Finance
Gimme Gimme Gimme
The equity and bond markets the past week have reverted back to their pre-Fed cut state. Just like a crack or heroin addict who's last fix has worn off, the money houses and speculators are asking, no demanding, that the Federal Reserve once again cut the funds rate by at least 25bp - just a month after they reduced it by 50bp. Why? Apparently because Ben Bernanke's schwartz was smaller than the demographics pounding the housing market into submission. That and Wall Street has yet to find buyers for the mountain of collateralized mortgage and leveraged buyout debt they would like to get off the books.Yet since that rate cut what have we seen? The DJIA has risen 500 points or 3.8% (at one point it was 900 pts), the yield curve has steepened and the front of curve is either side of 4.0%, the dollar has continued its merry plummet (down 3.9% against the Euro), corn prices are 10% higher, sugar +5.6%, palladium +13.4%, aluminum +7.3% and gold + 10.7%. Ok - lumber is -5.5% and wheat is flat. But if the complete lack of parking spaces at each shopping center and mall we drove to Sunday mid-afternoon (we recorded the football game so don't be too alarmed) is any indication of retail activity - the consumer is out there in force, in a big way. To say we were shocked is an understatement. Where is the money coming from? Rising wages? Credit card lines?
So will the Fed give the crack addicts another fix and feed the inflation bear at the same time? Or will some common sense prevail and they walk away after prescribing some long term rehab for the housing (and bond) markets?
Bernanke Shock
Did Bernanke rain on Wall Street's day again? A number of comments came out of his speech last night with the main stream media seeming to pick up on 'possible additional Fed rate cuts' as a good lead. We're not quite sure how they put that together, except perhaps as a result of most interviews being with mortgage lenders or others associated with that industry who have a vested interest in the Fed doing just that. However, what probably has Wall St. a bit more concerned is Bernanke's observation that while the broader financial markets have appeared to stabilize, those directly related to housing are still in poor shape. No shock there as the ills in the housing market and the associated lending/derivatives markets will only be fixed by the passage of time, not cheaper overnight rates. In addition, Bernanke made a very unsavory comment - that the Fed may in fact need to take back the 50bp cut from last month should inflation remain elevated or increase.With energy prices remaining high (oil at a record), gold over $750, grains near record highs or at least much higher than the prior year and most metals in the same boat it is no wonder the Fed remains concerned about inflation. In addition, the producer price index that was reported last week showed a large jump in the core crude goods component. That is inflation down the road. Labor costs as reported in the monthly NFP data were also elevated.
Last, the very recent trend in the stock market has been to buy US companies which have large exports, especially to the Eurozone. However, with ECB retaining a firm policy stance and the IMF indicating a slowdown in European growth is a distinct possibility, Wall Street may find themselves holding fools gold once again.
September Payrolls
Well, well. Perhaps the markets will learn to be more cautious in their interpretation of financial data? We wrote last weekWe view payroll data as suspect as it is less than clear the reduction in payroll growth comes from companies pulling back or instead, simply a growing shortage of skilled labor.Today the Labor Department reported that September payrolls came in slightly higher than expectations at +110,000 vs a market consensus of +100,000. Nothing too surprising there. However, August was revised to show a gain of 89,000 instead of the originally reported loss of 4,000 jobs (which at the time was a substantial 'miss'). We repeat again - any one who a) trusts the labor department data set and b) believes job creation figures still reflect accurately economic activity is fooling them self. The payroll data is subject to some of the most major 'corrections' of any government statistic and the underlying methodology is not to be trusted. In addition, having been at or above what economists consider full employment for a period of years, a reduction in payroll growth may reflect a shortage of skilled workers, not a slackening of economic activity. And the continued increases in earnings (of those surveyed) lends credence to this view - labor costs are rising reflecting more demand than supply of workers. In fact, the September figure is one of the larger ones we have seen of late, a 4.8% (annual) increase and 4.1% year/year.
There will be no further Fed cuts this year unless retail sales/consumer spending falls off the cliff. Inflation is alive and well, the dollar continues to decline and the economy remains strong - subprime/arm 'crisis' or not.
Greenspan On Rates
From a speech last night come these gems:"Central bank policies are changing and are going to have to change because the cost of being wrong if you lower rates is so much greater than when I was chairman," Greenspan said, in a speech in London sponsored by media company Bloomberg L.P. Grenspan said that because the balance between inflation and unemployment is deteriorating, ever higher rates are needed to hold inflation under control. This, he said, limits the ability of central banks to cut rates. Source: DJ wire
A bit self-serving as we don't think things are that dramatically different now than the short while ago when he was chairman of a Federal Reserve that put short rates at 1%. However, it is a point we have written about often - most of the systematic problems of the past 10 years can be traced to excess growth in the money supply and fire sale interest rates. Better late than never Mr. Greenspan.
