Mel's Blog

October 26,2010 Market News

October 27th, 2010 9:21 AM by Mel Samick

Fears that the U.S. economy is headed into a double-dip recession have eased somewhat as data surprises have swung the pendulum to the upside. September and October have been dominated by upside surprises on data ranging from the ISM Manufacturing Index to payrolls, and from the Trade Balance to Retail Sales numbers. This stands in sharp contrast to the experiences of July and August. Good corporate earnings so far and the hope of further quantitative easing (QE2) from the Fed have sent stocks soaring. The stock market seems to be in a mood to ignore all of the toxic news and only focus on the positives. Noticing this buoyant mood, Lebron James is also warming up to his disgruntled fan base and urging the people upset with his decision to sign with the Miami Heat, to move on. However, French President, Nicolas Sarkozy's, similar attempt is not going as well among the protesting workers who cannot fathom the prospect of working two more years before retirement.
In France, the furor involves government plans to boost the minimum age for retirement benefits from 60 to 62, and the age for full benefits from 65 to 67. A ferocious conflict regarding the proposal to raise the retirement age brings up the question of whether the U.S. will soon attempt the same. Few analysts believe that the White House or Congress would start pushing for a retirement age of 67, as early as this winter. This week's uproar in France symbolizes a financial reality that many advanced nations will have to face. Economic hard times in the wake of a deep recession are coinciding with long-run fiscal challenges that require politically difficult choices. Some analysts hope that Americans have a culture that emphasizes the virtue of working and could more easily swallow the bitter pill, unlike their French and Greek counterparts. The bitter pill of raising the retirement age is, in effect, reducing benefits by another name. On the positive side, medical science is working hard to advance life longevity in order to make up for the 'late' retirement.
The German economy appears set to continue its current strong growth. The government released data on Thursday sharply raising its figures from a previous forecast and predicting a drop in unemployment. The German Economics Ministry has more than doubled its growth forecast for the German economy, by 3.4 percent, up from a previous forecast of 1.4 percent in the Spring and is also contemplating ending stimulus and bank bailout programs. Just last year, Germany was hit by its steepest downturn in about six decades when the economy contracted by 4.7 percent. But now exports are booming and companies are reporting solid profits. These numbers are all signs of a hopeful turnaround which the U.S. and Japan would surely like to follow especially unemployed U.S. workers who are nearing the end of 99 weeks of unemployment benefits.
Global monetary policies are growing increasingly disjointed. While some of the developed nations like the U.S. and Japan are planing additional monetary easing, some developing economies are rasing rates to counter infation and currency appreciation. For example, the Fed's announcement regarding a second phase of quantitative easing was expected while the Chinese prioritized a hike in domestic interest rates over a faster pace of currency appreciation. In Europe, the ECB continues to talk hawkishly, while the Bank of England is considering another easing. Thankfully, the G-20 grouping declared a currency truce in South Korea over the weekend, with finance ministers making a pact to 'refrain from competitive devaluation of currencies' and to bring their current account imbalances into line - but without specifying numbers.
Will the FOMC be successful in reflating the U.S. economy? So, while the Fed programs in 2008/09 created massive balance sheet relief and profits for banks and many businesses, the household sector was unaffected because of a flawed belief that banks would transmit monetary policy easing to households. This was a costly error. The previous attempt brought lower liability funding costs for banks, corporates and financial institutions, which drove risk asset inflation rates higher. The FOMC now wants goods and services price inflation. One could argue that the reason they never got goods and services price inflation was that they took away the previous programs too soon. The real issue was that the Fed made one costly error - it forgot about consumer balance sheet repair. The buying of Agency 30-year MBS was meant to lower mortgage rates for households. But it just didn't work as desired. The average outstanding rate on eleven trillion in US residential mortgage debt is still funded above 6 percent. However, the asset side of consumer balance sheets is seriously underwater - down 30 to 40 percent - while liability funding costs haven't changed much. Worse still, credit card rates are in double-digits and banks are not giving loans easily. Consumers balance sheets are in trouble and thus they are not spending much. Therefore, goods and services prices remain under pressure and in a vicious loop, affecting the small business outlook. In the end, the Fed is desiring to fix all balance sheets -- household and corporate. The Fed has the desire for higher inflation and politically, it will be in their interest to push for 'household balance sheet repair', this time around. Hopefully, it works!.
Mel
Information provided by Amtrust Capital Banking.
Posted in:General
Posted by Mel Samick on October 27th, 2010 9:21 AM

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