Mauldin.....
Repeat: The Fed is not Going to Raise Rates
You wonder why the Fed is willing to be patient on lowering rates? One of their mandates is to help foster employment. If you look at their predictions for GDP over the next year, they are suggesting over 4.5% annually. Yet their job growth number is not even 150,000 jobs per month, which is barely in line with the growth in population. What is unwritten in the assumptions is that it would take growth of over 5% to seriously cut into the unemployment number. And that level of growth is just not in the cards. Raising rates would slow things down and hurt job growth which would soon create a recession.
We threw everything but the kitchen sink in the form of possible stimulus at the economy last year, and we are barely over 4% today. Without job creation, we are at the limits of GDP growth.
Stephen Roach of Morgan Stanley and one of my favorite analysts, wrote an open letter today to Alan Greenspan, calling for him to immediately raise short term rates to 3%, so the Fed would have some room for rate cuts during the next downturn.
This is not going to happen. Greenspan just touted the virtues of adjustable rate mortgages this week. (I simply do not understand why he would do this, even if his logic might be impeccable. He should not be encouraging risk taking and more debt.) In any event, do you think he would do that if he were planning to raise rates anytime soon? "Hmmm, let me see, what can I do to create the most harm possible? Tell people to get into adjustable rate mortgages and then raise rates? That would cement my reputation."
A Financial Times article noted the problem with auto loans, as there are more and more taken out for 6 and 7 years, which is good for sales today, but borrows from future sales. The article goes on to make the point that these longer period car loans mean that it takes longer for borrowers to get to "break-even" on their loans, thus longer before they can buy a new car. Rising rates would make that period even longer. There comes a point where new car sales are going to suffer from the current trend of borrowing for longer periods.
Next year, independent auto analyst David Littman projects that auto sales will start declining. "This year, he predicts, tax breaks and other political actions during the presidential election campaign will support auto sales by boosting disposable income even if interest rates rise. But next year he forecasts sales of cars and light trucks will drop to 16 million, from 16.8 million. That might not sound like much but it is the equivalent to a more than $22 billion revenue cut. 'That is the end of the world for a couple of automakers.'"
We add to that this note from the normally upbeat Dennis Gartman: "The US' economic news was anything other than stellar yesterday. Jobless claims rose to 350,000 from 344,000. Debates rage amongst those who make jobless claims the focus of their lives regarding weather and problematic seasonal adjustment factors, but we pay little heed to it. To those in that debate we say, in all dispassionate honesty, 'Get a life!' If we must pay attention we note that the 4-week moving average rose to 354,000 from 352,000 and that this is the 4th week in a row that this smoother number has risen. This, we think, is worthy of note and this we think is bothersome.
"Further, we note (disappointingly) that the sales of new homes fell 1.7% to just over 1.1 million units. That in and of itself was disappointing, but this is also the lowest level of home sales in 7 months. Worse still this slowdown in home sales is taking place even as the supply of new homes has risen to what is almost a decade long high of 370,000 units.
"Finally, January building permits here in the US were revised to 1.92 million annualized units from the previous estimate of 1.899 million. In light of an already problematic increase in the supply of new homes, this revision is not 'wanted' news."
Maybe Roach is right. Maybe raising short-term rates this year would not be the serious problem I think it would be. Maybe the economy keeps on chugging.
But I think the Fed believes that raising rates today risks slowing the economy down at a time when there are not enough jobs being created, housing is showing signs of weakness, the auto industry would get hammered, borrowing costs for business would rise and thus profits hurt, etc. etc. It is Pascal's wager. Even if one might think risks are small, do you risk the greater harm?
If Greenspan were to raise rates now and the economy began to slow, the mob would form and someone would start shouting "get a rope" as they head for the nearest tall tree. |
