Posted on 10/31/2002 4:43:01 PM PST by rohry
Market WrapUp for the Week Week in Graphs Storm Watch Geopolitical News Energy Precious Metals Raw Materials Thursday, October 31, 2002 Looking For a Catalyst The Chicago Manufacturing Index also fell to recession levels last month and the Chicago Purchasing Management Index fell to 45.9 from 48.1 in September. A reading below 50 indicates a contracting manufacturing sector. From the viewpoint of manufacturing, it looks like the double dip recession is here. The Institute For Supply Management report out tomorrow is also expected to show that manufacturing in general around the country is heading back into recession. More worrisome for Q4 is that consumer confidence is now at a decade low indicating that consumer spending may have peaked. Without the stimulus of another round of mortgage refinancing the consumer has no place else to go for money to maintain spending. What Will It Be? That leaves the good ole consumer. It will be important to watch chain store sales next month for signs of consumer retrenchment. This will give clues as to the all-important Christmas retailing season. If consumers pull back, then the economy will be back in recession. There dont appear to be any new catalysts that can drive consumer spending now that mortgage rates have moved up somewhat from last month. In order to create another spending boom, Greenspan needs to create another bubble somewhere that can be tapped and monetized, such as mortgage refis. Without a new asset to borrow against, the consumer is left only with credit cards to support additional spending. The Buyer of Last Resort The left is calling for more spending and more taxes to support new government transfer programs. The tax burden is already greater than 40% for most Americans, and even higher if you include state, property and sales taxes. Tax rates in the US are higher today than what the average serf paid his liege lord in feudal times. Yet more taxes are being advocated. Here in California the governor passed a major energy tax on consumers that will be implemented over time after next weeks election. With the state now financing 25% of the annual budget with debt, more income tax hikes are coming after the governor wins his reelection bid. It isnt understood by most politicians that in hard times, government should decrease the burden of taxation on its citizens. Instead it does just the opposite. After the Clinton Administration increased taxes in 1993, they followed it up with monetary stimulus and a credit boom, which gave us the 90s bubble. Now it appears that the same prescription is being advocated again, to raise taxes to pay for more spending and follow it up with lower interest rates and more credit. This is the standard answer you hear coming from Democrats, and you are increasingly hearing it come from Republicans as well. They should know better. Very few politicians today have the moral courage to tell voters the truth. What's The Truth? The Road to Perdition Instead we hear more calls for government to alleviate the pain when it was government that created the pain in the first place. There seems to be this mistaken belief that the government can solve all economic problems with continuous intervention in the economy and the markets through price supports, monetary expansion and fiscal stimulus. In each case of intervention, it has paid with more debt. It simply has not dawned on policymakers, academics, economists, or analysts that there is a limit to all of that debt. The financial profession is filled with a plethora of advisors from financial planners, brokers, anchors and news columnists who are out giving everyone advice based on a bull market. There are all sorts of rationalizations and explanations as to why there was a recession or bear market. It is easy for the profession to explain everything; while understanding nothing. The idiotic commentary that accompanies most earnings reports is a good example of this, as are the comments for 3-4% economic growth based on a continuous stream of borrowing by consumers, corporations, and lastly government. If federal, state, or municipal governments cant balance their budgets, they borrow more money. When borrowing money isnt enough, they raise taxes and that action is looked upon as fiscal discipline. It is the credit bubble of the 90s and the mortgage, consumption, bond, real estate, and dollar bubble that now exist on top of a stock market bubble giving me confidence that my Perfect Storm thesis is correct. In fact, I would recommend the reader pick up a copy of Charles Mackays Extraordinary Popular Delusions and the Madness of Crowds and read the chapters on the South Sea Bubble and John Laws Mississippi scheme to look at where we are heading. It is also recommended that the reader look at Charles Kindlebergers Manias, Panics, and Crashes for an understanding on what happens when governments and markets go to extremes as they are today. It's Here. The Four-Step Bear Market Rally Process The individual investor is coming back into the market after the majority of the rally has taken place. Up until last week, money has been flowing out of stock funds each month since July. Over $52 billion came out in July, $3 billion in August, and it is now reported another $16.1 billion came out in September. I believe it will be more of the same for October, since up until the middle of last week, money was flowing out of equity funds. Investor sentiment has done a remarkable turn around. It has gone from 28.4% bullish to 43.4% bullish, exceeding the number of advisors who are bearish. Investors are now putting money back into the market as the rally nears completion. The biggest worry now is missing out on all of the action. The advice given to the public is to buy now before all of the good news comes in before it is too late to own stocks. This next phase of the bear market should shear investors once again, but this time I believe it will lead to capitulation. Once burned, twice shy -- three times, bye-bye. For the month of October, the Dow gained 10.6%, its best showing since January of 1987. It was the first monthly gain for the Dow since March. The S&P 500 gained 8.6%, the biggest advance since March of 2000 when it peaked. The NASDAQ added 13.5%. During this month, smart-money commercial hedgers doubled their short position from 16,452 contracts to 31,052 contracts. Tomorrows report should show additional short positions being added. Whats more, this latest rally has taken place against a backdrop of declining volume, lower breadth, fewer new highs versus lows, and the bulk of the gains experienced in three-day gaps. Mutual fund cash positions are also at very low levels so there is very little fuel to support another rally without strong investor support coming in off the sidelines out of cash. Technically the market pattern is emerging out of a diagonal triangle that came too far, too fast. This is usually a pattern that signals an approaching end with some sort of reversal pattern to follow. The next leg down should be more horrendous taking the averages down to newer lows before we get a sustainable intermediate-term rally. It should be interesting to see what happens next week if the Fed cuts rates. Investors should watch the dollar to see how it holds up. A fourth reason not to cut rates not mentioned yesterday is that it telegraphs to the world that things arent going well. Lowering rates again leaves the Fed with very little ammunition to ward off a financial crisis when the next one occurs. Suffice to say there are plenty of financial crisis candidates around to give the Fed reason for pause. Volume increased on heavier selling today. Most days of distribution are accompanied by heavier volume while rallies have been occurring on weaker volume, which is not a good sign. Big board volume rose to 1.51 billion shares and Nasdaq volume rose to 1.7 billion. Volume on the NYSE was nearly 5% above the three-month average. Market breadth remained barely positive by 6 to 5 on the NYSE and by 10 to 9 on the Nasdaq. The VXN rose 1.7 to 52.99. The VIX fell .17 to 35.91. Overseas Markets Japanese stocks fell, completing a fifth month of declines, after the government backed away from bank industry changes some investors say are needed to end a 12-year economic slump. Nippon Telegraph & Telephone Corp. and other companies that rely on domestic demand slumped. The Nikkei 225 Stock Average dropped 1.3% to 8640.48. Treasury Markets Copyright © Jim Puplava |
According to the press release, what the BEA categorizes as the "final" numbers for Q3 have a 66% probablity of being within -0.6 to +0.9 points of the number in the release (3.1%), and a 90% probablity of being within -1.0 to +1.3 points.
So, using the 90% confidence numbers, the 3.1% number could actually be as low as 2.1% or as high as 4.4%.
When we have the option of peacefully changing our policies to encourage utilization of our own natural resources?
Yes, I think #3 is dismally immoral.
For all intents and purposes, it's the national equivalent of an armed robbery... a mugging.
"Give us the goods or we'll bomb the hell out of you."
We know the number is high because we know what kind of Durable Goods it takes to produce that kind of GDP number; we know about a lot of the components--Chicago PMI numbers; actual employment and personal income numbers that would result from a 3.1% GDP number and we know all that stuff is just not there.
Further, some of the real numbers in the GDP number that do support the GDP are also bad numbers for other reasons--for example, it is a problem for the auto industry to make cars at a loss, and sell them only with loss financing--it degrades the capital condition of the manufacturing company; and further, it drives the value of inventory cars down causing addition unnecessary loss to inventory owners.
Look for a reduction in the GDP number.
Evaporation's point is well taken--the real measure of this number is that the things that ought to flow from increasing GDP--increasing personal income; increasing employment; business economy expansion; are not happening. Everywhere you look, like Tulsa, where reported unemployment numbers are low, jobs (like 7500 airlines; World Com; Williams) are disappearing--and Tulsa is in relatively sound condition compared to the rest of the country. If the economy is really expanding, why do we need to continue to pump the fed funds rate?
Tell me Gramp Dave why you think "gold bugs" want the economy to crash? How does gold go up in a deflationary environment? If the economy just tanks, why isn't the next move for gold down? A crash is a deflationary event causing cash to appreciate in value against everything including gold--so gold will go down next if there is a crash, not up.
"Standard & Poor's, the independent financial research and ratings leader, today announced that Standard & Poor?s Core Earnings for the S&P 500 Index for the 12 months ended June 2002 were $18.48 per share compared to as-reported earnings per share (EPS) of $26.74. This means P/E ratios are over 40 for the S&P..." More to this story that meets the eye also. Historically, when we talked about P/E ratios, we talked about the ratio of the price to GAAP earnings--if you restate those S&P earnings to GAAP (no I have not done that for all the S&P companies, only some of the larger that I follow which I think are if anything better than representative), you will get a P/E over 60 which is a very expensive P/E even at the peak.
We also misunderstand the federal debt--it is not really a debt at all, it is the base for our monetary system. Now that is really a poor monetary system but what it is is what it is--you can't pay the debt off, or for that matter even pay it down very much without destroying your monetary base and causing a serious economic contraction. In fact, one of the things that tipped the economy over was the budget surplus and using the surplus to pay down debt--has the same effect as any other contractionary Fed open market activity buying back bonds.
About the so-called "debt" being the monetary base, don't you think that having too much of them would create prblems such as credit bubbles or inflation ?
If economic activity is sustained chiefly by expanding money base to increase consumer spending, that makes me worried.
We're swimming (drowning more like it) in money. The problem is that it has no producive place to go. Look around. Outside of entertaining ourselves trying to watch 50 channels of crap on TV or go to the movies to see Jack-Ass, just what are we doing. Halloween is the second biggest spending holiday. Too much money and not much important to do with it.
Richard W.
Richard W.
"About the so-called "debt" being the monetary base, don't you think that having too much of them would create prblems such as credit bubbles or inflation ? If economic activity is sustained chiefly by expanding money base to increase consumer spending, that makes me worried."
Sure. But that is the flip side of the issue--and you have to analyze what happens as a result of that act on the basis of the resulting conditions.
If you run a deficit and the fed does not print the money (create credits) to buy the debt instruments resulting from spending in excess of revenue, then you have deflation and a bad kind of deflation because it also hits the capital markets (takes avalable capital away from productive enterprises) and runs up interest rates.
If you run a deficit, thus, the fed usually will adopt a policy of printing the money to buy the resulting excess debt which policy is usually inflationary and I view it as bad because it makes existing money units (dollars) worth less.
Credit bubbles are a little different condition. When the fed lowers the interbank (fed funds) interest rates, it makes shorter term credit cheaper. As Doug Noland points out, creation of excess credit money is no longer the exclusive province of the fed--all kinds of institutions create additional credits in exchange for security or contract types of instruments that put additional liquidity into circulation at interest. Lots of times that credit is supported ultimately by a short term fed funds borrowing by a member bank and ultimately lent longer term at a higher rate by the bank or someone the bank finances with the intervening term credits supported by some kind of derivative instrument.
I know that is a little complicated--point is that credit bubbles are not really related to deficits or deficit spending by the federal government. Federal government may have something to do with this--easier for Fannie Mae to create credits because people loan Fannie Mae money because they believe the federal government will pay if Fannie can't--again, point is nothing to do with deficits or federal government borrowing.
Your intuitive feeling about suporting consumer spending with expanding monetary base is also correct. Not the result of deficint spending; no borrowing by the federal government involved; but the result of fed policy making bank reserves cheap and easy to get.
All a tour of bad monetary policy originating with your Federal Reserve System. I suspect that if the fed raised the fed funds rate to 8% next Wednesday, the economy would begin to recover rapidly. (Note incidentally that is what Paul Volker did in 1979 with exactly that result although it will be argued here that the circumstances were sufficiently different so as to make for a different result.) I can give you a sound monetary analysis why it would work that way but it would also be complicated and chew up band width.
Our markets are in a mess due to speculation buying of the 90s. It's that simple. Just like real estate was in the 80's and might go that way soon. McCaullifs (sp?) of the world got rich in the 90's while the "working" guy didn't. Now we are correcting for the Clinton/McCaullif excesses of the 90s.
"Do you think the housing market bubble will pop? What do you think will lead to a pop? What do you think the market reaction will be if it does pop?"
Got to identify some terms first. The economic utility of personal use real estate is determined by the amount the individual who has the present right to use the real estate interest can devote to owning it--usually expressed as a percentage of income in the case of primary residential property.
Historically, bank economists thought individuals could devote 15% of their income to debt service on their residence--later expanded to 20% and then 25% to cover debt service, real estate taxes, and insurance. That percentage is obviously not a cast in concrete number--it is probably a little different for different people. But you can reach your own conclusion with a pencil and it probably won't be too far off the 20-23.5% range.
At this point, however, that number is drifting up into the 40% range at a time when interest rates are historically low. The reason we think we have a bubble is because people can't commit 40% of their income over time to owning their principal house; and we think long term rates are like to go up under circumstances where a lot of people got into this 40% box with adjustable rate mortages. At that point, either income has to go up; the individual has to stop eating; or there are defaults on mortages with bad consequences.
"Bubble" refers to the excess market value that results from the willingness to overpay and take the risk of being unable to pay carry costs and debt service--"popping" refers to the condition that results when lots of this stuff goes into default and buyers are no longer willing to overcommit to pay "market value".
Will it happen? I think so. Only way you don't have it pop is the dollar loses a lot of value as a result of fed action giving people the excess liquidity to make the monthly payments. Rick Akerman has an insightful article yesterday on MarketWise Black Box which is frankly one of the best current economic articles I have seen concluding that the people who get hurt if the fed eliminates purchasing power of the dollar have enormous political swat and for that reason, when it gets to a choice of who gets goared, the housing owner is the guy who loses.
What leads to the pop--historically, the received economic wisdom is that lots of houses are for sale and not selling; sellers take the houses off the market; then some sellers really have to move the thing at any price so put the house back up at a lower price and a new trend of market price is established. In the current economic environment, that is exacerbated by declines in income resulting from contraction in the economy--people can't make the monthly payments any more.
Please do so. Assume enough basic knowledge on the part of your audience to make your analysis concise.
When I say "debt", I was refering to both government debt as well as cheaper loans mushroomed in recent years. Two different entities are involved, government and the Fed, as you already know. But even in government debt, the mechanism in U.S. is for U.S. government to borrow from the Fed, as far as I know. So I think that all loans come from the Fed.
I think that one of the main sticking point in this ongoing MarketWrapUp thread is about how to put discipline into the creation and maintenance of money base. Apparently, there is no good market mechanism for it. The Fed almost works like a government in its behavior.
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