The headlining article at money.cnn.com today is titled Did the Fed go too far?, asking whether or not the Fed was prudent in hacking our Fed Funds Rate all the way down to 2%. I’ll save you some time and skip to the end of the story: yes. Yes the Fed did go too far. But they ALWAYS go too far. They almost have to.
As much as we like to think of ourselves in this country as a shining beacon of sense and logic, we really are very prone to mob-mentality. When the media gets us all whooped up over an economic slowdown, we start demanding that the government (in this case, those that decide monetary policy) fix everything or else we’ll kick them out and find someone else who will.
It’s a lot like when any of us gets in the shower. We turn the water on and crank it all the way to the “hot” side because we are impatient and we want the hot water now. Of course, when the hot water finally starts to spray out, it’s way too hot and we’ve got to crank the dial further back to the “cold” side until we find a good balance. Well, by dropping the Fed Funds Rate all the way down to 2%, our Federal Reserve has essentially made the monetary “water” too hot. Now, we’re feeling the burn of inflation.
The question we are now faced with is whether or not we should cool things off by raising rates at this week’s Federal Open Market Committee meeting to battle inflation or leave them alone to help prop up our sputtering economy.
My opinion: if the Federal Reserve opts to raise rates, they are living in a delusional state that I can’t even conceive of. Here’s my three reasons.
Number one: Guiding our economy via monetary policy (the toggling of key interest rates and money liquidity) is like trying to steer a naval aircraft carrier. You can’t just turn the wheel and expect immediate results from a behemoth economy like ours. So, we need to give the rate cuts some time to mend our weakening housing sector and rising unemployment.
Number two: Monetary policy can’t do a whole lot to stop the increase in oil and commodity prices that are the largest forces driving inflation. Sure, we can shore up the dollar’s strength, but any benefit of that will, short-term, be eaten up by the decrease in exports that rely on a currency imbalance. The central problems are systemic and need to be addressed through foreign relations as opposed to interest rate hikes.
Number three: We’ll look really dumb as a country. Reversing monetary policy after our recent rash of aggressive rate cuts would send a clear signal that we do not have this bus under control. That would undermine international confidence in America and bring to life a whole host of new problems.
All that being said, exports are getting more expensive as the commodity boom continues unabated. We will eventually need to increase rates once we see a bit more stability in our economic recovery. But not yet, Big Ben. Not yet.
Monday, June 23, 2008
Friday, June 13, 2008
If having foreclosed properties was a contest, we'd be winning!
This was a big week for economic data, especially concerning the fate of our ailing housing market. I try and avoid belaboring statistics because, well, they’re boring as heck. These numbers, however, are pretty staggering.
First, consumer confidence hit a 28 year low this month. John Q. Public is afraid of our problematic economy and the media is aggressively cramming that agenda down his throat. No surprise there.
Consumer Price Index numbers came out this morning, which are commonly seen as the most accurate depiction of inflation as it effects the general public. On an annualized bases, the CPI rose 4.2% which was a tad hotter than economists expected. The majority of the move upwards was, you guessed it, skyrocketing gas prices. The good news in the report was that core inflation, measured by the CPI minus food and energy, came in at a tame 2.3% growth rate. The markets generally liked this data, suggesting inflation’s flare up may not be upon us quite yet.
While we’re on the subject of inflation, economists are divided concerning the Fed’s next move. Many are calling for an immediate rate hike to strengthen the dollar and stop any inflationary trend. Others would believe that inflation-targeting would drive up unemployment. These Phillips-curve huggers would have us think that a little more inflation is acceptable as long as it keeps a lid on job losses. In a closed economy, I would probably agree. But we’re global these days. People can borrow money from across the world and currency strength (especially our own, which most of the world’s commodities are priced by) is becoming all the more important. My estimation would be the exact opposite of these guys. If we are to promote business expansion, we need to maintain a competitive labor-cost advantage. Should prices get out of control, labor unions everywhere will rally for higher pay and inflate our comparably inexpensive labor costs. No good for growth of payroll employment.
Bernanke moved the markets again on Monday night when he gave a speech headlining the rising threat of inflation. He did not, however, indicate that the Fed was in any huge hurry to hike rates because of the “slack” in the economy that will inevitably dampen any price increases we may experience. Hiking rates in the very next meeting after lowering rates would send a big red flag to the world that we do not have our economy under control. Regardless of what is best or worst for the economy, I am placing all bets that the Fed will do nothing at their late-June meeting and remain stalwart in their rhetoric.
But the big enchilada of housing data this week has to be about foreclosures. Remember 12 months ago when we were complaining about ALL of the foreclosures plaguing our neighborhoods? Our country’s foreclosure rate is up 48% year-over-year, with 1 in every 483 homes in foreclosure. And you thought it was bad a year ago. Florida remains in the top ten states (#4, to be exact) with the highest rate of foreclosures, up 72% year-over-year with 1 in every 228 homes getting papers stapled to their doors. At the major metropolitan area level, the Sunshine State holds 2nd place (Cape Coral/Ft. Myers area with 1 in every 79 homes) and 10th place (Port St. Lucie/Ft. Pierce area). These areas were bloated with speculative investors, and now we’re seeing the fallout. It hurts, no question. But ultimately it will be healthy for the continued growth of real estate both locally and nationally.
For anyone who is worried about the long-term future of Florida real estate, allow me to remind you that the baby-boomer generation is retiring and old people love to buy homes and retire in sunny Florida. Probably will also be good for the Bob Evans restaurants, too. And Buick dealerships.
First, consumer confidence hit a 28 year low this month. John Q. Public is afraid of our problematic economy and the media is aggressively cramming that agenda down his throat. No surprise there.
Consumer Price Index numbers came out this morning, which are commonly seen as the most accurate depiction of inflation as it effects the general public. On an annualized bases, the CPI rose 4.2% which was a tad hotter than economists expected. The majority of the move upwards was, you guessed it, skyrocketing gas prices. The good news in the report was that core inflation, measured by the CPI minus food and energy, came in at a tame 2.3% growth rate. The markets generally liked this data, suggesting inflation’s flare up may not be upon us quite yet.
While we’re on the subject of inflation, economists are divided concerning the Fed’s next move. Many are calling for an immediate rate hike to strengthen the dollar and stop any inflationary trend. Others would believe that inflation-targeting would drive up unemployment. These Phillips-curve huggers would have us think that a little more inflation is acceptable as long as it keeps a lid on job losses. In a closed economy, I would probably agree. But we’re global these days. People can borrow money from across the world and currency strength (especially our own, which most of the world’s commodities are priced by) is becoming all the more important. My estimation would be the exact opposite of these guys. If we are to promote business expansion, we need to maintain a competitive labor-cost advantage. Should prices get out of control, labor unions everywhere will rally for higher pay and inflate our comparably inexpensive labor costs. No good for growth of payroll employment.
Bernanke moved the markets again on Monday night when he gave a speech headlining the rising threat of inflation. He did not, however, indicate that the Fed was in any huge hurry to hike rates because of the “slack” in the economy that will inevitably dampen any price increases we may experience. Hiking rates in the very next meeting after lowering rates would send a big red flag to the world that we do not have our economy under control. Regardless of what is best or worst for the economy, I am placing all bets that the Fed will do nothing at their late-June meeting and remain stalwart in their rhetoric.
But the big enchilada of housing data this week has to be about foreclosures. Remember 12 months ago when we were complaining about ALL of the foreclosures plaguing our neighborhoods? Our country’s foreclosure rate is up 48% year-over-year, with 1 in every 483 homes in foreclosure. And you thought it was bad a year ago. Florida remains in the top ten states (#4, to be exact) with the highest rate of foreclosures, up 72% year-over-year with 1 in every 228 homes getting papers stapled to their doors. At the major metropolitan area level, the Sunshine State holds 2nd place (Cape Coral/Ft. Myers area with 1 in every 79 homes) and 10th place (Port St. Lucie/Ft. Pierce area). These areas were bloated with speculative investors, and now we’re seeing the fallout. It hurts, no question. But ultimately it will be healthy for the continued growth of real estate both locally and nationally.
For anyone who is worried about the long-term future of Florida real estate, allow me to remind you that the baby-boomer generation is retiring and old people love to buy homes and retire in sunny Florida. Probably will also be good for the Bob Evans restaurants, too. And Buick dealerships.
Saturday, June 7, 2008
Oil prices vs. rising unemployment: The showdown of the century!
I hate it when I am dead-on correct about negative things. Allow me to quote myself from last week:
“Companies don’t want to increase their prices and become less competitive in the international marketplace if they can help it. However, that money is going to have to come from somewhere. So, if I had to guess, I’d say we’re gearing up for a big series of layoffs in the foreseeable future.”
Friday marked the release of our latest jobs report. Low and behold, in it we saw the biggest single-month leap upwards in unemployment in 22 years to a rate of 5.5%. Stocks responded by tanking over 350 points on the Dow. Consequently, the strength of the U. S. Dollar fell precipitously.
Here’s the catch for a falling dollar. Any commodity price that is pegged to the dollar (for instance, oil) goes skyrocketing. So, we saw the price of a barrel of crude oil jump from $128 to over $139, marking the biggest single day increase in history and the highest inflation-adjusted close for oil. I think we can safely say that holding your breath for a pullback in gas prices would be a bad idea.
As I’ve discussed endless times before, rising oil prices has an inflationary effect on all products. No matter what any business is selling, I’d bet they used trucks or planes (which both require gas) to get their merchandise from point A to point B. These inflationary pressures tend to force interest rates higher.
But rates came roaring down on Friday.
Here’s the scoop: there were contradictory forces at work on Friday. The oil price jump is inflationary, no doubt. But the large increase in the unemployment rate has a deflationary effect, and produced a net gain in mortgage bonds for the day. Basically, if everyone’s losing their jobs, it’s kinda hard for vendors to jack up prices and expect their stuff to keep selling. That made available fixed mortgage rates go down, which is super-duper for the home-buying or refinancing consumer.
In other news, Bernanke re-affirmed the Fed’s desire to stop the rate cutting cycle. He was quoted this week as saying that the Fed is “...attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.”
Translation: We’re sorry we did so much damage to our national currency and we’re gonna try to fix it pretty darn soon.
That could mean rate hikes by the end of the year. Honestly, the Fed raising rates would probably have a lowering effect on interest rates, so long as the free market perceives that inflation will remain contained.
As far as lending guidelines are concerned, there is no sign of them loosening in the nearby future. As Fannie Mae and Freddie Mac and other secondary market investors take bad loans onto their balance sheets, the government will impose more and more regulations, clamping down on an already tight set of lending guidelines. That means it’s going to become progressively harder over the next couple of months to qualify for any loans. The bright side is that rates are still at very low levels, historically speaking.
“Companies don’t want to increase their prices and become less competitive in the international marketplace if they can help it. However, that money is going to have to come from somewhere. So, if I had to guess, I’d say we’re gearing up for a big series of layoffs in the foreseeable future.”
Friday marked the release of our latest jobs report. Low and behold, in it we saw the biggest single-month leap upwards in unemployment in 22 years to a rate of 5.5%. Stocks responded by tanking over 350 points on the Dow. Consequently, the strength of the U. S. Dollar fell precipitously.
Here’s the catch for a falling dollar. Any commodity price that is pegged to the dollar (for instance, oil) goes skyrocketing. So, we saw the price of a barrel of crude oil jump from $128 to over $139, marking the biggest single day increase in history and the highest inflation-adjusted close for oil. I think we can safely say that holding your breath for a pullback in gas prices would be a bad idea.
As I’ve discussed endless times before, rising oil prices has an inflationary effect on all products. No matter what any business is selling, I’d bet they used trucks or planes (which both require gas) to get their merchandise from point A to point B. These inflationary pressures tend to force interest rates higher.
But rates came roaring down on Friday.
Here’s the scoop: there were contradictory forces at work on Friday. The oil price jump is inflationary, no doubt. But the large increase in the unemployment rate has a deflationary effect, and produced a net gain in mortgage bonds for the day. Basically, if everyone’s losing their jobs, it’s kinda hard for vendors to jack up prices and expect their stuff to keep selling. That made available fixed mortgage rates go down, which is super-duper for the home-buying or refinancing consumer.
In other news, Bernanke re-affirmed the Fed’s desire to stop the rate cutting cycle. He was quoted this week as saying that the Fed is “...attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.”
Translation: We’re sorry we did so much damage to our national currency and we’re gonna try to fix it pretty darn soon.
That could mean rate hikes by the end of the year. Honestly, the Fed raising rates would probably have a lowering effect on interest rates, so long as the free market perceives that inflation will remain contained.
As far as lending guidelines are concerned, there is no sign of them loosening in the nearby future. As Fannie Mae and Freddie Mac and other secondary market investors take bad loans onto their balance sheets, the government will impose more and more regulations, clamping down on an already tight set of lending guidelines. That means it’s going to become progressively harder over the next couple of months to qualify for any loans. The bright side is that rates are still at very low levels, historically speaking.
Sunday, June 1, 2008
America: It keeps slowing and slowing and slowing and slowing
This week was a mixed bag of encouraging economic news and dismal forecasts from everyone who matters. I’ll do my best to keep the statistics to a bare minimum, but there are a couple of pertinent numbers that deserve our attention.
First and foremost, our 1st quarter Gross Domestic Product growth was revised upwards from +0.6% annualized to +0.9%. That implies that our economic slowdown isn’t quite as shocking as analysts 1st expected. Also, the core inflation reading was revised downward ever so slightly from +2.2% to +2.1%, meaning the cost of goods and services is rising, but not as rapidly as we’d 1st thought. Both items are surprisingly good news for our country’s economic situation.
But of course, right as I’m breaking out the party hats and champagne bottles, Warren Buffett comes forward in all his ridiculously smart and wealthy glory and tells a German interviewer that the U.S. economy is already in a recession as far as the average person in concerned. For those of you that don’t know who Warren Buffett is, he’s like the Oprah of old, rich men. The investment guru went on to state that he sees that this recession we are already allegedly in will be “deeper and longer than many think”. So, I guess it’s time to put away the Dom Perignon and break out the Natural Ice.
Yum.
The Federal Reserve also lowered their growth forecast and simultaneously raised their expectations for both inflation pressure and unemployment in their latest press release. Sounds like a party to me. The kind of party that makes grown men cry.
At a technical level, a recession is defined as two consecutive quarters of negative GDP growth. So far, we haven’t had a single negative quarter. But all semantics aside, we are in a very anemic growth pattern as a country, and sometimes a prolonged stagnation can be worse for John Q. Public than an overt downturn. I do agree with what the Mr. Buffett is saying, as much as I hate to admit it. The fundamental problems that caused our credit crisis have not been purged from the system yet, and until that happens, we’re in for a rocky ride.
In other news, inflation concerns are still assailing the countryside. In a recent study released by JP Morgan, the anticipated rate of headline inflation will reach 5% by this summer. To give some contrast, we’re at 3.9% now. That would crimp the already abused consumer discretionary spending and slow our economy down even more. But here’s the bigger problem: the THOUGHT of inflation becoming a self-fulfilling prophecy. Let me explain. Mr. factory worker believes that prices are going up. To adapt for his loss of spending power, he and his union buddies rally for higher wages. The factory complies, but has to raise their product prices in order to offset the higher wages they are paying. And bada-bing, we have an inflationary trend.
I don’t think it’s going to play out that way, though. Companies don’t want to increase their prices and become less competitive in the international marketplace if they can help it. However, that money is going to have to come from somewhere. So, if I had to guess, I’d say we’re gearing up for a big series of layoffs in the foreseeable future. Now would be a good time to comment on how good your boss’s hair looks.
Dallas Fed Governor “Loose Lips” Fisher noted that if price expectations continued to worsen in the coming months, Fed policy makers would opt to raise interest rates “sooner rather than later” even if the economy is weak. So, if you’re planning on capitalizing on the low rates we have available, you probably want to get the ball rolling fairly soon. Don’t say I didn’t warn you.
First and foremost, our 1st quarter Gross Domestic Product growth was revised upwards from +0.6% annualized to +0.9%. That implies that our economic slowdown isn’t quite as shocking as analysts 1st expected. Also, the core inflation reading was revised downward ever so slightly from +2.2% to +2.1%, meaning the cost of goods and services is rising, but not as rapidly as we’d 1st thought. Both items are surprisingly good news for our country’s economic situation.
But of course, right as I’m breaking out the party hats and champagne bottles, Warren Buffett comes forward in all his ridiculously smart and wealthy glory and tells a German interviewer that the U.S. economy is already in a recession as far as the average person in concerned. For those of you that don’t know who Warren Buffett is, he’s like the Oprah of old, rich men. The investment guru went on to state that he sees that this recession we are already allegedly in will be “deeper and longer than many think”. So, I guess it’s time to put away the Dom Perignon and break out the Natural Ice.
Yum.
The Federal Reserve also lowered their growth forecast and simultaneously raised their expectations for both inflation pressure and unemployment in their latest press release. Sounds like a party to me. The kind of party that makes grown men cry.
At a technical level, a recession is defined as two consecutive quarters of negative GDP growth. So far, we haven’t had a single negative quarter. But all semantics aside, we are in a very anemic growth pattern as a country, and sometimes a prolonged stagnation can be worse for John Q. Public than an overt downturn. I do agree with what the Mr. Buffett is saying, as much as I hate to admit it. The fundamental problems that caused our credit crisis have not been purged from the system yet, and until that happens, we’re in for a rocky ride.
In other news, inflation concerns are still assailing the countryside. In a recent study released by JP Morgan, the anticipated rate of headline inflation will reach 5% by this summer. To give some contrast, we’re at 3.9% now. That would crimp the already abused consumer discretionary spending and slow our economy down even more. But here’s the bigger problem: the THOUGHT of inflation becoming a self-fulfilling prophecy. Let me explain. Mr. factory worker believes that prices are going up. To adapt for his loss of spending power, he and his union buddies rally for higher wages. The factory complies, but has to raise their product prices in order to offset the higher wages they are paying. And bada-bing, we have an inflationary trend.
I don’t think it’s going to play out that way, though. Companies don’t want to increase their prices and become less competitive in the international marketplace if they can help it. However, that money is going to have to come from somewhere. So, if I had to guess, I’d say we’re gearing up for a big series of layoffs in the foreseeable future. Now would be a good time to comment on how good your boss’s hair looks.
Dallas Fed Governor “Loose Lips” Fisher noted that if price expectations continued to worsen in the coming months, Fed policy makers would opt to raise interest rates “sooner rather than later” even if the economy is weak. So, if you’re planning on capitalizing on the low rates we have available, you probably want to get the ball rolling fairly soon. Don’t say I didn’t warn you.
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