Market Geeks and Gold

Gold at $1,127 an ounce?

Technical analysts predict there is more juice in the gold rally.

Technicians focus investment decisions on psychology and pure supply and demand considerations. Since they look at chart patterns, they are often called "chartists."

Three Imbalances Threaten Long-Term Economic Stability

 You can may have read the following commentary in the Wichita Eagle(3/25/2010):

The Economic Recovery

We are emerging from a financial and economic crisis of historic dimensions. Unemployment reached levels not seen since 1982. America suffered the largest falls in industrial output and housing starts since the "Roosevelt Recession" of 1937-38


However deep the recession, the recovery is well under way. A long list of indicators hit bottom last year and are rising: auto sales (February), durable goods orders (March), real retail sales (April), housing starts (April), and industrial production (June). The fall in global industrial production ended in March as did world trade's in May.

Most economists are sanguine about the long term but judge the current recovery to be fragile and weak. The consensus is wrong. This recovery is solid and broad-based.

Emerging economies (particularly Brazil, China and India) are leading a worldwide expansion. America's longer-term prospects are the real worry.

The Reckoning

Three major imbalances threaten the country's long-run economic stability and prosperity. We went into this crisis with a trade deficit equal to 5 percent of GDP and savings rates near zero. Government deficits equaled 1.2 percent of GDP when unemployment was still only at 4.6 percent. We could finance these imbalances only because the rest of the world was willing to lend us trillions of dollars. That dependence is neither in our long-term economic nor geopolitical interests.


This overdependence on foreign credit led to massive misallocations of America's resources. The housing bubble grew from 2003 and peaked in August 2006. Over that time period, home-building sucked an extra $900 billion in real resources away from the rest of the economy.


Finance and real estate grew to over 20 percent of the economy. Our brightest young graduates found it more attractive to become financial engineers rather than build planes and invent new products. We will be paying for this deadweight loss in higher unemployment and lower economic growth for many years.

The Future

Correcting the imbalances means we must save more and use less of what we produce for ourselves. In other words, Americans face lower living standards


Lower standards of living and a falling dollar will translate into higher domestic prices. If policymakers misinterpret those rising prices and continue to fight structural change with the wrong tools, they will start a vicious policy cycle culminating in the loss of the dollar as the world's reserve currency and unpredictable turmoil.

Where are our policies now? This recession was global and induced a global response. Many nations including America have disinterred the theories of John Maynard Keynes to justify massive government spending programs ("fiscal stimulus") to fight the recent economic recession. Central banks have used the ideas of Keynes' nemesis, Milton Friedman, to justify vanishingly low interest rates ("monetary stimulus") and unprecedented financial market interventions ("quantitative easing") toward the same end. This focus on the short term is crowding out the need for correcting the economy's imbalances. I doubt either Keynes or Friedman would wholly approve of the sins being committed in their names.

And in the Long Run...

What makes a great statesman? Historian J. Rufus Fears found three essential elements. A great statesman clearheadedly identifies and analyzes a major problem. Then he implements a solution that works both in the short run and in the long run. Focusing on the immediate problems of the 1930s, Keynes dismissed "the long run, (when) we are all dead."

Yet in the 1940s, Keynes turned around and engineered a remarkably resilient postwar monetary system. That act of statesmanship produced peace and prosperity for generations. Contrast that with current economic policy, where "in the long run, we are all in the soup."

Read more: http://www.kansas.com/2010/03/25/1240330/three-imbalances-threaten-long.html#ixzz0k344RWCK

You Doubted that We Are in a Recovery? Jobs Up by 162,000 Confirming the Household Uptrend

Confirmation for the Recovery

Mammon Among Friends has been dating the cyclical trough at June, 20010. Skeptics can now finally find confirmation that there is indeed a recovery in the jobs data announced this morning.

The Bureau of Labor Statistics announced, "Nonfarm payroll employment increased by 162,000 in March, and the unemployment rate held at 9.7 percent. Temporary help services and health care continued to add jobs over the month. Employment in federal government also rose, reflecting the hiring of temporary workers for Census 2010. Employment continued to decline in financial activities and in information."

The Household Survey of Employment

I have been following the household data very closely.  While noisy and trend distorted by the Census Bureau's insensitivity to the need for useful time series, the household data do not suffer from the cyclical biases of the payrolls data.

The unemployment rate remained at 9.7 percent in March, below its cyclical high of 10.1 percent in October.  For three months, households have reported large increases in employment after a huge drop in December (During Christmas, retailers did not hire as many workers as the seasonal adjustment process projected.)  Labor force growth has been strong.

Employment increased faster than population again in March.  Common sense dictates that the employment ratio, which hit bottom in December,  should be a long lagging indicator.  Bottoming out six months after the cyclical peak would be consistent with that characterization.

The unemployment rate is now five months past its cyclical high and the employment ratio is three months past its cyclical low.  This reflects the global recovery.

The Economic Recovery

We are emerging from a financial and economic crisis of historic dimensions.  Unemployment reached levels not seen since 1982.  America suffered the largest falls in industrial output and housing starts since the “Roosevelt Recession” of 1937-8.  

However deep the recession, the recovery is well underway.  A long list of indicators hit bottom last year and are rising: auto sales (February), durable goods orders (March), real retail sales (April), housing starts (April), and industrial production (June.)  The fall in global industrial production ended in March as did world trade’s in May.

Wichita

Aircraft orders were up sharply in February according the the Census Bureau for the second straight month.  The BLS payroll data indicated aerospace employment was level for March (it does not break out the detail in its monthly reports.)

Jobs

The Bureau of Labor Statistics released its Monthly Employment Report for February. Reading the tea leaves, we find confirmation that the economic recovery is underway. I stick by the judgment that June, 2009 was the trough.

There was little agreement among economists anticipating the reports. Snow had dampened construction activity and retail sales particularly in the east. The "Consensus" estimates were a drop of 50,000 jobs and a rise in the unemployment rate from 9.7 percent to 9.8 percent. The unemployment rate actually stayed at 9.7 percent and jobs dropped by 36,000.  According to American households, employment increased by more than popul;ation for the second straight month and it looks like the employment population ratio hit bottom in December.

If you strip out auto sales from the BLS's estimate of transportation equipment employment, we find jobs fell by a thousand. This gives us some evidence that aircraft industry jobs are not growing.

Heineken Wants to Be At Least Number Two!

Heineken's buys Femsa's beer unit. The dutch brewer may not be as big as AnheiserBush-InBev, but they know growth is to be found infast-growing emerging markets.

Confidence Down. Stocks Down. Asia Follows.

News galore and look what happened:




Consumer confidence was way down and retailers announced earnings. Not surprisingly, surprises move markets:



Dow Jones Newswires' Puja Rajeev reports that lagging consumer confidence is greeted with gloom in Asian markets:




Meanwhile the gnomes on Barron's MarketWatch discuss a new "Revolution Fund:"

Is Our National Defense As Sound as the Dollar?

In the 1950s, Egypt nationalized the Suez Canal.  Britain and France invaded.  America opposed the invasion.  The Eisenhower administration had no need to sent the marines.  It simply threatened to sell sterling bonds and vetoed IMF support for the pound forcing its devaluation. Pecunia was indeed the nervi belli.  Egypt kept the Canal.  One can picture a British gentleman, a veteran of the colonial wars, muttering over his brandy "I could understand superior arms, but the balance of payments?"

Greece, whose debt is owed in euros, a currency it can not print, is facing a major debt crisis.  While the country itself is an experienced deadbeat (Greece spent half its modern independent existence in default), its debt crisis is is putting great strain on the euro and the euro zone governments. 

Yet Greece's fiscal wantonness is not any worse than that of the U.S., which can print the currency it borrows in.  How secure are we in borrowing and borrowing?  Harvard professor Nigel Ferguson is an insightful student of financial history who knows what he is talking about. He warned in the Financial Times last week (2/10/2010) that "A Greek crisis is coming to America." 

Surveying the wreckage fiscal stimulus has wrought, Ferguson courts all the popularity of a biblical prophet by warning us "What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch."  I might add Keynes himself would agree. 

Ferguson writes, "On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic."

The bond markets may seem rather remote from our national security, but beware. Great empires require sound money and a good credit rating. Constantine's solidus held its value for 700 years and the Roman empire survived another thousand years in the East. Alexander Hamilton correctly viewed Great Britain's ability to borrow funds as essential to its military success as its navy.  America's currency and its debt earned a reputation worthy of trust which we rode to becoming a superpower.

Yet, sadly, neither a sound dollar nor a triple A credit rating seem high on Mr. Obama's national security agenda.   

Sic transit gloria.

Greece and the Fed's Exit Strategy Move Bank Stocks

U.S. banks have $176 million dollar exposure to the sovereign debt of the PIGSs (Portugal, Ireland, Greece, and Spain.)

Michael Corkery in the Wall Street Journal's "Deal Journal" asks, "So just what is the exposure of U.S. banks to debt in these four nations? 'Overall, we believe that the direct risk of the large U.S. banks to Ireland, Greece, Portugal and Spain is modest,' writes Barclays analyst Jonathan Glionna in a research note.


"Barclays analysts estimate the 10 largest U.S. financial institutions have a total of $169 billion of their loans tied up in the four troubled Euro nations. That is about about 19% of those banks’ combined Tier 1 capital, or the cash cushion that banks keep to absorb bad loans. Looking at the combined exposure of the 10 largest banks and the other 63 U.S. banking firms that supply cross border information to the Federal Institutions Examination Council, the total exposure is $176 billion. By country, the overall exposure of those 73 banks is $82 billion to Ireland, $68 billion to Spain, $18 billion to Greece and $9 billion to Portugal."


Alistair Barr reports on the effect of this and the Fed's exit stretegy on Market Watch. 







Speaking of PIGS, the UK's debt is starting to smell of bacon to use Ian Bremmer and Nouriel Roubini's phrase. Sara Schaefer Muñoz reports that British banks have a heavy exposure to UK soverign debt.  What about the Yanks?

Ford is in the Black

Matthew Dolan and Jeff Bennett reported on January 29th in the Wall Street Journal "Ford Posts First Full-Year Profit Since 2005." Ford earned $2.7 billion in 2009. Any number greater than zero is a miracle in Detroit. This despite the fact that Ford is burdened with a much greater debt burden than Chrysler and GM for whom the federal government rolled its bondholders.


The easy interpretation is that is one for capitalism as opposed to socialism.  Any student of the decline of American car making will realize that Detroit's inward focused culture and its willingness to run to Washington when in trouble are better. A deeper analysis shows that Ford, by bringing in an outsider, Alan Mulally, they committed themselves to remedying the root problem: Detroit's culture.