Ecomentary.com provides this archive of postings dating from 2011 dating back to 2001, as a resource. Due to the nature of dated material on the internet, we do not guarantee that hyperlinks are current.

October 03, 2011

Is The Double Dipper Upon Us? There are many negatives around the world, in spite of a few seemingly positives such as today’s ISM. Cyclical turning points often give rise to ambiguous data reads. This one is likely to be no different. The real puzzle is which Macro Area in the World has a political economy that can “do the right thing?” more…

September 30, 2011

Parsing FOMC Minutes: a somewhat unrewarding exercise Bernanke gave markets a fairly big clue as to where he thought the economy was by the third week in August (2011) and the statements of the earlier Fed meetings told us about the rather permanent extension of America’s version of ZIRP….But the Meeting Minutes really don’t enlighten us. more…

September 26, 2011

Truth in Lending What the Fed knows, what it wants and how to get there should have been the essential orientation of Bernanke’s opening conference speech at Jackson Hole. Gentle Ben left too many questions unanswered to feel as if we know where monetary policy is going and what the effects will be more…

September 21, 2011

The FOMC Speaks…whispers? Markets were looking for relief but got a confusing message. The message was Operation Twist but the subtext was that some serious difficulties for the economy may be coming our way. The relief package the Fed chose doesn’t have an inspiring history and the theory that justifies this policy choice is noticeable by its absence. more…

August 16, 2011

In the Kingdom of the Blind The former Vice Chairman of the Fed, and a former colleague of the current Fed Chairman offers a tantalizing insight into what the Fed may do next more…

November 07, 2010

Heat’s On: the Fed in Congressional Gun Sights This was written several days ago prior to the Bernanke speech at Jekyll Island and subsequent comments by other Fed officials and economic commentators. Those who justify the Fed’s actions have also spoken out forcefully (Dudley of the NY Fed and most recently, the Chief Economist of Goldman Sachs). What started as a domestic issue has now been pulled into the international arena as the implied currency depreciation stemming from quantitative easing is arousing the ire of major trading states. We can expect more forceful discussion in the future. more…

November 03, 2010

Hope over Experience We now know what the Fed has decided to do…at least for the moment. We don’t know if it will work, or for that matter, just how it will work to reduce unemployment. The FOMC statement is a triumph of hope over experience and a triumph of Authority over Rules. Markets better have “hope,” as well! more…

August 31, 2010

Market valuation is a ‘Sometime Thing’ Market Valuation Can Be a ‘Sometime Thing’ The dog days of August for a blogger must mean trying to make something out of nothing. Equities and Bonds rallied Friday by some 1.67% more or less. Random these days means high variance indices, but anyone who was long went home feeling better. The real data was not encouraging, and the Bernanke speech at Jackson Hole promised nothing that we did not know. Apparently the Bulls liked it more than the Bears and stocks went up. Go figure! more…

August 27, 2010

OPERATION TWIST Déjà vu The Magic Mystery Tour opens in Jackson Hole today and at 10:00AM, we will learn something of Chairman Bernanke’s present state of mind…or his current views on where the economy is going. The speech is supposedly entitled “The Economic Outlook and the Federal Reserve’s Policy Response.” Yesterday, his former colleague at Princeton, Alan Blinder, threw out another possible “remedy,” in an Op Ed piece in the WSJ. Blinder began by admitting that he thought the Fed was running out of ammunition. In as much as the Fed has to power to regulate the interest rate paid on excess reserves banked at the Fed, Blinder suggested that the Fed could choose to make that rate NEGATIVE, thereby taxing banks that choose to hold reserves rather than expanding their loan book. Last week, stimulated by another “bad” report (initial claims) we began to muse about what the Fed might do now and we wrote the attached piece. We are not suggesting that he will choose this route, but merely indicating that there is some theoretical basis for choosing to intervene at the long end of the curve. We had thought that if QE2 was about to begin, it would be at the long end until we were reminded of the famous Operation Twist of the early Kennedy years. Curiously, we had just come across a new interpretation of that “experiment.” While we doubt that Operation Twist 2 would be announced today, at least there is some theoretical basis for thinking it might be worth a try. Combining our thoughts last week with the Blinder piece, maybe a combination of negative interest rates on reserves and intervention at the long end would get banks to begin using their reserves to expand their loan books. That would be a surprise to the market, but it would have required an emergency meeting of the FOMC about which there have been no rumors. Let the games begin…in Jackson Hole, Professor Bernanke. We are all ears! more…

April 20, 2010

The Central Issue: Wall Street versus Main Street There is an interminable wrangle going on in Washington as to the proper content of a financial reform bill. Sadly, but predictably, both the Executive and Legislative branches define their tasks in terms of “outcomes.” That is they think they can prescribe and proscribe the activities of financial institutions based on the “outcomes” they wish to have. With this orientation, it is virtually guaranteed that we will get a bill no one really likes; that the bill will not do what we hope; and that our financial environment will be suffused with unintended and unpleasant consequences. Legislation that ignores economic incentives and substitutes a carrot and stick list of do’s and don’ts is the wrong methodology. Into this darkness, a bright light appeared today when the President of the Philadelphia Fed, Charlie Plosser, published a letter to various Congressional leaders that outlines in a clear, well thought manner how to go about financial reform. It is proposal that is modest in its demands and easy to understand. Modest and understandable limits to legislative activities are probably disqualifications for a serious consideration of the Plosser proposal. Still, this is a thoughtful piece that should be the foundation for a sensible approach to financial reform. It starts with incentives and harnesses the power of markets along socially desirable lines. It is heartwarming to know that not every Fed Reserve official marches in lockstep with political correctness. It is well worth reading. more…

January 27, 2010

FOMC Opens the door—a crack Kansas City Fed President Hoenig dissented from the FOMC policy statement today—suggesting the “extended period” doctrine was strongly attacked during the Committee’s deliberations. That sets the stage for a more careful parsing of the Minutes of this meeting when they are released. In the meanwhile, the several changes in wording from the previous FOMC statement open considerable ambiguity as to the FOMC’s true intentions. Ambiguity rather than transparency dominates this policy statement just at the time that Markets need much more clarity of Fed intentions more…

June 25, 2009

Managerial Capitalism in Default Notes on the Presentation The Panic of 2008 with hyperlink more…

June 23, 2009

The Panic of 2008: Managerial Capitalsim in Default This is a presentation used as the basis of our “outlook” remarks at the Westeran Economic Association meetings in Vancouver, B.C. June 30, 2009 more…

April 29, 2009

Getting There It seems as if it has been 100 days since we last had something to comment upon, but the occasion prompts some observation. As we thought about the precipice on which Obama’s economic plans seem to rest, it struck us as ironic that despite his sallies against Greed, that’s what he desperately needs. He needs savers to tire of riskless investing in Government secured assets and return with their “animal spirits.” He doesn’t need Keynesian multipliers—they probably will defeat his stimulus plan. He needs plain, old fashioned avarice on the part of investors all over the world. He needs them to pile into risky assets once more. That will unbridle our constricted credit system. Somebody better whisper in the President’s ear: greed is good. more…

April 11, 2009

PPIP-the ‘crony capitalist’ solution to toxic asset pricing The nature of the Ppip proposed by the Government to induce private investors to co-invest in toxic assets from our belabored banks has raised some serious welfare economics issues for analysts. By allowing significant leverage with the Government supplying both a co-equal equity slice and financing for the borrowed amounts, the Government hopes investors will “overpay” for the toxic assets now on bank balance sheets. A careful consideration of this program suggests that the Government’s multiple objectives can work only if the “auction” is a mutual consulation between buyers and sellers. That is hardly a market. It is a kind of crony capitalism among Government chosen “eligible” investors and the banks who part with the toxic assets. more…

March 24, 2009

Play Ball: The Real Season Is About to Begin The Administration’s plan to “bail in” private sector investors by offering them incentives and guarantees to remove toxic assets from the banks is about to unveiled. It will differ from the Paulsen strategy only in that it will have to hide the true costs. It must involve at least two ‘hidden ball tricks.’ The Real Season is about to begin more…

March 22, 2009

Which recovery counts? The “just wage” has now made its reappearance on the national stage. Perhaps it is relevant to recall what Babe Ruth said comparing his salary to President Hoover’s. more…

February 17, 2009

Down the Hayek Road Watching the hearings last week of the House Financial Services Committee was deeply depressing. While we recognize that this is a “show,” and not a serious deliberation into needed remedies for our banking crisis, it is hard to reconcile the need of legislators to parade in front of their constituents and our need for them to legislate wisely. Bank executives make good prey. In the best of times, one is always uneasy at the power a banker has over one’s business. In the worst of times, banks are even more suspicious of potential borrowers. They are in the intermediation business, caught between borrowing short and lending long and asymmetric risk is the environment in which they grant credit. Nothing new here, but in a recession, credit-worthy borrowers are also fewer in number. We want our banks to take more risk. Is the best way to do that putting them on display and forcing them into public confession? It would appear we are on the way to some form of “nationalization” in which the role of the Congress could become even more dangerous. We are marching very quickly down the Hayek Road! more…

February 13, 2009

Red Queen, Failure to Launch, Numbers in Hiding The market did not like the lack of specificity, but perhaps what really troubles the market is the (unspecified) size of the bailout itself. Size was not something clearly addressed, but at the end of the day, if the size of financial intervention that is required to unblock the financial system is far in excess what is currently estimated, then much of the market fear is understandable. Worse, the longer the market is kept in the dark, the longer will our clogged financial system prevent a real recovery. This is an issue of numbers in hiding and it goes to the heart of the issues that were raised but inadequately treated. Since they were not specifically treated, it is quite natural to ask why. What is unbecoming is what that omission may signify about the lack of unanimity within the Administration on necessary steps to financial recovery more…

February 13, 2009

Specific Plans: a Red Queen in Washington We apologize to readers. This missive was to have been sent last night, but the more we reviewed the day’s events, more questions than answered appeared. Treat this as a late night re-write to be followed with a (more disturbing) set of questions that additional thoughts this morning have provoked. more…

February 04, 2009

Political or Economic Correctness: where is my Grant? Lincoln came to Washington on a train from Springfield and passed through Baltimore. It was reportedly a clandestine trip for fear of an assassination. He inherited a dispirited country, gave his inaugural on March 4, 1861, and five weeks later, the firing on Fort Sumter began. Obama’s trip to Washington took a similar route, and his cabinet selections which reached across party lines echoed Lincoln. Obama is faced not with secession and an attempt to hold the Union together but with a recession threatening to descend into a serious economic calamity. Lincoln had to overcome divisive forces in his cabinet and on the Hill and was said to have been the best lawyer in a cabinet of lawyers. Lincoln’s challenge was the war and finding a General to carry out his war plan. Obama’s challenge is the economy and he badly needs a Grant to wage a viable campaign. It is a time of facing fundamentals and not falling victim to issues of political correctness such as how much compensation is allowed bank executives. It’s time to get started with the war against the recession. The first step is to promulgate a plan for the economy including our banks that makes sense and moves us forward. It is not apparent that Obama has found his Grant to lead the charge, but the time is ripe. more…

January 04, 2009

Economic Policy for the Incoming Administration The new administration takes over in less than three weeks, but the details of any policy mix for dealing with the current downturn remain unknown. The US economy is under severe strain and that strain is now spreading throughout the the global economic system. Is the Obama team confronted with a severe recession, or does the abrupt decline in spending and the withdrawal of confidence in our financial system indicate that we are now entering a second great depression? Policy formulation begins with a clear definition of the problem to be solved. The political campaign’s rhetoric points to a massive fiscal program, but significant ambiguity is present on many fronts. Markets are rallying on the hope that relief is on the way. Markets are also impatient. more…

December 08, 2008

Politically Correct Energy Strategy: another policy mistake in the making? In November, when the price of crude oil on the January futures market dipped below $50/bbl, it occurred to me to advocate a change in our national energy policy once again. This time, more particularly, a tax policy as it applies to crude oil and petroleum products. My bottom line was to get the government to be after January 20, 2009 to use its rhetoric creatively and begin a national security tax on petroleum products. As Rogers and Hammerstein put it, I must be a “cockeyed optimist.” more…

November 03, 2008

So he wins big. Then what? I had not intended to comment on the election tomorrow, but an incident last night, when I was dining with my family, was a kind of epiphany for me as I contemplated what could come out of the election tomorrow. Temporarily, it might give financial markets the “certainty” that they seem to need, and a (however) brief end to their discomfort with policy making in Washington. If it is a “sweep,” it will mean unified political leadership…or so it might seem at first glance. But will it mean undivided leadership on the central core of our economic issues? This is much less clear and markets willhave to surmount all sorts of hazy policy prescriptions likely to come on the heals of a sweep. Financial advisors to the Obama campaign have undoubtedly warned him that getting through the next six months or a year is essential and for that, sweeping (egalitarian based) tax reforms are probably not the right course. But, he will be confronted by a zealous and ideological left wing of the Democratic party that will push to get its agenda established. I have heard it said that he is campaigning with zeal to show that it is he, not the traditional left wing of the party, that carried the day in order that he has the clout to get his real agenda across. It should only happen! Where Obama could truly achieve greatness–because of his unique ethnic heritage together with his ability to rally all sorts of people to his vision of change—is to speak a healing language, much as Lincoln spoke at a time of great trouble. He has much less to gain from imposing an egalitarian ideology and it would, I fear, land him in a position where his leadership qualities are undermined. He made one telling point in this campaign, at least for me. He said that experience was not the issue. It was judgment. That reminded me of the fact that Lincoln had limited legislative experience and in 1858 was defeated by Douglas…but when it was time in 1861 to show leadership, he was there with the ability to judge the issue and judge the people that it would take to implement his vision. His conduct of the war, as we now know, was troubled by all the usual factionalism that troubles our political organization. Yet, he had the vision, and the persistence to triumph. He out-lawyered a cabinet of lawyers and he out-generaled his generals until he found the sword he needed to cut the Gordian knot of the military campaign. He chose a general that would do his bidding and despite terrible losses, he persisted. Our Union was saved, even if he was not.

This country needs unity, not division. It needs persistence, not will-o-the-wisp bending to ever constant political pressure. It badly needs leadership. It is not the agenda of “change” that is important. It is the ability to lead…and that is the bottom line on the ultimate success or failure of his vision. more…

October 29, 2008

No Fed Surprise: FOMC cuts 50 bps The FOMC confirmed the market’s expectation with a cut of 50 basis points to bring the Fed Funds rate to 1.00% The Fed’s priorities were clarified as the risks to growth heightened while those of inflation were lowered more…

October 03, 2008

Monetary Politics The Credit Crisis has created “new turf” for the Fed. In exercising authority on new turf, the Fed has become a much more political institution. The politics of money could become very dangerous to the Fed’s independence. Money is power and Congress and the White House are unlikely to allow the Fed’s appointed officials to act without new fetters of some sort. When this crisis is over, it is highly unlikely that the Fed will be the same independent instituiton that we used to know. It happened to the BOE. It will happen here.Money is just too important to be left to unelected officials…at least in the eyes of those that got to Washington by the rough and tumble of winning elections. hustings! more…

October 03, 2008

Will the real Paulson stand up? Henry Paulson had a glorious career at Goldman, rising to the top of the heap. That takes brains and brawn. His performance at the Treasury seems such an odd contrast to his previous career, marred as it has been by a poor perception of the impending problems in credit markets and by an unimpressive presentation on why a bailout centered on toxic waste was the way to go in this economic malaise. Maybe we just hired the wrong Paulson? more…

September 16, 2008

One, Two, Buckle My Shoe The Fed stood pat today…or did they. They did as far as changing the Federal Funds Rate Target. Later in the day, they jumped back into the deleveraging fray. More about that later. more…

October 31, 2007

Shoot the Moon or Pass the Queen of Spades The Fed has an interesting choice today: to placate current markets by a well anticipated rate cut or to think deeply about the signals about inflation, the currently low likelihood of a recession and sit tight. Any decision taken involves a risk evaluation and a strategy. The riskier course—certainly politically—-would be to avoid further liquidity and to stand pat until it is absolutely clear that inflation will not again gain the upper hand. more…

March 21, 2007

Fine Tuning Fed The Fed appears to be hedging its bet, perhaps plunging into the miasma of fine tuning. Its statement today, which retaine the current Fed Funds rate of 5 1/4 is filled with ambiguity as to which risk it will heed: inflation or slow growth. The statement says that its predominant policy concern is inflation, but its language focuses on what has changed since its last meeting more…

February 14, 2007

Gentle Ben Ben Bernanke has clearly matured. He handled the invitations to stray from his role as Fed Chairman to a political guru whose advocacy could embellish a Congressmen’s desire to please his constituents. He gently led the Senate Banking Committee through the major portions of the Fed’s monetary policy report today. The report features a slightly slower growth forecast (band) and an inflation band that is no worse than last year. The Fed’s bias continues to be pointed toward the possibilities of inflation, but in the present context seems highly unlikely to lead to changes in the Federal Funds rate in the near future more…

January 25, 2007

Will Colonel Jessup Please Stand Up? A year after resolving to reduce American dependence on oil, what has really changed. The SOTU message delivered this week provides further evidence that American politicians —of all stripes—are unwilling to tell the truth to the American voter. “No pain, no gain” is where it must begin. Without attacking the demand side of the equation, our dependence on foreign crude oil will continue to grow, in spite of the evidence that rising prices over the last two years have begun to make a dent in the growth of consumption. What is the problem? Simply put, “you can’t handle the truth,” as Colonel Jessup once said. more…

December 12, 2006

The Two-Handed Fed Market players like to read the Fed’s hand and then make their bets as to future policy actions What happens if the Fed has two hands? The next level of analysis is to figure out what the Fed knows…for sure. Let us know when you get the answer! more…

November 27, 2006

The Milton Friedman Century Over the course of a very long, public life, it is sometimes hard to see the influence that one man’s thinking and writing can have. Much of what we take for granted in economics and economic policy was achieved, “one inch at a time” by a persistent dedication to a vision of the connection between free markets and free choice. Persistence in the face of obstacles is the mark of tenacity. Persistence coupled with perspicacity is the mark of a true agent of change. Milton Friedman was that kind of man and the world is far better off for his vision and his endurance. more…

October 25, 2006

Moderating to Slow: Fed Sits Tight and Still Worries About Inflation The FOMC declined to move the Federal Funds rate today even though it continues to have concerns about inflation. (the bias is toward inflation). It acknowledged, however, that economic growth has slowed, as compared to its characterization at the previous meeting when it spoke of the moderation of economic growth. The committee did not ?translate? this lower growth into comfort about core inflation as it once again indicated that ?core levels of inflation have been elevated. more…

September 20, 2006

A Patient and Passive Fed The FOMC stood pat today with language that allows further tightening, if the circumstances dictated such a posture, or possibly easing at some distant time in the future. One could read some ambiguity into today’s statement because while inflationary risks continue to exist, housing is clearly exercising a drag on the economy. We see no reason to think that ease is imminent and that given the run of the data so far, the Fed is likely to stay the patient course it has chosen. more…

August 08, 2006

Fed Clenches Its Teeth and Sits Tight The FOMC today sat tight, no doubt with some grimaces around the table and at least open dissent. Fearing to do more than necessary and thereby risk an “overshoot” and wishing to extract itself from the predictable policy perch of 25 bps at a time, they paused, at least for now more…

August 06, 2006

Current Data and Past Minutes Suggest the FOMC Will Pause on August 8th
This FOMC meeting appears ready to mark a turning point in its policy course. After 17 straight increases in the Federal Funds target rate, we believe the FOMC will pause this time.
more…

July 19, 2006

Mid Year Monetary Policy Report: markets welcomed Bernanke’s views, but were they really understood? Chairman Bernanke gave his first Monetary Policy Report to the Senate Committee on Housing, Banking and Urban Affairs. His view was the economy was moderating in its growth although the core measures of inflation (personal expenditure basis) are showing higher and more persistent inflation than the central forecasts in January. He expects the inflation numbers to run above 2% in 2006 and 2007, even though he expects economic growth to moderate and come closer to the true potential growth rate of the economy.

Bernanke?s presentation differs in a significant way from what markets came to expect in the Greenspan era. More room is left open for uncertainty as to the actual numbers that will be produced during the course of the year. The Market read this as ?dovish,? but in fact Bernanke is not perfectly certain as to what the data will show or quite how the FOMC will react to those numbers.

Finally, implicit in all of this is a recognition that the current FOMC is a more collegial body. Bernanke may be taking control, but the best inference one can take from his presentation is that he ?represented? the balance of opinion at the FOMC, not necessarily just his own view. That may be the most significant change since the last MPR in January (under Greenspan). In any event, though traders may have welcomed his relative aplomb about inflation, the Fat Lady has yet to Sing. Old Opera: New Cast! more…

June 29, 2006

A Matter of Emphasis The FOMC raised its Fed Funds target rate by 25 basis points to 5.25% today, but it changed its emphasis by stating more clearly that economic growth was moderating. It appears that while future policy is quite data dependent, the Fed has given itself some breathing space along its past path of 25 bp increases at each meeting. All is well except:

1) the core inflation numbers cannot continue to increase without arousing market concerns that inflation is not ?well contained?

2) by emphasizing the policy dependency on the data, the market will be forced to consider whether any data point is ?noise? or substantive and it is unlikely that clear distinctions can be drawn. Hence, more volatility, rather than less is to be expected

3) the breakout today on equity prices suggests that the market has interpreted the breathing space as a Fed forecast that growth will slow sufficiently in the coming months to take the heat out of the inflation boil. The market may hope that Bernanke is right and that the continuing escalation of interest rates may be coming to an end. Hope springs eternal, particularly on the long side of equities

4) Fedspeak has tended to emphasize the divergence between members of the FOMC. Today?s statement seems to squelch that?at least for now. But ?bad data? will make that divergence reappear.

The market still does not know the implicit tradeoffs the Fed is making behind its policy curtain. Nuance is the order of the day, not transparency of Fed targets. more…

March 29, 2006

Bernanke’s First Meeting Illuminates But Does Not Surprise The FOMC statement issued yesterday contained more possibilities than is usual in a post meeting statement. Some will see this as increased transparency, but the statement also allows for quite distinctly different outcomes. The FOMC raised the bar (25 basis points was expected)and indicated that it will be watchful for signs that it must raise it further. At the same time, it has not really committed to further increases, unless the data compels it to do just that. Watch and measure the Navigator said earlier this month! more…

March 22, 2006

Bernanke’s Conundrum The recent speech at the New York Economics Club (3/20/06) by Fed Chairman Ben Bernanke provided a sharp contrast to speeches to that group by his predecessor. Bernanke gave a lucid, but technical expose of varying interpretations of the yield curve and the subtle implications for monetary policy that different interpretations of the yield curve provide. This introduces even more ambiguity into future behavior of the Fed, in spite of this Chairman’s professed desire for more transparency and a more rule-bound direction for Fed policy. We think this was not an accidental twist, but a first public step in creating a new consensus at the FOMC. more…

March 22, 2006

Energy Independence Is Not Energy Security Energy policy in the U.S. has been both partisan and a largely futile effort to pander to various political interests. Frequently, policies for energy security get commingled (wrongly in our view) with calls for energy independence,a goal that is beyond our reach. It is time for leadership on energy issues on a non-partisan basis, and a good beginning would be to drop the call for energy independence. The goal that is truly important is to improve our energy security. (This piece is also being published by the FPRI and will be available at www.fpri.org). more…

November 23, 2005

What the FOMC Minutes Reveal Insiders have long talked about the need for a change in the policy statement, but have generally thought that the policy settings were “steady as she goes.” That view may now be subject to change as the market mulls over the Minutes from the last FOMC meeting. In fact, it opens up the possibility that the “measured pace” doctrine is now subject to revision and that market yield curve forecasts will be revised more…

November 01, 2005

So far, So good! The FOMC feels comfortable with its moderate pace of removing monetary accommodation. It is most likely going to continue for the next two meetings which will conclude the Greenspan era. Will the Bernanke era change this stolidity? Only if the news on inflation would suddenly turn lousy. more…

October 25, 2005

The New Fed Chairman and the New Fed Wall Street economists and commentators have a new topic: to opine upon the likely policies of the Fed under its new chairman to be, Professor Ben S. Bernanke. Bernanke will have great power, but what he does with it is the issue. more…

October 12, 2005

The Fed IS Going Higher The Minutes of the FOMC September 20th meeting make unequivocally clear that the Fed?s focus on inflation continues to be paramount. Actual inflation may not be terribly high if we look only at the core readings, but the energy news is potentially a trouble spot. Expectations could change and the Fed would be forced to react even more firmly. The Fed still does not know the ?equilibrium real rate level? (even if it claims it can know it when they get there. But a new worry has emerged: ?worrisome loss of fiscal discipline,? and carping publicly on this front will likely cast the Fed into an adversarial roll. The nomination of Greenspan?s successor will become even more important if a monetary civil war breaks out. more…

September 20, 2005

Fed Focus is on Preventing Inflation Katrina was a horrible disaster and the FOMC statement took time to recognize the tragedy and the potential influences on the economy. The real story, however, was the FOMC’s focus on preventing inflation. This was not the time to take a “pause that refreshes.” This was the time to signal markets that the Fed is resolute in its self defined task more…

September 14, 2005

Postscript from Katrina and Rita “The End of Cheap Oil, Once Again” was written before the terrible twin hurricanes devastated the Gulf Coast. Because of the extent of the damage to crude oil and natural gas production as well as to the refining and storage facilities, some reflection was in order on our conclusions. Suprisingly, the damage only underscores the primacy of economics as the driver for the current price shocks, while at the same time highlights how the American energy economy has become increasingly vulnerable due to inadequate capacity–capacity to produce and the capacity to refine. The irony is that even the substantial amount of investment that seems to be taking place in the world energy system will still leave those vulnerabilities for many years to come more…

August 28, 2005

The End of Cheap Oil, Once Again Over the past two year the escalation of crude oil and petroleum product prices have soared, undermining conventional notions of a “normal” oil price. Does this change augur a new price paradigm? What underlies the change? What policies are now appropriate for “energy security?” more…

August 27, 2005

Greenspan Retrospective Part II: Menu for the New Chairman Greenspan is clearly winding down his long tenure as the Fed Chairman. Yesterday he tantalized with his remarks on asset price targeting. We expected more today, but the menu was sparse. Plenty to chew on, but little in the way of accoutrement. Big Shoes and plenty of Body Armor will be required of the next chairman more…

August 26, 2005

The Greenspan Retrospective: part I This year’s Kansas City Fed’s annual soiree is like the last tour for a retiring great athlete. Greenspan 18 year span makes his retirement a living retrospective on the current state of monetary policy making. This was his chance to introduce tricky questions regarding asset prices as possible targets for monetary policy makers…Part I with more to follow. more…

July 20, 2005

Greenspan on the Hill: the dog that didn’t bark Chairman Greenspan went to the House today (perhaps for the last time for the mid year report on Monetary Policy). Theformal report contained implicit hints that inflationary risks were still possible and that monetary policy might well have to be tightened further than market observers had thought in order to counteract such possible outcomes, the House Committee members virtually ignored these hints. In fact, the implicit threat of further inflation was a dog that didn’t bark more…

May 06, 2005

Couda Wouda Shouda Part II A cat has nine lives—how many does Greenspan have? Perhaps more? Nothing like waiting for a fat employment report on top of a rise in unit labor costs (declining productivity will take its toll) to do a number of things for bond junkies, including… more…

May 03, 2005

The Couda Wouda Shouda Bet This is a gambling age, if for no other reason than volatility is very low. Low Vol, as they say, makes it necessary to push the envelope in order to achieve the absolute return standards of our time…apparently, even for Central Bankers more…

May 03, 2005

Measuring the Fed Repetition is good for musicians, and in a former life, Greenspan was said to play a mean licorice stick. But repetition of “measured” is beginning to be less than transparent monetary policy. Time to change the music, Mr. Chairman. more…

April 13, 2005

The Conundra of Ignorance When Greenspan introduced the risk-heightener, ?Conundrum,? students of macro-economics were treated to a new concept in Central Bank Policy Tools: the deliberate use of ambiguity to heighten perceptions of risk. more…

February 04, 2005

Greenspan’s “Assignment” Since the late 1960?s, when economists posed the policy issue of how to assign policy instruments to reconcile potential conflicts between internal and external balance, both economic theory and economic reality have changed immeasurably. There is no longer the beguiling simple assignment of monetary and fiscal policy instruments that depended upon the foreign exchange regime and the state of capital mobility in which the economy operated. more…

February 02, 2005

FOMC still measured: practice your golf game This analyst cannot remember the FOMC leaving its ?Statement? unchanged on a back-to-back basis, but except for the expected 25 basis point rise, the statement today (February 2, 2005) matched the Statement of December 14, 2004 more…

January 29, 2005

Dumb and dumber Investors should watch with great interest the trials of Ebbers, Kozlowski and Swartz, Lay and Scruchy, to name the most vilified, as prosecutors attempt to punish corporate America for its crimes against shareholders. Unfortunately, justice for shareholders may not be forthcoming for a very simple reason. The alleged perpetrators of corporate malfeasance were too dumb to understand their own accounting systems. more…

January 28, 2005

?It ain?t over until it?s over? The estimable Yogi Berra, who gets more citations than Warren Buffet in Bartlett’s Quotations gave utterance to a profound thought on markets. Little did he know that it has stood such a test of time more…

December 02, 2004

The Dollar Problem: whose problem is it? When Alan Greenspan openly speculated on the fate of the dollar before banking and finance officials in Frankfurt nearly two weeks ago he was accused by many financial writers of stepping into ?No-No? land. Central Bank Governors are not supposed to pontificate (openly, anyway) on the value of their currency. The ?usual suspects? among public officials who are allowed such latitude are Treasury secretaries. In this regard, the most famous, was Governor John B. Connally, who served as Secretary under President Nixon. Then, as now, the dollar was a problem, not to us, but to others. more…

November 21, 2004

Greenspan Polishing His Patina The Chairman gave a quite remarkable speech on Friday in Frankfurt. It was remarkable because he worried aloud about the growth in U.S. net indebtedness to foreigners (the counterpart of a seemingly intractable current account deficit) and the ultimate impact on the dollar in FX markets. Many economists have voiced that concern before. The difference is that this economist is the Chairman of the world?s most important Central Bank and typically Fed chairmen leave discussions of the dollar to their Treasury Secretaries. But, as we all know, this Chairman has remade the rules of monetary policy and monetary policy discussions. more…

October 16, 2004

STAGFLATION ON THE HORIZON? The rapid rise in oil prices and the continued degree of current monetary ease has suggested to some analysts a striking parallel to the Stagflation of the 1970’s. We think that focusing on the differences between now and then will lead to more productive insights. Our view was published by the Financial Times on October 15th. more…

September 27, 2004

Fed Minutes Reveal A View Toward Considerable ?Disaccomodation? Despite many signs of less than robust growth, (as of August 10th), the FOMC was definitely on the ?watch path? and foresaw considerable room for removing the current level of accommodation. It also saw its role as doing that in a ?measured? fashion. more…

September 23, 2004

Claims Rise More than Expected Initial claims rising to 350K (compared to an expected 335K), a data point that appears to be consistent with the ?new wave of deflation? thinking that is spreading throughout the bond and equity markets. We would caution against drawing any firm conclusions on a weekly data bit, particularly after the hurricane week reading. more…

September 23, 2004

Housing Market Still Holding Up Well Single-family housing starts rose close to their prior record (1770k) in August to 1667k, suggesting that any existing inventory overhang is insufficient to deter builders from putting up more product. Total starts also rose to within 3.5% of their previous December 2003 high. Mortgage applications, based on MBA data have risen since their ?bottom? in June. Aggregate demand for housing appears to be sustaining, despite the 75 basis point rise in the Federal Funds rate. more…

September 21, 2004

The Fed Surprises No One Clearly conscious of the importance of ?staying the course,? the FOMC surprised no one with its 25 basis point rise today. Despite market concerns that the ?soft patch? may continue longer than the Fed officially believes, the Fed is staying with its strategy of removing modest amounts of ?accomodation? on a ?measured? basis. more…

September 14, 2004

Initial Claims Looking Better Than They Are? An ?unexpected? drop in claims would appear to be a signal event that the ?soft patch? could be ending. more…

August 13, 2004

The Wages of Monetary Sin One accusation thrown at the Fed in the Greenspan era is its apparent willingness to feed the Lions of Wall Street when they roar for more meat. When equity markets sink, the Lions roar, calling for easier money. more…

August 11, 2004

ISM and non MFG: playing the same tune The manufacturing and non-manufacturing surveys appear to reveal a possible divergence although both segments of activity rose, judged by their top line responses and the corresponding slowing of the rate of employment expansion plans. This is the dirge that dominates the political wars: where are the jobs, or better, where are jobs expanding? more…

August 10, 2004

Not Yet at the Fork in the Road Alan Greenspan is said to be a serious baseball fan and Yogi Berra, who has more quotes in Bartlett?s Business Quotations than Warren Buffet said, ?When you come to a fork in the road, take it.? The market should draw the correct inference: the FOMC does not believe that the economy is at a fork in the road?yet. more…

August 03, 2004

Soft Spot, Hard Spot: which is it? The component indices of the ISM tell an interesting story. Production and new orders accelerated while export orders were at nearly the same pace of expansion as in the prior month. Backlog orders fell and supplier delivery times improved. But, if this Presidential election is all about jobs, there is a continued suggestion that jobs at least in the key, manufacturing sector are not going to grow as rapidly as the Republican Party might like. more…

August 02, 2004

Advanced GDP and Chicago PMI: less growth, less inflation risk The Advanced GDP Report with below expectations growth of 3.0% for QII (consensus 3.7%) surprised on another count as well. It depicted an improving picture on the inflation threat. more…

July 26, 2004

Home Sales in June Broke Records While data include sales done earlier and recorded only in June, it is hard to see the forerunners of a consumer collapse, at least as far as confidence in the future. more…

July 21, 2004

Greenspan on the Hill: for whom has the bell tolled? The mid-year appearance of the Chairman signaled a new tack on the current sailboat of monetary policy. The winds of inflation may yet be off the port bow and the Chairman took up the pennant of all central bankers: inflation (at least in the long run) is a monetary phenomenon. But many questions remain more…

July 17, 2004

Ambiguous Macro Data and Tentative Markets Three pieces of data this week (all surveys to be sure) tend to support a thesis that the consumer is fine, albeit ‘shocked’ by oil prices and oil price anxieties. Yet, markets have exhibited striking tentativenes in the face of the likely actions of the Fed. more…

July 03, 2004

Life, Liberty and the Pursuit of Happiness As we celebrate our nation?s freedom, we are reminded that the Founding Fathers told us that the pursuit of happiness was one of our inalienable rights. The Fed wants to make us happy. Is that the best course to follow? more…

June 30, 2004

Can There Be A Surprise After the Telegraph? The decision was unanimous (no surprise) and all 12 Districts wanted a raise in the discount rate (to 2 ?%). What surprises did they have for the market? more…

June 29, 2004

Getting behind ‘Behind the Curve’ With the most likely outcome of the FOMC?s deliberations tomorrow a 25 basis point rise (the overly uniform consensus), economist jabber in the past few days has focused on whether the Fed is ?behind the curve.? The phrase itself is misleading, because the alleged curve behind which the Fed is sometimes accused of lurking involves two very different kinds of perceptual issues. more…

June 12, 2004

Changing Paradigms: deflation to inflation With the Greenspan speech on June 8th that made it perfectly clear to markets that ?measured? doesn?t mean the Fed will shrink from its duty to be vigilant on the inflation watch, the rush to ?get on board? from other members of the FedSpeak community has become a deluge. more…

June 12, 2004

Fear and Greed: Bond Market Rallies on CPI Relief It seems that the sell-off in the bond market in recent days was overdone and the less alarming CPI report caused a very rapid ?shock? retracement. Equity markets should respond similarly, leaving the underlying issue of the pace of normalization of the Fed Funds rate to addressed by the Fed. more…

June 09, 2004

Back to School We owe readers an apology for our take yesterday on the Greenspan speech. We essentially ignored the subtle warning to markets that if inflation were really a problem, the Fed would do its duty. We thought that was already widely understood and therefore focused on some of the logic Greenspan is now using to play down inflationary risks. more…

June 09, 2004

Greenspan’s Enigma Variations: variable pricing power Troubled by rising prices, the Fed needs to explain how it is that with “restored” profit margins,further hiring will not lead to inflationary wage settlements. The answer seems to be that those “restored” margins are fluid enough to absorb some pressure. It would appear that “pricing power” is a deus ex machina. more…

June 04, 2004

How Much Has Changed, Dr. Kohn? Governor Kohn gave us a glimpse into his own (and perhaps Greenspan?s) thinking more…

June 02, 2004

That Second Half Thing Two issues seem paramount for investors at this point of the cyclical rebound: (1) is the current performance of the economy ?as good as it gets,? in this economic cycle; (2) how fast will the Fed raise rates in its effort to bring the Federal Funds rate to a ?neutral setting?? more…

June 01, 2004

The Nothing is Easy Survey The ISM top line number moved upward (consistent but not comparable to the Chicago PMI last week), but the internal component numbers gave mixed readings. more…

May 31, 2004

Where are we going, if anywhere? This is the week when the true direction of economic policy may emerge. Tomorrow, we get construction spending and the ISM
more…

May 25, 2004

Buy Now Before the Price Rises
Home Sales are soaring even though mortgage rates are rising. One more sign the economy is at a turning point. more…

May 20, 2004

Measure for Measure At this juncture, with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. FOMC May 4, 2004. But what does “measured” really mean? more…

May 19, 2004

Monetary Commentary The real issue that is beginning to emerge is whether the Fed will be surprised by the data between now and June 30th. more…

May 13, 2004

Fed Dilemma: who’s crying now? The data are pointing to an old familiar refrain? Who’s crying now? Can the Fed resolve rising prices and bond trader expectations? We’ll know in a bit more than a month more…

May 12, 2004

Equities and Bonds: who moved my cheese? The question for traders and investors today is ?who moved my cheese?? Are equities in the drivers seat? more…

May 07, 2004

As it turns out Monster was a good indicator Monster.com gave the right signal and the payroll number surged again to 288K after the 308K for last month. And for the Bond Market, what does this suggest? more…

May 07, 2004

Initial Claims and Monster.com Suggest Improved Payrolls The economy is beginning to find those “missing jobs,” or so it now appears. more…

May 04, 2004

An End to Patience The Fed sat still today on interest rates but promulgated a “measured pace” as the route it will take to changing its policy settings more…

May 04, 2004

Fed Forecast The markets have been rumbling with fear that the Fed will replicate its interest rate step ladder of 1994/1995.
Today, the Fed must communicate in earnest. more…

April 21, 2004

What’s Changed Since March 16th Today, Chairman Greenspan meets with the JEC. The Market is waiting for the next turn of the screw in U.S. Monetary Policy. What’s changed since March 16th? more…

April 16, 2004

Data Review: Claims, NY Empire Survey, Philly Fed As the ship turns slowly in the wind, a picture of a sharply recovering economy is emerging more…

April 16, 2004

Market Pivots: Geopolitics vs Monetary Politics While earnings reports continue to impact individual stocks, in our view, the overall market conditions (behavior toward risk, valuation parameters, etc.) are now highly sensitized to geopolitical (and domestic political) risks and the likely future course of monetary actions by the Fed. more…

March 31, 2004

Chicago PMI and Factory Data Confirm Slower Acceleration A bit more data that suggests that while GDP growth is strong, its acceleration is slowing more…

March 25, 2004

Data Review: Initial Claims and Home Sales
The claims data would bring rousing cheers if employment growth were moving in a positive direction. Put another way, it will be hard to sustain the considerable, downward thrust in claims unless one wants to believe that labor force participation rates are going to continue to drop in a sizeable way or the work force that cannot find jobs is going back to school and not applying for benefits! The reference points for all three measures shown above (initial claims, continuing claims and four week average claims) have been pushed back into late 2000 or mid 2001.
more…

March 06, 2004

Reinventing Central Banking In some ways, economics, particularly economic policy making, has much in common with medicine. This is particularly true when it comes to the art of central banking. Since one of the oldest rules in medicine is for the physician to ?do no harm,? one ought not to be surprised that this is also a suitable maxim for the economic policy maker. more…

March 03, 2004

Non Manufacturing ISM Grows At a Slower Rate The old “second derivative” is showing its hand in the slowing of growth in the non-manufacturing data more…

March 02, 2004

Greenspan on the Current Account Ostensibly, Greenspan?s speech topic today at the Economic Club of New York was the current account, but the underlying message was an old theme: the importance of market competition in promoting flexibility in the global economy. While elements of both American political parties are rushing to sell Protectionism to the voters, Greenspan appears ?presidential? in reiterating the virtues of flexibility in dealing with economic ?imbalances.? more…

February 11, 2004

The Political Economy of Monetary Policy The semi-annual Humphrey-Hawkins circus came back to Washington today, with the Greenspan the Lion King competing for time against the two, partisan clown claques that parade as the People?s Choice. Asset markets around the world listened intently to the by-play for hints of future monetary policy changes. Our view is that hidden within the Greenspan show, is the high probability that the Fed will be sitting on the sidelines for the bulk of this year. more…

January 29, 2004

Stepping Stones to Patience The minutes of the December 9th FOMC meeting provides another data point offering insight into the evolution of recent FOMC statements. Markets have attached considerable significance to the ?for a considerable period? mantra since late fall last year. more…

January 28, 2004

FEDSHOCK: patience in, considerable period out There will be many questions asked as to “why now” and “on what basis?” But, this is an unusual time and Greenspan is an unusual man to say the least. He has been accused of being a “serial bubble-blower” by some. Maybe Chairman G needed some room and it was time to tell the Market that “nothing is forever!” Whatever led the Chairman to write a statement with such a change, he now has the room he prefers. more…

January 15, 2004

Data Review Good News, Good News, but where are the jobs? The initial claims data tell us that firing has slowed down. We’re still waiting for the hiring to begin more…

January 11, 2004

Head’s Up on 2004 The issue agenda for 2004 seems focused on the peculiarities of this recovery and how markets have reacted to this somewhat unusual set of circumstances. Domestically, financial markets are flooded with liquidity that contributed to very lucrative returns in equities, bonds and for those who sold the dollar forward. However satisfying that was to those with the “Right Stuff,” until the Missing Jobs show up, abundant liquidity will remain. Domestically that has boosed equity prices in the first weeks of the new year and internationally the dollar’s weakness threatens to break out into a New International Monetary fix. more…

January 08, 2004

It’s baaaaaack Market forecasts for 2003, made in many ‘end of the year’ reviews frequently focused on the high probabilities of single digit returns and stocks with low volatility. As it turned out, it was just the opposite more…

January 03, 2004

ISM Reverses Chicago PMI The ISM survey was a robust report that reversed the earlier survey for the Chicago region. Production, New Orders and Employment surged suggesting that QIV 03 GDP might do even better than consensus. more…

December 24, 2003

Durable Goods, Initial and Continuing Claims, Home Sales The durable goods report was suggestive of further bumps in the road with setbacks in key areas of the New Orders data. The Chicago PMI and the national ISM surveys take on significance in this light since the durable goods series is notoriously volatile. Initial Claims were hardly altered but Continuing Claims dropped sharply while Home Sales dropped for the third month in a row more…

December 23, 2003

Have No Confidence in Consumer Confidence but pay attention to Prices? Consumer Confidence numbers today from the UMICH Survey fell but are better than Consensus. Should we care? And on ahother datafront, today, the final GDP numbers for QIII were published. Real GDP unchanged but real Consumption up from 6.4 to 6.9%? The problem is to interpret that change…It’s all in the price, once again…or should we say, all in the prices! The BEA has recently revised the PCE deflator numbers and the real issue is whether the revised PCE and its sister, the PCE core, are going to be sufficiently reliable for the FOMC to start worrying once again about Deflation?

And, by the way, the UMICH final consumer confidence numbers are out (down from the prior month but higher than the Bloomberg consensus). Don’t get too excited that Christmas sales are going to bust out the top of the revised and somber estimates we have been hearing—no one really believes that these Consumer Surveys give very good forecasts one month ahead. more…

December 18, 2003

Data Review: Claims, LEI and Yield Curve Flattening The broader picture of labor market improvement continued today despite a slight rise in Continuing Claims. The LEI matched the consensus forecast of 0.3%, but provided little not already known while supporting the recovery of production and new orders and a lengthening work week. It is the positive surprise of a reduction in inflation estimates that is creating some rumbles in the bond market more…

December 16, 2003

Industrial Production Increases with Consumer Price Quiescence Small Minds should not bother with consistency in economic data series, especially with a recovery like the current one. Yet, some ‘expectations’ were fulfilled with the strong performance of Industrial Production and weak price inflation data. Consider the “considerable period” doctrine, once more, and the possibilities that QI2004 corporate profits could be better than expected more…

December 16, 2003

Housing Starts and Permits Yield Conflicting Signals The Housing Starts number was a ?blowout?, posting the highest single month total in the data series since 1984, and pulling up the 3-month average accordingly. However, building permits dropped, signaling a potential reduction in the Starts numbers going forward. more…

December 12, 2003

UMICH Consumer Confidence Data Slips Consumer confidence surveys are usually interpreted in light of current consumer attitudes—rather than as forecasts for forward purchasing plans. In that sense, the preliminary UMICH survey data tell us to be cautious. What it may be saying more than anything else is that the consumer wants to be sure that his personal income—and in particular, his wage income—is going to be there going forward more…

December 11, 2003

Changing Winds for 2004? While initial claims data the past two weeks have ? worsened,? we suspect nothing ?real? is changing other than the weather, the Thanksgiving holiday, and the very gradually shifting economy. In other words, ?noise? prevents the real, long-term trends from emerging steadily on a week-by-week basis. We would, of course, be happier if the 4-week average claims continued its descent in an uninterrupted manner, but it has not. Longer term, continuing claims have not yet been perturbed from their recent path of improvement. more…

December 09, 2003

Monetary Tea Leaves or Rules versus Discretion The FOMC met today and left the ?considerable period? doctrine in tact?or did it? There were several notable shifts in the semantics of today?s statement, arguably allowing market participants to put their own spin on the state of monetary policy. Critics of ambiguity will have a rich diet to digest, while Greenspan idolaters, who wish to give the ?man who? plenty of leeway in determining the timing of a shift of monetary policy will be pleased. On balance, for those of us more inclined to ?rules? over ?discretion,? it was a step backward. more…

November 27, 2003

Will the Real Recovery Please Stand Up! The Missing Person at this party has been New Jobs. Without a steady and substantial improvement in payrolls, neither policy makers nor business will feel truly comfortable, in spite of clear indications that the economy is improving. Corporate profits have been hitting new records, but only now does the likelihood of much better payroll growth seem within reach. The Fed has been extremely accommodative and the tax cuts have clearly stimulated consumer spending. The latest data seem to be showing that a fully elaborated recovery is now well underway. The upside possibilities for a better than expected QIV exist as well as a healthy expansion continuing into 2004. Investors have already written up equity values. In order for equity markets to improve substantially, some upside surprises are probably required. more…

November 19, 2003

Housing Blows Out Again The businessman was suspicious during most of the recovery upswing which was powered by far more optimistic consumers. Ultimately, they put their money where it counted, buying durables. more…

October 28, 2003

Taking No Chances The labor market is getting better, albeit not fast enough for the politicians. The FOMC has put its stamp of approval on this assessment while it remains opaque on how it will develop an exit strategy more…

October 24, 2003

Small Rise in Continuing Claims A small rise in Continuing Claims and little change in Initial Claims fails to offset the larger context of falling Continuing Claims. TWe see this as a barometer of an improving labor market going forward. more…

October 20, 2003

Cerberus and Snow When yesterday’s report of the Treasury Secretary Snow’s ‘exclusive interview’ with the London Times hit the markets, both bonds and fx were rocked. Then came the denials or ‘corrections’ from the Treasury itself and from spokesmen for the White House. But Snow has clearly become a leading spokesman (as was proved at the Dubai G-7 and in our view, still, there is more here than just a ‘loose cannon at the Treasury,’ as the FT’s editorial whined. We think he has given cover to the Fed to find an exit policy from the low interest rate trap. That is just one of the three heads of the U.S. policy dog. We shall see if the dog finally hunts! more…

October 17, 2003

Look Ma! No Hands The recent run of data is painting an improving picture of the economy, one that gives optimists heart that the ?turn? has finally begun. With all the focus on Jobs Jobs Jobs, pessimists will wait for hard evidence that hiring levels are really rising and that some of the lost millions are going back on the payroll. It has been our view that the tension point was the clear boost to consumer spending provided by the tax cuts as against the very low rate of job creation. In point of fact, the recent study by the BLS clearly indicates that what kills the employment data are the absence of new jobs, not the layoff pattern that is characteristic of nearly all recessions. We have always felt that the consumer would ?hang tough.? Ultimately, the real pessimists—none other that the managers of Corporate America who were battered by falling corporate profits, dwindling personal stock portfolios, enough ?bad apples? in the corporate governance world to make a very sour barrel of apple sauce, and the ?China Syndrome?—would come around. more…

September 18, 2003

Pyrrhic Victory Giving back some $48 Million in deferred compensation is not what it used to be. Despite his magnanimity, Dick Grasso finally had to step down as the CEO of the New York Stock Exchange. Giving back the bucks wasn?t enough. That would seem to be a victory for the forces of corporate governance. Before cheering, however, we should step back and ask some hard questions about whose victory it was and who could be the real losers? more…

September 17, 2003

Deficits Matter but to whom? We know it is the political season as the rant about the deficit rises by the decibel. Despite our science, economics cannot predict, without endless equivocation, the size of the deficit, even for 2004, much less the size of the cumulative deficit for the next 10 years. The bell is tolling incessantly over the impending disasters that will befall the economy as the Deficit Marches on, growing without suitable restraint. In fact, there is more than a single bell tolling the collapse of the Republic because growth in the deficit of the size some economists now project will surely eat all of our lunches. more…

September 07, 2003

When Data Mislead: the uncounted employed This recovery from the recession of 2001 has puzzled analysts and markets for many reasons. One puzzle is where are the jobs? The hallmark of this recovery is the very poor performance of measured employment. Even compared to the recession of 1990-1991, employment performance has been awful although reminiscent. At the same time, productivity has soared. That should have warned all of the analysts, including this one, that we had left something out of our analysis. more…

August 12, 2003

FOMC Threads the Needle: promise of an overshoot? The FOMC tried to throw oil on the troubled waters of the bond market by seemingly offering not to move the target rate for a ‘considerable period.’The balm was clearly required to prevent further damage to the recovery by sharply rising interest rates. In performing this seeming pre-commitment, the Fed is seemingly headed for an “overshoot,” a promise that some will suspect will be hard to keep. Credit must be given to the elegance of the phrasing as Greenspan has once again tried to ‘thread the needle’ via some opportunistic ambiguity more…

August 12, 2003

The Maestro’s Malapropisms: consistency needed this time Fallibility is the curse of all who prognosticate, yet sometimes one is amazed by the hat tricks that some policy makers can perform. Last night, when this piece was written, we found it difficult to imagine the language that the FOMC would use to thread the needle between commitment and discretion. Somehow, however, Greenspan found the path through the thicket, despite our prior foreboding. For the record, we post our mea culpa for doubting he could perform such delicate guidance. more…

July 17, 2003

Greenspan and the Monetary Report For two days, Greenspan walked the Congress through the economy’s tepid recovery (to date) and his modified optimism that prospects were improving. In his remarks to the House, he caused a substantial gyration in the Bond Market which he tried to repair with his comments on Wednesday to the Senate Banking Committee. The Senators were more graceful, but the Bond Market was jumping up and down all day. The Fed has not put on a convincing case either that the economy is truly on the mend or that it speaks with one mind on policy going forward. If one listened intently to the two days of Q&A, one could make a case that anything is still possible…

We think it is unclear that the Fed is finished its work for this recovery. The door to further easing seemed to close on Tuesday and was re-opened on Wednesday as the Chairman watched the Bond Market Boogie. more…

July 15, 2003

Speculating on the Greenspan Speculations In attempting to forecast the direction of the Chairman?s midyear testimony to the Congress, one should remember the old quip about Greenspan, to wit: ?If you are understanding what I am saying, I must be speaking too clearly!? The Chairman will have to wiggle a bit more than usual trying to reconcile the intense fascination with Deflation and the Bond Market’s recent disappointment with the FOMC’s last rate reduction. The real issue is time inconsistency which will could show just how nimble tongued the Chairman can be if the Congress alertly presses the issue. more…

July 14, 2003

Bastille Day on the Foreign Exchanges? There is a growing ‘chatter’ concerning the “imbalances” of the American economy (large current account deficit;large government deficit; and “insufficient savings”). Many problems or one problem? The other side of this coin is the ‘fear’ that one day foreign dollar holders will storm the foreign exchanges and take the dollar down. Bastille Day on the Foreign Exchanges? Hardly! more…

June 25, 2003

Dr. Greenspan and the ‘Classics’ What issues were hidden beneath the 25 basis point reduction and the markedly different language of the FOMC’s Statement? What has really been learned from the Japan experience? Has the Carry Trade been given a warning? more…

June 25, 2003

The Monetary Policy Dilemma The consensus on the FOMC’s likely actions today has jumped around over the past few weeks as the economic data and the bond and equity markets have rolled. Coming down to the wire, a 25 basis point cut was the most likely outcome, but there were many economists arguing for a 50 basis point cut. Our view was a 25 basis point cut, but we thought that size of the rate cut was much less important than the Fed’s vision of the economy’s real problems and its capabilities in dealing with those problems more…

June 14, 2003

Consumer Confidence Disappoints The University of Michigan preliminary survey data for June weakened from the May numbers. Since the consumer is the last redoubt of the Fed’s recovery strategy, even mild hesitation sets off concerns that the FOMC will have to charge further down its course of yield crushing. A Full Monty on June 25th? more…

May 31, 2003

Deflation Threat Can Be Beaten The following ‘leader’ to MAS052603 (The Paradox of Profligacy) was printed by the FT as a Letter to the Editor on 5/29/03 more…

May 27, 2003

The Paradox of Profligacy Many economists have recently despaired that the threat of deflation is beyond the power of a Central Bank to address, or to put it differently, that while inflation is fundamentally a monetary matter, deflation is not. The hinge is the stability of velocity. But, just as in the great hyperinflationary experiences, the public’s expectations—-particularly expectations about central banking behavior and its impact on prices—does count. The key is to avoid creating a substantial amount of risk aversion and the fear that the Central Bank will in fact back-off from its duty to create stable prices and maximum employment. more…

May 21, 2003

Deflation Risks and Policy Contradictions During his testimony to the Congress today, Greenspan pointed to the potentially serious consequences of deflation paired with the low probability of its occurrence. The emphasis was that the ?cost of insurance? against deflation was (currently) quite low and that had motivated the Fed to be aggressive in its monetary policy actions. He closed with the statement that the consequences of deflation could cause the Fed to take further action. more…

May 16, 2003

Deflation Risks: rising or falling? The Business Survey data did not give us much to cheer about, even if the Consumer Sentiment data put some good moves in the forward arena. Housing may be fading, however, and the inflation data pose an ominous threat to which the Fed is likely to respond. We are moving on a Wing and a Prayer. more…

May 06, 2003

AG is a Yogi Fan! FOMC leaves rates unchanged and muddies the water on the bias The FOMC left the Fed Funds rate unchanged, but altered its assessment of risk to the downside. more…

April 27, 2003

Will Pessimism Lift? The stock market continues to climb a wall of worry, but the chit-chat with managers suggests abundant pessimism on economic growth. Geopolitical fog? Lack of political direction? How long will the soft patch last? Only the Shadow knows! more…

March 27, 2003

New Home Sales Get Whacked In February The housing market has been a bulwark in this attempt at recovery. It is a principal focus of Fed policy, but sooner or later demographics and personal income growth will have a strong effect. Has there been a break in the trend? more…

March 25, 2003

What really matters for Consumer Confidence? Consumer confidence measures are widely quoted and widely disparaged as predictors of economic outcomes. But, in this business cycle, many predictions have been shattered. In a bi-modal world, investors have a choice of buying into highly volatile outcomes. In such circumstances, there will be big winners and big losers. Maybe it is time to sharpen one’s golf game. more…

March 13, 2003

Facts on the Ground The acceleration of U.S. forces into the Middle East set off its own dynamic for both the Administration and its opposition. Is a war the only option, or does the existence of substantial forces in the region give Real Containment another chance? more…

February 28, 2003

Final February 2003 Datapoints Investors who waited for the datastream this weak to reveal a set of clear trends were disappointed. The signals portrayed a mixed picture that will continue the high state of anxiety over the economy’s course as the countdown to hostilities in Iraq proceeds more…

January 30, 2003

Hidnsight or Foresight: December 10th FOMC Minutes It is always tempting to second-guess the FOMC on what they saw on a date six weeks earlier. Few prognosticators pass such a rigid standard, but the growing importance of the Federal Deficit in Fed policy making shows up in these minutes. Stay tuned! more…

January 30, 2003

The Fed in time of war With a neutral assessment of risk and no change in the federal funds target—despite considerable worry over the recent economic data and the slump in the market—one can ask what the Fed is worried about? more…

January 07, 2003

Bush the Bold Into the Breach Hints of the President’s new tax proposals rocked the market yesterday and the speech confirms what we wrote last night. This is an attempt to tilt investor expectations and use a rising stock market as a way to reconcile conflicting policy goals more…

November 15, 2002

Consumer and Producer Divergence We often say that the Fed is data driven in its policy determination and we commented on the apparent divergence of opinion by FOMC members this past week. Maybe they knew how divergent some of the data could be. The business sector is downcast and it is apparent in the data. Consumers think the economy will get better. Go figure how to survive in “interesting times.” more…

November 13, 2002

A Fed With Many Tongues Over the past several days, the Fed has become virtually loquacious. Its energies are devoted to explaining the puzzling decisions of November 6th. The more speakers, the greater the variety of notes—perhaps ‘too many notes’ as the Emperor was alleged to have said to Mozart. The more sound, the less convincing the music. more…

November 05, 2002

The Pivots of 2003 Divergent growth scenarios for QIV 2002 highlight forecasts for the economy. To a larger extent than normal, political events dominate economic events at least for the next few quarters. Forecasting economics is at best chancy. Forecasting politics should be left to prophets and magicians. The Fed has to be a bit of both and will cut rates tomorrow. We are evenly divided between 25 and 50 more…

September 12, 2002

It doesn’t get any easier Initial claims data are disappointing to those who feel the recovery, despite its wobbly character, is on track. Even Greenspan in his statement to Congress today admitted that the economy was weaker. The claims data, notorious for week to week variation, is developing a pattern that is consistent with other economic indicators that point to further weakness. more…

September 12, 2002

The Ennui Economy Among the many reasons why the Equity Risk Premium has risen, the most important has been Knightian Uncertainty! One of the sources of that Uncertainty includes the realization that the “great disconnect” between the optimistic prospects for the economy at the beginning of the Year and the behavior of the stock market turned out not to be a disconnect at all. The market correctly foresaw the slowing in growth, and the “shorts” have yet to be sharply punished for their skepticism. That skepticism may turn out to create a self-fulfilling prophecy, since Q3 GDP growth seems a very odd contrast to the dismal expectations of business…at least in terms of their investment plans more…

September 04, 2002

The Etiology of Recovery The complexity of the current economic environmentis because this RECESSION is DIFFERENT just as the BOOM that came before was different. However, Boom-Bust is not a totally unknown scenario, and it is well to re-emphasize some of the salient points of a Boom-Bust sequence. The keys to recovery are capital exit, availability of finance and the re-regulation saga that is unfolding more…

August 16, 2002

Crunch Time The data now point to a possible stalling out of the recovery. The Philadelphia Fed survey data suggest this stall and often front run other national indicators. Since consumer spending holds the key to the recovery and that spending depends upon job growth and income maintenance, the economy is now entering Crunch Time. more…

August 13, 2002

Stormy Weather but no leaks in the boat…so far The FOMC changed tack but not its basic course, despite explict recognition that stormy weather is buffeting the boat. Where does that leave monetary policy going forward? more…

August 09, 2002

Hang together or all hang separately At the present time, absent the data from Advance Retail Sales due Tuesday, the most likely outcome will be that the FOMC will issue a stronger statement that could include some commitment to move quickly in the event further evidence of an economic stall is developing. That could be a workable compromise between the fear of a failed recovery scenario and traditional central banking practice. We would rate the odds at 60% for this kind of outcome. more…

July 23, 2002

Infectious Greed Greenspan theorized to the House and Senate last week on the sources of the Bubble. He has a new theory that pivots on the bulwarks that broke down. Is it correct? more…

July 06, 2002

The Irrelevance of Macro The continuing divergence (“disconnect”) between the evidence of economic recovery and the persistence of a huge decline in equity values led us to write a speculative piece. While we explore the underlying themes of the disconnect designed for day trading, it seemed that some interesting day-trading themes could emerge prior to and following the July 4th holiday. more…

June 14, 2002

Slower Growth in Q2 This morning?s data provides a metric on the degree of disappointment with earlier optimism as to the sustainability of economic growth in the early phases of recovery. The lot of economic forecasters is a dismal one indeed more…

June 12, 2002

What is Wrong on Wall Street Today’s Richmond Fed survey confirms what all of us now recognize: Q2 growth is slowing and Q2 is going to be a much different affair than Q1. One issue to focus on is whether Q2 will be a good barometer for 2H02. more…

May 30, 2002

When the going gets tough, the tough start gnashing Either the majority of economic forecasters are very wrong, and have missed a major fork in the road, or market players are fixated incorrectly on a ?half-full glass? vision of the economy. ?Sell the rallies? has taken on the fetish quality of ?buy the dips? of the late 1990?s market. more…

May 20, 2002

The Double Dip Deja Do The ‘double-dippers’ are doing it again, worried about a stall in the U.S. economy. Double-dipping is not where your attention should be focused. Focus on valuation, while you recite the famous utterance of Yogi Berra: “A nickel ain’t worth a dime anymore.” more…

May 13, 2002

Good News is Bad News The economy gets better, but the equity markets gets substantially worse? Why the disconnect? Market suspicions are that investment demand will not revive,and growth will remain unbalanced. The Fed is clearly still worried about the economy’s “balance” even though they recognize that monetary policy is very ‘accommodative.”

Paradoxically, when the Fed finally raises rates, the equity market is likely to move up.more…

May 11, 2002

Quick Pics on Recovery Real earnings took a sharp decline of 0.6% last month continuing the pattern of increased volatility that has occurred since last year when the economy nosedived. It is unclear how to interpret the most recent data although we know that nominal wage growth has slowed quite sharply more…

April 03, 2002

The Disconnect An apparent disconnect is emerging between the investment plans of business firms and the highly optimistic concensus growth forecasts for real GDP in 2002. It has now become a concern of policy makers. more…

January 28, 2002

December Total Home Sales driven upward by Sales of New Homes Cheap money, particularly for mortgages, has blunted this recession, much in the same fashion as booming auto sales. Sooner or later, consumer balance sheets do get stretched even though debt service falls with lower rates. How long can this dance last? The Fed has seen enough data to back away from further easing at this point, but they are still waiting for hard evidence that business spending will improve—beyond replacement of inventories. The Fed won’t cut on Wednesday, but they are still ‘twixt and between.’ This probably means the bias toward weakness remains even if for now, they do not reduce the Federal Funds rate. This will give Fedwatchers more to comment upon as Greenspan modulates once more in front of the ‘liquidation’ dilemma. How strong can the recovery be if wallets are emptied now? more…

January 28, 2002

December Total Home Sales Higher but Fed Dilemma Continues Capping a record year, New Home Sales of one family homes rose to 935,000. This drove total sales (existing plus new)to a record rate of 6,125,000. The Fed has to hope that the consumer continues to spend for homes and autos until business spending improves. Greenspan’s ‘restatement’ doused hopes of a further cut at this, next FOMC meeting, but the Fed still is ‘twixt and between.’ FOMC will leave the bias tilted toward weakness, but will not cut further at least at this meeting. more…

January 26, 2002

Greenspan at the Senate Budget Hearings: when good news is bad news. Business spending will depend upon a robust consumer who has (atypically) continued to spend during this recession. The issue is if there is enough tension in the coiled spring of an inventory rebound to launch a solid recovery. All during the Long Boom, Goldilocks appeared as a technology miracle. Greenspan invoked his favored deus ex machina , technology, as a plausible reason for believing recovery will be stimulated by further business investment, in spite of unparalleled monetary easing that kept this recession from being too severe. Will technology create the thrust for a significant recovery? Only the Shadow knows! more…

January 25, 2002

The Fed’s Dilemma: the economic environment going forward. This piece was written before the Greenspan testimony this morning which we will review shortly. It is clear that the impact on the Budget of declining capital gains and reduced tax collections during the economy’s turndown will be the focus of Greenspan’s testimony. more…

January 19, 2002

The University of Michigan released their preliminary readings on consumer confidence today. Consumer Sentiment rose today from 88.8 to 94.2 (its highest in a year and the largest increase in the past two years. The Sentiment indicator which combines Current Conditions and Forward Expectations moved on the basis of the sharp increase in Forward Expectations as the Current Conditions measure deteriorated slightly. Broadly, consumers are voting as the Mid Atlantic business survey released by the Philadelphia Federal Reserve Bank—the economy will get better going forward, but patience is the theme for the present. more…

January 18, 2002

The data points continue to line up on the side of recovery and a turn around this quarter. What is left to calibrate is when and with what force the business sector begins to spend at rates that could produce 3+% growth on a consistent basis. Inventory replenishment can carry the economy only so far. The initial claims (current and 4 wk averages) give some confidence, but UE will continue to rise for several months. more…

January 17, 2002

During the Cold War, “the Russians are coming” expressed our deep-seated fears of a Russian surprise. Russian surprises continue, but now they are pleasant. Assistance with the U.S. anti-terrorist campaign and additional supplies of crude oil. Not everyone welcomes this last development. It is making OPEC’s output restriction campaign much tougher. The extra crude is translating into pleasant CPI surprises of declining headline inflation. Nothing is forever, and when GDP begins to grow again, here and around the world, this relief will vanish. Monetary policy-makers will have to worry about the behavior of core inflation that is not declining. more…

January 14, 2002

It is extremely difficult not to conclude from the Chairman’s speech that the odds have shifted markedly toward an additional easing on January 30th. The phrasing and emphasis indicate true concern that this recovery path has not achieved sufficient traction to take its success for granted. The economy faces significant risks along the way, and the Fed should leave no doubt. Unless the data over the next two weeks are extremely optimistic, the speech indicated that the Fed Chairman has the determination to make monetary policy sufficiently easy to insure a clear recovery path. more…

January 13, 2002

As the economy was bottoming out, 9-11 occurred creating downleg of a V within a U. Further policy response, sharp markdowns and attractive financing put the Consumer back in the game and inventory rebuilding must now occur. But without stabilized consumption, QI2002 could be a headfake and a double dip could lie along the road to recovery. The fundamentals have not shifted and the KEY to recovery is the CONSUMER…which has been our view for many weeks. If there is an “event” out there that could upset the recovery, it could be a Japanese financial accident. more…

December 26, 2001

Year End Review: What to look for in 2002

1. The U.S. will be the main driver for global growth in 2002, but therecovery will be weaker in the first half than in the second half.
2. The U.S. economy will bottom out in QI2002, but the return to high growth levels of 1997-1999 will be restrained by consumer ‘retrenchment’ as consumers seek to raise their savings rates and moderate the rate of growth of consumer debt.
3. The ‘inventory cycle’ that has been a major depressant to growth in 2001 will reverse in QI2002-that is the ‘rate of decrease’ will be lower than in IV2001 and therefore ‘growth positive.’ That will give some impetus for growth in QI-QII 2002, but longer term, private domestic fixed investment must revive to produce more enduring growth.
4. Already scheduled tax reductions for 2002 will provide some offset to consumer attempts to save more.
5. Even with lower rates of growth to consumer expenditures, QI2002’s ‘inventory rebound’ should provide some leveling off in the fall in Industrial Production and eventually, its gradual rise.
6. The Fed will return to a neutral bias sometime in QI2002,but will not be pressed to raise its Federal Funds target until QII or QIII 2002. The yield
   curve will flatten as short rates rise modestly. The Fed will have to face a
   substantial task of “reeling in” because the growth rates of various
   monetary aggregates are too high to achieve reasonable price level
   stability.
7. The trajectory of GDP growth in 2002 will be upward, but we are doubtful that the US will achieve a sharp “V” recovery in FH2002
8. By 2003, real GDP will grow at close to the ‘new’ trend growth of 3.25-3.5%, but the composition of demand will show a smaller ratio of fixed private investment to GDP, a higher personal savings rate and a larger ratio of Government expenditures to GDP. This suggests that rate of growth of productivity will be lower than the ‘boom’ period.
9. Fed Watching will take on a new dimension, as the Fed begins to ‘reel-in.’ How much and how fast will be the watchwords for QII/QIII 2002. more…

November 29, 2001

Mixed signals from the data appeared again with Initial Job Claims rising (breaking the recent four week downward trend). Whether the downward trend was a false omen or not, it is still likely that unemployment will continue to rise through the cycle bottom and well into the initial phases of recovery. Durable goods for October rose a record 12.8% with shipments rising for the first time since May 2000. This is a data series that frequently oscillates month-to=month, but there were some good signals in the technology sector for the first time in nearly a year. more…

November 27, 2001

Moving on: recovery’s implications for monetary policy Housing sales rebounded but the Conference Board measure of consumer confidence fell short of market expectations. This provided more uncertainty as to the timing of recovery and bonds rallied. With the equity market’s recovery ‘predicting’ recovery in the spring, the debate on monetary policy for 2002 commenced. more…

November 16, 2001

CPI Changes are an Energy Story–more good news coming? The collapse in oil prices dominated the CPI data released today. Energy prices fell 6.3% for the month or at an annual rate of 54.6%! It should only happen (provided you don’t own oil stocks)! A further reduction in crude and product prices to the levels of late 1998 or early 1999 would create a huge transfer of income from oil producers to oil consumers. If crude prices fall that far, it is the equivalent of a 75 billion dollar tax cut with no wrangling in the Congress! more…

November 07, 2001

The Fed responded aggressively to evidence of depressed household and business spending by reducing the Federal Funds target rate 50 basis points while approving the request of a single Federal Reserve District Bank (Richmond) for a 50 basis point cut in the discount rate. more…

October 20, 2001

The CPI data today reflected some moderation in the trend of inflation (2.6%as compared to 2.7% in August).
The core rate of inflation behaved similarly.? In a period of falling energy prices, we might expect more slowing in the rate of inflation, which we will get once the higher priced inventories of petroleum products are run down. more…

October 03, 2001

The Fed is not about to disappoint financial markets, even if it has reservations about too much monetary ease. This cut has dramatized the split between an impatient market and those who believe that monetary policy will indeed work— but are mindful that the lags are long and variable. more…

September 26, 2001

The Consumer Confidence numbers (reflecting some sampling done post-Attack)showed sharp declines
across the board. Compared to historical readings, the predictive power of the data may be undermined to some extent by the high levels in confidence reached during the Long Boom more…

August 14, 2001

There is the possibility that the signals we are now beginning to get are those of a recession… not just a massive slowdown. How does this disturbance compare with four prior recessions? Are there more policy alternatives to explore? more…

August 13, 2001

Capacity Utilization figures are signaling a recession, yet the consensus forecast has GDP moving up in QIII and QIV with moderate levels of unemployment. Can we reconcile the inconsistency? more…

August 04, 2001

Strange Data Points: Employment Report and the NAPM Non-Manufacturing Index. Which Ones and Which Months will catch the Fed’s eye? more…

July 31, 2001

The evidence of the investment bust has been nothing short of striking. At this point in the cycle, the essential question for investors is whether the economy is moving forward or backing up? Only by making a decision on this central issue can an investor have some confidence in his individual investor strategy. more…

July 19, 2001

Front-loaded Fed policy coupled with tax cut should improve economic activity

as the year progresses, yet weakness could arrive from abroad or from further domestic development Considerable uncertainty to the current economic situation until inventory adjustment a is complete and capital spending resumes. Risk to the downside still prevails and the Fed could do more Views of BoG and Reserve Bank Presidents reflect this assessment. It is implied in the 3Central Tendency2 of their individual projections… more…

June 27, 2001

Today, the consumer confidence numbers created a surprise for some of us who have found it difficult to believe that the consumer would “hang in” this long. The surprise is two fold—confidence didn’t fall; it rose! The data drive us to change our forecast for the FOMC more…

June 26, 2001

It’s a ‘pick em’ call on the Fed, but we will say 50 bp cut more…

May 23, 2001

The speed and virulence of the ‘snap back’ in the NASDAQ underscores how far the equity market has come since the bottom on April 4, 2001 more…

May 17, 2001

Fed is worried more about investment than about inflation more…

April 19, 2001

‘It’s The Credit Markets, stupid!’ Some say it was the bad payroll number that finally moved the FOMC—or alternatively, gave it ‘cover’ to do something more…

April 07, 2001

Is there a Split at the FOMC? One of the most puzzling aspects about the current correction is the stance of the FOMC. What does it really believe about the economy? more…

March 30, 2001

A Paradox on Both Your Houses

1. 1. ECB at the Siegfried Line
2. 2. The Costs of Zero-Cost of Capital
3. 3. How badly will Eurotech get squeezed?In the blackest of the night, we are only using the lanterns offered by US Multinationals who use US Tech Service Companies. Note page 3
4. 4. GDP growth counts –even for Tech. Central Banks, front and center! March! more…