Friday, June 27, 2014
Capital Markets Update
By Louis S. Barnes Friday, June 27th, 2014
Long-term rates have fallen back near the lows of the year, despite Wall Street salespeople trying to frighten investors about inflation and Fed tightening.
That extraction of funding from crowds is indefensible, but our situation is confusing. Example: we would like to unseat Assad in Syria, and we wish bad things for the ISIS mob; this week Assad’s air force hit ISIS in Syria. Leaving this region to its own devices looks better all the time. Oil prices fell back to $105.
The top reason for the new drop in rates: the revision of 1st quarter GDP to a 2.9% contraction. The 1st quarter is ancient history, and optimists still blame winter weather, but a 2.9% dump is big. Throw out adjustments for inventories, trade, and ObamaCare spending, and the economy pooped along somewhere between 1% and zero.
The 2nd quarter has been widely expected to rebound at a 4% or 5% annual pace. It ends Monday, we’ll get the first estimates next month, and stripped of rebound oddities might — might — exceed 2%.
Inflation is key to the confusion.
Personal income and spending in May were each supposed to rise .4%; income did, spending only .2%. That’s before inflation. After, by the Fed’s favorite “personal consumption expenditures,” spending fell .2% in April and .1% in May.
Yet financial media from here to Europe run on about central banks’ desire to raise the rate of inflation. Here in the US, PCE inflation has crawled close to the target 2% (right now 1.8% year-over-year), but Chair Yellen is suspicious that the rise is just noise and we’re really closer to 1%.
Most people have figured out that inflation 1% or below forces some of us to repay debt in dollars worth more than the ones we borrowed — that’s what falling real income does to us. Not all of us, but at least half of us.
Most people have not figured out that rising inflation, even 3% or 4%, is not necessarily good news for the economy. Inflation is good if income rises with prices. Even better: incomes rising faster than prices. In a normal economy, expansions are driven by positive feedback, incomes pulling prices, the feedback so strong that it inevitably spirals out of control and the Fed must intervene by creating recessions.
But we are in a world jammed with excess labor and drowning in excess investment. Cheap labor substitutes for capital. This is not some proof of Marxism, although most on the left are trying; it is temporary, its end already in sight. China’s working-age pool began to shrink this decade, Japan’s and Europe’s last decade, and birth rates are falling below replacement everywhere except a few spots near the equator.
Higher prices with flat incomes are undermining, a contractionary force. Example: US vehicle miles driven have never recovered from the spike to $3.50 gasoline.
Exception!! Houses. An amazing collection of financial people trying to analyze housing now assert that rising prices are a Bad Thing. Rose too fast last year, that’s why housing has slowed, they say.
This nonsense is perfect bull byproduct. In every US expansion since WW II, rising prices of homes have been central to growth and runaway feedback. In recessions the cost of credit drops, stays low because it takes a long time for jobs to recover, deferring Fed intervention, and meanwhile affordability soars. Never higher than now. Only about 5% of the US housing stock changes hands each year, and only the buyers must meet the test of affordability, but 100% of owners enjoy the wealth effect.
In this cycle housing purchasing power is limited for the two-thirds of our citizens crimped by flat incomes and rising consumer prices, working together to choke savings for a down payment, and further clamped for youth by student loans and too-tight mortgage credit. These are the reasons home price gains have flattened — April unchanged by FHFA measure — NOT because prices are too high or rising too fast.
Deficient income for too many of our people — that is the central issue. The Fed might nibble at some point, but will not bite until incomes enter that upward spiral.
Friday, June 20, 2014
Capital Markets
By Louis S. Barnes Friday, June 20th, 2014
There are times to suspend analysis and just listen to markets. Have to be careful even with that. First, pick the right markets. The stock market is not worth the trouble, thousands of different stocks at once sounding like a symphony performed by 5th-graders. Pick bullet markets: the 10-year US T-note has one issuer and is the most creditworthy and widely traded IOU on the planet. And oil. The second caution: Doonesbury’s Zonker Harris speaks to his flowers and they reply. He’s stoned, but even if you’re not, be careful to listen to markets and not your own echo. Last week had three big events: release of May CPI, the Fed meeting, and the further fragmentation of Iraq. Tuesday’s CPI jumped in an unpleasant surprise: 0.4% overall and 0.3% “core.” The 10-year T-note yield rose instantaneously — not far, just from 2.59% to 2.65%, but that 2.65% is one foot over the threshold toward a significant run upward. From January to May the 10-year traded 2.60%-2.80%, and in late May broke down to 2.45% but a week later was back above 2.60%. The Fed met the day after CPI, the 10-year poised to jump. The Fed’s statement and press conference could not have been more dovish. Back down to 2.57% by Thursday morning, safely below 2.60%. For an hour. Then back up to the edge. The bond market could not be more clear. No matter what the Fed intends — stay at 0% until doomsday — if inflation is crawling out of the box then yields are going higher. Given stagnant wages it is hard to see how inflation can rise, but it can. Perhaps 40% of US households are doing well (IT-skilled, marketable educations, careers in health care or education, plugged into the global economy), and their rising purchasing power can raise general prices for a time. The other 60% of households lose “real” purchasing power, and will substitute cheaper products, but it can take a long time for statisticians to adjust the aggregate US shopping basket. (BTW: Brace yourselves for more election-year “inequality” from the Left, cruelly disinterested in helping weaker households to compete in a global economy, instead focused on demonizing the successful to justify raising their taxes.) Oil is a less-tidy chart. It began a sustained rise from $95/bbl in February, now $107 and certainly feeding into inflation fears. Natural gas rose at the same time from $4.00, but has been relatively steady since at $4.75. The two markets interact, for the next several years not in short supply, but oil is “geopolitically sensitive.” I risk Zonkerism, but oil is telling me that sequential instability in Syria, Ukraine, and Iraq is the cause of the move. Add Czar Vladimir, who goes to sleep and wakes each day hoping that Middle Eastern instability gives him higher prices, and much more important, power. He will make all the mischief he can. The US is late to begin a strategic withdrawal from positions taken after WW II when our power was infinite. Especially in the Middle East we have held the lid so tight that pressure has grown instead of gradually releasing and cooking and releasing. Since 1950 the US population has a little more than doubled to 330 million while Iraq has grown from 5 million to 33; Saudi Arabia from 3.8 million to 27; Syria from 3.5 to 22; Iran from 16 to 81, Egypt from 21 to 88. Each is over-weighted to men because of female infanticide. Immense growth in numbers, some nations now inconceivably wealthy, most still poor, but all share primitive social capital. Great powers seldom, if ever, begin strategic withdrawal in time, before the fatal hollowing-out from overextension (see Kennedy 1989 “Rise and Fall of The Great Powers”). We can hope to be the exception because we have never aspired to empire, just stability. The big risk alongside “too late” is that one or more adversaries will underestimate our power and fortitude as we pull back, and try to take advantage. As now. There is no rulebook for Mr. Obama or his successors. Strategic defense while maintaining tactical offense is an art form, and markets are unforgiving judges.
There are times to suspend analysis and just listen to markets. Have to be careful even with that. First, pick the right markets. The stock market is not worth the trouble, thousands of different stocks at once sounding like a symphony performed by 5th-graders. Pick bullet markets: the 10-year US T-note has one issuer and is the most creditworthy and widely traded IOU on the planet. And oil. The second caution: Doonesbury’s Zonker Harris speaks to his flowers and they reply. He’s stoned, but even if you’re not, be careful to listen to markets and not your own echo. Last week had three big events: release of May CPI, the Fed meeting, and the further fragmentation of Iraq. Tuesday’s CPI jumped in an unpleasant surprise: 0.4% overall and 0.3% “core.” The 10-year T-note yield rose instantaneously — not far, just from 2.59% to 2.65%, but that 2.65% is one foot over the threshold toward a significant run upward. From January to May the 10-year traded 2.60%-2.80%, and in late May broke down to 2.45% but a week later was back above 2.60%. The Fed met the day after CPI, the 10-year poised to jump. The Fed’s statement and press conference could not have been more dovish. Back down to 2.57% by Thursday morning, safely below 2.60%. For an hour. Then back up to the edge. The bond market could not be more clear. No matter what the Fed intends — stay at 0% until doomsday — if inflation is crawling out of the box then yields are going higher. Given stagnant wages it is hard to see how inflation can rise, but it can. Perhaps 40% of US households are doing well (IT-skilled, marketable educations, careers in health care or education, plugged into the global economy), and their rising purchasing power can raise general prices for a time. The other 60% of households lose “real” purchasing power, and will substitute cheaper products, but it can take a long time for statisticians to adjust the aggregate US shopping basket. (BTW: Brace yourselves for more election-year “inequality” from the Left, cruelly disinterested in helping weaker households to compete in a global economy, instead focused on demonizing the successful to justify raising their taxes.) Oil is a less-tidy chart. It began a sustained rise from $95/bbl in February, now $107 and certainly feeding into inflation fears. Natural gas rose at the same time from $4.00, but has been relatively steady since at $4.75. The two markets interact, for the next several years not in short supply, but oil is “geopolitically sensitive.” I risk Zonkerism, but oil is telling me that sequential instability in Syria, Ukraine, and Iraq is the cause of the move. Add Czar Vladimir, who goes to sleep and wakes each day hoping that Middle Eastern instability gives him higher prices, and much more important, power. He will make all the mischief he can. The US is late to begin a strategic withdrawal from positions taken after WW II when our power was infinite. Especially in the Middle East we have held the lid so tight that pressure has grown instead of gradually releasing and cooking and releasing. Since 1950 the US population has a little more than doubled to 330 million while Iraq has grown from 5 million to 33; Saudi Arabia from 3.8 million to 27; Syria from 3.5 to 22; Iran from 16 to 81, Egypt from 21 to 88. Each is over-weighted to men because of female infanticide. Immense growth in numbers, some nations now inconceivably wealthy, most still poor, but all share primitive social capital. Great powers seldom, if ever, begin strategic withdrawal in time, before the fatal hollowing-out from overextension (see Kennedy 1989 “Rise and Fall of The Great Powers”). We can hope to be the exception because we have never aspired to empire, just stability. The big risk alongside “too late” is that one or more adversaries will underestimate our power and fortitude as we pull back, and try to take advantage. As now. There is no rulebook for Mr. Obama or his successors. Strategic defense while maintaining tactical offense is an art form, and markets are unforgiving judges.
Friday, June 13, 2014
Capital Markets
By Louis S. Barnes Friday, June 13th, 2014
Markets have paused, warily studying new plumes of smoke on the horizon. Not enough hazard to run to Treasurys or to scramble for oil, but not business as usual. Bergdahl, Brat, Baghdad, and Barak… but the important happening was Uber.
Markets have paused, warily studying new plumes of smoke on the horizon. Not enough hazard to run to Treasurys or to scramble for oil, but not business as usual. Bergdahl, Brat, Baghdad, and Barak… but the important happening was Uber.
US data do not support the acceleration camp: May retail sales arrived at a 0.3% gain, half the forecast, and stripped of credit-fueled vehicles, only 0.1%. April’s figures were revised better, but the three-year trend is down. The World Bank added its vote: US GDP will not crack 3% this year.
Long-term US rates are behaving in random and jittery fashion. The bond market ignored the technical break of 2.50% two weeks ago, blinking and puzzled now back above 2.60%. Treasurys still look good because German 10s pay 1.37%, and JGB 10s 0.60%, those central banks trying to devalue the euro and yen, so the paltry interest will be worth even less in anyone else’s currency.
A lot of ink will be spilled in the wrong places this weekend. Iraq is falling apart, but was never together, never should have been put together. No matter who runs the pieces of the place, each will need to sell oil. Regional instability has its stabilizers: business is better than battle, and the locals have a better, quicker shot at accommodation if the US stays out. The void in the White House makes most of us uneasy, but there are times not to do anything.
David Brat blew up Eric Cantor, which media headlined as a Tea Party revolution. Not. Too much of the media think anyone to the right of Nancy Pelosi is a Tea Pot. Cantor was the most nakedly ambitious and unprincipled politician in my memory. Brat is a well-liked teacher, a right-side but mainstream economist, a libertarian-populist, holds a theology degree and is a self-described Calvinist. An amateur pol whose entertaining edges will be sandpapered flat by campaigning. Too bad.
The important stuff is the long question before the house these last five years, and maybe twenty-five: Why persistently flat-to-falling wages throughout the West, incipient deflation, central-banks in sustained and unimaginable stimulus, their econometric models predicting recovery and wrong, wrong, and wrong?
Two answers. The first: the unprecedented global entry of more than a billion workers ca. 1990, and especially China catapulting their standard of living via excessive investment and predatory trade, undercutting the West and maybe themselves. The second: Uber.
Back to the beginning of the Industrial Revolution, many feared that mass production would lead to pervasive unemployment and crushed wages. The reverse happened. Throughout the IT revolution the same fear flourished, “automation” the bogeyman, robots and all, but automation requires software and robot-repair, whole new classes of better-paying jobs. If… if you have the skills. Thus today’s profound economic divide between the IT-facile and not.
That focus on automation misses the most important IT effect: a fantastic cost-reduction in the supply chain of manufactures and now services, and corresponding reduction in income to providers.
Uber. Guesses at the market value of its new stock: $17 billion. Its assets: a phone app and some billing software. Its market edge: mobilizing tens of millions of idle suppliers of limo/taxi services and taking a small rake on the fare. Simultaneously taking a temporary rake on formal, licensed taxi fares — temporary because putting them out of business. The net effect: Karl Marx’ blackest thought, capitalist competition bringing ruin to labor. The price of a ride will fall to the fare offered by the lowest-cost provider, perhaps not much of a car or driver, but cheap. Deflation.
Ubers of one kind or another are having the same effect throughout commerce.
The political response… On the Left, all of our economic woes are inflicted by the 1%. On the Right, all pain is the result of Big Government. The people need help to compete, and none is forthcoming. Do enjoy yourself, Mr. Brat.
Friday, June 6, 2014
Capital Markets
By Louis S. Barnes Friday, June 6th, 2014
“Silly season” for newsies is high summer, when there so little news that “Man Bites Dog!” migrates to page one. In this late-spring week news is plentiful, but a lot of it is silly. Keep sense of humor close by. The straight news aspects are brief, and pleasant. The surprise drop in long-term interest rates two weeks ago has held its new range, and the twin ISM reports for May rose just above the 55 level, the economy trending better than in the first four months of the year. But the level is not taking off: imports are strong, exports sliding, the combination a GDP minus. Today the monthly clincher, job data: 217,000 net new jobs. 63,000 in education and health, neither sector sustainable, one funded by debt, the other by theft. Lefties are thrilled to take presidential credit that we now have as many jobs as at the beginning of the recession. SEVEN years ago. Still, good news. The most important aspect of jobs, by far: income. NSG. Average hourly earnings rose by a nickel last month, 2.1% year-over-year, negative after inflation. The Fed released its comprehensive Z-1 financial flows, 1st quarter ending. Aggregate mortgage balances continue to fall, the pace slowing, but negative $38 billion in Q1. Write-offs of old trash still account for most of the decline, but every major category from Fannie to Helocs declined. The net worth of US households also hit a new high (trumpets on Left), but not much help to the half of the US without any assets, or the ones they have under water. Despite the sourpuss attitude in the above, the US economy is gradually creeping ahead and recovery may just be very, very long. We are in better shape by far than any other major region around the world. Mr. Obama had his most peculiar week in office. Isolation makes most of us odd (or odder, see Bergdahl). The EPA announced long-awaited CO2 limits on power plants, the president running around Congress to get it done. But the limits are why-bother timid: here in Colorado we were already on 2030 track, and even coal states barely peeped. L’affaire Bergdahl: worth doing, quietly and apologetically for a screw-loose AWOL; the grandstanding was stupid, running around Congress again, stupider. Immediately after the president fled to Europe and asked for new support for eastern NATO. One billion dollars. ONE. An accounting error. Europe understands these challenges to leadership, and misunderstanding by critics. Aside from US job data, this week’s most-anticipated global economic event: the ECB at last to rescue Europe. Mario Draghi had created high expectations, and every trader was glued to screens Thursday morning, alert to big stuff. Instead a fizzle in a fog of words. Embarrassing. Markets all over the world just sat there for hours, dumbfounded at pretentious thumb-twiddling. In defense of the ECB, Europe’s predicament has always been beyond central bank repair (which a brave leader would say). The euro is a disaster made worse by predatory German behavior, insisting on its right to export to the others 3% of its GDP, loan them the money to pay the bills, and then insist on repayment in euro-gelt. If you feel troubled by US politics, consider France. Hollande’s socialists last week came in third — 18% — in French Euro-parliament voting. BNP Paribas has been caught red-handed laundering terrorist cash in huge volume, a $10 billion US fine and demand for executive resignation pending. Hollande is outraged. He has used the D-Day anniversary to explain to all that Vladimir is misunderstood and a fine fellow. He is also a customer. France refuses to cancel Russian orders for two helicopter carriers, worth about $1.6 billion. These two tubs are of no strategic importance, but France could pull them into what’s left of its navy. Silly me — neither France nor any in Western Europe are willing to spend for self-defense. Back to reality. Markets are too quiet. The principal force holding down US rates is trouble elsewhere, and growing strength here can overwhelm the external.
“Silly season” for newsies is high summer, when there so little news that “Man Bites Dog!” migrates to page one. In this late-spring week news is plentiful, but a lot of it is silly. Keep sense of humor close by. The straight news aspects are brief, and pleasant. The surprise drop in long-term interest rates two weeks ago has held its new range, and the twin ISM reports for May rose just above the 55 level, the economy trending better than in the first four months of the year. But the level is not taking off: imports are strong, exports sliding, the combination a GDP minus. Today the monthly clincher, job data: 217,000 net new jobs. 63,000 in education and health, neither sector sustainable, one funded by debt, the other by theft. Lefties are thrilled to take presidential credit that we now have as many jobs as at the beginning of the recession. SEVEN years ago. Still, good news. The most important aspect of jobs, by far: income. NSG. Average hourly earnings rose by a nickel last month, 2.1% year-over-year, negative after inflation. The Fed released its comprehensive Z-1 financial flows, 1st quarter ending. Aggregate mortgage balances continue to fall, the pace slowing, but negative $38 billion in Q1. Write-offs of old trash still account for most of the decline, but every major category from Fannie to Helocs declined. The net worth of US households also hit a new high (trumpets on Left), but not much help to the half of the US without any assets, or the ones they have under water. Despite the sourpuss attitude in the above, the US economy is gradually creeping ahead and recovery may just be very, very long. We are in better shape by far than any other major region around the world. Mr. Obama had his most peculiar week in office. Isolation makes most of us odd (or odder, see Bergdahl). The EPA announced long-awaited CO2 limits on power plants, the president running around Congress to get it done. But the limits are why-bother timid: here in Colorado we were already on 2030 track, and even coal states barely peeped. L’affaire Bergdahl: worth doing, quietly and apologetically for a screw-loose AWOL; the grandstanding was stupid, running around Congress again, stupider. Immediately after the president fled to Europe and asked for new support for eastern NATO. One billion dollars. ONE. An accounting error. Europe understands these challenges to leadership, and misunderstanding by critics. Aside from US job data, this week’s most-anticipated global economic event: the ECB at last to rescue Europe. Mario Draghi had created high expectations, and every trader was glued to screens Thursday morning, alert to big stuff. Instead a fizzle in a fog of words. Embarrassing. Markets all over the world just sat there for hours, dumbfounded at pretentious thumb-twiddling. In defense of the ECB, Europe’s predicament has always been beyond central bank repair (which a brave leader would say). The euro is a disaster made worse by predatory German behavior, insisting on its right to export to the others 3% of its GDP, loan them the money to pay the bills, and then insist on repayment in euro-gelt. If you feel troubled by US politics, consider France. Hollande’s socialists last week came in third — 18% — in French Euro-parliament voting. BNP Paribas has been caught red-handed laundering terrorist cash in huge volume, a $10 billion US fine and demand for executive resignation pending. Hollande is outraged. He has used the D-Day anniversary to explain to all that Vladimir is misunderstood and a fine fellow. He is also a customer. France refuses to cancel Russian orders for two helicopter carriers, worth about $1.6 billion. These two tubs are of no strategic importance, but France could pull them into what’s left of its navy. Silly me — neither France nor any in Western Europe are willing to spend for self-defense. Back to reality. Markets are too quiet. The principal force holding down US rates is trouble elsewhere, and growing strength here can overwhelm the external.
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