Fear not–the U.S. will not go bankrupt, legally or otherwise, opines James Galbraith, senior scholar at University of Texas, in a new essay published by the Levy Economics Institute. Joe Sixpack’s finances, however, are another matter.
Yes, the U.S. government is running a large and growing current account deficit. And yes, that deficit portends trouble, at least in theory, in part because it could send the dollar tumbling even as the American government avoids bankruptcy in any practical sense of the word. Still, Galbraith counsels such a potential outcome wouldn’t be the end of the world, at least not any time soon. “First, it is not in the interest of key players outside the United States to permit [the dollar] to collapse in the near term,” he writes. “Second, there is no good and ready alternative to the dollar; that of the euro remains for now on the horizon.”
Elaborating on the second point, he reminds that if, say, China started dumping dollar-denominated bonds in exchange for euro-based replacements, the limited supply would create challenges for effecting the transaction. Galbraith explains:

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Risk continues to pay off in 2006 in the U.S. stock market. Exhibit A is slicing equities by market cap and comparing year-to-date performance through February 17. By that tactic, small cap is well ahead of mid cap, which in turn is comfortably beating large cap, as the chart below reveals. We expect no less over the long haul, and for the moment, the hierarchy is intact for 2006 thus far. (All charts below use data from StandardandPoors.com)

Further refining of equity market cap by style also shows a penchant this year for rewarding both smaller stocks and those with a value tilt. Value in fact has been on a roll for several years, trouncing growth in no uncertain terms in the 21st century. There’s been talk that growth is due for a rebound, but judging by the year-to-date numbers, the evidence of growth’s revival still looks premature, as the following chart details.

Moving to a sector analysis of equities, the taste for risk remains largely intact, or so one could argue. Consider that in the large cap space, as defined by the S&P 500, telecom stocks are not just leading, they’re flying. Even the recently red-hot energy sector is having a tough time keeping up with telecom this year. Telecom, of course, has long since shed its aura of Ma Bell stability, and by most accounts is now a volatile sector with about as much visibility in any given company as a gray ship in heavy fog. As such, the embrace of telecom this year suggests something other than running for cover as the strategy of preference.

Over in midcaps, risk is arguably in favor as well. Telecom stocks aren’t first in this slice of equities, but they’re a comfortable third, and doing quite nicely in the slot. Meanwhile, information technology stocks are the midcap leaders, suggesting that risky business remains alluring in this space as well, albeit with a slightly different strategy.

Things are a bit more complicated in small caps, where the top-performing sector this year through February is materials. We’ll leave it to the analysts to tell us if materials represent something safer than telecom and tech these days. In the meantime, we can say unequivocally that sector rotation in small caps marches to the beat of a different drummer relative to mid and large caps. Significant? Stay tuned….

What a week. After a string of economic reports in recent days suggesting that the death of growth has been greatly exaggerated (at least for the time being), today’s release on the producer price index surprises with a higher-than-expected rise in wholesale prices for January. The consensus forecast called for a 0.2% rise in PPI last month, with the actual number coming in a bit higher at 0.3%, according to TheStreet.com.
No big deal, right? Maybe. Monthly numbers don’t mean much. Trends over time are something else. With that in mind, consider the following chart and the conspicuously rising rolling 12-month change in PPI. You don’t need to be an economist to see that wholesale prices are on the rise, advancing at an annual pace of 5.7% last month vs. falling in 2002.

But if such a vision sends you into paroxysms of despair, we have the perfect antidote for what ails you: wholesale prices less food and energy. This is the pick-me-up you’ve been waiting for to chase the inflation blues away. Core PPI, after making a run for higher elevations in 2004 and early 2005, has taken a turn for lower realms lately. As the following chart illustrates, core PPI rose by 1.5% in January over the year-earlier pace. That’s down from the 2.8% rate of increase posted last May, and a heck of a lot lower than the 5.7% in top-line PPI.

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The market hardly needed another piece of evidence to support the notion that the economy remains bubbling. Bonds, however, are another story, which we’ll get to in a minute. Meanwhile, Fed Chairman Ben Bernanke debuted his Congressional testimony act yesterday and added to the general suspicion that growth is still the path of least resistance for the foreseeable future, accompanied by all the usual risks for monetary policy that come with such a view.
The Federal Open Market Committee’s “central tendency” forecast of GDP growth in 2006 is about 3.5%, and slightly lower for 2007, according to the Monetary Policy Report Bernanke submitted to Congress yesterday. That compares with a 3.1% rise in GDP for 2005. Consistent with that outlook is FOMC’s expectation that the jobless rate will decline a bit in 2006 from 2005’s 5.0%. For the moment, that guess on the jobless level looks like a safe bet in light of the fact that January’s unemployment rate dropped to 4.7%.
Beyond Bernanke, there’s no shortage of statistical props for arguing that the economy’s humming along nicely. That includes this morning’s release of initial jobless claims for the week through February, which are running below 300,000 for the fifth consecutive week. Meanwhile, continuing claims for jobless benefits remain impressive too, with the fifth straight week of below-the-2.6 million level. Together, the two trends are putting labor-market pessimists on the defensive. As Nomura Securities chief economist David Resler writes from New York today, “As much as job and income growth are the key ingredients to a healthy consumer, the outlook remains relatively bright, peering into 2006.”

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Joe Sixpack is at once confounding the experts and inserting himself into every debate among economists, politicians, investors and anyone else who has a dog in the race otherwise known as the American economy.
Indeed, yesterday’s blowout retail sales report revealed a sizzling 2.3% rise in January over December’s admittedly weak report. Even more impressive is the 8.8% rise for last month over the year-earlier number. That’s head and shoulders over general economic growth and the overall pace of inflation. Rumors of Joe’s death as a spending entity, in sum, continue to look greatly exaggerated.
To be sure, by a number of metrics, Joe’s spending looks set to get the better of him and his associates across the nation. Consumer debt is mounting in relative and absolute terms, in some cases to record levels, triggering anxiety attacks for some pundits. But no matter what you expect comes next in consumer spending, it’s a topical subject, and arguably the only subject at the Fed, on Wall Street, and Main Street. All eyes, in other words, are keenly focused on Joe in an attempt to divine his next move when it comes to pulling out his credit card.
With that in mind, now seems a good time to take a closer look at the January retail sales report, if only to amuse ourselves as we await the next injection of data and news. As such, we present the following chart, which shows the major categories tracked in the government’s retail sales survey. It’s ranked by one-month percentage change, with the 12-month change for each category tacked on for added perspective.

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It’s unclear how much of the game plan he’ll reveal, if any, but the pressure promises to be high for spilling the beans, or at least throwing out a bone.
Talking in abstractions about monetary policy and inflation targets won’t satisfy politicians this time around. It never did, and isn’t about to start now. Nonetheless, that may be all they get when Ben Bernanke fields questions for his debut grilling as Fed chairman on Capitol Hill tomorrow. Among the sea of inquiries that will no doubt get tossed at him, one we’d like to see earn some lip service is exploring Bernanke’s thinking (now that he’s in the driver’s seat) on the connection, real or perceived, between inflation and wages/employment when it comes to grinding out monetary policy decisions.
It’s a topical question, considering that unemployment’s fallen to 4.7% in December, the lowest since July 2001. Meanwhile, wages are growing nearly as fast as top-line inflation, measured by average hourly earnings and consumer prices, respectively. Using core CPI, which subtracts food and energy from the mix, wages are advancing at a considerably faster rate than inflation. All of which coincides with questions over the next move in the Fed’s monetary policy, namely, will the central bank soon declare inflation sufficiently contained and thereby end the current round of interest-rate hikes?

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Merrill Lynch is reportedly in talks to acquire a 50% slice of BlackRock, well known for its bond funds although it manages equity too. Merrill’s coup is said to come at the expense of Morgan Stanley, which also tried but failed to get a piece of this rock.
If there’s any confusion as to what makes BlackRock so attractive, a quick look at the fixed-income manager’s stock price will alleviate any stupefaction. Indeed, soaring share prices usually explain any frenzy over asset buying.
As it happens, there’s been no shortage of ascending performance in fixed-income land of late. Just ask the managers of Loomis Sayles Strategic Income, a mutual fund that searches the globe for alluring bonds, a strategy that’s fueled the mutual fund with a three-year annualized total return of more than 16% through the end of last year, according to Morningstar. That beats the Lehman Brothers Global Aggregate bond index’s 5.5% over that span, as well as the S&P 500’s 14.4% run. Everyone loves a winner, and some want to own it when it’s hot. Long live momentum.
BlackRock’s no slouch in cashing in on the bull market in bonds. As a business, the times could hardly be more flush for the firm. That said, the cat’s long been out of the bag on this score. The company’s shares are up more than 60% over the past year, more than ten fold higher than the stock market’s return over that span, based on the S&P 500, reports Yahoo Finance. BlackRock’s stock is no recent arrival to its bull market, having soared some ten-fold over the past six years as well.

It’s also no great mystery what’s behind BlackRock’s success. Bond yields remain relatively low of late, after having fallen for the better part of a generation. What’s not to like? Falling followed by relatively stable low yields is a bond manager’s claim to fame in the 21st century. Accordingly, net income for the fixed-income manager has climbed more than 290% in 2005 from 1999, mirroring the fortunes that accompany life among the fixed-income set when yields fall and don’t get up.
But if it’s a great time to buy bond managers, along with bonds, using rear-view mirrors, how will the purchase square with the years ahead? If the BlackRock acquisition is deemed a savvy move today, with the yield on then 10-year Treasury under 4.6%, how might the transaction be described several years hence if yields are materially higher?
The answer depends on your expectations for the price of money. To wit, do you expect inflation, deflation, or something in between, and how much? We can surmise Merrill’s forecast.

We know why they’re selling it. The question is, why are they buying it?
The “it” here is the 30-year Treasury bond, which returned to the capital markets after a four-and-a-half year respite. By all accounts, the security’s return was a rousing success, at least for the government. Buyers were crawling over each other to grab a slice of government debt whose principal won’t be returned until 2036. Bloomberg News reports that yesterday’s bidding was such that the yield fell to 4.53%, the lowest on record for a 30-year Treasury.

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The world is awash in liquidity, and that includes central bank coffers. Using IMF’s numbers, the monthly tally of international reserves at central banks around the world shows liquidity rising by 2.5% to a record high in the 12 months through December 2005.

Where is all this central bank liquidity going? Presumably, a fair chunk of it winds up in dollars. In fact, the buck has been climbing once again, giving support to the notion that central banks continue to park reserves in the world’s lone reserve currency. The gloom that hung over the greenback in January has since lifted, with the U.S. Dollar Index rising 2.6% since the selloff on January 23.

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The yield curve has inverted again, raising fears anew that a recession may be in the cards after all (or is that just another reverberation from the global savings glut that Fed Chariman Bernanke likes to talk about?) In any case, the 10-year Treasury’s yield of 4.56% in mid-morning was trading below the 2-year’s 4.61%. The inversion is all the more striking coming after last week’s batch of economic releases that suggested that the economy was still growing at a healthy clip in spite of the surprisingly low rate of growth posted in the first estimate of fourth-quarter GDP.

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