Farrell: The G20—What Were They Thinking?

In my unremarkable athletic career when I was young I had one particularly nutso coach.

I admittedly screwed up one day and his wrath descended on me in full force and he screamed "What are you doing, just what are you doing."

Thinking of answering I'm doing the best I can didn't seem wise at the time so I started with the lame answer "I thought..."

Not a good idea.

"Don't think, Farrell. Don't think. You're not capable of thinking so don't do it. React, I want you to react." OK, coach - got it.

So as not to disappoint him, I screwed up again the next day and his eruption was "Will you think out there, Farrell. God gave you a brain. Use it and start thinking. What is wrong with you." OK, coach. Got this one too. Don't think - react, except when you don't react - but think. And you wonder why I have issues.

US President Barack Obama speaks during a press conference at the conclusion of the G20 Summit in Toronto
Saul Loeb | AFP | Getty Images
US President Barack Obama speaks during a press conference at the conclusion of the G20 Summit in Toronto

The G-20is full of nutso coaches.

Not to belabor the point, but their manifesto at the end of the conference this past weekend was to promote "growth friendly budget cutting."


That's like government efficiency, or as the Wall Street Journal said - "pious heathens".

You can't cut budgets and promote growth. But it sure sounds good and gets them all out of town with every camp declaring victory. At best the G20 restated what separate nations had already said. They were/are going to cut budget deficits but grow at the same time. Some will cut their deficit by growing their way out of problems. I can't wait to see that! And we'll get a ringside seat since that's what the US intends to do. No pain (except for tax hikes: but that's only on the rich), just growth. And there are no penalties if you don't do as you say, and each nation can proceed at their own pace. Why do they bother to have these meetings? But, ok coach. Got it.

Personal income increased .4% last month. That is the fifth gain of that size in the last six months, and that's good stuff. You might jump to the conclusion that the 400,000 census jobs created last month might have had something to do with it, but part time jobs in the blender with over 100 million full time jobs wouldn't move the needle. Personal spending increased a moderate .2% which to me is good as the savings rate ticked up a bit to 4%. I believe the consumer will delever and save more, and I also believe we will have job growth, and, therefore, income growth.

The recent unemployment claims have been disquieting, but nothing is easy. This Friday we get the Bureau of Labor Statistics report on job growth and the number will be negative. But that will be because some census workers will have been let go. We need to look through to the private payroll number and the consensus is for growth of 100,000 plus. A disappointment this month will not be well received since last month showed a meager 41,000 jobs created. I expect the market to be boring all week waiting for the jobs number on Friday.

We do get other economic reports this week. The next most important after the jobs number is Thursday's announcement of the ISM manufacturing data. Manufacturing has been in a "V" shaped recovery and this report should affirm that. But manufacturing is only about 13% of the economy and less than 10% of employment. Tuesday will see the Case Shiller housing reportand that is emotionally so important to all of as our home is such a slug of our net worth. The consensus calls for a slight increase.

Most troubling to me, and I am paid to worry and be troubled, are the yields in the bond market.The 2 year US Treasury bond is trading close to a .63% yield. That is about the level it reached when Lehman Bros. collapsedand the world looked like it was going to end.

The 10 year US Treasury is close to 3% and while still a bit away from the post Lehman level which was less that 2.5%, give it time. Such low yields signal a disinflation level that borders on deflation.

The Fed already has spent $1.25 trillion buying mortgage backed securities trying to prop up that market and get cash into the system. Do they need to crank up the money machine again? It is how we financed World War II. The Treasury issued debt and the Fed bought it. But there would be no guarantee that the velocity of money would pick up.

We are getting to the time when the effects of the government stimulus program will ebb. Some say there have been very little in the way of effects, but I think that is more a political argument. Throwing a trillion dollars plus at an economy has to have done something. The animal spirits of the US economy now have to assert themselves.

I think we will be in a trading range until we get more evidence one way or the other.

Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.