Thursday, February 01, 2007


Not sure the iambic pentameter is working here, but hopefully the title catches your attention to the onslaught of data and the Fed. Stronger than expected GDP despite a 19% drop in residential investment, which took 1.2 percentage points off of growth, and an FOMC statement that moved the Fed from Dec's worrying about growth to confidence that the economy will grow -- while acknowledging that inflation has ebbed.

The market, in its infinite wisdom, rallied on the news, believing that the comments on inflation were setting the stage for an ease later this year. Since December, the market has moved its ease scenario out in time and down in its extent, but it is still betting on an ease beginning in August but definitely by December. Some of the market gurus, mostly wrong but never in doubt, are out there pitching the idea that softness is to come, 4th Q was a statistical anamoly, and look for an ease by July.

Markets want to read into to the statement what they want to believe. I believe something different. The Fed is telling us that the concerns they had about growth are past or at least passing, so they can be more confident in their forecast of continued moderate growth. As for inflation, they acknowledge the drop and they know it is energy related. They are also saying that resource use is tight and thus the risk for inflation remains.

So, tell me, if the Fed is confident about growth, which means greater utilization of resources, why does the market think the next move is an ease?

Two things to remember about this economy. First, it runs on credit and there is plenty available. Second, this economy is "adapt and grow". It has adapted to 5.25% funds, which is not restrictive, and so the economy is ready to grow. I believe that, the Fed believes that, the market savants that were convinced of a consumer implosion and recession last year -- don't.

Wednesday, January 24, 2007

Some Berry Good Thoughts . . . . So What Does Trigger The Fed

In today's Bloomberg, John Berry writes that the Fed is going to do more of the same -- watch, wait, and note that the greater risk is inflation. Inflation is the risk because money is cheap and available and as long as credit can expand so too can the economy.

How easy is money? This was reported in this morning's Wall Street Journal:
The investing arms of Goldman Sachs Group Inc. and Morgan Stanley are quietly collaborating on a massive private-equity play for the oil-and-gas assets of utility company Dominion Resources Inc. -- a deal that could top out at $15 billion, people familiar with the matter said.
When $15 billion and play are in the same sentance, money and credit aren't being rationed.

Back to Berry.

He sets the stage by writing:

A few weeks ago, many financial analysts were predicting that slowing growth would prompt the Fed to adopt more neutral language at the Jan. 30-31 meeting in preparation for reducing the target in March or May.

That prediction was a major misreading of Fed thinking.

I should say so. But the street savants are often wrong but never in doubt. So where does Goldman, the erstwhile private equity player, stand? Again, from the Berry article:
On the other hand, economists at Goldman Sachs Group Inc. haven't abandoned their forecast of 75 basis points of rate reductions in 2007, beginning by midyear.
Perhaps their economists should have lunch with the private equity guys. Since investors risk the firm's capital, the proverbial money going where the mouth is, I side with the risk takers.

Here is the meat of the story, at least to me:

Their counterparts at Macroeconomic Advisers LLC, who don't expect any such slowing in job growth, said in their weekly forecast update on Jan. 19 that they ``expect the Federal Reserve to maintain the fed funds rate at 5.25 percent throughout 2007.'' . . . .

. . . . They went even further, adding: ``The next decision for the Fed will be whether to resume tightening or to remain on hold, given the economy's apparent resiliency and the upside inflation risks emanating from tight labor markets.''

That's not a decision that is going to be on the table next week, however.

A number of Fed officials have indicated in recent speeches that they are quite comfortable with the current 5.25 percent target . . . .

They become uncomfortable if the curve flattens enough such that the market prices in a tightening before the Fed does. This occurs if data begin to reveal what this blog has been saying -- too much money chasing too few opportunities. As long as the curve behaves, so too will the Fed.

In sum, the Fed now turns a bit from data dependancy to watching the watchers.

Monday, January 22, 2007

Silent Savants, Golden Moments

Readers of this blog should be expressing a "what took so long" approach to the market sell-off rather than any suprise. The theme on this site has been questioning the market's obsessive pricing of Fed eases amidst expectations of a collapse in personal spending on the heels of collapsing home prices. The consistent answer to this view has been that the money creation process (that is bank lending) continues apace without any meaningful tightening of credit standards. Credit expansion trumps any concurrent slump in real estate pricing. Ask Sam Zell if there is a problem finding money to chase a mixed bag of properities. Continued lending by the banks is the reason why the inverted curve was indeed different this time around.

This is what Fed officials have been yapping about and why they remain vocally concerned about monetary inflation -- not the mere follow through of a commodity price spike. They have let us know that they anticipate some wage inflation in response to the multi-year trend that shifted earnings to the owners of capital and away from workers. The line between catch-up and inflation is for them to define.

While the FOMC waits and watches, you can expect the Fed to continue to talk a tougher game than they are playing. Market yields will continue to rise as ease expectations are unwound. Fed policy stays on the sidelines until the market approaches a positive curve that says the Fed is lagging economic events. Not something Bernanke would like to see. Until that time, mixed data and the unwind of those ridiculous expectations of Fed eases. Wonder what all the "street savants" will be saying after there is a no go at the end of the month.

Apologies for not writing since mid December. I have been taking time off and rearranging life priorities. My words of wisdom, balderdash to others, returns on a more regular basis in the next several weeks.