Friday, October 30, 2015
Capital Markets Update
By Louis S. Barnes Friday, October 30th, 2015
Long-term rates rose this week, not a lot, but since summer rates have not been able to penetrate the lows revisited in October. I would say that confusion about the future course deepened, but it can’t get any deeper.
Long rates rose a little after the Fed’s meeting broke on Wednesday and it issued another tortured statement, but the rate-spike was the next day, reacting to a third-quarter GDP report better than expected. Maybe it was.
In the old story, a person caught by a spouse in bed with someone other than the spouse says, “Are you going to believe me, or your lyin’ eyes?”
The “advance” Q3 number, to be revised: 1.5% growth, roughly as expected and unimpressive. However, consumer spending improved a good trend, up 3.2%, and had it not been for falling inventories overall GDP would have grown about 3.0%.
This inventory business should always be short-term back-averaged to find trend. Q2 GDP was 3.9%, inclusive of an inventory build which unwound in Q3, six-month net GDP running just above 2%. The same thing happens with trade figures: if consumers buy the products of other nations, our GDP looks soft but the economy itself is okay.
On Thursday the bond market was spooked by that strong consumer spending, and another internal element of the GDP report. The Bureau of Economic Analysis said that real disposable personal income in Q3 rose by 3.5% compared to a 1.2% gain in Q2. Uh-oh. The only reason the Fed has held back from liftoff has been dead incomes. If they are rising, the wolf really is at the door.
Today, from the same BEA: in Q3 wages grew by 0.2%, the lowest quarter since 1982. The Employment Cost Index, inclusive of labor costs beyond wages, rose only 0.6%, year-over-year 2.1%. September personal income decelerated to 0.1% growth. Where is the income to support this allegedly strong consumer?
Or the rising prices, if the consumer is spending beyond production? The Q3 personal consumption expenditure GDP deflator (apologies — the Fed’s favorite, “deflates” nominal GDP to an after-inflation figure) was 1.2%, and in September decelerated to 0.1% — not a hell of a lot more than half of the Fed’s target.
Confirmations from other data? Orders for durable goods tanked, September down .4%, and August revised down from zero to minus .9%, probably related to a strong dollar. Housing data is okay, but slowing in both volume and price gains. Housing data sources are unreliable, but there is no inflation to be feared from home prices rising somewhere between 3% and 5%, depending on the estimator. Rising prices and low inventory should encourage construction, but it’s still slow relative to pent-up demand, except for apartments.
Back to the Fed. Post-meeting statements began under Greenspan in February 1994, over his objection. Previously the Fed announced policy changes only by the actions of its traders — you figure out what we have in mind. That first post-meeting statement was 99 words; on Wednesday the Fed issued 515, murky and pointless rambling. Strunk & White, The Elements of Style: “Vigorous writing is concise. Remove unnecessary words.” I should send my Dad’s tattered copy to Yellen.
On Wednesday the Fed took out the only worthwhile sentence from the prior meeting’s statement: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” Any economic observer knows that the world outside the US is in trouble and exerting deflationary pressure here. What, that no longer matters?
I like Yellen, always have, and respect many of her colleagues. The Fed is divided into three camps, hawk, dove, and not sure — and the camps are farther apart than any time in my memory. They are on the edge of screwing this up. If the economy continues at its current pace, the risks of tightening far outweigh the risks of not. And if the economy decelerates as it appeared August-September, they and all of this “Wolf!” will look silly. And that’s unfortunate for all of us. Either way.
Long-term rates rose this week, not a lot, but since summer rates have not been able to penetrate the lows revisited in October. I would say that confusion about the future course deepened, but it can’t get any deeper.
Long rates rose a little after the Fed’s meeting broke on Wednesday and it issued another tortured statement, but the rate-spike was the next day, reacting to a third-quarter GDP report better than expected. Maybe it was.
In the old story, a person caught by a spouse in bed with someone other than the spouse says, “Are you going to believe me, or your lyin’ eyes?”
The “advance” Q3 number, to be revised: 1.5% growth, roughly as expected and unimpressive. However, consumer spending improved a good trend, up 3.2%, and had it not been for falling inventories overall GDP would have grown about 3.0%.
This inventory business should always be short-term back-averaged to find trend. Q2 GDP was 3.9%, inclusive of an inventory build which unwound in Q3, six-month net GDP running just above 2%. The same thing happens with trade figures: if consumers buy the products of other nations, our GDP looks soft but the economy itself is okay.
On Thursday the bond market was spooked by that strong consumer spending, and another internal element of the GDP report. The Bureau of Economic Analysis said that real disposable personal income in Q3 rose by 3.5% compared to a 1.2% gain in Q2. Uh-oh. The only reason the Fed has held back from liftoff has been dead incomes. If they are rising, the wolf really is at the door.
Today, from the same BEA: in Q3 wages grew by 0.2%, the lowest quarter since 1982. The Employment Cost Index, inclusive of labor costs beyond wages, rose only 0.6%, year-over-year 2.1%. September personal income decelerated to 0.1% growth. Where is the income to support this allegedly strong consumer?
Or the rising prices, if the consumer is spending beyond production? The Q3 personal consumption expenditure GDP deflator (apologies — the Fed’s favorite, “deflates” nominal GDP to an after-inflation figure) was 1.2%, and in September decelerated to 0.1% — not a hell of a lot more than half of the Fed’s target.
Confirmations from other data? Orders for durable goods tanked, September down .4%, and August revised down from zero to minus .9%, probably related to a strong dollar. Housing data is okay, but slowing in both volume and price gains. Housing data sources are unreliable, but there is no inflation to be feared from home prices rising somewhere between 3% and 5%, depending on the estimator. Rising prices and low inventory should encourage construction, but it’s still slow relative to pent-up demand, except for apartments.
Back to the Fed. Post-meeting statements began under Greenspan in February 1994, over his objection. Previously the Fed announced policy changes only by the actions of its traders — you figure out what we have in mind. That first post-meeting statement was 99 words; on Wednesday the Fed issued 515, murky and pointless rambling. Strunk & White, The Elements of Style: “Vigorous writing is concise. Remove unnecessary words.” I should send my Dad’s tattered copy to Yellen.
On Wednesday the Fed took out the only worthwhile sentence from the prior meeting’s statement: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” Any economic observer knows that the world outside the US is in trouble and exerting deflationary pressure here. What, that no longer matters?
I like Yellen, always have, and respect many of her colleagues. The Fed is divided into three camps, hawk, dove, and not sure — and the camps are farther apart than any time in my memory. They are on the edge of screwing this up. If the economy continues at its current pace, the risks of tightening far outweigh the risks of not. And if the economy decelerates as it appeared August-September, they and all of this “Wolf!” will look silly. And that’s unfortunate for all of us. Either way.
Friday, October 23, 2015
Capital Markets Update
By Louis S. Barnes Friday, October 23rd, 2015
In a week with little new US data (apartments hot, single family not), bonds and mortgages stayed the same — which is remarkable given the performance of stocks. The 10-year T-note could not break below 2.00%, mortgages just under 4.00%, but unchanged all through October while the Dow rocketed 500 points in the last two days.
These two markets usually trade opposite each other, stocks up on good economic news, bonds down in price and up in yield, and vice-versa on bad news. Good news should help corporate earnings and stocks, but any good news brings fear to bonds that the Fed will do something awful.
I have worked in or near credit markets for forty years, and like all colleagues regard the stock market as cognitively impaired and bi-polar, heavily overweighted to the manic side. Those people reciprocate, viewing us as depressed and void of imagination. How could these two pathologies join minds this week?
The first stock up-burst coincided with ECB chief Mario Draghi’s suggestion that he would expand its QE and perhaps drive euro-zone rates more deeply negative. The German 10-year fell in yield from 0.63% to 0.51%, pulling downward on US 10s. Meanwhile stocks interpreted more central bank easing as economic stimulus good for them. Then today, the People’s Bank of China cut by surprise its overnight and reserve rates — more glee for stocks, but bonds holding.
Who is right here? My bias declared, of course bonds are right, and stocks don’t get it. In a normal world, big central bank stimulus would be good news for stocks, but this world is not at all normal. Unprecedented, fantastic stimulus by the ECB, PBOC, and BOJ has done nothing more than to hold up the economic floor and to buy time.
Europe is caught in its own wire and trenches, the euro a proxy for the Western Front in 1917. Germany profiteers and the weak cannot recover while the ECB merely maintains the meat-grinder — a situation unique to Europe, but real recovery impossible no matter what the ECB does.
China is different. It has hit its head on the ceiling of investment-led growth, and reforms attempted in the last year have all backfired. On Monday it reported Q3 growth slipping below its imaginary 7%, to 6.9%. Other indicators suggest a far deeper slowdown: as of September, industrial production is down 5.7% year-over-year, and fixed investment is off 6.8%.
More to the story: unadjusted for inflation, reported China growth was only 6.2%. China is in deflation, an upside-down adjuster. Factory prices have fallen there for 43-straight months. As China in some desperation tries to keep the machine going, it holds its export volume (down only 3.7% YTD) by predatory pricing, exporting its deflation and unemployment to the world while constricting its imports. Double damage.
Stocks misinterpret China stimulus even more than European. The weaker China becomes internally, the more harm it can do to the rest of us. I do hope that more people will understand that ongoing global economic mire has far more to do with the rise of China and its misbehavior than the financial crisis.
Okay, if it’s that ugly, why didn’t bonds and mortgages do better instead of just holding? Because of the great disconnect of our time: were it not for the rest of the world’s self-entanglement, the US would be rocking. Fed-haters here include automatically in their screeds: “The Fed’s stimulus has failed to produce economic growth.” Horsefeathers. We have been growing so well that the Fed fears overheating, its leadership dying for an excuse to lift off, and might even be right.
Take some credit. No, not the Fed — take credit for US flexibility, and endurance of pain. We have recovered from the Great Recession as nowhere else, our government dysfunctional throughout, because we alone could inflict millions of foreclosures and job losses, adjust and move forward. The rest of the world is politically and culturally stuck.
Friday, October 16, 2015
Capital Markets Update
By Louis S. Barnes Friday, October 16th, 2015
Non-junkies find the Fed about as interesting as other non-junkies enjoy presidential debates, but I promise that Fed issues are vastly more important. And current. Long-term rates fell this week as a direct result of Fed disarray, the 10-year T-note below 2.00% briefly, and the prospect of Fed liftoff receding over the horizon.
Before the Fed whys and wherefores, some data. The US is not recessionary, but 3rd quarter GDP going into the 4th is far weaker than the 2nd. Consumer spending continues to cook along at 3% annual growth, but the soufflé is an unsustainable binge on cars, and other consumers forced to over-spend on rent and medical care.
Core CPI ticked up to 1.9% year-over-year, but driven by overweighted “cost of shelter” measured by rents running up at twice the pace of wages (that’s in part why the Fed prefers the PCE inflation measure, which is 1.2%). Too many Millennials can’t afford to buy homes, and face gouging in short-supplied rental markets.
Medical care datum: Medicare Part B charges for one-third of retirees may jump 52% next year, while their Social Security benefits receive no cost of living adjustment. That pattern is a proxy for at least three-quarters of Americans: wages rising 2% per year, medical care rising three times as fast. And ignored by our political leadership: Democrats are self-enthralled by Obamacare, and Republicans hate government so much that they refuse to intervene in predatory medical pricing.
Consumer spending is hollow also because we’re sucking up cheap imports and producing less here — that’s the gap between 3% consumer spending and fading GDP. The ordinary end to such a pattern in any economy is rising interest rates as it becomes necessary to borrow the money from overseas to fund the purchase of imports. Today, the world will buy any volume of US debt — good credit, strong dollar, Fed lifting off.
China’s trade surplus jumped to $60.3 billion in September, more than half with us. China’s imports from the world in 2015 have fallen 20.4%, overall exports also down, but only 3.7%. We can survive the hollowing damage for a while, but the rest of the world feels it now, acutely, and that damage feeds back to us also. The number of empty containers leaving Oakland and Long Beach — empty of exports, to be refilled with others’ production and sent back here — increased more than 20% in 2015.
Now the Fed. Usually there is a humorous approach, or wry, but the episode unfolding is not funny. Perhaps because the Fed has for years been the only functioning branch of government. Its deepening dysfunction has two sources: an economic situation without precedent and possibly beyond the Fed’s powers to manage or even meliorate, and second the appearance of internal failure by Chair Yellen.
The second is worse by far. In his two terms, Bernanke hardly missed a step, and his command was clear. The same was true for Greenspan, but his over-long stay (17 years) and excess of command led to his two policy errors, with which few dared to disagree: light overwatch of Wall Street, and the credit binge. The last time like this one: Volcker is a folk hero today, but by the end of his 1979-1987 tour his narrow, punishing, and imperious ways led to full-scale revolt inside the Fed and his resignation.
The Fed has become far too tolerant of voices dissenting in public, allowed in the name of transparency, and to let minor figures blow off steam, faculty-club style, usually presidents of regional Feds. More serious than dissent: throughout Yellen’s first year the Fed has looked silly by insisting on imminent liftoff based on bad forecasts.
Yellen on September 24 gave a definitive speech trying to assert control, but an awful one, far too long and void of insight. This week the rebellion. Two Fed governors, Daniel Tarullo and Lael Brainerd — presidential appointments confirmed by Congress, usually requiring alien invasion to disagree with the Chair — laid down blunt, even dismissive disagreement with Yellen and liftoff. Ms. Brainerd’s speech is as well-thought as anything out of the Fed in several years; Tarullo’s was rib-breaking direct.
This disarray is not about manners. Nor embarrassment for Yellen, backing away from a year of “Wolf!” Leadership failure dramatically increases the risk of policy error.
Non-junkies find the Fed about as interesting as other non-junkies enjoy presidential debates, but I promise that Fed issues are vastly more important. And current. Long-term rates fell this week as a direct result of Fed disarray, the 10-year T-note below 2.00% briefly, and the prospect of Fed liftoff receding over the horizon.
Before the Fed whys and wherefores, some data. The US is not recessionary, but 3rd quarter GDP going into the 4th is far weaker than the 2nd. Consumer spending continues to cook along at 3% annual growth, but the soufflé is an unsustainable binge on cars, and other consumers forced to over-spend on rent and medical care.
Core CPI ticked up to 1.9% year-over-year, but driven by overweighted “cost of shelter” measured by rents running up at twice the pace of wages (that’s in part why the Fed prefers the PCE inflation measure, which is 1.2%). Too many Millennials can’t afford to buy homes, and face gouging in short-supplied rental markets.
Medical care datum: Medicare Part B charges for one-third of retirees may jump 52% next year, while their Social Security benefits receive no cost of living adjustment. That pattern is a proxy for at least three-quarters of Americans: wages rising 2% per year, medical care rising three times as fast. And ignored by our political leadership: Democrats are self-enthralled by Obamacare, and Republicans hate government so much that they refuse to intervene in predatory medical pricing.
Consumer spending is hollow also because we’re sucking up cheap imports and producing less here — that’s the gap between 3% consumer spending and fading GDP. The ordinary end to such a pattern in any economy is rising interest rates as it becomes necessary to borrow the money from overseas to fund the purchase of imports. Today, the world will buy any volume of US debt — good credit, strong dollar, Fed lifting off.
China’s trade surplus jumped to $60.3 billion in September, more than half with us. China’s imports from the world in 2015 have fallen 20.4%, overall exports also down, but only 3.7%. We can survive the hollowing damage for a while, but the rest of the world feels it now, acutely, and that damage feeds back to us also. The number of empty containers leaving Oakland and Long Beach — empty of exports, to be refilled with others’ production and sent back here — increased more than 20% in 2015.
Now the Fed. Usually there is a humorous approach, or wry, but the episode unfolding is not funny. Perhaps because the Fed has for years been the only functioning branch of government. Its deepening dysfunction has two sources: an economic situation without precedent and possibly beyond the Fed’s powers to manage or even meliorate, and second the appearance of internal failure by Chair Yellen.
The second is worse by far. In his two terms, Bernanke hardly missed a step, and his command was clear. The same was true for Greenspan, but his over-long stay (17 years) and excess of command led to his two policy errors, with which few dared to disagree: light overwatch of Wall Street, and the credit binge. The last time like this one: Volcker is a folk hero today, but by the end of his 1979-1987 tour his narrow, punishing, and imperious ways led to full-scale revolt inside the Fed and his resignation.
The Fed has become far too tolerant of voices dissenting in public, allowed in the name of transparency, and to let minor figures blow off steam, faculty-club style, usually presidents of regional Feds. More serious than dissent: throughout Yellen’s first year the Fed has looked silly by insisting on imminent liftoff based on bad forecasts.
Yellen on September 24 gave a definitive speech trying to assert control, but an awful one, far too long and void of insight. This week the rebellion. Two Fed governors, Daniel Tarullo and Lael Brainerd — presidential appointments confirmed by Congress, usually requiring alien invasion to disagree with the Chair — laid down blunt, even dismissive disagreement with Yellen and liftoff. Ms. Brainerd’s speech is as well-thought as anything out of the Fed in several years; Tarullo’s was rib-breaking direct.
This disarray is not about manners. Nor embarrassment for Yellen, backing away from a year of “Wolf!” Leadership failure dramatically increases the risk of policy error.
Friday, October 9, 2015
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