FOMC Minutes

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If you are a McCombs alumni in Houston, please consider coming to the alumni event tonight – Thursday, February 18^th.  I’ll be speaking about the economy.  For information, check out this link:

Houston Alumni Event




Now, on to a summary of what I read…




1. Markets

The rally continues. The Dow rose 40 points after getting good news from Deere and Whole Foods.  Bond prices fell, pushing the yield to 3.73%.




The Fed minutes were viewed as somewhat optimistic.  This leads to the belief that the US will be first to raise interest rates (before Europe) and the dollar appreciated.  Even though the dollar appreciated, oil also rose to $77.43.




2. Economy

House construction increased. Construction of new homes increased 2.8% to a seasonally adjusted rate of 591,000 units.  Single family housing starts increased 1.5%.  This is 21.1% higher YOY.  This should solve a lot of problems because we need new houses.  We need new houses like Tiger needs another girlfriend.




Building permits fell. Applications for building permits fell 4.9% (following two months of large increases).  This is still 16.9% higher YOY.




Industrial output increased .9% in January. This was the seventh consecutive monthly increase. All three components (manufacturing, mining and utilities) increased.  Industrial output is just slightly higher (.9%) YOY.  Consumer durables increased more than nondurables.  In particular, auto manufacturing increased.




We’ll never find solutions with the political climate. President Obama said that the stimulus bill saved 2MM jobs.  This is one of those things that I can’t stand from any politician.  We have no idea how many jobs were saved (or not saved).  Republicans are saying that while there is a trillion dollar stimulus, we’ve lost millions of jobs and the deficit is soaring.  I really can’t tell you how little respect I have for all of these politicians (on both sides).  I’ve seen more rational arguments from my five year old.




Capacity utilization has increased. Factories are operating at 72.6% of capacity, an increase of .8% from the prior month.  This is far below the 80.6% long term average.  There is anecdotal evidence of hiring in the manufacturing sector.




The US deficit with China was $226.83 billion in 2009. With our 10% unemployment rate, there is going to be intense pressure for China to let the yuan appreciate. From 2005 to 2008, China let the yuan appreciate 21% against the dollar.  When the crisis hit, China stopped the appreciation.  Some estimate that the yuan is still 25% undervalued. In April, the US will have to decide whether to label China a “currency manipulator” under the Omnibus Trade and Competitiveness Act of 1988.




HAMP makes very small dent. The Treasury Department said that their foreclosure prevention program (Home Affordability Modification Program) reduced mortgage payments for 947,000 borrowers.  That’s an increase of 11% from December.  There are approximately 1.7MM borrowers who are eligible for the program.  (This is 3% of those with mortgages.)




Interest rates can be lowered to as low as 2% and loans can be extended to 40 years.  Program participants are given a trial modification and then it can be made permanent.




To date, only 116,000 have permanent modifications.  The average modification results in a savings of $522.




So far, Citi has modified 50% of eligible borrowers, JPM and WFC were at 38% and BAC is at 22%.




3. The Fed

Stop buying and SELL! Fed minutes showed that some members of the FOMC are ready to start selling some of the assets on the Fed’s $2.2 trillion balance sheet.  But, there’s concern about what that will do to interest rates.  We want to reduce the excess reserves, but we’re worried about the consequences of selling the securities.




The first signal. Most likely, the Fed’s first move will be raising the discount rate (which is the rate that the Fed charges for loans).  Currently, the rate is .5%.  When this happens, it could be the first signal of a change in Fed policy.




Leaving the Fed Funds rate low for an extended period. Fed governors think that there are three reasons why they can leave the Fed Funds rate low: (1) slack in the economy; (2) low inflation; and (3) low inflation expectations.  With that said, market based inflation expectations (seen by comparing TIPs with regular Treasuries) have been increasing.




Fed’s forecast isn’t particularly rosy. The Fed predicts growth between 2.8% and 3.5% this year and somewhere between 3.4% and 4.5% for the following two years.  Of course, this will hardly be enough to lower the unemployment rate.




The Fed predicts that unemployment will stay high for the next two years. They think that unemployment will be between 9.5% and 9.7% this year and between 8.2% and 8.5% next year.  They think it will be in the 6.6% to 7.5% range in 2012.




The Fed thinks that recovery will be slowed by: (1) household and business uncertainty; (2) slow improvements in employment; and (3) slow improvements in the credit markets.  A “sizeable minority” of Fed officials thing that it could take more than five or six year to fully recover from the recession.  I have asked Jenny to give me five to six years to improve.  I didn’t get a response.  Apparently, she has given up speaking to me for Lent.




Growing federal deficit. The federal deficit is $430.69 billion for the first four months of this fiscal year.  Currently, this is 8.8% higher than where we were at this time last year (when we ended with a deficit of $1.42 trillion).  On the good side, January’s deficit was $20 billion lower than one year ago.




Changes at Fannie and Freddie. The Federal Housing Finance Agency (Fannie and Freddie’s regulator) is proposing that Fannie and Freddie should not reach their goals of helping low income families by purchasing private label MBS.  This was a high risk way of reaching their goals.  Of course, the question is whether they can reach these goals in any way that isn’t risky.




4. Random

A special place in hell. The FTC is warning about con artists who are targeting the unemployed with bogus job placement  and work-at-home schemes.  They are targeting the 14.8MM unemployed Americans and the 11MM who are working part-time but want full-time work.  I have to believe that there’s a special place in hell for someone that would do something like this.




It doesn’t seem to end! Toyota is investigating complaints about the steering of Corolla’s.  Toyota’s CEO is now saying that he is not going to come to the US (and will not testify before Congress.  Some people believe that he doesn’t want to answer the interrogation.  Another line of thought is that he’s afraid because his US rental car was a Toyota.




Hackers. A computer security company said that hackers in Europe and China hacked into 2,500 companies over the last 18 months.  They also broke into computers at ten US government agencies.  The belief is that this is an Eastern European criminal group.  The thought is that they use China because there is lax oversight.




I had a really proud moment this week. My seven-year old turned on the tv and said, “Daddy, the Olympics aren’t on. Skating is on.” I said, “exactly son,” and I wiped the tear from my eye.




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