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Why Didn’t the Fed “Just Say No”? – Ep. 149

  • So far it’s been a pretty light week but what little economic data that has been released is bad, and all of it evidences the recession that nobody wants to acknowledge
  • Let’s start with the Consumer Credit numbers that came out on Monday.  Not only was the number extremely weak, but the revisions to the prior month were even weaker
  • The initial report for the growth in consumer credit in December was $21.3 billion
  • Now I don’t think growth in consumer credit is good; I think it undermines long-term living standards
  • The last thing you want to do is borrow money to consume, one of the points I really hammered home in my book, “How an Economy Grows and Why it Crashes”
  • If you haven’t bought that book, you should get a copy
  • Be sure to pick the collector’s edition because, in addition to being a really beautiful book, it has two entirely new chapters.  If you already have the original one, buy the collector’s edition and give the original away to a friend.
  • Consumers should not borrow to consume.  They should save to consume.
  • Businesses should use our savings to invest in capital equipment to grow the economy
  • When you consume savings, you undermine long-term economic growth and therefore future consumption is diminished
  • The problem is we’re living in a bubble, and in order to sustain this bubble economy, consumers have to keep spending
  • In this economy, however in order to keep spending they have to keep borrowing because they’re certainly not earning, and they don’t have any savings
  •  This has to blow up eventually but right now, it’s all about keeping the music going
  • Consumer credit was revised down from the originally reported $21.3 billion to just $6.4 billion of growth
  • They were looking for January to grow by $16.5 billion, and of course, this also includes student loans, as well as credit cards
  • Instead, we got an increase of just $10.5 billion
  • Consumer credit growth imploded in December and January
  • If there’s all this job creation why aren’t these newly-employed people spending money?
  • This shows you the jobs are going to people who already have part-time jobs, and need to supplement hours and wages
  • Also, we got the Small Business Optimism Index, which last month was 93.9, and there was an expectation that it would increase to 94.2, that small businesses would be a little more optimistic, yet it dropped a full point to 92.9 – the lowest level in 2 years
  • If that is the case, why are they hiring people?
  • The type of hiring that is going on is hiring part time workers to replace full-time workers
  • Which brings me to the data that came out today: Wholesale Trade
  • Inventories were expected to drop, but they increased by .3%
  • And the inventory for December was revised from -.1 to unchanged
  • The reason inventories spiked is because sales collapsed
  • The inventory to sales ratio just hit a new high, at 1.35
  • This is a 7-year high. The last time the inventory to sales ratio was this high was in April of 2009.  We were still knee-deep in the Great Recession
  • If this recovery even exists, why isn’t the merchandise being bought?
  • At some point this year, the lone remaining bright spot in this horrible economic landscape – the number of jobs being created – will turn down
  • We got more disappointing corporate earnings news this week
  • The reason the stock market is moving slightly up is because of the sentiment that the Fed will not raise rates in the near future
  • It’s not just the stock market – Oil is above $38/barrel
  • Also some of the industrial metals have had huge spikes
  • And of course, the dollar is going down against other currencies
  • The Australian dollar hit an 8- month high
  • The Canadian dollar hit a 4-month high
  • The New Zealand dollar was also at an 8-month high until the Reserve Bank of New Zealand surprised the markets and cut interest rates from 2.5% to 2.25% and that sent the New Zealand dollar tanking from +1% to -1.5%
  • One of the reasons the Reserve Bank gave was that inflation was not high enough
  • Inflation is 1.6% and they want it to be 2%
  • They don’t think the cost of living is rising fast enough in New Zealand
  • The declining dollar is taking a lot of pressure off of the emerging markets
  • Meanwhile, everybody thinks it’s a problem that the Chinese have sold so many treasuries
  • I think this is like manna from heaven for the Chinese – they managed to unload a lot of treasuries without collapsing the market
  • They have used some of that money to buy gold while their FOREX reserves have been going down, their gold reserves have been going up, even faster than is publicly acknowledged
  • I don’t think this is the beginning of a series of cuts for the New Zealand Reserve Bank – I think will be regarded as a mistake
  • Speaking of central bankers and nonsense, Richard  Fisher was on CNBC today – you may remember he was the guy who, a couple of months ago said, “We front-loaded economic growth” and “The Fed is a giant weapon that is out of bullets” and that the market was certainly going to go down with an interest rate hike
  • This time he was even more honest – he said the Federal Reserve injected monetary heroin and cocaine into the economy, and now we’re trying to keep it going with Ritalin, still providing an artificial stimulus to the economy
  • He said all this is OK, as long as it doesn’t infect the real economy – it did! The people on main street didn’t have as wild a ride as the people on Wall Street, but it was the same heroin