Sunday, September 30, 2012

Sometimes the Stock Market and the Global Economy Diverge

From CNBC anchor Maria Bartiromo: “My observation on the disconnect between what is happening in the economy versus what is happening in the stock market…today (Thursday) the latest GDP report was anemic lowered from a growth rate of some 1.7% growth to 1.3% on top of weak data on durable goods and pending home sales also not so hot… you would not know it from the stock market. They’re all up in the double digits today - greatly aided by the massive stimulus. The worry, of course, is that at some point fundamentals matter. Should you join stocks and not fight the Fed, rather than investing on the fundamentals like earnings growth, jobs, and economic growth? Make sure your eyes are wide open as we enter the third quarter (corporate) reporting.”

In Spain: Facing continued economic weakness, a majority of citizens in Catalonia (which accounts for about 20% of Spain’s economy) want to separate from Spain, and a review of Spain’s largest banks found that 7 out of 14 failed a stress test – along with a large but expected €60 billion ($76 billion) funding shortfall. Now the question is – will Spain ask for a bailout from the European Central Bank?
In China: The high profile and politically distracting Bo Xilai scandal (which included taking bribes, sexual misconduct and his wife murdering a British businessman) resulted in his removal from the Communist party leadership. Also, a dispute with Japan over islands in the East China Sea and concerns about economic slowdown add to market uncertainty. Notably, China’s Xinhua news agency announced that a major political transition process would start November 8 at the 18th National Congress of the Communist Party of China (this gathering of more than 2,200 delegates was last held in October 2007).

With market sensitivity increasing, news items can trigger strong and abrupt market moves (such as Philadelphia Federal Reserve President Charles Plosser’s concerns about QE3 that pushed markets sharply lower on Wednesday). Also, market dynamics may become more dependent on corporate profit growth trends, consumer confidence and the actions of political leaders as stimulus efforts likely enter a stage of diminishing returns. Hopefully, the U.S. elections on November 6 and China’s transition process (starting November 8) will help reduce economic uncertainty and political paralysis.

Sunday, September 23, 2012

Where Does the Economy Go From Here?

After massive stimulus efforts by global central bankers in recent years, many asset prices have increased and credit markets are calmer, but economic growth and employment trends remain muted. The commentaries below are worth considering as we assess – “where do we go from here?”

Howard Marks – Chairman of Oaktree Capital Management – a $78 billion fund (Memo to clients - Sept. 11, 2012)
“The world seems more uncertain today than at any other time in my life.” and “Economic growth doesn’t just happen. Its vigor depends on a combination of population gains, a conducive infrastructure, positive aspiration and profit motive, advances in technology and productivity, and benign exogenous developments. In many ways and to varying degrees, I think the future for these things in the U.S. is less good than it was in the past. The birthrate is down; our infrastructure is out of date; it’s uncertain whether technology can add as much to productivity in the future as it has in the recent past (but perhaps it always is); and mobility up the income curve has stagnated.”
Richard Fisher - President Federal Reserve Bank of Dallas (NYC Harvard Club Speech, Sept. 19, 2012)
"Nobody (at the Fed) really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course.” and “ Nobody—in fact, no central bank anywhere on the planet—has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank—not, at least, the Federal Reserve—has ever been on this cruise before” and “One of the most important lessons learned during the economic recovery is that there is a limit to what monetary policy alone can achieve. The responsibility for stimulating economic growth must be shared with fiscal policy. Ironically, and sadly, Congress is doing nothing to incent job creators to use the copious liquidity the Federal Reserve has provided”
Full text at

After significant positive moves from the market bottom in 2009, uncertainty continues and economic headwinds persist. While there are suggestions that the recent rally can drive the markets into “escape velocity”, prudent expectations for economic growth and investment returns are likely warranted.

Sunday, September 16, 2012

After Another Plan from the U.S. Federal Reserve...

On Thursday, the U.S. Federal Reserve Chairman announced plans to provide more stimulus because: 1) it was concerned that the economic recovery may be at risk and 2) U.S. employment trends need to improve. This third round of quantitative easing (QE3) promises to 1) keep interest rates low until at least the middle of 2015 and 2) take the unprecedented step of pursuing open-ended stimulus efforts (often interpreted as “printing money”) until the employment situation “substantially” improves. 

On Friday, investors confronted both positive and negative news as:August industrial production unexpectedly declined by 1.7%, with weakness in automotive production and other manufactured goods and 2) consumer sentiment improved during August with the Thomson Reuters/University of Michigan index unexpectedly increasing to 79.2 from 74.3. Against this backdrop, risk assets such as equities and commodities had strong positive moves, while stress in many credit markets continued to decline. 

At the same time, broad debates about the Fed’s unprecedented actions are focusing on topics such as: 1) does the Federal Reserve have special insights into increasing economic weakness, 2) are its actions politically motivated to assist in President Obama’s re-election and reduce Chairman Bernanke’s chances of losing his job and 3) does the Fed have the capacity to improve employment trends?


While the Federal Reserve hopes to reduce the risk adverse behavior of consumers, business leaders and lenders, the open-ended and unprecedented nature of its actions may also introduce more uncertainty into the markets. Regarding the potential to improve employment trends, with many businesses continuing to spend on new equipment and software to improve operational efficiencies, rather than hiring new employees, it seems that fiscal policy (by Congress), rather than monetary policy (by the Federal Reserve) may be a more constructive approach (assuming Congress can get its act together). Regarding political motivations, this is a presidential election year – everything is political. Regarding the tone of the markets, this week’s actions by the Fed may continue to improve the mood among investors, but let us not assume that “open-ended stimulus” also means “no risk investing”.

Sunday, September 9, 2012

After Another Disappointing U.S. Employment Report .....

On Friday, the U.S. Department of Labor reported August data that included:
  • Payrolls increased by a lower than expected 96,000,
  • Unemployment dropped to 8.1%,
  • Labor force participation rate (people either working or looking for work - 16 years and older) dropped to 63.5% - the lowest since Sept. 1981,
  • 368,000 people left the workforce and
  • Percentage of adult males in the labor force dropped to its lowest level since 1948.  
With the national political conventions over, job growth is now the number one topic confronting President Obama and Mitt Romney as they move toward the November 6 presidential election. For investors, the focus this week is - will the U.S. Federal Reserve announce additional stimulus in response to the weak employment data? 
  • Regarding the presidential campaign, an already close contest just became closer. With voters increasingly skeptical about Washington politicians, each candidate must now motivate “swing voters” to: 1) swing in their favor and 2) show up and vote on Election Day. 
  • Regarding the markets, while investors are hoping for additional stimulus actions by the Fed, there is increasing concern about the effectiveness of its efforts to improve the overall economy. 
  • Bottom line: markets may trend higher, but they may do so with significantly less investor conviction.

Europe's "Super Mario" Draghi Will Do "Whatever It Takes" to save the Euro

Earlier this summer, European Central Bank President Mario Draghi said he would do “whatever it takes” to save the Euro. This past Thursday, he said the ECB would buy the sovereign bonds of troubled Eurozone nations to address “short-term distortions in financial markets”. However, countries seeking assistance must agree to economic policies developed by the International Monetary Fund and other European authorities.

The actions of Mr. Draghi and the ECB are only one-step toward fixing the Eurozone’s problems, but it is a positive step. Concerns remain about: 1) Greece’s viability as a Eurozone member, 2) whether countries such as Spain and Italy are comfortable with the terms of ECB’s approach and 3) how supportive is Germany toward these efforts. For the moment, the Eurozone is not on the verge of a meltdown and most global markets had strong positive moves on the news. Time (and significant ECB funding) will determine if this effort is sustainable.

Sunday, September 2, 2012

Fed Chairman Bernanke Shares His Concerns about the U.S. Economy

Last Friday, U.S. Federal Reserve Chairman Ben Bernanke spoke at the Jackson Hole Economic Policy Symposium, an annual gathering of policy experts and academics. Below are selected excerpts - the complete text is at

  • On U.S. economic growth:  “Key sectors such as manufacturing, housing, and international trade have strengthened, firms’ investment in equipment and software has rebounded, and conditions in financial and credit markets have improved” but “the economic situation is obviously far from satisfactory and labor force utilization remains at very low levels.”
  • On the housing market: "Although the housing sector has shown signs of improvement, housing activity remains at low levels and is contributing much less to the recovery than would normally be expected at this stage of the cycle.
  • On challenges facing Federal, state and local  governments:  “State and local governments still face tight budget situations and continue to cut real spending and employment” and at the Federal level “resolution of the so-called fiscal cliff and the lifting of the debt ceiling, are probably also restraining activity.”
  • On Europe:  “A major source of financial strains has been uncertainty about developments in Europe. These strains are most problematic for the Europeans, of course, but through global trade and financial linkages, the effects of the European situation on the U.S. economy are significant as well.”
The problems in the U.S., Europe and Asia are well documented, but the road ahead remains unclear. With persistent concerns about global growth, short term areas of focus include U.S. employment trends (August data will be released Friday), and Eurozone dynamics (such as - Will German central bank chief Jens Weidmann resign from his post?). September will likely be a period of heightened market volatility.