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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: toddy who wrote (13239)	10/11/2004 2:01:11 AM
From: mishedlo	Read Replies (2) \| Respond to of 116555

Paul Kasriel Leading Indicators Signaling Moderating Economic Growth Trend Greenspan’s “soft patch” apparently was not as soft as we were led to believe. The Bureau of Economic Analysis (BEA), the official counter of the GDP beans, revised up its estimate of second quarter real economic growth from 2.8% to 3.3%. A few days later, this same BEA revised up July price-adjusted personal consumption expenditures from 0.8% to 1.1%. That revision made all the difference in the world for our estimate of third-quarter real consumer spending. Last month, we expected third-quarter real consumer spending to grow at an annualized rate of 2.7%. But now, with the upward revision to July, we now expect third-quarter real consumer spending to grow an annualized 4.2%. And because construction and business equipment spending also are coming in stronger than expected, we have boosted our forecast of third-quarter real GDP growth from 3.5% to 4.4%. But we do not believe that this above-trend economic growth rate will be sustained. Why not? Because leading indicators, especially the Leading Economic Indicators (LEI) index, are signaling a slowdown ahead, as shown in Chart 1. We expect the bulk of the slowdown to occur in consumer spending. As shown in Chart 2, growth in disposable personal income is slowing, in part because of the waning effects of the initial stimulus from recent prior tax cuts. Also, the boost to consumer spending from cash-out mortgage refinancing also is waning. Chart 3 shows that although mortgage applications for refinancing have started to move up, they remain low in relation to their surge in the summer of 2003. Chart 4 shows why the refi response to the recent decline in mortgage interest rates has been weak. The yield on a 30-year fixed rate mortgage today is only 5 basis points below its year-ago level; the yield on a 5-year balloon mortgage is 60 basis points higher. Thus, there is little or no rate advantage to refinance now. ...... One component of the LEI index that is signaling a slowdown in real economic growth is the yield spread between the Treasury 10-year security and fed funds. As shown in Chart 5, this spread has narrowed from 3.87 percentage points on June 14 to about 2.50 percentage points today. Although it is not unusual for this spread to narrow as the Fed begins to hike the funds rate, it is unusual how the spread narrowed. Usually, when the Fed begins to raise the funds rate, the spread narrows with the 10-year yield rising – but rising less than the funds rate. Typically, it is not until late in the Fed’s rate-increase cycle does the yield on the 10-year Treasury begin to fall. This time, however, early in the Fed’s rate-hike cycle, the yield on the 10-year Treasury started to fall absolutely, not just relative to the funds rate. As shown in Chart 6, the yield on the 10-year Treasury fell from a recent high of 4.89% on June 14 to a recent low of 4.00% on September 22. This recent absolute decline in the Treasury 10-year yield reinforces our view that the pace of economic activity is set to moderate. In our September forecast update, we expected the Fed to hike rates by 25 basis points at both the September 21 and November 10 FOMC meetings. Then we believed that the Fed would pause in its interest rate increases until the end of June 2005. Of course, the Fed did raise the funds rate by 25 basis points on September 21. And we continue to believe that it will raise the funds rate another 25 basis points on November 10. But with the upward revision by the BEA to second-quarter real GDP growth and our upward revision to forecast third-quarter growth, we are less certain of a Fed rate-hike pause after the November 10 FOMC meeting. Yes, we are forecasting a significant deceleration in real GDP growth between the third and fourth quarters – 4.4% to 2.7%. And, as we mentioned above, inflation expectations have fallen. But given data-reporting lags and our belief that the Fed pays little attention to leading indicators, it may not be sure of the fourth-quarter slowdown by the December 14 FOMC meeting. For this reason, we are penciling in another 25 basis point funds rate increase at the Fed’s annual holiday gift-exchange meeting. Then the pause. see the charts and full article here northerntrust.com

To: toddy who wrote (13239)	10/11/2004 2:06:08 AM
From: mishedlo	Respond to of 116555

Despite Soft Employment Numbers In September, FOMC Will Raise Funds Rate In November northerntrust.com

To: toddy who wrote (13239)	11/10/2004 1:54:21 PM
From: toddy	Read Replies (2) \| Respond to of 116555

there is no SOcial Security trust fund. PRIVATIZING SOCIAL SECURITY DOESN'T MAKE A LICK OF SENSE By JOHN CRUDELE November 9, 2004 -- PRIVATIZING Social Security is impossible. I'll say it again: allowing people to take some of their Social Security contributions and invest that money privately is not possible. End of story. Wall Street staged a wonderful rally last week partly on this Social Security fantasy and it doesn't want to hear logic. Politicians don't want to deal with it either because they believe people can be conned into thinking that such a simple plan will actually reform and strengthen Social Security. It won't. But it could make the entire financial system of this country a lot weaker. To be honest, I don't even like hearing myself say this. According to my latest statement from Social Security, I have contributed more than $80,000 during my lifetime into the government retirement program, and my employers have kicked in another $60,000 on my behalf. I'd love to get any part of that money back and be able to invest it myself. I'd even settle for the government's proposal — if you can call the whispers we've been hearing a "proposal" — that would allow us to privately invest some of the future money that we would have been paying into Social Security. But despite how much I'd like this to happen, it can't be done without causing extreme disruptions to this country's already weakened financial system. Here's why: It will probably come as a shock to no one that there isn't a big pile of Social Security money sitting somewhere. It isn't in the U.S. Treasury in Washington, nor at the Denver mint, nor hidden among alien spaceships in Roswell, N.M. Each year when you and I pay up to $5,449 of our hard-earned wages into the Social Security "trust fund" — which even a moron now knows is an oxymoron — that money gets spent by the government. First, the money goes to pay people who are currently collecting Social Security. These days there's money left over since the demographics of the country haven't shifted yet (but will) to people receiving more annually than is contributed. The leftover money right now is borrowed by Washington. In place of the cash, the government leaves IOUs in the trust fund. Taking this Social Security money allows the government to borrow less in the financial markets, where foreigners already contribute heavily to funding our annual budget deficit — which, in case you haven't noticed — has been growing. Let's not even get into one very important fact: If this plan had been put into place the last time it surfaced four years ago under the Democrats, people would have lost a lot more money when the stock-market bubble busted and would now also be entitled to a lot less from Social Security when they retire. Privatization didn't make sense then, and it doesn't now. If people are allowed to put that 20 percent chunk into private accounts, that means the government would have nearly $2,200 less that it can borrow from Social Security for each person who chooses this option. (This assumes we can also use the employer's contribution.) And, depending on the details, the numbers get worse. "Putting 10 percent of the payroll tax in private accounts without reducing benefits involves $1 trillion to $2 trillion of transition costs — transition costs being a euphemism for $1 trillion to $2 trillion of added deficits and debts," says Pete Peterson, former U.S. Commerce Secretary, author of "Running on Empty," a book about the Social Security calamity, and co-head of Blackstone Group. That extra money that'll have to be borrowed by Washington to replace the Social Security loans will cause an inevitable rise in interest rates beyond where they would ordinarily be. nypost.com * Please send e-mail to: jcrudele@nypost.com ............. toddy