Stephen Roach: “QE3 Is Not Going To Work”

Wednesday, July 25th, 2012

Is it any wonder that Stephen Roach is now ex-Morgan Stanley? Today’s brilliant truthiness in his interview on Bloomberg TV is an absolute must-watch as the veteran market practitioner notes that the Fed is forced to act next week and while consumers are telling you that they want to pay down debt – which all the monetray stimulus in the world is not going to change – that QE is nothing but crack to a ridiculously addicted market. With 70% of the US economy in a balance sheet recession, the Fed knows this (which he notes is now run by WSJ’s Jon Hilsenrath since what he prints must be adhered to by Ben for fear of market disappointment) and is “dangling QE in front of the markets like raw meat – but it has not worked and it will not work!” But critically, he believes, the euphoric response of markets will be tempered since they have become “used to the fact that all of this unconventional monetary easing by the central bank is just not what it is supposed to be.”

Roach on whether more Fed stimulus is a good idea:

“The Fed is flailing and has been flailing for the better part of the last three years. We had QE1, which worked, and that’s it. We’ve had QE2, Twist 1, Twist 2 and now maybe QE3. The economy is in the doldrums. The biggest piece of the economy is the American consumer. 70% is in a balance sheet recession…The Fed knows this, but they are dangling this raw meat in front of the markets and the markets are salivating as they always do in that frenetic way that they try to believe in the Fed. But it has not worked and it will not work. “

On how likely it is that the Fed will issue more stimulus:

“Absolutely. They have no choice. They have gone about their usual pre-FOMC leak frenzy where they talk to this reporter and that reporter. Jon Hilsenrath is actually the chairman of the Fed. When he writes something in the Wall Street Journal, Bernanke has no choice but to deliver on what he wrote.”

On whether the Fed will move on stimulus next week:

“Absolutely. They will not disappoint the markets. The markets are now setting themselves up and discounting the next QE2. The Fed has just woken up to ‘oh my gosh, the economy is weak again.’ Well hello! The economy has been weak for the consumer for 18 quarters. The growth rate of consumption over the last four and a half years has averaged below 1%. 70% of the economy growing below 1% and the Fed is just figuring this out? Come on.”

“The point is, when they plant a story in the Wall Street Journal, and this story has been planted. Jon Hilsenrath is the weed that grows…the guy has a perfect track record…They’ll do some type of QE3. Twist 2 was a huge disappointment. It was a feeble flailing at the windmill and the economy is a lot weaker than when they reached the Twist 2 decision. They’ll have to do another round of quantitative easing. I don’t know exactly what securities will be involved. You could speculate it could be mortgage-backeds to try to help the housing market. There is some criticism they have been too focused on Treasuries. We’ll have to wait and see, but I think it will definitely be another round of quantitative easing as opposed to the twisting again like we did last summer.”

On whether QE3 will work:

“No, it’s crack! That’s what it is. It’s not going to work. QE1 worked because it was in the midst of wrenching crisis. QE2 failed, despite what the Fed’s research shows. Twist 1 has failed. Twist 2 is failing. When 70% of the economy is in a balance sheet recession and the growth rate for 18 quarters in row has been at less than 1% at an average annual rate, consumers are telling you something. They want to pay down debt and rebuild saving and all of the monetary stimulus in the world is not going to change what is a perfectly rational response. So the idea that the Fed is going to step in and save the day, it has not worked in the past except during the depths of the crisis and i give them credit for that. And it will not work in the future. Don’t believe the Fed PR that they put out while we have research that shows that it worked. Of course they do.”

On whether he expects futures to be higher than they are right now:

“The markets have responded positively to the leaks that came out late yesterday afternoon, but the response is small. I think the markets have gotten used to the fact that all of this unconventional monetary easing by the central bank is just not what it is supposed to be. In terms of delivering an actionable vigorous response in the real economy.”

Tags: Balance Sheet, Bernanke, Chairman Of The Fed, Consumers, Crack, Disappointment, Doldrums, Frenzy, Morgan Stanley, Qe, Qe1, Qe3, Raw Meat, Recession, Stephen Roach, Stimulus, Truthiness, Wall Street, Wall Street Journal, Wsj
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Technical Take: In a Pickle

Tuesday, July 10th, 2012

by Guy Lerner, The Technical Take

Last week’s comments will certainly  suffice to explain how sentiment is impacting the current price action, so here they are: “From a sentiment perspective, the data remains consistent with a market top rather than the next launching pad to a new bull market or even a sustainable bull run. For several weeks, I have been of the opinion that whatever bounce develops would not carry too far because sentiment really wasn’t too bearish at the bottom. Large rallies usually start with real extremes in investor sentiment and consensus among the sentiment data, which we did not see despite the SP500 dropping about 10% over 8 weeks from the April highs. Although the “dumb money” was bearish (i.e., bull signal), corporate insiders were neutral. Throw in the fact that investors have been primed to front run anything that sounds like quantitative easing or bail out, you can understand why investors weren’t too concern. Don’t worry some central banker has your back.”

What I find fascinating is that investors know what is exactly driving this market.  It is bailouts,  quantitative easing, asset purchases or whatever you want to call it.  These plans can be real or just come from the mouths (i.e., jawboning) of central bankers.  I was listening to CNBC earlier in the week, and the disappointment of the hosts over the market’s response to the European Central Bank’s rate cut was palpable.  With the pre-market futures down about 0.5%, they immediately understood that some entity (i.e., Federal Reserve) would need to step in and do more.  Mind you this is pre-market action, and the SP500 is still only a couple of percent below the recent cyclical highs!  No reason to hope for a good jobs report or better earnings.  Maybe that is asking for too much.  Or maybe investors understand that positive data points takes more QE off the table.

The promises to fix the economies (i.e., equity markets) of the world with more debt are coming almost daily now.  The market’s response to each of these “fixes” seems to be getting less and less.  In addition, whether QE is the right policy still remains in doubt.  After all, it hasn’t turned the US economy around yet and some would argue, asset purchases and debt creation have put the US economy on a weaker foundation.  It would seem that investors are in a pickle.  More of the same is not working, and it just may require lower equity prices for investors to get what they really wish for.

The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator is neutral.

Figure 1. “Dumb Money”/ weekly

Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “Insider trading volume began a seasonal decline last week. Companies generally close trading windows for insiders 10-14 days prior to quarter’s end and reopen them following their subsequent earnings announcement. Volume will continue to dissipate over the next few weeks and getting a macro read will be difficult because of the limited number of insiders who are free to trade.”

Figure 2. InsiderScore “Entire Market” value/ weekly

Figure 3 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 63.72%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. It should be noted that the market topped out in 2011 with this indicator between 70% and 71%.

Figure 3. Rydex Total Bull v. Total Bear/ weekly

Tags: Asset Purchases, Cnbc, Corporate Insiders, Cyclical Highs, Disappointment, Dumb Money, Extremes, Federal Reserve, Guy Lerner, Investor Sentiment, Launching Pad, Market Futures, Mouths, Pickle, Pre Market, Qe, Quantitative Easing, Rallies, S&P500, Sentiment Data
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The Facebook Fiasco And The Pricking Of Tech Bubble 2.0

Friday, May 25th, 2012

by Greg Feirman, Top Gun Financial

May 24, 2012

What a disappointment Friday’s Facebook IPO was. How anticlimactic after all the build up and hype. What a debacle for Morgan Stanley and Nasdaq in what should have been their moment of triumph. Where to begin in this comedy of errors? It starts with Morgan Stanley’s decision to increase the size and price of the offering. An IPO that was originally targeted at $10 billion ballooned to $16 billion. Gauging the seemingly limitless demand for shares, Morgan Stanley must have thought the market could bear the increased size. In retrospect, they dumped too many shares at too high a price into the market resulting in the IPO being dead on arrival. As if that wasn’t enough, Nasdaq’s computerized system botched the transaction process. The 30 minute delay in opening shares was the result of their trying to resolve a bug that prevented traders from modifying and cancelling orders. The mistake they made was opening the stock without fixing the bug which led to complete chaos. Traders who had placed orders but then modified or cancelled them did not receive confirmation. Therefore, many traders did not know if they owned shares or not or at what price for about three hours. This is the trading equivalent of playing football in the dark. My own experience appears to be typical. Shortly after Facebook started trading at about 8:30am PST, I put in a limit order for 250 shares. After a few minutes, I tried to cancel my order but received an error message. Again and again I tried to cancel my order, only to receive error messages. After about an hour, I gave up in frustration. It wasn’t until early Saturday morning when I checked my account that I saw 250 unwanted shares of FB. George Brady, a 66 year old from North Carolina, had the same experience when he tried to cancel his order for 1,000 FB shares (“Investors Pummel Facebook”, The Wall Street Journal, May 22, A1). I sold my shares first thing Monday morning at $34. However, that left me with a $1500 loss having bought shares at $40 ($6 * 250 = $1500). Immediately after selling, I called Scottrade to complain. My local branch office was overloaded by calls and I was redirected to a call center where the broker I spoke with was completely unhelpful. A few hours later I called back, spoke with a broker in the local office, and registered a complaint. I am happy to say that Scottrade called me a few hours ago to say that my trade had been scratched. If you experienced something similar, make sure to call your broker and tell them what happened. Don’t just assume you got screwed and have to eat the loss. The best account of what happened at the Nasdaq was by Thomas Joyce, CEO of Knight Capital, Monday morning on Squawk on the Street who called it “the worst IPO by an exchange ever”. Joyce explained the Nasdaq system failure to accommodate order modifications and cancellations which left traders, including his company, trading in the dark for almost three hours. He said that Bob Greitfeld, CEO of the Nasdaq, should not have opened trading before fixing this bug. The responsible thing to do would have been to delay the IPO to Monday instead of recklessly plowing ahead. He said the overall losses to the industry could approach $100 million. His interview was a tour de force and nobody has said it better. ***** But the fact that all of us are shocked and outraged that an $18 billion IPO – the 2nd largest in history – priced at 100 times earnings flopped is really more noteworthy than another instance of greed and incompetence on Wall Street. Facebook is the vanguard of a new generation of internet companies and its failure foreshadows theirs. The larger meaning of the Facebook Fiasco is the pricking of Tech Bubble 2.0. While most of the country is in a lackluster recovery, the Silicon Valley is booming. Stimulated by the incredible new wealth of Facebook’s founders and investors, hundreds of new social networking and internet startups have been launched and funded here in the last few years. Indeed, the activity and frenzy has reached a new pitch in correlation with Facebook’s path to IPO. The Wall Street Journal reported on Friday that there are now 20 privately held internet companies with a valuation of more than $1 billion – compared with 18 in 1999 and 2000 (“The $1 Billion Start-up Club List, Minus Facebook”, WSJ.com Digits Blog, May 18). The most recent new member of the club is Pinterest, an online scrapbooking site with little revenue and no profit, which raised $100 million at a $1.5 billion valuation last week. It was valued at only $200 million last October. While Pinterest has little revenue or even a business model, it had more than 20 million unique visitors last month (“Pinterest’s Rite Of Web Passage – Huge Traffic, No Revenue”, The Wall Street Journal, February 16). It wasn’t too long ago that it seemed reasonable to value companies on web traffic as a proxy for future revenues. In retrospect, we learned that those future revenues don’t always materialize. But memories are short in the Silicon Valley where all the men are strong, all the women are good looking and all the children are above average. Some of the other hot new +$1 billion internet start ups include DropBox, which allows you to share files between all your computers and smart phones, Evernote, maker of note taking apps, and Airbnb, which has created a market for the rental of rooms in private homes. Twitter and FourSquare – also on the list – are yesterday’s news. In addition to being worth more than $1 billion, another thing most of these companies have in common is unprofitability. Indeed, many of them scarcely have any revenues. They are valued by venture capitalists primarily on their future potential and they fund their operations through these investments. One result of these massive infusions of venture capital is a hiring boom for technology workers in the Silicon Valley who now make more than $100,000/year on average (“Average Silicon Valley Tech Salary Passes $100,000″, The Wall Street Journal, January 24). Most of these tech workers are young men who prefer to live in San Francisco. Flush with cash from their high paying jobs, they have bid up the apartment market in the city. The average apartment rental asking price in the city in the 1st quarter was $2,633 – up 16% from $2,299 a year ago (Average Rental Asking Price SF 1Q12 Chart Attached). Studio and one bedroom apartments are seeing the strongest demand with their asking rents up 19% and 17% from the year ago period (“Renters Scramble As Market Takes Off”, The Wall Street Journal, April 19, A9B). Rents and home prices are not the only beneficiaries of the boom. Money trickles through the entire service sector that serves these newly rich, high income, young tech entrepreneurs and employees. “I hate the word trickledown, but that’s how regional economies spread the growth”, says Steve Levy, director of the Center for Continuing Study of the California Economy based in Palo Alto. For example, the popular Rosewood Hotel at the intersection of Sand Hill Road and 280 in Menlo Park has grown from 250 employees when it opened three years ago to 420 today. Occupancy rates as well as food and beverage sales are up and as a result Michael Casey, Rosewood’s general manager, is hiring restaurant workers and housekeepers (“IPO Wealth Trickling Through The Region”, The Wall Street Journal, April 19, A9A). What does all this have to do with the Facebook IPO? Venture capitalists invest money in companies in order to sell them for more down the road. The two classic exits are acquisition by a large company and IPO. Wall Street is greedy, dumb and myopic but there are limits. It will buy hot, new, unproven internet companies at 100 times earnings or even without earnings as long as their stocks go up. But one thing Wall Street does not like is losing money. Once they stop going up, you will have a hard time selling them new issues. Investors have not completely forgotten 1999 and 2000. Nobody knows exactly when this moment occurs but we know that it invariably does. The Facebook Fiasco looks to me like the tipping point.

Copyright © Top Gun Financial

Tags: Bubble 2, Comedy Of Errors, Computerized System, Dead On Arrival, Debacle, Disappointment, Error Messages, Facebook, Fiasco, George Brady, Ipo, Limit Order, Minute Delay, Morgan Stanley, Nasdaq, Retrospect, Saturday Morning, Shares Investors, Top Gun, Wall Street Journal
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Big GDP Miss: 2.2% Vs Expectations Of 2.5%, Composition Even Uglier

Friday, April 27th, 2012

So much for the +3.0% GDP whisper number. Instead of printing at the expected number of +2.5%, the first preliminary GDP data point (two more revisions pending) came out at 2.2%, a big disappointment for a quarter which had a substantial boost from the weather. And while of the 2.2%, Personal Consumption came in strong – as expected, as it was precisely the factor most impacted by pulling in demand forward courtesy of “April in February”, 0.59% of the 2.2% was an increase in inventories, something which was not supposed to happen as it means that the quality of the economic growth in Q1 was far worse than expected. Cementing the ugly composition of Q1 GDP was fixed investment which added just a paltry 0.18% – this is the number which is critical for ongoing cashflow generation and unfortunately, the very low print means that growth outlook for Q2 is now even worse than before and we expect economists will promptly trim their already bearish predictions for Q2 GDP. Finally, government “consumption” subtracted just 0.6% from the total number, a decrease from the 0.84% in Q4, which means that once again the government is starting to become less of a detractor to growth – a dagger in the heart to anyone who claims there is “quality” in GDP growth. And the number you have all been waiting for: At March 31, US Debt/GDP was 100.8%.

Full breakdown by category:

Tags: Composition, Dagger, Detractor, Disappointment, Economic Growth, Economists, GDP, Gdp Data, GDP Growth, Government Consumption, Growth Outlook, Heart, Inventories, Personal Consumption, Q2 Gdp, Q4, Revisions, Ugly, Weather, Whisper Number
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Voldemort, Volcker, and Magic (Tchir)

Friday, April 13th, 2012

by Peter Tchir, TF Market Advisors

Yesterday’s move seemed almost magical. Yellen spoke and the markets levitated overnight. Jobless claims were a big disappointment. Revisions hit the prior week’s number and yesterday’s number was much closer to 400k than to the almost mythical 350k the market had become used to expecting. The magic of BLS revisions have ensured that although numbers close to 350k were reported for at least 3 weeks, they have all been re-written as 360k or higher.

The markets briefly fell, but then stories of “gnomes” leaking China GDP started the markets higher again. That 9% GDP print turned out to be illusionary, as the real number came in at 8.1%, and since I see no reason for China to lie about it to make the data worse than it is, the real growth is probably even slower than that.

The weakness in sovereign debt over the past week finally made investors look behind the curtain of Draghi’s LTRO show, and they are underwhelmed. The fact that LTRO does what it is supposed to – ensure banks have access to money – is now a disappointment as too many people had believed that LTRO could do more than it actually could.

Which leads us to Voldemort and Volcker. How much of JPM’s earnings were a direct or indirect result of the activities of the CIO’s office. We may never know, especially the indirect part. I believe the primary trade they have on is long credit via tranches on IG9 vs short HY17 and HY18. The trade makes sense, both as a trade, but for JPM and their business in particular. It explains both the price moves in IG9 and the decompression of HY CDS in an environment that would normally see compression. He is big, but the “prop” trading people are worried about the wrong things. The Volcker rule was meant to limit prop bets on market making desks. Banks do need to take risk. Everyone, the Fed included, wants the banks to lend more, but each and every loan is a prop bet, and there is no profitable way to run a fully hedged lending book. Let the CIO and treasury run the bank.

Correlation desks, including the one at JPM should be looked at closely. If a desk buys a tranche and sells a corresponding amount of “delta” is that not a “prop” bet? As a market maker, they haven’t bought and sold something, they bought one thing, and sold another. Volcker should be looking at those positions and determining how much model risk should be allowed. A correlation bet is a bet like any other (just more complicated). The noise about IG9 is reasonable, just misplaced.

As yesterday’s magic dissipates, it is hard to see anything in the data that justifies the bullishness. I remain wary of the market, and certainly feel better today as being caught too short yesterday was painful. CDS indices are weak across the board. Spitalian 10 year bonds are both trading down today, and 5 year Spain now yields 16 bps more than 5 year Italy. A clear sign that the manipulation has run its course (the size of the Spanish bond market makes it far easier for the ECB and banks to control prices – at least for brief periods of time).

I will be looking to add HY17 or HY18 risk today. Not as a general risk on trade, but because if I am correct and they are part of the “whale” trade, they will be left alone by the big buyer and we can see some of that compression that should have occurred earlier this year. HYG and JNK are both back to “premiums” to NAV that seem unsustainable, particularly given the overall tone of trading so far today.

Tags: Banks, Bet, China Gdp, Curtain, Decompression, Desks, Disappointment, Draghi, Earnings, GDP, Gnomes, Indirect Result, Jobless Claims, Prop Bets, Revisions, Sovereign Debt, Tf, Tranches, Volcker, Voldemort
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Emerging Markets – a Slam Dunk? (Bradley)

Wednesday, October 19th, 2011

By Tom Bradley

China, India and the other emerging economies will grow considerably faster than the developed world over the next ten years. That statement appears to be as close to an economic certainty as anything we can say today.

Does it follow then that any reasonable investment strategy should be heavily stacked towards securities from these countries? Presumably, they will grow faster and deliver better returns to their shareholders over the long run.

The answer is yes, portfolios should have meaningful exposure to emerging markets. Should they be heavily stacked? Read on.

Emerging market stocks are a great example of where the price paid has to match up with the potential. In the past couple of decades, there’s been money to be made, but investors’ timing and skittishness has resulted in disappointing returns.

In his latest letter, Howard Marks, the Chairman of Oaktree Capital Management, addresses this point.

“I don’t mean in the least to suggest that the outlook for China, India and the rest of the emerging markets is less than bright. In fact, I’m sure they’ll out-grow the developed world over the remainder of the century. The problem, however, is that simplistic, mania-following investors elevated emerging markets to the pedestal of the “sure thing” where nothing can go wrong. And when prices incorporate unlimited virtue, the eventual result is bound to be disappointment, disillusionment and depreciation. Even favourable developments can lead to losses when they fail to measure up to expectations. That’s been the case in the emerging markets.”

Staying with Mr. Marks for a moment, it seems appropriate to bring out one of his well-traveled quotes.

“No asset can be considered a good idea (or a bad idea) without reference to its price.”

In the Steadyhand equity funds, we’ve been gradually increasing our exposure to emerging markets over the last year. It’s come in two forms – directly in companies located in the emerging market countries and indirectly through western-based firms that have meaningful and growing emerging market revenues. Stocks we’ve bought or added to include Unilever (Netherlands), Asia Pacific Breweries (Singapore), China Mobile (China), Dongfeng Motor Corp. (China), HSBC (UK), Samsung Electronics (Korea), Mead Johnson (U.S.), Dairy Farm International (Hong Kong), Bridgestone (Japan), SK Telecom (Korea) and Singapore Telecommunications (Singapore).

All of our managers are aware of the potential that emerging markets offer. They are looking for the best vehicles to tap into that potential and are carefully considering the price.

Tags: Bad Idea, Capital Management, Decades, Depreciation, Disappointment, Disillusionment, Emerging Economies, Emerging Market Stocks, Emerging Markets, Equity Funds, India, Investment Strategy, Losses, Outlook, Pedestal, Portfolios, Remainder, Shareholders, Slam Dunk, Sure Thing, Tom Bradley, Virtue
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Global Manufacturing PMI (Sept 2011): U.S. Shines in Suffering Global Manufacturing Sector

Wednesday, October 5th, 2011

Growth in the global manufacturing sector is on the brink of contraction. The global manufacturing PMI that I calculate on a GDP-weighted basis for the major economic regions fell to 50.1 in September from 50.4 in August, while the JP Morgan Global Manufacturing PMI fell to 49.9 from 50.1. The U.S. ISM Manufacturing PMI masks the state of the manufacturing sector elsewhere around the globe, though. The gauge jumped to 51.6 in September, indicating acceleration in growth from a paltry 50.6 in August.

While Germany is still showing signs of growth the recession in the rest of the Eurozone’s manufacturing sector is deepening. However, it seems as if the contraction in Italy is easing somewhat, but France, the second largest economy in the Eurozone, is sliding fast. In contrast, the manufacturing sector in the U.K. has managed to grow again after contracting in August. The cold spell has spread to emerging Europe as well, with Poland leading the way as growth in its manufacturing sector is close to stalling. Turkey was the exception as its manufacturing sector is growing again.

Asian countries are also suffering. China was the major disappointment as the CFLP Manufacturing PMI only managed to rise by an abysmal 0.3 percentage points to 51.2 in a month that is normally a very strong month from a seasonal perspective. The result was that my seasonally adjusted CFLP PMI fell 2.1 percentage points to 50.1 and therefore indicates that growth in China’s manufacturing sector has stagnated. It had a severe ripple effect on the rest of Asia. Growth in India’s manufacturing sector slowed sharply, while the contraction in Taiwan, South Korea and Australia deepened.

Russia and South Africa held up reasonably well in the other BRICS countries but the contraction in Brazil’s manufacturing sector quickened.

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****.

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****.

Tags: Acceleration, Asian Countries, Brazil, BRICs, Brink, Cold Spell, Contraction, Disappointment, Economic Regions, Emerging Europe, Eurozone, India, Ism Manufacturing, Jp Morgan, Leading The Way, Manufacturing Sector, Percentage Points, Plexus Asset Management, Recession, Ripple Effect, Sector Growth, South Korea
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Avery Shenfeld: Outlook/Perspective for Economy, Oil, Housing, Labour

Friday, April 29th, 2011

CIBC World Markets’ Avery Shenfeld shares his views on the U.S. economy, oil prices, housing, and employment with Bloomberg’s Tom Keene and Ken Prewitt.

APRIL 19, 2011

TOM KEENE, HOST, BLOOMBERG SURVEILLANCE: Avery Shenfeld joins us, CIBC World Markets. Avery, good morning.

AVERY SHENFELD, MANAGING DIRECTOR, CIBC WORLD MARKETS: Good morning.

KEENE: Is there a housing recovery in sight?

SHENFELD: Not really. You have to look – I mean we did see a bounce in housing starts today. But if you saw the Homebuilders Index earlier, you could see that there is a lot of pessimism. There is still lots of inventory of newly built houses, and, of course, a huge inventory of existing homes waiting to be cleared out.

If you go back to 2008, the housing starts numbers are basically bouncing aimlessly in a range between 475,000 and 675,000. So these latest numbers are really just part of that very bouncy, but still sideways trend.

KEENE: Where is your first quarter GDP? Michael Moran and Daiwa sub- two percent. Have you gone sub-two percent?

SHENFELD: We haven’t gone quite so low. We’re sitting at about 2.5 percent. And the reason is that if you look at the industrial production numbers, they still looked quite strong for the first quarter, which is telling you that the good sector – at least in production – was fairly healthy.

Our suspicion is that a good deal of that must have ended up in inventories because we are seeing the demand side numbers, which is what others I think are reacting to pushing their forecasts so low, are, in fact, responding to.

So it looks to me like we are at 2.5 percent, but that’s still – you know, it’s still a pretty big disappointment. Remember this was the quarter we were supposed to get the big benefits of the tax cuts announced in December, and they basically got eaten up in part by high gasoline prices and some disappointments elsewhere.

KEN PREWITT, BLOOMBERG NEWS: Well, what happens – this is sort of a moratorium so to speak on foreclosures while banks try to get their paperwork straightened out. Where are we in that process?

SHENFELD: Well, there are still some details being ironed out. The way this story is talking about dealing with some of the foreclosures that had, in fact, taken place under procedures that are now being accused of being unfair. But eventually we’re going to get that whole process unstuck and going again.

In my mind, that is actually a bit of a healthy development. You know, while we need to get this cloud lifted, we need to get the houses into the hands of people who are paying their mortgages, in terms of sort of start the process of the righting the ship.

But in terms of actually getting a big pick up in construction, I think the only good news here is that we are at such low levels that even if in 2012, for example, we are running at 700,000 or 800,000 starts, that is still an abysmal level by historical standards. But it would represent a nice percentage increase. So the irony is it is hard to go lower, and that’s I guess the best news.

KEENE: Avery, your team has been way out in front on oil. You called for higher oil prices before anywhere else. Oil, okay, a little bit of a respite – Brent $119.85; NYMEX $105.97. Will this be a stochastic surge, a pointy surge up and then down in hydrocarbons and commodities in general? Or is there a new persistency here at higher prices?

SHENFELD: You know, I think there is a bit of both. There may well be a secular trend that we are in where troughs in commodity prices at the lows of cycles are not as low as they used to be and peaks are generally somewhat higher than they used to be, which really reflects the growth we are seeing in emerging markets, their heavy use of commodities as part of that, and, at least for awhile, some need to invest again, to rebuild supply. So I think we are in for some cycles where peaks are a little higher than they used to be.

That said, if we look at the current situation, in my mind there may be – the next move might be actually a bit lower. We have those emerging markets that I talked about raising interest rates, trying to deal with inflation by effectively slowing economic growth. And so we may lose a bit of the juice that we are now seeing in commodity markets over the next six months or so.

PREWITT: Well, given that prices are down so much, and mortgage rates are the lowest pretty much they’ve ever been, what are people waiting for? I mean is it just uncertainty over the labor market?

SHENFELD: I think that it is not that there aren’t buyers. I mean we do see people out kicking the tires at these very low prices. But if there was simply – you know, the scale of the shock wave that hit and the overhang of houses to be cleared out just means that even when buyers do return, even when they recognize that these are very low prices, even with mortgage rates that are quite low, it is simply going to take time to clear out all that inventory.

And that is somewhat true in the – in the new home market it is getting a little bit better because we are not building, we are not completing very many houses now. There are only about 500,000 houses being completed a month; that is half of what we would normally see at the bottom of a deep recession. So that is helping, but, you know, I think the existing home market also needs to be repaired before builders gain the confidence. So it is just simply a matter of time.

PREWITT: Well, have we seen kind of a shift in attitude on a national basis, that people were scared by the price decline in housing and decided – you know, just like people got turned off by the stock market?

SHENFELD: That may be part of it. And, of course, for awhile it was also – and for some still, it was difficult to get mortgage credit. Not just the buyers were scared, but the financiers were scared, too, about lending – you know, having been burned by lending too much to the household sector, the financial system doesn’t tend to make the same mistake twice.

So we suddenly became a market that was erring on the side of caution, the mortgage insurers were really the only game in town. So I think part of it was on the credit side as well. But it was a mutual feeling, the borrowers didn’t want to borrow and the lenders didn’t really want to lend.

So for awhile, the pace of clearing out this inventory was stalled. It also takes awhile before the sellers recognize what their house is really worth and agree to cut the price enough to really get the market moving, and that’s where we are now. But prices have still been edging lower and so we may well be still another five percent or so for the bottom of house prices.

KEENE: Avery, your colleague, Benjamin Tal, has just been brilliant on the self-employed in the United States. Give us an update. Are our self- employed recovering?

SHENFELD: You know, I think we are starting to see a bit of a recovery there. It is part of a general recovery in the overall business conditions.

You know, we do have the labor market recovering. If you really want to know the key to the housing market, it is that we need people without jobs to get jobs again.

But it, again, goes back to the scale of the original decline. We’ve never seen recession that wasn’t called a depression, where we lost six percent of total employment. And if you go back since the post-war period, we’ve never had that deep a recession that then didn’t have an equally quick rebound in job creation.

So until we make more progress on the labor market as a whole, I think both the self-employed and the people who have pay jobs are still going to feel a little bit cautious. Remember, we see that in the wage numbers, which are climbing at an extremely slow pace these days.

KEENE: Let’s leave it there. Avery Shenfeld, thank you so much for that update. CIBC World Markets, this as housing permits and starts bounce along, a little better statistic today.

08:44

***END OF TRANSCRIPT***

2011 Roll Call, Inc.
Provided by ProQuest Information and Learning Company. All rights Reserved

Tags: Avery, Bloomberg, CIBC World Markets, Daiwa, Disappointment, Disappointments, Economy Oil, First Quarter, Gasoline Prices, GDP, Homebuilders, Inventories, Managing Director, Michael Moran, Oil Prices, Pessimism, Prewitt, Production Numbers, Quarter Gdp, Tom Keene
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“The Financial Industry Has Become So Politically Powerful That It Is Able To Inhibit the Normal Process of Justice And Law Enforcement”

Tuesday, March 1st, 2011

“The Financial Industry Has Become So Politically Powerful That It Is Able To Inhibit the Normal Process of Justice And Law Enforcement”

Washington’s Blog strives to provide real-time, well-researched and actionable information.  George – the head writer at Washington’s Blog – is a busy professional and a former adjunct professor.

In his acceptance speech for winner for best documentary at the Oscars, director Charles Ferguson said:

Three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that’s wrong.

But none of the mainstream, corporate networks covered it. Not CBS, ABC, NBC or MSNBC.

Ferguson told Reuters:

“The biggest surprise to me personally and biggest disappointment was that nobody in the Obama administration would speak with me even off the record — including people that I’ve known for many, many years,” Ferguson said backstage.

He believes Americans, who lost homes and jobs in the millions because of shady mortgage lending and bank collapses, are disappointed that “nothing has been done.”

“Unfortunately, I think that the reason is predominantly that the financial industry has become so politically powerful that it is able to inhibit the normal process of justice and law enforcement,” said Ferguson.

For background on the subversion of justice to the powers that be, see this.

Indeed, as I have repeatedly pointed out, fraud is one of the main causes of the financial crisis. See this and this.

Even Bernie Madoff tells New York Magazine:

“I realized from a very early stage that the market is a whole rigged job. There’s no chance that investors have in this market.”

***

“The SEC,” he says, “looks terrible in this thing.” And he doesn’t see himself as the only guilty party on Wall Street. “It’s unbelievable, Goldman … no one has any criminal convictions. The whole new regulatory reform is a joke. The whole government is a Ponzi scheme.”

The economy cannot stabilize unless fraud is prosecuted. But the folks in D.C. seem determined to turn a blind eye to Wall Street shenanigans, and is now moving to defund the enforcement agencies like the SEC and CFTC.

And yet the large corporate media never covers this issue. An October 2009 Pew Research Center study on the coverage of the financial crisis found that the media has largely parroted what the White House and Wall Street were saying. (The mainstream media is also pro-war.)

In fact, the financial industry has become so politically powerful that it is able to inhibit the normal process of justice and law enforcement, and the American press.

Tags: Acceptance Speech, Adjunct Professor, Bernie Madoff, Best Documentary, Charles Ferguson, Collapses, Corporate Networks, Director Charles, Disappointment, Financial Crisis, Financial Executive, Financial Fraud, Gold, Goldman, Guilty Party, Head Writer, Mortgage Lending, Msnbc, Oscars, Reuters, Subversion
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Rosenberg on the Non-Double-Dip; A Look Ahead to Second Half-2011 and 2012

Thursday, January 6th, 2011

by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis

The “Double Dip” for 2010 did not happen and one for 2011 now seems unlikely as well. However, a recession in 2012 is not out of the question. Dave Rosenberg explains in Breakfast with Dave

Can We See 4% GDP Growth For Q1? Yes, But Look For Air Pockets Thereafter

This is not a forecast as much as something that should be on the radar screen. Nor should this be considered a change in our fundamental view for 2011 as a whole — as a year of overall disappointment on the macro front. Be that as it may, the probability of a much stronger Q1 economic outcome has risen very recently.

Yes, you read that right. But why would that come as a surprise? We had near 4% GDP growth in the first quarter of last year (the consensus was little more than 2.5% going into that quarter) and by summer everyone was still talking about a double-dip recession and the stock market was beginning to price one in.

The points below show what it would take to get 4% GDP growth for Q1 — believe it or not, it is not a stretch to get there. With consumer spending at 3.5% (perhaps even higher), it doesn’t take much. The consensus right now is less than 3% (taken a month ago), but I would expect to see it revised up very shortly:

• Consumer spending 3.5% (the impact of the payroll tax cut)
• Residential investment 2% (the monthly construction spending numbers have risen modestly off the lows)
• Non-residential spending 5% (the architectural billing index is consistent with this)
• Capex 10% (still solid but moderating as the latest core orders data are predicting)
• Net exports swing from $470 billion to $460 billion (net addition of 0.4%)
• Inventories from $73 billion to $68 billion (drag of 0.2%)
• Government 1.5%

Even if government is flat, the number for Q1 would still be 3.7% seasonally adjusted annual rate.

What is important is what happens in the second and third quarter when we see the U.S. economy hitting an important air pocket. In Q2, there is a loss of fiscal support at the margin. Moreover, we will be deeper into this renewed leg of the downturn of home prices, with negative implications for the household wealth effect, confidence, and spending. We will be seeing the peak impact from the runup in energy prices too. The inventory cycle has pretty well run its course as well (it was responsible for half of the GDP growth in 2010). It would also likely be prudent to assume that some risk aversion will resurface from the renewal of European debt concerns in March after the Irish elections (if the opposition party wins, expect the EU deal to be renegotiated and the debt to be restructured, and if that happens, look for other countries to follow suit). Of course, we have the debt-ceiling issue to contend with in March-April and the GOP are dangling $100 billion of spending cuts in front of the White House in order to get a deal done. This is not last year’s lame duck Congress. And this doesn’t add to uncertainty and possible disappointment in the second and third quarter?

The Fed is not going to be able to embark on more balance sheet expansion unless things were to get really ugly given the new Congressional oversight and the longer list of “hawks” that are FOMC voters ― this comes to a head in June and remember what happened last year when Mr. Market hit a pothole as the Fed contemplated its elusive exit strategy. It would be irresponsible to ignore these risks.

All we know about Q4 is that we should see a decent pickup in capital spending ahead of the end of the bonus depreciation allowance, which will merely create another problem for 2012 but the story here is (i) consumer-led first quarter, followed by (ii) air pockets in both Q2 and Q3, and then (iii) a capex-led fourth quarter. Moreover, a 2012 recession cannot be ruled out. In fact, elections are great years to have recessions: 1960, 1970, 1980, 2000 and 2008! How about that Mr. Potter?

The Real Cause For The Recent Exuberance

Personal income was revised up $46.3 billion in the second quarter. This was huge ― the Commerce Department found $46.3 billion for the consumer that it thought wasn’t there before. This made the difference between income being up at nearly a 6% annual rate that quarter and 3%. The newly found income carried some important spending momentum with it into the third quarter and this was really big in terms of influencing people’s perceptions of how the economy was performing.

When double-dip risks were at their peak, it was when Q3 GDP was released initially and it showed a mere 1.6% annual growth rate, which was even weaker than the 1.7% print in Q2 (which was less than half the growth rate of Q1). Then Q3 GDP was revised up to 2% and then all the way to 2.6% and that is all she wrote as far as the double dip for 2010 was concerned. And it now looks like we are going to see something closer to 3.5% for Q4. So what happened was that consumers had more income than was thought previously.

This is a nice story. It explains why we were wrong on the Q3/Q4 double-dip scenario, but going forward, this income revision and its impact on spending can be considered yesterday’s story. As we said, there is the current payroll tax effect, but this will be contained to the first quarter and the one thing history teaches us is that tax cuts that are temporary in nature carry with them virtually no multiplier impact into the future. Look for Q2 of this year ― and likely Q3 as well ― to turn out to be as disappointing for the market, as was the case for these exact same quarters in 2010. In other words, look for a repeat except this time around we don’t have a Fed and a Congress that is going to pull another rabbit out of the hat during the summer and fall.

Change of Tune

I too thought a double-dip in 2010 or 2011 was likely. I changed my mind some time ago and made it theme number seven in Ten Economic and Investment Themes for 2011

7. US Avoids Double Dip

The tax cut extensions and the payroll tax decrease will keep the US out of recession. However, growth estimates are still too high. The tax cut extensions do nothing more than maintain the status quo while the payroll tax deduction is just for a year. Most will use it to pay down bills. Look for GDP at 2.0-2.5%. That is the stall rate.

There is no reason to stick with a forecast that is not going to happen. When retail sales picked up in November and continued into early December, that was it for me. I had significant doubts even before that.

Robust Jobs

On Monday, January 3, before the ADP numbers came out, in Factories Expand 17 Consecutive Months, Jobs Don’t I discussed the possibility for a couple months of good jobs reports.

The BLS report for December comes out on January 7th. The January report comes out on February 4th. Those reports could be robust because of retail and service sector hiring, especially the January report.

Everyone is now going gaga now because Wednesday’s ADP National Employment Report “suggests nonfarm private employment grew very strongly in December”.

ADP has private-sector employment at +297,000.

The pertinent question, assuming the report is correct (I’ll take the way under) is “how sustainable is it?” On this score I am in agreement with Rosenberg. I suggest not very, although next month or two could be good as well.

Bear in mind we had strong employment reports early last year, only to see them fade in the second half. Given that headwinds are enormous, I see no reason to change what I said in Jobs Forecast 2011 Calculated Risk vs. Mish.

Nor do I see any reason to change my long-term forecast that the US slips in and out of recession or near-recession and deflation for a number of years, just as Japan did.

Little has changed except a massive amount of stimulus delayed the double-dip. What can’t go on forever won’t and I doubt if this Congress is very accommodating to states in trouble.

Economic forecasts for 2010 ranged from hyperinflation to strong growth and strong inflation, to weak growth and strong inflation, to weak growth and minimal inflation, to weak growth or double-dip accompanied with deflation (my call), to outright economic Prechter-like collapse.

Those in the hyperinflation and strong inflation camps missed the mark by a mile. Mid-year it looked like the US was headed back into deflation but QEII forestalled that.

Giving credit where credit is due, those in the weak growth and minimal inflation camp got the 2010 call right. There were not many in that camp, but Calculated Risk was one of them.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: Air Pockets, Capex, Consensus, Consumer Spending, Dave Rosenberg, Disappointment, Double Dip Recession, Economic Outcome, energy, Fundamental View, GDP, GDP Growth, Global Economic Trends, Inventories, Lows, Michael Mish, Mish Shedlock, Payroll Tax, Radar Screen, Residential Investment, Stock Market
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