An Inside Look at the U.S. Economy
By Marc L. Flaster
Texas Insider Report: NEW YORK New York With a new Fed Chair assuming her post at the end of January not much was to be immediately expected. While Ben Bernanke was given a fond farewell and
Janet Yellen waited patiently for the mid-
March meeting to adjust her comfort level in the Fed Chair
her first news conference caused quite a stir.
The first official commentary suggests that she has learned a lesson or two about speaking out in public. That being said the supporting cast of governors has spent the rest of the month trying to protect her and modify her remarks.
Sticking to the prepared text the Fed is not planning to change policy anytime soon. They are scaling back on the bond purchase program a legacy from Big Ben but I would not bet against a change to
occur in the time line to the finish.
Unemployment numbers are on cue having fallen from 10 at the peak to 6.7 currently but the improvement has been at the expense of people leaving the employment force not more people finding jobs. Long term unemployed numbers have resisted the temptation to improve.
The economy continues to be buffeted by recurring one-time events each of a different nature:
- Hurricane Sandy
- this winters Arctic Express
- Russian advances on the Ukraine to name a few
- and maybe Auto Sales after Congress finished grilling the new leadership of General (Government) Motors.
First quarter GDP estimates are being revised downward almost daily anything below 2 will be dismissed as frozen custard before the thaw. Retail sales are still inventory burdened new Easter bonnets are already on sale. The green shoots of Spring may again die on the vine.
The FOMC target growth rate for the year is 3. With a cold start it will take a hyper-speed charge to reach that goal for the year.
No help is coming from abroad. The EuroZone is still floundering under the fiscal austerity imposed by the IMF in exchange for a liquidity lifeline. The Big D" does not stand for Dallas. And it is real in the southern grouping of the EuroZone.
Unemployment rolls continue to hold at double digits. Bond yields have tumbled as investors now seek any yield anywhere. The ECB has successfully managed away default risk.
China everyones designated driver has stimulated the industrial commodities market through hoarding and speculative activities. New reports indicate a stall in the fast lane (anyone for a Chevy Cobalt?). And emerging markets have re-submerged as industrial commodity prices have collapsed.
Housing sales have slowed as the longer end of the T curve has edged up 100 basis points from the lows
of early last year. This has been reflected in home mortgage rates.
It also took the air out of the refinance market as well. Builders used the first blush of improved sales activity to aggressively raise prices which added to the softer sales volume. (Both JPM and WFC report a 68 decline in mortgage loan origination in the first quarter.)
Snuffing out all the embers of economic rebirth is the inane Congressional disaster:
- the Dodd-Frank Act
- the Restraint of credit & heavy compliance burden on financial intermediaries
- Increased capital requirements rate risk stress assessments
- Health care costs and
- Constant testing of the patient to see if he is still alive before tightening the tourniquet further
All will continue to plague the markets and the economy.
Upward trajectory in the stock market encouraged the managers of our economy to falsely believe that they are on the right track. In the face of tempering the QE3 bond purchase program bond interest rates are actually lower than economists wrongly predicted. It is unlikely that any of the trends observed are on the way to reverse course in the near future.
An improvement in consumers activity rather than sentiment testing and confidence reporting that could be reflected in more than one quarterly report of GDP may show up in a further rise in yield for the 10 year T note. But to get the yield much beyond 3.00 will require a firestorm under the inflation rate.
As repeated by the now Mister Bernanke the Fed has no anecdote for deflation (D-word). It has been the policy strategy call it what you will of the Fed to fan the flames of market expectations. The Fed governors have even chosen sides Doves vs. Hawks rallying the troops around the coming heat wave.
Bank regulators are blanketing their charges requiring a multiplicity of explosive interest rate scenarios to be modeled into the balance sheet. A result is that bankers are forced to carry more capital lend less and stress liquidity rather than the return on that equity.
This is the playing field that has been re-graded for financial institutions to operate in. Definitely the challenges are greater and the rewards have been tempered.
To this observer a
change is not in the wind. In the words of the old philosopher: If you dont know where you are going any road will do.
Marc L. Flaster has advised financial institutions in balance sheet management for over 35 years and is a founding principal of Sandler ONeill Partners L.P.
The views expressed in this article do not necessarily reflect the opinions of any client or organization with which Marc L. Flaster might be affiliated. Readers are advised to complete their own due diligence and analysis.
