Yep, I agree Paulson is talking out both sides of his mouth. However, you can't ignore the potential fallout of a rate pause against the dollar. Why would Asians and OPEC countries buy US treasuries when the dollar is losing ground? It doesn't exactly take much currency fluctuation to erase a 5% treasury yield. Are they (foreign central banks with reserves) investing in our future growth, sacrificing current yield?

And speaking of treasuries, the entire yield curve is inverted, and we're not talking 2-10 inversion. 3 month is above the 30 yr bond. Well, take that back, based on current auction results, the 28-day treasury bill is above the 30 yr bond, 5.20 to 5.06%. The 10 yr trades at 4.97%.

All of the conflicting numbers indicate that either 1)I'm really confused, or 2)just really plain stupid.

I find this very interesting. Especially in wake of Bushy's comment during the 2004 election in which he said "I've always believed the best policy of the United States to be a strong dollar policy". I literally busted out laughing - either he slipped and made a mistake or he failed economics 101 - which would actually explain a lot.

"Strong dollar policy". Right. This administration? That's why we've spent like drunken sailors, driven up the defecit to unprecidented levels and embarked on the most unsustainable financial path this nation has ever seen? How 'bout sitting idle as jobs go flying out of this country practically as fast as the dollars? About the only things coming IN are cheap, junky Chinese-made goods and illegal aliens. And the only reason THOSE are coming in here is because the dollar just happens to be stronger than the Yuan and the Peso - and that ain't saying much.

A related thing of great concern to me is the amount of the U.S. economy that's being propped up by Chinese investment right now. If/when the Chinese decide that the U.S. isn't such a hot investment any more and start pulling out, it could very well create an international run on U.S. dollars and rapidly crash our economy. Sadly, there isn't much to prop it up either. Job growth is still kind of so-so. The jobs lost in the last recession have been re-created, but they're typically lower paying and less skilled. Inflation is on the rise. Nothing is really manufactured here any more. Insurance and medical costs are crippling business growth. We don't export anything except bombs it seems. This is not a good formula for reversing a huge debt load in the future.

My bet is that we'll be on a "weak dollar policy" for a long time simply because there's no way to get back to a strong dollar policy easily. I agree that we SHOULD have a stronger dollar to compete against a unified Europe and rising pressures from Asia. Hell, even Canada is practically 1:1 with the USD now.

You're right, I think, on the 2nd part. A lot of the Chinese profits from all that "made in China" are turned into American securities.

As far as those junky Chinese-made goods go, many of those goods are made in China by American or European-managed companies to Western specs. The Chinese contribute the labor, and are very good workers. The quality these days is very good for the price, i.e., good value, except if you're buying Nike, which jacks up its prices to pay Bode Miller and Michelle Who? Wie.

I'm guessing China may be our closest "closet" ally right now, considering the close economic ties. A lot closer than people think. I'm also guessing we are doing a lot more about global warming behind the scenes than meets the eye. No sense in raising flags and creating a media frenzy.

Every Treas Sec'y says "strong dollar", it is like saying "God bless the United States", it means nothing.

Hehe, well I suppose Profunds Inverse Dollar fund is worth study. :D

Fed meets in less than a week. Tell us your predictions.

I think the Fed will hit it one more time and tell us they will let rate hikes filter through the economy. The market will rally big, but give back most of the gains by the end of the month. October will bring pain, and there will be tears in Republican beers in November. Realtors will tell us the market will heat back up between Thanksgiving and Christmas, while new home sales stabilize and inventories grow higher.

I think the fed will raise it 2 or 3 more times before calling it quits. Domestic stocks will continue to perform sluggishly and housing starts will continue to bomb. We should see our first y-o-y decline in values very shortly and it'll only snowball from there.

The NAR will continue to pump their "soft landing" B.S.

Lemmee guess - a broker sent you that, didn't they?

nope

The market does need to shed some bears before we make a big move down. My cards were dealt some time ago, and I'm going to wait for conditions to improve before I get back in.

I'm surprised no bulls want to make a prediction. Whatsa matter? Don't wanna be disappointed?

I'm going to randomly muse here.

Just got home, commuting by bicycle lately, by the time I work 12 hours, ride, stop at the local pub for a pint, and wobble home, I can't do more than ramble.

Forget about S-T indicators like P/C ratio, oversolds, sentiment indicators, etc. Think about the fundamentals.

We know the economy is slowing. The leading indicators all started turning down in March. Retail sales are weakening each month. Capital investment in the ISM is sliding. GDP growth was cut in half sequentally in 2Q. The housing market we know about. And the Fed has made it pretty clear that they want, and expect, the economy to slow in order to bring down inflation. Which in July had accelerated to 2.4% core, above the Fed's comfort range of 1% to 2%.

So, stocks are down. Have they priced it in?

Down how much, and priced what in?

The S&P is only down 3.6% from the high earlier this year. Yes, the NDX is down more and I'm loving that, the SOX is down worse and I wish I'd shorted that, and RUO and RDG are down more. But the heart of the market is the S&P and it is barely down from its highs.

Meanwhile, earnings estimates have barely been cut. I don't have quantitative data here but from watching 2Q earnings, I haven't seen much estimate cutting at all. Some in tech, a bit in retail, basically none in industrials, financials, heathcare, staples, materials. For the S&P as a whole, I believe estimates remain at their 1Q levels.

As the economy slows, estimates have to be cut. Companies have spent 3-4 years squeezing their SGA - wages, pensions, supply chains, etc. I do not think they have many easy cuts left. As for COGS, companies have milked the manufacturing shifts to China etc. Corporate profit margins are at record highs. Now the COGS pressure is upward, not downward. Energy and commodities. The only remaining way they could preserve earnings at current levels is with revenue. Revenue = volume x price. A slowing economy usually means volume growth slows. Price can be raised, if demand is sufficiently inelastic, but that means inflation and the Fed will react to that.

So I think margins compress, and earnings growth slows or goes flat, meaning that estimates get cut.

Can the market rise while earnings estimates decline? Yes, but it doesn't usually happen at the beginning of estimate cuts. It happens at the end of estimate cuts, when the cuts are "in the stocks". We're at the beginning, not the end.

Look what's happened to stocks this earnings season. For the unfortunate companies who missed consensus and/or lowered guidance, their stocks got slammed. Guess it wasn't "in the stocks". When more and more companies start missing and lowering, more and more stocks will get slammed.

Where could the S&P go? In past economic slowdowns and/or recessions, the S&P has gone to anywhere from 12X to 8X forward estimates. Currently it is about 14X.

Suppose 2007 estimates get cut by 5%. And suppose the forward multiple goes down 10% to to 12.6X. The S&P could go down 15%. That would give us an S&P of around 1,090. Big pain.

Okay, I am NOT predicting the S&P gets to 1,090 or any other level. Leave that to Abby Joseph Cohen and other strategists (is she still around?). All I try to do is look at the factors and try to guess the likely direction. Being directionally right is usually profitable enough, and hard enough.

Right now, I see too many factors pointing directionally down. Slowing economy. Corporate margins are at record highs, where to go but down. Estimates are at record highs, and earnings growth has been very high, again more room to go down than up. % of estimate cuts is low, more room to rise than fall.

So my fundamental bet is directionally down.

Whether we get a "one and done" rally doesn't really matter.

(For what it is worth I am guessing no hike and resulting rally fizzles out. But its not going to change my investment stance either way.)

Oh by the way I do think the US has the best capital markets and the strongest economy and companies in the world. And that the US stock market will go up, on average and over time.

Doesn't mean that the US market can't go down for a time, or that the US economy has become immune to business cycles, or that US stocks will beat all other investments over a given period.

Finally, absent more bulls participating, here is a bullish argument I stumbled across.

http://www.greeninvestment.com/pdf/1q06.pdf

I like where he said RE players return to the stock mkt where the action will be. The article was too early to mention that the RE correction seems to be sliding gently without shocking the system.

I'm betting that currently it's a "wall of worry" concerning the stock mkt.

inflation is being managed, commodities hopefully have run out of steam and hopefully will show it in a month or two, and corp's are flush with cash. It's not often that the whole world is experiencing eco growth at the same time. Long term bonds % seems to reflect a general belief that the US is still the safe haven and I figure expected volatility's here will be less than in other countries. Even China is doing and planning currency revaluation correctly imo.


thx for article

No hike and SPX -0.44%, NDX -0.65% intraday.

I'm getting my preening in while I can.

Interesting turn!

That is on the money.

The other thing most people don't realize is because China has kept the Yuan artificially low, they have essentially given US consumers a discount from the real floating value of their exports. Makes their goods more competitive overseas, sure, but they don't make as much money as they could and we get good products at a cut rate price.

So in that sense a cheap Yuan is good for the US so thank the Chinese.

Regarding a Strong Dollar: Keep in mind that the Fed has just raised rates for over 2 years straight. That IS a VERY strong currency policy.

The main issue is that the is a GLOBAL SAVINGS GLUT, even though in the US we don't save jack. And all those savers are looking for someone to loan to...US! So there is lots of liquidity coming into the system even without Bernanke lowering rates. Quite frankly I think he could have kept going to 6% and still seen no ill effects. Historically speaking 6% is still in the basement.

Bernanke has no control over funds coming from overseas.

Regarding real estate investors getting back into the stock market:Don't bet on it. Their money is all tied up in non-liquid assets: Real Estate!!! If they happen to be invested in REITs and there is a run out of those...well, the real estate market really will crash.

Here's an example of Wall St reaction/interpretation of Fed action - shows how the game of parsing each word and nuance of the Fed statement is played - futures currently imply 50% probability of a hike at Sept mtg - basically we're back to having the market twitch with each new piece of econ data

the FOMC held policy rates unchanged today, following seventeen consecutive hikes at a 25bp increment. In its accompanying statement, the FOMC maintained the key elements from the previous meeting -- including its assessment that "some inflation risks remain" and that "the extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information." In doing so, the committee maintained its tightening bias and signalled that the policy pause does not reflect a major change in the Fed thinking about the economic outlook. This message of continuity in the policy setting process was reinforced by its repetition of the language from the June statement that growth is "moderating from its quite strong pace earlier this year, reflecting a gradual cooling of the housing market and the
lagged effects of increases in interest rates and energy prices."

In constructing the statement this way, the FOMC is signalling that a pause should not be viewed as an end to the tightening cycle. That said, the FOMC statement provides a strong indication that the committee will be on the sidelines for more than one meeting. The June statement was cautious on the link between growth and inflation stating that "the moderation in the growth of aggregate demand should help to limit inflation pressures over
time" In contrast, today's statement expressed greater conviction on the inflation outlook stating that "inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand." Any serious challenge to this view is not likely to emerge in the
coming weeks and we interpret today's statement as an indication that the bar is quite high to get the Fed to tighten at the September 20th FOMC meeting.

The FOMC is thus expressing a willingness to be patient with above 2% core inflation as it assesses the outlook -- a message consistent with Chairman Bernanke's recent congressional testimony. Assessing how much patience the Fed will display is now the key outlook issue. Most likely, the latest reports on inflation and labor costs have increased the committee's
concerns about medium-term inflation risk -- a point reinforced by the removal of the phrase from that June statement that "productivity gains have held down the rise in unit labor costs." In addition, FRB Richmond President Jeffrey Lacker's dissent at today's meeting likely reflects the existence of a minority view by some reserve bank presidents for further
tightening. What this suggests is that the Fed may not view patience as a virtue for long.

In all, we remain comfortable with our view that the Fed will be on hold at the September and October meetings. However, if we are right that growth firms into year end (with resource utilization rates rising and core inflation tracking above 2%) the FOMC will likely be tightening as we turn into 2007.

What's scary is the fact the dollar has actually lost ground against its counterparts. DXY dollar index.

Otherwise, I agree with your comments in full.

I do believe a pause is a good idea at this point. It will give the system time to equilibrate. 1 more month at 5.25% isn't going to make the world explode.

jyl, you say the futures market is showing a 50% chance of a hike in September, but the quoted text indicates a "hold" in September and October. Where do you stand?

TV had a Fed Governor on. He said probably not next time or it will send a message that they made a mistake by not raising rates. Then he said that the Chair should be finished raising rates altogether.

TV also said that the new stock mkt concern is a GNP slow down.

Just read a paper article by an old monetarist. His theories and policies were used as an example of a notable sect of economics at my school. His current talk on eco events is hard core monetarism. Nobody knows the future end all but I like reading all this crap.

final paragraph
- low inflation, soft landing, and solid growth can't happen all at once.
- To eliminate inflationary expectations take the chance and raise rates. [which didn't happen today]


I'll post if wanted.

Right now, I'm guessing no raise in Sept. Thinking economy will show enough slowing that Fed will not get rushed into raising just 6 weeks after announcing a pause, even though inflation will also continue above 1% to 2% range. October, I don't have a guess.

Ha ha ha - no Sh%T! Did they think the market's concern since May has been Fed rate hikes?

Would be interested to read the article if you can post it.

Hard to say if this is true this time around, but I would have to agree. I don't have objections to a pause now, but I would prefer to see a strong stance against inflation. Inflation readings have been pointing flat to higher and today's labor cost/productivity numbers don't indicate a slowdown in the pressure.

On the other hand, there are definite signs of added stress in the housing market. Consumer debt is growing at a strong pace, and the employment numbers are flat to declining.

My belief is that reducing inflation to <2% core CPI would send the nation into a deep recession, and the government would not allow this to happen. Rate cuts by March of 07?

In my opinion, it's either crash and burn or inflate to great wealth. There is no soft landing.

Inflate to great wealth - don't understand this part.

Ben Bernanke prints lots of cash and drops it to the masses. The housing boom, aka cheap money for all, makes everyone feel wealthy.

Would that mean yet more asset bubbles? The same ones we've been inflating, or new ones?

Actually he's been doing the opposite. Raising interest rates for 2 years constrains the money supply.

Bernanke has no control over whether people do reverse mortgages.

He also cannot control funds coming from overseas, which are substantial.

Despite the fact I believe the country needs a good haircut, I'm not confident those in power would tolerate it. I'm open to the possibility of rate cuts and increasing monetary injections, in which case I would likely take positions in commodities and energy.

On the other hand, the changing scenery in the housing market (downright scary in the past 6 weeks) and a strained consumer may mean the government can't avoid an ugly downturn.

We don't necessarily need new asset bubbles. Consumers only need access to cheap money.

Yes, that has been Fed's path the last two years. M2 money supply was declining (recently been on the increase). However, I was referring to what the Fed does in the next 6-12 months. If the economy falters, are rate cuts in the Fed playbook?

The Fed's Difficult Task

By MARTIN FELDSTEIN
WSJ, August 7, 2006; Page A13

A soft landing is a natural aspiration for any central bank confronting an unacceptably high rate of inflation. For today's Federal Reserve, that means bringing inflation down to less than 2% without the fall in output and employment that would constitute a recession.

The Fed governors and Reserve Bank presidents appear to believe this will happen. Their "central tendency" economic projections, summarized in the July Monetary Policy Report, state that the Fed's favored measure of inflation, the PCE price index excluding food and energy, will decline from the 2.9% rate in the most recent quarter to between 2% and 2.25% in 2007, presumably on its way to Ben Bernanke's "comfort zone" of 1% to 2% in 2008. They project this to occur with real GDP growing above 3% and the unemployment rate remaining under 5%. Indeed, not a single one of the 19 FOMC members projected growth of less than 2.5% in 2007 or an unemployment rate above 5.25%.

Although this optimistic outlook is possible, experience suggests that it is unlikely. A mild slowing of economic growth is generally not sufficient to reverse rising inflation. That generally requires a sustained period of excess capacity in product and labor markets, with GDP growth falling significantly or even turning negative.

The Fed's projected combination of strong growth and declining inflation requires either a rise in the rate of productivity growth that slows the rise in unit labor costs, or some favorable spontaneous decline of the external drivers of inflation that is unrelated to unit labor costs. Neither seems likely. Productivity growth appears to be slowing, and external drivers are pointing to a continuation of high or rising inflation.

The official estimates of productivity growth showed a gradual decline of productivity growth in the nonfarm business sector from 3.9% in 2003 to 3.4% in 2004 and 2.7% in 2005. The result of the slower productivity growth and rising compensation per hour (from a 4% rate in 2003 to 5.1% in 2005) caused the increase in unit labor costs to accelerate from 1.3% in 2003 to 2.1% in 2004 and 2.8% in 2005. Taking the new GDP estimates into account is likely to lower the calculated productivity growth rates and cause estimated unit labor costs to have risen faster than 3% in the most recent quarter. There is no reason to anticipate a favorable productivity surprise of the type that contained inflation in the 1990s.

The rapid rise in the overall cost of living creates wage pressures that make it harder to limit the rise in unit labor costs. The CPI in June was 4.3% higher than a year ago. Since wages and salaries have not kept pace, real wages were actually declining over the past year. That came to an abrupt end in June when they jumped at a 5.7% rate.

The external drivers of inflation imply that actual inflation is likely to rise even more rapidly than the unit labor cost numbers would otherwise imply. The doubling of the price of oil is being reflected in transportation costs and in the costs of goods that use petrochemical inputs. The gap between the sharp rise in real-estate prices over the past few years and the much smaller rise in rents is now causing a catch-up in rents, and in the implicit rental prices that the government statisticians impute to owner-occupied housing. The decline of the dollar in the past year, and its likely further decline in the year ahead, will boost the prices of imports and of domestic goods that compete in global markets. The expected rate of inflation implied by comparing the yields on Treasury Inflation Protected Securities and ordinary Treasury bonds has increased during the year to 2.6%.

But while a decline in the core inflation rate may not be compatible with the FOMC's "central tendency" growth projections, the interest rate hikes of the past two years could soon cause a significant and sustained economic slowdown, bringing down future inflation without the need for further rate hikes. Although it is too soon to tell, some FOMC members may oppose a rise in the interest rate at tomorrow's meeting because of this possibility, and because of their fear that another rate increase could lead to an unnecessarily deep economic decline.

The published forecasts of the FOMC members do not capture the full range of each individual's views. While stating that the most likely growth is 2.5%, an FOMC member may also believe that there is a risk that the growth and employment picture could be substantially worse than his or her forecast. As Alan Greenspan emphasized, monetary policy is a balancing of risks and cannot be made on the basis of the most likely projections alone.

The consequences of the past interest rate hikes are difficult to predict. The fall in the real level of house prices has caused residential construction to plummet, with housing starts off 14% from 12 months ago. The combination of lower housing wealth and a sharp fall in mortgage refinancing may cause the household saving rate to return to a positive level, bringing down consumer spending. Business expenditures on equipment and software slowed sharply in the most recent quarter. So a much sharper slowdown than the central tendency forecasts is certainly possible.

While this risk provides a rationale for a pause at tomorrow's meeting, it would be wrong to focus just on this downside risk. The probability that inflation will rise above the FOMC forecast is at least as great. The unemployment rate of 4.8% still represents a tight labor market. Waiting for more data before deciding to raise rates is not costless. If the Fed does not act and core inflation continues to rise, expected inflation may rise further. Higher expected inflation would cause faster increases in wages and prices. If the core PCE inflation rate rises above 3% in 2007, it would take a very substantial slowdown and a large loss of GDP and employment to bring it back under 2%.

In assessing the current interest rate decision, the FOMC members should recall that during the Volcker and Greenspan years the Fed pushed the fed funds rate to 8% above the concurrent rate of CPI inflation in the early 1980s, to 4% in 1989 and to almost 3% in 2000. That measure of the real fed funds rate is now less than 1%.

The Federal Reserve has a difficult task ahead. It is understandable that it would like to achieve the soft landing of low inflation with continued solid growth. But that may not be possible. And if the Fed wants to convince the markets that inflation will be contained in the future, it must show that it is willing to take the risk of tightening too much.

Mr. Feldstein, professor of economics at Harvard, was chairman of the Council of Economic Advisers under Reagan.

To hijack one poster's tag line (with the idea being the same):

Low Inflation
Soft Landing
Solid Growth

Pick any two

I'm for # 2 & 3

my little world says that our inflation is in competition with other's inflation so that's not that of a big deal if other's inflation is worse. And the max inflation that we could actually have isn't a real big deal if everybody's making money.

Well, you guys can sit here and argue fed policy, interest rates and string theory until the cows come home, but I know for a fact that the prices of gas, car parts, food, fiberglass supplies and beer have all gone up. To me, and the average joe, that is inflation.

Yup, and when wages are increasing less than inflation, it's double-trouble.

Thank goodness I can second guess the Fed, instead of being the Fed. ;)

"Those that don't remember history are doomed to repeat it" along w/ those that do.

Look up '73 - '74 in your history books(some of us will actually remember those good ole days), compare to what's going on now,

brace yourself

here's another good one to remember from '66-90 1 month CDs outperformed LC growth stocks

diversify, allocate, cut expenses hold on to your ass(et)s

and most of all don't listen too the snake oil salesman whether on TV, radio or press

I think it is amusing and disingenuous the way the elements that determine the inflation rate are cherry picked by the feds.

Real inflation numbers = real COLA for our Social Security program

If working Americans aren't getting wage increases matching inflation, why should America's senior citizens? :rolleyes:

Excellent question. Could it be that the SSA takes better care of retirees than business does of its active employees?

It's possible......