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Whither Deflation?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Last week, I warned my readers to get ready for more upward growth revisions. I believe that US growth in Q1 2010 will surprise even the most optimistic forecasters.
Why am I so confident? After all, my last call before the December employment report was way off. The bond market didn't go 'boo' back then and more jobs were lost. Today, Bloomberg published a sobering article stating that 824,000 jobs will disappear on February 5th.
No
doubt, when all is said and done, and the government bean counters
finish tallying up the wreckage, job losses from this recession will be
far worse than what was initially thought. And this recession hasn't
been gender neutral. By far, men have suffered a lot more than women as cyclical industries got hit harder.
But all that is about to start changing in Q1 2010. Consider the following very carefully:
- The Conference Board Leading Economic Index™
(LEI) for the U.S. increased 1.1 percent in December, following a 1.0
percent gain in November, and a 0.3 percent rise in October. - The January 2010 ISM Manufacturing report
showed widespread growth. Importantly, the manufacturing sector grew
for a sixth straight month, and both the New Orders and Production
Indexes are above 60 percent, indicating strong current and future
performance for manufacturing. - US real GDP surged 5.7% in the fourth quarter 2009,
confirming that the recession is over and the recovery is gaining
traction. While the acceleration in real GDP growth in the fourth
quarter primarily reflected an acceleration in private inventory
investment, there was a pick-up in non-residential investment, exports
and investment in equipment & software, a harbinger of future job
growth.
In the near term, it is highly likely that US growth
will continue to surprise to the upside. Interestingly, Tom Braithwaite
of the FT reports that US deflation no longer seen as a risk:
The
US has escaped the danger of a Japanese-style deflationary trap,
according to James Bullard, a voting member of the Federal Reserve's
key policy-setting committee.
Mr
Bullard, president of the Federal Reserve Bank of St Louis, told the
Financial Times in an interview that his preoccupation throughout 2009
had been deflation, but the risk had "passed".
Last week's Fed
meeting produced a dissenting vote for the first time in a year when
Thomas Hoenig, president of the Kansas City Fed and a rate hawk, argued
that financial conditions no longer warranted a policy of holding rates
at "exceptionally low levels . . . for an extended period".
Other
members of the Federal Open Markets Committee voted to preserve the
"extended period" phrase, generally taken to mean near-zero interest
rates will continue for at least six months. But they are also working
on an exit strategy from the exceptionally loose policy used to fight
the financial crisis.
Mr Bullard, who is considered a centrist
member of the FOMC, said he was happy to continue with the current
guidance, but he did have some sympathy for Mr Hoenig's argument that
"if you come off zero and you move up a little bit, it's still a very
easy policy. You've still got a very large balance sheet and you're
still at very low interest rates."
He
added that, although it was not time to tighten policy, members of the
committee would weigh in their decisions factors other than inflation
and unemployment. Factors to consider would include asset bubbles.
"I
think they're gaining weight with many people because of the bad
experience we had in the aftermath of the last recession, the housing
bubble and how that really has blown up and caused so many problems,"
he said.
When the Fed does come to
raise rates it may have to switch from its traditional benchmark of
targeting the federal funds rate to targeting a repurchase rate because
of the upheaval in the two markets over the last two years.
"I
think what the operating regime will really look like going forward is
an open question and one that the committee is working on," said Mr
Bullard, who said the Fed could consider using interest it paid on
reserves as the main rate but that it might prefer a market measure
such as the repo rate.
The broader
post-crisis economy was "on track" with its recovery, he said. "It's
not a real strong recovery but that's what we had predicted anyway. But
it will be above-average growth for the first half of 2010 and we'll
probably see some positive jobs growth in the first part of 2010 here."
He "hoped" that improvement in the labour market would come in the first quarter.
Following
harsh criticism of Ben Bernanke in the Senate ahead of his
reconfirmation as Fed chairman last week, Mr Bullard warned that
political interference with the Fed would be dangerous and he strongly
opposed plans to strip banking supervision from the central bank's
roster of duties.
"I think it's
dangerous for America and dangerous for a global economy to try to
divorce this central bank from true understanding of financial markets,
and I think that that's the direction we'll be going in if we separated
out the central bank from regulation," he said.
"What this crisis
has shown is that our understanding of financial mediation and how it
can impact on macro economy was not good enough. So what you want is to
force the central bank to get better understanding and more information
about financial markets as they're making monetary policy decisions."
Not
good enough? I'd say the Fed's understanding of how financial mediation
impacts the macro economy was downright pathetic pre-crisis and has
only marginally improved post-crisis. Who is tracking flows into hedge
funds, commodity funds, private equity funds, and flows coming from
sovereign wealth and global pension funds?
More importantly,
who is tracking leverage being built into the bond market? There too,
pension funds are playing an increasingly important role as they leverage up their fixed income holdings to deliver on their required actuarial rates of return.
I urge you to carefully read Niel Jensen's February 2010 letter from Absolute Return Partners, aptly titled If PIIGS Could Fly. Mr. Jensen's conclusion is a stark reminder of the challenges that lie ahead:
As
far as the bond market is concerned, as often pointed out by Martin
Barnes at BCA Research, if you want to know where the next crisis will
be, then look at where the leverage is being created today. And nowhere
is there more leverage being created at the moment than on sovereign
balance sheets. What is happening is an experiment never undertaken
before. As John Mauldin puts it, we are operating on the patient
without anaesthesia.
The big challenge will be to get the timing
right. These situations can run for longer than most people imagine.
Japan’s crisis has been widely predicted for almost a decade now, and
the ship appears to be as steady as ever. As I suggested earlier, the
key to predicting the timing of Japan’s demise – because there will be
one – may very well be embedded in the savings rate, which could quite
possibly turn negative in the next few years.
The Dubai crisis
taught us that markets are in a forgiving mode at the moment and,
before long, Greece could very well find some respite from its current
problems. But then again, ultimately, governments will find – just like
millions of households have found over the years – that you cannot
spend more then you earn in perpetuity. The enormous debt levels being
created at the moment will haunt us for many years to come and we may
have to wait a long time to see PIIGS fly again.
While
I agree with many of the arguments Mr. Jensen puts forward, I am not
convinced that the bond market will be the next crisis. You will likely
see the short end of the curve getting hit hard in Q1 2010 as the market adjusts its expectations on the Fed's next move, but not a full-fledged crisis in bonds.
Neither
am I convinced that deflation is dead. The risks of deflation have
subsided but the bigger test will come in the following few years,
especially if stimulus programs do not translate into a sustained
improvement in US and global labor markets. And that still remains the
overarching concern of policymakers across the planet. If they fail to
achieve this, a nasty deflationary spiral will ensue, in which case
high quality government bonds will look very attractive, even at
historic low yields.
»
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Leo, cheerleader for the Titanic,
may need help with reality therapy.
Economy and markets are here to give it...
http://www.jubileeprosperity.com/
Leo, what is your take on the Non-Manufacturing ISM employment index which was 44.6, indicating continued contraction? What is the relative importance of the manufacturing vs. non-manufacturing employment indexes?
Second that one.. Obviously Rosenburg was tap dancing all over that today. But seriously Leo, if you could describe why manufacturing ISM trumps the larger non-manufacturing ISM numbers, that would be, well, rosy!
LOL, this market is rigged. Watch tomorrow after the jobs figures how it will zoom right back up.
Leo, your forecasting track record is abysmal
and your analysis laughable. God save you...
How's that going today???
"The last duty of a central banker is to tell the public the truth"
~ Alan Blinder
atleast I am finally making some money finally with my stubbornly bearish trades !!
"I believe that US growth in Q1 2010 will surprise even the most optimistic forecasters." And Then "Neither am I convinced that deflation is dead. The risks of deflation have subsided but the bigger test will come in the following few years, especially if stimulus programs do not translate into a sustained improvement in US and global labor markets. And that still remains the overarching concern of policymakers across the planet. If they fail to achieve this, a nasty deflationary spiral will ensue, in which case high quality government bonds will look very attractive, even at historic low yields."
I'm not sure what position you are taking? You sound like the stock broker I fired right before the market dropped off the face of the earth. What is your call? You won't get it both ways. Pardon me if I'm missing your point.
Then "But all that is about to start changing in Q1 2010. Consider the following very carefully"
All of the following is happening (in my opinion) because we are experiencing the tail end effects of the "concentrated" and "well organized" massive expansion of world wide government spending. This is the "SUGAR HIGH". It can't last. The American consumer is still in a coma.
There is NO sign that the American consumer is spending at any meaningful manner. The consumers in the developing countries can't come close to offsetting the lack of American consumer spending. They flat out don't make enough money to spend enough to offset US spending. Not to mention that China is wisely putting the brakes on their reckless and inefficient spending.
You have to ask yourself why are the technology firms doing so well and not any industrial firms? Because every government entity around the globe has just spent more in less time than ever before in history. This has had a (temporary) positive impact in the developing world. These foreign businesses are trying to increase their productivity by investing in technology while at the same time hoping and praying that the US consumer comes out of its coma.
Now everything will come back to equilibrium because the American consumer is still in the coma and the worldwide governments are showing clear signs of possible default. I don't think they CAN spend anymore. They are broke, out of money, insolvent. Make no mistake; America is the dog that wags the tail in this world. The tail will not wag if the dog is sick and the dog is currently VERY sick.
This worldwide Keynesian experiment is coming to an end. All we can hope for is that the American public stays coherent enough to totally replace it's governing body over the next few years and that the bad debt begins clearing in the system at a much faster pace.
Deflation is the bigest threat we face.
Call Bernanke, Blankfein, Geithner, Paulson,
Rubin, Summers the candy men. The candy
men can't. Willie Wonka won't, put this
chocolate brown economy back together again
until our Constitutional rights are protected.
Deflation rules until all debts defaulted or paid
off...
http://www.jubileeprosperity.com/
http://www.youtube.com/watch?v=d0nERTFo-Sk
Western central banks don't understand deflation because they're unable to fundamentally question the assumption that debt is money. It is not.
The system of rents and debts and bond covenants, etc is breaking down because the credit engine has stalled out and has begun a multi-decade decline. That means there is no new cash to service all the rents, etc. Inevitably, financial assets vaporize - along with the money supply.
"Government spending" doesn't fix the problem, but merely delays the inevitable. An ever-increasing public sector debt CONTRACTS future money supply available to the private economy. The private economy correctly recognizes a future of higher taxes, higher interest, and a falling money supply.
Take a look at bankruptcies, foreclosures, liquidations, lawsuit filings ... all are going parabolic at this point. The only thing that would stop this process would be MASSIVE debt and tax relief. And that's just not going to happen until its too late.
Gold may fall in value (i expect it would fall as the overall money supply in circulation continues to vaporize). But it will outperform everything else. Fiat money is a temporary port in the storm. Sort of like the home of the second little pig - who had built his home with sticks. Better than straw, but ultimately incapable of surviving the deflationary hurricane.
Usury = virtual economy...
Leo, I would urge you to focus on the comments by Yophat above. Read what he says about Colorado Springs. Keep in mind that this is the home of the AF Academy and a very nice place.
They are busted and they are turning out the lights. Where is this different Leo? NY is months away from having its cities start cut backs. Wetchester County has very tough choices to make. Same in Cali, Fl,AZ, Nev and damn near every other state/municipality.
Industrial production is not our GDP. Consumption is. There are programed cuts in consumption planned everywhere. Even the federal level is getting religion. There will be no more stimulus. Not in 2010.
All this points to a fall in economic activity. This looks to start happening in the 2Q.
People look at our weak equities market and cry, "It's all about Greece!!"
That is only partly true. The market is looking six months forward (as usual) and it does not like what it sees coming.
I think 4Q GPD will be the best number we see in the next four years. The 1st Q will still look good on a relative basis, but by the time the report is released the evidence of the slowdown that is coming will be evident to all.
Amen brother...
Perhaps Mr. Kolivakis spends too much time in the sun, you know, studying solar type stuff.
especially if stimulus programs do not translate into a sustained improvement in US and global labor markets. And that still remains the overarching concern of policymakers across the planet. If they fail to achieve this, a nasty deflationary spiral will ensue,
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Stimulus programs never translate into sustained improvement. That's just more Keynesian fantasy period. How can deficit spending and pulling forward sales be anything else?
>
Why am I so confident? After all, my last call before the December employment report was way off. The bond market didn't go 'boo' back then and more jobs were lost. Today, Bloomberg published a sobering article stating that 824,000 jobs will disappear on February 5th.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
LOL proof the numbers were phony all along. Might as well," pick a number any number"
Leo;
A couple of posts back. You forecast big improvements in job numbers.
I asked you "where are these jobs going to come from." Do you have an answer yet?
The following are 20 reasons why the U.S. economy is dying and is simply not going to recover….
http://www.silverbearcafe.com/private/01.10/20reasons.html
bullard and plosser are lackeys. their word is crap, their read is trash. they are misdirection shills.
seriously? is that a serious question?
Of course it is a serious question. Monetary authorities need to track liquidity flows more carefully if they want to prevent asset bubbles. Of course, history has taught us that they want to aid and abate asset bubbles, which is why we always end up in a mess.
I will add that it's not just tracking liquidity flows, but also understanding where the risks are being taken, exposing which financial sector. Tracking leverage more carefully is critical if they truly want to prevent asset bubbles ( a big IF).
Here's a serious question- How's California going to survive?
California if it were its own country would rank in the top 5 in the world GDP
LA County if it were its own country would rank in the top 20 in the world GDP
Real unemployment according to shadowstats is running 21%.
"California paid out a record $20.2 billion in unemployment benefits last year, more than double the previous record of $8.2 billion in 2008, reports the state Employment Development Department." - http://economy.freedomblogging.com/2010/02/04/calif-09-jobless-payments-...
Average monthly revenue for California in 2009 was $43.6 billion. A 12% decline from the monthly average for 2007 & 2008. Spending only went down 8.7%. Get the picture...declining revenue and declining spending only the decline in spending never keeps pace with revenue. That is until the lights go out.
"Los Angeles County's six leading employers now are government entities: L.A. County employs 93,200 workers; the state of California has 30,200; the city of Los Angeles clocks in with 53,471." - http://www.latimes.com/news/opinion/la-oe-rutten27-2010jan27,0,6572019.c...
Or this -
It's one of those numbers that's so unbelievable you have to actually think about it for a while... Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?
How did we end up with so much short-term debt? Like most entities that have far too much debt - whether subprime borrowers, GM, Fannie, or GE - the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due. As they say on Wall Street, "a rolling debt collects no moss." What they mean is, as long as you can extend the debt, you have no problem. Unfortunately, that leads folks to take on ever greater amounts of debt... at ever shorter durations... at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.
http://www.silverbearcafe.com/private/02.10/bankrupt.html
Oh did you mean this kind of deflation -
This is pretty big news. That is a pretty decent discount on a purchase on real estate listed on HomePath.com. That kind of discount should get some inventory moving from Fannie Mae. I was browsing through the inventory and if you are looking at the areas with the most exposure to subprime loans you are going to find some steep discounts on top of the 3.5% that Fannie is offering.
Housing Wire - Fannie Mae will provide a 3.5% discount to those purchasing a real-estate owned (REO) property listed as part of its HomePath division, according to a company notice. The discount can be used for closing cost assistance or the buyer’s choice of appliances. The offer applies to any owner-occupant who closes on a property listed on HomePath.com before May 1, 2010.
http://www.bankreorealestate.com/reo-news/fannie-mae-gives-35-discount-o...
Or was this what you had in mind -
Read more: http://www.denverpost.com/news/ci_14303473#ixzz0eXu31JlHCOLORADO SPRINGS — This tax-averse city is about to learn what it looks and feels like when budget cuts slash services most Americans consider part of the urban fabric.
More than a third of the streetlights in Colorado Springs will go dark Monday. The police helicopters are for sale on the Internet. The city is dumping firefighting jobs, a vice team, burglary investigators, beat cops — dozens of police and fire positions will go unfilled.
The parks department removed trash cans last week, replacing them with signs urging users to pack out their own litter.
Neighbors are encouraged to bring their own lawn mowers to local green spaces, because parks workers will mow them only once every two weeks. If that.
Water cutbacks mean most parks will be dead, brown turf by July; the flower and fertilizer budget is zero.
City recreation centers, indoor and outdoor pools, and a handful of museums will close for good March 31 unless they find private funding to stay open. Buses no longer run on evenings and weekends. The city won't pay for any street paving, relying instead on a regional authority that can meet only about 10 percent of the need.
"I guess we're going to find out what the tolerance level is for people," said businessman Chuck Fowler, who is helping lead a private task force brainstorming for city budget fixes. "It's a new day."
Some residents are less sanguine, arguing that cuts to bus services, drug enforcement and treatment and job development are attacks on basic needs for the working class.
"How are people supposed to live? We're not a 'Mayberry R.F.D.' anymore," said Addy Hansen, a criminal justice student who has spoken out about safety cuts. "We're the second-largest city, and growing, in Colorado. We're in trouble. We're in big trouble."
Since the economy is on such an uptick and the deflation bear has been shot....let's go ahead and kill Fed unemployment support on July 31st!