Fed Statement Following November Meeting

The following is the full text of the statement following the Federal Reserve’s November meeting:

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Replace Ben Bernanke with Paul Volcker

Last week, the Federal Reserve statistical release (G.17) reported on industrial production and capacity utilization for the economy.

“Industrial production rose 0.7 percent in September after an upwardly revised gain of 1.2 percent in August. For the third quarter as a whole, output advanced at an annual rate of 5.2 percent, the first quarterly gain since the first quarter of 2008 and the largest gain since the first quarter of 2005. Production in manufacturing increased 0.9 percent in September, and the index excluding motor vehicles and parts rose 0.5 percent. Mining output strengthened 0.7 percent, while the output of utilities fell 0.7 percent. At 98.5 percent of its 2002 average, total industrial production was 6.1 percent below its level of a year earlier. In September, the capacity utilization rate for total industry increased to 70.5 percent, a level 10.4 percentage points below its average for 1972 through 2008.”

The Los Angeles Dodgers skipper, Joe Torre, when recently asked what the difference is managing during the regular season versus the post-season playoffs replied, to paraphrase Joe, in the regular season, you think about making a change; you consider it, then you follow your gut instincts. In post-season, you don’t consider making changes – you make changes. The inference here is years of experience are superior to rationalization.

Conventional wisdom said that no other American was more qualified to be Chairman of the Federal Reserve Board, if America found itself heading into another great depression, than Ben Bernanke. I submit that with interest rates nowhere to go but up; a weakening dollar, and massive budget deficits for years to come, the best person to run the Federal Reserve over the next two years is Paul Volcker.

At first blush, this idea may seem radical, but these are not ordinary times. What are the benefits if President Obama figuratively walks out to the pitcher’s mound, take the ball from Bernanke, and say, “Ben, you threw one hell of a game for eight innings. We can take it from here; the economy is heating up.” Then, Obama turn towards the bullpen forms his hand into the shape of a clam, opens, and closes it twice, to signal for his major league inflation closer – Paul Volcker.

This is presidential managing.

For starters, the world will know any future inflation in the US will be tame. When the cover of Barron’s is instructing the fed chief and the FOMC to raise rates at their next meeting, November 3-4 from 0.15% to 2.00%, perhaps he is hard-wired for fighting depression and we have gotten his A game – just when we needed it. But now, crisis accomadative monetery policy must give way to normal accomadative monetery policy.

The price of gold and our money supply is at all time highs. The SPDR Gold Shares (GLD) is now the second largest ETF behind the SPDR S&P 500 Index, holding $35 billion in assets. Only four central banks and the IMF control more gold, according to the World Gold Council. As the economy expands, do you really need a guy hanging around nicknamed “helicopter Ben”, named for vowing to spread money from helicopters to stop a depression from occurring, when too much liquidity is making too many people nervous?

This also sets a precedent. It was logical, I suppose, to move Tim Giethner from the Federal Reserve Bank of NY to Secretary of the Treasury to help thaw the frozen major center banks. The FDIC insurance fund is in the red, the (Unofficial) Problem Bank List at Calculated Risk show 479 names, therefore, most of the action over the next two years will occur in local and regional banks. Moving FDIC Chairman Sheila Baird to Secretary of the Treasury will maximize the power of the treasury to minimize the next leg of the banking crisis. On the other hand, maybe Volcker has a short list of candidates.

Cabinet members come and go all the time. Moreover, no one believes that it has to do with spending more time with the family. At least these are strategic reasons to point to if anxiety grows over persistent problems in the economy.

Fourth Quarter Outlook: Become a gold bug, now

The horrible jobs report, which overshadowed the stock market at the end of last week, portends a 4^th quarter reality that will disturb the financial markets as we continue to escape 2009. John Williams’ www.shadowstats.com forensics analysis of government data, namely U-2, U-6, and his SGS Alternative Data describes the brutality of the current recession/mild depression, in which, we find ourselves.

The unemployment report U-3 increased from 9.6 to 9.8 percent. Its broader counterpart, including those looking for full-time work while working part-time or, short-term unemployed for less than one year, reached 17 percent, climbing from 16.8. The SGS AD uses the 1980 BLS formula, adding back those unemployed for longer than one year, that changed in 1990, shows a whopping 21.4 percent unemployment, up from 21.2 percent, the previous month.

Job losses were reported at 263,000 in the September, payroll survey, while the household survey published an astonishing 785,000 jobs loss.

How will this affect the markets? Let me count the ways. Before I do, let us quickly review the landscape on the one-year anniversary of the 777 point drop in the DJIA. The immaculate rally from March, on less-bad economic data, advanced 62 percent, including a 15 percent 3^rd quarter performance, before experiencing a gentle case of vertigo. The market is still below the September 30, 2008 DJIA closing level of 10,850.60 or the S&P 500 Index’s 1,164.36. Obviously, a two trillion dollar hot shot by all the President’s men can only do so much.

Look for the last three months of 2009 to resemble a junkie coming down from her high. The TALF programs face truncation to the chagrin of conditional omnipotent financial firms; Cash for Clunkers, is a bittersweet memory for green shoot data sets. The $8,000 tax credit for first-time homebuyers ends soon – the S&P/Case-Shiller index, reflected July home price increases in 20 cities, the most robust in four years – even as existing sells unexpectedly fell.

The good news is we are only losing a few hundred thousands of jobs each month versus 700,000 each month. However, the bad news is that 40 percent of managers surveyed stated they will layoff additional workers going into the holiday season. If I were betting on the unemployment rate reaching 10 percent this year, Alan Greenspan is, I’d take the over.

Bill Gross recently suggested that the personal savings rate might be up to eight percent, with a fundamental shift in consumer spending habits. This will create a conundrum for V-shaped recovery cheerleaders and administration spokespersons. There are two germane reasons the consumer will sit-out this round of re-inflating the economy: the trickle-down stimulus plan crafted in Washington never found Main Street and until jobs begin growing again, caution over self-gratification will prevail around kitchen tables.

Additionally, Baby Boomers – the greatest spending generation – have lost its former gluttonous appetite to acquire things just for bragging rights. The “New Normal’ braggadocio is whining about how little interest your various cash positions are earning in CDs, Municipal Bonds, and Treasuries – not what you have acquired in deprecating goods.

So, why become a gold bug, now, (GLD, GDX) you ask. The simple answer is the respite from Armageddon we purchased with poorly planned deficit spending during 2008’s financial implosion has an expiration date. Vigorish charged by the world for our initial greed and incompetent rescue will soon come due.

For starters, the US dollar is an abused orphan. An obscene and growing federal budget deficit notched a 6.7 percent increase in spending for the second quarter to offset the severity of the first quarter contraction of an annualized 6.4 percent. The consumer benefited little from this expenditure while financial institutions, and now private equity firms, benefited mightily. Germany and Japan are issuing dollar denominated debt to arbitrage our currency’s weaken future. Expect other countries and multi-national corporations to follow.

Last week, the IOC rebuffed President’s Obama schnorring for the 2016 Olympic Games for Chicago on the world’s stage in Copenhagen. The irrational right-wing schadenfreude response failed to ask the only germane question to his rejection; why? Is it because Barack has lost his mojo? On the other hand, might it be because the world is still sore that America sold trillions of dollars of worthless toxic assets, stamped AAA by US rating agencies, to every country and continent that could rub two nickels together, over the last five years? If so, what other nasty surprises can we expect in the future.

Eventually, the Feds must allow interest rates to rise. They will be hesitant to do so, peering into the rear view mirror, watching the horror of 2008 and rising unemployment claims, and not keeping an eye on the road ahead. The deleveraging that began at the end of 2008 will continue for many years with chronic European-style high unemployment, near 10 percent, plaguing the US. Our ability to repay ever-increasing amounts of debt, from a stagnant economy, eventually will cause reexamination by our creditors, to our detriment.

The 1980s to 2006 real estate phenomenon, that transformed 2,000 sq. ft. personal residents into 4,000 to 6,000 sq. ft. ATM machines, and altered average Joes and Janes into Donald Trump, has vanished like D B Cooper in mid-air. Notwithstanding, stagnant incomes, reluctant borrowers, and tight credit combine, will home values offers a stunted growth period over the next five to ten years – without robust inflation?

Stock markets in the US will devolved further into a volatile trader’s paradise, mimicking emerging markets. However, the stock index to gold ratio going forward will clearly show the lost of the dollar’s purchasing power.

That brings us back to gold.

This bleak future of less USA prestige and girth in the world is due to expanding deficits, inadequate tax revenue, rising interest rates, and a day of reckoning with the global financial system. A diluted dollar - and the usual third act of political instability, which follows, the first two acts of financial calamity and economic collapse – is why I believe gold in the next three to five years will raise prices $2,000 to $4,000 per ounce. Avoid the US Treasury markets, as well.

Tuesday Markets: after you, my dear Alphonse

The next five per cent move in the market is as clear as the smoke-filled skies above Los Angeles. The deadly and massive Station fire, which doubled in a day to 105,000 acres, from 52,000, mirrored the brutally singled-minded cyclical bull market beginning in March. Both U.S. Fire Service and the Los Angeles County Fire Department concur that the fire’s growth had slowed and that its ferocity is declining. The same might be true for the magical, mystical Wall Street rally we witnessed over the last six months.

Pre-market jitters point to another down opening as disappointing economic manufacturing data of contraction from Europe, and unexpectedly, likewise from England, reminded investors that the all clear from last year’s global meltdown is not entirely clear. The overly rich valuations built into current share prices could be premature.

Bloomberg is reporting Paul Tudor Jones’s Tudor Investment Corp., Clarium Capital Management LLC and Horseman Capital Management Ltd. are among funds betting the green shoot economic recovery announced weeks ago by Goldman Sachs (GS) and Morgan Stanley (MS) are off base this time as economic growth will be overtaken by a continuation of fundamental deleveraging.

On Monday, the DJIA closed down 47.92 or .50 per cent at 9,496.28. The S & P 500 Index also fell 8.31 or .81 per cent to 1,020.62. NASDAQ fell, down 19.17 or .91 per cent to 2,009.06.

Total volume today on the NYSE was 1,377,655,473; advancing shares were 273,143,033 and declining shares were 1,094,260,290 with 10,252,150 unchanged. NASDAQ volume was 2,256,216,789; 847,105,496 shares were up, 1,385,908,101 were down, and 13,912,894 were unchanged.

The Five-Year Note closing yield was 2.387 percent; the Ten Year Note also was lower to 3.402 per cent; and the Thirty Year Bond fell to 4.18 per cent.

Today, economic data hitting the market includes Motor Vehicle Sales, Redbook, ISM Mfg Index, Construction Spending, and Pending Homes Sales Index. The inflated Motor Vehicle Sales figure with embedded Cash-for-Clunkers one-off buying borrowed from future purchases. That program ended August 24^th.

This year’s menace to society, unemployment residential foreclosures will pick up again in the fall, as explained by bankers yesterday. Because the government’s mortgage modification program is fully up and running, the foreclosure process ending in eviction can resume running in real time. This could add up to five million additional homes on the market by next spring.

Personal bankruptcies are rising again. Calculated Risk reported non-business filings are up 34.3 per cent from July 2008. Additionally, personal bankruptcies filed in July, are at their highest levels, 126, 434, since the 2005 reform of bankruptcy laws.

Mike Shedlock at Minyanville wrote about a recent Gallop Poll showing that the recent slowdown in consumer spans the entire spectrum of shoppers; from the Greatest Generation, Silent generation, Baby Boomers, Generation X, to Millennials. The study reports that all generations’ daily spending is down about $30. Truncated spending habits are a further macroeconomic drag on the economy.

However, the big enchilada this fall, for blowing a hole in any economic recovery or continued bull market, is commercial real estate. Disappearing prospective tenets, grossly over-valued properties, absent refinancing, and upside-down mortgages, should do to CRE what occurred to residential single-family homes in 2008.

If this does not bother you, then, neither will the fact that the FDIC is running low on cash. It should be pointed out that the FDIC is handing out 80 percent loss guarantees to supposedly intrepid private equity guys willing to save capitalism, if the deal is not too risky for them; but for taxpayers...

The Week Ahead: The End of Summer

As our friends and neighbors to the west of us in California, fight the yet uncontrolled, Angeles National Forest wildfire, a 42,000-acre, slow moving monster, our thoughts, and prayers are with you. Two firefighters, so far, tragically lost their lives battling this blaze. At this point, the 12,500 homes being threaten is a distant second to the potential loss of life.

In Arizona, we are still fighting a different crisis; namely the minor depression of 2008/2009. Last Thursday, the S&P/Case-Schiller home Price Index provided some encouraging news, reporting that homes prices increased 1.1 per cent, from the 1^st quarter to the 2^nd quarter, in 2009. However, prices still were down 31.6 per cent, from a year ago.

This morning, US markets point to a lower opening as Asian and European markets sold off overnight. The Shanghai Composite Index lost 6.7 per cent while Nikkei 225 Stock Average fell .4%. After 50 years ruling the Japanese government, the Liberal Democratic Party (LDP) felt defeat, election after election, losing 308 of 480 lower-house seats to the Democratic Party of Japan (DPJ). Later, the Yen rallied, which is bad for their manufacturers of exported goods. Europe stock exchanges fell this morning thinking that the six-month global stock market party may be ending soon. The London Exchange is closed today for a holiday.

This week may be an excellent time to take some profits from local Arizona stocks trading near their 52-week highs, such as ON Semiconductor Corp (ONNN), or Southern Copper Corp. (PCU), or Pinnacle West Capital Corp. (PNW). The bull market that started in March, with the S&P 500 Index testing 666 is showing signs of exhaustion, closing Friday at 1028.93. After the near-death experience of global markets from last September through March, including a 2008 negative return of 37 per cent for the S&P, taking profits will not be the worst decision one could make, at this time.

There are other headwinds facing the market to consider this week, as well. A slew of economic reports will hit the market; today the Chicago PMI, on Tuesday, ISM Mfg Index, and Construction Spending. On Wednesday, ADP Employment Report and Factory Orders; Thursday, Jobless Claims, Chain Store Sales, five different Treasury Auction announcements, and on Friday, the Bureau of Labor Statistics will announce the new unemployment figures, with the consensus predicting a loss of another 200,000 jobs and the unemployment rate rising from 9.4 per cent up to 9.6 per cent.

Elliott Wave’s Robert Prechter and market guru is calling a market top forming at these levels based on the latest wave count described in his August financial newsletter. Prechter’s forecasting record for the past year is quite strong. When he is in the zone, you must give credence to his outlook.

Many investors agree that the market has gotten ahead of itself in anticipation of a strengthening economy in the fourth quarter of 2009. After all, the government has only released 20 per cent of the $780 billion dollars, authorized in the stimulus bill to kick-start spending, with 80 per cent more waiting in the wings to juice the economy. Nevertheless, the larger question is this: will consumers come back into stores and spend like before? Or, has one too many close calls, in the past ten years with the dot.com bust, residential real estate bust, and stock market bust, plus retirement fast approaching baby boomers, permanently changed their spending and savings habit?

The savings rate in the US has gone from a negative number to over six per cent, in the last three years. If the consumer keeps their hands in their pockets, recovery from this downturn will be longer and more painful than currently advertised by Washington DC and Wall Street.

After the last 12 months, I cannot rule out anything that may or may not development in the stock markets. We are far from having a healthy economy, banking system, or fundamentally sound, earnings environment. Still, since March, markets have turned in a history-making performance to the upside. Just like the history-making performance to the downside, in 2008.

Thank God, we have a three-day weekend to rest.