A Melman Minute
| By | Leonard Melman |
|---|
When I look at recent contradictory data, the old saying "It don't add up" comes to mind. At one and the same time we are told that the economy is so strong, the Commerce Department had to revise America's estimated 2Q13 GDP growth rate upward from 1.7% to 2.5%, but in recent days we have learned that Pending Home Sales are in decline; Consumer Spending has flat-lined with a growth of only 0.1% and, as recently reported, the latest Durable Goods Orders report indicated the worst month-on-month declines in years.
I hate to speculate in this manner, but it would almost appear that if Commerce Department's GDP estimate was accurate, some of that accelerating growth would likely have continued into the e3arly 3Q13 data, but that has apparently NOT been the case.
By the way, we also cannot help but question the reasoning that if the Department of Commerce's new figures are accurate, why have we not had an immediate decision by the Fed to cut back or terminate their latest QE program of $85 billion per month of federal government debt purchases?
It also seems reasonable to assume that if the overall economy is growing more rapidly, as suggested by the revision in the GDP data, the fires of inflation would be heating up, but they appear to have become even more subdued of late. We might also ask why the modest rally in the price of copper has not only failed to advance rapidly but has now actually gone into reverse (see chart) if the economy is as strong as suggested by the GDP figure?
As we said, in our opinion, something just doesn't add up.
CONSUMER SPENDING AND INFLATION
The comments noted above came at least partially in response to data released this morning and commented on in an article by Reuters News Service. The specific comment in their article, authored by Lucia Mutikani, was, "...U.S. spending barely rose and inflation was tame in July..."
The actual figure released by the Commerce Department showed July Consumer Spending was up by a minuscule 0.1% and showed particular weaknesses in the purchase of durable goods, specifically including slowing auto and small truck sales. This data corresponds to jobs statistics for July which showed declines in hours worked and hourly wages as well as the loss of high-paying manufacturing jobs which tended to be replaced by low-paying service jobs.
This data also served to influence inflation figures which retreated somewhat for July with the latest figure also being plus 0.1% or an annualized rate of 1.2%.
MORE TROUBLES FOR MUNI BOND MARKET
It is difficult to over-emphasize the importance of the municipal bond market. For decades, it has been the source of huge increments of municipal and state financing for capital projects, general fund-raising, etc. Muni bond buyers were delighted to buy these bonds for several reasons including the fact that they were federal income tax-free; there was the tacit assumption that municipal and state governments would always be able to raise taxes if revenues otherwise declined and the funds raised were usually used for capital projects which then became security for the bonds issued.
All went well and any failures in the muni bond system were virtually non-existent in recent years. However, we have started to see a parade of municipal budget failures and bankruptcy filings such as Vallejo, California and, more importantly, Detroit, Michigan. Due to enormous staffing, pension and other personnel expenditures, there were simply insufficient funds on hand to pay all their obligations and it was becoming politically unpalatable to raise taxes further.
Let us fast-forward to the important California city of San Bernardino. Like other municipalities, that city found itself unable to pay all its current bills as well as continue to fund their mammoth pension payments to the California Public Employees' Retirement System (CALPERS) and attempted to file for bankruptcy last year, along with other California communities such as Stockton and Mammoth Lakes. They also cut back on payments to CALPERS and attorneys for that organization filed their objections to the bankruptcy.
This past Wednesday a California judge sided with the city and ruled San Bernardino was eligible to proceed with their bankruptcy. Among the pieces of information provided, the city claimed that it was now spending $26 million in annual pension payments and employee costs now consumed 80% of their annual budget, leaving them few resources to finance an array of municipal services or engage in capital projects.
CALPERS immediately stated their objections to the judge's decision and, in what we regard as a masterful exhibition of double-talk, declared on one hand that they continued to demand the city make up all back payments to the pension system, but on the other hand, CALPERS would do everything in their power to help the city "resolve its financial problems."
In any case, there can be little question that the bankruptcy of another major city, following sharply on the heels of Detroit, will have a dramatic effect on the ability of the Muni bond market to continue to provide the same kind of investment security that has been presumed to be in effect for many years.
Should the Muni market begin to fail in any meaningful way, that would raise general interest rates, increase the costs associated with a multitude of government projects and, thereby, become a force for higher rates in general - which is precisely that the Fed does not want to see.
SPEAKING OF INTEREST RATES...
One of the ongoing assumptions in currency markets, particularly those relating to nations whose economies are smaller and less-developed than major markets, is that lower interest rates would lead to increased exports as their production prices, calculated in terms of foreign nations' currencies, would be coming down if their home currency values declined. However, many are now reconsidering this proposition.
What has been happening is that investors are now beginning to shun those small nations, their currencies are falling sharply and domestic inflation is on the rise. In order to resolve this dilemma, countries such as Turkey, Indonesia, Brazil and other developing nations have begun to raise their domestic interest rates in order to protect their home currency values and this trend may also include the large Indian economy.
Unfortunately, raising rates is having the expected negative effects on their export economies leaving many countries with a "Hobson's Choice" of refusing to raise interest rates and seeing foreign depositors fleeing their country, further weakening their home currencies or raising them, leaving them vulnerable to reduced economic activity.
Sort of 'damned if you do, damned if you don't'.
That kind of difficulty feeds economic uncertainty, and historically such uncertainty has been a plus for precious metals markets.
As of 8:10 AM PDT, financial markets in Canada and the US are diverging with the Dow Industrials down by more than 40 points while Canada's TSX Index, supported somewhat by strong domestic bank earnings, is holding close to unchanged. Precious metals are returning some of their recent gains with gold down by about $15 to near $1,396 and silver is 36 cents lower to just under $24.00 per ounce. Base metals are trading lower this morning and mining share indexes are off by an average of about one percent.
In other markets an apparent temporary reduction in concern over Syria has led to lower Crude Oil prices which are now near $108 per barrel, down from their recent high of $113. The US Dollar Index is continuing its latest rally, up this morning by 22 basis points to 82.22 and long term interest rates are virtually unchanged so far today.
All quotes US$ unless otherwise indicated.
Our "Melman Minute" schedule has been revised for the coming week to Tuesday, Wednesday and Friday due to the Labour Day Holiday.