Spinning fantasies is catching on globally. Here’s how Bank of Japan Governor Haruhiko Kuroda addressed the audience at a recent conference discussing the state of affairs in that country:
“The issues I have raised so far are all complex, and there are no quick, definitive solutions for them. Nevertheless, I strongly believe that, at this one-and-a-half day conference, we will address the issues we currently face and find our way forward through lively discussions. I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it.’ Yes, what we need is a positive attitude and conviction. Indeed, each time central banks have been confronted with a wide range of problems, they have overcome the problems by conceiving new solutions.”
Mr. Kuroda is having about as much luck with money printing there as the Fed did here. It is not working to drive the real economy towards sustainable growth and it has also fouled up the functioning of the local bond market. With the pressure building, apparently the BOJ thinks that all the long-suffering Japanese need to do is think “happy thoughts.” It’s not the policy; it’s the mental state of the people who just don’t get the wonders of QE according to Kuroda’s reasoning. His comments suggest exasperation and fatigue to us.
We had mentioned in our prior letter that political winds were blowing against Fed policy and in May it became crystal clear that it too is feeling intense pressure. GDP growth for the first half of this year is looking pretty close to 0-1%. In addition, inflation, according to the Fed’s favorite measure, Core PCE (Personal Consumption Expenditures) is running at a historically low 1.2%. Remember, for whatever reason, the Fed wants us all to pay more for things, so that inflation number does not make it happy.
To combat uneasiness, the powers-that-be have decided to delve further into the absurd to make their angst over QE’s ineffectiveness go away. Last month, the San Francisco Fed, the former home of Ms. Yellen, released research that declared that seasonal adjustment factors were to blame for weak first quarter GDP data. Apparently, that data, which is already heavily massaged to account for the typically lower economic activity during winter months, needs to be seasonally adjusted some more in the researchers’ estimation. Quite soon after that release, the BEA (Bureau of Economic Analysis) said it was re-working the numbers.
GDP data had already been doctored in recent years to include intangibles. Anything for the perception of growth! Over in Europe the deciders have taken to estimating illegal drug and prostitution spending and adding those to GDP. We are not joking. After all, given the wonders of extreme central bank policy, it simply could not be possible that growth was negative in the winter quarter in the U.S now could it? Fed Chair Yellen has not employed a fairy tale analogy yet like Mr. Kuroda, but she does not mind if what many consider to be the most important indicator, the quarterly GDP estimate, turns into one.
Most of the other economic reports across the globe have come in decidedly weak for much of this year. We have looked at a lot of earnings releases the last few weeks and read company comments in many industries. In general, those views are closer to the GDP numbers before the BEA has another “whack” at them. Most retailers not only reported poor sales for the first quarter, they sounded less than optimistic for the second. In addition, capital goods orders are slow and the industrial economy seems softer than the surveys or employment numbers suggest. W.W. Grainger, a leading industrial supplier, just reported that last month’s daily sales were flat versus May 2014. That does not happen very often. It makes sense though because industrial production has grown at only 1.4% over the last year. Elsewhere, wholesale inventories are entirely too large relative to sales.
The Atlanta Fed second quarter GDP estimate is now running at only 1.9%. Rail traffic was down 0.6% for the first five months of this year. True, auto sales were quite strong for May, but that period included an extra weekend and unusual employee discounts for the masses to “move some metal.” Subprime lending and extended loan terms are other big supporting factors, but dealer inventories are now high. You do have to read the fine print or you might think it was real organic sales growth. The May employment report had the typical strong headline number, but only 7,000 manufacturing jobs were added in a continuation of a weak trend. That is not getting it done, yet the Fed wants to “Peter Pan” its way to into its tiresome sustainable growth propaganda mode in spite of the preponderance of evidence that suggests otherwise.
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