FMX | Connect – www.fmxconnect.com - (Reported 8/26/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
WHILE YOU WERE SLEEPING
Key reads of the day, on the political front, Karl Rove’s op-ed on page A13 of the WSJ is well worth a look (Honey, I Shrank My Approval Ratings). It sent a chill up my spine to see Jimmy Carter on the front page of the FT, but in the current state of weak political leadership, perhaps it was a propos. When I’m asked what would get me excited about the political landscape, to the point of even turning me bullish, it would be something like Mayor Michael Bloomberg announcing his candidacy (likely as an Independent if it were to occur). Now that would get me psyched and when I mention that to others at dinner parties and cocktail receptions you should see their eyes light up. I have no inside information on this and have never met Mr. Bloomberg personally, but heard him speak at a Toronto event a decade ago and that sermon about the financial and economic outlook at that time was a revelation of sorts.
Other must-reads today deal with the Fed — what Bernanke is likely to say tomorrow at Jackson Hole and what policy bullets are left in the chamber — see page B1 of the NYT (Bernanke Expected to Sketch New Fed Action on Economy). And, as if to address that very issue, again in the op-ed section of the WSJ, is former Fed Vice-Chairman Alan Blinder (who also happens to be buddies with Mr. Bernanke) — The Fed is Running Low on Ammo. Of course, save for charging a negative interest on bank reserves or the Fed adding other private sector securities to its cache other than just MBS; it would seem that outside of these radical strategies the policy cupboard is pretty bare.
Finally, it amazes us as to how clued out so many people are over the bond market. I even fielded an email today from a reader demanding a retraction from my comment that bonds are not in a bubble. Maybe the day I stop receiving these letters is the day I will switch my views around. But, I maintain that it is a completely nutty notion that bonds are in some sort of bubble. Where exactly is the excess leverage? Is 73% positive sentiment on Market Vane really overly bullish? There is no sign of speculative interest coming out of the Commitment of Traders report — all the non-commercial accounts have done in recent months is close out their short positions. Oh yes — the investing public. They are ploughing funds into bond funds and since they have no idea what they are doing it must be a bubble. The latest weekly ICI data did indeed show another $7.9 billion net inflow into the fixed-income market and net redemptions of $2.8 billion from equity funds. We can certainly understand how frustrating this must be for the throngs that have been saying for months now that this is a contrary positive development for equities. But in fact, it is a deliberate attempt on the part of households to correct their dramatic fixed-income under-representation in their overall asset mix.
GOLD GLITTERS
A contact of mine was kind enough to send me a copy of a speech that Ben Bernanke delivered on Japanese monetary policy back when he was still teaching economics at Princeton — A Case of Self-Induced Paralysis. Imagine that he gave this speech 11 years ago, and everything he laments in his speech is part and parcel of the U.S. macro and market backdrop today.
In any event, without getting too critical, this is the earliest piece we can find — three years ahead of his famous “What If” speech on November 22, 2002. What really caught our eye — on the same day that gold prices rose another $10 an ounce — was the section on “How to Get Out of a Liquidity Trap”, which we are clearly in considering that record-low mortgage rates have not stopped home sales from cratering to record-low levels. In particular, the subsection that contains one of the solutions to a deflationary debt deleveraging cycle, which is what he was advocating for Japan back then: “Depreciation of the Yen”. Indeed, instead of depreciating, the yen has strengthened 15% since Mr. Bernanke gave that speech, and look where Japan is today. So, it would go without saying that embarking on investment strategies that are inversely correlated with the greenback would seem to make good sense, and the gold price would certainly fit that bill (we should add silver into that mix as well).
A WEAK U.S. DURABLE GOODS REPORT
The headline durable goods new orders came in at +0.3% MoM for July, well below the +3.0% consensus estimate. June was revised up to -0.1% from -1.0%, but orders are still mired below April’s levels (same month the stock market peaked).
BURNING DOWN THE HOUSE
Once again, the consensus was fooled. It was looking for 330k on new home sales for July and instead they sank to a record low of 276k units at an annual rate. And, just to add insult to injury, June was revised down, to 315k from 330k. Just as resales undercut the 2009 depressed low by 15%, new home sales have done so by 19%. Imagine that even with mortgage rates down 100 basis points in the past year to historic lows, not to mention at least eight different government programs to spur homeownership, home sales have undercut the recession lows by double-digits.
POOR IN RICHMOND
We mentioned the Richmond Fed index yesterday but only discussed the five point decline in the manufacturing component. We didn’t discuss the more critical service sector category, which posted a huge drop in revenues to -10 in August from +8 in July — to stand at a six-month low. That is certainly one for the deflation books.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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