Wednesday, February 24, 2010

Greek lesson and impact from the eZone to the US

Riots in Greece. Citizens in a country strapped for funds wrecking the public infrastructure that it will not really be able to afford to repair. Priceless. MasterCard.

Whole industries on strike. Critical businesses like banks operating on skeleton crews.

Protesters are saying that the average man can't pay anything more, get it from the rich.

Ah, yes it should be a familiar theme to Americans where the solution to everything is to tax the rich theses days. But the rich are rich. The rich are mobile. The rich own the businesses that create the wealth and provide employment. Scare them off and you are left with the poor. Try taxing them - alone.

In the late 1960s riots in America decimated Watts in California, Newark, New Jersey and Detroit, Michigan. The reaction was by not just the rich but any middle class person who could afford it; that reaction was to leave. The riots were race-based. But the flight of the 'wealthy' was not. By the way the definition of 'wealthy' is anyone who has more money than you. These three cites were forever marked by these riots and the flight of their tax base. Newark is only just getting itself rebuilt. Detroit is a shadow of its former self and is now being decimated by a new challenge to its key industry, autos.

Rest assured that taxing The Rich is a slogan that like any other seemingly good intention is destined to help pave the road to hell. It may be a great slogan but as a policy it just won't fly.

Greece has overspent in a way that probably benefited public servants the most! But this is the hardest cost to trim from a budget especially in a social welfare state. In New York City as Mayor Bloomberg ran for another term he 'gifted' the MTA with a huge contract. After a transit strike in the late 1970s, the NY unions still got rich contracts. They own the city, almost literally the same way investment bankers 'own,' control or hold hostage their firms and their compensation polices. The municipal unions have power and tend to vote in a block- for you or against you. So politicians cave in to their demands. Municipal unions are powerful forces and all states will have a hard time reining in what has been expanded. Greece - socialist leanings or not - is no different.

Greece's people are rejecting the idea that they have done anything wrong. In their eye, someone else is at fault, call them 'the rich' although everybody who can in Greece hides income and avoids taxes. It's still someone else's fault.

What about the government that hid the country's excesses and did not face the music sooner? Are they at fault? What about hiding the excesses and at the same time not trying hard to compress expenditures so someday Greece could comply with The Rules? What were Greek leaders thinking? Did they think they could roll their ever-growing derivatives contracts forever? Are the people angry? yes! But these were their elected leaders and the people are responsible for their leader's actions.

Beware of Greeks bearing debt and/or protest placards. We already have seen what Icelanders have done when it comes time to pay the piper. What is the new modern legacy Greece will make for itself? Austerity, it's not my job? And if Greece can't get rich Greeks to pay what about the Rich countries of the e-Zone? Isn't that the next most logical step? If there is no need for austerity then everything in Greece must be fine except for the tax revenues to pay for it all. If you can't tax the rich or the poor or the middle class then you need an inflow from outside the country. QED.

Where Greece is heading with this logic is a very bad place. The unwillingness by Greeks to take their medicine is bad sign for all of Europe not just Greece. At some point soon Greek bond debt will be due and given this tilt on the part of Greeks no one will roll that debt over let alone contract for new debt. A country that wont' knuckle down to pay its debts puts itself in a real jam.

Pay what you owe? It's Greek to me. Maybe the Greeks can restore the good name of the Welsh or give Icelanders a run for their money as nonpayers. The trend is unsettling.

Meanwhile the US budget deficit gets bigger and the Administration wants to add another trillion to that load for healthcare coverage (not reform). And big challenges for medical costs and social security costs still lie ahead. Maybe Greece's troubles came just in time to give the US a wake up call. Even the RICH United Sates cannot afford to go off on trillion dollar spending programs- again (Iraq war) and again (Economic stimulus) and again (health care) . A penny spent must be a penny earned. The era of deficit financing in the US must be brought to a close and yes we ALL WE ALL WILL PAY MORE TAXES TO DO THIS. It's not just a vague prescription for Greece.

US debt levels? They are not Greek to me.

Friday, February 19, 2010

Fed's Move in a broader context

The markets seem to have untangled the mystery of the Fed's move that isn't a move.

The Fed's discount rate (or primary credit rate) is not a mainstay for bank funding so hiking that rate is not going to have any clear impact on a bank's cost of funds. Banks try to avoid the discount window.

While markets sold off in the wake of the Fed's announced discount rate hike late yesterday, after some reflection US markets have righted themselves. So we cannot even argue that market rates have been pushed up or equity prices pushed down in reaction to the Fed's move of a largely inconsequential rate- a rate used for leverage in implementing monetary policy.

The fact of the matter is that the Fed is paving the way for a rate hike. It has to get markets back to normal conditions before it can do that. But it will not necessarily hike rates quickly once normal interbank market rate relationships are re-established. But it's fair to say it is unlikely that the Fed would hike rates until it had removed the special facilities and rate arrangements it had put in place to deal with the crisis. In that respect we are now closer to a rate hike than we were before.

The release of the CPI on Friday underscores the subtlety of that message. The CPI headline was up but the core CPI fell leaving inflation really very tame for right now. GDP growth has been strong mostly on technicalities. Job growth has yet to check in and without job growth the recovery does not look solid. There is no reason to expect that the Fed is already trying maneuver to a rate hike even though we can argue that in some ways we are closer to having one.

Markets seem to have sorted this out. It is the situation as it was presented to us by Fed Chairman Bernanke in a statement made about one week ago. While markets were confused by his statement then, that has changed.

Still, with the rate hike the world has changed, too. We can see that the Fed wants to be prepared to hike rates if conditions warrant and that is different from saying that it plans to hike rates soon. Still the Fed's move carries a message. That is that the need for the emergency tactics is over. The Fed is betting on a continued recovery.

While it is possible for the Fed to use a wider spread to the discount rate to pressure the Fed funds rate higher that would take repeated efforts and a consistent strategy. There is no evidence that the Fed is trying to use the discount rate in that fashion. It is more obviously true that the Fed is trying to restore a normal Fed fund to discount rate spread as it claims.

There is some complaining about the Fed hiking rates in a post-FOMC meeting, making its move more of a surprise. But it is also true that making the move in that way made it look less like a move at an FOMC meeting that has monetary policy implications. Moreover, it was not a true surprise since Bernanke had just told us he wanted to do just that.
All in all it is hard to be critical of the what the Fed has done or how it has done it.

Still the new weakness in the CPI and the weakness in Europe's service sector revealed by its flash PMI for the service sector in February gives us some reason to wonder about not just the US but the global expansion. In some ways the timing of the Fed move is peculiar since growth is not exactly building in a clear way. We can understand the Fed wanting to get the interbank market and official rate structure back to normal as soon as possible. But the economy has been so weak for so long that if there is backsliding the possibility that economic weakness turns to financial catastrophe again is quite high.

So it is in that respect that markets were cheered by the Fed's move to normalize the discount rate. That move told the market that the Fed, at least, thinks the banking sector is more sold and that it can stand up by itself without special facilities or rate configurations. The Fed also is betting on growth. We can all hope that the Fed is right on this one.

Saturday, February 6, 2010

Markets sell off on good news again

A week ago the market went down after GDP rose at a 5.7% pace in 2009-Q4 This past week markets shrugged off a drop in the rate of unemployment to 9.7% from 10%.

Why all the pessimism? Why ignore such good news?

The ISMs cooked up improved numbers this past week and showed improvements their respective employment components as well. The MFG report was especially strong. Challenger's announced corporate layoffs remained low for January.

There are lingering financial sector concerns since Greece got in fiscal trouble. Often when something like happens there is thematic selling across the spectrum that sorts itself out in subsequent weeks. It's like Hells's Angels saying, 'Kill 'em all and let God sort 'em out'. OK we've killed them all, isn't it time for the sorting out?

The US jobs picture is much brighter now. We have gains in services jobs. We have gains in manufacturing jobs. Losses in the tiny construction sector - likely the result of harsh winter weather- swamped gains in the two main job sectors of the economy. This month is a good lesson about looking into the details of the report. The unemployment rate fell, average hourly earnings rose and the work week expanded. The economy improved in just about every major labor market respect.

It's time for some optimism to appear.

Thursday, February 4, 2010

Tough day for optimism

Feb 4th 2010
We appropriately flagged the Euro data as problematic this morning. The world is linked. Europe is having trouble with debt. Not that the US is sitting pretty; but it has dug itself out before. Europe is untested and not so incidentally, untrusted.

The back tracking in the jobless claims report is unwelcome news. Even the continued progress in the ISMs and their respective employment indices leave us wanting. Jobless claims need to continue to drop to signal strong expansion. Claims instead are now moving sideways. This is not a good development.

Stock market nervousness is sensible in this environment. Of course it's bit odd coming ahead the employment report instead of after it. We are at risk to that report after this stock market sell off. after all there are some good strong reports in addition the one s that are lacking. We are expecting to see a strong downward revision to worsen joblessness in addition to the losses already suffered. In that respect it will be hard for the market to find news that is good enough to rally off once this report is released.

Still markets are sold off now and the news is still mixed. How long before the usual transition to strength shows its hand? Or it it just not going to happen? That now seems to be a more serious question that it was before. It's not one I have asked before.