SOMETHING NEW (a short essay from a long copy devotee)
In the markets and in the world of macro economics everything is related to everything else. Each part of the jig-saw puzzle to assist in foretelling the future in even a hazy way, is incremental, and scattered pieces of data and interpretations when presented together can add perspective to deeper and broader articles floating about in our world of information over-load.
UNCLE BEN BERNANKE
Ben Bernanke, current Chairman of the US Federal Reserve and successor to the very unsuccesful Alan ‘Bubbles’ Greenspan has expressed the view that the Fed should be more transparent. Mr Greenspan only became lucidly transparent after his retirement when he said that some of his economic premises were wrong. In relation to transparency generally, though, some have said that just like the British sausage the less you know about its ingredients, the better it will taste and the safer you will feel.
Uncle Ben has the dual mandate of stable prices (low inflation) and full employment. With the official employment number hovering just under 9% it is reasonable to expect that inflation will be subdued as less jobs gives less income and lower demand. In the US economy, indeed the world economy, there is excess capacity and an abundance of goods and services and inflation is not a dominant worry for a central banker. But growth is, and bank lending is, and bank liquidity is, and bank solvency is. The world is deleveraging and the middle classes of the world have run out of ammo to fuel demand as they engage in paying down debt.
So in this new mood of transparency Uncle Ben has said that the Federal Open Markets Committee has decided that short-term interest rates will be kept at a near-zero level for another 3 years to promote economic growth and reduce unemployment. Presumably interest rates will only rise during that time if he is succesful and the economy rebounds in a meaningful, sustainable fashion. Uncle Ben has also said that the Fed may also re-start a bond-buying program if the economy remains sluggish. In passing and in context of his 3 year view on interest rates he also said "It’s certainly possible we will be either too optimistic or too pessimistic".
There has been huge condemnation of this Fed development. Comstock Partners said: "In our view the Fed’s new policy is an act of desperation rather than something to celebrate. The FOMC has used all of its conventional weapons and a lot of unconventional ones and is essentially out of ammunition. The banking system is swimming in excess reserves that it is not using—-adding more won’t make much of a difference. This is a classic liquidity trap where further easing will not be much help. The stock market strength assumes that the economy is getting stronger and that company earnings will remain at elevated levels. We think that this will not be the case, and that the market is subject to substantial downside risk."
Doug Noland author of the blog ‘The Credit Bubble Bulletin says; "It has been labeled an intellectual exercise and ridiculed as "intelligentsia." I’ll stick defiantly to the view that it remains one of the most important issues of our time: Are the Treasury and government-related debt markets part of a historic Credit Bubble and global financial mania? There are reasons why Jean-Claude Trichet over the years repeatedly stated "the ECB would never pre-commit" on interest-rate policy. The Federal Reserve this week moved further to the opposite polar extreme, essentially pre-committing to near-zero rates through late-2014. The ECB has historically believed that market speculation based upon future policy expectations works to foment market excesses, imbalances and attendant fragilities. In contrast, the activist Federal Reserve believes that it has a fundamental obligation to intervene and manipulate to achieve market outcomes the committee believes will spur growth. Unprecedented operations back in late-2008 took the Fed’s balance sheet from about $900bn to $2.2 TN. We were assured that the Fed had an "exit strategy." I’ve always presumed "no exit," and here we are today with Fed holdings at $2.9 TN. The economy is expanding, financial markets are strong and consumer price inflation is rather undeflationary – yet Dr. Bernanke is again signaling he is prepared for additional monetization."
The bottom line for us is: Exercise caution, don’t over-commit to equity markets, be careful, be selective, be prepared to jump on and off the equity express on frequent occasions. There are a lot of false prophets about and until the European banks write-off their bad debts, an abundance of false profits. Many of the false prophets seem to have just left Davos.
DAVOS
The great minds that assemble each year at Davos to discuss world affairs and who seemingly were unaware of Long-term Capital Management ( a speculative, model-based hedge fund rescued by the Fed in 1998), the tech-telco bubble/ crash, The Global Financial Crisis (Lehman Bros etc and the ‘too big to fail gang’), sovereign debt fiascos (from Iceland to Italy to Greece, Spain and Portugal), the current European Banking problems, the recent Corzine MFS debacle, have just concluded their 42nd meeting.
Judith Sloan who writes for The Wall Street Journal and The Australian, and who attended the conference said today " I can’t wait to get home, to a place where there are more rational and sensible thinkers per head of population than I ever realised." Ms Sloan’s home is Australia.
Last week in an op-ed piece in The Australian she said: "The meeting (on global warming) literally drips of political correctness. Much of the language is impenetrable, it is English by the way. According to the blurb for the meeting ‘the net result will be transformational changes in social values, resource needs and technological advances as never before. The necessary conceptual models do not exist to develop a systemic understanding of the great transformations taking place now and in the future’. "
The bottom line for us is: Beware of geeks bearing gifts, those who gave us the current chaos are struggling to understand the questions and almost certainly are incapable of generating the solutions.
FOURTH QUARTER US GDP
Fourth Quarter US GDP came in at 2.8% which on the surface looks to be a good result when compared with Q3 at 1.8%. BUT the CPI deflator came in at 0.4% (the lower the number the higher is real GDP) when other CPI numbers were as high as 3%. However, the real sting in the tail was the fact that 1.9% of the GDP number related to a rebuild of inventories which now are an over-hang for Q1 of 2012. Given that 15 out of 54 economists from The Wall Street Journal Economics Panel (28%) are forecasting Q1 2012 GDP under 2% it seems apparent (as Uncle Ben seems to be saying) that the US economy is still subdued, sluggish, less than robust, sombre, less than sunny, or whatever soft language you might like to use.
The bottom line for us is: Expect a market correction soon and volatility to continue amidst arguable and ambiguous macro statistics and political pronouncements.