Escape Velocity

The luckiest member of the club, yours truly, was recently fortunate enough to witness this mise en scène one early fall day.

“No,” he said, raising his arm Caesar-like to still the murmuring plebeians in the gallery.  “It is part of my plan.” 

He had used the driver to carry a creek and reach the right fringe of the 164-yard par three.  Choosing his two-ball putter, he navigated the bristly grass to the putting surface but left the ball woefully short, some 30 feet from the hole.  The country club crowd groaned.  Saving par seemed gone with the wind to the Dixie gentry surrounding the kidney-shaped green.

Surveying the slick pool table from every angle, his cool gaze hidden by Ray-Bans, a wry smile cracked the usual steel of his face.  Square in the line of his intended roll laid a crinkly, brown leaf, late of some thirsty dogwood.  The smile on his lips belied the click of tumblers locking into place in his calculating brain.

He addressed the dimpled sphere with something akin to insouciance.  But the expression was tinged with resignation, cuing the parasol-wielding ladies to cluck and the aristocratic Ashley Wilkeses watching the spectacle to shake their heads in sympathy at our foolish Rhett Butler.

Without a practice stroke, he launched the blade.  The ball marched on a straight line to the hole, the dogwood leaf standing athwart history and yelling “Stop!”  This was no Titleist poodle, though.  The determined Top-Flite tank  struck the impediment and veered up a hillock to the devilish location of the hole atop it.  With the satisfying rattle of ball in cup, parasols were flung in the air and shouts of “Good show, old boy” echoed back to the stately clubhouse, rattling the bourbon-filled coffee cups at a meeting of the Ladies Auxiliary of the Knights of the Mystic Mango.  Even cars that used to skedaddle in fear when their operators saw our hero on the tee box that abuts a city boulevard joined the halleluiah chorus with a torrent of horn blowing. 

Our hero doffed his visor with a “my work here is done” flourish and sauntered away to collect his trophy.

This was an up and down for the ages.  No, it was actually a down and up.  Little did the adoring masses realize that every butcher, baker and candlestick maker among them would soon be traveling the same arc of success.  The reason?  Our hero merely recognized that MV=PQ.  All that was needed was more V, velocity, that is, to find the sweet spot.  M, money supply, had been growing, but PQ, price level times quantity of goods and services, had remained anemic.  Velocity, the number of times a dollar is spent, hasn’t done its part – yet.

If history is any guide, V is about to begin pulling its weight.  Here’s a chart courtesy of the St. Louis Fed.  Shaded areas are U.S. recessions.

What the chart tells us is that velocity typically falls in the early stages of recovery, shooting higher as a “virtuous circle” of growing consumer confidence and generous monetary policy conspire to fuel growth.

What could go wrong?  V could continue to fall, facing the “fiscal cliff” that looms in 2013.  That could turn our down and up par save into down and down triple bogey.

Ben Bernanke, Social Worker

The Western World has become central bank-centric.  While China seems to be furiously ginning up public works projects to support growth, Europe and the U.S. are relying on monetary policy.  Financial markets have taken notice, expecting the money spigots to begin gushing again.

That may be the problem for equity investors.  If new money creation is already baked in the cake, the time-worn axiom of buy the rumor and sell the news could well be in play.  We expect swimming in place to be the trend until decisions from the Federal Open Market Committee and a German constitutional court are announced midweek.

First to the old world.  The European Central Bank authorized unlimited bond purchases last week, making good on ECB chief Mario Draghi’s word to do whatever it took to defend the euro.  But a group of German lawmakers are seeking an injunction preventing German participation in the plan.  The court rules Wednesday.

On this side of the Atlantic, all signs point to what we have been expecting since the summer began – a third round of quantitative easing by the Fed.  It has long been our opinion that the Fed was duty-bound by both statute and conscience to act anew.  With the August jobs report showing a disappointing addition of 96,000 jobs and an unemployment rate pushed down only by an exodus from the work force of the forlorn, it seems the Fed has all the cover it needs to boost money supply growth in the hope it translates into real economic activity.

For his part, Fed Chairman Ben Bernanke made it clear at Jackson Hole the week before that policy makers could and would act if needed, remarking not only on the dry numbers describing the economic landscape but the cost to the social fabric of continued bleak employment prospects.

“As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation.  The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years,” Bernanke said.

He also laid the groundwork for further action by defending the efficacy of the Fed’s prior rounds of extraordinary bond buying.

“For example, a study using the Board's FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs[large-scale asset purchases] may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred,” he said. 

The rubber meets the road Wednesday when the FOMC is slated to announce its policy decision.  At the very least, expect language in the directive extending the time horizon for keeping the Federal Funds rate target close to zero.

As for political considerations, we think they are also zero.  The Republican presidential candidate, Mitt Romney, has already said he would replace Bernanke, a Republican, if elected.  And the lags in monetary policy’s effect on the real economy prevent any palpable help for President Obama before the November election.

Meanwhile, the usual round of economic reports that follow the tone-setting employment data is slated for release.  Inflation news should be of no consequence, despite rising food and oil prices.  The biggest market mover outside central bank actions is likely to be Friday’s release of August retail sales.  Economists expect another 0.8% increase over the prior month.  A shortfall could hit markets hard if the Fed has failed to act.

The Loneliness of the Long-Distance Kicker

The feast of the Epiphany has come and gone. The three kings have followed the star, presented their gifts, genuflected before the new-born king and Christmas trees are now hauled to the curbside in 2010 Anno Domini to become mulch for spring flowers. The tulips will surely come, but the green shoots of economic recovery in these United States still appear vulnerable to a longer-than-expected cold spell.

We are normally an optimistic sort, intent on keeping our summer tan from fading too much, prone to basking in a winter sun when it happens to show its face to ours, but the news makes us dither. The experts, who apparently still have jobs, tell us that the economy needs to generate 100,000 jobs a month just to keep up with the newly employable that these United States produce. However, the Labor Department said another 85,000 jobs were lost last month, and they weren’t all place kickers who failed at crucial moments.

Who in his right mind would become a kicker rather than a right guard? Anonymity in the maelstrom of the trenches surely must be superior to the glare of the spotlight and shanking it wide right as time expires. How many fans miss the pulling guard missing his block and watch the skinny kid stub his toe on a field goal try?

Advice to the jobless: eat many sirloin steaks, milk shakes and performance-enhancing drugs, learn how to zone block and switch schools when a coach leaves after one year (see Lane Kiffin). Oh, this sporting life!

Monetary policy has been loosened to the point of pushing on a string. Fiscal policy has unleashed God knows how many billions, much of it to the royalists doing God’s work on Wall Street. Money borrowed from China has been thrown at the house and car-buying markets, which, ominously, appear ready to dry up when the dough does.

The virtuous cycle is unapparent. The hope was that incentives would jump-start hiring. The job-making engine has failed to turn over. Demand in the aughts proved illusory, driven by cheap credit and the housing bubble. Look for a double-dip recession unless the “guv’ment” (as Huck Finn’s pap put it) gets with the program and puts us directly to work and not rely on giving Goldman Sachs and the like 100 cents on the dollar for what were essentially defaulted insurance policies.

Just as the wildcat formation has brought new life to the staid world of football orthodoxy, it seems that a new New Deal is called for.

Latest NFL picks are coming up. Still cogitating.

Time and Tide

Some think this sporting life we lead is all candy and nuts and a very merry Christmas. Let us let you in on a not- so-secret secret; it’s really ifs and buts, double faults, a chunked wedge shot and a parlay (for entertainment purposes only) that against all advice successfully calls the money line on the Pittsburgh vs. Cleveland game but not the over-under. Ouch, baby.

But all is not lost. Though the Browns and Steelers failed to get near the point total predicted, retail sales last month jumped twice as much as the consensus expected. Things are on the mend in this season of light, though youngsters are still sent marching off into the maw of endless war, perhaps the only job they can land, while, God bless them, Goldman Sachs executives make the sacrifice of taking their bonuses in stock.

We loved the player who walked out on Cincinnati Bearcat coach Brian Kelly when he told his undefeated team at its banquet that he was leaving them in the lurch before the Sugar Bowl game with Florida to take the Notre Dame job. This bold, go-to-hell response from a young scholar bodes ill for the golden domers who desire above all else relevance and enlivens hope for the future of American youth.

We are usually an optimistic sort, believing that the next drive will soar straight into the fairway, that the five-iron will land softly close to the pin and that the birdie putt will rattle into the cup. Is there a more satisfying sound than that rattle? Well, maybe the gentle snore of a well-fed baby, or new-born whippoorwills calling from the hills, as Nat King Cole crooned a million summers ago when summer was a comin’ in but fast.

Where has that world gone? Each generation when it reaches a certain age asks the same question. We recently spoke with a person dear to us who called the closing out of the “oughts” as a lost decade. Not so.

Mark Ingram, the remarkable young halfback from Flint, Michigan, playing for Alabama, tearfully and gracefully accepted the Heisman Trophy last night, ushering in a new decade for us sporting men and women. His next job is against Texas and then on to professional riches. Some 40 years from now, he might be savoring that rattle in the cup.

Earl Weaver's Logic

Investing, gambling, managing a baseball team or confronting a par 5 with water in front have this question in common: When does one pull the plug?

The common rubric in baseball management circles these days is the pitch count. Regardless of the score and situation, once a predetermined limit of pitches is reached, the starter must be replaced with a fresh arm to keep the former from suffering arm fatigue or injury, the prevailing philosophy goes. But this is cookie-cutter discipline. If the object is to win, the best players should take the field. And if the starter is breezing along, why insert an inferior player merely because the starter has thrown x number of pills? Life itself is fraught with unknowns, but this doesn’t prevent the stalwart commuter or mom with a baby carriage from crossing the street merely because they have reached their limit by successfully doing so 10,000 times without getting hit by a bus.

If one is inclined to wager, the common wisdom is to press when ahead and pull back when behind. But this is a loser’s strategy. In effect, the wagerer acknowledges his position and gives up, preferring to dig the hole a little, not a lot, deeper, holding out hope that he can chip away at the deficit. The courage of one’s convictions becomes pale imitation.

When faced with a water hazard on a long par 5, the golfer is faced with the decision to lay up or go for the green (in my case, if all went right, it would be the third shot, but for the more accomplished it might be the second). Discretion may be the better part of valor, but as a poker-playing buddy of mine used to say, “No balls, no blue chips.” Since it’s just a game, it seems silly not to make a Homeric attempt that could result in a birdie or eagle, the psychic rewards of which would dwarf a day of triple bogeys.

The casino called the stock market has been encouragingly resilient this past month. But is it time to take money off the table, just as the baseball manager removes an effective starter or the prudent golfer or gambler lays up or reduces wagers?

The economic data last week were not encouraging. Retail sales were lower than expected. Deflation was evident in the price indices. However, much of this had to do with the decline in energy prices last month. The “green shoots” alluded to by Obama and Bernanke and the profit reports of Citibank and JPMorgan tempered the macro news. Indeed, the New York Fed’s Empire State survey of manufacturing suggested things are not sinking as fast as they have been.

I’m not taking out Sabbathia, not laying up and not cutting back on the wagering front. Look for further gains in stock prices as confidence builds that the worst is behind. Conditions may continue to deteriorate, but at a slower rate, which presages a bottom in the economy. Equity prices rebound before the economy. Sticking with F, AMD, PALM. Consider some REITS, such as DDR, which may be cheap after the General Growth Properties bankruptcy.

Like Earl Weaver, I'm leaving Cuellar, Palmer, Dobson and McNally in. Meanwhile, in our half of the inning, the gun is loaded, as Weaver used to say, and I’m counting on a three-run homer.