Tag Archives: Paulson

Comments on 8:30 numbers

Posted on by

Retail sales weak today, but exports up over 16% earlier this week, and jobless claims now settling in around 350,000 – far from recession levels. That’s what export economies look like.

Meanwhile, non oil import prices up 0.6%, and export prices up 0.9%.

US GDP growth may be hovering around zero, but no collapse yet.

Meanwhile, Bush/Bernanke/Paulson engineered USD collapse/inflation/export boom is underway and accelerating.

It was like yelling fire in a crowded theater.

The world was happily accumulating over $700 billion per year in financial assets, and had a total of over $2 trillion, when our leadership yelled ‘fire’ and caused a reverse stampede.

Imports are real benefits and exports are real costs, and now we’re paying the price.

Share

Re: proposals for liquidity and the dollar

Posted on by

> On Tue, Mar 4, 2008 at 5:14 PM, Saunders, Brock wrote:
> No problem….was just trying to think of solutions to regain liquidity in the credit market and provide some support for the USD.

Good thought!

My original proposal was for the Fed to reduce capital requirements for any bank absorbing its SIVs. And at the same time prohibit any new ones. The bank shareholders still are at risk of defaults, and this lets the sivs get absorbed, financed, and eventually mature. It costs the Fed nothing.

The Fed could at the same time accept them as collateral at TAF auctions once the capital issues are sorted out. The liability side is not the place for market discipline with a modern banking system.

To support the $ first you have to get Paulson to let the rest of the world know their cb’s are not outlaws or currency manipulators if they buy $US. That would help reverse the $ and help our standard of living. Fundamentally the $ is fine, it’s public the weak $ public policy that’s driving formerly happy holders to other assets.

warren

Share

Re: tell Paulson to let the MOF buy $

Posted on by

(an email)

On Jan 23, 2008 9:26 AM, Mike wrote:
> Trichet and his standard model are going to engineer a market crash in
> europe it looks like… wonder if he will be FT’s man of the year next
> year?

and he’s playing with fire with the lack of credible deposit insurance in the ecb’s member banks.

buy some 2 year german credit default ins if you haven’t already!

I think the ‘chess move’ here is for the BOJ to start buying $US. They would like to, but don’t want Paulson coming down on them for being ‘currency manipulators.’

If I were Tsy sec I’d be calling the MOF and giving them the green light to buy $US.

by the way, Jack Welch is on CNBC saying gdp is muddling along at 1.5% based on what he hears from corp america. no recession, yet

warren

♥

Share

Fed comments

Posted on by

The Fed is aware rate cuts don’t do much for near term financial disruptions. For example, the FF/LIBOR spread was first addressed with FF cuts, but little or nothing changed until the TAF was introduced to address and normalize that spread.

Along the same lines, Bernanke has recently met with the President and Congress to coordinate a fiscal package, and today’s cuts were preceded by Paulson talking about what Treasury is doing for the financial crisis.

The Fed knows they pay an inflation price for each cut, but also believe they need to get the current financial crisis behind them first, and then address any residual inflation issue. Nor does Congress want to go into the election with a weak economy.

The incentives are in place for a credible fiscal package.

And with core inflation indicators now moving up, the Fed would very much like this rate cut, along with the pending fiscal package, to ‘work’ and be the last one needed.

♥

Share

I’ve been wrong on the Fed

Posted on by

> Hi
>
> You’ve been looking for this kind of financial trouble for a bit over in Europe. Good call Warren.
>
> Bobby.
>

Thanks, yes, I called it from mid 2006 – weakness due to deficit too small to support the credit structure, but inflation racing up as food/fuel rise due to Saudis acting the swing producer and biofuels burning up our food supply.

My error was in thinking the inflation would keep the fed from cutting. Been totally wrong on that!

Never would have thought a CB would act this way in the face of a triple negative supply shock – food/fuel/importand export prices all ratcheting up.

And looks like another 50 cut or maybe even 75 or 100 on Jan 30 even as core inflation goes through their ‘comfort zone,’ and Bernanke’s pushing Congress to hike the deficit! Never imagined the Fed would be keen to send a strong ‘we don’t care about inflation’ message, regardless of GDP in the short run. Goes against every aspect of mainstream monetary theory. But they sure are doing it!

And still no major weakness in the real economy, apart from some possible weakness late December if exports fell off. That won’t be out for a while.

All I can come with are three things:

  1. They’ve been misusing futures prices for oil and food to predict inflation will fall.
  2. They are afraid of fixed exchange rate/gold standard types of monetary collapses, even though we have a floating exchange rate policy, where that doesn’t happen and for all practical purposes can’t happen with floating fx.
  3. They are relying on their forecasts for weakness to bring down inflation when it’s coming from a combination of producer price
    setting, biofuels, and Paulson’s weak $ policy chasing foreign central banks away from $US financial assets.

And yes, watch out for a system wide failure of the payments system in the Eurozone if deposit insurance gets tested by a major bank failure.

Also, the $US remains fundamentally strong, but Paulson and to some degree the Fed are scaring investors away from $US financial assets, including US and other pension funds, which keeps the $ cheap enough to drive increasing US exports.

warren

♥

Share

2008-01-21 Update

Posted on by

Major themes intact:

  • weak economy
  • higher prices

Weakness:

US demand soft but supported by exports.

US export strength resulting from non resident ‘desires’ to reduce the rate of accumulation of $US net financial assets. This driving force is ideologically entrenched and not likely to reverse in the next several months.

In previous posts, I suggested the world is ‘leveraged’ to the US demand for $700 billion per year in net imports, as determined by the non resident desire to accumulate 700 billion in $US net financial assets.

US net imports were something over 2% of rest of world GDP, and the investment to support that demand as it grew was probably worth another 1% or more of world GDP.

The shift from an increasing to decreasing US trade deficit is a negative demand shock to rest of world economies.

This comes at a time when most nations have decreasing government budget deficits as a percent of their GDP, also reducing demand.

The shift away from the rest of world accumulation of $US financial assets should continue. Much of it came from foreign CB’s. And now, with Tsy Sec Paulson threatening to call any CB that buys $US a ‘currency manipulator’, it is unlikely the desire to accumulate $US financial assets will reverse sufficiently to stop the increase in US exports. I’m sure, for example, Japan would already have bought $US in substantial size if not for the US ‘weak dollar’ policy.

All else equal, increasing exports is a decrease in the standard of living (exports are a real cost, imports a benefit), so Americans will be continuing to work but consuming less, as higher prices slow incomes, and output goes to non residents.

I also expect a quick fiscal package that will add about 1% to US GDP for a few quarters, further supporting a ‘muddling through’ of US GDP.

Additional fiscal proposals will be coming forward and likely to be passed by Congress. It’s an election year and Congress doesn’t connect fiscal policy with inflation, and the Fed probably doesn’t either, as they consider it strictly a monetary phenomena as a point of rhetoric.

Higher Prices:

Higher prices world wide are coming from both increased competition for resources and imperfect competition in the production and distribution of crude oil. In particular, the Saudis, and maybe the Russians as well, are acting as swing producer. They simply set price and let output adjust to demand conditions.

So the question is how high they will set price. President Bush recently visited the Saudis asking for lower prices, and perhaps the recent drop in prices can be attributed to those meetings. But the current dip in prices may also be speculators reducing positions, which creates short term dips in price, which the Saudis slowly follow down with their posted prices to disguise the fact they are price setters, before resuming their price hikes.

At current prices, Saudi production has actually been slowly increasing, indicating demand is firm at current prices and the Saudis are free to continue raising them as long as desired.

The current US fiscal proposals are designed to help people pay the higher energy prices, further supporting demand for Saudi oil.

They may also be realizing that if they spend their increased income on US goods and services, US GDP is sustained and real terms of trade shift towards the oil producers.

Conclusion:

  • The real economy muddling through
  • Inflation pressures continuing

A word on the financial sector’s continuing interruptions:

With floating exchange rates and countercyclical tax structures we won’t see the old fixed exchange rate types of real sector collapses.

The Eurozone banking sector is the exception, and remains vulnerable to systemic failure, as they don’t have credible deposit insurance in place, and, in fact, the one institution that can readily ‘write the check’ (the ECB) is specifically prohibited by treaty from doing so.

Today, in most major economies, fiscal balances move to substantial, demand supporting deficits with an increase in unemployment of only a few percentage points. Note the US is already proactively adding 1% to the budget deficit with unemployment rising only 0.3% at the last initial observation in December. In fact, fiscal relaxation is being undertaken to relieve financial sector stress, and not stress in the real economy.

Food and energy have had near triple digit increases over the last year or so. Even if they level off, or fall modestly, the cost pressures will continue to move through the economy for several quarters, and can keep core inflation prices above Fed comfort zones for a considerable period of time.

Fiscal measures to support GDP will add to the perception of inflationary pressures.

The popular press is starting to discuss how inflation is hurting working people. For example, I just saw Glen Beck note that with inflation at 4.1% for 07 real wages fell for the first time in a long time, and he proclaimed inflation the bigger fundamental threat than the weakening economy.

I also discussed the mortgage market with a small but national mortgage banker. He’s down 50% year over year, but said the absolute declines leveled off in October, including California. He also pointed out one of my old trade ideas is back – when discounts on pools become excessive to current market rates, buy discounted pools of mortgages and then pay mortgage bankers enough of that discount to be able refinance the individual loans at below market rates.

♥

Share

Why I expect US exports to continue to be very strong..

Posted on by

The desire to accumulate $US financial assets has been diminished for at least the following reasons:

  1. Treasury policy – Paulson is actively pushing both a strong yuan and threatening any other CB that buys $US with the label of ‘currency manipulator.’ CB’s had been perhaps the largest source of $US financial assets accumulation and are now limited to compounding of interest.
  2. US foreign policy is probably driving CB’s in less than friendly nations to diversify their reserves away from $US financial assets.
  3. Fed policy has the appearance of a ‘beggar thy neighbor’/’inflate your way out of debt’ policy, as the Fed aggressively cuts rates in the face of inflation not seen in 25 years.

This all sets in motion a downward pricing of the $US as non residents sell them to each other at lower and lower prices in this effort to lower their rate of accumulation of $US financial assets. But these financial assets can only ‘go away’ when they get spent or invested in the US, when US prices are low enough to cause this to happen. The rapid rise in exports and accelerated non resident buying of US real estate and other assets is anecdotal evidence this is taking place as theory predicts.

This is a very large cyclical force that should continue to drive rapidly rising exports for perhaps a year or more. Weak foreign economies should have little effect on this process, as that weakness doesn’t reduce the desire of portfolio managers to shift out of $US financial assets.

This is also highly inflationary for the US. This buying by non residents both drives down the $US and drives up the prices of US exports, now rising at a 7% clip last I checked.

The desired shift is probably well over $1 trillion which means exports will increase by a good part of that to facilitate this transfer.

This can sustain US GDP in the face of falling domestic demand, which will stay relatively low until housing picks up. Employment will remain reasonably good, but standards of living fall as we produce as much, but export more and consume less. We get paid to work but can buy less due to high prices, with our remaining production exported to those wishing to reduce their accumulated $US financial assets.

We’ve been talking about this possibility about a long time, but seems our trade negotiators have finally got their wish.

Meanwhile, Saudis continue to act the swing producer. In fact, they told Bush today they have 2 million bpd capacity in reserve, and that markets are well supplied. At their price, of course.

Probably have been some year end allocations out of crude by pension funds as with the price hikes they would need to sell some to keep the same ‘weight’ in their portfolios. That should be ending soon.

And I agree with Karim, the Fed is not likely to act on inflation until core starts to rise or their measures of inflation expectations start to rise, despite the fact that mainstream theory clearly says if any of that happens it’s too late. Seems to me the senior FOMC members are putting their jobs on the line by taking that kind of systemic risk, which their own theory tells them is far higher than the risk of any lost output from a .

♥

Share

If it isn’t inflation, what is it?

Posted on by

What we used to call an ‘inflation day’ –

  • $ down/oil up
  • Gold through 900- if nothing else, it’s an inflation expectation indicator (not that they cause anything, just reflect it)
  • Other metals up
  • Grains going parabolic
  • Stocks up

also,

  • Export driven growth means demand coming from and output going to non residents, rather than retail sales and other domestic consumption.
  • Changes of portfolio currency preferences away from the $US are driving the dollar down to low enough levels where non residents buy here to use up some of their $US financial assets.
  • Japan/mof (and others) would probably like to buy $ to keep the yen from rising and hurting their exports, but Paulson has warned the world CB’s that this makes them ‘currency manipulators’ and subject to criticism.

This is an explicit weak $ policy that is probably altering CB portfolio preferences and inducing price pressures on our imports.

The Fed is sending signals it’s fine with this kind of inflation at least as long as they are forecasting the risk of weaker domestic demand as a result (somehow) of financial concerns. And because they analyze the risks as if we had a fixed exchange rate they see the risks of supply side credit issues as those of the great depression of the 1930’s. Doesn’t happen with today’s floating fx.

Don’t know when/if the Fed ‘figures it out’ but the curve can go from wherever it is to seriously negative should the Fed hike aggressively to ‘get ahead of the inflation curve.’

The inflation is coming from non monetary sources – monopolist pricing in oil, biofuels linking food to fuel, portfolio shifts out of $US due to US political rhetoric and apparent Fed policy of inflating your way out of debt without concern for the value of the currency. Enough to scare any portfolio manager out of $US risk.

♥

Share

Re: fiscal response

Posted on by

On 04 Jan 2008 22:29:03 +0000, Prof. P. Arestis wrote:
> Dear Warren,
>
> Many thanks.
>
> This is all interesting. The sentence that caught my eye is this: “A fiscal

> package is being discussed to day by Bernanke, Paulson, and Bush. That

> would also reduce the odds of a Fed cut”. This would indeed reduce the odds
> of a rate cut. But would Bernanke accept such a proposition when he
> believes passionately that crowding-out in fiscl policy is very much the
> order of the fiscal day? I am curious to see the result of this discussion.

Dear Philip,

Very good point!

Warren

>
> Best wishes,
>
> Philip
>

♥

Share

Balance of risks revisited

Posted on by

“I don’t think that’s fair because I don’t — again, I think I’ve been pretty clear in saying we have an economy in the US that is fundamentally healthy. I think the jobs numbers today showed an economy that is fundamentally healthy. We’ve got very strong demand outside of the US. We’ve got exports growing, employment strong, inflation is contained. There are some risks, and I’m focused on those risks. That’s my job, and the biggest risk we have is housing and housing is a big drag on our economy and still, we’re going through a turbulent time in the capital markets. That’s a risk so we’re focused on the risks, but let’s not forget that we have a healthy economy.”
-Paulson

Two days before the Fed meeting Paulson is making the case that the economy is strong and he says the risks are *his job* and not the Fed’s job. Also, he said we have a strong $ policy after being silent on that for several months or more. No cut in the fed funds rate Tuesday would support his statements.
This article is the consensus view that’s pricing in a 25 cut on Tuesday.

US Fed seems poised to lower interest rates again at its meeting Tuesday

By JEANNINE AVERSA updated 6:46 a.m. ET, Sun., Dec. 9, 2007 WASHINGTON

A lot has changed since the U.S. Federal Reserve hinted two months ago that it might be finished cutting interest rates for a while. Credit has become harder to obtain,

Not true per se. Some spreads have widened, but absolute levels for mortgages, for example, are lower, and good credits are getting LIBOR minus funding in the bond markets. Yes, funding is more difficult and more expensive for ‘Wall Street’, but ‘Main Street’ borrowing needs are being met at reasonable terms.

Wall Street has convulsed again,

Stocks are generally up recently, and up for the year.

and the housing slump has intensified.

Maybe modestly, with some indicators flat to higher. Prices down for the quarter but YoY prices still higher as reported by the two broader measures.

As a result, policymakers at the central bank now appear to have changed their minds about the need to drop interest rates again.

Yes, that’s the appearance as seen by the financial press. (I haven’t read it that way.)

The Fed had cut rates twice this year and officials suggested in October that might be enough to help the economy survive the credit and housing stress.

And immediately afterward in several speeches as fed officials attempted unsuccessfully to take the cut out of Jan FF futures.

Then the problems snowballed,

There were no ‘snowballing problems’ only some spread widening even as absolute rates were generally lower and LIBOR rates going up over the next ‘turn’ at year end.

leading Fed Chairman Ben Bernanke to signal that one more cut might be needed.

Again, that’s how the financial press heard him. They never even reported firm the firm talk on inflation risks becoming elevated. The attitude is anything the fed says about inflation is just talk they have to say and that they don’t mean and not worth reporting.

Analysts expect the Fed to trim its key rate, now at 4.5 percent, by one-quarter of a percentage point at the meeting Tuesday. Some even speculate about the possibility of a half-point cut.

Yes, that’s the consensus.

Banks, financial companies and other investors who made loans to people with spotty credit

and fraudulent applications

or put money into securities backed by those subprime mortgages have lost billions of dollars (euros). Investors in the U.S. and abroad have grown more wary of buying new debt, thereby aggravating the credit crunch.

Yes. But again, ‘Main Street’ still remains well funded at reasonable terms.

All this has added to the turmoil on Wall Street, and Bernanke and other Fed officials say they must take it into account when deciding their next move.

Yes. And the economic numbers have come in strong enough for markets to take up to 35 bp out of the Eurodollars and nearly eliminate pricing in a 50 cut in the last few trading days.

But does lowering rates mean the Fed essentially is bailing out investors or encouraging more sloppy decision-making? In other words, what exactly is the Fed’s job?

Bernanke and other Fed officials say it is to make policy that keeps the economy growing and inflation low, a stable climate that benefits individuals, businesses and investors. The Fed also has a responsibility to ensure the banking system is sound and financial markets run smoothly.

Yes, exactly.

“There is a link between Wall Street and Main Street. The Fed is taking the right actions, but they should be careful,” said Victor Li, an economics professor at the Villanova School of Business.

That implies the question is whether the ‘market functioning’ risk is higher than the inflation risk, which is what the fed was addressing with the last two cuts.

This time ‘market functioning’ risk rhetoric has taken a back seat to ‘economic weakness’ risk rhetoric.
One more story of note:

Fed’s Inflation Measure Says Rates Can’t Fall as Traders Expect

By Liz Capo McCormick and Sandra Hernandez

Dec. 10 (Bloomberg) — The key to whether the Federal Reserve continues to cut interest rates after this week may hang on the wall behind economist Brian Sack’s desk in Washington.

Sack, head of monetary and financial market analysis at the Fed in 2003 and 2004, uses a chart that plots forward rates measuring investor expectations for inflation in five years. The gauge is so accurate that Sack and his colleagues persuaded the central bank to use it to help set policy. The chart is autographed by former Fed Chairman Alan Greenspan.

Right now, it shows current Fed Chairman Ben S. Bernanke may have less room to lower borrowing costs than investors in Treasuries anticipate, potentially setting bondholders up for a fall. The expected inflation rate, which Sack says replicates what Fed officials use, reached 2.91 percent last week, the highest since 2004, when the central bank began the first of an unprecedented 17 rate increases. The measure was at 2.79 percent on Nov. 1.

“One of the defining features of the Bernanke Fed to date is its emphasis on measures of longer-term inflation expectations,” said Sack, whose partners at Macroeconomic Advisors include former Fed Governor Laurence Meyer. “The Fed is willing to tolerate short-run movements in inflation, but only as long as those movements don’t appear to be dislodging long-run inflation expectations.”

Any evidence that accelerating inflation is becoming entrenched may heighten the Fed’s debate as policy makers consider cutting rates to keep the worst housing market in 16 years and mounting losses in securities related to subprime mortgages from tipping the economy into recession.

`Inflationary Pressures’

The gauge used by Sack, dubbed the five-year five-year forward breakeven inflation rate, suggests bets on lower Fed funds rates may be too bold.

Sack and other analysts derive the measure of inflation expectations from yields on five- and 10-year Treasury Inflation Protected Securities and Treasuries.

Five-year TIPS yield 2.15 percentage points less than five- year notes. This so-called breakeven rate is the average inflation rate investors expect over the next five years. The forward rate projects what the breakeven will be in five years, smoothing blips in inflation expectations from swings in oil prices or other events.

The five-year TIPS’ breakeven rate rose to a six-month high of 2.47 percent Nov. 27, the week after oil climbed to a record $99.29 a barrel, from about 1.9 percent on Aug. 31. As crude fell to a six-week low on Dec. 6, the breakeven rate declined and Sack’s measure dropped to 2.85 percent.

Bernanke mentioned the forward rate in a 2004 speech. Simon Kwan, a vice president at the San Francisco Fed, singled out the measure in a 2005 report, saying it “captures the market’s assessment of how well the Federal Reserve promotes price stability in the long run.”

Gaining Steam

Most analysts expect the economy to gain steam through 2008. Growth will slow to 1.5 percent this quarter from a 4.9 percent annual rate last quarter, and rise to 2.6 percent by 2009, according to the median forecast in a Bloomberg survey from Nov. 1 to Nov. 8.

The dollar, which is poised to depreciate against the euro for a second straight year, is also fueling inflation concerns. The currency’s drop and oil’s climb pushed import prices up 1.8 percent in October, the most in 17 months.

The government may say this week that consumer prices, which set TIPS rates, increased 4.1 percent last month from this year’s low of 2 percent in August and the biggest rise since July 2006, according to the median estimate of 19 economists. Food, imports and energy prices may raise inflation expectations, Bernanke said in a Nov. 30 speech in Charlotte, North Carolina.

To contact the reporter on this story:
Liz Capo McCormick in New York at Emccormick7@bloomberg.net ;
Sandra Hernandez in New York at shernandez4@bloomberg.net .

Last Updated: December 9, 2007 10:58 EST

‘The numbers’ could be used to support most anything the fed might do.The inflation numbers are both more than strong enough to support a hike, with CPI due to be reported north of 4.1 on December 14, and core moving up out of ‘comfort zones’ as well, not to mention ‘prices paid’ surveys higher and higher import and export with the weak $. Add to that the recent strong economic data – employment, CEO survey, and even car sales up a tad, etc. etc.

Inflation can also be dismissed as ‘only food and energy’ and due to fall based on (misreading) future prices as predictors of where prices will be, leaving the door open to cuts due to both ‘market functioning’ as justified by FF/LIBOR spreads at year end and the possibility of Wall Street spilling over to Main Street by ‘forward looking models’.

I can see the fed meeting going around in circles and it will come down to whether they care about inflation or not. Most of the financial community thinks they don’t, and they may be correct.

I think they do care, and care a lot, but that fear of ‘market functioning’ was severe enough to temporarily overcome their perceived imperative to sustain and environment of low inflation. And at the October meeting, the fear of some members has subsided enough to report a dissenting vote, along with half the regional banks voting against a cut.

I do think that if the fed cuts 25 it will be because they are afraid of what happens if they don’t as markets are already pricing in a 25 cut, even though this is what happened October 31, and Fisher said they wouldn’t price in a cut for that reason.

The Balance of Risks

So what would they anticipate if they don’t cut FF? The $ up, commodities down, stocks down, and credit spreads widening.

Is that risk less acceptable than the risk of promoting inflation and risking the elevation of inflation expectations if they do cut 25?

Then, there is the ‘compromise’ of cutting the discount rate and removing the stigma to address year end liquidity and ‘market functioning’ in general, with and/or without cutting the fed funds rate. The anticipated results would be a muted stock market reaction as FF/LIBOR spreads narrow, and hopefully, other credit spreads also narrow.

And if they cut the discount rate and don’t cut the FF rate, the $ will still be expected to go up and commodities down. And, with liquidity improved, stocks may be expected to do better as well.

But even though Kohn discussed this in his speech and others touched on the ‘liquidity versus the macro economy’ as well, there is no way to know how much consideration it may be given.

♥

Share