Finance Matters

Posts Tagged ‘inflation’

While we wait for the employment report, there was another big story yesterday — the Fed treatment of savers. 

Fed Chair Bernanke testified before the House Budget Committee, responding to some illuminating questions from Committee Chair Paul Ryan (R. WI).  Joe Weisenthal, who is usually on the track of the biggest story, anticipated this one yesterday:

DEAR SAVERS AND RETIREES: Stop Whining About Those Lousy Rates You’re Getting From The Bank

Here is Joe’s conclusion:

And while we sympathize with people not getting returns on their money, the fact of the matter is that the big problem we have right now is that people have too much debt, not an abundance of cash that’s just sitting there not returning anything.

The bottom line is this: Yes, it sucks that pensioners and garden-variety savers aren’t getting returns, but it also sucks for everyone in the U.S. right now, because the economic outlook seems to be so mediocre. Welcome to the club!

Until growth and inflation return to anything that looks robust, savers will have to be stuck with the same garbage returns boat the rest of us are in.

The confirmation came in Congressional testimony by Fed Chair Ben Bernanke and the ensuing questions.

There is a lot of buzz about the role of the Fed and also the leadership of Bernanke.  The leading Republican candidates all want to fire Bernanke, and some of them even want to abolish the Fed.  Some of the GOP House Budget Committee members have joined the criticism.

Here at “A Dash” I focus on investments, not politics.  Years ago some readers called me a “Bush apologist” and a blatant “supply sider.”  I have tried to explain that I do not have a partisan perspective, but an investment perspective.  I want to find the best investments no matter who is in power.  My perspective changes with the evidence.

With that in mind, let me suggest a few propositions for your consideration.  If these are not obvious, I recommend more research.

• Bernanke is a Republican, with a conservative background.  This is typical for Fed Chairs.
• If President Bush had been re-elected, the current GOP fiscal argument would be different.  There would be support for stimulus, including both tax cuts or spending.  If you do not believe this, look back in history to the end of the Bush administration.
• If President Bush had been re-elected, the GOP monetary story would be different.  They would be screaming for easy money, as both parties have always done, including past GOP administrations, and including Bush senior.
• Paul Ryan is an ambitious and aspiring VP candidate who has a theme that resonates — balancing the budget.  It is an effective political argument — for the party out of power.

Meanwhile, the Fed is doing a good job of ignoring politics and focusing on the economy.

Investment Conclusion

I continue my plea:  Look beyond politics.  Most recently, look beyond the popular ploy of making a villain out of the Fed.

The Fed has a dual mandate including both price stability and employment.  Here is the official statement:

The Congress established two key objectives for monetary policy–maximum employment and stable prices–in the Federal Reserve Act. These objectives are sometimes referred to as the Federal Reserve’s dual mandate.

There are many who have criticized the US approach suggesting that there should be only a single mandate – price stability.

So let us all be clear about this — very clear.

The Fed has no Third Mandate.  There is no interest rate guarantee for savers!

It is difficult enough to balance economic growth and price stability.  The idea that the Fed should be judged by a third criterion — maintaining interest rates for savers — is misguided, politically biased, displaying favoritism for one group, and basically wrong.

More importantly, it is not going to happen.  Our investment decisions should be based upon reality, not the wishful thinking of those with a partisan agenda.

I understand the plight of savers and senior citizens.  I work with such investors every day, helping them find a combination of a bond ladder, dividend stocks, and enhanced yield.  Those who do not have a job at all face a more difficult problem.  Until we have a stronger economic recovery, we are all in this together.

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See Also:

• JOHN MAULDIN: The Fed Has Created A Transparency Trap
• Bernanke’s Decision May Lead The Planet Into Financial Chaos
• One Dam Metaphor For The 2012 Global Financial System

Forget all the debates about debt monetazation, quantitative easing, and even inflation.

The REAL reason bankers should want Americans to stop getting rid of their debt and keep living off credit boils down to cold hard cash according to Morgan Stanley (via zerohedge).

Look what happens to banker pay when the Debt/GDP ratio rises — cha-ching! And you’ll note that both banker pay and Debt//GDP were really high around the 2008 and around the 1929 Stock Market crash.

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• London Banker Allegedly Arms Himself With Two Crossbows After Girlfriend Dumps Him
• These 10 Wall Streeters Are Friends With Some Pretty Awesome Celebrities
• Newt’s False And Pandering Attack On Goldman Sachs

The Los Angeles Times story about the humiliation of Fred Goodwin describes Britain as “a land where essentially feudal titles still carry great prestige”. True-ish. But I have to say that the UK doesn’t do business honours like it used to. I’ve …

Monday opens up a busy few days, although few corporates will release at the start of the trading week. However, that rapidly changes as the days progress and nearly 20% of S&P 500 listed companies announce quarterly results.

But more than just earnings, Monday is filled with a series of important macro announcements, including reports out of Japan, Italy, Germany, and the U.S. 

Here’s what you need to know.

• The Philippines start the day off with fourth quarter GDP. Economists expect the nation to see an annualized rate of 3.80%, which would represent an acceleration from the third quarter.
• At 3:00 a.m. EST Taiwan will announce unemployment, which is seen roughly flat at 4.33%.
• Attention then shifts to Europe, where at the same time, Slovakia and Spain will announce consumer confidence and GDP, respectively. Slovakian confidence last stood at -40.8. A reading below zero represents negative expectations. In Spain, the economy is expected to contract 0.2% quarter-on-quarter.
• Italy takes center stage at 4:00 a.m. EST, when it announces business confidence. Expectations are for the headline indicator to decline 20 basis points to 92.3. 
• At 5:00 a.m. the European Central Bank will report its own confidence readings for a variety of sectors. Expectations are for consumer confidence in the region to remain flat at -20.6, while business conditions improve marginally to -0.25 from -0.31.
• Economic announcements move to Latin America for the next several hours, when Chile and Brazil release data. Brazilian inflation is expected to rise to 0.3%, from a negative reading in December. Chile will announce industrial production at 7:00 a.m. EST, with economists forecasting a rise, albeit at a lower pace. The headline figure is forecast at 1.2%.
• The United States releases personal income and spending at 8:30 a.m. EST. Economists polled by Bloomberg see incomes expanding by 0.4%, with spending increasing 0.1%. 
• Then, at 10:30 a.m. EST, the Dallas Federal Reserve will announce manufacturing activity in the region, which covers Texas, northern Louisiana and southern New Mexico. The reading is expected to rise to zero, from -3 in December.
• Closing out the day are relatively early announcements in Asia, which can still impact after-hours trading in the U.S. At 4:00 p.m. EST South Korea will report industrial production. Economists see production surging 1.1% in December, from a -0.4% reading a period earlier. Then, at 4:30 p.m. EST, Japan will announce its jobless rate, which is expected to remain flat at 4.5%, followed by industrial production 20 minutes later, which is seen reversing a decline last month and growing 2.9% in January.

U.S. corporates reporting quarterly results on Monday include Gannett and Wendy’s. Below, a roundup of tomorrow’s big announcers.

Wendy’s (WEN): $0.04
Gannett (GCI): $0.69
McKesson (MCK): $1.38
Diamond Foods (DMND): $0.73

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See Also:

• Here Are The Key Market Moving Events For Friday, January 27, 2012
• Here Are The Key Market Moving Events For Thursday, January 26, 2012
• Good News: Trading In Asia Starts Friday In The Green

Economist James Hamilton at Econbrowser has the most succinct analysis of this week’s Fed announcement:

So the FOMC is saying that it would like inflation to be about 2% annually, but is expecting it only to be 1.4 to 2.0% over the next 3 years. Putting 2 and (less than) 2 together, the FOMC is telling us that, based on its price stability objective alone, the Fed is expecting inflation to be lower than it would like. In other words, even if the economy were at full employment, a little more stimulus would be called for. And of course, nobody thinks the U.S. is anywhere close to full employment.

The Fed’s forecast is for an unemployment rate between 7.4 and 8.1% for 2013. Interpretation: the Fed is expecting to exert some additional stimulus. Large-scale asset purchases– referred to popularly as more “quantitative easing”– are the primary tool available. So, if your motto is “don’t bet against the Fed,” then I wouldn’t bet against more QE during 2012.

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See Also:

• The New Fed Voters Are Likelier To Back A Push For More Easing
• Here’s Why Analysts Don’t See The Fed Raising Interest Rates Before 2014
• VINCENT REINHART: The Fed’s New Communication Policy Will Weaken Its Ability To Signal Commitment On Rates