Sunday, June 26, 2011

notes on the week ended june 25th

the Fed had a FOMC meeting early this week & bernanke had another press conference immediately thereafter, both of which were accompanied by considerable commentary from the blogoteriat, most of whom are under the illusion that the Fed's mandate is to control inflation & to foster maximum employment, & not to protect & to serve the banks, so there was some consternation that the Fed indicated they would attempt no more monetary stimulus in the face of unemployment which they predicted to remain between 8.6% and 8.9% for the remainder of this year...among their other pronouncements, they further lowered their expectations for growth this year, projecting that the economy will expand at a rate of 2.7% to 2.9% percent, .4% less than they guessed in april, and forecast a growth rate between 3.3% and 3.7% for 2012, off a half percent from what they guessed at their last meeting...since it typically takes a 4% growth rate to get unemployment down 1/2%, their indications are we're gonna still be over 8% unemployment all next year as well...questioned about this during his press conference, bernanke said the economy is “still years away” from what is considered a level of full employment...and if that werent bad enough, as you can see by the adjacent chart, every Fed growth forecast since january 2010 has proven to be excessively optimistic, and their guesses for future growth decreases each subsequent meeting as the future gets closer...

in congress, it appears negotiations on raising the debt limit have broken down....early this past week, after senate minority leader mcconnell suggested he was open to it,  there was speculation that the debt ceiling might be extended for a few months while they work on a more permanent solution...but to get to the targeted 2 trillion in savings over the next ten years would take some kind of tax increases, at a minimum letting the obama-bush tax cuts for the rich expire, so the republican negotiators eric cantor & john kyl walked out of the talks, leaving joe biden talking to himself and boehner with egg on his face...trading in CDSs, or protection against a US default, increased, & the differential between the cost of one year insurance & 5 year insurance on US debt narrowed to a range similar to that of the distressed debt of the PIGS in europe...though the official date for the debt to go over the limit is still august 2, some are now eying august 15th because thats the date when the treasury must make its major quarterly bond interest payouts...strangely enough, one of the loudest voices warning against the insecurity of US treasury bonds, bill gross of the worlds largest bond fund PIMCO, seems to have had an epiphany about proper countercyclical fiscal policy this week; in his monthly letter to investors, he said concern about deficits & spending cuts can wait for a stronger economy, and called for a new stimulus program similar the FDR's WPA...quoting economist hyman minsky, he opined that "government should become the “employer of last resort” in a crisis, offering a job to anyone who wants one – for health care, street cleaning, or slum renovation" and repeated david rosenberg's “I’d have a shovel in the hands of the long-term unemployed from 8am to noon, and from 1pm to 5pm I’d have them studying algebra, physics, and geometry.”

Distressing Gapboth of the monthly home sales reports were out this week; the NAR (National Association of Realtors) reports existing home sales at a seasonally adjusted annual rate of 4.81 million in may, down to a 6 month low from a revised 5.00 million in april, which was also revised down...the weakness was blamed on high gas prices & bad weather in april, and again, foreign cash buyers make up a quarter to a half of the purchasers in some distressed markets...the census bureau reported seasonally adjusted new home sales at an annual rate of 319 million in may, slightly down from a revised 326 thousand in april; the actual sales for may were 30 million, which was higher than last may's all time low of 26 million...bill mcbride produced the adjacent chart which is intended to show the comparative weakness in the housing industry and it shows sales of both new & existing homes in a historical perspective...moody's also reported their commercial real estate price index, which was down 3.7% in april from may to an all-time low (the index was started 11 years ago), and off 49% nominally - not inflation adjusted - from the peak...the losses on commercial real estate are putting more community banks in trouble (the unofficial list of problem banks stands at 1001) and falling real estate prices are also starting to impact municipal tax collections as sales are recorded and properties are reappraised....click on chart to view >>>>

the oil markets seemed to be shocked this week by the announcement from the IEA (International Energy Agency) of a planned release of 2 million barrels a day over the next month as prices took an immediate $6+ / brl hit before stabilizing; the US is to supply half of that 60 million barrel total from the strategic petroleum reserve, & 27 other countries supply the rest from their emergency supplies…the IEA press release indicated that this was to cover the shortfall from lybia as oil prices threatened “undermine the fragile global economic recovery”…but even those who would most benefit, the nation's refiners, said it "makes no sense” and “will do nothing to benefit consumers" as the crude market is already glutted...most analysts felt the move was political on the part of the US & europeans; i've got to say that oil at $100 a barrel hasnt struck me as an emergency warranting this kind of action; what do you do if there's a real emergency, ie, war in the persian gulf?...since energy secretaries & their staffs from 28 different countries were involved, this had to have taken some planning over several weeks, & it couldnt have been entirely secret, so i'd have to guess that oil price weakness over the past several weeks already reflected this pending announcement...at any rate, this year's "summer driving season" will be saved, & let's hope we dont have a real emergency during the winter heating season...

after pulling back from the edge of the abyss last week and seemingly coming to an agreement to release the next tranche of funds to greece, the european finance ministers went back to playing carrot & stick with the greeks, making the loan contingent on a vote of confidence for their prime minister Papandreou and parliamentary approval of a package of negotiated budget cuts...greece is still expected to put up for sale their ports, railways, airlines & telecom company, as well as prime mediterranean real estate, the proceeds of which would eventually go towards paying of the loans; essentially, its a foreign takeover of greece in essence not much different than a wartime occupation; certainly the greek people can see this coming and continue to shut down the country in protest...so although the headlines announce agreements made by the politicians, it still seems questionable whether any of them will work at street level...if greece should default, the biggest immediate losers are the ECB, & the french & german banks; but an unknown amount of that debt is insured by CDS issued by american banks so our exposure is unclear; furthermore, fitch reports that our money market funds have about half their assets in european bank securities...

the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me...

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