Fed Day

[solarbird]

Today is Fed Day (FOMC day, Federal Open Markets Committee day), and everyone is expecting a rate cut. I don't know what that's worth anymore with the Fed not even attempting to defend 1% (actual overnight rates are hanging around .15% - maybe it'll drop to zero) which means the US is already effectively in a liquidity trap. Bloomberg News talks about some of the "alternative" tools the Fed has been following.

Inflation is not on the radar anymore; core CPI in November was flat, and adding food and energy made it -1.7% in November, that's negative, and the lowest number since 1932. 1932 was not a good year. Dr. Roubini of RGE Monitor talks about deflation here, and also here, tho' I don't know if the latter is visible without subscription.

Housing starts fell 18.9% in November, to the lowest since World War II, which is as far back as records go. (And you have to go to secondary records to go back that far. Main numbers stop in 1959.) Overall industrial output also fell in November, by 0.6% month-to-month, or 7.3% since November 2007, the worst decline since 1980. Mish notes that much of the remaining strength is in defense, and may contract as the Iraq war finally winds down.

Washington Post surveying says most Americans oppose the automotive industry bailout, with more significantly more strongly opposed than strongly supporting. Moody's thinks prepackaged bankruptcy is on the way, but the White House says it's still working out a plan. Senator Levin (D-MI) thinks it'll look like the original Congressional plan, but I think he's wrong. There is something of a consensus emerging regardless that the GOP is insisting that the UAW be broken as a prerequisite to stepping in.

Many states are already running out of funds for unemployment insurance, and are scrambling to find new ways to recover the shortfalls. Unemployment is one of several factors starting to hit housing again; Alt-A mortgages are deteriorating much more rapidly than consensus expectations, which means the second wave of housing fallout is probably underway.

Brad Setser has a bit of analysis on the agencies/treasuries numbers I talked about yesterday, calling it a "crisis... in the balance of payments data" and going into details.

And that's all I have time for right now. Good luck.

Comments

[meesto.livejournal.com]

I was sent a newsletter that JP Morgan produces and it has an interesting thing about inflation tucked in towards the end of the document. I can send you a copy of the PDF file if you are interested.

"As for gold, we have concerns about possible selling by
the Swiss National Bank to repay its $54 billion swap line
to the Fed (advanced as part of the SNB’s purchase of
non-performing assets from UBS). We also think gold
may have further bouts of weakness as deflation fears
mount. In the long run, we believe gold will make
sense as a hedge against inflationary consequences
of today’s monetary expansion. Our few commodity
investments are momentum-based, and have been short
recently, generating on average flat returns for the year,
compared to -38% for the CRB Commodity Index.

CONCLUSIONS: asset prices need to reflect today’s
extraordinary risks

We’ve received "trend-follower" research predicting tax
rebellions, bread lines and food riots by 2010. These
articles reflect little confidence in the public sector's
ability to mitigate the damage. If there were no evidence
that public sector involvement ever worked, we would
understand the cynicism, but that’s not the case.
However, we need to get paid to take the risk of a
double-fisted monetary/fiscal expansion. Inflation and
interest rate risks are real, as the money supply balloons
and U.S. financing needs double*.

*Including refinancing of maturing debt, we estimate that the U.S
Treasury will need to double its borrowing needs from $1 trillion
in 2008 to $2 trillion in 2009. In an odd development, the Federal
Reserve hinted this week that they might issue notes of their own to
fund their asset purchases. The Fed can normally print as much
money as they need, so its not clear to use why they would adopt this
approach. The unorthodox nature of these latest developments is
another sign of the uncharted waters into which the public and private
sector are sailing."

[llachglin.livejournal.com]

I'm still amazed that some people are arguing whether or not we have more to worry about with inflation than deflation when the last three months have already had the worst deflation since 1938 (http://www.economicpopulist.org/?q=content/deflationary-bust-accelerates) (which had an equal -3.4% rate). You have to go back to 1929-1933 to see worse--though it was much, much worse. 1920-1921 was also really bad, with WWI production coming to a close.

I mean, when your list of bad deflations in the 20th/21st century is as follows:

1. End of WWI.
2. Great Depression (first recession)
3. (TIE) 2008 Bush Recession and second recession of Great Depression
4. End of WWII.

...you know you're not doing so well.

[llachglin.livejournal.com]

And there's the rate cut (http://www.bloomberg.com/apps/news?pid=20601087&sid=aWh.Nn9dXE_A&refer=home).

"The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent."

WOOHOOO ZERO

[silussa.livejournal.com]

On a political note...I think the GOP has just made themselves a regional party for the next generation, as well as pissing off voters in every major union state...which includes swing states they HAVE to win for the Presidency.

[king-chiron.livejournal.com]

A big chunk of the deflation was due to oil, oil can't drop another $100 a barrel (since it's currently at $50 or so). Inflation excluding food and oil and some other things, was flat. Food costs were up 0.2% and clothing costs were up 0.3% for November.

[llachglin.livejournal.com]

0% inflation is still not a good sign. All signs point to deflation at worst, and extremely low inflation at the other extreme. Even the Fed is saying that they're planning on keeping their funds rate at zero to a quarter point indefinitely. You don't do that if inflation is even a mild risk. Yet some people oppose government action against the recession because they're afraid of inflation. I don't think that's warranted.