Prague Twin

Thursday, November 30, 2006

So What is the Good News?

In the post below, I mentioned that we needed some good economic news this week. I got a very interesting comment from David Schantz who writes A Republic, if you can keep it. (If you don't go to his blog on Sunday's for the Question of the Week, you should).

I'm going to print the comment here because I think it exemplifies one of the basic points that I refer to from time to time which is that this economic expantion is not benfiting the average American.

I guess this would be good news. I heard from an old friend a few days ago, I hadn't talked to him in over twenty years. He is now buying and selling (high$) homes in the Daytona Beach, Florida area. Sounded to me like he was doing very well for himself. He said that I have a place to stay anytime I'd like to come for a visit.Sounds like a plan to me.When we were talking it was 80 degrees in Florida, it's suposed to snow in Missouri tomorrow. All I need to do is come up with the needed gas money to drive a 1993 half ton Chevy pickup (4x4) from Missouri to Florida.

Now I don't mean to say that David is an average person.... not by a long shot. But as you can see from the post, he is an American with an average income. He works hard to support his family. His friend on the other hand, has been making huge cash, and even if the economy takes a turn for the worse, his friend will still be sitting pretty. David, on the other hand, is likely to have his hours cut, or maybe he will even lose his job if the economy takes a sudden turn for the worse. But hey, at least his rich friend will put him up for a good time in Daytona Beach. I guess those of us who aren't rich can expect that our rich friends will help us out when the time comes..... but I wouldn't count on it.

So, did we get any good news this week so far? Well, Q3 GDP was revised upwards to 2.2% from an initial reading of 1.6%. That is good news (if you own stocks). Bernanke made a very upbeat report on Tuesday to the Italian American Association about the health of the economy, assuring all the rich people at the luncheon not to worry about the slowing growth because it is a natural for it to slow in this stage of an economic recovery. However, Bernanke warned that inflation is still a concern.

Consumers however don't seem to share Bernanke's optimistic view. Although new home sales came in higher than expected, prices are dropping rapidly. The drop in prices is what is fueling increased sales, and the real price drop (as Bernanke explained) is much more than the numbers indicate because sweateners offerered by the builders are not included in the price data. Builders are offering more free items than ever before, but there is no way to measure that on an official basis. Furthermore, inventories remain quite high and cancellations are not added into the inventory numbers.

Sales of durable goods were down nearly 9% in October, and consumer sentiment is softening accross the board. Today's data on initial jobless claims sent up some red flags as well. While the market expected claims to come down to about 312K from last week's 321K, the number came in at 357K and last week's number was revised slightly upward to 323K. This is two weeks in a row when actual jobless claims were higher than expected. If we get a similar surprise next Thursday, expect the mother of all data (Non-Farm Payrolls) to come in well under the expected 145K on Friday next.

The market had expected the PCE core deflator (the Fed's favorite measure of inflation) to ease slightly to a 2.3% year on year pace, but it came in the same as last month at 2.4%. Thus, as the job market tightens, and consumption eases, inflation remains the same. To make matters worse, the Chigago PMI (a regional manufacturing survey) came in well under expectations at 49.9. This is crucial because the 50 level means economic stagnation. All eyes will be on the nation-wide ISM number which is released tomorrow. The market is now gearing for a disappointment because of the Chicago data coming in below the Mason-Dixon line of 50 (if only just) for the first time in almost 4 years.

So as a result, the dollar has lost another 1.5 cents to the Euro. It will now cost you $1.3250 to buy one Euro, and $1.97 to buy one U.K. Pound (a 14 year high). The dollar index is down almost 10% in one year, and the dollar has lost 6 cents to the Euro in one month. It looks like we are racing to the all time high (or low if you are an American) of $1.3667 with reckless abandon. The Dow also took a fairly sharp drop on the Chicago PMI news. If the nationwide ISM index number reflects the Chicago reading from today, expect further losses for both the dollar and the Dow.

Furthermore, the ten year note dropped below 4.5% which can not be emphasised enough. If this closes the week below 4.5% the Fed is in quite a spot. The inversion of the yield curve is now at .75% and despite all the Fed's warnings to the contrary, the market still believes that the Fed will lower rates soon. However, without some relief from the inflation data, this will be impossible.

And last but certainly not least, oil has popped back up above $63 on news of a sharp drop in gasoline and heating oil inventories. A cold winter could put further upward pressure on oil prices which will further drive inflation.

Put simply, despite evidence of a slowing economy and a weakening housing market, the Fed will be unable to reduce lending rates, as the market expects it to, due to inflation pressures. As it becomes clear that the Fed will not cut rates, there will be serious fallout for the equities market and the housing industry. Both the Fed futures market and the Bond market expect a rate cut, and in fact more than one. I can't imagine that I am smarter that the market, but I just don't see how the Fed can justify a rate cut until inflation pressures start to ease.

What am I missing here?


  • What your missing???

    How about that the housing market is actually still going up for one!

    Check out this media spin!!!!

    By Anonymous Arch Stanton, at 5:04 AM  

  • Or try this one.

    By Anonymous Arch Stanton, at 5:07 AM  

  • "David, on the other hand, is likely to have his hours cut, or maybe he will even lose his job if the economy takes a sudden turn for the worse. But hey, at least his rich friend will put him up for a good time in Daytona Beach. I guess those of us who aren't rich can expect that our rich friends will help us out when the time comes..... but I wouldn't count on it."

    Given that the US isn't a social country, what did you expect?
    I often hear about the "greatest country in the World" in reference to the states. I guess those people chanting haven't been to Sweden, Switzerland, Finland...

    Nice post, btw. often posts about the housing bubble.

    By Anonymous romunov, at 6:44 AM  

  • Explain yourself Arch.

    Media spin? You do realize that MarketWatch is published by the Dow Jones exchange itself, and the author is the Bureau Chief.

    Avoid the "spin" and check this out. Keep in mind this comes from a conservative economist.

    The housing market is still going up? O.K. Arch, keep believing that. Enjoy.

    p.s., please you html for your gigantic links. They really screw up the page on certain browsers.

    By Blogger Praguetwin, at 6:55 AM  

  • Romunov,

    Yes, I'm sure we can assume most have never been to those countries.

    One would think the largest economy in the world would figure out a way to at least provide health care for it's workers, but one would be wrong.

    By Blogger Praguetwin, at 6:57 AM  

  • Arch,

    One last thing. The question refers to the seeming paradox between the Fed Futures rates and Bond markets (both well under 5%) and the current overnight rate of 5.25%.

    If the housing market is actually still going up, as you claim, then why is the market expecting the Fed to cut rates to save it?

    Even with a declining housing market, I don't believe the Fed will cut rates in the face of continued inflation pressures.

    So tell me, why does the market expect the Fed to cut rates?

    By Blogger Praguetwin, at 7:01 AM  

  • PT

    YES! the housing market is going up still! Look at the msnbc link I posted.

    Do you believe that the NEW housing chart you linked to is indicative of the WHOLE housing market???


    By Anonymous Arch Stanton, at 2:51 PM  

  • PT

    I like you do not believe the Fed will cut the rates.

    It is in fact likely that the housing market will eventually begin to fall and so the market will expect a preemptive move by the feds. But until the housing market actually starts to go in the direction that you want it to go, please report the direction that it is actually going.

    By Anonymous Arch Stanton, at 2:59 PM  

  • Interesting now is the fact that the 'markets' have the field to themselves with a minimum of political interference.
    I'm inclined to agree with Rom (I think). Economically the US does not have a social agenda, it is all about wealth generation.
    When people can eat, wear and live in dollars that system will prove its value.
    Meantime the markets, lacking moderation, will show the true effects of the system.
    I, for one, expect to see top end greed run rampant. The lower end of the economy will suffer, and I guess George W is the only one left to take the blame.
    I also expect this is the beginning of a major economic shake out for the 'great democracy.' Have fun :)

    By Blogger Cartledge, at 9:34 PM  

  • Cartledge

    You do of course realize that the U.S. is in fact the most charitable nation (be it via tax or actual charitable giving) in the history of the globe dont you?

    By Anonymous Arch Stanton, at 10:48 PM  

  • You do of course realize that the U.S. is in fact the most charitable nation (be it via tax or actual charitable giving) in the history of the globe dont you?


    It is all how you count the numbers. Do you count it as a percentage of GNI? Private vs. public? The U.S. total public engangement with the developing world in 2004 was $99 Billion. Of that, $47 billion was individual remittances to developing countries by immigrants ($30 billion was to Mexico and Latin America).

    So while government assistance to the developing world was only $20 billion (making the U.S. 21st out of 22nd in GNI% terms) immigrants sent $47 billion back to their families.

    It is all how you read the numbers. There are "lies, damn lies, and statistics" it was once said. I'm not sure where your statement falls, but you should look a little closer at it perhaps.

    As far as housing goes, perhaps you would prefer the term, "rapidly decelerating" as opposed to "weakening". If Q3 GDP was growing at a year on year pace of .86% (as the housing market is), after growing at over 10% per year, wouldn't you call it "weakening"? I sure would.

    My focus on the new housing market is due to the fact that construction represents 10% of the total economy. As construction spending decreases (which it continues to do), the economy as a whole suffers.

    Finally, I think you are the type of person who has to be knee deep in water before you will admit a flood is coming. I am mearly stating in this post that the housing market is "weakening" or "rapidly decelerating" if you prefer. There is a lot of legs left in this trend which you will see soon enough.

    By Blogger Praguetwin, at 5:01 PM  

  • First off, Cartledge is a big boy and can answer his own questions


    How about just in terms of total dollars spent both public & private????

    But then of course what if we include the spilled American Blood and the economic freedom it achieved? No one comes close. (Excepting of course perhaps the French, who’s blood helped America to exist in the first place).

    As to housing, how about simply stating the truth in the first place "housing is not growing as rapidly as before" or "growth in sales is slowing"

    In what way am I knee deep in water? Hahahaha

    Personally I think you are someone who has to be neck deep in wealth to realize "it's a good day"

    willtodoom willtodoom willtodoom

    By Anonymous Arch Stanton, at 3:52 PM  

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