On the Fed, the Keystone Pipeline & the War On Jobs

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
March 26, 2013

IN THIS ISSUE:

1. Bernanke Signals a Change in QE

2. Fed Lowers Forecast for the Economy

3. Economy May Be Gaining Momentum

4. This Still Doesn’t Feel Like a Recovery

5. Keystone Pipeline – the Real Story

6. Hanlon Investment Management Revisited

Did Bernanke Signal a Change in QE?

The Fed Open Market Committee (FOMC) met as scheduled last Tuesday and Wednesday to review monetary policy and its massive “quantitative easing” effort. The official policy statement released at the end of the meeting on Wednesday was little changed from those in previous months.

The FOMC voted to continue the monthly QE purchases of $40 billion in mortgages and $45 billion in Treasury bonds until the economy gets stronger. The statement also repeated that these unprecedented purchases would continue until the unemployment rate falls to 6½%, suggesting that QE would most likely continue at least through 2014, assuming inflation remains low. As expected, stocks rallied on the news.

But then at the press conference after the meeting and the release of the policy statement, Fed Chairman Bernanke delivered a “curve ball” that hasn’t gotten much coverage in the media. He announced that the Fed will adjust the amount of monthly bond purchases according to how it sees economic conditions.

In other words, if the FOMC views that the economy is continuing to improve with stronger payrolls and lower unemployment – not necessarily 6½% – that could lead to a decline in Fed bond buying, from $85 billion a month to something lower, so long as the economy keeps looking better.

So while Bernanke suggested that the Fed Funds Rate will remain near zero indefinitely, the size of the monthly mortgage/bond purchases could come down much sooner if the economy is viewed as improving by the FOMC – perhaps as early as the second half of this year.

And it’s worth noting that a mild economic upturn may be in the cards, perhaps driving GDP above 2% by the end of the year. Lower jobless claims, stronger housing numbers and a rebound in the index of leading indicators recently point to at least a mildly improving trend in the months ahead, barring any surprises.

I don’t know for sure how the equity markets will react if the Fed announces it is reducing its monthly QE purchases; it certainly will depend on how much and how fast. But as for me, I welcome the news.

The question remains as to whether the Fed will actually sell any of its massive securities holdings which will top $4 trillion by the end of this year. I have not found anything that indicates the Fed is obligated to sell these securities before maturity. If you have seen anything to the contrary, please send it along.

Fed Lowers Forecast for the Economy

The FOMC also released new estimates for GDP this year and next. Real GDP this year is now expected to grow 2.3–2.8%, versus a December 2012 forecast of 2.3–3.0%. Real GDP next year is projected to grow 2.9–3.4%, versus an earlier forecast of 3.0–3.5%; and real GDP in 2015 is expected to grow 2.9–3.7%, versus an earlier forecast of 3.0–3.7%.

The Fed also revised its forecasts for the US unemployment rate. The Fed predicts that the unemployment rate will stay above 6.5% for about two more years. The Fed expects the rate to fall to 7.3–7.5% by the end of this year. By the end of 2014, the Fed expects the rate to be 6.7–7.0%. The current unemployment rate is 7.7%.

The Fed’s latest economic forecast doesn’t see the unemployment rate falling to 6.5% until sometime in early 2015. Maybe this explains why Bernanke changed his position on when the Fed would start reducing its bond buying spree.

Economy May Be Gaining Momentum

On Thursday we get the third and final estimate of 4Q GDP. You will recall that in late January, the Commerce Department reported that 4Q GDP actually declined by 0.1% (annual rate). Then in late February, it revised that number up to a positive 0.1%. The consensus is that Thursday’s report will be revised again to +0.3%.

If Thursday’s GDP report comes in at 0.3%, that will mean the economy grew at an annual rate of only 1.68% last year. If so, that would be the worst year since 2001 when GDP rose only 1.1%. However, there is growing evidence that GDP growth in 2013 will be better. A growing number of forecasters are predicting that we could see 3% growth for all of this year.

I’m not that optimistic yet, nor is the Fed, as noted above, but there are some signs of improvement in the economy, especially in the housing market. Housing starts were released last week and confirmed that the trend in housing is still upward. Single-family housing starts rose to a 618,000-unit pace, the fastest rate since June 2008, with multifamily starts also rising for the month. Forward-looking building permits are now up over 30% on a year-ago basis.

Housing Starts

Existing home sales rose to a 4.98 million-unit pace in February, which is quickly approaching its long-run trend. The share of distressed sales fell to 25% in February, down from 34% in 2012. New home sales fell modestly, down 1.6% last month, to a seasonally adjusted annual rate of 313,000.

Despite the dip in sales, the median sales price for new homes surged 8% in February to $233,700. Part of the reason for the price increase is the fact that only 150,000 new homes were for sale in January and February – the lowest on record dating back to 1963. The supply of new homes on the market has consistently fallen over the past two years.

The share of “under water” homeowners (with mortgages exceeding the value of their homes) has dropped from 21.2% in mid-2009 to 14.8% in the 3Q of 2012, according to Moody’s Analytics. The number of US homes repossessed by lenders last month fell 11% from January and declined 29% from February last year, tumbling to the lowest level since September 2007, according to RealtyTrac.

This Still Doesn’t Feel Like a Recovery

According to the National Bureau of Economic Research (the group of academic economists who set dates for the beginning and end of business cycles), the US economy has been in a recovery since mid-2009. That’s when the recession that began in late 2007 is deemed to have ended. But for many Americans, if not most, it hasn't felt like a “recovery.”

While the recovery officially started in mid-2009, GDP growth for all of that year was -3.1%. 2010 saw growth of only 2.4%, followed by a dismal 1.8% GDP in 2011. As noted above, 2012 will likely be another sub-2% year for GDP. These numbers don’t feel like a recovery.

Overall GDP has surpassed its pre-recession peak in 2007, but by only a meager 2.5%. Although 5.7 million payroll jobs have been created from the low point in 2009, we lost 8.9 million jobs in the recession, so total employment remains 3.2 million short of its pre-recession level. Steep unemployment (7.7 percent in February) has kept the share of workers jobless for six months or more stubbornly high at 40% of total unemployed.

Although the economy satisfies the technical criteria for “recovery,” it feels like it’s still stuck in recession territory. A new Pew Research Center poll on the economy found that 33% of respondents report “hearing mostly bad news,” with only 7% “hearing mostly good news” and 58% acknowledging a mix.

Economic writer Robert Samuelson (syndicated by The Washington Post) may have said it best: “It's a ‘recovery’ but it’s not; the ‘recession’ is over but it isn’t.

Keystone Pipeline & Dems’ War On Jobs

President Obama has steadfastly opposed the construction of the Keystone Pipeline largely due to pressure from the environmentalist groups in his base. On the other hand, labor unions – also a big part of his base – want the pipeline built since it would generate tens of thousands of direct jobs and over 160,000 in indirect jobs. What’s Obama to do?

The reality is that a majority of Democrats in Congress also oppose Keystone. But why? John Fund of National Review Online wrote the best article I’ve seen on this topic last week, and I have reprinted it below. This should clear up the Keystone issue for all of us.

QUOTE:

The War on Jobs
by John Fund

Senate Democrats finally released their first budget plan in four years this month: It offers nearly $1 trillion in new taxes, an end to sequester budget savings, and almost no new spending restraint. Despite the failure of the 2009 stimulus package, Democrats also want an extra $100 billion to create jobs on infrastructure projects, few of which would be “shovel-ready” enough to hire workers anytime soon.

President Obama won’t release his own budget till April, but he has a golden opportunity to improve on the Senate budget and create real jobs. All he has to do is end his four-year delay in approving the Keystone XL pipeline, which would bring crude oil produced from Canada’s oil sands to refineries on the Gulf Coast. It is already “shovel-ready” — portions of it are already under construction. And because it’s being built by private-sector companies, any new pipeline jobs would come at zero cost to the taxpayers and the economic activity created would provide significant tax revenues.

Keystone has been completely scrubbed environmentally. Four government reports have been issued on its impact, all with essentially the same conclusion. The latest came this month, from the U.S. Department of State. It raised no major objections and concluded, as AP notes, “Other options to get the oil from Canada to U.S. Gulf Coast refineries are worse for climate change.” Nor will all the piped oil be Canadian: Keystone will provide a safe, reliable method of transporting 250,000 barrels of oil a day from the Bakken fields of North Dakota to refineries.

Man beside large oil pipe.

A key finding of State’s report is that the Canadian oil fields are so big — the world’s third-largest reservoir of oil — that they will almost certainly be developed. The question becomes whether the oil will be sent south to the U.S. by our friendly Canadian neighbor or shipped west to China and other Asian powers. Estimates show that for every dollar of oil that North America imports, we receive only 10 percent of the economic benefit — the economic activity the oil is used for. The rest of the money stays with the Venezuelans, Nigerians, and Saudis who pumped the oil. In contrast, when you add up oil-production costs, sales, and downstream jobs created by oil production, the domestic benefit from oil pumped from North American sources is roughly 80 to 90 cents of every dollar of oil revenue.

Every one of the governors along the Keystone pipeline’s route now backs the project. They predict that the $5.3 billion project would create 16,000 direct jobs and an estimated 163,000 jobs in indirect employment.

So why is the Obama administration resisting the pipeline? Before the election, Obama punted for fear of alienating pipeline opponents, including environmental donors and the Sierra Club. Since the election, bureaucrats in his Environmental Protection Agency have proposed withholding approval of Keystone unless Congress agrees to some kind of a carbon tax in exchange.

A carbon tax is clearly on the drawing boards of the Obama administration. A series of Treasury Department e-mails obtained by the Competitive Enterprise Institute under the Freedom of Information Act show that Ian Parry of Treasury’s Fiscal Affairs Department has openly advocated a carbon tax for the purposes of “raising revenue and putting it to good use.” He proposes a carbon tax of $25 per metric ton, which is roughly in the range of the tax proposed in Congress by Representative Henry Waxman, the ranking Democrat on the House Energy and Commerce Committee.

But Obama faces real pushback from labor unions within his coalition, who covet the many union jobs Keystone would create. Many would be in construction, the sector of the economy that was hardest hit by — and has yet to recover from — the collapse of the housing bubble in 2008.

Last year, a total of 69 House Democrats broke with Obama to support the Keystone project, with the overall bill passing by 293 to 127 — more than enough to override a presidential veto. In 2011, fewer House Democrats — 47 — had voted to defy Obama and back Keystone.

In the Senate last year, Majority Leader Harry Reid used a filibuster to block Keystone. But eleven Democrats broke party ranks to back the pipeline, and other pro-pipeline Democrats, such as Virginia’s Mark Warner, backed the filibuster only after personal pleas from President Obama.

Red-state Democratic senators who will be up for election in 2014 are strongly pressuring Obama to soften his stance on the pipeline. But there is no doubt that Obama’s environmental allies would explode in fury if he retreated. In January, Sierra Club executive director Michael Brune announced that his group would, for the first time in its history, participate in acts of civil disobedience to block Keystone. Sierra’s view of the best U.S. energy future is very clear: In a recent debate on Minnesota Public Radio, Brune supported keeping two-thirds of all of the world’s oil, coal, and natural-gas reserves “in the ground.”

In theory, liberals are in favor of creating jobs, but in reality, even jobs that pass strict environmental-impact reviews are too “dirty” for their taste. They also turn up their nose at the tax revenue those new jobs would create. In the end, liberals evidently believe that only government can create, or provide incentives to create, the “clean jobs” of the future. In the non-clean-jobs sector of the economy, and for workers unlucky enough to have jobs in politically incorrect industries, the government restrictions that liberals support will lead to a low-growth, lower-wage future. [Emphasis added.]

Conservatives need to highlight that opposition to Keystone is demonstrably anti-worker. You can’t promise to create jobs while doing your utmost to kill them. The way to divide Democratic voters from their Washington leadership is to reveal this internal contradiction at the heart of the budgets Democrats are finally putting on paper. [Emphasis added.]

END QUOTE

Hanlon Investment Management Revisited

In my January 8 E-Letter, I introduced you to Hanlon Investment Management and its “Managed Income Program.” As the name implies, this managed account investment is designed with the goal of producing a steady stream of income with minimal principal risk.

Hanlon’s tactical approach makes allocations among just about any type of bond based on their outlook for future performance, or moves to cash if no bonds are considered attractive.

While Hanlon’s forte is income, it can also be a way for conservative growth investors to get back into the market without the risk inherent in stocks. I know many investors who are sitting in cash, and Hanlon’s Managed Income Program may be a great alternative, what with stocks at record highs.

Go to the following link to learn more about Hanlon’s Managed Income Program on the Halbert Wealth website. If you are looking for a more conservative way to get your money off of the sidelines and into a program with the potential for growth and capital preservation, Hanlon may be just what you’re looking for.

And just in case you’re wondering about the other bond-based investments that we recommend, all employ active management strategies that seek to manage and minimize risks associated with the volatility likely to come along with a bear market in bonds. Some even seek to take advantage of falling bond prices when interest rates begin to rise.

If you are currently invested in a buy-and-hold bond strategy as part of your asset allocation, I believe your portfolio is living on borrowed time. Long-term interest rates have already started moving higher. I highly recommend that you consider replacing your current passive bond investments with Hanlon or one or more of the following actively-managed bond strategies that are designed to take bond market volatility in stride:

Columbus High-Yield Bond – Tactically manages high-yield bond mutual funds.

Equity Alternative – Long & short 30-year Treasury bond mutual funds.

Hg Capital Long/Short Govt. Bond – Long & short 30-year Treasury bond mutual funds.

Wellesley Convertible Bond – Fundamental “value style” management of convertible bonds.

The bond strategies above can work on a stand-alone basis or when combined with other stock and bond strategies in your portfolio. To learn more, give one of our Investment Consultants a call at 800-348-3601 or send us an e-mail at info@halbertwealth.com.

Wishing you profits in these crazy markets,

Gary D. Halbert

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Fed’s Dudley: $85 billion a month bond purchases must continue indefinitely

Fed’s Fisher: Bond buying program must be reduced