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The Blue Money Report
"Freedom of movement of capital is fundamentally good and positive for the world, provided it applies to economies in good shape."  
~ Michel Camdessus
managing director of the International Monetary Fund,
in National Journal, Feb, 14, 1998

Welcome to the Blue Money Report

Today's Commentary: 08.28.02
The Durability of Confidence

I love watching the Chicago Board of Trade. There is something magical about the multicolored jackets that look as though some uppity prep school had decided to "go wild" by reversing their mandatory dress coat. I especially enjoy watching the place erupt as new economic numbers are released. Tuesday morning, the durable goods report was reported to such jubilation and chaos you would have thought the news akin to announcing that school was out for the rest of the day.

The number itself, which looked pretty good at first glance, is indicative of the shadows these figures cast when the economy is struggling. First glance will only last until it is revised. The number itself would be much closer to accurate when averaged with the previous month. Even better, taking all the numbers to reach a sort of summer average of with June and July and, when it is released, August. This combined number would be a better indicator. The last month of summer may prove to be a wash due to July's too high number. If you average in August, which I am predicting as a negative, the durable goods will be a little better than flat. And if I make my case, the durable goods report, the report card of manufacturing should read little better than 2%.

So why do these bond traders erupt in such excitement only to have 5 year Treasuries end the day down? Because there is little else to celebrate. Perhaps it was the later that day release of another number, the Consumer Confidence Index.

Anthony Karydakis, the Senior Financial Director at BancOne said it best when he commented on the Consumer Confidence Index number. "you can't spend confidence."

I have always had issue with the this recovery and how it is supposed to take shape. The administration and Wall Street have put any hope that the economy will recover squarely on the shoulders of you and I. We have been encouraged to spend out of some sort of skewed sense of patriotism. There is little talk about how this type of economic patriotism will play itself out once the bill comes due. We have watched a trillion dollars of projected surplus disappear, only to remerge on the other side as a deficit. Americans are by nature are realists. Sooner or later, more often later, we will reign ourselves in, stop spending and start to pay the bill. Or at least acknowledge it.

So when asked how confident the consumer is now certain things pop into their heads. Folks are really starting to think about what they have done. There patriotic duty will have a price. Burdened with the debt of a late fall spending spree. Many had decided that in order to pay for the debt, they would use the roof over their heads, borrowing equity to pay one bill while extending the real cost of their debt over 15 or 30 years. They also realize that reliance on a paycheck from employment that may be more tenuous, non existent, or simply not what the employee wants or needs, has also shed a somewhat harsh light on their situation. When asked how they felt, the consumer said "not so great". "No, I don't feel good." "No, I don't think things are good." "No, I can't spend confidence." Is this lack of confidence any real surprise?

Perhaps we should ignore all of the data and embrace the intriguing notion of a blind recovery. The markets could creep back from the shadows unnoticed. Employment would rise gradually creating a need for goods. The need for further technological advance return as companies would seek to rekindle the bond between us and them. Employ us and we will buy stuff. We would feel less like the hunted and more like the predator. Currently, we are hiding in our homes (financially) and letting the economy drift about, cresting a wave here, drifting down there. With our heads in the sand, we don't much seem to care. Perhaps ignoring the recovery would help prod it along.

I wonder how the CBOT would react to a Insouciant Index. The double I's would mark how little we care. Greenspan could speak, but since we have never borrowed short term, we paid no heed. When economic numbers are released, or the ticker gently slides across the screen, we would be teaching our kid how to throw a frisbee, or perhaps watching them in the yearly rite of high school football's daily doubles. When CEO's do perp walks, we would walk in the woods. When CEO's signs pledges of truthfulness, we will be wondering why planes disturb beachgoers with trailing advertisements for famous crab houses. We would fill our days with more meaningful pursuits such as family and friends, forgetting our prior obsessions with the markets. We would understand long term and even perhaps find a soothing perspective in it.

The Insouciant Index would elicit a shrug when released as if we already understood the number. The CBOT might utter a technicolor, "dude". And to the dismay of those who can't pause and refresh themselves, the number would be high. It would always high in the summer.

In the winter, we would retire the index just to keep our perspective. In the colder months, we would be concerned about heat and paying for Christmas. We would be wondering why we are feeling more anxious about the future, when only a few months ago, we cared little about our plight. The Insouciant Index would be hitting all time lows and would need to be replaced by the Anxiety Index. Unless, of course, the economy, without our watchful eye, recovered.

Today's Commentary: 08.26.02
Running with Sticks

Warnings abound from everywhere about what lies ahead, what is developing on the horizon, or what is about to burst. If you keep toting that stick around, you will probably poke your eye out.

You really can't blame them for trying to see what the future brings. Going down for the record as the one who predicted a disaster can go a long way in positioning oneself for the next expert position of market psychic. It is almost as good a job as being the one who can pick the winners. Picking winners is, of course, a far better job but lately these folks have kept the unemployment lines fully staffed. So everyone's turned skeptical and pessimistic, looking for the dark cloud in a blue sky.

Let's take a look at some of these gathering clouds.

The stock market has had a nice go at it for the last five weeks or so. Not a great run, but a run nonetheless. Mutual funds have rebounded nicely and the large cap group has seen some more positive action than recent memory allows. But where there is good news, someone has bad.

The run it seems is largely due to pension rebalancing which should continue for at least another couple of weeks. There is a lot of cash that needs to go somewhere, and these pension managers are not so hot on bonds right now. But in the face of this reinvestment, the bad news bears are out in force warning of earnings, September (which has never been such a hot month for the stock market) and the fact that oil prices are on the rise just as summer gives way to the crispness of fall.

The guessing game provided courtesy of the Fed and more specifically, several of the policy makers, has left most folks who watch fixed income markets on the edge of their seats. With an opportunity to cut rates in a weakening economy, September 25, the next scheduled meeting date, could see additional easing if two things occur: Greenspan begins to feel as though every bump in the road needs to be fixed and his belief that underlying growth no longer is accommodative to improvement. He still believes that time is on the side of the economy even if things aren't as robust as he would like.

The pessimists see unemployment moving up as opposed to leveling off or even improving as some had hoped. There is still little indication that business is doing anything other than streamlining current operations which means that capital spending will remain stagnant for some time in the near future. Not at all what the average investor wants to hear.

But the consumer, the very backbone of the economy seems oblivious to all of this potentially bad news and have stepped up the refinancing of their homes in the current low interest environment. Here is where those who predict are having the most fun.

The Mortgage Bankers Association maintains an index of applications which rose 11.4% last month, which is a combination of both purchases and refinances. Broken down even further, the Refi Index (up 14% for the same period) is showing that consumers are still looking to their homes as a source of untapped capital. The move, however does not mimic the reasons that made the index soar last November.

Much of the refinancing now is taking place as a readjustment more than an equity tap. In previous refinancing booms, homeowners saw the value of their homes increasing and borrowed against this good news, pulling billions of dollars of equity from their homes and dumping it frivolously into the economy, some at the behest of the administration. The current wave is more of a consolidation than expansion. Lured by interest rates that will allow them to pay off their homes sooner, borrowers have decided that shorter terms are better for their future plans than their 401(k)s have turned out to be. The thought of owning their homes at an earlier age is all the enticement that is needed to sway those former risk takers.

So is there a bubble in housing as every is suggesting? Maybe, but I just don't see the dynamics present that would signify a bubble. There is demand, which has slacked off some in recent months and which will concern those whose investments are tied directly to home builders. There is money available and it is relatively cheap which allows many lower income and immigrant workers the luxury of purchasing an affordable house with an affordable rate of interest. With inflation continuing to be a non factor and the actual prices of homes stabilizing on a national basis, although there are some regional prices that are starting to suffer, the bubble is more talk than actual reality.

That said, consumers have more or less lost their will to spend their borrowed equity which will negatively effect the economy. Unemployment numbers will continue to be out of whack for at least another year. Any job additions are insignificant. The markets are transitional, which is the new double speak that you will begin to hear more often. Transitional simply states that markets are going from bear to bull, but without anything in the way of predictors as to when this will happen.

Inflation, which I mentioned previously as a non factor, will prove that the consumer is still a savvy individual. That a dollar borrowed is still a dollar owed, not something less. Debt has become the stick in our hands.