Stuck on the Zero Bound and Dissent

So, the FOMC spoke and its statement more or less conveys the fact that we are reaching an end game of sorts for Fed policy while voting members are simultaneously beginning to break ranks.

First, the “exceptionally low levels for the federal funds rate at least through mid-2013” language is simply another way of stating that they are stuck at the zero bound.

Some are interpreting this statement as a “bold pledge” that the Fed is prepared to face the weak economic climate and ready to be accommodative for a longer period than many expected.

Nonsense, the Fed is simply stating that the economy is far weaker than they had anticipated and that they are stuck with ZIRP ala BOJ over the last score of years.

This type of sentiment hardly inspires confidence.

Voting against the change in language were three members including Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser a further indication that the Fed hardly has a collected sense of the direction of policy and the outlook for the economy.

Will Bernanke Jump the Shark Tomorrow?

As most business and finance media onlookers gear up for another dose of Fed speak tomorrow with particular interest in the Feds response to the current debt downgrade, now might be a good time to weigh the potential that Bernanke’s Fed might craft policy language that effectively conveys a sense of their ineffectiveness resulting in a loss of credibility and confidence.

Given the fact that the Fed has pulled out all the stops over the last few years implementing QE1 and QE2 as well as a vast series of extraordinary measures (principal repayment treasury purchase program, discount window lending, commercial paper lending facility, etc. etc.) , it would seem that any additional unconventional policy action geared toward propping the flagging economy or mitigating the debt downgrade may start to look desperate and futile.

Will the Fed push policy action one step too far?

Are we on the verge of a Japanese-style moment whereby the majority of participants clearly recognize that the problems we face are bigger than the Fed and its cockamamie policy tools?

Fake It Till You Make It Fed Policy

Listening to Bernanke over the last two days it should be clear that the Fed is going to go for another round of quantitative easing.

While the evidence for the next round of QE was only slight when I first noted Federal Reserve Bank of Atlanta Dennis P. Lockhart’s “posture of flexibility” position back in March, the potential became a near certainty by May with the oil spike, reemergence of the European debt crisis, the debt ceiling uncertainty and most importantly the double dip for the U.S. housing market.

As these and other issues work to shake confidence, it’s easy to see that the Fed will simply continue to work to bolster confidence using the only remaining tool it has, namely it’s “balance sheet”.

One way or another the Fed will implement an accommodative policy until it feels the “real” economy is function normally and can withstand shocks on its own.

The problem is though, there is nothing normal about an economy with a central bank lording over it just waiting for signs of failure and prepared to pump in liquidity at a moment’s notice…. The Fed is not instilling confidence, it’s creating dependency.

Japan’s “Lost Score” should provide ample evidence that a phony centrally manipulated economy is not the right solution to our economic problems.

What would be best for the economy now (and all along since 2008) is for the Fed to let the economy go and for all participants to face reality head on regardless of the recognized losses.

If hard times and recession comes as a result, so be it.

Mid-Cycle Meltdown?: Jobless Claims February 19 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims remained unchanged at 627,000 from last week’s revised 627,000 claims while “continued” claims surged 170,000 resulting in an “insured” unemployment rate of 3.7%.

It’s important to note that although the last several reports have indicated a slight decrease in the seasonally adjusted initial jobless claims, the non-seasonally adjusted numbers are showing very large increases.

The following chart shows the recent trend in initial non-seasonally adjusted initial jobless claims with the year-over-year percent change acting as a rough equivalent of a seasonally adjustment.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

I have added a chart to the lineup which shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

NOTE: The charts below plot a “monthly” average NOT a 4 week moving average so the latest monthly results should be considered preliminary until the complete monthly results are settled by the fourth week of each following month.

As you can see, acceleration to claims generally precedes recessions.


Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).


In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a “flattening” period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the “mid-cycle slowdown” where for various reasons growth has generally slowed but then resumed with even stronger growth.

Until late 2007, one could make the case (as Fed chief Ben Bernanke surly did) that we were again experiencing simply a mid-cycle slowdown but now those hopes are long gone.

Adding a little more data shows that in the early 2000s we experienced a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing “initial” and “continued” unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

The most notable feature of the post-“dot com” recession era that is, unlike other recent post-recession eras, job growth has been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

It is now completely clear that the potential “mid-cycle” slowdown that appeared to be shaping up in late 2007, had been traded for a less severe downturn in the aftermath of the “dot-com” recession, and now has we have fully entered, instead, a mid-cycle meltdown.

On The Stamp: Food Stamp Participation November 2008

As a logical consequence of the prolonged economic downturn it appears that participation in the federal food stamp program is on the rise.

In fact, household participation has been climbing so steadily that it has surpassed the last peak set as a result of the immediate fallout following hurricane Katrina.

The latest data released by the Department of Agriculture shows that, on a year-over-year basis, household participation has increased a whopping 14.37% while individual participation, as a ratio of the overall population, has increased 12.88%.

November’s numbers had shown a slight decline for both household and individual participation from September as a result of declining temporary relief for hurricane effected regions.

However, participation is still climbing dramatically, likely as a result of the recent jump in total unemployment, driving the nominal benefit costs up 28.75% on a year-over-year basis to $3,561,667,207 for the month.

Looking at the last chart that plots the total unemployment rate (unemployment rate of all traditionally unemployed workers plus all marginally attached and part time workers) and the population adjusted individual program participation rate normalized since 2005, one can plainly see that program participation would be expected to continue its surge.

Bernanke’s Nightmare: Commercial Paper December 31 2008

This post is a follow up and further elaboration showing the current and historical values for some key interest rates.

These interest rates are for short term (30 day) commercial paper that is typically issued by corporations to “raise needed cash for current transactions”.

A key in reading these rates is to recognize that the AA non-financial is more highly rated than A2/P2 non-financial and that, in general, the AA non-financial tends to track the Federal Reserve’s target rate while the others typically track slightly higher.

Normally, the spread between the weakest quality paper (A2/P2 non-financial) and the highest (AA non-financial) is 15-20 basis points but as of the latest Fed posting, the spread has remained dramatically elevated at 615 basis points… truly a worrying sign.

The first chart shows the spread between the A2/P2 and AA non-financial while the lower two charts show the how all the short term commercial paper rates have tracked since 1998 and mid-2007 respectively.

Notice that prior to mid-2007, the Federal Reserve had been able to keep these rates fairly tight and in-line with the target rate but now we are seeing significant trouble.

In as sense, the current crisis has effectively erased all the rate cuts Bernanke has made this cycle and even added roughly another 100 basis points.

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings December 2008

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing dramatic new lows and continued evidence that the new home market is experiencing a prolonged bout of depression.

Each component of the NAHB housing market index remain WELL BELOW the worst levels ever seen in the over 20 years the data has been being compiled strongly suggesting that the current severe contraction has surpassed all other events seen in the last 22 years and is now firmly in uncharted territory.

Bernanke’s Nightmare: Commercial Paper December 01 2008

This post is a follow up and further elaboration showing the current and historical values for some key interest rates.

These interest rates are for short term (30 day) commercial paper that is typically issued by corporations to “raise needed cash for current transactions”.

A key in reading these rates is to recognize that the AA non-financial is more highly rated than A2/P2 non-financial and that, in general, the AA non-financial tends to track the Federal Reserve’s target rate while the others typically track slightly higher.

Normally, the spread between the weakest quality paper (A2/P2 non-financial) and the highest (AA non-financial) is 15-20 basis points but as of the latest Fed posting, the spread has remained dramatically elevated at 586 basis points… truly a worrying sign.

The first chart shows the spread between the A2/P2 and AA non-financial while the lower two charts show the how all the short term commercial paper rates have tracked since 1998 and mid-2007 respectively.

Notice that prior to mid-2007, the Federal Reserve had been able to keep these rates fairly tight and in-line with the target rate but now we are seeing significant trouble.

In as sense, the current crisis has effectively erased all the rate cuts Bernanke has made this cycle and even added another 90 basis points.

Bernanke’s Nightmare: Commercial Paper October 30 2008

This post is a follow up and further elaboration showing the current and historical values for some key interest rates.

These interest rates are for short term (30 day) commercial paper that is typically issued by corporations to “raise needed cash for current transactions”.

A key in reading these rates is to recognize that the AA non-financial is more highly rated than A2/P2 non-financial and that, in general, the AA non-financial tends to track the Federal Reserve’s target rate while the others typically track slightly higher.

Normally, the spread between the weakest quality paper (A2/P2 non-financial) and the highest (AA non-financial) is 15-20 basis points but as of the latest Fed posting, the spread has expanded dramatically to 438 basis points… truly a worrying sign.

The first chart shows the spread between the A2/P2 and AA non-financial while the lower two charts show the how all the short term commercial paper rates have tracked since 1998 and mid-2007 respectively.

Notice that prior to mid-2007, the Federal Reserve had been able to keep these rates fairly tight and in-line with the target rate but now we are seeing significant trouble with the spread now standing at a 472 basis points.

In as sense, the current crisis has effectively erased all the rate cuts Bernanke has made this cycle and even added another 75 basis points.

Question(s) of The Day - Paulson and Bernanke Flawed Characters?

Will Bernanke and Paulson eventually both be judged by history to be tragically flawed characters?

Bernanke… Expert on the Great Depression… possibly too much so?

Paulson… Wall Street insider… possibly too much so?

Question(s) of The Day - Are Rate Spreads Correct?

Is it possible that the LIBOR rate, TED and Commercial Paper spreads are simply telling us that, prior to this momentous unwind, rate spreads were just too low?

What makes the Fed think it can bully the market into taking on significant risk for just 15 – 30 basis points over its target rate?

The Almost Daily 2¢ - Epic Irony

By now most of you have likely already either perused the mega-bailout bill or some summarizations of its features so I won’t dwell endlessly on each individual feature but rather draw your attention to a few points of interest in the bigger, more ironic picture.

First, the “Purpose” of the proposed bill (soon to be law) sets out goals that, aside from being couched in foolish election-season populist language, declares an intention that is both pious and purposefully deceitful.

The purposes of this Act are—

(A) protects home values, college funds, retirement accounts, and life savings;
(B) preserves homeownership and promotes jobs and economic growth;
(C) maximizes overall returns to the taxpayers of the United States; and
(D) provides public accountability for the exercise of such authority.

The elites clearly take us for fools … perhaps rightly so, though I have to imagine that there is at least a small contingent among us who can see the irony, albeit subtle, in the notion of the largest taxpayer funded financial crisis bailout in human history “maximizing returns to the taxpayer”, “promoting job growth” and “preserving homeownership”.

Further irony, how about that 11th hour phone call to Warren Buffett by Congressional negotiators in desperate need of a confidence boost and reassurance that bailing out Wall Street is the right thing to do… a truly epic embarrassment.

Even further still, Senator John Kerry inadvertently hit on a great point of irony too when he suggested that ”[Voters] don’t want a bailout of Wall Street and neither do we. What we are talking about is not losing 3 million jobs in a matter of weeks.”

Yet, we have been watching unemployment simply skyrocket for eight straight months now and it will continue to skyrocket precisely for the reason that those being bailed out don’t feel even the slightest twinge of remorse about throwing workers overboard in order to maximize shareholder value.

All the more reason a taxpayer-funded bailout of private institutions is a clear perversion of our economic system.

Yet the most significant irony of all might be what happens in November.

I generally steer clear of direct political statements preferring instead to simply spur along some form of action whatever it may be and so today I ask just one thing.

Keep all of these foolish dealings fresh in your mind when you enter the voting booth … don’t vote for the incumbent and if you can’t get yourself to pull the lever for a party you oppose, simply leave the space blank.

The only way to get some balance back in the system is for tainted elitist and lazy career politicians to be sent packing.

GDP Report: Q2 2008 (Final)

Today, the Bureau of Economic Analysis (BEA) released their third and final installment of the Q2 2008 GDP report showing better than expected growth at an annual rate of 2.8%.

Looking at the report more closely though it appears that much of the growth was fueled by unusually large increases in exports, unusually large decrease in imports (inverse… declining exports adds to GDP), an unusually large increase in disposable personal income (likely fueled by the tax rebate checks) and fairly strong government consumption expenditures.

Still, fixed investment, both residential and non-residential continued to come under pressure with residential investment declining 13.3% and non-residential experiencing only tepid growth of 2.8% weighed down by a 5.0% decline in equipment and software.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

The Almost Daily 2¢ - Bernanke’s Nightmare

This post is a follow up and further elaboration on last week’s grim Federal Reserve chart showing the current and historical values for some key interest rates.

I’m going to add this to the rotation of recurring posts as I think it very clearly captures the trouble that the central bank has had in controlling interest rates since mid-2007.

These interest rates are for short term (30 day) commercial paper that is typically issued by corporations to “raise needed cash for current transactions”.

A key in reading these rates is to recognize that the AA non-financial is more highly rated than A2/P2 non-financial and that, in general, the AA non-financial tends to track the Federal Reserve’s target rate while the others typically track slightly higher.

Normally, the spread between the weakest quality paper (A2/P2 non-financial) and the highest (AA non-financial) is 15-20 basis points but as of the latest Fed posting, the spread has expanded dramatically to 409 basis points… truly a worrying sign.

The first chart shows the spread between the A2/P2 and AA non-financial while the lower two charts show the how all the short term commercial paper rates have tracked since 1998 and mid-2007 respectively.

Notice that prior to mid-2007, the Federal Reserve had been able to keep these rates fairly tight and in-line with the target rate but now we are seeing significant trouble.

In as sense, the current crisis has effectively erased all the rate cuts Bernanke has made this cycle and even added another 75 basis points.

The Almost Daily 2¢ - The Greenspan-Bernanke-Paulson Wreck

Make no mistake, today’s stock market plunge was as much the result of the bailouts of Bear Stearns, Fannie Mae and Freddie Mac as the absence of a bailout for Lehman Brothers and now for AIG.

Further, just as Bernanke-Paulson grossly underestimated the severity of the housing decline, their immediate socialization of the initial losses should unequivocally confirm their total lack of understanding of the depth and breadth of this crisis with behemoth disasters continuing to fall like dominos.

The bailouts that were nearly immediately doomed to irrelevance in terms of prevention will now wreak havoc on average Americans for decades to come.

Given our current circumstances, can everyone plainly see the absurdity of bailing out Bear Sterns in order to prevent the dreaded ripple effects?

It should come as no surprise, though I suppose with some irony, that a nearly two decade run of “Easy Al” monetary policy would give way to crisis and to even more irresponsible and unethical Federal Reserve mismanagement of our economic system.

It should be perfectly obvious to all that both Bernanke and Paulson need to resign immediately in order provide even the slimmest possibility for their replacements to implement measured, effective and fair policy.

Conspicuous Correlation: Retail Sales August 2008

Today, the U.S. Census Bureau released its latest nominal read of retail sales showing a decline of 0.3% from July 2008 and 1.6% increase above august 2007 on an aggregate of all items including food, fuel and healthcare services.

Discretionary retail sales including home furnishings, home garden and building materials, consumer electronics and department store sales, on the other hand, experienced another decline falling 2.41% compared to August 2007.

Further, adjusted for inflation, “real” discretionary retail sales declined 8.26% since August 2007.


On a “nominal” basis, there appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.

The following charts show the initial analysis plotting the year-over-year change to an aggregate series consisting of the primary discretionary retail sales categories that I termed the “discretionary” retail sales series and the year-over-year change to the S&P/Case-Shiller Composite home price index since 1993 and since 2000.


As you can see there was, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.

One problem with this initial analysis is that both retail sales and the S&P/Case-Shiller Composite index are reported in “nominal” (i.e. non-inflation adjusted) terms and thus result in a somewhat skewed view especially for the retail sales data.

In fact, the year-over-year change to “nominal” discretionary retail sales has been positive for seven of the last eight months while the year-over-year change to “real” discretionary retail sales has been negative for twelve straight months (see the following chart).

The key point here is that although inflation (as reported by the CPI) has been relatively stable in recent years it is always a factor and in light of the latest surprise increases to the CPI results as well as many anecdotal reports of producers now passing through increasing energy prices to the consumer, it’s important to adjust retail sales (and home values) in order to fully understand its direction.

As you can see from the above charts (click for larger version), adjusted for inflation (CPI for retail sales, CPI less shelter for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.

The Almost Daily 2¢ - Twin Peaks?

Subtitle: Bounce or Bust?

The S&P 500 bounced sharply off of the 1215 level on the euphoric but shortsighted notion that Fannie and Freddie had been successfully bailed out of their current predicament.

Of course, the GSEs are no better off now than before the latest panic but Paulson and Bernanke appear to have succeeded in, at least temporarily, restoring a measure of confidence and stemming the tide of anxiety and dread.

So the question is … Are we headed back up to the 200 day simple moving average or will the rally fail prematurely as the news-flow further illustrates the ongoing and worsening effects of the recession?

My take is that stemming panic will always lead to a continuation and even an amplification of panic in the future. … This is merely a postponement of the inevitable and is possibly even teeing it up for a larger crisis.

There were REAL reasons to panic about both Bear Stearns and Fannie Freddie … the economic deterioration continues and these institutions are, in fact, essentially insolvent.

Postponing a full recognition of that fact does nothing to address the actual problems at hand.

There are a host of very interesting technical similarities (which are noted below) that indicates that we have fully entered into another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.

It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs yielding a clear downward trend.

At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.

Notice also, that I’ve added both the “effective” federal funds rate (light grey line) and an overlay indicating the period of the last recession.

As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.00% in the trough.

It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.


THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

Although the recent, highly optimistic, Wall Street rally appeared strong, it’s collapse indicates that the prospects of a protracted bear market selloff is very real especially given the steady flow of poor macroeconomic, housing, consumer, retail sales and employment data that will continue to flow throughout 2008.