1. Open Season on Taxpayers:
The year 2013 marks the 100-year anniversary of the Federal Reserve. You will be interested to know that Bernanke is giving a lecture series on the merits of central banking (a PR company has been advising on the matter). Further, the St. Louis Fed has also recently launched an 8th- through 12th-grade curriculum making the case for the constitutionality of the Federal Reserve System – the first grade school propaganda of its kind. It seems that the Fed needs the hoi polloi to believe it is a legitimate entity. You see, a hundred years ago, it was argued that crisis could be prevented only if we had a strong central bank. Well, if not via prevention, perhaps the Fed’s reputation can be salvaged on the basis of crisis resolution. We will see.
This week, Germany’s Bild Zeitung recorded Mario Draghi’s appraisal of the eurozone credit crisis stating, “The worst is over, but there are still risks.” While we agree that the situation has stabilized, we don’t have the same confidence that the worst is in the rear view mirror. Rather, we would say the challenges have shifted completely from private to public sector concerns.
We will concede to Mr. Draghi that pressure has been temporarily relieved, and that the long-term refinancing operation (LTRO) has given Europe a three-year term to attempt to revive growth in the region. Barring a massive swing towards growth, the credit crisis will later reemerge with a vengeance – if it doesn’t happen sooner as a consequence of country-specific economic and employment issues (Portugal and Spain come to mind).
Now that the financial community has seen the whites of the ECB director’s eyes and knows what his commitment level is, financial firms may once again re-leverage their balance sheets. Likewise, investors may return with an unhealthy dose of central bank-inspired “liquid courage,” resting comfortably in the knowledge that the “Draghi put” is in place. In the same way as occurred in America under central banker Alan Greenspan, European market practitioners are growing more confident that the game is rigged in their favor, with little more to lose than someone else’s (the taxpayers’) money.
On top of this socialization of risk, the taxpayer/saver is also being subjected to financial repression – the redistribution of savings income from the saver to the banking sector. Not only will the global taxpayer pay off the financial sector’s losses over time, but via a low to zero interest rate policy set by numerous central banks, those taxpayers will rebuild the financial entities that are responsible for the current chaos.
Other than the prospects for additional quantitative easing (Fed money printing), speculators are running out of excuses – economic ones, at least – to push US markets higher. Reports this week showed the U.S. economy to be on shaky ground. Not enough to cause earth shattering quakes mind you, but just enough to cause an overheated market to question itself, if only for a day. In a word, the markets seem to be caught in “suspense.” During the week, both bonds and stocks began to forecast the possibility of stormy weather ahead, but neither broke into “dangerous” technical territory. Instead, the markets are remaining very still, awaiting more confirmation, either from the economy or from the Fed – see the box scores.
Perceptions may be finally catching up to reality regarding US economic health, or lack thereof. Existing home sales (February, 4.59 million vs. January, 4.63 million; cancellations soared 31%) and new home sales (February 313,000 vs. January 318,000) both saw declines from the previous month. New home sales have now disappointed for a second month in a row. The shortfall hasn’t discouraged home builders, though, as building permits rose yet again to 717,000, a three-year high. Perhaps builders should also take notice of the recent rise in mortgage rates. But hey, what have the fundamentals got to do with it? Jobless claims showed some continued improvement, registering 348,000 for the week ended March 17th – well below the 400,000 mark that would indicate trouble. We haven’t mentioned jobs here lately, but it appears that job creation in the US is still primarily in the areas of temporary help, healthcare, and construction (perhaps thanks to Obama) – dependent, we believe, on a continued expansion in consumer credit from already record levels.
Overseas, good news was also hard to find. Germany’s PMI (manufacturer’s index) fell further below 50 to 48.1, indicating contraction, while Greek finance ministers gave a no-confidence vote to the bailout, predicting a 4.5% decline in Greece’s GDP in 2012. China’s PMI (48.1) also fell into contraction territory, but that didn’t stop China from raising gas prices by 6.4% and diesel by 7.0%. Gas in China is now $4.42 a gallon.
Going forward, it will be interesting to see what the markets will do in the short run. Weak economic data and perhaps corporate earnings (growth in which fell flat in the 4th quarter of 2011) have both led to higher expectations for QE – consequently stabilizing markets in the face of bad news. But all themes have an end. Somewhere in the not-too-distant future, speculators will need to “face facts.” Only immediate and extremely large amounts of QE would keep stocks and bonds moving higher – but at a cost. Oil prices would skyrocket as well, thereby squashing indebted consumers. China has just experienced this awkward truth. We suspect the same will happen here in the US if QE is attempted. Higher prices at the pump may not be what the doctor ordered for the election this year. Instead, the Fed may wish to stimulate quietly or not at all. In the latter case, we would expect more volatility for the markets, to say the least – less so for relatively undervalued areas such as commodities.
President and CEO
VP Investment Management