Alan Greenspan packs up his bags today and says farewell to the job he’s held for the past 18-1/2 years. By several measures, he’s leaving the financial system of the United States in better shape than he found it. The standard inventory of accomplishments on the maestro’s watch includes lower inflation; milder and less frequent recessions; and greater transparency in the business of managing the nation’s money supply.
Call us crazy, but that’s progress by any reasonable definition of enlightened and successful central banking. That said, the maestro’s hardly escaped criticism. Whether it’s the rising trade gap, the march of red ink on the government’s balance sheet, or consumer spending run amuck (by some accounts), critics find much to question. The Fed, of course, has a fairly limited mandate, and relatively few tools at its disposal. As such, we can argue about what exactly is, and isn’t, relevant for assessing a Fed chairman’s record. But this much is clear: Greenspan leaves his successor, Ben Bernanke, with a thicket of rising challenges for which there are no obvious or easy answers in the deployment of the traditional levers of central banking.
For all the triumph that surrounds the retelling of Greenspan’s tenure over the past generation, it’s less than clear that the Fed and its counterparts around the world will be as successful in managing what awaits. The challenge is compounded by the fact that the world is arguably too dependent on the American consumer, an economic force that will be increasingly threatened by its penchant for assuming ever greater piles of debt. Adding to the uncertainty is the fact that Greenspan leaves his replacement with no obvious blueprint for running a central bank. The man who today exits the most powerful job in global finance with his reputation intact has become notable for being a nimble steward of monetary management, espousing no central theorem or rules of play.

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The federal government is a large and sprawling beast, spitting out economic reports as routinely as politicians call press conferences. The only difference in the 21st century being that official statistical releases now come a la carte, and in a variety of flavors. Search for a perspective that suits you, and consume only what you want.
Case in point: If you’re feeling gloomy about Friday’s surprisingly weak report on the economy for the fourth quarter, the ever helpful Treasury Secretary John Snow has a few encouraging words to counter the gloom emanating from that other government agency. “The advanced estimate of fourth quarter 2005 GDP released this morning is inconsistent with the underlying strength of the U.S. economy,” he opined in a press release dispatched after the Bureau of Economic Analysis released the advance estimate of GDP for last year’s October-through-December period.
Not only does Secretary Snow find reason to question BEA’s fourth-quarter analysis, he suggests that an informed observer might do well by looking elsewhere for economic enlightenment. “I would not read too much into today’s numbers,” he counsels. “They are somewhat anomalous, reflecting some special factors.” (Is that Treasury-speak for the BEA goofed?)

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No matter how you spin it, a drop to 1% from 4% is something more than trivial.
The big question now is whether the advance estimate of 1.1% growth for the economy in the fourth quarter portends a recession or merely a slowdown in 2006. Some pundits continue to think that neither is coming. Then again, weren’t we warned recently of darker days ahead via the inverted yield curves?

In any case, there are the numbers to digest; taken at face value, they paint a troubling profile. GDP rose at the slowest pace in three years in the last three months of 2005, the Bureau of Economic Analysis reports. Digging deeper, the stats only get worse, starting with the massive 17.5% fall in durable goods purchases in the fourth quarter–the biggest decline in 18 years. And while consumer purchases kept rising during October through December, they did so at a slim 1.1% pace, or the slowest rate of ascent since the last recession in the second quarter of 2001.

To say that economists were surprised by the GDP report is something of an understatement. The consensus forecast called for a 2.8% rise. The fact that the actual number came in at only 1.1% tells of the vast disconnect between expectations and reality.
The question is whether the advance GDP report constitutes reality, a line of inquiry that’s found much attention today in the wake of the economic news. Knowing full well that each and every GDP report is revised, some are holding out the hope that today’s 1.1% fourth-quarter rise will evolve into something more encouraging when the government dispenses the so-called preliminary report and then the final one.

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The general assumption regarding the current Fed policy is that the central bank’s intent on cooling the housing boom. Until and if the real estate market cries “uncle,” the central bank will continue raising interest rates. At least that’s the theory, and as theories go it’s as good as any, which is to say it’s in play until proven irrelevant.
As for facts, the housing market in particular has been on a tear in the 21st century, the fuel being the easy credit that became standard of recent years. Meanwhile, the Fed’s Alan Greenspan has been stung by criticism that the world’s most powerful central bank has been asleep at the switch while two of the greatest speculative booms in history have unfurled beneath its monetary nose.
The first, an extraordinary stock market run in the late-1990s, ended with a bursting of the bubble that for a time looked like it might drag the economy down with it. The Fed barely lifted a finger to slow the rise of excess in the latter half of the nineties, despite the maestro’s infamous recognition of the clear and present danger brewing a la his “irrational exuberance” speech of 1996.
Arguably, there is now another bubble in our presence, this time in residential real estate. But compared to its predecessor, the signs of irrational exuberance are fuzzier, the implications for the economy less distinct. History is clear on what the stock market crashes can do. The deflating of national housing bubbles isn’t nearly as common, nor as deeply studied.
That said, there are signs of late that the housing bubble, if in fact that’s what we’re in, is losing air. Whether the future will bring a slow leak or a crash remains to be seen. For the Fed’s part, it seems fixed on encouraging the former. Yet central banking is a blunt tool, as we’re so often told, and so the best laid plans may yet produce surprises.
In any case, it’s clear that the next five years aren’t likely to look like the past five years when it comes to housing trends. Yesterday’s report on December’s existing home sales is the latest bit of evidence suggesting that cooling is now the operative trend in residential real estate. Last month’s sales fell to the lowest rate since March 2004, dropping a sharp 5.7% in December from the previous month.

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Optimists like to say that there’s always a bull market somewhere. The challenge is deciding where the aphorism applies, and where it doesn’t. As always, there are doubts for each and every asset class. Inevitably, there is hope as well. Beauty and bull markets, in sum, remain in the eye of the beholder. Time is the final arbiter of who’s right and who’s wrong, but waiting ten years is about as practical letting your cat baby-sit the parrot.
Now that we’ve dispensed with the usual caveats, we’re free to point out that commodities, broadly defined, appear to be caught up in a phenomenon that some might label a bull market. In fact, more than a few pundits are applying the term these days, and forecasting that more of the same is on tap. One of the early adopters of this theme has been the celebrated globe trotter/investor Jim Rogers, who jumped on the band wagon early by launching the Rogers Commodity Index in 1998, a contrarian move at the time, given the soaring equity market back then.
In 2006, commodities as an investment look decidedly less contrarian. Indeed, most broad-based commodity indices have done quite nicely in recent years. The Dow Jones-AIG Commodity Index, for instance, gained an annualized 18% a year for the three years through the end of 2005, comfortably above the S&P 500’s 14.4%, for instance. And last year’s performance showed that commodities’ momentum was in particularly strong form, as the chart below reveals.

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It was King Abdullah’s first trip away from home since assuming the throne that oversees the world’s largest reserves of crude oil. It was telling that his first outing beyond the desert kingdom of Saudi Arabia brought him to the Middle Kingdom, widely expected to remain the world’s primary engine of demand growth for petroleum in the foreseeable future. In purely economic terms, it’s a marriage made in heaven: supplier and buyer holding hands, sharing tributes, and otherwise embracing each other’s press releases.
“Your excellency is the first Saudi King to visit China,” intoned Chinese President Hu Jintao on Monday in talks with the Saudi king, via CRI Online. “This is also your excellency’s first visit to another country since coming to the throne. And China is the first stop of your excellency’s tour. These three ‘firsts’ themselves demonstrate the importance you attach to Sino-Saudi relations.”
Supplier meets consumer…

Source: CHINAdaily

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With the Iran crisis continuing to bubble, oil prices mounting another run at $70 a barrel, and renewed anxiety on Wall Street about corporate earnings, you might think that the odds were fading for another round of Fed-induced interest-rate hikes. But the members of the National Association for Business Economics (NABE) think otherwise. The January NABE Industry Survey, released today, reflects expectations of “solid growth in the economy,” said Gene Huang, NABE member who in his day job is chief economist, FedEx Corporation, in a
press release.
Reviewing a copy of the entire survey obtained by CS reveals that the 142 NABE-member economists polled generally observe that industry demand for goods and services is rising. In fact, NABE’s net rising index–which measures the percent of respondents reporting rising demand minus the percent reporting falling demand– increased to 54 percent, the highest reading since the second quarter of 1997. No wonder then that the NABE survey finds that three out of five respondents predict inflation-adjusted gross domestic product will grow at an annual rate of three to four percent in the first half of 2006.

Source: NABE

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How do asset class returns stack up on a calendar-year basis for the past 10 years? Funny you should ask–we just compiled the answer, in graphical form. It’s too wide for our front page, but you can click here to behold the horse race for each of the 10 years through the end of 2005.
Once again, it’s clear that the variation of returns is far and wide, even on a year-by-year basis. For instance, last year witnessed emerging markets stocks soar by more than 30%, while foreign government bonds in developed markets shed 9% (both in $ terms). The big-picture playing field, in sum, delivers plenty of action, even for an active trader.
Meanwhile, for the more strategic minded, more than a few trends stand out when considering asset classes in calendarial terms. That includes the realization that cash isn’t always trash, and sometimes it’s one of the better games in the house. In 1998, 2000 and 2001, in particular, 3-month T-bills posted impressive returns in both relative and absolute terms by besting half of the asset classes listed in each of those years.
Of course, the only enduring truth for the restless rotation of asset classes is, well, the restless rotation of asset classes. Something’s always winning, and something’s always losing. Beyond that, you’re on your own, other than this bit of counsel: stay diversified, keep an eye on tactical rebalancing, and sleep with one eye open.
And now, step right up and place your bets for 2006….

The casual investor can be forgiven for claiming ignorance on the topical subject of inflation’s future path. In fact, enlightenment probably eludes the financial sophisticates as well.
Yesterday’s update on consumer prices in December exemplifies the muddle that prevails. Top-line inflation, measured by the consumer price index, pulled back last month by 0.1%, the Bureau of Labor Statistics reports. December’s 2.2% decline in energy prices was the big reason for CPI’s drop, which follows November’s even-larger descent.

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It doesn’t take much to set the oil market running skyward these days. A bit of anxiety here, talk of trouble there, and–wham! Crude’s takes flight.
Anyone who’s surprised by the trigger-finger mentality that defines oil trading of late hasn’t been paying attention. It may be easier to sleep by turning a blind eye to unfolding events in far-off locales, but for those who crack a newspaper or Google the world of oil news it’s deja vu all over again.
Indeed, there’s little wonder why a barrel of crude has shot up to nearly $67 in early New York trading this morning–that’s up by around 4.5% since Monday’s close, and the highest in around three months.
THE FLY IN MR. MARKET’S OINTMENT…
Oil prices, Feb ’06 contract

Source: NYMEX

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