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Posts Tagged ‘headlines’
“We Are Experiencing More Than Just A ‘Soft Patch’”
Wednesday, 22 May 2013 15:57
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Submitted by Lance Roberts of Street Talk Live blog,

“The economy is amazing right now – employment is recovering, innovation is going and housing is reviving.  What’s not to love?”  This was a statement I heard in the media to justify the recent rise in the stock market.  In this past weekend’s newsletter I went into significant detail in dismantling the bullish arguments with one point being the consistent weakness in the economic data. (Read more…)

The most recent release of the Chicago Fed National Activity Index (CFNAI) is the last of the components released each month that comprises the Economic and Employment Composite indexes.  The April data for the CFNAI was not good with the manufacturing component confirming what we had already seen in most of the regional Federal Reserve manufacturing surveys.  The overall CFNAI index plunged from to a negative 0.53 from a negative 0.23 in March.  In both months, manufacturing production fell, down 0.4 percent in April following a 0.3 percent decline in March.

However, as opposed to recent media headlines boasting of the strength of consumer spending and housing, the consumer & housing sector was the second largest drag on national activity in April dropping from negative 0.15 in March to negative 0.17 in April.  Employment also did not confirm the recent BLS report, which we suspected would be the case, as the employment component has fallen from a positive 0.35 in February to a positive 0.1 in March to ZERO in April.  This is certainly not a trend that supports the much hoped for job growth in the near future.

Let’s take a look at the two composite indexes to see what they are telling us about the economy and the most likely direction of the data in the months ahead.   Both indexes are weighted average of the CFNAI, ISM, several Federal Reserve manufacturing surveys, the NFIB Small Business survey, Chicago ISM and the Leading Economic Indicators.  The only difference between the two indices is that the employment composite is comprised of the employment components of the above as opposed to the overall activity components.

STA Economic Output Composite Index (EOCI)

The EOCI index fell sharply to 26.08 in April from 30.35 in March as the brief surge in activity from “Hurricane Sandy” finished working its way through the system.  The chart below compares the EOCI index to real, inflation adjusted, GDP on a quarterly basis.

STA-EOCI-Index-052013

There are a couple of important takeaways with this index.  The first is that both positive and negative trends in the EOCI index track very closely to the ebb and flow of GDP.  The second is that historically when the EOCI index was below 30 the economy was either in, or about to be in, a recession.  Currently, the economy is not running in recessionary territory, as of yet, but the trend of weakness in the macro economic data is somewhat concerning.

The chart below shows these corollary trends a bit better with the EOCI index, smoothed with a 3-month average, compared to the annual rate of change in nominal GDP.

STA-EOCI-GDP-052013

What is most concerning is that while the asset prices are inflated with artificial interventions that trend of economic data has clearly peaked for the current cycle.  Either the mainstream economists and analysts are correct and the economy is about to turn substantially stronger and play catch up with asset prices or asset prices will revert to catch up with the fundamentals of the economy.  The latter is much more likely the case from a historical perspective.

STA Employment Composite

If you strip the employment components out of the EOCI index and weight them into their own composite index we find that the hiring intentions of employers is clearly weakening.  The chart below shows the Employment Index smoothed with a 4-month average and compared to the annual rate of change in Total Non-Farm Employees.

STA-Employment-Index-vs-Employment-052013

As with the EOCI index above – employment activity clearly peaked in early 2012 and has begun to wane.  The recent uptick in the employment index, remember this is a 4-month moving average, is due to the effects from the uptick in economic activity from “Hurricane Sandy.”  This index will turn down in the next couple of months as the recently monthly data points have declined.

What is clear from the two composite indexes is that the broad economy, and by extension underlying employment, has clearly peaked and has began to weaken.  This is well within the context of historical trends and time frames.  While the mainstream analysts and economists continue to have optimistic views for a resurgence in economic activity by years end the current data trends, both globally and domestically, suggest otherwise. 

As we discussed recently:

“A wave of “disinflation” is currently engulfing the globe as the Eurozone economy slips back into recession, China is slowing down and the U.S. is grinding into much slower rates of growth. Even Japan, despite their best efforts through a massive QE program, cannot seem to break the back of the deflationary pressures on their economy. This is a problem that has yet to be recognized by the financial markets.

 

The recent inflation reports (both the Producer and Consumer Price Indexes) show deflationary forces at work. Wages continue to wane, economic production is stalling and price pressures are falling. More importantly, there are downward pressures on the most economically sensitive commodities such as oil, copper and lumber all indicating weaker levels of economic output. The battle against deflationary economic pressures has been what the Federal Reserve has been forced to fight since the financial crisis. The problem has been that, much like “Humpty-Dumpty”, the broken financial transmission system, as represented by the velocity of money, can’t be put back together again.”

The real concern for investors, and individuals, is the actual economy. We are likely experiencing more than just a “soft patch” currently despite the mainstream analysts rhetoric to the contrary. There is clearly something amiss within the economic landscape and the recent decline in the economic, employment and inflation data are telling us just that.

    



 
FOMC Minutes: This Is What It Sounds Like When Doves Cry, And When Others Start To See An Asset Bubble
Wednesday, 22 May 2013 13:02
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It appears (as we noted here) that the size of the balance sheet, difficulty of the exit, frothiness of markets, and not-totally-dismal labor headlines have even the doves a little more hawkish about the possibility of an exit at some point – though obviously the minutes are clear that the ‘flow’ can increase (as well as decrease) based on the data.

  • FOMC MINUTES: MANY SAID MORE PROGRESS NEEDED BEFORE SLOWING QE
  • FED’S BROAD PRINCIPLES ON EXIT `STILL VALID,’ FOMC MINUTES SHOW
  • SOME ON FOMC WILLING TO SLOW ASSET PURCHASES AS EARLY AS JUNE

    • (Read more…)

  • SOME SAID “CONDITIONS IN CERTAIN FINANCIAL MARKETS WERE BECOMING TOO BUOYANT”

Two things seem clear: 1) the Fed is explicitly forcing the market to hope for bad data to maintain gains as the gap between market and reality is now too large for a soft-landing; and 2) the Fed has explicitly admitted that it is the ‘flow’ not the ‘stock’ that matters – as we have been vociferous about for years. But what is worst, is that now that some at the FOMC are openly seeing asset bubbles, Bernanke is facing a mutiny on his hands!

The exit seems closer than many expected…

Pre: ES 1666.5, 10Y 2.01%, Gold $1363.50, DXY 84.28

The key section from the Minutes:

Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate. A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome. One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so. Most participants emphasized that it was important for the Committee to be prepared to adjust the pace of its purchases up or down as needed to align the degree of policy accommodation with changes in the outlook for the labor market and inflation as well as the extent of progress toward the  Committee’s economic objectives. Regarding the composition of purchases, one participant expressed the view that, in light of the substantial improvement in the housing market and to avoid further credit allocation across sectors of the economy, the Committee should start to shift any asset purchases away from MBS and toward Treasury securities.

And this:

A few members expressed concerns that investor expectations of the cumulative size of the asset purchase program appeared to have increased somewhat since it was launched last September despite a notable decline in the unemployment rate and other improvements in the labor market since then.

But without doubt, the punchline:

a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant, pointing to the elevated issuance of bonds by lower-credit-quality firms or of bonds with fewer restrictions on collateral and payment terms (socalled covenant-lite bonds). One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability.

Finally, after years of creating them, at least some at the Fed are seeing bubbles and more importantly, putting it in the transcript!

Full minutes (link):

 

    



 
Bernanke “No Tapering”; Silver Goes Up and Down Again
Wednesday, 22 May 2013 10:06
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In February, I wrote What Drives the Price of Gold and Silver?

 

If there is a credible rumor that the Fed is planning to further extend its “Quantitative Easing”, how would you expect the monetary metals to react? Typically, the gold price would rise and the silver price would rise even more. (Read more…) The question is why.

Traders read the headlines and they know how the price “should” react to such news, and they begin buying. For a while, the prophecy fulfills itself. But then what happens next? It may take an hour or a month, but sooner or later some of the new buyers begin to sell.

Most people accept the Quantity Theory of Money. In brief, if the money supply rises then prices will rise (though often there is a caveat that not all prices will rise uniformly).

Today, Fed Chairman Bernanke said that the ongoing increases in the quantity of dollars will continue. The silver market reacted as it “should”: more money = higher silver prices. Look at this annotated chart.

Bernanke Silver

In about 15 minutes, the silver price rose 2.2%. I call this the “Quantity Theory of Money Gap”. In about 15 minutes more, the price fell back to where it had been.

Within 30 minutes, all those who had bought based on this idea were, if not proven wrong, at least given losses by the market.

The price of the dollar as measured in gold or silver is collapsing and the rate of collapse will accelerate. This will be reflected in much higher prices of gold and silver when quoted in dollars. But it is not due to the quantity of money, and certainly not due to talk of the quantity of money.