Friday, September 27, 2013
Capital Markets
By Louis S. Barnes **************************Friday September 27th, 2013
Economic data this week continued the Three Bears pattern, adding to the national state of annoyance. Porridge, porridge, porridge. Couldn’t we have some that’s too hot or too cold, just to break the tedium? And to take our minds off the replay of 2011 Budget Chicken? Long-term rates continued to fall this week, but gently, mortgages near or a little below 4.50%. The all-important 10-year T-note has made it almost to 2.60% from the 2.98% high three weeks ago — all because the Fed de-tapered, and about the best we’re going to do unless the economy weakens. New orders for durable goods fell 0.1% in August, but better than forecast. Personal income rose 0.4% and spending by 0.3%, exactly as forecast. Same for sales of new homes, stuck near 400,000 monthly, and pending sales of all homes, about unchanged. The revision of 2nd quarter GDP did not revise; the final figure the same, 2.5% growth, far short of the Fed’s hopes. Claims for unemployment insurance have fallen to a cyclical low near 300,000 weekly, which in a normal labor market would presage higher wages via competition among employers, but this job market is anything but normal, weighed by overseas competition as never before. Porridge, porridge, porridge. Japan is quiet, and emerging nations are adjusting fairly well to higher interest rates and weaker currencies. The wrestling under the China blanket is increasing. Bo Xilai got life in the big house for corruption while everyone else’s could not be mentioned at his kangaroo trial. Outsiders now doubt most official reports of China’s economic health. Europe has waited a year for Angela Merkel’s re-election, thinking change would follow. Forget that. She was re-elected in trust that she will not to allow change. A bright spot, a very bright one: NYFed Prez Bill Dudley’s speech on Monday (www.newyorkfed.org, in English). After the Fed’s surprise last week, the Wall Street chorus performed its Ode to Whining, accompanied by mis-tuned violins each missing a string, in the style of massed cats whose tails have been stepped on. The Street considers it unfair for the Fed to adjust to new conditions, and of course if the Fed had not adjusted would have howled even louder. Dudley laid out the Fed’s reasoning just as Perfesser Bernanke did last week: “Another new source of drag for the economy is the sharp rise in long-term interest rates.” Duh. Get it? The Fed did. The reasons to taper were to expose any leverage bubble created by QE, and gradually to wean the economy back to living on its own resources, all the while keeping long-term rates low by promising not to raise the overnight cost of money for another two or three or more years. The promise — “forward guidance” — did not work. The Fed is neither blind nor stupid. The 1.50% explosion in long-term rates has had vastly more slowing effect on the US and global economy than the taper itself, even if complete. The exit from QE is going to be herky-jerky, and markets will overreact again and again because this situation is unprecedented. Suspending the taper makes a hell of a lot more sense than mechanically proceeding, adding to unexpected damage. Dudley made three other points: 900,000 new housing starts are nice, but he’d like to see 1.5 million; to taper he would like to see more “forward momentum,” not present in current numbers; and he is concerned about “fiscal drag,” this year the largest combined tax increases and budget cuts in modern record. Which leads to the Chicken Wreck. The President is annoyed because everyone else will not do as they are told. The Left wants a “clean bill,” raising the debt limit without any spending conditions, now or ever. Bloomberg reports that 61% of citizens are opposed to a clean bill and only 28% support one. Republicans are annoyed at each other. The Republican Right would be ridiculous if not so dangerous. The President’s approval rating is descending through the 40s. The 2011 wreck involved a lot of righteous anger; now everyone is weaker, and annoyed. Might be a brief opening for common sense. I can dream - See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-september-27-2013#sthash.JknwlQT6.dpuf
Economic data this week continued the Three Bears pattern, adding to the national state of annoyance. Porridge, porridge, porridge. Couldn’t we have some that’s too hot or too cold, just to break the tedium? And to take our minds off the replay of 2011 Budget Chicken? Long-term rates continued to fall this week, but gently, mortgages near or a little below 4.50%. The all-important 10-year T-note has made it almost to 2.60% from the 2.98% high three weeks ago — all because the Fed de-tapered, and about the best we’re going to do unless the economy weakens. New orders for durable goods fell 0.1% in August, but better than forecast. Personal income rose 0.4% and spending by 0.3%, exactly as forecast. Same for sales of new homes, stuck near 400,000 monthly, and pending sales of all homes, about unchanged. The revision of 2nd quarter GDP did not revise; the final figure the same, 2.5% growth, far short of the Fed’s hopes. Claims for unemployment insurance have fallen to a cyclical low near 300,000 weekly, which in a normal labor market would presage higher wages via competition among employers, but this job market is anything but normal, weighed by overseas competition as never before. Porridge, porridge, porridge. Japan is quiet, and emerging nations are adjusting fairly well to higher interest rates and weaker currencies. The wrestling under the China blanket is increasing. Bo Xilai got life in the big house for corruption while everyone else’s could not be mentioned at his kangaroo trial. Outsiders now doubt most official reports of China’s economic health. Europe has waited a year for Angela Merkel’s re-election, thinking change would follow. Forget that. She was re-elected in trust that she will not to allow change. A bright spot, a very bright one: NYFed Prez Bill Dudley’s speech on Monday (www.newyorkfed.org, in English). After the Fed’s surprise last week, the Wall Street chorus performed its Ode to Whining, accompanied by mis-tuned violins each missing a string, in the style of massed cats whose tails have been stepped on. The Street considers it unfair for the Fed to adjust to new conditions, and of course if the Fed had not adjusted would have howled even louder. Dudley laid out the Fed’s reasoning just as Perfesser Bernanke did last week: “Another new source of drag for the economy is the sharp rise in long-term interest rates.” Duh. Get it? The Fed did. The reasons to taper were to expose any leverage bubble created by QE, and gradually to wean the economy back to living on its own resources, all the while keeping long-term rates low by promising not to raise the overnight cost of money for another two or three or more years. The promise — “forward guidance” — did not work. The Fed is neither blind nor stupid. The 1.50% explosion in long-term rates has had vastly more slowing effect on the US and global economy than the taper itself, even if complete. The exit from QE is going to be herky-jerky, and markets will overreact again and again because this situation is unprecedented. Suspending the taper makes a hell of a lot more sense than mechanically proceeding, adding to unexpected damage. Dudley made three other points: 900,000 new housing starts are nice, but he’d like to see 1.5 million; to taper he would like to see more “forward momentum,” not present in current numbers; and he is concerned about “fiscal drag,” this year the largest combined tax increases and budget cuts in modern record. Which leads to the Chicken Wreck. The President is annoyed because everyone else will not do as they are told. The Left wants a “clean bill,” raising the debt limit without any spending conditions, now or ever. Bloomberg reports that 61% of citizens are opposed to a clean bill and only 28% support one. Republicans are annoyed at each other. The Republican Right would be ridiculous if not so dangerous. The President’s approval rating is descending through the 40s. The 2011 wreck involved a lot of righteous anger; now everyone is weaker, and annoyed. Might be a brief opening for common sense. I can dream - See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-september-27-2013#sthash.JknwlQT6.dpuf
Friday, September 20, 2013
Capital Markets
By Louis S. Barnes **************************Friday September 20th, 2013
Several jigsaw pieces to assemble this week, but they fit neatly into pictures of leadership from the Fed all the way to Pope Francis. First the taper-taper caper. Don’t misunderstand: the Fed’s un-taper is a stay of execution, not a commutation. One day the governor will say, get on with the show, and the lights in the Big House will dim. Only an economic relapse will preserve QE. Those mewling about Fed inconsistency and bad communication and how confusing it all is — if you want certainty, pick a different line of work. I admire Perfesser Bernanke’s honesty: “…The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy.” Translation: our taper jawbone jacked rates a lot farther than we expected, here and overseas, and we’re going to let all of that settle down and see what new data say. Next to that puzzle piece fits an amoeba-shaped thingy. Larry Summers put himself out of his misery, triggering a stock rally — not because an alternate would provide easier money, but because we won’t have to watch Congress hang Summers. A fate which absolutely everybody knew long before the President in June indicated his Summers desire — everybody except the President. Centrist senator Jon Tester, D Montana, sitting on Senate Banking last weekend revealed his Summers “no” intention, and that the first White House question of him regarding Summers came last Friday. The next piece requires a hammer to put in place. The White House is now scrambling to vet the nomination of Janet Yellen, whose quiet dignity through the Summers fiasco should be admired by all. The White House has treated her as the fifth choice in a field of two. It has also mistaken the position of Fed Chairman for Supreme Court-style political football. We’ve nearly wrecked that joint, but the Fed has great internal integrity despite fierce policy disagreements. Get on with Yellen. Then slip in the piece with the erased red line, and we have half of the overall puzzle: a President lost in professorial self-enrapture, the rest of us lesser beings. The other half of the puzzle-picture comes together quickly, the doppelganger of the first found in Congressional Republicans. For destructive self-congratulation, they and the White House are each other. De-fund ObamaCare? What for? If you are right and the whole thing collapses of its own weight, then disassembly does not require your attention. There is no going back: the prior “system” had long-since failed. Since ObamaCare will not be de-funded, and if it works in a process of evolution, you Teapots are going to look worse than usual. Quite the feat. Same for the budget. Obama is not going to reform entitlements and is not going to allow any Bowles-Simpson-style tax and budget reform. We’re going to waste the next three years and that’s how it is. That’s the Democrats’ problem. You Republicans have a heaven-sent opportunity as the minority party to look responsible. Zounds — even act responsibly! Make your points, dig in on the sequester line, stop this debt-limit brinkmanship, and offer something useful to the country. Census data released this week confirm the terrible flaw in the economy and the fatal flaw in ObamaCare. US median household income adjusted for inflation is the same as it was in 1988. Much of the tax burden of those households properly has been shifted to higher-earning ones, but the cost of health care in real dollars has doubled. Ideas, Teapots? Restore house calls by Marcus Welby, MD? Religion is dangerous, and I fear to trespass. However, slide this last piece between the halves of the puzzle above. Yesterday Pope Francis said that his church has become “obsessed” with abortion, gay marriage and contraception. “The dogmatic and moral teachings of the church are not all equivalent… a disjointed multitude of doctrines to be imposed insistently. We have to find a new balance.”He did not change official church doctrine, nor become entangled its bureaucracy. Nor did he fear wisdom. When at a dead end, redefine priorities and move on. Thus endeth the lesson. - See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-september-20-2013#sthash.Luf1qHoj.dpuf
Several jigsaw pieces to assemble this week, but they fit neatly into pictures of leadership from the Fed all the way to Pope Francis. First the taper-taper caper. Don’t misunderstand: the Fed’s un-taper is a stay of execution, not a commutation. One day the governor will say, get on with the show, and the lights in the Big House will dim. Only an economic relapse will preserve QE. Those mewling about Fed inconsistency and bad communication and how confusing it all is — if you want certainty, pick a different line of work. I admire Perfesser Bernanke’s honesty: “…The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy.” Translation: our taper jawbone jacked rates a lot farther than we expected, here and overseas, and we’re going to let all of that settle down and see what new data say. Next to that puzzle piece fits an amoeba-shaped thingy. Larry Summers put himself out of his misery, triggering a stock rally — not because an alternate would provide easier money, but because we won’t have to watch Congress hang Summers. A fate which absolutely everybody knew long before the President in June indicated his Summers desire — everybody except the President. Centrist senator Jon Tester, D Montana, sitting on Senate Banking last weekend revealed his Summers “no” intention, and that the first White House question of him regarding Summers came last Friday. The next piece requires a hammer to put in place. The White House is now scrambling to vet the nomination of Janet Yellen, whose quiet dignity through the Summers fiasco should be admired by all. The White House has treated her as the fifth choice in a field of two. It has also mistaken the position of Fed Chairman for Supreme Court-style political football. We’ve nearly wrecked that joint, but the Fed has great internal integrity despite fierce policy disagreements. Get on with Yellen. Then slip in the piece with the erased red line, and we have half of the overall puzzle: a President lost in professorial self-enrapture, the rest of us lesser beings. The other half of the puzzle-picture comes together quickly, the doppelganger of the first found in Congressional Republicans. For destructive self-congratulation, they and the White House are each other. De-fund ObamaCare? What for? If you are right and the whole thing collapses of its own weight, then disassembly does not require your attention. There is no going back: the prior “system” had long-since failed. Since ObamaCare will not be de-funded, and if it works in a process of evolution, you Teapots are going to look worse than usual. Quite the feat. Same for the budget. Obama is not going to reform entitlements and is not going to allow any Bowles-Simpson-style tax and budget reform. We’re going to waste the next three years and that’s how it is. That’s the Democrats’ problem. You Republicans have a heaven-sent opportunity as the minority party to look responsible. Zounds — even act responsibly! Make your points, dig in on the sequester line, stop this debt-limit brinkmanship, and offer something useful to the country. Census data released this week confirm the terrible flaw in the economy and the fatal flaw in ObamaCare. US median household income adjusted for inflation is the same as it was in 1988. Much of the tax burden of those households properly has been shifted to higher-earning ones, but the cost of health care in real dollars has doubled. Ideas, Teapots? Restore house calls by Marcus Welby, MD? Religion is dangerous, and I fear to trespass. However, slide this last piece between the halves of the puzzle above. Yesterday Pope Francis said that his church has become “obsessed” with abortion, gay marriage and contraception. “The dogmatic and moral teachings of the church are not all equivalent… a disjointed multitude of doctrines to be imposed insistently. We have to find a new balance.”He did not change official church doctrine, nor become entangled its bureaucracy. Nor did he fear wisdom. When at a dead end, redefine priorities and move on. Thus endeth the lesson. - See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-september-20-2013#sthash.Luf1qHoj.dpuf
Friday, September 13, 2013
Friday, September 6, 2013
Capital Markets
By Louis S. Barnes*********************************Friday September 6, 2013
The first week of each month always brings the most, the most important, and the newest news. The net result of this week’s load: a brief pause in the next leg up in long-term rates.
For forty years one of the most reliable economic indicators has been the monthly survey of manufacturing purchasing managers, renamed “ISM” (don’t ask). For August that value jumped to 55.7 (50 is breakeven, 60 a runaway) in an uptrend beginning early this year of the kind historically telling the Fed that it’s time to pull back. The companion ISM for the five-times-larger service sector has a history less than half as long, thus a suspect indicator but rocketed to 58.6 in August.
After those two releases, the 10-year T-note on Thursday touched 3.00% and mainstream low-fee mortgages reached 5.00%.
Today’s job data bought us some time, the 10-year down to 2.90%, mortgages high-4s. The headline 169,000-job gain was enough to maintain Fed-fear, but not the 74,000 jobs revised out of June-July, not the 2.2% year-over-year increase in wages (nominal; negative after inflation), and not the jobs themselves, heavy on the low-end.
The bond market also got help from the unspeakable Mr. Putin who said today in the event of US attack he would “support” his friend and barbarian Mr. Assad.
To make sense of it all… context, context, context.
Ever since bottom in 2009, many people and markets have expected a recovery to unfold in historical pattern, led by credit-sensitive housing and autos. These expectations have been mistaken, but that doesn’t mean forever, and the Fed’s top worry always is an economy running away from it. Credit has been restored for autos, and they are screaming at a 16-million-annual-sale pace. US auto companies are also much more competitive, free of legacy costs of millions of retirees.
Every recovery is lumpy, and the two lumpiest in this expansion are housing and jobs. If you’re in one of a half-dozen metro areas (Seattle, Bay Area, parts of LA and Texas, Denver, Minnenoplace, DC, Boston, and NYC…), and keep the right kind of friends, housing is a gas. The distressed areas have had a nice run from oversold, but are flattening. Absent restoration of credit to pre-Bubble standard, there is no chance whatever of a re-Bubble. The wealth effects from rising prices are helping the economy in modest ways, but a shadow of traditional-historical.
The job market is widely misunderstood. If you’re in the top 20% or so of employment, life is good — from the Fed’s perspective, hot and maybe too hot. The bottom 60% is stuck in ever-tougher global competition, replacing lost jobs with inferior ones, and has no way to build household net worth. Income inequality is a rising political issue, the Left with ideas centered on taking money from people who have too much, or making it harder to earn too much in the first place. The Right has offered nothing to help the struggling majority to ladder its way to success.
The Fed has no means to help that majority. It works, as it must, in the aggregate. As weird as it may sound, this unprecedented two-part economy can overheat, as the cohort of IT-adept, global-skilled, productive-by-nature pull away from the rest.
On net, fresh August data in hand, the Fed is on track to taper QE. And nobody knows if the sustained run-up in long-term rates is overdone, just starting, soon to abort recovery (as never in any prior recovery), or to undercut the rest of the world. Nor can we know if the run-up is the result of QE pullback, or anticipation of later Fed tightening, or an artifact of over-regulated banks unable to absorb new bonds.(Had to run that paragraph. Hedge all bets. Keep ‘em guessing. But the up-trend is still on.)
I don’t mean to over-emphasize, but the amateur in the explosives shop brings unusual risks. His decision to disengage in the Middle East has been correct and overdue, but disengagement is the most dangerous of all military maneuvers. 535 commanders in chief in Congress are having a wonderful, useless time. And why the amateur is stuck on Larry Summers for the Fed… a disturbing mystery to the markets.
The first week of each month always brings the most, the most important, and the newest news. The net result of this week’s load: a brief pause in the next leg up in long-term rates.
For forty years one of the most reliable economic indicators has been the monthly survey of manufacturing purchasing managers, renamed “ISM” (don’t ask). For August that value jumped to 55.7 (50 is breakeven, 60 a runaway) in an uptrend beginning early this year of the kind historically telling the Fed that it’s time to pull back. The companion ISM for the five-times-larger service sector has a history less than half as long, thus a suspect indicator but rocketed to 58.6 in August.
After those two releases, the 10-year T-note on Thursday touched 3.00% and mainstream low-fee mortgages reached 5.00%.
Today’s job data bought us some time, the 10-year down to 2.90%, mortgages high-4s. The headline 169,000-job gain was enough to maintain Fed-fear, but not the 74,000 jobs revised out of June-July, not the 2.2% year-over-year increase in wages (nominal; negative after inflation), and not the jobs themselves, heavy on the low-end.
The bond market also got help from the unspeakable Mr. Putin who said today in the event of US attack he would “support” his friend and barbarian Mr. Assad.
To make sense of it all… context, context, context.
Ever since bottom in 2009, many people and markets have expected a recovery to unfold in historical pattern, led by credit-sensitive housing and autos. These expectations have been mistaken, but that doesn’t mean forever, and the Fed’s top worry always is an economy running away from it. Credit has been restored for autos, and they are screaming at a 16-million-annual-sale pace. US auto companies are also much more competitive, free of legacy costs of millions of retirees.
Every recovery is lumpy, and the two lumpiest in this expansion are housing and jobs. If you’re in one of a half-dozen metro areas (Seattle, Bay Area, parts of LA and Texas, Denver, Minnenoplace, DC, Boston, and NYC…), and keep the right kind of friends, housing is a gas. The distressed areas have had a nice run from oversold, but are flattening. Absent restoration of credit to pre-Bubble standard, there is no chance whatever of a re-Bubble. The wealth effects from rising prices are helping the economy in modest ways, but a shadow of traditional-historical.
The job market is widely misunderstood. If you’re in the top 20% or so of employment, life is good — from the Fed’s perspective, hot and maybe too hot. The bottom 60% is stuck in ever-tougher global competition, replacing lost jobs with inferior ones, and has no way to build household net worth. Income inequality is a rising political issue, the Left with ideas centered on taking money from people who have too much, or making it harder to earn too much in the first place. The Right has offered nothing to help the struggling majority to ladder its way to success.
The Fed has no means to help that majority. It works, as it must, in the aggregate. As weird as it may sound, this unprecedented two-part economy can overheat, as the cohort of IT-adept, global-skilled, productive-by-nature pull away from the rest.
On net, fresh August data in hand, the Fed is on track to taper QE. And nobody knows if the sustained run-up in long-term rates is overdone, just starting, soon to abort recovery (as never in any prior recovery), or to undercut the rest of the world. Nor can we know if the run-up is the result of QE pullback, or anticipation of later Fed tightening, or an artifact of over-regulated banks unable to absorb new bonds.(Had to run that paragraph. Hedge all bets. Keep ‘em guessing. But the up-trend is still on.)
I don’t mean to over-emphasize, but the amateur in the explosives shop brings unusual risks. His decision to disengage in the Middle East has been correct and overdue, but disengagement is the most dangerous of all military maneuvers. 535 commanders in chief in Congress are having a wonderful, useless time. And why the amateur is stuck on Larry Summers for the Fed… a disturbing mystery to the markets.
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