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InvestmentFOMC Federal Reserve
« Previous 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Next » » Normxxx - Turning the screws... Markets about to turn the screws on the Fed?
Below is an extract from a commentary originally posted at www.speculative-investor.com on 25th October 2006. A massive credit expansion facilitated by the Fed's monetary largesse fueled one of the world's greatest ever stock market bubbles, and when this bubble eventually went 'pop' in 2000 the Fed facilitated an even greater credit expansion in an effort to mitigate the economy-wide effects of the bursting stock market bubble. At that point the credit expansion began to impact other markets to a much greater extent than the stock market bubble, causing a juvenile real estate boom to develop into the 'big daddy' variety and setting in motion major upward trends in commodity prices. After two years of large rises in the prices of houses and commodities, the Fed began to fear the consequences of the inflation it had worked so hard to create. It therefore began to apply some gentle pressure to the monetary brakes via numerous baby-step hikes in the official interest rate, but thanks mainly to the easy-money policies of other central banks- primarily the Bank of Japan- the Fed's attempts to stabilise prices came to almost no avail. It wasn't until the second quarter of this year, when the Bank of Japan began to join in the monetary tightening campaign, that tighter monetary policy began to take a significant toll. At that point commodity prices reversed course and the nascent downturn in the real estate market became more pronounced. With commodity prices appearing to have set major peaks, with the US yield curve having become inverted, and with the housing market having gone from extremely hot to moderately chilly, the Fed put its rate-hiking program on hold. If the stock and bond markets are to be believed, then the Fed got it just right. That is, the majority of stock and bond market participants seem to be operating under the assumption that the Fed ended its monetary tightening at exactly the right time: late enough to eliminate the inflation threat and remove the speculative froth from the property market, but not so late as to severely curtail the pace of corporate earnings growth and bring about a major downturn in housing prices. The consensus that the Fed 'got it just right' is evidenced by the performance of what we call the "Expected CPI" (the difference between the yield on a standard 10-year Treasury Note and the yield on an inflation-protected 10-year Treasury Note). As illustrated by the following chart, the "Expected CPI" has spent the past three years oscillating between 2.25% and 2.70%. It moved up to the top of its 3-year range during the second quarter of this year, but has since drifted back to near the bottom of this range alongside corrections in some high-profile commodities and rallies in financial assets (stocks and bonds). http://www.321gold.com/editorials/savill... But how realistic is the prevailing "Goldilocks" view? Or, putting it another way, what are the chances of the US economy actually being relatively unscathed by the most irresponsible monetary and fiscal policies since the days of F. D. Roosevelt? We don't think the chances are good. In our opinion there is a high probability of the financial markets and/or the US economy doing something to let the Fed know, in no uncertain terms, that it ended its rate hiking either too soon or too late. We actually don't think there's any possibility that the Fed ended its rate hiking campaign too late, but if the US economy plunges into a severe recession during 2007 then the collective finger of blame will no doubt be pointed at the Fed's last one or two rate hikes. This is because few people will realise that it was the flood of easy money that preceded the modest monetary tightening, and not the monetary tightening, that paved the way for the downturn. In other words, if events unfold in this way then the finger of blame will be pointed in the right direction for the wrong reason. The way things are going, however, there appears to be a much greater chance of the markets doing something that makes it look like the Fed stopped its rate hiking too early. In particular, the most likely time-window for cyclical lows in gold, gold stocks, copper and oil ends over the next couple of weeks, and with the notable exception of oil these markets have held above their June lows. If they soon begin to trend higher then in all likelihood so will the "Expected CPI", and by January the Fed might well be in the position where it is forced to resume its rate hiking to quell the surge in inflation expectations and avoid a consequential breakdown in the bond market. And if there's a sufficient inflation scare to provoke a resumption of the rate hikes then the entire "Goldilocks" thesis falls apart. In summary, we doubt that the Fed will be able to smoothly transition from a cycle that involved one of the most incredible monetary experiments in history to a more normal monetary cycle. Normxxx The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice. -- posted by Normxxx » mdorsey - Fed is getting squeezed Fed is getting squeezed by slow growth and too-high inflation By Sue Kirchhoff, USA TODAY Recent economic data, including Thursday's report that productivity growth sputtered this summer while labor costs rose at the fastest pace in two decades, has the central bank caught between what economist Allen Sinai calls "recession like" slow growth and "sticky high" inflation. "Nobody ... can be sure how this is all going to end up. Are we going to bounce back ... or is the housing and auto (industry) softness going to spread?" asks Sinai, head of Decision Economics. The Labor Department said Thursday that productivity, the measure of output per worker, stalled from July-September, as labor costs jumped 3.8%. Labor costs have spiked 5.3% in the past 12 months, fastest pace since the early 1980s. -- posted by mdorsey » mdorsey - I'm not the only one. Hopes for Fed rate cuts die Strong job report, service numbers undermine chances of a central bank cut anytime soon. November 3 2006: 4:37 PM EST WASHINGTON (Reuters) -- Fresh signs of a stronger economy and tight job market at the start of the fourth quarter have reshaped market expectations for Federal Reserve interest rate policy over the next few months. ............... But after 1.6 percent annualized growth in the third quarter, the latest reports suggest the economy will not stay down for long - perhaps not long enough to get inflation on the Fed's desired lower glide path. "Both strong jobs growth and a rebound in the non-manufacturing ISM mean the demand side also suggests rising inflation. The Fed should tighten," Charles Dumas, economist at Lombard Street Research in London, said in a research note. The news comes amid weak sales reports, and sales forecasts, from many major retailers, including Wal-Mart Stores (down $0.76 to $47.53, Charts), Target (down $0.93 to $56.03, Charts), Costco (down $1.18 to $51.82, Charts) and Gap (up $0.07 to $19.57, Charts). A number of Fed officials recently have stressed the need to make sure that expectations for higher inflation do not become entrenched. "This will certainly give hawks on the FOMC some ammunition," said Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, New York, referring to the Federal Open Market Committee, the Fed's policy-making arm. -- posted by mdorsey » lcha - Fed official says inflation a concern Fed official says inflation a concern MUNCIE, IND. - Chicago Federal Reserve President Michael Moskow on Wednesday repeated that more interest rate increases might be needed to bring down inflation, even at a time when economic growth is likely to be slightly below trend. "Taking all of the factors on growth and inflation into account, my current assessment is that the risk of inflation remaining too high is greater than the risk of growth being too low," Moskow said in remarks prepared for a Ball State University business forecasting round-table. Moskow will be a voting member of the policy-setting Federal Open Market Committee in 2007. -- posted by lcha » mdorsey - Fed does not rely on money growth: Bernanke By Greg Robb, MarketWatch Last Update: 11:52 AM ET Nov 10, 2006
-- posted by mdorsey » Normxxx - Come on Ben. In response to Come on Ben. posted by mdorsey:Alan Abelson addresses this very issue:
"It has been for some time a favorite conceit of the administration, its economic shills and the bullish claque on Wall Street that we're enjoying the best of all possible worlds: a buoyant economy unsullied by inflation. In truth, we've had the most lopsided expansion in memory (and ours, sigh, goes back a long way), with a fair number of people making out quite well, but a much larger number- make that a really huge number- of people treading water at best. "As to inflation, computers, as economists never tire of telling us, undeniably are cheaper than ever. The question is, though: Have you every tried eating a computer? Or living in a house made of computers? Or driving a computer to work? For, by contrast, the cost of shelter and food and fuel and lots of other stuff that is still quaintly considered by most of the citizenry as essential ingredients of the good life are awfully pricey and getting pricier. "Nor should we forget, in taking the measure of the economy, that it rests on a very tentative foundation, indeed: a giant but rapidly deflating housing bubble floating on a vast sea of debt." It turns out that there's much less to new job creation than meets the eye:
"The consensus- which has become a synonym for the wrong way crowd- was looking for upwards of 120,000 additions to the nation's nonfarm payrolls. Instead, the gain was a considerably more subdued 92,000. And as those trusty stewards of the excellent Liscio Report, Philippa Dunne and Doug Henwood, noted in their astute dissection of the numbers, the supposedly large revisions to previous months were not especially outsized, but pretty much in line with similar revisions effected over the past 45 years. "Somewhat ominous, too, was the fact that the improvement, far from widespread or even decently pervasive, was quite spotty- and those spots were either not terribly encouraging as indicators of future employment trends, or a mite suspect. "For example, in this survey, which was more or less critical because it happened to take place immediately in advance of the elections, a full 39,000, or 42% of the total gain, came courtesy of local governments, mostly back-to-school hires. Another 27,000 of the additions were in bars and restaurants and 23,000 were in health care. "In contrast, manufacturing shed 39,000 jobs in October and construction employment declined 26,000, weighed down by a hefty 31,000 shrinkage in payrolls connected to residential construction. The drop in homebuilding employment, Philippa and Doug point out, was conspicuous among the workers who finish houses, likely a preview of things to come. "But the larger point of all these numerical details- and we apologize if you're feeling a trifle numbed by numbers- is that the bulk of jobs being added are not big payers, and the bulk of the jobs being lost are." It gets worse! To quote from the BLS: Reliability of the estimates
"that an estimate based on a sample will differ by no more than 1.6 standard errors from the true population value because of sampling error. BLS analyses are generally conducted at the 90-percent level of confidence. For example, the confidence interval for the monthly change in total employment from the household survey is on the order of plus or minus 430,000. Suppose the estimate of total employment increases by 100,000 from one month to the next. The 90-percent confidence interval on the monthly change would range from -330,000 to 530,000 (100,000 +/- 430,000). These figures do not mean that the sample results are off by these magnitudes, but rather that there is about a 90-percent chance that the true over-the-month change lies within this interval. Since this range includes values of less than zero, WE COULD NOT SAY WITH CONFIDENCE THAT EMPLOYMENT HAD, IN FACT, INCREASED. If, however, the reported employment rise was half a million, then all of the values within the 90-percent confidence interval would be greater than zero. In this case, it [would be] likely (at least a 90-percent chance) that an employment rise [would have], in fact, occurred."
Normxxx The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice. -- posted by Normxxx » Normxxx - Fed:DishonestOr[Merely]Incompetent? The Fed: Dishonest or [Merely] Incompetent? Click here for link to complete article: http://www.itulip.com/forums/showthread....
Today's Quick Comment notes the recent epiphany experienced by the mainstream press: the Fed has been lying about the housing bubble for years by claiming it didn't exist, just as it lied about the stock market bubble when Greenspan and company claimed that bubble didn't exist. Well, the mainstream press are not exactly stating that the Fed was lying. But they are running stories about the housing market that can only be true if the Fed had either been lying- again- or if the Fed was, collectively, dumber than a bag of hammers- again. You decide. Get ready for a good six months of "It's just a house, stupid" stories like those below, reminiscent of the "There's no New Era, stupid" articles about tech stocks that came out of the mainstream press in 2001 a year after the collapse of the NASDAQ bubble and a basket case NASDAQ made it apparent that the bubble wasn't coming back. To wit:
August 25 2006 (Wall Street Journal Online) It's among today's most popular retirement-savings strategies: Buy the big house, hope the real-estate boom continues and then trade down at retirement, thus freeing up home equity that will pay for years of early-bird specials. Sound appealing? Trouble is, you will fork over a heap of dollars- and you'll end up with a surprisingly small nest egg. and
August 25 2006 (Fortune) Fortune's Shawn Tully dispels four myths about the future of home prices. For the past five years, the housing bulls have been trotting out one rational-sounding argument after another to explain why the boom made perfect economic sense. Forget about a crash, they assured homeowners. Expect a "soft landing" where your three-bedroom colonial in Larchmont or Larkspur not only holds onto its huge price gains, but keeps appreciating at a "normal," "sustainable" rate of 6 percent or so into the sunset. Americans wanted to believe, and they did. Now, the giant popping noise you're hearing is the sound of yesterday's myths exploding like balloons pumped up with too much hot air. Why do the common sense articles that dispel obvious bubble myths come out only after each time a bubble ends? The answer is that the publishing business becomes an unwitting participant, dependent on the advertising revenue generated by the companies that are the "producers" in asset bubbles, along with everyone else involved: the CEOs, management and employees of the companies that are "producing/promoting" the object of speculation; co-conspirators, such as the banks that finance them; the lawmakers who rely on the capital gains tax revenues from the sales of securities; and the industry of brokers, consultants, advisors and so on that grow up both to make money off ('feed on') the bubble and who act as boosters to re-enforce and perpetuate it. It's important to note that during the tech stock bubble, the object of speculation was not the products that the high tech companies produced- the computers, software and services- but the securities that the companies issued. At the time, iTulip.com as a parody of a tech stock company made light of this by creating no products at all except bogus stock certificates, of which we sold hundreds. It's just as important to note that in the case of the housing bubble, products were built- housing- but again the object of speculation is not the house itself- the product- but the underlying security, the mortgage paper, that is being actively traded into a bubble. Anyone who was part of the high tech industry and lived through the aftermath of the collapse of the NASDAQ bubble can tell you how devastating the collapse was to the high tech industry. There is still debate on how badly the collapse of the housing bubble will hurt the US economy. My position is that the damage will be slower but more extreme and widespread because, as Greenspan himself noted, housing represents 70% of household wealth, consumption which accounts for 2/3 of economic actitivity is closely tied to housing, and housing generated between 20% and 43% of private sector employment since 2002, depending on whose statistics you believe. By contrast, stocks represented less than 20% of household wealth and the high tech industry itself represented less than 2% of economic activity at the peak of that bubble. I doubt anyone seriously believes that the Fed did not see a housing bubble forming in nearly all regions of high population density around the US, creating from the standpoint of aggregate national economic impact a national housing bubble. Why did the Fed allow a housing bubble to form? A friend who runs a public company said it best, "Did they have a choice?" Meaning, the alternative following the stock market bubble collapse was a harsh recession, perhaps a deflationary depression like Japan's. I believe this is the reason, but still wonder, once the housing bubble got out of hand, why not at least speak to it publically and try to talk it down? One theory is that the Fed has decided that it can no longer constructively engage asset bubbles once they are underway, that the Fed winds up doing more harm than good when it tries. The last time the Fed moved actively to end an asset bubble and said so was in 1994. As discussed in The Bubble Cycle is Replacing the Business Cycle, Greenspan is quoted in the FOMC minutes saying,
The Fed quickly reversed course in 1995 by changing reserve requirements and other rules as documented in What (Really) Happened in 1995? by Aaron Krowne. Since then, you will find no mentioned of asset bubbles in any FOMC meeting notes, with the single exception of President of the Federal Reserve Bank of Boston, Cathy E. Minehan, saying during the June 4, 1999 meeting,
Nonetheless, the Fed did raise interest rates in 1999 and those rate hikes, by intent or not, did precipitate a collapse of the stock market bubble; and a series of 16 quarter point rate hikes up until last month have collapsed the housing bubble. The result of that latter will be worse than most expect. http://www.itulip.com/images/waterout.jpg Remember the pictures of tourists walking out onto the drained ocean floor before the Asian Tsunami hit in 2004? They were lured by the miracle of a surprising opportunity to walk out onto the exposed ocean floor. Fish flopped on the surface. All you had to do was reach out and pick them up. http://www.itulip.com/images/waterback.j... Intuition might tell you, "Well, this can't been good. Whatever force has sucked the ocean away from the shore is probably going to send it crashing back in with equal (and opposite) positive force eventually." The sudden, peculiar appearance of the ocean floor that had for a thousand years been covered in 100 feet of ocean water says: head for higher ground. Those who failed to do so drowned miserably when the water surged back, and when it receded again it left heaps of destruction and human ditrious in its wake. http://www.itulip.com/images/missing.jpg Asset bubbles are rather like tsunamis except they are man-made; of money instead of water, and instead of lasting for minutes they last for years. They draw people in, lured by the apparently risk-less money being freely tossed about. Just bend over and pick it up. What iTulip.com has been telling you for eight years is this: when you see apparently risk-less money- financial fish flopping on the bare ocean floor- head for higher ground. If you have the means and the risk appetite, maybe grab a few fish first. But in any case, head for higher ground. Don't stay too long and financially drown. http://www.itulip.com/images/creative_mo... During the stock market bubble, that meant heeding my warning to sell in March 2000 that the tech stock bubble was going to pop. In that case, you could run slowly to high ground, as stock markets are liquid and give you plenty of opportunities to exit. During the housing bubble, that meant heading my warning in 2004 that housing markets end by seizing up, and that you can get trapped, like the tourists on the beach. And I could not have been more explicit about how the collapse of the housing bubble was likely to unfold. (Apologies to long time readers for all this past history... this is for new members of our community.) When the tsunami of money recedes it leaves behind heaps of economic destruction within the industry that is the focus of the bubble. The technology industry has never recovered from the collapse of the NASDAQ bubble. The real estate industry won't return to normalcy, that is, merely to grow at the rate of inflation, for ten years or more. http://www.itulip.com/images/dreamhomes.... The US appears to be on a continuous treadmill of asset bubbles. The Fed needs to allow them to happen and dare not stop them, dare not even admit that they exist, and so has to lie about them. Bill Gross in his August 2006 article The End of History and the Last Bond Bull Market appears to think this series of bubbles, of which housing is only the most apparent, will terminate with the end of the current bubbles, creating one last bond bull market, a period of deflation presumably followed by a crushing inflation, much in line with our Ka-Poom theory. There is a darker explanation than either mere Fed dishonesty or incompetence. A reader recently pointed me to the web site of Catherine Austin Fitts, the founding director of Solari, Inc. who previously served as Managing Director and Member of the Board of Directors of the Wall Street investment bank, Dillon, Read & Co., Inc; served as Assistant Secretary of Housing/Federal Housing Commissioner at HUD in the first Bush Administration; and was the President and Founder of The Hamilton Securities Group, Inc., a broker-dealer/investment bank and software developer. In a long series of writings, she states:
Her take on the series of asset bubbles can be summed up as follows:
Strong words, indeed. I'm still digesting the contents of her web site and am interested to hear comments from the iTulip community on it. Give yourself an hour to read it. Normxxx The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice. -- posted by Normxxx |
