Farrell: The World As I See It

Gee, I don't think so...

The National Association of Business Economists- and don't we all want to be part of that convention at party time! - issued a report the other day that doesn't ring true to me. In the release the NABE said the ten year Treasury yield will be 4.3% by the end of next year, which would be up about a full percentage point from where it is now. I suppose there is a chance of that happening if the world decides it doesn't want to fund our deficit without higher rates. But they also said there would be four rate hikes by the Federal Reserve next year. I have mentioned that Soleil's Chief Economic Advisor, former Fed Governor Lyle Gramley, feels that it will be at least a year before any Fed rate hikes. Emphasis on the "at least." With such enormous amounts of unused capacity (and capacity utilization will be announced this Friday and is expected to be poor at best at under 70%), and unemployment likely to go above 10% soon, it is hard to conjure up the case for higher rates. If the Fed were to take on defense of the dollar which is a whole other conversation then rates could move up, but they have made it clear that is not going to happen.

The other pieces worth noting out of the NABE report were that "core" CPI (that's the ex food and energy number) will be 1.5% for 2010. We would guess a bit lower than that. Unemployment will go above 10% but finish next year at about 9.5% and we can only hope that number starts to decline soon. There probably will soon be an extension of unemployment benefits by Congress as it is guessed that one million people out of work will run out of benefits by the end of the year. That would be a desperate situation and an unemployment check is small relief but it is at least something.

Can it be? China saw one million car sales last month and that is the first time that has happened. If Emerging Markets continue to recover than OPEC's recent estimate that oil demand will rise by 700,000 barrels a day in 2010 could well be accurate. Currently oil fundamentals look bearish to me with worldwide inventories more than adequate and OPEC non compliance pumping more oil than is needed right now. The price of oil is reacting to the falling dollar, as is the price of gold, but OPEC feels secure in saying " The world economy is showing signs of recovery." It absolutely is but I would guess without the U.S firing on more pistons than currently the oil minister of Kuwait might be more right when he said the other day that "$60 to $80" is the right price. I noticed that Goldman Sachs sees $85 oil by the end of this year.

  • Strong China Trade Figures Point to Recovery

The New York Times Financial section reported that the British government is proposing to sell "a range of government owned assets, including its share of the Channel Tunnel to raise money to help plug the country's huge budget deficit." Said deficit is expected to reach 12% of gross domestic product, which, sadly, is the area we find our deficit to hover. With that in mind, pull out Tuesday's Wall Street Journal and read Zachary Karabell's piece "Deficits and the Chinese Challenge." Briefly, cash strapped Britain turned to the US in 1946 to help bail out its disastrous finances. The U.S used the opportunity to unseat Great Britain as the principal financial force it had once been. It is scary to consider the historical parallels between then and our current financial dependence upon China. We cannot, Zachary writes, assume "that because (we) have been a dominant nation on the world stage, it must continue to be so. That is a recipe for becoming Britain." It is a must read piece.

We are at last into the teeth of earnings season. Intel reported after the close on Tuesday following Johnson and Johnson's pre-opening report. Intel handily beat estimates and the stock rose in afterhours trading. The best piece of the announcement as I see it was the substantial rise in gross margins. Revenues were as predicted but cost control was so rigid that more fell to the bottom line than was expected. In addition to looking for revenue growth now and in the coming quarters it will be interesting to see if more companies exhibit Intel's cost control. American companies exited the last recession in lock down mode and never really expanded employment. Any increase in demand is going to flow to the bottom line in great big gobs. Large multinational companies with significant revenues overseas - like Intel - will begin to benefit from the weak dollar as favorable translations back to the dollar boost bottom lines. That is one of the benefits of a falling currency. For my money it is outweighed by the inflationary risks of a depreciating dollar and by the enormous risk that foreign appetites for our financial assets will inevitably fade if the currency continues down.