Comments made by European Central Bank President Trichet on Thursday night, in which the central banker stated policy makers will gradually withdraw emergency cash, hurt stocks overseas and that again flowed into U.S. trading. The market is not even close to wanting to hear these types of comments. Nevertheless, it is exactly what central banks need to be doing. (Although, St. Louis Fed Bank President Bullard last night, stating he hopes the U.S. central banks will extend its mortgage-backed security purchase program has stock-index futures sharply higher this morning.)
The global economy is not in a position to stand on its own and resume anywhere near normal growth, but you’ve got to allow the market to continue to wash out excesses and the miscalculation of risk that occurred via the previous loose money campaign. The current prolonged period of aggressive monetary stimulus is beginning to create other problems and it’s just not the rock-bottom level of rates but also other liquidity measures to banks. Just like intense government involvement, it may make things appear better than they are in the short term but it prolongs the economic damage. We’re seeing evidence of monetary policy exacerbating credit contraction, greatly endangering credibility regarding currency stability and leading to early-stage asset bubbles particularly in Asia (specifically, investors borrowing cheap dollars, converting to other currencies and buying assets in those countries).
Energy, tech and financial shares led the market lower on Friday. The traditional areas of safety – health-care, utilities and consumer staples – were the only sectors out of the top 10 groups to close higher on the session.
For the week, the broad market ended essentially flat, down just 0.19%, as the final three sessions of the week erased Monday and Tuesday’s gains.
Market Activity for November 20, 2009
The GreenbackThe dollar is getting hammered this morning, looking to move to that 74 handle on the Dollar Index again, due to the divergent statements between Trichet and Bullard. If the European Central Bank is really going to begin a mild tightening campaign (removing the emergency level of stimulus) and it’s just not talk, while our Fed is going to keep the pedal to the metal, possibly even expanding its quantitative easing campaign, the U.S.dollar will make a new low.
The greenback will find some support via Asian countries forced to buy dollars as the Chinese yuan continues to get de-valued against the currencies of its Asian neighbors (as it is pegged to the U.S. dollar). Thailand, South Korea, Vietnam et al., will seek to de-value their own currencies so not to lose too much export activity to the Chinese. This is all due to the Fed’s policy.direction. It’s a race to the bottom, and a trend of currency de-valuation is not a good sign for global growth. To the contrary, it is a recipe for turmoil. But this dollar support will prove temporary. The longer-term trend of the dollar is almost completely a function of monetary policy – it ultimately depends on how long they remain hooker loose.
Gold has made a new nominal dollar high this morning, up $20 to $1,166/oz (the inflation-adjusted high is roughly $2,200/oz., hit in 1980). The metal is up 59% since the S&P 500 hit its all-time high of 1565 on October 9, 2007.
The Fed and Independence
There’s a lot going on in Washington, which we’ve been talking about on a weekly basis – you can never separate economic developments from policy, and this is especially so today. The latest is this bill to make the Fed’s actions more transparent.
The House Financial Services Committee advanced a proposal to remove a 30-year ban on audits of monetary policy and engage in examinations of central bank actions.
There are many people in an uproar over this development as they believe the ideas in this bill will compromise the Fed’s independence from Congress. Well, welcome to the arena of concern; Fed independence, or lack thereof, appears to have been jeopardized for over a year now. I guess it takes intensely conspicuous acts to wake people up to the fact.
The reaction seems to be a bit carried away though as the process is in the earliest stages and the entire proposal is not all bad if it’s massaged a bit.
First, it is likely to be diluted as, if, it ends up flowing through the legislative process. It must first pass a vote in committee, then must be approved by both the House and the Senate, and then of course signed by the President.
Second, the Fed can inform Congress of its actions, such as emergency loans to specific banks and institutions, so long as there is a significant lag (say, 2-5 years). This is the case in terms of some other things the Fed does. We just cannot make the information immediately public as it may result in a run on specific banks, or develop into other situations that potentially cause widespread panic.
So that’s the part of the bill that isn’t all bad if a bit of common sense is incorporated. The very bad part of the bill is this idea that the GAO (Government Accountability Office, formerly known as the General Accounting Office) would be able to criticize or even have a role in determining monetary policy. This would paralyze the decision making process. (Some people may see action to paralyze the central bank as a good thing, frankly I’m not going to offer an opinion on this right now because things have not yet progresses to a point in which the opinion would seem anything other than outrageous – in time we’ll be able to discuss, I’m pretty confident of that.) Anyway, at this point in time, the Fed cannot be paralyzed and adding another set of players to the mix will probably do much more harm than good.
So we’ll see how it turns out. In general though, it sure doesn’t seem the Fed is nearly as independent from the political process as it should be. I’m frankly concerned that the Fed has been roped into monetizing the debt (keeping rates grounded and devaluing the dollar) as this makes it easier for the government to manage massive levels of deficit spending – the interest payments are lower than they otherwise would be and you’re paying debts back with dollars that are worth less. Of course, it leads to many problems down the road.
Week’s Data
We were without a data release on Friday but this week will be a big one even as it is cut short by Thanksgiving Day.
On Monday we’ll get existing home sales (October), the data is expected to show a 2.3% increase as first-time buyers rushed in during the first half of the month to get in before the tax credit deadline (that credit has been extended but as of October it was uncertain). If the number misses it will be a big market downer as it is abundantly clear the November reading is going to show decline.
On Tuesday we get the first revision to Q3 GDP and the CaseShiller Home Price Index (September). GDP is expected to be downwardly revised to show the economy expanded at a 2.9% real annual rate – originally estimated to have grown 3.5%. CaseShiller has a large lag to it (being September data) but is still heavily watched nonetheless. It should show prices rose for a fourth-straight month for the 20 cities the index tracks. The year-over-year reading should show prices declined at a reduced rate, which would extend upon the five-month trend. We’ll also get consumer confidence (November). The reading has been falling for three months and currently sits at a level that is the low point for every recession since 1967.
On Wednesday we get personal income and spending (October), durable goods (October) and initial jobless claims (pushed up to a Wednesday due to Thanksgiving). Personal income is expected to rise 0.2% after unchanged for September and spending is expected to rise 0.6%. Spending will be boosted by durables, which were driven by auto sales as they bounced off of September’s very weak car sales. Initial jobless claims are expected to fall 5K to 500K. If accurate, it will mark the first time the reading touches 500K since falling to 488K in early January. We’ll be watching for the increase in extended jobless claims as this will be the first week in which the latest French-style extension takes effect – up to 99 weeks of benefits now.
Have a great day!
Brent Vondera, Senior Analyst
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