Is Ben Bernanke about to lose face with Wall Street? That's the essential question coming out of yesterday's session. Each week the Fed Chairman reassures the street that he is on their side and that the fix is in, but the knee-jerk reaction to minutes from the most recent FOMC meetings suggested enough anxiety among the troops as to negate the agenda of its head honcho. To coin a phrase many outside observers think, if the Fed "takes their responsibilities seriously" then they should be working on the timing for hiking rates and not crafting more creative ways to goose the economy. That's the quandary. First, is the economy truly at the point where it's ready to run on its own without assistance from the Fed?
Secondly, does Wall Street have enough faith in the economy to place its chips in the game without the shooter tossing loaded dice? The take-the-money-and-run reaction yesterday seems to answer that last question. For all the bluster and all the analysts singing from the recovery-is-here hymn sheet there isn't enough confidence to give the economy the benefit of the doubt. That means if indeed the Fed is going to take away the punch bowl sooner rather than later, we could see more gyrations and guarded reactions where professionals sell first and decipher the information later. This morning some pretty smart people are saying that was the case yesterday. If so, then it speaks volumes about the lack of confidence in the recovery.
Concern about the mortality of this rally is palpable, but with the Fed on our side, we know each bump and bruise is yet another reason for tender loving care. Without that cover, the first time we need a band-aid investors will treat it like a heart attack. But, is that first time around the corner toward the end of 2014? There are a lot of questions, and the market will have to gut it out before we get the answers. Where this puts us with respect to Friday's jobs report isn't clear just yet. Keep in mind the market is closed on Friday when the numbers are out, and that's enough to heighten angst a few notches. Layer in the state of conventional wisdom at the moment ... are we rooting for a good number or a number that puts Fed accommodation back into the mix?
Heck, the question at this stage of the game wasn't supposed to even be about removing the punch bowl but instead how to spike it even more. I think a lot of the current rally is predicated on the assumption the Fed digs into its magic bag of tricks and whips out more aid. Of course, the economy could be firing on all cylinders and carry the rally baton from here. Yeah, I know don't kid a kidder. Actually part of this dilemma is the fault of Wall Street along with the general media that has over-hyped the worst post recession recovery-ever. Late yesterday I came across this headline from Reuters:
Strong U.S. Jobs Growth Expected for March
The article went on to point out consensus was 203,000, down from 227,000, and I'm left scratching my head as to how that number could be considered "strong." At this stage of the recovery are 203,000 new jobs really strong? Is 8.3% unemployment something to be cheered- have we arrived?
It isn't atypical for gyrations in the week we get the jobs market data. The thing is the market has held firm in the face of a string of economic data releases that consistently miss consensus. The reason the market was able to do so well is because everyone knew Ben Bernanke had our backs and the fix was in ... now we need that wink and nod again.
No Clandestine Message Here
This larger debate that we will be having and that you will be covering in the coming year about the size and role of government, this debate has been with us since our founding days. And during moments of great challenge and change, like the ones that we're living through now, the debate gets sharper, it gets more vigorous. That's a good thing. As the country that prizes both our individual freedoms and our obligations to one another, this is one of the most important debates that we can have.
But no matter what we argue or where we stand, we have always held certain beliefs as Americans. We believe that in order to preserve our own freedoms and pursue our own happiness, we can't just think about ourselves. We have to think about the country that made those liberties possible. We have to think about our fellow citizens with whom we share a community.
This isn't a Democrat or Republican idea: It's patriotism. Barack Obama at AP Luncheon
That was a heck of a press conference/stump speech yesterday that took dead aim at redefining patriotism and obligations to other Americans. The idea that some people aren't sharing enough of their earnings is offensive in a nation where 47% of working age citizens are paying zero into the federal pot. How does a person that works, grinds, innovate, and sacrifices become the villain in this equation?
And what is my obligation? I would protect my nation from foreign invaders and strangers on the street if I witnessed them attacked, but what is my obligation? I'm having a heck of time trying and still coming up short on the stuff I'm supposed to do for my closest relatives. I appreciate President Obama being direct although it took too long to build up to the true goal of yesterday's luncheon. It's scary but real and ... it's on!
Halftime in Detroit or Game Over
We got an update on auto sales, and the numbers were good, but the narrative continues to be misleading. From politicians bragging the auto bailouts worked, to Clint Eastwood's now infamous "halftime in America" commercial, there seems to be this idea autos are the perfect proxy for America. To be more specific the idea that Detroit is somehow the proxy for America since we are essentially discussing American automakers, unionized automakers and a town that is supposedly coming out of the rubble despite the burden of union-obligations. For a while the hot start for the Lions last season was even been painted as a reflection of the positive impact of bailouts.
Paris of the West
There was a time when Detroit was known as the Paris of the West and boasted a population of 1,849,568 (1950) but now it's more like the Athens of the West and the population has dwindled to 700,000. The city, like the car companies that propelled its growth, became complacent. Money that poured in like rain along with internal American migration masked mounting problems including a successful union money-grab that killed the automakers and now hang like the sword of Damocles over the Detroit. The city's fate is now in the hands of Gov. Rick Snyder who will decide tomorrow morning on one of three options:
Consent agreement that is fiscally sound and must have triggers in place to make sure city managers live up to their obligations to spending cuts and unions accept reforms. So far unions representing 4,500 workers (police and firefighters are in separate talks) have offered 10% concessions they say would save the state $100m annually. That amount is too little but does highlight just how large the obligations have become. In addition, those concessions come from a combination of wage cuts, healthcare cuts and revenue-generating programs like amnesty for unpaid parking tickets, taxes, and code fines.
An emergency manager would come in, and in effect, remove the mayor Bing and the unions from the process and begin making decisions on what and where to cut.
Bankruptcy is the nuclear option but one everyone hopes to avoid (This year has seen 21 cities default on loan obligations on a total of $978.0 million in debt.). It seems Detroit saw this coming when it raised $250.0 million in general obligation bonds last year in a move an analyst at Fitch calls a "clear indication of financial stress." Moody's has already downgraded the city's debt rating. Bankruptcy would make it hard for the city to raise cheap money for years to come but might be the only way to truly clean up the problem.
Detroit has about $42.0 million in cash and $60.0 million in monthly payouts. With $13.2 billion in long term debt, even a short term band-aid would be a waste of time. Now is the time to fix what ails the Motor City, but instead it's going to become a political football. Talk of violence and racism and retaliation have clouded efforts to come up with intelligent solutions. With momentum in Wisconsin to depose Governor Walker and President Obama's class warfare diatribe yesterday I think unions are going to draw a line in the sand. I think rabble-rousers will call the right to unionize (which isn't being question) a civil right.
Auto sales were good, but General Motors has its own issues with questionable goodwill and $25.0 billion in unfunded liabilities. Plus, GM missed consensus for March sales and continues to market share. Somehow there must be real consensus on medical care obligations of $5.5 billion. The same forces that made the Greek drama so gripping and dangerous are bubbling up beneath the surface. Austerity is a bitter pill, but one that has to be excepted when you get to the end of the road. Detroit is not unlike those Mediterranean nations that had it so good for so long without ever preparing for a future but still assuming a best-case scenario.
Pain in Spain
To their credit, the people of Spain voted in a conservative government after decades of love with socialists that promised a lot, delivered via smoke and mirrors but turn the nation into shell of its past glory. There are miles of new highways and high speed rail along with a couple dozen empty airports and 25% unemployment. Those gimmicks provide short term benefits that mask the need for true reforms and real innovation. Yes, Spain for a while was the leader in clean energy, too. In fact, Spain was hailed by President Obama as the nation with the right clean energy plan-but each clean energy job resulted in the loss of a few real jobs.
Now Spain is making tough cuts, the kind of cuts that only become tougher the longer they linger. Spain is making the kind of cuts president Obama derided yesterday when speaking in front of the Associated Press (his base).
Change in Spending
Spain has a delicate problem of instituting necessary austerity to lighten the load of its sinking ship. For many it is like tossing overboard valuable stuff from a luxury liner with a gashing hole in the hull. But for those that think Spain has a longer term legacy beyond the misspent years as a socialist nation then it's more akin to tossing over deadweight, like a giant golden calf from a lifeboat in order to buy time and regain health. With 50% youth unemployment, this promises to be a hot summer for Spain, where the guys that have only begun to fix the problem are now being blamed for its creation. The long term lesson for Americans is that things can get worse in a controlled manner that makes people feel better even as the foundation continues to erode.
At some point youth unemployment was 20%, and the idea was to develop programs that provided short term help. Then unemployment climbed to 30% then 40% and still the idea was to build a bunch of empty airports and under used high speed rail: a virtuous cycle would ready to erupt. Now, the only thing that's ready to erupt is a nation that has to toss the false dream of socialism and wealth redistribution overboard, plug a gaping hole and somehow make it to shore.
It looks like Ben Bernanke will have to hit the lecture circuit or maybe co-host the Today show with Sarah Palin, so he has a platform to reassure Wall Street that his word is his bond. We were promised to understand policy and intent without the difficult task of cutting through green-speak. The hype was we could toss the Rosetta Stone and read between the lines with ease. Now, Wall Street is confused, and this is reflected in the market.