Alan Moore Commentary 2-1-2011 alanmoorecommentary.blogspot.com
Ben Bernanke has become more titillating than Kim Kardashian; last month he bought $60B of bonds in the market to keep interest rates low and spur the economy, and Kim also wore spurs in her recent video to boot. In either case, I think we are being taken for a ride. Loose she goes and loose the money flows. Booty-full, the market loves the Kardashian-like monetary policy known as QE-2, which is a metaphor for a Fed mulligan; albeit, I am amazed watching the Kardashians on TV, as their family dysfunctions into fame, while amassing a fortune; ditto for the Palins. Both households seem to be rolling in cash, manipulating the media into more and more fame and fortune. WikiLeaks even published an email from Kim to Ben Bernanke asking him how to leverage her assets, and I quote: “Mr. Bernanke, I would like to re-capitalize my 10-status into more “balanced and sustainable growth”. What is your vision of a ‘ten’?” Bernanke replied: “five two’s all at once.” It is so insidious the way he lowers his standards, letting any quantitative tail wag the dog. He has definitely primed the pump, the gas pump that is.
In another of situation of global cleavage, as Bernanke embraced QE-2 last month, China tightened monetary policy more; this was announced: MarketWatch 1-14-11: “China raised the reserve requirement yesterday. The ratio, which determines the amount of funds banks must put aside as reserves, will rise to 19% for major lenders. The hike marks the seventh such increase since 2009 and comes three weeks after the PBOC unveiled a surprise interest-rate hike on Christmas Day”
Undaunted, Wall Street firms are unified in forecasting the S&P Index will hit 1430 in 2011; Gary Shiller--- the economist who forecasted the bursting of the housing bubble correctly---- is forecasting the same 1430 number, but that it will get there in the year 2020 (Financial Times, 1-6-11). Meredith Whitney, who forecasted the banking collapse in 2009, is saying there will be major Muni bond defaults (by cities and counties) this year as state budgets collapse and they will need a bailout. We have a sideways economy that historically is valued by the stock market at 13 or 14 times earnings; and, certainly profit margins can’t be maintained if wages start to rise; however, we should be so lucky. The S&P Index is now going for 18 times trailing earnings and that isn’t cheap. The idea that bonds are bad, and therefore stocks are good, is not necessarily a winner. Ergo, I am neutral in cash, only seeing two profitable macro trades in 2011: either the unemployment rate falls a point or two and the economy picks up, which would cause long-term bonds to drop 20% due to a rise in interest rates, or else things don’t pick up and the stock market goes down 20% in disappointment, reverting back to 15 times earnings. If you are 50/50 allocated long between the two, you should break even: a junction may be reached with the debate over raising the debt ceiling in March. Gold has already reacted a bit by falling over a hundred dollars an oz.…. Gold likes big deficits and ultra low interest rates which spells higher inflation. In fact, gold inversely correlates to rising real interest rates 81% of the time and only 19% directly correlates to inflation (WSJ, 1-19-2011, p. C14) ------when gold sees a pickup in consumer confidence and spending it extrapolates that into higher interest rates and sells off? If the Fed actually raises rates due to an increase in the CPI, gold will crash. Even if the Fed stops doing QE-2, gold will fall in an inflation-risk-off trade. Perhaps gold bugs are already looking at tightening monetary policy in Asia and Brazil and seeing it as a worldwide trend toward anti inflationary policy; certainly the ‘stagflating’ US economy and QE-2 are not sending the price of gold down.
Although the mainline CPI remains tame, food inflation is getting to be a world-wide catastrophe. Recently in Japan’s Tokyo fish market, a Tuna weighing 714 pounds was sold to a restaurant for $400,000 ($560/lb); that’s some sushi! Coffee, wheat, rice, orange juice and just about every other commodity is up 30% over the last year. Rents even rose in 2010 because all those foreclosed people had to move into apartments. Health care increased 11% and gasoline prices are well over $3 per gallon; a move from 3 to $4 is tantamount to an additional $400 million tax on Americans. The short-term saving grace is that interest rates would go up more if the Fed failed to stay QE-loose. Even so, there is one plausible scenario which could cause our rates to drop for a few months---- another European debt scare coming out of Spain. For sure, you can’t have strong economic growth without more inflation, given the liquidity in the banks. Also, Fannie Mae is still only requiring 3% down to buy a house, so government policy is geared to creating more inflation and more bubbles. Canada, on the other hand, increased the down payment requirement to 15% last month. Not one bank failed in Canada in 2009 because they never had a housing bubble to contend with. Even with no home problem, the average Canadian household owes 148% of income, which is more than the average American household (Financial Times, 1-24-11). Something has to give in Canada and it isn’t home prices; commodities had better stay up though.
The idea that the huge amount of money on corporate balance sheets will be unleashed in a rush of capital investment is not going to happen quickly. Over the last decade, the excess cash was typically used for stock buybacks, which ended up being a waste of resources. Larger companies outsourced expansion to India and china and there is no reason for that to stop. Case in point, the hottest selling gadget in America is the Apple iPhone, and it is made in China. On the other hand, small companies, unable to outsource, have generated the bulk of domestic jobs over the last year. Otherwise, with credit tight, all businesses will continue to maintain a high level of liquidity in order to not be dependent on the banks should another downturn occur. If they payout the cash in higher dividends, it gets taxed to the recipients, and also establishes an obligation that must be maintained to appease shareholders in the future. Since the future is still cloudy, there is a good reason to hold more cash than normal. Therefore, the big pop in investment that Wall Street is promoting will probably be a squeaker in 2011. As far as unemployment is concerned, there are 500k unemployed engineers in this country, their jobs are now in Asia. Do you think they will ever be rehired when American engineers are paid 3 times their counterparts in India; although, India is catching up fast with 15% wage inflation.
This was announced concerning the national debt which is fast approaching 100% of GDP:
Geithner says debt limit may be hit by March 31 by Greg Robb | ||
WASHINGTON (MarketWatch) -- Treasury Secretary Timothy Geithner said Thursday that the U.S. could hit the $14.3 trillion debt ceiling as early as the end of March. In a letter to Senate Democratic Leader Harry Reid, Geithner said the government right now has room to borrow about $335 billion. It is most likely that the debt ceiling would be hit between March 31 and May 16, Geithner said. "This means it is necessary for Congress to act by the end of the first quarter," Geithner said | ||
In addition to raising the debt ceiling, the Federal Government will certainly bail out California and other states that are collapsing by deploying a disguised QE-3 late in the year in form of federal guarantees. However, nothing the politicians do will help the housing market or employment and there is no “exit policy” that can be launched by the Fed without throwing us back into recession hell. Quantitative easing will continue until our Greece-like debt crisis arrives years down the road. Albert Camus explained this situation existentially in his play “No Exit”. Bernanke, Congress and Wall Street are the characters living that drama………. Read it and fear. Metaphorically for the play, Congress needs Bernanke to keep accommodating the spending deficits with QE; Bernanke needs the Wall Street banks to start making more loans to kill the liquidity trap in order to exit QE. The banks need Bernanke to keep buying bonds in the market to maintain a steep yield curve, so they can make abnormal spreads on loans, thereby inducing them to increase credit to small businesses, which is supposed to juice GDP and increase tax revenues and reduce the deficits. They all despise each other’s ideology, but can’t go it alone, and there is ‘no exit’ from this hellish merry-go-round. Quantitative Easing is with us for the “Camus” moment; in other words, until hell freezes over. In the mean time, Wall Street is in stock market heaven with the Dow reaching 12,000, at least until the hiccup last Friday caused by the Egypt thing, which could be a feared “Black Swan”.
The Government Employment Report was issued on January 7th for December and it was a downer: only 103,000 jobs were created which was took the joy off of the ADP jobs report two weeks earlier that had tooted a 297,000 number, which caused the stock market to rally 260 points that day. However, from a government poll of 60,000 households it was determined the unemployment rate fell from 9.8 to 9.4%. Of course that poll drops people who respond to the telephone query with: “I ain’t even looking for a job anymore; it’s a waste of time”.
The employment report actually contains two surveys: a survey of employers and a survey of households. The employer’s one revealed an increase of 103k new jobs, which included government workers, unlike the ADP payroll report. The household survey determines the unemployment rate, which found that 297,000 new jobs were created in December (about the same as the ADP report); but the survey also netted out 260,000 from the 139 million in the total workforce who said they were no longer looking for a job. Adding the two together and dividing the sum by 139 million yielded a drop of four tenths in the unemployment rate. That was how it was figured. The difference between the 103k employer survey, and 297k in the household one, was not explained. Probably it is because of a bias toward polling larger companies versus small businesses; the ADP report is biased toward small businesses, who must be hiring at a faster rate than larger companies that have all the cash. When the larger companies hire, they hire in Asia. The problem with the use of a household survey is that only after the unemployed worker goes over the 99-week benefit period, will he admit to not looking for a job any longer. Before that time, he must say he is looking for a job to continue collecting the government benefit. Since Congress extended the benefit period in late December, we should expect the labor force to rebound in January and the unemployment rate to go up again, just because more people will say they are looking for job to qualify for another check. All the while, actual job creation is stuck at around 100k a month (netting large companies with small businesses and government workers), is not enough to lift GDP going forward----- not that that has anything to do with the stock market.
The biggest gains in employment have been made in the leisure and health care sectors; more people are traveling and getting sick, probably from their food-stamp-like diets, because more people are collecting food stamps that ever before. Manufacturing has been a bright spot with significant employment gains in such companies as Boeing, Deere, GE, and Caterpillar, but the manufacturing sector only employs 11.7 million workers out of the total 139 million; how much can manufacturing really affect employment? In China, on the other hand, manufacturing represents 40% of the total workforce and they have a big problem if their currency rises and exports fall as a consequence. All you ever hear about China is that they have a huge trade surplus; did you know they also have a fiscal deficit of 2.2% of GDP, meaning they are also spending more than they collect in taxes. There are only three major countries I know of that have fiscal surpluses, Norway, Hong Kong and Saudi Arabia. Sweden, with a negligible deficit, is actually the most socialistic, but is in the best bank-shape of all; however, Swedish households owe 165% of incomes versus 135% in the USA (LT, 1-31). It is a myth that socialism will bankrupt a country, it takes fiscal mismanagement to do that; certainly Germany (3% deficit) is not far behind Sweden in their economic structure. To their credit, Sweden’s and Germany’s student math and science scores rank in the top ten in the world, while America is 27th, right above Mexico---every other developed country is producing smarter children than us. America has been subject to government risk-dampening, socialism creep for 40 years and seems unaware of the gravity of the situation, because it has evolved so slowly; like the turtle who was mugged by a gang of snails while walking down an alley in New York. A police detective came to investigate and asked the turtle if he could explain what happened. The turtle looked at the detective with a confused look on his face and replied “I don't know. It all happened so fast.”
Not that cutting the corporate tax rate will reign in socialism and make it better; if that were true, Ireland, with only a 12.5% tax rate, would be the best place in Europe to open a business and should have the lowest unemployment rate….it doesn’t. Or, perhaps we could do an old-fashion, Republican-supply-side tax cut to make the economy grow, although Congress could never agree on cutting spending and the deficit would just get worse. No, the GDP cure is not as simple as just reducing the tax rates; it always comes down to living within the means, which is a function of national willpower, and we have very little of it. Here is a novel idea: why not methodically cut spending until we have a surplus, and then reduce taxes to sop of the surplus? Alternatively, we can’t increase taxes and expect to collect more tax revenue in a poor economy, even Obama can see that. The health care bill, tax cuts, ballooning deficits, booms, market collapses: they all happen so fast for a turtle-head like me. My only consolation is that the turtle beat the hare in the race. Cash is cool until inflation appears to destroy its’ value: It hasn’t yet, and I will continue to wait for rising inflation before putting money into bonds or stocks. When the Consumer Price Index finally shocks the markets, all hell will break loose and there should be something worth buying then. If that scenario doesn’t happen, then don’t take my advice. Over the years, I have made every investment mistake in the book; and not to boast, I accomplished that feat without going broke.
Defaults are part of laissez faire capitalism, bailouts represent socialism creep. Defaults are good because the people that make bad investments directly suffer the losses, thereby making investors weigh risk versus reward carefully, causing bubbles to be pricked early on. Bailouts shift the burden of defaults to the public sector, specifically to the ones who pay taxes. Portugal was bailed out in January with a mere 1.3B Euros, Spain may require 200B: the European Union has no other option to prevent a run on the banks. All Europe needs to keep growing, is some real estate inflation and the recurring bailouts could work, though bailouts have given deflation a bad name. America had deflation through the 19th century, a time in which GDP and real household incomes grew the most in our history despite the Civil War interruption; it was also the century in which the industrial revolution occurred and business grew the most, while taxes were the least. However, we did not have massive debts to liquidate back then and people lived within their means because they didn’t have credit cards (Marc Faber, 1-12-11, Palm Beach). Prior to the 1970s, high inflation is something we only experienced during times of war. The difference today is in the debt levels that are carried by households to maintain the living standard to which they think they are entitled.
Whether faced with deflation, inflation or just high taxes, the rich everywhere can take care of themselves; that is why they became rich. In America, the top 1% now captures 25% of the nation’s 1040-reported- income: that is double what it was 30 years ago. On the other hand, the unemployment rate in Spain is 20% and a quasi-default won’t make it any worse in the private sector; albeit, government payrolls would implode from resulting austerity budgets---- as they should. A sovereign default just means the bonds will take a haircut of 20 to 30% and not payoff 100% at maturity----governments don’t really go bankrupt, they just get a bad credit rating which forces them to reduce spending and endure some deflation. No matter what, we will have a Spanish debt scare within the next three months and the only question is the intensity. This means the Euro is in worse shape than the dollar until the Spain thing blows over. The new European Stability Fund is loaded with 440 billion Euros and Spain could easily sop up half of it. Here is the irony: 28% of the funding of the Stability Fund is supposed to come from Italy and Spain, the very ones in trouble (FT 1-12-11). Germany has only committed to kick in 27%, so I don’t see how the plan can work for long. Unlike Spain, Congress can just raise the debt ceiling and keep spending, and they surely will; because the politicians will be swayed by Geithner’s threat that the Government will run out of money in May, which is a lie. The Treasury could sell the $275 billion in collateralize mortgage obligations they bought during the 2009 collapse and also not fund the $250B government worker pension contribution due in June. That’s over 500B in additional cash; besides, the tax revenues cover the interest payments on the national debt twenty times over. That is no threat of default if the ceiling is not raise; I would argue that there is a greater threat if it is. I would also argue that there is not a private sector taxpayer in the country that would not vote to cut government pensions, but the issue will never be put a vote: It is one of those “earmark” things. What can you expect when we have government by the lobbyists for the people that pay the lobbyists. Nevertheless, I would like to hear what Joe the Plummer has to say about pension cutting--------- and where is Joe when the taxpayers need him?
The bottom line of how we are doing is in the statistics:
On Page A2 of the WSJ on 1-28-2011 was reported:
“New unemployment claims rose 51,000 for the week ending January 21st.
The four week moving average of claims increased 15,750 to 428,750.
Continuing unemployment benefit claims rose 94,000
GDP for the 4th quarter came in at 3.2%
Durable goods orders fell 2.5% last month
Mortgage applications fell 12%”
This is the economy that stimulus and quantitative easing has built.
