Problems With How Inflation is Reported??????
I am glad to read in Reuters (via the Big Picture) that someone else is also concerned about how inflation is reported. Any body who has put gas in their tank or gone grocery shopping in the last couple of years knows that there is something wrong with the CPI as reported. Ultimately it hurts the credibility of the institutions reporting and using the data. Why not report a CPI with and without energy and food?
The Federal Reserve's adherence to core inflation, which strips out food and energy prices, is taxing the public's patience and risks credibility, a senior U.S. central banker said on Thursday.
"In the United States over the last 20 years, core measures excluding food and energy did take out a lot of noise. But in the last three years it has been extracting quite a bit of signal," said Harvey Rosenblum, head of research at the Federal Reserve Bank of Dallas.
Central bankers study core inflation because it is supposed to remove volatile one-off price movements to reveal an underlying "signal" of price pressures. But this practice is challenged when the components being removed keep rising.
"In the last three years, energy has moved in one direction for the most part, and food over the last two years has moved primarily up. And it is becoming annoying to people to see the central bank exclude those," he said.
As well as source of irritation, there were risks to being seen as out of touch with the real world for policy-makers trying to influence economic behavior through their communication strategy and interest rate decisions.
Thursday, June 7, 2007
Worker Productivity Drops in Q1 and Effects on the Labor Market
I am having a hard time putting a smiley face on this article from CNNMoney.com:
. . . . Worker productivity in the first quarter was much lower than original estimates, according to a government report Wednesday . . . . Productivity increased by 1.0 percent in the quarter, down from the original estimate of a 1.7 percent gain
. . . . the slower productivity raised inflation concerns, as the unit labor costs rose 1.8 percent in the quarter, up from the 0.6 percent rise in the original estimate.
On the labor front, U.S. employers announced plans in May to eliminate 71,115 jobs, up 32 percent from May 2006 when job cuts totaled 53,716, Reuters said.
It was the second consecutive month in which job cuts increased from the same period a year ago, according to the monthly job-cut report released Wednesday . . . .
Still, year to date, the pace of job cutting remains below last year's level, but the gap is rapidly closing. Heavy downsizing in the computer industry dominated May job cuts, Reuters said.
"Heavy job cutting in the computer industry reflects a slowdown in business spending on new technology. We may continue to see heavy cuts in the months ahead with spending expected to remain soft in the near future," John A. Challenger, chief executive officer at the Chicago-based firm, told Reuters.
An issue that is not being addressed are the job cuts in the housing industry. Admittedly, it is difficult to measure the loss of jobs in the construction trades because many of these people are self-employed. Or real estate sales portion of the business where the real estate agent just gets another job and doesn't perform as a full time agent any longer. But the job losses do exist. Also the mortgage departments of banks and mortgage companies must start laying off if the haven’t already started.
Nothing personal it is just business.
I am having a hard time putting a smiley face on this article from CNNMoney.com:
. . . . Worker productivity in the first quarter was much lower than original estimates, according to a government report Wednesday . . . . Productivity increased by 1.0 percent in the quarter, down from the original estimate of a 1.7 percent gain
. . . . the slower productivity raised inflation concerns, as the unit labor costs rose 1.8 percent in the quarter, up from the 0.6 percent rise in the original estimate.
On the labor front, U.S. employers announced plans in May to eliminate 71,115 jobs, up 32 percent from May 2006 when job cuts totaled 53,716, Reuters said.
It was the second consecutive month in which job cuts increased from the same period a year ago, according to the monthly job-cut report released Wednesday . . . .
Still, year to date, the pace of job cutting remains below last year's level, but the gap is rapidly closing. Heavy downsizing in the computer industry dominated May job cuts, Reuters said.
"Heavy job cutting in the computer industry reflects a slowdown in business spending on new technology. We may continue to see heavy cuts in the months ahead with spending expected to remain soft in the near future," John A. Challenger, chief executive officer at the Chicago-based firm, told Reuters.
An issue that is not being addressed are the job cuts in the housing industry. Admittedly, it is difficult to measure the loss of jobs in the construction trades because many of these people are self-employed. Or real estate sales portion of the business where the real estate agent just gets another job and doesn't perform as a full time agent any longer. But the job losses do exist. Also the mortgage departments of banks and mortgage companies must start laying off if the haven’t already started.
Nothing personal it is just business.
Gold Market #3
From Bloomberg:
Newcrest Mining Ltd., Australia's largest gold miner, is ``looking'' at closing its gold hedge book. . . . Miners sell production before it's mined to hedge against a drop in prices. Newcrest has about 700,000 ounces of gold hedged each year for the next 5 1/2 years, Smith said.
The real trick in the gold mining business is the all-in total cost of production per ounce. The all-in total cost of production is the mine cost of production, all administrative costs of the company, and any debt service. Those companies that are most successful commonly have the lowest cost of production. The difference between the cost of production and the price of gold is profit. To reduce your risk in the business a company will sell some portion of its production forward to lock in a price and therefore, stabilize their revenue. Then the only variable that a company needs to control is their own costs.
If you look at the price of gold in the last 20 years one will notice that the current high prices of gold are a relatively recent and the price of gold was in the $300 - $400/oz. for much of the last 2 decades. In addition the period of the late-1990s the price of gold was consistently below $300/oz. That was a period of limited exploration for new gold deposit and limited mine production, which contributes to the tight supply situation in the market today.
From Bloomberg:
Newcrest Mining Ltd., Australia's largest gold miner, is ``looking'' at closing its gold hedge book. . . . Miners sell production before it's mined to hedge against a drop in prices. Newcrest has about 700,000 ounces of gold hedged each year for the next 5 1/2 years, Smith said.
The real trick in the gold mining business is the all-in total cost of production per ounce. The all-in total cost of production is the mine cost of production, all administrative costs of the company, and any debt service. Those companies that are most successful commonly have the lowest cost of production. The difference between the cost of production and the price of gold is profit. To reduce your risk in the business a company will sell some portion of its production forward to lock in a price and therefore, stabilize their revenue. Then the only variable that a company needs to control is their own costs.
If you look at the price of gold in the last 20 years one will notice that the current high prices of gold are a relatively recent and the price of gold was in the $300 - $400/oz. for much of the last 2 decades. In addition the period of the late-1990s the price of gold was consistently below $300/oz. That was a period of limited exploration for new gold deposit and limited mine production, which contributes to the tight supply situation in the market today.
Wednesday, June 6, 2007
The ECB Increases the Interest Rate to 4% as Anticipated.
From CNNMoney.com:
The European Central Bank raised interest rates a quarter of a percentage point to 4 percent as expected Wednesday to combat inflationary dangers in a strongly expanding economy.
The increase marks a doubling of euro zone rates in 18 months, raising questions in financial markets over how close the ECB may be to ending its rate hikes.
But strong ECB warnings on inflation risks have left dealers virtually certain that rates will reach at least 4.25 percent this year. They are awaiting clearer direction from ECB President Jean-Claude Trichet . . . .
"First of all, we need guidance on whether the ECB still regards its monetary policy as accommodative," said Holger Schmieding, European economist at Bank of America in London.
At 4 percent, most economists say ECB rates now are in neutral territory and no longer stimulate economic growth. They want to know whether restraint is needed to control price pressures.
From CNNMoney.com:
The European Central Bank raised interest rates a quarter of a percentage point to 4 percent as expected Wednesday to combat inflationary dangers in a strongly expanding economy.
The increase marks a doubling of euro zone rates in 18 months, raising questions in financial markets over how close the ECB may be to ending its rate hikes.
But strong ECB warnings on inflation risks have left dealers virtually certain that rates will reach at least 4.25 percent this year. They are awaiting clearer direction from ECB President Jean-Claude Trichet . . . .
"First of all, we need guidance on whether the ECB still regards its monetary policy as accommodative," said Holger Schmieding, European economist at Bank of America in London.
At 4 percent, most economists say ECB rates now are in neutral territory and no longer stimulate economic growth. They want to know whether restraint is needed to control price pressures.
This Makes it Official No Rate Cut This Year
From CNNMoney.com. Goldman Sachs also said no rate cut in 2008 either. As stated in the post below the issue remains inflation and not employment, economic growth, or housing.
Goldman Sachs abandoned its forecast Tuesday for any interest rate cuts this year, adding that it sees none in 2008 either, citing tightness in the labor market and expectations for stronger economic growth.
Goldman's move comes a day after Merrill Lynch slashed its expectations for a rate cut this year, reducing its call for 2007 from 100 basis points of cuts to none. The firm cited its revised view on the Fed's persistent hawkish inflation stance and a recent string of stronger-than-expected data.
From CNNMoney.com. Goldman Sachs also said no rate cut in 2008 either. As stated in the post below the issue remains inflation and not employment, economic growth, or housing.
Goldman Sachs abandoned its forecast Tuesday for any interest rate cuts this year, adding that it sees none in 2008 either, citing tightness in the labor market and expectations for stronger economic growth.
Goldman's move comes a day after Merrill Lynch slashed its expectations for a rate cut this year, reducing its call for 2007 from 100 basis points of cuts to none. The firm cited its revised view on the Fed's persistent hawkish inflation stance and a recent string of stronger-than-expected data.
The Market May Finally Get It About Future Interest Rates
From the NY Times. The Fed is more worried about the inflation rate than the housing market or the economy. We are just now beginning the see the effects of higher energy costs on all the other things people buy. As a result the chances of rate decrease this year are declining.
. . . . But Mr. Bernanke’s remarks yesterday made it unambiguously clear that central bankers are not yet comfortable that inflation will settle down.
“Although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside,” Mr. Bernanke said via satellite to a financial conference in Cape Town. . . .
. . . . Just a month ago, investors who bet on the direction of interest rates were widely expecting a rate cut before the end of the year. Now, investors give a rate cut this year almost no chance. And in recent days, a number of Wall Street economists have issued less optimistic interest rate forecasts.
“We are pulling the plug on our forecast of Fed easing in 2007,” Jan Hatzius, chief United States economist for Goldman Sachs, said in a research note yesterday.
From the NY Times. The Fed is more worried about the inflation rate than the housing market or the economy. We are just now beginning the see the effects of higher energy costs on all the other things people buy. As a result the chances of rate decrease this year are declining.
. . . . But Mr. Bernanke’s remarks yesterday made it unambiguously clear that central bankers are not yet comfortable that inflation will settle down.
“Although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside,” Mr. Bernanke said via satellite to a financial conference in Cape Town. . . .
. . . . Just a month ago, investors who bet on the direction of interest rates were widely expecting a rate cut before the end of the year. Now, investors give a rate cut this year almost no chance. And in recent days, a number of Wall Street economists have issued less optimistic interest rate forecasts.
“We are pulling the plug on our forecast of Fed easing in 2007,” Jan Hatzius, chief United States economist for Goldman Sachs, said in a research note yesterday.
Commentary on the Housing Market is Becoming More Realistic
Once again the folks at Calculated Risk have done a very nice job of trying to separate the wheat from the chaff with regard to the housing market. One post that I found particularly interesting is a comparison of the current down turn in the housing markets to those that have occurred in the past.
Once again the folks at Calculated Risk have done a very nice job of trying to separate the wheat from the chaff with regard to the housing market. One post that I found particularly interesting is a comparison of the current down turn in the housing markets to those that have occurred in the past.
One of My Favorite Quotes - Liquidity is There Until It Isn't
This article from Bloomberg ties in well with my post below. Also there have been an increasing number of articles like these recently. I am not so sure anyone knows anything the rest of us don't, but they are saying that the risk in the credit markets is no longer balanced. When that happens there is increased risk exposure to random shocks.
Nine years ago a default by the Russian government on part of its debt caused financial markets around the world to seize up as investors rushed to shed risk. Today, Federal Reserve officials are concerned something similar may happen.
The anxiety isn't centered on Russia or any other particular country. It's that good times have been rolling for so long in markets everywhere that investors and institutions are behaving as if they have forgotten that there are always risks, that there's always something that can go wrong (my emphasis). The good times have been fueled by a flood of liquidity supplied from the huge pool of savings in China, some other Asian nations and oil exporting countries. Meanwhile, market volatility has largely disappeared in the wake of the successful efforts to tame global inflation.
That combination of liquidity, low inflation and low volatility has reduced interest rates around the globe and sent investors scurrying to find higher yields almost regardless of risk.
And on May 31, Terrence Checki, an executive vice president at the New York Fed who has spent years dealing with financial crises, especially in emerging market countries, warned at a conference in Athens, ``The recent long period of stability may contain the seeds of its own undoing.''
``Abundant global liquidity has been a powerful wind in the back of economic and policy progress and has brought substantial benefits,'' Checki said. ``In addition, as we all know, liquidity is ephemeral: it disappears at the most inconvenient times.'' (my emphasis)
Perhaps what worries Fed officials the most is that monetary policy can't do much to reduce the risks in this situation.
The liquidity hasn't been created by monetary policy decisions in the industrial world, and the Fed and its counterparts can't sop it up. And now some of the countries sporting foreign currency reserves totaling in the trillions of dollars are beginning to search for higher yields too.
In this largely benign investment climate, it's impossible to pinpoint what might go wrong -- what might trigger a sudden massive move to shed risk, such as occurred after the Russian default in August 1998. In that case, liquidity simply evaporated from markets everywhere, even in those for U.S. Treasury securities.
This article from Bloomberg ties in well with my post below. Also there have been an increasing number of articles like these recently. I am not so sure anyone knows anything the rest of us don't, but they are saying that the risk in the credit markets is no longer balanced. When that happens there is increased risk exposure to random shocks.
Nine years ago a default by the Russian government on part of its debt caused financial markets around the world to seize up as investors rushed to shed risk. Today, Federal Reserve officials are concerned something similar may happen.
The anxiety isn't centered on Russia or any other particular country. It's that good times have been rolling for so long in markets everywhere that investors and institutions are behaving as if they have forgotten that there are always risks, that there's always something that can go wrong (my emphasis). The good times have been fueled by a flood of liquidity supplied from the huge pool of savings in China, some other Asian nations and oil exporting countries. Meanwhile, market volatility has largely disappeared in the wake of the successful efforts to tame global inflation.
That combination of liquidity, low inflation and low volatility has reduced interest rates around the globe and sent investors scurrying to find higher yields almost regardless of risk.
And on May 31, Terrence Checki, an executive vice president at the New York Fed who has spent years dealing with financial crises, especially in emerging market countries, warned at a conference in Athens, ``The recent long period of stability may contain the seeds of its own undoing.''
``Abundant global liquidity has been a powerful wind in the back of economic and policy progress and has brought substantial benefits,'' Checki said. ``In addition, as we all know, liquidity is ephemeral: it disappears at the most inconvenient times.'' (my emphasis)
Perhaps what worries Fed officials the most is that monetary policy can't do much to reduce the risks in this situation.
The liquidity hasn't been created by monetary policy decisions in the industrial world, and the Fed and its counterparts can't sop it up. And now some of the countries sporting foreign currency reserves totaling in the trillions of dollars are beginning to search for higher yields too.
In this largely benign investment climate, it's impossible to pinpoint what might go wrong -- what might trigger a sudden massive move to shed risk, such as occurred after the Russian default in August 1998. In that case, liquidity simply evaporated from markets everywhere, even in those for U.S. Treasury securities.
Tuesday, June 5, 2007
3 Scenarios for the End of Cheap Debt
From a risk perspective - what should you do today if these are the 3 possibilities of how the cheap debt period will end (Wall Street Journal). Also when do you this the era of cheap credit will end because this will effect your decisions as well.
The waves of debt feeding today's buyout deluge will eventually recede. Now's the time to figure out what will make that happen.
This has become the essential question on Wall Street, where even the cocksure ranks of banks, hedge funds, and private-equity firms have begun to doubt lenient standards for lending and deal-making. . . . .
The markets have changed dramatically since 1989. . . . At the core of the change is the term "liquidity," a catch-all meaning there's lots of money in the markets for anyone who needs it.
Behind the liquidity is something grander: The culmination of decades of advances in the architecture of financial markets and information technology. The result is a global, instantaneous network of hyperinformed investors, moving money from Dubai, Geneva, or Greenwich into ever-more specialized investments.
Will this global liquidity actually minimize the impact of the inevitable credit downturn? Or is it, in fact, only feeding a bubble?
We won't know until it happens. But theories have begun to form around three different scenarios.
Scenario #1
The Big One: This is the realm of the capital letter, meant to express outsize effect: The Asian Currency Crisis or The Russian Financial Crisis. As this theory goes, some big event flips investor confidence in an instant, drying up capital as investors flee to safe havens. These are by their very nature unpredictable and devastating.
Right now, credit markets are at the other end of this spectrum. Bond investors demand next to nothing to own corporate debt. The difference in yield between a risky B-rated junk bond and an ultrasafe Treasury is just 2.4 percentage points, the lowest spread on record. It's a sign of investors' high tolerance for risk. The big event causes them to quickly reassess this tolerance, dumping corporate bonds and pushing out spreads in an instant.
Scenario #2
Death by Drowning: In this scenario, the pullback doesn't come from one outsize event. Instead, lenders and borrowers slowly choke on their own largess. Lenders prop up many companies in a series of refinancings, heaping new debt on old. Eventually, lenders would be compelled to tighten their standards. That's what's happened in the housing market today.
Scenario #3
The Slow Leak: The Slow Leak theory is the most benign of the scenarios. It's based around the idea that annual private-equity returns will gradually decline, slowly ending today's ferocious buyout binge, which comprises a third of today's record mergers volume. As private equity firms adapt, they'll pull back the reins on their borrowing, ending the debt boom before it gets too messy.
Investing has already gotten harder for the private-equity groups, which face hostile shareholders and boards of directors demanding more at the negotiating table. . . .
"The issue is not a meltdown but that they may not get the returns," says Morgan Stanley vice chairman Robert Kindler. Private-equity firms are targeting "high-teens returns, versus mid-20s three to five years ago."
The risk is they borrow even more as they try to make up for faltering performance ... which will bring them right back to scenarios one and two.
From a risk perspective - what should you do today if these are the 3 possibilities of how the cheap debt period will end (Wall Street Journal). Also when do you this the era of cheap credit will end because this will effect your decisions as well.
The waves of debt feeding today's buyout deluge will eventually recede. Now's the time to figure out what will make that happen.
This has become the essential question on Wall Street, where even the cocksure ranks of banks, hedge funds, and private-equity firms have begun to doubt lenient standards for lending and deal-making. . . . .
The markets have changed dramatically since 1989. . . . At the core of the change is the term "liquidity," a catch-all meaning there's lots of money in the markets for anyone who needs it.
Behind the liquidity is something grander: The culmination of decades of advances in the architecture of financial markets and information technology. The result is a global, instantaneous network of hyperinformed investors, moving money from Dubai, Geneva, or Greenwich into ever-more specialized investments.
Will this global liquidity actually minimize the impact of the inevitable credit downturn? Or is it, in fact, only feeding a bubble?
We won't know until it happens. But theories have begun to form around three different scenarios.
Scenario #1
The Big One: This is the realm of the capital letter, meant to express outsize effect: The Asian Currency Crisis or The Russian Financial Crisis. As this theory goes, some big event flips investor confidence in an instant, drying up capital as investors flee to safe havens. These are by their very nature unpredictable and devastating.
Right now, credit markets are at the other end of this spectrum. Bond investors demand next to nothing to own corporate debt. The difference in yield between a risky B-rated junk bond and an ultrasafe Treasury is just 2.4 percentage points, the lowest spread on record. It's a sign of investors' high tolerance for risk. The big event causes them to quickly reassess this tolerance, dumping corporate bonds and pushing out spreads in an instant.
Scenario #2
Death by Drowning: In this scenario, the pullback doesn't come from one outsize event. Instead, lenders and borrowers slowly choke on their own largess. Lenders prop up many companies in a series of refinancings, heaping new debt on old. Eventually, lenders would be compelled to tighten their standards. That's what's happened in the housing market today.
Scenario #3
The Slow Leak: The Slow Leak theory is the most benign of the scenarios. It's based around the idea that annual private-equity returns will gradually decline, slowly ending today's ferocious buyout binge, which comprises a third of today's record mergers volume. As private equity firms adapt, they'll pull back the reins on their borrowing, ending the debt boom before it gets too messy.
Investing has already gotten harder for the private-equity groups, which face hostile shareholders and boards of directors demanding more at the negotiating table. . . .
"The issue is not a meltdown but that they may not get the returns," says Morgan Stanley vice chairman Robert Kindler. Private-equity firms are targeting "high-teens returns, versus mid-20s three to five years ago."
The risk is they borrow even more as they try to make up for faltering performance ... which will bring them right back to scenarios one and two.
How Much It Costs to Fill Up Depends on Where You Are
A very readable article in the Wall Street Journal, about the regional differences in the price of gasoline. Basically, it depends on state taxes, transportation costs, and issues at your local refinery.
. . . . To be sure, costs are always higher for certain places than for others. For one, gasoline taxes vary widely from state to state. In New York, for example, taxes as of March 2007 were almost 61 cents a gallon, while in Alaska, they ran only 26 cents a gallon, according to API, an oil industry trade group.
Transportation costs also bump up gas prices in places far from refineries. Prices in the Midwest, which has to ship in about 35% of the gas it consumes, are usually more expensive than in the Gulf Coast, the country's major refining hub.
But currently, most of the difference in prices can be attributed to refinery snags that have affected some regions more than others. Although they have fallen slightly, fuel prices in Chicago are still among the highest in the country. Most of the increase can be tracked to a single refinery just outside the city in Whiting, Ind., analysts say. At least two other refineries in the Midwest also have cut production recently due to maintenance and glitches.
The Gulf Coast was also recently hit by outages at several large refineries, pushing up gas prices temporarily, although not as high as in the Midwest because the Gulf Coast region produces more than double the amount of gasoline it consumes. . . .
"As supplies shift around to areas where the price is higher, we typically see prices decline in the high-price regions and prices go up elsewhere," says Dough McIntyre, an analyst with Energy Information Administration, a federal agency.
In California, gasoline prices tell yet a different story. The state has some of the most stringent gas specifications in the country to cut pollution, and it isn't well-connected to the rest of the country via pipelines. The result is that prices there are determined largely by what goes on locally. Although refineries in California had some trouble last year and earlier this year, supplies have been steady lately.
A very readable article in the Wall Street Journal, about the regional differences in the price of gasoline. Basically, it depends on state taxes, transportation costs, and issues at your local refinery.
. . . . To be sure, costs are always higher for certain places than for others. For one, gasoline taxes vary widely from state to state. In New York, for example, taxes as of March 2007 were almost 61 cents a gallon, while in Alaska, they ran only 26 cents a gallon, according to API, an oil industry trade group.
Transportation costs also bump up gas prices in places far from refineries. Prices in the Midwest, which has to ship in about 35% of the gas it consumes, are usually more expensive than in the Gulf Coast, the country's major refining hub.
But currently, most of the difference in prices can be attributed to refinery snags that have affected some regions more than others. Although they have fallen slightly, fuel prices in Chicago are still among the highest in the country. Most of the increase can be tracked to a single refinery just outside the city in Whiting, Ind., analysts say. At least two other refineries in the Midwest also have cut production recently due to maintenance and glitches.
The Gulf Coast was also recently hit by outages at several large refineries, pushing up gas prices temporarily, although not as high as in the Midwest because the Gulf Coast region produces more than double the amount of gasoline it consumes. . . .
"As supplies shift around to areas where the price is higher, we typically see prices decline in the high-price regions and prices go up elsewhere," says Dough McIntyre, an analyst with Energy Information Administration, a federal agency.
In California, gasoline prices tell yet a different story. The state has some of the most stringent gas specifications in the country to cut pollution, and it isn't well-connected to the rest of the country via pipelines. The result is that prices there are determined largely by what goes on locally. Although refineries in California had some trouble last year and earlier this year, supplies have been steady lately.
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