Archive for June, 2009

Tail Chasing At the Fed

Tuesday, June 30th, 2009

The Federal Open Market Committee announced at the end of its June meeting on the 24th that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”  This implies they are not seeing any imminent sign of inflation looming just ahead, but they also made no reference to any significant deflationary pressures either.  This will not increase the odds that investors in money markets and short-term CDs will see any improvement in their earnings. We have seen an increase in long-term rates of late and that was addressed in their statement as follows: “…to provide support to mortgage and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn.”  It will be interesting to see how they combat the inevitable inflationary expectations such a massive monetary injection will nurture.  It’s as if the more securities they buy back, the more the potential for dollar degradation increases, resulting in a negative feedback loop that keeps pressuring longer-term rates upward.

Plenty of Room

Monday, June 29th, 2009

May Industrial Production, according to the Federal Reserve, continued the decline we saw in April, falling 1.1%.  Broken up into its components, they reported mining output was off 2.1%, utilities saw their output decline 1.4%, and manufacturing fell -1.0%, primarily reflecting a continuing fall in motor vehicles and parts. Year over year, industrial production has now declined 13.4%.  A key part of the report showed Capacity Utilization fell .7% to 68.3%, a new record low dating back for forty years to the inception of this data series.  While manufacturing no longer has the same clout within our economy it enjoyed in the middle of the last century, it still accounts for considerable employment and this continued abatement does not suggest any sudden improvement in upcoming employment data. The figures for future retail sales may also have a difficult time overcoming their lethargy if rank and file workers feel a need to cut back their consumption.

May Consumer Prices

Friday, June 26th, 2009

According to the Bureau of Labor Statistics, May saw a slight .1% rise in the Consumer Price Index.  On a year over year basis the headline CPI now registers a negative -1.0% decline.  As with other similar indicators (like the recent PPI report), the outlook for inflation is slight, if now actually non-existent.  At its core the CPI also rose just .1%, although it remains positive year over year, increasing by 1.8%.  Since this number is considered by many to be a point of particular focus by the Federal Reserve, it may take on added significance, although the Fed’s recent announcement at the conclusion of the Open Market Committee’s meeting didn’t suggest they found it particularly troublesome.  Further, since we remain within the Fed’s purported target range for inflation of somewhere between +1% to +2%, little impact is expected to be felt from this month’s data.

May Producer Price Index

Thursday, June 25th, 2009

The May Producer Price Index, commonly seen as a measure of inflation at the wholesale level, rose +0.2%, well short of consensus expectations. The primary influences on this month’s report were a substantial drop in food prices which partially offset a stronger hike in energy costs. The PPI has now fallen at a -4.7% rate year over year. The core measure, which excludes the influences from both food and energy, actually fell -0.1%, helping bring its year over year rate down -0.4% to a still strong +3.0%. While persistently high at the core, the downward trend of the headline number encourages us here at Atlas to expect inflation will continue to moderate, at least for the near future.

Honey, I Shrank the Debt

Wednesday, June 24th, 2009

To a great extent, credit ratings are the result of a comparison between your earnings, assets, and the amount you want to borrow. Getting a bank to finance your purchase of a house should require that they look at both your ability to service the payments (your earnings) and the value of the property (the asset) before determining how much they will loan against it (your leverage). How can you increase your credit worthiness after that? Two ways: either make more or pay down the loan. In today’s recessionary economy, Americans have begun to take the second option. As a percentage of our nation’s GDP, net new borrowing has gone from about 10% to a negative 2% in the last few years according to the Fed, suggesting debt service is lightening the overall debt load of those who can pay it. We see, however, in some of the world’s emerging economies room for the first option to play a part. There, with trade surpluses and a growing middle class, assets can still appreciate. Getting debt free is a good idea. Getting a toe-hold in some of those countries with good growth potential may be as well.

A Forgone Contusion

Tuesday, June 23rd, 2009

Years ago I saw bumper stickers touting “When the going gets tough, the tough go shopping.” Now it seems consumers are pulling in their horns a bit.  Annualized retail sales as reported by the Census Bureau have fallen hard six months running. The Fed is keeping rates low, in part to encourage spending. The Treasury Department has begun spending in our stead, hoping to fill the gap until buyers return en masse to the shopping centers. But who says they will? From the start of this millennium through 2007, your average American increased his spending by 44% according to The Economist, and total household debt rose to 71% of our nation’s total production measured through the end of last year. An aging population, caught in the throes of recession, and having seen their personal wealth evaporate dramatically of late, may decide to cool things down a bit. Having borrowed some $2.3 trillion over the last five years or so, which was then spent on remodeling (19%), investments like stocks (44%), and just stuff (20%), they need to settle down. The problem is all that spending accounted for 77% of America’s growth over that same period. Our economy will definitely be badly bruised if its absence is for a prolonged period.

Growing Green Forests

Monday, June 22nd, 2009

The annualized growth rate of the Economic Cycle Research Institute’s Weekly Leading Index continues moving toward positive territory, now at a 46-week high just -0.6% below the zero line. Their managing director Lakshman Achuthan recently said, “With WLI growth climbing to its best reading since July, U.S. growth prospects are rapidly reviving.” They are forecasting an end to the current recession sometime this summer. Their inflation gauge has risen in both of the last two months from a 51-year low and the ECRI sees good news there as well, “warranting neither deflation worries nor fears of an inflationary upsurge at this time.” Achuthan also pointed out at a separate interview earlier this month that “interest rates always rise when things are improving. If higher interest rates choked off recoveries, then we would always be in recession.” The weekly ECRI opinion is one of our favorite indicators here at Atlas. We hope this optimism will pan out, allowing the green shoots being discussed by many analysts to turn into a forest.