Bernanke headlines


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Bernanke comments on inflation:
(source = Bloomberg)

1) 14:48 Fed’s Bernanke says high energy price ‘provides incentive for ac

2) 14:47 Bernanke Says Inflation `Significantly Higher’ Than Fed Wants

3) 14:45 BULLET: FED: Bernanke’s address at Harvard compares current..>

4) 14:45 *BERNANKE SAYS INFLATION `SIGNIFICANTLY HIGHER’ THAN FED WANTS

5) 14:45 *BERNANKE SAYS OIL PRICE RISE POSES `SIGNIFICANT CHALLENGES’

6) 14:45 *BERNANKE: HIGH ENERGY PRICE `PROVIDES INCENTIVE FOR ACTION’

7) 14:45 *BERNANKE SPEAKING AT HARVARD COMMENCEMENT IN MASSACHUSETTS

8) 14:45 *BERNANKE SAYS PRICE STABILITY `A TOP PRIORITY’ FOR FED

9) 14:45 *BERNANKE SEES `LITTLE’ SIGN OF `1970S-STYLE WAGE-PRICE SPIRAL’

10) 14:45 *BERNANKE: RISE IN INFLATION EXPECTATIONS `SIGNIFICANT CONCERN’


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Bernanke comments


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The FOMC can’t possibly believe that a 2% Fed Funds rate is the ‘right’ rate given current CPI of about 4%, core at about 2.5%, GPD moving back up towards 2%, unemployment ‘only’ about 5%, and inflation expectations showing signs of elevating.

The 2% Fed Funds rate is only appropriate if their forecasts show as sufficiently high probability of economic deterioration and increased ‘slack’.

As Fisher and other have put it, they all believe low and stable inflation is a necessary condition for optimal growth and employment.

The Lehman issue will pass with a lot less drama than the Bear Stearns issue.

Q2 GDP forecasts are being revised up as most numbers are coming in better than expected.

Inflation continues to move higher.

The ‘Mike Masters sell-off’ in commodities will run its course, with commodities subject to competitive markets underperforming, and crude moving higher (when the smoke clears – they try not to make their position too obvious as with the Goldman sell off of August 2006) as Saudis continue as price setter.

2008-06-04 Crude Sell Off in 2006

2006 Crude Sell Off

I expect the sell off to be less than the approximate three month sell off from the Goldman index change in 2006.

Obama is looking strong, but it has been historically problematic to propose tax hikes and win the election.


News reports of Bernanke’s speech:

“Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve,” Bernanke said in a speech to graduating students at Harvard University.

Yes. To the point. They are concerned their own actions might indicate a higher tolerance for inflation and thereby elevate inflation expectations.

“We will need to monitor that situation closely,” he said, but added there was little sign a “1970s-style wage-price spiral, in which wages and prices chased each other ever upward,” might be starting.

The 1970s were all about oil prices working through the cost side of the economy, just as they are today. And there are still many nations with weak domestic demand, weak currencies, and continuously high levels of inflation.

He said the impact of soaring oil prices has been “relatively muted” because the amount of energy used to produce a given amount of output — a gauge known as energy intensity — has fallen markedly since the 1970s.

This only extends the delay between food/energy prices and core CPI.

He also said policy-makers learned a lesson in the 1970s, in particular that they must keep long-term inflation expectations anchored to achieve low and stable inflation.

Yes, the FOMC and the mainstream truly believes this. In fact, it’s all they have regarding ‘inflation’ vs. relative value changes in their models.

“If people expect an increase in inflation to be temporary and do not build it into their long-term plans for setting wages and prices, then the inflation created by a shock to oil prices will tend to fade relatively quickly,” he said.

Again, they all do truly believe this. They see inflation as a ‘monetary phenomena’, where somehow ‘too much money chases too few goods’. That makes ‘inflation’ a demand-side issue. Price pressures on the supply-side are only ‘relative value stories’ until ‘inflation expectations’ shape ‘long-term plans for setting wages and prices’.


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Re: Alt A downgrades


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(An email exchange)

On Wed, Jun 4, 2008 at 12:57 AM, Eric wrote:
>     I guess you have seen this article.
>
>      Primes going down too.
>
>
>      More generally look at the attached graphs, they suggest that IOs and other
>      exotic mortgage are clearly a major cause of the problems, independently of
>      the quality of the loans. I think there is here a pretty good argument to make
>      that non-fixed mortgages, and more especially exotic mortgage have structural
>      characteristics that make them prone to speculative and ponzi structure. The
>      borrowers expect to be able to refinance at one point once interest rate reset or
>      the principal become due. Warren you were saying that proof of ability to pay
>     “libor plus 3 or whatever” was necessary to qualify. This margin of safety
>      (expected ability to pay libor +3 even though now borrower pay only teaser rate)
>      may have been destroyed in several ways.
>
>      – the interest rate may have reset at a higher rate than libor + 3, so that people
>      cannot afford the mortgage anymore.
>
>      – ARMs reinforce the probability of the previous effect, especially when libor when
>      up sky high after the crisis
>
>     – Income of borrowers felt short of expectations, expecially with the economic
>     slowdown (here fiscal policy is clearly a big player)
>
>     – The margin of safety thinned. Maybe previously they had to prove libor + 5 but
>     progressively borrower only had to prove libor + 4 then libor + 3. This would qualify
>      more borrowers and make the deal more sensitive to shock in product and financial
>      markets
>
>      In all this case the affordability of the mortgage is questioned Þ need to refinance Þ
>      if not available then sell the house (short sale or foreclosure). Fixed-rate mortgage
>      eliminate three of the previous reason (only income expectations is a problem).
>
>      Éric

agreed with all.

add to that food and energy prices taking income from home mtg payments, which could be the larger short term effect.

the fed has been taking some heat for this under the theory that the low rates have hurt the $ and thereby hurt the financial sector via the above channel, rather than helped the financial sector via lower rates ‘easing’ conditions via the lower payments channel.

the fed has argued this isn’t the case, insisting the lower rates have helped more than hurt.

also, the fiscal package could soften some of the delinquency increases for a few months.


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2008-06-04 US Economic Release


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2008-06-04 MBAVREFI Index

MBAVPRCH Index (May 30)

Survey n/a
Actual 333.6
Prior 352.7
Revised n/a

Not looking good, as the ‘old consumption economy’ – cars, houses, etc.- gives way to the new export economy with the allocations coming via ‘price’ as higher food/fuel prices take away domestic spending power and the foreign sector scrambles to spend it’s now unwanted multi $trillion hoard on US goods, services, and domestic assets, and keeps GDP muddling through.

First, probably fighting strong seasonals.

Second, purchase applications fall off doesn’t jibe with recent housing data and confidence numbers that have been rebounding.

Third, mortgage bankers could be continuing to lose market share to banks and other direct lenders as secondary markets remain problematic.

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2008-06-04 MBAVREFI Index

MBAVREFI Index (May 30)

Survey n/a
Actual 1496.1
Prior 2013.5
Revised n/a

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2008-06-04 Challenger Job Cuts YoY

Challenger Job Cuts YoY (May)

Survey n/a
Actual 45.6%
Prior 27.4%
Revised n/a

Moving up. This hasn’t been much of an economic indicator, but employment is a lagging indicator and it makes sense for it to keep getting worse for a couple of quarters or so past the bottom of the cycle.

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2008-06-04 Challenger Job Cuts by Region TABLE

Challenger Job Cuts by Region TABLE

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2008-06-04 Challenger Job Cuts by Industry TABLE

Challenger Job Cuts by Industry TABLE

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2008-06-04 US Hiring

Hiring

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2008-06-04 ADP Employment Change

ADP Employment Change (May)

Survey -30K
Actual 40K
Prior 10K
Revised 13K

This report is private sector only. Government employment may be ticking up as we approach the election, as spending delayed from 2007 kicks in.

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2008-06-04 Nonfarm Productivity QoQ

Nonfarm Productivity QoQ (1Q F)

Survey 2.5%
Actual 2.6%
Prior 2.2%
Revised n/a

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2008-06-04 Nonfarm Productivity YoY

Nonfarm Productivity YoY (1Q F)

Survey n/a
Actual 3.3%
Prior 2.9%
Revised n/a

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2008-06-04 Unit Labor Costs QoQ

Unit Labor Costs QoQ (1Q F)

Survey 2.0%
Actual 2.2%
Prior 2.2%
Revised n/a

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2008-06-04 Unit Labor Costs per Unit

Unit Labor Cost per Unit (1Q F)

Survey n/a
Actual 117.9
Prior 118.0
Revised n/a

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2008-06-04 ISM Non-Manufacturing

ISM Non-Manufacturing Composite (May)

Survey 51.0
Actual 51.7
Prior 52.0
Revised n/a

Another better than expected report. Clearly above recession levels, and supporting forecasts for higher GDP this quarter.

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2008-06-04 ISM Non-Manufacturing TABLE

ISM Non-Manufacturing TABLE

Most categories noticeably stronger. Employment down some, but the average of the last few months is rising. New Exports Orders back up as well.

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2008-06-04 ISM Non-Manufacturing Prices Paid

ISM Non-Manufacturing Prices Paid

Survey n/a
Actual 77.0
Prior 72.1
Revised n/a

This is getting ‘out of control’ from the FOMC’s point of view.


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