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Five Things You Need to Know: Yellen, About Personal Savings, Perception of Wealth, VW Hates Corn, Fed Wins US Open


What you need to know (and what it means)!


Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. What's all the Yellen about?

The Wall Street Journal this morning reported that San Francisco Fed President Janet Yellen yesterday stressed the need for further rate increases if current inflation trends don't ease. We disagree.

  • The common media theme this morning is that San Francisco Fed President Janet Yellen yesterday warned of the potential for additional rate increases.
  • "U.S. stocks ended lower Thursday after Federal Reserve official Janet Yellen hinted at further interest rate hikes," the Associated Press reported.
  • We must have read a different speech.
  • What stood out to us in her comments, apart from the fact bonds mysteriously sold off on her purported tightening bias, is this:
    "With inflation too high, policy must have a bias toward further firming."
  • Stop right there. Now you have your AP headlines. But let's read further.
  • "However, our past actions have already put a lot of firming in the pipeline. These will unfold gradually over time. By pausing, we allowed ourselves more time to observe the data and more time to gauge how much, if any, additional firming is needed to pursue our dual mandate."
  • The main point here is that the FOMC voters, and Yellen is one, are keenly aware of criticism that the Fed typically overshoots with monetary policy.

2. The Yellen is About Personal Savings

We've harped on personal savings quite a bit lately, and the last thing we want to do is beat a dead horse here... well, not the last thing we want to do.... actually, the least thing we want to do is wake up in a pine box in a Mexican cemetery like Michael Douglas' character in the move "The Game," but since Yellen spoke at length about personal savings yesterday we wanted to take another look at the negative personal savings rate.

  • In the U.S., the personal savings rate has been declining for more than a decade, Yellen noted yesterday.
  • During the 1980s, it averaged 9 percent. Can you imagine saving 9%? Wow, that would take a lot of wheelbarrow trips to the bank.
  • "This July, it was all the way down to minus 1 percent," Yellen said. "Frankly," she added, "it's hard to see how it could go much lower."
  • We agree.
  • "So the risk is that a sustained rise could occur, which would put a real crimp in consumer spending and therefore in overall economic activity," she concluded.
  • See, we're all on the same page here. Then, she loses us.
  • "Though there's some uncertainty about why the savings rate has fallen into negative territory, I strongly suspect that part of it is related to the growth in consumer wealth over the last several years both through rising housing values and through rising stock values," Yellen said.
  • By "growth in consumer wealth" she must mean the perception of growth in consumer wealth since that is what rises in home values are... a perception. Unless, of course, one takes that perception of wealth to a bank and offers that perception of wealth up as collateral for loan that allows us to maintain our current level of spending.
  • Unfortunately, if that is true, then the consumer's perception of wealth has already been transferred from a potential future credit to a real, live debit. A debit that must be repaid.
  • Yellen concludes that a reversal in the negative personal savings rate represents a "downside risk for the economy."
  • We believe that's an understatement. Given a reasonable debt load, a reversal in the negative savings rate carries a reasonable downside risk for the economy.
  • Given a staggering debt load, a reversal in the negative savings rate carries a staggering downside risk for the economy.

Chart courtesy and Jas Jain.

3. Perception of Wealth Now Perception of Declining Prices

The National Association of Realtors, which had recently been generally upbeat on the future of the housing market. yesterday issued a more pessimistic outlook for the year, according to the New York Times.

  • The NAR said that it now expects sales to fall further than previously forecast - about 7.5 percent this year compared with an earlier projection of a 5 percent decline, the Times reported.
  • Most importantly, it also said it expected prices nationwide to drop during the next few months, instead of appreciating modestly.
  • That marks a grim, but significant shift, as it would be the first time since 1993 that median home prices have fallen in any given month.
  • For now, the NAR noted, it sees a continuing standoff between sellers and buyers.
  • "The seller is a lot more stubborn than any of us had anticipated," Mr. Lereah said. "Sellers for the last five years have been in control. It's very hard for them to give up control and revise their expectations downward."
  • Once sellers begin to drop their asking prices, housing industry officials hope that home sales will start to rise again, the Times said.
  • They key word there, unfortunately, is hope.
  • Instead, what we are watching for is a more deflationary psychology to set in among homebuyers.
  • No one really knows what will happen should sellers begin to ratchet down prices to meet demand, however, because, as noted above, there hasn't been a national median price decline in any given month since 1933.
  • However, Merrill's David Rosenberg notes that their research has found a tremendous amount of "serial correlation" in home price trends. In other words, what prices did the month before had a large effect on what home prices did the next month.

4. VW Rabbit Eats Oil, Not Corn

Volkswagen on Thursday attacked biofuels made from food crops as unsustainable, setting the German carmaker at odds with President Bush, US carmakers and European governments, the Financial Times reported.

  • Bernd Pischetsrieder, chief executive of Volkswagen, called on politicians to reduce tax breaks for current "first-generation" fuels made in the US and Europe from corn, wheat, rape seed and sugar beet, and increase tax breaks for new second-generation technologies that promise big cuts in carbon dioxide, the Financial Times reported.
  • Mr. Pischetsrieder said some of the current biofuels were "totally pointless" and "like a wolf in sheep's clothing," the newspaper added.
  • Meanwhile, the Environmental Protection Agency proposed an increase to renewable fuel requirements – mainly ethanol – from 2.78 percent of all fuel this year to 3.71 percent next year
  • Mr. Pischetsrieder is the highest profile opponent of today's biofuel technology, the FT said.
  • What exactly is biofuel technology? Basically it is any fuel derived from biomass, recently living organisms or their byproducts.
  • Another way to think of biomass is as a form of stored solar energy.
  • The most common products grown specifically for use as biofuels are corn and soybeans in the US, sugar cane in Brazil and palm oil in Southeast Asia.
  • Opponents of biofuels, such as VW's Mr. Pischetsrieder, have raised concerns about increased leakage of carcinogenic fumes, development of monoculture farms and the danger to rainforests from new palm plantations in developing countries, the FT said.

The Volkswagen 2007 Biofuel Destroyer

5. Fed Sweeps People in Straight Sets 6-0, 6-0, 6-0

An interesting read in the Wall Street Journal this morning from Greg Ip on the Bernanke Fed.

  • According to Ip, Fed Chairman Ben Bernanke is trying to subtly change the way the Fed operates in an effort to depersonalize the Fed by making its decision-making more democratic and easier to understand.
  • "At Federal Reserve meetings under Alan Greenspan, the chairman would state his recommendations for interest rates. Then the 18 other policy makers would say if they agreed. They usually did," he says.
  • When Fed officials debate the interest-rate decisions now, however, Bernanke speaks last. "Fed officials say it makes them feel freer to talk about what's on their minds, rather than responding to the chairman's views," Ip writes.
  • That's all well and good... more democratic, more transparent, yadda, yadda, yadda. What caught our eye, however, was this subtle distinction: "While Mr. Greenspan played tennis on the Fed's courts with Washington power brokers, Mr. Bernanke plays pickup basketball with the junior staff. He occasionally can be found shooting baskets alone on the Fed's court."
  • Hmmm. Well, what do you know, you learn something new every day. The Fed apparently has their own basketball and tennis courts!
  • Funny, we searched all morning and could barely find a single reference on any Federal Reserve web pages about their fancy tennis and basketball courts, much less a picture. But the atrium sure looks nice.

Fed Atrium , Eccles Building... Looks Like Match Point
Atrium, Eccles Building

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