The mainstream de-leveraging consumers continue to struggle in face of persistent high unemployment and housing market slump. The great recession hit both their income and their wealth hard. Low-end retailers such as JC Penny and Walmart are not doing well.
The mainstream consumer is powerless in driving the recovery.
Consumer spending is now overwhelmingly the story of the luxury shoppers. While a small segment of consumers, they wield an outside impact on the broader economy, earning roughly 50% of the total income in the U.S. and making about 48% of total expenditures.
The newly rich in emerging economies are also making their spending power felt around the globe from luxury accessories to luxury cars and homes. Here are some interesting recent reports:
Hermès cannot meet demand for luxury.
LVMH Sees No Slowdown in Luxury Goods Demand.
Urban luxury homes are back in demand, aided by new foreign buyers from Russia, China and Brazil.
Luxury spending picks up even as economy sputters (The Detroit News).
Even the recent market volatility hasn't affected their mood to spend.
The stock market recovery since 2009 has a lot to do with it. The Fed's easy money policy has a lot to do with it.
If the Fed wants to stimulate the economy, the wealth channel is both obvious and effective. This segment of the consumers are credit-worthy, cash-rich and asset-rich. They're the most likely candidate to lever up somewhat. If the banks want to lend, who else would they want to lend to?
Businesses catering to their needs are expanding, both domestically and internationally (see the recent earnings reports from Tiffany, Raulph Lauren, Nordstrom for example).
The recovery on the highend will trickle down. The Fed must pay a lot of attention to this most promising pillar of economic recovery where monetary policy has been and will continue to be effective.
If the Fed twists this Wednesday, risk-premium would be lowered. Investors would be chased out of safe-haven to take on more risks. Risk assets would be supported to some extent to counter the fear of Euro/Banking crisis and the fear of recession. This is not to create another asset bubble, but to ensure the recovery is in-tact.
Monday, September 19, 2011
Friday, September 9, 2011
More work to do for the Fed chief
Europe is clearly the big drag and big risk for the global economy and the market. U.S. may be the hope. President Obama's job speech last night looked like a refreshing refocus on the real thing, but he faces a difficult uphill battle to get the package through Congress.
The Fed may be able to do a bit more. Mr.Bernanke has been avoiding specifics in his last two big speeches, but provided a clear sounding board to the White House and to the Congress. The economic recovery is at risk of stalling, and the circus in Congress is making things worse.
Yet, it's troubling that Mr.Bernanke appeared troubled by "exceptionally cautious" households:
Spending power of a typical household comes from their current income and/or their asset. If their asset is not liquid, they can borrow against it. Both sources are under heavy headwinds, as noted by the Fed chief. How much more can they do?
If Mr.Bernanke cannot get over this, and continues to hold out hope that the households will step up spending miraculously, then we're unlikely to see decisive actions from the Fed. Perhaps this is what's troubling the market.
The Fed may be able to do a bit more. Mr.Bernanke has been avoiding specifics in his last two big speeches, but provided a clear sounding board to the White House and to the Congress. The economic recovery is at risk of stalling, and the circus in Congress is making things worse.
Yet, it's troubling that Mr.Bernanke appeared troubled by "exceptionally cautious" households:
One striking aspect of the recovery is the unusual weakness in household spending. After contracting very sharply during the recession, consumer spending expanded moderately through 2010, only to decelerate in the first half of 2011. The temporary factors I mentioned earlier--the rise in commodity prices, which has hurt households' purchasing power, and the disruption in manufacturing following the Japanese disaster, which reduced auto availability and hence sales--are partial explanations for this deceleration. But households are struggling with other important headwinds as well, including the persistently high level of unemployment, slow gains in wages for those who remain employed, falling house prices, and debt burdens that remain high for many, notwithstanding that households, in the aggregate, have been saving more and borrowing less. Even taking into account the many financial pressures they face, households seem exceptionally cautious. Indeed, readings on consumer confidence have fallen substantially in recent months as people have become more pessimistic about both economic conditions and their own financial prospects.
Spending power of a typical household comes from their current income and/or their asset. If their asset is not liquid, they can borrow against it. Both sources are under heavy headwinds, as noted by the Fed chief. How much more can they do?
If Mr.Bernanke cannot get over this, and continues to hold out hope that the households will step up spending miraculously, then we're unlikely to see decisive actions from the Fed. Perhaps this is what's troubling the market.
Wednesday, September 7, 2011
The Fed's dual mandate
New speech from Chicago Fed President Charles Evans makes it clear why the Fed should be more aggressive in tackling the unemployment problem.
The entire article is well worth a good read. Relative to the concerns and comments from the disenting regional Fed presidents, his arguments are based both on macroeconomic theory and empirical studies.
What seems to be lacking, however, is more convincing arguments on the efficacy of un-conventional monetary policies such as QE. On this front, the article is drawing on works by Michael Woodford and perhaps Paul Krugman to argue for setting consistent policy expectations over the medium and the long run.
Ideally, the accommodative monetary policy is most effective when combined with an expansionary fiscal policy which can create final demand directly.
The entire article is well worth a good read. Relative to the concerns and comments from the disenting regional Fed presidents, his arguments are based both on macroeconomic theory and empirical studies.
What seems to be lacking, however, is more convincing arguments on the efficacy of un-conventional monetary policies such as QE. On this front, the article is drawing on works by Michael Woodford and perhaps Paul Krugman to argue for setting consistent policy expectations over the medium and the long run.
Ideally, the accommodative monetary policy is most effective when combined with an expansionary fiscal policy which can create final demand directly.
Tuesday, August 30, 2011
Higher inflation rate may be allowed by the Fed
Interesting two-part interviews with Charles Evans, Chicago Fed president. He argues that the Fed's accommodative policies have been working, and he would support further aggressive easing.
In particular he mentioned that a high level of inflation rate (say, 3% per anum) should be allowed.
He also mentioned a recent opinion piece on Financial Times by Professor Michael Woodford, a leading monetary macro economist, which focuses on setting inflationary expectations as a policy tool.
In particular he mentioned that a high level of inflation rate (say, 3% per anum) should be allowed.
He also mentioned a recent opinion piece on Financial Times by Professor Michael Woodford, a leading monetary macro economist, which focuses on setting inflationary expectations as a policy tool.
Wednesday, August 24, 2011
Stiglitz: reverse tax, medical benefit, war & downturn
He touches on the wrong focus in Europe, the broad policy reversal that are needed, and what the Fed can and should do.
Tuesday, August 23, 2011
What are the options on the fiscal side?
For a serious discussion on tax reform and practical options to create jobs, here.
Saturday, August 13, 2011
Was QE2 effective?
Slow growth and market turmoil have brought us back to QE. Markets are expecting QE3, to be telegraphed perhaps as soon as the end of August at Jackson Hole.
It's important at this juncture to ask if QE2 has been effective. Most financial commentaters have dismissed its effectiveness out of the casual observation that the economy is still not growing very much and unemployment rate is still very high. Here is an example.
John Mauldin's latest newsletter "The Beginning of the Endgame" asks the same question about QE2:
Is this a fair assessment of QE2? Would one expect QE2 to create sales and customers for small businesses such that they demand for more laons? The Federal Reserve has no such power and one should not expect anything like this to start with. A fiscal stimulus may have that effect if it's designed to create final demands for these businesses. As to trade, a weaker dollar has helped. But again, the Fed can't control the world demand for U.S. goods and services. Is a slowing world economy the failure of QE2?
This type of off-hand, sloppy remarks help to cloud the general perception of monetary policies.
St Louis Fed's assessment is a good starting point. It's mostly effective, but its effect is difficult to be disentangled with the effects from other adverse shocks such as the Japanese earthquake and the European debt crisis.
One can argue perhaps QE2 wasn't large enough.
We also hear very often that normal transmission mechanisms (e.g. multiplier effect via banking system) for monetary policy have been broken, therefore QE2 or QE3 would not be effective. Paul Krugman has a different take. There are a wealth effect and a weak-dollar effect. These two effects have important investment implications.
QE is probably not the best tool to stimulate growth when the economy is weighed down by heavy debt loads. But it's probably the only viable tool to save the economy from slipping into another recession.
It's important at this juncture to ask if QE2 has been effective. Most financial commentaters have dismissed its effectiveness out of the casual observation that the economy is still not growing very much and unemployment rate is still very high. Here is an example.
John Mauldin's latest newsletter "The Beginning of the Endgame" asks the same question about QE2:
What about QE3? Let’s look at how that last move turned out. We ended up with more money on the Fed’s balance sheet and higher commodity prices. The NFIB survey I cited last week showed there was no great demand on the part of small business for loans. 91% had what they needed. What they want are sales and customers! The trade data yesterday showed exports fell by over $2.3 billion last month. That suggests a slowing world economy. Which is borne out by numerous other indicators.
Is this a fair assessment of QE2? Would one expect QE2 to create sales and customers for small businesses such that they demand for more laons? The Federal Reserve has no such power and one should not expect anything like this to start with. A fiscal stimulus may have that effect if it's designed to create final demands for these businesses. As to trade, a weaker dollar has helped. But again, the Fed can't control the world demand for U.S. goods and services. Is a slowing world economy the failure of QE2?
This type of off-hand, sloppy remarks help to cloud the general perception of monetary policies.
St Louis Fed's assessment is a good starting point. It's mostly effective, but its effect is difficult to be disentangled with the effects from other adverse shocks such as the Japanese earthquake and the European debt crisis.
One can argue perhaps QE2 wasn't large enough.
We also hear very often that normal transmission mechanisms (e.g. multiplier effect via banking system) for monetary policy have been broken, therefore QE2 or QE3 would not be effective. Paul Krugman has a different take. There are a wealth effect and a weak-dollar effect. These two effects have important investment implications.
QE is probably not the best tool to stimulate growth when the economy is weighed down by heavy debt loads. But it's probably the only viable tool to save the economy from slipping into another recession.
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