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Monday, May 05, 2008

ISM Services = Mfrg Gains In Some Sectors

The average person just does not grasp how strong an economic impetus is generated by adding to your manufacturing base. ISM Services came in at 52.0, with some signs that there could be strengthening later in the year. This is unequivocally the result of gains in some segments of manufacturing.

I am quite sure this is real because it picks up some trends I started seeing in the county data last year, and it matches NACM. It is also consonant with the industrial construction report and the freight data.

It is true that the vehicle manufacturing is tanking, but adding parts orders, etc, is going to cause a real ramp up in everything from rail to trucking to credit to metals, etc.

What's good about this is that it strengthens the case that the US will continue to do well in the war for money, which is frankly dominating world affairs about now.

Export orders for services are tanking though. I think the world economy is far weaker than most observers do. The question is whether the US can gain enough to offset the backlash from that weakening, which should really begin to be felt sometime in the last half of 2008. By 2009 we'll really feel it, and that's when I expect the Fed to go to 1 percent to keep it going.

I thought this Times of India coverage of Warren Buffet's remarks was interesting:
Buffett said the Fed acted properly when it arranged a $2.4 billion buyout in March of New York-based Bear Stearns by JPMorgan Chase & Co.

The billionaire said he turned down the opportunity because he lacked enough capital and time to craft a solution. More failures and wider panic may have resulted if the regulators didn't halt the run on Bear Stearns, he said. ‘‘The worry was that there would be contagion; it was a very real worry,'' Buffett said.

‘‘If Bear Stearns had gone, the next day, somebody else would have gone. It could've been a very, very, very chaotic situation.'' Buffett, 77, said he was contacted in March before JPMorgan, the third-biggest US bank by assets, agreed to buy Bear Stearns. The person calling him, whom he wouldn't identify, was ‘‘someone responsible'' and wasn't from the Federal Reserve or the Treasury.

The call lasted about half an hour, Buffett said. ‘‘As I understand it, Bear Stearns had $65 billion due on Monday and I didn't have $65 billion,'' Buffett said.
There's a lot of screaming about the Bernanke Fed, but from where I sit it has done a pretty darn good job playing the hand it was dealt.

I repeat that we are in a recession, but the worst of the manufacturing recession has passed (for now), and that is backstopping jobs and an intense constriction in consumer spending.

The Fed is credited with averting disaster viz Bear but what prevents this from happening again with another broker or bank? Is is that fact that the Fed now accepts virtually any collateral from any anybody? Would the limit to this backstop be the Fed balance sheet? Does the Fed comply to the same accounting rules viz Mark-to-Market?

Love the blog!
Really what prevented it from happening with another broker was the opening of the discount window to broker-dealers.

The loans roll, and at each renewal the borrowers have to ante up more collateral if theirs has devalued. That's why I'm so sure the financial crisis is not over.

A bunch of banks will fail. The trick is to get them to fail in a way that leaves good banks still standing.

There are more bank failures than show in the stats even in the recent past. The regulatory strategy has been to find them early enough to warn them in time to make them sell out before failure. It looks like that strategy is coming to an end, IMO.

I totally disagree.

The fed failed miserably from an oversight perspective during the housing boom. Also, I'm not buying that the system would have crashed if BSC had been allowed to fail. If you believe THAT, then you also must believe (even more so than me) that the fed has failed in its oversight duties.

No matter how you spin it, the fed has failed monumentally.
The actual ISM report contradicts your view:

The 12 industries reporting growth in April based on the new NMI composite index — listed in order — are: Arts, Entertainment & Recreation; Real Estate, Rental & Leasing; Professional, Scientific & Technical Services; Agriculture, Forestry, Fishing & Hunting; Mining; Wholesale Trade; Public Administration; Educational Services; Construction; Utilities; Retail Trade; and Information. The six industries reporting contraction in April are: Other Services*; Transportation & Warehousing; Finance & Insurance; Accommodation & Food Services; Health Care & Social Assistance; and Management of Companies & Support Services.
Anon - the volume reports on trucking and rail are the measurements I'm looking at. See this.
MAB - it's a big topic. I believe the Fed kept rates too low too long, but most of the driving force here was not rate-driven. It was driven by reckless lending.

The reckless lending was driven by reckless investors, and the reckless investors were created by the IBs and the ability of bank holding companies to buy and operate non-bank mortgage subsidiaries and various types of related businesses, such as insurance, title and flood. This ability was granted by GLB in the late 90s.

The FRB has the authority that Congress gives it, and no more. The FRB does not have the authority to sit down and write regulations for purchase-money loans, and given that fact, they cannot write meaningful enhancements for refinances.

Congress would have had to act. It didn't, and it still hasn't.

Also please consider that this bubble went on over most of the globe. You would think people would have exercised more caution given what happened in Japan, but no, they didn't.

The fed's low low interest rates caused a world wide housing boom. Why the world followed the fed's lead is puzzling.

In any event, the EU central bank (and a few others) seems to have developed a spine. That's the real decoupling story. It will be interesting to see how it plays out in the short and long terms.

Any thoughts?
MAB - no, the trend started in the 90s, and the fact that foreign banks overall had less restrictions than US banks is one of the arguments that was advanced for the repeal of Glass-Steagall.

ECB is going to push Europe over into a recession, but a recession with high inflation. Nothing they can do about the fundamentals.
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