.

Dr. Housing Bubble
April 13, 2011

The way housing is measured through the Bureau of Labor and Statistics (BLS) is troubling because it completely understates what is really happening with actual home values. For many years, especially during the bubble I drew attention to this thorn of a fact because many in high places were pointing to the CPI as being stable and actually reflecting reality. The Federal Reserve prides itself with being masters of price stability. But what if you are not measuring what you claim to be measuring? That is what started to happen in 1983 when it came to housing. In 1983 the BLS shifted the way it calculated the housing portion of the CPI by using an owner’s equivalent of rent. In other words, how much would you get if you rent your house out. This flawed methodology has come back to bite us in many ways but was completely intentional. It is no coincidence that only one year before in 1982 the Garn–St. Germain Depository Institutions Act of 1982 was passed and this allowed for adjustable rate mortgages (ARMs) that understated the monthly payment but allowed home prices to inflate. By calculating a rental equivalent the BLS understated inflation for many years, especially during the bubble years. Part of this is cynical in nature to slam those on fixed incomes like Social Security that actually depend on cost of living adjustments. If inflation doesn’t exist, then no cost of living adjustments. The wealthy do not rely on these little items so it is inconsequential but the majority of American families do depend on this data being accurate. Let us take a look at how flawed this measure is.

The BLS Measure of Housing

Source: The Mess that Greenspan Made

The above chart highlights the massive disconnect between the CPI and actual home values. You see that in the 1980s we did suffer a minor housing bubble which led to the savings and loans crisis. Yet that was small relative to what we faced a decade later starting in 1997. From 1997 to 2007 the CPI completely missed the once in a lifetime housing bubble. How did this happen? Well think about what the owner’s equivalent of rent (OER) measures. It basically measures what you would pay in rent for the home you are living in. Well this completely misses the fact that ARMs in the flavor of option ARMs for example actually allowed people to pay $500,000 for a tiny cardboard box that would rent for $1,000 or less. The real price of the home with a 30 year fixed mortgage actually carries a much higher cost, possibly of $3,000 to $4,000 a month. This is why price-to-rent ratios absolutely matter. If our central bank is going to make decade long monetary changes they should be using metrics that actually measure reality instead of some biased approach.

If the CPI understated the housing bubble nationwide you can only imagine what it did in bubble states like California. The year-over-year changes I believe highlight this disconnect clearly:

I decided to breakout the CPI housing component and measure it against the Case-Shiller 20 City Home Price Index. Now keep in mind what each of these items is focusing on. The Case-Shiller Index measures repeat home sales for the same home. This is one of the most accurate ways of measuring home prices in my opinion because you are looking at the same home over time. The blue line looks at the CPI housing component. It is important to note that housing makes up over 40 percent of the index so slight changes here impact the entire weighting of the CPI.

You can see for yourself that from 2001 the Case-Shiller was showing annual home price changes of 10 to over 15 percent! Yet the CPI never registered an annual increase of higher than 5 percent! In fact in many years it was registering annual changes of 2 or 3 percent which is completely absurd. Yet rents over this time did run sideways because people who pay rent actually use real world wages and in the real world, incomes went stagnant. Plus, why would you rent when anyone can play the housing lottery? Go in with nothing down and see what happens. The only reason the actual price of the home soared was the introduction of toxic mortgages with high leverage, the Federal Reserve artificially holding interest rates low, and a basic sense of graft and speculation throughout the entire country.

Now we already know what happened. But what is interesting is what is now happening. Rents initially started falling as the recession started which is to be expected. But rents seem to be ebbing higher right now even as home prices fall. Why is that?

-1. As more people lose their homes, they are seeking the only option they may have and that is a rental.

-2. Many cannot afford to buy and the only option available is government backed loans that at the very least, look at income which has been stagnant.

-3. You may have people making a more intentional decision to rent instead of buying because of the pain that occurred with the current housing market.

This is temporary in my view but could last a few years until the distressed inventory is worked out. We have never had so many people lose their homes on a nationwide scale. Right now all we are measuring is what someone would pay to rent their own home. For two full decades the entire measure was a sham and all it took was one mega housing bubble to distort the entire measure. The chart above is clear and shows home prices going down and rents slightly moving up on a nationwide basis. Yet other items like energy, food, and healthcare are eating up a larger portion of families’ disposable income. The CPI measure does not accurately reflect what is happening with housing values, even today.

The Federal Reserve prides itself with price stability. If that is the case, it needs to base decisions on metrics that actually measure what is happening in real time. That is, at one point nearly 70 percent of American households owned their home, with a mortgage mind you, yet they were using rental equivalency as a way to value a home? Those in these places will claim economists back these metrics but these are the same economists that missed the technology and housing bubbles and many who are hired by big investment banks. Two for two in that arena and not exactly unbiased.

Yet another point I would like to make is the fact that 30 to 40 percent of all purchases (depending on the market) are being conducted with FHA insured loans. These only require 3.5 percent down and the majority of these buyers are putting that amount down. Yet the real estate industry has pushed policies to keep selling fees up to 5 or 6 percent. In other words, all the tens of thousands of people buying today are starting from a negative equity position. If it costs 5 to 6 percent to sell off the top and you only put 3.5 percent down, you are in a negative equity spot. And what if home prices move lower as they are?

But let us look at another measure of housing for Los Angeles and add it to the graph above:

Look at the Home Price Index (HPI) for L.A. which is conservative but even with that, you can see that in one year the HPI for Los Angeles went up by a mind boggling 30 percent! Yet you can see the blue line CPI just moving sideways like a crab. As they say, don’t believe everything you read or hear.

Read the original article HERE.

By Lily Nonomiya and Mayumi Otsuma
Mar 13, 2011 8:15 PM PT
Bloomberg

The Bank of Japan poured a record 12 trillion yen ($146 billion) into the world’s third-biggest economy today as the strongest earthquake in the nation’s history triggered a plunge in stocks and surge in credit risk.

The yen fell after the central bank added funds to the financial system, reversing earlier gains against the dollar on speculation authorities would sell the currency to aid exporters. Governor Masaaki Shirakawa yesterday said he is ready to unleash “massive” liquidity to support markets.

“This is a big and also appropriate move,” said Stephen Schwartz, chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “It’s a short-term measure to ensure stability to prevent this shock from spilling over to the financial markets.”

Japan faces power blackouts, the risk of meltdowns at a nuclear power station, and a predicted death toll of more than 10,000 after the 8.9-magnitude temblor and subsequent tsunami devastated northeastern regions. More than 350,000 people are in emergency shelters. The central bank, meeting from noon in Tokyo, may respond to the disaster with tools other than policy rates, already cut to near zero to counter deflation.

Besides the 12 trillion yen of emergency funds, the Bank of Japan offered to buy 3 trillion yen of government bonds from lenders in repurchase agreements starting March 16. Today’s policy meeting was brought forward from 1 p.m.
Death Toll

The disaster may have killed 10,000 in Miyagi prefecture north of Tokyo, said Go Sugawara, a spokesman for the prefectural police department. The official toll reached 1,597, with 1,481 more missing and 1,683 injured, the National Police Agency said.

Before the quake, Japan’s economy was showing signs of a revival, after shrinking an annualized 1.3 percent in the fourth quarter of last year.

The cost of protecting Japanese government bonds with credit-default swaps surged the most in two years and the the Nikkei 225 Stock Average fell as much as 5.8 percent before paring the loss to 4.5 percent as of 11:28 a.m. local time.

The yen touched 80.62, the strongest since Nov. 9, before falling to 82.24 per dollar as of 11:37 a.m. in Tokyo from 81.84 in New York last week. It has gained about 0.9 percent against the greenback since the March 11 earthquake.

Bank of Japan officials may keep the central bank’s asset- purchase plans unchanged as they gauge the effect of the disaster. Economists said officials will likely keep longer-term credit programs at a total of 35 trillion yen.

Asset Purchases

The economic hit from the March 11 quake will depend on how long it shuts down factories and the distribution of goods and services, with the potential meltdown at the nuclear power facility clouding the outlook. For now, the central bank is likely to ensure lenders have enough cash to settle transactions, and aim any additional steps at providing credit in the areas of northeastern Japan devastated by the temblor, analysts said.

Shirakawa and his board could opt to accelerate asset purchases, including government bonds and exchange-traded funds, within the existing credit programs, particularly if the yen climbs and stocks tumble, said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who used to work at the central bank.

Prime Minister Naoto Kan is also preparing a fiscal response. Economic and Fiscal Policy Minister Kaoru Yosano said at a press conference the government still has 1.3 trillion yen in discretionary funds from the budget for the year through March 31 that can be allocated for quake relief.

Spending Package

“This earthquake affected a wide area, and it’s likely that the economic impact will exceed the 20 trillion yen in damage sustained during the Kobe earthquake” of 1995, Yosano said.

Finance Minister Yoshihiko Noda said it would take beyond the end of this month to compile a supplementary budget package. Opposition leader Sadakazu Tanigaki told reporters in Tokyo yesterday he proposed to Kan a temporary tax to help fund the relief effort.

The central bank set up a task force after the temblor, and pledged in a statement March 11 to ensure financial stability and said it will do everything it can to provide ample liquidity. The BOJ extended 55 billion yen to lenders over the past two days to ensure cash was on hand for withdrawals by survivors.
Assessing Banks

The money went to 13 financial institutions operating outside regular business hours in disaster-struck areas, the bank said in a statement yesterday, adding that it was checking on the scale of damage to lenders.

The quake struck hardest in Tohoku, the northern region of the main island of Honshu that accounts for about 8 percent of Japan’s gross domestic product.

Sony Corp. and Toyota Motor Corp. halted production after the quake struck 2:46 p.m. local time 130 kilometers (81 miles) off the coast of Sendai, north of Tokyo. Nissan Motor Co. said 2,300 new vehicles were damaged by tsunami surges. Tokyo Electric Power Co. is battling to avoid a meltdown at its Fukushima nuclear plant, and warned it will today begin rolling, periodic blackouts of Tokyo.

Declines in stocks may shake consumer confidence, which slid to a 10-month low in December as the government started to unwind economic stimulus measures. The economy had contracted in the fourth quarter as consumer spending and exports slumped, a decline economists had said would be temporary as a rebound in global growth fuels overseas demand.
Cost of Recovery

“The earthquake has increased the risk the economy won’t be able to emerge from its lull, which many believed would happen this quarter” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. He added that the government is likely to spend about 5 trillion yen for recovery efforts.

Policy makers may establish a lending program to help financial institutions in the Tohoku area, said Hiromichi Shirakawa, chief Japan economist at Credit Suisse in Tokyo and a former Bank of Japan official.

Today’s decision was originally scheduled for tomorrow following a two-day meeting; the BOJ said it cut short the gathering to accelerate its response. Shirakawa plans a press conference after the announcement.
‘New Measures’

“The BOJ is very likely to focus on cautious operations aimed at preventing any problems in fund transactions between financial institutions,” Goldman Sachs Group Inc. economists including Tokyo-based Chiwoong Lee wrote in a research note. “We also expect it to devise new measures in the context of its current comprehensive monetary policy to support the rebuilding of affected areas and buoy the entire Japanese economy based on continuing assessments of the impact.”

Read the entire article HERE.