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Why Apple’s Advantage is Gone

April 30, 2013 by · Leave a Comment 

The Daily Reckoning

If you accept the idea that a corporation has ‘personhood’ then it’s possible a well-managed corporation can grow, if not forever, then at least for a very long time. Institutions survive changes in leadership, provided they are built on solid foundations. A good business can remain a good business a long time.

Even in an infinite universe, though, nothing can grow forever. You need energy, for starters. And for something more terrestrial like a technology business, in order to keep growing you have to keep innovating. And the trouble with innovating is that the bigger you get, the harder it is to do. Even if you manage it, you’re bound to grow less fast once you reach a certain size.

We present these thoughts for your consideration today as we try and work out why Apple Inc. has sold $17 billion in corporate bonds. The US tech giant sold $5.5 billion in 10-year bonds at an annual yield of 2.415%. In addition, it sold three-year bonds at a yield of 0.511%, five-year bonds at a yield of 1.076%, and 30-year bonds at a yield of 3.883%.

It was the second largest corporate bond offering in history. By all accounts, it was gobbled up eagerly and the company could have sold more. There were $52 billion in orders for the deal, according to the Wall Street Journal. What’s even more notable is that Apple was able to borrow at kind of rates normally reserved for sovereign governments.

There are two parts of this story we want to focus on in today’s Daily Reckoning. The first is whether borrowing money in the bond market is the best way to return money to shareholders. And even if it is, what does it say about a technology company that returning money to shareholders is the best use of its capital?

The second part of the story is that blue chip corporate bonds are being valued by the market equally or even less risky than ‘safe’ government bonds. This confirms our theory that blue chip companies like Apple are really neo-feudal City States that use their shares as currency. And more importantly, some of these institutions may survive the coming years in much better shape than sovereign governments.

But getting back to the first point, Apple’s bond offering may actually indicate that it’s NOT one of the companies that will be around in twenty years. In fact, it’s possible to imagine a world in which Apple isn’t even around in five years. Don’t believe us? Read on!

The dominant trend of the last 200 years has been the commodification of everything. As credit, labour, and raw materials become cheaper, everything becomes cheaper to produce. For customers, this is great. It explains why items that would have been considered luxurious or outlandish even fifty years ago can now be bought off the shelf in any major city in the world.

For producers, commodification is hell on profit margins. To survive and thrive in a world where you have lots of competition, you have to be a low cost producer. Nowhere is this truer than in the extractive industries, where there is no value-added profit margin to pad the fall of commodity prices. If you can’t dig it or drill it cheaply, you’ll be one of the first firms punished when resource prices fall.

Since it burst on to the scene in the 1980s, Apple seemed to be in an industry that defied commodification. Its devices are run on a closed operating system. Apple devices run on Apple software, and they run very well. But they don’t always play well with other hardware or software.

That hasn’t mattered much until now. Apple enjoyed the benefit of low-cost Chinese labour for the hardware. But the real value added that created such big profits for shareholders was in the software and the intellectual property. Apple’s innovation-driven profits are best captured in a phrase that became popular in the early 2000s when describing the difference between US tech companies and Chinese manufacturers: ‘We think, they sweat.’

But the hardware end of the technology business was commodified quickly. Dell and Hewlett Packard’s competition in the personal computer business caused IBM to exit that space and focus on servers and high-margin products aimed at the corporate customers. Profit margins in hardware manufacturing and retailing were squeezed by low-cost production and big box retailers.

Apple resisted this, too, with its regular cycle of product innovation and well-choreographed releases that the media ate up. Apples devices were always the ‘newest’ and had high perceived value. And, of course, they were good. The iPod and the iPhone were devices that changed how people interacted with information in digital form.

But competitive advantages in the technology sector are tough to maintain. The world changes. Today, no one is particularly dazzled by the functions of the smart phone. Outside Europe and North America, Samsung gains market share on Apple and dominates in developing markets. The handset and the operating system for it have been effectively commodified, which brings us back to Apple’s bond offering.

Growth stocks don’t spend their time borrowing money in the bond market in order to return it to shareholders. True, Apples reckons that repatriating cash from low-tax overseas jurisdictions would destroy shareholder value. It’s cheaper, or better for shareholders apparently, to borrow money at low rates and pay out shareholders that way.

But generally, you only return money to shareholders when you don’t have anything better to do with it yourself. Maybe Apple is so successful now that it’s simply doing what all businesses ought to do: return profits to shareholders. Or maybe Apple knows that in order to retain shareholders it has to pay them with dividends because it’s no longer a growth stock.

We’d go with the latter explanation. Apple will find it impossible to retain its competitive advantage in the next ten years. To do so, it must constantly roll out new devices in which its intellectual property is embodied. A very well-run company might be able to do this for a long time, and Apple has. But the competition is not idle.

This is a fact anti-corporate luddites often forget. Except when they’ve been granted pseudo-monopolies by the government, the vast majority of businesses can only survive by serving the customer. If you fail to do that well, you fail. And someone is always trying to do better than you. Unless you’re an industry where the natural barriers to entry are very high, or the artificial barriers to entry (government policy) make it impossible, you will find it hard to innovate forever. You will eventually die.

Incidentally, this is why so many of those studies that justify stocks for the long run are flawed. They exclude failed companies from the performance figures of stock markets over time. If you only track the winners over time, you’re going to have a pretty good track record. But for every long-term winner, there are thousands of corporate corpses on the side of the great road of progress.

Will Apple be one of them? Eventually. Will it happen in the next five years? It does tend to happen quickly in the technology industry. It wouldn’t surprise us one bit. But the fate of one individual share isn’t the real issue here for investors, and that brings us back to the second part of the story.

Apple is not fit for purpose in a deflationary world. You must be the kind of company that can generate high returns on capital to survive. If not, you’re not a City State. More on that tomorrow.

Regards,
Dan Denning
for The Daily Reckoning Australia

Join me on Google Plus

From the Archives…

Gold Demand: The Great Disconnect Between Paper and Bullion
26-04-13 – Greg Canavan

Lest We Forget
25-04-13 – Greg Canavan

Praying for Government Incompetence
24-04-13 – Bill Bonner

The Cracks in Solidarity at the Recent G20 Gabfest
23-04-13 – Greg Canavan

How Central Planners are Committed to Ruining the Economy
22-04-13 – Joel Bowman

Similar Posts:

More articles from The Daily Reckoning….

Encounters at the End of the World

April 30, 2013 by · Leave a Comment 

The Daily Reckoning

Gold is recovering well, moving from weak hands to stronger ones. Not much else to report.

So we’ll tell you about our weekend…

‘I’ve been to Buenos Aires twice,’ said Jorge. ‘First, when I did my military service…and second, when I went after I got married.’

We were sitting around the campfire. But we had no fire. We were far from the urban attractions – the restaurants, hotels, nightclubs, street noise, lingerie shops, traffic light jugglers, political demonstrations, opera house…and all the other things that make Buenos Aires a delightful place to live.

That morning, we mounted on horses for the five-hour ride up to the high valley, Compuel. We passed a few arriendos – where the local people raise their crops and live in rude adobe houses.

From the mountain trail, we looked down on them. We could see the laundry drying on bushes…the small fields of corn…the pastures, often with a horse or two in them…a fruit orchard…and a pile of hay, pitched up by hand the way it was done in the 19th century in Europe and America.

No machines are used here, partly because the local people can’t afford them…and partly because there is no way to get them to these isolated farms. The road is too small and too rough.

Last year, a group of Paris-Dakar adventurers tried to cross Compuel. They got stuck in the marshes and used their satellite telephones to call for help. They hoped the Argentine military would send big helicopters to rescue them.

But the helicopters never came and the adventurers – French and Italian – eventually gave up and hiked down to our ranch house.

With no relief from the government in sight, Jorge organized a crew with horses that was able to pull the Land Rovers out of the muck. Then, using picks and shovels, they moved boulders out of the way and filled in the holes so the 4x4s were able to inch their way down the mountain.

We sent the Paris-Dakar organisers a bill for $226 for our time and trouble. It was never paid.

The Compuel Road is marked on the maps as a public road. About once a month, someone shows up at the ranch and demands to pass through. He shows Jorge a map that clearly indicates that the road goes up to Compuel and then continues up into the mountains and eventually ends up out on the salt flats in Catamarca Province.

Jorge gets a smile on his face. He politely informs the traveller that the road is not passable. Yes, it is public, says Jorge. But that doesn’t mean the public can use it.

Usually, he succeeds; the adventurer turns back. Occasionally, a hard-headed driver insists, and Jorge opens the gate and lets him through. Then he waits for the driver to straggle back on foot and prepares another crew to rescue him.

‘Jorge is a treasure.’ So true and so widely shared is this sentiment that the sentence could have come from the mouths of any one of dozens of people in the Calchaqui Valley.

He is known everywhere around these parts for being polite, honest, hardworking, cheerful and competent – all the qualities you want in a capataz.

We may be the owner of this ship, but Jorge is its captain. A capataz is the person who runs a ranch. He must know what he is doing. He must have the respect of the people who live and work on it (there are seven employees and 25 families on the ranch). And he must be ready to deal with whatever challenge God or man throws at him.

We had told Jorge that we wanted to do the circuito – the long loop that begins at the ranch house, takes us up the road to Compuel…and then leads down the Rio Compuel to Corralito, Pucarillo, and back to the sala, which what they call the ranch house.

Jorge’s face took on a look.

‘Hmm… It’s very rough,’ Jorge replied. ‘I’d better do it with you.’

‘No. It’s not necessary,’ we foolishly replied. ‘We know our way around pretty well now.’

‘I think I should go with you. The trail can be very hard to find.’

‘There is a trail, right?’

‘Yes, but it hasn’t been used in many years. I would like to go…really.’

Whether Jorge really wanted to go or not, we will never know. He works seven days a week. He is up before dawn. He brings up the horses. He readies the equipment. He organizes his workers…and keeps at it until darkness is so complete that he must retire. Every day.

On Sundays, Jorge typically mounts up and rides off to check on the cattle, either in campo adentro or campo afuera – each of which, one on either side of the sala, is about 10,000 acres.

This time, we were just heading in a different direction. On Saturday, we reached Compuel at about 4:00 in the afternoon. The valley is at about 12,000 level acres at about 10,000 feet high. There are no trees. Two rivers cut through the valley, meandering through the grass, bush, and lakes. Much of it is boggy…

‘In the summertime, much of this is covered in water,’ Jorge explained.

The water has gone down now…but there are still a few shallow lakes…and marshy areas. White ducks flew overhead. Cattle were grazing, scattered throughout the valley, accompanied by many healthy calves.

‘This has been a good year,’ Jorge explained, smiling. ‘It rained more than usual last year, so we had plenty of grass. The cows were fat. We got about 100 calves from this group – about 50% fertility. Better than usual.’

But Jorge was not happy.

We rode over to look at a llama. It was unafraid. Instead, it came up and smelled the horses. ‘And look,’ Jorge pointed to the ground. ‘Sheep tracks. There aren’t supposed to be any sheep here.’

The sheep are supposed to be up in the hills, not down in the valley. They belong to the local people – the gente. This valley is for our cattle.

There were also some cows in the valley without the yellow ear tags that we put on our own. Those gente cows weren’t supposed to be there, either.

It is an old system. The gente have their animals. We have ours. They keep their goats, sheep, llama and cattle up in the mountains. We keep ours in the valley. They use our land… and give us the equivalent of 5% of their animals per year. ‘The equivalent’ means cash. And since their animals are thin, tough and virtually unsaleable, the equivalent in cash is practically nothing.

Still, the form is more important than the substance. It marks the traditional relationship between the gente and the landowner. If the relationship breaks down…there is trouble. And Jorge, as capataz, is responsible for enforcing the rules and avoiding trouble.

‘Some people are always trouble,’ he explained. ‘One family has been here forever. And they’ve always been trouble. The grandfather was always causing problems. He died. But now his children cause trouble.’

We had passed one member of the clan on our ride up to Compuel. She was mounted on a thin horse…and wore a brightly colored hat. She crossed us without speaking.

‘Why not get rid of them?’ we suggested. ‘They’re renting from us, right?’

‘Hmmm…’

Jorge gave us another look.

‘That would be nice. But they claim ‘indigenous rights’. Very hard to do anything with them.’

After a tour of the valley…splashing through marshes…inspecting the bulls and calves…we took refuge for the night in a small stone house amid derelict corrals and extensive Inca ruins. Pottery shards were everywhere. Inca terraces spread out in both directions from the house.

As Jorge prepared the horses and pack mules for the night… hobbling two of them so the others wouldn’t leave…we explored the ruins and climbed a hill. From there, we could see almost the entire valley…surrounded by mountains on all sides.

The sun had gone behind Remate, the largest of the mountains. There was a small icing of snow on Remate. And now, with the sun down, it grew cold.

Summer is over. Everything was dry. It wouldn’t take much for a spark to set off a wildfire, sweeping through the valley. So we had only a small fire inside the kitchen of the stone house.

We cooked our sausages there. But we couldn’t sit inside. Like most houses in this part of the world, this one had no chimney. The smoke filled the room and then eased its way out through the front door and openings in the roof.

There were two rooms to the house. The kitchen. And the bedroom. The kitchen had nothing but a raised stone platform where the fire was made. Over it, a wire hung down from which an old tin can was suspended over the fire to heat up water. A handmade grill was propped on rocks over the fire too. Otherwise, there were no kitchen utensils…no sink…no stove…no cabinets…no granite-topped counters. Instead, the walls and floor were granite…

The bedroom was similarly spare. No beds. No closets. No dressers. Nothing but a dusty stone floor, on which we spread horse blankets. On top of the horse blankets, we put inflatable mattresses…and then sleeping bags.

Jorge didn’t seem to mind the smoke, so he did the cooking…bringing the sausages out on a wooden platter.

We sat on horse blankets and ate our sausages.

‘Yes, I had a good time in Buenos Aires.’ Jorge continued. ‘But I couldn’t live in the city. I like it out here. It’s quiet. I have time to think…without too many distractions.’

Overhead, the stars had come out. It was cold now. Wrapped in our coats and blankets, we looked up. Never had we seen so many stars. The air was thin and cold…like the air on the moon, we imagined…

There was no light from the ground…not even a campfire. There were no noises other than an eagle or a hawk. There were no clouds. Between us and the heavens, there was nothing at all.

To be continued…

Regards,

Bill Bonner
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

From the Archives…

Gold Demand: The Great Disconnect Between Paper and Bullion
26-04-13 – Greg Canavan

Lest We Forget
25-04-13 – Greg Canavan

Praying for Government Incompetence
24-04-13 – Bill Bonner

The Cracks in Solidarity at the Recent G20 Gabfest
23-04-13 – Greg Canavan

How Central Planners are Committed to Ruining the Economy
22-04-13 – Joel Bowman

Similar Posts:

More articles from The Daily Reckoning….

Bill Bonner and the Value of Public Information

April 30, 2013 by · Leave a Comment 

The Daily Reckoning

It has become tradition at La Estancia de Cafayate for Casey Research to host an intimate conference in conjunction with the Harvest Celebration. In the most recent of the series, Bill Bonner, co-founder of The Daily Reckoning, kicked the program off with a thought-provoking discussion about the nature of information.

With a nod to Nietzsche, Bill dissected the nature of information into two categories.

The first sort is that which is derived from direct observation. For an example, Bill pointed to the tangible information that comes from living in a tribal village. As a member of the tribe, you knew your neighbours, you knew what sort of crops would grow in the different seasons, where and when to hunt, etc.

Paraphrasing Bill, ‘If a member of the tribe came running into the village yelling that an enemy tribe was about to attack, you would have direct knowledge that there was an enemy tribe residing in the area and that the fellow doing the yelling wasn’t the sort to just make it up. So you could be certain an attack was likely.’

Given this high quality of information, Bill continued, you would be able to make an informed judgment about what action to take. You could, for instance, prepare to defend your village against the intruders, take flight, or remain and hope for the best. Regardless of how you acted, at least you knew you were acting on good information.

By contrast, there is the second type of information, that which Bill calls ‘public information‘. This is the sort of information that people believe is ‘true’, but only tangentially and without having personally observed it.

In other words, it is extremely poor-quality information, the sort of thing regularly ginned up in modern times by the media to attract eyeballs on advertisements, or promoted by politicians or businesses to further their own interests.

It’s Bill’s hypothesis that because the evolution of the human mind occurred against a backdrop of life-and-death decision-making based on hard information, our modern minds are genetically ill-equipped to deal with public information.

In other words, we evolved trusting that the information we were receiving was reliable, leaving us susceptible to believing that substantially all the information we receive today is reliable.

Making the point, Bill referred back to the case of the villagers being alerted by a fellow villager to a pending attack. So alerted, the villagers knew all they needed to know in order to decide which of the aforementioned actions to take.

But what happens when, in today’s world, someone comes running into the virtual village shouting ‘The globe is warming, the globe is warming?’ Or, ‘The economy needs quantitative easing!’

Because of the entirely understandable evolutionary precedent that we pay attention to hard information or risk being erased from the genetic pool, the human mind is essentially wired to accept that the threat from global warming is real…or that quantitative easing is needed. Or that Iraq somehow posed a threat requiring the spending of trillions of dollars and wasting untold lives to blow it to pieces.

How can we really know that any of this public information is true? We can’t. Yet with a sufficient amount of arm-waving in the global media, large swaths of the populace accept the information as true, setting in motion a giant snowball of political policy and the attendant massive misallocation of resources.

As a related aside, during the two-day break between the events, Doug and Ancha Casey, John Mauldin, and I made the trip to Bill Bonner’s estancia – a fairly grueling four-and-a-half-hour drive on bad roads (and in some parts, no roads at all) into the mountains above Cafayate.

Like many of Bill’s friends, I was never quite sure why anyone would want a home on a property that is a seven-hour drive from the nearest commercial airport, and most of the drive on washboard roads. But when you get there, you understand.

The estancia encompasses a massive and surprisingly verdant valley – I think on the order of 200,000 hectares – a veritable Shangri-La stretching as far as the eye can see.

Now, Bill is a pretty well-off guy, but unlike many people who have amassed considerable wealth, Bill generally shuns the superficial trappings in favour of simple pleasures and in undertaking hands-on projects that are anything but simple.

For instance, along with his sons and a couple of gauchos, he designed and built a small villa with three vaulted ceilings, using methods perfected by the Romans (he got the basic idea from a book on Roman architecture).

Very impressive, but more to the point, over the course of his life and his many studies, Bill has become a sceptic about much and maybe most of what he hears in the media, or that spews forth from the mouths of the politicians. Instead, he has developed a Missouri-like attitude of needing to observe something himself before believing it.

The important idea that Bill shared and that I am trying to share, is that if you take the time to step back and analyse the information you receive and parse it into that which you know to be true based on your own observations, as opposed to what is popularly accepted as true simply because it was printed in a news journal or said in a broadcast, your attitude about many things may change.

It may take some time and practice to hone your skills in separating discernible facts from public information that may actually be utter fiction…but the payoff in adopting this attitude can be significant.

In addition to saving yourself time and worries by mostly ignoring public information, learning to discern the difference between the two can lead to better decision making, in your everyday life and in your investments.

As a case in point, during the conference here, someone in the audience asked a question about quantitative easing.

Doug Casey took hold of the microphone and replied along the lines of, ‘People need to stop using constructs such as ‘quantitative easing’. Those are just terms that politicians have come up with to obfuscate the truth. The proper term for quantitative easing is currency debasement, plain and simple.’

Going back to the observable, we know from history what happens when a king or officialdom adopts a policy of energetic currency debasement: the currency units being debased invariably become worth less and less.

There is no example in history where debasing a currency doesn’t drive the purchasing power down over time. And certainly none where debasing a currency causes it to appreciate over time.

Jumping back to public information, ‘everyone’ knows that the US dollar is king…the best car in the junkyard, the two-ply toilet paper in a world where all other currencies are mere single ply. But is that accepted truth actually true?

Take a look at the following two charts, taken from the presentation that Frank Trotter, president of EverBank Direct, gave in Cafayate. The first shows the US dollar against 19 major currencies. It’s hard not to note that the mighty dollar has been in a long-term downtrend.

The second of Frank’s charts shows the one- and ten-year performance – through 2012 – of some of the EverBank World Currency team’s favourite currencies against the US dollar.

Of course, not shown in this mix is the performance of gold, the über-currency, over the same time periods. In 2012 gold rose by only about 3.5%, but for the ten-year period, it rose from $278 to $1,657, a gain of about 500%.

I want to toss out one more item of observable information as it relates to today’s economy, political environment, and the outlook for the US dollar.

The chart here is of federal spending in trillions of inflation-adjusted dollars. That means that the increase in spending shown accurately reflects the growth in government in real terms (as opposed to reflecting the decline in purchasing power from the currency debasement).

It also shows the scale of the purportedly draconian cuts in federal spending to be made as part of proposed austerity measures…revealing all the hand-wringing about the severe consequences of said cuts as just so much public information…or, if you prefer, misinformation.

Better to cling to the facts you know, rather than the ‘facts’ that circulate in the public domain.

Regards,

David Galland
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

From the Archives…

Gold Demand: The Great Disconnect Between Paper and Bullion
26-04-13 – Greg Canavan

Lest We Forget
25-04-13 – Greg Canavan

Praying for Government Incompetence
24-04-13 – Bill Bonner

The Cracks in Solidarity at the Recent G20 Gabfest
23-04-13 – Greg Canavan

How Central Planners are Committed to Ruining the Economy
22-04-13 – Joel Bowman

Similar Posts:

More articles from The Daily Reckoning….

The Market Ticker – Ok, The Cops Are Incompetent. I’m Supposed To Be Shocked?

April 30, 2013 by · Leave a Comment 

By Karl Denninger, The Market Ticker

Gee, who could have come up with this one?

Sue Lund lives about five blocks from where police engaged in a wild shootout April 19 with the two Boston Marathon bombing suspects and about eight doors down from where the one who escaped alive was found 18 hours later.

Yet, during the all-day manhunt, she said police never searched her Franklin Street home or garden shed in Watertown, Massachusetts. Ten other neighbors had the same story and said they didn’t know of any homes that had been searched on Franklin, where Dzhokhar Tsarnaev was discovered by someone on the street about 30 minutes after an area lockdown was lifted.

So let’s see if we got this right.

The cops unconstitutionally locked down a 20-block area.  This was not a case of “hot pursuit” where a valid exception exists to the 4th Amendment — they had no idea where the bad guy was, other than the general area where they saw him last.  That does not give license for what was done in Watertown.

But then to add to that they were both incompetent in that they didn’t search a street inside the perimeter, they lied about the fact that the boat was inside the perimeter and in addition the cops fired without having acquired a target and without having taken fire themselves when they shot up the boat.

The defendant had no weapon; he clearly did not shoot at the cops first.

In addition remember that the cops claimed the boat was outside of the perimeter.  That, it turns out, was a lie.  

How many lies do you get for free if you’re a cop?  

My answer is ZERO!  What’s yours?

Something might have spooked the police, who fired 30 or more rounds and lobbed flash grenades at the boat on the trailer. The burst of bullets shredded the hull and hit neighboring houses, residents said.

That’s a crime — by the police.

Law enforcement is only allowed to use deadly force to defend themselves.  They are not allowed to shoot without having a lawful target to shoot at.  The alleged perpetrator was unarmed and not moving; hell, he was barely alive!  He therefore could not have provoked the more than 30 rounds and flash-bang grenades that were fired at the boat and both shredded it and hit neighboring houses.

If you or I started popping off rounds at someone’s boat and/or hitting their house without having an identified and lawful defensive target for our shots we would be arrested and tried for a whole host of crimes.  In most states (including Florida) it is a criminal offense, for example to shoot across a paved road or over or through an occupied dwelling except when necessary in self-defense.

Never mind the fact that it is utterly common for the cops to fire dozens or even hundreds of rounds and hit nothing (or close to it!) that they were allegedly aiming at.  Examples abound including the two Asian ladies in California during the Dorner fiasco and the member of New York’s “finest” who used his partner as a human shield and STILL failed to hit the alleged perp, striking several innocent bystanders instead.

The law is not different for the cops in this regard than it is for ordinary people.

I HAVE ONE SIMPLE QUESTION: WHERE ARE THE DAMNED INDICTMENTS?

And finally, since I’m in a snarky mood this evening, I have one more question:

Why should the people respect law enforcement when law enforcement officers refuse to respect the law themselves and nobody will prosecute them for their violations of same?

More articles from the Market Ticker….

Fed Seen as Unlikely to Expand Asset Purchases; Jobs Metric Flawed

April 30, 2013 by · Leave a Comment 

The Federal Reserve is making modest progress in its push to reduce the unemployment rate. But that is not the jobs goal Congress actually established for the Fed. The central bank is supposed to be maximizing employment. And on that front, it is not making progress…. there are several reasons officials remain reluctant to do more. The benefits of additional asset purchases appear modest, at best. The consequences of buying more bonds are uncertain. And officials are frustrated that their monetary policy is being forced to play a role that most economists and Fed officials say could be more easily and effectively performed by fiscal policy. Another reason the Fed is not embracing new measures is that it already has tied the duration of low interest rates to the unemployment rate. The Fed said in December that it intended to hold interest rates near zero at least as long as the unemployment rate remained above 6.5 percent, provided that inflation remained under control. The theory is that the economy will get as much stimulus as it needs. …But recent research by two Fed economists suggests the current plan will not work if the Fed begins to reduce its efforts when unemployment falls below 6.5 percent, because that is not low enough to draw people into the job market. The economists, Christopher J. Erceg and Andrew T. Levin, both on leave at the International Monetary Fund, calculated that the number of people who wanted jobs but were not looking now exceeded the number actively searching. “It’s safe to ignore the participation rate during normal times,” Mr. Levin said earlier this month at a conference held by the Federal Reserve Bank of Boston, where the paper was presented. “Our message is that it may not be safe to ignore it now.”

Read more….

Moody’s: ‘Less Than Impressive’ Consumer Spending Proves Economy Is Slowing

April 30, 2013 by · Leave a Comment 

“”Utilities made up a pretty decent chunk of spending,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “When you extract from that, spending was less than impressive in March. The economy is slowing.””

Read more….

Neil Macdonald: The ‘monarchs of money’ and the war on savers

April 30, 2013 by · Leave a Comment 

“Very deliberately, the central bankers have punished savers, pushing interest rates so low that any truly safe investment — and older people are always advised to play it safe — yields a negative return when inflation is factored in. British pensioners Judy White and her husband Alan, at their home in Teddington, south of London: ‘I now have 50 per cent less.’ The policy has savaged pension and savings returns worldwide, but particularly in Britain, a nation of savers and pensioners.” — An excellent and rare mainstream media article focusing squarely on central bankers and calling them to task.

Read more….

Welcome Back Recession: Chicago PMI Implodes To 49, First Sub-50 Print Since September 2009

April 30, 2013 by · Leave a Comment 

“Total collapse. That is the only way to explain what just happened with the Chicago PMI which imploded from 52.4, and printed at a contractionary 49: the first sub-50 headline print since September 2009.” — Merely a flesh wound, we’re sure.

Read more….

U.S. private sector job increase smallest since Sept – ADP

April 30, 2013 by · Leave a Comment 

“U.S. private-sector hiring slowed again in April as companies added the fewest employees in seven months, the latest sign the economy is encountering a soft patch, a report by a payrolls processor showed on Wednesday. Businesses added 119,000 employees to their payrolls last month, according to the ADP National Employment Report, falling short of economists’ expectations for a gain of 150,000 jobs. It was the smallest gain since last September.”

Read more….

Is the Housing Market Beginning to Cool Down?

April 30, 2013 by · Leave a Comment 

The latest report from the National Association of Realtors shows that Pending Home Sales, which represents signed contracts, rose for the month of March to the highest level in three years. The seasonally adjusted index increased 1.5% to 105.7 and is the highest since April 2010 and 7% higher than the same time last year. According to Lawrence Yun, Chief Economist of NAR, there are signs that the housing market is beginning to cool down due to limited supply, not demand. Case-Shiller reported that the price of single family homes across the country rose 9.3% through February and was the biggest increase since May 2006. Higher home prices may be wiping out the affordability factor that home buyers would normally see along with low mortgage rates. In another report, Personal Income climbed 0.2% in March, according to the Commerce Department. This was a drop from 1.1% in February. Consequences of the sequestration are only beginning to appear. The Bureau of Economic Analysis also reported that U.S. personal spending increased 0.2% in March which was down from 0.7% in February. It appears that consumers are feeling the affects of the increased payroll tax that took place in January. Consumer spending is the biggest source of U.S. economic growth and accounts for approximately two-thirds of economic activity. The Conference Board reported that the consumer confidence index climbed to 68.1 this month from 61.9 in March. However, on the down side, consumers were less hopeful about the ability to find another job. This index is a long term indication of where the economy is headed. Before the recession, the index was around the 100 mark. The present situation index, which measures how consumers feel at the current time, hardly changed due to less optimism about the labor market. Is housing cooling down because of inventory or other economic factors? Savings remains scarce and fell to 2.6% from 4.7% in the fourth quarter. “The strong first quarter gains in consumer spending…are not sustainable, given the draw-down of personal savings,” Nariman Behravesh, chief economist at IHS, said ahead of Monday’s release. Personal consumption expenditures (PCE) grew 0.2% in March which was down from 0.7% in February. The small increase was due to fuel. The price index for PCE is one of the Fed’s preferred measures of inflation, which they aim for at 2%, and was up 1.0% year over year in March. The index actually fell 0.1% on a monthly basis. With this in mind, it seems inevitable that the Feds will continue with quantitative easing (purchase of $85 billion in Treasuries and mortgages a month) in order to provide stimulus. This stimulus is keeping mortgage rates down which is making it possible for many homeowners to refinance through traditional mortgages or through the Home Affordable Refinance Program (HARP). Expanding HARP for everyone, which has not been approved, would at least help those who are being locked out of refinancing due to tight lending guidelines. Home purchases may be suffering because of low inventory, but consumers personal finances may also be a factor. Incomes are not increasing in any significant way, yet home prices have been going up. At the same time, the popular first time home buyer program, FHA loans, has made it more difficult for consumers to purchase a home. With incomes flat and savings down, even the low 3.5% down payment requirement is becoming difficult to achieve. The Feds have good intentions through quantitative easing; keep rates down, let homeowners refinance and put money back in their pockets, improve the housing market so that more consumers will want to purchase homes which will increase the need for jobs. Instead, jobs in housing industry, which includes construction and special trades, are limited; banks haven’t gone along with the program and still have tight lending standards; and cash deals by investors have been driving home prices up to a point that many residential home buyers may no longer be able to afford homeownership. According to the Census Bureau, the rate of homeownership declined to 65.2 in the first quarter of 2013 from 65.6 in the fourth quarter of 2012 and hit the lowest level in 17 years (first quarter of 1995). The vacancy rate also declined 0.2% from a year ago and 0.1% from the fourth quarter of 2012. Now that corporations have begun investing in homes, are we going to become a nation of renters? Are we heading for another housing crisis if these major investors decide to get rid of these homes? FreeRateUpdate.com researches and reports advertised rates of active lenders within the FreeRateUpdate.com network.

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