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More Than Just Fluff!
Submitted by Leo Kolivakis, publisher of Pension Pulse.
What
a hockey game between Team Canada and Switzerland. The Swiss really
played well and it went into overtime, and then a shootout where our
star, Sidney Crosby, scored the game winner.
If
we play like that against the Russians, they're going to have us for
lunch. Hockey is a game of momentum and when the tide shifts, you could
find yourself in an awkward spot very quickly.
This brings me to tonight's topic. At 4:30 this afternoon, I received the now famous release from the Federal Reserve:
The
Federal Reserve Board on Thursday announced that in light of continued
improvement in financial market conditions it had unanimously approved
several modifications to the terms of its discount window lending
programs.
Like the closure of a number of extraordinary credit
programs earlier this month, these changes are intended as a further
normalization of the Federal Reserve's lending facilities. The
modifications are not expected to lead to tighter financial conditions
for households and businesses and do not signal any change in the
outlook for the economy or for monetary policy, which remains about as
it was at the January meeting of the Federal Open Market Committee
(FOMC). At that meeting, the Committee left its target range for the
federal funds rate at 0 to 1/4 percent and said it anticipates that
economic conditions are likely to warrant exceptionally low levels of
the federal funds rate for an extended period.
The
changes to the discount window facilities include Board approval of
requests by the boards of directors of the 12 Federal Reserve Banks to
increase the primary credit rate (generally referred to as the discount
rate) from 1/2 percent to 3/4 percent. This action is effective on
February 19.
In addition, the Board announced
that, effective on March 18, the typical maximum maturity for primary
credit loans will be shortened to overnight. Primary credit is provided
by Reserve Banks on a fully secured basis to depository institutions
that are in generally sound condition as a backup source of funds.
Finally, the Board announced that it had raised the minimum bid rate
for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2
percent. The final TAF auction will be on March 8, 2010.
Easing the terms of primary credit was one of the Federal Reserve's
first responses to the financial crisis. On August 17, 2007, the
Federal Reserve reduced the spread of the primary credit rate over the
FOMC's target for the federal funds rate to 1/2 percentage point, from
1 percentage point, and lengthened the typical maximum maturity from
overnight to 30 days. On December 12, 2007, the Federal Reserve created
the TAF to further improve the access of depository institutions to
term funding. On March 16, 2008, the Federal Reserve lowered the spread
of the primary credit rate over the target federal funds rate to 1/4
percentage point and extended the maximum maturity of primary credit
loans to 90 days.
Subsequently, in response to improving
conditions in wholesale funding markets, on June 25, 2009, the Federal
Reserve initiated a gradual reduction in TAF auction sizes. As
announced on November 17, 2009, and implemented on January 14, 2010,
the Federal Reserve began the process of normalizing the terms on
primary credit by reducing the typical maximum maturity to 28 days.
The increase in the discount rate announced Thursday widens the spread
between the primary credit rate and the top of the FOMC's 0 to 1/4
percent target range for the federal funds rate to 1/2 percentage
point. The increase in the spread and reduction in maximum maturity
will encourage depository institutions to rely on private funding
markets for short-term credit and to use the Federal
Reserve's primary credit facility only as a backup source of funds. The
Federal Reserve will assess over time whether further increases in the
spread are appropriate in view of experience with the 1/2 percentage
point spread.
So why is the Fed removing
liquidity? What does this mean for the bond, stock, currency and
commodities markets? Everyone is wondering whether this the seismic
shift that will jolt markets?
Relax. All the Fed is doing so far
is removing excess liquidity that was in place in light of
extraordinary circumstances. The Fed did not do this to support the
greenback since the US dollar was already rallying prior to this move,
no doubt helped by the troubles in Europe.
To understand why the
Fed is beginning to tighten, all you have to do is look at the recovery
that is going on right now in the United States. First, the Conference Board Leading Economic Index (LEI) for the U.S. increased 0.3 percent in January, following a 1.2 percent gain in December, and a 1.1 percent rise in November:
Says
Ataman Ozyildirim, Economist at The Conference Board: "The U.S. LEI has
risen steadily for nearly a year, led by an improvement in financial
markets and a manufacturing upturn. Consumer expectations and housing
permits have also contributed to these gains over this period, but to a
lesser extent — especially in recent months. Current economic
conditions, as measured by The Conference Board Coincident Economic Index
(CEI), have also improved modestly since July 2009, helped by
strengthening industrial production, despite continued weakness in
employment."
Adds Ken Goldstein, Economist at The Conference
Board: "The cumulative change in the U.S. LEI over the past six months
has been a strong 9.8 percent, annualized. This signals continued
economic recovery at least through the spring."
Second, U.S. industrial production jumped 0.9% in January signaling an economic recovery:
Industrial
production in the U.S. climbed more than expected in January, marking a
sustained economic rebound for manufacturing, utilities and mining.Factories increased production of consumer goods and business equipment, highlighting advances in all major component indexes.
“Manufacturing
in general has looked good over the last several months,” said Russell
Price, senior economist with Ameriprise Financial Inc. in Detroit.
“Even though inventories remain tight, new orders continue to improve,
and the sector in general looks very positive.”The 0.9
percent increase follows a 0.7 percent gain in December, according to a
Federal Reserve report released Wednesday. Manufacturing rose 1
percent, while mining and utilities both climbed 0.7 percent.The increase beat expectations - economists polled by Bloomberg predicted a 0.7 percent jump.
The
capacity utilization rate, a measurement of industrial capacity and how
much of it is being used, rose 0.7 percentage points to 72.6 percent,
which is still well below its 80.6 percent average from 1972 to 2009.The
industrial production index, which is seasonally adjusted, is expressed
as a percentage of output relative to a base year. The current base
year is 2002 and equals 100. In January, the index was at 101.1,
meaning the economy has only just surpassed its level of industrial
production from almost eight years ago.January output was 0.9 percent above its year-earlier level of 100.1.
Industrial
production is a key determiner of the gross domestic product, and
therefore closely monitored by the Federal Reserve when setting
monetary policy.
And
it's not just manufacturing that's looking good. A couple of weeks ago,
Yanick Desnoyers, Assistant Chief Economist at the National Bank of
Canada, wrote that the U.S. recovery is more than just fluff. Importantly, I quote the following:
As
it turns out, surprisingly, real output in the service sector, the
heavy-weight component of the U.S. economy (66%), is no longer in
recovery mode but clearly already in expansion mode! As Chart 3 clearly
shows, in the United States, real activity in this sector is already up
1.7% relative to its level at onset of recession....
The
overall picture, then, is relatively simple. Service output is
expanding, activity in the goods sector is recovering rapidly, and
construction remains the weak link by far. However, this last sector accounts for less than 10% of activity.
In that weekly, Yanick also mentioned that U.S. monetary policy is too accommodating:
The
Federal Reserve’s real key rate stands at about -200 basis points. If
we factor in the expansion of the central bank’s balance sheet, we sink
to about -500 basis points, the same depth in the accommodating zone as
in 1975 (blue star in Chart 14). And everyone remembers what happened
next back then. Inflation literally ran away, forcing the Federal
Reserve to raise its key rate to a record high, which in turn caused
the recession of 1982.
On the basis of our measure of the
output gap, which is much closer to the situation that prevailed during
the 1991 recession, not because the downturn was less severe this time
but rather because of the unusual occurrence of capacity destruction in
the economy, monetary policy in the United States seems overly
accommodating right now.
Under
the circumstances, the recovery under way in the U.S. economy should
spur the Federal Reserve to action early in the second half of 2010,
that is, sometime around August.
Other forecasters
predicting no rate hikes before 2011 are assuming that potential GDP
was not affected during the crisis and that its growth will remain
strong going forward. With credit set to flow less freely in future, we
do not regard this as the most likely of assumptions.
Last week, Marco Lettieri , another economist at the National Bank of Canada, followed up with a weekly stating that U.S. inflation dynamics suggest policy is too accommodative and concluded by stating:
Though
we do not expect inflation to escalate out of control, it would be wise
to be forward looking and keep inflation expectations in check. The
current environment no longer warrants zero-percent interest rates to
allow the economy to grow and labour conditions to improve. In our
opinion, inflation may surprise on the upside, especially as the U.S.
economy tones up through the first half of 2010, revitalized by
increased business investment and an improving labour market. We
continue to expect the FOMC to begin normalizing interest rates at its
meeting of August 2010.
You can keep up-to-date with the latest from the National Bank of Canada's economic research team by going to their site. In my opinion, they are among the best economists out there, always looking forward, not backward.
So
while the markets might react negatively to the Fed's latest move,
please keep in mind that policy is still way too accommodating. This
means that dips in stocks will continue to be bought and there is still
a strong likelihood that speculative bubbles will percolate up in
certain sectors (my money is in alternative energy).
Forget what the bears and skeptics claim. The U.S. recovery is more than just fluff.
»
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You're right Leo, it is more than fluff - its utter bullshit!
At least it's shit.
Off balance sheet entities completely ignored - check.
CDS markets ignored - check.
Front running, HFT, and prop trading the only volume in markets - check.
More fluff commentary from bullshit statistics - check.
Average american - go fuck yourself.
Leo,
I admire you for coming into the Lion's den. You knew your viewpoint would not sit well here. So kudos to you.
Also, you bring up some very valid concerns. Even perma-bears like Jim Grant have capitulated and assumed the recovery would be robust due to the unprecedented stimulus provided by the government and Fed. The accommodations from these parties was ten times any previous recession. So we should see growth in the economy. It has already clearly appeared in all risk assets.
I am not a classically trained economist, just someone who reads lots of economic pieces and applies my simple common sense. It seems difficult to believe that we can fix a problem of loose money and over-indebtedness with more of the same even if we move from consumer/corporate to government debt. So this upturn is built on a house of sand.
The upturn very well could last longer than readers at Zero Hedge expect, but the downturn will be brutal as these measures fade. And, they will fade. You cannot point to a historical period where government spending led to a robust private economy. Even after WWII, the government was scared to death that the economy would collapse. Fortunately, the private sector had delevered from the Depression and our biggest competitors were in shambles after the war. It led to a boom.
Kirk
Large corporate welfare entities engage in fraud - check.
Fraud street sucking Treasury tit - check.
Federal Reserve Bank engaging and encouraging political fraud and theft - check.
Main Street and Small Business expanding - go fuck yourself.
Higher profits for corporate welfare - check.
Biggest bonuses for corporate welfare recipients - check.
Increases in wages for everyone else - go fuck yourself.
Recovery for large corporations - check.
Recovery for entire middle class - go fuck yourself.
it's actually quite simple.
unnecessary consumption was financed by loans with imaginary collateral and the problem was magnified by the velocity of money.
it was fun while it lasted.
but it's really over.
where we go from here is not really discernable, but several things are.
the public sector doesn't have the cashflow to support operations, let alone pension, medical and other obligations to its former employees, let alone cashflow to support capital investment.
the private sector is contracting.
no, the world is not going to end, but it is going to be a very different place over the next ten years as realities set in.
and Leo, must you really play the sympathy card? Your MS is something I would not wish on anyone. But it has no place in these discussions.
Here is what you need to know about me:
1) Back in 2005, and especially 2006, I was deeply concerned about the US housing/securitization bubble and challenged some senior VPs where I was working at. That, and more pernicious bs, ended up costing me my job. They were tired of my warnings. It ended up costing them billions (but hey, it's not their money).
2) I am an economist by training with years of experience in financial markets. I've allocated to the top hedge funds and PE funds, and have a deeper understanding of liquidity than traditional economists.
3) I am not a perma-bull or perma-bear. I call it like I see it and put my own money where my mouth is. One of the pension fund managers I respect recently told me his forward indicators are rolling over. I don't see it yet. He agreeed with me that in the near term, growth will surprise to the upside.
4) The final thing you should all know about me is the toughest battle I've dealt with in my life is fighting Multiple Sclerosis (MS) for the last 12 years. In recent years especially it's been tough. But as Nietzsche said, "what doesn't kill you makes you stronger". Bring it on! I enjoy a good battle of the minds and I welcome some challenging counter arguments to the points I've discussed in my post.
Cheers.
I am not a perma-bull or a perma-bear either Leo, but for god sakes, watch that William Black PBS interview posted on ZH. Watch the Black Hammer interview from UCLA.
This ain't 2005 or 2006 and this time it is different.
Believing our US government figures, at this point in time,
there is no excuse for....
Best of luck to you with the MS
"what doesn't kill you makes you stronger." But, Leo, not everyone makes it into that second category! :)
(Actually, I should credit that joke to the writers of Frasier c.1995. Maybe we'll see good times like those years too - maybe)
Ok, here's a challenge for all. I don't think Leo and Leo detractors are in that much disagreement.
What does the beginning of hyperinflation and complete loss of confidence in a currency look like?
It looks like a recovery in REAL things. People begin to desperately exchange doomed wealth for real wealth.
Yes, we're doomed (to be followed by a new dawn). Yes, statistics are recovering, especially in manufacturing.
The tidal wave analagy is best. Leo is looking down at the beach not out at the horizon and the wave is moving VERY SLOWLY. "Look! the water is comming back!" All must remember, when they read history, they may be reading about a year, a decade, or a century in 5 minutes.
Leo, sadly point number 4 has driven all of your viewpoints both on ZH and previously on NC, particularly when it comes to your overly aggressive responses if someone disagrees with your position. It's like you have an axe to grind, Leo. Your "bring it on" comment says it all. There's nothing to bring on Leo, it's just that some of us see the world through a different lens than you do. Best of Luck.
Leo, nobody likes to deal with a juvenile bully.
Go away, grow up... come back in 10-20 years.
About 1)... they were tired of you, not your warnings. As we are here.
Take the hint and go away.
1) What's your point? There was a time when Greenspan was a rational human being who opposed central banking and supported a Gold standard. That does not mean that as a consequence of his former lucidity, we must now heed the nonsense he regurgitates about quantitative easing and central planning policies.
2) Ok, so you're an economist. So is Paul Krugman.
3) No one, that I saw, is calling you a perma-bull. Maybe perma-delusional? The 'recovery', even if there's no double dip, will be a drawn out process. Economic activity spawning from Government spending sprees and Central bank printing does not work, even if it causes economic ACTIVITY to increase temporarily (which is pretty much all your graphs and data points show and which you're correlating with growth), it does not mean there's growth, and I would contend that it takes away from future growth by tieing up capital, diverting capital and thus skewing market supplies and demands, ignoring the issue of debt loads which also tie up capital investments, etc. At any point have you inquired about how are businesses doing? If what you claim works, we'd never have recessions, we'd always be at full employment, and Zimbabwe would likely be a great place to visit.
4) That sucks, and I wish you well.
Hey Leo you sound like a real heavy hitter, I am
wondering where you find all this time to blog
and waste on the internet are you self employed?
Well said Leo. I disagree with your take on the economy but appreciate the service you provide by keeping both arguments in front of us. Any group is capable of falling into group think.
My background is science, not economics. My frustration with economic and market debate is the looseness of it. It allows EVERYONE to say they were right, DEPENDING ON THE TIMEFRAME. Which renders all the debate almost worthless unless we can zero in on only the commentary that is consistent with our own investing or trading plans. With the reluctance of almost any commentator to put it on the line......"we will see X amount of growth by x month, if we don't then my thesis was wrong".......I'm finding this all to be getting very close to a waste of time. A year from now I'm quite confident you and Bruce Krasting will both find ways to claim to have been right, you just happen to be talking about a 3 month timeframe and he was talking about a 9 month timeframe or longer. We'd all benefit from more inclusion of timing in everyone's commentary. Just my 2 cents worth. krb
No Leo;
What you really need is an underwater mortgage, the house next door selling for half price. And the pols piling up deficits to bail out their buddies at the banks and mortgage lenders. Near term, growth will surprise to the upside right before it goes KA-BOOM.
Put me in the recovery Bullshit column. If the company I work for can't sell hot water boilers when we are in one of the coldest winters on record, then Im not buying into any recovery. Did we not see another 31,000 added to the unemployment list last week? As for the 1/4 rate hike, I think it was to help prop up the dollar. In December, $53 Billion of treasuries were sold onto the market by the Chinese and Japanese. The US can't afford now to let the dollar fall back again. It was the PIIGS flap in Europe that has been the main reason the dollar has been rebounding. The economy still sucks. I'm still working a 3 day work week since the beginning of the year. Our prime selling season is almost over. We don't sell many hotwater boilers in the summer. Forget those green shoots. Banks are still refraining from lending to small business. Enough with those green shoots again.
Leo, you just like riling the crowds, don't you? You treatment of issues could easily appear in The Onion!
When the Canadian housing bubble bursts it's gonna take more than pampers and pacifiers, to stop you from crying, Leo. LOL
Leo,
your perceived recovery is about as realistic as is your perceived global warming.
top scientists fleeing the sinking ship like the lying rats they are.
and soon top economists will be tarred and feathered and run out of town.
Here's a forecast for the next couple of years:
Overcapacity will dwindle:
1. Because of bankruptcies
2. Because of M&A
And bankruptcies mean less jobs and M&A also means less jobs. Hmmm.
Here's the important things to understand about Leo:
1. He's completely wrong right now about the economy improving. We all know that, and he certainly knows it too - because he's no dummy.
2. He & his advice will occasionally make profits in any environment, timed well enough (call it luck or skill, or whatever). After all, the markets never move in a straight line.
3. Eventually, things will improve (I think from a spot well *below* where we currently are). And when they do... Leo will declare that he had been correct all along. I guarantee that.
Recovery? Jesus what a clown.
I'm trying to understand how we can get good growth when austerity plans are popping up here and there... tip of the iceberg.
Maybe we get 1 or 2 quarters of growth while people still think we're in 1935-1936. I thing we're 1930-1931 but that's for another time.
I guess trillions in government money has to do something but IMO that something will be short lived and most growth numbers will be confised with inflation but they'll have the audacity to tell us inflation is contained.
Didn't Molson-Coors just experience a 5.6% increase in COGS? Go look at most companies's income statements... costs have nowhere to go but up:
1. as unit sales drop fixed costs per unit increase
2. rates are at all time lows, as rates increase, interest expense should increase
3. you can stop investing for so long until you end up with higher maintenance costs and higher depreciation
4. hedging contracts for commodities and energy are probably coming to an end... 140$ oil, probably never fully made it through the system. The system has probably been incrementally digesting 40-60-80$ Input prices are probably compressing the margins.
Good morning! The lovefest continues...lol! I love reading comments from traders with attention deficit disorder...lol. Please, I beg you to read those these two weekly comments very carefully:
U.S. recovery: more than just fluff
and
U.S. inflation dynamics suggest policy is too accommodative
I referred to them in my post, and even quoted some material, but it's painfully obvious none of the critics here bothered reading these papers thoroughly. They prefer listening to Rosie (fine economist but nowhere near as good in predicting the economy as the NBF team).
God darn it, I'll make financial economists out of all of you if it's the last thing I do. Stop looking back at the recession, start looking forward to the recovery. As for stocks, the overall indexes will likely make marginal gains, but there will be pockets of speculative activity in energy, tech, commodities, medical devices, biotech and alternative energy.
Very simple response to you sir:
Economists *NEVER* make money.
On par with teachers...those who can, do; those who can't, teach.
Further, saying economists are the ones who are "looking forward to the recovery" is so absurdly false its laughable. I've never met a bigger group of trend following, straight-line extrapolating lemmings than economists. Its as if they have no concept of exponential growth.
Leo, how about you try to reconcile your upbeat prognosis with local, state, and federal tax receipts? The story you tell is completely negated by that data.
Leo, God love ya for your optimism, but it's sort of like trying to persuade us to ignore the quickly approaching, deadly tidal wave and, rather, focus on the beautiful lush flora in front of us......as we run headlong to avoid likely death.
There is NO accurate historical data to which to refer, that can predict the long-term damage that QE has initiated. To quote you, there will be pockets of activity. Agreed. And I'll be happy if I die with a hard-on!
Borrowing wisdom from a friend of mine:
If you're not working, you're not making money,
If you're not making money, you can't buy food,
If you can't buy food, you can't eat,
If you can't eat, you can't poop,
If you can't poop, you die.
i would recommend reading some stuff from worthy sources like Society General.
There will be no recovery, at least not the next 2 years. We are all doomed;-)
Leo: It comes as a surprise that you are now working for the Fed.
Please have your bunk mate Benny, there wear some protection. never mind, it appears you are all full up.
Appreciate the data. I don't doubt economic production is up, and this is a good thing. I'm not seeing a commensurate pickup in top line this earnings season.
The real weakness to me is the financial system and markets. Liquidity conditions, which are tightening, are the driver of that organ.
The Mighty Ducks could have whomped Switzerland for heaven's sake.
Credit Crosby, our city's faux hero, with a win but don't act like it's the market triumphing over a wall of worry.
How do I flag a contributor post as junk?
Mark it zero, Dude.
Even a comatose patient twitches and shows some signs of life. That is all that is really going on. Stimulus dollars and drips from the printing of FRNs. No real recovery. Government statistics are manipulated and flawed.
But, hey, gotta love the spirit! Keep throwing those challenges, Leo.
I'm beginning to wonder if Leo is military psyops, treasury, or CIA.
The more plausible answer is that he probably works the prop trading desk at Goldman's Sack.
Leo, such a masochist.
As for the poster questioning if the Fed can fight deflation, dude, are you kidding me?
Actually, the Fed is no more or less a herd following entity than the average quant trader, or mom who shops at Walmart, for that matter. The Fed is and always will be one step behind the curve, doomed to be taking penicillin for a cold... and an aspirin for cancer.
The fed can fight inflation and deflation, but do they in reality? No, because they are clueless.
I commend you, Leo. Once again you manage to address us 'skeptics', while you continue to ignore 100% of the posts on economics made by Tyler and Marla that support the skeptic point of view. The flakiness of the statistics you post have been refuted on here multiple times by other posts. Maybe you should just write a personalized email educating Tyler and Marla instead. Although, given that you gave the ZH staff a digital bj in the 1 year anniversary thread, I'm not going to hold my breath. Your articles on here are akin to a KKK leader speaking in front of Blacks and Jews -- keep talking, Leo.
+100. i think readers of this site tend to forget that economic conditions improved over past 3-6month. In addition to this, what i find interesting that majority of readers of this site think FED can inflate economy but can not deflate it. Thats just absurd. Over past 100 or so years every CB in the world knows how to fight inflation. Much bigger issue is deflation. One major case of deflation was and is Japan. And nobody knows how to deal with it. Its very clear that FED has every tool to drain liquidity, however what is not clear if they have tools to fight deflation.
Actually any nation can easily fight deflation. Deflation is not a problem, in fact during the 19th century there were many periods of intense deflation, yet living standards for the US still improved dramatically over that time.
Japan was a creditor nation with a growing export market to the US, that is a very different scenario. JGBs were mainly held by Japanese domestic savers. Question, where is the US supposed obtain the funding for its newly issued Treasuries? There is not enough capital in the world able to cover the future obligations on US debt. Even if the US say eliminated Medicare and Social Security all that would do is lead to savings by consumers and break the fragile consumer economy. The US dollar is finished.
Advice Japan to to get rid of yen and make USD their currency, then start to print them in competitive way.
Yes, the have all tools present during board meetings.
Let deflation run its course without the propping up of markets and their inflated prices, and deflation is no more than a necessary correction. For Govts to do that though is politically impossible, and therefore Govts. and CB's continue to try to "put a bottom in housing prices" et al. Let markets correct - it might cause quite a bit of short term pain and I do not say that without pause. However, recovery will happen, and the pain will certainly make the lesson well learned, and hard to forget. Unfortunately the road we're on is a long one and in the end I'll be lighting my cigars with $100 dollar bills because matches will be too expensive.
Leo, I'm starting to think you actually believe the stuff you continue to spew on here. Be careful Leo, you are going to get hurt. I think Mark Twain put it best: It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.
You've got some thick skin, Leo and I commend you for that. Most people would fold facing just 1/100th of the abuse you put up with here.
My fellow Zero Hedgers, please take it easy on the man, its what makes a market!
Leo is unphased by our assaults. he has shields up, 100% integrity (apparently matter/energy shields completely
block the truth too)
ZH'ers, phasers on full,,,,,fire! We have got to get the fact that the US Gov't is fraudulent and manipulates data
through to Leo, before he goes broke....
And the only way to do that is to bring those shields.
Fire again...shields are down to 99 % Another 98 blasts
should do it.
Right Leo, and the IRS has a big refund check in the mail to Joe Stack...
Leo- I applaud your article for a simple reason. It gets people pissing and moaning. You must of known what the reaction would be.
Steve Liesman, is that you?