What do you Buy for the Country that has Everything?
A few market comments by Peter Tchir.
The Fed Wants to Know What You Buy for a Country that has Everything?
We need an increase in real final demand. That is what will turn our economy around. Unfortunately, real final demand generation isn’t one of the tools in the Fed’s workbox. Asset buying is. That is all they really have left, next to just giving everyone $1 million.
But QE is not a good tool for increasing final demand. Sometime it can help, but with the current situation, I don’t think it will do anything, at least not for domestic final demand.
But how do you get people to buy more when so many already have so much?
We have a record number of people receiving food stamps. That is sad and awful, but QE3 isn’t going to spur final demand from this group. No amount of mortgage bond buying is going to get a penny directly into the pockets that need it most. We need to create jobs, but jobs come from final demand and this large group will not increase that just because the Fed is buying mortgages.
Then there is the rich. The group that owns most of the stocks but is already doing well and already spends a lot of money. This group is the most likely to directly benefit from QE, at least in the short term. Certainly their stock portfolios jumped in value. Anyone who hasn’t re-financed now can, but seriously, how many people is that? The Fed purchases will keep a group of professionals in banking and the legal side busy, but now we are talking about a relatively small group of people. The problem here is that this group has been spending at a relatively “normal” pace. Is their spending really going to increase? A $3,000 purchase of jewelry versus a $2,500 one otherwise? Does that do much? When QE1 was enacted, this group was on its heels. It was nervous. It wasn’t spending. It was freaking out how suddenly it was impossible to get a jumbo mortgage. But by and large, that is a distant memory.
Then there is some group, lets’ call it upper middle class, just below the truly rich. What demand creation is there here? I don’t see it. As far as I can tell, this is the group that got itself into the worst shape pre crisis and is still recovering. The aspiration purchases, the Viking stove, sub-zero fridge, a flat screen TV in every room, and more rooms than you will ever use. This group, often looks fine on the outside, but after years of binging on credit, followed by years of living nervously on the edge, they are still in balance sheet repair mode. They own far more stuff than they need and still haven’t finished paying for it, let alone saving properly for retirement. The crisis was a wake-up call, which isn’t a horrible thing long term, but more mortgage buying isn’t going to have a big impact on demand from this group.
All that leaves is the lower middle class. For many, mortgages will still be hard to get. Many bought more than they needed at the peak, maybe not with quite the same extravagance as the upper middle class, but right up there. This group might be on the cusp of being able to buy more, but job security is still a prime concern, far more of a concern than the value of their homes. The Fed may be able to stabilize home prices, but until job security is felt, spending will remain lackluster.
I just have this image of fireman diligently pouring water on a fire. Multiple firetrucks, lights flashing, brave fireman pouring water on a fire. The problem is that it is a chemical fire and the water is totally ineffective at actually putting out the fire.
Other Problems With Final Demand Creation
The older population does not need “stuff”. They are in downsizing mode. The demographics are bad. We aren’t as bad as some other countries in terms of demographics, but the reasonably high correlation between growth and an aging population is hard to miss. This problem is much harder to deal with since demographics cannot be changed quickly, and the reality is that what we consume is somewhat age dependent. It is changing with time, but things like bigger homes full of more stuff, isn’t one of the desires of this group.
The youth seem in real trouble. If it wasn’t for absolutely shocking numbers in places like Spain we would be appalled at our own youth employment numbers. That is scary in its own right since if it isn’t addressed, we will have even bigger problems down the road. This group isn’t really buying homes. They were never a huge part, though in the heyday some were buying apartments or starter homes. Now, they aren’t. Even if they can get a mortgage, many don’t want to buy as they aren’t ready to settle down or commit to an area, and they have no faith in the housing market. They can see that paying 6% in commissions plus all the other things that go along with home ownership is expensive, and won’t do it if they aren’t truly sure they want to be in a specific area. It is a different attitude than we had. They weren’t brought up in an American Dream environment, they lived through an American Dream Run Amuck environment. The student debt burden, lack of jobs, and frustration this group feels, is not being helped by QE3.
That leaves us largely with foreign demand as the potential rescuer. Can the Fed debase the dollar so much that we can produce cheaply enough to supply the rest of the world? At some level, that appears to be the goal. The Fed sees that without domestic wage inflation, we can afford to weaken the currency and hope for a growth in exports. The problem with that is if you went to the UN and asked which nation planned to increase exports, every single hand would be raised. The ENTIRE PLANET is trying to increase exports. But since one person’s export is another person’s import, the global net change has to be zero. So how can every country increase net exports? They can’t. If you ask that same group how many would like to see a lower currency to help exports, not many hands would go down. The goals of all the countries are similar, yet, in a zero sum world, cannot all happen. Looking for final demand from foreigners, in an increasingly protectionist world, where everyone else has the same strategy is weak.
Fiscal Policy. LOL. ROFL. LMAO. Seriously? Fiscal policy and good government is probably the only way to spur final demand and then jobs at this stage, but I don’t see it happening here until we have another crisis of some sort, and the Fed policies will probably just mask the fact that there is a crisis brewing until it becomes worse than it had to. The Fed is great at blowing bubbles. Their track record on blowing bubbles is pretty clear, their track record on navigating successfully out of problems, is also fairly clear, and it’s not so hot.
OMT is still MIA
I am growing more concerned that Europe is slipping back into crisis mode. We have had a window where the ECB stepped up, Germany backed down, and there is enough “wiggle room” to get something done. Spain needs to ask and they need to ask soon, because all Europe has is “wiggle room”. There is not true deep support for the ECB’s new policy. Heck, the IMF has admitted how difficult it is to structure programs for EU nations. The German court upheld ESM, but will other countries raise their own challenges? Will disgruntled Germans (and those in other countries) find alternative ways to try and block plans for more widespread ECB intervention?
I don’t know the answers to those questions, but it would be foolish to think that someone isn’t working on those plans of attack. Draghi is desperately trying to get pregnant. He knows there is no such thing as being “a little pregnant” and once the OMT is turned on for Spain, and then Italy, there will be almost no turning back. Either the programs will work right away – doubtful, or every 6 months or so, Europe will be faced with the alternative of taking losses on existing programs and stopping them, or upping the ante – likely. So the likely scenario is every so often (3 to 9 months), Europe will face the same old decision, admit you were wrong, take losses, and move on to proper restructuring, or paper it over and pretend it will get better (which eventually it may). We all know what Europe will decide. Politicians and Central Bankers don’t lose money, not if they can help it. So Draghi needs to get on that slippery slope of aggressive buying before he gets stopped out.
I have believed Spain would apply in time, and still do, but I see far more risk of negative headlines in the interim, than I did even a week ago.
No Rush to Buy Assets
I had gone from short to neutral, and would now go back to short. There isn’t a need to rush to buy assets. From all the things I’ve been looking at since QE3 was announced, I’ve come back to the conclusion that patience is good. I would not be horribly short, and look for opportunities to buy on pullbacks, and start slowly but surely, accumulating some puts while vol is cheap and stocks are still so high.
I am less concerned about spreads, since banks in particular still seem cheap, given how aggressive central banks are (or are trying to be), but again, I don’t think you miss much by being patient. Too many people are long and there is too much out there that poses risk, and liquidity is abysmal. Liquidity was awful on the way up, but it will be even worse on the way down.
Given my thoughts on final demand and the global battle to debase their own currencies, I do NOT like commodities here.