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Monday, August 22, 2011

Ah, Monday

CFNAI came in better, and last month's figure was revised upward. Still, we are at a low number.

I am not too optimistic, because I think most of this was due to the clearance in some of the Japanese supply lines, and judging by rail that is now fading out.

Last week a range of forecasters issued major downward revisions for economic trajectories. Most of them are really now predicting recessions, because the US economy doesn't spend a year in definitely-below-2%-GDP range without falling into recession. It never has.

Other indicators do show gathering weakness. Retail profits aren't good at all, consumer confidence has dropped most significantly recently among the households with money, which would suggest less spending there, and the lower purchase money mortgage apps do suggest that these households are beginning to bow out.

My personal belief based on the latest indicators from stores is that there is another range of price increases just flowing through the system for living basics, and that the bottom 60% of consumers will be impacted by those increases quite negatively.

All of this does increase the probability that the Fed will do something stupid, though. Their only chance of goosing the thing enough to drive a quarter or two higher in order to escape the year-before-recession bound is to get those higher-income consumers to spend like drunken sailors.

Next year is an election year, and the Fed won't want to be placed in a position of having to announce QE3 in, say, March.

So everything now waits on Jackson Hole....

If there's no QE3 announcement this week, then I think Mr. Market will proceed to apply more pain than Bernanke can bear.

M_O_M, do you have some insight as to how the Fed makes decisions when they're stuck between a rock and a hard place like this? I don't think the political system, and maybe not the public, is ready to admit that our fiscal problems need to be fixed before monetary policy can do anything useful. I'd guess that Washington is demanding that the Fed do something.

I'm not sure what their institutional priorities really are anymore--they've changed a lot in the last few years.
Neil - DC wants the Fed to wave the magic monetary wand and fix everything, and the Fed wants DC to wave the magic fiscal wand and fix all the things monetary policy can't fix.

I don't think anybody has any insight into this type of decision making at the Fed, because the Fed has never been faced with such a pickle. It's not just the US - it's the European mess also.

If you go by the statements some have made, their prior thinking was that inflation at these levels was a no-no for more buying. But I think they are now intimidated and they might junk their prior reasoning.

Normally what any FOMC would do in such a situation would be to try to split the difference - promise a future activity if such-and-such happens, and then sit. In other words, try to control expectations. But once the Fed gets in the habit of controlling stock prices, all bets are off, and that's the game they are playing now.

I don't think the markets can sell off too far because there is too much money out there. As stocks go down they have to drain some of it off.
I doubt stocks will revisit the 2009 bottom in the next few months. But I think there's a high probability they'll go lower from here, whether or not there is a QE3 announcement this week.
Neil - the economic outlook is so very poor that I think you are correct.

There is a floor on it, though. Not necessarily on commodity prices, but a floor on stocks. There will come a point at which they will be a good buy, and there will be buyers.
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