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Thursday, August 11, 2011

Weekly Claims

I believe this. Headline 395K this week, 405K 4-wk moving average.

There's another round of claims coming, but mostly what is happening now is that we seem to be rolling higher-paid jobs out and lower-paid jobs in.

Because of the funding problems at the state and local government levels and pending cuts in some service industries, these are pretty well doomed to tick up again. But right now we are through one bulge, auto production is okay (although final sales trends may still be degenerating), and we will have to live through a pretty tight winter.

As we move through into next year, lower mortgage rates and time should help home sales. This will boost the economy a little. If we do not continue the FICA tax cut (and we shouldn't) it will take some money out of the economy. However lower fuel prices seem likely to put far more back in.

India reported 9.9% inflation, mostly on food. China is sitting at 6.5%. We have a way to go before we can get prices more aligned with incomes and production profit margins.

PS: On policy. First, see Mark's post. The Fed cannot possibly afford to do QE3, because inflation expectations are relatively high. The last a debt-loaded economy needs is higher interest rates, and the fact that interest rates are so discontinuous with inflation expectations is a bad warning in and of itself.

Second, the consumer economy worldwide is teetering, primarily on basic rises in costs:
“You’ve got to stimulate demand growth,” said Indra Nooyi, CEO of Purchase, New York-based PepsiCo, in an interview. “Until we stimulate primary consumption, the cash will continue to sit on the sidelines.”
Yeah, well that's a fine idea, but the ability to continue stimulus operations is highly limited. And you know what? For many companies, demand is going to fall relative to the last six months, because of the collapse of capital markets. That high end 20-25% that Howard Davidowitz was talking about just got a painful kick in the, er, confidence organs:
The biggest one-week plunge in stocks since 2008 followed by the downgrade of the country’s top credit rating may even be unnerving those who are fully employed and earning more than $100,000 a year. Rising concern among such households, which have the wherewithal to spend, poses a risk to a recovery that Federal Reserve policy makers said this week was already advancing “considerably slower” than projected.
Regarding this, and I apologize for the crudity, I can only comment "No Shit, Sherlock". The high-end consumers were carrying retail sales expansions! Now they will be considerably more cautious, which means further impairment of money flows throughout the economy. This points out the perils of following a stimulative strategy which selectively increases the incomes of the top 1/4 while decreasing the incomes of the bottom 3/4, plus impairing the return on investment for companies producing stuff.

The cure for this is to let Mr. Market work his magic and destroy the excesses in the system. It's gonna hurt, but at the end of it prices will settle at a point at which the volume interchange of goods and services can begin to increase again. Prevent the financial system from collapsing. Let investors take losses on their bad investments. That's the only cure now, and it is a sure and certain cure.

Also, central banks have effectively run out of the ability to use monetary infilling to support price structures. The Fed's QE2 was 600 billion over six months. Now let's look at the retraction of money into Other Deposits in the US - here's the last graph again:

If you look at that graph, Mr. Market has sterilized over half of that money in a few short months. The beatings will continue until morale improves, and morale will improve from the bottom up this time.

In its own way, the Fed has become a Communist Party-like structure attempting to fix prices and control markets. This is working just as well for us as it did for the Soviets and the Communist Chinese era. Planned economies don't work because they are inherently brutally inefficient economies. It is not the name of the thing that counts, but the nature of the thing.

Comments:
Great post MOM, thanks for that. I have nothing to add.
 
Who says planned economies don't work?
 
You expect anything other than central planning from "'progressives", who are always the smartest people in the room? Hayek, not Keynes was the humble one, and the macroeconomic clerisy is overwhelmingly Keynesian in this respect. Just read some of Ken Rogoff's recent interviews/writings if you want some very fresh examples. Or as you do. Mom, dissect the rationale of Bernanke as FR chair.
 
So the Fed is implying QE3 in our future and the two political parties have boiled down to diametrically opposed policies. The policies espoused by each would mean 40 years in the desert for the other party, so neither one can compromise on anything. Neither party is likely to win big enough in 2012 to have everything its own way, so nothing meaningful is going to change regarding entitlements or taxes for 3 years, minimum.

The four horsemen are approaching, and they're on auto-pilot.
 
MOM,

"The Fed cannot possibly afford to do QE3, because inflation expectations are relatively high."

That's pretty much how I see it. I believe Bernanke is going to surprise a lot of risk investors at some point.

He simply cannot afford to risk letting the 1970s inflationary genie spiral out of the bottle. We wouldn't have a cork big enough to contain the gusher.
 
If I may play devil's advocate here, hasn't the Fed made pretty clear that they are happy to shovel money into the system if they detect deflation? Haven't they stated that declines in the stock market and home prices are deflationary? And haven't they also repeatedly said that commodity price increases are not their fault, nor their concern?

I don't know for sure that what they say is really what they think, but it seems to me that when oil and metals break down, QE3 is likely to follow.
 
Neil - there were three dissenters on the wording change in the last FOMC vote.

Plosser, Kocherlakota and Fisher. These three certainly would vote against QE3.

Not only that, but look at the action today. Home prices aren't really dropping, except of course in relatiionship to the cost of a hamburger or a gallon of gas.

On Treasuries, we saw the rebellion on the long end today.

Labor productivity is down - the Fed did succeed in driving some wage gains. They honestly don't have room for QE3. I believe they might lose a few more when it comes down to it.
 
M_O_M, I hope you're right. I'd love to see some sanity from the Fed. Three dissenters seems like a thin reed, though, when Bernanke is out this week talking the dollar down.

For what it's worth, I'm not making any bets either way.
 
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