The week's economic reports

Robust retail sales and a trio of reports showing markedly higher inflation highlighted the week's economic data. Stocks and bonds ended with the S&P 500 Index down 2.5 percent to 1,468, now up just 3.5 percent for the year, and the yield of the 10-year U.S. Treasury note rose 12 basis points to 4.24 percent.
Pending Home Sales: Pending home sales rose 0.6 percent in October and the year-over-year decline narrowed slightly from -20.1 percent to -18.4 percent as the most recent data reflected activity just after the worst of the credit market tumult during August and September. The National Association of Realtors remains as the only major organization that is bullish on housing in 2008 and they look increasingly ridiculous as a result.

International Trade: Higher prices for imported oil offset higher levels of exports as the overall trade gap between the U.S. and the rest of the world widened slightly in October to $57.8 billion following a downwardly revised $57.1 billion in September. Current levels remain far above the monthly trade deficits near $70 million posted in 2005 and 2006.

The oil trade deficit rose from $24.2 billion in September to $26.3 billion in October as the price of imported crude oil jumped from $68.51 per barrel to $72.49 per barrel. The trade gap with the Euro area rose from $6.4 billion to $11.9 billion in October, with Japan from $6.2 billion to $8.0 billion, and with China from $23.8 billion to $25.9 billion.

Import/Export Prices: Prices of imported goods rose a sharp 2.7 percent in October, the biggest monthly increase in 17 years, and now stand 11.4 percent higher than a year ago. Higher oil prices and a weakening U.S. dollar were primarily responsible for the surge as fuel prices increased 10 percent on the month and 49 percent from year-ago levels.

Retail Sales: Retail sales rose more than expected in November, up 1.2 percent after a 0.2 percent increase in October. From year-ago levels, sales rose 6.3 percent, an improvement over the 5.0 percent annual gain in October. Excluding motor vehicle sales, which declined a full 1.0 percent last month, the increase was even greater than the headline number at 1.8 percent after an "ex-autos" gain of 0.4 percent in October.
Gasoline station sales rose sharply last month (up 6.8 percent) but other gains were broad-based, led by clothing (up 2.6 percent), electronics (up 2.5 percent), and sporting goods (up 2.2 percent). Sales excluding gasoline rose 0.6 percent for the month and if both gasoline station sales and automobile sales are excluded, sales rose 1.1 percent.

Recall that these figures are not adjusted for inflation or population growth, so sales are more an indication of the total price paid rather than the quantity of goods sold, but nevertheless, this report points to an American consumer that has not yet pulled back on spending in any meaningful way. Also factoring into this report was a slightly earlier start to the holiday shopping season due to Thanksgiving Day coming relatively early on November 22nd.

Producer Prices: Prices at the wholesale level posted their biggest gain in 34 years rising 3.2 percent in November after a mild 0.1 percent gain in October. The core rate, excluding food and energy, rose 0.4 percent after being flat last month. On a year-over-year basis, the overall PPI rose 7.7 percent and the core rate was up 1.9 percent. Surging energy prices led the way, up 14.1 percent for the month, with gasoline prices up 35 percent after declining last month.

Consumer Prices: Rising energy prices caused consumer prices to post their biggest monthly increase since late-2006 following Hurricane Katrina. Overall inflation rose 0.8 percent in November, following an increase of 0.3 percent in October, bringing the year-over-year gain to 4.3 percent, a rate that has not been exceeded in more than two years.
Core inflation, excluding food and energy, rose 0.3 percent in November, exceeding the important 0.2 percent mark for the first time in 10 months. From year-ago levels, the core rate is up 2.3 percent, still well below the late-2005 peaks but far above the 2.0 percent mark widely believed to be the comfort level of the Federal Reserve.
Energy prices led the way higher as the cost of gasoline rose 9.3 percent last month and 37.4 percent from year-ago levels while the overall energy index gained 5.7 percent in November and 21.4 percent on a year-over-year basis. There were a number of factors having to do with seasonal adjustments that made these increases even more than they would otherwise have been due to the fact that energy prices are usually declining at this time of the year.

Food prices rose 0.3 percent in November and 4.7 percent from year-ago levels, so senior citizens who spend most of their money to heat their home and put food on the table are experiencing double-digit annual inflation at the moment, a topic that may get increasing attention in an election year if prices remain high. Recall that last year at this time, the nation was in the midst of a virtual free-fall in energy prices that did not conclude until mid-January - in this respect, late-2007 is very different from late-2006.

Summary: A surprisingly strong report on retail sales followed last week's surprisingly strong labor report in what appears to be an economy that just doesn't want to slow down, at least not when measured using ordinary metrics. Both of these reports are crucial to the near-term outlook and, while economic growth will surely slow in the fourth quarter from its torrid third-quarter pace, recent estimates of late-2007 growth are now being revised upward modestly from previous estimates of between zero and one percent just a few weeks ago.

As for inflation, there seems to be little doubt that it is becoming a serious problem for policy-makers as evidenced by last week's trio of reports showing both monthly and yearly price increases that haven't been seen since the aftermath of Hurricane Katrina two years ago. There is a big difference, however, between 2005 and 2007.

In the post-Katrina period, price surges were related to twin natural disasters in the Gulf Coast whose effects were quite severe, but also quite temporary. Here in 2007, recent price increases have been more systemic in nature due to stubbornly high prices for both energy and food and are therefore not likely to recede as readily as those caused by disruptions to Gulf Coast energy production. Excluding 2005, you have to go all the way back to 1991 to find a higher level of overall annual inflation.

The Week Ahead: The week ahead will be highlighted by housing starts on Tuesday and the final estimate of third quarter GDP on Thursday. Also scheduled for release are reports on New York area manufacturing and the homebuilders' housing market index on Monday, leading economic indicators and the Philadelphia Fed survey on Thursday, and both consumer sentiment and personal income/spending on Friday.

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Oil and gold contest update #5

As was the case two weeks ago, there has again been little movement in the price of oil and gold in the latest update to the "Guess the Year-End Price of Oil and Gold" contest.
With crude oil finishing the week at $91.35 per barrel and gold ending at $793.10 per ounce, this now leaves bBdaBeerman (a software engineer? "b" for binary? oh dear, a horrible flashback!) partially obscured in the graphic above, as was the case for lower case "cp" two weeks ago.

Rounding out the top five are IIO, SC, and Vespucian - wait - make that, "rounding out the top six" with TJ & the Bear in the number six spot. Your humble scribe is currently in eighth place with guesses of $87 for oil and $810 for gold. For the entire list of guesses see this post from October.

Note that a final determination has not yet been made as to exactly how the winner will be determined - that college intern who was researching the subject for me didn't exactly work out. He said something about "root mean square" as he left - I'll have to go through the notes he left behind.

From here on out the excitement will build to feverish heights with another update next Friday followed by one more update on December 28th with the winner to be announced on New Years Eve.

Remember that the lucky winner will receive a free one year subscription to Iacono Research where the model portfolio again gave back some of its hefty year-to-date gains this week but still sports almost a 20 percent increase for 2007.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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A party at the Ritz hosted by Freddie Mac

Reader WW sent this in as a sort of early Christmas present. Thanks. Apparently losing billions of dollars doesn't stop a Government Sponsored Enterprise from having a good time during the holiday season (see the area circled in red at the bottom).
Wrote WW:

Freddie Mac lost $2B last quarter and plans to lose another $2B next quarter on $9B in revenue (20% losses). To celebrate, they threw a decadent holiday party at the Ritz Carlton in exclusive McLean, VA. They had a laser printer that printed pictures on chocolate lollipops for the kids, hors d'oeuvres, entertainment. You'd think it was the Goldman Sachs partners dinner. Alas, it was a Government Sponsored Enterprise pissing away money right before they're going to need a taxpayer bailout.

Happy Holidays to one and all.

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Inflation returns, even in the government's statistics

The Labor Department reported sharply higher inflation in November as consumer prices rose 0.8 percent, the steepest increase in 26 months. From year-ago levels, inflation was a full 4.3 percent higher, the worst year-over-year reading since Hurricane Katrina.
Energy prices led the way higher as gasoline rose 9.3 percent last month and 37.4 percent from a year ago while the overall energy index gained 5.7 percent in November and 21.4 percent on a year-over-year basis.

Food prices rose 0.3 percent in November and 4.7 percent from year-ago levels, so if you're a senior citizen who spends most of your money to heat your home and put food on the table, your "personal" inflation rate is probably in double-digits.

Don't spend that 2 percent Social Security increase all in one place.

A Breach in the Core

Even "core inflation" rose sharply in November, at its fastest rate since January. The preferred measure of inflation for most economists because it strips out food and energy, categories that are rising in price volatile, the "core rate" rose 0.3 percent last month and is now up 2.3 percent on an annual basis.
This increase may make the task of the Federal Reserve a bit more complicated as they attempt to cushion the fall-out from the mortgage lending crisis and housing bust.

Not that this will stop them from cutting interest rates - they'll just have a tougher time explaining their actions to other economists.

On Tuesday, short-term rates were lowered for the third time in four months and a coordinated global plan to inject liquidity into the banking system was announced on Wednesday - there appears to be little fight left in the "fight against inflation" here in the U.S. ("vigilance" left town some time ago).

The U.S. Dollar Rises

Naturally, currency traders pushed the dollar higher. Follow the logic here...

The Fed lowered interest rates on Tuesday and is expected to do so again and again next year, however, since inflation is now soaring, currency traders figure that interest rates in the U.S. might hold steady or maybe even go higher, boosting the dollar's yield and maybe increasing its appeal relative to other currencies.

Does anybody really think the Fed is going to stop cutting rates or raise them?

As we begin an election year?

That's just dumb - you deserve to lose money on that trade.

Less Inflation with More Housing

As for the housing bubble and its impact on inflation, it is interesting to note the effect that housing is having now that home prices are going down. Recall that house prices are not included in the inflation statistics, but rather "owners' equivalent rent" is used.

So, just as a housing boom results in lower rents when everyone is out buying their own place, reducing demand for rental units, a housing bust has a similar effect on rents as a good portion of the housing inventory glut, originally intended to be owner occupied, become rental units.

It's hard to have any significant inflation in the official government statistics during and after a housing boom when you only use rents.

Had real home ownership costs been included in the inflation statistics, much of what we are now seeing in housing and credit markets could probably have been avoided.

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Greenspan: Odds rising for a recession

It's the holiday season and, for this blog, it is like no other holiday season in that there is one gift that just keeps on giving.

Former Federal Reserve Chairman Alan Greenspan will appear on NPR News' Morning Edition tomorrow to once again make another recession prediction and deny any responsibility for the housing bubble.

Asked whether the economy will tip into a recession — something that has not happened since 2001 — Greenspan said, "It's too soon to say, but the odds are clearly rising."

He said he felt this way because of the slowing pace of growth. "We are getting close to stall speed," he said. "We are far more vulnerable at levels where growth is so slow than we would be otherwise," he added. "Indeed, it's like someone who has an immune system that's not working very well is subject to all sorts of diseases and the economy at this level of growth is subject to all sorts of shocks."
...
Greenspan again rejected criticism that his policy actions helped to feed a housing boom that eventually went bust. Critics say Greenspan held interest rates too low for too long after the 2001 recession.

To have prevented such euphoria in housing that fed a bubble in prices, Greenspan said the Fed would have had to jack up interest rates so high that it would have damaged the economy. "That would have broken the back of the economy, and brought the housing boom down," Greenspan said.

Either that or the Fed could have made just the feeblest attempt at regulating the mortgage industry to stop people from buying houses they clearly couldn't afford.

Why doesn't some reporter ask him why Ben Bernanke is now stuck having to come up with disclosure guidelines, regulation, and a plan for oversight while at the same time trying to figure out what the heck to do with a bursting housing bubble.

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Simply out and out wrong

According to this Bloomberg report (hat tip CB), yet another critic of former Fed chief Alan Greenspan surfaced yesterday in central bank historian Allan Meltzer of Carnegie Mellon University in Pittsburgh.

Better late than never, it would seem, but we probably could have avoided a lot of the problems we see today if there had been this kind of growing criticism back in 2004.

Meltzer said that Greenspan "lets himself off much too easy" in recent comments about his role in the housing bubble, taking issue with yesterday's op-ed piece in the Wall Street Journal where, for the first time, the former Fed chairman acknowledged that low interest rates had something to do with the housing bubble.

Worried about "deflation" as real interest rates first probed negative territory starting in 2002 and then made a home there for the next three years, Meltzer was consulted on subject.

"I said, 'Alan, we have had six or seven deflations in the United States in the history of the Federal Reserve, and only one of them ever had terrible consequences, and that was 1929 to 1933,'" he said. "That was because deflation was not only bad, but because the money growth was lower and lower and lower, so the expectation was deflation would continue. In all the other six, nothing happened."

Greenspan "continued to believe that deflation was the problem. He was wrong about that, simply out and out wrong," Meltzer said.

In another few years there will probably be a near-consensus on the subject of who is most responsible for the current mess.

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Shopocolypse

After this morning's robust retail sales report, maybe we should all have a look at Morgan Spurlock's latest offering, What Would Jesus Buy?

From the Wikipedia entry:

The film focuses on the issues of the commercialization of Christmas, materialism, the over-consumption in American culture, globalization, and the business practices of large corporations, as well as their economic and cultural effects on American society, as seen through the prism of activist/performance artist Bill Talen, who goes by the alias of "Reverend Billy," and his troupe of activists, whose street theater performances take the form of a church choir called "The Church of Stop Shopping," that sings anti-shopping and anti-corporate songs.

[And you thought some of my sentences went on and on ...]

Having achieved his first national notoriety with the ground-breaking 2004 documentary Super Size Me and, more recently, with the excellent 30 Days series on FX, the independent film maker now strikes at the heart of the American way of life as we currently know it.

A few more links:

• What Would Jesus Buy? - Official Website
• Church of Stop Shopping - Official Website of Reverand Billy
• What Would Jesus Buy? - IMDB
• Taking on Christmas Consumerism - Nightline

It's funny how, in order to get any attention at all, this subject matter has to be packaged in a way that somehow appeals to the public, who might then watch the trailer or read a movie review, realize the truth that it contains, and then go on borrowing money to buy even more stuff that they don't need.

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Retail sales surge

The Commerce Department reported that retail sales rose more than expected in November, up 1.2 percent after a 0.2 percent increase in October. From year-ago levels, sales rose 6.3 percent, an improvement over the 5.0 percent annual gain in October.
Gasoline station sales rose sharply in November (up 6.8 percent) but other gains were broad-based, led by clothing (up 2.6 percent), electronics (up 2.5 percent), and sporting goods (up 2.2 percent) while motor vehicle sales fell (down 1.0 percent).

Recall that these figures are not adjusted for inflation or population growth, so sales are more an indication of the total price paid rather than the quantity of goods sold.

Nevertheless, despite higher prices at the pump, American consumers appear to be continuing to do their civic duty in support of the U.S. economy.

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UPDATE: Thursday, Dec. 13th, 7:15 AM

Producer prices surged 3.2 percent in November and are up 7.7 percent from year ago levels - tomorrow's report on consumer prices should be very interesting and might give today's seemingly robust retail sales figures a whole different feel.

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Donald Trump, American

David Lazarus wrote a great story for the LA Times today about his personal experience with one of Donald Trump's "Investors are Making Millions in Foreclosures - So Can You" free teaser seminars that are just a come-on for a $1,495 workshop.

It is a sad testament to the world we live in that the business of "helping others make money" is one of the most profitable businesses to be in and the degree to which these businesses are profitable has much more to do with sales and marketing than it does with actually "helping others make money".

Combine Americans' 20-year old "culture of debt" with a keen desire to live large and be noticed while doing so, and it's no wonder that The Donald is so popular.

According to this Forbes profile, he "borrowed heavily, built big, lived large, and became a billionaire during the 1980s. Nearly lost it all after 1990 realty crash. Stayed flamboyant, smartened up and embraced reality TV."

Will he "lose it all" in the current real estate crash? Probably not. He's figured out how to lend his celebrity name to others and let them take the risk, as David Lazarus explains:

So off I went to Pasadena, where I soon found myself in a hotel meeting room with about three dozen other wannabe real estate moguls. Before us was a banner featuring Trump's typically dour image. "Think big," it instructed.

"Trump is prestige," a participant named Van Patrick, 40, told me as we waited for the event to start. "People follow him, investment-wise."

Hock Chong, 42, echoed this sentiment. "Since he's had such good success, I want to learn his secrets," Chong said.

Our instructor was a Texan named Steve Goff, 40, who told me before things got started that he had bought and sold about 300 houses since getting into real estate 11 years ago. He said he had never bought or sold a house in California.

I asked Goff if he's a millionaire. He said no. He said he had been through bankruptcy, two divorces and had his own home foreclosed upon.

"I love helping people," Goff said of why he now works for Trump University. "I'm very passionate about helping people achieve success."

The entire story is well worth reading. If you're like me, you probably won't learn anything you didn't already know about how these things work, but the comments by all of the interview subjects give the topic added perspective.

It's nice to see that the business of teaching people how to "Make big money in real estate" is adapting so quickly and effortlessly to the changing real estate market.

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Liquidity surges, oil surges

Well, energy markets sure aren't taking the news of the Federal Reserve's new "Global Liquidity Plan" very well. It seems that the combination of less oil inventory and more paper money inventory is having the predictable result - higher oil prices.
Earlier today, the Energy Information Administration reported that U.S. inventories of crude oil fell again, though not nearly as big a drop as last week. The days of "historically high" stockpiles appear to be about over in he U.S. - they've been over in most of the rest of the world for some time now.

The organization's Short Term Energy Outlook calls for lower prices by the end of winter - all the way down to $86 a barrel.

Wow! Could Steve Forbes have ever imagined that, here in 2007, someone would be predicting that oil prices would fall to $86?

Everyone seems to be counting on a big world-wide economic slowdown to ratchet back energy consumption so that existing production levels will result in lower prices.

If that does occur, then there will be a host of other problems, all of which are likely to be countered by even lower interest rates (primarily in the U.S.) and even more "liquidity" (primarily in the U.S.) causing oil-exporters to rethink what paper money (primarily in the U.S.) is really worth these days.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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Alan Greenspan explains the roots of the mortgage crisis

In an op-ed($) appearing in today's Wall Street Journal (hat tip CB), Alan Greenspan explains how we got into the current mess and the role the Federal Reserve played.

After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own. There was clearly little the world's central banks could do to temper this most recent surge in human euphoria, in some ways reminiscent of the Dutch Tulip craze of the 17th century and South Sea Bubble of the 18th century.

I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices. In my judgment, however, the impact on demand for homes financed with ARMs was not major.

Demand in those days was driven by the expectation of rising prices -- the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages. In fact, home prices continued to rise for two years subsequent to the peak of ARM originations (seasonally adjusted).

I and my colleagues at the Fed believed that the potential threat of corrosive deflation in 2003 was real, even though deflation was not thought to be the most likely projection. We will never know whether the temporary 1% federal-funds rate fended off a deflationary crisis, potentially much more daunting than the current one. But I did fret that maintaining rates too low for too long was problematic. The failure of either the growth of the monetary base, or of M2, to exceed 5% while the fed-funds rate was 1% assuaged my concern that we had added inflationary tinder to the economy.
...
The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.

A few comments:

1. Of course, the elephant in the living room is the glaring omission that, while the bubble was inflating, there was a complete lack of regulation for both mortgage origination and Wall Street product "innovation".

Low interest rates, in and of themselves, would not have caused the housing bubble as we now know it.

Prudence would have dictated an approach where, back in 2001 or 2002, the world's second most powerful man might have said, "Look, we've got to take real interest rates to zero. Let's keep an eye on things so we don't just create another bubble somewhere else."

The bad stuff didn't start happening until a couple years later, after the Fed-sponsored transfer of mortgage backed security origination from Fannie and Freddie to Wall Street was complete and everyone joked that, "If you can fog a mirror, you can get a home loan".

2. Once again, the complete failure to recognize a bubble early on is glossed over in the now common bubble defense, "Can't see 'em forming, can't pop 'em when you do see 'em". This is more evidence of why naive economists at the nation's central bank should not be entrusted with the power they currently possess. Had any of them pulled their noses out of their statistical data and spent some time in the real world, they would have seen the bubble formation clearly.

3. To say that "the impact on demand for homes financed with ARMs was not major" is just laughable.

4. To say that "if low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages" is ludicrous.

5. It's nice to know that we'll eventually be able to "get back to business". Whew! Some of us were worried that this mess might turn into something more serious.

For a more reality-based (and much funnier) explanation of the roots of the mortgage mess, see "An interview with Alan Greenspan".

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How not to win friends on Wall Street

Another terrific cartoon by Kahunabear at Stockmania on the Federal Reserve's quarter-point rate cut that disappointed more than a few on Wall Street.

Is that a champagne bottle in Alan "Bubbles" Greenspan's hand? And what about the woman in red in the back?

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Did somebody throw up?

Wow, it looks like today's FOMC meeting went over pretty well. Apparently Ben Bernanke and crew aren't buying into the "Financial Armageddon at the doorstep" idea.

Not having plowed through all the commentary it is unclear how this will impact the "Bernanke Cycle" as currently modeled. For now, the obligatory side-by-side comparison:
It looks like Barry Ritholtz has summarized things best so far in item #1 of his "Ten things you may not have known about the Federal Reserve".

1. “Hey Wall Street: We’re not your Bitch anymore.”

Ben grows a spine. For how long? We'll see.

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Give Nouriel Roubini a pat on the back

We are off to Costco for the better part of the rest of the day, doing our small part as American consumers in support of the U.S. economy during its time of need.

[One of the few downsides to living so far away from major population centers is that you can't get low-priced Kirkland products at any of the local stores. Oh well, it's a very small price that we are more than happy to pay.]

While we're gone, the Federal Reserve is sure to announce another reduction in short-term interest rates. They will succeed in making money cheaper but that doesn't necessarily mean that banks will be any more willing to lend it out.

With this move, the rate cut total for the year 2007 will come to at least one percent - an amount that, six months ago, would have seemed ludicrous to all but one man:

Economist Nouriel Roubini over at Roubini Global EconoMonitor.

Even your humble scribe, in his 2007 predictions, did not foresee such a monetary easing this year, although there was a caveat having to do with "big external events". The credit crisis surely qualifies as a big event, but certainly not an external one, though, come to think of it, since the Fed outsourced much of credit creation to what they call the "shadow banking system" at Pimco, this really is an external event to the Federal Reserve.

4. Interest Rates Will Remain Unchanged

Absent any big external events, the Fed will leave short-term rates at 5.25 percent and long-term rates will hover around 4.5 to 4.7 percent. Nothing will change. The Fed will talk tough on inflation when it's appropriate and threaten to raise rates while at the same time gobs and gobs of money and credit will be created in an attempt to keep asset prices elevated.

This gambit will be successful for equities and commodities, but not for housing. The Fed would much prefer that equities and housing continue to rise in price rather than equities and commodities, but you don't always get what you want.

It looks like it's going to be another pretty good year in the predictions department for yours truly, but back to Nouriel and his bold early-2007 interest rate call.

A reference is not available (if anyone has a link, please post it in the comments section), but, this electronically scribbled note was located:

3/21/07, Nouriel Roubini

I expect the Fed to ease by at least 100bps this year and start easing earlier than expected by the markets.

Remember that this came at a time of the year when long-term rates had just begun to rise to what now seem ridiculously high levels of over five percent in June. Of course that was before the events of August.

Well done. Everyone give Nouriel a pat on the back.

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The common man's sovereign wealth fund

The streetTRACKS Gold Shares ETF (NYSE:GLD) "tonnes in the trust" rose by more than 12 tonnes yesterday as the price of gold gained another $17 per ounce in London.
The trust now has 615 tonnes in allocated storage, now well clear of China and the ECB, an organization that is believed to have sold some of their reserves recently.

Netherlands - look out, you're next and then it's on to Japan.
This is turning into kind of a "common man's" sovereign wealth fund, in some ways similar to the giant funds run by China and some Middle Eastern oil exporting nations.

Just like these big countries that are looking for something to do with their huge piles of quickly depreciating U.S. dollars, it seems that many individuals are also accumulating way too much paper money and they too are looking for something to do with it all.

This is not a bad place to put it.

Full Disclosure: Long GLD at time of writing.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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Santa may have some extra gifts this year

Neither rain nor snow nor gloom of night will keep Santa from his appointed rounds, but the bursting of the housing bubble may make his work a bit easier than last year.


Hat tip TK.

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Birth-death model adjustments to payrolls

There's been a lot of talk over the last year about the Labor Department's birth death model and its impact on the monthly nonfarm payrolls report - it seemed like a good time to whip up a table to get a better idea of what's going on.
Recall that these estimates are used to arrive at the "unadjusted" changes to nonfarm payrolls along with data coming from the Labor Department's survey of state employment insurance records for some 400,000 businesses. The birth death model accounts for the "birth" and "death" of businesses that are not reflected in the regular survey.

This total is then subject to seasonal adjustments, which results in the monthly data that is widely reported in the media.

For example, the details of last Friday's labor report for the month of November showed a total of 240,000 new jobs via the establishment survey, of which 51,000 jobs could be attributed to the birth-death estimate (see above). This 240,000 figure was then seasonally adjusted down to 94,000 which is what you probably heard in the news.

So, last month the birth death model accounted for 21 percent of all new jobs reported which sounds reasonable. But, looking back in the BLS data you see that a total of about 1.5 million jobs now exist that weren't there a year ago and, of that total, over 1.1 million jobs are the result of the birth death model.

This seems like quite a bit - more than 70 percent - and this historically high ratio has been the major complaint about the birth-death adjustments.

Looking at the individual categories provides more detail.

In the Leisure and Hospitality category a total of 368,000 new jobs were created and 328,000 of them were from the birth death model - that's 89 percent.

For Trade, Transportation, and Utilities the total is 74 percent, for Professional and Business Services the total is 51 percent, and for Education and Health Services the total is 29 percent. Note that Education and Health Services is, by far, the single biggest source of job growth adding 561,000 jobs alone over the last 12 months.

The first category that appears to be seriously distorted by the birth death adjustment is Construction, where, before adding in the birth death adjustments, about 274,000 fewer jobs exist today than a year ago, but including the adjustment only 134,000 jobs have been lost.

Similarly, in the Financial Activities category, before adding in the birth death adjustments about 126,000 were lost over the last year, but with the adjustments the job loss is only about 12,000.

Both of these last two adjustments are obviously in error and will be subject to massive revisions.

Last year there was an upward revision of some 800,000 jobs due to the recalibration of the birth-death model long after the initial monthly data was released. Don't be surprised if the next downward revision matches this total.

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UPDATE: Monday 12/10, 2:55 PM

Here's a new chart - note the areas in red.

The Gain/Loss as Reported column is the 12-month total as of November (these are the not-seasonally adjusted numbers but it really doesn't make a difference). The Birth/Death Adjustment is the data from the table above from this page at the BLS. The Survey Data column is column 2 minus column 3 and the Birth/Death Adjustment as a percent of the total gain/loss as reported is column 3 as a percent of column 2.

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Bernanke takes some flak at Bloomberg

Two reports at Bloomberg today add to the continuing criticism that Fed Chairman Ben Bernanke has been taking since he began cutting interest rates back in August. While many on Wall Street have applauded these moves, figuring that easier money in 2007 and 2008 will help cure the problems caused by easier money early in the decade, a small but growing number of analysts have been critical of the rate cuts.

In Price Measure Says Rate Can't Fall as Traders Expect, more people seem to be noticing that the Federal Reserve is cutting interest rates while inflation is rising. Controlling inflation expectations has been one of the key elements of the Bernanke Fed's fight against inflation - as odd as that may sound, to have to fight the very thing that they are instrumental in creating.

The fight doesn't appear to be going so well at the moment.

In Bernanke May Risk 'Fool in Shower' Label for Economy, the recent and future rate cuts are viewed as possibly causing the economy to be overstimulated over time, as the lagged effects of the cuts are felt.

Federal Reserve Chairman Ben S. Bernanke may have to risk becoming the proverbial "fool in the shower" to keep the U.S. economy out of recession.

Renewed turbulence in financial markets puts Bernanke, 53, under pressure to open the monetary spigots wider to pump up the economy. Traders in federal funds futures are betting it's a certainty the Fed will cut its benchmark interest rate from 4.5 percent tomorrow, and they see a better-than-even chance the rate will be 3.75 percent or below by April.

"The Fed has to assure the markets that it's ready to ride to the rescue and cut rates by as much as necessary," says Lyle Gramley, a former Fed governor who's now a senior economic adviser in Washington for the Stanford Group Co., a wealth- management firm.

The danger of such a strategy is that Bernanke may become like the bather, in an analogy attributed to the late Nobel- Prize-winning economist Milton Friedman, who gets scalded after turning the hot water all the way up in a chilly shower. The monetary-policy equivalent would be faster inflation or another asset bubble in the wake of aggressive Fed action to tackle the slowdown in the economy.

There's that word turbulence again. In my view it is far too hopeful a term that seems to be popping up more and more the worse things get. You'll know we're really in trouble when they start using phrases like "systemic problems" in place of "turbulence".

As for the shower analogy, according to the business school at the University of North Carolina, in these slides(.pdf), the hot-cold water adjustments are attempts to stabilize the economy that can "prove destabilizing because of time lags" where a government might be "constantly stimulating or contracting the economy at the wrong time."
A couple of points here.

First, if ever there was a "fool in the shower" it was former Fed Chairman Alan Greenspan who left interest rates far too low for far too long while encouraging speculators to take on even greater risk while at the same time staunchly backing a "hands off" policy for market regulation.

The result is what we see unfolding today.

Second, it seems obvious at this point that, since Paul Volcker left town in 1987, the water at the Federal Reserve runs at two temperatures, but not hot and cold. Over the last twenty years, hot and very hot would better describe what comes out of the taps at the Fed.

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A hedge against heating oil

Slowly but surely, many people are starting to realize how much less their paper money buys these days and how much higher the price of oil and gold have risen. Readers of the Wall Street Journal see it nearly every week:
(Someone really ought to have a contest to guess the year-end price of these two important commodities - it could be fun.)

Readers of the NY Times got yet another look at the past and future phenomenon that is private ownership of gold bullion in this article yesterday where one buyer figured she would "hedge against heating oil" this winter.

At Lexington Coin, a shop in affluent Lexington, Mass., the number of customers seeking to do business in gold coins spiked, the owner, Eric Carlson, said. Some customers were there to lock in profits, selling bullion coins containing an ounce of gold that they had bought five years earlier when gold traded under $350. Some were selling just one coin, telling Mr. Carlson they needed money to pay property taxes or car repair bills.
And some were buying, saying that they thought gold’s price would continue to climb. “The ones purchasing 10 coins at a time told me they were taking the money out of stocks and bank accounts,” Mr. Carlson said. “A woman buying three American Eagles told me she was buying them as a hedge against the price of her home heating oil shooting up this winter.”

Gold has a long history of waxing and waning in allure. At the moment, it holds a particular attraction, given Americans’ worries about inflation, the risks in the financial market and the falling value of the dollar.

“People understand gold’s intrinsic value,” said Katherine M. Porter, an associate professor of law and a bankruptcy specialist at the University of Iowa. “But because it’s beautiful and they can hold it in their hands, they may not perceive how volatile, like all traded commodities, gold is.”

Naturally, they interviewed an economist and he thought the whole idea of owning gold coins to be rather dimwitted:

James K. Galbraith, an economist and public policy professor at the University of Texas, however, cautioned that investors who are considering a gold purchase now, either to hold or trade, should “be prepared to take a bath.” They should know, he said, what happened to those who waited in long lines outside shops on Jan. 21, 1980, eager to pay more than $900 apiece for coins containing an ounce of gold.

While gold is a hot commodity now, the demand by average investors is still far from what it was then. That was the top of the previous gold bull market, which had begun in January 1975, after President Gerald R. Ford signed a bill legalizing private ownership of gold coins, bars and certificates.

Dimwitted economists have been saying that owning gold is a bad idea at $400, $500, $600, $700 and now $800. They'll probably keep saying it until it is true again - that day however is still years away.

ooo

This week's cartoon from The Economist:

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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Busted!

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