martes, 16 de diciembre de 2014

martes, diciembre 16, 2014

Up and Down Wall Street

Oil: The Fed’s New Wild Card

Muted inflation and the sudden drop in oil prices will help shape the Federal Open Market Committee’s decision on when to boost interest rates. The dangers of falling commodities prices.

By Randall W. Forsyth           

Dec. 12, 2014 11:33 p.m. ET
 
Never write a letter and never destroy one. “That eternally sage counsel came from the famed Cardinal Richelieu, who served as Louis XIII’s brain. Were the wily prelate alive today, we’ve not a scintilla of a doubt he would have amended his exhortation to replace ‘letter’ by ‘e-mail.’
But, of course, the advice, if anything, is even more pungent now than it was then.”

As constant readers might recognize, that suggestion comes from my illustrious predecessor in this space, the late and much-missed Alan Abelson. Yet, some 9½ years since it was proffered here, it remains largely unheeded, especially in the environs of Sony’s Hollywood offices, from which all sorts of embarrassing e-mails were recently hacked, notably between the studio’s head, Amy Pascal, and a high-powered producer, Scott Rudin. 


As in the classic flick Casablanca, we were “Shocked! Shocked!” to learn that powerhouses of the entertainment industry could be as nasty, petty, and downright stupid as any bunch of high school kids. In particular, it came to light that Rudin called Angelina Jolie a “minimally talented spoiled brat.” If her talent is to attract publicity, then the producer’s characterization is utterly unfair, given the unending barrage of stories concerning her personal life visible to those perusing the multitude of gossip rags while queuing to check out at the supermarket.  (From an editor’s standpoint, conjuring up those stories and images about celebrities must be an extraordinary effort, almost as much as coming up with the 50 new sex tricks featured monthly on the covers of other learned journals stacked near the cash register.) 


We were further stunned that in their exchanges, Pascal and Rudin made racially insensitive comments about President Obama’s preferences in films. Shocking, in the epicenter of extreme political correctness.  Not for nothing do hypocrisy and Hollywood make for a fine alliterative pair. 


IN CONTRAST, IT IS REASONABLY certain that e-mail exchanges between Federal Reserve officials are on a vastly higher plane, both in terms of civility and intellectual content. Collegiality has long trumped conflict, especially among the Fed’s board of governors, although the district bank presidents have tended to display an independent streak that has induced them to dissent from decisions of the policy-setting Federal Open Market Committee. (To review, the FOMC consists of seven Fed board members, the New York Fed president, plus a rotating cast of four of the 11 district presidents.)  


Not since the 1970s and 1980s, when there were revolts against the Fed chief, has the central bank displayed any real fractiousness. Maybe that’s because the spotlight on the central bank is so much brighter these days.  Moreover, the Fed is far more forthcoming today in communicating what it’s doing and thinking. There was a time when that had to be inferred from arcane signals sent through open-market operations, which had to be mastered by Fed watchers (and journalists covering the central bank). These days, such knowledge is as useful as knowing DOS commands would be for the average personal-computer user. 


Fed-watching still remains a favorite parlor game both on Wall Street and in Washington. That’s especially the case since this month marks the sixth anniversary of the central bank’s decision to keep its key policy rate nailed to the floor, or nearly so, at 0%-0.25%. The Fed ended its bond-buying extravaganza known as quantitative easing in October and seems headed inevitably toward taking the next step in normalizing rates.  But how fast? That’s the key question before the equity, credit, and currency markets, with the FOMC holding a two-day meeting that winds up Wednesday. This will be the first confab since September in which the panel will update its economic projections and guesses of the federal-funds rate target (depicted in the famous “dot” forecast chart) and in which Chair Janet Yellen will take questions from the press about the panel’s statement. (This exercise happens only every other FOMC meeting, so October’s gathering involved only minor tweaks.) 


A lot has happened since September, notably robust gains in employment and the collapse in oil prices. So what does the FOMC do? It’s hard to imagine somebody with more insight into that question than Don Kohn, the former Fed vice chair and a 40-year veteran of the central bank, who briefed clients of Potomac Research Group last week. 


Along with most other Fed watchers, Kohn says the FOMC remains on track for a mid-2015 liftoff for the fed-funds target. Moreover, he thinks the panel will scrap its avowed intention to keep the funds rate near zero for a “considerable time,” as do most observers. But there are wild cards in this data-dependent projection. 


“Despite dramatic improvement in the labor market and signs of solid [gross domestic product] growth, Don still believes the risks to the economy are slightly to the downside, and he thinks the FOMC agrees,” Greg Valliere wrote in his invaluable daily Morning Bullets missive to PRG clients. 


The major concerns are global economic weakness and an inflation rate well below the Fed’s target, he added. Kohn thinks that Yellen & Co. will look past the recent plunge in energy prices, but concedes that some of the decline could creep into core inflation. The key is inflation expectations; if they fall further, that would be quite troubling for the central bank and could forestall a midyear liftoff, even if the jobless rate continues to drop, he adds. 


The bottom line for the markets is that, in place of the “considerable time” pledge, the Fed will promise to be “flexible and data-dependent—and the trajectory of rate hikes, once they begin, will be tentative and gradual,” Kohn concludes. 


And, one presumes, there will be no trash talk about other policy makers. 


ODDS OF A MIDYEAR FED RATE HIKE got a good bit longer after the steep selloff last week in crude oil and stocks, culminating in Friday’s 300-plus-point drop in the Dow industrials, with the S&P 500 barely clinging to 2000. For the week, investors in U.S. stocks wound up $875 billion poorer, their worst showing in more than three years, significantly cutting their 2014 gain to $1.5 trillion. 


The benefits from the crash in crude and lower gasoline prices should make up for this pummeling of the plutocrats. And the Commerce Department’s report on November retail sales, released Thursday, seemed to confirm that. The larger-than-expected 0.7% gain suggested consumers were taking their energy windfalls to the malls. 


But the numbers trumpeted on the tube are seasonally adjusted. And when Stephanie Pomboy, the maven of MacroMavens, dug into the data, she found that the seasonal adjustment (fudge factor, to normal folks) artificially enhanced the results to a surprising extent. Specifically, she relates, the adjustment assumed a 0.3% decline in retail sales—even with all the frenetic promotions to lure shoppers into stores or online. When the statisticians assume a drop, they add back the fudge factor to offset the presumed seasonal influences.


In contrast, the Commerce Department had assumed robust retail-sales gains in previous Novembers—1.8% in 2013, 2.5% in 2012, 2.8% in 2011, Steph finds. Not since the recession times of 2008 and 2009 did Commerce assume a negative November for retail sales. 


These fudge factors make it easier for reported numbers to top expectations. With the recovery purportedly getting stronger, “that doesn’t seem to make a whole lotta sense now, does it?” she writes in an e-mail. 


Meanwhile, inflation—the equal part of the Fed’s dual mandate along with employment—seems likely to fall further below the central bank’s target. That’s evident from market-based indicators, notably the relative yields on nominal Treasury securities and Treasury Inflation Protected Securities, or TIPS. Based on those indicators, expected inflation five years hence—the Fed’s favored measure—has collapsed to the lowest level since 2009, according to David P. Goldman, head of Americas for Reorient Capital in Hong Kong.  Based on that indicator alone, the Fed would be expected to be easing (not likely) instead of tightening, he writes. 


Given this, the futures markets’ forecast of a 1.5 percentage-point rise in the fed-funds target in two years represents “cognitive dissonance at 200 decibels.” According to the CME, fed-funds futures are pricing in a 0.75%-1% rate by the end of 2015, significantly below the 1.375% predicted by the FOMC in its last forecasts, in September. 


Rarely do the market tell-tales all flutter in the same direction, but now that’s toward deflation. It isn’t just oil doing the signalling; it is other goods ranging from iron ore to milk. Meanwhile, junk bonds issued by leveraged energy companies, which helped finance the oil boom, are under siege, while yields on longer-dated Treasuries continue to grind lower, with the 30-year bond smashing through the 3% barrier and getting gangbuster demand at near-record lows. 


All of which suggests something is afoot other than the purported tax cut that is supposed to accrue from the energy-price slide. In inflationary times, a drop in prices at the pump is a windfall. But when high energy prices and cheap money create a boom in shale—producing the most vibrant sector of the U.S. economy, in earnings, capital expenditures, and employment—an oil-price plunge can be a dangerous problem. 


Thinking that the economic effects of lower gas prices are the same as they would have been in the 1970s is as outdated now as my yellow-orange Opel Manta, in which I listened for updates on Patty Hearst’s abduction while I waited patiently in a gas line during the first oil embargo.

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