Heap Of New Data, FOMC and Greenspan Testimonial Suggest Volatile Week Ahead

Monday, October 31, 2005

A heap of new economic indicators will probably lead to volatile market developments in the week to come. Major market action could follow on the heels of the FOMC meeting on Tuesday and Fed chairman Alan Greenspan's testimonial to Congress on Thursday.
On Monday the PCE deflator, one of the Fed's dearest figures used to predict future inflation trends, and the NAPM could initiate a correction from Friday's rally which would also be driven by technical factors after the latest surge in share prices.
On Tuesday all eyes will be on the statement following the third-last FOMC meeting chaired by Alan Greenspan. All forecasts predict another 25 basis point hike in the Fed Funds rate which will climb to 4.0%. The short end of the debt market has already priced in this action and market participants will scrutinize the FOMC statement for a variation in the wording regarding growth and the inflation outlook.
Wednesday leaves the opportunity for a short breather with only the EIA petroleum status report on the agenda.
Focus your concentration powers on Thursday. As jobless claims, productivity and factory order figures will be released before Fed chairman Alan Greenspan will testify to Congress about the economic outlook they should not have that much impact on market movements. Greenspan's testimonial will begin at 10 AM NY time and markets will probably trade in narrow ranges until the end of his Q&A session.
Friday will bring the new un/employment report where projections vary wildly between a minus of 25,000 and a plus of 300,000 for nonfarm payrolls.
For all consensus estimates surf to econoday.com.

US GDP Growth Through Govt. Spending - And Other Frightening Figures

Sunday, October 30, 2005

Although markets rallied on Friday with the Dow recording the biggest one-day gain since April I am here one more time to warn that things do not look as they appear. While most market participants and bloggers - summed up at macroblog - cheered the surprisingly strong preliminary growth figure of 3.8% (Q2: 3.3%) a look at Econbrowser's chart (and the BEA press release) shows that government spending has become a major factor in the strenghtening process.
I do not consider this great news. While this can be partly explained by hurricane-induced clean-up spending it also means that the US government has been piling on more debt again and this trend shows no slowdown. Quite the opposite. Public debt rose another $26 billion in the last 5 working days alone.
It also contradicts the administration's philosophical line of "starving the (government) beast to death," which conservatives like to cite so often.
Sitting on empty coffers latest money supply figures for both the dollar and the Euro-area indicate an acceleration of the (electronic) printing presses. While seasonally adjusted M3 money stock rose 7.6% year-on-year in the US, the European Central Bank (ECB) reported (pdf) a further jump in M3 growth from 8.2 to 8.5% for September, saying that the growth relied on further credit expansion to both consumers and governments.
Adding some interpretation to the US data I want to point out that velocity growth is only a minor factor in exploding money supply as the chart below shows.

Velocity of Money Circulation divided by GDP

CHART: The velocity of dollars in circulation has slowed dramatically between 1995 and 2003 but is picking up slowly again. Data: Economagic.com
Coming back to Europe, inflation data shows that even the decline of oil prices did not lead to a slowing in the process of Euro-devaluation. Eurostat reported in a flash estimate (pdf) that inflation in October ran at an annual rate of 2.5% after 2.6% in September.
European central banks begin to grow weary about the inflation trend. A research paper from the Austrian central bank (Oesterreichische Nationalbank), done by Peter Kugler and Sylvia Kaufmann and titled "Does Money Matter for Inflation in the Euro Area?" warns that a robust cointegration is found between money growth and inflation. According to their results an M3-growth rate of slightly above 5% is compatible with a non-accelerating average rate of inflation of 2%.
So what do you think now about explosive money supply growth?

Insanity Of The Day: Get Rich With Credit Card Backed FX Trading

Saturday, October 29, 2005

I spotted this insane ad at another blog. Is this the solution? From the housing bubble to the Forex trading bubble?
We would not even need any more paper or ink for the creation of ever more money. Let's just not worry and be happy when everybody starts to e-trade forex on margin with money that is not available in the first place. With a little help from the Fed this bubble could build and build and build. It's so easy. The Fed - also the banking supervisor - only needs to take an online look at current open positions and raise rates when people are long dollars or cut rates when they are short dollars. New interest rates everyday; televised by CNBC. Mad money 24/7.
Doesn't it make macroeconomic sense in the end? No need to actually produce anything at all anymore! Why spend money on commodities and other resources for production when we can create digital numbers without all that stuff that would only make dirty hands. Why waste gas when condo-flipping when we can actually create wealth-defining numbers on the (Made in China) flatscreen?
No more waste, no more dirty hands, digital numbers only - with the built-in option of changing their colour from black to red! And everybody could be happy! Until the credit card bill arrives!

History Reserves A Sad Place For The Next Fed Boss

Friday, October 28, 2005

The nomination of Ben Bernanke, head of US President George W. Bush's Council of Economic Advisers (CEA), as successor to Federal Reserve Chairman Alan Greenspan has sparked a hot international discussion about the future course of US monetary policy.
The academic world fiercely debates whether Bernanke will be a "hawk" who is not afraid to fight inflationary pressures with higher interest rates or a "dove" who prefers to let the stuttering economy rumble ahead on a cushion of cheap credit. But gyrating capital markets obviously fear the latter.
Ben "Printing Press" Bernanke's reputation is engraved in stone with weary asset managers since he said in a speech in November 2002,"the US government has a technology, called a printing press - or, today, its electronic equivalent - that allows it to produce as many US dollars as it wishes at essentially no cost."
Such a stance certainly pleases Bush who has been running up more debts than any other president in US history and is for this reason actually the biggest enemy to a sound monetary policy in times of rising inflation. Public debt jumped from US$5.8 trillion to more than $8 trillion (that is $8,000,000,000,000) since he took office in 2001, and he is the first president who has never vetoed any costly bill Congress has presented to him.
Be it $80 billion per year for the war in Iraq on top of the $430 billion the Pentagon needs to keep its war machine running on idle, $225 billion for a renovation of the US highway system (including a $220 million bridge to an uninhabited island in Alaska) or some $200 billion for rebuilding efforts after the hurricanes in the southern US, Bush has always been a happy spender. At the same time he has aggravated the fiscal situation by numerous tax cuts benefiting the upper crust of America's society. By the time Bush goes home, the US debt will scratch the $10 trillion level.
A Free-Spending Bush Is Bernanke's Worst Enemy
Uncertain times lie ahead. The man who gave Bernanke the job is actually his worst enemy. While Greenspan is trying to save his legacy as the Fed chairman who oversaw the longest peacetime expansion of the US economy from 1987 to 2001 by notching up the leading interest rate in baby steps of quarter percentage points and has difficulties keeping energy-induced inflation in check, Bernanke has a lot of work at hand to build a reputation of being as independent of the White House administration as Greenspan was.
Being groomed in the White House before his return to the Fed, where he served as a governor for three years before his current tenure into Bush's innermost circles, is certainly not of help. At his post in the White House Bernanke missed the chance to caution Bush against a continuation of the explosive growth of US government debt.
Greenspan Did Too Little, Too Late
US inflation, meanwhile, has already accelerated to an annual rate of 4.7% in September, up from 3.3% at the end of 2004, a trend that could derail Greenspan's reputation from being "The Maestro" to simply "Easy Al" who will be remembered for doing "too little, too late", his predecessor, Paul Volcker, said in April.
The mandate of the Fed is a delicate issue, as the world's most-important monetary authority has not only to guard against inflation - which it does by raising interest rates - but also has to keep employment at the highest-possible level, which is achieved by low interest rates that encourage businesses to invest.
While Greenspan came from the private sector and was described by his colleagues as a data-driven chairman with little regard for ideology while on the job, Bernanke's last position at the CEA certainly puts him much closer to the happy spenders in the White House and Congress, where most Republican politicians see no problem in keeping the money-tap wide open. They trust that China and the other Asian exporters will stay forever happy selling their goods for evermore American debt paper, which are just an obligation to pay later.
The US itself has little left that it can export save for the US dollar and ATPs - Advanced Technological Products, a euphemistic term for a combination of weapons and computers used in the trade-deficit statements. But even as the biggest arms dealer in the world, US sales of killing devices no longer outweigh the imports of computers manufactured mostly in Taiwan and China.
In the first eight months of 2005 the trade deficit widened from $427 billion to $500 billion compared to the same period a year earlier. A nation once envied for its textiles (jeans), big cars and computers, "Made in the USA" has become a second choice for the same products now manufactured by the new industrial giants, China and India.
The game has worked so far because the rest of the world could rest assured, knowing their dollars would always be a stable reserve currency happily accepted by all.
Rising Inflation Is The Biggest Threat
Rising inflation has changed this picture altogether. China is building up a strategic petroleum reserve financed by selling part of its gigantic dollar holdings, which is a result of the fact that commodities are becoming reserve currencies these days.
Russia has quietly lowered the dollar part of its total foreign-exchange reserves from 90% to 70%. South Korea's announcement to diversify out of the dollar sent the dollar into a free fall for a day until its central bank issued a statement that it did not plan such a move, only again to renounce this statement a day later. Japan, with $800 billion the biggest holder of US debt papers, just remains silent as it knows it has no cheap way out of the dollar-devaluation dilemma. If markets get the idea that Japan is starting to sell its dollar papers, the US currency would certainly start a tumble that could turn into a crash that would lead to global impoverishment since 75% of all investments are denominated in greenbacks.
Problems On Several Fronts
Now Bernanke faces problems on several fronts, and the world, especially capital markets, will watch his every move closely. If he is to keep the dovish Greenspan policy of baby interest-rate steps he risks losing on the inflation front, with energy prices surging anew in the face of a growing supply-demand gap. This can lead to a devaluation of the dollar as its holders will try to get rid of a currency that buys less and less every month.
Playing the hawk, on the other hand, and propping up the dollar with higher rates could lead the US economy into a low- to no-growth environment, a situation Bush will probably try to prevent at literally all costs before the mid-term elections in 2006.
Taking from his first remarks at Monday's news conference, which were a kowtow to Bush, I am more willing to gamble on a dovish Bernanke. The world has seen enough examples of how the White House wipes out critical voices at all levels.
Gaining the same credibility as Greenspan, whose words can make markets turn on a dime, will be a tough task for Bernanke, whose bio shows a long list of academic credentials but not that much on-the-job experience. Skeptics fear he will rely too much on economic models and to a lesser extent on current data.
But there are also enthusiastic endorsements of him. James D. Hamilton, professor of economics at the University of California in San Diego, wrote in an initial reaction: "I've disagreed with Bernanke on a number of specific issues over the years ... But I will be doing so from a position of respect for the new office holder". Hamilton called him a first-rate mind.
The former economic adviser to president Bill Clinton, Brad Setser, wrote that Bernanke "probably appeals more to the center and the center-left than the supply-side right".
Interestingly Republicans voiced more concerns. The National Review, a haven for dyed-in-the-wool conservatives, has been launching hit-pieces against Bernanke, although little validity can be attributed to their frothy criticism.
A Sad Place In History?
Bernanke, 51, will certainly try his best to serve the maximum term of 14 years at the top of the Federal Reserve Board and keep the American economy in the best shape possible. But the son of a pharmacist and a teacher from South Carolina could be handed a sad place in history and it will not be his fault.
Not even the most brilliant head at the Federal Reserve Board will be able to prevent the decline of the American empire as long as we see a continuation of the policies made by the persons currently residing in the White House.
The questions of the future are not so much whether Bernanke will be a hawk or a dove. The question is whether the US government will find out soon enough that in an interconnected world they can no longer follow a petro-theist foreign policy financed with the money of others.
Looking at the numerous problems the US government faces - and taking into account that not one of them has yet been addressed - the major problem is not whether one brilliant economist with loads of academic credentials replaces another. Rather, it lies much more with the future course of American policy and the results of it on its economy. Or let me say it this way: The problem is not A(lan Greenspan) or B(en Bernanke) - it is (George) W (Bush).
NOTE: This piece was first published in Asia Times Online.
UPDATE: As I was busy otherwise yesterday I found out only now that Harriet Miers has requested a withdrawal of her nomination to the High Court. As the officers desert their general I would not bet all chips that this is the last high-level defection in Bush's core team. Ahem, sorry, I forgot the independent status of the Fed chairman...

The Wells Are Running Dry

Wednesday, October 26, 2005

Following a blogo-trail starting at Past Peak that led me to The Oil Drum and on to Chris Vernon's Vital Trivia (hat tips to all) I landed at this article in the October issue of the Petroleum Review that gives us the reasons why oil prices will continue their northward path, a move predicted by OPEC already in this post from August when crude had passed the $70-mark. As oil demand has been surging close to 3.5% this year the world's major producers are reporting significant declines in exploration.

Major Oil Producers report production decline

TABLE: The major oil producers report significant declines in their production. Figure are in million barrels per day. Courtesy of Vital Trivia
Oil share prices will remain a focus of speculation as they are entangled in a web of higher oil prices and lower production and a continuing series of restatements of their reserves. From the Petroleum Review:
Quite remarkably, in the first half of 2005 the top five, the top ten and the top 22 publicly quoted oil companies all produced less crude and NGLs than they did in 2004 and only slightly more than they did in 2003 and 2002. Given the global increase in production and demand over the last three years it is clear that, in aggregate, the largest private oil companies are losing market share. For ten of the top 22 companies, and for four out of the five largest private companies, the first half of 2005 saw lower crude and NGLs production than in 2004. Ten companies also produced less in first half 2005 than they did in 2003, while nine companies produced less than in 2002. Clearly, it is no exaggeration to say that the world's largest publicly quoted oil companies are now really struggling to hold production levels, with only a few managing to maintain their market share of global production.

top oil companies

GRAPH: Past Peak has done this graphic comparison of oil production of the 10 biggest companies, showing that nine of them produced less than in 2002.
Optimists have been factoring in a $10 premium for geopolitical uncertainties into the oil price. But as these figures show there is a fundamental reason why crude will not fall back to levels wished by US president Bush who showed optimism in June.
Oil prices have reversed their correction from the nominal all-time highs reached a few weeks ago. As the heating season is only beginning in the northern hemisphere I expect prices to top the record levels soon again. For "the bigger picture" - hey Barry, I fear your lawyers just lost a case but with a blog worth that much you certainly can afford the next fill-up - read this earlier post and have a look at this table:

Petroleum Review projections

SPOTTED GLOBLOGALLY: Michael Shedlock had a refreshing piece on how Congress plans to borrow its way out of its budget problems, pointedly headlined "Totally Out of Touch with Reality."
Kash at Angry Bear makes a convincing case that overall inflation figures are a good leading indicator for "core" inflation in his post titled "More on the 'Missing Inflation'."
MacroMouse points to this BIS report (pdf) on growth in international derivative markets.
UPDATE: A car that makes its own fuel!? The Israeli Weizmann Institute has developed such a prototype. Follow this link to Isracast.
UPDATE: I just finished reading Jim Puplava's "There Is No Plan B" at Financial Sense, one of, if not the, best articles on the oil outlook I have come across. Highly recommended!

The Problem Is not A(lan) Or B(en) - It is W.

Tuesday, October 25, 2005

Having woken up from a good sleep after my (too) stiff Gin and Tonic I find out the world has not changed that much since the nomination of Ben Bernanke for the Fed chair. All the other problems are still here. Yesterday's boost in equity markets is still a miracle to me as I have looked in vain to find an investment instrument that would reflect or anticipate the future performance of the Fed chairman (or can this be seen in - declining - bond markets?)
If I take the dollar as a substitute - which weakened against all other majors - I would have to conclude that the world shares my view that the major problem is not whether one brilliant economist with loads of academic credentials replaces the other one but lies much more with the future course of American policy and the results of it on its economy. To repeat my headline: The problem is not A(lan Greenspan) or B(en Bernanke); it is Dubya (and to a certain extent J(ohn Snow.))
As Greenspan has warned often enough in the last 10 months the biggest threat to the US is its lax fiscal policy and the current account deficit. No links today; I hope this forces you into browsing the archive of this blog.
In my big picture which I had promised for today I feel sorry for whoever is given the task of cleaning up the mess made up from exploding federal (and local) debts, rising inflation, wars, a crappy education system and at least a dozen other major problems (browse my archive) like the housing bubble the - still - biggest economy of the world faces and which is ruled by a government that has not addressed one of them yet. Ben Bernanke will occupy a sad place in history and it will not be his fault.
Not even the most brilliant head at the Federal Reserve Board will be able to prevent the decline of the American empire as long as we see a continuation of the policies made by the persons currently residing in the White House.
The questions of the future are not so much whether Bernanke will be a hawk or a dove. The question is whether the US government will find out soon enough that in an interconnected world they cannot longer follow a petro-theist foreign policy financed with the money of others.
Take out ATP (advanced technological products = WEAPONS) from the trade balance; but do so only in the vicinity of a doctor; you are guaranteed a shock when you see how bad the decline of the US productive base has become. The US has only two things left for which there is a demand elsewhere: Arms and the dollar. While I am pessimistic that the demand for weapons will decline anytime soon (me old-style pacifist) I am thinking very much about my stance on the dollar. Until now I have seen the greenback supported by coming rate hikes and the weak performance of the European and the Japanese economy. But as higher rates always mean more risk (browse my archive) I think the 10-month long correction of the dollar could come to an end not too long from now as the world's first reserve currency will experience more damage from a US government that is viewed as hostile in rapidly expanding parts of this globe.
While the White House is still congratulating itself to the nomination of Bernanke - whose first remark was a loyalist kowtow to Bush - the world is not standing still.
My #1 barometer for political instability - gold - has risen 2% since yesterday. Oil has begun to reverse its downward correction, equities are pulling back and bonds do too. Consumer confidence has further slipped and the GDP figures on Friday may be not all that bad although certainly lower - but this time I will wait for their revision before believing into them.
Anybody around who wants to be in the shoes of the Fed chairman?

Ben "Helicopter" Bernanke Could Land At The Fed Chair - Shares Soar - UPDATED

Monday, October 24, 2005

President George W. Bush will hold a press conference at 1 PM Eastern Time and speculations are running high that he will announce that Ben "Printing Press" Bernanke (click for bio) will succeed Federal Reserve chairman Alan Greenspan, Bloomberg TV reported, citing a DowJones news report. Greenspan will step down in 99 days. Bernanke, famous for his comments made in 2002 that he would drop dollar notes from a helicopter in order to keep the economy going has been groomed in the White House as the head of Bush's Council of Economic Advisers for the past couple of months. In this post he missed the chance to caution the current administration against a continuation of the explosive growth of US public debts that has surpassed the $8 trillion mark last week. In an initial reaction gold and silver surged on the news while equities retreated from the day's highs reached just before this piece of news came out, despite a further fall of crude oil prices. The dollar fell on the news as well from his day's highs as did treasuries.
For more facts on Bernanke and the two other contestants for the world's second most important job read this earlier post.
Bernanke Would Be A Blunt Signal For Ever More Easy Money
Having been close to Bush for the past months Bernanke cannot be seen as an independent policymaker as this administration is well known for its ways to silence critical voices. Getting dyed in the White House just before climbing the Fed chair would be a very blunt signal to the markets that the administration is not willing to accept any dissent in monetary policy. Looking at the soaring debt Bush has been creating since he took office and considering the dovish stance of Bernanke one does not get the picture that the US is serious about reducing soaring deficits which will put inflationary pressure on the greenback.
Story developing...but if it is going to be Bernanke I will first have a stiff Gin and Tonic.
NOTE: Bloomberg TV lines up one commentator after the other on this issue. Tune in if you can. I am experiencing streaming problems.
UPDATE 1: Marketwatch has conflicting reports, saying that Greenspan's successor will be named next Monday.
APOLOGY FOR MY ERROR: The Marketwatch story meant this Monday. My error.
The Wall Street Journal stays with its bet that the announcement will be made at 1 PM.
Share markets are back up to the day's highs.
UPDATE 2: Gold soars above $468, silver is up at $7.69 and the dollar falls to 1.1996 Euros after having hit a daily high of 1.1920 Euros.
UPDATE 3: Reuters quotes a knowledgeable source that Ben Bernanke will indeed become the new Fed chairman.
From the Reuters story:
President George W. Bush was expected to announce on Monday that he has picked top economic adviser Ben Bernanke to succeed Federal Reserve Chairman Alan Greenspan, a knowledgeable source said.
An announcement was to come at 1 p.m. EDT. Bush told reporters there would be "an announcement soon" on his choice to replace Greenspan, whose 18-year tenure at the Fed runs out on January 31.
Bernanke is chairman of Bush's Council of Economic Advisers. He served on the Fed's Board of Governors for nearly three years before moving to the White House in June.
His move to the White House was watched with interest on Wall Street because of the belief that he was on the fast track to replace Greenspan.
Bernanke, a highly regarded monetary economist, has advocated steps toward greater policy transparency at the Fed and is a long-time advocate of inflation targets.
At the Fed, he argued the central bank could help cement its inflation-fighting credibility by putting a number on its definition of price stability.

While commentators consider Bernanke a hawk who will fight inflation I wonder if the White House can afford a Fed chairman that would further strain the US budget with higher interest rates.
But my opinion is contradicted by bond markets which are turning lower, adding 5 basis points to the 10-year Treasury yield. Thrilling moments of history indeed. Gotta look for that bottle of Tanqueray.
Transcript Of Bush And Bernanke Remarks
UPDATE 4: Marketwatch presents us with the transcript of the presidential announcement and Bernankes first words following the official nomination:
Bush: Good afternoon. One of a president's most important appointments is chairman of the Federal Reserve. In our economy, the Fed is the independent body responsible for setting monetary policy, for overseeing the integrity of our banking system, for containing the risk that can arise in financial markets, and for ensuring a functioning payment system. Across the world, the Fed is the symbol of the integrity and the reliability of our financial system, and the decisions of the Fed affects the lives and livelihoods of all Americans.
To lead this institution, a chairman must be a person of impeccable credentials, sound policy judgment, and character. Today I'm honored to announce that I'm nominating Ben Bernanke to be the next chairman of the Federal Reserve.
Over the course of a career marked by great accomplishment, Ben has done path-breaking work in the field of monetary policy, taught advanced economics at some of our top universities, and served with distinction on the Fed's Board of Governors. He's earned a reputation for intellectual rigor and integrity. He commands deep respect in the global financial community. And he'll be an outstanding chairman of the Federal Reserve.
Ben will replace a legend, Alan Greenspan, who will retire when his current term runs out at the end of January. For nearly two decades, Chairman Greenspan has shepherded our economy through its highs and its lows. Under a steady chairmanship, the United States economy has come through a stock market crash, financial crises from Mexico to Asia, two recessions, corporate scandals, and shocks ranging from devastating national disasters to a terrorist attack in the heart of America's financial center.
Through all these challenges, Chairman Greenspan's prudent judgment and wise policies have kept inflation low. He's played a major role in America's strong economic growth. He has dominated his age like no central banker in history. He has contributed to a better life for all Americans. And I thank him for his service.
Ben Bernanke is the right man to build on the record Alan Greenspan has established. Ben graduated from Harvard with top honors, earned a doctorate in economics from Massachusetts Institute of Technology. He's built a record of excellence as both an academic and policymaker. He is the author of several scholarly books and is one of the most cited economists in the world. As Fed governor, Ben advocated greater transparency in communication with the public and markets. His speeches were widely admired for their keen insight and clear, simple language.
Ben's career has also been distinguished by leadership. He was chairman of Princeton's Economics Department, founding director of Princeton's Bendheim Center for Finance, and a founding editor of the International Journal of Central Banking. Since June he has served as Chairman of the Council of Economic Advisors.
Ben is also a kind and decent man who is held in high regard by all those who have worked with him. He has the support of a strong and loving family. I'm pleased to see that Ben's wife, Anna, and his two children, Alyssa and Joel, are with us today.
I want to thank Ben for his willingness to serve in a position so important for world markets and so vital to the well being of the American people. I urge the Senate to act promptly to confirm Ben Bernanke as the 14th chairman of the Federal Reserve.
Ben, thanks for serving.
Bernanke: Thank you. I'd like to express my deep appreciation to President Bush for the trust he has shown in me in asking me to lead the Federal Reserve System. If I am confirmed by the Senate, I will do everything in my power, in collaboration with my Fed colleagues, to help to ensure the continued prosperity and stability of the American economy.
In light of the announcement the President has just made, it's especially gratifying to have Chairman Greenspan here. In more than 18 years at the helm of the Federal Reserve, Alan Greenspan has set the standard for excellence in economic policymaking. I am personally grateful to Chairman Greenspan for his collegiality and support during my time as a member of the Fed's Board of Governors.
Our understanding of the best practice in monetary policy evolved during Alan Greenspan's tenure at the Fed, and it will continue to evolve in the future. However, if I am confirmed to this position, my first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years.

And me? I gotta give it all a long thought, second-guessing all my assumptions about Bernanke, listening in to more comments on his nomination. Will try to come up with "The Big Picture" (as long as Barry Ritholtz does not mind copycatting his trademark) tomorrow.
Just one initial thought: There is an awful lot of economic indicators coming up this week, culminating with Q3 GDP growth on Friday, all of them expected to be on the weaker side. Today's relief rally does not look like a genuine change in sentiment. See it confirmed in the developments in bond markets.
Bloggers Initial Reactions
For initial reactions to today's sudden announcement in blogosphere surf to the Wall Street Journal's Econoblog (no subscription needed.)

Connecting The Dots For This Week

Last week's wide market gyrations despite the absence of major economic data lets me gasp for breath for the week to come. Consumer confidence on Tuesday, durable goods orders on Thursday and the GDP figures for Q3 on Friday almost guarantee a continuation of the rollercoaster ride whose new layout seems to bring more downward slopes than upward slowdowns of the ride. For the consensus figures surf to Econoday. Still looking for a website that compiles all public appearances of Fed members I am only able to point out two Greenspan speeches on October 26 and 27 listed on the FRB calendar (can somebody point me to a site that lists all Fed speeches!?). On Wednesday Greenspan will receive the Harry S. Truman Medal for Economic Policy Presentation and on Thursday he is scheduled for some remarks at the commissioning ceremony for the New Houston Branch Building. Market participants will be all eyes and ears for any subtle hints about Friday's GDP growth report which is expected to come in at a real 3.8% with the deflator rising to 3.0%.
Hurricanes Katrina and Rita can be held responsible if we see a negative surprise as I expect it. And with Wilma taking aim at Florida the GDP figures for the current quarter could also see another hit. Is the Kondratieff winter finally dawning?

Real GDP growth Q1 2000 to Q2 2005

GRAPH: GDP growth has been on a downward slide since Q2 2004. Data: Econoday
Public Debt Surpassed $8 trillion last week.
As the coming economic indicators provide enough reasons for some market action last week's new negative milestone was overlooked. On October 18 US public debt surpassed the $8 trillion mark (to be exact: $8,003,897,406,911.24) for the first time in history.

US public debt

GRAPH: US public debt is on an explosive path since president Bush took office. History will attribute him as the biggest ever public spender. The White House has not yet addressed the problem that will aggravate by rising interest rates. Is an AAA rating still justified? See also the post "US AAA rating - how much longer???"
The acting administration has managed to raise its debt by 8.5% since September 30, 2004. Since George Bush has taken responsibility the US public debt has risen an astounding 37.8% or $2.2 trillion. At the end of the fiscal year 2001 the figure was $5.8 trillion. What a comfortable life it must be when you not only have the license to kill, but also the license to print.
Speaking of killing: Secretary of State Condoleezza Rice has again managed to contradict herself within a few sentences concerning Iran and its nuclear aspirations. From a Reuters report:
"Military action isn't on the agenda...The American president never takes any option off the table." I love such contradictions weren't it for the suspicion that the US has no other choice to extend its new oil colonialism if it wants to keep its economy and its war machine going. By the way, I darkly remember that the same language was used before the invasion of Iraq - ahem, I mean the liberation of the Iraqi people who now enjoy a very different standard of living. Yes, I am sarcastic as the US policy and its language leave me with no other option.
At least we can be happy that there will be now war with North Korea. Why? Because there is no oil. It is relatively easy to land tanks on the beaches of Iraq who shoot their way to the next refinery for a fill-up. But in North Korea the US army would have to bring its own diesel/kerosene supplies. And while a tank may be a difficult target for the defenders, an oil-laden supply truck in its tracks can be taken out even with a slightly rusty North Korean rifle. So, peace to North Korea - who has nuclear bombs - and keep the guns aimed at oil-rich Iran. Yes, I am sarcastic as the US policy and its language leave me with no other option.
The Fed-Refco-Austria Connection
In hindsight the summoning of the heads of the 14 biggest derivatives players by the Fed in mid-September also begins to make sense. As the Fed is not only a monetary policy maker but also the banking watchdog I cannot rule out the conclusion that this meeting was a the beginning of a coordinated effort to keep the fallout from the Refco bankruptcy as small as possible. While the big names of Wall Street were being prepared for the things to come, a small Austrian wannabe, Bawag (Bank fuer Arbeit und Wirtschaft) was dealt the big blow. The bank whose CEO is reported to be (have been?) a close personal friend of Refco CEO Bennett got left standing in the rain with a loan to Bennett amounting to more than $450 million, collateralized with Refco shares. That is roughly the profit of two years for Austria's fourth biggest but most profitable bank, wholly owned by the Austrian Trade Union Federation OeGB.
The Wall Street Journal reported on Saturday that Wolfgang Floettl, son of former Bawag CEO Walter Floettl seems to be involved into the Refco disaster. Wolfgang is married to Anne Eisenhower, Dwight D's granddaughter.
Floettl jun. sees himself caught up again in a scandal without any fault on his side.
From the WSJ (which consistently spelled his name incorrectly Flottl - it is Floettl):
Mr. Flottl confirms conducting trades through Refco, but says all obligations to it were paid in full and on time and that he's flummoxed over why his name surfaced in connection with Refco's problems. "It is ludicrous," he says. It's possible the debts were moved on or off Refco's books without the customers' knowledge or even their awareness that the debts still existed.
Mr. Flottl's father for two decades ran a small Austrian bank, Bawag P.S.K. Group, that earlier this month extended emergency loans that Mr. Bennett used to pay off the debts after being confronted by Refco's board about them.
Those loans, uncharacteristically large for a bank of its size, now look pretty risky, given that Mr. Bennett's collateral - Refco stock - has lost 96% of its value since Oct. 7, the Friday before the scandal broke. U.S. investigators are trying to figure out why Bawag was so quick to loan Mr. Bennett such a large sum, and Austrian regulators are looking into it, too. Bawag is listed as Refco's biggest unsecured creditor, with claims of about $451.2 million.
Another tie between Bawag and Refco is Thomas Hackl, who was head of investment banking at the Austrian bank before leaving in 2000 to become the New York-based brokerage's head of global asset management, Refco said in a statement at the time. Mr. Hackl, who is no longer with the brokerage, couldn't be reached for comment.
Mr. Floettl says Ross Capital used Refco as a broker to trade bonds, foreign exchange and futures from roughly the early 1990s to the late 1990s. He also says he traded on behalf of Bawag until 1994, the year his father stepped down from his post there, after questions were raised about the propriety of that trading. Mr. Flottl says his investments made money for the bank. Regulators investigated the matter and issued a confidential report, but the contents remain unknown, a person familiar with the matter says. The episode left Bawag's lenders nervous. The Financial Times reported in 1994 that six banks yanked credit lines from Bawag, citing the close ties between the father and son and other concerns.
In 1999, Bawag acquired a 10% stake in Refco, which it sold in 2004, and securities filings outline other dealings between Bawag and Refco.
Bawag's supervisory board, after meeting Thursday evening, issued a statement yesterday saying that jobs at the bank are safe and that it has adequate reserves even if the loans aren't repaid. Bawag said that it had been lending money to Refco since 1999, though it didn't say how much.
The Flottl family is from Vienna, where his father was known for ruling Bawag with a strong hand. "He was 'Mr. Bawag,' " Alarich Fenyves, a bank consultant in Vienna, says of the now-retired father. Though Walter Flottl was known as a conservative banker, people still talk about the bank's decision to add a penthouse to one of its buildings - an odd move, given the union-owned bank's egalitarian roots.
As a young man, Wolfgang Flottl moved to Boston to earn a degree from Harvard Business School in June 1981 and then established Ross Capital in Bermuda. Arvind Krishnamurthy, who traded U.S. and Canadian bonds at Ross in 1993 and 1994, said Ross Capital gave traders much autonomy to make their own decisions.
"We were organized into small groups of traders, each pursuing their own strategies with capital that had been allocated to us," Mr. Krishnamurthy said in an email. He said he had little interaction with Mr. Flottl beyond occasional group meetings. A spokesman for Mr. Flottl said those traders given autonomy followed strict guidelines.
In the early 1990s, Mr. Flottl began to take a keen interest in art. He reportedly snapped up a Degas in 1991. At a Christie's auction that fall, he was described as the buyer who purchased three pricey works. A spokesman for Mr. Flottl said Mr. Flottl doesn't comment on private matters such as art.
In more recent years, Mr. Floettl has been a seller, accepting an estimated $50 million from Los Angeles's J. Paul Getty Museum for Cezanne's "Young Italian Woman Leaning on Her Elbow." In June 2004, he sold one of his Degas pieces, originally acquired for $9.7 million, for an estimated $7.6 million.
Floettl jun. had made big headlines in Austria more than 10 years ago. Recalling my own reporting from then there was no legal wrongdoing but eyebrows rose in the closely knit Vienna banking circle when it came to light that Bawag's outstanding profitability was not a result of conservative banking policy but a father-son business connection. Floettel sen. had wagered serious amounts of money in bets his son placed on complicated spread and derivative investments. While no money was lost - the bank had been reporting record profits for a period lasting more than 20 years - Floettl sen's reputation got badly dented in the process as he had simply not told the public the truth about the origin of Bawag's high profits.
Floettl jun. is an on-and-off Bermuda resident whose estate in Tuckers Town nestles between the mansions of billionaire Ross Perot and outgoing Italian prime minister Silvio Berlusconi and is highly praised as a big spender by waiters there who remember him not asking for change when he paid with a $50 bill for a coffee. Coffee isn't that good in that particular Bermudian bistro.
As I am deviating into gossip I can also include the story about Ross Perot and the coral reefs of Bermuda, the northernmost living coral reefs in the world, nurtured by the warm Gulf stream.
When Ross Perot bought his multi-million mansion in Tuckers Town he wanted to add a dock for his yacht. Bermudian authorities declined this destruction of the highly praised reefs for environmental reasons. So what did Perot do? He simply blew out the reef and paid a hefty fine. Billionaires can have it their way.
And to add some gossip about Silvio Berlusconi one should not forget that Silvio housed a part of his art collection at his estate in Bermuda's billionaire's corner Tuckers Town. He considered Bermuda such a safe place that he saved in the wrong spot. His mansion lacked a proper burglar's alarm and a caretaker found only empty walls and vitrines on his semi-weekly visit.
OK, I gotta stop the Bermuda gossip here as I still want to be able to visit the blessed island without bodyguards in the future, having lived there for 3 years. No, not in Tuckers Town, but aboard my sailboat moored in Ely's Harbour.
Forecast For The Week
Back to business. See share markets continuing to drift lower as sentiment has certainly turned negative, but watch out for sharp technical rallies taking out shorts. The S&P 500 is poised to test this year's lows if economic indicators are coming in on the weak side.
Gold showed a strong reversal from its recent tectbook correction, rallying $7 in late trading on Friday. I am waiting for a new test of the last high above $481. German news station n-tv had a half hour long report on gold last Saturday. What struck me was the information that industrial demand for gold now tops 200 tons p.a. This goes against the populist myth that there is no use for gold except than for the jewellery industry. A good part of demand comes from electronics producers since the shiny metal has superior qualities as a conductor (as has silver which is much cheaper). OK, so here we go: 200 tons for the industry, 850 tons for Indian gold buyers and 800 tons for the jewellery industry leave only some 650 tons for investment purposes based on data from goldsheetlinks.com. 650 tons translate into a mere 20.8 million ounces left for the goldbugs. Imagine what happens when only 7 percent of the US population decide to put one ounce each in their closets. Imagine what will happen when they decide to do the same with 2 ounces! So better be - and stay - long gold.
Silver also seems to have finished its correction and will take out the $8 mark on the back of a new surge in gold. And for fundamental reasons (growing demand because catalytic converters for diesel engines need more of the metal than catalytic converters for gasoline engines) I am taking a closer look at platinum which has been going sideways for more than a year by now. A breakout could propel it to $1200. Its sister metal Rhodium has already hit an alltime high at $2,930.
Crude oil reversed its recent decline on Friday too, closing above the $60 mark. With the winter season nearing I assume the uptrend will resume on the first set of bad oil data that will hit the market in the next weeks. European consumers still have to fill up their heating oil tanks as they have been waiting for prices to come down. But the window of opportunity may be very short-lived, I fear for all those who warm their homes with hydrocarbons.
The World Is Flat
I will now return to continue reading the thrilling book "The World Is Flat" by Thomas L. Friedman. The history of the 21st century is a must-read for every long-term investor. With every page I become more convinced that shorting the US equity market is the right investment decision. For aditional reasons for this read the book as well as the previous post and follow the links in it.

Greenspan: 100 Days To Go - And Then?

Sunday, October 23, 2005


Today is a remarkable day as it is the beginning of Fed chairman Alan Greenspan's last 100 days before he will hand over the helm to his yet unknown successor. Since I have covered his most likely successors in the post "AP Boils Down Greenspan Succession to 3 Names" - a list that since then got enriched with names like Treasury Secretary John Snow (OhMyGod), Fed governor Donald Kohn (my personal favourite) and the idea that the acting administration will pick some superbull from Wall Street and I had also covered the topic "Will Greenspan Lose His Wreath Of Honour Before He Retires?" I want to focus on a matter that has been worrying me for quite a while. Worrying me so much that I started writing this post a 3 AM local (Vienna) time.
Crediting the Maestro with the longest peacetime expansion of the US and with it the global economy I nevertheless notice a remarkable difference between his style at the Fed and that of the (young) European Central Bank (ECB) and other western central banks. The difference lies in terms of accessibility. After every council meeting of the ECB its acting president braves some 60 to 90 minutes of questioning by the Euro-international press corps.
Whereas the quality of the questions at these once-a-month events can be discussed at length - I feel tempted to use Brad DeLong's multiple headline "Why Oh Why Can't We Have a Better Press Corps?" - this is only of secondary interest to me in this post. I will do that after the next ECB press conference - or one of the next ones.
Soviet style
I rather want to focus about the big distance the Federal Reserve Board (FRB) puts between itself and the rest of the world. While the chairman, the governors and the regional Fed presidents can be seen quite frequently behind a standing desk, delivering a speech - and quite many of them in the recent past - that mostly leave the impression they are out there to calm the markets it is notable that the high priests of ever expanding credit are quite reluctant to go into a Q&A session afterwards and in 99% percent of cases walk off without leaving any opportunity to second question their announcements.
While this can at least happen sometimes, mostly in the case when they can expect a tame auditorium that will not delve deeper into monetary policy, I am missing an important event in the agenda of the Fed. That is press conferences. Googling "Federal Reserve press conference" the first reference dates back to September 16, 1999 when FRB member Edward W. Kelley explained the steps the Fed would be taking to avoid a Y2K data disaster at the National Press Club.
But since then? No interviews, no press conferences. The last authority that has been so distanced from the people whose lives it influences has been the government of the USSR. We all know how that ended.
The legal status of the Fed has been a hotly discussed talking point since its inception I wonder why this institution whose decisions influence directly and indirectly every citizen of this world is so reluctant to do what every other public body - yes, I know this is disputed too - does. That is, giving account to the representatives of the public, the media.
We all would consider it very arrogant when our political representatives would take the same stance, shielding themselves behind a few press releases and two annual visits to Capitol hill where Greenspan shows off his immense knowledge with answers to asking politicians that only leave them room for a deep breathe, but no follow-up questions as they have visibly been confused by "Greenspeak."
But other than that the most important person in monetary policy on this globe is inaccessible to the rest of us mere mortals, even to the third power in a democracy; the media (and I would love to see bloggers included who could add a lot of expertise to any media event.)
The Fed is quite good at stressing the point that it acts as transparent as possible. But they are even better at hiding from questions concerning the Exchange Stabilization Fund (ESF), the actions of the "Working Group on Financial Markets" (see the post "Money Firm Claims Wall Street Is Rigged By The Government") and its operations in bond and equity markets.
Having covered the German Bundesbank as a journalist a decade ago I still remember the immediate buzz in the newsroom when the German watchdog of price stability was reported to inquire the dollar rate with the major players in the market.
Where is the balance sheet?
You don't see such events happening with the Fed. Nor does one see an audited annual report of the Federal Reserve either. Yes, they publish an annual report to Congress that covers the economy and such issues as the management and value of their real estate and their outlays for research and salaries - which rose significantly more than the official inflation rate in 2004 - but I am missing one thing required from every shopkeeper in the world. Call it balance sheet.
While the acting administration in the White House announced last week that it will name Greenspan's successor by mid-November I doubt that the Bush-crony to step into the shoes of Alan Greenspan will change this style. No administration in the young history of the US has added more layers of secrecy than this one.
Seeing the success of their political interventions I think they have every reason to hide as much from the public as possible.
But don't worry, I have the strong feeling that this government will not get away unscathed. Thank whoever that we live in a time where the truth finds its way on the internet by pictures and writings. The Abu Ghraib and Guantanamo scandals only came to our knowledge this way and it will not be the last scandals that will find their way into the public.
As I begin to stray away from my original issue of this post, muttering about a US international policy that offends people on several continents, let's get back to Greenspan's last 100 days.
While we can safely assume that the Fed will continue its 25 basis point steps until January 31 last week's speech of San Francisco Fed president Janet Yellen raised the issue that the "neutral zone" of the Fed Funds rate might extend as far as 5.5 %. Inflation will come at a cost to the happy spenders in the White House as every Fed move raises their bill in terms of interest payments on new debts which are currently generated to the tune of $3 billion per day. The IMF also prescribes higher interest rates for the US while it recommends to the ECB to stand pat (US jargon)/ stay put (UK jargon), its chief Rodrigo de Rato said on Friday.
NOTE:
The IMF is quite open to the public in terms of interviews and press conferences although its policies are highly disputed around the world.
Markets Price In Higher Inflation
Markets are beginning to price in their future expectations of higher inflation. The 10-year Treasury yield has risen to 4.50% from under 4% less than three months ago. Equity markets are beginning to test the lower ends of this year's trading ranges and I am expecting a titanic fight once the Dow comes into the 10,000-point area, a region where it magically bounced off on April 20, 2005. Please note that Fed Funds were 100 basis points lower then (and maybe read the post "No Matter What Happens, Wall Street Does Not Go Down which will lead you to a myriad of other interesting blogposts.)

Fed Funds vs. S&P 500 from 1950 to 2005

GRAPH: There has been no period in history where equity markets did not move inversely to interest rate levels. We may see some delay in this process as it is currently the case, but history shows that there is no exception from this rule. Data: www.economagic.com
The Fed is fully aware that any word it utters to the public may bear the fate to become the initial point of market disturbances, as the research paper "Transmission of Information Across International Equity Markets" (pdf) from Jon Wongswan from February 2003 concludes. Remembering the more recent past they have also been doing a good job at discreetly hinting that upcoming macroeconomic data might be different from consensus expectations. A lesson Fed researchers Jon Faust; John H. Rogers; Shing-Yi B. Wang and Jonathan H. Wright have scientifically proven in the Fed paper "The High-Frequency Response of Exchange Rates and Interest Rates to Macroeconomic Announcements" (pdf) in October 2003. But one wonders whether the current ping-pong of Fed speakers who hover between cautious remarks and optimism on a weekly basis by now will not exactly lead to the event they wish to avoid at all costs: A market move like those in October 1929, 1987 and 1989 and the extended slide in the year 2000.
Problems Only Aggravate By Staying Silent On Them
Reading these papers I understand that the Fed is very cautious about what it says on the record. But from my past times as a journalist I have learned that a public body only aggravates problems by stying silent on pressing problems. And we are facing a lot more problems today than the Y2K issue was back before the new millennium. Fed Vice Chairman Roger Ferguson has acknowledged the globalization process and its implications for public policy as well in his speech "Globalization: Evidence and Policy Implications" from May 2005, saying, "policymakers should and do pay attention to globalization." Not that he drew any conclusions for the Fed itself, though.
To speculate whether the next Fed chairman will be more accessible makes no sense before we know who it will be. But it would be a welcome move if he would open up himself to a Q&A sessions once in a while. As the world has become a more transparent place the Fed should become the same too.

Tied Up With Administrative Work

Thursday, October 20, 2005

Don't think this blog is dying but I am currently tied up with all the administrative work I've been pushing ahead in front of me for the running year. Expect me to be back to blogging by next Monday.

M3 and Public Debt Hit Record Highs - Refco Disaster Will Add Still More Liquidity

Saturday, October 15, 2005

So the Fed is tightening. Tightening? Can we be really sure that the Fed's last 11 rate hikes led to a tightening? A look at money supply figures shows that the last time M3 slowed down was in 2003 whereas the lowering of lending standards by banks since then seems to have offset the efforts of the Fed. Expect money supply to stay on its upward shooting path in the wake of the Refco disaster. As regulators have requested major banks to assist in the Refco clean-up according to the WSJ it can be assumed that they themselves will take part in it as well. Taking it from the past (October '87 and '89, LTCM 1998...) the Fed has always been best at throwing more - and more and more - money at whatever problem appeared on the horizon. How much longer will this work? The next problem in the financial sector may hit Deutsche Bank. AP reported on Friday that the Fed has ordered the bank to "take steps to prevent money laundering after finding deficiencies in its controls."
Back to the avalaunche of declining economic indicators.
Although Dr. Altig (macroblog) cautioned me in May, suspecting that money supply figures are also picking up trend velocity growth (see comments of the post "If it weren't that cheap to print them greenbacks..."), I still stick to my point that we see an awful lot of money being printed/electronically created at an increasing speed since Bush took office. To be fair, it was not much better under the previous administrations.
I would be grateful for any advice pointing to an event in history where a nation was successful in printing its way out of problems. I am pretty confident that I have not overlooked such a magical wonder. My common sense tells me it is - and will be forever - impossible.

Money supply M3 10yrs

GRAPH: US money supply M3 hit $10.035 trillion ($10,035 000 000 000) on October 3, rising $82 billion ($82,000 000 000) within four weeks.
Shocked by this record? Hold your breath. After a 25-year high in inflation (pdf) figures and a 23-year low in industrial production the world is ready for a new US record figure on Monday or Tuesday when America's public debt will reach the $8 trillion mark, roughly $2.5 trillion more since the Bush administration started signing the bills. And don't overlook that these dreadful numbers have overshadowed Friday's release of a 1.2 percent decline in real earnings (pdf) when most people were shocked to see the trade deficit approaching the $60 billion mark.
Declining Federal Deficit A One-Time Event
Last year's reduction of the federal deficit to $319 billion vs. a forecast of $419 billion will not be repeated in the running fiscal year that began on October 1 as corporate profit growth has begun to slow already. Citicorp issued a profit warning on Friday, citing mounting credit card delinquencies that will lead to 6 % less profit. These delinquents will not help boosting US GDP, I bet safely.
Being a fan of anecdotal evidence as a leading indicator I take note that CNBC has started running commercials by H.R. Block these days, where an 800-number offers free first advice for indebted consumers in trouble. So that is an area where we will see growth... Does anybody spot other growth areas?
Certainly not the majority of these bloggers (and this is only a selection.)
Econ Bloggers Zero In On Inflation
Angry Bear picks up on Econbrowser's post "Inflation's back?."
Calculated Risk suggests to look at "Fun CPI numbers" and points to Barry Ritholtz' "Look Ma, No Inflation," as well as to Dave Altig, who applies the most noble understatement with the headline "The CPI Report: Very Interesting," and has since come up with the highly recommended post "Household Inflation Expectations: No Improvement" which warns us not to expect any relief anytime soon on the inflation front, taking its clues from the decline in consumer sentiment.
Capital Markets & Economic Analysis weighs in on the inflation issue with the post "Inflation For Idiots."
The Capital Spectator says "A New Inflation Report, Same Old Debate" although this post would reward a sexier headline to attract more readers.
For some controversy opposing the afore-mentioned posts turn to ever-bull Larry Kudlow, who ignores the headline CPI figure and prays for rate cuts in his post "Irresponsible Fed."
LK's prayers will start Tim Iacono (The Mess That Greenspan Made)fuming, I am confident. He reminds us in "Inflation, Interest Rates, Game Theory" that core inflation only works for non-eating, non-driving consumers, a species quite hard to find on the new continent.
The Skeptical Speculator is as usual one of the best places to find a neutral sum-up of recent economic indicators.
William J. Polley concludes that we are already in an uncomfortable situation.
Elaine Supkis draws comparisons between 1929 and today in her post "Refco - Repro 1929."
Michael Shedlock (Global Economic Analysis) focuses on the stellar rise in personal bankruptcies here and here. He also picks up on the discussion about a possible move in oil markets that would bring us oil priced in Euros. While his post "Oil Priced in Euros. Would it matter?" starts with the Venezuelan perspective, I had discussed the Iranian perspective in the post "Iranian Oil Bourse Could Kill The US Dollar", republished in the Asia Times and at least another 116 times on the web.
If you look for some positive news on the global economic stage, surf to the New Economist who points to "China And India: A Visual Essay (pdf)" from DB Research.
Last, but not least I recommed the young blog Everyone's Illusion from bond market expert Jacob who started blogging on a high level in August and has kept up his quality since.
On a second personal note I may add that I will be spending Sunday and Monday night on a plane, returning to cold Austria and will not be able to continue blogging before Tuesday/Wednesday, depending on my foreseeable jetlag. I may add that I caught more gold and silver coins (must see that beautiful design!) than fish during my vacation that will end tomorrow.

Fed Paper: Foreign Buyers Suppress 10-Year Yield By 150 Basis Points

Wednesday, October 12, 2005

Here comes your next daily warning that it is time to look (or run?) for cover. Hat tip to The Capital Spectator who alerts us to a research paper from the Federal Reserve Board that concludes 10-year Treasury yields would currently be 150 (!!) basis points higher were it not for the massive buying of foreigners, namely foreign central banks. 10-year Treasuries yielded 4.41 % yesterday. Without the foreign purchases the yield would be 5.91 %! The abstract of the highly interesting paper "International Capital Flows and U.S. Interest Rates" (pdf) from Fed researchers Francis and Veronica Warnock goes as follows:
Foreign flows have an economically large and statistically significant impact on long-term interest rates. Controlling for various macroeconomic factors we estimate that had there been no foreign flows into U.S. bonds over the past year, the 10-year Treasury yield would currently be 150 basis points higher; even a step-down to average inflows would imply an increase of 105 basis points. The impact of the headline-making foreign official flows - a relatively small subset of total foreign accumulation of U.S. bonds - is also significant but markedly smaller. Our results are robust to a number of alternative specifications.
In the paper itself the Warnocks claim that without any official foreign inflows long-term yields would still be 60 basis points above their current level.
Fed Has Its Problems With TIC Data
I am also amused that the Fed researchers share my view, also discussed in the posts
that the Treasury Inflow Capital (TIC) data provided by the US Treasury are not really user friendly. To quote the Warnocks who point out that there is no way of knowing whether the TIC data is accurate:
"The TIC system reports monthly data on the purchases and sales of all types of long-term securities (equities as well as corporate, agency, and Treasury bonds) by all foreigners (that is, foreign officials and private investors). As such, the TIC data gives a much fuller picture of international flows into U.S. securities. It is, however, less timely than the FRBNY data, being released six weeks after month's end.
While the TIC system is more comprehensive than FRBNY's custodial reports, for at least two reasons TIC data are not as accessible to most data users. First, the data presentation is much more complicated; FRBNY publishes a single holdings number per week, whereas the TIC system publishes a myriad of time series each month. Second, the TIC transactions data are by design less accurate than FRBNY's custodial data. Rather than directly accessing investors' accounts to collect transactions data, the TIC system relies on market participants - primarily banks and broker dealers - to enter on reporting forms the amount of gross purchases and gross sales between U.S. and foreign residents. The aggregate nature of the TIC transactions data does not allow for the detailed editing and checking that is possible with security- or account-level data. This, coupled with the ever-increasing complexity of international financial systems, makes maintaining high quality data no small feat.
That said, we have no direct way of knowing whether the TIC capital flows data are accurate, in part because benchmark surveys of capital flows do not exist. However, high quality security-level benchmark surveys of foreigners' holdings of U.S. securities - surveys that recently have been conducted annually - can be used to gauge whether recorded capital flows data are reasonably accurate. Specifically, one can form flows-based holdings estimates and compare them with known holdings from the benchmark surveys. The comparison is not perfect, because unknown valuation adjustments are incorporated into the marked-to-market positions data, but large discrepancies between holdings given by the comprehensive benchmark surveys and holdings implied from capital flows data would indicate a problem with the flows data."
We learn there is always room for improvement and that nothing is more important in financial markets than the proven reliability of official sources. Money moves at the speed of a mouseclick nowadays.
As I am currently enjoying a vacation and the sun has come out again I cut off my daily post at this point, hoping to have raised enough curiosity with my readers to read the whole research paper themselves.

FOMC Worries Mainly About Rising Federal Deficits And Higher Inflation

Tuesday, October 11, 2005

Ongoing lax fiscal policy and growing inflationary pressures seem to be the two main worries in the economic outlook of the Federal Open Market Committee (FOMC), the latest FOMC minutes show. While hurricanes Katrina and Rita had added to to the uncertainty about the course of the economy over the coming months - but were seen to have a temporary negative effect only - the committee decided to stay on its path of 25 basis point Fed Funds rate hikes in order to quell any misled expectations about "its perceptions of the fundamental strength and resilience of the economy and about its commitment to fostering price stability."
Expect further rate hikes and do not assume that the Fed will stop at 4.50 %. The FOMC acknowledged that even after the latest rate hike,
"the federal funds rate would likely be below the level that would be necessary to contain inflationary pressures, and further rate increases probably would be required."
A bit further down the statement had some milder words.
"Although energy prices had the potential to add to inflation pressures, and inflation expectations had recently exhibited some signs of increasing, members agreed that the risks to inflation, as well as those to growth, remained essentially balanced under an assumption of appropriate policy action."
The not-so-bad-news went only that far as
"...meeting participants were concerned that price pressures, which had been elevated before the storm, could climb further, primarily as a result of additional increases in energy prices."
And there are massively growing worries about the public debt which stood at $7.99 trillion as of October 10.
"With regard to fiscal policy, meeting participants noted that federal outlays would increase sharply in order to assist with recovery and reconstruction efforts in the aftermath of the hurricane. The eventual size of the increment to federal outlays was unclear, but it was likely to be quite large. The substantial step-up in government spending would add to federal deficits that were already large and underscored the worrisome loss of fiscal discipline evident in recent years."
This news comes on a day when Bloomberg TV elevated Treasury Secretary John Snow into the ranks of those that might succeed Greenspan as Fed chairman. Not exactly a reassurance that the administration will step up its efforts to rein limitless spending to a point where the public debt appears to become unsustainable.
The economy won't be of much help in rebalancing the US, the forecast expects.
"...the staff lowered its projection for economic growth over the remainder of 2005 in light of the economic dislocation associated with Hurricane Katrina. At the same time, however, the staff increased the growth rate forecast for 2006 to reflect the boost to economic activity from the rebuilding effort. By 2007, the level of output was expected to move back to the path it would have followed in the absence of the storm. The staff revised upward its forecast of overall inflation for 2005 and of core inflation for 2006, reflecting the effects of higher energy prices, but lowered its projection for overall inflation slightly for 2006. It was recognized that there were considerable near-term uncertainties and that many data series in coming months would be influenced by the effects of the storm."
There were no specific figures given, adding to the impression that the Fed is as clueless about the future development as all other mortals who see relatively robust earnings numbers in the corporate sector but share the macroeconomic sorrows of the the Federal Reserve System.
It has to be noted in this context that the FOMC took note of anecdotal evidence that lower-income households consumption may get further restrained by high energy prices. This could bring company earnings under renewed pressure from two sides: less spending and higher prices in a time when consumers have already been spending more than they earn.
A first conclusion of the meaning of the latest Fedspeak confirms the impression that growing inflation fears are taking hold with most Fed representatives as they have repeatedly voiced such concerns in the last weeks. See the posts further down in this blog. The dreadful picture has not changed for better and today's upward price action in energy markets combined with bond and equity markets heading south only reinforces my negative expectations for the US economy which will be the inflection point for a global downturn.
In case you are not convinced, check precious metals prices. Gold trades at an 18-year high, silver at this year's high and platinum at a 25-year high.
The markets hopes are right now hanging high on the release of the latest earnings numbers of Apple after the market's close. I want to add that a robust economy is not built on an admittedly innovative company which makes great products (this blog is produced on a Powerbook G4) but has yet failed to translate this into a bigger market share of the PC market and faces stiff competition in the audio devices market. Also take a look a your iPod and look where it is actually made!

Eurosystem Sold Gold For 98 Million Euros

One Eurosystem central bank has sold gold with a value of 98 milion Euros in the week ending on October 7, the European Central Bank (ECB) reported on Tuesday. Assuming a gold price of 395 Euros per ounce this translates into sales of a little more than 248,100 ounces. The position gold and gold receivables in the ECB's weekly financial statement shrunk to 149,784 billion Euros.

Greenspan Switches Into The Fast Lane


Federal Reserve chairman Alan Greenspan can switch into the fast lane. No, don't think a 50 basis points rate hike is in the making for the next FOMC meeting.
The Luxist, a blog obsessively covering luxury products reports that he has recently won a Porsche Boxster at a charity auction. The New York Postsuggested he keep the car in order to get a better understanding on the impact of non-core inflation on people's lives. Government officials are not supposed to accept gifts over $25. Greenspan last drove a car himself in 1987.

Gone Fishing...

Friday, October 07, 2005

It's been an exciting week marketwise. I am off for a week of fishing and reading but will be on watch for the FOMC minutes coming Tuesday. Depending on the weather I might find time to come up with a daily post. So please check back.

Barracuda01

Fed Fisher Punches The Market Again

Thursday, October 06, 2005

The markets will have a hard time not only short but also medium and long term.
Conventionally I abstain from commenting on the policy of other nations (we got enough dumb politicians in Austria too) but when president Bush and his vice Richard Halliburton, excuse me, Cheney, start demonizing Islamism and announce coming "decades of war" I think this is of concern to every citizen of this world. Today's speech of the president who has run up more debt than any other American leader before him reminds me a little of Joseph Goebbels propaganda speech of 1943 when he asked a frantic auditorium "do you want total war?" We know how that ended.
In this context one is almost relieved to read Fed Dallas president Richard Fisher's latest speech where he points out that inflation has also to be fought on the government's spending side. Fisher made it clear that the Fed won't "let the inflation virus infect the blood supply and poison the system." Fisher's remarks dealt the markets another blow, the second in two days. From his speech:
When governments run massive deficits, markets worry about two of three possible outcomes.
The first is that taxes would eventually be raised to pay for spending and move the ledgers toward balance. Higher taxes, of course, risk sending highly mobile capital scurrying to more tax-friendly destinations, destroying investment and jobs as it leaves.
The second is that the central bank would monetize the deficit, inflating the economy. The risk would be capital flight to destinations where the purchasing power of capital is better preserved. Here, I want to make myself perfectly clear: As a member of the FOMC, I will never vote to monetize fiscal profligacy. And while I never speak for my colleagues, it is my distinct impression that none of them will do so either.
So this leaves a third option: better calibrating and configuring government spending programs. In a globalized world, nations must tax and spend more prudently than ever. Just to retain capital, yet alone attract more, they must offer taxpayers the best deal at the lowest price. No government anywhere in the world can go on taxing and spending as if it is still operating in yesterday's economy. If the United States is to remain an economic colossus, its fiscal authorities, like its central bankers, will have to become paragons of prudence and restraint, implementing policies that will put the nation in a position to bolster, not hamper, its competitive edge.
Remember, take away the military spending and there would be no deficit anymore. The US spends some $420 billion on its standing army which is more than the next ten big weapon spenders pull out of their pockets every year. Russia now spends $19 billion on its army annually.
Also remember that the cost of the war in Iraq, at least $170 million every single day, is not included in the $420 billion figure. This adds another cool $60 billion annually, at least. And now the two leaders of the biggest army tell us that the "war on terror" - reminds me of "fucking for virginity" - will go on and on and on.
Something is seriously wrong. I am short the Dow since 10,550 and I see no reason to change that position as long as this administration is trigger-happy on opening ever more fronts in a war that cannot be fought and therefore cannot be won. Peace is a process founded on the pillars of education and safety. With these war-mongers in the White House the rest of the world has really something to fear. Something is seriously going wrong and I see no way out of it as long as Dubya tries to mold the world according to his or his buddy's beliefs.
By the way, gold rallied strongly today. Remember its the most tangible asset when you flee a war zone.

"Strongly Vigilant" ECB Stays Put - BoE too

The European Central Bank (ECB) and the Bank of England (Boe) both announced on Thursday that they will leave lading interest rates unchanged. Find the press releases here and here. Both central banks appeared uncomfortable with the inflationary outlook caused by high energy prices and the ECB noted that it sees no significant reversal of the situation because of continuing high global demand for oil.
ECB president Jean-Claude Trichet warned in his introductory statement to a webcasted press conference that energy prices pose a severe risk to price stability. "Strong vigilance with regard to upside risks to price stability is warranted. It is essential that the increase in the current inflation rate does not translate into higher underlying inflationary pressures in the euro area," he said. Trichet also cautioned of high money supply growth which now exceeds 8 % and seems to be driven mainly by mortgage loans. "Strong monetary and credit growth, in the context of an already ample liquidity situation in the euro area, points to risks to price stability over medium to longer horizons," Trichet pointed to inflationary dangers on the horizon.
Both central banks are caught in a web of slowing growth and rising inflation.
"According to Eurostat's flash estimate, annual HICP inflation was 2.5% in September, compared with 2.2% in the previous two months, and it is likely that HICP inflation will remain elevated in the short term," Trichet said and urged governments to streamline their fiscal policies.

Inflation Warnings Are Inflating - Hoenig Is Next

It gets hard to keep up with all the warning signs spelling i-n-f-l-a-t-i-o-n the Federal Reserve System puts on the road into the future. There clearly is an inflation in inflation warnings.
The next one from the Fedsystem's front bench is non-voting Fed Kansas City president Thomas Hoenig who stated in his speech (pdf) from late Wednesday, "The primary concern for the outlook is that higher costs may lead to greater inflation pressures."
He concluded
"let me provide a brief summary of my view of the US economic outlook and monetary policy. The overall outlook ... for the remainder of this year and 2006 is good. Considerable time will be required for the recovery from hurricanes Katrina and Rita, but I currently expect that the storms' impact on economic growth will be limited.
In the next six months, I expect growth will be somewhat slower due to the disruption of business activity. In 2006, the rebuilding efforts in the affected Guld regions could add overall stimulus to growth. I believe that the greatest concern for the outlook is the potential for inflationary pressures to emerge. Currently, these pressures appear to be modest, but they will need to be carefully monitored going forward."
I begin to repeat myself pointing out that inflation, unemployment and the multiple deficits will be the next market-shaking new. Who knows which will hit first?

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