Archive for July, 2011

Trickle Down

Friday, July 29th, 2011

An hour glass has been used as metaphor by poets and philosophers for ages.  I remember how fascinating it was the first time I discovered one.  Watching the fine sand pour down, form shape-shifting dunes, fill the bottom half and await the requisite flip before beginning the process all over again probably occupied more of my time than it should have.  I still keep a little one around, an egg-timer, just because it is to me one of those perfectly designed simple machines with a defined and useful purpose which mankind occasionally produces.

Seeing one’s income reduced to a trickle is not nearly so delightful.    The Federal Reserve, in an effort to stimulate our economy, has reduced short-term rates almost to zero and held them there for years now.  It seems rather obvious to me this strategy has not had the desired results.  The unintended consequences, however, have been severe.  Savers, retirees, those unwilling to take a large amount of risk with their nest egg, and many others are feeling squeezed.  Lipper says money market yields have averaged 0.03% for 12 months through June, and that’s before tax!  Meanwhile the core rate of inflation measured 1.3% according to the Commerce Department, and at the headline level (which includes incidentals like food and gasoline) is four times higher.  This means anyone depending on a fixed income is receiving a negative return; it means our spending power is declining more almost every month.

This may sound radical but I think the Fed should raise rates.  They want to see an increase in retail sales.  How can that happen when retirees, one of the fasted growing demographics in America today, fear they won’t be able to afford dinner, much less items which are less pressing.  Do they fear raising short-term rates will somehow ignite runaway inflation?  Low rates led to many of the inflationary bubbles we have witnessed.  A plethora of projected fears such as a dollar default, a bankrupt America, or out-of-control gasoline prices haven’t had such an effect.  Why would removing the fetters on spending for a wide swath of our population do so?  Certainly the global markets which control rate levels for extended maturities will go their own way as usual.  Perhaps they will even react favorably, seeing such a real stimulus for what it is, a fundamental trust in market forces rather than another misguided attempt to force economic behavior upon a system of dynamic but random variables.

Shovel Ready Stimulus

Thursday, July 28th, 2011

Independence Day has passed for another year and we all had plenty to celebrate.  It’s just possible that some folks had a bit more to be thankful about than others.  I’m talking about anyone who received a raise recently in this moribund economy.  Who would that be?

I don’t keep track of every Tom, Dick or Barry but the White House did release its annual salary report just before the three-day Fourth of July weekend commenced detailing how its 454 staff members are compensated.  That’s important when you have just $37.1 million to divvy up.  Over one-third, 141 to be exact, are now pulling down something north of $100,000 annually and 21 reached the $172,000 peak for the year.  More than half of these hard working folks (54%) received a raise amounting to an average 16% bump.  Overall the payroll cost climbed roughly 8%.  Certainly that will help sooth those public servants who suffer when feeling the average American worker’s pain.

Supposedly there is a freeze on the pay for Federal Workers but there are plenty of exclusions.  Military salaries were one.  Fair enough.  Of equal importance were congressional staffers who received a bye according to the Washington Post.  Apparently this exclusion also covered many others on Pennsylvania Avenue.  Seeing these staffers make something like twice (or more) the national average salary tells me that stimulus packages are still being handed out if you happen to be working in the right place like, for instance, that blighted area known as Washington D.C.  The next time I hear some politician say we need to cut spending, I’m going to get my shovel ready.  Right after I grab my wallet.

Busted Flat

Wednesday, July 27th, 2011

America’s budget difficulties and our massive deficit have combined with concerns about the Euro’s stability, becoming a dominant feature of news headlines for some time now.  With our total debt outstanding soaring well above $14 trillion according to the Treasury Department, worries surface suggesting we may go broke or that China will foreclose on us.  Though such comments smack of hysteria, how can they still be rationally addressed?  Let’s refer at an example from the recent past which may provide some clarification.

California, with a Gross State Product a bit over $1.9 trillion according to the World Bank, would qualify, if it were a nation, as a member of the G8 unlike smaller countries like Portugal, Ireland, Greece or Spain (the infamous PIGS causing such worries in Euroland).  In the middle of 2009 unemployment had hit a seventy-year high.  The Golden State found itself squeezed by falling revenue and rising costs, facing a fiscal dilemma.  Fitch downgraded the state’s credit to BBB, just a tad lower than the A- at which they had been rating it.  Governor Schwarzenegger and the state assembly were unable to agree on any way to resolve the enormous financial crisis.  In response to what the State Controller called “a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression,” registered warrants, affectionately called California IOUs publically, were issued by the state in July.  While initially accepted by institutions, after a couple of weeks Bank of America, Wells Fargo, JP Morgan Chase and Citigroup decided to stop honoring them although others, including many credit unions, did not go along with this embargo.  The state was forced to begin slashing spending on major programs like education and healthcare in an attempt to rein in a crippling budget deficit.

Obviously, taken as a whole, our nation is much larger than a single component.  We have an economy with a GDP north of $14 trillion.  More importantly, the U.S. is a sovereign nation, giving it authority to set certain standards and influence some behavior, possibly like requiring banks to accept federal IOUs no matter what.  That was something California couldn’t do.  But certainly, while any comparison between California and the U.S. contains some huge flaws, we can see the state still remains in business.  Fitch restored its credit rating back to A- in April of 2010.  Arguably this does not address the larger questions centered around how we as a nation will ever pay off all our creditors foreign and domestic, but that is a question we don’t need to answer immediately or just by ourselves.  After all, as J. Paul Getty has been credited with saying, “If you owe the bank $100 that’s your problem.  If you owe the bank $100 million, that’s the bank’s problem.”

Mid 2011 ECRI

Tuesday, July 26th, 2011

In mid-June the Economic Cycle Research Institute (ECRI) announced their Weekly Leading Index (WLI) hit 128.4, a six week high.  The WLI is seen as one way to measure future U.S. economic growth, but is also considered short-term in nature.  To get a longer-term perspective it must be annualized, and when doing so it has had a terrific track record dating back over the last eighty years or so.  Unfortunately this calculation keeps the anticipated growth rate unchanged at 1.7%, a very low reading which tends to skirt along just above recessionary levels.  It is at, in fact, the lowest level we have seen since last December.  At best the report suggests any continuation of the current recovery here stateside will remain tepid.

Lakshman Achuthan is Chief Operations Officer at ECRI.  On National Public Radio (NPR) he recently discussed the very long-term trajectory we have been seeing in our economy as follows:  “Ever since the mid-1970s the pace of expansion has been stair stepping down in every expansion so that the last expansion was the weakest expansion on record on every count, including GDP and jobs.”  We share their concern that possibly this lackluster recovery may not gain enough traction to weather a set of adverse circumstances which could arise in a number of areas, thereby pushing us into another, perhaps even deeper, recession sometime early next year.

June Existing Home Sales

Monday, July 25th, 2011

The National Association of Realtors (NAR) reported that existing home sales failed to rebound in June from a terrible reading in May.  The weak numbers were exacerbated by higher than expected contract cancellations.  Seasonally adjusted the annualized rate dropped to 4.77 million units after reading 4.81 million the month before.  Month-over-month the pace fell 0.8 percent, 8.8 percent from a year ago.

The NAR chief economist, Lawrence Yun, is pinning some of the blame for the high rate of cancellations on banks because of their “tight credit and low appraisals.”  Procuring a loan may be tough, but those able to meet the strict standards are rewarded with a national average commitment rate for 30-year conventional, fixed rate mortgage 4.51 percent, the lowest so far this year.  Since 1971, there have only been four months that have had a lower rate, all last year.  The bulk of existing home buyers were already existing home owners.  First-time home buyers represented just 31 percent of the total, down from 43 percent a year ago when a tax credit was being offered to purchasers without homeowner experience.  At $184,300, the median price of a home increased by 0.8 percent.

There is a lot of economic activity that comes along with the purchase of a home.  First, realtors are paid; and often furniture and floorings are purchased or landscape is completed. The housing industry provided a foundation for the last economic expansion.  This foundation has been shaken and continues to be unstable. It is likely the rest of the economy will remain fragile so long as this understructure remains under pressure.


Friday, July 22nd, 2011

In September of 1995 House Speaker Gingrich, who had swept into office with a passel of Republicans promising to put America’s house back in order by limiting deficit spending, balked at Clinton’s attempt to raise the debt ceiling.  With no budget, the government began operating under a short-term “continuing resolution” until one could be passed.  By mid-November, when that didn’t happen despite bipartisan efforts headed up by Vice-President Al Gore, Senate Majority Leader Bob Dole and House Majority Leader Dick Armey, “non-essential” services were shut down for a few days and workers furloughed.  They were eventually paid about $400 million for not working according to the Clinton administration.  A temporary spending bill was passed but with no permanent resolution forthcoming, a second shutdown began mid-December.  It was resolved with the passage of a budget in early January, 1996.  During the melee, Clinton’s popularity plummeted but Dole and Gingrich were at loggerheads with each other in the ensuing presidential primary.  Clinton eventually won reelection.

How did the stock market react to all this uncertainty?  I was working with many of you back then and you may recall the unsettled tenor of the times as we navigated our investments through troubled waters.  There were frequent fluctuations with charts and portfolio values seesawing back and forth.  Despite the headline confusion however, the markets generally would inhabit a trading range, moving up and down in a narrow two to three percent band before suddenly climbing, establishing another area of consolidation at new higher levels.

That was then, of course.  Are things very different today?  Certainly the names have changed even though the roles being played seem a mere reprise.  I won’t pretend to know how this entire issue will be resolved, but so far the market behavior seems similar.  Prices overall advance, then consolidate in a narrow range.  The parameters are just a little wider between highs and lows and the higher level of prices overall makes the volatility seem more pronounced, but the similarities exist nonetheless.  Let’s hope the final resolution is the same, with markets advancing after a budget is finally passed.  Naturally, as is often said in the investment industry, past performance is no guarantee of future results.  That warning is possibly more aptly applied to Congress.

June Retail Snails

Thursday, July 21st, 2011

As the country eases into the lazy hazy crazy days of summer, we are continuing to get the last details of spring’s economy.  The Census Bureau’s most recent retail sales data has slowed to a pace much like that produced by the contraction and extension mechanism a snail uses to motor across surfaces.  After growing 0.2 percent in April and contracting 0.1 percent in May, retail sales managed to extend 0.1 percent in June.  This creeping pace does not buttress your Atlas crew’s confidence in our economy’s strength.

There was some movement in automobile sales as they were up 0.8 percent after falling 1.8 percent in May.  If the month’s auto sales (which are notoriously volatile) are taken out, the statistic stops moving altogether month-over-month, remaining unchanged, and this is after a paltry pace of plus 0.2 percent in May.  Consumers did manage to spend less on gasoline even as the price went down, so removing petrol along with autos reveals other retail spending actually increased marginally by 0.2 percent.

This is one of those statistics which moves with the economy and is not able to tell us much about the future.  But looking back at it can give us a reference point for where the economy has come from and thus some sense of continuing momentum (or lack thereof).  Doing so shows major slowing in retail sales since the last quarter of 2010 when their average annualized growth rate was 3.87 percent.  It fell to 3.6 percent in the first quarter of 2011 and only managed .27 percent in the second.  The temperatures may be heating up, but retail spending has retracted into its shell.