Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Memetrics
novahockey
quarterback
ScottC
yellojktLonger Run Policy Considerations
Big Picture: The Fed is on hold until late 2014. Previously they anticipated low interest rates through mid-2013. Inflation target is 2%. The Fed will continue to re-roll its investments into mortgage backed debt. Operation Twist will continue.
In this new age of transparency, the Fed is giving investors more of a look at their thinking.
More granular stuff: The Fed has taken down its forecast for GDP growth in 2012 and 2013. In November, they projected 2.5% – 2.9% GDP growth for 2012 and 3.0% to 3.5% for 2013. They now expect 2.2% to 2.7% growth for 2012 and 2.8% to 3.2% for 2013. So, while the general tenor of most observers seems to be more optimistic, the Fed is going in the opposite direction.
However, they took down their unemployment estimates from November, so that is a positive. What is interesting is that they stated the “normal rate of unemployment” range was 5.2% to 6.0%. Which means that once unemployment gets in the mid 5-s, the Fed will start tightening. At least that is how I interpret it. Don’t expect to see long-term unemployment rates similar to the ones Clinton (5.19%) and Bush (5.27%) enjoyed. 6 is the new 5. The Fed is at least paying lip service to the idea of preventing future bubbles.
The Fed introduced an inflation target of 2%. Note the 10 year is yielding 2%. Get the message? Nope, the 10 year rallied hard on the announcement. Stocks also rallied.
Filed under: Uncategorized | Tagged: Federal Reserve |
All Things in Moderation 
So, Brent, if I’m interpreting this correctly, I’m probably better off continuing to build up my savings, make sure I stay on good terms with my landlord, keep an eye on the real estate market, and I’m likely to be able to get more house for my $$$ if I wait an extra six months to a year before looking to buy? Or maybe even a year or two?
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yep — just tells us what to do. refi? pay down mortgage? blow it all in Vegas? stockpile canned goods?
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The government and the Fed are trying to put a floor under house prices, with the hope that a with a little bit of economic growth and a little bit of inflation, house prices will stagnate while the rest of the economy catches up.
So, I don’t think you have to worry about prices collapsing, and I don’t think you have to worry about them getting away from you. If you find a house you like, buy it. If you don’t find anything you like, don’t worry about prices getting away from you.
Of course I am talking my own book, having just had my offer accepted, so that probably means prices are about to collapse….
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In which case (prices collapsing) I’ll wait. 🙂
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NoVA:
stockpile canned goods
Normal here in UT. Every good Mormon family has a year’s worth. I always make sure I know who my Mormon neighbors are. . .
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“What is interesting is that they stated the “normal rate of unemployment” range was 5.2% to 6.0%. Which means that once unemployment gets in the mid 5-s, the Fed will start tightening. At least that is how I interpret it. Don’t expect to see long-term unemployment rates similar to the ones Clinton (5.19%) and Bush (5.27%) enjoyed. 6 is the new 5. ”
My own guess for the “normal rate of unemployment” would be between 6% – 7%. Basically what we had in the mid nineties prior to the start of the dot.com bubble.
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As always great stuff Brent. Thanks for keeping us all up to date and thanks for the additional analysis.
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OT and a day late, but the Detroit Tigers signed Prince Fielder! Tigers’ fans everywhere, myself included, and Detroit area buffet restaurants rejoiced!
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Well at least buffets with salad bars. After all Prince Fielder is a 5’11” 265 lb vegetarian.
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http://www.tumblr.com/photo/1280/ronsays/6986428141/1/tumblr_lngwblElt81qkae66
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That’s a funny pic NOVA. I have in laws who live in Michigan’s UP farther north than ash…folks up there are shall we say…”thrifty”.
My sister in law judges the quality of the meal by the quantity. She thinks that pic is literally good advice! LOL
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I had a roommate at school who would order pizza from the worst place in town. it was garbage. but it was huge. i remember questioning him and he said, “nova, sometimes quantity is better than quality.’
he had a bit of a weight issue.
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A couple of other projections from this:
– mortgage lending is likely to decrease, because banks will make any excuse not to lend money out at 3.5-4% for 15-30 years when the Fed is targeting 2% inflation. It would make no sense. Yes, banks make money on the points, but now Dodd Frank requires that the banks hold x percentage of the loans they originate. Plus the banks STILL have to package these loans into MBS. As an investor, why should I buy your MBS at 4-5% when I can invest in studetn loans or corporate bonds at the same or better rate without the dififculties that the MBS bring?
– state budgets are being torn up all over the country. Pension funds are limited in their allowable investments. their projected rates of return just got knocked into a cocked hat for a longer period now. That’s a revenue shortfall that has to be made up.
– savers and fixed income people just got taken out and shot . . again.
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“mortgage lending is likely to decrease”
can you elaborate on this? does that mean tighter standards and higher down payments or LTV requirement for refis? or even no loans for the “best” credits scores, etc?
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Nothing will change for public consumption. It’s a question of allocation of capital on the part of the banks.
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Never underestimate the propensity of yield pigs to reach for an extra few basis points.
Never underestimate the propensity of people to lever paltry yields into something acceptable
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Call me wrong, because I thought they would announce the MBS program this month.
Here’s my issue with this. There’s going to be nobody on the other side of the trade. The good thing about previous policy is that you could always find somebody who thought your guess about the Fed was wrong. Now, those people have been effectively eliminated.
So just like when everybody rushes to one side of a boat, the economy has a issue when everybody is betting the same way. That’s basically what the housing crisis was about at it’s core. Everybody bet that prices would rise at an increasing rate, and they had LOTS of money to do that, courtesy of the Fed.
So we are seeing in this the genesis of the next bubble, though we don’t know yet where it will arise.
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Farmland
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Already or so I’ve read.
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My father was a bookie john/banned. And so I understand the concept you are talking about. In his world you simply protected yourself by “laying off” some $$$ if the boat tilted too much to one side. Of course the “line” is set with the hopes of balancing the boat…Too much money on the Pats…simply make them give enough points until you lure some Giant’s money into the pool.
And so my question to you and Brent is what is the financial worlds version of “laying off”. Actually I suspect that is simply shorting or going long depending on risk…I should have asked…what is the Feds’ mechanism for “laying off”?
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The Fed is actually buying and selling all the time, Operation Twist for instance. They also have hundred of billions worth of MBS that they could unload if they so chose. They resemble the house more than a bookie. They can’t lose no matter which way you bet, or for how long or short.
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Please read this piece on energy production;
“Harold Hamm: President Obama’s State of the Union Missing Key Part in Energy Exploration”
Key Point:
“As more and more oil wells go on line, America’s dependence on foreign oil has steadily gone down since 2005. According to the Energy Information Agency’s (EIA) Fourth Quarter 2011 report, US domestic drilling has broken through to the 58% mark.
“Those numbers are big,” Hamm said reacting to the news. “I remember when I first was on Squawk Box back in the Oct. 2010- we were barely below 50% of oil production in American (47.8%) and I predicted in less than 5 years America would be above 50%. We have exceeded my timeline. We are now we are producing 58% of oil in the United States!”
What’s driving this increase? The oil being fracked out of the 25000-square-mile chunk of land called The Bakken which spans between North Dakota and Montana.
“We have had oil fields coming on pretty big and pretty quick,” explained Hamm. “In November of 2011 we produced 510,000 barrels a day out of North Dakota. That number will ramp up to million barrels a day by 2015. We need to quit discounting U.S. oil production. It’s anything but insignificant. North America is getting off foreign oil and becoming energy independent is becoming a reality because of the Bakken.”
http://www.cnbc.com/id/46133855
The last estimate, if true, is an enormous game changer.
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Yes, and that is why I very bullish long-term on the US economy.
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I don’t know if you guys read my post the other night. On Monday I heard the former President of Shell Oil America John Hofmeister speak about our energy situation. Since his retirement he is now touring the country and speaking on behalf of a non profit
http://www.citizensforaffordableenergy.org/
I got his book..”Why we hate the Oil Companies”. The dude is fascinating and he gores everybody’s ox..he is the Bill Maher of Oil Ceo’s..politically incorrect. He is very bullish on the future long term. But he’s so pessimistic about our politics he thinks we may need gas lines and blackouts before America gets peoed enough to do the right thing…which is PLAN…1-10 years…10-25 years..and 25-50.
He looks at ten sources of energy…five of the naturals..wind, solar, tidal, geothermal and hydroelectric and the five non renewables coal, oil, natural gas, nuclear..and oops..I’ve pulled a Rick Perry. His basic point..we need all ten in combination and if we do things right we have plenty of energy in the U.S. As I read his book I plan to share more..this guy was really sharp.
No matter how progressive I may be, how much I rail against the Corporations…the CEO’s are some smart dudes..and they ooze charisma..for the most part..I’m still not sure how Geithner got ahead..he’s the black hole of charisma…must be a really, really, really smart dude eh.
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So everybody, both equity and debt investors, took the Fed to be optimistic when I took them to be flat. I think that is more strange than not.
JNCP, I think 6.5 % unemployment should be considered normal from recent history, and 5% unemployment should be considered full employment.
Were I the budget maker appointed by Congress to do its work that it will not do, I would decree balanced budget at 7%, surplus when the unemployment is lower, and deficit when it is higher. All by auto correcting mechanisms – Spending set as if unemployment is 7% and more employment raising more revenue and less costing us on unemployment comp, TANF, and the like. Government receding when markets are growing and growing when markets are down, but in a predictable fashion that gets us out of perpetual deficit.
I would use my notebook computer to determine the magic numbers because I can project anything in XL. War and flooding of the inland waterways and deferred maintenance would have to be figured in at some average level, beyond my ken, but I could have an assistant who had her own notebook computer with that model.
If we did not jettison income taxation in favor of transaction and commerce taxation, I would add in the flat rate with large personal deduction I have mentioned, as well as permitting corporations to deduct dividends paid to stockholders to get to a single tax base and a single tax. No dividend exclusion, no CG, no brackets, no itemized deduction, but a big personal exemption, like Adam Smith wanted, for the poor. I would probably increase SS taxation across the board [even for the poor,to maintain the premise of “insurance”] and raise the max tax base every five years with inflation. I would only means test in the current sense: SS benefits would be marginal income and taxed on the marginal contribution if your total income, incl. SS, exceeded the large personal exemption. Mine would, if this were in effect tomorrow, so I am NOT A HYPOCRITE.
As budget czar I would report on areas where Congress and the Prez could help me out.
Health care and a rational immigration system would be variables I would like not to have figure in XL. Bank bailout restrictions are another variable they could help me with.
That’s how I would do it, if I were appointed to do Congress’ main job. Just I, my assistant, a phone answering machine, and two really good laptops.
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SS benefits would be marginal income and taxed on the marginal contribution if your total income, incl. SS, exceeded the large personal exemption. Mine would, if this were in effect tomorrow, so I am NOT A HYPOCRITE.
Actually, if your proposal would increase your own taxes, you are a hypocrite for simply not paying more voluntarily right now. At least that is my understanding of the position of many members of this blog.
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I will answer for Scott: if I thought paying more taxes were a moral imperative I would be hypocritical, in his eyes, for not volunteering. I think it is merely a fiscal solution, not a moral imperative. I AM CLEAN.
No smiley req’d…
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Mark- That’s a valid distinction in my mind.
Did Buffett posit the need to for the wealthy to pay more in taxes as a moral imperative? I know that numerous politicans, Obama included, have done so.
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FWIW, both Scott and I were scratching our heads over the market action. I thought the Fed’s statement was bearish. Obviously I was wrong.
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Perhaps expectations were low?
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The reaction of the bond market made sense. The stock market reaction remains inexplicable to me.
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“Don’t fight the Fed” is my guess.
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Your workload would be even lighter if you switched positions with your assistant and put her in charge.
Just sayin’.
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ashot:
Actually, if your proposal would increase your own taxes, you are a hypocrite for simply not paying more voluntarily right now. At least that is my understanding of the position of many members of this blog.
You misunderstand.
From what I can tell, Mark is not proposing this as a matter of justice or fairness. He is proposing it as a practical, viable solution to a problem. And that makes all the difference. Obviously the practical viability of the plan rests on it being applied to everyone. Mark cannot implement the plan on his own.
Warren Buffet, on the other hand, has proposed that his own taxes should be raised as a matter of justice or fairness. He was quite explicit about that. Rectifying that supposed injustice is within his power, even in the absence of a law. Yet not only does he not rectify it, he magnifies the injustice by employing people to limit the amount of taxes he pays. He is, for this reason, a hypocrite of the first order. He professes to believe something that his actions demonstrate he does not actually believe.
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Mark beat you to the punch, but you did answer my question about what Buffet has said. As I recall, I agreed with your characterization although I don’t find the charge particularly compelling.
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Damn. That’s what I get for being so verbose.
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