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Economic Update for the Week of 01/18/2013

The official rate of inflation for December year over year came in at 1.7%. First I must point out that the inflation numbers come with much manipulation. Second consider that it is an average which means some things you buy have gone up in price much more than 1.7% while other items decline in price. The inflation each individual feels depends upon the types of products and services that they buy. 1.7% however is a number a bureaucrat can love except that it comes with vast quantities of printed money, historic annual budget deficits, anemic growth, stubbornly high unemployment, stagnant wages, and artificially manipulated low interest rates. Other than that, Government and Fed officials can be happy with what they have engineered. Everyone else who is suffering from these ailments will not be so happy.

 

The German economy is estimated to have contracted by ½% in the fourth quarter of 2012. Germany has been one of the bright spots holding up the Eurozone and as Germany slows, the whole region will likely slow especially given the continued troubles in countries such as Greece, Spain, and Italy which probably won't be growing anytime soon. In fact, the Euro has been rising which makes German exports more expensive. As a result, European car sales have fallen to 12.5 million in 2012 which is the lowest in 19 years. Why is this so important? Well if car sales are slowing, so does the need for the raw inputs which slows the rest of the supply chain of countries such as Australia and Canada who are major providers of those inputs. The crisis in Southern Europe along with the stagnation in Northern Europe is causing consumption in many areas in addition to car sales. This should serve as a warning that things are probably going to get worse again before they get better.

 

Accounting gimmicks help JPMorgan and Bank of America post profits. How did they do this you might wonder? The recaptured loan losses by moving money from these reserves to earnings which without they would not have earned profits. I know I sound like a broken record, however this should tell us something that after the largest stimulus we've ever seen, the largest banks being major beneficiaries of said stimulus are still having trouble. Without these gimmicks, they would clearly be in trouble. Millions of homes are still in foreclosure and hundreds of billions of HELOC debt still on the books of the banks; how can it make sense to lower the reserves against future losses? Well they want to show a profit and keep their share price up, but we know better of what is really going on and can be prepared.

 

Empire State and Philly Fed Manufacturing both report negative numbers of -7.8 and -5.8 respectively which show signs of worry in the manufacturing arena. This is part of the muddle through economy that we are currently in that can only exist because of the massive government deficits and money printing efforts of the Fed. Trillions of Dollars of deficit and trillions of monetary stimulus and this is what we have to show for it? Lousy economic numbers nearly 5 years later.

 

On a seemingly bright note, housing starts jumped to 954,000. Most of these were for multi-family units which make sense because there is a growing demographic trend for young people who will need their first home/condo. As I've explained before, the building of a house is what generates economic activity from the building materials to the labor required to put it together. We must put this into perspective however because we lost over 2.2 million construction jobs from the peak and only added back about 110,000. In addition, we still have enormous shadow inventory, so adding more supply to the market will not likely help prices.

 

Currency war anyone? Recently Japan has begun massive money printing with the objective of lowering the value of the Japanese Yen to the US Dollar which would make their exports cheaper. The problem is that The Fed has been printing massive amounts of money as has the European Central Bank with the same objectives. What we've seen so far is few repercussions in the US from all the money printing so other countries think they can do the same. My gut tells me this will not end well, but the end result is unknown. A friend recently recommended the book, "Currency Wars: The Making of the Next Global Crisis" by James Rickards which is now on my reading list.

 

The last item for this week is AT&T who recently took a $10 billion charge to earnings due to the underfunding of it's pension. To be clear, AT&T has been one of the responsible companies in funding their pension. The problem however is when the pension earns less than expected, the funding requirement goes up. This is in large part due to the low interest rate environment artificially manipulated by The Fed. More unintended consequences.

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