Monday, September 20, 2010

Market Update 9 20 10 _ Night fishing, Policy, and Unintended Consequences

Night fishing, policy makers, and the law of unintended consequences

This weekend I took the family to the lake.  This was a new lake for me, I’d heard a lot about it and now I was ready to enjoy it.  Fishing was my primary goal…I was going to fish until I couldn’t make one more cast.  I’d go out three or four times each day.  The last trip of the day was always the most peaceful, it was made after the kids were down for the night and the lake was empty and dark.  I’d slip away from the dock around 10 PM and I’d just go find a place to fish, kill the motor, and enjoy the absolute solitude of fishing under the stars.

This time of year the nights are getting cool so there really aren’t many bugs to contend with.  Pickwick Lake is a deep and picturesque river-lake that is surrounded by the high forested hills and rocky cliff faces of Tennessee, Mississippi, and Alabama.  I stood on the casting deck of my boat alone in the cool night air, bathed in the light of a full moon, gently bobbing on the smooth blue-black surface of this deep lake, and I was in awe of the stars set against the crest line of the hills that surrounded me.  Cast after cast I made toward the bank.  My goal of relaxing was slowly but surely materializing.  Each cast washed away a bit of stress...I was no longer thinking about work, the house, the yard, the FDIC, the Fed, nothing.  About the time I was hitting my rhythm with the casts I noticed something out of the corner of my eye in the silvery moon-lit darkness to my right.  I looked over and it was a BAT coming straight at my face!

Well it seems that the aforementioned “lack of bugs” this time of year that I find so pleasing is a sign that other things are happening as well. Each time I cast I take a small lure on the end of my line and I whip it behind me and then launch it through the air as far as I can.  I then retrieve it and do this all over again.  To me it’s a fun and relaxing thing.  To a bat that isn’t getting enough to eat it looks a whole lot like an easy meal…and this chow bell was ringing loud and often.

 That bat dive-bombed my head until I quit fishing.  I had to put the pole down and go somewhere else.  I don’t know that it takes a lot in the way of explaining to relay to you how un-nerving it is to have a huge bat dive-bombing your face at midnight…under a full moon…when you’re out in the middle of nowhere.  I don’t mind bats in general…I spend a lot of time outdoors and they don’t bother me in the slightest.  However…this was the first time I’ve had a huge bat dive so close to my head that I could hear his wings beating the air in rapid fire style.  Up until that point I’d never considered how fast their wings move…let me tell you it’s quick.  This might be one of those few times when it’s a good thing that there is nobody around for miles to hear you scream as I have an image to uphold.

My perfect plan for relaxation ran smack into the law of unintended consequences.  My casting lures at night signaled to the bat that there was food near my head…big easy to catch food and it wasn’t leaving until it got some. 

Monetary and fiscal policy in uncharted waters

This morning I was reliving my trip and I realized that there are some similarities between night fishing on a new lake and conducting monetary and fiscal policy in this environment.  Night fishing a new lake is a difficult proposition.  You are in unfamiliar waters, you can’t see any of the navigation aids, you can’t see the shore, nor any hazards that may lie in front of you, you are almost blind…so you have to slow down and do things in a more cautious manner.  Even then…when you know you need to exercise more caution things can still go wrong…and they may not be the things that were on your list of potential problems. 

My list of concerns for fishing were short but serious and included other boats running without navigation lights, an unforeseen obstacle in the dark water, and being unable to see the shoreline as I approach to cast.  It was a short but manageable list and I had a plan to deal with each of these.  The unintended consequence that I simply did not anticipate was that my lure would show up to echo-locating bats as a big fat juicy meal at a time when such things were lacking.  Despite all of my planning and risk management steps my own actions ultimately caused the majority of my problems. 

Those conducting monetary and fiscal policy are night fishing right now.  The economy is in uncharted waters, there are plenty of hazards to worry about, policy makers have to move cautiously, and the actions they take will carry consequences to places beyond the immediately obvious.

There is no shortage of problems to contend with in our current lackluster economy; high unemployment, a terrible housing market, a highly leveraged consumer, state governments beginning to run into trouble, GSE’s that are still bleeding money, and the list goes on.  Many of these problems do not have easy solutions.  We’ve spent a lot of money thus far trying to fix these problems…but to date we’ve not seen much progress.  Thus is the nature of the beast in a massive deleveraging process. The consumer has spent years worth of future earnings…now they have to try to pay it back in a time when their income is declining or disappearing.  This will take some time to right itself. 

In the absence of consumer spending (which has historically been 2/3’s of GDP) we get a more inefficient replacement in the form of government spending.  There has been no shortage of this type of spending.  This money has been thrown far and wide in an effort to stimulate the economy.  We’ve had the first time home buyers program (twice), the cash for clunkers program, several extensions of unemployment benefits…you name it…we’ve spent it. 

As I see the government casting money out this-way-and-that, I can’t help but wonder…where is the bat?  Where is the unintended consequence of our actions?  I could come up with a whole list of potential issues...but in the end the problem may come out of nowhere as suddenly as my echo-locating friend on the lake.  Until then I guess we’ll keep casting.

 

Thursday, September 2, 2010

FW: Market Update 9 2 10 _ What do a coal miner and the economy have in common?

I was reading the news about the Chilean miners that are trapped 2,500 feet below the surface of the earth and I realized that there is a corollary for our economy in the making here.  There are tremendous difficulties associated with their rescue and many had written them off for dead at the outset.  Now however, there appears to be some hope.  They can communicate with the men, they can get food down to them, and eventually they should be able to drill a hole large enough to rescue them from their dire predicament.  It’s going to take a long time, a lot of money, and a great deal of emotional and physical difficulty but it’s possible for them to come out of this alive.  That is truly great news and they’ll probably all get big movie contracts after they get rescued.  I figure if Hollywood can make a movie with nothing more for a story than Tom Hanks, a raft, and a volley-ball then this miner story should be a slam dunk.  

There is one man in the bunch though that serves as an interesting corollary to our economic predicament.  Yonni Barrios is one of the men who is stuck underground in Chile.  By all reported measures he is a hero to his teammates as he has delivered first aid, provided flu shots and more importantly provided leadership in a time of great uncertainty.  Much like the economy Yonni’s future looked to have some dark times coming as he was buried 2,500 feet below the surface a few weeks ago.  As the world rallied around them, and great steps were taken to effect their rescue the clouds hovering over their future lightened in color and the worst of the threats seemed to pass.  The future of these miners is heading toward a very happy ending at this point…except for Yonni’s.

Yonni’s problem (much like the problems our economy faces) is that while he might escape the worst potential outcome…he still has some very serious problems to deal with once he gets passed the immediate threat.  You see…Yonni’s problem is that while he was trapped under the earth fighting for his life…his wife bumped into his girlfriend at a vigil being held half a mile above him.  Yep…I’ll let that sink in for a minute.  Picture the scene…a candle light vigil in the barren wind-swept foothills on a cool Chilean evening…a very somber yet hopeful energy fills the air.  His wife was calling his name aloud…and then she heard someone else calling his name aloud…they sought each other out and I can only imagine how the conversation unfolded from there.  If it were my wife I imagine they’d have to restrain her to keep her from plugging the air hole they had drilled for me.

I don’t know if anyone has alerted Yonni to what awaits him on the surface when they get him out in December…maybe they avoided the topic to keep his spirits up…but he runs the real (and ironic) risk of rescuers pulling him up from 2,500 feet only to have his wife put him back 6 feet under when he gets there.

The FOMC, the economy, and Yonni’s girlfriend

The Fed has been dealing with a situation that is conceptually similar to Yonni’s.  The economy appears to be headed in a direction with fewer dark clouds hanging over it…but there remain significant obstacles to getting things back to normal.

The FOMC minutes showed that while the Fed believes we’re not faced with the threat of imminent deflation or inflation there remain significant obstacles as we move forward.  Unemployment, housing, and consumer spending are essentially like Yonni’s girlfriend…they represent significant obstacles to things getting back to “normal”.  So while we might have avoided the worst of the danger we’re far from being out of the woods (or copper mine for that matter).

Initial Jobless Claims were released this morning at 472,000 vs. a 475,000 expectation…very much in line.  Continuing Claims achieved similar results posting 4.456 million vs. an expectation of 4.45 million.  Continuing the recent trend both numbers had prior month revisions that took last month’s numbers to levels that were a bit worse than originally thought.

The market is off a bit on this news today.  The 10-year is currently trading at a 2.62%. 

Pessimist of the week award

In perhaps the most pessimistic change of view this week Bank of America revised their 1st quarter 2010 forecast on the 10-year Treasury downward to 2.00%.  TWO PERCENT by 1Q 2011.  To put things in perspective the cycle low on the 10-year is a 2.08%.  We achieved that low point at the height of the economic melt-down.  B-of-A predicts we will punch through that level shortly.  I find it a stretch…but that’s just one man’s opinion.

Their forecast is based on the premise that the Fed will spend $500 to $750 billion to purchase Treasury bonds in another round of quantitative easing to support the economy. 

As a counterpoint we have at least two Fed officials speaking this week stating that they are reluctant to do any more quantitative easing.  They maintain that any additional measures will require a very thorough cost-benefit analysis, and they liken more quantitative easing to “pushing on a string”.  

If you have any questions or if there is anything I can be doing for you just let me know.

Steve Scaramastro, SVP

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