Posted by Michael A. Kamperman on March 24, 2010
The economy tanked when home prices collapsed. All of a sudden banks, pension plans, and endowments were sitting on significant mortgage losses. Consumers were sitting on homes that were worth less than their mortgages. Everyone is still sitting and waiting for housing prices to stabilize and turn higher. It looks like we will be waiting for a long period of time. Worse, it looks like housing is poised to take another leg down. Home sales in January and February have been anemic. This despite the extension of the first time home buyers tax credit and the new trade tax credit to encourage those that sold a home to buy another one. Theoe tax credits expire on April 30, which is the date contracts must be signed to qualify. Additionally, the Fed will stop purchasing mortgages at the end of March. The Fed’s models suggest interest rates will rise by less than 1/2% when the Fed exits the market. If we have learned anything it is don’t put too much faith in mathematical models of the economy and the markets. The money simply doesn’t exist to replace the Bank of England and the Federal Reserves nearly $2 trillion in bond purchases over the last year. Interest rates are going up for someone somewhere and available credit is going to dry up for someone somewhere. My thoughts are mortgages rates could rise to well over 6% soon after the Fed exits. If we can’t sell homes with tax credits and low mortgage rates, then we won’t see the housing market turn up when we lose the tax credits and mortgage rates rise. For the record in February new home sales plunged to lowest level since they started keeping records back in the early 1960′s.These
Greece is an early precursor to what will happen when the Fed exits its quantitative easing program. Its been no secret Greece’s economy has been suffering from the global deflationary depression and that Greece had high levels of debt relative to its GDP. So why did the markets all of sudden slam Greek debt and nearly double its interest rates? It looks like the bond market is looking forward to March 31 when the Fed “normalizes” things a little more. Shrewd bond traders are not wanting to get stuck with the hot potato come April. It won’t take long for the Fed to admit it misread the strength of the economic recovery and the health of the bond markets and resume its quantitative easing program.
Now that Healthcare Reform is done, what will the Obama Administration do to aid the housing market, create and save jobs, and place the economy on firm economic ground? My fear is not much will happen. The clues come from how Healthcare Reform was handled. There was a significant emphasis placed on not increasing the deficit. And, part of the costs for increased Medicaid benefits were pushed off on the States that are known to be already broke. Plus, not much thought was given to the inability of some people to be able to afford to pay health insurance premiums. When one in seven mortgages are delinquent it is highly likely there is no available access to cash for many of those who are delinquent. Not to mention how are the 15 million people officially unemployed, and the 15 million not officially unemployed, going to be able to pay these premiums? To fix the housing market its going to take money. To create jobs its going to take money. An administration that is unwilling to ignore the deficit for its signature issue doesn’t look like an Administration that will ignore it for issues it clearly is not as interested in. Without much more help from Washington the outlook for home prices, jobs, and economic growth is not good.
Posted by Michael A. Kamperman on March 13, 2010
President Obama and his economic team have finally stumbled upon the absolutely best economic decision they could make by nominating Janet Yellen, President of the San Francisco Federal Reserve Bank, to the position of Vice-Chair of the Fed. Ms. Yellen would go from currently being a non-voting member of the Fed to a permanent voting member of the Fed’s Open Market Committee that sets interest rate and other Fed policies, like quantitative easing. Ms. Yellen is considered a Dove on monetary policy because she believes the Fed has a dual and equally compelling mandate to target both inflation and unemployment, as in current law. Many though would probably prefer a Hawk who would represent someone who tilts toward inflation as being the ever more pressing concern of the Fed, and therefore considers unemployment conditions as secondary to Fed policy. While unemployment is currently our nation’s number one problem, the best reason to nominate Ms. Yellen is not because she is a Dove. It is because she is not an anachronistic ideologue trapped in a 19th century understanding of the role of money in our society. She is the antithesis to Ron Paul and his “get back on gold and get rid of the Fed” religion.
Importantly, Ms Yellen doesn’t believe that monetary policy should be limited to the zero barrier of interest rate policy. Not many people are willing to loan someone some of their money and then pay them to boot. But Ms Yellen understands that in a deflationary environment the Fed needs to seek ways to use monetary policy to stimulate demand even when interest rates are already set at the barrier of zero. Hence, under the right conditions Ms. Yellen is an advocate of quantitative easing. Well, anyone who doesn’t understand that we are in the midst of the right conditions is either dumb, blind, or lying. If not now, when? The Kansas City School District is on the verge of shuttering almost half of their schools due to a severe lack of funds. Washington can simply send the school districts more money and pay for it by having the Fed buy the Treasuries issued to finance the policy. I don’t know anyone who doesn’t want America’s kids to have the best education in the world. So why is Washington twiddling its thumbs while thousand of Teachers continue to get pink slipped?
While President Obama has made a wise choice, I will with-hold rendering judgement on whether the Whitehouse finally gets it, or whether the Whitehous is simply playing politics and throwing a bone to the Progressive wing of the Democratic Party. You see there are two other vacancies on the Federal Reserve’s Open Market Committee that President Obama and his economic advisers have irresponsibly ignored for the last 14 months. If this is stumbling economic luck for us because of politics, then we will know it when President Obama fails to fill the other two Fed seats soon with people who hold similar views to Ms. Yellen. But if the Whitehouse isn’t buying their own snow job on jobs, then they know they need to find Fed Governor’s that will continue quantitative easing rather than those that prefer to end it like the current voting members of the FOMC. After March the Fed will no longer be in the bond market buying up mortgages primarily backed by U.S. agencies. Someone will step in and buy those mortgages. But will someone else be available to step in and buy whatever those people were buying, like junk bonds or Greek Sovereign debt? The Fed and the Bank of England purchased almost $2 trillion worth of U.S. and U.K. debt in the last year. Where does that money come from when they step aside? They have purchased almost as much as China has in foreign reserves. They have purchased more than twice as much as exists in the world’s largest sovereign wealth funds. The only way to replace all of the money is to use leverage, or to resume quantitative easing. Otherwise the world will spend the next year robbing Peter to pay Paul. Please President Obama, show us you get it and put two more Yellen’s on the Fed.
Posted by Michael A. Kamperman on March 5, 2010
The V-shaped recovery crowd and their allies in the Whitehouse are desperate to see the job growth that they predicted would occur by the first quarter to materialize. Instead, the Labor Department reported the U.S. lost another 36,000 net jobs in February despite counting the hiring of 15,000 Census workers who will be let go this summer. Many analysts are touting that the snow storms actually masked tens of thousands of jobs and in fact we probably created jobs in February. The only problem is the Labor Department itself disputes this analysis. Here is the quote from today’s unemployment report “In order for severe weather conditions to reduce the estimate of payroll employment, employees have to be off for an entire pay period and not be paid for the time missed. About half of all workers in the payroll survey have a 2-week, semi-monthly, or monthly pay period. Workers who received pay for any part of the reference pay period, even one hour, are counted in the February pay- roll employment figures. While some persons may have been off payrolls during the survey reference period, some industries, such as those dealing with cleanup and repair activities, may have added workers.” Also, we must consider that while a company that closed a day for snow couldn’t hire anybody, they also couldn’t fire anybody. The bottom line is we really didn’t create any jobs in February. So don’t fall for Larry Summer’s snow job on snow holding back job creation in February. He needs to be held accountable for why the policies he is championing to restore jobs to the economy aren’t creating any net jobs. Almost everyone believes the minimalist $15 billion jobs bill will only create a minimal amount of jobs. The ADP unemployment report methodology wasn’t impacted by the snow and there numbers for a loss of 22,ooo private sector jobs in February closely corresponds with the official unemployment report from the Department of Labor.
In case you missed it Gallup interviewed over 20,000 people in late January and stated the unemployment and underemployment rate (those working part-time for economic reasons who need a full-time job) was 19.9%. The U-6 rate in February rose back to 16.8%. This is the real unemployment rate. Basically, according to Gallup one in five Americans aged 18 and older who want a full-time job are unable to find one. Additionally, Gallup reported that the unemployed/underemployed spend an average of $48 per day compared to the employed who spend $75 per day. This means the 30 million people without a full-time job are spending $10,000 per year less than those with full-time jobs. This represents a massive drag on consumer spending in the U.S.
It is time for the President to step forward and acknowledge his administration underestimated the severity of the economic downturn and that Washington needs to do much more to find jobs for the unemployed. Yet not only is the Whitehouse not acknowledging that our problems are worse than we initially thought, they are trapped in political spin and are trying to portray today’s loss of jobs as ”better than expected.” It is not better than what was expected only a few weeks ago before the snow. In fact the snow argument only appeared in the last week to mask the weakness in the unemployment report. We will not find jobs for all of the unemployed/underemployed if we continue to deny that the steps taken so far were not enough. President Obama, we need a one trillion dollar jobs bill to jump start the economy. Please quit talking about the need for deficit reduction and please start talking about the need for job creation. Hoover tried to limit deficit spending in 1931 and look where that got us, and him. No economist believes that a combination of both spending cuts and tax increases like those being forced on Greece, and on our States, will lead to job creation. My son goes to The University of Texas. UT has been told by the Texas Governor they have to cut 5% of their budget, which equates to cutting $100 million. America can do better than this. We will find the next FDR in either 2012, 2016, or in 2020. But we would be better off if we found him in the Whitehouse in 2010.
Posted by Michael A. Kamperman on March 1, 2010
This man is now my hero. He is the first highly respected financial commentator to recognize the seriousness of the current debt-induced deflationary depression. At risk to his reputation he has manned-up and called on Ben Bernanke to resume quantitative easing. When it comes to quantitative easing ignorance reigns. Many people have left comments on his column that the way to get out of debt is not to take on more debt. They are confusing borrowing and spending with printing. In the U.S. quantitative easing involves the Federal Reserve creating money out of thin air (printing) and purchasing assets. When the Fed purchases U.S. Treasury bonds with printed money the U.S. debt is reduced, not increased. This gives the federal government the leeway to maintain or increase spending without raising taxes or increasing the national debt. The economy desperately needs support. Increasing federal spending is the only way to stabilize the economy. As Evans-Pritchard points out the state of Illinois is running a $13 billion budget deficit on a total budget of $28 billion. Basically, Illinois needs to double state tax revenues or cut state spending in half. Many other states are in similar dire predicaments. The states cannot print, the Fed can. It must fulfill its duel mandate of price stability and full employment. Likewise, the federal government must fulfill its moral obligation to support the states.
Evans-Pritchard points out “the Fed’s Monetary Multiplier dropped to an all-time low of 0.809 last week.” Money is not circulating as it should. He also points out that “the M3 money supply has fallen at a 5.6pc rate since September.” Additionally, he highlights that ”the contraction of eurozone bank credit to firms accelerated to 2.7pc in January, while eurozone M3 fell by a further €55bn. Japan’s GDP deflator has dropped to a record low of -3pc. He claims “these are epic warning signals, with echoes of 1931. Yet the Fed has just raised the Discount Rate. It is winding up liquidity operations, and preparing to reverse QE, even though the housing market has tipped over again. New home sales fell 11pc in January to 309,000 units, the lowest since data began, and 24pc of mortgages are in negative equity.” He is so right!
Evans-Pritchard quotes the Bank of England’s Head Governor Mervyn King as saying “”I was struck by the mood at the G7, where several of the major economies around the world said quite openly that they were relying on external demand growth to generate growth. That can’t be true of everybody,” he said. We already know Larry Summers is advising President Obama to pursue just such a strategy. He believes we can spend less in America and save more, all the while growing our economy by selling more to others just like China does. As King states we can’t all run an import/export surplus. Meanwhile the British Pound is getting pounded by currency markets limiting the ability of the Bank of England to aggressively print money and revive its economy. It is up to Ben Bernanke and the Federal Reserve to aggressively print more money thereby providing cover to Britain, Japan, and the European Central Bank to pursue their own quantitative easing programs. Fed Vice Chair Donald Kohn retired today. This means President Obama now has three openings on the Fed. His appointments will decide the course the Fed ultimately takes. Hopefully someone in the Whitehouse is pointing out Evans-Pritchard’s comments to him.
