Stock markets succumbed to a bout of profit-taking last week, sparked by concerns that the rally has overshot the pace of economic recovery. Riskier assets were showing signs of fatigue as the US dollar - the catalyst of many recent moves - stabilized and was perceived to be near its trough (if only short-term in the books of ardent dollar bears).
The greenback, usually the remit of the US Treasury, received support from Fed Chairman Ben Bernanke in a speech. He noted that the Fed was "attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability." These comments spurred some buying interest.
Bill King (The King Report) summarized the situation as follows: "For the past few months, bad economic news was perceived to be good news for stocks on the rationale that it ensured more juice. Dollar down, stocks and gold up has been the routine. Are we at an inflection point, where bad economic news is becoming bad news for stocks?"
Source: Ed Stein, Comics.com, November 20, 2009.
The past week's performance of the major asset classes is summarized by the chart below. With the exception of equities and investment-grade corporate bonds, most asset classes closed higher on the week despite nervousness creeping in before the weekend. Gold bullion touched a record high of $1,152.74 on Thursday and helped platinum, silver, palladium and copper reach fresh peaks for the year.
A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below.
The MSCI World Index (-1.1%) and the MSCI Emerging Markets Index (+0.3%) followed different paths last week, resulting in year-to-date gains of 24.5% and an impressive 70.2% respectively. Notwithstanding solid gains since the March lows, no major index has yet been able to reclaim the 2007 pre-crisis peaks.
As far as the US indices are concerned, the Dow Jones Industrial Index eked out a small gain for the week as investors emphasized high quality, but the other major indices all reversed a two-week up-patch. Six of the ten economic sectors closed lower for the week, with Technology (-1.4%) and Consumer Discretionary (-1.1%) underperforming,
The year-to-date gains in the US remain firmly in positive territory and are as follows: Dow Jones Industrial Index 17.6%, S&P 500 Index 20.8%, Nasdaq Composite Index 36.1% and Russell 2000 Index 17.1%.
Top performers among stock markets this week were Bangladesh (+21.3%), Latvia (+4.5%), Kazakhstan (+4.3%), Qatar (+4.1%) and China (+3.8%. At the bottom end of the performance rankings, countries included Ecuador (-9.3%), Egypt (-7.6%), Greece (-7.1%), Turkey (-7.0%) and Macedonia (-6.3%).
Of the 98 stock markets I keep on my radar screen, 39% recorded gains (last week 66%), 58% (31%) showed losses and 3% (3%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)
While other benchmark indices have been going from strength to strength, the Japanese Nikkei Dow has been in a downtrend since August and last week recorded a fourth consecutive down-week. The weakness in Japanese stocks coincided with a surge in the price of credit default swaps (CDSs) on Japanese government bonds (JGBs) - under stress of sovereign solvency fears. The chart below shows the significant underperformance of the Nikkei (red line) versus the S&P 500 (green line) - in absolute terms in the top section and on a relative basis (blue line) in the bottom part.
John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included iShares Silver Trust (SLV) (+6.2%), PowerShares DB Silver (DBS) (+6.2%), PowerShares DB Base Metals (DBB) (+4.6%), SPDR S&P Metals and Mining (XME) (+3.8%) and Market Vectors Agribusiness (MOO) (+3.8%).
At the bottom end of the performance rankings, ETFs included iShares MSCI Turkey Investible Market (TUR) (-8.1%), HOLDRS Merrill Lynch Market Oil Service (OIH) (-4.3%), First Trust ISE-Revere Natural Gas (FCG) (-3.9%), SPDR S&P International Financial Sector (IPF) (-3.9%) and iShares Dow Jones US Home Construction (ITB) (-3.7%).
"Short-term US interest rates turned negative on Thursday as banks frantically stockpiled government securities in order to polish their balance sheets for the end of the year," reported the Financial Times. Three-month T-Bills traded at a yield of -0.03% and six-month Bills fell to 0.12% - the lowest six-month yield since 1985. "Conventional wisdom says it's year-end window dressing ... But why Bills? If you want to park cash, why not place it in some short-term paper with a positive yield? ... those pundits that exclaim there is no problem are not correct. If there were no concerns, the cash would not eagerly run to a negative yield vehicle," observed Bill King.
Signs of heightened risk aversion also came from a widening of the spread of emerging-market bond yields over Treasuries and an increase in credit default swap spreads on corporate bonds and sovereign debt (notably the US and the UK). Risk aversion also resulted in the selling of some commodity-linked currencies.
In other news, a US congressional panel on Thursday approved the Ron Paul-Alan Grayson initiative to open the Federal Reserve's monetary policy decisions to government audits. The panel approved the amendment to broader legislation to revamp financial rules, but put off a vote on the broader measure.
Also, the Fed announced a reduction in the term of discount window loans from 90 to 28 days, effective January 14, 2010. Asha Bangalore (Northern Trust) argued that the need for discount window loans had decreased significantly from the period following the collapse of Lehman Brothers. "This [Fed's announcement] marks the beginning of a gradual withdrawal of the extraordinary support the Fed has extended to the global financial system as signs of stability have emerged," she said.
Next, a tag cloud of all the articles I read during the week. This is a way of visualizing word frequencies at a glance. "Gold" has been rising in prominence for a while, and now occupies the top slot in the media. Words such as "rates", "dollar", "prices" and "China" are not far behind.
Back to the stock markets: The S&P 500 Index broke above 1,100 on Monday, but reversed course later in the week and again closed below what was seen as an important resistance level.
The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town) are given in the table below. With the exception of the Russell 2000 Index, the indices in the table are all trading above their 50-day moving averages, with all the indices also above their respective 200-day moving averages. However, many European markets have already fallen to below their 50-day lines (not shown on this table, but indicated on the performance table higher up), pointing to possible further weakness.
The October lows are also given in the table. A break below these levels would indicate a reversal of the uptrend since March, i.e. reversing the progression of higher-reaction lows.
In addition to having retraced 50% of their bear market declines and up-volume recently having been mediocre, the Dow Industrial and S&P 500 are up against significant medium-term downward trendlines. Also, negative divergences are showing up in a number of breadth indicators, often good leading indicators at tops, as discussed below.
The number of S&P 500 stocks trading above their respective 50-day moving averages has declined from 92.6% in September to 56.8%, having made a series of declining tops while the underlying index was making new highs for the move. "This means that less and less stocks have been helping the index move higher, and it's definitely something that favors the bearish argument," said Bespoke.
The Bullish Percent Index shows the percentage of stocks that are currently in bullish mode as a result of point-and-figure buy signals. The figure is still relatively high at 77.0%, but the indicator appears to be topping out.
Richard Russell, 85-year-old writer of the Dow Theory Letters newsletter, said: "I keep thinking that the stock market is on thin ice ... I'm still bothered by the fact that this 'bull market' never started from an area where stocks were selling below 'known values'. Every bear market I've ever seen has ended with stocks selling below 'known values'. We never saw anything like that at the October 2008 lows or at the March 2009 lows. For this reason, I continue to think that maybe the final bear market bottom lies ahead. Suspicion, thy name is Russell."
In case you have missed Adam Hewison's (INO.com) short technical analysis videos during the past week, click on the following links to access these excellent presentations: S&P 500, Dow and Nasdaq, the US dollar, gold and crude oil.
As stated before, share prices have moved too far ahead of economic reality. This calls for a cautious approach in anticipation of the market working off its overbought condition and fundamentals reasserting themselves. I will bide my time while the fundamentals play catch-up.
For more discussion on the economy and financial markets, see my recent posts "Velocity of US money supply at long last edging up", "2009 Rally vs. 1982 Bull Market", "Picture du Jour: Plunging dollar erodes non-US investors' returns", "WealthTrack: Bruce Berkowitz - golden rules of investing", and "Donald Coxe - Investment Recommendations (November 2009)". (And do make a point of listening to Donald Coxe's webcast of November 20, which can be accessed from the sidebar of the Investment Postcards site.)
Twitter and Facebook
I regularly post short comments (maximum 140 characters) on topical economic and market issues, web links and graphs on Twitter. For those not doing so already, you can follow my "tweets" by clicking here. You may also consider joining me as a friend on Facebook.
"Global business confidence is slowly improving. Businesses remain cautious, but sentiment is much better than at the beginning of the year and is consistent with a tentative global economic recovery," according to the results of the latest Survey of Business Confidence of the World by Moody's Economy.com. "Businesses were much more upbeat ... notably optimistic about the economy's prospects next spring. South American businesses are the most positive, and North Americans generally the most negative."
Source: Moody's Economy.com
The Ifo World Economic Climate Indicator rose in the fourth quarter of 2009 for the third time in succession, with the economic climate improving in all major economic regions. The improvement was particularly marked in Asia, where the indicator even surpassed its long-term average, but the climate indicator also rose clearly in Western Europe and North America in the fourth quarter. While the recovery of the world economy is driven especially by Brazil as well as India, China and other Asian countries, the economic expectations are now optimistic almost everywhere, with the exception of several countries in Central and Eastern Europe.
Source: Ifo, November 19, 2009.
As far as hard data are concerned, the Japanese gross domestic product grew by 1.2% quarter on quarter between July and September - the biggest quarterly expansion since the first quarter of 2007. A growing trade surplus and stimulus-fuelled private consumption combined to help the world's second-largest economy recover from its worst postwar recession.
The latest acronym used in the context of economic recovery is "LUV", indicating an L-shaped economic recovery in Western Europe, a U-shaped improvement in the US and a V-shaped reversal in the BRIC and other emerging countries.
A snapshot of the week's US economic reports is provided below. (Click on the dates to see Northern Trust's assessment of the various data releases.)
Thursday, November 19
• Index of Leading Economic Indicators underscores US economy will continue to grow
• Labor market data point to stabilizing conditions
Wednesday, November 18
• Higher prices for cars and energy lifted CPI in October
• Housing starts - permits show a more stable trend
Tuesday, November 17
• Fed reduces term of discount window loans
• Factory production slips in October
• Higher prices for food and energy lift wholesale prices, core price index declines
Monday, November 16
• Chairman Bernanke stresses job market and credit conditions; the dollar receives special mention
• October retail sales - noteworthy gains of several components
Bespoke's "Economic Indicator Diffusion Index" measures the pace at which US indicators are coming in ahead of (or below) expectations over a 50-day period. Interestingly, the Index last week fell into negative territory as data reports failed to live up to (higher) expectations.
1. A U-shaped US consumer. Roubini argues against a "V-shaped" recovery, which he says puts too much confidence in this year's strong equity rally. Eighty percent of the population reacts to home prices, not equity prices, and he forecasts that home prices will fall further.
2. Difficult labor market conditions. Expect a strong second half of 2009 and a sluggish 2010, with growth below potential and continued job losses.
3. Balance sheet recession caused by over-leverage and debt accumulation. There are signs of a massive re-leveraging in the public sector. The cost of maintaining this level of debt will be very high and a drag on the economy.
4. Investment usually is a strong recovery component. But investment will not recover while one third of current capacity is not utilized.
5. A damaged financial system and the related credit crunch. Only half of the estimated $3 trillion global credit losses (IMF recently lowered their estimates) have been recognized so far. Expect more to come, especially in Europe.
6. Home prices said to fall further and commercial real estate bust continuing.
7. Exit strategy: Damned if you do and damned if you don't. Removing fiscal accommodation will constrain a recovery that still appears weak. It has already been determined that it is too early to remove fiscal accommodation, but if it continues it will fuel persistent large budget deficits and lead to inflation.
8. Fall in potential GDP levels and possibly in potential growth.
9. Global imbalances: Over-spenders retrench while over-savers don't compensate. Fall in demand from countries that tend to be over-spenders (US, UK) has not been neutralized by countries that tend to be over-savers (Japan, Germany).
10. Emerging markets (EMs) fared better, but can't close the consumption gap. Can China/India be the engine of global growth? No. Can EMs decouple from anemic growth in G3? No. Is the policy response of China/Asia appropriate and sustainable? No. There are not the necessary social safety nets in EM countries, so the motive to save is high. Private demand has to take over and drive growth.
|Date||Time (ET)||Statistic||For||Actual||Briefing |
|Nov 16||08:30 AM||Retail Sales||Oct||1.4%||0.7%||0.9%||-2.3%|
|Nov 16||08:30 AM||Retail Sales ex auto||Oct||0.2%||0.1%||0.4%||0.4%|
|Nov 16||08:30 AM||Empire Manufacturing||Nov||23.51||20.5||30.00||34.57|
|Nov 16||10:00 AM||Business Inventories||Sep||-0.4%||-1.0%||-0.7%||-1.6%|
|Nov 17||08:30 AM||Core PPI||Oct||-0.6%||0.2%||0.1%||-0.1%|
|Nov 17||08:30 AM||PPI||Oct||0.3%||0.7%||0.5%||-0.6%|
|Nov 17||09:00 AM||Net Long-term TIC Flows||Sep||$40.7B||$30.0B||$30.0B||$34.2B|
|Nov 17||09:15 AM||Capacity Utilization||Oct||70.7%||70.5%||70.8%||70.5%|
|Nov 17||09:15 AM||Industrial Production||Oct||0.1%||0.2%||0.4%||0.6%|
|Nov 18||08:30 AM||Housing Starts||Oct||529K||585K||600K||592K|
|Nov 18||08:30 AM||Building Permits||Oct||552K||585K||580K||575K|
|Nov 18||08:30 AM||CPI||Oct||0.3%||0.2%||0.2%||0.2%|
|Nov 18||08:30 AM||Core CPI||Oct||0.2%||0.0%||0.1%||0.2%|
|Nov 18||10:30 AM||Crude Inventories||11/13||-0.887M||NA||NA||1.76M|
|Nov 19||08:30 AM||Initial Claims||11/14||505K||510K||504K||505K|
|Nov 19||08:30 AM||Continuing Claims||11/13||5611K||5580K||5598K||5650K|
|Nov 19||10:00 AM||Leading Indicators||Oct||0.3%||0.5%||0.4%||1.0%|
|Nov 19||10:00 AM||Philadelphia Fed||Nov||16.7||12.0||12.2||11.5|
Click here for a summary of Wells Fargo Securities' weekly economic and financial commentary.
US economic data reports for the week include the following:
Monday, November 23
• Existing home sales
Tuesday, November 24
• Case Shiller 20 City Index
• Consumer confidence
• FHFA Home Price Index
Wednesday, November 25
• Personal income and spending
• PCE prices
• Initial jobless claims
• Durable goods orders
• Michigan Sentiment Index
• New home sales
Thursday, November 19
• Thanksgiving Day
The performance chart for various financial markets usually obtained from the Wall Street Journal Online is unfortunately not available this week.
"The recipe for perpetual ignorance is to be satisfied with your opinions and
content with your knowledge," said Elbert Hubbard, American writer (hat tip: The Kirk Report). Let's hope the news items and quotes from market commentators included in the "Words from the Wise" review will make a contribution towards continuously shaping new opinions and increasing the knowledge of the readers of Investment Postcards to enable them to make the appropriate investment decisions.
This week, the markets will be closed on Thursday, Thanksgiving Day, and on Friday from 13:00 EST.
That's the way it looks from Cape Town (where I am enjoying beautiful summer days before making my annual early-December trip to New York City).
Source: Tom Toles, The Washington Post, November 17, 2009.
Clusterstock: The Journal has the richest readership among print publications
"The Wall Street Journal has the wealthiest readership among print readers according to a new survey from Mediamark Research & Intelligence, by way of BtoB Online.
"This is why Rupert Murdoch is trying to build stronger pay walls around his sites. He wants to protect his premium readership so he can keep charging high ad rates."
Source: Jay Yarow and Kamelia Angelova, Clusterstock - The Business Insider, November 19, 2009.
Financial Times: Goldman's PR problem
"Although the $500 million Goldman Sachs has pledged to help small businesses is the largest donation the company has ever made, the firm remains the whipping boy for Wall Street excess, says Francesco Guerrera."
Click here for the full article.
Source: Financial Times, November 18, 2009.
Ifo: Clear improvement in the Ifo World Economic Climate Indicator
"The Ifo World Economic Climate Indicator rose in the fourth quarter of 2009 for the third time in succession. The rise in the indicator is the result of both more favourable expectations for the coming six months as well as less negative assessments of the current economic situation. The recovery of the world economy is driven especially by the dynamic development in Brazil as well as in India, China and other Asian countries.
"The economic climate improved in all major economic regions. The improvement was particularly marked in Asia, where the indicator even surpassed its long-term average. Also in Western Europe and North America the climate indicator rose clearly in the fourth quarter of 2009. The economic expectations are now very optimistic almost everywhere, with the exception of several countries of Central and Eastern Europe.
"In contrast, the current economic situation is still assessed as decidedly unfavourable in all major regions, although these assessments clearly improved over the previous quarter. The appraisals of the current economic situation are particularly negative in the euro area, North America, Central and Eastern Europe and Russia.
"The inflation expectations for 2009, on a worldwide average, are clearly lower than the inflation estimate for the previous year (2.5% compared to 5.4%). According to the expectations of the World Economic Survey (WES) participants, prices will increase only slightly in the course of the coming six months.
"The short-term interest rates will increase again in the coming six months for the first time in more than a year, in the opinion of the WES experts. In accord with the more favourable economic outlook, the WES experts anticipate that the long-term interest rates are also likely to increase in the coming six months in most countries.
"An increasing number of WES experts regard the euro as overvalued. The other major world currencies, the US dollar, the Japanese yen and the British pound, are now seen as properly valued, on average."
Source: Ifo, November 19, 2009.
Bill King (The King Report): Sovereign solvency fears
"Over the past several weeks, credit default swaps (CDS) on sovereign debt have rallied sharply. Investors increasingly fear that the massive amounts of sovereign debt will not be repaid. The following CDS chart on JGBs is alarming.
"While the surge in CDS on Japanese debt has retrenched over the past week, the CDS on US and UK debt have rallied ... Our guess is the market fears another downturn will lead to more stimulus and more governments absorbing crappy paper and risk from the private sector ... The last crisis flamed on fears of bank and major corporate solvency. The next crisis could be characterized by sovereign solvency fears."
Source: Bill King, The King Report, November 18, 2009.
The Wall Street Journal: China's blunt talk for Obama
"China's top banking regulator issued a sharp critique of US financial management only hours before President Barack Obama commenced his first visit to the Asian giant, highlighting economic and trade tensions that threaten to overshadow the trip.
"Liu Mingkang, chairman of the China Banking Regulatory Commission, said that a weak US dollar and low US interest rates had led to 'massive speculation' that was inflating asset bubbles around the world. It has created 'unavoidable risks for the recovery of the global economy, especially emerging economies', Mr. Liu said. The situation is 'seriously impacting global asset prices and encouraging speculation in stock and property markets'.
"Early Monday, a spokesman for China's Ministry of Commerce added further criticism of the Obama administration, targeting recent measures by Washington against Chinese exports. 'We've always known the US and the West as free market economies. But now we're seeing a protectionist side,' the spokesman, Yao Jian, told a monthly press briefing. Mr. Yao also rejected criticism of China's currency policy, saying the yuan's exchange rate has little to do with trade imbalances with the US and that China should keep the exchange rate stable.
"The Chinese comments signaled that Mr. Obama - on the third leg of a four-country Asian tour - can expect blunt talk from Chinese leaders on the economy. The issue could complicate his broad agenda in China that also includes efforts to extract new commitments on climate change and to encourage them to take a more active role to defuse nuclear threats in Iran and North Korea."
Click here for the full article.
Financial Times: Obama in China
"Barack Obama and Hu Jintao pledge to work together on a long list of pressing international issues during talks in the Chinese capital Beijing."
Click here for the full article.
Source: Financial Times, November 17, 2009.
Reuters: China, US eye pact to help troubled banks
"Chinese and US regulators are negotiating a pact aimed at encouraging Chinese financial institutions to buy into small and medium-sized banks in the United States, bankers briefed on the plan said on Tuesday.
"Chinese bankers have complained that it's been difficult for them to set up branches or invest in banks in the world's leading economy, due partly to US regulators' tough supervision and strict approval process for financial deals.
"But the global financial landscape has been revamped by the credit crisis, and cash-rich Chinese banks are now bigger players on the world scene and are scouting around for investment targets.
"To illustrate the global shake-down, Industrial and Commercial Bank of China is now the world's biggest bank by market value, while Citigroup, once the world's No.1 bank, is worth the same as a second-tier commercial bank in China.
"Two senior Chinese bankers said they had been invited this year by US officials, investment bankers and financial advisers to look at several potential investments in US banks, mostly in financial trouble.
"'The trend is already there,' said one Chinese banker. 'Now they're going to make this into an agreement to show there's a change in official attitude toward Chinese investments in the US banking system,' said the banker, who declined to be identified due to the sensitive nature of the matter."
Source: George Chen, Reuters, November 17, 2009.
Financial Times: Geithner defends record to Congress
"Tim Geithner launched a fierce defence of his record as US Treasury secretary on Thursday as Republicans said his policies had failed and he should resign.
"In an unusually testy Congressional hearing, Mr Geithner told his Republican critics that he refused to take responsibility for 'the legacy of crises you've bequeathed this country'.
"Kevin Brady, senior House Republican on the joint economic committee, told Mr Geithner he was a failure. 'Unemployment skyrocketed ... The deficit is becoming frightening ... We are reduced to begging China to buy our debt and getting lectures from other nations on our financial disarray,' he said. 'The public has lost all confidence in your ability to do the job.'
"Mr Geithner shot back: 'I agree with almost nothing in what you've said.'
"Although the US economy has started growing again, last month the unemployment rate breached 10% and is expected to stay high. With investment banks returning to profit but ordinary people still suffering, Republicans are increasing their attacks on the Obama administration over the economy.
"The Treasury secretary faced an array of questions and criticism during the hearing, which was ostensibly about plans to reform financial regulation. On that topic, Mr Geithner urged Congress to press ahead with legislation to reform the US regulatory system.
"He said reform would help to avoid a situation such as the government bail-out of insurance behemoth AIG in the future. He was criticised for his role in that rescue as then-president of the New York Federal Reserve.
"'The United States of America ... came into this crisis without anything like the basic tools countries need to contain financial panics,' he said. 'Coming into AIG, we had basically duct tape and string.'
"Mr Geithner also faced complaints that China was unfairly undervaluing its currency, the renminbi.
"He replied that he was confident Beijing would soon move to flexible rates. 'They understand they need to do it, I think they want to do it, and I'm quite confident they will do it,' he said.
"He also defended the 'extraordinary' actions taken to stabilise the economy and said the troubled asset relief programme was bringing good returns to US taxpayers."
Source: Sarah O'Connor and Alan Rappeport, Financial Times, November 19, 2009.
Mark Felsenthal (Reuters): House panel OKs plan to open Fed policy to audits
"A US congressional panel on Thursday approved a measure to open the Federal Reserve's monetary policy decisions to government audits, a surprise blow to the central bank's efforts to shield its independence and a signal of frustration with the central bank.
"The provision, co-sponsored by Republican Representative Ron Paul and Democrat Alan Grayson, would allow a congressional watchdog agency to conduct a broad review of the US central bank's policy and lending. Fed officials have strongly opposed it, saying it would cast doubt on the central bank's independence from political pressure.
"The House of Representatives Financial Services Committee approved the amendment to broader legislation to revamp financial rules. The panel put off a vote on the broader measure.
"House Financial Services Committee Chairman Barney Frank, who opposed the Paul-Grayson measure, predicted it would be revisited when financial reform legislation is debated by the House.
"'I think it's going to be seen as weakening the independence of monetary policy with consequent negative implications,' he told reporters after the vote. 'I think people will be worried about the impact on the dollar and on interest rates, and I think that one may be revisited when we get to the floor.'
"However, Paul's measure has earned support from more than half of the members of the House.
"The amendment is a further congressional slap at the US central bank after a Senate regulatory overhaul proposed stripping the Fed of its regulatory authority. Some lawmakers fault the Fed for failing to anticipate or prevent the financial crisis that pitched the economy into deep recession, while others are angry at its extensive emergency support for financial institutions.
"The Fed objected to the provision, saying it could raise financial market questions about its independence and could result in higher long-term interest rates as investors worry about inflation risks."
Source: Mark Felsenthal, Reuters, November 20, 2009.
Bespoke: Government spending - where does it end?
"On Thursday, the Treasury Department released its monthly budget statement which summarizes revenues and spending for the month of October. After one looks at these figures, it's hard to believe that they are accurate, but unfortunately they are. Unless you have been living under a rock for the last several years, you know that our Federal Government has been spending money at rates that would make even a sub-prime borrower blush. But even taking this into account, these numbers are still startling, if not scary.
"During the month of October, the Federal Government spent $2.30 for every dollar of revenue it took in. Given the fact that this is the fifth time this year that the ratio has exceeded two, one might think that this type of deficit spending is commonplace. However, going back to 1970, October was only the 13th month that the ratio ever exceeded two. Prior to 2008, the ratio exceeded two on average once every 6.5 years. In the last two years, the ratio has exceeded two on average once every three months!
"The charts below highlight the twelve-month rolling totals of government revenues and outlays. It doesn't take an accountant to see that these two lines are moving in the wrong direction. Given the fact that nobody thinks Washington is going to reign in spending, the only way to solve the gap is through higher revenues (raising taxes) or increasing the money supply. Is it any surprise that barely a day goes by where the dollar doesn't trade down in value?"
Source: Bespoke, November 16, 2009.
MoneyNews: Obama admits spending binge risks plunge into second recession
"President Barack Obama gave his sternest warning yet about the need to contain rising US deficits, saying on Wednesday that if government debt were to pile up too much, it could lead to a double-dip recession.
"With the US unemployment rate at 10.2%, Obama told Fox News his administration faces a delicate balance of trying to boost the economy and spur job creation while putting the economy on a path toward long-term deficit reduction.
"His administration was considering ways to accelerate economic growth, with tax measures among the options to give companies incentives to hire, Obama said in the interview with Fox conducted in Beijing during his nine-day trip to Asia.
"'It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a way that could actually lead to a double-dip recession,' he said."
Source: MoneyNews, November 18, 2009.
The Washington Post: Bailout program could be extended
"The Obama administration is poised to extend the life of the highly unpopular $700 billion financial bailout and, to display a commitment to fiscal responsibility, is planning to use much of the leftover funds to reduce the national debt, government sources said.
"Administration officials are grappling with how best to announce the extension of the Troubled Assets Relief Program at a time when the economy is struggling and the unemployment rate is at its highest point in 26 years. The officials are hoping that by putting roughly $200 billion toward paying down the $12 trillion national debt, they could mitigate the political fallout, the sources said.
"No final decision about the fate of the bailout has been made, and officials are keenly aware that their preferred course contains risks. Officials worry that lawmakers, seeking to fund their own projects, may try to tap any large sum of unused money set aside for debt reduction, the sources said, speaking on condition of anonymity because the internal deliberations were private.
"Congressional Democrats are already eyeing the unexpended bailout cash as a source of funding for new efforts to combat soaring unemployment. Rep. John B. Larson (D-Conn.), chairman of the House Democratic Caucus, said lawmakers could send an important message about their priorities by taking money from the financial bailout program and redirecting it to pay for road and bridge projects and other measures meant to create jobs."
Source: David Cho, Michael Shear and Lori Montgomery, The Washington Post, November 19, 2009.
Asha Bangalore (Northern Trust): Chairman Bernanke stresses job market, credit conditions and dollar
"The Chairman spoke at length about credit conditions and the labor market. In his opinion, impaired financial market conditions have led to banks holding larger buffers compared to the situation prior to the onset of the current crisis. In addition, a shaky economic environment marked with high loan losses and uncertainty about regulatory capital standards are factors restraining the growth of credit. The impaired market for securitization is another aspect that is contributing to the reduction of credit availability.
"The main message is that the credit machine needs to function for self-sustained economic activity. There is a minor improvement to note on this front. Loan extensions remain noticeably weak but for the week ended November 4, the decline was smaller (6.5%) compared with recent weeks. It appears that a trough has been established. Additional improvements with positive readings will be necessary to declare the coast is clear.
"Bernanke also spoke extensively about the labor market and more or less reiterated the well known aspects of the current labor market conditions. He raised the issue of a 'jobless recovery' and highlighted the reasons for the likelihood of this situation.
"The explicit mention of the dollar was the most important departure from earlier speeches. He noted that the Fed is 'attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability.' Historically, the dollar is the domain of the Treasury Department.
"The inflationary implications of the weak dollar are restrained partly by the enormous slack in the economy. However, prices of imported goods excluding fuel have risen for three straight months and commodity prices have also risen. Although inflation expectations have risen in recent days, the overall picture is that of a contained situation. Inflation expectations will be watched closely in the months ahead."
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 16, 2009.
Asha Bangalore (Northern Trust): Fed reduces term of discount window loans
"The Fed announced a reduction in the term of discount window loans to 28 days from 90 days as of January 14, 2010. The Fed lengthened the maturity of discount window loans on August 17, 2007 to 30 days from a maximum term of overnight and extended it further to 90 days on March 16, 2008.
"As seen in the chart below, the need for discount window loans has reduced significantly from the period following the collapse of Lehman Brothers. This marks the beginning of a gradual withdrawal of the extraordinary support the Fed has extended to the global financial system as signs of stability have emerged."
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, November 17, 2009.
Financial Times: Short-term US interest rates turn negative
"Short-term US interest rates turned negative on Thursday as banks frantically stockpiled government securities in order to polish their balance sheets for the end of the year.
"The development highlighted the continuing distortions in the financial system more than a year after Lehman Brothers' failure triggered a global crisis.
"The growing appetite for short-term government debt reflects an effort by banks to present pristine year-end balance sheets to regulators and investors - an effort known as 'window dressing' on Wall Street, analysts said.
"With the Federal Reserve maintaining an overnight target rate of zero to 0.25 per cent, investors are demonstrating a willingness to completely forgo interest income - or even to take a small loss - to own securities that are seen as safe.
"Ted Wieseman, economist at Morgan Stanley, said there was a 'squeeze in the [Treasury] bill sector' that was 'intensifying as investors stash money over year-end'.
"The scramble has been exacerbated by the fact that all leading US banks, many sitting on big trading profits, will this year close their books at the same time - at the end of December. In past years, investment banks such as Goldman Sachs and Morgan Stanley reported annual results in November.
"'People are setting up for year-end early, and once you see bill rates going down quickly, it pulls in more buying,' said Gerald Lucas, senior investment adviser at Deutsche Bank.
"On Thursday, Treasury bills maturing in January traded below zero per cent, traders said. Three-month bills traded at 1 basis point and six-month bills fell to a record low of 13 basis points - compared with 14 basis points at the height of the crisis last year."
Source: Michael Mackenzie, Financial Times, November 20, 2009.
MoneyNews: Bullard - shrinking reserves key to exit plan
"A senior Federal Reserve official said on Wednesday the US central bank may start tightening financial conditions by adjusting its extensive asset purchase programs rather than raising interest rates.
"'The market's focus on interest rates is disappointing, given quantitative easing,' St. Louis Federal Reserve Bank President James Bullard said in a presentation to a group of bankers. "Markets should be focusing on quantitative monetary policy rather than interest rate policy," he said.
"'The main challenge for monetary policy going forward will be how to adjust the asset purchase program without generating inflation while interest rates are near zero,' Bullard said.
"Medium-term inflation hinges on what the Fed will do with this program, he said.
"Bullard said financial market focus on interest rates may in part be misplaced because the Fed has in the past waited two and a half to three years after the end of a recession before raising rates.
"'Assuming that the (Fed) would behave the same way that it's behaved in the past, this could mean that the (Fed) would not start increasing rates until early 2012,' he said.
"However, the Fed will take into account the criticism that it fueled a housing bubble that contributed to the crisis by holding interest rates too low for too long in the early part of the decade, he said."
Source: MoneyNews, November 18, 2009.