How to Make Sound Policy Decisions

The next two days are going to be very cool around here. Mid 60's and windy. Here comes the fall.

Update on Stomach Stocks
I opened positions in both Hormel Foods (HRL) and Campbells Soup Co. (CPB) today. I mentioned my reasoning in yesterdays column.

Repudiation of Financial Engineering Begins at Home?
Today Market Ticker ran a YouTube Video posted by a woman that had had her limit of the outrageous banking practices on display even after getting saved by the US taxpayer. Well worth the 4 minutes:

While the woman gets her Kens mixed up a bit (Ken Lay and Ken Lewis of BAC) she makes plenty of sense.

The banks right now have access to the lowest cost capital in recorded human history. At the same time they are charging the highest rates possible and resorting to tricks and fraud to jack rates up even higher. This happened to my wife very recently as well, no late payment just a higher rate for reasons never made clear to her (she paid off and closed the account).

The problem I see right now is that there is no place to turn. All the banks are playing the same game, so you are going to get gouged no matter what. The woman in the video claims she is going to stop paying her balance unless her terms for repayment are met. While I admire her courage, I in no way advise such a course. Sadly for maybe 80% of all credit users they have no idea that they are getting slammed and have no idea or ability to live without revolving credit. If you are reading this site you will not need any pointers on matters of personal finance and keeping away from this kind of thing.

Do I think anything will come of this "movement". Perhaps on the fringes, but of course nothing ever really changes when you cannot get anyone to listen.

How to Make Sound Policy Decisions
I never cover the FED Beige Book Report as no where in the world does there exist a more qualitative mumble of terms and sentiment that cannot be measured and thus cannot have any meaning. Traders seem to use it as a playable moment. I think the scariest thing about this report is that it may actually influence monetary policy.

This one time I will cover some of the language behind the report so any interested can see just how absurd the whole thing is.

To start off, most watchers of this metric will only grab a headline summary and never read the report at all. From Yahoo Finance today:
Fed survey shows US recession may be over
Wow! That sounds great! How good are things progressing? From the article:

WASHINGTON (AP) -- Economic activity is stabilizing or improving in the vast majority of the country, according to a new government survey, adding to evidence that the worst recession since the 1930s is over. The Federal Reserve's snapshot of economic conditions backs predictions by Fed Chairman Ben Bernanke and most other analysts that the economy has started to grow again in the current quarter.

There you have it. The snapshot seems pretty good. Anything to be wary of in the article?:

In the survey released Wednesday, all but one of the Fed's 12 regions indicated that economic activity was "stable," showed "signs of stabilization" or had "firmed." The one exception was the St. Louis region, which continued to report that the pace of decline in economic activity appeared to be "moderating."

Hold on a moment. I am not sure that "stable" or "signs of stabilization" after a crash is quite "recovery" or "growth".

That is the summary headline. What about the real thing?

From the Beige Book Report:

Reports from the 12 Federal Reserve Districts indicate that economic activity continued to stabilize in July and August. Relative to the last report, Dallas indicated that economic activity had firmed, while Boston, Cleveland, Philadelphia, Richmond, and San Francisco mentioned signs of improvement. Atlanta, Chicago, Kansas City, Minneapolis, and New York generally described economic activity as stable or showing signs of stabilization; St. Louis remarked that the pace of decline appeared to be moderating. Most Districts noted that the outlook for economic activity among their business contacts remained cautiously positive.

It seems those interviewed by the FED have been well schooled in the whole "second derivative" reporting structure. I am glad some areas mentioned some signs of improvement.

How about a word count comparison? Should things really be getting better, terms that denote such a thing should be used more often. Let's count them up!

Firm, Firmed, or Firming: 2
Improve, Improving, or Improvement: 6
Pickup: 3

For such a strong report, one that implies the end of the greatest recession since the 1930', that language seems a bit flaccid.

How about some nasty words?

Weak, Weaker, or Weakening: 15
Soft, Softer, or Softening: 6
Decline, Declined, or Declining: 14

Final Tally:
Good Words = 11
Bad Words = 35

Granted this is a very unscientific look at the Beige Book Report, but the report itself is not scientific to begin with.

The FED has been on a victory lap world tour touting how amazing a job they did in saving the world. The technical recession may be over by whatever criteria are used, but clearly the economy at the root is in serious trouble.

The bulls would have you believe that at the March lows all stocks were priced as if everything was going to zero and we were all going to live in caves going forward. Would the S&P 500 really be at 666 if the world ended? Who knows, it is a significant number.

I would submit the March lows had priced in a bigger than usual recession along with an overextended consumer that had years of pulling back to do, not the end of the world. Now the market is pricing in an end to the recession and a return to wild spending by the consumer. That, or wild spending by the government to takes the place of the consumer.

There is no use trying to play fundamentals or covering hard data. Only a massive smack to head will disavow those of the bullish bent of their recovery playbook. I would say DOW 9000 and S&P 500 at 900 are hard bottoms that will not be crossed to the downside until and unless something major happens to shake the complacent off their perch. I was fond of saying in late 2007 that people could not pretend forever. Indeed they could not. But it seems they cannot accept reality for any stretch of time either.

Have a good night.