Friday, October 31, 2014
Capital Markets Update
By Louis S. Barnes Friday, October 31st, 2014
Mortgage and long-term rates are still near their lows — reassuring, considering everything else has lost its marbles. Or perhaps bonds are doing well because everything else is nuts… a fair proposition to which we’ll return.
Aged about 12 I got to see the Ringling Brothers and Barnum & Bailey “Greatest Show in Earth” at Madison Square Garden in NYC. Three rings and then some, acts and animals all over that giant auditorium floor, but each one in confined space. Watching the economy today is like that circus, but each act interactive with the others.
A lion tamer trying to get in the little car with the clowns while lions chase them round and round… An elephant knocks down half the trapeze, Wallendas landing in the crowd… The ringmaster trying to restore order while a troop of escaped monkeys strips him of top hat, red coat, and megaphone.
From order to chaos and back to order…. The Fed, doing its level best to maintain dignity, issued a hawkish statement post-meeting Wednesday. Very hawkish, and as ignored as the ringmaster above. “Substantial improvement in the outlook for the labor market… underlying strength in the broader economy.” Chair Yellen has made her call: unemployment as traditionally measured now below 6%, and new claims for unemployment insurance at a super-cycle low, the threat is sudden gains in wages and inflation. She left in “considerable period of time” for 0%-.25% Fed funds, but we know from Fed vice-chair Stanley Fischer that “considerable” is weeks to six months.
This was a hair-trigger statement, a profound bet that those traditional measures of the labor market will again be predictive. I suppose the Chair has to make that call. Although not tightening yet, the threat itself is a form of tightening, and the market response leads us straight to the chaos.
Only currencies moved on the Fed’s words, the euro and yen resuming free-fall versus the dollar. The mechanism of falling is investors of all kinds selling zero-paying euro- and yen-denominated securities and buying dollar ones, anticipating Fed-hiked yield. Back to Fed quandaries: one of the best inflation indicators is long-term Treasurys. Treasury 10s have fallen all year, consistent with a forecast for a weak economy and falling inflation, and silly for the Fed to think of raising its rate. But, Eric Rosengren, Boston-Fed-Prez and the smartest one of the lot, pointed to this Fed problem: if the dollar is rocketing, a lot of money is buying UST-10s and artificially cutting its yield, masking an inflation threat. But the dollar is up because the Fed threatens to tighten, maybe prematurely. You want circular rings in your circus?
How about data? US GDP gained 3.5% in Q3, but hollow: consumption a thin 1.8% pace, the rest suspect. In today’s release, personal spending fell .2% in September, and incomes rose only .2%, both far below estimate. PCE core inflation held at 1.5% year-over-year but is certain to fall if only because the rocketing dollar will cut the cost of all imports. Might falling oil goose the economy? Very little, negligible compared to historical drops. Prior drops cut the cost of all energy, but today natural gas and oil are already down. This one is gasoline-only, not bad, but not big.
Stock market marbles are pouring out of heads on today’s news that the Bank of Japan will increase annual QE from $650 billion to $725 billion. And — incredible — Japan’s government pension fund will dump an additional one-quarter of its $1.4 trillion assets into global stocks, the BoJ effectively buying Japanese bonds that the fund holds to free up the cash. Meanwhile the ECB has begun a pathetic QE, roughly four years too late and a piddling $2 billion per month, but even that excites marbleless stock yahoos.
The BoJ and ECB are hosing funny money into bubbled markets, mostly so that at future trial they can say the collapse wasn’t their fault, while the Fed wants to tighten into imaginary inflation. Could I make that up?
Stick with the basics. If US wages begin to rise, the Fed will tighten quickly. The bond market, dollar-distorted or not, will then vote on the Fed’s move: appropriate, overdue, or premature? Hunch here: long-term rates might even fall on the move.
Friday, October 17, 2014
Capital Markets Update
By Louis S. Barnes Friday, October 17, 2014
Wow. What was that all about? For one thing, not the US economy. Another thing not about: mortgage rates, just about back where they were before the stock market circus. Take it one piece at a time….
Pay as little attention as possible to the stock market. It enjoyed a one-way rally for three years, and was way overdue for waves of profit-taking — for any reason or no reason at all. But two fundamentals remain unchanged: if you sell your stocks there is nothing useful to do with the money, just safety plays with little or no yield; and second, business conditions and earnings are still good, especially in the US.
With those two forces in place it’s hard to get a deep unwind underway. To harm the real economy, stocks have to crash. The real economy may not be accelerating, but it is not slowing in any meaningful way. US manufacturing is very strong, aided by energy costs as little as one-third those of competitors overseas. September industrial production rose 1%.
Job market signals are super-strong but somehow misleading, not pushing wages up. Claims for unemployment insurance fell to 264,000 last week, a level triggering Fed tightening any time in the last 40 years. September retail sales fell .3%, yet another accurate sign of wage weakness. Housing starts are up 9% in nine months, but the whole shebang is apartments, not homes for equity-building.
If the US economy is as-was, where’s the fire? Europe. Again. Linkage to markets here are strange but powerful.
The euro experiment has been a disaster because it requires economic changes beyond cultural tolerance. Non-German Europe has never been as productive as Germany. For accounts to balance among 19 nations, the strong must adopt behavior reciprocal to the weak until the weak adopt the productive culture of the strong. For the euro to work, Germany must become consumer-based, inflation tolerant, and an importer. Italy, Spain, and, France must “reform:” shrinking their welfare states, making it easy to hire and fire workers, start and close new businesses.
Ain’t gonna happen. Never is a long time, but never. The ECB has bought time. It has given an insolvent euro-banking system enough cash to soak up sovereign debt still flooding from every treasury but Germany’s. Three years ago sovereign bonds all over Europe entered a fire sale, yields soaring. The ECB put out the fire by blustering, saying it would buy these bonds if markets dared to sell against it.
The ECB has not bought a single bond, and markets want to see the cash. The proximate cause of all the market hoo-ah this week has been awful economic news out of Europe, GDPs falling into recession and disinflation turning to deflation. The telltale is bonds, not stocks. Euro-zone bonds have decoupled again: German 10s trade 0.82%, Greek 10s 8.90% (up a full point this week), Spain’s 2.20% and Italy’s 2.56%.
Global markets have caught their breath at week’s end because everyone assumes Europe will try something to save itself. However, markets also assume that so much damage has been done to real economies that nothing will work. This crisis will recur, and on shorter cycle than prior ones.
From Europe outward, effects caromed like a pool-table break. A new European recession is profoundly deflationary for the world, thus intercepting Fed intentions to raise rates. Markets and the Fed itself had adopted “liftoff” to describe the Fed’s initial moves above zero. Now we’re groping for new slang to describe a new Fed predicament: any liftoff will be followed soon by a return to zero. “Crash” is too strong, but “dead stick” is close. James Bullard, St. Louis Fed Prez, for months a big, fluffy hawk this week said QE should be reconsidered.
ECB and Fed chatter will lurch markets temporarily, but the global bond rally reflects deep belief that the central banks have shot their wads. Now it’s up to economies themselves, and in Europe the possibility of political exhaustion with the euro experiment. The day it folds will be rough, but global recovery would follow.
Wow. What was that all about? For one thing, not the US economy. Another thing not about: mortgage rates, just about back where they were before the stock market circus. Take it one piece at a time….
Pay as little attention as possible to the stock market. It enjoyed a one-way rally for three years, and was way overdue for waves of profit-taking — for any reason or no reason at all. But two fundamentals remain unchanged: if you sell your stocks there is nothing useful to do with the money, just safety plays with little or no yield; and second, business conditions and earnings are still good, especially in the US.
With those two forces in place it’s hard to get a deep unwind underway. To harm the real economy, stocks have to crash. The real economy may not be accelerating, but it is not slowing in any meaningful way. US manufacturing is very strong, aided by energy costs as little as one-third those of competitors overseas. September industrial production rose 1%.
Job market signals are super-strong but somehow misleading, not pushing wages up. Claims for unemployment insurance fell to 264,000 last week, a level triggering Fed tightening any time in the last 40 years. September retail sales fell .3%, yet another accurate sign of wage weakness. Housing starts are up 9% in nine months, but the whole shebang is apartments, not homes for equity-building.
If the US economy is as-was, where’s the fire? Europe. Again. Linkage to markets here are strange but powerful.
The euro experiment has been a disaster because it requires economic changes beyond cultural tolerance. Non-German Europe has never been as productive as Germany. For accounts to balance among 19 nations, the strong must adopt behavior reciprocal to the weak until the weak adopt the productive culture of the strong. For the euro to work, Germany must become consumer-based, inflation tolerant, and an importer. Italy, Spain, and, France must “reform:” shrinking their welfare states, making it easy to hire and fire workers, start and close new businesses.
Ain’t gonna happen. Never is a long time, but never. The ECB has bought time. It has given an insolvent euro-banking system enough cash to soak up sovereign debt still flooding from every treasury but Germany’s. Three years ago sovereign bonds all over Europe entered a fire sale, yields soaring. The ECB put out the fire by blustering, saying it would buy these bonds if markets dared to sell against it.
The ECB has not bought a single bond, and markets want to see the cash. The proximate cause of all the market hoo-ah this week has been awful economic news out of Europe, GDPs falling into recession and disinflation turning to deflation. The telltale is bonds, not stocks. Euro-zone bonds have decoupled again: German 10s trade 0.82%, Greek 10s 8.90% (up a full point this week), Spain’s 2.20% and Italy’s 2.56%.
Global markets have caught their breath at week’s end because everyone assumes Europe will try something to save itself. However, markets also assume that so much damage has been done to real economies that nothing will work. This crisis will recur, and on shorter cycle than prior ones.
From Europe outward, effects caromed like a pool-table break. A new European recession is profoundly deflationary for the world, thus intercepting Fed intentions to raise rates. Markets and the Fed itself had adopted “liftoff” to describe the Fed’s initial moves above zero. Now we’re groping for new slang to describe a new Fed predicament: any liftoff will be followed soon by a return to zero. “Crash” is too strong, but “dead stick” is close. James Bullard, St. Louis Fed Prez, for months a big, fluffy hawk this week said QE should be reconsidered.
ECB and Fed chatter will lurch markets temporarily, but the global bond rally reflects deep belief that the central banks have shot their wads. Now it’s up to economies themselves, and in Europe the possibility of political exhaustion with the euro experiment. The day it folds will be rough, but global recovery would follow.
Friday, October 10, 2014
Capital Markets Update
By Louis S. Barnes Friday, October 10, 2014
Mortgage interest rates improved this past week on concerns that the global economy is slowing and that deflation is spreading. The IMF lowered its global growth outlook again for 2015 down to +3.8%. German Factory Orders fell to their lowest levels since 2009. The FOMC Minutes from its September meeting indicated that risks of a weak global economy will allow the Fed to keep the Fed Funds rate at its current levels for a considerable time. September Import prices were down 0.9% year over year and Export prices were down 0.2% year over year. Inflation in Europe is currently only 0.3% and in the U.S. is only 1.5%. Other economic data of note included the August JOLTS Job Openings, weekly jobless claims, and August Wholesale Inventories which were all stronger than expected. August Consumer Credit, though, was weaker than expected. The revolving credit component fell for the first time in six months. The Treasury auctioned $61 billion in 3 Year Notes, 10 Year Notes, and 30 Year Bonds which were met with mixed demand.
The Dow Jones Industrial Average is currently at 16,695, down over 300 points on the week. The crude oil spot price is currently $85.61 per barrel, down over $4 per barrel on the week. The Dollar weakened versus the Euro and Yen on the week.
Next week look toward Wednesday’s Producer Price Index (PPI) and Retail Sales, Thursday’s Jobless Claims, Industrial Production, and Philadelphia Fed Survey, and Friday’s Housing Starts and Consumer Sentiment Index as potential market moving events. Bond markets are closed on Monday for Columbus Day.
Mortgage interest rates improved this past week on concerns that the global economy is slowing and that deflation is spreading. The IMF lowered its global growth outlook again for 2015 down to +3.8%. German Factory Orders fell to their lowest levels since 2009. The FOMC Minutes from its September meeting indicated that risks of a weak global economy will allow the Fed to keep the Fed Funds rate at its current levels for a considerable time. September Import prices were down 0.9% year over year and Export prices were down 0.2% year over year. Inflation in Europe is currently only 0.3% and in the U.S. is only 1.5%. Other economic data of note included the August JOLTS Job Openings, weekly jobless claims, and August Wholesale Inventories which were all stronger than expected. August Consumer Credit, though, was weaker than expected. The revolving credit component fell for the first time in six months. The Treasury auctioned $61 billion in 3 Year Notes, 10 Year Notes, and 30 Year Bonds which were met with mixed demand.
The Dow Jones Industrial Average is currently at 16,695, down over 300 points on the week. The crude oil spot price is currently $85.61 per barrel, down over $4 per barrel on the week. The Dollar weakened versus the Euro and Yen on the week.
Next week look toward Wednesday’s Producer Price Index (PPI) and Retail Sales, Thursday’s Jobless Claims, Industrial Production, and Philadelphia Fed Survey, and Friday’s Housing Starts and Consumer Sentiment Index as potential market moving events. Bond markets are closed on Monday for Columbus Day.
Friday, October 3, 2014
Capital Markets Update
By Louis S. Barnes Friday, October 3, 2014
At the end of a strange week with lots of fresh data, two things stand out: mortgage and long-term rates stayed low, and market movements were magnified by mass escape from wrong-side trades.
On the surface the US data is strong. September payrolls jumped 248,000 jobs, plus another 69,000 revised up from prior months. But the whole purpose of a job is to make money. Average hourly earnings rose… um… er… fell one cent to $24.53, up just 2.0% year-over-year before inflation.
The Fed’s job is to lean against too-rapid job growth, because in all modern economic cycles employers began to compete for employees by paying higher wages, ultimately producing inflation. The optimists are out of their minds today, cheering the health of the economy, but the income/unemployment disconnect is without precedent — although it does connect to a different view of the world.
We are in a global deflation event, with which no one alive has or can have experience. Even those as old as I (65) have lived entire economic lives anticipating inflation, rarely high, usually moderate, and always present. Incomes have risen steadily, even if not so fast in real terms. Moderate inflation has been an enormous benefit to disciplined households. Mortgage debt is in nominal dollars, the original balance and payment gradually but steadily shrinking. Avoid buying things whose prices inflate (which varies cycle to cycle), and beat inflation.
The US is in better shape — vastly better shape — than any other major nation with the exception of the UK. However, the absence of income growth, inflated or otherwise, is a telltale. One alternate explanation for a quarter of a million new jobs monthly and no wage growth: the unemployed and partially employed are taking jobs at poorer wages than old jobs, or — just as important for the youth set — poorer than expected.
Consider math that Americans have never had to consider. If I bought a home any time after 1935, I could expect my debt-to-income ratio at the outset to fall every year thereafter. The payment would become a smaller fraction of my gross income even if I did not upgrade my career, thereby adding safety (above all), increasing disposable income aside from the house payment, and I had bought an appreciating asset.
Friends in the financial world don’t get it. They are of-by-and-for markets in which any demand/supply disequilibrium is blamed on price. Thus today, just as they misunderstood home prices falling way below “clearing prices” 2007-2011, they mistake last year’s home price rise as overdone and blame it for this year’s softening home sales. The alternate (real) universe: the bulk of last year’s home price rise (except in strong local economies, like mine) was due to a rebound in overly discounted prices, and now we are reverting to non-recovery.
We might get a housing recovery going if we backed off Dodd-Frank and CFPB hysteria, but that’s not enough. Home buyers are instinctively aware of this calculus: if my income is rising 2% per year, and I’ve got to pay 4.25% interest to buy a home which might not appreciate, maybe I’ll rent defensively even if rents are rising 5%, and beat that game by renting a lesser apartment? We need higher incomes and would have them were the world not holding us back.
Deflation. Italy downshifted its growth forecast from 0.8% to minus 0.3%, its wallpaper bonds (145% of GDP) rising to 2.32%. German 10s pay 0.89% in a currency falling fast versus the buck. Japan 10s pay 0.521%; in its suicidal miracle, it has inflated the cost of goods, but incomes less so. France will cut 1.5% from public spending, budget deficit still 4.5% of GDP, growth forecast cut to 0.4%, national debt 95% of GDP. Europe-wide year-over-year CPI fell last month to 0.3%.
The fantastic, panicked devaluation of euro and yen (soon to be joined by the yuan) is a desperate attempt to halt deflation overseas, but it exports disinflation to us.
Oh-by-the-way: the top geopolitical risk is now Hong Kong. China cannot hide a Tiananmen there, but neither can it tolerate this mass revolt. Perhaps it will fizzle.
At the end of a strange week with lots of fresh data, two things stand out: mortgage and long-term rates stayed low, and market movements were magnified by mass escape from wrong-side trades.
On the surface the US data is strong. September payrolls jumped 248,000 jobs, plus another 69,000 revised up from prior months. But the whole purpose of a job is to make money. Average hourly earnings rose… um… er… fell one cent to $24.53, up just 2.0% year-over-year before inflation.
The Fed’s job is to lean against too-rapid job growth, because in all modern economic cycles employers began to compete for employees by paying higher wages, ultimately producing inflation. The optimists are out of their minds today, cheering the health of the economy, but the income/unemployment disconnect is without precedent — although it does connect to a different view of the world.
We are in a global deflation event, with which no one alive has or can have experience. Even those as old as I (65) have lived entire economic lives anticipating inflation, rarely high, usually moderate, and always present. Incomes have risen steadily, even if not so fast in real terms. Moderate inflation has been an enormous benefit to disciplined households. Mortgage debt is in nominal dollars, the original balance and payment gradually but steadily shrinking. Avoid buying things whose prices inflate (which varies cycle to cycle), and beat inflation.
The US is in better shape — vastly better shape — than any other major nation with the exception of the UK. However, the absence of income growth, inflated or otherwise, is a telltale. One alternate explanation for a quarter of a million new jobs monthly and no wage growth: the unemployed and partially employed are taking jobs at poorer wages than old jobs, or — just as important for the youth set — poorer than expected.
Consider math that Americans have never had to consider. If I bought a home any time after 1935, I could expect my debt-to-income ratio at the outset to fall every year thereafter. The payment would become a smaller fraction of my gross income even if I did not upgrade my career, thereby adding safety (above all), increasing disposable income aside from the house payment, and I had bought an appreciating asset.
Friends in the financial world don’t get it. They are of-by-and-for markets in which any demand/supply disequilibrium is blamed on price. Thus today, just as they misunderstood home prices falling way below “clearing prices” 2007-2011, they mistake last year’s home price rise as overdone and blame it for this year’s softening home sales. The alternate (real) universe: the bulk of last year’s home price rise (except in strong local economies, like mine) was due to a rebound in overly discounted prices, and now we are reverting to non-recovery.
We might get a housing recovery going if we backed off Dodd-Frank and CFPB hysteria, but that’s not enough. Home buyers are instinctively aware of this calculus: if my income is rising 2% per year, and I’ve got to pay 4.25% interest to buy a home which might not appreciate, maybe I’ll rent defensively even if rents are rising 5%, and beat that game by renting a lesser apartment? We need higher incomes and would have them were the world not holding us back.
Deflation. Italy downshifted its growth forecast from 0.8% to minus 0.3%, its wallpaper bonds (145% of GDP) rising to 2.32%. German 10s pay 0.89% in a currency falling fast versus the buck. Japan 10s pay 0.521%; in its suicidal miracle, it has inflated the cost of goods, but incomes less so. France will cut 1.5% from public spending, budget deficit still 4.5% of GDP, growth forecast cut to 0.4%, national debt 95% of GDP. Europe-wide year-over-year CPI fell last month to 0.3%.
The fantastic, panicked devaluation of euro and yen (soon to be joined by the yuan) is a desperate attempt to halt deflation overseas, but it exports disinflation to us.
Oh-by-the-way: the top geopolitical risk is now Hong Kong. China cannot hide a Tiananmen there, but neither can it tolerate this mass revolt. Perhaps it will fizzle.
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