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Does Ben Bernanke have access to a Bloomberg? I ask that because he is apparently unaware that the dollar index is down for 9 straight days, gold is hitting new highs and silver is approaching cult status. He said at his press conference that a strong and stable dollar was in the best interests of the US and global economy but right now we have neither. Given that he, more than any other policy maker, has the ability to accomplish what he says is in our best interests, one can’t help but wonder why he doesn’t. I’m beginning to think he’s actually working for Auric Goldfinger.
Bernanke made it clear at the press conference that he intends to complete the second round of quantitative easing and then reinvest the proceeds of maturing bonds to maintain the size of the Fed’s balance sheet. Apparently he thinks it is coincidence that as he talked the dollar fell while commodities rose. He believes QE II has been effective and plans to pursue it come hell or high oil prices. Yes, stock prices have risen since Bernanke started buying Treasuries but so have interest rates, gas, Pampers and Wheaties. The effect on the overall economy has been negative and one only has to look at the first quarter GDP report to confirm that.
Nominal GDP growth (not adjusted for inflation) in the first quarter was 3.7% which is virtually unchanged from the previous trend. What did change was inflation. Last quarter, the price index for GDP was up only 0.4% (which I said at the time was unrealistically low) but this quarter the index rose to 1.9%. The Fed’s inflationary policies turned 3.7% nominal growth into 1.8% real growth. It is real growth - growth in the volume of goods and services produced not the dollar value - that matters. Fed policy reduces real growth today and even worse reduces future growth by diverting investment to real assets such as gold and silver.
The US economy is still growing today despite terrible monetary policy and even worse fiscal policy. Bernanke has said repeatedly that the bad things going on in the economy are “transitory”. Since almost every recession of the last 40 years was preceded by a spike in oil prices, maybe Bernanke will be right. His policy of benign neglect with respect to the dollar pushes us closer to that day.
Despite the weakness of the GDP report, the economic data last week actually wasn’t that bad overall. In fact, even the GDP report had some good news in it, just not enough to overcome the bad. Two of the biggest contributors to GDP growth were spending on durable goods and investment in equipment and software. If this expansion is to continue, it will have to be led by private investment and this is a good sign. It was, however, offset by a drop in residential and non-residential structures. Additionally, one of the largest negatives was a drop in government spending which reduced GDP by over 1%. Unfortunately 2/3 of that was reduced defense spending which likely won’t be repeated.
Personal income and spending rose more than expected, at least on a nominal basis. Income rose 0.5% and spending rose 0.6%. Unfortunately, adjusted for inflation, real disposable income rose only 0.1% and spending just 0.2%. The Goldman and Redbook retail reports were also strong with Redbook reporting sales up 5.3% over last year. Some of that is due to the timing of Easter though so don’t get too excited.
Better was the report on durable goods which showed a gain of 2.5% on a surge in transportation orders. Ex transportation, orders were still up 1.3% and more importantly the investment component was up 3.7%. It appears the positive contribution to GDP in the first quarter is continuing. The Chicago PMI was also strong at 67.6 so manufacturing continues to be strong.
Housing continues to be weak. It was a non factor in the GDP report so it has stopped subtracting from growth but it is still very weak. New home sales were up to a 300k annual rate but that is coming off the all time low set last month. Sales in March are 1.9% below the rate in the fourth quarter. Median price rose 2.9% from last month but is down 4.9% year over year. Average price fell 3.8% on the month and 6.4% year over year. Case Shiller also showed a continuing decline in home prices with the 10 city index down 2.6%. Pending home sales were higher by 5.1% but that was probably due to a rush to buy before FHA insurance premiums rise. Mortgage applications were also down after a surge to get FHA financing.
Two negative reports on employment soured the overall data. The employment cost index rose 0.6% quarter to quarter and 2% year over year. Wages were only up 0.4% with the rest of the rise in benefits costs, mostly health insurance. With unemployment so high, the rising cost of hiring is not good news. Jobless claims also provided a negative tone to the week, rising to 429k. The downtrend in claims appears to be over. We’ll get more information on the jobs market next week, but it doesn’t appear to be improving.
Stocks rose last week with the S&P 500 up 2%. Earnings were generally good but several companies reported higher costs affecting earnings or the outlook. Foreign markets generally performed worse than the US with emerging markets dominating the list of down bourses. Emerging markets are still trying to fight an inflation problem caused by excessive capital inflows. Brazil, as an example, is booming but so is inflation. Rio is now more expensive the NYC.
The real fireworks were once again in the commodity markets where gold and silver both made new highs. The flip side of that is the US dollar index which continue to fall as noted above. The dollar is nearing the all time low set in July 2008 and if that doesn’t scare you a little, nothing will. The weak dollar is a symptom of bad monetary and fiscal policy in the US. Capital is flowing to emerging market countries and commodities and unless we change policy that will continue no matter what those countries do to try and slow it down. Bernanke’s policies have a global impact and as he said a stronger dollar would be very beneficial right now for everyone. Unfortunately, it doesn’t appear Bernanke is prepared to do anything about it.
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