Monday, August 27, 2012 - Still Waiting on the Fed

Still Waiting on the Fed
Sinclair Noe

DOW – 33 = 13,124
SPX – 0.69 = 1410
NAS + 3 = 3073
10 YR YLD -.03 = 1.65%
OIL +.25 = 95.72
GOLD – 7.10 = 1664.60
SILV - .10 = 30.82
PLAT – 6.00 = 1549.00


The Greek economy shrank 6.2% in the last quarter. The European Monetary Union is insisting on even more austerity in return for emergency funding. They're trying to see if they can contract the economy right into oblivion. And that's the good news; the bad news is that 20% of Greek bank loans are now non-performing.  The non-performing loans in Greece are bound to get worse, as the government does not have enough cash to return VAT tax refunds to small businesses which depend on such rebates for survival.  So, it is highly likely that the non-performing assets in Greek banks will rise as small businesses fail. And in Spain, 9.5% of bank loans are non-performing, a record high and cause for a little concern. Italy's fiscal deficit is swelling. Germany is still the strongest Euro-country and they will probably see economic contraction in the next quarter. The UK might be as bad as any of them, with the exception of Greece. 

In China, the housing bubble is deflating.  Prices are falling rapidly.  Lack of new construction has had a worldwide impact on the prices of raw materials.  The slowdown in demand and the decline in raw material prices has significant negative implications for the commodity producing countries like Australia and Canada.  The banking system in China, already undercapitalized, is facing major increases in non-performing loans. Japan has been taking a nap for the past 20 years. 


The United States looks like the prettiest horse in the glue factory. There are some positive economic signs:

Earlier this year I told you the Federal Reserve and the administration would try to revive the economy through the housing market. And it's kind of working. After seven years of the real estate market nationwide being a drag on the overall economy, we seem to have turned the corner.  New numbers are creating the expectation that economic growth in the U.S. will actually be bolstered by housing.

Sales of resale and new homes have been gaining steam throughout 2012, and prices are now tracking right alongside. Builder confidence is up, and interest rates for consumer mortgages remain historically low.  Last week’s average rate on a 30-year fixed rate loan was 3.62 percent, according to Freddie Mac.  

The AP reported today that “the housing recovery is looking steadier and more sustainable, which will likely add to economic growth in 2012 for the first time in seven years.  Purchases, construction and prices are gradually but consistently increasing, though they remain far below levels seen in a healthy economy.  That’s a big change for an industry that has been a major drag on the economy since the housing bubble burst more than five years ago. It's estimated  that home construction will add 0.2 percentage points to growth this year. That would make 2012 the first full calendar year in which housing has added to growth since 2005.

Of course, it might leave you feeling queasy to think the housing market has fully recovered. There is a big shadow inventory; there is still a big problem with negative equity; and it seems lending has become more strict than a CIA employment application. 

We know that the labor picture has been showing signs  of improvement. The unemployment rate stands at 8.3% and the economy added 163,000 jobs last month. Of course, there are different ways to count employment, and by some calculations the jobs picture is not so bright. Even the jobs that have been created are not as good as the jobs that were lost.  Meanwhile, inflation is non-existent, at least according to the government. The measurements of inflation changed several years ago, and if all you buy is flat screen TVs and typewriters, there is no inflation. 

The point is that the Federal Reserve has a dual mandate of price stability and maximum employment, and given a backdrop of no official inflation and persistently high and likely under-reported unemployment, and the outlook for a global slowdown, you may be wondering what it takes to motivate the Fed to announce more monetary easing. That's what the markets were thinking today.

The markets appear to be totally transfixed on the next policy statement from the Fed or the ECB or both, and to be totally ignoring the fundamental growth slowdown worldwide and the lasting impact of the last downturn.  In reality, there is really very little the Fed, the ECB, the Bank of Japan, the Bank of England, or any central bank can do to help their respective economies during a debt deleveraging cycle by the private sector. The central banks can provide liquidity, but their actions cannot resolve the solvency crises now facing the major industrial economies.  The money goes to the wrong places, it gets sucked into the black hole of debt; it does not get put to use in the broader economy and it does not create production and it may be the most circuitous and costly path to creating jobs. Meanwhile, stimulus in the form of fiscal policy is stuck in neutral, unable to inch forward due to a thoroughly dysfunctional Congress. 

Speaking of politics, the GOP convention is underway. It started with a whimper. The tone was deliberately subdued after Isaac led Republicans to scrap most of their first day's schedule in Tampa. Actually, it was a sunny day in Tampa, and it looks like Hurricane Isaac will hit New Orleans, but the graphics of Hurricane damage in New Orleans on a split screen with the GOP convention, well, they are laying low for now. With many of the 50,000 delegates still struggling to get to Tampa on storm-delayed flights, organizers mounted a scaled-back agenda on Monday and reshuffled their lineup of speakers into a three-day plan, capped by Romney's speech Thursday night. And most of the stuff between now and then is fluff. However there is a chance that we'll see some up and coming politician wow the crowd. Reagan did it in 76. Clinton proved he could talk endlessly in 88. Obama made an impression in 04.