Initial Jobless Claims were expected to post a 505,000 level today…the number we actually got is 542,000. Continuing Claims were also released at higher levels than expected. The Philadelphia Fed Index for the second month in a row posted a very negative number. This index tracks manufacturing trends in the Philadelphia Federal Reserve District. This is a diffusion index so any number below 0 indicates contraction, conversely any number above 0 indicates expansion. Last month this index posted a very disappointing number…it did the same this month. The survey expected the Philly Fed to post a -35 but we actually got a -39.
Treasuries are running like a greyhound this morning pushing yields lower across the length of the curve. Starting on the short end of the curve you’ve got a one-month bill yielding 3 basis points, If you don’t like that you could stretch out and get a 1.00% yield on the current two year Treasury, and if that doesn’t float your boat you can score a whopping 3.20% on a 10-year Treasury.
Oil is down over $3.00 today and is teetering on the $50 mark. It has traded with a $49 handle today.
JP Morgan is quoted in an article this morning forecasting Fed Funds at ZERO in the next few months. I’ve attached the article and inserted it at the bottom of this e-mail for reference.
Today GMAC joins the list of “people that make bad decisions that then apply to become a bank holding company and probably will get permission to do so”. They applied this morning. Additionally word JUST ran across the screen from Senator Bond that a bipartisan group has agreed on an aid plan for the automakers…watch for this to develop.
After thinking about how wrong the Fed and Treasury have been since this meltdown began I went back to the summer of 2007 and pulled a few quotes from them that capture their outlook at the time. Our view at the time was much more negative than theirs and it seemed like they were doing more cheerleading than analyzing. So below are some quotes from both of them, followed by graphs of several key economic data that show what actually happened.
From the FOMC statement in August of 2007:
“Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.” 10 days later they changed their mind and cut the discount rate in an intermeeting cut and changed their outlook to “downside risk to growth”.
From the US Treasury economic update for August 2007:
“The U.S. economy and the job market are healthy, with sustained job growth, low unemployment, and rising wages. Solid fundamentals will support continued growth in household spending and business investment." Assistant Secretary Phillip Swagel, August 3, 2007
Since that time:
-Initial Jobless Claims have risen 67%
-GDP growth is down 105%
-Philly Fed Index is down 624%
-New Home Sales are down 40%
-the yield on the 5 year Treasury is down 122 bps
It does not comfort me that these are the same people that are making the decisions on spending Federal money that will decide how much my taxes will go up.
I got to thinking about this recently and I came to two potential solutions. Option 1 is I become a pirate…I hear there is good money to be made, plenty of opportunity, and apparently very little risk involved.
Second is that I stay here, pay a lot more in taxes but I petition the government to even the playing field. If the government wants to raise my taxes and use that money to keep paying a guy in Detroit $80/hr to install tail lights on SUV’s, and to pay for a subprime borrower on the coast to keep his house, then I think I should get some benefit from that. After all, why should my standard of living drop so that the irresponsible party can keep their standard of living? I propose that everyone that has their taxes go up because of this debacle gets assigned an autoworker and a subprime borrower. Each year the autoworker that gets my taxes has to drive me to the coast for a month while I vacation in the house of the subprime borrower that got the other part of my tax increase. The subprime guy will essentially be running a bed and breakfast type operation while I’m there…cooking…cleaning the room…basic hotel stuff. If either of these parties get tired of the arrangement they can agree to send back my taxes and I’ll go away. I see this plan as more fair than the current direction we seem to be heading.
I’ve attached below graphs of some of the key economic indicators that I discussed above.
If you have any questions on this material just let me know.
Below is an article from Bloomberg this morning that quotes JP Morgan as saying the Fed will likely take Fed Funds to zero very shortly.
Nov. 20 (Bloomberg) -- The U.S. Federal Reserve will probably cut interest rates to zero percent over the next two months to staunch deflation, according to JPMorgan Chase & Co.
The Fed will lower borrowing costs by 50 basis points at each of the next two policy meetings on Dec. 16 and Jan. 28, JPMorgan economist Michael Feroli wrote in a note to investors yesterday. The central bank will hold rates at zero for the rest of 2009 to prevent prices from spiraling down as companies cut jobs and banks reduce lending, stifling spending, Feroli said.
The Fed may not be the only central bank to begin offering free money to jolt life into their recessionary economies and keep prices rising as the 15-month credit crisis deepens. The Bank of Japan cut its benchmark rate to 0.3 percent last month, and the European Central Bank has signaled it's ready to lower rates further after two reductions in the past six weeks.
U.S. consumer prices plunged 1 percent last month, the most since Labor Department records began in 1947, the government said yesterday. Some Fed members indicated a willingness to cut rates to spur growth and keep prices from falling, according to minutes from the last Federal Open Market Committee meeting that were released hours after the price report.
``Taking the target rate to zero percent would not be costless for the Fed,'' Feroli said. Public confidence may drop ``if there is a perception that the Fed has `run out of ammo.'''
Fed officials cut their forecasts for inflation and growth at the Oct. 28-29 meeting. Some members saw a risk that the inflation rate will fall below the Fed's objective of ``price stability.''
Feroli said cutting the key rate to zero from the current 1 percent wouldn't exhaust the central bank's tools. The Fed could become ``more aggressive'' by purchasing the debt of Fannie Mae, Freddie Mac and other government-chartered mortgage financing companies, Feroli said.
``The path of least resistance may be for the Fed to first communicate to the markets that the nature of the current economic woes should keep rates low for an extended period,'' Feroli said.
To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net
Last Updated: November 19, 2008 22:35 EST
Posts
No comments:
Post a Comment