Central Banks: When We Succeed, We Fail
17 minutes ago
World View & Market Commentary.
Forest first; Trees second.
Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.
The recovery regained incremental strength in the third quarter, but the pace is still quite soft. Third quarter GDP expanded at a 2.0 percent annualized pace, following a 1.7 percent rise the prior quarter. The latest figure matched analysts' projections for a 2.0 percent gain.
The latest quarter was led by gains in inventory investment, consumer spending, equipment investment, and government purchases. On the negative side, housing investment fell back and net exports worsened on higher imports. Exports rose moderately.
How strong final sales are is still an important issue in terms of whether demand is picking up or not and it slowed by both key measures. Growth in real final sales to domestic purchasers slowed to 2.5 percent, following a 4.3 percent boost in the second quarter. Final sales of domestic product (adds in net exports) eased to 0.6 percent from 0.9 percent annualized in the second quarter. A big question is whether the boost in imports reflects optimism on the part of businesses that spending is going to pick up-and there is no certain answer. The surge in both imports and inventories at the same time implies optimism. But if demand does not pick up, the boost in inventories will be a negative in coming quarters.
Year-on-year, real GDP in the second quarter is up 3.1 percent, compared 3.0 percent in the second quarter.
Economy-wide inflation as measured by the GDP price index firmed to 2.3 percent in the third quarter, following a 1.9 percent increase the previous period. The median market forecast was for a 2.0 percent rise.
A slowdown in wages & salaries made for a slowdown in the third-quarter employment cost index, at plus 0.4 percent vs. the second-quarter's plus 0.5 percent. The on-year rate is plus 1.9 percent vs plus 1.8 percent in the second quarter. Wages & salaries rose only 0.3 percent in the third quarter, down from the second-quarter's 0.4 percent. The on-year rate slipped one tenth to plus 1.5 percent, a rate just above on-year consumer price inflation which has been trending slightly over 1.0 percent. Benefit costs were unchanged at 0.6 percent though the on-year rate rose two tenths from the second quarter to plus 2.7 percent. Employment costs remain very quiet, giving the Federal Reserve the leeway it needs for further accommodation.
Fed Asks Dealers to Estimate Size of Debt Purchases
Oct. 28 (Bloomberg) -- The Federal Reserve asked bond dealers and investors for projections of central bank asset purchases over the next six months, along with the likely effect on yields, as it seeks to gauge the possible impact of new efforts to spur growth.
The New York Fed survey, obtained by Bloomberg News, asks about expectations for the initial size of any new program of debt purchases and the time over which it would be completed. It also asks firms how often they anticipate the Fed will re- evaluate the program, and to estimate its ultimate size.
With their benchmark interest rate near zero, policy makers meet Nov. 2-3 to consider steps to boost an economy that’s growing too slowly to reduce unemployment near a 26-year high. Financial-market participants are focusing on the size, timing and maturities of likely purchases aimed at lowering long-term rates, with estimates reaching $1 trillion or more.
“If they buy too much, I think there’s a real chance that rates are going to rise because people are worried about inflation,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “If they don’t buy much, they’re not going to have a market impact.”
Claims data offer rare good news on the labor market as initial claims fell steeply to 434,000 in an October 23 week that isn't skewed by special factors. The level is the lowest since July as is the four-week average of 453,250. Given that July's data were distorted by adjustment problems tied to auto retooling, the latest batch of data is perhaps the best so far of the recovery.
Continuing claims for the October 16 week fell 122,000 to a two-year low of 4.356 million. The four-week average of 4.447 million is down 39,000. The unemployment rate for insured workers slipped one tenth to 3.5 percent. Emergency claims and those on extended benefits are also down.
In other words, the BOJ is now permitted to do what the Fed will have authority to do with a few months: buy virtually all risk assets, as buying ETFs is the same as buying the general market courtesy of the most traded security in the world, SPY, to push and pull the entire market in whatever direction it goes. There are two questions at this point: is the BOJ allowed to buy foreign (read US) assets that fall under the above buckets, and whether the FX currency swap line recently established with the BOJ will allow the Fed to use Japanese proxies to monetize various US assets. Or will the Fed first seek input from the BOJ on how to proceed with sending the Dow to 36k.
The volume of purchase applications picked up after two weeks of steep declines, 3.9 percent higher in the October 22 week. Refinancing applications rose 3.0 percent. The gains coincide with a drop in mortgage rates including a nine basis point decline for 30-year loans to 4.25 percent. This week's heavy run of housing data indicates the sector is stabilizing at a very low level.
Aircraft orders lifted overall durables sharply in September but ex-transportation components are mixed and net down. New factory orders for durable goods in September rebounded 3.3 percent, following a 1.0 percent decrease in August. The gain in September came in significantly above the consensus forecast for a 1.6 percent boost. Excluding transportation, new durables orders fell back 0.8 percent, following a 1.9 percent increase in August.
By major industries, transportation led orders up, jumping 15.7 percent in September after declining 8.8 percent the prior month. Nondefense aircraft soared a monthly 105.0 percent after dropping 30.0 percent the month before. Defense aircraft orders advanced 30.0 percent in September while motor vehicles slipped 0.4 percent.
Other components were mixed but more down than up. Declines were seen in primary metals, down 0.5 percent; fabricated metals, down 1.6 percent; computers & electronics, down 4.0 percent; communications equipment, down 18.6 percent; and "all other," down 0.1 percent. Gains were seen in machinery, up 2.0 percent, and in electrical equipment, up 0.4 percent.
Business investment in equipment continues to oscillate between positives and negatives due to its inherent monthly volatility and only moderate uptrend. Nondefense capital goods orders excluding aircraft in September slipped 0.6 percent after jumping 4.8 percent in August. Shipments for this series continued to edge up, rising 0.4 percent in September after gaining 1.3 percent the prior month.
Year-on-year, overall new orders for durable goods in September held steady at up 12.2 percent. Excluding transportation, new durables orders eased to up 9.5 percent from 13.6 percent the prior month.
The bottom line is that durables excluding transportation have been typically volatile but essentially flat over the last few months. Growth in manufacturing appears to be slowing at least for the near term. On the news, equity futures declined marginally while Treasury rates were little changed.
Alaska's untapped oil reserves estimate lowered 90 percent
The U.S. Geological Survey says a revised estimate for the amount of conventional, undiscovered oil in the National Petroleum Reserve in Alaska is a fraction of a previous estimate.
The group estimates about 896 million barrels of such oil are in the reserve, about 90 percent less than a 2002 estimate of 10.6 billion barrels.
The new estimate is mainly due to the incorporation of new data from recent exploration drilling revealing gas occurrence rather than oil in much of the area, the geological survey said.
Berkshire Hathaway Tells SEC: Accounting Rules Don't Apply To Us, And We Don't Have To Take Writedowns
Is Berkshire Hathaway asking the SEC for special treatment?
The regulator questioned Buffett's firm in May over a glaring absence in write-downs concerning losses worth $1.86 billion on Kraft and US Bancorp, Reuters reported today.
Berkshire denies any accounting malpractice despite the fact that the losses endured for at least 12 months and were clearly not temporary under SEC guidelines.
Here's what Berkshire CFO Marc Hamburg wrote in a response letter (which can be viewed in full at Zero Hedge) to the SEC's queries in May:We believe it is reasonably possible that the market prices of Kraft Foods and U.S. Bancorp will recover to our cost within the next one to two years assuming that there are no material adverse events affecting these companies or the industries in which they operate.Hamburg then attempts to further justify Berkshire's actions by arguing that the firm is pretty sure the losses are "recoverable through anticipated future investment income" (ok...) and that the firm has a talent for holding securities for long periods of time, so it can wait for the shares to bounce back (hmmm).
We believe that our conclusions to not record other-than-temporary impairment charges on investments in an unrealized loss position for more than twelve consecutive months was appropriate and in accordance with ASC 320 and Topic 5M.