A Little Smoother

Capital Markets Update

By Louis S. Barnes               Friday, August 28th, 2015

Whether markets are resolving some of the uncertainties and frights leading to two weeks of chaos, or merely fatigued, they are settling down. Quiet is good.

The US consistently shows more signs of “self-sustaining” growth. In the last seven years a false hope, but apparent now that the Fed can remove another set of its economic training wheels. The net of GDP revisions for the first six months of 2015: we are grinding along at 2.2% annual growth, which is probably the centerline of future prospects. Not accelerating, not fancy, but sustainable.

Housing is in a long, slow recovery, unit sales rising about 6% annually, and prices perhaps 5%. Those numbers cannot pick up until incomes do, especially among the young, but at those levels would not contribute to inflationary overheating for several years. Or, given mortgage credit over-tightening, maybe ever. There is nothing too hot about this economy, with the possible exceptions of student and auto loans. Peanuts.

Inflation is the whole point of Fed operations. Its job is to intercept inflation (or deflation) before it gets going. The Fed’s models have over-predicted both GDP and inflation for seven-straight years, but that stopped-clock may at last have the correct time. Year-over-year core PCE inflation as of July had risen 1.2%, but in May plus .3%, June .1% and July .2% — the last three months account for half of the last year’s rise. If that’s a trend, the Fed has real reason to lift off, not just the yips to get off unnatural, bubble-inflating zero.

As the US economy enters a normal realm, it’s entirely appropriate for the Fed to remove emergency and experimental ease. Two things hold it back: first the weird labor market mismatch, unemployment falling off the low end of the scale but very little growth in incomes. That’s relatively small potatoes, which will resolve themselves. If incomes suddenly take off, then the Fed will come harder and faster; if they stay low, the Fed can move very slowly.

The second Fed-retardant is huge. Or maybe not. The outside world is a mess. In many ways, all of it badly screwed up, and in important places — Europe and Japan — not at all clear how they get out of the traps they are in, no matter how energetic their central banks. China is especially upsetting because it’s in obvious economic difficulty, but will not share honest numbers with the rest of us.

We tend to forget about slow-motion trouble spots, like Japan and Europe. The NYT reported this week that Japan’s declining population has resulted in 8 million abandoned homes. The BOJ’s QE has for a year bought Japan’s government debt at twice the rate of new budget deficit, which itself is half of Japan’s government spending. The BOJ now owns 27% of all Japanese government bonds. Here the Fed owns about 18% of marketable Treasurys and agency MBS, but stopped buying more than a year ago; at the BOJ’s current pace by 2020 it will own 65% of all JGBs. It will have to stop, but when, and to what effect no one knows.

Aside from the slow-rollers… China. The US is the least trade-dependent economy of any major nation, only about 12% of GDP. Of that, China supplies 21% of our imports, and buys only 7% of our exports. But we have terrible measurement trouble. Trade used to consist of tangible goods, manufactured and raw, but “services” are the rapid growth category in modern economies. That’s what Google does. Apple sells tangibles, but implied sales of its intellectual property — innovation — are fantastically more valuable. Global employment compensation is every day more linked to and compressed by trade and instantaneous electronic price-discovery, brand new in just the last two decades and in that time accelerating at the pace of Moore’s Law.

We should assume the Fed lifts off soon. I hope in September, just to get the first step over with, and to make the Fed look like it knows what it’s doing. But I cannot imagine an inflation problem here or anywhere in a world like the preceding two paragraphs, and the Fed’s continuous rolling-over of its long-term Treasury and MBS holdings should keep mortgage rates low.

Whether markets are resolving some of the uncertainties and frights leading to two weeks of chaos, or merely fatigued, they are settling down. Quiet is good.
The US consistently shows more signs of “self-sustaining” growth. In the last seven years a false hope, but apparent now that the Fed can remove another set of its economic training wheels. The net of GDP revisions for the first six months of 2015: we are grinding along at 2.2% annual growth, which is probably the centerline of future prospects. Not accelerating, not fancy, but sustainable.
Housing is in a long, slow recovery, unit sales rising about 6% annually, and prices perhaps 5%. Those numbers cannot pick up until incomes do, especially among the young, but at those levels would not contribute to inflationary overheating for several years. Or, given mortgage credit over-tightening, maybe ever. There is nothing too hot about this economy, with the possible exceptions of student and auto loans. Peanuts.
Inflation is the whole point of Fed operations. Its job is to intercept inflation (or deflation) before it gets going. The Fed’s models have over-predicted both GDP and inflation for seven-straight years, but that stopped-clock may at last have the correct time. Year-over-year core PCE inflation as of July had risen 1.2%, but in May plus .3%, June .1% and July .2% — the last three months account for half of the last year’s rise. If that’s a trend, the Fed has real reason to lift off, not just the yips to get off unnatural, bubble-inflating zero.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-28-2015#sthash.gadoxdV3.dpuf

Whether markets are resolving some of the uncertainties and frights leading to two weeks of chaos, or merely fatigued, they are settling down. Quiet is good.
The US consistently shows more signs of “self-sustaining” growth. In the last seven years a false hope, but apparent now that the Fed can remove another set of its economic training wheels. The net of GDP revisions for the first six months of 2015: we are grinding along at 2.2% annual growth, which is probably the centerline of future prospects. Not accelerating, not fancy, but sustainable.
Housing is in a long, slow recovery, unit sales rising about 6% annually, and prices perhaps 5%. Those numbers cannot pick up until incomes do, especially among the young, but at those levels would not contribute to inflationary overheating for several years. Or, given mortgage credit over-tightening, maybe ever. There is nothing too hot about this economy, with the possible exceptions of student and auto loans. Peanuts.
Inflation is the whole point of Fed operations. Its job is to intercept inflation (or deflation) before it gets going. The Fed’s models have over-predicted both GDP and inflation for seven-straight years, but that stopped-clock may at last have the correct time. Year-over-year core PCE inflation as of July had risen 1.2%, but in May plus .3%, June .1% and July .2% — the last three months account for half of the last year’s rise. If that’s a trend, the Fed has real reason to lift off, not just the yips to get off unnatural, bubble-inflating zero.
As the US economy enters a normal realm, it’s entirely appropriate for the Fed to remove emergency and experimental ease. Two things hold it back: first the weird labor market mismatch, unemployment falling off the low end of the scale but very little growth in incomes. That’s relatively small potatoes, which will resolve themselves. If incomes suddenly take off, then the Fed will come harder and faster; if they stay low, the Fed can move very slowly.
The second Fed-retardant is huge. Or maybe not. The outside world is a mess. In many ways, all of it badly screwed up, and in important places — Europe and Japan — not at all clear how they get out of the traps they are in, no matter how energetic their central banks. China is especially upsetting because it’s in obvious economic difficulty, but will not share honest numbers with the rest of us.
We tend to forget about slow-motion trouble spots, like Japan and Europe. The NYT reported this week that Japan’s declining population has resulted in 8 million abandoned homes. The BOJ’s QE has for a year bought Japan’s government debt at twice the rate of new budget deficit, which itself is half of Japan’s government spending. The BOJ now owns 27% of all Japanese government bonds. Here the Fed owns about 18% of marketable Treasurys and agency MBS, but stopped buying more than a year ago; at the BOJ’s current pace by 2020 it will own 65% of all JGBs. It will have to stop, but when, and to what effect no one knows.
Aside from the slow-rollers… China. The US is the least trade-dependent economy of any major nation, only about 12% of GDP. Of that, China supplies 21% of our imports, and buys only 7% of our exports. But we have terrible measurement trouble. Trade used to consist of tangible goods, manufactured and raw, but “services” are the rapid growth category in modern economies. That’s what Google does. Apple sells tangibles, but implied sales of its intellectual property — innovation — are fantastically more valuable. Global employment compensation is every day more linked to and compressed by trade and instantaneous electronic price-discovery, brand new in just the last two decades and in that time accelerating at the pace of Moore’s Law.
We should assume the Fed lifts off soon. I hope in September, just to get the first step over with, and to make the Fed look like it knows what it’s doing. But I cannot imagine an inflation problem here or anywhere in a world like the preceding two paragraphs, and the Fed’s continuous rolling-over of its long-term Treasury and MBS holdings should keep mortgage rates low.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-28-2015#sthash.gadoxdV3.dpuf

Whether markets are resolving some of the uncertainties and frights leading to two weeks of chaos, or merely fatigued, they are settling down. Quiet is good.
The US consistently shows more signs of “self-sustaining” growth. In the last seven years a false hope, but apparent now that the Fed can remove another set of its economic training wheels. The net of GDP revisions for the first six months of 2015: we are grinding along at 2.2% annual growth, which is probably the centerline of future prospects. Not accelerating, not fancy, but sustainable.
Housing is in a long, slow recovery, unit sales rising about 6% annually, and prices perhaps 5%. Those numbers cannot pick up until incomes do, especially among the young, but at those levels would not contribute to inflationary overheating for several years. Or, given mortgage credit over-tightening, maybe ever. There is nothing too hot about this economy, with the possible exceptions of student and auto loans. Peanuts.
Inflation is the whole point of Fed operations. Its job is to intercept inflation (or deflation) before it gets going. The Fed’s models have over-predicted both GDP and inflation for seven-straight years, but that stopped-clock may at last have the correct time. Year-over-year core PCE inflation as of July had risen 1.2%, but in May plus .3%, June .1% and July .2% — the last three months account for half of the last year’s rise. If that’s a trend, the Fed has real reason to lift off, not just the yips to get off unnatural, bubble-inflating zero.
As the US economy enters a normal realm, it’s entirely appropriate for the Fed to remove emergency and experimental ease. Two things hold it back: first the weird labor market mismatch, unemployment falling off the low end of the scale but very little growth in incomes. That’s relatively small potatoes, which will resolve themselves. If incomes suddenly take off, then the Fed will come harder and faster; if they stay low, the Fed can move very slowly.
The second Fed-retardant is huge. Or maybe not. The outside world is a mess. In many ways, all of it badly screwed up, and in important places — Europe and Japan — not at all clear how they get out of the traps they are in, no matter how energetic their central banks. China is especially upsetting because it’s in obvious economic difficulty, but will not share honest numbers with the rest of us.
We tend to forget about slow-motion trouble spots, like Japan and Europe. The NYT reported this week that Japan’s declining population has resulted in 8 million abandoned homes. The BOJ’s QE has for a year bought Japan’s government debt at twice the rate of new budget deficit, which itself is half of Japan’s government spending. The BOJ now owns 27% of all Japanese government bonds. Here the Fed owns about 18% of marketable Treasurys and agency MBS, but stopped buying more than a year ago; at the BOJ’s current pace by 2020 it will own 65% of all JGBs. It will have to stop, but when, and to what effect no one knows.
Aside from the slow-rollers… China. The US is the least trade-dependent economy of any major nation, only about 12% of GDP. Of that, China supplies 21% of our imports, and buys only 7% of our exports. But we have terrible measurement trouble. Trade used to consist of tangible goods, manufactured and raw, but “services” are the rapid growth category in modern economies. That’s what Google does. Apple sells tangibles, but implied sales of its intellectual property — innovation — are fantastically more valuable. Global employment compensation is every day more linked to and compressed by trade and instantaneous electronic price-discovery, brand new in just the last two decades and in that time accelerating at the pace of Moore’s Law.
We should assume the Fed lifts off soon. I hope in September, just to get the first step over with, and to make the Fed look like it knows what it’s doing. But I cannot imagine an inflation problem here or anywhere in a world like the preceding two paragraphs, and the Fed’s continuous rolling-over of its long-term Treasury and MBS holdings should keep mortgage rates low.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-28-2015#sthash.gadoxdV3.dpuf

Whether markets are resolving some of the uncertainties and frights leading to two weeks of chaos, or merely fatigued, they are settling down. Quiet is good.
The US consistently shows more signs of “self-sustaining” growth. In the last seven years a false hope, but apparent now that the Fed can remove another set of its economic training wheels. The net of GDP revisions for the first six months of 2015: we are grinding along at 2.2% annual growth, which is probably the centerline of future prospects. Not accelerating, not fancy, but sustainable.
Housing is in a long, slow recovery, unit sales rising about 6% annually, and prices perhaps 5%. Those numbers cannot pick up until incomes do, especially among the young, but at those levels would not contribute to inflationary overheating for several years. Or, given mortgage credit over-tightening, maybe ever. There is nothing too hot about this economy, with the possible exceptions of student and auto loans. Peanuts.
Inflation is the whole point of Fed operations. Its job is to intercept inflation (or deflation) before it gets going. The Fed’s models have over-predicted both GDP and inflation for seven-straight years, but that stopped-clock may at last have the correct time. Year-over-year core PCE inflation as of July had risen 1.2%, but in May plus .3%, June .1% and July .2% — the last three months account for half of the last year’s rise. If that’s a trend, the Fed has real reason to lift off, not just the yips to get off unnatural, bubble-inflating zero.
As the US economy enters a normal realm, it’s entirely appropriate for the Fed to remove emergency and experimental ease. Two things hold it back: first the weird labor market mismatch, unemployment falling off the low end of the scale but very little growth in incomes. That’s relatively small potatoes, which will resolve themselves. If incomes suddenly take off, then the Fed will come harder and faster; if they stay low, the Fed can move very slowly.
The second Fed-retardant is huge. Or maybe not. The outside world is a mess. In many ways, all of it badly screwed up, and in important places — Europe and Japan — not at all clear how they get out of the traps they are in, no matter how energetic their central banks. China is especially upsetting because it’s in obvious economic difficulty, but will not share honest numbers with the rest of us.
We tend to forget about slow-motion trouble spots, like Japan and Europe. The NYT reported this week that Japan’s declining population has resulted in 8 million abandoned homes. The BOJ’s QE has for a year bought Japan’s government debt at twice the rate of new budget deficit, which itself is half of Japan’s government spending. The BOJ now owns 27% of all Japanese government bonds. Here the Fed owns about 18% of marketable Treasurys and agency MBS, but stopped buying more than a year ago; at the BOJ’s current pace by 2020 it will own 65% of all JGBs. It will have to stop, but when, and to what effect no one knows.
Aside from the slow-rollers… China. The US is the least trade-dependent economy of any major nation, only about 12% of GDP. Of that, China supplies 21% of our imports, and buys only 7% of our exports. But we have terrible measurement trouble. Trade used to consist of tangible goods, manufactured and raw, but “services” are the rapid growth category in modern economies. That’s what Google does. Apple sells tangibles, but implied sales of its intellectual property — innovation — are fantastically more valuable. Global employment compensation is every day more linked to and compressed by trade and instantaneous electronic price-discovery, brand new in just the last two decades and in that time accelerating at the pace of Moore’s Law.
We should assume the Fed lifts off soon. I hope in September, just to get the first step over with, and to make the Fed look like it knows what it’s doing. But I cannot imagine an inflation problem here or anywhere in a world like the preceding two paragraphs, and the Fed’s continuous rolling-over of its long-term Treasury and MBS holdings should keep mortgage rates low.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-28-2015#sthash.gadoxdV3.dpuf

The Wild Ride Gets Wilder

Capital Market Updates

 By Louis S. Barnes               Friday, August 21st, 2015

Calm down. Think it over, figure it out. Just because we see confusion and panic out there doesn’t mean we have to sign up.

The media focus is on the stock market. If for no other reason than that, don’t pay much attention to the stock market. If it goes nuts in either direction, the authorities have to get involved, but we’re miles from that.

However, there is one useful hint from the stock market this week: for many months stocks have traded up on bad economic news, thinking that would mean the Fed staying on hold. This week’s news has been awful — so bad that even if the Fed does lift off in September it will likely be an immaterial one-and-done. Now, the benefit of Fed on hold has been overwhelmed by something else, worse than Fed tightening.

We have several choices for that honor: Europe has entered a new, German-driven Greek deal which is ridiculous on its face. Greece will have new elections, but not really a government (or an economy). Pyongyang’s Fat Boy threatens war. Japan’s GDP “unexpectedly” shrank 1.6% in the 2nd quarter despite fantastic QE by the BOJ. A new, modest tsunami of currency devaluations ripple from Asia, too many to count.

At the center: China, of course. China drives everybody crazy because it’s the Saturday Night Live Liar of economic data. The economic/market upset underway would not be so troublesome if we had straight data and clear government intentions. Best I can figure, China began last year a multi-pronged effort to rebalance its economy toward consumption and open markets and away from state-driven investment and credit — and every effort has failed and left each sector in worse shape than to begin with. China used to have a stock market; now it doesn’t. Weaning from state credit has left it with more state credit outstanding and deeper reliance on it. The reputation of the leadership and Party has suffered accordingly.

China is not likely to land hard. If we’ve learned anything in the last decade, it’s that central banks can create relatively stable mountains of IOUs under their carpets. But the chain of events leading to broad market and economic upsets is in play anyway, China’s devaluation the immediate signal that global trade may be in trouble.

China’s consumption of commodities has crested, but the emerging-nation supply chain was calibrated for further increase. The emerging nations are also customers of China, and will buy less, increasing pressure on China. China is a customer of Europe and the US, and will buy less; hence so will they. In the last 25 years global trade has grown faster than GDP, everyone now everyone else’s customer. That global trade conveyor has made everybody rich, especially big corporations with global turnstiles enjoying unimaginable profit margins.

Ordinary cyclical oops-a-daisies are not a big deal, and that’s what this is likely to be. However, markets have the screaming bejabbers at the moment for fear of a reinforcing spiral driven by an incipient trade war becoming a currency race to the bottom. Even that is recurrent and recoverable. The part that’s not: we’ve never gone though an adjustment like this with so much debt outstanding, and deflation nearby.

Back to the Fed. Minutes of its meeting only three weeks ago were released Wednesday, and reveal the Fed properly uncertain then. Today, I assume jaw-dropped.

Exclusion is one way to get close to the heart of the matter. Things about the Fed that are not true: it did not miss its chance to lift off last fall, winter, or spring; if the world is too shaky now for liftoff, then lifting off earlier would leave it too tight now. The Fed’s zero-percent policy and QE did not cause current difficulty — without its heroics 2008-9 we’d be living in caves. Nor the goofy plan to hike now so it can cut later.

The Fed does not have to lift off now, although it might just to shut up the irresponsible jackdaws and their financial creationism. The only element of the US economy flashing red is apparent “full employment,” and the need for pre-emptive liftoff. Nothing else is even amber. Keep it simple: the Fed doesn’t matter now.

The risk to the global trade conveyor exceeds all other risk combined.

Calm down. Think it over, figure it out. Just because we see confusion and panic out there doesn’t mean we have to sign up.

The media focus is on the stock market. If for no other reason than that, don’t pay much attention to the stock market. If it goes nuts in either direction, the authorities have to get involved, but we’re miles from that.

However, there is one useful hint from the stock market this week: for many months stocks have traded up on bad economic news, thinking that would mean the Fed staying on hold. This week’s news has been awful — so bad that even if the Fed does lift off in September it will likely be an immaterial one-and-done. Now, the benefit of Fed on hold has been overwhelmed by something else, worse than Fed tightening.

We have several choices for that honor: Europe has entered a new, German-driven Greek deal which is ridiculous on its face. Greece will have new elections, but not really a government (or an economy). Pyongyang’s Fat Boy threatens war. Japan’s GDP “unexpectedly” shrank 1.6% in the 2nd quarter despite fantastic QE by the BOJ. A new, modest tsunami of currency devaluations ripple from Asia, too many to count.

At the center: China, of course. China drives everybody crazy because it’s the Saturday Night Live Liar of economic data. The economic/market upset underway would not be so troublesome if we had straight data and clear government intentions. Best I can figure, China began last year a multi-pronged effort to rebalance its economy toward consumption and open markets and away from state-driven investment and credit — and every effort has failed and left each sector in worse shape than to begin with. China used to have a stock market; now it doesn’t. Weaning from state credit has left it with more state credit outstanding and deeper reliance on it. The reputation of the leadership and Party has suffered accordingly.

China is not likely to land hard. If we’ve learned anything in the last decade, it’s that central banks can create relatively stable mountains of IOUs under their carpets. But the chain of events leading to broad market and economic upsets is in play anyway, China’s devaluation the immediate signal that global trade may be in trouble.

China’s consumption of commodities has crested, but the emerging-nation supply chain was calibrated for further increase. The emerging nations are also customers of China, and will buy less, increasing pressure on China. China is a customer of Europe and the US, and will buy less; hence so will they. In the last 25 years global trade has grown faster than GDP, everyone now everyone else’s customer. That global trade conveyor has made everybody rich, especially big corporations with global turnstiles enjoying unimaginable profit margins.

Ordinary cyclical oops-a-daisies are not a big deal, and that’s what this is likely to be. However, markets have the screaming bejabbers at the moment for fear of a reinforcing spiral driven by an incipient trade war becoming a currency race to the bottom. Even that is recurrent and recoverable. The part that’s not: we’ve never gone though an adjustment like this with so much debt outstanding, and deflation nearby.

Back to the Fed. Minutes of its meeting only three weeks ago were released Wednesday, and reveal the Fed properly uncertain then. Today, I assume jaw-dropped.

Exclusion is one way to get close to the heart of the matter. Things about the Fed that are not true: it did not miss its chance to lift off last fall, winter, or spring; if the world is too shaky now for liftoff, then lifting off earlier would leave it too tight now. The Fed’s zero-percent policy and QE did not cause current difficulty — without its heroics 2008-9 we’d be living in caves. Nor the goofy plan to hike now so it can cut later.

The Fed does not have to lift off now, although it might just to shut up the irresponsible jackdaws and their financial creationism. The only element of the US economy flashing red is apparent “full employment,” and the need for pre-emptive liftoff. Nothing else is even amber. Keep it simple: the Fed doesn’t matter now.

The risk to the global trade conveyor exceeds all other risk combined.

- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-21-2015#sthash.nvaZrQ6n.dpuf

Calm down. Think it over, figure it out. Just because we see confusion and panic out there doesn’t mean we have to sign up.

The media focus is on the stock market. If for no other reason than that, don’t pay much attention to the stock market. If it goes nuts in either direction, the authorities have to get involved, but we’re miles from that.

However, there is one useful hint from the stock market this week: for many months stocks have traded up on bad economic news, thinking that would mean the Fed staying on hold. This week’s news has been awful — so bad that even if the Fed does lift off in September it will likely be an immaterial one-and-done. Now, the benefit of Fed on hold has been overwhelmed by something else, worse than Fed tightening.

We have several choices for that honor: Europe has entered a new, German-driven Greek deal which is ridiculous on its face. Greece will have new elections, but not really a government (or an economy). Pyongyang’s Fat Boy threatens war. Japan’s GDP “unexpectedly” shrank 1.6% in the 2nd quarter despite fantastic QE by the BOJ. A new, modest tsunami of currency devaluations ripple from Asia, too many to count.

At the center: China, of course. China drives everybody crazy because it’s the Saturday Night Live Liar of economic data. The economic/market upset underway would not be so troublesome if we had straight data and clear government intentions. Best I can figure, China began last year a multi-pronged effort to rebalance its economy toward consumption and open markets and away from state-driven investment and credit — and every effort has failed and left each sector in worse shape than to begin with. China used to have a stock market; now it doesn’t. Weaning from state credit has left it with more state credit outstanding and deeper reliance on it. The reputation of the leadership and Party has suffered accordingly.

China is not likely to land hard. If we’ve learned anything in the last decade, it’s that central banks can create relatively stable mountains of IOUs under their carpets. But the chain of events leading to broad market and economic upsets is in play anyway, China’s devaluation the immediate signal that global trade may be in trouble.

China’s consumption of commodities has crested, but the emerging-nation supply chain was calibrated for further increase. The emerging nations are also customers of China, and will buy less, increasing pressure on China. China is a customer of Europe and the US, and will buy less; hence so will they. In the last 25 years global trade has grown faster than GDP, everyone now everyone else’s customer. That global trade conveyor has made everybody rich, especially big corporations with global turnstiles enjoying unimaginable profit margins.

Ordinary cyclical oops-a-daisies are not a big deal, and that’s what this is likely to be. However, markets have the screaming bejabbers at the moment for fear of a reinforcing spiral driven by an incipient trade war becoming a currency race to the bottom. Even that is recurrent and recoverable. The part that’s not: we’ve never gone though an adjustment like this with so much debt outstanding, and deflation nearby.

Back to the Fed. Minutes of its meeting only three weeks ago were released Wednesday, and reveal the Fed properly uncertain then. Today, I assume jaw-dropped.

Exclusion is one way to get close to the heart of the matter. Things about the Fed that are not true: it did not miss its chance to lift off last fall, winter, or spring; if the world is too shaky now for liftoff, then lifting off earlier would leave it too tight now. The Fed’s zero-percent policy and QE did not cause current difficulty — without its heroics 2008-9 we’d be living in caves. Nor the goofy plan to hike now so it can cut later.

The Fed does not have to lift off now, although it might just to shut up the irresponsible jackdaws and their financial creationism. The only element of the US economy flashing red is apparent “full employment,” and the need for pre-emptive liftoff. Nothing else is even amber. Keep it simple: the Fed doesn’t matter now.

The risk to the global trade conveyor exceeds all other risk combined.

- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-21-2015#sthash.nvaZrQ6n.dpuf

Calm down. Think it over, figure it out. Just because we see confusion and panic out there doesn’t mean we have to sign up.

The media focus is on the stock market. If for no other reason than that, don’t pay much attention to the stock market. If it goes nuts in either direction, the authorities have to get involved, but we’re miles from that.

However, there is one useful hint from the stock market this week: for many months stocks have traded up on bad economic news, thinking that would mean the Fed staying on hold. This week’s news has been awful — so bad that even if the Fed does lift off in September it will likely be an immaterial one-and-done. Now, the benefit of Fed on hold has been overwhelmed by something else, worse than Fed tightening.

We have several choices for that honor: Europe has entered a new, German-driven Greek deal which is ridiculous on its face. Greece will have new elections, but not really a government (or an economy). Pyongyang’s Fat Boy threatens war. Japan’s GDP “unexpectedly” shrank 1.6% in the 2nd quarter despite fantastic QE by the BOJ. A new, modest tsunami of currency devaluations ripple from Asia, too many to count.

At the center: China, of course. China drives everybody crazy because it’s the Saturday Night Live Liar of economic data. The economic/market upset underway would not be so troublesome if we had straight data and clear government intentions. Best I can figure, China began last year a multi-pronged effort to rebalance its economy toward consumption and open markets and away from state-driven investment and credit — and every effort has failed and left each sector in worse shape than to begin with. China used to have a stock market; now it doesn’t. Weaning from state credit has left it with more state credit outstanding and deeper reliance on it. The reputation of the leadership and Party has suffered accordingly.

China is not likely to land hard. If we’ve learned anything in the last decade, it’s that central banks can create relatively stable mountains of IOUs under their carpets. But the chain of events leading to broad market and economic upsets is in play anyway, China’s devaluation the immediate signal that global trade may be in trouble.

China’s consumption of commodities has crested, but the emerging-nation supply chain was calibrated for further increase. The emerging nations are also customers of China, and will buy less, increasing pressure on China. China is a customer of Europe and the US, and will buy less; hence so will they. In the last 25 years global trade has grown faster than GDP, everyone now everyone else’s customer. That global trade conveyor has made everybody rich, especially big corporations with global turnstiles enjoying unimaginable profit margins.

Ordinary cyclical oops-a-daisies are not a big deal, and that’s what this is likely to be. However, markets have the screaming bejabbers at the moment for fear of a reinforcing spiral driven by an incipient trade war becoming a currency race to the bottom. Even that is recurrent and recoverable. The part that’s not: we’ve never gone though an adjustment like this with so much debt outstanding, and deflation nearby.

Back to the Fed. Minutes of its meeting only three weeks ago were released Wednesday, and reveal the Fed properly uncertain then. Today, I assume jaw-dropped.

Exclusion is one way to get close to the heart of the matter. Things about the Fed that are not true: it did not miss its chance to lift off last fall, winter, or spring; if the world is too shaky now for liftoff, then lifting off earlier would leave it too tight now. The Fed’s zero-percent policy and QE did not cause current difficulty — without its heroics 2008-9 we’d be living in caves. Nor the goofy plan to hike now so it can cut later.

The Fed does not have to lift off now, although it might just to shut up the irresponsible jackdaws and their financial creationism. The only element of the US economy flashing red is apparent “full employment,” and the need for pre-emptive liftoff. Nothing else is even amber. Keep it simple: the Fed doesn’t matter now.

The risk to the global trade conveyor exceeds all other risk combined.

- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-21-2015#sthash.nvaZrQ6n.dpuf

Premier Mortgage Group – A Division of Cherry Creek Mortgage

- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-21-2015#sthash.nvaZrQ6n.dpuf

Premier Mortgage Group – A Division of Cherry Creek Mortgage

- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-21-2015#sthash.nvaZrQ6n.dpuf

Calm down. Think it over, figure it out. Just because we see confusion and panic out there doesn’t mean we have to sign up.

The media focus is on the stock market. If for no other reason than that, don’t pay much attention to the stock market. If it goes nuts in either direction, the authorities have to get involved, but we’re miles from that.

However, there is one useful hint from the stock market this week: for many months stocks have traded up on bad economic news, thinking that would mean the Fed staying on hold. This week’s news has been awful — so bad that even if the Fed does lift off in September it will likely be an immaterial one-and-done. Now, the benefit of Fed on hold has been overwhelmed by something else, worse than Fed tightening.

We have several choices for that honor: Europe has entered a new, German-driven Greek deal which is ridiculous on its face. Greece will have new elections, but not really a government (or an economy). Pyongyang’s Fat Boy threatens war. Japan’s GDP “unexpectedly” shrank 1.6% in the 2nd quarter despite fantastic QE by the BOJ. A new, modest tsunami of currency devaluations ripple from Asia, too many to count.

At the center: China, of course. China drives everybody crazy because it’s the Saturday Night Live Liar of economic data. The economic/market upset underway would not be so troublesome if we had straight data and clear government intentions. Best I can figure, China began last year a multi-pronged effort to rebalance its economy toward consumption and open markets and away from state-driven investment and credit — and every effort has failed and left each sector in worse shape than to begin with. China used to have a stock market; now it doesn’t. Weaning from state credit has left it with more state credit outstanding and deeper reliance on it. The reputation of the leadership and Party has suffered accordingly.

China is not likely to land hard. If we’ve learned anything in the last decade, it’s that central banks can create relatively stable mountains of IOUs under their carpets. But the chain of events leading to broad market and economic upsets is in play anyway, China’s devaluation the immediate signal that global trade may be in trouble.

China’s consumption of commodities has crested, but the emerging-nation supply chain was calibrated for further increase. The emerging nations are also customers of China, and will buy less, increasing pressure on China. China is a customer of Europe and the US, and will buy less; hence so will they. In the last 25 years global trade has grown faster than GDP, everyone now everyone else’s customer. That global trade conveyor has made everybody rich, especially big corporations with global turnstiles enjoying unimaginable profit margins.

Ordinary cyclical oops-a-daisies are not a big deal, and that’s what this is likely to be. However, markets have the screaming bejabbers at the moment for fear of a reinforcing spiral driven by an incipient trade war becoming a currency race to the bottom. Even that is recurrent and recoverable. The part that’s not: we’ve never gone though an adjustment like this with so much debt outstanding, and deflation nearby.

Back to the Fed. Minutes of its meeting only three weeks ago were released Wednesday, and reveal the Fed properly uncertain then. Today, I assume jaw-dropped.

Exclusion is one way to get close to the heart of the matter. Things about the Fed that are not true: it did not miss its chance to lift off last fall, winter, or spring; if the world is too shaky now for liftoff, then lifting off earlier would leave it too tight now. The Fed’s zero-percent policy and QE did not cause current difficulty — without its heroics 2008-9 we’d be living in caves. Nor the goofy plan to hike now so it can cut later.

The Fed does not have to lift off now, although it might just to shut up the irresponsible jackdaws and their financial creationism. The only element of the US economy flashing red is apparent “full employment,” and the need for pre-emptive liftoff. Nothing else is even amber. Keep it simple: the Fed doesn’t matter now.

The risk to the global trade conveyor exceeds all other risk combined.

- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-21-2015#sthash.nvaZrQ6n.dpuf

Calm down. Think it over, figure it out. Just because we see confusion and panic out there doesn’t mean we have to sign up.

The media focus is on the stock market. If for no other reason than that, don’t pay much attention to the stock market. If it goes nuts in either direction, the authorities have to get involved, but we’re miles from that.

However, there is one useful hint from the stock market this week: for many months stocks have traded up on bad economic news, thinking that would mean the Fed staying on hold. This week’s news has been awful — so bad that even if the Fed does lift off in September it will likely be an immaterial one-and-done. Now, the benefit of Fed on hold has been overwhelmed by something else, worse than Fed tightening.

We have several choices for that honor: Europe has entered a new, German-driven Greek deal which is ridiculous on its face. Greece will have new elections, but not really a government (or an economy). Pyongyang’s Fat Boy threatens war. Japan’s GDP “unexpectedly” shrank 1.6% in the 2nd quarter despite fantastic QE by the BOJ. A new, modest tsunami of currency devaluations ripple from Asia, too many to count.

At the center: China, of course. China drives everybody crazy because it’s the Saturday Night Live Liar of economic data. The economic/market upset underway would not be so troublesome if we had straight data and clear government intentions. Best I can figure, China began last year a multi-pronged effort to rebalance its economy toward consumption and open markets and away from state-driven investment and credit — and every effort has failed and left each sector in worse shape than to begin with. China used to have a stock market; now it doesn’t. Weaning from state credit has left it with more state credit outstanding and deeper reliance on it. The reputation of the leadership and Party has suffered accordingly.

China is not likely to land hard. If we’ve learned anything in the last decade, it’s that central banks can create relatively stable mountains of IOUs under their carpets. But the chain of events leading to broad market and economic upsets is in play anyway, China’s devaluation the immediate signal that global trade may be in trouble.

China’s consumption of commodities has crested, but the emerging-nation supply chain was calibrated for further increase. The emerging nations are also customers of China, and will buy less, increasing pressure on China. China is a customer of Europe and the US, and will buy less; hence so will they. In the last 25 years global trade has grown faster than GDP, everyone now everyone else’s customer. That global trade conveyor has made everybody rich, especially big corporations with global turnstiles enjoying unimaginable profit margins.

Ordinary cyclical oops-a-daisies are not a big deal, and that’s what this is likely to be. However, markets have the screaming bejabbers at the moment for fear of a reinforcing spiral driven by an incipient trade war becoming a currency race to the bottom. Even that is recurrent and recoverable. The part that’s not: we’ve never gone though an adjustment like this with so much debt outstanding, and deflation nearby.

Back to the Fed. Minutes of its meeting only three weeks ago were released Wednesday, and reveal the Fed properly uncertain then. Today, I assume jaw-dropped.

Exclusion is one way to get close to the heart of the matter. Things about the Fed that are not true: it did not miss its chance to lift off last fall, winter, or spring; if the world is too shaky now for liftoff, then lifting off earlier would leave it too tight now. The Fed’s zero-percent policy and QE did not cause current difficulty — without its heroics 2008-9 we’d be living in caves. Nor the goofy plan to hike now so it can cut later.

The Fed does not have to lift off now, although it might just to shut up the irresponsible jackdaws and their financial creationism. The only element of the US economy flashing red is apparent “full employment,” and the need for pre-emptive liftoff. Nothing else is even amber. Keep it simple: the Fed doesn’t matter now.

The risk to the global trade conveyor exceeds all other risk combined.

- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-21-2015#sthash.nvaZrQ6n.dpuf

Gave It All Back

Capital Markets Update

Premier Mortgage Group                 August 14th, 2015

Mortgage interest rates increased slightly this past week as economic data was mostly stronger than expected. Economic data stronger than expected included June Wholesale Inventories, July Retail Sales, June Business Inventories, the July Producer Price Index (PPI), and July Industrial Production. Business Inventories increased the most since January of 2013. PPI increased more than expected but was actually down 0.8% year over year. Core PPI, excluding the food and energy components, was up 0.6% year over year. Economic data weaker than expected included weekly jobless claims, July Capacity Utilization, and the University of Michigan Consumer Sentiment Index. The Treasury auctioned $64 billion of 3 Year Notes, 10 Year Notes, and 30 Year Bonds which were met with mixed demand. China devalued its currency to help stimulate exports to strengthen its economy. Greece continues to negotiate with creditors regarding additional bailout funds which it will need to be able to make a payment due to the European Central Bank on August 20th.

The Dow Jones Industrial Average is currently at 17,446, up about 70 points on the week. The crude oil spot price is currently at $42.44 per barrel, down over $1 per barrel on the week. The Dollar weakened versus the Euro and strengthened versus the Yen on the week.

Next week look toward Monday’s Housing Market Index, Tuesday’s Housing Starts, Wednesday’s Consumer Price Index (CPI) and FOMC Minutes, and Thursday’s Jobless Claims, Philadelphia Fed Survey, and Existing Home Sales as potential market moving events.

Another Choppy Week

Capital Markets Update

By Louis S. Barnes               Friday, August 7th, 2015

 

Whither long-term interest rates? Everyone building a new home, or thinking of buying anything wants to know. What is the up-side risk, Fed on the warpath?

 

Long-term rates rose in anticipation of the Fed meeting concluding on Wednesday. Markets got the hawkish post-meeting statement they expected, but since mid-morning Thursday long-term rates… fell. What’s up with down?

 

The Fed’s statement changed only one word which mattered, adding “some” as noted: “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market….” The Fed never adds words without purpose. Bond market cynics feel the Fed is so determined to liftoff that it might as well have inserted “any.”

 

Unless the economy flat stalls between now and fall, the Fed will invent theory as necessary to justify a rate hike. As of Wednesday. Then the ground shifted.

 

On Thursday 2nd quarter GDP arrived a thin 2.3% annualized, and Q1 was revised to a 0.6% annual gain, initially reported as a similar contraction. Optimists’ claims of a strong rebound after a bad winter — absurd, although they are still in shameless denial.

 

However, with the quarterly figure came a benchmark revision: from 2011-2014 GDP did not grow at 2.3% annually, only 2.0% — optimists and the Fed itself throughout the period predicting acceleration above 3.0%.

 

Then this morning, the sleepy last-Friday in July, everyone of importance in the Hamptons, the Employment Cost Index for Q2: up a negligible 0.2%. The ECI is the best indicator of labor compensation, inclusive of benefits. This Q2 figure is the lowest since 1982 (then in the pit of previously the worst recession since the Depression).

 

Now back away from this week’s micro detail. And please do not read the following as negative — the conclusion is the good news that long-term rates are going to stay down, and recession risk is minor.

 

Back away as far as it’s possible to go: the Fed’s job is to encourage the most rapid economic growth possible while keeping inflation under control. Thus the first question before the Fed every day: How fast is that? Economists speak of “potential” and “capacity.” The most over-complicated terminology: the non-accelerating inflation rate of unemployment, “NAIRU.” In English: How low can unemployment go before employers pay too much, and inflation? The current 5.3% is already at NAIRU low.

 

Back to “too fast,” the most basic calculation: add the rate of productivity increase to population growth. If GDP rises faster than that, inflation results. US population is growing about 1% per year, and productivity is poor, only about 1%, way off long-term trends. Add ‘em up, get 2%, and you have the speed limit of the US economy.

 

Ouch. Last week the Fed fat-fingered a release of the Fed staff’s study of the same issue. Historically the Fed staff does fairly well, better than private economists and the regional-Fed presidents. Best of all, they reflect the intentions of the Fed Chair (a slightly cooked book, circular). The staff’s estimate of annual GDP potential in the next five years: 1.80%. That means our economy is growing too fast now.

 

This line of thought has cascaded into the bond market in slow motion. Until the last two weeks, the working assumption was a Fed that wanted to lift off for fear of financial market bubbles inflated by zero-cost money, to begin a long process gently so as not harshly later, and to take out insurance against age-old NAIRU fear that a too-tight labor market would beget too-fast wage growth, even though no such thing is evident.

           

Now it seems the Fed intends to put on brakes, enforce a 2% limit late in 2016. The stock market bozos and other optimists don’t get it, but old-time bond-market people drool happily at the prospect of a Fed more likely to err on the tight side.

 

Mark me down with the droolers. The Fed is stuck, using measures of a bygone US economy, and underestimating external effects on us. Today the outside world is in a dangerous trade war, competitively devaluing currencies, labor, and materials. The world needs more stimulus, not less; and Lord knows, better public policy everywhere.