Interesting market action this week after the Fed’s FOMC meeting and ¼% Fed Funds rate increase, Treasury’s statement on 30 year bonds, and GM and Ford’s plunge into junk status.* Stocks and bonds have zig zagged all over the place .* * I don’t read too much into this.* The combined impact of all this was like clapping your hands and watching the coven of crows scatter from the bond market tree only to alight in the stock market tree and back again.* No place else to go , apparently.* *The fundamental situation hasn’t changed.* *Fed’s statement was a little bizarre though.*
“The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.* Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices.* Labor market conditions, however, apparently continue to improve gradually.* Pressures on inflation have picked up in recent months and pricing power is more evident.* Longer-term inflation expectations remain well contained.”* *
This is more classic Alan Greenspan tightrope walking.* Read what you want into this statement.* He is pushing on the gas “the stance of monetary policy is accommodative etc” while stepping on the brake – raising rates by ¼%.* Talk about a schizophrenic policy.* It seems pretty clear now that the Fed isn’t playing to solve any problems – just playing for more time, apparently.
Greenspan is almost obsessive on the subject of productivity.* Productivity is defined as output per labor hour.* *Over the last three years or so productivity has been growing at a better than 4% rate.* But productivity is slowing.* Economists estimate 2.6% this year which is just about the long term average in the U.S.* Productivity is going to slow because output is slowing.* The GDP* statistics are telegraphing this.* Inventories are building and the consumer is working uphill now.* Gas prices, higher real estate taxes, the AMT, the inflation that isn’t there, and anemic wage growth are taking a toll on the consumer.* We need* to keep our eye on productivity growth as it will become the “statistic of the month” for the traders and speculators who set the market price at 4:00* pm every day.* High productivity growth keeps inflation at bay while allowing for corporate profit growth.* It is Greenspan’s cure all.* But it works in reverse, too.
By maintaining a measured* pace of rate increases the borrow short – lend long game just keeps going on. Surplus capital floating in the system chasing yield will keep rates low.* Asset bubbles will keep expanding.* Consumers will go deeper in debt to maintain current levels of consumption as “real” purchasing power is eroded by inflation and effective taxation that isn’t there.* Low mortgage rates will chase housing prices even higher and encourage more helocs to pay the tuitions for junior and the vacation in Mexico next winter.* Twin deficits will continue to grow.* China and Asian partners will continue to supply the savings needed to keep the wheels spinning in the U.S.* We will continue to have an illusory sense of security as measured by “full employment” and* “low inflation”.* But the underlying real imbalances in the U.S. economy* are building to what is apparently going to be a mighty big blast at some point down the road as the Fed fiddles with its measured pace while China and the rest of the world bides its time.*
Paul A. Volcker recently described his take on this situation in the Washington Post:
“Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.* What really concerns me is that there seems to be so little willingness or capacity to do much about it”
He is talking about the Fed here.
So what is today’s message for ERs and ER wannabees like you and* me:*
* * * * * * * * * * * * * * * * *Keep your powder dry, pards!*