STOCK MARKET WATCH, Thursday 6 May

Debt, Jobs and Inflation

Alan Greenspan was very friendly to the financial market yesterday with his statement of taking a “measured” pace in raising interest rates. Where I really think he missed the boat is when he said, “Inflation is low and resource use is slack.” Inflation has been buried in a bunch of statistical mumbo-jumbo, but is more than obvious to anyone that buys gas or groceries. Also remember that a key resource that remains slack is human labor. Without jobs and increasing wages, it will be very difficult to service the higher costs of debt. According to Bill Gross of PIMCO, “Inflationary pressures build as long as we have this emergency less-than-zero percent real interest rate.” From the looks of it, the bond market is not buying Mr. Greenspan’s assertion of low inflation. The Fed Chairman is actually between a rock and a hard spot between artificially low interest rates causing inflation and higher interest rates piercing the debt bubble. He is forced into a position of being patient, even though he took the word out of the Fed statement. The bond market will have its final say as bonds drop in value forcing market interest rates higher.

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More on Debt

I am not an expert on debt, but one thing I know for sure…it is not a good thing! In my mind, it’s a form of slavery. We even coined the cute cliché, “I owe, I owe – so off to work I go!” We are at the point now where we have to borrow over $1.5 billion per day from our friends overseas; funny how we’ve been alienating many of them lately. This is absolutely unsustainable!

From someone who has much more experience than me, this is what Richard Russell had to say yesterday. “The debt situation in the U.S. is ballooning. At the Federal level the national debt is rising at almost a 10% annualized rate. The total debt in the U.S. is now about 300% of the U.S. Gross National Product, a situation never seen before. A goodly chunk of the debt has been financed at the Fed’s low 1% rate. The situation, as I see it, is extremely dangerous. I’ve said that the Fed, in keeping rates at 1%, has built a fantastic “debt-bubble.” When this bubble bursts, and it will burst, the U.S. could go into a long period of deflationary “unwinding,” a period which would see panic for liquidity and dollars with which to carry or pay off debt. This is the frightening situation that now faces the Greenspan Fed.”

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The employment report will be watched closely on Friday. A strong report will cause bonds to fall further, while a weak labor number will be favorable for Treasuries. I will also be paying attention to see what the revision will be from the March report that claimed an increase of 308,000 jobs. In any case, I expect the sales of Treasury debt to command first priority from market participants, otherwise the Federal Reserve will have to buy the debt themselves. The day they begin to monetize Treasuries will be the day gold sprouts wings and flies!

http://www.financialsense.com/Market/wrapup.htm

the need to frown and his fear of offending his favorite Presidential candidate during an election cycle.

At the Berkshire Hathaway annual meeting this past week, Charlie Munger dismissed the idea that highly liquid capital markets have been a net benefit to capitalism. This assertion made Bill Mann think back to Warren Buffett's old challenge to investors: Make each transaction as if you only get to invest in 20 companies in your lifetime. Would your portfolio look different?

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Where this concept becomes beneficial is in the way that it creates a much higher awareness of the type of trading cost that many investors fail to value: opportunity cost. Whenever you are buying a stock, you are in essence making the following claim: "At this moment, I see no better place in the world for my money than this one." Your statement is the exact opposite when you sell. "I've searched all of my worldly possessions, and there is nothing that I think that is more disposable to me than this particular asset." That's what stocks are: assets. They're claims on the future earnings of the underlying company.

If you only get to make 20 decisions ever, that would make you value each and every transaction a heck of a lot more than otherwise, don't you think? So many investors still seem to take the "Fire, ready, aim" approach to deploying their own assets. Buy something because Joe from the gym mentioned it -- heck, it's going up! -- and endeavor to learn about the company later. Maybe. Put a sell-stop in just in case it drops, because that will protect you, right?

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original document source at Financial Sense

thought I'd stop in and note things look a bit grim this morning.

If I were and advisor I'd be advising "run for your lives!"

That's probably why I am not a financial advisor. :-)

Hope you all fare well at the casino today. I'll check back near the end.

:toast:

Julie

http://quotes.ino.com/chart/?s=NYBOT_DXY0

Last trade 89.65 Change +0.34 (+0.38%)

related articles:

http://cbs.marketwatch.com/news/newsfinder/pulseone.asp?dateid=38113.3636342593-814290689&siteID=mktw&scid=0&doctype=806&property=&value=&categories=&

Dollar adds to yen gain after U.S. jobless claims data

CHICAGO (CBS.MW) -- The dollar rallied vs. the Japanese yen, up 0.8 percent at 109.56 yen, after U.S. labor data pointed to continued improvement for this segment of the economy. Initial claims for state unemployment benefits fell by 25,000 to 315,000 in the week ended May 1, the Labor Department reported Thursday. This is the lowest level since the week ended Oct. 28, 2000. The dollar remained mixed vs. its European counterparts in the wake of central bank policy decisions. The British pound was up 0.4 percent at $1.7972 after the Bank of England raised its key interest rate by a quarter point to 4.25 percent.

...a bit more...

It's MaeveDay!

Have a Great Day Marketeers!

http://money.cnn.com/2004/05/06/news/economy/jobless_claims/index.htm
Jobless claims lowest since 2000

Americans filing for unemployment insurance fall by 25,000 to 315,000
NEW YORK (CNN/Money) - The number of Americans seeking unemployment assistance tumbled last week, the government reported, coming in well below economists' expectations.

Initial claims for unemployment insurance dropped by 25,000 to 315,000 in the week ending May 1. That's down from the previous week's revised figure of 340,000, and below estimates for 335,000, according to Briefing.com. The figure is the lowest since October 2000.

The four-week average of initial claims, which irons out weekly fluctuations, slipped to 343,250 last week from a revised 347,000 the prior week.
<more>

BTW, they raised last week's figures by 2,000--just so you'll know.


Off to meet with my editor today!

It's all in the marketing. B-)

http://www.guardian.co.uk/uslatest/story/0,1282,-4059260,00.html

WASHINGTON (AP) - The House plans to pass a bill making permanent a broader bottom tax bracket that benefited virtually all wage earners in the next step in a plan to preserve President Bush's tax cuts.

Three of those tax cuts expire at the end of the year: the expanded bottom tax bracket, a reduction in the marriage penalty and an increase in the child tax credit.

The House has addressed one of the issues each week, beginning last week with a bill making the tax cuts for married couples permanent. House GOP leaders next week expect to debate the bill that would permanently expand the lowest 10-percent tax bracket. A bill to preserve the bigger child credit will be considered last.

The House voted Wednesday to prevent millions of middle-income families from losing their tax cuts to the alternative minimum tax, a levy imposed on wealthy tax dodgers that has been trapping more middle-class taxpayers each year.

None of the bills become law until and unless they are passed by the Senate and signed by the president.

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They learn quickly, no?

May 6 (Bloomberg) -- Police raided DaimlerChrysler AG's Japanese truck unit and arrested seven people on charges including falsifying safety reports, police said.

The raid was part of a probe into whether Mitsubishi Fuso Truck & Bus Corp. submitted false reports to the transport ministry about wheel design flaws blamed for 50 accidents and one death in 2002, Kanagawa prefecture police said. Former Fuso chairman Takashi Usami, 63, and former Mitsubishi Motors Corp. Managing Director Akio Hanawa, 63, were among those arrested, police said.

The arrests are the latest sign that Mitsubishi Motors, which owned Fuso at the time of the accidents, failed to improve management procedures after the discovery of 20 years of hidden customer complaints prompted a 2 million vehicle recall in 2000 and 2001. DaimlerChrysler, which owns 37 percent of Mitsubishi Motors, raised its stake in Fuso to 65 percent in March.

``This raises fresh safety and quality concerns at Mitsubishi Motors,'' said Yasuhiro Matsumoto, a credit analyst at BNP Paribas Securities (Japan) Ltd. in Tokyo. ``The bad image may be passed on to Mitsubishi Motors'' because the problems arose while Fuso was still part of the automaker and the two companies still share the Mitsubishi brand.

Requests to the companies and police to contact the arrested former executives' lawyers were declined.

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http://www.reuters.com/financeNewsArticle.jhtml?type=businessNews&storyID=5059493

CHICAGO (Reuters) - Wal-Mart Stores Inc. (WMT.N: Quote, Profile, Research) and other U.S. retailers on Thursday said April sales slowed down after a strong Easter holiday, as consumers took a break from a three-month shopping spree.

Wal-Mart, the world's biggest retailer, reported a 4.4 percent increase in April sales at its U.S. stores open at least a year -- a key measure known as same-store sales.

The company had said all month that sales would likely reach only the low end of its forecast for a 4 percent to 6 percent gain because many customers did their Easter shopping in March instead of April.

<snip>

Despite Pier 1's poor outlook, the National Retail Federation trade group said retail executives were more optimistic in April, and many said they were able to raise prices for the first time in years.

That bodes well for profitability. Retailers had slashed prices throughout the economic downturn, cutting into profit margins.

"Now that retailers have more control over pricing, they are in the driver's seat," said Tracy Mullin, NRF president and CEO. "Consumers will still be able to find great deals, but retailers will be able to strategically mark down merchandise instead of offering sweeping discounts to reduce inventories."

http://www.guardian.co.uk/business/story/0,3604,1210729,00.html

The Bank of England raised interest rates today for the third time since November in an effort to take some wind out of a strengthening economy.
As widely expected and in keeping with its "gradualist" approach on interest rates, the Bank's monetary policy committee (MPC) pushed up the cost of borrowing by a quarter-point to 4.25%.

"The global economic upswing has been maintained. In the UK, output growth has been at or above trend and business surveys are consistent with further strengthening. Retail spending continues to be robust, underpinned by income growth and unexpectedly strong house price inflation. Investment prospects have improved," the Bank said in a statement.

In a week that saw plenty of evidence of a buoyant economy - rising house prices, soaring debt and a recovering manufacturing sector - the MPC decision was all but a foregone conclusion as far as analysts were concerned.

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Rates hit 4.25% in bid to curb spending

Doesn't appear to have slowed down housing over there yet

snip>
The Halifax yesterday said house prices rose by 1.8 per cent in April and were up 19.1 per cent on a year earlier - the fastest rate of growth since last August.

April’s increase added £2795 to the price-tag of a typical home and provided the latest evidence suggesting that the economy is growing strongly despite the two increases in borrowing costs from the Bank since last November.

In recent weeks many banks and building societies have been frantically repricing their fixed-rate mortgage deals.

snip>

But he added that the risk of a "destabilising boom and bust" had increased over recent months as the market failed to show any signs of slowing down.

He said annual house price inflation was running at 18.9 per cent for the year to the end of April, while mortgage lending rose by £15 billion during the first three months of 2004.

At the same time the number of sales was showing signs of accelerating, at a time when economists wanted to see a levelling off in both transactions and borrowing.

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Homeowners Hit by Interest Rate Rise

http://news.scotsman.com/latest.cfm?id=2886486

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If lenders pass on the full hike in rates, monthly repayments on a £65,000 loan will increase to £428.78 from £418.79, based on a new rate of 6.25%.

But first-time buyers, who are more likely to have a loan of around £100,000, will see their repayments rise by £15 a month to £659.66.

While today’s rise is likely to have little impact on people’s ability to afford their mortgages, homeowners have now seen cumulative increases of nearly £30 to a £65,000 loan since November.

And if the base rate ends the year at 4.75%, as many economists are predicting, they will have seen their repayments rise by a total of £50 since interest rates first began to increase.

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They are becoming a tough crowd lately.

9:15AM: S&P futures vs fair value: -6.3. Nasdaq futures vs fair value: -11.0. At its worst levels of the morning, the futures market continues to point to a lower open for the cash market.

9:00AM: S&P futures vs fair value: -5.2. Nasdaq futures vs fair value: -9.5. Expectations remain set for a lower open in the cash market, as futures indications remain near their worst levels of the morning. Same store sales reports are generally in-line to better than expected, yet they have failed to excite the market, which remains hostage to concerns over inflation and rising interest rates. Today's session is likely to be choppy, like yesterday's, as the market remains hesitant ahead of tomorrow's Employment report.

8:32AM: S&P futures vs fair value: -5.5. Nasdaq futures vs fair value: -8.0. Futures indications lift on the heels of the in-line Productivity report and better than expected Initial Claims report. Specifically, Nasdaq futures lift 2 points and S&P futures lift 0.5 points. Despite the slight improvement, the futures market continues to point to a lower open for the cash market.

US investors on Wednesday played a waiting game as they mulled the ramifications of the Federal Reserve (news - web sites)'s monetary policy statement the previous day.

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Art Hogan, chief US markets analyst at Jefferies & Co, said: "We're trying to decide what our footing is." He added that the economy was currently "not too hot, not too cold" but that hints of inflationary pressure could soon change that.

Shortly after the open, traders took in news that the US service-sector activity index grew at a record pace in April, confounding expectations of a dip. The index, compiled by the Institute for Supply Management, measures the pace of growth in the two-thirds of the US economy accounted for by services.

The employment component of the index also rose, fanning hopes for a pick-up in jobs growth. Economists believe this is more likely to happen in the services sector than in industry because of outsourcing.

story

http://www.wthr.com/Global/story.asp?S=1845074

Merger leads to Bank One layoffs

Indianapolis, May 5 - Hundreds of Bank One employees must find new jobs beginning July first. The company plans job cuts.

The financial institution plans to eliminate at least 185 local jobs and over 300 nationwide. The cuts stem from a planned merger with JP Morgan Chase.

...more...

The rose-colored glasses view of hiring bewilders me.

Only 300 layoffs nationwide? Those are two BIG banks. It's lucky that they have almost zero overlap geographically, so there should be very few branches a block from each other where one eneds to be closed... but 300???

I'd expect to see more than that go in Texas alone(the only real overlap other than Delaware). There would also be a number of HQ jobs that would be duplicative.

I expected JPMChase/BankOne to be a reletively "bloodless" merger... but 300? They have like 165,000 employees between them. 300 layoffs is like .2% of the workforce.

http://www.guardian.co.uk/business/story/0,3604,1210474,00.html

If the International Monetary Fund has sometimes looked in need of a firm hand on the tiller in recent months then its new managing director, Rodrigo Rato, has been a captain in search of a ship. For that reason alone, his appointment this week has a satisfying neatness to it.

Convenience and availability do not, however, guarantee that Rato will be a success in running the world's most important financial institution. The IMF's history is pock-marked with managing directors chosen for reasons of political expediency rather than their credentials for the job.

In Rato's case, there were four plus points. First, he is a European, and a European by tradition runs the IMF - moreover, he came from a country that supported the war in Iraq, which guaranteed a fair wind from Washington. Second, he was not Gordon Brown, who could have had the job for the asking. Third, he was from a big European country but not Germany or France, which provided the last two IMF chiefs. Finally, he had nothing better to do after eight years as finance minister in José María Aznar's government, deposed in the recent Spanish elections.

Rato has been a key figure in Spanish politics for nearly 30 years. He was an architect of the centre-right People's party and now has to convince IMF staff and the international community he has the wherewithal to lead the organisation out of its recent doldrums.

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http://money.cnn.com/2004/05/06/news/economy/productivity.reut/

WASHINGTON (Reuters) - U.S. first quarter business productivity grew at a respectable pace, the government said Thursday, but unit labor costs unexpectedly edged higher, reinforcing the view that inflation is creeping back into the economy.

Non-farm business productivity, or worker output per hour, increased 3.5 percent in the January-to-March period from a revised 2.5 percent in the final three months of last year, the Labor Department said.

Wall Street had forecast the 3.5 percent gain and the fourth quarter was previously reported as a 2.6 percent advance.

<snip>

Economists speaking before the release thought the data would be consistent with trend potential GDP growth -- the rate at which the U.S. economy can grow without hitting inflationary speed bumps -- in the 3.5 percent to 4.0 percent range.

Unit labor costs conflicted slightly with this outlook, rising 0.5 percent over the first quarter, and the fourth-quarter measure was revised up to an unchanged reading from the originally reported 0.4 percent decline. Wall Street had expected no change in first-quarter unit labor costs.

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From Maeve's article above:

A series of strong reports from the job market may force the central bank's hand to raise rates sooner than previously anticipated.

From this article:

Confirmation that unit labor costs, although turning higher, remain very low will endorse the Fed's view it can take its time in tightening policy to give the economy a chance to work off past excesses and take up the slack in the labor market.

Guess we'll have to watch what the bond market has to say about all of this. :crazy:

So I wonder - who is controlling whom here? The bond traders or the ivory tower Fed.

control. The Fed seems stuck right now. The bond market pushing for a rate hike, the carry trade/derivatives market at the risk of imploding if they do raise the rates. Perhaps the choices have come down to the lesser of 2 evils, hyperinflation by holding off or implosion by raising to soon, too high, or too quickly in succession.

http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=5061823

Greenspan Says Globalization Reduces Trade Risks

CHICAGO (Reuters) - Continued globalization and innovation are helping reduce the dangers of a disruptive correction of the U.S. international trade imbalance, Fed Chairman Alan Greenspan said on Thursday.

"We may not be able to usefully determine at what point foreign accumulation of net claims on the United States will slow or even reverse, but is evident that the greater the degree of international flexibility, the less the risk of crisis," Greenspan said in prepared remarks to a banking conference sponsored by the Federal Reserve Bank of Chicago.

"Should globalization continue unfettered and thereby create an ever more flexible international financial system, history suggests that current account imbalances will be defused with modest risk of disruption," Greenspan said.

The current account deficit, the most comprehensive measure of the trade, measures about 5 percent of the U.S. economy, a level many economists believe is not sustainable.

Greenspan acknowledged foreign investors will likely lose their appetite for U.S. assets eventually.

"At some point ... international investors, private and official, faced with a concentration of dollar assets in their portfolios, will seek diversification, irrespective of the competitive returns on dollar assets," Greenspan said.

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say? I don't like what I'm reading into it at all. I've got to have something wrong here. I'm pessimistic again today.

but is evident that the greater the degree of international flexibility, the less the risk of crisis,"

Is he saying, hey world, suck it up a little longer, keep buying our debt or we'll all go down together?

"Should globalization continue unfettered and thereby create an ever more flexible international financial system, history suggests that current account imbalances will be defused with modest risk of disruption,"

I have no idea what history he's referring to here, but it seems we need to continue on this path of globalization so the US can continue to export her inflation while at the same time having the world help cover and pay her debts.

"At some point ... international investors, private and official, faced with a concentration of dollar assets in their portfolios, will seek diversification, irrespective of the competitive returns on dollar assets," Greenspan said.

So, at some point it won't matter how damn high a return the buck is paying, the world is going to want to be deversified from the buck alone - isn't the idea of deversification a form of spreading out risks and the novel idea of risks associated with the US buck sounds to me like a decline in confidence in it.


But he said a decade-long transition to a "far more vigorous competitive world economy" appears to have stimulated global production and lessened the dangers of running a high trade gap.

Giving himself and the US push for globalization a bit of a pat on the back. It was the worth the risk and the world owes us a favor in return (please buy out debt).

"Protectionism, some signs of which have recently emerged, could significantly erode global flexibility and, hence, undermine the global adjustment process,"

Hey, Lou Dobbs - knock it off! You are attempting to undo what I've worked hard for the past 17 years. You're putting my legacy at risk.


:shrug:

on what this mouthpiece is attempting to spin any better than you have done, 54anickel.

It appears that the snakeoil salesman has come full circle and just jerks himself off in the most disgusting and disturbing of ways.

In order to continue to support the risks for the heavy hitters (ie hedge funds and derivatives), the "globalization" must go on!

We (read "the world") need to look past all of the economic spin and just keep baling and piling resources into the dollar until the inevitable collapse (when the dollar becomes the scourge of the earth) occurs -- then "Watch out below!"

that's OK. Look at how well the buck's doing again today!
I hope it can continue this rally for a bit longer so that the blue light stays in my favorite department for a bit longer. Hopefully there will be a back to school sale again when rates actually go up.

http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=5061390§ion=news

NEW YORK (Reuters) - U.S. stocks opened lower on Thursday as investors shied away from rising oil prices, fears of rising interest rates, and unease over geopolitical events.

A sharper-than-expected drop in weekly jobless claims failed to raise optimism, as labor costs edged higher, sparking new fears of inflation.

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Hi everyone!

Thought a reading was way overdue.

Today's reading is HARMONIZE changing to PROGRESS. Here is the changing line from Harmonize: "The person in this position is lost in the memory of a harmonious experience. That time has passed. Fortunately, reform is possible. There is an opportunity to move on to a situation of new growth."

Here is a quote from PROGRESS: "If you are a leader and in a position to implement progressive action, you will meet with great success."

Okay, well, I think this reading may refer to how we all miss Bill Clinton. Remember that economy? I sure do. I think this Bush recession has given the opportunity for us to take progressive action. There are plenty of people fed up. One of my best friends was laid off of her job on Monday. Outsourced to India. :cry:

I have to run for now. I have my final exam this morning.

I hope all of the marketeers are doing okay. I know I haven't been around much lately. I'm sorry about that.
:-(
Have a great day everyone!
:hi:

Good to see you back here.

I need to run along to work. Thanks to all for keeping the thread pumping - especially 54anickel and UpInArms for doing so much of the heavy lifting lately.

Ozy :hi:

http://www.reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=5052550

WASHINGTON, May 5 (Reuters) - The Federal Reserve's multiple policy objectives of maximum employment, price stability and moderate long-term interest rates make sense, Fed governor Mark Olson said on Wednesday.

snip>

Olson said that as a young banker his customers' concerns were often formed by the Great Depression and did not include inflation.

"Only after the high-inflation years of the 1970s and early 1980s, after the spending power of incomes had been seriously eroded, were the consequences of inflation fully understood," his speech said.

"Part of the success in achieving consistent economic growth in the United States is due in significant part to broad public support for our mandated monetary policy objectives," he said.



Bwahahahaha - Hey Olson, what's your definition of inflation anyway?

I suspect there's a better than 50/50 chance that his "definition" of inflation is that same as most of the economic world. It's only here that a small spike in the PPI becomes "stagflation" or a rise in the "prices paid" component of one of the ISM indices. Or that gold is shooting up.

There's plenty of signs that we have left the "1% inflation watch out for deflation" range and moved (gasp) into the 2-3% inflation range. This is hardly a problem.

that the Fed has repeatedly admitted they do not truly understand. (Bernanke's speech has been posted here several times). So they are fighting an unknown enemy with their only known weapon of inflation.

Time will tell how it all works out.

But don't you find it just a bit odd that with all the unprecedented stimulus that inflation is low?

Deflation is not well understood because it happens so rarely, but it IS far more devastating than people think.

I'm of the opinion that we came a lot closer than people assumed and only massive stimulus was able to (just barely) keep us out of the hole. There's a significant danger of overshooting to the up side, but they may not have had a choice. Had they moderated their aggressive cutting they might have ended up having no "weapons" at all and find themselves (like Japan) at 0% with no borrowing demand and nowhere to lower it to.

"I'm of the opinion that we came a lot closer than people assumed and only massive stimulus was able to (just barely) keep us out of the hole."

I think its noteworthy that the most massive fiscal stimulus in history (2001-2004) has only produced a minimal effect on creating any form of sustainable economic activity. Just seems more list reflating bubbles. IMO, we may have both inflation in some sectors, and borderline deflation in some sectors, hence the term that I read a month or two ago "Deinflation." IMHO, the Fed's attempts at "inflation" will only deepen the upcoming deflationary period, but that's my opinion.

In essence, in the US we have *way* too much private, corporate and gov't debt, not enough trade exports, and globally we have overcapacity (and in the US too @ 76%), and not enough energy/oil for all of us...just seems like a deflationary storm that has only been delayed by a *massive* influx of gov't debt/money supply. If this materializes, the US will not have a Japanese (or any other country) to provide the "consumer of last resort" function to thwart the deflationary effects, but of course my opinion is in the minority.

People want to talk about "inflation in some sectors and deflation in some sectors" because they look at inflation as merely a change in price levels rather than looking at price changes as a result of inflation.

Inflation/Deflation is a comparison of the change in the supply of money compared to the change in the production/consumption of goods and services. So the fact that computers continue to get cheaper while getting more powerfull is not "deflation" and gas prices shooting up is not "inflation" though both contribute in their own way.

The current environment is largely as it has been spun. We were on the cusp of deflation for the last couple years and are just now comming off of that bleeding edge. A syptom of that is that inflation is visible on the horizon, but not yet a threat of it's own.

Dow 10,228.91 -82.04 (-0.80%)
Nasdaq 1,933.01 -24.25 (-1.24%)
S&P 500 1,111.98 -9.55 (-0.85%)
10-Yr Bond 4.588% +0.018

looks like there's no toe-hold for the numbers this morning

blather claims it's priced in.

http://www.gold-eagle.com/gold_digest_04/droke050504.html

The Wall Street bears are on the ropes and bleeding and are on the verge of being stopped altogether by the resurgent bull. The month of May, as I see it, will be a supremely critical one for the bears and probably their last chance to turn the market their way. However, based on the latest actions of the Federal Reserve it may already be too late for the bears to mount a meaningful comeback.

According to economist Ed Yardeni, the latest reading of "Super Money" suggests that the Fed is providing lots of liquidity to fuel what he calls the "Global Synchronized Boom (GSB), which is boosting profits in the U.S. and around the world. In March, for instance, so-called "Super Money" was 17.8 percent above the year-ago level, the fastest pace since February 1991. Yardeni points out that during the previous GSB between 1993-1997, Super Money growth ranged between 10 and 16 percent, with a peak of 16.3 percent.

The Fed recently announced that the broader M3 money supply had exploded upward by $42.1 billion, the biggest 1-week increase of the year, to a record $9.043 trillion! Since the beginning of 2004, the M3 money supply has increased by $223.4 billion, or an average weekly increase of $17.2 billion, according to Donald Rowe of The Wall Street Digest. At the current pace, M3 will grow by almost one trillion dollars in 2004.

As Rowe suggests, this is really the story of the year and yet almost no mainstream news outlets have covered it. This, friends, is what is keeping the U.S. economy afloat. It's also what will help stimulate the job growth that so many are wringing their hands over. Already, half a million jobs were created in the first quarter alone. To quote Rowe, "Faster M3 money supply growth produces faster GDP growth."

The Federal Reserve indicators I follow suggest the Fed is laying down a massive line of support underneath the stock market, one that will be extremely difficult, if not impossible, for the bears to break. We could well be witnessing the bears' swan song in 2004.

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http://www.mlive.com/newsflash/business/index.ssf?/newsflash/get_story.ssf?/cgi-free/getstory_ssf.cgi?f0026_BC_EU-ChinaTrade&&news&newsflash-financial

BRUSSELS, Belgium (AP) -- China and the European Union signed trade and custom cooperation agreements on Thursday, cementing closer cooperation which the EU hopes will ultimately make the two "the single biggest" trading partners in the world.

"The numerous agreements show how fast the relations are developing," EU Commission president Romano Prodi said in a joint news conference with Chinese Premier Wen Jiabao.

"We will further promote cooperation," added Wen.

The customs cooperation deal aims to combat endemic piracy of goods that international trade groups estimate costs Western companies $16 billion in sales each year.

Everything from pirated designer wear to movies and music CDs continue to flood European markets from China. In the works since 1997, the deal will offer administrative assistance to help customs officers work better together.

Beijing, which joined the WTO in 2001, claims it has started to stop the illegal use of trademarks, copyrights and other intellectual property by Chinese companies.

Wen lobbied Prodi to try and lift a 15-year arms embargo, which the EU imposed after the 1989 crackdown on pro-democracy protesters in Tiananmen Square. But Prodi said his hands were tied, adding any lifting would have to be agreed by the 25 EU nations.

"I explained the issue is currently under discussion between the member states," said Prodi.

<snip>

Once their relationship comes to full bloom "I think and I bet that the trade and investment between China and Europe will be the single biggest in the world," said Prodi.

...more...

http://www.gold-eagle.com/editorials_04/hathaway050504.html

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How does gold do in a period of rising interest rates? The casual and perhaps superficial answer, and the one already reached by supposedly savvy street-smart traders over the last several weeks, is that it does poorly. The recent precipitous 11% decline in gold prices from $430 to $385 suggests that the fund managers, TV commentators and traders dumping gold were collectively reading from the Summers-Barsky script (the 1988 thesis by former Undersecretary of the Treasury and current President of Harvard Lawrence Summers). That paper, "Gibson's Paradox and the Gold Standard" posits that the price of gold must be inverse to the return on financial assets:

"The willingness to hold the stock of gold depends on the rate of return available on alternative assets. We assume the alternative assets are physical capital and bonds."

In his paper "Gold 2002: Can the Investment Consensus Be Wrong? The Summers Barsky Gold Thesis" Peter Palmedo of Sun Valley Gold demonstrated that the weekly price fluctuations in gold were almost entirely (88%) explained by the stock market. Notwithstanding the covariance of both in 2003, it is a matter of common sense. Expectations for good returns on financial assets put gold in the doghouse. However, losing money in stocks and bonds, especially the expectation of more of the same, drives investors to consider the merits of safe havens including cash, T-Bills, and gold.

The residue of high investment expectations built up in the previous bull market, even though the S&P remains 22% below its all time peak four years ago, occludes the merits of safe haven investing. The survival of optimism in the aftermath of the dot com crash is a testament to the resilience of institutional and popular memory as well as to the inherent difficulty, at the broadest cultural levels, of recognizing and adapting to new realities. In addition, high hopes have been sustained well beyond the norm by the Fed's stance of aggressive ease. Almost free 1% money (and the promise of more) sustained the illusion of positive returns by allowing carry trade artists to craft "new" investment products built on nothing more than speculative leverage. The reflation trade, which centered on "hard assets" of any kind, was a corollary of the Fed stance, and explains both the speculative excess in base metals as well as the temporary misperception of gold. It also explains why 2003 provided an exception to the rule that gold prices tend to vary inversely with those of financial assets.

While a rise in interest rates might be presumed in the popular media to be theoretically bad for gold, it is more important to ask and answer several related questions before jumping to any particular conclusion. First, is the prospective rise in interest rates the beginning or the end of a process? Second, are the increases in nominal interest rates identical to real interest rates? Third, and most important, will the interest rate increases be favorable or adverse for the returns on financial assets?

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http://web.mit.edu/krugman/www/deflator.html

This week's cover story in The Economist makes it more or less official. Deflation, not inflation, is now the greatest concern for the world economy. Over the past year, producer prices have fallen throughout the advanced world; consumer prices have been falling for the last 6 months in France and Germany; in Japan wages have actually fallen 4 percent over the past year. Until the recent crisis prices were falling in Brazil; they continue to fall in China and Hong Kong; they will probably soon be falling in a number of other developing countries.

So far, none of these price declines looks anything like the massive deflation that accompanied the Great Depression. But the appearance of deflation as a widespread problem is disturbing, not only because of its immediate economic implications, but because until recently most economists - myself included - regarded sustained deflation as a fundamentally implausible prospect, something that should not be a concern.

The point is that deflation should - or so we thought - be easy to prevent: just print more money. And printing money is normally a pleasant experience for governments. In fact, the idea that governments have a hard time keeping their hands off the printing press has long been a staple of political economy; dozens of theoretical papers have argued that the temptation to engage in excessive money creation causes an inherent inflationary bias in fiat-money economies. It is largely to combat that presumed bias that most of the world has accepted the notion that monetary policy should be conducted by an independent central bank, insulated from political influence - and has written into the charters of those central banks that they should seek price stability as their main, often only, goal.

Yet here we are, with deflation turning out to be a serious problem after all - and with policymakers finding that it is not as easy either to prevent or to reverse as we all thought.

How can this be happening? What does it imply for policy? The purpose of this note is to argue that more or less conventional economic theory actually does suggest some answers to these questions - but that these answers fly in the face of conventional policy wisdom. And because the answers are so hard to accept, deflation is indeed a real risk. (This note should be viewed as a companion piece to my earlier writings on Japan, particularly Japan: still trapped , but this time tries to approach the problem more generically).

The note is in four parts. The first considers the popular view that deflation is simply a product of world excess capacity, and the problems with that view. The second part argues a point that is gradually becoming familiar: that concerns about deflation generally make sense only if they are linked with the idea of a liquidity trap, in which the money supply is irrelevant at the margin. The third part tries to go to a deeper level, relating deflationary pressures to an excess of desired saving over desired investment - an approach that leads to a seemingly paradoxical interpretation of deflationary pressures that I believe to be fundamental to the whole issue. Finally, I consider the policy implications of the apparent emergence of a serious deflationary threat.

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years of claiming victory over inflation might have actually been a warning of deflation to come.

http://www.imf.org/external/pubs/ft/def/2003/eng/043003.pdf

http://www.thenation.com/doc.mhtml?i=20030630&c=1&s=greider

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"Painful adjustment" means facing up to some long-suppressed truths. Washington's single-minded championing of globalization, for instance, has been good for US multinationals but not for the balance sheet of the American economy, which is underwater and has been for years. That is the meaning of the huge trade deficits, the accumulating indebtedness that inevitably will produce a painful reckoning in standards of living (as a nation, we manage to consume more than we produce by borrowing every year from abroad).

But the even larger reality is that America's weakening position signals the need for a deep restructuring of globalization as well. The globalized system the United States launched and protected throughout the cold war decades approaches its own reckoning with the dilemma of too many factories and not enough buyers. Escaping this condition will require fiendishly difficult diplomacy (made more so by the Bush Administration's cockeyed imperialism), but the risks are historic in dimension (the global trading system disintegrated after 1929 as worldwide depression led nations to protect their own producers and markets from foreign competitors). First, leading nations must join to launch worldwide stimulative policies and persuade rising nations like China not to bring down the system by overwhelming rival producers. The fundamental solution, however, involves the kind of moderating reforms advocated by antiglobalization activists worldwide--rules to rebalance the system and genuinely promote wages as well as output, financial terms that give developing countries more time and space to seek their own distinctive economic plans, plus new institutions of governance that are truly equitable and democratic, instead of corporatized lawmaking. That's a very tall order for statesmanship in a world presently governed by small-minded men.

Meanwhile, the economic dysfunction in the American system involves many other contentious questions, including the overbearing scale of certain dominant enterprises. The spectacular costs of allowing ever-growing bigness in corporations are reflected every day in the news (think of the doomed AOL Time Warner merger that has lost more than $200 billion for investors, or the scandalous behavior of financial mega-firms like Citigroup, or the conglomerate homogenization of broadcasting). The gathering evidence also suggests that the mass-consumption economy that has flourished since World War II may at last be running out of gas. Too many indebted consumers are tapped out or will be in hard times. Who's going to buy all this stuff? Is this weakened condition related to the gross and growing wage inequalities of the past two decades?

The "market signal" of small-d depression might be saying: Don't invest more in the old stuff since we've already got too many shopping centers. Start investing in "problems" the country has long neglected--see these really as economic opportunities. Invest in the energy technologies and industrial transformations required for the posthydrocarbons age of ecologically sustainable prosperity. Invest in healthcare and transportation and production systems to deliver safe, healthy food. Invest in the smaller, more nimble firms ready to do things differently. Invest in people--the human development that begins with children at a very early age. These and other investment opportunities are where the future jobs and higher returns are most likely to be found. The status quo interests will naturally resist such shifts in purpose and deploy their political muscle to block any promising departures. But a fundamental restructuring at least would open the way to think anew, to strive for a different kind of politics. If the Chicken Littles turn out to be right, a pivotal moment is approaching, one that may be both dreadful and promising.

more...

http://www.gold-eagle.com/editorials_04/laird050504.html

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I believe that 99 percent of the US and the World thinks or likes to think that things are going to go on as before. But regardless of what we think, the whole picture has already changed and is just waiting for the genesis point of the NEW ERA. It has always been thus in new era times.

That genesis event will be currency related, but this time the currency of concern is the world's reserve currency, the US dollar, with nothing really backing it, other than the good will of our trading partners, most of whom have already fought a world war to the death with us, and who will hold no real sympathy at all for the US once our financial use to the world has run its course. There will be no 'Marshall Plan' for the US should this event occur. Do you expect they really care about us? How much de we really depend on these foreign entities for our economic security??? That is the question.

Is it possible that we are moving along in the world, with not a CLUE to what is waiting to happen, that our so called friends may be really waiting for our day to come, and will just watch it happen. I know that is not a nice thought, but my point is, it is worth thinking about. Particularly when the US is depending on the world economic community to bail out the dollar. Maybe these people are just waiting for the time they can cut the cord to the US, when their internally calculated rate of real return on their US dollar assets falls below a secret internal threshold. Maybe that's when the first Mexican bandit fires.

Former Treasury Secretary Lawrence Summers said in a speech to the International Institute of Economics : "...it surely cannot be prudent for us as a country to rely on a balance of financial terror to hold back reserve sales that would threaten our stability" http://biz.yahoo.com/rf/040324/economy_summers_1.html

All it takes for a Mexican stand-off to result in a blood bath is for an irreconcilable impasse to occur, all the time one side is waiting for the other to fire, and thinking of jumping the gun...

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Dow 10,200.09 -110.86 (-1.08%)
Nasdaq 1,929.17 -28.09 (-1.44%)
S&P 500 1,109.00 -12.53 (-1.12%)
10-yr Bond 4.600% +0.030
30-yr Bond 5.365% +0.017

NYSE Volume 1,002,379,000
Nasdaq Volume 1,200,249,000

2:00PM: More of the same, as the major averages continue to vacillate along their respective session lows... The Nasdaq maintains its underperformance position relative to the S&P 500 and the Dow... In the Dow, only 4 of its 30 components are trading in the green... Specifically, leaders to the upside include Johnson & Johnson (JNJ 54.71 +0.63), which was among yesterday's biggest losers, as well as Procter & Gamble (PG 107.27 +0.46) and Boeing (BA 43.95 +0.19)...
Laggards of note include Caterpillar (CAT 76.90 -1.90) and General Motors (GM 46.33 -1.23), both of which also headlined in yesterday's session... Overall, 8 issues are showing losses of more than a point... Wal-Mart (WMT 54.80 -1.06) is among these after delivering April same store sales of 4.4%, in-line with analysts' expectations and company guidance of 4-6% growth...NYSE Adv/Dec 466/2826, Nasdaq Adv/Dec 668/2389

1:30PM: Little change since the last update, as the major averages continue to trade within only a short reach of their respective session lows... The lackluster trade in the U.S. markets echoes the dreary action recorded in overseas markets today... To that effect, the European DAX, CAC, and FTSE closed down 2.8%, 2.0%, and 1.2%, respectively... Note that the Bank of England raised interest rates by 25 basis points today... While in the U.S., the fed funds rate remains at its 46-year low of 1.0%, the market is anticipating a rate hike in the near- to intermediate-term...

Keep in mind, though, that even at 1.25% or 1.50%, the federal funds rate will be near its historical lows... Additionally, note that the Fed in its latest directive indicated that the policy of accommodation can be removed at a pace that is likely to be measured...

Dow 10,241.26 -69.69 (-0.68%)

Don't these #'s mean something?

http://business-times.asia1.com.sg/story/0,4567,115308,00.html


THE dollar has been fired up by the latest utterances of the oracular Federal Reserve chairman Alan Greenspan, and by what the market infers to be his intention to raise US interest rates soon.

This is assumed to be good news because it implies the end of deflation (even though Mr Greenspan insists that he sees no danger of US inflation yet). But the market better be careful what it wishes for because it just might get it - and have to face the consequences!

As the always perceptive Paul Krugman noted in the International Herald Tribune this week, the International Monetary Fund (IMF) is urging the US government to prepare the economy for higher interest rates and to avoid 'financial market disruption both domestically and abroad'.

What this means in simple terms is that an economy deeply in debt cannot easily tolerate higher interest rates, and in this respect we need to add the names of Japan and Britain alongside that of the United States.

The virtuous (in some senses) circle of extreme monetary easing and rising output in recent years - aided hugely by the emergence of China, India and others as global producers of goods and services - has not only kept inflation at bay but even managed to turn the fear of deflation into Public Enemy No 1.

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So, how does the recent finding that labor costs are increasing effect the picture? :shrug:

http://www.thehindubusinessline.com/2004/04/26/stories/2004042600070800.htm

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Some select remarks of the Fed chief, Dr Alan Greenspan,:

(1) Mr Greenspan said the fiscal implications of a rising level of retiring US workers are a "very significant problem" for the US budget in the long term. "It hasn't impacted yet on the short-term markets," he said. "Clearly, you cannot find footprints of either the immediate deficit or the long-term deficit in long-term Treasury yields as yet." Yields are rising because "the news is good" on the U.S. economy, he said.

(2) "It is fairly apparent that pricing power is gradually being restored," Dr Greenspan said in response to a question on the economy from Senator Richard Shelby, an Alabama Republican, at a Senate Banking Committee hearing on the banking industry. "Threats of deflation that were a significant concern last year by all indications are no longer an issue before us. Clearly it is a change that has occurred in the last number of weeks."

Dr Greenspan dismissed rising commodity prices as an inflation threat, saying they are a small part of total costs for companies. Inflation pressures are "reasonably contained," and labour productivity, which helps companies hold down prices because they can produce more goods in an hour, is "still impressive".

While commodity prices are rising, labour costs, which account for more than two-thirds of the final cost of goods and services, are still declining, he said. Non-farm unit labour costs fell 0.4 per cent in the fourth quarter after a 5.6 percent decline in the prior three months, Labour Department data show.

(3) All told, the available data, industry and supervisory judgments, and the long and successful experience of the US commercial banking system in dealing with changing rates suggest that, in general, the industry is adequately managing its interest rate exposure. Many banks indicate that they now either are interest-rate neutral or are positioned to benefit from rising rates.

Looks like some bargain hunters came out of the woodwork again. :eyes:

Dow 10,241.26 -69.69 (-0.68%)
Nasdaq 1,937.74 -19.52 (-1.00%)
S&P 500 1,113.99 -7.54 (-0.67%)
10-yr Bond 4.602% +0.032
30-yr Bond 5.375% +0.027

NYSE Volume 1,505,145,000
Nasdaq Volume 1,773,632,000

Close Dow -69.69 at 10,241.26, S&P -7.57 at 1,113.96, Nasdaq -19.52 at 1,937.74: It was a bit of a roller-coaster ride for the market today, as the major averages spent the first portion of the session drifting lower and the second part paring its losses... As a result, while the market finished the session with notable losses, the major averages managed to close well off their respective session lows... Much of the negative bias was tied to continued concerns regarding rising interest rates and inflation, as well as the expected slow-down in earnings, as comparisons become more difficult in the second half of the year...
The latter concern became particularly obvious in the face of generally in-line to better than expected April same store sales reports, which failed to incite buying enthusiasm, with the retail sector being among today's biggest laggards... Other laggards of note included the hardware, telecom, networking, biotech, gold, oil services, steel, banking, and broker/dealer groups... There was little leadership to the upside to speak of...

Today's economic reports included the Initial Claims report at 315K (consensus 335K), which pointed to continued improvement in the lay-offs picture, and the Q1 Productivity report at 3.5% (in-line with consensus), which showed Unit Labor Costs increasing just 0.5%, for their first increase this year... Despite recent increases in commodity prices, with crude oil at a new 13-year high today, stability in unit labor costs is a major restraining factor in the outlook for inflation (see The Big Picture column for more details)... Finally, much of the market's hesitation was tied to participants' hesitation ahead of tomorrow's Employment report, which is likely to be market-moving (see the Looking Ahead column for more details)...

Elsewhere, the bond market closed with mild losses across its yield curve and the 10-year note down 6/32, bringing its yield up to 4.60%...NYSE Adv/Dec 633/2720, Nasdaq Adv/Dec 916/2249


Have a great night marketeers :hi: